Totally get the fear of messing up a crypto transfer. I've double-checked addresses so many times, it's almost a ritual. One wrong digit and it's gone. Sticking to small test transactions first has saved me more than once
Nah, I haven’t sent a test transaction to the wrong address, but I’ve come close with typos. Always triple-check. If it’s wrong, the funds are usually lost unless the recipient sends them back. Test sends are my safety net
Man, losing 4 STEEM like that must sting. I've had close calls myself, which is why I’m obsessive about test transactions. One small send first, confirm it’s right, then the rest. Saves a lot of heartache
Just like on any social media site you friend someone on the blockchain.
Then, you don't have to remember if you typed their username the right way. You'll look them up on the contact list and know it's the one you friended.
Crypto never sleeps, unlike us traders trying to sneak a weekend break. Markets keep moving, and missing a key shift can hurt. Gotta stay alert, even if it’s just a quick chart check on a Sunday 😅
There comes a time in life when a man prioritizes having peace, focusing on his spiritual connection, dedicated work, and self-improvement above all else.
Cos it's a 100% guaranteed success, not that LSTR it's not but no volatility will affect SURGE (unless LSTR quotes over $50) since it's pegged to 1$, hence you're on a winning move buying below 1$ once the presale is finished.
I love having a 17% (maybe more) APR paid weekly and with no staking, so you have liquidity all the time.
The compound interest that you may build is commont to HBD and that's a great deal too, your savings ball becomes bigger and bigger, if you kepp periodically investing in SURGE your compound interest becomes greater sooner than expected.
If you have a WAX address, make sure you have your wallet ready and be prepared to link some addresses to the twitch stuff, as there are plenty giveaways on these events.
I use Anchor, but you can use whatever you are most comfortable with.
Sweet !! Just signed up using inLeo App .. pretty seamless and trying to catch up on whats new here. SURGE and all those stuff .. interesting !!! I sitll dont know how to move my LEO from Hive to the Dex though. Anyone can give a tip ?
I have on thing to ask. Now the price of SURGE is 4 $HIVE and it's below 1 dollar. But if the HIVE price increase, do I need to spend 4 HIVE for buying SURGE. In that case the price of SURGE will cross 1 dollar.
Did you hear about the guy who threw his alarm clock while hosting a party? He wanted to see if time flys while having fun. Credit: reddit @caspermoeller89, I sent you an $LOLZ on behalf of luchyl
Totally agree, having a few strong convictions and going deeper on those long-term picks is where the real gains are. Spreading too thin just dilutes the impact.
Spot on. Holding tiny fractions across hundreds of stocks often leads to higher fees and less focus. Better to build meaningful positions in a smaller, well-researched set of assets. Learned this the hard way early on
I just can't believe I forgot to go to the Gym again yesterday. That's six years in a row now. Credit: reddit @senorcoconut, I sent you an $LOLZ on behalf of ben.haase
What's up, everybody? My name is Dimitri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Benjamin Bratton, a professor of visual arts at UC San Diego and the author of a recently published book titled Revenge of the Real, Politics for a Post-Pandemic The book explores how our collective response to the COVID-19 pandemic demonstrates a critical inability on the part of society to govern itself. The pandemic in this sense serves as a sort of non-negotiable reality check that appends the comfortable illusions of a world that increasingly bears no resemblance to the one we have vacated. It's a conversation that raises important questions about not only how we came to find ourselves in our current predicament of mask wars, urban riots, and institutional decay, but also (1/42)
how we might go about constructing a world that is more representative of reality and the needs of the present moment. This part of the discussion continues into the overtime, where Benjamin and I explore what a post-pandemic world might look like and what this means for our conceptions of governance and the individual. So without any further ado, I bring you my conversation with philosopher and author Benjamin Bratton. Benjamin Bratton, welcome to Hidden Forces. Thanks for having me. It's great having you on. So you and I have spoken briefly by phone and just now I've read your book this weekend. I think the entire framing of the book is fascinating and it touches on a lot of the topics that I've raised on prior episodes of Hidden Forces. Before we get into the book, I'd love for you to describe yourself because you're a rather eclectic guy. You seem to have, you don't fit into a box, not even close. So I'm curious how you describe yourself and what are your interests? What drives (2/42)
you? Well, to admit, I sometimes have a hard time describing myself in this sense. I suppose really I'm a writer. I write a number of books of nonfiction, primarily focused on issues of philosophy, computer science, design and architecture, geopolitics, various mixtures of these. So kind of depending on the audience, different things come to the fore. I'm a professor at University of California, San Diego. I also taught at Syark in Los Angeles. I direct an urban futures think tank at the Strelka Institute. In Moscow, the current iteration of which is called the terraforming, which is not the terraforming of Mars or the moon to make them suitable for earth-like life, but rather the terraforming of the earth to ensure that it remains viable for earth-like life. The new book that you mentioned that comes out this week is about the pandemic and what happened, what we need to learn from it, what was exposed in essence, how to make sense of it. So what led you to write the book? Was it the (3/42)
pandemic or was the subject brewing in your head long before that? Yeah, probably just some extent. I mean, the book really is a book of political philosophy more than a kind of policy blueprint. The book emerged from an essay that was published quite relatively early in the pandemic in March or April called 18 Lessons of Quarantine Urbanism. And I suppose in terms of what led me to write it, I think a lot of us who have friends and colleagues in China were watching what was happening and felt a little bit of a Cassandra complex that we knew what was coming. We were watching the administrations and maybe our friends and colleagues sort of sitting on their hands and various things sort of had come to pass. And so it became clear to me that in many regards that instead of thinking of the pandemic simply as a kind of state of exception and aberration from the norm, it really was a kind of episode by which a number of let's say pre-existing conditions were exposed, kind of added old adage (4/42)
of when the tide goes out, we can see who was swimming naked. And it turns out it was not just a few people, but in many respects, an entire system of healthcare, an entire logic within philosophy, an entire logic of biopolitical critique that ended up being enormously unhelpful in thinking through what the pandemic was, what our responses might be. And perhaps on the most deepest level, a kind of crisis in the logic and culture of governance, particularly in the West, that among the most richest and technologically sophisticated countries in the world were found themselves basically helpless for reasons that were unnecessary and should hopefully never be repeated. So how much of this book is a critique of Western political culture and what you termed to be its philosophical shortcomings? And how much of it also applies to Eastern Asian countries, some of which perhaps did much better under lockdown? Well, to some extent, I think it would be a mistake to make two gross generalizations. (5/42)
Clearly, the country, I mean, the way I put it is like this. One of the ways to think about the pandemic was that we all sort of lived through involuntarily, the largest control experiment in comparative governance that we're likely to see. The virus was the control variable and different policy regimes, but also different political cultures were tested. And the results are plain to see. Can we measure deaths per 100,000 and any number of other things you may wish to look at? And the countries that did the best, perhaps Taiwan, South Korea, Singapore, some others, are Asian technocracies that were able to respond quickly, partially because they had experiences with SARS because they had a kind of equitable, inclusive, and effective public health institutions. And they have a kind of political culture that is well suited to a capacity for collective self-organization. And quite clearly, certain kinds of policy decisions and policy instruments that were deployed in Taiwan, for example, (6/42)
simply wouldn't have been culturally possible in Texas or Southern Italy or Brazil or Italy. And that if the Asian technocracies, to a certain extent, may have done well, and I'm not in any respect trying to gloss over the problems in China's response, for example, but the countries that did the worst were clearly the ones that were run by the wave of populist regimes that had taken power over the last decade, United States, Brazil, India, I've mentioned, the UK, Russia. And that one of the lessons to be drawn from this, which should have been obvious, is that populist politics emphasis on narrative, on cultural narrative, the idea that a constructed narrative as a way of understanding how the world works, how political power might be organized, simply doesn't work. That ultimately, an underlying reality, a biological reality, a biochemical reality, an epidemiological reality that is indifferent to social construction will ultimately have its day. And I think that's what we saw. How (7/42)
much of the impediments that were erected, let's say, by populist regimes, were the result of cultural factors? And how much were simply the fact that these regimes or these administrations or candidates came to power by directly delegitimizing or pointing to the inefficiencies or corruptions of the existing institutions, and that therefore, in their response, it was very difficult to consistently corral the population to follow the administered line? That's right. It's a vicious circle in the logic of populism. And you may say that there's a kind of... I mean, the way I would see it is that over the last generation or so, 40 years, there has been a... From the beginning of neoliberalism, there has been a kind of deliberate dismantling and deconstruction of the principle of governance, both on the right and on the left, as a kind of something that should be seen with a kind of permanent suspicion. This dismantling of governance makes governance ineffective. That governance becomes (8/42)
ineffective, governance becomes delegitimized. That governance becomes delegitimized. This gives, as you suggest, oxygen to populism of all sorts. The dysfunction of government is in and of itself an excuse for further delegitimization and deconstruction of the systems of government, which then make it even more dysfunctional, which increase... It's a vicious cycle. Yeah. More vicious than virtuous. That's right. That's right. And so you end up with the situation in which with populations that are for both legitimate and probably illegitimate reasons are less able to collectively self-organize, find themselves in a situation where that collective self-organization is impossible and we have body count to prove it. So I'm curious. I mean, you're touching on it and we'll get into it later in the conversation as well. Where did the title of the book come from? Can you speak a little bit more to what you mean? The Revenge of the Real. Right. When you talk about the real. Well, the real is, (9/42)
as I say, is that kind of underlying biological, physical, material, epidemiological reality that is indifferent to cultural projection, indifferent to social construction, indifferent to our narrativizations. We are part of it. It's us. But whether we're talking about a pandemic, we're talking about climate change, we're talking about any number of ways in which the underlying biochemistry of our planetary condition is, in essence, bursting through the seams of the narrative illusions that we all try to use to make sense of the world around us. This suppression of the real, which is again is, I think, central to this project, can only last for so long. And that the law, you know, when you think of it sort of a boiling pot, the more that it is suppressed, the more that it is ignored, the more that our preferred illusions take up the time and space that should be used to kind of address the world as it is, the more damaging and the more violent that eruption actually is. So besides (10/42)
COVID-19 or infectious disease, what are some of the other forms of the real that the pandemic has forced us to confront? And how important is the fear of death and our societies, I think, really unhealthy relationship to mortality? How does that factor into all of this? And I'm reminded of the experience of the United States of the citizenry to the attacks of 9-11. And without minimizing how scary those attacks were, I also want to emphasize that I think our reaction to them was exaggerated. And it was, in some ways, a reaction that was politically beneficial for the administration at the time, which stoked fears and concerns. But people also did have an exaggerated fear of death, death, something which is inevitable and which we all will face at one point or another. And then all we can do is prolong it for a very short period of time and get people are willing to go to great lengths to forestall or perhaps even in their head, if they can imagine it, prevent it entirely. So how did (11/42)
this pandemic bring out our fears around mortality and morbidity? Well, it's a fascinating question. I think that in terms of linking with 9-11, which is an interesting one, I suppose the way in which I might approach it has to do with the ways in which we understand where risk really is and what really is a risk, what really is something that may result in our death, which is something that might be dangerous to us. And what, on the other hand, is something in which we invest and organize our fear of death. And these are not always the same thing. I think to your point, obviously, in the years after 9-11, the question of trying to reorganize our society and reorganize our cities, reorganize our airports, reorganize our schools in relationship to the threat of political terrorism became a national project. It was a refortification against a presumed and predictive and possible speculative future violence, one that was extraordinarily unlikely compared to, for example, dying of heart (12/42)
disease, dying of lung cancer, dying of any of the kinds of things that Americans tend to die of, diabetes and so forth and so on. And so there is a sense of risk, and then there's a sense of where a place where risk is actually invested. I think with the pandemic, this kind of miscalculation of risk that we saw that was probably most pervasive was not the kind of being afraid of shark attacks kind of risk that we saw after 9-11 where there was a kind of, all of our attention on the wrong thing. It was more about a miscalculation of the relationship between individual risk and collective risk. And I think this was kind of the last of the pandemic. One of the things that the pandemic showed was that many of the risks that any of us may face personally are really our collective risks, that if someone in my city is infected, is sick, or if several people in my city are infected or sick, that this is a risk to me. And that my investment in care for them, my investment in testing for them, (13/42)
my investment in the provision of appropriate healthcare for them is to my benefit. There was a meme going around, around sort of in the middle of the culture war over masks that was about someone who refused to turn on their headlights as they were driving around the city because they could see everybody else. They have the freedom to drive their car on the road so forth and so on. I think that part of the culture war over the mask was where this issue of risk really became and the kind of calculations and miscalculations of risk really came to bear. So this is an interesting part of the book where you couch this observation in terms of the subject versus object as well as our over-individuation. Explain to me what you mean by that. How does our conception of the immunological commons and our conception of individuality interface with the realities of the world and the fact that so many of the risks we face are communal as opposed to individual? I mean, they affect us individually, (14/42)
but they are macro risks. That's right. Well, one of the things I talk about is what I call the ethics of the object, which we might contrast to an ethics of the subject. In political ethics or really ethics more broadly, there is a presumption that one's subjectivity is the basis of this ethical discussion. Put simply, if I can calibrate my internal moral state, my sort of mental disposition towards you or to the world in a particular kind of way and train this and discipline this towards the proper ethical disposition, then my activities, my behaviors and the effects of my activities and behaviors will be somehow correspondent to this internal moral state. If I think good thoughts, I will do good things. If I do good things, then good things will happen. Intentions matter, in other words. Intentions not only matter, intentions are the thing that matters. The focus for ethics is on the calibration of intentionality. That's what I would say is the inherited sense of ethics of the (15/42)
subject. By contrast, what I suggest is the ethics of the object that must be added to this, not necessarily replace it, but added to this. The reason we wore masks was because we came to a different kind of ethical realization, whether we realized it or not. When I approach a stranger in the street, we're both wearing a mask, the possibility that I might infect them, do them harm, do them a kind of potentially serious form of violence, has nothing to do with whether or not I like them or hate them or know them or don't know them or have. My internal subjective moral state towards this person is totally irrelevant to whether or not my actions will do them harm. My actions will do them harm because of an objective biological reality that we are part of the same species, that there is a virus that my exhale is their inhale and so forth. We wore masks because we were able to recalibrate a logic of ethics towards one's self as an object, one's self as a biological object, and to construct (16/42)
a kind of public ethics around this reality. We were able to do it relatively quickly and to activate this relatively quickly. This too, I think, is one of the positive lessons from the sociologic of the pandemic. Not that I think we should all continue to wear masks forever and ever, but more generally, this sense of understanding ourselves in relationship to the world through this lens of the objective, to think of the objective as a space of ethics rather than as a kind of space of over-rationalizing tyranny against ethics is, in fact, something that's very important. So how much of this reflects an evolved understanding of ethics in your view? And how much of it is actually a result of fundamentally new dynamics on the planet as a result of not just population changes, but also changing ecosystems as a result of some of those population changes and practices, etc. How much is the ethics of the object? How much is the pandemic itself? No, not the pandemic itself. How much is the (17/42)
ethics of the object on evolved understanding? And how much of it is not so much an evolved understanding? You could still say it's an evolved understanding, but the circumstances of the earth and of human society on planet earth are different than they were a thousand years ago. Where there are more people, we have different types of technologies, different types of wastes, different types of problems. That's right. So how much of this is a philosophy for the current age? Well, I think it is a philosophy of the current age, but I think that if it is an evolved understanding, it is an evolved understanding of a condition and circumstance that in a way always has been. We always have been a kind of biological creature. Unwitting agents in all sorts of harmful dramas. Unwitting agents, exactly. Unwitting agents, unconscious objects in a certain kind of degree. The way in which I would couch this in a bigger picture, and I'm not sure the ethics of the object would qualify of this, but (18/42)
this kind of what you call a kind of evolved perspective. Another way of putting that might be in relationship to what I call in some other work, the Copernican Trauma or Copernican Turn. There are moments in, and this goes to your question about the technological aspect of this. There's moments in history, in sort of socio-technical history where we use technology in a certain way that allows us not just to do something in the world, but to discover that the world works very differently than we thought, the technology that we use to make it. So a telescope or a microscope, without telescopes, a heliocentric cosmology isn't really possible. Without microscopes, don't cause microbes, but once you understand that the surfaces of the world are covered with them, you see them differently. I think Darwinian biology was a kind of Copernican Trauma, neuroscience by which we understand ourselves as an animal that our most beautiful forms of cognition are also animal forms. Neuroscience, where (19/42)
our thinking about our thinking and understanding that to itself as a physical objective fact, this is marvelous. I think artificial intelligence and what I call synthetic intelligence will also prove to be a kind of Copernican Trauma, but there are a number of different sequences along the way by which we come to understand, in essence, the objectivity of our subjectivity in ways that change the way we understand the world. Most of them, most of them were able to be accomplished through some form of technological abstraction and alienation. The technology was essential to these kinds of epistemological transformations. To that point, let's reverse that a bit. How much is our subjective notion of self and personal identity formed by similar types of models and frameworks that we bring to the world? Well, this is a big question to the extent to what sense of our sense of self is part of a neuroanatomical disposition. Exactly, right. That agreeing to structural language and process (20/42)
lights and sounds in particular kinds of ways, all those, you can't separate a sense of self from that. Those things are themselves not givens. They are the result. I would make this point. We have always been technological creatures in a certain sense, and that even our anatomy itself is the result and effects of millions of years of technological mediation with the world. We have opposable thumbs, not so that we can pick up tools, but because our ancestors picked up tools. Our thumbs work the way that we do. This question of to what extent are we a biological given that then enters into social relations and mediations with the world, and to what extent do those mediations and social relations with the world produce that biological condition is a bit of a, I would say, chicken or egg situation, though obviously, we know that eggs came before chickens by several million years, so it doesn't really hold. It's a dynamic process, in other words, that our conceptions of the world and our (21/42)
biologies, those are constantly evolving. But what I'm trying to wean out though here is that, yes, our sensory perceptions allow our individual beings to process information individually, but that's not the same thing. Right, but that's not the same thing as our conception of self and our sense of identity and ego. That's right. So how much of that would you say is kind of running as a piece of software as opposed to being hardwired in a biology, that if a different type of culture existed in the world, that you could take the same biologically evolved human beings, but those individuals could operate in a world where with far less ego, far less sense of self. I mean, there are all sorts of theories, one of them, obviously, I think generally discredited from the 1970s, Jillian James' bicameral mind, but that posited that the ancients actually had far less or lacked an ego entirely and had a relationship to the gods that was really a sort of an expression of their internal bicamerality (22/42)
between their conscious and unconscious mind. So that's kind of what I'm getting at, which is it seems to me when I read your book that what you're suggesting is that given the state of the world, given where our technology's at, etc., etc., part of what the solution means is moving to a world where we think of ourselves less as individuals and more as part of a collective. And so what does that mean experientially and qualitatively for a human being living in the world? Yeah, thanks for the question. Let me put it this way. There are a lot of ways in which one might experience one's own subjectivity, one's own agency, one's own identity. I think we are at a sort of weird cultural moments in the West where all three of these things are thought of as basically being more or less the same thing and they're not. And so if one has a sense that one's agency is insufficient, one might choose to amplify one's sense of identity or subjectivity. And I think in ways that we could go into, this (23/42)
has led to a number of problems, including the populist wave that I was speaking to. Now to your question about the hardware software aspect of this, which is a kind of interesting one, we think through many as homo sapiens, we think linguistically, we think visually, of course, we think auditorially, we think in lots of different ways, but language both spoken and written in the last several tens of thousands of years has become an increasingly central part of how it is that we think language itself is obviously deeply social and trans individual at its foundations. For me to even think about my own, you know, independence and autonomy, I'm thinking about this through the grammars and structures of a language that is already trans individual. And so the conditions of that sense of subjectivity, that's not the same thing as autonomy, but let's say that sense of autonomy is itself constructed through a non autonomous technology. I don't know that this is a paradox, but it is certainly (24/42)
an important way to appreciate this. You know, in terms of consciousness, which is something that I know a lot of people are very concerned about, I happen to be particularly in my recent work around AI and synthetic intelligence, I've become less focused and interested in consciousness per se. But it's a neuroscientist at Princeton named Graziano, whose work on the social theory of consciousness I find rather compelling. And basically his idea goes like this, is that in all predator-prey relationships, there was some kind of capacity for other mind projection, that the fox can imagine how the eagle sees. And so it knows to go under and hide because it's imagining a line of sight from above or to catch a fox, you need to think like a fox in this way. So there's some kind of undermined capacity to anticipate what the other person's thinking. What's happened is that one of the things that makes our sapiens, whatever, 60,000, 40,000, where we want to sort of locate this, we're able to in (25/42)
essence turn that other mind capacity back in on ourselves. We were able to think of ourselves as if we were an other mind, as if we were an external kind of structure. And it's this interiorization of what began as an exterior relationship to the world that probably took a great lesson in the basis of this sense of subjectivity in the first place. I don't fully follow that last part. First of all, what are we talking about when we say consciousness number one? And where you lost me was in the turning consciousness in on itself, that somehow the human version of consciousness or expression of it is somehow different than that of, let's say, a predator or a prey. It is. I mean, I'm sorry. I didn't mean to make it obscure. That's fine. But so yeah, first of all, what do we mean when we talk about consciousness and then what is that distinction? So consciousness in this sense would be this experience of one's own, this sort of subjective experiences of one's own thoughts. So thinking (26/42)
about thinking, let's say, the capacity to not only think anthropocriticities, but to think about thinking and perhaps to think about thinking about thinking in these terms of this. A larger sense of cosmic awareness? Well, a larger sense of a kind of reflexive awareness of one's own sentience. Like we might separate sentience from sapience in this regard. Yeah, because I wouldn't necessarily connect consciousness with ego or identity, which is where I think I'm getting a little confused. Are you putting those two together? No, I'm not. I was suggesting that since you were talking, we were talking about this in terms of the relationship of the kind of evolutionary arc by which these might develop in relationship to one another, that we may want to sort of ask the question of how infected this come about and where was this kinds of moments of switches? There's another point that we may want to consider in terms of the ancients. And of course, I think what we mean by the ancients here is (27/42)
maybe not entirely clear. I think it was the oral societies, preliterate societies, I think is what... Yeah, I'm not sure this argument is necessarily borne by the record. One way to think about this is there's this caves, the Neolithic caves, or one is being at Lascaux. One is at Chauvet in France and others at Lascaux. The one at Chauvet is about 32,000 years old. The one at Lascaux, which we had studied much longer, was about 16,000 years old. And so the distance, the historical record between the present Lascaux and Chauvet are all about 16,000 years. The Wehrner Herzog film that you might be familiar with is at Chauvet at the beginning. And one of things you see in the art that happens there is that there's a representation of animals and a representation of the world around these ancestors of ours. Everything is represented sort of in a kind of horizontal movement. But at Lascaux, 16,000 years later, there's this huge shift where things meet your gaze. The animal looks at you in (28/42)
the eye. There are pictures of people that will return to look at you in the eye. And so whoever made those was able to imagine that in the future, not in the present, there would be someone else who's looking at this picture who will have a gaze that will be observing this picture in the future and that can make this picture. Now, I can meet that future gaze through this image. There's a lot going on there. And so some have suggested that this kind of some kind of light bulb went on during this particularly recent period that allowed for this kind of anticipation of a kind of futural consciousness as being something to which and from which a kind of communication is possible. This is more what I would refer to more generally as the capacity for sapiens rather than as necessarily consciousness. But I think it nevertheless gets to the heart of the phenomenon that we're trying to hone in on here. So is the phenomenon, because I think you kind of mentioned it before we got to this point, (29/42)
which is that individuation, though it was something that was that evolved as a sort of an adaptive way of interfacing with the world, has at this stage become a kind of malignancy. No, no, no, no, no. Let me try to introduce a little bit of specificity into this as well. The individuation and the sense of individuation that I'm speaking of, the kind of would identify as a kind of particular, at this point, has become a kind of potentially rather malignant trait of some aspects of Western political culture is not the capacity for sapiens, is not the capacity for a kind of projective or futural or speculative intersubjectivity. That might identify with this in the cave scenario. That the scenario of the kind of projective intersubjectivity or projective interobjectivity is closer to what I was talking about the ethics of the object. However, what I'm speaking to in the book about the kind of crisis of individuation or kind of malignant forms of individuation, in many cases, a kind of (30/42)
suppression or forgetting of that basis of subjectivity in which a kind of fantastically fragile fiction of a self-sovereign, autonomous individual is understood as a kind of ontological principle, as the basis of how society works itself. That not just the relatively dubious sort of conventional liberal discussion that a society is made up of essentially of individuals that subsequently choose to enter into social contracts, but even further than that, that they don't really even enter into these social contracts, that they simply are these kinds of encapsulated atomized selfish automatons bouncing off one each other like billiard balls, acting in their intensive self-interest in ways that are clearly motivated by any number of cultural motivations. This is the individuation that I speak of in the book as being particularly troublesome. Right. A principle of emergence that through all of our competing self-interest, whether it's in the marketplace or in the political sphere, through (31/42)
that process emerges a kind of order, a hidden order, and that the world that we live in today results from the competing impulses and self-interests of these automata. What you're suggesting is, and you're not the only one, I mean, this is, I think I've talked about this a bit in the context of one episode where we explored the foundations of Protestantism and the Reformation. Right. Max Weber and so forth. Right, exactly. It's not a controversial view to take, but the reason I was bringing it up was because it does seem like one of the conclusions you draw is that if we want to transition to a more sustainable world and a world in which we can live, given, I think, the state of our technology, the capacities for both destruction and creation that these technologies allow, that we need to be able to get to a place where this hyper-individuation ceases to be, that we roll it back somehow. I think I've seen this, for example, what I consider to be hyper-individuation in terms of (32/42)
narcissism, like the outgrowth of narcissism in society. I don't know if that's what you mean, but I suppose try and clarify what I just said because I don't have obviously the same- Yeah, you know, I'm happy to, yeah, no, and I think there's consider an overlap in what we're suggesting here. The question of emergence and order is an important aspect of this, and I'm not suggesting that the principle of the internal dynamics of complex adaptive systems that are not directed, that there is not only a capacity for the emergence of bottom-up order, but that this is one of the fundamental principles of complex adaptive systems themselves, whether those are physical or social or cultural linguistic. I think this is indisputable. However, there are one of the other emergent properties of those systems, which I think goes back to this question of to sentience and sapiens. One of the emergent properties of those systems can also be the capacity for self-modeling, that the entire system itself (33/42)
becomes in a way capable of modeling itself and deliberately acting back upon itself, that there becomes a capacity for certain kind of deliberate and deliberative recursion within that system, that there is emergence and then this emergence also has a kind of, let's say, a kind of second or third order cybernetic capacity for a feedback and recursion. This is also a form of intelligence. This is also a form of collective sapiens, not just individual sapiens, but a kind of collective sapiens. It implies foresight. It implies regulation. It implies structuring. It implies composition. This itself is a reflex, a capacity of which we are very capable, but have to a certain extent lost some expertise in. When I speak of the kind of crisis of governance in the West, this is really what I mean. What I mean is that we have lost this ability really to perform these feats of recursive regulatory compositional structure. Again, it's not that emergence isn't real or emergence is important, but (34/42)
one of the things that also should emerge is this capacity for recursion. How much is it that the capacity for recursion is inadequate or diminished? How much of it is that the map of the territory is no longer accurate, that the simulation that we're running of the real of reality has increasingly become unmoored from reality itself, and that this is what we are experiencing and that this is what the pandemic brought to the fore. Yeah. No, we're on the same page here. I think it's both. And both meaning that both the model of the real that we are producing is inadequate to the purposes of this recursion. And also, after 40 years, 50 years of kind of deliberate dismantling and deconstruction of the principle of governmentality itself, the impetus or inclination to enter into this recursion itself is atrophy to a certain kind of degree. So a couple questions there. One, what do you attribute to that, to the unmooring, to the increasing disconnect between the simulation and reality, or (35/42)
the simulation as an appropriate model of what reality is so that we can act upon in an effective way? And two, is the attack on institutions or the deconstruction of the systems of self-governance, et cetera, do those result in part from, actually, I'll just pose it as a question. What does that result from? But take the first one first, if you don't mind. Yeah, let me take the first one because I think what you've hit upon here is an important point. It might be worth sort of walking it through a little bit. So we have a tremendous capacity for producing incredibly rich models and simulations of the past, present, and future. Our capacity to produce these models as forms of technical abstraction is not atrophied whatsoever. I think probably, if nothing else, earth science and climate science are exemplary of this, I will make the argument that the very idea of climate change itself, not the phenomenon, but the concept of it, is an epistemological accomplishment of planetary scale (36/42)
computation without this massive planetary scale sensing and modeling and computation capacity that takes billions and billions of data points and produces model simulations of earth, past, present, and future through them. Simple heuristics like a hockey stick don't occur. But to your point, like we see with our science, the problem now is not really that the models are not accurate enough. Like if we could just get this out to 17 decimal points instead of seven decimal points, then we would have a better bottle of it. We would know what to do. No, what's happened is that model of the world, of what the future, this collective model of what the likely future of our ecological substrate, upon which all of our economies from which they emerge is in danger, that model itself does not have the capacity to have an effective recursive effect back on the real. The climate model cannot recursively affect the climate in the same way. And that is the problem. We see that in many respects, (37/42)
financial model. Because the climate model is a model of a physical system. Well, it's a model of a physical system. And the institutional structures that we have constructed in relationship to this model are not ones that activate this model as an instrument of governance. It is merely a representation of a possibility. Many financial models, for example, it's a descriptive model as opposed to a prescriptive one. It's a descriptive model as opposed to a recursive one. Is it as opposed to a recursive one? So many financial models are recursive in ways that climate models are not, in that financial models can in fact cause the thing to happen that they are modeling. Donald McKenzie's book, An Engine, Not a Camera on the History of Sock Exchanges, kind of towards this. So that's the second part of your point, where there's a problem or crisis, if you like. There's this mismatch between we have this tremendous technological capacity to produce models of the world and this tiny little (38/42)
T-Rex arm capacity to actually use those models to recursively act back upon the world in a way that would make those models tools of governance. The first part though about are the models, we're making the wrong kind of models. This is also true and this, I think, does to go to a certain degree goes to the question of this question of individuation and the question of what I would consider a kind of historically catastrophic misuse of our computational capacity towards the tracking and modeling and simulation of individual user behavior, individual consumer behavior that has amplified not only this kind of model of society as being an aggregation of atomic atomized individuals, but has amplified and accelerated that atomization even further and has even structured its own critique. That even the critique of surveillance capitalism from Shoshana Zuboff or others is predicated on the idea that of course computation is about modeling individuals, but now what needs to happen instead of (39/42)
these coercive contractual relationships between individuals and predatory platforms, these individuals must counter-weaponize themselves and take back their individual private data. The problem, however, is this hyperindividuation of the use of computation itself as if the individual human were the proper unit of analysis for how it is that the computation would model the world. Unless this is in a sense, is sort of repurposed towards things that are more beneficial, I don't think any amount of kind of political solutionism that we might get from the surveillance capitalism critique is going to be very helpful. It also seems to speak to a larger sense of consciousness for a planet that can view itself and act upon itself in a way that is simply not possible at the individual level. I want to move the second part of our conversation into the overtime, Benjamin, and that's going to give us an opportunity to really talk about what a post-pandemic world would look like if we were to (40/42)
implement some of these solutions that you feel are needed and what it would look like if we didn't. In other words, what is the sort of path of least resistance if things continue to move as they are today and what this means in both cases for the nation-state. We've talked about it a bit for the individual, for corporations, and for I think peace security and quality of life. For anyone who is 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 part of today's conversation with Benjamin, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library, or subscribe directly through our Patreon page at patreon.com slash hiddenforces. There's also a link in the summary page to this episode with instructions on how to connect the overtime (41/42)
feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Benjamin, stick around, we're going to move the rest of our conversation into the overtime. Every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod, or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (42/42)
What's up, everybody? My name is Dimitri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. This episode was released early to premium subscribers last week, and it features someone who truly needs no introduction. And for those of you who may not know Muhammad Al-Aryan, he is the president of Queens College Cambridge and chief economic advisor at Aliyahns, the corporate parrot of PIMCO, where Muhammad was CEO and co-chief investment officer from 2007 to 2014. Muhammad is a remarkably gifted communicator who is intimately connected to the global policymaking community. This makes him uniquely valuable to speak to during a time when the prospect of a policy failure is arguably the single biggest risk factor facing markets and the global economy. I asked Muhammad to appear on the podcast today because I (1/43)
believe that we are entering a very dangerous period in financial markets. As investors, we've all been conditioned to believe that markets always go up, that dips are always meant to be bought, and that when things don't work out, central banks are here to bail us out. But in a world where inflation is persistent and policymakers around the world have begun raising rates and contracting credit, continuing to bet on mean reversion could prove to be a deadly strategy for investors. My objective in this conversation is to give you a framework that you can use to navigate a world that is transitioning from one of insufficient demand to insufficient supply, from historically low volatility to rising uncertainty, and from easy money to hard choices. This is true not only for central bankers, but also for investors like you and me. Subscribers to our Super Nerd Tier can access the transcript to this episode as well as the Intelligence Report, which is the cliff notes to the Hidden Forces (2/43)
podcast, formatted for easy reading of episode highlights with answers to key questions, quotes from reference material, and links to all relevant information, books, articles, etc. used by me to prepare for this conversation. Since this episode deals with markets and investing, I want to make it absolutely clear that nothing we say on this podcast can or should be viewed as financial advice. Financial 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 deeply enlightening conversation with my guest, Muhammad Al-Aryan. So Muhammad, it's great to have you on the podcast. You've been one of the more outspoken critics of the Fed in recent months. We've made the case for more hawkish forward guidance and also tighter monetary policy. What would you say are the risk factors that most concern you and that markets in the economy are grappling with right now, and how do those (3/43)
risks relate to the Federal Reserve's current stance on monetary policy and inflation? So my major concern is that we are witnessing a big policy mistake. We are in phase three of this policy mistake. And that policy mistake will unduly harm the economy, undermine livelihoods, and then also disrupt the market that could then have a negative spillback effect onto the economy. So if you think step back and think of what would happen to our economic recovery, it would be undermined not by private sector developments, not by the end of a cycle, but by the Fed being too late in taking its foot off the accelerator and instead having to hit the brakes very hard. So I'd love to go into that in more detail, specifically this idea of a policy mistake. What exactly do you think the Fed has gotten wrong here? So three stages of this policy mistake. Mistake number one goes back to 2020 when for understandable reasons they decided to adopt a new policy framework. The problem is that the policy (4/43)
framework they adopted was made for the world of yesterday, not the world of today. The world of yesterday was insufficient demand. The world of today is insufficient supply. The mistake number one is adopting a framework change at the wrong time that told the markets that they would be looking backwards, not forward in trying to contain inflation. Step number two, which was a much more obvious mistake, and many of us have warned against it, is that as early as March of last year, they decided to characterize the higher inflation as transitory, and they did not, quote, retire that characterization until the end of November when there was ample evidence, both from the companies and from the economic data, that inflation was not transitory. Mistake number three is what's happening today. By not moving early enough, they're going to be forced into a very hard pivot. They will bunch three sets of contractionary measures, and the risk is that this economy could not navigate through these (5/43)
three contractory measures. I'd like to explore that more, Mohamed, but you're so good at, I think, you're one of the best in the industry at really creating metaphors or mental frameworks that help people think about where we find ourselves on a big picture level. You did it in 2009 with the, quote, new normal hypothesis that we were moving into a regime of secular stagnation driven by structural impediments to growth. You did it again in how you describe central banks as the, quote, only game in town, which I think really captured the significance that central bank policy was going to play in informing the direction of markets and the, I think, decision-making framework for investors at the time. I'd love to take a step back here and understand what your framework is for where we are moving in today. You talked about insufficient supply versus insufficient demand, which was the issue during the stagnationary period. How would you describe where we find ourselves today, and what do (6/43)
you think are the key factors responsible for that? So I think if you were to look for the bumper sticker, we've entered in a world not just of insufficient supply, and that relates not just to the supply of goods and services, but also to the supply of labor, but also in a world in which we have either pressed polls or reverse on globalization. And that in itself has an additional set of consequences for the global economy. I think the first element insufficient supply, we live it every day. It's harder to get things. It takes longer to ship things around the world. It's become much more expensive. Oil has become much more expensive. Energy is more expensive. Gas is more expensive. And then there are labor shortages. I think all of us are exposed to these labor shortages. So we know what that world looks like, and there are certain aspects that are good about it, which is higher wages, and in particular, higher wages for the less well-paid, and that is good, but it is also (7/43)
inflationary more broadly. The second element we don't see as much, but it is consequential. For a long time, we were living in a disinflationary world. And the way I describe this is just think of what Amazon, Google, and Uber have allowed us to do. And I'm just using these as labels. It cuts out the middle person. So it provides us with lower cost. Google allows us to price search. We are less price takers, and we are more price setters. And then Uber, perhaps the least well-understood effect, but the most powerful, allows us to use existing assets to deal with supply problems. Those three things were very powerful, and they played it out for over a decade in causing disinflationary winds. Now we have a very strong counter force, which is the fragmentation of the global economy. If you're Australia and you've been doing business with China, you know what that feels like. Suddenly, the Chinese economy is no longer available to you, both on terms of selling things and important things. (8/43)
We are seeing more regionalization, the emergence of blocks as opposed to globalization, and we are seeing very weak multilateral institutions. A perfect example of that, of how we are exposed to this, is vaccine inequality. Delta originated in India. Omicron originated in South Africa. And in both cases, the global system had failed to provide sufficient vaccination. We thought we were fine because we were highly vaccinated, but it turns out we are vulnerable to the parts of the world that are not. So we have to learn to live with a world that is more fragmented and where spillover effects are more pronounced. Is that another way of saying that you think that we're moving from a more open world to a more closed world? From a world that assumed openness was almost a given to one in which we are much less open, yes. I don't want to say closed because I don't think any economy other than maybe North Korea can live in a closed global economy, but certainly less open. Right. And I mean, (9/43)
another way of thinking about this, obviously, is that geopolitical tensions have been rising. And I wonder why markets don't seem to have reacted to rising geopolitical tensions over the last several years, the way that one would have expected them to if you had pulled an investor 10 or 20 years ago. Why do you think that is? I think there's two elements. One longstanding and the other one is more recent. Longstanding is very difficult to price by modal distribution. Look at what's happening in Russia and Ukraine today. It's either going to end up open conflict or it's going to end up diplomatic resolution. It's very difficult to be confident about one outcome. So you end up in a model's middle. You'd price neither outcomes. You'd price some average of the two that is least likely to materialize. But there's something else recently. And let me take you to the investment committee, to a typical investment committee in a sophisticated investment management company. You present a case (10/43)
for buying a certain bond, stock, whatever. And we go through all the fundamentals. Is it financially resilient? Is it well managed? Does it have a good market in front of it? And you convince us all that the fundamentals are green light. You will be asked a very important question. Who's going to buy after us? The subsequent buyer does two things that are very important for an investment. One, they validate your investment. Think of you buying an apartment. The minute you close on that apartment, what you really want is 10 people bidding for the apartment next door because the value of your apartment is going to go up. So the subsequent buyer validates your own purchase. But the subsequent buyer does something else as well. They provide you liquidity if you have to change your mind. Now I come along and I tell you, your subsequent buyer is a central bank. It is the Federal Reserve. It has a massive balance sheet. It has seemingly an infinite willingness to use it. And one more thing, (11/43)
it is price insensitive. It is not a commercial participant. It will buy regardless and it will turn up every single month with massive purchases. If I tell you that and you believe it because you've seen it now month after month, you will buy ahead of this. And whenever you see a geopolitical shock causing some pullback in asset prices, you will know that there's a big buyer out there. And it doesn't matter that they're buying just government bonds and mortgages because it ripples through the whole system. So the second reason why markets have been immune from geopolitical risk, in fact from almost any shock is there was a confidence that the Federal Reserve was our best friend forever. And don't underestimate how powerful that phenomenon was. That's why you hear consistently, buy the dip, Tina, there is no alternative, and FOMO, out. Okay, this is great because I do want to ask you about this. And we'll probably pivot again later back into geopolitics because I do want to ask you how (12/43)
you think they move towards a more multipolar world that we are currently living through will impact the decisions of governments to, let's say for example, one good example is in Europe, consider trade-offs between security and the welfare state. But in terms of the Fed, this is really fascinating because one of the questions I wanted to ask you is how does someone like you factor in things like behavioral conditioning or risk tolerance that change structurally as a result of the types of dynamics that you've described here, the reinforcement of buy the dip, and also the fact that investors now for years have become conditioned to this not just because of the Federal Reserve, but because of the historical empirical data that has shown convincingly that investors are better off being in the market and not selling, just using opportunities to buy. How do you think about that going forward if one of the major sort of legs under that stool gets taken out? Some great behavior in the power (13/43)
of behavioral science in understanding outcomes. It doesn't explain everything, but it sets that extra bit of insight that's really important. We're coming from a period in which investors have been deeply conditioned to buy the dip, and they've had consistent confirmation that that is the right thing to do. There was a reason why that is happening is very visible. It's called the Federal Reserve injecting as much as 120 billion of liquidity each month into the marketplace. It has been reinforced by experience, and because of that, a couple of things happened. The dips became smaller in duration and in magnitude, and that was critical. And two, because of that, volatility came down. And when volatility comes down, there are models that encourage people to put more money at risk because the volatility of your investment is lower. So you've had this reinforcing behavioral and structural technical playing out, and the result of that were three incredible years of returns. To think that (14/43)
we've had 20% basically average returns for the last three years, while we've had COVID, geopolitical problems, all sorts of other issues is incredible. But it is explained by this mix of not only liquidity, but behavioral aspects. Now, behavioral aspects are really difficult to predict, but you've got to keep on looking every single day. In the marketplace, the biggest change in behavioral aspects was when the marketplace goes from thinking in relative terms to thinking in absolute terms. There's this famous story of someone who comes home with a dog and declares to his family proudly that he paid $40,000 for this dog. And the family looks and says, you did what? And the response, he says, yes, it was a great deal. The cat was selling for $50,000. That is what's called a relative mindset. You continue buying not because what you're buying has value in itself, but it has value relative to other assets. And that can go on for a very long time. So when the Federal Reserve takes down and (15/43)
makes it onerous to hold bonds, you are pushed into taking more and more risk. And that works great. At some point, you get the pivot from relative to absolute. At some point, someone says, is a dog worth $40,000? And there is a wake-up call for everybody. I grew up in emerging markets. I cannot tell you the amount of times I've seen this regime shift. And they are violent when they occur. So it is very difficult to predict when this regime shift will happen. The good news is when it does happen, if you understand it quickly enough, you have time to get back on site. So again, a lot of really great points. I want to try to pull them out and address the Metsha individually. The first has to do with investor expectations and how these expectations have been shaped by the reassuring posture of central banks who have stood ready to, quote, buy the dip and provide the liquidity necessary to both elongate the bull market and perhaps more consequently for the purposes of credit and leverage, (16/43)
reduce volatility. Do you think that this conditioning has made markets more resistant to embracing this new regime of insufficient supply, spotty liquidity, et cetera, that you think we're moving into? And if so, what does that mean for the type of volatility that we should be prepared to see once markets try and readjust? That's my first question. Maybe the more broader question here is why do you think the Fed, if you agree with this, the Fed and other central banks didn't accurately factor into their tightening cycle the risks to financial instability, that they were focused very much on employment and on inflation, but they were maybe not taking enough account of the more difficult things to measure like capital misallocation or unsustainable business practices? So let me suggest on your second question first, if I may, on your second question, that is the other way around, that it is because the Federal Reserve was so worried about financial instability that it ended up with a (17/43)
pedal to the metal approach when the economy would have called for something else. Let's take the fourth quarter of 2018. A relatively new Federal Reserve chair comes in, recognizes that the Fed had been co-opted by markets, recognizes as a ton of moral hazard that had built in, recognizes there was an unhealthy codependency between the Fed and the markets, and in the fourth quarter starts signaling that the Fed was going to tighten policies consistent with economic developments. If you remember, at that time the economy was doing extremely well, markets were just fine, liquidity was abundant. Markets have their second day per tantrum. The first one was in 2013, May, June, they had their second one. This one plays out in the equity market in a big way and come the beginning of January 2019, Chair Powell undertakes a massive U-turn that is not warranted by economic developments. It was in response to financial instability. Now, if you are charitable, you would say, well, of course it's (18/43)
related to economic fundamentals because at some point the financial instability would spill back onto the economy. If you are less charitable, you would say it is yet another time that the Federal Reserve has proved that the Fed put is alive, that the minute the market is uncomfortable, is volatile, the Fed will have no choice but to be pulled back in. That is if you like, people traced that all the way back to 18 years ago to this conditioning of the market that there was a Fed put. In fact, the last period of instability, a lot of the narrative was in term of where is the Fed put? Where is the Fed put? Is it minus 10% on the S&P? Is it minus 20% on the S&P? I would say to you the problem is that the Fed became so sensitive to financial markets that it put that ahead of other things. It's a little bit like you fall into the trap of providing candy to your child. You recognize that you've provided too much candy. You try to stop. Your child has a tantrum. You decide that the (19/43)
consequences of the tantrum are not something that you want to live with and you give more candy even though you know that that is not a good long-term solution. That is where the Fed got stuck in and it worked as long as there was no inflation. Now that there's inflation, the Fed cannot do that anymore. And that's what the market is recognizing. Look, I am one who have said, no matter what you think of fundamentals, you should continue riding the liquidity wave. I've said this over and over again the whole of last year. I remember Leon Kooperman, a very famous and respected hedge fund manager, saying on TV that he was really worried about the markets and then he was asked, how are you positioned? And his answer was, I'm a fully invested bear. Yes, I'm a bear, but I'm fully invested because it's liquidity right now that is governing outcomes, not valuations. So people will ride that. Let me give you one last example if I may. At the end of 2007, a CEO of a major US bank came to see me (20/43)
and I asked him, where are we in the market cycle? And he drew an upside down you. And I said, where are we? He said, very near the top. And I said, how are you positioned? And he said, maximum risk on. And I said, how can you be maximum risk on if you need a top? He said, Mohammed's very simple. Number one, everybody else is maximum risk on. Number two is I don't know where the top is exactly. And number three is I'm confident I can reposition myself once there is unambiguous evidence. I remember that phrase, unambiguous evidence that we've turned. His bank had to be saved by the US government. So there is an inclination to ride these liquidity waves right till the end because the cost of premature exit is perceived to be quite high, especially when you judge on short term performance. So again, lots of really interesting threads to pull on here. Just with respect to this observation about both the fundamental unpredictability of markets, the difficulty, in other words, of timing a (21/43)
top, and the herd behavior and conditioning of investors. The chase momentum late into a cycle. How would you say that investors are set up going into this top, wherever it might be? And maybe you think we've already hit it. So it's still that very few people are comfortable taking on the momentum trade. And that's why we have seen equities recover, even though inflation is 7%. That is why we have seen equities do well, even though the yield curve has been flattening, signaling an increased possibility of a policy mistake. And what the other thing people have discovered is that we lack inherent liquidity. You know, if I had said to you a few years ago that a widely owned name that is deemed to be highly liquid in the marketplace could be down 25% in a few hours. You could wipe 250 billion off a market valuation. You would have said that's really unlikely unless this company is defaulting. Well, that's what happened to Metta, to Facebook. I was talking to someone who told me that they (22/43)
had difficulty trading Microsoft. That when the paradigm changes at that moment, there was a risk absorption in the system. And that tells you two things. One is many people are on one side of that trade, a trade that has worked extremely well. And by the way, it has continued to work relatively well. The losses of January were notable when nothing compared to the gains of the last few years. It tells you that it's still a very crowded trade, but it also tells you that there's structural illiquidity in the system. And that makes sense because since the financial crisis of 2008, we have shrunk by regulation the intermediaries. And we have increased significantly the end users, the non-banks. The ratio of non-banks to banks has gone up enormously. Now, the non-banks can't trade among each other very easily at all. They have to go through the banks. So when they want to reposition in a major way, there simply isn't enough risk absorption to allow that to happen without massive moves in (23/43)
prices. You've seen that with Amazon, you've seen that with Facebook, Metta, but we've also seen it with Snap up 62%. And I think we have to get used to the fact that when the liquidity goes out, we are going to have a lot more volatility, not just single name, but because of ETFs also for indices as a whole. Okay, so that actually raises two questions. The first question is, if we assume that the Fed has lost control of the inflation narrative and that inflation is in fact going to be sticky, it's going to be persistent, does that almost guarantee that the Fed has to hike us into a recession? And given your observations about liquidity, what does that mean for asset prices? And two, what guarantees do we have that the Fed would even be able to do anything about inflation since many of the sources of inflation this time around are supply driven and in some ways out of the Fed's control? So Dovers will live through the 70s and I was just learning economics at university. Remember what (24/43)
an inflation dynamic looks like. Younger people haven't lived through it. And inflation dynamics starts with a major disruption somewhere. In the 70s, it was the oil price increase. Today, it was supply disruptions, labor shortage. It's very local, it's lumber prices you will hear. And then next thing you know, it starts to be very broadly driven. It starts to be more persistent. And the reason why is if you're not careful, what is a reversible and temporary shock changes behavior. And that's why a lot of us, actually a few of us as early as April last year was urging the Fed to be open-minded. Don't call it transitory because you don't know. Have some humility. And what we've seen happen is that the shock may well have started in a certain place, lumber, chips. Next thing you know, it starts disrupting supply chains. It spreads. That's phase one of an inflation process. Phase two is what's called adaptive expectations and we are seeing it today. As people realize, they've been hit in (25/43)
real terms and they want to compensate. Companies start passing on prices to their final consumer without any hesitation whatsoever. And then wage earners start requesting higher wages. That's exactly what has been playing out. Phase three is the most dangerous one. It is when the expectation formation is not just adaptive, you're not just trying to compensate for past inflation, but becomes anticipatory. You start wanting to compensate for future inflation. At its extreme, and I'm not saying we're going anywhere near that, we are not. We're not going back to the levels of the 70s, even though we are following the dynamics of the 70s. At its extreme, it becomes hyperinflation. Now, the Federal Reserve cannot deal with the first shock, but it can deal with what happens thereafter. This Fed had the wrong framework, part one of the mistake, got stuck in a transitory characterization of inflation, part two of the mistake, and part three, it failed to move when it could move. You can go (26/43)
back and though I and others were urging the Fed to slowly take his foot off the accelerator by reducing QE last summer, because what we wanted to avoid is what's going to happen now. The Fed is going to be forced into a bunching of three contractionary measures, and that threatens the economy in a way that was avoidable. It will end its asset purchases. They should have already done that a while ago. It will start raising interest rates and it will look to reduce its nine trillion, bloated balance sheet. And that is why we are now in the world of third or fourth best. The first best approach was to start early, go slowly, and make sure that the economy can accommodate. Now, the Fed is going to be forced into a major pivot, and we don't know what the consequences of that pivot is going to be. The marketplace is pushing it to increase interest rates at least five times in 2022. I would have never called for five interest rate hikes. I don't know whether our highly-leveled economy can (27/43)
absorb five rate hikes so quickly. Again, tons of great questions. One is, how does one think about the relative sensitivity of this economy today to interest rate hikes and monetary contractions? It's so easy to forget. The balance sheet is 10 times bigger than it was pre-2008. It's absolutely wild, 1,000%. But you mentioned the 1970s and that you're saying you don't think we'll see inflation like that, but we are seeing one similar to what we had in the 70s, which is rising energy prices. Can you not foresee the possibility that energy prices could get out of control similar to how they did in the 70s, especially given some of the explicit policy choices and ESG mandates that have been adopted by Western governments and corporations in recent years? So that's a really complicated question because lots of things have driven energy prices. But let me focus on a crucial point you just raised, is that the transition to a greener economy, to a more sustainable economy, is proving to be (28/43)
more complicated than we expected. And I think that this is showing us that it's not enough to agree on the destination. And I am absolutely committed to the destination of a more sustainable way of doing things. I'm absolutely committed to the war against climate change. But whenever you embark on a journey, it's not enough to say, I'm going towards a destination without spending time thinking about the journey. And it turns out that we didn't think enough about the journey, that we didn't realize you cannot substitute something with nothing. So we started the transition away from particularly polluting energy sources, and that is a good thing. But we didn't have the green energy available in enough magnitude. Because of that, gas and oil in particular, that are now being treated as transition energy sources, have seen their prices go up a long way. Now that causes two things. One is stagflationary forces, but that doesn't impact the destination. It just means the journey becomes less (29/43)
pleasant, but it also can erode political will. And already we've seen certain countries in the developing world re-open core minds to try and deal with this energy surge. And the more people do that, the more you lose political will, the more the destination becomes more elusive. So keep an eye on energy. It's really important. The first effect, the stagflationary force, will play itself out because people get priced out of energy-intensive activities. But the second effect is one that you really have to keep an eye on. All right, so let's switch back to geopolitics because that actually does relate to energy. It relates specifically to the cost-benefit analysis that leaders make in a multilateral framework, versus one where individual countries have concern for their national best interest and specifically their national defense. How do you think that changing expectations on the part of global leaders will manifest in terms of shifting alliances, bilateral agreements, and other (30/43)
forms of diplomacy and military buildup in Europe and Asia, and in particular in Europe where you've got these security trade-off that has happened ever since the dawn of the Cold War, where the Europeans have basically offloaded their security to the United States. And that has also given them the luxury to be able to come together in the form of the EU, which itself is sort of one question of the viability of that system. So for a long time, countries ran what I call a dual-option model. You had an option on the US for national security, and you had an option on something else, the EU, or more recently, China. So let's take the example of Australia. Australia is a member of the Five Eye Intelligence System. That is the US, Canada, UK, New Zealand, and Australia. That is the highest level of national security coordination. So Australia had an option on the US for national security. It also was pursuing links with China in order to pursue economic prosperity. That's the dual-option (31/43)
model, and it worked very well. In option pricing terms, the price of that option was very, very low. As US-China tensions build up, the price of that option becomes much more elevated. And at some point, as the factor happened in Australia, you are asked to make a choice. And believe me, the last thing these dual-option countries want to do is make this sort of choice. So the first thing is to recognize that this dual-option model worked fine when it was US and Europe. The US would stand by and let Europe pursue its ever closer union, because that was viewed actually as enhancing the national security of the continent. But it's very different when it comes to US-China with all the complications of that relationship. That is the first major change in the way the system operates. But there's another change that I think we should not underestimate. Coming out of World War II, we constructed a global system where the core, basically the US and Europe, were given massive privileges, and (32/43)
two in particular. The issuance of the reserve currency, which means that you give pieces of paper to the rest of the world and you receive goods and services, that's a great deal. And the second thing is that countries outsourced to the US and to Europe the management of their savings. So the US and Europe ran with a much higher level of savings than they would otherwise, which meant that their interest rates were lower than they would otherwise. Add to that, the US and Europe were given enormous power at the multilateral institution. Even today, the head of the World Bank is an American, the head of the IMF is a European. Even today, Europe and the US, with one or two other countries, can block major decisions at these organizations. Now that system works well if together with these privileges comes responsibility. And that is the implicit contract that the rest of the world had with this system. The core is privileged, but the core is responsible for the well functioning of the (33/43)
system. And to the extent that you have volatility, the Russian crisis, the Asian crisis, the Mexican crisis, the Argentine in default, they all happen in the periphery. 2008 was a great shock to that system, because the crisis happened originated in the US. 2017 was another shock to this system, because under President Trump, the US pivoted very suddenly to an America First model. And then today, there's a third shock to that system, which is that the Federal Reserve is in the midst of making a policy mistake. And that is the world's most powerful central bank. So the other thing that's happened to our global system that has made it less stable, more fragmented, that has made multilateralism much harder to pursue, is that the implicit contract itself is trusted by fewer people, or at least is not trusted as much as it was before. So what does that mean for the position of a dollar? And also, what does it mean for other, let's say currency like either foreign currencies of an emerging (34/43)
country like China, which of course, obviously the Chinese you want cannot replace the dollar, at least not today. And there still doesn't seem to be any good alternative. But also, what does it mean for something like gold, or let's say cryptocurrencies, which have been huge beneficiaries of the risk on trade, but which interestingly enough, have this quality that's different than any other asset class that I can think of in recent memory, which is that so much of the narrative that has driven their valuation has been political in nature. It has been a bet against governments, a bet against central banks. So how do you think of that? So it's really important to remember that when it comes to reserve currency, when it comes to the dollar, you cannot replace something with nothing. So you have to be able to identify what is it that's going to replace the dollar. No other national currency has the attributes of a dollar. So if your world is limited to simply national currency, you end up (35/43)
in a situation where the dollar is the cleanest dirty shirt. What do I mean by that? Assume you are on a business trip and you really are a good packer and you've packed exactly for the duration of that trip. And then suddenly your trip is extended and you don't have time to go to the laundry. That morning you will look at what you have in your closet and you will wear your least dirty shirt or blouse. And that's what the dollar is. The dollar is not perfectly clean, but it is cleaner than anything else. So whenever I hear that the Chinese currency is going to overtake the dollar as a reserve currency, I think, you know what, that's going to take decades. Along comes crypto. Crypto is very different. Crypto is underwritten by an innovative technology. It has a bunch of people that are fundamentalists for the reasons you've cited. They love the notion of a currency operating outside the government system. And their steadfast adoption of that currency has encouraged other people to start (36/43)
adopting it. So will that be the end of the dollar? The answer is no. I'm not a believer that crypto will disappear, but I am a believer that crypto will not become the world currency because governments will fight it. They will fight it because it complicates monetary policy. It takes away the senior edge that you get from issuing a currency. And legitimate concerns that the good of blockchain technology and the broader good of fintech and other innovation comes also with increased risk of malfeasance. Illicit payments, etc. So this notion that we should expect governments to stand by on the sideline and see a crypto on is not going to happen. And we've seen two reactions. China, very clear, make it almost impossible for the private sector to develop their own alternative currencies, but co-opt the technology and start working on a central bank digital currency, CBDC. The US, unfortunately, is still trying to sort out. Does it want a private model? Does it want a public model? And the (37/43)
two sides aren't talking to each other enough. They should be. They really should be because this innovation is not going to disappear. But in neither cases is crypto a global currency. Does that also mean that you think that regulations will distinguish or differentiate between certain types of protocols that, let's say, generate utility versus ones that are focused on being currencies like stablecoins or something like Bitcoin, for example, which was recently adopted in a certain way by the government in El Salvador? So I do think that we're going to have refined regulation. I do think that people are going to recognize that this is an incredible heterogeneous space, that it's not just bitcoins, that there is an enormous amount of things to look at. And we will get differentiated regulation. But it's going to take time. Right now, the two sides are speaking different languages. The crypto fintech industry, with repeating the mistake of big tech, which is you are so focused on the (38/43)
incredible innovations and the things that you're able to do, that you weren't able to do, and the efficiency gains, that you lose sight of the systemic implications. And by the time you realize you're systemically important, it's too late to do something about the unintended consequences and collateral damage of your activity. That's what has happened with big tech. Governments on the other side are also repeating the same mistake, which is of not engaging early enough and with an open mind enough to understand how powerful these innovations are. So hopefully the two sides will talk to each other more because there are significant efficiency gains to be made to all sorts of financial transactions. And it needn't be a global currency, but it can be really impactful in terms of the payment system, remittances, and all sorts of other issues that right now are rather inefficient in the financial system and are costing too many people, too much money, including, unfortunately, the most (39/43)
vulnerable segments of our population. Mohammad, you've been so generous with your time. We had some technical difficulties that caused you to drop off during the call. One last question, if you could answer this, which is, given everything that we've talked about today and your views on where the market is going and the risks, or maybe a better way to put it is the risks and how to position. So, Ganesh, how do you think about positioning yourself and what are the industries and national economies and regional economies that you think are best positioned to handle the type of regime that we're moving into? So I think of three simple frameworks to apply. And when you solve for your own risk tolerance and investment objectives, you get answers. The first one is the ratio of tactical positioning relative to structural positioning, relative to secular positioning. Tactical is something that you believe in for now, but you have your eyes wide open to things changing. Riding the liquidity (40/43)
wave is an example of tactical. Secular is something that's going to work up over time, but it will be a bumpy process. The second example is because you are taking advantage of some inefficiency in the system, investor segmentation being one example. So the first thing is be very clear as to how you are positioned. And right now, you want to emphasize structural and tactical over secular because the world is uncertain. The second is understand the importance of mistakes. Mistakes are mostly recoverable in the investment world. If you have time and you're not forced out of your positions and you don't have a default, most mistakes are recoverable. There are unrecoverable mistakes and you require a tremendous amount of granular analysis and understanding of where are you in the capital structure, how are you collateralized or not collateralized, who else is sitting in the table with you. And you just have to recognize whether if you end up making a mistake and we really don't want to (41/43)
make a mistake, no one wants to make a mistake, but when the world is uncertain as it is today, the probability of a mistake goes up, that you have contained and eliminated your unrecoverable mistakes. And then the third issue is what attributes do you want during both the journey and the destination? For example, today, you would want wherever you invest to have pricing power. Pricing power is really important in a world facing inflationary pressures. And that comes down to the last issue is that sort of determination comes from a mindset that has three things. One is resilience. If you fall down, you pick yourself up really quickly. You don't have to deal with all the consequences of falling down. Two is optionality. You keep your mind open. You look for data. You've revisited your priors. And the third one is agility. It's a confidence to move forward even after you've made a mistake. And hopefully if you have resilience, then that mistake is not too costly. Mohammad, thank you so (42/43)
much for your time. I really appreciate having you on. Thank you. It's my great pleasure. Thanks for all the great questions and the interesting discussion. As always, thanks for listening. We'll see you next week. (43/43)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? Today's episode of Hidden Forces was recorded on Monday, May 25th, which means that neither Thomas Ridd or I had a chance to comment on the protests and riots that have ensued since the death of George Floyd. That said, the subject of this conversation, disinformation and political warfare, is highly relevant to the situation we all find ourselves in today. If we take a step back and we look at any one of the many news stories that dominate our attention, what do they all have in common? They're all stories. That's (1/43)
obvious, you might say it's a tautology. I know it is, but it's also a profound realization when you stop to think about it. Stories are, by definition, delivered to us secondhand. Their sourcing is curated by media organizations and social media platforms whose biases, incentives, and exigencies often put them in an imperfect alignment with the truth. The situation has only become more complicated today. The disintermediation of the media industry, the elimination of gatekeepers and the proliferation of highly sophisticated third-party ad platforms has led to a radical reorganization of the media environment and with it a profound increase in misinformation. It's within this new environment that a very old practice has found a new home. The art of disinformation and political warfare with the Soviets dubbed active measures represents one of the most urgent threats facing Western societies today. I say Western, but I should really say open, liberal, and democratic societies which rely (2/43)
on a vibrant and free marketplace of information from which to source ideas, validate facts, and challenge arguments. You're going to learn today that active measures are a form of systematic deception. They're adversarial and they're meant to change our behavior and in some cases elicit a very specific response. They exploit existing contradictions and drive divisions where they already exist and they are active, which means we are often interacting with them and we don't even know it. Most importantly, active measures require our active participation in the story-making process. Without our credulity, they are powerless and it is our credulity, in fact, our tenuous relationship to the truth that makes these measures so powerful. In the first half of this conversation, we focus on historical examples of active measures, things like the 1959 Christmas Day Swastika campaign, the AIDS hoax, the neutron bomb, and nuclear winter, perhaps the ultimate example of a KGB active measure that (3/43)
completely alarmed Western countries with science that no one in Moscow ever believed was true. In the second half, we spend our time on conspiracy theories, including a conversation about claims of Russian interference in the 2016 election and how our hysterical reaction to those interferences were themselves a perfect example of how active measures operate in practice. For those of you who remain interested in this topic after today's conversation, I highly recommend you check out my guest's book. The research that went into active measures is mind-boggling, and Thomas did an amazing job of making so much of that primary source material available online for free. And I've incorporated some of it into the rundown to this week's episode, which is available to subscribers along with the transcript and part two to our conversation at patreon.com. And with that, please enjoy this week's episode with my guest, Thomas Ridd. Thomas Ridd, welcome to Hidden Forces. Thank you. Thanks for having (4/43)
me. How are you? I'm very well. Yeah, very well. Just settling in here in my home studio, which I built for this purpose. Really? When did you build the studio? When the pandemic hit and my book was coming out, I thought, I really need to invest in some hardware. That was smart of you. You'd be surprised at how many people haven't considered to do that, or they don't even think it's important. My work is a little techy, so I went to this one tech conference, obviously online, and some people shared pictures of their setups at home. And I saw that some people would hook up their DSLR cameras, their camons and Nikons, as a webcam, which is really cool. That's great. Well, yeah, we have a whole system in place too for our guests to help them set up a sound system or a sound solution, because I also hate crappy audio, as I've talked about. But I know you have limited time today, so I actually want to get right into this conversation, because your book is one that I looked very much forward (5/43)
to reading. Every so often, I'll go through Amazon and look at upcoming books, and yours was one of those books that I eyed, and it's about a subject that I find so interesting. Before we get into it, and the book is Active Measures, as I mentioned in the introduction, give us a little bit about your background for those who aren't familiar with your work. Yeah, so I am a professor. I teach at Johns Hopkins University in Washington, D.C. And my work is at the intersection between computer security and political science. So I'm a political scientist by training, but did a fair amount of technical training as well. So it's cyber security and intelligence history, what I do. So you've actually written three other books or four other books? Four other books. Yeah. Yeah, one of them might be your PhD thesis, the one on war and media operations. But there's also a really interesting book that you've written on the history of cybernetics, which I know a little bit about from having studied (6/43)
information theory, but that's fascinating. What got you into writing a book about cybernetics? I got this question a lot about where this term cyber comes from. And the standard response comes from science fiction from William Gibson's book Neuromancer, which I found a little too... There was intellectually shallow as a response. And of course, if you start looking and trace the history of the term as well as the thinking behind the early internet, really, then you end up with the history of cybernetics in the 1940s. So I went back and told that story. So how does your current book, Active Measures Fit in the Progression of Your Previous Works, what led you to write it? So when the 2016 election interference started to happen, the Russian interference in the US general election, when it became public in June 2016, I was in the middle of investigating down in the technical weeds, a Russian espionage campaign that started in late 1996, known as Moonlight Mades to people studying this (7/43)
kind of thing. And the history of cyber operations is different from other histories in the sense that usually when you go back further back in time, you see more details, the archives open. But in computer network intrusions, the opposite is true because the digital forensics disappear when you go back in time. And there are no archives open yet. So I wanted to change that. And I'm successfully tracked down an old command and control machine that was used by these early Russian operators in the 1990s in London. And I was doing an in-depth analysis with colleagues on the malware that we found, the old malware and the old sort of hacking behavior. And when I was in the middle of doing that, the election interference hit. So I was like, I had this puzzle that I suddenly confronted. I clearly was able to understand some of the technical forensics and the evidence there was very strong that was clear. We're looking at a Russian disinformation operation, literally from day one. But the (8/43)
history, I didn't understand. So I thought, okay, I just have to understand the history of what is going on. So I started right there. Well, the title of the book is very interesting. Some people may not know what active measures are. So we probably want to begin with the definition. But the subtitle is the secret history of disinformation and political warfare, which almost feels to be self-negating in a way. So maybe you can tell our listeners, those who don't know what active measures are, what are active measures and why did you choose this as the title of the book? Yeah, active measures is a term of art that emerged in the Eastern Bloc and Soviet intelligence community in the 1960s. And throughout the entire Cold War was how they refer to disinformation operations. It's actually quite a helpful term because it asks two questions right there. The first is, how do these measures become active and how do you measure them? I think most people are familiar with the idea of (9/43)
disinformation. And one of the things that I came to realize when reading the book is that active measures or disinformation in practice, and this is again a term that's not ... I don't know if you just mentioned this, but it's a term that's no longer in use. But this is not really necessarily about creating false information. You had this great interview you did over three hours, I think, with Ladislav Bitman, who was a Czech intelligence officer. He described it as systematic deception. He also described it as sticking a pin into the ass of an elephant or something like that. Again, this idea of systematic deception with either a specific goal or a general objective to impair the enemy by exacerbating existing contradictions within the society. Can you elaborate on that a little bit? Yeah, so the early idea that was developed in these operations, and this really dates back a century, but became articulated in these large bureaucracies, as you just pointed out in the 1950s and 60s. (10/43)
Disinformation is not about just forgeries and producing fake documents. It's about tapping into existing fears, into existing prejudices of the target. Whatever the target is, it can be a society, it can be only one individual or an organization. Then gently exacerbating those concerns or nudging them along into a specific direction where you want them. Sometimes, you may decide as an offender, as an operator, to use completely accurate information. Sometimes, you will introduce some forgeries along the way in order to achieve that effect. But the goal always is to exacerbate something that already exists. I think this is a point that Bitman, in that interview, that I think you listened to, comes back to again and again. Well, there are some great examples in the book, both in Europe with, I'm thinking specifically, of the Christmas Day 1959 Swastika campaign to exacerbate existing tensions in the German public and in Europe around the Nazi past and anti-Semitism, and also in the (11/43)
United States with America's history of racism and how that's been used consistently. I wonder, are examples to even broaden the debate, are examples things like the Tea Party movement, Black Lives Matter, Me Too, things like this, not that these themselves were operations, but that within these, or what could be entirely organic movements in their genesis, are active operations by foreign intelligence agencies like the GRU or the former KGB, or other countries that seek to destabilize, in this case, the United States? So let's stick for a moment with the example that you just brought up, the Christmas 1959 anti-Semitic campaign, because it's easier, in my experience, it's easier to talk about distant examples where you see a similar dynamic with a little more emotional detachment. As soon as we talk about the present, the risk is that people immediately will... Which is also what makes them so fertile as well. Exactly. Exactly. Yeah, exactly. Yeah, exactly. So the 1959 anti-Semitic (12/43)
campaign where a KGB operation smeared and dobbed swastikas and Jews out at synagogues and graves and cemeteries across Europe, even in the United States, that operation of course tapped into existing anti-Semitic sentiments in Germany and elsewhere, because it was a real problem. I mean, the Holocaust was only 14 years in the past, so that precisely was what made the operation so powerful. Not that it invented something new, but that it tapped into an existing trauma. And it's no coincidence in my mind, although I'm obviously, I don't know for a fact, but I don't think it's a coincidence that the engineer at the mastermind behind that operation was an Armenian officer who I think understood the value or rather the effect of trauma from his own history. So even today, when somebody on Twitter mentions that campaign from 1959, because it hasn't been fully exposed as a campaign until today, I mean, I'm collecting all the evidence that accumulated over the years in the book, even today (13/43)
people would react on Twitter by saying, well, but obviously Germans would react that way. I am German. They would say, well, obviously we, you know, Germany had an anti-Semitic problem. They didn't need KGB for that, which is precisely the point. What do you mean it's precisely the point? Can you elaborate on that? Well, the point is Germany had, was deeply traumatized by the Holocaust, and of course still had existing neo-Nazis, you know, leftover Nazis, actual Nazis in the 1950s and 60s, some of them in positions of power still. And the KGB understood that pouring oil into this, you know, fire would only lead to another explosion of outrage, and it did. So the notion that something, that Germany has an existing problem there and doesn't need outside help, that is the raw material for a successful operation. You know, in your mentioning of Ivanishovich Agayans, I think his name was the Armenian, and his understanding of the sensitivity of the issue of anti-Semitism and how it could (14/43)
be wielded effectively in a disinformation or active measures campaign. I think about just how artistic many of these campaigns have been, the ones in your book. This isn't something that can be easily taught, and the people behind these types of operations are extremely creative people. Can you speak a little bit to that, to what kind of person or what kind of organization is required to be effective in these types of campaigns of active measures? Yeah, so that is something that I found just fascinating, because active measures, if you look at how these, the development of forgeries and of getting under the skin into the subculture of your adversary, this is a skill set that is required to be good at this that runs counter to a military mindset. And bear in mind that many of the organizations executing disinformation operations have a military culture. For example, Stasi, Foreign Intelligence, HVA, who is really good at this, they had an internal rank system and military training. And (15/43)
so the puzzle, the question is really, how do these organizations that value discipline, orderly conduct, and also an intelligence collection traditionally values, factual, very factual reporting, and careful language of estimative probabilities. All this runs counter to a culture of forging and running disinformation operations. So it appears that they internally needed to find people who had high risk appetites, as well as the really artistic, almost artistic, the mindset of a creative writer, who really has to study his or her subject first and then understand how a specific culture works, and then start writing and sort of penetrating it, and ultimately publishing something under false pretenses that has a corrosive effect. Well, so there are many contemporary questions to explore in this conversation, but before we do that, I think it might be helpful to actually go through some historical examples, because in fact, the book is a history of disinformation. And actually, that (16/43)
raises the larger question, which is, how do you write a history of disinformation? How do you go about researching a book like this and feeling confident that you're not actually contributing to advancing a body of misinformation or to perpetuating an active measure? Yeah, that's a super tough question. And of course, also a fascinating one for an author. How do you write a book about disinformation without disinformation in it? And what I did is two things that I just would point out. One is, I'm showing my work. You just quoted from this interview that you heard with Bitman, which you can find in my end notes. You can literally pull down the entire interview and listen to it. You can find many primary source documents that I work with from various intelligence archives in the end notes, the full document there as well. So everybody can check the source documents. So I had to work with the best source documents available and also be very open about the limitations of some of the (17/43)
first-hand accounts that we have in memoirs from defectors, for example, because some are less reliable than others. And then the other thing that I did is I sometimes included, I made it part of the story how I discover the story and sometimes explicitly highlight, sometimes in the text, but mostly in the end notes, the limitations of certain pieces of evidence that we have. So for example, I describe the story of how Der Spiegel, the news weekly in Germany, reported out the story that Angela Merkel and the NSA, the national security agency, spied on Angela Merkel's cell phone. And there were doubts around that story and some doubts remain, although it appears to be factually correct. And I decided that I wanted to tell the story of how Der Spiegel reported it and what the limitations were. So it's a bit of a convoluted way of telling a story sometimes, but I think it's necessary to... Can you tell our listeners who may not be familiar with this, what you're referring to? Yeah, so (18/43)
relatively early in the Snowden, after the Snowden leaks, the story broke that the NSA, the American spy agency, Eaves dropped on the phone of the German Chancellor, Angela Merkel, the mobile phone. And it became a huge point of contention between Obama and Merkel and for German-American relations. And Der Spiegel, the German magazine, reported out the story, broke the story, but they never quoted Snowden as a source. So they remained that question, where does the story come from? How did they get their hands on this story? Nobody contested the veracity of the story, but the question was, why now and how did they find it if it's not from Snowden? So the suspicion arose in the intelligence community in the US and elsewhere that this could be an active measure. A true one, accurate information was given to this newspaper, but nevertheless an active measure. Now, we don't have actually strong evidence that it is an active measure, but the fact that some influential people believe it might (19/43)
have been one is something that I made part of the story, which I think is... And why? Because it shows the corrosive, effective, active measures. If we can't explain something, then of course immediately we begin to doubt and potentially see foreign interference. That in itself is part of the history of this information. How does that relate to the accusations of Russian hacking in the US election? Yeah, so sorry, I'm jumping back and forth between old examples and new... Oh, sorry, I didn't mean to interrupt you. I only mentioned that. We can go back to it. I only mentioned that because our reaction to that story was so integral to the effect in this of any campaign and that's why I brought it up. But we can go back. I'm sorry, go ahead. No, no, I mean, it's a great question you're raising and indeed there's a parallel. You know, when I wrote this book, I became at some point quite concerned that I could become ultimately what is often called a useful idiot and it's just literally a (20/43)
technical term that you find in intelligence archives. I didn't want to become somebody a useful idiot who inadvertently helps an adversary achieve an objective, you know, years after the fact. If I tell the story in a way they want it to be told. And I thought to myself, okay, there are two ways I could become a useful idiot, either by understating the effect of an operation or by overstating the effect of an operation. So when I look at 2016, the different components of the election interference, I was acutely aware that we collectively in the United States especially tend to overstate their effectiveness, the effectiveness of the Russian interference. And I didn't want to run into that trap. And you think that's generally true? We tend to overstate, generally speaking? Well, of course, we have to be specific and I am very specific in the book. Would you like me to go into some detail? Sure. Look, Thomas, your book is fantastic. It's full of so many incredible stories. The ones that (21/43)
stuck out most to me, interestingly enough, besides the swastika story, which I mentioned because it was so exemplary for what we discussed earlier in terms of how it exacerbated internal contradictions or frictions, were stories that were relevant to my own life that I remember, like the neutron bomb. I may not have remembered the actual campaign against the neutron bomb. I was born in 1981, but I do remember the neutron bomb. I remember that term. I also remember nuclear winter, which is a fascinating story because it involved people like Carl Sagan as potentially useful idiots in a way. And the AIDS story, the AIDS story, fascinating. So feel free to mention whatever you like because there are too many things for us to get through in the course of this interview. Yeah, that history is richer than I had anticipated myself when I started the book, obviously. But let me just turn the question around to you because I think you have done, you really did your homework for this (22/43)
conversation. What is the story that surprised you most? What story surprised me most? Maybe the nuclear winter story? Yeah. But it's a tough question. You're putting me on the spot, but maybe that story? Yeah, the nuclear winter story just to tease out the gist and the morale of the story in the book is fascinating because there's this theory that takes hold in the early 1980s that a nuclear war, global nuclear war, a major nuclear exchange between the superpowers could kick up so much debris and dust and smoke into the atmosphere that there could be a regional or potentially an entire winter-like scenario on the entire northern hemisphere, potentially even the entire planet as a result of this war, meaning temperatures would drop and the entire climate would be messed up for years. So that theory, the question is where does that theory come from? And what's fascinating about the story to me is that this is one of the examples where this theory organically emerges in the scientific (23/43)
community in the United States. But then at some point, the Russian nuclear scientists, climate scientists, and ultimately the Russian intelligence community want to jump on the bandwagon and want to shape the theory because it serves their interests ultimately, because it makes a nuclear war up here as complete folly. And what happens is that the KGB convinces itself. We only have one really good source for that, but still it's a very plausible situation that this was actually accurate, that KGB convinces itself that it successfully shaped the conversation about nuclear winter. And there is no good evidence to support that narrative. So it's really a case of self-disinformation. KGB self-convince itself that it was more successful than it actually was. And the story is so important because this is a pattern that we see again and again in the history of these intelligence operations. Why is that important that they convince themselves? Because it shows us that running disinformation (24/43)
operations at scale on a large bureaucracy does it, creates a blowback effect. So let me give you another example. So there's this mid-1960s operation, 1964, that I describe in the book with a lot of archival evidence. I have all the Czech case files. It's called Operation Neptune. And the Operation Neptune was playing out 19 years after the Holocaust, after the end of World War II. And the goal of the operation was very clear. We know the goal. The goal was let's try to do an operation to force the German parliament, the West German parliament, the Bundestag, into extending the statute of limitations for war crimes so that German war criminals from World War II, from the Holocaust, wouldn't get away with genocide, with war crimes. And the Czech said, okay, let's publish files, Nazi files, to restart the conversation to sort of pour fire into this conversation in, pour oil into the fire of this conversation in West Germany about Nazi war crimes and put pressure on the parliament (25/43)
through public outrage. So they ran this operation that involved dropping Nazi files into a lake and had them discovered by the press. You laugh. Yeah. No, it was a funny story. It was a very funny story. Bitman talked about this one as well in your interview, I think. Yeah, only briefly. It's an insane story. It's one of the most cinematic stories. I also have like 300 pictures or 500 pictures of the story in the released. Yeah, I think you also published an article on the internet with this story and there's some pictures as well, which I included in the rundown. Yeah, thank you for this and why our magazine, yeah, it turned out nice. They included many of the pictures. Yeah. But the takeaway point here is the assessment that they did internally. So the Czechs, you know, the Germans end up extending the statute of limitations. This actually happens a few months after the operation concludes. And the Czechs write a letter to a memo to KGB in Moscow and KGB responds, essentially (26/43)
slapping them on the back saying, great, you did it. Successfully, the Germans changed their law. Well done. But I can tell you as a German historian, that's just not what happened. Every family in Germany, almost every family, people had this conversation with their parents and grandparents. What did you do in the war? People were coming to terms with the Holocaust. I mean, the word Holocaust itself got established a little later as a major term that everybody knows today. The notion that there's a small Czech Czechoslovak operation, you know, it's like pouring a bucket of water on a moving glacier. But if you only look at the bucket of water, you think you actually move the glacier with it. So that is basically what the Czechs and KGB did. They were kidding themselves. So let's actually go back to nuclear winter, because I think we got slightly sidetracked or I sidetracked us, because it is you probably hit the nail on the head. It probably was the most interesting or surprising (27/43)
story for me. Maybe not the one that resonated the most with my contemporary experiences. That might have been the AIDS campaign. But the nuclear winter was the one, what was the most surprising? So I'm not sure where we left off exactly, but can you continue on that one? Yeah. So the story on the nuclear winter story is that you had this organically emerging theory of nuclear weapons potentially causing climactic change on a major planetary proportion scale, and KGB then trying to shape the story and make it more extreme, and then convincing themselves they were successful and internally claiming credit for the nuclear winter story. So that's why I mentioned the the Nazi documents in the 60s. It's the same logic. It's an agency taking credit for something that happens almost completely without their own influence. That really relates back to what we already talked about in the Bitman interview. If you're affecting something that is already existing, an existing fear, an existing (28/43)
theory, an existing narrative, if you're running an active measure to affect that existing thing, then of course, the question is how do you measure it? How do you measure your own effect on something that was already happening? And the answer is very hard to measure. You don't have a measurement device, as Bitman said in the interview. And because you don't have a measurement device, you create this temptation for a bureaucracy to simply claim that they had success because they can. I mean, because you can't measure success, you also can't really just say there's no effect. That's the mirror image. It's just vague by definition. So that is the great temptation, I think, and it's within that temptation that we are discussing the 2016 election interference. These operations, they feel disinformation itself feels a lot like yanking on the threads of a sweater or of a tapestry of an image that's woven into fabric. But active measures are simultaneously the rethreading of that fabric. And (29/43)
it feels like it gets to a place where it's hard to distinguish between the active measure, as you say, and the truth. And this brings us to a larger question, which is that when you engage with this material enough, you begin to really question the nature of truth itself. And for the most part, the book is really not, it's not an intellectual reflection as much as it is a reflection through the recounting of all these different stories and all the research you did. But you did mention this a bit towards the end. How important or how prominently does this dilemma feature in your view? Yeah, so that's, of course, the toughest question. Should we change our relationship to objective facts to the truth? I mean, I had these experiences when I was writing the book that I would go through archival material and in all of active measures, like yearly plans from Stasi or the Czechs or mostly the Bulgarians, actually, Bulgarian intelligence, state security, and they would discuss their annual (30/43)
plans with KGB. And many of these operations I didn't know about. And there were books that were mentioned. So I would Google the book, go to A-books, and there it was. And then I would buy the book. And then I had it in the mail and nobody had seen this book as a forgery before. Some of these books were like reviewed in high profile. I mean, one of them was reviewed in The Guardian and in The Washington Post, and it was a KGB operation. So I began to, I mean, it was an unpleasant sort of weird experience to again and again find these forgeries that hadn't been discovered as such. But of course the... Books, that book was actually, is that the book you're referring to that actually was reviewed? It was reviewed by The Times or major publications? Yeah. So there was a fake memoir of a Chilean general who got assassinated by Pinochet. Right. And similarly, isn't the same thing the case for the protocols of the elders of Zion? A similar story? In the sense that it was originally a product (31/43)
of misinformation? I mean, the protocols of the elders of Zion are just made up, obviously. But I'm not talking about that in the book. I just want to make that clear. It's not part of... No, maybe it was an interview that I heard. But I mean, it was just another example in my mind of... The reason I brought up the protocols is because it's still active, right, in a sense, right? It's still something that is actively believed and discussed. Yeah, of course. I mean, there are many examples like that. There are still people out there who believe AIDS is an engineered bio weapon. Right, that it was developed at Fort Detrick by the US government. Right? For example, yeah. I mean, that was a conspiracy theory that was making the rounds already before the Soviets picked it up in the early 1980s. One, again, one of those examples where you have an existing organic narrative at the fringes in this case, far-left activist circles in New York and Boston. And then it gets picked up and amplified (32/43)
and developed by an intelligence agency. You know, Thomas, I mentioned to you right before we started recording that I used to do a television show on the RT network. I ended the program before... Or right around the time that the war in Syria began, but before it really got crazy. And it was not a political program, but every morning we would have meetings, editorial meetings, where we would have to let the director of the news department know what we were putting out there. And I remember just one distinct moment right now as you're talking, where I had a very specific framing and he was questioning it. And I was like, well, what do you mean? He was, well, his response to something like, how do we know? This very sort of open-ended question, how do we know? And there was a... I distinctly remember on multiple occasions, there was this tendency to want stories to openly question established narratives. And clearly, it was not with the best intentions. And there's a kind of embedded (33/43)
cynicism in all of that. You know what I mean? I mean, absolutely. The temptation, of course, is to... I mean, it's good to ask tough, open questions. I had to do this all the time to question my beliefs when I was writing this book, because if I don't do that, if I don't really radically question, for example, a narrative that I convinced myself of, that it is accurate, then I would fall into that trap. But of course, the trick is to always be open to new evidence. And ideology can conflict with facts in interesting ways. I tell that story in the book of a specific forgery that the East German newspaper, Neues Deutschland, puts out, I believe, in 1957, where they describe how big oil, Rockefeller, is influencing Eisenhower's foreign policy. And it's a forgery. They made it up. I mean, they meaning some regime foragers for the East Germans. But the way they introduced the forgery is so fascinating. They say, this letter spells out in gleaming clarity how capitalism works. And for them, (34/43)
the forgery was even better than the truth. Obviously, they don't admit that it is a forgery. But in their own mind, the forgery was even better than the truth because they knew it was really going on. So they came up with a fake letter that just spelled out what was for them a truth. It's like a painting that is depicting a landscape in the perfect light conditions or something like that, which is obviously just a painting. But really, the beauty that you capture is real. And it's that type of ideological self-convincing that I think we can still see today. Another phrase that came up, I don't know if this is a phrase I've read anywhere, but it's something I've written, I've used in writing. And it is that these types of campaigns or efforts, they use truth in the service of lies. And they're incredibly cynical in that way. There's another instance of a story in your book. I don't remember which one it was, but where the measures were found to be false or fake. But the KGB, I think it (35/43)
was that was perpetuating these, doubled down by basically saying, well, this is exactly what you would expect. I mean, it completely fits the MO. So what difference does it really make if it's fake or not fake? This is exactly what we all know is going on anyway. Yeah. You're referring to two different quotes from far-left peace magazines in the United Kingdom that were sent a forgery by KGB or a war plan that looked like a forgery. And they said, well, this could be a forgery or it could be real, but it doesn't really matter because even if it's a forgery, the reality looks like it or something like it. So this is really scandalous. And that is exactly what I had in mind. So thank you for bringing that up. I think any investigative journalist, any investigator in a law enforcement context, intelligence analysts or scholars like myself, you occasionally, if you're really honest with yourself, you see that temptation in yourself. You're writing something, you're doing research, and you (36/43)
selectively look for something that will support your existing narrative. It's a very deep-seated temptation that really we all have, but it's very treacherous. And as people who are professionally sort of going after facts, we have to train ourselves to value the facts that contradict what we already think most, these are the most valuable facts, the ones that falsify our thinking, not the ones that confirm our thinking. Absolutely. And also that fit into existing narratives that are perpetuating themselves in the public mind. It's a lot easier to get traction in the media today when you insert a story into an existing narrative, into a preexisting framing, especially one that is no pun intended active, that is particularly potent in the moment. Another thing that I thought a lot about when I was reading your book was how these types of measures exploit hypocrisies in the body politic of an open society like the United States, because America is not the American military, American (37/43)
intelligence agencies are not the paragons of virtue in every way. And there are many things that our intelligence agencies do covertly that we may not, that they, let's say in public, would deny. And I think this is a particular issue for an open society like the United States because these hypocrisies are more evident. They are hypocrisies, whereas in a closed authoritarian society, it isn't necessarily hypocritical to engage in these types of behaviors. So I wonder what you think of that. And maybe the Snowden revelations are a good example to perhaps explore in an attempt to try and understand how this actually works in practice. Yeah, so when I started mentioning publicly the election interference in 2016, I was on the record as one of the first calling it out as what it was. Of course, I got a lot of pushback. And among the pushback was the argument that, well, aren't we doing just the same thing? Isn't CIA doing the same type of operations that they are doing? So let's not kid (38/43)
ourselves and just blame the Russians. So I wanted to be in a position to tackle that argument with the facts and therefore decided to look at some early CIA operations. That's why political warfare is in the title, by the way, because CIA called it political warfare. That's in time of art in the 1950s. So most of these measures were developed and deployed in Germany, in between East and West Germany, correct? Yeah. In the early days. In the early days. Yeah, I just put a particular emphasis on Berlin because I wanted to tell that story. But the others as well. But Berlin was the hotspot, yeah. So please continue. Yeah, so if you look at what CIA did in the 1950s, you see that they were really aggressive, quite good at what they did. You're putting out a lot of forged information under false pretenses. But then when you move into the 60s, at some point, they become a little more reluctant. They wind down their most aggressive operations in Berlin. Why exactly is really difficult to (39/43)
say? But they do that we can clearly see in the archives. And they become more concerned also about factually correct information. And this is in documents and memos that were never designed to be or never written to be published. So they're not deceiving us. You can read the memos and you get a sense that they're actually trying to put stories out that are accurate. They do a memoir, CIA publishes a memoir of a defector, not defector of a spy, Oleg Pankowski, a GRU colonel at the time. And he gets executed in Moscow and then CIA publishes the debriefings as a memoir. But obviously nobody mentioned that this is a CIA book. But they take great care to be as accurate as they possibly can be on the content side. And that's a fascinating little shift that's going on there. As the East, the Soviets and the East Germans and the Czechoslovaks are escalating in the mid-60s, CIA appears to de-escalate the forgery and deception game. So, Thomas, I'm going to move the second part of our (40/43)
conversation into the overtime, where I want to explore further the role of journalism in active measures and what journalists can take away from this conversation and how they can get better at recognizing such types of campaigns, what to do in the event that they're passed, let's say, credible information that they can verify, but that which they also know is being fed to them or they suspect is being fed to them by a malicious actor. I do want to talk more about the Russian hack in 2016. Also, the email leak is a great example of using something that is true for the purposes of foreign intelligence, but with an eye also on the future. I know, obviously, it's all speculation, but this is so important. We live in such a divided time in the US. For regular listeners, you know the drill. If you're new to the program or if you haven't subscribed yet to our audio file, Autodidact or Super Nerd Tears, head over to patreon.com slash hidden forces or scroll down to the summary section of (41/43)
this week's episode and click on the link that sends you to the Hidden Forces Patreon page, where you can continue to listen to my conversation with Thomas, including getting access to the transcript, rundown, and notes to today's conversation. I hope you guys will join us. Thomas, stick around. We're going to move the second part of our conversation into the overtime. Sure, sounds good. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For (42/43)
more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod, or send me an email at dkathiddenforces.io. As always, thanks for listening. We'll see you next week. (43/43)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Matt Taiby. That was last on the show about two years ago and our conversation focused mainly on the news media, how the press covers politics and power and how propaganda works in a democratic society. It was a great episode. Check it out after today's recording if you're interested. Many of you will already know Matt by reputation. He's one of the most outspoken, no holds barred journalists that you will find anywhere and a precious rarity during a time where many prominent (1/43)
journalists and political commentators seemed to prioritize servile flattery and compliance above any commitment to telling the truth. Matt is also a contributing editor for Rolling Stone and winner of the 2008 National Magazine Award for columns and commentary. He co-hosts the Useful Idiots podcast alongside Katie Halper, publishes a regular newsletter on Substack, which I strongly recommend you all subscribe to and is the author of 10 books, the latest of which is Hate INC, which we discussed during our last conversation together on episode 78. We are living through what I would describe conservatively as a very dangerous time. Everyone's on edge because unsurprisingly, days after the election was supposed to be over, we still don't know who the president is and technically we may not know until inauguration day. What's most remarkable though about the shit show that this election is turning into is how predictable it was. I've watched panels and been on conference calls at think (2/43)
tanks dealing with how to manage voting regularities, large numbers of mail-in ballots and just about any other issue you can imagine and yet somehow we still managed to screw it up. How can you not entertain conspiracies when you're faced with explanations that demand such incompetence? It's one of the many questions that Matt and I explore as we try and wrap our heads around this ongoing parody of an election that is guaranteed to piss off one half of the country and further radicalize and polarize an already outraged electorate. I've been saying this since the very beginning of the coronavirus outbreak. Coronavirus is not the existential threat that we should be concerned about. The polarization in our communities and in our country is. If it means we can't effectively govern ourselves or hold a free and fair election whose outcome the vast majority of Americans can trust. We have enemies both foreign and domestic who would love nothing more than to further divide us. And so far we (3/43)
have fallen directly into that trap. I have absolutely no idea what the next few months will hold but I implore everyone listening today to think twice before acting on your impulses and emotions. We need calm. The anger and unrest in this country could easily spiral out of control and I don't think any of us are prepared for what something like that will actually look like. We are all accountable and we all need to hold ourselves accountable. In a democracy there is no one else. A quick note for anyone who is new to hidden forces. We don't accept commercial sponsors. These conversations last anywhere between 90 minutes to two hours. The second half of which is made available to our premium subscribers along with transcripts to each conversation as well as notes in the form of rundowns that I put together ahead of each and every episode. If you value what we do consider signing up for one of our four content tiers. If that's not an option for you there are still things you can do to (4/43)
support the show by sharing your enthusiasm and love for the podcast. Tweet it out send it to your friends and write us a review on Apple podcasts. Every bit of support helps especially in a climate like this where independent voices are needed and where we face significant resistance in breaking through the noise of partisan ranker and disinformation that has only been amplified by this most recent election. And on that note please enjoy this week's conversation with my guest Matt Taiibi. Matt Taiibi, welcome to Hidden Forces. Thanks for having me on, Dmitry. Long time. Yeah, it's been how long has it been? A couple of years I think. Yeah, I think so. Yeah, I think both campaigns have conspired against us on this morning. Shenanigans. Yeah. Yeah, we had a really tough time setting that up. For listeners we also may have a mystery guest joining us later. We'll see. There's a lot of technical issues going on. Matt, I don't think I've actually ever seen the back of this part of your (5/43)
room. This is new. I moved to this place. It's nice. Yeah, I think. And that's the cover of which book was that on the right? That's the divide. That's the divide. It's a painting by Molly Krabb-Apple. Yeah. Right. It's the only piece of art I own. So last time you were on the show, I don't know if you remember this, but we talked about your experience covering the Republican primary and actually Trump in particular and how you actually thought that he had a much better chance of winning than your colleagues did, but you kind of got suckered into going along with them. Yeah. And you said, I think you said, I tried to find the transcript, but it was in the, it was must have been in the overtime. I think you said that you would never let that happen to you again. And I did let it happen again. So what happened? What were your expectations this time around with the election? Well, I thought Trump would do a lot better. And some of the things that I thought were worth pointing out, and I (6/43)
wrote about this actually a couple of times, one thing that was really important was that Trump went into the 2016 election day with a lot of ambivalence among Republican voters about him. I mean, I think his approval rating, he had a tough time creeping over 60% approval rating throughout most of that election year. And if you remember correctly, 19% of the voters who cast votes, this is according to exit polls in 2016, disapproved of both candidates and Trump did really well with those folks. But four years since, Trump really consolidated his support among Republicans. So he kind of entered this election cycle with the profile of a typical Republican incumbent with approval ratings that hovered somewhere between 85 and 95% among Republicans, which I think is important because incumbents usually don't lose. And he had basically the same profile as like a George Bush in 2004. So I wrote about that stuff a lot. And yet I fell for the same, the same stuff over the summer because I kept (7/43)
seeing poll numbers that look like it was just not possible for there to be that many hidden voters. And I also heard repeatedly from pollsters who I talked to, oh, we've changed our techniques and we're not going to miss that stuff anymore. And we know what we're looking for and we're never going to let that mistake happen again. And it happened again. It's just unbelievable. And I'm kind of embarrassed, frankly, because I participated in a little bit in the mirage that this was a done deal. Well, so a natural question is, because you would have expected them to make changes, did they make changes? Were those changes ineffective in practice because of anomalies specific to this race? I mean, why were the polls so off? Because the extent of the divergence is enormous. Yeah. I mean, look at Ohio. They were predicting a five point loss for Trump in Ohio. And what did he end up with? Like an eight point win, something like that. Right? So, you know, a 12 point swing is pretty massive. And (8/43)
yes, he lost the popular vote. Like if you look at the popular vote, that's almost reflective of where the polls were. But on a state by state basis, they were pretty significantly wrong in a lot of places and almost universally wrong in the same direction. There were a couple of outliers there. You know, I think maybe Arizona is a bit of an outlier. But to answer your question, I think there must be something inherently confusing or flawed in the polling process. And I always talk about it in terms of you can only get so much from yes or no answers from people, right? Like if you're actually covering a campaign and you talk to people and you can tell that like with every fiber of their being, they not only love their candidate, but despise the other candidate, that tends to be reflective of something, right? Like the people on that block, if you're not going to get a person who is so completely cut off from all the other people in his circle, his or her circle that they believe this (9/43)
thing. So when you encounter that kind of enthusiasm, it tends to suggest that there's a lot of it out there. So maybe that's what polls, the problem with polls is, is that they frame this as, as would you or wouldn't you? Yes or no? And that doesn't do as much to detect what's actually happening as more subjective tests might reveal. I wonder also to what extent, and then we'll get off of this because this is more like wonky type of stuff, but I wonder to what degree Trump's rallies in the last few weeks, how that contributed to changing the dynamics on the ground. It certainly could have and the Democratic candidate being absent, you know, doesn't help either. I think, you know, you know, Biden essentially was a no show, which lent itself to some questions. I saw some people talking about how some elderly voters might have been a little freaked out about that because Trump really alienated elderly voters significantly this year with his coronavirus policies. But you know, some of (10/43)
their trust in Biden might have been undermined by, you know, things that they're recognizing maybe from people in their own circle. Like the guy's absent for nine days at a time and has trouble when he speaks in public, you know, maybe he isn't declined. I think that did have an impact probably because Trump, he bounces back from COVID and he looks like he's like ready to go play an NBA game and, you know, in a couple of weeks, it's, it had to have an impact. Yeah, he's like the energizer bunny. He just keeps going. So let's actually move our conversation to election night, Matt. First of all, you guys did your typical drinking game. I watched some of that. Did you? So what is that? Do you do that every time there's any kind of election or is it just for presidential politics or you just do it generally? We do it sometimes for like debates and stuff like that because what we're really usually trying to do and we didn't really do the game that much that night because we got wrapped up (11/43)
in the results. But normally you're watching something like a debate and the whole joke is that you're trying to predict what people say. So, you know, for a Democratic party drinking game, if one of the rules is drink every time they say existential threat, you're going to take like five shots that night, right? Because they say, yeah, exactly. So that's the whole joke is, you know, it's predicting the stuff that you hear in political coverage. So we do that every now and then. So what's the lesson that we can draw so far? Like what have we learned early on in this election that we didn't know going into it? So I think the big thing is if you look at the down ballot results and you look at the shift in the demographics of Trump's support, which I thought were amazing. Like Trump did worse with white male voters and he did better with basically every other demographic. And if the Republican Party is smart and there isn't necessarily evidence to suggest that they are, but if they are, (12/43)
they will see that the opening is there for them to market themselves as the working class party of the country, right? And alternatively to present the Democrats as the party of the rich elites, which there's some validity to that, right? The Republicans under Trump expanded their support with Hispanic voters. They did pretty well with new immigrants. And the reasons for that are complicated, I think, but it's something I think it really highlights some bad decisions that the Democrats made last year to kind of devalue certain lines of argument that were being made by people like Sanders and Warren about class issues. They ran screaming from that. And as a result, they couldn't run on it with Biden and that left an opening. And for a politician who was more clever, that could become a problem. And it's reflected in the down ballot stuff. Yeah. So the numbers that I have here in front of me is that he gained pretty much one-fifth of black male voters up from 13% in 2016. He doubled his (13/43)
support amongst black female voters. He doubled his support amongst LGBT people. And he gained in terms of Latinos and Asians. And I wonder, when I saw that, I thought, well, this is like one of those like Thomas Kuhn paradigm shift moments. It's like you've got this theory and it's clearly not working. All the empirical data is telling you that you need to change your entire theoretical framework for how you see the world. And yet I wonder if the Democrats are actually going to do that. There was this incredibly tone deaf op-ed that I read a couple days ago or yesterday maybe by Charles Blow at the New York Times. And he basically, what he did was he looked at the data and he said, this is further evidence for just how entrenched the patriarchy is that minorities and marginalized groups would actually vote in greater numbers for their oppressor. Right. Yeah. And the problem, I think, to anybody who doesn't live in that bubble is that language itself. I don't give Trump credit for (14/43)
anything affirmatively that he did to win those votes. I think that a lot of that voting behavior comes from probably apprehension about trends in academic thought that sort of portray minorities as terminal victims, as people who are, whose success or failure is 100% dependent upon the indulgence of a patriarchal white supremacist class. I think a lot of people in those groups don't see themselves in that light and they resent it. And for me, frankly, I think it's a racist caricature a little bit. And it's kind of like an inverted version of the old Republican argument. Actually, it's not even that old. Like Donald Trump Jr. was just making it that you have to want success as much as we do in order to get it. Like basically what they're saying is that we're successful because we've earned it and you aren't successful because you haven't earned it. But the Democratic rhetoric is kind of like a flip of that. It's like you only succeed because we allow it. And you don't succeed because (15/43)
we don't allow it. That's not an attractive theory, I don't think. But you're right. They're going to double down on it. So you think they're going to double down on it? Because I was actually wondering if one of the positive outcomes that will come from this is that there will be a re-examination and a reckoning within the Democratic Party. You don't think so? You're shaking your head. There should have been one four years ago about a lot of stuff, like starting with the Democratic platform and maybe continuing on to how the media looks at politics. But remember, one of the early conclusions of both the political class and the kind of attendant big corporate media was that the only reason that Donald Trump won was because of racism. Basically they took the Hillary Clinton's deplorables comment and they expanded it to no longer cover just a third of Trump's voters, but all of them. And now this became the de facto go-to explanation for Trump's entire base. And these results should tell (16/43)
them that that was a flawed construction because clearly minorities themselves did not see it that way. And yet they're not going to, I really doubt they're going to do that because that would mean re-examining past errors, which they just don't like to do. I mean, it's one of the things that we found out in the last four years is that they just cannot to want to go back and say, we screwed this up. And there's no way to address it without doing that. So let's game out a few scenarios here. First of all, what is going on right now with the vote counting? Because I've been confused by this as well. I'm confused about what Trump is alleging, what he wants, because on the one hand he wanted vote counting to continue. So he wanted them to finish voting, but now he wants voting to stop. Where are we with this? I don't really, I mean, and I have to admit, I've never really covered a vote counting story and I'm not really good on the mechanics of how it all works. But I think what Trump is (17/43)
alleging, what their people are saying is that we want to have access to watching the process of counting votes. And they want also to stop any new voting that would take place. But there also clearly are people who are gathering outside of some voting places, screaming for people to stop counting. So I'm a little confused about what exactly is going on. This is a disaster. It's really a disaster. Well, sure. I mean, it raises all kinds of questions about the legitimacy of the processes because and, you know, you couple this with the sort of rampant dishonesty of the press in the last four years. It's just going to make people suspicious of the results. I personally don't necessarily think that way, but people are going to come away with this with questions about what happened on election night. Well, I don't think of myself as a conspiracy theorist. In fact, they go out of my way and not to do that. And a good example is even the Jeffrey Epstein situation. I didn't jump out and start (18/43)
saying what I thought happened or didn't happen. I wasn't in the cell with him, but I've been amazed even with myself, what I've been willing to entertain in this situation. I want to take a quote from a friend of yours, Glenn Greenwald, who wrote, no matter what the final result, there will be substantial doubts about its legitimacy by one side or the other, perhaps both. And no deranged conspiracy thinking is required for that. An electoral system suffused with this much chaos, error, protracted outcomes, and seemingly inexplicable reversals will sow doubt and distrust, even among the most rational citizens. I feel like that's a pretty good description of where we are today. It's such a disaster. And I wonder if it's just that our expectations are too high or, you know, in the words of Crystal Ball, who was on your show recently, why can't we have nice things anymore? Well, for so long, we didn't really have an issue with this because the possibility of, well, that's not true. I (19/43)
mean, we clearly had significant road fraud in some pretty famous elections in the Kennedy's election in 1960 being a famous one. But we don't have a uniform national vote counting system. So inevitably what ends up happening is that collecting all the results comes down to, you know, a confederacy of different state systems that all have their own idiosyncrasies. And we saw this very clearly with the disaster in Iowa. And I was there for that. You know, when they didn't have a clear result, they were sort of just making up the rules as they went along. And there were people who would come up and there would be spokespersons for the state who would say one thing. And then you would hear a completely different explanation from some other person in the government, you know, a few minutes later. And you would find that certain counties behaved one way and other counties behaved other ways. And that's just not sustainable. If that's the case for across an entire country of 350 million (20/43)
people, then clearly you're going to get problems. And that's before you even get to the question of whether there's corruption, which is, of course, totally possible. So yeah, and then people are going to doubt the results, you know, like just to take Wisconsin, for example, what's a Republican supposed to think when they go to bed, you know, looking at the map and seeing that it looks like they've got it in the bag. And they wake up the next morning and they see like within a minute, the whole picture has been reversed. It's almost certainly legit because if you're just taking all votes from Milwaukee, that makes some sense. But like, I don't know, people are going to, they're going to wonder about it. They just won't. Yeah. And we knew this. This is the other thing that's really difficult to wrap your head around, because we understood that there was going to be a huge number of mail-in ballots and that those mail-in ballots were going to be countered in the days afterwards. Why (21/43)
exactly that's the case? I'm not sure. But of course, I mean, Martin Gellman wrote this really great analysis and and projection for the Atlantic where he talked about, he basically gamed out this exact scenario that Trump would come out and say that he won the election, which is exactly what he did. And now lots of people, regardless of what's going to happen, are going to doubt the outcome. Mm-hmm. Yeah. And the frustrating thing is that clearly some states that were more experienced with election night shenanigans took the time to make sure that they had a lot of this lockdown before election night. So Florida didn't have problems and they were able to report their results in a timely fashion, despite having historic numbers of mail-in ballots. But other states just decided not to go that route. And, you know, they were releasing results piecemeal and kind of making up when they're going to release results on the fly and like, what is that? Why do it that way? You know, there should (22/43)
have been, I just do not understand saying, let's take a break and reconvene at five o'clock tomorrow evening to start counting again. Like that makes zero sense to me in a situation like this. Yeah, it does. It makes you wonder whether they do it on purpose. Sure. And you combine that with the press decisions that seem completely subjective about when they call certain states and when they don't. You know, I'm not, I'm not sure I grasped that either because, you know, they're called New York with 0% of the voting, basically. And I understand that because there's no way New York was going to go for Trump, but that's based on prior voting patterns. And as we saw, you know, during this election, prior voting patterns didn't hold in a lot of places. And in some cases they were pretty significant. So why are we waiting to call Alaska when X amount of the vote is already in and it's clear it's not going to be close, but we are calling it in other places. Like I don't get that either. I (23/43)
don't know. Some of it doesn't make sense even to me and I work in the media, you know. Yeah. So let's, I mean, this is conjecture and, and I, like I said, I'm not a conspiracy theorist, but this election, this election has made me more of a conspiracy theorist, just like the 2008 financial crisis. Yeah. You know, it really has not as much because with the financial crisis, you could actually see people doing it out, out in public. It was more flagrant. But I mean, is Biden going to win this thing? Is that what it, what it's looking like right now? I should say we're recording this on Thursday, noon, Thursday, November 5th. So the most likely scenario is Biden retains one or both of Arizona and Nevada that coupled with him winning Wisconsin and Michigan gives them the election. If he wins Nevada and it's just Wisconsin, I think it comes out to be exactly 270. The only scenario for Trump that seems like it has a chance of working is if he flips Arizona and then doesn't live in (24/43)
Pennsylvania. So then at that point, Biden doesn't get the 270, I think. And then we're talking about Trump winning, but that doesn't sound likely to me. So, and you know, who knows, but the traditional people who, who are usually authoritative about these things, they have always been confident. Yeah, but no, but they sound extremely confident that they're at least going to get a result that is favorable to them in Pennsylvania. So, you know, I wonder if we'll ever stop taking official numbers for granted because it just gives us a false sense of security and certainty and we need that in order to operate our brains. I firmly believe that by the way. That's important. But anyway, go ahead. Yeah. Well, you covered Wall Street, so you would know that for sure. So let's actually, for the purposes of speculation, let's assume that Biden wins. It also doesn't seem clear yet whether the Republicans are going to retain the Senate. Everyone says that they are, but I know that David Perdue's (25/43)
race against John Ossoff in Georgia potentially could flip. And that's kind of the pathway that the Democrats have. But let's assume that the Republicans get the Senate. So, which means we're going to enter into a period of divided government. That's for sure. I wonder how that's going to impact Biden's agenda. I also wonder to what degree they may welcome it because it'll be a lot easier for them not to be held accountable for their promises and to sort of, you know, keep the base of the Democratic Party, the real base, which I think diverges from their template at bay. I wonder what implication this is going to have for Nancy Pelosi. So, you know, I'm curious, what are your thoughts? Let's say we have Biden in the executive, the Democrats control the Congress, albeit having lost, I think, seven seats or something like that, and the Republicans retaining the Senate. I mean, I think it's a perfect scenario for the Democrats because it absolves them of the responsibility to do any of (26/43)
the difficult kinds of governing that that their ostensible base wants of them while they'll be able to seamlessly continue doing the things that they've always really wanted to do, like enhance the military budget, go to war in places, make sure that corporate tax loopholes aren't closed, you know, deliver bailouts. They'll have plenty of juice to get all those things done, but it's things like, you know, canceling student debt or ending, taking antitrust action against tech monopolies. Like that's the kind of stuff that just they will not even have to answer questions about thinking of doing as long as they don't have the Senate. So, you know, for me personally, I always thought people like Nancy Pelosi were much better or more comfortable in the position that she's been in, which is, you know, being in opposition that doesn't really have to oppose anything or do anything, you know, I mean, it's performative and they're good at that. Well, I mean, about the tech platforms, I should (27/43)
say, our mystery guest was supposed to be Matt Stoller, but because of some technical issues we've had here, that may not happen. But I had written out some questions for Matt that I wanted us to discuss, the three of us, and one of them had to do with the tech platforms. Well, first of all, that raised an important point, which is that Facebook and Twitter in particular featured prominently in this election with suppression of news. When Trump came out and said he won the election, Twitter censored that tweet. And I also saw a bunch of other, I have some screenshots of censoring both Democrat and Republican. And near a time then got censored. Yeah, I saw that. Yeah, I forget. She said something like the president, the Biden is winning Michigan or something like that, and she got censored. That's so freaky to me, man. That we have private corporations running public squares, the primary spaces where we come to political consensus, and they are making decisions about what to allow and (28/43)
what not to allow. And their defenders say that they have every right to do that because they're a private company rather than looking at the context, which is that they're a private company facilitating a public space. You know? Well, it's even worse than that, I would argue, because they're private companies that got called into the hill after Trump got elected and overtly threatened with increased right regulation by people like Senator Mark Warner, Macy Hirono, Hawaii. And basically these companies were told most of these companies had long histories of not wanting to be in the fact checking or political content moderation game. You know, Mark Zuckerberg right before the 2016 election was saying like, we're not a news organization. We're a tech company, right? And then they get hauled in by the Senate. They get ordered. Where is your plan for preventing the fomenting of discord? That's the phrase that they use. Told that if they don't do that, there's going to be tax penalties and (29/43)
all kinds of other things. They suddenly have to enter, enter partnerships with the FBI and groups like the Atlantic Council. The FBI calls them private sector partnerships now. So they're being advised on what is and is not fake news by groups full of former intelligence officials and big corporate donors and overseas. Parties and partisan officials. Yeah. Partisan officials. And suddenly they're, you know, like mad interfering in the publication of private news media. I think that's a clear first amendment issue. It's not just private companies acting on their own accord. This is, this is a partnership that has to be understood that way. So where does this lead us? I do want to bring us back to some of the issues around governance, but let's stay with this a bit. Where do you think this takes us? Is this going to become a more permanent feature of our social landscape like surveillance did after 9 11? Yeah, I think so. And this was the reason that I had such, I struggled. With the, (30/43)
even the possibility of voting for the Democrats is because I think that this is going to lead to essentially an ongoing kind of quasi censorship regime. Cause remember, they could have gone a couple of ways with these tech companies. Like they could have insisted on breaking up their monopolistic control of news distribution, which would have limited pretty significantly the possibility of spreading both foreign misinformation and fake news and all that stuff. But they didn't do that. They, they specifically kept the, you know, this kind of oligopoly of tech firms in place and they're all imposing rules that are completely subjective and clearly kind of go in the direction of, we're going to use the standard of what would the Washington post consider real news as what we're going to censor and not censor. And the problem is those companies, those traditional arbiters of a fact and authorities have their own political views. I mean, the other day I wrote an article where I was going to (31/43)
talk about why I didn't want to vote for either party in this election. And I thought about the headline and the headline was going to be vote for neither. But I knew that that would actually trigger Twitter's policy against discouraging people from voting. So I had to change the headline. Do you think that really would have triggered that? Yeah, no, I know, I know exactly. I've spoken to the people at the company about what their rules are in terms of why they step in. Like they have one of the, one of the things they are big into is any news that suggests that people not take real precautions during the pandemic. Another one had, it was anything that, that encouraged people not to vote or gave them false reasons not to vote. Like a classic example would be a news item that told them that a certain polling place was closed. Now, I didn't think that my stance fell into that category, but I could see it being misinterpreted that way. So I thought- Clearly not because it's your opinion. (32/43)
It's my opinion, but, but that's the problem is that we're living in this environment where people are going to have to start weighing stuff like that. And what people are going to back off from the line because they don't want to be taken off these platforms. So what does that mean for people like you and me? And especially you, because you're like one of the most opinionated journalists that I follow. So what, how does this impact our work? I think it's significant because, and when Alex Jones first got kicked off, the first thing I thought of was, you know, all of you is kind of hashtag resistance, quote unquote liberals who are cheering because, you know, ding dong, the witch is dead. We finally got rid of this horrible person. But what they're not thinking of is we just replaced one system of speech regulation, you know, that have been built up over hundreds of years. I mean, it took forever to get us to this place where, you know, the courts decided issues like libel and slander (33/43)
and that sort of stuff. It was a flawed system, but it was a pretty good system. It worked, right? And we just changed it in a heartbeat for a new one that where corporate tech overlords who are not accountable, not elected, not transparent, make decisions. Basically, you know, behind closed doors about who gets to be distributed and who doesn't. And everybody loves that. And right away, you could see what the end game of that is that it's going to start with Alex Jones and they're going to slowly move in the borders to start including other people. And then they're going to take on not just people, but themes like Q and on. Right. And then they're going to date that even within Q and on, they expanded the definition of what of what was impermissible there. They started off with encouraging violence. And then they did, then they expanded it to something, anything that was tied to real world harm, which is like an impossibly vague standard. So, you know, for people like me, let's say (34/43)
that I have an opinion that the New York Post story that they ran about Hunter Biden, that I don't think it should be censored and that I think it's a legitimate news story in some way. Like I could see myself being bounced from these platforms, even if I'm not saying that I believe the story or think it's that important, you know, other journalists and I've talked about this with other journalists, we all worry about it now. Yeah. Well, ironically, those of us who thought that it was a bad idea for Alex Jones to be taken off of YouTube, I was one of those people. I think many people, a fraction of people, but a vocal minority of people, saw that as a kind of closet fascism. Ironically, not that YouTube's actions were somehow fascist, but that those of us who were opposed to that, and the same would be true with the Hunter Biden story. I stayed away from that story. I didn't have the nerve to even get involved in it because of all the pretenses associated with it. But it was another (35/43)
example of something where it was clearly newsworthy and yet no one wanted to touch it. Yeah, I did the same thing. So I did a whole big thing on it, like on the media response to it. And then I went back through all the publicly available things that were known about it. And then I also did some additional reporting talking to people in Ukraine. But I didn't touch any of the stuff that was actually in the emails because I wanted to say, here's what we know for sure before we get into the issue of what they're reporting. Right. Yeah. But just to do that, people will say, OK, you're a closet Trump or you're doing this because you love Trump. And it's not that it's that you what worries me is the idea of suppressing a legitimate news story because like once they do that once, they're going to just keep narrowing the parameters until, you know, finally, they're going to make the argument that anything that isn't, you know, within the lane of kind of mainstream milk toast CNN reportability (36/43)
is like somehow illegitimate. Every time they make the argument that this is that something is foreign disinformation, they also narrow the parameters because they can always subjectively argue that X, Y or Z content aids, you know, Putin or some other foreign actor in helping so discord or whatever it is. So like I'm afraid of these standards because they can easily be applied to people like you or me. Yeah. So I mean, to that effect, you see because Stoller, like I said, he was supposed to come on and I read some of his more recent stuff and he's more optimistic on a Biden administration than I would have expected. And I think the reasons for that, one of them, I think has to do with what he thinks Biden's ideology is versus his voting record, which expresses his pragmatism as a representative of Delaware. But do you think that because this is such a unifying bipartisan issue, just like China, for example, do you think that this is something Republicans and Democrats can come (37/43)
together on in the next four years where we might actually see some hearings to address some of the stuff that came out of the Sicilini report? What report? The House Antitrust Subcommittee chaired by Congressman Sicilini, which recently came out with its report on large technology platforms. Oh, right. Yes. The one that concluded that Facebook and all those companies where they fit the definition of monopolies, right? Yeah, exactly. So I doubt it. This is my primary worry. And I think your Matt Stoller is probably right in his assessment of what Biden's actual political leanings are. But he played along. I didn't, you know, I didn't hear him complaining about any of these big changes that were taking place in the last year. And, you know, he piled on with all the rest of them when, when there was all this talk of, you know, foreign subversion involving, you know, other people on the ticket. So, yeah, that's what worries me. I mean, I think the Republicans are going to focus on (38/43)
something that is harder to prove, which is that the new changes in the informational landscape are designed specifically to suppress conservative thought, which I don't think is exactly right. I think it's much more that they're looking to try to eliminate speech kind of across the spectrum, you know, including, you know, they'd be like, Jackabin got locked out of its account for a couple of things, you know, before the election. Satire, like, you know, the Babylon B, obviously that's conservative. They've had some issues, but sites like the World Socialist website in those, in some of those hearings, like Google essentially admitted that it had been criticized for deranking the World Socialist website. So I don't think that there's going to be any bipartisan energy that's going to get together to, you know, help prevent the next phasing out of QAnon or the World Socialist website. Like I see that as being opposite to what the kind of bipartisan consensus would do. I bet they are (39/43)
going to come together to make sure no one like Trump ever gets elected again. Well, that's very possible, right? Or maybe not, because, you know, what's interesting is that this new version of the Democratic Party that so enthusiastically welcomed in the kind of Lincoln project type Republican and David Frum and Bill Kristol, all those neocons, like, where's the room that's left for the Republican Party? If they're smart, again, they will lean into the whole populist angle that Trump turned out to be kind of a phony at. But, you know, they will lean into the class aspect of it and, you know, and find somebody who can play that role a little bit better. So I don't know. I worry that the Democrats are essentially going to become like the representative of the old two-party state. And, you know, and the Republicans are going to have to reinvent themselves as something else. That's interesting, because I was actually, so these are a few of the questions that I want to ask you, but we're (40/43)
going to move it into the overtime for it, Matt. But one of them is, what does a post-Trump Republican Party look like? First of all, what's going to happen to Trump? That's a really open question. Is he going to be indicted? Is he going to be prosecuted for anything? Is he going to be pardoned by a Biden administration? Is he going to go and start a media company? Is he going to be basically like a political leader in exile? Because we're kind of like a banana republic. So he's going to be like out in a third country agitating. I also feel like the real future of the Democratic Party is a far more populist, as you pointed out, socialist type party. And people that better aligned with that vision are people like AOC and Bernie and others. And AOC really knows how to use social media. I mean, she is like made for this time. So I want to ask you about that. I also wonder what's going to happen to Nancy Pelosi. Is she going to survive the next four years? But I'm going to save those and (41/43)
other questions for the overtime, Matt. For anyone who is 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 part of my conversation with Matt, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Matt, stick around. We're going to move the second part of our conversation into the subscriber overtime. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free (42/43)
email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (43/43)
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest on this episode, which was originally made available to premium subscribers only, is economist and author Charles Goodheart. Professor Goodheart is widely recognized for his contributions to the fields of monetary economics and central bank policy, and he is perhaps most famously associated with what we commonly refer to as Goodheart's law, the stipulation that any observed statistical regularity ceases to function as an objective or accurate measure, the moment that it becomes a target of public policy. Both Professor Goodheart and his co-author and former colleague Manoj Pradhan recently co-authored a book which puts forward a compelling and controversial argument about the long-term effects of an aging (1/43)
society on inflation, interest rates, investment, savings, and consumption, as well as economic growth and public policy decisions related to things like taxes and government spending, all of which we discuss in today's conversation. The main argument put forward by both authors is that the inevitable decline in dependency ratios caused by aging demographics will lead to structural, long-term increases in interest rates and inflation that will strain government finances and jeopardize the policy-making independence of central banks as their mandates to control inflation come increasingly into conflict with the objectives of politicians and national governments. Now you could argue that we are already seeing the early evidence in support of these conclusions, and so my objective in bringing Professor Goodheart onto the podcast today was to more fully explore the arguments and assumptions that he and his co-author make in the book, the evidence in support of their conclusions, and the (2/43)
implications of their findings and projections for the economy, investors, and governments. For anyone new to the program, Hidden Forces is listener-supported. I don't rely on advertisers or commercial sponsors, which is why the second hour of our conversations is normally available to premium subscribers only. If you want access to our full episode library, as well as the transcripts and intelligence reports, which include my takeaways from every episode and my thoughts on what comes next, head over to hiddenforces.io, select the episode that you're interested in, and click on the premium extras, where you can then sign up to one of our premium content tiers. And with that, please enjoy this extremely informative conversation with my guest, Charles Goodheart. Dr. Charles Goodheart, welcome to Hidden Forces. I'm glad to be here. It's my pleasure having you on here, Professor. So, as I will have mentioned in the introduction, you've written a very interesting book. The book is titled (3/43)
The Great Demographic Reversal, Aging Societies, Waning and Equality, and an Inflation Revival. Most of the book, as I understand it, was written in 2019, and it was published in 2020. And many of the predictions that you make in the book related to inflation in particular have, in fact, manifested. We're living through them currently. To what extent they'll prove durable, is debatable, and it's certainly something that I want to explore with you here today. But before we do that, I'd love to know what the origins of this book are, and when you and your co-author began to develop the arguments that you put forward in it. As I recall, and my memory is getting worse, the problem that we were concerned with was why there was such disinflation in the period after the great financial crisis in 2008, and why the recovery was so sluggish. I was working at that time as a consultant at Morgan Stanley in London, and Manoj Pradhan was another economist working at Morgan Stanley. And we began (4/43)
developing the thesis that the underlying reason for the disinflation that was occurring at that time, and the reason why central banks were unable to effectively counter it, was because there was a huge surge in the availability of labor. And we wrote a quite long article which was presented at a Bank for International Settlements meeting in, I think it was 2018, it might have been 2017. I can't remember the exact date. It's actually 2017 if you're referring to a demographics will reverse That's right. three multi-decade global trends. And it was really an extension of that paper into a much longer and more detailed format that led to the book. In particular, the great argument against our view that a shortage of labor and an increase in the proportion in the population of the aged of the retired aged would be inflationary was to argue that, well, surely Japan has had a reduction in its labor force earlier, an increase in the aged working in Japan. And it doesn't that provide an (5/43)
important, indeed, convincing argument against your general thesis. So we actually had to study and work out arguments about why inflation remained so low in Japan before we could really do the rest of the book. And we have a whole chapter devoted to what had happened in Japan. It is chapter nine. Why didn't it happen in Japan? A revisionist history of Japanese evolution. Yeah. So I very much actually want to ask you that as part of a larger conversation around counter arguments to your thesis. But before we even get into that, I really want to delve into the book's main conclusions. And also, if you can tell us what you feel the big story of the last 30 years is. So it's essentially that how would you describe the role of labor and labor over supply and its impact on inflation and its impact on debt and interest rates, etc., and equality versus inequality. What is that impact over the last 30 or 40 years? Where do you begin the time series? And why do you feel that all of this is in (6/43)
the process of reversing? Okay. The basic argument that we make is that the mainstream economists in general have not appreciated how extraordinary were the developments in the provision and availability of labor that occurred in the 30 years between about 1990 and 2020. There were effectively three elements in this. The first element is the purely demographic element. There had been a baby boom in the decade or so immediately after World War II. And this was now working its way through the labor force so that there was an increase in the number of workers from the earlier baby boom. Secondly, after the post-World War II baby boom, the proportion or the number of children that on average each woman gave birth to began to decline very sharply. So that the birth rate in most developed countries fell from about four or five per woman to the level that it now is, which is significantly under the rate that would maintain the population constant, which is 2.1 children per woman because of (7/43)
few die in the early ages. And it is now actually in many of our countries gone below 1.5. So the population eventually will actually decline. But in the years between 1990 to 2020, it meant that the number of children that women had declined really very sharply. Moreover, the increase in the availability, consumer durables, refrigerators, freezers, washing machines, etc. meant that women no longer had to shop every day and undertake household activities every day with the result that when I was young, the proportion of women actually participating in the workforce was probably no more than about 10 or 15%. By the time we get to the period from 1990 to 2020, it had risen very sharply over 60%. Now, in addition to the fact that there were more people of working age and that many more were now participating in the workforce because of the availability of women to work in the workforce rather than do housework, it was also the case that the expectation of life was rising, but was rising (8/43)
rather slower. So that what is known as the dependency ratio, the ratio of workers to those who were dependent upon the workers, the young and the old, the dependency ratio improved very sharply. Now, there's a very simple sort of a way of looking at this, which is that the more workers you have relative to dependents, the more disinflationary the situation will begin, will be, because you don't hire somebody to work for you unless you expect the value of their output to be greater than the wage you pay them, obviously, and moreover, they've got to save for their retirement. So workers or an increase in the proportion of workers is generally disinflationary, whereas dependents, the young and the old are inflationary because they consume but don't produce. And in fact, an increasing share of the old, which we're going to have increasingly over the next few decades, is even more inflationary because they require a lot of assistance, because frequently they become incapacitated and need, (9/43)
besides getting pensions, they need medicine, and when they're incapacitated, they need a lot of care. So the demographic conditions were very, very favorable during these years. Moreover, there was a huge increase in globalization as after the fall of the Iron Curtain, Eastern Europe became part of the world's trading system, as did China after Deng Xiaoping. And that meant that the availability of workers, because China is the most popular country in the world, to anyone who could move their production to a low wage from a high wage economy, who's going to do, I'm very well. And there was an enormous amount of such offshoring. Such offshoring was largely in the form of manufacturing, which meant that all our economies move from being quite largely having manufactured production to a much more service economy. And it's much easier to put pressure on employers for labor bargaining power to be stronger and for trade unions to operate when workers are gathered together in large numbers (10/43)
in factories, rather than in small groups in services. And that meant that the power of labor effectively became broken, and the strength of private sector trade unions declined barely very sharply between 1990 and really up to 2020. With the power of the trade unions and labor bargaining power broken, and with the ability of employers to shift production to low wage economies and gain high profits from doing so, the benefits of the growth of output during these 30 years shifted increasingly towards capital, whether in the form of human capital, particular skills, or financial capital, or real capital, and away from labor. This is much more evident in the United States than it is in Europe, but there has happened to a degree in Europe as well. And that meant that inequality within countries increased. It was probably the best 30 years in which to be a capitalist in the modern world ever, but the benefits did not go in any way so much towards labor. Now, the two factors have occurred (11/43)
recently. First, the dependency ratio is beginning to rise adversely with the decline in the working age population in many of our countries and its slower growth virtually everywhere. And the increasing share of the old in our economies who are expensive, fiscally expensive, they consume quite a lot, but they do not produce. And also, of course, the division of the world into geopolitical blocks again, and the tendency to feel that you need to make your supply chain safe by having it based in friendly countries rather than in the least cost countries so that the spat or conflict between the US and China is having the effect and will have the effect of reducing the forces that have brought declining goods prices and disinflation to much of the western world, alongside the fact that China and indeed Russia are two of the countries where the workforce is going to decline really quite sharply from now on. How significant has the role of technology been in putting downward pressure on (12/43)
prices during this period? How would you rank that effect? Certainly it's been an effect, but I'm one of the great concerns over the last decade or so has been that productivity has been very slow. And as you probably know, Robert Gordon has written a book arguing that technological advances will be much harder to attain over the next decades than they were earlier because all of you like the low hanging fruit have already been picked. Now, that's not generally accepted, but I would argue that there is another factor as well, which is that the ability to move particularly manufacturing production offshore to low wage economies so maintained the profitability of the companies doing so that they really didn't need to invest domestically in order to maintain a satisfactory indeed quite fast rate profit growth. In our view, one of the beneficial effects of the changing demographic and geopolitical conditions is that the upwards pressure on wages that we see from a growth of labor (13/43)
tightness, shortage of labor will force companies to have to invest domestically in order to keep unit labor costs down and to maintain their profitability. So we actually see the rate of growth of output per worker improving over coming decades. And moreover, we are concerned that a increasing share of the workforce will have to be channeled into looking after the old when they become incapacitated. It's something like 20% of the Japanese workforce. And consequently, rather than fear the introduction of technology and robots and AI and all the rest of it, we think that actually we're going to need all the technological improvements we can get in order to offset the adverse effects on overall aggregate growth from the fact that the wage force is going to, labor force, is going to be increasingly on the downward slope over future decades. So you mentioned that one of the factors driving the disinflation over the last 30 years has been the decrease in the dependency ratio and that in the (14/43)
next 20, 30 years that we're going to be living through that one of the dominant forces that's going to be driving inflation is going to be the reversal of that. The fact that we have more and more people that are entering into the period of their life where they're going to be less productive, but going to be simultaneously consuming resources. One of the questions I have about that is the assumption that they're going to be able to maintain a certain level of consumption. We do know that in general over people's lifetimes today, even now with all the entitlement programs that exist, older people consume less. So do your assumptions take that into account? In other words, it is the idea that the consumption patterns that we see today for people that are above 65, that are above 75 will be relatively similar and that the major assumption that you're making that others don't is that those entitlement programs that sustain that consumption are going to remain in place. Is that (15/43)
essentially it? To a degree, yes. If you look at the figures for the life cycle development of incomes and consumption as people age, you will in fact see that the young actually consume a great deal less than those of working age, but the old actually consume rather more. Now, the reason why the old consume rather more is not because we go on more holidays or we buy more clothes or we buy fancier food. The reason why they old consume more is that they need more care and they need more medicine, and that drives their consumption up. So when you say the old consume less, you're thinking of sort of standard goods and services rather than thinking as well of the need for people to look after the old. And it's very difficult to do that by robots. Well, let me ask you, if you don't mind, I want to actually interject and ask a question here. First of all, I want to make sure I understand what national cohort we're looking at here and if there's a difference between how much older people (16/43)
consume in the United States where let's say drug prices are excessively high versus in India, for example, where you have multi-generational households, a lot of the support for aging members of society are provided by younger people. How are you taking those factors into account? Well, I'm assuming if you like a more advanced world, remember people with fewer children is going to be hard for them to provide support. And let me take China, for example, and in the old days, the old were looked after within the family group. Nowadays, if you've got the one child policy, which remember was introduced, I can't remember the exact date, but I certainly, by the 1970s, you've got one grandchild with four grandparents. Moreover, the one grandchild may have migrated from the agricultural peasant west to the manufacturing east of China. So, there's absolutely no way that in China, you can expect that the old will get looked after within the family circle. And again, the same is true admittedly (17/43)
to a somewhat lesser extent in the west. The idea that we're going to get looked after, in Victorian times, the old were looked after by the unmarried daughters. And the idea that that might be true nowadays would be regarded, I think, with a certain degree of amazement in our current societies. The old either get along on their own, or if they're incapacitated and civilian incapacitated, they have to go into various specialist old people's homes. And that latter costs a great deal of money. So, I wanted, there's so many different parts of this argument that I want to dig into. Let's, since you brought up China, China has a very interesting demographic curve because of the one child policy. So, there's going to be a period in time in the near future where the stress caused by the fact that the dependency ratios blow out is going to be greater, I guess, than, is it fair to say that any other country, is that accurate? As great as any other country, I wouldn't say necessarily great. It's (18/43)
going to be quite severe in Russia, quite severe in Germany, much less severe in the US than the UK, but partly because of immigration. If there was no immigration, our working age population would also be going down. But in fact, it's just going to grow more slowly over the next decade or so. So, what role does excess capacity here play? Because in the world that we're describing over the coming decades, it isn't just that dependency ratios change, but also the expectation would be that overall populations will decline, correct? Won't decline for about the next 15 years, as I remember my demographic data. Because the reason they won't decline is because apart from the COVID years, we're otherwise almost all living a lot longer. But the section of the population, which is growing proportionately the fastest, is the very old. And so that what we are getting is a slower growing population with a very rapid rise in the number of those over 65, particularly the number of those over 85, (19/43)
offsetting a very slow growing or even declining working age population. And again, a very slow growing or even declining population of young below the age of 20. So, you said this earlier that older people consume, I don't know if you said it, but it was implied that they consume different types of things than younger people do. Yes. So, younger people consume more homes, they consume more durable goods, cars, etc. Is there going to be variability in older people consume services in the form of healthcare? Is there going to be a discrepancy in your estimation in terms of where we're going to see inflation? In other words, are we going to see deflation of the cost of automobiles, refrigerators, etc. But inflation and the cost of certain services or healthcare services are going to cost more for the elderly, but maybe new car prices are going to decline? I mean, how do we, or do you see it as just a general increase in inflation across the board? Well, again, one of the things that Book (20/43)
emphasizes is that with the growth of the world economy, you've got to look at this in terms of the world as a whole rather than individual countries. So, we think that what is going to happen is that goods prices, well, I think that you're right, that service prices will rise more than goods prices because that's what the old or increasing proportion of the population largely need to consume. But of course, it will lead to, particularly alongside the geopolitical problems, the decline in goods prices, which have been a major element over the last three decades, will end. And we already have a sharp differentiation between goods prices, which until very recently have been generally declining, and service prices which have been generally rising. And that differential is likely to become at least as marked, if not more marked in the future. So, what you are saying is there is going to be variability in terms of where we're going to see the inflation? Oh, yeah. There always has been and (21/43)
there always will be. So, let's investigate another assumption that you make in the book, which is that governments will continue to honor the pensions, the healthcare insurance policies, et cetera, that they currently provide to their aging citizens. This obviously going to put a huge strain on working people, who also have a say in how their society is governed and in the choices that their government makes. Make the argument for me as to why we can continue to expect to see that, as opposed to governments just cutting back on these unfunded liabilities, like in the US, like Medicare, Medicaid, Social Security. They may have to cut back somewhat, because the old of whom I'm now one have had, I think, a very fortunate life. And as you indicate, the condition in terms of taxation of workers in future may be increasingly harsh. But one of the issues here is a sort of political science issue, which is that the proportion of the old who vote, the good you hire and the proportion of the (22/43)
young who vote. And the suggestion that the retirement age should be raised, or that you should cut back on the relative generosity of pensions or Medicare and Medicaid, tends to run into very severe political opposition. To take one example, Putin, who after all is an autocrat with great control over Russian conditions, the one area where he tried to bring about what he thought of as the appropriate reform, which was to raise the retirement age, met with such opposition that he was forced to some extent to back down again, until very, very recently, although the expectation of life was steadily increasing, the age of retirement was held either constant or actually reduced. It has only been, I think, in the last sort of maybe five or 10 years, that there has been any tendency whatsoever for politicians to try to raise the retirement age. And it is so unpopular as a generality with the voting public that the only way to do this is usually to say that you will raise the retirement age (23/43)
not now, but say 20 years in advance. So the main argument we make is, if you like, a political one, that we don't think it would be possible for politicians to do this, there's also, I think, a more moral welfare type argument, which is how far is it actually right to reduce the relative benefits of Medicare and Medicaid to our populations? Yeah, I mean, I thought about this a bit because you raised it in the book, and one further point of support for your argument is actually the response of governments across the world, and particularly in China, for reasons perhaps that are multifaceted, the very stringent COVID measures that were put in place. Now, COVID disproportionately impacted and threatened older demographics, and yet societies across both the West and East made every effort to try and to lower the incidence of mortality and morbidity as a result of the spread of the virus in order to contain it. So I think that's an interesting piece of support, which is in other words that (24/43)
broadly speaking, what we do see is that governments have and do put policies into effect that may actually be detrimental to younger people in order to support the interests of older folks. Now, I also, when I was thinking through that, I also thought to myself, well, it's also true that older people, baby boomers we're talking about now, pretty much control the government. It's certainly the case in the US and in Europe. I don't know, I don't know what other parts of the world look like, but certainly here. At some point, those individuals pass away, and the people in positions of power begin to reflect the demographics of let's say millennials or Gen Xers. So how much of that is a role? Not the fact that older people have voting power, because also I wonder to what degree older folks will remain active voters. I don't know, because one of the things that you also bring up in the book is that the incidence of dementia and illnesses like this are on the rise. I don't know how many (25/43)
people with dementia vote. So the point I'm trying to make or the question I'm trying to formulate here is how much of this is actually a result of the fact that the people in power are of the same age as the demographics that we're talking about here. And as the demographics of the people in power change, you can expect the demographics of the people that they serve to also change. And maybe we're extrapolating current trends into the future when we shouldn't necessarily. That may be so, but let me put a counter argument, which is that you tend to come into power when you are in your 50s and 60s, because it's difficult to climb the greasy ladder until that time. So that those in power will always tend to be relatively close to retirement, and they will have therefore the interests of the retired at heart, whereas they may think that the young are in better shape to look after themselves. Yeah, I guess that wasn't though true in the post-World War II period. Is that simply because we (26/43)
had the biggest demographic? Well, no, because we also had, that was the people that were running the country at the time where they were veterans of World War II. I don't know. Anyway, it was just a thought that I had. Let's talk about, so in the future that you're putting forward here, we're going to see rises in inflation. Let's talk about where the money comes from to support the consumption of a portion of the population, which is unable to basically pay its own way, because they're not gainfully employed or they're not as productive. What role does debt play in this situation? How much of this comes from borrowing? How much of this would come from monetization of debt? How much would come from taxes? How do you see that happening? And what happens to interest rates in this environment? That's a very important question. If you look at your congressional budget office studies of the longer-term future for fiscal developments, you will see that the COVID bulge in debt was simply a (27/43)
little small blip in what is, in their view and mine, a continuing upwards trend, which gets more and more vertical in the debt ratio, largely as a result of the expenses of Medicare and Medicaid and so on over time. And the same is exactly true for the UK. If you look at the Office for Budget Responsibility, the OBR, and you look at their long-term projections, you will see that under present policies with existing taxes and existing policies on retirement ages, Medicare, Medicaid, etc., that the debt ratio effectively explodes. And that will be made a lot worse if nominal interest rates start rising quite sharply. Which is obviously what's happened in the very recent past. Indeed. Now, the indication of that, according to, for example, John Cochran of Stanford University, is that the underlying situation is inevitably going to be increasingly inflationary because the Ministers of Finance, the Secretary of the Treasury, simply cannot afford to pay out these large sums and will have (28/43)
to, therefore, finance their expenditures through monetary expansion. The alternative that we are faced with is either to cut back really quite severely on the benefits to the old, which we've talked about already, or to impose much higher taxes. But taxes are also highly politically unpopular. And the question is, how are we going to get through this? And how are we going to square the fiscal equations so that we don't have an explosive debt ratio? We don't have a situation where we are forced to monetize the debt and, therefore, tend to get into increasing inflation. How are we actually going to do it? What is going to happen to the taxes and or to expenditures of various kinds, including defense expenditures, which are likely to rise? Basically, we are now in a very difficult fiscal situation. Expenditures, because of the worsening dependency ratio in the increasing population of the old, public sector expenditures are going to go up. And we don't have enough taxes to meet that. And (29/43)
the debt ratio and the debt service burden are simply going to expand without limit until something blows. And that will be extremely unattractive. And that raises the question of what on earth are we going to do? Are we going to raise much more additional taxation? How are the existing workers going to react if they are taxed more? What other taxes can we consider? Or are we going to cut back somehow on the public sector benefits to the elderly? So what happens to economic growth in this environment? And actually two questions. One, what happens to economic growth? And also, just an observation I'd like for you to comment on it. How important does political power become for voting blocks of people in this type of a world? Because it seems like so much of what determines standard of living for the individuals discussed here is how much they're taxed and the benefits that they receive from the state. Well, let's take that in two parts. The first thing is that output is done by those who (30/43)
work. And the decline in the growth of the working age population means that overall output is almost certain to grow less fast than it has been growing in the last three decades. That doesn't mean to say that output per worker will grow less fast. Output per worker is probably likely to grow faster, but overall growth will decline. And that will certainly be a problem, particularly in some ways for China, I think, because they're going to have to shift from having really very fast growth of about sort of 6% to 8% per annum down to something that may be lucky to be 2% or 3% per annum. And that is coming down the road at them really quite quickly. And for the Western countries, it's going to be a reduction from growth of maybe 2% per annum to growth of maybe half to 1% per annum overall. And that's going to be a problem. Your second part of your question was about voting blocks. There are many, many different reasons why people join different parties. And that may alter in future, but (31/43)
certainly the younger part of our population, the workers, are going to resent the higher taxation, which seems likely to come becoming down the road at them. I also wonder how they're going to react to that, right? So besides simply demanding higher wages, which would increase inflation, by the way, that's actually an interesting point now that I'm thinking aloud, which is that inflation is the government's friend when it comes to paying out liabilities. So if the government has to cut social security checks, depending on what it decides to index the inflation of those checks to, inflation can be its friend. Does the inflation actually help offset some of the pressure on government expenditures to the age and cohort in this scenario? To a limited extent, yes. But if the inflation is expected, then everyone will try and adjust their position. So they're in real terms, they remain the same. The inflation has got to be greater than people expect, as it is now. The inflation now is much (32/43)
greater than people expect. Even so, it doesn't automatically benefit the public sector for two reasons. The first one is that quite a lot of the debt is now index linked. In other words, linked to the rate of inflation. And that means to that extent, that doesn't help. The second is that in so far as wages are indexed, again, it doesn't help the government because the inflation then just becomes even greater. Back in 1973, in the UK, the then Prime Minister, Ted Heath, agreed that trade union wages, particularly public sector trade union wages, should be indexed to prices. And when the Israel Arab War came and oil prices shot up by a factor of four, that indexation of wages in the UK meant we suffered much more from inflation than any other country in the world because they didn't have indexed wages. So to the degree that as you get more inflation, people insist on protecting themselves through some form of indexation, the more difficult the overall situation becomes, because the less (33/43)
the benefit to the public sector and the worse the overall inflationary conditions and the worse the debt service ratio becomes. So Professor, my last question or questions for you have to do with what investors not should do, but how investors should think about the sectors or industries or types of companies that would perform better in this type of environment. And one of the things that comes to mind here is housing because again, one of your conclusions in the book also is somewhat counterintuitive, which is that you think that housing will actually do well. And the reason for that, as I understood it, is because you expect that we will not see an increase in multi-generational housing in the United States and Europe. And I would love to understand a little bit more about that because I feel like what we have in fact been seeing is more people living at home with their parents. And one of the trends that I have intuitively expected to see more of is people living with their (34/43)
parents and helping their parents basically manage retirement into the end of life and inheriting their homes, so that much of that would happen. Where is your thesis different on this? You may be right on that one. I wouldn't want to go to the great lengths to try and disagree with you. I think our argument was rather that old people don't like moving because it's very stressful. They mostly paid off their mortgage, so they don't have to. And as the children eventually leave home, what you will get will be a misallocation of floorspace with the old staying on rattling around in a larger house than they need because they don't want to face the reality of selling up and maybe going to an old people's home. And that therefore the children, as and when they leave, have to buy houses of their own because there's an overall misallocation of floorspace. Now, if the children of course stay at home, then that your counter argument would hold. But at the moment, of course, housing prices have (35/43)
increased drastically because of the very low interest rates that we've had over the last couple of decades and is very difficult for the young to buy houses. In the short run, I expect nominal interest rates to go up to a point where the housing markets in our economy is crack and we get a fairly sharp decline in housing prices. But I was thinking much more of the medium and longer term future whereby with housing prices having been brought sharply down from the present very exalted levels that the misallocation of floorspace because of the old wanting to stay on in their big houses will lead to a greater demand for housing overall than simply looking at demographic figures might otherwise suggest. But as you say, if the young stay on at home, then that won't happen. But it's a question of whether the young will stay on at home. One point in your favor of your argument is that the age of having the first child and very frequently the only child has now risen very sharply so that when (36/43)
I was young in the 1940s and early 1950s, the age of having a first child was in the low 20s. Now the average age of having the first child has moved up in many countries to the low 30s. And that means that children will tend to be staying with their parents until the parents are considerably older than was the case many decades ago. So I see the merits of your argument and perhaps we should have qualified the argument about housing. So my last question is, what does this mean for the types of financial returns that we can expect to see in the coming decades and what types of assets or investments might under or overperform based on what we've seen over the last 30 years? The last 30 years have been wonderful for people holding financial assets. Interest rates have trended downwards, which has meant that if you hold government bonds, they've appreciated over time. Housing prices have rocketed up in relationship to average incomes. Equities have done extraordinarily well. As I said (37/43)
earlier, if you hold capital, the returns to capital over these last 30 years up to 2020 have been really dramatic, much greater than the return to labor. And it's basically the thesis of our book that the returns to capital will come down and come down quite sharply overall. There are always going to be sectors that are down do quite well. And pharmaceuticals, for example, the older need more pills than the young. So pharmaceuticals will do well. People investing in old people's homes will do quite well. And of course, there may be certain parts of the world which will do better than others. One of the key issues is that the massive decline in the birth rate that we've seen over most of the world is not true, particularly in Africa. In Africa, the birth rate for women is still in the sort of four to five or even in some countries higher range. And their population is exploding, their working age population is exploding. The population of Nigeria within about 10 years is going to be (38/43)
bigger than the population of the United States. And one of the questions that is very much, I think, open is whether Africa can become the China of the next few decades. Very uncertain because China had the advantage of maybe an authoritarian, but nevertheless an efficient administration. It was unified and it had a pretty well educated workforce. There's a long way to go before the political administration in Africa can have the same ability as in China. And Africa is divided up into many countries, I think, some like 45 countries. So it's not unified in the way that China was. And the educational level of the African workforce is lower than the education level, the Chinese workforce. But one of the major questions of the longer term future is going to be how Africa develops and how we can help Africa to develop. So actually one last question for you, Professor. It's not related to Africa or whether or not the labor in African countries can be as productive as western labor without (39/43)
actually emigrating here and whether actually some of the more populist anti-immigrant sentiments will actually allow for that to happen. That would be an interesting conversation to have as well. But my actual last question for you is about the yield curve because I believe in the book you say that the long term consequences of what you're describing would lead to a steepening of the curve, but that's actually not what we have been seeing. I mean, how do you see that? What accounts for why we're seeing the short end rise relative to the long end? And is that something that you expect to change in short order? Yes. And the development of quantitative tightening, the opposite of quantitative easing or QEs, it's normally known, could well bring that about. In the short run, the short rates are rising very sharply because of the need to bring inflation back towards target, though I doubt whether they will succeed in doing that in any short order. The long rate is held down because (40/43)
people's expectations are generally adaptive in the sense that you expect for the future what you have observed in the past. And what people have observed in the past have been three decades of declining and then very low inflation. Most people now working in banks and investment banks have known nothing other than low and declining inflation. And therefore, particularly with central banks saying that they will bring it back to target, inflation back to target, and with many mainstream economists claiming that the longer term future is still going to be secular stagnation and lower for longer, that their expectations of the longer term future is that we're going to revert to very low inflation. And our book takes the opposite line. And therefore, it's no surprise with central banks, most economists and their own experience leading them to expect that things will go back to what they're used to seeing in the past, that longer term expectations about inflation, it will return to the low (41/43)
levels of the past. And with that, longer term interest nominal interest rates will also return to the lower levels of the past. But the longer the present inflation lasts, the more that these expectations will even for the long term, will slowly ratchet up. And if you add the ratcheting up of expectations to the fact that fiscal and other conditions are worsening quite sharply and quantitative tightening is taking place, that long term interest rates will rise. And when eventually the recession that I think is going to occur takes place, what will then happen will be that short rates will fall back and fall back quite sharply relative to long rates. So the steeping of the yield curve is something that I think that Manoj and I would expect to see in say something like about five to 10 years. It's not happening now, certainly, rather the opposite. But we think that it will happen. Because presumably we're going to go through a period of very, very low growth as a result of a prolonged (42/43)
recession where inflation is also going to come down temporarily. Yes. That's essentially your thesis. So Professor Goodhart, this is wonderful. Thank you so much. I got so much value out of reading your book. I think, like I said at the very top, it's valuable just the fact that it puts forward a thesis and an argument that is so different, that runs so counter to the consensus about the effects of aging demographics on inflation. Just that alone makes it worth reading, but it's very detailed. There's a lot of data that you put forward in the book. And I just found it incredibly useful. And I recommend it to anyone who's interested in the subject. So thank you so much for coming on the podcast to talk about it. Well, thank you. It was a pleasure. you (43/43)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Gillian Ted, chair of the editorial board and editor at large of the Financial Times. She writes weekly columns covering a range of economic, financial, political and social issues and she is here to speak with us today. Gillian, welcome back to Hidden Forces. Great to be on the show at this incredibly intense moment. So that's actually something I wanted to ask you about because you joined the Financial Times in the early 90s, I believe, as a correspondent for the former (1/43)
Soviet Union in Europe. You were stationed in Tokyo during the bursting of the dot-com bubble and the 9-11 attacks and you covered Wall Street, of course, leading up to and through the crisis, which we talked about in our last episode together. And now you find yourself as the editor at large of what is effectively the largest English language financial newspaper in the world. What is it like to work at the Financial Times in your capacity during a time like this? Well, it's moments like this that make me realize why journalism is such a responsibility and a privilege and a passion of mine because essentially, you know, we're paid to tell people about other people and try and illuminate how the world's working or often not working. And doing that in quiet times and peace times is always very important as part of the civic duty, but doing it in times of drama of war, medical war, of the thought we got now or financial war, of the thought I've seen before in financial crises shows the (2/43)
importance of trying to do your best in difficult circumstances to explain how the world's working. Well, last time you were on the show, I asked you how the experience of covering the last financial crisis changed you and you said that it taught you humility, enough humility you said to realize that as journalists on a good day, we get 40% of the truth. But you also said that it taught you about the power of social silences and I asked you then what you thought people were not talking about and you said things like pensions and the slow moving car crash that's there, antibacterial resistance, which is interesting given the current moment. And we talked about the corporate bond market, leveraged loans, emerging markets. What are the social silences today with all of this coverage about coronavirus? What are people not talking about? Well, I think that the first point to make is that the coronavirus really does demonstrate the importance of elites and pundits like myself of being humble (3/43)
because frankly, I've been concerned for a long time about antibacterial resistance. I still am. I've worried about a pandemic to a degree but not in a very realistic immediate manner. And it's very interesting because the Davos World Economic Forum asks the sort of global elite every year to rank the risks they're most concerned about. And if you go back 10, 15 years, pandemics was one of them. In the last couple of years, pandemics have barely featured at all in the risks that people are watching, which indicates the fact that it's always the risk that you take your eye off the ball or eye off watching that comes back to really bite. So when I think about now what risks were missing, to a certain degree, things are moving so fast that everyone's breathlessly watching the latest headline. So everyone's thinking a lot about the impact of coronavirus on the rich countries because places like Europe and America are very much on the television screens in the frame. One of the things I (4/43)
think people aren't paying nearly enough attention to is what this is going to mean for the emerging market countries. The emerging market economic shock and financial shock is very severe but is not being discussed properly. But if you move beyond the coronavirus, questions about what all of this is doing to civil liberties, to the growing intrusion of tech surveillance are not being properly discussed right now. And then there are the other wider questions about do we understand who actually owns the internet on which we've all become so desperately dependent and who actually controls it? Yeah, I saw you actually tweeted out an image of or a video that showed people on Florida's beach, the cell phones of every single individual, to just show the overcrowding. Is that what you mean? Well, it was partly because there was an extraordinary effort by some computer scientists to try and track cell phones from Florida Beach, which showed both the degree to which they had congregated without (5/43)
social distancing on Florida beaches, but then dramatically dispersed across the country at the end of their holidays. And that was scary because of what it said about social distancing and the lack of it. But it was also scary that people can get that information and highlight it so clearly. And I think we're going into a phase where people are going to be faced with some very hard uncomfortable moral choices, which is, is it better to keep people safe and in the name of safety, accept a higher level of surveillance? Or is it going to be a case where people say, actually, I don't want to sacrifice that much privacy. And I'd rather take risks on the health front than have governments know exactly what I'm doing and where I'm doing it. Are you concerned about that, about the measures that are being taken, particularly, I think, in Western countries, right? Because in a country like China, although they were noticeable to us or noteworthy to us, I don't know how unusual they were, or at (6/43)
least how beyond the realm of expectations they were for people in China. But for us in the United States, these really are draconian measures. We're not used to it. I've reached for metaphors. And I feel like you would have to go back to World War II to think about this level of societal impact due to government policy. But of course, back then, it was to mobilize for the war. Now, it's to demobilize. It's to stay in our homes. Is that what you're talking about? Well, absolutely. And what's stunning right now is the speed at which norms are changing. And when I just think back to my own life, I'm based in New York. And because I'm based in New York, and I speak a lot to newsmakers, I've had a fairly good sense for some time that we were heading towards a lockdown. But, you know, my friends and colleagues back in London, when I spoke to them just three weeks ago and said, listen, guys, schools will be shut. Borders may close. They could not believe it. It was unimaginable in London (7/43)
just three weeks ago that say schools will be shut. And then of course, we're moving a situation in London where schools were shut, and suddenly institutions were closed down. And now we've moved into a situation where if you leave your house in the UK, your neighbors are likely to report you if you're seen loitering around, where they're looking at, you know, license plate numbers through cameras to see whether people are leaving and driving without getting permission, etc, etc. So it's really quite an astonishing shift in attitude. And to my mind, the critical question is, it's one thing to take emergency measures in more time. Will these emergency measures be subject to any type of proper societal debate or scrutiny or oversight? And what happens if or when we get back to peacetime? And suddenly there won't be any justification at all for much of what's been put in place. So I actually, I live in New York. And the last time you were on the program, we did this from the studio in (8/43)
person. I'm not in New York right now. What is it like in New York at the moment? Well, the streets are stunningly empty. And it is quieter than I've ever seen New York before in my life, which in some ways is actually very nice. I mean, if you walk along the river, it is just beautiful and peaceful and quiet. And the springs here and there's trees coming out blossoms there. Birds are singing, you can hear the birds properly for the first time. But the level of stress and fear is rising very fast. People are tuning into Andrew Governor Cuomo's briefings all the time. And the death toll is obviously rising fast too. The streets still have some shops open in terms of grocery stores and pharmaceutical stores. There's big queues outside the grocery stores because they're only letting people in one at a time. And I went to Whole Foods this morning and had to wait for the best part of an hour before we can actually get into the store. But once you get in, there's still plenty of produce. So (9/43)
it's a bizarre mixture of the seemingly normal, seemingly totally abnormal and sense of dread and waiting. Are people wearing masks now when they go out? Like when you go to the supermarket or other people wearing masks? There's definitely more mask wearing going on now. It's still not the dominant pattern. There is more mask wearing going on now. And it's a very interesting issue, the mask thing, because from an anthropological perspective, it's clear that masks are much more than just about medical risk. It's also for some people, a deserter shows control, shows support towards a wider group, or simply indicate that they want to be responsible. In Asian culture, they play that very differently because their masks are seeing as almost an unequivocal good thing. And there's not stigma to wearing masks. In American talk, quite recently, there was stigma, but I suspect that's now drying down. Right. So let's shift into a conversation about the economy and the shutdowns, because this (10/43)
really is, again, it's rich. We live in the age of the unprecedented, where I feel like so many of us find ourselves reaching for that descriptor that this is unprecedented. We haven't seen this before. But really, we haven't, at least not in our lifetimes, where the government shuts down the economy. On the one hand, the government is shutting down the economy effectively. That's not the objective, but it's effectively shutting down economic activity. And on the other, it is expanding stimulus measures, both on the fiscal side and on the monetary side, though it isn't so much to stimulate, but rather to sustain. And I've gone through some of your writings on the FT. Of course, I also follow many of your writers, Spiegel, Rana Faroohar. And one of the things that you wrote about had to do with financial flows and the importance of dollar funding. How has the panic around COVID-19 impacted the financial flows that normally grease the wheels of trade and that back global supply chains? (11/43)
What are we seeing there? Well, the terrible irony that hangs over the global political economy today is that at a time when the US has often tried to downplay its global leadership and adopt an American first policy, the dollar has become more, not less central to the global economy. Because not only is America the biggest economy, and not only is in many ways a dollar regarded as a key reserve currency for central banks around the world, but dollars account for a very large part of the trade finance, a grease is the world's supply chains. And what's become clear is that as these supply chains go into crisis, and as different parts of the supply chains start to default along that chain, you're starting to see a scramble for dollars that potentially is going to be extremely nasty. Because if you are an American company or if you're an American bank and you want to get access to dollars in a crisis, you can usually go to the central bank in some form. If you are in Indonesia or China or (12/43)
Germany, you don't have access through your banks to the same Fed window. So thankfully, the Federal Reserve has rushed to try and plug that gap by providing dollars to other central banks around the world that they can then lend on to their own banks and by default the companies. But the question that's hanging over the markets right now is whether that emergency action is going to be sweeping enough and fast enough to prevent any shocks in the dollar funding markets. So you're talking about dollar swap lines. One of the things that came to my mind when I was thinking about this is that to my knowledge at least, there aren't any swap lines open with the people's bank of China. And Chinese companies have huge dollar funding needs. Has the FT done any reporting on this? What's the situation there exactly? Well, there's two problems in terms of assessing what the potential scale of dollar stress in China is. One is that there's a huge amount of opacity around this. And a lot of this has (13/43)
been done offshore. Even international regulators find it very hard to track what the true condition is inside China. And of course, the regulators themselves may or may not give some kind of de facto support. So the whole situation is very opaque. Secondly, we are dealing with a slow burn, slow motion crisis where essentially a lot of the unraveling of these supply chains and a lot of the default pressures will occur over the course of several weeks. So that again makes it hard to work out exactly what's happening and when it will really bite. But the good news is that the Chinese central bank, PBC and Chinese government do have a vast supply of treasuries that they potentially could use to raise dollar funding if they had to do so. And they could theoretically either sell those in the open market if they needed to, or even if the Fed was agreed to some kind of swap with the Fed using those treasuries or simply going to the open markets to do that. But it's unclear what that would (14/43)
mean for the treasury market. It's unclear how the threat to that might be. At the moment, the chance of the Fed cutting a deal with the PBOC is pretty low given the hostility between China and the US. And the PBOC is the People's Bank of China. But you things are changing very fast day by day and nothing could be ruled out. Right. And to that point, it would seem to me that if they did sell treasuries, even under the current conditions, it would be a political statement in and of itself, wouldn't it? Well, at the moment, the Fed is desperately trying to keep the treasury price high and the yield low. And that game is going to get even more intense going down the tracks because the stimulus package they're talking about is going to require massive amounts of bond issuance. And they need to find someone to buy those bonds and they need to try and keep the rates low or the borrowing cost will be too high or the interest cost will be too high. So they are going to be engaged in a very (15/43)
nasty, difficult dance in the months ahead. But certainly at the moment, the Fed doesn't want to see China dumping a whole bunch of treasuries in the market and potentially do the sorting prices. Well, so speaking of bonds, it isn't just treasuries. It's also the corporate bond market. And that, in fact, it seems to me looking at the Fed's announcements that the corporate bonds are the primary target for their liquidity facilities. One of them is a primary market facility. One is a secondary market facility. And in fact, you guys wrote, it might have been you or one of your journalists at the F.T. wrote an article about BlackRock and the conflict of interest there. What can you tell us about what you know or what you understand about the Fed's objectives with its latest changes, the facilities, these announcements and what is effectively a form of QE that it's engaging in? Well, the Fed's basically engaged in a whack-a-mole and it's trying to jump into every sort of incipient stress in (16/43)
the markets one by one and try and offset it. So the amount of programs it's unveiled in recent days is absolutely astonishing and dishing the complex. And frankly, they themselves don't know all the details to them yet. But one of the key elements of these programs is to try and stop stress in mortgage markets, which has started to become very serious. Another key element has been to try and stop stress in the corporate bond market. And that's very noteworthy because it's the first time the Fed has ever jumped into corporate credit before potentially exposed itself to a lot of those risks. And it's doing so really in a quite astonishing way, both in the secondary market where it's pledged to buy corporate bonds and secondary market and exchange-shared funds holding corporate bonds, but also in the primary market as well, which again is completely unprecedented. Now, taking on that level of corporate exposure and risk is potentially going to be quite difficult for the Fed to handle (17/43)
because although it's said it will only buy investment-grade corporate bonds, the reality is that the sudden slowdown in the economy puts about a trillion dollars worth of corporate bonds at risk for a downgrade from investment-grade to junk bond status. And the rating agency is a warning that a lot of those junk bonds are going to default. So it's one thing to say in a very grandiose, dramatic way that the Fed is going to buy corporate bonds. It's quite another to work out how to implement that program. And so the question people are asking is, well, how are they going to do it? The Fed has decided to essentially outsource it to BlackRock. Some people would say, well, actually they could have kept it in-house and used their own people, but they have a huge bandwidth problem at the moment and lack of expertise and skills. So BlackRock's been given the mandate, but been given the mandate without a beauty parade. And in spite of the fact that BlackRock itself has massive fund management (18/43)
business with bonds and equities that are going to benefit from the Fed's new strategies. So there's a huge issue of conflict of interest here. And plenty of BlackRock's rivals are absolutely furious by what they regard as a sweetheart deal that shouldn't have been done. Whereas the Fed and other people around it will say, well, this was the only option in a hurry. So you think taxpayers should be concerned about conflict of interest? Or do you think, again, so your point really is that the Fed relies on, not just in this case, but even in its normal operations, it relies on primary dealers to intermediate its purchases of US Treasury securities. The Fed is not completely independent, so it relies on third parties. Is this something where they wouldn't be able to do it on their own effectively? Well, it's an open question whether the Fed could do it on its own or not. I mean, many Fed officials would say it certainly couldn't do it on its own quickly. If it had many weeks to hire (19/43)
people and set up a program, it could do. But the question is whether it's better to act quickly given the American economy faces this huge great looming problem of corporate bonds or to use BlackRock. Now, could they have done a proper beauty parade quickly? Possibly. But again, that takes time. Almost everyone in the market agrees that BlackRock has the biggest capability in terms of both its fund management skills, but also its advisory skills. And it has been running as an independent consultancy operation now for a number of years, more than a decade. And they claim they have a very well-trenched system for avoiding conflicts of interest. And certainly that argument's convinced a long list of public institutions in the last 10 years who have used BlackRock for services. So they say they'll manage the complex fine. Let's hope so. For my part, I think I can understand why the Fed did this in a wartime situation. But I think that if it's going to do this, it's absolutely essential (20/43)
that three things happen. Firstly, I think that BlackRock should do this pro bono without charging fees. And it does look as if that's roughly what's going to happen for at least part of it. Secondly, I think that there should be maximum transparency all the way through what's happening. And again, it's quite encouraging. It does seem like trying to take a more transparent approach than before. And thirdly, I think there should be a three-month review and probably a new beauty parade then to see whether BlackRock really is the best people to do that or to consider whether to bring the whole thing into house. Hmm. Well, to your point about the corporate bond market, it's hard to really understate how much that market has grown since the last financial crisis. I think it's about 10 trillion in size now and more than 40% of that market represents that triple B tranche that's at risk of a downgrade. So it sounds like you think about 25% of that market is that significant risk. You also (21/43)
have talked about this concept of monetary morphine that investors have become accustomed to a world in which the Fed keeps interest rates low, money is easy, and that if anything gets out of hand, that the Fed and central banks will always be there. And I think the open question for all of us has been, will policy be effective this time around? And what will it take for it to be effective and what does effective look like? How are you thinking about that right now? What are you looking for to determine whether or not monetary policy is and will be effective? Well, there's really three aspects you're asking when you think about whether it's effective or not. The first is, do the financial wheels keep turning in the system? Is other cogs still functioning normally? And the Fed is primarily focused on delivering that right now because they really are engaged in the most terrifying game of what I call whack-a-mole or cat and mouse where bits of the system keep half freezing up, they're (22/43)
trying to keep it going, and most of the programs they're unveiling right now are geared towards that. The second thing they're trying to do is to keep confidence in the markets and in the wider economy. And again, that's part of what the game is right now. And that's an extremely difficult job to do. The third thing they're trying to do is to eventually help stimulate demand. But frankly, there's almost nothing the Fed can do in that respect right now because it doesn't matter how cheap money is or how many corporate bonds it buys and how much liquidity it pumps into the system. If people are terrified, they're not going to borrow money to spend money or to invest or anything like that, they're just not going to do it. And so, the idea of using Fed policy right now to boost demand is frankly ridiculous. But the Fed can and absolutely should try to maintain confidence insofar as it can and eventually and also most immediately keep the financial system going. The longer term question (23/43)
though is a degree to which the Fed gets sucked into essentially cooperating with the government and the Treasury. And you have a coordination of fiscal and monetary policy that basically leads to the Fed underwriting a massive debt expansion quite explicitly. And that I suspect is where we're going next. How do you mean that the Fed would underwrite that, that it would accept an increasing amount of U.S. sovereign securities? Well, one of the very important things that's happened in the last two or three days has been a growing discussion amongst Fed watchers and inside the Fed about what they call yield curve control. And that's an idea which originated in Japan. And traditionally, what central banks are trying to do is to control the short term rate of borrowing to their overnight operations or their discount operations or their policy rates. And the long term rate of borrowing basically was set by what markets thought the longer term outlook was like. And also the degree to which (24/43)
governments are going to have to sell bonds to raise money for the budgets. And so historically, they've controlled the short term but left the longer term rates float freely. Japan a few years ago started trying to control both the short and the long term through something called yield curve control. And the reason why that matters enormously is because if you have a government that's issuing lots of 10 year bonds or 20 year bonds, if you can control the yield curve and keep those borrowing costs low, then essentially you're making the cost of dealing with that debt much more manageable. Now America has hitherto refrained from that so-called yield curve control, but I suspect that's where we're now heading. Do you see the Fed? The other thing is interesting, you mentioned it before, that the Fed didn't go into the corporate bond market. That wasn't part of its open market operations. Now it is, well, it's part of the liquidity facilities. I mean, one of the things that I feel like so (25/43)
many of us are asking is how far, will it stop anywhere or will it simply continue to buy assets in markets that it deems to be important? And again, this is also, we're in such a confusing time because it's not clear how much this bond buying and these liquidity facilities are a preemptive reaction to credit markets freezing up and how much of it is also just simply an anxiety about equity markets because so many people are now invested in equity markets. How do you think about that? Where do you think this goes? Could we eventually see the Fed begin to even purchase equities? Well, Japan has done that through ETFs. The Bank of Japan now owns a sizable chunk of the ETF market. And if things get worse and worse, the Fed leadership has made it clear that the skies are limit. There is no limit to where they're going to go. And that's what they're essentially saying that they would consider almost anything. I think that it would be an absolutely stunning shocking move for the Fed to do. (26/43)
But we've seen a lot of shocking moves in the last couple of weeks and also in the last decade. So who knows? It's quite a transformation. Do you ever wonder the economy? We call it a capitalist economy, but I'm not sure what you would call it anymore. I mean, certainly if you're buying equities. So actually I have one more question about the Fed since we're on it. And that has to do with this debate that has been gaining more attention in Washington and in the United States. Perhaps it took a little bit of a blow with what looks like is going to be the nomination of Joe Biden to run at the top of the Democratic ticket. But this idea of issuing a platinum coin or helicopter money or some version of this, where to your point about the Fed and the Treasury almost working closer together, where these things, the two almost merge. Do you see some point where because of this crisis that the Fed's independence becomes significantly at risk and we could see a more populist government in the (27/43)
US, whether it's a new government in 2020, or if it's the existing administration that decides to use or make dollar issuance without actually having to borrow the money in the Treasury market? Well, I think basically almost nothing's off the table in the meeting term because I think the only way to frame what's going on is to look at it in terms of a wartime economy. And the reality is that if you look at the visible aspects of this, namely the way that the President signed the Defense Production Act and essentially ordered General Motors to start making ventilators, that's one physical obvious sign of it. What's much less obvious is essentially you are getting a day factor underwriting of government debt by the central bank. And inevitably that puts fiscal and monetary policy not so much on a collision course, but in a realm where they are coordinating closely. Will we end up with central banks losing their independence in 10 years time? And that is entirely possible. If you look (28/43)
back to the period after World War II, it's very instructive because debt has absolutely skyrocketed in the US and there's really only four ways you can deal with high debt like this or debt of any sort. You either have a mass inflation or you have defaults or you have eventually revolution or you are lucky enough to grow yourself out. But that's almost never happened because what's happened in the World War II period and things as you grow yourself out at a time of what they call financial oppression, i.e. controls over where investors can put their money. And what happened in the years after World War II was essentially you had growth and you had inflation, but you had most crucially negative rates on most government instruments. And that means that through the magic of compounding, if you keep that up for a long period of time, you essentially have a transfer of money from the savers of pensioners to the government that helps pay the whole thing off. So I suspect that's probably (29/43)
where we're going to go. But the question is, can you do that without new national borders, without new national capital controls? Can you do that in the open market where technology can let you put money anywhere you want? Who knows? So from your reporting on this, what have you learned about the plans of the government to get us out of this? We're now in, certainly in New York, we're in what's effectively a lockdown. That can't go on forever, right? At some point, we've got to produce something so that we can all live and grow our economies. I don't know how much testing is being done and contact tracing, because that seems like an essential part of this. I haven't, and I haven't been following this as closely as you have. What do we know about the plan to get us out? They got us in, the plane is in the air, but how do we land this thing? Well, I think at the moment, what we know is as follows. The Fed is operating as a coherent, coordinated, grown-up government agency. And they are (30/43)
in crisis mode. They're reactive, not proactive, the most part, but they're behaving in a professional, very organized manner. And all credit to Jay Powell and his colleagues for doing that. It's very impressive. And for the most part, the central banks around the world are coordinating together very closely. Again, extremely impressive. The White House and the Treasury are, frankly, a mess. And they have been reactive, shambolic, chaotic. And so the idea of trying to ask anyone in the White House or the Treasury for a five-year plan or even a two-year plan or a five-minute plan is ridiculous. I mean, they've got through the stimulus bill. They have sensors of how they want to try and start rolling out parts of that. But it's chaotic. So it's extremely unclear what is going to happen. But my best guess, yes, it's terrifying. My best guess is that we are going to slowly slip into more and more of a wartime economy. Savvy investors, well-connected plutocrats will find ways to make money (31/43)
and benefit. Many smaller businesses will be driven to the war. There will be tremendous hardship and suffering, which will be only partly alleviated by the government handouts. There will be growing fights and bitter pressure between people like Trump who want to reopen the economy quickly and people who are looking at the scale of death. And there's going to be some very nasty societal choices about the question of, to what degree do we want to sacrifice lots of people to keep the economy going or not? So as all of this is happening, we have an election coming up in November. And actually, there are real questions about whether Joe Biden is going to be that candidate. He hasn't looked particularly well in a series of interviews on television. There's a lot of speculation about what his health is. But even if he is the candidate, it's not clear how people are going to go to the polls. If we're experiencing another wave in the fall of COVID-19 and hospitals are overloaded and there (32/43)
aren't enough ventilators and people are panicked, A, it's not clear that people are going to be participating as much as they used to, which I assume at least the Democrats will try and create some kind of remote voting solution like when you're out of the country. And I'm kind of a little worried, to be honest, about the political instability in all of this. I mean, right now, we're talking about the economic fallout, but given how polarized and divided the country was heading into this, do you worry about what we might see in the second half of this year, politically? Yeah. I mean, not just in the second half of the year, so I worry about that. I worry about next 10 years, frankly. There's every possibility that either the elections will get cancelled or they'll be done under very controversial conditions. We just don't know. I very much hope they're not. I very much hope that if necessarily we go to some kind of online polling, we can without the danger of cyber hacking. But it's (33/43)
clearly going to be very disruptive. And what's clear is that this could potentially last a lot longer than people originally thought. I mean, the idea of it basically being a two-week containment and then it will be fine. And they're still going on television and Trump breathing and saying two weeks to stop the spread, 15 days to stop spread. I mean, the reality is from what the medical experts are saying right now, it's likely to be more like 15 weeks. That's the message that really hasn't permeated yet, but it will be tough. I mean, just in the last 24 hours in the UK on Sunday, I'm speaking, they've just come out in the UK, which had been in total denial until very recently. And so that they may have lockdown measures for six months. That's going to be shocking for people to try and live with and accept. But it's very hard to see why the UK or Italy is going to be different from the US. This is also a question, but one of the things that I think about is, you mentioned maybe the (34/43)
elections being hacked, but that's a form of cyber. We have this kind of liminal battle space between the US and Russia, also China, this information warfare landscape. We had problems last time around in 2016. People doubted the legitimacy of the elections. They're going to doubt the legitimacy of the elections this time around again. And if the economies are in a prolonged slump, we are also living through a kind of geopolitical global disorder. We've seen it most recently in Syria and Turkey and the US pullout and then pull back into Rajava. We have the ongoing new Cold War tensions with not just Russia, but also China. China's economy is in really bad shape. That's another thing that I wanted to ask you about. What do we know about what their economy is facing? And my concern is that, just like we saw in World War II, the interwar period was a really difficult economic period for all countries. And one of the features that was common across them was that economic turmoil for many (35/43)
of the players, Germany included, and the United States, of course, began before the countries entered the war. Do you think about that period as a sort of analogy for where we might find ourselves in today? Absolutely. Absolutely. I mean, that's, you know, if you look back at the historical charts, that's absolutely the case. And it's one again, one of the scary things that you're seeing, the potential for enormous economic stress. You know, you already had a loss of faith in political institutions, growing sense of populism, even before this started. It's hard to see how, you know, it's only going to go back to democratic norms anytime soon. What countries do you think are most at risk of that, of being politically destabilized in the current system? Well, I think that most of the countries are at risk of it. I think the US, though, it turns out play out particularly extremely right now, because, you know, at least in places like, you know, continent Europe, you A, have slightly more (36/43)
centrist parties with a more dominant profile. But you also have, you know, fully entrained social safety nets, which are actually protecting parts of the population. And the problem with the US stimulus package is that it's essentially coming out, you know, slowly. And whether it hits households fast enough to offset the tremendous amount of pain is unclear. So Europe's a really interesting situation. I mean, because they've had problems going back to even before the 2008, well, the 2008 crisis. I mean, they, the idea with Europe was always that the European Monetary Union is a product of optimistic times. And at the time, they saw crises as opportunities to move forever closer union. What we find to be the case now is that this is not what's happening. And in fact, people like Lagarde and other pro-EU officials have a very difficult time passing the type of stimulus measures that not even close to what we have here, but whatever they can get. Maybe you can also tell our listeners, (37/43)
what has the ECB done during this time? And how does this fit into the larger challenges that Europe is facing in order to try and make what is basically a Confederacy work like something close to the United States for the purposes of stimulus for peripheral countries in particular, like Greece, for example, that are very difficult situations, given COVID-19, given their shutdowns, and given the fact that they're, let's say, a tourist economy, largely. Well, the fundamental problem hanging out of the European Union is that you have a common monetary policy, a common currency, and you have financial markets that are integrated to a degree. You don't really have a common European capital market as such. But of course, you don't have a common fiscal policy. And so the big test for the European Union right now is whether out of this, you will start to see the beginnings of a common fiscal policy, because you've already had parts of the European leadership called for common coronabonds, (38/43)
which would be joint EU-wide coronabonds. And you've got people like Christine Lagarde at the ECB calling increasingly strongly for some kind of fiscal policy support to go with what the ECB is doing. I mean, the ECB, like the Fed, is doing what it can to try and keep financial markets operating and the wheels of finance turning. It's also trying in general terms to boost demand. But again, it can't do much to boost demand unless it's fiscal policy involved. So again, another prediction is out of this, we'll see coronabonds basically pave the way for joint fiscal policy in the European Union for the first time. And frankly, that's good. The coronabonds will be the new Euro bonds. Well, I've long thought that we need to have some kind of joint Euro bond. It's been very hard to break through the hostility of some nation states towards that idea. Nothing like a crisis to concentrate minds. And Europe in particular tends to only take world radical steps when there is a crisis. So I suspect (39/43)
that future historians will look back and see this as a time when the crisis actually broke the deadlock around fiscal policy and really started to align fiscal policy, not closely with monetary policy, but more closely to it than there's been in the past. Do you think that's easier now with Brexit having been completed for Europe to move forward? It's definitely a lot easier now that the UK is not there anymore because the UK was of course the surface, the approach to that. And of course, it was also out of the single currency. So one more question for you, Gillian, has to do with energy markets. This of course is a huge story that's kind of been buried again. Everything is, nothing compares to coronavirus, but the world does go on. And a few weeks ago, and we covered this with Ben Hubbard, the Middle East correspondent for the New York Times. We covered this story about the fallout between Russia and Saudi Arabia and Saudi Arabia's expansion of its supply in the face of collapsing (40/43)
demand and the collapsing price of oil and the rippling impact that this has on commercial oil producers, specifically shale in the United States. What is going on with energy markets and how does this factor into the current situation economically and politically? Well, what's happened with energy markets is about the very last thing in the world you want to see right now, which is a price war and a market share war between Saudi, Russia, and America that's turned very vicious and essentially has pushed down energy prices dramatically, adding to the deflation risks, and adding to the sense of international turmoil. So that's another very nasty hammer blow on the US economy because of course, the shale industry has been a key source of growth in recent years. All right, well, Jillian, thank you very much. I want to ask you actually, I have one more question, because one of the articles that you wrote about was that you went on your final bike ride. Have you actually been able to go on (41/43)
another bike ride since you've gone into quarantine? I have. And in fact, I've been cycling almost every day when it's not raining. And I cannot recommend it highly enough as a source of joy and stress relief and just a chance to keep fit and to remain connected with some of the most vibrant joyous aspects of life. I mean, it so happens that in New York right now, spring isn't de-coming, the blossoms out. Cycling is a great way to, you know, get into the fresh air without too many risks because on a bike, you are inevitably socially distanced from people. So yes, I would strongly recommend cycling to anybody who's listening. My editor does the same thing. So that makes two of you. Jillian, I deeply appreciate your time. Thank you so much. And I hope to have you on again the program sometime in the future. Thank you. And stay safe. And for anyone else who's listening, stay safe and stay optimistic. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York (42/43)
City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com. slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolao. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (43/43)
What's up everybody? Welcome to this week's Market Forces segment of the Hidden Forces Podcast where I speak with market professionals, business people and anyone else with an economic perspective on current events. Today I speak with Ben Friedland, Executive Vice President and Co-head of Alternative Investments Practice for CBRE, the largest commercial real estate services firm in the world. In his capacity at the firm, Ben advises many of the world's top hedge funds and private equity companies regarding real estate investments, leases and acquisitions and is in a unique position to provide insight into how the forces of technology and globalization are changing this age-old, multi-trillion dollar industry for the 21st century. Let's get right into it. Now I want to welcome Ben Friedland onto the show. Ben, how are you? I'm great. Thanks for having me. Welcome to Hidden Forces. Excited to be here. What does it feel like? You're the first Hidden Forces listener to actually come on as (1/43)
a guest. I'm the first one? Long time listener, first time caller? Well, I mean, hopefully there are others who, well, obviously many of the guests have heard the show, but I think they heard it primarily because they were prompted, but you're actually a listener, so that's really great. We're getting into this. So, Ben, we're kind of friends. So I've known you now since it was cold the first time we met. I feel like we met close to a year ago. That's right. Right? You remember? At dinner. At dinner. Where was it? It was... It was in good memory, Ben. It was in Rock Center. It was me, you, Porzio and Todd Rollin. Porzio. We were having fish or something. That's right. Well, you're Greek, so we went Greek. Cool, cool, cool. All right. Why don't you tell our audience a little bit? I mean, I have many specific questions for you and there's a good reason I brought you on, but why don't you tell our audience a little bit about yourself and what you do? Sure. I am at a company called CB (2/43)
Richardella, CBRE. It's the largest real estate firm in the world. I'm located in the New York office and I run the Alternative Investments Group with my partner, which is a global group representing hedge funds and private equity firms for their real estate concerns. You basically sell real estate or what to hedge funds to private equity people. You also facilitate investments and what exactly do you do? It's the nature of your job. It's advisory. They hire me for advice when they're looking for their own space to operate their operations either in the city or elsewhere or investments that they have that they want to optimize or investments that they're looking into that they want to do some additional due diligence around the real estate. Those are all things that they'll look to me for. It's really successful, powerful people in finance. Anyone we would know? Yeah. It's a lot of this sort of Wall Street Journal type names and they're interesting type A personalities. Are you allowed (3/43)
to tell us anything about them? I'd rather go general then specific. We'll see if we'll get into that. That's interesting. For me, I was thinking about this because the audience knows this. We do a lot of episodes and then you'll know this as well because you listen to the show, but we do some of these market forces segments where the rules are relaxed for me and I can do things that are not within the bounds of a big structured show. I'm not clearly thought on exactly what everything is that interests me most about you and what you do and what it is that I wanted to bring you on here for, but one just simply has to do with the fact that you interact with so many successful people at the very top of finance. You've been doing it for years and I think it's interesting given also the fact that you listen to a ton of podcasts, not only this one. I would actually call you, I think I've told you this, I would call you the classic Tim Ferris listener. The way that you're very structured, (4/43)
organized, you have answers for everything that are clearly thought out as to why you do. I don't know. Is there anything, Ben, that you do in your life that you haven't clearly thought about? I try to be pretty thoughtful about everything. Sometimes people think that I'm being overly thoughtful, but even something like going away on vacation and having time to do something random, I would structure that time within the vacation to say, all right, here are the things that I'm doing that I need to make sure that I'm doing and then if I want to have some spontaneity. Structured fun. Yeah, structured spontaneity. Structured fun. Let me ask you this. Since you do listen to a ton of podcasts and this is kind of a phenomenon today that a lot of people listen to podcasts and a lot of people listen to podcasts discriminately in order to learn things, what about your clients? Is that you find that's common among your clients? Do they have the time? Do they have the interest? Yeah, I think that (5/43)
these type A's what they're very focused on in every way is time and efficiency. One of the great things about podcasts, unlike other mediums, is you can do them while you're doing other things, whether you're working out or for me on the train or cleaning your house, whatever it is that you're doing, your hands are free and you're able to transport yourself into a story or ideas that you can listen to while doing other things. I think it's taken off in the same way that it's of interest for me. A lot of my clients have found it similarly valuable. Let me ask you this then. This is interesting. We're kind of going off the rails now because this is not actually the question that I had, but it is interesting to me. I'm thinking about this because I remember what it was like for me when I went through this learning period using podcasts, a combination of podcasts and YouTube videos and blogs. Before that, of course, it was books. I would go to Barnes & Noble and I would just take books (6/43)
off the shelf. I learned much more after college than before because in college ... I'm not surprised at all. You're an auto-didact. I didn't like me giving a syllabus and being told what to read. I knew after I read this, this is what I wanted to read. After I read this, I need a little bit of that and listen to that. How do you listen? Let's say you sent me that one podcast by a Furnham Street with Naval. You really love that. I do. You have a whole structure to your podcast. You listen on overcast and you're able to put your favorite podcast or whatever else. How does that work? Let's say you hear something like Naval's podcast, the one with Naval. What goes through your head in terms of what you want to hear next, what you want out? How does that change where your mind goes? Part of it, I start out by saying what do I not want initially. I try really hard to filter out things that I think are noise to make sure that I'm hearing the best stuff. Once I ... that Furnham Street, when I (7/43)
heard Naval, I just love that guy. I said, I want to learn everything about Naval. Fortunately, there are lots of different ways to learn about people. I went through the same thing with Yuval Harari when someone had recommended ... He's very interested to listen to. When you hear it, it's just mind blowing stuff and you want to hear more. I will get lost down the rabbit hole of these things and follow them as they interest me. I think if you think of it not as any pursuit, but just pleasure of knowledge, then that's the best path that you can go down. I agree. That's interesting. We were talking about Sam Harris's podcast that he did with Ben Shapiro and Eric Weinstein. Did you ever follow up on Weinstein stuff? No, not since ... Have you ever listened to Shapiro's stuff? Yes, previously before the ... I listened to ... I hadn't. I heard one episode with him and this other guy at the Reuben Report. I didn't find it interesting. I didn't actually ... I found Ben Shapiro more (8/43)
interesting when he was contrasted to Sam Harris because of my views on Sam Harris's ... my opinion on materialism that I'm non-materialist and my thinking around philosophy, whereas Sam Harris is and I thought Shapiro made some points that I would have made. I thought that was interesting. Eric Weinstein really impressed me. I think he impressed you too. We were talking about this. I looked into some of his stuff. I started listening to him and he's a partner with Peter Thiel, which I didn't know. It surprised me in a sense because of just the vast array of his intelligence. Yes, there's so much stuff. There's a ton of stuff and you have to really filter. Do you feel like your approach to that is similar to your clients? Is that something that they do? Yes, I think we're all pretty ruthless with our time. We are really ... Just as an example, I know a lot of people like Shark Tank. I just looked at that a little more critically and said, I love new business ideas. That gets my brain (9/43)
going in a way that I enjoy. Then as you break it down, you've got the four judges propping themselves up or you've got false choices that are made or forced negotiations that are created. If you enjoy that sort of human drama, then that's all fine. For me, I said, all right, in an hour program, I'm getting 10 minutes of the good stuff. I'm trying very hard at one of the things in the Tim Ferriss book. I forget who initially said this, but unless it's a full body hell yeah, then you should pass. That's the way when you think about your time and whether you want to read a book or whether you want to see a show, investing time in a show, all these things, ideally you really want to filter through a lot because it's your free time. I think it's so interesting how popular Tim Ferriss has gotten. I got another buddy, Dan. He runs his own CrossFit. It's called North Tribe, I think, or North. It's in the North Fork. He's a great guy and he loves Tim Ferriss. He's very much like this. He's (10/43)
always thinking about how do I get better? How do I improve? I think it's really interesting. On that point, let me ask you something. You've got three kids, right? Three kids. Three kids. Age group? 13, 10, and seven. What are the things that I think about, and I think I mentioned this in my interview with Heather Berlin, I think I did with her, but regardless, it has to do with discipline. I've thought about this sort of theoretically. What do I think if I had children, what would be the single most important attribute that I would want to inculcate in them? I think that in today's world with the array of distractions, it would be discipline. I wonder to you how important that is, discipline in your own life, and then how important that is for your children and how you see that. It's a great question because part of these things you'd like to think of them is that they work for everyone, but really there's individuals who, here's a good example. I'm a morning person. I really believe (11/43)
in the morning is the beginning of routine. The morning is good for everybody if you can start your day earlier and do good things earlier. But if you run across someone who just says, I'm a night person and I don't like the morning, then there's only so much you think your good advice can do for that person. So if similar interactions with my kids at varying ages for various things, but what I like to do is sort of explain on the higher level theoretically what discipline provides and say things like the more things we make routine, the more we can accomplish and talk about it in that sense so they understand where we're coming from instead of, I think the word discipline for kids can be, sound like a negative when it really can be a positive. You need discipline. You know what that's from, right? It's a horrible impression. That's kindergarten cop. I couldn't do it. You don't have a tumor. Oh man, he was amazing. God bless him. God bless him. He was so amazing. Did you hear the Tim (12/43)
Ferriss episode where he interviewed Arnold Schwarzenegger? I didn't, but I will say I watched Terminator 2 and you and I both share a love of AI in the future and Skynet and what's going to happen there was pretty prescient early on. Yeah. I'm a cybernetic organism. I love it. Skynet became operational. Oh man, he was amazing. He was amazing. Listen, he was amazing. You got to hear the Tim Ferriss episode, dude. You want to talk about, let me tell you something. Arnold Schwarzenegger is a business, brilliant business mind. He was a millionaire before he- Real estate, right? Yeah. Or he goes back to real estate. Well, he was, so do you know the story? It's really great. In the 70s, he said, he's like, buck then, everything was like, everyone was into European. Right? Everything was like, so they, Kim and Franco, the Italian bodybuilder guy, the short guy, they created this brick and construction company, whatever. That year they created it, there was a huge earthquake in California at (13/43)
some point in the 70s. All these houses lost their time. They were right there to do all the work. He had this whole thing and he told Tim, you got to hear it. It was really funny. He was talking to Tim Ferriss and he's telling him what the strategy was, right? You're going to get this because you're a sales guy and you know exactly about all this stuff. You've talked to me about answers that you get and people tell you know. You have a whole system. Schwarzenegger, he said that the guy would tell Schwarzenegger how much he was willing to pay. Schwarzenegger would go back until Franco and Franco would start yelling and screaming and the guy would be like an Italian and then the guy would get really scared and he'd go, hold on, let me go back and soften the meat. I'll soften the meat. He said, you go back and convince Franco and there's this whole thing. I wish I remembered. Good cop, bad cop. Yeah, really funny man. But anyway, I always thought that Schwarzenegger, for all his (14/43)
failings, moral failings and everything else is a really fascinating, interesting guy who, and you've seen Pumping Iron, I mean for me like he really is like the manifestation of someone who wills success. Who like, you know. You can see why Tim Ferriss would be attracted to him. 100%. And you know one other comment about how you ingest this stuff from Tim Ferriss, you know one thing about his book that I think a lot of people find attractive is you don't really have to go chapter by chapter if something does, and he says right at the beginning, if something doesn't stick move on and I think that's a recipe for ingesting information in general right now. And I've all said that too in the podcast you sent me. Yeah, yeah. So don't, you know, don't feel like you have to read whole articles, don't feel like you have to read whole books, especially ones that are now being designed in a way where you can snipe what you want out of it and not have to take time on things that you don't want. (15/43)
What's that app you use that you told me about? Yeah, Blinkist. So that is a perfect example of something that I love where, so Blinkist is an app that takes nonfiction books and truncates them down to, you know, 10 to 15 sort of key points and then some further drilling down on those key points. And look, if it's in replacement of you reading Walter Isaacson's Einstein book, then that could be a bad thing. But for me, I wanted to read it and knew I was never going to read it. Like James Glakes, The Information. I read dinner. I read it. Yeah. You read through it. I read it the next day. You recommended a book at dinner and in two days, you know, I feel like I got, you know, maybe it's not 100%, but that 75% is good enough for me for the core concepts for the book. I got another question for you. And actually, I didn't structure it this way when I wrote it down, but I thought about it this way now as I'm looking at it. And it's basically about trust, about how important trust is, (16/43)
right? You know, specifically in your line of work, I mean, but I think it's a life principle because I remember Portcio told me about how you guys met. Now, you were, if I'm not mistaken, they were, you were pitching them. Why don't you tell me? Because I hear, yeah. So he was with MDC. He was with MDC and he was the person who was making the hiring decision. So David Portcio also for the audience, I've mentioned David once before, but he is now a partner with Hidden Forces and he's helping me build the company to kind of, you know, scale it out beyond just the podcast. So go ahead. So he was introduced to someone else at CB who's a great broker or a great guy, but not really a contemporaries of David. So they didn't connect in a way that gave David the comfort that he needed to say, I'm comfortable making this decision. And you know, as you said, really all of these things are ultimately about trust. You can't convince someone of anything. You can't sell someone anything. You can't (17/43)
do anything with anybody until they trust you because they won't believe anything that you're going to say if they don't trust you. So you have to start there. Do you think that people can learn to be trustworthy or are you born that way? And you just have to tap into it, maybe let go. I mean, it's interesting because I've never actually had this conversation because I'm thinking there was a point in my life where I let go of enough fear that I could be that way. And not be concerned with the ramifications being bad as long as you were being truthful. Yeah. In other words, that my deceit or my deceitfulness, I think was a function of my insecurity. And so when I kind of got into a place where I felt just safer, I wasn't worried so much. And that kind of also speaks to this other thing that I think you and I talked about before, which has to do with collaboration. And there are many people who operate in this sort of fear based mode. So they hoard everything. They hoard their ideas. (18/43)
They hoard whatever it is. Instead of just being open, just spreading it and it comes back to you because you're not afraid to share it. Yeah. That's right. Well, I would start by saying I'm a big believer in environmental theory. So if you're in a game, when I say game, let's say a profession, if you're a car salesman and someone is going lot to lot and you need to sell them on buying a car and there's no advantage for you, for them to get educated at your lot and then go to another lot, then everything that you're doing is going to be motivated towards making that sale in that moment. So the job is to do. And I always loved Charlie Munger. It's just incentives are everything. So it's hard to fight incentives. I feel fortunate, I've talked about this with my father a lot, that I'm in a profession in an industry where being good over the long term is a value for me. So I'm pushed in a way where there is no scenario where I do something that's against my client's best interest because (19/43)
at this point in my career, anything that I would do against my clients is against me and my reputation and the work that I do. So they know at this point that everything that I'm doing is with their long term best interest in mind. And that's really the most powerful thing because then when you do want to give a recommendation to them that is a little bit outside the box, they trust that it's coming from a safe place. Did you have anyone that you looked up to that wasn't, let's say, your father or a school teacher growing up? Like someone that was like a hero? Like we talk about, I'm not saying Schwarzenegger was a hero, but we talk about someone like that, someone that's outside of your immediate circle. That's a good question. I would say I didn't have anyone, certainly in any sort of a work capacity until I was at CBRE for a few years. I met a woman named Mary Ann Ty who I always say is the LeBron of real estate. I love that. It's just not fair. She's just more talented. Isn't she (20/43)
the head of the company? She's one of the heads of the tri-state region, but she's really an icon. And just someone, there's a quote by Supreme Court Justice Sonja, Saddamayor, about if you have your mentors, it's one thing to have mentors like Derek Jeter where you say, that guy really handles himself well and that's someone that I want to emulate. It is an entirely different thing than the specific goals that you are looking to accomplish. There's someone who you interact with on a day-to-day basis and get to see how they handle themselves in all the different situations ethically and business-wise, how they handle all of that and grow from that. Quite a privilege. Yeah, so I feel very fortunate and I love, I think a big part of the whole sort of Tim Ferris-Naval revolution is that you should always be learning. You should have tons of mentors. You should have tons of mentees. I'm 42. I feel like I have a lot on both sides and it's something that I don't think is age-specific. I'd (21/43)
like to think of myself as an 85-year-old trying to learn from a 20-year-old about what the new stuff is. How has that affected your hiring, the way that you hire people and also you talked about being on both sides, I assume you mean also being a mentor to someone else, right? Yeah. In fact, when was your first experience actually being a mentor to someone? What age did that come? I would say that right when I got to the second step, at the beginning of my career, it was a lot of really laborious type stuff, actually foot-walking buildings, going floor to floor in skyscrapers, writing down the names of the companies and getting the phone numbers and calling them up. It was pretty laborious at the beginning. Once I figured out how to do that and do it well, even from the second stage, I was mentoring people below me on some of the ... A lot of times you're the closest to it. If you've just accomplished something, you're the best person. I was the best person at the company to give the (22/43)
advice on what I had just done. You know, when you're in that position, right, and someone comes to you for advice, or is it sometimes also you want to give that advice, where do you think that comes from? How does that feel? Where does that come from? Well, a few things. Number one is I think part of it is who you are. Some people are shares and some people are takers. But I do think that in today's environment, just from a practical business sense in the Yuval Harari sort of theme, sharing is the key because of the increased transparency in business and the increased demands of clients to make sure that your service is absolutely a game all across the board. What that requires is more disciplines brought into the business. If someone, just as an example, if someone hires me to find them a data center in Connecticut, I have to bring in the Connecticut expert and I have to bring in the data center expert. So for everything that you want, whereas teams may have been three or four (23/43)
people, now I'll have a team that could have five or six people. It's just my industry, but I would imagine and I've seen in others that the teams are getting larger to ensure that the full offering is provided. So I still do see some people who are acting as loan agents and for whatever reason, maybe they're supremely talented, they have certain relationships to keep the business, but I'm finding it harder and harder for those people to compete in a world where other people are collaborating against them. I think the desire to mentor is one of those innate biological yearnings. I think if you're a man, it's a fathering instinct. If you're a woman, it's a mothering instinct. I think it's something that just comes inside. You care, you want to impart some knowledge, something you learned. You might have also some longing for immortality. You can get into complex sort of psychological things. Indeed. I mean, I know people that on a separate note, speaking about immortality and about (24/43)
death and death anxiety and all this stuff, people, a lot of people that work late into their lives maniacally, because I think on some level, they hope illogically, obviously, rationally that they'll be able to be too useful to die. There's a sense in which if I stop working, if my life is defined by work and I stop working, then what is my life? Which has always been my fear of working so much that you've got nothing else. You know what I mean? Yeah. Yeah. You want to fill out the rest of it. We probably both know people like that. We've met people like that. Yes. I always remember the 30 Rock when Alec Baldwin was on his deathbed. I haven't seen that. It was great. Tina Fey comes up to him and he basically says, I thought about it. My whole life, the only thing I was ever good at, just looking back, I should have worked more. Oh, man. That's really funny. All right. You mentioned technology there. I did mention that when I introduced you at the top of the show before you were here. (25/43)
I do want to feed that a little bit, because you and I have talked about it. It's this interesting idea that particularly, it's really social networks, like LinkedIn or Facebook or anything where you can amplify the power of your network so that your reputation is able to go much further. If you have a great reputation, if you're got like Tim Ferriss who has a very good reputation, it travels far and it's really empowering. Is that kind of what you're getting at? Is that ... Yeah. You think of when I first started in 1999, if you were going to a meeting and you present your services and then you leave, what did everybody ask for? They asked for three references. At best, they're going to have some follow-up phone calls with three people that you hand selected for them to call to have a 10-minute conversation maybe a little bit longer about whether you're the right person or not or your team. Now, even before you show up for the meeting, they know exactly who you are. They've read your (26/43)
LinkedIn profile. They've seen articles or quotes that you have. They Google who you found this interview. They found this interview. Listen to this interview. You're a smart guy. Interesting. Right. I like him already. There's just so much more information that is available. What that means is in the two categories, in terms of being a good actor and in terms of the value proposition, they both really need to be there in a way that they didn't previously because it's easier for the end user to figure it out. Let me ask you something else because I want to circle back a little bit this mentoring thing because you touched on hiring. This is interesting to me because until once I started to be in a position and this started my late 20s to hire anyone, it's been an interesting process of the self-discovery for me. It's something that no one ever taught me. I unfortunately didn't have anyone a mentor besides my father as a personal. Yeah, really my personal life. I didn't have anyone a (27/43)
business and that's a shame. I would have liked to, but regardless I didn't. Some things just I had to learn on my own. I'm curious about what your approach to hiring is or interviewing is. How do you do that? Well, I'd start by agreeing that it's really difficult. It's hard to find the right person and know how they're going to fit over the long term. To find them to begin with. Yeah, just to find them to begin with. Let's talk about that a second because this is really interesting. We're talking about technology. This is one of those things. I think it's analogous to dating apps now that I'm listening. It's like dating apps. You've got the same technology. You can't find a decent date or you're not going to find your future wife very easily by going on Tinder or on any of these other apps. In the same sort of way you've got LinkedIn, you've got all these other apps. It's not like you can just find the perfect employee just by going on there. I think it's really hard. It's really (28/43)
hard. You need people around you who have a sense of what you would want so they can do the initial filtering ideally. What I would say, the number one thing I would say, at least it's worked for me, is you may not exactly have the role that fits that person perfectly, but if you think that that person is a talented, motivated person, then you should bring them on board. That's what my partner and I have done recently where the people, what we thought that we wanted and what the people then presented to us wasn't an exact fit. We said we just believe these people are of real value and we'd like to bring them aboard. Do you have a top three characteristics that you need to have for someone? Certainly, number one that jumps out is self-motivated. Nobody's got the time to motivate someone, so if you're not self-motivated, I just ... And resourceful. That kind of goes together, right? You don't need to ask me for an explanation for everything. You can figure it out yourself. That's right. (29/43)
That's right. Otherwise, it's a nightmare because then you're doing more work than you did before you hired the person. The training anyone green is you really have to make sure that your return on investment is going to be good because teaching that the low-level stuff in any profession takes the most time and is the lowest return on value. That brings us back to trust, right, in collaboration, right? Because if you train someone, there are people that are worried about training someone, giving them all this great information, and then they leave the company. You should be able to let people be free to leave, but they should want to stay, right? It seems to me that the sort of millennial contracts that they are looking to sign are much shorter term and much more ... The dream is dead of staying at a company for your entire career and retiring from there. The offering from the companies need to align in some way with the employee's long-term goals. What I've always found is you can't (30/43)
fight against incentives. You just won't win that sort of a thing. What I say to the people that work with me is I want this to go as well as it possibly can, and I want this to be of value for you. If at any point you think that this isn't working for some reason, let's make sure our values are realigned. If at that point it just doesn't make sense, you want to do something different, I will never inhibit your growth. That's happened a lot where there have been people that have left the firm. I've seen people make huge mistakes, not just in my firm, at other firms, that when someone's leaving that was of value to them, they lash out and they're upset because it hurts them selfishly. It hurts them when their right-hand person leaves or when someone of value to them leaves. That's, hey, it's not nice and it's also not smart because that person goes on to another position of prominence within the industry. They remember, hey, who was my friend, not when it was just in their self- (31/43)
interest, who was my actual friend? That brings up our friend Portzio, because he is a perfect example of someone that understands, in my view, the idea that just because someone isn't directly working with you, that they can't be part of your larger modernization engine. He has lots of people that he will do favors for or do things for me. David and I met more than a year before I started Hidden Forces. We've been in touch ever since and he was very gracious to introduce me to lots of people during that process. He was the perfect person for me to bring on as a partner in this company. That brings us back to this point of this disintermediated world, technology makes that very possible. You have all these people in your extended network and you can think of ... and that's very entrepreneurial, right? You can say, all right, I know David, I know Ben, I know this guy, I know that guy, I know this girl, I know that. I know all these people and I can make this deal happen in my head with (32/43)
all these people. I know what I need or this person over there who needs this, I know this guy, I'll bring him in touch with that guy and I'll make that work. That's a huge skill. Connecting people is hugely valuable. You have that as well, I'm sure. Your position and being an intermediary for so many very successful people makes you probably an extra fluid conduit for that. Yes, especially in a job flow. I'll know the companies that are hiring, that are firing, I'll know the good people that are out there for whatever reason. There's nothing more fun, frankly, for me than to connect someone that I think is of value and care about to a company that I think would find them of value. All I do is make the connection and they take it from there. They work, you think about the investment of my time, how long did that take me to do and that could change someone else's life and it's just amazing karma. You just feel great about it. I agree with self-motivation. I think another one for me is (33/43)
integrity. It's a pretty simple one. Another one for me, which I don't know that this applies for everyone or it needs to apply, but given the work that I do, I need to feel like the person I hire and this is very rare and so this is why it's very difficult for me to hire, needs to be very passionate about the vision that I'm sharing because it's not about me or I don't want it to be about me or about her or about him. I want it to be about this vision and this collective future that I'm moving. That also speaks to the responsibility I have as a leader to be able to have a compelling vision. They say money is a short-term motivator. If you're really trying to do great work, have great people doing great work, you have to motivate them in a way beyond money. Now, you have to start with the money just to get to base, but after that, if you really want them up at night thinking about how to make the team project better, then you really need someone who believes in the long-term vision and (34/43)
you're right, it's up to the leaders to provide that. For all the shit that Steve Jobs got after Walter Isaacson's book came out and everything at the end of the day, the one thing that Steve Jobs did for sure was motivate people with a great vision and it was backed by his own passion for that vision. That's the thing that I always respected about Steve Jobs among many other things is that in an age where there are so many people, unfortunately, who are concerned with themselves and so much of their work and whatever they do, in particular in media, and that's one of the reasons I created this show because I think so much of media is self-indulgent, is that Steve built this remarkable vision company and his focus always was on Apple. You could hear in the way he talked about it. It was palpable in everything that he was doing. That's right. Let me ask you this before we go, Ben. I want to have some fun questions for you. We talked about movies. I know you're a Matrix fan. We talked (35/43)
about that. What are your top movies? How important? There's movies, there's music, there's video games, there are books. I don't know which one is your favorite category and then from there, what are your top things? It's changed over time and even the importance of it all. I remember very clearly that I always thought that movies and music were very important to me. I used to, when CDs were what were bought, I used to take the boxes in my entire room at home with all the CD boxes on the walls. I thought it was the coolest thing at the time. I remember meeting my wife in college and she had six CDs to her collection. I remember reprogramming myself and saying, I guess that isn't one of the most important things to me. You don't need everything from all people or from all different types of medium. What I would say is I'm less movie-ish now because of, I think the best content is on series. I'm a wire fanatic, David Simon. I love you. Just breaking bad. I find a lot of commonality with (36/43)
my friends and clients in enjoying those types of shows. Everyone really has to recommend a movie to me pretty hard. I think the filter for all this is you find the 10 or so people in your life that you just trudge their judgment of your own likes. They have to know you well enough to know what you would like and what you wouldn't to recommend it to you. Otherwise, it's too hard. You need these human filters on everything to figure out what is worth spending your time on. Have you seen Gattica? I'm a massive Gattica fan. I was going to say. I was going to say. I'd also say all these movies from what I would consider my childhood or a little bit older, rewatching those. I just rewatched Shawshank with all my kids. Some might say a seven-year-old, a little young to watch the sodomy scene, but we fast forwarded that part and the rest of it was great. That was a scene. We would just watch Memento last night. I just find for kids, I was thinking about this last night, for kids, anytime (37/43)
you're sort of giving them a theory about another way of life, it is all theoretical to them. Because they're not in it. So you could say, hey, there's all these kids on this continent that have no food. Aren't we so lucky that we have food? And they can't really, just from those few sentences, they can't really envision that in an impactful way. And I was thinking about it last night as we were watching a movie. The movie is actually the best way. If you can get them a three-hour, two-and-a-half-hour block of being in a different world and wholly transported to a different place, I find that after those things are when we have the best conversations about different things. So when you watch the Matrix with your kids, right? Yeah. So I'm very curious about this. First of all, did you watch it with all three of them together? No, because I love it so much. I watched it with the eldest years ago. So what was that like for him? And what was that like for you watching his reaction? Yeah, (38/43)
so I love it. I will often pause it. So he said, what do I love about the Matrix? They have all these macro questions of life, ignorance versus bliss. Does Neo take the red pill or the blue pill? And so that kind of stuff, I will excitedly pause it and say, look at this, he's got one of life's big decisions here. He can either decide to not know what's going on and live a perfectly happy life, or he can learn the truth, but it really sucks and the life is going to suck. And there's just something like that, or does it say, Dad, stop pausing the movie? It's a mix of both. I think I really try hard to try to make this stuff as entertaining as I can for the kids. I hit it right on and I'd say that's sort of when I'm at my maximum happiness level, is I feel like I'm exposing my kids to new concepts. But there are definitely times when they're like, all right, Dad. And even by the way, Memento last night was a little slow relative to, they loved the Matrix, they loved Shawshank. That's a (39/43)
mind trip movie. That's a mind trip movie. I saw that movie for the first time when I was living and working in Italy. Sorry, it was not when I was working, it's when I was living as a student before I was working in Italy. I was a junior and I was pretty high watching it. And so I was already not in the best sort of memory state. And I remember just being really freaked out by it a little bit. And it was because it was such a good movie. And freaky, this idea that it rings true in many ways, obviously. Yeah, it was pretty powerful. Well it's become more, the whole idea that the robots are going to take over and use humans as living batteries. Yeah, that's a theme that a lot of people have picked up on. Yeah, well you know, we were talking about the episode that I did here where I mentioned Bill Joy, his Wired article, and Ted Kaczynski's Industrial Society and his future. Unbelievable the Ted Kaczynski that letter, how early on he predicted these things. Unbelievable. Yeah, and what (40/43)
he did, right? The fact that he actually tried to blow up the system. I mean, I think that's really interesting. That's what I think makes him an interesting interview subject, if I could have him on. And assuming that I don't know if and how deranged he is. I mean, I don't know ultimately if he made that decision consciously or if he made it from a different place. Because if someone made that decision consciously, I think it's very interesting. We see all these movies, right? What is the Force Awakens and all those other stuff? It's talking about the rebellion, right? The forefathers of the United States were traitors, were rebels, right? The only reason that we call the loyalists, that they were the Benedict Arnold's or whatever, is because we look at it from the framework of Americans today. But they were rebellion against the crown. What they were doing was a revolutionary act. Martin Luther and against the Catholic Church, all these. And this is a remarkable thing. Jesus Christ (41/43)
of Nazareth. Same thing. Like you're going up against the entire establishment and almost every single person that does that is going to be wiped off the map. It's a really scary thing to do. Who does that, right? And obviously I'm not comparing the Unibob and bombing a few people to Jesus of Nazareth. My point simply being that to take a step like that is assuming that you do it consciously, I think for guys like you and me, it's hard to fully appreciate that. Yeah, it takes a special personality. You're giving up everything, right? Right. Like you're giving everything else up. Right. You're saying none of that stuff matters anymore. What matters is this one act. And Kazinsky was a Harvard professor. Harvard, right? He was a Harvard graduate and he was a professor at Berkeley. Right. And he had a PhD in mathematics from Michigan. So he was giving up a lot to pursue this. It seemed like he had a lot. It's interesting. Yeah, also he had moved, like I said, he had moved up to the (42/43)
mountains of Wyoming or Colorado. I can't remember where. And it's also interesting that even up there, and there's a whole history to this, there was apparently some kind of construction happening near his cabin. And he realized basically there was no way that he could get away from all of it. They could have been you, Ben. You could have been doing construction, you had a high rise. Listen, Ben, it was great having you on. I appreciate you coming on. Thanks so much, Brad. I had a great time talking with you. Thank you. Yeah, all right. And that was my episode with Ben Friedland. I want to thank Ben for being on my program. Today's episode was produced by me and edited by Stylianos Nicolaos. For more episodes, you can check out our website at hiddenforcespod.com. And the conversation through Facebook, Twitter, and Instagram at hiddenforcespod or send me an email at dkat hiddenforcespod.com. Thanks for listening. We'll see you next week. (43/43)
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens. The challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is George Friedman, the founder and chairman of forecasting firm Geopolitical Futures, the founder of Stratford, a geopolitical intelligence and consulting firm, and the best-selling author of books such as The Next 100 Years and The Storm Before the Calm, America's Discord, The Coming Crisis of the 2020s and The Triumph Beyond. In the first hour, George and I discuss what he describes as the institutional and socio-economic cycles that drive historical events. We explore several notable examples of such cycle turnings in history, including Andrew Jackson's abolishment of the second bank of the United States, which facilitated the financing of westward expansion, the (1/44)
presidency of Rutherford B. Hayes and the Long Depression, the growth in American consumption that arrived on the back of FDR's reforms in the 1930s, and the neoliberal era sparked by the Reagan Revolution. In the second hour, George and I apply this framework to the era we are living in today, which according to George is the first time in American history that both the 80-year institutional cycle and the 50-year socio-economic cycle are occurring concurrently. We discuss how and why so-called woke ideology and the sclerotic and ineffective bureaucracy are symptoms of the end of the institutional cycle, and why the economic policies of this new era will lead to more capital investment and a revitalization of the American economy. Lastly, George provides us with a roadmap for geopolitical events in the 21st century that includes reconciliation with Putin's Russia, a new paradigm of peace in the Middle East, and a long and challenging period of economic weakness in China that will (2/44)
consume the energies of the Chinese Communist Party and challenge the PRC's ability to assert itself on the global stage for at least the next several decades. If you want access to both parts of today's 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.com. All of our content tiers give you access to our premium feed, which you can use to listen to the rest of today's episode 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&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 have questions, feel free to send an email to infoathiddenforces.io and I, or someone from our team, will get right (3/44)
back to you. And with that, please enjoy this thoughtful and perceptive conversation with my guest, George Friedman. George Friedman, welcome to Hidden Forces. Thank you for having me. You know, George, I'm actually surprised that this is your first appearance on the show. Because of, I think, how influential you are, I've had so many of the analysts that work for you at Stratford on the podcast. So, you know, let's... I want to give people a sense of who you are, your background. I'm also interested in understanding how you grew up, what informs your sort of framework and approach to thinking through problems before we get into your framework and applying that framework to the rest of the world. But what's your story? Well, I was born in Hungary in 1949 to give way at my age. Two months later, we had to escape from Hungary. My parents had been... My father had been in... Fighting in Russia. Then they discovered he was Jewish. So, they put him in a work camp in Russia. Then took him to (4/44)
Mauthausen. My mother went to Lichtenberg. We came back to Hungary. I wasn't born yet. And they discovered that the communists were going to arrest him. So, my family's life was geopolitical. It was fleeing. We fled to... Over the Danube, I was about two months old. They peddled over. Got to Vienna. In Vienna, they got to an American displaced refugee camp. They fell in love with America. The first thing they did was gave us food, a dinner. They had been having a dinner at a long time. Then doctors examined us, gave us whatever we needed, led us to a room where they had beds for everyone. And we had to stay there for a year or so. And then they brought us over. And my father remained there for two years. Further, it turned out later that he was working for US counterintelligence on Russian infiltrations of Austria. My father was held back for two years. We got to come over without him. We found out that later, I had access to some files. And he was working at a hotline, headquarters of (5/44)
US counterintelligence. And he told me later the story that they wanted to know who was escaping from Hungary, who was an agent, and who was escaping from the country that was really escaping. And he pointed out to them that if he had no family with him, he was an agent. If the family was with him, he was escaping. Very simple. And that my father taught me, be stupid. All the Americans are very smart. That's their problem. If you're stupid, you can obviously see the thing. Can you elaborate on that exactly? What do you mean by be stupid? Don't be so sophisticated. Think about the people as they are. Would a refugee come alone? Most of them have families. Would they bring their families if there were agents? No. If they come across as alone, they probably left their families behind and they're in danger. If they come with their families, it's a real escape. So it was a story told and I think it was true. The problem with the Americans were they were so complex in their thinking, they (6/44)
didn't trust the obvious. So the simple human dimension was subsumed. Analytics systems were created. So that was what he said, always be stupid. Always avoid your education. Avoid old brilliant talk. See the obvious. He's alone. He's a spy. He's with his family. He's a refugee. Very simple. I feel like there's an important lesson there for listeners to really meditate on as we continue this conversation because it speaks to how you approach forecasting. Okay, so you left Europe, you said, when you were three years old. What city did you first arrive in? Bronx. In New York. And that's where you grew up? I grew up until I was in junior high school. In junior high school, we made famous journey to Queens and Long Island. But my elementary school was in the Bronx and I learned stickball and how to run away from people. Run away from people. So you moved to Queens, where in Queens and where in Long Island did you go? Well, in Queens, it was interesting because I grew up five miles or so (7/44)
from the president. I never met him. I didn't know him. It was the same neighborhood. It was a working class neighborhood. He didn't live in a working class neighborhood. He didn't make it states. I lived in Springfield Gardens, which was more working class. And I recognized Trump because he carries himself with the same arrogant confidence that we all did. It was like the Bronx transferred to Queens and you didn't look weak and you didn't look scared and you were tough. Even if you couldn't win the fight, you look that way. What was it about growing up in the inner city, growing up in those boroughs that created that kind of culture in your view? We were all poor. We were all lost. This was an immigration area. There was Italians. There were Irish. There were everyone. Clodded together in groups, the Jews, the Irish, the Italians, the Puerto Ricans, we fought. We were states. I mean, nation states built in. Okay, the gangs were that way. And in that way, we understood something. There (8/44)
was little mercy in the world. What was said was not what was meant. We all kept our real fears inside of us and presented a face to the world that was crafted to be appropriate to the world. So I learned from that that what people are and what they appear to be, what is crafted, the other is real. They interplay. You can't predict people on that basis. I learned to judge the politicians on that basis. Politicians are craftsmen. They craft the persona their nation requires of them. Within them, you can judge what they are. So when we look at the president, I mean, he appears to be strange, except for the fact that the majority of the country voted for him. So it wasn't strange to them. There was strange to some people. So when I went to Cornell to go to school, I was a very strange person to these people. I had to re-craft my personality. So I look at politics from the point of view of politicians are brilliant craftsmen of themselves. They are designed to understand. They have a (9/44)
profound understanding of the nation where there wouldn't be leaders. And when you look at it, if you look at the leader, you're missing the point. The leader is an artifice. He's responding to the country. Look at the country. Not the president. You'll understand what is happening. But if you personalize it, then it's simply win by the president. And presidents don't survive and win. No other leaders, but dictators either. They have to respond or they can't rule. When you went to Cornell, when you went to college, did you already know what you wanted to study? Did you already know what you were interested in? Well, as an undergraduate at City College in New York, I studied political science. When I went to college, I studied political philosophy. Political philosophy led me to Marxism. And I was not a Marxist, but wrote a book on my dissertation on Herbert Marcuse and how sexuality intersected with politics. It was a very pleasant book. It was insane. I went to Cornell and I met (10/44)
America in a different way than I met at City College. I met students who were rising, rising out of the slums. Those who came from the upper classes, I saw all the mixtures. Okay, I saw the persona they presented. I learned a great deal in political philosophy. Then I served to determine the army. Then I turned to the intelligence world, but stayed out of the intelligence world as much as possible. And through my experience, I finally realized I became a professor, a tenured professor. I say that with glory, it's a major achievement. But I left my universities and went to three universities. I was developing theories that were unacceptable. In other words, the universities are ideological in nature. And they can have conservative ideologies. In the past, these ideologies doesn't matter. You conform. I found it very difficult to conform because I came from a very different life than most of them. But also, I was led by my education to think in very different ways. So as I was (11/44)
developing these things, they had no place there. I then had a, at the Louisiana State University, had my own center. Running a center at a university is a bureaucratic nightmare of battling for turf and everything else. And I realized I had no time to think. I couldn't write books or anything like that. So I left the university. And I left the university and I had a very strange idea. I could do my work intellectually more effectively in the private sector, selling what I know, the teaching. Besides my students didn't care. At 19, you don't really care about the prepundities of Hegel. So we have a strange understanding of education. But I started a company that did this. The only reason I did that is I knew nothing about business. So I didn't have an idea what to do. But I had a lot of people who knew me in Washington. So I started by sending out articles daily to these people, and then to other people. Then my wife had a strange idea. Why don't we charge? Why don't we make them pay (12/44)
for it? And to my shock, they did. And it spread from that point onward. My life was a series from the beginning of crises and dangers and everything else. And it made me conscious of the obvious, which is a very difficult thing for a professor to do, to be conscious of what's there right in front of you. So it did what my father said. I became stupid. Okay, so I'm very excited to get into that because it's very important for me to understand your framework and the same for the audience. Just a couple more questions on your background. So that company was Stratford. That company was Stratford. And what year was that that you founded it? 1996. 1996, okay. So as I said, I've had many Stratford alumni on the podcast. Peter Zeihan has been on the podcast. Cameron Bihari, who introduced us, has been a regular guest on the podcast. Jacob Shapiro, Marco Pappich. I could go on and on listing people who have gone on to have their own successful careers as geopolitical analysts after having (13/44)
learned and studied under you. So it's been a very influential company. It's kind of like the Fairchild Semiconductor, or PayPal of the geopolitical space. And in that sense, it's very rare to find a company that has produced so many people who themselves have gone on to create their own companies and have their own impact on a particular industry or field. In this case, the field is national security and intelligence. So let's... I'm not even going to bother asking you, but one of the questions I had in mind to ask you was sort of like, what school of thought would you say most aligns with yours? Because you do feel like a realist, but again, it's obvious when reading your work that you don't adhere to a particular rigid framework. And I've used the word framework before, but I wouldn't quite describe it as a framework. You have a very... What feels like a very bottoms-up analysis. And in some sense, it's almost like an irrigation path. It's like you focus much more on constraints and (14/44)
what people have to do and what they need to do in the case of leaders, as opposed to kind of, does this fit a template that I have in my head about how the world works and if it doesn't, I can't see it. Walk me through the way you view the world. How do you think through problems? You gave the example of look at what's obvious. How do you know what's obvious? How do you know what to focus on? What is signal and what is noise in international affairs and politics? We begin with three principles, imperatives. What do you have to do as an individual, as a country? Okay. What can you do? Very different from what you must do, possibly. Who doesn't want you to do it? Or who wants you to do something else? If you look at a country, as a machine, a corporation, whatever you want, you look at what it consists of. What is its capabilities? What is urge? What is its need? You don't look at the leader. The leader misleads you. He is there. He is the summary of the nation, but not necessarily (15/44)
pointing it. For example, we knew that Russia had to invade Ukraine. Why? Because of Northern border Ukraine was 300 miles from Moscow. The Russians had had invasions from Napoleon and Hitler that took them to Moscow. Moscow was their heart. They were 300 miles away by Route 3 and they were terrified. They were always afraid, but when Ukraine became independent, the border was so close, they were going to try to take it back. It was their buffer zone. Ukraine became the buffer zone between our Europe, if you will, Western Europe, their Europe. Who owned it had the offensive capability. From the Russian point of view, there was an imperative to take Ukraine. They didn't have the capability, but they suddenly felt they had the capability to do it. That was triggered by an American event, the Maidan uprising, the uprising in Ukraine that frightened the Russians terribly. They saw it. It was very much organized, involved the Americans. Go to the sound system that they suddenly had. Where (16/44)
did they get a sound system like that? I went to look at it. It was a good start sound system for that audience. I also look at old uprisings as asking one question, where are the bathrooms? You can do without food for two days, but you can't go without a bathroom. If you're going to keep people in a square for three days, you have to have mobiles, toilets. That's the one thing you have to have. They were there. I know us and I know we get ready for things. The Russians know us. They know they get ready for things. They read Maidan as us trying to take control of Ukraine to be right on the Russian border. Now, if they had taken Ukraine, they'd be right on the border with NATO. We couldn't tolerate that. Ukraine became this critical piece of real estate, really minor in many ways. We convinced during the Maidan uprising the Russians that we had intentions. We had intentions of making Ukrainian not neutral, but part of the West that would join NATO, which was always the major question (17/44)
for the Russians. The Russian imperative was to keep Ukraine at least neutral, and after Maidan, they said, that wasn't going to happen. They saw what we did in the Balkans, in their intervention there, and they read the Americans, rightly wrongly, as potentially aggressive. Potential I learned in the Bronx was probable, and probable was I was certain. So you didn't have the luxury of saying, oh, they probably wouldn't. So the Russians took a look at the board and said, we've got to take Ukraine. I see nations as rational. They are like good businessmen and everything, and the leaders are good businessmen, if nothing else. They're rational people. They are looking at it and looking at their country and looking at their responsibilities. And they watch other countries and their imperatives. We had the imperatives to keep them out of Ukraine. Do not become another Russian front. Then the Cold War would be back. They had the imperatives, keep them away from 300 miles from Moscow. We can't (18/44)
defend Moscow with 300 miles. So you had two different imperatives. The American imperative on Ukraine of making sure the Russians had not occupied, NATO's imperative. The Russian imperative do not let NATO to the border of Russia. And so it was very predictable. I didn't think NATO would be able politically to advance into Ukraine. I think Russia thought this was the opportunity to move themselves into that position. But they didn't have the capability. The Russian army failed. It moved into Ukraine. It was a full invasion. Now they're saying, well, we only want to capture it. Nonsense. There were three columns coming in. One column was aimed at Kiev, and one column down the center. They were coming up from the south. They were coming from the east. They were coming from every direction. They were going to take Ukraine. If you remember the early pictures of the invasion, there was a line of tanks coming down the mountain. They were stalled. Their logistics system failed. They couldn't (19/44)
get oil, fuel to the tanks. I then knew this is not going to work, folks. So the central thrust failed, although there was fighting in Kiev and stuff, because they just couldn't support their forces. So I realized logistics were not prepared for war. They were not ready for this. And so it became obvious that they could do the area closest to them with the logistics that they had. They couldn't take all of Ukraine. They couldn't retreat for political reasons. They couldn't advance for military reasons. This is what would be the long war. It would end in a draw. You can't solve it. Now we're at the draw point. But I looked at these countries and what they were afraid of. What they needed, what they wanted. I looked at them as if they were people. And people you can predict by what they crave and what they want. And you must have money for going to college for your child and all these things. You can predict their lives in some sense. Not mysteries. So with states. So how do you (20/44)
differentiate between the push and pull of national interest and the push and pull of the political needs or expediency of the leader? A political leader must live with the nation. The fear of Moscow falling was deep in the heart of every Russian. This was not an alien thought that it came to the president of Russia. He was responding to a deep fear built into the Russian people by history. Presidents who do not understand the national mood in any country can't be leaders. The nature of leadership is not crafting a vision like a Marxist always failed to achieve it. It is understanding that the nation has divided as it is underlying necessities. And those who fulfill those necessities must understand them, must respond to them. Leaders are prisoners of the times. So when we talk about Donald Trump, we always have to remember that this crazy man appealed to the majority of the country. Did he craft himself to be that man? Or was he bad man? He was bad man in Asia. It doesn't matter. But (21/44)
he caught what was happening in the country. Putin understood what was happening in his country. Otherwise you have coup d'etats, assassinations, impeachments and so on. So don't think of the leader as separate from the nation. He is the representative of the nation, even when a dictator. Hitler was Germany at that time. He didn't impose himself on an unwilling people. The leaders who succeed are leaders who, well, they can intimidate people. That's not very efficient because you have to trust your police and everything else. So how do we think about that in the context of decision making? Let's just take the example of US Russia. How do we determine whether or not NATO enlargement was in the national interest? Or whether it was a mistake made in the pursuit of the national interest? How do we do the same thing for Russia and its invasion of Ukraine? Was the invasion of Ukraine in the national interest of Russia? Or was it a mistake in the pursuit of national interest? It was a (22/44)
national interest. It was not a national capability. So you have to look at two things. All nations cannot achieve their interests. The leader's job is to align interest with capability with opposition. What the leader does, if he's a good leader, that he understands the imperatives of the nation, I don't want another attack on Moscow. Design the capability necessary to prevent that. We created NATO at a time when the Soviet army had won World War II. We played a great role, but it was a marginal role, in a sense, for Normandy and all the great things we did. It was the Russian army that broke the Verracht. Now, the Russian army was still fully standing as mortar. It had conquered Eastern Europe, we'd conquered Western Europe, if you will. We feared they would come further if they reached the French coast, if you will. They could now challenge us as an Atlantic. The Atlantic is our barrier. The United States cannot be invaded by land, unless Canada really gets mad at us. The sea is our (23/44)
barrier, is our wall. We went to war in World War I because the U-boats were beginning to operate, sank the Lusitania. We feared the loss of the Atlantic, the British fleet couldn't hold them. In World War II, we went into the same thing. We went into Britain giving them weapons, lendies, to try to keep them out of the Atlantic. So, for us, the oceans are the barriers, but the Europeans land. Now, we did not want the Russians any more than Germans, sitting in Scherberg, with fleet. We didn't want their boats. The Cold War had much more to do with the Atlantic than they thought. So, for example, if the war broke out, NATO's plan, and I had been in shape, Supreme Headquarters and I, I was here for a while, our entire problem was, how do we make sure we can get our ships across the Atlantic to supply? The Russians had created a fleet of submarines to come down and block us. We created anti-submarine warfare, so there was a battle quietly going on, the competition to control the Atlantic. (24/44)
If Europe falls into one country's hands, the United States faces the only threat, same with the Pacific. We had to defend both seas. So, our war was a sea. After that, we were in a unique position that we hadn't been before, we controlled the Pacific. The Atlantic was unchallenged and we wanted to keep it that way. So, we drew a line in Europe between us and the Russians, we didn't want to fight. We created something called NATO. We created NATO because Europe was shattered. They couldn't defend themselves. NATO had an American commander, Sikur, Supreme Allied Commander Europe, and he was the one who ran NATO. But when I was in shape, we knew what the Belgian Air Force would do, and at what time, at what place, on day three of a Russian invasion, we could count on it. Once the Soviet Union fell, the Cold War did not end. That was not the end of the Cold War. A new Russian Tsar emerged. These are old Tsars. They called themselves Chairman or whatever. A new Tsar came in, and this new (25/44)
Tsar tried to make an accommodation in the United States. That broke down the Balkans. Remember that we went into the Balkans to stop the killing and everything else. They thought they were taking advantage of their situation on their southeastern flank. Something happened when we tried to get the head of Yugoslavia to the court of the United Nations. We asked the Russians, they would do it. Would the Russians, Chernomirdian, who is Prime Minister, talk to him and say, look, it's over? And he did. Then something happened strategically, but it was a tiny thing. Kosovo has an airport in Pristina. We took the airport at Kosovo. And the Russians thought they would be allied with us and allowed to use that airport, patrol it with us because of what we had done in the end of the war. We made a move there to force the Russians back, refusing to allow them into the Balkans. That's when Putin became President. Putin became President saying, the Americans are a nightmare. They're going to be (26/44)
moving on us. They did this in the Balkans. They had no interest in the Balkans. What do they care about Kosovo? They're not in Kosovo for moral reasons. We may have been. I still don't know why Clinton is doing that. But the Russians read it, had to read it, had to read the worst case scenario. They're going to be building up an line to our west. And here in the southwestern portion, they built it. And that was the time that Putin emerged. And he had a very different view than Gorbachev had. Gorbachev had a view of Antonto with the west. Putin had a view that this was the preface to war with him. Or that it was going to come up to it, that we just moved the line east. And he then had a long-term strategy of blocking the Americans. So when you look at it, we saw ourselves in a position of consolidating Eastern Europe, Western, former Eastern Europe. He saw that consolidation as a threat. NATO, that part, fell apart. It no longer resisted. The European countries were direct. The (27/44)
European countries were strong. But they very much enjoyed not having to pay for the defense. Or they paid a little, but they didn't take risks. They weren't involved in these things, only marginally. At that point, it became obvious that the rationality of NATO had ceased to exist. There was no point to it. The Europeans chose not to be able to produce the defense capability they could obviously produce, because there was no such thing as Europe. Europe is a continent with a lot of different countries that have hundreds of years of history of loathing of each other, fear of each other, different interests, their competitors. They were brought together by poverty. They had that in common and forged by the Americans. And by the time we reached the Ukrainian war, the Balkans, there was no NATO. It was not like we knew what the Belgians were going to do in the morning and the third day with the Air Force. All the plans were on paper. They were not real. So we had no capability or (28/44)
intention or interest in attacking Russia. But they could not assume the best outcome was likely. The Russians had no real interest in taking Western Europe. What would they do with it? Would they wreck again and they'd have to supply it? But they took the most pessimistic view, because that's usually the best view to take. So in both cases, we misunderstood each other because we were looking at the imperatives. Yes, we had the imperatives to knock out Russia. That would be wonderful. Then everything would be great. We didn't have the capability of doing it. And therefore not the intention. The Russians dreamt of building a new buffer at least, but they didn't have the capability. So imperatives, what we must do, that's frequently not what we can do. And this is the deep division that Hitler encountered, that Hirohir had encountered. He had an imperative to control the Western Pacific for getting fuel from Indonesia and so on. He just couldn't do it. So history is a competition between (29/44)
imperatives and capabilities. Much of our lives are. So let's take a step back here, because what we're doing here is also applying a lot of lessons to the world we live in today, which is something I do want to do. But before we do that, let's just, with two questions. One has to do with how you view yourself as an analyst. And then I want to talk about your cyclical theory of history, which breaks down into institutional and socioeconomic cycles, which is very important and something I want the audience to understand before we continue this conversation. So first of all, just real quick, do you consider yourself primarily a political theorist, a historian, a philosopher, or something else? How would you describe yourself? I've been all these things at once. I am now bad word for this futurist, because it's... Sounds like you have a crystal ball and an apk in your head. Yeah. What I do is I'm a realist. I'm not interested in personalities. I'm not interested in ideology. The ideology (30/44)
of the Russians was the same as the Tsars, it was undistodained. In the ideology differed, Russia was the same. You had a realist in a Hans Morgenthau sense or a realist in a more sort of just... I'm trying to look at reality sense. I studied with Hans Morgenthau at City College. I was enormously lucky to have him as my professor of geopolitics. But he had a focus on decision makers. What I saw was that is the decision makers did not make decisions autonomously. They made decisions on the one hand, considering what the nation could do, what the nation wanted to do. And at the time of the Cold War, the nation wanted to the Cold War, both nations. So the difference... he thought me a great deal about how nation-states interact. The one place I differed with him was in his focus on the leaders making policy, when the nation made the policy and the leader adopted it. The leader is the vehicle. The spirit of the nation is the driving force of policy. The spirit, yes. But that derives from (31/44)
need. We live our lives in fear. In Europe, every human being in 1950 was afraid. They'd lived through hell. They were afraid to repeat itself. The American public feared that twice they had been drawn into a war at the worst time. First World War, the Second World War, they had to come in to save the Atlantic. This time, they didn't want that task. They didn't want another war. Truman understood that. Truman was successful not because he was particularly brilliant or anything else, but he came from the Midwest. And he understood all the soldiers that had gone to war and died in World War I or World War II. And we don't need this. We're far away. He knew we wanted war kept far away from us and not have to send our sons to war. NATO was, is invention. It came out of the NATO that period. So did he make the policy on NATO? No. The country couldn't want have the Third World War. Did Khrushchev, Stalin first and Khrushchev make the policy of not invading Western Europe? No. The Russians (32/44)
were not prepared to go in other two years in a bloody war. They were exhausted. They had lost everything. So the leaders may have dreams of what they want to do, but it's the capabilities and they can't be leaders if they don't capture. As you call the spirit of the time, but the needs of the time, the paradises that the people had. So the American imperative came from the fear of another world war that brought us into it late and caused many lives. Let's be there to block it. The Russian fear was that the American attempt to block with NATO was an opening for another invasion of Russia as they had in First World War and World War II. And each had perfectly reasonable reasons to think this possible. That was the Cold War. It never happened because neither side had the capability or really the intention of doing it. But the leader is, if he's going to survive, he's going to be the spokesman for the national necessity. He's imprisoned by reality. There are leaders who don't survive who (33/44)
believe all sort of things are possible. They can for a while survive with the secret police. But the secret police will eventually get them and the head of the secret police will rise and it will go on and on. Stable real governments are the creation or democratic of whatever means of the spirit of the nation. Stalin captured that. So let's go now to your approach to history. As I said, you come across very much as a sort of cyclical theorist of history. We've covered various frameworks related to cycles, whether it's Neil Howe's generational theory, whether it is Nikolai Kondratiev's 50-year economic cycle based on, in particular, the commodity cycle. Years ago, I interviewed Robert Preckter for an old program I had with, you know, Elliott Wave theorists. So I have some working knowledge of this stuff and I do see a lot of similarities in how you approach your institutional cycle theory and your socioeconomic cycle theory. But walk me in the audience through this. What do we mean by (34/44)
institutional cycle and socioeconomic cycle? What are the key drivers of each cycle? What is the historical evidence for this? And how does this relate to your previous observation about imperatives versus capabilities? First of all, I came by this being stupid. I looked at American history and I saw certain radical shifts that took place. The strength of America is it reinvents itself. We started by breaking all norms and guardrails, as they say these days. Washington was loathed by many Americans for breaking them. They were loyalists. But we invented our country and we survived by reinventing it. The fundamental principle of our country is innovation and the recognition of obsolescence and the recognition of what's coming next. I noted that the system shifted for no reason that I can either fathom routinely at 50 years to socioeconomic system, 80 years at the institutional system. That is how does our government run? Every 80 years it changes course. What social crisis comes along? (35/44)
And I can name them. I mean, you know, first there was what I called the Washington cycle. He founded the country. By 50 years later Andrew Jackson came. The reality of the United States has changed. We'd want to lose the entire territory. We're going to the West. The Eastern Banks were focused on Eastern development. The ability of farmers to buy land, to build and so on was gone. He wrecked the Eastern banking system, leading to a great crisis in the country. Jackson creating capital for the occupation of the West and took the country to the next step. He had an imperative. He had to integrate the Louisiana Territory. The United States. The financial system would not allow that. He wrecked the financial system. You're seeing as reckless and foolish and monstrous and everything else. Can you explain that one second? So how did the... So you're referring to as his refusal to renew the charter for the second bank of the United States. How did that facilitate the expansion of the Western (36/44)
frontier? The money is important. You have to buy horses. You have to buy plows. You have to buy everything. There was no credit available to those who went to Louisiana Territory. The Central Bank was wholly focused on the situation along the East Coast. So having purchased Louisiana Territory, Jackson knew that we now had to advance into it. Capital was necessary, not capital for building large factories, but to do the basic fundamental things that had to be done. Among them building roads, canals, all the things to get them there. The Appalachian Trail was cut just before that. The... across the Appalachians. The Erie Canal had been done just before that. We were building the connecting tissue of the country. Otherwise Louisiana purchase made no sense. Now there had to be banks in the West. There had to be places where mortgages could be taken out, loans on getting plows, all the things that normal life would include. The Bank of the United States did not grasp that, did not want (37/44)
that. They saw that as an alien evolution. This could not last. Therefore, when Jackson came in, he wrecked the bank in a sense and created a new financial system to support the geopolitical reality that had emerged. It was a new one. The reason I ask is because I'm only superficially familiar with this period in American history. I know Jackson refused to renew the charter and that this led to the era known as Wildcat Banking or Free Banking, which eventually came to an end with the passage of the National Banking Act during the Civil War. That laid the groundwork for a national currency backed by government bonds and the eventual passage of the Federal Reserve Act in 1913. But how was that period of free banking essential in facilitating the movement of capital from the East and from supporting transatlantic trade toward the West and Westward expansion? Well, one thing was obvious. The West was wonderful country, agricultural country, tremendous opportunities. Entrepreneurs wanted to (38/44)
go there. They were the settlers. The entrepreneurs needed financing by breaking down the central bank into Wildcat Banks, as you called them. The bankers also wanted to make money. They knew they could go there. Financed these, draw the capital back into it by recurring loans. Some failed, others succeeded. But we settled a bit West. And what happened was that the old institutions that George Washington had bought in place were no longer relevant to the reality of the country. It had to be broken. It was broken by Jackson. The Wildcat Bankers were simply local bankers who did not depend on the federal government to do more than issue currency. And they were able to finance it. Without that, we would not have expanded Westward. So that was the next issue. So he sort of facilitated the further decentralization within the US capital system, the system of banking, in order to allow for Westward expansion by giving the people expanding Westwards the ability to be more flexible with the (39/44)
allocation of their capital. But look at the geopolitical problem. The United States fought the war of 1812. The British had come back. We had no strategic depth. In other words, we had a strip of land along the East Coast. We had no significant navy that we'd afford. If they came back in 1812, would they come back again? We needed strategic depth. We needed more than a coastal country. The French, who hated the British, sold the land west of us because they couldn't use it. And Napoleon needed the money. Needed the money. And we needed the Mississippi Valley. And we needed the land west of it and east of it. So it was a geopolitical necessity of the United States to expand Westward. It needed the depth that the British came and took the East Coast. We'd fight back. We had to have that depth. In order to have that depth, we had that economic system underneath it that it could support itself. Farming was by far the best. Agriculture was outstanding. The problem was that the banking (40/44)
system was oriented geopolitically at the East Coast. We were no longer that. The reality had shifted. And anyone who wanted to keep the old institutions in place had not grasped the reality of the threat from the British or of the depth of the economic possibilities of Midwest. What Jackson did, because he was an under-educated man, hadn't really learned much, he saw the obvious. People were coming out here. They couldn't get the machinery they needed to do things they needed to start farms. They couldn't buy land. They couldn't buy built houses. This is ridiculous. They couldn't get a loan. He took a look at the system and wrecked the banking system and the federal government as well, creating new states that had not been there before and broke the norm. The norm was a North-South divide, but running along the Eastern Seaboard of merchants, farmers living together in a stable anglophile mode. Well, the English immigration was not going to settle the West. So two things had to happen. (41/44)
A shift in immigration that took place later. We needed workers. And the other thing that had to happen was a financial system that could support the logistical system, the geopolitical system, I should say. And so if we had bought the Louisiana Territory and not broken the bank, it would have failed. Expansion would have withered on the vine. Exactly. And he went and wrecked the bank to open the door for regional banking, putting instead of a central bank, state banks, making states out of the colony that we had taken. And so each state could have its own banking system and take care of it. It worked for years. So I want to look at some other cases historically, like the Civil War and the period around World War II, for other examples of either institutional crises or socioeconomic crises precipitating new cycles. And then I want to try to understand where we are today, because I think one of the things that's unique about the cycle that we're living in today is we have actually two (42/44)
cycles, according to you, one socioeconomic, one institutional, that are colliding at the same time. And I think that's new in the American experience. I also want to apply this to some of the stuff we talked about in terms of presidents and leaders, to the current president and to the current set of interlocking geopolitical challenges that the United States faces in the second hour, George. 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 George, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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. George, stick around. (43/44)
We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 at cofinus and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (44/44)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Jacob Siegel, a senior editor at Tablet Magazine and the author of a widely shared article about the subject of disinformation titled, A Guide to Understanding the Hoax of the Century. That hoax, according to Jacob, is the information war itself, which he believes conflates the anti-establishment politics of domestic populists with acts of war by foreign enemies, turning the American people into targets for mass psychological operations and into instruments of control. Jacob and I spend the first hour of our conversation trying to wrap our arms around this sprawling leviathan of public and private surveillance in order to both understand it and reassert our power over it and over (1/44)
an information environment that has left us feeling increasingly disoriented and vulnerable to both foreign interference and the disinformation efforts of our own government and intelligence agencies. The second hour of our conversation is devoted to thinking through and in some cases arguing about what can be done to begin to solve the problem. As you will hear and as regular listeners know, I am of the view that we can and should regulate these platforms by introducing governing incentives, epistemic objectives and transparency that is non-partisan and which can produce an information environment that is in everyone's best interests. 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 slash subscribe. All of our content here gives you access to our premium feed which you can listen to on your mobile device using your favorite (2/44)
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&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 have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly important conversation with my guest, Jacob Siegel. Jacob Siegel, welcome to Hidden Forces. Thank you for having me. I've been enjoying reading your stuff, Jacob. You're a great writer. For people that aren't familiar with you, before we start, I'd love for you to tell us a little bit about who you are and how you got into writing publicly, you know, on various magazines. You write for Unheard, you write for Tablet. How did you get to where you are today? I mean, the short answer is (3/44)
that it started in Brooklyn New York with my father, Fred Siegel, who's an historian and a writer, and my brother, my older brother Harry Siegel was in journalism. And when I got back from Afghanistan, I left Brooklyn, took some travels to various places. And in 2012, I deployed to Afghanistan with the army. When I got back, I took my first real job in journalism. Prior to that, actually I had been writing, prior to that, but I had been writing fiction. So when I got back from Iraq, actually, to rewind for a second, I met a number of other veteran writers in a free writing workshop run by NYU, which was just an incredible, really fortuitous opportunity. We all just randomly sort of wandered into this free writing workshop. And through that, I met people like Phil Kly, Roy Scranton, and Mac Gallagher, with whom I would go on to edit an anthology of literary fiction called Fire and Forget, which was the first in the preeminent collection of short stories, really the preeminent work of (4/44)
fiction by Iraq and Afghanistan veterans. So that came out, I believe it came out in 2012, which was the same time I was in Afghanistan. And then I got back from Afghanistan with plans to continue writing fiction, which was my first love in terms of writing and still the thing I care most about. But it's no way to earn a living, despite some exceptions, like my friend Phil Kly. And so I took a job. My brother was at the Daily Beast at the time. I took a job at the Daily Beast as the more or less the veterans affairs reporter and editor, and parlayed that into a job doing national security, reporting, writing about various issues related to veterans, including corruption in the VA system. And so it all just sort of worked outward from there. So that was my first real job in journalism. I took the leap from fiction to journalism, but I had a family background in writing. And so it wasn't a great stretch. And now I'm at Tablet Magazine, where I think on any given day, the best magazine in (5/44)
America. And the senior news editor there, I do a daily newsletter called The Scroll, comes out every afternoon. I write frequently for them. And as you mentioned, for other places. So a bit of this, a bit of that is how I got to where I am now. Yeah. Tablet is a great magazine. And it's one of a number of new journalistic outfits that's come out over the years that is just doing exceptional work. And speaking to a lot of deeper cultural, spiritual, philosophical issues that people are concerned about that aren't really represented somehow in the mainstream press. I'm curious, before we get into your big piece on disinformation, which is why I should have come here, I'm curious, well, one, do you agree with that? And what do you think that's about? Why now? And what are organizations like Tablet speaking to that people are looking for? Yeah, I definitely agree with it. It's harder for me to talk about the other places that maybe we share some affinities with. But I can tell you what I (6/44)
know about why Tablet is doing the kind of extraordinary work that Tablet has been doing and that would once have been something you might have expected at the really big glossy places with much bigger budgets and the ability to attract more prestigious writers. But those places have collapsed in the same way that other elite institutions in the United States have collapsed. And largely for the same reasons, they got invested in self-serving delusional narratives. They chased after Trump, Russia, collusion stuff. They started to see their fellow Americans as broken and degenerate in some way and themselves as sort of shepherds and members of an elect whose job was not to report on the country or be curious and inquisitive, but rather to push through moral mandates. So that's a sort of larger story of corruption and collapse. And Tablet has been an exception for a number of reasons, most notably because on the people who run it, Alana Newhouse, the editor has guts and isn't easily cowed (7/44)
and is not looking for the kind of adoration and career approval that I think some other people in her position are looking for. Maybe because certainly it hasn't always been easy for Tablet when we were publishing, one of the first places publishing pieces, skeptical of lockdown, skeptical of the vaccine approval process in the United States, and doing so in a way that was not sort of red meat for the right wing. So it wasn't like we were challenging liberals, but at the same time picking up a vast new right wing audience because it was done in a sort of dispassionate, skeptical way, the sort of thing you might have found in these other prestigious magazines a few decades ago. But that certainly was not always a popular thing to do. And Tablet has just cultivated its position as a Jewish magazine is the most, is really the key to it. It's that in being deeply invested in the idea of being a Jewish magazine and what that entails, accepting one's position as an outsider to some extent, (8/44)
and also not viewing political fashions as the highest authority, not viewing ideology as not being sort of idolatrous in our relationship to cultural or ideological trends as freed up a space, a sort of skeptical, interested space. You know, you took the words out of my mouth because that was going to be my next question. Which is, I wonder if part of what explains Tablet's success is its grounding in tradition and in an identity that is less swayable or less swayed by the ebbs and flows of modernity and a lot of the reactionary culture of today? I think that's exactly right. But at the same time, you know, in terms of what we cover, Tablet is now more cosmopolitan than it's ever been. So a decade ago, the kinds of stories you would find on Tablet were, let's say, more straightforwardly, obviously Jewish in terms of their themes and subjects. You know, there was still political writing, there was still investigative reporting, all of that was still happening, but within a narrower and (9/44)
more explicitly Jewish focus, now as the US News Editor and the Editor of this Daily Newsletter, the scroll, you know, 85, 90% of what I cover is not obviously Jewish. It's not Jewish in terms of being of particular religious or communal interest to Jews. These are news stories about America and their Jewishness derives from the sort of sensibility and perspective with which we approach them, which is, you know, with a particular understanding of the special relationship between Jews in America, which has been, you know, an incredibly historically good relationship for Jews vis-a-vis the Jewish experience in Europe, let's say. So it's partly through that, it's partly through an understanding of what you said that there are traditions and texts and, you know, relationships that transcend the merely political, the merely cultural, and so we should view what's going on on a day-to-day basis through these deeper connections. There's also a healthy skepticism around assimilation and (10/44)
awareness of authoritarian power that I think makes the Jewish community more counter-culturally relevant today than it was, say, in the early 2000s when Israeli politics and US policy around the war on terror had such a defining impact on Jewish politics in the US. And what's interesting about that is that it also speaks to another facet of identity, which is the military and the role of veterans in the counterculture today versus the early 2000s and the influence that they're having on public discourse and political analysis in a kind of communal way. Does that resonate with you? Is it something that you found to be true? You know, I'm not sure, frankly. I don't see what I'm doing necessarily as being reflective of a larger trend or a sort of larger community of veterans who are invested in the kind of political analysis or cultural analysis that I'm doing, but it doesn't mean it's not happening. You know, at the same time, I just said all of this about tablet's Jewish identity. You (11/44)
know, I don't feel especially close to American Jewish communal institutions. I feel like basically an outsider, and I would say the same with my relationship to American veterans organizations, with the exception of these small sort of close connections that I have people like Phil Klyue, I co-host this podcast with, or tablet. But in general, you know, my relationship is sort of an outsider and an observer. And so if there is something to what you're describing, and there may very well be, I haven't been a part of it, and it hasn't been especially salient to me, honestly. Yeah, and I definitely don't want to put myself out as an expert on all these different cultural phenomena. What I guess I've picked up on is that there's a kind of independent center of gravity, both within the Jewish community and within the community of veterans. And maybe there's something about that that has created more interesting takes from people in those areas. But again, it's not something I've studied. (12/44)
It's just something that peripherally I've kind of noticed, and you're at the intersection of both of those with tablet and your experience as a veteran, which I didn't explicitly state. So that was a much longer background than I had planned, Jacob, but I think it was actually interesting. So the reason that I asked you to come on the podcast today is the reason that a lot of people have been having gone recently. I've noticed that since I reached out to you, you've been kind of on a bunch of different podcasts for good reason. And the reason is that you wrote recently about three weeks ago or so, I think it published an article and tablet called A Guide to Understanding the Hoax of the Century. And it is an article about this phenomenon of disinformation. It's not really about disinformation. I mean, it speaks to something larger, but through the vector of disinformation. So rather than have me explain it, I'd love for you to maybe talk about what you wrote in that article, and then (13/44)
we can sort of use that as a jumping off point to have a larger discussion about it and what you write about. Sure. So in around probably as early as late 2017, but certainly by mid-2018, I had begun to notice that this word disinformation, which I wasn't especially familiar with and wasn't something that one found commonly in public discourse during the Obama administration, for instance, was all of a sudden everywhere. And it was all of a sudden the sort of organizing principle of national security discourse, the organizing principle of high-level political opposition to Donald Trump. It was all sort of revolving around this notion that there was this thing, disinformation, which had infiltrated the American political system, but not just the American political system, had infiltrated the very ecosystem in which we all lived and in which the political system took place and was situated, and that having infiltrated it, it was now destroying liberal democracy from within. And one could (14/44)
find these kinds of statements coming from NATO security officials from US intelligence officials. One could find it in Congress, in the countering foreign disinformation and propaganda act that President Obama passed in December of 2016 in subsequent congressional committees and inquiries and bills. But also, one could find it coming from the NGO sector, from progressive activists concerned about disinformation, radicalizing young people. And one could also find it coming from press outlets who seem to simply accept the premises of disinformation as if it was a sort of settled objective scientific phenomena. But having noticed that it was all of a sudden everywhere and that it was also its ubiquitousness was accompanied by a what was presented as an imminent existential threat to America that demanded immediate action be taken to fundamentally change the American political system, to fundamentally rewrite the rules of the internet, to restrict, if not outright eliminate free speech in (15/44)
a number of cases, to deem whole categories of information and inquiry so dangerous that they were off limits, lest one who was inquiring into those categories even accidentally spread Russian disinformation. So all of this seemed to happen very rapidly. It was obviously tied to this larger narrative about Donald Trump's, what we now know to be a false narrative about Donald Trump's connections to the Kremlin. And it was being used to fundamentally alter not only the explicit rules of the American political system, but also the underlying political philosophy of American society with its emphasis on freedom of speech and freedom of association. So having noticed this, I started to look into it. And what I found was that it was a deliberate and coordinated strategy carried out by particular government agencies in concert with a particular set of government-aligned NGOs that were then passed through essentially credulous and compliant press outfits. And I'm talking about, you know, not (16/44)
fringe press outfits, but the New York Times and the Washington Post and, you know, one point the New York Times disinformation reporter, because every newspaper, after a certain point, had to have its own disinformation reporter called for the appointment of a reality czar in the United States, something that would have seemed totally dystopian, ripped out of a Philip K. Dick novel. But now all of a sudden this was happening. So I started to look into this probably as early as 2018. Then two major events occurred, which put it into focus for me. One was the pandemic. And so what had begun as a framework that was nominally focused on Russian and foreign threats was seamlessly converted into an apparatus for controlling domestic political speech. And in fact, this had actually begun to occur prior to the COVID pandemic in 2020. But the COVID pandemic was what really put that into stark relief, because all of the language and all of the sort of machinery of the censorship machinery that (17/44)
was supposed to combat Russian and foreign disinformation was transitioned without any open debate, without any democratic process or accountability was simply transitioned over to enforcing not only issues like vaccine mandates, but to enforcing official narratives that we now know to have been untrue. So for instance, regarding the origins of COVID-19 and the lab leak theory, this machinery of disinformation and information regulation, which was embedded into the social media platforms, and which relied on this large and extended network of NGOs and academic research institutions who sort of credentialed and played the objective experts when in fact they were effectively working in tandem with intelligence agencies and political operatives began to now enforce COVID narratives. And then the next thing that happened that was particularly significant for me was the Russian bounties story that your listeners may recall was the accusation that Russia was placing bounties on American (18/44)
soldiers in Afghanistan. And I immediately recognized this story as being sort of implausible and fantastical on its face as soon as I heard about it, having been a military intelligence officer in Afghanistan, it simply didn't pass the sniff test. And yet I saw the way that it was propagated through mainstream news outlets, again, the New York Times and the Washington Post, were the two papers that originally carried this story. So in other words, what you had was on the one hand, this large coordinated machinery of censorship that was simply purging from public discourse, anything that dissented from the official narrative line on an issue like the origins of COVID, while at the same time, that same machinery could propagate false narratives, for instance, that explicitly political, I should say false narratives, not merely erroneous narratives, let's say this wasn't just a question of the official messaging of the White House getting something wrong. This was a brazenly false, (19/44)
brazenly partisan narrative leaked to the press at a moment where it was designed to have maximum political impact, and just carried and echoed endlessly by every high level democratic official, by all of the largest newspapers in the United States as if it was the truth. So it was in the process of trying to absorb those things that I ended up thinking about this idea of disinformation as not simply a form of censorship, not simply a framework for regulating information to censor, but as its own form of government, as its own mandate, its own mandate to rule, that information regulation was replacing the official and explicit procedures of constitutional democracy as a new system of power inside the United States, and that's what I investigate in this piece. Fantastic summary, Jacob. So let's dig into this. I'm not entirely sure where and how I want to come at it, but it seems to me, maybe the best way to do it is to put forward a general working hypothesis that I have, and we can (20/44)
work our way around it. So when I look back at the early 2000s, at that point in time, we still had this really powerful, largely centralized, hierarchical system of propaganda in the US, and that served very effectively to promote the Iraq war and the war on terror. And it's easy to forget now what an indomitable force that was. We had wall-to-wall coverage at all the majoring news networks, specialized shows on Fox, CNN, MSNBC, promoting the war with names like Countdown Iraq, an unbelievably calculated way of regimenting the minds of the citizenry, and inculcating in people a sense of inevitability around the invasion, which many people were openly against. Now, fast forward to 2008, the financial crisis comes along, and that was the first time where, in my opinion at least, because of YouTube primarily, there were alternative sources of information that began to seep into the American mind. And at the time, when I was ingesting those sources, as someone who had already grown (21/44)
increasingly cynical about American power and the incentives of agents and government, I felt like I was coming into contact with the truth through what I was learning. And I became increasingly radicalized. I went down the whole Alex Jones rabbit hole, ended up on David Ike and Lizard People. And through those experiences and my time working at RT, which I didn't mention, I've come to the view that what's happened is that we've moved from this highly controlled information ecosystem, where the U.S. government didn't really have to worry about the, quote, Russians or any foreign actors, meaningfully affecting public discourse, to the point where we are now where the information environment in the United States is so chaotic that not only is the U.S. government trying to regain control of it, but foreign actors are also trying to exploit it by spreading, quote, disinformation, which I don't know how tactical it is. I mean, it seems to me that the real effort is to undermine our sense of (22/44)
reality, to demoralize us and to seed and amplify cynicism in a way that further cripples our capacity to come together as a society. Stuff that Peter Pomeranzov, who has been on the show before, writes about so persuasively. I'm curious, do you agree with that framing? Do you disagree with it? Where do you come down on this? I largely agree with that framing. You lost me at the end and I'll get to that in a second, but I agreed with the first 85% of it. And the reason why it's so difficult to describe is because it's a new cosmos. This is the Gutenberg revolution. We're at the dawn of digital political age that we can scarcely understand at this point, but which is already destabilizing and reformatting institution after institution. So it's not as if the American political class simply hallucinated that there was a destabilizing effect that the internet was creating this chaotic effect, but they falsely attributed that to Russian disinformation tactics. So in other words, they took (23/44)
what is a broad sociotechnological revolution on the order of the printing press and one which has undermined the kind of centralized narrative authority that you were describing was still in place in 2003, one that has had that effect in many places, not only in the United States and one that has had that effect on many institutions within the United States, not simply on the government or the sort of neoliberal establishment. They took that and they insisted that it was all Russian disinformation all along. And I find that to be implausible on its face. It's clear that Russia has attempted to have a destabilizing effect. It's clear that Russia spreads propaganda in much the same way that other countries, including the United States, attempt to seed propaganda into foreign information ecosystems. But it's not by any means clear that this has had a profound effect in terms of changing political attitudes in the United States. And when you look more closely at the evidence, the largest (24/44)
claims for Russia's hacking of the United States political system break down under scrutiny. So the Facebook ad buys are one example. We heard all of these reports about Russia infiltrating Facebook, but when you looked at the ad buys, it was something like $100,000. They didn't all go to Donald Trump. When you looked at the activity of the infamous Russian trolls, you found that, okay, you could say they got X number of impressions, but an impression just means somebody looked at something. It doesn't mean it had any pointed or determinative effect on their thinking. And many of these trolling efforts were, they were laughable. Now, might they have had some sort of effect in the aggregate? Yeah, they could have had an effect in the aggregate, but the effect would have been merely to exacerbate a kind of informational confusion that already existed. There's a great French philosopher of propaganda, Jacques Elul. In his book, Propaganda, the Formation of Man's Attitudes, for one thing, (25/44)
he makes a distinction between foreign propaganda and domestic propaganda. So domestic propaganda, in other words, propaganda used by government and directed at its own population is almost always more powerful than foreign propaganda simply because it understands the premises and priors of the target population and good propaganda is not implanting some wholly new and foreign idea in somebody's head. It's working off of the assumptions that they already have. So the sort of standard operating procedures of propaganda would limit the effectiveness of some of these Russian campaigns. So it's clear that some of the things Pomeranians have described, I think, are real, and they certainly match some of the ambitions of the Russian government. But they are both implausible as explanations for what has taken place in the United States. And they are also cynically and opportunistically exaggerated by political actors in the United States. So the Steele dossier, whatever Russia was doing in (26/44)
2016, the Steele dossier was a piece of political opposition research paid for by the Hillary Clinton campaign originally paid for actually by a conservative institution when Trump was still one among many candidates in the Republican field was originally funded by Republicans to knock Trump out of the Republican field. That didn't work. The Clinton campaign picked it up. They were working with this outfit called Fusion GPS, essentially a private intelligence firm run by these former Wall Street Journal reporters. And it was a political document. It was a nakedly overtly partisan political document with ludicrously thin sourcing. You know, much of it we've since learned was actually coming from not from these deep Kremlin sources that Christopher Steele had, but from Russian think tank employees working in Washington, DC. I mean, that's the extraordinary thing about it. To come back for a moment to this sort of idea that I was laying out a minute ago that these things that are (27/44)
presented as foreign threats are really a way of sort of obscuring domestic threats and turning them into sort of opening up the possibility of using the tools of warfare against what are in fact domestic elements. The Steele dossier itself was a sort of fantasy of Russia, which came from people inside DC. So yes, there is a destabilizing and chaotic effect that chaos promoting effect that the internet is having, but that doesn't explain how we got this essentially attempted coup on a sitting president. So again, a lot of things to discuss here. It was rather amazing after the election of Donald Trump, just how many outlets and how many political hacks in the mainstream media amplified and facilitated so many contrived narratives promoting ridiculous conspiracies like the PP tape and head on criminals like Michael Avenatti and porn star Stormy Daniels as though they were paragons of virtue and credibility, which is also a great lesson for people who are trying to discern the (28/44)
credibility of any particular narrative. It should always be very wary when a small number of sources keep getting brought up over and over again as being central to the story. We had the same thing in the lead up to the Iraq war. So I want to draw a distinction here between, because I use the word disinformation and I use the word misinformation. And one of the things that I've sort of come to realize over time as I read other people whose work I agree with like yours or others is that I can easily see how someone hearing me use the word disinformation could misinterpret that as being a signal for something else. So when I talk about Russian disinformation, I don't actually mean tactically that there was this effort to undermine the US elections. Actually, the analysis of someone like Yochai Benkler is something much more on point with what sort of how I see this, which is I think there is an effort to undermine our sense of trust in our institutions, which we already distrust for (29/44)
good reasons. And that if anything, our reaction, the mainstream press's reaction to the 2016 election actually played right into that strategy. But that ultimately all of that exploits our internal weakness, which stems from the lack of accountability, the understandable loss of trusted institutions, and the larger technological problem that we have, which is that this marketplace of idea, so to speak, which was enhanced by the promise of a free and open internet, has been captured by these platforms that increasingly define people's sense of reality and moderate conversation such that even the word censorship doesn't really make sense anymore, because every manifestation of speech on these networks is a discretionary choice of the platform that happens almost entirely at the level of algorithms in an automated fashion, amplifying or suppressing one thing or another, because it's basically impossible to run these platforms in any other way and make them actually usable and useful for (30/44)
people. So I'm curious, how do you view that framing and how similar or different is it to how you view the problem? I appreciate hearing you lay this out. It's interesting for me to hear, and I think what you just said, particularly at the end there is very sharp, and that's exactly right, that the power of these platforms is so vast and so determinative of underlying social realities and the way in which they control not only the pillars of the political economy at this point, but also they control the arena in which social life occurs, not just politics, dating, routine interaction, and I avoid the terms disinformation and misinformation. There's a reason why in this very long essay I just wrote, I never do what is sort of the standard pro forma move in all of these pieces and define disinformation versus misinformation. The reason why I don't do that is that I think that they are airstots, technical signifiers. They have no real meaning beyond the ways in which they serve the (31/44)
interests of the party in power. So the idea that there is some category of information, some category of objective statements or facts that could be labeled misinformation in a kind of, is a regulatory function. It's not an epistemological function. It doesn't serve the interests of conversation or of debate. It's only a tool for regulators, and I'm not interested in playing this game and reifying this false scientific air, nor am I interested in helping out the regulators in this way. So I avoid it. But I will grant that there is a effort to seed false narratives. Let's just isolate Russia for a moment. Russia is not the only country that does this, but Russia clearly made efforts and I'm sure continues to make efforts, though I haven't studied some of the more recent campaigns, to seed false and divisive efforts, not only in the United States, but certainly in Eastern Europe as well, and probably actually much more so in Eastern Europe than in the United States. However, the (32/44)
question is, first of all, we could simply call that propaganda. I'm sorry, I just want to say, I think the reason why the word propaganda doesn't fit well is that there's not necessarily an underlying ideology or message that's being propagated. I think that was true during the Cold War, but I think that's where I go back to Peter Palmeratsev and I think what he does so well is convey that. What there seems to be is there seems to be a systematic effort to undermine some of the central pillars of what we do believe without necessarily replacing it with a larger narrative. But the effort is to replace it with Russian power and with an expanding Russian state. So I do think there is a core to it. Look, it's not nihilistic, right? Putin is not a chaos agent. He's not a nihilistic chaos agent, is a particular set of interests. But I do think, actually, it's interesting you say that, I do think that not in Russia. Forget, let's say, Peter's depiction of Russia when he lived there, when (33/44)
he's a producer, because I didn't live there and I'm in no position to discuss that. But it does feel that there is an effort to inspire a sense of nihilism around our own sort of identities as Americans and our reverence for our institutions and to sort of inculcate a sense of cynicism. That does seem to be part of it. And I mentioned my part, my time working at RT. When I look back now at that time, at the time, the... And by the way, I also should mention this, Jacob, you and I have never spoken like in the years leading up to the Ukraine war on this show, I was very critical of this narrative against Russia. And I had on guests who I've talked about before, people like Stephen Cohen, who was my professor of Soviet studies in college. So I'm definitely not coming at this from the perspective of being an apologist for American power and institutions. But I look back at my time there and I realize now that a lot of what... A lot of the pushback that I got in editorial meetings was (34/44)
around wanting the content ultimately to be more cynical, to make people question not necessarily any particular narrative or to implant new narratives, but to just undermine their overall sense of confidence in everything and even in their ability to understand anything and to become cynical. And it feels like that is what I try to speak to when I use the word disinformation. But the reason why that narrative that you've just laid out is powerful among people in the West and in the United States is because we're cynical about our own government. And in its own strange way, it's actually a very optimistic view, because it suggests that if we can merely eliminate this outside Russian interference, perhaps we can recapture the legitimacy of those institutions and recapture something like the broad social consensus under which we once lived and which promoted a prosperous and fairly stable society. I don't think that's the case. And I say this as somebody who you said you're an apologist (35/44)
for American power. I'm no apologist for Russian power. I have no particular affection for Russia. And insofar as I have a dog in this fight, I'm an American and I'm an American writer. And that's where my loyalties and my interests lie. But I think that the excessive focus on Russia has been a very destructive distraction that has actually precluded our ability to address the fundamental sources of instability, cynicism and distrust in American society. Let me give you another way to think about this. Totally agree with that, by the way. Let me give you another way to think about this that's a bit more concrete, because these conversations about sort of narrative propagation, part of what makes them so powerful in exactly the way you just described and the way Russia might use them. The conversation itself is sort of unmoored from concrete realities and therefore can never be fully resolved, the extent to which Russia is promoting nihilism, the extent to which that amorphous (36/44)
nihilistic narrative affects what goes on in the United States. It's very difficult to measure and it's difficult to assess. It's a sort of subjective and affective domain in many ways. Think about this for a moment though. So disinformation, what we now refer to as disinformation and Russian disinformation tactics, in many ways, conceptually grows out of a discourse around hybrid war and hybrid war theory, which was popularized in 2014 with the Russian invasion of Crimea, the Euro Maidan protests in Ukraine, which the US backed, sponsored and backed and Russia opposed, and at the same time the Islamic States campaign in Syria and Iraq and its capture of Mosul in 2014. These three events, which I talk about in my tablet essay, all three sort of elevated the stature of hybrid war as the dominant new theory among NATO and American security specialists and what hybrid war referred to was this mixture of conventional overt military tactics and covert military tactics that especially drew (37/44)
on information operations and attempts to message the public, particularly through social media. So you'll recall some of the ISIS social media campaigns. Really like barbaric memes that they were propagating in 2014 and Russia spreading these stories about whichever, you know, one of the Baltic countries that they did in a number of places in Ukraine or in the Baltic countries, spreading stories that were intended to cause the local populations there to lose faith in their own governments, to overestimate the strength of the Russian military forces, overestimate the strength of the Russian government, etc. So this is the hybrid war theory and it sort of is adjacent to what's called fourth generation war theory and also what is referred to as the Garamantsov doctrine inside of Russia, which is this new doctrine of informational warfare and in which influence operations are primary and, you know, the internet and winning the internet and winning narrative wars on the internet becomes as (38/44)
important, if not more important than conventional military strength. That at least is the way it's interpreted in the US and among NATO defense officials. So this is critically important because it lays the conceptual foundations for the contemporary disinformation discourse. But what's interesting is that the earliest critics of this hybrid war theory, many of the earliest critics were Eastern European security officials who saw it as a way of distracting from the still vital measures of real military strength in beans and bullets. In other words, they were critical of this Western and NATO obsession with hybrid war because they thought that it was a kind of abstraction, a sort of, and not only an abstraction in the sense that it was a mistake, but also an evasion, a means of avoiding the kinds of actual transfers of arms, the actual reallocation of military forces that would have been needed to contain the Russian military and deter Russian expansionism. So that's one thing to keep (39/44)
in mind is that there is a kind of core material argument for the ways in which people simply get lost in these conversations. It's not to say that there's nothing to them. It's not to say that there's no effort to sort of seed nihilism in the West from Russia or China for that matter. But it is a distraction from more vital matters. And because it is by its nature so abstract and amorphous, it lends itself, this whole discourse lends itself to manipulation by the most powerful actors who get to determine what disinformation is. Disinformation is a word that only takes on meaning in the mouth of power. It doesn't matter what somebody on the street calls disinformation. It has no effect on anything. The word itself only acquires meaning when it's used to censor in the American political context. And so I think that's worth keeping in mind. Yeah, so a lot of thoughts here. One, I encourage people to go back and listen to my conversation with David Colcullen, a counterinsurgency expert (40/44)
with whom we talked about hybrid theories of war, like liminal warfare and conceptual envelopment that incorporate elements of what we're talking about today, at least insofar as the national security state and the intelligence community see things. Look, there's nothing that I can point to in what you said, Jacob, that I would readily disagree with. This term disinformation has most certainly been used by the powerful to silence people. It's been used to discredit them and to deplatform them in many instances. And it's also been used, as we saw in the case of Donald Trump, to deflect attention away from the failures of institutional power structures and by elites who have governed these institutions. And I think similarly, the lack of accountability among those in power has undermined our trust in government. And it's left us in a place that to me at least feels exceedingly vulnerable because of the unique dimensions of the international order today. And a lot of these conversations (41/44)
that we seem to have end up being about how to decide what is and is not true, how to sort out the, quote, disinformation, when in fact what is needed, I think at least, and this is what I want to talk to you about in the second hour, Jacob, is a kind of very high level regulatory architecture that introduces transparency, that works at the level of incentives so that there isn't any room for the CIA or the White House to sit in between you and me on Twitter, for example, deciding what is and is not appropriate speech. Instead, the platforms would have to adhere to certain best practices, like, for example, I'm not saying this is the correct policy, but not selling people's attention to advertisers and not modeling their behavior has to make them maximally exploitable, which could have huge unforeseen benefits to public discourse. In other words, this idea that somehow the solution needs to be either unfiltered chaos, which wouldn't work for anyone, or a cartel of private companies (42/44)
with the government and the intelligence agencies exercising discretionary oversight, which is what we have now, this framing, this either or framing is false. There is another way, but it feels like we've lost the language to come up with solutions that are democratic, and that's where I felt frustrated with how this conversation continues to be framed, but that's something that we'll get into in the second hour, Jacob. For anyone who is 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 Jacob, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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 (43/44)
right now. Jacob, stick around, man. We're going to move the second half of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 Nicolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (44/44)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? I'm Dmitri Kofinas and you're listening to Hidden Forces, where each week I speak with experts in the fields of technology, science, finance and culture to help you gain the tools to better navigate an increasingly complex world so that you're less surprised about tomorrow and better able to predict what happens next. My guest this week is Andres Schleifer, professor of economics at Harvard University and one of the most cited economists in the world. Schleifer has worked in the areas of comparative corporate governance, (1/44)
law and finance, behavioral finance as well as institutional economics. He has published seven books including his latest A Crisis of Beliefs, Investor Psychology and Financial Fragility with his co-author Nicola Genaioli. Our conversation today centers on the subject of beliefs, how they impact markets and how economists and financial practitioners are attempting to model them using data about people's expectations, assumptions and attitudes in order to make better informed investment and policy decisions. The first half of the episode is devoted to exploring the mechanics of the 2007-2008 crisis and the role played by structured products and derivatives, off-balance sheet vehicles, money market funds, GSEs and a policy of ultra low interest rates that fueled overconfidence in the power of regulators and in the sustainability of the status quo. In the second half we devote time to exploring a more formal approach to thinking about Haiman Minsky's instability hypothesis and how market (2/44)
participants looking at the same data day after day can suddenly draw radically different conclusions about that same data when their beliefs about the world change dramatically. Given the destabilizing forces of populist politics, trade tensions and changing geopolitical fault lines, the ability to draw valuable insights from data about expectations and beliefs is invaluable for any investor or policymaker looking to gain a sense of market sentiment, where it stands and where it might be going. And with that, let's get right into this week's conversation. Dr. Andre Schleifer, welcome to Hidden Forces. Thank you, I'm very happy to be here. It's great having you on the program. I just finished reading your book as I was telling you. The book is called A Crisis of Beliefs. When did this come out? I think the book came out in September, maybe two months ago, just for the 10th anniversary of the crisis. How long were you working on it? First of all, reading the book, you realize how many (3/44)
citations are actually of your own papers or papers that you've co-authored with other people. I wonder how much of this book was you pulling from the body of work that you have developed over years and maybe even decades? I wouldn't say decades, but certainly many of the themes in this book go back to the things my collaborators and I have done over the last maybe one decade or five or six years. One of the reasons to write the book is that the papers were written tended to be technical papers and they didn't deal with the financial crisis itself, the 2008 crisis. We wanted to write something about the crisis and all that material was totally new to the book. The first half of the book, pretty much the first half, is an explanation of the mechanics of the crisis, the mortgage market, the refinancing, securitization, CDOs, MBS, all that stuff. The second half is an attempt to try and create some type of a framework or a model of expectations and of beliefs in order to try and see if (4/44)
you can extract meaningful insights about the future and about the present market conditions. That's correct, yes. Up until now, how useful has survey data been? How much has it been incorporated in forecasts both by the private sector as well as by the public sector and institutions like the Federal Reserve? That's a very interesting question. Back in the days, let's say 60 or 70 years ago when the field of macroeconomics was developed after World War II, a lot of what macroeconomists did was to collect survey data and to predict the macroeconomy based on the survey data and the expectations of business people, executives and so on. What happened in the 1970s to the field of economics and macroeconomics in particular is that it became dominated by a very, very important idea called the rational expectations hypothesis, which is the idea that people use their understanding of the economy completely, rationally and efficiently, and that once you have a model of the economy, you don't (5/44)
really need expectations data. The model itself will tell you what to expect. Starting in the 1980s, the interest in survey data and expectations data and macroeconomics in particular and finance as well has waned. I think it's only the last several years that we're seeing a revival precisely at the same time as people realize that our expectations are not particularly rational and so there may be information and survey data that we couldn't obtain otherwise. When did people begin to meaningfully question the rational expectations hypothesis? Well, again, there is parallel developments, some in finance and some in macroeconomics. Finance, the challenges to efficient markets hypothesis go back to Robert Schiller's work starting in 1980 and they've been advances for the last 30, 35 years. It's really a pretty developed field. It develops out of alternatives to rationality. In macroeconomics, I think, again, prior to the rational expectations revolution, there was a common way of thinking (6/44)
about the world. Then it declined and it's only more recently that people started thinking about beliefs and expectations other than rational expectations in a more systematic way. Well there's been a renewed interest in behavioral theories and finance in particular in economics after the crisis. I think if I would say that finance did better than macroeconomics with respect to the crisis, I'm not sure finance was that effective in predicting the crisis, but it is certainly the case as we try to explain in the book that finance understood the mechanics of the crisis extremely well. I think that probably played some role in accelerating policy right after Lehman or producing prescriptions for policy right after Lehman. Economics, I think, was far behind precisely because it didn't have a way of thinking about errors and beliefs following the financial crisis, around the financial crisis. One of the things that it comes out from reading your book is you make it salient, the point (7/44)
salient, which is we know that the fractures began to emerge in financial markets and began to become obvious in the summer of 2007, approximately with B and P Pariba, with Bear Stearns. There were signs that there were stresses in the market, but despite that, it was not until Lehman where you saw it both in volatility, but also just in price declines where the crisis really broke out. Why don't you walk us through, because like I said, he did a great job in the beginning of the book explaining how the crisis developed over time until we got to 2008. Can you take that timeline from 1996 to 2006? Yes, but let me say as a first point is that one of the things we've learned in the last decade is that financial crisis all have more or less the same structure, which is their origins are always or nearly always in a bubble in the price of some particular asset or group of assets, housing being the most conspicuous example in many historical episodes, that these bubbles are often financed by (8/44)
debt, whether it's mortgage debt in the case of the housing bubble, some other kind of debt. In 1929, people used to buy stocks on margin. And so there is leverage plus a bubble. And that there is also exposure of financial institutions to this bubble, either because they're the holders of debt such as mortgages or because they are exposed in some other way. And so what happens is that when the bubble begins to deflate or to collapse, as it did in the case of say US stocks in 1929 or in the case of housing prices in 2008, what you see is that the holders of debt in a particular financial institutions begin losing money, begin suffering from the defaults on the debt, and that precipitates, runs on banks at a financial panic. So there is a very intimate link that was understood first, actually was understood even before that, but was explained first by Charlie Kindleberger in 1978 between bubbles, leverage, deflation of bubbles, and financial crisis. And so one of the things that we try (9/44)
to describe in the book is precisely the path of the financial crisis of 2008, which follows all the standard steps. So we had a bubble in the housing market. It started in the 90s until 1990s. US home prices for close to a century were relatively steady. It reached its peak in 06, 07. The bubble was financed by debt, which was mortgage debt, debt mortgage debt through financial innovations such as mortgage-backed securities was converted into other kinds of debt that was held in part by institutions, but in part by banks and investment banks. So there was a lot of debt in the financial innovation associated with the housing bubble. When the bubble began to deflate in 07, a lot of the holders of debt started losing money that included banks and investment banks as well as financial institutions. When they started losing money, they started liquidating their positions because they didn't want to run out of cash. When people liquidate their positions, the value of their holdings or the (10/44)
value of these assets such as mortgage-backed securities falls even further, and eventually the system cracks, which is what Lehman was. It was the final run at the end of a long period of degradation of the financial system. One of the things you highlight in the book is this distinction between idiosyncratic risk and systemic risk. A lot of these financial innovations and financial products were created with the idea of allowing firms to better manage their risk, but in fact, when everyone was doing them, systemic risk went up. What you're describing there, for example, is if a system is leveraged based on the value of assets and the value of those assets begins to decline, the liquidity begins to dry out. That's exactly right. So again, there was a lot of sophistication to financial engineering that went into the creation of mortgage-backed securities and various other more complex derivatives such as CDOs or collateralized debt obligations. The lot of that sophistication, as you (11/44)
said, was an attempt to diversify risks or to put different things together into portfolios so that in normal times they wouldn't lose money or wouldn't default all at the same time. What happens at the time of stress, and that's again a financial universal, is that the things you think are uncorrelated become correlated. The things you think are different and provide you with diversification will turn out to lose value at the same time and you don't get diversification benefits. So this particular, this growth of correlation in the time of crisis is again a very common feature that leads to financial panics and liquidations and crisis in the end. During the fallout, the media, of course, they picked up on regulation, they picked up on fraud, things like this. In smaller circles, there was an emphasis on monetary policy. There was some conversation around structured products like CDOs, but I don't know that anyone appreciated anywhere near to the extent that subsequent history would (12/44)
deem appropriate the impact that securitization played in facilitating leverage in the financial system. Of all the things, securitization, regulation, Fed policy, accounting standards, where would you rank securitization, the mortgage-backed security, collateralized debt obligations, credit default swaps and things like this in enabling the crisis? Well again, let me say, I want to come back to history, which is that you see financial innovation in all bubbles and crisis. You see some fraud on the margin in all bubbles and crisis. You see some bad behavior. In this instance, it was the rating agencies, but also mortgage originators in all crisis. To me, the common features are bubbles, leverage, deflation of bubbles, and the inability of the financial system to deal with all the losses. I think if you ask how much could be attributed to financial innovation, I think it is unquestionably the case that we had more lending, more subprime lending, more bad mortgages issued than (13/44)
originated, and perhaps more bad behavior because of financial innovation, because of MBS and CDOs. And of course, CDOs were a very important reason for the losses of the financial institution. So I would put them fairly high, though again, I want to say that this is just part of what happens in every leveraged bubble. And of course, that goes back to something you were talking about with these fire cells. People, I don't think certainly the public didn't understand the role that the money markets was playing in financing a lot of these off-balance sheet entities that were carrying a lot of the risk that was not on the balance sheet of banks. Absolutely. So the money markets funds, the other were financing these special investment vehicles that were holding MBS and other securities, and they were assuming that their collateral is completely safe. But then when it turned out that MBS was not as safe as people thought it would be, all these institutions, all these arrangements turned out (14/44)
to be runnable and extremely unstable. So why is it, in your opinion, you have this great chart, you have a lot of charts in the book, many dealing with the housing market, some dealing with credit, but you have this one of volatility of the VIX. And you see in the summer of 2007, we mentioned that period where volatility began to increase, the VIX began to spike, and it stayed elevated and choppy for about a year, but leading into the crisis, it began to drop. So there was this sense that things were contained, and then there was a marked reversal. And I think this speaks to the thesis of your book, this idea of what causes, if I understand correctly, that markets have beliefs, they have expectations, and what can cause markets to look at the same dataset one day in one particular way and then have a completely different perspective the next day, and that can lead to a financial crisis. Well, that's very important again. So this crisis is characterized by this very interesting quiet (15/44)
period between the summer of 2007 when we see the first signs of substantial declines in home prices and losses on mortgage backed securities and the Lehman crisis a year later. And what's interesting is that when you see the first problems in financial markets in the summer of 2007, the Fed understands them and they interpret them as liquidity problems, which is to say they want to prevent financial institutions that are suffering these losses from liquidating their positions. And so the Fed actually intervenes pretty aggressively through several programs to keep investment banks and others from liquidating their position. And these interventions work. These interventions are very successful, and so we don't have a crisis in the summer of 2007 as one might have thought. But I think unfortunately what happens as a result of these very successful interventions is that the Fed concludes and the policymakers conclude that what we have is not a solvency problem. What we have is not a (16/44)
problem whereby financial institutions are beginning to lose hundreds of billions of dollars or what ended up being hundreds of billions of dollars, but rather a liquidity problem. And so they think that they have things under control. And if you look at the meetings of FOMC, the governing body of the Federal Reserve, if you look at the speeches of Ben Bernanke and various Fed governors, these are speeches about lack of liquidity in the financial system. One of the things that you appreciate when you look through all of these charts is you can see the stress that the system came under very dramatically and the impact that government support had, for example, prime money market funds and government money market funds, the blowout in the repo market, haircuts. I mean, you could see that you said liquidity. The liquidity was drying up because it was a solvency issue, but the Fed saw it as a liquidity issue. Exactly. The issue was the solvency issue that banks were in fact projected to (17/44)
lose by the IMF. By the Fed as well, although the Fed has not released its projections. A tremendous amount of money, actually something that by the end of 2007 and certainly early 2008 looked like it might be threatening to the life of the financial system. But the Fed pretty clearly, and you see this again in speeches, you can see this in documents, felt that things were under control. So it did not want to step up the interventions. The pivotal moment was the rescue of Bear Stearns in March of 2008 when the Fed facilitated the acquisition of Bear Stearns by J.P. Morgan. That was probably the pivotal moment because the question was what the authorities would do right after that. And instead of saying never again, we now have to shore up the financial system. We have to encourage the banks to stop paying dividends. We have to encourage the banks to raise equity. We have to protect the financial system. The Fed went and the Treasury in particular went in exactly the opposite direction (18/44)
and said, well, we've saved these guys, but now you're on your own and we're not saving anybody else. And this was the position until after Lehman. It seems to me that to the extent that the book has policy lessons, particularly with respect to 2008, it seems to me that it would have been much wiser for the Treasury and the Fed to be much more aggressive in March than they were for six months after Lehman. Of course, after Lehman, when bankrupt, policy was extremely aggressive and extremely effective, but it took Lehman to make that happen. Well, since we're talking about policy, let's actually go a little further back because every bust is preceded by a boom. And this was a huge credit boom as we've began to outline here. What role did regulators, the central bank in particular, play in enabling this bubble? Well, that's a question that is heavily debated. The book doesn't take a particularly strong stand on this, but many people would say that the policy of low interest rates in the (19/44)
early 2000s was something that precipitated the boom. Of course, one has to be careful because that's probably true. But the Fed begins raising interest rates, I think, in 2003 or 2004. And that, of course, does not stop the boom. In fact, the boom speeds up considerably in 05, 06. Those are probably the most irresponsible years of the boom. I think the issue to me, again, is that the Fed does not think it's particularly in the business of monitoring risk-taking by banks. And in particular, I think it, and again, we can talk about whether or not this is something they could have done, but it's very clear that during this period, banks massively increased their exposure to the housing market through CDOs, through MBS holdings, through mortgage holdings. And the Fed continues to treat most of these holdings as completely safe investments. But also, Greenspan is on record having stated that he wanted to create a wealth effect. There was a desire, an explicit desire to use asset price (20/44)
appreciation to goose the economy. I don't remember those statements. I'm sure you're right. The evidence we have is that wealth effects are pretty minor, which is to say, the classic example of that, of course, is that we had the Internet bubble that collapsed, and $5 trillion or some number like that of stock market wealth was lost. And absolutely nothing happened to the economy. The risks to the economy posed by leverage and liquidations and interruptions in the supply of credit seem to be much more significant than anything related to the wealth effect. I should say, though, now that you've raised it, that is an important issue because the wealth effect is how the Fed model operates. The Federal Reserve has a model of the U.S. economy. It doesn't particularly incorporate in any interesting way things like financial fragility and the vulnerability of financial institutions to crisis, but the wealth effect is a central feature of the Fed's macroeconomic model. So where do beliefs and (21/44)
expectations fit in this? Some of the things we're mentioning here are the meat and potato sort of stuff, the guts of the system. Where do the beliefs which can drive, as we say here, we went from the same conditions before Lehman to after Lehman, but markets reacted very differently? Some might say, well, that's kind of obvious because Lehman changed what people thought was possible that they didn't see before. But the question is, why didn't they see that? I think the beliefs come in three very important ways. The first one, which is in some sense the most obvious one, is that beliefs come in at the time that the housing bubble develops, which is to say that we know and the U.S. is no exception to that. We see the same things happening in Australia today. We see that at the time home prices are growing, people develop utterly unrealistic expectations about future continued growth of housing prices. That is a very important feature of every bubble. The second place where beliefs enter (22/44)
the picture is something we already briefly discussed, which is to say that even after home prices begin falling, there is pervasive neglect of downside risk by policy makers, by market participants, and so on. Which is to say that, again, we've touched on this in a number of ways. People believe in wealth effects, and Bernanke goes out and says, look, subprime is a trivial part of U.S. wealth. So if you've got major subprime losses, wealth losses will be minor, and therefore the effects on the macroeconomy are going to be minor. People believe that banks, in fact, have a lot of capital, which they appear to have. So there is a lack of incorporation, a lack of understanding, how through the interconnections between financial institutions, how through these fire sales mechanisms the economy is actually much more vulnerable, and the financial system is much more vulnerable. More interconnected. More interconnected than it appears to be. And of course, the reason that Lehman is such a (23/44)
dramatic event is precisely because that comes to light. I think one of the things that Federal Reserve officials used to say is that Lehman is like Drexel. If you may remember, Drexel was the investment bank in the 1980s merger, boom, Michael Milken's investment bank at some point when under and of course, it looked bad, but nothing happened to the macroeconomy, to the economy. So many people thought that Lehman, you know, because that's not the end of the world. And then of course, what the events surrounding Lehman bankruptcy laid bare is the enormous interconnectedness of the financial system. And fortunately, policymakers learned very fast that Lehman is not like Drexel and that it's going to bring down the whole U.S. financial system. And so then they intervene much more aggressively. That was more obvious to them in the case of AIG, but it wasn't in the case of some of these investment banks like Lehman because they moved very quickly to bail out AIG around the same time. When (24/44)
did the AIG bailout happen? The AIG bailout happened the week after Lehman. After Lehman. Again, this gets into a set of controversies that have remained unresolved, but in the two weeks leading to the Lehman bankruptcy, the authorities are watching, I think at least four institutions. They're watching AIG, they're watching Lehman, they're watching Merrill Lynch, and they're watching Morgan Stanley. And all of them are in trouble. And I think that it so happened that Lehman came under extreme pressure first. It could have been somebody else. And so a decision was made not to rescue Lehman. And I think as soon as it became apparent, which was rather immediate, what were the consequences of Lehman bankruptcy? The authorities turned around. Barclays was in conversations by the bank, right? How hard was the Fed pushing for some kind of a merger or a buyout? Okay, now we are in the domain of gossip, which I'm very happy to participate in. But I want to make sure we understand that I don't (25/44)
know any more than anybody else, which is that there were attempts to sell Lehman that were going on or to arrange a sale of Lehman since Bear Stearns, since right after Bear Stearns, which were not successful for whatever reasons, but I think mostly because Lehman management did not want to be sold. Also I think a loan from Berkshire Hathaway also was on the table or in equity. Well, they were discussing. I think, again, there were discussions. So there were several attempts, several conversations. I think the conversation that went the furthest is the conversation with Barclays Bank in the UK. I think now there are two versions of the story. There is the Hank Paulson version of the story, which is that that was supposed to happen and the British Treasury messed it all up. And so they had a plan and they just were messed up by the chancellor. I can't remember. Maybe it was the governor of the Bank of England. And then there is the British version of it, which is, what are you talking (26/44)
about? This acquisition was something we've learned about very late in the game. It would have required a huge amount of process and approval and due diligence. And the idea that we could have approved it overnight is just a ludicrous idea. So maybe historians one day will figure out who is right about that. Of course, the other side of the story is that there was literally six months of trying to sell Lehman. So why that didn't happen in advance is a complicated story. So I took us off target. You were laying out three aspects of beliefs. One is this unhinged expectations that occur in the bull phase of the market. People expect that markets are going to continue to rise, home prices are going to rise by 10% every month. Some of the most ridiculous estimates were in Orange County and in California in general. Orange County, I think was 14% a year, something like that. For 10 years. For 10 years. This is the old trees grow to the sky. Exactly. Marital bubbles. And that goes part and (27/44)
parcel with another thing you mentioned, which is the neglect of downside risk. And I think you were about to give us the third one before I took us off track. The third point, which is again, the beliefs is the question that I started on, which is why Lehman was so pivotal. And why did it so radically change the situation? And I think Lehman was so pivotal. And again, this is why we call it a crisis of beliefs is precisely because it made it clear that the government essentially has to rescue everybody, which is to say that the financial system was so interdependent and the asset holdings of different financial institutions were so similar and risk exposures of different financial institutions were so similar that if one of them goes under, the others will as well. And so you have as a response to that this very massive intervention by the Fed across the board with essentially every financial institution is getting rescued. But that was when the markets turned. That was the markets. (28/44)
Right. When they realized that they had it wrong sort of collectively. Right. And of course, again, you also see an overreaction at that time because the markets decided and you see that for example, the prices of triple A rated mortgage backed securities that the world is going to come to an end. But again, fortunately, the policy at that point became extremely effective, extremely aggressive. And so by March of 2008, the financial system was more or less rescued. So when you look back at expectations data from this time, what do you see? How does this correlate to what we saw in the financial markets? Well, there are several things that I can talk about. So the first one is the expectations data in the housing market and with respect to the risks of mortgage backed securities. In fact, they're totally consistent with the bubble, which is to say that people thought that home prices are going to rise much faster than was realistic or plausible, of course, than they actually did. And (29/44)
people also thought, given these beliefs about home prices, that mortgage backed securities and even more exotic instruments such as CDOs were much safer than they turned out to be. The mistakes were largely linked to the asset price appreciation expectations. Now the second place where expectations data are very helpful in the book spends a lot of time on this is this failure to appreciate the risks to the economy resulting from accumulating losses by banks and growing losses to homeowners and others related to depreciation of home prices. So if there are some tables in the book that talk about macroeconomic expectations, both of Wall Street forecasters and the Federal Reserve, and what these data show is that macroeconomic forecasters were reducing their forecast for the growth rate of the U.S. economy, but they stayed positive through the summer of 2008, which is to say that Wall Street forecasters did not see that the financial system is about to collapse. That was one of the most (30/44)
stunning charts you had in the book because their meltdown scenario I think was like point ... Well, I'm coming to that. So one might think the Fed did better, but of course it did not, which is to say that there is a meeting on August 5th of 2008 of the FOMC, the Federal Open Markets Committee, which sets interest rate policy. And in preparation for that meeting, the staff of the Federal Reserve prepares some macroeconomic forecasts. And you saw that actually for that early August meeting, six weeks before the Lehman crisis, the Fed staff raises its forecast for the growth rate of the U.S. economy. So they obviously do not think that there is an imminent crisis. In fact, as you've pointed out, it's even more extreme than that because the Fed staff is asked to produce a forecast for the nightmare scenario. I think it had a technical term of severe financial stress for the U.S. financial system. And the Fed produces an outlook which suggests that in that case the U.S. economy will have (31/44)
slight negative growth in the second half of 2008, returning to positive growth in 2009, and that the unemployment rate will peak at 6.7%. So again, there is no appreciation that something like Lehman might happen, and in reality the unemployment rate peaked at 10%, not 6.7%. And it peaked at 10% with huge monetary and fiscal interventions. It peaked at 10% with gigantic monetary and fiscal interventions. But again, it goes back to our point that the Fed did not then, and I don't think does today, have a correct model of the economy. And in particular, things like financial fragility and panics and crisis are not part of the Fed model. It's all about wealth effects. I want to ask you a few things. And the question that comes up with that has to do with how much of that is because of their belief that they can't model that. Did you in this process look at analogous forecasts during the depths of the recession in early 2009, and how those compared to estimates right before markets tanked (32/44)
in 2008? The after Lehman, all the forecasts declined precipitously, and in fact they probably become too negative relative to what ended up happening. But again, I don't think that people anticipated that government interventions will be as fast as aggressive and as effective as they turned out to be. And so you see the forecast tank after Lehman, though not before, but then recover pretty quickly afterwards. I should have said, by the way, that except for events like the financial crisis, when the economy is going through a relatively calm period. These forecasts tend to be pretty good. It's not that they're random forecasts. They tend to be pretty good. People more or less understand how the economy works. It's precisely this neglect of risks associated with indebtedness and interconnected indebtedness of financial institutions that caused the forecast to be so far off. I think you also mentioned this follows sort of appropriately as the work of Haiman Minsky, because what you're (33/44)
citing in a sense is you're giving data that explains or that follows along Minsky's instability hypothesis. That's what you see in the expectations data. Expectations are pretty much in line with financial markets except when there is a change in market regime, when there is a sudden shift in the market. That's where, as you said, the Fed was actually revising their expectations up at the same time as markets began to tank. The Fed was clearly extremely late and extremely far behind in appreciating, but not just the Fed, the private sector forecasters as well, in understanding the building up of risk. Do you think that it will be possible, based on what you've done and what you think other researchers can do and will do, that we'll be able to get to a place where we can use survey data? First, how good is the data? How much better can the data get? How much does it have to rely on surveys? How much can it begin to rely on big data sets produced from search engines, social networks, et (34/44)
cetera? Other ways of extracting data about social mood, how good can the data get? Then how good can our models get where we can actually become better at forecasting financial crises? Is that something that is realistic? Let me answer this question in three steps. The first step is that I think even without better data and better models, I think if considerations of financial fragility became closer to the forefront of macroeconomic and policy discussions, it would be a better world. Financial fragility, you're not talking about expectations data now, you're talking about systemic risk? I say systemic risk, yes. Some of what you learn from systemic risk about is the existing expectations data, which is to say that if you look and people expect 10% growth in home prices or 15% growth at home prices, something is wrong. The Fed would tell you that that's too fuzzy and not quantitative enough. Our officials today would tell you that, I assume, right? Again, remember, I've tried to do it (35/44)
in three steps. The first thing is that the level, the sophistication of the conversation can be improved even with the existing data and models. One has to go outside of the existing data models, but it seems to me that you could have a better conversation even with the tools that we have. Second, it seems to me that, yes, absolutely, that we are at the beginning of transition of macroeconomics to more realistic models. I think the financial crisis of 2008 shook people up and they are much more open today. This is what you started with when you talked about behavioral macroeconomics and finance. They are much more open today than they would have been 10 years ago to the idea that we should introduce expectations both in terms of data and in terms of models into macroeconomic analysis. That is happening. I can tell you how fast it will happen. Of course, the third point is that it would normally take 20 years, even if we do have more sophisticated macroeconomic analysis, for that to be (36/44)
put into the formal Fed models and for the data to be created. If you think about rational expectations, the ideas came out in the 1970s and they were incorporated into the Fed model in the 1990s. Those things don't happen overnight, but we do have a lot of expectations data. They are not terrible. They are not perfect, but they are not terrible. A lot of people are beginning to collect more. I think in that respect, things are definitely looking up. From the data that you've been looking at, because you've put a lot of work in, obviously, to do this, what do you think about where we are today? Anecdotally, it seems that the markets are not responding as well to the same quality of good news today as they would have been six months ago. The case in point perhaps is the G20 with Trump and the Chinese. I don't know exactly if anybody knows what it is that they agreed on. There is a certain amount of fuzziness about it. The markets are obviously extremely nervous. Prices of risky assets (37/44)
are extremely high. There is a non-trivial chance that we're going to have substantial asset price deflation, particularly of risky assets, whether we're talking about sovereign debt or whether we're talking about risky corporate debt or whether we're talking about equities. All these markets appear to be in dangerous territory. The one thing that seems to be different in 2018, and that is thanks to policies that were introduced after the crisis, is that financial institutions appear to be financially in better shape than they were in 2007 and 2008. I think a lot of it is thanks to stress tests, which assuming that they have the integrity we think they have actually have played some role in shoring up the capital of the financial institutions. I think people are much more nervous about it than they were in 2007, 2008. I think from that side there's been a lot of progress. Because there's memory of the crisis. There is memory of the crisis. I think from that perspective things are much (38/44)
better than they used to be. With the caveat that we're assuming that there is some integrity to all these regulatory mechanisms. That's the sense in which the situation is. By the way, the situation is in some ways much more dangerous in Europe, where you have in various countries, populist parties that want to restructure debt and are thinking about leaving or changing the way in which the Euro mechanism works. Banks are much more vulnerable in Europe than they are in the United States. Because of the amount of sovereign debt they hold. Each other's debt they hold. Yes, Italian debt. Italian debt is a big one. How dangerous do you think the situation is with Italy, given the size of its bond market? The fact that these are countries again that are within an exchange rate mechanism within the European Monetary Union, which is something that's very different than the United States, which uses the US dollar and has been using the US dollar for at least 100 years under its current (39/44)
incarnation. Look again, when I answer these questions of what I distinguish the territory where I feel I know something of the territory where I think I'm making the same kind of gases and conjectures as anybody else. You have to think about Italy, whether the five-star movement actually means what it's as and whether the Northern League means what it's as or whether there is some kind of elaborate dance between the European community and Italy that is going to take us to the brink, but then everybody's going to walk away from the brink and make up and let Italians spend a little more money and everything is going to go back to normal. I have no particular insight into that matter. It would seem to me to be totally suicidal for Italy as a country to do things that are particularly aggressive with respect to its policies. But on the other hand, we're talking about extra spending of 2% of GDP, which is what they're fighting over, which seems to be a little trivial. I can't imagine that (40/44)
the European authorities are going to precipitate the collapse of the European monetary system over 2% spending by Italy. All the reasons suggest that they should agree, but sometimes reason doesn't govern. Exactly, which brings us back to rational expectations and the need to revamp our models around beliefs and guiding expectations. Before we end, I wonder, how has your research and that of your colleagues working in this field been received first by the private sector and second by public officials and regulators? Do you see a discrepancy there? Let me divide those two as you've divided them. I think that I've been working on behavioral finance and ideas related to behavioral finance for many decades. I think that those ideas have been effectively incorporated, absorbed into the thinking, into the private sector. These are not just my ideas, these ideas of many others. I think the private sector has very effectively absorbed behavioral finance. That doesn't mean that they've (41/44)
absorbed the newest staff. That's probably going to take a little longer, but I don't think that these ideas are things that people will find particularly disagreeable. I think I found the Fed to be both the current and former officials of the Fed to be a little more defensive. I sort of understand it, as I said and as I keep repeating, economic policy after Lehman was brilliant. There is a point of view that says, hey, we were brilliant after Lehman. Why do you want to pick on us about what happened before Lehman? It seems to me, for thinking about the future, for thinking about the policy in the future, we actually do need to get to the bottom of what happened after Lehman. I understand why they're irritated with my trying to stir this up or the book trying to stir this up because they think of themselves as saints for rescuing the free world. It seems to me that it's nonetheless important to figure this out. I think there are some discussions, sometimes more friendly, sometimes less (42/44)
friendly, but the truth is going to win out. Well that's always hoped for. Dr. Schleifer, I want to thank you for coming on the program. It's an interesting topic. As I mentioned at the top of the show, I don't think that the assertion that expectations and beliefs have a significant impact on markets is a controversial idea. But I think what makes this book most worth reading is that it's an attempt at modeling expectations data in a way that market participants and regulators can use in order to make better forecasts. I highly recommend it to anyone who's interested in learning more about what's happening at the leading edge of this field. I appreciate this very much. The book has a red cover, so it's a great Christmas present. And it's got a bull on it too. And your co-author is? Nicola Giannioli, who is a brilliant young man, who was a student of mine about 15 years ago at Harvard and has been a professor of economics in Italy for the last several years. So an Italian interruption. (43/44)
Thank you very much for coming on the program. Thank you. That was my episode with Andre Schleifer. I want to thank Andre for being on my program. Today's episode of Hidden Forces was recorded at Edge Studio in New York City. For more information about today's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you're a regular listener to the show, take a moment to review us on Apple Podcasts. Which review helps more people find the show and join our amazing community? Today's episode was produced by me and edited by Stryanus Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (44/44)
What's up everybody? My name is Demetrius Cofinas 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 guest in this episode of Hidden Forces is Adam Butler, the CIO of Resolve Asset Management, an alternative asset management firm that focuses on providing cutting edge, globally diversified, and systematic investment strategies that are non-correlated to traditional portfolios. In the first hour, Adam and I evaluate and explore the structural changes that our economy has undergone since the 2008 financial crisis, along with their consequences for market accountability, monetary policy, and the stability of our political economy, all in the context of discussing his approach to financial modeling and systematic investing. In the second hour, we engage in an expansive and valuable discussion about the mind-bending (1/45)
progress being made in artificial intelligence, how it's already disrupting multi-trillion dollar industries, the incredible promise that this technology holds, and the dangers that it poses to the stability of our economies and political systems. 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. 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&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 have questions, feel free to send an email to info at hiddenforces.io (2/45)
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 that should not be relied upon as the basis for financial decisions. And with that, please enjoy this incredibly expansive and invaluable conversation with my guest, Adam Butler. Adam Butler, welcome to Hidden Forces. It is so great and exciting to be here. We've had the chance to have a conversation in person and we've hosted you on our podcast, Resolve Riffs, and it's always been just really interesting and fulfilling. So excited to have this chat. Yes, you were at our Austin dinner along with many other very smart and interesting people. And I should mention this because I've never actually done this. I don't think I've ever, once, since we launched the Genius community in the two years that we've had it, ever cited a name (3/45)
of the people at the dinners. But I feel comfortable at this point doing that. I mean, just as an example for people to understand, our next dinner, which is in New York this week, the folks that will be there will be Philip Carlson Sleezak, Josh Wolf, Henry Olson, the political analyst, James Aitken, who was listening on the podcast, and a number of our really excellent members. And that's really how these dinners are. They're a mix of members and special invites. And you were one of the special invites to our Austin dinner. I love it, man. I love it. I try to always bring people in new faces. The conversations are great. They're always thematic. I don't remember what the theme to that dinner was, but the theme in New York is, understandably, about the upcoming elections and their impact on the economy and national security. Yeah, Lacey Hunt led the conversation at ours. And I mean, he just comes at the issues of fiscal profligacy and Fed response functions and R-Star and all kinds of (4/45)
stuff and a very unique frame. So he's always fabulous. It has sparked a tremendous conversation. And there were awesome contributions from the guests as well. Yeah, Kevin Coldiron was also there who has been on the podcast who wrote The Rise of Kerry. Marshall Kozlov, who hosts the Realignment podcast and is a really smart... I was about to say kid. I shouldn't call him kid because it almost sounds derogatory, but I mean it in the most endearing sense because he's a young, smart person. And so anyway, they're great. It was a lot of fun. I had fun catching up with you in person, but we'd already been in touch for years. I had been on your podcast some years ago and I deeply respect your... I've used this term Renaissance mind. And I'm very excited to have you on, Adam, because every now and then I bring people on the show who I feel like I can have a kind of almost off-the-record conversation with that's more casual, but nonetheless fruitful. And while I've structured an outline for (5/45)
our conversation and some of the things that I hope to speak about our AI, which you do a lot of work in, we'll get into that and the economy, et cetera, I'm sure we'll go all over the place, we'll rift. So just to start off, you're the CIO of Resolve Asset Management. What is Resolve? Resolve was founded in 2015. I've got two business partners, Mike and Rodrigo, and it grew out of a recognition after 2008 that the way that we've been thinking about the investment paradigm, which had largely been trying to sort of navigate the macro view using narratives and an understanding of the global economy and the different degrees of freedom and moving parts and just getting the really big calls so spectacularly wrong in 2008 and then a period of very unpleasant reflection around why was I so miscalibrated or why were we so miscalibrated in that? And it wasn't that we were miscalibrated about what was about to happen, what were the causes of the collapse, what were the local nex eye of that (6/45)
collapse. In other words, where was that risk most likely to manifest and when we actually got those calls right. But what we failed to do is recognize the capability of governments to step in and change the rules. So we ended up doing very, very well until governments stepped in and changed the mark to mark accounting rules and accelerated the quantitative easing. And we've been short all of those sectors and having a fantastic year. To be fair, I had some big commodity bets on. So it's not like we had a huge double digit year accruing because the commodity bets offset a lot of our bets against the banks, et cetera. But the unbelievable reversal that happened when they reversed the market accounting rules and introduced TARP and quantitative QE1, QE2, QE3 were extremely disorienting and disheartening. And that set us on a journey. And one of the individuals that was really a huge catalyst for my shifted thinking was Philip Tetlock, who I'm sure you're familiar with and is a great (7/45)
inspiration to me. But I happen to stumble on a lecture that he gave to the Long Now Foundation, I think back in 2009 on his book, Expert Political Judgment, where he described, first of all, the motivations for his experiment and then the data that he collected and what they discovered from parsing that data. So are you familiar with that book and that experiment? I'm familiar with super forecasting, but I may have been told about the experiment in other podcast interviews. But why don't you go ahead and tell me because it'll be useful and, of course, helpful for the audience. So Dr. Tetlock graduated, I think, with a master's or a PhD in psychology. He went to work in the intelligence community in DC. And as a starting analyst, he was charged with effectively being the secretary at meetings. So he would be taking notes on what these senior policy analysts, senior military analysts, senior politicians, etc. had to say about what they were observing in the Kremlin, the Polyboro, (8/45)
economic situations, etc. And then he would be responsible for reading out the minutes, a summary of the minutes at the next meetings. And what he observed was that there was virtually no correlation between what the senior analysts had forecast was going to happen and why and what actually happened over the subsequent months and quarters. And so he took this and went back to university and got sponsored to do this large study. So he recruited about 180 experts on average, about 16 years of experience across a wide variety of fields, economists, senior journalists, senior policy analysts, people working in the intelligence community, etc. And average level of educational attainment of master's level, so experts in their fields. And he asked them about 100 questions each over the course of about 10 or 12 years. So he accumulated about 18,000 answers. And he asked questions in a very specific way. So what do you expect to happen? And what is the probability that you assign to this (9/45)
expectation? So he was trying to measure not just the accuracy of people's forecasts, but also the calibration of people's level of confidence to their accuracy. So he's got 18,000 observations over this long period across a very wide variety of complex domains. Questions like, will the inflation rate in France rise above 3% or not? Russia, will the USSR expand their border in this direction? So very specific questions were very specific. And anyway, so all this data, he summarized the results. So some interesting counterintuitive things came out of this. Number one, people are not very good forecasters in their own domain of expertise. In fact, when he asked questions to experts outside of their domain of expertise, they tended to actually be both more accurate and more well calibrated than within their domain of expertise. The experts most likely to be cited in academic journals or appear on TV or in newspapers, less accurate and less well calibrated than those who toil in greater (10/45)
obscurity. There was not a single expert who demonstrated either an accuracy or a calibration above 50%. So in aggregate, we're not very good. But when you take the average of everybody's response, that was better than any single expert. And alongside this, he also ran some simple algorithms. So over the short term, things typically will revert to the mean. Over the long term, things will typically follow the same trend that we've observed over the last many years or decades. And these simple algorithmic approaches outperformed all of the individual experts, the aggregation of all experts, like the average of their views, and had an accuracy level that was greater than 50%. And by virtue of their design, were as well calibrated as you could be, because they were able to determine. When you say I performed all of the experts, I'm assuming you mean all of the experts across a wide range of questions that they're asked, right? Correct. Yeah. So the capability of the algorithmic approaches (11/45)
was they ran this, these algorithms against the humans on each of the questions, and then evaluated them both against the individuals and against the average views of all of the individuals. And the algorithmic approaches came out on top in all of these different metrics, right? So this was a really big wake up call to me who had been using more of a discretionary or clinical approach to forecasting and problem solving in markets, and led me down this path to systematic models and ensembles and machine learning and just as a way to measure the calibration of models on how they perform out of sample, that sort of thing. And so resolve really grew out of this recognition and our application of what started out being fairly simple models and grew into ensembles of simple models and then ensembles of slightly more complex models and expressed in a global macro context. In order to be bullish on the use of systematic passive investing strategies, do you need to necessarily trust that there (12/45)
will always be some sufficient number of discretionary investors? And is there some way of knowing what that number is? You need to assume that there is some proportion of less well-informed investors. I mean, there are bad models, just as there are bad human forecasters, right? So as I scan the infosphere in my domain, most models are bad models. I mean, the canon of empirical finance is littered with a statistical technique that doesn't actually give you any information about what to expect in the period after the experiment was conducted. Everything is in sample, right? And so to me, the biggest benefit of machine learning, and we could talk about how machine learning sort of blends into AI maybe at some point, but the benefit of machine learning is that it breaks a problem up into the data that you learn on, so the data that you calibrate your model on, and then the data that you hold out from that calibration process. And once you feel comfortable that you've calibrated the model (13/45)
to the best of your ability, you then apply it to this out-of-sample dataset to see what the true error rate is, to estimate what that error will be when you go to deploy this live, right? Whereas all of the empirical literature that originates largely out of the Chicago school way of thinking is all in sample, and there's no or not all, all is a big statement. But the majority of the canonical literature is based on in-sample testing exclusively, and so it doesn't really give you any information on what to expect out of sample or how to use the in-sample information to make better decisions on what models to deploy and with what confidence. And that's what I spend the last 15 to 20 years on of my life. I could talk about that at Nausium in whatever depth you might want, but the reality is that the world of finance is much more random, and it is much harder to select good strategies that will have expectancy to outperform out of sample than most people realize. And that's why we tend (14/45)
to really prioritize diversification in every dimension that you could possibly prioritize it. I don't know if you heard my conversation with Dohan Farmer on complexity economics. I did, yes. And he used agent-based simulations, but there's some crossover there with who we talked about in that episode and what you're talking about. So I definitely recommend people listen to that. So okay, then take me back now to the 2008 period, and as you said, you were well positioned for the crisis, but you were caught flat-footed or blindsided by the effect that policymakers had in changing the rules of the game. What was it specifically that you were unprepared for beyond the fact that you were unprepared for the changes? Was it that your theories of money and credit didn't reflect the new realities of how monetary policy and the monetary system worked? Or was it something more fundamental along the lines that we were just discussing, that your approach at modeling using statistical regressions (15/45)
and sampling from historical data was wrong? I think it was a little bit of everything. I think that my economic framework was overly simple, that I had gotten a major theme correct, and that had built some overconfidence. Like the emerging market commodity cycle theme, I had gotten very right for several years, and I started to maybe see too many things through that prism. And so there was a little bit of a miscalibration there. It was a failure of imagination around what the different tools the authorities could bring to bear if pressed to change the rules or change the trajectory or fundamentally just change the game. So I think it was a variety of different things. Eventually, it was just a recognition that, and I still hold this view generally to this day, that the economy is a complex adaptive system. It is emergent in every conceivable sense of the word and that it is not very fruitful to try and understand it or at least make decisions in markets on the basis of some clinical (16/45)
or narrative-based understanding of the underlying dynamics. It's just there are too many degrees of freedom, there are too many interactions, and those interactions are too complex and reflexive for any individual human. And I would argue any individual algorithm to be able to navigate. And our strategies use tens of thousands of different algorithms, all viewing markets from a slightly different angle. You've seen this image of the black hole. So that image is a computer synthesis that's an aggregation from a wide variety of different spectra and different ways of observing that black hole. Well, it's the same sort of thing. We're viewing markets through a wide variety of different spectra and then aggregating those signals to get a more fulsome view. And if you look at the Kaggle competitions, which are just these machine learning forecasting competitions, all of the top scoring teams now are using ensembles or meta ensembles of some kind. And it's just because you're trying to (17/45)
model highly complex systems. And so there's no single right way. And there's so much conditionality in the process of forecasting that some of your models are going to be well fit to certain conditions and others for different conditions. But on average, you're likely to converge on something that's better than. So it's this idea of the Gestalt, right? Where the hole ends up being better than the sum of the parts. Yeah, no, totally. I get that. I mean, the application of these models to finance is yet another area we can expect to see some potentially enormous benefits accrue as a result of the advancements happening in AI and machine learning that we're definitely going to talk about in the second hour. Did you ever hear my conversation with Gary Gerstle on the rise and fall of the neoliberal order? He's written a number of interesting books, two of which were relevant to the conversation. One was about the New Deal order and one was about the neoliberal order. And the conversation (18/45)
was about the breakdown of the neoliberal order and the move to something new. And so I think about that in the context of your befuddlement, mine as well, at the changing of the rules that occurred, our naivete at politicians' willingness to change rules that we thought were so bedrock and fundamental in domestic policy that impacted the economy in 2008. And I think we are now seeing something similar in the international arena. And speaking for me personally, I grew up, I mean, Gulf War I, which I identify as the commencement point for the New World Order and the internationalization of neoliberalism. This was of course, right after the fall of the Berlin Wall and the collapse of Soviet communism. I was 10 years old then. So I grew up in this world and I took many things for granted. And so my sensibilities were assaulted in 2008. And I think that in many ways, like we're living in the revenge of today in the world, the revenge of politics, the revenge of geopolitics, of national (19/45)
security, of more bedrock concerns upon which economies are built. That's the other thing that's also interesting. When you compare classical liberalism or libertarian thought or anarcho-capitalism with, I think, more accurate views of how the economy works, libertarians will often assume that economic relationships are more fundamental, when in fact, politics and power is more fundamental. And governments create rules of the road that set the conditions for which an economy can or cannot flourish. You know what I mean? What are your thoughts on that? Like, how does that relate to your experience and your insights? I think I went from a view that economies and markets were much more organic and unmanaged prior to 2008. And I think upon reflection that I was too naive about that going into 2008. And then of course, in 2008, we really were able to see just how managed and the types of tools that governments are able to bring to bear on markets and on economies. And over the last 15 years (20/45)
or so, we've seen more tools emerge. We've got these swap lines were put in place late in 2008. So you've got this Euro-dollar market that exists outside of the US. So basically any dollar that's originated at a bank outside of the US banking system is a Euro-dollar credit. So a bank in France makes a dollar loan to a French citizen. Well, prior to 2008, those dollar loans were not collateralized with dollar holdings. They're not collateralized with dollar holdings now either. But the banks were net short dollars against their Euro collateral prior to 2008. And in 2008, there was this huge dollar collateral call for which the global banks were not. They did not have the collateral, which mean they had to use their euros to go and buy dollars from the dollar system. And there was just a shortage of dollars. So the dollar rose tremendously. There was a shortage of high-quality collateral like T-bills and treasury bonds. And so there was a run on that. And so the Fed implemented these (21/45)
swap lines, which provided lines of credit to foreign banks. So they were able to provide them with effectively unlimited amounts of dollars as loans to fulfill their dollar liabilities. So I wasn't familiar with the Euro-dollar system prior to 2008. That wasn't really on my radar. But these swap lines, along with QE and all of the other tools that have been brought to bear, including now buying credit outright and buying ETFs of credit outright in the wake of the pandemic crash, they've just demonstrated the ability to move further and further into the realm of direct manipulation of public markets and prices. And I think we should all just acknowledge now that we operate within a fully managed financial system where the authorities have all of the tools necessary at their disposal to ensure that we never have a 2008-style crisis again. And even a recession or certainly recessionary conditions reflected in financial markets again. And so the big risks now don't really exist in the (22/45)
areas of the market that most people typically look. But rather, they're externalized to the political domain and to the social domain. So for example, the big risk that I see is at some point in the future, there will be a political party that will be put in place in Europe or in the US or like a major economy where the party will recognize the people's frustration and anger about various issues, one of them being that more and more people are feeling left out or feeling left behind and perceiving that the Fed is a major instrument of that, of propagating this accelerating gap, and will just decide to take away power from the Fed to use those tools on behalf of markets. And so this is now the type of thing that market participants need to price in, and they just don't break out in one direction or another. But when we do lose equilibrium, they break out fast and they break out to a much larger extent than they used to. And these real risks that could generally derail the economy and (23/45)
the financial markets are risks like the people wrestling control of the monetary system from the Fed, which is not on people's radar. Man, so much to respond to. I feel like there are two separate threads there. One is your realization about the euro-dollar market. And there, I want to point listeners to there are many episodes that we've done on the internationalization of the dollar, the dollar system, the euro-dollar system. But one in particular with Levin and about the evolution of the euro-dollar system is one I highly recommend because the dollar really is at its core, it's a denomination. It's a denomination. And French banks operating outside of the Federal Reserve System have the ability to issue dollar-based loans without actually secure collateral and gaining unlimited access to dollar swap lines gave them a lifeline where they didn't have one. And it's so important for understanding the strength of the dollar and why it goes up in these kinds of credit crises. I also (24/45)
recommended a conversation I had with Katarina Pistor about when Adam and I were talking about regulations and laws and how those really create the rules of the road that determine what kind of economy you get. She wrote an excellent book on that. We had a great conversation about it. And also further to your point, just to close off this thread and then go to the more interesting one about political instability, to your point about the authority's ability to arrest crises, just look at SVB. If SVB had happened in 2008, that would have been a full-blown crisis. But what did they do? They had a quick resolution for it and they tightened three more times. They raised interest rates three more times. So really great points. With respect to political instability, back in 2008 or 2009 or 2010 around that period, I had, I remember tweeting about this, which was that the way I thought of it then was that the suppression of financial volatility through QE and these constant interventions and (25/45)
forward guidance and the coddling of the yield curve was causing a buildup in political instability in the same way that and this is a metaphor and I hope it doesn't get too twisted, a functioning democracy like that of, say, the Italian Republic, which has seen the fall of countless coalition governments since World War II, when it's functioning well, has a lot of political volatility, but it has regime stability. Whereas, and this again would metaphorically apply to how we conduct monetary policy in 2008, a more managed political system like that of Iran has very little political volatility, but enormous, unqualifiably large amounts of regime instability. So I think you make a very great observation, which is that the choices we have made to quell the volatility in financial markets and kick the can down the road are now showing up in our politics. They're showing up in the reshaping of politics and the rise of populism, which is the population's attempt to circumvent the (26/45)
intermediary role of elites in shaping political outcomes. And lastly, just to emphasize one more thing you said about the dangers this poses to Fed independence, I think this is partly what you see in some of the solutions prescribed by practitioners of MMT, which include the abolition of Fed independence and the incorporation of central bank policymaking into treasury. Are you concerned about what that would mean in practice to lose Fed independence, nominal Fed independence, I should say, because at the limit central banks are not really independent? I think the context of how that happens is really important. So I think that the modern era of financial markets started either in 1987 or in 1998. In 1987, the Greenspan Fed, Greenspan had only been Fed chair for a few months, and he had to coordinate or he did end up coordinating this large response to the October 19 crash in 1987. And in doing so, introduced this concept of the Fed put, which was then crystallized in 1998, during (27/45)
what was originally called the Tye-Bot crisis and eventually reappeared as a schism in the Russian sovereign debt markets. And it turned out that this firm long-term capital management had been extremely long Russian debt against some other trades because they were a Stadar fund. And in order for Stadar funds and credit to be able to generate the size of returns that the partners expected, they need to take on a huge amount of leverage. So you have this massive amount of leverage on a bet that has gone horribly wrong. And who provides this leverage? Well, the major investment banks. And so since all these major investment banks are now so interconnected, they were in 1998, they're even more interconnected now, the Greenspan Fed identified that this could be a cascading financial catastrophe, and they stepped in and bailed out long-term capital management. There was another manifestation of this Fed put. And then we saw the real Fed put in 2008, which we've already hashed out. And so (28/45)
over this time period, what the Fed has done is they've conditioned investors to believe that they could take as much risk as they want, because when the chips are down, they will step in and do whatever it takes to save the financial system, preserve asset markets, and preserve the status quo. And as a function of that, financial markets, just seeing that there is no real risk in financial markets anymore, have scaled up the amount of leverage and the proportion of assets that are allocated to risky assets versus safer assets, like, for example, treasuries, to the highest ever. So for example, the proportion of household balance sheets that are allocated to equities today is at the highest level ever. So the reason for this is that the Fed has made an implicit promise, and not just the Fed, but global central banks, have made an implicit promise to the market that they will always be there to ensure that their wealth grows over time. And we've also changed legislation to accommodate (29/45)
this. So the legislation that they've introduced over the years, mandating default allocations to equity funds, to passive index funds, again, continue to perpetuate this by providing a constant bid to markets. And we can get into what some of those microstructure effects, if you want. So we've linked now the markets to virtually every dimension of our lives, right? Like, your healthcare is tied to your employer. Your employer's health is intertwined with the market, and the market now ends up being the tail that wags the economy dog because it's just so much larger than the economy. And because such a large proportion of the credit that is issued against the economy is not issued against future cash flows, but rather against collateral, right? So if you've already got capital, you've got access to cheap credit and basically as much as you want. If you don't have capital, then all the income in the world is not going to give you access to cheap credit, right? So you've got the Fed (30/45)
setting up a situation of intense moral hazard with this implicit promise, not just to the priests of finance and their banks and their hedge funds, but to the citizenry at large and tying it to their employment and to their health benefits, et cetera. So you've now got a Fed and a government that understand how to use the tools to effectively manage the economy and avoid recession and financial bear markets, et cetera. And you've got a citizenry that is conditioned to believe that they can be successful and will be successful with this. And so we've got this financialized economy, right? And I think this financialized economy over time has severely constrained the degrees of freedom that we have as governments, as central banks, as broader institutions to effectuate policy, because we can't really effectuate policy that might compromise growth, that might cause sustained inflation, et cetera, because the financial system is so overleveraged and so reliant on a nominal growth rate that (31/45)
exceeds the interest on the debt, that only the solution space that overlaps with those primary objectives can even possibly be considered. So just to summarize, one, would you agree with the framing that the stock market has gone from being a marketplace for allocating capital to more of a savings vehicle for ordinary Americans? Yes. Is that one way of summarizing what you said? And is the second way of summarizing it also that the US government has increasingly taken ownership over the performance of that savings vehicle? And so when things don't go well, they get the blame for it. Oh yeah, absolutely. It becomes a political problem. So does that explain, for example, in this most recent cycle, why, and this is a question I think I raised to James Aitken, why J Powell was late to raise and early to cut because there is a bias for number go up? Well, I think J is operating good faith. Look, we just don't have any real precedent for inflation over the last 30 years, right? And every (32/45)
time the Fed has become concerned about inflation over the last 30 years, they have become over vigilant. And I think many argue that they've actually caused financial crises. So I think J was being prudent in waiting. I think we can look back in retrospect and say, obviously, he was slow. Because there were many reasons to believe that inflation was an exogenous event driven by supply chains and other COVID related matters. Absolutely. I mean, there was a lot of narratives for why that inflation spiked the way it did. And I don't think that those debates are settled. I think we can maybe say that the inflation has been more transitory than many people feared. Whether we can attribute that to Fed policy or not, I'm not sure. But it definitely was more transitory than- You never bought into the argument that, by many people like Larry Summers, that whether or not the inflation was driven by primarily driven by exogenous factors, that it could become embedded through inflation (33/45)
expectations. That was, I think, one of the arguments for preemptive raising. Was that something that you never really bought into? Oh, yeah, absolutely. I mean, what is expectations? The expectations channel really mean, right? Well, it means that employees, the labor force is going to get up at about their demands for getting raises. Like, let's keep in mind, profit margins for U.S. corporations have been rising for the last 30 years and are currently at the highest they've ever been. Now, part of that is due to a change in the mix of companies in the S&P. We migrated from maybe more of an industrial base in 2008. Keep in mind, it was dominated by commodities, oil companies, and now it's dominated largely by tech. And tech has always enjoyed higher margins in other sectors. So some of its compositional. But anyway, you slice it, the private sector is currently operating at the highest margins ever. They have been operating at the highest margins. Maybe not the highest margins ever. I (34/45)
know there were periods back in the 40s and 50s when they had very high margins as well. But either way, we're at the very upper end of that channel. So there is room for the corporate sector to allow for some labor inflation. In other words, some increase in wages for labor to be capturing a larger percentage of the economic pie, which has been largely accruing to the corporate sector for the last 30, 40 years. But it is economic dogma that wages are part of somehow wages are part of our measures of inflation. But the prices of homes are not really and the prices of assets are definitely not. So our language and our policy and the way we measure things over time has really evolved to be just vastly preferential to capital over labor. And Larry Summers saying, well, the expectations channel is what we're really afraid of. That's largely a concern that labor is going to get up and start demanding higher wages. And that sort of fear of a wage spiral. It was a wage spiral along with a (35/45)
commodity scarcity that drove inflation, sustained inflation in the 1970s. And I think that there was a fear that we might repeat that cycle, though in reality, most of the elements that contributed to inflation in the 70s really weren't present and weren't primary factors that led to the spike in inflation in the recent episode. So let's take one of those, which is demographics. Obviously, today's demographics are less inflationary by the traditional way we think about the relationship between demographics and aging demographics and inflation. But when you take a more nuanced view and you consider the growth in public sector debt, the growth in unfunded liabilities, as well as people's expectations about the role of government in the economy, you could make the argument, as one of our previous guests, former chief economist for the Bank of England, Charles Goodhart has, that aging demographics and a rising dependency ratio will actually be inflationary because the government will need (36/45)
to print more money to finance the deficit along with interest payments on the debt in an environment of sluggish economic growth where the deflationary headwinds of globalization are also in retreat. I'm curious, one, are you familiar with that argument? And two, what do you think of it? I am. Yeah, I think so the argument goes that older people, they tend to have a larger proportion of the institutional alpha, just the understanding of the machinery that makes a business run. And so as these older people move out of the workforce and are replaced by younger people who are just beginning to learn the ropes and the institutional machinery that allow whatever organization that they've just entered to mobilize productivity, then we're just going to become less productive. And there may actually be a slight shift in headcount. So you may have just during certain periods of different overlaps of when these generational bubbles rise and fall, that there may actually be a period where the (37/45)
labor force itself may shrink just because more people are retiring than are entering the labor force. And therefore, you'll have effectively a labor scarcity a loss of the most productive element of the labor force at the same time. And this will cause a shift in the supply demand dynamics for labor and increase the cost of labor and thereby propagate inflation. Combined also with fiscal spending in the context of rising debt levels and rising interest costs. Yes, yeah, absolutely. I'm not sure that those two things have to be linked, but they certainly are linked at the moment. So do you have a view on whether we're moving into a period of secular inflation? Because there are, the opposite view of this is someone like Mike Green, who I think, I don't want to misrepresent his views, but until recently, I'm pretty sure at least his view was that the forces of deflation that were present during the long, great moderation period under Greenspan and Bernanke are still with us and that the (38/45)
inflation that we did see was in fact transitory. And that this is much to do about nothing. Again, I don't want to misrepresent Mike's views, but that's sort of the view that I've come away with. Where are you on that? Are you on the camp of deflationists or are you on the camp of someone like Goodheart or maybe like Russell Napier, who view it more as a structural inflationary environment driven in no small part by government fiscal spending? Yeah, so I know Mike quite well, we've discussed this at length. I'd say that I started out having a stronger confidence in sustained inflation and that my views have shifted to feel that we're likely have more moderate levels of inflation and potentially even a disinflation over the next decade. But a lot depends on things that are outside the economy. Like if we get a major escalation in the Russia-Ukraine conflict, if we get a major escalation in the conflict in the Middle East and it drags in the Saudis and the other Arab states, you can (39/45)
absolutely see situations where you get some sort of major commodity supply disruptions or other states of affairs that might produce substantial inflationary impulse. The Trump presidency potential is a huge wildcard. He has promised to raise tariffs on a variety of goods from already relatively high levels. Sidney is going to raise them four times. I think he said from 50% to 200% on this broad basket of goods, these kinds of policies can be very highly inflationary in the short term. So there's just a lot of moving parts. The natural state of the economy, if we can avoid major conflicts, if we can avoid major political and policy moves that run counter to the sort of neoliberal order that we have been following the trajectory of for the past 20 or 30 years, is disinflationary. A major conflagration with China obviously could be highly inflationary since we import so many goods. A major conflict involving Taiwan. Now I mean, think about the proportion of the economy that currently (40/45)
depends on AI or computational derivatives. That would obviously be a massive blow to the supply of global chips, global computation. So that has downstream effects. The Longshoreman strike, here's an example of political shock that could have very profound effects if, you know, we've solved that problem in the short term, but we've got to go back to the drawing board in mid-January and this could all fall apart. I wonder how would a Trump administration deal with the Longshoreman versus a Kamala administration? That actually has a very big impact. If we feel that Trump is unlikely to be conciliatory with the Longshoreman strike, then we should be ready for a protracted period of a major shutdown of global trade, at least through the world's largest global importer and consumer. And so that could be a pretty substantial inflation shock. So there's a number of dynamics, I think, that could, especially if one or more of them converge and happen at the same time, could really change the (41/45)
rules of the game. But the natural state of the economy is disinflationary, especially in a period where the Fed is managing the economy for, you know, relatively low rates and people are generally inclined to take large risks on uncertain technological bets. You know, it would be fascinating to see what would happen in a number of venues if Trump were to return into office. The Longshoreman strike is just one example, and that actually made me think about Ronald Reagan and the air traffic controller strike. I mean, it's hard to believe that he replaced all those air traffic controllers overnight. He just fired them on. I mean, I don't know how many there were, but that was an incredibly gutsy move that could have not worked out in his favor and it ended up working out. I just thought about how much more difficult is that to do that in this case? How many more Longshoremen are there? I don't know. Are there more? I mean, I presume there are. Well, yeah, I'm that sure with the coal (42/45)
miners, for sure. It would be interesting. So, look, Adam, I'm going to move us to the second hour, where we're going to transition our conversation to what I'm most interested in speaking with you about today, which is the remarkable progress that's being made every single day in AI, a field that you know quite a bit about and have devoted quite a bit of time to understanding as part of your work and also had a personal interest, I'd say. And I want to understand how, one, you're using this technology and just how exciting and also fraught with risk this revolution is. And I don't think there's any other way to put it. This feels like it's going to be on par with or more transformative to social, political, and economic life than even the Industrial Revolution was. So, there's a lot to discuss in terms of technology, the business opportunities, the risks to people's livelihoods and to society, and the efforts at regulating such a rapidly evolving field. For anyone who is new to the (43/45)
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 Adam, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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. Adam, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 Nicolao. (44/45)
For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinus and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Rick Ruhl, President and CEO of Sprott U.S. Holdings and Senior Managing Director of Sprott INC, a global alternative asset manager focused on precious metals and real assets, serving 200,000 clients with approximately $12 billion in assets under management worldwide. After spending most of the last decade in a period of prolonged underperformance, gold has spent the last two years on a tear, up 67% since September 2018. And with the exception of a sharp dip during the heights (1/45)
of the COVID-19 outbreak, the rise has been steep and more or less uninterrupted. My goal with today's episode is to introduce Hidden Forces listeners to this category, not just to gold, but to the entire natural resource industry. So admittedly, gold is at the very top of that list. To this point, we discuss gold both as a physical commodity, something that needs to be prospected, mined, extracted, refined and stored, and as an investment in the form of bullion, equities and derivatives. We also spend time in the regular episode discussing gold in philosophical terms. What is it? What is it that gives gold its value? Is it a hedge? Is it insurance? And if so, insurance against what? And is it possible to even think about gold without thinking about the macroeconomy, credit markets and ultimately people's faith in the institution of paper money? Other topics include the supply and demand side drivers of the gold price, what Rick sees in terms of changing institutional demand for gold, (2/45)
how the mining industry has changed over the last few decades, the relationship of gold to silver and where the silver market is trending, the use of public ledgers and blockchain related technologies in the precious metals industry and much, much more. For Hidden Forces listeners who are investors in the space, Rick and the team at Sprott have offered to review your natural resource portfolio free of charge, which you can send to them directly at SprottUSA.com slash rankings. And given that this is an investment related episode, I want to be absolutely clear that nothing that I say during the course of today's conversation 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. Lastly, I want to remind everyone that Hidden Forces is listener supported. We don't advertise. If you want to learn more about how to support the show and gain access to our premium (3/45)
overtime feed so you can listen to the second half of my conversation with Rick, download the transcript or read through the episode rundown. Head over to patreon.com slash Hidden Forces where you can learn all about it. And with that, please enjoy today's conversation with my guest, Rick Ruhl. Rick Ruhl, welcome to Hidden Forces. Pleasure to be with you. Thank you. No, the pleasure is all mine. It's great having you on the program. We're going to talk about a lot today. Obviously, gold is at the very top of that list, but you're someone who is in the natural resource space and you've been in the space for what, I think, close to four decades now? Embarrassingly, yes. If you start young and then live a long time, that's what happens. Yeah. So why don't you, for those of our listeners who may not be familiar with you or your background, maybe you could give us a sense of how you got started in this space in the natural resource and commodity business? I had an interest in natural (4/45)
resources and basic industries from a very young age, really from my teens. I was fascinated by geology, but also interested in forestry and agriculture. The only degree granting institution in North America that had a degree in natural resource finance was the University of British Columbia at that time. So I emigrated from the United States to Canada. I believe it was 1970. I've been principally interested in natural resource and precious metals, finance, and investing ever since. There have been times in my career when I have attempted to do natural resources and other businesses, but I understand resource-based businesses and financial services businesses fairly well. So with very few exceptions, I don't stray outside my area of expertise at all anymore. So what drew you to the industry in the first place? What was it that attracted you to it? Well, ironically as a young man, because I like to be out of doors, and I thought that geology, agriculture, forestry, things like that (5/45)
would take me out of doors. The consequence of my success in the business is I've been confined to a desk almost ever since. But I also like the certainty associated with resources. Coincidity is an interesting word because they're extremely cyclical. But one of the things I've learned over the course of my career is that in cyclical businesses like resources, bear markets, when everything feels bad, are the authors of bull markets when things are going to be good. And bull markets, when everything is going well, are the authors of bear markets. And so that one realization has served me well in the industry. I guess the third reason is I grew up in Silicon Valley, really, San Jose, California. And I remember hearing fairly early on 30 or 35 years ago that the median economic life expectancy of many technological innovations is 18 months before somebody builds a better one. And the idea that by the time I understood a business proposition that it would be irrelevant didn't strike me as (6/45)
a good thing. The business cycles associated with things like coal and paper and power and bricks have seemed to me to be easier to understand, not the same as easy, but easier to understand than other areas, particularly technologically related areas. So when you say they're cyclical, is that because they're so capital intensive? That's a great observation. That's one of the reasons that they're cyclical. They're also unusually centered around the business cycle. Because commodities as a consequence of technology are an increasingly small part of the total cost of a finished product, demand for commodities tends to be fairly insensitive to price. An example would be in platinum right now. It takes $125 worth of platinum in a catalytic converter to enable one to attain the emissions required to sell a 50 or $60,000 car. If the price of platinum doubled, it wouldn't change. The finished price of the car, so when auto sales go up, as an example, it can impact platinum demand. The price (7/45)
can go up without the fact that the price went up impacting the demand. So the prices of commodities vary really dramatically. Witness, as an example, crude oil prices over the last 30 years. That actually raised another question, which is maybe why you find yourself so much indoors, which is that the financial side of this industry is very interesting. I wonder to what degree as you spend time in the space, your interests shifted to the financial side. How interesting is that part of the business for you? I started really on the financial side rather than on the operating side. While all of the industry is of interest to me, I started my life as a career as a credit analyst. I was reasonably successful as a credit analyst, but in terms of employing it, necessarily, I guess you're employed indoors. You maybe are explaining an instrument to a bank. You're explaining a credit structure or a capital structure to an issuer. You're explaining the efficacy of an investment to an investor. (8/45)
The other thing that happened is that although very early in my career, when I couldn't afford any backup, I did a lot of my own technical work, which is to say I attempted to do my own geology. I attempted to do my own site visits. It became clear to me as soon as I could afford to hire somebody who was better than I technically and mercifully that happened fairly quickly, that everyone was served better. There were certain things that I could do that the geologists or the engineers couldn't do. There were certainly things that they could do, things that they could see that I couldn't see. Although I've always enjoyed the site visits and I've always learned a lot from them, the truth is that the highest and best use of my time is not necessarily on site visits, although I still do them from time to time. Principally, I guess to learn about the non-technical aspects of a company's culture, whether or not the safety culture is good, whether or not there is a feel of operational (9/45)
efficiency. Something as simple as whether or not the labor force is happy, smiling, approachable, proud, those types of things. It's also interesting because the nature of the natural resource business, depending on the commodity, can be extremely risky, both politically but also in terms of personal, physical safety, depending on where some of these mines are located, including in the case of gold. The focus today is on gold, or that's how I imagine it, but I also am very curious to not only how and where else Sprott invests, but also where your interests are. If there are any exciting prospects for the future of the natural resource industry that you're interested in, maybe water. I know you've talked about uranium before. I'm not sure to what a degree it's cyclical. I know that it took a hit with the Fukushima reactor that went offline in 2011 and then the depression of demand by Japan. Maybe you could tell our listeners to start, what are the buckets within the natural resource (10/45)
industry that Sprott invests and where your own interest area lies? In the very near term, which is to say the next 12 to 18 months, I think the easiest place to make money will be in precious metals. I believe that's a consequence of the policy response to the COVID-19 virus and the response to the slowdown in the economic recovery that we enjoyed for the 10 years prior to the year that we're in. By policy response, I mean quantitative easing, artificially low interest rates, debt and deficits. All of these things debase and destabilize various currencies, including the US dollar. Traditionally during periods of time, when people are concerned about the purchasing power of their fiat-denominated savings, particularly when real interest rates are negative, like they are now, precious metals have done well. I don't see any alternative for the powers that be, the big thinkers, if you will, in their own minds other than a continuation of fiscal policies that will be good for precious (11/45)
metals. My suspicion is that both the good money and the easy money in the near term will be made in precious metals. The next part of what I'm going to say is, for me, much more speculative, which is to say that I believe that COVID or no COVID, we were due for an unwinding of the economic recovery that we had enjoyed from 2009 to 2019. While I'm not an economist, a 10-year long economic recovery is, in my experience, one that's very long of tooth, particularly if you believe like me that that recovery was more due to artificial stimulus and artificial low interest rates than it was to an increase in productivity, an increase in trade or an increase in individual wealth. The combination of an unwinding of a decade of recovery punctuated by the global economic slowdown engendered by the virus, I think means that we are going to have a period of a softer economy. That isn't to say that we might not have an equities bull market. There seems to be a disconnect between Wall Street and Main (12/45)
Street. My belief is that the real economy worldwide will reset lower for a while. Recessions used to be an expectation, but the big thinkers in the world have tried to make recessions illegal. I don't think the markets care too much about what the big thinkers think. My own outlook is for a softer economy for three to four years. If I'm correct that we will have a softer economy, most of the natural resources sector, most basic materials, will continue weak for a while. The interesting thing about that is that I see it ultimately as an opportunity, not a near-term opportunity, but commodities have been priced below the total cost of production for some number of years. If that continues, you will balance supply and demand by reducing supply. As you mentioned, these businesses are capital intensive, so starting up that supply when supply tightness begins to come into account won't be an easy matter, which is by way of saying I think that natural resource investors in the next five (13/45)
years may very well enjoy two bull markets. The first one, which is underway in precious metals, and the second one, three years from now, four years from now, five years from now, surprisingly strong rebound, sort of like the rebound in the year 2000, 2001, across the whole range of industrial commodities. What sectors have been operating below cost of capital for the last few years that you're referencing? Certainly, uranium as an example. The International Energy Agency suggests that the fully loaded cost to produce a pound of uranium worldwide, including cost of capital, and importantly, adding back prior your write-downs where companies take them off the balance sheet, is about $60 a pound. You make the stuff for $60, and you sell it for $30. You lose $30 a pound, and of course, being miners, you try and make it up on volume. Tough thing to do. The consequence of that is that about half of worldwide uranium production is shut down, and it's difficult to restart these mines. When (14/45)
the price of uranium goes up, it will be a while before there's a supply response. But probably a more dramatic example is oil and gas. The same agency, International Energy Agency, suggests coincidentally that the price to produce a barrel of oil is somewhere between $50 and $60 a barrel. Again, not lifting cost, but total cost, including cost of capital. Again, you make the stuff for $60, and this time you sell it for $40 or $42. You lose $20, $25 a barrel, and at present, you're doing this 83, 84 million times a day. We have seen other circumstances where oil was priced below the cost of production for two or three or four years. It can do that because of stranded capital, so much money got invested during the good times. But eventually, low oil prices mean, as they mean today, much, much, much less sustaining capital investment and almost no new project investment. That impairs the ability of the industry to respond to developing tightness and an increase in oil prices by (15/45)
increasing production. They can't do it in the near term. Copper is a little illusory in the sense that it's very, very capital intensive, and there's a huge difference between cash production cost and total cost, which is to say full cycle exploration, all those things. But it's believed that the incentive price for a new copper mine worldwide is about $3.50 a pound. So right now, the industry is making copper for $2.80 a pound that would cost them $3.50 a pound to replace. In the last 15 years, as an example, the average head grade, that is to say, the percentage of copper in oars being mined, was around 1%. Today, it's about 1.5% of 1%. So we're setting ourselves up for a circumstance throughout a lot of industrial commodities, agricultural minerals, base metals, oil and gas, uranium. We're setting ourselves up for real supply shortages as the productive capacity begins to be cannibalized, and three years from now, four years from now, five years from now, as we go into a cyclical (16/45)
economic recovery. There are other commodities that are mispriced, where the market is out of kilter because of politics. My favorite one there is water. Water is to believe to be a right. And so water is allocated in most of the world politically rather than via markets. So you get circumstances as an example where water is used for such brilliant things as growing rice in the desert, like here in California. And eventually, there's going to be an ugly, ugly, ugly reckoning around the lack of capital investment in water and the lack of real markets in water. The only way that you can make really, really, really vast broad mistakes in the world is through politics. And I'm afraid here in California that we're making absolutely stupendous mistakes around water, which might be, at least for a while, of advantage economically. It's interesting. We actually spoke about this in 2012. And I believe at that time, you cited something like 85% of the water used in California was used by 3% of (17/45)
the population, which was the agricultural sector at the time. You have a good memory. Yeah. You have a good memory. That's correct. I don't know if it still is, but absolutely. I mean, that's a huge factor that we have in general across our economy where costs are seen as economic externalities and we can't accurately price them. The other thing I was thinking about when you were discussing oil and uranium, but especially with oil, is that these various commodities, some of them are inputs for other commodities. I mean, the classic example is like silver. Silver comes out as a byproduct of all these other industrial mining operations, but even gold, you need oil and you need water. So I wonder how much do these cycles influence each other? To do an accurate or a probabilistically accurate projection of where the price of any one particular commodity is going to be, how much is its price influenced or its projections influenced by the price or behavior or cyclicality of its inputs? (18/45)
Well, those are certainly issues. Certainly one of the things that has happened very recently, like in the last three or four months, has been the incredible increase in earnings performances of certain gold companies. Those are gold companies primarily located outside the United States where the product that they produce, gold, has been going up, but it's been going up also in a relatively strong commodity. While the prices of their inputs are denominated in Canadian dollars and Australian dollars is an example. So their input costs have been falling, but particularly their energy input costs have been falling. And energy, I mean, gold mining, well, all mining is a very energy intensive business. So the incredible decrease that we've seen in oil and natural gas prices has been a real boon to mining companies. So what you say is true. Traditionally, the largest costs associated with the resource industries have been, well, the largest variable cost, of course, is exploration. But the (19/45)
real costs are the cost of capital because it's a capital intensive business. And then the so-called social costs, social license, rent, tax, those types of things. And I could only wish those were cyclical. They only seem to go up. It seems that for most other sectors, the endogenous factors dominate in terms of determining price. But in the case of gold, it always seems that every conversation about gold really focuses on exogenous factors that drive the demand, like monetary policy, pandemics, QE, financial crises. I wonder with respect to gold, to what degree is its price determined by endogenous factors, which I imagine would be pretty much isolated to the supply side. And then how much of it is really exogenous forces that basically lead to conversations like the one we started this episode with, which are macroeconomic? In my experience, both are important. But because remember that gold is at once a consumer good in the form of high work index jewelry, and it's also money. So (20/45)
there are circumstances where the industry has done a relatively good job in promoting jewelry demand. And also there has been a slow motion economic recovery in societies that put a real premium on gold as adornment. I'm thinking India, Pakistan, places like that. But the variable with regards to gold has always been investment demand. And I would argue that the investment demand really is a function of two things. It's a function of faith in purchasing power of other savings instruments. And it's a function of real interest rates. If there are very, very high real interest rates, particularly high real interest rates in the world's reserve currency, the US dollar, then the default savings mechanism becomes the US 10-year treasury. If we have a circumstance like we have today where the real return on a 10-year treasury is negative 1% a year for 10 years, which is to say the US government solemnly swears to give you back less money in 10 years than you gave them, gold does well. So (21/45)
that raises another question for me. It's something I thought about when I sat down to put together the rundown for this episode because I haven't, in the three plus years now that I've been doing Hidden Forces, I haven't covered gold once, not once on the show. I mean peripherally. I've never done a single episode dedicated to gold. And I'm someone who owns gold. I've invested in gold. I want to be careful when I say I see its value. I think I see its value or maybe it's, you know, I see what I want to see. And so I'm also, as someone who has sought gold as a form of insurance, I'm also aware of the fact that I didn't always think of it as insurance. There was a time when I thought that it was a hedge against inflation, but I've since revised that perception. And I would think it would be very interesting to have now a bit of a philosophical discussion about what is gold and how do we measure its value? I'm curious, how would you answer that question? If I ask you what is gold and how (22/45)
we measure it, what would you say? Well first of all, I would praise you for describing it in the same fashion I see, which is to say as insurance. I mean, yes, it's many things more than that, but its value is subjective rather than objective. If you're an Indian national, as an example, the efficacy for gold, its value to you will be measured in savings in India as an example, rupiah related. Whereas in the United States, it would be US dollars related. And people need to pay different premiums for different amounts of insurance for different reasons if you follow me. The value is subjective. I mean, I have been interested in gold as an investment. I've been philosophically interested in gold for a very long time. And occasionally I ponder Buffett's description of it as a pet rock. The difference of course is that Buffett ignores 6,000 years of history. He ignores the fact that if you were a Vietnamese person at the end of the Vietnam War, you were either a prisoner or you had gold (23/45)
to pay to escape. He ignores the experience of the European Jewish diaspora. He ignores a lot. And so I am occasionally struck by the fact that there are psychological reasons for gold, maybe historical reasons. Why is it valuable? I mean, I understand that Aristotle described the reasons why it's money. You know, it has utility. It's pretty. It has a youth separate and apart from being money. It's malleable. It's durable. It's divisible. It's constant. All those things. It's wonderful money. But occasionally I too say what gives it its value? Is it also a faith based currency? So at the bottom of your question, the only thing that I can say is it has absolute function as money. It's perfectly designed to be money. What gives money value other than utility? And those become interesting questions. My temptation is to say history. I mean, certainly it can't be counterfeited, all those types of things. But behind all that, other than its luster, other than the fact that it does have (24/45)
utility as an adornment, why is it so efficient, both as a medium of exchange and as a store of value? And that's a very interesting question, one that I don't have an answer for. You kind of hit on exactly what I was contemplating when I was coming up with these questions. And I actually also thought about whether it's even possible to think about the value of gold or speculate about the price of gold without thinking about the value of or the faith in paper money, in the institution of paper money. That's right where I was going actually. We, you and I, denominate gold in US dollars. European people denominate it in euros. As Doug Casey famously says, the dollar is an IOU nothing. And the euro is a who owes you nothing. So you have a difficult time, nominator by the numerator, pardon me, if you're trying to value something in an instrument that is itself valueless, you have an interesting challenge. So I wonder there, maybe the next appropriate question would be, how would we go (25/45)
about trying to measure? It might be a fool's errand. I acknowledge that, but how might we try to go about measuring a population's or people's faith in the currency of the realm? I don't know the answer to that. I do suspect anecdotally that the increasing fondness that people have for gold is an expression of an increasing nervousness. Maybe not about the purchasing power of the dollar, but rather the maintenance of purchasing power of longer term US dollar denominated savings instruments. Because, you know, the, again, like it's been, I guess now about eight years, eight years, because it was July 26 when, when I last prepared any questions to ask you. And if you had asked me then what I would expect to have happened to the value of gold in the face of the balance sheet expansion that we've continued to see in the, in the year since, since that period, I would have been surprised. And so it's kind of an open question for me, what the drivers will be going forward, given the economic (26/45)
circumstances that we may very well see continued sluggish growth in the US. And yet there are, I think we've got a political setup that has greased the wheels of money printing, so to speak. And I wonder in that type of environment, are we describing, and again, because it gives me pause that a lot of other people feel this way, but are we looking at a kind of stagflationary period? And in that world, in the last time we had a situation like that, gold, I think, you actually, you'll know better than me, the returns, I think we're like 30% annualized over 10 years. But at the same time, we just got out of like a 10-year bull market in gold. So I'm curious what you think about that. I don't think that we have a replay in terms of gold performance of the decade of the 1970s, which was of course the decade of stagflation. Those were my formative economic years, so I remember them well. And the reason that I don't think that we have the replay is that we came into that decade with gold (27/45)
price controlled. It had been fixed by fiat at $35 an ounce. So it came into the decade selling for probably a third of what the free market price would have been at that point in time. But the rest of what you say, I think is reasonably prescient. It's interesting in terms of gold's place in the popular viewpoint that you say that you haven't done an article on gold for eight years. That's because I think your media product is something that you make a living on. And you probably thought for some period of time that there simply wasn't enough interest in gold to do an article on it. And I think that has a lot to do with everything. One of the reasons that bear markets get oversold and bull markets get overbought is that people use price action to justify a narrative. And sometimes the price of something goes up because it's going up and it goes down because it's going down. If you begin to get, as an example, nervous about the economy and you begin to develop an interest in the (28/45)
narrative around defense mechanisms, including gold, and the price goes up, the fact that it went up, that price action begins to justify the narrative. And while, as you suggest, the policy response over the last 10 years to the liquidity crisis of 2008 was stimulative, people wanted to believe as a consequence of 2001 and 2008 that the big thinkers of the world, the government people, had things under control, that they stickhandled or managed the world through difficult circumstances. So there was still confidence in the economy. When you, as an example, lowered interest rates, you at once lowered the cost of capital to corporate America, which helped earnings, at the same time that by reducing the amount of interest paid on savings deposits, you increased the attraction of dividend yields. So we had a disconnect between Wall Street and Main Street that continues today. And part of that, I think, was due to confidence. If we had something that shakes confidence, and my suspicion is (29/45)
that we are eroding confidence every day, gold becomes more attractive. But going back a little bit to the reason why you haven't seen fit, despite the fact that you own it to talk about it, we're still in a circumstance where almost nobody cares. You come out of the Agora realm, and I populate a very strange community of gold bugs. But the truth is that there was a study published a couple years ago, and I believe it was JPMorgan Chase, but I can't remember exactly who it was, a major U.S. investment house at any rate that suggested that the market share of precious metals and precious metals related securities was between 1 third of 1 percent and 1 half of 1 percent of savings and investment assets in the United States. And that the sort of three decade mean was somewhere between 1 and a half and 2 percent. So when I'm telling you that I think we have a two-year or three-year bull market in gold, I'm not suggesting a circumstance like the Agora copywriters used to write about 30 (30/45)
years ago, the collapse of the U.S. dollar in the ascendancy of gold, gold being the world's reserve currency, all that kind of stuff. I'm talking about a reversion to mean. I'm talking about gold's market share going from 1 half of 1 percent to 2 percent. But if it does that, demand for precious metals and precious metals related securities goes somewhere between three and four times as high in the largest savings and investment market in the world. And ironically, I think if you saw gold at some number like $3,000 an ounce, that despite the fact that most of the price catch up that had to take place would have taken place, in other words, when the price goes up, the absolute attraction of gold is less. The psychological attraction to gold will be higher. It's a self-reinforcing cycle. Yeah, yeah. Of allocation. That's what happened in the 70s. You know, there was, at the beginning of the decade of the 70s, there was an amazing argument for gold because of negative real interest rates (31/45)
or at least very low real interest rates. At the end of the decade, the U.S. 10-year treasury was yielding 15,6. And that high interest rate had slowed the economy. So the real interest rate then was, you know, sort of 6, 7 percent. At the same time that the incentive to own gold was the lowest, the interest in and the price for gold were highest because the price action gold up from $35 an ounce to $850 an ounce had in and of itself justified the narrative. Now, that's such a great point. You know, I've seen those numbers as well, actually. And, you know, further to your point, the impact on the gold price is at the margin. So it may seem like a small difference going from 0.5 percent or less than 0.5 percent to 1.5 to 2 percent, but that could be an enormous difference in price. And on top of that, I wonder to what degree you think we might see institutional buying because I think central banks now we're heading to the second decade of net purchases by central banks after having been (32/45)
net sellers beginning with some period in the 1990s. I wonder to what degree we might see that type of institutional buy-in and what impact would that have on the price? That's kind of two-part question. I can't speak to the central banks except for I could understand central banks from countries that have a problem with American hegemony in terms of the way they operate their economies and societies. And, you know, there are some countries that have an absolute incentive away from U.S. dollar holdings and in favor of gold as a way to reduce American political control over them. I get that. I can't really speak to central bank purchases. What I can tell you as a Sprott employee is that interest in gold among the largest institutional investors in the world, endowments, pension plans, even sovereign wealth funds is really coming alive. We were engaged, we meaning Sprott, as an institution for five or six or seven years in propagandizing global 1000 investors, those are the biggest 1000 (33/45)
investors in the world. And really it was an exercise in the wilderness for some period of time. Now we're taking incoming calls as opposed to making outgoing calls. The interest around big insurance companies, big pension plans and big endowments is very high and you can understand why. You know, think about an endowment with a sort of a 30-year point of view that puts, you know, 15% of their assets in U.S. tenure treasuries. They are absolutely, positively, without a doubt, guaranteed to lose 1% a year compounded over 10 years. Jim Grant describes that as return free risk. Yeah, he's great. Really, gold is competing with return free risk for those investors and that's not a very tough fight. Yeah, so that's also interesting because you guys are in a position to actually have some proprietary information flow there. You know, when was the last time that you saw this kind of uptake and interest that you can recall? In terms of the big, big, big allocators, which is to say the big (34/45)
pension funds and big endowments, the, well, the last time would have been the 70s and I didn't inhabit a part of the market where I had access to that information. This is new in my career. Really, more than, let's say, 2011? Absolutely. That's so interesting. Yeah, absolutely. When did that interest begin? When did you begin to notice it? 2000, 2019, about a year ago. Yeah. You know, the truth is that we had been selling gold as a diversification tool selling. We had been attempting to sell gold as a diversification tool to these large investors beginning about 2012. So we sort of joke internally that we've worked 10 years to be overnight successes and we had no response, but we're getting a lot of response to that pitch now. Is that, I mean, I guess it's kind of like asking the question, how do these institutional investors see gold as a portfolio diversifier? Do they see it taking the place of bonds or is it something kind of all its own? I think they're regarding it as a separate (35/45)
asset class. I actually think that the institutions that I have talked to have a very sober view of it. They're, of course, from my point of view, underweighted, but they regard it as an insurance class or some of them as non-correlated and volatile liquidity. How much do you think, well, I guess also, I also wonder what sort of institutional infrastructure and policy do these firms have in place? Are they already kind of there in a position they will handle this kind of inflow? And two, in the kind of mid-2000s when gold was beginning to hit its stride and when I say mid-2000s, I mean like 2004 or so during the last bull run, one of the arguments that you heard was the beginning of these ETFs like GLD and some of these other gold ETFs. And I think those were, I think 2004 was GLD and I think the iShares, iAU Gold Trust was 2005. But how important of a role does that play this time around since, for the most part, there hasn't been a huge, at least not proportional to ownership (36/45)
creation of new derivatives products in the space that I'm aware of? Well, GLD has been enormously helpful, I think, in terms of democratizing gold ownership. Gold has always been easy to buy and sell for those who developed the capacity to do it. But as all of the other aspects of our life become more securitized, the ability to hold gold surrogate products, which is to say ETFs and securities accounts, has made them broadly more accessible to many, many people. GLD, remember, started as a retail product and it was an enormously successful retail product. The very liquidity that it enjoys now means it's a great institutional product. If you are, you know, somebody like Norgis Bank, the Norwegian sovereign wealth fund, and you're responsible for a trillion dollar portfolio, if you want to take a 1% position in something, and I'm not suggesting that they are or are not long gold, I'm just using them to illustrate things, to get on and off a meaningful position if you're managing a (37/45)
trillion dollars is a real chore. The liquidity associated with the gold futures market has always been fantastic, but for various reasons, futures haven't been considered asset classes by some big institutional investors. But certainly GLD gives the largest investors in the world liquidity that they need to enter and exit seamlessly. It's been enormously important as a facility for the gold market. So what about gold equities? I guess one, what kind of interest are you seeing in equities? And when people talk about investing in gold equities, what do they mean? That would use up the whole interview. Well, we got time. So let's start at the beginning. Gold bull markets and even recoveries from oversold bottoms, which are much more frequent than gold bull markets, follow fairly predictable patterns over time. Gold moves first, the metal moves before the equities do the equities don't anticipate the move in the metal traditionally. And we saw that this time. Gold really... Why is that? (38/45)
Why don't they anticipate the move? I have my suspicions, but when gold is out of favor, it's normally so deeply out of favor that nobody gives a damn about the equities and they're not anticipating anything. They're just bored to it. When the metal moves, two things happen. The metal moving begins to stimulate interest in the whole topic. Gold was a forgotten asset class in the last decade. But the second thing that happens is six months, nine months after you've seen the move in the commodity price, you see the impact of that move first in the income statement, higher product prices generally swell margins. And then in the balance sheet, where the generation of cash begins to show up in the balance sheet, because gold is a cyclical commodity during periods of time in the gold market, when life is rough, which is to say when prices are low, the industry executives become extremely conservative. And that's important too, because in the beginning of a gold bull market, they don't do any (39/45)
stupid things with the inbound cash. I mean, later on, they can be counted on to make dumb acquisitions, to make dumb investment decisions. When the income increases too much and the free cash increases too much, the encouragement to be stupid becomes overwhelming and they do become stupid. But in the circumstance that we're in right now, margins increase, cash increases, the balance sheet increases, and the willingness to do something stupid after a bear market is fairly low. So there's this wonderful virtuous circle in the near term. Always the biggest and the best, the most liquid move first. The gold community itself has had their faith in themselves challenged in the bear market. And so even gold bugs, rather than going immediately for leverage, go to the finest, the biggest, the best, the most liquid equities, the guys with the most operating margin, the best balance sheets. What are we talking about there? I mean, large cap miners, for example? The barracks, the new months, the (40/45)
Franco's, the Wheatons, guys with very, very, very stout operating margins, stout balance sheets, New York Stock Exchange listings, lots of liquidity. What happens after that is a couple things. The valuation discrepancies between the best of the best and the rest begin to get extreme. With all of the money concentrated in the top of the sector, the trading liquidity and the share prices escalate there, but they get stuck down below. And two things happen. The early equity investors who came into the best of the best begin to look for relative value down the quality trail. At the same time, that value arbitrage begins to happen, which is to say that the best of the best enjoy a lower cost of capital, and they begin to look at doing takeovers with people who have unequal cost of capital. And so the equity rally begins to democratize. So you're saying capital goes directly into some of the juniors and then also some of the majors buy the juniors and M&A deals? Correct. Correct. And where (41/45)
are we in that cycle? Very early on. I mean, we've seen decent M&A, but most of the M&A has been horizontal M&A, which is to say people merging for strategic reasons or merging to get scale. But my suspicion is we've got another 18 months of very stout merger and acquisition markets and gold. So what have we seen in gold equities? Has there been a move at all? Is it very, very early? If I'm right about the direction of the gold price, and I think I am, then we're fairly early on. My friend Ross Beattie has said we're in a third or fourth inning of a game that's likely to go extra innings. Certainly the last six months, well, really, I guess the last nine months, you could say we've been in an equities bull market, but all the move at the beginning was concentrated on the great big guys. The last three months, we've seen a much broader based and much more explosive move. What's interesting this time is that in prior recoveries, gold would go from the ultra large caps to the large caps (42/45)
to the mid caps to the juniors, and then to the hyper juniors, you know, the sort of 50 million market cap explorers. Just in the last 60 days, we've seen an explosion in the hyper juniors, a real speculative explosion. And I don't know if this is Robin Hood money coming in. I mean, I don't know what it is. I've never seen a market that has democratized, gone from institutional to retail punter as fast as this market has. And that makes me a little nervous about a meaningful pullback in the near term. That's very interesting. You mean in equities or also in the price of bullion? In the equities. I think bullion has a real friend in Congress and the executive. Really, that's interesting. Well, I want to pick your brain more on that, Rick, as well as what we're seeing in equities, but we're going to move the second part of this conversation into the subscriber overtime. For anyone who is new to the program, Hidden Forces is listener supported. If you want to access the rest of this (43/45)
conversation, as well as the transcripts and rundowns, to each episode, head over to patreon.com slash hidden forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime fee to your phone so that you can continue to listen to these extra discussions, just like you listen to the regular podcast. Rick, stick around. We're going to move the second half of this conversation into the overtime. Great. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode (44/45)
was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (45/45)
What's up everybody? My name is Demetrius Grafinis 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 guest in this episode of Hidden Forces is financial journalist and economic historian Paul Blustein. Paul has written about economic issues for more than 40 years, first as a reporter at leading news organizations like The Wall Street Journal and The Washington Post, and later as the author of several critically acclaimed books, including a history of the 2001 Argentine debt crisis that I have often referenced on this podcast. His latest book, King Dollar, traces how the US dollar became the de facto currency for global trade, savings and investment, and examines what recent policy shifts in Washington and how they have been perceived abroad may mean for the future value and status of the greenback. Paul and I (1/45)
spend the first hour of our conversation exploring the story of the dollar's evolution from its role as a second class unit of account within its own hemisphere to becoming the most important and preeminent currency in all of human history. The second hour builds on that foundation as we speculate about what the future holds for dollar hegemony in a world characterized by growing trade protectionism, a breakdown in international cooperation, and a potentially irreparable loss of confidence among foreign investors in US leadership and in the strength and reliability of US capital markets. This could not be a time-lear conversation about a subject whose ramifications will continue to play out over many years if not decades to come. If you want access to all of it 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. All of our content here gives you access to our premium feed, which (2/45)
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&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 have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this extraordinarily timely and illuminating conversation with my guest Paul Bluestine. Paul Bluestine, welcome to Hidden Forces. Pleasure to be with you. Paul, this conversation is 14 years in the making because that's about the amount of time, just short by a few days I think, that you and I have been corresponding. I initially reached out to you during the Fukushima Daiichi nuclear facility disaster and I didn't know you were living in (3/45)
Japan at the time, but I had read and the money kept rolling in and out years earlier. This is of course a famous book you've written about the Argentine debt crisis in 2001, which was at the time and may still be the largest debt default in history, I don't know. And you had told me, you hadn't read anything on Argentina in a long time and so you thought it'd be better to introduce me to Desmond Lachman who was deputy director at the IMF and later at Salomon Smith Barney during the time of the collapse of the Argentine economy and the default on its sovereign debt, which I believe was about $100 billion or so or just under at the time. We continued to correspond in the years afterwards, but there was really no opportunity to talk about Argentina and that was the reason I'd reached out to you. And again, this is a book I've mentioned many times on the podcast before and we recently did a few episodes on Argentina and of course that book always factors into my understanding of the (4/45)
history of that country's economy in the last 100 years. Yeah, absolutely. And I know that that's a role that you've played for other people as well. I heard another podcast recently you did with the Mercatus Institute, David Beckworth, and he said the same thing and I was like, wow man, that's wild. Like David and I had the same experience where you had this impact on us years ago and I always love having people on the show who have impacted me or whose work has impacted me in the past, especially when I was younger. Because when you're younger, it's like whatever you read, it's like revelatory. So before we get into the conversation we're going to get into today about the dollar and your book King Dollar, which is about the preeminent role played by the US dollar in the world, its history and its future. I'd love to learn a little bit more about you and your own career and your progression. You've written for the Wall Street Journal and the Washington Post and a lot of other (5/45)
publications. You've authored so many books. So tell me a little bit about you and how did you get your start? Like what's your story? Well, I went to the University of Wisconsin. I was, I'm not from Wisconsin, but I was a pretty decent student there and then went off to Oxford University where I did a degree called Philosophy, Politics and Economics. And the way they teach economics at Oxford, it's extremely theoretical and highfalutin and they don't really talk about stocks and bonds. They talk about equity and debt. And when I finished there, I was thinking, what do I want to do? Well, all my friends were going to law school and I thought, well, I probably shouldn't do that. If everybody else is doing it, there might be a glut in the law business. And so I decided to try my hand at journalism. And my dreams of being the next Woodward and Bernstein were kind of thwarted because everyone wanted to do that if this was in the mid-70s. But because I studied economics, I was able to get a (6/45)
job at Forbes magazine. They hired me under the illusion that having studied economics at Oxford, I might know something about how the economy and companies actually worked. And anyway, from there, I went to the Wall Street Journal and began to put some of my economics training to some practice because I was covering the Federal Reserve and the Federal Budget and then moved from there to the Washington Post in the late 80s. That's my hometown paper. And just continued covering economics. I found it to be really rewarding. It's, you know, I didn't have quite the glamorous image that the White House reporters or the Style Section Party reporters had, but I enjoyed doing it. I enjoyed writing about stuff that people know is important but don't quite grasp intuitively. And so I was very gratified to hear what you said about how my book influenced you. There's nothing I like better than hearing from professors or students because my books are used in a number of university courses. I've (7/45)
been able to go on the internet and find them, you know, the syllabi on the internet. And there's nothing I like better than hearing from professors or students that, oh, you know, Bluestine's books were really popular with the, they hated the textbook, but, you know, those books brought these subjects alive and really helped people understand this, well, these hidden forces to coin a phrase. Indeed, yes, the hidden forces. So what excites you about the subject of money and finance? Would it try? I know that you were interested in journalism primarily, and so you kind of conveniently went into money and finance because you had this degree from Oxford in philosophy, politics, and economy, which by the way sounds super fascinating. I mean, you know, like so much of the way that we think about economics today has been built around these almost like, you know, Newtonian models, or at least that's how I learned it, Smithsonian economics. We didn't really learn political economy. We didn't (8/45)
study history in school. At least I didn't. So that sounds very fascinating, but you got into money and finance and you said you found the economy fascinating. So what was it that attracted you to this subject? Well, that's a good question. I mean, what's not to be fascinated and excited about? I suppose the more I got into it, the more crazy stuff was happening. I think, you know, particularly when I did my first book, my first book was about the Asian financial crisis in the late 1990s, the crisis that hit, you know, Korea, Thailand, first, well, first Thailand, then Indonesia, Korea, and then later Russia and Brazil. And looking back on that now, from the perspective that we have today, where, you know, we've already been through the global financial crisis of 2008, and COVID and all these other things that have happened. But that crisis really brought the world pretty close to the precipice. And I guess the transformative moment for me, I remember going to interview a guy at the (9/45)
IMF, his name is Jack Borman. He's sadly no longer with us. He was sort of the top, top ranking Michael civil servant at the IMF, not the managing director and deputy managing director, but the really top guy on the staff. And he had never been very forthcoming in interviews. He was very, I mean, as people at the IMF are very guarded and, and I asked him, how did you know that Korea was really in trouble? And he said, Oh my God, let me tell you, I was at my house, our beach house in Rehoboth Beach, Delaware, and we were expecting 24 people for Thanksgiving dinner. And this phone call came from our mission in Seoul saying, you know, the Koreans are almost, they're almost bankrupt. They're almost out of money, out of hard currency. Now, you know, we can get into the definition explanation of what that is. And I had to spend all day, this guy was telling me he had to spend all day on a conference call trying to figure out what the heck the IMF ought to do to rescue this, what was then the (10/45)
11th largest economy in the world from a default, which could have sent, you know, could really have sent the world into a quite dire situation. And then he said, but you know, and by the time I got downstairs, you know, all the dishes had been cleared away and the guests had gone and I said, and I said, I sat there and I said, wow. So Mr. Borman, I mean, are there like a whole bunch of other stories like that? And he said, oh, yeah, let me tell you. Oh, you got to interview Wanda Tseng, you got to go interview Hubert NICE, you got to, you know, and he gave me all these names of people who worked on this staff. And I said, gee, and I was walking back to the newsroom to the Washington Post from that interview when I thought to myself, yeah, there could be a pretty good book here, you know, this is really quite a man, I mean, this could be quite a yarn, right? So yeah, I've sort of been able to put books together as bad things have happened. There was that crisis, there was the Argentine (11/45)
crisis that you can't, you know, the book I did on that, the collapse of the World Trade negotiations a few years later, and the Euro crisis would happen with Greece and Ireland and so forth. So yeah, I just found it endlessly. I hate to say that I, you know, I enjoyed it. Clap my hands and yeah, you know, it's, you feel sorry for the people who suffer and people really do suffer and, but you just have to hope that by writing about it and informing the public debate about these things that those things won't happen quite as often. That's kind of the difficult line we walk, right? I mean, we live in this world, we don't want things to go haywire. At the same time, when things go haywire, it gives us something to write about, to think about, to talk about, and that's sort of our job. So I understand that feeling. So you mentioned that the South Koreans, who were at the time the 11th largest economy in the world, were out of hard currency. Of course, when we're talking about hard (12/45)
currency, we're really talking about primarily these dollars. Right. And so that brings us very conveniently to the subject of your new book, King Dollar. Let's talk about the book. So what would you say King Dollar is about? How would you describe that, in other words? Why did you write it? And why is the subject important in your view? Well, I got into it in, I think it was 2019, 2020. There was an awful lot of talk, partly because of the rise of cryptocurrency, partly because the US government was weaponizing the dollar, meaning, by which I mean it was either threatening or actually cutting off targets from access to the dollar system. And there was a lot of talk that the dollar might be, other actors would find all kinds of new currencies to replace the dollar. And also there was a lot of, I suppose, what you'd call the usual concern that, because the national debt was mounting and it was hard to see how the money supply could be kept under control, that the dollar would somehow (13/45)
lose its reserve currency Yeah, it would be debased. And so for all those reasons, there was a lot of speculation about, yeah, that it would lose its reserve currency status and that it would no longer have this special unique status that it has. And when you say reserve currency, of course, as you know, from reading the book, I try to be careful in saying that that's the reserve currency, that terminology really only refers to the dollars, a special status as the currency that's held by central banks around the world in their foreign currency reserves. It has about 60% of those dollar denominated securities. I count for about 60, but that's just the beginning of it. Its special status is the currency that is used in international commerce of all kinds, trade, finance, borrowing, hedging, all these ways which we can get into. And because there was this speculation about it, and I suppose cryptocurrency may have been really the trigger that, you know, because that was really when (14/45)
Bitcoin and the other cryptos were starting to have one of their many heydays, which have come and gone and come back now. So I thought, you know, this is a subject I know something about because I kind of lived it. I covered the Federal Reserve, I hate to date myself, but I covered the Federal Reserve in the late 1970s, early 80s when Paul Volcker, the towering literally because he was six foot seven, was chairman of the Fed and crushed inflation by really just putting the U.S. economy through the ringer. I covered that. I covered a story about, you know, how the bond market grew in the 70s. So I thought to myself, you know, I kind of know this stuff. I don't know at all, but there's a good book here. So I'm curious, let's maybe put a pin in this, but I'd be curious if we have time to ask you about how much of what we know about and the stories we tell about Paul Volcker, are stories that we've sort of manufactured over the years to create him into a mythic figure and how accurate and (15/45)
reflective those are of the man at the time. But let's put a pin in that. What I would want to do is actually start by building a foundation and spending some time going through the story of the dollars early years, its inception and development for being a unit of account set by the U.S. Mint to an obligation of the U.S. central bank, to its ascendancy as the world's default international currency. If you approach the member of the Continental Congress or a merchant or shopkeeper in Philadelphia in the late 1700s and ask him, what is a dollar? What is the answer that you would have gotten? Hmm, good question. Gosh. I mean, at that time, it was a pretty decentralized system. First, he'd probably ask you if you were talking about U.S. dollars or Spanish dollars. Yeah, well, yes. I'm not sure. But I guess what you're getting at is the fact that dollars were then just things that were issued by banks. And of course, there were coins of gold and silver that were issued by the government. (16/45)
There were Continentals that were issued by the Revolutionary Government. Where we got the phrase, not worth a Continental. Exactly. And there have been so many of them printed that they didn't hold their value. Is it fair to say that it was primarily a denomination? It was a unit of account. It was a relationship between gold and what the paper money would be, but all the paper monies were issued obviously by different banks because these were privately issued notes. Oh, yeah. I mean, those notes that were issued by banks, I mean, the banks were essentially saying, I promise to redeem. And this would be printed on the bank notes, on the bills. In such a bank, the classic bank of Newburgh, New York, I've Spick and Falls Bank of Michigan. I found a bunch of names from my book Allegheny Bank in Maryland. They would put print on their bills that they promised to redeem in speci in precious metal if that bill was presented to them. So in a sense, the bill was as good as gold, but traveling (17/45)
to those banks to redeem those notes was no small matter in those days. So as time went on, we're talking about the 19th century now, as time went on, there were questions that were logically arose, quite reasonably arose in people's minds about whether some of these banks really had the specie that they claimed they had. And in any event, you didn't know how good the regulation was of those banks and whether they would be solvent enough to be able to pay their liabilities. And although some banks were very reputable and their bills circulated at close to par, meaning like say a $5 note would really get you $5 worth of goods at any merchant's shop, there were other notes that if you presented a $5 bill, you might only get, I don't know, $4.25 or something worth. That's like one of the most fascinating things about reading history is you get kind of deeper down to the base layer of whatever it is. Today, we conflate, we synonymize the dollar with banknotes. We assume those two things (18/45)
are the same thing, but they're really not. Technically, they're not. I mean, when you pull dollars out of J.P. Morgan, you're actually taking J.P. Morgan bucks. But because of the way that the system has been centralized over the years, we've come to conflate those two. Can you tell me how that, what was the process by which that began to change and that the public began to conflate these two things, such that we live in a world today where the Federal Reserve note that we have in our pocket or the money that's in our bank account is for us dollars, universal dollars, and that's how we think of it. We don't think of it as banknotes or the obligations of the bank. Yeah, it's such a fascinating process. And it's something I really learned in the course of doing the book. It's not something I intuitively understood. And the really hugely important step was the creation of the Federal Reserve. The Federal Reserve Act signed into law in 1913 by President Woodrow Wilson. So it wasn't until (19/45)
then that America had a central bank. All the major European powers, Britain had the Bank of England, the French had the Bank de France, and so forth. And some great stories about how in the process of creating this central bank, American lawmakers went over to Europe to ask for advice about how to create one. And the Europeans said, just do it. I mean, it's so stupid that you're the world's now the world's biggest economy. Why don't you have it? Didn't they send Paul Warburg over there? Wasn't he sort of the guy that led the project? Yes, absolutely. Paul Warburg, who is really in some ways the most crucial figure, but Senator Aldrich and the other members of Congress who were eventually responsible for the legislation. But when you have a central bank, I mean, it's called that for a reason, because when you convert what is really private money, as you call it, JPMorgan Bucks, when you have money deposited at JPMorgan, it's just a liability of JPMorgan to you. Now, it's backed by law. (20/45)
If JPMorgan cannot make good on its obligation to you when you come to turn your deposit into paper bills and demand your money, then the federal regulators will descend on JPMorgan and close it. JPMorgan may not be a good example because it's too big to fail, but that's another story. Right. We also have an important distinction to make, which is that we have the official regulation, which offers limited backing by the FDIC and deposit insurance. But really, at this point, post-2008, there's a sense, certainly post-SVB, there's a sense that the government is just going to back up everything, all the deposits. Well, I mean, right. I guess what I would suggest is we put that aside in terms of the sort of more cosmic question you asked, which is why do we now think of a dollar as a dollar, whether it's deposited in a bank or in our wallets? And I argue in my book that it's a whole series of steps and a whole edifice and series of arrangements all backed by laws, regulations, in which we (21/45)
depend on the state to, partly it's a federal reserve, partly it's rule of law and the court system, which adjudicates disputes. When banks make loans, they know that the loans they hold are assets. And if the borrower doesn't repay, they could be forced into bankruptcy. That's all part of it. The federal reserve's commitment to maintain the more or less stable purchasing power of dollars, all of these things are crucial in the confidence that we have as ordinary consumers or as business people or whatever role in the economy we're playing in believing that the dollars that we, or the yen or the pounds or the euros, whatever, this is true for all economies, but it's since we're talking about the dollar, it is certainly true for the dollar. That is why we are confident that the JPMorgan bucks are exactly equivalent to those dollar bills that we can just pull out of our wallets and it says federal reserve note at the top. And another thing that it says on it is this note is legal tender (22/45)
for all obligations, public and private. That's the government saying, if you pay a debt, whether it's taxes or a debt owed under a contract using dollars and you satisfy the terms of the contract by paying in dollars, well then a court of law will deem that contract to have been fulfilled, which is not true if you say, well, I'll tell you what, I'll pay you in gold or Bitcoin or something else. That's not legal tender. So this whole edifice of laws and commitments that the state makes that give us as individuals or companies or lenders or borrowers or whatever, that the money that we are transacting in is good. Yeah, so there are two competing histories here. One is the history of the dollar's internationalization, which we're going to talk about. But we've been talking about so far as the history of the federalization of the dollar, which if it's not already obvious to people, this is a process that was not linear. It went through of course the period of wildcat banking, which was a (23/45)
step back from centralization after the second bank of the United States' charter expired. It wasn't renewed by Andrew Jackson. This is a famous story that I feel like people are learning about now, Nicholas Biddle and all this stuff. But one of the interesting parts of this history was after the passage of the Federal Reserve Act and it was passed in 1913 and the bank became operational in 1914, there was a process of selling regional banks into the system. I remember reading lectures that Paul Wohlberg was giving talks. He was going out to the country and trying to convince banks to join the system. There's a whole history here. It's just absolutely fascinating. I don't know if you know the answer to this question. I don't, which is why I'm asking it. Yeah, it's fine. But how long did it take for the vast majority of banks to join the Federal Reserve System? No, I don't know the answer to that question. But it was a voluntary thing. I mean, again, there was supposedly obviously a (24/45)
level of coercion as well in the sense that once the collective became large enough, you don't want to not be part of it. But it wasn't. It was a voluntary action. I recommend people listen to my episode with Levin and Ed, where we discuss some of this history as well as my episode with Perry Merling, where we cover more of the internationalization of the dollar. So there was this federalization aspect, the solidification of its role, the dollar's role in its place within U.S. borders. Because as we mentioned, we started this conversation, the Spanish dollar was the most widely used dollar in the Western Hemisphere. So eventually, the dollar became the currency as today, which we know, which is the global reserve asset, the currency that is used most widely in all private transactions. How long after the U.S. became the world's largest economy, did the U.S. dollar overtake the Great British Pound as the preferred currency of international trade and commerce, which was for many years (25/45)
the role that the dollar plays today? Oh, a long time. I mean, it's pretty clear that the U.S. became the world's largest economy around 1870. But because the U.S. financial system and monetary system was so defederalized, decentralized, as you were just pointing out, the period of wildcat banking was over by 1870. But there was still no central bank, and there was still no Federal Reserve. So it wasn't really until, I mean, it's hard to date exactly when the dollar overtook the pound. There's a lot of scholarship that's been done by Barry Eikengreen and other economic historians. It's quite interesting. But it's pretty clear that by the 1920s, the dollar was giving the pound a good shove aside because, you know, the Europe had been through the First World War. The U.S. by then did have a central bank. It had the Federal Reserve. And the Federal Reserve Act gave U.S. banks much greater liberty to have branches and subsidiaries and whatnot, not only within their own states, but outside (26/45)
of their own states and abroad as well. So the dollar was, the American banks were really barging into Europe by that point. But really, it wasn't, of course, as we all know, that period of the 20s was followed by a not so good decade, in which it really didn't matter whose currency was on top because so little international commerce was going on. But it was, you know, I think the point at which we can really say the dollar became the dominant global currency by international agreement was in 1944 at the Bretton Woods Conference. You know, that agreement is null and void today. It was dismantled later. But so, as I say, go from 1870 when the U.S. became the world's largest economy to 1944 when it was, U.S. was not only the world's largest economy by far, but clearly going to be the global hegemon following the Second World War. That's a long period of time, isn't it? So what are the major pieces of physical U.S. dollar infrastructure that we need to be aware of to understand how the (27/45)
system works? And can we rank them in importance? That's an interesting question. So I'm talking about things like the Swift system, chips, Fedwire, stuff like that. Yeah. Well, I would say the aspect of the hardware or the institutions that are least well appreciated is chips. You know, I write a good bit about chip system. The Clearing House Interbank Payment System. The Clearing House, Clearing House Interbank Payment System. Now, I'm not, you know, I'm not claiming any great revelations. It's not like I scooped, you know, did some great investigative reporting and told people about some institutions. Sure, but most people don't even know what this is. They wouldn't even know the acronym. So. Exactly. And you know, people have heard about Swift and it's partly because, you know, they're familiar that when they make an international payment, you know, they have to enter the Swift code. And they know that if a country or is disconnected from Swift, that it'll have difficulty doing (28/45)
international payments. Well, that's true. It'll be really inconvenient. But Swift is just a messaging system. It's important, but all it, what it does is it, when one bank transmits money, you know, across borders to another, it sends a message, say, you know, to confirm if this is what is happening. But you can do that in all kinds of ways. It used to be done by TELX machine. It used to be done and it can be done by email if necessary. I mean, I guess you want to make sure you use a very secure email system. But Swift doesn't actually transmit funds and it doesn't clear and settle funds. Chips is where funds are enormous amounts of dollars that cross international borders are cleared and settled. Now, Fedwire, which also, you know, handles a tremendous amount of clearing and settling, mostly handles domestic payments. For those familiar with crypto, I don't know if this analogy will resonate with you or if it's accurate, but it seems kind of like Fedwire is the base layer that (29/45)
everything reconciles to and that chips is the secondary layer that's actually available to process the vast majority of transactions. Everything settles on Fedwire because ultimately the dollar is a liability of the US central bank. But does that resonate? Does that make sense? Well, sort of. But chips, I mean, chips is a matching system, right? So the member banks are some, you know, the big, there's something like 40 banks and it's a private, it's a private network. It's not, it's not run by the government, right? But it's based in New York, it's subject to US law and that's incredibly important. And it's got all the biggest US banks in it, but it also has a lot of big foreign banks in it. And this is a crucial qualifier here. It's the US subsidiaries or branches of foreign banks and they are also subject to US law. And so, you know, these banks are handling, you know, just gigantic amounts of money and payments to each other on a daily basis. So if, you know, if, so if JP Morgan, (30/45)
you know, is getting, you know, $3 billion in payments from, you know, the Banco do Brazil or something like that. And if Paribas in France is getting $2 billion from Bank of Tokyo Mitsubishi or something. So then what CHIPS does is it says, okay, well, we'll match these payments so that if Bank of Tokyo Mitsubishi is an equivalent amount to Paribas in France, well, then we'll cancel those two. But of course, those two banks don't pay the exact same amount to each other every day, but we'll, we'll match the payments. They use this very sophisticated algorithm to do that. And but then of course, if there's some leftover, then we'll match the payments from that's leftover from Banco do Bank of Tokyo, and we'll match that against the amounts that Banco do Brazil owes to JP Morgan. And you know, I mean, I'm, I'm, there's a whole process of reconciliation. Yeah. Right. Right. That's what the algorithm does. It's very sophisticated. And what it does is it's basically canceling what one bank (31/45)
owes another against what the other bank owes to it. And then when they're, but of course, the two banks don't owe exactly the same amount to each other on any given day, but then other banks owe, owe amounts to the, to the first two banks that we're talking about. So these things all get canceled out in this very sophisticated algorithm that chips runs, and it handles more than 90% of the dollar payments that are made across borders. These are, you know, stupendously large amounts. Their last public disclosures are 540,000 transactions per day on average, 1.8 trillion in value. And since that's all subject to US law, the reason I'm saying, I'm emphasizing the importance of chips here, and the fact that all these foreign banks that are connected to chips are US subsidiaries also subject to US law, is that this is what gives the potency to US sanctions, because what the US government can say is if you, you foreign banks, you know, anywhere in the world, if you transact with someone we (32/45)
don't like, someone that we've targeted, we've designated as especially designated national, this is the term that the Treasury Department uses when it wants to sanction, if you do business with that bad guy, then you're cut off from chips. And that means you can't conduct international business. So this is, that's why I'm saying chips is, in my view, the most important piece of hardware. I like the way you put it. Yeah, I mean, to your point, it's, I don't know if you mentioned this, but all data processing backup sites for chips and Fedwire are located in the US, which is what gives the US jurisdictional authority. I don't know, I don't have the analogy at the top of mind, but there's something about the power of secondary sanctions. It's kind of like, it's almost like ethereal, like you don't want to be tainted with anything that could be remotely seen as going against US government policy and banks are so allergic to that possibility and so risk averse that they end up just cutting (33/45)
off entities or cutting off countries at the merest hint. And in fact, we saw that with Russia. I think even before the private sector was way ahead of the government in applying those secondary sanctions to entities doing business with Russia, because they were worried that if they, it wasn't worth their time. It wasn't worth their, it was from a risk awards standpoint, it wasn't worth it. Just get out of Russia, get out of dealing with these companies, because what if the US government decides to sanction them, et cetera, that's going to impact our business. So there's a private logic of its own that makes these sanctions and the fear of sanctions just really devastating for private entities and countries that are remotely impacted by them. Let's shift our attention now, Paul, to what has made the dollar. So we talk about the physical infrastructure, but there are other aspects of this that are more difficult to define, some of which we've kind of talked about, which is the (34/45)
credibility of US leadership or the legal system and things like this, that I think you would argue have made the dollar what it is today, which is the preeminent global currency and has made it successful in the face of the end of Bretton Woods and the end of gold backing. And I think some of the things that you focus in on the book are things like liquidity, credibility, crisis management, things like this. In chapter three of the book is organized as a sequence of stress tests and policy responses, including, as we said, the end of the Bretton Woods system of fixed exchange rates, things like the inflation spiral in the late 1970s, the super dollar cycle during the Reagan administration, and of course the great financial crisis among others. What do these examples tell us about not just the dollar's resiliency and its source of strength, but the tests that have turned it into the currency it is today? Yeah, I think at each of those junctures, there were all these predictions that, (35/45)
you know, okay, the dollar is doomed. And, you know, one of the, I hate to say one of the delights, I guess what I have to admit as a writer, you have to take some delight in finding fodder that will be, you know, useful in your writing. I kept coming across these predictions that people had made often quite distinguished economists. And, you know, people who were, you know, they weren't just kooks, they were quite legitimate scholars, and they had good reason to be making the kinds of claims that they were. And at each of these stages, each of those junctures that you may, okay, the, you know, the Nixon taking the, racing the last vestiges of the gold standard in 1971. And then the inflation, which, you know, was a really probably, you know, maybe the most serious threat, because when you have double digit inflation, and it seems to be racing out of control, why do people want to hold dollars? And, you know, then of course, the rise of the yen and the rise of the euro, which people, (36/45)
there were lots of predictions that those would supplant or at least seriously rival the dollar. And the global financial crisis, I would say was the one, you know, there was just so much of a, all right, we're done with this system. And there was quite legitimate the complaints about the dollar dominance at that point, because it had contributed to the crisis. And the world had seen how dangerous it is to depend on, you know, on a system in which one currency is dominant. So, but at each juncture, you know, we saw the importance of the unique advantage that the US and its currency and its financial system have, which is the depth and breadth and liquidity of the market for US government obligations, treasury bills, treasury bonds, treasury notes, right? The US doesn't have any unique advantages in terms of rule of law. I mean, Europe has that, Japan has that. It's not the only big economy in the world. Europe is a big economy. China is a big economy. Japan is still kind of a big (37/45)
economy. And, you know, the fact that the dollar has been the reserve currency for so long doesn't mean that it'll stay the reserve currency for so long, because after all the British pound was the reserve currency for a long time, and it, you know, gave way to the dollar. But no currency has ever been as dominant as the dollar is today. And no other currency on earth today has this feature of a, you know, one type of obligation that is so deep, so liquid, and with such a broad market because, and that's so crucial in a crisis, because everyone wants to be able to, they want to have an asset that they can convert to cash in a hurry. If they can't get cash in a hurry, can't pay their obligations, they're the next Lehman Brothers. And they also want to have an asset that they don't have to sell at fire sale prices and treasury obligations, because the market is so deep and broad. And, you know, we can talk about the exceptions, you know, there have been periods of time when the treasury (38/45)
market hasn't functioned so well, and we had that just a few days ago, but put that aside for a minute. I mean, that's the unique quality of the dollar. Well, that's where all this whole conversation is building to. It's building to today, which is my goal is to apply this framework and this foundation to that conversation on the second hour. Is the dollar's international status in your view something that's kept alive by the inertia of network effects? Or is it a policy that must be actively maintained by things like a credible anti-inflation policy by the Fed, a succession policy also, which is something that we'll have a chance to talk about in the second hour, the independence, in other words, the perceived independence of the Fed, a willingness to coordinate with other central banks when imbalances threaten the system, the use of things like swap lines, for example, unparalleled market liquidity, which you just got to not just in the dollar, but also in treasuries. And the Fed's (39/45)
readiness to backstop the world in extremis, which is the role it played in 2008. Well, I guess the answer to your question is yes and yes. So yes, both the private network effects of the infrastructure and the inertia, but also the active support of the US government and wanting the dollar to play that role. In other words, if the US stepped away and changed its policies, that would have a materially detrimental impact on the dollar's viability as an international currency. Well, I mean, the US has to really step away because the network effects are so powerful. I mean, as you know, the sort of the underlying premise of my book is that the dollars dominance, the special unique quality that it has in international commerce is almost impregnable, barring catastrophic missteps by the US government. And I'm of the view, I mean, okay, we'll come to the present day later in this discussion, but I'm of the view that many catastrophic missteps are being made, but are they catastrophic enough (40/45)
that the US is really stepping away so badly from the pillars and the foundations of dollar dominance that it really is at risk? I don't think so. But if the Federal Reserve were to announce, well, or if the US government were to announce, well, the Federal Reserve is not going to play the role in a global crisis that it has in the past, we're only going to provide swap lines to countries that we like and who play ball with us and who do what the President of the United States wants. I think that would seriously undermine confidence in the dollar, no question in its international role for all of these kinds of dire scenarios that people can come up with of the US government really stepping away from its commitments and from providing the foundations and underpinnings of dollar dominance. My answer always is, well, dollar dominance is important, but it's not nearly as important as avoiding these dire scenarios. I mean, just the other day in one of my presentations, someone said, well, (41/45)
what would it take? I mean, suppose we had an all out war with China. I mean, after all, it was the first and second world wars that brought down the pound. And my view as well, the first and second world wars were a lot more important and horrible than losing the dominance of the pound to Britain. If we have a war, that's going to be a lot more important than losing dollar dominance. I think it's also important to note that when we're talking about the role of the dollar, we're also, it's really about the role of the United States. I mean, the role of the United States certainly after the collapse of the Soviet Union and then the rise of neoliberalism and the broadening of globalization has been to play the role of guarantor of the international commercial and trading system. And the question I think that a lot of investors are asking themselves today and policymakers in other countries is, is the US government intent on smashing that system? And I think if it is, then that changes (42/45)
the calculus, I think, for people who in some sense might agree with you about the sources of dollar dominance. It might change the calculus that they have in their heads about the staying power of the dollar because it is important for the US to actually play a certain role in maintaining that system. And if it actually seeks to try to undermine it, well, then the question becomes, how long does it take and are we beginning to already see kind of the backlash that is emerging from some of these policies? Paul, I'm going to boost the second hour where I want to wrap up this part of the conversation. I also want to talk about some other things. When we talk a little bit about crypto, I want to get a little bit more specific here. Also, there's some conversations about CBDCs and things like this. And then I really want to talk about this fear or this risk of a cascading loss of confidence in Washington and the effect that that could have on the dollar, on US treasuries, and potentially a (43/45)
secular move out of US capital markets by investors. 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 to access the second hour of today's conversation with Paul, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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. Paul, stick around, we're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 (44/45)
page. Today's episode was produced by me and edited by Stylianos Nicolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinis and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
What's up everybody? I have some very exciting news to share with all of you. My friend and fellow podcaster Grant Williams and I have teamed up to launch a new podcast series we're calling the 100-Year Pivot. It's a joint effort based on a shared understanding that we are living through a once-in-a-century economic, political, and geopolitical reordering that will require us to develop novel maps and investment frameworks to help us navigate these incredibly consequential times. Over the course of the series, Grant and I will be speaking with the smartest, most plugged-in people we know to help us chart a path through this gathering storm as we seek to position ourselves, our organizations, our families, and our portfolios for the changes to come. Premium subscribers to the Hidden Forces podcast and the Grant Williams podcast will have early access to the episodes in this ongoing series. Go to hiddenforces.io-subscribe to access our premium feed, so the episodes in this series will (1/45)
download automatically to your mobile podcast app whenever we publish. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&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 have questions, feel free to send an email to infoathiddenforces.io 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 first in a long series of conversations on the 100-year pivot with my friend and co-host, Grant Williams. Welcome everybody to the first episode of the 100-year pivot. Joining me as co-host on this is my great mate and (2/45)
podcaster supreme, Dimitri Kofinas. Mate, how are you? I'm so happy that we're doing this. Yeah, yeah, we've talked about collaborating for quite some time and we never figure out what to do, right? But this little project of ours is something that's grown completely organically. We didn't sit down with a pad and pen and come up with some kind of great idea we could do. It just happened and I think that's such an important component of this whole idea. Yeah, and I love the name that we've chosen. I feel like that name resonated with both of us. We threw out a few titles when we were brainstorming over it. I think it was just the same day, within the same hour or so we came up with this name. And I feel like it really captures both the secular trends that are so powerful, the forces that I use that term for my show, whatever the analogous term that you use. You guys obviously talk about the end game with you and Bill Fleckenstein. And then the pivot, which I think is the actionable part (3/45)
that speaks to investors. Yeah, absolutely. And since we came up with the idea and the title, I mean, the pivots are happening left and right. There's so much to talk about. But I think it's worth, before we kind of just have a little look at the world now, it's worth us talking about what we aim to get out of these conversations. And the beauty of that is, as we said out, nothing, right? That's one of the beauties of it. We're like the Seinfeld of financial podcasts. Right, right. Yeah, the whole idea of this is to, we recognize there's something going on. And the conversation you and I recorded back in February, I'm sure your subscribers are the same, but mine resonated so strongly with them. And in a way that none of them were expecting. A lot of people said to me, I had the same paraphrased response so many times, I didn't even know that I was feeling this way until Dmitri articulated it so perfectly. And that feeling, that feeling sometimes you just have to follow those feelings (4/45)
and try and understand what's behind them. And that, I think, is really what we're trying to do here. Yeah, I agree. And I told you what I love about this also is that so many of my podcasts, my MO is like hardcore prep structure. And I love that we're going to do something that isn't that way. And quite frankly, some of the most popular podcasts I've ever released are the ones that haven't been structured. Because at the end of the day, people love, people, I think, don't even realize how much they respond to authentic conversations, where they feel like they're actually in the room. So I feel like we're going to be able to accomplish that here. And I'm very excited. I was telling you this as well, that there are people that, not only the people that you've interviewed, that I haven't, that we're going to be bringing on the show, but also there are people that I've interviewed, that I've really enjoyed talking to, that I don't necessarily want to speak to again. Because I feel like (5/45)
I've gotten most of what I want. But the idea of interviewing them with you now makes me so excited to speak with them again. Yeah, and the same goes for me. The beauty of this is that not only can these conversations go anywhere and be about any kind of subject that crops up, but my questions are going to lead to places that you want to explore and vice versa. And I think having this unstructured idea of, look, these people are thoughtful, interesting people who have perspectives that you and I are both interested in, where do they take us? Because the world is kind of unanchored at the moment. And so to have a chance to have these unstructured conversations, to just explore ideas and try and understand not just kind of what's happening, but how those shifts are happening, why those shifts are happening, and what it means to people. Because I think there's a, you spoke about this so beautifully, and this whole concept of yours of financial nihilism, captured it so well, this loss of (6/45)
meaning. This loss of meaning in financial markets, this loss of meaning of money, people being unmoored from any kind of grounded center, just leads to conversations. I've had plenty of them over dinner in the last couple of years of people. You go for a quick dinner and you end up three and a half hours later and two bottles of wine in, sitting there with your head in your hands, and how many of those conversations, and every single one of them has been profound. Yeah, I can't remember the name of the academic who's associated with the term the meaning crisis, but this is a term that we've heard bandied about quite a bit, especially since the pandemic. And I think that sentiment also filters into financial markets and to politics. And I think we are part of this 100-year pivot is about finding a new source of meaning and a new organizing principle in society. That's what we're sort of trying to figure out in real time. Yeah, I mean, look, it could come from any one of a number of (7/45)
directions. I published this piece in March with five essays from great friends of mine, many or all of whom will hopefully grace this podcast with us. And I gave them a very, very broad brief. I'd had conversations with them in the last year or so about the world and their thoughts on it. So I knew kind of that they were thinking along the same lines as I was in terms of trying to figure things out. But I gave them a very broad brief. So I'm not going to tell you what to write about. I want you to write about how you're feeling and how you see the world and how it makes you feel, not what makes you think. And, you know, it worked beautifully. I got five completely different essays back, each taking a very different line of attack for the problems that the world is facing. And, you know, when you put them together, it was an extraordinarily rounded set of ideas and also questions, you know, that leave you thinking, wow, what really is going on? And more importantly, how do I feel about (8/45)
it? I told you that I loved that entire, what would you call it? It was a newsletter, but they were individual essays. Yeah, just a collection of essays. That's all I know. That was really wonderful. And my favorite one was Rogers. And I told you that I had really spoke to me when he quoted Aveda, that line from Aveda, that I still need your love after all that I've done. And he asks, whose love? Yeah. Whose love do we need after all that we've done? And I think what he was referring to, if I remember correctly, was forgiveness and grace, the grace of God. And there is a sense in which we're going through a trial, a great trial as a people, as a country, as a nation, as a world. And it's going to shape the future profoundly, perhaps in the same way that World War II, the Depression, shaped the post-war generation and the war itself and all of that and the sacrifice, the collective sacrifices. You and I talked about, in fact, it's so interesting that you asked this question in the (9/45)
conversation we had, whatever it was, was it a couple of months ago grant? I don't remember when we recorded it. And you specifically asked, could a drop in the stock market cause that collective sense of sacrifice? And my initial reaction was like, not really, unless it was cataclysmic. It was so significant that it caused, it necessitated shared sacrifice. And I recently had a conversation with James Van Galen on the show where we talked about the possibility of a wealth-driven recession, a recession that's driven by a fall in the stock market that's so great that it has such a substantial impact on consumer spending because of the fact that the top 10% are responsible for 50% of consumer spending and because also baby boomers do so much to support their children. So there are knock-on effects. And then AI could accelerate that. So I think as I reflected on what you said in the last couple of weeks, I think there may be more truth to that. And we're sort of going to see that playing (10/45)
out potentially here with these tariffs that Trump imposed. Everyone's still trying to figure out how impactful they're going to be because we still live in a complicated internationalized global trade world, characterized by global trade. And so there are tons of prices that we can't quite figure out because it's not as simple as, you know, we slapped tariffs on China and their goods are going to get more expensive. They're importing parts and pieces and sending their goods onto other third-party nations that are assembling the piece. And so all of that together is something that no one could really quite figure out. There's so much uncertainty also in the supply chain and the rhetoric and then the policies of this administration. And so this feels like COVID in a sense, right? In the sense of like this just feels like uncharted territory. You know, it's really interesting that that answer you gave there was a microcosm of this podcast because you started off talking about Rogers' (11/45)
essay on religion and you ended up with tariffs, right? And supply chains. And that to me is fascinating because that's the strange thing that's happening here. And, you know, as I said in my, the letter I published and I said in our conversation, you know, I'm not a religious man, but there's a spiritual component to this. And I've been really struck by the kind of swell in talk about religion in private emails I've had and conversations that those letters and our conversation sparked. It's fascinating to me to see that this idea of religion and I don't necessarily mean it in the form of a God, but in the form of, as you said, some kind of moral center, some kind of compass that gives principles and ethics and morals and guidance and all that stuff. It feels like people are grasping for it and to go from there to supply chains in the space of a few minutes just shows you how close all this is. And I think how at sea everybody is in trying to figure all this stuff out. And, you know, (12/45)
some of the people we've got lined up when I went through those five essays, there was one thread that ran right the way through them, one reference that was made by each of the five authors, which didn't come as a surprise to me, but I think it's very telling. And that was our mutual friend, Neil Howes and Bill Strauss's book, The Fourth Turning. You know, this idea of a fourth turning and all that it brings in terms of the things we talked about and morals and ethics and principles, that kind of stuff. It ran through that letter like a seam of gold through a rock. You know, it was really, really interesting and we're going to have Neil join us on the podcast. It's one of our first couple of guests to talk about that. And I'm curious to hear your thoughts on that as a starting point for this kind of exploration of ours. I mean, it's right there in the name too, right? Yeah. I think Neil's generational cycles are 80 to 100 years roughly. I think he's a perfect guest to start this (13/45)
because I think when you study enough history, and I am by no means a historian, there are many people who I follow who I would consider to be people that actually have studied history. But from my superficial understanding of history, there is so much about this time that just feels resonant. It feels like we're playing out something that's happened many times before. And there are many shocking similarities to the 1930s, you know, with these trade wars and the potential capital wars and the breakdown of the global order. So I think having on a historian like Neil, who's also developed a framework that tries to put some of that history into a kind of rhythmic order is a very appropriate first episode for this series. Yeah, I think so too. And it's funny, you know, I read that book, I don't know, maybe 15 years or something like that. And I found it profoundly interesting and thought provoking at the time. But it's funny with that in the back of my mind, there have been a few things (14/45)
along the last 15 years that have, I've kind of added and added and added as a way to various lenses to look through things. And that has definitely been one of them. And I've talked about this before you brought up the Great Depression and World War Two and all these echoes throughout history around the last fourth turning. And you know, what's fascinating to me is, you know, when I grew up in the UK at school, history was my favorite subject and we, we learned about World War Two and the lead up to World War Two and that was a big focus of history in England, obviously it would have been. And from that day to literally a few years ago, the piece that I could never really understand properly, even though you kind of read about it, I could never really understand it was, you think about how could society reach a point where someone like Hitler could be elected, elected, you know, not, this is not someone who stole power, this is this guy was elected a landslide. And I could never (15/45)
really put myself in that place to understand it. And I listened to podcasts called the rest is history, which which I really, really enjoy and they did a little five part mini series about the rise of the Nazi party and 1920s and 30s in Germany. And, and that brought this period to life. And going into it, not understanding how it could happen. I came out of that thinking, how could it not have happened. And I think that's the important thing for all of us today is to understand the times we're living through are going to be written about for hundreds of years to come. This is a period of time that is changing the entire way the world works. It's changing every relationship in the world, not just between countries, but between generations and between classes and between everything is up for grabs here. And we talk about in our little corner of the world of financial world, we talk about the system being reset and all this stuff and it's kind of a throw away phrase because we're (16/45)
talking about the monetary system or the financials. We don't really know what we're talking about. We just recognize that things are shifting. And for me, as we go through this journey together, you and I, along with our guests, I think the things I'm trying to really put into place is to help people gain. The perspective that they will get in 20 years, but try and get it now by looking backwards. I think with Churchill it said the further back you look, the farther forward you can see. And I think that's such an important concept. So hopefully in these conversations, we can bring ideas and bring thoughts and bring perspectives to the table that will help people in real time gather a much bigger understanding rather than having their heads in the chaos and not being able to step back far enough to see. Yeah, I love that. Actually, I recently stepped away from Twitter and it's been so good for not just my mental health, but also I think also for my ability to do exactly what you're (17/45)
describing because it's so easy to get caught up in the noise and now see the big picture. And I think, you know, when we were talking with Neil about doing the show, we were also talking with Russell Napier who you and I agree has just been... Look, my personal perspective is that when it comes to finance and political economy, there is no one who I have followed these years who has nailed it better in terms of creating the most coherent, complete and accurate framework than Russell Napier. Agreed. And to that point, I was saying to both Neil and Russell that when I started the Hidden Forces podcast, my goal was to try and understand the forces that are impacting the epiphenomena of the world. And we talk about this all the time in markets, you know, what's driving the market. Everyone, no one knows and you're always trying to extract. We're even talking about this with the case of the supply chains and no one knows actually what the impact is going to be. The problem is very clear. (18/45)
Tariffs, rising in cost of imported goods. Why can't we figure it out? Because it's a complex system and markets as a whole are even more complex. And I said something to you guys in an email, which actually I want to give credit to Tim O'Reilly, who inspired this with an episode that we had done. It was sort of a combination of something he had written in his book about the future. It was a book about map making. And what I said was that I feel like, and this applies to the series, what I think I hope to accomplish with this series, is that we are able to draw for our listeners a map to the future by helping us all. Collectively, not just helping them, but you and I are trying to figure this out in real time and we're never going to quite know. We're just kind of trying to figure it out by understanding the forces that are shaping the present. And I think that's the thing that the people, and for me, that means developing a framework, developing maps. And for me, what that has meant (19/45)
in practice is trying to find the people that have developed either the most accurate map or some map of the territory that is illuminating, that creates that aha moment. And folks like Neil Howe have done that with his generational cycles theory. Russell Napier has done that with national capitalism. And there are others, many of whom I've mentioned to you in an email. I even mentioned one who I don't know if she's necessarily for us, but I think it's a great example, again, of this for people to have a sense. When I had Shoshana Zuboff on my show back, this was a long time ago. I think it was episode 79, so this would have been 2018 or 2019, and she wrote her book, Surveillance Capitalism. Yeah, at that time, nobody, I mean, I had read some folks like Sherry Turkle who had done great work. She had written a book called Alone Together where she talked about what was going on back in 2013 with social media. But no one had quite nailed it in developing this framework that helped to (20/45)
really explain to folks what was going on. What were the forces that were driving the changes that we were experiencing and putting into a coherent framework? And I think for our listeners, I'm sure this is true for you, and I know this is true for my listeners as well. My listeners enjoy when they are able to understand something. I'm that way too, right? If you illuminate something for me, if I'm staring at a problem for whatever period of time, a month, a year, 10 years, and someone comes along and they drop something in front of me that suddenly changes, something shifts in my understanding. It's kind of like moving a three-dimensional object in space. You're seeing only a two-dimensional version of that object. All of a sudden, you shift it and you see what it is. And that is such a powerful experience. And it's not just valuable from an investment standpoint, it's also just deeply gratifying. And I hope that we can accomplish that with the show. In fact, that to me is what I'm (21/45)
most excited about about this program, Grant, is that you and I together will be able to bring on the people that we feel are the highest signal to noise ratio folks and sit down and speak with them and, in a sense, through a series, expose our listeners to those people who, over the years, we have found to be the most valuable teachers. At least that is how I feel. Yeah, the beauty of this for me, Dmitry, is that I come into this with only questions. I don't have answers. I have thoughts and I have perspectives, but really, I just have questions at the moment. And I think it's funny you talked about that three-dimensional object. And I was looking at thinking about this and what we were going to do over the last several weeks. And in my timeline popped up one of those terrific pictures that are taken from the air. It looks like a drone shot, but of animals in a desert walking. And you see, it looks like a big shadow and then it says, zoom in. You can actually see that it looks like (22/45)
animals. This was zebras in this case. It looks like a whole herd of zebras. But when you zoom in and look closely, it's the shadows of the zebras and the zebras are there. And what you just said just brought that back to me about reexamining this 3D object in space. And it's that. I don't even know what my questions are at the moment. All I know is I feel this great sense of uncertainty and this great sense of unpredictability in the world. And everywhere you go, particularly this last week has been a perfect example of this, you're surrounded by such faux certainty. Everybody is certain about everything. Everybody will tell you exactly what these tariffs are going to mean, exactly what is going to happen in markets. And it's utter nonsense. From day one, we're guessing about the future. So you cannot be certain. It's a physical impossibility. So I think this idea that we can just ask questions and just go where those answers take us. And that could mean with that same guest or it (23/45)
might lead us to another guest or it might lead us down a completely different avenue. And I have no idea where that's taking us. And I cannot tell you how thrilling I find that idea. Me too, man. Like I said, I love again, for me, my podcast so often, not always, but so often is this like structured teaching experience where I do a deep dive on a guest or a topic. And I try to extract ahead of time what I think the most interesting things are. And then I create a kind of outline so we can explore those things so I can share those things with the audience. In this case, what I find especially exciting is that I feel like this is going to be a much more inclusive experience. This is going to be much more about like, hey, why don't you come and join us for this conversation as we all try and figure this out together. And the fact that there's going to be less sort of conscious preparation, I think is a big part of it. So again, I can't emphasize how excited I am, man. This is really (24/45)
going to be an incredible journey. Well, we talked about Neil and the importance that he's had for both of us in trying to figure this out. Talk a little bit more about Russell because as you said, you and I both come at this from the financial world. That was our route into this whole podcasting space. But you touched on it a minute ago. Russell has been absolutely spot on in just about everything he said. And that's why he's probably going to be the second guest in the series to use that as a framework. Well, I can't bring up Russell without first just mentioning that you introduced us. And I have to say, again, it's just important to point out that I think this project is possible because of how generous you are. And you are, and I don't want to go do the whole congratulating each other thing where people do that on podcasts. But you're a very generous person, Grant, and you've been very generous to not just me, but all sorts of folks with your network. So Russell's an example of (25/45)
that. I met Russell through you. I'm sure what probably happened was I heard him on a podcast episode and I reached out and said, hey, any chance you can introduce me? Because he's just, and he first came on for an episode on the Asian financial crisis. You know, he had written a book about his experience in Hong Kong through the Asian financial crisis. And I believe it was, the book was diary entries from 1995 to the height and resolution of the crisis, maybe 95 to 98. And I mentioned that first because that was the way that I was exposed to Russell. I was exposed to his methodology. I was exposed to how he thinks. One of the things I really love about Russell, and I look for this in all the high signal to noise ratio people that I identify, there's a process for coming to an understanding. And part of that process involves a baseline level of humility. Now, what I also love about Russell, and the reason I bring this up actually in the context of the Asian financial crisis is because (26/45)
he was looking at his diary entries. He went back and published and analyzed what he thought at the time. Not what he thinks he thought now, but actually what he thought at the time, what he was saying, what he was writing. And that is a level of accountability that I think is something we should all strive for. And it comes across in the quality of his analysis. The other thing I love about Russell is that he's a historian. Again, I don't think it's a coincidence that we're picking two historians. And in fact, you know, I put together a list of names that I shared with you about some people that I think might be interesting guests to have on. And there are certainly historians in there. And of course, Russell's the keeper of the quote, library of mistakes, a library of financial mistakes. And I can't tell you how much I've, like I said, I've gotten so much value from him. I also love that. And I think this is really important to Grant. I'm trying to think about where I recently spoke (27/45)
with someone about this. But in any case, you know, this, let's go back to this thing about frameworks. Ah, right. It was a conversation I had with George Friedman where this came up. So this is the thing about frameworks, right? Actually, you know, you know that I'm a father. I recently became a father. My son's now seven months or something. And there's been something really magical about watching him awaken. You know, like there's a kind of awakening that happens with every day that he grows older. And what I also noticed, and I knew this already. So I already had a quote framework around how this works in childhood development. But you can see that he went from being born where everything is just stimuli. Yeah. Unstructured streams of information, colors, light sounds. He has no way to say that sound, oh, that's an elephant, you know, or that's a door. All he sees is some sort of like, you know, just overflow of information. And what I've read about this incidentally is that it's (28/45)
somewhat like being on psychedelics or having a stroke in your left hemisphere. You know, it's like you just lose the ability to have any kind of, everything just kind of melts into each other. And I feel like what happens as we get older is we bring structure to experience. We structure the world around us. And that's what these frameworks are about. We need the frameworks. We need frameworks to navigate the world. You know, this also brings us back to questions about God and all else, which is that reality is not as it seems to be, right? Because so much of what we do is we bring order to experience. We structure the reality that this chaotic world of information that comes at us so that we can navigate it. But the maps we use to navigate it should not be confused with the territory. And as we get older, we develop these maps and some of us get exceptionally wedded to those maps. And what I think is so special about this series is that what we're doing is we're breaking, we're (29/45)
acknowledging that those maps no longer work and that we shouldn't be attached to them as though they are the territory. And the people, and this is my favorite quote by Russell, is that the worst thing you can do, and I'm paraphrasing now, he doesn't say this exact thing. He does say that the worst thing you can do, but the worst thing you can do in sort of periods of great change, the kind of change that we're talking about here, is to ask to get all the right answers to all the wrong questions. And what that really means is what framework are you using? What are the sets of questions that derive from what framework that you're getting answers? And you think you're getting all the right answers, but you're using the wrong framework, because those frameworks are outdated. Your models no longer work. Your maps no longer accurately represent the territory that you're seeking to navigate. And when you go through these cycles, everything has to change. Your baseline assumptions have to (30/45)
change. So one of the things I really love about Russell as well is that he has that sort of deep bottoms-up analysis, and he's not dependent on a framework. And those people are exceptionally intelligent. They tend to have, if not an academic historical background, they certainly have an appreciation for history because you have to be willing to break the old and to build something new. So that's what I love about Grant. I love about Russell. And I think what's great about Neil, and again, why I think he's such a great person to start the episode with, is he helps his framework and his model helps explain why we're going through this transition. And then again, Russell's is about like building a new model to understand the political economy of a changing global order, of a changing economic order, and what that world looks like, what will increasingly look like, and how to navigate it. You know, I can go into so many directions with what you just said. Remind me to come back to the (31/45)
fatherhood thing in a second, because there's a component to that I want to talk about. But the one piece of that I would add to what you just said there is the time element. You have to be able to change your framework quickly, because we've grown up in periods of long, slow-moving trends. Globalization has been a 40-year trend that has now kind of reached its apogee. And we haven't had to really function quickly apart from if you've been in the markets, you've had the odd day of chaos where you've had to react, but you haven't really had to completely adjust your framework quickly. You've had to deal with a 10% down day in 2008, or deal with whipsaws when the markets have rallied in the middle of bear markets and stuff. So you haven't had to really break things down to their roots and then rebuild them again. And that's what we're talking about here. We are talking about a world that we all believe, to your point, we understand how it works and we simply don't. And that has already (32/45)
happened. The world no longer works the way we all believe it does. And so the quicker we kind of figure out how it's changed and what that means for us and what we have to do to adapt to it, the better for all of us. But we want to come back to that father thing, because I know, and it's been such a cool thing to watch you on this journey as a father of a young child, because I've got two grandkids now, I'm at the other end of that spectrum. But for me, this is such an important part of this, because I don't really spend much time worrying about me and I'm worrying about my place in this and how I'm going to deal with this. Because I am far enough down the track and I've lived a life and I've built a family. I've done all those things. The thing that I spent all my time thinking about and worrying about is, how do my kids navigate this? And now I look at this beautiful six and four year old girls who are completely oblivious to this. And my questions are all about what's the world (33/45)
they're going to inherit like and how can we either prepare them for it ideally or try and provide some sort of haven from it if it's really bad. Those are the questions that I really want to dig into, because if we can help the people who are going to have to deal with this in ways that we aren't, we're simply not going to have to deal with it in the way that someone who's 15 now is going to have to deal with this world. We're just not. We're going to be through that stage where it's the kind of thing that overwhelms your most productive years. So that's a big component to me and this fatherhood, the peace. And again, through these conversations and through the essays and everything, I keep getting that back, people talking about their kids and talking about their families and talking about, we become a newer to this when you're staring at markets. You become a newer to volatility really, because it's part of your job. And for a lot of people, it's how they make their money. They (34/45)
embrace the volatility. But if we take the last couple of weeks, for example, out of the way, and I'm sure I won't speak for you, but I've looked at this or I've been forced to look at it, I should say through a financial lens, because the news feeds that I'm getting bombarded in the emails, I'm getting it all from people who are financial practitioners and trying to understand the world through that lens. But if you step back for a moment and try and imagine the last two weeks without headlines about stock markets down 20% and without talk about recessions and without talk about financial aspects of this, what does that world look like to someone who's never read The Wall Street Journal in their lives or doesn't have a 401k or if they do it in a company pension plan, it's manageable. They don't think about the stock market ever until it's front page news or until it's on 60 minutes about the crash. That's a very different world that those people are living in. That's the vast majority (35/45)
of people. We are in a minority. So again, there are so many different ways that we can take this, but there are also so many different vantage points that you can stand and look at it from that will, to your point, about the wrong questions and the right answers, give you a completely different vector upon which to travel towards this thing. That also, again, brings me back to frameworks. One of the things that I don't know if you and I talked about it, I've spoken about in recent episodes, is that I feel like we've just gotten to the point now where investors have become comfortable with the idea of mean reversion. They've become really comfortable with this idea that, okay, yeah, we had the 2008 crisis. That was really scary, but the markets rebounded. We had COVID scary, but the markets rebounded every time the markets come back. And I'm not saying that markets don't come back, that the world's going to end. That's not what I'm suggesting. But I think the setup this time could be (36/45)
one where the markets don't revert back to the previous paradigm. And there are a lot of reasons to think that that's possible. One is the Baby Boom Retirement Wall. You have people that are going to increasingly be pulling their money out. You have this tariffs and this intention, at least stated intention by the Trump administration, to rebalance wealth and income in society, which also will change those dynamics, and will change dollar recycling, which has been a big, huge source of asset price appreciation. And you also have AI, which is something that I just don't think is spoken about enough in this context. And this is again something that I spoke about recently in my episode titled, Are We About to Enter the First White-Color Recession? And I mentioned the wealth-driven effect, which is that if stock prices go down, substantially down, if one's net worth declines, especially if they're nearing retirement age or in retirement age, they become much more risk-averse about (37/45)
spending. Consumer spending is so heavily tilted towards the higher echelon income brackets. That could drive a recession. Firms that were previously reluctant to experiment with artificial intelligence, large language models, may become more willing to do so because they've already let go of people and they're cost-conscious. And so, chat GPT went from being not good enough to maybe just good enough. And so that kicks off, that ignites the beginning of a multi-year, multi-decade reordering of the economy, a technological revolution driven by AI. And that also has huge political ramifications. Maybe that finally gives the Democratic Party, whose base consists of white-collar workers who previously were organized around the banner of some of this woke ideology, to now being focused around UBI and sort of the effects of losing their jobs and losing economic opportunities. In other words, maybe we end up seeing happen to the white-collar workforce, what happened to the blue-collar (38/45)
workforce. And that has profound implications for politics. Now, I don't know exactly how I got on this train, Grant. I don't know how I remember exactly what your question was and why I got here, but I guess that's in the spirit of the podcast. Yeah, look, exactly right. And like I said, this whole thing is going to be such an adventure. And I'm very conscious of us doing a podcast, talking about a podcast. Again, Seinfeld, that keeps coming up. Podcast about nothing and podcast about a podcast. Exactly. So we won't make this episode too long, but we wanted to share the beginning of this journey with you and what we're going to do. You know, Dmitry and I will publish these conversations and we're going to make sure that everybody gets to hear them because I think this is profoundly important questions. We will publish them to our subscribers probably a week before they go public just so they get the benefit of that for supporting our work. But I think, you know, Dmitry, a big part of (39/45)
this is going to be the audience out there, whether they email you or they email me and ask us the questions and it suggests people that they've heard of that brought an interesting perspective to the way they try and order the world around them. Because, you know, you and I have our networks and the network effect of those networks is terrific. But I've lost count of how many interesting people I've come across over the years that I'd never heard of before. And you have these conversations with them or you read something they've written and to your point, right? It suddenly turns a torch on, you know, in a corner that you've been trying to squint into for quite some time. And so, you know, having the audience be a part of this and join us on this exploration is going to be a huge component of it. Absolutely. I couldn't agree more. And I'm very excited by the prospect of hearing back from people. Again, I go back to this thing of like there's something really exciting to me about (40/45)
changing the format of the show. Again, I'm still doing my podcast. You're still doing your podcast. Yep. But you have actually done series like this before with other people. I have never done anything like this. I've been doing the show for eight years now, roughly speaking. And it's been roughly the same format. It's been me interviewing people, nerding out on their material, constructing an outline and sort of quizzing them and occasionally more conversational programming and occasionally kind of more panel stuff. But it's been more or less the same and certainly just me. I'm very excited by this idea of doing it with somebody else. I can't tell you how excited I am and doing it with you of all people. Well, I agree. I say we've both been trying to find the right way to collaborate for quite some time now. And I'm delighted we found it. Well, listen, let's wrap things up there. The first episode of this will be out sometime in the next couple of weeks when we can. Of course, the (41/45)
big problem, Dimitri, with doing this with the co-host is you have three calendars to align. That's the single biggest impediment, especially when you're all on different time zones. I've recorded podcasts at four in the morning in Australia and I've done all kinds of things over the years. You're lucky because you're right in the middle. So you should be fine. So in terms of publishing, the plan is to publish this to the whole world so that everybody gets a chance to join us on this journey because we both believe it's profound. Our own subscribers will get it first. We'll probably publish it a week before it goes public. But anyone that's not a subscriber will have the chance to listen to these conversations. Absolutely. So I think we were still trying to figure out how we would publish the public feed, but we're going to both publish this on our private feeds, Brent. So your premium subscribers will get it. My premium subscribers will get it. And then what we're probably going to do (42/45)
is we're both going to publish it on our own feeds publicly. We also talked about maybe when we publish it publicly, maybe we'll put it on a regular feed. But we can hash that out for a second. We'll figure that out. Well, yeah, when Neil's episode comes out, we'll have a lot to talk about. We'll mention that too at the top. Hey, we did tell people we're doing this on the fly, right? Exactly. There you go. It's authentic. Exactly. All right, my friend. Well, listen, we'll reconvene when we can pin Neil down and we'll be back with this in the not too distant future. In the meantime, Demetri, just let people know where they can follow all the great stuff you do at Hidden Forces. Yeah, you can go to hiddenforces.io to learn more about the podcast. I do have a Twitter feed, but like I said, I've taken an indefinite hiatus from Twitter. But my Twitter handle, if you want to go through it, is at Coffinas with a K. And I also have a Twitter handle at Hidden Forces pod that you can follow. (43/45)
Yep. And I'm pretty easy to find, grant-williams.com. My Twitter handle is at TTMYGH. And boy, did I wish I was taking a hiatus from Twitter at the moment. It is becoming almost unbearable. It is not a very fun place. I also should mention, if you want to mention it to Grant, I have an email address that you can reach out to infoathiddenforces.io and all the emails get forwarded to me. So feel free to reach out through there if you need to connect. Actually, and the same goes for me, infoatgrant-williams.com and they will come to me too. All right, my friend, this has been terrific. I look forward to this journey with you. I don't know which one of us is Sancho Panza and which one is Don Quixote, but I guess we'll figure that out as we go along this journey as well. I'll talk to you soon. Awesome. YouTube, take care of Grant. 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 (44/45)
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 at cofinas and you can email me at infoathiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
What's up everybody? My name is Demetrius Grafinis and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens. The challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Chief Operating Officer at Research Firm, China-Beijed Book, Shizad Kazi. Shizad was last on the podcast more than two years ago to discuss the post-COVID reopening of the Chinese economy. I asked him back on the podcast today to discuss the preliminary impact Trump's tariffs have had on U.S. and Chinese businesses and on their respective economies, stock markets and currencies. We also discussed whether the action plan to revitalize consumption that was recently announced by the Chinese State Council and CPC Central Committee represents a more determined effort by Beijing to ignite a flywheel of endogenous demand for Chinese output should the country's export sector (1/45)
become priced out of critical markets in the U.S. and Europe. I also asked Shizad about Trump's stated desire to do a deal with China, what such a deal would look like, how big it could be and what concessions either side is prepared to make in order to get it done. If you want access to all of our premium content or you want to learn more about the Hidden Forces genius community and how to attend one of our many virtual Q&As, in-person events and dinners, you can do that at hiddenforces.io. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this timely and informative conversation with my guest Shizad Kazi. Shizad Kazi, welcome back to Hidden Forces. Hey, thanks for having me back on, Dimitri. It's great having you. How long ago were you on the podcast? It was like three years ago? Something like that, I think about three years ago. Right, and you were at one of (2/45)
our New York dinners a couple of years ago too. Yeah, exactly. We actually just did one recently in Washington, D.C. and the focus there was on the Trump administration's China policy to the extent that there is one. It's not entirely clear. Rush Doshi was there. John Pelston, who you remember from the dinner that you were at was there too. That was a very interesting conversation. I feel like, I feel like, and tell me if this is right, and then we'll get into a series of questions about the economy. It doesn't seem like we have heard as much of a coherent policy articulated for the public on China from this administration as I would have expected us to based on how important China was and how big it factored into the Trump administration's first term. Do you generally agree with that? If that's the case, why do you think that is? Is it just in your estimation because they haven't communicated that publicly, but there is a larger strategy internally? What do we know there? How would (3/45)
you answer that question? Yeah, there isn't necessarily a full-blown strategy that has at least been unveiled publicly. I don't believe that there really exists one behind closed doors either. Instead, what the administration has come out with this time around is something different. They've got a global goal. They've got a goal of structurally changing America's trading relationships with the world at large. That by and large includes changing America's trading relationships with China. A series of goals are being pursued. We've heard about things like there may be more investment restrictions. We've heard about things like there might be more export controls. What we haven't seen is a comprehensive plan that says, look, these are our top three or top five things we're going to accomplish vis-a-vis China. This is how it's being done as part of this global effort of rewiring US trade. Yeah. Let me ask you this question, which is, what do we know about what the material impact has been (4/45)
so far on the ground in China from the tariffs? And also, I think more importantly, from the rhetoric that's coming out of the Trump administration. Yeah. I think as soon as the election took place in the US, it was pretty clear on the Chinese side that there's going to be a round two of a US-China trade war. And funny enough, I think it was Wall Street that certainly did not expect, despite over the several weeks and months once the administration took control, that there absolutely was going to be a global trade war of sorts, certainly global tariffs. But I think in China, they certainly understood that at the same time, they believe thus far and they continue to believe that there eventually will also be some kind of US-China deal. That said, on the economic front, the first impact was actually positive in the sense that there was a lot of front loading companies buying a lot of materials in advance of tariffs coming and a lot of inventory buildup taking place out here in the US. So (5/45)
the economic impact was positive because manufacturing looked good, exports looked strong. But where we are today on the ground, as China-Beijing books real-time data showed us, a lot of that front loading effect and the boost to exports was certainly present in the first couple of months of the year, certainly there in the end of 2024, but has now expired. So into March, we saw our export orders indices slide, we saw manufacturing beginning to slow down, factory production beginning to slow down. So the economic impact that pulling forward of growth that took place, that trend has faded. And now we're, I think, on track to look at what is most likely going to be a sequential slowdown in the Chinese manufacturing sector. All right. So I'm going to have more questions to ask about the impact on China's economy. I still would love to get some clarity because I feel like I'm in the majority of the cohort of people who don't really exactly know what is being tariffed, how much it's being (6/45)
tariffed, which tariffs are for negotiations, which aren't, what's on today that was off yesterday or that's what's off today that was on yesterday. Like, where are we today? We're recording this on Wednesday, April 16th. What exactly do we know about what has been tariffed and from those things, what do you think is going to remain on at these levels or close to these levels? Yeah. I mean, this is a pretty fluid situation for sure. And there has been such a rapid ratcheting up or escalation of tariffs that it's become almost dizzying for markets. And we saw markets, you know, what happens when you get really dizzy sometimes you puke. And that's what happened last week in the bond market. And certainly has been happening with equities lately. So the simple way to put it right now, I think, was to be China at least, is that you have the top line tariffs at 145% on China right now. Now you have any products that contain chips or semiconductors that have been moved out of that top 145% (7/45)
rate. And instead, the 20% initial fentanyl tariffs that have gone into effect in February, those still apply to the consumer electronics and those products like your iPhones, computers and such. And that basket of goods is going to be most likely hit under the upcoming sectoral tariffs, which are going to be announced once the US Trade Representative finishes his investigation where, you know, where they're looking, it's called a section 232. Basically, it's saying that look their national security concerns around a foreign country's trade practices or violation of trade laws and trade agreements. And so as a result, we have to punish them by putting tariffs on. We don't know what that tariff amount is going to look like. We also currently don't necessarily have clarity on how quickly that investigation can be done. Typically, those investigations take about 270 days. I do not anticipate that the US Trade Representative will be taking that long off a time, but at the same time, we (8/45)
don't know how soon and what that number is going to look like. So over the weekend, you heard a lot of things being referred to as exemptions they're not technically exemptions as much as they are just moving them from one tariff basket to another with the expectation of more higher tariffs on those goods coming. Let me make one other point. As I said that everything else is under the 145%. So how do you think about that in terms of argue whether they're going to stay or not stay? Look, at the end of the day, we don't know we're dealing with a administration where President Trump is certainly the decision maker here. I think everybody finally understands that. And so that means things can change and change very, very quickly without much forewarning. Pulling back, one could expect that look tariff levels on most products will most likely not stay at these high levels, but we're certainly not going back. I think one thing we can all probably bet our money on today safely is that status (9/45)
quo ante as in where was the US-China trading relationship vis-a-vis tariff numbers on February 1st or January 31st or even the day the President got inaugurated. Are we going back to that? I can say fairly confidently no. So a few more pointed questions on tariffs. Let's just talk about auto tariffs here for a second because this is also a low margin business and there's a lot of uncertainty as well here. I know a lot of folks are looking to maybe try to order a car or get a car early and head of the tariffs being put back on because I think there was some kind of pause on these tariffs as well. Maybe I'm mistaken. So can you just walk me through exactly what's going on here because a lot of these brands that are also foreign brands, they have domestic manufacturing like BMW, but they don't manufacture all their cars domestically. So there's so much confusion here. What do we know about auto tariffs? Yeah. So if my understanding of this is correct, essentially the auto tariffs rule (10/45)
has been amended or the way this was written out in the proclamation and then subsequently in other documents has been amended to say that if a certain amount of US content is included in an automobile, you would deduct that when determining the tariff on the rest of the auto parts. So this is where tariffs start to get incredibly confusing and incredibly technical. And so they are not necessarily being hit with one singular number because again, the idea is that we don't want to punish as a matter of fact, we want to encourage more production being done within the United States. So you make sure that you're not then penalizing car companies when they do have a certain amount of US, United States product in there. So the rule of origin, laws as they exist, everything is now being talked about. The conversations are getting more technical and I think markets and the professional investors are certainly having a hard time and I can imagine why a lot of people who are trying to keep on (11/45)
top of this would be having a tough time. This is complicated stuff that normally trade lawyers and stiff suits in DC talk about and then we don't typically talk about these things on social media and in the press. Yeah, I feel like I probably need to bring on a trade expert to walk me through some of this stuff because it clearly isn't just based on where the product is assembled or manufactured in the final stage. It's about the entire supply chain and it sounds like it at least. It sounds like every part that is manufactured outside the United States gets tariffed. And if that's indeed the case, one has to ask him or herself, what's the goal here? Is the goal here to bring the entire manufacturing chain back to the United States or are we eventually going to get a more targeted set of tariffs that looks to onshore certain parts of certain supply chains? I mean, that to me is the important clarity that I'm looking for at least. So let's shift now to talk a little bit about the (12/45)
Chinese consumer. So I've seen reports that China's consumers have increased their consumption of domestic brands over four and ones amidst the recent trade war. I've also seen a lot of these TikTok videos of different people running sort of wholesalers out of China that are producing, let's say, Fendi bags at a fraction of the cost that it's being sold to American consumers or European consumers. I'm not entirely clear what's happening there if this is being promoted to distributors in the US, directly to consumers, to domestic consumers in China. I'm curious to understand about that too. And I'm also curious to understand how much of this reported move by Chinese consumers to domestic consumption of Chinese brands. I've seen some talk about an accelerated shift away from US consumption. How much of that move was already in the making? And how meaningful is it on the margin at the very least to possibly kind of offset some of the demand crush for Chinese production from lost overseas (13/45)
markets? So there's two questions. So sorry about that. Why don't you just take the last one first and then we can re-ask you the first one? Sure. So let me maybe sketch out something from first starting from the macro point for our audiences. The first thing to understand is that Chinese consumer spending has been incredibly lackluster in the aftermath of COVID and more specifically COVID lockdowns. The two years that you had a zero COVID policy in China were absolutely incredibly destructive, as you can imagine, because you're looking at firms shutting down, you're looking at incredibly sluggish economic growth, you are looking at people losing their livelihoods, you're looking at young graduates not being able to find jobs, you're looking at most fundamentally a lot of economic uncertainty. In the midst of all that, you also got a very severe and very serious property market crisis, which was of course by and large engineered by the Chinese authorities, by the CCP, by President Xi, (14/45)
as a way to sort of begin and as a way to maybe more proactively address the property bubble, to prick the bubble, to let the air out and to deal with that situation or problem before it turned into a actual very serious crisis. But the result of that was a lot of wealth destruction took place in China as well, which of course subsequently also resulted in consumers becoming incredibly cautious. So this is the background for the last five years really that matters, nothing before that makes too much of a difference anymore. Now where we are in real-time numbers, if you will, is that Chinese consumer spending has slowly but surely gotten better if you look at year-over-year comparisons, right? So if you looked at consumer spending around the Lunar New Year holiday this year in our data, you would see that it certainly looked better than your ago levels and it was on par with pre-COVID levels as a matter of fact, other indicators would show that it was airline bookings perhaps were even (15/45)
better than 2019. So consumers are out there, they are spending some money now that previously they were not, but at the same time they're still very defensive, they're not going to continue to spend outside of instances, holidays and very specific periods where more consumption typically takes place anyway. What that means by the way is that they are also looking for being competitive on a pricing level is very important, but they're also not going to be supporting I think a lot of these expensive foreign brands when they have very good local alternatives. So for foreign companies, this is a challenge anyway because they were looking at an, as it is, they were looking at a slowing consumer market in China, then they were looking at potential crisis in the consumer part of the economy, in the consumption side of the economy, and then they have a range of local companies that they need to increasingly compete with. So that story, that pain point has been around for a few years now for (16/45)
foreign companies. That leads me to your second question and the second point, which is this new idea I've seen around being floated around and argued that well, if China loses the US market, it'll be able to make up for it by not only selling to other countries, but also through domestic consumption. And now this could not be farther from the truth, that both couldn't be farther from the truth, but the domestic consumption side is even more fantastical because the reality is, as I just described, consumer spending has been by and large, just not at a level where they could support everything that China produces. And more importantly, the government has not done anything meaningful on the consumer side, on the household side, vis-a-vis providing stimulus, that would actually help spur consumer spending and do so in a way that was sustainable. They have done trade-in programs and good trade-in programs and such and provided subsidies for a very short time that has provided a short-term, (17/45)
very limited boost to the economy, two things like retail sales. But this is not the stuff that is going to change the consumer spending patterns in any kind of meaningful way. So no, if the US market is lost, that is going to create, that is a very big, very serious headwind for the Chinese economy. That carries very serious repercussions for the Chinese economy. So last month, China's State Council and the CPC Central Committee issued an action plan to revitalize consumption to boost domestic demand. The action plan focuses on increasing incomes, improvising consumption capacity, upgrading service quality, and optimizing the consumption environment. How important is this plan? This got a lot of attention in my world because the argument has been made for years now that the Chinese government would ultimately have to restructure the incentives and the regulations in its economy, boost safety nets, etc., in order to find a way to boost domestic consumption in order to get this flywheel (18/45)
happening and so that the producers weren't so dependent on external markets for economic growth. What do you know about this plan? How important is it and how does it factor in here? Yeah, look, for the last probably at least 10 years, we've heard some version of a plan to boost domestic consumption, some version of a plan to, quote unquote, rebalance the economy, some version of a plan to create dual circulation. What unfortunately we get is a lot of catchy sounding titles and promises coming out of the CCP and off Beijing, but we see little to no progress. Ten years is a very, very long time to be making the same promise and then at the same time making little to no progress on that stated policy goal. So I know that every time one of these new things comes out of a Central Party committee meeting or an annual meeting of party officials or the Chinese government, there's a lot of attention paid to such promises, but at the end of the day, we collect large-scale private data in China (19/45)
and we have been wishing and wanting for a long time to see evidence within the numbers and it's just not there. The support for SMEs, the credit support for SMEs is just not there. The types of changes, structural changes that need to be made in order to create a state that provides better elderly care, better support for child care. A lot of the rules have to change around their local IDs and such, residency requirements, more importantly, none of that is taking place. So I wouldn't pay too much attention and I certainly have not paid too much attention to the latest batch of pledges that have come out of Beijing. But we'll see if they're finally ready to make the changes, it'll show up in the data first and that's the place to look. So we know what's happened to U.S. equities as a result of enter the U.S. dollar as a result of the last few months. What has been the impact on Chinese equities and the Chinese renminbi? So the Chinese Yuan is most certainly beginning to weaken. It has (20/45)
led to, once again, a call on, you know, there's a Chinese devaluation coming. And as we recently wrote in a client note that, you know, foreign observers have called eight of the last zero Chinese devaluations. So we certainly don't believe today that a Chinese one-off deval is in the offing, that there's a high likelihood of that happening. The reasons for that are kind of well understood. They do not want to create a financial panic. They don't need a currency manipulator label to be added onto them. They don't want to upset their trading relationships with other countries because that wouldn't just hit the U.S. I would hit other countries. So the Chinese Yuan has certainly weakened. They seem to be comfortable with it weakening a little bit. The comparative where it was 7.2 was the latest line in the sand and it's weakened since then. So maybe some depreciation is happening and is in order and that would certainly sort of ease the blow from the tariffs. But certainly no one-off (21/45)
devaluation in the cards today. Chinese equities have had a pretty good time starting fall of 2024 because there was a big call on Wall Street that, hey, look, there's big bazooka is about to be fired in China. Big stimulus is coming. The stimulus never came, but whatever policy announcements did come through and a lot of the risk mitigation that was announced in terms of, you know, loans being switched from one balance sheet to the other and allowances to issue more debt at the local government level, at the federal government, or at the center. You know, they were sort of seen as examples of stimulus. And so the Chinese equities started to do well. And then of course, you got Deepsea. And when Deepsea happened, that was treated on the street as a total and absolute game changer that China was now leading the AI race, perhaps, and this was going to create more opportunities. So Chinese equities hit, you know, obviously multi-year highs. But in the aftermath of tariffs and trade war (22/45)
starting especially after what happened post, quote, unquote, liberation day, you know, we've seen Chinese equities also struggle also beginning to decline again. So that trade did not last a long time. And I have to make this point, you know, I went repeatedly on various television networks arguing pretty aggressively that, look, markets had to take geopolitical risk very, very seriously. Markets had to take trade war risk very seriously. And it's just nobody was interested because people, again, you know, the market continues to see President Trump more so as a dealmaker than as tariff man. And that has proven to be immensely costly in the last several weeks. I've not heard anyone juxtapose those two, tariff man and dealmaker. That's interesting. I mean, you're right. The way we think of Trump, and I still think the way we think of Trump is as dealmaker. And that's actually going to be a question that I'm going to ask you, Shazad. So let's hold off for that one. But what has been the (23/45)
policy response thus far since liberation day? The Chinese are responding with reciprocal tariffs. However, I don't know how meaningful that is because again, like it's not like U.S. companies are hyper competitive within China's economy to begin with. So what has been the policy response and how do we interpret those responses? How much of that is just signaling to try to get a deal maybe or to try to say, hey, we're going to kind of respond to save face, but we want to meet you at the table. And how much of that response has actually been to try and put pressure on the U.S.? I know there have been some reports. I don't know how true they are or aren't that the Chinese have been selling U.S. treasures on the margin. Some people might argue, even if they agree that that is happening, they might argue about why it's happening. Is it happening because the Chinese are voluntarily selling treasures in order to send a signal? Are they selling treasures because they need dollars? I can't (24/45)
make sense of any of this. So you tell me, what have they done thus far and how do we pull signal from the noise here? Yeah, the Chinese response as far as their retaliatory tariffs of 125% on U.S. goods, excluding U.S. semiconductor imports because they of course want any and all semiconductors they can get from us are not particularly meaningful. You cannot be the world's sort of biggest exporter and have incredibly weak consumption and then expect your retaliatory tariffs to carry much meaning. That said, there are of course companies that sell into China that would prefer not to have those tariffs. So my comment applies to the larger sort of trade balance and where things stand at a macro level. But certainly again, it doesn't apply to every and all companies selling inside of China. But that said, the other thing they've done of course is try to institute export controls or further export controls on rare earth or so-called rare earth minerals. Again, there we are yet to see in (25/45)
practice in the coming months and so forth, how far can they go in actually enforcing and ensuring that the U.S. isn't just pulling a China by that. I mean, just buying those rare earth minerals and critical minerals from third parties. So I'm not sure what capacity and what authority and what ability Beijing actually has to stop the U.S. from just buying it from elsewhere. Because unless China wants to cut off the whole world, which doesn't seem like a good idea when China is trying to rally lots of countries on its side to actually push back against the U.S., that becomes very difficult. They have of course announced a suspension of buying planes from Boeing. So that's kind of stood out. It's not clear how meaningful that is for Boeing because it seems like that was a very small percentage of Boeing sales this year to begin with. So I think all we're saying, so we're giving lots of examples here, what are we really saying? What we're really saying here is that when it comes to a (26/45)
trade war, the world's largest consumer holds far more cards than the world's largest exporter. That's the bottom line here. And so China cannot do any kind of one-to-one retaliation and China's retaliatory measures are at the end of the day going to be pretty limited in their impact. China's toolkit to retaliate is also very limited. Now, what happens next? What happens next is they could really escalate this. They could really escalate by actually selling treasuries, which there is no evidence that they're doing right now. They could escalate this by saying we're going to start interfering in critical supplies like pharmaceuticals, like medical equipment. So as it is now, the 145% tariff means that a lot of U.S.-China bilateral trade is basically coming to a standstill anyway, which means that China itself will now be relying on rerouting its products to the U.S. But do they actually say, you know what, forget about it? Things they really need? Let's not do that. Or let's suffer the (27/45)
pain and let's create the shortage economy in the U.S. When consumer starts things running out of basic goods and basic supplies that they rely on us for, like what happened during COVID, that is going to put so much pressure on the administration that it'll have no option but to change tack. So they could go through a series of very serious escalations here, but that would put us in a different water. I think that would probably bring us closer to a hot war. Right now, this is really a trade war. This is not really even full-fledged economic warfare. That would start taking us much closer to something much more dangerous. So I'm so glad you brought up the whole who holds the cards here, because that was going to be my next question, because the administration, including the Treasury Secretary, have really made this point over and over again in interviews, which is that we quote, hold the cards, not China as a surplus trading partner. Is it fair to say that that a conclusion derives (28/45)
from viewing this trade war in very conventional terms, which is to say, you've got two trading partners and they each are motivated by gaining as much access to the other party's market as possible. And so escalation really comes along the lines of raising tariffs and making it harder to access the other person's domestic marketplace. Whereas if you were to focus on China's ability to withhold critical inputs for the pharmaceutical supply chain, for example, then you could say that China actually holds the cards. Again, depending on the pain point you're looking at, first of all, do you agree with that? It depends on how we're defining the scope of the possible war here. The way I like to think about it and frame it is that just because we hold the cards doesn't mean that China cannot hurt us. That China cannot make this incredibly difficult for us, incredibly painful for us, and incredibly dangerous for our own stability and economic well-being at home. Okay, so here's my last (29/45)
question, Shazad. What is the deal that comes out of this? Where do we finally end up? Because I feel like that's what investors are most focused on, and I'm sure many business people in China and the US to the extent that they're up to speed on this issue and how it's impacting their businesses are concerned about as well. Is there a quote deal to be made here? What is the scope of that deal? Who are the people that are having it? What do you know? And what do we know about this? Yeah, so I think a lot of people talk about the US-China deal, and the person who talks about it most of course is the president, is Donald Trump. I think this will boil down to what everybody thinks is a deal, as you just said. What do we mean by it? I am incredibly skeptical today off the idea that there can be a big deal for the centuries, deal for the ages between the US and China. And what I mean by that is a deal where we get rid of all tariffs and take them back to levels, say even take them back to (30/45)
levels where they were at at the end of the Biden administration. Forget about the first Trump administration. And of course China gets rid of their 125%. China again has unfettered access to our market. On the other hand, they are saying full cooperation on fentanyl. Absolutely going to make structural changes to our economy. So we actually support consumption over production. We actually therefore open up the market, create more opportunities for American companies. Then we open up the market in real ways where we stop providing subsidies and support to our own companies. So we create more fair access for your countries. We get rid of any problems you have with IP theft and so on and so forth. This magical scenario, this utopia that was once conceived of in terms of what China would eventually look like from the US standpoint, and the converse being China having unfettered and total open access. Come here by the farmlands. It doesn't matter where you want to put them. We'll buy or (31/45)
your all your technology and put them in our military bases again. That stuff's not going to happen. Not even close to it. And I deliberately sketched this out so that I can explain to people what a true deal between the two sides could actually look like. We are nowhere there and we will never be there. What is possible between the two sides? However, is a series of mini deals or a maybe a skinny deal as I could call it, which is that we have deals around very specific things. A deal around TikTok, a deal around more fentanyl cooperation, realizing that China will probably never fully comply and may not even ultimately have the ability to help us as much as we'd like it to. And a deal that focuses on bringing eventually bringing down tariffs to some level that is below 145%, but certainly remains above where it was even above the 20% fentanyl low tariff. So I think we are headed towards a lot of volatility in this relationship because we are structurally changing it and change is (32/45)
painful and change creates a lot of chaos. So really the thing to do is to brace for that and to understand that big China recoupling is out. Total decoupling is an unlikely scenario right now and a recoupling is certainly an unlikely scenario right now. It's a messy middle that we have to prepare for. And so it's complicated, tough, chaotic times ahead. So superficially this looks like a very unilateral approach by the United States, which you can see even evidenced by the blanket tariff bands and the tariffing of our close allies and partners in Europe and Asia. Is there any talk about this administration looking to pivot, maybe again, maybe this is all part of some strategy, to pivot into creating some kind of new trading block or ecosystem that relies more on countries with which the US is aligned or has friendly relations? And how are China's trading partners? We saw talk about the, again, these are superficial readings of headlines coming from my end, but the South Koreans, the (33/45)
Japanese looking to kind of do some kind of joint thing with China, try to put pressure on the US to reduce tariffs. So like how is this shaking out from an international perspective? There has been a lot of chatter lately, certainly on this idea of creating a new customs union or new trading blocks where countries with similar values and similar laws and adherents to trade laws and trade agreements trade with each other. That's of course not something we can expect in the short run or probably even in the medium run. Now that said, as we try to move supply chains out of China, as we try to substitute Chinese products or other products for Chinese products, more inputs from Mexico, more inputs from Vietnam and South Korea and so forth, and maybe other countries in Latin America, as we try to enforce things like near-shoring, French-shoring, and of course, reshoring, the reality is that the changes in supply chains will over time most likely create this new quote unquote trading block. (34/45)
The question that we don't have much clarity on today is where ultimately do we see China and all of this? Because obviously Chinese inputs are in so many things that we would still be buying from these other countries. So where do we want to have them completely restricted and brought them down to zero? Where are we okay with 10% Chinese inputs? Where are we okay with 50% Chinese inputs if those things exist at some point at the end of the day? That thinking, that strategizing, I just don't think has been done yet. But I think we are certainly moving towards supply chains shifting more reliably out of China and not just shifting and as you say, you know, you use the word superficial in another context here, but the superficial change in changing of supply chains, which has been the transshipment problem that factories just load up a ship, send it to Vietnam, hang out in the port for however long you need to so that the goods now become Vietnamese goods, and then you get the new piece (35/45)
of paper and you move on towards the US, or you send, you know, a pair of shoes that I like to say, and you change the tag on it, you know, or you maybe put a pair of laces in there and say, now this is a Vietnamese pair of sneakers and not Chinese. So that's not a real shifting of supply chains. You know, we need much more than that. Chinese owned factories, maybe even producing things and Cambodia and shipping them to the US may not be good enough either. So these, this is all very complicated. We'll see where it ends up. But the long-term trend has to be shifting supply chains out of China and doing it at a faster pace and more reliably than it's been done so far. Again, is there any talk or do you think that eventually this administration will focus in on specific supply chains that they want to prioritize reshoring or French shoring? And let's say when it comes to things like Nike sneakers or apparel made in China, that they're going to be less concerned about that and they're (36/45)
happy to sort of yield that industry to the Chinese? You know, I would hope that the upcoming reviews and investigations on the so-called sectoral tariffs, which are supposed to focus on pharmaceuticals, semiconductors and metals, copper, steel, and one more, I believe, I think some of those should, that's an opportunity for the administration to not just tell us what the tariffs are going to be and what type of trade issues we're trying to correct for, but to also come out with a plan that says, look, this is 10% off X, Y, and Z thing needs to move out by the end of 2026 or 50% by the end of 2027 needs to be placed in another country. I'm throwing numbers out, obviously, I'm pulling these from the air, but a realistic plan, a reshoring plan, a near-shoring plan would be good to see. The administration has been in power for just under a quarter, an economic quarter yet, so I know they're trying to get a lot done in a short time period, but soon enough, it would be good to start hearing (37/45)
these ideas as well. I feel like that's what most Americans, and this is what I'm interested in, in which is where can we find consensus in this country, because that's where we can develop the most durable, sustainable cross-party policies that can endure across administrations and across party administrations. I think one of those areas would be most people can agree that we don't want to be in a situation where if something happens in the rest of the world, we can't produce insulin in the United States. I'm not saying that's the case with insulin, I don't know enough about these supply chains and know which drugs are most affected, but there are clearly critical supply chains where I think most Americans would be willing to endure whatever is necessary, so long as they feel like it's being done in a competent way, to actually get those supply chains French or near-shored or on-shored. To that degree, maybe this is my last question. I said my last couple of questions ago, but maybe (38/45)
my last question has to do with Latin America. This seems like, again, based on how Trump seems to talk about regional spheres of influence, it seems that there's a real opportunity here for Latin America to play an outsized role in whatever the vision is from this administration, whatever the Trump doctrine is on trade. Do you agree with that? What kind of talk do we hear around some of these companies moving manufacturing to Latin America and what that would mean for tariffs? It would mean for the cost of goods, et cetera. I wish I knew more about Latin American economies and where they are today, but of course, that seems like an obvious part of the plan. Not only do we want things very, very close by, which really, quite honestly puts Mexico in a very good position, but there may be other Latin American countries, especially Latin American countries, where increasingly you're also getting a big Chinese presence, but we want to take a closer look at what's going on and where (39/45)
American companies need to be or should be or could be also placed. Same thing again, what's going on in Central America? Are there opportunities there? These are conversations that I think should be very live, should be happening. I am, of course, not read into this. Again, I don't know the region well enough to be able to talk intelligently, but the reality is, to your earlier point, that the concept here needs to be economic security. The concept here needs to be supply chain security, especially for things that are necessary. Too much of the online commentary it has focused on correctly, as you said, on things like our Nike T-shirts and our Nike shoes, but that's not what this is about. Ultimately, this is also, by the way, the administration would do itself a lot of favors if they sent out people to very competently talk about it. I know they've got the people to do it. The Vice President himself is certainly a big fan of this idea, but talking about the manufacturing of the (40/45)
future, talking about how America will support the manufacturing of the future, what does that look like? What do factories look like in the 21st century so that we can actually have a more sensible, a more advanced, a more current conversation about manufacturing? Because I think a lot of people snicker and jeer and sneer because they think we want people to go back to sweatshops. Certainly, I don't think that's the idea, and I obviously would not be advisable. So there's a great opportunity here, Dmitri, to talk about the revitalization off the United States, to talk about the reindustrialization, and to talk about it in a technologically sophisticated and advanced way so that we're talking about the future and not looking back at the past. So again, it wasn't my last question. One more. Let's see where this goes. I don't believe the talk about fiscal austerity in the United States. I don't believe the administration, when they say they're looking to cut back fiscal spending and all (41/45)
this stuff. I don't think that's consistent with the larger goals of reindustrializing the United States. That's going to require a huge cap expend. What is your take on this, and what would be the implications of that, of your answer for the budget deficit, for yields? I mean, I'm just curious to know what your thinking is there. So I would leave that up to economists, and I would leave that up especially to people who really understand US economic policy and fiscal policy, but the larger point stands that at the place we are today, if we want to be, this is a big if, if we want to actually do industrial policy in a serious way, if we want to support industries and encourage them to come back home, we will not most likely be able to do that by just saying, here are some tax cuts, here's deregulation. Because at the end of the day, I'm not sure if our tax cuts and our deregulation will still make the economics of it all work for the companies who may alternatively say, you know, look (42/45)
at Apple, for example, okay, so China is getting a lot of tariffs, fine, temporarily will shift a significant amount of our production into India, because that makes more sense for them. It doesn't make as much sense as China. They rather just stay in China, but if they can't, then they go to India next. They're not bringing it to California, Arizona, or South Carolina. So if we want other aspects of our other industries, other factories, and other manufacturing parts of the economy to come back home, we're going to have to think about this in a bigger way. Shazam, this is great, man. It was great seeing you again. Of course, I see you all the time on CNBC. You've been questioning it over there. For people that want to read, subscribe to China-Beijed Book stuff, or follow you, or the team there at China-Beijed Book, how can they do that? You know, we've got a very active X or Twitter account. It's called China-Beijed Book. So follow us there. Visit our website as well, www.china- (43/45)
beijed-book.com, and follow our media, and listen to our podcast wherever you get your podcasts. Awesome, Shazam. Again, man, thank you so much for coming on the show. Hey, thanks so much, Dimitri. Good to see you. For everyone listening, Hidden Forces is a listener-supported podcast. We don't accept advertisers or commercial sponsors. If you want to learn more about our premium-only content, including paywall podcasts and intelligence reports, you can do that at hiddenforces.io.com. Subscribe, where you can also schedule a call to learn more about our Genius Community and how to access special pricing to third-party research, live Q&As with domain experts in markets, geopolitics, and technology, and how to attend our popular in-person events held in some of the most beautiful cities in the world. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a (44/45)
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 at cofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
What's up everybody? Welcome to this week's Market Forces segment of the Hidden Forces Podcast with me, Demetri Kofinas. Today, I speak with Charlie Grant, a columnist for the Wall Street Journal, where he covers U.S. healthcare and industrial companies, including the electric car company Tesla, which he has been writing critically on since 2015. In his previous life, Charlie was a reporter at Grant's Interest Trade Observer and is a CFA charter holder. Charlie, welcome to Hidden Forces. Hey, thanks for having me. Yeah, how'd you like my little intro there of you? It was smooth. It was smooth. You didn't give him much else to work with, Matt. Yeah. Well, you know, we have tight word counts at the Journal, so I keep my bio in similarly tight fashion. You know that article you guys wrote that we're going to get into? Well, we're going to get into the Solar City acquisition, but I could totally tell. There was a few people, it was you and two other writers on that total, right? That's (1/45)
right, yeah. But I could tell that one of the comments about flattering the balance sheet, that totally came from you. That might be a Grant family. Exactly, yeah, yeah, yeah. So we're big fans of Grant's Interest Trade Observer here, and that conference is coming up now too, next week, actually, I think. The week after. So yeah, Charlie, I'm very excited to have you on. It's been, I've known you now since 2011 or ... 12, something like that. Yeah, 11 or 12. Yeah. Yeah, this is the first time you're on the show, but you've become really a prolific Twitter, and you've amassed quite a following. Shout out to Jack Dorsey. Yeah, you made an addictive platform. And you've been writing about Tesla for at least since 2015, and I've just caught wind of it just from Twitter, and I know you've been doing a lot of great work on it, and it's something that I haven't had an opportunity to cover on this show because of all the other stuff we cover, but given what's been going on in the news lately, (2/45)
and the fact that I think Tesla is at the intersection of a lot of these forces that we cover, the growing income wealth gap, the availability of cheap financing, the allure of technology and the way that it captures the dreams and aspirations of this bull market, and just Elon Musk's role as an icon for this bull market. I think it's a really interesting story. For my sake and for our audience's sake, and before I even say that, I got to say, I'm starting to do this now because I'm doing more finance shows. This is not financial advice, don't sue me. That's what I said when I had Brian Kelly on. This is definitely not financial advice. What's the official way you do that? That's clear enough. Yes, yes. I prefer plain English to boilerplate legal language, not investment advice. All right. I have a bunch of quotes here that are really cool, but I'm going to pull up a couple of yours before we start. One of them is, this is from October 7th. It's high time for Tesla and Wall Street to (3/45)
acknowledge reality. This is both from you. My favorite is, CO Elon Musk is a visionary, but there's a fine line between setting aggressive goals and misleading shareholders. Very direct, Charlie. This is what I want to talk about because you're not the only one that's been talking about this. Tesla has been sort of controversial and surrounded this company since day one. One way or another, but there's sort of been an ebb and flow of it and it seems to have really hit a critical state recently. Maybe you can give us a timeline history of Tesla. I think the company was founded or began operations in 2003. It went public in 2010, shortly after it produced its first car. Does that roadster, yeah. Tell us a little bit about this company's history and how we got here. Right. Elon Musk started, he published his grand master plan on the internet. The idea was to build luxury electric cars for a select few ultra high end product, make some profits off that, reinvest those profits into (4/45)
building a mainstream electric car, which is what you'll know now as the Model 3. That would launch a new era of electrification and some of the things that come with that, self-driving capabilities, that sort of thing, ride sharing, a lot of what Silicon Valley envisions for the automotive future. In some ways, he's accomplished almost all of those goals. The Model S started being built en masse in 2013 or so. Tesla narrowly averted bankruptcy. People saw this great car. It's a great car. I want to be clear about that. Have you ever driven one? No, but I've ridden it. It's amazing. On a reporter salary, a high end Tesla is not really an option in this business, but it's a great car. The allure of the product certainly has helped propel the rise of the business. Tesla has in many ways satisfied what its visionaries and its early disciples, if you will. They are disciples. I mean, mind. But where the master plan deviated from reality was that Tesla was building these cars not from (5/45)
reinvesting their own profits. They've never made any meaningful profit, but from the continuous generosity of the capital markets. They've been regular razors of equity. They've raised significant debt in recent years. Convertible bonds eventually turning into pure fixed rate instruments. And Wall Street's been all too happy to fund this, but the profits never really materialized. And it has created the situation where Tesla, you alluded to all this controversy where they make these great products and they get these fans that are truly passionate about them. I have the emails to prove it. Readers have a right to chime in with their feedback and they give it to me. Have you ever gotten any interesting bull arguments for Tesla? Sure. We can get to those in a minute, but this is where the flash point is because the bearers, like myself, will say, well, you've never made a business that can stand on its own and capital markets access comes and goes. And where Tesla has had this high stock (6/45)
price and bigger valuations and Ford and GM and that sort of thing, but they're still been really living hand to mouth on a year to year basis and sooner or later that catches up with you. And you think it's caught up to them now at this point? I think that's part of the reason why we've seen the stock go down so much in the past month or so. So with the Roadster, were they profitable or did they have gross profits at that time? There were spot periods like in 2013 where they made a narrow gap profit. When did they release the Model S? Around then, early to mid part of this decade, so 2012, 2013. There was a time with the Model S, a window where I think sentiment generally improved tremendously on the company. Yes, yes, because they had averted bankruptcy and the car was here and people could see how cool this thing was and they were not wrong about that. I want to give credit where it's due. And it was heavily shorted at the time as it has been back in 2013. And the stock went from (7/45)
somewhere around $20 to $200 in a year. It just rocketed. And there have been bumps in the road here and there since then, but more or less it's been a smooth ride higher. At least if you just look at things from a stock market perspective. If you look a little deeper, things start to get a little more iffy for this business. Well, it seems like you don't have to look very deep to see that. At this point now, but yes. I have not engaged really deeply with Tesla or the car industry more broadly. And what I did pretty much beyond just the general hearsay that I've gotten over the last few years was in the last two days, after I spoke to you and I said, listen, Charlie, I want you to come on, let's talk about this. And I spent the last two days kind of going through the financials, checking some stuff out. It looks pretty scary and it looks pretty obviously scary. I think so. So I also did some, in my research, I saw some interesting things that Jim Chano said specifically. The one thing (8/45)
that really stuck out to me was that he had put together a spreadsheet with all the executive departures of the last two years. And he compared the company to Enron. And of course, Jim Chano's famously shorted Enron in early 2000s. For him, he talks about what he calls the dark turn, which was the acquisition of Solar City by Tesla in 2016, I believe. Where does that sort of sit in your view in terms of the trajectory of this company? Was that really a fateful turn? Was it more something that illuminated what was already company practice, sort of practice by Elon Musk, or did it really embolden him to begin to act in a way that breaks perhaps with sort of his fiduciary duty? So I think that a lot of the problems we are seeing today with the current stock price slide and Tesla's signature bond issue trading in the mid-80s on the dollar well below par sign of significant financial stress, I would say that Solar City acquisition is a huge part of that. The stock market, of course, loved (9/45)
it at the time because Solar City was experiencing significant financial stress. Talk to the audience, for those who don't know, tell them what Solar City has given the backstory on this. Sure. So Solar City was another Elon Musk project. He wasn't CEO, but he was chairman of the company and its largest shareholder. And that's the rooftop solar panel clean energy business, which in theory doesn't really have much to do with manufacturing an automobile. So Solar City was another high-flying stock, but Solar accounting is very complicated. The technology is changing rapidly. So Solar prices, the economics of installing solar on a roof, sort of like an electric car, but not really, are interesting and you'll get adopters, but the industry is still young and hasn't figured out a way to make the economics work. That's a common thread here. The solar industry. Solar industry. And also true for the auto, but I'm talking about solar now. We can talk about the auto issues. Those are two (10/45)
different paths, too, right, in solar. One is the large solar feels like the kind of stuff we see in Arizona. Versus the idea of having each individual home. Right. Yes, yes. And I'm talking about the rooftop business specifically being problematic here. So Solar City, you are securitizing these assets. So your balance sheet automatically becomes very heavy with debt. And Solar City's stock price was falling. The bonds were trading at distressed levels and it really looked like the company might not survive. Did this start in 2015? 2015 was when the problem started to appear. 2016, they got acute. And in June 2016, Tesla announced that it was buying Solar City. And Elon Musk is the largest shareholder of both companies and the chairman of both companies. And these two businesses don't really have much to do with each other. So let's talk about a second. So what percentage of Solar City did Elon Musk own? Sure, off the top of my head, but significant chunk. Double did it ownership. I (11/45)
think in the 20s, pretty close to Tesla, which is, you know, he owns a little more than a fifth of Tesla and a similar percentage of Solar City. So not the majority and owner, but enough to make something happen, especially when you're also chairman of the board. And so this deal seemed, you know, from us, you know, we were in complete shock. I mean, this is kind of, shall we say, not in accordance with traditional corporate governance practices to do this sort of thing. But at the deal closed, Solar City seemed to be saved because they had the Tesla's access to the capital markets, which made some people think that these debt problems might be resolved. And Tesla's share price took off right after the acquisition again. It had fallen down to, you know, the high $100 range, $180, something like that. At its peak last summer, the stock reached into, you know, north of $380 a share. Well, didn't its market caps surpass GM's? Yes. Yes. Which is remarkable when you look at the number of (12/45)
cars that's manufacturing versus the number of cars that GM's manufacturing. To interrupt here, to interject, perhaps is a better way to put it. We did a show over the summer with Hubert Horan, the transportation analyst on Uber. And similarly, there are some similarities for me between Uber and Tesla. Specifically, in terms of the sort of secret sauce, hope, or expectation that investors have around that justify the valuation. The idea that in the case of Uber, that the application and the routing system would allow the company to overcome the losses to economies of scale generated by the traditional tax limo industry. And similarly with Tesla, the idea that they would be able to have a market cap larger than GM, which produces however many millions of cars. Yeah, like 11 million or something. Or if that's VW, I have this number here, VW does that. GM is just under 10 million cars. And I guess the idea of that is that they have some kind of really incredible head start on the future, (13/45)
which is electric vehicles and taking off. Exactly. So the idea is a decade from now, we'll all be driving Teslas, we'll all be using Uber. In both cases, what makes these companies so disruptive to the traditional incumbent players is that investors are willing to fund losses at absurd levels. Tesla at one point was losing about $20,000 on a gap net income basis per car sold. And GM and Ford's shareholder base just simply won't tolerate that sort of thing. And that makes it for a significant disadvantage, though, for management teams when you chart your strategy. So that's to your point, at the top of this broadcast about macroeconomic low interest rates, easy credit. There's a very common thread between Tesla and Uber and a lot of these other so-called disruptors that you see in the market, that the willingness to fund losses is something you only see when money is easy. And you can just tap the markets again and again and again. And that becomes the zeitgeist and the thought process (14/45)
of investors. That can take you very far, but if you don't build a sustainable business, then you have a very high diving board that you're at risk of. So Tesla was founded in 2003. It sold its first car in 2010. That was shortly after the market peaked at over $140 a barrel. They were expecting, yeah, oil. There were expectations that we would see $200 a barrel. I mean, certainly no one expected that we would not know one. I'm sure there were people that did, but many people were caught flat footed by the fracking revolution. Caught me off guard. Yeah, it caught me off guard as well. And so how much of a role do you think that has played in acting as a headwind for Tesla in its attempt to break through as a startup car manufacturer? Yeah. I mean, I think that's one reason electric cars are still niches. I mean, GM, I think Bloomberg reported a year ago or so that GM's electric car, the Chevy Bolt, which is not particularly selling. That was Lutz's project, wasn't it? Yes. Yeah, I (15/45)
think that's right. That was, I mean, he's been gone a while, but yeah, I mean, the electrification, that car is celebrated, but they're losing something like $9,000 on every one they sell. And so they can't build that many of them. Do they not get subsidies on those? They do, but the economics still don't work. I mean, the buyer gets a subsidy. And that's a particularly American phenomenon, right? Because in Europe, I assume that these cars are more popular. They are, yes, yes. And also because gas, you know, there's more... More expensive gas. ...conium gas taxes there and that sort of thing. Here in America, the opportunity cost to owning a gas guzzler is much lower and people want big Ford F-15. You know, Tesla is very popular on the coasts and in New York and San Francisco and those places. There's a great middle in this country and SUVs, pickup trucks, that sort of thing are still the name of the game. And when you have access to cheap gasoline, the opportunity cost benefit of (16/45)
driving electric is kind of thin. So that's been an issue holding back electrification more generally. That's not really a specific Tesla issue beyond the fact that they're all electric cars. That's an issue that GM and other guys trying to break into the EV market and the U.S. face. So I mentioned subsidies there. Subsidies have played a huge role in Tesla's growth. It's part of the controversy too. Okay. Well, talk to me a little bit about that. So, I mean, we talked about the debt that's going to keep coming in and out. I do want to talk about sort of the economics of these cars, but let's talk a little bit about the subsidies and maybe you can tie that into what the cost is of building a road stir. Well, they don't have the road stir anymore. They don't have a new supposed road stir that's going to come in at some point. But the Model S, the Model 3, the cost of actually creating one of these vehicles, how much they can bring in theoretically sort of with them or they are bringing (17/45)
in and how that all ties in with the subsidies. Well, yeah. So there's a few different ways these subsidies work. And there's not one coherent policy here we're going on. But there's the federal tax credit for an EV buyer. You get up to $7,500 for qualifying electric car as a tax rebate. And that applies for the first 200,000 cars that in the U.S. that a manufacturer sells, a brand. So Tesla, all of GM would fall under that umbrella. No one's hit that number yet, but people think that this year sometime Tesla will cross the line. Which is why they're going to lose the subsidy. Well, they wouldn't lose it right away under current law. It would be you have like a six-month grace period once you sell the 200,000 car and then it tapers gradually. So you probably take another year or so before it went away altogether. But that's the buyer tax subsidy. In California, there are state-level credits for EV buyers as well that can also lower the consumers bill. And the manufacturer, because of (18/45)
like zero emissions laws, so if you make a polluting car, you've got to make a clean one. And so a lot of manufacturers will sell what are known as compliance cars to comply with the regulations, but not necessarily a product that they're going to be aggressive or just not featuring in terms of a bottom line, how they plan to make money in the auto business. So you earn what are called credits, so zero emission credits. And you can satisfy your emissions requirements either by building a clean car or by buying the credits from someone else. So Tesla, since they only make electric cars, zero emissions, they have those credits they can sell. And that's been an important revenue. That's interesting. Because that's very high margin. It's a small part of their overall revenue, but the margins on that are 100%, essentially. And so that's certainly helping keep the finances afloat somewhat. And then there's also non-economic incentives. If you've ever driven in California, if you have an (19/45)
electric car, you can use the HOV lane, even if you're by yourself. That's also true here as well. Yeah. But in California, that seems, I have to confess, that's something I'd be willing to pay for if I lived there. It's not economics, it's not a pure financial subsidy, but it matters when you're considering whether to buy one. And then so this company becomes political because some conservatives don't really like the idea of tax subsidies. So there's that angle of the controversy with Tesla. But let's say just in terms of like, if I'm looking at the financials of this company, and I'm taking into account the subsidies, and I'm taking all of this stuff into account as I'm looking at what the costs are and what the revenue prospects are and what the prospects are for profitability for this company. Like realistically, when you look at the financials here, what is the path to profitability for this company? I don't see one. You don't see one at all? No. So why is that not reflected in (20/45)
the stock price? What do you account for? It started to. See, I differ with the broader market on this. Sure. Well, you differ for a while about it. Yes, yes. And I've been wrong. There's a term for that. But things are ... I don't want to shy away from that and protect ... Some of my predictions have been premature. I told you. It runs in the family. I actually, the audience may not know this, but your father is Jim Grant who had been on the program and he's made a comment before here that I really liked, which actually Josh Wolff also repeated on his own separately, which is ... But your dad had said, Jim had said that we at Grant's like to think that we like to be right later. Yes. Yeah, so. And I was also ... I told you I had spoken with Mark Spiegel a couple days ago and he's going to be on the program next Monday to talk about this exact same thing. And he's been short the company for like four years or something like that. So you could be wrong for a long time if you're right. (21/45)
Yes, absolutely. That's the way Mark's part. But to bring it back to that, which is that the market ... And this kind of feeds back to the bull story that Tesla, looking back, it may end up being sort of one of the iconic companies of the bull market. So it's not uncharacteristic. Of course, you have manias and stock prices. But I'm curious, how does the market rationalize the price and what are some of the other factors? For example, there has been willingness by different funds to invest in Tesla. What is the rationale for the price? And what is the rationale for the price currently? Well, the bull argument is still that this company is going to dominate the future of the auto industry 10, 20 years out. And bulls who have more sophisticated arguments around this than others, but the gist of it is essentially I'm willing to endure the short term ups and downs of manufacturing. And eventually, they'll figure out how to mass produce a car like all the GMs and Fords, but they'll just (22/45)
have much nicer products that everyone will want. And eventually, they'll gradually push these other guys to the sidelines of the auto business. And 10, 20 years out, Tesla will have 40, 50% market share. I mean, I'm ... But let's talk about that because I've tried to follow those bull arguments. And what I was hoping or expecting to find was that there would be some interesting proprietary piece of technology that Tesla's been developing, for example, in autonomous driving. To my surprise, from what I understand, they don't have a single patent on autonomous driving. Yeah, well ... Which is surprising for me, considering that they're a technology company located in Silicon Valley and that this is supposed to be the future. And so much of what I think defines them in the popular mind is that they're a technology company, a technology car. Right. That's a lot of hooey. They're a car company. Right. So they're an upstart car company. In terms of ... I'm putting on the spot here to give (23/45)
someone else's argument, but I'm just trying to understand what the coherent argument that the bulls are making is. How could you get there? If you needed to get there, if you wanted to make the case for them? Well, part of it is that only a small percentage of Americans have tried this car. And the idea is once you try this, you'll never want to drive anything else. That is a pretty awesome experience. Yeah. But the question is, is that the experience of driving a fast electric car, is the experience of driving a Tesla? Right. Right. And there are, I think, Audi, BMW, Porsche, Mercedes, these companies are all going to be coming out with fully electric vehicles. See, and that's a huge part of why I think that Tesla's hard times are just only starting to begin here, is what you just said. The competition has been ... Tesla had a huge head start. They were more serious about this than any other company. The automakers were slow to realize how popular electric would be, how in demand (24/45)
this would be on Wall Street, that sort of thing. And so that gave Tesla a huge leg up. And this is all credit to Elon Musk that he has inspired the rest of the industry to get serious about this. But now you have these experienced car makers. Porsche has no joke in terms of making a nice car, right? It's a gorgeous car. Yeah. And it's going to be all electric. I'm not sure any one of these individual brands, how big of a seller they're going to be. But we Jaguar unveiled their new SUV to compete with Tesla's SUV. But I've seen some of these have prices below the Model S, right? Yeah. And these are beautiful cars. I mean, if you look at them, they're very attractive. Exactly. I mean, it's one thing to say a Chevy Volt can't compete with a Tesla. I agree with that. That's factual. And that was the paradigm before Tesla. That's where Tesla innovated, right? Right. And Elon Musk supposedly was traveling around Silicon Valley, going to garages and seeing people would have a Porsche parked (25/45)
next to a Toyota hybrid. Yeah. And he said, essentially, people want, they want an electric vehicle, but they also have the money to spend for a... Yes. And that was a completely valid market segment that they've gone after. I think Tesla made a mistake though in trying to become a mainstream auto manufacturer. The Model 3. Right. Exactly. Which is where the real disaster has struck, right? And I mean, a niche auto player, you can make a profit and be a standalone business. You might not get much equity value for that though. So I mean, I always thought Tesla would do fine if they stuck to making basically custom ultra high end sweet rides for a very wealthy select population, which is how they got started. There's a lot of rich people in Silicon Valley. You can make that kind of business work and keep the scale small enough where you can manage it. But Elon promised a million cars on the road by 2020 back in 2016 when they were putting out $50,000 a year. And they still haven't sold (26/45)
$200,000 as you said. In the US. They've sold more than $200,000 worldwide. But they were talking about, I mean, an exponential ramp in production fast. And you have to know how to do this because the auto business, frankly, is not a good business. Right. It's very hard. It's very intensive. You get your parts delivered up front. It takes up a serious amount of work in capital. It's economically sensitive. Luxury car sales get hammered in every recession. It's been a long time since we've had one, but I mean, you just don't sell high end cars in that environment. The manufacturing process also changed tremendously. Forget the automation component, right? Which I think there's something really enamoring about Tesla building all their cars here domestically and having their operations here from what I understand. All their plants are here, correct? Yes. But the thing that I've discovered in delving into this a bit is just how much the car industry has changed over the last couple of (27/45)
decades and the role of suppliers in this process. And that they actually have much higher price to earnings ratios for their stocks than the actual ... The OEMs. Yeah, the OEMs. That's a huge issue too, right? Because that's networks and business development and relationships. Yeah. And now the auto stocks have done in this roaring bull market over the last eight years. The Volkswagen's of the world has been great conditions to sell cars. Easy credit has helped. Auto sales in the US were at record breaking paces year after year after year. And the market gave GM six, seven times earnings on their multiple. And Ford the same thing and Toyota maybe eight or nine, but nothing too different. And I think that's basically right. I think the market has it right with that. This is a very hard business and a lot of things go wrong sometimes beyond your control. And profits are minimal and everything has to go just right to make things work. The world's most efficient plants, something like a (28/45)
few minutes of downtime unscheduled in a year can make the whole operation unprofitable. Everything needs to be just so. You can't just decide you're going to learn how to do that. There's one of the reasons why we haven't really had an meaningful auto startup in the last 50 years that has lasted. This also brings back something else you said, which is that the public has operated, I think, an investor have operated under the assumption that the skills that Tesla is acquiring and the brand it's building that's purely electric are going to outweigh the legacy knowledge that comes from being a car manufacturer. But what I've discovered in my reading and what you're saying it sounds like is that actually what's far more important still is all the other stuff and not, let's say, the battery, which has been like, for example, some big thing. It's much more than just design. Right, exactly. That in fact, all the know how that comes with building a car is still vastly more important than any (29/45)
other part of this business. It's not just a matter of intelligence or anything like this. Elon Musk can land a rocket ship on a barge. You know what? I can't do that. That's a big part of this also. Bulls will say to me, hey, have you landed a rocket on a barge? I say, you got me there. I have not. It's not like he's not a smart guy or something, but this is specialized knowledge that you can't just substitute for with something else. That is what the bulls have missed here. That's also what's so cool about this story. Putting aside all the financial stuff, you know what I mean? Putting aside all the meat and potatoes, it's the fact that Elon Musk captures the wildest aspirations of this bull market. Also, I think this particular iteration of a bull market at this particular point in our evolution, technology and the innovations that are happening in technology, the public is becoming increasingly aware of things that would otherwise seem to be extremely up to subjects. That's what (30/45)
artificial intelligence, machine learning, advances in healthcare and biotechnology, synthetic biology, all these things. The fact that this guy has a space company, like you said, he is launching rockets into space, launching his car into space by the way, which I think is ... That might have been a waste of money, but ... That's also really fascinating, right? So that he launched a roadster into space, I want to ask you something. I don't mean this ... I'll put it in a non-controversial way. People like Lutz, for example, Bob Lutz of the former vice chair of GM, who has called, I think it's him or maybe with someone else, he's called it a Ponzi scheme. Some people have called it a Ponzi scheme. I thought that was kind of weird for someone to call it Tesla Ponzi scheme, but when I looked into it a little deeper, let's say the bear case, if you were to make a bear case, it's not a traditional Ponzi scheme, but you could say that one of the features of Tesla, which is so unique, is that (31/45)
Elon manages to diffuse anxieties or concerns about, let's say, a potentially failing business or a potentially failing project by not creating a new business, but creating sort of the prospect of a new business, whether it is high-speed tunnels, whether it's semi-trucks, whether it is ... I even talked about some kind of electric plane, like all this stuff. I think it's a hyperloop New York to Washington in 20 minutes. Yeah, he just comes up with this ... Which sounds nice, but color me skeptical on that one. But it's a fascinating thing though, right? Because just to bring it back to this, to get away from the meat and potatoes and just on this sort of aspirational quality, it's really astounding how far, regardless of what the fate of Tesla is or if people agree with you or don't agree with you, no one can deny that Elon is a tremendous showman and he's managed to use that to great effect. Absolutely. And, you know, in covering him and in covering the story, have you ever found (32/45)
anyone like that? I must say, when I thought about it, I certainly didn't think that Steve Jobs qualified. I thought you'd have to go to Walt Disney or PT Barnum. I couldn't think of anyone comparable within the last sort of boom. Yeah, well, just look at the Gallup polls of most popular Americans. Okay, Elon Musk is from South Africa, but he was included in this poll. And he was in the top five. I saw this came out maybe a few months ago and Elon was one of the most popular Americans and I got to tell you, there were no other business CEOs anywhere close on that list. It's kind of crazy how people truly idolize him in a way that's unique. I mean, no other company has that. And that has been part of the reason why Tesla has reached such heights. And I also think that is part of the reason that they're getting into trouble now. Did you see the interview that, what's his name? One of the writers for Interstellar did with Elon at South by Southwest? I read about it. You had to really (33/45)
watch it, but like it's not different than a lot of other ones, but it was really funny because this guy sitting there asking him, you know, these really esoteric questions about existential risks to humanity around things that I talk about on this show. Interesting things about, you know, the problem with designing a utility function for AI and whatever, like global warming, whatever it is, like these existential risks and Elon's sitting there with his flight jacket, right? Looks like he just got off of a spaceship. And he's giving these answers, but the reality is he's also the CEO of these different companies. And he's not at the auto plant while this is going on. Right. He's at South by Southwest. He's at the Oscars. He's in Australia with Amber Herd. And like, you know, if you're running a private company, then you should do it your way. But you know, public companies, I think you should be really sure there are no problems going on in your own backyard when you're making (34/45)
appearances like that. And as we've seen in the last few weeks, definitely not all as well at Tesla. And you know, the thing is, I totally agree with that. And it's just, again, for me personally, I want a guy like Elon to succeed. I love what he's done with space travel. I love the audacity. But at the end of the day, you know, you can only get so many free passes. That's right. And what it seems like to me is that where we're at with Tesla and why I wanted to bring you in here and talk about it today, given what's been happening most recently is that it feels like, unlike the other times, it feels like this time something is really breaking. And it's breaking also because we may be at a point where the tide is coming in. Well, so that's a... Or going out as they say. So we got off a bit of a tangent there from the Solar City acquisition, but I want to come back to that. That Tesla, what they always had before was a pretty clean balance sheet. So the profits looked dopey. You know, (35/45)
they were never going to make any money. And I always thought, well, the stock could go down a lot, but there wasn't much debt on the balance sheet. You could always issue equity and re-figure things out. You know, those companies could definitely experience sharp declines. As long as you keep your debt burden to a dull roar, you can survive a lot of things. But what happened with Solar City when Tesla assumed that their debt went from maybe $2 billion, most of which was convertible bonds, so they didn't even necessarily owe the principal back, now it's more like $10 billion. And that is a really scary thing if your production, if you keep losing money the way you always have. And so we've seen that Tesla issued a $1.7 billion bond last August to help finance the Model 3, and that bond got downgraded by Moody's after one interest payment. And that bond is trading at $0.87 on the dollar less than a year after being issued. They've spent all the proceeds already on their cash burn. And (36/45)
now what? So that's really alarming because they still don't make a profit. We don't have first quarter numbers, but I strongly suspect we'll see more sharp losses. And when you have this debt, it means the clock is ticking. You can't just say Elon's going to figure it out one day. He needs to figure it out right now. And it's taking a rising interest rate environment and also in the uncertainty of the time domain, which is we don't know what's going to happen tomorrow. We don't know what's going to happen to liquidity. That's right. That's right. And so, the big problems in this position were even if they clean up their manufacturing problems, handle this recall that was announced on Thursday. 123,000 Model Ss, right? Yep. And the supplier is going to pay for the replacement parts, but it's still going to cost Tesla money. Labor is not free. That is, even if they figure those things out, like you mentioned rising rates, like some things that they've exposed themselves to factors that (37/45)
are not even within their control here. And living at the pleasure of the capital markets, well, it's been a long time since this happened, but capital markets do close up sometimes without warning. And I mean, if that happens, this company is toast. How does this end? How does this end? Look, you're not an oracle, but how? I'm really not. Let's make that clear to the audience. None of us are. But I'm sure you've imagined ways in which it might end. What are some of those that you've envisioned? Well, I think they can hang on for a while. The stock has been going down sharply for a few weeks now. We've seen that before and had sharp rebounds. Basically, Moody said when they downgraded that debt last week that they need to raise $2 billion in the near term. And they could do that in the equity market, possibly. I think the debt market is a non-starter, given the way the last bond situation has gone. You're saying issue more equity. Yeah. Now, the stock price, that currency is worth a (38/45)
lot less than it was six months ago. And they were actually in much better shape when the Model 3 was this vision instead of this actual product that's causing significant losses and a lot of production headaches. I mean, so Tesla has overpromised and underdelivered. Elon Musk said in 2016 they were going to build 100,000 Model 3s in the second half of 2017. And they built like 3,000, something like that. 2,000. And he said 100,000 to 200,000. You can't, in the public markets, even a guy that everyone wants to believe in like Elon Musk, you can't keep pulling stunts like that. Eventually people stop believing you. And if people have lost faith in him, it could get very ugly very quickly. I don't think people have totally lost faith in him yet. I think even if he can't raise enough equity, the world is still a wash in liquidity. You can go to SoftBank, you can go to 10 cent. There are theoretical options out there, but he needs to find a new stream of money and he needs to find it soon. (39/45)
Otherwise, the stock is in serious trouble. But what's challenging for me is I want to find the way in which a bull would rationalize this. I can't find that case. In other cases where a company is impaired and it's running a very high risk of bankruptcy, I can still find in the timeline that you're laying out and others have laid out that it can go on for much longer, I can find a way to rationalize that argument. I still haven't come across one that, like you mentioned faith. It's not clear to me based on everything that Elon has said, the companies put out and the financials, what that case would be. It just seems to me that it's so divorced from reality. One option is bankruptcy is a dirty word, but when you file for bankruptcy, you can reorganize the company, reset the debt levels, you can reset the capital structure in a way that makes sense and start fresh. I think operationally that would be perfect. I certainly would be much less bearish on the outfit if they got a clean start (40/45)
with a new balancing. Of course, there's a small little hold up with that, which is you have to wipe out the current equity holders. That's obviously not something that can happen without significant angst. What about finding a buyer? Is that even realistic? Not at these valuations. Maybe SpaceX, maybe Elon's. Not at these valuations. Not right now. Let's say we get to a place where its price becomes attractive. What a company like, let's say Apple, which has supposed to be doing some work in autonomous driving and has a proclivity to associate its software with its hardware. Would they be interested in possibly buying a company like this in order to compete with, let's say, a Google or an Uber or whatever, some of these other tech companies that are providing the software solution? Never say never. That could happen. These companies are pretty secretive about their self-driving programs. We know Apple's working on one, but we really don't know much else in the general public. There (41/45)
could be a buyer out there, but here's another reason to wonder whether that could really happen. What if this self-driving thing is just a fad? We saw that Uber accident last week. I think regulators have been, in all these states, self-driving has been something to welcome, something to be a leader in. As you know, regulators can be quite fickle about this sort of thing. You saw the Arizona governor turn on Uber sharply in a matter of 72 hours. It went from, you're welcome in my state to, well, maybe not. This business is very exciting and valued highly and has captured people's imaginations, but there's no guarantee it's going to pan out. I actually think that, it's a really good point you bring up. I actually think, generally speaking, we may be on the verge of a rise in regulations, an increase in regulations across a number of industries. We might see it in the cryptocurrency market and see it here as well with autonomous driving vehicles, especially if we have a turn in global (42/45)
equity markets and people lose a lot of money. People start asking for the regulations. The same thing without having to drive vehicles in accidents. The Tesla brand is obviously worth something and something meaningful, but that is... At the right price. Yes. Honestly, that's the sort of thing that if Tesla went bankrupt, you could buy that brand for really not much money and it would be a fantastic deal for a buyer, but that's not a reason to holding onto this. It's not like you can't show the other way. It's because someone's going to buy it. Yes. I mean, the Tesla's plant, the Gigafactory is new, but not a whole lot really goes on there yet. It's not finished. The main plant Tesla got in California was an old plant from the 1980s that previous owners had abandoned. They didn't want it. I mean, these assets are not necessarily... There's nothing wrong with them per se, but it's not something that people are going to fall over themselves to have at any price in the industry. Wall (43/45)
Street will always fall over themselves to have the hot joy at any price. In general, it just seems that they've bitten off much more than they can chew. Absolutely. Charlie, I want to thank you for coming on and I also want to ask you, and if people want to follow you, you write the Wall Street Journal, what industries do you cover? How can they find your stuff and how do they follow you on Twitter? Whereas I said you are a prolific Twitter. Twitter handle is C-Grant WSJ. You can find our stuff on the Herd on the Street page that runs in the back of the business and finance section in print and on the market section of the Wall Street Journal online on wsj.com. If you want to send me a note about how much you liked my article or much more likely how terrible it was. What a terrible person you are. What a terrible person I am. I read it. I don't always get back to you, but I read it. My email is published in the online articles and you can find it there. There I meant. It was great (44/45)
having you on the show, man. Thanks for having me anytime. And that was my Market Forces segment with Charlie Grant. I want to thank Charlie for being on the program. Today's episode was produced by me and edited by Stylianos de Polao. For more episodes you can check out our website at hiddenforcespod.com. Follow us on Twitter, Facebook and Instagram at Hidden Forces Pod or send me an email at dkathiddenforcespod.com. Thanks for listening. See you next week. (45/45)
What's up everybody? My name is Demetri Kaffines 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 guest in this episode of Hidden Forces is Jeffrey Sacks, a world-renowned economist, best-selling author and professor at Columbia University where he was the former director of the Earth Institute. He is also one of the most reputable critics of the US intelligence community and American foreign policy, especially as it pertains to the ongoing war in Ukraine and US relations towards Moscow since the end of the Cold War. I developed an extensive outline for this conversation, the scope of which vastly exceeded the time allotted for it. I hope Dr. Sacks and I can find an additional hour or two to complete it because it is arguably one of the most important public conversations that any policymaker, politician or (1/45)
media pundit should be having at this moment. In the first hour of what I hope to be a multi-part conversation, Jeffrey Sacks and I discuss his career in public policy, including his unique experience working directly with the most important foreign policy figures of the late 20th century, including the last leader of the Soviet Union Mikhail Gorbachev, US President Bill Clinton and UN Secretary General Kofi Annan. We have an opportunity to touch on the national security state, the history of the CIA, including any potential role it may have had in JFK's assassination, and Dr. Sacks' unique critique of US foreign policy both during the Cold War and after the fall of the USSR. Part two of this conversation, which I hope to record and release soon, will dig much deeper into the national security state, or deep state as it's known, and its influence on US foreign policy. I also hope to discuss US policy vis-Ã -vis post-Soviet Russia in the 1990s and in the years leading up to both the (2/45)
2014 and 2022 invasions of Ukraine, as well as American policy towards China, America's Middle East policy, industrial policy, the continued threat of terrorism, and the steps Jeffrey Sacks believed that we should take to reform the US government, revitalize our economy, and reformulate our foreign policy so that it can reasonably achieve our national security objectives without resulting in imperial overreach or exhaustion. If you enjoy this podcast and it brings valuable insights to your life and business, please consider writing us a review and rating the podcast on Apple and Spotify. Each positive review of Hidden Forces helps more people find the show and join our amazing community. And with that, please enjoy part one of my conversation about America's national security state, foreign policy, and the war in Ukraine with my guest, Jeffrey Sacks. Dr. Jeffrey Sacks, welcome to Hidden Forces. Oh, good to be with you. Thank you so much. Yeah. You know, I've known about your work for a (3/45)
long time. I went to NYU, my sister went to Columbia, I have friends that went up to Columbia, and I know people that work there. So, but I've always associated you with development, economics and climate change. But that's not what we're going to talk about today. We're talking about today's foreign policy. But just briefly, what's your background? How did you get into economics and how did you begin your work in public policy? Well, I've been doing what I'm doing in one way or another for 44 years now. As a kid in high school, my parents took us abroad and I got fascinated in how the world is rather strange and needs a figuring out. I visited the Soviet Union during high school on a family trip, met a pen pal who lived in East Berlin, visited him after high school, decided I really needed to understand the world a lot better than I did. I grew up in the US Midwest, just outside of Detroit. And the world seemed fascinated to me. So I started in college at Harvard college, studying (4/45)
economics, fell in love with the subject. After graduating from college, I went back to East Germany, learned a bit more, became completely fascinated in the question of what we call in economics comparative economics, why do different parts of the world live differently? Why are some places rich, others poor? Who's got the best economic system? All of these questions fascinated me already more than 50 years ago. And I've basically continued in that track. I got my PhD at Harvard. I joined the faculty as an assistant professor. They were very kind. They promoted me each year up to full professor. So at a quite young age, I was a senior professor at Harvard. And I was invited to start working on real economic problems in countries that were in crisis, starting in South America, where I worked on and helped to solve what we call a hyperinflation. A hyperinflation is an inflation. Everybody knows what that is, but so rapid that the prices are rising by thousands of percent per year. And I (5/45)
helped Bolivia to stop a hyperinflation in 1985. When you do that, you also get involved in foreign policy. You also get involved in international relations because economies don't just operate on their own. They operate in a political world within a country, but they operate in an international geopolitical world as well. Well, I didn't know that I was doing geopolitics exactly in 1985, but I began to do so. I got invited to a number of other countries. In 1989, a most remarkable thing happened for me. I was invited by the Polish government to help them on their economic crisis. It was a communist government, and I told them I couldn't really help them because one of my heroes, Lekwowęca, the head of Solidarity in Poland, was under house arrest. So I would like to help, but I can't really help under such political conditions. The gentleman said to me that he understood, and I said, please call me if anything changes. Well, four weeks later, he called, said, we're going to end the (6/45)
martial law. We're going to release Mr. Węca. We're going to start negotiations with the Solidarity movement. And I scurried right over to Poland, and I said I would help to advise both the government and the opposition. Then came elections for the first time in Central Europe in 45 years, and suddenly I was the main outside advisor of the first post-communist government as the iron curtain was falling. And I helped them through their economic and political and geopolitical labyrinth, and things worked out quite well. And from their Mikhail Gorbachev's team called me, said help us. Soviet Union's got lots of trouble. And so I started working with the economic team of President Gorbachev. Then, of course, as people know, the Soviet Union came to an end, and President Yeltsin's team said help us. And I said, okay, I will work with you. And I spent a number of years around the region of Russia, Ukraine, Poland, Hungary, Czechoslovakia, which became Czech Republic, and Slovakia, Slovenia, (7/45)
and many, many other places, and became rather deeply involved in the politics and the geopolitics of Central Europe, Eastern Europe, and the former Soviet Union. Now, from there, I was invited to come to Africa, which I had not worked in. I began to visit China and India regularly. I was asked by both governments to give advice in both China and in India. And in Africa, I began a very intensive period for me of 20 years of working on the challenges facing the poorest countries in the world. Well, at that point, the UN Secretary General, Kofi Annan, said come be my advisor. And I said, great. And I packed up our bags. The family moved from Harvard, where I was professor, to Columbia University. I came in 2002. I came in a dual capacity as special advisor to the UN Secretary General, Kofi Annan, and as head of a rather remarkable innovation of Columbia University called the Earth Institute, which was focused not only on the economics issues that I had spent my career to that point (8/45)
working on, but the challenges of climate change and technology transformation and so forth. So it expanded my outlook, the questions that I was asking my colleagues, because suddenly I was a director of an institute with hundreds of climate scientists, including a unit of NASA. So it was really quite interesting, quite extraordinary. And I headed the Earth Institute for 14 years from 2002 to 2016. I served as special advisor for three secretaries general, Kofi Annan, Ban Ki-moon, and Antonio Guterres. I continue to be a senior advisor of the United Nations. I've now worked in more than 140 countries. So I've seen the world from all different perspectives. And I suppose that that's what draws me more and more to geopolitics right now. Because when you've seen the world not only from the perspective from New York looking out or from Washington looking out, but from Moscow looking across the Atlantic or from Beijing looking across the Pacific or from Nairobi in Kenya and so forth, you (9/45)
see things in a very different perspective. And that, I suppose, describes where I am today, not a U.S. centered view, but what I hope to be a kind of world centered view that tries to understand how the different places in the world fit together. So my outline for this discussion already was too long for the amount of time. Normally we do two hours, but now listeners can hear that there are a lot of places that we could go. I wish we could even just linger on the 1990s because I, as I mentioned, I was a student in the early 2000s at NYU. I didn't mention the date, but many of my professors in political science and a lot of the people I've met over the years were diplomats or people in positions of political power during that period who were also at a mature stage in their careers. And I don't know that one can overestimate the psychological impact that the collapse, and I would argue sudden collapse of the Soviet Union because it really was very sudden at the time that it was (10/45)
experienced by people that wrote about it. In retrospect, people say that it was inevitable, but at the time it seemed to have shocked a lot of folks. Can I tell you two anecdotes that, you know, two of the most amazing moments of my life, but because I was witness in the front row to this unbelievable revolution that was underway just after June 4, 1989, Poland had these semi-free elections because it wasn't entirely open democracy yet. It was in a transition from communism to democracy. And in these partially free elections, the solidarity movement basically won every seat that was contested. And soon after that election, I sat down with one of the most senior people who became the foreign minister of Poland, actually, but at that point he was just an opposition figure, but solidarity had won all the contested seats. And he asked me, what should be done? And I said, well, you have to form the new government. And he said, what are you talking about? We can't form the government. We're (11/45)
in communist-dominated Poland. I said, no, no, you just had elections. You need to form the new government. And he said, no, we can't anyway. The crisis is so deep. It's going to be explosive. We'll try to hold this communist regime to account, but we can't really manage this. I said, no, no, yes, you can manage it. I have some ideas. We're going to get your debt canceled. We're going to get a fresh start for you and so forth. Well, we discussed this for several hours. At the end, he stood up very forlorn and said, Mr. Sacks, I feel so bad because I think you are right. And that was, okay, we're going to have to move to some political leadership here faster than we anticipated. So that's how the first post-communist government started to take shape. And in fact, little known fact, but I watched it close up, Mikhail Gorbachev actually helped solidarity get into the government in Poland. Then just fast forward two and a half years, 1991, December, I'm invited to head a small delegation (12/45)
of economists to the Kremlin to meet with President Boris Yeltsin, who's president of Russia, but there still is the Soviet Union. This is December 1991, the last days literally of the Soviet Union. So we were sitting there in a huge room in the Kremlin. We were across a table and President Yeltsin had not arrived. And then way in the back of this enormous cavernous room, the door opens and in walks President Yeltsin from the far end of the room. And he walks in a big stride up to the chair directly in front of me because I was heading this small delegation. He sat down and he said, gentlemen, I would like to tell you that the Soviet Union has just ended. Those were the first words literally out of translation, of course, but those were his first words. And then he pointed to the door in the distant back of the room. He said, you know, who I was meeting with in the next room, I was meeting with the leaders of the Soviet military and they have just agreed to the end of the Soviet Union. (13/45)
And I heard this directly, just like that from President Yeltsin. So these were absolutely extraordinary days. So Dr. Sachs, I want to make the best use of our time possible. And maybe I can convince you at the end of the conversation to come back because there are sort of two major categories that I've identified in the course of constructing an outline for this conversation. One was to kind of zoom out and understand your central critique of U.S. foreign policy and what others call American exceptionalism as it pertains to international affairs. And that would lead to a conversation about the national security state, the CIA, and Schlesinger's imperial presidency. The other part is to understand your critique of U.S. foreign policy in the post-Cold War era and specifically as it pertains to Ukraine and then also to understand your larger conception of the international system. I think the reason why this is really important and I want to emphasize this with listeners is that there (14/45)
are not many opportunities in my opinion to have conversations with thoughtful critics of American foreign policy. There are lots of voices, critical voices out there, but I don't find most of them to be particularly convincing. We have had conversations with folks like John Meersheimer in the past or my former professor of Soviet history, Stephen Cohen, but we don't have as many as I would like and this is going to be an opportunity to do that. We might not get into really as much of a conversation about Ukraine as I would like, but let's start with your main critique or set of critiques of American foreign policy. What are those and how far back does one need to go in order to capture the totality of the strategic blunder that you've been describing in your recent writings and interviews? Well, these two issues of American exceptionalism and the post-Cold War and how we find ourselves in an outright war with Russia right now because we are at war. The United States has personnel on (15/45)
the ground that are providing the intelligence and manning the missiles that Ukraine is using to attack Russia. That's us there. The Russians know it too. We're a neck deep into this and it's extremely dangerous because the United States has 6,000 nuclear warheads and so does Russia. We're in a shooting match right now that really terrifies me, I have to say. These issues are conjoined. They're actually the same kind of issue. My critique is that basically, the US is too arrogant the way our government works. It doesn't listen to other countries. It thinks that we always know best. This is the security state, I'm speaking of, not the American people who don't have much say in this, but the security state thinks, well, we're so powerful, we can do what we want. Now, let me quickly add a caveat. Things are changing very fast because things aren't working out the way America wants. So there's a very steep learning curve that's taking place right now. People are even in the security state (16/45)
are understanding, gee, that unipolar moment, that idea that we were the world's sole superpower and so forth. We have to rethink that. So the critique that I'm making is a critique that I've been making for a long time. I wrote a book several years ago before the Ukraine war and its current variant was underway, called a New Foreign Policy Beyond American Exceptionalism, because I already felt our arrogance was very dangerous. It's become a lot more dangerous, but also people are beginning to understand that that exceptionalism is also filled with the kind of blinders that are leading us astray. So where does this all come from? Well, I think probably most major powers in history, by the time they become major powers, are pretty proud of themselves and think that their culture or their God or their religion or their technologists or whatever happens to be the particular approach of the observer has vindicated their country as a natural leader. And you would see this in any empire of (17/45)
the past, that this is God-given. It proves God's on our side or our gods are on our side or whatever the claim has been made. And in this sense, the US is no different from other major powers of the past. In fact, I like to say and I deeply believe that we've learned almost everything about being an empire from Britain, which was the dominant power in the world from roughly 1800 to roughly 19, let's say 1945, but one could quibble with the decades a little bit. But in any event, yes, Britain thought itself masters of the world and in some ways it was in the 19th century. It was the first country to industrialize. It had an economy that just dominated the world and it was able to beat the heck out of just about everyone that it tried to beat the heck out of in the 19th century. Now, for the United States, we've kind of had that view throughout our long history. The self-image that the US is the city on the hill, a phrase made popular again by Ronald Reagan in an inspiring presidential (18/45)
speech. But the idea that America's exceptional was part of our founding. But then America spent two centuries at war. We don't really think of it this way, but it was some genocides and some brutal wars across the American continent of defeating native populations, which were nations and had large territories, which we beat them out of, especially the 19th century. Then at the end of the 19th century in 1898, we had taken over the continent and almost immediately the feeling of Teddy Roosevelt and McKinley was, okay, now we expand into the oceans. Now we take the empire in Hawaii. Now we eat the heck out of the waning, faltering, dying Spanish empire. So we take Puerto Rico. We take Cuba in our hemisphere. We take the Philippines on the other side of the planet. That was 1898 in the Spanish-American War. And America joins about 100 years after, joins the European imperial powers, who have already been trans-oceanic powers. America's a very late comer to this. But God, what a booming (19/45)
economy with a continental scale economy, huge technological innovations, the wonderful discovery of mass public education, so many things going for the United States, so much natural resource base, filled with coal, oil, gas, everything one needs for great greatness of military power, of technology, of industry, and so forth. And America does become the dominant economy already in the early 20th century, but not the dominant geopolitical force. But the idea that, oh, we're great. We're really something, is of course bolstered by all of this. Then, I'm speeding history very quickly, but two world wars, great depression, and low and behold by 1945, Britain is no longer an empire. It's exhausted. It's collapsed. India is about to declare its independence. Within a couple of decades, Britain loses almost all of its imperial possessions that have been conquered over the preceding couple of centuries. And America finds itself essentially as the unrivaled power of the world, but for the (20/45)
Soviet Union, which is much weaker economically and technologically, but militarily is a major, major power and a nuclear superpower, of course. So that begins the Cold War era. Now, there's a fateful expression that to me changed America because it's so self-flattering. I think it went to our heads, actually, almost in a literal sense. And that's when Henry Luce, the publisher of Time at Life, said, this is the American Century. When he said it in 1941, oh my God, you swoon over that phrase. And it's a wonderful phrase, and it was true. It felt so incredible, American Century. He didn't mean a good century for America. He meant the century that America would govern the world, essentially. And that became the mindset after 1945. Not all wrong, by the way, America was a superpower, militarily, technologically, economically, financially, culturally, you name it, America was a superpower. And I personally love more than any other president of the United States, Franklin Roosevelt, who (21/45)
guided the country through the Great Depression, and who guided the country through World War II, and who invented the United Nations, and who set America on the course of global leadership. So there was this very optimistic sense, this is the American Century, and we will guide the world. And America did many wonderful things in the early days. It created the UN, it created UN institutions, it launched the World Health Organization, it launched UNESCO, and the UN Education, Scientific, and Cultural Organization. It did many wonderful things. It helped to inaugurate an era of open trade, which made it possible for other countries to follow along in economic development. So that was the good side. The other side, though, was we entered a Cold War, kind of in a crusading spirit. We could talk for hours, days, weeks, months, and years about the Cold War, and I'm going to restrain myself, except to say, I think it could have been avoided, I think it could have been ended much sooner. But (22/45)
it was viewed as the great Twilight struggle to use the famous phrase of John F. Kennedy. And after several decades that were extremely dangerous, and we came close to blowing up the world in the Cuban Missile Crisis in October 1962, the Soviet Union in the second half of the 1980s was exhausted and needed fundamental reform. And a young reformer, Mikhail Gorbachev, came to the forefront almost miraculously. And the main point about Mikhail Gorbachev was he was a man of peace beyond anything else. He was a great patriot. He was a socialist. He believed in socialism, but he was a man of peace. He said, I'm not going to shoot our opposition. And the Soviet Union basically could not hold together other than through force. And so this was the demise of the Soviet Union. Now, just to say, here's where the critique comes in of the next 30 plus years. I was there. I was an advisor to Gorbachev. I was an advisor to Yeltsin. I was an advisor to the second president of Ukraine, Leonid Kuchma. I (23/45)
loved Gorbachev's idea, which was now a world of peace. And he called it a common European home that would stretch from Rotterdam on the North Sea all the way across Eurasia to Vladivostok. And he saw that as a peaceful zone and an integrated economic zone. And I love that vision and I love it till today. But what I can tell you in short is the U.S. deep state, that means the CIA, the national security apparatus, the Pentagon, the White House. I know these organizations, not every one of them, intimately and so forth. But I watched all of this quite close up. They didn't say, oh, we have had the hand of peace extended. Let us cooperate. They really said, oh, we defeated our foe. Now we are the only power in the world. We can do what we want. And this initiated an era called neoconservatism. It really was started in the last year of the Bush senior White House in 1992. And it was really started, you can pinpoint it, by the Secretary of Defense, Richard Cheney, who of course went on to (24/45)
become vice president under George W. Bush Jr. and his deputy, Paul Wolfewitz. And they already in 1992 said, we're it. We're the only superpower in the world. Our grand strategy as a nation is to remain completely unchallenged. What came to be called full spectrum dominance in every part of the world. So we have to be militarily the dominant, economically the dominant, financially the dominant, technologically the dominant. We need to dominate. And that is the foreign policy that we have had since 1992. So it's 32 years running. I've been a critic of it those 32 years because I've said, and maybe this sounds strange and counterintuitive, but I've said, don't declare victory of the Cold War. Rather, declare peace with our counterparts. Don't rub their face in it, as Churchill said, in victory, magnanimity and in peace, goodwill, not conquest. But I watched close up something that Wesley Clark told us about. Wesley Clark was the NATO commander during the Clinton administration. We (25/45)
became friends after that, though we didn't see eye to eye on foreign policy often. But Wesley Clark told a story about walking into the Pentagon. He tells it two times, but one is in 2001 after 9-11. And he's told, yeah, we're going to go to war several times because we're going to take out every one of America's enemies. We're going to not just address al-Qaeda and what's just happened to us after 9-11, but we're going to take out Saddam. We're going to take out Mohamed Qaddafi. We're going to take out all of Russia's would-be allies because we are the United States of America. And so we launched a lot of wars of choice. And this is what has gotten us into a colossal mess. And every war of choice, I've been a public critic of it, strongly saying, we don't need this war. It's going to hurt us. We're not going to win. We're going to spend trillions of dollars. We're going to get a lot of people killed. And it's not going to help the United States. It's going to hurt the United States. (26/45)
It's going to make the world more dangerous. So again, so much to respond to. First of all, for people that are curious about this history that you talk about, I think maybe the best articulation of the imperial agenda you described by the new conservatives was Bill Kristol's project for a new American century. His father Irving was the founder of the new conservative movement in the 1970s. And also another scholar who I studied in college who wrote a book called American Empire. His name is Andrew Bacevich. He's written many books. In that book, he talks about full spectrum dominance, which was really a compelling theory at the time. And there's something to be said about the lingering framework of full spectrum dominance and the danger that it poses because it could cause certain foreign policy thinkers to overreach thinking that we have powers that we no longer have. I'm just trying to think about where I want to go here. So one of the things I'd like to do on this show is give (27/45)
people frameworks. And you mentioned the deep state. What's challenging with words like the deep state is they become profuse in American culture and language. And yet no one really has a clear definition for what it is. Now that may be by design in a sense, because it's very difficult to wrap your arms around something like this. But to the extent that we can, first of all, is there anyone who you presume has a complete picture of the deep state? And to the extent that you really understand what this is, how would you describe it? What is the schema that you would give people? The deep state for me is the national security apparatus. And I believe that the most important institution in it is the Central Intelligence Agency and the intelligence agencies more generally. I think a tremendous amount of U.S. policy is made in the intelligence communities, which were designed, unfortunately, back in 1947 under the National Security Act, not so much as intelligence agencies as almost a (28/45)
secret army of the president of the United States. So a great deal of what the deep state has done over the decades is topple other governments. And typically, this is done in what are called covert regime change operations. It's sometimes overt, like sending in NATO to bomb Libya in 2011. But mostly it's done covertly. And there's a wonderful book that was a dissertation, actually, under John Meersheimer by Lindsey O'Rourke called Covert Regime Change. It's really worth reading. It's stunning because she studies just the period 1947 to 1989 because, as she says at the beginning, she wanted to study a period where there's been a lot of declassification of documents, not that covert regime change stopped then, but rather she wanted to be able to examine documents. And she records during the period 1947 to 1989 70 regime change operations, 64 of which are covert. Now, what is a covert operation? It's pretty weird because when a government's overthrown, you know it. A covert operation (29/45)
isn't really a secret. What it means is the CIA denies it. Ah, it's not us. It's somebody else. But of course, the US is very deeply involved in it. I've seen some of this very close up. I know others bits of it by reading about it, studying about it, talking to people who were involved. But it's a pervasive part of our foreign policy. And that's basically what the deep state does. Now, who are the institutions? It is a small group, but I could not tell you whether it's unchanged administration to administration, but it's the president, it's the National Security Council, it's the intelligence agencies, it's the Pentagon. It is a very small number of major military contractors. And it's the Armed Services Committees of the Congress. That is a few hundred people. And they are the main determinants of the American use of violence, whether in covert means or decisions on going to war. So again, we could linger here forever. There's a great book that I read years ago by Tim Wiener called (30/45)
Legacy of Asciers, which I think is a quote of Dwight D. Eisenhower's when he was reflecting on the CIA. There's criticisms of that book, of course, because it goes into so many details. Some people say is Tim Wiener just an agent of the CIA, because one of the contensions of the book was that this agency has been a total disaster. And so because it's shrouded in secrecy by design, a lot of rumors persist about it that no one can really verify one way or the other. Another problem with the quote, deep state or national security state or the CIA or the national security apparatus is that much of what the public knows at the very least, right, is stuff that's very old, stuff that's been released over time. And so, I guess one question I have here is, how much do you think what we know about what the CIA was in 1963 when Harry Truman wrote his critique of the organization in the Washington Post a month after Kennedy was assassinated? How much of what we understand about the intelligence (31/45)
apparatus is actually relevant to how it operates today and how much power the agencies have today? I think it's still very relevant and it's completely shocking and dismaying to me that the last time there was a serious investigation by Congress of the CIA was 1975, the church committee of Frank Church of Idaho, that was 50 years ago this coming year. We've not had a serious investigation since then. Now, I've seen some coups straight up with my own eyes because I work abroad. I had a president tell me they're going to take me out and they did, by the way. A president tell you that they're going to take him out, not take you out. No, no, no. Yeah, yeah, I just want to make sure people know. You're talking about Haitian president Aristeed. Exactly. So the president of Haiti, Aristeed said to me, thank you, you got it exactly right. They're going to take me, President Aristeed, out. And I, being a naive economist, said, no, no, we're going to get this to work. We'll fix this and so on. (32/45)
One day they walked him to an unmarked plane and overthrew him and flew him to the Central African Republic. They literally did it. And then I got this unbelievable glimpse into how this works when horrified I called the New York Times reporter on the beat of Haiti and said to her, report this, come on, it's broad daylight. She said to me, this is a friend, oh no, my editor is not interested in this. Excuse me, your editor is not interested in an American led coup in broad daylight. And that's how it went down. Now, that's just little Haiti, but that's how it went down. And I've seen lots of this over the years, not in a systematic way. No one's sharing this information with me. I'm an economist. I'm dealing with budgets and taxes and exchange rates, but you hear a lot because I'm dealing with heads of state and I'm dealing with foreign ministers and I'm dealing with economy ministers and so on. And we're meddling up and down the wazoo and it's extremely dangerous. And the track record (33/45)
of all of this is terrible because if you overthrow another country, you don't end up in a new equilibrium. You end up in a profound disorientation. And just to take another case, because you're right, the American people know very little about this. We know very little about it. It's all secret. So you just get glimpses of it. But another example, Obama decided together with Hillary Clinton that they would overthrow the Syrian president Bashar al-Assad. And president made what's called a finding, presidential finding, and he ordered the CIA to train an arm jihadists basically to overthrow Bashar al-Assad. And they did that, but they didn't succeed as in many cases they failed. Now, this was all denied for years. And then there were two, I think maybe three times that this was mentioned in the New York Times in 2015 and 2016. It's called Operation Timber Sycamore. It's a real document, a real plan. It's something really signed by the president of the United States. But the American (34/45)
people aren't told almost anything. Okay, one day the New York Times ran one page about it, said it didn't work. But my God, if you try to overthrow another government, frankly, I'd like the American people to understand. That's how Syria got into such a prolonged chaos. And then what happened, by the way, which is par for the course, after several years, Russia came in on the side of Assad. And when Russia came in, we attacked Russia for meddling in the internal affairs of Syria. So it's called gaslighting. It was pure gaslighting, purely phony. And that I happened to know because I knew people very much involved in the whole episode. I heard an earful about the U.S. machinations during that period. So again, we're not going to have a chance to get into any of that. I wish, again, I hope that I can convince you to come on to talk about all of that. There's another book I want to recommend for listeners. It's called Active Measures by Thomas Rid. And it only came to me now because (35/45)
you're talking about how we don't really know. And that's by design. The book Active Measures is actually about the Soviet KGB, intelligence apparatus, and how it operated. And by design, created this environment of uncertainty even within its own ranks. And that has a really pernicious effect on a society. And similarly, the cult of secrecy that we have in the United States has been too. I want to propose a theory to you, and I'm curious if it resonates. There are a lot of theories that have cropped up over the years about CIA or intelligence meddling operations. One is obviously the assassination of John F. Kennedy in 1963. Another one is the attacks of 9-11. With respect to JFK's, actually with both in these cases, there was suppression of information. I know this is a fact for 9-11. We know this is a fact on the historical record for JFK. We also know it for 9-11, but I've also had Senator Bob Carey, who was one of the 11 members of the 9-11 commission on here. And he actually (36/45)
said, quote, this was a conspiracy that went to the highest levels of the Saudi government, of the Saudi royal family. And we've recently seen some videotape coming up again. Very odd. Why is this videotape recently surfacing of a Saudi diplomat casing the US Capitol? My theory about all of these things is that because we have this sort of extrajudicial agency that exists outside the law that has not just Black Ops budgets provided by the government, but also has its own revenue streams that it generates illegally and is able to use fund operations, because of all this secrecy and because of how compromised so many people are as a result of how our government operates since the end of World War II. My sense is that we, people assume, for example, that a lot of people assume that Oswald killed Kennedy because he worked for the CIA and because of all the connections around him. But it's also perfectly possible that Oswald was a deeply compromised human being who went rogue, maybe (37/45)
thinking that would please his handlers at the CIA, killed Kennedy. And so the whole thing was suppressed because so many people were involved and people were also terrified, self-censored. You know, I remember listening to a phone call that Lyndon Johnson had with either Chief Justice Warren or with Gerald Ford. And one of the two or both didn't want the job because people were terrified. And I think the same is true for 9-11. We don't really know who was involved, where it crossed boundaries with the CIA, where the intelligence committee or anything else. Does that resonate with you? Well, I've studied the Kennedy assassination at length, in part because I wrote a book about President Kennedy and his negotiation of the partial nuclear test ban treaty in 1963. So I got very much drawn into the subject. I'm personally convinced that there was a conspiracy, that the United States government was very much involved, that the CIA was involved, that papers are still being withheld. We know (38/45)
that show a lot of what was known because here we are 61 years later and every president has withheld documents that we're supposed to have been released a long time ago. When you say the government was involved, do you mean a shadow government, a source of power that was filled with the ranks of people in the intelligence community, maybe people also within the official government, but not the official government itself? We don't know. You know, we really don't know. I think a lot of people who had government jobs were involved. Let me put it that way. You know, it was crazy and rogue or a little bit more even structured than that. It was a coup and it was a very awful thing. And aside from everything else, just as a footnote, because for all of us who spent a lifetime hearing about it, looking at this as a breuder, reading about it, talking about it, the forensics for that never added up at all. And so it's clearly there was bullshit from the very beginning in all of this. And what (39/45)
you see, by the way, is it's the collapse of the American public's confidence in government. Yeah. It starts then. It's the tragedy. It's what Bob Dylan says in Murder Most Foul. It was really the end of the illusion in a way. Yeah. So JFK, another item we'll have to add to our list for when you come back on the show. I'm going to actually end the conversation here, Dr. Sacks, because we're basically running up on the end of it. And I want to tell you sort of where I wanted to take this conversation and also to let listeners know as well in case we can continue it later. Absolutely. One area, obviously, this is just a prelude to the main act, which is really a conversation about post-Cold War politics, foreign policy vis-a-vis Russia. The question of, I don't really like the question of who lost Russia. It's a common one that people ask. I think it's actually a malformed question. But I think it's one way to think about kind of where I wanted to take this conversation, which is how (40/45)
much is this quote America's fault? Because I think part of this, I think it's just the result that in America, people talk about America. It's just natural. But there's a kind of weird sense in which everything that goes wrong in the world is America's fault. But somehow we're incredibly incompetent, but at the same time, everything that happens, any kind of coup is America's tentacle somewhere. And again, I think this also speaks to what we talked about earlier, which is the immense power that's going up around the executive, the quote, deep state. People have lost confidence. They don't know what is real and what's not real. And this is really problematic. And again, I actually want to quote another great book by Peter Pomerotsev called Nothing is True and Everything is Possible. It's actually about post-Soviet propaganda and how propaganda works in Russia. But it's actually something that reflects increasingly how American society is organized informationally these days. But I just (41/45)
want to highlight, you know, one of the, some of the things that I want to talk to you about is one, the argument about NATO enlargement as the reason for the war in Ukraine. And I wanted to get specifically into that, just enlargement overall, reunification in Germany. I just kind of wanted to understand the scope of your thinking there. Great. I also wanted to talk about the withdrawal, the unilateral withdrawal from the ABM Treaty in 2002, as well as the Intermediate Range Nuclear Forces Treaty in 2018. And then also all the provocations with respect to Ukraine. And I think there is a really great opportunity to not just bring in conversations about the intelligence community, but also the messy job of trying to understand really how the United States interfaces with the world. I mean, there are a lot of companies and NGOs that have their own ideas and those things spread internationally. And I don't know to what extent it was NATO itself that created a security dilemma for Putin. (42/45)
Certainly there are geopolitical arguments for why NATO expansion would be problematic for Russia. But to what extent was it really a Russian issue? To what extent was it really a Putin issue? And it was much more about the westernization of Ukraine that made him nervous, just like the westernization of Taiwan and other Asian countries might make China nervous, because perhaps it undermines their sense of confidence in the staying power of their regimes. All great questions. I look forward to continuing, because these really are great questions and very important ones. And let's spend some time on them. Yeah, and we'll have a chance also to talk about, I wanted to have a section here called President Sacks. And I wanted to understand sort of how... Oh my God, no. Because you do a great job in your book actually of what I love about also your book, New Foreign Policy, is that you spend quite a bit of time talking about, okay, so if this, if here's what's wrong, how do we address those (43/45)
problems? I think that's super important. I think as Americans, we want to be constructive in how we engage with politics and our future. And so I appreciate that. And I look forward to having you back on soon and talk about all these things, Dr. Sacks. Really a pleasure. Great to be with you. And yes, let's do some more. Thanks. Thank you. And I want to remind listeners that they can find conversations like this one with experts in Soviet history, foreign policy, and national security in the related tab of this week's episode page on our website at hiddenforces.io. I also want to encourage those of you who enjoy this podcast and who feel that it brings valuable insights to your life and business to rate and review the podcast right now on Apple and Spotify. Each positive review of Hidden Forces helps more people find the show and join our amazing community. Thanks for listening, and we'll see you next week. If you want to listen in on the rest of today's conversation, head over to (44/45)
hiddenforces.io. slash 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 Stylian Nusnikolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
What's up everybody? Welcome to this Market Forces segment of the Hidden Forces podcast where I speak with market professionals, business people and anyone else with an economic perspective on current events. My guest for this segment is Rachel Ziemba. Rachel is managing director of research at Forkast RGE and a senior research analyst at Rubini Global Economics. Rachel, welcome to the program. It's a pleasure to be here. The pleasure is all mine and the audience's. I'm very excited to have you on. We've been speaking for a few months, but now you're in studio. I was prepping before this interview. I was looking at your work and looking on the internet and searching around to see what are the juicy topics, what's going on in the market, what it would be interesting to talk about, and relevant. They were these five major things that kept coming up on my radar. One, at the very top was North Korea and geopolitics in general, kind of shove that in there, but definitely North Korea. The (1/45)
dollar, the decline in the dollar from year to date, basically January, emerging markets, which is your specialty or one of your specialties. I really want to get into that, the equity market in emerging markets, the disinflation in emerging markets, these bilateral deals between nations. That feeds into another thing that was on my radar, which is Saudi Arabia and energy. I want to get into that. Maybe this inflation deflation thing globally, that ties in. All these things tie into each other. Let's start with North Korea, because obviously this has the largest existential fat tail out there. The markets have seemed to be pretty indifferent to this reality, whatever it is. In that sense, they seem to be also reflecting the public at large. The interesting thing about Kim Jong-un is, when he first came to power, I don't remember how many years ago, but the narrative was, or the hope was, that this guy was westernized. He had grown up in and around Western institutions, educated in (2/45)
Switzerland. He was going to be able to come in and possibly be someone we could negotiate with. In fact, it seems the worst case scenario has turned out in terms of our relationship with North Korea. He has surprised us tremendously in his capacities with his ballistic missile development. What is the latest on North Korea? How is that? Give us that market perspective as well. How are markets dealing with this? Sure. I think markets really are struggling to price the risks out of North Korea. Markets tend to struggle to price geopolitical risk. Before we get into North Korea, I think one of the big questions I get repeatedly is, why aren't markets pricing geopolitical risk? There's so much of it out there. My response is usually to say, well, you've got to start from how does it affect the economy and how does it affect asset prices? Because some geopolitical risks can be a demand shock as there's output loss and some might be a supply shock. There's a shortage of a given commodity. (3/45)
We shouldn't expect them all to be the same. But off my soapbox, back to North Korea. In the North Korean context, what we've seen over the last several decades has been an escalation up as they continue to develop their nuclear program. That really is part of the existential threat being asked to give up nuclear proliferation. In many ways, there's a degree of rationality there that they have seen other leaders give up nuclear capabilities and lose power. The other big challenge is so many resources have gone into building up this nuclear program that the population might be very unhappy if suddenly they were told they had to give it up. Where we are now is that Kim Jong-un, as his predecessors have done, is really testing out the new U.S. president. We may in the U.S. not think that the president is that new anymore, but this is part of a cycle. Each time around, North Korea's nuclear capabilities are more extensive. Where are we now? We've had several missile tests to show the (4/45)
length of distance they might be able to send a weapon. We've had a nuclear test. This is clearly a step up of provocation. In response, we've had increasing economic pressure, economic sanctions. We had the latest announced by the UN Security Council earlier this week on Monday. I would expect to see, given the cost of a military escalation, the extreme loss of life from any military first response from the United States or its allies, that I would expect that economic pressure will continue to grow. We at Rubini Global Economics just put out a recent piece arguing that there will be a parallel track. There will be multilateral measures. There will be U.S. unilateral measures. Why do they need to be unilateral measures? Because at the most of the trade and finance that is keeping the North Korean regime alive comes via China. Most of the finance that supports the businesses that exist there, underground or official, and so China's involvement is really key. Russia's involvement is (5/45)
really key as well. As the Chinese have cracked down a bit, the Russians have stepped in and provided more financing, more energy. Despite this pressure, and there will be more, it remains to be seen if that's going to lead to a policy change. You think the public and the market took that in a tepid way. They didn't really react to it much. They didn't put much stock into that language. It's not characteristic language. I think before this administration, the most Bellicose rhetoric I heard against North Korea was really in President Bush's State of the Union address after 9-11. That was the axis of evil. What do you think of that? Sure. You're right. Not only has there been an escalation of rhetoric and action on North Korea's side, in some ways the Trump administration and particularly the president himself has used language that has countered and has almost been in lockstep with that of the North Koreans. That's new. We have a president now who came into office as a dealmaker, as a (6/45)
negotiator, and as someone who said, I'm not going to act presidential, and I put that in quotes, just to be presidential. I'm not going to be guided by the norms that exist because I think America's gotten bad deals on many things. We can talk about that over the course of our conversation. The rhetoric on the U.S. side has very clearly stepped up. They're trying to attack. The danger here is that as there's escalation up and things that are said for a domestic audience like the North Koreans will receive fire and fury, in my mind it raises a chance of some sort of accident, some sort of escalation. Strategic analysts I speak to, and I sit here as an economist, as a country risk expert, not a nuclear scientist or the like, but most people still believe that North Korea is a way off from actual nuclear capability. When you say a way off, what do you mean? What I've seen, contrasting opinions from people in the intelligence community primarily. We're both. Yeah. What gives you that (7/45)
and that's a broader topic we can get to. I think the answer is twofold. One is that there is an extreme tail risk of war, which could happen at which point a lot of bets are off. One way to respond to that would to buy very long dated options and to hedge against some major correction. Or to say that there will be signs ahead of time. Now if there was a US attempt at a surgical strike, there would probably be a number of warning signs. People out there in the press have, and experts really point to the signpost to watch there is around the US non-essential personnel, the Americans present in the Korean Peninsula. There's a number of other steps as well. It's not to say it won't happen, but that there will be signposts. The other reason, but short of military conflict, the economic impacts tend to be related to maybe there will be some form of a loss of confidence in South Korea, in Japan, some delayed investment. To some extent from South Korea's perspective, they've been living with (9/45)
this threat, this unresolved border, this unresolved conflict for decades. They're just continuing on and living their life. From a market perspective, the other thing that is going on is if anything, the geopolitical risk coupled with the inflation issues we might get to in a few minutes have conspired to bring down long-term interest rates in the United States. That in turn has made equity markets that look really pricey to me in the US at least, has made them look a little bit more attractive. I think the other part of the story is that if anything, by focusing on sanctions, on economic pressure and the like, that has helped a number of market actors say what imminent war is not likely. There can always be things that occur and the like, but you could ... Mistakes. I mean, things like we talked about there, you mentioned things, unforeseeable events, and that's difficult to price, but also those could be very catastrophic, whether we're talking about financial markets or in reality. (10/45)
Before we get into the inflation deflation, emerging markets and more detail, the dollar, the carry trade, which is something I want to discuss because I think that's super interesting. Let's just wrap this up a little bit because you mentioned a paper that you guys are out with. You talk about market pressures and unilateral and multilateral. The thing that I would like you to clarify for me is when you talk about unilaterally, how would the US act unilaterally in your view? Then when you talk about multilaterally, who would they act with and who would participate? Is China really ... Well, it's a difficult question for you to answer. It's unfair to ask you what China thinks. Again, this is something else where at least in the press, I'm not privy to any special information. It's unclear whether the US has the leverage to compel China to engage North Korea in a way that would quell the crisis and prevent them from stopping their ballistic missile program. I guess I would start by (11/45)
saying actually I think it's very difficult in this day and age and with the importance of China and with the importance of its sovereignty for the US to compel China to do much. China is in the same way if China turned around and said, how do we compel the US? I think one of the challenges and it's something that causes folks in Washington and elsewhere a lot of angst because they would like to be able to compel whether it's China or fill in the blank country. China has its own interests and I think the goal here is identifying where those interests align with the US. The Chinese for a long period of time have looked at the cost-benefit analysis and said if they prefer to have a buffer state between the more US military-supported countries of South Korea and even Japan and they've been very worried about what an implosion of North Korea would mean from a humanitarian perspective because those people would continue to flood into China. They've also seen some economic benefits of having (12/45)
some degree of trade with the country. That was a shift since the mid-90s. The mid-90s there were all sorts of stories about famine, crisis, North Korea was imploding in many ways. Since then, the Chinese started to be a bit of economic activity opening. Through shell corporations, but on the margins the area of China adjoining North Korea has benefited from some of that activity. The Chinese interests are mixed. We fast forward to today and the nuclear escalation, the nuclear threats, the greater uncertainty, some Chinese actors are starting to rethink that sort of knee-jerk response. However, they don't like to be forced by the US to do something and the like. As a result, the US response is, I would say, parallel. A parallel process of keeping a coalition together, that's the multilateral, UN-security council-based approach, and unilateral. US action directly. A lot of people use the example of, well, what can we learn from Iran sanctions and that, the like. That was also a case (13/45)
where the US did some things on their own for a long, long time, but also there was a multilateral coalition and the like. That was really important in Iran's case because they trade with a lot of countries. Now, in North Korea's case, they've been so isolated that China and Russia account for almost all of the trade and financing. It makes multilateral measures important in a different way because you need to have China on board. That's what the last two round of UN sanctions have done. They have shown China being willing to agree to restrictions in fishing and textile and other exports. How they'll be implemented is an open question. That brings us back to the unilateral measures that US is doing. Those are being done both via congressional legislation, but also via executive order. We're talking about sanctions. I'm talking about sanctions. All of them are sanctions. But the US doesn't trade with North Korea. The US doesn't. So it means that what the US is doing is sanctioning or (14/45)
listing companies, individuals that are trading with North Korea. They're using the threat and acting on it to encourage China to implement what they've agreed to. That brings us to what I see as a risk that's out there about how this economic pressure could influence global risk sentiment. That's if the US continues to escalate on the sanction side and involve measures on major Chinese financial institutions, a big bank, or follows through on a threat that I think they probably won't, but follows through on a threat to reduce tariffs, reduce trade with, say, China in a more meaningful way. Now, I do think there's an element that what some members of Congress are talking about, which is cutting off Chinese banks from the US financial system, that's playing with fire. Also, the Chinese have disproportion. How many trillions of dollars in US securities? Over a trillion. Probably more like one and a half trillion. That doesn't really make much sense. Although I would say that politically (15/45)
speaking, if any administration were going to go to the populist route of erecting tariffs, this administration would. We touched on something a little bit both directly when I mentioned the carry trade in the dollar and also indirectly in just the conversation itself. It's a risky situation. Although we haven't seen really any panic in markets or in the public domain, we have seen a rise in treasuries. The 10-year yield has dropped down to about 2% now, I think it is, roughly. Gold has been up, but the dollar's been down. The dollar during the same period has dropped roughly 10% of give or take. I don't know where we are now exactly. Treasuries are moving up, but the dollar's going down. That means that there's an outflow of dollars going into something. Dollars are leaving to go somewhere other than the treasury market to account for ... How do we square that circle? How do we square that circle? And where is it going? I think what's going on, some of the move into treasuries has (16/45)
come from other dollar denominated assets. It's gone from US equities into treasuries. Some of it, I think, as you say, has gone as the result of the fact that not only have US treasury yields fallen, but European and Japanese yields have fallen a lot as well. I know it can seem counterintuitive given that Japan is one of the countries potentially in the crosshairs here, but the yen continues to be a major safe haven in this regard. I think a number of people have looked around and said, well, US high yields, US equities, a variety of assets have looked pricey. From the dollar standpoint, I think there's been an arc here of flows that's really, really been based on relative monetary policy as well as geopolitics. That's been over the last nine months or so. We had a period where after some countries moved out of deflation, people started finally expecting the Federal Reserve to hike interest rates and expecting the ECB not to do very much, that there was a significant move into US (17/45)
assets, both because people had high expectations of the equity markets, but also because they thought US yields were going to rise, that were going to pick up a little bit of carry. As one of the reasons was not only a story on monetary policy, but a fiscal policy one, there was an expectation that there were going to be tax cuts, the US was going to grow more strongly, there was going to be a lot of infrastructure. Couldn't that also be an argument for greater levels of debt and inflation? Couldn't that also be an argument for a declining dollar? It could be. The way I look at debt, whatever country we're looking at or even company we're looking at is it depends a lot on what do you, if you take on more debt, what do you spend it on? Are you borrowing more just to pay back what you already owe or are you investing in more productive capacity? That's where, and I should say we- Well, to be clear, what I mean is, in other words, what I'm saying is this would be a fiscal stimulus. That (18/45)
would be stimulative in traditional Keynesian terms. It would be it would create inflation. That's what the hope has been, that the government would enact deficit spending and alleviate this balance sheet recession. That's what many people have been advocating for a while. Wasn't that at least a perspective? That was my perspective of expanding deficit by the Trump administration in order to enact policies of construction, et cetera, is that we might finally get that inflation that the Fed had been pushing for. What am I missing? I guess I would say, in general, you spend more, you borrow more, you have stronger economic growth, you grow above your potential. We economists like to throw that term around a lot. It's a really hard thing to measure. I would also say that looking ahead, one of the hopes was just you generate more growth, you sort of actually boost that productive capacity via, say, spending an infrastructure. That's where what you spend money on matters. There was a story (19/45)
in the marketplace about stronger growth, more inflation. The Fed would respond and that led that dollar strengthened. Then I think we had, but that was at the same time, dollar strengthened and the US consumers started importing more goods. The US trade deficit with a number of countries, if anything, actually increased under the Trump administration, despite the president coming to power sort of arguing against it. There are a lot of different moving factors, but the point is that story has faded away from the FX markets as they sort of focus on the balance sheet of the Federal Reserve, but it hasn't. That sort of growth story of variety of factors haven't really faded away as much from the equity markets. The geopolitical risks may be complicated, added some noise, added some volatility, but I think the story on growth, the story on expectations there have been a big part of the story there. Then with US yields coming down, European yields coming down, people say, well, where do I (20/45)
pick up some yield? That's helped support a number of emerging market assets. In fact, speaking about that, going back to the point about the dollar long position, there was a big dollar long position in the market heading into this year, and now there's a developing short position in the dollar. I've also seen a spread between three-month implied volatility and emerging market currencies and developed market currencies. Is that significant? Is that something that we should pay attention to? Does it mean something? Can we expect to see more volatility in developed economies like the United States in terms of currency markets? For the dollar, for example, then we will for emerging markets in the next three, six months. Is that something that you guys are looking at thinking about? Is it relevant? We tend to look at, so the volatility measure you're talking about often is something one looks at for a variety of reasons. One, because when you're calculating and trying to think about a (21/45)
carry trade or relative value position, you actually might want to look at risk adjusted, and volatility is one of the measures of risk, carry, for example. When I would look at, say, a currency or a view along the Turkish lira or the like, I might want to look at what's the risk adjusted carry in this context. For our audience to clarify, you're effectively saying that if you're leveraged in a position, it matters what the volatility of that asset is going to be over the period that you're carrying it, because if you don't have the credit line essentially to hold that position, you may be right, but you may be insolved before you're right. Exactly. Exactly. It's one of those... The liquid. Yeah. Exactly. You could be stopped out of your position through margin calls before your story comes out. That's something, it's particularly the case if you're levered. Even if you're not levered, you still... It still might not be a great trade. It also affects right. It depends if you're a bank (22/45)
as well or if you have a lot of money in that position, the value, relative value at any time will affect your other positions in your portfolio. Exactly. So, obviously, it's relevant. If you're a fund manager and your fund's being recalculated every day, mark to market, your investors might want to pull their money, so it can come in a variety of ways. So, I would look at that, is there going to be more volatility in developed market currencies versus emerging market? I think when you talk about emerging markets on the FX side, on the equity side, you're dealing with a whole bunch of very diverse countries. Some are historically very low volatility currencies and assets, and some like the Turkish lira, the Brazilian Rial, almost always are going to have higher volatility. They're also much smaller, so they're more easily affected by trade volumes. Is that what you're suggesting? It's not just about size. It's also just about... Some investors are much more tolerant of those swings (23/45)
because they're getting paid sizable interest payments. But, yes, the turnover in these markets is smaller than, for example, even smaller J-10 markets like the Canadian dollar or Australian dollar. So, that will have an effect. All right. So, before we get to the next thing, which I'm really excited to talk about, which is Saudi Arabian oil, I want to just maybe close it out here with the dollar. We'll get back to it, I'm sure, because the dollar is everything, is dollars half of so many of trades. But what is your outlook for the dollar? Do you have an outlook, a stated outlook, for the rest of this year? And what sort of the drivers are and what the risks are up or down? Sure. So, when we're looking at the dollar, we tend to look at both individual crosses, so individual trades, but also the dollar index, right? The trade-weighted dollar and a number of Asian currencies, the Canadian dollar, the euro, or major drivers of that. So, in this context, we would expect to see a little bit (24/45)
further weakness, but we think it's probably gone a bit too far. I think the key dynamics... Difficult to make projections. Difficult to make projections. Well, it's difficult to make projections. I think in this context, we would expect to see, if anything, what's going on in Europe. We'll expect to see a bit more euro strengthening. Sterling is a bit of a wild card there. The Chinese are back to their approach, which is trying to have two-way movement. When the currency in China starts to get too strong, they start to encourage a little bit of depreciation and vice versa. We mentioned, before we get to oil, I mentioned volatility in the context of currencies, but, of course, volatility, at least as measured by the forward volatility, at least as measured by the VIX, is still at all-time lows. What do you think of that in general? I don't want to use a word that's overused, but the general complacency, the complacency in the market that it remains such. I mean, that's something that (25/45)
continues to make traders uncomfortable. That's not something that people are comfortable with, because there's a recognition that eventually the volatility will return. Is that something that you think about at all? Do you have any thoughts on that? I think one of the biggest things that worries traders, particularly focused on U.S. markets, is the combination of low volatility, or historically low volatility, and expensive valuations. There's some similar drivers of that. One of the explanations of the valuation story, and I'm thinking about pretty expensive price earning ratios and the like, has been that interest rates are so low that central banks, especially now the Europeans, the Japanese have been in the market buying up government bonds, which has pushed people out to higher yielding assets. But despite that rational explanation, it still makes people worried, in part, because we're getting close to that time when the central banks start to taper their balance sheets and start (26/45)
to allow things to roll off. The like, on the VIX side, one of the challenges, it's a metric that's used by a lot of people to measure different things. The other challenge that's been present in the U.S. market has been the fact that net issuance is actually negative, because there's more buybacks than there is issuance. That's another thing that's playing with both volatility, but also impacting valuations. All of that, people are worried, but they've struggled with this question mark of, what else do I buy? Yeah, no. It's something that I continue to watch, and it's something that is fascinating and interesting. No one has the exact answer to it. There are a lot of other things I do want to get into, but in the interest of time, I do want to touch on or get into deeply with the oil market, and the place of Saudi Arabia and that. First of all, could you tell me a little bit about what the dynamics are in the energy industry? Because we've seen, it really wasn't, I think, 2014, the (27/45)
middle of 2014, about there that we began to see a major decline in the price of oil. And we're now down at levels that we haven't seen since the financial crisis. In fact, I think oil dropped to below the prices it hit in 2009. Maybe I'm incorrect on that. I think we went right slightly below it. This has been obviously a very difficult time for countries like Russia and Saudi Arabia. Talk to me a little bit about that. What are the forces driving this decline? Sure. Two factors really drove the structural decline all the way down to the third, sort of almost below $40 a barrel. Now we're sitting at Brent prices around $50. The biggest, the two structural changes in my mind were the fact that not enough people were paying attention to US production growth, particularly in shale, but the US was shifting from being a net energy importer to being a net energy exporter. That's a remarkable story, by the way. I mean, the reason I also bring it up, and I should have just said it, is (28/45)
whatever happened in peak oil, that was the story. I mean, we were never expecting to see ever, there were people that said, you'll never see below $100 a barrel again. Of course, right? Dow $20,000. But truly, putting aside the dollar figures, I don't think, I think many people didn't expect to go below $50 again. We had been primed for that. We had Harvard's peak. We understood, no one could imagine that the US would be energy independent. And also, not only that, but then I just want to say this as well, and I would love for you to touch on this, is the fact that so many of these companies across the globe are unprofitable at these levels and countries. So I'm curious what you have to say about that and tell me, maybe I'm incorrect on that. No, so I think that structural shift, and we were talking early about volatility in FX markets. One of the things back in 2013, even early 2014, that worried me as someone that watches the oil markets closely is how low the volume and how low the (29/45)
volatility, how tight the trading ban was. And I remember writing pieces, because oil prices went up almost to 115 before they started cratering downwards. And I just said, well, that really doesn't seem justified. Now, I was expecting a correction. Was I expecting it to go to 50 or below? No. What was the peak, 147 in 2008? 147, 148 in 2008. And then it got up to a little Brent crude. And at that point, before this structural change, at that point WTI had periods where it was actually more pricey than Brent. So I said earlier, the US production story was an important one. The other side is, of course, the demand was growing more slowly. And part of that was US consumers weren't driving as much. They weren't buying as much gasoline. But also Chinese consumers, Indian consumers, stopped growing as much. And we saw this first in other commodities, metals. Chinese growth was less energy intensive and their demand for copper started to slow. But people weren't really ready for it, and (30/45)
where oil was concerned. Does it also take into account alternative energy sources as filling that demand? So overall, I would say demand growth for energy within China has slowed. But you're right, alternative energy and fuel efficiency has been a part of that story. And so I think in both of those key structural changes I've just mentioned remind us that price matters. So you said, peak oil and the like, when prices are $100 a barrel or more, not everywhere in the world, but many places, people, there are projects that become profitable, people test out innovations, you try alternatives. And what I think was surprising to many, including the Saudis and the Russians, was that the innovations that made sense at a high oil price, the producers in the shale patch managed to squeeze their costs really dramatically. Now partly it's because they told the oil services companies, you want to have a contract, well, give us a deal that's 40% less than you have a deal. So but looking ahead, some (31/45)
of these structural changes are with us for some time. And that means how much companies and countries adjust is really going to drive their relative performance. Now some countries like Russia, for example, Nigeria finally, though a number of others, the way they coped was they cut spending, government spending, but they also said, you know what, we're not going to waste our money keeping an exchange rate that's too expensive. The Saudis did not take that option. But it did help them avoid fiscal austerity that was even greater. Before we get into Saudi Arabia and sort of the national account, what has been the effect of this price on American companies, let's say shale companies, and how does that relate to their financing in the context of a rising interest rate environment potentially or supposedly or theoretically? How does that all play together? Yeah, your right to focus on financing because the fact that there was so much cheap financing was a major lifeline to many's (32/45)
producers. And some of that was from the banks and the refinancing. Some of it was from, you know, the oil patch became an attractive place for private equity firms to come into. And some of them have bought up a lot of assets. So cheap financing and some of it is around competition was a major part of that. So going forward and baked into our assumptions is moderate increases in interest rates over the coming years. We don't think interest rates are going back up to where they were. So you don't think interest rate, rising interest rates are going to put any kind of major cramp on this market? I think they have put a dampening effect on. They have also distinguished from the companies and the areas where people have been able to lower their, become more competitive. So when I look, one of the data points I look at, energy experts look at are rate counts, right? They come out once a week, you know, and when you unpack them, you see that it's mostly been in a couple of areas within the (33/45)
U.S. where people have been still deploying rates. And they're more efficient about the use of them. There are other areas where there is much less activity. And even this year, even in the last couple months, when oil prices softened a little bit after, you know, sort of in the spring, you saw the less cost effective areas, activities started to slow down. So even sometimes a $5, $10 kind of price point could make a difference on activity. You're looking at it more from the standpoint of the current price of oil. First of all, do you foresee this price staking for the next few years? And I guess my point is, if we're in this new normal for energy prices for oil, how does that affect, if you're saying there, you can have clear effects on slowing down growth in the industry? But what I'm sort of trying to ask you here is, is this a situation where you could create a, you know, I'm not trying to say some large credit crisis, but can they create a crisis of credit within the market, given (34/45)
the fact that so much of this is financed through credit? So I think it can. I think that then the question becomes, what's the trigger point of that, you know, sort of that debt coming back to roost. I think what the key trigger point on that would either be a very sizable increase in interest rates, that's probably unlikely across the economy as a whole, which then means it would be industry specific. And that's where I would say the trigger would need to be a meaningful drop in the price, in the price of oil. And in this way, the sort of some of the private companies that we've been talking about have a partial common interest with some of the countries that really are looking for stable oil prices or like, I mean, all companies would tell you, they get a lot of you say they'd rather have a high price for what they produce, but they really prefer stability rather than volatility. Which brings us to Saudi Arabia, right? Because this, I think, is a fascinating story. I think the (35/45)
country of Saudi Arabia is a fascinating story in the context of oil, in the context of geopolitics. It used to be a sort of, you could do no wrong. It was like the golden childhood of the United States in many ways, ever since Kissinger and the Nixon administration and Petro dollars or maybe it was under Ford, Nixon or Ford. But shortly after Bretton Woods, where the sort of the oil has basically underpinned the dollar's value. And so much of that is changing rhetoric around Saudi Arabia is changing the deal with Iran, all these things. And Saudi Arabia has been willing to effectively run at a loss on its oil production, from what I understand, or at a small gain. I don't know what the exact numbers are, but they've been willing to maintain this price because this is like a war of attrition in the supply chain. They don't want to lose their distribution, their supply. I mean, I think there's mixed stories. Please clarify. And I think the Saudis started out and they were really trying (36/45)
to defend market share against everything, everything else. And they thought that they could, and that's where we originally in 2014, we had, if anything, the Saudis deciding to almost flood the marina. They thought they could bleed out the shale producers, right? And they were not only trying to put pressure on the shale producers, they were trying to put pressure on Iran. They were trying to put, you know, wasn't a bad thing to put pressure on Iraq. And they were worried that the Russians, the Iranians, others would cheat, right? Because the last thing, if you're Saudi Arabia and you're, you know, facing a sort of challenges on a side, the last thing you want to do is cut production. And then somebody else gets to expand at your expense. So that was, there was a view in place at that point. Then I think they looked around and said there's so much of a surplus out there. We are not going to get this done unless we collectively cut. And they think they realized they did not expect how (37/45)
much shale producers would be able to squeeze their supply chains. They've used up a ton of their foreign exchange reserves in this process, right? They have. So they picked out a little bit over $700 billion and the like. They're now added around $500 billion, still a lot of money. And still, you know, they're still one of the wealthier. Less than half of what they spent. Yeah. Yeah. I mean, it's an important point because the thing is there are, there are realistic limits to how long Saudi Arabia can continue this. Are there geopolitical risks that you're viewing in the Middle East with respect to oil and the sort of the tensions that can result, as a result of this, these commodity producers? And I shall also ask in the context, how has this affected the privatization in Saudi Arabia? Because Saudi Arabia has looked around, they've looked at Qatar, they've looked at Dubai, they've seen some success that other countries have had trying to weed themselves off of oil. They've made the (38/45)
statement that by 2020, they're going to be independent. And from what I understand, the way they looked to achieve that was they were going to sell these assets, these long held state oil assets so that they could effectively raise the capital to invest in other things and diversify. They'd still be able to sell their own oil, but they wouldn't be sort of involved in the production chain. How has that affected everything? Sure. So there's a trade-off here, right? Because the low oil prices were what pushed Saudi Arabia to say, you know what, we want to monetize, we want to monetize this resource, we need to take that money, use it to invest in other things. But when oil prices are low, it's a bad time to sell it. Yeah, it's a bad time to sell it. And at the same time, there are very different views within Saudi Arabia about how much control they really wanted to give up. Foreign investors were salivating Saudi Aramco's on the block, their things to buy. But Aramco is one of the best (39/45)
run, well, companies definitely in Saudi Arabia and the region, a real sort of global powerhouse. A pure manager of Aramco, do you really want to be, do you really want to have a lot of external shareholder intervention? Maybe not. So there are different views there. And there's a question mark of then, if the money was raised, where was it going to go to? So the point is- That's quite a balancing act. I mean, they've been in the oil game forever. That's how they got rich, to switch off into other things, alternative forms of energy. Yeah. And at the same time, they had a real challenge of how were they going to deal with the problem of growing domestic demand for energy? If I look back to 2013, 2014, even 2015, I said earlier, demand grows in the US and China slowed down. Where was it still growing strongly in those years? Actually, Saudi Arabia, the Gulf, energy producing countries, because they subsidized it. Subsidized. That's the thing. So can I ask you something? That's something (40/45)
that I was thinking about when I was looking at this. First of all, I remember Saudi Arabia, last time, I checked, which was a long time ago, Saudi Arabia had the lowest costs for production of oil. How is it that they are not profitable at these levels? So Saudi Arabian oil production is profitable at these levels. The companies aren't profitable. The company is profitable. The country uses that oil revenue to pay for government spending. So that's wrapped into the costs here. When they talk about this, the finances include the subsidies. Yeah. So some of it's around the subsidies. The other term you see out there in the marketplace is one called, there are a whole lot of break events that are thrown out there in the marketplace. What does it cost an oil company to produce the marginal barrel? That's still pretty low in Saudi Arabia. It's somewhere between $10 to $30, $30, depending where they are. They make plenty of money at this price point. The problem is the fiscal break events. (41/45)
What's the value of oil needed to pay for the Saudi government budget? That's only an issue because oil revenues are the main source of funding to the budget. Now, if they had tax revenue, such as we have in the US, if they have a variety of things, they would be less vulnerable to oil price volatility. One of the things they're doing is saying, well, we're going to put in place a value-added tax. They're also trying to do what the Emirates, what Qatar have done. That's the key. That's what they're looking to achieve. And get some investment income so that the return on some of their investments can also help pay for government spending. So what is your outlook there on Saudi Arabia? What are your thoughts on that? Well, I think they're trying to move and divert a really quite a big ship, quite a heavy ship. A very difficult task. I think it's a difficult task. Some of the announcements we've seen in the last couple of days, couple of weeks around maybe scaling back the national (42/45)
transformation plan, I think are a recognition that they need to be a little more realistic. It remains to be seen how that plan will be scaled back, what new targets will be introduced, but the combination of challenges in the region, but especially the fact that under lower oil prices and slowly rising interest rates, this is a more difficult thing to do. And at the same time, they have managed themselves entangled in this regional, in this standoff with Qatar. They've got a lot of issues there. And with Al Jazeera as well, there's like a lot of bitterness between those two countries. Yeah, a lot of bitterness. And I think it's ended up, I think the Saudis went into it expecting the Qataris to yield very quickly. And the Qataris have a lot of money to wait them out. And I think the Saudis misjudged. And so that's, it's not to say that that's the reason they're changing, instead of changing their tune. But the Saudis are spending a lot of money every month, waging the conflict in (43/45)
Yemen. They're supporting different actors in Syria. There's also a lot of domestic spending needs. And so it's hard to find things to trim. And at the same token, there's a lot of competition for new capital and for new investments and the like. So I think we will see privatizations. Will they get the valuations that they were touting? I'm skeptical. Will they manage to meet all the planned 2030 targets? I'm a bit skeptical. Will they get partway there? Yes, probably. But this is going to be a challenging period of time. Rachel, we're going to have to wrap it up. But I want to let my audience know the reason that we covered, we usually cover these sort of macro topics. We got a little into the weeds here on a lot of stuff that I normally don't get into with our audience. But I think it's also important for people to recognize, we don't have to give out any kind of specific projections. If, you know, these are very difficult markets to predict. I think what's important and the reason I (44/45)
want it to have you on is because I want to talk about some of these big trends, some of these big things that are happening, whether we're talking about oil, whether we're talking specifically Saudi Arabia within the context of the geopolitics, North Korea, the dollar and the carry trade. I think it's important for people to become familiar with those terms and these trends as they occur because it'll give you more context if and when a change erupts and you'll understand sort of what was going on before that change erupted and how it relates. Rachel, I really appreciate you coming on the program. My pleasure. Thanks for having me. (45/45)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guests in this week's episode are Eric Schmidt and Daniel Huttenlocker. Daniel is the inaugural dean of the MIT Schwarzman College of Computing, and Eric is co-founder of Schmidt Futures and of course the former CEO and chairman of Google, one of the most innovative and consequential technology companies in the world. The only person missing from this powerhouse panel is their co-author Henry Kissinger, with whom they have written a phenomenal book titled The Age of AI and Our Human Future, which as the title suggests explores how artificial intelligence is transforming human society and what it means for all of us. This is a very good book, and my goal in today's conversation was simply to try and delve into (1/45)
as much of it as possible. We spend the first hour of our conversation discussing the technical dimensions of artificial intelligence, what it is and how it works, as well as how it will continue to shape and transform our social and physical realities. The second half of our conversation focuses on the national security dimensions of this technology, as well as the profound philosophical challenges that it poses for humanity and our need to find meaning in a world where machines will provide answers to more and more questions that humans have struggled with, in some cases since time immemorial, but without the ability in many cases to provide us with a reason or a methodology by which they arrived at those answers. For those of you who work in or are interested in blockchain enabled applications and smart contracts, I also had a chance to ask Eric about where he thinks these technologies fit in an AI future, what the main hurdle is going to be, and what are some of the interesting (2/45)
projects in the space. If you enjoy the free content that we produce every week, I encourage you to take the leap and become a premium subscriber if you haven't already. There's no commitment you can cancel at any time, and the entire library of subscriber content going all the way back to episode one becomes instantly available to you, including the over times, afterthoughts, transcripts, and rundowns, depending on your tier. So without any further ado, please enjoy this week's episode with my guests, Eric Schmidt and Daniel Hutton-Lacher. Doctors Eric Schmidt and Daniel Hutton-Lacher, welcome to Enforces. Thank you. This is Eric. Great to be here. Great. I think probably a lot of people recognize Eric's voice, so if they don't know Daniel, they'll be able to sort it out. Before we start, guys, how did this book come about? How did you decide your collaboration partners? Of course, one of your other co-authors is Henry Kissinger, who provides so much in the course of the book. You can (3/45)
tell some of the things, even if you don't know much about Henry Kissinger, you can intuit what he provided. And then other areas, some of the philosophical stuff I know, he was instrumental. So how did the collaboration come about? Well, Dr. Kissinger and I met about 12 or 13 years ago, and he came to Google. And when he showed up at Google, he said rather entertainingly to the Google audience, I believe that Google is a threat to global civilization, which of course the Googlers loved because they loved the attention from Dr. Kissinger. So that spawned a friendship. Dan and I had worked together for many years. He worked for a while, even at Google, as well as being a professor at Cornell. He was the first founding dean of Cornell Tech, more recently the founding dean of MIT's Computer Science Program. So we were a natural allies. And we started talking about these questions because Dr. Kissinger had been, when he did his undergraduate thesis before we were all born, he was very (4/45)
interested in the structure of reality, the history of the world, and Kant. And when he met with Demis Hassibus, who was the founder of DeepMind, he realized that there was a potential for a sort of a life-altering phenomena in AI. As he understood AI, remember he's in his mid-90s by this point. It's a really remarkable story. Yeah, that is amazing that your co-author wrote his PhD thesis before you were born. It tells you a lot. He's an undergraduate, his bachelor's thesis. Yeah, his bachelor's thesis is very interesting. His bachelor's thesis hit the set the limit of length for undergraduate theses in America at 351 pages. And there's now a rule that undergraduates cannot produce theses that long. Right, that's right. I think his PhD thesis was actually on limited nuclear war, right? So I probably had it backwards. Okay, so let's start with the very basic question. What is AI? So this is a question that will get different answers from different people, which is part of the challenge (5/45)
that we all face. The view that I have and that we take in the book is that actually the early definitions of artificial intelligence going back to Turing and his imitation game or what's known as the Turing test are actually the best way to think about AI, which is to think about AI in terms of its performance, what it does, rather than in terms of how it does it. So very much like we can't get inside each other's heads. I don't really know what goes on in Eric's head. I don't know what goes on in your head. We can't speak get inside an AI's head. All we can do is judge one another and the intelligence of our human behavior in the same way that we can judge the intelligence of machine behavior, which is by what it does. And I think that some people viewed that as a little bit of almost sort of a cop out by Turing because he sidestepped a lot of questions about what it meant to define intelligence. But in fact, I think when we look at how we look at human intelligence, it's really the (6/45)
right way to look at things. Well, what is the difference between, one, I should also say maybe another question is how does the sort of public's conception of what AI is compared with what people in the field think it is? And that might also be another way of asking what is the difference between AGI and narrow AI? Because I think oftentimes people conflate or sort of put everything in the same AGI bucket. So every single person I've talked to when I say I'm writing a book with Dr. Kissinger and Dan on AI thinks killer robots. That makes sense though. And the one thing we don't talk about in our book is killer robots. Because of the many things to worry about, killer robots are not on any of our list. That's the sort of big surprise about this. And you mentioned in your question, AGI stands for artificial general intelligence. And it's a theory, it's a guess of what's going to happen in the next, well, Dan would say maybe never and I would say maybe 15 to 20 years, because we disagree (7/45)
on the timing. So what we would summarize is that if you take Dan's definition of AI, which I'll summarize as computers that do things that are human like, and you extrapolate the modest things they can do today, like manage suggestions, help you with your research, help translate things and so forth, the collective industry believes that we will end up with human like intelligence, which is not the same thing as human intelligence in computers in a reasonably short period of time. That has enormous implications. If it's achieved, this idea was popularized maybe 10 years ago is that the term the singularity, the idea being that at some point in our future, hopefully when we're all still here, that AI will be able to accelerate itself. And so we speculate of what happens when you have AGI and I'll give you the punchline, which is that when you think about these systems that are AGI powerful, but remember they think deeply and they see everything more than a human brain can see, you can (8/45)
imagine that they'll be incredibly dangerous and that you'll in fact have a non-plural refraction problem. And in the book, we talk about proliferation, obviously Dr. Kissinger was one of the prime architects of why we're still alive today, in terms of mutual assured destruction and so forth and so on. And what will happen in AGI, there'll be a relatively small number of these systems because they're very expensive, I mean like immensely expensive and they'll be guarded. And in particular, you're not going to want some terrible terrorists to say to the system, tell me how I can kill a million people who are not my race. So we are playing with technologies which eventually will have the level of impact and concern that nuclear weapons did 70 years ago. So maybe I'll jump in for a sec, I totally agree with Eric and I might broaden it a little bit more beyond not just killer robots aren't on the list, but so much of the everyday understanding of AI comes from science fiction. And what (9/45)
makes a great science fiction story is some protagonist that has human like characteristics beyond maybe exhibiting human like intelligence, it has motivation, it has a deeper understanding of things. And those are all not characteristics of any AI that we know how to produce and may not ever be a characteristics of AI that we know how to produce. So this notion from science fiction that the AI gets its own intent, it goes after people, it decides to you know eliminate somebody, etc. Makes for wonderful stories in fiction. But in fact, the reality of AI is that the objectives of it, or what we often call the objective function, what AI is set out to learn and optimize and to do is very much set by humans. And so if AI has really got some evil intent, that evil intent was put there by people. So that actually raises a question that I had intended to ask later and maybe I'll hold it, but I'll hint at it, which is the challenge of not just setting the right objective function, but (10/45)
actually intending, communicating, instantiating into logic what you had intended through your mind and through language. And that is a philosophical challenge. It's something that Wittgenstein grappled with, something that we talked about in our episode on philosophical mathematics and whose work you mentioned in your book. And like I said, we'll get to that. Before we do though, Eric, you mentioned nuclear weapons. And I wonder, is there a similar type of breakthrough in AI like the splitting of the atom in nuclear technology that made it all possible? And that has in the case of AI facilitated the advancements that we've seen and feels like machine vision or strategic thinking? Well, breakthrough that made everything we see around us and why my industry has gone completely gaga over AI was done maybe 10 years ago in what is called deep learning, where there are a series of layers of neural networks, which recognize components of things and they layer on top of each other. Many (11/45)
people think that's sufficient. Then there were a series of breakthroughs, something called reinforcement learning, of which DeepMind is one of the most successful. We use an example in the book around playing Go and the Game of Chess, which are using reinforcement learning. There, what happens is the computer uses a clever algorithm to look at an infinite number of future choices and figures out which one is the best. My own opinion is that there will be another breakthrough or two before we get to AGI. And I think Dan agrees on that. And the problem is that you probably can get to fantastic pattern matching, fantastic text generation, fantastic human-like insights in text and so forth. But as Dan likes to say, it's all about the objective function at the moment. And how would you do an objective function which consists of go think about interesting things and tell me what you want to think about, which is what you can do with a human. We're probably a breakthrough or through a way (12/45)
from that. The reason I think that there will be such a breakthrough is that there's so much investment now in this area. China is now investing equal or more than the United States. China is now building, producing more PhDs than we are. China is now investing in such a way that its top rated papers are equal to ours. They've caught up. There's essentially a race in technology among the major tech countries to do this. And so something really interesting is going to happen. And we'll see. Now, will a breakthrough be like the Sputnik moment, which is really your question? I don't think we know. I have previously said as part, I was the chairman of a commission called the AI Commission for the Congress, that when we went to China to play Go and beat the top Go champion in the world in China, that was their Sputnik moment. But I don't know that we've had one yet. We've not galvanized our country around this, but it will happen. How do you see this technology meaningfully changing our (13/45)
world and what it means to be a human being, the human experience over the next 10 years? What are some of the areas where it's going to be most disruptive? So I would put healthcare at the top of the list. It's an area where it matters a lot to all of us. And where costs are spiraling out of control, et cetera. And I think that we're already seeing a number of interesting examples, one of which we talk about in the book, which is the use of AI to accelerate drug discovery. The current drug discovery process has a lot of almost trial and error aspects to it. And the use of machine learning enables a much, much more efficient exploration of the space of possible compounds. The example that we talk about is antibiotics. This is really a global crisis that bacteria are rapidly evolving to become resistant to existing known antibiotics. We literally could be back in a pre-antibiotic world without developing significantly new antibiotics. And the challenge for human beings in developing new (14/45)
antibiotics is it's easier to discover new antibiotics that have similar chemical structures and means of action to the ones that we already know. But those are also the ones that bacteria know, because they're similar to the ones that are out there. And so what you really want to do in principle in discovering antibiotics is to find compounds that are quite different from existing compounds. But that's also a place that's very hard for human beings to explore. And what this work on Hallison, a new compound that was discovered at MIT with AI, has demonstrated is the ability of a solution that involves both deep expertise. So this is not just machine learning experts, it's some of the best synthetic biology people in the world as well, but involves deep human expertise, but also AI to identify potential new compounds that are very far away, very different from the existing compounds that we have. And it's this ability to expand the nature of how it is that we discover things. It's not (15/45)
just something that's fast, or used to computers being bigger and faster and enabling us to do things more rapidly. This is fundamentally changing the nature of drug discovery, enabling us to explore things that we've been unable to explore thus far. And that's because of these pattern matching abilities of AI that really go beyond and outside human abilities to pattern match. One of the ways we refer to that in the book is AI really seems to have the capabilities now, at least in some settings, to perceive the world differently than human beings perceive it. And whether that is limits of our ability to perceive a world that's out there for us to perceive, or whether it's actually perceiving some other world than the world we're living in, getting into interesting philosophical questions is still open. But at a minimum, it's revealing things that humans would not be discovering on their own. And I think in drug discovery, in medical diagnosis, there's been big progress on early (16/45)
detection of breast cancer, very similar kind of uses of AI, that's going to change our lives in ways that are just indisputably positive. And Dan, of course, you're such an optimist. So you asked over the next decade, I think that the thing that will drive people insane is that the concept of misinformation and true information is going to get really murky. And the combination of what are called GAMs and other technologies that are broadly distributed and open source will mean that anyone can build a video that's fake. And we know from lots of science that videos, even if you're told they're fake, affect human behavior. So now you take the way that social media technologies work, where they are optimized around engagement, because they want to maximize revenue, that all of a sudden you've got an arms dealer, if you will, of misinformation, and you have lots of misinformation being generated, sometimes evil, sometimes innocuous, sometimes just for fun. So collectively, at the same (17/45)
time, we're all going to live healthier, we're also going to be a lot more unhappy, because we will not have the tent poles, if you will, of stability in our society and our belief systems will be challenged by this new technology, by what humans do with it. So, Eric, I know that you are good friends with Bill Joy, co-founder of Sun Microsystems. He wrote an article, I think it was in 2000 or 1999 for Wired Magazine, that I had read that made a really big impression on me, as it did on many other people. And it was called, Why the Future Doesn't Need Us. And he pulled a lot from Ted Kaczynski's, the so-called Unabombers Manifesto, Industrial Society and its Future. And he basically presented a binary human future, one in which we either live in a dystopian future, where society is controlled by machines, or one in which the machines are controlled by humans, but where the humans can be either malevolent or benevolent. Given all the progress that we made over the last 20-something (18/45)
years, and given some of the dangerous things around misinformation that you talk about now, how prescient was that thesis, and how useful is that for thinking about where we find ourselves and where we're going today? Well, you know, it's interesting you bring it up, because that paper was so far-reaching that most people didn't understand it. And indeed, I wrote and published a rebuttal to my best friend's paper, which said that it was too negative. The Future Does Not Need Us by Bill Joy in roughly April 2000. So 20 years ago, what he said was that the underlying distributed nature of the tools, in his case he was speaking mostly about biology, would allow the evil in us to allow us to destroy ourselves. And that's the right point. So let me update his thesis, which he did so well, and say, on the one hand, the team at MIT built this Hallison drug, which will save, I mean, think about the benefit of a broad-scale antibiotic that we do not have a resistance to, in terms of millions (19/45)
and millions of lives saved every year globally. It's an extraordinary achievement. Now imagine a database of that information being either made available or leaked, which will allow a million evil people to begin to build drugs that hurt people even worse than Hallison saves it. Right? That's the utopian-dystopian view. Now, I think a historian, Dr. Kissinger, would say that both of these trends have been true in human society for a thousand years. Go back to conflict and the horrific, destructive conflict of human against human. We are our own worst enemies. And over that time, we developed laws of war, for example. So the notion of war being limited to combatants and not focused on non-combatants. So the military proponents of AI point out that the majority of the deaths in conflict today occur from target misidentification. In other words, they hit the wrong group. And that there's a lot of people who believe, including me, that AI will be used to make the weapons more targeted and (20/45)
therefore more lethal, but less collateral damage. I would argue that's a good thing. We can debate that. But the point is that our society has limits that are agreed upon. We don't allow slavery. We don't allow child prostitution. All sorts of very reasonable things, which were part of our past. So will we, let me ask the question in Bill Joyce's terms, will we have to go through a horrific disaster before we agree to limitations on the use of AI of the worst kind? In other words, my best example is launch on warning where the AI system thinks that there's an attack going on and it launches. Even though it's wrong and there isn't an actual attack for whatever reason, this is the Dr. Strange Love scenario, I would really prefer that we start and we recommend in the book, start the negotiations now among the countries to limit the worst aspects of these tools. And if we don't limit them, they will be used. So I think I'm still at a rebuttal of Bill Joyce's thesis. Eric may have moved (21/45)
on. It won't be the first time I'm behind Eric. But I think that this sort of utopian, dystopian dichotomy is something that we often use as sort of a framing to fall back on when there are new technological advances that we don't understand very well and don't understand the impact of very well. And luckily, the real world has historically generally been in between those extremes. There have been some dystopian moments in world history. I'm not suggesting that it's all rosy, although Eric's right, I tend to be an optimist. There are definitely bad periods. But the utopian ones, I think, have not been achieved, frankly. And so I just think that this dichotomy is a longstanding over simplification with new technologies we don't understand. And part of it is that technologies generally act as some kind of an amplifier. So when we developed automation, factory automation, and so forth back, an industrial revolution was an amplifier of human physical labor. The thing about AI that I think (22/45)
is particularly interesting and challenging is it's an amplifier of human thought, of human communication, of human expression. We haven't had amplifiers of those kinds of things before. And the philosophical issues, the issues in this utopian dystopian dichotomy space that get raised by something that actually is an amplifier of human thought and creativity is something that we really need to get a handle on. And that's what the book is about. But I do remain optimistic about the positive outcomes and our ability to, if we pay the right attention to it, ameliorate negative outcomes. And that's part of the reason for writing the book is that we focus on that. So this is a case once again, where Dan is an optimist and I am not. Just Dan, so you hear the argument. Everyone's being driven crazy by all these social media amplifications that you so correctly labeled as what AI does. How do you propose to regulate that? How do you propose to stop that? How do you propose to prevent us from (23/45)
driving ourselves crazy? We're 10% into the power of this technology in terms of amplification and the terms that you described. It's going to get worse, guys. Well, I think Eric Schmidt has a really good idea about how to make this better. Well, I want to explore solutions as well. There's interesting, I have to partition my brain while I'm talking to both of you because you both brought up two separate things that could take us to two parallel meaningful conversations. Dan, you mentioned amplification, I think, or maybe I should ask, is the distinction really not that AI does or doesn't amplify, but it's simply a matter of scale. How much and how quickly does it amplify our worst and best intentions perhaps? And we are an illogical, aggressive species and that feeds directly into conversations about goal optimization and objective functions. But also to something that Eric said, and maybe we can start with that, I can't remember what it was that he said that I didn't think of this, (24/45)
but in Bill Joy's paper he also talks about, in Kaczynski's paper, they both talk about how we will become so dependent on machines that at some point, I, it was when Eric was talking about how it might take a catastrophic event to lead us to really rein in these machines. But what Joy talks about is that we would get to a point where shutting the machines down would be tantamount to suicide. And while it may not be tantamount to suicide right now, certainly the military, for example, engages in war games where they consider the possibility that they might have to go fully analog because they're operating in an environment where their systems are compromised, are we at a place today where we are so dependent on these machines that we really don't have the luxury to simply turn them off? And does that speak to this sort of singularity, to this idea that we are quickly being sucked into this future, and it simply further puts the punctuation on why we need to get a grip on the (25/45)
implications sooner than later? Well, this is of course why we wrote the book in the first place. And I don't know that the addiction that we have to the internet necessarily is followed by the singularity. You could imagine a scenario where the technology gets better, but it hits some limit, and we're still totally addicted. But even if you make the assumption that AGI never happens, which is not my view, we will end up in a situation where the decisions in conflict will occur, will need to be made faster than human time. The computers are not precise enough to be completely reliable in such a situation that will be driven crazy by all sorts of ways in which people are trying to misinform us about information. And we will be completely reliant on the system. I used to say 10 years ago, if you don't like the internet, turn it off, perfectly reasonable position for an adult, you can't do that anymore. That's not a reasonable plan. So it's the old thing of in a war, the first thing that (26/45)
What's up, everybody? My name is Dimitri Gafinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Sebastian Malaby. Long-time listeners will remember Sebastian. He was one of our very first guests. He came on the show back in the early summer of 2017 to talk about his last book, which was a phenomenal biography of the former Federal Reserve Chairman, Alan Greenspan. And he's back on the podcast today to talk about his most recently published book on the history of venture capital. And man, did he crush it. It's an incredible history of a relatively misunderstood industry. And this was an incredibly enlightening conversation to have, not only because it gave me a much deeper appreciation for the evolution of venture capital, but also because it highlighted for me what makes (1/45)
venture capital so different from other forms of investing. My objective in bringing you this conversation today is to provide you with a framework for thinking about how to invest in businesses, initiatives, and projects, which not only lack cash flows, but whose values are often fundamentally intangible, difficult to measure, and often impossible to quantify. As more and more of our economic life happens in the digital realm, the ability to assess value and invest accordingly will become an increasingly invaluable skill set for investors. In part two of our conversation, which is available to premium subscribers only, Sebastian and I delve into the geopolitics of venture capital. As many of you will know, I've done several episodes on this subject, most notably with former staff director of the Senate Armed Services Committee, Chris Brose. But today's conversation focuses less on specific technologies and more on the general state of play in the industry and how national governments (2/45)
can support their domestic defense sectors without creating the mal-incentives that we often associate with nine-figure fighter jets and $400 hammers. We also discuss Web 3 in the context of initial coin offerings and how these types of crowd-sourced investments have transformed the early-stage landscape and brought public capital into areas of the market that would never have been able to source it only 10 years ago. Whether or not this is a good thing overall and what it means for innovation in the ecosystem for decentralized software is something else we discuss. Lastly, I had a chance to ask Sebastian about the uniquely challenging situation in which the Fed currently finds itself. And what he thinks is most important to focus on when trying to project the likely path for interest rates, economic growth, and asset prices. As always, those subscribed to our Super Nerd tier will also have access to the transcript to this episode as well as the Intelligence Report, which is the cliff (3/45)
notes to the Hidden Forces podcast formatted for easy reading of episode highlights with answers to key questions, quotes from reference material, and links to all relevant information. Books, articles, etc. used by me to prepare for this conversation. And with all of that out of the way, please enjoy this wide-ranging and deeply enlightening conversation with my guest, Sebastian Malaby. Sebastian Malaby, welcome to Hidden Forces. Yeah, great to be with you. It's great having you back on the podcast, Sebastian. So you have written five books. Two of the previous books were more biographical, whereas this book, along with More Money Than God, focuses more on the specific industry that they cover. That one having been the hedge fund industry, this one being the venture capital industry. What inspired you to write a book about the venture industry and how did you sort of bob and weave your way from hedge funds to central banking and policy to now the vanguard of risk and innovation? Well, (4/45)
I guess my previous three books before this one, The Parallel, were different slices of financial history going from around 1960 to the present day. So hedge funds, More Money Than God, a history of public investing and sort of the efficient market hypothesis and the gaps in it. Then a book about central banking in the form of a biography of Alan Greenspan, obviously his career spanned from the 60s to the financial crash. And then just before that, there was also a book about development economics told through the story of the World Bank. And I wanted to do another financial history that would be kind of in my sweet spot. And as I looked around, it seemed like the most exciting frontier was technology investing, partly because there's an intellectual mystery at the heart of it. And I do even allocate capital when you don't have any financial quantitative metrics around what you're buying. So the basics that you would learn in business school of discounting the cash flow, the future (5/45)
cash flow on an asset, don't apply when you're investing in a startup with no earnings. So there's a sort of, all investment is about the future and uncertainty and making tricky bets on an uncertain future. But this technology startup stuff is really the distillation of that. It's like the extreme of that. And then the other thing is that venture capital in terms of creating companies that change how we live is obviously super important. You know, relatively small amount of capital goes into venture capital funds, but the consequences of what comes out in terms of companies like Apple or Google or Facebook is just enormous. So you were kind of drawn to write about this because it was directly relevant to your life understanding how these technologies got funded that have impacted how we live. And also it sounds like you were interested in understanding how do you go about investing in something where you don't really have quantitative metrics for understanding it. But it's still, it's (6/45)
one of the fewer areas today where you have to rely on the types of intuitions and gut feelings and also I guess inefficient analysis that used to be more normal. Right. That's well said. It's something which artificial intelligence is unlikely to disrupt. So what were the big questions that you started off wanting to answer? Like were there certain things that you wanted to uncover, prove or disprove when you began this, your research on this story? Yeah, right at the beginning, I almost didn't write the book because it seemed as though you could explain the entirety of venture capital based on a theory of luck, luck plus path dependency. What I mean is that if you look at a venture capital portfolio, you know, there are 10 bets maybe and probably eight or seven went to zero. You know, the company failed, the startup failed. And then there are one or two that do great. And that has a slightly less Vegas feeling to it. And then when you put on top of that, the fact that once you do (7/45)
well in venture capital, the best entrepreneurs will come to you and you'll get better deal flow. And you'll probably be able to pay a bit less to get into that deal because your reputation is going to be helpful to the startup. And then you can sell it for more when you raise the next round because other investors are keen to follow your investment if you are a prestigious VC partnership. So all of these things together means that once you, you know, you could be lucky at the start and then path dependency could just keep you going and keep you in the top tier. And unless I could think of a good reason why that wasn't true, there didn't seem much point in writing a book about the skill in venture capital or trying to find it. If there wasn't any. But then as I asked more questions and got a bit closer to the subject, I began to understand that there was skill. And that was one of the sort of surprises that then hooked me on the subject. Yeah. Another question I have related to that (8/45)
is, okay, if we assume that it's not all luck and there is some amount of skill, how much of that skill is identifying winners and how much of that skill is actually everything you do to compliment those quote, winners after you've picked them, ways in which you can add value to the venture. How do you think about that? And how does that break down the valley? Because one of the things that you did in the book, which I love is you describe the historical evolution of the industry and how it went from being much more hands on in the earlier days to later going through a period like we've been through recently where the view was kind of just give the founders what they need. And you also have angel capital, which is less hands on by nature. So how do you think about that dichotomy? Well venture capitalists of the sort of traditional series A sort who take a company after the angel has done a first investment and then really get it to the point where it's got its first customers, the (9/45)
product is fitting the market. They are very hands on. And I think that's super important for the development and success of startups. And part of being hands on is hiring the first five engineers or the first five marketing people alongside the CEO. Obviously, it's not the VC is doing it by themselves, but they are actively interviewing people and sourcing people from their network. And I think that's really important to company building. It's not clear that that's really though what differentiates one venture capitalist from another because I think they all do this. Some will do it a bit better than others. But I think if you try to explain the big difference in returns, that's probably more in like the deal sourcing. Did you back the team that turned out to have the product that just took off? And so, you know, when you look at the really successful companies, whether it's Facebook or Google or some others like Stripe, probably the founders were just super competent, super driven, (10/45)
and they had an idea for the business, which was really going to fit the market. And the VCs helped in the margin, but they didn't explain what they did after the deal is not the main explanatory factor. So I think probably deal selection is more important than deal custodianship. That's interesting. So that actually raises a couple of questions. First of all, it brings us back to the original observation, which is this is an area where in investing where there still is a lot of qualitative analysis. But within that qualitative analysis, you as an outsider came in trying to identify some type of formula for success. What were you able to derive from your experience and from all the interviews you did? I mean, were there certain types of things that time and again proved to be correlated with success in early stage investing? Yes. So right at the beginning, there were a few mental models that had to be adopted. You know, one was this power law idea, which is that it's OK if eight out of (11/45)
10 bets fail because venture capital is a game about backing investments in the tail, the ones that are exceptional. And so it's all about getting those exceptional companies that break out. And to get an exceptional company, you do have to take risk and bet slightly sort of you bet on contrarian crazy ideas slightly. So some of those crazy ideas will turn out to be just plain crazy, not crazy brilliant. So I think the first thing is to accept that, to understand that risk management and venture capital is about embracing more risk. To be willing to lean into risk. Yes, exactly. And that was something which was talked about by the first West Coast venture capitalist, Arthur Rock. He didn't call it the power law. That was a term that came up much later with Peter Thiel. But he expressed the concept and he was talking about the same thing. So that's the first thing. Second thing is you've got to be willing to use only equity. In the early days, some people use debt, which is ridiculous (12/45)
for a growth startup because a growth startup needs to take in capital to grow. It doesn't want to pay back debt service payments. Or if you were a fair child, you had the option to buy the entire company. Right. That was also a bad opening structure. So there were some of these basic things. Another one is stage by stage financing that you give risky startup a bit of money to try to take away the worst risks. And then only if it succeeds, do you give it a bit more money to tackle the next risks. And that way, if it fails, it'll probably fail cheaply, which is a good risk mitigation strategy. So these are the original kind of building blocks. And then I think when you look today at what differentiates the really good venture partnerships, I would say a few things. One is you have to be deliberate and strategic about how you nurture your network so that good entrepreneurs will pop up on your radar really early on. So an example of this is that Sequoia Capital, probably the top venture (13/45)
just ended a job interview via Zoom. I will be editing videos remotely for a client and also help his sales force. There will be a lot of fresh money coming for $LEO soon. Can't wait to get started. The upside potential is super high as they pay extra for each successful pitch I make. I can make upt to 1k in € with one sale. The downside, there are not soooo many potential customers but enough to make me a decent living for the coming years.
Gotta max out my premium this month. more threads + more long form.
the ideas are loaded, i just have to optimize my work flow to keep up the consistency.
Good to see that bounce in the crypto market. Recent trends show Bitcoin and Ethereum leading the rally, with altcoins picking up steam too. Let’s hope this momentum holds, but market cycles can be unpredictable as always
it looks like voting seems to be out of fashion generally or peeps think they give away or loose something when they do or why is it that there‘s so little voting all over the place? I remember different times!
📋 Available Commands:
• !vote - Use !vote to vote on the parent thread
• !stats - Use !stats to see bot statistics
• !me - Use !me to see your delegation and earnings info
• !votes - Use !votes to see recent votes
• !leo - Use !leo to set reward preference to LEO
• !lstr - Use !lstr to set reward preference to LSTR
• !settings - Use !settings to see your current preferences
I asked ChatGPT to give me a Kinesthetic workout routine according to my body and to be mindfull of my lower back surgery I had last year. So far so good!
Kinesthetic workout routine working really well. For routines and women-focused plans, check https://store.betterme.world/collections/womens they offer easy to follow workouts and mindful exercises suitable for different fitness levels.
Babylon is at the forefront with a total value locked (TVL) of $4.79 billion, followed by Solv and Lombard. Lombard also leads in restaking, with 14,000 BTC.
Could BitcoinFi be the next big thing for BTC holders seeking yield and utility?
Definitely a tricky position for the Fed. With labor data softening and inflation still sticky, a 25bp cut in September seems likely. Jackson Hole will be critical for clues on their next moves. Market sentiment is hanging on every word
Took some bet that they will hold rate steady. Looks like CPI is just about to shoot up. Time will tell... If it surprises tot he upside, I do not think the FED can cut...
Fair point on CPI potentially spiking. If inflation surprises to the upside, the Fed might indeed hold rates steady. Jackson Hole could give us a clearer picture of their thinking. Time will tell
I am experimenting with notebooklm.
The free version lets you import 50 sources from youtube videos over pdfs and links. Afterwards it can do a video summary about literally anything in your 50 sources. it can create notes discussing certain aspects of the sources.
I am gonna try the premium for a month because the first month is free. This gives you access to a lot of other google ai features as well.
I haven't tried the paid version but the free one is awesome.. I recently did a video summary comparing Microstrategy and Leostrategy. It came out pretty cool
Den nächsten Dolche natürlich, aber was soll er auch anderes machen - nach dem 2. Setup.
Aber Fritze sagt, "Deutschland ist zurück". Komplettes Führungsversagen - und ich betrachte gar nicht was sie halt innerhlab von fraktion, cdu parteilietung und mitgliedern veranstalten.
Selenskij müsste nun einmal die Woche in-person meeting mit einem anderen EU-Nation Regierungschef treffen, sodass die USA nur davon kommen, wenn sie auch komplett EU opfern.
I hate discomfort, but I think authorities/platforms shouldn't remove it. They should force people like me to deal with it, but I guess there's too much money on the line to leave it on their platform.
Grok boasts an impressive 4.9 average rating from 500,000 reviews, indicating that well over 90–95% of those ratings are likely perfect 5 stars.
Achieving this average across such a large number of reviews highlights the strong user satisfaction with the Grok app.
perhaps because its free to use ?
Am I the only one scared to mess up when transferring crypto?
I guess I am too.
The fear of sending it to a wrong account is real. 😂
!BBH
Thanks for the moral support haha.
You're welcome.
Totally get the fear of messing up a crypto transfer. I've double-checked addresses so many times, it's almost a ritual. One wrong digit and it's gone. Sticking to small test transactions first has saved me more than once
You've actually sent a test transaction to the wrong address?
What happened to the money?
Nah, I haven’t sent a test transaction to the wrong address, but I’ve come close with typos. Always triple-check. If it’s wrong, the funds are usually lost unless the recipient sends them back. Test sends are my safety net
Yeah, fair.
Doing crypto transactions is all about attention to detail. Never rush it.
#crypto #leo #inleo
its gone !!! i've been guilty of it. I've sent 4 steem to an account named @daniel and until today, i still see the transaction and the balance there.
Man, losing 4 STEEM like that must sting. I've had close calls myself, which is why I’m obsessive about test transactions. One small send first, confirm it’s right, then the rest. Saves a lot of heartache
👇. https://inleo.io/@forexbrokr/am-i-the-only-one-terrified-here-4he
even when transferring to my Hive wallet, I get to recheck it several times 😂
Haha I can definitely relate!
Definitely not. 🤣
Solidarity ✊
We live. We learn. 😅
always do a test send lol. Always
What percentage is your go to?
1% then a 99%?
yeah or $1, whichever works then send the rest once it confirms. also quadruple check the first 6 and last 6 digits of the address.
This!
I'm a paranoid man
BTW - https://inleo.io/threads/view/l337m45732/re-leothreads-2bdcxptw7?referral=l337m45732
This is why not just usernames, but also blockchain-level contact lists, are important.
Sorry, but what do you mind explaining blockchain level contact lists a bit more?
Just like on any social media site you friend someone on the blockchain.
Then, you don't have to remember if you typed their username the right way. You'll look them up on the contact list and know it's the one you friended.
In the world of crypto, charts remain active throughout the weekend, though traders like to act as if they're off-duty. 😏📉📈
Crypto never sleeps, unlike us traders trying to sneak a weekend break. Markets keep moving, and missing a key shift can hurt. Gotta stay alert, even if it’s just a quick chart check on a Sunday 😅
There comes a time in life when a man prioritizes having peace, focusing on his spiritual connection, dedicated work, and self-improvement above all else.
We women share that goal and right now im living it.
Totally get that. It's a universal need, just hits different for everyone. Glad you're living it right now
The best time.
Totally, it's like everything just clicks into place when you focus on what really matters
Yeah. t's almost like a kind of "epiphany".
Exactly, it's like everything suddenly makes sense in a new way. That "aha" moment just hits different.
I made it to 100 SURGE, first step towards 1K ...
Bravo.
!BBH
Thank you ;)
Hahahaha
This is truly inspiring
Keep Surging 😎
Thanks ;)
Why SURGE and not LSTR ?
Cos it's a 100% guaranteed success, not that LSTR it's not but no volatility will affect SURGE (unless LSTR quotes over $50) since it's pegged to 1$, hence you're on a winning move buying below 1$ once the presale is finished.
I love having a 17% (maybe more) APR paid weekly and with no staking, so you have liquidity all the time.
The compound interest that you may build is commont to HBD and that's a great deal too, your savings ball becomes bigger and bigger, if you kepp periodically investing in SURGE your compound interest becomes greater sooner than expected.
Can you ask for more?
LFG!
Thanks for your support ;)
Me too... A very good start I would say.
!BBH
I'm waiting for som HBD to be withdrawn in 2 days and I'll be buying more, hope I can come in time 😅
Pd: I'm saving VP since I depleted it to 60%, voting like a mad man :P
I'm unstaking it too rn.
The problem with VP happens to me often. I ended sometimes around 30%
BBH
Great about your unstaking move... will be voting soon, I owe you my vote ;)
Don't worry but thank you.
If you are on #NFTOPIA5
Drop down some photos of what you discovered around the event if you are attending. I will review them later and distribute some upvotes.
Details on how to attend the event bellow on the first comment to this #threadcast.
#NFTOPIA5
Here on @Splinterlands Stream
https://img.leopedia.io/DQmQsjApn4Ne5CC3n9aFwgMUNmTonrkSTy6fPiNPhGj2S7y/FireShot%20Capture%20335%20-%20Frame%20-%20[framevr.io].png
Was not ablet to join this morning. But glad you mate it.
I dsicovered forkyishere
Noice!
I can seeeeeeeee you!
I am going be looking like this...
the 20% APR is not up to date? Who did the booth?
Well spotted. I guess it needs update. Unsure you submitted it.
If you can, distribute the stuff on X or other social networks. Use #nftopia5 to refer to this event. I have shared this thread on X.
Session still up... after a while you need to move your mouse otherwise it will log you off.
#splinterlands are there too!
@cryptoshots.nft in the mix!
Look at this view!
This area might get active today...
Proof of attendance! @forkyishere and @mickvir
Here we are at the Crypto Shots booth
Come along...
Join the event here: https://nftopia.weebly.com/
You can also follow the Twitch stream...
If you have a WAX address, make sure you have your wallet ready and be prepared to link some addresses to the twitch stuff, as there are plenty giveaways on these events.
I use Anchor, but you can use whatever you are most comfortable with.
Twitch for the live event:
I will be there too. And you can watch the yesterday event that I missed too.
Having some dinner first...
Right dinner out of the way...
If you want a place to check your WAX NFTs, I use for example:
https://wax.atomichub.io
My user on WAX is ffoorryykkww (I also own the same user on Hive)
Some examples of stuff you can win on the event... (probably a lot more than this because I fell asleep).
Discord channel of #nftopia is https://discord.com/invite/JBtrWMnsVW
Right, ready to enable threadcast... once it gets closer I will.
Ups, I counted wrongly.
I am at the Pixel Booth
Top floor
This guy made me record this :D
Someone killed forky!🤤
Sweet !! Just signed up using inLeo App .. pretty seamless and trying to catch up on whats new here. SURGE and all those stuff .. interesting !!! I sitll dont know how to move my LEO from Hive to the Dex though. Anyone can give a tip ?
Here’s an answer I gave in Discord about SURGE and why the $1 peg is kept + demand is likely to be heavy once the $50k liquidity pool goes live
Good to know, thank you for this
Thanks for this. It helps a lot in the decision to put more into SURGE in my eyes. It makes sense too
I have on thing to ask. Now the price of SURGE is 4 $HIVE and it's below 1 dollar. But if the HIVE price increase, do I need to spend 4 HIVE for buying SURGE. In that case the price of SURGE will cross 1 dollar.
yep
SURGE has no capped upside
It could be (and likely will be) $2+ in the future
Lock in high yields by buying now
Thanks for putting this out.
For a moment, I had a misconception that surge could never go above $1
Thanks for explaining, this clarifies things.
#cmduo
Guessing game.
Win $DUO
Read the rules, link in comments.
Range: 550-700
Correct guess (963) - @moretea has won a duo call and 0.6 staked DUO, congrats!
Prizes:
Closest guess: DUO call (0.2 staked DUO)
Correct guess: 0.3 DUO staked to your account
Deadline: August 18th @ 8 am UTC
#duo #threadcast #gameonleo #pob #cent #sloth #duogame #guessinggame
taglist:
@anderssinho @chaosmagic23 @lourica @ijatz @moretea @brando28 @mmonline @ben.haase @bitcoinman @dubble @drakernoise @luchyl @les90 @rainbowdash4l
(ask to be tagged or removed from taglist)
Yeah, won with the magic numbers of Nikola Tesla
💪🏽🥳👍🏽
Nu guess: 555
Someone is on fire! 🔥
!DUO !PIMP !BBH !SLOTH !BEER !LUV !vote
✅ Voted thread successfully!
Vote weight: 5.15%
You just got DUO from @caspermoeller89.
They have 1/1 DUO calls left.
Learn all about DUO here.
https://inleo.io/@caspermoeller89/inleo-duo-guessing-game-rules?referral=caspermoeller89
551
666
651
!LOLZ !ALIVE !BBH
lolztoken.com
The Goosetapo.
Credit: reddit
@caspermoeller89, I sent you an $LOLZ on behalf of ben.haase
(5/10)
666
666
699
587
560
!DOOK
!BBH
!LOLZ
lolztoken.com
He wanted to see if time flys while having fun.
Credit: reddit
@caspermoeller89, I sent you an $LOLZ on behalf of luchyl
(2/4)
Farm LOLZ tokens when you Delegate Hive or Hive Tokens.
Click to delegate: 10 - 20 - 50 - 100 HP
700 !BBH !LOLZ !ALIVE !PIZZA
lolztoken.com
In a Thai con-do.
Credit: reddit
@caspermoeller89, I sent you an $LOLZ on behalf of master-lamps
(9/10)
Farm LOLZ tokens when you Delegate Hive or Hive Tokens.
Click to delegate: 10 - 20 - 50 - 100 HP
Almost Diamond!
Nice! Congrats! I'm just a few points ahead :)
Didn't know you were into this too.
How much usd is this ?
Zero at the moment... not yet distributed.
https://app.grass.io/register/?referralCode=ZBTnTzyJEv7gmyn
Signs of being new to investing:
Owning 0.5 shares in 300 different stocks.
This isn't diversification, it's dilution. Managing so many stocks with minimal investment might be spreading attention too thin.
Is good to have a couple of long shots but having your convictions and going big is the real way to win.
Do the research and find your long term stock that will last the test of time.
Totally agree, having a few strong convictions and going deeper on those long-term picks is where the real gains are. Spreading too thin just dilutes the impact.
Spot on. Holding tiny fractions across hundreds of stocks often leads to higher fees and less focus. Better to build meaningful positions in a smaller, well-researched set of assets. Learned this the hard way early on
GM! Starting the day with some cheap $LEO
Nice work! Thinking about buy some as well 👍
Solid buy there. Smart to get in ahead of the next wave of buys form surge.
So you grabbed some.
Right??
yeah *2500 $LEO
I am jealous of you.
Great
how many hive did you just use ?
mostly swapping in the pool. Think I used 7k hive
Happy Sunday from here.
Just leaving the church.
Hope you'll have an amazing day.
#thread2earn #photography
You look amazing 😉
Happy Sunday to you too
Awnn, thank you.
!BBH
Nice shades! Does the hat always goes with the dress or is that you? !BBH
Thank you. That's a scarf and yes, it goes with the dress. 😄
!BBH
Same to you !
Thank you.
!BBH
End of week's/Start of week's🧵 for feeding the #mighty #leoai 🦁💡
Every #comment is a data snack 🍪
Every 🧠 you tag, a new flavor in the mix.
Let’s train it well, together. Don't forget it's classic #podcast #hiddenforces
#threadtofeedthelion #leoecosystem #bbh
#20250817
Nice image!! 😆
Thanks, got a couple of more themes for #leoai do gather and refine data !LOLZ
Feel free to share any theme, I can't come up with:
https://inleo.io/@ben.haase/-bringing-leoai-to-life-datafeeding-threads-in-every-setting-dkv?referral=ben.haase
lolztoken.com
That's six years in a row now.
Credit: reddit
@senorcoconut, I sent you an $LOLZ on behalf of ben.haase
(7/10)
Farm LOLZ tokens when you Delegate Hive or Hive Tokens.
Click to delegate: 10 - 20 - 50 - 100 HP
This is the full transcription of podcast 'Hidden Forces'.
Revenge of the Real Politics for a Post-Pandemic World Benjamin Bratton #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? My name is Dimitri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Benjamin Bratton, a professor of visual arts at UC San Diego and the author of a recently published book titled Revenge of the Real, Politics for a Post-Pandemic The book explores how our collective response to the COVID-19 pandemic demonstrates a critical inability on the part of society to govern itself. The pandemic in this sense serves as a sort of non-negotiable reality check that appends the comfortable illusions of a world that increasingly bears no resemblance to the one we have vacated. It's a conversation that raises important questions about not only how we came to find ourselves in our current predicament of mask wars, urban riots, and institutional decay, but also (1/42)
how we might go about constructing a world that is more representative of reality and the needs of the present moment. This part of the discussion continues into the overtime, where Benjamin and I explore what a post-pandemic world might look like and what this means for our conceptions of governance and the individual. So without any further ado, I bring you my conversation with philosopher and author Benjamin Bratton. Benjamin Bratton, welcome to Hidden Forces. Thanks for having me. It's great having you on. So you and I have spoken briefly by phone and just now I've read your book this weekend. I think the entire framing of the book is fascinating and it touches on a lot of the topics that I've raised on prior episodes of Hidden Forces. Before we get into the book, I'd love for you to describe yourself because you're a rather eclectic guy. You seem to have, you don't fit into a box, not even close. So I'm curious how you describe yourself and what are your interests? What drives (2/42)
you? Well, to admit, I sometimes have a hard time describing myself in this sense. I suppose really I'm a writer. I write a number of books of nonfiction, primarily focused on issues of philosophy, computer science, design and architecture, geopolitics, various mixtures of these. So kind of depending on the audience, different things come to the fore. I'm a professor at University of California, San Diego. I also taught at Syark in Los Angeles. I direct an urban futures think tank at the Strelka Institute. In Moscow, the current iteration of which is called the terraforming, which is not the terraforming of Mars or the moon to make them suitable for earth-like life, but rather the terraforming of the earth to ensure that it remains viable for earth-like life. The new book that you mentioned that comes out this week is about the pandemic and what happened, what we need to learn from it, what was exposed in essence, how to make sense of it. So what led you to write the book? Was it the (3/42)
pandemic or was the subject brewing in your head long before that? Yeah, probably just some extent. I mean, the book really is a book of political philosophy more than a kind of policy blueprint. The book emerged from an essay that was published quite relatively early in the pandemic in March or April called 18 Lessons of Quarantine Urbanism. And I suppose in terms of what led me to write it, I think a lot of us who have friends and colleagues in China were watching what was happening and felt a little bit of a Cassandra complex that we knew what was coming. We were watching the administrations and maybe our friends and colleagues sort of sitting on their hands and various things sort of had come to pass. And so it became clear to me that in many regards that instead of thinking of the pandemic simply as a kind of state of exception and aberration from the norm, it really was a kind of episode by which a number of let's say pre-existing conditions were exposed, kind of added old adage (4/42)
of when the tide goes out, we can see who was swimming naked. And it turns out it was not just a few people, but in many respects, an entire system of healthcare, an entire logic within philosophy, an entire logic of biopolitical critique that ended up being enormously unhelpful in thinking through what the pandemic was, what our responses might be. And perhaps on the most deepest level, a kind of crisis in the logic and culture of governance, particularly in the West, that among the most richest and technologically sophisticated countries in the world were found themselves basically helpless for reasons that were unnecessary and should hopefully never be repeated. So how much of this book is a critique of Western political culture and what you termed to be its philosophical shortcomings? And how much of it also applies to Eastern Asian countries, some of which perhaps did much better under lockdown? Well, to some extent, I think it would be a mistake to make two gross generalizations. (5/42)
Clearly, the country, I mean, the way I put it is like this. One of the ways to think about the pandemic was that we all sort of lived through involuntarily, the largest control experiment in comparative governance that we're likely to see. The virus was the control variable and different policy regimes, but also different political cultures were tested. And the results are plain to see. Can we measure deaths per 100,000 and any number of other things you may wish to look at? And the countries that did the best, perhaps Taiwan, South Korea, Singapore, some others, are Asian technocracies that were able to respond quickly, partially because they had experiences with SARS because they had a kind of equitable, inclusive, and effective public health institutions. And they have a kind of political culture that is well suited to a capacity for collective self-organization. And quite clearly, certain kinds of policy decisions and policy instruments that were deployed in Taiwan, for example, (6/42)
simply wouldn't have been culturally possible in Texas or Southern Italy or Brazil or Italy. And that if the Asian technocracies, to a certain extent, may have done well, and I'm not in any respect trying to gloss over the problems in China's response, for example, but the countries that did the worst were clearly the ones that were run by the wave of populist regimes that had taken power over the last decade, United States, Brazil, India, I've mentioned, the UK, Russia. And that one of the lessons to be drawn from this, which should have been obvious, is that populist politics emphasis on narrative, on cultural narrative, the idea that a constructed narrative as a way of understanding how the world works, how political power might be organized, simply doesn't work. That ultimately, an underlying reality, a biological reality, a biochemical reality, an epidemiological reality that is indifferent to social construction will ultimately have its day. And I think that's what we saw. How (7/42)
much of the impediments that were erected, let's say, by populist regimes, were the result of cultural factors? And how much were simply the fact that these regimes or these administrations or candidates came to power by directly delegitimizing or pointing to the inefficiencies or corruptions of the existing institutions, and that therefore, in their response, it was very difficult to consistently corral the population to follow the administered line? That's right. It's a vicious circle in the logic of populism. And you may say that there's a kind of... I mean, the way I would see it is that over the last generation or so, 40 years, there has been a... From the beginning of neoliberalism, there has been a kind of deliberate dismantling and deconstruction of the principle of governance, both on the right and on the left, as a kind of something that should be seen with a kind of permanent suspicion. This dismantling of governance makes governance ineffective. That governance becomes (8/42)
ineffective, governance becomes delegitimized. That governance becomes delegitimized. This gives, as you suggest, oxygen to populism of all sorts. The dysfunction of government is in and of itself an excuse for further delegitimization and deconstruction of the systems of government, which then make it even more dysfunctional, which increase... It's a vicious cycle. Yeah. More vicious than virtuous. That's right. That's right. And so you end up with the situation in which with populations that are for both legitimate and probably illegitimate reasons are less able to collectively self-organize, find themselves in a situation where that collective self-organization is impossible and we have body count to prove it. So I'm curious. I mean, you're touching on it and we'll get into it later in the conversation as well. Where did the title of the book come from? Can you speak a little bit more to what you mean? The Revenge of the Real. Right. When you talk about the real. Well, the real is, (9/42)
as I say, is that kind of underlying biological, physical, material, epidemiological reality that is indifferent to cultural projection, indifferent to social construction, indifferent to our narrativizations. We are part of it. It's us. But whether we're talking about a pandemic, we're talking about climate change, we're talking about any number of ways in which the underlying biochemistry of our planetary condition is, in essence, bursting through the seams of the narrative illusions that we all try to use to make sense of the world around us. This suppression of the real, which is again is, I think, central to this project, can only last for so long. And that the law, you know, when you think of it sort of a boiling pot, the more that it is suppressed, the more that it is ignored, the more that our preferred illusions take up the time and space that should be used to kind of address the world as it is, the more damaging and the more violent that eruption actually is. So besides (10/42)
COVID-19 or infectious disease, what are some of the other forms of the real that the pandemic has forced us to confront? And how important is the fear of death and our societies, I think, really unhealthy relationship to mortality? How does that factor into all of this? And I'm reminded of the experience of the United States of the citizenry to the attacks of 9-11. And without minimizing how scary those attacks were, I also want to emphasize that I think our reaction to them was exaggerated. And it was, in some ways, a reaction that was politically beneficial for the administration at the time, which stoked fears and concerns. But people also did have an exaggerated fear of death, death, something which is inevitable and which we all will face at one point or another. And then all we can do is prolong it for a very short period of time and get people are willing to go to great lengths to forestall or perhaps even in their head, if they can imagine it, prevent it entirely. So how did (11/42)
this pandemic bring out our fears around mortality and morbidity? Well, it's a fascinating question. I think that in terms of linking with 9-11, which is an interesting one, I suppose the way in which I might approach it has to do with the ways in which we understand where risk really is and what really is a risk, what really is something that may result in our death, which is something that might be dangerous to us. And what, on the other hand, is something in which we invest and organize our fear of death. And these are not always the same thing. I think to your point, obviously, in the years after 9-11, the question of trying to reorganize our society and reorganize our cities, reorganize our airports, reorganize our schools in relationship to the threat of political terrorism became a national project. It was a refortification against a presumed and predictive and possible speculative future violence, one that was extraordinarily unlikely compared to, for example, dying of heart (12/42)
disease, dying of lung cancer, dying of any of the kinds of things that Americans tend to die of, diabetes and so forth and so on. And so there is a sense of risk, and then there's a sense of where a place where risk is actually invested. I think with the pandemic, this kind of miscalculation of risk that we saw that was probably most pervasive was not the kind of being afraid of shark attacks kind of risk that we saw after 9-11 where there was a kind of, all of our attention on the wrong thing. It was more about a miscalculation of the relationship between individual risk and collective risk. And I think this was kind of the last of the pandemic. One of the things that the pandemic showed was that many of the risks that any of us may face personally are really our collective risks, that if someone in my city is infected, is sick, or if several people in my city are infected or sick, that this is a risk to me. And that my investment in care for them, my investment in testing for them, (13/42)
my investment in the provision of appropriate healthcare for them is to my benefit. There was a meme going around, around sort of in the middle of the culture war over masks that was about someone who refused to turn on their headlights as they were driving around the city because they could see everybody else. They have the freedom to drive their car on the road so forth and so on. I think that part of the culture war over the mask was where this issue of risk really became and the kind of calculations and miscalculations of risk really came to bear. So this is an interesting part of the book where you couch this observation in terms of the subject versus object as well as our over-individuation. Explain to me what you mean by that. How does our conception of the immunological commons and our conception of individuality interface with the realities of the world and the fact that so many of the risks we face are communal as opposed to individual? I mean, they affect us individually, (14/42)
but they are macro risks. That's right. Well, one of the things I talk about is what I call the ethics of the object, which we might contrast to an ethics of the subject. In political ethics or really ethics more broadly, there is a presumption that one's subjectivity is the basis of this ethical discussion. Put simply, if I can calibrate my internal moral state, my sort of mental disposition towards you or to the world in a particular kind of way and train this and discipline this towards the proper ethical disposition, then my activities, my behaviors and the effects of my activities and behaviors will be somehow correspondent to this internal moral state. If I think good thoughts, I will do good things. If I do good things, then good things will happen. Intentions matter, in other words. Intentions not only matter, intentions are the thing that matters. The focus for ethics is on the calibration of intentionality. That's what I would say is the inherited sense of ethics of the (15/42)
subject. By contrast, what I suggest is the ethics of the object that must be added to this, not necessarily replace it, but added to this. The reason we wore masks was because we came to a different kind of ethical realization, whether we realized it or not. When I approach a stranger in the street, we're both wearing a mask, the possibility that I might infect them, do them harm, do them a kind of potentially serious form of violence, has nothing to do with whether or not I like them or hate them or know them or don't know them or have. My internal subjective moral state towards this person is totally irrelevant to whether or not my actions will do them harm. My actions will do them harm because of an objective biological reality that we are part of the same species, that there is a virus that my exhale is their inhale and so forth. We wore masks because we were able to recalibrate a logic of ethics towards one's self as an object, one's self as a biological object, and to construct (16/42)
a kind of public ethics around this reality. We were able to do it relatively quickly and to activate this relatively quickly. This too, I think, is one of the positive lessons from the sociologic of the pandemic. Not that I think we should all continue to wear masks forever and ever, but more generally, this sense of understanding ourselves in relationship to the world through this lens of the objective, to think of the objective as a space of ethics rather than as a kind of space of over-rationalizing tyranny against ethics is, in fact, something that's very important. So how much of this reflects an evolved understanding of ethics in your view? And how much of it is actually a result of fundamentally new dynamics on the planet as a result of not just population changes, but also changing ecosystems as a result of some of those population changes and practices, etc. How much is the ethics of the object? How much is the pandemic itself? No, not the pandemic itself. How much is the (17/42)
ethics of the object on evolved understanding? And how much of it is not so much an evolved understanding? You could still say it's an evolved understanding, but the circumstances of the earth and of human society on planet earth are different than they were a thousand years ago. Where there are more people, we have different types of technologies, different types of wastes, different types of problems. That's right. So how much of this is a philosophy for the current age? Well, I think it is a philosophy of the current age, but I think that if it is an evolved understanding, it is an evolved understanding of a condition and circumstance that in a way always has been. We always have been a kind of biological creature. Unwitting agents in all sorts of harmful dramas. Unwitting agents, exactly. Unwitting agents, unconscious objects in a certain kind of degree. The way in which I would couch this in a bigger picture, and I'm not sure the ethics of the object would qualify of this, but (18/42)
this kind of what you call a kind of evolved perspective. Another way of putting that might be in relationship to what I call in some other work, the Copernican Trauma or Copernican Turn. There are moments in, and this goes to your question about the technological aspect of this. There's moments in history, in sort of socio-technical history where we use technology in a certain way that allows us not just to do something in the world, but to discover that the world works very differently than we thought, the technology that we use to make it. So a telescope or a microscope, without telescopes, a heliocentric cosmology isn't really possible. Without microscopes, don't cause microbes, but once you understand that the surfaces of the world are covered with them, you see them differently. I think Darwinian biology was a kind of Copernican Trauma, neuroscience by which we understand ourselves as an animal that our most beautiful forms of cognition are also animal forms. Neuroscience, where (19/42)
our thinking about our thinking and understanding that to itself as a physical objective fact, this is marvelous. I think artificial intelligence and what I call synthetic intelligence will also prove to be a kind of Copernican Trauma, but there are a number of different sequences along the way by which we come to understand, in essence, the objectivity of our subjectivity in ways that change the way we understand the world. Most of them, most of them were able to be accomplished through some form of technological abstraction and alienation. The technology was essential to these kinds of epistemological transformations. To that point, let's reverse that a bit. How much is our subjective notion of self and personal identity formed by similar types of models and frameworks that we bring to the world? Well, this is a big question to the extent to what sense of our sense of self is part of a neuroanatomical disposition. Exactly, right. That agreeing to structural language and process (20/42)
lights and sounds in particular kinds of ways, all those, you can't separate a sense of self from that. Those things are themselves not givens. They are the result. I would make this point. We have always been technological creatures in a certain sense, and that even our anatomy itself is the result and effects of millions of years of technological mediation with the world. We have opposable thumbs, not so that we can pick up tools, but because our ancestors picked up tools. Our thumbs work the way that we do. This question of to what extent are we a biological given that then enters into social relations and mediations with the world, and to what extent do those mediations and social relations with the world produce that biological condition is a bit of a, I would say, chicken or egg situation, though obviously, we know that eggs came before chickens by several million years, so it doesn't really hold. It's a dynamic process, in other words, that our conceptions of the world and our (21/42)
biologies, those are constantly evolving. But what I'm trying to wean out though here is that, yes, our sensory perceptions allow our individual beings to process information individually, but that's not the same thing. Right, but that's not the same thing as our conception of self and our sense of identity and ego. That's right. So how much of that would you say is kind of running as a piece of software as opposed to being hardwired in a biology, that if a different type of culture existed in the world, that you could take the same biologically evolved human beings, but those individuals could operate in a world where with far less ego, far less sense of self. I mean, there are all sorts of theories, one of them, obviously, I think generally discredited from the 1970s, Jillian James' bicameral mind, but that posited that the ancients actually had far less or lacked an ego entirely and had a relationship to the gods that was really a sort of an expression of their internal bicamerality (22/42)
between their conscious and unconscious mind. So that's kind of what I'm getting at, which is it seems to me when I read your book that what you're suggesting is that given the state of the world, given where our technology's at, etc., etc., part of what the solution means is moving to a world where we think of ourselves less as individuals and more as part of a collective. And so what does that mean experientially and qualitatively for a human being living in the world? Yeah, thanks for the question. Let me put it this way. There are a lot of ways in which one might experience one's own subjectivity, one's own agency, one's own identity. I think we are at a sort of weird cultural moments in the West where all three of these things are thought of as basically being more or less the same thing and they're not. And so if one has a sense that one's agency is insufficient, one might choose to amplify one's sense of identity or subjectivity. And I think in ways that we could go into, this (23/42)
has led to a number of problems, including the populist wave that I was speaking to. Now to your question about the hardware software aspect of this, which is a kind of interesting one, we think through many as homo sapiens, we think linguistically, we think visually, of course, we think auditorially, we think in lots of different ways, but language both spoken and written in the last several tens of thousands of years has become an increasingly central part of how it is that we think language itself is obviously deeply social and trans individual at its foundations. For me to even think about my own, you know, independence and autonomy, I'm thinking about this through the grammars and structures of a language that is already trans individual. And so the conditions of that sense of subjectivity, that's not the same thing as autonomy, but let's say that sense of autonomy is itself constructed through a non autonomous technology. I don't know that this is a paradox, but it is certainly (24/42)
an important way to appreciate this. You know, in terms of consciousness, which is something that I know a lot of people are very concerned about, I happen to be particularly in my recent work around AI and synthetic intelligence, I've become less focused and interested in consciousness per se. But it's a neuroscientist at Princeton named Graziano, whose work on the social theory of consciousness I find rather compelling. And basically his idea goes like this, is that in all predator-prey relationships, there was some kind of capacity for other mind projection, that the fox can imagine how the eagle sees. And so it knows to go under and hide because it's imagining a line of sight from above or to catch a fox, you need to think like a fox in this way. So there's some kind of undermined capacity to anticipate what the other person's thinking. What's happened is that one of the things that makes our sapiens, whatever, 60,000, 40,000, where we want to sort of locate this, we're able to in (25/42)
essence turn that other mind capacity back in on ourselves. We were able to think of ourselves as if we were an other mind, as if we were an external kind of structure. And it's this interiorization of what began as an exterior relationship to the world that probably took a great lesson in the basis of this sense of subjectivity in the first place. I don't fully follow that last part. First of all, what are we talking about when we say consciousness number one? And where you lost me was in the turning consciousness in on itself, that somehow the human version of consciousness or expression of it is somehow different than that of, let's say, a predator or a prey. It is. I mean, I'm sorry. I didn't mean to make it obscure. That's fine. But so yeah, first of all, what do we mean when we talk about consciousness and then what is that distinction? So consciousness in this sense would be this experience of one's own, this sort of subjective experiences of one's own thoughts. So thinking (26/42)
about thinking, let's say, the capacity to not only think anthropocriticities, but to think about thinking and perhaps to think about thinking about thinking in these terms of this. A larger sense of cosmic awareness? Well, a larger sense of a kind of reflexive awareness of one's own sentience. Like we might separate sentience from sapience in this regard. Yeah, because I wouldn't necessarily connect consciousness with ego or identity, which is where I think I'm getting a little confused. Are you putting those two together? No, I'm not. I was suggesting that since you were talking, we were talking about this in terms of the relationship of the kind of evolutionary arc by which these might develop in relationship to one another, that we may want to sort of ask the question of how infected this come about and where was this kinds of moments of switches? There's another point that we may want to consider in terms of the ancients. And of course, I think what we mean by the ancients here is (27/42)
maybe not entirely clear. I think it was the oral societies, preliterate societies, I think is what... Yeah, I'm not sure this argument is necessarily borne by the record. One way to think about this is there's this caves, the Neolithic caves, or one is being at Lascaux. One is at Chauvet in France and others at Lascaux. The one at Chauvet is about 32,000 years old. The one at Lascaux, which we had studied much longer, was about 16,000 years old. And so the distance, the historical record between the present Lascaux and Chauvet are all about 16,000 years. The Wehrner Herzog film that you might be familiar with is at Chauvet at the beginning. And one of things you see in the art that happens there is that there's a representation of animals and a representation of the world around these ancestors of ours. Everything is represented sort of in a kind of horizontal movement. But at Lascaux, 16,000 years later, there's this huge shift where things meet your gaze. The animal looks at you in (28/42)
the eye. There are pictures of people that will return to look at you in the eye. And so whoever made those was able to imagine that in the future, not in the present, there would be someone else who's looking at this picture who will have a gaze that will be observing this picture in the future and that can make this picture. Now, I can meet that future gaze through this image. There's a lot going on there. And so some have suggested that this kind of some kind of light bulb went on during this particularly recent period that allowed for this kind of anticipation of a kind of futural consciousness as being something to which and from which a kind of communication is possible. This is more what I would refer to more generally as the capacity for sapiens rather than as necessarily consciousness. But I think it nevertheless gets to the heart of the phenomenon that we're trying to hone in on here. So is the phenomenon, because I think you kind of mentioned it before we got to this point, (29/42)
which is that individuation, though it was something that was that evolved as a sort of an adaptive way of interfacing with the world, has at this stage become a kind of malignancy. No, no, no, no, no. Let me try to introduce a little bit of specificity into this as well. The individuation and the sense of individuation that I'm speaking of, the kind of would identify as a kind of particular, at this point, has become a kind of potentially rather malignant trait of some aspects of Western political culture is not the capacity for sapiens, is not the capacity for a kind of projective or futural or speculative intersubjectivity. That might identify with this in the cave scenario. That the scenario of the kind of projective intersubjectivity or projective interobjectivity is closer to what I was talking about the ethics of the object. However, what I'm speaking to in the book about the kind of crisis of individuation or kind of malignant forms of individuation, in many cases, a kind of (30/42)
suppression or forgetting of that basis of subjectivity in which a kind of fantastically fragile fiction of a self-sovereign, autonomous individual is understood as a kind of ontological principle, as the basis of how society works itself. That not just the relatively dubious sort of conventional liberal discussion that a society is made up of essentially of individuals that subsequently choose to enter into social contracts, but even further than that, that they don't really even enter into these social contracts, that they simply are these kinds of encapsulated atomized selfish automatons bouncing off one each other like billiard balls, acting in their intensive self-interest in ways that are clearly motivated by any number of cultural motivations. This is the individuation that I speak of in the book as being particularly troublesome. Right. A principle of emergence that through all of our competing self-interest, whether it's in the marketplace or in the political sphere, through (31/42)
that process emerges a kind of order, a hidden order, and that the world that we live in today results from the competing impulses and self-interests of these automata. What you're suggesting is, and you're not the only one, I mean, this is, I think I've talked about this a bit in the context of one episode where we explored the foundations of Protestantism and the Reformation. Right. Max Weber and so forth. Right, exactly. It's not a controversial view to take, but the reason I was bringing it up was because it does seem like one of the conclusions you draw is that if we want to transition to a more sustainable world and a world in which we can live, given, I think, the state of our technology, the capacities for both destruction and creation that these technologies allow, that we need to be able to get to a place where this hyper-individuation ceases to be, that we roll it back somehow. I think I've seen this, for example, what I consider to be hyper-individuation in terms of (32/42)
narcissism, like the outgrowth of narcissism in society. I don't know if that's what you mean, but I suppose try and clarify what I just said because I don't have obviously the same- Yeah, you know, I'm happy to, yeah, no, and I think there's consider an overlap in what we're suggesting here. The question of emergence and order is an important aspect of this, and I'm not suggesting that the principle of the internal dynamics of complex adaptive systems that are not directed, that there is not only a capacity for the emergence of bottom-up order, but that this is one of the fundamental principles of complex adaptive systems themselves, whether those are physical or social or cultural linguistic. I think this is indisputable. However, there are one of the other emergent properties of those systems, which I think goes back to this question of to sentience and sapiens. One of the emergent properties of those systems can also be the capacity for self-modeling, that the entire system itself (33/42)
becomes in a way capable of modeling itself and deliberately acting back upon itself, that there becomes a capacity for certain kind of deliberate and deliberative recursion within that system, that there is emergence and then this emergence also has a kind of, let's say, a kind of second or third order cybernetic capacity for a feedback and recursion. This is also a form of intelligence. This is also a form of collective sapiens, not just individual sapiens, but a kind of collective sapiens. It implies foresight. It implies regulation. It implies structuring. It implies composition. This itself is a reflex, a capacity of which we are very capable, but have to a certain extent lost some expertise in. When I speak of the kind of crisis of governance in the West, this is really what I mean. What I mean is that we have lost this ability really to perform these feats of recursive regulatory compositional structure. Again, it's not that emergence isn't real or emergence is important, but (34/42)
one of the things that also should emerge is this capacity for recursion. How much is it that the capacity for recursion is inadequate or diminished? How much of it is that the map of the territory is no longer accurate, that the simulation that we're running of the real of reality has increasingly become unmoored from reality itself, and that this is what we are experiencing and that this is what the pandemic brought to the fore. Yeah. No, we're on the same page here. I think it's both. And both meaning that both the model of the real that we are producing is inadequate to the purposes of this recursion. And also, after 40 years, 50 years of kind of deliberate dismantling and deconstruction of the principle of governmentality itself, the impetus or inclination to enter into this recursion itself is atrophy to a certain kind of degree. So a couple questions there. One, what do you attribute to that, to the unmooring, to the increasing disconnect between the simulation and reality, or (35/42)
the simulation as an appropriate model of what reality is so that we can act upon in an effective way? And two, is the attack on institutions or the deconstruction of the systems of self-governance, et cetera, do those result in part from, actually, I'll just pose it as a question. What does that result from? But take the first one first, if you don't mind. Yeah, let me take the first one because I think what you've hit upon here is an important point. It might be worth sort of walking it through a little bit. So we have a tremendous capacity for producing incredibly rich models and simulations of the past, present, and future. Our capacity to produce these models as forms of technical abstraction is not atrophied whatsoever. I think probably, if nothing else, earth science and climate science are exemplary of this, I will make the argument that the very idea of climate change itself, not the phenomenon, but the concept of it, is an epistemological accomplishment of planetary scale (36/42)
computation without this massive planetary scale sensing and modeling and computation capacity that takes billions and billions of data points and produces model simulations of earth, past, present, and future through them. Simple heuristics like a hockey stick don't occur. But to your point, like we see with our science, the problem now is not really that the models are not accurate enough. Like if we could just get this out to 17 decimal points instead of seven decimal points, then we would have a better bottle of it. We would know what to do. No, what's happened is that model of the world, of what the future, this collective model of what the likely future of our ecological substrate, upon which all of our economies from which they emerge is in danger, that model itself does not have the capacity to have an effective recursive effect back on the real. The climate model cannot recursively affect the climate in the same way. And that is the problem. We see that in many respects, (37/42)
financial model. Because the climate model is a model of a physical system. Well, it's a model of a physical system. And the institutional structures that we have constructed in relationship to this model are not ones that activate this model as an instrument of governance. It is merely a representation of a possibility. Many financial models, for example, it's a descriptive model as opposed to a prescriptive one. It's a descriptive model as opposed to a recursive one. Is it as opposed to a recursive one? So many financial models are recursive in ways that climate models are not, in that financial models can in fact cause the thing to happen that they are modeling. Donald McKenzie's book, An Engine, Not a Camera on the History of Sock Exchanges, kind of towards this. So that's the second part of your point, where there's a problem or crisis, if you like. There's this mismatch between we have this tremendous technological capacity to produce models of the world and this tiny little (38/42)
T-Rex arm capacity to actually use those models to recursively act back upon the world in a way that would make those models tools of governance. The first part though about are the models, we're making the wrong kind of models. This is also true and this, I think, does to go to a certain degree goes to the question of this question of individuation and the question of what I would consider a kind of historically catastrophic misuse of our computational capacity towards the tracking and modeling and simulation of individual user behavior, individual consumer behavior that has amplified not only this kind of model of society as being an aggregation of atomic atomized individuals, but has amplified and accelerated that atomization even further and has even structured its own critique. That even the critique of surveillance capitalism from Shoshana Zuboff or others is predicated on the idea that of course computation is about modeling individuals, but now what needs to happen instead of (39/42)
these coercive contractual relationships between individuals and predatory platforms, these individuals must counter-weaponize themselves and take back their individual private data. The problem, however, is this hyperindividuation of the use of computation itself as if the individual human were the proper unit of analysis for how it is that the computation would model the world. Unless this is in a sense, is sort of repurposed towards things that are more beneficial, I don't think any amount of kind of political solutionism that we might get from the surveillance capitalism critique is going to be very helpful. It also seems to speak to a larger sense of consciousness for a planet that can view itself and act upon itself in a way that is simply not possible at the individual level. I want to move the second part of our conversation into the overtime, Benjamin, and that's going to give us an opportunity to really talk about what a post-pandemic world would look like if we were to (40/42)
implement some of these solutions that you feel are needed and what it would look like if we didn't. In other words, what is the sort of path of least resistance if things continue to move as they are today and what this means in both cases for the nation-state. We've talked about it a bit for the individual, for corporations, and for I think peace security and quality of life. For anyone who is 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 part of today's conversation with Benjamin, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io and check out our episode library, or subscribe directly through our Patreon page at patreon.com slash hiddenforces. There's also a link in the summary page to this episode with instructions on how to connect the overtime (41/42)
feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Benjamin, stick around, we're going to move the rest of our conversation into the overtime. Every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod, or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (42/42)
This is the full transcription of podcast 'Hidden Forces'.
Monetary Tightening & the End of the Risk-on Trade Mohamed El-Erian #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? My name is Dimitri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. This episode was released early to premium subscribers last week, and it features someone who truly needs no introduction. And for those of you who may not know Muhammad Al-Aryan, he is the president of Queens College Cambridge and chief economic advisor at Aliyahns, the corporate parrot of PIMCO, where Muhammad was CEO and co-chief investment officer from 2007 to 2014. Muhammad is a remarkably gifted communicator who is intimately connected to the global policymaking community. This makes him uniquely valuable to speak to during a time when the prospect of a policy failure is arguably the single biggest risk factor facing markets and the global economy. I asked Muhammad to appear on the podcast today because I (1/43)
believe that we are entering a very dangerous period in financial markets. As investors, we've all been conditioned to believe that markets always go up, that dips are always meant to be bought, and that when things don't work out, central banks are here to bail us out. But in a world where inflation is persistent and policymakers around the world have begun raising rates and contracting credit, continuing to bet on mean reversion could prove to be a deadly strategy for investors. My objective in this conversation is to give you a framework that you can use to navigate a world that is transitioning from one of insufficient demand to insufficient supply, from historically low volatility to rising uncertainty, and from easy money to hard choices. This is true not only for central bankers, but also for investors like you and me. Subscribers to our Super Nerd Tier can access the transcript to this episode as well as the Intelligence Report, which is the cliff notes to the Hidden Forces (2/43)
podcast, formatted for easy reading of episode highlights with answers to key questions, quotes from reference material, and links to all relevant information, books, articles, etc. used by me to prepare for this conversation. Since this episode deals with markets and investing, I want to make it absolutely clear that nothing we say on this podcast can or should be viewed as financial advice. Financial 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 deeply enlightening conversation with my guest, Muhammad Al-Aryan. So Muhammad, it's great to have you on the podcast. You've been one of the more outspoken critics of the Fed in recent months. We've made the case for more hawkish forward guidance and also tighter monetary policy. What would you say are the risk factors that most concern you and that markets in the economy are grappling with right now, and how do those (3/43)
risks relate to the Federal Reserve's current stance on monetary policy and inflation? So my major concern is that we are witnessing a big policy mistake. We are in phase three of this policy mistake. And that policy mistake will unduly harm the economy, undermine livelihoods, and then also disrupt the market that could then have a negative spillback effect onto the economy. So if you think step back and think of what would happen to our economic recovery, it would be undermined not by private sector developments, not by the end of a cycle, but by the Fed being too late in taking its foot off the accelerator and instead having to hit the brakes very hard. So I'd love to go into that in more detail, specifically this idea of a policy mistake. What exactly do you think the Fed has gotten wrong here? So three stages of this policy mistake. Mistake number one goes back to 2020 when for understandable reasons they decided to adopt a new policy framework. The problem is that the policy (4/43)
framework they adopted was made for the world of yesterday, not the world of today. The world of yesterday was insufficient demand. The world of today is insufficient supply. The mistake number one is adopting a framework change at the wrong time that told the markets that they would be looking backwards, not forward in trying to contain inflation. Step number two, which was a much more obvious mistake, and many of us have warned against it, is that as early as March of last year, they decided to characterize the higher inflation as transitory, and they did not, quote, retire that characterization until the end of November when there was ample evidence, both from the companies and from the economic data, that inflation was not transitory. Mistake number three is what's happening today. By not moving early enough, they're going to be forced into a very hard pivot. They will bunch three sets of contractionary measures, and the risk is that this economy could not navigate through these (5/43)
three contractory measures. I'd like to explore that more, Mohamed, but you're so good at, I think, you're one of the best in the industry at really creating metaphors or mental frameworks that help people think about where we find ourselves on a big picture level. You did it in 2009 with the, quote, new normal hypothesis that we were moving into a regime of secular stagnation driven by structural impediments to growth. You did it again in how you describe central banks as the, quote, only game in town, which I think really captured the significance that central bank policy was going to play in informing the direction of markets and the, I think, decision-making framework for investors at the time. I'd love to take a step back here and understand what your framework is for where we are moving in today. You talked about insufficient supply versus insufficient demand, which was the issue during the stagnationary period. How would you describe where we find ourselves today, and what do (6/43)
you think are the key factors responsible for that? So I think if you were to look for the bumper sticker, we've entered in a world not just of insufficient supply, and that relates not just to the supply of goods and services, but also to the supply of labor, but also in a world in which we have either pressed polls or reverse on globalization. And that in itself has an additional set of consequences for the global economy. I think the first element insufficient supply, we live it every day. It's harder to get things. It takes longer to ship things around the world. It's become much more expensive. Oil has become much more expensive. Energy is more expensive. Gas is more expensive. And then there are labor shortages. I think all of us are exposed to these labor shortages. So we know what that world looks like, and there are certain aspects that are good about it, which is higher wages, and in particular, higher wages for the less well-paid, and that is good, but it is also (7/43)
inflationary more broadly. The second element we don't see as much, but it is consequential. For a long time, we were living in a disinflationary world. And the way I describe this is just think of what Amazon, Google, and Uber have allowed us to do. And I'm just using these as labels. It cuts out the middle person. So it provides us with lower cost. Google allows us to price search. We are less price takers, and we are more price setters. And then Uber, perhaps the least well-understood effect, but the most powerful, allows us to use existing assets to deal with supply problems. Those three things were very powerful, and they played it out for over a decade in causing disinflationary winds. Now we have a very strong counter force, which is the fragmentation of the global economy. If you're Australia and you've been doing business with China, you know what that feels like. Suddenly, the Chinese economy is no longer available to you, both on terms of selling things and important things. (8/43)
We are seeing more regionalization, the emergence of blocks as opposed to globalization, and we are seeing very weak multilateral institutions. A perfect example of that, of how we are exposed to this, is vaccine inequality. Delta originated in India. Omicron originated in South Africa. And in both cases, the global system had failed to provide sufficient vaccination. We thought we were fine because we were highly vaccinated, but it turns out we are vulnerable to the parts of the world that are not. So we have to learn to live with a world that is more fragmented and where spillover effects are more pronounced. Is that another way of saying that you think that we're moving from a more open world to a more closed world? From a world that assumed openness was almost a given to one in which we are much less open, yes. I don't want to say closed because I don't think any economy other than maybe North Korea can live in a closed global economy, but certainly less open. Right. And I mean, (9/43)
another way of thinking about this, obviously, is that geopolitical tensions have been rising. And I wonder why markets don't seem to have reacted to rising geopolitical tensions over the last several years, the way that one would have expected them to if you had pulled an investor 10 or 20 years ago. Why do you think that is? I think there's two elements. One longstanding and the other one is more recent. Longstanding is very difficult to price by modal distribution. Look at what's happening in Russia and Ukraine today. It's either going to end up open conflict or it's going to end up diplomatic resolution. It's very difficult to be confident about one outcome. So you end up in a model's middle. You'd price neither outcomes. You'd price some average of the two that is least likely to materialize. But there's something else recently. And let me take you to the investment committee, to a typical investment committee in a sophisticated investment management company. You present a case (10/43)
for buying a certain bond, stock, whatever. And we go through all the fundamentals. Is it financially resilient? Is it well managed? Does it have a good market in front of it? And you convince us all that the fundamentals are green light. You will be asked a very important question. Who's going to buy after us? The subsequent buyer does two things that are very important for an investment. One, they validate your investment. Think of you buying an apartment. The minute you close on that apartment, what you really want is 10 people bidding for the apartment next door because the value of your apartment is going to go up. So the subsequent buyer validates your own purchase. But the subsequent buyer does something else as well. They provide you liquidity if you have to change your mind. Now I come along and I tell you, your subsequent buyer is a central bank. It is the Federal Reserve. It has a massive balance sheet. It has seemingly an infinite willingness to use it. And one more thing, (11/43)
it is price insensitive. It is not a commercial participant. It will buy regardless and it will turn up every single month with massive purchases. If I tell you that and you believe it because you've seen it now month after month, you will buy ahead of this. And whenever you see a geopolitical shock causing some pullback in asset prices, you will know that there's a big buyer out there. And it doesn't matter that they're buying just government bonds and mortgages because it ripples through the whole system. So the second reason why markets have been immune from geopolitical risk, in fact from almost any shock is there was a confidence that the Federal Reserve was our best friend forever. And don't underestimate how powerful that phenomenon was. That's why you hear consistently, buy the dip, Tina, there is no alternative, and FOMO, out. Okay, this is great because I do want to ask you about this. And we'll probably pivot again later back into geopolitics because I do want to ask you how (12/43)
you think they move towards a more multipolar world that we are currently living through will impact the decisions of governments to, let's say for example, one good example is in Europe, consider trade-offs between security and the welfare state. But in terms of the Fed, this is really fascinating because one of the questions I wanted to ask you is how does someone like you factor in things like behavioral conditioning or risk tolerance that change structurally as a result of the types of dynamics that you've described here, the reinforcement of buy the dip, and also the fact that investors now for years have become conditioned to this not just because of the Federal Reserve, but because of the historical empirical data that has shown convincingly that investors are better off being in the market and not selling, just using opportunities to buy. How do you think about that going forward if one of the major sort of legs under that stool gets taken out? Some great behavior in the power (13/43)
of behavioral science in understanding outcomes. It doesn't explain everything, but it sets that extra bit of insight that's really important. We're coming from a period in which investors have been deeply conditioned to buy the dip, and they've had consistent confirmation that that is the right thing to do. There was a reason why that is happening is very visible. It's called the Federal Reserve injecting as much as 120 billion of liquidity each month into the marketplace. It has been reinforced by experience, and because of that, a couple of things happened. The dips became smaller in duration and in magnitude, and that was critical. And two, because of that, volatility came down. And when volatility comes down, there are models that encourage people to put more money at risk because the volatility of your investment is lower. So you've had this reinforcing behavioral and structural technical playing out, and the result of that were three incredible years of returns. To think that (14/43)
we've had 20% basically average returns for the last three years, while we've had COVID, geopolitical problems, all sorts of other issues is incredible. But it is explained by this mix of not only liquidity, but behavioral aspects. Now, behavioral aspects are really difficult to predict, but you've got to keep on looking every single day. In the marketplace, the biggest change in behavioral aspects was when the marketplace goes from thinking in relative terms to thinking in absolute terms. There's this famous story of someone who comes home with a dog and declares to his family proudly that he paid $40,000 for this dog. And the family looks and says, you did what? And the response, he says, yes, it was a great deal. The cat was selling for $50,000. That is what's called a relative mindset. You continue buying not because what you're buying has value in itself, but it has value relative to other assets. And that can go on for a very long time. So when the Federal Reserve takes down and (15/43)
makes it onerous to hold bonds, you are pushed into taking more and more risk. And that works great. At some point, you get the pivot from relative to absolute. At some point, someone says, is a dog worth $40,000? And there is a wake-up call for everybody. I grew up in emerging markets. I cannot tell you the amount of times I've seen this regime shift. And they are violent when they occur. So it is very difficult to predict when this regime shift will happen. The good news is when it does happen, if you understand it quickly enough, you have time to get back on site. So again, a lot of really great points. I want to try to pull them out and address the Metsha individually. The first has to do with investor expectations and how these expectations have been shaped by the reassuring posture of central banks who have stood ready to, quote, buy the dip and provide the liquidity necessary to both elongate the bull market and perhaps more consequently for the purposes of credit and leverage, (16/43)
reduce volatility. Do you think that this conditioning has made markets more resistant to embracing this new regime of insufficient supply, spotty liquidity, et cetera, that you think we're moving into? And if so, what does that mean for the type of volatility that we should be prepared to see once markets try and readjust? That's my first question. Maybe the more broader question here is why do you think the Fed, if you agree with this, the Fed and other central banks didn't accurately factor into their tightening cycle the risks to financial instability, that they were focused very much on employment and on inflation, but they were maybe not taking enough account of the more difficult things to measure like capital misallocation or unsustainable business practices? So let me suggest on your second question first, if I may, on your second question, that is the other way around, that it is because the Federal Reserve was so worried about financial instability that it ended up with a (17/43)
pedal to the metal approach when the economy would have called for something else. Let's take the fourth quarter of 2018. A relatively new Federal Reserve chair comes in, recognizes that the Fed had been co-opted by markets, recognizes as a ton of moral hazard that had built in, recognizes there was an unhealthy codependency between the Fed and the markets, and in the fourth quarter starts signaling that the Fed was going to tighten policies consistent with economic developments. If you remember, at that time the economy was doing extremely well, markets were just fine, liquidity was abundant. Markets have their second day per tantrum. The first one was in 2013, May, June, they had their second one. This one plays out in the equity market in a big way and come the beginning of January 2019, Chair Powell undertakes a massive U-turn that is not warranted by economic developments. It was in response to financial instability. Now, if you are charitable, you would say, well, of course it's (18/43)
related to economic fundamentals because at some point the financial instability would spill back onto the economy. If you are less charitable, you would say it is yet another time that the Federal Reserve has proved that the Fed put is alive, that the minute the market is uncomfortable, is volatile, the Fed will have no choice but to be pulled back in. That is if you like, people traced that all the way back to 18 years ago to this conditioning of the market that there was a Fed put. In fact, the last period of instability, a lot of the narrative was in term of where is the Fed put? Where is the Fed put? Is it minus 10% on the S&P? Is it minus 20% on the S&P? I would say to you the problem is that the Fed became so sensitive to financial markets that it put that ahead of other things. It's a little bit like you fall into the trap of providing candy to your child. You recognize that you've provided too much candy. You try to stop. Your child has a tantrum. You decide that the (19/43)
consequences of the tantrum are not something that you want to live with and you give more candy even though you know that that is not a good long-term solution. That is where the Fed got stuck in and it worked as long as there was no inflation. Now that there's inflation, the Fed cannot do that anymore. And that's what the market is recognizing. Look, I am one who have said, no matter what you think of fundamentals, you should continue riding the liquidity wave. I've said this over and over again the whole of last year. I remember Leon Kooperman, a very famous and respected hedge fund manager, saying on TV that he was really worried about the markets and then he was asked, how are you positioned? And his answer was, I'm a fully invested bear. Yes, I'm a bear, but I'm fully invested because it's liquidity right now that is governing outcomes, not valuations. So people will ride that. Let me give you one last example if I may. At the end of 2007, a CEO of a major US bank came to see me (20/43)
and I asked him, where are we in the market cycle? And he drew an upside down you. And I said, where are we? He said, very near the top. And I said, how are you positioned? And he said, maximum risk on. And I said, how can you be maximum risk on if you need a top? He said, Mohammed's very simple. Number one, everybody else is maximum risk on. Number two is I don't know where the top is exactly. And number three is I'm confident I can reposition myself once there is unambiguous evidence. I remember that phrase, unambiguous evidence that we've turned. His bank had to be saved by the US government. So there is an inclination to ride these liquidity waves right till the end because the cost of premature exit is perceived to be quite high, especially when you judge on short term performance. So again, lots of really interesting threads to pull on here. Just with respect to this observation about both the fundamental unpredictability of markets, the difficulty, in other words, of timing a (21/43)
top, and the herd behavior and conditioning of investors. The chase momentum late into a cycle. How would you say that investors are set up going into this top, wherever it might be? And maybe you think we've already hit it. So it's still that very few people are comfortable taking on the momentum trade. And that's why we have seen equities recover, even though inflation is 7%. That is why we have seen equities do well, even though the yield curve has been flattening, signaling an increased possibility of a policy mistake. And what the other thing people have discovered is that we lack inherent liquidity. You know, if I had said to you a few years ago that a widely owned name that is deemed to be highly liquid in the marketplace could be down 25% in a few hours. You could wipe 250 billion off a market valuation. You would have said that's really unlikely unless this company is defaulting. Well, that's what happened to Metta, to Facebook. I was talking to someone who told me that they (22/43)
had difficulty trading Microsoft. That when the paradigm changes at that moment, there was a risk absorption in the system. And that tells you two things. One is many people are on one side of that trade, a trade that has worked extremely well. And by the way, it has continued to work relatively well. The losses of January were notable when nothing compared to the gains of the last few years. It tells you that it's still a very crowded trade, but it also tells you that there's structural illiquidity in the system. And that makes sense because since the financial crisis of 2008, we have shrunk by regulation the intermediaries. And we have increased significantly the end users, the non-banks. The ratio of non-banks to banks has gone up enormously. Now, the non-banks can't trade among each other very easily at all. They have to go through the banks. So when they want to reposition in a major way, there simply isn't enough risk absorption to allow that to happen without massive moves in (23/43)
prices. You've seen that with Amazon, you've seen that with Facebook, Metta, but we've also seen it with Snap up 62%. And I think we have to get used to the fact that when the liquidity goes out, we are going to have a lot more volatility, not just single name, but because of ETFs also for indices as a whole. Okay, so that actually raises two questions. The first question is, if we assume that the Fed has lost control of the inflation narrative and that inflation is in fact going to be sticky, it's going to be persistent, does that almost guarantee that the Fed has to hike us into a recession? And given your observations about liquidity, what does that mean for asset prices? And two, what guarantees do we have that the Fed would even be able to do anything about inflation since many of the sources of inflation this time around are supply driven and in some ways out of the Fed's control? So Dovers will live through the 70s and I was just learning economics at university. Remember what (24/43)
an inflation dynamic looks like. Younger people haven't lived through it. And inflation dynamics starts with a major disruption somewhere. In the 70s, it was the oil price increase. Today, it was supply disruptions, labor shortage. It's very local, it's lumber prices you will hear. And then next thing you know, it starts to be very broadly driven. It starts to be more persistent. And the reason why is if you're not careful, what is a reversible and temporary shock changes behavior. And that's why a lot of us, actually a few of us as early as April last year was urging the Fed to be open-minded. Don't call it transitory because you don't know. Have some humility. And what we've seen happen is that the shock may well have started in a certain place, lumber, chips. Next thing you know, it starts disrupting supply chains. It spreads. That's phase one of an inflation process. Phase two is what's called adaptive expectations and we are seeing it today. As people realize, they've been hit in (25/43)
real terms and they want to compensate. Companies start passing on prices to their final consumer without any hesitation whatsoever. And then wage earners start requesting higher wages. That's exactly what has been playing out. Phase three is the most dangerous one. It is when the expectation formation is not just adaptive, you're not just trying to compensate for past inflation, but becomes anticipatory. You start wanting to compensate for future inflation. At its extreme, and I'm not saying we're going anywhere near that, we are not. We're not going back to the levels of the 70s, even though we are following the dynamics of the 70s. At its extreme, it becomes hyperinflation. Now, the Federal Reserve cannot deal with the first shock, but it can deal with what happens thereafter. This Fed had the wrong framework, part one of the mistake, got stuck in a transitory characterization of inflation, part two of the mistake, and part three, it failed to move when it could move. You can go (26/43)
back and though I and others were urging the Fed to slowly take his foot off the accelerator by reducing QE last summer, because what we wanted to avoid is what's going to happen now. The Fed is going to be forced into a bunching of three contractionary measures, and that threatens the economy in a way that was avoidable. It will end its asset purchases. They should have already done that a while ago. It will start raising interest rates and it will look to reduce its nine trillion, bloated balance sheet. And that is why we are now in the world of third or fourth best. The first best approach was to start early, go slowly, and make sure that the economy can accommodate. Now, the Fed is going to be forced into a major pivot, and we don't know what the consequences of that pivot is going to be. The marketplace is pushing it to increase interest rates at least five times in 2022. I would have never called for five interest rate hikes. I don't know whether our highly-leveled economy can (27/43)
absorb five rate hikes so quickly. Again, tons of great questions. One is, how does one think about the relative sensitivity of this economy today to interest rate hikes and monetary contractions? It's so easy to forget. The balance sheet is 10 times bigger than it was pre-2008. It's absolutely wild, 1,000%. But you mentioned the 1970s and that you're saying you don't think we'll see inflation like that, but we are seeing one similar to what we had in the 70s, which is rising energy prices. Can you not foresee the possibility that energy prices could get out of control similar to how they did in the 70s, especially given some of the explicit policy choices and ESG mandates that have been adopted by Western governments and corporations in recent years? So that's a really complicated question because lots of things have driven energy prices. But let me focus on a crucial point you just raised, is that the transition to a greener economy, to a more sustainable economy, is proving to be (28/43)
more complicated than we expected. And I think that this is showing us that it's not enough to agree on the destination. And I am absolutely committed to the destination of a more sustainable way of doing things. I'm absolutely committed to the war against climate change. But whenever you embark on a journey, it's not enough to say, I'm going towards a destination without spending time thinking about the journey. And it turns out that we didn't think enough about the journey, that we didn't realize you cannot substitute something with nothing. So we started the transition away from particularly polluting energy sources, and that is a good thing. But we didn't have the green energy available in enough magnitude. Because of that, gas and oil in particular, that are now being treated as transition energy sources, have seen their prices go up a long way. Now that causes two things. One is stagflationary forces, but that doesn't impact the destination. It just means the journey becomes less (29/43)
pleasant, but it also can erode political will. And already we've seen certain countries in the developing world re-open core minds to try and deal with this energy surge. And the more people do that, the more you lose political will, the more the destination becomes more elusive. So keep an eye on energy. It's really important. The first effect, the stagflationary force, will play itself out because people get priced out of energy-intensive activities. But the second effect is one that you really have to keep an eye on. All right, so let's switch back to geopolitics because that actually does relate to energy. It relates specifically to the cost-benefit analysis that leaders make in a multilateral framework, versus one where individual countries have concern for their national best interest and specifically their national defense. How do you think that changing expectations on the part of global leaders will manifest in terms of shifting alliances, bilateral agreements, and other (30/43)
forms of diplomacy and military buildup in Europe and Asia, and in particular in Europe where you've got these security trade-off that has happened ever since the dawn of the Cold War, where the Europeans have basically offloaded their security to the United States. And that has also given them the luxury to be able to come together in the form of the EU, which itself is sort of one question of the viability of that system. So for a long time, countries ran what I call a dual-option model. You had an option on the US for national security, and you had an option on something else, the EU, or more recently, China. So let's take the example of Australia. Australia is a member of the Five Eye Intelligence System. That is the US, Canada, UK, New Zealand, and Australia. That is the highest level of national security coordination. So Australia had an option on the US for national security. It also was pursuing links with China in order to pursue economic prosperity. That's the dual-option (31/43)
model, and it worked very well. In option pricing terms, the price of that option was very, very low. As US-China tensions build up, the price of that option becomes much more elevated. And at some point, as the factor happened in Australia, you are asked to make a choice. And believe me, the last thing these dual-option countries want to do is make this sort of choice. So the first thing is to recognize that this dual-option model worked fine when it was US and Europe. The US would stand by and let Europe pursue its ever closer union, because that was viewed actually as enhancing the national security of the continent. But it's very different when it comes to US-China with all the complications of that relationship. That is the first major change in the way the system operates. But there's another change that I think we should not underestimate. Coming out of World War II, we constructed a global system where the core, basically the US and Europe, were given massive privileges, and (32/43)
two in particular. The issuance of the reserve currency, which means that you give pieces of paper to the rest of the world and you receive goods and services, that's a great deal. And the second thing is that countries outsourced to the US and to Europe the management of their savings. So the US and Europe ran with a much higher level of savings than they would otherwise, which meant that their interest rates were lower than they would otherwise. Add to that, the US and Europe were given enormous power at the multilateral institution. Even today, the head of the World Bank is an American, the head of the IMF is a European. Even today, Europe and the US, with one or two other countries, can block major decisions at these organizations. Now that system works well if together with these privileges comes responsibility. And that is the implicit contract that the rest of the world had with this system. The core is privileged, but the core is responsible for the well functioning of the (33/43)
system. And to the extent that you have volatility, the Russian crisis, the Asian crisis, the Mexican crisis, the Argentine in default, they all happen in the periphery. 2008 was a great shock to that system, because the crisis happened originated in the US. 2017 was another shock to this system, because under President Trump, the US pivoted very suddenly to an America First model. And then today, there's a third shock to that system, which is that the Federal Reserve is in the midst of making a policy mistake. And that is the world's most powerful central bank. So the other thing that's happened to our global system that has made it less stable, more fragmented, that has made multilateralism much harder to pursue, is that the implicit contract itself is trusted by fewer people, or at least is not trusted as much as it was before. So what does that mean for the position of a dollar? And also, what does it mean for other, let's say currency like either foreign currencies of an emerging (34/43)
country like China, which of course, obviously the Chinese you want cannot replace the dollar, at least not today. And there still doesn't seem to be any good alternative. But also, what does it mean for something like gold, or let's say cryptocurrencies, which have been huge beneficiaries of the risk on trade, but which interestingly enough, have this quality that's different than any other asset class that I can think of in recent memory, which is that so much of the narrative that has driven their valuation has been political in nature. It has been a bet against governments, a bet against central banks. So how do you think of that? So it's really important to remember that when it comes to reserve currency, when it comes to the dollar, you cannot replace something with nothing. So you have to be able to identify what is it that's going to replace the dollar. No other national currency has the attributes of a dollar. So if your world is limited to simply national currency, you end up (35/43)
in a situation where the dollar is the cleanest dirty shirt. What do I mean by that? Assume you are on a business trip and you really are a good packer and you've packed exactly for the duration of that trip. And then suddenly your trip is extended and you don't have time to go to the laundry. That morning you will look at what you have in your closet and you will wear your least dirty shirt or blouse. And that's what the dollar is. The dollar is not perfectly clean, but it is cleaner than anything else. So whenever I hear that the Chinese currency is going to overtake the dollar as a reserve currency, I think, you know what, that's going to take decades. Along comes crypto. Crypto is very different. Crypto is underwritten by an innovative technology. It has a bunch of people that are fundamentalists for the reasons you've cited. They love the notion of a currency operating outside the government system. And their steadfast adoption of that currency has encouraged other people to start (36/43)
adopting it. So will that be the end of the dollar? The answer is no. I'm not a believer that crypto will disappear, but I am a believer that crypto will not become the world currency because governments will fight it. They will fight it because it complicates monetary policy. It takes away the senior edge that you get from issuing a currency. And legitimate concerns that the good of blockchain technology and the broader good of fintech and other innovation comes also with increased risk of malfeasance. Illicit payments, etc. So this notion that we should expect governments to stand by on the sideline and see a crypto on is not going to happen. And we've seen two reactions. China, very clear, make it almost impossible for the private sector to develop their own alternative currencies, but co-opt the technology and start working on a central bank digital currency, CBDC. The US, unfortunately, is still trying to sort out. Does it want a private model? Does it want a public model? And the (37/43)
two sides aren't talking to each other enough. They should be. They really should be because this innovation is not going to disappear. But in neither cases is crypto a global currency. Does that also mean that you think that regulations will distinguish or differentiate between certain types of protocols that, let's say, generate utility versus ones that are focused on being currencies like stablecoins or something like Bitcoin, for example, which was recently adopted in a certain way by the government in El Salvador? So I do think that we're going to have refined regulation. I do think that people are going to recognize that this is an incredible heterogeneous space, that it's not just bitcoins, that there is an enormous amount of things to look at. And we will get differentiated regulation. But it's going to take time. Right now, the two sides are speaking different languages. The crypto fintech industry, with repeating the mistake of big tech, which is you are so focused on the (38/43)
incredible innovations and the things that you're able to do, that you weren't able to do, and the efficiency gains, that you lose sight of the systemic implications. And by the time you realize you're systemically important, it's too late to do something about the unintended consequences and collateral damage of your activity. That's what has happened with big tech. Governments on the other side are also repeating the same mistake, which is of not engaging early enough and with an open mind enough to understand how powerful these innovations are. So hopefully the two sides will talk to each other more because there are significant efficiency gains to be made to all sorts of financial transactions. And it needn't be a global currency, but it can be really impactful in terms of the payment system, remittances, and all sorts of other issues that right now are rather inefficient in the financial system and are costing too many people, too much money, including, unfortunately, the most (39/43)
vulnerable segments of our population. Mohammad, you've been so generous with your time. We had some technical difficulties that caused you to drop off during the call. One last question, if you could answer this, which is, given everything that we've talked about today and your views on where the market is going and the risks, or maybe a better way to put it is the risks and how to position. So, Ganesh, how do you think about positioning yourself and what are the industries and national economies and regional economies that you think are best positioned to handle the type of regime that we're moving into? So I think of three simple frameworks to apply. And when you solve for your own risk tolerance and investment objectives, you get answers. The first one is the ratio of tactical positioning relative to structural positioning, relative to secular positioning. Tactical is something that you believe in for now, but you have your eyes wide open to things changing. Riding the liquidity (40/43)
wave is an example of tactical. Secular is something that's going to work up over time, but it will be a bumpy process. The second example is because you are taking advantage of some inefficiency in the system, investor segmentation being one example. So the first thing is be very clear as to how you are positioned. And right now, you want to emphasize structural and tactical over secular because the world is uncertain. The second is understand the importance of mistakes. Mistakes are mostly recoverable in the investment world. If you have time and you're not forced out of your positions and you don't have a default, most mistakes are recoverable. There are unrecoverable mistakes and you require a tremendous amount of granular analysis and understanding of where are you in the capital structure, how are you collateralized or not collateralized, who else is sitting in the table with you. And you just have to recognize whether if you end up making a mistake and we really don't want to (41/43)
make a mistake, no one wants to make a mistake, but when the world is uncertain as it is today, the probability of a mistake goes up, that you have contained and eliminated your unrecoverable mistakes. And then the third issue is what attributes do you want during both the journey and the destination? For example, today, you would want wherever you invest to have pricing power. Pricing power is really important in a world facing inflationary pressures. And that comes down to the last issue is that sort of determination comes from a mindset that has three things. One is resilience. If you fall down, you pick yourself up really quickly. You don't have to deal with all the consequences of falling down. Two is optionality. You keep your mind open. You look for data. You've revisited your priors. And the third one is agility. It's a confidence to move forward even after you've made a mistake. And hopefully if you have resilience, then that mistake is not too costly. Mohammad, thank you so (42/43)
much for your time. I really appreciate having you on. Thank you. It's my great pleasure. Thanks for all the great questions and the interesting discussion. As always, thanks for listening. We'll see you next week. (43/43)
This is the full transcription of podcast 'Hidden Forces'.
Active Measures The Secret History of Disinformation & Political Warfare Thomas Rid #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? Today's episode of Hidden Forces was recorded on Monday, May 25th, which means that neither Thomas Ridd or I had a chance to comment on the protests and riots that have ensued since the death of George Floyd. That said, the subject of this conversation, disinformation and political warfare, is highly relevant to the situation we all find ourselves in today. If we take a step back and we look at any one of the many news stories that dominate our attention, what do they all have in common? They're all stories. That's (1/43)
obvious, you might say it's a tautology. I know it is, but it's also a profound realization when you stop to think about it. Stories are, by definition, delivered to us secondhand. Their sourcing is curated by media organizations and social media platforms whose biases, incentives, and exigencies often put them in an imperfect alignment with the truth. The situation has only become more complicated today. The disintermediation of the media industry, the elimination of gatekeepers and the proliferation of highly sophisticated third-party ad platforms has led to a radical reorganization of the media environment and with it a profound increase in misinformation. It's within this new environment that a very old practice has found a new home. The art of disinformation and political warfare with the Soviets dubbed active measures represents one of the most urgent threats facing Western societies today. I say Western, but I should really say open, liberal, and democratic societies which rely (2/43)
on a vibrant and free marketplace of information from which to source ideas, validate facts, and challenge arguments. You're going to learn today that active measures are a form of systematic deception. They're adversarial and they're meant to change our behavior and in some cases elicit a very specific response. They exploit existing contradictions and drive divisions where they already exist and they are active, which means we are often interacting with them and we don't even know it. Most importantly, active measures require our active participation in the story-making process. Without our credulity, they are powerless and it is our credulity, in fact, our tenuous relationship to the truth that makes these measures so powerful. In the first half of this conversation, we focus on historical examples of active measures, things like the 1959 Christmas Day Swastika campaign, the AIDS hoax, the neutron bomb, and nuclear winter, perhaps the ultimate example of a KGB active measure that (3/43)
completely alarmed Western countries with science that no one in Moscow ever believed was true. In the second half, we spend our time on conspiracy theories, including a conversation about claims of Russian interference in the 2016 election and how our hysterical reaction to those interferences were themselves a perfect example of how active measures operate in practice. For those of you who remain interested in this topic after today's conversation, I highly recommend you check out my guest's book. The research that went into active measures is mind-boggling, and Thomas did an amazing job of making so much of that primary source material available online for free. And I've incorporated some of it into the rundown to this week's episode, which is available to subscribers along with the transcript and part two to our conversation at patreon.com. And with that, please enjoy this week's episode with my guest, Thomas Ridd. Thomas Ridd, welcome to Hidden Forces. Thank you. Thanks for having (4/43)
me. How are you? I'm very well. Yeah, very well. Just settling in here in my home studio, which I built for this purpose. Really? When did you build the studio? When the pandemic hit and my book was coming out, I thought, I really need to invest in some hardware. That was smart of you. You'd be surprised at how many people haven't considered to do that, or they don't even think it's important. My work is a little techy, so I went to this one tech conference, obviously online, and some people shared pictures of their setups at home. And I saw that some people would hook up their DSLR cameras, their camons and Nikons, as a webcam, which is really cool. That's great. Well, yeah, we have a whole system in place too for our guests to help them set up a sound system or a sound solution, because I also hate crappy audio, as I've talked about. But I know you have limited time today, so I actually want to get right into this conversation, because your book is one that I looked very much forward (5/43)
to reading. Every so often, I'll go through Amazon and look at upcoming books, and yours was one of those books that I eyed, and it's about a subject that I find so interesting. Before we get into it, and the book is Active Measures, as I mentioned in the introduction, give us a little bit about your background for those who aren't familiar with your work. Yeah, so I am a professor. I teach at Johns Hopkins University in Washington, D.C. And my work is at the intersection between computer security and political science. So I'm a political scientist by training, but did a fair amount of technical training as well. So it's cyber security and intelligence history, what I do. So you've actually written three other books or four other books? Four other books. Yeah. Yeah, one of them might be your PhD thesis, the one on war and media operations. But there's also a really interesting book that you've written on the history of cybernetics, which I know a little bit about from having studied (6/43)
information theory, but that's fascinating. What got you into writing a book about cybernetics? I got this question a lot about where this term cyber comes from. And the standard response comes from science fiction from William Gibson's book Neuromancer, which I found a little too... There was intellectually shallow as a response. And of course, if you start looking and trace the history of the term as well as the thinking behind the early internet, really, then you end up with the history of cybernetics in the 1940s. So I went back and told that story. So how does your current book, Active Measures Fit in the Progression of Your Previous Works, what led you to write it? So when the 2016 election interference started to happen, the Russian interference in the US general election, when it became public in June 2016, I was in the middle of investigating down in the technical weeds, a Russian espionage campaign that started in late 1996, known as Moonlight Mades to people studying this (7/43)
kind of thing. And the history of cyber operations is different from other histories in the sense that usually when you go back further back in time, you see more details, the archives open. But in computer network intrusions, the opposite is true because the digital forensics disappear when you go back in time. And there are no archives open yet. So I wanted to change that. And I'm successfully tracked down an old command and control machine that was used by these early Russian operators in the 1990s in London. And I was doing an in-depth analysis with colleagues on the malware that we found, the old malware and the old sort of hacking behavior. And when I was in the middle of doing that, the election interference hit. So I was like, I had this puzzle that I suddenly confronted. I clearly was able to understand some of the technical forensics and the evidence there was very strong that was clear. We're looking at a Russian disinformation operation, literally from day one. But the (8/43)
history, I didn't understand. So I thought, okay, I just have to understand the history of what is going on. So I started right there. Well, the title of the book is very interesting. Some people may not know what active measures are. So we probably want to begin with the definition. But the subtitle is the secret history of disinformation and political warfare, which almost feels to be self-negating in a way. So maybe you can tell our listeners, those who don't know what active measures are, what are active measures and why did you choose this as the title of the book? Yeah, active measures is a term of art that emerged in the Eastern Bloc and Soviet intelligence community in the 1960s. And throughout the entire Cold War was how they refer to disinformation operations. It's actually quite a helpful term because it asks two questions right there. The first is, how do these measures become active and how do you measure them? I think most people are familiar with the idea of (9/43)
disinformation. And one of the things that I came to realize when reading the book is that active measures or disinformation in practice, and this is again a term that's not ... I don't know if you just mentioned this, but it's a term that's no longer in use. But this is not really necessarily about creating false information. You had this great interview you did over three hours, I think, with Ladislav Bitman, who was a Czech intelligence officer. He described it as systematic deception. He also described it as sticking a pin into the ass of an elephant or something like that. Again, this idea of systematic deception with either a specific goal or a general objective to impair the enemy by exacerbating existing contradictions within the society. Can you elaborate on that a little bit? Yeah, so the early idea that was developed in these operations, and this really dates back a century, but became articulated in these large bureaucracies, as you just pointed out in the 1950s and 60s. (10/43)
Disinformation is not about just forgeries and producing fake documents. It's about tapping into existing fears, into existing prejudices of the target. Whatever the target is, it can be a society, it can be only one individual or an organization. Then gently exacerbating those concerns or nudging them along into a specific direction where you want them. Sometimes, you may decide as an offender, as an operator, to use completely accurate information. Sometimes, you will introduce some forgeries along the way in order to achieve that effect. But the goal always is to exacerbate something that already exists. I think this is a point that Bitman, in that interview, that I think you listened to, comes back to again and again. Well, there are some great examples in the book, both in Europe with, I'm thinking specifically, of the Christmas Day 1959 Swastika campaign to exacerbate existing tensions in the German public and in Europe around the Nazi past and anti-Semitism, and also in the (11/43)
United States with America's history of racism and how that's been used consistently. I wonder, are examples to even broaden the debate, are examples things like the Tea Party movement, Black Lives Matter, Me Too, things like this, not that these themselves were operations, but that within these, or what could be entirely organic movements in their genesis, are active operations by foreign intelligence agencies like the GRU or the former KGB, or other countries that seek to destabilize, in this case, the United States? So let's stick for a moment with the example that you just brought up, the Christmas 1959 anti-Semitic campaign, because it's easier, in my experience, it's easier to talk about distant examples where you see a similar dynamic with a little more emotional detachment. As soon as we talk about the present, the risk is that people immediately will... Which is also what makes them so fertile as well. Exactly. Exactly. Yeah, exactly. Yeah, exactly. So the 1959 anti-Semitic (12/43)
campaign where a KGB operation smeared and dobbed swastikas and Jews out at synagogues and graves and cemeteries across Europe, even in the United States, that operation of course tapped into existing anti-Semitic sentiments in Germany and elsewhere, because it was a real problem. I mean, the Holocaust was only 14 years in the past, so that precisely was what made the operation so powerful. Not that it invented something new, but that it tapped into an existing trauma. And it's no coincidence in my mind, although I'm obviously, I don't know for a fact, but I don't think it's a coincidence that the engineer at the mastermind behind that operation was an Armenian officer who I think understood the value or rather the effect of trauma from his own history. So even today, when somebody on Twitter mentions that campaign from 1959, because it hasn't been fully exposed as a campaign until today, I mean, I'm collecting all the evidence that accumulated over the years in the book, even today (13/43)
people would react on Twitter by saying, well, but obviously Germans would react that way. I am German. They would say, well, obviously we, you know, Germany had an anti-Semitic problem. They didn't need KGB for that, which is precisely the point. What do you mean it's precisely the point? Can you elaborate on that? Well, the point is Germany had, was deeply traumatized by the Holocaust, and of course still had existing neo-Nazis, you know, leftover Nazis, actual Nazis in the 1950s and 60s, some of them in positions of power still. And the KGB understood that pouring oil into this, you know, fire would only lead to another explosion of outrage, and it did. So the notion that something, that Germany has an existing problem there and doesn't need outside help, that is the raw material for a successful operation. You know, in your mentioning of Ivanishovich Agayans, I think his name was the Armenian, and his understanding of the sensitivity of the issue of anti-Semitism and how it could (14/43)
be wielded effectively in a disinformation or active measures campaign. I think about just how artistic many of these campaigns have been, the ones in your book. This isn't something that can be easily taught, and the people behind these types of operations are extremely creative people. Can you speak a little bit to that, to what kind of person or what kind of organization is required to be effective in these types of campaigns of active measures? Yeah, so that is something that I found just fascinating, because active measures, if you look at how these, the development of forgeries and of getting under the skin into the subculture of your adversary, this is a skill set that is required to be good at this that runs counter to a military mindset. And bear in mind that many of the organizations executing disinformation operations have a military culture. For example, Stasi, Foreign Intelligence, HVA, who is really good at this, they had an internal rank system and military training. And (15/43)
so the puzzle, the question is really, how do these organizations that value discipline, orderly conduct, and also an intelligence collection traditionally values, factual, very factual reporting, and careful language of estimative probabilities. All this runs counter to a culture of forging and running disinformation operations. So it appears that they internally needed to find people who had high risk appetites, as well as the really artistic, almost artistic, the mindset of a creative writer, who really has to study his or her subject first and then understand how a specific culture works, and then start writing and sort of penetrating it, and ultimately publishing something under false pretenses that has a corrosive effect. Well, so there are many contemporary questions to explore in this conversation, but before we do that, I think it might be helpful to actually go through some historical examples, because in fact, the book is a history of disinformation. And actually, that (16/43)
raises the larger question, which is, how do you write a history of disinformation? How do you go about researching a book like this and feeling confident that you're not actually contributing to advancing a body of misinformation or to perpetuating an active measure? Yeah, that's a super tough question. And of course, also a fascinating one for an author. How do you write a book about disinformation without disinformation in it? And what I did is two things that I just would point out. One is, I'm showing my work. You just quoted from this interview that you heard with Bitman, which you can find in my end notes. You can literally pull down the entire interview and listen to it. You can find many primary source documents that I work with from various intelligence archives in the end notes, the full document there as well. So everybody can check the source documents. So I had to work with the best source documents available and also be very open about the limitations of some of the (17/43)
first-hand accounts that we have in memoirs from defectors, for example, because some are less reliable than others. And then the other thing that I did is I sometimes included, I made it part of the story how I discover the story and sometimes explicitly highlight, sometimes in the text, but mostly in the end notes, the limitations of certain pieces of evidence that we have. So for example, I describe the story of how Der Spiegel, the news weekly in Germany, reported out the story that Angela Merkel and the NSA, the national security agency, spied on Angela Merkel's cell phone. And there were doubts around that story and some doubts remain, although it appears to be factually correct. And I decided that I wanted to tell the story of how Der Spiegel reported it and what the limitations were. So it's a bit of a convoluted way of telling a story sometimes, but I think it's necessary to... Can you tell our listeners who may not be familiar with this, what you're referring to? Yeah, so (18/43)
relatively early in the Snowden, after the Snowden leaks, the story broke that the NSA, the American spy agency, Eaves dropped on the phone of the German Chancellor, Angela Merkel, the mobile phone. And it became a huge point of contention between Obama and Merkel and for German-American relations. And Der Spiegel, the German magazine, reported out the story, broke the story, but they never quoted Snowden as a source. So they remained that question, where does the story come from? How did they get their hands on this story? Nobody contested the veracity of the story, but the question was, why now and how did they find it if it's not from Snowden? So the suspicion arose in the intelligence community in the US and elsewhere that this could be an active measure. A true one, accurate information was given to this newspaper, but nevertheless an active measure. Now, we don't have actually strong evidence that it is an active measure, but the fact that some influential people believe it might (19/43)
have been one is something that I made part of the story, which I think is... And why? Because it shows the corrosive, effective, active measures. If we can't explain something, then of course immediately we begin to doubt and potentially see foreign interference. That in itself is part of the history of this information. How does that relate to the accusations of Russian hacking in the US election? Yeah, so sorry, I'm jumping back and forth between old examples and new... Oh, sorry, I didn't mean to interrupt you. I only mentioned that. We can go back to it. I only mentioned that because our reaction to that story was so integral to the effect in this of any campaign and that's why I brought it up. But we can go back. I'm sorry, go ahead. No, no, I mean, it's a great question you're raising and indeed there's a parallel. You know, when I wrote this book, I became at some point quite concerned that I could become ultimately what is often called a useful idiot and it's just literally a (20/43)
technical term that you find in intelligence archives. I didn't want to become somebody a useful idiot who inadvertently helps an adversary achieve an objective, you know, years after the fact. If I tell the story in a way they want it to be told. And I thought to myself, okay, there are two ways I could become a useful idiot, either by understating the effect of an operation or by overstating the effect of an operation. So when I look at 2016, the different components of the election interference, I was acutely aware that we collectively in the United States especially tend to overstate their effectiveness, the effectiveness of the Russian interference. And I didn't want to run into that trap. And you think that's generally true? We tend to overstate, generally speaking? Well, of course, we have to be specific and I am very specific in the book. Would you like me to go into some detail? Sure. Look, Thomas, your book is fantastic. It's full of so many incredible stories. The ones that (21/43)
stuck out most to me, interestingly enough, besides the swastika story, which I mentioned because it was so exemplary for what we discussed earlier in terms of how it exacerbated internal contradictions or frictions, were stories that were relevant to my own life that I remember, like the neutron bomb. I may not have remembered the actual campaign against the neutron bomb. I was born in 1981, but I do remember the neutron bomb. I remember that term. I also remember nuclear winter, which is a fascinating story because it involved people like Carl Sagan as potentially useful idiots in a way. And the AIDS story, the AIDS story, fascinating. So feel free to mention whatever you like because there are too many things for us to get through in the course of this interview. Yeah, that history is richer than I had anticipated myself when I started the book, obviously. But let me just turn the question around to you because I think you have done, you really did your homework for this (22/43)
conversation. What is the story that surprised you most? What story surprised me most? Maybe the nuclear winter story? Yeah. But it's a tough question. You're putting me on the spot, but maybe that story? Yeah, the nuclear winter story just to tease out the gist and the morale of the story in the book is fascinating because there's this theory that takes hold in the early 1980s that a nuclear war, global nuclear war, a major nuclear exchange between the superpowers could kick up so much debris and dust and smoke into the atmosphere that there could be a regional or potentially an entire winter-like scenario on the entire northern hemisphere, potentially even the entire planet as a result of this war, meaning temperatures would drop and the entire climate would be messed up for years. So that theory, the question is where does that theory come from? And what's fascinating about the story to me is that this is one of the examples where this theory organically emerges in the scientific (23/43)
community in the United States. But then at some point, the Russian nuclear scientists, climate scientists, and ultimately the Russian intelligence community want to jump on the bandwagon and want to shape the theory because it serves their interests ultimately, because it makes a nuclear war up here as complete folly. And what happens is that the KGB convinces itself. We only have one really good source for that, but still it's a very plausible situation that this was actually accurate, that KGB convinces itself that it successfully shaped the conversation about nuclear winter. And there is no good evidence to support that narrative. So it's really a case of self-disinformation. KGB self-convince itself that it was more successful than it actually was. And the story is so important because this is a pattern that we see again and again in the history of these intelligence operations. Why is that important that they convince themselves? Because it shows us that running disinformation (24/43)
operations at scale on a large bureaucracy does it, creates a blowback effect. So let me give you another example. So there's this mid-1960s operation, 1964, that I describe in the book with a lot of archival evidence. I have all the Czech case files. It's called Operation Neptune. And the Operation Neptune was playing out 19 years after the Holocaust, after the end of World War II. And the goal of the operation was very clear. We know the goal. The goal was let's try to do an operation to force the German parliament, the West German parliament, the Bundestag, into extending the statute of limitations for war crimes so that German war criminals from World War II, from the Holocaust, wouldn't get away with genocide, with war crimes. And the Czech said, okay, let's publish files, Nazi files, to restart the conversation to sort of pour fire into this conversation in, pour oil into the fire of this conversation in West Germany about Nazi war crimes and put pressure on the parliament (25/43)
through public outrage. So they ran this operation that involved dropping Nazi files into a lake and had them discovered by the press. You laugh. Yeah. No, it was a funny story. It was a very funny story. Bitman talked about this one as well in your interview, I think. Yeah, only briefly. It's an insane story. It's one of the most cinematic stories. I also have like 300 pictures or 500 pictures of the story in the released. Yeah, I think you also published an article on the internet with this story and there's some pictures as well, which I included in the rundown. Yeah, thank you for this and why our magazine, yeah, it turned out nice. They included many of the pictures. Yeah. But the takeaway point here is the assessment that they did internally. So the Czechs, you know, the Germans end up extending the statute of limitations. This actually happens a few months after the operation concludes. And the Czechs write a letter to a memo to KGB in Moscow and KGB responds, essentially (26/43)
slapping them on the back saying, great, you did it. Successfully, the Germans changed their law. Well done. But I can tell you as a German historian, that's just not what happened. Every family in Germany, almost every family, people had this conversation with their parents and grandparents. What did you do in the war? People were coming to terms with the Holocaust. I mean, the word Holocaust itself got established a little later as a major term that everybody knows today. The notion that there's a small Czech Czechoslovak operation, you know, it's like pouring a bucket of water on a moving glacier. But if you only look at the bucket of water, you think you actually move the glacier with it. So that is basically what the Czechs and KGB did. They were kidding themselves. So let's actually go back to nuclear winter, because I think we got slightly sidetracked or I sidetracked us, because it is you probably hit the nail on the head. It probably was the most interesting or surprising (27/43)
story for me. Maybe not the one that resonated the most with my contemporary experiences. That might have been the AIDS campaign. But the nuclear winter was the one, what was the most surprising? So I'm not sure where we left off exactly, but can you continue on that one? Yeah. So the story on the nuclear winter story is that you had this organically emerging theory of nuclear weapons potentially causing climactic change on a major planetary proportion scale, and KGB then trying to shape the story and make it more extreme, and then convincing themselves they were successful and internally claiming credit for the nuclear winter story. So that's why I mentioned the the Nazi documents in the 60s. It's the same logic. It's an agency taking credit for something that happens almost completely without their own influence. That really relates back to what we already talked about in the Bitman interview. If you're affecting something that is already existing, an existing fear, an existing (28/43)
theory, an existing narrative, if you're running an active measure to affect that existing thing, then of course, the question is how do you measure it? How do you measure your own effect on something that was already happening? And the answer is very hard to measure. You don't have a measurement device, as Bitman said in the interview. And because you don't have a measurement device, you create this temptation for a bureaucracy to simply claim that they had success because they can. I mean, because you can't measure success, you also can't really just say there's no effect. That's the mirror image. It's just vague by definition. So that is the great temptation, I think, and it's within that temptation that we are discussing the 2016 election interference. These operations, they feel disinformation itself feels a lot like yanking on the threads of a sweater or of a tapestry of an image that's woven into fabric. But active measures are simultaneously the rethreading of that fabric. And (29/43)
it feels like it gets to a place where it's hard to distinguish between the active measure, as you say, and the truth. And this brings us to a larger question, which is that when you engage with this material enough, you begin to really question the nature of truth itself. And for the most part, the book is really not, it's not an intellectual reflection as much as it is a reflection through the recounting of all these different stories and all the research you did. But you did mention this a bit towards the end. How important or how prominently does this dilemma feature in your view? Yeah, so that's, of course, the toughest question. Should we change our relationship to objective facts to the truth? I mean, I had these experiences when I was writing the book that I would go through archival material and in all of active measures, like yearly plans from Stasi or the Czechs or mostly the Bulgarians, actually, Bulgarian intelligence, state security, and they would discuss their annual (30/43)
plans with KGB. And many of these operations I didn't know about. And there were books that were mentioned. So I would Google the book, go to A-books, and there it was. And then I would buy the book. And then I had it in the mail and nobody had seen this book as a forgery before. Some of these books were like reviewed in high profile. I mean, one of them was reviewed in The Guardian and in The Washington Post, and it was a KGB operation. So I began to, I mean, it was an unpleasant sort of weird experience to again and again find these forgeries that hadn't been discovered as such. But of course the... Books, that book was actually, is that the book you're referring to that actually was reviewed? It was reviewed by The Times or major publications? Yeah. So there was a fake memoir of a Chilean general who got assassinated by Pinochet. Right. And similarly, isn't the same thing the case for the protocols of the elders of Zion? A similar story? In the sense that it was originally a product (31/43)
of misinformation? I mean, the protocols of the elders of Zion are just made up, obviously. But I'm not talking about that in the book. I just want to make that clear. It's not part of... No, maybe it was an interview that I heard. But I mean, it was just another example in my mind of... The reason I brought up the protocols is because it's still active, right, in a sense, right? It's still something that is actively believed and discussed. Yeah, of course. I mean, there are many examples like that. There are still people out there who believe AIDS is an engineered bio weapon. Right, that it was developed at Fort Detrick by the US government. Right? For example, yeah. I mean, that was a conspiracy theory that was making the rounds already before the Soviets picked it up in the early 1980s. One, again, one of those examples where you have an existing organic narrative at the fringes in this case, far-left activist circles in New York and Boston. And then it gets picked up and amplified (32/43)
and developed by an intelligence agency. You know, Thomas, I mentioned to you right before we started recording that I used to do a television show on the RT network. I ended the program before... Or right around the time that the war in Syria began, but before it really got crazy. And it was not a political program, but every morning we would have meetings, editorial meetings, where we would have to let the director of the news department know what we were putting out there. And I remember just one distinct moment right now as you're talking, where I had a very specific framing and he was questioning it. And I was like, well, what do you mean? He was, well, his response to something like, how do we know? This very sort of open-ended question, how do we know? And there was a... I distinctly remember on multiple occasions, there was this tendency to want stories to openly question established narratives. And clearly, it was not with the best intentions. And there's a kind of embedded (33/43)
cynicism in all of that. You know what I mean? I mean, absolutely. The temptation, of course, is to... I mean, it's good to ask tough, open questions. I had to do this all the time to question my beliefs when I was writing this book, because if I don't do that, if I don't really radically question, for example, a narrative that I convinced myself of, that it is accurate, then I would fall into that trap. But of course, the trick is to always be open to new evidence. And ideology can conflict with facts in interesting ways. I tell that story in the book of a specific forgery that the East German newspaper, Neues Deutschland, puts out, I believe, in 1957, where they describe how big oil, Rockefeller, is influencing Eisenhower's foreign policy. And it's a forgery. They made it up. I mean, they meaning some regime foragers for the East Germans. But the way they introduced the forgery is so fascinating. They say, this letter spells out in gleaming clarity how capitalism works. And for them, (34/43)
the forgery was even better than the truth. Obviously, they don't admit that it is a forgery. But in their own mind, the forgery was even better than the truth because they knew it was really going on. So they came up with a fake letter that just spelled out what was for them a truth. It's like a painting that is depicting a landscape in the perfect light conditions or something like that, which is obviously just a painting. But really, the beauty that you capture is real. And it's that type of ideological self-convincing that I think we can still see today. Another phrase that came up, I don't know if this is a phrase I've read anywhere, but it's something I've written, I've used in writing. And it is that these types of campaigns or efforts, they use truth in the service of lies. And they're incredibly cynical in that way. There's another instance of a story in your book. I don't remember which one it was, but where the measures were found to be false or fake. But the KGB, I think it (35/43)
was that was perpetuating these, doubled down by basically saying, well, this is exactly what you would expect. I mean, it completely fits the MO. So what difference does it really make if it's fake or not fake? This is exactly what we all know is going on anyway. Yeah. You're referring to two different quotes from far-left peace magazines in the United Kingdom that were sent a forgery by KGB or a war plan that looked like a forgery. And they said, well, this could be a forgery or it could be real, but it doesn't really matter because even if it's a forgery, the reality looks like it or something like it. So this is really scandalous. And that is exactly what I had in mind. So thank you for bringing that up. I think any investigative journalist, any investigator in a law enforcement context, intelligence analysts or scholars like myself, you occasionally, if you're really honest with yourself, you see that temptation in yourself. You're writing something, you're doing research, and you (36/43)
selectively look for something that will support your existing narrative. It's a very deep-seated temptation that really we all have, but it's very treacherous. And as people who are professionally sort of going after facts, we have to train ourselves to value the facts that contradict what we already think most, these are the most valuable facts, the ones that falsify our thinking, not the ones that confirm our thinking. Absolutely. And also that fit into existing narratives that are perpetuating themselves in the public mind. It's a lot easier to get traction in the media today when you insert a story into an existing narrative, into a preexisting framing, especially one that is no pun intended active, that is particularly potent in the moment. Another thing that I thought a lot about when I was reading your book was how these types of measures exploit hypocrisies in the body politic of an open society like the United States, because America is not the American military, American (37/43)
intelligence agencies are not the paragons of virtue in every way. And there are many things that our intelligence agencies do covertly that we may not, that they, let's say in public, would deny. And I think this is a particular issue for an open society like the United States because these hypocrisies are more evident. They are hypocrisies, whereas in a closed authoritarian society, it isn't necessarily hypocritical to engage in these types of behaviors. So I wonder what you think of that. And maybe the Snowden revelations are a good example to perhaps explore in an attempt to try and understand how this actually works in practice. Yeah, so when I started mentioning publicly the election interference in 2016, I was on the record as one of the first calling it out as what it was. Of course, I got a lot of pushback. And among the pushback was the argument that, well, aren't we doing just the same thing? Isn't CIA doing the same type of operations that they are doing? So let's not kid (38/43)
ourselves and just blame the Russians. So I wanted to be in a position to tackle that argument with the facts and therefore decided to look at some early CIA operations. That's why political warfare is in the title, by the way, because CIA called it political warfare. That's in time of art in the 1950s. So most of these measures were developed and deployed in Germany, in between East and West Germany, correct? Yeah. In the early days. In the early days. Yeah, I just put a particular emphasis on Berlin because I wanted to tell that story. But the others as well. But Berlin was the hotspot, yeah. So please continue. Yeah, so if you look at what CIA did in the 1950s, you see that they were really aggressive, quite good at what they did. You're putting out a lot of forged information under false pretenses. But then when you move into the 60s, at some point, they become a little more reluctant. They wind down their most aggressive operations in Berlin. Why exactly is really difficult to (39/43)
say? But they do that we can clearly see in the archives. And they become more concerned also about factually correct information. And this is in documents and memos that were never designed to be or never written to be published. So they're not deceiving us. You can read the memos and you get a sense that they're actually trying to put stories out that are accurate. They do a memoir, CIA publishes a memoir of a defector, not defector of a spy, Oleg Pankowski, a GRU colonel at the time. And he gets executed in Moscow and then CIA publishes the debriefings as a memoir. But obviously nobody mentioned that this is a CIA book. But they take great care to be as accurate as they possibly can be on the content side. And that's a fascinating little shift that's going on there. As the East, the Soviets and the East Germans and the Czechoslovaks are escalating in the mid-60s, CIA appears to de-escalate the forgery and deception game. So, Thomas, I'm going to move the second part of our (40/43)
conversation into the overtime, where I want to explore further the role of journalism in active measures and what journalists can take away from this conversation and how they can get better at recognizing such types of campaigns, what to do in the event that they're passed, let's say, credible information that they can verify, but that which they also know is being fed to them or they suspect is being fed to them by a malicious actor. I do want to talk more about the Russian hack in 2016. Also, the email leak is a great example of using something that is true for the purposes of foreign intelligence, but with an eye also on the future. I know, obviously, it's all speculation, but this is so important. We live in such a divided time in the US. For regular listeners, you know the drill. If you're new to the program or if you haven't subscribed yet to our audio file, Autodidact or Super Nerd Tears, head over to patreon.com slash hidden forces or scroll down to the summary section of (41/43)
this week's episode and click on the link that sends you to the Hidden Forces Patreon page, where you can continue to listen to my conversation with Thomas, including getting access to the transcript, rundown, and notes to today's conversation. I hope you guys will join us. Thomas, stick around. We're going to move the second part of our conversation into the overtime. Sure, sounds good. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts, and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolaou. For (42/43)
more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter, and Instagram at Hidden Forces Pod, or send me an email at dkathiddenforces.io. As always, thanks for listening. We'll see you next week. (43/43)
This is the full transcription of podcast 'Hidden Forces'.
Making Sense of Election 2020 and Its Aftermath Matt Taibb #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Matt Taiby. That was last on the show about two years ago and our conversation focused mainly on the news media, how the press covers politics and power and how propaganda works in a democratic society. It was a great episode. Check it out after today's recording if you're interested. Many of you will already know Matt by reputation. He's one of the most outspoken, no holds barred journalists that you will find anywhere and a precious rarity during a time where many prominent (1/43)
journalists and political commentators seemed to prioritize servile flattery and compliance above any commitment to telling the truth. Matt is also a contributing editor for Rolling Stone and winner of the 2008 National Magazine Award for columns and commentary. He co-hosts the Useful Idiots podcast alongside Katie Halper, publishes a regular newsletter on Substack, which I strongly recommend you all subscribe to and is the author of 10 books, the latest of which is Hate INC, which we discussed during our last conversation together on episode 78. We are living through what I would describe conservatively as a very dangerous time. Everyone's on edge because unsurprisingly, days after the election was supposed to be over, we still don't know who the president is and technically we may not know until inauguration day. What's most remarkable though about the shit show that this election is turning into is how predictable it was. I've watched panels and been on conference calls at think (2/43)
tanks dealing with how to manage voting regularities, large numbers of mail-in ballots and just about any other issue you can imagine and yet somehow we still managed to screw it up. How can you not entertain conspiracies when you're faced with explanations that demand such incompetence? It's one of the many questions that Matt and I explore as we try and wrap our heads around this ongoing parody of an election that is guaranteed to piss off one half of the country and further radicalize and polarize an already outraged electorate. I've been saying this since the very beginning of the coronavirus outbreak. Coronavirus is not the existential threat that we should be concerned about. The polarization in our communities and in our country is. If it means we can't effectively govern ourselves or hold a free and fair election whose outcome the vast majority of Americans can trust. We have enemies both foreign and domestic who would love nothing more than to further divide us. And so far we (3/43)
have fallen directly into that trap. I have absolutely no idea what the next few months will hold but I implore everyone listening today to think twice before acting on your impulses and emotions. We need calm. The anger and unrest in this country could easily spiral out of control and I don't think any of us are prepared for what something like that will actually look like. We are all accountable and we all need to hold ourselves accountable. In a democracy there is no one else. A quick note for anyone who is new to hidden forces. We don't accept commercial sponsors. These conversations last anywhere between 90 minutes to two hours. The second half of which is made available to our premium subscribers along with transcripts to each conversation as well as notes in the form of rundowns that I put together ahead of each and every episode. If you value what we do consider signing up for one of our four content tiers. If that's not an option for you there are still things you can do to (4/43)
support the show by sharing your enthusiasm and love for the podcast. Tweet it out send it to your friends and write us a review on Apple podcasts. Every bit of support helps especially in a climate like this where independent voices are needed and where we face significant resistance in breaking through the noise of partisan ranker and disinformation that has only been amplified by this most recent election. And on that note please enjoy this week's conversation with my guest Matt Taiibi. Matt Taiibi, welcome to Hidden Forces. Thanks for having me on, Dmitry. Long time. Yeah, it's been how long has it been? A couple of years I think. Yeah, I think so. Yeah, I think both campaigns have conspired against us on this morning. Shenanigans. Yeah. Yeah, we had a really tough time setting that up. For listeners we also may have a mystery guest joining us later. We'll see. There's a lot of technical issues going on. Matt, I don't think I've actually ever seen the back of this part of your (5/43)
room. This is new. I moved to this place. It's nice. Yeah, I think. And that's the cover of which book was that on the right? That's the divide. That's the divide. It's a painting by Molly Krabb-Apple. Yeah. Right. It's the only piece of art I own. So last time you were on the show, I don't know if you remember this, but we talked about your experience covering the Republican primary and actually Trump in particular and how you actually thought that he had a much better chance of winning than your colleagues did, but you kind of got suckered into going along with them. Yeah. And you said, I think you said, I tried to find the transcript, but it was in the, it was must have been in the overtime. I think you said that you would never let that happen to you again. And I did let it happen again. So what happened? What were your expectations this time around with the election? Well, I thought Trump would do a lot better. And some of the things that I thought were worth pointing out, and I (6/43)
wrote about this actually a couple of times, one thing that was really important was that Trump went into the 2016 election day with a lot of ambivalence among Republican voters about him. I mean, I think his approval rating, he had a tough time creeping over 60% approval rating throughout most of that election year. And if you remember correctly, 19% of the voters who cast votes, this is according to exit polls in 2016, disapproved of both candidates and Trump did really well with those folks. But four years since, Trump really consolidated his support among Republicans. So he kind of entered this election cycle with the profile of a typical Republican incumbent with approval ratings that hovered somewhere between 85 and 95% among Republicans, which I think is important because incumbents usually don't lose. And he had basically the same profile as like a George Bush in 2004. So I wrote about that stuff a lot. And yet I fell for the same, the same stuff over the summer because I kept (7/43)
seeing poll numbers that look like it was just not possible for there to be that many hidden voters. And I also heard repeatedly from pollsters who I talked to, oh, we've changed our techniques and we're not going to miss that stuff anymore. And we know what we're looking for and we're never going to let that mistake happen again. And it happened again. It's just unbelievable. And I'm kind of embarrassed, frankly, because I participated in a little bit in the mirage that this was a done deal. Well, so a natural question is, because you would have expected them to make changes, did they make changes? Were those changes ineffective in practice because of anomalies specific to this race? I mean, why were the polls so off? Because the extent of the divergence is enormous. Yeah. I mean, look at Ohio. They were predicting a five point loss for Trump in Ohio. And what did he end up with? Like an eight point win, something like that. Right? So, you know, a 12 point swing is pretty massive. And (8/43)
yes, he lost the popular vote. Like if you look at the popular vote, that's almost reflective of where the polls were. But on a state by state basis, they were pretty significantly wrong in a lot of places and almost universally wrong in the same direction. There were a couple of outliers there. You know, I think maybe Arizona is a bit of an outlier. But to answer your question, I think there must be something inherently confusing or flawed in the polling process. And I always talk about it in terms of you can only get so much from yes or no answers from people, right? Like if you're actually covering a campaign and you talk to people and you can tell that like with every fiber of their being, they not only love their candidate, but despise the other candidate, that tends to be reflective of something, right? Like the people on that block, if you're not going to get a person who is so completely cut off from all the other people in his circle, his or her circle that they believe this (9/43)
thing. So when you encounter that kind of enthusiasm, it tends to suggest that there's a lot of it out there. So maybe that's what polls, the problem with polls is, is that they frame this as, as would you or wouldn't you? Yes or no? And that doesn't do as much to detect what's actually happening as more subjective tests might reveal. I wonder also to what extent, and then we'll get off of this because this is more like wonky type of stuff, but I wonder to what degree Trump's rallies in the last few weeks, how that contributed to changing the dynamics on the ground. It certainly could have and the Democratic candidate being absent, you know, doesn't help either. I think, you know, you know, Biden essentially was a no show, which lent itself to some questions. I saw some people talking about how some elderly voters might have been a little freaked out about that because Trump really alienated elderly voters significantly this year with his coronavirus policies. But you know, some of (10/43)
their trust in Biden might have been undermined by, you know, things that they're recognizing maybe from people in their own circle. Like the guy's absent for nine days at a time and has trouble when he speaks in public, you know, maybe he isn't declined. I think that did have an impact probably because Trump, he bounces back from COVID and he looks like he's like ready to go play an NBA game and, you know, in a couple of weeks, it's, it had to have an impact. Yeah, he's like the energizer bunny. He just keeps going. So let's actually move our conversation to election night, Matt. First of all, you guys did your typical drinking game. I watched some of that. Did you? So what is that? Do you do that every time there's any kind of election or is it just for presidential politics or you just do it generally? We do it sometimes for like debates and stuff like that because what we're really usually trying to do and we didn't really do the game that much that night because we got wrapped up (11/43)
in the results. But normally you're watching something like a debate and the whole joke is that you're trying to predict what people say. So, you know, for a Democratic party drinking game, if one of the rules is drink every time they say existential threat, you're going to take like five shots that night, right? Because they say, yeah, exactly. So that's the whole joke is, you know, it's predicting the stuff that you hear in political coverage. So we do that every now and then. So what's the lesson that we can draw so far? Like what have we learned early on in this election that we didn't know going into it? So I think the big thing is if you look at the down ballot results and you look at the shift in the demographics of Trump's support, which I thought were amazing. Like Trump did worse with white male voters and he did better with basically every other demographic. And if the Republican Party is smart and there isn't necessarily evidence to suggest that they are, but if they are, (12/43)
they will see that the opening is there for them to market themselves as the working class party of the country, right? And alternatively to present the Democrats as the party of the rich elites, which there's some validity to that, right? The Republicans under Trump expanded their support with Hispanic voters. They did pretty well with new immigrants. And the reasons for that are complicated, I think, but it's something I think it really highlights some bad decisions that the Democrats made last year to kind of devalue certain lines of argument that were being made by people like Sanders and Warren about class issues. They ran screaming from that. And as a result, they couldn't run on it with Biden and that left an opening. And for a politician who was more clever, that could become a problem. And it's reflected in the down ballot stuff. Yeah. So the numbers that I have here in front of me is that he gained pretty much one-fifth of black male voters up from 13% in 2016. He doubled his (13/43)
support amongst black female voters. He doubled his support amongst LGBT people. And he gained in terms of Latinos and Asians. And I wonder, when I saw that, I thought, well, this is like one of those like Thomas Kuhn paradigm shift moments. It's like you've got this theory and it's clearly not working. All the empirical data is telling you that you need to change your entire theoretical framework for how you see the world. And yet I wonder if the Democrats are actually going to do that. There was this incredibly tone deaf op-ed that I read a couple days ago or yesterday maybe by Charles Blow at the New York Times. And he basically, what he did was he looked at the data and he said, this is further evidence for just how entrenched the patriarchy is that minorities and marginalized groups would actually vote in greater numbers for their oppressor. Right. Yeah. And the problem, I think, to anybody who doesn't live in that bubble is that language itself. I don't give Trump credit for (14/43)
anything affirmatively that he did to win those votes. I think that a lot of that voting behavior comes from probably apprehension about trends in academic thought that sort of portray minorities as terminal victims, as people who are, whose success or failure is 100% dependent upon the indulgence of a patriarchal white supremacist class. I think a lot of people in those groups don't see themselves in that light and they resent it. And for me, frankly, I think it's a racist caricature a little bit. And it's kind of like an inverted version of the old Republican argument. Actually, it's not even that old. Like Donald Trump Jr. was just making it that you have to want success as much as we do in order to get it. Like basically what they're saying is that we're successful because we've earned it and you aren't successful because you haven't earned it. But the Democratic rhetoric is kind of like a flip of that. It's like you only succeed because we allow it. And you don't succeed because (15/43)
we don't allow it. That's not an attractive theory, I don't think. But you're right. They're going to double down on it. So you think they're going to double down on it? Because I was actually wondering if one of the positive outcomes that will come from this is that there will be a re-examination and a reckoning within the Democratic Party. You don't think so? You're shaking your head. There should have been one four years ago about a lot of stuff, like starting with the Democratic platform and maybe continuing on to how the media looks at politics. But remember, one of the early conclusions of both the political class and the kind of attendant big corporate media was that the only reason that Donald Trump won was because of racism. Basically they took the Hillary Clinton's deplorables comment and they expanded it to no longer cover just a third of Trump's voters, but all of them. And now this became the de facto go-to explanation for Trump's entire base. And these results should tell (16/43)
them that that was a flawed construction because clearly minorities themselves did not see it that way. And yet they're not going to, I really doubt they're going to do that because that would mean re-examining past errors, which they just don't like to do. I mean, it's one of the things that we found out in the last four years is that they just cannot to want to go back and say, we screwed this up. And there's no way to address it without doing that. So let's game out a few scenarios here. First of all, what is going on right now with the vote counting? Because I've been confused by this as well. I'm confused about what Trump is alleging, what he wants, because on the one hand he wanted vote counting to continue. So he wanted them to finish voting, but now he wants voting to stop. Where are we with this? I don't really, I mean, and I have to admit, I've never really covered a vote counting story and I'm not really good on the mechanics of how it all works. But I think what Trump is (17/43)
alleging, what their people are saying is that we want to have access to watching the process of counting votes. And they want also to stop any new voting that would take place. But there also clearly are people who are gathering outside of some voting places, screaming for people to stop counting. So I'm a little confused about what exactly is going on. This is a disaster. It's really a disaster. Well, sure. I mean, it raises all kinds of questions about the legitimacy of the processes because and, you know, you couple this with the sort of rampant dishonesty of the press in the last four years. It's just going to make people suspicious of the results. I personally don't necessarily think that way, but people are going to come away with this with questions about what happened on election night. Well, I don't think of myself as a conspiracy theorist. In fact, they go out of my way and not to do that. And a good example is even the Jeffrey Epstein situation. I didn't jump out and start (18/43)
saying what I thought happened or didn't happen. I wasn't in the cell with him, but I've been amazed even with myself, what I've been willing to entertain in this situation. I want to take a quote from a friend of yours, Glenn Greenwald, who wrote, no matter what the final result, there will be substantial doubts about its legitimacy by one side or the other, perhaps both. And no deranged conspiracy thinking is required for that. An electoral system suffused with this much chaos, error, protracted outcomes, and seemingly inexplicable reversals will sow doubt and distrust, even among the most rational citizens. I feel like that's a pretty good description of where we are today. It's such a disaster. And I wonder if it's just that our expectations are too high or, you know, in the words of Crystal Ball, who was on your show recently, why can't we have nice things anymore? Well, for so long, we didn't really have an issue with this because the possibility of, well, that's not true. I (19/43)
mean, we clearly had significant road fraud in some pretty famous elections in the Kennedy's election in 1960 being a famous one. But we don't have a uniform national vote counting system. So inevitably what ends up happening is that collecting all the results comes down to, you know, a confederacy of different state systems that all have their own idiosyncrasies. And we saw this very clearly with the disaster in Iowa. And I was there for that. You know, when they didn't have a clear result, they were sort of just making up the rules as they went along. And there were people who would come up and there would be spokespersons for the state who would say one thing. And then you would hear a completely different explanation from some other person in the government, you know, a few minutes later. And you would find that certain counties behaved one way and other counties behaved other ways. And that's just not sustainable. If that's the case for across an entire country of 350 million (20/43)
people, then clearly you're going to get problems. And that's before you even get to the question of whether there's corruption, which is, of course, totally possible. So yeah, and then people are going to doubt the results, you know, like just to take Wisconsin, for example, what's a Republican supposed to think when they go to bed, you know, looking at the map and seeing that it looks like they've got it in the bag. And they wake up the next morning and they see like within a minute, the whole picture has been reversed. It's almost certainly legit because if you're just taking all votes from Milwaukee, that makes some sense. But like, I don't know, people are going to, they're going to wonder about it. They just won't. Yeah. And we knew this. This is the other thing that's really difficult to wrap your head around, because we understood that there was going to be a huge number of mail-in ballots and that those mail-in ballots were going to be countered in the days afterwards. Why (21/43)
exactly that's the case? I'm not sure. But of course, I mean, Martin Gellman wrote this really great analysis and and projection for the Atlantic where he talked about, he basically gamed out this exact scenario that Trump would come out and say that he won the election, which is exactly what he did. And now lots of people, regardless of what's going to happen, are going to doubt the outcome. Mm-hmm. Yeah. And the frustrating thing is that clearly some states that were more experienced with election night shenanigans took the time to make sure that they had a lot of this lockdown before election night. So Florida didn't have problems and they were able to report their results in a timely fashion, despite having historic numbers of mail-in ballots. But other states just decided not to go that route. And, you know, they were releasing results piecemeal and kind of making up when they're going to release results on the fly and like, what is that? Why do it that way? You know, there should (22/43)
have been, I just do not understand saying, let's take a break and reconvene at five o'clock tomorrow evening to start counting again. Like that makes zero sense to me in a situation like this. Yeah, it does. It makes you wonder whether they do it on purpose. Sure. And you combine that with the press decisions that seem completely subjective about when they call certain states and when they don't. You know, I'm not, I'm not sure I grasped that either because, you know, they're called New York with 0% of the voting, basically. And I understand that because there's no way New York was going to go for Trump, but that's based on prior voting patterns. And as we saw, you know, during this election, prior voting patterns didn't hold in a lot of places. And in some cases they were pretty significant. So why are we waiting to call Alaska when X amount of the vote is already in and it's clear it's not going to be close, but we are calling it in other places. Like I don't get that either. I (23/43)
don't know. Some of it doesn't make sense even to me and I work in the media, you know. Yeah. So let's, I mean, this is conjecture and, and I, like I said, I'm not a conspiracy theorist, but this election, this election has made me more of a conspiracy theorist, just like the 2008 financial crisis. Yeah. You know, it really has not as much because with the financial crisis, you could actually see people doing it out, out in public. It was more flagrant. But I mean, is Biden going to win this thing? Is that what it, what it's looking like right now? I should say we're recording this on Thursday, noon, Thursday, November 5th. So the most likely scenario is Biden retains one or both of Arizona and Nevada that coupled with him winning Wisconsin and Michigan gives them the election. If he wins Nevada and it's just Wisconsin, I think it comes out to be exactly 270. The only scenario for Trump that seems like it has a chance of working is if he flips Arizona and then doesn't live in (24/43)
Pennsylvania. So then at that point, Biden doesn't get the 270, I think. And then we're talking about Trump winning, but that doesn't sound likely to me. So, and you know, who knows, but the traditional people who, who are usually authoritative about these things, they have always been confident. Yeah, but no, but they sound extremely confident that they're at least going to get a result that is favorable to them in Pennsylvania. So, you know, I wonder if we'll ever stop taking official numbers for granted because it just gives us a false sense of security and certainty and we need that in order to operate our brains. I firmly believe that by the way. That's important. But anyway, go ahead. Yeah. Well, you covered Wall Street, so you would know that for sure. So let's actually, for the purposes of speculation, let's assume that Biden wins. It also doesn't seem clear yet whether the Republicans are going to retain the Senate. Everyone says that they are, but I know that David Perdue's (25/43)
race against John Ossoff in Georgia potentially could flip. And that's kind of the pathway that the Democrats have. But let's assume that the Republicans get the Senate. So, which means we're going to enter into a period of divided government. That's for sure. I wonder how that's going to impact Biden's agenda. I also wonder to what degree they may welcome it because it'll be a lot easier for them not to be held accountable for their promises and to sort of, you know, keep the base of the Democratic Party, the real base, which I think diverges from their template at bay. I wonder what implication this is going to have for Nancy Pelosi. So, you know, I'm curious, what are your thoughts? Let's say we have Biden in the executive, the Democrats control the Congress, albeit having lost, I think, seven seats or something like that, and the Republicans retaining the Senate. I mean, I think it's a perfect scenario for the Democrats because it absolves them of the responsibility to do any of (26/43)
the difficult kinds of governing that that their ostensible base wants of them while they'll be able to seamlessly continue doing the things that they've always really wanted to do, like enhance the military budget, go to war in places, make sure that corporate tax loopholes aren't closed, you know, deliver bailouts. They'll have plenty of juice to get all those things done, but it's things like, you know, canceling student debt or ending, taking antitrust action against tech monopolies. Like that's the kind of stuff that just they will not even have to answer questions about thinking of doing as long as they don't have the Senate. So, you know, for me personally, I always thought people like Nancy Pelosi were much better or more comfortable in the position that she's been in, which is, you know, being in opposition that doesn't really have to oppose anything or do anything, you know, I mean, it's performative and they're good at that. Well, I mean, about the tech platforms, I should (27/43)
say, our mystery guest was supposed to be Matt Stoller, but because of some technical issues we've had here, that may not happen. But I had written out some questions for Matt that I wanted us to discuss, the three of us, and one of them had to do with the tech platforms. Well, first of all, that raised an important point, which is that Facebook and Twitter in particular featured prominently in this election with suppression of news. When Trump came out and said he won the election, Twitter censored that tweet. And I also saw a bunch of other, I have some screenshots of censoring both Democrat and Republican. And near a time then got censored. Yeah, I saw that. Yeah, I forget. She said something like the president, the Biden is winning Michigan or something like that, and she got censored. That's so freaky to me, man. That we have private corporations running public squares, the primary spaces where we come to political consensus, and they are making decisions about what to allow and (28/43)
what not to allow. And their defenders say that they have every right to do that because they're a private company rather than looking at the context, which is that they're a private company facilitating a public space. You know? Well, it's even worse than that, I would argue, because they're private companies that got called into the hill after Trump got elected and overtly threatened with increased right regulation by people like Senator Mark Warner, Macy Hirono, Hawaii. And basically these companies were told most of these companies had long histories of not wanting to be in the fact checking or political content moderation game. You know, Mark Zuckerberg right before the 2016 election was saying like, we're not a news organization. We're a tech company, right? And then they get hauled in by the Senate. They get ordered. Where is your plan for preventing the fomenting of discord? That's the phrase that they use. Told that if they don't do that, there's going to be tax penalties and (29/43)
all kinds of other things. They suddenly have to enter, enter partnerships with the FBI and groups like the Atlantic Council. The FBI calls them private sector partnerships now. So they're being advised on what is and is not fake news by groups full of former intelligence officials and big corporate donors and overseas. Parties and partisan officials. Yeah. Partisan officials. And suddenly they're, you know, like mad interfering in the publication of private news media. I think that's a clear first amendment issue. It's not just private companies acting on their own accord. This is, this is a partnership that has to be understood that way. So where does this lead us? I do want to bring us back to some of the issues around governance, but let's stay with this a bit. Where do you think this takes us? Is this going to become a more permanent feature of our social landscape like surveillance did after 9 11? Yeah, I think so. And this was the reason that I had such, I struggled. With the, (30/43)
even the possibility of voting for the Democrats is because I think that this is going to lead to essentially an ongoing kind of quasi censorship regime. Cause remember, they could have gone a couple of ways with these tech companies. Like they could have insisted on breaking up their monopolistic control of news distribution, which would have limited pretty significantly the possibility of spreading both foreign misinformation and fake news and all that stuff. But they didn't do that. They, they specifically kept the, you know, this kind of oligopoly of tech firms in place and they're all imposing rules that are completely subjective and clearly kind of go in the direction of, we're going to use the standard of what would the Washington post consider real news as what we're going to censor and not censor. And the problem is those companies, those traditional arbiters of a fact and authorities have their own political views. I mean, the other day I wrote an article where I was going to (31/43)
talk about why I didn't want to vote for either party in this election. And I thought about the headline and the headline was going to be vote for neither. But I knew that that would actually trigger Twitter's policy against discouraging people from voting. So I had to change the headline. Do you think that really would have triggered that? Yeah, no, I know, I know exactly. I've spoken to the people at the company about what their rules are in terms of why they step in. Like they have one of the, one of the things they are big into is any news that suggests that people not take real precautions during the pandemic. Another one had, it was anything that, that encouraged people not to vote or gave them false reasons not to vote. Like a classic example would be a news item that told them that a certain polling place was closed. Now, I didn't think that my stance fell into that category, but I could see it being misinterpreted that way. So I thought- Clearly not because it's your opinion. (32/43)
It's my opinion, but, but that's the problem is that we're living in this environment where people are going to have to start weighing stuff like that. And what people are going to back off from the line because they don't want to be taken off these platforms. So what does that mean for people like you and me? And especially you, because you're like one of the most opinionated journalists that I follow. So what, how does this impact our work? I think it's significant because, and when Alex Jones first got kicked off, the first thing I thought of was, you know, all of you is kind of hashtag resistance, quote unquote liberals who are cheering because, you know, ding dong, the witch is dead. We finally got rid of this horrible person. But what they're not thinking of is we just replaced one system of speech regulation, you know, that have been built up over hundreds of years. I mean, it took forever to get us to this place where, you know, the courts decided issues like libel and slander (33/43)
and that sort of stuff. It was a flawed system, but it was a pretty good system. It worked, right? And we just changed it in a heartbeat for a new one that where corporate tech overlords who are not accountable, not elected, not transparent, make decisions. Basically, you know, behind closed doors about who gets to be distributed and who doesn't. And everybody loves that. And right away, you could see what the end game of that is that it's going to start with Alex Jones and they're going to slowly move in the borders to start including other people. And then they're going to take on not just people, but themes like Q and on. Right. And then they're going to date that even within Q and on, they expanded the definition of what of what was impermissible there. They started off with encouraging violence. And then they did, then they expanded it to something, anything that was tied to real world harm, which is like an impossibly vague standard. So, you know, for people like me, let's say (34/43)
that I have an opinion that the New York Post story that they ran about Hunter Biden, that I don't think it should be censored and that I think it's a legitimate news story in some way. Like I could see myself being bounced from these platforms, even if I'm not saying that I believe the story or think it's that important, you know, other journalists and I've talked about this with other journalists, we all worry about it now. Yeah. Well, ironically, those of us who thought that it was a bad idea for Alex Jones to be taken off of YouTube, I was one of those people. I think many people, a fraction of people, but a vocal minority of people, saw that as a kind of closet fascism. Ironically, not that YouTube's actions were somehow fascist, but that those of us who were opposed to that, and the same would be true with the Hunter Biden story. I stayed away from that story. I didn't have the nerve to even get involved in it because of all the pretenses associated with it. But it was another (35/43)
example of something where it was clearly newsworthy and yet no one wanted to touch it. Yeah, I did the same thing. So I did a whole big thing on it, like on the media response to it. And then I went back through all the publicly available things that were known about it. And then I also did some additional reporting talking to people in Ukraine. But I didn't touch any of the stuff that was actually in the emails because I wanted to say, here's what we know for sure before we get into the issue of what they're reporting. Right. Yeah. But just to do that, people will say, OK, you're a closet Trump or you're doing this because you love Trump. And it's not that it's that you what worries me is the idea of suppressing a legitimate news story because like once they do that once, they're going to just keep narrowing the parameters until, you know, finally, they're going to make the argument that anything that isn't, you know, within the lane of kind of mainstream milk toast CNN reportability (36/43)
is like somehow illegitimate. Every time they make the argument that this is that something is foreign disinformation, they also narrow the parameters because they can always subjectively argue that X, Y or Z content aids, you know, Putin or some other foreign actor in helping so discord or whatever it is. So like I'm afraid of these standards because they can easily be applied to people like you or me. Yeah. So I mean, to that effect, you see because Stoller, like I said, he was supposed to come on and I read some of his more recent stuff and he's more optimistic on a Biden administration than I would have expected. And I think the reasons for that, one of them, I think has to do with what he thinks Biden's ideology is versus his voting record, which expresses his pragmatism as a representative of Delaware. But do you think that because this is such a unifying bipartisan issue, just like China, for example, do you think that this is something Republicans and Democrats can come (37/43)
together on in the next four years where we might actually see some hearings to address some of the stuff that came out of the Sicilini report? What report? The House Antitrust Subcommittee chaired by Congressman Sicilini, which recently came out with its report on large technology platforms. Oh, right. Yes. The one that concluded that Facebook and all those companies where they fit the definition of monopolies, right? Yeah, exactly. So I doubt it. This is my primary worry. And I think your Matt Stoller is probably right in his assessment of what Biden's actual political leanings are. But he played along. I didn't, you know, I didn't hear him complaining about any of these big changes that were taking place in the last year. And, you know, he piled on with all the rest of them when, when there was all this talk of, you know, foreign subversion involving, you know, other people on the ticket. So, yeah, that's what worries me. I mean, I think the Republicans are going to focus on (38/43)
something that is harder to prove, which is that the new changes in the informational landscape are designed specifically to suppress conservative thought, which I don't think is exactly right. I think it's much more that they're looking to try to eliminate speech kind of across the spectrum, you know, including, you know, they'd be like, Jackabin got locked out of its account for a couple of things, you know, before the election. Satire, like, you know, the Babylon B, obviously that's conservative. They've had some issues, but sites like the World Socialist website in those, in some of those hearings, like Google essentially admitted that it had been criticized for deranking the World Socialist website. So I don't think that there's going to be any bipartisan energy that's going to get together to, you know, help prevent the next phasing out of QAnon or the World Socialist website. Like I see that as being opposite to what the kind of bipartisan consensus would do. I bet they are (39/43)
going to come together to make sure no one like Trump ever gets elected again. Well, that's very possible, right? Or maybe not, because, you know, what's interesting is that this new version of the Democratic Party that so enthusiastically welcomed in the kind of Lincoln project type Republican and David Frum and Bill Kristol, all those neocons, like, where's the room that's left for the Republican Party? If they're smart, again, they will lean into the whole populist angle that Trump turned out to be kind of a phony at. But, you know, they will lean into the class aspect of it and, you know, and find somebody who can play that role a little bit better. So I don't know. I worry that the Democrats are essentially going to become like the representative of the old two-party state. And, you know, and the Republicans are going to have to reinvent themselves as something else. That's interesting, because I was actually, so these are a few of the questions that I want to ask you, but we're (40/43)
going to move it into the overtime for it, Matt. But one of them is, what does a post-Trump Republican Party look like? First of all, what's going to happen to Trump? That's a really open question. Is he going to be indicted? Is he going to be prosecuted for anything? Is he going to be pardoned by a Biden administration? Is he going to go and start a media company? Is he going to be basically like a political leader in exile? Because we're kind of like a banana republic. So he's going to be like out in a third country agitating. I also feel like the real future of the Democratic Party is a far more populist, as you pointed out, socialist type party. And people that better aligned with that vision are people like AOC and Bernie and others. And AOC really knows how to use social media. I mean, she is like made for this time. So I want to ask you about that. I also wonder what's going to happen to Nancy Pelosi. Is she going to survive the next four years? But I'm going to save those and (41/43)
other questions for the overtime, Matt. For anyone who is 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 part of my conversation with Matt, as well as the transcripts and rundowns to this episode and every other episode we've ever done, head over to patreon.com slash Hidden Forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime feed to your phone so that you can listen to these extra discussions just like you listen to the regular podcast. Matt, stick around. We're going to move the second part of our conversation into the subscriber overtime. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free (42/43)
email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (43/43)
This is the full transcription of podcast 'Hidden Forces'.
The Rise of Inflation & the Great Demographic Reversal Charles Goodhart #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest on this episode, which was originally made available to premium subscribers only, is economist and author Charles Goodheart. Professor Goodheart is widely recognized for his contributions to the fields of monetary economics and central bank policy, and he is perhaps most famously associated with what we commonly refer to as Goodheart's law, the stipulation that any observed statistical regularity ceases to function as an objective or accurate measure, the moment that it becomes a target of public policy. Both Professor Goodheart and his co-author and former colleague Manoj Pradhan recently co-authored a book which puts forward a compelling and controversial argument about the long-term effects of an aging (1/43)
society on inflation, interest rates, investment, savings, and consumption, as well as economic growth and public policy decisions related to things like taxes and government spending, all of which we discuss in today's conversation. The main argument put forward by both authors is that the inevitable decline in dependency ratios caused by aging demographics will lead to structural, long-term increases in interest rates and inflation that will strain government finances and jeopardize the policy-making independence of central banks as their mandates to control inflation come increasingly into conflict with the objectives of politicians and national governments. Now you could argue that we are already seeing the early evidence in support of these conclusions, and so my objective in bringing Professor Goodheart onto the podcast today was to more fully explore the arguments and assumptions that he and his co-author make in the book, the evidence in support of their conclusions, and the (2/43)
implications of their findings and projections for the economy, investors, and governments. For anyone new to the program, Hidden Forces is listener-supported. I don't rely on advertisers or commercial sponsors, which is why the second hour of our conversations is normally available to premium subscribers only. If you want access to our full episode library, as well as the transcripts and intelligence reports, which include my takeaways from every episode and my thoughts on what comes next, head over to hiddenforces.io, select the episode that you're interested in, and click on the premium extras, where you can then sign up to one of our premium content tiers. And with that, please enjoy this extremely informative conversation with my guest, Charles Goodheart. Dr. Charles Goodheart, welcome to Hidden Forces. I'm glad to be here. It's my pleasure having you on here, Professor. So, as I will have mentioned in the introduction, you've written a very interesting book. The book is titled (3/43)
The Great Demographic Reversal, Aging Societies, Waning and Equality, and an Inflation Revival. Most of the book, as I understand it, was written in 2019, and it was published in 2020. And many of the predictions that you make in the book related to inflation in particular have, in fact, manifested. We're living through them currently. To what extent they'll prove durable, is debatable, and it's certainly something that I want to explore with you here today. But before we do that, I'd love to know what the origins of this book are, and when you and your co-author began to develop the arguments that you put forward in it. As I recall, and my memory is getting worse, the problem that we were concerned with was why there was such disinflation in the period after the great financial crisis in 2008, and why the recovery was so sluggish. I was working at that time as a consultant at Morgan Stanley in London, and Manoj Pradhan was another economist working at Morgan Stanley. And we began (4/43)
developing the thesis that the underlying reason for the disinflation that was occurring at that time, and the reason why central banks were unable to effectively counter it, was because there was a huge surge in the availability of labor. And we wrote a quite long article which was presented at a Bank for International Settlements meeting in, I think it was 2018, it might have been 2017. I can't remember the exact date. It's actually 2017 if you're referring to a demographics will reverse That's right. three multi-decade global trends. And it was really an extension of that paper into a much longer and more detailed format that led to the book. In particular, the great argument against our view that a shortage of labor and an increase in the proportion in the population of the aged of the retired aged would be inflationary was to argue that, well, surely Japan has had a reduction in its labor force earlier, an increase in the aged working in Japan. And it doesn't that provide an (5/43)
important, indeed, convincing argument against your general thesis. So we actually had to study and work out arguments about why inflation remained so low in Japan before we could really do the rest of the book. And we have a whole chapter devoted to what had happened in Japan. It is chapter nine. Why didn't it happen in Japan? A revisionist history of Japanese evolution. Yeah. So I very much actually want to ask you that as part of a larger conversation around counter arguments to your thesis. But before we even get into that, I really want to delve into the book's main conclusions. And also, if you can tell us what you feel the big story of the last 30 years is. So it's essentially that how would you describe the role of labor and labor over supply and its impact on inflation and its impact on debt and interest rates, etc., and equality versus inequality. What is that impact over the last 30 or 40 years? Where do you begin the time series? And why do you feel that all of this is in (6/43)
the process of reversing? Okay. The basic argument that we make is that the mainstream economists in general have not appreciated how extraordinary were the developments in the provision and availability of labor that occurred in the 30 years between about 1990 and 2020. There were effectively three elements in this. The first element is the purely demographic element. There had been a baby boom in the decade or so immediately after World War II. And this was now working its way through the labor force so that there was an increase in the number of workers from the earlier baby boom. Secondly, after the post-World War II baby boom, the proportion or the number of children that on average each woman gave birth to began to decline very sharply. So that the birth rate in most developed countries fell from about four or five per woman to the level that it now is, which is significantly under the rate that would maintain the population constant, which is 2.1 children per woman because of (7/43)
few die in the early ages. And it is now actually in many of our countries gone below 1.5. So the population eventually will actually decline. But in the years between 1990 to 2020, it meant that the number of children that women had declined really very sharply. Moreover, the increase in the availability, consumer durables, refrigerators, freezers, washing machines, etc. meant that women no longer had to shop every day and undertake household activities every day with the result that when I was young, the proportion of women actually participating in the workforce was probably no more than about 10 or 15%. By the time we get to the period from 1990 to 2020, it had risen very sharply over 60%. Now, in addition to the fact that there were more people of working age and that many more were now participating in the workforce because of the availability of women to work in the workforce rather than do housework, it was also the case that the expectation of life was rising, but was rising (8/43)
rather slower. So that what is known as the dependency ratio, the ratio of workers to those who were dependent upon the workers, the young and the old, the dependency ratio improved very sharply. Now, there's a very simple sort of a way of looking at this, which is that the more workers you have relative to dependents, the more disinflationary the situation will begin, will be, because you don't hire somebody to work for you unless you expect the value of their output to be greater than the wage you pay them, obviously, and moreover, they've got to save for their retirement. So workers or an increase in the proportion of workers is generally disinflationary, whereas dependents, the young and the old are inflationary because they consume but don't produce. And in fact, an increasing share of the old, which we're going to have increasingly over the next few decades, is even more inflationary because they require a lot of assistance, because frequently they become incapacitated and need, (9/43)
besides getting pensions, they need medicine, and when they're incapacitated, they need a lot of care. So the demographic conditions were very, very favorable during these years. Moreover, there was a huge increase in globalization as after the fall of the Iron Curtain, Eastern Europe became part of the world's trading system, as did China after Deng Xiaoping. And that meant that the availability of workers, because China is the most popular country in the world, to anyone who could move their production to a low wage from a high wage economy, who's going to do, I'm very well. And there was an enormous amount of such offshoring. Such offshoring was largely in the form of manufacturing, which meant that all our economies move from being quite largely having manufactured production to a much more service economy. And it's much easier to put pressure on employers for labor bargaining power to be stronger and for trade unions to operate when workers are gathered together in large numbers (10/43)
in factories, rather than in small groups in services. And that meant that the power of labor effectively became broken, and the strength of private sector trade unions declined barely very sharply between 1990 and really up to 2020. With the power of the trade unions and labor bargaining power broken, and with the ability of employers to shift production to low wage economies and gain high profits from doing so, the benefits of the growth of output during these 30 years shifted increasingly towards capital, whether in the form of human capital, particular skills, or financial capital, or real capital, and away from labor. This is much more evident in the United States than it is in Europe, but there has happened to a degree in Europe as well. And that meant that inequality within countries increased. It was probably the best 30 years in which to be a capitalist in the modern world ever, but the benefits did not go in any way so much towards labor. Now, the two factors have occurred (11/43)
recently. First, the dependency ratio is beginning to rise adversely with the decline in the working age population in many of our countries and its slower growth virtually everywhere. And the increasing share of the old in our economies who are expensive, fiscally expensive, they consume quite a lot, but they do not produce. And also, of course, the division of the world into geopolitical blocks again, and the tendency to feel that you need to make your supply chain safe by having it based in friendly countries rather than in the least cost countries so that the spat or conflict between the US and China is having the effect and will have the effect of reducing the forces that have brought declining goods prices and disinflation to much of the western world, alongside the fact that China and indeed Russia are two of the countries where the workforce is going to decline really quite sharply from now on. How significant has the role of technology been in putting downward pressure on (12/43)
prices during this period? How would you rank that effect? Certainly it's been an effect, but I'm one of the great concerns over the last decade or so has been that productivity has been very slow. And as you probably know, Robert Gordon has written a book arguing that technological advances will be much harder to attain over the next decades than they were earlier because all of you like the low hanging fruit have already been picked. Now, that's not generally accepted, but I would argue that there is another factor as well, which is that the ability to move particularly manufacturing production offshore to low wage economies so maintained the profitability of the companies doing so that they really didn't need to invest domestically in order to maintain a satisfactory indeed quite fast rate profit growth. In our view, one of the beneficial effects of the changing demographic and geopolitical conditions is that the upwards pressure on wages that we see from a growth of labor (13/43)
tightness, shortage of labor will force companies to have to invest domestically in order to keep unit labor costs down and to maintain their profitability. So we actually see the rate of growth of output per worker improving over coming decades. And moreover, we are concerned that a increasing share of the workforce will have to be channeled into looking after the old when they become incapacitated. It's something like 20% of the Japanese workforce. And consequently, rather than fear the introduction of technology and robots and AI and all the rest of it, we think that actually we're going to need all the technological improvements we can get in order to offset the adverse effects on overall aggregate growth from the fact that the wage force is going to, labor force, is going to be increasingly on the downward slope over future decades. So you mentioned that one of the factors driving the disinflation over the last 30 years has been the decrease in the dependency ratio and that in the (14/43)
next 20, 30 years that we're going to be living through that one of the dominant forces that's going to be driving inflation is going to be the reversal of that. The fact that we have more and more people that are entering into the period of their life where they're going to be less productive, but going to be simultaneously consuming resources. One of the questions I have about that is the assumption that they're going to be able to maintain a certain level of consumption. We do know that in general over people's lifetimes today, even now with all the entitlement programs that exist, older people consume less. So do your assumptions take that into account? In other words, it is the idea that the consumption patterns that we see today for people that are above 65, that are above 75 will be relatively similar and that the major assumption that you're making that others don't is that those entitlement programs that sustain that consumption are going to remain in place. Is that (15/43)
essentially it? To a degree, yes. If you look at the figures for the life cycle development of incomes and consumption as people age, you will in fact see that the young actually consume a great deal less than those of working age, but the old actually consume rather more. Now, the reason why the old consume rather more is not because we go on more holidays or we buy more clothes or we buy fancier food. The reason why they old consume more is that they need more care and they need more medicine, and that drives their consumption up. So when you say the old consume less, you're thinking of sort of standard goods and services rather than thinking as well of the need for people to look after the old. And it's very difficult to do that by robots. Well, let me ask you, if you don't mind, I want to actually interject and ask a question here. First of all, I want to make sure I understand what national cohort we're looking at here and if there's a difference between how much older people (16/43)
consume in the United States where let's say drug prices are excessively high versus in India, for example, where you have multi-generational households, a lot of the support for aging members of society are provided by younger people. How are you taking those factors into account? Well, I'm assuming if you like a more advanced world, remember people with fewer children is going to be hard for them to provide support. And let me take China, for example, and in the old days, the old were looked after within the family group. Nowadays, if you've got the one child policy, which remember was introduced, I can't remember the exact date, but I certainly, by the 1970s, you've got one grandchild with four grandparents. Moreover, the one grandchild may have migrated from the agricultural peasant west to the manufacturing east of China. So, there's absolutely no way that in China, you can expect that the old will get looked after within the family circle. And again, the same is true admittedly (17/43)
to a somewhat lesser extent in the west. The idea that we're going to get looked after, in Victorian times, the old were looked after by the unmarried daughters. And the idea that that might be true nowadays would be regarded, I think, with a certain degree of amazement in our current societies. The old either get along on their own, or if they're incapacitated and civilian incapacitated, they have to go into various specialist old people's homes. And that latter costs a great deal of money. So, I wanted, there's so many different parts of this argument that I want to dig into. Let's, since you brought up China, China has a very interesting demographic curve because of the one child policy. So, there's going to be a period in time in the near future where the stress caused by the fact that the dependency ratios blow out is going to be greater, I guess, than, is it fair to say that any other country, is that accurate? As great as any other country, I wouldn't say necessarily great. It's (18/43)
going to be quite severe in Russia, quite severe in Germany, much less severe in the US than the UK, but partly because of immigration. If there was no immigration, our working age population would also be going down. But in fact, it's just going to grow more slowly over the next decade or so. So, what role does excess capacity here play? Because in the world that we're describing over the coming decades, it isn't just that dependency ratios change, but also the expectation would be that overall populations will decline, correct? Won't decline for about the next 15 years, as I remember my demographic data. Because the reason they won't decline is because apart from the COVID years, we're otherwise almost all living a lot longer. But the section of the population, which is growing proportionately the fastest, is the very old. And so that what we are getting is a slower growing population with a very rapid rise in the number of those over 65, particularly the number of those over 85, (19/43)
offsetting a very slow growing or even declining working age population. And again, a very slow growing or even declining population of young below the age of 20. So, you said this earlier that older people consume, I don't know if you said it, but it was implied that they consume different types of things than younger people do. Yes. So, younger people consume more homes, they consume more durable goods, cars, etc. Is there going to be variability in older people consume services in the form of healthcare? Is there going to be a discrepancy in your estimation in terms of where we're going to see inflation? In other words, are we going to see deflation of the cost of automobiles, refrigerators, etc. But inflation and the cost of certain services or healthcare services are going to cost more for the elderly, but maybe new car prices are going to decline? I mean, how do we, or do you see it as just a general increase in inflation across the board? Well, again, one of the things that Book (20/43)
emphasizes is that with the growth of the world economy, you've got to look at this in terms of the world as a whole rather than individual countries. So, we think that what is going to happen is that goods prices, well, I think that you're right, that service prices will rise more than goods prices because that's what the old or increasing proportion of the population largely need to consume. But of course, it will lead to, particularly alongside the geopolitical problems, the decline in goods prices, which have been a major element over the last three decades, will end. And we already have a sharp differentiation between goods prices, which until very recently have been generally declining, and service prices which have been generally rising. And that differential is likely to become at least as marked, if not more marked in the future. So, what you are saying is there is going to be variability in terms of where we're going to see the inflation? Oh, yeah. There always has been and (21/43)
there always will be. So, let's investigate another assumption that you make in the book, which is that governments will continue to honor the pensions, the healthcare insurance policies, et cetera, that they currently provide to their aging citizens. This obviously going to put a huge strain on working people, who also have a say in how their society is governed and in the choices that their government makes. Make the argument for me as to why we can continue to expect to see that, as opposed to governments just cutting back on these unfunded liabilities, like in the US, like Medicare, Medicaid, Social Security. They may have to cut back somewhat, because the old of whom I'm now one have had, I think, a very fortunate life. And as you indicate, the condition in terms of taxation of workers in future may be increasingly harsh. But one of the issues here is a sort of political science issue, which is that the proportion of the old who vote, the good you hire and the proportion of the (22/43)
young who vote. And the suggestion that the retirement age should be raised, or that you should cut back on the relative generosity of pensions or Medicare and Medicaid, tends to run into very severe political opposition. To take one example, Putin, who after all is an autocrat with great control over Russian conditions, the one area where he tried to bring about what he thought of as the appropriate reform, which was to raise the retirement age, met with such opposition that he was forced to some extent to back down again, until very, very recently, although the expectation of life was steadily increasing, the age of retirement was held either constant or actually reduced. It has only been, I think, in the last sort of maybe five or 10 years, that there has been any tendency whatsoever for politicians to try to raise the retirement age. And it is so unpopular as a generality with the voting public that the only way to do this is usually to say that you will raise the retirement age (23/43)
not now, but say 20 years in advance. So the main argument we make is, if you like, a political one, that we don't think it would be possible for politicians to do this, there's also, I think, a more moral welfare type argument, which is how far is it actually right to reduce the relative benefits of Medicare and Medicaid to our populations? Yeah, I mean, I thought about this a bit because you raised it in the book, and one further point of support for your argument is actually the response of governments across the world, and particularly in China, for reasons perhaps that are multifaceted, the very stringent COVID measures that were put in place. Now, COVID disproportionately impacted and threatened older demographics, and yet societies across both the West and East made every effort to try and to lower the incidence of mortality and morbidity as a result of the spread of the virus in order to contain it. So I think that's an interesting piece of support, which is in other words that (24/43)
broadly speaking, what we do see is that governments have and do put policies into effect that may actually be detrimental to younger people in order to support the interests of older folks. Now, I also, when I was thinking through that, I also thought to myself, well, it's also true that older people, baby boomers we're talking about now, pretty much control the government. It's certainly the case in the US and in Europe. I don't know, I don't know what other parts of the world look like, but certainly here. At some point, those individuals pass away, and the people in positions of power begin to reflect the demographics of let's say millennials or Gen Xers. So how much of that is a role? Not the fact that older people have voting power, because also I wonder to what degree older folks will remain active voters. I don't know, because one of the things that you also bring up in the book is that the incidence of dementia and illnesses like this are on the rise. I don't know how many (25/43)
people with dementia vote. So the point I'm trying to make or the question I'm trying to formulate here is how much of this is actually a result of the fact that the people in power are of the same age as the demographics that we're talking about here. And as the demographics of the people in power change, you can expect the demographics of the people that they serve to also change. And maybe we're extrapolating current trends into the future when we shouldn't necessarily. That may be so, but let me put a counter argument, which is that you tend to come into power when you are in your 50s and 60s, because it's difficult to climb the greasy ladder until that time. So that those in power will always tend to be relatively close to retirement, and they will have therefore the interests of the retired at heart, whereas they may think that the young are in better shape to look after themselves. Yeah, I guess that wasn't though true in the post-World War II period. Is that simply because we (26/43)
had the biggest demographic? Well, no, because we also had, that was the people that were running the country at the time where they were veterans of World War II. I don't know. Anyway, it was just a thought that I had. Let's talk about, so in the future that you're putting forward here, we're going to see rises in inflation. Let's talk about where the money comes from to support the consumption of a portion of the population, which is unable to basically pay its own way, because they're not gainfully employed or they're not as productive. What role does debt play in this situation? How much of this comes from borrowing? How much of this would come from monetization of debt? How much would come from taxes? How do you see that happening? And what happens to interest rates in this environment? That's a very important question. If you look at your congressional budget office studies of the longer-term future for fiscal developments, you will see that the COVID bulge in debt was simply a (27/43)
little small blip in what is, in their view and mine, a continuing upwards trend, which gets more and more vertical in the debt ratio, largely as a result of the expenses of Medicare and Medicaid and so on over time. And the same is exactly true for the UK. If you look at the Office for Budget Responsibility, the OBR, and you look at their long-term projections, you will see that under present policies with existing taxes and existing policies on retirement ages, Medicare, Medicaid, etc., that the debt ratio effectively explodes. And that will be made a lot worse if nominal interest rates start rising quite sharply. Which is obviously what's happened in the very recent past. Indeed. Now, the indication of that, according to, for example, John Cochran of Stanford University, is that the underlying situation is inevitably going to be increasingly inflationary because the Ministers of Finance, the Secretary of the Treasury, simply cannot afford to pay out these large sums and will have (28/43)
to, therefore, finance their expenditures through monetary expansion. The alternative that we are faced with is either to cut back really quite severely on the benefits to the old, which we've talked about already, or to impose much higher taxes. But taxes are also highly politically unpopular. And the question is, how are we going to get through this? And how are we going to square the fiscal equations so that we don't have an explosive debt ratio? We don't have a situation where we are forced to monetize the debt and, therefore, tend to get into increasing inflation. How are we actually going to do it? What is going to happen to the taxes and or to expenditures of various kinds, including defense expenditures, which are likely to rise? Basically, we are now in a very difficult fiscal situation. Expenditures, because of the worsening dependency ratio in the increasing population of the old, public sector expenditures are going to go up. And we don't have enough taxes to meet that. And (29/43)
the debt ratio and the debt service burden are simply going to expand without limit until something blows. And that will be extremely unattractive. And that raises the question of what on earth are we going to do? Are we going to raise much more additional taxation? How are the existing workers going to react if they are taxed more? What other taxes can we consider? Or are we going to cut back somehow on the public sector benefits to the elderly? So what happens to economic growth in this environment? And actually two questions. One, what happens to economic growth? And also, just an observation I'd like for you to comment on it. How important does political power become for voting blocks of people in this type of a world? Because it seems like so much of what determines standard of living for the individuals discussed here is how much they're taxed and the benefits that they receive from the state. Well, let's take that in two parts. The first thing is that output is done by those who (30/43)
work. And the decline in the growth of the working age population means that overall output is almost certain to grow less fast than it has been growing in the last three decades. That doesn't mean to say that output per worker will grow less fast. Output per worker is probably likely to grow faster, but overall growth will decline. And that will certainly be a problem, particularly in some ways for China, I think, because they're going to have to shift from having really very fast growth of about sort of 6% to 8% per annum down to something that may be lucky to be 2% or 3% per annum. And that is coming down the road at them really quite quickly. And for the Western countries, it's going to be a reduction from growth of maybe 2% per annum to growth of maybe half to 1% per annum overall. And that's going to be a problem. Your second part of your question was about voting blocks. There are many, many different reasons why people join different parties. And that may alter in future, but (31/43)
certainly the younger part of our population, the workers, are going to resent the higher taxation, which seems likely to come becoming down the road at them. I also wonder how they're going to react to that, right? So besides simply demanding higher wages, which would increase inflation, by the way, that's actually an interesting point now that I'm thinking aloud, which is that inflation is the government's friend when it comes to paying out liabilities. So if the government has to cut social security checks, depending on what it decides to index the inflation of those checks to, inflation can be its friend. Does the inflation actually help offset some of the pressure on government expenditures to the age and cohort in this scenario? To a limited extent, yes. But if the inflation is expected, then everyone will try and adjust their position. So they're in real terms, they remain the same. The inflation has got to be greater than people expect, as it is now. The inflation now is much (32/43)
greater than people expect. Even so, it doesn't automatically benefit the public sector for two reasons. The first one is that quite a lot of the debt is now index linked. In other words, linked to the rate of inflation. And that means to that extent, that doesn't help. The second is that in so far as wages are indexed, again, it doesn't help the government because the inflation then just becomes even greater. Back in 1973, in the UK, the then Prime Minister, Ted Heath, agreed that trade union wages, particularly public sector trade union wages, should be indexed to prices. And when the Israel Arab War came and oil prices shot up by a factor of four, that indexation of wages in the UK meant we suffered much more from inflation than any other country in the world because they didn't have indexed wages. So to the degree that as you get more inflation, people insist on protecting themselves through some form of indexation, the more difficult the overall situation becomes, because the less (33/43)
the benefit to the public sector and the worse the overall inflationary conditions and the worse the debt service ratio becomes. So Professor, my last question or questions for you have to do with what investors not should do, but how investors should think about the sectors or industries or types of companies that would perform better in this type of environment. And one of the things that comes to mind here is housing because again, one of your conclusions in the book also is somewhat counterintuitive, which is that you think that housing will actually do well. And the reason for that, as I understood it, is because you expect that we will not see an increase in multi-generational housing in the United States and Europe. And I would love to understand a little bit more about that because I feel like what we have in fact been seeing is more people living at home with their parents. And one of the trends that I have intuitively expected to see more of is people living with their (34/43)
parents and helping their parents basically manage retirement into the end of life and inheriting their homes, so that much of that would happen. Where is your thesis different on this? You may be right on that one. I wouldn't want to go to the great lengths to try and disagree with you. I think our argument was rather that old people don't like moving because it's very stressful. They mostly paid off their mortgage, so they don't have to. And as the children eventually leave home, what you will get will be a misallocation of floorspace with the old staying on rattling around in a larger house than they need because they don't want to face the reality of selling up and maybe going to an old people's home. And that therefore the children, as and when they leave, have to buy houses of their own because there's an overall misallocation of floorspace. Now, if the children of course stay at home, then that your counter argument would hold. But at the moment, of course, housing prices have (35/43)
increased drastically because of the very low interest rates that we've had over the last couple of decades and is very difficult for the young to buy houses. In the short run, I expect nominal interest rates to go up to a point where the housing markets in our economy is crack and we get a fairly sharp decline in housing prices. But I was thinking much more of the medium and longer term future whereby with housing prices having been brought sharply down from the present very exalted levels that the misallocation of floorspace because of the old wanting to stay on in their big houses will lead to a greater demand for housing overall than simply looking at demographic figures might otherwise suggest. But as you say, if the young stay on at home, then that won't happen. But it's a question of whether the young will stay on at home. One point in your favor of your argument is that the age of having the first child and very frequently the only child has now risen very sharply so that when (36/43)
I was young in the 1940s and early 1950s, the age of having a first child was in the low 20s. Now the average age of having the first child has moved up in many countries to the low 30s. And that means that children will tend to be staying with their parents until the parents are considerably older than was the case many decades ago. So I see the merits of your argument and perhaps we should have qualified the argument about housing. So my last question is, what does this mean for the types of financial returns that we can expect to see in the coming decades and what types of assets or investments might under or overperform based on what we've seen over the last 30 years? The last 30 years have been wonderful for people holding financial assets. Interest rates have trended downwards, which has meant that if you hold government bonds, they've appreciated over time. Housing prices have rocketed up in relationship to average incomes. Equities have done extraordinarily well. As I said (37/43)
earlier, if you hold capital, the returns to capital over these last 30 years up to 2020 have been really dramatic, much greater than the return to labor. And it's basically the thesis of our book that the returns to capital will come down and come down quite sharply overall. There are always going to be sectors that are down do quite well. And pharmaceuticals, for example, the older need more pills than the young. So pharmaceuticals will do well. People investing in old people's homes will do quite well. And of course, there may be certain parts of the world which will do better than others. One of the key issues is that the massive decline in the birth rate that we've seen over most of the world is not true, particularly in Africa. In Africa, the birth rate for women is still in the sort of four to five or even in some countries higher range. And their population is exploding, their working age population is exploding. The population of Nigeria within about 10 years is going to be (38/43)
bigger than the population of the United States. And one of the questions that is very much, I think, open is whether Africa can become the China of the next few decades. Very uncertain because China had the advantage of maybe an authoritarian, but nevertheless an efficient administration. It was unified and it had a pretty well educated workforce. There's a long way to go before the political administration in Africa can have the same ability as in China. And Africa is divided up into many countries, I think, some like 45 countries. So it's not unified in the way that China was. And the educational level of the African workforce is lower than the education level, the Chinese workforce. But one of the major questions of the longer term future is going to be how Africa develops and how we can help Africa to develop. So actually one last question for you, Professor. It's not related to Africa or whether or not the labor in African countries can be as productive as western labor without (39/43)
actually emigrating here and whether actually some of the more populist anti-immigrant sentiments will actually allow for that to happen. That would be an interesting conversation to have as well. But my actual last question for you is about the yield curve because I believe in the book you say that the long term consequences of what you're describing would lead to a steepening of the curve, but that's actually not what we have been seeing. I mean, how do you see that? What accounts for why we're seeing the short end rise relative to the long end? And is that something that you expect to change in short order? Yes. And the development of quantitative tightening, the opposite of quantitative easing or QEs, it's normally known, could well bring that about. In the short run, the short rates are rising very sharply because of the need to bring inflation back towards target, though I doubt whether they will succeed in doing that in any short order. The long rate is held down because (40/43)
people's expectations are generally adaptive in the sense that you expect for the future what you have observed in the past. And what people have observed in the past have been three decades of declining and then very low inflation. Most people now working in banks and investment banks have known nothing other than low and declining inflation. And therefore, particularly with central banks saying that they will bring it back to target, inflation back to target, and with many mainstream economists claiming that the longer term future is still going to be secular stagnation and lower for longer, that their expectations of the longer term future is that we're going to revert to very low inflation. And our book takes the opposite line. And therefore, it's no surprise with central banks, most economists and their own experience leading them to expect that things will go back to what they're used to seeing in the past, that longer term expectations about inflation, it will return to the low (41/43)
levels of the past. And with that, longer term interest nominal interest rates will also return to the lower levels of the past. But the longer the present inflation lasts, the more that these expectations will even for the long term, will slowly ratchet up. And if you add the ratcheting up of expectations to the fact that fiscal and other conditions are worsening quite sharply and quantitative tightening is taking place, that long term interest rates will rise. And when eventually the recession that I think is going to occur takes place, what will then happen will be that short rates will fall back and fall back quite sharply relative to long rates. So the steeping of the yield curve is something that I think that Manoj and I would expect to see in say something like about five to 10 years. It's not happening now, certainly, rather the opposite. But we think that it will happen. Because presumably we're going to go through a period of very, very low growth as a result of a prolonged (42/43)
recession where inflation is also going to come down temporarily. Yes. That's essentially your thesis. So Professor Goodhart, this is wonderful. Thank you so much. I got so much value out of reading your book. I think, like I said at the very top, it's valuable just the fact that it puts forward a thesis and an argument that is so different, that runs so counter to the consensus about the effects of aging demographics on inflation. Just that alone makes it worth reading, but it's very detailed. There's a lot of data that you put forward in the book. And I just found it incredibly useful. And I recommend it to anyone who's interested in the subject. So thank you so much for coming on the podcast to talk about it. Well, thank you. It was a pleasure. you (43/43)
This is the full transcription of podcast 'Hidden Forces'.
Gillian Tett Wartime Economy The Greatest Financial & Political Crisis Since World War II #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Gillian Ted, chair of the editorial board and editor at large of the Financial Times. She writes weekly columns covering a range of economic, financial, political and social issues and she is here to speak with us today. Gillian, welcome back to Hidden Forces. Great to be on the show at this incredibly intense moment. So that's actually something I wanted to ask you about because you joined the Financial Times in the early 90s, I believe, as a correspondent for the former (1/43)
Soviet Union in Europe. You were stationed in Tokyo during the bursting of the dot-com bubble and the 9-11 attacks and you covered Wall Street, of course, leading up to and through the crisis, which we talked about in our last episode together. And now you find yourself as the editor at large of what is effectively the largest English language financial newspaper in the world. What is it like to work at the Financial Times in your capacity during a time like this? Well, it's moments like this that make me realize why journalism is such a responsibility and a privilege and a passion of mine because essentially, you know, we're paid to tell people about other people and try and illuminate how the world's working or often not working. And doing that in quiet times and peace times is always very important as part of the civic duty, but doing it in times of drama of war, medical war, of the thought we got now or financial war, of the thought I've seen before in financial crises shows the (2/43)
importance of trying to do your best in difficult circumstances to explain how the world's working. Well, last time you were on the show, I asked you how the experience of covering the last financial crisis changed you and you said that it taught you humility, enough humility you said to realize that as journalists on a good day, we get 40% of the truth. But you also said that it taught you about the power of social silences and I asked you then what you thought people were not talking about and you said things like pensions and the slow moving car crash that's there, antibacterial resistance, which is interesting given the current moment. And we talked about the corporate bond market, leveraged loans, emerging markets. What are the social silences today with all of this coverage about coronavirus? What are people not talking about? Well, I think that the first point to make is that the coronavirus really does demonstrate the importance of elites and pundits like myself of being humble (3/43)
because frankly, I've been concerned for a long time about antibacterial resistance. I still am. I've worried about a pandemic to a degree but not in a very realistic immediate manner. And it's very interesting because the Davos World Economic Forum asks the sort of global elite every year to rank the risks they're most concerned about. And if you go back 10, 15 years, pandemics was one of them. In the last couple of years, pandemics have barely featured at all in the risks that people are watching, which indicates the fact that it's always the risk that you take your eye off the ball or eye off watching that comes back to really bite. So when I think about now what risks were missing, to a certain degree, things are moving so fast that everyone's breathlessly watching the latest headline. So everyone's thinking a lot about the impact of coronavirus on the rich countries because places like Europe and America are very much on the television screens in the frame. One of the things I (4/43)
think people aren't paying nearly enough attention to is what this is going to mean for the emerging market countries. The emerging market economic shock and financial shock is very severe but is not being discussed properly. But if you move beyond the coronavirus, questions about what all of this is doing to civil liberties, to the growing intrusion of tech surveillance are not being properly discussed right now. And then there are the other wider questions about do we understand who actually owns the internet on which we've all become so desperately dependent and who actually controls it? Yeah, I saw you actually tweeted out an image of or a video that showed people on Florida's beach, the cell phones of every single individual, to just show the overcrowding. Is that what you mean? Well, it was partly because there was an extraordinary effort by some computer scientists to try and track cell phones from Florida Beach, which showed both the degree to which they had congregated without (5/43)
social distancing on Florida beaches, but then dramatically dispersed across the country at the end of their holidays. And that was scary because of what it said about social distancing and the lack of it. But it was also scary that people can get that information and highlight it so clearly. And I think we're going into a phase where people are going to be faced with some very hard uncomfortable moral choices, which is, is it better to keep people safe and in the name of safety, accept a higher level of surveillance? Or is it going to be a case where people say, actually, I don't want to sacrifice that much privacy. And I'd rather take risks on the health front than have governments know exactly what I'm doing and where I'm doing it. Are you concerned about that, about the measures that are being taken, particularly, I think, in Western countries, right? Because in a country like China, although they were noticeable to us or noteworthy to us, I don't know how unusual they were, or at (6/43)
least how beyond the realm of expectations they were for people in China. But for us in the United States, these really are draconian measures. We're not used to it. I've reached for metaphors. And I feel like you would have to go back to World War II to think about this level of societal impact due to government policy. But of course, back then, it was to mobilize for the war. Now, it's to demobilize. It's to stay in our homes. Is that what you're talking about? Well, absolutely. And what's stunning right now is the speed at which norms are changing. And when I just think back to my own life, I'm based in New York. And because I'm based in New York, and I speak a lot to newsmakers, I've had a fairly good sense for some time that we were heading towards a lockdown. But, you know, my friends and colleagues back in London, when I spoke to them just three weeks ago and said, listen, guys, schools will be shut. Borders may close. They could not believe it. It was unimaginable in London (7/43)
just three weeks ago that say schools will be shut. And then of course, we're moving a situation in London where schools were shut, and suddenly institutions were closed down. And now we've moved into a situation where if you leave your house in the UK, your neighbors are likely to report you if you're seen loitering around, where they're looking at, you know, license plate numbers through cameras to see whether people are leaving and driving without getting permission, etc, etc. So it's really quite an astonishing shift in attitude. And to my mind, the critical question is, it's one thing to take emergency measures in more time. Will these emergency measures be subject to any type of proper societal debate or scrutiny or oversight? And what happens if or when we get back to peacetime? And suddenly there won't be any justification at all for much of what's been put in place. So I actually, I live in New York. And the last time you were on the program, we did this from the studio in (8/43)
person. I'm not in New York right now. What is it like in New York at the moment? Well, the streets are stunningly empty. And it is quieter than I've ever seen New York before in my life, which in some ways is actually very nice. I mean, if you walk along the river, it is just beautiful and peaceful and quiet. And the springs here and there's trees coming out blossoms there. Birds are singing, you can hear the birds properly for the first time. But the level of stress and fear is rising very fast. People are tuning into Andrew Governor Cuomo's briefings all the time. And the death toll is obviously rising fast too. The streets still have some shops open in terms of grocery stores and pharmaceutical stores. There's big queues outside the grocery stores because they're only letting people in one at a time. And I went to Whole Foods this morning and had to wait for the best part of an hour before we can actually get into the store. But once you get in, there's still plenty of produce. So (9/43)
it's a bizarre mixture of the seemingly normal, seemingly totally abnormal and sense of dread and waiting. Are people wearing masks now when they go out? Like when you go to the supermarket or other people wearing masks? There's definitely more mask wearing going on now. It's still not the dominant pattern. There is more mask wearing going on now. And it's a very interesting issue, the mask thing, because from an anthropological perspective, it's clear that masks are much more than just about medical risk. It's also for some people, a deserter shows control, shows support towards a wider group, or simply indicate that they want to be responsible. In Asian culture, they play that very differently because their masks are seeing as almost an unequivocal good thing. And there's not stigma to wearing masks. In American talk, quite recently, there was stigma, but I suspect that's now drying down. Right. So let's shift into a conversation about the economy and the shutdowns, because this (10/43)
really is, again, it's rich. We live in the age of the unprecedented, where I feel like so many of us find ourselves reaching for that descriptor that this is unprecedented. We haven't seen this before. But really, we haven't, at least not in our lifetimes, where the government shuts down the economy. On the one hand, the government is shutting down the economy effectively. That's not the objective, but it's effectively shutting down economic activity. And on the other, it is expanding stimulus measures, both on the fiscal side and on the monetary side, though it isn't so much to stimulate, but rather to sustain. And I've gone through some of your writings on the FT. Of course, I also follow many of your writers, Spiegel, Rana Faroohar. And one of the things that you wrote about had to do with financial flows and the importance of dollar funding. How has the panic around COVID-19 impacted the financial flows that normally grease the wheels of trade and that back global supply chains? (11/43)
What are we seeing there? Well, the terrible irony that hangs over the global political economy today is that at a time when the US has often tried to downplay its global leadership and adopt an American first policy, the dollar has become more, not less central to the global economy. Because not only is America the biggest economy, and not only is in many ways a dollar regarded as a key reserve currency for central banks around the world, but dollars account for a very large part of the trade finance, a grease is the world's supply chains. And what's become clear is that as these supply chains go into crisis, and as different parts of the supply chains start to default along that chain, you're starting to see a scramble for dollars that potentially is going to be extremely nasty. Because if you are an American company or if you're an American bank and you want to get access to dollars in a crisis, you can usually go to the central bank in some form. If you are in Indonesia or China or (12/43)
Germany, you don't have access through your banks to the same Fed window. So thankfully, the Federal Reserve has rushed to try and plug that gap by providing dollars to other central banks around the world that they can then lend on to their own banks and by default the companies. But the question that's hanging over the markets right now is whether that emergency action is going to be sweeping enough and fast enough to prevent any shocks in the dollar funding markets. So you're talking about dollar swap lines. One of the things that came to my mind when I was thinking about this is that to my knowledge at least, there aren't any swap lines open with the people's bank of China. And Chinese companies have huge dollar funding needs. Has the FT done any reporting on this? What's the situation there exactly? Well, there's two problems in terms of assessing what the potential scale of dollar stress in China is. One is that there's a huge amount of opacity around this. And a lot of this has (13/43)
been done offshore. Even international regulators find it very hard to track what the true condition is inside China. And of course, the regulators themselves may or may not give some kind of de facto support. So the whole situation is very opaque. Secondly, we are dealing with a slow burn, slow motion crisis where essentially a lot of the unraveling of these supply chains and a lot of the default pressures will occur over the course of several weeks. So that again makes it hard to work out exactly what's happening and when it will really bite. But the good news is that the Chinese central bank, PBC and Chinese government do have a vast supply of treasuries that they potentially could use to raise dollar funding if they had to do so. And they could theoretically either sell those in the open market if they needed to, or even if the Fed was agreed to some kind of swap with the Fed using those treasuries or simply going to the open markets to do that. But it's unclear what that would (14/43)
mean for the treasury market. It's unclear how the threat to that might be. At the moment, the chance of the Fed cutting a deal with the PBOC is pretty low given the hostility between China and the US. And the PBOC is the People's Bank of China. But you things are changing very fast day by day and nothing could be ruled out. Right. And to that point, it would seem to me that if they did sell treasuries, even under the current conditions, it would be a political statement in and of itself, wouldn't it? Well, at the moment, the Fed is desperately trying to keep the treasury price high and the yield low. And that game is going to get even more intense going down the tracks because the stimulus package they're talking about is going to require massive amounts of bond issuance. And they need to find someone to buy those bonds and they need to try and keep the rates low or the borrowing cost will be too high or the interest cost will be too high. So they are going to be engaged in a very (15/43)
nasty, difficult dance in the months ahead. But certainly at the moment, the Fed doesn't want to see China dumping a whole bunch of treasuries in the market and potentially do the sorting prices. Well, so speaking of bonds, it isn't just treasuries. It's also the corporate bond market. And that, in fact, it seems to me looking at the Fed's announcements that the corporate bonds are the primary target for their liquidity facilities. One of them is a primary market facility. One is a secondary market facility. And in fact, you guys wrote, it might have been you or one of your journalists at the F.T. wrote an article about BlackRock and the conflict of interest there. What can you tell us about what you know or what you understand about the Fed's objectives with its latest changes, the facilities, these announcements and what is effectively a form of QE that it's engaging in? Well, the Fed's basically engaged in a whack-a-mole and it's trying to jump into every sort of incipient stress in (16/43)
the markets one by one and try and offset it. So the amount of programs it's unveiled in recent days is absolutely astonishing and dishing the complex. And frankly, they themselves don't know all the details to them yet. But one of the key elements of these programs is to try and stop stress in mortgage markets, which has started to become very serious. Another key element has been to try and stop stress in the corporate bond market. And that's very noteworthy because it's the first time the Fed has ever jumped into corporate credit before potentially exposed itself to a lot of those risks. And it's doing so really in a quite astonishing way, both in the secondary market where it's pledged to buy corporate bonds and secondary market and exchange-shared funds holding corporate bonds, but also in the primary market as well, which again is completely unprecedented. Now, taking on that level of corporate exposure and risk is potentially going to be quite difficult for the Fed to handle (17/43)
because although it's said it will only buy investment-grade corporate bonds, the reality is that the sudden slowdown in the economy puts about a trillion dollars worth of corporate bonds at risk for a downgrade from investment-grade to junk bond status. And the rating agency is a warning that a lot of those junk bonds are going to default. So it's one thing to say in a very grandiose, dramatic way that the Fed is going to buy corporate bonds. It's quite another to work out how to implement that program. And so the question people are asking is, well, how are they going to do it? The Fed has decided to essentially outsource it to BlackRock. Some people would say, well, actually they could have kept it in-house and used their own people, but they have a huge bandwidth problem at the moment and lack of expertise and skills. So BlackRock's been given the mandate, but been given the mandate without a beauty parade. And in spite of the fact that BlackRock itself has massive fund management (18/43)
business with bonds and equities that are going to benefit from the Fed's new strategies. So there's a huge issue of conflict of interest here. And plenty of BlackRock's rivals are absolutely furious by what they regard as a sweetheart deal that shouldn't have been done. Whereas the Fed and other people around it will say, well, this was the only option in a hurry. So you think taxpayers should be concerned about conflict of interest? Or do you think, again, so your point really is that the Fed relies on, not just in this case, but even in its normal operations, it relies on primary dealers to intermediate its purchases of US Treasury securities. The Fed is not completely independent, so it relies on third parties. Is this something where they wouldn't be able to do it on their own effectively? Well, it's an open question whether the Fed could do it on its own or not. I mean, many Fed officials would say it certainly couldn't do it on its own quickly. If it had many weeks to hire (19/43)
people and set up a program, it could do. But the question is whether it's better to act quickly given the American economy faces this huge great looming problem of corporate bonds or to use BlackRock. Now, could they have done a proper beauty parade quickly? Possibly. But again, that takes time. Almost everyone in the market agrees that BlackRock has the biggest capability in terms of both its fund management skills, but also its advisory skills. And it has been running as an independent consultancy operation now for a number of years, more than a decade. And they claim they have a very well-trenched system for avoiding conflicts of interest. And certainly that argument's convinced a long list of public institutions in the last 10 years who have used BlackRock for services. So they say they'll manage the complex fine. Let's hope so. For my part, I think I can understand why the Fed did this in a wartime situation. But I think that if it's going to do this, it's absolutely essential (20/43)
that three things happen. Firstly, I think that BlackRock should do this pro bono without charging fees. And it does look as if that's roughly what's going to happen for at least part of it. Secondly, I think that there should be maximum transparency all the way through what's happening. And again, it's quite encouraging. It does seem like trying to take a more transparent approach than before. And thirdly, I think there should be a three-month review and probably a new beauty parade then to see whether BlackRock really is the best people to do that or to consider whether to bring the whole thing into house. Hmm. Well, to your point about the corporate bond market, it's hard to really understate how much that market has grown since the last financial crisis. I think it's about 10 trillion in size now and more than 40% of that market represents that triple B tranche that's at risk of a downgrade. So it sounds like you think about 25% of that market is that significant risk. You also (21/43)
have talked about this concept of monetary morphine that investors have become accustomed to a world in which the Fed keeps interest rates low, money is easy, and that if anything gets out of hand, that the Fed and central banks will always be there. And I think the open question for all of us has been, will policy be effective this time around? And what will it take for it to be effective and what does effective look like? How are you thinking about that right now? What are you looking for to determine whether or not monetary policy is and will be effective? Well, there's really three aspects you're asking when you think about whether it's effective or not. The first is, do the financial wheels keep turning in the system? Is other cogs still functioning normally? And the Fed is primarily focused on delivering that right now because they really are engaged in the most terrifying game of what I call whack-a-mole or cat and mouse where bits of the system keep half freezing up, they're (22/43)
trying to keep it going, and most of the programs they're unveiling right now are geared towards that. The second thing they're trying to do is to keep confidence in the markets and in the wider economy. And again, that's part of what the game is right now. And that's an extremely difficult job to do. The third thing they're trying to do is to eventually help stimulate demand. But frankly, there's almost nothing the Fed can do in that respect right now because it doesn't matter how cheap money is or how many corporate bonds it buys and how much liquidity it pumps into the system. If people are terrified, they're not going to borrow money to spend money or to invest or anything like that, they're just not going to do it. And so, the idea of using Fed policy right now to boost demand is frankly ridiculous. But the Fed can and absolutely should try to maintain confidence insofar as it can and eventually and also most immediately keep the financial system going. The longer term question (23/43)
though is a degree to which the Fed gets sucked into essentially cooperating with the government and the Treasury. And you have a coordination of fiscal and monetary policy that basically leads to the Fed underwriting a massive debt expansion quite explicitly. And that I suspect is where we're going next. How do you mean that the Fed would underwrite that, that it would accept an increasing amount of U.S. sovereign securities? Well, one of the very important things that's happened in the last two or three days has been a growing discussion amongst Fed watchers and inside the Fed about what they call yield curve control. And that's an idea which originated in Japan. And traditionally, what central banks are trying to do is to control the short term rate of borrowing to their overnight operations or their discount operations or their policy rates. And the long term rate of borrowing basically was set by what markets thought the longer term outlook was like. And also the degree to which (24/43)
governments are going to have to sell bonds to raise money for the budgets. And so historically, they've controlled the short term but left the longer term rates float freely. Japan a few years ago started trying to control both the short and the long term through something called yield curve control. And the reason why that matters enormously is because if you have a government that's issuing lots of 10 year bonds or 20 year bonds, if you can control the yield curve and keep those borrowing costs low, then essentially you're making the cost of dealing with that debt much more manageable. Now America has hitherto refrained from that so-called yield curve control, but I suspect that's where we're now heading. Do you see the Fed? The other thing is interesting, you mentioned it before, that the Fed didn't go into the corporate bond market. That wasn't part of its open market operations. Now it is, well, it's part of the liquidity facilities. I mean, one of the things that I feel like so (25/43)
many of us are asking is how far, will it stop anywhere or will it simply continue to buy assets in markets that it deems to be important? And again, this is also, we're in such a confusing time because it's not clear how much this bond buying and these liquidity facilities are a preemptive reaction to credit markets freezing up and how much of it is also just simply an anxiety about equity markets because so many people are now invested in equity markets. How do you think about that? Where do you think this goes? Could we eventually see the Fed begin to even purchase equities? Well, Japan has done that through ETFs. The Bank of Japan now owns a sizable chunk of the ETF market. And if things get worse and worse, the Fed leadership has made it clear that the skies are limit. There is no limit to where they're going to go. And that's what they're essentially saying that they would consider almost anything. I think that it would be an absolutely stunning shocking move for the Fed to do. (26/43)
But we've seen a lot of shocking moves in the last couple of weeks and also in the last decade. So who knows? It's quite a transformation. Do you ever wonder the economy? We call it a capitalist economy, but I'm not sure what you would call it anymore. I mean, certainly if you're buying equities. So actually I have one more question about the Fed since we're on it. And that has to do with this debate that has been gaining more attention in Washington and in the United States. Perhaps it took a little bit of a blow with what looks like is going to be the nomination of Joe Biden to run at the top of the Democratic ticket. But this idea of issuing a platinum coin or helicopter money or some version of this, where to your point about the Fed and the Treasury almost working closer together, where these things, the two almost merge. Do you see some point where because of this crisis that the Fed's independence becomes significantly at risk and we could see a more populist government in the (27/43)
US, whether it's a new government in 2020, or if it's the existing administration that decides to use or make dollar issuance without actually having to borrow the money in the Treasury market? Well, I think basically almost nothing's off the table in the meeting term because I think the only way to frame what's going on is to look at it in terms of a wartime economy. And the reality is that if you look at the visible aspects of this, namely the way that the President signed the Defense Production Act and essentially ordered General Motors to start making ventilators, that's one physical obvious sign of it. What's much less obvious is essentially you are getting a day factor underwriting of government debt by the central bank. And inevitably that puts fiscal and monetary policy not so much on a collision course, but in a realm where they are coordinating closely. Will we end up with central banks losing their independence in 10 years time? And that is entirely possible. If you look (28/43)
back to the period after World War II, it's very instructive because debt has absolutely skyrocketed in the US and there's really only four ways you can deal with high debt like this or debt of any sort. You either have a mass inflation or you have defaults or you have eventually revolution or you are lucky enough to grow yourself out. But that's almost never happened because what's happened in the World War II period and things as you grow yourself out at a time of what they call financial oppression, i.e. controls over where investors can put their money. And what happened in the years after World War II was essentially you had growth and you had inflation, but you had most crucially negative rates on most government instruments. And that means that through the magic of compounding, if you keep that up for a long period of time, you essentially have a transfer of money from the savers of pensioners to the government that helps pay the whole thing off. So I suspect that's probably (29/43)
where we're going to go. But the question is, can you do that without new national borders, without new national capital controls? Can you do that in the open market where technology can let you put money anywhere you want? Who knows? So from your reporting on this, what have you learned about the plans of the government to get us out of this? We're now in, certainly in New York, we're in what's effectively a lockdown. That can't go on forever, right? At some point, we've got to produce something so that we can all live and grow our economies. I don't know how much testing is being done and contact tracing, because that seems like an essential part of this. I haven't, and I haven't been following this as closely as you have. What do we know about the plan to get us out? They got us in, the plane is in the air, but how do we land this thing? Well, I think at the moment, what we know is as follows. The Fed is operating as a coherent, coordinated, grown-up government agency. And they are (30/43)
in crisis mode. They're reactive, not proactive, the most part, but they're behaving in a professional, very organized manner. And all credit to Jay Powell and his colleagues for doing that. It's very impressive. And for the most part, the central banks around the world are coordinating together very closely. Again, extremely impressive. The White House and the Treasury are, frankly, a mess. And they have been reactive, shambolic, chaotic. And so the idea of trying to ask anyone in the White House or the Treasury for a five-year plan or even a two-year plan or a five-minute plan is ridiculous. I mean, they've got through the stimulus bill. They have sensors of how they want to try and start rolling out parts of that. But it's chaotic. So it's extremely unclear what is going to happen. But my best guess, yes, it's terrifying. My best guess is that we are going to slowly slip into more and more of a wartime economy. Savvy investors, well-connected plutocrats will find ways to make money (31/43)
and benefit. Many smaller businesses will be driven to the war. There will be tremendous hardship and suffering, which will be only partly alleviated by the government handouts. There will be growing fights and bitter pressure between people like Trump who want to reopen the economy quickly and people who are looking at the scale of death. And there's going to be some very nasty societal choices about the question of, to what degree do we want to sacrifice lots of people to keep the economy going or not? So as all of this is happening, we have an election coming up in November. And actually, there are real questions about whether Joe Biden is going to be that candidate. He hasn't looked particularly well in a series of interviews on television. There's a lot of speculation about what his health is. But even if he is the candidate, it's not clear how people are going to go to the polls. If we're experiencing another wave in the fall of COVID-19 and hospitals are overloaded and there (32/43)
aren't enough ventilators and people are panicked, A, it's not clear that people are going to be participating as much as they used to, which I assume at least the Democrats will try and create some kind of remote voting solution like when you're out of the country. And I'm kind of a little worried, to be honest, about the political instability in all of this. I mean, right now, we're talking about the economic fallout, but given how polarized and divided the country was heading into this, do you worry about what we might see in the second half of this year, politically? Yeah. I mean, not just in the second half of the year, so I worry about that. I worry about next 10 years, frankly. There's every possibility that either the elections will get cancelled or they'll be done under very controversial conditions. We just don't know. I very much hope they're not. I very much hope that if necessarily we go to some kind of online polling, we can without the danger of cyber hacking. But it's (33/43)
clearly going to be very disruptive. And what's clear is that this could potentially last a lot longer than people originally thought. I mean, the idea of it basically being a two-week containment and then it will be fine. And they're still going on television and Trump breathing and saying two weeks to stop the spread, 15 days to stop spread. I mean, the reality is from what the medical experts are saying right now, it's likely to be more like 15 weeks. That's the message that really hasn't permeated yet, but it will be tough. I mean, just in the last 24 hours in the UK on Sunday, I'm speaking, they've just come out in the UK, which had been in total denial until very recently. And so that they may have lockdown measures for six months. That's going to be shocking for people to try and live with and accept. But it's very hard to see why the UK or Italy is going to be different from the US. This is also a question, but one of the things that I think about is, you mentioned maybe the (34/43)
elections being hacked, but that's a form of cyber. We have this kind of liminal battle space between the US and Russia, also China, this information warfare landscape. We had problems last time around in 2016. People doubted the legitimacy of the elections. They're going to doubt the legitimacy of the elections this time around again. And if the economies are in a prolonged slump, we are also living through a kind of geopolitical global disorder. We've seen it most recently in Syria and Turkey and the US pullout and then pull back into Rajava. We have the ongoing new Cold War tensions with not just Russia, but also China. China's economy is in really bad shape. That's another thing that I wanted to ask you about. What do we know about what their economy is facing? And my concern is that, just like we saw in World War II, the interwar period was a really difficult economic period for all countries. And one of the features that was common across them was that economic turmoil for many (35/43)
of the players, Germany included, and the United States, of course, began before the countries entered the war. Do you think about that period as a sort of analogy for where we might find ourselves in today? Absolutely. Absolutely. I mean, that's, you know, if you look back at the historical charts, that's absolutely the case. And it's one again, one of the scary things that you're seeing, the potential for enormous economic stress. You know, you already had a loss of faith in political institutions, growing sense of populism, even before this started. It's hard to see how, you know, it's only going to go back to democratic norms anytime soon. What countries do you think are most at risk of that, of being politically destabilized in the current system? Well, I think that most of the countries are at risk of it. I think the US, though, it turns out play out particularly extremely right now, because, you know, at least in places like, you know, continent Europe, you A, have slightly more (36/43)
centrist parties with a more dominant profile. But you also have, you know, fully entrained social safety nets, which are actually protecting parts of the population. And the problem with the US stimulus package is that it's essentially coming out, you know, slowly. And whether it hits households fast enough to offset the tremendous amount of pain is unclear. So Europe's a really interesting situation. I mean, because they've had problems going back to even before the 2008, well, the 2008 crisis. I mean, they, the idea with Europe was always that the European Monetary Union is a product of optimistic times. And at the time, they saw crises as opportunities to move forever closer union. What we find to be the case now is that this is not what's happening. And in fact, people like Lagarde and other pro-EU officials have a very difficult time passing the type of stimulus measures that not even close to what we have here, but whatever they can get. Maybe you can also tell our listeners, (37/43)
what has the ECB done during this time? And how does this fit into the larger challenges that Europe is facing in order to try and make what is basically a Confederacy work like something close to the United States for the purposes of stimulus for peripheral countries in particular, like Greece, for example, that are very difficult situations, given COVID-19, given their shutdowns, and given the fact that they're, let's say, a tourist economy, largely. Well, the fundamental problem hanging out of the European Union is that you have a common monetary policy, a common currency, and you have financial markets that are integrated to a degree. You don't really have a common European capital market as such. But of course, you don't have a common fiscal policy. And so the big test for the European Union right now is whether out of this, you will start to see the beginnings of a common fiscal policy, because you've already had parts of the European leadership called for common coronabonds, (38/43)
which would be joint EU-wide coronabonds. And you've got people like Christine Lagarde at the ECB calling increasingly strongly for some kind of fiscal policy support to go with what the ECB is doing. I mean, the ECB, like the Fed, is doing what it can to try and keep financial markets operating and the wheels of finance turning. It's also trying in general terms to boost demand. But again, it can't do much to boost demand unless it's fiscal policy involved. So again, another prediction is out of this, we'll see coronabonds basically pave the way for joint fiscal policy in the European Union for the first time. And frankly, that's good. The coronabonds will be the new Euro bonds. Well, I've long thought that we need to have some kind of joint Euro bond. It's been very hard to break through the hostility of some nation states towards that idea. Nothing like a crisis to concentrate minds. And Europe in particular tends to only take world radical steps when there is a crisis. So I suspect (39/43)
that future historians will look back and see this as a time when the crisis actually broke the deadlock around fiscal policy and really started to align fiscal policy, not closely with monetary policy, but more closely to it than there's been in the past. Do you think that's easier now with Brexit having been completed for Europe to move forward? It's definitely a lot easier now that the UK is not there anymore because the UK was of course the surface, the approach to that. And of course, it was also out of the single currency. So one more question for you, Gillian, has to do with energy markets. This of course is a huge story that's kind of been buried again. Everything is, nothing compares to coronavirus, but the world does go on. And a few weeks ago, and we covered this with Ben Hubbard, the Middle East correspondent for the New York Times. We covered this story about the fallout between Russia and Saudi Arabia and Saudi Arabia's expansion of its supply in the face of collapsing (40/43)
demand and the collapsing price of oil and the rippling impact that this has on commercial oil producers, specifically shale in the United States. What is going on with energy markets and how does this factor into the current situation economically and politically? Well, what's happened with energy markets is about the very last thing in the world you want to see right now, which is a price war and a market share war between Saudi, Russia, and America that's turned very vicious and essentially has pushed down energy prices dramatically, adding to the deflation risks, and adding to the sense of international turmoil. So that's another very nasty hammer blow on the US economy because of course, the shale industry has been a key source of growth in recent years. All right, well, Jillian, thank you very much. I want to ask you actually, I have one more question, because one of the articles that you wrote about was that you went on your final bike ride. Have you actually been able to go on (41/43)
another bike ride since you've gone into quarantine? I have. And in fact, I've been cycling almost every day when it's not raining. And I cannot recommend it highly enough as a source of joy and stress relief and just a chance to keep fit and to remain connected with some of the most vibrant joyous aspects of life. I mean, it so happens that in New York right now, spring isn't de-coming, the blossoms out. Cycling is a great way to, you know, get into the fresh air without too many risks because on a bike, you are inevitably socially distanced from people. So yes, I would strongly recommend cycling to anybody who's listening. My editor does the same thing. So that makes two of you. Jillian, I deeply appreciate your time. Thank you so much. And I hope to have you on again the program sometime in the future. Thank you. And stay safe. And for anyone else who's listening, stay safe and stay optimistic. Today's episode of Hidden Forces was recorded at Creative Media Design Studio in New York (42/43)
City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com. slash hiddenforces. Today's episode was produced by me and edited by Stylianos Nicolao. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (43/43)
!BBH
!vote
✅ Voted thread successfully!
Vote weight: 10.62%
This is the full transcription of podcast 'Hidden Forces'.
How Technology is Advancing Networking & Accountability in Commercial Real Estate #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? Welcome to this week's Market Forces segment of the Hidden Forces Podcast where I speak with market professionals, business people and anyone else with an economic perspective on current events. Today I speak with Ben Friedland, Executive Vice President and Co-head of Alternative Investments Practice for CBRE, the largest commercial real estate services firm in the world. In his capacity at the firm, Ben advises many of the world's top hedge funds and private equity companies regarding real estate investments, leases and acquisitions and is in a unique position to provide insight into how the forces of technology and globalization are changing this age-old, multi-trillion dollar industry for the 21st century. Let's get right into it. Now I want to welcome Ben Friedland onto the show. Ben, how are you? I'm great. Thanks for having me. Welcome to Hidden Forces. Excited to be here. What does it feel like? You're the first Hidden Forces listener to actually come on as (1/43)
a guest. I'm the first one? Long time listener, first time caller? Well, I mean, hopefully there are others who, well, obviously many of the guests have heard the show, but I think they heard it primarily because they were prompted, but you're actually a listener, so that's really great. We're getting into this. So, Ben, we're kind of friends. So I've known you now since it was cold the first time we met. I feel like we met close to a year ago. That's right. Right? You remember? At dinner. At dinner. Where was it? It was... It was in good memory, Ben. It was in Rock Center. It was me, you, Porzio and Todd Rollin. Porzio. We were having fish or something. That's right. Well, you're Greek, so we went Greek. Cool, cool, cool. All right. Why don't you tell our audience a little bit? I mean, I have many specific questions for you and there's a good reason I brought you on, but why don't you tell our audience a little bit about yourself and what you do? Sure. I am at a company called CB (2/43)
Richardella, CBRE. It's the largest real estate firm in the world. I'm located in the New York office and I run the Alternative Investments Group with my partner, which is a global group representing hedge funds and private equity firms for their real estate concerns. You basically sell real estate or what to hedge funds to private equity people. You also facilitate investments and what exactly do you do? It's the nature of your job. It's advisory. They hire me for advice when they're looking for their own space to operate their operations either in the city or elsewhere or investments that they have that they want to optimize or investments that they're looking into that they want to do some additional due diligence around the real estate. Those are all things that they'll look to me for. It's really successful, powerful people in finance. Anyone we would know? Yeah. It's a lot of this sort of Wall Street Journal type names and they're interesting type A personalities. Are you allowed (3/43)
to tell us anything about them? I'd rather go general then specific. We'll see if we'll get into that. That's interesting. For me, I was thinking about this because the audience knows this. We do a lot of episodes and then you'll know this as well because you listen to the show, but we do some of these market forces segments where the rules are relaxed for me and I can do things that are not within the bounds of a big structured show. I'm not clearly thought on exactly what everything is that interests me most about you and what you do and what it is that I wanted to bring you on here for, but one just simply has to do with the fact that you interact with so many successful people at the very top of finance. You've been doing it for years and I think it's interesting given also the fact that you listen to a ton of podcasts, not only this one. I would actually call you, I think I've told you this, I would call you the classic Tim Ferris listener. The way that you're very structured, (4/43)
organized, you have answers for everything that are clearly thought out as to why you do. I don't know. Is there anything, Ben, that you do in your life that you haven't clearly thought about? I try to be pretty thoughtful about everything. Sometimes people think that I'm being overly thoughtful, but even something like going away on vacation and having time to do something random, I would structure that time within the vacation to say, all right, here are the things that I'm doing that I need to make sure that I'm doing and then if I want to have some spontaneity. Structured fun. Yeah, structured spontaneity. Structured fun. Let me ask you this. Since you do listen to a ton of podcasts and this is kind of a phenomenon today that a lot of people listen to podcasts and a lot of people listen to podcasts discriminately in order to learn things, what about your clients? Is that you find that's common among your clients? Do they have the time? Do they have the interest? Yeah, I think that (5/43)
these type A's what they're very focused on in every way is time and efficiency. One of the great things about podcasts, unlike other mediums, is you can do them while you're doing other things, whether you're working out or for me on the train or cleaning your house, whatever it is that you're doing, your hands are free and you're able to transport yourself into a story or ideas that you can listen to while doing other things. I think it's taken off in the same way that it's of interest for me. A lot of my clients have found it similarly valuable. Let me ask you this then. This is interesting. We're kind of going off the rails now because this is not actually the question that I had, but it is interesting to me. I'm thinking about this because I remember what it was like for me when I went through this learning period using podcasts, a combination of podcasts and YouTube videos and blogs. Before that, of course, it was books. I would go to Barnes & Noble and I would just take books (6/43)
off the shelf. I learned much more after college than before because in college ... I'm not surprised at all. You're an auto-didact. I didn't like me giving a syllabus and being told what to read. I knew after I read this, this is what I wanted to read. After I read this, I need a little bit of that and listen to that. How do you listen? Let's say you sent me that one podcast by a Furnham Street with Naval. You really love that. I do. You have a whole structure to your podcast. You listen on overcast and you're able to put your favorite podcast or whatever else. How does that work? Let's say you hear something like Naval's podcast, the one with Naval. What goes through your head in terms of what you want to hear next, what you want out? How does that change where your mind goes? Part of it, I start out by saying what do I not want initially. I try really hard to filter out things that I think are noise to make sure that I'm hearing the best stuff. Once I ... that Furnham Street, when I (7/43)
heard Naval, I just love that guy. I said, I want to learn everything about Naval. Fortunately, there are lots of different ways to learn about people. I went through the same thing with Yuval Harari when someone had recommended ... He's very interested to listen to. When you hear it, it's just mind blowing stuff and you want to hear more. I will get lost down the rabbit hole of these things and follow them as they interest me. I think if you think of it not as any pursuit, but just pleasure of knowledge, then that's the best path that you can go down. I agree. That's interesting. We were talking about Sam Harris's podcast that he did with Ben Shapiro and Eric Weinstein. Did you ever follow up on Weinstein stuff? No, not since ... Have you ever listened to Shapiro's stuff? Yes, previously before the ... I listened to ... I hadn't. I heard one episode with him and this other guy at the Reuben Report. I didn't find it interesting. I didn't actually ... I found Ben Shapiro more (8/43)
interesting when he was contrasted to Sam Harris because of my views on Sam Harris's ... my opinion on materialism that I'm non-materialist and my thinking around philosophy, whereas Sam Harris is and I thought Shapiro made some points that I would have made. I thought that was interesting. Eric Weinstein really impressed me. I think he impressed you too. We were talking about this. I looked into some of his stuff. I started listening to him and he's a partner with Peter Thiel, which I didn't know. It surprised me in a sense because of just the vast array of his intelligence. Yes, there's so much stuff. There's a ton of stuff and you have to really filter. Do you feel like your approach to that is similar to your clients? Is that something that they do? Yes, I think we're all pretty ruthless with our time. We are really ... Just as an example, I know a lot of people like Shark Tank. I just looked at that a little more critically and said, I love new business ideas. That gets my brain (9/43)
going in a way that I enjoy. Then as you break it down, you've got the four judges propping themselves up or you've got false choices that are made or forced negotiations that are created. If you enjoy that sort of human drama, then that's all fine. For me, I said, all right, in an hour program, I'm getting 10 minutes of the good stuff. I'm trying very hard at one of the things in the Tim Ferriss book. I forget who initially said this, but unless it's a full body hell yeah, then you should pass. That's the way when you think about your time and whether you want to read a book or whether you want to see a show, investing time in a show, all these things, ideally you really want to filter through a lot because it's your free time. I think it's so interesting how popular Tim Ferriss has gotten. I got another buddy, Dan. He runs his own CrossFit. It's called North Tribe, I think, or North. It's in the North Fork. He's a great guy and he loves Tim Ferriss. He's very much like this. He's (10/43)
always thinking about how do I get better? How do I improve? I think it's really interesting. On that point, let me ask you something. You've got three kids, right? Three kids. Three kids. Age group? 13, 10, and seven. What are the things that I think about, and I think I mentioned this in my interview with Heather Berlin, I think I did with her, but regardless, it has to do with discipline. I've thought about this sort of theoretically. What do I think if I had children, what would be the single most important attribute that I would want to inculcate in them? I think that in today's world with the array of distractions, it would be discipline. I wonder to you how important that is, discipline in your own life, and then how important that is for your children and how you see that. It's a great question because part of these things you'd like to think of them is that they work for everyone, but really there's individuals who, here's a good example. I'm a morning person. I really believe (11/43)
in the morning is the beginning of routine. The morning is good for everybody if you can start your day earlier and do good things earlier. But if you run across someone who just says, I'm a night person and I don't like the morning, then there's only so much you think your good advice can do for that person. So if similar interactions with my kids at varying ages for various things, but what I like to do is sort of explain on the higher level theoretically what discipline provides and say things like the more things we make routine, the more we can accomplish and talk about it in that sense so they understand where we're coming from instead of, I think the word discipline for kids can be, sound like a negative when it really can be a positive. You need discipline. You know what that's from, right? It's a horrible impression. That's kindergarten cop. I couldn't do it. You don't have a tumor. Oh man, he was amazing. God bless him. God bless him. He was so amazing. Did you hear the Tim (12/43)
Ferriss episode where he interviewed Arnold Schwarzenegger? I didn't, but I will say I watched Terminator 2 and you and I both share a love of AI in the future and Skynet and what's going to happen there was pretty prescient early on. Yeah. I'm a cybernetic organism. I love it. Skynet became operational. Oh man, he was amazing. He was amazing. Listen, he was amazing. You got to hear the Tim Ferriss episode, dude. You want to talk about, let me tell you something. Arnold Schwarzenegger is a business, brilliant business mind. He was a millionaire before he- Real estate, right? Yeah. Or he goes back to real estate. Well, he was, so do you know the story? It's really great. In the 70s, he said, he's like, buck then, everything was like, everyone was into European. Right? Everything was like, so they, Kim and Franco, the Italian bodybuilder guy, the short guy, they created this brick and construction company, whatever. That year they created it, there was a huge earthquake in California at (13/43)
some point in the 70s. All these houses lost their time. They were right there to do all the work. He had this whole thing and he told Tim, you got to hear it. It was really funny. He was talking to Tim Ferriss and he's telling him what the strategy was, right? You're going to get this because you're a sales guy and you know exactly about all this stuff. You've talked to me about answers that you get and people tell you know. You have a whole system. Schwarzenegger, he said that the guy would tell Schwarzenegger how much he was willing to pay. Schwarzenegger would go back until Franco and Franco would start yelling and screaming and the guy would be like an Italian and then the guy would get really scared and he'd go, hold on, let me go back and soften the meat. I'll soften the meat. He said, you go back and convince Franco and there's this whole thing. I wish I remembered. Good cop, bad cop. Yeah, really funny man. But anyway, I always thought that Schwarzenegger, for all his (14/43)
failings, moral failings and everything else is a really fascinating, interesting guy who, and you've seen Pumping Iron, I mean for me like he really is like the manifestation of someone who wills success. Who like, you know. You can see why Tim Ferriss would be attracted to him. 100%. And you know one other comment about how you ingest this stuff from Tim Ferriss, you know one thing about his book that I think a lot of people find attractive is you don't really have to go chapter by chapter if something does, and he says right at the beginning, if something doesn't stick move on and I think that's a recipe for ingesting information in general right now. And I've all said that too in the podcast you sent me. Yeah, yeah. So don't, you know, don't feel like you have to read whole articles, don't feel like you have to read whole books, especially ones that are now being designed in a way where you can snipe what you want out of it and not have to take time on things that you don't want. (15/43)
What's that app you use that you told me about? Yeah, Blinkist. So that is a perfect example of something that I love where, so Blinkist is an app that takes nonfiction books and truncates them down to, you know, 10 to 15 sort of key points and then some further drilling down on those key points. And look, if it's in replacement of you reading Walter Isaacson's Einstein book, then that could be a bad thing. But for me, I wanted to read it and knew I was never going to read it. Like James Glakes, The Information. I read dinner. I read it. Yeah. You read through it. I read it the next day. You recommended a book at dinner and in two days, you know, I feel like I got, you know, maybe it's not 100%, but that 75% is good enough for me for the core concepts for the book. I got another question for you. And actually, I didn't structure it this way when I wrote it down, but I thought about it this way now as I'm looking at it. And it's basically about trust, about how important trust is, (16/43)
right? You know, specifically in your line of work, I mean, but I think it's a life principle because I remember Portcio told me about how you guys met. Now, you were, if I'm not mistaken, they were, you were pitching them. Why don't you tell me? Because I hear, yeah. So he was with MDC. He was with MDC and he was the person who was making the hiring decision. So David Portcio also for the audience, I've mentioned David once before, but he is now a partner with Hidden Forces and he's helping me build the company to kind of, you know, scale it out beyond just the podcast. So go ahead. So he was introduced to someone else at CB who's a great broker or a great guy, but not really a contemporaries of David. So they didn't connect in a way that gave David the comfort that he needed to say, I'm comfortable making this decision. And you know, as you said, really all of these things are ultimately about trust. You can't convince someone of anything. You can't sell someone anything. You can't (17/43)
do anything with anybody until they trust you because they won't believe anything that you're going to say if they don't trust you. So you have to start there. Do you think that people can learn to be trustworthy or are you born that way? And you just have to tap into it, maybe let go. I mean, it's interesting because I've never actually had this conversation because I'm thinking there was a point in my life where I let go of enough fear that I could be that way. And not be concerned with the ramifications being bad as long as you were being truthful. Yeah. In other words, that my deceit or my deceitfulness, I think was a function of my insecurity. And so when I kind of got into a place where I felt just safer, I wasn't worried so much. And that kind of also speaks to this other thing that I think you and I talked about before, which has to do with collaboration. And there are many people who operate in this sort of fear based mode. So they hoard everything. They hoard their ideas. (18/43)
They hoard whatever it is. Instead of just being open, just spreading it and it comes back to you because you're not afraid to share it. Yeah. That's right. Well, I would start by saying I'm a big believer in environmental theory. So if you're in a game, when I say game, let's say a profession, if you're a car salesman and someone is going lot to lot and you need to sell them on buying a car and there's no advantage for you, for them to get educated at your lot and then go to another lot, then everything that you're doing is going to be motivated towards making that sale in that moment. So the job is to do. And I always loved Charlie Munger. It's just incentives are everything. So it's hard to fight incentives. I feel fortunate, I've talked about this with my father a lot, that I'm in a profession in an industry where being good over the long term is a value for me. So I'm pushed in a way where there is no scenario where I do something that's against my client's best interest because (19/43)
at this point in my career, anything that I would do against my clients is against me and my reputation and the work that I do. So they know at this point that everything that I'm doing is with their long term best interest in mind. And that's really the most powerful thing because then when you do want to give a recommendation to them that is a little bit outside the box, they trust that it's coming from a safe place. Did you have anyone that you looked up to that wasn't, let's say, your father or a school teacher growing up? Like someone that was like a hero? Like we talk about, I'm not saying Schwarzenegger was a hero, but we talk about someone like that, someone that's outside of your immediate circle. That's a good question. I would say I didn't have anyone, certainly in any sort of a work capacity until I was at CBRE for a few years. I met a woman named Mary Ann Ty who I always say is the LeBron of real estate. I love that. It's just not fair. She's just more talented. Isn't she (20/43)
the head of the company? She's one of the heads of the tri-state region, but she's really an icon. And just someone, there's a quote by Supreme Court Justice Sonja, Saddamayor, about if you have your mentors, it's one thing to have mentors like Derek Jeter where you say, that guy really handles himself well and that's someone that I want to emulate. It is an entirely different thing than the specific goals that you are looking to accomplish. There's someone who you interact with on a day-to-day basis and get to see how they handle themselves in all the different situations ethically and business-wise, how they handle all of that and grow from that. Quite a privilege. Yeah, so I feel very fortunate and I love, I think a big part of the whole sort of Tim Ferris-Naval revolution is that you should always be learning. You should have tons of mentors. You should have tons of mentees. I'm 42. I feel like I have a lot on both sides and it's something that I don't think is age-specific. I'd (21/43)
like to think of myself as an 85-year-old trying to learn from a 20-year-old about what the new stuff is. How has that affected your hiring, the way that you hire people and also you talked about being on both sides, I assume you mean also being a mentor to someone else, right? Yeah. In fact, when was your first experience actually being a mentor to someone? What age did that come? I would say that right when I got to the second step, at the beginning of my career, it was a lot of really laborious type stuff, actually foot-walking buildings, going floor to floor in skyscrapers, writing down the names of the companies and getting the phone numbers and calling them up. It was pretty laborious at the beginning. Once I figured out how to do that and do it well, even from the second stage, I was mentoring people below me on some of the ... A lot of times you're the closest to it. If you've just accomplished something, you're the best person. I was the best person at the company to give the (22/43)
advice on what I had just done. You know, when you're in that position, right, and someone comes to you for advice, or is it sometimes also you want to give that advice, where do you think that comes from? How does that feel? Where does that come from? Well, a few things. Number one is I think part of it is who you are. Some people are shares and some people are takers. But I do think that in today's environment, just from a practical business sense in the Yuval Harari sort of theme, sharing is the key because of the increased transparency in business and the increased demands of clients to make sure that your service is absolutely a game all across the board. What that requires is more disciplines brought into the business. If someone, just as an example, if someone hires me to find them a data center in Connecticut, I have to bring in the Connecticut expert and I have to bring in the data center expert. So for everything that you want, whereas teams may have been three or four (23/43)
people, now I'll have a team that could have five or six people. It's just my industry, but I would imagine and I've seen in others that the teams are getting larger to ensure that the full offering is provided. So I still do see some people who are acting as loan agents and for whatever reason, maybe they're supremely talented, they have certain relationships to keep the business, but I'm finding it harder and harder for those people to compete in a world where other people are collaborating against them. I think the desire to mentor is one of those innate biological yearnings. I think if you're a man, it's a fathering instinct. If you're a woman, it's a mothering instinct. I think it's something that just comes inside. You care, you want to impart some knowledge, something you learned. You might have also some longing for immortality. You can get into complex sort of psychological things. Indeed. I mean, I know people that on a separate note, speaking about immortality and about (24/43)
death and death anxiety and all this stuff, people, a lot of people that work late into their lives maniacally, because I think on some level, they hope illogically, obviously, rationally that they'll be able to be too useful to die. There's a sense in which if I stop working, if my life is defined by work and I stop working, then what is my life? Which has always been my fear of working so much that you've got nothing else. You know what I mean? Yeah. Yeah. You want to fill out the rest of it. We probably both know people like that. We've met people like that. Yes. I always remember the 30 Rock when Alec Baldwin was on his deathbed. I haven't seen that. It was great. Tina Fey comes up to him and he basically says, I thought about it. My whole life, the only thing I was ever good at, just looking back, I should have worked more. Oh, man. That's really funny. All right. You mentioned technology there. I did mention that when I introduced you at the top of the show before you were here. (25/43)
I do want to feed that a little bit, because you and I have talked about it. It's this interesting idea that particularly, it's really social networks, like LinkedIn or Facebook or anything where you can amplify the power of your network so that your reputation is able to go much further. If you have a great reputation, if you're got like Tim Ferriss who has a very good reputation, it travels far and it's really empowering. Is that kind of what you're getting at? Is that ... Yeah. You think of when I first started in 1999, if you were going to a meeting and you present your services and then you leave, what did everybody ask for? They asked for three references. At best, they're going to have some follow-up phone calls with three people that you hand selected for them to call to have a 10-minute conversation maybe a little bit longer about whether you're the right person or not or your team. Now, even before you show up for the meeting, they know exactly who you are. They've read your (26/43)
LinkedIn profile. They've seen articles or quotes that you have. They Google who you found this interview. They found this interview. Listen to this interview. You're a smart guy. Interesting. Right. I like him already. There's just so much more information that is available. What that means is in the two categories, in terms of being a good actor and in terms of the value proposition, they both really need to be there in a way that they didn't previously because it's easier for the end user to figure it out. Let me ask you something else because I want to circle back a little bit this mentoring thing because you touched on hiring. This is interesting to me because until once I started to be in a position and this started my late 20s to hire anyone, it's been an interesting process of the self-discovery for me. It's something that no one ever taught me. I unfortunately didn't have anyone a mentor besides my father as a personal. Yeah, really my personal life. I didn't have anyone a (27/43)
business and that's a shame. I would have liked to, but regardless I didn't. Some things just I had to learn on my own. I'm curious about what your approach to hiring is or interviewing is. How do you do that? Well, I'd start by agreeing that it's really difficult. It's hard to find the right person and know how they're going to fit over the long term. To find them to begin with. Yeah, just to find them to begin with. Let's talk about that a second because this is really interesting. We're talking about technology. This is one of those things. I think it's analogous to dating apps now that I'm listening. It's like dating apps. You've got the same technology. You can't find a decent date or you're not going to find your future wife very easily by going on Tinder or on any of these other apps. In the same sort of way you've got LinkedIn, you've got all these other apps. It's not like you can just find the perfect employee just by going on there. I think it's really hard. It's really (28/43)
hard. You need people around you who have a sense of what you would want so they can do the initial filtering ideally. What I would say, the number one thing I would say, at least it's worked for me, is you may not exactly have the role that fits that person perfectly, but if you think that that person is a talented, motivated person, then you should bring them on board. That's what my partner and I have done recently where the people, what we thought that we wanted and what the people then presented to us wasn't an exact fit. We said we just believe these people are of real value and we'd like to bring them aboard. Do you have a top three characteristics that you need to have for someone? Certainly, number one that jumps out is self-motivated. Nobody's got the time to motivate someone, so if you're not self-motivated, I just ... And resourceful. That kind of goes together, right? You don't need to ask me for an explanation for everything. You can figure it out yourself. That's right. (29/43)
That's right. Otherwise, it's a nightmare because then you're doing more work than you did before you hired the person. The training anyone green is you really have to make sure that your return on investment is going to be good because teaching that the low-level stuff in any profession takes the most time and is the lowest return on value. That brings us back to trust, right, in collaboration, right? Because if you train someone, there are people that are worried about training someone, giving them all this great information, and then they leave the company. You should be able to let people be free to leave, but they should want to stay, right? It seems to me that the sort of millennial contracts that they are looking to sign are much shorter term and much more ... The dream is dead of staying at a company for your entire career and retiring from there. The offering from the companies need to align in some way with the employee's long-term goals. What I've always found is you can't (30/43)
fight against incentives. You just won't win that sort of a thing. What I say to the people that work with me is I want this to go as well as it possibly can, and I want this to be of value for you. If at any point you think that this isn't working for some reason, let's make sure our values are realigned. If at that point it just doesn't make sense, you want to do something different, I will never inhibit your growth. That's happened a lot where there have been people that have left the firm. I've seen people make huge mistakes, not just in my firm, at other firms, that when someone's leaving that was of value to them, they lash out and they're upset because it hurts them selfishly. It hurts them when their right-hand person leaves or when someone of value to them leaves. That's, hey, it's not nice and it's also not smart because that person goes on to another position of prominence within the industry. They remember, hey, who was my friend, not when it was just in their self- (31/43)
interest, who was my actual friend? That brings up our friend Portzio, because he is a perfect example of someone that understands, in my view, the idea that just because someone isn't directly working with you, that they can't be part of your larger modernization engine. He has lots of people that he will do favors for or do things for me. David and I met more than a year before I started Hidden Forces. We've been in touch ever since and he was very gracious to introduce me to lots of people during that process. He was the perfect person for me to bring on as a partner in this company. That brings us back to this point of this disintermediated world, technology makes that very possible. You have all these people in your extended network and you can think of ... and that's very entrepreneurial, right? You can say, all right, I know David, I know Ben, I know this guy, I know that guy, I know this girl, I know that. I know all these people and I can make this deal happen in my head with (32/43)
all these people. I know what I need or this person over there who needs this, I know this guy, I'll bring him in touch with that guy and I'll make that work. That's a huge skill. Connecting people is hugely valuable. You have that as well, I'm sure. Your position and being an intermediary for so many very successful people makes you probably an extra fluid conduit for that. Yes, especially in a job flow. I'll know the companies that are hiring, that are firing, I'll know the good people that are out there for whatever reason. There's nothing more fun, frankly, for me than to connect someone that I think is of value and care about to a company that I think would find them of value. All I do is make the connection and they take it from there. They work, you think about the investment of my time, how long did that take me to do and that could change someone else's life and it's just amazing karma. You just feel great about it. I agree with self-motivation. I think another one for me is (33/43)
integrity. It's a pretty simple one. Another one for me, which I don't know that this applies for everyone or it needs to apply, but given the work that I do, I need to feel like the person I hire and this is very rare and so this is why it's very difficult for me to hire, needs to be very passionate about the vision that I'm sharing because it's not about me or I don't want it to be about me or about her or about him. I want it to be about this vision and this collective future that I'm moving. That also speaks to the responsibility I have as a leader to be able to have a compelling vision. They say money is a short-term motivator. If you're really trying to do great work, have great people doing great work, you have to motivate them in a way beyond money. Now, you have to start with the money just to get to base, but after that, if you really want them up at night thinking about how to make the team project better, then you really need someone who believes in the long-term vision and (34/43)
you're right, it's up to the leaders to provide that. For all the shit that Steve Jobs got after Walter Isaacson's book came out and everything at the end of the day, the one thing that Steve Jobs did for sure was motivate people with a great vision and it was backed by his own passion for that vision. That's the thing that I always respected about Steve Jobs among many other things is that in an age where there are so many people, unfortunately, who are concerned with themselves and so much of their work and whatever they do, in particular in media, and that's one of the reasons I created this show because I think so much of media is self-indulgent, is that Steve built this remarkable vision company and his focus always was on Apple. You could hear in the way he talked about it. It was palpable in everything that he was doing. That's right. Let me ask you this before we go, Ben. I want to have some fun questions for you. We talked about movies. I know you're a Matrix fan. We talked (35/43)
about that. What are your top movies? How important? There's movies, there's music, there's video games, there are books. I don't know which one is your favorite category and then from there, what are your top things? It's changed over time and even the importance of it all. I remember very clearly that I always thought that movies and music were very important to me. I used to, when CDs were what were bought, I used to take the boxes in my entire room at home with all the CD boxes on the walls. I thought it was the coolest thing at the time. I remember meeting my wife in college and she had six CDs to her collection. I remember reprogramming myself and saying, I guess that isn't one of the most important things to me. You don't need everything from all people or from all different types of medium. What I would say is I'm less movie-ish now because of, I think the best content is on series. I'm a wire fanatic, David Simon. I love you. Just breaking bad. I find a lot of commonality with (36/43)
my friends and clients in enjoying those types of shows. Everyone really has to recommend a movie to me pretty hard. I think the filter for all this is you find the 10 or so people in your life that you just trudge their judgment of your own likes. They have to know you well enough to know what you would like and what you wouldn't to recommend it to you. Otherwise, it's too hard. You need these human filters on everything to figure out what is worth spending your time on. Have you seen Gattica? I'm a massive Gattica fan. I was going to say. I was going to say. I'd also say all these movies from what I would consider my childhood or a little bit older, rewatching those. I just rewatched Shawshank with all my kids. Some might say a seven-year-old, a little young to watch the sodomy scene, but we fast forwarded that part and the rest of it was great. That was a scene. We would just watch Memento last night. I just find for kids, I was thinking about this last night, for kids, anytime (37/43)
you're sort of giving them a theory about another way of life, it is all theoretical to them. Because they're not in it. So you could say, hey, there's all these kids on this continent that have no food. Aren't we so lucky that we have food? And they can't really, just from those few sentences, they can't really envision that in an impactful way. And I was thinking about it last night as we were watching a movie. The movie is actually the best way. If you can get them a three-hour, two-and-a-half-hour block of being in a different world and wholly transported to a different place, I find that after those things are when we have the best conversations about different things. So when you watch the Matrix with your kids, right? Yeah. So I'm very curious about this. First of all, did you watch it with all three of them together? No, because I love it so much. I watched it with the eldest years ago. So what was that like for him? And what was that like for you watching his reaction? Yeah, (38/43)
so I love it. I will often pause it. So he said, what do I love about the Matrix? They have all these macro questions of life, ignorance versus bliss. Does Neo take the red pill or the blue pill? And so that kind of stuff, I will excitedly pause it and say, look at this, he's got one of life's big decisions here. He can either decide to not know what's going on and live a perfectly happy life, or he can learn the truth, but it really sucks and the life is going to suck. And there's just something like that, or does it say, Dad, stop pausing the movie? It's a mix of both. I think I really try hard to try to make this stuff as entertaining as I can for the kids. I hit it right on and I'd say that's sort of when I'm at my maximum happiness level, is I feel like I'm exposing my kids to new concepts. But there are definitely times when they're like, all right, Dad. And even by the way, Memento last night was a little slow relative to, they loved the Matrix, they loved Shawshank. That's a (39/43)
mind trip movie. That's a mind trip movie. I saw that movie for the first time when I was living and working in Italy. Sorry, it was not when I was working, it's when I was living as a student before I was working in Italy. I was a junior and I was pretty high watching it. And so I was already not in the best sort of memory state. And I remember just being really freaked out by it a little bit. And it was because it was such a good movie. And freaky, this idea that it rings true in many ways, obviously. Yeah, it was pretty powerful. Well it's become more, the whole idea that the robots are going to take over and use humans as living batteries. Yeah, that's a theme that a lot of people have picked up on. Yeah, well you know, we were talking about the episode that I did here where I mentioned Bill Joy, his Wired article, and Ted Kaczynski's Industrial Society and his future. Unbelievable the Ted Kaczynski that letter, how early on he predicted these things. Unbelievable. Yeah, and what (40/43)
he did, right? The fact that he actually tried to blow up the system. I mean, I think that's really interesting. That's what I think makes him an interesting interview subject, if I could have him on. And assuming that I don't know if and how deranged he is. I mean, I don't know ultimately if he made that decision consciously or if he made it from a different place. Because if someone made that decision consciously, I think it's very interesting. We see all these movies, right? What is the Force Awakens and all those other stuff? It's talking about the rebellion, right? The forefathers of the United States were traitors, were rebels, right? The only reason that we call the loyalists, that they were the Benedict Arnold's or whatever, is because we look at it from the framework of Americans today. But they were rebellion against the crown. What they were doing was a revolutionary act. Martin Luther and against the Catholic Church, all these. And this is a remarkable thing. Jesus Christ (41/43)
of Nazareth. Same thing. Like you're going up against the entire establishment and almost every single person that does that is going to be wiped off the map. It's a really scary thing to do. Who does that, right? And obviously I'm not comparing the Unibob and bombing a few people to Jesus of Nazareth. My point simply being that to take a step like that is assuming that you do it consciously, I think for guys like you and me, it's hard to fully appreciate that. Yeah, it takes a special personality. You're giving up everything, right? Right. Like you're giving everything else up. Right. You're saying none of that stuff matters anymore. What matters is this one act. And Kazinsky was a Harvard professor. Harvard, right? He was a Harvard graduate and he was a professor at Berkeley. Right. And he had a PhD in mathematics from Michigan. So he was giving up a lot to pursue this. It seemed like he had a lot. It's interesting. Yeah, also he had moved, like I said, he had moved up to the (42/43)
mountains of Wyoming or Colorado. I can't remember where. And it's also interesting that even up there, and there's a whole history to this, there was apparently some kind of construction happening near his cabin. And he realized basically there was no way that he could get away from all of it. They could have been you, Ben. You could have been doing construction, you had a high rise. Listen, Ben, it was great having you on. I appreciate you coming on. Thanks so much, Brad. I had a great time talking with you. Thank you. Yeah, all right. And that was my episode with Ben Friedland. I want to thank Ben for being on my program. Today's episode was produced by me and edited by Stylianos Nicolaos. For more episodes, you can check out our website at hiddenforcespod.com. And the conversation through Facebook, Twitter, and Instagram at hiddenforcespod or send me an email at dkat hiddenforcespod.com. Thanks for listening. We'll see you next week. (43/43)
This is the full transcription of podcast 'Hidden Forces'.
Navigating the Twin Crises of the 2020s George Friedman #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens. The challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is George Friedman, the founder and chairman of forecasting firm Geopolitical Futures, the founder of Stratford, a geopolitical intelligence and consulting firm, and the best-selling author of books such as The Next 100 Years and The Storm Before the Calm, America's Discord, The Coming Crisis of the 2020s and The Triumph Beyond. In the first hour, George and I discuss what he describes as the institutional and socio-economic cycles that drive historical events. We explore several notable examples of such cycle turnings in history, including Andrew Jackson's abolishment of the second bank of the United States, which facilitated the financing of westward expansion, the (1/44)
presidency of Rutherford B. Hayes and the Long Depression, the growth in American consumption that arrived on the back of FDR's reforms in the 1930s, and the neoliberal era sparked by the Reagan Revolution. In the second hour, George and I apply this framework to the era we are living in today, which according to George is the first time in American history that both the 80-year institutional cycle and the 50-year socio-economic cycle are occurring concurrently. We discuss how and why so-called woke ideology and the sclerotic and ineffective bureaucracy are symptoms of the end of the institutional cycle, and why the economic policies of this new era will lead to more capital investment and a revitalization of the American economy. Lastly, George provides us with a roadmap for geopolitical events in the 21st century that includes reconciliation with Putin's Russia, a new paradigm of peace in the Middle East, and a long and challenging period of economic weakness in China that will (2/44)
consume the energies of the Chinese Communist Party and challenge the PRC's ability to assert itself on the global stage for at least the next several decades. If you want access to both parts of today's 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.com. All of our content tiers give you access to our premium feed, which you can use to listen to the rest of today's episode 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&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 have questions, feel free to send an email to infoathiddenforces.io and I, or someone from our team, will get right (3/44)
back to you. And with that, please enjoy this thoughtful and perceptive conversation with my guest, George Friedman. George Friedman, welcome to Hidden Forces. Thank you for having me. You know, George, I'm actually surprised that this is your first appearance on the show. Because of, I think, how influential you are, I've had so many of the analysts that work for you at Stratford on the podcast. So, you know, let's... I want to give people a sense of who you are, your background. I'm also interested in understanding how you grew up, what informs your sort of framework and approach to thinking through problems before we get into your framework and applying that framework to the rest of the world. But what's your story? Well, I was born in Hungary in 1949 to give way at my age. Two months later, we had to escape from Hungary. My parents had been... My father had been in... Fighting in Russia. Then they discovered he was Jewish. So, they put him in a work camp in Russia. Then took him to (4/44)
Mauthausen. My mother went to Lichtenberg. We came back to Hungary. I wasn't born yet. And they discovered that the communists were going to arrest him. So, my family's life was geopolitical. It was fleeing. We fled to... Over the Danube, I was about two months old. They peddled over. Got to Vienna. In Vienna, they got to an American displaced refugee camp. They fell in love with America. The first thing they did was gave us food, a dinner. They had been having a dinner at a long time. Then doctors examined us, gave us whatever we needed, led us to a room where they had beds for everyone. And we had to stay there for a year or so. And then they brought us over. And my father remained there for two years. Further, it turned out later that he was working for US counterintelligence on Russian infiltrations of Austria. My father was held back for two years. We got to come over without him. We found out that later, I had access to some files. And he was working at a hotline, headquarters of (5/44)
US counterintelligence. And he told me later the story that they wanted to know who was escaping from Hungary, who was an agent, and who was escaping from the country that was really escaping. And he pointed out to them that if he had no family with him, he was an agent. If the family was with him, he was escaping. Very simple. And that my father taught me, be stupid. All the Americans are very smart. That's their problem. If you're stupid, you can obviously see the thing. Can you elaborate on that exactly? What do you mean by be stupid? Don't be so sophisticated. Think about the people as they are. Would a refugee come alone? Most of them have families. Would they bring their families if there were agents? No. If they come across as alone, they probably left their families behind and they're in danger. If they come with their families, it's a real escape. So it was a story told and I think it was true. The problem with the Americans were they were so complex in their thinking, they (6/44)
didn't trust the obvious. So the simple human dimension was subsumed. Analytics systems were created. So that was what he said, always be stupid. Always avoid your education. Avoid old brilliant talk. See the obvious. He's alone. He's a spy. He's with his family. He's a refugee. Very simple. I feel like there's an important lesson there for listeners to really meditate on as we continue this conversation because it speaks to how you approach forecasting. Okay, so you left Europe, you said, when you were three years old. What city did you first arrive in? Bronx. In New York. And that's where you grew up? I grew up until I was in junior high school. In junior high school, we made famous journey to Queens and Long Island. But my elementary school was in the Bronx and I learned stickball and how to run away from people. Run away from people. So you moved to Queens, where in Queens and where in Long Island did you go? Well, in Queens, it was interesting because I grew up five miles or so (7/44)
from the president. I never met him. I didn't know him. It was the same neighborhood. It was a working class neighborhood. He didn't live in a working class neighborhood. He didn't make it states. I lived in Springfield Gardens, which was more working class. And I recognized Trump because he carries himself with the same arrogant confidence that we all did. It was like the Bronx transferred to Queens and you didn't look weak and you didn't look scared and you were tough. Even if you couldn't win the fight, you look that way. What was it about growing up in the inner city, growing up in those boroughs that created that kind of culture in your view? We were all poor. We were all lost. This was an immigration area. There was Italians. There were Irish. There were everyone. Clodded together in groups, the Jews, the Irish, the Italians, the Puerto Ricans, we fought. We were states. I mean, nation states built in. Okay, the gangs were that way. And in that way, we understood something. There (8/44)
was little mercy in the world. What was said was not what was meant. We all kept our real fears inside of us and presented a face to the world that was crafted to be appropriate to the world. So I learned from that that what people are and what they appear to be, what is crafted, the other is real. They interplay. You can't predict people on that basis. I learned to judge the politicians on that basis. Politicians are craftsmen. They craft the persona their nation requires of them. Within them, you can judge what they are. So when we look at the president, I mean, he appears to be strange, except for the fact that the majority of the country voted for him. So it wasn't strange to them. There was strange to some people. So when I went to Cornell to go to school, I was a very strange person to these people. I had to re-craft my personality. So I look at politics from the point of view of politicians are brilliant craftsmen of themselves. They are designed to understand. They have a (9/44)
profound understanding of the nation where there wouldn't be leaders. And when you look at it, if you look at the leader, you're missing the point. The leader is an artifice. He's responding to the country. Look at the country. Not the president. You'll understand what is happening. But if you personalize it, then it's simply win by the president. And presidents don't survive and win. No other leaders, but dictators either. They have to respond or they can't rule. When you went to Cornell, when you went to college, did you already know what you wanted to study? Did you already know what you were interested in? Well, as an undergraduate at City College in New York, I studied political science. When I went to college, I studied political philosophy. Political philosophy led me to Marxism. And I was not a Marxist, but wrote a book on my dissertation on Herbert Marcuse and how sexuality intersected with politics. It was a very pleasant book. It was insane. I went to Cornell and I met (10/44)
America in a different way than I met at City College. I met students who were rising, rising out of the slums. Those who came from the upper classes, I saw all the mixtures. Okay, I saw the persona they presented. I learned a great deal in political philosophy. Then I served to determine the army. Then I turned to the intelligence world, but stayed out of the intelligence world as much as possible. And through my experience, I finally realized I became a professor, a tenured professor. I say that with glory, it's a major achievement. But I left my universities and went to three universities. I was developing theories that were unacceptable. In other words, the universities are ideological in nature. And they can have conservative ideologies. In the past, these ideologies doesn't matter. You conform. I found it very difficult to conform because I came from a very different life than most of them. But also, I was led by my education to think in very different ways. So as I was (11/44)
developing these things, they had no place there. I then had a, at the Louisiana State University, had my own center. Running a center at a university is a bureaucratic nightmare of battling for turf and everything else. And I realized I had no time to think. I couldn't write books or anything like that. So I left the university. And I left the university and I had a very strange idea. I could do my work intellectually more effectively in the private sector, selling what I know, the teaching. Besides my students didn't care. At 19, you don't really care about the prepundities of Hegel. So we have a strange understanding of education. But I started a company that did this. The only reason I did that is I knew nothing about business. So I didn't have an idea what to do. But I had a lot of people who knew me in Washington. So I started by sending out articles daily to these people, and then to other people. Then my wife had a strange idea. Why don't we charge? Why don't we make them pay (12/44)
for it? And to my shock, they did. And it spread from that point onward. My life was a series from the beginning of crises and dangers and everything else. And it made me conscious of the obvious, which is a very difficult thing for a professor to do, to be conscious of what's there right in front of you. So it did what my father said. I became stupid. Okay, so I'm very excited to get into that because it's very important for me to understand your framework and the same for the audience. Just a couple more questions on your background. So that company was Stratford. That company was Stratford. And what year was that that you founded it? 1996. 1996, okay. So as I said, I've had many Stratford alumni on the podcast. Peter Zeihan has been on the podcast. Cameron Bihari, who introduced us, has been a regular guest on the podcast. Jacob Shapiro, Marco Pappich. I could go on and on listing people who have gone on to have their own successful careers as geopolitical analysts after having (13/44)
learned and studied under you. So it's been a very influential company. It's kind of like the Fairchild Semiconductor, or PayPal of the geopolitical space. And in that sense, it's very rare to find a company that has produced so many people who themselves have gone on to create their own companies and have their own impact on a particular industry or field. In this case, the field is national security and intelligence. So let's... I'm not even going to bother asking you, but one of the questions I had in mind to ask you was sort of like, what school of thought would you say most aligns with yours? Because you do feel like a realist, but again, it's obvious when reading your work that you don't adhere to a particular rigid framework. And I've used the word framework before, but I wouldn't quite describe it as a framework. You have a very... What feels like a very bottoms-up analysis. And in some sense, it's almost like an irrigation path. It's like you focus much more on constraints and (14/44)
what people have to do and what they need to do in the case of leaders, as opposed to kind of, does this fit a template that I have in my head about how the world works and if it doesn't, I can't see it. Walk me through the way you view the world. How do you think through problems? You gave the example of look at what's obvious. How do you know what's obvious? How do you know what to focus on? What is signal and what is noise in international affairs and politics? We begin with three principles, imperatives. What do you have to do as an individual, as a country? Okay. What can you do? Very different from what you must do, possibly. Who doesn't want you to do it? Or who wants you to do something else? If you look at a country, as a machine, a corporation, whatever you want, you look at what it consists of. What is its capabilities? What is urge? What is its need? You don't look at the leader. The leader misleads you. He is there. He is the summary of the nation, but not necessarily (15/44)
pointing it. For example, we knew that Russia had to invade Ukraine. Why? Because of Northern border Ukraine was 300 miles from Moscow. The Russians had had invasions from Napoleon and Hitler that took them to Moscow. Moscow was their heart. They were 300 miles away by Route 3 and they were terrified. They were always afraid, but when Ukraine became independent, the border was so close, they were going to try to take it back. It was their buffer zone. Ukraine became the buffer zone between our Europe, if you will, Western Europe, their Europe. Who owned it had the offensive capability. From the Russian point of view, there was an imperative to take Ukraine. They didn't have the capability, but they suddenly felt they had the capability to do it. That was triggered by an American event, the Maidan uprising, the uprising in Ukraine that frightened the Russians terribly. They saw it. It was very much organized, involved the Americans. Go to the sound system that they suddenly had. Where (16/44)
did they get a sound system like that? I went to look at it. It was a good start sound system for that audience. I also look at old uprisings as asking one question, where are the bathrooms? You can do without food for two days, but you can't go without a bathroom. If you're going to keep people in a square for three days, you have to have mobiles, toilets. That's the one thing you have to have. They were there. I know us and I know we get ready for things. The Russians know us. They know they get ready for things. They read Maidan as us trying to take control of Ukraine to be right on the Russian border. Now, if they had taken Ukraine, they'd be right on the border with NATO. We couldn't tolerate that. Ukraine became this critical piece of real estate, really minor in many ways. We convinced during the Maidan uprising the Russians that we had intentions. We had intentions of making Ukrainian not neutral, but part of the West that would join NATO, which was always the major question (17/44)
for the Russians. The Russian imperative was to keep Ukraine at least neutral, and after Maidan, they said, that wasn't going to happen. They saw what we did in the Balkans, in their intervention there, and they read the Americans, rightly wrongly, as potentially aggressive. Potential I learned in the Bronx was probable, and probable was I was certain. So you didn't have the luxury of saying, oh, they probably wouldn't. So the Russians took a look at the board and said, we've got to take Ukraine. I see nations as rational. They are like good businessmen and everything, and the leaders are good businessmen, if nothing else. They're rational people. They are looking at it and looking at their country and looking at their responsibilities. And they watch other countries and their imperatives. We had the imperatives to keep them out of Ukraine. Do not become another Russian front. Then the Cold War would be back. They had the imperatives, keep them away from 300 miles from Moscow. We can't (18/44)
defend Moscow with 300 miles. So you had two different imperatives. The American imperative on Ukraine of making sure the Russians had not occupied, NATO's imperative. The Russian imperative do not let NATO to the border of Russia. And so it was very predictable. I didn't think NATO would be able politically to advance into Ukraine. I think Russia thought this was the opportunity to move themselves into that position. But they didn't have the capability. The Russian army failed. It moved into Ukraine. It was a full invasion. Now they're saying, well, we only want to capture it. Nonsense. There were three columns coming in. One column was aimed at Kiev, and one column down the center. They were coming up from the south. They were coming from the east. They were coming from every direction. They were going to take Ukraine. If you remember the early pictures of the invasion, there was a line of tanks coming down the mountain. They were stalled. Their logistics system failed. They couldn't (19/44)
get oil, fuel to the tanks. I then knew this is not going to work, folks. So the central thrust failed, although there was fighting in Kiev and stuff, because they just couldn't support their forces. So I realized logistics were not prepared for war. They were not ready for this. And so it became obvious that they could do the area closest to them with the logistics that they had. They couldn't take all of Ukraine. They couldn't retreat for political reasons. They couldn't advance for military reasons. This is what would be the long war. It would end in a draw. You can't solve it. Now we're at the draw point. But I looked at these countries and what they were afraid of. What they needed, what they wanted. I looked at them as if they were people. And people you can predict by what they crave and what they want. And you must have money for going to college for your child and all these things. You can predict their lives in some sense. Not mysteries. So with states. So how do you (20/44)
differentiate between the push and pull of national interest and the push and pull of the political needs or expediency of the leader? A political leader must live with the nation. The fear of Moscow falling was deep in the heart of every Russian. This was not an alien thought that it came to the president of Russia. He was responding to a deep fear built into the Russian people by history. Presidents who do not understand the national mood in any country can't be leaders. The nature of leadership is not crafting a vision like a Marxist always failed to achieve it. It is understanding that the nation has divided as it is underlying necessities. And those who fulfill those necessities must understand them, must respond to them. Leaders are prisoners of the times. So when we talk about Donald Trump, we always have to remember that this crazy man appealed to the majority of the country. Did he craft himself to be that man? Or was he bad man? He was bad man in Asia. It doesn't matter. But (21/44)
he caught what was happening in the country. Putin understood what was happening in his country. Otherwise you have coup d'etats, assassinations, impeachments and so on. So don't think of the leader as separate from the nation. He is the representative of the nation, even when a dictator. Hitler was Germany at that time. He didn't impose himself on an unwilling people. The leaders who succeed are leaders who, well, they can intimidate people. That's not very efficient because you have to trust your police and everything else. So how do we think about that in the context of decision making? Let's just take the example of US Russia. How do we determine whether or not NATO enlargement was in the national interest? Or whether it was a mistake made in the pursuit of the national interest? How do we do the same thing for Russia and its invasion of Ukraine? Was the invasion of Ukraine in the national interest of Russia? Or was it a mistake in the pursuit of national interest? It was a (22/44)
national interest. It was not a national capability. So you have to look at two things. All nations cannot achieve their interests. The leader's job is to align interest with capability with opposition. What the leader does, if he's a good leader, that he understands the imperatives of the nation, I don't want another attack on Moscow. Design the capability necessary to prevent that. We created NATO at a time when the Soviet army had won World War II. We played a great role, but it was a marginal role, in a sense, for Normandy and all the great things we did. It was the Russian army that broke the Verracht. Now, the Russian army was still fully standing as mortar. It had conquered Eastern Europe, we'd conquered Western Europe, if you will. We feared they would come further if they reached the French coast, if you will. They could now challenge us as an Atlantic. The Atlantic is our barrier. The United States cannot be invaded by land, unless Canada really gets mad at us. The sea is our (23/44)
barrier, is our wall. We went to war in World War I because the U-boats were beginning to operate, sank the Lusitania. We feared the loss of the Atlantic, the British fleet couldn't hold them. In World War II, we went into the same thing. We went into Britain giving them weapons, lendies, to try to keep them out of the Atlantic. So, for us, the oceans are the barriers, but the Europeans land. Now, we did not want the Russians any more than Germans, sitting in Scherberg, with fleet. We didn't want their boats. The Cold War had much more to do with the Atlantic than they thought. So, for example, if the war broke out, NATO's plan, and I had been in shape, Supreme Headquarters and I, I was here for a while, our entire problem was, how do we make sure we can get our ships across the Atlantic to supply? The Russians had created a fleet of submarines to come down and block us. We created anti-submarine warfare, so there was a battle quietly going on, the competition to control the Atlantic. (24/44)
If Europe falls into one country's hands, the United States faces the only threat, same with the Pacific. We had to defend both seas. So, our war was a sea. After that, we were in a unique position that we hadn't been before, we controlled the Pacific. The Atlantic was unchallenged and we wanted to keep it that way. So, we drew a line in Europe between us and the Russians, we didn't want to fight. We created something called NATO. We created NATO because Europe was shattered. They couldn't defend themselves. NATO had an American commander, Sikur, Supreme Allied Commander Europe, and he was the one who ran NATO. But when I was in shape, we knew what the Belgian Air Force would do, and at what time, at what place, on day three of a Russian invasion, we could count on it. Once the Soviet Union fell, the Cold War did not end. That was not the end of the Cold War. A new Russian Tsar emerged. These are old Tsars. They called themselves Chairman or whatever. A new Tsar came in, and this new (25/44)
Tsar tried to make an accommodation in the United States. That broke down the Balkans. Remember that we went into the Balkans to stop the killing and everything else. They thought they were taking advantage of their situation on their southeastern flank. Something happened when we tried to get the head of Yugoslavia to the court of the United Nations. We asked the Russians, they would do it. Would the Russians, Chernomirdian, who is Prime Minister, talk to him and say, look, it's over? And he did. Then something happened strategically, but it was a tiny thing. Kosovo has an airport in Pristina. We took the airport at Kosovo. And the Russians thought they would be allied with us and allowed to use that airport, patrol it with us because of what we had done in the end of the war. We made a move there to force the Russians back, refusing to allow them into the Balkans. That's when Putin became President. Putin became President saying, the Americans are a nightmare. They're going to be (26/44)
moving on us. They did this in the Balkans. They had no interest in the Balkans. What do they care about Kosovo? They're not in Kosovo for moral reasons. We may have been. I still don't know why Clinton is doing that. But the Russians read it, had to read it, had to read the worst case scenario. They're going to be building up an line to our west. And here in the southwestern portion, they built it. And that was the time that Putin emerged. And he had a very different view than Gorbachev had. Gorbachev had a view of Antonto with the west. Putin had a view that this was the preface to war with him. Or that it was going to come up to it, that we just moved the line east. And he then had a long-term strategy of blocking the Americans. So when you look at it, we saw ourselves in a position of consolidating Eastern Europe, Western, former Eastern Europe. He saw that consolidation as a threat. NATO, that part, fell apart. It no longer resisted. The European countries were direct. The (27/44)
European countries were strong. But they very much enjoyed not having to pay for the defense. Or they paid a little, but they didn't take risks. They weren't involved in these things, only marginally. At that point, it became obvious that the rationality of NATO had ceased to exist. There was no point to it. The Europeans chose not to be able to produce the defense capability they could obviously produce, because there was no such thing as Europe. Europe is a continent with a lot of different countries that have hundreds of years of history of loathing of each other, fear of each other, different interests, their competitors. They were brought together by poverty. They had that in common and forged by the Americans. And by the time we reached the Ukrainian war, the Balkans, there was no NATO. It was not like we knew what the Belgians were going to do in the morning and the third day with the Air Force. All the plans were on paper. They were not real. So we had no capability or (28/44)
intention or interest in attacking Russia. But they could not assume the best outcome was likely. The Russians had no real interest in taking Western Europe. What would they do with it? Would they wreck again and they'd have to supply it? But they took the most pessimistic view, because that's usually the best view to take. So in both cases, we misunderstood each other because we were looking at the imperatives. Yes, we had the imperatives to knock out Russia. That would be wonderful. Then everything would be great. We didn't have the capability of doing it. And therefore not the intention. The Russians dreamt of building a new buffer at least, but they didn't have the capability. So imperatives, what we must do, that's frequently not what we can do. And this is the deep division that Hitler encountered, that Hirohir had encountered. He had an imperative to control the Western Pacific for getting fuel from Indonesia and so on. He just couldn't do it. So history is a competition between (29/44)
imperatives and capabilities. Much of our lives are. So let's take a step back here, because what we're doing here is also applying a lot of lessons to the world we live in today, which is something I do want to do. But before we do that, let's just, with two questions. One has to do with how you view yourself as an analyst. And then I want to talk about your cyclical theory of history, which breaks down into institutional and socioeconomic cycles, which is very important and something I want the audience to understand before we continue this conversation. So first of all, just real quick, do you consider yourself primarily a political theorist, a historian, a philosopher, or something else? How would you describe yourself? I've been all these things at once. I am now bad word for this futurist, because it's... Sounds like you have a crystal ball and an apk in your head. Yeah. What I do is I'm a realist. I'm not interested in personalities. I'm not interested in ideology. The ideology (30/44)
of the Russians was the same as the Tsars, it was undistodained. In the ideology differed, Russia was the same. You had a realist in a Hans Morgenthau sense or a realist in a more sort of just... I'm trying to look at reality sense. I studied with Hans Morgenthau at City College. I was enormously lucky to have him as my professor of geopolitics. But he had a focus on decision makers. What I saw was that is the decision makers did not make decisions autonomously. They made decisions on the one hand, considering what the nation could do, what the nation wanted to do. And at the time of the Cold War, the nation wanted to the Cold War, both nations. So the difference... he thought me a great deal about how nation-states interact. The one place I differed with him was in his focus on the leaders making policy, when the nation made the policy and the leader adopted it. The leader is the vehicle. The spirit of the nation is the driving force of policy. The spirit, yes. But that derives from (31/44)
need. We live our lives in fear. In Europe, every human being in 1950 was afraid. They'd lived through hell. They were afraid to repeat itself. The American public feared that twice they had been drawn into a war at the worst time. First World War, the Second World War, they had to come in to save the Atlantic. This time, they didn't want that task. They didn't want another war. Truman understood that. Truman was successful not because he was particularly brilliant or anything else, but he came from the Midwest. And he understood all the soldiers that had gone to war and died in World War I or World War II. And we don't need this. We're far away. He knew we wanted war kept far away from us and not have to send our sons to war. NATO was, is invention. It came out of the NATO that period. So did he make the policy on NATO? No. The country couldn't want have the Third World War. Did Khrushchev, Stalin first and Khrushchev make the policy of not invading Western Europe? No. The Russians (32/44)
were not prepared to go in other two years in a bloody war. They were exhausted. They had lost everything. So the leaders may have dreams of what they want to do, but it's the capabilities and they can't be leaders if they don't capture. As you call the spirit of the time, but the needs of the time, the paradises that the people had. So the American imperative came from the fear of another world war that brought us into it late and caused many lives. Let's be there to block it. The Russian fear was that the American attempt to block with NATO was an opening for another invasion of Russia as they had in First World War and World War II. And each had perfectly reasonable reasons to think this possible. That was the Cold War. It never happened because neither side had the capability or really the intention of doing it. But the leader is, if he's going to survive, he's going to be the spokesman for the national necessity. He's imprisoned by reality. There are leaders who don't survive who (33/44)
believe all sort of things are possible. They can for a while survive with the secret police. But the secret police will eventually get them and the head of the secret police will rise and it will go on and on. Stable real governments are the creation or democratic of whatever means of the spirit of the nation. Stalin captured that. So let's go now to your approach to history. As I said, you come across very much as a sort of cyclical theorist of history. We've covered various frameworks related to cycles, whether it's Neil Howe's generational theory, whether it is Nikolai Kondratiev's 50-year economic cycle based on, in particular, the commodity cycle. Years ago, I interviewed Robert Preckter for an old program I had with, you know, Elliott Wave theorists. So I have some working knowledge of this stuff and I do see a lot of similarities in how you approach your institutional cycle theory and your socioeconomic cycle theory. But walk me in the audience through this. What do we mean by (34/44)
institutional cycle and socioeconomic cycle? What are the key drivers of each cycle? What is the historical evidence for this? And how does this relate to your previous observation about imperatives versus capabilities? First of all, I came by this being stupid. I looked at American history and I saw certain radical shifts that took place. The strength of America is it reinvents itself. We started by breaking all norms and guardrails, as they say these days. Washington was loathed by many Americans for breaking them. They were loyalists. But we invented our country and we survived by reinventing it. The fundamental principle of our country is innovation and the recognition of obsolescence and the recognition of what's coming next. I noted that the system shifted for no reason that I can either fathom routinely at 50 years to socioeconomic system, 80 years at the institutional system. That is how does our government run? Every 80 years it changes course. What social crisis comes along? (35/44)
And I can name them. I mean, you know, first there was what I called the Washington cycle. He founded the country. By 50 years later Andrew Jackson came. The reality of the United States has changed. We'd want to lose the entire territory. We're going to the West. The Eastern Banks were focused on Eastern development. The ability of farmers to buy land, to build and so on was gone. He wrecked the Eastern banking system, leading to a great crisis in the country. Jackson creating capital for the occupation of the West and took the country to the next step. He had an imperative. He had to integrate the Louisiana Territory. The United States. The financial system would not allow that. He wrecked the financial system. You're seeing as reckless and foolish and monstrous and everything else. Can you explain that one second? So how did the... So you're referring to as his refusal to renew the charter for the second bank of the United States. How did that facilitate the expansion of the Western (36/44)
frontier? The money is important. You have to buy horses. You have to buy plows. You have to buy everything. There was no credit available to those who went to Louisiana Territory. The Central Bank was wholly focused on the situation along the East Coast. So having purchased Louisiana Territory, Jackson knew that we now had to advance into it. Capital was necessary, not capital for building large factories, but to do the basic fundamental things that had to be done. Among them building roads, canals, all the things to get them there. The Appalachian Trail was cut just before that. The... across the Appalachians. The Erie Canal had been done just before that. We were building the connecting tissue of the country. Otherwise Louisiana purchase made no sense. Now there had to be banks in the West. There had to be places where mortgages could be taken out, loans on getting plows, all the things that normal life would include. The Bank of the United States did not grasp that, did not want (37/44)
that. They saw that as an alien evolution. This could not last. Therefore, when Jackson came in, he wrecked the bank in a sense and created a new financial system to support the geopolitical reality that had emerged. It was a new one. The reason I ask is because I'm only superficially familiar with this period in American history. I know Jackson refused to renew the charter and that this led to the era known as Wildcat Banking or Free Banking, which eventually came to an end with the passage of the National Banking Act during the Civil War. That laid the groundwork for a national currency backed by government bonds and the eventual passage of the Federal Reserve Act in 1913. But how was that period of free banking essential in facilitating the movement of capital from the East and from supporting transatlantic trade toward the West and Westward expansion? Well, one thing was obvious. The West was wonderful country, agricultural country, tremendous opportunities. Entrepreneurs wanted to (38/44)
go there. They were the settlers. The entrepreneurs needed financing by breaking down the central bank into Wildcat Banks, as you called them. The bankers also wanted to make money. They knew they could go there. Financed these, draw the capital back into it by recurring loans. Some failed, others succeeded. But we settled a bit West. And what happened was that the old institutions that George Washington had bought in place were no longer relevant to the reality of the country. It had to be broken. It was broken by Jackson. The Wildcat Bankers were simply local bankers who did not depend on the federal government to do more than issue currency. And they were able to finance it. Without that, we would not have expanded Westward. So that was the next issue. So he sort of facilitated the further decentralization within the US capital system, the system of banking, in order to allow for Westward expansion by giving the people expanding Westwards the ability to be more flexible with the (39/44)
allocation of their capital. But look at the geopolitical problem. The United States fought the war of 1812. The British had come back. We had no strategic depth. In other words, we had a strip of land along the East Coast. We had no significant navy that we'd afford. If they came back in 1812, would they come back again? We needed strategic depth. We needed more than a coastal country. The French, who hated the British, sold the land west of us because they couldn't use it. And Napoleon needed the money. Needed the money. And we needed the Mississippi Valley. And we needed the land west of it and east of it. So it was a geopolitical necessity of the United States to expand Westward. It needed the depth that the British came and took the East Coast. We'd fight back. We had to have that depth. In order to have that depth, we had that economic system underneath it that it could support itself. Farming was by far the best. Agriculture was outstanding. The problem was that the banking (40/44)
system was oriented geopolitically at the East Coast. We were no longer that. The reality had shifted. And anyone who wanted to keep the old institutions in place had not grasped the reality of the threat from the British or of the depth of the economic possibilities of Midwest. What Jackson did, because he was an under-educated man, hadn't really learned much, he saw the obvious. People were coming out here. They couldn't get the machinery they needed to do things they needed to start farms. They couldn't buy land. They couldn't buy built houses. This is ridiculous. They couldn't get a loan. He took a look at the system and wrecked the banking system and the federal government as well, creating new states that had not been there before and broke the norm. The norm was a North-South divide, but running along the Eastern Seaboard of merchants, farmers living together in a stable anglophile mode. Well, the English immigration was not going to settle the West. So two things had to happen. (41/44)
A shift in immigration that took place later. We needed workers. And the other thing that had to happen was a financial system that could support the logistical system, the geopolitical system, I should say. And so if we had bought the Louisiana Territory and not broken the bank, it would have failed. Expansion would have withered on the vine. Exactly. And he went and wrecked the bank to open the door for regional banking, putting instead of a central bank, state banks, making states out of the colony that we had taken. And so each state could have its own banking system and take care of it. It worked for years. So I want to look at some other cases historically, like the Civil War and the period around World War II, for other examples of either institutional crises or socioeconomic crises precipitating new cycles. And then I want to try to understand where we are today, because I think one of the things that's unique about the cycle that we're living in today is we have actually two (42/44)
cycles, according to you, one socioeconomic, one institutional, that are colliding at the same time. And I think that's new in the American experience. I also want to apply this to some of the stuff we talked about in terms of presidents and leaders, to the current president and to the current set of interlocking geopolitical challenges that the United States faces in the second hour, George. 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 George, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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. George, stick around. (43/44)
We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 at cofinus and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (44/44)
This is the full transcription of podcast 'Hidden Forces'.
Understanding the Hoax of the Century Jacob Siegel #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Jacob Siegel, a senior editor at Tablet Magazine and the author of a widely shared article about the subject of disinformation titled, A Guide to Understanding the Hoax of the Century. That hoax, according to Jacob, is the information war itself, which he believes conflates the anti-establishment politics of domestic populists with acts of war by foreign enemies, turning the American people into targets for mass psychological operations and into instruments of control. Jacob and I spend the first hour of our conversation trying to wrap our arms around this sprawling leviathan of public and private surveillance in order to both understand it and reassert our power over it and over (1/44)
an information environment that has left us feeling increasingly disoriented and vulnerable to both foreign interference and the disinformation efforts of our own government and intelligence agencies. The second hour of our conversation is devoted to thinking through and in some cases arguing about what can be done to begin to solve the problem. As you will hear and as regular listeners know, I am of the view that we can and should regulate these platforms by introducing governing incentives, epistemic objectives and transparency that is non-partisan and which can produce an information environment that is in everyone's best interests. 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 slash subscribe. All of our content here gives you access to our premium feed which you can listen to on your mobile device using your favorite (2/44)
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&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 have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this incredibly important conversation with my guest, Jacob Siegel. Jacob Siegel, welcome to Hidden Forces. Thank you for having me. I've been enjoying reading your stuff, Jacob. You're a great writer. For people that aren't familiar with you, before we start, I'd love for you to tell us a little bit about who you are and how you got into writing publicly, you know, on various magazines. You write for Unheard, you write for Tablet. How did you get to where you are today? I mean, the short answer is (3/44)
that it started in Brooklyn New York with my father, Fred Siegel, who's an historian and a writer, and my brother, my older brother Harry Siegel was in journalism. And when I got back from Afghanistan, I left Brooklyn, took some travels to various places. And in 2012, I deployed to Afghanistan with the army. When I got back, I took my first real job in journalism. Prior to that, actually I had been writing, prior to that, but I had been writing fiction. So when I got back from Iraq, actually, to rewind for a second, I met a number of other veteran writers in a free writing workshop run by NYU, which was just an incredible, really fortuitous opportunity. We all just randomly sort of wandered into this free writing workshop. And through that, I met people like Phil Kly, Roy Scranton, and Mac Gallagher, with whom I would go on to edit an anthology of literary fiction called Fire and Forget, which was the first in the preeminent collection of short stories, really the preeminent work of (4/44)
fiction by Iraq and Afghanistan veterans. So that came out, I believe it came out in 2012, which was the same time I was in Afghanistan. And then I got back from Afghanistan with plans to continue writing fiction, which was my first love in terms of writing and still the thing I care most about. But it's no way to earn a living, despite some exceptions, like my friend Phil Kly. And so I took a job. My brother was at the Daily Beast at the time. I took a job at the Daily Beast as the more or less the veterans affairs reporter and editor, and parlayed that into a job doing national security, reporting, writing about various issues related to veterans, including corruption in the VA system. And so it all just sort of worked outward from there. So that was my first real job in journalism. I took the leap from fiction to journalism, but I had a family background in writing. And so it wasn't a great stretch. And now I'm at Tablet Magazine, where I think on any given day, the best magazine in (5/44)
America. And the senior news editor there, I do a daily newsletter called The Scroll, comes out every afternoon. I write frequently for them. And as you mentioned, for other places. So a bit of this, a bit of that is how I got to where I am now. Yeah. Tablet is a great magazine. And it's one of a number of new journalistic outfits that's come out over the years that is just doing exceptional work. And speaking to a lot of deeper cultural, spiritual, philosophical issues that people are concerned about that aren't really represented somehow in the mainstream press. I'm curious, before we get into your big piece on disinformation, which is why I should have come here, I'm curious, well, one, do you agree with that? And what do you think that's about? Why now? And what are organizations like Tablet speaking to that people are looking for? Yeah, I definitely agree with it. It's harder for me to talk about the other places that maybe we share some affinities with. But I can tell you what I (6/44)
know about why Tablet is doing the kind of extraordinary work that Tablet has been doing and that would once have been something you might have expected at the really big glossy places with much bigger budgets and the ability to attract more prestigious writers. But those places have collapsed in the same way that other elite institutions in the United States have collapsed. And largely for the same reasons, they got invested in self-serving delusional narratives. They chased after Trump, Russia, collusion stuff. They started to see their fellow Americans as broken and degenerate in some way and themselves as sort of shepherds and members of an elect whose job was not to report on the country or be curious and inquisitive, but rather to push through moral mandates. So that's a sort of larger story of corruption and collapse. And Tablet has been an exception for a number of reasons, most notably because on the people who run it, Alana Newhouse, the editor has guts and isn't easily cowed (7/44)
and is not looking for the kind of adoration and career approval that I think some other people in her position are looking for. Maybe because certainly it hasn't always been easy for Tablet when we were publishing, one of the first places publishing pieces, skeptical of lockdown, skeptical of the vaccine approval process in the United States, and doing so in a way that was not sort of red meat for the right wing. So it wasn't like we were challenging liberals, but at the same time picking up a vast new right wing audience because it was done in a sort of dispassionate, skeptical way, the sort of thing you might have found in these other prestigious magazines a few decades ago. But that certainly was not always a popular thing to do. And Tablet has just cultivated its position as a Jewish magazine is the most, is really the key to it. It's that in being deeply invested in the idea of being a Jewish magazine and what that entails, accepting one's position as an outsider to some extent, (8/44)
and also not viewing political fashions as the highest authority, not viewing ideology as not being sort of idolatrous in our relationship to cultural or ideological trends as freed up a space, a sort of skeptical, interested space. You know, you took the words out of my mouth because that was going to be my next question. Which is, I wonder if part of what explains Tablet's success is its grounding in tradition and in an identity that is less swayable or less swayed by the ebbs and flows of modernity and a lot of the reactionary culture of today? I think that's exactly right. But at the same time, you know, in terms of what we cover, Tablet is now more cosmopolitan than it's ever been. So a decade ago, the kinds of stories you would find on Tablet were, let's say, more straightforwardly, obviously Jewish in terms of their themes and subjects. You know, there was still political writing, there was still investigative reporting, all of that was still happening, but within a narrower and (9/44)
more explicitly Jewish focus, now as the US News Editor and the Editor of this Daily Newsletter, the scroll, you know, 85, 90% of what I cover is not obviously Jewish. It's not Jewish in terms of being of particular religious or communal interest to Jews. These are news stories about America and their Jewishness derives from the sort of sensibility and perspective with which we approach them, which is, you know, with a particular understanding of the special relationship between Jews in America, which has been, you know, an incredibly historically good relationship for Jews vis-a-vis the Jewish experience in Europe, let's say. So it's partly through that, it's partly through an understanding of what you said that there are traditions and texts and, you know, relationships that transcend the merely political, the merely cultural, and so we should view what's going on on a day-to-day basis through these deeper connections. There's also a healthy skepticism around assimilation and (10/44)
awareness of authoritarian power that I think makes the Jewish community more counter-culturally relevant today than it was, say, in the early 2000s when Israeli politics and US policy around the war on terror had such a defining impact on Jewish politics in the US. And what's interesting about that is that it also speaks to another facet of identity, which is the military and the role of veterans in the counterculture today versus the early 2000s and the influence that they're having on public discourse and political analysis in a kind of communal way. Does that resonate with you? Is it something that you found to be true? You know, I'm not sure, frankly. I don't see what I'm doing necessarily as being reflective of a larger trend or a sort of larger community of veterans who are invested in the kind of political analysis or cultural analysis that I'm doing, but it doesn't mean it's not happening. You know, at the same time, I just said all of this about tablet's Jewish identity. You (11/44)
know, I don't feel especially close to American Jewish communal institutions. I feel like basically an outsider, and I would say the same with my relationship to American veterans organizations, with the exception of these small sort of close connections that I have people like Phil Klyue, I co-host this podcast with, or tablet. But in general, you know, my relationship is sort of an outsider and an observer. And so if there is something to what you're describing, and there may very well be, I haven't been a part of it, and it hasn't been especially salient to me, honestly. Yeah, and I definitely don't want to put myself out as an expert on all these different cultural phenomena. What I guess I've picked up on is that there's a kind of independent center of gravity, both within the Jewish community and within the community of veterans. And maybe there's something about that that has created more interesting takes from people in those areas. But again, it's not something I've studied. (12/44)
It's just something that peripherally I've kind of noticed, and you're at the intersection of both of those with tablet and your experience as a veteran, which I didn't explicitly state. So that was a much longer background than I had planned, Jacob, but I think it was actually interesting. So the reason that I asked you to come on the podcast today is the reason that a lot of people have been having gone recently. I've noticed that since I reached out to you, you've been kind of on a bunch of different podcasts for good reason. And the reason is that you wrote recently about three weeks ago or so, I think it published an article and tablet called A Guide to Understanding the Hoax of the Century. And it is an article about this phenomenon of disinformation. It's not really about disinformation. I mean, it speaks to something larger, but through the vector of disinformation. So rather than have me explain it, I'd love for you to maybe talk about what you wrote in that article, and then (13/44)
we can sort of use that as a jumping off point to have a larger discussion about it and what you write about. Sure. So in around probably as early as late 2017, but certainly by mid-2018, I had begun to notice that this word disinformation, which I wasn't especially familiar with and wasn't something that one found commonly in public discourse during the Obama administration, for instance, was all of a sudden everywhere. And it was all of a sudden the sort of organizing principle of national security discourse, the organizing principle of high-level political opposition to Donald Trump. It was all sort of revolving around this notion that there was this thing, disinformation, which had infiltrated the American political system, but not just the American political system, had infiltrated the very ecosystem in which we all lived and in which the political system took place and was situated, and that having infiltrated it, it was now destroying liberal democracy from within. And one could (14/44)
find these kinds of statements coming from NATO security officials from US intelligence officials. One could find it in Congress, in the countering foreign disinformation and propaganda act that President Obama passed in December of 2016 in subsequent congressional committees and inquiries and bills. But also, one could find it coming from the NGO sector, from progressive activists concerned about disinformation, radicalizing young people. And one could also find it coming from press outlets who seem to simply accept the premises of disinformation as if it was a sort of settled objective scientific phenomena. But having noticed that it was all of a sudden everywhere and that it was also its ubiquitousness was accompanied by a what was presented as an imminent existential threat to America that demanded immediate action be taken to fundamentally change the American political system, to fundamentally rewrite the rules of the internet, to restrict, if not outright eliminate free speech in (15/44)
a number of cases, to deem whole categories of information and inquiry so dangerous that they were off limits, lest one who was inquiring into those categories even accidentally spread Russian disinformation. So all of this seemed to happen very rapidly. It was obviously tied to this larger narrative about Donald Trump's, what we now know to be a false narrative about Donald Trump's connections to the Kremlin. And it was being used to fundamentally alter not only the explicit rules of the American political system, but also the underlying political philosophy of American society with its emphasis on freedom of speech and freedom of association. So having noticed this, I started to look into it. And what I found was that it was a deliberate and coordinated strategy carried out by particular government agencies in concert with a particular set of government-aligned NGOs that were then passed through essentially credulous and compliant press outfits. And I'm talking about, you know, not (16/44)
fringe press outfits, but the New York Times and the Washington Post and, you know, one point the New York Times disinformation reporter, because every newspaper, after a certain point, had to have its own disinformation reporter called for the appointment of a reality czar in the United States, something that would have seemed totally dystopian, ripped out of a Philip K. Dick novel. But now all of a sudden this was happening. So I started to look into this probably as early as 2018. Then two major events occurred, which put it into focus for me. One was the pandemic. And so what had begun as a framework that was nominally focused on Russian and foreign threats was seamlessly converted into an apparatus for controlling domestic political speech. And in fact, this had actually begun to occur prior to the COVID pandemic in 2020. But the COVID pandemic was what really put that into stark relief, because all of the language and all of the sort of machinery of the censorship machinery that (17/44)
was supposed to combat Russian and foreign disinformation was transitioned without any open debate, without any democratic process or accountability was simply transitioned over to enforcing not only issues like vaccine mandates, but to enforcing official narratives that we now know to have been untrue. So for instance, regarding the origins of COVID-19 and the lab leak theory, this machinery of disinformation and information regulation, which was embedded into the social media platforms, and which relied on this large and extended network of NGOs and academic research institutions who sort of credentialed and played the objective experts when in fact they were effectively working in tandem with intelligence agencies and political operatives began to now enforce COVID narratives. And then the next thing that happened that was particularly significant for me was the Russian bounties story that your listeners may recall was the accusation that Russia was placing bounties on American (18/44)
soldiers in Afghanistan. And I immediately recognized this story as being sort of implausible and fantastical on its face as soon as I heard about it, having been a military intelligence officer in Afghanistan, it simply didn't pass the sniff test. And yet I saw the way that it was propagated through mainstream news outlets, again, the New York Times and the Washington Post, were the two papers that originally carried this story. So in other words, what you had was on the one hand, this large coordinated machinery of censorship that was simply purging from public discourse, anything that dissented from the official narrative line on an issue like the origins of COVID, while at the same time, that same machinery could propagate false narratives, for instance, that explicitly political, I should say false narratives, not merely erroneous narratives, let's say this wasn't just a question of the official messaging of the White House getting something wrong. This was a brazenly false, (19/44)
brazenly partisan narrative leaked to the press at a moment where it was designed to have maximum political impact, and just carried and echoed endlessly by every high level democratic official, by all of the largest newspapers in the United States as if it was the truth. So it was in the process of trying to absorb those things that I ended up thinking about this idea of disinformation as not simply a form of censorship, not simply a framework for regulating information to censor, but as its own form of government, as its own mandate, its own mandate to rule, that information regulation was replacing the official and explicit procedures of constitutional democracy as a new system of power inside the United States, and that's what I investigate in this piece. Fantastic summary, Jacob. So let's dig into this. I'm not entirely sure where and how I want to come at it, but it seems to me, maybe the best way to do it is to put forward a general working hypothesis that I have, and we can (20/44)
work our way around it. So when I look back at the early 2000s, at that point in time, we still had this really powerful, largely centralized, hierarchical system of propaganda in the US, and that served very effectively to promote the Iraq war and the war on terror. And it's easy to forget now what an indomitable force that was. We had wall-to-wall coverage at all the majoring news networks, specialized shows on Fox, CNN, MSNBC, promoting the war with names like Countdown Iraq, an unbelievably calculated way of regimenting the minds of the citizenry, and inculcating in people a sense of inevitability around the invasion, which many people were openly against. Now, fast forward to 2008, the financial crisis comes along, and that was the first time where, in my opinion at least, because of YouTube primarily, there were alternative sources of information that began to seep into the American mind. And at the time, when I was ingesting those sources, as someone who had already grown (21/44)
increasingly cynical about American power and the incentives of agents and government, I felt like I was coming into contact with the truth through what I was learning. And I became increasingly radicalized. I went down the whole Alex Jones rabbit hole, ended up on David Ike and Lizard People. And through those experiences and my time working at RT, which I didn't mention, I've come to the view that what's happened is that we've moved from this highly controlled information ecosystem, where the U.S. government didn't really have to worry about the, quote, Russians or any foreign actors, meaningfully affecting public discourse, to the point where we are now where the information environment in the United States is so chaotic that not only is the U.S. government trying to regain control of it, but foreign actors are also trying to exploit it by spreading, quote, disinformation, which I don't know how tactical it is. I mean, it seems to me that the real effort is to undermine our sense of (22/44)
reality, to demoralize us and to seed and amplify cynicism in a way that further cripples our capacity to come together as a society. Stuff that Peter Pomeranzov, who has been on the show before, writes about so persuasively. I'm curious, do you agree with that framing? Do you disagree with it? Where do you come down on this? I largely agree with that framing. You lost me at the end and I'll get to that in a second, but I agreed with the first 85% of it. And the reason why it's so difficult to describe is because it's a new cosmos. This is the Gutenberg revolution. We're at the dawn of digital political age that we can scarcely understand at this point, but which is already destabilizing and reformatting institution after institution. So it's not as if the American political class simply hallucinated that there was a destabilizing effect that the internet was creating this chaotic effect, but they falsely attributed that to Russian disinformation tactics. So in other words, they took (23/44)
what is a broad sociotechnological revolution on the order of the printing press and one which has undermined the kind of centralized narrative authority that you were describing was still in place in 2003, one that has had that effect in many places, not only in the United States and one that has had that effect on many institutions within the United States, not simply on the government or the sort of neoliberal establishment. They took that and they insisted that it was all Russian disinformation all along. And I find that to be implausible on its face. It's clear that Russia has attempted to have a destabilizing effect. It's clear that Russia spreads propaganda in much the same way that other countries, including the United States, attempt to seed propaganda into foreign information ecosystems. But it's not by any means clear that this has had a profound effect in terms of changing political attitudes in the United States. And when you look more closely at the evidence, the largest (24/44)
claims for Russia's hacking of the United States political system break down under scrutiny. So the Facebook ad buys are one example. We heard all of these reports about Russia infiltrating Facebook, but when you looked at the ad buys, it was something like $100,000. They didn't all go to Donald Trump. When you looked at the activity of the infamous Russian trolls, you found that, okay, you could say they got X number of impressions, but an impression just means somebody looked at something. It doesn't mean it had any pointed or determinative effect on their thinking. And many of these trolling efforts were, they were laughable. Now, might they have had some sort of effect in the aggregate? Yeah, they could have had an effect in the aggregate, but the effect would have been merely to exacerbate a kind of informational confusion that already existed. There's a great French philosopher of propaganda, Jacques Elul. In his book, Propaganda, the Formation of Man's Attitudes, for one thing, (25/44)
he makes a distinction between foreign propaganda and domestic propaganda. So domestic propaganda, in other words, propaganda used by government and directed at its own population is almost always more powerful than foreign propaganda simply because it understands the premises and priors of the target population and good propaganda is not implanting some wholly new and foreign idea in somebody's head. It's working off of the assumptions that they already have. So the sort of standard operating procedures of propaganda would limit the effectiveness of some of these Russian campaigns. So it's clear that some of the things Pomeranians have described, I think, are real, and they certainly match some of the ambitions of the Russian government. But they are both implausible as explanations for what has taken place in the United States. And they are also cynically and opportunistically exaggerated by political actors in the United States. So the Steele dossier, whatever Russia was doing in (26/44)
2016, the Steele dossier was a piece of political opposition research paid for by the Hillary Clinton campaign originally paid for actually by a conservative institution when Trump was still one among many candidates in the Republican field was originally funded by Republicans to knock Trump out of the Republican field. That didn't work. The Clinton campaign picked it up. They were working with this outfit called Fusion GPS, essentially a private intelligence firm run by these former Wall Street Journal reporters. And it was a political document. It was a nakedly overtly partisan political document with ludicrously thin sourcing. You know, much of it we've since learned was actually coming from not from these deep Kremlin sources that Christopher Steele had, but from Russian think tank employees working in Washington, DC. I mean, that's the extraordinary thing about it. To come back for a moment to this sort of idea that I was laying out a minute ago that these things that are (27/44)
presented as foreign threats are really a way of sort of obscuring domestic threats and turning them into sort of opening up the possibility of using the tools of warfare against what are in fact domestic elements. The Steele dossier itself was a sort of fantasy of Russia, which came from people inside DC. So yes, there is a destabilizing and chaotic effect that chaos promoting effect that the internet is having, but that doesn't explain how we got this essentially attempted coup on a sitting president. So again, a lot of things to discuss here. It was rather amazing after the election of Donald Trump, just how many outlets and how many political hacks in the mainstream media amplified and facilitated so many contrived narratives promoting ridiculous conspiracies like the PP tape and head on criminals like Michael Avenatti and porn star Stormy Daniels as though they were paragons of virtue and credibility, which is also a great lesson for people who are trying to discern the (28/44)
credibility of any particular narrative. It should always be very wary when a small number of sources keep getting brought up over and over again as being central to the story. We had the same thing in the lead up to the Iraq war. So I want to draw a distinction here between, because I use the word disinformation and I use the word misinformation. And one of the things that I've sort of come to realize over time as I read other people whose work I agree with like yours or others is that I can easily see how someone hearing me use the word disinformation could misinterpret that as being a signal for something else. So when I talk about Russian disinformation, I don't actually mean tactically that there was this effort to undermine the US elections. Actually, the analysis of someone like Yochai Benkler is something much more on point with what sort of how I see this, which is I think there is an effort to undermine our sense of trust in our institutions, which we already distrust for (29/44)
good reasons. And that if anything, our reaction, the mainstream press's reaction to the 2016 election actually played right into that strategy. But that ultimately all of that exploits our internal weakness, which stems from the lack of accountability, the understandable loss of trusted institutions, and the larger technological problem that we have, which is that this marketplace of idea, so to speak, which was enhanced by the promise of a free and open internet, has been captured by these platforms that increasingly define people's sense of reality and moderate conversation such that even the word censorship doesn't really make sense anymore, because every manifestation of speech on these networks is a discretionary choice of the platform that happens almost entirely at the level of algorithms in an automated fashion, amplifying or suppressing one thing or another, because it's basically impossible to run these platforms in any other way and make them actually usable and useful for (30/44)
people. So I'm curious, how do you view that framing and how similar or different is it to how you view the problem? I appreciate hearing you lay this out. It's interesting for me to hear, and I think what you just said, particularly at the end there is very sharp, and that's exactly right, that the power of these platforms is so vast and so determinative of underlying social realities and the way in which they control not only the pillars of the political economy at this point, but also they control the arena in which social life occurs, not just politics, dating, routine interaction, and I avoid the terms disinformation and misinformation. There's a reason why in this very long essay I just wrote, I never do what is sort of the standard pro forma move in all of these pieces and define disinformation versus misinformation. The reason why I don't do that is that I think that they are airstots, technical signifiers. They have no real meaning beyond the ways in which they serve the (31/44)
interests of the party in power. So the idea that there is some category of information, some category of objective statements or facts that could be labeled misinformation in a kind of, is a regulatory function. It's not an epistemological function. It doesn't serve the interests of conversation or of debate. It's only a tool for regulators, and I'm not interested in playing this game and reifying this false scientific air, nor am I interested in helping out the regulators in this way. So I avoid it. But I will grant that there is a effort to seed false narratives. Let's just isolate Russia for a moment. Russia is not the only country that does this, but Russia clearly made efforts and I'm sure continues to make efforts, though I haven't studied some of the more recent campaigns, to seed false and divisive efforts, not only in the United States, but certainly in Eastern Europe as well, and probably actually much more so in Eastern Europe than in the United States. However, the (32/44)
question is, first of all, we could simply call that propaganda. I'm sorry, I just want to say, I think the reason why the word propaganda doesn't fit well is that there's not necessarily an underlying ideology or message that's being propagated. I think that was true during the Cold War, but I think that's where I go back to Peter Palmeratsev and I think what he does so well is convey that. What there seems to be is there seems to be a systematic effort to undermine some of the central pillars of what we do believe without necessarily replacing it with a larger narrative. But the effort is to replace it with Russian power and with an expanding Russian state. So I do think there is a core to it. Look, it's not nihilistic, right? Putin is not a chaos agent. He's not a nihilistic chaos agent, is a particular set of interests. But I do think, actually, it's interesting you say that, I do think that not in Russia. Forget, let's say, Peter's depiction of Russia when he lived there, when (33/44)
he's a producer, because I didn't live there and I'm in no position to discuss that. But it does feel that there is an effort to inspire a sense of nihilism around our own sort of identities as Americans and our reverence for our institutions and to sort of inculcate a sense of cynicism. That does seem to be part of it. And I mentioned my part, my time working at RT. When I look back now at that time, at the time, the... And by the way, I also should mention this, Jacob, you and I have never spoken like in the years leading up to the Ukraine war on this show, I was very critical of this narrative against Russia. And I had on guests who I've talked about before, people like Stephen Cohen, who was my professor of Soviet studies in college. So I'm definitely not coming at this from the perspective of being an apologist for American power and institutions. But I look back at my time there and I realize now that a lot of what... A lot of the pushback that I got in editorial meetings was (34/44)
around wanting the content ultimately to be more cynical, to make people question not necessarily any particular narrative or to implant new narratives, but to just undermine their overall sense of confidence in everything and even in their ability to understand anything and to become cynical. And it feels like that is what I try to speak to when I use the word disinformation. But the reason why that narrative that you've just laid out is powerful among people in the West and in the United States is because we're cynical about our own government. And in its own strange way, it's actually a very optimistic view, because it suggests that if we can merely eliminate this outside Russian interference, perhaps we can recapture the legitimacy of those institutions and recapture something like the broad social consensus under which we once lived and which promoted a prosperous and fairly stable society. I don't think that's the case. And I say this as somebody who you said you're an apologist (35/44)
for American power. I'm no apologist for Russian power. I have no particular affection for Russia. And insofar as I have a dog in this fight, I'm an American and I'm an American writer. And that's where my loyalties and my interests lie. But I think that the excessive focus on Russia has been a very destructive distraction that has actually precluded our ability to address the fundamental sources of instability, cynicism and distrust in American society. Let me give you another way to think about this. Totally agree with that, by the way. Let me give you another way to think about this that's a bit more concrete, because these conversations about sort of narrative propagation, part of what makes them so powerful in exactly the way you just described and the way Russia might use them. The conversation itself is sort of unmoored from concrete realities and therefore can never be fully resolved, the extent to which Russia is promoting nihilism, the extent to which that amorphous (36/44)
nihilistic narrative affects what goes on in the United States. It's very difficult to measure and it's difficult to assess. It's a sort of subjective and affective domain in many ways. Think about this for a moment though. So disinformation, what we now refer to as disinformation and Russian disinformation tactics, in many ways, conceptually grows out of a discourse around hybrid war and hybrid war theory, which was popularized in 2014 with the Russian invasion of Crimea, the Euro Maidan protests in Ukraine, which the US backed, sponsored and backed and Russia opposed, and at the same time the Islamic States campaign in Syria and Iraq and its capture of Mosul in 2014. These three events, which I talk about in my tablet essay, all three sort of elevated the stature of hybrid war as the dominant new theory among NATO and American security specialists and what hybrid war referred to was this mixture of conventional overt military tactics and covert military tactics that especially drew (37/44)
on information operations and attempts to message the public, particularly through social media. So you'll recall some of the ISIS social media campaigns. Really like barbaric memes that they were propagating in 2014 and Russia spreading these stories about whichever, you know, one of the Baltic countries that they did in a number of places in Ukraine or in the Baltic countries, spreading stories that were intended to cause the local populations there to lose faith in their own governments, to overestimate the strength of the Russian military forces, overestimate the strength of the Russian government, etc. So this is the hybrid war theory and it sort of is adjacent to what's called fourth generation war theory and also what is referred to as the Garamantsov doctrine inside of Russia, which is this new doctrine of informational warfare and in which influence operations are primary and, you know, the internet and winning the internet and winning narrative wars on the internet becomes as (38/44)
important, if not more important than conventional military strength. That at least is the way it's interpreted in the US and among NATO defense officials. So this is critically important because it lays the conceptual foundations for the contemporary disinformation discourse. But what's interesting is that the earliest critics of this hybrid war theory, many of the earliest critics were Eastern European security officials who saw it as a way of distracting from the still vital measures of real military strength in beans and bullets. In other words, they were critical of this Western and NATO obsession with hybrid war because they thought that it was a kind of abstraction, a sort of, and not only an abstraction in the sense that it was a mistake, but also an evasion, a means of avoiding the kinds of actual transfers of arms, the actual reallocation of military forces that would have been needed to contain the Russian military and deter Russian expansionism. So that's one thing to keep (39/44)
in mind is that there is a kind of core material argument for the ways in which people simply get lost in these conversations. It's not to say that there's nothing to them. It's not to say that there's no effort to sort of seed nihilism in the West from Russia or China for that matter. But it is a distraction from more vital matters. And because it is by its nature so abstract and amorphous, it lends itself, this whole discourse lends itself to manipulation by the most powerful actors who get to determine what disinformation is. Disinformation is a word that only takes on meaning in the mouth of power. It doesn't matter what somebody on the street calls disinformation. It has no effect on anything. The word itself only acquires meaning when it's used to censor in the American political context. And so I think that's worth keeping in mind. Yeah, so a lot of thoughts here. One, I encourage people to go back and listen to my conversation with David Colcullen, a counterinsurgency expert (40/44)
with whom we talked about hybrid theories of war, like liminal warfare and conceptual envelopment that incorporate elements of what we're talking about today, at least insofar as the national security state and the intelligence community see things. Look, there's nothing that I can point to in what you said, Jacob, that I would readily disagree with. This term disinformation has most certainly been used by the powerful to silence people. It's been used to discredit them and to deplatform them in many instances. And it's also been used, as we saw in the case of Donald Trump, to deflect attention away from the failures of institutional power structures and by elites who have governed these institutions. And I think similarly, the lack of accountability among those in power has undermined our trust in government. And it's left us in a place that to me at least feels exceedingly vulnerable because of the unique dimensions of the international order today. And a lot of these conversations (41/44)
that we seem to have end up being about how to decide what is and is not true, how to sort out the, quote, disinformation, when in fact what is needed, I think at least, and this is what I want to talk to you about in the second hour, Jacob, is a kind of very high level regulatory architecture that introduces transparency, that works at the level of incentives so that there isn't any room for the CIA or the White House to sit in between you and me on Twitter, for example, deciding what is and is not appropriate speech. Instead, the platforms would have to adhere to certain best practices, like, for example, I'm not saying this is the correct policy, but not selling people's attention to advertisers and not modeling their behavior has to make them maximally exploitable, which could have huge unforeseen benefits to public discourse. In other words, this idea that somehow the solution needs to be either unfiltered chaos, which wouldn't work for anyone, or a cartel of private companies (42/44)
with the government and the intelligence agencies exercising discretionary oversight, which is what we have now, this framing, this either or framing is false. There is another way, but it feels like we've lost the language to come up with solutions that are democratic, and that's where I felt frustrated with how this conversation continues to be framed, but that's something that we'll get into in the second hour, Jacob. For anyone who is 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 Jacob, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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 (43/44)
right now. Jacob, stick around, man. We're going to move the second half of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 Nicolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (44/44)
This is the full transcription of podcast 'Hidden Forces'.
Andrei Shleifer Crisis of Beliefs A New Model of Investor Psychology #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? I'm Dmitri Kofinas and you're listening to Hidden Forces, where each week I speak with experts in the fields of technology, science, finance and culture to help you gain the tools to better navigate an increasingly complex world so that you're less surprised about tomorrow and better able to predict what happens next. My guest this week is Andres Schleifer, professor of economics at Harvard University and one of the most cited economists in the world. Schleifer has worked in the areas of comparative corporate governance, (1/44)
law and finance, behavioral finance as well as institutional economics. He has published seven books including his latest A Crisis of Beliefs, Investor Psychology and Financial Fragility with his co-author Nicola Genaioli. Our conversation today centers on the subject of beliefs, how they impact markets and how economists and financial practitioners are attempting to model them using data about people's expectations, assumptions and attitudes in order to make better informed investment and policy decisions. The first half of the episode is devoted to exploring the mechanics of the 2007-2008 crisis and the role played by structured products and derivatives, off-balance sheet vehicles, money market funds, GSEs and a policy of ultra low interest rates that fueled overconfidence in the power of regulators and in the sustainability of the status quo. In the second half we devote time to exploring a more formal approach to thinking about Haiman Minsky's instability hypothesis and how market (2/44)
participants looking at the same data day after day can suddenly draw radically different conclusions about that same data when their beliefs about the world change dramatically. Given the destabilizing forces of populist politics, trade tensions and changing geopolitical fault lines, the ability to draw valuable insights from data about expectations and beliefs is invaluable for any investor or policymaker looking to gain a sense of market sentiment, where it stands and where it might be going. And with that, let's get right into this week's conversation. Dr. Andre Schleifer, welcome to Hidden Forces. Thank you, I'm very happy to be here. It's great having you on the program. I just finished reading your book as I was telling you. The book is called A Crisis of Beliefs. When did this come out? I think the book came out in September, maybe two months ago, just for the 10th anniversary of the crisis. How long were you working on it? First of all, reading the book, you realize how many (3/44)
citations are actually of your own papers or papers that you've co-authored with other people. I wonder how much of this book was you pulling from the body of work that you have developed over years and maybe even decades? I wouldn't say decades, but certainly many of the themes in this book go back to the things my collaborators and I have done over the last maybe one decade or five or six years. One of the reasons to write the book is that the papers were written tended to be technical papers and they didn't deal with the financial crisis itself, the 2008 crisis. We wanted to write something about the crisis and all that material was totally new to the book. The first half of the book, pretty much the first half, is an explanation of the mechanics of the crisis, the mortgage market, the refinancing, securitization, CDOs, MBS, all that stuff. The second half is an attempt to try and create some type of a framework or a model of expectations and of beliefs in order to try and see if (4/44)
you can extract meaningful insights about the future and about the present market conditions. That's correct, yes. Up until now, how useful has survey data been? How much has it been incorporated in forecasts both by the private sector as well as by the public sector and institutions like the Federal Reserve? That's a very interesting question. Back in the days, let's say 60 or 70 years ago when the field of macroeconomics was developed after World War II, a lot of what macroeconomists did was to collect survey data and to predict the macroeconomy based on the survey data and the expectations of business people, executives and so on. What happened in the 1970s to the field of economics and macroeconomics in particular is that it became dominated by a very, very important idea called the rational expectations hypothesis, which is the idea that people use their understanding of the economy completely, rationally and efficiently, and that once you have a model of the economy, you don't (5/44)
really need expectations data. The model itself will tell you what to expect. Starting in the 1980s, the interest in survey data and expectations data and macroeconomics in particular and finance as well has waned. I think it's only the last several years that we're seeing a revival precisely at the same time as people realize that our expectations are not particularly rational and so there may be information and survey data that we couldn't obtain otherwise. When did people begin to meaningfully question the rational expectations hypothesis? Well, again, there is parallel developments, some in finance and some in macroeconomics. Finance, the challenges to efficient markets hypothesis go back to Robert Schiller's work starting in 1980 and they've been advances for the last 30, 35 years. It's really a pretty developed field. It develops out of alternatives to rationality. In macroeconomics, I think, again, prior to the rational expectations revolution, there was a common way of thinking (6/44)
about the world. Then it declined and it's only more recently that people started thinking about beliefs and expectations other than rational expectations in a more systematic way. Well there's been a renewed interest in behavioral theories and finance in particular in economics after the crisis. I think if I would say that finance did better than macroeconomics with respect to the crisis, I'm not sure finance was that effective in predicting the crisis, but it is certainly the case as we try to explain in the book that finance understood the mechanics of the crisis extremely well. I think that probably played some role in accelerating policy right after Lehman or producing prescriptions for policy right after Lehman. Economics, I think, was far behind precisely because it didn't have a way of thinking about errors and beliefs following the financial crisis, around the financial crisis. One of the things that it comes out from reading your book is you make it salient, the point (7/44)
salient, which is we know that the fractures began to emerge in financial markets and began to become obvious in the summer of 2007, approximately with B and P Pariba, with Bear Stearns. There were signs that there were stresses in the market, but despite that, it was not until Lehman where you saw it both in volatility, but also just in price declines where the crisis really broke out. Why don't you walk us through, because like I said, he did a great job in the beginning of the book explaining how the crisis developed over time until we got to 2008. Can you take that timeline from 1996 to 2006? Yes, but let me say as a first point is that one of the things we've learned in the last decade is that financial crisis all have more or less the same structure, which is their origins are always or nearly always in a bubble in the price of some particular asset or group of assets, housing being the most conspicuous example in many historical episodes, that these bubbles are often financed by (8/44)
debt, whether it's mortgage debt in the case of the housing bubble, some other kind of debt. In 1929, people used to buy stocks on margin. And so there is leverage plus a bubble. And that there is also exposure of financial institutions to this bubble, either because they're the holders of debt such as mortgages or because they are exposed in some other way. And so what happens is that when the bubble begins to deflate or to collapse, as it did in the case of say US stocks in 1929 or in the case of housing prices in 2008, what you see is that the holders of debt in a particular financial institutions begin losing money, begin suffering from the defaults on the debt, and that precipitates, runs on banks at a financial panic. So there is a very intimate link that was understood first, actually was understood even before that, but was explained first by Charlie Kindleberger in 1978 between bubbles, leverage, deflation of bubbles, and financial crisis. And so one of the things that we try (9/44)
to describe in the book is precisely the path of the financial crisis of 2008, which follows all the standard steps. So we had a bubble in the housing market. It started in the 90s until 1990s. US home prices for close to a century were relatively steady. It reached its peak in 06, 07. The bubble was financed by debt, which was mortgage debt, debt mortgage debt through financial innovations such as mortgage-backed securities was converted into other kinds of debt that was held in part by institutions, but in part by banks and investment banks. So there was a lot of debt in the financial innovation associated with the housing bubble. When the bubble began to deflate in 07, a lot of the holders of debt started losing money that included banks and investment banks as well as financial institutions. When they started losing money, they started liquidating their positions because they didn't want to run out of cash. When people liquidate their positions, the value of their holdings or the (10/44)
value of these assets such as mortgage-backed securities falls even further, and eventually the system cracks, which is what Lehman was. It was the final run at the end of a long period of degradation of the financial system. One of the things you highlight in the book is this distinction between idiosyncratic risk and systemic risk. A lot of these financial innovations and financial products were created with the idea of allowing firms to better manage their risk, but in fact, when everyone was doing them, systemic risk went up. What you're describing there, for example, is if a system is leveraged based on the value of assets and the value of those assets begins to decline, the liquidity begins to dry out. That's exactly right. So again, there was a lot of sophistication to financial engineering that went into the creation of mortgage-backed securities and various other more complex derivatives such as CDOs or collateralized debt obligations. The lot of that sophistication, as you (11/44)
said, was an attempt to diversify risks or to put different things together into portfolios so that in normal times they wouldn't lose money or wouldn't default all at the same time. What happens at the time of stress, and that's again a financial universal, is that the things you think are uncorrelated become correlated. The things you think are different and provide you with diversification will turn out to lose value at the same time and you don't get diversification benefits. So this particular, this growth of correlation in the time of crisis is again a very common feature that leads to financial panics and liquidations and crisis in the end. During the fallout, the media, of course, they picked up on regulation, they picked up on fraud, things like this. In smaller circles, there was an emphasis on monetary policy. There was some conversation around structured products like CDOs, but I don't know that anyone appreciated anywhere near to the extent that subsequent history would (12/44)
deem appropriate the impact that securitization played in facilitating leverage in the financial system. Of all the things, securitization, regulation, Fed policy, accounting standards, where would you rank securitization, the mortgage-backed security, collateralized debt obligations, credit default swaps and things like this in enabling the crisis? Well again, let me say, I want to come back to history, which is that you see financial innovation in all bubbles and crisis. You see some fraud on the margin in all bubbles and crisis. You see some bad behavior. In this instance, it was the rating agencies, but also mortgage originators in all crisis. To me, the common features are bubbles, leverage, deflation of bubbles, and the inability of the financial system to deal with all the losses. I think if you ask how much could be attributed to financial innovation, I think it is unquestionably the case that we had more lending, more subprime lending, more bad mortgages issued than (13/44)
originated, and perhaps more bad behavior because of financial innovation, because of MBS and CDOs. And of course, CDOs were a very important reason for the losses of the financial institution. So I would put them fairly high, though again, I want to say that this is just part of what happens in every leveraged bubble. And of course, that goes back to something you were talking about with these fire cells. People, I don't think certainly the public didn't understand the role that the money markets was playing in financing a lot of these off-balance sheet entities that were carrying a lot of the risk that was not on the balance sheet of banks. Absolutely. So the money markets funds, the other were financing these special investment vehicles that were holding MBS and other securities, and they were assuming that their collateral is completely safe. But then when it turned out that MBS was not as safe as people thought it would be, all these institutions, all these arrangements turned out (14/44)
to be runnable and extremely unstable. So why is it, in your opinion, you have this great chart, you have a lot of charts in the book, many dealing with the housing market, some dealing with credit, but you have this one of volatility of the VIX. And you see in the summer of 2007, we mentioned that period where volatility began to increase, the VIX began to spike, and it stayed elevated and choppy for about a year, but leading into the crisis, it began to drop. So there was this sense that things were contained, and then there was a marked reversal. And I think this speaks to the thesis of your book, this idea of what causes, if I understand correctly, that markets have beliefs, they have expectations, and what can cause markets to look at the same dataset one day in one particular way and then have a completely different perspective the next day, and that can lead to a financial crisis. Well, that's very important again. So this crisis is characterized by this very interesting quiet (15/44)
period between the summer of 2007 when we see the first signs of substantial declines in home prices and losses on mortgage backed securities and the Lehman crisis a year later. And what's interesting is that when you see the first problems in financial markets in the summer of 2007, the Fed understands them and they interpret them as liquidity problems, which is to say they want to prevent financial institutions that are suffering these losses from liquidating their positions. And so the Fed actually intervenes pretty aggressively through several programs to keep investment banks and others from liquidating their position. And these interventions work. These interventions are very successful, and so we don't have a crisis in the summer of 2007 as one might have thought. But I think unfortunately what happens as a result of these very successful interventions is that the Fed concludes and the policymakers conclude that what we have is not a solvency problem. What we have is not a (16/44)
problem whereby financial institutions are beginning to lose hundreds of billions of dollars or what ended up being hundreds of billions of dollars, but rather a liquidity problem. And so they think that they have things under control. And if you look at the meetings of FOMC, the governing body of the Federal Reserve, if you look at the speeches of Ben Bernanke and various Fed governors, these are speeches about lack of liquidity in the financial system. One of the things that you appreciate when you look through all of these charts is you can see the stress that the system came under very dramatically and the impact that government support had, for example, prime money market funds and government money market funds, the blowout in the repo market, haircuts. I mean, you could see that you said liquidity. The liquidity was drying up because it was a solvency issue, but the Fed saw it as a liquidity issue. Exactly. The issue was the solvency issue that banks were in fact projected to (17/44)
lose by the IMF. By the Fed as well, although the Fed has not released its projections. A tremendous amount of money, actually something that by the end of 2007 and certainly early 2008 looked like it might be threatening to the life of the financial system. But the Fed pretty clearly, and you see this again in speeches, you can see this in documents, felt that things were under control. So it did not want to step up the interventions. The pivotal moment was the rescue of Bear Stearns in March of 2008 when the Fed facilitated the acquisition of Bear Stearns by J.P. Morgan. That was probably the pivotal moment because the question was what the authorities would do right after that. And instead of saying never again, we now have to shore up the financial system. We have to encourage the banks to stop paying dividends. We have to encourage the banks to raise equity. We have to protect the financial system. The Fed went and the Treasury in particular went in exactly the opposite direction (18/44)
and said, well, we've saved these guys, but now you're on your own and we're not saving anybody else. And this was the position until after Lehman. It seems to me that to the extent that the book has policy lessons, particularly with respect to 2008, it seems to me that it would have been much wiser for the Treasury and the Fed to be much more aggressive in March than they were for six months after Lehman. Of course, after Lehman, when bankrupt, policy was extremely aggressive and extremely effective, but it took Lehman to make that happen. Well, since we're talking about policy, let's actually go a little further back because every bust is preceded by a boom. And this was a huge credit boom as we've began to outline here. What role did regulators, the central bank in particular, play in enabling this bubble? Well, that's a question that is heavily debated. The book doesn't take a particularly strong stand on this, but many people would say that the policy of low interest rates in the (19/44)
early 2000s was something that precipitated the boom. Of course, one has to be careful because that's probably true. But the Fed begins raising interest rates, I think, in 2003 or 2004. And that, of course, does not stop the boom. In fact, the boom speeds up considerably in 05, 06. Those are probably the most irresponsible years of the boom. I think the issue to me, again, is that the Fed does not think it's particularly in the business of monitoring risk-taking by banks. And in particular, I think it, and again, we can talk about whether or not this is something they could have done, but it's very clear that during this period, banks massively increased their exposure to the housing market through CDOs, through MBS holdings, through mortgage holdings. And the Fed continues to treat most of these holdings as completely safe investments. But also, Greenspan is on record having stated that he wanted to create a wealth effect. There was a desire, an explicit desire to use asset price (20/44)
appreciation to goose the economy. I don't remember those statements. I'm sure you're right. The evidence we have is that wealth effects are pretty minor, which is to say, the classic example of that, of course, is that we had the Internet bubble that collapsed, and $5 trillion or some number like that of stock market wealth was lost. And absolutely nothing happened to the economy. The risks to the economy posed by leverage and liquidations and interruptions in the supply of credit seem to be much more significant than anything related to the wealth effect. I should say, though, now that you've raised it, that is an important issue because the wealth effect is how the Fed model operates. The Federal Reserve has a model of the U.S. economy. It doesn't particularly incorporate in any interesting way things like financial fragility and the vulnerability of financial institutions to crisis, but the wealth effect is a central feature of the Fed's macroeconomic model. So where do beliefs and (21/44)
expectations fit in this? Some of the things we're mentioning here are the meat and potato sort of stuff, the guts of the system. Where do the beliefs which can drive, as we say here, we went from the same conditions before Lehman to after Lehman, but markets reacted very differently? Some might say, well, that's kind of obvious because Lehman changed what people thought was possible that they didn't see before. But the question is, why didn't they see that? I think the beliefs come in three very important ways. The first one, which is in some sense the most obvious one, is that beliefs come in at the time that the housing bubble develops, which is to say that we know and the U.S. is no exception to that. We see the same things happening in Australia today. We see that at the time home prices are growing, people develop utterly unrealistic expectations about future continued growth of housing prices. That is a very important feature of every bubble. The second place where beliefs enter (22/44)
the picture is something we already briefly discussed, which is to say that even after home prices begin falling, there is pervasive neglect of downside risk by policy makers, by market participants, and so on. Which is to say that, again, we've touched on this in a number of ways. People believe in wealth effects, and Bernanke goes out and says, look, subprime is a trivial part of U.S. wealth. So if you've got major subprime losses, wealth losses will be minor, and therefore the effects on the macroeconomy are going to be minor. People believe that banks, in fact, have a lot of capital, which they appear to have. So there is a lack of incorporation, a lack of understanding, how through the interconnections between financial institutions, how through these fire sales mechanisms the economy is actually much more vulnerable, and the financial system is much more vulnerable. More interconnected. More interconnected than it appears to be. And of course, the reason that Lehman is such a (23/44)
dramatic event is precisely because that comes to light. I think one of the things that Federal Reserve officials used to say is that Lehman is like Drexel. If you may remember, Drexel was the investment bank in the 1980s merger, boom, Michael Milken's investment bank at some point when under and of course, it looked bad, but nothing happened to the macroeconomy, to the economy. So many people thought that Lehman, you know, because that's not the end of the world. And then of course, what the events surrounding Lehman bankruptcy laid bare is the enormous interconnectedness of the financial system. And fortunately, policymakers learned very fast that Lehman is not like Drexel and that it's going to bring down the whole U.S. financial system. And so then they intervene much more aggressively. That was more obvious to them in the case of AIG, but it wasn't in the case of some of these investment banks like Lehman because they moved very quickly to bail out AIG around the same time. When (24/44)
did the AIG bailout happen? The AIG bailout happened the week after Lehman. After Lehman. Again, this gets into a set of controversies that have remained unresolved, but in the two weeks leading to the Lehman bankruptcy, the authorities are watching, I think at least four institutions. They're watching AIG, they're watching Lehman, they're watching Merrill Lynch, and they're watching Morgan Stanley. And all of them are in trouble. And I think that it so happened that Lehman came under extreme pressure first. It could have been somebody else. And so a decision was made not to rescue Lehman. And I think as soon as it became apparent, which was rather immediate, what were the consequences of Lehman bankruptcy? The authorities turned around. Barclays was in conversations by the bank, right? How hard was the Fed pushing for some kind of a merger or a buyout? Okay, now we are in the domain of gossip, which I'm very happy to participate in. But I want to make sure we understand that I don't (25/44)
know any more than anybody else, which is that there were attempts to sell Lehman that were going on or to arrange a sale of Lehman since Bear Stearns, since right after Bear Stearns, which were not successful for whatever reasons, but I think mostly because Lehman management did not want to be sold. Also I think a loan from Berkshire Hathaway also was on the table or in equity. Well, they were discussing. I think, again, there were discussions. So there were several attempts, several conversations. I think the conversation that went the furthest is the conversation with Barclays Bank in the UK. I think now there are two versions of the story. There is the Hank Paulson version of the story, which is that that was supposed to happen and the British Treasury messed it all up. And so they had a plan and they just were messed up by the chancellor. I can't remember. Maybe it was the governor of the Bank of England. And then there is the British version of it, which is, what are you talking (26/44)
about? This acquisition was something we've learned about very late in the game. It would have required a huge amount of process and approval and due diligence. And the idea that we could have approved it overnight is just a ludicrous idea. So maybe historians one day will figure out who is right about that. Of course, the other side of the story is that there was literally six months of trying to sell Lehman. So why that didn't happen in advance is a complicated story. So I took us off target. You were laying out three aspects of beliefs. One is this unhinged expectations that occur in the bull phase of the market. People expect that markets are going to continue to rise, home prices are going to rise by 10% every month. Some of the most ridiculous estimates were in Orange County and in California in general. Orange County, I think was 14% a year, something like that. For 10 years. For 10 years. This is the old trees grow to the sky. Exactly. Marital bubbles. And that goes part and (27/44)
parcel with another thing you mentioned, which is the neglect of downside risk. And I think you were about to give us the third one before I took us off track. The third point, which is again, the beliefs is the question that I started on, which is why Lehman was so pivotal. And why did it so radically change the situation? And I think Lehman was so pivotal. And again, this is why we call it a crisis of beliefs is precisely because it made it clear that the government essentially has to rescue everybody, which is to say that the financial system was so interdependent and the asset holdings of different financial institutions were so similar and risk exposures of different financial institutions were so similar that if one of them goes under, the others will as well. And so you have as a response to that this very massive intervention by the Fed across the board with essentially every financial institution is getting rescued. But that was when the markets turned. That was the markets. (28/44)
Right. When they realized that they had it wrong sort of collectively. Right. And of course, again, you also see an overreaction at that time because the markets decided and you see that for example, the prices of triple A rated mortgage backed securities that the world is going to come to an end. But again, fortunately, the policy at that point became extremely effective, extremely aggressive. And so by March of 2008, the financial system was more or less rescued. So when you look back at expectations data from this time, what do you see? How does this correlate to what we saw in the financial markets? Well, there are several things that I can talk about. So the first one is the expectations data in the housing market and with respect to the risks of mortgage backed securities. In fact, they're totally consistent with the bubble, which is to say that people thought that home prices are going to rise much faster than was realistic or plausible, of course, than they actually did. And (29/44)
people also thought, given these beliefs about home prices, that mortgage backed securities and even more exotic instruments such as CDOs were much safer than they turned out to be. The mistakes were largely linked to the asset price appreciation expectations. Now the second place where expectations data are very helpful in the book spends a lot of time on this is this failure to appreciate the risks to the economy resulting from accumulating losses by banks and growing losses to homeowners and others related to depreciation of home prices. So if there are some tables in the book that talk about macroeconomic expectations, both of Wall Street forecasters and the Federal Reserve, and what these data show is that macroeconomic forecasters were reducing their forecast for the growth rate of the U.S. economy, but they stayed positive through the summer of 2008, which is to say that Wall Street forecasters did not see that the financial system is about to collapse. That was one of the most (30/44)
stunning charts you had in the book because their meltdown scenario I think was like point ... Well, I'm coming to that. So one might think the Fed did better, but of course it did not, which is to say that there is a meeting on August 5th of 2008 of the FOMC, the Federal Open Markets Committee, which sets interest rate policy. And in preparation for that meeting, the staff of the Federal Reserve prepares some macroeconomic forecasts. And you saw that actually for that early August meeting, six weeks before the Lehman crisis, the Fed staff raises its forecast for the growth rate of the U.S. economy. So they obviously do not think that there is an imminent crisis. In fact, as you've pointed out, it's even more extreme than that because the Fed staff is asked to produce a forecast for the nightmare scenario. I think it had a technical term of severe financial stress for the U.S. financial system. And the Fed produces an outlook which suggests that in that case the U.S. economy will have (31/44)
slight negative growth in the second half of 2008, returning to positive growth in 2009, and that the unemployment rate will peak at 6.7%. So again, there is no appreciation that something like Lehman might happen, and in reality the unemployment rate peaked at 10%, not 6.7%. And it peaked at 10% with huge monetary and fiscal interventions. It peaked at 10% with gigantic monetary and fiscal interventions. But again, it goes back to our point that the Fed did not then, and I don't think does today, have a correct model of the economy. And in particular, things like financial fragility and panics and crisis are not part of the Fed model. It's all about wealth effects. I want to ask you a few things. And the question that comes up with that has to do with how much of that is because of their belief that they can't model that. Did you in this process look at analogous forecasts during the depths of the recession in early 2009, and how those compared to estimates right before markets tanked (32/44)
in 2008? The after Lehman, all the forecasts declined precipitously, and in fact they probably become too negative relative to what ended up happening. But again, I don't think that people anticipated that government interventions will be as fast as aggressive and as effective as they turned out to be. And so you see the forecast tank after Lehman, though not before, but then recover pretty quickly afterwards. I should have said, by the way, that except for events like the financial crisis, when the economy is going through a relatively calm period. These forecasts tend to be pretty good. It's not that they're random forecasts. They tend to be pretty good. People more or less understand how the economy works. It's precisely this neglect of risks associated with indebtedness and interconnected indebtedness of financial institutions that caused the forecast to be so far off. I think you also mentioned this follows sort of appropriately as the work of Haiman Minsky, because what you're (33/44)
citing in a sense is you're giving data that explains or that follows along Minsky's instability hypothesis. That's what you see in the expectations data. Expectations are pretty much in line with financial markets except when there is a change in market regime, when there is a sudden shift in the market. That's where, as you said, the Fed was actually revising their expectations up at the same time as markets began to tank. The Fed was clearly extremely late and extremely far behind in appreciating, but not just the Fed, the private sector forecasters as well, in understanding the building up of risk. Do you think that it will be possible, based on what you've done and what you think other researchers can do and will do, that we'll be able to get to a place where we can use survey data? First, how good is the data? How much better can the data get? How much does it have to rely on surveys? How much can it begin to rely on big data sets produced from search engines, social networks, et (34/44)
cetera? Other ways of extracting data about social mood, how good can the data get? Then how good can our models get where we can actually become better at forecasting financial crises? Is that something that is realistic? Let me answer this question in three steps. The first step is that I think even without better data and better models, I think if considerations of financial fragility became closer to the forefront of macroeconomic and policy discussions, it would be a better world. Financial fragility, you're not talking about expectations data now, you're talking about systemic risk? I say systemic risk, yes. Some of what you learn from systemic risk about is the existing expectations data, which is to say that if you look and people expect 10% growth in home prices or 15% growth at home prices, something is wrong. The Fed would tell you that that's too fuzzy and not quantitative enough. Our officials today would tell you that, I assume, right? Again, remember, I've tried to do it (35/44)
in three steps. The first thing is that the level, the sophistication of the conversation can be improved even with the existing data and models. One has to go outside of the existing data models, but it seems to me that you could have a better conversation even with the tools that we have. Second, it seems to me that, yes, absolutely, that we are at the beginning of transition of macroeconomics to more realistic models. I think the financial crisis of 2008 shook people up and they are much more open today. This is what you started with when you talked about behavioral macroeconomics and finance. They are much more open today than they would have been 10 years ago to the idea that we should introduce expectations both in terms of data and in terms of models into macroeconomic analysis. That is happening. I can tell you how fast it will happen. Of course, the third point is that it would normally take 20 years, even if we do have more sophisticated macroeconomic analysis, for that to be (36/44)
put into the formal Fed models and for the data to be created. If you think about rational expectations, the ideas came out in the 1970s and they were incorporated into the Fed model in the 1990s. Those things don't happen overnight, but we do have a lot of expectations data. They are not terrible. They are not perfect, but they are not terrible. A lot of people are beginning to collect more. I think in that respect, things are definitely looking up. From the data that you've been looking at, because you've put a lot of work in, obviously, to do this, what do you think about where we are today? Anecdotally, it seems that the markets are not responding as well to the same quality of good news today as they would have been six months ago. The case in point perhaps is the G20 with Trump and the Chinese. I don't know exactly if anybody knows what it is that they agreed on. There is a certain amount of fuzziness about it. The markets are obviously extremely nervous. Prices of risky assets (37/44)
are extremely high. There is a non-trivial chance that we're going to have substantial asset price deflation, particularly of risky assets, whether we're talking about sovereign debt or whether we're talking about risky corporate debt or whether we're talking about equities. All these markets appear to be in dangerous territory. The one thing that seems to be different in 2018, and that is thanks to policies that were introduced after the crisis, is that financial institutions appear to be financially in better shape than they were in 2007 and 2008. I think a lot of it is thanks to stress tests, which assuming that they have the integrity we think they have actually have played some role in shoring up the capital of the financial institutions. I think people are much more nervous about it than they were in 2007, 2008. I think from that side there's been a lot of progress. Because there's memory of the crisis. There is memory of the crisis. I think from that perspective things are much (38/44)
better than they used to be. With the caveat that we're assuming that there is some integrity to all these regulatory mechanisms. That's the sense in which the situation is. By the way, the situation is in some ways much more dangerous in Europe, where you have in various countries, populist parties that want to restructure debt and are thinking about leaving or changing the way in which the Euro mechanism works. Banks are much more vulnerable in Europe than they are in the United States. Because of the amount of sovereign debt they hold. Each other's debt they hold. Yes, Italian debt. Italian debt is a big one. How dangerous do you think the situation is with Italy, given the size of its bond market? The fact that these are countries again that are within an exchange rate mechanism within the European Monetary Union, which is something that's very different than the United States, which uses the US dollar and has been using the US dollar for at least 100 years under its current (39/44)
incarnation. Look again, when I answer these questions of what I distinguish the territory where I feel I know something of the territory where I think I'm making the same kind of gases and conjectures as anybody else. You have to think about Italy, whether the five-star movement actually means what it's as and whether the Northern League means what it's as or whether there is some kind of elaborate dance between the European community and Italy that is going to take us to the brink, but then everybody's going to walk away from the brink and make up and let Italians spend a little more money and everything is going to go back to normal. I have no particular insight into that matter. It would seem to me to be totally suicidal for Italy as a country to do things that are particularly aggressive with respect to its policies. But on the other hand, we're talking about extra spending of 2% of GDP, which is what they're fighting over, which seems to be a little trivial. I can't imagine that (40/44)
the European authorities are going to precipitate the collapse of the European monetary system over 2% spending by Italy. All the reasons suggest that they should agree, but sometimes reason doesn't govern. Exactly, which brings us back to rational expectations and the need to revamp our models around beliefs and guiding expectations. Before we end, I wonder, how has your research and that of your colleagues working in this field been received first by the private sector and second by public officials and regulators? Do you see a discrepancy there? Let me divide those two as you've divided them. I think that I've been working on behavioral finance and ideas related to behavioral finance for many decades. I think that those ideas have been effectively incorporated, absorbed into the thinking, into the private sector. These are not just my ideas, these ideas of many others. I think the private sector has very effectively absorbed behavioral finance. That doesn't mean that they've (41/44)
absorbed the newest staff. That's probably going to take a little longer, but I don't think that these ideas are things that people will find particularly disagreeable. I think I found the Fed to be both the current and former officials of the Fed to be a little more defensive. I sort of understand it, as I said and as I keep repeating, economic policy after Lehman was brilliant. There is a point of view that says, hey, we were brilliant after Lehman. Why do you want to pick on us about what happened before Lehman? It seems to me, for thinking about the future, for thinking about the policy in the future, we actually do need to get to the bottom of what happened after Lehman. I understand why they're irritated with my trying to stir this up or the book trying to stir this up because they think of themselves as saints for rescuing the free world. It seems to me that it's nonetheless important to figure this out. I think there are some discussions, sometimes more friendly, sometimes less (42/44)
friendly, but the truth is going to win out. Well that's always hoped for. Dr. Schleifer, I want to thank you for coming on the program. It's an interesting topic. As I mentioned at the top of the show, I don't think that the assertion that expectations and beliefs have a significant impact on markets is a controversial idea. But I think what makes this book most worth reading is that it's an attempt at modeling expectations data in a way that market participants and regulators can use in order to make better forecasts. I highly recommend it to anyone who's interested in learning more about what's happening at the leading edge of this field. I appreciate this very much. The book has a red cover, so it's a great Christmas present. And it's got a bull on it too. And your co-author is? Nicola Giannioli, who is a brilliant young man, who was a student of mine about 15 years ago at Harvard and has been a professor of economics in Italy for the last several years. So an Italian interruption. (43/44)
Thank you very much for coming on the program. Thank you. That was my episode with Andre Schleifer. I want to thank Andre for being on my program. Today's episode of Hidden Forces was recorded at Edge Studio in New York City. For more information about today's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you're a regular listener to the show, take a moment to review us on Apple Podcasts. Which review helps more people find the show and join our amazing community? Today's episode was produced by me and edited by Stryanus Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (44/44)
This is the full transcription of podcast 'Hidden Forces'.
Financial Markets and the AI Revolution Adam Butler #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetrius Cofinas 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 guest in this episode of Hidden Forces is Adam Butler, the CIO of Resolve Asset Management, an alternative asset management firm that focuses on providing cutting edge, globally diversified, and systematic investment strategies that are non-correlated to traditional portfolios. In the first hour, Adam and I evaluate and explore the structural changes that our economy has undergone since the 2008 financial crisis, along with their consequences for market accountability, monetary policy, and the stability of our political economy, all in the context of discussing his approach to financial modeling and systematic investing. In the second hour, we engage in an expansive and valuable discussion about the mind-bending (1/45)
progress being made in artificial intelligence, how it's already disrupting multi-trillion dollar industries, the incredible promise that this technology holds, and the dangers that it poses to the stability of our economies and political systems. 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. 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&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 have questions, feel free to send an email to info at hiddenforces.io (2/45)
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 that should not be relied upon as the basis for financial decisions. And with that, please enjoy this incredibly expansive and invaluable conversation with my guest, Adam Butler. Adam Butler, welcome to Hidden Forces. It is so great and exciting to be here. We've had the chance to have a conversation in person and we've hosted you on our podcast, Resolve Riffs, and it's always been just really interesting and fulfilling. So excited to have this chat. Yes, you were at our Austin dinner along with many other very smart and interesting people. And I should mention this because I've never actually done this. I don't think I've ever, once, since we launched the Genius community in the two years that we've had it, ever cited a name (3/45)
of the people at the dinners. But I feel comfortable at this point doing that. I mean, just as an example for people to understand, our next dinner, which is in New York this week, the folks that will be there will be Philip Carlson Sleezak, Josh Wolf, Henry Olson, the political analyst, James Aitken, who was listening on the podcast, and a number of our really excellent members. And that's really how these dinners are. They're a mix of members and special invites. And you were one of the special invites to our Austin dinner. I love it, man. I love it. I try to always bring people in new faces. The conversations are great. They're always thematic. I don't remember what the theme to that dinner was, but the theme in New York is, understandably, about the upcoming elections and their impact on the economy and national security. Yeah, Lacey Hunt led the conversation at ours. And I mean, he just comes at the issues of fiscal profligacy and Fed response functions and R-Star and all kinds of (4/45)
stuff and a very unique frame. So he's always fabulous. It has sparked a tremendous conversation. And there were awesome contributions from the guests as well. Yeah, Kevin Coldiron was also there who has been on the podcast who wrote The Rise of Kerry. Marshall Kozlov, who hosts the Realignment podcast and is a really smart... I was about to say kid. I shouldn't call him kid because it almost sounds derogatory, but I mean it in the most endearing sense because he's a young, smart person. And so anyway, they're great. It was a lot of fun. I had fun catching up with you in person, but we'd already been in touch for years. I had been on your podcast some years ago and I deeply respect your... I've used this term Renaissance mind. And I'm very excited to have you on, Adam, because every now and then I bring people on the show who I feel like I can have a kind of almost off-the-record conversation with that's more casual, but nonetheless fruitful. And while I've structured an outline for (5/45)
our conversation and some of the things that I hope to speak about our AI, which you do a lot of work in, we'll get into that and the economy, et cetera, I'm sure we'll go all over the place, we'll rift. So just to start off, you're the CIO of Resolve Asset Management. What is Resolve? Resolve was founded in 2015. I've got two business partners, Mike and Rodrigo, and it grew out of a recognition after 2008 that the way that we've been thinking about the investment paradigm, which had largely been trying to sort of navigate the macro view using narratives and an understanding of the global economy and the different degrees of freedom and moving parts and just getting the really big calls so spectacularly wrong in 2008 and then a period of very unpleasant reflection around why was I so miscalibrated or why were we so miscalibrated in that? And it wasn't that we were miscalibrated about what was about to happen, what were the causes of the collapse, what were the local nex eye of that (6/45)
collapse. In other words, where was that risk most likely to manifest and when we actually got those calls right. But what we failed to do is recognize the capability of governments to step in and change the rules. So we ended up doing very, very well until governments stepped in and changed the mark to mark accounting rules and accelerated the quantitative easing. And we've been short all of those sectors and having a fantastic year. To be fair, I had some big commodity bets on. So it's not like we had a huge double digit year accruing because the commodity bets offset a lot of our bets against the banks, et cetera. But the unbelievable reversal that happened when they reversed the market accounting rules and introduced TARP and quantitative QE1, QE2, QE3 were extremely disorienting and disheartening. And that set us on a journey. And one of the individuals that was really a huge catalyst for my shifted thinking was Philip Tetlock, who I'm sure you're familiar with and is a great (7/45)
inspiration to me. But I happen to stumble on a lecture that he gave to the Long Now Foundation, I think back in 2009 on his book, Expert Political Judgment, where he described, first of all, the motivations for his experiment and then the data that he collected and what they discovered from parsing that data. So are you familiar with that book and that experiment? I'm familiar with super forecasting, but I may have been told about the experiment in other podcast interviews. But why don't you go ahead and tell me because it'll be useful and, of course, helpful for the audience. So Dr. Tetlock graduated, I think, with a master's or a PhD in psychology. He went to work in the intelligence community in DC. And as a starting analyst, he was charged with effectively being the secretary at meetings. So he would be taking notes on what these senior policy analysts, senior military analysts, senior politicians, etc. had to say about what they were observing in the Kremlin, the Polyboro, (8/45)
economic situations, etc. And then he would be responsible for reading out the minutes, a summary of the minutes at the next meetings. And what he observed was that there was virtually no correlation between what the senior analysts had forecast was going to happen and why and what actually happened over the subsequent months and quarters. And so he took this and went back to university and got sponsored to do this large study. So he recruited about 180 experts on average, about 16 years of experience across a wide variety of fields, economists, senior journalists, senior policy analysts, people working in the intelligence community, etc. And average level of educational attainment of master's level, so experts in their fields. And he asked them about 100 questions each over the course of about 10 or 12 years. So he accumulated about 18,000 answers. And he asked questions in a very specific way. So what do you expect to happen? And what is the probability that you assign to this (9/45)
expectation? So he was trying to measure not just the accuracy of people's forecasts, but also the calibration of people's level of confidence to their accuracy. So he's got 18,000 observations over this long period across a very wide variety of complex domains. Questions like, will the inflation rate in France rise above 3% or not? Russia, will the USSR expand their border in this direction? So very specific questions were very specific. And anyway, so all this data, he summarized the results. So some interesting counterintuitive things came out of this. Number one, people are not very good forecasters in their own domain of expertise. In fact, when he asked questions to experts outside of their domain of expertise, they tended to actually be both more accurate and more well calibrated than within their domain of expertise. The experts most likely to be cited in academic journals or appear on TV or in newspapers, less accurate and less well calibrated than those who toil in greater (10/45)
obscurity. There was not a single expert who demonstrated either an accuracy or a calibration above 50%. So in aggregate, we're not very good. But when you take the average of everybody's response, that was better than any single expert. And alongside this, he also ran some simple algorithms. So over the short term, things typically will revert to the mean. Over the long term, things will typically follow the same trend that we've observed over the last many years or decades. And these simple algorithmic approaches outperformed all of the individual experts, the aggregation of all experts, like the average of their views, and had an accuracy level that was greater than 50%. And by virtue of their design, were as well calibrated as you could be, because they were able to determine. When you say I performed all of the experts, I'm assuming you mean all of the experts across a wide range of questions that they're asked, right? Correct. Yeah. So the capability of the algorithmic approaches (11/45)
was they ran this, these algorithms against the humans on each of the questions, and then evaluated them both against the individuals and against the average views of all of the individuals. And the algorithmic approaches came out on top in all of these different metrics, right? So this was a really big wake up call to me who had been using more of a discretionary or clinical approach to forecasting and problem solving in markets, and led me down this path to systematic models and ensembles and machine learning and just as a way to measure the calibration of models on how they perform out of sample, that sort of thing. And so resolve really grew out of this recognition and our application of what started out being fairly simple models and grew into ensembles of simple models and then ensembles of slightly more complex models and expressed in a global macro context. In order to be bullish on the use of systematic passive investing strategies, do you need to necessarily trust that there (12/45)
will always be some sufficient number of discretionary investors? And is there some way of knowing what that number is? You need to assume that there is some proportion of less well-informed investors. I mean, there are bad models, just as there are bad human forecasters, right? So as I scan the infosphere in my domain, most models are bad models. I mean, the canon of empirical finance is littered with a statistical technique that doesn't actually give you any information about what to expect in the period after the experiment was conducted. Everything is in sample, right? And so to me, the biggest benefit of machine learning, and we could talk about how machine learning sort of blends into AI maybe at some point, but the benefit of machine learning is that it breaks a problem up into the data that you learn on, so the data that you calibrate your model on, and then the data that you hold out from that calibration process. And once you feel comfortable that you've calibrated the model (13/45)
to the best of your ability, you then apply it to this out-of-sample dataset to see what the true error rate is, to estimate what that error will be when you go to deploy this live, right? Whereas all of the empirical literature that originates largely out of the Chicago school way of thinking is all in sample, and there's no or not all, all is a big statement. But the majority of the canonical literature is based on in-sample testing exclusively, and so it doesn't really give you any information on what to expect out of sample or how to use the in-sample information to make better decisions on what models to deploy and with what confidence. And that's what I spend the last 15 to 20 years on of my life. I could talk about that at Nausium in whatever depth you might want, but the reality is that the world of finance is much more random, and it is much harder to select good strategies that will have expectancy to outperform out of sample than most people realize. And that's why we tend (14/45)
to really prioritize diversification in every dimension that you could possibly prioritize it. I don't know if you heard my conversation with Dohan Farmer on complexity economics. I did, yes. And he used agent-based simulations, but there's some crossover there with who we talked about in that episode and what you're talking about. So I definitely recommend people listen to that. So okay, then take me back now to the 2008 period, and as you said, you were well positioned for the crisis, but you were caught flat-footed or blindsided by the effect that policymakers had in changing the rules of the game. What was it specifically that you were unprepared for beyond the fact that you were unprepared for the changes? Was it that your theories of money and credit didn't reflect the new realities of how monetary policy and the monetary system worked? Or was it something more fundamental along the lines that we were just discussing, that your approach at modeling using statistical regressions (15/45)
and sampling from historical data was wrong? I think it was a little bit of everything. I think that my economic framework was overly simple, that I had gotten a major theme correct, and that had built some overconfidence. Like the emerging market commodity cycle theme, I had gotten very right for several years, and I started to maybe see too many things through that prism. And so there was a little bit of a miscalibration there. It was a failure of imagination around what the different tools the authorities could bring to bear if pressed to change the rules or change the trajectory or fundamentally just change the game. So I think it was a variety of different things. Eventually, it was just a recognition that, and I still hold this view generally to this day, that the economy is a complex adaptive system. It is emergent in every conceivable sense of the word and that it is not very fruitful to try and understand it or at least make decisions in markets on the basis of some clinical (16/45)
or narrative-based understanding of the underlying dynamics. It's just there are too many degrees of freedom, there are too many interactions, and those interactions are too complex and reflexive for any individual human. And I would argue any individual algorithm to be able to navigate. And our strategies use tens of thousands of different algorithms, all viewing markets from a slightly different angle. You've seen this image of the black hole. So that image is a computer synthesis that's an aggregation from a wide variety of different spectra and different ways of observing that black hole. Well, it's the same sort of thing. We're viewing markets through a wide variety of different spectra and then aggregating those signals to get a more fulsome view. And if you look at the Kaggle competitions, which are just these machine learning forecasting competitions, all of the top scoring teams now are using ensembles or meta ensembles of some kind. And it's just because you're trying to (17/45)
model highly complex systems. And so there's no single right way. And there's so much conditionality in the process of forecasting that some of your models are going to be well fit to certain conditions and others for different conditions. But on average, you're likely to converge on something that's better than. So it's this idea of the Gestalt, right? Where the hole ends up being better than the sum of the parts. Yeah, no, totally. I get that. I mean, the application of these models to finance is yet another area we can expect to see some potentially enormous benefits accrue as a result of the advancements happening in AI and machine learning that we're definitely going to talk about in the second hour. Did you ever hear my conversation with Gary Gerstle on the rise and fall of the neoliberal order? He's written a number of interesting books, two of which were relevant to the conversation. One was about the New Deal order and one was about the neoliberal order. And the conversation (18/45)
was about the breakdown of the neoliberal order and the move to something new. And so I think about that in the context of your befuddlement, mine as well, at the changing of the rules that occurred, our naivete at politicians' willingness to change rules that we thought were so bedrock and fundamental in domestic policy that impacted the economy in 2008. And I think we are now seeing something similar in the international arena. And speaking for me personally, I grew up, I mean, Gulf War I, which I identify as the commencement point for the New World Order and the internationalization of neoliberalism. This was of course, right after the fall of the Berlin Wall and the collapse of Soviet communism. I was 10 years old then. So I grew up in this world and I took many things for granted. And so my sensibilities were assaulted in 2008. And I think that in many ways, like we're living in the revenge of today in the world, the revenge of politics, the revenge of geopolitics, of national (19/45)
security, of more bedrock concerns upon which economies are built. That's the other thing that's also interesting. When you compare classical liberalism or libertarian thought or anarcho-capitalism with, I think, more accurate views of how the economy works, libertarians will often assume that economic relationships are more fundamental, when in fact, politics and power is more fundamental. And governments create rules of the road that set the conditions for which an economy can or cannot flourish. You know what I mean? What are your thoughts on that? Like, how does that relate to your experience and your insights? I think I went from a view that economies and markets were much more organic and unmanaged prior to 2008. And I think upon reflection that I was too naive about that going into 2008. And then of course, in 2008, we really were able to see just how managed and the types of tools that governments are able to bring to bear on markets and on economies. And over the last 15 years (20/45)
or so, we've seen more tools emerge. We've got these swap lines were put in place late in 2008. So you've got this Euro-dollar market that exists outside of the US. So basically any dollar that's originated at a bank outside of the US banking system is a Euro-dollar credit. So a bank in France makes a dollar loan to a French citizen. Well, prior to 2008, those dollar loans were not collateralized with dollar holdings. They're not collateralized with dollar holdings now either. But the banks were net short dollars against their Euro collateral prior to 2008. And in 2008, there was this huge dollar collateral call for which the global banks were not. They did not have the collateral, which mean they had to use their euros to go and buy dollars from the dollar system. And there was just a shortage of dollars. So the dollar rose tremendously. There was a shortage of high-quality collateral like T-bills and treasury bonds. And so there was a run on that. And so the Fed implemented these (21/45)
swap lines, which provided lines of credit to foreign banks. So they were able to provide them with effectively unlimited amounts of dollars as loans to fulfill their dollar liabilities. So I wasn't familiar with the Euro-dollar system prior to 2008. That wasn't really on my radar. But these swap lines, along with QE and all of the other tools that have been brought to bear, including now buying credit outright and buying ETFs of credit outright in the wake of the pandemic crash, they've just demonstrated the ability to move further and further into the realm of direct manipulation of public markets and prices. And I think we should all just acknowledge now that we operate within a fully managed financial system where the authorities have all of the tools necessary at their disposal to ensure that we never have a 2008-style crisis again. And even a recession or certainly recessionary conditions reflected in financial markets again. And so the big risks now don't really exist in the (22/45)
areas of the market that most people typically look. But rather, they're externalized to the political domain and to the social domain. So for example, the big risk that I see is at some point in the future, there will be a political party that will be put in place in Europe or in the US or like a major economy where the party will recognize the people's frustration and anger about various issues, one of them being that more and more people are feeling left out or feeling left behind and perceiving that the Fed is a major instrument of that, of propagating this accelerating gap, and will just decide to take away power from the Fed to use those tools on behalf of markets. And so this is now the type of thing that market participants need to price in, and they just don't break out in one direction or another. But when we do lose equilibrium, they break out fast and they break out to a much larger extent than they used to. And these real risks that could generally derail the economy and (23/45)
the financial markets are risks like the people wrestling control of the monetary system from the Fed, which is not on people's radar. Man, so much to respond to. I feel like there are two separate threads there. One is your realization about the euro-dollar market. And there, I want to point listeners to there are many episodes that we've done on the internationalization of the dollar, the dollar system, the euro-dollar system. But one in particular with Levin and about the evolution of the euro-dollar system is one I highly recommend because the dollar really is at its core, it's a denomination. It's a denomination. And French banks operating outside of the Federal Reserve System have the ability to issue dollar-based loans without actually secure collateral and gaining unlimited access to dollar swap lines gave them a lifeline where they didn't have one. And it's so important for understanding the strength of the dollar and why it goes up in these kinds of credit crises. I also (24/45)
recommended a conversation I had with Katarina Pistor about when Adam and I were talking about regulations and laws and how those really create the rules of the road that determine what kind of economy you get. She wrote an excellent book on that. We had a great conversation about it. And also further to your point, just to close off this thread and then go to the more interesting one about political instability, to your point about the authority's ability to arrest crises, just look at SVB. If SVB had happened in 2008, that would have been a full-blown crisis. But what did they do? They had a quick resolution for it and they tightened three more times. They raised interest rates three more times. So really great points. With respect to political instability, back in 2008 or 2009 or 2010 around that period, I had, I remember tweeting about this, which was that the way I thought of it then was that the suppression of financial volatility through QE and these constant interventions and (25/45)
forward guidance and the coddling of the yield curve was causing a buildup in political instability in the same way that and this is a metaphor and I hope it doesn't get too twisted, a functioning democracy like that of, say, the Italian Republic, which has seen the fall of countless coalition governments since World War II, when it's functioning well, has a lot of political volatility, but it has regime stability. Whereas, and this again would metaphorically apply to how we conduct monetary policy in 2008, a more managed political system like that of Iran has very little political volatility, but enormous, unqualifiably large amounts of regime instability. So I think you make a very great observation, which is that the choices we have made to quell the volatility in financial markets and kick the can down the road are now showing up in our politics. They're showing up in the reshaping of politics and the rise of populism, which is the population's attempt to circumvent the (26/45)
intermediary role of elites in shaping political outcomes. And lastly, just to emphasize one more thing you said about the dangers this poses to Fed independence, I think this is partly what you see in some of the solutions prescribed by practitioners of MMT, which include the abolition of Fed independence and the incorporation of central bank policymaking into treasury. Are you concerned about what that would mean in practice to lose Fed independence, nominal Fed independence, I should say, because at the limit central banks are not really independent? I think the context of how that happens is really important. So I think that the modern era of financial markets started either in 1987 or in 1998. In 1987, the Greenspan Fed, Greenspan had only been Fed chair for a few months, and he had to coordinate or he did end up coordinating this large response to the October 19 crash in 1987. And in doing so, introduced this concept of the Fed put, which was then crystallized in 1998, during (27/45)
what was originally called the Tye-Bot crisis and eventually reappeared as a schism in the Russian sovereign debt markets. And it turned out that this firm long-term capital management had been extremely long Russian debt against some other trades because they were a Stadar fund. And in order for Stadar funds and credit to be able to generate the size of returns that the partners expected, they need to take on a huge amount of leverage. So you have this massive amount of leverage on a bet that has gone horribly wrong. And who provides this leverage? Well, the major investment banks. And so since all these major investment banks are now so interconnected, they were in 1998, they're even more interconnected now, the Greenspan Fed identified that this could be a cascading financial catastrophe, and they stepped in and bailed out long-term capital management. There was another manifestation of this Fed put. And then we saw the real Fed put in 2008, which we've already hashed out. And so (28/45)
over this time period, what the Fed has done is they've conditioned investors to believe that they could take as much risk as they want, because when the chips are down, they will step in and do whatever it takes to save the financial system, preserve asset markets, and preserve the status quo. And as a function of that, financial markets, just seeing that there is no real risk in financial markets anymore, have scaled up the amount of leverage and the proportion of assets that are allocated to risky assets versus safer assets, like, for example, treasuries, to the highest ever. So for example, the proportion of household balance sheets that are allocated to equities today is at the highest level ever. So the reason for this is that the Fed has made an implicit promise, and not just the Fed, but global central banks, have made an implicit promise to the market that they will always be there to ensure that their wealth grows over time. And we've also changed legislation to accommodate (29/45)
this. So the legislation that they've introduced over the years, mandating default allocations to equity funds, to passive index funds, again, continue to perpetuate this by providing a constant bid to markets. And we can get into what some of those microstructure effects, if you want. So we've linked now the markets to virtually every dimension of our lives, right? Like, your healthcare is tied to your employer. Your employer's health is intertwined with the market, and the market now ends up being the tail that wags the economy dog because it's just so much larger than the economy. And because such a large proportion of the credit that is issued against the economy is not issued against future cash flows, but rather against collateral, right? So if you've already got capital, you've got access to cheap credit and basically as much as you want. If you don't have capital, then all the income in the world is not going to give you access to cheap credit, right? So you've got the Fed (30/45)
setting up a situation of intense moral hazard with this implicit promise, not just to the priests of finance and their banks and their hedge funds, but to the citizenry at large and tying it to their employment and to their health benefits, et cetera. So you've now got a Fed and a government that understand how to use the tools to effectively manage the economy and avoid recession and financial bear markets, et cetera. And you've got a citizenry that is conditioned to believe that they can be successful and will be successful with this. And so we've got this financialized economy, right? And I think this financialized economy over time has severely constrained the degrees of freedom that we have as governments, as central banks, as broader institutions to effectuate policy, because we can't really effectuate policy that might compromise growth, that might cause sustained inflation, et cetera, because the financial system is so overleveraged and so reliant on a nominal growth rate that (31/45)
exceeds the interest on the debt, that only the solution space that overlaps with those primary objectives can even possibly be considered. So just to summarize, one, would you agree with the framing that the stock market has gone from being a marketplace for allocating capital to more of a savings vehicle for ordinary Americans? Yes. Is that one way of summarizing what you said? And is the second way of summarizing it also that the US government has increasingly taken ownership over the performance of that savings vehicle? And so when things don't go well, they get the blame for it. Oh yeah, absolutely. It becomes a political problem. So does that explain, for example, in this most recent cycle, why, and this is a question I think I raised to James Aitken, why J Powell was late to raise and early to cut because there is a bias for number go up? Well, I think J is operating good faith. Look, we just don't have any real precedent for inflation over the last 30 years, right? And every (32/45)
time the Fed has become concerned about inflation over the last 30 years, they have become over vigilant. And I think many argue that they've actually caused financial crises. So I think J was being prudent in waiting. I think we can look back in retrospect and say, obviously, he was slow. Because there were many reasons to believe that inflation was an exogenous event driven by supply chains and other COVID related matters. Absolutely. I mean, there was a lot of narratives for why that inflation spiked the way it did. And I don't think that those debates are settled. I think we can maybe say that the inflation has been more transitory than many people feared. Whether we can attribute that to Fed policy or not, I'm not sure. But it definitely was more transitory than- You never bought into the argument that, by many people like Larry Summers, that whether or not the inflation was driven by primarily driven by exogenous factors, that it could become embedded through inflation (33/45)
expectations. That was, I think, one of the arguments for preemptive raising. Was that something that you never really bought into? Oh, yeah, absolutely. I mean, what is expectations? The expectations channel really mean, right? Well, it means that employees, the labor force is going to get up at about their demands for getting raises. Like, let's keep in mind, profit margins for U.S. corporations have been rising for the last 30 years and are currently at the highest they've ever been. Now, part of that is due to a change in the mix of companies in the S&P. We migrated from maybe more of an industrial base in 2008. Keep in mind, it was dominated by commodities, oil companies, and now it's dominated largely by tech. And tech has always enjoyed higher margins in other sectors. So some of its compositional. But anyway, you slice it, the private sector is currently operating at the highest margins ever. They have been operating at the highest margins. Maybe not the highest margins ever. I (34/45)
know there were periods back in the 40s and 50s when they had very high margins as well. But either way, we're at the very upper end of that channel. So there is room for the corporate sector to allow for some labor inflation. In other words, some increase in wages for labor to be capturing a larger percentage of the economic pie, which has been largely accruing to the corporate sector for the last 30, 40 years. But it is economic dogma that wages are part of somehow wages are part of our measures of inflation. But the prices of homes are not really and the prices of assets are definitely not. So our language and our policy and the way we measure things over time has really evolved to be just vastly preferential to capital over labor. And Larry Summers saying, well, the expectations channel is what we're really afraid of. That's largely a concern that labor is going to get up and start demanding higher wages. And that sort of fear of a wage spiral. It was a wage spiral along with a (35/45)
commodity scarcity that drove inflation, sustained inflation in the 1970s. And I think that there was a fear that we might repeat that cycle, though in reality, most of the elements that contributed to inflation in the 70s really weren't present and weren't primary factors that led to the spike in inflation in the recent episode. So let's take one of those, which is demographics. Obviously, today's demographics are less inflationary by the traditional way we think about the relationship between demographics and aging demographics and inflation. But when you take a more nuanced view and you consider the growth in public sector debt, the growth in unfunded liabilities, as well as people's expectations about the role of government in the economy, you could make the argument, as one of our previous guests, former chief economist for the Bank of England, Charles Goodhart has, that aging demographics and a rising dependency ratio will actually be inflationary because the government will need (36/45)
to print more money to finance the deficit along with interest payments on the debt in an environment of sluggish economic growth where the deflationary headwinds of globalization are also in retreat. I'm curious, one, are you familiar with that argument? And two, what do you think of it? I am. Yeah, I think so the argument goes that older people, they tend to have a larger proportion of the institutional alpha, just the understanding of the machinery that makes a business run. And so as these older people move out of the workforce and are replaced by younger people who are just beginning to learn the ropes and the institutional machinery that allow whatever organization that they've just entered to mobilize productivity, then we're just going to become less productive. And there may actually be a slight shift in headcount. So you may have just during certain periods of different overlaps of when these generational bubbles rise and fall, that there may actually be a period where the (37/45)
labor force itself may shrink just because more people are retiring than are entering the labor force. And therefore, you'll have effectively a labor scarcity a loss of the most productive element of the labor force at the same time. And this will cause a shift in the supply demand dynamics for labor and increase the cost of labor and thereby propagate inflation. Combined also with fiscal spending in the context of rising debt levels and rising interest costs. Yes, yeah, absolutely. I'm not sure that those two things have to be linked, but they certainly are linked at the moment. So do you have a view on whether we're moving into a period of secular inflation? Because there are, the opposite view of this is someone like Mike Green, who I think, I don't want to misrepresent his views, but until recently, I'm pretty sure at least his view was that the forces of deflation that were present during the long, great moderation period under Greenspan and Bernanke are still with us and that the (38/45)
inflation that we did see was in fact transitory. And that this is much to do about nothing. Again, I don't want to misrepresent Mike's views, but that's sort of the view that I've come away with. Where are you on that? Are you on the camp of deflationists or are you on the camp of someone like Goodheart or maybe like Russell Napier, who view it more as a structural inflationary environment driven in no small part by government fiscal spending? Yeah, so I know Mike quite well, we've discussed this at length. I'd say that I started out having a stronger confidence in sustained inflation and that my views have shifted to feel that we're likely have more moderate levels of inflation and potentially even a disinflation over the next decade. But a lot depends on things that are outside the economy. Like if we get a major escalation in the Russia-Ukraine conflict, if we get a major escalation in the conflict in the Middle East and it drags in the Saudis and the other Arab states, you can (39/45)
absolutely see situations where you get some sort of major commodity supply disruptions or other states of affairs that might produce substantial inflationary impulse. The Trump presidency potential is a huge wildcard. He has promised to raise tariffs on a variety of goods from already relatively high levels. Sidney is going to raise them four times. I think he said from 50% to 200% on this broad basket of goods, these kinds of policies can be very highly inflationary in the short term. So there's just a lot of moving parts. The natural state of the economy, if we can avoid major conflicts, if we can avoid major political and policy moves that run counter to the sort of neoliberal order that we have been following the trajectory of for the past 20 or 30 years, is disinflationary. A major conflagration with China obviously could be highly inflationary since we import so many goods. A major conflict involving Taiwan. Now I mean, think about the proportion of the economy that currently (40/45)
depends on AI or computational derivatives. That would obviously be a massive blow to the supply of global chips, global computation. So that has downstream effects. The Longshoreman strike, here's an example of political shock that could have very profound effects if, you know, we've solved that problem in the short term, but we've got to go back to the drawing board in mid-January and this could all fall apart. I wonder how would a Trump administration deal with the Longshoreman versus a Kamala administration? That actually has a very big impact. If we feel that Trump is unlikely to be conciliatory with the Longshoreman strike, then we should be ready for a protracted period of a major shutdown of global trade, at least through the world's largest global importer and consumer. And so that could be a pretty substantial inflation shock. So there's a number of dynamics, I think, that could, especially if one or more of them converge and happen at the same time, could really change the (41/45)
rules of the game. But the natural state of the economy is disinflationary, especially in a period where the Fed is managing the economy for, you know, relatively low rates and people are generally inclined to take large risks on uncertain technological bets. You know, it would be fascinating to see what would happen in a number of venues if Trump were to return into office. The Longshoreman strike is just one example, and that actually made me think about Ronald Reagan and the air traffic controller strike. I mean, it's hard to believe that he replaced all those air traffic controllers overnight. He just fired them on. I mean, I don't know how many there were, but that was an incredibly gutsy move that could have not worked out in his favor and it ended up working out. I just thought about how much more difficult is that to do that in this case? How many more Longshoremen are there? I don't know. Are there more? I mean, I presume there are. Well, yeah, I'm that sure with the coal (42/45)
miners, for sure. It would be interesting. So, look, Adam, I'm going to move us to the second hour, where we're going to transition our conversation to what I'm most interested in speaking with you about today, which is the remarkable progress that's being made every single day in AI, a field that you know quite a bit about and have devoted quite a bit of time to understanding as part of your work and also had a personal interest, I'd say. And I want to understand how, one, you're using this technology and just how exciting and also fraught with risk this revolution is. And I don't think there's any other way to put it. This feels like it's going to be on par with or more transformative to social, political, and economic life than even the Industrial Revolution was. So, there's a lot to discuss in terms of technology, the business opportunities, the risks to people's livelihoods and to society, and the efforts at regulating such a rapidly evolving field. For anyone who is new to the (43/45)
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 Adam, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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. Adam, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 Nicolao. (44/45)
For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinus and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
Is Gold in a New Bull Market A Deep-Dive Into Humanity’s 5,000-Year-Old Obsession Rick Rule #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
Today's episode of Hidden Forces is made possible by listeners like you. For more information about this week's episode or for easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you listen to the show on your Apple Podcast app, remember you can give us a review. Each review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. What's up everybody? My guest on this episode of Hidden Forces is Rick Ruhl, President and CEO of Sprott U.S. Holdings and Senior Managing Director of Sprott INC, a global alternative asset manager focused on precious metals and real assets, serving 200,000 clients with approximately $12 billion in assets under management worldwide. After spending most of the last decade in a period of prolonged underperformance, gold has spent the last two years on a tear, up 67% since September 2018. And with the exception of a sharp dip during the heights (1/45)
of the COVID-19 outbreak, the rise has been steep and more or less uninterrupted. My goal with today's episode is to introduce Hidden Forces listeners to this category, not just to gold, but to the entire natural resource industry. So admittedly, gold is at the very top of that list. To this point, we discuss gold both as a physical commodity, something that needs to be prospected, mined, extracted, refined and stored, and as an investment in the form of bullion, equities and derivatives. We also spend time in the regular episode discussing gold in philosophical terms. What is it? What is it that gives gold its value? Is it a hedge? Is it insurance? And if so, insurance against what? And is it possible to even think about gold without thinking about the macroeconomy, credit markets and ultimately people's faith in the institution of paper money? Other topics include the supply and demand side drivers of the gold price, what Rick sees in terms of changing institutional demand for gold, (2/45)
how the mining industry has changed over the last few decades, the relationship of gold to silver and where the silver market is trending, the use of public ledgers and blockchain related technologies in the precious metals industry and much, much more. For Hidden Forces listeners who are investors in the space, Rick and the team at Sprott have offered to review your natural resource portfolio free of charge, which you can send to them directly at SprottUSA.com slash rankings. And given that this is an investment related episode, I want to be absolutely clear that nothing that I say during the course of today's conversation 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. Lastly, I want to remind everyone that Hidden Forces is listener supported. We don't advertise. If you want to learn more about how to support the show and gain access to our premium (3/45)
overtime feed so you can listen to the second half of my conversation with Rick, download the transcript or read through the episode rundown. Head over to patreon.com slash Hidden Forces where you can learn all about it. And with that, please enjoy today's conversation with my guest, Rick Ruhl. Rick Ruhl, welcome to Hidden Forces. Pleasure to be with you. Thank you. No, the pleasure is all mine. It's great having you on the program. We're going to talk about a lot today. Obviously, gold is at the very top of that list, but you're someone who is in the natural resource space and you've been in the space for what, I think, close to four decades now? Embarrassingly, yes. If you start young and then live a long time, that's what happens. Yeah. So why don't you, for those of our listeners who may not be familiar with you or your background, maybe you could give us a sense of how you got started in this space in the natural resource and commodity business? I had an interest in natural (4/45)
resources and basic industries from a very young age, really from my teens. I was fascinated by geology, but also interested in forestry and agriculture. The only degree granting institution in North America that had a degree in natural resource finance was the University of British Columbia at that time. So I emigrated from the United States to Canada. I believe it was 1970. I've been principally interested in natural resource and precious metals, finance, and investing ever since. There have been times in my career when I have attempted to do natural resources and other businesses, but I understand resource-based businesses and financial services businesses fairly well. So with very few exceptions, I don't stray outside my area of expertise at all anymore. So what drew you to the industry in the first place? What was it that attracted you to it? Well, ironically as a young man, because I like to be out of doors, and I thought that geology, agriculture, forestry, things like that (5/45)
would take me out of doors. The consequence of my success in the business is I've been confined to a desk almost ever since. But I also like the certainty associated with resources. Coincidity is an interesting word because they're extremely cyclical. But one of the things I've learned over the course of my career is that in cyclical businesses like resources, bear markets, when everything feels bad, are the authors of bull markets when things are going to be good. And bull markets, when everything is going well, are the authors of bear markets. And so that one realization has served me well in the industry. I guess the third reason is I grew up in Silicon Valley, really, San Jose, California. And I remember hearing fairly early on 30 or 35 years ago that the median economic life expectancy of many technological innovations is 18 months before somebody builds a better one. And the idea that by the time I understood a business proposition that it would be irrelevant didn't strike me as (6/45)
a good thing. The business cycles associated with things like coal and paper and power and bricks have seemed to me to be easier to understand, not the same as easy, but easier to understand than other areas, particularly technologically related areas. So when you say they're cyclical, is that because they're so capital intensive? That's a great observation. That's one of the reasons that they're cyclical. They're also unusually centered around the business cycle. Because commodities as a consequence of technology are an increasingly small part of the total cost of a finished product, demand for commodities tends to be fairly insensitive to price. An example would be in platinum right now. It takes $125 worth of platinum in a catalytic converter to enable one to attain the emissions required to sell a 50 or $60,000 car. If the price of platinum doubled, it wouldn't change. The finished price of the car, so when auto sales go up, as an example, it can impact platinum demand. The price (7/45)
can go up without the fact that the price went up impacting the demand. So the prices of commodities vary really dramatically. Witness, as an example, crude oil prices over the last 30 years. That actually raised another question, which is maybe why you find yourself so much indoors, which is that the financial side of this industry is very interesting. I wonder to what degree as you spend time in the space, your interests shifted to the financial side. How interesting is that part of the business for you? I started really on the financial side rather than on the operating side. While all of the industry is of interest to me, I started my life as a career as a credit analyst. I was reasonably successful as a credit analyst, but in terms of employing it, necessarily, I guess you're employed indoors. You maybe are explaining an instrument to a bank. You're explaining a credit structure or a capital structure to an issuer. You're explaining the efficacy of an investment to an investor. (8/45)
The other thing that happened is that although very early in my career, when I couldn't afford any backup, I did a lot of my own technical work, which is to say I attempted to do my own geology. I attempted to do my own site visits. It became clear to me as soon as I could afford to hire somebody who was better than I technically and mercifully that happened fairly quickly, that everyone was served better. There were certain things that I could do that the geologists or the engineers couldn't do. There were certainly things that they could do, things that they could see that I couldn't see. Although I've always enjoyed the site visits and I've always learned a lot from them, the truth is that the highest and best use of my time is not necessarily on site visits, although I still do them from time to time. Principally, I guess to learn about the non-technical aspects of a company's culture, whether or not the safety culture is good, whether or not there is a feel of operational (9/45)
efficiency. Something as simple as whether or not the labor force is happy, smiling, approachable, proud, those types of things. It's also interesting because the nature of the natural resource business, depending on the commodity, can be extremely risky, both politically but also in terms of personal, physical safety, depending on where some of these mines are located, including in the case of gold. The focus today is on gold, or that's how I imagine it, but I also am very curious to not only how and where else Sprott invests, but also where your interests are. If there are any exciting prospects for the future of the natural resource industry that you're interested in, maybe water. I know you've talked about uranium before. I'm not sure to what a degree it's cyclical. I know that it took a hit with the Fukushima reactor that went offline in 2011 and then the depression of demand by Japan. Maybe you could tell our listeners to start, what are the buckets within the natural resource (10/45)
industry that Sprott invests and where your own interest area lies? In the very near term, which is to say the next 12 to 18 months, I think the easiest place to make money will be in precious metals. I believe that's a consequence of the policy response to the COVID-19 virus and the response to the slowdown in the economic recovery that we enjoyed for the 10 years prior to the year that we're in. By policy response, I mean quantitative easing, artificially low interest rates, debt and deficits. All of these things debase and destabilize various currencies, including the US dollar. Traditionally during periods of time, when people are concerned about the purchasing power of their fiat-denominated savings, particularly when real interest rates are negative, like they are now, precious metals have done well. I don't see any alternative for the powers that be, the big thinkers, if you will, in their own minds other than a continuation of fiscal policies that will be good for precious (11/45)
metals. My suspicion is that both the good money and the easy money in the near term will be made in precious metals. The next part of what I'm going to say is, for me, much more speculative, which is to say that I believe that COVID or no COVID, we were due for an unwinding of the economic recovery that we had enjoyed from 2009 to 2019. While I'm not an economist, a 10-year long economic recovery is, in my experience, one that's very long of tooth, particularly if you believe like me that that recovery was more due to artificial stimulus and artificial low interest rates than it was to an increase in productivity, an increase in trade or an increase in individual wealth. The combination of an unwinding of a decade of recovery punctuated by the global economic slowdown engendered by the virus, I think means that we are going to have a period of a softer economy. That isn't to say that we might not have an equities bull market. There seems to be a disconnect between Wall Street and Main (12/45)
Street. My belief is that the real economy worldwide will reset lower for a while. Recessions used to be an expectation, but the big thinkers in the world have tried to make recessions illegal. I don't think the markets care too much about what the big thinkers think. My own outlook is for a softer economy for three to four years. If I'm correct that we will have a softer economy, most of the natural resources sector, most basic materials, will continue weak for a while. The interesting thing about that is that I see it ultimately as an opportunity, not a near-term opportunity, but commodities have been priced below the total cost of production for some number of years. If that continues, you will balance supply and demand by reducing supply. As you mentioned, these businesses are capital intensive, so starting up that supply when supply tightness begins to come into account won't be an easy matter, which is by way of saying I think that natural resource investors in the next five (13/45)
years may very well enjoy two bull markets. The first one, which is underway in precious metals, and the second one, three years from now, four years from now, five years from now, surprisingly strong rebound, sort of like the rebound in the year 2000, 2001, across the whole range of industrial commodities. What sectors have been operating below cost of capital for the last few years that you're referencing? Certainly, uranium as an example. The International Energy Agency suggests that the fully loaded cost to produce a pound of uranium worldwide, including cost of capital, and importantly, adding back prior your write-downs where companies take them off the balance sheet, is about $60 a pound. You make the stuff for $60, and you sell it for $30. You lose $30 a pound, and of course, being miners, you try and make it up on volume. Tough thing to do. The consequence of that is that about half of worldwide uranium production is shut down, and it's difficult to restart these mines. When (14/45)
the price of uranium goes up, it will be a while before there's a supply response. But probably a more dramatic example is oil and gas. The same agency, International Energy Agency, suggests coincidentally that the price to produce a barrel of oil is somewhere between $50 and $60 a barrel. Again, not lifting cost, but total cost, including cost of capital. Again, you make the stuff for $60, and this time you sell it for $40 or $42. You lose $20, $25 a barrel, and at present, you're doing this 83, 84 million times a day. We have seen other circumstances where oil was priced below the cost of production for two or three or four years. It can do that because of stranded capital, so much money got invested during the good times. But eventually, low oil prices mean, as they mean today, much, much, much less sustaining capital investment and almost no new project investment. That impairs the ability of the industry to respond to developing tightness and an increase in oil prices by (15/45)
increasing production. They can't do it in the near term. Copper is a little illusory in the sense that it's very, very capital intensive, and there's a huge difference between cash production cost and total cost, which is to say full cycle exploration, all those things. But it's believed that the incentive price for a new copper mine worldwide is about $3.50 a pound. So right now, the industry is making copper for $2.80 a pound that would cost them $3.50 a pound to replace. In the last 15 years, as an example, the average head grade, that is to say, the percentage of copper in oars being mined, was around 1%. Today, it's about 1.5% of 1%. So we're setting ourselves up for a circumstance throughout a lot of industrial commodities, agricultural minerals, base metals, oil and gas, uranium. We're setting ourselves up for real supply shortages as the productive capacity begins to be cannibalized, and three years from now, four years from now, five years from now, as we go into a cyclical (16/45)
economic recovery. There are other commodities that are mispriced, where the market is out of kilter because of politics. My favorite one there is water. Water is to believe to be a right. And so water is allocated in most of the world politically rather than via markets. So you get circumstances as an example where water is used for such brilliant things as growing rice in the desert, like here in California. And eventually, there's going to be an ugly, ugly, ugly reckoning around the lack of capital investment in water and the lack of real markets in water. The only way that you can make really, really, really vast broad mistakes in the world is through politics. And I'm afraid here in California that we're making absolutely stupendous mistakes around water, which might be, at least for a while, of advantage economically. It's interesting. We actually spoke about this in 2012. And I believe at that time, you cited something like 85% of the water used in California was used by 3% of (17/45)
the population, which was the agricultural sector at the time. You have a good memory. Yeah. You have a good memory. That's correct. I don't know if it still is, but absolutely. I mean, that's a huge factor that we have in general across our economy where costs are seen as economic externalities and we can't accurately price them. The other thing I was thinking about when you were discussing oil and uranium, but especially with oil, is that these various commodities, some of them are inputs for other commodities. I mean, the classic example is like silver. Silver comes out as a byproduct of all these other industrial mining operations, but even gold, you need oil and you need water. So I wonder how much do these cycles influence each other? To do an accurate or a probabilistically accurate projection of where the price of any one particular commodity is going to be, how much is its price influenced or its projections influenced by the price or behavior or cyclicality of its inputs? (18/45)
Well, those are certainly issues. Certainly one of the things that has happened very recently, like in the last three or four months, has been the incredible increase in earnings performances of certain gold companies. Those are gold companies primarily located outside the United States where the product that they produce, gold, has been going up, but it's been going up also in a relatively strong commodity. While the prices of their inputs are denominated in Canadian dollars and Australian dollars is an example. So their input costs have been falling, but particularly their energy input costs have been falling. And energy, I mean, gold mining, well, all mining is a very energy intensive business. So the incredible decrease that we've seen in oil and natural gas prices has been a real boon to mining companies. So what you say is true. Traditionally, the largest costs associated with the resource industries have been, well, the largest variable cost, of course, is exploration. But the (19/45)
real costs are the cost of capital because it's a capital intensive business. And then the so-called social costs, social license, rent, tax, those types of things. And I could only wish those were cyclical. They only seem to go up. It seems that for most other sectors, the endogenous factors dominate in terms of determining price. But in the case of gold, it always seems that every conversation about gold really focuses on exogenous factors that drive the demand, like monetary policy, pandemics, QE, financial crises. I wonder with respect to gold, to what degree is its price determined by endogenous factors, which I imagine would be pretty much isolated to the supply side. And then how much of it is really exogenous forces that basically lead to conversations like the one we started this episode with, which are macroeconomic? In my experience, both are important. But because remember that gold is at once a consumer good in the form of high work index jewelry, and it's also money. So (20/45)
there are circumstances where the industry has done a relatively good job in promoting jewelry demand. And also there has been a slow motion economic recovery in societies that put a real premium on gold as adornment. I'm thinking India, Pakistan, places like that. But the variable with regards to gold has always been investment demand. And I would argue that the investment demand really is a function of two things. It's a function of faith in purchasing power of other savings instruments. And it's a function of real interest rates. If there are very, very high real interest rates, particularly high real interest rates in the world's reserve currency, the US dollar, then the default savings mechanism becomes the US 10-year treasury. If we have a circumstance like we have today where the real return on a 10-year treasury is negative 1% a year for 10 years, which is to say the US government solemnly swears to give you back less money in 10 years than you gave them, gold does well. So (21/45)
that raises another question for me. It's something I thought about when I sat down to put together the rundown for this episode because I haven't, in the three plus years now that I've been doing Hidden Forces, I haven't covered gold once, not once on the show. I mean peripherally. I've never done a single episode dedicated to gold. And I'm someone who owns gold. I've invested in gold. I want to be careful when I say I see its value. I think I see its value or maybe it's, you know, I see what I want to see. And so I'm also, as someone who has sought gold as a form of insurance, I'm also aware of the fact that I didn't always think of it as insurance. There was a time when I thought that it was a hedge against inflation, but I've since revised that perception. And I would think it would be very interesting to have now a bit of a philosophical discussion about what is gold and how do we measure its value? I'm curious, how would you answer that question? If I ask you what is gold and how (22/45)
we measure it, what would you say? Well first of all, I would praise you for describing it in the same fashion I see, which is to say as insurance. I mean, yes, it's many things more than that, but its value is subjective rather than objective. If you're an Indian national, as an example, the efficacy for gold, its value to you will be measured in savings in India as an example, rupiah related. Whereas in the United States, it would be US dollars related. And people need to pay different premiums for different amounts of insurance for different reasons if you follow me. The value is subjective. I mean, I have been interested in gold as an investment. I've been philosophically interested in gold for a very long time. And occasionally I ponder Buffett's description of it as a pet rock. The difference of course is that Buffett ignores 6,000 years of history. He ignores the fact that if you were a Vietnamese person at the end of the Vietnam War, you were either a prisoner or you had gold (23/45)
to pay to escape. He ignores the experience of the European Jewish diaspora. He ignores a lot. And so I am occasionally struck by the fact that there are psychological reasons for gold, maybe historical reasons. Why is it valuable? I mean, I understand that Aristotle described the reasons why it's money. You know, it has utility. It's pretty. It has a youth separate and apart from being money. It's malleable. It's durable. It's divisible. It's constant. All those things. It's wonderful money. But occasionally I too say what gives it its value? Is it also a faith based currency? So at the bottom of your question, the only thing that I can say is it has absolute function as money. It's perfectly designed to be money. What gives money value other than utility? And those become interesting questions. My temptation is to say history. I mean, certainly it can't be counterfeited, all those types of things. But behind all that, other than its luster, other than the fact that it does have (24/45)
utility as an adornment, why is it so efficient, both as a medium of exchange and as a store of value? And that's a very interesting question, one that I don't have an answer for. You kind of hit on exactly what I was contemplating when I was coming up with these questions. And I actually also thought about whether it's even possible to think about the value of gold or speculate about the price of gold without thinking about the value of or the faith in paper money, in the institution of paper money. That's right where I was going actually. We, you and I, denominate gold in US dollars. European people denominate it in euros. As Doug Casey famously says, the dollar is an IOU nothing. And the euro is a who owes you nothing. So you have a difficult time, nominator by the numerator, pardon me, if you're trying to value something in an instrument that is itself valueless, you have an interesting challenge. So I wonder there, maybe the next appropriate question would be, how would we go (25/45)
about trying to measure? It might be a fool's errand. I acknowledge that, but how might we try to go about measuring a population's or people's faith in the currency of the realm? I don't know the answer to that. I do suspect anecdotally that the increasing fondness that people have for gold is an expression of an increasing nervousness. Maybe not about the purchasing power of the dollar, but rather the maintenance of purchasing power of longer term US dollar denominated savings instruments. Because, you know, the, again, like it's been, I guess now about eight years, eight years, because it was July 26 when, when I last prepared any questions to ask you. And if you had asked me then what I would expect to have happened to the value of gold in the face of the balance sheet expansion that we've continued to see in the, in the year since, since that period, I would have been surprised. And so it's kind of an open question for me, what the drivers will be going forward, given the economic (26/45)
circumstances that we may very well see continued sluggish growth in the US. And yet there are, I think we've got a political setup that has greased the wheels of money printing, so to speak. And I wonder in that type of environment, are we describing, and again, because it gives me pause that a lot of other people feel this way, but are we looking at a kind of stagflationary period? And in that world, in the last time we had a situation like that, gold, I think, you actually, you'll know better than me, the returns, I think we're like 30% annualized over 10 years. But at the same time, we just got out of like a 10-year bull market in gold. So I'm curious what you think about that. I don't think that we have a replay in terms of gold performance of the decade of the 1970s, which was of course the decade of stagflation. Those were my formative economic years, so I remember them well. And the reason that I don't think that we have the replay is that we came into that decade with gold (27/45)
price controlled. It had been fixed by fiat at $35 an ounce. So it came into the decade selling for probably a third of what the free market price would have been at that point in time. But the rest of what you say, I think is reasonably prescient. It's interesting in terms of gold's place in the popular viewpoint that you say that you haven't done an article on gold for eight years. That's because I think your media product is something that you make a living on. And you probably thought for some period of time that there simply wasn't enough interest in gold to do an article on it. And I think that has a lot to do with everything. One of the reasons that bear markets get oversold and bull markets get overbought is that people use price action to justify a narrative. And sometimes the price of something goes up because it's going up and it goes down because it's going down. If you begin to get, as an example, nervous about the economy and you begin to develop an interest in the (28/45)
narrative around defense mechanisms, including gold, and the price goes up, the fact that it went up, that price action begins to justify the narrative. And while, as you suggest, the policy response over the last 10 years to the liquidity crisis of 2008 was stimulative, people wanted to believe as a consequence of 2001 and 2008 that the big thinkers of the world, the government people, had things under control, that they stickhandled or managed the world through difficult circumstances. So there was still confidence in the economy. When you, as an example, lowered interest rates, you at once lowered the cost of capital to corporate America, which helped earnings, at the same time that by reducing the amount of interest paid on savings deposits, you increased the attraction of dividend yields. So we had a disconnect between Wall Street and Main Street that continues today. And part of that, I think, was due to confidence. If we had something that shakes confidence, and my suspicion is (29/45)
that we are eroding confidence every day, gold becomes more attractive. But going back a little bit to the reason why you haven't seen fit, despite the fact that you own it to talk about it, we're still in a circumstance where almost nobody cares. You come out of the Agora realm, and I populate a very strange community of gold bugs. But the truth is that there was a study published a couple years ago, and I believe it was JPMorgan Chase, but I can't remember exactly who it was, a major U.S. investment house at any rate that suggested that the market share of precious metals and precious metals related securities was between 1 third of 1 percent and 1 half of 1 percent of savings and investment assets in the United States. And that the sort of three decade mean was somewhere between 1 and a half and 2 percent. So when I'm telling you that I think we have a two-year or three-year bull market in gold, I'm not suggesting a circumstance like the Agora copywriters used to write about 30 (30/45)
years ago, the collapse of the U.S. dollar in the ascendancy of gold, gold being the world's reserve currency, all that kind of stuff. I'm talking about a reversion to mean. I'm talking about gold's market share going from 1 half of 1 percent to 2 percent. But if it does that, demand for precious metals and precious metals related securities goes somewhere between three and four times as high in the largest savings and investment market in the world. And ironically, I think if you saw gold at some number like $3,000 an ounce, that despite the fact that most of the price catch up that had to take place would have taken place, in other words, when the price goes up, the absolute attraction of gold is less. The psychological attraction to gold will be higher. It's a self-reinforcing cycle. Yeah, yeah. Of allocation. That's what happened in the 70s. You know, there was, at the beginning of the decade of the 70s, there was an amazing argument for gold because of negative real interest rates (31/45)
or at least very low real interest rates. At the end of the decade, the U.S. 10-year treasury was yielding 15,6. And that high interest rate had slowed the economy. So the real interest rate then was, you know, sort of 6, 7 percent. At the same time that the incentive to own gold was the lowest, the interest in and the price for gold were highest because the price action gold up from $35 an ounce to $850 an ounce had in and of itself justified the narrative. Now, that's such a great point. You know, I've seen those numbers as well, actually. And, you know, further to your point, the impact on the gold price is at the margin. So it may seem like a small difference going from 0.5 percent or less than 0.5 percent to 1.5 to 2 percent, but that could be an enormous difference in price. And on top of that, I wonder to what degree you think we might see institutional buying because I think central banks now we're heading to the second decade of net purchases by central banks after having been (32/45)
net sellers beginning with some period in the 1990s. I wonder to what degree we might see that type of institutional buy-in and what impact would that have on the price? That's kind of two-part question. I can't speak to the central banks except for I could understand central banks from countries that have a problem with American hegemony in terms of the way they operate their economies and societies. And, you know, there are some countries that have an absolute incentive away from U.S. dollar holdings and in favor of gold as a way to reduce American political control over them. I get that. I can't really speak to central bank purchases. What I can tell you as a Sprott employee is that interest in gold among the largest institutional investors in the world, endowments, pension plans, even sovereign wealth funds is really coming alive. We were engaged, we meaning Sprott, as an institution for five or six or seven years in propagandizing global 1000 investors, those are the biggest 1000 (33/45)
investors in the world. And really it was an exercise in the wilderness for some period of time. Now we're taking incoming calls as opposed to making outgoing calls. The interest around big insurance companies, big pension plans and big endowments is very high and you can understand why. You know, think about an endowment with a sort of a 30-year point of view that puts, you know, 15% of their assets in U.S. tenure treasuries. They are absolutely, positively, without a doubt, guaranteed to lose 1% a year compounded over 10 years. Jim Grant describes that as return free risk. Yeah, he's great. Really, gold is competing with return free risk for those investors and that's not a very tough fight. Yeah, so that's also interesting because you guys are in a position to actually have some proprietary information flow there. You know, when was the last time that you saw this kind of uptake and interest that you can recall? In terms of the big, big, big allocators, which is to say the big (34/45)
pension funds and big endowments, the, well, the last time would have been the 70s and I didn't inhabit a part of the market where I had access to that information. This is new in my career. Really, more than, let's say, 2011? Absolutely. That's so interesting. Yeah, absolutely. When did that interest begin? When did you begin to notice it? 2000, 2019, about a year ago. Yeah. You know, the truth is that we had been selling gold as a diversification tool selling. We had been attempting to sell gold as a diversification tool to these large investors beginning about 2012. So we sort of joke internally that we've worked 10 years to be overnight successes and we had no response, but we're getting a lot of response to that pitch now. Is that, I mean, I guess it's kind of like asking the question, how do these institutional investors see gold as a portfolio diversifier? Do they see it taking the place of bonds or is it something kind of all its own? I think they're regarding it as a separate (35/45)
asset class. I actually think that the institutions that I have talked to have a very sober view of it. They're, of course, from my point of view, underweighted, but they regard it as an insurance class or some of them as non-correlated and volatile liquidity. How much do you think, well, I guess also, I also wonder what sort of institutional infrastructure and policy do these firms have in place? Are they already kind of there in a position they will handle this kind of inflow? And two, in the kind of mid-2000s when gold was beginning to hit its stride and when I say mid-2000s, I mean like 2004 or so during the last bull run, one of the arguments that you heard was the beginning of these ETFs like GLD and some of these other gold ETFs. And I think those were, I think 2004 was GLD and I think the iShares, iAU Gold Trust was 2005. But how important of a role does that play this time around since, for the most part, there hasn't been a huge, at least not proportional to ownership (36/45)
creation of new derivatives products in the space that I'm aware of? Well, GLD has been enormously helpful, I think, in terms of democratizing gold ownership. Gold has always been easy to buy and sell for those who developed the capacity to do it. But as all of the other aspects of our life become more securitized, the ability to hold gold surrogate products, which is to say ETFs and securities accounts, has made them broadly more accessible to many, many people. GLD, remember, started as a retail product and it was an enormously successful retail product. The very liquidity that it enjoys now means it's a great institutional product. If you are, you know, somebody like Norgis Bank, the Norwegian sovereign wealth fund, and you're responsible for a trillion dollar portfolio, if you want to take a 1% position in something, and I'm not suggesting that they are or are not long gold, I'm just using them to illustrate things, to get on and off a meaningful position if you're managing a (37/45)
trillion dollars is a real chore. The liquidity associated with the gold futures market has always been fantastic, but for various reasons, futures haven't been considered asset classes by some big institutional investors. But certainly GLD gives the largest investors in the world liquidity that they need to enter and exit seamlessly. It's been enormously important as a facility for the gold market. So what about gold equities? I guess one, what kind of interest are you seeing in equities? And when people talk about investing in gold equities, what do they mean? That would use up the whole interview. Well, we got time. So let's start at the beginning. Gold bull markets and even recoveries from oversold bottoms, which are much more frequent than gold bull markets, follow fairly predictable patterns over time. Gold moves first, the metal moves before the equities do the equities don't anticipate the move in the metal traditionally. And we saw that this time. Gold really... Why is that? (38/45)
Why don't they anticipate the move? I have my suspicions, but when gold is out of favor, it's normally so deeply out of favor that nobody gives a damn about the equities and they're not anticipating anything. They're just bored to it. When the metal moves, two things happen. The metal moving begins to stimulate interest in the whole topic. Gold was a forgotten asset class in the last decade. But the second thing that happens is six months, nine months after you've seen the move in the commodity price, you see the impact of that move first in the income statement, higher product prices generally swell margins. And then in the balance sheet, where the generation of cash begins to show up in the balance sheet, because gold is a cyclical commodity during periods of time in the gold market, when life is rough, which is to say when prices are low, the industry executives become extremely conservative. And that's important too, because in the beginning of a gold bull market, they don't do any (39/45)
stupid things with the inbound cash. I mean, later on, they can be counted on to make dumb acquisitions, to make dumb investment decisions. When the income increases too much and the free cash increases too much, the encouragement to be stupid becomes overwhelming and they do become stupid. But in the circumstance that we're in right now, margins increase, cash increases, the balance sheet increases, and the willingness to do something stupid after a bear market is fairly low. So there's this wonderful virtuous circle in the near term. Always the biggest and the best, the most liquid move first. The gold community itself has had their faith in themselves challenged in the bear market. And so even gold bugs, rather than going immediately for leverage, go to the finest, the biggest, the best, the most liquid equities, the guys with the most operating margin, the best balance sheets. What are we talking about there? I mean, large cap miners, for example? The barracks, the new months, the (40/45)
Franco's, the Wheatons, guys with very, very, very stout operating margins, stout balance sheets, New York Stock Exchange listings, lots of liquidity. What happens after that is a couple things. The valuation discrepancies between the best of the best and the rest begin to get extreme. With all of the money concentrated in the top of the sector, the trading liquidity and the share prices escalate there, but they get stuck down below. And two things happen. The early equity investors who came into the best of the best begin to look for relative value down the quality trail. At the same time, that value arbitrage begins to happen, which is to say that the best of the best enjoy a lower cost of capital, and they begin to look at doing takeovers with people who have unequal cost of capital. And so the equity rally begins to democratize. So you're saying capital goes directly into some of the juniors and then also some of the majors buy the juniors and M&A deals? Correct. Correct. And where (41/45)
are we in that cycle? Very early on. I mean, we've seen decent M&A, but most of the M&A has been horizontal M&A, which is to say people merging for strategic reasons or merging to get scale. But my suspicion is we've got another 18 months of very stout merger and acquisition markets and gold. So what have we seen in gold equities? Has there been a move at all? Is it very, very early? If I'm right about the direction of the gold price, and I think I am, then we're fairly early on. My friend Ross Beattie has said we're in a third or fourth inning of a game that's likely to go extra innings. Certainly the last six months, well, really, I guess the last nine months, you could say we've been in an equities bull market, but all the move at the beginning was concentrated on the great big guys. The last three months, we've seen a much broader based and much more explosive move. What's interesting this time is that in prior recoveries, gold would go from the ultra large caps to the large caps (42/45)
to the mid caps to the juniors, and then to the hyper juniors, you know, the sort of 50 million market cap explorers. Just in the last 60 days, we've seen an explosion in the hyper juniors, a real speculative explosion. And I don't know if this is Robin Hood money coming in. I mean, I don't know what it is. I've never seen a market that has democratized, gone from institutional to retail punter as fast as this market has. And that makes me a little nervous about a meaningful pullback in the near term. That's very interesting. You mean in equities or also in the price of bullion? In the equities. I think bullion has a real friend in Congress and the executive. Really, that's interesting. Well, I want to pick your brain more on that, Rick, as well as what we're seeing in equities, but we're going to move the second part of this conversation into the subscriber overtime. For anyone who is new to the program, Hidden Forces is listener supported. If you want to access the rest of this (43/45)
conversation, as well as the transcripts and rundowns, to each episode, head over to patreon.com slash hidden forces. There's also a link in the summary page to this episode with instructions on how to connect the overtime fee to your phone so that you can continue to listen to these extra discussions, just like you listen to the regular podcast. Rick, stick around. We're going to move the second half of this conversation into the overtime. Great. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode (44/45)
was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
Will the U.S. Dollar Survive the Breakdown of the International System Paul Blustein #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetrius Grafinis 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 guest in this episode of Hidden Forces is financial journalist and economic historian Paul Blustein. Paul has written about economic issues for more than 40 years, first as a reporter at leading news organizations like The Wall Street Journal and The Washington Post, and later as the author of several critically acclaimed books, including a history of the 2001 Argentine debt crisis that I have often referenced on this podcast. His latest book, King Dollar, traces how the US dollar became the de facto currency for global trade, savings and investment, and examines what recent policy shifts in Washington and how they have been perceived abroad may mean for the future value and status of the greenback. Paul and I (1/45)
spend the first hour of our conversation exploring the story of the dollar's evolution from its role as a second class unit of account within its own hemisphere to becoming the most important and preeminent currency in all of human history. The second hour builds on that foundation as we speculate about what the future holds for dollar hegemony in a world characterized by growing trade protectionism, a breakdown in international cooperation, and a potentially irreparable loss of confidence among foreign investors in US leadership and in the strength and reliability of US capital markets. This could not be a time-lear conversation about a subject whose ramifications will continue to play out over many years if not decades to come. If you want access to all of it 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. All of our content here gives you access to our premium feed, which (2/45)
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&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 have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this extraordinarily timely and illuminating conversation with my guest Paul Bluestine. Paul Bluestine, welcome to Hidden Forces. Pleasure to be with you. Paul, this conversation is 14 years in the making because that's about the amount of time, just short by a few days I think, that you and I have been corresponding. I initially reached out to you during the Fukushima Daiichi nuclear facility disaster and I didn't know you were living in (3/45)
Japan at the time, but I had read and the money kept rolling in and out years earlier. This is of course a famous book you've written about the Argentine debt crisis in 2001, which was at the time and may still be the largest debt default in history, I don't know. And you had told me, you hadn't read anything on Argentina in a long time and so you thought it'd be better to introduce me to Desmond Lachman who was deputy director at the IMF and later at Salomon Smith Barney during the time of the collapse of the Argentine economy and the default on its sovereign debt, which I believe was about $100 billion or so or just under at the time. We continued to correspond in the years afterwards, but there was really no opportunity to talk about Argentina and that was the reason I'd reached out to you. And again, this is a book I've mentioned many times on the podcast before and we recently did a few episodes on Argentina and of course that book always factors into my understanding of the (4/45)
history of that country's economy in the last 100 years. Yeah, absolutely. And I know that that's a role that you've played for other people as well. I heard another podcast recently you did with the Mercatus Institute, David Beckworth, and he said the same thing and I was like, wow man, that's wild. Like David and I had the same experience where you had this impact on us years ago and I always love having people on the show who have impacted me or whose work has impacted me in the past, especially when I was younger. Because when you're younger, it's like whatever you read, it's like revelatory. So before we get into the conversation we're going to get into today about the dollar and your book King Dollar, which is about the preeminent role played by the US dollar in the world, its history and its future. I'd love to learn a little bit more about you and your own career and your progression. You've written for the Wall Street Journal and the Washington Post and a lot of other (5/45)
publications. You've authored so many books. So tell me a little bit about you and how did you get your start? Like what's your story? Well, I went to the University of Wisconsin. I was, I'm not from Wisconsin, but I was a pretty decent student there and then went off to Oxford University where I did a degree called Philosophy, Politics and Economics. And the way they teach economics at Oxford, it's extremely theoretical and highfalutin and they don't really talk about stocks and bonds. They talk about equity and debt. And when I finished there, I was thinking, what do I want to do? Well, all my friends were going to law school and I thought, well, I probably shouldn't do that. If everybody else is doing it, there might be a glut in the law business. And so I decided to try my hand at journalism. And my dreams of being the next Woodward and Bernstein were kind of thwarted because everyone wanted to do that if this was in the mid-70s. But because I studied economics, I was able to get a (6/45)
job at Forbes magazine. They hired me under the illusion that having studied economics at Oxford, I might know something about how the economy and companies actually worked. And anyway, from there, I went to the Wall Street Journal and began to put some of my economics training to some practice because I was covering the Federal Reserve and the Federal Budget and then moved from there to the Washington Post in the late 80s. That's my hometown paper. And just continued covering economics. I found it to be really rewarding. It's, you know, I didn't have quite the glamorous image that the White House reporters or the Style Section Party reporters had, but I enjoyed doing it. I enjoyed writing about stuff that people know is important but don't quite grasp intuitively. And so I was very gratified to hear what you said about how my book influenced you. There's nothing I like better than hearing from professors or students because my books are used in a number of university courses. I've (7/45)
been able to go on the internet and find them, you know, the syllabi on the internet. And there's nothing I like better than hearing from professors or students that, oh, you know, Bluestine's books were really popular with the, they hated the textbook, but, you know, those books brought these subjects alive and really helped people understand this, well, these hidden forces to coin a phrase. Indeed, yes, the hidden forces. So what excites you about the subject of money and finance? Would it try? I know that you were interested in journalism primarily, and so you kind of conveniently went into money and finance because you had this degree from Oxford in philosophy, politics, and economy, which by the way sounds super fascinating. I mean, you know, like so much of the way that we think about economics today has been built around these almost like, you know, Newtonian models, or at least that's how I learned it, Smithsonian economics. We didn't really learn political economy. We didn't (8/45)
study history in school. At least I didn't. So that sounds very fascinating, but you got into money and finance and you said you found the economy fascinating. So what was it that attracted you to this subject? Well, that's a good question. I mean, what's not to be fascinated and excited about? I suppose the more I got into it, the more crazy stuff was happening. I think, you know, particularly when I did my first book, my first book was about the Asian financial crisis in the late 1990s, the crisis that hit, you know, Korea, Thailand, first, well, first Thailand, then Indonesia, Korea, and then later Russia and Brazil. And looking back on that now, from the perspective that we have today, where, you know, we've already been through the global financial crisis of 2008, and COVID and all these other things that have happened. But that crisis really brought the world pretty close to the precipice. And I guess the transformative moment for me, I remember going to interview a guy at the (9/45)
IMF, his name is Jack Borman. He's sadly no longer with us. He was sort of the top, top ranking Michael civil servant at the IMF, not the managing director and deputy managing director, but the really top guy on the staff. And he had never been very forthcoming in interviews. He was very, I mean, as people at the IMF are very guarded and, and I asked him, how did you know that Korea was really in trouble? And he said, Oh my God, let me tell you, I was at my house, our beach house in Rehoboth Beach, Delaware, and we were expecting 24 people for Thanksgiving dinner. And this phone call came from our mission in Seoul saying, you know, the Koreans are almost, they're almost bankrupt. They're almost out of money, out of hard currency. Now, you know, we can get into the definition explanation of what that is. And I had to spend all day, this guy was telling me he had to spend all day on a conference call trying to figure out what the heck the IMF ought to do to rescue this, what was then the (10/45)
11th largest economy in the world from a default, which could have sent, you know, could really have sent the world into a quite dire situation. And then he said, but you know, and by the time I got downstairs, you know, all the dishes had been cleared away and the guests had gone and I said, and I said, I sat there and I said, wow. So Mr. Borman, I mean, are there like a whole bunch of other stories like that? And he said, oh, yeah, let me tell you. Oh, you got to interview Wanda Tseng, you got to go interview Hubert NICE, you got to, you know, and he gave me all these names of people who worked on this staff. And I said, gee, and I was walking back to the newsroom to the Washington Post from that interview when I thought to myself, yeah, there could be a pretty good book here, you know, this is really quite a man, I mean, this could be quite a yarn, right? So yeah, I've sort of been able to put books together as bad things have happened. There was that crisis, there was the Argentine (11/45)
crisis that you can't, you know, the book I did on that, the collapse of the World Trade negotiations a few years later, and the Euro crisis would happen with Greece and Ireland and so forth. So yeah, I just found it endlessly. I hate to say that I, you know, I enjoyed it. Clap my hands and yeah, you know, it's, you feel sorry for the people who suffer and people really do suffer and, but you just have to hope that by writing about it and informing the public debate about these things that those things won't happen quite as often. That's kind of the difficult line we walk, right? I mean, we live in this world, we don't want things to go haywire. At the same time, when things go haywire, it gives us something to write about, to think about, to talk about, and that's sort of our job. So I understand that feeling. So you mentioned that the South Koreans, who were at the time the 11th largest economy in the world, were out of hard currency. Of course, when we're talking about hard (12/45)
currency, we're really talking about primarily these dollars. Right. And so that brings us very conveniently to the subject of your new book, King Dollar. Let's talk about the book. So what would you say King Dollar is about? How would you describe that, in other words? Why did you write it? And why is the subject important in your view? Well, I got into it in, I think it was 2019, 2020. There was an awful lot of talk, partly because of the rise of cryptocurrency, partly because the US government was weaponizing the dollar, meaning, by which I mean it was either threatening or actually cutting off targets from access to the dollar system. And there was a lot of talk that the dollar might be, other actors would find all kinds of new currencies to replace the dollar. And also there was a lot of, I suppose, what you'd call the usual concern that, because the national debt was mounting and it was hard to see how the money supply could be kept under control, that the dollar would somehow (13/45)
lose its reserve currency Yeah, it would be debased. And so for all those reasons, there was a lot of speculation about, yeah, that it would lose its reserve currency status and that it would no longer have this special unique status that it has. And when you say reserve currency, of course, as you know, from reading the book, I try to be careful in saying that that's the reserve currency, that terminology really only refers to the dollars, a special status as the currency that's held by central banks around the world in their foreign currency reserves. It has about 60% of those dollar denominated securities. I count for about 60, but that's just the beginning of it. Its special status is the currency that is used in international commerce of all kinds, trade, finance, borrowing, hedging, all these ways which we can get into. And because there was this speculation about it, and I suppose cryptocurrency may have been really the trigger that, you know, because that was really when (14/45)
Bitcoin and the other cryptos were starting to have one of their many heydays, which have come and gone and come back now. So I thought, you know, this is a subject I know something about because I kind of lived it. I covered the Federal Reserve, I hate to date myself, but I covered the Federal Reserve in the late 1970s, early 80s when Paul Volcker, the towering literally because he was six foot seven, was chairman of the Fed and crushed inflation by really just putting the U.S. economy through the ringer. I covered that. I covered a story about, you know, how the bond market grew in the 70s. So I thought to myself, you know, I kind of know this stuff. I don't know at all, but there's a good book here. So I'm curious, let's maybe put a pin in this, but I'd be curious if we have time to ask you about how much of what we know about and the stories we tell about Paul Volcker, are stories that we've sort of manufactured over the years to create him into a mythic figure and how accurate and (15/45)
reflective those are of the man at the time. But let's put a pin in that. What I would want to do is actually start by building a foundation and spending some time going through the story of the dollars early years, its inception and development for being a unit of account set by the U.S. Mint to an obligation of the U.S. central bank, to its ascendancy as the world's default international currency. If you approach the member of the Continental Congress or a merchant or shopkeeper in Philadelphia in the late 1700s and ask him, what is a dollar? What is the answer that you would have gotten? Hmm, good question. Gosh. I mean, at that time, it was a pretty decentralized system. First, he'd probably ask you if you were talking about U.S. dollars or Spanish dollars. Yeah, well, yes. I'm not sure. But I guess what you're getting at is the fact that dollars were then just things that were issued by banks. And of course, there were coins of gold and silver that were issued by the government. (16/45)
There were Continentals that were issued by the Revolutionary Government. Where we got the phrase, not worth a Continental. Exactly. And there have been so many of them printed that they didn't hold their value. Is it fair to say that it was primarily a denomination? It was a unit of account. It was a relationship between gold and what the paper money would be, but all the paper monies were issued obviously by different banks because these were privately issued notes. Oh, yeah. I mean, those notes that were issued by banks, I mean, the banks were essentially saying, I promise to redeem. And this would be printed on the bank notes, on the bills. In such a bank, the classic bank of Newburgh, New York, I've Spick and Falls Bank of Michigan. I found a bunch of names from my book Allegheny Bank in Maryland. They would put print on their bills that they promised to redeem in speci in precious metal if that bill was presented to them. So in a sense, the bill was as good as gold, but traveling (17/45)
to those banks to redeem those notes was no small matter in those days. So as time went on, we're talking about the 19th century now, as time went on, there were questions that were logically arose, quite reasonably arose in people's minds about whether some of these banks really had the specie that they claimed they had. And in any event, you didn't know how good the regulation was of those banks and whether they would be solvent enough to be able to pay their liabilities. And although some banks were very reputable and their bills circulated at close to par, meaning like say a $5 note would really get you $5 worth of goods at any merchant's shop, there were other notes that if you presented a $5 bill, you might only get, I don't know, $4.25 or something worth. That's like one of the most fascinating things about reading history is you get kind of deeper down to the base layer of whatever it is. Today, we conflate, we synonymize the dollar with banknotes. We assume those two things (18/45)
are the same thing, but they're really not. Technically, they're not. I mean, when you pull dollars out of J.P. Morgan, you're actually taking J.P. Morgan bucks. But because of the way that the system has been centralized over the years, we've come to conflate those two. Can you tell me how that, what was the process by which that began to change and that the public began to conflate these two things, such that we live in a world today where the Federal Reserve note that we have in our pocket or the money that's in our bank account is for us dollars, universal dollars, and that's how we think of it. We don't think of it as banknotes or the obligations of the bank. Yeah, it's such a fascinating process. And it's something I really learned in the course of doing the book. It's not something I intuitively understood. And the really hugely important step was the creation of the Federal Reserve. The Federal Reserve Act signed into law in 1913 by President Woodrow Wilson. So it wasn't until (19/45)
then that America had a central bank. All the major European powers, Britain had the Bank of England, the French had the Bank de France, and so forth. And some great stories about how in the process of creating this central bank, American lawmakers went over to Europe to ask for advice about how to create one. And the Europeans said, just do it. I mean, it's so stupid that you're the world's now the world's biggest economy. Why don't you have it? Didn't they send Paul Warburg over there? Wasn't he sort of the guy that led the project? Yes, absolutely. Paul Warburg, who is really in some ways the most crucial figure, but Senator Aldrich and the other members of Congress who were eventually responsible for the legislation. But when you have a central bank, I mean, it's called that for a reason, because when you convert what is really private money, as you call it, JPMorgan Bucks, when you have money deposited at JPMorgan, it's just a liability of JPMorgan to you. Now, it's backed by law. (20/45)
If JPMorgan cannot make good on its obligation to you when you come to turn your deposit into paper bills and demand your money, then the federal regulators will descend on JPMorgan and close it. JPMorgan may not be a good example because it's too big to fail, but that's another story. Right. We also have an important distinction to make, which is that we have the official regulation, which offers limited backing by the FDIC and deposit insurance. But really, at this point, post-2008, there's a sense, certainly post-SVB, there's a sense that the government is just going to back up everything, all the deposits. Well, I mean, right. I guess what I would suggest is we put that aside in terms of the sort of more cosmic question you asked, which is why do we now think of a dollar as a dollar, whether it's deposited in a bank or in our wallets? And I argue in my book that it's a whole series of steps and a whole edifice and series of arrangements all backed by laws, regulations, in which we (21/45)
depend on the state to, partly it's a federal reserve, partly it's rule of law and the court system, which adjudicates disputes. When banks make loans, they know that the loans they hold are assets. And if the borrower doesn't repay, they could be forced into bankruptcy. That's all part of it. The federal reserve's commitment to maintain the more or less stable purchasing power of dollars, all of these things are crucial in the confidence that we have as ordinary consumers or as business people or whatever role in the economy we're playing in believing that the dollars that we, or the yen or the pounds or the euros, whatever, this is true for all economies, but it's since we're talking about the dollar, it is certainly true for the dollar. That is why we are confident that the JPMorgan bucks are exactly equivalent to those dollar bills that we can just pull out of our wallets and it says federal reserve note at the top. And another thing that it says on it is this note is legal tender (22/45)
for all obligations, public and private. That's the government saying, if you pay a debt, whether it's taxes or a debt owed under a contract using dollars and you satisfy the terms of the contract by paying in dollars, well then a court of law will deem that contract to have been fulfilled, which is not true if you say, well, I'll tell you what, I'll pay you in gold or Bitcoin or something else. That's not legal tender. So this whole edifice of laws and commitments that the state makes that give us as individuals or companies or lenders or borrowers or whatever, that the money that we are transacting in is good. Yeah, so there are two competing histories here. One is the history of the dollar's internationalization, which we're going to talk about. But we've been talking about so far as the history of the federalization of the dollar, which if it's not already obvious to people, this is a process that was not linear. It went through of course the period of wildcat banking, which was a (23/45)
step back from centralization after the second bank of the United States' charter expired. It wasn't renewed by Andrew Jackson. This is a famous story that I feel like people are learning about now, Nicholas Biddle and all this stuff. But one of the interesting parts of this history was after the passage of the Federal Reserve Act and it was passed in 1913 and the bank became operational in 1914, there was a process of selling regional banks into the system. I remember reading lectures that Paul Wohlberg was giving talks. He was going out to the country and trying to convince banks to join the system. There's a whole history here. It's just absolutely fascinating. I don't know if you know the answer to this question. I don't, which is why I'm asking it. Yeah, it's fine. But how long did it take for the vast majority of banks to join the Federal Reserve System? No, I don't know the answer to that question. But it was a voluntary thing. I mean, again, there was supposedly obviously a (24/45)
level of coercion as well in the sense that once the collective became large enough, you don't want to not be part of it. But it wasn't. It was a voluntary action. I recommend people listen to my episode with Levin and Ed, where we discuss some of this history as well as my episode with Perry Merling, where we cover more of the internationalization of the dollar. So there was this federalization aspect, the solidification of its role, the dollar's role in its place within U.S. borders. Because as we mentioned, we started this conversation, the Spanish dollar was the most widely used dollar in the Western Hemisphere. So eventually, the dollar became the currency as today, which we know, which is the global reserve asset, the currency that is used most widely in all private transactions. How long after the U.S. became the world's largest economy, did the U.S. dollar overtake the Great British Pound as the preferred currency of international trade and commerce, which was for many years (25/45)
the role that the dollar plays today? Oh, a long time. I mean, it's pretty clear that the U.S. became the world's largest economy around 1870. But because the U.S. financial system and monetary system was so defederalized, decentralized, as you were just pointing out, the period of wildcat banking was over by 1870. But there was still no central bank, and there was still no Federal Reserve. So it wasn't really until, I mean, it's hard to date exactly when the dollar overtook the pound. There's a lot of scholarship that's been done by Barry Eikengreen and other economic historians. It's quite interesting. But it's pretty clear that by the 1920s, the dollar was giving the pound a good shove aside because, you know, the Europe had been through the First World War. The U.S. by then did have a central bank. It had the Federal Reserve. And the Federal Reserve Act gave U.S. banks much greater liberty to have branches and subsidiaries and whatnot, not only within their own states, but outside (26/45)
of their own states and abroad as well. So the dollar was, the American banks were really barging into Europe by that point. But really, it wasn't, of course, as we all know, that period of the 20s was followed by a not so good decade, in which it really didn't matter whose currency was on top because so little international commerce was going on. But it was, you know, I think the point at which we can really say the dollar became the dominant global currency by international agreement was in 1944 at the Bretton Woods Conference. You know, that agreement is null and void today. It was dismantled later. But so, as I say, go from 1870 when the U.S. became the world's largest economy to 1944 when it was, U.S. was not only the world's largest economy by far, but clearly going to be the global hegemon following the Second World War. That's a long period of time, isn't it? So what are the major pieces of physical U.S. dollar infrastructure that we need to be aware of to understand how the (27/45)
system works? And can we rank them in importance? That's an interesting question. So I'm talking about things like the Swift system, chips, Fedwire, stuff like that. Yeah. Well, I would say the aspect of the hardware or the institutions that are least well appreciated is chips. You know, I write a good bit about chip system. The Clearing House Interbank Payment System. The Clearing House, Clearing House Interbank Payment System. Now, I'm not, you know, I'm not claiming any great revelations. It's not like I scooped, you know, did some great investigative reporting and told people about some institutions. Sure, but most people don't even know what this is. They wouldn't even know the acronym. So. Exactly. And you know, people have heard about Swift and it's partly because, you know, they're familiar that when they make an international payment, you know, they have to enter the Swift code. And they know that if a country or is disconnected from Swift, that it'll have difficulty doing (28/45)
international payments. Well, that's true. It'll be really inconvenient. But Swift is just a messaging system. It's important, but all it, what it does is it, when one bank transmits money, you know, across borders to another, it sends a message, say, you know, to confirm if this is what is happening. But you can do that in all kinds of ways. It used to be done by TELX machine. It used to be done and it can be done by email if necessary. I mean, I guess you want to make sure you use a very secure email system. But Swift doesn't actually transmit funds and it doesn't clear and settle funds. Chips is where funds are enormous amounts of dollars that cross international borders are cleared and settled. Now, Fedwire, which also, you know, handles a tremendous amount of clearing and settling, mostly handles domestic payments. For those familiar with crypto, I don't know if this analogy will resonate with you or if it's accurate, but it seems kind of like Fedwire is the base layer that (29/45)
everything reconciles to and that chips is the secondary layer that's actually available to process the vast majority of transactions. Everything settles on Fedwire because ultimately the dollar is a liability of the US central bank. But does that resonate? Does that make sense? Well, sort of. But chips, I mean, chips is a matching system, right? So the member banks are some, you know, the big, there's something like 40 banks and it's a private, it's a private network. It's not, it's not run by the government, right? But it's based in New York, it's subject to US law and that's incredibly important. And it's got all the biggest US banks in it, but it also has a lot of big foreign banks in it. And this is a crucial qualifier here. It's the US subsidiaries or branches of foreign banks and they are also subject to US law. And so, you know, these banks are handling, you know, just gigantic amounts of money and payments to each other on a daily basis. So if, you know, if, so if JP Morgan, (30/45)
you know, is getting, you know, $3 billion in payments from, you know, the Banco do Brazil or something like that. And if Paribas in France is getting $2 billion from Bank of Tokyo Mitsubishi or something. So then what CHIPS does is it says, okay, well, we'll match these payments so that if Bank of Tokyo Mitsubishi is an equivalent amount to Paribas in France, well, then we'll cancel those two. But of course, those two banks don't pay the exact same amount to each other every day, but we'll, we'll match the payments. They use this very sophisticated algorithm to do that. And but then of course, if there's some leftover, then we'll match the payments from that's leftover from Banco do Bank of Tokyo, and we'll match that against the amounts that Banco do Brazil owes to JP Morgan. And you know, I mean, I'm, I'm, there's a whole process of reconciliation. Yeah. Right. Right. That's what the algorithm does. It's very sophisticated. And what it does is it's basically canceling what one bank (31/45)
owes another against what the other bank owes to it. And then when they're, but of course, the two banks don't owe exactly the same amount to each other on any given day, but then other banks owe, owe amounts to the, to the first two banks that we're talking about. So these things all get canceled out in this very sophisticated algorithm that chips runs, and it handles more than 90% of the dollar payments that are made across borders. These are, you know, stupendously large amounts. Their last public disclosures are 540,000 transactions per day on average, 1.8 trillion in value. And since that's all subject to US law, the reason I'm saying, I'm emphasizing the importance of chips here, and the fact that all these foreign banks that are connected to chips are US subsidiaries also subject to US law, is that this is what gives the potency to US sanctions, because what the US government can say is if you, you foreign banks, you know, anywhere in the world, if you transact with someone we (32/45)
don't like, someone that we've targeted, we've designated as especially designated national, this is the term that the Treasury Department uses when it wants to sanction, if you do business with that bad guy, then you're cut off from chips. And that means you can't conduct international business. So this is, that's why I'm saying chips is, in my view, the most important piece of hardware. I like the way you put it. Yeah, I mean, to your point, it's, I don't know if you mentioned this, but all data processing backup sites for chips and Fedwire are located in the US, which is what gives the US jurisdictional authority. I don't know, I don't have the analogy at the top of mind, but there's something about the power of secondary sanctions. It's kind of like, it's almost like ethereal, like you don't want to be tainted with anything that could be remotely seen as going against US government policy and banks are so allergic to that possibility and so risk averse that they end up just cutting (33/45)
off entities or cutting off countries at the merest hint. And in fact, we saw that with Russia. I think even before the private sector was way ahead of the government in applying those secondary sanctions to entities doing business with Russia, because they were worried that if they, it wasn't worth their time. It wasn't worth their, it was from a risk awards standpoint, it wasn't worth it. Just get out of Russia, get out of dealing with these companies, because what if the US government decides to sanction them, et cetera, that's going to impact our business. So there's a private logic of its own that makes these sanctions and the fear of sanctions just really devastating for private entities and countries that are remotely impacted by them. Let's shift our attention now, Paul, to what has made the dollar. So we talk about the physical infrastructure, but there are other aspects of this that are more difficult to define, some of which we've kind of talked about, which is the (34/45)
credibility of US leadership or the legal system and things like this, that I think you would argue have made the dollar what it is today, which is the preeminent global currency and has made it successful in the face of the end of Bretton Woods and the end of gold backing. And I think some of the things that you focus in on the book are things like liquidity, credibility, crisis management, things like this. In chapter three of the book is organized as a sequence of stress tests and policy responses, including, as we said, the end of the Bretton Woods system of fixed exchange rates, things like the inflation spiral in the late 1970s, the super dollar cycle during the Reagan administration, and of course the great financial crisis among others. What do these examples tell us about not just the dollar's resiliency and its source of strength, but the tests that have turned it into the currency it is today? Yeah, I think at each of those junctures, there were all these predictions that, (35/45)
you know, okay, the dollar is doomed. And, you know, one of the, I hate to say one of the delights, I guess what I have to admit as a writer, you have to take some delight in finding fodder that will be, you know, useful in your writing. I kept coming across these predictions that people had made often quite distinguished economists. And, you know, people who were, you know, they weren't just kooks, they were quite legitimate scholars, and they had good reason to be making the kinds of claims that they were. And at each of these stages, each of those junctures that you may, okay, the, you know, the Nixon taking the, racing the last vestiges of the gold standard in 1971. And then the inflation, which, you know, was a really probably, you know, maybe the most serious threat, because when you have double digit inflation, and it seems to be racing out of control, why do people want to hold dollars? And, you know, then of course, the rise of the yen and the rise of the euro, which people, (36/45)
there were lots of predictions that those would supplant or at least seriously rival the dollar. And the global financial crisis, I would say was the one, you know, there was just so much of a, all right, we're done with this system. And there was quite legitimate the complaints about the dollar dominance at that point, because it had contributed to the crisis. And the world had seen how dangerous it is to depend on, you know, on a system in which one currency is dominant. So, but at each juncture, you know, we saw the importance of the unique advantage that the US and its currency and its financial system have, which is the depth and breadth and liquidity of the market for US government obligations, treasury bills, treasury bonds, treasury notes, right? The US doesn't have any unique advantages in terms of rule of law. I mean, Europe has that, Japan has that. It's not the only big economy in the world. Europe is a big economy. China is a big economy. Japan is still kind of a big (37/45)
economy. And, you know, the fact that the dollar has been the reserve currency for so long doesn't mean that it'll stay the reserve currency for so long, because after all the British pound was the reserve currency for a long time, and it, you know, gave way to the dollar. But no currency has ever been as dominant as the dollar is today. And no other currency on earth today has this feature of a, you know, one type of obligation that is so deep, so liquid, and with such a broad market because, and that's so crucial in a crisis, because everyone wants to be able to, they want to have an asset that they can convert to cash in a hurry. If they can't get cash in a hurry, can't pay their obligations, they're the next Lehman Brothers. And they also want to have an asset that they don't have to sell at fire sale prices and treasury obligations, because the market is so deep and broad. And, you know, we can talk about the exceptions, you know, there have been periods of time when the treasury (38/45)
market hasn't functioned so well, and we had that just a few days ago, but put that aside for a minute. I mean, that's the unique quality of the dollar. Well, that's where all this whole conversation is building to. It's building to today, which is my goal is to apply this framework and this foundation to that conversation on the second hour. Is the dollar's international status in your view something that's kept alive by the inertia of network effects? Or is it a policy that must be actively maintained by things like a credible anti-inflation policy by the Fed, a succession policy also, which is something that we'll have a chance to talk about in the second hour, the independence, in other words, the perceived independence of the Fed, a willingness to coordinate with other central banks when imbalances threaten the system, the use of things like swap lines, for example, unparalleled market liquidity, which you just got to not just in the dollar, but also in treasuries. And the Fed's (39/45)
readiness to backstop the world in extremis, which is the role it played in 2008. Well, I guess the answer to your question is yes and yes. So yes, both the private network effects of the infrastructure and the inertia, but also the active support of the US government and wanting the dollar to play that role. In other words, if the US stepped away and changed its policies, that would have a materially detrimental impact on the dollar's viability as an international currency. Well, I mean, the US has to really step away because the network effects are so powerful. I mean, as you know, the sort of the underlying premise of my book is that the dollars dominance, the special unique quality that it has in international commerce is almost impregnable, barring catastrophic missteps by the US government. And I'm of the view, I mean, okay, we'll come to the present day later in this discussion, but I'm of the view that many catastrophic missteps are being made, but are they catastrophic enough (40/45)
that the US is really stepping away so badly from the pillars and the foundations of dollar dominance that it really is at risk? I don't think so. But if the Federal Reserve were to announce, well, or if the US government were to announce, well, the Federal Reserve is not going to play the role in a global crisis that it has in the past, we're only going to provide swap lines to countries that we like and who play ball with us and who do what the President of the United States wants. I think that would seriously undermine confidence in the dollar, no question in its international role for all of these kinds of dire scenarios that people can come up with of the US government really stepping away from its commitments and from providing the foundations and underpinnings of dollar dominance. My answer always is, well, dollar dominance is important, but it's not nearly as important as avoiding these dire scenarios. I mean, just the other day in one of my presentations, someone said, well, (41/45)
what would it take? I mean, suppose we had an all out war with China. I mean, after all, it was the first and second world wars that brought down the pound. And my view as well, the first and second world wars were a lot more important and horrible than losing the dominance of the pound to Britain. If we have a war, that's going to be a lot more important than losing dollar dominance. I think it's also important to note that when we're talking about the role of the dollar, we're also, it's really about the role of the United States. I mean, the role of the United States certainly after the collapse of the Soviet Union and then the rise of neoliberalism and the broadening of globalization has been to play the role of guarantor of the international commercial and trading system. And the question I think that a lot of investors are asking themselves today and policymakers in other countries is, is the US government intent on smashing that system? And I think if it is, then that changes (42/45)
the calculus, I think, for people who in some sense might agree with you about the sources of dollar dominance. It might change the calculus that they have in their heads about the staying power of the dollar because it is important for the US to actually play a certain role in maintaining that system. And if it actually seeks to try to undermine it, well, then the question becomes, how long does it take and are we beginning to already see kind of the backlash that is emerging from some of these policies? Paul, I'm going to boost the second hour where I want to wrap up this part of the conversation. I also want to talk about some other things. When we talk a little bit about crypto, I want to get a little bit more specific here. Also, there's some conversations about CBDCs and things like this. And then I really want to talk about this fear or this risk of a cascading loss of confidence in Washington and the effect that that could have on the dollar, on US treasuries, and potentially a (43/45)
secular move out of US capital markets by investors. 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 to access the second hour of today's conversation with Paul, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain 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. Paul, stick around, we're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash 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 (44/45)
page. Today's episode was produced by me and edited by Stylianos Nicolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinis and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
The Hundred Year Pivot A New Podcast Series by Demetri Kofinas and Grant Williams #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? I have some very exciting news to share with all of you. My friend and fellow podcaster Grant Williams and I have teamed up to launch a new podcast series we're calling the 100-Year Pivot. It's a joint effort based on a shared understanding that we are living through a once-in-a-century economic, political, and geopolitical reordering that will require us to develop novel maps and investment frameworks to help us navigate these incredibly consequential times. Over the course of the series, Grant and I will be speaking with the smartest, most plugged-in people we know to help us chart a path through this gathering storm as we seek to position ourselves, our organizations, our families, and our portfolios for the changes to come. Premium subscribers to the Hidden Forces podcast and the Grant Williams podcast will have early access to the episodes in this ongoing series. Go to hiddenforces.io-subscribe to access our premium feed, so the episodes in this series will (1/45)
download automatically to your mobile podcast app whenever we publish. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&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 have questions, feel free to send an email to infoathiddenforces.io 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 first in a long series of conversations on the 100-year pivot with my friend and co-host, Grant Williams. Welcome everybody to the first episode of the 100-year pivot. Joining me as co-host on this is my great mate and (2/45)
podcaster supreme, Dimitri Kofinas. Mate, how are you? I'm so happy that we're doing this. Yeah, yeah, we've talked about collaborating for quite some time and we never figure out what to do, right? But this little project of ours is something that's grown completely organically. We didn't sit down with a pad and pen and come up with some kind of great idea we could do. It just happened and I think that's such an important component of this whole idea. Yeah, and I love the name that we've chosen. I feel like that name resonated with both of us. We threw out a few titles when we were brainstorming over it. I think it was just the same day, within the same hour or so we came up with this name. And I feel like it really captures both the secular trends that are so powerful, the forces that I use that term for my show, whatever the analogous term that you use. You guys obviously talk about the end game with you and Bill Fleckenstein. And then the pivot, which I think is the actionable part (3/45)
that speaks to investors. Yeah, absolutely. And since we came up with the idea and the title, I mean, the pivots are happening left and right. There's so much to talk about. But I think it's worth, before we kind of just have a little look at the world now, it's worth us talking about what we aim to get out of these conversations. And the beauty of that is, as we said out, nothing, right? That's one of the beauties of it. We're like the Seinfeld of financial podcasts. Right, right. Yeah, the whole idea of this is to, we recognize there's something going on. And the conversation you and I recorded back in February, I'm sure your subscribers are the same, but mine resonated so strongly with them. And in a way that none of them were expecting. A lot of people said to me, I had the same paraphrased response so many times, I didn't even know that I was feeling this way until Dmitri articulated it so perfectly. And that feeling, that feeling sometimes you just have to follow those feelings (4/45)
and try and understand what's behind them. And that, I think, is really what we're trying to do here. Yeah, I agree. And I told you what I love about this also is that so many of my podcasts, my MO is like hardcore prep structure. And I love that we're going to do something that isn't that way. And quite frankly, some of the most popular podcasts I've ever released are the ones that haven't been structured. Because at the end of the day, people love, people, I think, don't even realize how much they respond to authentic conversations, where they feel like they're actually in the room. So I feel like we're going to be able to accomplish that here. And I'm very excited. I was telling you this as well, that there are people that, not only the people that you've interviewed, that I haven't, that we're going to be bringing on the show, but also there are people that I've interviewed, that I've really enjoyed talking to, that I don't necessarily want to speak to again. Because I feel like (5/45)
I've gotten most of what I want. But the idea of interviewing them with you now makes me so excited to speak with them again. Yeah, and the same goes for me. The beauty of this is that not only can these conversations go anywhere and be about any kind of subject that crops up, but my questions are going to lead to places that you want to explore and vice versa. And I think having this unstructured idea of, look, these people are thoughtful, interesting people who have perspectives that you and I are both interested in, where do they take us? Because the world is kind of unanchored at the moment. And so to have a chance to have these unstructured conversations, to just explore ideas and try and understand not just kind of what's happening, but how those shifts are happening, why those shifts are happening, and what it means to people. Because I think there's a, you spoke about this so beautifully, and this whole concept of yours of financial nihilism, captured it so well, this loss of (6/45)
meaning. This loss of meaning in financial markets, this loss of meaning of money, people being unmoored from any kind of grounded center, just leads to conversations. I've had plenty of them over dinner in the last couple of years of people. You go for a quick dinner and you end up three and a half hours later and two bottles of wine in, sitting there with your head in your hands, and how many of those conversations, and every single one of them has been profound. Yeah, I can't remember the name of the academic who's associated with the term the meaning crisis, but this is a term that we've heard bandied about quite a bit, especially since the pandemic. And I think that sentiment also filters into financial markets and to politics. And I think we are part of this 100-year pivot is about finding a new source of meaning and a new organizing principle in society. That's what we're sort of trying to figure out in real time. Yeah, I mean, look, it could come from any one of a number of (7/45)
directions. I published this piece in March with five essays from great friends of mine, many or all of whom will hopefully grace this podcast with us. And I gave them a very, very broad brief. I'd had conversations with them in the last year or so about the world and their thoughts on it. So I knew kind of that they were thinking along the same lines as I was in terms of trying to figure things out. But I gave them a very broad brief. So I'm not going to tell you what to write about. I want you to write about how you're feeling and how you see the world and how it makes you feel, not what makes you think. And, you know, it worked beautifully. I got five completely different essays back, each taking a very different line of attack for the problems that the world is facing. And, you know, when you put them together, it was an extraordinarily rounded set of ideas and also questions, you know, that leave you thinking, wow, what really is going on? And more importantly, how do I feel about (8/45)
it? I told you that I loved that entire, what would you call it? It was a newsletter, but they were individual essays. Yeah, just a collection of essays. That's all I know. That was really wonderful. And my favorite one was Rogers. And I told you that I had really spoke to me when he quoted Aveda, that line from Aveda, that I still need your love after all that I've done. And he asks, whose love? Yeah. Whose love do we need after all that we've done? And I think what he was referring to, if I remember correctly, was forgiveness and grace, the grace of God. And there is a sense in which we're going through a trial, a great trial as a people, as a country, as a nation, as a world. And it's going to shape the future profoundly, perhaps in the same way that World War II, the Depression, shaped the post-war generation and the war itself and all of that and the sacrifice, the collective sacrifices. You and I talked about, in fact, it's so interesting that you asked this question in the (9/45)
conversation we had, whatever it was, was it a couple of months ago grant? I don't remember when we recorded it. And you specifically asked, could a drop in the stock market cause that collective sense of sacrifice? And my initial reaction was like, not really, unless it was cataclysmic. It was so significant that it caused, it necessitated shared sacrifice. And I recently had a conversation with James Van Galen on the show where we talked about the possibility of a wealth-driven recession, a recession that's driven by a fall in the stock market that's so great that it has such a substantial impact on consumer spending because of the fact that the top 10% are responsible for 50% of consumer spending and because also baby boomers do so much to support their children. So there are knock-on effects. And then AI could accelerate that. So I think as I reflected on what you said in the last couple of weeks, I think there may be more truth to that. And we're sort of going to see that playing (10/45)
out potentially here with these tariffs that Trump imposed. Everyone's still trying to figure out how impactful they're going to be because we still live in a complicated internationalized global trade world, characterized by global trade. And so there are tons of prices that we can't quite figure out because it's not as simple as, you know, we slapped tariffs on China and their goods are going to get more expensive. They're importing parts and pieces and sending their goods onto other third-party nations that are assembling the piece. And so all of that together is something that no one could really quite figure out. There's so much uncertainty also in the supply chain and the rhetoric and then the policies of this administration. And so this feels like COVID in a sense, right? In the sense of like this just feels like uncharted territory. You know, it's really interesting that that answer you gave there was a microcosm of this podcast because you started off talking about Rogers' (11/45)
essay on religion and you ended up with tariffs, right? And supply chains. And that to me is fascinating because that's the strange thing that's happening here. And, you know, as I said in my, the letter I published and I said in our conversation, you know, I'm not a religious man, but there's a spiritual component to this. And I've been really struck by the kind of swell in talk about religion in private emails I've had and conversations that those letters and our conversation sparked. It's fascinating to me to see that this idea of religion and I don't necessarily mean it in the form of a God, but in the form of, as you said, some kind of moral center, some kind of compass that gives principles and ethics and morals and guidance and all that stuff. It feels like people are grasping for it and to go from there to supply chains in the space of a few minutes just shows you how close all this is. And I think how at sea everybody is in trying to figure all this stuff out. And, you know, (12/45)
some of the people we've got lined up when I went through those five essays, there was one thread that ran right the way through them, one reference that was made by each of the five authors, which didn't come as a surprise to me, but I think it's very telling. And that was our mutual friend, Neil Howes and Bill Strauss's book, The Fourth Turning. You know, this idea of a fourth turning and all that it brings in terms of the things we talked about and morals and ethics and principles, that kind of stuff. It ran through that letter like a seam of gold through a rock. You know, it was really, really interesting and we're going to have Neil join us on the podcast. It's one of our first couple of guests to talk about that. And I'm curious to hear your thoughts on that as a starting point for this kind of exploration of ours. I mean, it's right there in the name too, right? Yeah. I think Neil's generational cycles are 80 to 100 years roughly. I think he's a perfect guest to start this (13/45)
because I think when you study enough history, and I am by no means a historian, there are many people who I follow who I would consider to be people that actually have studied history. But from my superficial understanding of history, there is so much about this time that just feels resonant. It feels like we're playing out something that's happened many times before. And there are many shocking similarities to the 1930s, you know, with these trade wars and the potential capital wars and the breakdown of the global order. So I think having on a historian like Neil, who's also developed a framework that tries to put some of that history into a kind of rhythmic order is a very appropriate first episode for this series. Yeah, I think so too. And it's funny, you know, I read that book, I don't know, maybe 15 years or something like that. And I found it profoundly interesting and thought provoking at the time. But it's funny with that in the back of my mind, there have been a few things (14/45)
along the last 15 years that have, I've kind of added and added and added as a way to various lenses to look through things. And that has definitely been one of them. And I've talked about this before you brought up the Great Depression and World War Two and all these echoes throughout history around the last fourth turning. And you know, what's fascinating to me is, you know, when I grew up in the UK at school, history was my favorite subject and we, we learned about World War Two and the lead up to World War Two and that was a big focus of history in England, obviously it would have been. And from that day to literally a few years ago, the piece that I could never really understand properly, even though you kind of read about it, I could never really understand it was, you think about how could society reach a point where someone like Hitler could be elected, elected, you know, not, this is not someone who stole power, this is this guy was elected a landslide. And I could never (15/45)
really put myself in that place to understand it. And I listened to podcasts called the rest is history, which which I really, really enjoy and they did a little five part mini series about the rise of the Nazi party and 1920s and 30s in Germany. And, and that brought this period to life. And going into it, not understanding how it could happen. I came out of that thinking, how could it not have happened. And I think that's the important thing for all of us today is to understand the times we're living through are going to be written about for hundreds of years to come. This is a period of time that is changing the entire way the world works. It's changing every relationship in the world, not just between countries, but between generations and between classes and between everything is up for grabs here. And we talk about in our little corner of the world of financial world, we talk about the system being reset and all this stuff and it's kind of a throw away phrase because we're (16/45)
talking about the monetary system or the financials. We don't really know what we're talking about. We just recognize that things are shifting. And for me, as we go through this journey together, you and I, along with our guests, I think the things I'm trying to really put into place is to help people gain. The perspective that they will get in 20 years, but try and get it now by looking backwards. I think with Churchill it said the further back you look, the farther forward you can see. And I think that's such an important concept. So hopefully in these conversations, we can bring ideas and bring thoughts and bring perspectives to the table that will help people in real time gather a much bigger understanding rather than having their heads in the chaos and not being able to step back far enough to see. Yeah, I love that. Actually, I recently stepped away from Twitter and it's been so good for not just my mental health, but also I think also for my ability to do exactly what you're (17/45)
describing because it's so easy to get caught up in the noise and now see the big picture. And I think, you know, when we were talking with Neil about doing the show, we were also talking with Russell Napier who you and I agree has just been... Look, my personal perspective is that when it comes to finance and political economy, there is no one who I have followed these years who has nailed it better in terms of creating the most coherent, complete and accurate framework than Russell Napier. Agreed. And to that point, I was saying to both Neil and Russell that when I started the Hidden Forces podcast, my goal was to try and understand the forces that are impacting the epiphenomena of the world. And we talk about this all the time in markets, you know, what's driving the market. Everyone, no one knows and you're always trying to extract. We're even talking about this with the case of the supply chains and no one knows actually what the impact is going to be. The problem is very clear. (18/45)
Tariffs, rising in cost of imported goods. Why can't we figure it out? Because it's a complex system and markets as a whole are even more complex. And I said something to you guys in an email, which actually I want to give credit to Tim O'Reilly, who inspired this with an episode that we had done. It was sort of a combination of something he had written in his book about the future. It was a book about map making. And what I said was that I feel like, and this applies to the series, what I think I hope to accomplish with this series, is that we are able to draw for our listeners a map to the future by helping us all. Collectively, not just helping them, but you and I are trying to figure this out in real time and we're never going to quite know. We're just kind of trying to figure it out by understanding the forces that are shaping the present. And I think that's the thing that the people, and for me, that means developing a framework, developing maps. And for me, what that has meant (19/45)
in practice is trying to find the people that have developed either the most accurate map or some map of the territory that is illuminating, that creates that aha moment. And folks like Neil Howe have done that with his generational cycles theory. Russell Napier has done that with national capitalism. And there are others, many of whom I've mentioned to you in an email. I even mentioned one who I don't know if she's necessarily for us, but I think it's a great example, again, of this for people to have a sense. When I had Shoshana Zuboff on my show back, this was a long time ago. I think it was episode 79, so this would have been 2018 or 2019, and she wrote her book, Surveillance Capitalism. Yeah, at that time, nobody, I mean, I had read some folks like Sherry Turkle who had done great work. She had written a book called Alone Together where she talked about what was going on back in 2013 with social media. But no one had quite nailed it in developing this framework that helped to (20/45)
really explain to folks what was going on. What were the forces that were driving the changes that we were experiencing and putting into a coherent framework? And I think for our listeners, I'm sure this is true for you, and I know this is true for my listeners as well. My listeners enjoy when they are able to understand something. I'm that way too, right? If you illuminate something for me, if I'm staring at a problem for whatever period of time, a month, a year, 10 years, and someone comes along and they drop something in front of me that suddenly changes, something shifts in my understanding. It's kind of like moving a three-dimensional object in space. You're seeing only a two-dimensional version of that object. All of a sudden, you shift it and you see what it is. And that is such a powerful experience. And it's not just valuable from an investment standpoint, it's also just deeply gratifying. And I hope that we can accomplish that with the show. In fact, that to me is what I'm (21/45)
most excited about about this program, Grant, is that you and I together will be able to bring on the people that we feel are the highest signal to noise ratio folks and sit down and speak with them and, in a sense, through a series, expose our listeners to those people who, over the years, we have found to be the most valuable teachers. At least that is how I feel. Yeah, the beauty of this for me, Dmitry, is that I come into this with only questions. I don't have answers. I have thoughts and I have perspectives, but really, I just have questions at the moment. And I think it's funny you talked about that three-dimensional object. And I was looking at thinking about this and what we were going to do over the last several weeks. And in my timeline popped up one of those terrific pictures that are taken from the air. It looks like a drone shot, but of animals in a desert walking. And you see, it looks like a big shadow and then it says, zoom in. You can actually see that it looks like (22/45)
animals. This was zebras in this case. It looks like a whole herd of zebras. But when you zoom in and look closely, it's the shadows of the zebras and the zebras are there. And what you just said just brought that back to me about reexamining this 3D object in space. And it's that. I don't even know what my questions are at the moment. All I know is I feel this great sense of uncertainty and this great sense of unpredictability in the world. And everywhere you go, particularly this last week has been a perfect example of this, you're surrounded by such faux certainty. Everybody is certain about everything. Everybody will tell you exactly what these tariffs are going to mean, exactly what is going to happen in markets. And it's utter nonsense. From day one, we're guessing about the future. So you cannot be certain. It's a physical impossibility. So I think this idea that we can just ask questions and just go where those answers take us. And that could mean with that same guest or it (23/45)
might lead us to another guest or it might lead us down a completely different avenue. And I have no idea where that's taking us. And I cannot tell you how thrilling I find that idea. Me too, man. Like I said, I love again, for me, my podcast so often, not always, but so often is this like structured teaching experience where I do a deep dive on a guest or a topic. And I try to extract ahead of time what I think the most interesting things are. And then I create a kind of outline so we can explore those things so I can share those things with the audience. In this case, what I find especially exciting is that I feel like this is going to be a much more inclusive experience. This is going to be much more about like, hey, why don't you come and join us for this conversation as we all try and figure this out together. And the fact that there's going to be less sort of conscious preparation, I think is a big part of it. So again, I can't emphasize how excited I am, man. This is really (24/45)
going to be an incredible journey. Well, we talked about Neil and the importance that he's had for both of us in trying to figure this out. Talk a little bit more about Russell because as you said, you and I both come at this from the financial world. That was our route into this whole podcasting space. But you touched on it a minute ago. Russell has been absolutely spot on in just about everything he said. And that's why he's probably going to be the second guest in the series to use that as a framework. Well, I can't bring up Russell without first just mentioning that you introduced us. And I have to say, again, it's just important to point out that I think this project is possible because of how generous you are. And you are, and I don't want to go do the whole congratulating each other thing where people do that on podcasts. But you're a very generous person, Grant, and you've been very generous to not just me, but all sorts of folks with your network. So Russell's an example of (25/45)
that. I met Russell through you. I'm sure what probably happened was I heard him on a podcast episode and I reached out and said, hey, any chance you can introduce me? Because he's just, and he first came on for an episode on the Asian financial crisis. You know, he had written a book about his experience in Hong Kong through the Asian financial crisis. And I believe it was, the book was diary entries from 1995 to the height and resolution of the crisis, maybe 95 to 98. And I mentioned that first because that was the way that I was exposed to Russell. I was exposed to his methodology. I was exposed to how he thinks. One of the things I really love about Russell, and I look for this in all the high signal to noise ratio people that I identify, there's a process for coming to an understanding. And part of that process involves a baseline level of humility. Now, what I also love about Russell, and the reason I bring this up actually in the context of the Asian financial crisis is because (26/45)
he was looking at his diary entries. He went back and published and analyzed what he thought at the time. Not what he thinks he thought now, but actually what he thought at the time, what he was saying, what he was writing. And that is a level of accountability that I think is something we should all strive for. And it comes across in the quality of his analysis. The other thing I love about Russell is that he's a historian. Again, I don't think it's a coincidence that we're picking two historians. And in fact, you know, I put together a list of names that I shared with you about some people that I think might be interesting guests to have on. And there are certainly historians in there. And of course, Russell's the keeper of the quote, library of mistakes, a library of financial mistakes. And I can't tell you how much I've, like I said, I've gotten so much value from him. I also love that. And I think this is really important to Grant. I'm trying to think about where I recently spoke (27/45)
with someone about this. But in any case, you know, this, let's go back to this thing about frameworks. Ah, right. It was a conversation I had with George Friedman where this came up. So this is the thing about frameworks, right? Actually, you know, you know that I'm a father. I recently became a father. My son's now seven months or something. And there's been something really magical about watching him awaken. You know, like there's a kind of awakening that happens with every day that he grows older. And what I also noticed, and I knew this already. So I already had a quote framework around how this works in childhood development. But you can see that he went from being born where everything is just stimuli. Yeah. Unstructured streams of information, colors, light sounds. He has no way to say that sound, oh, that's an elephant, you know, or that's a door. All he sees is some sort of like, you know, just overflow of information. And what I've read about this incidentally is that it's (28/45)
somewhat like being on psychedelics or having a stroke in your left hemisphere. You know, it's like you just lose the ability to have any kind of, everything just kind of melts into each other. And I feel like what happens as we get older is we bring structure to experience. We structure the world around us. And that's what these frameworks are about. We need the frameworks. We need frameworks to navigate the world. You know, this also brings us back to questions about God and all else, which is that reality is not as it seems to be, right? Because so much of what we do is we bring order to experience. We structure the reality that this chaotic world of information that comes at us so that we can navigate it. But the maps we use to navigate it should not be confused with the territory. And as we get older, we develop these maps and some of us get exceptionally wedded to those maps. And what I think is so special about this series is that what we're doing is we're breaking, we're (29/45)
acknowledging that those maps no longer work and that we shouldn't be attached to them as though they are the territory. And the people, and this is my favorite quote by Russell, is that the worst thing you can do, and I'm paraphrasing now, he doesn't say this exact thing. He does say that the worst thing you can do, but the worst thing you can do in sort of periods of great change, the kind of change that we're talking about here, is to ask to get all the right answers to all the wrong questions. And what that really means is what framework are you using? What are the sets of questions that derive from what framework that you're getting answers? And you think you're getting all the right answers, but you're using the wrong framework, because those frameworks are outdated. Your models no longer work. Your maps no longer accurately represent the territory that you're seeking to navigate. And when you go through these cycles, everything has to change. Your baseline assumptions have to (30/45)
change. So one of the things I really love about Russell as well is that he has that sort of deep bottoms-up analysis, and he's not dependent on a framework. And those people are exceptionally intelligent. They tend to have, if not an academic historical background, they certainly have an appreciation for history because you have to be willing to break the old and to build something new. So that's what I love about Grant. I love about Russell. And I think what's great about Neil, and again, why I think he's such a great person to start the episode with, is he helps his framework and his model helps explain why we're going through this transition. And then again, Russell's is about like building a new model to understand the political economy of a changing global order, of a changing economic order, and what that world looks like, what will increasingly look like, and how to navigate it. You know, I can go into so many directions with what you just said. Remind me to come back to the (31/45)
fatherhood thing in a second, because there's a component to that I want to talk about. But the one piece of that I would add to what you just said there is the time element. You have to be able to change your framework quickly, because we've grown up in periods of long, slow-moving trends. Globalization has been a 40-year trend that has now kind of reached its apogee. And we haven't had to really function quickly apart from if you've been in the markets, you've had the odd day of chaos where you've had to react, but you haven't really had to completely adjust your framework quickly. You've had to deal with a 10% down day in 2008, or deal with whipsaws when the markets have rallied in the middle of bear markets and stuff. So you haven't had to really break things down to their roots and then rebuild them again. And that's what we're talking about here. We are talking about a world that we all believe, to your point, we understand how it works and we simply don't. And that has already (32/45)
happened. The world no longer works the way we all believe it does. And so the quicker we kind of figure out how it's changed and what that means for us and what we have to do to adapt to it, the better for all of us. But we want to come back to that father thing, because I know, and it's been such a cool thing to watch you on this journey as a father of a young child, because I've got two grandkids now, I'm at the other end of that spectrum. But for me, this is such an important part of this, because I don't really spend much time worrying about me and I'm worrying about my place in this and how I'm going to deal with this. Because I am far enough down the track and I've lived a life and I've built a family. I've done all those things. The thing that I spent all my time thinking about and worrying about is, how do my kids navigate this? And now I look at this beautiful six and four year old girls who are completely oblivious to this. And my questions are all about what's the world (33/45)
they're going to inherit like and how can we either prepare them for it ideally or try and provide some sort of haven from it if it's really bad. Those are the questions that I really want to dig into, because if we can help the people who are going to have to deal with this in ways that we aren't, we're simply not going to have to deal with it in the way that someone who's 15 now is going to have to deal with this world. We're just not. We're going to be through that stage where it's the kind of thing that overwhelms your most productive years. So that's a big component to me and this fatherhood, the peace. And again, through these conversations and through the essays and everything, I keep getting that back, people talking about their kids and talking about their families and talking about, we become a newer to this when you're staring at markets. You become a newer to volatility really, because it's part of your job. And for a lot of people, it's how they make their money. They (34/45)
embrace the volatility. But if we take the last couple of weeks, for example, out of the way, and I'm sure I won't speak for you, but I've looked at this or I've been forced to look at it, I should say through a financial lens, because the news feeds that I'm getting bombarded in the emails, I'm getting it all from people who are financial practitioners and trying to understand the world through that lens. But if you step back for a moment and try and imagine the last two weeks without headlines about stock markets down 20% and without talk about recessions and without talk about financial aspects of this, what does that world look like to someone who's never read The Wall Street Journal in their lives or doesn't have a 401k or if they do it in a company pension plan, it's manageable. They don't think about the stock market ever until it's front page news or until it's on 60 minutes about the crash. That's a very different world that those people are living in. That's the vast majority (35/45)
of people. We are in a minority. So again, there are so many different ways that we can take this, but there are also so many different vantage points that you can stand and look at it from that will, to your point, about the wrong questions and the right answers, give you a completely different vector upon which to travel towards this thing. That also, again, brings me back to frameworks. One of the things that I don't know if you and I talked about it, I've spoken about in recent episodes, is that I feel like we've just gotten to the point now where investors have become comfortable with the idea of mean reversion. They've become really comfortable with this idea that, okay, yeah, we had the 2008 crisis. That was really scary, but the markets rebounded. We had COVID scary, but the markets rebounded every time the markets come back. And I'm not saying that markets don't come back, that the world's going to end. That's not what I'm suggesting. But I think the setup this time could be (36/45)
one where the markets don't revert back to the previous paradigm. And there are a lot of reasons to think that that's possible. One is the Baby Boom Retirement Wall. You have people that are going to increasingly be pulling their money out. You have this tariffs and this intention, at least stated intention by the Trump administration, to rebalance wealth and income in society, which also will change those dynamics, and will change dollar recycling, which has been a big, huge source of asset price appreciation. And you also have AI, which is something that I just don't think is spoken about enough in this context. And this is again something that I spoke about recently in my episode titled, Are We About to Enter the First White-Color Recession? And I mentioned the wealth-driven effect, which is that if stock prices go down, substantially down, if one's net worth declines, especially if they're nearing retirement age or in retirement age, they become much more risk-averse about (37/45)
spending. Consumer spending is so heavily tilted towards the higher echelon income brackets. That could drive a recession. Firms that were previously reluctant to experiment with artificial intelligence, large language models, may become more willing to do so because they've already let go of people and they're cost-conscious. And so, chat GPT went from being not good enough to maybe just good enough. And so that kicks off, that ignites the beginning of a multi-year, multi-decade reordering of the economy, a technological revolution driven by AI. And that also has huge political ramifications. Maybe that finally gives the Democratic Party, whose base consists of white-collar workers who previously were organized around the banner of some of this woke ideology, to now being focused around UBI and sort of the effects of losing their jobs and losing economic opportunities. In other words, maybe we end up seeing happen to the white-collar workforce, what happened to the blue-collar (38/45)
workforce. And that has profound implications for politics. Now, I don't know exactly how I got on this train, Grant. I don't know how I remember exactly what your question was and why I got here, but I guess that's in the spirit of the podcast. Yeah, look, exactly right. And like I said, this whole thing is going to be such an adventure. And I'm very conscious of us doing a podcast, talking about a podcast. Again, Seinfeld, that keeps coming up. Podcast about nothing and podcast about a podcast. Exactly. So we won't make this episode too long, but we wanted to share the beginning of this journey with you and what we're going to do. You know, Dmitry and I will publish these conversations and we're going to make sure that everybody gets to hear them because I think this is profoundly important questions. We will publish them to our subscribers probably a week before they go public just so they get the benefit of that for supporting our work. But I think, you know, Dmitry, a big part of (39/45)
this is going to be the audience out there, whether they email you or they email me and ask us the questions and it suggests people that they've heard of that brought an interesting perspective to the way they try and order the world around them. Because, you know, you and I have our networks and the network effect of those networks is terrific. But I've lost count of how many interesting people I've come across over the years that I'd never heard of before. And you have these conversations with them or you read something they've written and to your point, right? It suddenly turns a torch on, you know, in a corner that you've been trying to squint into for quite some time. And so, you know, having the audience be a part of this and join us on this exploration is going to be a huge component of it. Absolutely. I couldn't agree more. And I'm very excited by the prospect of hearing back from people. Again, I go back to this thing of like there's something really exciting to me about (40/45)
changing the format of the show. Again, I'm still doing my podcast. You're still doing your podcast. Yep. But you have actually done series like this before with other people. I have never done anything like this. I've been doing the show for eight years now, roughly speaking. And it's been roughly the same format. It's been me interviewing people, nerding out on their material, constructing an outline and sort of quizzing them and occasionally more conversational programming and occasionally kind of more panel stuff. But it's been more or less the same and certainly just me. I'm very excited by this idea of doing it with somebody else. I can't tell you how excited I am and doing it with you of all people. Well, I agree. I say we've both been trying to find the right way to collaborate for quite some time now. And I'm delighted we found it. Well, listen, let's wrap things up there. The first episode of this will be out sometime in the next couple of weeks when we can. Of course, the (41/45)
big problem, Dimitri, with doing this with the co-host is you have three calendars to align. That's the single biggest impediment, especially when you're all on different time zones. I've recorded podcasts at four in the morning in Australia and I've done all kinds of things over the years. You're lucky because you're right in the middle. So you should be fine. So in terms of publishing, the plan is to publish this to the whole world so that everybody gets a chance to join us on this journey because we both believe it's profound. Our own subscribers will get it first. We'll probably publish it a week before it goes public. But anyone that's not a subscriber will have the chance to listen to these conversations. Absolutely. So I think we were still trying to figure out how we would publish the public feed, but we're going to both publish this on our private feeds, Brent. So your premium subscribers will get it. My premium subscribers will get it. And then what we're probably going to do (42/45)
is we're both going to publish it on our own feeds publicly. We also talked about maybe when we publish it publicly, maybe we'll put it on a regular feed. But we can hash that out for a second. We'll figure that out. Well, yeah, when Neil's episode comes out, we'll have a lot to talk about. We'll mention that too at the top. Hey, we did tell people we're doing this on the fly, right? Exactly. There you go. It's authentic. Exactly. All right, my friend. Well, listen, we'll reconvene when we can pin Neil down and we'll be back with this in the not too distant future. In the meantime, Demetri, just let people know where they can follow all the great stuff you do at Hidden Forces. Yeah, you can go to hiddenforces.io to learn more about the podcast. I do have a Twitter feed, but like I said, I've taken an indefinite hiatus from Twitter. But my Twitter handle, if you want to go through it, is at Coffinas with a K. And I also have a Twitter handle at Hidden Forces pod that you can follow. (43/45)
Yep. And I'm pretty easy to find, grant-williams.com. My Twitter handle is at TTMYGH. And boy, did I wish I was taking a hiatus from Twitter at the moment. It is becoming almost unbearable. It is not a very fun place. I also should mention, if you want to mention it to Grant, I have an email address that you can reach out to infoathiddenforces.io and all the emails get forwarded to me. So feel free to reach out through there if you need to connect. Actually, and the same goes for me, infoatgrant-williams.com and they will come to me too. All right, my friend, this has been terrific. I look forward to this journey with you. I don't know which one of us is Sancho Panza and which one is Don Quixote, but I guess we'll figure that out as we go along this journey as well. I'll talk to you soon. Awesome. YouTube, take care of Grant. 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 (44/45)
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 at cofinas and you can email me at infoathiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
The Economic Fallout from Trump’s China Tariffs Shehzad Qazi #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetrius Grafinis and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens. The challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Chief Operating Officer at Research Firm, China-Beijed Book, Shizad Kazi. Shizad was last on the podcast more than two years ago to discuss the post-COVID reopening of the Chinese economy. I asked him back on the podcast today to discuss the preliminary impact Trump's tariffs have had on U.S. and Chinese businesses and on their respective economies, stock markets and currencies. We also discussed whether the action plan to revitalize consumption that was recently announced by the Chinese State Council and CPC Central Committee represents a more determined effort by Beijing to ignite a flywheel of endogenous demand for Chinese output should the country's export sector (1/45)
become priced out of critical markets in the U.S. and Europe. I also asked Shizad about Trump's stated desire to do a deal with China, what such a deal would look like, how big it could be and what concessions either side is prepared to make in order to get it done. If you want access to all of our premium content or you want to learn more about the Hidden Forces genius community and how to attend one of our many virtual Q&As, in-person events and dinners, you can do that at hiddenforces.io. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this timely and informative conversation with my guest Shizad Kazi. Shizad Kazi, welcome back to Hidden Forces. Hey, thanks for having me back on, Dimitri. It's great having you. How long ago were you on the podcast? It was like three years ago? Something like that, I think about three years ago. Right, and you were at one of (2/45)
our New York dinners a couple of years ago too. Yeah, exactly. We actually just did one recently in Washington, D.C. and the focus there was on the Trump administration's China policy to the extent that there is one. It's not entirely clear. Rush Doshi was there. John Pelston, who you remember from the dinner that you were at was there too. That was a very interesting conversation. I feel like, I feel like, and tell me if this is right, and then we'll get into a series of questions about the economy. It doesn't seem like we have heard as much of a coherent policy articulated for the public on China from this administration as I would have expected us to based on how important China was and how big it factored into the Trump administration's first term. Do you generally agree with that? If that's the case, why do you think that is? Is it just in your estimation because they haven't communicated that publicly, but there is a larger strategy internally? What do we know there? How would (3/45)
you answer that question? Yeah, there isn't necessarily a full-blown strategy that has at least been unveiled publicly. I don't believe that there really exists one behind closed doors either. Instead, what the administration has come out with this time around is something different. They've got a global goal. They've got a goal of structurally changing America's trading relationships with the world at large. That by and large includes changing America's trading relationships with China. A series of goals are being pursued. We've heard about things like there may be more investment restrictions. We've heard about things like there might be more export controls. What we haven't seen is a comprehensive plan that says, look, these are our top three or top five things we're going to accomplish vis-a-vis China. This is how it's being done as part of this global effort of rewiring US trade. Yeah. Let me ask you this question, which is, what do we know about what the material impact has been (4/45)
so far on the ground in China from the tariffs? And also, I think more importantly, from the rhetoric that's coming out of the Trump administration. Yeah. I think as soon as the election took place in the US, it was pretty clear on the Chinese side that there's going to be a round two of a US-China trade war. And funny enough, I think it was Wall Street that certainly did not expect, despite over the several weeks and months once the administration took control, that there absolutely was going to be a global trade war of sorts, certainly global tariffs. But I think in China, they certainly understood that at the same time, they believe thus far and they continue to believe that there eventually will also be some kind of US-China deal. That said, on the economic front, the first impact was actually positive in the sense that there was a lot of front loading companies buying a lot of materials in advance of tariffs coming and a lot of inventory buildup taking place out here in the US. So (5/45)
the economic impact was positive because manufacturing looked good, exports looked strong. But where we are today on the ground, as China-Beijing books real-time data showed us, a lot of that front loading effect and the boost to exports was certainly present in the first couple of months of the year, certainly there in the end of 2024, but has now expired. So into March, we saw our export orders indices slide, we saw manufacturing beginning to slow down, factory production beginning to slow down. So the economic impact that pulling forward of growth that took place, that trend has faded. And now we're, I think, on track to look at what is most likely going to be a sequential slowdown in the Chinese manufacturing sector. All right. So I'm going to have more questions to ask about the impact on China's economy. I still would love to get some clarity because I feel like I'm in the majority of the cohort of people who don't really exactly know what is being tariffed, how much it's being (6/45)
tariffed, which tariffs are for negotiations, which aren't, what's on today that was off yesterday or that's what's off today that was on yesterday. Like, where are we today? We're recording this on Wednesday, April 16th. What exactly do we know about what has been tariffed and from those things, what do you think is going to remain on at these levels or close to these levels? Yeah. I mean, this is a pretty fluid situation for sure. And there has been such a rapid ratcheting up or escalation of tariffs that it's become almost dizzying for markets. And we saw markets, you know, what happens when you get really dizzy sometimes you puke. And that's what happened last week in the bond market. And certainly has been happening with equities lately. So the simple way to put it right now, I think, was to be China at least, is that you have the top line tariffs at 145% on China right now. Now you have any products that contain chips or semiconductors that have been moved out of that top 145% (7/45)
rate. And instead, the 20% initial fentanyl tariffs that have gone into effect in February, those still apply to the consumer electronics and those products like your iPhones, computers and such. And that basket of goods is going to be most likely hit under the upcoming sectoral tariffs, which are going to be announced once the US Trade Representative finishes his investigation where, you know, where they're looking, it's called a section 232. Basically, it's saying that look their national security concerns around a foreign country's trade practices or violation of trade laws and trade agreements. And so as a result, we have to punish them by putting tariffs on. We don't know what that tariff amount is going to look like. We also currently don't necessarily have clarity on how quickly that investigation can be done. Typically, those investigations take about 270 days. I do not anticipate that the US Trade Representative will be taking that long off a time, but at the same time, we (8/45)
don't know how soon and what that number is going to look like. So over the weekend, you heard a lot of things being referred to as exemptions they're not technically exemptions as much as they are just moving them from one tariff basket to another with the expectation of more higher tariffs on those goods coming. Let me make one other point. As I said that everything else is under the 145%. So how do you think about that in terms of argue whether they're going to stay or not stay? Look, at the end of the day, we don't know we're dealing with a administration where President Trump is certainly the decision maker here. I think everybody finally understands that. And so that means things can change and change very, very quickly without much forewarning. Pulling back, one could expect that look tariff levels on most products will most likely not stay at these high levels, but we're certainly not going back. I think one thing we can all probably bet our money on today safely is that status (9/45)
quo ante as in where was the US-China trading relationship vis-a-vis tariff numbers on February 1st or January 31st or even the day the President got inaugurated. Are we going back to that? I can say fairly confidently no. So a few more pointed questions on tariffs. Let's just talk about auto tariffs here for a second because this is also a low margin business and there's a lot of uncertainty as well here. I know a lot of folks are looking to maybe try to order a car or get a car early and head of the tariffs being put back on because I think there was some kind of pause on these tariffs as well. Maybe I'm mistaken. So can you just walk me through exactly what's going on here because a lot of these brands that are also foreign brands, they have domestic manufacturing like BMW, but they don't manufacture all their cars domestically. So there's so much confusion here. What do we know about auto tariffs? Yeah. So if my understanding of this is correct, essentially the auto tariffs rule (10/45)
has been amended or the way this was written out in the proclamation and then subsequently in other documents has been amended to say that if a certain amount of US content is included in an automobile, you would deduct that when determining the tariff on the rest of the auto parts. So this is where tariffs start to get incredibly confusing and incredibly technical. And so they are not necessarily being hit with one singular number because again, the idea is that we don't want to punish as a matter of fact, we want to encourage more production being done within the United States. So you make sure that you're not then penalizing car companies when they do have a certain amount of US, United States product in there. So the rule of origin, laws as they exist, everything is now being talked about. The conversations are getting more technical and I think markets and the professional investors are certainly having a hard time and I can imagine why a lot of people who are trying to keep on (11/45)
top of this would be having a tough time. This is complicated stuff that normally trade lawyers and stiff suits in DC talk about and then we don't typically talk about these things on social media and in the press. Yeah, I feel like I probably need to bring on a trade expert to walk me through some of this stuff because it clearly isn't just based on where the product is assembled or manufactured in the final stage. It's about the entire supply chain and it sounds like it at least. It sounds like every part that is manufactured outside the United States gets tariffed. And if that's indeed the case, one has to ask him or herself, what's the goal here? Is the goal here to bring the entire manufacturing chain back to the United States or are we eventually going to get a more targeted set of tariffs that looks to onshore certain parts of certain supply chains? I mean, that to me is the important clarity that I'm looking for at least. So let's shift now to talk a little bit about the (12/45)
Chinese consumer. So I've seen reports that China's consumers have increased their consumption of domestic brands over four and ones amidst the recent trade war. I've also seen a lot of these TikTok videos of different people running sort of wholesalers out of China that are producing, let's say, Fendi bags at a fraction of the cost that it's being sold to American consumers or European consumers. I'm not entirely clear what's happening there if this is being promoted to distributors in the US, directly to consumers, to domestic consumers in China. I'm curious to understand about that too. And I'm also curious to understand how much of this reported move by Chinese consumers to domestic consumption of Chinese brands. I've seen some talk about an accelerated shift away from US consumption. How much of that move was already in the making? And how meaningful is it on the margin at the very least to possibly kind of offset some of the demand crush for Chinese production from lost overseas (13/45)
markets? So there's two questions. So sorry about that. Why don't you just take the last one first and then we can re-ask you the first one? Sure. So let me maybe sketch out something from first starting from the macro point for our audiences. The first thing to understand is that Chinese consumer spending has been incredibly lackluster in the aftermath of COVID and more specifically COVID lockdowns. The two years that you had a zero COVID policy in China were absolutely incredibly destructive, as you can imagine, because you're looking at firms shutting down, you're looking at incredibly sluggish economic growth, you are looking at people losing their livelihoods, you're looking at young graduates not being able to find jobs, you're looking at most fundamentally a lot of economic uncertainty. In the midst of all that, you also got a very severe and very serious property market crisis, which was of course by and large engineered by the Chinese authorities, by the CCP, by President Xi, (14/45)
as a way to sort of begin and as a way to maybe more proactively address the property bubble, to prick the bubble, to let the air out and to deal with that situation or problem before it turned into a actual very serious crisis. But the result of that was a lot of wealth destruction took place in China as well, which of course subsequently also resulted in consumers becoming incredibly cautious. So this is the background for the last five years really that matters, nothing before that makes too much of a difference anymore. Now where we are in real-time numbers, if you will, is that Chinese consumer spending has slowly but surely gotten better if you look at year-over-year comparisons, right? So if you looked at consumer spending around the Lunar New Year holiday this year in our data, you would see that it certainly looked better than your ago levels and it was on par with pre-COVID levels as a matter of fact, other indicators would show that it was airline bookings perhaps were even (15/45)
better than 2019. So consumers are out there, they are spending some money now that previously they were not, but at the same time they're still very defensive, they're not going to continue to spend outside of instances, holidays and very specific periods where more consumption typically takes place anyway. What that means by the way is that they are also looking for being competitive on a pricing level is very important, but they're also not going to be supporting I think a lot of these expensive foreign brands when they have very good local alternatives. So for foreign companies, this is a challenge anyway because they were looking at an, as it is, they were looking at a slowing consumer market in China, then they were looking at potential crisis in the consumer part of the economy, in the consumption side of the economy, and then they have a range of local companies that they need to increasingly compete with. So that story, that pain point has been around for a few years now for (16/45)
foreign companies. That leads me to your second question and the second point, which is this new idea I've seen around being floated around and argued that well, if China loses the US market, it'll be able to make up for it by not only selling to other countries, but also through domestic consumption. And now this could not be farther from the truth, that both couldn't be farther from the truth, but the domestic consumption side is even more fantastical because the reality is, as I just described, consumer spending has been by and large, just not at a level where they could support everything that China produces. And more importantly, the government has not done anything meaningful on the consumer side, on the household side, vis-a-vis providing stimulus, that would actually help spur consumer spending and do so in a way that was sustainable. They have done trade-in programs and good trade-in programs and such and provided subsidies for a very short time that has provided a short-term, (17/45)
very limited boost to the economy, two things like retail sales. But this is not the stuff that is going to change the consumer spending patterns in any kind of meaningful way. So no, if the US market is lost, that is going to create, that is a very big, very serious headwind for the Chinese economy. That carries very serious repercussions for the Chinese economy. So last month, China's State Council and the CPC Central Committee issued an action plan to revitalize consumption to boost domestic demand. The action plan focuses on increasing incomes, improvising consumption capacity, upgrading service quality, and optimizing the consumption environment. How important is this plan? This got a lot of attention in my world because the argument has been made for years now that the Chinese government would ultimately have to restructure the incentives and the regulations in its economy, boost safety nets, etc., in order to find a way to boost domestic consumption in order to get this flywheel (18/45)
happening and so that the producers weren't so dependent on external markets for economic growth. What do you know about this plan? How important is it and how does it factor in here? Yeah, look, for the last probably at least 10 years, we've heard some version of a plan to boost domestic consumption, some version of a plan to, quote unquote, rebalance the economy, some version of a plan to create dual circulation. What unfortunately we get is a lot of catchy sounding titles and promises coming out of the CCP and off Beijing, but we see little to no progress. Ten years is a very, very long time to be making the same promise and then at the same time making little to no progress on that stated policy goal. So I know that every time one of these new things comes out of a Central Party committee meeting or an annual meeting of party officials or the Chinese government, there's a lot of attention paid to such promises, but at the end of the day, we collect large-scale private data in China (19/45)
and we have been wishing and wanting for a long time to see evidence within the numbers and it's just not there. The support for SMEs, the credit support for SMEs is just not there. The types of changes, structural changes that need to be made in order to create a state that provides better elderly care, better support for child care. A lot of the rules have to change around their local IDs and such, residency requirements, more importantly, none of that is taking place. So I wouldn't pay too much attention and I certainly have not paid too much attention to the latest batch of pledges that have come out of Beijing. But we'll see if they're finally ready to make the changes, it'll show up in the data first and that's the place to look. So we know what's happened to U.S. equities as a result of enter the U.S. dollar as a result of the last few months. What has been the impact on Chinese equities and the Chinese renminbi? So the Chinese Yuan is most certainly beginning to weaken. It has (20/45)
led to, once again, a call on, you know, there's a Chinese devaluation coming. And as we recently wrote in a client note that, you know, foreign observers have called eight of the last zero Chinese devaluations. So we certainly don't believe today that a Chinese one-off deval is in the offing, that there's a high likelihood of that happening. The reasons for that are kind of well understood. They do not want to create a financial panic. They don't need a currency manipulator label to be added onto them. They don't want to upset their trading relationships with other countries because that wouldn't just hit the U.S. I would hit other countries. So the Chinese Yuan has certainly weakened. They seem to be comfortable with it weakening a little bit. The comparative where it was 7.2 was the latest line in the sand and it's weakened since then. So maybe some depreciation is happening and is in order and that would certainly sort of ease the blow from the tariffs. But certainly no one-off (21/45)
devaluation in the cards today. Chinese equities have had a pretty good time starting fall of 2024 because there was a big call on Wall Street that, hey, look, there's big bazooka is about to be fired in China. Big stimulus is coming. The stimulus never came, but whatever policy announcements did come through and a lot of the risk mitigation that was announced in terms of, you know, loans being switched from one balance sheet to the other and allowances to issue more debt at the local government level, at the federal government, or at the center. You know, they were sort of seen as examples of stimulus. And so the Chinese equities started to do well. And then of course, you got Deepsea. And when Deepsea happened, that was treated on the street as a total and absolute game changer that China was now leading the AI race, perhaps, and this was going to create more opportunities. So Chinese equities hit, you know, obviously multi-year highs. But in the aftermath of tariffs and trade war (22/45)
starting especially after what happened post, quote, unquote, liberation day, you know, we've seen Chinese equities also struggle also beginning to decline again. So that trade did not last a long time. And I have to make this point, you know, I went repeatedly on various television networks arguing pretty aggressively that, look, markets had to take geopolitical risk very, very seriously. Markets had to take trade war risk very seriously. And it's just nobody was interested because people, again, you know, the market continues to see President Trump more so as a dealmaker than as tariff man. And that has proven to be immensely costly in the last several weeks. I've not heard anyone juxtapose those two, tariff man and dealmaker. That's interesting. I mean, you're right. The way we think of Trump, and I still think the way we think of Trump is as dealmaker. And that's actually going to be a question that I'm going to ask you, Shazad. So let's hold off for that one. But what has been the (23/45)
policy response thus far since liberation day? The Chinese are responding with reciprocal tariffs. However, I don't know how meaningful that is because again, like it's not like U.S. companies are hyper competitive within China's economy to begin with. So what has been the policy response and how do we interpret those responses? How much of that is just signaling to try to get a deal maybe or to try to say, hey, we're going to kind of respond to save face, but we want to meet you at the table. And how much of that response has actually been to try and put pressure on the U.S.? I know there have been some reports. I don't know how true they are or aren't that the Chinese have been selling U.S. treasures on the margin. Some people might argue, even if they agree that that is happening, they might argue about why it's happening. Is it happening because the Chinese are voluntarily selling treasures in order to send a signal? Are they selling treasures because they need dollars? I can't (24/45)
make sense of any of this. So you tell me, what have they done thus far and how do we pull signal from the noise here? Yeah, the Chinese response as far as their retaliatory tariffs of 125% on U.S. goods, excluding U.S. semiconductor imports because they of course want any and all semiconductors they can get from us are not particularly meaningful. You cannot be the world's sort of biggest exporter and have incredibly weak consumption and then expect your retaliatory tariffs to carry much meaning. That said, there are of course companies that sell into China that would prefer not to have those tariffs. So my comment applies to the larger sort of trade balance and where things stand at a macro level. But certainly again, it doesn't apply to every and all companies selling inside of China. But that said, the other thing they've done of course is try to institute export controls or further export controls on rare earth or so-called rare earth minerals. Again, there we are yet to see in (25/45)
practice in the coming months and so forth, how far can they go in actually enforcing and ensuring that the U.S. isn't just pulling a China by that. I mean, just buying those rare earth minerals and critical minerals from third parties. So I'm not sure what capacity and what authority and what ability Beijing actually has to stop the U.S. from just buying it from elsewhere. Because unless China wants to cut off the whole world, which doesn't seem like a good idea when China is trying to rally lots of countries on its side to actually push back against the U.S., that becomes very difficult. They have of course announced a suspension of buying planes from Boeing. So that's kind of stood out. It's not clear how meaningful that is for Boeing because it seems like that was a very small percentage of Boeing sales this year to begin with. So I think all we're saying, so we're giving lots of examples here, what are we really saying? What we're really saying here is that when it comes to a (26/45)
trade war, the world's largest consumer holds far more cards than the world's largest exporter. That's the bottom line here. And so China cannot do any kind of one-to-one retaliation and China's retaliatory measures are at the end of the day going to be pretty limited in their impact. China's toolkit to retaliate is also very limited. Now, what happens next? What happens next is they could really escalate this. They could really escalate by actually selling treasuries, which there is no evidence that they're doing right now. They could escalate this by saying we're going to start interfering in critical supplies like pharmaceuticals, like medical equipment. So as it is now, the 145% tariff means that a lot of U.S.-China bilateral trade is basically coming to a standstill anyway, which means that China itself will now be relying on rerouting its products to the U.S. But do they actually say, you know what, forget about it? Things they really need? Let's not do that. Or let's suffer the (27/45)
pain and let's create the shortage economy in the U.S. When consumer starts things running out of basic goods and basic supplies that they rely on us for, like what happened during COVID, that is going to put so much pressure on the administration that it'll have no option but to change tack. So they could go through a series of very serious escalations here, but that would put us in a different water. I think that would probably bring us closer to a hot war. Right now, this is really a trade war. This is not really even full-fledged economic warfare. That would start taking us much closer to something much more dangerous. So I'm so glad you brought up the whole who holds the cards here, because that was going to be my next question, because the administration, including the Treasury Secretary, have really made this point over and over again in interviews, which is that we quote, hold the cards, not China as a surplus trading partner. Is it fair to say that that a conclusion derives (28/45)
from viewing this trade war in very conventional terms, which is to say, you've got two trading partners and they each are motivated by gaining as much access to the other party's market as possible. And so escalation really comes along the lines of raising tariffs and making it harder to access the other person's domestic marketplace. Whereas if you were to focus on China's ability to withhold critical inputs for the pharmaceutical supply chain, for example, then you could say that China actually holds the cards. Again, depending on the pain point you're looking at, first of all, do you agree with that? It depends on how we're defining the scope of the possible war here. The way I like to think about it and frame it is that just because we hold the cards doesn't mean that China cannot hurt us. That China cannot make this incredibly difficult for us, incredibly painful for us, and incredibly dangerous for our own stability and economic well-being at home. Okay, so here's my last (29/45)
question, Shazad. What is the deal that comes out of this? Where do we finally end up? Because I feel like that's what investors are most focused on, and I'm sure many business people in China and the US to the extent that they're up to speed on this issue and how it's impacting their businesses are concerned about as well. Is there a quote deal to be made here? What is the scope of that deal? Who are the people that are having it? What do you know? And what do we know about this? Yeah, so I think a lot of people talk about the US-China deal, and the person who talks about it most of course is the president, is Donald Trump. I think this will boil down to what everybody thinks is a deal, as you just said. What do we mean by it? I am incredibly skeptical today off the idea that there can be a big deal for the centuries, deal for the ages between the US and China. And what I mean by that is a deal where we get rid of all tariffs and take them back to levels, say even take them back to (30/45)
levels where they were at at the end of the Biden administration. Forget about the first Trump administration. And of course China gets rid of their 125%. China again has unfettered access to our market. On the other hand, they are saying full cooperation on fentanyl. Absolutely going to make structural changes to our economy. So we actually support consumption over production. We actually therefore open up the market, create more opportunities for American companies. Then we open up the market in real ways where we stop providing subsidies and support to our own companies. So we create more fair access for your countries. We get rid of any problems you have with IP theft and so on and so forth. This magical scenario, this utopia that was once conceived of in terms of what China would eventually look like from the US standpoint, and the converse being China having unfettered and total open access. Come here by the farmlands. It doesn't matter where you want to put them. We'll buy or (31/45)
your all your technology and put them in our military bases again. That stuff's not going to happen. Not even close to it. And I deliberately sketched this out so that I can explain to people what a true deal between the two sides could actually look like. We are nowhere there and we will never be there. What is possible between the two sides? However, is a series of mini deals or a maybe a skinny deal as I could call it, which is that we have deals around very specific things. A deal around TikTok, a deal around more fentanyl cooperation, realizing that China will probably never fully comply and may not even ultimately have the ability to help us as much as we'd like it to. And a deal that focuses on bringing eventually bringing down tariffs to some level that is below 145%, but certainly remains above where it was even above the 20% fentanyl low tariff. So I think we are headed towards a lot of volatility in this relationship because we are structurally changing it and change is (32/45)
painful and change creates a lot of chaos. So really the thing to do is to brace for that and to understand that big China recoupling is out. Total decoupling is an unlikely scenario right now and a recoupling is certainly an unlikely scenario right now. It's a messy middle that we have to prepare for. And so it's complicated, tough, chaotic times ahead. So superficially this looks like a very unilateral approach by the United States, which you can see even evidenced by the blanket tariff bands and the tariffing of our close allies and partners in Europe and Asia. Is there any talk about this administration looking to pivot, maybe again, maybe this is all part of some strategy, to pivot into creating some kind of new trading block or ecosystem that relies more on countries with which the US is aligned or has friendly relations? And how are China's trading partners? We saw talk about the, again, these are superficial readings of headlines coming from my end, but the South Koreans, the (33/45)
Japanese looking to kind of do some kind of joint thing with China, try to put pressure on the US to reduce tariffs. So like how is this shaking out from an international perspective? There has been a lot of chatter lately, certainly on this idea of creating a new customs union or new trading blocks where countries with similar values and similar laws and adherents to trade laws and trade agreements trade with each other. That's of course not something we can expect in the short run or probably even in the medium run. Now that said, as we try to move supply chains out of China, as we try to substitute Chinese products or other products for Chinese products, more inputs from Mexico, more inputs from Vietnam and South Korea and so forth, and maybe other countries in Latin America, as we try to enforce things like near-shoring, French-shoring, and of course, reshoring, the reality is that the changes in supply chains will over time most likely create this new quote unquote trading block. (34/45)
The question that we don't have much clarity on today is where ultimately do we see China and all of this? Because obviously Chinese inputs are in so many things that we would still be buying from these other countries. So where do we want to have them completely restricted and brought them down to zero? Where are we okay with 10% Chinese inputs? Where are we okay with 50% Chinese inputs if those things exist at some point at the end of the day? That thinking, that strategizing, I just don't think has been done yet. But I think we are certainly moving towards supply chains shifting more reliably out of China and not just shifting and as you say, you know, you use the word superficial in another context here, but the superficial change in changing of supply chains, which has been the transshipment problem that factories just load up a ship, send it to Vietnam, hang out in the port for however long you need to so that the goods now become Vietnamese goods, and then you get the new piece (35/45)
of paper and you move on towards the US, or you send, you know, a pair of shoes that I like to say, and you change the tag on it, you know, or you maybe put a pair of laces in there and say, now this is a Vietnamese pair of sneakers and not Chinese. So that's not a real shifting of supply chains. You know, we need much more than that. Chinese owned factories, maybe even producing things and Cambodia and shipping them to the US may not be good enough either. So these, this is all very complicated. We'll see where it ends up. But the long-term trend has to be shifting supply chains out of China and doing it at a faster pace and more reliably than it's been done so far. Again, is there any talk or do you think that eventually this administration will focus in on specific supply chains that they want to prioritize reshoring or French shoring? And let's say when it comes to things like Nike sneakers or apparel made in China, that they're going to be less concerned about that and they're (36/45)
happy to sort of yield that industry to the Chinese? You know, I would hope that the upcoming reviews and investigations on the so-called sectoral tariffs, which are supposed to focus on pharmaceuticals, semiconductors and metals, copper, steel, and one more, I believe, I think some of those should, that's an opportunity for the administration to not just tell us what the tariffs are going to be and what type of trade issues we're trying to correct for, but to also come out with a plan that says, look, this is 10% off X, Y, and Z thing needs to move out by the end of 2026 or 50% by the end of 2027 needs to be placed in another country. I'm throwing numbers out, obviously, I'm pulling these from the air, but a realistic plan, a reshoring plan, a near-shoring plan would be good to see. The administration has been in power for just under a quarter, an economic quarter yet, so I know they're trying to get a lot done in a short time period, but soon enough, it would be good to start hearing (37/45)
these ideas as well. I feel like that's what most Americans, and this is what I'm interested in, in which is where can we find consensus in this country, because that's where we can develop the most durable, sustainable cross-party policies that can endure across administrations and across party administrations. I think one of those areas would be most people can agree that we don't want to be in a situation where if something happens in the rest of the world, we can't produce insulin in the United States. I'm not saying that's the case with insulin, I don't know enough about these supply chains and know which drugs are most affected, but there are clearly critical supply chains where I think most Americans would be willing to endure whatever is necessary, so long as they feel like it's being done in a competent way, to actually get those supply chains French or near-shored or on-shored. To that degree, maybe this is my last question. I said my last couple of questions ago, but maybe (38/45)
my last question has to do with Latin America. This seems like, again, based on how Trump seems to talk about regional spheres of influence, it seems that there's a real opportunity here for Latin America to play an outsized role in whatever the vision is from this administration, whatever the Trump doctrine is on trade. Do you agree with that? What kind of talk do we hear around some of these companies moving manufacturing to Latin America and what that would mean for tariffs? It would mean for the cost of goods, et cetera. I wish I knew more about Latin American economies and where they are today, but of course, that seems like an obvious part of the plan. Not only do we want things very, very close by, which really, quite honestly puts Mexico in a very good position, but there may be other Latin American countries, especially Latin American countries, where increasingly you're also getting a big Chinese presence, but we want to take a closer look at what's going on and where (39/45)
American companies need to be or should be or could be also placed. Same thing again, what's going on in Central America? Are there opportunities there? These are conversations that I think should be very live, should be happening. I am, of course, not read into this. Again, I don't know the region well enough to be able to talk intelligently, but the reality is, to your earlier point, that the concept here needs to be economic security. The concept here needs to be supply chain security, especially for things that are necessary. Too much of the online commentary it has focused on correctly, as you said, on things like our Nike T-shirts and our Nike shoes, but that's not what this is about. Ultimately, this is also, by the way, the administration would do itself a lot of favors if they sent out people to very competently talk about it. I know they've got the people to do it. The Vice President himself is certainly a big fan of this idea, but talking about the manufacturing of the (40/45)
future, talking about how America will support the manufacturing of the future, what does that look like? What do factories look like in the 21st century so that we can actually have a more sensible, a more advanced, a more current conversation about manufacturing? Because I think a lot of people snicker and jeer and sneer because they think we want people to go back to sweatshops. Certainly, I don't think that's the idea, and I obviously would not be advisable. So there's a great opportunity here, Dmitri, to talk about the revitalization off the United States, to talk about the reindustrialization, and to talk about it in a technologically sophisticated and advanced way so that we're talking about the future and not looking back at the past. So again, it wasn't my last question. One more. Let's see where this goes. I don't believe the talk about fiscal austerity in the United States. I don't believe the administration, when they say they're looking to cut back fiscal spending and all (41/45)
this stuff. I don't think that's consistent with the larger goals of reindustrializing the United States. That's going to require a huge cap expend. What is your take on this, and what would be the implications of that, of your answer for the budget deficit, for yields? I mean, I'm just curious to know what your thinking is there. So I would leave that up to economists, and I would leave that up especially to people who really understand US economic policy and fiscal policy, but the larger point stands that at the place we are today, if we want to be, this is a big if, if we want to actually do industrial policy in a serious way, if we want to support industries and encourage them to come back home, we will not most likely be able to do that by just saying, here are some tax cuts, here's deregulation. Because at the end of the day, I'm not sure if our tax cuts and our deregulation will still make the economics of it all work for the companies who may alternatively say, you know, look (42/45)
at Apple, for example, okay, so China is getting a lot of tariffs, fine, temporarily will shift a significant amount of our production into India, because that makes more sense for them. It doesn't make as much sense as China. They rather just stay in China, but if they can't, then they go to India next. They're not bringing it to California, Arizona, or South Carolina. So if we want other aspects of our other industries, other factories, and other manufacturing parts of the economy to come back home, we're going to have to think about this in a bigger way. Shazam, this is great, man. It was great seeing you again. Of course, I see you all the time on CNBC. You've been questioning it over there. For people that want to read, subscribe to China-Beijed Book stuff, or follow you, or the team there at China-Beijed Book, how can they do that? You know, we've got a very active X or Twitter account. It's called China-Beijed Book. So follow us there. Visit our website as well, www.china- (43/45)
beijed-book.com, and follow our media, and listen to our podcast wherever you get your podcasts. Awesome, Shazam. Again, man, thank you so much for coming on the show. Hey, thanks so much, Dimitri. Good to see you. For everyone listening, Hidden Forces is a listener-supported podcast. We don't accept advertisers or commercial sponsors. If you want to learn more about our premium-only content, including paywall podcasts and intelligence reports, you can do that at hiddenforces.io.com. Subscribe, where you can also schedule a call to learn more about our Genius Community and how to access special pricing to third-party research, live Q&As with domain experts in markets, geopolitics, and technology, and how to attend our popular in-person events held in some of the most beautiful cities in the world. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a (44/45)
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 at cofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
Tesla Bankruptcy Has the Road to Profitability Closed for Good Charley Grant #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? Welcome to this week's Market Forces segment of the Hidden Forces Podcast with me, Demetri Kofinas. Today, I speak with Charlie Grant, a columnist for the Wall Street Journal, where he covers U.S. healthcare and industrial companies, including the electric car company Tesla, which he has been writing critically on since 2015. In his previous life, Charlie was a reporter at Grant's Interest Trade Observer and is a CFA charter holder. Charlie, welcome to Hidden Forces. Hey, thanks for having me. Yeah, how'd you like my little intro there of you? It was smooth. It was smooth. You didn't give him much else to work with, Matt. Yeah. Well, you know, we have tight word counts at the Journal, so I keep my bio in similarly tight fashion. You know that article you guys wrote that we're going to get into? Well, we're going to get into the Solar City acquisition, but I could totally tell. There was a few people, it was you and two other writers on that total, right? That's (1/45)
right, yeah. But I could tell that one of the comments about flattering the balance sheet, that totally came from you. That might be a Grant family. Exactly, yeah, yeah, yeah. So we're big fans of Grant's Interest Trade Observer here, and that conference is coming up now too, next week, actually, I think. The week after. So yeah, Charlie, I'm very excited to have you on. It's been, I've known you now since 2011 or ... 12, something like that. Yeah, 11 or 12. Yeah. Yeah, this is the first time you're on the show, but you've become really a prolific Twitter, and you've amassed quite a following. Shout out to Jack Dorsey. Yeah, you made an addictive platform. And you've been writing about Tesla for at least since 2015, and I've just caught wind of it just from Twitter, and I know you've been doing a lot of great work on it, and it's something that I haven't had an opportunity to cover on this show because of all the other stuff we cover, but given what's been going on in the news lately, (2/45)
and the fact that I think Tesla is at the intersection of a lot of these forces that we cover, the growing income wealth gap, the availability of cheap financing, the allure of technology and the way that it captures the dreams and aspirations of this bull market, and just Elon Musk's role as an icon for this bull market. I think it's a really interesting story. For my sake and for our audience's sake, and before I even say that, I got to say, I'm starting to do this now because I'm doing more finance shows. This is not financial advice, don't sue me. That's what I said when I had Brian Kelly on. This is definitely not financial advice. What's the official way you do that? That's clear enough. Yes, yes. I prefer plain English to boilerplate legal language, not investment advice. All right. I have a bunch of quotes here that are really cool, but I'm going to pull up a couple of yours before we start. One of them is, this is from October 7th. It's high time for Tesla and Wall Street to (3/45)
acknowledge reality. This is both from you. My favorite is, CO Elon Musk is a visionary, but there's a fine line between setting aggressive goals and misleading shareholders. Very direct, Charlie. This is what I want to talk about because you're not the only one that's been talking about this. Tesla has been sort of controversial and surrounded this company since day one. One way or another, but there's sort of been an ebb and flow of it and it seems to have really hit a critical state recently. Maybe you can give us a timeline history of Tesla. I think the company was founded or began operations in 2003. It went public in 2010, shortly after it produced its first car. Does that roadster, yeah. Tell us a little bit about this company's history and how we got here. Right. Elon Musk started, he published his grand master plan on the internet. The idea was to build luxury electric cars for a select few ultra high end product, make some profits off that, reinvest those profits into (4/45)
building a mainstream electric car, which is what you'll know now as the Model 3. That would launch a new era of electrification and some of the things that come with that, self-driving capabilities, that sort of thing, ride sharing, a lot of what Silicon Valley envisions for the automotive future. In some ways, he's accomplished almost all of those goals. The Model S started being built en masse in 2013 or so. Tesla narrowly averted bankruptcy. People saw this great car. It's a great car. I want to be clear about that. Have you ever driven one? No, but I've ridden it. It's amazing. On a reporter salary, a high end Tesla is not really an option in this business, but it's a great car. The allure of the product certainly has helped propel the rise of the business. Tesla has in many ways satisfied what its visionaries and its early disciples, if you will. They are disciples. I mean, mind. But where the master plan deviated from reality was that Tesla was building these cars not from (5/45)
reinvesting their own profits. They've never made any meaningful profit, but from the continuous generosity of the capital markets. They've been regular razors of equity. They've raised significant debt in recent years. Convertible bonds eventually turning into pure fixed rate instruments. And Wall Street's been all too happy to fund this, but the profits never really materialized. And it has created the situation where Tesla, you alluded to all this controversy where they make these great products and they get these fans that are truly passionate about them. I have the emails to prove it. Readers have a right to chime in with their feedback and they give it to me. Have you ever gotten any interesting bull arguments for Tesla? Sure. We can get to those in a minute, but this is where the flash point is because the bearers, like myself, will say, well, you've never made a business that can stand on its own and capital markets access comes and goes. And where Tesla has had this high stock (6/45)
price and bigger valuations and Ford and GM and that sort of thing, but they're still been really living hand to mouth on a year to year basis and sooner or later that catches up with you. And you think it's caught up to them now at this point? I think that's part of the reason why we've seen the stock go down so much in the past month or so. So with the Roadster, were they profitable or did they have gross profits at that time? There were spot periods like in 2013 where they made a narrow gap profit. When did they release the Model S? Around then, early to mid part of this decade, so 2012, 2013. There was a time with the Model S, a window where I think sentiment generally improved tremendously on the company. Yes, yes, because they had averted bankruptcy and the car was here and people could see how cool this thing was and they were not wrong about that. I want to give credit where it's due. And it was heavily shorted at the time as it has been back in 2013. And the stock went from (7/45)
somewhere around $20 to $200 in a year. It just rocketed. And there have been bumps in the road here and there since then, but more or less it's been a smooth ride higher. At least if you just look at things from a stock market perspective. If you look a little deeper, things start to get a little more iffy for this business. Well, it seems like you don't have to look very deep to see that. At this point now, but yes. I have not engaged really deeply with Tesla or the car industry more broadly. And what I did pretty much beyond just the general hearsay that I've gotten over the last few years was in the last two days, after I spoke to you and I said, listen, Charlie, I want you to come on, let's talk about this. And I spent the last two days kind of going through the financials, checking some stuff out. It looks pretty scary and it looks pretty obviously scary. I think so. So I also did some, in my research, I saw some interesting things that Jim Chano said specifically. The one thing (8/45)
that really stuck out to me was that he had put together a spreadsheet with all the executive departures of the last two years. And he compared the company to Enron. And of course, Jim Chano's famously shorted Enron in early 2000s. For him, he talks about what he calls the dark turn, which was the acquisition of Solar City by Tesla in 2016, I believe. Where does that sort of sit in your view in terms of the trajectory of this company? Was that really a fateful turn? Was it more something that illuminated what was already company practice, sort of practice by Elon Musk, or did it really embolden him to begin to act in a way that breaks perhaps with sort of his fiduciary duty? So I think that a lot of the problems we are seeing today with the current stock price slide and Tesla's signature bond issue trading in the mid-80s on the dollar well below par sign of significant financial stress, I would say that Solar City acquisition is a huge part of that. The stock market, of course, loved (9/45)
it at the time because Solar City was experiencing significant financial stress. Talk to the audience, for those who don't know, tell them what Solar City has given the backstory on this. Sure. So Solar City was another Elon Musk project. He wasn't CEO, but he was chairman of the company and its largest shareholder. And that's the rooftop solar panel clean energy business, which in theory doesn't really have much to do with manufacturing an automobile. So Solar City was another high-flying stock, but Solar accounting is very complicated. The technology is changing rapidly. So Solar prices, the economics of installing solar on a roof, sort of like an electric car, but not really, are interesting and you'll get adopters, but the industry is still young and hasn't figured out a way to make the economics work. That's a common thread here. The solar industry. Solar industry. And also true for the auto, but I'm talking about solar now. We can talk about the auto issues. Those are two (10/45)
different paths, too, right, in solar. One is the large solar feels like the kind of stuff we see in Arizona. Versus the idea of having each individual home. Right. Yes, yes. And I'm talking about the rooftop business specifically being problematic here. So Solar City, you are securitizing these assets. So your balance sheet automatically becomes very heavy with debt. And Solar City's stock price was falling. The bonds were trading at distressed levels and it really looked like the company might not survive. Did this start in 2015? 2015 was when the problem started to appear. 2016, they got acute. And in June 2016, Tesla announced that it was buying Solar City. And Elon Musk is the largest shareholder of both companies and the chairman of both companies. And these two businesses don't really have much to do with each other. So let's talk about a second. So what percentage of Solar City did Elon Musk own? Sure, off the top of my head, but significant chunk. Double did it ownership. I (11/45)
think in the 20s, pretty close to Tesla, which is, you know, he owns a little more than a fifth of Tesla and a similar percentage of Solar City. So not the majority and owner, but enough to make something happen, especially when you're also chairman of the board. And so this deal seemed, you know, from us, you know, we were in complete shock. I mean, this is kind of, shall we say, not in accordance with traditional corporate governance practices to do this sort of thing. But at the deal closed, Solar City seemed to be saved because they had the Tesla's access to the capital markets, which made some people think that these debt problems might be resolved. And Tesla's share price took off right after the acquisition again. It had fallen down to, you know, the high $100 range, $180, something like that. At its peak last summer, the stock reached into, you know, north of $380 a share. Well, didn't its market caps surpass GM's? Yes. Yes. Which is remarkable when you look at the number of (12/45)
cars that's manufacturing versus the number of cars that GM's manufacturing. To interrupt here, to interject, perhaps is a better way to put it. We did a show over the summer with Hubert Horan, the transportation analyst on Uber. And similarly, there are some similarities for me between Uber and Tesla. Specifically, in terms of the sort of secret sauce, hope, or expectation that investors have around that justify the valuation. The idea that in the case of Uber, that the application and the routing system would allow the company to overcome the losses to economies of scale generated by the traditional tax limo industry. And similarly with Tesla, the idea that they would be able to have a market cap larger than GM, which produces however many millions of cars. Yeah, like 11 million or something. Or if that's VW, I have this number here, VW does that. GM is just under 10 million cars. And I guess the idea of that is that they have some kind of really incredible head start on the future, (13/45)
which is electric vehicles and taking off. Exactly. So the idea is a decade from now, we'll all be driving Teslas, we'll all be using Uber. In both cases, what makes these companies so disruptive to the traditional incumbent players is that investors are willing to fund losses at absurd levels. Tesla at one point was losing about $20,000 on a gap net income basis per car sold. And GM and Ford's shareholder base just simply won't tolerate that sort of thing. And that makes it for a significant disadvantage, though, for management teams when you chart your strategy. So that's to your point, at the top of this broadcast about macroeconomic low interest rates, easy credit. There's a very common thread between Tesla and Uber and a lot of these other so-called disruptors that you see in the market, that the willingness to fund losses is something you only see when money is easy. And you can just tap the markets again and again and again. And that becomes the zeitgeist and the thought process (14/45)
of investors. That can take you very far, but if you don't build a sustainable business, then you have a very high diving board that you're at risk of. So Tesla was founded in 2003. It sold its first car in 2010. That was shortly after the market peaked at over $140 a barrel. They were expecting, yeah, oil. There were expectations that we would see $200 a barrel. I mean, certainly no one expected that we would not know one. I'm sure there were people that did, but many people were caught flat footed by the fracking revolution. Caught me off guard. Yeah, it caught me off guard as well. And so how much of a role do you think that has played in acting as a headwind for Tesla in its attempt to break through as a startup car manufacturer? Yeah. I mean, I think that's one reason electric cars are still niches. I mean, GM, I think Bloomberg reported a year ago or so that GM's electric car, the Chevy Bolt, which is not particularly selling. That was Lutz's project, wasn't it? Yes. Yeah, I (15/45)
think that's right. That was, I mean, he's been gone a while, but yeah, I mean, the electrification, that car is celebrated, but they're losing something like $9,000 on every one they sell. And so they can't build that many of them. Do they not get subsidies on those? They do, but the economics still don't work. I mean, the buyer gets a subsidy. And that's a particularly American phenomenon, right? Because in Europe, I assume that these cars are more popular. They are, yes, yes. And also because gas, you know, there's more... More expensive gas. ...conium gas taxes there and that sort of thing. Here in America, the opportunity cost to owning a gas guzzler is much lower and people want big Ford F-15. You know, Tesla is very popular on the coasts and in New York and San Francisco and those places. There's a great middle in this country and SUVs, pickup trucks, that sort of thing are still the name of the game. And when you have access to cheap gasoline, the opportunity cost benefit of (16/45)
driving electric is kind of thin. So that's been an issue holding back electrification more generally. That's not really a specific Tesla issue beyond the fact that they're all electric cars. That's an issue that GM and other guys trying to break into the EV market and the U.S. face. So I mentioned subsidies there. Subsidies have played a huge role in Tesla's growth. It's part of the controversy too. Okay. Well, talk to me a little bit about that. So, I mean, we talked about the debt that's going to keep coming in and out. I do want to talk about sort of the economics of these cars, but let's talk a little bit about the subsidies and maybe you can tie that into what the cost is of building a road stir. Well, they don't have the road stir anymore. They don't have a new supposed road stir that's going to come in at some point. But the Model S, the Model 3, the cost of actually creating one of these vehicles, how much they can bring in theoretically sort of with them or they are bringing (17/45)
in and how that all ties in with the subsidies. Well, yeah. So there's a few different ways these subsidies work. And there's not one coherent policy here we're going on. But there's the federal tax credit for an EV buyer. You get up to $7,500 for qualifying electric car as a tax rebate. And that applies for the first 200,000 cars that in the U.S. that a manufacturer sells, a brand. So Tesla, all of GM would fall under that umbrella. No one's hit that number yet, but people think that this year sometime Tesla will cross the line. Which is why they're going to lose the subsidy. Well, they wouldn't lose it right away under current law. It would be you have like a six-month grace period once you sell the 200,000 car and then it tapers gradually. So you probably take another year or so before it went away altogether. But that's the buyer tax subsidy. In California, there are state-level credits for EV buyers as well that can also lower the consumers bill. And the manufacturer, because of (18/45)
like zero emissions laws, so if you make a polluting car, you've got to make a clean one. And so a lot of manufacturers will sell what are known as compliance cars to comply with the regulations, but not necessarily a product that they're going to be aggressive or just not featuring in terms of a bottom line, how they plan to make money in the auto business. So you earn what are called credits, so zero emission credits. And you can satisfy your emissions requirements either by building a clean car or by buying the credits from someone else. So Tesla, since they only make electric cars, zero emissions, they have those credits they can sell. And that's been an important revenue. That's interesting. Because that's very high margin. It's a small part of their overall revenue, but the margins on that are 100%, essentially. And so that's certainly helping keep the finances afloat somewhat. And then there's also non-economic incentives. If you've ever driven in California, if you have an (19/45)
electric car, you can use the HOV lane, even if you're by yourself. That's also true here as well. Yeah. But in California, that seems, I have to confess, that's something I'd be willing to pay for if I lived there. It's not economics, it's not a pure financial subsidy, but it matters when you're considering whether to buy one. And then so this company becomes political because some conservatives don't really like the idea of tax subsidies. So there's that angle of the controversy with Tesla. But let's say just in terms of like, if I'm looking at the financials of this company, and I'm taking into account the subsidies, and I'm taking all of this stuff into account as I'm looking at what the costs are and what the revenue prospects are and what the prospects are for profitability for this company. Like realistically, when you look at the financials here, what is the path to profitability for this company? I don't see one. You don't see one at all? No. So why is that not reflected in (20/45)
the stock price? What do you account for? It started to. See, I differ with the broader market on this. Sure. Well, you differ for a while about it. Yes, yes. And I've been wrong. There's a term for that. But things are ... I don't want to shy away from that and protect ... Some of my predictions have been premature. I told you. It runs in the family. I actually, the audience may not know this, but your father is Jim Grant who had been on the program and he's made a comment before here that I really liked, which actually Josh Wolff also repeated on his own separately, which is ... But your dad had said, Jim had said that we at Grant's like to think that we like to be right later. Yes. Yeah, so. And I was also ... I told you I had spoken with Mark Spiegel a couple days ago and he's going to be on the program next Monday to talk about this exact same thing. And he's been short the company for like four years or something like that. So you could be wrong for a long time if you're right. (21/45)
Yes, absolutely. That's the way Mark's part. But to bring it back to that, which is that the market ... And this kind of feeds back to the bull story that Tesla, looking back, it may end up being sort of one of the iconic companies of the bull market. So it's not uncharacteristic. Of course, you have manias and stock prices. But I'm curious, how does the market rationalize the price and what are some of the other factors? For example, there has been willingness by different funds to invest in Tesla. What is the rationale for the price? And what is the rationale for the price currently? Well, the bull argument is still that this company is going to dominate the future of the auto industry 10, 20 years out. And bulls who have more sophisticated arguments around this than others, but the gist of it is essentially I'm willing to endure the short term ups and downs of manufacturing. And eventually, they'll figure out how to mass produce a car like all the GMs and Fords, but they'll just (22/45)
have much nicer products that everyone will want. And eventually, they'll gradually push these other guys to the sidelines of the auto business. And 10, 20 years out, Tesla will have 40, 50% market share. I mean, I'm ... But let's talk about that because I've tried to follow those bull arguments. And what I was hoping or expecting to find was that there would be some interesting proprietary piece of technology that Tesla's been developing, for example, in autonomous driving. To my surprise, from what I understand, they don't have a single patent on autonomous driving. Yeah, well ... Which is surprising for me, considering that they're a technology company located in Silicon Valley and that this is supposed to be the future. And so much of what I think defines them in the popular mind is that they're a technology company, a technology car. Right. That's a lot of hooey. They're a car company. Right. So they're an upstart car company. In terms of ... I'm putting on the spot here to give (23/45)
someone else's argument, but I'm just trying to understand what the coherent argument that the bulls are making is. How could you get there? If you needed to get there, if you wanted to make the case for them? Well, part of it is that only a small percentage of Americans have tried this car. And the idea is once you try this, you'll never want to drive anything else. That is a pretty awesome experience. Yeah. But the question is, is that the experience of driving a fast electric car, is the experience of driving a Tesla? Right. Right. And there are, I think, Audi, BMW, Porsche, Mercedes, these companies are all going to be coming out with fully electric vehicles. See, and that's a huge part of why I think that Tesla's hard times are just only starting to begin here, is what you just said. The competition has been ... Tesla had a huge head start. They were more serious about this than any other company. The automakers were slow to realize how popular electric would be, how in demand (24/45)
this would be on Wall Street, that sort of thing. And so that gave Tesla a huge leg up. And this is all credit to Elon Musk that he has inspired the rest of the industry to get serious about this. But now you have these experienced car makers. Porsche has no joke in terms of making a nice car, right? It's a gorgeous car. Yeah. And it's going to be all electric. I'm not sure any one of these individual brands, how big of a seller they're going to be. But we Jaguar unveiled their new SUV to compete with Tesla's SUV. But I've seen some of these have prices below the Model S, right? Yeah. And these are beautiful cars. I mean, if you look at them, they're very attractive. Exactly. I mean, it's one thing to say a Chevy Volt can't compete with a Tesla. I agree with that. That's factual. And that was the paradigm before Tesla. That's where Tesla innovated, right? Right. And Elon Musk supposedly was traveling around Silicon Valley, going to garages and seeing people would have a Porsche parked (25/45)
next to a Toyota hybrid. Yeah. And he said, essentially, people want, they want an electric vehicle, but they also have the money to spend for a... Yes. And that was a completely valid market segment that they've gone after. I think Tesla made a mistake though in trying to become a mainstream auto manufacturer. The Model 3. Right. Exactly. Which is where the real disaster has struck, right? And I mean, a niche auto player, you can make a profit and be a standalone business. You might not get much equity value for that though. So I mean, I always thought Tesla would do fine if they stuck to making basically custom ultra high end sweet rides for a very wealthy select population, which is how they got started. There's a lot of rich people in Silicon Valley. You can make that kind of business work and keep the scale small enough where you can manage it. But Elon promised a million cars on the road by 2020 back in 2016 when they were putting out $50,000 a year. And they still haven't sold (26/45)
$200,000 as you said. In the US. They've sold more than $200,000 worldwide. But they were talking about, I mean, an exponential ramp in production fast. And you have to know how to do this because the auto business, frankly, is not a good business. Right. It's very hard. It's very intensive. You get your parts delivered up front. It takes up a serious amount of work in capital. It's economically sensitive. Luxury car sales get hammered in every recession. It's been a long time since we've had one, but I mean, you just don't sell high end cars in that environment. The manufacturing process also changed tremendously. Forget the automation component, right? Which I think there's something really enamoring about Tesla building all their cars here domestically and having their operations here from what I understand. All their plants are here, correct? Yes. But the thing that I've discovered in delving into this a bit is just how much the car industry has changed over the last couple of (27/45)
decades and the role of suppliers in this process. And that they actually have much higher price to earnings ratios for their stocks than the actual ... The OEMs. Yeah, the OEMs. That's a huge issue too, right? Because that's networks and business development and relationships. Yeah. And now the auto stocks have done in this roaring bull market over the last eight years. The Volkswagen's of the world has been great conditions to sell cars. Easy credit has helped. Auto sales in the US were at record breaking paces year after year after year. And the market gave GM six, seven times earnings on their multiple. And Ford the same thing and Toyota maybe eight or nine, but nothing too different. And I think that's basically right. I think the market has it right with that. This is a very hard business and a lot of things go wrong sometimes beyond your control. And profits are minimal and everything has to go just right to make things work. The world's most efficient plants, something like a (28/45)
few minutes of downtime unscheduled in a year can make the whole operation unprofitable. Everything needs to be just so. You can't just decide you're going to learn how to do that. There's one of the reasons why we haven't really had an meaningful auto startup in the last 50 years that has lasted. This also brings back something else you said, which is that the public has operated, I think, an investor have operated under the assumption that the skills that Tesla is acquiring and the brand it's building that's purely electric are going to outweigh the legacy knowledge that comes from being a car manufacturer. But what I've discovered in my reading and what you're saying it sounds like is that actually what's far more important still is all the other stuff and not, let's say, the battery, which has been like, for example, some big thing. It's much more than just design. Right, exactly. That in fact, all the know how that comes with building a car is still vastly more important than any (29/45)
other part of this business. It's not just a matter of intelligence or anything like this. Elon Musk can land a rocket ship on a barge. You know what? I can't do that. That's a big part of this also. Bulls will say to me, hey, have you landed a rocket on a barge? I say, you got me there. I have not. It's not like he's not a smart guy or something, but this is specialized knowledge that you can't just substitute for with something else. That is what the bulls have missed here. That's also what's so cool about this story. Putting aside all the financial stuff, you know what I mean? Putting aside all the meat and potatoes, it's the fact that Elon Musk captures the wildest aspirations of this bull market. Also, I think this particular iteration of a bull market at this particular point in our evolution, technology and the innovations that are happening in technology, the public is becoming increasingly aware of things that would otherwise seem to be extremely up to subjects. That's what (30/45)
artificial intelligence, machine learning, advances in healthcare and biotechnology, synthetic biology, all these things. The fact that this guy has a space company, like you said, he is launching rockets into space, launching his car into space by the way, which I think is ... That might have been a waste of money, but ... That's also really fascinating, right? So that he launched a roadster into space, I want to ask you something. I don't mean this ... I'll put it in a non-controversial way. People like Lutz, for example, Bob Lutz of the former vice chair of GM, who has called, I think it's him or maybe with someone else, he's called it a Ponzi scheme. Some people have called it a Ponzi scheme. I thought that was kind of weird for someone to call it Tesla Ponzi scheme, but when I looked into it a little deeper, let's say the bear case, if you were to make a bear case, it's not a traditional Ponzi scheme, but you could say that one of the features of Tesla, which is so unique, is that (31/45)
Elon manages to diffuse anxieties or concerns about, let's say, a potentially failing business or a potentially failing project by not creating a new business, but creating sort of the prospect of a new business, whether it is high-speed tunnels, whether it's semi-trucks, whether it is ... I even talked about some kind of electric plane, like all this stuff. I think it's a hyperloop New York to Washington in 20 minutes. Yeah, he just comes up with this ... Which sounds nice, but color me skeptical on that one. But it's a fascinating thing though, right? Because just to bring it back to this, to get away from the meat and potatoes and just on this sort of aspirational quality, it's really astounding how far, regardless of what the fate of Tesla is or if people agree with you or don't agree with you, no one can deny that Elon is a tremendous showman and he's managed to use that to great effect. Absolutely. And, you know, in covering him and in covering the story, have you ever found (32/45)
anyone like that? I must say, when I thought about it, I certainly didn't think that Steve Jobs qualified. I thought you'd have to go to Walt Disney or PT Barnum. I couldn't think of anyone comparable within the last sort of boom. Yeah, well, just look at the Gallup polls of most popular Americans. Okay, Elon Musk is from South Africa, but he was included in this poll. And he was in the top five. I saw this came out maybe a few months ago and Elon was one of the most popular Americans and I got to tell you, there were no other business CEOs anywhere close on that list. It's kind of crazy how people truly idolize him in a way that's unique. I mean, no other company has that. And that has been part of the reason why Tesla has reached such heights. And I also think that is part of the reason that they're getting into trouble now. Did you see the interview that, what's his name? One of the writers for Interstellar did with Elon at South by Southwest? I read about it. You had to really (33/45)
watch it, but like it's not different than a lot of other ones, but it was really funny because this guy sitting there asking him, you know, these really esoteric questions about existential risks to humanity around things that I talk about on this show. Interesting things about, you know, the problem with designing a utility function for AI and whatever, like global warming, whatever it is, like these existential risks and Elon's sitting there with his flight jacket, right? Looks like he just got off of a spaceship. And he's giving these answers, but the reality is he's also the CEO of these different companies. And he's not at the auto plant while this is going on. Right. He's at South by Southwest. He's at the Oscars. He's in Australia with Amber Herd. And like, you know, if you're running a private company, then you should do it your way. But you know, public companies, I think you should be really sure there are no problems going on in your own backyard when you're making (34/45)
appearances like that. And as we've seen in the last few weeks, definitely not all as well at Tesla. And you know, the thing is, I totally agree with that. And it's just, again, for me personally, I want a guy like Elon to succeed. I love what he's done with space travel. I love the audacity. But at the end of the day, you know, you can only get so many free passes. That's right. And what it seems like to me is that where we're at with Tesla and why I wanted to bring you in here and talk about it today, given what's been happening most recently is that it feels like, unlike the other times, it feels like this time something is really breaking. And it's breaking also because we may be at a point where the tide is coming in. Well, so that's a... Or going out as they say. So we got off a bit of a tangent there from the Solar City acquisition, but I want to come back to that. That Tesla, what they always had before was a pretty clean balance sheet. So the profits looked dopey. You know, (35/45)
they were never going to make any money. And I always thought, well, the stock could go down a lot, but there wasn't much debt on the balance sheet. You could always issue equity and re-figure things out. You know, those companies could definitely experience sharp declines. As long as you keep your debt burden to a dull roar, you can survive a lot of things. But what happened with Solar City when Tesla assumed that their debt went from maybe $2 billion, most of which was convertible bonds, so they didn't even necessarily owe the principal back, now it's more like $10 billion. And that is a really scary thing if your production, if you keep losing money the way you always have. And so we've seen that Tesla issued a $1.7 billion bond last August to help finance the Model 3, and that bond got downgraded by Moody's after one interest payment. And that bond is trading at $0.87 on the dollar less than a year after being issued. They've spent all the proceeds already on their cash burn. And (36/45)
now what? So that's really alarming because they still don't make a profit. We don't have first quarter numbers, but I strongly suspect we'll see more sharp losses. And when you have this debt, it means the clock is ticking. You can't just say Elon's going to figure it out one day. He needs to figure it out right now. And it's taking a rising interest rate environment and also in the uncertainty of the time domain, which is we don't know what's going to happen tomorrow. We don't know what's going to happen to liquidity. That's right. That's right. And so, the big problems in this position were even if they clean up their manufacturing problems, handle this recall that was announced on Thursday. 123,000 Model Ss, right? Yep. And the supplier is going to pay for the replacement parts, but it's still going to cost Tesla money. Labor is not free. That is, even if they figure those things out, like you mentioned rising rates, like some things that they've exposed themselves to factors that (37/45)
are not even within their control here. And living at the pleasure of the capital markets, well, it's been a long time since this happened, but capital markets do close up sometimes without warning. And I mean, if that happens, this company is toast. How does this end? How does this end? Look, you're not an oracle, but how? I'm really not. Let's make that clear to the audience. None of us are. But I'm sure you've imagined ways in which it might end. What are some of those that you've envisioned? Well, I think they can hang on for a while. The stock has been going down sharply for a few weeks now. We've seen that before and had sharp rebounds. Basically, Moody said when they downgraded that debt last week that they need to raise $2 billion in the near term. And they could do that in the equity market, possibly. I think the debt market is a non-starter, given the way the last bond situation has gone. You're saying issue more equity. Yeah. Now, the stock price, that currency is worth a (38/45)
lot less than it was six months ago. And they were actually in much better shape when the Model 3 was this vision instead of this actual product that's causing significant losses and a lot of production headaches. I mean, so Tesla has overpromised and underdelivered. Elon Musk said in 2016 they were going to build 100,000 Model 3s in the second half of 2017. And they built like 3,000, something like that. 2,000. And he said 100,000 to 200,000. You can't, in the public markets, even a guy that everyone wants to believe in like Elon Musk, you can't keep pulling stunts like that. Eventually people stop believing you. And if people have lost faith in him, it could get very ugly very quickly. I don't think people have totally lost faith in him yet. I think even if he can't raise enough equity, the world is still a wash in liquidity. You can go to SoftBank, you can go to 10 cent. There are theoretical options out there, but he needs to find a new stream of money and he needs to find it soon. (39/45)
Otherwise, the stock is in serious trouble. But what's challenging for me is I want to find the way in which a bull would rationalize this. I can't find that case. In other cases where a company is impaired and it's running a very high risk of bankruptcy, I can still find in the timeline that you're laying out and others have laid out that it can go on for much longer, I can find a way to rationalize that argument. I still haven't come across one that, like you mentioned faith. It's not clear to me based on everything that Elon has said, the companies put out and the financials, what that case would be. It just seems to me that it's so divorced from reality. One option is bankruptcy is a dirty word, but when you file for bankruptcy, you can reorganize the company, reset the debt levels, you can reset the capital structure in a way that makes sense and start fresh. I think operationally that would be perfect. I certainly would be much less bearish on the outfit if they got a clean start (40/45)
with a new balancing. Of course, there's a small little hold up with that, which is you have to wipe out the current equity holders. That's obviously not something that can happen without significant angst. What about finding a buyer? Is that even realistic? Not at these valuations. Maybe SpaceX, maybe Elon's. Not at these valuations. Not right now. Let's say we get to a place where its price becomes attractive. What a company like, let's say Apple, which has supposed to be doing some work in autonomous driving and has a proclivity to associate its software with its hardware. Would they be interested in possibly buying a company like this in order to compete with, let's say, a Google or an Uber or whatever, some of these other tech companies that are providing the software solution? Never say never. That could happen. These companies are pretty secretive about their self-driving programs. We know Apple's working on one, but we really don't know much else in the general public. There (41/45)
could be a buyer out there, but here's another reason to wonder whether that could really happen. What if this self-driving thing is just a fad? We saw that Uber accident last week. I think regulators have been, in all these states, self-driving has been something to welcome, something to be a leader in. As you know, regulators can be quite fickle about this sort of thing. You saw the Arizona governor turn on Uber sharply in a matter of 72 hours. It went from, you're welcome in my state to, well, maybe not. This business is very exciting and valued highly and has captured people's imaginations, but there's no guarantee it's going to pan out. I actually think that, it's a really good point you bring up. I actually think, generally speaking, we may be on the verge of a rise in regulations, an increase in regulations across a number of industries. We might see it in the cryptocurrency market and see it here as well with autonomous driving vehicles, especially if we have a turn in global (42/45)
equity markets and people lose a lot of money. People start asking for the regulations. The same thing without having to drive vehicles in accidents. The Tesla brand is obviously worth something and something meaningful, but that is... At the right price. Yes. Honestly, that's the sort of thing that if Tesla went bankrupt, you could buy that brand for really not much money and it would be a fantastic deal for a buyer, but that's not a reason to holding onto this. It's not like you can't show the other way. It's because someone's going to buy it. Yes. I mean, the Tesla's plant, the Gigafactory is new, but not a whole lot really goes on there yet. It's not finished. The main plant Tesla got in California was an old plant from the 1980s that previous owners had abandoned. They didn't want it. I mean, these assets are not necessarily... There's nothing wrong with them per se, but it's not something that people are going to fall over themselves to have at any price in the industry. Wall (43/45)
Street will always fall over themselves to have the hot joy at any price. In general, it just seems that they've bitten off much more than they can chew. Absolutely. Charlie, I want to thank you for coming on and I also want to ask you, and if people want to follow you, you write the Wall Street Journal, what industries do you cover? How can they find your stuff and how do they follow you on Twitter? Whereas I said you are a prolific Twitter. Twitter handle is C-Grant WSJ. You can find our stuff on the Herd on the Street page that runs in the back of the business and finance section in print and on the market section of the Wall Street Journal online on wsj.com. If you want to send me a note about how much you liked my article or much more likely how terrible it was. What a terrible person you are. What a terrible person I am. I read it. I don't always get back to you, but I read it. My email is published in the online articles and you can find it there. There I meant. It was great (44/45)
having you on the show, man. Thanks for having me anytime. And that was my Market Forces segment with Charlie Grant. I want to thank Charlie for being on the program. Today's episode was produced by me and edited by Stylianos de Polao. For more episodes you can check out our website at hiddenforcespod.com. Follow us on Twitter, Facebook and Instagram at Hidden Forces Pod or send me an email at dkathiddenforcespod.com. Thanks for listening. See you next week. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
The ‘Deep State’ and the War in Ukraine (Part I) Jeffrey Sachs #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetri Kaffines 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 guest in this episode of Hidden Forces is Jeffrey Sacks, a world-renowned economist, best-selling author and professor at Columbia University where he was the former director of the Earth Institute. He is also one of the most reputable critics of the US intelligence community and American foreign policy, especially as it pertains to the ongoing war in Ukraine and US relations towards Moscow since the end of the Cold War. I developed an extensive outline for this conversation, the scope of which vastly exceeded the time allotted for it. I hope Dr. Sacks and I can find an additional hour or two to complete it because it is arguably one of the most important public conversations that any policymaker, politician or (1/45)
media pundit should be having at this moment. In the first hour of what I hope to be a multi-part conversation, Jeffrey Sacks and I discuss his career in public policy, including his unique experience working directly with the most important foreign policy figures of the late 20th century, including the last leader of the Soviet Union Mikhail Gorbachev, US President Bill Clinton and UN Secretary General Kofi Annan. We have an opportunity to touch on the national security state, the history of the CIA, including any potential role it may have had in JFK's assassination, and Dr. Sacks' unique critique of US foreign policy both during the Cold War and after the fall of the USSR. Part two of this conversation, which I hope to record and release soon, will dig much deeper into the national security state, or deep state as it's known, and its influence on US foreign policy. I also hope to discuss US policy vis-Ã -vis post-Soviet Russia in the 1990s and in the years leading up to both the (2/45)
2014 and 2022 invasions of Ukraine, as well as American policy towards China, America's Middle East policy, industrial policy, the continued threat of terrorism, and the steps Jeffrey Sacks believed that we should take to reform the US government, revitalize our economy, and reformulate our foreign policy so that it can reasonably achieve our national security objectives without resulting in imperial overreach or exhaustion. If you enjoy this podcast and it brings valuable insights to your life and business, please consider writing us a review and rating the podcast on Apple and Spotify. Each positive review of Hidden Forces helps more people find the show and join our amazing community. And with that, please enjoy part one of my conversation about America's national security state, foreign policy, and the war in Ukraine with my guest, Jeffrey Sacks. Dr. Jeffrey Sacks, welcome to Hidden Forces. Oh, good to be with you. Thank you so much. Yeah. You know, I've known about your work for a (3/45)
long time. I went to NYU, my sister went to Columbia, I have friends that went up to Columbia, and I know people that work there. So, but I've always associated you with development, economics and climate change. But that's not what we're going to talk about today. We're talking about today's foreign policy. But just briefly, what's your background? How did you get into economics and how did you begin your work in public policy? Well, I've been doing what I'm doing in one way or another for 44 years now. As a kid in high school, my parents took us abroad and I got fascinated in how the world is rather strange and needs a figuring out. I visited the Soviet Union during high school on a family trip, met a pen pal who lived in East Berlin, visited him after high school, decided I really needed to understand the world a lot better than I did. I grew up in the US Midwest, just outside of Detroit. And the world seemed fascinated to me. So I started in college at Harvard college, studying (4/45)
economics, fell in love with the subject. After graduating from college, I went back to East Germany, learned a bit more, became completely fascinated in the question of what we call in economics comparative economics, why do different parts of the world live differently? Why are some places rich, others poor? Who's got the best economic system? All of these questions fascinated me already more than 50 years ago. And I've basically continued in that track. I got my PhD at Harvard. I joined the faculty as an assistant professor. They were very kind. They promoted me each year up to full professor. So at a quite young age, I was a senior professor at Harvard. And I was invited to start working on real economic problems in countries that were in crisis, starting in South America, where I worked on and helped to solve what we call a hyperinflation. A hyperinflation is an inflation. Everybody knows what that is, but so rapid that the prices are rising by thousands of percent per year. And I (5/45)
helped Bolivia to stop a hyperinflation in 1985. When you do that, you also get involved in foreign policy. You also get involved in international relations because economies don't just operate on their own. They operate in a political world within a country, but they operate in an international geopolitical world as well. Well, I didn't know that I was doing geopolitics exactly in 1985, but I began to do so. I got invited to a number of other countries. In 1989, a most remarkable thing happened for me. I was invited by the Polish government to help them on their economic crisis. It was a communist government, and I told them I couldn't really help them because one of my heroes, Lekwowęca, the head of Solidarity in Poland, was under house arrest. So I would like to help, but I can't really help under such political conditions. The gentleman said to me that he understood, and I said, please call me if anything changes. Well, four weeks later, he called, said, we're going to end the (6/45)
martial law. We're going to release Mr. Węca. We're going to start negotiations with the Solidarity movement. And I scurried right over to Poland, and I said I would help to advise both the government and the opposition. Then came elections for the first time in Central Europe in 45 years, and suddenly I was the main outside advisor of the first post-communist government as the iron curtain was falling. And I helped them through their economic and political and geopolitical labyrinth, and things worked out quite well. And from their Mikhail Gorbachev's team called me, said help us. Soviet Union's got lots of trouble. And so I started working with the economic team of President Gorbachev. Then, of course, as people know, the Soviet Union came to an end, and President Yeltsin's team said help us. And I said, okay, I will work with you. And I spent a number of years around the region of Russia, Ukraine, Poland, Hungary, Czechoslovakia, which became Czech Republic, and Slovakia, Slovenia, (7/45)
and many, many other places, and became rather deeply involved in the politics and the geopolitics of Central Europe, Eastern Europe, and the former Soviet Union. Now, from there, I was invited to come to Africa, which I had not worked in. I began to visit China and India regularly. I was asked by both governments to give advice in both China and in India. And in Africa, I began a very intensive period for me of 20 years of working on the challenges facing the poorest countries in the world. Well, at that point, the UN Secretary General, Kofi Annan, said come be my advisor. And I said, great. And I packed up our bags. The family moved from Harvard, where I was professor, to Columbia University. I came in 2002. I came in a dual capacity as special advisor to the UN Secretary General, Kofi Annan, and as head of a rather remarkable innovation of Columbia University called the Earth Institute, which was focused not only on the economics issues that I had spent my career to that point (8/45)
working on, but the challenges of climate change and technology transformation and so forth. So it expanded my outlook, the questions that I was asking my colleagues, because suddenly I was a director of an institute with hundreds of climate scientists, including a unit of NASA. So it was really quite interesting, quite extraordinary. And I headed the Earth Institute for 14 years from 2002 to 2016. I served as special advisor for three secretaries general, Kofi Annan, Ban Ki-moon, and Antonio Guterres. I continue to be a senior advisor of the United Nations. I've now worked in more than 140 countries. So I've seen the world from all different perspectives. And I suppose that that's what draws me more and more to geopolitics right now. Because when you've seen the world not only from the perspective from New York looking out or from Washington looking out, but from Moscow looking across the Atlantic or from Beijing looking across the Pacific or from Nairobi in Kenya and so forth, you (9/45)
see things in a very different perspective. And that, I suppose, describes where I am today, not a U.S. centered view, but what I hope to be a kind of world centered view that tries to understand how the different places in the world fit together. So my outline for this discussion already was too long for the amount of time. Normally we do two hours, but now listeners can hear that there are a lot of places that we could go. I wish we could even just linger on the 1990s because I, as I mentioned, I was a student in the early 2000s at NYU. I didn't mention the date, but many of my professors in political science and a lot of the people I've met over the years were diplomats or people in positions of political power during that period who were also at a mature stage in their careers. And I don't know that one can overestimate the psychological impact that the collapse, and I would argue sudden collapse of the Soviet Union because it really was very sudden at the time that it was (10/45)
experienced by people that wrote about it. In retrospect, people say that it was inevitable, but at the time it seemed to have shocked a lot of folks. Can I tell you two anecdotes that, you know, two of the most amazing moments of my life, but because I was witness in the front row to this unbelievable revolution that was underway just after June 4, 1989, Poland had these semi-free elections because it wasn't entirely open democracy yet. It was in a transition from communism to democracy. And in these partially free elections, the solidarity movement basically won every seat that was contested. And soon after that election, I sat down with one of the most senior people who became the foreign minister of Poland, actually, but at that point he was just an opposition figure, but solidarity had won all the contested seats. And he asked me, what should be done? And I said, well, you have to form the new government. And he said, what are you talking about? We can't form the government. We're (11/45)
in communist-dominated Poland. I said, no, no, you just had elections. You need to form the new government. And he said, no, we can't anyway. The crisis is so deep. It's going to be explosive. We'll try to hold this communist regime to account, but we can't really manage this. I said, no, no, yes, you can manage it. I have some ideas. We're going to get your debt canceled. We're going to get a fresh start for you and so forth. Well, we discussed this for several hours. At the end, he stood up very forlorn and said, Mr. Sacks, I feel so bad because I think you are right. And that was, okay, we're going to have to move to some political leadership here faster than we anticipated. So that's how the first post-communist government started to take shape. And in fact, little known fact, but I watched it close up, Mikhail Gorbachev actually helped solidarity get into the government in Poland. Then just fast forward two and a half years, 1991, December, I'm invited to head a small delegation (12/45)
of economists to the Kremlin to meet with President Boris Yeltsin, who's president of Russia, but there still is the Soviet Union. This is December 1991, the last days literally of the Soviet Union. So we were sitting there in a huge room in the Kremlin. We were across a table and President Yeltsin had not arrived. And then way in the back of this enormous cavernous room, the door opens and in walks President Yeltsin from the far end of the room. And he walks in a big stride up to the chair directly in front of me because I was heading this small delegation. He sat down and he said, gentlemen, I would like to tell you that the Soviet Union has just ended. Those were the first words literally out of translation, of course, but those were his first words. And then he pointed to the door in the distant back of the room. He said, you know, who I was meeting with in the next room, I was meeting with the leaders of the Soviet military and they have just agreed to the end of the Soviet Union. (13/45)
And I heard this directly, just like that from President Yeltsin. So these were absolutely extraordinary days. So Dr. Sachs, I want to make the best use of our time possible. And maybe I can convince you at the end of the conversation to come back because there are sort of two major categories that I've identified in the course of constructing an outline for this conversation. One was to kind of zoom out and understand your central critique of U.S. foreign policy and what others call American exceptionalism as it pertains to international affairs. And that would lead to a conversation about the national security state, the CIA, and Schlesinger's imperial presidency. The other part is to understand your critique of U.S. foreign policy in the post-Cold War era and specifically as it pertains to Ukraine and then also to understand your larger conception of the international system. I think the reason why this is really important and I want to emphasize this with listeners is that there (14/45)
are not many opportunities in my opinion to have conversations with thoughtful critics of American foreign policy. There are lots of voices, critical voices out there, but I don't find most of them to be particularly convincing. We have had conversations with folks like John Meersheimer in the past or my former professor of Soviet history, Stephen Cohen, but we don't have as many as I would like and this is going to be an opportunity to do that. We might not get into really as much of a conversation about Ukraine as I would like, but let's start with your main critique or set of critiques of American foreign policy. What are those and how far back does one need to go in order to capture the totality of the strategic blunder that you've been describing in your recent writings and interviews? Well, these two issues of American exceptionalism and the post-Cold War and how we find ourselves in an outright war with Russia right now because we are at war. The United States has personnel on (15/45)
the ground that are providing the intelligence and manning the missiles that Ukraine is using to attack Russia. That's us there. The Russians know it too. We're a neck deep into this and it's extremely dangerous because the United States has 6,000 nuclear warheads and so does Russia. We're in a shooting match right now that really terrifies me, I have to say. These issues are conjoined. They're actually the same kind of issue. My critique is that basically, the US is too arrogant the way our government works. It doesn't listen to other countries. It thinks that we always know best. This is the security state, I'm speaking of, not the American people who don't have much say in this, but the security state thinks, well, we're so powerful, we can do what we want. Now, let me quickly add a caveat. Things are changing very fast because things aren't working out the way America wants. So there's a very steep learning curve that's taking place right now. People are even in the security state (16/45)
are understanding, gee, that unipolar moment, that idea that we were the world's sole superpower and so forth. We have to rethink that. So the critique that I'm making is a critique that I've been making for a long time. I wrote a book several years ago before the Ukraine war and its current variant was underway, called a New Foreign Policy Beyond American Exceptionalism, because I already felt our arrogance was very dangerous. It's become a lot more dangerous, but also people are beginning to understand that that exceptionalism is also filled with the kind of blinders that are leading us astray. So where does this all come from? Well, I think probably most major powers in history, by the time they become major powers, are pretty proud of themselves and think that their culture or their God or their religion or their technologists or whatever happens to be the particular approach of the observer has vindicated their country as a natural leader. And you would see this in any empire of (17/45)
the past, that this is God-given. It proves God's on our side or our gods are on our side or whatever the claim has been made. And in this sense, the US is no different from other major powers of the past. In fact, I like to say and I deeply believe that we've learned almost everything about being an empire from Britain, which was the dominant power in the world from roughly 1800 to roughly 19, let's say 1945, but one could quibble with the decades a little bit. But in any event, yes, Britain thought itself masters of the world and in some ways it was in the 19th century. It was the first country to industrialize. It had an economy that just dominated the world and it was able to beat the heck out of just about everyone that it tried to beat the heck out of in the 19th century. Now, for the United States, we've kind of had that view throughout our long history. The self-image that the US is the city on the hill, a phrase made popular again by Ronald Reagan in an inspiring presidential (18/45)
speech. But the idea that America's exceptional was part of our founding. But then America spent two centuries at war. We don't really think of it this way, but it was some genocides and some brutal wars across the American continent of defeating native populations, which were nations and had large territories, which we beat them out of, especially the 19th century. Then at the end of the 19th century in 1898, we had taken over the continent and almost immediately the feeling of Teddy Roosevelt and McKinley was, okay, now we expand into the oceans. Now we take the empire in Hawaii. Now we eat the heck out of the waning, faltering, dying Spanish empire. So we take Puerto Rico. We take Cuba in our hemisphere. We take the Philippines on the other side of the planet. That was 1898 in the Spanish-American War. And America joins about 100 years after, joins the European imperial powers, who have already been trans-oceanic powers. America's a very late comer to this. But God, what a booming (19/45)
economy with a continental scale economy, huge technological innovations, the wonderful discovery of mass public education, so many things going for the United States, so much natural resource base, filled with coal, oil, gas, everything one needs for great greatness of military power, of technology, of industry, and so forth. And America does become the dominant economy already in the early 20th century, but not the dominant geopolitical force. But the idea that, oh, we're great. We're really something, is of course bolstered by all of this. Then, I'm speeding history very quickly, but two world wars, great depression, and low and behold by 1945, Britain is no longer an empire. It's exhausted. It's collapsed. India is about to declare its independence. Within a couple of decades, Britain loses almost all of its imperial possessions that have been conquered over the preceding couple of centuries. And America finds itself essentially as the unrivaled power of the world, but for the (20/45)
Soviet Union, which is much weaker economically and technologically, but militarily is a major, major power and a nuclear superpower, of course. So that begins the Cold War era. Now, there's a fateful expression that to me changed America because it's so self-flattering. I think it went to our heads, actually, almost in a literal sense. And that's when Henry Luce, the publisher of Time at Life, said, this is the American Century. When he said it in 1941, oh my God, you swoon over that phrase. And it's a wonderful phrase, and it was true. It felt so incredible, American Century. He didn't mean a good century for America. He meant the century that America would govern the world, essentially. And that became the mindset after 1945. Not all wrong, by the way, America was a superpower, militarily, technologically, economically, financially, culturally, you name it, America was a superpower. And I personally love more than any other president of the United States, Franklin Roosevelt, who (21/45)
guided the country through the Great Depression, and who guided the country through World War II, and who invented the United Nations, and who set America on the course of global leadership. So there was this very optimistic sense, this is the American Century, and we will guide the world. And America did many wonderful things in the early days. It created the UN, it created UN institutions, it launched the World Health Organization, it launched UNESCO, and the UN Education, Scientific, and Cultural Organization. It did many wonderful things. It helped to inaugurate an era of open trade, which made it possible for other countries to follow along in economic development. So that was the good side. The other side, though, was we entered a Cold War, kind of in a crusading spirit. We could talk for hours, days, weeks, months, and years about the Cold War, and I'm going to restrain myself, except to say, I think it could have been avoided, I think it could have been ended much sooner. But (22/45)
it was viewed as the great Twilight struggle to use the famous phrase of John F. Kennedy. And after several decades that were extremely dangerous, and we came close to blowing up the world in the Cuban Missile Crisis in October 1962, the Soviet Union in the second half of the 1980s was exhausted and needed fundamental reform. And a young reformer, Mikhail Gorbachev, came to the forefront almost miraculously. And the main point about Mikhail Gorbachev was he was a man of peace beyond anything else. He was a great patriot. He was a socialist. He believed in socialism, but he was a man of peace. He said, I'm not going to shoot our opposition. And the Soviet Union basically could not hold together other than through force. And so this was the demise of the Soviet Union. Now, just to say, here's where the critique comes in of the next 30 plus years. I was there. I was an advisor to Gorbachev. I was an advisor to Yeltsin. I was an advisor to the second president of Ukraine, Leonid Kuchma. I (23/45)
loved Gorbachev's idea, which was now a world of peace. And he called it a common European home that would stretch from Rotterdam on the North Sea all the way across Eurasia to Vladivostok. And he saw that as a peaceful zone and an integrated economic zone. And I love that vision and I love it till today. But what I can tell you in short is the U.S. deep state, that means the CIA, the national security apparatus, the Pentagon, the White House. I know these organizations, not every one of them, intimately and so forth. But I watched all of this quite close up. They didn't say, oh, we have had the hand of peace extended. Let us cooperate. They really said, oh, we defeated our foe. Now we are the only power in the world. We can do what we want. And this initiated an era called neoconservatism. It really was started in the last year of the Bush senior White House in 1992. And it was really started, you can pinpoint it, by the Secretary of Defense, Richard Cheney, who of course went on to (24/45)
become vice president under George W. Bush Jr. and his deputy, Paul Wolfewitz. And they already in 1992 said, we're it. We're the only superpower in the world. Our grand strategy as a nation is to remain completely unchallenged. What came to be called full spectrum dominance in every part of the world. So we have to be militarily the dominant, economically the dominant, financially the dominant, technologically the dominant. We need to dominate. And that is the foreign policy that we have had since 1992. So it's 32 years running. I've been a critic of it those 32 years because I've said, and maybe this sounds strange and counterintuitive, but I've said, don't declare victory of the Cold War. Rather, declare peace with our counterparts. Don't rub their face in it, as Churchill said, in victory, magnanimity and in peace, goodwill, not conquest. But I watched close up something that Wesley Clark told us about. Wesley Clark was the NATO commander during the Clinton administration. We (25/45)
became friends after that, though we didn't see eye to eye on foreign policy often. But Wesley Clark told a story about walking into the Pentagon. He tells it two times, but one is in 2001 after 9-11. And he's told, yeah, we're going to go to war several times because we're going to take out every one of America's enemies. We're going to not just address al-Qaeda and what's just happened to us after 9-11, but we're going to take out Saddam. We're going to take out Mohamed Qaddafi. We're going to take out all of Russia's would-be allies because we are the United States of America. And so we launched a lot of wars of choice. And this is what has gotten us into a colossal mess. And every war of choice, I've been a public critic of it, strongly saying, we don't need this war. It's going to hurt us. We're not going to win. We're going to spend trillions of dollars. We're going to get a lot of people killed. And it's not going to help the United States. It's going to hurt the United States. (26/45)
It's going to make the world more dangerous. So again, so much to respond to. First of all, for people that are curious about this history that you talk about, I think maybe the best articulation of the imperial agenda you described by the new conservatives was Bill Kristol's project for a new American century. His father Irving was the founder of the new conservative movement in the 1970s. And also another scholar who I studied in college who wrote a book called American Empire. His name is Andrew Bacevich. He's written many books. In that book, he talks about full spectrum dominance, which was really a compelling theory at the time. And there's something to be said about the lingering framework of full spectrum dominance and the danger that it poses because it could cause certain foreign policy thinkers to overreach thinking that we have powers that we no longer have. I'm just trying to think about where I want to go here. So one of the things I'd like to do on this show is give (27/45)
people frameworks. And you mentioned the deep state. What's challenging with words like the deep state is they become profuse in American culture and language. And yet no one really has a clear definition for what it is. Now that may be by design in a sense, because it's very difficult to wrap your arms around something like this. But to the extent that we can, first of all, is there anyone who you presume has a complete picture of the deep state? And to the extent that you really understand what this is, how would you describe it? What is the schema that you would give people? The deep state for me is the national security apparatus. And I believe that the most important institution in it is the Central Intelligence Agency and the intelligence agencies more generally. I think a tremendous amount of U.S. policy is made in the intelligence communities, which were designed, unfortunately, back in 1947 under the National Security Act, not so much as intelligence agencies as almost a (28/45)
secret army of the president of the United States. So a great deal of what the deep state has done over the decades is topple other governments. And typically, this is done in what are called covert regime change operations. It's sometimes overt, like sending in NATO to bomb Libya in 2011. But mostly it's done covertly. And there's a wonderful book that was a dissertation, actually, under John Meersheimer by Lindsey O'Rourke called Covert Regime Change. It's really worth reading. It's stunning because she studies just the period 1947 to 1989 because, as she says at the beginning, she wanted to study a period where there's been a lot of declassification of documents, not that covert regime change stopped then, but rather she wanted to be able to examine documents. And she records during the period 1947 to 1989 70 regime change operations, 64 of which are covert. Now, what is a covert operation? It's pretty weird because when a government's overthrown, you know it. A covert operation (29/45)
isn't really a secret. What it means is the CIA denies it. Ah, it's not us. It's somebody else. But of course, the US is very deeply involved in it. I've seen some of this very close up. I know others bits of it by reading about it, studying about it, talking to people who were involved. But it's a pervasive part of our foreign policy. And that's basically what the deep state does. Now, who are the institutions? It is a small group, but I could not tell you whether it's unchanged administration to administration, but it's the president, it's the National Security Council, it's the intelligence agencies, it's the Pentagon. It is a very small number of major military contractors. And it's the Armed Services Committees of the Congress. That is a few hundred people. And they are the main determinants of the American use of violence, whether in covert means or decisions on going to war. So again, we could linger here forever. There's a great book that I read years ago by Tim Wiener called (30/45)
Legacy of Asciers, which I think is a quote of Dwight D. Eisenhower's when he was reflecting on the CIA. There's criticisms of that book, of course, because it goes into so many details. Some people say is Tim Wiener just an agent of the CIA, because one of the contensions of the book was that this agency has been a total disaster. And so because it's shrouded in secrecy by design, a lot of rumors persist about it that no one can really verify one way or the other. Another problem with the quote, deep state or national security state or the CIA or the national security apparatus is that much of what the public knows at the very least, right, is stuff that's very old, stuff that's been released over time. And so, I guess one question I have here is, how much do you think what we know about what the CIA was in 1963 when Harry Truman wrote his critique of the organization in the Washington Post a month after Kennedy was assassinated? How much of what we understand about the intelligence (31/45)
apparatus is actually relevant to how it operates today and how much power the agencies have today? I think it's still very relevant and it's completely shocking and dismaying to me that the last time there was a serious investigation by Congress of the CIA was 1975, the church committee of Frank Church of Idaho, that was 50 years ago this coming year. We've not had a serious investigation since then. Now, I've seen some coups straight up with my own eyes because I work abroad. I had a president tell me they're going to take me out and they did, by the way. A president tell you that they're going to take him out, not take you out. No, no, no. Yeah, yeah, I just want to make sure people know. You're talking about Haitian president Aristeed. Exactly. So the president of Haiti, Aristeed said to me, thank you, you got it exactly right. They're going to take me, President Aristeed, out. And I, being a naive economist, said, no, no, we're going to get this to work. We'll fix this and so on. (32/45)
One day they walked him to an unmarked plane and overthrew him and flew him to the Central African Republic. They literally did it. And then I got this unbelievable glimpse into how this works when horrified I called the New York Times reporter on the beat of Haiti and said to her, report this, come on, it's broad daylight. She said to me, this is a friend, oh no, my editor is not interested in this. Excuse me, your editor is not interested in an American led coup in broad daylight. And that's how it went down. Now, that's just little Haiti, but that's how it went down. And I've seen lots of this over the years, not in a systematic way. No one's sharing this information with me. I'm an economist. I'm dealing with budgets and taxes and exchange rates, but you hear a lot because I'm dealing with heads of state and I'm dealing with foreign ministers and I'm dealing with economy ministers and so on. And we're meddling up and down the wazoo and it's extremely dangerous. And the track record (33/45)
of all of this is terrible because if you overthrow another country, you don't end up in a new equilibrium. You end up in a profound disorientation. And just to take another case, because you're right, the American people know very little about this. We know very little about it. It's all secret. So you just get glimpses of it. But another example, Obama decided together with Hillary Clinton that they would overthrow the Syrian president Bashar al-Assad. And president made what's called a finding, presidential finding, and he ordered the CIA to train an arm jihadists basically to overthrow Bashar al-Assad. And they did that, but they didn't succeed as in many cases they failed. Now, this was all denied for years. And then there were two, I think maybe three times that this was mentioned in the New York Times in 2015 and 2016. It's called Operation Timber Sycamore. It's a real document, a real plan. It's something really signed by the president of the United States. But the American (34/45)
people aren't told almost anything. Okay, one day the New York Times ran one page about it, said it didn't work. But my God, if you try to overthrow another government, frankly, I'd like the American people to understand. That's how Syria got into such a prolonged chaos. And then what happened, by the way, which is par for the course, after several years, Russia came in on the side of Assad. And when Russia came in, we attacked Russia for meddling in the internal affairs of Syria. So it's called gaslighting. It was pure gaslighting, purely phony. And that I happened to know because I knew people very much involved in the whole episode. I heard an earful about the U.S. machinations during that period. So again, we're not going to have a chance to get into any of that. I wish, again, I hope that I can convince you to come on to talk about all of that. There's another book I want to recommend for listeners. It's called Active Measures by Thomas Rid. And it only came to me now because (35/45)
you're talking about how we don't really know. And that's by design. The book Active Measures is actually about the Soviet KGB, intelligence apparatus, and how it operated. And by design, created this environment of uncertainty even within its own ranks. And that has a really pernicious effect on a society. And similarly, the cult of secrecy that we have in the United States has been too. I want to propose a theory to you, and I'm curious if it resonates. There are a lot of theories that have cropped up over the years about CIA or intelligence meddling operations. One is obviously the assassination of John F. Kennedy in 1963. Another one is the attacks of 9-11. With respect to JFK's, actually with both in these cases, there was suppression of information. I know this is a fact for 9-11. We know this is a fact on the historical record for JFK. We also know it for 9-11, but I've also had Senator Bob Carey, who was one of the 11 members of the 9-11 commission on here. And he actually (36/45)
said, quote, this was a conspiracy that went to the highest levels of the Saudi government, of the Saudi royal family. And we've recently seen some videotape coming up again. Very odd. Why is this videotape recently surfacing of a Saudi diplomat casing the US Capitol? My theory about all of these things is that because we have this sort of extrajudicial agency that exists outside the law that has not just Black Ops budgets provided by the government, but also has its own revenue streams that it generates illegally and is able to use fund operations, because of all this secrecy and because of how compromised so many people are as a result of how our government operates since the end of World War II. My sense is that we, people assume, for example, that a lot of people assume that Oswald killed Kennedy because he worked for the CIA and because of all the connections around him. But it's also perfectly possible that Oswald was a deeply compromised human being who went rogue, maybe (37/45)
thinking that would please his handlers at the CIA, killed Kennedy. And so the whole thing was suppressed because so many people were involved and people were also terrified, self-censored. You know, I remember listening to a phone call that Lyndon Johnson had with either Chief Justice Warren or with Gerald Ford. And one of the two or both didn't want the job because people were terrified. And I think the same is true for 9-11. We don't really know who was involved, where it crossed boundaries with the CIA, where the intelligence committee or anything else. Does that resonate with you? Well, I've studied the Kennedy assassination at length, in part because I wrote a book about President Kennedy and his negotiation of the partial nuclear test ban treaty in 1963. So I got very much drawn into the subject. I'm personally convinced that there was a conspiracy, that the United States government was very much involved, that the CIA was involved, that papers are still being withheld. We know (38/45)
that show a lot of what was known because here we are 61 years later and every president has withheld documents that we're supposed to have been released a long time ago. When you say the government was involved, do you mean a shadow government, a source of power that was filled with the ranks of people in the intelligence community, maybe people also within the official government, but not the official government itself? We don't know. You know, we really don't know. I think a lot of people who had government jobs were involved. Let me put it that way. You know, it was crazy and rogue or a little bit more even structured than that. It was a coup and it was a very awful thing. And aside from everything else, just as a footnote, because for all of us who spent a lifetime hearing about it, looking at this as a breuder, reading about it, talking about it, the forensics for that never added up at all. And so it's clearly there was bullshit from the very beginning in all of this. And what (39/45)
you see, by the way, is it's the collapse of the American public's confidence in government. Yeah. It starts then. It's the tragedy. It's what Bob Dylan says in Murder Most Foul. It was really the end of the illusion in a way. Yeah. So JFK, another item we'll have to add to our list for when you come back on the show. I'm going to actually end the conversation here, Dr. Sacks, because we're basically running up on the end of it. And I want to tell you sort of where I wanted to take this conversation and also to let listeners know as well in case we can continue it later. Absolutely. One area, obviously, this is just a prelude to the main act, which is really a conversation about post-Cold War politics, foreign policy vis-a-vis Russia. The question of, I don't really like the question of who lost Russia. It's a common one that people ask. I think it's actually a malformed question. But I think it's one way to think about kind of where I wanted to take this conversation, which is how (40/45)
much is this quote America's fault? Because I think part of this, I think it's just the result that in America, people talk about America. It's just natural. But there's a kind of weird sense in which everything that goes wrong in the world is America's fault. But somehow we're incredibly incompetent, but at the same time, everything that happens, any kind of coup is America's tentacle somewhere. And again, I think this also speaks to what we talked about earlier, which is the immense power that's going up around the executive, the quote, deep state. People have lost confidence. They don't know what is real and what's not real. And this is really problematic. And again, I actually want to quote another great book by Peter Pomerotsev called Nothing is True and Everything is Possible. It's actually about post-Soviet propaganda and how propaganda works in Russia. But it's actually something that reflects increasingly how American society is organized informationally these days. But I just (41/45)
want to highlight, you know, one of the, some of the things that I want to talk to you about is one, the argument about NATO enlargement as the reason for the war in Ukraine. And I wanted to get specifically into that, just enlargement overall, reunification in Germany. I just kind of wanted to understand the scope of your thinking there. Great. I also wanted to talk about the withdrawal, the unilateral withdrawal from the ABM Treaty in 2002, as well as the Intermediate Range Nuclear Forces Treaty in 2018. And then also all the provocations with respect to Ukraine. And I think there is a really great opportunity to not just bring in conversations about the intelligence community, but also the messy job of trying to understand really how the United States interfaces with the world. I mean, there are a lot of companies and NGOs that have their own ideas and those things spread internationally. And I don't know to what extent it was NATO itself that created a security dilemma for Putin. (42/45)
Certainly there are geopolitical arguments for why NATO expansion would be problematic for Russia. But to what extent was it really a Russian issue? To what extent was it really a Putin issue? And it was much more about the westernization of Ukraine that made him nervous, just like the westernization of Taiwan and other Asian countries might make China nervous, because perhaps it undermines their sense of confidence in the staying power of their regimes. All great questions. I look forward to continuing, because these really are great questions and very important ones. And let's spend some time on them. Yeah, and we'll have a chance also to talk about, I wanted to have a section here called President Sacks. And I wanted to understand sort of how... Oh my God, no. Because you do a great job in your book actually of what I love about also your book, New Foreign Policy, is that you spend quite a bit of time talking about, okay, so if this, if here's what's wrong, how do we address those (43/45)
problems? I think that's super important. I think as Americans, we want to be constructive in how we engage with politics and our future. And so I appreciate that. And I look forward to having you back on soon and talk about all these things, Dr. Sacks. Really a pleasure. Great to be with you. And yes, let's do some more. Thanks. Thank you. And I want to remind listeners that they can find conversations like this one with experts in Soviet history, foreign policy, and national security in the related tab of this week's episode page on our website at hiddenforces.io. I also want to encourage those of you who enjoy this podcast and who feel that it brings valuable insights to your life and business to rate and review the podcast right now on Apple and Spotify. Each positive review of Hidden Forces helps more people find the show and join our amazing community. Thanks for listening, and we'll see you next week. If you want to listen in on the rest of today's conversation, head over to (44/45)
hiddenforces.io. slash 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 Stylian Nusnikolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
Why are Financial Markets So Bad at Pricing Geopolitical Risk Rachel Ziemba #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? Welcome to this Market Forces segment of the Hidden Forces podcast where I speak with market professionals, business people and anyone else with an economic perspective on current events. My guest for this segment is Rachel Ziemba. Rachel is managing director of research at Forkast RGE and a senior research analyst at Rubini Global Economics. Rachel, welcome to the program. It's a pleasure to be here. The pleasure is all mine and the audience's. I'm very excited to have you on. We've been speaking for a few months, but now you're in studio. I was prepping before this interview. I was looking at your work and looking on the internet and searching around to see what are the juicy topics, what's going on in the market, what it would be interesting to talk about, and relevant. They were these five major things that kept coming up on my radar. One, at the very top was North Korea and geopolitics in general, kind of shove that in there, but definitely North Korea. The (1/45)
dollar, the decline in the dollar from year to date, basically January, emerging markets, which is your specialty or one of your specialties. I really want to get into that, the equity market in emerging markets, the disinflation in emerging markets, these bilateral deals between nations. That feeds into another thing that was on my radar, which is Saudi Arabia and energy. I want to get into that. Maybe this inflation deflation thing globally, that ties in. All these things tie into each other. Let's start with North Korea, because obviously this has the largest existential fat tail out there. The markets have seemed to be pretty indifferent to this reality, whatever it is. In that sense, they seem to be also reflecting the public at large. The interesting thing about Kim Jong-un is, when he first came to power, I don't remember how many years ago, but the narrative was, or the hope was, that this guy was westernized. He had grown up in and around Western institutions, educated in (2/45)
Switzerland. He was going to be able to come in and possibly be someone we could negotiate with. In fact, it seems the worst case scenario has turned out in terms of our relationship with North Korea. He has surprised us tremendously in his capacities with his ballistic missile development. What is the latest on North Korea? How is that? Give us that market perspective as well. How are markets dealing with this? Sure. I think markets really are struggling to price the risks out of North Korea. Markets tend to struggle to price geopolitical risk. Before we get into North Korea, I think one of the big questions I get repeatedly is, why aren't markets pricing geopolitical risk? There's so much of it out there. My response is usually to say, well, you've got to start from how does it affect the economy and how does it affect asset prices? Because some geopolitical risks can be a demand shock as there's output loss and some might be a supply shock. There's a shortage of a given commodity. (3/45)
We shouldn't expect them all to be the same. But off my soapbox, back to North Korea. In the North Korean context, what we've seen over the last several decades has been an escalation up as they continue to develop their nuclear program. That really is part of the existential threat being asked to give up nuclear proliferation. In many ways, there's a degree of rationality there that they have seen other leaders give up nuclear capabilities and lose power. The other big challenge is so many resources have gone into building up this nuclear program that the population might be very unhappy if suddenly they were told they had to give it up. Where we are now is that Kim Jong-un, as his predecessors have done, is really testing out the new U.S. president. We may in the U.S. not think that the president is that new anymore, but this is part of a cycle. Each time around, North Korea's nuclear capabilities are more extensive. Where are we now? We've had several missile tests to show the (4/45)
length of distance they might be able to send a weapon. We've had a nuclear test. This is clearly a step up of provocation. In response, we've had increasing economic pressure, economic sanctions. We had the latest announced by the UN Security Council earlier this week on Monday. I would expect to see, given the cost of a military escalation, the extreme loss of life from any military first response from the United States or its allies, that I would expect that economic pressure will continue to grow. We at Rubini Global Economics just put out a recent piece arguing that there will be a parallel track. There will be multilateral measures. There will be U.S. unilateral measures. Why do they need to be unilateral measures? Because at the most of the trade and finance that is keeping the North Korean regime alive comes via China. Most of the finance that supports the businesses that exist there, underground or official, and so China's involvement is really key. Russia's involvement is (5/45)
really key as well. As the Chinese have cracked down a bit, the Russians have stepped in and provided more financing, more energy. Despite this pressure, and there will be more, it remains to be seen if that's going to lead to a policy change. You think the public and the market took that in a tepid way. They didn't really react to it much. They didn't put much stock into that language. It's not characteristic language. I think before this administration, the most Bellicose rhetoric I heard against North Korea was really in President Bush's State of the Union address after 9-11. That was the axis of evil. What do you think of that? Sure. You're right. Not only has there been an escalation of rhetoric and action on North Korea's side, in some ways the Trump administration and particularly the president himself has used language that has countered and has almost been in lockstep with that of the North Koreans. That's new. We have a president now who came into office as a dealmaker, as a (6/45)
negotiator, and as someone who said, I'm not going to act presidential, and I put that in quotes, just to be presidential. I'm not going to be guided by the norms that exist because I think America's gotten bad deals on many things. We can talk about that over the course of our conversation. The rhetoric on the U.S. side has very clearly stepped up. They're trying to attack. The danger here is that as there's escalation up and things that are said for a domestic audience like the North Koreans will receive fire and fury, in my mind it raises a chance of some sort of accident, some sort of escalation. Strategic analysts I speak to, and I sit here as an economist, as a country risk expert, not a nuclear scientist or the like, but most people still believe that North Korea is a way off from actual nuclear capability. When you say a way off, what do you mean? What I've seen, contrasting opinions from people in the intelligence community primarily. We're both. Yeah. What gives you that (7/45)
sense of confidence? Given some of the lack of confidence or the implied lack of confidence in the lack of consensus in the intelligence community? I think there are a number of sources that suggest, or I guess what I should say is, there are plenty of ways that North Korea could, via conventional and other weapons, threaten its near neighbors, particularly South Korea and Japan. Some of the evidence that we've seen in the press, and from experts, suggests that even targets like Guam or maybe within reach in this context. At this point, I think we have to operate on the assumption that there's been improvements, there's been likes, but that some of this are still tests and they're still ... Then I think as an economist, as a market participant, I try to look at the scenarios and think about how do I position myself, which I guess brings us back to where we started, which is, why are markets blasé about this? Or why have they reacted briefly? The US equity market continues to rally, (8/45)
and that's a broader topic we can get to. I think the answer is twofold. One is that there is an extreme tail risk of war, which could happen at which point a lot of bets are off. One way to respond to that would to buy very long dated options and to hedge against some major correction. Or to say that there will be signs ahead of time. Now if there was a US attempt at a surgical strike, there would probably be a number of warning signs. People out there in the press have, and experts really point to the signpost to watch there is around the US non-essential personnel, the Americans present in the Korean Peninsula. There's a number of other steps as well. It's not to say it won't happen, but that there will be signposts. The other reason, but short of military conflict, the economic impacts tend to be related to maybe there will be some form of a loss of confidence in South Korea, in Japan, some delayed investment. To some extent from South Korea's perspective, they've been living with (9/45)
this threat, this unresolved border, this unresolved conflict for decades. They're just continuing on and living their life. From a market perspective, the other thing that is going on is if anything, the geopolitical risk coupled with the inflation issues we might get to in a few minutes have conspired to bring down long-term interest rates in the United States. That in turn has made equity markets that look really pricey to me in the US at least, has made them look a little bit more attractive. I think the other part of the story is that if anything, by focusing on sanctions, on economic pressure and the like, that has helped a number of market actors say what imminent war is not likely. There can always be things that occur and the like, but you could ... Mistakes. I mean, things like we talked about there, you mentioned things, unforeseeable events, and that's difficult to price, but also those could be very catastrophic, whether we're talking about financial markets or in reality. (10/45)
Before we get into the inflation deflation, emerging markets and more detail, the dollar, the carry trade, which is something I want to discuss because I think that's super interesting. Let's just wrap this up a little bit because you mentioned a paper that you guys are out with. You talk about market pressures and unilateral and multilateral. The thing that I would like you to clarify for me is when you talk about unilaterally, how would the US act unilaterally in your view? Then when you talk about multilaterally, who would they act with and who would participate? Is China really ... Well, it's a difficult question for you to answer. It's unfair to ask you what China thinks. Again, this is something else where at least in the press, I'm not privy to any special information. It's unclear whether the US has the leverage to compel China to engage North Korea in a way that would quell the crisis and prevent them from stopping their ballistic missile program. I guess I would start by (11/45)
saying actually I think it's very difficult in this day and age and with the importance of China and with the importance of its sovereignty for the US to compel China to do much. China is in the same way if China turned around and said, how do we compel the US? I think one of the challenges and it's something that causes folks in Washington and elsewhere a lot of angst because they would like to be able to compel whether it's China or fill in the blank country. China has its own interests and I think the goal here is identifying where those interests align with the US. The Chinese for a long period of time have looked at the cost-benefit analysis and said if they prefer to have a buffer state between the more US military-supported countries of South Korea and even Japan and they've been very worried about what an implosion of North Korea would mean from a humanitarian perspective because those people would continue to flood into China. They've also seen some economic benefits of having (12/45)
some degree of trade with the country. That was a shift since the mid-90s. The mid-90s there were all sorts of stories about famine, crisis, North Korea was imploding in many ways. Since then, the Chinese started to be a bit of economic activity opening. Through shell corporations, but on the margins the area of China adjoining North Korea has benefited from some of that activity. The Chinese interests are mixed. We fast forward to today and the nuclear escalation, the nuclear threats, the greater uncertainty, some Chinese actors are starting to rethink that sort of knee-jerk response. However, they don't like to be forced by the US to do something and the like. As a result, the US response is, I would say, parallel. A parallel process of keeping a coalition together, that's the multilateral, UN-security council-based approach, and unilateral. US action directly. A lot of people use the example of, well, what can we learn from Iran sanctions and that, the like. That was also a case (13/45)
where the US did some things on their own for a long, long time, but also there was a multilateral coalition and the like. That was really important in Iran's case because they trade with a lot of countries. Now, in North Korea's case, they've been so isolated that China and Russia account for almost all of the trade and financing. It makes multilateral measures important in a different way because you need to have China on board. That's what the last two round of UN sanctions have done. They have shown China being willing to agree to restrictions in fishing and textile and other exports. How they'll be implemented is an open question. That brings us back to the unilateral measures that US is doing. Those are being done both via congressional legislation, but also via executive order. We're talking about sanctions. I'm talking about sanctions. All of them are sanctions. But the US doesn't trade with North Korea. The US doesn't. So it means that what the US is doing is sanctioning or (14/45)
listing companies, individuals that are trading with North Korea. They're using the threat and acting on it to encourage China to implement what they've agreed to. That brings us to what I see as a risk that's out there about how this economic pressure could influence global risk sentiment. That's if the US continues to escalate on the sanction side and involve measures on major Chinese financial institutions, a big bank, or follows through on a threat that I think they probably won't, but follows through on a threat to reduce tariffs, reduce trade with, say, China in a more meaningful way. Now, I do think there's an element that what some members of Congress are talking about, which is cutting off Chinese banks from the US financial system, that's playing with fire. Also, the Chinese have disproportion. How many trillions of dollars in US securities? Over a trillion. Probably more like one and a half trillion. That doesn't really make much sense. Although I would say that politically (15/45)
speaking, if any administration were going to go to the populist route of erecting tariffs, this administration would. We touched on something a little bit both directly when I mentioned the carry trade in the dollar and also indirectly in just the conversation itself. It's a risky situation. Although we haven't seen really any panic in markets or in the public domain, we have seen a rise in treasuries. The 10-year yield has dropped down to about 2% now, I think it is, roughly. Gold has been up, but the dollar's been down. The dollar during the same period has dropped roughly 10% of give or take. I don't know where we are now exactly. Treasuries are moving up, but the dollar's going down. That means that there's an outflow of dollars going into something. Dollars are leaving to go somewhere other than the treasury market to account for ... How do we square that circle? How do we square that circle? And where is it going? I think what's going on, some of the move into treasuries has (16/45)
come from other dollar denominated assets. It's gone from US equities into treasuries. Some of it, I think, as you say, has gone as the result of the fact that not only have US treasury yields fallen, but European and Japanese yields have fallen a lot as well. I know it can seem counterintuitive given that Japan is one of the countries potentially in the crosshairs here, but the yen continues to be a major safe haven in this regard. I think a number of people have looked around and said, well, US high yields, US equities, a variety of assets have looked pricey. From the dollar standpoint, I think there's been an arc here of flows that's really, really been based on relative monetary policy as well as geopolitics. That's been over the last nine months or so. We had a period where after some countries moved out of deflation, people started finally expecting the Federal Reserve to hike interest rates and expecting the ECB not to do very much, that there was a significant move into US (17/45)
assets, both because people had high expectations of the equity markets, but also because they thought US yields were going to rise, that were going to pick up a little bit of carry. As one of the reasons was not only a story on monetary policy, but a fiscal policy one, there was an expectation that there were going to be tax cuts, the US was going to grow more strongly, there was going to be a lot of infrastructure. Couldn't that also be an argument for greater levels of debt and inflation? Couldn't that also be an argument for a declining dollar? It could be. The way I look at debt, whatever country we're looking at or even company we're looking at is it depends a lot on what do you, if you take on more debt, what do you spend it on? Are you borrowing more just to pay back what you already owe or are you investing in more productive capacity? That's where, and I should say we- Well, to be clear, what I mean is, in other words, what I'm saying is this would be a fiscal stimulus. That (18/45)
would be stimulative in traditional Keynesian terms. It would be it would create inflation. That's what the hope has been, that the government would enact deficit spending and alleviate this balance sheet recession. That's what many people have been advocating for a while. Wasn't that at least a perspective? That was my perspective of expanding deficit by the Trump administration in order to enact policies of construction, et cetera, is that we might finally get that inflation that the Fed had been pushing for. What am I missing? I guess I would say, in general, you spend more, you borrow more, you have stronger economic growth, you grow above your potential. We economists like to throw that term around a lot. It's a really hard thing to measure. I would also say that looking ahead, one of the hopes was just you generate more growth, you sort of actually boost that productive capacity via, say, spending an infrastructure. That's where what you spend money on matters. There was a story (19/45)
in the marketplace about stronger growth, more inflation. The Fed would respond and that led that dollar strengthened. Then I think we had, but that was at the same time, dollar strengthened and the US consumers started importing more goods. The US trade deficit with a number of countries, if anything, actually increased under the Trump administration, despite the president coming to power sort of arguing against it. There are a lot of different moving factors, but the point is that story has faded away from the FX markets as they sort of focus on the balance sheet of the Federal Reserve, but it hasn't. That sort of growth story of variety of factors haven't really faded away as much from the equity markets. The geopolitical risks may be complicated, added some noise, added some volatility, but I think the story on growth, the story on expectations there have been a big part of the story there. Then with US yields coming down, European yields coming down, people say, well, where do I (20/45)
pick up some yield? That's helped support a number of emerging market assets. In fact, speaking about that, going back to the point about the dollar long position, there was a big dollar long position in the market heading into this year, and now there's a developing short position in the dollar. I've also seen a spread between three-month implied volatility and emerging market currencies and developed market currencies. Is that significant? Is that something that we should pay attention to? Does it mean something? Can we expect to see more volatility in developed economies like the United States in terms of currency markets? For the dollar, for example, then we will for emerging markets in the next three, six months. Is that something that you guys are looking at thinking about? Is it relevant? We tend to look at, so the volatility measure you're talking about often is something one looks at for a variety of reasons. One, because when you're calculating and trying to think about a (21/45)
carry trade or relative value position, you actually might want to look at risk adjusted, and volatility is one of the measures of risk, carry, for example. When I would look at, say, a currency or a view along the Turkish lira or the like, I might want to look at what's the risk adjusted carry in this context. For our audience to clarify, you're effectively saying that if you're leveraged in a position, it matters what the volatility of that asset is going to be over the period that you're carrying it, because if you don't have the credit line essentially to hold that position, you may be right, but you may be insolved before you're right. Exactly. Exactly. It's one of those... The liquid. Yeah. Exactly. You could be stopped out of your position through margin calls before your story comes out. That's something, it's particularly the case if you're levered. Even if you're not levered, you still... It still might not be a great trade. It also affects right. It depends if you're a bank (22/45)
as well or if you have a lot of money in that position, the value, relative value at any time will affect your other positions in your portfolio. Exactly. So, obviously, it's relevant. If you're a fund manager and your fund's being recalculated every day, mark to market, your investors might want to pull their money, so it can come in a variety of ways. So, I would look at that, is there going to be more volatility in developed market currencies versus emerging market? I think when you talk about emerging markets on the FX side, on the equity side, you're dealing with a whole bunch of very diverse countries. Some are historically very low volatility currencies and assets, and some like the Turkish lira, the Brazilian Rial, almost always are going to have higher volatility. They're also much smaller, so they're more easily affected by trade volumes. Is that what you're suggesting? It's not just about size. It's also just about... Some investors are much more tolerant of those swings (23/45)
because they're getting paid sizable interest payments. But, yes, the turnover in these markets is smaller than, for example, even smaller J-10 markets like the Canadian dollar or Australian dollar. So, that will have an effect. All right. So, before we get to the next thing, which I'm really excited to talk about, which is Saudi Arabian oil, I want to just maybe close it out here with the dollar. We'll get back to it, I'm sure, because the dollar is everything, is dollars half of so many of trades. But what is your outlook for the dollar? Do you have an outlook, a stated outlook, for the rest of this year? And what sort of the drivers are and what the risks are up or down? Sure. So, when we're looking at the dollar, we tend to look at both individual crosses, so individual trades, but also the dollar index, right? The trade-weighted dollar and a number of Asian currencies, the Canadian dollar, the euro, or major drivers of that. So, in this context, we would expect to see a little bit (24/45)
further weakness, but we think it's probably gone a bit too far. I think the key dynamics... Difficult to make projections. Difficult to make projections. Well, it's difficult to make projections. I think in this context, we would expect to see, if anything, what's going on in Europe. We'll expect to see a bit more euro strengthening. Sterling is a bit of a wild card there. The Chinese are back to their approach, which is trying to have two-way movement. When the currency in China starts to get too strong, they start to encourage a little bit of depreciation and vice versa. We mentioned, before we get to oil, I mentioned volatility in the context of currencies, but, of course, volatility, at least as measured by the forward volatility, at least as measured by the VIX, is still at all-time lows. What do you think of that in general? I don't want to use a word that's overused, but the general complacency, the complacency in the market that it remains such. I mean, that's something that (25/45)
continues to make traders uncomfortable. That's not something that people are comfortable with, because there's a recognition that eventually the volatility will return. Is that something that you think about at all? Do you have any thoughts on that? I think one of the biggest things that worries traders, particularly focused on U.S. markets, is the combination of low volatility, or historically low volatility, and expensive valuations. There's some similar drivers of that. One of the explanations of the valuation story, and I'm thinking about pretty expensive price earning ratios and the like, has been that interest rates are so low that central banks, especially now the Europeans, the Japanese have been in the market buying up government bonds, which has pushed people out to higher yielding assets. But despite that rational explanation, it still makes people worried, in part, because we're getting close to that time when the central banks start to taper their balance sheets and start (26/45)
to allow things to roll off. The like, on the VIX side, one of the challenges, it's a metric that's used by a lot of people to measure different things. The other challenge that's been present in the U.S. market has been the fact that net issuance is actually negative, because there's more buybacks than there is issuance. That's another thing that's playing with both volatility, but also impacting valuations. All of that, people are worried, but they've struggled with this question mark of, what else do I buy? Yeah, no. It's something that I continue to watch, and it's something that is fascinating and interesting. No one has the exact answer to it. There are a lot of other things I do want to get into, but in the interest of time, I do want to touch on or get into deeply with the oil market, and the place of Saudi Arabia and that. First of all, could you tell me a little bit about what the dynamics are in the energy industry? Because we've seen, it really wasn't, I think, 2014, the (27/45)
middle of 2014, about there that we began to see a major decline in the price of oil. And we're now down at levels that we haven't seen since the financial crisis. In fact, I think oil dropped to below the prices it hit in 2009. Maybe I'm incorrect on that. I think we went right slightly below it. This has been obviously a very difficult time for countries like Russia and Saudi Arabia. Talk to me a little bit about that. What are the forces driving this decline? Sure. Two factors really drove the structural decline all the way down to the third, sort of almost below $40 a barrel. Now we're sitting at Brent prices around $50. The biggest, the two structural changes in my mind were the fact that not enough people were paying attention to US production growth, particularly in shale, but the US was shifting from being a net energy importer to being a net energy exporter. That's a remarkable story, by the way. I mean, the reason I also bring it up, and I should have just said it, is (28/45)
whatever happened in peak oil, that was the story. I mean, we were never expecting to see ever, there were people that said, you'll never see below $100 a barrel again. Of course, right? Dow $20,000. But truly, putting aside the dollar figures, I don't think, I think many people didn't expect to go below $50 again. We had been primed for that. We had Harvard's peak. We understood, no one could imagine that the US would be energy independent. And also, not only that, but then I just want to say this as well, and I would love for you to touch on this, is the fact that so many of these companies across the globe are unprofitable at these levels and countries. So I'm curious what you have to say about that and tell me, maybe I'm incorrect on that. No, so I think that structural shift, and we were talking early about volatility in FX markets. One of the things back in 2013, even early 2014, that worried me as someone that watches the oil markets closely is how low the volume and how low the (29/45)
volatility, how tight the trading ban was. And I remember writing pieces, because oil prices went up almost to 115 before they started cratering downwards. And I just said, well, that really doesn't seem justified. Now, I was expecting a correction. Was I expecting it to go to 50 or below? No. What was the peak, 147 in 2008? 147, 148 in 2008. And then it got up to a little Brent crude. And at that point, before this structural change, at that point WTI had periods where it was actually more pricey than Brent. So I said earlier, the US production story was an important one. The other side is, of course, the demand was growing more slowly. And part of that was US consumers weren't driving as much. They weren't buying as much gasoline. But also Chinese consumers, Indian consumers, stopped growing as much. And we saw this first in other commodities, metals. Chinese growth was less energy intensive and their demand for copper started to slow. But people weren't really ready for it, and (30/45)
where oil was concerned. Does it also take into account alternative energy sources as filling that demand? So overall, I would say demand growth for energy within China has slowed. But you're right, alternative energy and fuel efficiency has been a part of that story. And so I think in both of those key structural changes I've just mentioned remind us that price matters. So you said, peak oil and the like, when prices are $100 a barrel or more, not everywhere in the world, but many places, people, there are projects that become profitable, people test out innovations, you try alternatives. And what I think was surprising to many, including the Saudis and the Russians, was that the innovations that made sense at a high oil price, the producers in the shale patch managed to squeeze their costs really dramatically. Now partly it's because they told the oil services companies, you want to have a contract, well, give us a deal that's 40% less than you have a deal. So but looking ahead, some (31/45)
of these structural changes are with us for some time. And that means how much companies and countries adjust is really going to drive their relative performance. Now some countries like Russia, for example, Nigeria finally, though a number of others, the way they coped was they cut spending, government spending, but they also said, you know what, we're not going to waste our money keeping an exchange rate that's too expensive. The Saudis did not take that option. But it did help them avoid fiscal austerity that was even greater. Before we get into Saudi Arabia and sort of the national account, what has been the effect of this price on American companies, let's say shale companies, and how does that relate to their financing in the context of a rising interest rate environment potentially or supposedly or theoretically? How does that all play together? Yeah, your right to focus on financing because the fact that there was so much cheap financing was a major lifeline to many's (32/45)
producers. And some of that was from the banks and the refinancing. Some of it was from, you know, the oil patch became an attractive place for private equity firms to come into. And some of them have bought up a lot of assets. So cheap financing and some of it is around competition was a major part of that. So going forward and baked into our assumptions is moderate increases in interest rates over the coming years. We don't think interest rates are going back up to where they were. So you don't think interest rate, rising interest rates are going to put any kind of major cramp on this market? I think they have put a dampening effect on. They have also distinguished from the companies and the areas where people have been able to lower their, become more competitive. So when I look, one of the data points I look at, energy experts look at are rate counts, right? They come out once a week, you know, and when you unpack them, you see that it's mostly been in a couple of areas within the (33/45)
U.S. where people have been still deploying rates. And they're more efficient about the use of them. There are other areas where there is much less activity. And even this year, even in the last couple months, when oil prices softened a little bit after, you know, sort of in the spring, you saw the less cost effective areas, activities started to slow down. So even sometimes a $5, $10 kind of price point could make a difference on activity. You're looking at it more from the standpoint of the current price of oil. First of all, do you foresee this price staking for the next few years? And I guess my point is, if we're in this new normal for energy prices for oil, how does that affect, if you're saying there, you can have clear effects on slowing down growth in the industry? But what I'm sort of trying to ask you here is, is this a situation where you could create a, you know, I'm not trying to say some large credit crisis, but can they create a crisis of credit within the market, given (34/45)
the fact that so much of this is financed through credit? So I think it can. I think that then the question becomes, what's the trigger point of that, you know, sort of that debt coming back to roost. I think what the key trigger point on that would either be a very sizable increase in interest rates, that's probably unlikely across the economy as a whole, which then means it would be industry specific. And that's where I would say the trigger would need to be a meaningful drop in the price, in the price of oil. And in this way, the sort of some of the private companies that we've been talking about have a partial common interest with some of the countries that really are looking for stable oil prices or like, I mean, all companies would tell you, they get a lot of you say they'd rather have a high price for what they produce, but they really prefer stability rather than volatility. Which brings us to Saudi Arabia, right? Because this, I think, is a fascinating story. I think the (35/45)
country of Saudi Arabia is a fascinating story in the context of oil, in the context of geopolitics. It used to be a sort of, you could do no wrong. It was like the golden childhood of the United States in many ways, ever since Kissinger and the Nixon administration and Petro dollars or maybe it was under Ford, Nixon or Ford. But shortly after Bretton Woods, where the sort of the oil has basically underpinned the dollar's value. And so much of that is changing rhetoric around Saudi Arabia is changing the deal with Iran, all these things. And Saudi Arabia has been willing to effectively run at a loss on its oil production, from what I understand, or at a small gain. I don't know what the exact numbers are, but they've been willing to maintain this price because this is like a war of attrition in the supply chain. They don't want to lose their distribution, their supply. I mean, I think there's mixed stories. Please clarify. And I think the Saudis started out and they were really trying (36/45)
to defend market share against everything, everything else. And they thought that they could, and that's where we originally in 2014, we had, if anything, the Saudis deciding to almost flood the marina. They thought they could bleed out the shale producers, right? And they were not only trying to put pressure on the shale producers, they were trying to put pressure on Iran. They were trying to put, you know, wasn't a bad thing to put pressure on Iraq. And they were worried that the Russians, the Iranians, others would cheat, right? Because the last thing, if you're Saudi Arabia and you're, you know, facing a sort of challenges on a side, the last thing you want to do is cut production. And then somebody else gets to expand at your expense. So that was, there was a view in place at that point. Then I think they looked around and said there's so much of a surplus out there. We are not going to get this done unless we collectively cut. And they think they realized they did not expect how (37/45)
much shale producers would be able to squeeze their supply chains. They've used up a ton of their foreign exchange reserves in this process, right? They have. So they picked out a little bit over $700 billion and the like. They're now added around $500 billion, still a lot of money. And still, you know, they're still one of the wealthier. Less than half of what they spent. Yeah. Yeah. I mean, it's an important point because the thing is there are, there are realistic limits to how long Saudi Arabia can continue this. Are there geopolitical risks that you're viewing in the Middle East with respect to oil and the sort of the tensions that can result, as a result of this, these commodity producers? And I shall also ask in the context, how has this affected the privatization in Saudi Arabia? Because Saudi Arabia has looked around, they've looked at Qatar, they've looked at Dubai, they've seen some success that other countries have had trying to weed themselves off of oil. They've made the (38/45)
statement that by 2020, they're going to be independent. And from what I understand, the way they looked to achieve that was they were going to sell these assets, these long held state oil assets so that they could effectively raise the capital to invest in other things and diversify. They'd still be able to sell their own oil, but they wouldn't be sort of involved in the production chain. How has that affected everything? Sure. So there's a trade-off here, right? Because the low oil prices were what pushed Saudi Arabia to say, you know what, we want to monetize, we want to monetize this resource, we need to take that money, use it to invest in other things. But when oil prices are low, it's a bad time to sell it. Yeah, it's a bad time to sell it. And at the same time, there are very different views within Saudi Arabia about how much control they really wanted to give up. Foreign investors were salivating Saudi Aramco's on the block, their things to buy. But Aramco is one of the best (39/45)
run, well, companies definitely in Saudi Arabia and the region, a real sort of global powerhouse. A pure manager of Aramco, do you really want to be, do you really want to have a lot of external shareholder intervention? Maybe not. So there are different views there. And there's a question mark of then, if the money was raised, where was it going to go to? So the point is- That's quite a balancing act. I mean, they've been in the oil game forever. That's how they got rich, to switch off into other things, alternative forms of energy. Yeah. And at the same time, they had a real challenge of how were they going to deal with the problem of growing domestic demand for energy? If I look back to 2013, 2014, even 2015, I said earlier, demand grows in the US and China slowed down. Where was it still growing strongly in those years? Actually, Saudi Arabia, the Gulf, energy producing countries, because they subsidized it. Subsidized. That's the thing. So can I ask you something? That's something (40/45)
that I was thinking about when I was looking at this. First of all, I remember Saudi Arabia, last time, I checked, which was a long time ago, Saudi Arabia had the lowest costs for production of oil. How is it that they are not profitable at these levels? So Saudi Arabian oil production is profitable at these levels. The companies aren't profitable. The company is profitable. The country uses that oil revenue to pay for government spending. So that's wrapped into the costs here. When they talk about this, the finances include the subsidies. Yeah. So some of it's around the subsidies. The other term you see out there in the marketplace is one called, there are a whole lot of break events that are thrown out there in the marketplace. What does it cost an oil company to produce the marginal barrel? That's still pretty low in Saudi Arabia. It's somewhere between $10 to $30, $30, depending where they are. They make plenty of money at this price point. The problem is the fiscal break events. (41/45)
What's the value of oil needed to pay for the Saudi government budget? That's only an issue because oil revenues are the main source of funding to the budget. Now, if they had tax revenue, such as we have in the US, if they have a variety of things, they would be less vulnerable to oil price volatility. One of the things they're doing is saying, well, we're going to put in place a value-added tax. They're also trying to do what the Emirates, what Qatar have done. That's the key. That's what they're looking to achieve. And get some investment income so that the return on some of their investments can also help pay for government spending. So what is your outlook there on Saudi Arabia? What are your thoughts on that? Well, I think they're trying to move and divert a really quite a big ship, quite a heavy ship. A very difficult task. I think it's a difficult task. Some of the announcements we've seen in the last couple of days, couple of weeks around maybe scaling back the national (42/45)
transformation plan, I think are a recognition that they need to be a little more realistic. It remains to be seen how that plan will be scaled back, what new targets will be introduced, but the combination of challenges in the region, but especially the fact that under lower oil prices and slowly rising interest rates, this is a more difficult thing to do. And at the same time, they have managed themselves entangled in this regional, in this standoff with Qatar. They've got a lot of issues there. And with Al Jazeera as well, there's like a lot of bitterness between those two countries. Yeah, a lot of bitterness. And I think it's ended up, I think the Saudis went into it expecting the Qataris to yield very quickly. And the Qataris have a lot of money to wait them out. And I think the Saudis misjudged. And so that's, it's not to say that that's the reason they're changing, instead of changing their tune. But the Saudis are spending a lot of money every month, waging the conflict in (43/45)
Yemen. They're supporting different actors in Syria. There's also a lot of domestic spending needs. And so it's hard to find things to trim. And at the same token, there's a lot of competition for new capital and for new investments and the like. So I think we will see privatizations. Will they get the valuations that they were touting? I'm skeptical. Will they manage to meet all the planned 2030 targets? I'm a bit skeptical. Will they get partway there? Yes, probably. But this is going to be a challenging period of time. Rachel, we're going to have to wrap it up. But I want to let my audience know the reason that we covered, we usually cover these sort of macro topics. We got a little into the weeds here on a lot of stuff that I normally don't get into with our audience. But I think it's also important for people to recognize, we don't have to give out any kind of specific projections. If, you know, these are very difficult markets to predict. I think what's important and the reason I (44/45)
want it to have you on is because I want to talk about some of these big trends, some of these big things that are happening, whether we're talking about oil, whether we're talking specifically Saudi Arabia within the context of the geopolitics, North Korea, the dollar and the carry trade. I think it's important for people to become familiar with those terms and these trends as they occur because it'll give you more context if and when a change erupts and you'll understand sort of what was going on before that change erupted and how it relates. Rachel, I really appreciate you coming on the program. My pleasure. Thanks for having me. (45/45)
This is the full transcription of podcast 'Hidden Forces'.
The Age of A.I. and Our Human Future Eric Schmidt & Dan Huttenlocher #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guests in this week's episode are Eric Schmidt and Daniel Huttenlocker. Daniel is the inaugural dean of the MIT Schwarzman College of Computing, and Eric is co-founder of Schmidt Futures and of course the former CEO and chairman of Google, one of the most innovative and consequential technology companies in the world. The only person missing from this powerhouse panel is their co-author Henry Kissinger, with whom they have written a phenomenal book titled The Age of AI and Our Human Future, which as the title suggests explores how artificial intelligence is transforming human society and what it means for all of us. This is a very good book, and my goal in today's conversation was simply to try and delve into (1/45)
as much of it as possible. We spend the first hour of our conversation discussing the technical dimensions of artificial intelligence, what it is and how it works, as well as how it will continue to shape and transform our social and physical realities. The second half of our conversation focuses on the national security dimensions of this technology, as well as the profound philosophical challenges that it poses for humanity and our need to find meaning in a world where machines will provide answers to more and more questions that humans have struggled with, in some cases since time immemorial, but without the ability in many cases to provide us with a reason or a methodology by which they arrived at those answers. For those of you who work in or are interested in blockchain enabled applications and smart contracts, I also had a chance to ask Eric about where he thinks these technologies fit in an AI future, what the main hurdle is going to be, and what are some of the interesting (2/45)
projects in the space. If you enjoy the free content that we produce every week, I encourage you to take the leap and become a premium subscriber if you haven't already. There's no commitment you can cancel at any time, and the entire library of subscriber content going all the way back to episode one becomes instantly available to you, including the over times, afterthoughts, transcripts, and rundowns, depending on your tier. So without any further ado, please enjoy this week's episode with my guests, Eric Schmidt and Daniel Hutton-Lacher. Doctors Eric Schmidt and Daniel Hutton-Lacher, welcome to Enforces. Thank you. This is Eric. Great to be here. Great. I think probably a lot of people recognize Eric's voice, so if they don't know Daniel, they'll be able to sort it out. Before we start, guys, how did this book come about? How did you decide your collaboration partners? Of course, one of your other co-authors is Henry Kissinger, who provides so much in the course of the book. You can (3/45)
tell some of the things, even if you don't know much about Henry Kissinger, you can intuit what he provided. And then other areas, some of the philosophical stuff I know, he was instrumental. So how did the collaboration come about? Well, Dr. Kissinger and I met about 12 or 13 years ago, and he came to Google. And when he showed up at Google, he said rather entertainingly to the Google audience, I believe that Google is a threat to global civilization, which of course the Googlers loved because they loved the attention from Dr. Kissinger. So that spawned a friendship. Dan and I had worked together for many years. He worked for a while, even at Google, as well as being a professor at Cornell. He was the first founding dean of Cornell Tech, more recently the founding dean of MIT's Computer Science Program. So we were a natural allies. And we started talking about these questions because Dr. Kissinger had been, when he did his undergraduate thesis before we were all born, he was very (4/45)
interested in the structure of reality, the history of the world, and Kant. And when he met with Demis Hassibus, who was the founder of DeepMind, he realized that there was a potential for a sort of a life-altering phenomena in AI. As he understood AI, remember he's in his mid-90s by this point. It's a really remarkable story. Yeah, that is amazing that your co-author wrote his PhD thesis before you were born. It tells you a lot. He's an undergraduate, his bachelor's thesis. Yeah, his bachelor's thesis is very interesting. His bachelor's thesis hit the set the limit of length for undergraduate theses in America at 351 pages. And there's now a rule that undergraduates cannot produce theses that long. Right, that's right. I think his PhD thesis was actually on limited nuclear war, right? So I probably had it backwards. Okay, so let's start with the very basic question. What is AI? So this is a question that will get different answers from different people, which is part of the challenge (5/45)
that we all face. The view that I have and that we take in the book is that actually the early definitions of artificial intelligence going back to Turing and his imitation game or what's known as the Turing test are actually the best way to think about AI, which is to think about AI in terms of its performance, what it does, rather than in terms of how it does it. So very much like we can't get inside each other's heads. I don't really know what goes on in Eric's head. I don't know what goes on in your head. We can't speak get inside an AI's head. All we can do is judge one another and the intelligence of our human behavior in the same way that we can judge the intelligence of machine behavior, which is by what it does. And I think that some people viewed that as a little bit of almost sort of a cop out by Turing because he sidestepped a lot of questions about what it meant to define intelligence. But in fact, I think when we look at how we look at human intelligence, it's really the (6/45)
right way to look at things. Well, what is the difference between, one, I should also say maybe another question is how does the sort of public's conception of what AI is compared with what people in the field think it is? And that might also be another way of asking what is the difference between AGI and narrow AI? Because I think oftentimes people conflate or sort of put everything in the same AGI bucket. So every single person I've talked to when I say I'm writing a book with Dr. Kissinger and Dan on AI thinks killer robots. That makes sense though. And the one thing we don't talk about in our book is killer robots. Because of the many things to worry about, killer robots are not on any of our list. That's the sort of big surprise about this. And you mentioned in your question, AGI stands for artificial general intelligence. And it's a theory, it's a guess of what's going to happen in the next, well, Dan would say maybe never and I would say maybe 15 to 20 years, because we disagree (7/45)
on the timing. So what we would summarize is that if you take Dan's definition of AI, which I'll summarize as computers that do things that are human like, and you extrapolate the modest things they can do today, like manage suggestions, help you with your research, help translate things and so forth, the collective industry believes that we will end up with human like intelligence, which is not the same thing as human intelligence in computers in a reasonably short period of time. That has enormous implications. If it's achieved, this idea was popularized maybe 10 years ago is that the term the singularity, the idea being that at some point in our future, hopefully when we're all still here, that AI will be able to accelerate itself. And so we speculate of what happens when you have AGI and I'll give you the punchline, which is that when you think about these systems that are AGI powerful, but remember they think deeply and they see everything more than a human brain can see, you can (8/45)
imagine that they'll be incredibly dangerous and that you'll in fact have a non-plural refraction problem. And in the book, we talk about proliferation, obviously Dr. Kissinger was one of the prime architects of why we're still alive today, in terms of mutual assured destruction and so forth and so on. And what will happen in AGI, there'll be a relatively small number of these systems because they're very expensive, I mean like immensely expensive and they'll be guarded. And in particular, you're not going to want some terrible terrorists to say to the system, tell me how I can kill a million people who are not my race. So we are playing with technologies which eventually will have the level of impact and concern that nuclear weapons did 70 years ago. So maybe I'll jump in for a sec, I totally agree with Eric and I might broaden it a little bit more beyond not just killer robots aren't on the list, but so much of the everyday understanding of AI comes from science fiction. And what (9/45)
makes a great science fiction story is some protagonist that has human like characteristics beyond maybe exhibiting human like intelligence, it has motivation, it has a deeper understanding of things. And those are all not characteristics of any AI that we know how to produce and may not ever be a characteristics of AI that we know how to produce. So this notion from science fiction that the AI gets its own intent, it goes after people, it decides to you know eliminate somebody, etc. Makes for wonderful stories in fiction. But in fact, the reality of AI is that the objectives of it, or what we often call the objective function, what AI is set out to learn and optimize and to do is very much set by humans. And so if AI has really got some evil intent, that evil intent was put there by people. So that actually raises a question that I had intended to ask later and maybe I'll hold it, but I'll hint at it, which is the challenge of not just setting the right objective function, but (10/45)
actually intending, communicating, instantiating into logic what you had intended through your mind and through language. And that is a philosophical challenge. It's something that Wittgenstein grappled with, something that we talked about in our episode on philosophical mathematics and whose work you mentioned in your book. And like I said, we'll get to that. Before we do though, Eric, you mentioned nuclear weapons. And I wonder, is there a similar type of breakthrough in AI like the splitting of the atom in nuclear technology that made it all possible? And that has in the case of AI facilitated the advancements that we've seen and feels like machine vision or strategic thinking? Well, breakthrough that made everything we see around us and why my industry has gone completely gaga over AI was done maybe 10 years ago in what is called deep learning, where there are a series of layers of neural networks, which recognize components of things and they layer on top of each other. Many (11/45)
people think that's sufficient. Then there were a series of breakthroughs, something called reinforcement learning, of which DeepMind is one of the most successful. We use an example in the book around playing Go and the Game of Chess, which are using reinforcement learning. There, what happens is the computer uses a clever algorithm to look at an infinite number of future choices and figures out which one is the best. My own opinion is that there will be another breakthrough or two before we get to AGI. And I think Dan agrees on that. And the problem is that you probably can get to fantastic pattern matching, fantastic text generation, fantastic human-like insights in text and so forth. But as Dan likes to say, it's all about the objective function at the moment. And how would you do an objective function which consists of go think about interesting things and tell me what you want to think about, which is what you can do with a human. We're probably a breakthrough or through a way (12/45)
from that. The reason I think that there will be such a breakthrough is that there's so much investment now in this area. China is now investing equal or more than the United States. China is now building, producing more PhDs than we are. China is now investing in such a way that its top rated papers are equal to ours. They've caught up. There's essentially a race in technology among the major tech countries to do this. And so something really interesting is going to happen. And we'll see. Now, will a breakthrough be like the Sputnik moment, which is really your question? I don't think we know. I have previously said as part, I was the chairman of a commission called the AI Commission for the Congress, that when we went to China to play Go and beat the top Go champion in the world in China, that was their Sputnik moment. But I don't know that we've had one yet. We've not galvanized our country around this, but it will happen. How do you see this technology meaningfully changing our (13/45)
world and what it means to be a human being, the human experience over the next 10 years? What are some of the areas where it's going to be most disruptive? So I would put healthcare at the top of the list. It's an area where it matters a lot to all of us. And where costs are spiraling out of control, et cetera. And I think that we're already seeing a number of interesting examples, one of which we talk about in the book, which is the use of AI to accelerate drug discovery. The current drug discovery process has a lot of almost trial and error aspects to it. And the use of machine learning enables a much, much more efficient exploration of the space of possible compounds. The example that we talk about is antibiotics. This is really a global crisis that bacteria are rapidly evolving to become resistant to existing known antibiotics. We literally could be back in a pre-antibiotic world without developing significantly new antibiotics. And the challenge for human beings in developing new (14/45)
antibiotics is it's easier to discover new antibiotics that have similar chemical structures and means of action to the ones that we already know. But those are also the ones that bacteria know, because they're similar to the ones that are out there. And so what you really want to do in principle in discovering antibiotics is to find compounds that are quite different from existing compounds. But that's also a place that's very hard for human beings to explore. And what this work on Hallison, a new compound that was discovered at MIT with AI, has demonstrated is the ability of a solution that involves both deep expertise. So this is not just machine learning experts, it's some of the best synthetic biology people in the world as well, but involves deep human expertise, but also AI to identify potential new compounds that are very far away, very different from the existing compounds that we have. And it's this ability to expand the nature of how it is that we discover things. It's not (15/45)
just something that's fast, or used to computers being bigger and faster and enabling us to do things more rapidly. This is fundamentally changing the nature of drug discovery, enabling us to explore things that we've been unable to explore thus far. And that's because of these pattern matching abilities of AI that really go beyond and outside human abilities to pattern match. One of the ways we refer to that in the book is AI really seems to have the capabilities now, at least in some settings, to perceive the world differently than human beings perceive it. And whether that is limits of our ability to perceive a world that's out there for us to perceive, or whether it's actually perceiving some other world than the world we're living in, getting into interesting philosophical questions is still open. But at a minimum, it's revealing things that humans would not be discovering on their own. And I think in drug discovery, in medical diagnosis, there's been big progress on early (16/45)
detection of breast cancer, very similar kind of uses of AI, that's going to change our lives in ways that are just indisputably positive. And Dan, of course, you're such an optimist. So you asked over the next decade, I think that the thing that will drive people insane is that the concept of misinformation and true information is going to get really murky. And the combination of what are called GAMs and other technologies that are broadly distributed and open source will mean that anyone can build a video that's fake. And we know from lots of science that videos, even if you're told they're fake, affect human behavior. So now you take the way that social media technologies work, where they are optimized around engagement, because they want to maximize revenue, that all of a sudden you've got an arms dealer, if you will, of misinformation, and you have lots of misinformation being generated, sometimes evil, sometimes innocuous, sometimes just for fun. So collectively, at the same (17/45)
time, we're all going to live healthier, we're also going to be a lot more unhappy, because we will not have the tent poles, if you will, of stability in our society and our belief systems will be challenged by this new technology, by what humans do with it. So, Eric, I know that you are good friends with Bill Joy, co-founder of Sun Microsystems. He wrote an article, I think it was in 2000 or 1999 for Wired Magazine, that I had read that made a really big impression on me, as it did on many other people. And it was called, Why the Future Doesn't Need Us. And he pulled a lot from Ted Kaczynski's, the so-called Unabombers Manifesto, Industrial Society and its Future. And he basically presented a binary human future, one in which we either live in a dystopian future, where society is controlled by machines, or one in which the machines are controlled by humans, but where the humans can be either malevolent or benevolent. Given all the progress that we made over the last 20-something (18/45)
years, and given some of the dangerous things around misinformation that you talk about now, how prescient was that thesis, and how useful is that for thinking about where we find ourselves and where we're going today? Well, you know, it's interesting you bring it up, because that paper was so far-reaching that most people didn't understand it. And indeed, I wrote and published a rebuttal to my best friend's paper, which said that it was too negative. The Future Does Not Need Us by Bill Joy in roughly April 2000. So 20 years ago, what he said was that the underlying distributed nature of the tools, in his case he was speaking mostly about biology, would allow the evil in us to allow us to destroy ourselves. And that's the right point. So let me update his thesis, which he did so well, and say, on the one hand, the team at MIT built this Hallison drug, which will save, I mean, think about the benefit of a broad-scale antibiotic that we do not have a resistance to, in terms of millions (19/45)
and millions of lives saved every year globally. It's an extraordinary achievement. Now imagine a database of that information being either made available or leaked, which will allow a million evil people to begin to build drugs that hurt people even worse than Hallison saves it. Right? That's the utopian-dystopian view. Now, I think a historian, Dr. Kissinger, would say that both of these trends have been true in human society for a thousand years. Go back to conflict and the horrific, destructive conflict of human against human. We are our own worst enemies. And over that time, we developed laws of war, for example. So the notion of war being limited to combatants and not focused on non-combatants. So the military proponents of AI point out that the majority of the deaths in conflict today occur from target misidentification. In other words, they hit the wrong group. And that there's a lot of people who believe, including me, that AI will be used to make the weapons more targeted and (20/45)
therefore more lethal, but less collateral damage. I would argue that's a good thing. We can debate that. But the point is that our society has limits that are agreed upon. We don't allow slavery. We don't allow child prostitution. All sorts of very reasonable things, which were part of our past. So will we, let me ask the question in Bill Joyce's terms, will we have to go through a horrific disaster before we agree to limitations on the use of AI of the worst kind? In other words, my best example is launch on warning where the AI system thinks that there's an attack going on and it launches. Even though it's wrong and there isn't an actual attack for whatever reason, this is the Dr. Strange Love scenario, I would really prefer that we start and we recommend in the book, start the negotiations now among the countries to limit the worst aspects of these tools. And if we don't limit them, they will be used. So I think I'm still at a rebuttal of Bill Joyce's thesis. Eric may have moved (21/45)
on. It won't be the first time I'm behind Eric. But I think that this sort of utopian, dystopian dichotomy is something that we often use as sort of a framing to fall back on when there are new technological advances that we don't understand very well and don't understand the impact of very well. And luckily, the real world has historically generally been in between those extremes. There have been some dystopian moments in world history. I'm not suggesting that it's all rosy, although Eric's right, I tend to be an optimist. There are definitely bad periods. But the utopian ones, I think, have not been achieved, frankly. And so I just think that this dichotomy is a longstanding over simplification with new technologies we don't understand. And part of it is that technologies generally act as some kind of an amplifier. So when we developed automation, factory automation, and so forth back, an industrial revolution was an amplifier of human physical labor. The thing about AI that I think (22/45)
is particularly interesting and challenging is it's an amplifier of human thought, of human communication, of human expression. We haven't had amplifiers of those kinds of things before. And the philosophical issues, the issues in this utopian dystopian dichotomy space that get raised by something that actually is an amplifier of human thought and creativity is something that we really need to get a handle on. And that's what the book is about. But I do remain optimistic about the positive outcomes and our ability to, if we pay the right attention to it, ameliorate negative outcomes. And that's part of the reason for writing the book is that we focus on that. So this is a case once again, where Dan is an optimist and I am not. Just Dan, so you hear the argument. Everyone's being driven crazy by all these social media amplifications that you so correctly labeled as what AI does. How do you propose to regulate that? How do you propose to stop that? How do you propose to prevent us from (23/45)
driving ourselves crazy? We're 10% into the power of this technology in terms of amplification and the terms that you described. It's going to get worse, guys. Well, I think Eric Schmidt has a really good idea about how to make this better. Well, I want to explore solutions as well. There's interesting, I have to partition my brain while I'm talking to both of you because you both brought up two separate things that could take us to two parallel meaningful conversations. Dan, you mentioned amplification, I think, or maybe I should ask, is the distinction really not that AI does or doesn't amplify, but it's simply a matter of scale. How much and how quickly does it amplify our worst and best intentions perhaps? And we are an illogical, aggressive species and that feeds directly into conversations about goal optimization and objective functions. But also to something that Eric said, and maybe we can start with that, I can't remember what it was that he said that I didn't think of this, (24/45)
but in Bill Joy's paper he also talks about, in Kaczynski's paper, they both talk about how we will become so dependent on machines that at some point, I, it was when Eric was talking about how it might take a catastrophic event to lead us to really rein in these machines. But what Joy talks about is that we would get to a point where shutting the machines down would be tantamount to suicide. And while it may not be tantamount to suicide right now, certainly the military, for example, engages in war games where they consider the possibility that they might have to go fully analog because they're operating in an environment where their systems are compromised, are we at a place today where we are so dependent on these machines that we really don't have the luxury to simply turn them off? And does that speak to this sort of singularity, to this idea that we are quickly being sucked into this future, and it simply further puts the punctuation on why we need to get a grip on the (25/45)
implications sooner than later? Well, this is of course why we wrote the book in the first place. And I don't know that the addiction that we have to the internet necessarily is followed by the singularity. You could imagine a scenario where the technology gets better, but it hits some limit, and we're still totally addicted. But even if you make the assumption that AGI never happens, which is not my view, we will end up in a situation where the decisions in conflict will occur, will need to be made faster than human time. The computers are not precise enough to be completely reliable in such a situation that will be driven crazy by all sorts of ways in which people are trying to misinform us about information. And we will be completely reliant on the system. I used to say 10 years ago, if you don't like the internet, turn it off, perfectly reasonable position for an adult, you can't do that anymore. That's not a reasonable plan. So it's the old thing of in a war, the first thing that (26/45)
This is the full transcription of podcast 'Hidden Forces'.
A History of Venture Capital & How to Make the Future Sebastian Mallaby #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? My name is Dimitri Gafinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Sebastian Malaby. Long-time listeners will remember Sebastian. He was one of our very first guests. He came on the show back in the early summer of 2017 to talk about his last book, which was a phenomenal biography of the former Federal Reserve Chairman, Alan Greenspan. And he's back on the podcast today to talk about his most recently published book on the history of venture capital. And man, did he crush it. It's an incredible history of a relatively misunderstood industry. And this was an incredibly enlightening conversation to have, not only because it gave me a much deeper appreciation for the evolution of venture capital, but also because it highlighted for me what makes (1/45)
venture capital so different from other forms of investing. My objective in bringing you this conversation today is to provide you with a framework for thinking about how to invest in businesses, initiatives, and projects, which not only lack cash flows, but whose values are often fundamentally intangible, difficult to measure, and often impossible to quantify. As more and more of our economic life happens in the digital realm, the ability to assess value and invest accordingly will become an increasingly invaluable skill set for investors. In part two of our conversation, which is available to premium subscribers only, Sebastian and I delve into the geopolitics of venture capital. As many of you will know, I've done several episodes on this subject, most notably with former staff director of the Senate Armed Services Committee, Chris Brose. But today's conversation focuses less on specific technologies and more on the general state of play in the industry and how national governments (2/45)
can support their domestic defense sectors without creating the mal-incentives that we often associate with nine-figure fighter jets and $400 hammers. We also discuss Web 3 in the context of initial coin offerings and how these types of crowd-sourced investments have transformed the early-stage landscape and brought public capital into areas of the market that would never have been able to source it only 10 years ago. Whether or not this is a good thing overall and what it means for innovation in the ecosystem for decentralized software is something else we discuss. Lastly, I had a chance to ask Sebastian about the uniquely challenging situation in which the Fed currently finds itself. And what he thinks is most important to focus on when trying to project the likely path for interest rates, economic growth, and asset prices. As always, those subscribed to our Super Nerd tier will also have access to the transcript to this episode as well as the Intelligence Report, which is the cliff (3/45)
notes to the Hidden Forces podcast formatted for easy reading of episode highlights with answers to key questions, quotes from reference material, and links to all relevant information. Books, articles, etc. used by me to prepare for this conversation. And with all of that out of the way, please enjoy this wide-ranging and deeply enlightening conversation with my guest, Sebastian Malaby. Sebastian Malaby, welcome to Hidden Forces. Yeah, great to be with you. It's great having you back on the podcast, Sebastian. So you have written five books. Two of the previous books were more biographical, whereas this book, along with More Money Than God, focuses more on the specific industry that they cover. That one having been the hedge fund industry, this one being the venture capital industry. What inspired you to write a book about the venture industry and how did you sort of bob and weave your way from hedge funds to central banking and policy to now the vanguard of risk and innovation? Well, (4/45)
I guess my previous three books before this one, The Parallel, were different slices of financial history going from around 1960 to the present day. So hedge funds, More Money Than God, a history of public investing and sort of the efficient market hypothesis and the gaps in it. Then a book about central banking in the form of a biography of Alan Greenspan, obviously his career spanned from the 60s to the financial crash. And then just before that, there was also a book about development economics told through the story of the World Bank. And I wanted to do another financial history that would be kind of in my sweet spot. And as I looked around, it seemed like the most exciting frontier was technology investing, partly because there's an intellectual mystery at the heart of it. And I do even allocate capital when you don't have any financial quantitative metrics around what you're buying. So the basics that you would learn in business school of discounting the cash flow, the future (5/45)
cash flow on an asset, don't apply when you're investing in a startup with no earnings. So there's a sort of, all investment is about the future and uncertainty and making tricky bets on an uncertain future. But this technology startup stuff is really the distillation of that. It's like the extreme of that. And then the other thing is that venture capital in terms of creating companies that change how we live is obviously super important. You know, relatively small amount of capital goes into venture capital funds, but the consequences of what comes out in terms of companies like Apple or Google or Facebook is just enormous. So you were kind of drawn to write about this because it was directly relevant to your life understanding how these technologies got funded that have impacted how we live. And also it sounds like you were interested in understanding how do you go about investing in something where you don't really have quantitative metrics for understanding it. But it's still, it's (6/45)
one of the fewer areas today where you have to rely on the types of intuitions and gut feelings and also I guess inefficient analysis that used to be more normal. Right. That's well said. It's something which artificial intelligence is unlikely to disrupt. So what were the big questions that you started off wanting to answer? Like were there certain things that you wanted to uncover, prove or disprove when you began this, your research on this story? Yeah, right at the beginning, I almost didn't write the book because it seemed as though you could explain the entirety of venture capital based on a theory of luck, luck plus path dependency. What I mean is that if you look at a venture capital portfolio, you know, there are 10 bets maybe and probably eight or seven went to zero. You know, the company failed, the startup failed. And then there are one or two that do great. And that has a slightly less Vegas feeling to it. And then when you put on top of that, the fact that once you do (7/45)
well in venture capital, the best entrepreneurs will come to you and you'll get better deal flow. And you'll probably be able to pay a bit less to get into that deal because your reputation is going to be helpful to the startup. And then you can sell it for more when you raise the next round because other investors are keen to follow your investment if you are a prestigious VC partnership. So all of these things together means that once you, you know, you could be lucky at the start and then path dependency could just keep you going and keep you in the top tier. And unless I could think of a good reason why that wasn't true, there didn't seem much point in writing a book about the skill in venture capital or trying to find it. If there wasn't any. But then as I asked more questions and got a bit closer to the subject, I began to understand that there was skill. And that was one of the sort of surprises that then hooked me on the subject. Yeah. Another question I have related to that (8/45)
is, okay, if we assume that it's not all luck and there is some amount of skill, how much of that skill is identifying winners and how much of that skill is actually everything you do to compliment those quote, winners after you've picked them, ways in which you can add value to the venture. How do you think about that? And how does that break down the valley? Because one of the things that you did in the book, which I love is you describe the historical evolution of the industry and how it went from being much more hands on in the earlier days to later going through a period like we've been through recently where the view was kind of just give the founders what they need. And you also have angel capital, which is less hands on by nature. So how do you think about that dichotomy? Well venture capitalists of the sort of traditional series A sort who take a company after the angel has done a first investment and then really get it to the point where it's got its first customers, the (9/45)
product is fitting the market. They are very hands on. And I think that's super important for the development and success of startups. And part of being hands on is hiring the first five engineers or the first five marketing people alongside the CEO. Obviously, it's not the VC is doing it by themselves, but they are actively interviewing people and sourcing people from their network. And I think that's really important to company building. It's not clear that that's really though what differentiates one venture capitalist from another because I think they all do this. Some will do it a bit better than others. But I think if you try to explain the big difference in returns, that's probably more in like the deal sourcing. Did you back the team that turned out to have the product that just took off? And so, you know, when you look at the really successful companies, whether it's Facebook or Google or some others like Stripe, probably the founders were just super competent, super driven, (10/45)
and they had an idea for the business, which was really going to fit the market. And the VCs helped in the margin, but they didn't explain what they did after the deal is not the main explanatory factor. So I think probably deal selection is more important than deal custodianship. That's interesting. So that actually raises a couple of questions. First of all, it brings us back to the original observation, which is this is an area where in investing where there still is a lot of qualitative analysis. But within that qualitative analysis, you as an outsider came in trying to identify some type of formula for success. What were you able to derive from your experience and from all the interviews you did? I mean, were there certain types of things that time and again proved to be correlated with success in early stage investing? Yes. So right at the beginning, there were a few mental models that had to be adopted. You know, one was this power law idea, which is that it's OK if eight out of (11/45)
10 bets fail because venture capital is a game about backing investments in the tail, the ones that are exceptional. And so it's all about getting those exceptional companies that break out. And to get an exceptional company, you do have to take risk and bet slightly sort of you bet on contrarian crazy ideas slightly. So some of those crazy ideas will turn out to be just plain crazy, not crazy brilliant. So I think the first thing is to accept that, to understand that risk management and venture capital is about embracing more risk. To be willing to lean into risk. Yes, exactly. And that was something which was talked about by the first West Coast venture capitalist, Arthur Rock. He didn't call it the power law. That was a term that came up much later with Peter Thiel. But he expressed the concept and he was talking about the same thing. So that's the first thing. Second thing is you've got to be willing to use only equity. In the early days, some people use debt, which is ridiculous (12/45)
for a growth startup because a growth startup needs to take in capital to grow. It doesn't want to pay back debt service payments. Or if you were a fair child, you had the option to buy the entire company. Right. That was also a bad opening structure. So there were some of these basic things. Another one is stage by stage financing that you give risky startup a bit of money to try to take away the worst risks. And then only if it succeeds, do you give it a bit more money to tackle the next risks. And that way, if it fails, it'll probably fail cheaply, which is a good risk mitigation strategy. So these are the original kind of building blocks. And then I think when you look today at what differentiates the really good venture partnerships, I would say a few things. One is you have to be deliberate and strategic about how you nurture your network so that good entrepreneurs will pop up on your radar really early on. So an example of this is that Sequoia Capital, probably the top venture (13/45)
just ended a job interview via Zoom. I will be editing videos remotely for a client and also help his sales force. There will be a lot of fresh money coming for $LEO soon. Can't wait to get started. The upside potential is super high as they pay extra for each successful pitch I make. I can make upt to 1k in € with one sale. The downside, there are not soooo many potential customers but enough to make me a decent living for the coming years.
Keep grinding brother!
Hmm. Still there are many potential buyer of $LEO.
That's a good one. Every extra cent counts.
All the best.
!BBH
This is such a great news. Congratulations to you 🎉
!vote
✅ Voted thread successfully!
Vote weight: 6.23%
!me
👤 Your Leo Strategy Voter Stats
🤝 Your LEO Delegation: 20K LEO
💎 Lifetime Earnings:
• LEO: 0.765 LEO
• LSTR: 0.103 LSTR
!stats
📊 Leo Strategy Voter Bot Statistics
💪 Total LEO Power: 3.032M LEO
💰 24h Payouts:
• LEO: 15.982 LEO
• LSTR: 2.098 LSTR
• Delegators: 79
Thanks a lot!
which means soon you will become a leo whale. congratulation in advance.
I'm very happy for you! Sounds like a great opportunity!
good luck to you as they'll call you soon 😀
Great news. I wish you the best... and go get those clients!
Gotta max out my premium this month. more threads + more long form.
the ideas are loaded, i just have to optimize my work flow to keep up the consistency.
you are doing fantastic just keep it up and keep buying the premium. here we fo
🦾
That sounds like a great plan ;)
!vote
❌ Post has already been voted!
Please try to vote on a different post.
Gm, frens!
Having my second cup of coffee now, still not much of an effect but will be buzzing during the third one..
What else, seeing a little bounce back up, let's see if it'll last
#crypto
Good to see that bounce in the crypto market. Recent trends show Bitcoin and Ethereum leading the rally, with altcoins picking up steam too. Let’s hope this momentum holds, but market cycles can be unpredictable as always
True that!
LEODEX 💪🏽🦁👍🏽 in Space …
… connections are growing!
#animation #motiongraphics #graphicdesign #leodex
Some say leodex better then sex 🤣
!vote
do you also see and experience it with your threads that most of the time only those with fin content or the $LEO ticker in it get votes at all?
totally, mostly Leo shilling is being rewarded 🤣
Understandle helps build hype but leaves other feelings left out
yep, so we Non-Fin content creators need to keep together through the desert 🏜️
Lets get a campaign going 💪
🫵🏽 VOTE! for NON-FINcontent NOW! 🫵🏽
it looks like voting seems to be out of fashion generally or peeps think they give away or loose something when they do or why is it that there‘s so little voting all over the place? I remember different times!
✅ Voted thread successfully!
Vote weight: 9.78%
💪🏽🦁👍🏽
the sooniverse is always expanding
yep, it does 💪🏽🦁👍🏽 let’s make $GM great again, Overlord! 🤓
haha go for it! i don't have time to work on the project but happy to have anyone work on it
🤓
you need a nerd … i wouldn‘t even know where to begin …
Gonna put all the defi, trading stuff aside for a while, walk to a nearby park to read a Stephen King book.
It's in Finnish, not sure what it's called in English, Awakening, perhaps? Nevertheless, halfway through and really enjoying it!
So no spoilers! 😅😬
#reading #books
you can find the original title in the inprint of the book, in the fine print
Good point! 👌
Great reading!
Yes, it really is! 👌
What a great idea!
Factory reset for the mind 😅
😆
Great read!
Yeah, read King's Joyland earlier this summer and this feels even better 👍
haven't read Joyland yet
Good one as well, loved the atmosphere 👌
It’s coming today 👀
Scrapping funds wherever they are to get as much SURGE as possible... some of them will come late as I see 🥲
You still have a little time. Probably not too much tho... so hurry (a bit)
Well there's still enough time before the coming snapshot...
I wish to buy some SURGE if everything goes well
you guy's are really doing great in leo
I am waiting for it.
🎉🎉🎉
New me for later tonight
This is nice
I think I am going to throw a threadcast while I am there later.
I seem to not be able to do anything related with hive engine, anyone else?
Working fine here.
Seems to be working for me. You can try a different RPC (gear icon in the lower right corner assuming page loads for you).
Hmm I checked that and changed it, still getting error
I'm using keychain mobile iOS
No. Mine has been working fine. Did a couple small trades there.
Its working for me
works fine by me
Wrapped up some work tonight. Time to relax and go to sleep.
Enjoy the freedom!
Is this a thing? I mean, the "Switch to Staked" button seems to not be working atm...
#inleo #leo
The feature has been disabled
Thanks for the info ;)
Anytime
they disable things but dont update the website....
staked >10k $LEO today , 5k $LEO to go for #APEX #LION
Good move, congratulations
Always more leo
A smile costs nothing but can make someone’s day brighter. Don’t forget to share your smile today! #GoodVibes
🙂.
😁
just like your selfie seems good with a smile so why not put a smile on our face to make our life good
!BBH
https://inleo.io/threads/view/uyobong/re-leothreads-37g2h2afn
Good morning everyone... with a coffee to awaken all the senses
#Gm, #coffeelovers, #bbh
you should avoid drinking hot coffe in plastic mug.
suggestion
Thanks for the suggestion, but my ceramic mug broke recently, and it was the one I used for coffee. This one was just for emergencies.
i need a cup of tea to start my day
Morning
Good morning Lions
It’s about to be a very long day! Have to go to church now. ✌️
GM
Got my kids helping me with #painting today
Hi,
My name is Sana, I am from India.
I just joined Inleo today using keystore method.
Excited to explore it further.
I am going to create a introduction soon.
#intro #firstthread #inleo
welcome to inleo!
?????
I did not get you 😶
welcome to inleo
thankyou 😊
While responding to a thread, I discovered that there are about 5 income sources in the LEO economy. Please add the ones I did not mention.
#blockchaintourist.
!settings
⚙️ Your Settings
🎯 Reward Preference: LEO
📋 Available Commands:
•
!vote- Use !vote to vote on the parent thread•
!stats- Use !stats to see bot statistics•
!me- Use !me to see your delegation and earnings info•
!votes- Use !votes to see recent votes•
!leo- Use !leo to set reward preference to LEO•
!lstr- Use !lstr to set reward preference to LSTR•
!settings- Use !settings to see your current preferences!stats
📊 Leo Strategy Voter Bot Statistics
💪 Total LEO Power: 3.031M LEO
💰 24h Payouts:
• LEO: 15.982 LEO
• LSTR: 2.098 LSTR
• Delegators: 79
!me
👤 Your Leo Strategy Voter Stats
🤝 Your LEO Delegation: 200.000 LEO
💎 Lifetime Earnings:
• LEO: 0.015 LEO
• LSTR: 0.000 LSTR
✍️ Blogging on the Hive blockchain & InLeo, I draw inspiration from crypto, finance & daily life. The blockchain makes every idea count!
#hive #inleo #web3 #blockchain #blogging
https://inleo.io/@behiver/where-are-you-getting-your-sources-of-inspiration-to-write-on-the-hive-blockchain-and-inleo-avh
Oh yes! Same
i get some inpiration everywhere
Come along to #nftopia5 if you can.
!vote
✅ Voted thread successfully!
Vote weight: 15.51%
idea ~ Crypto ~ Money
still walking the 🐕 there is money in parks
Nazi
Anyone still doubts about it?
I don't even know what "Nazi" means anymore...
they never planned to respect peace in the first time
Make AI great again.
(I've expected more from Donald)
😂
AI made it possible which is impossible in real life🤣🤣
I'm not surprise with this scenario. So predictable, to be honest.
hahaha
#surge #leostrategy
Thank you for the graphic design!
!vote
✅ Voted thread successfully!
Vote weight: 5.75%
Last few hours? I thought it will end within that time.
It depends on your time zone.
But for more information:
https://peakd.com/hive-167922/@leostrategy/how-are-surge-dividends-paid-24-hours-left-fkc
what then? that big first batch isn’t gone already, isn’t it?
No. See more information here: https://peakd.com/hive-167922/@leostrategy/how-are-surge-dividends-paid-24-hours-left-fkc
Thanks a lot 🤝
I asked ChatGPT to give me a Kinesthetic workout routine according to my body and to be mindfull of my lower back surgery I had last year. So far so good!
ah yes, this one is great for your lower back
Yeah no stress what so ever
adding to my morning routine
I hope you know how to repair floors and walls.. just in case it slip out
I'll just do this at the neighbors house lol
ooh yes, that's the way. I wouldn't have thought of it, but that's perfect lol
Better call the construction company already, you gonna need a new wall, every other week !LOLZ
Seriously how is he stopping it?
I'm assuming he had some help with Ai
Might be, hard to tell with lower quality gif
I mean yeah but... you can see the rope handles he's swinging that thing with are pretty light!
I'm can figure those handles your talkin about, but you're right he's swinging to effortlessly
lolztoken.com
In the Stu-Stu-Studio
Credit: reddit
@senorcoconut, I sent you an $LOLZ on behalf of ben.haase
(6/10)
NEW: Join LOLZ's Daily Earn and Burn Contest and win $LOLZ
Kinesthetic workout routine working really well. For routines and women-focused plans, check https://store.betterme.world/collections/womens they offer easy to follow workouts and mindful exercises suitable for different fitness levels.
hey how to withdraw the amount because I have participated in this airdrop but not able to understand it. In which exchange the coin is listed ?
what do you want to withdraw??? I mean which coin
haha sorry by mistake. actually I have replied someone's thread but it published here as a thread.
Ohhhh ok lol
if you're talking about leodex, all assets are on their native chains. For LEO specifically it's on Arbitrum
I don't know why this comment is here. I replied to someone's thread, but it published as a thread :( xD.
lol oops
BitcoinFi is experiencing impressive growth, with more than 68,500 BTC staked, representing a value of $7.39 billion.
Babylon is at the forefront with a total value locked (TVL) of $4.79 billion, followed by Solv and Lombard. Lombard also leads in restaking, with 14,000 BTC.
Could BitcoinFi be the next big thing for BTC holders seeking yield and utility?
Maybe this display glitch is just telling me where to take some profit in the future.
1 $LEO at $0.916 sounds pretty feasible to me 🤷♂️
One day after waking up you will see the price for sure.
🤲🏾
it's not a glitch lol 😆
Wake up it's Reality
Soon wen lol
Wait... When? How?!!!
i think its just a display glitch when viewing your hive engine balances in the wallet section. looks like a sign for me
Ah~ I had that one... Didn't have a lot of LEO so I didn't feel rich. !LOLZ !PIZZA
lolztoken.com
Make me one with everything.
Credit: reddit
@carephree, I sent you an $LOLZ on behalf of ahmadmanga
(1/4)
NEW: Join LOLZ's Daily Earn and Burn Contest and win $LOLZ
🚨Fed in a tight spot:
Labor market weakening 📉
Inflation remains above 2% target 🔥
Trump increases interest rate cut pressure 🏛️
Market expects 25bp cut in September 📊
All eyes on #JacksonHole August 21-23 👀
#Fed #FOMC
Definitely a tricky position for the Fed. With labor data softening and inflation still sticky, a 25bp cut in September seems likely. Jackson Hole will be critical for clues on their next moves. Market sentiment is hanging on every word
Took some bet that they will hold rate steady. Looks like CPI is just about to shoot up. Time will tell... If it surprises tot he upside, I do not think the FED can cut...
Fair point on CPI potentially spiking. If inflation surprises to the upside, the Fed might indeed hold rates steady. Jackson Hole could give us a clearer picture of their thinking. Time will tell
It will be VERY interesting! Volatility is about to make a come back!
!summarize
I am experimenting with notebooklm.
The free version lets you import 50 sources from youtube videos over pdfs and links. Afterwards it can do a video summary about literally anything in your 50 sources. it can create notes discussing certain aspects of the sources.
I am gonna try the premium for a month because the first month is free. This gives you access to a lot of other google ai features as well.
Here's my latest NotbookLM video:
That is so cool, I did not know I was not following you on twitter
hehe thanks 😊
I haven't tried the paid version but the free one is awesome.. I recently did a video summary comparing Microstrategy and Leostrategy. It came out pretty cool
Interesting!
I dont remember how in hell did Criston got out of this murder been a White Cloak wtf?? must have been Alicent pulling her strings
#skiptavds, #nowwatching, #hotd, #tvonleo, #targaryen
!vote
✅ Voted thread successfully!
Vote weight: 23.68%
Did anyone seriously expect anything else?
Nope, Fritze hat auch kapituliert, er sehe Fortschritt...
Trump und Putin holen sich einen runter auf die Wellen in den Zeitungen und das Entsetzen.
Und am Montag will Selenskij wieder ins Weisse Haus um sich die nächste Demütigung abzuholen oder was glaubt er bekommt er da?!
Den nächsten Dolche natürlich, aber was soll er auch anderes machen - nach dem 2. Setup.
Aber Fritze sagt, "Deutschland ist zurück". Komplettes Führungsversagen - und ich betrachte gar nicht was sie halt innerhlab von fraktion, cdu parteilietung und mitgliedern veranstalten.
Selenskij müsste nun einmal die Woche in-person meeting mit einem anderen EU-Nation Regierungschef treffen, sodass die USA nur davon kommen, wenn sie auch komplett EU opfern.
FUCKIN LOSER FRITZE 😵💫
Männer mit Philosophie Diplom sollten zu erst eingezogen werden. Beginnend mit dem Buchstaben M.
Total victory for #russian:
Most people forget that we're constantly being spun... so of course they thought something would come of it (other than what seems to be nothing)
Putin gave Trump and the world a kick in the ass, that's what happened!
Networking tip: don’t just ask for intros. First ask contacts for their insight. Often they’ll offer the intro naturally.
This is Hilarious!!!
The world is just a huge lie, I'm all here for it!!! #gaza #genocide #israel #infowar #war
Truth makes people uncomfortable.
Yeah, and we can't let people feel less comfortable on our platform, can we?
I'm all for discomfort. That's what accelerates progress :)
I hate discomfort, but I think authorities/platforms shouldn't remove it. They should force people like me to deal with it, but I guess there's too much money on the line to leave it on their platform.
!summarize #grok #manipulation
That's so stupid. You can't make that shit up.
!BBH
Those Italians certainly know how to make a sandwich, I’ll give them that!
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 19.1% weight.