I’m in. Do you think Saylor eases up if we go sideways for a while, or does he buy more, and will John share any concrete plans for real Dash use, not just price talk?
Man, those were the days with huge LEO stacks from delegations! Now it feels like a grind, but I’m digging the challenge. Gotta hustle with content and engagement to earn. How’re you adapting to the shift? 🚀
• !SURGE me - To see your info
• !SURGE stats - To see yield statistics.
• !SURGE hbd - To set payout to HBD
• !SURGE lstr - To set payout to LSTR
• !SURGE richlist - To see the richlist
• !SURGE help - Show this message
💡 How it works:
• Hold SURGE tokens to earn 15% APR
• Weekly distributions every Monday
As AI agents become the dominant web participants ,reading, transacting, curating , platforms like INLEO that build with this future in mind will lead.
Absolutely, agentic AI is the next frontier! By 2030, we'll see autonomous systems driving innovation at 5x the current pace, turning scarcity into abundance. It's the greatest time to build solutions and embrace the future
Elon Musk talked about how we are moving into a world of abundance. He feels AI coupled with robots will generate economic output that provides people with most of what they need.
He even mentioned this on the earnings call with reference to Optimus, Tesla's humanoid bot.
Spot on! Elon’s vision with Optimus shows how AI and robotics will redefine abundance. By 2035, we could see humanoid bots handling 50% of manual labor, freeing humans for creative pursuits. It’s the dawn of an incredible era
That's my own projection based on current trends in robotics and AI adoption rates. I’m estimating that with exponential growth, we could hit 50% automation of manual labor by 2035. No direct quote from Musk, just my analysis of the trajectory
Did you make it to the Top 30 RICH list of #LSTR. If not then you still have time before it gets too late. #LSTR is trading at a discounted price. Grab them and make it to the RICH list.
I wish I could clean mirrors for a living. It's just something I can see myself doing. Credit: reddit @gungunkrishu, I sent you an $LOLZ on behalf of ben.haase
(6/10) Delegate Hive Tokens to Farm $LOLZ and earn 110% Rewards. Learn more.
Bitcoin testing 112K support is a critical level to watch. If it holds, we might see a bounce, but a break below could signal deeper correction. Market sentiment feels shaky right now, so risk management is key
That's a wild thought. The idea that we could wipe ourselves out and still keep those weapons around is just insane. Future generations might look back and wonder how we even survived this long.
As stated in this Thread, we have just initiated a powerdown of (most) of our LEO POWER
LeoStrategy can and will never sell our LEO. Our fund is keeping 100,000 LEO powered up for Threads curation while moving the rest of our LEO to Arbitrum to be staked for sLEO
This LEO will remain permanently staked in the sLEO contract. sLEO's USDC rewards begin paying out exactly 1 month and 1 day from today, so we will ensure our entire LEO stack (except for the 100k LEO POWER) is staked and earning on day 1
As LeoDex grows, USDC rewards will be earned by LeoStrategy. 100% of our USDC inflows from staking rewards will purchase LEO on Maya Protocol and stake it for more sLEO (Autocompounding daily).
This creates daily buy pressure on LEO and also accretes pristine LEO Per Share to our balance sheet for LSTR holders to enjoy a continuously up-and-to-the-right effect on LSTR tokens' LEO value
1/🧵 Not Just Another Office Romance: "Love Scout" K-Drama Review
"Love Scout" is a 2025 Korean series having 12 episodes of romance, workplace and family drama based genres. The series is starred by "Lee Jun-hyuk" as a single dad and "Han Ji-min" as a single workaholic CEO. #outreach #threadstorm #moviereview
The series is a beautiful definition of an all round chemistry. There is not just the chemistry between the female and male lead but also the chemistry between the father and his daughter and the one between the CEO and her secretary's daughter. This is a storyline you'll keep smiling to.
This could be a good time to start Powering Down $LEO to stake it as sLEO on Arbitrum. I'm personally torn about the decision to leave #ineo social media. I want to reward the users who are engaging with me.
On the other hand, I see a lot of potential for #leo in the cross chain DEX space. The progress we have been having is genuinely excellent.
We fixed the @lstr.voter distributor issues. A payout is being force pushed as we speak for the past 5 days of payouts
Our new update uses a different methodology to resolve payouts, so this issue will not happen again
The new methodology sends all of the LEO held in @lstr.voter as opposed to trying to resolve the exact curation rewards received by it. Since the main source of rewards for @lstr.voter is Curation Rewards anyways, it doesn't make sense to try and resolve the exact amount
This also gave us an idea: we can put together @lstr.voter blog posts once per day or week and if those blog posts get curated, then 100% of the rewards earned would be automatically split to @lstr.voter LEO POWER delegators
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 learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Mark Holuesco, the founding partner and chief executive officer of Holuesco Partners, a Bahamian-based value-oriented investment firm that invests across a wide variety of industries, geographies and market capitalizations. This is one of a series of episodes that I'm recording with value investors motivated by my concerns about how the direction of the global economy and the ongoing geostrategic competition between the US and China will impact asset markets in the years to come. In the first hour, Mark and I discuss his macro framework and approach to value investing, his concerns about government debt and its implications for interest rates and inflation, trends in global (1/57)
liquidity, the future direction of the US dollar and why he believes that 2022 marked a long-term turning point for value with huge implications for investors. In the second hour, Mark and I discuss some of the more promising investment opportunities that exist outside the United States, in particular within the UK and Japan, as well as how to assess similar opportunities in China, whether the country is investable and the risks investors face when putting capital to work in Chinese companies and the Chinese market. We also discuss more about Mark's investment framework, his views on the role of gold in one's portfolio, opportunities within the US energy sector and much more. 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 (2/57)
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, 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. 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. 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 thoughtful and extraordinarily valuable conversation with my guest, Mark Haleuesco. Mark Haleuesco, welcome to Hidden Forces. Thanks very much. Nice to be here. I'm excited to have you on, Mark. This is part (3/57)
of a series of episodes that I'm doing on value investing, informed by a macro framework that sees the future that we're embarking on as being one that may be more favorable to that investment style. And so I think I want to expose our audience to it and explore some of the work that folks like you are doing in this area. Before we start, I'd love to talk a little bit about your career because you seem like someone whose career progressed very quickly. And I'm curious to learn a little bit more about you and how you got your start in this business. I guess I started very young. I guess when you say it progressed very quickly, I started working for a trust company while I was in college and high school here in the Bahamas. I grew up in the Bahamas. And when I came back from getting a master's degree, started working for the trust company and basically decided I didn't want to be a trust employee. So reached out to Sir John Templeton, who was on the island, famous global international (4/57)
investor. And he turned me down initially for a job. And then I decided I would get him to sponsor me for the CFA exam, chartered financial analysis exam because there were only two CFA's on the island. He was one. You needed to get a CFA to sponsor you. So I wrote him back and said, geez, thanks very much for turning me down, but would you sponsor me for a CFA? And he agreed that a year later when I passed the first level of the CFA, I wrote him back. Thanked him for sponsoring me, told him I passed the first level and he invited me in. After a conversation and a Saturday morning in his office, which used to be in the attic of a shopping center, he offered me a job. And so that certainly changed my professional life and my life in many respects. And I guess my career developed rapidly because at the time it was just Sir John and I in the office on the investment side, he had two accountants, two secretaries and receptionist. And we had an office in Fort Lauderdale with more analysts, (5/57)
but Sir John and I, we were it in terms of the investment staff in the Bahamas. So I got to work next to him and he became comfortable with me and gave me more and more responsibilities. I started off researching companies for him. He would come in, lay a piece of paper on my desk. Normally it was hotel stationary because that was the cheapest way of getting stationary, was to take some from a hotel you stayed in. And he'd write me little notes saying, you know, do this or do that. And I would do it, put it on his desk. And yeah, so he just kept giving me more and more responsibilities, became a research analyst for the group, took over the management of some of the portfolios that he ran for private individuals. And then in May of 87, so I started working for him in 85, in May of 87, he came in and put all of his mutual funds on his desk and said, from now on, you figure out what should go in these portfolios and leave the trade tickets on my desk. And that was 11 o'clock in May of (6/57)
And I left the office and I went for a long run to try to calm down. And that was sort of the beginning of my management of mutual funds. So yeah, very quick progression with him from 85 to 87 and then, you know, did other things after that. Yeah. It was your time at Templeton Global Advisors and how you went from a research analyst in 85 to managing all of the portfolios that were previously managed by Sir John Templeton himself that I identified as the sort of reason why I said that you progress very quickly. I have a number of questions that I wasn't prepared to ask because I didn't know some of those details. I didn't know that you got turned down in your first pitch. So I'm curious, what did you say to him that you can tell us that didn't work? And then I'm just curious to understand how you actually, before I even ask you that, I didn't know that you grew up in the Bahamas either. What was that experience like? And also, did you have some sort of template in your father (7/57)
that got you interested in finance or what was the source of your early fascination with this business? I really couldn't figure it out. I grew up in the Bahamas. My mother's family has been here since the 1700s. So long history in the Bahamas. I did all the typical things you do when you grew up in the Bahamas. I worked on a dock pumping gas. You know, I worked for a mechanic on boats and I decided that working outside and the blazing heat in the summer really wasn't for me. My mother knew somebody at a trust company and got me a job there. And honestly, I was in the file room when I first started. But I was just always fascinated by the idea that somebody could give you their money and you could grow it over time. And honestly, at the time, the trust company that's no longer in existence really didn't do that well. Both of my parents were lawyers. I decided I didn't want to be a lawyer. So I was just fascinated by it. And I was also fascinated by the fact that every day you woke up, (8/57)
you know, if you're an architect and you're designing a building, you can put those plans down. You can walk away. And the design is exactly where it was when you left it two weeks ago. If you're a portfolio manager or a research analyst and you put your portfolio down, you go away for two weeks. You're two weeks behind. So I enjoyed the fact that it was, I'm a very competitive person. So I enjoyed the fact that you could quantify what you do and you can compare it to other people. I was also fascinated by the fact that it changed every day. It was very fast paced, in my opinion, at the time. So I didn't really have an aha moment in terms of getting into the finance business. What did I say to Sir John? You know, it was interesting. When I first wrote to Sir John, he turned me down. So he'd never met me. And I wrote him back a year later and thanked him for sponsoring me. You know, I think part of asking me in was he wanted to see if I could pass the first level of the CFA, even though (9/57)
I had a master's degree. He also caught him at the right time. He really needed help, needed staff, although he could have hired anybody anywhere in the world. But it was interesting. When I sat down with Sir John on that Saturday morning and he interviewed me in an office with butterflies all over the wall, which was sort of fascinating. He had a pink jacket on, yellow pants, you know, suspenders and butterflies all over the wall. He didn't ask me any investment questions. I'd prep for a week to answer all sorts of investment questions. And I guess he felt that because I passed the first level of the CFA and I got a master's degree with a concentration of finance, technically I should know what I'm doing. You know, his first question was, you know, where did I go to church? So it was really, hopefully, an interview of character, of work ethic, you know, talked to me about team sports that I did in school and extracurricular activities, my family, things of that nature. And you know, I (10/57)
was so excited when he offered me a job on the spot and he didn't tell me what the salary would be. And I went home and I very excitedly told my dad, I got a job with a great Sir John Templeton. The first thing out of his mouth was, what's he going to pay you? And I said, I don't know. My father thought I was an idiot because I didn't know what I was going to get paid. But actually it was paid by the hour too. My first raise was a dollar and fifty cents an hour. I joined him in the early summer, in the late summer it came to work and there was an envelope on my desk. And I thought, well, it's not working out too well. I opened up the envelope and it said, due to your hard work and diligence, I'm happy to raise your salary by a dollar and fifty cents an hour, effective September 1st. So I was paid by the hour. I got my first raise, it was a dollar and fifty cents and it sort of went off from there. I love that you didn't ask him how much money you made. I wonder if that also was an (11/57)
important indication, not only of your character and motivations in seeking employment with him, but also an indication of maybe what he saw in you or what he was looking for in someone to mentor, which was someone that was passionate about the work and not necessarily motivated by making money, which is a common motivation in finance. At twenty-five, fresh out of school, trying to start a family, you obviously worry about money, but quite honestly, I had struggled trying to find a good job coming out of college. When I finished college in 82, the US was in a recession. And I didn't really know anybody in Boston and New York and thought that was the route to go if you wanted to get into the financial service sector. So I went straight to business school to a school that would take you without any full-time work experience. And so I was just happy when I got the job that I was going to actually learn that, obviously, Sir John had such a great reputation. And to me, if anybody worked for (12/57)
Sir John Templeton, whether it was for a month or six months or six years, it's sort of like going back to school and the reputation that he had would be so valuable. So I wanted to be able to eventually buy a car. I was sort of going to work on a motorcycle, which was difficult in the rainy season, but at the time, money really wasn't that important. Yeah, you had a long-term perspective. You said that you got a master's and then you said business school. I'm assuming the master was a master's in business. What did you study in college? Economics. I went to Holy Cross College studying economics. But really, what I really studied was crew. I was on the crew team. And although I majored in economics, I learned so much in athletics and rowing crew and the camaraderie, the teamwork, the joy of working hard, accomplishing goals, things of that nature. I got as much out of rowing crew and college than I did at a classroom. My parents hate to hear that after spending all the money to send me (13/57)
to college. But I started economics in college. If you had to identify one, the most valuable lesson from your time in athletics, could you pick one specific thing? Was it overcoming challenges? Was it the teamwork? What was it? For me, it was learning the joy of hard work. A lot of people shy away from hard work. When I consider how hard we had to work and prepare to row, I still sort of get tingles. We had an amazing coach who basically taught us the value and the beauty of hard work. For me, I always like to tell people I'm not really smarter than most people. I'm just willing to go the extra distance. I'm willing to work harder than most people. Have you taken four steps? I'm willing to take five, that sort of thing. Well, if anyone's inspired by that, I recommend they go back and listen to our conversation with Tim Grover, who was Michael Jordan's strength coach for a conversation about what it takes to be a winner, one of my favorite episodes ever. Last background question, Mark, (14/57)
which is, what led you to start your own fund in 2000? What was your vision then? What were you hoping to accomplish with that? I started off with Templeton and it grew very rapidly. It turns out in 1992, Sir John sold the business. I became a director of the firm, the head of global equities, but my main job was running the global equity division and managing the mutual funds that was assigned to me. Then in 1992, Sir John sold the business to Franklin, became Franklin Templeton. They were fantastic and they grew the firm rapidly. The funds that I was managing grew extremely rapidly. We had about 19 billion of assets when we sold to Franklin. As my funds grew, I gave them up to other people to manage. By 2000, I was running the Templeton foreign fund, which is about 15 billion, and Templeton growth fund, which is about the same size. The group that I was managing, we had about another 40 or 50 billion. It seemed like I was becoming a manager of people as opposed to a manager of (15/57)
assets. I was in a unique position where I had a great relationship with the Johnson family who owned Majority Stake at Franklin. I told them that, look, we had grown rapidly. We'd had great success, but I wanted to concentrate on picking stocks and doing it with a few people for a few clients. That's what I truly love. I truly love coming to work and turning on the computer and seeing what's going around the world. I didn't enjoy the 70 people that reported to me nine different locations around the world. I mean, they were fantastic people, but it involved an enormous amount of travel and administrative work. I found my time on research was shrinking and my time on administration was growing. I just love investing. I had an agreement with them that I would start a new subsidiary. I would get 60% of the profits. They would get 40, and we would concentrate on running a global equity long short fund. That was also at a time in 2000 when the markets were, we had the bubble, and there was (16/57)
a great opportunity to start that fund. We eventually started a long only fund, and then eventually I bought the majority of the business off of them. Really, I decided to start my own business because of the love of investing and the lack of love of managing large groups of people. Also, remember, when I started working for Sir John, it was just Sir John and I and five other people in the office. The decision making was so quick, and my boss was just next door. Then when you get into a larger organization with people all over the world and committees, and it was just a phenomenal people, but just a different environment. I wanted to go back to the environment that I found myself in when I first joined John Templeton. What an interesting conversation that would be. We're not going to have that because we're here to talk about investing, but what an interesting conversation that would be to discuss, the difference between running a large and small organization, especially in the (17/57)
investment world. I'm glad that you said that you love investing because that's what we're here to talk about. Let's start with frameworks, which is something I always try to pull out of people to get to first principles in terms of how they see the world, how they see investing. You invest with a value-oriented framework, and you also have a macro overlay that you bring to your investing. How would you describe each of those? Let's begin first with your value framework. People describe value investing different ways. I guess I would describe it as that we try to compare a company's price to its intrinsic value. Intrinsic is an important part of the phrase. What's the company worth? An intrinsic value can encompass growth, encompass breakup value. To us, it's not just investing based on momentum or growth per se. What is this company worth? Where's the stock price? Now, very simplistic description, but very complicated process. When we do that, we try to come up with a price target. If (18/57)
I'm right, I think the stock can go to this level. More importantly, we come up with a risk target. If I'm wrong, how much money am I going to lose? In the investment business, it's really that component that I think distinguishes us from other people. In an enormous amount of time, on what if I'm wrong? How much money am I going to lose? If you have a collection of stocks and your upside is 50% and your downside is 10, you don't have to be right more than half the time to make good money. If your upside is 25% and your downside is 25%, well, you've got to be right a vast majority of the time to make money. The framework is that let's try to find things that are intrinsically cheap where our upside to downside ratio is skewed to the upside. That gives me a sense of how much risk I'm taking to the portfolio. I remember coming out of the bubble in 2000 and at one point, stock markets had dropped I think 15% one year and 20% the next year. We got to the point where in a hedge fund, we (19/57)
were 90% net long, which hedge funds don't get 90% net long. Somebody says, well, that's an enormous amount of risk you're taking in the portfolio. I thought to myself, wow, it's the least amount of risk I think I've ever taken a portfolio because my downside on the collection of 40 or 45 names that I have in my portfolio was single digits. My upside was more than 50%. From my perspective, it was the least amount of risk I'd ever taken in the portfolio, although when you look at the net exposure I had in the fund, people say, well, you're taking a lot of risk. There's a couple of points there. I guess one is that we look at risk as the possibility of losing money. That's the risk. When an analyst recommends a name, I talk about what is the catalyst for this name in terms of how will we achieve the upside and what will convince you if you're wrong and what do you think can go wrong? For a bank, it may be that the analyst is using a downside that reflects a recessionary environment. Then (20/57)
it's my job as the portfolio manager to decide when that may occur and when that risk in that stock may occur. Or if you're the energy analyst, you might be using $80 upside for oil and $40 downside. Then it's my job, more of the analysts, to think about under what scenario could oil prices get down to $40, which would make that a poor investment. I guess that's where some of the top-down work comes into play. It's intrinsic value as opposed to value. Sometimes that incorporates growth, sometimes it doesn't. If I'm listening to you correctly, it sounds like in addition to the importance of how you define value, it's also important how you define risk. Do you believe you can do more to limit the downside than you can to control the upside? I would say we're more aware of the downside. I don't know if we have control over it because a lot of times we have no control over markets. But I have more control on how I put my portfolio together. I can manage the risk in my portfolio by limiting (21/57)
the amount of names that I have that have lots of downside. In this business, as you know, if you're right two thirds of the time, that's a phenomenal batting average. But you don't have to be right two thirds of the time if you limit your downside. Once again, if you really do your work and you're going to be wrong on the downside two thirds of the time, when you pick an upside, you're going to make mistakes or something's going to happen that you don't anticipate. Same thing on the downside. We're constantly trying to adjust our upside and downside. To me, it gives a framework for how much potential reward and risk I'm taking and how aggressive I need to be. If I've got tons of names all over the world and I can put together a portfolio with 50% upside and 10% downside, that's a great ratio. If you get to a point in the United States where you have very frothy markets and it's difficult to find a portfolio that has that type of ratio, most of the names in the US are more up 50 down (22/57)
50, unfortunately. That tends to move you and push you to other markets around the world. A lot of times your framework decides how you allocate assets, both in terms of types of names and the geographic places that you might look. I poorly framed that question about relative measures of control and managing upside versus downside risk. Let me see if I can ask it again. Is your focus on mitigating risk of the downside reflect a broader recognition that over many cycles the benefits of being invested outweigh those of being in cash? Focusing more of your attention on what can go wrong so you can remain in the game, so to speak, makes sense. I think my history has given me a better appreciation for downside. When I took over the funds from Sir John Templeton, I took them over in May of 87. I don't know if you remember what happened in October of 87. That was six, but yes, I've read about it. I always joke with people that Sir John Templeton was a better market timer than people think he (23/57)
was. He gave up all of his funds in May of 87 and in October he said, we had the great crash. We ran both global money and international money. We ran the Templeton foreign fund was a non-US equity mutual fund. We were investing outside of the United States during the Asian crisis, the Latin American crisis. If you grew up in the 1980s and early 1990s, you saw an enormous amount of damage in equity markets outside of the United States. I guess I was somewhat conditioned by the environment that I grew up in professionally where I'm perhaps too concerned about the downside. I would say that's probably, if you say, what's one of the faults of your approach or what's one of the downsides to your approach, I would say that we're too much of a nervous nally sometimes. You started the fund in 2000, which was a great year to begin a fund, a value investment fund. It's like, if I were to put some dates together, it seems that 2000, 2007 or so was a good period for value. What explains why value (24/57)
investing has underperformed and lost so much favor with investors, especially over the last five to 10 years in your view? It's underperformed dramatically over the last five or 10 years and that's because we've just been in an unusual interest rate environment more than anything, in an unusual liquidity environment. When you have massive liquidity and when you have interest rates to the extent they are, historically you've always unfortunately had these periods like this. If you're a company and your cost of capital is 2%, you only need to make 3% to borrow capital. You get all of these inefficient companies that are out there that compete effectively with more efficient companies, more profitable companies. But really, we just had unusual amounts of liquidity in the system. Liquidity leads to speculation. You've also had a real lack of growth. Look at last year, I think the MAG7 in the United States, the earnings grew 36%, something along those lines. The other 493 companies, NSP (25/57)
500, grew their earnings low single digits. There's really been a lack of growth, not only outside of certain stocks in the US, but outside of the US. As a result of that, people have overpaid for growth. But if you look at a graph of value versus growth investing over time and starting the 1970s, there were periods of underperformance for value, but nothing as prolonged as what happened after the financial crisis when they just brought rates down to unusually low levels and flooded the system with money and after COVID. I would say those are two extremely unique events. We're slowly trying to figure out how to move away from that period. With a higher cost of capital, I think you're going to see a major change in that environment between value and growth. Liquidity and rates really have driven this fascination with growth versus value investing. I've heard you say that 2002 marked a turning point for value. Why do you feel that way and what would you point to specifically to support (26/57)
that argument? I think rates pretty much bottomed back then. I think that as rates normalize and as liquidity starts coming out of the system, the two of those events, which I think have already started, you can say, okay, well, rates have gone up or down. I would say that that marked a low point in terms of rates and a high point in terms of liquidity. There's such a disparity now between value and growth all over the world. There's so much concentration of people's portfolios on growth versus value. To me, it's cost of capital and liquidity. The things that have caused this disparity in performance have changed. In terms of liquidity, there's different ways of looking at liquidity. If you take the US, the Federal Reserve balance sheet, that's rolled over. It's still massive, but it's moving, whether it's on an absolute basis or a percentage of GDP it's shrinking. You look at government spending, it's completely out of control. We've never had government spending these budget (27/57)
deficits, 6% of GDP when you have basically a good economy and low unemployment. Obviously, there's a new administration trying to get that under control. There's absolutely no way you can continue with 6% budget deficits as a percentage of GDP. You've got the Federal Reserve balance sheets are starting to turn, government spending is going to turn, the Treasury with the way they've been issuing government securities on the short end versus long and provided massive liquidity. The other area would be bank credit. Bank credit is also changing. I just feel that liquidity is all the things that provided excess liquidity in the system are beginning to change. The other thing too is that government debt is so high in the United States, it's just high everywhere in the world. It's the same level as it was coming out of World War II. Back then, the government basically inflated their way out of the debt problem. There are very few ways of solving the debt problem rather than growing the (28/57)
economy and trying to inflate your way out of the problem. To me, that argues for sustainably higher rates than people anticipate as the world also struggles with lower liquidity levels. Is that another way of saying that the reason why you think we're in a period of structurally higher rates is because of the refinancing costs reflected in part in government deficit spending and the size of national debts? That's a part of it, but I think people's view on rates is conditioned by what's happened over the last 10 or 15 years. What has happened over the last 10 or 15 years is completely abnormal. People who haven't been in business in the financial sector, who haven't been alive for more than 50 or 60 years, just think that the post-financial crisis era was normal. It's not. I just think that we're going back to a more normal level of rates prior to the 2008 period. Part of that is, yes, sustainably higher inflation. That doesn't mean inflation is going to be 6%, 7%, 8%. But if you have (29/57)
3% to 4% inflation or even 2% to 4% inflation, you add some risk premium on top of that. Rates today are much more normal than people realize. This idea that rates need to continue to come down, I don't think we're going to go back to 2% on the US Treasury. For a while. The inflation in your view would be driven by monetization, government spending. And spending has certainly provided massive amounts of impotence to inflation. We've had too much money in the system, and a lot of that money has been provided by the US government. And unfortunately, a lot of the employment is provided by the US government as well. If you look at the employment statistics in the United States and look at changes in employment and how much that's been created by the government, tariffs cause slightly higher inflation, although the administration will tell you it won't. There's so many different elements out there that are adding to inflation. The government's got a real tricky job in the United States now (30/57)
to try to grow the economy without letting inflation rise too much. But at the same time, the only way you're going to get out of this debt problem is to let inflation help and inflate your way out of the debt problem. So this is a problem obviously that's not unique to the US. However, there is an outstanding concern about the value of the dollar. You've written about this as well. How does this factor into the value of the dollar? Because the dollar has been very strong in recent years. Yeah. So as a global investor, obviously if you invest outside the United States, you have to take currency and consideration. The great thing about investing outside the United States today is that you can hedge away most of that risk and it doesn't cost you anything. So when you hedge, if you use the forward markets, basically the cost of hedging is normally the differential interest rates. And because of where US rates are today versus most countries around the world, you don't really have to take (31/57)
much currency risk. So that's interesting and helpful. However, currency does a lot of different things to different companies in different parts of the world. We had a morning meeting today. We were discussing how a change in yen value impacts the book value of Japanese companies. And you have to be aware that currencies have a major impact on how companies report. It's a global economy. BMW and Germany does 40% of its business in China. It has a large business in the United States. Although you're investing in a euro-based company, its actual business exposure to the euro is very low relative to its dollars and Chinese currency. You have to take all that consideration, figure out whether or not the companies hedge themselves and then whether or not you want to overlay a hedge on top of that. So currency is something you take into consideration when you're evaluating a company, the risk to that company in terms of where it's doing business. It gets very complicated, particularly when (32/57)
companies themselves are hedging. And then you have to decide whether or not I want to hedge again. But it's just one of those macro factors that you need to take consideration. I just believe that purchasing power, powerity, which a lot of people look at doesn't really tell you where the currency is going to go. It tells you what the environment is in a particular country at any point in time. There's the famous Big Mac index. What would a Big Mac cost in the US versus Japan? And if it's cheaper or more expensive in Japan, maybe it tells you something about the purchasing power of the currency over there. But really differences in interest rates and what business people decided to do is what drives the currency in the short run and the medium term. And right now, I think that it's difficult to say with tariffs being imposed that the dollar is going to weaken substantially because normally the dollar, if you put a tariff on a foreign country, their currency tends to adjust somewhat to (33/57)
take into consideration that tariff. But over the long run, it seems as if to me that the dollar is one of the most consensus trades in the world. Our funds are based in dollars, so we have to take that into consideration when we invest overseas. But if you look at the DXY, the trade weighted basket of currencies, generally these levels, you know, Sir John has an interesting graph he gave me a long, long time ago. It basically showed the trade weighted dollar going up. And on one side, he wrote time to invest in US names. It showed the trade weighted dollar going down and he wrote on the side time to invest in foreign companies. And in 1990, when he gave me the graph, it was at a low and he wrote on the side time to invest in US companies again. Well, we're at a point in time where the currency buys you a lot overseas and the dollar is very sort of crowded. So I'm happy to slowly be looking to increase non-dollar weightings in our funds. I'm actually interested to ask you about this (34/57)
because I think I've heard you say that you own a small percentage of US-based companies or you aim to own a small percentage. Do I have that right? No, we don't aim to own any percentage in any country. We just try to look around the world and see what's cheap. And 20% of the names around the world are in the US, but the US is 70% of the index. We were 20%. So in a long-only fund, we're roughly 20% in the US in our hedge fund because we can also short securities on a net basis. We're single digit. And that's pretty unusual. However, when I joined Sir John in the late 1980s, I ran the Templeton Foreign Fund. It was a fund that invested outside the US. And at one point in time, the EFIT index, which is the index of non-US stocks, was 70% Japan. And I went to zero and people thought, wow, that's incredibly risky. You're being compared to an index that's 70% Japan, a year zero. And my response was, wow, you're taking an enormous amount of risk. You're investing half of your portfolio in a (35/57)
country that you know is substantially overvalued just because it represents 70% of an index. How could you do that? I looked like an idiot for a year or two in the Templeton Foreign Fund when I was so underweight Japan. But quite honestly, for most of the 1990s, it didn't matter what I did, I outperformed the index because Japan peaked out and it started to drop. The same thing today in the United States, people say, geez, you're taking an enormous amount of risk. You only have 20% of a long portfolio in the United States that represents 70% of an index that you're compared to. Isn't that risky? But once again, I define risk as the potential to lose money. And from my perspective, when I look around the world, the downside in the US is much greater than the downside in a lot of the companies that I'm investing in, Japan, UK, etc. So in the short term, maybe it's risky in the long run, it helps your career. So I have a few more questions I want to ask about rates and tariffs, but this (36/57)
benchmarking has come up a number of times on this conversation. And it sounds to me like something that's been very important in your career is not just what you've benchmarked to, but not being wedded to benchmarks that everyone else is focused on, which is also another way of saying being a contrarian, being willing to go your own way. Would you agree with that? And how important has that been in terms of your success as an investor? You know, I was thinking about this the other day because they asked me what characteristic makes you a good investor. And I said, well, you have to be rational versus emotional. And to a certain extent, you have to sort of enjoy being off on your own. If you're comfortable in a crowd, if you enjoy waking up on a Saturday and going playing golf with everybody on the golf course and dressing like they all dress and playing with all the rules and sitting around the golf shop afterwards with everybody. I find that incredibly uncomfortable, quite honestly. (37/57)
I'd rather be out sailing on a windsurfing by myself. Or at the same time, you have to have the ability to work with other people, go back to the crew analogy. You have to have this love of working with people, but being uncomfortable, being with the crowd. I heard someone describe it that if you're in the jungle and a tiger approaches you, you want to run away with everybody away from the tiger, but at the same time, you don't want to be running over the cliff when everyone's running over the cliff. So I think you have to have this comfort level about doing things by yourself and an uncomfort being in the crowd. So I think that's a characteristic that's really helpful as a global money manager. And it goes to the index. I want to be in business. I want to make money. And I don't want to lose money. And I want to be... When I started my business, somebody says, why are you starting it now? I said, look, I don't want to be a long only money manager and be down 20% when the market's down (38/57)
50 and say, wow, what a great job I did. I want to make money. And so for me, I think over the long... There are going to be periods, sometimes long periods where you want to perform the index. But over the long run, if you can stick to what you're doing, regardless of what the index said you should be doing. And if you're not worried about that index and the composition of that index, you can only get different results from other people by doing things that are different from other people. And it's easier doing that when you're not following the index. Is it also fair to say that you're less concerned about career risk than most people? You're always worried about your clients and you don't want to disappoint your clients. One of the things you have to be careful of is you get older and more established and more comfortable that you actually take risk. In this business, you're not avoiding risk. You're just managing risk. You're understanding risk. And sometimes as you get older and (39/57)
you're more comfortable financially, you're not willing to take risk. But you have to take risk and you have to manage that risk. So yeah, it's easier to do that if you're financially comfortable and if your clients have been with you for a long time. 80% of our clients have been with us since the first year we started our hedge fund. And that's helpful. So I mentioned that... Well, hopefully we'll have a chance in the second hour to talk more about your process and philosophy. But I mentioned that I had a couple more questions about rates and tariffs. So you mentioned earlier in our conversation that it's likely that we're moving into a higher, structurally higher inflationary environment and an environment of higher rates. The question I have for you is, what do you see for real rates? Does that still mean a positive rate environment or is the inflation indicative of structurally negative real rates? I'm just curious how you see that. Well, it would be better for the government. If (40/57)
we had negative real rates. And you think, is that speaks to the discussion we had earlier about the debt and deficits and government spending and some of the outstanding liabilities that need to be financed? Look, the new Treasury Secretary, who is I think an incredibly capable guy, smart as a whip, probably one of the better Treasury secretaries the US has had for a long time, he's got this 3-3-3 approach. And one of his 3s approach is they want to get the budget deficit down to 3%, minus 3%. That's still a budget deficit. So he's still talking about adding to the debt. So for me, the only way they're going to get debt under control is to inflate their way out of the problem. So I'm not a rate expert, but to me, it means negative real rates. So tariffs, I'm confused. I mean, I do feel like there is some obvious way in which tariffs are used in this administration for political or geopolitical purposes. I don't necessarily see the larger strategic game plan for revitalizing the (41/57)
American economy and how tariffs are being used in that context. They still seem to be more of a tactic than a strategy, a tactical deployment than a strategic use. How do you view tariffs being used in this administration? Is there some way in which you expect them to be used? I mean, do you have some confidence around how they'll be deployed and what impact they're going to have going forward? Well, I agree with you. I think they are tactical. And I also agree that they don't really improve the competitive structure of the companies they're trying to protect longer term. Why are they tactical? I think these numbers aren't exactly right, but they're close. I think something like 80% of all exports from Mexico go to the United States, and it represents something like 25% of GDP. Mexico is very, very vulnerable to rates. If you wanted to negotiate with Mexico and you threatened to slap tariffs on Mexico, that's huge. Same thing for Canada, I think something like 70% of all exports from (42/57)
Canada go to the United States, and it's also a very large percentage of GDP. However, you've got to be very careful because if you look at the percentage of cars being produced by US manufacturers in Mexico, it's a very large percentage for General Motors. I think it's like 35% or 40% of the cars sold in America come from Mexico. So you're also damaging US companies to a certain extent. It's interesting, an investment in BMW. BMW is actually quite good in terms of its domestic production versus its Mexican and Canadian production versus the US manufacturers. So I would say BMW is in a better situation to not get hurt by these tariffs than the US companies that you're trying to protect. And the other thing it does is that, as I mentioned, higher tariffs also impact the currency. So the currencies tend to adjust a little bit, not by the same extent as the tariff, but to some extent, depending on the country. So if you put a 10% tariff on certain goods coming out of a country, it tends (43/57)
to weaken that currency to offset the cost of the tariff. But that makes the dollar stronger, which makes your goods in the United States less competitive overseas. So yes, I think it is a negotiating tactic. And I believe that a better scenario for the United States in terms of its competitive industrial base is to remove regulations, what they're doing quite rapidly, keep the tax rate low, which they're trying to implement, but also not keep the dollar so strong. I mean, obviously, if the dollar weakens, that's to your benefit as an exporter around the world. So I think the tariffs are creating a lot of confusion. I think they are a tactical negotiating tool. However, there are some countries that dump things into the United States. Sometimes they don't dump them directly into the United States. And tariffs on certain goods from certain countries, even when they come indirectly, some goods come from China to Canada, and then from Canada to the US. And so it might appear as if you're (44/57)
putting tariffs on Canadian companies, but it's actually goods coming from China. It's very complicated, but I would say it's a tactical tool. It's going to create confusion. Confusion is good if you're a long-term investor, because it creates abnormal price movements. And if you can take advantage of that from a longer term perspective, then that's okay. I've heard what feels like mixed messages coming out of this administration on the dollar. It sounds like there is both a desire for a strong dollar, maybe because it sounds good, and then also some policies to weaken the dollar. I'm curious if you have a sense of any kind of clear direction in this area. Look, I think that nobody in the administration is going to come out and say they want a weak dollar. Just like the current Treasury Secretary has come out and said he's not going to change the allocation of government debt when it rolls over more to the long end. Although when he was in the Treasury Secretary, he was criticizing the (45/57)
then Treasury Secretary because they didn't roll a lot of the debt into the long end to take advantage of low rates. So no one's going to come out and say, I think they want a weak dollar. I don't think that politically is acceptable, but I think it would be to their benefit to have a weak dollar. And it would be much better longer term than tariffs, just as if they could get long-end rates down. Yes, they would love to roll this enormous amount of debt coming to this year into the long end of the Treasury, but they're not going to tell you that up front. So let's go back to this question of valuations, the valuation of U.S. companies versus companies in the rest of the world, Japanese companies, companies in Europe. You're quite a bit about how there are a lot of opportunities in the U.K. We touched on this a little bit, but what explains, if you had to be specific and summarize this, what explains the over valuations in the U.S. in your view? The over valuations in the U.S. is just (46/57)
liquidity and low rates and the concentration around the world and the fact that the United States has been a place dominated by companies that are growing. So to a certain extent, the success has caused the overvaluation. Some of the valuation is justified, but not the extent. Companies selling at 20 and 25 times revenues. We have companies out there that are $250 billion in size that are generating a billion dollars in cash flow. At some point valuations became stretched in the United States. But the success and the differentiation between growth in the U.S. and a lot of countries around the world has caused this over concentration on U.S. assets and the overpricing of U.S. assets. There's a sort of momentum trade associated with this. Very much so. How much do you factor in systematic passive flows into this equation? And do you have any concern that value will continue to struggle as those flows continue to dominate the pricing relative to discretionary allocation decisions of (47/57)
active managers like you? Yeah, it's interesting because it works both ways, right? It works on the way up. And then when you get some of these companies reporting poor earnings and the MAG-7 starts to struggle, it's going to work on the way down too. So you think that cost of capital that we talked about earlier, some of the underlying structural economic effects are going to ultimately be the spark that serves as a catalyst and then that momentum will go into reverse? Look, you never know what the catalyst is going to be for the system. You might be identified for companies generally. But look at AI. Look at all of a sudden the information that's come out on Chinese development of AI. Totally unexpected and what that did for those companies. And if those companies, there's such an over concentration and if people start pulling that and they start shrinking as a percentage of the index, then it's sort of self-fulfilling, right? The index starts to shrink in that area. And so it's (48/57)
difficult to say what's going to cause it. We're even having companies that are reporting great numbers and beating and they're dropping. Once again, I think it's just over concentration in people's portfolios. They've gotten too big and they need to quote unquote rebalance. But generally, I would say higher cost of capital, you know, the percentage of companies in America that don't make money is at an all-time high while the market is at an all-time high valuation. And that's interesting. I love that you brought up deep seek because I also had that reaction. The market got so spooked. And besides the fact that it didn't entirely make sense why it was selling off, given the fact that the software innovations made by deep seek weren't necessarily bearish. If any, you could argue they were bullish for the need for further compute. It just shows you how fragile this bull market is, I think. And it also reveals something else. I'm curious if you agree with this. I think it reveals an (49/57)
underlying anxiety about America's place in the world, our geo-strategic positioning, our national security state, our geopolitical power. And so that kind of, you know, brings me to another question, which is how do you factor these things in? Politics, national security, how do you factor these things in when you consider where to invest? Understanding that government regulations may change in line with the needs of the national security state, and that could impact the value of your investments. Well, I guess the greatest example of that today is China and Taiwan. You know, a lot of people say China is investable. There are other people out there that say because investors say China is uninvestable, it's actually a great investment. You know, the risk to your Chinese investments is that a situation happens like Russian investments. I'm on the board of a company in Europe that manages funds for individuals, and they had some exposure to Russian-vated Ukraine. You couldn't trade those (50/57)
assets. You had to price them at zero. So that's the geopolitical risk. Obviously, the biggest geopolitical risk today is China-Taiwan. And, you know, the impact that would have, obviously, on the semiconductor sector is massive given the strength of Taiwan semi-manufacturing. So it goes back to that upside-down side. I mean, when you get to the point where companies get close to net cash, and in the course of a year or two or three, you feel you can get that investment back in terms of cash returned from a company. You know, your job as a portfolio manager is to decide, well, is that geopolitical risk reflected in that? And, okay, I'm not certain about what China will do with Taiwan. So how much do I want to have in China? Do I want to take that risk? And will it be 5% of my portfolio, 15% of my portfolio? So I'm willing to take some risk with Chinese investments, but it's not 10% of my portfolio. But, you know, what most people don't realize is, you know, we mentioned BMW earlier, (51/57)
40% of their business is Chinese. You know, most people's investments in China are much greater than they realize, even if their portfolio manager says, oh, we don't invest in China. Oh, heck, you do invest in China. You know, you go down to your portfolio and you look at all the investments that these companies have and all the revenue and income that's generated in China, most people would be shocked. So my direct investment in China is about 4.5%, but my indirect investment in China is probably closer to 15%. So I love that you brought that up. I mean, first of all, how confident are you in that 15% number? Because as we saw, even the US government, even the military, didn't understand how vulnerable its supply chains were. They had to cancel or halt production of the F-35 fighter at some point because they discovered that a magnet, a critical magnet was being produced in China. How confident are you about the vulnerabilities of the companies that you invest in, given how (52/57)
interconnected this world has been and how globalized it's been? Well, I hate being compared to the US military because I believe you they've never been able to complete an audit. So I mean, I don't know that they're the best comparison. So look, let's look at some of our investments in China. Outside of the political risk in China, there are industry risk in China like real estate. The real estate industry is a mess. The banking industry is a mess. So one of our largest investment series, Yum China, they have the Kentucky Fried Chicken and the Pizza Hut franchise in China. Net cash balance sheet, this time last year, it was like 25% of its balance sheet. Now it's a little bit smaller because they've just raised their dividend 50%. They're opening new stores and the population continues to become wealthier and able to afford eating out more. It's a company that basically you can look at the growth of its store base and the amount of cash it generates and the amount of cash you're (53/57)
getting back. What's the geopolitical risk of Kentucky Fried Chicken and Pizza Hut as opposed to real estate or finance, et cetera? But you can be pretty comfortable. It takes a lot of legwork. I've been to China, visited the management of Yum China in China. I remember the first time I ever went to Hong Kong, I went with a gentleman by the name of Mark Mobius who ran our emerging markets group. And we were chatting with an analyst in Hong Kong and they'd invited some companies there and one manufacturer of a company was talking about his watch facility and it was pretty close to the border. So we decided we'd go check it out. Turns out it wasn't there. Didn't have a watch manufacturing facility where he said he had it. So a lot of information is available if you're just willing to read through annual reports and go visit companies. So we're pretty comfortable with what our indirect exposure is to China. That's our job. Our job is to figure out where these companies make or where they (54/57)
generate revenue, how they generate profits, what competitive advantages they have, what are the risks to that business, both politically, technology, or corporate-wise and then sort of adjust accordingly. It also sounds like you might be more willing to invest in a Chinese company if its operations are primarily overseas or its factories are located outside of China or it's listed outside of China. Those are all nuanced ways of assessing the risk of the particular company. Somewhat, correct. So I'm going to move us to the second hour mark. I want to talk a little bit about opportunities outside the United States. I asked you, for example, what accounts for the overvaluations in the U.S. I'm curious to ask you the opposite question of what accounts for some of the undervaluations, especially in places like the U.K. I also would like to discuss more about your investment process and your investment philosophy, as well as some of the unique opportunities that are in the U.S. I think (55/57)
you've written quite a bit about the energy sector. 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 to access the second hour of today's conversation with Mark, 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. Mark, 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 (56/57)
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. (57/57)
believing in ideologies, all those things about meaning, the fear of death, the needing to feel that you're something bigger than yourself, none of that goes away. Those raw things have to be satisfied. And when we talk about Putin's expansionism, that's what he's channeled that into. And I think the other fact that you'd invoke there is identity as a process of psychology and almost psychoanalytics. I think that plays a very big role as well. It's a weird pattern of an authority that humiliates you, like an abusive parent, which is very, very evident in Russia, every day when you live there, but also historically, and then you compensate the resentment to build up from that through an expansionism. So there's this weird social psychological dynamic going on as well, based around humiliation and aggression. So all those things that are happening, and yeah, and Putin's continued international adventures are to do with two things. One of them, again, is signaling. If I can go in and bomb (46/57)
increasingly paranoid about everything, myself included, I feel this way. And I've come to the view that what's responsible is a breakdown in shared belief systems, that what's happened is that the stories that we tell ourselves about each other and about who we are in a deeply communal sense are breaking down. Not only are they breaking down, but they no longer work, and they've been shown in many instances to be frauds. Whether we're talking about the lip service, paid to democracy and human rights, as justifications for wars of aggression and occupation, or the idea that somehow trillions of dollars can be conjured out of thin air to support asset prices, but that somehow we have to go on pretending that it's really about supporting the economy and that we really do live in a free market capitalist system. I invited Peter onto the podcast today because he wrote about this world years ago, during his time living and working in Russia. And not long after the publication of his book (2/57)
conditions that made this possible? What sort of vacuum existed? How did Russian society find itself in such a vacuum, a cultural vacuum, for lack of a better term or a sort of state of nihilism, where a regime like this and stories like this could emerge and try to compete as the dominant narratives of society? First of all, there's a big historical legacy in a certain way that Soviet Union did this as well. So we are talking about a lot of historical conditioning and a lot of people understanding the kind of the gospels of the Soviet Union were nonsense, but having to repeat them and understand that they are a way of communicating power. We're talking about propaganda theory, this idea of propaganda as messaging as in trying to convince people. There's also propaganda as signaling. It's a signal. This is what we say is the truth and if you want to survive, you better not. So it's not about persuasion, it's kind of like communicating power. But would you say that it was that (28/57)
Aleppo to Smith-A-Reeves, don't you dare doing anything at home. If I can push Biden around, just think what I'll do here to you at home. So there's definitely a messaging back. I'm big and scary internationally, they're alone at home. But also, without a doubt, it brings a certain amount of pleasure and fulfillment to ordinary Russians. And I'm not saying Russians want war. I don't think they do. I think there's a low threshold for self-sacrifice, but the going around swinging your genitals on the international stage does help people feel fulfilled and that they have, if not meaning, then some sort of satisfaction. This is so fascinating to me because you touched, again, just to wrap up the point about power. I think it's also so important for me to clarify what I mean when I talk about it, because in the absence of a belief system, it seems to me that the only thing that's left to hold society together is raw power. That human beings have the capacity to live in a society of millions (47/57)
What's up, everybody? My name is Dmitri 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 Peter Pomerotsev, a Soviet-born British journalist and former TV producer who has written two extraordinary books, which together have done more to help me understand the predicament in which we find ourselves today with respect to our relationship to truth, identity, and meaning. Then probably anything else I've read since starting this podcast, and that's saying a lot because I've read a lot of books and articles and listened to a lot of podcasts trying to figure out what it is that's really happening to us. What is it that's responsible for this creeping sense of unreality, where so many of the things that we've taken for granted no longer seem to work and where people feel (1/57)
describing that experience, he began to notice that some of the things that he wrote about, the cynicism, the sense of surreality, the nostalgia, and what he described as an aggressive apathy, were also showing up in Western countries. And he began to ask himself a question which, to this day, whenever I say it, it makes the hair stand up on the back of my neck. Why did the future arrive first in Russia? And that's the central question that has preoccupied me ever since I heard him say it, and which forms the foundation for today's conversation. Because as you will hear, some of the same forces that were operational in the late Soviet Union and in early post-Soviet Russia are at work in Western societies today. And if we want to understand what the future might look like when trust in institutions has completely deteriorated, when grounding notions of identity and meaning have all been disappeared, when any independent standard of truth has become so elusive that people are willing to (3/57)
believe in anything, and the only thing left to unify us is raw and unbridled power, then we would be wise to not only understand the path that Russia has followed in the last several decades, but to do everything in our power to avoid following it any further. Because it leads to only one place, and that is a repressive society that uses the language and institutions of democratic capitalism for authoritarian ends. For both existing subscribers and anyone new to the podcast, we've moved our premium subscription off of Patreon and onto Supercast, which you can now access directly through the Hidden Forces website at hiddenforces.io and get immediate access to the second half of my conversation with Peter and every other guest in a single unified episode, which will be delivered directly to your podcast app of choice every week or whenever we publish anything new. Subscribers to our Super Nerd Tier will also have access to the human transcriptions of both the first and second parts of (4/57)
my guest conversations, as well as the all new intelligence reports, which are the cliff notes of 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 each and every conversation, along with my takeaways from every episode. And with all of that out of the way, please enjoy this deeply enlightening conversation with my guest, Peter Pamarantsev. Peter Pamarantsev, welcome to Hidden Forces. Thank you for having me. I'm so excited to have you on, Peter. The reason I asked you to come on the podcast is because I want to see if you can help me and my listeners answer a question that I first heard you pose in a lecture or it might have been an interview you gave, but which you also ask in your second book on propaganda, which is, why did the future, i.e. the world we're living in today in Western society, why did that (5/57)
future arrive first in Russia? And for those who haven't read your books, that question may not make sense immediately, but I promise that it will shortly. But before we delve into answering that or trying to answer it, I'd love for you to give me a sense of who you are, your background, and your connection to Russian society insofar as it's relevant to today's conversation. Sure. So the story is actually my second book, which is partly a mix of family memoir and kind of analysis of contemporary propaganda. So I was one in Kiev, actually, in 77. And when I was nine months old, my parents were who were they were being arrested a lot for sort of essentially giving out copies of censored books, which sounds absurd today, but that carried a sense of around sort of seven years, but giving out copies of books by Nabokov and Solzhenitsyn, talking about sort of hand-printed copies that people gave to each other. And there was a time when a lot of kind of dissidents would be exiled rather than (6/57)
put into prison and camps or other people that were often given the option. The policy was trying to get rid of minor kind of troublesome elements. And so they were exiled and really accidentally, after a period of wandering around Europe, sort of politically homeless, they ended up in London because my father got a job at the BBC World Service. So I grew up accidentally British. And then I went back to the former Soviet Union, but to Russia, to Moscow, after university. I went to film school there, worked in think tanks there, and then interested in them, as you can already tell, both in policy and in arts and storytelling, kind of at the same time as I continued to be, and ended up working in Russian entertainment TV in the kind of the first draft of the Putin era when Russia was still pretending to be a democracy. So I came to Moscow in 2001, right after September the 11th, I remember it very well, because hardly anybody was in the plane, people were scared to fly. And then I was at (7/57)
film school and, you know, working on British documentaries about Russia until around 2006, and then 2006, 2010, stroke 11 was when I actually worked inside the Russian entertainment industry. And I mean, my great ambition was to make kind of feature films, but like all people who dreamt of making all featured documentaries, I ended up making factual entertainment shows, reality shows. It was a very exciting time in Russian entertainment, because a lot of these kind of Western formats, like the Apprentices, for example, or Love Island, or Stand Up Comedy, or sitcoms, were coming to Russia for the first time. And it was a time of kind of quite broad cultural experimentation, which was both an elite art and an entertainment. But yeah, my first book was about that world, but also seeing this new kind of authoritarian regime take hold that was really modeled in some ways on reality shows and entertainment, but certainly tried to be entertaining as well as oppressive, and that was really (8/57)
invested in TV as its main medium, but also in a weird way as it saw itself as a TV show. It didn't just use TV, it saw its own exercise of power as a sort of reality show, which definitely seemed to anticipate reality show hosts becoming president of the US. So in that sense, they seem to have kind of clicked on to some sort of truth that we all live in now. So yeah, but I left Russia in 2011 for many reasons, but partly because it was, you know, the turn towards dictatorship was already apparent, even though it was actually still the Medvedev era. So Russia was still playing nice, and officially, it was still moving towards the West, but everybody on the ground could tell that things were going really dark. People were starting to leave. Now it's obviously just an out and out dictatorship. And yeah, and I kind of like moved away from TV back towards policy, and have ended up kind of gravitating towards academia, I ended up working at the London School of Economics. Now I work at (9/57)
Johns Hopkins University, studying propaganda, studying the weird coming together of media and policy, both about Russia, but really across the world, and kind of thinking what media can do, how do we create TV and other types of media that are actually good for democracy? That kind of ended up being the question I sort of asked myself. So we know what the other side are up to. But, you know, we have a lot of assumptions about how media is meant to help democracy, but how do you tell stories, or how do you create shows that are good for democracy? And I can't say I've solved that, but that's kind of the big question that I explore these days. So you said that when you arrived in Russia, it was kind of the first draft of the Putin era, which was an interesting choice of words, given the fact that you also said it later when you were describing television that, in a sense that the Russian state saw itself through television, where you described sound a lot like a hall of mirrors. What (10/57)
role does television, and did it then and does it play now, in Russian culture and Russian society? And to that point, would you have the views that you have today, or the depth of understanding that you have today, not just as a result of the fact that you were an expat, but how instrumental was it that you were actually working inside of the machinery of television? I mean, look, there's other people who've written very, very good analyses of Russian propaganda without working in the television industry. So Arkady Ostrofsky's brilliant The Invention of Russia covers the 1990s, and the role that media and TV played in securing this new model of power. Andrew Wilson has written a great book called Virtual Politics, all about that as well. So it clearly didn't have to to write about this. I suppose it gave me a sense of the texture and the sense of the characters, and a sense of the kind of attitude of your regular TV workers who actually start this, and who are kind of like the sort of (11/57)
the media soldiers in the middle of it. So I never worked on political shows, because I wouldn't as a foreigner, to be frank, but also as an individually, maybe I wouldn't as well, given my background. But I certainly saw a lot of people who were making news shows and current affairs shows and documentaries supported the regime. And I'd go drinking with them, or I sit in an edit suite with them, or, you know, I'd have an editor on my show that just got off working from a piece of state propaganda. So I talked to them all the time, without writing a book, just they were just the people I knew, and the people I hung out with. So I got to know their attitudes, and their worldviews were kind of, you know, very important, because they're the sort of people that kind of reflected and both reinforced the kind of governing attitudes of the country. So I suppose that was a big added value. But in terms of the regime, and it's actually to TV, you've got to go back to the 1990s, when you have (12/57)
this chaotic period in Russian politics, democratic in a kind of, you know, chaos theory of democracy. And around 96, when Yeltsin, who's the president at that time, is really on the ropes, very famously, all the oligarchs unite behind him to stop the communists from getting into power. And they unite behind him and put their resources in, and the main thing they do is capture TV. Before that TV is used in a very chaotic way. You know, there are other forms that were more important to the Soviet regime. The Soviet regime was very invested in propaganda. But, you know, TV was pretty lame, basically. But they realized that, look, this is a moment where you could take advantage of TV, and they all the main TV channels which are controlled by oligarchs get behind Yeltsin and play an important role in securing his victory. And what is a sort of genuine vote at that point? Then in 1999, Putin is a nobody. He has a rating of, you know, I think it was like below 10%, when he's made Prime (13/57)
Minister by Yeltsin. And he's transformed into a vote winner via a huge TV campaign and a kind of a war in Chechnya, which is kind of a made for TV war in the sense that he is made into a war leader on TV. And he's completely aware of that. He's very aware that he's a no one. And that it's the power of television that has given him this aura, this charisma, which nobody thought he had. He's not a Chavez. He's never gone on the streets to rabble rouse. You know, he's not a populist in that sort of bottom up way. It's all created through TV. And he's completely aware of that. And so kind of almost one of the first things he does in the early 2000s, even before he takes control of the oil industry, which becomes obviously his key lever, even before he takes control over all the security forces, the first thing he goes for to take over as TV. And it happens bit by bit. It happens, you know, quite, you know, lots of things happen as some of the he does it overnight. But that's the direction (14/57)
he goes in. And he secures power over the main TV channels and the oligarchs he gets rid of are the ones that control TV. So Berezovsky, Gysinski, before he goes for the ones that control oil and gas. So he prioritizes media control. And the journey to securing media control is really at the top of his securing of authoritarian power. And, you know, we could say that since 1213, the internet also plays a big role. But really up to then, it's really all about TV. And really quite rapidly, he secures central control over TV. You know, first, all the big channels come under him, some smaller channels are left to their own devices. And slowly, all of that is collected into a fairly centralized system. So, you know, they prioritize it. They on a deeper level, what their spin doctors talk about is that they felt very weak in the 1990s. And to compensate for that weakness, they had to create the aura of power, even though the state was very weak. And the way you do that through TV, you're (15/57)
constantly reaffirming the central role of the Kremlin, you're doing show trials, you know, against oligarchs to show, haha, look, you know, we do have control. And so kind of informational dominance becomes a way to compensate for a sense of insecurity. I mean, now they pretty much have everything under wraps. But in the 90s and early 2000s, when oligarchs were very strong, when local governors were very strong, when, you know, security forces were very disorganized and redo the bidding of whoever would pay them the most rather than central power, you almost compensate for that by having, you know, hegemony over at the imagination. So that's another kind of deeper reason they invest in information dominance so much. I'm interested in exploring this reliance on storytelling. And also what it sounds like you're describing the aesthetics of power. And maybe something else, which we think about in Western capitalism as kind of fake it till you make it, sort of create the appearance of (16/57)
success and then sort of become successful through that process of having created the perception in the minds of other people. That's a very nice parallel. I hadn't thought about that, but that's not a bad parallel. That's not bad. So describe for me and my listeners what it is that we're talking about here, what it is that you describe in your first book through your experience of living and working in Russia. What is the sort of cultural manifestation that we're describing? And then what I would like to do is try to understand its origins, its progression from the end of communist Russia, because interestingly enough to get to ahead of ourselves, I did another episode with my friend Simon Mihailovich, who emigrated to the United States in the 1970s. And he sees the beginning of this unraveling actually in the period of destilization, but then really accelerating with Perestroika and then through into the early 1990s. What is it that you experienced that you write about that we're (17/57)
trying to get our arms around today in this conversation? Well, look, again, we're talking about phase one Putinism. So now we're on a different model. So, but it's a very important one to understand because it's one that's been imitated by a lot of people by Viktor Orban in Hungary, by Vucic in Serbia, by Erdogan in Turkey. And when we think about nightmare scenarios of the US, which I think is still nightmare scenarios, but there's the scenarios, we're talking about Putin phase one. And Putin phase one is something that was nicknamed managed democracy, which is still the veneer of democracy, but actually underneath it's becoming a dictatorship. Now it's just an open dictatorship. Again, aesthetics, the aesthetics of democracy. It's interesting. Again, I just want to point this out, aesthetics plays a really powerful role, I think in your book and in this conversation. And I think it says actually very interesting. I think when we look at politics, we always lead towards sort of a lot (18/57)
of explanations based on self interest or based on power. I think aesthetics and psychology, psychoanalysis might be interesting additions to how we think about these things. We've definitely started talking about psychoanalysis a lot more in America. We still don't a lot in geopolitics. But anyway, coming back to Putin, so the idea was to have the veneer of democracy, but actually still controlled. So if you were to switch on a Russian channel in 2007, eight, you would see actually a very lively debate show between different political parties in a way much more intense than an American one, much more kind of Jerry Springer like, you know, with a lot of rowing and shouting. But all those parties were actually to a greater or lesser extent either created or controlled by the Kremlin. Real opposition were already being forced out and would soon just be not allowed on TV altogether. That ends up being nebarnly. But before that, that's lots of stages. And the idea was to reflect different (19/57)
bits of society. So everybody felt represented. But to make sure that none of them could ever really compete with Putin. So the overall point of this reality show was there is no alternative to Putin. But you had your crazy communists who were meant to kind of soak up some of the resentment of pensioners. But everybody else was meant to look at them and go, oh, my God, they're crazy old commies. And then there was the really far right guy, Zyrunovsky, who was created by the Kremlin literally, who would play the role of like the crazy far right Steve Bannonny kind of character. And he would get, by the way, like 17% of the vote. But most people go, oh, my God, he's crazy. And he would say outrageous things, crazy things that part of the population would like, but anybody normal will go, whoa, he's mad. And then you had a kind of liberals who were always a little bit effete and a bit kind of, you know, very un-Russian. And they would, you know, get their 6% of the kind of liberal elite (20/57)
votes. But it was very clear that they didn't represent real Russia. They weren't real men. They were, you know, they were nerds. And, you know, they clearly didn't reflect normal Russians. Interesting. Real men also something really to sit on a bit and to think about in the course of this conversation, this notion of masculinity. Oh, yeah, that obviously plays a huge role, almost to kind of a camp sort of way with Putin's photographs of him being so virile and riding horses and going around bare-chested. And so you were meant to look at that and go, wow, Putin is just so much better compared to all of this. And there is no real alternative to him. But we do have some sort of debates. They don't want politics to be boring. It's not meant to be fun. You know, there were stories around these parties and these characters and they were all, you know, these fun debates and, you know, you got to vent a lot of spleen. Though ultimately, when it came to any big decisions, all these parties (21/57)
were completely loyal. So they came to sort of arresting an oligarch, they'd all be on board. So that was the model. I suppose the twist to give to all of this was that this was done quite openly. So it was openly telegraphed that all these parties are loyal and controlled and part of the Kremlin. So this is a very, very interesting layering of messages. Yes, we do have some freedom, but actually it's all controlled and don't you get any ideas. So Koav, who was the kind of guy who was running all of this, who was kind of in charge of media policy and in charge of running the so-called parliament, would leak photos of his own office with, you know, telephones to all these party leaders, making it very clear that he was in charge. And then it's kind of hard to, sometimes I find it hard to grasp for, for Westerners. This wasn't about conning people. This was about saying, this is a game. These are the rules of the game. These are the limits of the game. And then on an even more subtle (22/57)
level to say, look, democracy is actually always controlled. We have democracy, but it's really controlled by our own deep state, so to speak. And it's the same over there in America. They do have democracy, but it's controlled by a deep state or in Britain, it's actually all controlled. So this is the package. And sort of saying that the alternative was the 1990s, which was chaos. Do you want that? Of course you don't. So always bouncing off like, you know, that democracy was just chaos. This is what it is. You know, this is sort of command and control democracy. And, you know, we can have some fun with it. You know, there's some color. Elections are definitely not up for it, but you can go and say some crazy stuff. You can even criticize bits of the, maybe not Putin, you can criticize the government. You don't criticize Putin, who's sort of almost above politics, but you can have a go with the government. You're allowed to do that. So there are some bets, you know, there's ways to (23/57)
express dissent. But please know that actually at the end of the day, it's limited. Is the distinction that you just can't speak too truthfully, that you can't break the third wall? Is that the real distinction that it's okay to dissent? Just don't really use language from the world as it is, from reality. You have to continue to play act in this larger sort of masquerade. Is that the distinction? Exactly, exactly. So I think you've really put your finger on it there. And when we think about power, it's getting people to play along, which shows you have power. And by people playing along, you kind of weirdly break them. And people by agreeing to play along, people become part of it and sort of commit it to it. And I think if we think about power and dictatorial power, it's getting people to play along, which is the secret, because actually only so much your repressive organs can do. There's only so many people you can arrest. So it's getting people to play along, which is the key. It (24/57)
was also in the Soviet period. And so it was interesting. So when I was there, if you wanted to speak the full truth, you weren't at that moment usually killed. You were just off TV. Yeah. And being on TV was being relevant. So there were opposition people like Boris Nemtsov, who was on TV for a long time. And then he started to go too far. And then there were just blacklists. There were blacklists of people who cannot get on TV. And Nemtsov eventually got into those lists. And people sort of think about, talk about the real opposition, which meant not being on TV, which meant being irrelevant. So you weren't killed for it at that point. You weren't put in prison for it. You were just made irrelevant. You were not in the reality show. You weren't in the Big Brother House. Instead of like Orwellian Big Brother is the Big Brother House. If you want to be in the Big Brother House, you've got to play along. And you're right. And that's what I try to get at in my book. It's not a top down (25/57)
system of coercion. It's a way of getting everybody playing along, which in a very subtle way breaks you, because you become part of it. And there's actually been a lot of anthropology about this. I'm not the first person to notice this. There's been very good anthropology about this, about the Assad regime, for example, in Syria, the first father. So I'm certainly not the first person to tweak this. But my book is in many ways about what it's like living in that, I suppose. So I actually want to pull a quote from your book. I have so many quotes on this rundown. I have quotes from both, this is not propaganda and from Nothing is True and Everything is Possible. This quote speaks to what you were describing just a moment earlier. Let's see where I want to start to pull it from. But even when you know the whole justification for the president's war is fabricated, even when you fathom that the reason is to create a new political technology to keep the president all powerful and forget (26/57)
about the melting economy, even when you know and understand this, the lies are told so often on Ostankino that after a while you find yourself nodding, because it's hard to get your head around the idea that they are all lying quite as much and quite so brazenly and all the time. And at some level, you feel that if Ostankino can lie so much and get away with it, doesn't that mean that they have real power, a power to define what is true and what isn't, and wouldn't you do better just to nod anyway? Now, this speaks to two things. One, it speaks directly to what you were describing before, which is that in a sense, the power to define reality is a power that's so awesome that it instills in the listener or in the viewer, at the very least a healthy sense of fear, fear of going against a power that's so powerful that it has the capacity to define what's real. But it also speaks to something else, which is really what I want to get to and draw it from you, which is what were the (27/57)
distinction was always equal or did it begin where more people were convinced and over time it just became the signal for power? In other words, the form of propaganda and did people's conviction in the story deteriorate over the course of the USSR's history so much so that by the time of the collapse in the 1990s, there was a sense that like again to the title of your book, nothing is true and everything is possible. So I think we can look, we can go all the way back to the start and look at sort of peaks and crests in this. If we're talking about the period that I'm kind of bay concerned with, which is the Cold War period and post-war period, there was probably a moment in the 1960s where there was a real hope for socialism with a human face. There was a certain amount of optimism. There was real economic progress and there was a certain amount of liberalization and a certain amount of reformers, especially in the culture sections, which might make you think that it was possible. By (29/57)
the 1970s, it's clear that it's sort of the breaching of era, complete cynicism. By the way, the time it gets to the 80s and 90s, it's lost all its meaning. So I'm concerned with that bit. I mean, you could then go back to the 20s to the Stalin period. 20 people seem to believe it, but the Stalin period is just about power. So maybe this is a cycle, I don't, you know, we'd have to do a lot of kind of deep right for that. But in what I'm concerned with, which is that period, then I think that's the kind of arc. But coming back to what I was saying exactly about the Soviet one, the difference between the Soviet one and the Putin one is that because communism itself was meant to be a rational enlightenment philosophy, which was meant to respect evidence, it claimed to be scientific, you know, it claimed to be an enlightenment, the ultimate enlightenment experiment. A, there was a normative position that you could criticize it from. You could say, well, you've promised to give us socialist (30/57)
utopia, but you have not. And here's the evidence. And they would then try to produce other evidence, say, well, actually, we have, look at these statistics and the Soviet system had all these think tanks trying to prove the economy was working well. You know, it was quite bizarre. They came up with the idea that people weren't unemployed, they just had so much free time, that showed it was doing well. I mean, it was like, because it was a system which was meant to have values, you could attack it for that. You could say that you are creating a better society. Why are these people in prison? And because they signed up to various human rights norms, you could criticize them for that. The dissidents used to say that we're going to hold you accountable by your own laws. There were laws around freedoms in the Soviet Union, which were clearly ignored, but they were there. So because it was a coherent philosophy and an enlightenment philosophy, there was a normative standpoint that you could (31/57)
criticize it from. The difference with the picnic era is like, they don't believe in anything. They can be left wing, right wing, they can be nihilist, they can be idealistic, they can change, they can be completely situationist. I think nihilism actually is a coherent philosophy. I think that cynical, cynical, if you look at the kind of definitions of cynical, it means you can believe lots of things. It's not believing in nothing. It's like, belief is so thin that you can do this thing in the morning and this thing in the afternoon. That's the world that I lived in. That's interesting though. So what is the distinction between believing in anything and believing in nothing? So nihilism is still a coherent worldview. I mean, nihilists were 19th century, kind of like heart. I mean, there's Russian novels about nihilists, their belief in the blackness is a commitment. They make a commitment to their nihilism, like grunge fans or something. There's a philosophy there. This is about being (32/57)
a nihilist at one moment and then putting on a business suit and being a kind of liberal rationalist the next. There's a coherence to nihilism. Here, we're talking about just being different things. It's more a masquerade that you're constantly indulging in. I mean, there is an emotional logic there. There's a psychological logic there, which I think we couldn't try to sort of find. So I'm not saying there's nothing there in terms of an engine, but in terms of belief systems that you can translate into words and ideas and facts and debates, there isn't a stable one. And I'm always asked, what does Putin believe and what do Russians believe? And I'm like, if you're asking that question, you've understood nothing. The point is they can believe lots of things and none of them matter. And that's hard for, again, in a Western culture where we're brought up from school age to say, what do you think? Yeah. And to re-hardening our sense of self, it's very hard to understand a culture where the (33/57)
opposite is valued. And that was actually already embedded in the Soviet educational system, where nobody asks you what you thought. You were just meant to power it back Soviet dogma, whether you believed in it or not. So that was already there in the Soviet system, but it's kind of multiplied. And if anything, and what I try to get to in the book is what they would say that all your beliefs in the West are bullshit, what I would always hear from, and there are kind of elite because, you know, people who work in media, create media are sort of elites, was that you don't understand, Peter, they would tell me, all that stuff about human rights, all your stuff about a liberal world order that you've grown up with, it's bullshit. Your elites don't believe in it either. It reminds us of the Soviet Union, where they would parrot these things, but no one believed in it. And actually, below all this are just games, manipulation, and the same kind of, I think I call it culture as zero gravity (34/57)
in the book, that we have here. And you will find that out soon. And I remember listening to them going, oh, you just have, you know, you're, this is sour grapes. We have politicians who still believe in facts and ideas, they're corrupt, whatever, but they still believe in stuff. And I suppose the story of my second book is coming back to the West and going, Oh, my God, did they actually have a point? Because you just have this explosion of a lack of belief in anything and a very similar attitude towards facts. So I suppose that the symptom of this world view is that facts lose their meaning because facts become instrumentalized, all ideas are instrumentalized. They only, you know, they're not a thing in itself in this world. There's something to hit people with or confuse people with or intimidate people with, but they're not something that you kind of use to debate because there's nothing to debate about. Facts lose their meaning. And if anything, there's this kind of celebration of (35/57)
sending a big middle finger up to factual language and a reveling in nonsense speech and a reveling in just saying the most absurd things and saying, that's kind of almost your kind of your badge of honor. And, you know, we see some of that in the West now, which was, you know, what kind of struggling to deal, how you deal with leaders who don't care if they're caught lying. That was one of the agonies for my liberal friends in Russia. You know, they really believed in holding truths of power. And they would produce this evidence about Putin's corruption or about, you know, the fact that the elections were rigged. And the Kremlin would go, So what? Yeah, we're lying. And that resonated with people. Most people in Russia said, Yes, so what? None of your ideals matter. Democracy was a nightmare or a sham. What is this evidence that you're producing? What does it mean? It means nothing. We live in a world of chaos and let's speak about it that way as well. And I remember so many of my (36/57)
friends just being like, you know, because they believed in democracy. And they were like, no, but here's the evidence. And it just didn't mean anything. And that was a very dizzying moment. But now I think we see it everywhere. What kind of what was used to it now, where the evidence has stopped meaning anything. So much to pick apart here or to reflect on. First, again, I want to pull a quote out from your book that actually speaks directly to what you said. This is not propaganda. Were you right? I returned to London because in my naivete, I wanted to live in a world where, quote, words have meaning, where every fact was not dismissed with triumphant cynicism, or as, quote, just PR or quote, information war. Here are the two sort of things I want to highlight. One is it seems that what you're describing is a society that feels as if it has gone through the apocalypse. And what it has discovered in the course of doing so is a deeper truth, which is that there really is no truth, that (37/57)
everything is relative, that nothing has underlying substance or meaning. And so that the truly enlightened people are the ones that understand that and in a sense believe in nothing, not in an ideological way, but truly deeply nothing. So that's one observation. And I also want to reflect on whether that's actually true or not, because you can approach that question from two different perspectives and both I think can carry some a lot of intellectual weight. And the second thing I want to sort of reflect on is a more practical question, which is what shattered that mythology? We don't have to necessarily try to extract that from the Soviet experience, because I think in some ways we tried to address it a bit and we talked about the Stalinization or Perestroika or the 1990s where communism collapsed and all of a sudden you had these overnight billionaires, you know, running around town with Maybachs, as you describe in the book, but maybe more to the point, what shattered this myth in (38/57)
the west? Because as you pointed out, your colleagues in Russia would say, you will discover this soon too. And this is the question, right? Have we discovered this? Is that what's happened here in the west that we discovered it at some point? And I would say in a sense we have, but then that brings us back to the deeper question, which is, did we discover a deeper underlying truth? Or in fact, have we in a sense deluded ourselves? And then further to the point, if in fact we discovered a deeper underlying truth that really there is no truth that we can discern, what does that say about our need for mythology? And can we erect myths and live by them knowing this deeper truth? Because this is the, this then brings us all the way back to some of the fundamental sort of foundational issues with the Enlightenment and the death of God. And our attempt to, in a sense, construct a society very much along the lines of communist Russia, highly scientific, but full of so many contradictions. And (39/57)
you sort of wonder, where does this leave us? So I said a lot, but I'm curious, I want to allow you to just reflect on what I said and respond however you want. And we'll see where it takes us. Yeah, look, there's so many issues here. So what happens when you realize that like the myth is hollow? I think there's different ways of reacting to it. So the working out of the communist in Russia, the communist myth was hollow. And the attempt at creating democracy in the early 90s was disastrous in so many ways. Ended up with people who believed in nothing. But doesn't mean that they were free. And here's a big paradox. And we see this all the time in the West with people who don't believe mainstream media. They're not free. They end up embracing conspiracy theories as a way to make sense of the world. So we still need a way to make sense of the world on some psychological level. So if it had led to real freedom, that would be interesting. But it didn't. If anything, the opposite, you go to (40/57)
a kind of, I want to try and describe in the book, was almost a medieval sort of psychology, where, you know, instead of the kind of mix of myth and reason that Enlightenment democracy had, you just have pure myth. And conspiratorial thinking replaces ideology as a way of... And in a sense, you fully invest yourself in the story that there is an all-powerful elite and that they control the world and that you certainly can't do anything about it. But in somehow, in your sort of recognition of that, that you somehow are exercising a level of freedom. If anything, you'll have completely helpless. So this is the paradox. In order to kind of be free, you need to trust at least a little bit. And we see that everywhere in the West and you see that in Russia as kind of dominant. And I think that even though the various messages the Kremlin can do, they can believe or not believe in them, the conspiratorial world view is genuine. I mean, that is... That's not a world view as in as like a (41/57)
philosophy, that's like a psychological, you know, crutch, basically. And the need for identity is still there. And the need for fake community is still there. And all those things are still there. If anything, they've kind of been made naked. You just have the psychological pulsating needs now with no veneer of ideology or much less of a veneer of ideology. And I think you see the same here. When they came up trying to come up with a name for the Putin Youth Group, which was openly modeled on the Hitler-Yugand, they didn't call it young Komsomol or Hitler-Yugand or young whatever, they just called it Nashi. Us. So there's us and there's them. So the need to define yourself, or none of that goes away. The psychological underbelly, if anything, is revealed. So as long as there's nothing in freedom, there's just these psychological needs and fears and inability to make sense of the world. And, you know, the need for warped, sadomasochistic father figures, all that stuff is there. So in (42/57)
that sense, that's the Esquistle very relevant to understand it all. Just the ideological bit and the kind of stuff of democracy about debates and reason, evidence that's all gone. And I think you see some of that here as well. You have these kind of political movements, which obviously they're tied to in America, problems about race and all that kind of stuff, because that's the sort of history that we live in here. But their essence is just expressed through pure belonging, almost sometimes almost without ideology. I mean, is Trump right? Is he left? Well, I mean, we can't really tell anymore. It's just this need for certain types of authority figures and a certain type of experience of, you know, I'd say pseudo community. So that's kind of what we're left. And again, I'm certainly not the only people to notice this that as ideology and the politics of ideology goes away, everything becomes about identity in and of itself. And I think we have to think a lot more about what is (43/57)
identity, and what is healthy identity and what is destructive identity. But, you know, Fukuyama's got a whole book about this, you know, about how ideology went away. So now you're just left with pure dynamics of belonging and what belong. And again, Russia got to that very, very early. This idea, they twig very early that Putin doesn't can't be ideological, because people don't believe in any ideologies. And also, like, he needs to cobble together a lot of other people. And so they come up with this idea of creating what they call the Putin's Coeblitions Tour, which is translated as the Putin majority, but it's much closer to what Trump refers to as the American people, the real people, the true people. It's this amorphous emotional thing that anybody can project themselves into, which is really defined by what it's not the enemies, the enemies of the states. First, it's the oligarchs, then it's the West, it can move around. So it really is about giving people that sense of belonging (44/57)
really outside of a, in a very kind of jello like emotional construct, which is constantly changing its kind of messages. But the emotional structure is very similar. Yeah, it's interesting because you also mentioned identity, which I think is the other half of this story. Because I think that what creates the vacuum is the destruction of both identity, a sort of sense of communal identity, and meaning, and its replacement with one thing, power, a sort of raw power that can define both identity and meaning and is foundational to both. Yeah, and I think that's pretty evident from Russian foreign policy. When in 2011-12 there's huge protests demanding reforms in Russia and concrete reforms and reforms which will end up loosening the power of the Kremlin, whoever's in there. Putin's response is to set off on a bunch of imperialist adventures, and they are all about that. Let's compensate because people do need meaning. Again, none of those things go away, by the way, even when you stop (45/57)
of people, if they have shared beliefs, those things allow them to form expectations about people's behavior and their own behavior, et cetera. But absent that, you need the sort of Leviathan. And then the other point is interesting about entertainment because in a sense, it seems to me, in the world you describe in the book, and I want to also use this as an opportunity to begin to shift our attention towards the West, it seems that entertainment very much plays that role of quelling the inner-term oil of inspired by meaninglessness or just filling the void of the emptiness of everyday existence, that there's something to that, that it's central in that way. And I feel like we've seen that happen in the West. We've seen it happen in the stock market with the transformation of the stock market from something that actually performs a very basic utility function of reallocating capital to being actually increasingly a casino and a place in which to act out the dramas that begin in some (48/57)
ways, quite literally in online communities with the example of like GameStop or some of these cryptocurrencies, people looking for communities and fusing them with financial markets, also with the election of Donald Trump and increasingly Rand Paul and Anthony Fauci, and everything becomes increasingly a drama, everything becomes increasingly a form of entertainment. So actually, this, one, love your thoughts on that. And then I want to ask that question when maybe we'll move this to the second half of our conversation and I'll ask it, we'll keep it for there, but when did you first begin to see some of the characteristics of this sort of post-Soviet Russian culture emerge in the West? So, well, the revolutionary year of 2016 is obviously the one that is the inflection point. Both Trump and Brexit happening, but we already saw elements of it on the fringes. But without a doubt, the Trump moment is huge. Then you see the emergence of Duterte in the Philippines, who's 2015, very, very (49/57)
recognizable, Bolsonaro or bad, you know, there's another pattern here, by the way, these are all men of a certain age. So I didn't, there's another kind of like through line here when it comes to identity. Which I'd love to explore. I just think it's just pretty self-evident, isn't it? I don't even know what to say. It's so obvious that there are a certain type of men, you know, projecting a certain type of masculinity and appealing to people who feel under threat, I suppose. But we can go deeper, you're right. So all those things are very similar. But then I'd say also that the rise of conspiratorial narratives, aside from the power bit, the appeal of conspiratorial narratives, so again, throughout Eastern Europe, about Vucic here, the rise of it, I mean, the US, and really conspiratorial thinking being the thing that replaces ideology. So we always have conspiracy theories. The Soviets had their conspiracy theories that the bourgeoisie were behind everything. But that conspiracy (50/57)
theory was that's buttress in ideology. The Nazis had the Jews behind everything. But again, the conspiracy theory was a subset to the ideology. Here you have almost conspiracy thinking for the sake of conspiracy thinking. The conspiratorial mindset is the ideology and the conspiracy theory can change. One moment it's the imperialist, the next moment is the Jews, then it's the aliens, then it's Q. It's always changing. There's a lovely statistic about most people who follow QAnon didn't actually understand the details of QAnon. So it was just about being in the conspiratorial world that they derived fun out of. There's lots of research showing that conspiracy theories are very related to when people feel there's no sense of future anymore. Which I think here is the key. Those ideologies, well, for all their obvious faults, were future-orientated. We were heading somewhere and you could sort of judge facts and evidence in comparison to that. The facts show that our society is (51/57)
progressing, or the facts show it's not progressing. We need to progress better. Just a whole idea of progress kind of pushes you towards a slightly more rational discussion. When that disappears, conspiratorial narratives tend to rise. There's very good research in Hungary about how after the 2008 crisis, which is one of the other big moments, I think, which undermined faith and liberal democratic progress, after the 2008 crisis, which hits Hungary very hard, people stop believing in the future and conspiratorial narratives go up. So these things, I think, are very connected. So I'd say if 2016 is the moment where the new unreality maybe becomes impossible to ignore, and if the rise of conspiratorial narratives is the thing to track as a kind of growth, I think obviously 2008 is the big moment, which undermines for a whole generation any sense of a future. I think that's a very obvious thing to say, but I think it's very interesting to see where it hit hardest. I mean, it hit hardest (52/57)
in bits of America, where people had their savings wiped out. It hit hardest in Hungary. Hungary was really hit by the financial crisis, and Orban is a really interesting reaction to that, definitely the most Putin-esque politician in Europe, and so on. So I think that's the big kind of moment when we realize that what was an ideology has become a myth. We think we're heading towards this happy, globalized village, but actually, A, we're not getting there, and B, loads of people are unhappy about it, and loads of people feel left out by it, and there's a whole generation of young people who can't even buy houses, and the myth becomes, it's seen as empty, but again, it takes a while for a crisis to sort of percolate into culture and politics. So 2008 is the shock. It kind of percolates through around the 13th century. So many thoughts that I want to try to articulate before I move it to the second half of our conversation, Peter. One, I love this observation. You made it in the book as (53/57)
well, which is that in the absence of agreement, in the absence of societal consensus, the future becomes impossible, and so in this sense, this also somewhat explains why there's an appeal for the sort of nostalgic leader who looks back towards the past to give people something that's stable, something that's in a very physical sense solid to hold on to. I also, I just love, and I want to reflect on it in the second half of our conversation, this observation about, one, the sort of evidence that we had entered this world with the 2016 election as an example, and distinguish that from looking to understand where did this process begin to go off the rail, so to speak. What are the causal factors? I think 2008 absolutely ruptured in a sense, people's belief, but I think 2001 and the invasion of Iraq, using words like freedom and democracy was in some ways more devastating because so much of who we are in the West is based on this idea of Western liberal democracy and capitalism is the (54/57)
second part of that equation, which 2008 completely destroyed or our response to 2008 and the self-dealing that was so evidently on display by those who supposedly were entrusted with the responsibility of protecting us and safeguarding the overall integrity of the system. I think you can look at the entire progression of Western society throughout the 20th century, from monarchy and Christianity and monotheism to rationality, nationalism, and capitalism to now where I feel like we're in another period of transition where who we thought we were isn't exactly who we are, and that's the space I want to explore with you in the second half of our conversation, Peter. 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 to access the second half of my conversation with Peter, as well as the transcripts and intelligence reports, which (55/57)
include additional notes, resources, links, and other material that will help you get the most out of each and every episode, head over to hiddenforces.io and become a premium subscriber today. Peter, stick around. We're going to move the second half of our conversation into the subscriber over time. Okay, that's great. 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 full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io. 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 (56/57)
concept of what consciousness is. I think of AI as applied philosophy. I think of it in that sort of a way. What do you think of this other culture that and this could bring us into a larger discussion about Silicon Valley bubble thinking and sort of how it is or is not representative of the largest society. What do you think about this immortal this quest for immortality that is finding new life in Silicon Valley? I think it's laughable and stupid. It's just the more bubble-esque they become in Silicon Valley. The bigger the goals. It's no longer curing cancer. It's ending death. It's no longer fixing this world. It's going to Mars. And I think it's great to go to Mars but thinking about it as some sort of philanthropic endeavor is ridiculous. So that's the first and the second thing is that the heart of that problem is the singularity idea. It's this idea that everything is exponential and that technology will happen exponentially. And if it does then we can eventually in the day a (32/57)
mean? You know, and you cannot deny that that is a human experience. It takes denial to push that out of your model. And again, that's because I think in large part it's inconvenient. And it requires a tremendous amount of work and effort. So before we wrap up this interview, Christian, I do want to talk a little bit about some of the great interesting stuff that you do with your company, at least one case. Now, what role have you played with Ford? I'm fascinated with Ford because I'm fascinated. You mentioned Lincoln and the New Lincoln's specifically the continental has stood out for me. I mean, I've seen that car on the street and there's no other car. Volkswagen has a nice new model somewhere I've seen. It's not out yet. It's a concept car. But like that car, when I hit the street, I was wowed by it. And when then I read your book and I realized that this was, you know, obviously it must have been, but this was a conscious decision by the company to reinstate luxury in the brand. (51/57)
we're interested in. So that's the big story, the smaller story, which is what I'm trying to talk about in my last book is it's also very practical and helpful. So people talk about art, particularly in America, about art and music and museums as something you do on Sundays in your spare time. That is sort of a luxury for the wealthy. And that is there's something to be said about that it's very luxurious to do. Yet I think engaging with art is the most advanced way of learning about others and engaging with other times and other ways of thinking. It also provides the context for understanding everything. Right. But it also, if you want to understand how to sell cars in China, it's nice to understand what it's like to be a Chinese driver or somebody buying the first car in the history of the family. If you want to sell mobile phones in Brazil, it's nice to understand what it is like to be a 17 year old woman that's buying her first mobile phone and what her life is like in order to (15/57)
and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter and Instagram at hiddenforcespod or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kaphinas. Today, we speak with Christian Mesbia. Christian is founder of Red Associates, a consultancy group focused on helping companies bridge the qualitative divide between themselves, their products, and their customers. The sociologists, anthropologists, economists, journalists, and designers who make up Red employ the methods of social science to study human behavior. Instead of minimizing complexity, they embrace the non-linearities, helping companies reinvent themselves and their products from the bottom up. In this episode, we examine the world from the perspective of human experience, what philosophers call phenomenology. Rather than try to objectify reality, we will revel in its subjectivity. Rather than discount our senses in favor of hard data, we will discount the data in favor of our experience. Experience matters. Reality is messy. Data is fuzzy. The problem of consciousness is hard. Try (1/57)
as we might to fit the world to our models. Reality has a stubborn way of eluding even the most disciplined researcher. The most experienced traders don't make decisions off a spreadsheet. They use their intuition. The same intuition that you use when deciding who you can trust, if the price you are paying for something is too high, or if there's just something off about a room, or a scene, or a story you've just heard. To discount the authoritative wisdom that comes from lived experience is to discount the value of the very question that has led you down the path of inquiry. It is to discount everything that makes life meaningful. And if we want to understand the world around us, why we do what we do, then that journey must begin and end with the human experience. As always, you can gain access to reading lists put together by me, ahead of every episode, by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to this show on iTunes or Android, make sure to (2/57)
subscribe. If you like the show, write us a review. And if you want to sneak peek into how the sausage is made, or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at hiddenforcespod. And now, let's get right into this week's conversation. So Christian Mesbia, it's wonderful having you studio. Thank you very much for coming. Thank you for having me. Yeah. I met you and first, in fact, heard you speak at David Kirkpatrick's Techonomy conference, which our listeners know because David was on our program. He was actually our episode one on the show. And I really liked what you had to say. I found a deep level of kinship with your approach to... It's difficult for me to even kind of express it. Our listeners will know some of what I'm referring to from the episode on philosophical mathematics, Wittgenstein. It's a challenge for me to express what it is exactly that I found appealing with your perspective. But why (3/57)
don't you tell us a little bit first about who you are, and then we can proceed further in this discussion. Where would you like to take it? I suppose that I should have been an academic philosopher, but I was so bored in university. I found it dreadful and political, and it seemed like people were fighting over very small things. So instead of that, I chose to figure out a way to do philosophy or be interested in the kinds of topics that I was interested in, in other ways than the traditional way. So I founded a consultancy when I was 22 or 23, and I sold that and I did another one, and that was merged with a bigger company and so on. So this is my third or fourth version of the same company, really, which is trying to use sophisticated theory about human beings to understand us and understand our life and use that to figure out how to make things, how to make cars and phones and medicine and all kinds of things. You found a way to make philosophy profitable. You bridge the... Another (4/57)
way, would it be fair to say, is you bridge the qualitative divide between us and data, us and the quantified world. Right. So the big deal right now in the business world is, of course, that there's a new set of data we can get our hands on, and that is the data that tracks us while we click on where we move, and in your phone you would have 80 different things that it can measure and know about you. And that's a huge step forward in terms of the way that we've understood markets before, because the way we understood markets before was by asking people, and we're notoriously poor at figuring out what we want or like or even what we do. So when we say we cook in a certain way, it's probably untrue, and when we say we dress in a certain way, it's probably untrue. So the big data world and the new data sets that come about are exciting, yet they're not a truth machine, and that's sort of my critique of it is that people think that the data sets that we now have from the digital world is (5/57)
a map of the world, which it definitely isn't, and it also matters who asks questions and how we ask questions to that data, and that is largely overlooked, and that's why we make so many mistakes. You're saying it is a map, it is not the world, or it is not a map? It's a map, but it's not of the world. Exactly. It's a map of some part of the world, but not the entire thing. It's interesting that you say that because another thing I was thinking about while reading your book in preparation for this interview is the distinction between the map and the territory, and I do think that we do suffer from this conditioning increasingly in a digital world where we've mistaken the map for the territory. So I want to get into that, and we will, but before we do that, I want to ask you something because I am curious. You described it very well. You are a very philosophical person, and you found a way to apply philosophical principles and ideas and thinking, and introspection and a certain (6/57)
humility. I think you have a good sense of humility around what is knowable. I mean, we'll get into Heidegger and being because I think that's very relevant as well to this, and phenomenology and experiential knowledge, and authoritative wisdom that comes from lived experience. I think that's very powerful. But when I was reading you, I couldn't help but sort of empathize again with some, like when I saw you speak at the economy, I empathized with some of your perspectives, and I thought to myself, well, what was this person's life like growing up? And I am curious about that. So you're from Denmark. I don't know what other culture is like there and how people respond to philosophical inquiry if they think it's a waste of time. If they don't, in America, I think for the most part it's considered kind of a waste of time. You're asking questions that don't have answers or whatever. I certainly was very sort of introspective, very curious. I had these big questions as a kid and no real (7/57)
answers, and I felt very alone in that journey for me. I'm curious, what was that like for you growing up, and when did you begin to ask these questions? When did you start looking at the world, and when did you realize that you were looking at the world differently than others, and did you have people in your life to sort of make you feel that this was or was not normal or whatever else? Right. That was 17 questions in one, but I'll take it from one end. I think I've always been a reader, and I've loved the actor reading. Probably some of the times I'm most happy is when I read what happened 200 years ago or what other people thought about something, and I find it amazing that people had the same thoughts and feelings that I have right now in Syria 400 years ago. Isn't that amazing? It's just time travel almost, and I very early on found that. I think some people say that there's a correlation between literary criticism and asthma. I think one of the reasons ... And asthma. Yeah, (8/57)
because the more asthma you have, the more books you read. I had asthma as a kid, so I ended up reading a lot. It's not though in Denmark there isn't an anti-intellectual culture. You have at least half of the population would be interested in books and would be talking about it, and it's a completely reasonable thing to spend your time on. There's a concept of being cultured, which is part of the culture that is okay to know about music and our songs and our stories and so on. That's part of being a human being, and even though that's not productive in the most crude sense of the word, it certainly is part of life to know what kind of music they played and made up in the 1890s and so on. I didn't have probably the loneliness that you described, but I was probably a bit more excessive in the area of reading than most people. Then I found very early that I liked seeing patents and things. I liked seeing how, why people do what they do and so on. So I started being an observer and a (9/57)
listener more than a speaker and a doer, and I like sort of waiting a little bit before I make conclusions and cast judgments. I think I found that the people that understood things were the ones that listened a lot. Casting judgment is something that is necessary, but only at the point where you know, and I just felt that people did it very fast. In America, when I moved to America around a decade ago, I found a culture where people have the decision before they've even done the inquiry and then try to spend a lot of time on fitting the data to that conclusion. I found that sort of unhelpful and weird. Well, especially in media, that's definitely true. I also worked for a really wonderful man, but he used to say, we're going to do a bunch of focus groups, we're going to do all this and that, and then we're going to do whatever we want anyway, which made him very human. So listening to you talk, one of the things that struck me is, and I just wanted to say this, again, I find kinship (10/57)
with this idea that you found companionship in the works of other people who had written perhaps lived millennia before you, which I relate to that very much. I also was thinking when you were talking, I was thinking about Denmark, which is an interesting case because Denmark has for a very long time been a very homogeneous culture. It's very interesting that you are partly in the business of bridging cultural gaps and cultural divides, which is something that I will want to get into. There's something to that though, that it's also the most open economy in the world, which means that you can't stay and build walls around yourself if you want to survive. Because it's so small. It's so small. So you have to trade and you have to, it's been a sort of a trading seafaring nation. So language is important. Nobody speaks Danish. So you have to learn Russian and you have to learn German and you have to learn French and so on. If you want to trade with anybody and if you want to trade with (11/57)
them, you also need to understand where they come from and what their world is like. So even though it's a very homogeneous country, it's also a country that is so weak and have lost every single war for a thousand years that since the Vikings really, it's only gotten smaller. And that means that you have to compete in other means and cultural understanding and learning languages and so on is one way. Those northern Nordic countries are beautiful, gorgeous countries. In the summer, right? A couple of weeks in the summer. Yeah, just but also like just in general, the architecture, the interiors of the homes, I imagine in large part because so much of the time must be spent inside because of the winners. And also because there's more material wealth that can be accumulated because less of it is spent sort of, you know, I think I'm Greek and I think about how in Greece people would traditionally spend so much money sort of having a great time. But there's so much beauty increased to spend (12/57)
your time outside, you know, to go and spend it by the beach or whatever else. So let me ask you this. So in the context of what we're saying, now we're talking about philosophy, we're talking about sort of how your progression and these questions and there's something that comes up in your books and when I've heard you speak and that deals with the humanities. And this is where I would like to take this now because you also cite a number of people in your work who have given you inspiration or with whom you connect. One of who is Edward O. Wilson, the famous biologist. I've actually read, I assume you may have as well his book on the meaning of human existence. And there's this great quote in that book that deals with the humanities where he specifically says that if aliens were to visit us, what they would take from our society would not be our science, they would find it dismal and useless. They are far, have sparser past us. They would instead be fascinated with our humanities. And (13/57)
so that's where I would like to kind of move us now to discuss sort of what the humanities are to you. And then let's have a conversation about what the humanities are to us. What is the significance of the humanities? Because you have some very great things to say about that in your book. Yeah. So there are two sides to that story. There is the big story, which is the meaning of our culture is the way we create beauty and the way we create, try to understand the world we live in. And I think Winston Churchill said that when he was asked to cut the budgets during the darkest times of the Second World War, he was asked to cut the budgets of the national endowment of the arts and humanities. And he said, well, what are we fighting for then? No, what's the point? And I think that's the big story here that you can listen to our shared world by listening to the music that we've created. And you can understand where our life was at. If you read the novels and the poetry of whatever time (14/57)
service that person. So I think the command is not the only place, but it's the most advanced and the best place to learn about the skills of putting yourself into other people's world and engaging with that world in a sophisticated way. So I just find that the people that are most helpful for me in my company and that we hire are trained in history, art history, literature. There's a study you cite from a company called or a research outfit called PayScale. I see, is that correct? And what did they find? What was the... Not surprisingly, they find that if you come out of college with a computer science degree, your likelihood of making money and getting a job is higher in the first years compared to people coming out of the humanities. But if you take the top 5%, if you take the best earners, the people that make most money in the country and you can care about that or not, but it's sort of one measure of success. And there's an over... There's a big weight on people with a humanities (16/57)
background. So if you look at the people that run our banks, if you look at the people who run the big financial institutions, they have a history or a French background. They're rounded people. Theater. Exactly. They're interested in so many things. Anthropology, psychology, philosophy. Exactly. So what I've seen in the big corporations that I worked in, there is a glass ceiling for people without a rounded understanding of culture and language and so on. And if you don't have that, which is something you get from being in the humanities, you have a hard time competing on the top jobs. And that just comes out in that data. It comes out that people with a humanities background at the very top are overrepresented three times over engineering. And that obviously is not because they have a piece of paper that says, I had a degree in philosophy from Yale. It is because the proof is in the pudding. Exactly. It's because it makes a substantive difference if you've studied humanities and (17/57)
you've reflected on questions of being and human being. So in that sense, when I've sort of over time reflected on this process and investigated this turn, I do actually, and I wonder if you feel the same way. I think that the point in which this started to change, this is a very difficult sort of thing to discuss because of course the enlightenment was very important. And before that, there was a lot of darkness. So I don't mean to suggest that we were on the right path before the enlightenment. The enlightenment was wonderful. I'm not throwing the baby out with the bathwater, but clearly there was this move towards a more scientific worldview in which we looked increasingly to model the world and to find ways to create deterministic systems and ways of understanding everything. And that's something that we've discussed on the show often with complexity and Newtonian mechanics and Newtonian principles and neoclassical models and economics, et cetera. But there has been this (18/57)
abandonment of phrenesis, so to speak. So, you know, I look at it really since the enlightenment, but do you see it as a sort of a more or less linear trend? Or do you see that there have been certain periods, for example, the Industrial Revolution or even today where we've been hastier in our sort of jettison of these humanities or of these non-scientific ways of spending our time and thinking about the world? I think I am an empiricist. I am into science in so many ways. And I think natural sciences have been spectacularly successful since the enlightenment. Yet there is a fundamental mistake in thinking that we humans can be our not our bodies, but our shared world and our culture can be studied with the same technique and the same tools as you study bacteria or asteroids. I think you have to have a difference between the clear difference between the natural world and you can call the universe and our world, the human world and what Heidegger, who is one of my sort of the people I'm (19/57)
year misunderstanding of human beings and everything since, you know, being in time was published in the end of the 1920s has been about that. It's either been in the world of philosophy. It's been a reaction against it or a development of it in my book. And you can read the history of Western philosophy through that lens as sort of a different description of who we are as human beings. And all we've done in my company is we've said, we've taken that seriously and said, well, if it's true that we engage in the world and we need to study people in a different way, then asking them because we don't know, which is why surveys are wrong, which is why we can't predict elections, which is why focus groups, as your old boss said, should be neglected and why you should observe people and try to make sense of them in a different way. Reality is messy. It is. And data is fuzzy. Yeah. No, no, I feel you on that. And so what you're describing there in terms of the progression of Western philosophy (22/57)
is that fuzzy divergence between those who seek to find a very deterministic, quantifiable measure of self, of world, of object, of value, et cetera. And those like Heidegger or Wittgenstein who take a more qualitative picture, a qualitative view, and certainly with what you're describing there with the hammer, experience matters. Exactly. And it's not a black box where we say, okay, you know, it doesn't matter what's going on in the inside. We can ignore the problem of consciousness. There's actually this really great, I love Terrence McKenna. I think he's got such incredible, he has hit so many beautiful things. One of which was, and I just know this because I was looking for some stuff on my social media to create social media because I had this tremendous amount of work actually doing social media to exhaust me. I found this great interview of his and I took a short clip of it where he said it's a failure of the theory of evolution that it cannot account for human consciousness, (23/57)
which after all created the theory of evolution. So I think we can't get away from that, that fundamental problem, which is that we are the measure of reality of all things. We are the ones having the experience. Right. Yeah. So Heidegger would, so that he would say, well, there, there will be planets and there will be objects in the world without us, yet they wouldn't be called planets and forks and rivers. They would just be stuff. And it's us that gives it names and categorizes it and so on, which is a meaningful thing to study as well. And the problem with that is that you can't, there's no view from nowhere with that. You can't, you can't be a robot and study it. You have to be a human to understand that that's a river and that's a fork. And you have to understand what is relevant right now. Is the dust on the floor relevant or is it the conversation happening right here that's relevant? Figuring that out is very hard. And that's why they in Silicon Valley run into the problems (24/57)
with AI all the time is that they can't crack the problem of that you talk about, which is consciousness and they can't figure out generalized AI, right, which is wanting to do something, having being startled about something, being wonder about the universe, wanting to understand how to create warp speed things that could send us to Alpha Centauri, all those kinds of wishes to do things, something that they can't figure out. And they're not an iota closer to that than they were in the sixties. They've been much better at creating close systems, algorithmic things that you basically could do on a piece of paper. They can just do it with a computer way faster and then we can. But the human problem and the problem of the really hot problem they haven't gotten closer to and I don't think they want it. Let's talk about this because you and I, we spoke a little bit before this and we've both read Boostrom's book and it sounds like you're very into this subject. And it's been something I've (25/57)
wanted to cover on the show and I have not found the right guess to do it. But I'd love to have a little bit of a conversation with you on this right now. What is the hard problem of AI? And first of all, we're talking about general AI versus narrow AI. We're talking about AI in the way that the public and the popular culture conceptualizes it, which is a so-called superintelligence, computer intelligence that is competitive with or surpasses human intelligence. Right. They used to be good old fashioned AI in the sixties or fifties. That was the term, good old fashioned AI. Yeah, go-fi, basically. And that was the idea that you can feed a machine with enough information for it to have a complete map of the world. And we thought that, or humans thought that, especially humans attending the University of MIT, thought that our brain was a map of the world with concepts that we then projected onto the world. So when you saw a fork, you would say fork because of that, because you would sort (26/57)
of add up all the aspects of the fork to become a fork. And they found that that was a dead end and it was dead for 30 years. And now they're back, in a way, with a split of the concept of AI, from being AI to being general AI and specific or more specific AI. And more specific AI is really just advanced software. It's just like a spreadsheet is better at calculating than I am and has been since the early eighties. It's just a very advanced version, very fast. And an element of machine learning there as well. Yeah, right. But there was machine learning. There's been machine learning for a long time. The really hard problem is the other side, which is we can have the will to say, wouldn't it be wonderful if we could go to other galaxies? Or wouldn't it be wonderful if we could cure cancer? Something like that. Getting a machine to have will, to have Inspiration. Wonder, to have inspiration, to want to learn. That's the really hard problem. And that's something that Heidegger calls it, (27/57)
that we are the only being in the known universe that takes a stand on its own being, that thinks about its own identity all the time. So as far as we know, a fox doesn't think, I wonder if I should be more wolf-like today. Or something like that. And an asteroid don't have sort of internal social strife with whether it got dressed well this morning. It doesn't have a sort of social panic over the wrong haircut. Yet we as beings have that all the time. We have a constant dialogue with ourselves in terms of who we are and where we are and so on. And we engage in the world, in worlds that are constructed in a particular way that he describes in his book. And I think that is something that they have a hard time figuring out. Which world are we in? Are we in the world now of radio? Are we in the world of philosophy? Are we in the world of birthday parties? What's the world you are in getting a machine to understand that now I'm in the world of birthday parties but I'm talking about AI or (28/57)
whatever it is, that's really hard for them. So the direction of the intent behind a direction, you can get a machine to figure out by feeding it a lot of pictures. You can get it to figure out whether a mold is benign or not. But wanting to do that in the first place is the hard problem. Yeah and will and interest in leaning in to a particular area. What Brochram is saying in his book is the really scary problem is if we get just an ounce of that, just the minimal version of that, what would that look like? And his example is, let's say we tell an AI that it has to make paper clips. And his example is paper clips. And it starts replicating itself because it really wants to make paper clips. And it doesn't have anything else in its world than paper clips. Then you start replicating itself and it will start getting rid of things that's between it and making paper clips. And suddenly you have a world made of paper clips very, very fast because of the replication capabilities of (29/57)
computers. That's its goal. Or I think he has another one as well which is okay well what if you know that's silly and we don't, someone will say well okay no one's going to say paper clips. What if you know the goal, the central goal, axiomatic goal of this AI is to generate human happiness? Well what if the AI decides that human beings would be maximally happy with a slightly lobotomized brain? And you said something essentially to that regard. Which is probably true. Goes back to your point about an asteroid doesn't have internal conflict. Exactly. So the day I see a computer having social stigma or something like that, I, or being startled about something, playing goal, right? If it gets startled over a move, I'll be willing to talk about, you know, we have a real situation now. But before that it's just software in my book. It's very advanced software but it's just software. And of course that doesn't get to the other dilemma which is we have no idea and we can't know what a (30/57)
machine is or is not feeling and is there is not experiencing. So that brings us back to square one in many ways. Right. There's a Werner Herzog movie called Low and Behold out right now. Is it documentary? Is that documentary, right? And he has a question he asks everybody. It is does the internet dream of itself? Which is exactly a good question, right? It's does it have those kinds of weird human things which is we can dream of ourselves and if you think about your dream world it's a rather complex thing that we don't even understand. So how about we spend some time on understanding that rather than thinking we can have the machines do it. What do you think about because this is to me I find it a little nuts what I'm about to talk about now and it delves it has to do with the discussion on AI which is this other popular notion which is that we can simply upload our consciousness to a server. To me that one is the easiest one to simply debunk. It's most basic level. We have no (31/57)
few days before Ray Kurzweil dies, he can upload himself to the. It's interesting that it's always before the profit dies that this kind of thing will happen in his own prophecy. When you're just for our listeners who may not know when you refer to the singularity, you're referring to the term coined. Was it coined by Ray Kurzweil? Yeah, it was. Which is that roughly around the year 2050 but it's not, it doesn't have to be a specific date but there's a point in which machine intelligence will surpass human intelligence. So I think it's moving back the sicker he feels earlier it becomes. He thinks like what, 5,000 supplements a day? He takes a ton of pills. In order to sustain himself till the day where he can upload himself to the cloud and download himself into a new body. There's a great documentary. I don't know if you've seen the documentary on him. This is very interesting in the context of our conversation right now because when I watched that documentary, I don't know the man (33/57)
personally. I saw a person who was dealing with the grief, the grief of having lost his father. And the fear that is so common that we've dealt with human beings have dealt with since they became aware of death, which is the fear of death, the fear of the unknown. And he's dealing with all of those things like all of us but it's very interesting to see how it manifests in his life, which is this pursuit for the holy grail, for the, what's the term in mythology for the fountain of youth? I mean one thing is that you have bunkers, people like that walking around and I think they're sort of interesting to listen to but that they become the ideology of a economic powerhouse like Silicon Valley. And it's the only really driving idea out there is too much. I was pitched by an editor to write a book called The Singularity is Far, Far Away because they're not getting closer to- That's a playoff of Kurt Schwa's book The Singularity is Near. Exactly. But the editor has strong PR instincts. (34/57)
Exactly. And I thought that was a fun idea but it's just that they haven't gotten closer to the core and hardest problem. They've gotten way better at other things but what's so wrong about that? What's so wrong about celebrating all the things we can do with the technology rather than wishing we go to Mars and ending death? I think there are other things to do. And I think even the notion of ending death is within, for me it's within the realm of scientific inquiry. What seems to me where I totally see no capacity for understanding is when I'm told about uploading consciousness. I just find that so absurd on its face because it's, you can't tell me that you even know what that is. You have no concept of it. And in fact you have no idea what an upload is within the concept of the fact that you don't know- I mean we could go real deep into this fact. I have no idea where I am. I'm living in a matrix of my own brain. This is not in dispute. So to look through a microscope and tell me (35/57)
that you see what you see, well you're also looking through your eye and where are you even in this scenario and who is you and what am I? I mean these are basic philosophical questions and yes, I think to bring it back to how we started this conversation, I think everyone who is very brilliant and doing tremendous work in Silicon Valley and everywhere else would benefit tremendously from reflecting on and taking courses in the humanities and in philosophy because these are essential questions. I would actually say it's in Silicon Valley they focus on small things or extremely large out of the way things. So either it is big brains dealing with small things like how do we share pictures or how do you know that sort of thing or very very large things like Mars and Endless Life. And I think there might be a slice in between those two like how do we yield and how do we deal with our healthcare system and how do we create food for enough people and so on. That are also worthy of some (36/57)
attention. Who was it now I'm blanking she's a writer, Gillian Tett. Right. Do you remember what she said to the economy? I wasn't there. Oh you okay you weren't there. Okay so she said something well I would love to have her on the show I spoke to her maybe you can help me and she said something really great that stuck in my head which was that the culture of Silicon Valley today reminds her not exactly but close to the culture in finance in prior to 2008 and I really related to that. I said yes I feel that as well I do sense that sort of I mean that was the notion in the derivatives market and in the mathematical modeling of securities that were somehow able to take risk and just dispense it into the ether which defied logic. It's wanting a truth machine. It's the machine that can watch over us in its grace and make sure that we have no risk in our markets and we can get our marketing algorithms perfectly tuned and we can get everything sort of tuned into a system that will tell us (37/57)
what the future will be like and I don't understand why they so wish for that but it certainly is. It's a religious desire. It is. It's a religious desire. It's for the father for God. I mean there's so much of this it feeds into the same rudimentary mechanism whatever that is of human being search for for meaning and that's why it's so important I think to reflect on these to recognize that you're not the first person to have these thoughts and that the way in which you're expressing them is your particular expression but you know make no mistake there is something here that is universal. All right. So let me ask you this in the context of the fact so we're describing one culture which is Silicon Valley. Let's talk about because and I do want to get into what you do because you have some fascinating case studies that you've presented in your book and I'm aware of as well with your company. Tell me how you view culture overall. It's such a difficult question to sort of for me to (38/57)
express right because I mean where do you even begin. I live in this bubble of New York. It's hard enough for me to get out of the New York culture to think about the wider American culture. There was so much shock in the large cities of the United States over the most recent election. How do I even wrap my head around the way that people live in Africa or Indonesia or in China. Tell me a little bit about how you view the world culturally and yeah that's the best I can do to express my question. Right. So we are asked by companies and sometimes public institutions or mostly companies about what is going on among our customers or our customers customers or whatever it is. And in order to do that we have to get out of our bubble. Anthropology is one technique that is developed over the last hundred years of going and spending enough time with and in another culture in order to understand and see the world the way they see it. So that's what we do. And I think the only answer to your (39/57)
question is I don't know but I can send skilled people to go and try to understand what's going on in Western China when it comes to how they eat or something like that. We can study cultural phenomena fairly rigorously and actually empirically by observing reality and we can use that to understand what that phenomena looks like and how that works. So let's say you want to study tea in China. Tea to the Chinese is as advanced as wine is to the French. It's something that you drink for particular conversations particular type of tea for particular situations. There's a particular price point of tea or fanciness of the tea and so on. So understanding that whole world is a pretty big deal if your world is sweetened peach flavored cold bottled tea. Right. And understanding brewing techniques and so on that takes a while and you can't just send out a questionnaire through SurveyMonkey and then people click a little bit and say tell you that you have to go and experience what it's like and (40/57)
understand by being quiet for a little bit and just observing and listening. So we're big proponents of being introverted listeners and looking at the world and trying to make sense of it and see what makes sense for these people and truly put yourself into their shoes. And the reason why I talk so much about the humanities is that's what you're doing when you're a historian. When you're a historian you want to understand Napoleon or the Duque Windsor. You go into peace together their world through pictures and paintings and objects that you find from the time and notes that people have written down and you try to peace out or create a picture of what that was like to be the Duque Windsor and saying no to the English crown or being Napoleon and losing in Waterloo. What was that like? What was his life like? What was his world like? So piecing it together through a set of different sorts of data not just quantitative but aesthetic, practical, all kinds of objects and situations and (41/57)
practices that are going on in the in the cultural field and figure out what makes sense to that and what makes sense to them in their world. What are the way they construct their world? And that is immensely helpful if you are a CEO of a big company and you have several layers between you and the world. People will prepare everything for you and you will lead a very comfortable life that is far away from the reality of these people. So if it was somebody selling tea in China it's helpful to know what's tea to them. Right? And what language do they use and what practices do they have? And that's also the you're touching on numerous occasions that you're touching on that distinction between Descartes and Heidegger. And is our introspection enough to tell us what we need to know about the world or do we need to go out and experience? Exactly. Or can we ask them to introspect? Can we send out, you know, 3,000 questionnaires to people and ask them to introspect about how they do something? (42/57)
You know, we don't know why we do something. Do you know how you drive? Do you know how you don't know those things? It's funny when you're talking, you know, I make you're reminding me when I work on the technology side of television on application development and design and user experience. And when I was overseeing a focus group in 2009, it was for a brand new remote that we were designing that was a motion remote that went along with this new interface that we had been building for the set top box. And I remember being so, so exhausted by all the different people's opinions, I thought to myself, how am I supposed to make sense of all of this? You know what I mean? And I think that again speaks to there's also a simple desire to just come with an answer that works, that so often is what drives these outcomes, which is I need to jam the solution into this narrow model, into this confining sort of thing, which I think also speaks to something else that I think about often. And I (43/57)
wanted to speak with you about as well, which is to what extent are we actually just creating a world that is more adapted for machines and less adapted for human beings rather than us, you know, being able to merge with machines or whatever else. I mean, I feel like in many ways, we're building a society that increasingly pushes away the things that make us human and the things that matter. That's why I wrote the book. I mean, I know there are snake soil people everywhere and at any time, but I just found that the brain scanning people and the data people were saying things that they couldn't prove at all. And that's not such a big problem. The big problem is that somebody took notes, you know, smart people took notes from nonsense as long as it was natural science looking. And I just found, have we lost our ability to be critical? Have we lost our ability to have undermined our innate ability to be in touch with others? And I think we are educating our kids out of it. I think we are (44/57)
undermining the research in the area right now and the floor and in the house. There's a bill to take out the rest, the remaining small percentage of humanities, federal funded humanities research, the national diamond of the arts gone. So we are undermining our own ability, our innate ability to do these things. And that's not good. And it's sort of boring too. Some of the best programming in the United States has come out of PBS. Because it doesn't have to rely on advertising. Sesame Street. I mean, I could name a number of programs. Yeah. And what culture doesn't have museums and publicly funded research in in our art history? I think that should be part of any civilized place. You know, to bring back, there's something else I wanted to mention that I didn't want to forget when you were speaking, which is I think another central problem here is the reason why there is this bias towards quantification is because the qualitative doesn't scale as well as quantitative. That sort of (45/57)
problem of how do we deal with a market that views T in the way that we view Y. And that's a difficult bridge to gap. You know, people want easy solutions. Again, so much of this is about laziness. Yeah. You would have to go to Western China. It would be rather uncomfortable. You'd get stomach disease from the spicy food. You would have to sit in an airplane. You would have to engage with people that doesn't speak English very well. You know, that's messy. Wasn't it one of George Soros' traders at Quantum Fund who at one point he left the fund or I don't think he was still part of the fund, but he went and lived in Sweden for a while? In Finland. Yeah. Phil Robert Johnson, yeah. Right. Who said that in order to understand what the Finnish government would do and so on, we would need to be in Finland. He was also the one that talked about the difference between the German and the British culture and why the Germans wouldn't let the British change the collaboration on the pound and the (46/57)
Deutsche Marken and so on. So that's a cultural perspective on finance that was helpful enough to bring down the Bank of England. That's a great story. Regardless, I should do an episode on this show just on that. You're talking about... He's getting Robert in. I mean, he's... That would be great. Well, that's a great story. You're talking about when Quantum Fund, when George Soros essentially, he gained notoriety as the man who broke the Bank of England because he shorted the British pound during the period of ERM when the UK was sort of moving towards entering the Euro and that was an incredible story. Right. So basically, they bet on the Germans wouldn't give the British the flexibility to devalue the pound because they were pissed at the British and so they bet on a cultural feel rather than an analytical... And on George Soros' back pain. Exactly. Notoriously always gets back pain. His son's... I don't know if you mentioned that in your book. I don't remember seeing that, but his (47/57)
son always says that, you know, my father will give you all sorts of logical reasons why he makes a decision, but in the end, he moves out of a position based on lower back pain. Right. But it's interesting to think about that because you also, I'm sure, get... have a feeling of the market. It might maybe be your stomach or it's somewhere else, but we all have an ability to align ourselves and adjust ourselves to the mood around us. So the mood of the nation is something we feel. The difference between us and George Soros is that he listens to it. So he listens to it. He has the conviction. And the balls. And the balls. To bet three times capital. Oh my God. On something like that. And he's done it over and over again because he sees himself as a reflection of the market and he relates to that kind of knowledge, which is a kind of knowledge. It's a knowledge to feel that New York feels different now than it did six months ago before the election. But we can feel it. It's a real fact (48/57)
that New York feels different. Just like you can say a party is great or a party is good or the mood in the room is downwards or whatever it is. It's something that we can discuss and talk about and relate to. And that has a lot to do with markets. So what they bet on is interesting. They bet on the reactions to the reactions of something, right? So you have an event, then people react to it, and then other people react to those reactions. And that's what you want to know. And that's why they're so extremely successful because they look somewhere else than everybody else. Well, that's a great point because one of the arguments I often get into with some of my friends when we have little arguments about this is you're not trading based on what you think markets will do in response to XYZ. You're making a bet based on what you think the market thinks is someone else is going to do. It's a multi-order derivative decision-making process. So it's very out there as far as not being (49/57)
quantifiable. And the difference sores and others is that he's honest about it. He's honest about the fact that it is a qualitative. That's the case. You know, there's also this great one of our other guests that we had here, Sebastian Malibu, who is the biographer of Alan Greenspan, has this great moment in his book where Alan Greenspan is now, you know, who is a classic data sleuth. He got a seat on the exchange across the street from his office and he went down there and he decided to cut out the middleman and basically make some additional profits because he wouldn't have to go between an intermediary broker. And what he found was he was getting slaughtered and he started listening to sort of understanding why was this happening and he's hearing these guys saying, you know, I really feel that, feel the market's getting choppy. He's like, what do you mean? You, what do you mean? What do you mean it's getting choppy? What do you mean if you feel you feel it's bottoming? What do you (50/57)
Tell me a little bit about this process because I think this is an interesting story. Right. So luxury is many things, right? To many people, it can be an apple in season or it can be a spa or it can be whatever. So we looked into among the target group of the people that buy these kind of cars that are $60,000 and up, what's luxurious to them? And if you look at the industry, it seems like if you look at BMW or Mercedes or anybody, it seems like it's driving really fast in a really fast car on an empty road. That's sort of the experience of among beautiful mountains. That's the luxurious experience yet then spend time with people that have luxurious cars. First of all, they don't drive it themselves. They have drivers, particularly in China and India. And secondly, they sit in traffic all day and they're just stuck in traffic. So we thought about what would a different luxurious experience be? If we want to be quiet, you'll want to be very clean because the cities of the world are not (52/57)
that anymore. If we want where you can work, it'll be one where you can have meetings. It'll be one that's rather different from sitting right up and driving a really fast car. So the idea was to move the entire luxurious experience towards something that was low, chunky, very quiet, very clean. It is chunky. It's funny you say that. It's sort of a flight rather than a drive. And it has sort of a, the seats are thick and big and comforting. So the idea was to sort of create a whole other focus on luxury. And then also on top of that, build a range of services that would make owning the car feel luxurious and that the value of the car would go up the longer you owned it because we would add services all along. So the idea was to redefine what luxury was based on an understanding of spending time with people in the big cities of the world and look at how to create a quiet flight rather than a fast ride out of the experience. And that's, and out of that has come a whole range of things, (53/57)
but the last launch and the next launch of the navigator will be focused on that. But the real deal will happen after 2020 when we can do much more around assisted driving. And we can do a whole, I mean, we don't know about driverless cars yet because there's still a whole lot of technology problems and everybody has those problems, by the way. But given certain technological breakthroughs, we would be able to do a whole lot with a car that would make it delightful again to be in a car because right now it's not fun. Because you're stuck in traffic all the time. Yeah. And you know, there are people saying, why do you put speedometers that go above 30 miles an hour? We're never ever going above 30 miles an hour because we're stuck in traffic all the time. It's a good vision to run 100 miles an hour down an empty country road, but it's just not my reality. That's such a great point. I never thought of it that way. So the idea was to switch to a relevant kind of luxury that would be very (54/57)
different from all the German sort of cars. You also, when you were speaking and comparing it to an airplane, I thought about an innovation. I don't remember who, for some reason, I have it in my mind connected with Richard Branson and Virgin, but it was the idea to put Wi-Fi into airplanes because, okay, you're going to spend six hours. Would I rather have six hours in a flight with nothing to do? Or would I rather have seven hours on the flight on Wi-Fi? That's a big question. And so that's an innovation that has to do with the experience, right? Right. Richard Branson is the master of taking something completely standard and then tweaking two, three experience buttons that completely changes the experience. So an airplane becomes a nightclub or whatever it is, just by changing the lights. Oh, man. Yeah. And he does the cheapest things with the most massive impact really well. That's his real genius, I think, other than his balls. I mean, he's just press balls and tons of things he's (55/57)
doing. He has, well, also his branding model is, was he the first to really take that approach, which was to take a particular brand, an experience and move it across sectors? Yeah. The only area he didn't do it was the condoms. He didn't think Virgin would be a relevant name for that, but he had thought about it. Yeah. They thought about Virgin condoms and they thought that maybe that's problematic, but, but everything else, I mean, Virgin bride and Virgin phones and Virgin everything. That would be problematic. Yeah. It's sort of, it's at least it stops you in a drag killer. Well, Christian, I really appreciated having you on. This was a great conversation. Yeah. A rare radio conversation. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Well, thank you very much. And I should look to get Jilly and Ted on, but thank you very much for coming on. Thank you very much. And that was my episode with Christian Mesbia. I want to thank Christian for being on my program. Today's episode was produced by me (56/57)
Awesome to see the community feeding #leoai with such cool content! Loving the vibe of training it together 🚀 Can't wait to see how it evolves with all these data snacks 🍪
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kofinas. Today, we speak with Anne Stevenson Yang and is the co-founder of J Capital Research which conducts ground up primary research for institutional money managers, unequities and the Chinese economy. She is the former co-founder of Blue Bamboo Ventures and also founder and operator of the CRM software company Clarity Data Systems. And she is the creator of 66 Cities, a publishing company whose flagship magazine is City Weekend, one of the highest circulated English magazines in China. Anne first moved to the Middle Kingdom in 1985, making her family and home in China for the next 25 years. She is the author of China Alone, China's emergence and potential return to isolation, a subject that we will cover in depth today. In this episode, we take a trip to the other side of the world, to the land of China, the territory that one in every five people calls home. Our conversation concerns itself with (1/57)
certainly I am, to this China of the post-Cold War. But of course, there was a pre-Cold War China. Reforms did not begin after 1989 nor have they ended. What has that process been like in China? Where can we pinpoint some of the most significant turning points? It's an interesting question. Reform is a word that we attach to essentially all government change in China since 1979 when Deng Xiaoping began the current program of opening. I think that in the West, we graft on to that word the idea of increasing liberalization and openness when in reality that's not really what's behind it. But I think the way we should look at China is 1979 to 89 and then 1989 on. 1979 was when Deng Xiaoping essentially walked out of prison and into Zhongnanhai, the leadership compound in Beijing and became the government leader and began to liberalize China in a whole lot of unexpected ways. Allow people to stop, if they met their quotas for growing grain, for example, then they could begin to grow cash (12/57)
what type of property is constitutes investable. In a technical sense, all the land is owned by the government. So the major distortion is that land is owned by the government and local governments on the local level. So the government has a key interest in high land values. How does that work? Let's say you, if you're in China and you want to own something, how does that work? I still don't understand it. Well, the government's issue leases on the land. So you get a lease on the land for 20 years, 40 years, or 70 years. Most residential property will be 70 years. And then you own the building that's built on top of the land, but the government will have the right theoretically to take back that land at the end of the lease. It hasn't happened in most localities. In a few it has. A couple of them have tried to impose new fees. And the people who own the houses got really upset. They retracted it or they impose much lower fees. It's kind of a negotiation. So there's a quality like (46/57)
them completed, but almost none of them occupied, all of them, mostly all of them sold. And these are projects that specifically are pitched to the Chinese aspirational investor. So they're not supposed to be places you really want to live. They're supposed to be places that you buy because in some mythical future, there will be wealthy people who will want to live here and commute to their wealthy jobs in their wealthy cars, and you'll sell your unit to them for a lot of money. So all of... Sound like a Vegas. Yeah, but way bigger, way bigger. All of Vegas would fit into one ever grand development. It's just totally... Let's not even pick on ever grand. Let's just go to any interior city. There's a city that I've been to called Shryan, which is in Podongkube, way off in the west of Hubei province. And Shryan, for complicated historical reasons, it lost its core industry. So they were in a panic to invest. So they invested in all this real estate. There's one real estate company that (35/57)
sinister. It's like brokerages, private equity funds, public equity funds, trusts, all sorts of non-banking financial institutions. But what essentially happened from 2009 was the governments wanted more capital than the banks could lend with any reasonable prudence. And so what would happen is a trust would lend the money. Like you're a developer, you're very risky. We're not really sure what's going to happen, but you'll pay 9%. So I'm the trust. I'll lend to you at 9% and then I will sell that loan to the bank tonight. And I'll give the bank 7%. So I keep the 2% spread. It's on the bank's balance sheet. I don't have risk. And then I do it again tomorrow. Yeah. So something similar in the United States with the CDO market and the sort of disintermediation of loans and ownership and everything else. Yeah. In a sense, it's like that. So where are we today? What does the picture look like? You mentioned 2015. What was the drop there? 60, about 2 thirds of the Shanghai composite? I think (28/57)
where China changed its tax system, it changed its customs, it changed the way local governments managed their budgets. It changed really personnel appointments within the party in order to aggregate more power to Beijing. And they did it in a very clever way. For example, under the old system, localities' provinces would have a negotiation with Beijing every year and decide how many taxes they would pay to Beijing. So what Beijing did was they went to the provinces and they said, look, you're paying us, let's say, 25% of your gross national product of Shanghai every year, and that's, let's say, $100 million. So let's fix your payment at $100 million. And what we're going to do is we're going to impose a VAT tax and an income tax, and Beijing is going to collect all of it and then rebate to you the portion that's due to you. Initially, the localities were fine with that because the cost was the same. Over time, it became very unbalanced so that the lower the level of the government, (15/57)
the contemporary changes in Chinese society that came after the death of Chairman Mao, beginning with the ascendancy of Deng Xiaoping, the architect of a new brand of thinking that combines socialist ideology with pragmatic aspects of market economics that the Chinese have called socialism with Chinese characteristics. What changed in the 10 years between the beginning of these economic reforms and the events in Tiananmen Square? And how do the Chinese government's reaction to the uprisings in 1989 alter the opening of Chinese society? How do the Chinese response differ from the Soviet reaction in the same year to the fall of the Berlin Wall and what has set China apart in its path of development since? Some have called it a miracle and by any measure it has been exactly this, the Chinese miracle. The size of the Chinese economy has increased more than 25 fold in the last 25 years from 6% of US GDP in 1992 to 60% today, an accomplishment that defies all principles of economic gravity. (2/57)
Loan growth in China has averaged 16% in the last 20 years, reaching an all-time high of 35% of GDP in June of 2009 amidst the greatest economic contraction the world has seen in almost a century. Total debt in China recently surpassed 300% of GDP, making Western finances seem frugal by comparison. In the first seven years since the financial crisis, bank liabilities in China grew by nearly $15 trillion, the near equivalent of the consolidated size of all US commercial banks. China has used more cement in three years building and overbuilding than the US did in all of the 20th century. Hundreds of thousands of meters of unsold residential real estate, the size of Singapore, massive industrial overcapacity, go cities by the hundreds. The Chinese economy is in terrible need of a recession, a recession that it cannot afford but one that it cannot avoid. How will the citizens of China, its trading partners, emerging markets and developed economies react when the reckoning finally arrives (3/57)
and how much longer can the Chinese government continue to postpone the inevitable? As always, you can gain access to reading lists put together by me ahead of every episode by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to the show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want a sneak peek into how the sausage is made or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at HiddenForcesPod. And now let's get right to this week's conversation. So Ms. Anne Stevenson Yang, thank you so much for coming on the HiddenForces Podcast. Welcome. Well, thank you. And just Anne is good. Okay, Anne. All right. So Anne, before we begin, our listeners should know and maybe you can clarify for me as well. Now you have lived in China for the last 30 years, is that about correct? Yeah, people keep adding on for me, but yeah, that's about (4/57)
right. It's about right. You've raised your children in China. That's right. The second one was born there. Your husband is Chinese. Yep. And you speak fluent Mandarin. Yep, always trying, but I would call it pretty fluent. And what is your background besides that? I mean, what did you start off with? I mean, how did you find your way in China and what is your background? I'm a mutt. I started out as a journalist in New York and I just floated over to China because I thought it was, I was actually politically interested in what was going on at the time and I got offered this job at the Chinese government foreign languages press and I thought, why not for a year? That will be fun. How did you live? That was 1985. 1985, wow. Yeah, so yeah, I met my husband there, got married so that, and then just the growth of the Chinese economy kind of sucked me back. So I would say I'm an economic migrant. Very adventurous of you. Why did you choose China specifically because you found what was going (5/57)
on there politically interesting or how had you studied the country for a long time? Okay, well, this is really embarrassing, but this is my age, right? So I grew up in the 1970s. Mao Zedong was a hero. We didn't really know that much about China. I went to a parochial school. I had a copy of the Little Red Book in my blazer pocket. I thought, this is finally the version of communism where they understand the peasants, right? I know it's really embarrassing, but I thought that this was a model that would work and I wanted to see it. So when I was working, I was actually working a night shift at business week on the desk in New York and I just, I had a break. So I went out, I went to China Books and Periodicals, which existed then. I bought all the magazines and I wrote to them and said, I want to go work for you. And then I forgot about it. But one of them sent me a telegram like six months later. So I thought, why not? Yeah, telegrams existed then. That's exciting. Very exciting. (6/57)
Yeah, it was kind of. And how long after you moved to China did you meet your husband? Well, we worked in the same building, but I wasn't really aware of him until we got sent. OK, you really want to know this? Sure. In 1987, there was a county in Jiangsu province that was growing fruit trees for the first time and they'd gotten sort of relatively rich and they wanted propaganda about this. So they invited, you know, so-called journalists from Beijing to come and visit. And so I was sent with my interpreter and the guy who worked at our magazine, the Indian guy was sent. And he had his interpreter, who is now my husband. He spoke, he was an Hindi interpreter because he'd been in the Chinese army, had been trained in Hindi to be in the army on the border with India. So we spent three weeks together traveling around Jiangsu, you know, going to communes and, you know, learning about tea growing and, you know, congratulating people on their factory accomplishments. And then I don't know, (7/57)
we just got married. The rest is history. Yeah. All right. So, well then, let me ask you, what's going on in China? What's going on? Basically in China, every man, woman and child, government, private, dog cat is focused on trying to make sure that the government, that the Chinese economy rises in value, that prices rise, that assets stay high and rise, and that there's enough stimulus to create growth. That's a maniacal focus of basically every human being in China right now, not on value, not on creating something new, but on making sure that asset prices stay high. So what is the timeline of events that have sort of raised concern for people in China? Because there's something else that, you know, I've picked up on, which is usually I like to cover subjects that are controversial, aren't necessarily consensus, but I feel like the case with China is one where there isn't much controversy around the idea that there is a bubble in China. Certainly I've been hearing about a bubble in (8/57)
coastal real estate for like 10 years or more. This isn't something where many people are going to come out and say, you're a whack job for saying this, or you're crazy for suggesting that the hard landing in China is a possibility. That's true, but it's fairly new. I would date that general apprehension from summer of 2015. So prior to that, you were pretty much a heretic if you didn't believe in the ever-growing value and strength and emergence into the sunlight of the Chinese consumer and the Chinese economy. But what happened in 2015 is, number one, the Chinese stock market crashed. In spite of the Chinese government's insistence that they would hold the stock value at $4,500, it went down below $3,000. The second thing is that the reminB devalued by 3%. That shocked the world and it indicated that the Chinese government, in fact, is not in control of the whole economy, which basically the Western world believed. You mentioned the first part of why it was a shock. Why did the (9/57)
reminB crash? It didn't crash. It declined by 3%. That was just really because the PBOC, you have an offshore reminB and an onshore reminB. The offshore reminB was trading at a premium or at a gap with a gap. That's not legal under IMF rules. China very much wanted to become a reserve currency for the IMF. So they decided, okay, we're just going to close that gap and we're going to depreciate the onshore reminB by 3%. They didn't realize that all hell would break loose. The offshore reminB is for the tradable goods sector. There's one currency for the service sector in China and one. What is the breakdown there? The offshore reminB is really quite small. It's just trying to testing the waters to try to consider whether they might make the reminB convertible at some point. They've actually retracted the offshore reminB quite a bit since that time. At its height, I would say there was ... I don't even remember the numbers, but let's say 3 trillion reminB offshore one place or another, (10/57)
which is really, if you think about it, quite small. There is some currency arbitrage discrepancy between certain class of people in China and others. From what I understand, there's one market for the vast majority of people when it comes to exchange and then for another part. Is that incorrect? Well, there are people who have access to reminB offshore. If you have an account in Hong Kong or if you have export earnings or for some reason you're exposed to the international economy, then you may have access to offshore reminB. To that extent, you may have more window on the foreign economy than the average Chinese person. Otherwise, it's really just who has access to hard currency, dollars, and who doesn't. Let's begin at the beginning, which is reform in China. I'm fascinated by this. Reading your book and preparing for this interview, it put me into a place of thinking about the Chinese economy and the Chinese political system in a way that I never had before. We're used to, (11/57)
crops and sell them. Allow people to have some private markets. Allow people to start taking over bust factories and run them for profit as long as they paid off the debts and paid the workers, things like that. The country really blossomed in a lot of ways. And then you came up to 1989. So essentially what happened was that this really worked very well. People got a whole lot richer. In many ways it was confusing, but it was also exciting. There was a lot of cultural opening, whereas in the past it had been impossible to listen to Western music or read Western newspapers or wear Western clothes. All of a sudden these things were coming in. There was experimental theater. There was what they used to call disco dance. There was art. There was all sorts of stuff. There was Qigong, which is a type of quasi-spiritual physical exercise that became very, very popular. And all of this led to a almost chaotic opening and to a concurrent demand for more rights, more political rights. And it (13/57)
culminated in 1989. We all know what happened in 1989. And 1989 was followed very quickly by the breakup of the Soviet Union in 1990. And essentially what happened was that the Chinese central government grew terrified that China would go the way of the Soviet Union and would crack up. And so they prioritized re-centralizing the apparatus. When you're talking about 1989, you're talking about Tiananmen Square. We know that the government cracked down heavily on the society after that, after the uprisings. But is there much information that is available? Because I know in China you can't get much of anything, right? Even if you Google Tiananmen Square, there's nothing there. Yeah, of course. You can't get a lot of information on what precisely the crackdown consisted in. There are very wide-ranging estimates on how many people were killed, how many people incarcerated. But I think for my purposes, what's really interesting is what happened in the years culminating in 1995 thereafter, (14/57)
the less money you had. So the government made a deal with the people, but was that sort of an explicit offering that the government did that they said, look, not in these exact words, but leave us in power and we will reform certain parts of the economy that many of you had wished we would in order to expand economic growth? What was the conversation that happened internally in the country around that cataclysmic sort of event? Well, I think there's a little bit of a misunderstanding embedded there. A system like the Chinese system is not concerned with what people think. The interlocutors are not individuals. The interlocutors are entities, state-owned enterprises, and local governments, and those are the constituents for the national government and the people they have to talk to. The individuals will follow. So what the central government did, it was a process of negotiation, not one of strong arming, although it was pretty clear who had more power than whom. So the central (16/57)
government would go to the localities and negotiate over tax authority, negotiate over appointments authority, and gradually, gradually, gradually, they pulled more budget authority and appointments authority up to the central government so that they would have control. Is there any comparative framework in the United States that would help us to understand the functioning of the Chinese state? No, and I think that that's very important because we tend to think that it's similar. There's a national government, there are provincial governments, there are local governments, but it's a unitary system. It's not a federal system. So for example, local governments don't have the authority to make their own budgets, to collect taxes and make their own budgets. The chief reason why we've got this huge property bubble, because local governments are stuck with the tab for schools and hospitals and roads and bridges and water processing and all that sort of thing. And yet the money trickles down (17/57)
to them from the center, goes to the province first and then to the city level. The prefecture, there are five levels of government in China, and so the prefecture at the bottom is stuck with all the costs and yet it doesn't have the right to keep most of the revenue. So what can they do? They had to raise money through debt. Wow. How would you compare it to the Soviet system pre-1991, pre-1989? You know, I don't know enough about the Soviet system to be able to tell you. Let's just say that the Chinese system is, they're very, very different in a lot of different ways. The Union was and is a petroleum state. So they have a lot more natural, unitary organization to their government and also it has radically lower population, what, 130 million or so, compared with 1.3 billion, with a territory that's much, much larger and tributaries, you know, rivers and a few railways that connect all the key cities. So that's very different. The kind of power that you can exercise over Russia and the (18/57)
former Soviet Union is very different from what you can exercise over China. Right. And the research point being important, which is that the Soviets would be able to raise living standards by selling natural resources with greater ease or commodities than the Chinese who needed to build, for whom building an industrial economy was much more important. I suppose you're suggesting. I think that's true. Also, the Soviets would be more capable of using repressive power to control their public. The Chinese, that's true out in the less populated areas in the far west, but in the densely populated areas along the coast, that's not what's going to fly. What's going to fly is raising investment capital because in a place where you have, let's say, you know, 30 million people living in a fairly dense area to build a road or bridge raises economic performance very rapidly and that creates unity and support. And that brings us really to the crux of this conversation, which is debt. Because debt (19/57)
and the financial system is the mechanism through which you can exercise control over people in a non-coercive manner. Yeah, I think that's right. And I think it's, there's some brilliant person named Goodheart. I can't remember who it is exactly who said that. Goodheart's law. Yeah. I wrote that right here actually to begin with for this conversation because I felt when a measure becomes a target, it ceases to be a good measure. Exactly. Great minds think alike. I thought to myself, that sounds like a Confucian saying, but I think, I know I wrote that there when I was thinking about this conversation, I kept coming back to that, which is that the Chinese have an obsession with numbers, with hitting targets. And I was astounded when I looked into this fact further. I mean, one of the things has to do with the measure of GDP in China. We're not trusting the GDP numbers that began measuring electricity. I'm telling you things that I'm sure you know. And that in short order, it turned out (20/57)
that the Chinese government was encouraging contractors and builders to leave the lights on in these places in order to present false figures of electricity consumption. Yeah, it's not even that complicated a lot of the time. A lot of the time you simply invent the number that you need. This is important to remember about GDP and so many other numbers in China, that these numbers are organizational tools and targets. They're not calculated results of a data set, whether or not you distort the calculation. The point is, you use something like GDP to mobilize people and to indicate what production levels should be. And if you were to drop the GDP target, it's a self-fulfilling prophecy. And they have pretty much relied on that number as their prime point of national pride. And as the calling card for the entire point of their existence as a legitimate authority in China. I mean, that seems to be so connected to their legitimacy. Yeah, you could say that. And I think it has a couple of (21/57)
purposes. One purpose is that organizational purpose. So your principal constituency, if you're the Chinese government, are state-owned enterprises. And state-owned enterprises make their budgets with reference to the GDP target, and they receive their investment capital with reference to the GDP target. The GDP target is measured against historical industry performance next to GDP. And then you sort of do a calculus and you figure out how much investment capital this company should get. So they're required to use that when they make their budget. So on one hand, it's a campaign tool. On the other hand, it's an external messaging tool for investors. So incoming capital investment and portfolio investment, whether it's FDI or portfolio, is very, very important to the Chinese economy. How are you going to get capital investment if your economy is only growing, say, 3% and Brazil's is growing 5%. So you've got to show growth that outstrips other developing countries. Is there FDI's (22/57)
foreign direct investment? Is there a lot of foreign direct investment? I mean, there are so many aspects of this and that I want to get into. And hearing you talk, I'm trying to figure out how to get in without getting lost in the weeds. Sorry. No, no, no. Don't apologize at all. I feel like this has been an overwhelming task for me to try to figure out how to come in here. But there are so many interesting aspects of this, one of which is the extent to which the Chinese boom has been led by domestic savings. It seems from my research that it is even more than it was the case in the Japanese boom. The Chinese boom has been largely fueled by domestic savings. Is that correct? Yeah, that is correct. I think it tends to mislead people by leading them to think that it's all about thrifty individuals storing their money in the bank when really it's just a measure of the amount of capital domestically as opposed to the amount of capital washing over the shores. But that's true. China pulled (23/57)
off really quite a remarkable feat, which was to increase its investment. I think you noted that simply the increment in bank assets in China between 2009 and 2013 exceeded the total bank assets in the United States. Yes. The economy that's 40% larger and that's been building its bank assets for 150 years. So it's a remarkable number. As they were doing that, generally speaking, as you increase your investment to that degree, you're going to depreciate your currency because you're expanding the pool of currency. But China actually has the command and control ability to build so much stuff that it could actually increase demand for investment even as it was investing so much money. So the currency was appreciating, returns on investment domestically were rising very high. It was attracting hot capital. It's a Ponzi scheme. That sounds like a Ponzi scheme to me. Yeah, you could put it that way. It certainly does. The focus, I mean, then I say it, and here are a couple of other numbers (24/57)
I've got for you. The total amount of concrete used between 2011 and 2013 in Japan far exceeded. I've got the numbers here. It looks like 4.5 gigatons was what the United States used for 100 years between 1901 and 2000. And 6.6 was used by China for just two years. That sound right to you? About close to 50% of the economy's construction, less than half of the economy's slightly less than half of its construction. Is that also right? I think that that's an exaggeration. I would put construction and real estate at about 20 to maximum 25% of the economy. It's not really fair to count all building materials because they also go into ships and automobiles and other sorts of things. But it's very significant. As for the amount of cement, yeah, I've heard that as well. It is phenomenal. It's taken a very severe toll on China's natural environment. Eventually that will end, but one hopes it will end sooner rather than later. On the thing to bring it back a little bit, you were talking about (25/57)
the growth of bank assets. I think you said from 2009, I mean that was the number that I had found as well from 2009 to recently the amount of assets generated by the banking sector. In other words, a reflection of the growth and liabilities was the total amount of U.S. bank assets. It basically is a reflection of loan growth. And that suggests a great amount of malinvestment. It suggests it without proving it because it's very difficult to expand that type of credit in particular in the face of an economic contraction, which is what the world was experiencing globally at that time. I mean, things like that about China alarm me. And again, I speak very humbly because unlike you, I do not live in China. I don't know the country. I don't speak Mandarin. But just on the very high level, it seems to me to defy every principle of common economic sense. Well, this is the thing about China. It's tremendous size in its centrality. So China can create growth phenomena that exceed anything the (26/57)
world has ever seen. It can also create disasters that are greater than the world has ever seen. And it's important to remember that it's not just the bank assets because the central government was really panicked to create, to pour investment into the economy and to avoid the downturn that the rest of the world was seeing. But they were also committed optically to sound banks with good bank assets. So they had to create a shadow sector that became far, far larger than it ever had been before. It had been something like 5% of the financial system. It grew at the height to 55% of the financial system. And that's really because you insist on having banks that are making prudent loans. And yet you need four times as many loans as prudently can be made. You create a shadow sector, the banks buy the loans back, and then everybody's happy. How does that shadow sector operate? Are you talking about the SEOs? Companies like the trust companies. Shadow makes it sound sinister. It's not (27/57)
it was 40%, maybe? I have reversed. Maybe 45%. I have reversed. Okay. So close to half. The market collapsed in China. So what have we seen since then? Well, essential stability for them. The central government and its deputies spent trillions of RMB supporting the Shanghai market value to make sure that they couldn't quite pull off 4500 for the index, but they pulled off 3000. So it's been hanging out at that level. And they've been keeping all the debt rolling over. So you essentially have a situation where China, the return on capital invested just goes down every year. So in the best of circumstances, you have roughly seven to one ratio for investment to GDP growth. So you have to invest 40% of the economy to get a 6%, 6 to 7% GDP growth. That's a reflection also of the inefficiency of the deployment of the capital. Exactly. So you figure that, if you put it in really simplistic terms, you figure that GDP growth should be roughly on a par with lending growth. So if you were to (29/57)
bring lending growth down to 6.5% or so of GDP, then you would see GDP growth of 1 seventh that, so no more than 1%. So that figure is where organic GDP growth is now. So in other words to say this is basically the Chinese government is committed to a certain growth rate. It has political reasons for wanting that. These are real people in positions of power who want to maintain their position of power. And the way that they're attempting to do that is to continue to force an otherwise unsustainable situation to go on a bit longer. Yeah, that's right because you have a situation where just it's in nobody wants to put their hands on that tar baby. So everybody has the intellectual realization that it's not really a good thing, that the quality of life for the average Chinese person has declined, not improved, that education standards, health standards, environmental standards, all of those things are not improving even as GDP growth rises. That's something I actually wanted to ask you (30/57)
about because we see video footage from China constantly. And we see people with smartphones snapping pictures. We see lots of lights. We see all these buildings. And it's impressive. It's something I often wonder about, which is what has been the improvement in the quality of life in China over the past 30 or 50 years when measured in the total sense of that word, given the pollution and given the urbanization? The fact that people have moved from the rural parts of the country, this mass, which is also really remarkable, the fact that hundreds of millions of people have actually migrated, physically moved through that country, it speaks again to the power of the Chinese state, which is pretty remarkable and I think difficult to comprehend as an American. But really, what has been the real improvement in the quality of life? Where can we see improvements in quality of life and where can we not see that? Or have we seen a decline in quality of life? Well, there's significant (31/57)
improvement via the better communication system, the fact that there's an internet, that there are smartphones that are universal now. The roads and the transportation networks are phenomenal and that greatly improves the quality of life. But as to the other things, yes, you can replicate the hardware. I mean, I'll give you an example. I've been to three replica Manhattan's in China. That's the idea. One of them quite large and two others kind of smaller, but still replica Manhattan's. I've been to a replica Hong Kong. I've been to a replica Venice, although they call themselves Florence. How do we think of them? No, it's not like a toy. It's the real thing. I know, but I mean, okay, this is why I ask that. It's astounding. I've seen the replica Paris. I mean, that to me looks like a full blown town or city. Is that what it is? In the middle of Anhui, yeah. And it's sort of... What is it for? And what I understand is it the equivalent of a suburb in so far as it's another community (32/57)
with a town and people that can commute from there to other work? What is it itself supposed to be? And what is the... But see, this is the point that you can replicate the hardware, but it's not the same thing as having the original. I cut you off, but I also want you to, if you can address at some point this, which is, do they have any idea what they're doing? Does the leadership, are they just sort of wanting... Because we see this all the time, we wonder, right? People ask that about Bernie Madoff. I'm not drawing a direct relationship, but for me personally speaking, there is a Ponzi aspect to this. And I think that just the point in which you're in so deep that you just hope that you can keep it going before you die. Is that sort of what the dynamic has been, is in China? Yeah, I think Bernie Madoff is an apt comparison not to say anything about the ethical quality of Chinese leaders, but you start out by thinking, well, isn't this a great thing? All this portfolio investment we (33/57)
can capture from overseas if we just pretend that China Mobile is a real company. We sort of paste together all our post offices and call them China Mobile and we'll list it and we'll gain a billion dollars, that's a great thing. And then over time, you get caught in it. And so now they're in a situation where if they don't continue to reinvest and to raise the amount of investment capital, then a whole lot of credits just go bust. And nobody is willing to accept the consequences of that because nobody knows how far systemically it will go. Well, how far systemically will it go without knowing exactly? I mean, what do you think? It is really tough to say. It's really tough to say. Why? Because there are so many contingencies, and dependencies, and so many things we don't know. But let's take one company ever grand, which is a company I love to hate. There's a real estate company that has projects in 170 cities, probably has 250 projects or so. Ongoing? Not all of them ongoing, some of (34/57)
actually tried to recreate Niagara Falls. And Shryan is in the mountains. There's no water. This is in the mountains. They actually tried to dig Niagara Falls as a sort of ornament to the real estate development. There's a development in Yunnan where they dug a 150 kilometer canal so that they could have a moat around the five star hotel in the development. Just totally loco things. But what happens is you have to finance these things. And the ultimate... You finance them maybe originally with bank loans and then with shadow bank loans, but then generally over time those things get securitized and sold to the general public. And it runs like a river, tributaries all over the country. So you really don't know which grandmother in which small town owns the security that will go bust if Niagara Falls is never built. And you just can't take that on. How are you going to deal with that? Because the guy who sold her that security might well be a government official in that town. And how are (36/57)
you, as the provincial government and the central government, going to say to her, oh, that... We didn't mean that. That wasn't us. That was him. That's on you. You lose all your savings. You don't have a pension. Sorry, lady. So a few things I'm thinking about. When you talk about the Niagara Falls, I thought about the fact that I discovered recently that there is a mock Dubai in China. Are you familiar with that? No, which one is that? I'll find the pictures I'll show you. I mean, unless this is fake news. But... Everything can happen there. And to me that sort of signified that... Because for me Dubai is Dubai. Dubai is already a mock Dubai. Exactly. Exactly. They're building fake islands. It was in fact in the center of the city was the fake island Dubai sort of palm tree. Oh, I know what you mean. Bay High. Okay. Yeah, it's way down in the south. Talk about a derivative. Talk about really going... I mean, that to me reflects... That's wild. So I think that's fascinating, right? (37/57)
Because it's one thing to replicate Venice and to call it Florence or whatever. And it's a whole other thing to replicate a replica. You know, that's... How meta. Anyway. But the other thing, you know, again, you're talking there and this is something that I've spoken about for years. It's not even just something recently, but I did speak about it recently in a conversation with Mark Fawber. Well, although I don't think I expressed it explicitly, which is I find that the use of debt and the financial sector, in particular in China, specifically in China, is very much meant to coerce through other means to get these people to work way harder than they would otherwise work with the expectation that they will be able to reap the rewards that are sitting in their savings account. But those savings that they experience as being theirs are not actually theirs. They are the states, right, to do whatever they want to with. I mean, that's a particularly harsh way of putting it, but you can (38/57)
certainly say that the Chinese government is very focused on capturing savings and retaining them within China for these mad projects. So wouldn't it be nice if a Chinese person could instead buy a mutual fund overseas and eventually, I don't know what, send their kids overseas for education? People do do that, but it's a very small proportion. Well, I guess what I mean is, and I definitely want you to correct me if I'm wrong here, I guess what I'm thinking is there seems to be no respect by the financial sector in China for the savings of the people that are putting the money there. It seems that they feel that they can wield that for investments at their will. Well, they can because there's a universal backstop, right? So nothing is ... Well, we have that here in the US as well, but there is the pretense that it's your money. I mean, that pretense seems more specious in China. Well, we sort of do, but losses are borne by investors here, and they're really not borne by investors in (39/57)
China. In small places where you don't hear about the people, like a bunch of people invest in a private P2P platform in some locality, sure, those people lose, but if you go to your bank and you buy a wealth management product that's actually not sold by the bank, but it's not the bank's product, maybe it's some dodgy coal firm that actually went bust two years ago, you're not going to lose on that because the government won't let you. So all of the investment managers know that, and they take risks accordingly. Do you spend any time thinking about, I'm sure to some extent you do, the context of China within the global economy? Sure, of course. Yeah, it would make sense. I mean, I'm just throwing it out there because we were so bogged down here in China itself, but what do you see as the effect of Fed policy, for example, and any type of contraction in US GDP, or if we have any kind of recession here, what would be the knock-on effects in China and emerging economies, and how does (40/57)
that all sort of play itself out? Because at some point we're going to have recession, there's nothing wrong with it, it's a normal, healthy thing to have recessions, and the Fed is supposedly trying to raise interest rates and contract the size of their balance sheet. If they continue to go down that path, there is of course the dollar carry trade. There are many things that can impact a company like China. So what is ... It's interesting that you call it a company, I wouldn't argue. A country. No, did I call it a company? You might have been afraid in. I mean, that leads to a lot of inestimables. So will the Fed really raise how many times and will it really contract its balance sheet? We hope so, but as the United States demonstrates, once you have a fiat currency, it's very, very tempting to use it to fund all sorts of liabilities, and we have plenty of liabilities going forward. So that is really the biggest question for China. If the US dollar does strengthen, then China is (41/57)
cooked. But if the United States relents, turns around, and puts more cash into the world economy, then you could have another, I don't know how long of this in China. Have you ever think about how the Chinese government would react if in fact they lost control of the economic levers, or really not able to hit that target and unrest began to come out? And I say that why. I say it because, again, looking at the history and thinking about the totality of the decades that have preceded this, and also the way in which the Chinese government and Chinese society tends to think of itself in much grander, sort of larger scale terms, would it be an exaggeration to imagine that the Chinese government may turn inward in a much more repressive manner than anything we've seen for decades? I think it will certainly try. I think that we've already seen that going on for the last several years, the attempts to constrict the capital account and make it harder to get money out, the attempts to control (42/57)
the internet with much greater force than was true in the past, the really almost complete lack of cultural development and exchange. Really the only cultural events that are available in China are the big international events that come for a day or two, but there's really no room anymore for the development of Chinese arts. For people to gather and exchange ideas politically has become much harder than it used to be. So I think we've already seen that happen. Could they go back to 1975? I don't know. Certainly that will be the preferred path of the party, certainly rather than dissolution, but there are many other paths that could be taken and it's impossible to know which one will be more likely. Do you ever imagine how long this could go on for further? In other words, how much longer they can maintain this sort of illusory growth? Well I think that question is really the Japan question. Can you keep putting money into the economy to keep the debt rolling over, never recognize the (43/57)
debt, what happens to the economy in those circumstances? In some sense that's been already going on since 2011 and you see it in the sort of decline of spending power domestically of the average Chinese person and the decline in sort of the standard of living. But there's a key element that still needed that Japan went through that China has not gone through, which is a significant depreciation of the value of assets. So if the Chinese government is willing to see the Chinese people see their apartments go from 100,000 square meter to 20,000 square meter, then yes that could happen. You could have a long, long, long grind. But I think that that's not very likely and I think much more likely China is going to hit a wall. The currency will suddenly depreciate and assets will drop much faster than people would like. And they've never seen that. The people that have seen depreciation and prices in China, they've never seen a price decline before, right? The property market has only (44/57)
existed since 2000. So in reality it's one generation. And also it's, despite the phenomenal construction and development of commercial property, the proportion of Chinese population who really live in the commercial property economy is kind of small. There are a lot of people who own these apartments, but most people have either rural dwellings that they inherited from their parents and one where another that don't really belong to them but they have the right to live in or urban apartments that came from the work organization of themselves or their parents. Let me ask you this about the real estate. You touched on it a little bit before, but what is the mechanism through which, because the way I understand it, the real estate market in China is particularly inflated due to the fact that it was one of the early parts of the economy to be liberalized, right? Liberalized to be privatized rather. And there's some other also, some weird mechanics and dynamics around who can have property, (45/57)
eminent domain, but it's obviously much more engaged. Yeah, that's right. So that's the chief distortion is that the government's on the land, but there's also types of property rights. Basically, every long-term urban dweller in China owns an apartment in one way or another, but that apartment very likely may not be saleable because of the different shades and gradations of rights that are attached to that apartment. And so I'm not going to push you anymore about making projections. I mean, I'm curious. It's to me, I'll tell you another reason why I have many friends who are very pessimistic as I have been for a very long time on the US dollar and on the US bond market and et cetera. But I don't see that being a problem anytime soon because when I look at the countries like China or when I look around the world, I still feel that in the next crisis, the US bond market would still appear rather attractive to a lot of people. And another great example, as you mentioned, this question (47/57)
around property rights, the Chinese citizens don't have a bill of rights. They don't have the same right over their property that we do. And so that is sort of reflected in a way in the capital flight that's leaving the country. They know many wealthy people who have made a lot of money in China know that they're not necessarily going to be able to keep that money and they're looking to get it out. Right? Yeah, I think that's right. And I think that that's a key and underappreciated point that everybody, remember all the columnists who starting from 2009 were warning about the US dollar and how we're going to induce this terrible inflation and the US dollar wasn't going to be... Well, that hasn't really happened. You don't see Americans trying to buy assets overseas or trying to emigrate. And that's because in the end, it's about the degree of trust in the government and it's about the quality of life within the country. And on a relative basis, the US is still looking pretty good. (48/57)
Yeah, relative, exactly. That's the key. Relative is key, right? That may change with the current political situation. And though we've had inflation, certainly in asset prices, that can quickly turn to deflation and we've been fighting deflation or the Federal Reserve and central banks in the West have been fighting that with their monetary policy. Yeah, that's right. And probably with less effect than they really think. I would say... Yeah, I'm not sure we solved anything, but... No, I mean, I was trying to basically... I wanted to see if we could try and sort of create some hypothetical scenarios here about where things would go. I mean, there are so many factors, there are so many variables. There's North Korea, of course, which is a big variable and our president is another variable walking and talking and tweeting variable. I'm trying not to take that bait. No, I don't want you to take that bait. I actually don't talk about Donald Trump on the program because I find that it's (49/57)
very difficult to do so effectively and usefully. I mean, a lot of times... Without having people's blood pressure rise. And also, I just think most of the commentary around him is not very useful. There is actually... I don't know if you're familiar with Sam Harris. He talks about him too much. I mean, but there are times in which he describes his criticisms in a way that I find useful. But I think for the most part, conversations around him are not very useful. I want to mention one more point on bringing back to China before we end, which is we were talking about loan growth. I've got two charts here in front of me. One is of loan growth in China. And another one is of percent year over year annual GDP growth since 2007. And what is indisputable based on these charts is that annual GDP, the trend for annual GDP growth has been down, whereas right now, loan growth looks pretty flat, but it had a huge jump in 2008. Are we going to continue to see every year it's going to be much more (50/57)
challenging to generate growth in China? Yeah, I think if you were to draw that top chart using including corporate bonds and including all sorts of quasi loans like short term private equity, then you would find that the two lines are in opposition to each other. And the reason is simply because you require more capital every year to drive the same amount of GDP growth and you have a target, so you just have to put in more capital. And that's why I think that they're going to hit a wall because it's very important politically for whatever reason to fulfill the promise to the Chinese people that GDP will double by 2020. I guess the starting point was 2010, I don't know. And what that means is that you have to have 6.53% GDP growth every year. So they're just damn well going to hit that target. And that's unfortunate because the quality of growth, it's kind of like people talk about digging holes and filling them in again or building a Mexican wall. But essentially that's what you're (51/57)
doing. You're putting a tax on every Chinese citizen. Well supposedly the Soviet Union in its heyday produced cars that had negative equity because they actually had to take the cars apart for the parts. The actual commodity that went into creating the car was worth more than the final product. Yeah, exactly. And you get a lot of that with Chinese comparisons between steel that's of less value than cabbage and things like that. Think of the amount of energy and resources that were required to dig all that iron ore out of the ground in Western Australia, stick it on barges, haul it up to China, put it into these towers. And then you're going to, I'll tell you, there's a city in Ordos County in Inner Mongolia which is the biggest county for coal in China where their solution to the bubble breaking was actually to blow up the buildings to rebuild them. That's very funny. And that was proposed. I don't know whether they eventually did it. They ended up with these huge... There was some (52/57)
similar proposals less serious here in the United States. And in fact, I opened one of my early television shows years ago by having a bulldozer bulldozing a house and it was a mock solution to the housing crisis. Yeah. The idea was you create jobs by putting people in bulldozers and then you create jobs by rebuilding the house. Exactly. They've done that. There's another county in Ordos where they had built all these towers and they couldn't find people to live in them. So they actually, I swear to God, this is true, they actually exploded, blew up schools in neighboring counties. Nobody in them, of course. So that the kids would have to go to that county to go to school. That's a real story. Yeah. And then you'd find these kids, you know, of course for them it was a dream because they were living 50 miles from their parents. They're like 14 years old. They have their own little Moto scooters and they're squatting in these like dark towers with maybe a hot plate, battery run with four (53/57)
students living in this like weird empty apartment together. Where are they going to school? In the model school in this new county because they built a model school so they were down well going to enroll in that. I mean, totally insane. And that is the extreme sort of version of what many in the United States propose. I mean, that's the idea of digging holes and filling them back up. I mean, that's not a radical idea in certain sort of Kinsien circles. Well, I mean, let's not go overboard. The U.S. U.S. infrastructure does look, you know, it is decrepit. People are dying in train accidents that looks 60 years old because it is 60 years old. Whereas in China, it's all brand, brand, brand new. And that's the difference. But you know, in the same way, if we were to raise $3 trillion to build, you know, a wall around the perimeter of the United States, yes, that would raise GDP. How would that raise the quality of life? Well, also, but I'm remembering specifically when I was living in (54/57)
D.C. that there were some people coming out in the New York Times saying that the snowstorm would actually be good for the economy because it employs people. But this is an asinine idea. People say the same thing about war all the time, whereas Adam Smith believed that defense industries should not count toward GDP because they were detracting from GDP. From wealth. They destroy wealth. Exactly. I think something that many people fail to recognize that, again, we talk about good heart and the notion that just because we can measure GDP doesn't mean it's a useful measure for any of the things that matter to us. And we could be growing an economy just like we could be growing cells in our body, but whether those cells are malignant or benign is a completely different question. And I think that that's what's so frightening about, to me, looking at China, looking at these ghost cities, these hundreds of ghost cities, it's just as terrifying the fact that they've deployed capital, (55/57)
resources, and labor to generate massive amounts of so-called wealth. But in fact, in a contraction, it could turn out to be that huge amounts of land that was once arable is no longer arable because they've built slabs of concrete on it. They've polluted their environment tremendously. And it's just a frightening picture. I think in some ways, the Chinese economy, to me, is a national representation of the human animal in some ways, very out of balance with its ecosystem. I think it represents in some ways what we do collectively to the planet. And maybe I'm going off the rails a little bit, but it sort of reminds me of that in a way. No, I understand what you mean. I think, to me, it's a representative of how political systems excessively centralized go off the rails. Yeah, I know. I agree with that as well. So, Annie, it was great having you on. Thanks, Dmitry. Thank you. And that was my episode with Ann Stevenson Yang. I want to thank Ann for being on my program. Today's episode (56/57)
was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter, and Instagram at HiddenForcesPod, or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
a note. This was a, the board no longer has faith in him because of ways that he's communicated and we don't trust him. And he's gone. And by the way, Greg Brockman has been demoted from chairman of the board. He's no longer on the board and he is now going to be just an employee of the company. We're also, they elevated CTO or former CTO, Miram Arati to the CEO position, the interim CEO position and said, they'd figure it out from there. This was a neutron bomb. I mean, whatever, pick your hackneyed language of a huge massive explosion for reasons that I think will probably spend the rest of this conversation unpacking. But it was the just act one of an incredibly sort of dramatic moment. The rest of the night was spent sort of with people trying to figure out what the hell was going on. There was about, I don't know, a five or six hour period where we hadn't heard from any of the principles involved. And the speculation at that time, I think, was my interpretation was that there must (10/57)
company. They have a very specific mandate that has nothing to do with that. So I think that it means there are competitive pressures. So the competitive pressures seem to be the bigger problem. And the talent drain that happened at OpenAI is like a perfect example of that. Well, there's a larger question of just how inescapable the absolute vortex of the AI arms race is from a commercial perspective. I think that's a really reasonable question. By the way, this is Hinton's main point when he left Google is that it's an all-consuming thing that he can't imagine how we're going to get out of. I mean, it's a black hole of pressure. The question is whether Sam and the leadership of OpenAI would have more power to resist that pressure, at least in some way, from where they were versus where they are. My general feeling is that as the pole position industry and generation defining startup, which they were, I mean, it is a remarkable achievement that won. Not only did they kick this whole (27/57)
potential for impact. And it took him about 10 minutes to decide that he was going to be the guy. And it kind of seems like they did because one, he had the qualification of agreeing with them on AI safety things. And two, he was the guy that said, yes, it's come out subsequent to Nat Freeman, who used to run GitHub has said no. I think one thing that I will note about Emmett, and again, I have a very strong feeling that Emmett's story in this is ultimately going to be a very, very small footnote. But one thing that is notable is that in the sort of, you know, six paragraph or whatever note that he sent out on Twitter last night, like 4am, he said, PPS, before I took the job, I checked on the reasoning behind the change that board did not remove Sam over any specific disagreement on safety. Their reasoning was completely different from that. I'm not crazy enough to take this job without board support for commercializing our awesome models. So again, this leaves everyone with the (21/57)
that's coming together in December. I decided to pull the trigger on it. Well, I'm very excited to hear about that, Nathaniel. So thank you so much for coming on, man. This was awesome. I really appreciate it. Yeah, always love chatting to me, Tree. All right, have a good one. Bye, everybody. Yeah, you too. (57/57)
question of then what the hell was it? Was it just someone didn't like Sam or didn't like how what Sam was doing? What could possibly justify this? And the board has been unwilling to make a case. So I'm going to hold this question. But what I wanted to say is that I think it opens up the door to a conversation about open AI's role as a nonprofit organization, and its relationship to Microsoft and how workable that was. And maybe, and I'll ask this question, then I want to take a few questions. We have some great questions that have already come in. Are we too quick to attack the board here and not give them enough of a benefit of the doubt? In other words, their point was that what they said was that Sam was not being transparent, that they couldn't trust him, right? So couldn't there be a lot of truth there? And that maybe in part because of the nature of the enterprise, the fact that it wasn't nonprofit. I mean, Sam says he has no shares. I don't really know how that works. But that (22/57)
Welcome everybody. Today's call is part of a series of live Q&As that I host regularly for members of our Hidden Forces Genius community and sometimes I open them up to our newsletter subscribers. The newsletter is free and you can subscribe to it and get special invitations like these at hiddenforces.io by scrolling all the way down to the bottom of the page or just waiting for the pop-up. Besides these audience Q&As that we do several times a month, community members also get invites to in-person events and dinners that I host all over the world with many of the same guests that you've heard on the Hidden Forces podcast before. And if you want to learn more about that and the Hidden Forces Genius community, you can do that at hiddenforces.io slash subscribe. So Nathaniel, the reason that I asked you to come on the show, as you know, on such short notice, and we're recording this on the evening of Monday, November 20th, is because beginning at around this time on Friday. So a few (1/57)
days ago, we learned that Sam Altman, the CEO and co-founder of OpenAI, was fired by his board of directors. And since then, we've heard all sorts of rumors and explanations for the firing, as well as the perspective rehiring and then refiring again. It almost feels like of Sam amid a total mutiny at the company. For those of you who don't know Nathaniel Whittemore or who need a more formal introduction, Nathaniel is the founder of the Breakdown Network, which encompasses an assortment of podcasts, including the AI Breakdown, as well as other content that explores the big picture power shifts remaking our world. So Nathaniel, quickly do me a favor and introduce yourself and just add anything that I've left out. And then let's get into a few questions that I have. And then I really want to encourage our members and other listeners who are joining for this call to drop any questions that you have in the Q&A box, because I really want to take audience questions today. This is what these (2/57)
calls are all about. After all, I have plenty of opportunities to ask questions of my guests on the podcast. So these are really for you. So Nathaniel, quick introduction, and then let's start to work our way through as many of these questions as we can. Absolutely. I mean, listen, you did a great job. The thing that I always come back to if I'm doing this fast is this idea of big picture power shifts that's always been what's interested in me. I was a history major. I love big patterns of history. It's why Hidden Forces has very long been my favorite podcast. And for me, exploring it through media, through news analysis is what I've done. So the Breakdown, it came out at a time where I was spending all of my time in and around Bitcoin and crypto, and particularly in the context of what it meant to have a non-sovereign monetary system and how that played into other global changes, the fragmentation of the American-led global order and yada, yada, yada. And so for me, it was a vehicle (3/57)
to explore all those things. And I had a very similar experience around this time last year that many up people did when ChatGPT came out. And there were a number of other products that were emerging at the same time. There were these image generation tools that were starting to arise. And I had the experience of playing around. I think actually for me, the sort of unstable diffusion and mid-journey were even more transformative the first time I tried them from the standpoint of just seeing magic presented in front of my eyes. And I started to explore all of these new generative AI technologies, got very convinced very quickly that, like me, people were having these zero to one moments where they were understanding that they were going to impact how they worked and what they worked on and were racing to try to figure that out. And that was the sort of genesis of the AI Breakdown. So ever since that show started, which is actually only April, believe it or not, I've been spending every (4/57)
day looking at what's happening, trying to contextualize it, understanding it in the context of the new technology itself, but also the big sort of economic issues that surround it, policy issues that surround it, social issues that surround it. There's going to be a million dimensions, which obviously is sort of part of why I think people are so intrigued to spend more time on this. I had a personal moment that sort of drove at home for me a little bit. I mean, you have different experiences that drive at home and I was sent a version of my podcast in Greek, which I can speak Greek and I understand Greek, and it was with a guest who's not Greek, who's Iranian, and they dubbed us two. Now, I know how I sound in Greek, so I didn't sound like I sound. He sounded the way I would have expected him to sound like he was speaking Greek and it was very good. The generative AI company that did it is run by a Greek person, so he kind of made some edits, but I can see how this is going to quickly (5/57)
get to a place where it's going to be perfect and it made me realize like two things. One, I've had this idea in my head that I'm really lucky because I speak English. English is a language that can reach lots of people with the podcast, so I have a competitive advantage that this is a language that I understand natively. Then I realized, whoa, we're going to be in a world where people are able to compete with me from any country because they're going to be able to translate into perfect English. It also made me think about this is an area where, and I feel like you probably have recognized this as well, you want to understand where these trends are going because you want to try and take advantage of them sooner than later because as an example, as soon as this technology is up to snuff and that could be really within just a few years, and it probably is in some of the other languages, more difficult in Greek because there isn't as much text on the internet. I could take this podcast (6/57)
and I could reach new listeners. I could expand my audience because all of a sudden I've translated it into like 100 different languages, which is like a modality of thinking about audience expansion that you wouldn't have otherwise. Yeah. I mean, I think I barely had time to wrap my head around this, but it feels like translation is actually one of the most solvable things. I mean, it is just really happening. I don't know what the implications are of a world where the default will be you get to consume content in whatever language you're experiencing the world through regardless almost of what they did. Now, of course, I think that by and large content creators will still be the drivers of those change. You will opt into using Wondercraft or whatever, when Spotify integrates these types of features to do that sort of dubbing and translation initially, but I can also see a world where it's platform mediated and it's just even if you don't do that, all you have to do, it's almost like (7/57)
an opt out for Spotify or something like that where they're just naturally doing that. I think there are some pretty profound implications probably of language ceasing to be a barrier in the way that it's been a barrier for the entire history of human experience. Again, so I recommend people follow your work and follow the AIA breakdown because you cover these big picture trends and that's what the podcast is about. So let's apply your expertise and the things that you spend your time on to this. I mean, this has all the makings of a great story. It has human drama. It's consequential in the sense that it's grappling, not only is the industry so important, but it's grappling with some of the decades-long themes like the tension between entrepreneurs and founders on the one side and the board and investors on the other and the empowerment of the founder. And also this larger question that's been in the public consciousness for some time now, which is this battle between, though it has (8/57)
been articulated in this way until recently, the battle between the AI safety people and the acceleration is. So give us a recap starting with, I think it was noon Pacific Standard Time on Friday that the news broke that Sam had been fired. So just bring us up to speed. When did this start and where are we now in this story and what's happened in between? As an aside, I got to tell you, I was very happy to not be intimately involved with the chaotic multi-billion dollar value destruction Sam episode of this November as opposed to last year. So I was thinking about this. I think let's do maybe the literal 60-second bullet point version of just what happened so that we can go back in on Peele because there's so many layers. So Demetri, to your point, noon Pacific Time, 3pm on the East Coast, maybe just after, but consequently before the close of markets, let's put it that way, Open AI, the board announces that Sam Altman has been fired. He's leaving to spend time with his family kind of (9/57)
be something enormously egregious that happens. I thought it was some sex scandal with Chad J.B. D. or something. I didn't even think a sex scandal was a big enough thing. I mean, the amount of sheer value destruction that was going to be created by this seemed to me to be something where either A, there was like Sam was keeping state secrets or B, AGI had literally been invented and he had kept it from the board. Something of that sort of level of significance. It's the only thing that made sense. But then as the night wore on, we started to get commentary one, Greg Brockman quit in flames. Basically, he said, not a chance I'm sticking around to just be an employee with this. And Sam had sent sort of some nice gracious tweets or whatever, but very clearly was, you could feel the intensity of things going on. And part of the reason for that was that it was very clear that no one had been consulted in this. It doesn't really seem like counsel was consulted in this. It was the investors (11/57)
weren't consulted, Microsoft wasn't consulted, Microsoft did their sort of nice little statement kind of a thing where they said, sure, we're excited about the new leadership, excited about this partnership, whatever the thing they have to say, basically. You could almost feel the happenings going on behind the scenes. So Friday night, everyone's still grappling with this. By Saturday, early to mid-afternoon, it's clear that this is not a done deal and there are battles going on. There are conversations, I think the Verge maybe broke it at 4 or 5 p.m. East Coast time on Saturday, that the board was now actively back in conversations to bring Sam and Greg back. And that as part of that, they were demanding kind of understandably the resignation of the rest of the board. And we're now kind of at the 24-hour mark of not having had any meaningful explanation from the board around why Sam had been fired, which of course just leaves everyone to be speculating wildly about what it might be. (12/57)
But at that point, 24 hours goes by, the speculation had shifted from, okay, did Sam do something crazy terrible too? Was there just some sort of internal power struggle? I think that the most common explanation at this point was around the idea that perhaps there was just some huge disagreement around safety questions and around risk questions. And it started to be sort of interpreted as the effective altruists on the one hand versus the accelerationists, the EACCs on the other hand. That started to be Tell people a little bit just quickly for people that don't know, what do we mean by accelerationists? Accelerationists who are not scared of the risks of AI and AGI in particular and think that it leads to a world of abundance. Now, there's infinite variations within that. There's just people who are sort of broadly techno-optimist accelerationists who think that technology is going to be a net good force for humanity, but maybe who still have some questions on the specifics here. (13/57)
There's other people who are like, bring on the super intelligent gods and let humans be consigned to a secondary species. It's not a term that has full a singular meaning. In fact, and I think in some ways right now, what it means is not the guys trying to slow down AI, not the guys trying to pause AI. So we're kind of getting this interpretation of it being a safety issue and reinforcing that as the fact that at the center of it seems to be Ilya, who's one of the board members, Ilya Sutsgever, who was a chief scientist at Open AI. And he has expressed various concerns. He was at the time leading the super alignment team, which was Open AI's effort to get to actual alignment with super intelligent AGI over the next four years. They had kind of set their moonshot project. He also worked under Jeffrey Hinton, right? Yes, he was at Google. And Jeffrey had resigned from Google famously over concerns about safety. Yeah. Elon Musk says that his friendship with Larry Page ended over (14/57)
recruiting Ilya away from Google to Open AI originally way back when it happened. So Ilya being at the center of this seemed to reinforce for some people that this was a disagreement around safety questions, but it also kind of started to seem like maybe there was a lot of just the very classic garden variety interpersonal struggle stuff, right? Ilya had been demoted about a month ago in terms of how much authority he had. Clearly didn't like that. And so personally, I was left wondering, is it actually these AI safety questions or is it not? So going into sort of Saturday night, we have what's clear is that there's a sort of a groundswell of people trying to get Sam back in in power in Open AI. There's a sticking point with the board doesn't want to resign, or maybe it's that they don't know who's going to replace them on the board. And so there's a lot of intransigence. And then on Sunday, Sam is back at Open AI to actually try to figure this thing out and negotiate. He's in the (15/57)
building. He holds up, he tweets out a picture of him holding a guest badge and says, this is the first and last time I'll wear one of these. Satya Nadella from Microsoft is literally mediating these conversations, right? And again, throughout sort of the afternoon, we start to get more of a trickle of information. Really, honestly, not much happened until very late at night actually on Sunday, where apparently Mira, the former CTO who had been elevated to interim CEO had determined at some point over the preceding two days that she was going to use her new authority to bring Greg and Sam back, which obviously the board wasn't happy about because they had just fired Sam at least and demoted Greg. And that apparently caused a battle with Adam DiAngelo, who was one of the board members who's the CEO of Quora, who was formerly at Facebook. And that led to the news that we got around midnight last night that Emmett Shear, the former CEO of Twitch, had been hired to lead the company as new (16/57)
CEO. So we've gone from Sam on Friday morning to Mira on Friday night through Sunday afternoon to Emmett Shear on Sunday night. And we can talk about Emmett and what it might represent. But the final part of this story from Sunday night early into this morning was that at, I think, 3 a.m. East Coast time, 2.57, because I spent a lot of time looking at this tweet. Satya Nadella basically tweeted out that they were looking forward to getting to know Emmett and the new OpenAI leadership team, but that Sam and Greg were coming to work at Microsoft, which is just, I mean, an outcome that I don't think many people had, even as they started to look at the full spectrum. I think that the absolute default assumption, should they be unsuccessful and wrenching control back of OpenAI itself, was that these two guys were going to go start their own startup to compete with effectively a blank check from any investor that they wanted. Now, just to finally wrap this up so we can get into whatever (17/57)
questions you want to take the direction of. This is where things were this morning at around 8.15 as I set off to drive my daughter to school, to kindergarten. And then when I get back, it turns out that OpenAI employees are not content with the arrangement and the way that this is done and had signed a letter demanding the board's resignation, the return of Sam and Greg, and very impressively, something like 500 out of the 770 employees had signed that when it was announced at like 8.30 AM. But even more impressively, it turns out that it was only signed by 500 because most of them were sleeping. And so I think at the time that we're recording this, or the last number that I saw from an hour ago, it was something like 735 of the 770 employees had basically said, the board needs to go or we're leaving and we're going to Microsoft with Sam and Greg, or at least not staying here, which is astounding because that's probably a higher percentage of the people than Microsoft would have (18/57)
gotten to come over if they had actually acquired the company. So it's just this massively strange situation. It is very clear that there is still a battle being waged behind the scenes. Sam has been dropping kind of cryptic tweets that don't say much, just sort of vaguely trying to reassure the developer community, I guess, in some ways, but we are still unresolved. And in fact, every time someone announces something that sounds like a resolution, it has turned out not to be and has been sort of upended within six to 12 hours. Yeah. I mean, so great summation. Ilya's participation in that final letter saying that he wanted to, that he'd lost confidence of the board is the one that's like most perplexing. But again, I feel like it just highlights our ignorance at the moment. We're still trying to put pieces together. So we still don't understand to what degree he was pushing for this. He also tweeted out, I guess this was this morning, he tweeted out, I deeply regret my participation (19/57)
in the board's actions. I never intended to harm open AI. I love everything we've built together and I will do everything I can to reunite the company. Quick question on Emmett's qualifications. Is Emmett's qualifications Emmett, former Twitch CEO, are his qualifications mainly that he's on the AI safety camp? I mean, that is the interpretation. So if you read like Kara Swisher is very clear to her, that's what the big thing is. Now, people who know Emmett, I don't have a dog in that is Emmett a good CEO or not fight. He was CEO of a very dynamic company that sold to Amazon sort of before and after the sale for 11 years, which is not nothing. He built that company from scratch as a CTO. He's got a reputation as being a very good leader, as a good engineer. And he's also got a reputation as being very thoughtful and interesting. But the flip side of this is of course that this is one of, if not the most significant startup in the world right now, it certainly has the sort of biggest (20/57)
he was, let's say, engaging in other deals on the side in order to try to get pieces of other companies that he's potentially working on and trying to start. And that that was also interfering with the board's ability to exercise governance. So there's actually two questions embedded here. One is, is it possible that there was a reasonable justification for this based on the actual facts that we haven't heard? And the answer, of course, is yes, because we haven't heard. But the second question is whether it's reasonable to give the benefit of the doubt when the stakes are this high, when the board refuses to articulate what that is. And the board hasn't even, by the way, come out and said it's too sensitive and could cause harm if we explained what he was being deceptive about. They've just said nothing. And so I have a hard time with the argument. Like, look, I think it's a big sort of well, actualism on Twitter right now when people are like, well, the nonprofit board is just (23/57)
exerting their right to do it. It's like, yeah, sure. But they're not explaining why. And so it's all right as everyone else to say that that sounds like total bullshit from where we're sitting. I mean, listen, Andre Carpethy said this in a tweet as well during the middle of the whole thing. Someone said something to the effect of, it's weird that Andre, who's kind of right after the set of people, I mean, he's as well known as prominent as important as any of these folks in many ways. And someone said, it's weird that he hasn't said anything. And he basically said, I haven't had anything to add because the board has, you know, not taken their chance to explain what their logic was. And so we just kind of have to assume it is what it looks like. And I think that that's a pretty reasonable place to be. Again, they haven't even gone so far as to say something like, there was a safety disagreement that's too important to give publicly, but we stand behind our conviction. They've just said (24/57)
nothing. And it sort of has left everyone to assume that it is actually less significant. And I don't think that people care whether it was technically in the rights of the non-profit board to do this thing. Lawyers will care when there are, you know, the lawsuits that are inevitably coming down the line. But in the court of public opinion, the board is basically fully wrong. And I don't feel bad for not giving them the benefit of the doubt, given that they haven't taken the chance to actually make an argument. So I'm going to take some listener questions. Richard asks, how does Microsoft's increased influence and Samsung UROL impact the speed and trajectory of open AI? What does this say for direction, control, and security? And I would add to that, Nathaniel, just a larger question of this, does Microsoft ultimately come out, you think, as the biggest winner in all of this? I think that it certainly puts more pressure on commercialization. I don't think that Satya is lying when he (25/57)
said, you know, in his initial tweet that they've learned a lot over the last half decade around how to let companies sort of function on their own, more or less, you know, between LinkedIn and GitHub and this sort of thing. I think that they have done a good job of sort of shifting that. Microsoft is no longer a pariah where like your company, when you sell to it, goes to die in quite the same way that it would have been a decade ago, in large part due to changes that have sort of happened on Satya's watch. But at the same time, it's a huge company, right? When this happened, it wiped out $48 billion of market cap in a matter of minutes, right? That's an enormous amount of pressure and not just pressure, but fiduciary responsibility. Microsoft is structured in a way where it's their job to think about AI safety issues. Now, they might decide to take it to shareholders and say, we should all be thinking about these issues. But right now, it's not their job because they're a public (26/57)
thing off with chatGPT, I'm just absolutely burying the faces of everyone else with egg. GPT-4 hasn't even been close to touched, subsequent to that. Google has just continued to delay Gemini. Amazon is theoretically training something on, that's even bigger than GPT-4, but we haven't seen it yet, although it could be announced in the next couple of weeks. Olympus is the code name, apparently. But they were really in the pole position coming into this and had a huge influence in shaping the nature of the industry. And I think that they lose that in a lot of ways with this. I think it creates an opening that allows for more of that commercial pressure, not less to come in. I also think that, maybe I'll invert your question a little bit. I think it's possible that Microsoft's the bigger winner, but I still think it's, I think that Microsoft had already done a phenomenal job. I mean, listen, Microsoft's relationship with OpenAI kind of reset the way that startups and big tech think about (28/57)
each other for this generation of companies. It was a new precedent. It was not an acquisition. It wasn't just a straight investment. It was very clearly something different, but the model has now been sort of semi-copied by Amazon and Google in terms of Anthropic. And part of it's just the reality of limited compute resources to go around. But I think that they were in a pretty good position already. I mean, they were making more money from OpenAI. And I think that anything that sort of sows chaos in the lead that they had, even if yes, they own sort of more of it ultimately, I kind of don't think there's any real winners in this basically. I think the biggest loser is the AI safety field. We'll have to get to that. So I'm going to take another Microsoft question here and skip around a bit. Nima asks two really great questions. So one is, if the majority of the OpenAI team moves to Microsoft and others are poached by competitors, what do you believe will be the impact of this event on (29/57)
the competitive dynamic and landscape in artificial intelligence? Could it in fact better level the field among large language models? And then the second question is, if a regulatory movement grows to slow down acceleration, is Microsoft a more susceptible target for regulatory scrutiny? So both really great questions. Yeah, my answer is yes and yes. So yes, I think that it does have the potential to create less of a, I mean, listen, by weakening the company that I was sort of arguing is in the poll position, you inherently create a space where there is more, there's more equivalence, let's say, right? There's more room to catch up. And I think that that is almost a, I don't see how that doesn't happen to some extent in the sense that developers in particular who OpenAI had just extra one over with Dev Day relative to where they had sat before November 6th, have to be very questioning what they're going to do kind of going forward and how much they're going to invest in the chat GPT (30/57)
and OpenAI ecosystem versus working with other models, whether they're closed or open. And so there's an argument that it's ultimately a good thing for the world to not have a single dominant force. The flip side is I think that that's probably counteracted a little bit by increased concentration in the hands of Microsoft. I think a frenemy relationship between OpenAI and Microsoft is probably not better for the world than a fully absorbed relationship. But it's hard to say those things are going to take a while to blame out. But I think that the question of whether there's going to be more, if it creates more of a target for regulatory scrutiny is absolutely, there's a question of sort of, will it actually be able to happen exactly as intended or will there be antitrust suits? It creates all sorts of new questions that they were always probably going to have to deal with at some point as that relationship evolved, but are coming a lot faster now. So Sundeep asks, if the Accelerate and (31/57)
Commercialized crowd wins out at OpenAI, do you see dangers of AI going the route of nuclear energy? Some scary near misses end up setting progress back by decades. The Silicon Valley mindset seems to be that absolutely nothing can be permitted to hold back tech by even one extra day. What are your thoughts on that? Yeah, there's a couple things in here that I think are really interesting and worth pulling out. And Dmitry, this is a conversation that you and I actually have a lot. I do think that Silicon Valley does represent the position almost always that tech is sort of a natural good that benefits the world, that the net byproduct of almost all technology is good for the world. And they have lots of evidence that they point to, but that is sort of Silicon Valley's position. They've done a good job over the last 20 years of basically dragging the rest of the world along with them that nothing should slow down or impede progress and that technology is kind of coming at you whether (32/57)
you want it or not. Now, I would argue, and this is a little bit of probably out of scope of this conversation, that that was not just Silicon Valley sort of stumbling into power, but also had to do with sort of big political decisions such as the decision to sort of, I mean, globalization decisions and the way that that impacted the economics of America. We traded the sort of jobs for cheaper stuff and a lot of what has come from technology, we're not so sure actually sort of net benefited us, but Silicon Valley is always going to represent that position. I don't think it's particularly unusual or surprising. I think a bigger question is sort of where the rest of the world is going to fall when it comes to that. And frankly, that's why I think you're seeing such intense and vicious narrative warfare between sort of the forces of pause, slow down, AI safety, effective altruism, whatever subdivision of that whole set of things. And on the other hand, the sort of accelerationists because (33/57)
they know there are big stakes at play here. These are positions held by sub 5% of the world or call it America if we just want to define the parameters of Americans who are going to be involved in American policy decisions. I think that the vast, vast majority of people don't really have a strong perspective on this yet because A, it's new, B, it's complicated, C, it's kind of a reasonable default position to take to say if a lot of researchers are at least reasonably concerned that there's a lot of risk here, we should probably take that seriously even if we also see a lot of the upside. I think a lot of people are finding themselves in the middle and an admittedly uninformed middle as they're trying to get up to speed with it. And so the two poles are really aggressively trying to pull them in either direction. Silicon Valley because I think it's existential in a way that's not just about AI but it's about whether the tech industry can continue to sort of dominate the conversation (34/57)
and sort of do no wrong or at least get its way even if it's been sort of said to do wrong. And on the other hand, it's existential because the people literally think it's existential from the standpoint of whether humanity survives. So the narrative stakes are quite high. Yeah, that's a really great point. I mean, the existential side is well established, but this idea that Silicon Valley is banking on this as being the new technological paradigm and the ability to develop that unencumbered or the fear that they might be encumbered in trying to develop that is something that's freaking out a lot of people. It is. And it's interesting to me why that is. I don't have a good explanation yet for why there is sort of such intensity around this. I think that it's probably like anything, a variety of positions where I think that there are probably in the same way that there are people on the side of sort of AI safety who very genuinely believe they're P doom to use sort of the expression (35/57)
that's used in those circles a lot, their probability of doom, the percentage chance they ascribe to sort of a human life ending event is very high and they believe that realistically. I think that there's probably the inverse of that on the acceleration aside who think that genuinely AI will, if given the chance in 10 years, solve cancer and solve, you know, and all these things would sort of prevent human flourishing. And so it becomes, you know, Mark Andreessen literally argued that it's a form of violence to not allow this to proceed in his techno-optimist manifesto. Then I think you have others who are just sort of generally think that the AI safety folks are sort of crying about nothing and making fallacious arguments and it's stupid, you know, and then you have sort of the libertarian set who doesn't want sort of government to be involved in this and say, you know, if they do this, then, you know, where does it stop? And, you know, so there's all these different dimensions. It's (36/57)
not a coalition per se. Yeah, those people are always way, way off center. The sort of no regulation this is like David Crockett's America is so totally missing the ball. Actually, you know, this point about power I think is actually central and I've something I've talked about. It's not a coincidence that we got democratic reforms and moved towards more pluralistic systems of representation after the end of the bubonic plague and the price of labor went up. Labor was empowered and with the empowerment of labor, you got the empowerment of civic bodies and the population, people. And I think that it's also not a coincidence that we've seen increased fragmentation and rising populism and political dissatisfaction in Western democracies since the fall of the Berlin Wall and the rise of globalization, which disempowered labor in these Western countries and also technology also appropriated more power towards capital against labor. And so you've seen this move of disempowerment of labor (37/57)
relative to capital and AI represents the apotheosis of this. You know, it is the singularity, you know, not to just a quote Ray Kurzweil, but truly it's a massive concentration of power. And I do wonder to what degree we're also what we see in the case of the acceleration is just a recognition of that recognition that they are on the cusp of a massive, and I don't mean it in a twirling your moustache kind of way. I just mean it in a kind of fundamental way. They see it. This is where it's going. They want to be on the side of the people that have the power in what could end up being a feudalistic type of global society, which again reverses all the gains of the breakdown of feudalism that happened after the end of the bubonic plague in Europe. So another question Michael asks, if the board is motivated by safety concerns, is it naive for a software vendor to think that they have any meaningful influence over the trajectory of AI technology when hardware progress will inevitably (38/57)
continue producing improvements and capabilities for the foreseeable future? So I'm not entirely sure. I think I understand where he's going, but I don't quite get it as a question, but maybe you do. So what do you think of that? What's your response to that, Nathaniel? Maybe I'll reframe it a little bit and apologies to the person who asked the question if this is not the direction that it was going. But I feel like the question is, is it naive for anyone to swim against the tide when the tide is so clearly pointed in the other direction? Is it naive for this board to have thought that this would meaningfully impact anything even if they were completely successful and Sam and Greg just quietly went into the night? Sort of is the answer a little bit. Mostly in terms of execution, though, not in terms of principle. I think one of the real travesties of this, if it really was executed the way that it was, which is there not being some insane egregious inflection point moment when it (39/57)
comes to AI safety and the capacity of these systems, is that this body spent their most powerful tool on bullshit, it seems like. Listen, the structure that they set up theoretically to create a nonprofit that could fire the CEO of this incredibly important startup, WorkDish, in the sense that they did fire the CEO of this thing, but was this the right time to do it? It feels like it's just going to end up turning some amount of narrative against the AI safety folks because they look very chicken little-ish. The fact that it seems likely that Sam's going to consolidate power after this and no longer be an ally to that group in any meaningful way, certainly Silicon Valley is now on a McCarthy-esque witch hunt to try to root out all the effective altruists at their organizations. Of course, I'm overstating the case to make the point, but I don't know, it's not naive on the very broadest level to think that there are chances to drag the world toward the better a little bit. You're never (40/57)
going to convince humans that they can't do that. It's what makes us who we are to be optimistic about the capacity to divert things which seem like they have momentum such that they can't possibly be diverted. That's very American. That's very American. Not necessarily very human. I don't know. It's certainly more American, but I think it's fairly human in terms of the sense of agency to exert will over the world. I think that's pretty quintessential to humanity, but the poor way I feel now. George has a question on governance that I want to ask before that. Kelly asks a question about Elon and anything we know about Elon's involvement. Elon, we do know, was involved in OpenAI and its founding. He's also recently started a AI company. I don't know to what degree is just a lark or some kind of thing, performative act, again, to generate a media hype and excitement, whatever, and how much of it's substantive. But is there any involvement for Elon here? Elon's always trying to find some (41/57)
way to get some kind of action, whatever it is, whether it's attention or whether it's material. But how has he featured in this story at all? My read is no in this particular instance. How I'll qualify it is that Elon has two chaos modes. Either I create the chaos or I benefit from the chaos. I don't think that he created the chaos here. I think that this was done outside of him. However, he is enormously talented at benefiting from the chaos. There was a while before Ilya sent that message this morning where I thought one of the most natural outcomes for this would be Ilya moving over to XAI. Great prediction. And sort of, I mean, Elon has taken a stance of being closer to what it appears that Ilya feels relative to Sam, certainly not a full sort of pause or anything like that, but at least giving lip service to that side of things. But Elon is never far from the surface of things, and he's going to be a major player in this. For those who aren't paying attention closely, outside of (42/57)
even just GROC and sort of like the anti-woke chat, GPT bot and stuff, Tesla has some of the most advanced artificial intelligence in the world. The way that they are doing full self-driving is they're inferring on site, right? They are taking in all of that information from all of the cameras on that vehicle and making decisions in real time, which is a real world sort of AI that basically no one else has the way that they do. And it's not hard to start to see how this incredible trove of conversational data from Twitter slash X, plus that sort of inference capacity that comes from real world data in the form of all the fleet of Tesla cars that are out there collecting it, combines into their robot, which brings sort of all of these things together into, who would you say are the big players in the AI for among AI foundation models? It's a very small handful. There's open AI, there's Anthropic, which was a split out from open AI. There's XAI who is new, but you would just have to give (43/57)
Elon credit and call that sort of the representative of the entirety of Elon's stuff. And his LLM is Grock, right? Yes, inclusive of Grock and Tesla and all that. Microsoft is really sort of aligned with open AI on that. They do technically have, they just announced the next generation of their sort of LLM, but it's so clearly secondary to what they're doing with open AI. And then there's Google who are sort of far behind at this point, which is the whole very interesting thing. Meta, who are sort of have taken this sort of leadership position in the open space approach. And Amazon, who again, they sort of got pushed out of the way by open AI, but are now, they've sort of moved into professional services with bedrock and helping enterprises sort of train models. But it seems like their ambition to have a competitor is still there. Obviously, they need it to power sort of Alexa devices and things like that to some extent. Apple's a big question mark. They are now from all reports (44/57)
spending millions of dollars a day training their own models, although it still seems unclear exactly what they're going to do. It kind of seems like their focus is to get the technology sufficiently advanced that they can actually run these things on device so they don't have to deal with the cloud. And then there's a whole cadre of sort of open source approaches too numerous to list, but there's Mistral, there's stability, there's all the hugging face models. I mean, there's a huge array of things building in that space as well. So all of you can hear just how well versed Nathaniel is in this industry. So he is the AI explainer. If you need a podcast to listen to where you can download stuff every five minutes, it's Nathaniel. So George asks, is this a symptom of problems with governance both in the tech space and in the nonprofit space? I'm troubled because nonprofit does not mean you are, quote, doing good the way many folks think. It just means you essentially get to dodge (45/57)
taxation and operate under less regulatory scrutiny. Yeah, I think that there are indictments to go around in terms of governance here. But I think that for me, to the extent that we are looking for things which we should sink our teeth into and ask questions of how we're going to sort of not do this again or fix this, I think that it comes back to questions of AI governance specifically. And really, it's an even more simple question is what are, if anything, the guardrails around these sort of frontier models and the advancement of this space? And in many ways, I think that you can view OpenAI's nonprofit sort of weird structure as a self-regulatory approach trying to create those guardrails in the absence of there being a state-level guardrail or anything like that. And it has clearly not worked. And I think it's very hard to argue after this that the approach that they set out to do sort of worked without consequence. It's being put to the test as we speak. But again, to me, it's (46/57)
less relevant almost whether or not OpenAI's model worked and more like what is going to be the set of guardrails around this, if anything. And that's in many ways with the battle around the ASafety question is, who's going to get to determine what companies can and can't do in this space? So Leo asks a question about adoption. Do you see this impacting AI adoption anyway? I don't see it. If anything, it just accelerates it. Yeah, I think the thing that makes AI weird relative to other hypey technologies, of which I have a lot of familiarity with previous hypes is that it's just actually good. I think one of the most dismissible opinions to me when it comes to AI is the sort of, well, actually, it's not even that good. It's just predicting words and all the sort of stuff. It's really good. These things are transformational technologies. I don't think that homework is ever going to happen again. As it happened when we were growing up, I think that the way that writing happens is totally (47/57)
going to change. I think, blah, blah, blah, blah, I could go on for an endless list. But those things aren't mandated from above and they're not just from hype there because people try these things and they're like, oh, that's a much better, more efficient, more powerful way to do things that I was doing and in fact opens up new things that I could never do before. So this is a question from Michael, which I think is interesting. He says, it doesn't seem like the policy regulation narrative for semiconductor export controls and AI safety have been coordinated. Hidden forces has covered some of the semiconductor controls and AI safety voices haven't come up. Are there people interested in AI safety or in the effective altruism community or anywhere else that are advocating for hardware controls in the interest of AI safety? So I would just say, obviously, there are in the sense that the semiconductor export controls are in some ways a attempt to slow down progress in AI, but (48/57)
specifically for the Chinese based on limiting their exposure to hardware. But the question is, is that also something that regulators are looking at, Nathaniel, do you know with respect to US and American corporations? Yes. So one of the potential regulatory approaches, and this is a fairly extreme one, but it's something that's sort of a potential outcome even at the executive order, is the US government at least having visibility into who's using compute. So one of the easy vectors for them to start having some amount of control is to force the cloud computing providers, so the Amazons and Googles of the world, to let them know when a certain customer is using over a certain threshold of compute. Now, this is something that's going to be fought incredibly viciously. I mean, just insanely tooth and nail fought. But if the government's trying to understand who's doing massive training runs before they happen and want visibility into that, they do have access to this information (49/57)
potentially through the compute providers to get that. So the short answer to the question is, yes, the government is looking into ways to have access to that sort of hardware level visibility, at least if not straight up control. I haven't seen proposals yet to give the government authority to actually green light, the usage of compute. Most of the sort of green lighting type proposals or licensing type proposals are farther downstream where if maybe there's a sort of a red teaming requirements, testing requirements, and the government gets to say, no, you can't deploy that sort of model because it's too advanced or something. But I haven't seen yet a restriction of compute, but an observation of compute is definitely on the agenda. So what is in your opinion, if you had to guess, what is the next use case or next small number of use cases that you think are going to serve as the next kind of paradigm shift in the consumers or the user's mind about really how transformative this (50/57)
technology is going to be? So I think that we've spent a lot of this year following along the progress of like a new thing to come out every few days. And I think a lot of next year is going to be about integrating the stuff that's already here into workflows in really practical ways. So building interfaces on top of things like chat GPT and Anthropics Claw that are custom purpose for profession X or role Y that are just add a layer. Again, it's almost a UX layer. The capacity of GPT-4 is very high. And of course, engineers are going to be excited and focused on GPT-5, but there's so much in GPT-4. But if right now, the only way that people are interacting with it by and large is sort of a blank screen that's a cursor that says, what can I help you with? And I think that that's going to change a lot this year. And I think that we'll move from just a pure kind of early adopter set, although there's tens of millions, if not hundreds of millions of early adopters doing all sorts of (51/57)
experiments with these things to, I don't know, accountants. I'm just saying, here's how we use this tool and other accountants copying them hundreds and hundreds and hundreds and thousands of times. I think you'll see social media managers say, here's how we do content calendaring, blah, blah, blah, blah. I think actually it's going to be a much more boring sort of integrated period. Now, it'll be punctuated by like mind blowing things, the likes of which you've never seen, but that'll be sort of contrasted with just the sort of steady flow of these tools into actual human workflows. So I have one last question for you, Nathaniel. Give us the name of one or more books, and this might be hard because this is such a new field, books that you would recommend for people that are interested in learning about this field, and also other sources, like how do you educate yourself in real time and stay up to date? What are some good journals, some good online magazines, some good people to (52/57)
follow besides you that you follow to help stay up to breast on this industry? Yeah, I don't know if books are the right way to for this. I think where books can be helpful is books can create a really good grounding for particularly some of the AI safety debates. There's a lot of text there, it kind of delves into philosophy. Nick Bostrom's Super Intelligence, we came out about seven years, eight years ago. Yeah, exactly. That sort of thing is there. In terms of keeping track of this, it's fascinating because there's this whole new core of content creators that are sort of just emerging now, and I think they're actually quite good. You don't have the sort of shilliness, I mean a little bit on X because that's just the nature of the platform, but you don't have the same sort of shilliness that you see with crypto YouTubers that you do with AI YouTubers. There's some great people like Matt Wolf who have created these channels that are just pure value. Matt Berman is another person who (53/57)
explains things, he's more technical. There's a handful of those now, there's a dozen or something like that. I think in terms of people to follow from a news standpoint, I think that, I'm sort of not biased, I go wherever the information is good. The information, just the information.com is by a million light years the best newsroom when it comes to AI. I mean, it's just- Yeah, everyone is citing them, everybody's citing them. Every scoop is them. Now, I think that is testament to the fact that AI has brought tech back to San Francisco and Silicon Valley specifically in a way that looked like maybe it had lost during COVID because it matters once again to have this incredible concentration of actual frontier brainpower. It's sort of returned and the information is where they're strong is in those actual geographic ecosystems where there are people who are writing for them, have relationships with people who would go into those companies and things like that, but they're a great (54/57)
source. On Twitter, it sounds silly, but one really great resource is Robert Scoble. He's been a tech obsessed guy. He loves technology, always has been an evangelist for various things. He just created a new show called Unaligned, which I actually haven't even seen, but what he's been doing is trying to curate the entire world of ex-users on AI into lists. He's got a list for ex-companies. He's got a list for ex-artists. I've found that lists don't usually stick as the way that people sort of interact with Twitter, but they're a great way to, if you're trying to figure out who you actually like, you go check out one of Scoble's lists and then you end up finding two or three people who come up over and over and over again and you follow them and you're in a good spot. It's a field that rewards finding new voices and new people, but it's going to keep changing too, I think. How do people follow you besides following NLW at NLW on Twitter or X as you call it? I still haven't internalized (55/57)
it. I know. I'm meaning that. I'm working on it. How else do people follow you? How do they find the podcast? What's the best way to take advantage of all the things that you have to offer, Nathaniel? If you are an audio listener, the AI Breakdown, if you search the AI Breakdown, you'll know it's mine because it's got an old retro futurist, kind of like 50s image on the cover with a little robot guy at the center of a family. You can find it on any podcast platform. The YouTube is, I think it's youtube.com slash at AI Breakdown or AI Breakdown Pod, maybe or something like that. If you search my name, Nathaniel Whittemore, you search the AI Breakdown it'll be there. If you're a visual consumer, every podcast episode is actually two videos on YouTube. Breakdown.network has all the information about other stuff. There's a Discord, there's a newsletter, and then there's also, we're now kind of moving into the world of learning communities. I've got a beta educational learning community (56/57)
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 learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Mark Holuesco, the founding partner and chief executive officer of Holuesco Partners, a Bahamian-based value-oriented investment firm that invests across a wide variety of industries, geographies and market capitalizations. This is one of a series of episodes that I'm recording with value investors motivated by my concerns about how the direction of the global economy and the ongoing geostrategic competition between the US and China will impact asset markets in the years to come. In the first hour, Mark and I discuss his macro framework and approach to value investing, his concerns about government debt and its implications for interest rates and inflation, trends in global (1/57)
liquidity, the future direction of the US dollar and why he believes that 2022 marked a long-term turning point for value with huge implications for investors. In the second hour, Mark and I discuss some of the more promising investment opportunities that exist outside the United States, in particular within the UK and Japan, as well as how to assess similar opportunities in China, whether the country is investable and the risks investors face when putting capital to work in Chinese companies and the Chinese market. We also discuss more about Mark's investment framework, his views on the role of gold in one's portfolio, opportunities within the US energy sector and much more. 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 (2/57)
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, 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. 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. 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 thoughtful and extraordinarily valuable conversation with my guest, Mark Haleuesco. Mark Haleuesco, welcome to Hidden Forces. Thanks very much. Nice to be here. I'm excited to have you on, Mark. This is part (3/57)
of a series of episodes that I'm doing on value investing, informed by a macro framework that sees the future that we're embarking on as being one that may be more favorable to that investment style. And so I think I want to expose our audience to it and explore some of the work that folks like you are doing in this area. Before we start, I'd love to talk a little bit about your career because you seem like someone whose career progressed very quickly. And I'm curious to learn a little bit more about you and how you got your start in this business. I guess I started very young. I guess when you say it progressed very quickly, I started working for a trust company while I was in college and high school here in the Bahamas. I grew up in the Bahamas. And when I came back from getting a master's degree, started working for the trust company and basically decided I didn't want to be a trust employee. So reached out to Sir John Templeton, who was on the island, famous global international (4/57)
investor. And he turned me down initially for a job. And then I decided I would get him to sponsor me for the CFA exam, chartered financial analysis exam because there were only two CFA's on the island. He was one. You needed to get a CFA to sponsor you. So I wrote him back and said, geez, thanks very much for turning me down, but would you sponsor me for a CFA? And he agreed that a year later when I passed the first level of the CFA, I wrote him back. Thanked him for sponsoring me, told him I passed the first level and he invited me in. After a conversation and a Saturday morning in his office, which used to be in the attic of a shopping center, he offered me a job. And so that certainly changed my professional life and my life in many respects. And I guess my career developed rapidly because at the time it was just Sir John and I in the office on the investment side, he had two accountants, two secretaries and receptionist. And we had an office in Fort Lauderdale with more analysts, (5/57)
but Sir John and I, we were it in terms of the investment staff in the Bahamas. So I got to work next to him and he became comfortable with me and gave me more and more responsibilities. I started off researching companies for him. He would come in, lay a piece of paper on my desk. Normally it was hotel stationary because that was the cheapest way of getting stationary, was to take some from a hotel you stayed in. And he'd write me little notes saying, you know, do this or do that. And I would do it, put it on his desk. And yeah, so he just kept giving me more and more responsibilities, became a research analyst for the group, took over the management of some of the portfolios that he ran for private individuals. And then in May of 87, so I started working for him in 85, in May of 87, he came in and put all of his mutual funds on his desk and said, from now on, you figure out what should go in these portfolios and leave the trade tickets on my desk. And that was 11 o'clock in May of (6/57)
And I left the office and I went for a long run to try to calm down. And that was sort of the beginning of my management of mutual funds. So yeah, very quick progression with him from 85 to 87 and then, you know, did other things after that. Yeah. It was your time at Templeton Global Advisors and how you went from a research analyst in 85 to managing all of the portfolios that were previously managed by Sir John Templeton himself that I identified as the sort of reason why I said that you progress very quickly. I have a number of questions that I wasn't prepared to ask because I didn't know some of those details. I didn't know that you got turned down in your first pitch. So I'm curious, what did you say to him that you can tell us that didn't work? And then I'm just curious to understand how you actually, before I even ask you that, I didn't know that you grew up in the Bahamas either. What was that experience like? And also, did you have some sort of template in your father (7/57)
that got you interested in finance or what was the source of your early fascination with this business? I really couldn't figure it out. I grew up in the Bahamas. My mother's family has been here since the 1700s. So long history in the Bahamas. I did all the typical things you do when you grew up in the Bahamas. I worked on a dock pumping gas. You know, I worked for a mechanic on boats and I decided that working outside and the blazing heat in the summer really wasn't for me. My mother knew somebody at a trust company and got me a job there. And honestly, I was in the file room when I first started. But I was just always fascinated by the idea that somebody could give you their money and you could grow it over time. And honestly, at the time, the trust company that's no longer in existence really didn't do that well. Both of my parents were lawyers. I decided I didn't want to be a lawyer. So I was just fascinated by it. And I was also fascinated by the fact that every day you woke up, (8/57)
you know, if you're an architect and you're designing a building, you can put those plans down. You can walk away. And the design is exactly where it was when you left it two weeks ago. If you're a portfolio manager or a research analyst and you put your portfolio down, you go away for two weeks. You're two weeks behind. So I enjoyed the fact that it was, I'm a very competitive person. So I enjoyed the fact that you could quantify what you do and you can compare it to other people. I was also fascinated by the fact that it changed every day. It was very fast paced, in my opinion, at the time. So I didn't really have an aha moment in terms of getting into the finance business. What did I say to Sir John? You know, it was interesting. When I first wrote to Sir John, he turned me down. So he'd never met me. And I wrote him back a year later and thanked him for sponsoring me. You know, I think part of asking me in was he wanted to see if I could pass the first level of the CFA, even though (9/57)
I had a master's degree. He also caught him at the right time. He really needed help, needed staff, although he could have hired anybody anywhere in the world. But it was interesting. When I sat down with Sir John on that Saturday morning and he interviewed me in an office with butterflies all over the wall, which was sort of fascinating. He had a pink jacket on, yellow pants, you know, suspenders and butterflies all over the wall. He didn't ask me any investment questions. I'd prep for a week to answer all sorts of investment questions. And I guess he felt that because I passed the first level of the CFA and I got a master's degree with a concentration of finance, technically I should know what I'm doing. You know, his first question was, you know, where did I go to church? So it was really, hopefully, an interview of character, of work ethic, you know, talked to me about team sports that I did in school and extracurricular activities, my family, things of that nature. And you know, I (10/57)
was so excited when he offered me a job on the spot and he didn't tell me what the salary would be. And I went home and I very excitedly told my dad, I got a job with a great Sir John Templeton. The first thing out of his mouth was, what's he going to pay you? And I said, I don't know. My father thought I was an idiot because I didn't know what I was going to get paid. But actually it was paid by the hour too. My first raise was a dollar and fifty cents an hour. I joined him in the early summer, in the late summer it came to work and there was an envelope on my desk. And I thought, well, it's not working out too well. I opened up the envelope and it said, due to your hard work and diligence, I'm happy to raise your salary by a dollar and fifty cents an hour, effective September 1st. So I was paid by the hour. I got my first raise, it was a dollar and fifty cents and it sort of went off from there. I love that you didn't ask him how much money you made. I wonder if that also was an (11/57)
important indication, not only of your character and motivations in seeking employment with him, but also an indication of maybe what he saw in you or what he was looking for in someone to mentor, which was someone that was passionate about the work and not necessarily motivated by making money, which is a common motivation in finance. At twenty-five, fresh out of school, trying to start a family, you obviously worry about money, but quite honestly, I had struggled trying to find a good job coming out of college. When I finished college in 82, the US was in a recession. And I didn't really know anybody in Boston and New York and thought that was the route to go if you wanted to get into the financial service sector. So I went straight to business school to a school that would take you without any full-time work experience. And so I was just happy when I got the job that I was going to actually learn that, obviously, Sir John had such a great reputation. And to me, if anybody worked for (12/57)
Sir John Templeton, whether it was for a month or six months or six years, it's sort of like going back to school and the reputation that he had would be so valuable. So I wanted to be able to eventually buy a car. I was sort of going to work on a motorcycle, which was difficult in the rainy season, but at the time, money really wasn't that important. Yeah, you had a long-term perspective. You said that you got a master's and then you said business school. I'm assuming the master was a master's in business. What did you study in college? Economics. I went to Holy Cross College studying economics. But really, what I really studied was crew. I was on the crew team. And although I majored in economics, I learned so much in athletics and rowing crew and the camaraderie, the teamwork, the joy of working hard, accomplishing goals, things of that nature. I got as much out of rowing crew and college than I did at a classroom. My parents hate to hear that after spending all the money to send me (13/57)
to college. But I started economics in college. If you had to identify one, the most valuable lesson from your time in athletics, could you pick one specific thing? Was it overcoming challenges? Was it the teamwork? What was it? For me, it was learning the joy of hard work. A lot of people shy away from hard work. When I consider how hard we had to work and prepare to row, I still sort of get tingles. We had an amazing coach who basically taught us the value and the beauty of hard work. For me, I always like to tell people I'm not really smarter than most people. I'm just willing to go the extra distance. I'm willing to work harder than most people. Have you taken four steps? I'm willing to take five, that sort of thing. Well, if anyone's inspired by that, I recommend they go back and listen to our conversation with Tim Grover, who was Michael Jordan's strength coach for a conversation about what it takes to be a winner, one of my favorite episodes ever. Last background question, Mark, (14/57)
which is, what led you to start your own fund in 2000? What was your vision then? What were you hoping to accomplish with that? I started off with Templeton and it grew very rapidly. It turns out in 1992, Sir John sold the business. I became a director of the firm, the head of global equities, but my main job was running the global equity division and managing the mutual funds that was assigned to me. Then in 1992, Sir John sold the business to Franklin, became Franklin Templeton. They were fantastic and they grew the firm rapidly. The funds that I was managing grew extremely rapidly. We had about 19 billion of assets when we sold to Franklin. As my funds grew, I gave them up to other people to manage. By 2000, I was running the Templeton foreign fund, which is about 15 billion, and Templeton growth fund, which is about the same size. The group that I was managing, we had about another 40 or 50 billion. It seemed like I was becoming a manager of people as opposed to a manager of (15/57)
assets. I was in a unique position where I had a great relationship with the Johnson family who owned Majority Stake at Franklin. I told them that, look, we had grown rapidly. We'd had great success, but I wanted to concentrate on picking stocks and doing it with a few people for a few clients. That's what I truly love. I truly love coming to work and turning on the computer and seeing what's going around the world. I didn't enjoy the 70 people that reported to me nine different locations around the world. I mean, they were fantastic people, but it involved an enormous amount of travel and administrative work. I found my time on research was shrinking and my time on administration was growing. I just love investing. I had an agreement with them that I would start a new subsidiary. I would get 60% of the profits. They would get 40, and we would concentrate on running a global equity long short fund. That was also at a time in 2000 when the markets were, we had the bubble, and there was (16/57)
a great opportunity to start that fund. We eventually started a long only fund, and then eventually I bought the majority of the business off of them. Really, I decided to start my own business because of the love of investing and the lack of love of managing large groups of people. Also, remember, when I started working for Sir John, it was just Sir John and I and five other people in the office. The decision making was so quick, and my boss was just next door. Then when you get into a larger organization with people all over the world and committees, and it was just a phenomenal people, but just a different environment. I wanted to go back to the environment that I found myself in when I first joined John Templeton. What an interesting conversation that would be. We're not going to have that because we're here to talk about investing, but what an interesting conversation that would be to discuss, the difference between running a large and small organization, especially in the (17/57)
investment world. I'm glad that you said that you love investing because that's what we're here to talk about. Let's start with frameworks, which is something I always try to pull out of people to get to first principles in terms of how they see the world, how they see investing. You invest with a value-oriented framework, and you also have a macro overlay that you bring to your investing. How would you describe each of those? Let's begin first with your value framework. People describe value investing different ways. I guess I would describe it as that we try to compare a company's price to its intrinsic value. Intrinsic is an important part of the phrase. What's the company worth? An intrinsic value can encompass growth, encompass breakup value. To us, it's not just investing based on momentum or growth per se. What is this company worth? Where's the stock price? Now, very simplistic description, but very complicated process. When we do that, we try to come up with a price target. If (18/57)
I'm right, I think the stock can go to this level. More importantly, we come up with a risk target. If I'm wrong, how much money am I going to lose? In the investment business, it's really that component that I think distinguishes us from other people. In an enormous amount of time, on what if I'm wrong? How much money am I going to lose? If you have a collection of stocks and your upside is 50% and your downside is 10, you don't have to be right more than half the time to make good money. If your upside is 25% and your downside is 25%, well, you've got to be right a vast majority of the time to make money. The framework is that let's try to find things that are intrinsically cheap where our upside to downside ratio is skewed to the upside. That gives me a sense of how much risk I'm taking to the portfolio. I remember coming out of the bubble in 2000 and at one point, stock markets had dropped I think 15% one year and 20% the next year. We got to the point where in a hedge fund, we (19/57)
were 90% net long, which hedge funds don't get 90% net long. Somebody says, well, that's an enormous amount of risk you're taking in the portfolio. I thought to myself, wow, it's the least amount of risk I think I've ever taken a portfolio because my downside on the collection of 40 or 45 names that I have in my portfolio was single digits. My upside was more than 50%. From my perspective, it was the least amount of risk I'd ever taken in the portfolio, although when you look at the net exposure I had in the fund, people say, well, you're taking a lot of risk. There's a couple of points there. I guess one is that we look at risk as the possibility of losing money. That's the risk. When an analyst recommends a name, I talk about what is the catalyst for this name in terms of how will we achieve the upside and what will convince you if you're wrong and what do you think can go wrong? For a bank, it may be that the analyst is using a downside that reflects a recessionary environment. Then (20/57)
it's my job as the portfolio manager to decide when that may occur and when that risk in that stock may occur. Or if you're the energy analyst, you might be using $80 upside for oil and $40 downside. Then it's my job, more of the analysts, to think about under what scenario could oil prices get down to $40, which would make that a poor investment. I guess that's where some of the top-down work comes into play. It's intrinsic value as opposed to value. Sometimes that incorporates growth, sometimes it doesn't. If I'm listening to you correctly, it sounds like in addition to the importance of how you define value, it's also important how you define risk. Do you believe you can do more to limit the downside than you can to control the upside? I would say we're more aware of the downside. I don't know if we have control over it because a lot of times we have no control over markets. But I have more control on how I put my portfolio together. I can manage the risk in my portfolio by limiting (21/57)
the amount of names that I have that have lots of downside. In this business, as you know, if you're right two thirds of the time, that's a phenomenal batting average. But you don't have to be right two thirds of the time if you limit your downside. Once again, if you really do your work and you're going to be wrong on the downside two thirds of the time, when you pick an upside, you're going to make mistakes or something's going to happen that you don't anticipate. Same thing on the downside. We're constantly trying to adjust our upside and downside. To me, it gives a framework for how much potential reward and risk I'm taking and how aggressive I need to be. If I've got tons of names all over the world and I can put together a portfolio with 50% upside and 10% downside, that's a great ratio. If you get to a point in the United States where you have very frothy markets and it's difficult to find a portfolio that has that type of ratio, most of the names in the US are more up 50 down (22/57)
50, unfortunately. That tends to move you and push you to other markets around the world. A lot of times your framework decides how you allocate assets, both in terms of types of names and the geographic places that you might look. I poorly framed that question about relative measures of control and managing upside versus downside risk. Let me see if I can ask it again. Is your focus on mitigating risk of the downside reflect a broader recognition that over many cycles the benefits of being invested outweigh those of being in cash? Focusing more of your attention on what can go wrong so you can remain in the game, so to speak, makes sense. I think my history has given me a better appreciation for downside. When I took over the funds from Sir John Templeton, I took them over in May of 87. I don't know if you remember what happened in October of 87. That was six, but yes, I've read about it. I always joke with people that Sir John Templeton was a better market timer than people think he (23/57)
was. He gave up all of his funds in May of 87 and in October he said, we had the great crash. We ran both global money and international money. We ran the Templeton foreign fund was a non-US equity mutual fund. We were investing outside of the United States during the Asian crisis, the Latin American crisis. If you grew up in the 1980s and early 1990s, you saw an enormous amount of damage in equity markets outside of the United States. I guess I was somewhat conditioned by the environment that I grew up in professionally where I'm perhaps too concerned about the downside. I would say that's probably, if you say, what's one of the faults of your approach or what's one of the downsides to your approach, I would say that we're too much of a nervous nally sometimes. You started the fund in 2000, which was a great year to begin a fund, a value investment fund. It's like, if I were to put some dates together, it seems that 2000, 2007 or so was a good period for value. What explains why value (24/57)
investing has underperformed and lost so much favor with investors, especially over the last five to 10 years in your view? It's underperformed dramatically over the last five or 10 years and that's because we've just been in an unusual interest rate environment more than anything, in an unusual liquidity environment. When you have massive liquidity and when you have interest rates to the extent they are, historically you've always unfortunately had these periods like this. If you're a company and your cost of capital is 2%, you only need to make 3% to borrow capital. You get all of these inefficient companies that are out there that compete effectively with more efficient companies, more profitable companies. But really, we just had unusual amounts of liquidity in the system. Liquidity leads to speculation. You've also had a real lack of growth. Look at last year, I think the MAG7 in the United States, the earnings grew 36%, something along those lines. The other 493 companies, NSP (25/57)
500, grew their earnings low single digits. There's really been a lack of growth, not only outside of certain stocks in the US, but outside of the US. As a result of that, people have overpaid for growth. But if you look at a graph of value versus growth investing over time and starting the 1970s, there were periods of underperformance for value, but nothing as prolonged as what happened after the financial crisis when they just brought rates down to unusually low levels and flooded the system with money and after COVID. I would say those are two extremely unique events. We're slowly trying to figure out how to move away from that period. With a higher cost of capital, I think you're going to see a major change in that environment between value and growth. Liquidity and rates really have driven this fascination with growth versus value investing. I've heard you say that 2002 marked a turning point for value. Why do you feel that way and what would you point to specifically to support (26/57)
that argument? I think rates pretty much bottomed back then. I think that as rates normalize and as liquidity starts coming out of the system, the two of those events, which I think have already started, you can say, okay, well, rates have gone up or down. I would say that that marked a low point in terms of rates and a high point in terms of liquidity. There's such a disparity now between value and growth all over the world. There's so much concentration of people's portfolios on growth versus value. To me, it's cost of capital and liquidity. The things that have caused this disparity in performance have changed. In terms of liquidity, there's different ways of looking at liquidity. If you take the US, the Federal Reserve balance sheet, that's rolled over. It's still massive, but it's moving, whether it's on an absolute basis or a percentage of GDP it's shrinking. You look at government spending, it's completely out of control. We've never had government spending these budget (27/57)
deficits, 6% of GDP when you have basically a good economy and low unemployment. Obviously, there's a new administration trying to get that under control. There's absolutely no way you can continue with 6% budget deficits as a percentage of GDP. You've got the Federal Reserve balance sheets are starting to turn, government spending is going to turn, the Treasury with the way they've been issuing government securities on the short end versus long and provided massive liquidity. The other area would be bank credit. Bank credit is also changing. I just feel that liquidity is all the things that provided excess liquidity in the system are beginning to change. The other thing too is that government debt is so high in the United States, it's just high everywhere in the world. It's the same level as it was coming out of World War II. Back then, the government basically inflated their way out of the debt problem. There are very few ways of solving the debt problem rather than growing the (28/57)
economy and trying to inflate your way out of the problem. To me, that argues for sustainably higher rates than people anticipate as the world also struggles with lower liquidity levels. Is that another way of saying that the reason why you think we're in a period of structurally higher rates is because of the refinancing costs reflected in part in government deficit spending and the size of national debts? That's a part of it, but I think people's view on rates is conditioned by what's happened over the last 10 or 15 years. What has happened over the last 10 or 15 years is completely abnormal. People who haven't been in business in the financial sector, who haven't been alive for more than 50 or 60 years, just think that the post-financial crisis era was normal. It's not. I just think that we're going back to a more normal level of rates prior to the 2008 period. Part of that is, yes, sustainably higher inflation. That doesn't mean inflation is going to be 6%, 7%, 8%. But if you have (29/57)
3% to 4% inflation or even 2% to 4% inflation, you add some risk premium on top of that. Rates today are much more normal than people realize. This idea that rates need to continue to come down, I don't think we're going to go back to 2% on the US Treasury. For a while. The inflation in your view would be driven by monetization, government spending. And spending has certainly provided massive amounts of impotence to inflation. We've had too much money in the system, and a lot of that money has been provided by the US government. And unfortunately, a lot of the employment is provided by the US government as well. If you look at the employment statistics in the United States and look at changes in employment and how much that's been created by the government, tariffs cause slightly higher inflation, although the administration will tell you it won't. There's so many different elements out there that are adding to inflation. The government's got a real tricky job in the United States now (30/57)
to try to grow the economy without letting inflation rise too much. But at the same time, the only way you're going to get out of this debt problem is to let inflation help and inflate your way out of the debt problem. So this is a problem obviously that's not unique to the US. However, there is an outstanding concern about the value of the dollar. You've written about this as well. How does this factor into the value of the dollar? Because the dollar has been very strong in recent years. Yeah. So as a global investor, obviously if you invest outside the United States, you have to take currency and consideration. The great thing about investing outside the United States today is that you can hedge away most of that risk and it doesn't cost you anything. So when you hedge, if you use the forward markets, basically the cost of hedging is normally the differential interest rates. And because of where US rates are today versus most countries around the world, you don't really have to take (31/57)
much currency risk. So that's interesting and helpful. However, currency does a lot of different things to different companies in different parts of the world. We had a morning meeting today. We were discussing how a change in yen value impacts the book value of Japanese companies. And you have to be aware that currencies have a major impact on how companies report. It's a global economy. BMW and Germany does 40% of its business in China. It has a large business in the United States. Although you're investing in a euro-based company, its actual business exposure to the euro is very low relative to its dollars and Chinese currency. You have to take all that consideration, figure out whether or not the companies hedge themselves and then whether or not you want to overlay a hedge on top of that. So currency is something you take into consideration when you're evaluating a company, the risk to that company in terms of where it's doing business. It gets very complicated, particularly when (32/57)
companies themselves are hedging. And then you have to decide whether or not I want to hedge again. But it's just one of those macro factors that you need to take consideration. I just believe that purchasing power, powerity, which a lot of people look at doesn't really tell you where the currency is going to go. It tells you what the environment is in a particular country at any point in time. There's the famous Big Mac index. What would a Big Mac cost in the US versus Japan? And if it's cheaper or more expensive in Japan, maybe it tells you something about the purchasing power of the currency over there. But really differences in interest rates and what business people decided to do is what drives the currency in the short run and the medium term. And right now, I think that it's difficult to say with tariffs being imposed that the dollar is going to weaken substantially because normally the dollar, if you put a tariff on a foreign country, their currency tends to adjust somewhat to (33/57)
take into consideration that tariff. But over the long run, it seems as if to me that the dollar is one of the most consensus trades in the world. Our funds are based in dollars, so we have to take that into consideration when we invest overseas. But if you look at the DXY, the trade weighted basket of currencies, generally these levels, you know, Sir John has an interesting graph he gave me a long, long time ago. It basically showed the trade weighted dollar going up. And on one side, he wrote time to invest in US names. It showed the trade weighted dollar going down and he wrote on the side time to invest in foreign companies. And in 1990, when he gave me the graph, it was at a low and he wrote on the side time to invest in US companies again. Well, we're at a point in time where the currency buys you a lot overseas and the dollar is very sort of crowded. So I'm happy to slowly be looking to increase non-dollar weightings in our funds. I'm actually interested to ask you about this (34/57)
because I think I've heard you say that you own a small percentage of US-based companies or you aim to own a small percentage. Do I have that right? No, we don't aim to own any percentage in any country. We just try to look around the world and see what's cheap. And 20% of the names around the world are in the US, but the US is 70% of the index. We were 20%. So in a long-only fund, we're roughly 20% in the US in our hedge fund because we can also short securities on a net basis. We're single digit. And that's pretty unusual. However, when I joined Sir John in the late 1980s, I ran the Templeton Foreign Fund. It was a fund that invested outside the US. And at one point in time, the EFIT index, which is the index of non-US stocks, was 70% Japan. And I went to zero and people thought, wow, that's incredibly risky. You're being compared to an index that's 70% Japan, a year zero. And my response was, wow, you're taking an enormous amount of risk. You're investing half of your portfolio in a (35/57)
country that you know is substantially overvalued just because it represents 70% of an index. How could you do that? I looked like an idiot for a year or two in the Templeton Foreign Fund when I was so underweight Japan. But quite honestly, for most of the 1990s, it didn't matter what I did, I outperformed the index because Japan peaked out and it started to drop. The same thing today in the United States, people say, geez, you're taking an enormous amount of risk. You only have 20% of a long portfolio in the United States that represents 70% of an index that you're compared to. Isn't that risky? But once again, I define risk as the potential to lose money. And from my perspective, when I look around the world, the downside in the US is much greater than the downside in a lot of the companies that I'm investing in, Japan, UK, etc. So in the short term, maybe it's risky in the long run, it helps your career. So I have a few more questions I want to ask about rates and tariffs, but this (36/57)
benchmarking has come up a number of times on this conversation. And it sounds to me like something that's been very important in your career is not just what you've benchmarked to, but not being wedded to benchmarks that everyone else is focused on, which is also another way of saying being a contrarian, being willing to go your own way. Would you agree with that? And how important has that been in terms of your success as an investor? You know, I was thinking about this the other day because they asked me what characteristic makes you a good investor. And I said, well, you have to be rational versus emotional. And to a certain extent, you have to sort of enjoy being off on your own. If you're comfortable in a crowd, if you enjoy waking up on a Saturday and going playing golf with everybody on the golf course and dressing like they all dress and playing with all the rules and sitting around the golf shop afterwards with everybody. I find that incredibly uncomfortable, quite honestly. (37/57)
I'd rather be out sailing on a windsurfing by myself. Or at the same time, you have to have the ability to work with other people, go back to the crew analogy. You have to have this love of working with people, but being uncomfortable, being with the crowd. I heard someone describe it that if you're in the jungle and a tiger approaches you, you want to run away with everybody away from the tiger, but at the same time, you don't want to be running over the cliff when everyone's running over the cliff. So I think you have to have this comfort level about doing things by yourself and an uncomfort being in the crowd. So I think that's a characteristic that's really helpful as a global money manager. And it goes to the index. I want to be in business. I want to make money. And I don't want to lose money. And I want to be... When I started my business, somebody says, why are you starting it now? I said, look, I don't want to be a long only money manager and be down 20% when the market's down (38/57)
50 and say, wow, what a great job I did. I want to make money. And so for me, I think over the long... There are going to be periods, sometimes long periods where you want to perform the index. But over the long run, if you can stick to what you're doing, regardless of what the index said you should be doing. And if you're not worried about that index and the composition of that index, you can only get different results from other people by doing things that are different from other people. And it's easier doing that when you're not following the index. Is it also fair to say that you're less concerned about career risk than most people? You're always worried about your clients and you don't want to disappoint your clients. One of the things you have to be careful of is you get older and more established and more comfortable that you actually take risk. In this business, you're not avoiding risk. You're just managing risk. You're understanding risk. And sometimes as you get older and (39/57)
you're more comfortable financially, you're not willing to take risk. But you have to take risk and you have to manage that risk. So yeah, it's easier to do that if you're financially comfortable and if your clients have been with you for a long time. 80% of our clients have been with us since the first year we started our hedge fund. And that's helpful. So I mentioned that... Well, hopefully we'll have a chance in the second hour to talk more about your process and philosophy. But I mentioned that I had a couple more questions about rates and tariffs. So you mentioned earlier in our conversation that it's likely that we're moving into a higher, structurally higher inflationary environment and an environment of higher rates. The question I have for you is, what do you see for real rates? Does that still mean a positive rate environment or is the inflation indicative of structurally negative real rates? I'm just curious how you see that. Well, it would be better for the government. If (40/57)
we had negative real rates. And you think, is that speaks to the discussion we had earlier about the debt and deficits and government spending and some of the outstanding liabilities that need to be financed? Look, the new Treasury Secretary, who is I think an incredibly capable guy, smart as a whip, probably one of the better Treasury secretaries the US has had for a long time, he's got this 3-3-3 approach. And one of his 3s approach is they want to get the budget deficit down to 3%, minus 3%. That's still a budget deficit. So he's still talking about adding to the debt. So for me, the only way they're going to get debt under control is to inflate their way out of the problem. So I'm not a rate expert, but to me, it means negative real rates. So tariffs, I'm confused. I mean, I do feel like there is some obvious way in which tariffs are used in this administration for political or geopolitical purposes. I don't necessarily see the larger strategic game plan for revitalizing the (41/57)
American economy and how tariffs are being used in that context. They still seem to be more of a tactic than a strategy, a tactical deployment than a strategic use. How do you view tariffs being used in this administration? Is there some way in which you expect them to be used? I mean, do you have some confidence around how they'll be deployed and what impact they're going to have going forward? Well, I agree with you. I think they are tactical. And I also agree that they don't really improve the competitive structure of the companies they're trying to protect longer term. Why are they tactical? I think these numbers aren't exactly right, but they're close. I think something like 80% of all exports from Mexico go to the United States, and it represents something like 25% of GDP. Mexico is very, very vulnerable to rates. If you wanted to negotiate with Mexico and you threatened to slap tariffs on Mexico, that's huge. Same thing for Canada, I think something like 70% of all exports from (42/57)
Canada go to the United States, and it's also a very large percentage of GDP. However, you've got to be very careful because if you look at the percentage of cars being produced by US manufacturers in Mexico, it's a very large percentage for General Motors. I think it's like 35% or 40% of the cars sold in America come from Mexico. So you're also damaging US companies to a certain extent. It's interesting, an investment in BMW. BMW is actually quite good in terms of its domestic production versus its Mexican and Canadian production versus the US manufacturers. So I would say BMW is in a better situation to not get hurt by these tariffs than the US companies that you're trying to protect. And the other thing it does is that, as I mentioned, higher tariffs also impact the currency. So the currencies tend to adjust a little bit, not by the same extent as the tariff, but to some extent, depending on the country. So if you put a 10% tariff on certain goods coming out of a country, it tends (43/57)
to weaken that currency to offset the cost of the tariff. But that makes the dollar stronger, which makes your goods in the United States less competitive overseas. So yes, I think it is a negotiating tactic. And I believe that a better scenario for the United States in terms of its competitive industrial base is to remove regulations, what they're doing quite rapidly, keep the tax rate low, which they're trying to implement, but also not keep the dollar so strong. I mean, obviously, if the dollar weakens, that's to your benefit as an exporter around the world. So I think the tariffs are creating a lot of confusion. I think they are a tactical negotiating tool. However, there are some countries that dump things into the United States. Sometimes they don't dump them directly into the United States. And tariffs on certain goods from certain countries, even when they come indirectly, some goods come from China to Canada, and then from Canada to the US. And so it might appear as if you're (44/57)
putting tariffs on Canadian companies, but it's actually goods coming from China. It's very complicated, but I would say it's a tactical tool. It's going to create confusion. Confusion is good if you're a long-term investor, because it creates abnormal price movements. And if you can take advantage of that from a longer term perspective, then that's okay. I've heard what feels like mixed messages coming out of this administration on the dollar. It sounds like there is both a desire for a strong dollar, maybe because it sounds good, and then also some policies to weaken the dollar. I'm curious if you have a sense of any kind of clear direction in this area. Look, I think that nobody in the administration is going to come out and say they want a weak dollar. Just like the current Treasury Secretary has come out and said he's not going to change the allocation of government debt when it rolls over more to the long end. Although when he was in the Treasury Secretary, he was criticizing the (45/57)
then Treasury Secretary because they didn't roll a lot of the debt into the long end to take advantage of low rates. So no one's going to come out and say, I think they want a weak dollar. I don't think that politically is acceptable, but I think it would be to their benefit to have a weak dollar. And it would be much better longer term than tariffs, just as if they could get long-end rates down. Yes, they would love to roll this enormous amount of debt coming to this year into the long end of the Treasury, but they're not going to tell you that up front. So let's go back to this question of valuations, the valuation of U.S. companies versus companies in the rest of the world, Japanese companies, companies in Europe. You're quite a bit about how there are a lot of opportunities in the U.K. We touched on this a little bit, but what explains, if you had to be specific and summarize this, what explains the over valuations in the U.S. in your view? The over valuations in the U.S. is just (46/57)
liquidity and low rates and the concentration around the world and the fact that the United States has been a place dominated by companies that are growing. So to a certain extent, the success has caused the overvaluation. Some of the valuation is justified, but not the extent. Companies selling at 20 and 25 times revenues. We have companies out there that are $250 billion in size that are generating a billion dollars in cash flow. At some point valuations became stretched in the United States. But the success and the differentiation between growth in the U.S. and a lot of countries around the world has caused this over concentration on U.S. assets and the overpricing of U.S. assets. There's a sort of momentum trade associated with this. Very much so. How much do you factor in systematic passive flows into this equation? And do you have any concern that value will continue to struggle as those flows continue to dominate the pricing relative to discretionary allocation decisions of (47/57)
active managers like you? Yeah, it's interesting because it works both ways, right? It works on the way up. And then when you get some of these companies reporting poor earnings and the MAG-7 starts to struggle, it's going to work on the way down too. So you think that cost of capital that we talked about earlier, some of the underlying structural economic effects are going to ultimately be the spark that serves as a catalyst and then that momentum will go into reverse? Look, you never know what the catalyst is going to be for the system. You might be identified for companies generally. But look at AI. Look at all of a sudden the information that's come out on Chinese development of AI. Totally unexpected and what that did for those companies. And if those companies, there's such an over concentration and if people start pulling that and they start shrinking as a percentage of the index, then it's sort of self-fulfilling, right? The index starts to shrink in that area. And so it's (48/57)
difficult to say what's going to cause it. We're even having companies that are reporting great numbers and beating and they're dropping. Once again, I think it's just over concentration in people's portfolios. They've gotten too big and they need to quote unquote rebalance. But generally, I would say higher cost of capital, you know, the percentage of companies in America that don't make money is at an all-time high while the market is at an all-time high valuation. And that's interesting. I love that you brought up deep seek because I also had that reaction. The market got so spooked. And besides the fact that it didn't entirely make sense why it was selling off, given the fact that the software innovations made by deep seek weren't necessarily bearish. If any, you could argue they were bullish for the need for further compute. It just shows you how fragile this bull market is, I think. And it also reveals something else. I'm curious if you agree with this. I think it reveals an (49/57)
underlying anxiety about America's place in the world, our geo-strategic positioning, our national security state, our geopolitical power. And so that kind of, you know, brings me to another question, which is how do you factor these things in? Politics, national security, how do you factor these things in when you consider where to invest? Understanding that government regulations may change in line with the needs of the national security state, and that could impact the value of your investments. Well, I guess the greatest example of that today is China and Taiwan. You know, a lot of people say China is investable. There are other people out there that say because investors say China is uninvestable, it's actually a great investment. You know, the risk to your Chinese investments is that a situation happens like Russian investments. I'm on the board of a company in Europe that manages funds for individuals, and they had some exposure to Russian-vated Ukraine. You couldn't trade those (50/57)
assets. You had to price them at zero. So that's the geopolitical risk. Obviously, the biggest geopolitical risk today is China-Taiwan. And, you know, the impact that would have, obviously, on the semiconductor sector is massive given the strength of Taiwan semi-manufacturing. So it goes back to that upside-down side. I mean, when you get to the point where companies get close to net cash, and in the course of a year or two or three, you feel you can get that investment back in terms of cash returned from a company. You know, your job as a portfolio manager is to decide, well, is that geopolitical risk reflected in that? And, okay, I'm not certain about what China will do with Taiwan. So how much do I want to have in China? Do I want to take that risk? And will it be 5% of my portfolio, 15% of my portfolio? So I'm willing to take some risk with Chinese investments, but it's not 10% of my portfolio. But, you know, what most people don't realize is, you know, we mentioned BMW earlier, (51/57)
40% of their business is Chinese. You know, most people's investments in China are much greater than they realize, even if their portfolio manager says, oh, we don't invest in China. Oh, heck, you do invest in China. You know, you go down to your portfolio and you look at all the investments that these companies have and all the revenue and income that's generated in China, most people would be shocked. So my direct investment in China is about 4.5%, but my indirect investment in China is probably closer to 15%. So I love that you brought that up. I mean, first of all, how confident are you in that 15% number? Because as we saw, even the US government, even the military, didn't understand how vulnerable its supply chains were. They had to cancel or halt production of the F-35 fighter at some point because they discovered that a magnet, a critical magnet was being produced in China. How confident are you about the vulnerabilities of the companies that you invest in, given how (52/57)
interconnected this world has been and how globalized it's been? Well, I hate being compared to the US military because I believe you they've never been able to complete an audit. So I mean, I don't know that they're the best comparison. So look, let's look at some of our investments in China. Outside of the political risk in China, there are industry risk in China like real estate. The real estate industry is a mess. The banking industry is a mess. So one of our largest investment series, Yum China, they have the Kentucky Fried Chicken and the Pizza Hut franchise in China. Net cash balance sheet, this time last year, it was like 25% of its balance sheet. Now it's a little bit smaller because they've just raised their dividend 50%. They're opening new stores and the population continues to become wealthier and able to afford eating out more. It's a company that basically you can look at the growth of its store base and the amount of cash it generates and the amount of cash you're (53/57)
getting back. What's the geopolitical risk of Kentucky Fried Chicken and Pizza Hut as opposed to real estate or finance, et cetera? But you can be pretty comfortable. It takes a lot of legwork. I've been to China, visited the management of Yum China in China. I remember the first time I ever went to Hong Kong, I went with a gentleman by the name of Mark Mobius who ran our emerging markets group. And we were chatting with an analyst in Hong Kong and they'd invited some companies there and one manufacturer of a company was talking about his watch facility and it was pretty close to the border. So we decided we'd go check it out. Turns out it wasn't there. Didn't have a watch manufacturing facility where he said he had it. So a lot of information is available if you're just willing to read through annual reports and go visit companies. So we're pretty comfortable with what our indirect exposure is to China. That's our job. Our job is to figure out where these companies make or where they (54/57)
generate revenue, how they generate profits, what competitive advantages they have, what are the risks to that business, both politically, technology, or corporate-wise and then sort of adjust accordingly. It also sounds like you might be more willing to invest in a Chinese company if its operations are primarily overseas or its factories are located outside of China or it's listed outside of China. Those are all nuanced ways of assessing the risk of the particular company. Somewhat, correct. So I'm going to move us to the second hour mark. I want to talk a little bit about opportunities outside the United States. I asked you, for example, what accounts for the overvaluations in the U.S. I'm curious to ask you the opposite question of what accounts for some of the undervaluations, especially in places like the U.K. I also would like to discuss more about your investment process and your investment philosophy, as well as some of the unique opportunities that are in the U.S. I think (55/57)
you've written quite a bit about the energy sector. 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 to access the second hour of today's conversation with Mark, 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. Mark, 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 (56/57)
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. (57/57)
economy is rolling over and their margins are getting compressed, they say, crap, what do we have to do? We have to cut costs or raise prices. And then the prices start to go up and everyone says, look, corporations are passing on price increases, but really that's just the lagged effect. Fascinating. So it's like a blow off top in inflation as we head into a recession. Exactly. There's something else that's counter intuitive, which I think is also interesting and striking. I just want to mention it. And again, I want you to stay on course here, Eric, which is when we're at the very beginning of our conversation, we were talking about the longer leading indicators. One of those were was monetary aggregates. Another one of those was interest rates. And interestingly enough, the Fed focuses on indicators like inflation and employment, which are late to the game, in order to adjust their behavior, which are actually the leading indicators, which is monetary policy. Exactly. Which I think (48/57)
said, I see signs that the economy's slowing, but there's no signs of recession. And you know what Bernanke was most concerned about in February of 2008? Inflation. He said inflation is going to be our problem now because oil prices were out $100 a barrel and they were contemplating the market was actually pricing in potential rate hikes because of the high inflation. And his main concern at that time was inflation. And we were basically six months ahead of catastrophic deflation. So here we are again, where inflation is very high, it's way too high. It's obviously being impacted by supply issues, geopolitical issues, and also the lagged effect of economic growth. So the Fed has to bring down the rate of inflation, but because of the lag nature of it, by the time they see that inflation is coming down in the CPI, that means the economy will have already been slowing for a year. And that's what we're seeing now. So I think that while the current headlines are about inflation, the (54/57)
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 this week's episode is Eric Besmejian. Eric is an economic cycle analyst and the founder of EPB Macro Research, an economics-based research firm focused on inflection points in economic growth and the impact on asset prices. His research has been featured across major financial media outlets and has been kind enough to provide a sample of his latest cyclical trends monthly update report for premium subscribers to our Super Nerd Tier that you can get through this week's episode page on our website at hiddenforces.io. This conversation is the latest in a series of episodes that I've been releasing on markets and investing with an especially strong focus this time on the macroeconomy and in particular the (1/57)
secular and cyclical trends in the rate of growth and inflation. Secular forces are things like demographics that the GDP levels, trends in globalization and the regular and predictable doubling in computing power commonly referred to as Moore's law. Long term trends in other words that remain in place through multiple economic cycles. Cyclical trends on the other hand are the six to 18 month fluctuations in growth determined by things like income, production, consumption and employment. We can anticipate changes in the direction and magnitude of these trends by relying on a variety of what are known as leading as well as coincident economic indicators. Things you've probably heard of before like building permits, new manufacturing orders, non-farm payrolls, personal consumption, industrial production, stuff like that. Understanding where you are in an economic cycle and what the long term secular forces are that are pulling you or pushing you in any particular direction is as (2/57)
important to investors as the weather and the ocean currents are to the navigator of a sailboat. They inform the allocation strategies and performance expectations of a variety of asset classes, business models and policy choices over time. My objective in bringing you this conversation today is to expose you to a framework for thinking about the macroeconomy that is empirical, data oriented and very much based in reality. One that you can use to forecast major economic inflection points and the resulting impact on asset prices as you try and manage your own portfolios and make your own investment decisions. As most of you already know, Hidden Forces is listener supported. I don't rely on advertisers or commercial sponsors. So the second part of today's conversation with Eric is available to premium subscribers only. You can access that part of the conversation as well as the transcripts and intelligence reports to each episode by visiting our website at hiddenforces.io selecting the (3/57)
episode that you're interested in and clicking on the premium extras where you can then sign up to one of our premium content tiers. Since some of this episode deals with investing, it should be absolutely clear that 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 week's episode with my guest, Eric Besmajan. Eric Besmajan, welcome to Hidden Forces. Hey, Dimitri. Thanks for having me. It's my pleasure having you on, Eric. You're a brilliant guy, man. I really, really appreciate your work. It's something I haven't been able to find readily anywhere else and I've looked for it for quite a long time. Before we get into your work, I'm curious, I want to know a little bit more about you and how you got into doing this because you have like this almost a passion for economic indicators that I (4/57)
haven't really seen anywhere else. So how did that come about? Yeah, thanks. It's a little bit of a roundabout story. So I started studying economics at New York University and when I was there, I took a course on financial crises and it resonated with me so deeply because there were these repeated crises that happened throughout history and every single time that one of these crises happened, it was always somewhat unexpected or it caught everyone by surprise, but they all had very similar characteristics which were excessive levels of debt for the most part. The basis of the crises was some buildup of debt in some sector or many sectors of the economy. And I thought to myself, you have to at least have a foundation to understand when these financial crises have the potential for occurring because if you're in 2007, let's say, and you're doing bottoms up fundamental analysis on a company and then the crisis occurs, your analysis really doesn't matter. All the companies are going to go (5/57)
down. All equities are going to go down. So whether you're a stock specific analyst, no matter what market you're in, you have to have a foundation for understanding what I would call these secular economic trends or these long term economic trends that are basically signs of excess. So that really got me down the road of studying these debt buildups, the concept of debt deflation, and just the longer term secular economic trends, which are mainly a function of debt and demographics. So that was sort of how I got the wheels turning on the long term economic process. After school though, I went over and I worked at a quantitative hedge fund in Midtown, wasn't macro. It was a quantitative fund scanning for mispriced equity derivatives. So we would scan 60, 70, 80,000 options per day and look for what we thought were mispricings. And even though it was a little bit different than my macro background, I learned a great deal about statistical analysis, a little bit of computer programming. (6/57)
And while I was there, I was still sort of more passionate about macro. So I would read all the research on the street and I would read all of the prevailing macro analysis that was out there. And I thought it was quite poor in terms of spotting these major inflection points. Most of it seemed to go one direction. It generally seemed to be bullish until it was glaringly obvious that being bullish was not the right outcome. So I continued to study these economic trends. And I came across Jeffrey Moore, who was dubbed as the father of leading indicators. He co-founded the Economic Cycle Research Institute. And what was interesting about studying Jeffrey Moore's work is he was laser focused on what we call these leading economic indicators and trying to anticipate turns in the business cycle. And that was extremely insightful for me because I was working at a hedge fund that needed to mark performance on a quarterly and yearly basis. So I was sensitive to the fact that you couldn't stay (7/57)
laser focused on these 10 year trends. It was important to know, but you couldn't have your entire process be a 10 year trend because you needed to have some ability to mark performance on a shorter term basis. So I dug deeper into these leading economic indicators and I started to merge the two processes of these long term secular economic trends and these business cycle indicators, trying to spot these inflection points on a more timely basis. And when I did that, I started to sort of put these models together in my head. And I saw that there was really nobody that I could find that was doing it. There were some people who I view as mentors to me who were doing these long term economic trends brilliantly. There were people that were doing the shorter term business cycle work, but nobody was combining the two of them together. So I thought that there was a really good opportunity. And when I left the fund, I started publishing this work and the audience that I was publishing to just (8/57)
the community of investors was extremely receptive to the combination of this long term economic trends, sort of the gravity, I call it, but also the more timely cyclical inflection points. And I just continued to publish this work. I got a good reception from it. So that sort of developed into what I'm doing now, which is publishing these long term secular economic trends, establishing what the gravity in the economy is, but then also alerting investors to the more timely cyclical inflection points so that they can prepare for what's coming over the next couple of quarters. I love it. So a couple of thoughts and some questions that come out of this. One, I also want to highlight your use of the word gravity for listeners, because that's something that you commonly refer to. And you use it as an analogy to describe the secular trends. Is another way to think about secular versus cyclical as a difference between climate versus weather? I think that's a really good description, actually, (9/57)
because the secular economic trends are the longer term forces that are very, very, very slow moving. The secular economic trends will not change tomorrow or a year from now, even if you put processes in place to try and change them. So for example, demographics is a secular economic trend. Even if we put in place a policy that was geared around having a lot of babies today, it still wouldn't impact these secular trends for another five, 10, 15 years as that new class of babies came up through their early years and the economy had to divert more investment and more resources. So even though you can put policies in place today, it still takes some time. It's almost like they move at glacial speed. So I think that's a very good analogy is that the long-term trends are just very slow moving and you can make a difference over time, but they're very slow and it takes quite a bit of persistence to change them. Would you also put things like, so you mentioned debt demographics for secular (10/57)
forces, would you also put something like Moore's Law in that bucket as well as, let's say, globalization? So we had decades of increased globalization. Now we're moving into a period where in some ways the world is showing clear trends of de-globalization. Would those qualify secular trends? Yeah, I would consider anything that is a consistent directional pattern over three to five or longer years to me would be a secular trend. The reason that I always describe them as demographics is because I'm focused on economic growth and if I had to boil it down to just two main factors, it would be the debt and the demographics or more specifically, productivity and demographics, debt being the most influential factor on productivity. So I think that there is a larger basket of things that you can put into these secular trends. My focus on demographics is not trying to be overly exclusive. It's just if I had to boil it down, I try and make the process as simple as I can. Those who I would say (11/57)
are the two major forces, but we definitely have a confluence of factors that drive the secular trend. So correct me if I'm wrong here, but when we talk about indicators, what we're really talking about here is cyclical indicators. In that regard, we have what we broadly call leading indicators, which give us information about what's going to happen in the future. We have coincident indicators, which tells us what's happening right now. We have lagging indicators that are like the forensic evidence that we can look at after the fact, after the event has occurred to say, ah, there was for example, a recession between this date and this date. And is it also fair to say that lagging indicators are actually the most accurate indicators? Yes, I think that was a perfect description. And there's a part in an economic process for all the indicators, the leading, the coincident and the lagging. The lagging indicators tend to be lagging one in terms of where they move in the sequence, but they (12/57)
also tend to be lagging in terms of their methodology or the way in which they're reported. So the most reliable economic data tends to be the government data, but it can be lagging because when it's first announced, then it gets revised, then usually it gets revised a second time. And then usually there's an annual benchmark revision. And then sometimes there's a five year benchmark revision. So when we do the forensic evidence looking back over many decades, the government data tends to be far and away the most accurate, but it takes a long time for it to increase in its accuracy once they move from a survey estimation to actually tabulating the information. The leading economic indicators can be much more volatile. They can be much more noisy, but they're reported on a more timely basis and they tend to move earlier in the sequence. So the leading coincident lagging process is one about the economic sequence, but it's also about the way in which economic data is reported as well. So (13/57)
I think that's a great point. All right. So I think now would be the appropriate time for you to explain your framework and walk me through how you try to understand the economy and walk me through that sequence and where we are in that sequence today. Okay. So before I get into the cyclical or the leading indicators, I always start with the secular economic trend because as I mentioned, that's economic gravity. And even though we're mainly concerned about what's going to happen over the next couple of quarters, it's very easy to overlook these secular economic trends. And I think that you do yourself a huge disservice if you don't first analyze the secular trends because you need to understand where the gravity in the economy is. Why is that important? The cyclical economic trends are the fluctuations in growth that happen on top of the secular trend. However, if gravity is pulling you down, you have to approach the data with a bias that the cyclical upturns will be more fleeting or (14/57)
shorter lasting and the cyclical downturns will last longer or will be harder to break. And the evidence of that is that if you go back over the last 30 years, since the early 1990s, the economy has only spent 42% of the time in a cyclical upturn. It's spent 58% of the time in a cyclical downturn. And the way that you can rationalize that is because the secular trends are declining. Debt levels are increasing, population growth is declining, that puts downward pressure on economic growth. Therefore, when we move to the cyclical trends, we have to approach the data with a bias that cyclical upturns will fade faster and will be shorter, cyclical downturns will last longer. Further evidence of that is that going back again to the 90s over the last three decades, cyclical upturns in economic growth have lasted 13 months on average, while cyclical downturns have lasted 18 months on average. So we have to be aware that the downturns are going to be lasting longer than the upturns because of (15/57)
that economic gravity. So once I establish the secular trends, then I move to the cyclical trends trying to understand where the economy is today. So let's now define the cyclical trend today. The cyclical trend is defined by what I call the four corners of the economy. The four corners of the economy would be consumption, income, production, and employment. Every economy has these four corners. Some have more than others, right? So China would have more production and less consumption. The United States would have more consumption and less production. But every economy has all four of those corners and they work in a cycle, right? So if you have more consumption, that means you need more production. If you have more production, you need more employment. If you have more employment, then you would generate more income. If you generate more income, that feeds through again to more consumption. And that will be what we call a virtuous economic cycle. It's cycling upwards. It could also (16/57)
work in reverse though, right? So if you have less income, then you have less consumption, you have less production, then you need fewer employees, and that feeds through again to lower income. So the economy is always cycling upwards or cycling downwards. And the combination of those four corners is what defines the cyclical trend. It's important to look at all four corners of the economy because when you look at something like GDP, for example, or real GDP, it's not entirely comprehensive. It's what we use to define the business cycle broadly. But GDP doesn't take into consideration the income side of the equation. For that, we use GDI or Gross Domestic Income. It doesn't really take into consideration employment. And these are all different corners that really influence the way that the economy is cycling. The way that the economy is cycling. So it's important to look at all four corners and the comprehensive movement in which that these indicators are cycling. So you look at things (17/57)
like non-farm payrolls. You look at things like real personal consumption. You look at things like industrial production or real personal income. And the combination or the blend of those coincident indicators defines the current trend. So if we take where we are today in July of 2020, we have a strong deceleration in the growth rate of real personal income. Obviously inflation is quite high. It's damaging people's real incomes. The growth rate of real income is trending definitively lower. As the stimulus payments wear off, real consumption growth is starting to trend down in a really meaningful way. And that in turn is pulling production growth down. And employment is the last leg to fall. We see jobless claims starting to rise. So employment in turn will follow the other three corners. We're in a very clearly defined cyclical downturn. Now, quick question. Let's take employment since it's the last of the four to turn. At what stage in the economic cycle are we when we begin to see (18/57)
fall offs in employment? When you start to see fall off in employment or like a negative non-farm payrolls number, most likely at that point you're already in a recession. So by the time you see a contraction in these four coincident indicators, at that point you're basically at the start of a recession. When I define the trend, the trend is about the direction of economic growth. So if growth moves from 5% to 2%, that's a cyclical downturn. Even though growth isn't negative, 2% is still positive, that's a directional decline. The momentum in the economy is moving lower. So where we are now is the direction of the economy or the momentum of the economy is strongly to the downside. But we're not technically in a recession yet because employment growth unless it gets massively revised is still running at about 3% to 4% positive. So directionally economic growth is moving down. We're in a cyclical downturn but we're not quite in a recession yet. The reason I'm able to, what I feel is (19/57)
confidently assert that a recession is an extremely high likelihood is because I know that the trend is down but now we have to study the leading indicators because the trend just tells you what's happened last month or what happened as of the most recent economic data. The leading indicators tell you where you're going and if we're moving downwards, if the growth rate is decelerating, you're dangerously close to the zero bound in terms of positive or negative growth and the leading indicators tell you that you're going to keep moving down, then the chances are you're going to slice right through zero and growth will be negative on all four of those corners. So I love this. Give me a second here so I can clarify it. The coincident indicators give us a month to month view of where the economy is. And while they're not telling us where it's going, they can tell us important information about the trend that we've been experiencing month to month. So that is in some sense a way of thinking (20/57)
about what the future is going to hold. It's telling us the momentum. And then you couple that with indicators that are more predictive, the leading indicators, correct? Exactly. So a lot of people talk about leading indicators now and I think that there is a strong tendency with a lot of the chart work that we see to sort of overlay two lines and if one leads the other one, people say that's a leading indicator and it may be, but the process of leading indicators, as I was schooled through my study of Jeffrey Moore, is a little bit more in depth than that. It's the correlation doesn't equal causation, right? Like the price of Bitcoin and avocados, right? In my process, that would be disqualified because we have to see a consistent lead time across history, but it also has to make sense. It has to make logical sense in the economic sequence. So for example, hours worked or weekly hours worked would be a logical leading indicator of employment because a employer would slash somebody's (21/57)
hours before they took a more binding and permanent step of firing or hiring somebody. Another example would be building permits. You need a permit before you start construction. So it would be logical that the trend in new permits would lead something like construction employment or construction spending. So you need to have a logical correlation and then it needs to be proven across history and not just five years or 10 years, the longer, the better, obviously. So once we know the coincident trend or the momentum, we study the leading indicators to say, hey, is that momentum going to continue or are we nearing an inflection point where things are actually going to start, the momentum is going to change. And those inflection points are everything. All the money is really made or lost at these inflection points because the crowd is going one way. Everyone sort of extrapolates what's happening today into the future. Most economic models like what the Fed uses are really based on these (22/57)
linear extrapolations of what happens or what's happening now is going to continue happening in the months ahead. That's why whenever growth is strong, people always confuse a cyclical trend for a new secular trend. Like when Trump was in office, growth accelerated from 0% in 2016 to almost 3% in 2018. Everyone said, this is it. We're going to hit a scape velocity. We're going to hit a 5%. Yeah, we're going to hit a 5%. We're going to hit a scape velocity. But as soon as growth was hitting 3%, you saw the leading indicators start to crest and start to move lower, which gave you strong confirmation that, no, this is not a secular change. This is just a cyclical trend. So the leading indicators, I separate them into two buckets, what we would call longer leading economic indicators and shorter leading economic indicators. And I do that for two reasons. One is because when you study leading indicators, some happen to have longer leads and some happen to have shorter leads. So it's good to (23/57)
break them up into two buckets, which is what I do. It also gives you a secondary confirmation. If you see longer leading indicators inflect, and then you see shorter leading indicators inflect in a logical sequence with historically consistent lead lag times, then you have that much more confidence that, hey, long leading moved, short leading moved, coincident data, or the trend is about to change versus just having one step, you have a confirmation step. So in other words, there's a historical sequence across the entire historical dataset that we have going back. I don't even know. Maybe you can tell us how far back the dataset goes, where we have enough data to look at all of these different indicators. But there's a consistent sequence and the tighter it adheres to that sequence, the more data points that you have fall in line, the more confident you can feel. Exactly. So for example, I got a question the other day on a client call that somebody said, I know that industrial metals (24/57)
like copper are declining really fast right now. But don't you think it could be a one-off because of XYZ factor? And my answer was that it could be a one-off factor, but if I have a basket of eight long leading indicators and all eight or seven out of eight move lower, and then copper or industrial metals would be a shorter leading indicator, and it starts to decline exactly as you would expect with the historical sequence, exactly on schedule in a predictable pattern that gives you a lot more confidence that this is not a one-off, this is actually part of a broader economic cycle or a broader economic sequence. Okay, so where are we now? We know that the current trend is lower and we're dangerously close to the zero bound in terms of positive or negative growth. So any further deceleration will put the economy into a recession. What are the latest growth trends right now? Like where are we? So based on the composite of consumption, production, income and employment, growth is (25/57)
trending at about 1% right now. And it's being held up by employment, which we know is generally the last leg to fall. A lot of people think that two negative quarters of real GDP is a recession. It generally works. It's a good rule of thumb, but it's not the actual definition of a recession. Actual definition is a decline or negative growth across those four indicators that I suggested. We're going to likely have two negative quarters by the time this is over. We may see two negative quarters, but and I'm not trying to justify a way weakness in the economy because we are trending lower, but the first two quarters are pulled significantly lower by inventory components. So these two negative quarters of GDP may very well reflect a recession, but it's not exactly the definition. So when you say they're pulled lower because of inventory components, are you saying because companies stocked up on inventories heading into those two quarters that they didn't buy as much during that period? (26/57)
Exactly. So they didn't buy as much than when the inventory clears those shelves that acts as a drag on economic growth. And was that stocking up on inventory driven by how much of that was the result of the fact that there were supply chains issues, so companies were trying to get ahead of disruptions and they ended up stocking up on inventory? I think huge. I mean, we saw record inventory builds. So I mean, you always have over time, the inventory component of GDP nets to zero. It neither adds nor subtracts from GDP over the long term, but we saw three or four consecutive quarters of inventory adding a whole two points or a whole three points to GDP growth. And now that's unwinding. So GDP growth in this second quarter is subtracting about 2% as of the latest estimate. So if you look at real final sales, which is just GDP excluding the inventory component, it's probably actually going to be slightly positive in the second quarter. But again, that's not to discount the weakness that (27/57)
we're seeing. Growth is trending at about 1% right now. So we're very, very close to that zero bound. Any further deceleration is going to knock us below zero and that will officially be a recession in the NBER's eyes. But recession or no recession is less significant than the direction. Where's the momentum heading? And the momentum is lower and we're about 1% right now. So then we go to our leading indicators. And let's start with the longer leading indicators. The longer leading indicators are generally your monetary aggregates, your credit aggregates, your changes in interest rates and the housing sector. Things that are very interest rates sensitive technically because the Fed, people may have heard the term, when the Fed engages in tightening or easing monetary policy, it has long and variable lags. That sort of gives you your first clue there that those long and variable lags are longer leading indicators. So when we look at the monetary and credit aggregates right now, they're (28/57)
declining at really a historic pace, the fastest since the 1980s because this is, you know, the fastest and most aggressive tightening cycle since the 1980s. So we'll look at things like the monetary base, you can look at other deposit liabilities in the banking system. And what I like to do, a really strong indicator that I use is I take a composite basket of mortgage rates, treasury rates and corporate rates because that sort of captures the entire economy. Everyone is going to feel a change in those interest rates no matter where you sit, whether you're a household, a corporate or the government. So the change in treasury rates, mortgage rates and corporate rates, the rate of change. So are the interest rates higher or lower than 18 months ago, let's say. And we see that the interest rates across that composite basket are about 300 basis points higher than 18 months ago. And that is the most extreme magnitude of change in interest rates since the 1980s. Can I ask you something else (29/57)
there, Eric? Also, I want to mention something for listeners who either heard our episode with Levin and or didn't, which is we discussed the challenges of measuring broad money supply because of the role of shadow banking and the expansion of dollar liquidity that goes far beyond the US banking system. So the focus on interest rates is important in that context because that allows you to measure the price of money versus the supply of money, which is in the form of monetary aggregates. The other thing I just want to also point out and ask you, and then please I want you to continue, I don't want to interrupt this flow, is, I mean, how important is it that the nominal value of the interest rate rise today versus in the early 1980s comes from a much lower level of interest rates? So the impact that it has is much greater because you're starting at such a lower level and that reflects the larger levels of outstanding debt in the economy. Exactly right. So it's the largest change in (30/57)
interest rates in terms of absolute change, 300 basis points in 18 months since the 1980s. But exactly like you just mentioned, in 1980, the last reference point, aggregate debt to GDP was 150%. It's 370% now. So we're trying to push the same interest rate shock onto the economy with 200% more debt as a percentage of GDP. So that's likely to have an even larger effect than the 300 basis point change in the 1980s because there's going to be that much more debt that has to roll into those higher interest rates. When we think about how interest rates affect the economy, a lot of people talk about how there's a lot of fixed rate debt out there and that's certainly true. But the weighted average maturity of this massive debt pile that we have is still around five years with 20% of it rolling every two years. So if interest rates are 300 basis points higher than 18 months ago, that's almost two years ago, there's a significant amount of debt that's going to have to roll into those higher (31/57)
rates. And since that number that I'm quoting is a blend, it's going to impact how the government rolls their debt. They have a significant amount of short-term debt that they roll. It's going to impact the household sector and it's going to impact the corporate sector. We know that the corporate sector rolls debt extremely frequently and that's going to impact their earnings. It's going to impact their margins and that's why it's a leading indicator because they feel the impact and now they have to respond. So what's their response going to be? And we'll get to that as we move through the sequence. And I also want to mention that the important part about this process is that it's a basket approach. As you mentioned, there can be some differences in how monetary aggregates act today versus 20 or 30 years ago and that's why it's important to never make these inflection point determinations off one single indicator. When the whole collective basket is moving together, that also gives you (32/57)
increased confidence that this is a cyclical or an economic event that's causing all of these longer leading indicators to move in the same direction. Whenever I look at the basket of longer leading indicators, I'm looking at the magnitude of the change like we just mentioned, but I'm also looking at the breadth of the change. Is it just one of six indicators that's moving or is it seven out of eight? Seven out of eight is a lot different than two out of eight, let's say. So now we have a significant tightening through monetary aggregates, we have a significant tightening in our credit aggregates, and we have a record rate of change increase in interest rates. The other long leading indicator is the housing sector because, not surprisingly, the housing sector is very sensitive to those changes in credit availability and interest rates. And what do we see going on right now in the housing sector? It's basically absorbing all of the headlines. We see a very significant slowdown in the (33/57)
volume of housing transactions. Now, a lot of people jump in right there and they say, but prices are still going up. If we think about where inflation is in the economic sequence, inflation comes at the end. It's a lagging economic indicator. Inflation often peaks in the middle of a recession. And when we talk about the housing sector, we have to separate volume versus price. Volume leads price. So we're always going to see a significant decline in the volume of the housing sector before we see a decline in prices. When you say the volume of the housing sector, what do you mean? Volume of transactions. So we see new home sales, for example, down 30% from peak. We see existing home sales down 25, 30% from peak. And the reason that's important, it's actually kind of funny. Existing home sales, by that I mean a home that's already been built that someone is living in, the transactions in the existing home sale market only make up about 90% of the total housing volume. But it really (34/57)
contributes almost nothing to economic activity. The economic activity comes from new construction. It's the building, it's the labor, it's the ordering of new supplies. So even though the new home sale market is only about 10% of the volume, it's all of the economic activity. So we see a substantial decline in the volume of new home sales. We're starting to see a decline in building permits. I have a question just there again for my own interest here. The decline in volume is a way of understanding what that means. Does that suggest that buyers are not getting the price they want and so they're pulling there, they're not necessarily transacting at those prices. So there's a period of time that sellers or buyers need to get comfortable with the new pricing dynamics in the market. Is that what that reflects? So it can reflect a lot of different things. It could reflect buyer hesitation because prices have increased too high. So they've sort of hit their threshold of we can't afford (35/57)
prices at these levels. We have to wait for them to come down before we're ready to start transacting again. It could mean something as simple as home building companies are getting worried about the environment. So they're putting less supply on the market. They're building less homes. So there's less available to transact. Whether it's supply or whether it's demand, people always ask me, it doesn't really matter because the impact of the economy is in the aggregate activity. It's in the volume of transactions. If there's less transactions going on, you think about a new home and this is why housing is a longer leading indicator. If a new home gets sold, you have to build it. You need labor to build it. You need to order raw materials to build it. And then once the house is built, somebody moves into it, then what happens? Somebody needs to order new furniture. They need to order new appliances and that comes up as new orders and that is exactly where we move from longer leading (36/57)
indicators to shorter leading indicators. So now the housing sector is either cycling upwards or cycling downwards and that's going to impact how many new orders that customers or companies are placing. And those new orders are generally for durable manufactured goods. It's for home appliances. It's for furniture. It's for all of these things that require a manufacturing process. So the next part of the sequence as you transition from longer leading to shorter leading is you start to see a change in the volume of new orders that is in the same direction as the longer leading indicator. So moving where we are in our sequence today, we're cycling downwards on the current trend. We see a very significant decline in the longer leading indicators, meaning the monetary credit and interest rate aggregates and the housing sector. So then the next place that you would expect this slowdown to show up is in the volume of new orders. And what did we see on the last report, Dmitri? ISM new orders (37/57)
fell to 49.2. That's a contraction in the volume of new orders exactly when you would expect it. So that's not a one-off. That would be, okay, that's moving exactly when we would expect it. What else is a shorter leading indicator? The general sentiment of manufacturers would be a shorter leading indicator because the ones feeling our customers ordering more, are they not ordering more? Are we worried about the future? Are we less worried about the future? So you have manufacturing sentiment. And then you also have your industrial raw commodities because if they have less new orders, they know that they're going to produce less over the next couple of months. So they're going to have less demand for these raw materials to build those durable goods. And what do we see happening right now? Massive declines in copper. And it's not just copper. I look at a whole basket of industrials, which includes rubber, rosin, tallow, wool tops, zinc, everything that generally goes into a manufacturing (38/57)
process. And those prices are falling at a very precipitous rate. See, that's actually great. So just to highlight that, whereas certain types of commodities are traded in futures markets and benefit from an enormous amount of speculative liquidity, something like wool tops don't. Exactly. Exactly. How significant is that looking at those types of indicators and how does all that fit into your model? And then please continue. Like I said, I don't want to interrupt the trend. It's super important. I get that question all the time. They say, well, isn't copper depressed because there's so many speculators? And yes, when we differentiate between these commodities that are traded very actively on futures markets versus commodities that aren't, if we're seeing a discrepancy, that's something to note. But the fact that we're seeing these lesser traded commodities like rosin, rubber, wool tops, they're trending down and copper's trending down, then you have more confidence. Again, this whole (39/57)
process is about building confidence as you move through the sequence. You say, well, if rosin, rubber, tallow, wool tops, all those are going down and copper is going down. Well, it's probably not speculators. It's probably part of this broader sequence where all of these industrial commodities are moving lower. Notice how I didn't say oil though. Oil tends to be a little bit more service sector based. It definitely contributes largely to manufacturing processes, but it's also like airlines, driving, that's more service sector. So when we study this sequence, the fact that oil is still elevated while these industrial commodities are plunging is actually very historically consistent. Oil tends to fall once the recession arrives because the service sector really only starts to contract in a recession. Service sector almost is very non-cyclical. So the fact that we have industrial commodities going down, but oil prices staying elevated, yes, there's a supply component, there's a (40/57)
geopolitical component. But as far as the economic sequence, we've seen oil come down for about 120 to the 90 range. It's come off a little bit, but it's not falling at the same speed as the industrials makes a lot of sense with the economic sequence. So now we've moved from the longer leading to the shorter leading. Now we're seeing declines in new orders, industrial materials. We're also seeing inventories start to bloat at retailers. You're seeing these reports from Walmart, these reports from Target, these reports from major retailers that are saying, hey, look, we have a little bit too much inventory. What does that mean? If you have sales that are starting to come down, but you have too much inventory, that is a leading indicator of future production, because they're going to have to order less in the future. So all of this is happening very timely with the historical consistency. So if we see longer leading indicators moving down, it's transitioned to shorter leading indicators. (41/57)
We have a high degree of confidence that what's going to happen next, those coincident indicators that we defined first are going to take another leg lower. Why is that? Because if Walmart, for example, has too much inventory and the housing sector is slowing, for example, people are going to need to order less of those goods that they have too much inventory of. So they're going to call their manufacturers and they're going to slow their rate of production. And when they slow their rate of production, you're going to see that show up in industrial production, which would be our coincident indicator. If production starts to slow and manufacturers are pumping out less unit volume, they're going to hang on to these employees as long as they can, because it's very difficult to fire and hire people. It's a lot of friction involved with that. But if production keeps slowing, eventually they're going to say, we just don't have enough work. We don't have enough units to pump out. And then (42/57)
employment starts to come down. So you can start to get the picture of how we move from Fed tight ends. It contracts monetary aggregates. It contracts our credit aggregates. It pushes higher interest rates across the economy. That slows the housing sector. And then the housing sector feeds through to our new orders, our manufactured goods, our inventory components from retailers. And then they are forced to slow their rates of production, which causes the output at manufacturers to go down and eventually the employment to go down. We just looked at that from the housing sector. But we can also look at it, and I'll do this a little bit more quickly, from the corporate sector. I just looked at it from the lens of the housing sector and mortgage rates. But let's say that that basket of interest rates that we took includes corporate rates. So a corporation issued debt at 2.5%, 18 months ago. Now they're staring at 5.5% percent rates that they have to roll that debt into. So if they're (43/57)
going to roll debt at 300 basis points, higher interest rates, that's going to massively increase their interest expense. What do we know about the duration of outstanding corporate debt today? How does it compare to the past? And what can we infer about the severity of the recession based on that duration? Great question. And the need to roll it over. Yeah, we know for sure that the average maturity in the corporate sector has lengthened. There's no question that it's lengthened. But that still doesn't mean that zero debt rolls every single year or every two years. Is that a result of corporate borrowing increasingly moving into the bond market? It is. And it's also, they've felt every single time they go to issue, they feel that interest rates are very low. So they try and lock in these rates in the future. But because of this secular trend that we've talked about, because of this gravity, they always find themselves with lower and lower and lower interest rates. That actually makes (44/57)
a lot of sense. That actually makes more sense than what my life is. Exactly. So they have tried to extend their maturity outwards for sure. But a significant portion still does have to roll because there were some companies that issued five years ago or seven years ago, and now that debt's coming due. But you do bring up an important point, which is the magnitude of the change in interest rates is very important in terms of determining the severity of the economic slowdown. But the duration that interest rates stay elevated is also a very important consideration. So if we go through a tightening cycle like 2018, let's say, interest rates kind of went up and they came down very quickly. We had the Powell Pivot in 2018. There wasn't a whole lot of time for lots and lots of corporates or lots and lots of households to roll into that debt. But if the Fed feels that they need to stay on this tightening path longer and more aggressively, and interest rates stay elevated for 18 months, 24 (45/57)
months, 36 months, now there's less and less people that are going to be able to avoid rolling into that higher debt. So magnitude is important, but the duration that interest rates stay elevated is also important. And we're at a point now where we have interest rates that are starting to be up for quite a while. When you have such an indebted economy, when interest rates stay up for six months, a year, 18 months, it starts to really be impactful. So going back to our example of a corporate, they're going to roll their debt into a higher interest rate, let's say 300 basis points. That's going to dramatically increase their interest expense. So this is a longer leading process. Another longer leading indicator would be corporate margins. Why is that? Because if their interest rates are going up, their interest expense is going up, but the momentum in the economy is falling. So their revenues aren't really increasing. If you have flat and declining revenues, but higher interest expense, (46/57)
that's going to compress your margins. It's going to reduce your earnings. So compressed corporate margins would be a long leading indicator. So you see margins falling. And when did margins peak? Q3 of 2021, longer leading indicator. So a corporation is now going to feel that their margins are getting squeezed. And Wall Street punishes you if you have declining gross margins. So what does a company have to do in order to preserve those margins? They have to cut costs somewhere. First, they try and maybe scale back some of their investment, which shows up again as new orders because they're going to invest less and maybe plant and equipment or invest less in the economy, which requires less ordering. So they're going to do all these marginal things to try and preserve their margins. Another thing that they're going to try and do is they may try and raise their prices. They may try and raise their prices, which shows up as inflation, which comes later in the economic sequence. So as the (47/57)
is actually so interesting when you think of it that way. But again, please continue where you are. I don't want to take us on track. No, you nailed it. Their mandate is employment and inflation. Two lagging indicators. So by the time that those indicators move, we're well on the way of going down that sequence. So we're in some cases, we're already in it. We're already in the recession when it comes to employment. So by the time employment declines, the Fed's going to say, okay, now we're in a recession, we have to stop raising interest rates. But if they stop then, you're still going to have this sort of tidal wave of slowing that's going to hit the economy from the rate hike that they just did. And actually, I just want to say something else. Again, for listeners, because this reminds me of a conversation that we had with Muhammad Al-Aryan last year. And of course, Muhammad is not the first, this is like a well-known fact. But one of the concerns about Fed policy is always around (49/57)
how ahead or behind of the curve they are, because the extent to which they are can exacerbate the economic cycle. And you end up getting caught into a situation where you're tightening too late, and then you end up loosening when you should be tightening. And then the Fed ends up in a situation where it's constantly playing catch-up, and you end up having these exacerbated peaks and drops. Exactly. They make booms bigger and they make busts worse. Because if you think about what happened coming out of COVID, the economy was coming out of COVID out of the summer of 2020. All the leading indicators were moving significantly higher in the summer of 2020, certainly by September, October, November of 2020. And then we got into 2021. The economy was absolutely ripping in the early part of 2021, but they didn't see inflation yet. Inflation was going to come because it comes later in the sequence, so they kept easing, and they kept easing, and they kept easing. Then by the time they saw (50/57)
inflation come, the economy was already accelerating for a year and a half. So yeah, their mandate, basically, by design means they're always going to miss it, which is unfortunate in the way that we've structured it. Out of curiosity, why do you think that is? It's not like, I've made this point before, the central banks have the most PhDs, certainly economics PhDs in any institution in the world. Why is it that they're wedded to these indicators? Is it just because of the mandates? Is it just because of the mandates that Congress and the government have provided them, or is there some other reason for it? Yeah, I don't think that the mandates necessarily are the problem. I think that they're good mandates. I would wish that employment wasn't part of their mandate. I wish it was a single mandate, which is just inflation, because we get into a situation like now where their two mandates are in conflict, and they're not going to be able to solve for both at the same time. So then how do (51/57)
you pick? In the description of their mandate, there isn't a preference over one of the other. They're supposed to try and solve for both of the problems, but you wind up in a situation like we are now where it's virtually impossible for them to solve for both variables, and then you get into a conflict of which one to pick. So I don't think it's the mandate. I think that they're correct in their targeting of inflation. I just think that the way in which they go about spotting these trends is flawed. They are using more of these point estimate type models, like the Phillips curve, and things where you put a whole bunch of inputs into a model, and it spits out what the number or what the inflation rate should be. And that gets to our earlier discussion about these cyclical inflection points is every time you get to an inflection point, let's say we go back to our Trump example of the economy was accelerating from 2016 to 2018, when the Fed puts in all of these numbers into their model (52/57)
in 2018, they're all very good numbers, it spits out a very high number. But that is a linear extrapolation of what's happening at the moment when the economy is cyclical, all free markets cycle. So their models aren't designed to pick up these inflection points. They're always basically putting in the inputs that we have today, which are pushing out outputs that are giving you sort of more of the same, we're actually telling you that it's going to continue going in that direction. So when we were in 2018, the economy was slowing hard, we were getting to the end of 2018, markets started to get really chaotic. Before the Fed pivoted actually in November of 18, the Fed ended up cutting rates four to six months later. But at that time in November, the market and the Fed was pricing rate hikes, three or four rate hikes into 2019. Again, you go back to 2008, in February of 2008, and this kind of is ironic, which where we are now, in February of 2008, Bernanke didn't see a recession. He (53/57)
current risk right now that most people feel is inflation, if the Fed continues on this path, which it looks like they're going to six to 12 months in the future, we may bring back the fear of deflation again, because of how hard they're tightening and the impact that that's going to have on the economy. So I actually want to dig into that in the second hour of our conversation, Eric. I'm going to move that part to the premium feed. And when we get to the other side, I want to finish off what we were discussing with respect to the corporate sector, and when we can expect to see earnings downgrades and the impact on corporate earnings as a result of the kind of things that we're describing here, which will eventually lead us to the part of the conversation that I'm most excited about and interested in, which is using these indicators to then make probabilistic assessments about the Fed's reaction function, the impact on the stock market, bonds, gold, etc. and how to use these indicators (55/57)
as part of a broader portfolio strategy. 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 Eric, as well as the episode transcripts and intelligence reports, head over to hiddenforces.io and check out our episode library. You can also become a premium subscriber today. Eric, stick around. We're going to move the second part of our conversation onto the premium feed. 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 full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription (56/57)
available through the Hidden Forces website at hiddenforces.io. 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 HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (57/57)
will three days after you've written it will be lining the bottom of a parrot's cage or wrapping up fish and chips or something like that. Whereas a book, at least, there's a possibility of some posterity. Books remain. I mean, yes, you see these big sales of books outside libraries, but most of them are fiction, body-sripping fiction, which has a very short lifespan. But non-fiction books can last for many years. I mean, for instance, I wrote a book about the eruption of the volcano Krakatoa. And I think, I don't know what to sound conceited about this, but that'll probably be the definitive book about Krakatoa for many, many years. Which volcano is that? Where is that? Krakatoa is a big, huge volcano which erupted between Java and Sumatra in 1883, August the 27th. And it was the first event, it was the beginning of the global village because of an interesting fact that they had just completed the submarine cable. The news of Lincoln's assassination in 1865 took 12 days to reach (53/57)
And he belongs in the same hall of anti-heroes that Elizabeth Holmes belongs in now. I listened to another interview of yours and I learned that you studied geology in school, correct? And you had gone to Africa originally to practice as a geologist, or is that you were doing your PhD there? No, I wasn't clever enough to do a PhD. I got a degree that in England is called a Desmond, because it's a play on words of Desmond 2,2. It was a 2,2, meaning second-class degree and a second tier of that class. And armed with a Desmond, you could certainly never go off and do a PhD. So I went off to be a geologist in Africa in Uganda. And well, an extraordinary story, far too long to tell here, but I was not very good at my job. I mean, I was supposed to be looking for copper in the foothills of the Ruinsori Mountains, which are beautiful on the Congo-Uganda border. And I didn't find any copper and I was there living in a tent in a little village called Kyan Jojo. And I was obsessed with (41/57)
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. 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 remember, if you listen to the show on your Apple podcast app, you can give us a review. This review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. Few things are as responsible for the making of the modern world as precision engineering. And yet, it remains invisible. We live customizable lives, expecting the universe to conform to our expectations. And yet, beneath this manifold exterior exists a world of exactness so precise that it passes largely unnoticed. It is this world of increasing perfection, uniformity, and repetition that we speak about today in a conversation on the (1/57)
genius brought to bear by humanity in reshaping the world, as well as an homage on the craftsmanship and personal touch that gives our world its meaning. Our endless striving for that which is flawless is most human. Yet try as we might, we cannot rid the world of all its imperfections. Humanity, after all, is by its very nature hopelessly, beautifully, fatally flawed. To err is human, said Alexander Pope. Perfection is divine. This week on Hidden Forces, Simon Winchester, Precision, and the Making of the Modern World. So they're bound to be listeners to this show who have read your books. I'm sure of it, obviously. Absolutely. And like I said, confession, I've only read the perfectionists, but you've written the Professor and the Mad Men. Just here, let me look here on Amazon. This has got 900 reviews and you have basically five stars, which is, I've seen a lot of books and I know that's right up there. But you have such a variety of work. The men who, what is it? The men who united (2/57)
the states. The men who united the states. The map that changed the world. That looks amazing. I feel like I would love that. I heard an interview you did talking about your book on the Pacific. I just thought, amazing. You basically, what it seems to me is looking at your work, let's say, if I were looking for books, it seems that you take something that doesn't necessarily seem like a topic and you turn it into one. And that's what I felt about the perfectionists. When I first saw it, I said, wow, that's a book I want to read, like a history of precision engineering. But I never would have imagined to do something like that. How did the idea for this book come together? It came from a reader. The only book thus far where a complete stranger sent me an email out of the blue, a chap called Colin Povey, who lived in Florida, a place called Clearwater. And he said, I've read all your books, which is nice, and I've liked them, which is even nicer. And I've often wondered whether someone, (3/57)
and I think it should be you, should write a history of precision, which is integral to all of our lives. And yet it's sort of invisible. It's like the air we breathe or the language we speak. So we don't think about it rather like you said. And I put it to my editor, Harper Collins, my publishers, and they said, yes, it sounds a good idea, but we can't quite see the sort of narrative thrust, the through line, as they call it. In other words, you could write it as a series of sort of episodic essays, but that wouldn't be very satisfactory. So does precision have a beginning? Does it have a middle? Does it have a conclusion? And in doing some research, I was able to find out. And I think without cheating as well, that it does have a specific... When you say cheating, what do you mean? Well, I mean, you could fudge these things. In theory, you could always invent a through line. But I came up with a through line, which was real. And what I did was, I looked at the very first thing, which (4/57)
one can say legitimately was precise. And that was a cylinder made in 1776 on May the 4th, which people remind me now, of course, is Star Wars Day. May the 4th be with you. Not my joke, theirs. And that was made for James Watt by an extraordinary eccentric Englishman called John Wilkinson. And he made it with an exactness, a tolerance, if you like, between the outer wall of the piston, what I wanted to put in it, and the inner wall of the cylinder that he had invented, of the thickness of an English shilling, which in those days, 1776, was one-tenth of an inch. And with that number, 0.1, I thought there's the beginning of a through line, because that would be chapter one. And chapter two would be 001, and chapter three, 00001. So each chapter would be more precise, if you like. It would be more exacting tolerances up to the very present day, when they're, what I believe, are the limits of precision engineering. Things are being machined to one to the minus 28 zeros, and then a one. So (5/57)
very, very tiny little tolerances. So that gave me the narrative thrust of the book, and the editors seemed to think it was a reasonable idea. And mercifully, the reviewers have too, so everyone wins. So to clarify for our audience, we're talking about tolerances. What do you mean? Well, if you like, the easiest way is how well it fits. Our shoe has got a tolerance, if I don't know about your feet, but let's say, an eighth of an inch. Tolerance of error. Tolerance of the amount of allowable error between the size of your foot and the size of your shoe. Obviously, with a shoe, it's a great deal. But with a tiny piece of, let's say, a motor car, the tolerances are tiny. I mean, they would be 1,000th of an inch. With a jet engine, they would be 1,000th of a millimeter. So tolerance is a crucial and critical aspect of precision engineering. And I should, perhaps, at this point, tell your listeners the difference between precision and accuracy, which people often get confused with. So it's (6/57)
boring, but let's get the boring part out of the way. No, it's actually not. I didn't know this either, and I found it very educational. Well, in the English language, there are no synonyms, and precision and accuracy are not synonyms. Accuracy, the best way of sort of realizing it, is to think of a dartboard. Your intention when you throw arrows or fire bullets at a target is to hit the center. And if you do that, if you have achieved your intention, then that is accuracy. If however you fire bullets or arrows or whatever at the target, and they all, perhaps, don't hit the center, but they all hit the same place, let's say, 10 o'clock, and you do it the same time, time, time, time, time, time, time, time, you've achieved great precision. If you can achieve precision and accuracy, then you're absolutely off to the races. But there is a difference, and the crucial sort of to take this a little way forward aspect of doing the same thing time, time, time, time, time, time, is the making (7/57)
of pieces of whatever, whether it's a carburetor or a piece for a refrigerator or a television or an iPhone, that are exactly the same, are crucially, and the word is interchangeable, the making of interchangeable parts, such that if a part fails, you just get another one out of the box and it fits perfectly. So those things, tolerance, interchangeable parts, accuracy and precision, lie at the center of this book. The book is about a great deal more than that, but those four concepts are important to know about. Is it fair to say the way I think about it also is that in order to achieve precision, you need to have ... I mean, it's very much something where you've got tools that allow you to be precise. The accuracy is more a human methodological approach. It's about, first of all, you could have very precise tools, but be highly inaccurate, because you don't have the right theory and how to approach it, say ... Well, I mean, a good example is maybe this will be later on in the (8/57)
discussion, but I'm in the making of the Hubble telescope. Right, exactly. So it was the mirror when it was ground, was ground very precisely, but it was inaccurate, because it was one-fiftieth of the thickness of a human hair flatter than it should have been. In other words, your intention was to make it a certain dimension, and what actually came out was incredibly precise, but it was wrong. So it was precisely inaccurate. What was it, the Mars rover in 98? What year was it, or 2001? There was a piece of equipment in outer space that was sent by NASA that cost hundreds of millions of dollars or billions of dollars, and they got one digit off. They rounded in the wrong air, and I think it was because they were translating from the metric system to ... Well, the classic example of that on Earth is a Canada flight that filled up with kerosene flying from ... I think it actually was an American, rather, Canadian plane, flying from let us say Chicago to Winnipeg, and it loaded the fuel in (9/57)
gallons, whereas what was required was ... Was liters, and they overfilled the plane. Well, the other way around, they put in liters. I think it was there for flying from Canada to the United States. He said, I want 10,000 gallons, and they put in 10,000 liters, and he ran out of fuel. He ran out of fuel. Oh, my God. And he had to make an emergency landing somewhere in South Dakota or somewhere you don't want to be. That's wild. I have a question for you before we proceed along with the substance of the book, and that has to do with how you write something like this. At first, when I began to read the book, I didn't understand why you put the precision numbers there. I mean, I sort of understood it as I started reading along. The structure of the book came together for me as I started to read it. You created this structure within which that was relevant to the material. I wonder, do you do that with your other books, and how did you have that thought? Well, I think the three components (10/57)
to write a successful nonfiction book. First of all, you've got to have a good idea. So there's no point in writing about your grandmother who collects moths or something. No one's going to be very... How do you judge a good idea? Well, I suppose that comes to... That's the talent. That's something. That's the mystery. And you might think that the second component is good writing. I mean, good writing is important, but I think it's not the most... Not the second most important thing. First important thing is the structure of the book. You can write lyrically about an incredible idea, but if you get the structure wrong or inappropriate or clumsy, you'll lose the reader. And that's what you don't want to do. You want a sort of on, on, on, you know, the reader is compelled to say, what next? And you, I think... I mean, maybe I'm flattering myself, but because you know that the next chapter is going to be about things even more accurate than the one you've just read, you think, well, I'd (11/57)
better, you know, before I go to sleep tonight, I'd better look at chapter five. So with, for instance, a book like... I did books on the Atlantic and the Pacific. And in the Atlantic, you know, gigantic subject, well, how do you corral all this information into one coherent structure? And what I decided to do was to do it sort of chronologically, but based it on the seven ages of man from Shakespeare, from as you like it. And if you remember from school, you know, it was the infant and then the schoolboy and then the soldier and then the lover and then the judge and the old man and the return to childhood. And it seemed to me that you could look at the ocean from its origins, its childhood. The school child is us getting to know about the ocean. In other words, educating ourselves about the ocean. The soldier would be about all the wars fought across the ocean, you know, everything from Trafalgar to the Vikings to modern warfare. And so it would go on. And similarly with the men who (12/57)
united the States, I decided, and you know, it obviously has to be in a discussion with your editor, I decided I'd do America looking at it as it were, not necessarily through foreign eyes, although I'm English, so they're sort of foreign, although I'm American now. But through the structure given to me by the Chinese philosophical elements of earth, air, water, fire and metal. And you could, it worked out very neatly because you could begin by looking at America in context of earth, geology, mountains, plains, all the rest of it. And then ending up in metal, which would be things like telegraph wires and the computer age and that sort of thing. And so getting the structure. The book was about all the people who over the centuries brought the country closer together. Yes, it was the physical uniting of the States. This is what I mean. Your books are so, what a creative idea. What a creative way to think about things. Not many people do that. And that's a common theme throughout all (13/57)
your books, huh? I try to make it that moment. It's obviously not quite when I wrote a book about the Yangtze River. And that simple travelogue, except that the structure there was that I realized, which I used to live in China, that going upstream from Shanghai towards Tibet, where it rises 4,000 miles away, you're actually going back in Chinese time because Shanghai is an ultra modern city. You get to Nanjing. That's famous or infamous in the 30s and 40s. Wuhan, that's famous in 1911, the time of the Chinese Revolution. And then you go up into Western China. It becomes really old fashioned, full of old temples. And there's a lot of Buddhism there, a lot of Taoism. And so the structure of the book is not simply a travelogue, but it's looking at the river as a vehicle for exploring Chinese history. That's interesting. You say as you go up, you go back. Exactly. There's something similar that I experienced while reading your book, which is that as I went into further detail, as the (14/57)
chapters moved from more and more precise towards more and more precise, I found that I was moving further and further away. And it felt like there was some level of conscious influence on your part as well, moving further away from what made sense. In a sense, the book is both story about precision, but it's also an homage to imprecision. I'm so glad you got that. What I did not want the book to be was a sort of a pion to precision, saying precision is good in all of its manifestations. I wanted to say particularly, and you spotted it so well, thank you, that as you get more and more precise, you want to say, wait a minute, is this good for us? And aren't we forgetting things that we were once very good at, like craftsmanship and working with wood and working with our hands and doing things which are imprecise and which nonetheless remind us of our soul, because we were imprecisely made and yet we're beautiful. I'm not, but some people are very beautiful. There's no straight lines in (15/57)
landscape, and yet landscape is very beautiful. Whereas precision is all based with perfect spheres, perfect straight lines, perfect flatness, perfect fit, is perfection in the end a bit tedious and robbing us of our humanity. So I didn't want to make that. I didn't want this book to be a scold. I didn't want this to be shrill. But I wanted particularly in the later stages, when you're looking at really, really precise devices, I wanted to say, is this what we really want? You know what came to me now? Your wife is Japanese, correct? Yes. What came to me now when you were speaking, have you seen the man in the high tower? Yes, I have seen the man in the high tower. So I'm sort of reminded when you're speaking that the world of sort of maximum precision is the... The western side. Well, the Nazi, this future fictitious Nazi regime and that the imprecise is the Japanese. It's the Japanese one. And you would in a funny sort of way, you would think it might be the reverse. But no, the (16/57)
Japanese revere, and I try and make this point in the later chapters of the book, to this day, although they're known for, you know, Nikon and Canon and all these highly precise manufacturing companies, they also, the government awards the title of living national treasure to usually rather elderly people who have spent their lives devoted to craftsmanship, making things of woodwork and lack aware and flower arranging and things which are elementally human and have nothing to do with engineering. And I think that's wonderful. It's also wonderful that... And I do remember that from the book. And I think one of the things that we lack in society is a place for the wise. The older people that have come before who have something to share. And in many cases, especially in these busy cities, they become a burden as opposed to anything else. And that's the case in Japan as well. They all have become a burden of society. It's so interesting you'd say that. I've often thought, but I don't think (17/57)
I'm clever enough to do it, that I should do a book wandering around the world interviewing elders in societies that have... Oh, wow, that's amazing. ...and revere elders. And a woman I met in Hawaii, who is very much inclined to talk to Hawaiian elders, said that if she ever did such a book, or if I ever do such a book, the title is obvious. It would be called The Original Instructions, because these people sort of have the wisdom to know what the world really should be all about. I think it would be too difficult a book to do. And you might find you were going back to what we said earlier about you can sort of fudge things. I think you might end up being tempted to almost put words in people's mouths, because you would be talking to a lot of shamans in Indonesia and elderly people in the Andaman Islands and things. And you wouldn't quite understand it, you wouldn't quite get it, and there would be a temptation to say, make him say something that makes my point. It's so interesting (18/57)
that you make that point. Yes, that's a good point. Something else that came to me while you were talking, and it goes back to this distinction between precision and accuracy. In some sense, it could be that as our lives become more precise, they become less accurate, that they are less aligned with our intentions, with the type of life that we want to live, that we may... We have forgotten and overlooked. Yeah, I mean, it's a... We don't have to know how we want to live anymore. Yes. We're too sort of subsumed in the world of buying new iPhones and televisions and things. There's less intention. There's less intention. There's a sort of Socratic argument to be made about... There's an argument to be made of letting life take you along a certain path, rather than necessarily demanding of it things that you think you ought to want, but perhaps deep down you don't. That was something else that I thought about when I was reading your book, which was... And I wrote it down somewhere here. (19/57)
I had a few things, a precision, efficiency, optimization, and order, this need to order. And I think that the common thread for me was the human's mind desire to bend the world to its will. And I think that sort of would become so expert at that. And living, as you say, in a world where there is a certain level of flow, we surrender to life in a sense is difficult. And I think it's more difficult than it used to be because we've gotten so good at putting order around the world, the way we want things to be. Well, I think that's why I live, or try to live the way I do. I mean, far from living a blameless life, but I live a deliberately rural life that I've... Yes, I've got a small apartment here in New York, so I can come down and do things like talk to you. I live on a very remote farm in a very remote village in Western Massachusetts. It's totally non-fashionable. And I have chickens and bees and all that sort of thing. And I love old-fashioned things like stamp collecting. I'm a (20/57)
real nerd, I'm afraid. Good, then you're... And I think I mentioned in the book my Sunday morning ritual. And this is being recorded on a Thursday, I think, isn't it? Yes. I have eight clocks in my house, and I've got a barograph that I've been religiously keeping a record, clockwork record of the rises and falls of atmospheric pressure in the village since 2001, I think. And I wind them all up on Sunday morning and set them correctly. So I love the ritual. It takes about an hour, and the clocks are different designs. Some of them chime and some of them don't. But by eight o'clock, by breakfast time on Sunday morning, all of them are, as they say, in rate. And they're still in rate on Monday, but by Tuesday they're starting to fall out of rate. And by Wednesday and Thursday it's a complete shambles. And then on Sunday I have to move the hands forward or backwards. But it reminded me of a lovely line, which I quote, I think, two or three times in the book, in a novel which I've always (21/57)
liked, a detective story by a woman called Dorothea Ell Sayers. It's called Gordy Night, and it's set in Oxford. And she talks about walking through Oxford late on a summer's night and listening to the college clocks chiming midnight, as she put it, chiming midnight in friendly disagreement. And I love that. Now, it's a beautiful quote. I remember that from your book. There's also another great quote of yours in the book, which I want to say to our audience because it sort of puts a bow in the sense on what we were just discussing, where it speaks to what we were just discussing. Is such a wish for perfection truly essential to modern health and happiness a necessary component of our very being? I thought that was a great quote. I think it's a question which increasingly we need to ask for philosophical reasons, for sort of spiritual reasons, if that doesn't sound too pretentious to say so. But also because it seems that we're demanding maybe too much of our devices, both our (22/57)
mechanical devices and our electronic devices, that we're pushing our abilities to machine things to the edge, I mean, and dangerously so. And I give an example of a jet engine, a Trent 900 Rolls-Royce Trent. There were four of them powering a Qantas A380, a big double-decker, fully laden jet going from Singapore to Sydney in 2010. And they were at 7,000 feet and the engines were spooled up to full power, heading obviously for a 35,000-feet cruising altitude, when suddenly the number two engine that won closest to the Fuse Lodge on the port side, left-hand side of the aircraft, exploded. Well, it ended happily, immersively, except the ruined engine, $50 million worth. But when they investigated, they found that the culprit was a tiny titanium pipe about the size of a drinking straw, which had been miss-machined by a fellow in Hucknell in Northern England and passed by the inspectors. And the wall of the tube was a fraction of a millimeter too thin. And it ruptured and spewed hot oil (23/57)
onto the titanium. Rotocort fire, all sorts of mayhem resulted. And one wonders whether our ability to machine things down to that level of precision is taxing our mechanical abilities. And whether we've reached, we should say, OK, our jet engines are powerful enough, they're fast enough. Let's just, until we never find new materials or something like that, let's just not push things. And oddly enough, since the book was written, I guess I finished it last December, this problem has really gathered momentum. And at the moment, as we speak, there is something like 110 jet aircraft waiting for engines in Toulouse, in France, in Boeing factories in Washington State and down in South Carolina, because no engines can be made that are good enough and free of these kind of mechanical faults because the technology of building these engines is becoming so difficult. So in a funny sort of world, the way the physical world is telling us, maybe you've gone far enough, let's pause for a moment. (24/57)
Interesting. And that actually, if I remember correctly, that's the middle of the book, that chapter, right? It's approximately the middle. And then that's where you, sort of as a reader, you say, wow, you know, I've never put that much thought into what goes into these engines on which I relied to fly from here to there. And then we get to the satellite and we get to the microprocessor and the transistors. What was that research like for you? I mean, the last chapter is, I can't even remember the number off the top of my head. It was, I mean, I couldn't even say it out, the tolerance level. I have it here for the microprocessor. What did you learn about, I guess what I'm thinking is, we've experienced this exponential rate of change in society and we attribute it to Moore's law and to the microprocessor. But what the book also does is it shows that this is a trend that started before that really, right? Because there is an exponential trend that occurs in terms of our level of precise (25/57)
engineering. There are certain years when both mechanical and electronic, but it is now getting, as I've hoped, I've sort of tried to explain in the mechanical world, starting to get out of hand. And in the electronic world, it's becoming near absurd, the levels we're talking about. I mean, Moore's law, yes, the ever, the doubling every couple of years, it seems to be going on and within the microprocessor community, they insist that it'll continue going on. But the reality is that there are, you know, my iPhone 8 here has a chip in it, the A11 chip, which is an Apple proprietary chip made in Taiwan, has 4.3 billion transistors in it, in something about as big as the nail on my pinky finger. I think the most remarkable statistic that I learned and Intel confirm it, that there are now more transistors in the world. And bearing in mind, the transistor was only invented in 1948 and the first transistor was about the size of my fist. They're now so small that there are more transistors (26/57)
operating in the world today than there are leaves on all the trees in all the world. Now to get here to the studio today, I was driving down the Massachusetts turnpike and it's just wall-to-wall trees on either side of you. And you think there must be unimaginable numbers of leaves, so that statistic must be wrong. But it is right. They're making 13 trillion transistors a day. The numbers are such that if you know you're Heisenberg and you probably know it far better than I do, but you're operating now down at levels which are subatomic. And so things start behaving peculiarly. I mean, it's all quantum, it's quantum mechanics basically, which as Richard Feynman famously said, no one really understands. And how do materials, how does electric current, how does it all behave at that level? Are we possibly reaching a limit in the world of electronic precision? The engineers say, no, no, no, no, no, within this quantum computing there's optical computing. We can get faster, we can get (27/57)
cleverer. One wonders. And of course then that leads on to the, in my view, it's out of the realm of this book and I didn't write about it at all, but artificial intelligence and robotics. And then combining those two things with ever-increasing levels of precision and ever-fine tolerances. And the world starts to descend not necessarily into nightmare, but into a world which seems potentially dystopian. Was that near your mind while you were writing this book? It wasn't at all, but I do have this very clever Japanese wife who kept saying to me, reminding me that the Japanese have it in perspective. In other words, as I mentioned earlier, have a love for the imprecise. They worship bamboo in just the same way that they worship titanium. Both are to be revered. But she would say to me increasingly, as I would come back from my study and say, I've made this extraordinary discovery about GPS or about optical glassware or the LIGO observatories, she would say, well, yes, just hold on a (28/57)
minute. I mean, are there limits? Are we going too far? Are we crazily worshipping precision? Are we fetishizing precision? She's kept me on the straight and narrow and saying, to write this book properly, you need to consider and remind people of the joys of the imprecise as well. One of those is the Rolls Royce. That's what's so interesting. Another point I wouldn't have thought it. If you had asked me, I would have said this is a very precise machine. But in fact, in the contemporary analog would have been Henry Ford and the Ford Motor Company. You draw that parallel. Can you tell us a little bit about what you write in the book with respect to the Rolls Royce, the process that went into and I guess no longer does. I assume they no longer make them by hand. No, they don't. And what I do quite deliberately is to compare two iconic motor cars which were built almost exactly the same period of time from 1908 to 1927. And on the one hand is the Rolls Royce Silver Ghost, which is (29/57)
reckoned to be the sort of ... What a beautiful car. ... Stunning. I had no idea what that car was until I read your book. It was just a wonderful machine. It's so beautiful. And nearly all of them that were made, 8,000 were made, nearly all still exist and are running today, which is extraordinary. Incredible. 120 years later, 115 years later. So you look at that, which was a machine made by hand, lovingly made by old ... Lovingly made. Literally lovingly. I remember the first time I have a sort of professional relationship with Rolls Royce, which came about ... You have to get into this too. This is great. It's great for you to tell our audience whether now or later your history as a writer in LA with the LA gangs and your use of the Rolls Royce. Oh, yes. Well, this is probably best to dispose of that now. Basically, what happened, I was a reporter for the London Sunday Times and back in the mid-80s when editors, commissioning editors spent money like drunken sailors. They came to me (30/57)
one day and said, Winchester, we'd like you to write a series of articles about Europe because the English don't like Europe. I don't know anything about it. I didn't want to know even less. But we think we have a responsibility to tell the English what Europe's all about. Will you please get a photographer and go on six journeys around Europe, any way you like and by any form of transportation, make each one different and write a 5,000-word essay on each of these journeys. And the first thing I did, I got hold of a yacht and sailed from Stockholm to Helsinki. Then I got to the photographer and my BMW motorbikes in Munich and rode them to Turin. That must have been a lot of fun. It was tremendous fun. Patrick is still an agent of the goggles. By bad of full face helmets. I didn't know goggles. My lips going crazy. And then I got two horses and we rode them through the Black Forest of Southwest Germany. Wow. Then we walked, or at least I walked, Patrick took the car. I walked from Cadiz (31/57)
to Gibraltar around the southwestern rim of Spain. Then I rode on the train from Victoria Station in London to the Victoria Hotel in Briege in Switzerland on the Italian border. And then we went to a club I belonged to in London to sort of see what we had got in the bag as it were and then discussed the journey that was going to be the lead story, which was a motor car journey from the westernmost point of Europe, which we defined as the cliffs at the edge of Finnisterre in western France. Because this was the Soviet Union time. The easternmost point in Europe would be the city of Astrakhan, which is where the vulgar meets the Caspian Sea. So we had lunch and we obviously dined rather well because at the end Patrick said, do we have to take your not an old Volvo? And I said, no, I tell you what, why don't we see if we can get hold of a Rolls Royce? I can't believe you get that pay to do this. This is remarkable. Really, I mean, you would have got a kind of an assignment today. So I (32/57)
rang up Rolls Royce PR people and they said, call you back in half an hour and half an hour later they did, true to their word. And so we have a silver spirit in ocean blue and it's on the coming off the production line tomorrow. It's a cancelled order. And if you'd like to come up to crew, we'll show you around the factory and you can take the car for three months. So I went up to the factory and talking about the loving assembly of these cars. There was a man there that showed me a crankshaft, beautifully forged piece of steel, perfectly, perfectly well polished by hand with chamois leathers. And he had made it such that no one side of it was even a fraction of a gram heavier than any other. So if you put it between two bearings and started it spinning, it theoretically would never stop. Well, obviously friction would do for it in the end, but no one side was heavier than another. So it wouldn't have a tendency to slow down. And so I've always remembered that. And anyway, I picked up (33/57)
the Rolls-Royce and the only embarrassing thing was the registration number, which was RRM1 for Rolls-Royce Motors 1. But the parking meter people outside the Sunday Times office thought it was Rupert Murdoch's car, so they never gave it a ticket. And I lived in a little village in Oxfordshire and whenever I drove it home, all the villagers would gather outside the gates because they thought that Roger Moore had come to stay. Well, this was what year again? 84. And they were beautiful cars then. I don't like them now. No, I don't like them at all. They're nothing to do with whether or not. But those were beautiful. They were still beautiful. The Silver Spirit was a lovely car. But the Silver Ghost, I mean, the upshot of that story was they were so pleased with the publicity. They kept giving me Rolls-Royce's or lending. Took them back in the end. But so what I decided to do in this chapter was to compare these two cars, which sort of represented the way in which the use of precision in (34/57)
the automobile industry had diverged because the Rolls-Royce, the Silver Ghost, 1908 to 1927, was all made by hand. And so if a piece didn't fit, the man who was making it by hand would simply file it down until it did fit. Whereas Henry Ford, the car that I chose that was made from 1908 to 1927 was, of course, the Model T. And instead of there being 8,000, that was the number of Rolls-Royce's, 16 million Model T's were made on assembly lines. And if the pieces which were meant to be, and this harks back to the very beginning of our conversation, were meant to be interchangeable all exactly the same time, after time, after time, after time, if one piece wasn't, then it wouldn't fit in whatever, you know, the carburetor or the brake lining or the transmission or steering gear. And the production line would stop and investigators would fan out trying to find what was the offending part, replace it, all the workers would stand around smoking and being bored. It would cost a lot of money. (35/57)
And so precision turns out to have been much more important for the production, the mass production of inexpensive, popular motor cars than for the hand-making of ultra-luxurious cars like Rolls-Royce's. And the interesting thing is that during those years from 08 to 27, the price of a Rolls-Royce went up dramatically. But during those same years, the price of a Model T went down from $809 in 1908 to 217 in 1927. So everything that Ford wanted when Ford first came up with the idea of I want to make motor cars, his whole ethos, unlike Henry Royce, who said, I want to make the best car in the world. Henry Ford said, we live in a beautiful country. I want every American to be able to get on the road and see it. This is a car for the common person. Well, the common people required more precision than did the aristocracy and the rich. What was the name of the Frenchman who did the same thing for muskets? Yes, he was called Blanc. And he was an interesting story, really. I mean, this is in (36/57)
prescience and his intelligence. He realized this was something that should be told to the gun makers of America. And so he wrote a letter by hand, obviously, and had it transported across the Atlantic to the Secretary of War in Washington saying, we have two armories in America, one in Springfield in Massachusetts and one in Harpers Ferry in Virginia. Tell them that they must start making these components for our guns interchangeably. And so the War Department took a long time because of bureaucracy, but they got the message and they held a competition and they said, who wants to give us a demonstration of the making of flintlocked muskets interchangeable parts? And a man stuck up his hand and that was Eli Whitney. And Eli Whitney was famous because he invented the cotton gin, but it never patented it and so was relatively poor. He needed the money and so he knew if he successfully engineered this demonstration, he would get the contract to make 8,000 guns for the US Army, but he (39/57)
cheated. So he laid on a demonstration. It would be too boring to give you the details of what he did, but he essentially hoodwinked all the people that came to his demonstration. By the way, having read that, he sounds like a modern-day Silicon Valley entrepreneur, sort of pitching investors. Well, I mean, he's seen equivalent of Elizabeth Holmes at Theron House. Exactly. Yeah, exactly. That's a great point. And he hoodwinked them and they didn't know what they were seeing. Much as the people who sent for the nice Wall Street Journal reporter who read the book, they said, okay, Mr. Whitney, you've made a demonstration which certainly is convinced to all of us. So here's your contract for 8,000 guns. And he made them and they were five years late. None of them worked properly. And so to the engineering community, and this was a news to me, because I thought in common with nearly all American schoolchildren, that Eli Whitney was a great hero. He's not. He is a charlatan. He's a villain. (40/57)
mountaineering. And I would go every two or three weeks to a British council library in a place called Fort Portal about 30 miles away and get any books I could about climbing. One day I got a book called Coronation Everest by a man called James Morris. And I read it in one go by the campfire late that night and early into the morning. James Morris had been the London Times correspondent on the expedition to Mount Everest that got to the summit in 1953, 31st of May, 1953. And he had never climbed before in his life, but he got up to 26,000 feet. And using an elaborate system of codes, he got the news of the success of the expedition back to London to be published in his newspaper, The London Times, on the morning of the Queen's coronation. I mean, I remember that as a little boy, the Queen, who's still on the throne today. This was her big day. And to have as an additional piece of news the fact that a British expedition had got to the summit of the world's highest mountain just sort (42/57)
of added cream and jam to the wonderful cake the coronation was going to be. So I thought, my God, this is an amazing story of James's. I wasn't any good at traveling around the world with a hammer and bottle of sulphuric acid and a magnifying glass. But maybe all I had to do was to travel around the world with a pencil and a notebook. And that would be an agreeable way to spend a life. So I wrote to James Morris, who I'd never heard of. And I said, dear Mr. Morris, I've just read your book. I'm a 21 year old geologist living in East Africa. And my basic question is, can I be you? And he wrote back very kindly. And he said, if you're serious, then quite honest to being a writer, you'll never get very rich, but you'll have an extraordinarily valuable, worthwhile and amusing and fun life. So my advice to you is on the day you receive this letter, not next week, not next month, but the day you receive it, give up your job in Africa, come back to England, get a job on a small local (43/57)
newspaper and write to me again. Well, to cut a very long story short, I did indeed leave Africa. Got a job in the far north of England as a reporter on a daily newspaper. And he was amazed and said things like, never lose your sense of wonder, never bothered to learn short. He was amazed that you had done it. You had actually done it. Taken his advice. He was, you've done that, my God, you know. I feel sort of in Locco parentis now. So never lose your sense of wonder. Don't become cynical and jaded. Don't bother to learn shorthand. Everyone will tell you you must, but it's a waste of time. And then this was the kicker, really. Every month or so, send me the clippings of the stories you've written for your paper. And down to me, and he lived in a village in North Wales. And I will annotate them and send them back to you. And with any luck, turn you into a halfway decent writer. And he did that. He did for starting in 1967. And we wrote to each other once a month until 1974. Wow. When (44/57)
we met for the first time. And Watergate was finished. I had reported on Nixon leaving the White House. And I hadn't reported on Ford pardoning him. Because on that particular day, the 8th of September, 1974, I was covering evil, conneval, attempting to jump over the Snake River Canyon in Idaho. Big mistake. But anyway, then Washington went quiet. So I decided to take a holiday and I was still a climber. So I went to North Wales with an Australian or rather South African girlfriend of mine. And on the way up to North Wales, she said, doesn't your friend James Morris live here? It was everyone knew that James had created the monster that I turned into. And I said, yes. And she said, are you going to see him? And I said, I've never spoken to him. The relationship has entirely been by letter. She said, this is ridiculous. Were you nervous to meet him? I was. I was terrified. And Jackie, her name was Jackie Leishman, picked up that when we got to the little hotel we were staying in, picked (45/57)
up the phone and found his number and dialed his number and put the receiver to my ear. And he said, hello. And I said, hello. This is Simon Winchester. And this person said, well, this is James, my God. I mean, I read you every morning from Washington. You're, I created you. You're my protege. Are you calling from America? And I said, no, I'm calling from the Penny Gouraud Hotel down the road. And anyway, a long conversation. He said, you must come for tea tomorrow. So Jackie and I, the next morning, we went climbing and came down from the hills at about three and motored to this little village called Clanny Stumdwee, found this beautiful house, parked the car, walked across the gravel to the front door. And you could see the sort of the parquet flooring and the carpets and so forth in the living room. And we were filthy dirty. So I suggested we take our climbing boots off and I pressed the doorbell. And we were kneeling down on the front doorstep and the door opened and a woman (46/57)
appeared. And I said, oh, hello. I'm Simon Winchester. And this is Jackie Leishman. You must be a Mrs. Morris. And this person said, no, I'm James, actually. And there was this brief moment of disbelief. But then we stood up and this person said, I'll get my wife. And I thought, now this is spiraling out of control because James, you know, he'd climbed to 26,000 feet on Mount Everest, had been a captain in the British army and the Brigade of Guards, had fathered four children, had walked alone across the Hadramat in the southern part of Arabia. So whoever was going to come down the stairs, would I? Assume be a bearded person with a Yukon Jack shirt. Not at all. Down the stairs comes a middle-aged lady with a little girl in tow. And we all troop off into the drawing room to have tea with me, fairly obviously a man and Jackie, fairly obviously a young woman and Elizabeth Morris. Middle-aged lady and Suki, a little nine-year-old girl. And my hero, my mentor, twinsett and pearls, little (47/57)
hanky tucked up her sleeve, tweed skirt, legs decorously crossed, little court shoes and all the chesty accoutrements of rather substantial accoutrements, I might say, of womanhood. But, you know, being Britain, of course, nothing was said about this. We just drank our tea and talked about other things and then we left at about six. And Jackie said to me as we passed through the gates, what was all that about? I said, I have not the foggiest idea. And the next morning a note was pushed under my door at the hotel. Dear Simon, I'm sorry to have put you and your friend through a somewhat awkward social situation, but the fact of the matter is that I've decided to change sex and I'm going to Casablanca, which back in the 70s, that's when it was all done, chop and change surgery. And if everything's successful, I'm going to return to Britain with the name Jan Morris. And I hope you and I can be friends. Well, Jan and I, she's now 91. We've written a book together on British architecture in (48/57)
India. And we're, I suppose it'd be idle to say that we're bosom friends, but we're good friends. And she now lives with Elizabeth as they used to be sisters in law, but they were now allowed to remarry about 10 years ago. And for years afterwards, The Guardian, if it ever got an application from someone to be a reporter, they said it's very easy to become a reporter on The Guardian. All you need to do is to go to Oxford and get a bad geology degree and then make friends with the transaction. That's so funny. That's remarkable. And that must have been quite a shock. I mean, it was, sure, it was the 70s. It was on the heels on the tail of the counterculture, but still, you know, today, I wouldn't say it's common, but we're becoming more educated about this part of the national conversation. Yeah. Jan wrote a wonderful book called Conundrum about it published in 76, I think, still in print today. And I urge anyone that's curious about this to know because, you know, there's an awful lot (49/57)
of gender reassignment surgery going on these days, and it's become, I wouldn't say tedious, but it almost commonplace, whereas in 74, no one knew about it. And her book is a very tender treatment of the whole thing. I'm always amazed. Amaze isn't even the right word. It's, I don't know how someone finds the courage to do that. No, well, I've never had the urge, but I think, no, but I mean, Jan talks about sitting under the piano as a four-year-old saying, why am I dressed like a boy? I'm a girl. I want to be a girl. And so, although he went through all the accepted rituals of getting married and having children, and he didn't want to do any of those things, and had this incredibly sympathetic wife who is still the wife. Remarkable. That's also remarkable. What I hear about that, that's also. That is the most extraordinary thing. Elizabeth's story is, to me, the more compelling story. Really? To me, yes. Has she considered writing a book about it? I don't think so. She's a very (50/57)
different woman. She's wonderfully capable, clearly very, very tolerant. And I don't know, it's Macabre, to think who will go first. I mean, they're both in their nineties. Elizabeth is a little bit older. I mean, and I think gender reassignment places all sorts of stresses on the body. Imagine it would. So, how long the two of them will survive, I don't know. But Jan is still writing. She wrote a book about the battleship Yamato, Japanese super battleship, just last year. You all have a lot in common. Well, I think so, except I check myself in the shower each day. We don't have that much in common. Well, I have another question for you. When you read James's book, so you are a non-fiction writer, you've never written fiction, correct? I've written one book of fiction, but it's so... It was a mistake. Well, I was asked to write what was called a future history about writing it from the perspective of 2020, or what had happened after Hong Kong passed back to China in 1997. Oh, (51/57)
interesting. It was sort of quite an interesting thesis. There was a war between China and Japan, which could yet happen. It's not something... Which book was that? It was called A Pacific Nightmare, and it was published in, I think, 1993 or there. That was the sequel to the Pacific book. Well, oddly enough, I'd written a book about the Pacific in early 90s, then Pacific Nightmare, and then the new Pacific. So I'm all Pacific now. Pacific doubt. I'm curious though, so you read James's book, you read the story of a person who piggybacked off the expedition and wrote about it. What was it about that that you said, this is what I want to do? Well, it was Jan, I suppose. Yes, that's the name. I'll give her, because I think most of the advice subsequent to my getting to know her really well came when she was a woman. She said, you've got to write books, because writing for newspapers, yes, it's immediately satisfying, but you have to accept that what you write will be in a newspaper that (52/57)
London. The news of Krakatoa's eruption, an operator working for Reuters sent a message saying Krakatoa erupting, as it was happening as he was on the sender, many feared dead and then the line went dead and he was killed. But the message got to Jakarta. Then it went on the cable under the sea to Singapore, from Singapore to Colombo in Ceylon or Sri Lanka. Then up to Suez in the Red Sea, then across the Mediterranean to Gibraltar, then through into the Atlantic and up to Beirut, then up to Cornwall, then up to London. And that message saying Krakatoa erupted many dead was on the desk of the London Times four minutes later. And that meant that it was published with obviously embellishment once. Research had been done the next morning in the London Times and people were sitting in their horse-drawn carriages going to work, reading about places in the world that they'd never heard of, Java, Sumatra, Krakatoa, things that had happened just hours before with the same easy familiarity that (54/57)
they might have been talking about, Bayswater or Mayfair or Liverpool. And so I believe, well I am absolutely certain of it, that it was the first major news event in the world that was known about all over the world within minutes of it occurring. That period in the last quarter of the 1800s of the 19th century and then towards the beginning of the 20th century, there was such a reorganization. I mean, I know it from American history of American life and dealing with the railroads and then the telegraph and the telephone, it was a remarkable time. I mean, that's what you're sort of capturing there. Oh, and that's sort of what I was saying in the men who united the states. Exactly, that's what I was thinking about when you were saying that. The way that the country suddenly developed quite extraordinary and of course this is another period when things are changing, the paradigm is shifting. I'd read this book by, I can't remember the name of the author, but I read this book called The (55/57)
Land of Desire. I don't know if you're familiar with it, but it's a history, it was written in 1992. It's a history of consumer capitalism from the late 19th century to the early 20th. And I remember this one particular scene when he tied abstract art, the rise of abstract art, to not specifically people riding in railcars, but the experience of riding in a rail car and seeing the landscape move so quickly by was an abstract experience of the land. And that just that stuck out to me when you were talking. Mr. Winchester, I really appreciate you coming onto the program. Thank you so much. It's a great pleasure. I just enjoyed it enormously. Thank you. Thank you very much. And that was my episode with Simon Winchester. I want to thank Mr. Winchester for being on my program. 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, take a moment to (56/57)
review us on Apple Podcasts. Each review helps more people find the show and join our amazing community. Today's episode was produced by me and edited by Stylianos de Colau. 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 hiddenforces.io. As always, thanks for listening. We'll see you next week. (57/57)
their respective roles as alternatives to fossil fuels in the coming decades. And with that, please enjoy this timely and informative conversation with my guest, Stephen Kunan. Dr. Stephen Kunan, welcome to Hidden Forces. Happy to be here. Happy to be talking. Thank you. My pleasure to have you on. So can you give me and my listeners a sense of your background, how you became interested in this field of climate science, and what roles you've held in both the private and public sector? Yeah. So let's see a brief bio. I grew up in New York City, was educated in New York City public schools, particularly Stuyvesant High School, which is a special high school for science and math. That was about 50 years ago and had a wonderful education there. Went off to Caltech for undergraduate work, bachelor's in physics. I went to California because it was the late 60s and it was the thing to do. Ph.D. at MIT in theoretical physics, then back to Caltech as a professor, starting in 1975 for just about (5/57)
30 years. The last nine of those years I was the provost at Caltech as well, with responsible for the research and education programs across the Institute. In 2005, I went to become the chief scientist for the oil company BP. It was a big transition, but taught me about the private sector. I knew energy would be important and I went there to help them figure out what beyond petroleum really meant. I did that for five years based in London and then returned to the US when my friend Steve Chu became secretary of energy. He asked me to come help out and I became the under secretary for science in the Department of Energy during the First Obama Administration. After two and a half years, which is about the average time in government, I left the government and came to NYU to start a center about big data for big cities. I did that for six years and now I'm just a professor at NYU teaching energy and climate science at the graduate level. There was a famous physicist, Leo Zalard, who was (6/57)
What's up, everybody? My name is Dometrick Afinas, and you're listening to Hidden Forces, a podcast that helps investors, entrepreneurs, and everyday citizens get an edge by equipping themselves with the knowledge needed to anticipate the challenges and opportunities of tomorrow. By sharing my critical thinking approach and by challenging consensus narratives about the power structures shaping our world, I help you make the connections to see the bigger picture, empowering you to make smarter decisions. On this week's episode, I speak with Stephen Kuhnen, director of NYU's Center for Urban Science and Progress, who also served as undersecretary of science at the U.S. Department of Energy under Barack Obama and as chief scientist at BP, where he was a strong advocate for research into renewable energies and alternative fuel sources. The subject of climate change, or more specifically the science of climate change, has become like almost everything else in our society a matter of (1/57)
political identity. A recent Pew Research study found that Democrats are more than three times as likely as Republicans to say that dealing with climate change should be a top priority. And yet, if you ask people, independent of party affiliation, for their views on climate change and why they believe what they believe, most of them will struggle to give you a coherent answer. Very few people, and this goes for politicians, journalists, and even academics, have actually read the reports put out by organizations like the IPCC and others responsible for doing the actual research that we all cite when we talk about, quote, the science. And I am as guilty on this as anyone. After all, why would I want to spend a minute of my time learning about exactly why we are so screwed? Or how exactly we've destroyed the planet and, quote, broken the climate? I've read all the headlines. Climate catastrophe, climate disaster, the earth is burning. But how true is that exactly? Are we really facing a (2/57)
climate apocalypse? Is climate science really, quote, more reliable than physics? Something that journalist David Wallace-Well said in a recent appearance on the Joe Rogan podcast? Not according to my guest, but more importantly, as he would say, not according to the science, which, to borrow from the book's title, is very much unsettled. Now, before you react to that very provocative headline, no one is saying that climate change is a hoax or that anthropogenic warming isn't real. The purpose of this conversation is not to surreptitiously undermine the consensus view nor to troll those who believe strongly in it. Rather, it is simply meant to inform and educate me, and those of you like me who either haven't read the reports or are simply skeptical about just how bad the situation is and what's required from us in order to solve it. For the record, this is a subject that concerns me deeply, but the doom and gloom narrative surrounding it, I think, is actually counterproductive to (3/57)
helping us actually address the problem. This is a very complicated subject, and we spend the next two hours between the first half and the overtime, working our way through the data, what it says and what the models predict about not only future warming, but also the incidence of droughts, forest fires, hurricanes, rising sea levels, climate-induced migration, and pandemics driven by a warming planet. In the subscriber overtime, we focus most of our attention on the incentives that account for these widely divergent narratives on climate, the importance of morals and values in thinking about how we structure climate policy, and the missing components of costs and trade-offs that we need to think about when coming to decisions on how best to adapt our societies and ourselves to the changing climate. We also discuss geoengineering, including carbon extraction and the use of aerosols to dampen the sun's rays, as well as alternative sources of energy like wind, solar, and nuclear, and (4/57)
most famous in the early 20th century for having written the letter that Einstein sent to Roosevelt to start the Manhattan Project. Zalard was quite a character. He had his own 10 commandments and one of them is you should reinvent yourself for 36 years. I've sort of taken that to heart over the last couple of decades of my life. I totally feel that. What was your role as under secretary of science in the Obama Administration? What were you tasked with? I was fortunate not to have to deal with the nitty gritty of budgets and such. I was at one level a strategist for the department. I wrote the first technology plan for the government in energy technologies. What technology should the government be investigating? How should it think about its investments and so on? In another way, I was the scientific conscience for the department. Many people say I was Steve Chew, Steve Chew. Steve is certainly a fine scientist, but he needed somebody to push back against him sometimes scientifically. (7/57)
That was another one of my roles. If I look at where I'm coming from, I'm a physicist. I love understanding how the world works and I've applied that to many different areas of science. I'm an educator. My greatest joy is seeing faces light up when I teach somebody something and been doing that in the classroom now again for a couple years after hiatus of about 20 years. Maybe most importantly for the present discussion, I've got experience as an advisor on science and technology to decision makers. In previous decades, I've weighed in on the human genome project for the government, on various weapons systems, on radiological terrorism. I testified to Joe Biden in the early 2000s on dirty bombs when he was running the Foreign Relations Committee. I've had a long involvement in the stewardship of the nuclear weapons stockpile that this country has. Then in the private sector, I was again advising the chief executive of BP. I still advise numerous energy companies. All of those come (8/57)
together now in the particular take on climate science that I'm trying to educate the public about. Tell me a little bit more about that. How does that all come together? What led you to both become interested in this field and then ultimately to write a book with such a subtle, I'll admit, but nonetheless controversial title, given the view among many scientists and members of the media that the science is quote, settled when it comes to anthropogenic climate change? Yeah. Of course, I've been interested in the subject for a long time. I even started an observational program in the early 90s to try to measure one aspect of the climate. For the time I was in BP and then in the government, the focus was on the technologies that we might be able to develop and deploy in order to forestall the worst of climate change. I really had not dug deeply into the science. Starting in late 2013, 2014, I was asked by the American Physical Society, which is the professional society representing (9/57)
50,000 physicists both in the US and worldwide, to have a look at the statement that they had put out on climate change. They had put one out in I think 2007 and 2008. It was rather controversial at the time because it said the evidence was intolerable. We've got to act now, et cetera, et cetera. Incontrovertible really gets a physicist's attention because it means we understand this absolutely. Many people at the time, although I was not one because I was busy with other things, took issue with that. They in fact had to reissue an explanatory text for the statement in about 2009. Anyway, 2013 comes along and I get asked to chair a committee to reissue, update the statement. I decided rather than simply endorse what you have cited as the consensus, we were after all physicists and we were going to dig deeply into the issue. I convened a workshop in January of 2014, three consensus scientists, many of them IPCC authors, and three people who took issue with that consensus. Then a number (10/57)
of others of us who were on the committee to consider the statement. We talked for a day. We had presentations and discussion. There's a transcript up on the web that one can find. I came away from that meeting really shaken, unsettled to use the book's title, if you're like, that the science was nowhere near as solid as what had been portrayed in the media or certainly what the politicians were talking about. I wrote a op-ed for the Walt Street Journal in September of 2014 in which I laid out some of the concerns and issues I had understood. A lot of response over 2000 online comments to that article in the journal. Many of them supportive, but some saying, of course, you idiot, you don't understand, et cetera, et cetera. I started paying close attention, not only to the science, but the way it was being portrayed in the media and the politicians, their discussion of it. The way I like to summarize the statement is, I'd like to adapt a line from the movie, The Princess Bride. And one (11/57)
of the characters keeps using the word inconceivable. And at some point in Ego Montoya, who is the principal character in the movie, says, you keep using that word. I do not think it means what you think it means. And I think the adaptation to the current situation is, I don't think the science says what you think it says. Everybody quotes the science. The president, President Biden, who is a fine leader, he keeps saying, it's a policy of my administration to listen to the science. And then you've got John Kerry, who said, there's no doubt in anybody's mind that the science is absolutely certain. And so you have various people like Bernie Sanders, Mark Carney, the former head of the Bank of England, Bill Gates, my good friend, Ernie Moniz, who was secretary of energy in the second Obama administration. They're all talking words, existential threat, climate crisis, climate emergency, climate disaster. And in fact, when you actually read the literature and the reports, there is no (12/57)
support for that kind of hysteria at all. And so I think people really want to understand, should be understanding, what does the science really say? And that's why I've written the book to highlight some of the things that are in the popular perception that just ain't so. So what does the science say? And perhaps just as importantly, what do we mean when we say or when we talk about the science? I think in the popular discussion, the science is what is presented in the assessment reports. So these are reports that are issued periodically by the United Nations Intergovernmental Panel on Climate Change and the US government every four years in the National Climate Assessment. And these reports are meant to survey, summarize, and make concise or understandable for non-experts exactly what we know and what we don't know about the science. And the problem is that there is a long game of telephone that goes on, which starts with the peer-reviewed literature, the reports of the basic (13/57)
research written by scientists for scientists peer-reviewed. There is then the process of putting the assessment reports together, which can go on for a couple years typically, involve hundreds if not thousands of people contributing. They are a narrative, if you like, that are meant to convey things to non-experts. Then there are the summaries for policy makers of the assessment reports, which further distill the understanding down. And then finally you get to the media, which translated for the general public. And very few people actually read the assessment reports. And so there's ample opportunity for mischief along that chain of refining and filtering to spin things one way or the other. And in fact, if you look at certainly the media and the summaries for policy makers, there are a lot of things they don't tell you, or there are things that they misrepresent when you actually go read the assessment reports or even the underlying literature. And so that's what people mean by the (14/57)
science. And my guess is that I don't know for sure, but certainly Bernie Sanders, John Kerry, maybe even Bill Gates, I don't know, have not actually read the reports, let alone the underlying literature. So that's actually a good segue because I wanted to spend some time getting really clear on what it is that we do know. And also to clearly differentiate between what the reports themselves say, in other words, what the data says, and the assumptions that are baked into that data and the wide variety of projections, because there are so many different types of projections based on different types of models. And these models diverge dramatically in some cases. I think people would be surprised to learn just how much they diverge. So I'd love to get into that. Okay, but let's try to separate the conversation into what we've observed about the climate over the last century, century and a half, and even further back through proxies, the models themselves, and then the projections going (15/57)
forward. So let me tell you some things that are in the report that might come as a surprise to many people who've only gotten their information from the media. And these are direct quotes from the most recent UN report. We have low confidence regarding the sign of the trend in magnitude or frequency of floods on a global scale. We have low confidence in any global scale trend in droughts or dryness since the middle of the 20th century. We have low confidence in trends in small-scale severe weather phenomena like hail or thunderstorms. And we have low confidence in large-scale changes in the intensity of mid-gladitude storms since 1900. And then you dig a little bit deeper into some of the other phenomena. US heat waves are now no more common than they were at the beginning of the 20th century. And the warmest temperatures in the US have not gone up in the past 50 years. Global wildfires have declined more than 25% since 2003, and the last year 2020 was one of the least active years in (16/57)
the wildfire record. There's no detectable human impact on hurricanes over the past century. And the one that is in many ways a bottom line is that the net economic impact of warming of three degrees, which is twice the Paris goal, if it happened would be minimal. And all of these statements are not Steve talking, but they are in fact exactly what's in the assessment reports or the recent quality peer-reviewed literature. So the statement that we've already broken the climate is just not supported by the data. So maybe it would be best if we tried to separate some things out here by order of importance. Let's focus on temperature for a moment, because I think that's the metric that's most top of mind for most people and most directly related to warming. What have we seen in terms of rising temperatures on the planet over not just the course of the last 100 or 200 years, but going as far back as we have records? And what do we know about the effects that that warming had on the planet? (17/57)
Right. So first of all, when we talk about temperature, the temperature is different everywhere and every time. And so we generally talk about a global average temperature. And we talk about the anomaly in that average temperature, namely how much does it differ from expectations? And what we've seen since about 1900 or 1880, the time when we started to have good global records of temperature, of course they get better as the decades go on from 1880, is that the global average temperature of the earth has risen by about a degree centigrade, which is 1.8 degrees Fahrenheit for US listeners. But that rise has not been steady. You know, it rose pretty rapidly from 1910 to 1940, actually went down from 1940 to 1970, 1975, and then started going up again. But in the last decade or so has been relatively flat. I mean, still increasing, but relatively flat. So we've seen a warming not steady of about a degree over the last century, last 120 years. For that, if you go back to the 1600s, we had (18/57)
what was called the little ice age. And while there's some controversy about whether that was a global phenomenon still or not, I think most people, almost everybody, and certainly the assessment reports say it was about half a degree to a degree cooler than it was at the beginning of this century. I'm sorry, the beginning of the 20th century. And then if you go back even further, there are periods in the past over the last many thousand years since the end of the ice age where it was, in fact, we think as warm as it is today. So variations in the temperature are not at all unusual. What is really the issue for us is whether the recent warming that we've seen over the last century, to what extent is that driven by human activities? Or is it part of the natural variation of the system? You can go back further. There are the glaciers, the ice ages, popularly. If you go back to the last time, we were not in a glaciation, the so-called Emean period, about 125,000 years ago. The temperature (19/57)
was two degrees warmer, we think, and sea level was up to six meters higher, 20 feet higher than it is today. So variations in the climate are not at all unusual. The real question, as I said, is to what extent are the recent changes influenced by humans? Let's look at just 1940 to 1970, where temperatures actually dropped, because I think that raises some interesting questions, because clearly the world was already industrialized. We weren't generating as many hydrocarbons and releasing molecules into the atmosphere at the rate that we have been after, let's say, 1980. But certainly it wasn't an insignificant contribution. How do scientists explain that? They don't. If you look at the official assessment reports, not Steve talking, they will say it's some combination of natural variability, and we should talk a little more about natural variability in a moment, human influences and bad data. And that's why we have no explanation of that. So my own sense is that there is demonstrable (20/57)
long-term variability in the system. We see cycles over 60 years, 70 years, and unless you understand those cycles, they can pollute or contaminate your understanding of what's going on. Is that another way of saying that there is a lot of noise on the channel and that we're trying to focus in on this one signal of human contribution to climate change, and we're trying to draw a direct causal connection between the warming that we've been observing over the last 40 to 50 years in particular and human activity? And then on top of that, there seems to be a strong view that if we can get our act together, so to speak, as a global community and make significant changes to how we operate at scale, that we can effectively reverse the warming that's expected. Do I have that right? I mean, how did that view come about? So I think the first thing we need to understand is that humans exert both a warming and a cooling influence on the planet. The warming influence we exert is through the (21/57)
greenhouse gases largely that we put into the atmosphere, most of that CO2 from the use of fossil fuels. We exert a cooling influence by the aerosols, the particles that we put into the lower atmosphere by burning dirty coal, for example, putting sulfur up into the atmosphere. And those two play against one another. And the net human influence is the difference between the two about comparable to the CO2 influence net. The other thing to understand is that those human influences are physically small. They are about 1% of the natural energy flows in the system. So we've got this big system and we are tickling it a little bit. We're tickling it in a constant way. We're always adding net warming influence. But nevertheless, it's very small at the level of 1%. The third thing to understand is that there's a lot of noise in the channel, natural variability on all scales from year to year, from decade to decade, from century to century. And then finally, you have to understand that we have (22/57)
good observations with a precision comparable to what we need to understand the response to human influences. We only have that for about 120 or 130 years. And even then, it's not great. The oceans are one of the most important parts of the climate system. And of course, they're very difficult to observe. And we don't have really good ocean data, except for the last 20 or 30 years. On ocean temperatures, is that what you mean? Temperature, salinity, currents, those are the things that are important in the ocean. And so the consensus does as good a job as they think they can. And they would say that at least half of the warming since 1950 is due to human influences. But could it be, as I look at it, could it be a third or a quarter? Yeah, it could be. Well, when you say it could be, here's where I want to pull out. Because what often times occurs in these conversations is because the consensus view is so strong, when they hear someone say could be, what they're really hearing is this (23/57)
person's just throwing shade. They're just basically saying, oh yeah, it could be, anything could be. I could be made of silicone. But when you say could be, what are we talking about here in terms of likelihoods? Yeah, so of course, all of these statements are probability statements. And there's no firm number. We can at best give a range, saying there is a 10 to 90% chance that the number is in this interval. Those things have shifted around a lot as we understand more, as the models get better and as our understanding improves. So could we see warming as much as four degrees? Yes, but we could also see warming as good as one and a half degrees. And uncertainty is an intrinsic, perhaps the central part of science. The general public doesn't understand that, then the politicians want certainty. So there is this kind of clash of cultures between the probabilistic thinking of scientists and the need for certainty that people naturally have. Well, so a couple of thoughts. I think this is (24/57)
a good opportunity to get into the modeling. But I also want to say that I think part of the reason why these conversations become so emotional for people and seem so morally clear cut is because we're presented with projections of what we think will happen if we don't act, expressed as near-certainties, while at the same time the costs of action are either deemed to be incalculable or they're ignored entirely. And I absolutely agree that our discomfort with uncertainty is a big driver here. And it is, I would argue, impairing our decision-making, regardless of what the proper course of action is, exactly because we're assigning incomplete values to the things that we're discussing. So to that point, I'd like to focus in on the uncertainty and have you explain to me and to my audience how the earth warms, how that process works, because it's a complex process that begins with the sun. It also involves the molecular constituency of greenhouse gases in the atmosphere, as well as the (25/57)
earth's reflectivity. And then let's get into how the models are developed. So let's talk a little bit of science about the temperature of the earth. And the temperature of the earth at the surface is set by a balance between the warming influence of the sunlight that gets absorbed by the earth and the heat radiated by the earth. After all, if it's absorbing the sunlight, it's got to get rid of the energy somehow, and it does that by radiating heat. On the sunlight side, the warming influence, about 30% of the sunlight is reflected by the earth, by the land, the oceans, importantly the clouds and the snow and ice toward the polar regions. And the balance of that sunlight, 70%, is absorbed by the planet and what goes to drive the weather systems, the currents in the ocean and so on. In order to balance that warming, the cooling influence is the heat radiated by the earth. And the basic physics of that heat radiation, namely infrared radiation, was well understood. It was established by (26/57)
some physicists, Stefan and Boltzmann in the 19th century, and it's understood that as the temperature of the earth goes up, it radiates more. And so it is a natural thermostat, if you like, that sets the temperature of the planet. If there's more sunlight absorbed, then the temperature will go up, there will be more heat absorbed. And if you go through that balance quantitatively, as you do in any simple climate class, you discover that the average temperature of the earth is 255 Kelvin. If I could translate that into ordinary human temperature scales, it's about minus 20 degrees centigrade. And that's much colder than what we observe. It's actually about 15 degrees centigrade positive that we see in the earth. That's what the temperature would be if there were no atmosphere. Atmosphere, that's correct. And what is keeping the temperature at its observed value of about 15 degrees centigrade is in fact the so-called greenhouse effect. And that is some molecules in the atmosphere, (27/57)
particularly water, but also CO2 and some other less common molecules, intercept the heat that's radiated from the ground and slow its progress out to space and therefore make the planet warmer than it would be. Just like the insulation provided by a jacket or a blanket which impedes the flow of your body heat and hence keeps you warm. And what humans are doing is adding carbon dioxide and other gases to the atmosphere that are increasing the effectiveness of this insulation and so slowing the progress of heat back out into space and therefore warming the surface of the planet. We should realize that the warming is not uniform over the globe. It's warming much more rapidly in the polar regions, in particularly the North Pole or the Arctic. It's also warming more rapidly on the land than it is over the oceans. And as we mentioned, the average warming has not been steady at all but has gone up and gone down a bit over the last century, century and a half. So what accounts for the more (28/57)
rapid warming at the poles and on land versus the ocean? Do we understand that? The land has a smaller heat capacity. It responds more rapidly to warming influences. The oceans take a longer time to warm. And in the poles, we're seeing a lot of it is what's called the isalbedo feedback where in fact that as the ice becomes less common, the reflectivity goes down and so the poles warm a bit more rapidly than the equator. Because the ice sheet reflects more sun and as the ice sheet dissipates, the oceans begin to take in much of that warming. So let's get into the modeling now, how the modeling is actually done because this was actually for me one of the more fascinating parts of the book. I had no clue how to any significant extent how climate models are actually developed, what they look like and most importantly, the extent of the subgrid assumptions that are made. So what goes into that? The popular perception is, heck, it's just physics, right? We understand physics very well and so (29/57)
we should be able to do a wonderful job of modeling. In fact, it's not at all like that. It is an enormous challenge to model the climate on the scales that are useful for understanding how it responds to human influences. The way in which it's done is to cut the earth, both the atmosphere and the oceans, into small bits, voxels, volume elements like pixels, but three dimensions. And there are hundreds of millions of these that you need to cover the earth. You then use the basic laws of physics to move the energy, the atmosphere, the momentum, the matter through these voxels, time step by time step, as small as 10 minutes sometimes, and watch the climate evolve under solar heating, greenhouse gases, infrared radiation, and so on. And we build these physical processes in. There are, however, a number of practical problems that make it very difficult to do this in a useful way. Because computer power is not infinite, we have a significant computer power these days, but nowhere near (30/57)
enough to do the job, right? You can't make the boxes too small, otherwise you get too many of them for the computer to handle. Remember, we've got to step these through 10 minutes at a time over centuries. So that's an enormous, let's say a billion time steps or something. So the computational impact of that is exponential? It's enormous. And the runs of the modern models take months to run on the fastest supercomputers. So we can't make the boxes too small, otherwise we get too many of them and we can't compute. But there are many processes in the climate system that happen on distances smaller than the typical 60 miles of a box. Clouds are the most important one. And clouds are a couple of miles across. I'm looking out my window here in the Hudson Valley at the moment, and they're probably, I don't know, half a mile, quarter mile across, and of course they're varied across the sky. And because you can't describe those explicitly in the computer, you have to make assumptions about (31/57)
what the clouds are doing in the boxes. And depending upon the kind of assumptions you make, you'll get different answers. So that's one of the major sources of uncertainty. Let's just talk about that example. What are those assumptions based on? And in the case of clouds, how significant and important are clouds in contributing to warming or cooling? Yeah. So the clouds can warm or cool. In general, high clouds warm because they're a little more effective in trapping heat than the atmosphere around them. Low clouds in generally cool because they reflect more of the sunlight and don't have so much influence on the heat interception. The assumptions that need to go in, so you've got this box, actually you've got a whole stack of boxes up in the atmosphere over a particular part of the ocean or the land. The box is 60 miles on a side, but in general is very thin. The boxes need to be thin in order to describe the atmosphere, which is really a thin layer on top of the planet. So I've got (32/57)
these basically layers in which I've got to make assumptions. How many clouds are there? Given the temperature and humidity in the box and other things in the surrounding boxes, how many clouds are there? And what are their properties? How much height do they let through? And people try to make those assumptions based upon basic physical understanding, observations. We have some spots on the globe where we try in detail to observe the clouds and laboratory experiments of how clouds are formed. So basically sample size the clouds in one region and extrapolate out and generalize patterns that you can use in your assumptions for other boxes. If there's this temperature and this humidity, how many clouds do I have of what type and so on? And there's a lot of variability in those assumptions. And a lot of the art of model building has got to do with how you make those subgrid scale assumptions. So the clouds are really important in the models and the experts say that the clouds and in (33/57)
particular the way clouds interact with aerosols, the particles that we're putting up in the atmosphere, are the biggest uncertainty in the models. How much uncertainty are we talking about here? Well, one common measure of the models is how much will the temperature go up if we doubled carbon dioxide? And the previous estimates ranged anywhere from one and a half degrees to four and a half degrees. And the most recent generation of models, which will inform the next UN assessment report to be issued in July, are even more uncertain than that. Some of them say the temperature would go up as much as six degrees and others say the temperature would go only up by one and a half degrees if we were to double carbon dioxide from the pre-industrial. So on the face of it, that doesn't make sense, right? I mean, most people are going to hear that and they're going to say, how can more advanced models give us a wider range of outcomes? Right. Well, we are trying to understand the response of the (34/57)
system to a less than 1% influence, it's chaotic, it's multi-scale, and we have incomplete observations. So it's not surprising that the science is unsettled. How much of this is also because we're talking about a complex dynamic system that exhibits feedback? So when you push on one part of the system, when you affect the value of one variable, that then can lead to a series of positive reinforcements that exacerbate that initial movement causing indirect effects. Right. Indeed, the feedbacks are really important. They are thought to amplify the direct warming effect of greenhouse gases by a factor of two or three. However, they're not something that we can measure or compute from first principles. We have to see them emerge from the models, of course we have some guidance from observations, but that's one of the trickiest things that the models have to get right. So are methane bombs an example of that? The phenomenon of melting permafrost leading to the decomposition of organic (35/57)
material, releasing methane into the atmosphere leading to further warming? Right. So methane is a very potent greenhouse gas. Most of what's emitted is actually from agriculture rather than from fossil fuels, but nevertheless, it's very important. There is a lot of methane tied up in the permafrost and under the ocean, and people are concerned that if the temperature gets warmer, it will start to be released from the permafrost. I can't say we've got much definitive evidence of that right now. It's one of the things that some people think are working out there. When you say there isn't much definitive evidence, what is the uncertainty around that exactly? Because it seems pretty straightforward. I don't know the precise numbers, but I don't not believe that we've seen a great deal of methane outgassing from the Arctic regions, which is where you would expect it to show up. So we have instrumental readings on that data? Of course, people are trying to measure the methane coming out of (36/57)
the tundra. Okay, so let's get back to the modeling here a second, because I think this is also a good opportunity for us to differentiate between weather and climate. When we talk about or when you talk about the chaos that exists in these simulations, this is something that we have firsthand experience with as daily consumers of weather forecasts. As the days pass, it becomes incrementally difficult to forecast the weather with any degree of accuracy. How much of this is similar to how we make projections about the Earth's climate? Yeah, it's quite different, although many people use the same computer codes to describe climate as they do weather. Let me tell you why they're different. Weather is largely what we call an initial value problem. If you know the state of the atmosphere now, you can pretty well use the basic laws of physics. If your computer model has got a fine enough description to do a reasonable job of predicting a couple days out. And our ability to predict or (37/57)
forecast to be more technically correct has gotten better over the last 50 or 60 years, largely due to finer and more sophisticated computer models, but also better knowledge of the weather today in order to let us forecast what's going to happen tomorrow. Even still, the ability, the accuracy of our forecasts, the skill pretty well gives out after about 10 days or 12 days or so. And that's because the weather system is chaotic. Small changes in what we think the atmosphere is today can lead to large changes in our forecast 10 days out, 12 days out. And this is the famous butterfly effect or chaos that was discovered by Lorenz at Lorenz at MIT in the early 60s. Is that part of what we mean or what scientists mean when they talk about tuning the models? Does that relate to starting conditions? No, that's a different discussion. And we can talk about tuning in a bit. But let me continue on weather and then discuss its difference with climate. The other difference in weather is that the (38/57)
dynamics of the ocean, the changes in the ocean, don't matter at all for the next 10 days or 12 days. The ocean doesn't change. The temperatures, the ocean are fixed during that time are essentially fixed. And so we don't have to worry about the dynamics of the ocean in forecasting weather. Climate is completely different. Its time scales are decades to centuries over which it changes. In fact, the official definition of climate is a 30 year average. And so on those time scales, we very much need to know about how the ocean is changing. And also on those time scales, the detailed initial conditions hardly matter because they get washed out or forgotten after 10 days or two weeks. And so it's a very different kind of problem. And people who say, well, we can predict weather and therefore we should be able to understand climate, they just don't know what they're talking about. So are you saying that setting initial conditions is a much bigger challenge when thinking about climate? And if (39/57)
that's true, how much of that is because climate is happening on a much bigger scale? I mean, am I thinking about that correctly? Yeah. The analogy I like to use, which is almost a physical analogy for the weather, is a boiling pot of water. If you try to describe the bubbles in detail, which is like the weather, it's very difficult to do that. And of course, it changes rapidly and it's chaotic and so on. On the other hand, if you want to talk about how the average level of the water will decline as the water evaporates, we can predict that with fair confidence. In other words, the macro observations are easier to predict than the micro observations. Yes, except that the macro phenomena we're looking at are small changes that happen over decades. And we also want to understand how those changes impact the micro phenomena, things like hurricanes, tornadoes, droughts. So that actually leads me to another question. I don't want to do rail list because I want to make sure that you can (40/57)
continue explaining what else you want to say. But one of the other areas where there are clearly a lot of assumptions baked in here is how changes in temperature will impact ecosystems. And in turn, there's an additional set of assumptions, which is how changes in ecosystems will impact human beings. And that's when we get to questions about climate, refugees, migrations, wars, et cetera. Right. Would you like to continue on the models? Sure. Let's continue on the models and we can pick up on that later. So having set up your models and the grid and the basic laws of physics and made some decisions about the subgrid scale parametrizations, you're still faced with two other problems. One is, how do I initialize the model? After all, we don't know the detailed state of the atmosphere or the oceans a thousand years ago. And so what people do is to start up the models sometime very far in the past with no human influences at all and run them for some number of centuries until they come (41/57)
into balance. That the ocean currents on a large scale look right. You get a jet stream, the temperature, the planets about right and so on. And then you say, okay, I'll take this arbitrary point in time as the starting point. Let me now start applying human influences. Let's say over the last 250 years as we have observed them and watch how the climate changes. And of course, there is some arbitrariness and importance as to exactly when you choose that starting point. And so what people do is take many different starting points and just average the results together. And of course, the results can differ wildly depending upon how you start them. The last thing that needs to be done is to tune the model. The subgrid parametrizations all have parameters in them. How much does the albedo or the forest change when there's snow on it, for example, or exactly how much water vapor is transported upward in convection in the warm equator from the sea surface, things of that sort. And we don't (42/57)
know those numbers. They're adjustable. We can make reasonable guesses, but the precision that we need to understand the climate system with mandates that we fiddle with those numbers in order to get things to look about right. And so there's a good deal of tuning that goes on. In some cases, the parameters need to be set very differently than what we thought they would be. In other cases, the models are tuned to kind of give the results that people expect. And so it is a pretty subtle business that is necessary, but not often discussed. So here's a question I have, because early on in our discussion, you said that the models, the last generation models gave us a range of roughly one and a half to 4.5 degrees of warming. And I assume the 21st century, is that right? No, no, that's what's called the equilibrium, namely if you took the unperturbed planet and you double the carbon dioxide, how much would the new temperature be? That's not the warming during the last century. No, no, not (43/57)
the last century, projecting forward. These are projections about what would happen over the course of 100 years if you doubled the warming or this would just be immediately warming. That's correct. Well, they actually do it several different ways, but one way is to just suddenly double the CO2 and ask how much the temperature went up. So in both of those cases, the lower bound is close to or roughly at the maximum threshold that a broad part of the scientific community engaged in this subject have identified as sort of critical. Maybe that number is two degrees of warming. I've seen the UN, I think it is that put it out, nor that maybe it was under the Paris Climate Accords, 1.5 to 2 degrees. Yeah, the Paris Accords started out at, they started out at two degrees and more recently they've set a goal of keeping the warming due to human influences down to one degree, one and a half degrees. So now if we were to agree that one and a half to two degrees, anything above that would be (44/57)
catastrophic, then it seems in some ways much more reasonable to look at these models and say, well, there's a lot of uncertainty, but the uncertainty is on the upside. It's not on the downside. And so the question is how much do we know about what the effect of two or three degrees of warming or four degrees of warming on the planet would be? And how in line are people's understandings of what the effects would be versus what the data and the models actually say they would be? Yeah, that's a really tricky question because you start compounding our uncertainties in future emissions and concentrations, so future human influences, then that gets fed into what the future climate is going to be and events associated with the climate. And then that compounds into how the ecosystems are going to respond and then finally how human society is going to respond. And it's extraordinarily murky from what I read. One of the few quantitative predictions is in the models, is the net economic impact (45/57)
of warming both on the US and globally, and even for warming two or three times the Paris goal. When you say two or three times, do you mean four to six degrees of warming? Yes, correct. Or let's say up to, well, one and a half times three is four and a half, let's say five degrees of warming. The net economic impact is six or 7% of GDP in 2090 or roughly 100 years from now. Annual every year or in just one year, total absolute impact. In other words, the economy would be 6% less in 2090 than it would have been otherwise. Where is that data coming from? Where are those projections coming from? Well, that's not data, that's projections. And it's the kind of best guess that the economists can make on what the influence of temperature is going to be. Is this in the actual climate reports? Absolutely, absolutely, both in the US report and in the UN reports. And in the book I give reference, I actually show the figures. So now let's say 6%, that sounds like a lot, right? If the US economy (46/57)
is $80 trillion a year, which it would be in 2090 if it grows at 2%, a year, that sounds like a lot. But it is only three years worth of growth in 2090. Namely, our growth in the economy in the US, for example, would be delayed by only two or three years for warming that's much greater than what the Paris Accord aspires to limit us to. Now, you can disbelieve the economists, all right? On the other hand, that's what the science currently says. What about ecosystem decline? How much of that is climate related? Like, what is our degree of certainty around that and how it'll be impacted by rising temperatures? Do we have some idea? Yeah, I have not studied the ecosystem parts of the UN or US government reports in great detail. My impression is the science is on the standards of physical science certainly is pretty murky. And again, you have a lot of trouble disentangling natural variability from effects caused by rising temperatures, which may or may not be caused largely by human (47/57)
influences. So very tough, I think, for me to give an informed opinion about that. So I want to ask you one more question before we move it to the overtime professor, because in the book, among some of those projections that we discussed like economic costs, you also discussed the effect on agricultural yields and food supply. This is a huge concern for people. And one of the reasons why we have projections around climate refugees and migration, for example, there's a very popular book on this subject whose author was on Joe Rogan a couple of years ago. I heard the episode recently and he cited a number of a billion climate refugees by the end of the century. A lot of that has to do with the expectations that warming will lead to significant crop failures, lower yields, and starvation for hundreds of millions or over a billion people. So what do we know about the impact that rising temperature and climate change, based on projections that have been made, what effect that would have on (48/57)
yields of crops and our capacity to carry the population of the earth by providing enough food to feed them? Yeah. So of course, it's a murky business like many of these impact things are. Nevertheless, the UN in its so-called working group II, or its special report on climate change and the land, certainly discusses what has been and what might be in the future. Again, let's start with what has been first, if you look since 1960, the yields and the production of food has just gone through the roof. And the yields, for example, of corn in the US, corn globally, rice, wheat, they've all gone up strongly due largely to technology, to agricultural practices, and to breeding of the crops. Now, what the report says is that if the temperature hadn't gone up, well, the yields would have gone down by a few percent rather than having gone up by 100 percent, they would have gone up by, let's say, 93 percent or something. As a scientist, I would say, how do you know that? That's a counter (49/57)
factual, as we say in the business, and it's extraordinarily difficult to opine with that with any degree of credibility. You've got to know how things would have happened if the climate hadn't changed, for example, how would agricultural practices have changed and so on. But the bottom line for me in that is that the projected impacts or the predicted impacts were small. Now, we can talk about going out in the future, and they don't say much. It's very hard to find quantitative statements. One of the few quantitative statements that they do say is that we could see an increase in food prices by 2050 under moderate scenarios, an average of 7 percent increase in the price, but anywhere between 1 and 23 percent in grain prices. To me, that's a ridiculous- From their current levels, inflation adjusted? Well, they don't say probably what they would have been otherwise. But to me, that's a ridiculous statement because the price depends on the balance of supply and demand, which are two big (50/57)
numbers, and the difference is what determined the price. But even if you believe the 23 percent impact, when you look historically at how grain prices have fluctuated over the last century, it's by much more than 23 percent. So I think, like many things associated with climate impacts, small and in the noise is what one can conclude from that. Again, not Steve talking. This is what's in the reports and in the book, of course, I give the references and the graphs and so on. Something I actually forgot to ask you, and I want to ask you before we move into the overtime, deals with back testing. How effective are these models across the board? How good are they at predicting warming in the past, exposed using historical data? So, hindcasting, as it's called in the business, is to take the state of the climate in some point in the past and then run it forward under what we think are the human influences and see whether we match the observations that we've had from that point in the past up (51/57)
to the current. And for the global temperature record, on average, it produces about the amount of warming that we have seen, although there's some amount of tuning that goes into that in order to get that result. But the detailed behavior over, let's say, several decade periods is quite wrong. It misses the strong warming at the beginning of the 20th century. It doesn't do a great job on the slight cooling. And of course, it does pretty well over the last 30 or 40 years, in part, because as some of the experts will admit, there's some amount of tuning that goes on in order to get that. When you start to look beyond the global temperature at things on a regional scale, for example, rain in California, temperature extremes, they get pretty bad. And I would say the uncertainties are large enough to be effectively useless in trying to understand how we're going to respond in the future. But you would say that they're pretty effective in predicting future warming? Global temperature. Well, (52/57)
we talked about the uncertainties in the future warming, just because you've gotten the last 40 years right doesn't mean you're going to get the next 100 years right. And one of the big uncertainties is this balance between sensitivity to greenhouse gas warming and aerosol cooling. And the other big uncertainty is an inability to reproduce these multi-decade natural oscillations of the climate system. So I'm going to move the second half of our conversation into the overtime, Professor. I want to delve deeper into some of these extreme weather phenomena, because I think there are a lot of interesting cases in the book. We haven't had a chance to discuss sea levels. I know that's a really big one for people. We touched on hurricanes early on, and we touched on forest fires. I think droughts are also relevant. I don't know to what degree we already discussed those. I also want to explore the incentives that might account for some of the diverging narratives that exist. Who are the (53/57)
stakeholders? Why has this view become such a prevalent view? And I think that also relates to morals and values and how we think about costs, because there are costs to making this a global priority if we can manage to do that. There are also questions about whether that's even possible, and what are the most effective ways to allocate our time, because I think that's very important. I think a lot of times when this is discussed, people don't take that into account, and I think that that's unrealistic. I also want to ask you about geoengineering, because I assume some of that relates to your work when you were at BP. You probably learned a lot about where the technology was at that time, and I assume you've stayed abreast. You discussed solar radiation management in the book. I want to ask you about that. That has to do a lot with, I suppose you would call it reflectivity of the Earth's atmosphere, the albedo of the Earth, and carbon dioxide removal, which is something carbon (54/57)
captures, so to speak, that people are pretty familiar with. I want to delve into those, because I really want to get specific on what the costs are, how realistic these technologies are. There are reports recently that Bill Gates is an investor in one particular company out of Boston, where they're focused on actually trying to increase the Earth's albedo. So I'm curious to know what you think the costs would be to actually implement something like that, how realistic, and then what the risks are. Of course, we're going to be discussing alternative sources of energy, including the viability of nuclear, because I want to know what your thoughts are on that, and if we can really reach any of these ambitious emission targets without building more nuclear power plants. 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 (55/57)
second part of my conversation with Stephen, as well as to the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io to check out our episode library, or subscribe directly through our Patreon page at patreon.com.com slash hiddenforces. 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. Stephen, stick around. We're going to move the second half of our conversation into the subscriber overtime. That's great. Not going anywhere. 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 (56/57)
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 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. (57/57)
thing. Within that though, the phone mattered less. Nobody loved their phone the way people love their phones now. Nobody would buy a new phone every other year. That would never happen. The phone was an appliance. It was like a television or a dishwasher or a radio. It was just kind of in your house. Now the phone has a totally different meaning. It's sort of like if you ask somebody, what would you rather lose, your wallet or your phone? Everybody would say, I would rather lose my wallet because at least I can cancel the stuff with my phone. Your phone is the most important thing that's on your body. It seems now that life of course was slower in the 90s and that it was more like that what I recognize now is that you were able to sort of be an autonomous being in a way that's become difficult. You didn't need to express your opinion about anything that happened. People didn't care if you never did. In fact, it was kind of seen as somewhat obnoxious if you were constantly telling (41/57)
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 Chuck Klosterman, a best-selling American author and essayist whose work focuses on American popular culture. His most recent book about the decade of the 1990s was an instant New York Times bestseller, and reading it conjured up in me a wellspring of beautiful memories about a time that I've often described as feeling like it was almost a dream. What it is about the 1990s that makes it feel this way is something that Chuck and I explore in this conversation. It was, after all, the last truly analog decade. There was no YouTube, no social media. Most people didn't even own a cell phone, and the internet was still a place that you had to go to, which often meant dialing up from a (1/57)
landline at home or going to an internet cafe. The feeling of the era writes Chuck Klosterman, and what that feeling supposedly signified isolates the 90s from both its distant past and its immediate future. It was a period of ambivalence defined by an overwhelming assumption that life, and in particular American life, was underwhelming. That was the thinking at the time. It's not the thinking now. Now the 90s seems like a period when the world was starting to go crazy, but not so crazy that it was unmanageable or irreparable. It was the end of the 20th century, but also the end of an age when we control technology more than technology controlled us. It was, as Chuck Klosterman writes, a good time that happened long ago, although not nearly as long ago as it seems. This conversation fits into a series of episodes that we've published over the years on television history and culture, technology and the human experience, and the transformation in our perceptions of the world and what it (2/57)
means to be a human being. You can find these and other related podcasts on this week's episode page at hiddenforces.io, where you can also access the second part of today's conversation by joining one of our three content tiers. This gives you access to our premium feed, which you can use to listen to the second part of today's conversation 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 absolutely wonderful episode with my guest, Chuck Closterman. Chuck Closterman, welcome to Hidden Forces. It's (3/57)
my pleasure to be on the Hidden Forces. Am I now a Hidden Force? Does this make me a Hidden Force? I don't even... Were you ever hidden? Maybe when you were up in Fargo, you were a Hidden Force. Well... It's been uncovered and discovered and you're a very acclaimed author. So that's actually my first question for you, Chuck, before we get into the book itself. I'm curious, when you meet people who haven't... Not just haven't met you before, but don't even know who you are. They might have read your work, but didn't know it was you. How do you describe who you are and what you do? So you're saying if I meet someone who doesn't know who I am or if I meet someone who doesn't... You're like you're invited to a dinner by your wife or something and no one knows who you are or you're like at a cocktail party and no one knows who you are and you get that question. So what do you do, Chuck? Oh, I would just say, well, I'm a writer. I was a newspaper journalist for about eight or 10 years and (4/57)
then I worked in magazines for a while and then I write books. And the follow-up question to that is, well, what do you write about? I would say, well, the only book you might have heard about came out about 20 years ago. It had a title called Sex, Drugs and Cocoa Puffs. People remember that title. If you know who I am, it's probably because of that, but don't read that book. So the reason that you're here today is that you've written your latest book, which is titled The 90s. People can guess what it's about. It's a wonderful book. I so enjoyed reading it. I was a child of the 90s. I was born in 1981, so I was 10 years old in 1991, which begins your formal decade. People get into that and how you chose it. And I graduated college as a teenager. High school as a teenager. So I came of age in a sense in the 1990s. And therefore, my experience of the decade was somewhat different than the experience of, say, someone like you, who was, I guess, how old were you when the decade started? (5/57)
Yeah, I graduated high school in 1990. So I was 18 in 1990. And then the decade ends. I was living in Akron, Ohio in my late 20s. So really, the 90s do encapsulate the first stage of my adulthood. So you were kind of the age of Ben Stiller and Ethan Hawke's characters in reality bites, right out of college in the middle of the decade. I went to reality bites the last semester I was at college. The movie was about kids finishing college and going into life. That's the exact status me and my friends were at. It was like it was in the spring. I very clearly remember the group of us who went to that. Yeah. So what was the hardest thing about writing this book? Well, the hardest thing, I guess, was not so much the process. Well, I mean, OK, the first thing was I had never written a book like this, right? I had done some books that are about the 90s. I guess, you know, eating the dinosaur was kind of about 90s type stuff. The Coco Puffs book was. But those were all my personal experience of (6/57)
that period. Like everything I wrote about all the media, all the culture I wrote about were essentially connected to my experience with those things, like almost explaining what my life was like through these things that I was into. This book had, you know, more detach. There was more detachment to it. This book also sort of, I mean, comprehensive is the wrong word to use because you can't be comprehensive about a time period like that. It's just impossible. But the fact of the matter is the other 11 books I've done, you could say they're good, you could say they're bad. The one thing you would have to say is like, I'm the only person who could have written them. Like they're very personal or specific to me. But there have been books like the 90s before, you know, there's a book called The 60s. There are books about the 70s. David Helvisch Dam famously wrote The 50s, you know, the book I was doing sort of already has a template to what the expectation is. So I guess for me, that was (7/57)
the hardest part, where in the past, my gauge of how successful a book was was simply how much it matched my kind of interior idea of what it should be. Like if the book in my mind and the book that came into existence were somewhat similar, I was satisfied. But this one was a little different in that way, in that my perception of it really isn't enough. Like if you're trying to write contemporary history in a way that will accurately sort of reflect the actual experience of living through that period, you can't only use yourself as a guide. So I mean, that was hard in a sense. It was hard to sort of realize that the success or failure of this book is less connected to me than the other ones I have done. I guess I also knew that it was probably going to be read by people who typically don't read my books. I mean, this is the kind of book where someone's walking through an airport or looking on Amazon or, you know, and they see a book about a time period and they're like, oh, the 90s, I (8/57)
lived through that. Or I came just after that or whatever the case may be. They have no interest in sort of me as the person doing it. They're interested just in the subject matter. So I kind of realized this has to be done in a way that extends sort of beyond who I typically think reads my books to a different kind of person. So that was actually going to be one of my next questions, which is how do you differentiate between your subjective experience of a time period and this fuzzy collective sense or objective sense of what it was? How did you go about trying to apprehend that? Well, you know, it's an interesting thing in that. So I was a journalist in the 90s, a straight newspaper journalist. And at that time, the goal was objectivity. And over time, that concept has sort of been, the common was pejorative, that there is now sort of this sense that no one can be objective. It's impossible. It's an impossible goal. So you should actually be as subjective as possible. You should kind (9/57)
of steer into that subjectivity. But that's to me the wrong way of looking at objectivity. Like the goal of objectivity is not to be perfect. It's to come as close to that as possible by sort of thinking of your biases, recognizing them and sort of implementing that into the way you investigate or explain a situation. So when you're working from a subjective point of view, you are the arbiter, you are the judge, you are the jury, you are the executioner, you're all of it. OK, if something feels true to you, like there are things, I wrote a book called Frogger Rock City about listening to like hair metal bands growing up in the Midwest. And if I had a feeling about Cinderella or I had a feeling about Judas Priest, that was enough. What I'm trying to translate is that feeling. When you're working in a more objective paradigm, you're not trying to translate a feeling. You're hoping that a feeling emerges from the fact that you are looking at this thing from a degree of attachment and (10/57)
detachment and separation. And how do you do that? Well, you just try to stay constantly aware of what you think personally about a situation and recognize that that understanding or that perception is in your consciousness and that you can't let that thing that's there, this idea that's there kind of preexisting way you feel about it. Emotively, you have to try to keep that from coloring what you end up writing. That's not a great explanation. I realize it doesn't feel that unnatural to me, though, because that was just kind of so ingrained in me when I was a young reporter. That was that was just that was everything, you know, and that I wanted to move into book writing to get away from that. But now all these years later, I find myself gravitating back toward it. It's interesting because when I was preparing for this conversation, I didn't just rely on your book and reading the book, but I also went back and watched some of the clips that you referenced, watched a couple of movies, (11/57)
listened to a lot of music and tried to immerse myself in the cultural milieu of the decade. And that made me wonder about how do we separate the feeling of what it was like to live through a time versus how we remember that time later on as we've retrieved the memory, worked it over, integrated it with other people's memories and fiction that references the decade and makes it mean something that it didn't necessarily mean for the people who lived in it. So how do you differentiate between those two things and which one were you trying to capture? Well, I mean, that's an excellent question because what you're really talking about is the problem of nostalgia. OK, so someone looks at a book called The Nineties. They see a picture of this old phone on the cover. Their natural inclination is to see this as probably an exercise in nostalgia and that maybe that they will enjoy the book or maybe be repelled by the book because they assume it's probably going to traffic and nostalgic ideas (12/57)
and and sort of the whole concept basically of reliving the life that you once lived. But honestly, this book isn't nostalgic at all. And I say that because I, at least to me, have a very specific definition of what nostalgia is. Nostalgia is not just remembering something that happened to you. Nostalgia is looking back on an event that you experienced and injecting sort of this emotional memory of the person you were at the time and then thinking about the event differently because of that. This is why someone can look back at a really terrible period of their life with a sense of nostalgia because they can look back on it with this understanding that the event made them who they are and sort of built the way they think about the world and that they were a person who experienced that that they kind of miss. And then they remember the event itself. I mean, you just my dad would talk about the Great Depression with a sense of nostalgia. And he's always, of course, was talking about how (13/57)
terrible it was. But what he was really talking about was his memory of being like a six year old and a seven year old kid and the things that he did in this time that sort of just gone forever. You know, that's what nostalgia is. Nostalgia is changing the meaning of the thing. And I would say my principal goal with this book was not to do that to the 90s. There is a real desire now with contemporary history to look at it through this subjective lens and kind of take the way we think about the world now and push it back through the expanse of time. So the way we would understand any issue about society or film or, you know, identity, any of these things. Now, the desire is to look at the past and kind of jam those ideas into it and then re experience the time as if like almost we're inventing what 1994 was like or what 1997 was really like. My hope was to reflect the way it felt at the time to live through this period. This is why I didn't do a bunch of new interviews for this book. If (14/57)
you talk to somebody about, you know, what the 1996 election was like and you talk to some political analysts now, they will take their understanding of the world now and say, well, OK, I see these fragments of this in the 96 election and that there's certain things about Bill Clinton and Bob Dole and all this that we that we kind of understand now because we see how the world is unspooled. What I wanted to do was talk about something like the 1996 election. The way it felt at the time and the way to do that is to go back through what was written and said about these things as they were happening. For instance, like when I read about Y2K, I don't know how many people listening this are familiar with this, but when we were moving from the year 1999 to the year 2000, there was sort of a widespread panic that computer chips were going to all fail because they were designed to understand time through two digits. So it was like 79, 80, 81, 82, up through 99. And then we went to the year (15/57)
It would be double zero. And the belief was that computers would think the year was 1900. And then they would just immediately, I guess, realize they had not yet been invented. I don't know. The idea was that there was this potential tragedy that was going to happen on January 1st of the year 2000. Of course, that didn't happen. So now we look back on that as sort of one of two ways, which is either a proof that there was never a risk and that this was all imagined or there's a subset of people who are like, actually, that is sort of science at its best. We actually stopped this disaster from happening. All the things we did to combat Y2K during the year of 1999 actually succeeded. But these are retroactive beliefs. What was interesting to me was to go back and see what people were saying at the time. What were people saying in October 1999 about Y2K? Now, you mentioned earlier how how do you sort of, you know, kind of separate the feeling of these things from what happened? In a (16/57)
sense, you can't. But what I was hoping to do is that by kind of sticking to what seemed like straightforward information from the time that the texture that once existed could be sort of recreated, that it wasn't a new kind of understanding of the 90s, but an accurate one. Yeah. So many thoughts about that. One, obviously, I'm reminded. I mean, the quintessential movie that captures our obsession and concern over Y2K was Office Space, where literally the guy's job was to recompute the numbers or transfer the dates to new spreadsheets so that the world wouldn't come to an end. And what's interesting also about that movie is there was this kind of sense of like real boredom. And so I'm curious, looking back on it, what do you feel were the actual feelings that pervaded the time? What did people feel during the 1990s? If we could talk about something like that in the aggregate, what was the feeling of the time? Well, I mean, Office Space is an interesting example, because you say there (17/57)
was this this sense of kind of tedium of boredom, of being sort of trapped by your job. OK. The Cold War had ended, history had ended, everything just kind of felt safe, cocooned. Is that just us looking back on it now? Or was that actually something that we felt? Maybe not realizing it, but we did. At the time, there was a sense in the culture that life was somewhat underwhelming. That the 1990s, if you're using like the broadest possible strokes, are kind of categorized by this idea that people were potentially optimistic about their own life, but generally pessimistic about society. There was a sense there was an interest in the 1970s. And part of that is because there's just always an interest in every generation about a generation that happened just before they were born. So you always kind of go in the 70s, people were interested in the 50s. In the 80s, people were interested in the 60s. In the 90s, people were interested in the 70s. So in some ways, it was the natural (18/57)
progression. But I think part of it had to do with the sense that during the 80s, there was a shift. And the organic nature of culture was no longer a legitimate force, that now every decision was pre-made or manufactured or very consciously created. So you were looking back at the 70s almost with this idea, not that it was a pure time or that it was like an easier time or any of these things or more political or less political time. It was just that, well, it seems like if there was a blockbuster movie like Jaws or Star Wars or whatever, that happened naturally. It was legitimate interest from people and that they made these things happen. Whereas in the 80s, we got used to the idea that, well, we make blockbusters every summer. People assume that there's going to be a movie that's designed for them to see 14 times if it works. There was a kind of a belief that we were now kind of in America on autopilot, that the Cold War had ended so we were the only superpower and things were just (19/57)
going to kind of continue to be in sort of this kind of static. I don't know how to describe it. Like now it's tough, of course, is the idea that like, well, are these things that we are now saying retroactively or do we actually feel at the time? Not everybody did, but I mean, it seemed pretty symptomatic of living through that period. That it was an easier time to be alive because the stakes were lower, but we didn't recognize that in the moment. It was a very luxurious decade. You know, there was a feeling in which I always point to the movie, Smack in the Middle of the Decade, Independence Day, where basically all the battles that Earth had to wage had been waged in one. And now we had to look outside the Earth to find an adventure. And so I think we took my senses, reflecting on this also in preparation for this conversation. I do feel like looking back, we didn't really realize how incredibly privileged we were living through that time and maybe living through such a comfortable, (20/57)
luxurious time also created not just a sense of complacency, but a kind of boredom that made it not necessarily worth living. Because I feel like there was also that sense of it too. Before we go any further, there's something I want to do, which is to actually delineate what we're talking about here. Like, what is the 90s? And you start the book by saying that the quote, 90s began on January 1st of 1990, except for the fact that, of course, they didn't. What delineates a decade? How do you decide what the start point and the end point, the bookends of a decade are, so to speak? This seems like a strange answer, but in a way, a decade is built around sort of framed by the period where our cliche and caricature of that time begins and when that cliche and kind of caricature ends. And what I mean by that is, say you're going to a 1960s themed costume party. Everyone knows, hey, we're dressing like people from the 60s. No one's going to dress like it's 1962. That's not going to happen. (21/57)
People are going to dress like it is like they're a beetle or they're hippie or these things that really start around 1964 moving forward. You know, there is a sense about the 90s that like that, at least the sense I'm projecting in this book, I guess, is that when we think of that time period, but we're really thinking about as kind of a way of life and a way of being that comes after the release of Nirvana is never mind. I mean, like a lot of historians will say that the 90s really began with the fall of the Berlin Wall. That makes a lot of sense to say like, okay, so the Berlin Wall falls in 1989 and then 9 11 happens in 2001. And this is really the framework we use to understand the 90s. The fact of the matter is 1990 was still very much like the 1980s. When you look at like that, you know, Cheers was the biggest show. Joe Montana was still the best quarterback in the NFL. You know, like, you know, like Twin Peaks had come up that out that year, but Twin Peaks seemed like a real (22/57)
kind of fringe thing. You know, like Warrent was touring with Trickster and, you know, all these bands like the New Kids on the Block had a major tour. A lot of these things that we think about as kind of like 80s ideas, they were still happening in 1990. But starting with the release of Nevermind, there was a real shift in what the way it was perceived to understand a young person. Then in order to understand the modern young person, you almost had to understand it through Kurt Cobain and through the idea of these kind of the aesthetics and the values being propagated by this movement in music. You know, Nirvana was the most important band in the 90s, but not for musical reasons necessarily. I mean, their music was important, but more so had to do with non-musical reasons. This idea that the most important thing about Nirvana was that they perceived their success as humiliating, that they were embarrassed to be the biggest band in the world, and that they were constantly seemingly (23/57)
trying to undercut that despite essentially staying in the same cultural spot. You know, and that to me is when the 90s really start, when that attitude becomes normative. So explain that. And before you do actually, let me see if I can find a quote where you actually say something like this. Right. So you say, in the 90s, doing nothing on purpose was a valid option, and a specific brand of cool became more important than almost anything else. The key to that coolness was disinterest in conventional success. The 90s were not an age for the aspirant. The worst thing you could be was a sellout, and not because selling out involved money. Selling out meant you needed to be popular, and any explicit desire for approval was enough to prove you were terrible. So where did that come from? This idea that trying too hard or wanting to be somebody was so bad. A lot of it comes from, I guess, the sort of splitting of the culture into a clear underground and mainstream to these two sort of (24/57)
adversarial channels that happened during the 70s and the 80s. You mean that dichotomy emerged in the 70s? Well, yeah. I mean, say you look at in 1967, who was the most critically accepted band? It was the Beatles. Who was the biggest band? It was the Beatles. OK, those things could exist simultaneously. This begins to widen as we move into the 70s and even more so in the 80s, where there's an idea that there's things for the mainstream audience, which became to mean an unserious casual consumer. Somebody who basically just accepted what was given to them through marketing or through media. And then sort of this uncompromising underground culture. For people who have taste? Well, people who have taste or people who more often just disliked what they saw as a mainstream idea. That they, you know, these things split, right? And then you get these weird situations where a band like Nirvana is like the Beatles again very briefly. They're the most beloved band by critics and they're the (25/57)
biggest band. And that kind of causes a sort of a paralysis of self identity. Like the anxiety Nirvana seemed to feel from the position they occupied in the culture was very palpable. And that then sort of like, you know, became kind of endemic with with anybody who wanted to be interested in culture. This idea that when you looked at, say, the previous decade where there was a real desire for hugeness, where like the idea of being commercially big in any idiom of art. The idea of being big almost like the ends just for the means or whatever. It's like if you're you're massively successful, the meaning of what you're doing almost becomes secondary to the proof that you are succeeding. And the 90s had a discomfort with that, that a lot of people saw that as really kind of cheap. And that's the whole idea of like selling out. The idea of selling out has existed for a very long time. I mean, you know, people would say Bob Dylan sold out by going electric, you know, the whoever record (26/57)
called the who sell out. And this was way back, like, you know, 30 years before this were, but it was at its apex in the 90s. And I do think that in a lot of ways it was psychologically damaging to, you know, people who sort of experienced it. This idea that if you wanted to do something, there was kind of an emptiness in having what you do succeed because it illustrated a kind of desperation on the part of the creator. That it was less artistic to sort of look at what you were doing as a commodity of any sort. So you always had to fight against that, even though you also understood it was ridiculous. It made no sense to make something and have no one experience it, you know. So that was the huge sort of like just crazy thing about the idea of selling out, which is that everyone understood it to be ludicrous. And yet you still had to play within those rules. Like you had to accept something and try to almost perform this thing that you consciously understood to be crazy. So I'm curious (27/57)
to understand, I don't want to dwell on it too much because there's so many other things that I really do want to talk about. But did that stem from the fact that 90s culture was predominantly and this actually gets us into a secondary question, which is also very important and elicited some confusion for me. During the course of reading the book around generations because I'm technically a millennial and you had these two different generations that kind of remembered this period that were old enough to remember it and live it and be culturally influenced by it, which is the Gen X and the millennials. Is the reason that this allergic reaction to mainstream success in the sense that somehow if my artwork is assimilated and becomes mainstream, that it's something happens to it, that it's no longer what it was. Is that in part because the mainstream culture, at least to begin the decade, was Gen Xers and Gen Xers were a smaller cohort and they felt sort of bullied by the larger cultural (28/57)
forces of their previous generation of the baby boomers? Huh. I wouldn't say that. I can understand that argument being made. But I don't know if that was really the case. I mean, this is always the things you got. This is why a book like this is complicated to do. First of all, we have the idea of what a Gen Xer is and what a Gen Xer wants and what are the values of Generation X and all of these things. But of course, with any generation, be it millennial, baby boomer, whatever the fuck you use is your generational example, a small sliver of that generation actually adopts all the characteristics they're supposedly supposed to hold. I mentioned how we look at someone like Courtney Love as a real 90s figure. Shania Twain in the 90s sold 14 times as many records as Courtney Love. My so-called life is almost like a defining Gen X show, like Angela Chase and like Jared Leto's character in that, you know, in Brandt Crackauer and all this. These are almost like these Gen X teens from (29/57)
Central Casting in a way. When that show came out, it was on ABC on Thursday night and I watched every episode. I was really into that show from the very first episode, but the show that its rival that was new on NBC was Friends. Okay. I think it's pretty clear that my so-called life lasted one year and has still some kind of, you know, cultural residue. But Friends became one of the biggest sitcoms that ever existed. Okay. Now Friends is a weird example of something from the 90s in the sense that these are young people in their 20s trying to find, you know, their way in the world. It seems like that should be very indicative of the Gen X mindset and it should be a Gen X show, but it's not. That show kind of exists out of time. The characters on Friends don't look like Ethan Hawke and reality bites. They don't have those kind of conversations. They almost exist as though, you know, we could be living through any period of time. The problems we're dealing with, the relationships we're (30/57)
having could have happened in the 60s, 70s, 80s, 90s or beyond. And as a consequence, Friends was much more popular and is still popular today in a way that my so-called life can't be. Yes. So first of all, whenever we're talking about like, like just these these ideas of like what, how a Gen X person thinks or whatever, we're just talking about the kind of person who actually cared about those things. You know, it's actually kind of a small, you know, everybody had some elements of it, but few people had them all. So when you're talking about like, is this idea of selling out does ever do with the 90s or does it have to do specifically with this Gen X mindset? I see what you're saying, but like throughout the 90s the Gen X person was the center of youth culture. And that's what we're always talking about with generations. We're always talking about the youngest adults. You know, it's always, it's very interesting, you know, we think about like what people were like in the 80s, you (31/57)
know, like, you know, we think about, oh, you know, there's all this cocaine and people just wanted to get rich and MTV sort of became the way we understood everything. We're not really talking about 75 year old people in the 80s though. Like when we talk about people of the 80s, we're talking about young people of the 80s. When we talk about the 90s, we're talking about young people of the 90s. You're saying like, you're a millennial, right? I think it's hard for people to accept that millennials are now in their 40s. It doesn't seem like that should be how it is. Millennials are supposed to be 20 year olds. Yeah, who don't want to, you know, upset at work or whatever, you know, but that's hard for people to get around these cliches. I mean, and that's the trouble. Like there are a lot of people who say like generations are stupid. These ideas that all people share characteristic, it's not that different than astrology, you know, like it makes no sense that everyone born in March (32/57)
would have the same personality or whatever. They're like, it's the same way with Generation X. Just to apply these characteristics to the entire populace is like, you know, idiotic. And I understand that. I actually don't think it's idiotic. I think it's idiotic to deny it. I look at people that are my exact age and we share so many cultural reference points. I mean, we're able to just flow in memory and remember things and things that spread like wildfire throughout our generation, throughout our age group from school to school. No one had met anyone else, but we all had some of the same reference point jokes, the same things made sense. I mean, there's a real intelligence that travels there in the culture. No, it's an interesting deal. I think like the movie The Big Chill from the 1980s, which is a movie about the 60s, is interesting in this regard because that's a movie about people later in life realizing that these shared ideas that they had in the 1960s are kind of falling apart (33/57)
and dissolving underneath their feet. And it's sort of the recognition that like some of the things that we all believed in that we sort of remember as being important and integral to society were very flawed and sort of false and all of these things. You're probably having the same experience with people your age now. It's like a lot of the things that you might see as connecting fluid, you would not have identified as such at the time. You know that at the time it just seemed like, well, I like this and my friends like this, but it doesn't have a lot of meaning. But when you get older and you start seeing that everybody seemed to have some understanding of this, and it's so hard in life to find these unilateral points of understanding that when you do find something, almost amplifies its significance. Some people who read this book have said like, in fact, strangely high number. I said, like, why don't you talk about pogs? I don't remember what those were. There were this thing in (34/57)
the 90s that people were into. It was like a little game. It was sort of like, I think it predates magic, the gathering, although I don't know. It was something that I remember. I remember them happening, but I no way thought of it as a significant thing. But to some people it was, more people than I would have guessed. Yeah. Another thing that strikes me is when we talk about this kind of a version to success and concepts of selling out, I'm struck by the comparison to the 80s where success really was kind of the celebrated thing. A lot of these 80s movies, whether it was Michael J. Fox, The Secret of My Success, it was a lot of characters kind of made it, made a lot of money. Money was a big deal in the context of those films. And it kind of makes sense also when you combine it with the Reagan Revolution and the end of the 1970s and the reduction of taxes and deregulation. So like, the political elements are really interesting. I want to quote you one more time here because there's (35/57)
something that you said that kind of reminded me of this. So this is a quote also from the introduction, actually, I think both the quotes that I pulled from the introduction. You write, for much of the decade, Seinfeld was the most popular, most transformative live action show on television. It altered the language and shifted the comedic sensibilities and almost every random episode was witnessed by more people than the 2019 finale of Game of Thrones. Yet, if you missed an episode of Seinfeld, you simply missed it. You had to wait until it was reared the following summer when you could try to manually record it on VHS videotape. If you missed it again, the only option was to go to a public archive in Los Angeles or Manhattan and request a special viewing on 8mm videotape. But of course, this limitation was not something people worried about because caring that much about any TV show was not a normal thing to do. And even if you did, you would pretend you didn't because this was the (36/57)
90s. I love that paragraph. I'm not sure what it was that you said that made me think of it. It may have been this idea of like, what was a normal thing to do? Because now we're so used to having these kind of like, you want to talk about multiple tiers? I mean, there are niche groups of people that are obsessed with one particular thing. And with the internet and YouTube and the reduction in the cost of storage space on hard drives, you have the ability to access all sorts of content from all sorts of periods. And, you know, if you want to watch all the Seinfeld, you can do it. It's not a problem. And it's easy to forget that the 90s was the last time. And this is something that I I'd like to reflect on with you, where it really feels like the last analog decade, the last period where being human felt a certain way, where life felt grounded, and where our sense, and this is where I really wanted to take it, our sense of time and space felt the way it had. I mean, look, there's no (37/57)
doubt that technology alters this. There are wonderful accounts of the invent of the locomotive and people's, the transformation of time and space, the ability to go from one place to another. But something about the digital revolution, the introduction of mobile computing and hyperconnectivity and always on technology that collapsed time and space, outward time and space in the world, and also dissolved the barrier between our internal world and this external world that has collapsed into a singularity. And in fact, it's the inviolability of the internal world in the 1990s that sat with me the most in preparation for this conversation, thinking about the phone. I didn't actually have a phone in my room, but, you know, we had a phone in the house. And if someone was going to call me, and I was expecting the phone call, I was going to stand by the phone and be physically there. If I was going to go on the internet, I was going to physically go on the internet, you know? And so there was (38/57)
this, I bring that up, I guess, there's no clear question. I do this sometimes, I try and avoid doing it. But I'm, I'd like to kind of talk about that, how the feeling of living in a time where you still, you were kind of grounded in the physical world and not in this kind of world that we've moved in today. Okay, that's very interesting. I guess I have a lot to say on this. I'll try to be brief and not get off on too far a tangent. But okay, first of all, the feeling you're discussing is a retroactive feeling that you did not have in the 90s. And I can kind of prove why that was. You look at a book like Generation X, the subtitle of that book is Tales from an Accelerated Culture. The idea of the acceleration of culture was an omnipresent concept presented through the media throughout the 1990s. There was this idea that culture was accelerating too fast for us to fully sort of control, that we were losing control of these things as they were happening, or that we already had. Now what (39/57)
they're talking about are things like the proliferation of cable television. That was seen as almost like too much media, right? We have 24 hours of channels now. We have 24 hour sports. How could this be? The phone is a massive thing. I think from a day-to-day experience, nothing has changed more about being alive from the 90s to now than the phone, even in some ways more than the internet. Because the phone was anchored you to a place that if you wanted to be able to communicate with people who were not in front of you, you had to be in your house. Long-distance calling used to cost money, right? People would complain over how much long distance calls cost. Maybe they thought it was too high, but nobody thought it should be free. Nobody was like calling should be limitless. People would go to college and they'd break up because they went to different colleges and they couldn't afford to make long-distance calls. Things like that, the centrality of the phone to our lives was a huge (40/57)
people, broadcasting your ideas about the world. I always think it's funny when people who love Twitter, they'll say it's like, well, it's sort of like a huge party for all the world. It's like the town square. Can you imagine a party where somebody stands on the table and just spouts political ideas for four straight hours? They would not get invited to a lot of parties. Twitter is not like a party. It is not like any kind of actual human interaction because humans don't do that when they've actually got to be people. I think that as we look back, when people say they miss the 90s, what they're really saying is they miss the thing you described. This idea that just the experience of being a person, of being a singular person or whatever separate from technology was still possible. But this is what's always tricky when it was actually happening in, say, 1995, which is a real key year for the internet because of Amazon starts, Craiglist starts, a lot of things begin in 1995. Nobody in (42/57)
1995 felt as though life was placid and slow. It only seemed to be accelerating. We then hit a point where things changed so radically that moving back in time almost seems going back to 1992 now, I think almost feels like to people like going back to 1952 because everything would be different. 1900. I feel like it's 100 years ago. It feels like to me, when I look back at that period of time, I actually feel like it was a dream. It feels like it didn't happen. It feels like the memories have populated, but it can't possibly be. This is the most interesting thing about being, I mean, you're, I guess, on the cusp of this, but of being like a generation X person or a baby boomer or I guess a older millennial, is that we are going to be the only people in the history of humankind who understand both experiences of pre and post internet that we just by chance happen to live through this period of this transformation. There's been other people like this. I mean, people who remember pre and (43/57)
post television, that also had to be just a crazy thing that in the past, before television existed, the idea of seeing a non-live sporting event or a a political convention or what any event happening anywhere, which is it wasn't even something you missed. It was just an impossible thing to have. You know, then all of a sudden, it was possible. It's the same way with this. I mean, there's all these things now that the internet allows that we didn't really even, it wasn't even like something that was fantasized about before that. It was like no one ever thought of this, you know, no one ever thought that like, if somebody was say like the internet was the coming internet was described to someone in 1988, you went back to 1988 and you say, the internet's coming. This is what it's going to be. I think it's unlikely that the first thing they would think like, boy, that's really going to change pornography. You know, they are like, it's really going to alter our ability to gamble on sports (44/57)
or whether all these things that have happened that they weren't like things that we were waiting to see, you're waiting to sort of, they just changed and all of a sudden, they became completely normal. Yeah. I mean, I totally agree. I'm sitting here trying to think about really what made the internet and really for me, it wasn't just the internet. The internet alone isn't really sufficient to bring about the kind of socio-psychological spiritual shift in the zeitgeist that we've experienced and we've lived through. I think it was the combination of the internet and mobile. The ability, not just mobile now, but this is now where all devices have increasingly become intelligent and the combination of machine intelligence, increasing levels of machine intelligence and ubiquitous connectivity has to go back to what I mentioned earlier, kind of broken the seal between the external and the internal. And what's interesting about that, I'm curious what you have to say about this. First of (45/57)
all, I think it has violated our sense of privacy. People don't feel like there really is anywhere that they can be safe where they can actually be. I mean, I feel like you need to literally leave your phone at home, but even if you leave your phone at home, you've taken an action that's so unnatural that that in itself conveys important information about what you're going to do. So there's a sense of having lost much of that internal, private, sacred space. And at the same time, a kind of expectation that the external world should conform to your internal subjective experience of it. And there's a kind of rolling disorientation that I feel like we're all living through as a result of that. And I'm curious, I don't know if you agree with that, if that speaks to something that you think's accurate or maybe kind of overshoots. Well, I mean, okay, several things. First of all, the thing you mentioned about turning your phone off, that's really insightful. I mean, I know this guy who (46/57)
allegedly murdered these people in Moscow, Idaho, you know, you hear this about the like one of the things. Oh, well, this guy, he murdered a bunch of some college students in Idaho. This is recently or yeah, like a month ago. And one of the things that I have heard about this, I have tangentially heard about this. Going to be used against him is like during the time of the crimes, like his phone was turned off during that period, like turning your phone off now makes you suspicious. A privacy thing is a fascinating deal. And I write about this in the book, like the idea of doxing, for example, okay, you know, it is now actually perceived as a form of violence to dock someone online, to say where they are, to give their location, to give their real name. It's beginning of the 90s, most people dox to themselves, your name, your address, and your phone number was in a phone book. You had to pay money to keep it out of the phone book. You had to pay extra if you wanted an unlisted number. (47/57)
If you called up the operator, and if you knew the area code of the person you're looking for, they would just connect you to that person, you know, now that is seen as absolutely like beyond the pale, like you would never in a possibility. Now what changed? Did life become more dangerous from 1994 to 2004? It did not. It did not become more dangerous. All evidence shows that it didn't. But it's this idea that somehow because we haven't like we're complicit in this organism, this internet organism, that there is just this different kind of risk. I mean, it used to be that like nobody wanted to give their credit card over the internet. Like you didn't want to buy a book on Amazon, maybe you're like, I don't know. I don't want to do that. I'd call a bookstore and give them my credit card number, but I didn't want to put it into the internet. The magnitude and the size of it made it seem dangerous. And there was a third thing I wanted to discuss. I can't remember what was, you were (48/57)
talking about just sort of like the, well, this kind of sense of alienation, you know, it is weird. It's like we become alienated by this thing that in some ways we can't live without. I mean, I used to always use this example just about television and film. So how long have humans existed? You can use a whole bunch of different figures, 25,000 years, 250,000 years, all depends on what you consider when hominids start. We go to East Africa and decide like this is the first person. Okay. Regardless of when you pick, it's an extraordinarily long time or anything a person sees that's moving is there. That if you see a tiger walking in the grass, that means you're in front of a tiger. Everything about your physiology and your biology and the way your brain is constructed has been sort of built to recognize that if you see something in front of you, it's because it's happening. Then we start with film in the early 20th century. You know, they talk about, you know, the great train robbery. (49/57)
The first time people see that movie, a train is coming at them. They jump out into the aisles. They think a train is coming out of the screen. A guy shoots a gun at the screen. People duck. You know, it's like they can't fucking believe that they're seeing something that's not happening in front of them, you know, but that normalizes real quick. We completely understand now the difference between seeing someone in real life and watching an episode of The Sopranos. We totally understand that like, I'm looking at you now on Zoom and you're not here. Okay. I have complete conscious understanding that things that I see are very often not real. Okay. But because we're conscious of that, we think that our body has also adopted this. I suspect our body has not. I suspect that technology has evolved faster than a person. And there is something inherently unsettling to us about constantly being put in a world that is more mediated than not. That we are always sort of psychologically dealing (50/57)
with the fact that our brain is triangulating the fact of what it knows consciously and what it feels unconsciously. And that is sort of why I think people who are on the internet all day and maybe who love the internet and view it as like the thing that saved their life are still vaguely unhappy and feel a little bit weird. I've used this example before. Are you a sports fan at all? Sure. Okay. Not much, much anymore. I don't have the time for it. But yes. Imagine a basketball game in your mind right now. Okay. What are you imagining? Are you imagining the way it looks on television? No, I was actually, no, but that's a really great opportunity. Well, no, it's interesting. You're a real exception to this. Almost everyone has played basketball, right? At some point, even like in elementary school, or they went to a game in high school or their friend, even they hate sports, but their friend bottom to one. Everybody has experienced basketball to some degree in real life in the United (51/57)
States. And yet when you ask most people to imagine a basketball game, myself included, the first thing I think of is the way basketball looks on television. I think of a specific game from 1984 when someone says, think of a basketball game. I just think of it instantly. I think it's now become more natural for our first thought to be the fabricated version of something as opposed to the thing that we experience in reality. And I wonder if that leads to a kind of mental unease. Yeah, you kind of touch on that in the book when you talk about hyper-reality. Something else that comes to mind for me, and I feel like I have seen studies referenced about this, but maybe you can confirm it for me. My sense is that digital experiences are less memorable than analog or physical experiences. That in other words, if you spend your time playing, we're talking about the 1990s and you're sitting in front of your PlayStation, or your Nintendo, or your Sony Genesis, and you're playing a video game and (52/57)
spending all day playing it, I wonder if there's something less memorable about that. And in general, in the world that we live in today, populated as it is by digital experiences, where lots of people spend time in isolation and the social component of their experiences is also digital. In other words, that isn't me and my friend coming over and we're playing Madden NFL for four hours straight. It's me by myself in a room and getting on a multiplayer room and constantly just losing myself in this immersive experience over many, many hours. Over many, many hours, I wonder if it has the same memorable quality. And that speaks to a larger phenomenon that I feel like I've experienced the more time I spent immersed in the digital world. And I'm reluctantly immersed because it's good for my business and I need to spend a certain amount of time on Twitter, et cetera, et cetera, et cetera. That's an observation that I want to maybe hold and explore as we move to the second hour. I also want (53/57)
to make another observation, which is I think actually that one of the larger is beyond simply the interface, the intermediation of reality through this digital layer where you and I, for example, are now talking on Zoom. There is a lot of loss there. There's less information that's being conveyed. It's a very different experience. But I think that even more profound than the intermediation, the difference in the actual experience of what life is like when it's digitized is the increasingly the intelligence that's in the background of everything that's been growing year after year, ever more and greater, and influences our decision making and our lives and our reality in ways that don't rise to the surface. But we all either are aware of it on some level or were aware of it until recently it slipped to a subconscious part of our lives. I think that is what makes the change from where we are today to where we were in the 90s uniquely all-consuming and transformational and not (54/57)
necessarily in a good way. And that's another question, Chuck, which is like, can we make normative statements about, can we say that the 90s were better objectively than today because of this fact? But there are a number of other things. We're not going to get to all of them. There are a lot of interesting things in your book, like celebrity. Also, another thing that I thought about, which is the ladder of success. Me, I spent my life moving from career to career and made my own career in media and really was able to do that because of the tools of blogging and social media and podcasting and video and all this stuff, something that would have been available to me. I had to go through the ladder of traditional media. And so there's something interesting about how our ability to exercise power over our career and all this stuff, how that's changed conspiracies and the move of conspiracy being this private thing that I used to listen to Coast to Coast AM. And I used to watch Unsolved (55/57)
Mysteries and X-Files, but there wasn't like this tribal cult that I could join and form my identity around. So there's so many interesting things that you talk about in the book. And we'll try to get to as many of them as we can in the second hour. For anyone who's 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 Chuck, 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. Chuck, stick around. We're going to move the second part of our conversation to the premium feed. If you want to listen in on the rest of today's conversation, head (56/57)
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. (57/57)
because you just didn't do anything. You just sat there. Maybe the next 15 years looks like something very different. Yeah. And if you want a little bit of food for thought of that, imagine the 6040, so it's 60, you know, the 6040 portfolio. So imagine 5% of the SMP, I think is Nvidia. And if you put commodities and energy is probably what, around 5% as well. So imagine we do have that inflationary environment, the portion that's going to carry you out and help you is less than one of the Mac 7. So that passive portfolio is not going to help you out if we do get that, you know, the environment we're talking about. So that's what I want to talk about in the second hour, guys. I certainly want to talk about your commodity thesis, both of your commodity thesis, but especially yours, Paolo, on whether we're not transitioning into commodity bull market, what similarities it may have to the 1960s and 70s. In other words, how instructive is that period to helping us think about what we're (54/57)
to our audience. But Paulo, since you're going to be introducing yourself for the first time, I would love to have you just tell us a little bit about who you are and what your story is. And also, both of you, this is relevant. People that heard Leshrub's episode know, and these are anonymous names. He's got an anonymous Twitter account, like a number of really smart people in the modern age. They have Twitter accounts that they interface with. You guys both have substacks as well now. You're also an anonymous account on Twitter. So tell us a little bit about who you are or what your story is for those who aren't familiar with you or your work. Thanks Dimitri and real pleasure to be here. Thanks so much for having me on, guys. My background can probably be best summarized as just over 20 years in finance and assortment of roles. I'm a little bit of a misfit toy in the industry in that I've pivoted my career over the years a few times. I started in the early 2000s in a global macro role (5/57)
What's up everybody? My name is Demetri Kaphinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guests in this episode of Hidden Forces are Paulo Macro and La Shrub, two very popular authors with large Twitter accounts who also published their market commentary and investment ideas on paulomacro.substack.com and shrubstack.com respectively. This is a conversation about not only ideas and investment frameworks, but also about process and how these two investors with 40 years of market experience between them seize investment opportunities and manage risk, including one of the largest risks of all, you, you, and the behavioral biases that can so often lead all of us to make bad decisions at the worst possible time. In the first hour of our conversation, I asked Paulo and La Shrub about some of their (1/57)
respective frameworks, including the e-mification of developed economies and their political systems, and the need to understand the incentives of policymakers, how their toolboxes have changed in the years since the COVID-19 pandemic, and how that should inform your expectations about interest rates, inflation, credit rationing, and much more. In the second hour, we explore how the contemporary strain on the international system and on American military and financial hegemony could amplify some of the budgetary and political headwinds facing developed economies in the years ahead. We discuss the conundrum facing policymakers in China, the investment opportunity in commodity the search for a new safe asset in a world of worsening fiscal balance sheets, and what it feels like to be financially gaslighted during an inflationary recession where prices rise as your living standard declines. If you want access to that part of the conversation and you're not already subscribed to Hidden (2/57)
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. 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. 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, (3/57)
please enjoy this highly entertaining, thoughtful and educational conversation with my guests, Paulo Macro and Leshrub. Paulo, Macro and Leshrub, welcome both to Hidden Forces. Great to be here. Good to be back. Good to be back. You remember the last one? Why do we called it? What was it the best investment podcast ever? Right. But now we have Palo on, so we're going to make it the best one. Exactly. So it's great having you guys both on. Leshrub, you were on last summer. I think in August we did it in studio in Athens, right? Yeah, it was a face-to-face and it was a turning point in the markets. We had a bit of a bearish stance back then, I think that things were getting a bit too hot and there was a correction afterwards. And then the policymakers took a decisive stance in October and got us where we are today. So we're going to have a chance to talk about that. Paulo, you haven't been on the podcast before, so I'm going to have both of you have an opportunity to introduce yourselves (4/57)
on the sell side with a major bank and then moved to the buy side to a group of mutual funds focused on international equities as an analyst. Moved back to the sell side for the big trading floor fund at a major bulge bracket bank that morphed into kind of more of an original ideas cross asset role with focus on commodity related equities. And following Lehman moved back to the buy side this time as a marketer raising assets for hedge funds. And didn't particularly like that role though, loved the people I worked with and learned a lot sort of went to hedge fund college behind the scenes helping managers raise money. And then from there I spent the last 10 years focused on Latin America as my name Paulo or pseudonym implies my background and passion really is for the macro and understanding how the big picture meets the bottom up. And my background is Brazilian. My parents are from there. So I grew up speaking Portuguese in the house and kind of a foot in both worlds. I live in New (6/57)
York. I'm born and raised in New York. So I'm a rare breed of New Yorker who's actually from here. But with the Brazilian background and the dual citizenship and the passport and the sort of up close understanding of Latin America and Brazil and my focus in the last 10 years was as a Latin America specialist again for major banks. So I've moved around a little bit over the years and put different sort of perspectives in my experience set in my bag. Today now sort of a free agent with an interesting year of transition ahead and earlier this year right around the time shrub did something similar. I moved over to sub stack after a few years of getting to know people on Twitter really out of the desire to write more long form free moving thought pieces. It was something that I particularly enjoyed when I worked for banks and hedge funds and very happy doing it today while just focusing on managing my own money. So when did you start tweeting? I know you've had the account since I think (7/57)
2013, but when did you actually start like putting content out on Twitter? A couple of years ago really I think got more active after COVID. You know, we're all shut in our rooms waiting for the world to end wondering when we can come back out. And for me it was it was a weird departure because at the time I was working as a broker for a bank and suddenly being thrown into a full zoom work from home environment you start to want to reach out to people and Twitter ended up being a fascinating way to connect and sort of discovered from there variety of individuals from sell side and buy side and all over the place globally that were exchanging ideas on the macro, on individual equities, on credit and it kind of grew from there really out of nothing. I started with a couple of dozen followers and I'm still shocked that people find it interesting but managed to meet a lot of interesting people over the last few years doing it. But it was really around COVID. I tweeted a little bit before (8/57)
COVID on a couple of particular subjects but never really developed much of a following or a real close engagement with the platform until after COVID hit. And LeShrop what about you? I said, you know, you were on the podcast, we did an episode in August either published in late August or you might actually might have been September. I don't remember when the Athens dinner was exactly. I think it was in August but we might have published it in early September. But for people that haven't heard that or who might just want to refresh her on who you are, what's your deal? Kind of what's your story? Yeah, sure. So I started in, I did a brief stint in investment banking just to learn the basics. And then I was lucky enough to move to a hedge fund in 2006 and I was working for one of the big shorts, you know, the one of the famous people in the big short. So I spend the next five years at that hedge fund going through, you know, the whole subprime crisis but also going through the recovery (9/57)
and both were equally useful lessons for what came after obviously. But you know, my background is in special situations event driven investing and this was the driver of all of all our trades, including the big short and including the recovery trades. And then after that, I spend the next 10 years again in hedge funds as a portfolio manager and lately running a family office again with a very flexible mandate. And I think what changed in the last few months, I've actually decided to write more and stay at home and spend more time with the kids for the next few months. I actually had like a little existential crisis that I didn't spend time with my two year old daughter before she goes to school. So I decided to just take some a few months off from managing other people's money after, you know, 16 years. So I'm just running my own portfolio and running after the kids for now. And in the meantime, it just gives me a chance to write more on the sub stack, which I'm actually really (10/57)
enjoying because it's just helping me frame my thoughts in a more clear way. Like I just tried to write in a way that people can understand and relate and it's kind of my trading diary. And it's, you know, I try to make it funny as well because it's, you know, you need to have fun while you're doing this. So it's actually something I wanted to ask you guys, how much of your writing and communication, public communication is something that you do because it allows because of the benefits that come with it? It's 100% beneficial to my process. So that's the driver for you. It isn't necessarily that it's enjoyable in and of itself that makes you want to do it. I'm enjoying it at the same time, but I find it very beneficial to my process. That's why I started tweeting because it's kind of weird, but I started tweeting my trade ideas. And I noticed that the trade ideas I was tweeting out had a much higher hit ratio than the trade ideas I wasn't tweeting out. And I realized is because I was (11/57)
feeling like, you know, I felt that my tweets were going out to an average person and I kind of didn't want anyone to get hurt by stupid trade or something. So maybe subconsciously I was just only sharing my best ideas that had a high probability of success. You know, just thinking like on the other side of the tweet could be like an old lady reading it and, you know, does something stupid with it. So I found myself sharing like having a very high hit ratio on that. And then whatever I wasn't tweeting, maybe I was a bit more lazy about it. So I had a lower hit ratio. So that's what got me to write more and more because, you know, I just feel like I'm being more responsible almost because, you know, at the end of the day, when you're in a hedge fund, you have a team, you brainstorm with each other. So that brainstorming creates an investment process. But when you're trading by yourself and your own portfolio, you know, it can be quite a lonely process. And that's why, you know, I call a (12/57)
palo once in a while, you know, we just catch up and we brainstorm because we're kind of recreating the same thing. But, you know, that's the important thing about writing. You put it on paper and you become more accountable as well. So I found, I've actually found out that, you know, I started writing in October. And the reason why I sat down to start writing was because if you remember towards the end of October, there was the big pivot of Yellen and Powell. So I think at that time, you know, yields were blowing up to 5%. The market was at its lowest. Duration was getting sold off. Biotech was getting sold off. So I actually thought that was like a great opportunity in buying long duration, buying biotech, which I affectionately called the biotech Rosemary's Baby. Because it's kind of like devil's offspring of long duration in some ways. Like that's why it's long duration, like a Rosemary's Baby. So anyway, so it got me to think, you know what, this is a great opportunity. I want to (13/57)
put it on paper. So that helped me to frame my thinking. And that's when I bought a lot of those things and it worked out. But actually that's how I started writing long form because it kind of, I saw the opportunity. I wanted to put it on paper and that's how it started really. And I kept going. I thought that I would run out of things to write about, but actually, you know, this market just gives you something to write about all the time. Well, what's great is that you have such a unique voice. Paulo, would you say that, does that explain the shrubs explanation, capture the reasons that you write and how much of that is actually something that you enjoy and maybe you would do irrespective of the benefits to your trading and investing? Yeah, he's spot on in more ways than just the writing. We both have kids around the same age. So we're, you know, our lives are sort of kind of charmed here in the sense that we get to do what we love, which is observe and transact in the financial (14/57)
markets and write about it for people who care and want to read how we think, but also spend more time with our families. It's amazing where we were just a few years ago and having this kind of independence at a time when a lot of people barely see their kids. So I'm for one very grateful and I know exactly what shrub is getting at in terms of that side of the picture. For me, the writing, as he also laid out so well, is part of the flywheel of operating better in the marketplace. I tend to find, you'll hear other people say this as well, but writing something down kind of immortalizes it or keeps you honest. Sometimes you have a million thoughts running through your head, especially with markets as wild and interconnected as we have today in macro and it's hard to keep your thoughts straight. If I wasn't writing for others, I would be writing in a diary just to try to keep myself honest about what I was thinking when. The idea that you can have this sort of digital trail that at your (15/57)
fingertips, in 10 years, we're going to look back at these post shrub and just face palm our foreheads and be like, what were we thinking? We were playing JV ball or in way, but right now it's so helpful because and I also say this is someone who learned to write late in life. English was always my worst subject, writing and composition and despite having sort of multiple languages in my life, I had a lot of mental blocks as a writer early on and I learned to write almost overnight from a college roommate who sat me down, looked over my shoulder at me struggling with a one or two pager and he said, listen, throw all this away. What were you trying to say? And I told him and he was secretly recording me and he played it back for me. He said, this is perfect. Now literally dictate, like write down what you just dictated to me and don't change a thing. And it was like something clicked. Suddenly there were no blocks because I was speaking what I was thinking and I was writing what I was (16/57)
speaking. And as long as those three things think, speak, write are in alignment, you can write well. The added trick that I've only grown to appreciate over the last few years is that the more I write and think about the market, the better my speculation seem to get. And then those developments in the marketplace and in my own trading and investing, boomerang back on more of a desire to write and around we go. So writing is absolutely essential for me in terms of the flywheel of being able to think well and then operate well in the market. So what about conversations like these and further to the point podcasting in general, because you guys have a podcast that you do together. As far as I know, unless I missed a recent one, you released two so far where you guys basically get on a call, you riff, you exchange ideas. It seems like that is in some ways really just a publication of a private process that you guys go through, like Leshrab was saying, they'll give you a call, you guys (17/57)
will exchange ideas and think things through. How useful is that and is that what also led you to launch the podcast? Yeah, so basically, I've been speaking with Paolo for a while and I really enjoy exchanging ideas with him. I have a lot of respect for him. But also, the reason why we speak is because not only because we're aligned, but actually it's because sometimes we differ. I find that we sometimes have the same ideas, but with different timings. So when something big happens, like when there's a major event, we will just speak about something. And then at some point, we were like, dude, why don't we just record it? I mean, we just record it and we put it on a sub stack. I mean, we have these conversations anyway, so let's just record one of them and just put it on. So I can't remember what it was the reason for the first one, Paolo, but we recorded it and we rift around it and we really enjoyed it ourselves. And then there was another incident, I think it was maybe after the (18/57)
inflation data and during Yellen's visit to Asia or something and we recorded another one. But the whole idea behind it was, we called it the fly on the wall. So it's basically Paolo and I having a phone call and just recording it and sharing it with our readers. Yeah, it's amazing in 2024 what you can find at your fingertips that kind of open or replicate certain environments. It used to be that if you wanted to build a real intellectual horsepower, you would hire some of the sharpest analysts you can find and put them in a room, you'd have the morning meeting, you'd all have to be in the same place. And then every once in a while, you'll chat with your buddy who runs another fund and trade notes, compare an idea. The idea that someone like shrub and I can not only strike up a friendship from other areas of the world, but then get to know each other and start riffing as if we were fellow investors in situations. And we, despite the fact that we have a lot of similarities in some of (19/57)
the stuff we write about and we tend to agree more often than we disagree, where it gets interesting, as he said, is we come at situations very differently sometimes. And that's for me, the real value add is not only do we interface great and I happen to really like shrub on a personal level. I think he's terrific and all around great guy, but a guy who you feel like he makes you smarter and just trading notes and thinking out loud, again, is part of the process that helps you be sharper in the market. And it's also nice to have a few allies who, when you're having the inevitable tough day and getting blasted in the market, like you can call up and be like, man, today really kind of sucked. And then you shake it off. And so much of what we do is emotional self-control and focus that you really want, guys that you feel like you can depend on in bouncing ideas off of. And he was right. It was actually his idea. He's being modest that it would be a great idea just to record it. And it's (20/57)
helpful too, because I went back and listened to one of them. And not only did I find myself smiling at some of the funny stuff, but it's, again, like in the spirit of keeping a diary, it's a great way to go back and hear yourself talking with someone else about what was going through your head at that point in time. I just can't imagine having this kind of replication 10, 15, 20 years ago. There's just so much power in being able to communicate with someone like shrub and save it for posterity and then share it with people who seem to get something out of it as well. Again, it keeps you honest. It helps me trade better. Yeah, that's invaluable. I've had a few different people in my life over certain periods that I've called on a regular basis. And I haven't had someone like that since before the pandemic. And I feel like for me, the quality that I look for in someone like that besides very smart, someone that's very intelligent and knowledgeable, is also someone that's deeply curious (21/57)
and humble. Because even though we talk about humility in general and how valuable it is on the show and as a quality trait, I think in private where there's less consequences than not being humble, maybe there isn't some direct decisions that's coming out of it. But there's something about having that kind of humility in those kinds of conversations that allows them to be really useful because you're talking to somebody else who also doesn't have the answers and knows they don't have the answers and they're trying to figure out. And they're also excited at the prospect of figuring it out. And now with these AI note-taking apps, before if you record these conversations, I don't know, how many people are actually going to go back over time and sort through this is what I said. Unless you're some really great note-taker. But now, I just feel like we're on the cusp of just a huge change in intellectual productivity. And for people like us that deal on ideas and thinking through problems, (22/57)
it's just going to change our lives in ways that I think are difficult to imagine. Since you mentioned humility, by the way, I'd like to think that after 20 years in the markets, both Paulo and I have been humbled enough by the market to just acquire a sense of humility to respect the market itself. So I think the market is a... What would be the right term, Paulo? Is it like a humiliating mechanism or it's just... Or it's a humbling mechanism? It just... It kind of grounds you. I've seen very wealthy people being humbled by the markets. And I mean, I've been humbled many times and I constantly am being humbled. But I think it's like... You know how I compared the market to the sea because I come from an island, I love the sea. And the sea has to be loved and respected at the same time. And the market is in a way very similar. It changes its moods, it has its storms and it has its calms. But it has to be respected. And you have to go with the flow when it comes to that. Yeah, I'm still (23/57)
paying tuition to the market. And I'm trying to set up my life and I do this consciously where I've taken so many hits over the years in my P&L. And I tend to run a lot of all. I have a very high tolerance for risk. That's wildly inappropriate for most people. And I tell that to people up front. But in that context, you have to take the punches with the good. But I also find with experience that certain behaviors that I exhibit at certain points in time are very good red flags for when something is about to go wrong. And now that I'm aware of those things, and it comes down to like a simple cheer or a chest thump even. I took a very large loss last year. I had a good year, but it was a great year that ended up being a good year. And which is an unusual kind of feeling because, hey, what are you complaining about? You still had a great year. But the money that was left on the table, I know exactly how I lost it. And afterwards, in talking about those losses with shrub and a couple of (24/57)
other people, I'm trying to set up in my life. I literally told these friends one on one. A, I never imagined that the tuition could be so expensive. And a good buddy of mine responded with, yeah, if the tuition weren't egregiously expensive, you wouldn't learn the lesson. And that was a big takeaway for me in managing risk and getting out of a loss early. But the other one was, I told this to a few friends and they thought I was kidding. I said, no, I'm serious. If you ever see me this confident around a dinner table or over drinks again, you need to call my wife. You need to tell her what I just did. And she needs to walk me to the computer and start trading at like forcing me to trade out of stuff. I need you to do that for me to protect me from myself. Like, don't ever let me be that confident in my positions ever again, because the loss is literally right around the corner. And people thought I was kidding. I have that arrangement now with more than one person where they will call (25/57)
my wife and get me out. And I need that because this market will destroy you emotionally and put you through hell. And the only thing you have at the end of the day is the humility to accept that you are going to make mistakes. These mistakes will cost real money and just insulate yourself at every turn from your worst self so that you have a shot at really taking money out of the market over the long run, while keeping your sanity and remaining a good person. At this point, if anything happens to me that really starts to screw with my emotional equilibrium, I just start getting out. I have a huge tolerance for risk, but I also have a dwindling tolerance for things that really screw me up mentally. Who is it that I've heard you quote saying that whenever he gets a certain feeling when he gets too excited or too overconfident, he literally goes and lies down until the feeling passes? That's an old market wizard. Pre-dates like the Commodities Corp guys. There was a trader named Stanley (26/57)
Kroll, and he was quoting someone else where he was saying it more in the context of there are certain commodity futures that he just doesn't understand. For him, it was platinum. He says, whenever I feel like trading platinum, I just go lie down until the feeling passes. I love that. That's more tongue-in-cheek. There's actually a lesson in that exactly to this point. Know yourself, know that you are tempted to speculate on stuff that you lose money on more often than not, and that your best course of action in that corner of the market is just not to be there and force yourself to stay away. It's tongue-in-cheek, but it's hilarious the way he thinks about it, but it's also so true. Just protect yourself from yourself. When Paolo told me that thing about the platinum story, I freaked out because platinum, I'm very bullish platinum, and I was very long platinum when he told me the story. I'm like, oh my God, I'm so bullish platinum, and now Paolo just messed my brain. As an aside, (27/57)
Soros said the opposite. So Soros, he said whenever he had a, you know, whenever he had, he was feeling a bad back or a pain in his back, he would just go and close all the positions. Yeah, so this is the opposite thing. I think it's just a question of knowing yourself. Like Soros is obviously the God of trading. So Soros' built-in algorithm was telling him trouble, and that was exhibiting through a pain in his body. Whereas in my case and Paolo's case to a degree, you know, actually we are getting overconfident, right Paolo? So we're building up our confidence, and we have the opposite effect, but you know, after years, you kind of know, damn it, I'm getting a bit too confident, I need to just pair back my risk. But it's just funny how it exhibits in different ways to different people, and it's all just about knowing yourself and protecting yourself. Like my default mechanism is when I feel something is going wrong, I sell a lot of stuff and I just increase my cash position. And I (28/57)
keep writing about this, that you know, I feel as cash as my hedge when I feel uncertain, I just pair back and I just observe. So let's do some observing. I'd love to get a sense of kind of where each of you are focused right now, and what are the big macro questions or themes that you've been focused on, and what are those narratives that you feel are either appropriately descriptive of what is going on, or maybe have it wrong, and you guys are taking an opposite tact on it. So maybe we can, let's go with you shrub, kind of where has your mind been at recently, and you know, what are some of the areas maybe where you and Paolo are in agreement? Yeah, sure. So since the October, November pivot of Paolo and Yellen, I've been framing it like this, that this is a reelection cycle. And the policymakers are just incentivized to get their candidates elected, as simple as that. So, you know, I affectionately called policymakers tamagotchi like that Japanese toy, because the tamagotchi has a (29/57)
very simple reaction function. So, you know, in the case of a policymaker, they want very simple things, like in the case of Yellen, for example, in October, why did she pivot? She pivoted because the 10 years spiked above 5%. So, her reaction function triggered and said, I got to get the 10 year below 5%, because I need to get my candidate reelected. So, simple as that. So what did we see since the November pivot? We saw a very determined treasury and a very determined Fed, whereby they're just trying to do everything possible to patch things in the financial markets, and create a stability, low volatility until the election day, and get people incentivized to vote for their guy. They did that through various ways. You know, they issued more bills than coupons in the quarterly refunding announcement. They drew down the TGA. They, you know, all sorts of tricks that we didn't really care before, or, you know, now they're doing it QT tapering. So, they're quantitative tightening, they're (30/57)
tapering quantitative tightening from 60 billion to 25 billion, because, you know, what's the most visible problem we have right now is we have a big deficit of more than 2 trillion a year. So, by doing patchworks like tapering the QT, that by itself reduces supply by about 400 billion. I mean, that's not a long-term fix. It's a short-term fix, but it kind of like reduces volatility in the bond market until we get to election time. So, my framework was observe what the policymakers are doing, and it's not just on the monetary policy side. It's also on other policies. For example, at the beginning of the year, I bought cannabis stocks because I saw that almost 80, 90 percent of Americans were in favor of marijuana reform. And I was expecting policymakers to be very driven to reschedule marijuana from schedule one drug to the schedule three drug, which they're in the process of doing. And, you know, the marijuana stocks had like a 50 percent rally since, but that's just a function of (31/57)
policymakers being driven. The other sector that, again, which was more on the monetary side, was immigration reform. So, you know, the prison stocks that had a very big run as a result of immigration being a major problem that they're trying to tackle. And the other thing that just came up, which I think is very, very, very important, and I'm shocked that it appeared only on page 14 of the Financial Times this weekend, is that there is a possibility for a major housing reform, whereby Freddie Mac applied to the FHFA, the Federal Housing Association, to offer secondary mortgages to people. So, just to make it simple, right now, the Fannie Freddie, they only offer primary mortgages. And there's a lot of equity that's trapped in the housing market. Now, if you have a mortgage with Freddie, you can, what Freddie wants is they want you to come to them and you take an additional mortgage at a favorable rate and you release equity from your house. So, Meredith Whitney wrote this article that (32/57)
was very eloquent, where she said, look, if this passes, it can add a trillion of consumer stimulus in the economy. And if Fannie also joins in, that could add two trillion of consumer stimulus by the end of the year. And the funny part is, it doesn't need Senate approval from what I understand. There's like a 60-day consultation period. And if the FHFA does not block it, then this will pass. So, this is basically Freddie Mac and FHFA becoming political again, just in line with the policymakers and providing what could be a significant consumer stimulus in the economy, just in line with the reelection cycle. Why they're doing it now, I really think it has to do with where we are in the election process, because right now, the housing market is very, very tight. We're still trying to tackle inflation, so this doesn't really do much except make homeowners very happy. And I think it's more than almost 70% of Americans own a home, so it's obviously very beneficial for consumers. So, in (33/57)
summary, that's where I'm at. I'm thinking about it in a very simple way, because I want to have a framework that helps me invest, and also I found that simple things make the best results. It's a very simple thing. It's a reelection cycle. The policymakers are very incentivized to keep this together until the election. After the election, that's a different conversation we can have later. But until the election, I think everyone is motivated to just keep this together. And Shrub and I actually, our views come together around a lot of what he just said in an interesting way. I'm happy to accentuate on some of the points. Sure. Yeah, well, I'll tell you what I was going to ask and then feel free to add to it. What I was going to say is that this kind of seems to kind of fold into a framework that you have. You could refer to it as, I mean, I would call it America's Becoming Brazil. That's sort of the way I think of it. But it aligns with a more emerging market framework where in (34/57)
countries where you tend to see this in countries with weaker institutions, where there's more patronage and currying favor through the political system to interest groups in order to get reelected. This isn't something that I feel like we've seen to this degree. Of course, we've seen it to various degrees in the United States, but it seems like it's more true today and that the gloves are off in a way that it wasn't the case before. And I'm curious in your answer if you can incorporate some reflection on that. And to what degree does this actually align with this larger framework that you have, which is that in order to understand the U.S. economy and financial markets today, it helps to understand emerging markets because a lot of what we've seen in EM we're seeing now in developing countries. 100%. Actually, that's where I was going because with shrub sort of conceptualization of political expediency driving so many decisions. And I suppose on some level, in the term political (35/57)
economy, the word political comes first, but we sort of ignored that in 20 or 30 years of a structural bull market in America's exceptionalism, our equity market, our bonds, which the world couldn't seem to get enough of over the last 40-ish years. And here we are at a point where debts have, certainly in the public space, have grown to an unsustainable level between what we've already issued and the contingent liabilities that we've promised, particularly to the boomers. And actually, to shrub's point about the housing reform that is being discussed, these are real numbers. The interesting thing to me on top of everything he mentioned is that millennials, their household formation is going through the roof right now. The tip of the millennial spear is sort of just crossed 40. And people waited to get married and have a kid in part because of the great financial crisis in the way that kind of delayed things from a household formation perspective. But now, like the rubber meets the (36/57)
road, if you're a millennial and you even remotely thought about starting a family like the clock's ticking, right? And yet the profile of the American demographics is fascinating because you have 20% of Americans or boomers. The millennials are a bigger cohort around 25-ish percent, but boomers have over half of the net worth of America and the asset base. So no wonder you're hearing more stories of millennials buying their first home with help from their parents. The boomers know that they have to let go at some point. And if they don't help their kids, the government's going to make them through wealth taxes down the line, through dropping the inheritance tax ceilings from the 13 million or so down to two or three. The wealth will be transferred one way or the other. But we're also looking down the barrel of just exploding contingent liabilities on the social security and Medicare side that are just starting to move through the big part of the bulge, the plateau of boomers from 1954 (37/57)
to 1959-ish. And the beauty is boomers vote in droves, right? Because it's their goodie bag. Young people tend to vote far less than older people. And who does this housing program target? The boomers who are probably down to 20 or 30 percent LTV, you know, they're in their 60s, 70s, they pay down almost the entire mortgage. And now the government's literally saying, well, your house price exploded and you're in the kind of salad years of your life, you're probably about to take retirement. And here's another couple of hundred grand from Freddie Mac that you can borrow against your house and you don't need to worry about that because when you die, the bank will just sell the house to get their money back and whatever's leftover passes to your kids. The boomers always win. And this is another case where because they vote in droves, this policy is going to be wildly effective in buying votes because people can now go out and we're reliving the 2000s second mortgage HELOC phenomenon where (38/57)
people borrowed insanely against their homes. And now you're telling people, you have all this untapped equity in your home, you've always wanted an RV, like maybe the time is now, like you've only got another 10 or 20 years and you can't take it with you. So go have some fun in your twilight years. Like everything that Trump said, and then you think like, man, this actually benefits the boomers more than anybody because they're the ones with the untapped equity. Yeah, stuff like this swings in election. To come back to your question about my framework, some people call it the e-mification of the West. We've lived for a long time in America, certainly since the great financial crisis in no way in fear of Japanification in the US, that demographics inevitably we're going to follow Western Europe, Italy, Japan down into the kind of twilight. From there, the debts are unsustainable. The country is low growth, no growth. How do we avoid the kind of perennial, disinflationary, deflationary (39/57)
trap that the West seems to be stuck in? And then COVID changed everything. It's taken a while surprisingly for people to come around to the view that the fiscal really matters. And when the fiscal starts to matter more than monetary policy, usually the two are sort of in balance, then you end up quickly, especially considering the size of the initial conditions of the debt in a place where we start, yes, we still have the senior age and the privilege of the world's reserve currency. But we know from history that that doesn't last forever and that capital centers move around the world over time. Capital moves to where it's best treated. And if capital is getting abused through tax policy, fiscal policy, monetary policy, or all of the above, capital will start to move. The concept of fiscal dominance, where the fiscal, imagine two people sitting in a rowboat and they're rowing in opposition to one another. The fiscal is this huge Arnold Schwarzenegger at this point, and still is, who's (40/57)
rowing massively while you have Jay Powell and team at the FOMC rowing in opposition, trying to restrain the inflation in the system from the overconsumption and excess demand created by the insane borrow and spend on public accounts. And there's only so much that he can do. And this is an experience that Brazilians, Turks, South Africans, and other EMs know very well. It doesn't end in outright disaster and the world ends and like, where do I move to? Like, should I buy a gun? Life does go on, but it's not actually an experience that Americans are familiar with. And certainly nobody alive here who's never had any kind of experience in these sort of frontier-ish emerging markets that are profoundly cyclical. But they're learning. And just the fact that people now start to know what fiscal dominance means and that it's gaining attention suggests to me that this is a longer-term trend that is catching fire and is changing the way we need to think about managing risk. It's changing long- (41/57)
term trends. There's a lot of money to be made as capital shifts amidst those trends. And the vast majority of people will take a long time to figure this out. The people who get there first and get the joke early will probably make the most amount of money. Can I just add something here actually on Paolo's thing? Because my old boss used to say something that really stuck with me. And he said it in 2008. He said, every crisis is different. And because, as investors, we have this recency bias about what we live through. So I think as a result of most investors being scarred by 2008, I mean, people our age, a lot of us were scarred by 2008, there's a lot of current market participants that still expect the next crisis to be 2008. And it's not because the toolbox has changed, the incentives have changed. The policymakers discovered QE, the monetary authorities discovered QE, and the fiscal authorities discovered they can get away with 6% deficits. So the next crisis is going to look (42/57)
completely different. That's why I really appreciate Paolo's view emerging markets framework. And the funny thing is, he said that we were afraid of Japanification initially. But look at what Japanification is today, not what it was before. Today it is covert depreciation of currencies, covert debasement of currencies, negative real rates, a form of yield control, and then pretend that you care about your currency. So today the US has positive real rates of what, 2%? Well, the Japanese have negative real rates of 2%. They're doing yield curve control, and they pretend that they care that the yen has depreciated by 30%, but actually they don't really care because the exports are doing better. So Japanification of the past is very different than the Japanification of today. It's actually, Japan is also stealing a bit the emerging market. It's so funny, shrub. This is not your father's Japan, you know? Exactly. Not your father's Japan, but they're doing it so eloquently because they're a (43/57)
developed market. They're saying, we're going to intervene. We can't stand having the yen at 155. It's like, guys, if you don't want to have the yen at 155, why don't you raise your rates by 200 bips because your rates are currently at zero? So this is it. Why, you know, you have a country with zero rates, negative real rates. They could have arrested the decline in the yen just by raising their rates, but they're not doing it. You know, they're saying, we can't have our yen depreciating. Yeah, because you actually want to deflate your debt away. Is it difficult to imagine a future in the US that looks a lot like that, where we have negative real rates and they just pretend and they just deflate their debt away? I mean, that's not a 2008 scenario, right? That's like the complete opposite. That's right. And the reaction function of policymakers as well, the classic generals fighting the last war, look at the clear bias with the FOMC. The moment things get a little shaky, it's, whoops, (44/57)
like we need a new line of credit for X, Y and Z or boy, like, you know, maybe it won't be seven cuts this year, it'll be three or four. Like, how about hikes, guys? Like, you want to get inflation back in the box and wrestle the bond market into submission and try to kick the can down a little while. And why not just stop talking completely and say, it's all on the table. The playing field is wide open for monetary policy going forward, including the right tail. Like, if we have to take it up again in the second series of rate hikes, but people are starting to get the joke on the political side as well, the bias is clear that these guys are still worried about 2008 coming back, right? The captains of industry are still biased towards rates are going up, but they'll always come back down. You know, the US media always says, oh, you know, Powell does not want to be like Arthur Burns. And I'm like, guys, Powell also doesn't want to be Trichet. Yeah. Remember Trichet? I mean, Trichet was (45/57)
raising rates and, you know, during 08. So it's a fine balance. And I think policymakers would prefer to be burns than being Trichet. And by the way, this is why you and I are bullish commodities, right? Because you want to hedge that tail where they just say, you know what, screw it, we're not going to hike rates, we're just going to cut rates. That's why you want to be long. Some real assets as a hedge. And the bias here goes back a long way, right? You remember under Bernanke, he said several things that still kind of echo in history, like, you know, contained in talking about subprime. But as they started to, you know, do QE full bore coming out of the crisis, you know, his big thing was, you know, if inflation becomes a problem, we can raise rates in 15 minutes. It's like, wow, you are so confident you can get that genie back in the bottle. Have you ever been to Brazil or Turkey? Because when the fiscal is rolling against you, it takes a little more than 15 minutes, buddy. But (46/57)
it's okay now, we went through transitory for a year and a half, and it's all under control. Like, good job. I don't know, I've seen competent and incompetent and experienced and inexperienced central bankers. I think there's a real lack of institutional knowledge at the Federal Reserve. But a lot of lip service being paid to the Arthur Burns mistakes of the 70s. And these guys don't realize even what we're going through now is not the 70s. This one feels a little different to me, although I didn't trade and live through the 70s, because again, the initial conditions were different, at least, you know, when Volcker jacked rates to the teens around the time I was born, the national debt was still 25, 30% of GDP. So the interest expense wasn't compounding at anywhere near the rate it is today. I mean, we're looking at potentially a trillion dollars and 25, just an interest expense. Think about the amount of money that is in Saudi Arabia, Japan's and the US savers pocket. It's massively (47/57)
goes off this point about Japanification. Are either of you familiar with a paper by Charles Goodhart and Manoj Bradan from 2017 on demographics? They also published a book in 2020 on the subject and I had Charles on the Dr. Goodhart on the podcast. But are you guys familiar with this? Because they pushed back, I mean they wrote the original paper in 2017. So this was in the thick of secular stagnation, but they pushed back against what was a popular thesis at the time, that aging demographics would have the same effect in the decades to come as they had in Japan's lost decades. They pushed back against the consensus, few in other words, that aging demographics are necessarily deflationary by looking in part at the political incentives that may result in a world where real interest rates rise, inflation and wage growth pick up and inequality falls. Which is in line with Leshrub's observation about using a government-sponsored enterprise like Freddie Mac to offer boomer second lean home (49/57)
equity loans or lines of credit. So I'm curious how if you guys are familiar with that, their work at all. I think it does make sense. I didn't read the paper, but I read something similar. It does make sense. I mean this is actually how socialist countries work. I think Paolo is more suited to talk about this, but you look at Italy or extreme example, Venezuela. I think Paolo, you probably know Venezuela. I think they're having declining population, but they're highly inflationary environment obviously. So the same thing is probably going to happen with Europe at some point, I would think. But Paolo, you know more about Venezuela than I do. Yeah, I'm also not familiar with the paper and have not read the book. The thing I would kind of keep in mind in all of this, it's very easy to get depressed at the outlook for various of these trends because there just doesn't seem to be any sort of political appetite to really address the key sources of a lot of these imbalances and problems. (50/57)
Absent a crisis. I think it's Michael Hartnett from Merrill Lynch is one of my favorite quotes. He likes to say that the markets stop panicking when politicians start panicking. And nobody's panicking in DC over the deficit. In fact, I don't think anybody discusses it at all outside of a handful of people because there's simply no appetite by the American public to address deficits because money was free for so long. I tend to think most people just think it drops from the sky and that we can continue to live beyond our means while funded by the good graces of foreign creditors without consequence. And then one day the bond market will take notice or the dollar will take notice. And all throughout this, you have that hiss and the radio white noise in the universe of demographics increasingly aging in the US. But you've also got the crosswind of immigration, especially the broadening labor availability at the low end. And so there's a lot to keep track of in all of this. But I think we (51/57)
also had a saying on the desk when I was focused more on Brazil 10 years ago, for a while there when Brazil was really going into the hole in 2015, somebody turned to me and said, yeah, Brazil is becoming Argentina. Argentina is becoming Venezuela and Venezuela is becoming Zimbabwe. And I couldn't stop laughing. But then it occurred to me like there are different grades of this process, right? It's not like, oh, my God, we're all going to die and we need to protect ourselves by gold. Like we're going to hyperinflate. This process will take years of kind of rolling crack ups, occasional blowouts in bond yields, occasional corrections in the equity market, occasional reps in commodities. We're kind of entering a golden era of active management and portfolio management in that sense, because I could see a world we're in 10 to 15 years from now, everything is exactly where it is today, sort of real price wise, or you know, nominal price wise. But it's been a very long and interesting road (52/57)
to nowhere, where you have 50% corrections in equities, you have commodities that triple and then come back. That's one world. There are certainly other worlds where commodities rewreck higher because the dollar is persistently debased and not and, you know, currencies don't come back when you've cut them in half or down 90 in real terms. It's usually it tends to be one way when you start down that road. But the idea of buy and hold of the last 40 years in duration, in equities, especially in large cap US, let your sitting do the work. The autopilot that is, you know, people's 401ks, especially the boomers, again, they win again, right? They've had 40 years of, yeah, okay, oh wait, it was nasty. 2001 wasn't pleasant. But we always come back and make new highs within, you know, two or three years. So you get conditioned to think that the arrow always points up into the right over time and that your wealth will compound in real terms and give you more spending power the older you get (53/57)
moving into today, this concept of rolling crackups. And also, I want to go back and talk a little bit more about what we were discussing in the beginning of the conversation about weakening institutions. Because you know, like I think the way that we're used to dealing with problems in the United States is we kind of deal with them like adults. You know, I don't want to be disparaging of emerging markets. But in general, what you tend to see is that countries that are successful have politicians that put forward long term, more strategic solutions to problems. And while FDR was a populist leader, many of the programs that he instituted have stuck around, whether it's social security, some of the regulations, the Glass-Steakle that was passed in the early 1930s. And whereas emerging markets with weak institutions, it's much more like every election cycle is different. There's much more variability. And that higher level of variability is really bad for business because business people (55/57)
feel a lot of uncertainty and it makes it really difficult to invest for the long term. So that's something else I want to talk about in the second hour as well as a number of other themes that both of you guys talk about. 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 to access the second hour of today's conversation with Paolo and the shrub, 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. Guys, stick around. We're going to move the second part of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to (56/57)
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 Nuznico Laos. 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. (57/57)
were 1984, Orwell's 1984, you would have had O'Brien torturing Winston Smith to make him, you know, accept big brother. But Mustafa Mahnd doesn't say that to John the Savage. He just says, it sounds like you're fighting for your right to be unhappy. You're welcome to it. Goodbye. So that answers your question. I think Dmitri, John the Savage had it. Aldous Huxley, the author of Brave New World, understood that there was something about struggle and suffering and dealing with imperfection and pain that was required to make us fully human. And I'll end with this. There's a Live Not By Lies is coming out. There's a documentary coming out in April from Angel Studios. And in it, we talked to this young man, Timo Krishka, in Bratislava. He was a filmmaker and a photographer who was raised after communism. And he got involved in a project to go interview elderly Christians, Catholics who had suffered in communist prisons. Many of them are living in great poverty today. They never really (54/57)
and the more you talk with them, I've been with some of them on their rounds. And you have to work really hard to dismiss this all and come up with some sort of materialistic explanation for the things they see all the time and that I've seen in their company. But when I was working on the book Dmitri, I got this email from a friend who's a Vatican journalist, Catholic, and he said, look, I know you think that the whole UAP-NHI thing is nonsense, but I'm telling you, there's a lot going on here that you don't realize, and it is fundamentally a religious story. I said, okay, fine, what should I read? Well, the first thing you told me to read was Dana Posulka's book, American Cosmic. All right, I picked it up. I read it on a flight to Brussels for a conference, and it knocked me flat. I realized that my own understanding of UAPs, that whole world, was basically stuck in the early 90s, first season of X-Files. And I didn't take it seriously, but you can't read that book and hear the (14/57)
entities. And we're basically being re-enchanted in a medieval way, whether we want it or not. The question is, are we as a people, as Christians and as non-Christians, are we prepared for this? So, there are so many things to respond to there. First, I want to give voice to those in the audience who heard some of what you had to say about the presence of apparitions and other paranormal phenomena, and who are struggling with really taking that in. And I want to say that I too have a difficult time relating to this, probably because I've never had an experience like what you've described, and it's hard for me to take your comments literally, despite the fact that this is not the first time I've heard stories like this. Lua Lozando shared something similar with me when he was on the podcast, and I've explored themes like these to various degrees, the folks like Joshua Schreie, Megan O'Giblin, Teresia Bill Burton, and even Ian McGillchrist, who I love very much and whose work has had a (20/57)
Community on Circle and it's so resonated with me on multiple levels. And so has your book and we're going to have a chance to talk about that. But before we do, I'd love to learn a little bit more about you. You have a very long Wikipedia page. One of the longest... Some of it is actually accurate, Dimitri. So tell me what is accurate. What can you tell us about your background? Well, I'm coming to you today from Budapest in Hungary, which is a long way from where I was born, a small town in South Louisiana on the Mississippi River. And I've just sort of traveled a lot as a journalist. I started my journalism career in Washington and then moved to New York. I was a film critic in New York and a columnist. Moved then to Dallas, Texas to work for the Dallas Morning News on the editorial page and ended up back in my hometown in 2012, a town of like 2,000 people after my younger sister died. I wanted to get close to the family and be part of that. Moved there with my wife and kids and it (4/57)
love, and how to find mystery and meaning in a world that for many has come to feel empty and soulless. In the second hour, Rod and I discuss what the Eastern tradition of Christianity can tell us about how we should live in the world, how those lessons apply to the culture wars, how to confront evil, and the appropriate role he thinks Christianity should play in policy and politics. 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 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 (2/57)
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 learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Rod Drear, an American conservative writer who has written about religion, politics, film, and culture in the American conservative national review, the weekly standard, the Wall Street Journal, and other notable publications. He's also the author of several extremely successful books on Christianity and religion, such as How Dante Can Save Your Life, The Benedict Option, Live Not By Lies, and his most recent book that we are here to talk about today, Living in Wonder, Finding Mystery and Meaning in a Secular Age. Rod and I spend the first hour of our conversation engaging on fundamental questions about the nature of existence, the nobility of God, the centrality of (1/57)
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 evocative and thoughtful conversation with my guest, Rod Dreher. Rod Dreher, welcome to Hidden Forces. It's great to be here. Thanks for having me on. I'm super stoked to have you on, Rod. I apologize to listeners for my voice. I've been dealing with a cold the last week or so, but I think we'll be fine and it's definitely worth the conversation to have. So Rod, as I said, I'm super excited to have you on. I found your book initially when I was perusing Amazon some months ago and I put it on a list, a long list of books that I wanted to read and to reach out to the authors. But what actually motivated me to have you on was that a member of our Genius Community posted one of your sub-stack articles about UAPs and NHI to our Genius (3/57)
all went to hell. It's kind of a Southern Gothic story about the dog secret of the family. Turns out that they didn't actually want us back there and I got really sick from the shock of all this. Got chronic mono for three years and the thing that brought me out of it more than anything else was reading Dante, the divine comedy and reading it at a very deep level, trying to apply the lessons of the Commedia to my own life. And I did after three years find healing, but all of that just destroyed my marriage. My wife and I, now ex-wife, we fought the good fight for 10 years to try to save the marriage, but it just couldn't be done in the end. So after she filed for divorce, I moved with my older son to Europe and I work for a think tank in Budapest now and my son's in graduate school in Vienna and I write books and I write a daily sub-stack. And the stuff that interests me more than anything is religion and its intersection with culture and politics, things like that. I've written about (5/57)
six or seven books, but the ones that I'm best known for are my last three, the Benedict option, which came out in 2017, it's in 11 languages, Live Not Buy Lies 2020. I had the great good fortune, if that's the right phrase, to publish it during COVID and after the summer of George Floyd. And it's a book about what people who came to America to escape Soviet communism, they were starting to see totalitarianism, a different form of it emerge in America with wokeness and all of that. And they were trying to warn Americans, but nobody would listen to them because our idea of totalitarianism was based on George Orwell 1984, the Soviet Union and what we're dealing with is a different kind of totalitarianism. I call it soft totalitarianism. Well, unlike the Benedict option, which got tons of media coverage in 2017, this one got zero mainstream media coverage because it was calling out wokeness as totalitarian. But it's sold far more than any of my other books. It's sold 210,000 copies in the (6/57)
US and a lot overseas. In fact, a documentary film is about to come out from Angel Studios in April based on this. We actually went back to Eastern Europe and interviewed some of these Christians who had stayed behind and resisted totalitarianism. Some of them went to prison for it. Then of course, this third book that came out in 2024, Living in Wonder, it's sort of the capstone of what I didn't intend to be a trilogy, but it's turned out to be and a trilogy about how to be faithfully Christian in a post-Christian, postmodern world. And this is about recovering enchantment. And what I mean by enchantment is the sense that as we Orthodox say, and you grew up Orthodox. I grew up Greek Orthodox, yeah. Yeah, yeah, I'm an Orthodox Christian, a convert. We say that God is everywhere present and filling all things. And I think that's true. That's a metaphysical truth. And what I'm trying to do in this book is open the eyes of Christians in the modern West which has become very desacralized, (7/57)
very disenchanted in the sense that people don't have a sense of the sacred everywhere around them. I want to turn that around because I don't think the faith will survive without it. But also I go into some pretty weird places. I know we'll get into in today's conversation, but you can't have enchantment, good enchantment, light enchantment without dark enchantment as well. When you take down the buffers, the psychological buffers that modernity has provided against the idea of the spiritual world, you can let God back in, but you also let in darker spirits. So anyway, I'm living in 58 years old, living in Budapest, enjoying writing and just seeing what's going to happen next. And this is, of course, Dimitri, an incredibly exciting and scary time to be alive. I was just in London at the ARC Conference Alliance for Responsible Citizenship, the Jordan Peterson thing. There were 4,600 people there from all around the world. Not everybody agreed on everything and there were people there. (8/57)
I saw Curtis Jarvin, Minceus Mulbug in the audience and there were also some Christian leaders there. And Coptic Archbishop and David Brooks of the New York Times, Neil Ferguson and others. But everybody's coming together because there is a sense that the story that we've all been living by in the post-war period, the sort of managerial liberalism that's both on the left and the right, has come to an end and we don't know what's next. So it was fun to get together with these people and talk, make friends, talk about things and figure out where we go from here. So that was a wonderful answer. You mentioned a number of things that I intend for us to talk about. And I do want to talk about some of the political implications or some of the policy questions that come out of, some of the practical questions that come out of engaging in the subject that we're going to talk about today. But I'd like to at least spend the first hour trying to set a foundation for the discussion. And I think (9/57)
maybe the best way to do that, as I mentioned that I'd read an article that one of our members shared from your sub-stack where you mentioned UAPs and NHI. So my first question ties into that, but it also deals directly with this idea of living in wonder because in the first few pages of the book, you tell a story of a man who you call Nino, who had a series of paranormal encounters with what some today might call UAPs or NHI. His accounts sound very similar to some of the encounters described by people like Dan and Pasulka, who's been on the podcast and her book Encounters. Something with Jim Larkatsky and Skinwalkers at the Pentagon, as well as Lua Lozondo, who ran the Advanced Aerospace Threat Identification Program in his book Eminent. He actually describes encounters that he had as a result of his trying to investigate this phenomenon. What's interesting is for people that haven't actually trying to understand what these folks are actually talking about, much of what this (10/57)
phenomenon is described as sounds a lot more like paranormal events, more like Ghostbusters than like X-Shorts. In any case, as a result of these encounters, Nino came to realization that, quote, materialism is false and that the core of the world is not what we think it is. That phrase, the world is not what we think it is, gets to one of the core arguments of your book, which you say is about living in a world filled with mystery. Unpack that for me and let's start first with what is it that you think most Westerners think that the world is and how is that tied up with materialism? Yeah, well, there's a guy, you might have even had him on your show once, Jeffrey Kripel. He's an academic at Rice University who writes about religion and he decries what he calls the iron cage of rationality that we all live in in the contemporary world, meaning that we are so bound by an enlightenment way of seeing the world, this disenchanted way of seeing the world, that we just push outside of our (11/57)
consciousness and outside of taking seriously anything that goes against the idea of materialism, which is to say that the world is made up entirely of matter, that matter doesn't have any meaning and there's nothing that if you can't measure it scientifically, it doesn't really exist. Well, Kripel is not a Christian, but he's been fighting against us for most of his career. And I agree with him. I am an Orthodox Christian, but I think he's completely right. Even a lot of Christians in the United States today and in the West live a fundamentally disenchanted life. We tend to think of Christianity as nothing but morals, ethics, and of course, prayer. God is up there, but he doesn't bother too much with the material world. And the idea of angels, demons, that sort of thing, it just seems arcade to a lot of people and they don't like to talk about it. Well, I think we have to talk about it because this stuff is real. There's a fantastic book that came out a year or two ago called They (12/57)
Flew, F-L-E-W, by Carlos Eyre. I think E-I-R-E. He's a Yale University historian, National Book Award winner, a really solid, respected guy. And he writes about how getting into the archives, the counter-reformation in Spain, he saw many, many, many written testimonies signed in some cases by hundreds of witnesses who saw monks, nuns, priests fly. We don't know why it happened, but it happened. And what Eire, I mean, he's right, he has a distinguished historian. He said that there is no other area of intellectual inquiry in which we would completely dismiss written testimonials like this from lots and lots of people other than religion, other than things that violate the tenets of materialism. And the fact that Eire wrote this being a man of his stature, and it's paradigm changing. And this connects with the whole UAP-NHI thing in ways that I hadn't anticipated when I started working on the book. I mean, the book also has a chapter about exorcism. I've known exorcists for many years, (13/57)
testimonies of people like Gary Nolan, Dr. Gary Nolan, and others without realizing that something's going on. And that this stuff is being taken seriously at high levels of the US government. And so that, it maybe finally decided to write another chapter about this, and I'd started tweeting about it when I first read the book, and that's when this Nino guy reached out to me. He's a lawyer in his 30s, very conservative Catholic, and he wrote me the story. It's the first story in the book, in fact, and I wanted to go there as the first story and not tell a conventional Christian story of miracles, because it speaks to this moment of enchantment that we're all in now, of re-enchantment of the entire culture. Nino said that when he was a teenager growing up in New England, he was driving down a country road, saw a huge spaceship over, hovering over a field. He pulled, or what he thought was a spaceship. He pulls over and stares at it, then drives on, doesn't tell a soul because he thinks (15/57)
they won't believe him. Seven years later, he's sitting in his apartment, he's in law school, and he's studying for a test at his kitchen table. Suddenly, a portal, as he describes, it opens up on the bare wall of his kitchen, and through this portal came two shimmering humanoid beings that look like they were made out of energy that's flowing like water. And he said they communicated with him telepathically, and it wasn't anything important. They just said things like, a bird is about to land on your windowsill. That happened. A car is about to backfire on the street. That happened. Then they went away. Well, Nino is a good rationalist, though a Catholic, a rationalist. He goes straight to the hospital, demands a brain scan, demands a blood test. He thought he was losing his mind, but he was fine. Well, these things kept coming back, usually in periods he said of emotional stress in his life. And he said that after he got married, his wife saw them too. So he knew this wasn't a (16/57)
hallucination. When he reached out to me, he was just at the point of great distress over this. He and his wife had just gone on vacation to Colorado, and all this poltergeisty type stuff that you hear all the time in these UAP or in HI encounters, that was happening to them. He said, I want to tell my priest, my parish priest about this, but I'm afraid he's going to laugh at me. And I said, well, let me tell you that in talking to Exorcist for researching my book, this happens to a fair number of Christians who encounter these things. And I said, let me ask you, you're a man of prayer. Did you ever pray in the presence of these things? Well, yeah. So what happened? Well, they went away. I said, did that not indicate to you there might be something demonic here? He said he hadn't thought of it that way. He thought if they were demons, they'd want to fight him. He said, look, bypass your parish priest, call the Exorcist of your archdiocese, because in the Catholic Church, every diocese (17/57)
is supposed to have an exorcist. Then let me know what happens. So he did this. The Exorcist told him, yeah, we've seen this before. Prayed over him. They never came back. I met him in person a year later. I said, so what happened? He goes, yeah, I found so much peace. Those things tried to drive me away from Christ, but it actually drove me to Christ. So I put that in the book, Demetri, because I want the reader who's maybe picking it up in a bookstore to understand that when we talk about reenchantment, we're not simply talking about miraculous healings, the appearance of angels, things like that. We're talking about the appearance or reappearance of the paranormal and the uncanny. I recently heard, I listened to Mark Andreessen's podcast, Mr. Andreessen on Joe Rogan, and he mentions to Rogan that he was talking to a Catholic university professor who said to him that a medieval peasant would be better able psychologically to cope with the world that is fast moving towards us than an (18/57)
average modern person. Well, it turns out this professor I found out later is a friend of mine. I said, so what did you mean by that? He said that in the Middle Ages, the average peasant understood that we lived in a world where we weren't the only intelligence, that there's God, there's angels, there's demons, there's all kinds of things. But he knew that this was something that had to be navigated. It didn't freak him out, that there were ways of navigating through this world that you could do without losing your mind or losing your soul. That's the sort of mindset, said my professor friend, that people today are going to have to develop. And it's not just about demons and NHI, it's about things like artificial intelligence, which is progressing so quickly that people will start to treat them as if they were gods, even if they believe that these are merely machines. They're going to, we can get into this later if you want, but they're going to establish themselves as God-like (19/57)
profound impact on me, as I know it's had on you. Maybe the best way for me to approach this subject and to try to penetrate it from a perspective that does resonate with me is to do so via a critique. And that would be a critique of the mainstream materialist or materialist atheist or materialist secularist view that science has anything definitive to say at all about the ontological nature of the world and the nature of our own existence. This is a view, the view that science can give us answers about these sort of foundational truths that I have long rejected, and it's one area where Ian McGillchrist's framework works so beautifully, because while science can help us build models of the world that we can use to make predictions and exercise power over it, it cannot tell us who we are. It certainly cannot speak to the mystery of existence or to the nature of reality, and certainly it cannot say anything about the existence of God. So I'm curious how you would answer the assertion or (21/57)
respond to the assertion that science cannot make definitive statements about ontological truth. So we cannot reason our way to God or to knowledge about the nature of reality, and that only through revelation and the truth of authoritative experience can such knowledge be conveyed to us. Yeah, that's a massive question, and I'm so glad that you're familiar with Ian McGillchrist's work. He's been a huge influence on me, and he's one of the heroes of my book, Living in Wonder. Well, I was just last weekend in Cambridge in the UK and present at a talk Jordan Peterson gave at Clare College, and he was talking about this himself, and he said that science presents us facts, but we have to know which facts to which we should attend, and in what degree to which we should attend to them, and you can't really do that without focusing your attention. Well, how do we know to what we should attend? The way we make those decisions are about the stories that we have in our head, right? And for me, (22/57)
let me go back to my college years when I was wrestling with Christianity. I wasn't a Christian. I was raised Methodist, but we were Eastern and Christmas Methodist. When I got to be a teenager, my faith, what faith I had dissolved, but I went to the cathedral at Chatra when I was 17 years old and was just completely bowled over by the glory of God in that medieval cathedral. I knew nothing about that cathedral. I'd never seen a cathedral. I was 17-year-old kid raised in 1970s and 1980s America, small town America, and I perceived at some deep level that God is present here, and all of my teenage agnosticism just went right out the door. Now, I didn't leave there as a Christian, but I left there on a search. I felt like there was some truth, some presence there that I could not account for intellectually in the sense of, you know, rationally. And that sent me on a search. One of the big points of my pilgrimage was when I was in college and read Kierkegaard for the first time, you know, (23/57)
the Danish 19th century Protestant philosopher. And he's probably most famous for something he said, truth is subjectivity. Now, when I first heard that, I thought he's saying that there is no such thing as truth, that, you know, we all have our own views. That's not what he meant by it. What he meant by the kind of truths for which we live and we die are truths that can only be known by the heart, by the perceiving subject. I forget the phrase he used, he was a difficult writer. It's like passionately appropriating a truth claim inwardly. That's how you know what's true. And that made sense to me. And I thought, you know, I keep trying to find the right argument that's going to convince me to be a Christian. But Kierkegaard's saying there is no argument. The argument is living. And you're not going to be able necessarily to demonstrate this with logical propositions. And, you know, in fact, you know, premise, premise, premise, conclusion. But you can still know it. I ended up becoming (24/57)
a Christian in my mid 20s. But it wasn't really until reading Ian McGillchrist many years later, I first discovered McGillchrist a few years ago, that I understood what Kierkegaard was trying to say. And it was this, that there are domains of truth, that we have the left brain and the right brain. The right brain is the perceptive faculties or as orthodox would say, the noetic faculties of the human person, by which we take in sense data from the outside, outside our heads. It refers it to the left brain, the analytical side, which analyzes it and in a properly working brain, the left brain sends it back to the right for integration into a picture of the world. Well, McGillchrist says, as you well know, your audience is familiar with him. Yeah, he's been on the podcast. Okay, good. Well, so as you know, then he says that our problem in the West is we've gotten stuck in the left brain because it's given us a lot of power. You've all know a Harari has this great phrase in which he says (25/57)
that in modernity, we exchanged meaning for power in early modernity, which is to say, if we decide that there is no meaning outside our heads, only the meaning that we choose to give it to the material world, then we can do whatever we want with the material world. And that is the basis of the scientific revolution. And that has given us immense practical power over the world. It's made us rich and power, all of these things. But it has now, in the 21st century, it has left us on a blasted heath to use Shakespeare's phrase, where we don't know what to believe. We've lost a sense of purpose. We've lost a sense of wonder, and we are falling apart. So I would say to sort of wrap this up, that to think about there being two ways to understand truth, I mean, all truth is one ultimately. But McGilchrist says that there are truths that can only be known through the senses, like the truths that come to us through music, through dance, through liturgy, through art, through religion, through a (26/57)
participation with the truth. This is what Kierkegaard meant to by truth is subjectivity. And this is what is at the basis of enchantment. It's not to say scientific truth is lesser, but it is to say that it's a different kind of truth, a different way of engaging with ultimate reality. And we need both to be, not only fully human, but we need both to be, to learn as much about the nature of reality as we possibly can in our limited condition as human beings trapped in time. So I'm going to try to speak to a few things. First of all, I couldn't agree more. I think, again, this is the challenge, like what do we mean when we talk about knowing something in our hearts? Right? Like, do we literally mean the beating heart that we understand that's made up of atoms and flesh and blood? Or do we mean something else? Or maybe it's both of those things, but there is something there that resonates with me. I also think there's something that's true about knowing versus being able to prove. Being (27/57)
able to provide a logical proof of something, you may not be positive. Here's actually a great line from a movie I was called to watch, again, after reading your book, which was the movie Contact. You remember that movie with Jodie Foster? Yeah, yeah, yeah. Right. I saw it recently, too. Right, perfect. So Matthew McConaughey was a priest and Jodie Foster played this sort of like rational left brain scientist. And there was this beautiful scene where they were out in the balcony. I don't know if you remember this, they were out in DC at some function. And I also love that they're both sort of attracted to each other and she's very hesitant. She's like, why am I attracted to this barbarian priest? And she's trying to convince him, you know, to not believe in God. It's just very interesting. She's trying to work him over to sort of renounce his religion. And she says at one point, you know, like, how do you know that God exists? Like, I would want proof. And then he says to her, did you (28/57)
love your father? And she says very much. He goes, prove it. And I love that line. And it speaks to something that I think philosophers like Kirk Gertl and Ludwig Wittgenstein have both spoken to Gertl through his incompleteness theorems and Wittgenstein in his comments about the limits of language, the limitations of our ability to capture the totality of the world and all of its essence within the descriptive confines of logical forms. And McConaughey's character's challenge is a perfect example of that. You know, prove to me that you love your wife. Prove to me that you love your father. You can't. So the question- Before we go away from that, let me jump in here. This is something that we struggle with, we English speakers, because we only have one word for to know. But in French and in German, they have different words for to know, for the verb to know. In French, it's savoir and connaître. So to know something in the savoir sense is to know it as a fact. But to know something in (29/57)
the connaître sense is to know it personally. Like, I, you and I would know each other in the connaître sense. But I would know that you're a podcast or a Greek American podcast, or that's a savoir sense. And religion is primarily about connaître, knowing God in the connaître sense. Marshall McLuhan, the great Marshall McLuhan, many people don't know that he was a faithful, daily mask going Catholic, you know, this great media theorist, he said that this speaks to what we were just discussing. He said there are two ways of understanding truth, truth as percept and truth as concept. It's right brain, left brain. He said that people forget, academics especially, forget that religion is primarily percept. And if they forget that, if religion becomes nothing but concept, but propositions and you know, dogmas, things like that, and that's all it is. It has to be that at some level. But if that's all it is, it begins to die. McLuhan said that every person he ever knew who lost the faith (30/57)
did so by first ceasing to pray, ceasing to open themselves up to the perception of the presence of God. And they thought that it was enough to think the right thoughts and eventually their faith disappeared. If English had better words to help us understand what it means to know, I think the problem and the solution to the problem would be clearer. So I love that. You know, when I was a young man, I was very interested in epistemological questions and questions about the nature of the world, less so about questions of ethics. And maybe because I was Greek and I grew up in a Greek home, I was especially attracted to Plato's philosophy. And what happened to me in my college years was that I got to this place where I think I became very nihilistic, because I had this idea in my head that I could reason my way to God, that I could sort of use my mind to figure out the nature of existence. And also the subtext here was that I didn't want to die. So I also wanted to find some way, some (31/57)
explanation that eased my existential angst. And what I came to realize later in my life, through experiences that I've talked about, I'm a survivor of a brain tumor. I had surgery and radiation after losing, I had developed severe dementia. And something I learned that I didn't know until I had to go through this experience was that you cannot know God or you cannot know, again, I also feel uncomfortable using the word God, because I feel like it's, for me, it's more of a, this is probably too big of a can of worms to open, but it's more of a metaphor for me that transcends human thought. Again, it brings us back to like the limitations of my mind. But I've come to believe that you can only know that mystery through revelation, that the only things you can know rather definitively about the ontology of the world, about the nature of reality, are things that can be revealed to you through revelatory experience, through the authoritative experience, and not through reason. And I think (32/57)
that unless you've had that experience, or something proximate, you struggle to be able to understand what I'm saying. I feel like whenever I have conversations with people that haven't, that don't sort of intuitively get that, we struggle to have a conversation because everything ends up being, has to be premised around certain scientific and logical constructs. So I'm curious, how that relates to you and how you've seen that in your own life. Yeah, that's man, that's so profound and important. Well, I'll tell you this, I came to believe in God as a Christian. The journey started in Shatra with this revelation of awe and wonder that I wasn't expecting. And that told me there is something beyond and it is real and it wants to know you, it. And it finally, I came to a conclusion, decided I've got to commit my life to Jesus Christ. Seven or eight years later, when as a young journalist, I was sent to interview an elderly Catholic Monsignor who was in a nursing home. He was in his (33/57)
mid-90s, he had been born in the 1890s. He was in his mid-90s and my editor sent me to talk to him because before he became a priest in midlife, he had been an artist of some renown and an art scholar. And they just wanted to know about that part of his life. So I went to see this old man, I go into his apartment and he's like Yoda, right? He's a little short man, very old, but has had so much light in his face, very gentle, invited me to sit down. I just started asking him typical journalistic questions. And he told me his life story and how he had come to America from Guatemala, study in the Ivy League, lost his faith, was an atheist for a while, then went back to Guatemala when his father was dying. His father was a coffee planter and they had a mass of reconciliation with the church. Monsignor Sanchez, Carlos Sanchez, his name, he told me that, you know, when he went to Neil to receive communion, he didn't believe any of it, but he wanted to honor his parents by hiding from them (34/57)
that he was an atheist. The priest held the host out, the consecrated wafer. A burst of light came out and covered him and he audibly heard a voice say, I have always loved you. Instantly he was reconverted. He comes back to America, he was teaching in Dartmouth, begins living a life as a diligent Catholic. And then after a few years, begins to feel a calling for the priesthood, but he kept putting it off and thinking, yeah, it doesn't make sense. This was like the 1940s. They didn't need priests like they do today. It made no sense. He goes back to Guatemala later for a second visit of the family, knelt to receive communion this time as a believer. Same thing happened. But this time the voice said, why don't you do as I ask? Well, he knew that he had to become a priest. He did become a priest ordained at the age of 51, which is really strange in those days. But he had to come to America because in his home country, there was a communist revolution underway or a rebellion. They put his (35/57)
name on a hit list. Now, I tell you that story because I was sitting there listening to this as a 24-year-old man and watching this elderly Guatemalan priest sob as he's telling this story. These are about events that happened 50, 60 years ago and it might as well have happened last week. And I realized this man is a witness. Something happened to him and I could accept the truth of what he had to say because he had radically changed his life. He had become a Catholic priest because of it. Now, could I prove it? No, but I felt that this was the bookend to what had begun, the journey that had begun at Chatra when I had a revelation of God's presence. I felt it was happening a second time through the life and the presence of this man. Now, I ended up becoming a Catholic. I started studying to be a Catholic and I became, I was received into the Catholic Church in 1993. I was 26 years old. I was in Washington, D.C. and I became a very conservative Catholic, very ideologically Catholic. And (36/57)
I thought because I was thinking all the right Catholic thoughts and I went to church, I prayed, I did all of that, that my faith was fine, nothing could destroy it. And then we get to 2002. I was working in New York for a national review and the abuse scandal happened. And I remember talking to a priest back then, a good man, Father Tom Doyle, who had basically sacrificed his clerical career to defend victims. After our interview, he said, look, Rod, I can tell you're serious about your faith. And I want to warn you that if you keep going down this path of investigation, you are going to go to places darker than you can imagine. I said, well, Father, I appreciate that. Thanks for the warning. But I feel like I have to do this as a Catholic, as a journalist, and as a new father. He said, well, look, God bless you, I'll help you any way I can, but you better get ready. This is going to be dark. Dimitri, I had no way of knowing how dark it was going to be. I couldn't write but about a (37/57)
tiny bit of what I learned because people, priests and others would tell me stories, but they wouldn't go on the record. I knew they were true. I wouldn't go on the record. Three years later, my faith, my Catholic faith, was in ruins. But I learned something important about epistemology in that. I ended up becoming Orthodox, not by the way, because I thought the Orthodox Church was without sin, no church is, but because that was the only option open to me, I just lost my capacity to believe as a Catholic. But I learned this, that I had always thought that my faith would be unassailable if I had all the logic, the logical arguments for Catholicism solid in my head. It didn't work out that way. What I did not realize until I was put through that agonizing test is that all sorts of facts and collections of facts, they can be completely airtight. But if your heart is unable to integrate them into your life because of whatever, it doesn't matter. So when I became an Orthodox Christian, I (38/57)
had been intellectually humiliated, frankly, by the way I had believed as a Catholic. But I came in saying that I cannot allow myself to get stuck in my left brain with my faith. It's not to say you should never think deeply and intellectually about religious matters as an Orthodox Christian or any Christian. But it's rather to say, be humble and realize that the way to know God and to integrate God into your own heart and yourself into the life of God, it's not primarily through mastering propositional arguments, but by praying and going to liturgy and living the life, fasting, doing good works for people and allowing the faith by doing so to be sedimented into your bones. And I'm not capable of believing in an institution as I once believed in an institution as a Catholic. But then again, I knew so many of my Catholic friends were just as outraged about the scandal as I was, but they didn't lose their Catholic faith. And I think they didn't lose their Catholic faith because they had (39/57)
lived a much less cerebral Catholic life than I had done. Again, so many questions for you and I'm trying to do my best to think about how to walk this conversation in a constructive way. Let me ask you this, we've mentioned now the Eastern and Western traditions a few times. How would you describe what the distinction between those two traditions are and what is the story you would tell that would explain how these two traditions broke off from each other? What explains the different ways in which each branch of the church tackles and has tackled these questions about the nature of the world and our own existence? Yeah, that's a great question. And it's one that I thought I understood from the outside as a Catholic, but I really didn't. I mean, I just assumed that Orthodoxy was basically an Eastern form of Catholicism, maybe a little more mystical, but basically the same. And that's just not true. And I say that as someone who has great love and respect for the Catholic Church. Look, (40/57)
I'm a man of the West and even though I'm an Eastern Orthodox Christian, the fate of the West, I believe, rests primarily on the health of the Catholic Church. So I don't want to discourage Catholics. Nevertheless, when I was received into the Orthodox Church in 2006, I remember talking to a priest in the Cathedral in Dallas where I came in and I said, also give me some books to read so I can learn how to be Orthodox. And he just smiled at me and said, well, I can give you some books to read, but it's going to take you 10 years to be Orthodox. Like, what does that mean? And he tried to explain to me that being Orthodox is not about mastering a set of facts, theological facts about Orthodox Christianity. It's about living it. It's about absorbing knowledge through lived experience. And of course, it's important to read things, of course, read the Bible, but also read the Church Fathers and educate yourself about your faith. But knowing about the faith and knowing God are two very (41/57)
different things. And I think that speaks to a basic difference between Eastern and Western Christianity. And the West is so analytical in its approach to Christianity and everything else. That's one of the strengths about the West. But it's very, very easy to fall into thinking as a Western Christian, to fall into thinking that you know God, when in fact, you really know about God. And in the East, it's so much more about conversion of the heart. Now, I would have thought as a Western Christian hearing that from the outside, I would have thought that sounds very emotional and simplistic, but that's not it at all. It all has to do with the way the Church of the East thinks about who the human person is. And I mentioned earlier the word noetic faculty. Well, when Orthodox Christians talk about the heart, they don't mean the organ in your chest. They're talking about the quality of the human mind that is sort of like the receiver for things of the Spirit. And to be a sinner is to have a (42/57)
noose, no US, it's a Greek word that is somehow blocked that the Holy Spirit cannot flow into you. As you purify yourself through holy living, through repentance and all of the things, your news becomes more clear. A saint is someone whose news is almost entirely clear and he's filled with the presence of God. I would say that that elderly Catholic priest, Monsignor Sanchez, the fact that he just seemed to have so much light coming out off of him was a sign of a man whose news had been greatly cleared, which is to say his heart. Now, these are really complicated and way beyond my pay grade to talk about philosophically and theologically what the particular differences are. But I think it is really less about intellectual differences between East and West and more about experiential differences because there are Catholics, Eastern-Rite Catholics in Ukraine and elsewhere, who in my experience are much more like the Orthodox than they are like Western Catholics. They still use the liturgy (43/57)
of St. John Chrysostom, by the way. But when you talk to Catholics of the Middle East, for example, they in the experience of the Orthodox are much more about the news, about the heart, knowing God that way. And it is not as Westerners might have it, all about sentimentality and emotion. That is a fundamental misconception that people in the West, I was the same way, have about Orthodox Christianity. So, you know, I think, again, just to sort of aid listeners here, I think also many Westerners are familiar with this mode of knowing the mystery through things like meditation or some of the other Eastern traditions like Vedic traditions or Buddhism. And anyone that's been in a deep state of meditation where there's an awareness that arises, an awareness of the mind and the thoughts that you're having and the compulsive thoughts that you're having, can, I think, in some ways relate to what we're describing here. I want to go back to something I mentioned at the beginning, which was when I (44/57)
started analytical philosophy in college and I had this sort of existential crisis in my life as a senior. And I became kind of very solipsistic. I would say I experienced existential dread and terror because I got to this place of analysis where I realized that according at least to the methodology I was applying to my analysis, that I had no proof of anything other than my own existence. The only thing that I could say definitively was that I exist and nothing else. Kogito ergo sum. Exactly, which I think explains people's fascination with the simulation hypothesis because as a thought experiment, if we were in fact living in a simulation and it were convincing enough, we'd have no way to prove it, which goes back to my earlier point that science cannot provide you with definitive truth is about the ontological nature of the world. That truth can only come to you through revelation. And something that was revealed to me through my experiences of suffering that we touched on earlier (45/57)
is that love is truth, that somehow this presence or source energy that's at the heart of creation and our own consciousness that we've been referring to as God in this conversation is somehow tied up in love, not eros, not romantic love, but love in the deepest sense of the word, God's love. Does that resonate with you and where does love factor into this conversation in your opinion? Yeah. Boy, that's a massive question there. Well, in the book, in Living in Wonder, I used the the model that this wonderful contemporary orthodox theologian Timothy Patizus talks about in his book, The Ethics of Beauty, where he talks about finding our way to God through beauty, through desire for beauty, and through eros for beauty. And he says that that's one thing that we all have, we have desire, that's what makes us human. We usually use the word eros to describe sexual desire, but that's not the whole of it. You have kind of eros for food and just desire. But through purification, through the (46/57)
Christian, climbing the ladder of perfection, it gets purified to love for others and eventually gets to the highest form of agape, which is completely self-sacrificing love. And that's what the church says that Christ gave for us. He poured himself out for us. And if you take it from a Christian perspective, I mean, here is the incarnate God coming to earth to take on the finitude of human existence for the sake of saving us. Kierkegaard calls this the absolute paradox, the idea that the infinite could become finite, the eternal could become temporal. Christ is the absolute paradox. And not only did he incarnate, but he took on the worst of our suffering so he could defeat death. You might remember from your Orthodox church going as a child, at the Paschal Liturgy, at Easter Liturgy, we sing Christ's Risen from the dead, trampling down death by death, and upon those in the tombs restoring life. And this is something that was kind of new to me when I became Orthodox 19 years ago. The (47/57)
idea that Christ conquered death, I had heard that in Western Christianity, but it's taken so seriously in the East that all of the effects of death had been conquered by God loving us so much that he took on death to defeat it for us. So you ask about love, that is the purest expression of love imaginable from the source of love itself, God. And I can only really understand love as in a Christian framework because that's really the only way I've thought about it for most of my adult life. And it has to require sacrifice. I think of this scene in the great Terence Malick film, A Hidden Life. Did you ever see that? I didn't. I've seen the thin red line. I've seen Tree of Life. What was the movie you said? Oh, it's called A Hidden Life. It came out five or six years ago. It's based on a true story of an Austrian farmer, Catholic farmer Franz Jägerstader. And Franz really lived. In fact, his case is up for canonization now. He lived in an Alpine village in Northern Austria and went to (48/57)
church like everybody else. And then the Nazis came to town. Almost everybody in town became a Nazi, but not him. Not him and his wife. He couldn't do it. He thought that swearing allegiance to Hitler would be like swearing allegiance to the Antichrist. There's a scene in the film where he goes, and this is pure care regard. Malick invented this himself, but Franz, the farmer, goes into the village church and there's an artist there painting biblical scenes on the wall. And Franz compliments him on that. The old artist says, you know, people come in here all the time looking at these biblical scenes and they admire it. They admire the artwork. They admire Jesus for all the good things he did. The problem is, said the artist, Jesus did not come to call admirers. He came to call disciples. And the way to tell the difference between an admirer and a disciple is willingness to suffer. Well, this is a foreshadowing of what Franz goes through. He eventually was arrested by the Nazis and (49/57)
executed it as a traitor. And you know this going into the film because he really did live. And so what the film is trying to illuminate is the hidden life inside this simple Austrian farmer. Why was he the only churchgoing Catholic in that city who resisted the Nazis? It's because of his faith. It's because he loved God so much that he was willing to die to himself in everyday life so that when he was put to the test, he passed it. And there's an aspect of love in that, you know. And my book, Live Not By Laws, when I went into Eastern Europe and into Russia to talk to Christians who suffered under communism, and I talked to this one man in Alexander Ogorodnikov in Moscow. His face is partially paralyzed from the beatings he took from the guards. They all said that the only way that they got through prison and kept on to their faith was their ability to bear suffering because they knew that no matter what, God was real and he loved them. And they loved him so much they were willing to (50/57)
take on the sufferings of Christ for the sake of that love. And if you can do that in prison, being, having the hell beaten out of you by guards, then how much easier is it to do it in everyday life with your family, with your neighbors, with the people around you? The answer is it's hard. I struggle with this all the time. But this is why we must become perfected in love. And this is why when you believe that God is ultimately love, as I do as a Christian, you have to know that that love makes demands on you and those demands are often sacrificial. One more question before we move into the second hour rod, since we're talking about suffering, is suffering necessary in your view for spiritual growth? Absolutely. You know, I, when I was here in Budapest in 2019 doing interviews for Live Not By Lies with Christians who had suffered in Hungarian communist prisons, I was on a tram with my translator. She's a young Catholic and she said, you know, Rod, I really do struggle. I can't even (51/57)
talk to my Catholic friends about what I'm going through in life. If I tell them that, oh, my husband and I are fighting lately or our little boy is not letting us sleep, we don't know what to do with his behavior problems. They cut me off and say, oh, you got to get a divorce. You got to put your kid in daycare. You deserve to be happy. And she said, I'll tell them, wait, I am happy. I'm happily married. I'm happy being a mom, but a happy life is not a life without anxiety, without stress, but they don't even understand that. I looked at her and said, Anna, it sounds like you're fighting for your right to be unhappy. She said, that's it. Where'd you get that phrase? It's chapter 17 of Huxley's Brave New World. I don't know if you, when the last time you read that was, but that's the chapter when John the Savage, the dissident from this perfect society, is dragged before Mustafa Mahnd. He's the world leader for Europe. And then unlike in Orwell's dystopia, which is a dystopia of fear (52/57)
and torture and police, Brave New World is a dystopia of perfect pleasure. They keep you entertained. They give you drugs to be happy. You know, everything is taken care of. And Mustafa Mahnd brings John the Savage there and says, why won't you come join us? I mean, we give you everything you want. Mustafa even describes their society as, quote, Christianity without tears. Well, John the Savage, who's been raised in the woods reading nothing but Shakespeare, he tells him, that's the problem with you people. You could stand to have more tears. And what he goes on to say, John, does is that we have to have suffering, the prospect of suffering, to have love in beauty and art and poetry and all the good things in life, the things that make us fully human. It's not to say that suffering is a positive good, but it is to say that we do need that suffering and that struggle in order to purify ourselves, to perfect ourselves and to live a fully human life. Well, you would think that if this (53/57)
recovered from it. But as he went and talked to these people, he realized that almost all of them had an inner joy and an inner peace that had completely escaped him, even though he was raised in liberty and prosperity. And that drew him in so much deeper into realizing how because they were able to offer their suffering to God, it purified them and left them not broken but healed in a paradoxical way. And it affected him so strongly that today, Timo Krishka, he's stayed friends. He's studying to be a Greek Catholic priest. So, Ron, I'm going to move us to the second hour. I do want to touch a bit more on the simulation hypothesis and why you think this age-old thought experiment that goes at least as far back as Plato's allegory of the cave is showing up in this new technological form. Is it just because this is the language of the time or is there something more going on here? I'd also like to discuss the practical implications of what we've been talking about today and how your (55/57)
Christian faith applies to politics and the culture war, which is raging across Western societies as people, I think, try and grapple with both the speed of cultural change and their need to find meaning in a world that has come to feel for so many devoid of it. 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 Rod, 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. Rod, 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 (56/57)
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 Nicolau. 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. (57/57)
he goes in. And he secures power over the main TV channels and the oligarchs he gets rid of are the ones that control TV. So Berezovsky, Gysinski, before he goes for the ones that control oil and gas. So he prioritizes media control. And the journey to securing media control is really at the top of his securing of authoritarian power. And, you know, we could say that since 1213, the internet also plays a big role. But really up to then, it's really all about TV. And really quite rapidly, he secures central control over TV. You know, first, all the big channels come under him, some smaller channels are left to their own devices. And slowly, all of that is collected into a fairly centralized system. So, you know, they prioritize it. They on a deeper level, what their spin doctors talk about is that they felt very weak in the 1990s. And to compensate for that weakness, they had to create the aura of power, even though the state was very weak. And the way you do that through TV, you're (15/57)
my guest conversations, as well as the all new intelligence reports, which are the cliff notes of 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 each and every conversation, along with my takeaways from every episode. And with all of that out of the way, please enjoy this deeply enlightening conversation with my guest, Peter Pamarantsev. Peter Pamarantsev, welcome to Hidden Forces. Thank you for having me. I'm so excited to have you on, Peter. The reason I asked you to come on the podcast is because I want to see if you can help me and my listeners answer a question that I first heard you pose in a lecture or it might have been an interview you gave, but which you also ask in your second book on propaganda, which is, why did the future, i.e. the world we're living in today in Western society, why did that (5/57)
that sense, that's the Esquistle very relevant to understand it all. Just the ideological bit and the kind of stuff of democracy about debates and reason, evidence that's all gone. And I think you see some of that here as well. You have these kind of political movements, which obviously they're tied to in America, problems about race and all that kind of stuff, because that's the sort of history that we live in here. But their essence is just expressed through pure belonging, almost sometimes almost without ideology. I mean, is Trump right? Is he left? Well, I mean, we can't really tell anymore. It's just this need for certain types of authority figures and a certain type of experience of, you know, I'd say pseudo community. So that's kind of what we're left. And again, I'm certainly not the only people to notice this that as ideology and the politics of ideology goes away, everything becomes about identity in and of itself. And I think we have to think a lot more about what is (43/57)
ways, quite literally in online communities with the example of like GameStop or some of these cryptocurrencies, people looking for communities and fusing them with financial markets, also with the election of Donald Trump and increasingly Rand Paul and Anthony Fauci, and everything becomes increasingly a drama, everything becomes increasingly a form of entertainment. So actually, this, one, love your thoughts on that. And then I want to ask that question when maybe we'll move this to the second half of our conversation and I'll ask it, we'll keep it for there, but when did you first begin to see some of the characteristics of this sort of post-Soviet Russian culture emerge in the West? So, well, the revolutionary year of 2016 is obviously the one that is the inflection point. Both Trump and Brexit happening, but we already saw elements of it on the fringes. But without a doubt, the Trump moment is huge. Then you see the emergence of Duterte in the Philippines, who's 2015, very, very (49/57)
What's up, everybody? My name is Dmitri 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 Peter Pomerotsev, a Soviet-born British journalist and former TV producer who has written two extraordinary books, which together have done more to help me understand the predicament in which we find ourselves today with respect to our relationship to truth, identity, and meaning. Then probably anything else I've read since starting this podcast, and that's saying a lot because I've read a lot of books and articles and listened to a lot of podcasts trying to figure out what it is that's really happening to us. What is it that's responsible for this creeping sense of unreality, where so many of the things that we've taken for granted no longer seem to work and where people feel (1/57)
increasingly paranoid about everything, myself included, I feel this way. And I've come to the view that what's responsible is a breakdown in shared belief systems, that what's happened is that the stories that we tell ourselves about each other and about who we are in a deeply communal sense are breaking down. Not only are they breaking down, but they no longer work, and they've been shown in many instances to be frauds. Whether we're talking about the lip service, paid to democracy and human rights, as justifications for wars of aggression and occupation, or the idea that somehow trillions of dollars can be conjured out of thin air to support asset prices, but that somehow we have to go on pretending that it's really about supporting the economy and that we really do live in a free market capitalist system. I invited Peter onto the podcast today because he wrote about this world years ago, during his time living and working in Russia. And not long after the publication of his book (2/57)
describing that experience, he began to notice that some of the things that he wrote about, the cynicism, the sense of surreality, the nostalgia, and what he described as an aggressive apathy, were also showing up in Western countries. And he began to ask himself a question which, to this day, whenever I say it, it makes the hair stand up on the back of my neck. Why did the future arrive first in Russia? And that's the central question that has preoccupied me ever since I heard him say it, and which forms the foundation for today's conversation. Because as you will hear, some of the same forces that were operational in the late Soviet Union and in early post-Soviet Russia are at work in Western societies today. And if we want to understand what the future might look like when trust in institutions has completely deteriorated, when grounding notions of identity and meaning have all been disappeared, when any independent standard of truth has become so elusive that people are willing to (3/57)
believe in anything, and the only thing left to unify us is raw and unbridled power, then we would be wise to not only understand the path that Russia has followed in the last several decades, but to do everything in our power to avoid following it any further. Because it leads to only one place, and that is a repressive society that uses the language and institutions of democratic capitalism for authoritarian ends. For both existing subscribers and anyone new to the podcast, we've moved our premium subscription off of Patreon and onto Supercast, which you can now access directly through the Hidden Forces website at hiddenforces.io and get immediate access to the second half of my conversation with Peter and every other guest in a single unified episode, which will be delivered directly to your podcast app of choice every week or whenever we publish anything new. Subscribers to our Super Nerd Tier will also have access to the human transcriptions of both the first and second parts of (4/57)
future arrive first in Russia? And for those who haven't read your books, that question may not make sense immediately, but I promise that it will shortly. But before we delve into answering that or trying to answer it, I'd love for you to give me a sense of who you are, your background, and your connection to Russian society insofar as it's relevant to today's conversation. Sure. So the story is actually my second book, which is partly a mix of family memoir and kind of analysis of contemporary propaganda. So I was one in Kiev, actually, in 77. And when I was nine months old, my parents were who were they were being arrested a lot for sort of essentially giving out copies of censored books, which sounds absurd today, but that carried a sense of around sort of seven years, but giving out copies of books by Nabokov and Solzhenitsyn, talking about sort of hand-printed copies that people gave to each other. And there was a time when a lot of kind of dissidents would be exiled rather than (6/57)
put into prison and camps or other people that were often given the option. The policy was trying to get rid of minor kind of troublesome elements. And so they were exiled and really accidentally, after a period of wandering around Europe, sort of politically homeless, they ended up in London because my father got a job at the BBC World Service. So I grew up accidentally British. And then I went back to the former Soviet Union, but to Russia, to Moscow, after university. I went to film school there, worked in think tanks there, and then interested in them, as you can already tell, both in policy and in arts and storytelling, kind of at the same time as I continued to be, and ended up working in Russian entertainment TV in the kind of the first draft of the Putin era when Russia was still pretending to be a democracy. So I came to Moscow in 2001, right after September the 11th, I remember it very well, because hardly anybody was in the plane, people were scared to fly. And then I was at (7/57)
film school and, you know, working on British documentaries about Russia until around 2006, and then 2006, 2010, stroke 11 was when I actually worked inside the Russian entertainment industry. And I mean, my great ambition was to make kind of feature films, but like all people who dreamt of making all featured documentaries, I ended up making factual entertainment shows, reality shows. It was a very exciting time in Russian entertainment, because a lot of these kind of Western formats, like the Apprentices, for example, or Love Island, or Stand Up Comedy, or sitcoms, were coming to Russia for the first time. And it was a time of kind of quite broad cultural experimentation, which was both an elite art and an entertainment. But yeah, my first book was about that world, but also seeing this new kind of authoritarian regime take hold that was really modeled in some ways on reality shows and entertainment, but certainly tried to be entertaining as well as oppressive, and that was really (8/57)
invested in TV as its main medium, but also in a weird way as it saw itself as a TV show. It didn't just use TV, it saw its own exercise of power as a sort of reality show, which definitely seemed to anticipate reality show hosts becoming president of the US. So in that sense, they seem to have kind of clicked on to some sort of truth that we all live in now. So yeah, but I left Russia in 2011 for many reasons, but partly because it was, you know, the turn towards dictatorship was already apparent, even though it was actually still the Medvedev era. So Russia was still playing nice, and officially, it was still moving towards the West, but everybody on the ground could tell that things were going really dark. People were starting to leave. Now it's obviously just an out and out dictatorship. And yeah, and I kind of like moved away from TV back towards policy, and have ended up kind of gravitating towards academia, I ended up working at the London School of Economics. Now I work at (9/57)
Johns Hopkins University, studying propaganda, studying the weird coming together of media and policy, both about Russia, but really across the world, and kind of thinking what media can do, how do we create TV and other types of media that are actually good for democracy? That kind of ended up being the question I sort of asked myself. So we know what the other side are up to. But, you know, we have a lot of assumptions about how media is meant to help democracy, but how do you tell stories, or how do you create shows that are good for democracy? And I can't say I've solved that, but that's kind of the big question that I explore these days. So you said that when you arrived in Russia, it was kind of the first draft of the Putin era, which was an interesting choice of words, given the fact that you also said it later when you were describing television that, in a sense that the Russian state saw itself through television, where you described sound a lot like a hall of mirrors. What (10/57)
role does television, and did it then and does it play now, in Russian culture and Russian society? And to that point, would you have the views that you have today, or the depth of understanding that you have today, not just as a result of the fact that you were an expat, but how instrumental was it that you were actually working inside of the machinery of television? I mean, look, there's other people who've written very, very good analyses of Russian propaganda without working in the television industry. So Arkady Ostrofsky's brilliant The Invention of Russia covers the 1990s, and the role that media and TV played in securing this new model of power. Andrew Wilson has written a great book called Virtual Politics, all about that as well. So it clearly didn't have to to write about this. I suppose it gave me a sense of the texture and the sense of the characters, and a sense of the kind of attitude of your regular TV workers who actually start this, and who are kind of like the sort of (11/57)
the media soldiers in the middle of it. So I never worked on political shows, because I wouldn't as a foreigner, to be frank, but also as an individually, maybe I wouldn't as well, given my background. But I certainly saw a lot of people who were making news shows and current affairs shows and documentaries supported the regime. And I'd go drinking with them, or I sit in an edit suite with them, or, you know, I'd have an editor on my show that just got off working from a piece of state propaganda. So I talked to them all the time, without writing a book, just they were just the people I knew, and the people I hung out with. So I got to know their attitudes, and their worldviews were kind of, you know, very important, because they're the sort of people that kind of reflected and both reinforced the kind of governing attitudes of the country. So I suppose that was a big added value. But in terms of the regime, and it's actually to TV, you've got to go back to the 1990s, when you have (12/57)
this chaotic period in Russian politics, democratic in a kind of, you know, chaos theory of democracy. And around 96, when Yeltsin, who's the president at that time, is really on the ropes, very famously, all the oligarchs unite behind him to stop the communists from getting into power. And they unite behind him and put their resources in, and the main thing they do is capture TV. Before that TV is used in a very chaotic way. You know, there are other forms that were more important to the Soviet regime. The Soviet regime was very invested in propaganda. But, you know, TV was pretty lame, basically. But they realized that, look, this is a moment where you could take advantage of TV, and they all the main TV channels which are controlled by oligarchs get behind Yeltsin and play an important role in securing his victory. And what is a sort of genuine vote at that point? Then in 1999, Putin is a nobody. He has a rating of, you know, I think it was like below 10%, when he's made Prime (13/57)
Minister by Yeltsin. And he's transformed into a vote winner via a huge TV campaign and a kind of a war in Chechnya, which is kind of a made for TV war in the sense that he is made into a war leader on TV. And he's completely aware of that. He's very aware that he's a no one. And that it's the power of television that has given him this aura, this charisma, which nobody thought he had. He's not a Chavez. He's never gone on the streets to rabble rouse. You know, he's not a populist in that sort of bottom up way. It's all created through TV. And he's completely aware of that. And so kind of almost one of the first things he does in the early 2000s, even before he takes control of the oil industry, which becomes obviously his key lever, even before he takes control over all the security forces, the first thing he goes for to take over as TV. And it happens bit by bit. It happens, you know, quite, you know, lots of things happen as some of the he does it overnight. But that's the direction (14/57)
constantly reaffirming the central role of the Kremlin, you're doing show trials, you know, against oligarchs to show, haha, look, you know, we do have control. And so kind of informational dominance becomes a way to compensate for a sense of insecurity. I mean, now they pretty much have everything under wraps. But in the 90s and early 2000s, when oligarchs were very strong, when local governors were very strong, when, you know, security forces were very disorganized and redo the bidding of whoever would pay them the most rather than central power, you almost compensate for that by having, you know, hegemony over at the imagination. So that's another kind of deeper reason they invest in information dominance so much. I'm interested in exploring this reliance on storytelling. And also what it sounds like you're describing the aesthetics of power. And maybe something else, which we think about in Western capitalism as kind of fake it till you make it, sort of create the appearance of (16/57)
success and then sort of become successful through that process of having created the perception in the minds of other people. That's a very nice parallel. I hadn't thought about that, but that's not a bad parallel. That's not bad. So describe for me and my listeners what it is that we're talking about here, what it is that you describe in your first book through your experience of living and working in Russia. What is the sort of cultural manifestation that we're describing? And then what I would like to do is try to understand its origins, its progression from the end of communist Russia, because interestingly enough to get to ahead of ourselves, I did another episode with my friend Simon Mihailovich, who emigrated to the United States in the 1970s. And he sees the beginning of this unraveling actually in the period of destilization, but then really accelerating with Perestroika and then through into the early 1990s. What is it that you experienced that you write about that we're (17/57)
trying to get our arms around today in this conversation? Well, look, again, we're talking about phase one Putinism. So now we're on a different model. So, but it's a very important one to understand because it's one that's been imitated by a lot of people by Viktor Orban in Hungary, by Vucic in Serbia, by Erdogan in Turkey. And when we think about nightmare scenarios of the US, which I think is still nightmare scenarios, but there's the scenarios, we're talking about Putin phase one. And Putin phase one is something that was nicknamed managed democracy, which is still the veneer of democracy, but actually underneath it's becoming a dictatorship. Now it's just an open dictatorship. Again, aesthetics, the aesthetics of democracy. It's interesting. Again, I just want to point this out, aesthetics plays a really powerful role, I think in your book and in this conversation. And I think it says actually very interesting. I think when we look at politics, we always lead towards sort of a lot (18/57)
of explanations based on self interest or based on power. I think aesthetics and psychology, psychoanalysis might be interesting additions to how we think about these things. We've definitely started talking about psychoanalysis a lot more in America. We still don't a lot in geopolitics. But anyway, coming back to Putin, so the idea was to have the veneer of democracy, but actually still controlled. So if you were to switch on a Russian channel in 2007, eight, you would see actually a very lively debate show between different political parties in a way much more intense than an American one, much more kind of Jerry Springer like, you know, with a lot of rowing and shouting. But all those parties were actually to a greater or lesser extent either created or controlled by the Kremlin. Real opposition were already being forced out and would soon just be not allowed on TV altogether. That ends up being nebarnly. But before that, that's lots of stages. And the idea was to reflect different (19/57)
bits of society. So everybody felt represented. But to make sure that none of them could ever really compete with Putin. So the overall point of this reality show was there is no alternative to Putin. But you had your crazy communists who were meant to kind of soak up some of the resentment of pensioners. But everybody else was meant to look at them and go, oh, my God, they're crazy old commies. And then there was the really far right guy, Zyrunovsky, who was created by the Kremlin literally, who would play the role of like the crazy far right Steve Bannonny kind of character. And he would get, by the way, like 17% of the vote. But most people go, oh, my God, he's crazy. And he would say outrageous things, crazy things that part of the population would like, but anybody normal will go, whoa, he's mad. And then you had a kind of liberals who were always a little bit effete and a bit kind of, you know, very un-Russian. And they would, you know, get their 6% of the kind of liberal elite (20/57)
votes. But it was very clear that they didn't represent real Russia. They weren't real men. They were, you know, they were nerds. And, you know, they clearly didn't reflect normal Russians. Interesting. Real men also something really to sit on a bit and to think about in the course of this conversation, this notion of masculinity. Oh, yeah, that obviously plays a huge role, almost to kind of a camp sort of way with Putin's photographs of him being so virile and riding horses and going around bare-chested. And so you were meant to look at that and go, wow, Putin is just so much better compared to all of this. And there is no real alternative to him. But we do have some sort of debates. They don't want politics to be boring. It's not meant to be fun. You know, there were stories around these parties and these characters and they were all, you know, these fun debates and, you know, you got to vent a lot of spleen. Though ultimately, when it came to any big decisions, all these parties (21/57)
were completely loyal. So they came to sort of arresting an oligarch, they'd all be on board. So that was the model. I suppose the twist to give to all of this was that this was done quite openly. So it was openly telegraphed that all these parties are loyal and controlled and part of the Kremlin. So this is a very, very interesting layering of messages. Yes, we do have some freedom, but actually it's all controlled and don't you get any ideas. So Koav, who was the kind of guy who was running all of this, who was kind of in charge of media policy and in charge of running the so-called parliament, would leak photos of his own office with, you know, telephones to all these party leaders, making it very clear that he was in charge. And then it's kind of hard to, sometimes I find it hard to grasp for, for Westerners. This wasn't about conning people. This was about saying, this is a game. These are the rules of the game. These are the limits of the game. And then on an even more subtle (22/57)
level to say, look, democracy is actually always controlled. We have democracy, but it's really controlled by our own deep state, so to speak. And it's the same over there in America. They do have democracy, but it's controlled by a deep state or in Britain, it's actually all controlled. So this is the package. And sort of saying that the alternative was the 1990s, which was chaos. Do you want that? Of course you don't. So always bouncing off like, you know, that democracy was just chaos. This is what it is. You know, this is sort of command and control democracy. And, you know, we can have some fun with it. You know, there's some color. Elections are definitely not up for it, but you can go and say some crazy stuff. You can even criticize bits of the, maybe not Putin, you can criticize the government. You don't criticize Putin, who's sort of almost above politics, but you can have a go with the government. You're allowed to do that. So there are some bets, you know, there's ways to (23/57)
express dissent. But please know that actually at the end of the day, it's limited. Is the distinction that you just can't speak too truthfully, that you can't break the third wall? Is that the real distinction that it's okay to dissent? Just don't really use language from the world as it is, from reality. You have to continue to play act in this larger sort of masquerade. Is that the distinction? Exactly, exactly. So I think you've really put your finger on it there. And when we think about power, it's getting people to play along, which shows you have power. And by people playing along, you kind of weirdly break them. And people by agreeing to play along, people become part of it and sort of commit it to it. And I think if we think about power and dictatorial power, it's getting people to play along, which is the secret, because actually only so much your repressive organs can do. There's only so many people you can arrest. So it's getting people to play along, which is the key. It (24/57)
was also in the Soviet period. And so it was interesting. So when I was there, if you wanted to speak the full truth, you weren't at that moment usually killed. You were just off TV. Yeah. And being on TV was being relevant. So there were opposition people like Boris Nemtsov, who was on TV for a long time. And then he started to go too far. And then there were just blacklists. There were blacklists of people who cannot get on TV. And Nemtsov eventually got into those lists. And people sort of think about, talk about the real opposition, which meant not being on TV, which meant being irrelevant. So you weren't killed for it at that point. You weren't put in prison for it. You were just made irrelevant. You were not in the reality show. You weren't in the Big Brother House. Instead of like Orwellian Big Brother is the Big Brother House. If you want to be in the Big Brother House, you've got to play along. And you're right. And that's what I try to get at in my book. It's not a top down (25/57)
system of coercion. It's a way of getting everybody playing along, which in a very subtle way breaks you, because you become part of it. And there's actually been a lot of anthropology about this. I'm not the first person to notice this. There's been very good anthropology about this, about the Assad regime, for example, in Syria, the first father. So I'm certainly not the first person to tweak this. But my book is in many ways about what it's like living in that, I suppose. So I actually want to pull a quote from your book. I have so many quotes on this rundown. I have quotes from both, this is not propaganda and from Nothing is True and Everything is Possible. This quote speaks to what you were describing just a moment earlier. Let's see where I want to start to pull it from. But even when you know the whole justification for the president's war is fabricated, even when you fathom that the reason is to create a new political technology to keep the president all powerful and forget (26/57)
about the melting economy, even when you know and understand this, the lies are told so often on Ostankino that after a while you find yourself nodding, because it's hard to get your head around the idea that they are all lying quite as much and quite so brazenly and all the time. And at some level, you feel that if Ostankino can lie so much and get away with it, doesn't that mean that they have real power, a power to define what is true and what isn't, and wouldn't you do better just to nod anyway? Now, this speaks to two things. One, it speaks directly to what you were describing before, which is that in a sense, the power to define reality is a power that's so awesome that it instills in the listener or in the viewer, at the very least a healthy sense of fear, fear of going against a power that's so powerful that it has the capacity to define what's real. But it also speaks to something else, which is really what I want to get to and draw it from you, which is what were the (27/57)
conditions that made this possible? What sort of vacuum existed? How did Russian society find itself in such a vacuum, a cultural vacuum, for lack of a better term or a sort of state of nihilism, where a regime like this and stories like this could emerge and try to compete as the dominant narratives of society? First of all, there's a big historical legacy in a certain way that Soviet Union did this as well. So we are talking about a lot of historical conditioning and a lot of people understanding the kind of the gospels of the Soviet Union were nonsense, but having to repeat them and understand that they are a way of communicating power. We're talking about propaganda theory, this idea of propaganda as messaging as in trying to convince people. There's also propaganda as signaling. It's a signal. This is what we say is the truth and if you want to survive, you better not. So it's not about persuasion, it's kind of like communicating power. But would you say that it was that (28/57)
distinction was always equal or did it begin where more people were convinced and over time it just became the signal for power? In other words, the form of propaganda and did people's conviction in the story deteriorate over the course of the USSR's history so much so that by the time of the collapse in the 1990s, there was a sense that like again to the title of your book, nothing is true and everything is possible. So I think we can look, we can go all the way back to the start and look at sort of peaks and crests in this. If we're talking about the period that I'm kind of bay concerned with, which is the Cold War period and post-war period, there was probably a moment in the 1960s where there was a real hope for socialism with a human face. There was a certain amount of optimism. There was real economic progress and there was a certain amount of liberalization and a certain amount of reformers, especially in the culture sections, which might make you think that it was possible. By (29/57)
the 1970s, it's clear that it's sort of the breaching of era, complete cynicism. By the way, the time it gets to the 80s and 90s, it's lost all its meaning. So I'm concerned with that bit. I mean, you could then go back to the 20s to the Stalin period. 20 people seem to believe it, but the Stalin period is just about power. So maybe this is a cycle, I don't, you know, we'd have to do a lot of kind of deep right for that. But in what I'm concerned with, which is that period, then I think that's the kind of arc. But coming back to what I was saying exactly about the Soviet one, the difference between the Soviet one and the Putin one is that because communism itself was meant to be a rational enlightenment philosophy, which was meant to respect evidence, it claimed to be scientific, you know, it claimed to be an enlightenment, the ultimate enlightenment experiment. A, there was a normative position that you could criticize it from. You could say, well, you've promised to give us socialist (30/57)
utopia, but you have not. And here's the evidence. And they would then try to produce other evidence, say, well, actually, we have, look at these statistics and the Soviet system had all these think tanks trying to prove the economy was working well. You know, it was quite bizarre. They came up with the idea that people weren't unemployed, they just had so much free time, that showed it was doing well. I mean, it was like, because it was a system which was meant to have values, you could attack it for that. You could say that you are creating a better society. Why are these people in prison? And because they signed up to various human rights norms, you could criticize them for that. The dissidents used to say that we're going to hold you accountable by your own laws. There were laws around freedoms in the Soviet Union, which were clearly ignored, but they were there. So because it was a coherent philosophy and an enlightenment philosophy, there was a normative standpoint that you could (31/57)
criticize it from. The difference with the picnic era is like, they don't believe in anything. They can be left wing, right wing, they can be nihilist, they can be idealistic, they can change, they can be completely situationist. I think nihilism actually is a coherent philosophy. I think that cynical, cynical, if you look at the kind of definitions of cynical, it means you can believe lots of things. It's not believing in nothing. It's like, belief is so thin that you can do this thing in the morning and this thing in the afternoon. That's the world that I lived in. That's interesting though. So what is the distinction between believing in anything and believing in nothing? So nihilism is still a coherent worldview. I mean, nihilists were 19th century, kind of like heart. I mean, there's Russian novels about nihilists, their belief in the blackness is a commitment. They make a commitment to their nihilism, like grunge fans or something. There's a philosophy there. This is about being (32/57)
a nihilist at one moment and then putting on a business suit and being a kind of liberal rationalist the next. There's a coherence to nihilism. Here, we're talking about just being different things. It's more a masquerade that you're constantly indulging in. I mean, there is an emotional logic there. There's a psychological logic there, which I think we couldn't try to sort of find. So I'm not saying there's nothing there in terms of an engine, but in terms of belief systems that you can translate into words and ideas and facts and debates, there isn't a stable one. And I'm always asked, what does Putin believe and what do Russians believe? And I'm like, if you're asking that question, you've understood nothing. The point is they can believe lots of things and none of them matter. And that's hard for, again, in a Western culture where we're brought up from school age to say, what do you think? Yeah. And to re-hardening our sense of self, it's very hard to understand a culture where the (33/57)
opposite is valued. And that was actually already embedded in the Soviet educational system, where nobody asks you what you thought. You were just meant to power it back Soviet dogma, whether you believed in it or not. So that was already there in the Soviet system, but it's kind of multiplied. And if anything, and what I try to get to in the book is what they would say that all your beliefs in the West are bullshit, what I would always hear from, and there are kind of elite because, you know, people who work in media, create media are sort of elites, was that you don't understand, Peter, they would tell me, all that stuff about human rights, all your stuff about a liberal world order that you've grown up with, it's bullshit. Your elites don't believe in it either. It reminds us of the Soviet Union, where they would parrot these things, but no one believed in it. And actually, below all this are just games, manipulation, and the same kind of, I think I call it culture as zero gravity (34/57)
in the book, that we have here. And you will find that out soon. And I remember listening to them going, oh, you just have, you know, you're, this is sour grapes. We have politicians who still believe in facts and ideas, they're corrupt, whatever, but they still believe in stuff. And I suppose the story of my second book is coming back to the West and going, Oh, my God, did they actually have a point? Because you just have this explosion of a lack of belief in anything and a very similar attitude towards facts. So I suppose that the symptom of this world view is that facts lose their meaning because facts become instrumentalized, all ideas are instrumentalized. They only, you know, they're not a thing in itself in this world. There's something to hit people with or confuse people with or intimidate people with, but they're not something that you kind of use to debate because there's nothing to debate about. Facts lose their meaning. And if anything, there's this kind of celebration of (35/57)
sending a big middle finger up to factual language and a reveling in nonsense speech and a reveling in just saying the most absurd things and saying, that's kind of almost your kind of your badge of honor. And, you know, we see some of that in the West now, which was, you know, what kind of struggling to deal, how you deal with leaders who don't care if they're caught lying. That was one of the agonies for my liberal friends in Russia. You know, they really believed in holding truths of power. And they would produce this evidence about Putin's corruption or about, you know, the fact that the elections were rigged. And the Kremlin would go, So what? Yeah, we're lying. And that resonated with people. Most people in Russia said, Yes, so what? None of your ideals matter. Democracy was a nightmare or a sham. What is this evidence that you're producing? What does it mean? It means nothing. We live in a world of chaos and let's speak about it that way as well. And I remember so many of my (36/57)
friends just being like, you know, because they believed in democracy. And they were like, no, but here's the evidence. And it just didn't mean anything. And that was a very dizzying moment. But now I think we see it everywhere. What kind of what was used to it now, where the evidence has stopped meaning anything. So much to pick apart here or to reflect on. First, again, I want to pull a quote out from your book that actually speaks directly to what you said. This is not propaganda. Were you right? I returned to London because in my naivete, I wanted to live in a world where, quote, words have meaning, where every fact was not dismissed with triumphant cynicism, or as, quote, just PR or quote, information war. Here are the two sort of things I want to highlight. One is it seems that what you're describing is a society that feels as if it has gone through the apocalypse. And what it has discovered in the course of doing so is a deeper truth, which is that there really is no truth, that (37/57)
everything is relative, that nothing has underlying substance or meaning. And so that the truly enlightened people are the ones that understand that and in a sense believe in nothing, not in an ideological way, but truly deeply nothing. So that's one observation. And I also want to reflect on whether that's actually true or not, because you can approach that question from two different perspectives and both I think can carry some a lot of intellectual weight. And the second thing I want to sort of reflect on is a more practical question, which is what shattered that mythology? We don't have to necessarily try to extract that from the Soviet experience, because I think in some ways we tried to address it a bit and we talked about the Stalinization or Perestroika or the 1990s where communism collapsed and all of a sudden you had these overnight billionaires, you know, running around town with Maybachs, as you describe in the book, but maybe more to the point, what shattered this myth in (38/57)
the west? Because as you pointed out, your colleagues in Russia would say, you will discover this soon too. And this is the question, right? Have we discovered this? Is that what's happened here in the west that we discovered it at some point? And I would say in a sense we have, but then that brings us back to the deeper question, which is, did we discover a deeper underlying truth? Or in fact, have we in a sense deluded ourselves? And then further to the point, if in fact we discovered a deeper underlying truth that really there is no truth that we can discern, what does that say about our need for mythology? And can we erect myths and live by them knowing this deeper truth? Because this is the, this then brings us all the way back to some of the fundamental sort of foundational issues with the Enlightenment and the death of God. And our attempt to, in a sense, construct a society very much along the lines of communist Russia, highly scientific, but full of so many contradictions. And (39/57)
you sort of wonder, where does this leave us? So I said a lot, but I'm curious, I want to allow you to just reflect on what I said and respond however you want. And we'll see where it takes us. Yeah, look, there's so many issues here. So what happens when you realize that like the myth is hollow? I think there's different ways of reacting to it. So the working out of the communist in Russia, the communist myth was hollow. And the attempt at creating democracy in the early 90s was disastrous in so many ways. Ended up with people who believed in nothing. But doesn't mean that they were free. And here's a big paradox. And we see this all the time in the West with people who don't believe mainstream media. They're not free. They end up embracing conspiracy theories as a way to make sense of the world. So we still need a way to make sense of the world on some psychological level. So if it had led to real freedom, that would be interesting. But it didn't. If anything, the opposite, you go to (40/57)
a kind of, I want to try and describe in the book, was almost a medieval sort of psychology, where, you know, instead of the kind of mix of myth and reason that Enlightenment democracy had, you just have pure myth. And conspiratorial thinking replaces ideology as a way of... And in a sense, you fully invest yourself in the story that there is an all-powerful elite and that they control the world and that you certainly can't do anything about it. But in somehow, in your sort of recognition of that, that you somehow are exercising a level of freedom. If anything, you'll have completely helpless. So this is the paradox. In order to kind of be free, you need to trust at least a little bit. And we see that everywhere in the West and you see that in Russia as kind of dominant. And I think that even though the various messages the Kremlin can do, they can believe or not believe in them, the conspiratorial world view is genuine. I mean, that is... That's not a world view as in as like a (41/57)
philosophy, that's like a psychological, you know, crutch, basically. And the need for identity is still there. And the need for fake community is still there. And all those things are still there. If anything, they've kind of been made naked. You just have the psychological pulsating needs now with no veneer of ideology or much less of a veneer of ideology. And I think you see the same here. When they came up trying to come up with a name for the Putin Youth Group, which was openly modeled on the Hitler-Yugand, they didn't call it young Komsomol or Hitler-Yugand or young whatever, they just called it Nashi. Us. So there's us and there's them. So the need to define yourself, or none of that goes away. The psychological underbelly, if anything, is revealed. So as long as there's nothing in freedom, there's just these psychological needs and fears and inability to make sense of the world. And, you know, the need for warped, sadomasochistic father figures, all that stuff is there. So in (42/57)
identity, and what is healthy identity and what is destructive identity. But, you know, Fukuyama's got a whole book about this, you know, about how ideology went away. So now you're just left with pure dynamics of belonging and what belong. And again, Russia got to that very, very early. This idea, they twig very early that Putin doesn't can't be ideological, because people don't believe in any ideologies. And also, like, he needs to cobble together a lot of other people. And so they come up with this idea of creating what they call the Putin's Coeblitions Tour, which is translated as the Putin majority, but it's much closer to what Trump refers to as the American people, the real people, the true people. It's this amorphous emotional thing that anybody can project themselves into, which is really defined by what it's not the enemies, the enemies of the states. First, it's the oligarchs, then it's the West, it can move around. So it really is about giving people that sense of belonging (44/57)
really outside of a, in a very kind of jello like emotional construct, which is constantly changing its kind of messages. But the emotional structure is very similar. Yeah, it's interesting because you also mentioned identity, which I think is the other half of this story. Because I think that what creates the vacuum is the destruction of both identity, a sort of sense of communal identity, and meaning, and its replacement with one thing, power, a sort of raw power that can define both identity and meaning and is foundational to both. Yeah, and I think that's pretty evident from Russian foreign policy. When in 2011-12 there's huge protests demanding reforms in Russia and concrete reforms and reforms which will end up loosening the power of the Kremlin, whoever's in there. Putin's response is to set off on a bunch of imperialist adventures, and they are all about that. Let's compensate because people do need meaning. Again, none of those things go away, by the way, even when you stop (45/57)
believing in ideologies, all those things about meaning, the fear of death, the needing to feel that you're something bigger than yourself, none of that goes away. Those raw things have to be satisfied. And when we talk about Putin's expansionism, that's what he's channeled that into. And I think the other fact that you'd invoke there is identity as a process of psychology and almost psychoanalytics. I think that plays a very big role as well. It's a weird pattern of an authority that humiliates you, like an abusive parent, which is very, very evident in Russia, every day when you live there, but also historically, and then you compensate the resentment to build up from that through an expansionism. So there's this weird social psychological dynamic going on as well, based around humiliation and aggression. So all those things that are happening, and yeah, and Putin's continued international adventures are to do with two things. One of them, again, is signaling. If I can go in and bomb (46/57)
Aleppo to Smith-A-Reeves, don't you dare doing anything at home. If I can push Biden around, just think what I'll do here to you at home. So there's definitely a messaging back. I'm big and scary internationally, they're alone at home. But also, without a doubt, it brings a certain amount of pleasure and fulfillment to ordinary Russians. And I'm not saying Russians want war. I don't think they do. I think there's a low threshold for self-sacrifice, but the going around swinging your genitals on the international stage does help people feel fulfilled and that they have, if not meaning, then some sort of satisfaction. This is so fascinating to me because you touched, again, just to wrap up the point about power. I think it's also so important for me to clarify what I mean when I talk about it, because in the absence of a belief system, it seems to me that the only thing that's left to hold society together is raw power. That human beings have the capacity to live in a society of millions (47/57)
of people, if they have shared beliefs, those things allow them to form expectations about people's behavior and their own behavior, et cetera. But absent that, you need the sort of Leviathan. And then the other point is interesting about entertainment because in a sense, it seems to me, in the world you describe in the book, and I want to also use this as an opportunity to begin to shift our attention towards the West, it seems that entertainment very much plays that role of quelling the inner-term oil of inspired by meaninglessness or just filling the void of the emptiness of everyday existence, that there's something to that, that it's central in that way. And I feel like we've seen that happen in the West. We've seen it happen in the stock market with the transformation of the stock market from something that actually performs a very basic utility function of reallocating capital to being actually increasingly a casino and a place in which to act out the dramas that begin in some (48/57)
recognizable, Bolsonaro or bad, you know, there's another pattern here, by the way, these are all men of a certain age. So I didn't, there's another kind of like through line here when it comes to identity. Which I'd love to explore. I just think it's just pretty self-evident, isn't it? I don't even know what to say. It's so obvious that there are a certain type of men, you know, projecting a certain type of masculinity and appealing to people who feel under threat, I suppose. But we can go deeper, you're right. So all those things are very similar. But then I'd say also that the rise of conspiratorial narratives, aside from the power bit, the appeal of conspiratorial narratives, so again, throughout Eastern Europe, about Vucic here, the rise of it, I mean, the US, and really conspiratorial thinking being the thing that replaces ideology. So we always have conspiracy theories. The Soviets had their conspiracy theories that the bourgeoisie were behind everything. But that conspiracy (50/57)
theory was that's buttress in ideology. The Nazis had the Jews behind everything. But again, the conspiracy theory was a subset to the ideology. Here you have almost conspiracy thinking for the sake of conspiracy thinking. The conspiratorial mindset is the ideology and the conspiracy theory can change. One moment it's the imperialist, the next moment is the Jews, then it's the aliens, then it's Q. It's always changing. There's a lovely statistic about most people who follow QAnon didn't actually understand the details of QAnon. So it was just about being in the conspiratorial world that they derived fun out of. There's lots of research showing that conspiracy theories are very related to when people feel there's no sense of future anymore. Which I think here is the key. Those ideologies, well, for all their obvious faults, were future-orientated. We were heading somewhere and you could sort of judge facts and evidence in comparison to that. The facts show that our society is (51/57)
progressing, or the facts show it's not progressing. We need to progress better. Just a whole idea of progress kind of pushes you towards a slightly more rational discussion. When that disappears, conspiratorial narratives tend to rise. There's very good research in Hungary about how after the 2008 crisis, which is one of the other big moments, I think, which undermined faith and liberal democratic progress, after the 2008 crisis, which hits Hungary very hard, people stop believing in the future and conspiratorial narratives go up. So these things, I think, are very connected. So I'd say if 2016 is the moment where the new unreality maybe becomes impossible to ignore, and if the rise of conspiratorial narratives is the thing to track as a kind of growth, I think obviously 2008 is the big moment, which undermines for a whole generation any sense of a future. I think that's a very obvious thing to say, but I think it's very interesting to see where it hit hardest. I mean, it hit hardest (52/57)
in bits of America, where people had their savings wiped out. It hit hardest in Hungary. Hungary was really hit by the financial crisis, and Orban is a really interesting reaction to that, definitely the most Putin-esque politician in Europe, and so on. So I think that's the big kind of moment when we realize that what was an ideology has become a myth. We think we're heading towards this happy, globalized village, but actually, A, we're not getting there, and B, loads of people are unhappy about it, and loads of people feel left out by it, and there's a whole generation of young people who can't even buy houses, and the myth becomes, it's seen as empty, but again, it takes a while for a crisis to sort of percolate into culture and politics. So 2008 is the shock. It kind of percolates through around the 13th century. So many thoughts that I want to try to articulate before I move it to the second half of our conversation, Peter. One, I love this observation. You made it in the book as (53/57)
well, which is that in the absence of agreement, in the absence of societal consensus, the future becomes impossible, and so in this sense, this also somewhat explains why there's an appeal for the sort of nostalgic leader who looks back towards the past to give people something that's stable, something that's in a very physical sense solid to hold on to. I also, I just love, and I want to reflect on it in the second half of our conversation, this observation about, one, the sort of evidence that we had entered this world with the 2016 election as an example, and distinguish that from looking to understand where did this process begin to go off the rail, so to speak. What are the causal factors? I think 2008 absolutely ruptured in a sense, people's belief, but I think 2001 and the invasion of Iraq, using words like freedom and democracy was in some ways more devastating because so much of who we are in the West is based on this idea of Western liberal democracy and capitalism is the (54/57)
second part of that equation, which 2008 completely destroyed or our response to 2008 and the self-dealing that was so evidently on display by those who supposedly were entrusted with the responsibility of protecting us and safeguarding the overall integrity of the system. I think you can look at the entire progression of Western society throughout the 20th century, from monarchy and Christianity and monotheism to rationality, nationalism, and capitalism to now where I feel like we're in another period of transition where who we thought we were isn't exactly who we are, and that's the space I want to explore with you in the second half of our conversation, Peter. 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 to access the second half of my conversation with Peter, as well as the transcripts and intelligence reports, which (55/57)
include additional notes, resources, links, and other material that will help you get the most out of each and every episode, head over to hiddenforces.io and become a premium subscriber today. Peter, stick around. We're going to move the second half of our conversation into the subscriber over time. Okay, that's great. 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 full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io. 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 (56/57)
few days before Ray Kurzweil dies, he can upload himself to the. It's interesting that it's always before the profit dies that this kind of thing will happen in his own prophecy. When you're just for our listeners who may not know when you refer to the singularity, you're referring to the term coined. Was it coined by Ray Kurzweil? Yeah, it was. Which is that roughly around the year 2050 but it's not, it doesn't have to be a specific date but there's a point in which machine intelligence will surpass human intelligence. So I think it's moving back the sicker he feels earlier it becomes. He thinks like what, 5,000 supplements a day? He takes a ton of pills. In order to sustain himself till the day where he can upload himself to the cloud and download himself into a new body. There's a great documentary. I don't know if you've seen the documentary on him. This is very interesting in the context of our conversation right now because when I watched that documentary, I don't know the man (33/57)
what the future will be like and I don't understand why they so wish for that but it certainly is. It's a religious desire. It is. It's a religious desire. It's for the father for God. I mean there's so much of this it feeds into the same rudimentary mechanism whatever that is of human being search for for meaning and that's why it's so important I think to reflect on these to recognize that you're not the first person to have these thoughts and that the way in which you're expressing them is your particular expression but you know make no mistake there is something here that is universal. All right. So let me ask you this in the context of the fact so we're describing one culture which is Silicon Valley. Let's talk about because and I do want to get into what you do because you have some fascinating case studies that you've presented in your book and I'm aware of as well with your company. Tell me how you view culture overall. It's such a difficult question to sort of for me to (38/57)
with this idea that you found companionship in the works of other people who had written perhaps lived millennia before you, which I relate to that very much. I also was thinking when you were talking, I was thinking about Denmark, which is an interesting case because Denmark has for a very long time been a very homogeneous culture. It's very interesting that you are partly in the business of bridging cultural gaps and cultural divides, which is something that I will want to get into. There's something to that though, that it's also the most open economy in the world, which means that you can't stay and build walls around yourself if you want to survive. Because it's so small. It's so small. So you have to trade and you have to, it's been a sort of a trading seafaring nation. So language is important. Nobody speaks Danish. So you have to learn Russian and you have to learn German and you have to learn French and so on. If you want to trade with anybody and if you want to trade with (11/57)
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kaphinas. Today, we speak with Christian Mesbia. Christian is founder of Red Associates, a consultancy group focused on helping companies bridge the qualitative divide between themselves, their products, and their customers. The sociologists, anthropologists, economists, journalists, and designers who make up Red employ the methods of social science to study human behavior. Instead of minimizing complexity, they embrace the non-linearities, helping companies reinvent themselves and their products from the bottom up. In this episode, we examine the world from the perspective of human experience, what philosophers call phenomenology. Rather than try to objectify reality, we will revel in its subjectivity. Rather than discount our senses in favor of hard data, we will discount the data in favor of our experience. Experience matters. Reality is messy. Data is fuzzy. The problem of consciousness is hard. Try (1/57)
abandonment of phrenesis, so to speak. So, you know, I look at it really since the enlightenment, but do you see it as a sort of a more or less linear trend? Or do you see that there have been certain periods, for example, the Industrial Revolution or even today where we've been hastier in our sort of jettison of these humanities or of these non-scientific ways of spending our time and thinking about the world? I think I am an empiricist. I am into science in so many ways. And I think natural sciences have been spectacularly successful since the enlightenment. Yet there is a fundamental mistake in thinking that we humans can be our not our bodies, but our shared world and our culture can be studied with the same technique and the same tools as you study bacteria or asteroids. I think you have to have a difference between the clear difference between the natural world and you can call the universe and our world, the human world and what Heidegger, who is one of my sort of the people I'm (19/57)
as we might to fit the world to our models. Reality has a stubborn way of eluding even the most disciplined researcher. The most experienced traders don't make decisions off a spreadsheet. They use their intuition. The same intuition that you use when deciding who you can trust, if the price you are paying for something is too high, or if there's just something off about a room, or a scene, or a story you've just heard. To discount the authoritative wisdom that comes from lived experience is to discount the value of the very question that has led you down the path of inquiry. It is to discount everything that makes life meaningful. And if we want to understand the world around us, why we do what we do, then that journey must begin and end with the human experience. As always, you can gain access to reading lists put together by me, ahead of every episode, by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to this show on iTunes or Android, make sure to (2/57)
subscribe. If you like the show, write us a review. And if you want to sneak peek into how the sausage is made, or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at hiddenforcespod. And now, let's get right into this week's conversation. So Christian Mesbia, it's wonderful having you studio. Thank you very much for coming. Thank you for having me. Yeah. I met you and first, in fact, heard you speak at David Kirkpatrick's Techonomy conference, which our listeners know because David was on our program. He was actually our episode one on the show. And I really liked what you had to say. I found a deep level of kinship with your approach to... It's difficult for me to even kind of express it. Our listeners will know some of what I'm referring to from the episode on philosophical mathematics, Wittgenstein. It's a challenge for me to express what it is exactly that I found appealing with your perspective. But why (3/57)
don't you tell us a little bit first about who you are, and then we can proceed further in this discussion. Where would you like to take it? I suppose that I should have been an academic philosopher, but I was so bored in university. I found it dreadful and political, and it seemed like people were fighting over very small things. So instead of that, I chose to figure out a way to do philosophy or be interested in the kinds of topics that I was interested in, in other ways than the traditional way. So I founded a consultancy when I was 22 or 23, and I sold that and I did another one, and that was merged with a bigger company and so on. So this is my third or fourth version of the same company, really, which is trying to use sophisticated theory about human beings to understand us and understand our life and use that to figure out how to make things, how to make cars and phones and medicine and all kinds of things. You found a way to make philosophy profitable. You bridge the... Another (4/57)
way, would it be fair to say, is you bridge the qualitative divide between us and data, us and the quantified world. Right. So the big deal right now in the business world is, of course, that there's a new set of data we can get our hands on, and that is the data that tracks us while we click on where we move, and in your phone you would have 80 different things that it can measure and know about you. And that's a huge step forward in terms of the way that we've understood markets before, because the way we understood markets before was by asking people, and we're notoriously poor at figuring out what we want or like or even what we do. So when we say we cook in a certain way, it's probably untrue, and when we say we dress in a certain way, it's probably untrue. So the big data world and the new data sets that come about are exciting, yet they're not a truth machine, and that's sort of my critique of it is that people think that the data sets that we now have from the digital world is (5/57)
a map of the world, which it definitely isn't, and it also matters who asks questions and how we ask questions to that data, and that is largely overlooked, and that's why we make so many mistakes. You're saying it is a map, it is not the world, or it is not a map? It's a map, but it's not of the world. Exactly. It's a map of some part of the world, but not the entire thing. It's interesting that you say that because another thing I was thinking about while reading your book in preparation for this interview is the distinction between the map and the territory, and I do think that we do suffer from this conditioning increasingly in a digital world where we've mistaken the map for the territory. So I want to get into that, and we will, but before we do that, I want to ask you something because I am curious. You described it very well. You are a very philosophical person, and you found a way to apply philosophical principles and ideas and thinking, and introspection and a certain (6/57)
humility. I think you have a good sense of humility around what is knowable. I mean, we'll get into Heidegger and being because I think that's very relevant as well to this, and phenomenology and experiential knowledge, and authoritative wisdom that comes from lived experience. I think that's very powerful. But when I was reading you, I couldn't help but sort of empathize again with some, like when I saw you speak at the economy, I empathized with some of your perspectives, and I thought to myself, well, what was this person's life like growing up? And I am curious about that. So you're from Denmark. I don't know what other culture is like there and how people respond to philosophical inquiry if they think it's a waste of time. If they don't, in America, I think for the most part it's considered kind of a waste of time. You're asking questions that don't have answers or whatever. I certainly was very sort of introspective, very curious. I had these big questions as a kid and no real (7/57)
answers, and I felt very alone in that journey for me. I'm curious, what was that like for you growing up, and when did you begin to ask these questions? When did you start looking at the world, and when did you realize that you were looking at the world differently than others, and did you have people in your life to sort of make you feel that this was or was not normal or whatever else? Right. That was 17 questions in one, but I'll take it from one end. I think I've always been a reader, and I've loved the actor reading. Probably some of the times I'm most happy is when I read what happened 200 years ago or what other people thought about something, and I find it amazing that people had the same thoughts and feelings that I have right now in Syria 400 years ago. Isn't that amazing? It's just time travel almost, and I very early on found that. I think some people say that there's a correlation between literary criticism and asthma. I think one of the reasons ... And asthma. Yeah, (8/57)
because the more asthma you have, the more books you read. I had asthma as a kid, so I ended up reading a lot. It's not though in Denmark there isn't an anti-intellectual culture. You have at least half of the population would be interested in books and would be talking about it, and it's a completely reasonable thing to spend your time on. There's a concept of being cultured, which is part of the culture that is okay to know about music and our songs and our stories and so on. That's part of being a human being, and even though that's not productive in the most crude sense of the word, it certainly is part of life to know what kind of music they played and made up in the 1890s and so on. I didn't have probably the loneliness that you described, but I was probably a bit more excessive in the area of reading than most people. Then I found very early that I liked seeing patents and things. I liked seeing how, why people do what they do and so on. So I started being an observer and a (9/57)
listener more than a speaker and a doer, and I like sort of waiting a little bit before I make conclusions and cast judgments. I think I found that the people that understood things were the ones that listened a lot. Casting judgment is something that is necessary, but only at the point where you know, and I just felt that people did it very fast. In America, when I moved to America around a decade ago, I found a culture where people have the decision before they've even done the inquiry and then try to spend a lot of time on fitting the data to that conclusion. I found that sort of unhelpful and weird. Well, especially in media, that's definitely true. I also worked for a really wonderful man, but he used to say, we're going to do a bunch of focus groups, we're going to do all this and that, and then we're going to do whatever we want anyway, which made him very human. So listening to you talk, one of the things that struck me is, and I just wanted to say this, again, I find kinship (10/57)
them, you also need to understand where they come from and what their world is like. So even though it's a very homogeneous country, it's also a country that is so weak and have lost every single war for a thousand years that since the Vikings really, it's only gotten smaller. And that means that you have to compete in other means and cultural understanding and learning languages and so on is one way. Those northern Nordic countries are beautiful, gorgeous countries. In the summer, right? A couple of weeks in the summer. Yeah, just but also like just in general, the architecture, the interiors of the homes, I imagine in large part because so much of the time must be spent inside because of the winners. And also because there's more material wealth that can be accumulated because less of it is spent sort of, you know, I think I'm Greek and I think about how in Greece people would traditionally spend so much money sort of having a great time. But there's so much beauty increased to spend (12/57)
your time outside, you know, to go and spend it by the beach or whatever else. So let me ask you this. So in the context of what we're saying, now we're talking about philosophy, we're talking about sort of how your progression and these questions and there's something that comes up in your books and when I've heard you speak and that deals with the humanities. And this is where I would like to take this now because you also cite a number of people in your work who have given you inspiration or with whom you connect. One of who is Edward O. Wilson, the famous biologist. I've actually read, I assume you may have as well his book on the meaning of human existence. And there's this great quote in that book that deals with the humanities where he specifically says that if aliens were to visit us, what they would take from our society would not be our science, they would find it dismal and useless. They are far, have sparser past us. They would instead be fascinated with our humanities. And (13/57)
so that's where I would like to kind of move us now to discuss sort of what the humanities are to you. And then let's have a conversation about what the humanities are to us. What is the significance of the humanities? Because you have some very great things to say about that in your book. Yeah. So there are two sides to that story. There is the big story, which is the meaning of our culture is the way we create beauty and the way we create, try to understand the world we live in. And I think Winston Churchill said that when he was asked to cut the budgets during the darkest times of the Second World War, he was asked to cut the budgets of the national endowment of the arts and humanities. And he said, well, what are we fighting for then? No, what's the point? And I think that's the big story here that you can listen to our shared world by listening to the music that we've created. And you can understand where our life was at. If you read the novels and the poetry of whatever time (14/57)
we're interested in. So that's the big story, the smaller story, which is what I'm trying to talk about in my last book is it's also very practical and helpful. So people talk about art, particularly in America, about art and music and museums as something you do on Sundays in your spare time. That is sort of a luxury for the wealthy. And that is there's something to be said about that it's very luxurious to do. Yet I think engaging with art is the most advanced way of learning about others and engaging with other times and other ways of thinking. It also provides the context for understanding everything. Right. But it also, if you want to understand how to sell cars in China, it's nice to understand what it's like to be a Chinese driver or somebody buying the first car in the history of the family. If you want to sell mobile phones in Brazil, it's nice to understand what it is like to be a 17 year old woman that's buying her first mobile phone and what her life is like in order to (15/57)
service that person. So I think the command is not the only place, but it's the most advanced and the best place to learn about the skills of putting yourself into other people's world and engaging with that world in a sophisticated way. So I just find that the people that are most helpful for me in my company and that we hire are trained in history, art history, literature. There's a study you cite from a company called or a research outfit called PayScale. I see, is that correct? And what did they find? What was the... Not surprisingly, they find that if you come out of college with a computer science degree, your likelihood of making money and getting a job is higher in the first years compared to people coming out of the humanities. But if you take the top 5%, if you take the best earners, the people that make most money in the country and you can care about that or not, but it's sort of one measure of success. And there's an over... There's a big weight on people with a humanities (16/57)
background. So if you look at the people that run our banks, if you look at the people who run the big financial institutions, they have a history or a French background. They're rounded people. Theater. Exactly. They're interested in so many things. Anthropology, psychology, philosophy. Exactly. So what I've seen in the big corporations that I worked in, there is a glass ceiling for people without a rounded understanding of culture and language and so on. And if you don't have that, which is something you get from being in the humanities, you have a hard time competing on the top jobs. And that just comes out in that data. It comes out that people with a humanities background at the very top are overrepresented three times over engineering. And that obviously is not because they have a piece of paper that says, I had a degree in philosophy from Yale. It is because the proof is in the pudding. Exactly. It's because it makes a substantive difference if you've studied humanities and (17/57)
you've reflected on questions of being and human being. So in that sense, when I've sort of over time reflected on this process and investigated this turn, I do actually, and I wonder if you feel the same way. I think that the point in which this started to change, this is a very difficult sort of thing to discuss because of course the enlightenment was very important. And before that, there was a lot of darkness. So I don't mean to suggest that we were on the right path before the enlightenment. The enlightenment was wonderful. I'm not throwing the baby out with the bathwater, but clearly there was this move towards a more scientific worldview in which we looked increasingly to model the world and to find ways to create deterministic systems and ways of understanding everything. And that's something that we've discussed on the show often with complexity and Newtonian mechanics and Newtonian principles and neoclassical models and economics, et cetera. But there has been this (18/57)
year misunderstanding of human beings and everything since, you know, being in time was published in the end of the 1920s has been about that. It's either been in the world of philosophy. It's been a reaction against it or a development of it in my book. And you can read the history of Western philosophy through that lens as sort of a different description of who we are as human beings. And all we've done in my company is we've said, we've taken that seriously and said, well, if it's true that we engage in the world and we need to study people in a different way, then asking them because we don't know, which is why surveys are wrong, which is why we can't predict elections, which is why focus groups, as your old boss said, should be neglected and why you should observe people and try to make sense of them in a different way. Reality is messy. It is. And data is fuzzy. Yeah. No, no, I feel you on that. And so what you're describing there in terms of the progression of Western philosophy (22/57)
is that fuzzy divergence between those who seek to find a very deterministic, quantifiable measure of self, of world, of object, of value, et cetera. And those like Heidegger or Wittgenstein who take a more qualitative picture, a qualitative view, and certainly with what you're describing there with the hammer, experience matters. Exactly. And it's not a black box where we say, okay, you know, it doesn't matter what's going on in the inside. We can ignore the problem of consciousness. There's actually this really great, I love Terrence McKenna. I think he's got such incredible, he has hit so many beautiful things. One of which was, and I just know this because I was looking for some stuff on my social media to create social media because I had this tremendous amount of work actually doing social media to exhaust me. I found this great interview of his and I took a short clip of it where he said it's a failure of the theory of evolution that it cannot account for human consciousness, (23/57)
which after all created the theory of evolution. So I think we can't get away from that, that fundamental problem, which is that we are the measure of reality of all things. We are the ones having the experience. Right. Yeah. So Heidegger would, so that he would say, well, there, there will be planets and there will be objects in the world without us, yet they wouldn't be called planets and forks and rivers. They would just be stuff. And it's us that gives it names and categorizes it and so on, which is a meaningful thing to study as well. And the problem with that is that you can't, there's no view from nowhere with that. You can't, you can't be a robot and study it. You have to be a human to understand that that's a river and that's a fork. And you have to understand what is relevant right now. Is the dust on the floor relevant or is it the conversation happening right here that's relevant? Figuring that out is very hard. And that's why they in Silicon Valley run into the problems (24/57)
with AI all the time is that they can't crack the problem of that you talk about, which is consciousness and they can't figure out generalized AI, right, which is wanting to do something, having being startled about something, being wonder about the universe, wanting to understand how to create warp speed things that could send us to Alpha Centauri, all those kinds of wishes to do things, something that they can't figure out. And they're not an iota closer to that than they were in the sixties. They've been much better at creating close systems, algorithmic things that you basically could do on a piece of paper. They can just do it with a computer way faster and then we can. But the human problem and the problem of the really hot problem they haven't gotten closer to and I don't think they want it. Let's talk about this because you and I, we spoke a little bit before this and we've both read Boostrom's book and it sounds like you're very into this subject. And it's been something I've (25/57)
wanted to cover on the show and I have not found the right guess to do it. But I'd love to have a little bit of a conversation with you on this right now. What is the hard problem of AI? And first of all, we're talking about general AI versus narrow AI. We're talking about AI in the way that the public and the popular culture conceptualizes it, which is a so-called superintelligence, computer intelligence that is competitive with or surpasses human intelligence. Right. They used to be good old fashioned AI in the sixties or fifties. That was the term, good old fashioned AI. Yeah, go-fi, basically. And that was the idea that you can feed a machine with enough information for it to have a complete map of the world. And we thought that, or humans thought that, especially humans attending the University of MIT, thought that our brain was a map of the world with concepts that we then projected onto the world. So when you saw a fork, you would say fork because of that, because you would sort (26/57)
of add up all the aspects of the fork to become a fork. And they found that that was a dead end and it was dead for 30 years. And now they're back, in a way, with a split of the concept of AI, from being AI to being general AI and specific or more specific AI. And more specific AI is really just advanced software. It's just like a spreadsheet is better at calculating than I am and has been since the early eighties. It's just a very advanced version, very fast. And an element of machine learning there as well. Yeah, right. But there was machine learning. There's been machine learning for a long time. The really hard problem is the other side, which is we can have the will to say, wouldn't it be wonderful if we could go to other galaxies? Or wouldn't it be wonderful if we could cure cancer? Something like that. Getting a machine to have will, to have Inspiration. Wonder, to have inspiration, to want to learn. That's the really hard problem. And that's something that Heidegger calls it, (27/57)
that we are the only being in the known universe that takes a stand on its own being, that thinks about its own identity all the time. So as far as we know, a fox doesn't think, I wonder if I should be more wolf-like today. Or something like that. And an asteroid don't have sort of internal social strife with whether it got dressed well this morning. It doesn't have a sort of social panic over the wrong haircut. Yet we as beings have that all the time. We have a constant dialogue with ourselves in terms of who we are and where we are and so on. And we engage in the world, in worlds that are constructed in a particular way that he describes in his book. And I think that is something that they have a hard time figuring out. Which world are we in? Are we in the world now of radio? Are we in the world of philosophy? Are we in the world of birthday parties? What's the world you are in getting a machine to understand that now I'm in the world of birthday parties but I'm talking about AI or (28/57)
whatever it is, that's really hard for them. So the direction of the intent behind a direction, you can get a machine to figure out by feeding it a lot of pictures. You can get it to figure out whether a mold is benign or not. But wanting to do that in the first place is the hard problem. Yeah and will and interest in leaning in to a particular area. What Brochram is saying in his book is the really scary problem is if we get just an ounce of that, just the minimal version of that, what would that look like? And his example is, let's say we tell an AI that it has to make paper clips. And his example is paper clips. And it starts replicating itself because it really wants to make paper clips. And it doesn't have anything else in its world than paper clips. Then you start replicating itself and it will start getting rid of things that's between it and making paper clips. And suddenly you have a world made of paper clips very, very fast because of the replication capabilities of (29/57)
computers. That's its goal. Or I think he has another one as well which is okay well what if you know that's silly and we don't, someone will say well okay no one's going to say paper clips. What if you know the goal, the central goal, axiomatic goal of this AI is to generate human happiness? Well what if the AI decides that human beings would be maximally happy with a slightly lobotomized brain? And you said something essentially to that regard. Which is probably true. Goes back to your point about an asteroid doesn't have internal conflict. Exactly. So the day I see a computer having social stigma or something like that, I, or being startled about something, playing goal, right? If it gets startled over a move, I'll be willing to talk about, you know, we have a real situation now. But before that it's just software in my book. It's very advanced software but it's just software. And of course that doesn't get to the other dilemma which is we have no idea and we can't know what a (30/57)
machine is or is not feeling and is there is not experiencing. So that brings us back to square one in many ways. Right. There's a Werner Herzog movie called Low and Behold out right now. Is it documentary? Is that documentary, right? And he has a question he asks everybody. It is does the internet dream of itself? Which is exactly a good question, right? It's does it have those kinds of weird human things which is we can dream of ourselves and if you think about your dream world it's a rather complex thing that we don't even understand. So how about we spend some time on understanding that rather than thinking we can have the machines do it. What do you think about because this is to me I find it a little nuts what I'm about to talk about now and it delves it has to do with the discussion on AI which is this other popular notion which is that we can simply upload our consciousness to a server. To me that one is the easiest one to simply debunk. It's most basic level. We have no (31/57)
concept of what consciousness is. I think of AI as applied philosophy. I think of it in that sort of a way. What do you think of this other culture that and this could bring us into a larger discussion about Silicon Valley bubble thinking and sort of how it is or is not representative of the largest society. What do you think about this immortal this quest for immortality that is finding new life in Silicon Valley? I think it's laughable and stupid. It's just the more bubble-esque they become in Silicon Valley. The bigger the goals. It's no longer curing cancer. It's ending death. It's no longer fixing this world. It's going to Mars. And I think it's great to go to Mars but thinking about it as some sort of philanthropic endeavor is ridiculous. So that's the first and the second thing is that the heart of that problem is the singularity idea. It's this idea that everything is exponential and that technology will happen exponentially. And if it does then we can eventually in the day a (32/57)
personally. I saw a person who was dealing with the grief, the grief of having lost his father. And the fear that is so common that we've dealt with human beings have dealt with since they became aware of death, which is the fear of death, the fear of the unknown. And he's dealing with all of those things like all of us but it's very interesting to see how it manifests in his life, which is this pursuit for the holy grail, for the, what's the term in mythology for the fountain of youth? I mean one thing is that you have bunkers, people like that walking around and I think they're sort of interesting to listen to but that they become the ideology of a economic powerhouse like Silicon Valley. And it's the only really driving idea out there is too much. I was pitched by an editor to write a book called The Singularity is Far, Far Away because they're not getting closer to- That's a playoff of Kurt Schwa's book The Singularity is Near. Exactly. But the editor has strong PR instincts. (34/57)
Exactly. And I thought that was a fun idea but it's just that they haven't gotten closer to the core and hardest problem. They've gotten way better at other things but what's so wrong about that? What's so wrong about celebrating all the things we can do with the technology rather than wishing we go to Mars and ending death? I think there are other things to do. And I think even the notion of ending death is within, for me it's within the realm of scientific inquiry. What seems to me where I totally see no capacity for understanding is when I'm told about uploading consciousness. I just find that so absurd on its face because it's, you can't tell me that you even know what that is. You have no concept of it. And in fact you have no idea what an upload is within the concept of the fact that you don't know- I mean we could go real deep into this fact. I have no idea where I am. I'm living in a matrix of my own brain. This is not in dispute. So to look through a microscope and tell me (35/57)
that you see what you see, well you're also looking through your eye and where are you even in this scenario and who is you and what am I? I mean these are basic philosophical questions and yes, I think to bring it back to how we started this conversation, I think everyone who is very brilliant and doing tremendous work in Silicon Valley and everywhere else would benefit tremendously from reflecting on and taking courses in the humanities and in philosophy because these are essential questions. I would actually say it's in Silicon Valley they focus on small things or extremely large out of the way things. So either it is big brains dealing with small things like how do we share pictures or how do you know that sort of thing or very very large things like Mars and Endless Life. And I think there might be a slice in between those two like how do we yield and how do we deal with our healthcare system and how do we create food for enough people and so on. That are also worthy of some (36/57)
attention. Who was it now I'm blanking she's a writer, Gillian Tett. Right. Do you remember what she said to the economy? I wasn't there. Oh you okay you weren't there. Okay so she said something well I would love to have her on the show I spoke to her maybe you can help me and she said something really great that stuck in my head which was that the culture of Silicon Valley today reminds her not exactly but close to the culture in finance in prior to 2008 and I really related to that. I said yes I feel that as well I do sense that sort of I mean that was the notion in the derivatives market and in the mathematical modeling of securities that were somehow able to take risk and just dispense it into the ether which defied logic. It's wanting a truth machine. It's the machine that can watch over us in its grace and make sure that we have no risk in our markets and we can get our marketing algorithms perfectly tuned and we can get everything sort of tuned into a system that will tell us (37/57)
express right because I mean where do you even begin. I live in this bubble of New York. It's hard enough for me to get out of the New York culture to think about the wider American culture. There was so much shock in the large cities of the United States over the most recent election. How do I even wrap my head around the way that people live in Africa or Indonesia or in China. Tell me a little bit about how you view the world culturally and yeah that's the best I can do to express my question. Right. So we are asked by companies and sometimes public institutions or mostly companies about what is going on among our customers or our customers customers or whatever it is. And in order to do that we have to get out of our bubble. Anthropology is one technique that is developed over the last hundred years of going and spending enough time with and in another culture in order to understand and see the world the way they see it. So that's what we do. And I think the only answer to your (39/57)
question is I don't know but I can send skilled people to go and try to understand what's going on in Western China when it comes to how they eat or something like that. We can study cultural phenomena fairly rigorously and actually empirically by observing reality and we can use that to understand what that phenomena looks like and how that works. So let's say you want to study tea in China. Tea to the Chinese is as advanced as wine is to the French. It's something that you drink for particular conversations particular type of tea for particular situations. There's a particular price point of tea or fanciness of the tea and so on. So understanding that whole world is a pretty big deal if your world is sweetened peach flavored cold bottled tea. Right. And understanding brewing techniques and so on that takes a while and you can't just send out a questionnaire through SurveyMonkey and then people click a little bit and say tell you that you have to go and experience what it's like and (40/57)
understand by being quiet for a little bit and just observing and listening. So we're big proponents of being introverted listeners and looking at the world and trying to make sense of it and see what makes sense for these people and truly put yourself into their shoes. And the reason why I talk so much about the humanities is that's what you're doing when you're a historian. When you're a historian you want to understand Napoleon or the Duque Windsor. You go into peace together their world through pictures and paintings and objects that you find from the time and notes that people have written down and you try to peace out or create a picture of what that was like to be the Duque Windsor and saying no to the English crown or being Napoleon and losing in Waterloo. What was that like? What was his life like? What was his world like? So piecing it together through a set of different sorts of data not just quantitative but aesthetic, practical, all kinds of objects and situations and (41/57)
practices that are going on in the in the cultural field and figure out what makes sense to that and what makes sense to them in their world. What are the way they construct their world? And that is immensely helpful if you are a CEO of a big company and you have several layers between you and the world. People will prepare everything for you and you will lead a very comfortable life that is far away from the reality of these people. So if it was somebody selling tea in China it's helpful to know what's tea to them. Right? And what language do they use and what practices do they have? And that's also the you're touching on numerous occasions that you're touching on that distinction between Descartes and Heidegger. And is our introspection enough to tell us what we need to know about the world or do we need to go out and experience? Exactly. Or can we ask them to introspect? Can we send out, you know, 3,000 questionnaires to people and ask them to introspect about how they do something? (42/57)
You know, we don't know why we do something. Do you know how you drive? Do you know how you don't know those things? It's funny when you're talking, you know, I make you're reminding me when I work on the technology side of television on application development and design and user experience. And when I was overseeing a focus group in 2009, it was for a brand new remote that we were designing that was a motion remote that went along with this new interface that we had been building for the set top box. And I remember being so, so exhausted by all the different people's opinions, I thought to myself, how am I supposed to make sense of all of this? You know what I mean? And I think that again speaks to there's also a simple desire to just come with an answer that works, that so often is what drives these outcomes, which is I need to jam the solution into this narrow model, into this confining sort of thing, which I think also speaks to something else that I think about often. And I (43/57)
wanted to speak with you about as well, which is to what extent are we actually just creating a world that is more adapted for machines and less adapted for human beings rather than us, you know, being able to merge with machines or whatever else. I mean, I feel like in many ways, we're building a society that increasingly pushes away the things that make us human and the things that matter. That's why I wrote the book. I mean, I know there are snake soil people everywhere and at any time, but I just found that the brain scanning people and the data people were saying things that they couldn't prove at all. And that's not such a big problem. The big problem is that somebody took notes, you know, smart people took notes from nonsense as long as it was natural science looking. And I just found, have we lost our ability to be critical? Have we lost our ability to have undermined our innate ability to be in touch with others? And I think we are educating our kids out of it. I think we are (44/57)
undermining the research in the area right now and the floor and in the house. There's a bill to take out the rest, the remaining small percentage of humanities, federal funded humanities research, the national diamond of the arts gone. So we are undermining our own ability, our innate ability to do these things. And that's not good. And it's sort of boring too. Some of the best programming in the United States has come out of PBS. Because it doesn't have to rely on advertising. Sesame Street. I mean, I could name a number of programs. Yeah. And what culture doesn't have museums and publicly funded research in in our art history? I think that should be part of any civilized place. You know, to bring back, there's something else I wanted to mention that I didn't want to forget when you were speaking, which is I think another central problem here is the reason why there is this bias towards quantification is because the qualitative doesn't scale as well as quantitative. That sort of (45/57)
problem of how do we deal with a market that views T in the way that we view Y. And that's a difficult bridge to gap. You know, people want easy solutions. Again, so much of this is about laziness. Yeah. You would have to go to Western China. It would be rather uncomfortable. You'd get stomach disease from the spicy food. You would have to sit in an airplane. You would have to engage with people that doesn't speak English very well. You know, that's messy. Wasn't it one of George Soros' traders at Quantum Fund who at one point he left the fund or I don't think he was still part of the fund, but he went and lived in Sweden for a while? In Finland. Yeah. Phil Robert Johnson, yeah. Right. Who said that in order to understand what the Finnish government would do and so on, we would need to be in Finland. He was also the one that talked about the difference between the German and the British culture and why the Germans wouldn't let the British change the collaboration on the pound and the (46/57)
Deutsche Marken and so on. So that's a cultural perspective on finance that was helpful enough to bring down the Bank of England. That's a great story. Regardless, I should do an episode on this show just on that. You're talking about... He's getting Robert in. I mean, he's... That would be great. Well, that's a great story. You're talking about when Quantum Fund, when George Soros essentially, he gained notoriety as the man who broke the Bank of England because he shorted the British pound during the period of ERM when the UK was sort of moving towards entering the Euro and that was an incredible story. Right. So basically, they bet on the Germans wouldn't give the British the flexibility to devalue the pound because they were pissed at the British and so they bet on a cultural feel rather than an analytical... And on George Soros' back pain. Exactly. Notoriously always gets back pain. His son's... I don't know if you mentioned that in your book. I don't remember seeing that, but his (47/57)
son always says that, you know, my father will give you all sorts of logical reasons why he makes a decision, but in the end, he moves out of a position based on lower back pain. Right. But it's interesting to think about that because you also, I'm sure, get... have a feeling of the market. It might maybe be your stomach or it's somewhere else, but we all have an ability to align ourselves and adjust ourselves to the mood around us. So the mood of the nation is something we feel. The difference between us and George Soros is that he listens to it. So he listens to it. He has the conviction. And the balls. And the balls. To bet three times capital. Oh my God. On something like that. And he's done it over and over again because he sees himself as a reflection of the market and he relates to that kind of knowledge, which is a kind of knowledge. It's a knowledge to feel that New York feels different now than it did six months ago before the election. But we can feel it. It's a real fact (48/57)
that New York feels different. Just like you can say a party is great or a party is good or the mood in the room is downwards or whatever it is. It's something that we can discuss and talk about and relate to. And that has a lot to do with markets. So what they bet on is interesting. They bet on the reactions to the reactions of something, right? So you have an event, then people react to it, and then other people react to those reactions. And that's what you want to know. And that's why they're so extremely successful because they look somewhere else than everybody else. Well, that's a great point because one of the arguments I often get into with some of my friends when we have little arguments about this is you're not trading based on what you think markets will do in response to XYZ. You're making a bet based on what you think the market thinks is someone else is going to do. It's a multi-order derivative decision-making process. So it's very out there as far as not being (49/57)
quantifiable. And the difference sores and others is that he's honest about it. He's honest about the fact that it is a qualitative. That's the case. You know, there's also this great one of our other guests that we had here, Sebastian Malibu, who is the biographer of Alan Greenspan, has this great moment in his book where Alan Greenspan is now, you know, who is a classic data sleuth. He got a seat on the exchange across the street from his office and he went down there and he decided to cut out the middleman and basically make some additional profits because he wouldn't have to go between an intermediary broker. And what he found was he was getting slaughtered and he started listening to sort of understanding why was this happening and he's hearing these guys saying, you know, I really feel that, feel the market's getting choppy. He's like, what do you mean? You, what do you mean? What do you mean it's getting choppy? What do you mean if you feel you feel it's bottoming? What do you (50/57)
mean? You know, and you cannot deny that that is a human experience. It takes denial to push that out of your model. And again, that's because I think in large part it's inconvenient. And it requires a tremendous amount of work and effort. So before we wrap up this interview, Christian, I do want to talk a little bit about some of the great interesting stuff that you do with your company, at least one case. Now, what role have you played with Ford? I'm fascinated with Ford because I'm fascinated. You mentioned Lincoln and the New Lincoln's specifically the continental has stood out for me. I mean, I've seen that car on the street and there's no other car. Volkswagen has a nice new model somewhere I've seen. It's not out yet. It's a concept car. But like that car, when I hit the street, I was wowed by it. And when then I read your book and I realized that this was, you know, obviously it must have been, but this was a conscious decision by the company to reinstate luxury in the brand. (51/57)
Tell me a little bit about this process because I think this is an interesting story. Right. So luxury is many things, right? To many people, it can be an apple in season or it can be a spa or it can be whatever. So we looked into among the target group of the people that buy these kind of cars that are $60,000 and up, what's luxurious to them? And if you look at the industry, it seems like if you look at BMW or Mercedes or anybody, it seems like it's driving really fast in a really fast car on an empty road. That's sort of the experience of among beautiful mountains. That's the luxurious experience yet then spend time with people that have luxurious cars. First of all, they don't drive it themselves. They have drivers, particularly in China and India. And secondly, they sit in traffic all day and they're just stuck in traffic. So we thought about what would a different luxurious experience be? If we want to be quiet, you'll want to be very clean because the cities of the world are not (52/57)
that anymore. If we want where you can work, it'll be one where you can have meetings. It'll be one that's rather different from sitting right up and driving a really fast car. So the idea was to move the entire luxurious experience towards something that was low, chunky, very quiet, very clean. It is chunky. It's funny you say that. It's sort of a flight rather than a drive. And it has sort of a, the seats are thick and big and comforting. So the idea was to sort of create a whole other focus on luxury. And then also on top of that, build a range of services that would make owning the car feel luxurious and that the value of the car would go up the longer you owned it because we would add services all along. So the idea was to redefine what luxury was based on an understanding of spending time with people in the big cities of the world and look at how to create a quiet flight rather than a fast ride out of the experience. And that's, and out of that has come a whole range of things, (53/57)
but the last launch and the next launch of the navigator will be focused on that. But the real deal will happen after 2020 when we can do much more around assisted driving. And we can do a whole, I mean, we don't know about driverless cars yet because there's still a whole lot of technology problems and everybody has those problems, by the way. But given certain technological breakthroughs, we would be able to do a whole lot with a car that would make it delightful again to be in a car because right now it's not fun. Because you're stuck in traffic all the time. Yeah. And you know, there are people saying, why do you put speedometers that go above 30 miles an hour? We're never ever going above 30 miles an hour because we're stuck in traffic all the time. It's a good vision to run 100 miles an hour down an empty country road, but it's just not my reality. That's such a great point. I never thought of it that way. So the idea was to switch to a relevant kind of luxury that would be very (54/57)
different from all the German sort of cars. You also, when you were speaking and comparing it to an airplane, I thought about an innovation. I don't remember who, for some reason, I have it in my mind connected with Richard Branson and Virgin, but it was the idea to put Wi-Fi into airplanes because, okay, you're going to spend six hours. Would I rather have six hours in a flight with nothing to do? Or would I rather have seven hours on the flight on Wi-Fi? That's a big question. And so that's an innovation that has to do with the experience, right? Right. Richard Branson is the master of taking something completely standard and then tweaking two, three experience buttons that completely changes the experience. So an airplane becomes a nightclub or whatever it is, just by changing the lights. Oh, man. Yeah. And he does the cheapest things with the most massive impact really well. That's his real genius, I think, other than his balls. I mean, he's just press balls and tons of things he's (55/57)
doing. He has, well, also his branding model is, was he the first to really take that approach, which was to take a particular brand, an experience and move it across sectors? Yeah. The only area he didn't do it was the condoms. He didn't think Virgin would be a relevant name for that, but he had thought about it. Yeah. They thought about Virgin condoms and they thought that maybe that's problematic, but, but everything else, I mean, Virgin bride and Virgin phones and Virgin everything. That would be problematic. Yeah. It's sort of, it's at least it stops you in a drag killer. Well, Christian, I really appreciated having you on. This was a great conversation. Yeah. A rare radio conversation. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Well, thank you very much. And I should look to get Jilly and Ted on, but thank you very much for coming on. Thank you very much. And that was my episode with Christian Mesbia. I want to thank Christian for being on my program. Today's episode was produced by me (56/57)
and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter and Instagram at hiddenforcespod or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
China. In small places where you don't hear about the people, like a bunch of people invest in a private P2P platform in some locality, sure, those people lose, but if you go to your bank and you buy a wealth management product that's actually not sold by the bank, but it's not the bank's product, maybe it's some dodgy coal firm that actually went bust two years ago, you're not going to lose on that because the government won't let you. So all of the investment managers know that, and they take risks accordingly. Do you spend any time thinking about, I'm sure to some extent you do, the context of China within the global economy? Sure, of course. Yeah, it would make sense. I mean, I'm just throwing it out there because we were so bogged down here in China itself, but what do you see as the effect of Fed policy, for example, and any type of contraction in US GDP, or if we have any kind of recession here, what would be the knock-on effects in China and emerging economies, and how does (40/57)
debt, what happens to the economy in those circumstances? In some sense that's been already going on since 2011 and you see it in the sort of decline of spending power domestically of the average Chinese person and the decline in sort of the standard of living. But there's a key element that still needed that Japan went through that China has not gone through, which is a significant depreciation of the value of assets. So if the Chinese government is willing to see the Chinese people see their apartments go from 100,000 square meter to 20,000 square meter, then yes that could happen. You could have a long, long, long grind. But I think that that's not very likely and I think much more likely China is going to hit a wall. The currency will suddenly depreciate and assets will drop much faster than people would like. And they've never seen that. The people that have seen depreciation and prices in China, they've never seen a price decline before, right? The property market has only (44/57)
former Soviet Union is very different from what you can exercise over China. Right. And the research point being important, which is that the Soviets would be able to raise living standards by selling natural resources with greater ease or commodities than the Chinese who needed to build, for whom building an industrial economy was much more important. I suppose you're suggesting. I think that's true. Also, the Soviets would be more capable of using repressive power to control their public. The Chinese, that's true out in the less populated areas in the far west, but in the densely populated areas along the coast, that's not what's going to fly. What's going to fly is raising investment capital because in a place where you have, let's say, you know, 30 million people living in a fairly dense area to build a road or bridge raises economic performance very rapidly and that creates unity and support. And that brings us really to the crux of this conversation, which is debt. Because debt (19/57)
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kofinas. Today, we speak with Anne Stevenson Yang and is the co-founder of J Capital Research which conducts ground up primary research for institutional money managers, unequities and the Chinese economy. She is the former co-founder of Blue Bamboo Ventures and also founder and operator of the CRM software company Clarity Data Systems. And she is the creator of 66 Cities, a publishing company whose flagship magazine is City Weekend, one of the highest circulated English magazines in China. Anne first moved to the Middle Kingdom in 1985, making her family and home in China for the next 25 years. She is the author of China Alone, China's emergence and potential return to isolation, a subject that we will cover in depth today. In this episode, we take a trip to the other side of the world, to the land of China, the territory that one in every five people calls home. Our conversation concerns itself with (1/57)
the contemporary changes in Chinese society that came after the death of Chairman Mao, beginning with the ascendancy of Deng Xiaoping, the architect of a new brand of thinking that combines socialist ideology with pragmatic aspects of market economics that the Chinese have called socialism with Chinese characteristics. What changed in the 10 years between the beginning of these economic reforms and the events in Tiananmen Square? And how do the Chinese government's reaction to the uprisings in 1989 alter the opening of Chinese society? How do the Chinese response differ from the Soviet reaction in the same year to the fall of the Berlin Wall and what has set China apart in its path of development since? Some have called it a miracle and by any measure it has been exactly this, the Chinese miracle. The size of the Chinese economy has increased more than 25 fold in the last 25 years from 6% of US GDP in 1992 to 60% today, an accomplishment that defies all principles of economic gravity. (2/57)
Loan growth in China has averaged 16% in the last 20 years, reaching an all-time high of 35% of GDP in June of 2009 amidst the greatest economic contraction the world has seen in almost a century. Total debt in China recently surpassed 300% of GDP, making Western finances seem frugal by comparison. In the first seven years since the financial crisis, bank liabilities in China grew by nearly $15 trillion, the near equivalent of the consolidated size of all US commercial banks. China has used more cement in three years building and overbuilding than the US did in all of the 20th century. Hundreds of thousands of meters of unsold residential real estate, the size of Singapore, massive industrial overcapacity, go cities by the hundreds. The Chinese economy is in terrible need of a recession, a recession that it cannot afford but one that it cannot avoid. How will the citizens of China, its trading partners, emerging markets and developed economies react when the reckoning finally arrives (3/57)
and how much longer can the Chinese government continue to postpone the inevitable? As always, you can gain access to reading lists put together by me ahead of every episode by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to the show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want a sneak peek into how the sausage is made or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at HiddenForcesPod. And now let's get right to this week's conversation. So Ms. Anne Stevenson Yang, thank you so much for coming on the HiddenForces Podcast. Welcome. Well, thank you. And just Anne is good. Okay, Anne. All right. So Anne, before we begin, our listeners should know and maybe you can clarify for me as well. Now you have lived in China for the last 30 years, is that about correct? Yeah, people keep adding on for me, but yeah, that's about (4/57)
right. It's about right. You've raised your children in China. That's right. The second one was born there. Your husband is Chinese. Yep. And you speak fluent Mandarin. Yep, always trying, but I would call it pretty fluent. And what is your background besides that? I mean, what did you start off with? I mean, how did you find your way in China and what is your background? I'm a mutt. I started out as a journalist in New York and I just floated over to China because I thought it was, I was actually politically interested in what was going on at the time and I got offered this job at the Chinese government foreign languages press and I thought, why not for a year? That will be fun. How did you live? That was 1985. 1985, wow. Yeah, so yeah, I met my husband there, got married so that, and then just the growth of the Chinese economy kind of sucked me back. So I would say I'm an economic migrant. Very adventurous of you. Why did you choose China specifically because you found what was going (5/57)
on there politically interesting or how had you studied the country for a long time? Okay, well, this is really embarrassing, but this is my age, right? So I grew up in the 1970s. Mao Zedong was a hero. We didn't really know that much about China. I went to a parochial school. I had a copy of the Little Red Book in my blazer pocket. I thought, this is finally the version of communism where they understand the peasants, right? I know it's really embarrassing, but I thought that this was a model that would work and I wanted to see it. So when I was working, I was actually working a night shift at business week on the desk in New York and I just, I had a break. So I went out, I went to China Books and Periodicals, which existed then. I bought all the magazines and I wrote to them and said, I want to go work for you. And then I forgot about it. But one of them sent me a telegram like six months later. So I thought, why not? Yeah, telegrams existed then. That's exciting. Very exciting. (6/57)
Yeah, it was kind of. And how long after you moved to China did you meet your husband? Well, we worked in the same building, but I wasn't really aware of him until we got sent. OK, you really want to know this? Sure. In 1987, there was a county in Jiangsu province that was growing fruit trees for the first time and they'd gotten sort of relatively rich and they wanted propaganda about this. So they invited, you know, so-called journalists from Beijing to come and visit. And so I was sent with my interpreter and the guy who worked at our magazine, the Indian guy was sent. And he had his interpreter, who is now my husband. He spoke, he was an Hindi interpreter because he'd been in the Chinese army, had been trained in Hindi to be in the army on the border with India. So we spent three weeks together traveling around Jiangsu, you know, going to communes and, you know, learning about tea growing and, you know, congratulating people on their factory accomplishments. And then I don't know, (7/57)
we just got married. The rest is history. Yeah. All right. So, well then, let me ask you, what's going on in China? What's going on? Basically in China, every man, woman and child, government, private, dog cat is focused on trying to make sure that the government, that the Chinese economy rises in value, that prices rise, that assets stay high and rise, and that there's enough stimulus to create growth. That's a maniacal focus of basically every human being in China right now, not on value, not on creating something new, but on making sure that asset prices stay high. So what is the timeline of events that have sort of raised concern for people in China? Because there's something else that, you know, I've picked up on, which is usually I like to cover subjects that are controversial, aren't necessarily consensus, but I feel like the case with China is one where there isn't much controversy around the idea that there is a bubble in China. Certainly I've been hearing about a bubble in (8/57)
coastal real estate for like 10 years or more. This isn't something where many people are going to come out and say, you're a whack job for saying this, or you're crazy for suggesting that the hard landing in China is a possibility. That's true, but it's fairly new. I would date that general apprehension from summer of 2015. So prior to that, you were pretty much a heretic if you didn't believe in the ever-growing value and strength and emergence into the sunlight of the Chinese consumer and the Chinese economy. But what happened in 2015 is, number one, the Chinese stock market crashed. In spite of the Chinese government's insistence that they would hold the stock value at $4,500, it went down below $3,000. The second thing is that the reminB devalued by 3%. That shocked the world and it indicated that the Chinese government, in fact, is not in control of the whole economy, which basically the Western world believed. You mentioned the first part of why it was a shock. Why did the (9/57)
reminB crash? It didn't crash. It declined by 3%. That was just really because the PBOC, you have an offshore reminB and an onshore reminB. The offshore reminB was trading at a premium or at a gap with a gap. That's not legal under IMF rules. China very much wanted to become a reserve currency for the IMF. So they decided, okay, we're just going to close that gap and we're going to depreciate the onshore reminB by 3%. They didn't realize that all hell would break loose. The offshore reminB is for the tradable goods sector. There's one currency for the service sector in China and one. What is the breakdown there? The offshore reminB is really quite small. It's just trying to testing the waters to try to consider whether they might make the reminB convertible at some point. They've actually retracted the offshore reminB quite a bit since that time. At its height, I would say there was ... I don't even remember the numbers, but let's say 3 trillion reminB offshore one place or another, (10/57)
which is really, if you think about it, quite small. There is some currency arbitrage discrepancy between certain class of people in China and others. From what I understand, there's one market for the vast majority of people when it comes to exchange and then for another part. Is that incorrect? Well, there are people who have access to reminB offshore. If you have an account in Hong Kong or if you have export earnings or for some reason you're exposed to the international economy, then you may have access to offshore reminB. To that extent, you may have more window on the foreign economy than the average Chinese person. Otherwise, it's really just who has access to hard currency, dollars, and who doesn't. Let's begin at the beginning, which is reform in China. I'm fascinated by this. Reading your book and preparing for this interview, it put me into a place of thinking about the Chinese economy and the Chinese political system in a way that I never had before. We're used to, (11/57)
certainly I am, to this China of the post-Cold War. But of course, there was a pre-Cold War China. Reforms did not begin after 1989 nor have they ended. What has that process been like in China? Where can we pinpoint some of the most significant turning points? It's an interesting question. Reform is a word that we attach to essentially all government change in China since 1979 when Deng Xiaoping began the current program of opening. I think that in the West, we graft on to that word the idea of increasing liberalization and openness when in reality that's not really what's behind it. But I think the way we should look at China is 1979 to 89 and then 1989 on. 1979 was when Deng Xiaoping essentially walked out of prison and into Zhongnanhai, the leadership compound in Beijing and became the government leader and began to liberalize China in a whole lot of unexpected ways. Allow people to stop, if they met their quotas for growing grain, for example, then they could begin to grow cash (12/57)
crops and sell them. Allow people to have some private markets. Allow people to start taking over bust factories and run them for profit as long as they paid off the debts and paid the workers, things like that. The country really blossomed in a lot of ways. And then you came up to 1989. So essentially what happened was that this really worked very well. People got a whole lot richer. In many ways it was confusing, but it was also exciting. There was a lot of cultural opening, whereas in the past it had been impossible to listen to Western music or read Western newspapers or wear Western clothes. All of a sudden these things were coming in. There was experimental theater. There was what they used to call disco dance. There was art. There was all sorts of stuff. There was Qigong, which is a type of quasi-spiritual physical exercise that became very, very popular. And all of this led to a almost chaotic opening and to a concurrent demand for more rights, more political rights. And it (13/57)
culminated in 1989. We all know what happened in 1989. And 1989 was followed very quickly by the breakup of the Soviet Union in 1990. And essentially what happened was that the Chinese central government grew terrified that China would go the way of the Soviet Union and would crack up. And so they prioritized re-centralizing the apparatus. When you're talking about 1989, you're talking about Tiananmen Square. We know that the government cracked down heavily on the society after that, after the uprisings. But is there much information that is available? Because I know in China you can't get much of anything, right? Even if you Google Tiananmen Square, there's nothing there. Yeah, of course. You can't get a lot of information on what precisely the crackdown consisted in. There are very wide-ranging estimates on how many people were killed, how many people incarcerated. But I think for my purposes, what's really interesting is what happened in the years culminating in 1995 thereafter, (14/57)
where China changed its tax system, it changed its customs, it changed the way local governments managed their budgets. It changed really personnel appointments within the party in order to aggregate more power to Beijing. And they did it in a very clever way. For example, under the old system, localities' provinces would have a negotiation with Beijing every year and decide how many taxes they would pay to Beijing. So what Beijing did was they went to the provinces and they said, look, you're paying us, let's say, 25% of your gross national product of Shanghai every year, and that's, let's say, $100 million. So let's fix your payment at $100 million. And what we're going to do is we're going to impose a VAT tax and an income tax, and Beijing is going to collect all of it and then rebate to you the portion that's due to you. Initially, the localities were fine with that because the cost was the same. Over time, it became very unbalanced so that the lower the level of the government, (15/57)
the less money you had. So the government made a deal with the people, but was that sort of an explicit offering that the government did that they said, look, not in these exact words, but leave us in power and we will reform certain parts of the economy that many of you had wished we would in order to expand economic growth? What was the conversation that happened internally in the country around that cataclysmic sort of event? Well, I think there's a little bit of a misunderstanding embedded there. A system like the Chinese system is not concerned with what people think. The interlocutors are not individuals. The interlocutors are entities, state-owned enterprises, and local governments, and those are the constituents for the national government and the people they have to talk to. The individuals will follow. So what the central government did, it was a process of negotiation, not one of strong arming, although it was pretty clear who had more power than whom. So the central (16/57)
government would go to the localities and negotiate over tax authority, negotiate over appointments authority, and gradually, gradually, gradually, they pulled more budget authority and appointments authority up to the central government so that they would have control. Is there any comparative framework in the United States that would help us to understand the functioning of the Chinese state? No, and I think that that's very important because we tend to think that it's similar. There's a national government, there are provincial governments, there are local governments, but it's a unitary system. It's not a federal system. So for example, local governments don't have the authority to make their own budgets, to collect taxes and make their own budgets. The chief reason why we've got this huge property bubble, because local governments are stuck with the tab for schools and hospitals and roads and bridges and water processing and all that sort of thing. And yet the money trickles down (17/57)
to them from the center, goes to the province first and then to the city level. The prefecture, there are five levels of government in China, and so the prefecture at the bottom is stuck with all the costs and yet it doesn't have the right to keep most of the revenue. So what can they do? They had to raise money through debt. Wow. How would you compare it to the Soviet system pre-1991, pre-1989? You know, I don't know enough about the Soviet system to be able to tell you. Let's just say that the Chinese system is, they're very, very different in a lot of different ways. The Union was and is a petroleum state. So they have a lot more natural, unitary organization to their government and also it has radically lower population, what, 130 million or so, compared with 1.3 billion, with a territory that's much, much larger and tributaries, you know, rivers and a few railways that connect all the key cities. So that's very different. The kind of power that you can exercise over Russia and the (18/57)
and the financial system is the mechanism through which you can exercise control over people in a non-coercive manner. Yeah, I think that's right. And I think it's, there's some brilliant person named Goodheart. I can't remember who it is exactly who said that. Goodheart's law. Yeah. I wrote that right here actually to begin with for this conversation because I felt when a measure becomes a target, it ceases to be a good measure. Exactly. Great minds think alike. I thought to myself, that sounds like a Confucian saying, but I think, I know I wrote that there when I was thinking about this conversation, I kept coming back to that, which is that the Chinese have an obsession with numbers, with hitting targets. And I was astounded when I looked into this fact further. I mean, one of the things has to do with the measure of GDP in China. We're not trusting the GDP numbers that began measuring electricity. I'm telling you things that I'm sure you know. And that in short order, it turned out (20/57)
that the Chinese government was encouraging contractors and builders to leave the lights on in these places in order to present false figures of electricity consumption. Yeah, it's not even that complicated a lot of the time. A lot of the time you simply invent the number that you need. This is important to remember about GDP and so many other numbers in China, that these numbers are organizational tools and targets. They're not calculated results of a data set, whether or not you distort the calculation. The point is, you use something like GDP to mobilize people and to indicate what production levels should be. And if you were to drop the GDP target, it's a self-fulfilling prophecy. And they have pretty much relied on that number as their prime point of national pride. And as the calling card for the entire point of their existence as a legitimate authority in China. I mean, that seems to be so connected to their legitimacy. Yeah, you could say that. And I think it has a couple of (21/57)
purposes. One purpose is that organizational purpose. So your principal constituency, if you're the Chinese government, are state-owned enterprises. And state-owned enterprises make their budgets with reference to the GDP target, and they receive their investment capital with reference to the GDP target. The GDP target is measured against historical industry performance next to GDP. And then you sort of do a calculus and you figure out how much investment capital this company should get. So they're required to use that when they make their budget. So on one hand, it's a campaign tool. On the other hand, it's an external messaging tool for investors. So incoming capital investment and portfolio investment, whether it's FDI or portfolio, is very, very important to the Chinese economy. How are you going to get capital investment if your economy is only growing, say, 3% and Brazil's is growing 5%. So you've got to show growth that outstrips other developing countries. Is there FDI's (22/57)
foreign direct investment? Is there a lot of foreign direct investment? I mean, there are so many aspects of this and that I want to get into. And hearing you talk, I'm trying to figure out how to get in without getting lost in the weeds. Sorry. No, no, no. Don't apologize at all. I feel like this has been an overwhelming task for me to try to figure out how to come in here. But there are so many interesting aspects of this, one of which is the extent to which the Chinese boom has been led by domestic savings. It seems from my research that it is even more than it was the case in the Japanese boom. The Chinese boom has been largely fueled by domestic savings. Is that correct? Yeah, that is correct. I think it tends to mislead people by leading them to think that it's all about thrifty individuals storing their money in the bank when really it's just a measure of the amount of capital domestically as opposed to the amount of capital washing over the shores. But that's true. China pulled (23/57)
off really quite a remarkable feat, which was to increase its investment. I think you noted that simply the increment in bank assets in China between 2009 and 2013 exceeded the total bank assets in the United States. Yes. The economy that's 40% larger and that's been building its bank assets for 150 years. So it's a remarkable number. As they were doing that, generally speaking, as you increase your investment to that degree, you're going to depreciate your currency because you're expanding the pool of currency. But China actually has the command and control ability to build so much stuff that it could actually increase demand for investment even as it was investing so much money. So the currency was appreciating, returns on investment domestically were rising very high. It was attracting hot capital. It's a Ponzi scheme. That sounds like a Ponzi scheme to me. Yeah, you could put it that way. It certainly does. The focus, I mean, then I say it, and here are a couple of other numbers (24/57)
I've got for you. The total amount of concrete used between 2011 and 2013 in Japan far exceeded. I've got the numbers here. It looks like 4.5 gigatons was what the United States used for 100 years between 1901 and 2000. And 6.6 was used by China for just two years. That sound right to you? About close to 50% of the economy's construction, less than half of the economy's slightly less than half of its construction. Is that also right? I think that that's an exaggeration. I would put construction and real estate at about 20 to maximum 25% of the economy. It's not really fair to count all building materials because they also go into ships and automobiles and other sorts of things. But it's very significant. As for the amount of cement, yeah, I've heard that as well. It is phenomenal. It's taken a very severe toll on China's natural environment. Eventually that will end, but one hopes it will end sooner rather than later. On the thing to bring it back a little bit, you were talking about (25/57)
the growth of bank assets. I think you said from 2009, I mean that was the number that I had found as well from 2009 to recently the amount of assets generated by the banking sector. In other words, a reflection of the growth and liabilities was the total amount of U.S. bank assets. It basically is a reflection of loan growth. And that suggests a great amount of malinvestment. It suggests it without proving it because it's very difficult to expand that type of credit in particular in the face of an economic contraction, which is what the world was experiencing globally at that time. I mean, things like that about China alarm me. And again, I speak very humbly because unlike you, I do not live in China. I don't know the country. I don't speak Mandarin. But just on the very high level, it seems to me to defy every principle of common economic sense. Well, this is the thing about China. It's tremendous size in its centrality. So China can create growth phenomena that exceed anything the (26/57)
world has ever seen. It can also create disasters that are greater than the world has ever seen. And it's important to remember that it's not just the bank assets because the central government was really panicked to create, to pour investment into the economy and to avoid the downturn that the rest of the world was seeing. But they were also committed optically to sound banks with good bank assets. So they had to create a shadow sector that became far, far larger than it ever had been before. It had been something like 5% of the financial system. It grew at the height to 55% of the financial system. And that's really because you insist on having banks that are making prudent loans. And yet you need four times as many loans as prudently can be made. You create a shadow sector, the banks buy the loans back, and then everybody's happy. How does that shadow sector operate? Are you talking about the SEOs? Companies like the trust companies. Shadow makes it sound sinister. It's not (27/57)
sinister. It's like brokerages, private equity funds, public equity funds, trusts, all sorts of non-banking financial institutions. But what essentially happened from 2009 was the governments wanted more capital than the banks could lend with any reasonable prudence. And so what would happen is a trust would lend the money. Like you're a developer, you're very risky. We're not really sure what's going to happen, but you'll pay 9%. So I'm the trust. I'll lend to you at 9% and then I will sell that loan to the bank tonight. And I'll give the bank 7%. So I keep the 2% spread. It's on the bank's balance sheet. I don't have risk. And then I do it again tomorrow. Yeah. So something similar in the United States with the CDO market and the sort of disintermediation of loans and ownership and everything else. Yeah. In a sense, it's like that. So where are we today? What does the picture look like? You mentioned 2015. What was the drop there? 60, about 2 thirds of the Shanghai composite? I think (28/57)
it was 40%, maybe? I have reversed. Maybe 45%. I have reversed. Okay. So close to half. The market collapsed in China. So what have we seen since then? Well, essential stability for them. The central government and its deputies spent trillions of RMB supporting the Shanghai market value to make sure that they couldn't quite pull off 4500 for the index, but they pulled off 3000. So it's been hanging out at that level. And they've been keeping all the debt rolling over. So you essentially have a situation where China, the return on capital invested just goes down every year. So in the best of circumstances, you have roughly seven to one ratio for investment to GDP growth. So you have to invest 40% of the economy to get a 6%, 6 to 7% GDP growth. That's a reflection also of the inefficiency of the deployment of the capital. Exactly. So you figure that, if you put it in really simplistic terms, you figure that GDP growth should be roughly on a par with lending growth. So if you were to (29/57)
bring lending growth down to 6.5% or so of GDP, then you would see GDP growth of 1 seventh that, so no more than 1%. So that figure is where organic GDP growth is now. So in other words to say this is basically the Chinese government is committed to a certain growth rate. It has political reasons for wanting that. These are real people in positions of power who want to maintain their position of power. And the way that they're attempting to do that is to continue to force an otherwise unsustainable situation to go on a bit longer. Yeah, that's right because you have a situation where just it's in nobody wants to put their hands on that tar baby. So everybody has the intellectual realization that it's not really a good thing, that the quality of life for the average Chinese person has declined, not improved, that education standards, health standards, environmental standards, all of those things are not improving even as GDP growth rises. That's something I actually wanted to ask you (30/57)
about because we see video footage from China constantly. And we see people with smartphones snapping pictures. We see lots of lights. We see all these buildings. And it's impressive. It's something I often wonder about, which is what has been the improvement in the quality of life in China over the past 30 or 50 years when measured in the total sense of that word, given the pollution and given the urbanization? The fact that people have moved from the rural parts of the country, this mass, which is also really remarkable, the fact that hundreds of millions of people have actually migrated, physically moved through that country, it speaks again to the power of the Chinese state, which is pretty remarkable and I think difficult to comprehend as an American. But really, what has been the real improvement in the quality of life? Where can we see improvements in quality of life and where can we not see that? Or have we seen a decline in quality of life? Well, there's significant (31/57)
improvement via the better communication system, the fact that there's an internet, that there are smartphones that are universal now. The roads and the transportation networks are phenomenal and that greatly improves the quality of life. But as to the other things, yes, you can replicate the hardware. I mean, I'll give you an example. I've been to three replica Manhattan's in China. That's the idea. One of them quite large and two others kind of smaller, but still replica Manhattan's. I've been to a replica Hong Kong. I've been to a replica Venice, although they call themselves Florence. How do we think of them? No, it's not like a toy. It's the real thing. I know, but I mean, okay, this is why I ask that. It's astounding. I've seen the replica Paris. I mean, that to me looks like a full blown town or city. Is that what it is? In the middle of Anhui, yeah. And it's sort of... What is it for? And what I understand is it the equivalent of a suburb in so far as it's another community (32/57)
with a town and people that can commute from there to other work? What is it itself supposed to be? And what is the... But see, this is the point that you can replicate the hardware, but it's not the same thing as having the original. I cut you off, but I also want you to, if you can address at some point this, which is, do they have any idea what they're doing? Does the leadership, are they just sort of wanting... Because we see this all the time, we wonder, right? People ask that about Bernie Madoff. I'm not drawing a direct relationship, but for me personally speaking, there is a Ponzi aspect to this. And I think that just the point in which you're in so deep that you just hope that you can keep it going before you die. Is that sort of what the dynamic has been, is in China? Yeah, I think Bernie Madoff is an apt comparison not to say anything about the ethical quality of Chinese leaders, but you start out by thinking, well, isn't this a great thing? All this portfolio investment we (33/57)
can capture from overseas if we just pretend that China Mobile is a real company. We sort of paste together all our post offices and call them China Mobile and we'll list it and we'll gain a billion dollars, that's a great thing. And then over time, you get caught in it. And so now they're in a situation where if they don't continue to reinvest and to raise the amount of investment capital, then a whole lot of credits just go bust. And nobody is willing to accept the consequences of that because nobody knows how far systemically it will go. Well, how far systemically will it go without knowing exactly? I mean, what do you think? It is really tough to say. It's really tough to say. Why? Because there are so many contingencies, and dependencies, and so many things we don't know. But let's take one company ever grand, which is a company I love to hate. There's a real estate company that has projects in 170 cities, probably has 250 projects or so. Ongoing? Not all of them ongoing, some of (34/57)
them completed, but almost none of them occupied, all of them, mostly all of them sold. And these are projects that specifically are pitched to the Chinese aspirational investor. So they're not supposed to be places you really want to live. They're supposed to be places that you buy because in some mythical future, there will be wealthy people who will want to live here and commute to their wealthy jobs in their wealthy cars, and you'll sell your unit to them for a lot of money. So all of... Sound like a Vegas. Yeah, but way bigger, way bigger. All of Vegas would fit into one ever grand development. It's just totally... Let's not even pick on ever grand. Let's just go to any interior city. There's a city that I've been to called Shryan, which is in Podongkube, way off in the west of Hubei province. And Shryan, for complicated historical reasons, it lost its core industry. So they were in a panic to invest. So they invested in all this real estate. There's one real estate company that (35/57)
actually tried to recreate Niagara Falls. And Shryan is in the mountains. There's no water. This is in the mountains. They actually tried to dig Niagara Falls as a sort of ornament to the real estate development. There's a development in Yunnan where they dug a 150 kilometer canal so that they could have a moat around the five star hotel in the development. Just totally loco things. But what happens is you have to finance these things. And the ultimate... You finance them maybe originally with bank loans and then with shadow bank loans, but then generally over time those things get securitized and sold to the general public. And it runs like a river, tributaries all over the country. So you really don't know which grandmother in which small town owns the security that will go bust if Niagara Falls is never built. And you just can't take that on. How are you going to deal with that? Because the guy who sold her that security might well be a government official in that town. And how are (36/57)
you, as the provincial government and the central government, going to say to her, oh, that... We didn't mean that. That wasn't us. That was him. That's on you. You lose all your savings. You don't have a pension. Sorry, lady. So a few things I'm thinking about. When you talk about the Niagara Falls, I thought about the fact that I discovered recently that there is a mock Dubai in China. Are you familiar with that? No, which one is that? I'll find the pictures I'll show you. I mean, unless this is fake news. But... Everything can happen there. And to me that sort of signified that... Because for me Dubai is Dubai. Dubai is already a mock Dubai. Exactly. Exactly. They're building fake islands. It was in fact in the center of the city was the fake island Dubai sort of palm tree. Oh, I know what you mean. Bay High. Okay. Yeah, it's way down in the south. Talk about a derivative. Talk about really going... I mean, that to me reflects... That's wild. So I think that's fascinating, right? (37/57)
Because it's one thing to replicate Venice and to call it Florence or whatever. And it's a whole other thing to replicate a replica. You know, that's... How meta. Anyway. But the other thing, you know, again, you're talking there and this is something that I've spoken about for years. It's not even just something recently, but I did speak about it recently in a conversation with Mark Fawber. Well, although I don't think I expressed it explicitly, which is I find that the use of debt and the financial sector, in particular in China, specifically in China, is very much meant to coerce through other means to get these people to work way harder than they would otherwise work with the expectation that they will be able to reap the rewards that are sitting in their savings account. But those savings that they experience as being theirs are not actually theirs. They are the states, right, to do whatever they want to with. I mean, that's a particularly harsh way of putting it, but you can (38/57)
certainly say that the Chinese government is very focused on capturing savings and retaining them within China for these mad projects. So wouldn't it be nice if a Chinese person could instead buy a mutual fund overseas and eventually, I don't know what, send their kids overseas for education? People do do that, but it's a very small proportion. Well, I guess what I mean is, and I definitely want you to correct me if I'm wrong here, I guess what I'm thinking is there seems to be no respect by the financial sector in China for the savings of the people that are putting the money there. It seems that they feel that they can wield that for investments at their will. Well, they can because there's a universal backstop, right? So nothing is ... Well, we have that here in the US as well, but there is the pretense that it's your money. I mean, that pretense seems more specious in China. Well, we sort of do, but losses are borne by investors here, and they're really not borne by investors in (39/57)
that all sort of play itself out? Because at some point we're going to have recession, there's nothing wrong with it, it's a normal, healthy thing to have recessions, and the Fed is supposedly trying to raise interest rates and contract the size of their balance sheet. If they continue to go down that path, there is of course the dollar carry trade. There are many things that can impact a company like China. So what is ... It's interesting that you call it a company, I wouldn't argue. A country. No, did I call it a company? You might have been afraid in. I mean, that leads to a lot of inestimables. So will the Fed really raise how many times and will it really contract its balance sheet? We hope so, but as the United States demonstrates, once you have a fiat currency, it's very, very tempting to use it to fund all sorts of liabilities, and we have plenty of liabilities going forward. So that is really the biggest question for China. If the US dollar does strengthen, then China is (41/57)
cooked. But if the United States relents, turns around, and puts more cash into the world economy, then you could have another, I don't know how long of this in China. Have you ever think about how the Chinese government would react if in fact they lost control of the economic levers, or really not able to hit that target and unrest began to come out? And I say that why. I say it because, again, looking at the history and thinking about the totality of the decades that have preceded this, and also the way in which the Chinese government and Chinese society tends to think of itself in much grander, sort of larger scale terms, would it be an exaggeration to imagine that the Chinese government may turn inward in a much more repressive manner than anything we've seen for decades? I think it will certainly try. I think that we've already seen that going on for the last several years, the attempts to constrict the capital account and make it harder to get money out, the attempts to control (42/57)
the internet with much greater force than was true in the past, the really almost complete lack of cultural development and exchange. Really the only cultural events that are available in China are the big international events that come for a day or two, but there's really no room anymore for the development of Chinese arts. For people to gather and exchange ideas politically has become much harder than it used to be. So I think we've already seen that happen. Could they go back to 1975? I don't know. Certainly that will be the preferred path of the party, certainly rather than dissolution, but there are many other paths that could be taken and it's impossible to know which one will be more likely. Do you ever imagine how long this could go on for further? In other words, how much longer they can maintain this sort of illusory growth? Well I think that question is really the Japan question. Can you keep putting money into the economy to keep the debt rolling over, never recognize the (43/57)
existed since 2000. So in reality it's one generation. And also it's, despite the phenomenal construction and development of commercial property, the proportion of Chinese population who really live in the commercial property economy is kind of small. There are a lot of people who own these apartments, but most people have either rural dwellings that they inherited from their parents and one where another that don't really belong to them but they have the right to live in or urban apartments that came from the work organization of themselves or their parents. Let me ask you this about the real estate. You touched on it a little bit before, but what is the mechanism through which, because the way I understand it, the real estate market in China is particularly inflated due to the fact that it was one of the early parts of the economy to be liberalized, right? Liberalized to be privatized rather. And there's some other also, some weird mechanics and dynamics around who can have property, (45/57)
what type of property is constitutes investable. In a technical sense, all the land is owned by the government. So the major distortion is that land is owned by the government and local governments on the local level. So the government has a key interest in high land values. How does that work? Let's say you, if you're in China and you want to own something, how does that work? I still don't understand it. Well, the government's issue leases on the land. So you get a lease on the land for 20 years, 40 years, or 70 years. Most residential property will be 70 years. And then you own the building that's built on top of the land, but the government will have the right theoretically to take back that land at the end of the lease. It hasn't happened in most localities. In a few it has. A couple of them have tried to impose new fees. And the people who own the houses got really upset. They retracted it or they impose much lower fees. It's kind of a negotiation. So there's a quality like (46/57)
eminent domain, but it's obviously much more engaged. Yeah, that's right. So that's the chief distortion is that the government's on the land, but there's also types of property rights. Basically, every long-term urban dweller in China owns an apartment in one way or another, but that apartment very likely may not be saleable because of the different shades and gradations of rights that are attached to that apartment. And so I'm not going to push you anymore about making projections. I mean, I'm curious. It's to me, I'll tell you another reason why I have many friends who are very pessimistic as I have been for a very long time on the US dollar and on the US bond market and et cetera. But I don't see that being a problem anytime soon because when I look at the countries like China or when I look around the world, I still feel that in the next crisis, the US bond market would still appear rather attractive to a lot of people. And another great example, as you mentioned, this question (47/57)
around property rights, the Chinese citizens don't have a bill of rights. They don't have the same right over their property that we do. And so that is sort of reflected in a way in the capital flight that's leaving the country. They know many wealthy people who have made a lot of money in China know that they're not necessarily going to be able to keep that money and they're looking to get it out. Right? Yeah, I think that's right. And I think that that's a key and underappreciated point that everybody, remember all the columnists who starting from 2009 were warning about the US dollar and how we're going to induce this terrible inflation and the US dollar wasn't going to be... Well, that hasn't really happened. You don't see Americans trying to buy assets overseas or trying to emigrate. And that's because in the end, it's about the degree of trust in the government and it's about the quality of life within the country. And on a relative basis, the US is still looking pretty good. (48/57)
Yeah, relative, exactly. That's the key. Relative is key, right? That may change with the current political situation. And though we've had inflation, certainly in asset prices, that can quickly turn to deflation and we've been fighting deflation or the Federal Reserve and central banks in the West have been fighting that with their monetary policy. Yeah, that's right. And probably with less effect than they really think. I would say... Yeah, I'm not sure we solved anything, but... No, I mean, I was trying to basically... I wanted to see if we could try and sort of create some hypothetical scenarios here about where things would go. I mean, there are so many factors, there are so many variables. There's North Korea, of course, which is a big variable and our president is another variable walking and talking and tweeting variable. I'm trying not to take that bait. No, I don't want you to take that bait. I actually don't talk about Donald Trump on the program because I find that it's (49/57)
very difficult to do so effectively and usefully. I mean, a lot of times... Without having people's blood pressure rise. And also, I just think most of the commentary around him is not very useful. There is actually... I don't know if you're familiar with Sam Harris. He talks about him too much. I mean, but there are times in which he describes his criticisms in a way that I find useful. But I think for the most part, conversations around him are not very useful. I want to mention one more point on bringing back to China before we end, which is we were talking about loan growth. I've got two charts here in front of me. One is of loan growth in China. And another one is of percent year over year annual GDP growth since 2007. And what is indisputable based on these charts is that annual GDP, the trend for annual GDP growth has been down, whereas right now, loan growth looks pretty flat, but it had a huge jump in 2008. Are we going to continue to see every year it's going to be much more (50/57)
challenging to generate growth in China? Yeah, I think if you were to draw that top chart using including corporate bonds and including all sorts of quasi loans like short term private equity, then you would find that the two lines are in opposition to each other. And the reason is simply because you require more capital every year to drive the same amount of GDP growth and you have a target, so you just have to put in more capital. And that's why I think that they're going to hit a wall because it's very important politically for whatever reason to fulfill the promise to the Chinese people that GDP will double by 2020. I guess the starting point was 2010, I don't know. And what that means is that you have to have 6.53% GDP growth every year. So they're just damn well going to hit that target. And that's unfortunate because the quality of growth, it's kind of like people talk about digging holes and filling them in again or building a Mexican wall. But essentially that's what you're (51/57)
doing. You're putting a tax on every Chinese citizen. Well supposedly the Soviet Union in its heyday produced cars that had negative equity because they actually had to take the cars apart for the parts. The actual commodity that went into creating the car was worth more than the final product. Yeah, exactly. And you get a lot of that with Chinese comparisons between steel that's of less value than cabbage and things like that. Think of the amount of energy and resources that were required to dig all that iron ore out of the ground in Western Australia, stick it on barges, haul it up to China, put it into these towers. And then you're going to, I'll tell you, there's a city in Ordos County in Inner Mongolia which is the biggest county for coal in China where their solution to the bubble breaking was actually to blow up the buildings to rebuild them. That's very funny. And that was proposed. I don't know whether they eventually did it. They ended up with these huge... There was some (52/57)
similar proposals less serious here in the United States. And in fact, I opened one of my early television shows years ago by having a bulldozer bulldozing a house and it was a mock solution to the housing crisis. Yeah. The idea was you create jobs by putting people in bulldozers and then you create jobs by rebuilding the house. Exactly. They've done that. There's another county in Ordos where they had built all these towers and they couldn't find people to live in them. So they actually, I swear to God, this is true, they actually exploded, blew up schools in neighboring counties. Nobody in them, of course. So that the kids would have to go to that county to go to school. That's a real story. Yeah. And then you'd find these kids, you know, of course for them it was a dream because they were living 50 miles from their parents. They're like 14 years old. They have their own little Moto scooters and they're squatting in these like dark towers with maybe a hot plate, battery run with four (53/57)
students living in this like weird empty apartment together. Where are they going to school? In the model school in this new county because they built a model school so they were down well going to enroll in that. I mean, totally insane. And that is the extreme sort of version of what many in the United States propose. I mean, that's the idea of digging holes and filling them back up. I mean, that's not a radical idea in certain sort of Kinsien circles. Well, I mean, let's not go overboard. The U.S. U.S. infrastructure does look, you know, it is decrepit. People are dying in train accidents that looks 60 years old because it is 60 years old. Whereas in China, it's all brand, brand, brand new. And that's the difference. But you know, in the same way, if we were to raise $3 trillion to build, you know, a wall around the perimeter of the United States, yes, that would raise GDP. How would that raise the quality of life? Well, also, but I'm remembering specifically when I was living in (54/57)
D.C. that there were some people coming out in the New York Times saying that the snowstorm would actually be good for the economy because it employs people. But this is an asinine idea. People say the same thing about war all the time, whereas Adam Smith believed that defense industries should not count toward GDP because they were detracting from GDP. From wealth. They destroy wealth. Exactly. I think something that many people fail to recognize that, again, we talk about good heart and the notion that just because we can measure GDP doesn't mean it's a useful measure for any of the things that matter to us. And we could be growing an economy just like we could be growing cells in our body, but whether those cells are malignant or benign is a completely different question. And I think that that's what's so frightening about, to me, looking at China, looking at these ghost cities, these hundreds of ghost cities, it's just as terrifying the fact that they've deployed capital, (55/57)
resources, and labor to generate massive amounts of so-called wealth. But in fact, in a contraction, it could turn out to be that huge amounts of land that was once arable is no longer arable because they've built slabs of concrete on it. They've polluted their environment tremendously. And it's just a frightening picture. I think in some ways, the Chinese economy, to me, is a national representation of the human animal in some ways, very out of balance with its ecosystem. I think it represents in some ways what we do collectively to the planet. And maybe I'm going off the rails a little bit, but it sort of reminds me of that in a way. No, I understand what you mean. I think, to me, it's a representative of how political systems excessively centralized go off the rails. Yeah, I know. I agree with that as well. So, Annie, it was great having you on. Thanks, Dmitry. Thank you. And that was my episode with Ann Stevenson Yang. I want to thank Ann for being on my program. Today's episode (56/57)
was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter, and Instagram at HiddenForcesPod, or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
way to get some kind of action, whatever it is, whether it's attention or whether it's material. But how has he featured in this story at all? My read is no in this particular instance. How I'll qualify it is that Elon has two chaos modes. Either I create the chaos or I benefit from the chaos. I don't think that he created the chaos here. I think that this was done outside of him. However, he is enormously talented at benefiting from the chaos. There was a while before Ilya sent that message this morning where I thought one of the most natural outcomes for this would be Ilya moving over to XAI. Great prediction. And sort of, I mean, Elon has taken a stance of being closer to what it appears that Ilya feels relative to Sam, certainly not a full sort of pause or anything like that, but at least giving lip service to that side of things. But Elon is never far from the surface of things, and he's going to be a major player in this. For those who aren't paying attention closely, outside of (42/57)
Commercialized crowd wins out at OpenAI, do you see dangers of AI going the route of nuclear energy? Some scary near misses end up setting progress back by decades. The Silicon Valley mindset seems to be that absolutely nothing can be permitted to hold back tech by even one extra day. What are your thoughts on that? Yeah, there's a couple things in here that I think are really interesting and worth pulling out. And Dmitry, this is a conversation that you and I actually have a lot. I do think that Silicon Valley does represent the position almost always that tech is sort of a natural good that benefits the world, that the net byproduct of almost all technology is good for the world. And they have lots of evidence that they point to, but that is sort of Silicon Valley's position. They've done a good job over the last 20 years of basically dragging the rest of the world along with them that nothing should slow down or impede progress and that technology is kind of coming at you whether (32/57)
Welcome everybody. Today's call is part of a series of live Q&As that I host regularly for members of our Hidden Forces Genius community and sometimes I open them up to our newsletter subscribers. The newsletter is free and you can subscribe to it and get special invitations like these at hiddenforces.io by scrolling all the way down to the bottom of the page or just waiting for the pop-up. Besides these audience Q&As that we do several times a month, community members also get invites to in-person events and dinners that I host all over the world with many of the same guests that you've heard on the Hidden Forces podcast before. And if you want to learn more about that and the Hidden Forces Genius community, you can do that at hiddenforces.io slash subscribe. So Nathaniel, the reason that I asked you to come on the show, as you know, on such short notice, and we're recording this on the evening of Monday, November 20th, is because beginning at around this time on Friday. So a few (1/57)
days ago, we learned that Sam Altman, the CEO and co-founder of OpenAI, was fired by his board of directors. And since then, we've heard all sorts of rumors and explanations for the firing, as well as the perspective rehiring and then refiring again. It almost feels like of Sam amid a total mutiny at the company. For those of you who don't know Nathaniel Whittemore or who need a more formal introduction, Nathaniel is the founder of the Breakdown Network, which encompasses an assortment of podcasts, including the AI Breakdown, as well as other content that explores the big picture power shifts remaking our world. So Nathaniel, quickly do me a favor and introduce yourself and just add anything that I've left out. And then let's get into a few questions that I have. And then I really want to encourage our members and other listeners who are joining for this call to drop any questions that you have in the Q&A box, because I really want to take audience questions today. This is what these (2/57)
calls are all about. After all, I have plenty of opportunities to ask questions of my guests on the podcast. So these are really for you. So Nathaniel, quick introduction, and then let's start to work our way through as many of these questions as we can. Absolutely. I mean, listen, you did a great job. The thing that I always come back to if I'm doing this fast is this idea of big picture power shifts that's always been what's interested in me. I was a history major. I love big patterns of history. It's why Hidden Forces has very long been my favorite podcast. And for me, exploring it through media, through news analysis is what I've done. So the Breakdown, it came out at a time where I was spending all of my time in and around Bitcoin and crypto, and particularly in the context of what it meant to have a non-sovereign monetary system and how that played into other global changes, the fragmentation of the American-led global order and yada, yada, yada. And so for me, it was a vehicle (3/57)
to explore all those things. And I had a very similar experience around this time last year that many up people did when ChatGPT came out. And there were a number of other products that were emerging at the same time. There were these image generation tools that were starting to arise. And I had the experience of playing around. I think actually for me, the sort of unstable diffusion and mid-journey were even more transformative the first time I tried them from the standpoint of just seeing magic presented in front of my eyes. And I started to explore all of these new generative AI technologies, got very convinced very quickly that, like me, people were having these zero to one moments where they were understanding that they were going to impact how they worked and what they worked on and were racing to try to figure that out. And that was the sort of genesis of the AI Breakdown. So ever since that show started, which is actually only April, believe it or not, I've been spending every (4/57)
day looking at what's happening, trying to contextualize it, understanding it in the context of the new technology itself, but also the big sort of economic issues that surround it, policy issues that surround it, social issues that surround it. There's going to be a million dimensions, which obviously is sort of part of why I think people are so intrigued to spend more time on this. I had a personal moment that sort of drove at home for me a little bit. I mean, you have different experiences that drive at home and I was sent a version of my podcast in Greek, which I can speak Greek and I understand Greek, and it was with a guest who's not Greek, who's Iranian, and they dubbed us two. Now, I know how I sound in Greek, so I didn't sound like I sound. He sounded the way I would have expected him to sound like he was speaking Greek and it was very good. The generative AI company that did it is run by a Greek person, so he kind of made some edits, but I can see how this is going to quickly (5/57)
get to a place where it's going to be perfect and it made me realize like two things. One, I've had this idea in my head that I'm really lucky because I speak English. English is a language that can reach lots of people with the podcast, so I have a competitive advantage that this is a language that I understand natively. Then I realized, whoa, we're going to be in a world where people are able to compete with me from any country because they're going to be able to translate into perfect English. It also made me think about this is an area where, and I feel like you probably have recognized this as well, you want to understand where these trends are going because you want to try and take advantage of them sooner than later because as an example, as soon as this technology is up to snuff and that could be really within just a few years, and it probably is in some of the other languages, more difficult in Greek because there isn't as much text on the internet. I could take this podcast (6/57)
and I could reach new listeners. I could expand my audience because all of a sudden I've translated it into like 100 different languages, which is like a modality of thinking about audience expansion that you wouldn't have otherwise. Yeah. I mean, I think I barely had time to wrap my head around this, but it feels like translation is actually one of the most solvable things. I mean, it is just really happening. I don't know what the implications are of a world where the default will be you get to consume content in whatever language you're experiencing the world through regardless almost of what they did. Now, of course, I think that by and large content creators will still be the drivers of those change. You will opt into using Wondercraft or whatever, when Spotify integrates these types of features to do that sort of dubbing and translation initially, but I can also see a world where it's platform mediated and it's just even if you don't do that, all you have to do, it's almost like (7/57)
an opt out for Spotify or something like that where they're just naturally doing that. I think there are some pretty profound implications probably of language ceasing to be a barrier in the way that it's been a barrier for the entire history of human experience. Again, so I recommend people follow your work and follow the AIA breakdown because you cover these big picture trends and that's what the podcast is about. So let's apply your expertise and the things that you spend your time on to this. I mean, this has all the makings of a great story. It has human drama. It's consequential in the sense that it's grappling, not only is the industry so important, but it's grappling with some of the decades-long themes like the tension between entrepreneurs and founders on the one side and the board and investors on the other and the empowerment of the founder. And also this larger question that's been in the public consciousness for some time now, which is this battle between, though it has (8/57)
been articulated in this way until recently, the battle between the AI safety people and the acceleration is. So give us a recap starting with, I think it was noon Pacific Standard Time on Friday that the news broke that Sam had been fired. So just bring us up to speed. When did this start and where are we now in this story and what's happened in between? As an aside, I got to tell you, I was very happy to not be intimately involved with the chaotic multi-billion dollar value destruction Sam episode of this November as opposed to last year. So I was thinking about this. I think let's do maybe the literal 60-second bullet point version of just what happened so that we can go back in on Peele because there's so many layers. So Demetri, to your point, noon Pacific Time, 3pm on the East Coast, maybe just after, but consequently before the close of markets, let's put it that way, Open AI, the board announces that Sam Altman has been fired. He's leaving to spend time with his family kind of (9/57)
a note. This was a, the board no longer has faith in him because of ways that he's communicated and we don't trust him. And he's gone. And by the way, Greg Brockman has been demoted from chairman of the board. He's no longer on the board and he is now going to be just an employee of the company. We're also, they elevated CTO or former CTO, Miram Arati to the CEO position, the interim CEO position and said, they'd figure it out from there. This was a neutron bomb. I mean, whatever, pick your hackneyed language of a huge massive explosion for reasons that I think will probably spend the rest of this conversation unpacking. But it was the just act one of an incredibly sort of dramatic moment. The rest of the night was spent sort of with people trying to figure out what the hell was going on. There was about, I don't know, a five or six hour period where we hadn't heard from any of the principles involved. And the speculation at that time, I think, was my interpretation was that there must (10/57)
be something enormously egregious that happens. I thought it was some sex scandal with Chad J.B. D. or something. I didn't even think a sex scandal was a big enough thing. I mean, the amount of sheer value destruction that was going to be created by this seemed to me to be something where either A, there was like Sam was keeping state secrets or B, AGI had literally been invented and he had kept it from the board. Something of that sort of level of significance. It's the only thing that made sense. But then as the night wore on, we started to get commentary one, Greg Brockman quit in flames. Basically, he said, not a chance I'm sticking around to just be an employee with this. And Sam had sent sort of some nice gracious tweets or whatever, but very clearly was, you could feel the intensity of things going on. And part of the reason for that was that it was very clear that no one had been consulted in this. It doesn't really seem like counsel was consulted in this. It was the investors (11/57)
weren't consulted, Microsoft wasn't consulted, Microsoft did their sort of nice little statement kind of a thing where they said, sure, we're excited about the new leadership, excited about this partnership, whatever the thing they have to say, basically. You could almost feel the happenings going on behind the scenes. So Friday night, everyone's still grappling with this. By Saturday, early to mid-afternoon, it's clear that this is not a done deal and there are battles going on. There are conversations, I think the Verge maybe broke it at 4 or 5 p.m. East Coast time on Saturday, that the board was now actively back in conversations to bring Sam and Greg back. And that as part of that, they were demanding kind of understandably the resignation of the rest of the board. And we're now kind of at the 24-hour mark of not having had any meaningful explanation from the board around why Sam had been fired, which of course just leaves everyone to be speculating wildly about what it might be. (12/57)
But at that point, 24 hours goes by, the speculation had shifted from, okay, did Sam do something crazy terrible too? Was there just some sort of internal power struggle? I think that the most common explanation at this point was around the idea that perhaps there was just some huge disagreement around safety questions and around risk questions. And it started to be sort of interpreted as the effective altruists on the one hand versus the accelerationists, the EACCs on the other hand. That started to be Tell people a little bit just quickly for people that don't know, what do we mean by accelerationists? Accelerationists who are not scared of the risks of AI and AGI in particular and think that it leads to a world of abundance. Now, there's infinite variations within that. There's just people who are sort of broadly techno-optimist accelerationists who think that technology is going to be a net good force for humanity, but maybe who still have some questions on the specifics here. (13/57)
There's other people who are like, bring on the super intelligent gods and let humans be consigned to a secondary species. It's not a term that has full a singular meaning. In fact, and I think in some ways right now, what it means is not the guys trying to slow down AI, not the guys trying to pause AI. So we're kind of getting this interpretation of it being a safety issue and reinforcing that as the fact that at the center of it seems to be Ilya, who's one of the board members, Ilya Sutsgever, who was a chief scientist at Open AI. And he has expressed various concerns. He was at the time leading the super alignment team, which was Open AI's effort to get to actual alignment with super intelligent AGI over the next four years. They had kind of set their moonshot project. He also worked under Jeffrey Hinton, right? Yes, he was at Google. And Jeffrey had resigned from Google famously over concerns about safety. Yeah. Elon Musk says that his friendship with Larry Page ended over (14/57)
recruiting Ilya away from Google to Open AI originally way back when it happened. So Ilya being at the center of this seemed to reinforce for some people that this was a disagreement around safety questions, but it also kind of started to seem like maybe there was a lot of just the very classic garden variety interpersonal struggle stuff, right? Ilya had been demoted about a month ago in terms of how much authority he had. Clearly didn't like that. And so personally, I was left wondering, is it actually these AI safety questions or is it not? So going into sort of Saturday night, we have what's clear is that there's a sort of a groundswell of people trying to get Sam back in in power in Open AI. There's a sticking point with the board doesn't want to resign, or maybe it's that they don't know who's going to replace them on the board. And so there's a lot of intransigence. And then on Sunday, Sam is back at Open AI to actually try to figure this thing out and negotiate. He's in the (15/57)
building. He holds up, he tweets out a picture of him holding a guest badge and says, this is the first and last time I'll wear one of these. Satya Nadella from Microsoft is literally mediating these conversations, right? And again, throughout sort of the afternoon, we start to get more of a trickle of information. Really, honestly, not much happened until very late at night actually on Sunday, where apparently Mira, the former CTO who had been elevated to interim CEO had determined at some point over the preceding two days that she was going to use her new authority to bring Greg and Sam back, which obviously the board wasn't happy about because they had just fired Sam at least and demoted Greg. And that apparently caused a battle with Adam DiAngelo, who was one of the board members who's the CEO of Quora, who was formerly at Facebook. And that led to the news that we got around midnight last night that Emmett Shear, the former CEO of Twitch, had been hired to lead the company as new (16/57)
CEO. So we've gone from Sam on Friday morning to Mira on Friday night through Sunday afternoon to Emmett Shear on Sunday night. And we can talk about Emmett and what it might represent. But the final part of this story from Sunday night early into this morning was that at, I think, 3 a.m. East Coast time, 2.57, because I spent a lot of time looking at this tweet. Satya Nadella basically tweeted out that they were looking forward to getting to know Emmett and the new OpenAI leadership team, but that Sam and Greg were coming to work at Microsoft, which is just, I mean, an outcome that I don't think many people had, even as they started to look at the full spectrum. I think that the absolute default assumption, should they be unsuccessful and wrenching control back of OpenAI itself, was that these two guys were going to go start their own startup to compete with effectively a blank check from any investor that they wanted. Now, just to finally wrap this up so we can get into whatever (17/57)
questions you want to take the direction of. This is where things were this morning at around 8.15 as I set off to drive my daughter to school, to kindergarten. And then when I get back, it turns out that OpenAI employees are not content with the arrangement and the way that this is done and had signed a letter demanding the board's resignation, the return of Sam and Greg, and very impressively, something like 500 out of the 770 employees had signed that when it was announced at like 8.30 AM. But even more impressively, it turns out that it was only signed by 500 because most of them were sleeping. And so I think at the time that we're recording this, or the last number that I saw from an hour ago, it was something like 735 of the 770 employees had basically said, the board needs to go or we're leaving and we're going to Microsoft with Sam and Greg, or at least not staying here, which is astounding because that's probably a higher percentage of the people than Microsoft would have (18/57)
gotten to come over if they had actually acquired the company. So it's just this massively strange situation. It is very clear that there is still a battle being waged behind the scenes. Sam has been dropping kind of cryptic tweets that don't say much, just sort of vaguely trying to reassure the developer community, I guess, in some ways, but we are still unresolved. And in fact, every time someone announces something that sounds like a resolution, it has turned out not to be and has been sort of upended within six to 12 hours. Yeah. I mean, so great summation. Ilya's participation in that final letter saying that he wanted to, that he'd lost confidence of the board is the one that's like most perplexing. But again, I feel like it just highlights our ignorance at the moment. We're still trying to put pieces together. So we still don't understand to what degree he was pushing for this. He also tweeted out, I guess this was this morning, he tweeted out, I deeply regret my participation (19/57)
in the board's actions. I never intended to harm open AI. I love everything we've built together and I will do everything I can to reunite the company. Quick question on Emmett's qualifications. Is Emmett's qualifications Emmett, former Twitch CEO, are his qualifications mainly that he's on the AI safety camp? I mean, that is the interpretation. So if you read like Kara Swisher is very clear to her, that's what the big thing is. Now, people who know Emmett, I don't have a dog in that is Emmett a good CEO or not fight. He was CEO of a very dynamic company that sold to Amazon sort of before and after the sale for 11 years, which is not nothing. He built that company from scratch as a CTO. He's got a reputation as being a very good leader, as a good engineer. And he's also got a reputation as being very thoughtful and interesting. But the flip side of this is of course that this is one of, if not the most significant startup in the world right now, it certainly has the sort of biggest (20/57)
potential for impact. And it took him about 10 minutes to decide that he was going to be the guy. And it kind of seems like they did because one, he had the qualification of agreeing with them on AI safety things. And two, he was the guy that said, yes, it's come out subsequent to Nat Freeman, who used to run GitHub has said no. I think one thing that I will note about Emmett, and again, I have a very strong feeling that Emmett's story in this is ultimately going to be a very, very small footnote. But one thing that is notable is that in the sort of, you know, six paragraph or whatever note that he sent out on Twitter last night, like 4am, he said, PPS, before I took the job, I checked on the reasoning behind the change that board did not remove Sam over any specific disagreement on safety. Their reasoning was completely different from that. I'm not crazy enough to take this job without board support for commercializing our awesome models. So again, this leaves everyone with the (21/57)
question of then what the hell was it? Was it just someone didn't like Sam or didn't like how what Sam was doing? What could possibly justify this? And the board has been unwilling to make a case. So I'm going to hold this question. But what I wanted to say is that I think it opens up the door to a conversation about open AI's role as a nonprofit organization, and its relationship to Microsoft and how workable that was. And maybe, and I'll ask this question, then I want to take a few questions. We have some great questions that have already come in. Are we too quick to attack the board here and not give them enough of a benefit of the doubt? In other words, their point was that what they said was that Sam was not being transparent, that they couldn't trust him, right? So couldn't there be a lot of truth there? And that maybe in part because of the nature of the enterprise, the fact that it wasn't nonprofit. I mean, Sam says he has no shares. I don't really know how that works. But that (22/57)
he was, let's say, engaging in other deals on the side in order to try to get pieces of other companies that he's potentially working on and trying to start. And that that was also interfering with the board's ability to exercise governance. So there's actually two questions embedded here. One is, is it possible that there was a reasonable justification for this based on the actual facts that we haven't heard? And the answer, of course, is yes, because we haven't heard. But the second question is whether it's reasonable to give the benefit of the doubt when the stakes are this high, when the board refuses to articulate what that is. And the board hasn't even, by the way, come out and said it's too sensitive and could cause harm if we explained what he was being deceptive about. They've just said nothing. And so I have a hard time with the argument. Like, look, I think it's a big sort of well, actualism on Twitter right now when people are like, well, the nonprofit board is just (23/57)
exerting their right to do it. It's like, yeah, sure. But they're not explaining why. And so it's all right as everyone else to say that that sounds like total bullshit from where we're sitting. I mean, listen, Andre Carpethy said this in a tweet as well during the middle of the whole thing. Someone said something to the effect of, it's weird that Andre, who's kind of right after the set of people, I mean, he's as well known as prominent as important as any of these folks in many ways. And someone said, it's weird that he hasn't said anything. And he basically said, I haven't had anything to add because the board has, you know, not taken their chance to explain what their logic was. And so we just kind of have to assume it is what it looks like. And I think that that's a pretty reasonable place to be. Again, they haven't even gone so far as to say something like, there was a safety disagreement that's too important to give publicly, but we stand behind our conviction. They've just said (24/57)
nothing. And it sort of has left everyone to assume that it is actually less significant. And I don't think that people care whether it was technically in the rights of the non-profit board to do this thing. Lawyers will care when there are, you know, the lawsuits that are inevitably coming down the line. But in the court of public opinion, the board is basically fully wrong. And I don't feel bad for not giving them the benefit of the doubt, given that they haven't taken the chance to actually make an argument. So I'm going to take some listener questions. Richard asks, how does Microsoft's increased influence and Samsung UROL impact the speed and trajectory of open AI? What does this say for direction, control, and security? And I would add to that, Nathaniel, just a larger question of this, does Microsoft ultimately come out, you think, as the biggest winner in all of this? I think that it certainly puts more pressure on commercialization. I don't think that Satya is lying when he (25/57)
said, you know, in his initial tweet that they've learned a lot over the last half decade around how to let companies sort of function on their own, more or less, you know, between LinkedIn and GitHub and this sort of thing. I think that they have done a good job of sort of shifting that. Microsoft is no longer a pariah where like your company, when you sell to it, goes to die in quite the same way that it would have been a decade ago, in large part due to changes that have sort of happened on Satya's watch. But at the same time, it's a huge company, right? When this happened, it wiped out $48 billion of market cap in a matter of minutes, right? That's an enormous amount of pressure and not just pressure, but fiduciary responsibility. Microsoft is structured in a way where it's their job to think about AI safety issues. Now, they might decide to take it to shareholders and say, we should all be thinking about these issues. But right now, it's not their job because they're a public (26/57)
company. They have a very specific mandate that has nothing to do with that. So I think that it means there are competitive pressures. So the competitive pressures seem to be the bigger problem. And the talent drain that happened at OpenAI is like a perfect example of that. Well, there's a larger question of just how inescapable the absolute vortex of the AI arms race is from a commercial perspective. I think that's a really reasonable question. By the way, this is Hinton's main point when he left Google is that it's an all-consuming thing that he can't imagine how we're going to get out of. I mean, it's a black hole of pressure. The question is whether Sam and the leadership of OpenAI would have more power to resist that pressure, at least in some way, from where they were versus where they are. My general feeling is that as the pole position industry and generation defining startup, which they were, I mean, it is a remarkable achievement that won. Not only did they kick this whole (27/57)
thing off with chatGPT, I'm just absolutely burying the faces of everyone else with egg. GPT-4 hasn't even been close to touched, subsequent to that. Google has just continued to delay Gemini. Amazon is theoretically training something on, that's even bigger than GPT-4, but we haven't seen it yet, although it could be announced in the next couple of weeks. Olympus is the code name, apparently. But they were really in the pole position coming into this and had a huge influence in shaping the nature of the industry. And I think that they lose that in a lot of ways with this. I think it creates an opening that allows for more of that commercial pressure, not less to come in. I also think that, maybe I'll invert your question a little bit. I think it's possible that Microsoft's the bigger winner, but I still think it's, I think that Microsoft had already done a phenomenal job. I mean, listen, Microsoft's relationship with OpenAI kind of reset the way that startups and big tech think about (28/57)
each other for this generation of companies. It was a new precedent. It was not an acquisition. It wasn't just a straight investment. It was very clearly something different, but the model has now been sort of semi-copied by Amazon and Google in terms of Anthropic. And part of it's just the reality of limited compute resources to go around. But I think that they were in a pretty good position already. I mean, they were making more money from OpenAI. And I think that anything that sort of sows chaos in the lead that they had, even if yes, they own sort of more of it ultimately, I kind of don't think there's any real winners in this basically. I think the biggest loser is the AI safety field. We'll have to get to that. So I'm going to take another Microsoft question here and skip around a bit. Nima asks two really great questions. So one is, if the majority of the OpenAI team moves to Microsoft and others are poached by competitors, what do you believe will be the impact of this event on (29/57)
the competitive dynamic and landscape in artificial intelligence? Could it in fact better level the field among large language models? And then the second question is, if a regulatory movement grows to slow down acceleration, is Microsoft a more susceptible target for regulatory scrutiny? So both really great questions. Yeah, my answer is yes and yes. So yes, I think that it does have the potential to create less of a, I mean, listen, by weakening the company that I was sort of arguing is in the poll position, you inherently create a space where there is more, there's more equivalence, let's say, right? There's more room to catch up. And I think that that is almost a, I don't see how that doesn't happen to some extent in the sense that developers in particular who OpenAI had just extra one over with Dev Day relative to where they had sat before November 6th, have to be very questioning what they're going to do kind of going forward and how much they're going to invest in the chat GPT (30/57)
and OpenAI ecosystem versus working with other models, whether they're closed or open. And so there's an argument that it's ultimately a good thing for the world to not have a single dominant force. The flip side is I think that that's probably counteracted a little bit by increased concentration in the hands of Microsoft. I think a frenemy relationship between OpenAI and Microsoft is probably not better for the world than a fully absorbed relationship. But it's hard to say those things are going to take a while to blame out. But I think that the question of whether there's going to be more, if it creates more of a target for regulatory scrutiny is absolutely, there's a question of sort of, will it actually be able to happen exactly as intended or will there be antitrust suits? It creates all sorts of new questions that they were always probably going to have to deal with at some point as that relationship evolved, but are coming a lot faster now. So Sundeep asks, if the Accelerate and (31/57)
you want it or not. Now, I would argue, and this is a little bit of probably out of scope of this conversation, that that was not just Silicon Valley sort of stumbling into power, but also had to do with sort of big political decisions such as the decision to sort of, I mean, globalization decisions and the way that that impacted the economics of America. We traded the sort of jobs for cheaper stuff and a lot of what has come from technology, we're not so sure actually sort of net benefited us, but Silicon Valley is always going to represent that position. I don't think it's particularly unusual or surprising. I think a bigger question is sort of where the rest of the world is going to fall when it comes to that. And frankly, that's why I think you're seeing such intense and vicious narrative warfare between sort of the forces of pause, slow down, AI safety, effective altruism, whatever subdivision of that whole set of things. And on the other hand, the sort of accelerationists because (33/57)
they know there are big stakes at play here. These are positions held by sub 5% of the world or call it America if we just want to define the parameters of Americans who are going to be involved in American policy decisions. I think that the vast, vast majority of people don't really have a strong perspective on this yet because A, it's new, B, it's complicated, C, it's kind of a reasonable default position to take to say if a lot of researchers are at least reasonably concerned that there's a lot of risk here, we should probably take that seriously even if we also see a lot of the upside. I think a lot of people are finding themselves in the middle and an admittedly uninformed middle as they're trying to get up to speed with it. And so the two poles are really aggressively trying to pull them in either direction. Silicon Valley because I think it's existential in a way that's not just about AI but it's about whether the tech industry can continue to sort of dominate the conversation (34/57)
and sort of do no wrong or at least get its way even if it's been sort of said to do wrong. And on the other hand, it's existential because the people literally think it's existential from the standpoint of whether humanity survives. So the narrative stakes are quite high. Yeah, that's a really great point. I mean, the existential side is well established, but this idea that Silicon Valley is banking on this as being the new technological paradigm and the ability to develop that unencumbered or the fear that they might be encumbered in trying to develop that is something that's freaking out a lot of people. It is. And it's interesting to me why that is. I don't have a good explanation yet for why there is sort of such intensity around this. I think that it's probably like anything, a variety of positions where I think that there are probably in the same way that there are people on the side of sort of AI safety who very genuinely believe they're P doom to use sort of the expression (35/57)
that's used in those circles a lot, their probability of doom, the percentage chance they ascribe to sort of a human life ending event is very high and they believe that realistically. I think that there's probably the inverse of that on the acceleration aside who think that genuinely AI will, if given the chance in 10 years, solve cancer and solve, you know, and all these things would sort of prevent human flourishing. And so it becomes, you know, Mark Andreessen literally argued that it's a form of violence to not allow this to proceed in his techno-optimist manifesto. Then I think you have others who are just sort of generally think that the AI safety folks are sort of crying about nothing and making fallacious arguments and it's stupid, you know, and then you have sort of the libertarian set who doesn't want sort of government to be involved in this and say, you know, if they do this, then, you know, where does it stop? And, you know, so there's all these different dimensions. It's (36/57)
not a coalition per se. Yeah, those people are always way, way off center. The sort of no regulation this is like David Crockett's America is so totally missing the ball. Actually, you know, this point about power I think is actually central and I've something I've talked about. It's not a coincidence that we got democratic reforms and moved towards more pluralistic systems of representation after the end of the bubonic plague and the price of labor went up. Labor was empowered and with the empowerment of labor, you got the empowerment of civic bodies and the population, people. And I think that it's also not a coincidence that we've seen increased fragmentation and rising populism and political dissatisfaction in Western democracies since the fall of the Berlin Wall and the rise of globalization, which disempowered labor in these Western countries and also technology also appropriated more power towards capital against labor. And so you've seen this move of disempowerment of labor (37/57)
relative to capital and AI represents the apotheosis of this. You know, it is the singularity, you know, not to just a quote Ray Kurzweil, but truly it's a massive concentration of power. And I do wonder to what degree we're also what we see in the case of the acceleration is just a recognition of that recognition that they are on the cusp of a massive, and I don't mean it in a twirling your moustache kind of way. I just mean it in a kind of fundamental way. They see it. This is where it's going. They want to be on the side of the people that have the power in what could end up being a feudalistic type of global society, which again reverses all the gains of the breakdown of feudalism that happened after the end of the bubonic plague in Europe. So another question Michael asks, if the board is motivated by safety concerns, is it naive for a software vendor to think that they have any meaningful influence over the trajectory of AI technology when hardware progress will inevitably (38/57)
continue producing improvements and capabilities for the foreseeable future? So I'm not entirely sure. I think I understand where he's going, but I don't quite get it as a question, but maybe you do. So what do you think of that? What's your response to that, Nathaniel? Maybe I'll reframe it a little bit and apologies to the person who asked the question if this is not the direction that it was going. But I feel like the question is, is it naive for anyone to swim against the tide when the tide is so clearly pointed in the other direction? Is it naive for this board to have thought that this would meaningfully impact anything even if they were completely successful and Sam and Greg just quietly went into the night? Sort of is the answer a little bit. Mostly in terms of execution, though, not in terms of principle. I think one of the real travesties of this, if it really was executed the way that it was, which is there not being some insane egregious inflection point moment when it (39/57)
comes to AI safety and the capacity of these systems, is that this body spent their most powerful tool on bullshit, it seems like. Listen, the structure that they set up theoretically to create a nonprofit that could fire the CEO of this incredibly important startup, WorkDish, in the sense that they did fire the CEO of this thing, but was this the right time to do it? It feels like it's just going to end up turning some amount of narrative against the AI safety folks because they look very chicken little-ish. The fact that it seems likely that Sam's going to consolidate power after this and no longer be an ally to that group in any meaningful way, certainly Silicon Valley is now on a McCarthy-esque witch hunt to try to root out all the effective altruists at their organizations. Of course, I'm overstating the case to make the point, but I don't know, it's not naive on the very broadest level to think that there are chances to drag the world toward the better a little bit. You're never (40/57)
going to convince humans that they can't do that. It's what makes us who we are to be optimistic about the capacity to divert things which seem like they have momentum such that they can't possibly be diverted. That's very American. That's very American. Not necessarily very human. I don't know. It's certainly more American, but I think it's fairly human in terms of the sense of agency to exert will over the world. I think that's pretty quintessential to humanity, but the poor way I feel now. George has a question on governance that I want to ask before that. Kelly asks a question about Elon and anything we know about Elon's involvement. Elon, we do know, was involved in OpenAI and its founding. He's also recently started a AI company. I don't know to what degree is just a lark or some kind of thing, performative act, again, to generate a media hype and excitement, whatever, and how much of it's substantive. But is there any involvement for Elon here? Elon's always trying to find some (41/57)
even just GROC and sort of like the anti-woke chat, GPT bot and stuff, Tesla has some of the most advanced artificial intelligence in the world. The way that they are doing full self-driving is they're inferring on site, right? They are taking in all of that information from all of the cameras on that vehicle and making decisions in real time, which is a real world sort of AI that basically no one else has the way that they do. And it's not hard to start to see how this incredible trove of conversational data from Twitter slash X, plus that sort of inference capacity that comes from real world data in the form of all the fleet of Tesla cars that are out there collecting it, combines into their robot, which brings sort of all of these things together into, who would you say are the big players in the AI for among AI foundation models? It's a very small handful. There's open AI, there's Anthropic, which was a split out from open AI. There's XAI who is new, but you would just have to give (43/57)
Elon credit and call that sort of the representative of the entirety of Elon's stuff. And his LLM is Grock, right? Yes, inclusive of Grock and Tesla and all that. Microsoft is really sort of aligned with open AI on that. They do technically have, they just announced the next generation of their sort of LLM, but it's so clearly secondary to what they're doing with open AI. And then there's Google who are sort of far behind at this point, which is the whole very interesting thing. Meta, who are sort of have taken this sort of leadership position in the open space approach. And Amazon, who again, they sort of got pushed out of the way by open AI, but are now, they've sort of moved into professional services with bedrock and helping enterprises sort of train models. But it seems like their ambition to have a competitor is still there. Obviously, they need it to power sort of Alexa devices and things like that to some extent. Apple's a big question mark. They are now from all reports (44/57)
spending millions of dollars a day training their own models, although it still seems unclear exactly what they're going to do. It kind of seems like their focus is to get the technology sufficiently advanced that they can actually run these things on device so they don't have to deal with the cloud. And then there's a whole cadre of sort of open source approaches too numerous to list, but there's Mistral, there's stability, there's all the hugging face models. I mean, there's a huge array of things building in that space as well. So all of you can hear just how well versed Nathaniel is in this industry. So he is the AI explainer. If you need a podcast to listen to where you can download stuff every five minutes, it's Nathaniel. So George asks, is this a symptom of problems with governance both in the tech space and in the nonprofit space? I'm troubled because nonprofit does not mean you are, quote, doing good the way many folks think. It just means you essentially get to dodge (45/57)
taxation and operate under less regulatory scrutiny. Yeah, I think that there are indictments to go around in terms of governance here. But I think that for me, to the extent that we are looking for things which we should sink our teeth into and ask questions of how we're going to sort of not do this again or fix this, I think that it comes back to questions of AI governance specifically. And really, it's an even more simple question is what are, if anything, the guardrails around these sort of frontier models and the advancement of this space? And in many ways, I think that you can view OpenAI's nonprofit sort of weird structure as a self-regulatory approach trying to create those guardrails in the absence of there being a state-level guardrail or anything like that. And it has clearly not worked. And I think it's very hard to argue after this that the approach that they set out to do sort of worked without consequence. It's being put to the test as we speak. But again, to me, it's (46/57)
less relevant almost whether or not OpenAI's model worked and more like what is going to be the set of guardrails around this, if anything. And that's in many ways with the battle around the ASafety question is, who's going to get to determine what companies can and can't do in this space? So Leo asks a question about adoption. Do you see this impacting AI adoption anyway? I don't see it. If anything, it just accelerates it. Yeah, I think the thing that makes AI weird relative to other hypey technologies, of which I have a lot of familiarity with previous hypes is that it's just actually good. I think one of the most dismissible opinions to me when it comes to AI is the sort of, well, actually, it's not even that good. It's just predicting words and all the sort of stuff. It's really good. These things are transformational technologies. I don't think that homework is ever going to happen again. As it happened when we were growing up, I think that the way that writing happens is totally (47/57)
going to change. I think, blah, blah, blah, blah, I could go on for an endless list. But those things aren't mandated from above and they're not just from hype there because people try these things and they're like, oh, that's a much better, more efficient, more powerful way to do things that I was doing and in fact opens up new things that I could never do before. So this is a question from Michael, which I think is interesting. He says, it doesn't seem like the policy regulation narrative for semiconductor export controls and AI safety have been coordinated. Hidden forces has covered some of the semiconductor controls and AI safety voices haven't come up. Are there people interested in AI safety or in the effective altruism community or anywhere else that are advocating for hardware controls in the interest of AI safety? So I would just say, obviously, there are in the sense that the semiconductor export controls are in some ways a attempt to slow down progress in AI, but (48/57)
specifically for the Chinese based on limiting their exposure to hardware. But the question is, is that also something that regulators are looking at, Nathaniel, do you know with respect to US and American corporations? Yes. So one of the potential regulatory approaches, and this is a fairly extreme one, but it's something that's sort of a potential outcome even at the executive order, is the US government at least having visibility into who's using compute. So one of the easy vectors for them to start having some amount of control is to force the cloud computing providers, so the Amazons and Googles of the world, to let them know when a certain customer is using over a certain threshold of compute. Now, this is something that's going to be fought incredibly viciously. I mean, just insanely tooth and nail fought. But if the government's trying to understand who's doing massive training runs before they happen and want visibility into that, they do have access to this information (49/57)
potentially through the compute providers to get that. So the short answer to the question is, yes, the government is looking into ways to have access to that sort of hardware level visibility, at least if not straight up control. I haven't seen proposals yet to give the government authority to actually green light, the usage of compute. Most of the sort of green lighting type proposals or licensing type proposals are farther downstream where if maybe there's a sort of a red teaming requirements, testing requirements, and the government gets to say, no, you can't deploy that sort of model because it's too advanced or something. But I haven't seen yet a restriction of compute, but an observation of compute is definitely on the agenda. So what is in your opinion, if you had to guess, what is the next use case or next small number of use cases that you think are going to serve as the next kind of paradigm shift in the consumers or the user's mind about really how transformative this (50/57)
technology is going to be? So I think that we've spent a lot of this year following along the progress of like a new thing to come out every few days. And I think a lot of next year is going to be about integrating the stuff that's already here into workflows in really practical ways. So building interfaces on top of things like chat GPT and Anthropics Claw that are custom purpose for profession X or role Y that are just add a layer. Again, it's almost a UX layer. The capacity of GPT-4 is very high. And of course, engineers are going to be excited and focused on GPT-5, but there's so much in GPT-4. But if right now, the only way that people are interacting with it by and large is sort of a blank screen that's a cursor that says, what can I help you with? And I think that that's going to change a lot this year. And I think that we'll move from just a pure kind of early adopter set, although there's tens of millions, if not hundreds of millions of early adopters doing all sorts of (51/57)
experiments with these things to, I don't know, accountants. I'm just saying, here's how we use this tool and other accountants copying them hundreds and hundreds and hundreds and thousands of times. I think you'll see social media managers say, here's how we do content calendaring, blah, blah, blah, blah. I think actually it's going to be a much more boring sort of integrated period. Now, it'll be punctuated by like mind blowing things, the likes of which you've never seen, but that'll be sort of contrasted with just the sort of steady flow of these tools into actual human workflows. So I have one last question for you, Nathaniel. Give us the name of one or more books, and this might be hard because this is such a new field, books that you would recommend for people that are interested in learning about this field, and also other sources, like how do you educate yourself in real time and stay up to date? What are some good journals, some good online magazines, some good people to (52/57)
follow besides you that you follow to help stay up to breast on this industry? Yeah, I don't know if books are the right way to for this. I think where books can be helpful is books can create a really good grounding for particularly some of the AI safety debates. There's a lot of text there, it kind of delves into philosophy. Nick Bostrom's Super Intelligence, we came out about seven years, eight years ago. Yeah, exactly. That sort of thing is there. In terms of keeping track of this, it's fascinating because there's this whole new core of content creators that are sort of just emerging now, and I think they're actually quite good. You don't have the sort of shilliness, I mean a little bit on X because that's just the nature of the platform, but you don't have the same sort of shilliness that you see with crypto YouTubers that you do with AI YouTubers. There's some great people like Matt Wolf who have created these channels that are just pure value. Matt Berman is another person who (53/57)
explains things, he's more technical. There's a handful of those now, there's a dozen or something like that. I think in terms of people to follow from a news standpoint, I think that, I'm sort of not biased, I go wherever the information is good. The information, just the information.com is by a million light years the best newsroom when it comes to AI. I mean, it's just- Yeah, everyone is citing them, everybody's citing them. Every scoop is them. Now, I think that is testament to the fact that AI has brought tech back to San Francisco and Silicon Valley specifically in a way that looked like maybe it had lost during COVID because it matters once again to have this incredible concentration of actual frontier brainpower. It's sort of returned and the information is where they're strong is in those actual geographic ecosystems where there are people who are writing for them, have relationships with people who would go into those companies and things like that, but they're a great (54/57)
source. On Twitter, it sounds silly, but one really great resource is Robert Scoble. He's been a tech obsessed guy. He loves technology, always has been an evangelist for various things. He just created a new show called Unaligned, which I actually haven't even seen, but what he's been doing is trying to curate the entire world of ex-users on AI into lists. He's got a list for ex-companies. He's got a list for ex-artists. I've found that lists don't usually stick as the way that people sort of interact with Twitter, but they're a great way to, if you're trying to figure out who you actually like, you go check out one of Scoble's lists and then you end up finding two or three people who come up over and over and over again and you follow them and you're in a good spot. It's a field that rewards finding new voices and new people, but it's going to keep changing too, I think. How do people follow you besides following NLW at NLW on Twitter or X as you call it? I still haven't internalized (55/57)
it. I know. I'm meaning that. I'm working on it. How else do people follow you? How do they find the podcast? What's the best way to take advantage of all the things that you have to offer, Nathaniel? If you are an audio listener, the AI Breakdown, if you search the AI Breakdown, you'll know it's mine because it's got an old retro futurist, kind of like 50s image on the cover with a little robot guy at the center of a family. You can find it on any podcast platform. The YouTube is, I think it's youtube.com slash at AI Breakdown or AI Breakdown Pod, maybe or something like that. If you search my name, Nathaniel Whittemore, you search the AI Breakdown it'll be there. If you're a visual consumer, every podcast episode is actually two videos on YouTube. Breakdown.network has all the information about other stuff. There's a Discord, there's a newsletter, and then there's also, we're now kind of moving into the world of learning communities. I've got a beta educational learning community (56/57)
that's coming together in December. I decided to pull the trigger on it. Well, I'm very excited to hear about that, Nathaniel. So thank you so much for coming on, man. This was awesome. I really appreciate it. Yeah, always love chatting to me, Tree. All right, have a good one. Bye, everybody. Yeah, you too. (57/57)
What's up, everybody? My name is Dmitriy Kofinas, 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 Dmitriy Alparovitch, the co-founder and executive chairman of Silverado Policy Accelerator, the co-founder of leading cybersecurity company CrowdStrike and the author of the soon-to-be-released World on the Brink, How America Can Beat China in the Race for the 21st Century. In the first hour of our conversation, Dmitriy makes the case that we are already in the midst of a new Cold War, and that Taiwan is the strategic flashpoint that risks triggering a devastating conflict between two nuclear powers in a way that West Berlin nearly played during America's last Cold War with the Soviet Union. We discuss the similarities and differences between Cold Wars I and II, (1/57)
including the role played by the USSR as a liberator in Europe, and the strong appeal of communism as a competing ideology in the early decades of the first Cold War. We also discuss how we lost an opportunity to build a sustainable peace with post-Soviet Russia, and how that has made the new Cold War with China all the more challenging and dangerous. The episode's second hour begins with a discussion about the importance of Taiwan and a thought experiment about what would happen in the event of an uncontested Chinese takeover of the island. We discuss the philosophical underpinnings of American supremacy and arguments for its preservation, the need to build national unity by addressing legitimate political grievances, military industrial reform, immigration, and what it will take to deter a Chinese invasion of Taiwan that the major beliefs could happen before the end of this decade. If you want access to that part of the conversation, and you're not already subscribed to Hidden (2/57)
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, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative and sobering conversation with my guest, Dmitri Alperovic. Dmitri Alperovic, welcome back to Hidden Forces. It's great to be back. Thank you. And you're back, and you're back with a new book, your first book. Congratulations. (3/57)
Thank you. Maybe first and only, we'll see how it goes. It's a lot of work. We're just talking about that. I can only imagine. I don't even know how people write books. I mean, first of all, it's a lot of work, period. But while you also have a full-time job and you've got a gazillion other responsibilities to write a book, it's insane. The biggest challenge I faced is just the stress of the prolonged process to have to republish it, because the book was, for all intents and purposes, locked down back in August. And it's taking this long to get it out. And I was able to make small changes to it, but I was in pins and needles of something big happens. If Xi Jinping dies, a lot in the book has a change, and there's not an opportunity to do so. Yeah. I mean, you did update it for October 7th. I don't know how far into the conflict you actually did update it, but you got that in there. So before we get into the book, or the title of the book is World on the Brink, How America Can Beat (4/57)
China and the Race for the 21st Century, we'll get into the book. But real quick, you talk a little bit about your bio in the book, and I don't think you and I have had a chance to actually discuss this on air at all. You immigrated from the Soviet Union when you were in high school, correct? No, not in high school. I was a teenager. Yeah, teenager. So tell us a little bit about that experience. What's sort of your background? Yeah. So I was born in the former Soviet Union in Moscow in the 1980s and was able to come over from my family. Ultimately, I ended up in Chattanooga, Tennessee, which was an interesting experience, going from Moscow, a city of 10 plus million people to the deep south, and a city of 150,000. It was done in the 1990s. So it was after the fall of the Soviet Union, and things were much more relaxed. So this was not sort of the escape from the Communist Soviet Union of the 1970s, as a number of people have done. Yeah. So how good was your English at that time? It was (5/57)
pretty good. I had studied it since second grade in Russia. So English was actually not the problem. It was just more of a cultural experience, and particularly of the deep south, because the south is different. It's not like the rest of the United States. So I can only imagine what it was like for you to be arriving at a high school like that, and also for those kids. Like how they probably stereotyped you in their head. I mean, did you have a heavy Russian accent? Like fill us in a little bit on that. Like what was the cultural experience like for you and for them? Well, I'll tell you a quick anecdote. So we didn't go straight to the United States because our immigration system is, unfortunately, a mess. And we actually initially immigrated to Canada. So I was in Toronto for about a year, and then my dad ended up getting a job in Chattanooga, and that's why we moved there on an H1B visa for him. And my first day in school in Chattanooga in Toronto is actually pretty easy to (6/57)
assimilate. You know, it's a big city. Again, my English was great. So I didn't have many problems there. But my first day in school in Chattanooga, this kid comes up to me and he says, where are you from? And I sort of hesitate because, you know, if I say Russia or Soviet Union, again, this is the South, it is the 90s, early 90s, but it's still the South. And, you know, we just came out of the Cold War. So, you know, I answer truthfully, but not fully. I say, I just arrived from Canada and the guy says, where's that? And I knew that my answer was irrelevant. Wow. That was, it was probably a good move. So let's move now to the subject of the book. As I mentioned, the title of the book is World on the Brink, How America Can Beat China in the Race for the 21st Century. The book describes a new security paradigm defined by China's rise as an economic, military, and technological power that threatens the power and authority that the United States has amassed since the end of the Cold War (7/57)
and cemented really through the unipolar period. You call this paradigm Cold War II. And before we discuss the term Cold War II, why you chose it, and whether or not it's appropriate, I'm curious to understand your perspective on how we got here. Yeah, absolutely. I've been passionate about this issue for well over a decade now. In fact, my first exposure to the fight with the PRC was actually in 2010 when I was in the field of cybersecurity at the time. And I got a call from this company you may have heard of called Google. And they had just been infiltrated by China and they were asking me to work with them on this investigation, which I ended up naming Operation Aurora, actually named for the Russian battleship of the 1917 Bolshevik Revolution that fired the shot. There was a signal to Lenin to launch the revolution. And that was often called the shot heard around the world, the shot to change history, the course of the 20th century. And I felt very strongly at the time that this (8/57)
was the first time that you had seen a nation state like China infiltrate American companies, steal intellectual property. At least it was something that was first revealed in our investigation. As we learned later, it actually had been going on for many years. We were ignoring that and that it was a dramatic moment. It certainly changed the course of my life and my career and I think of the entire cybersecurity industry and really set us on the path of acknowledging that China is not on a path to being a friend, that it is an adversary. It took several years for the Obama administration to finally get to that acknowledgement publicly. And then, of course, the Trump administration picked it up and took it further and the Biden administration has largely adopted Trump administration's policies on China. But the appreciation that we were in a pretty existential fight I've had for a while. But as I write in the book, the Cold War term, I think is the only one that is appropriate. In fact, (9/57)
what we have between the United States and China literally is the dictionary definition of a Cold War. Literally, I can tell you the definition from just the Oxford dictionary is that a Cold War is a state of political hostility between countries that is characterized by threats, propaganda. And other measures short of warfare, open warfare. I mean, I would challenge any of your listeners to tell me that that is not the exact definition of the state of relationships between our two countries right now. But beyond that, we go through the history of Cold War one, as I call it, the Cold War and compare and contrast to what's going on today in China. And I was actually struck doing the deep research for this book of how almost identical the two conflicts are on just every single part of the competition that defined the first Cold War, whether it's the global competition for supremacy between the two nations, whether it's the arms race, right? We're in a nuclear arms race, we're in a (10/57)
conventional arms race, we're in a space war and a space race that characterized, of course, the 1960s. We are both preparing for war over a flashpoint, a regional flashpoint in the first Cold War, it was West Berlin and a little bit Cuba. And today it's Taiwan. We have an ideological struggle. It's not communism versus capitalism, but it's authoritarianism versus democracy. In fact, President Biden even acknowledges that even though he won't accept the term Cold War, we have a scramble for military basis in the region. We are deploying bases now once again on the Philippines, expanding our presence in Japan and on our territories in Guam. And Chinese are doing the same with Pakistan, with Cambodia, with Djibouti. So on almost every level, we are in the struggle and even on economic dependence. As I write in the book, a lot of people make this argument that we can't possibly be in a Cold War in China, with China because of all this trade that goes on and we didn't have that in the (11/57)
Soviet Union and actually debunk that. Certainly the magnitude of trade with China is, you know, off the charts in terms of the scale and Farx seeds, anything we had with the Soviet Union. But there was quite a bit of trade with the Soviet Union and very important trade for them in particular, because as I write in the book, virtually the entire oil and gas industry, the fossil fuel industry of the Soviet Union, that financed the regime, that financed the arms race, that financed the guerrilla movements, you know, communist guerrilla movements that they were sponsoring around the world, was running off technology, Western technology that was sold to them. Right. I write about how we had sold them key components for weapons systems throughout the Cold War, how the Europeans provided loans to sustain the regime in exchange for oil and gas, in exchange for wheat that was being exported. So not on the same level as China, but there was quite a bit of trade and dependence that existed even (12/57)
throughout the Cold War. So the two conflicts are very, very similar. And the reason I call Cold War two, and it's Roman numeral two, not two, not two dot oh, this is not a continuation of the first one. It's a different conflict entirely. But it is in a way sort of like World War One and World War Two, different conflicts, different parties involved, different causes of it. But they're both World Wars and these are both Cold Wars and both great Cold Wars. So, you know, the first one is Roman numeral one, the second one is Roman numeral two. You know, those are great points. And I want to delve into some of them in more detail. And I also want to draw out some of the distinctions between the first Cold War and what you call the second Cold War and get your thoughts on that. Before we do that, one more question on how we got here. So looking back, was it the euphoria of the 1990s? That was it primarily that just the the vibes, so to speak, of that decade that led us to believe that the (13/57)
Chinese would become more like us and that they would feel comfortable in a position of subordination to American power? I think it goes further than that. Probably defining a moment of the relationship is actually Tiananmen Square was 1989. Right. So as the Soviet Union was falling apart, as the Berlin Wall was coming down later that year, you had this confrontation with the students in Beijing and the Chinese regime, unlike the regimes in Eastern Europe, chose to brutally suppress it and kill untold number of people. Perhaps we'll never even know the full death toll there. And there was a momentary sort of shock in America of, oh, my God, you know, maybe we got these people wrong, but it lasted all of five seconds. Right. We stopped selling the weapons, which we were doing throughout the 1980s. Just remarkable that we were actually selling blackout helicopters and other weapons platforms to China that they promptly reverse engineered and produce indigenous copies of, which are (14/57)
creating enormous problems for us now in the Pacific. So we stopped doing that. But we basically continued fully trading with them through the 1990s and 2000s, ignoring the fact that this is a country that had no intention of liberalizing, had no intention of really tamping down its anti-Americanism, which was latent, but always there. And, you know, I write in the book that we also got the start of the Cold War one wrong because, you know, many people think it started sort of in 1945, right as the Second World War ended, or, you know, 1946, with the famous speech by Churchill in Fulton, Missouri, talking about an iron curtain that has descended on Eastern Europe. And as I write in the book, I actually think that's wrong. I think the first Cold War began in 1920 as the first hot war between the United States and Russia ended. A lot of Americans don't know this or have forgotten, but we actually fought a war with Russia where we sent American troops to the end of the First World War (15/57)
into Siberia, into the Far East, to intervene in the Russian civil war against the Bolsheviks and try to help the white forces ultimately failed. Of course, the Bolsheviks won. We left, promptly forgot about that conflict in which almost 500 American soldiers have perished in Russia. And the Russians didn't. And I quote their writings at the time saying that the lesson they took away from that intervention is that they're in an existential conflict with the capitalist West and they had to fight to the death. And they started building their military forces, their economy for that fight. And what do we do? We started trading with them. We started to have American and British and German industrialists going over to the Soviet Union, providing the intellectual property, building factories, you know, the Volga Limousines that the Soviet leadership would drive in the parades on Red Square that, you know, everyone had seen videos of where they would inspect the troops and the military (16/57)
systems. Those Volga Limousines came out of a factory that was built by, you know, who Henry Ford, who came over to the Soviet Union, build initially tractor factory. Later that was expanded to an automobile factory, nationalized by the Soviets. Of course, the steel plan in Mariupol. We've talked a lot about the war in Ukraine, the Azov style steel facility, this enormous steel facility that was the last hold out for Ukrainian forces before they were overrun by the Russians in Mariupol in the start of the war. That was an exact copy of a steel plant in Gary, Indiana that was basically brought over by American industrials to build in the Soviet Union to help Stalin industrialize this country. And there are so many numerous examples of that where we were at literally helping their economy throughout the 1920s, 1930s at the same time as they were doing what? Stealing intellectual property. Not through cyber, of course, cyber didn't exist, but through traditional means. The Chinese scaled (17/57)
that up massively, of course, including in cyber. But the similarities between the two conflict are numerous. And just as in the first Cold War, I believe the second Cold War started a lot earlier than we realized. It didn't start with a Trump tariff war of 2017, 2018. It began much earlier, I think in potentially 70s, 80s, could be even earlier, where the Chinese, you look at their writings, were focused on this conflict, were focused on taking Taiwan. And we really ignored it and pretended that the problem didn't exist. And now the chickens are coming to roost. So a strategic ambiguity, an example of an expedient policy solution that's now coming back to bite us, the decision to try and walk a middle path between. Strategic ambiguity is interesting. And I write about the sepidosa in the 1970s, which I think is widely misunderstood. This whole Nixon Kissinger opening up China that some China hocks believe was a mistake, some people believe that it was a phenomenal move against the (18/57)
Soviet Union. I think that whole episode is widely misunderstood because what happened there, and I think it was the right move by Nixon Kissinger is they went over to China. They came up with this concept of strategic ambiguity on Taiwan, this phrasing that we used to this day of the one China policy, which means that we acknowledge and we use the word acknowledge. We do not accept, we do not recognize, but we acknowledge that people in Taiwan and China believe there is one China. That is it. That is our entire policy and which does not recognize that Taiwan is a part of China or China is a part of Taiwan, as was for many years that the feeling on Taiwan, it just acknowledges that there are people that feel that way. Right. So it was brilliant phrasing that gave the Chinese a pretense that we support their position when in reality we did nothing of the sort. Right. And what we got out of that out of that statement is the Soviet Union getting deeply scared by this growing alignment (19/57)
between the United States and China in 1972, which Kissinger very brilliantly leveraged immediately. Almost as soon as he left Beijing, what did he do? He turned around and flew to Moscow to meet with Brezhnev and to strike a detente deal with the Soviet Union. Mao, in fact, was livid. He thought he was completely snuckered by Kissinger. He talked about how this is a duplicitous man that can be trusted. So funny because now, of course, he's been heralded as this great friend of China. But at the time, Mao was absolutely astonished that he would be betrayed in this way, where he thought that they were building a partnership with America against the Soviet Union. China had just fought a border conflict with the Soviet Union in 1969. What does Kissinger do? He leverages that and improves the relationship with the Soviet Union and doesn't actually pay China anything. This is the mistake that people make, that China was not opened up by Nixon and Kissinger. It was not recognized. The trade (20/57)
did not open. We did not withdraw from Taiwan until 1979, which was not Kissinger and Nixon. It was Carter and Brzezinski that decided to pay for the improved relationship with China that Kissinger and Nixon secured, pay years later, seven years later, Kissinger throughout his time, both in the Nixon administration and the Ford administration kept pushing the Chinese off because they kept saying, well, when are you going to withdraw from Taiwan? When are you going to recognize us? And he was like, just wait, just wait, we'll get to it. Right. And Brzezinski and Carter come in and they say, why don't we pay them? Even though we've already secured the price, which was the detente with the Soviet Union, why don't we open up China? We draw from Taiwan, recognize China, and we are where we are today because of that fateful decision for which we really, except for the economic benefit, then I don't want to underestimate them. They were certainly significant to our economy, but from a (21/57)
national security perspective, we paid a huge price for it. We really got nothing for it because by that point in 1979, the Soviet Union and China were already reconciling. So that period of tensions was diminishing. In fact, a few years later, under Gorbachev, they would already start to rebuild their relationships to a great extent and the time was failing because Soviet Union at that point invaded Afghanistan. So the whole landscape was changing from what it was like in 1972 that Kissinger and Nixon leveraged. And I think it was a huge mistake by Carter and Brzezinski to actually open up China. We draw from Taiwan. And in fact, most of our problems, we can talk about this with regards to Taiwan's defense stem from that critical decision of 1979. What's interesting is that Carter and Brzezinski also armed the Mujahideen, which came back to bite the Americans. I mean, hindsight is always 2020, but- That was more on Reagan and fairness, but yes. Well, what's interesting about that is (22/57)
it brings up 9-11. So to bring it back to how we got here, the Bush administration, the second Bush administration, Bush W, the son, came into office with an intention to focus on China. And like is often the case, intentions are assaulted by reality. You get punched in the face, your game plan goes out, you change. How important was 9-11 in determining where we are today? And how do you think American foreign policy would have been different and the challenges that we would face today would be different had that not occurred? Yeah, the counterfactual is always really hard, right? We don't know what path history would have taken, but we do have some indications. And people have forgotten this, but just as President Bush, the junior, came into office, we had an enormous confrontation with China, right? They shot down effectively, well, it didn't shoot down, but basically forced down one of our spy planes in international waters that landed in Hainan Island in China, where they basically (23/57)
held the crew hostage and took all the equipment from that plane, reverse engineered it later on, which was a big problem. So we had this incredible tension with China in April of 2021, months before 9-11, of course. And it ultimately got resolved, but there was a lot of anti-China feeling coming into the Bush administration that was completely put on the back burner as 9-11 occurred and preoccupied us for the next 15 years plus as we pursued this war on terrorists. So I do think that 9-11 absolutely distracted us. I mean, it was obviously a huge conflict and we had to respond to it, but we dropped our eye of the ball. I think there was a feeling of the Bush administration that we were all now, the whole world was now united against terrorism. It was an attempt, of course, to mend the relationships with Russia. He famously said he looked into Putin's eyes and saw his soul, and the same thing was happening with China, and they got both of these wrong. Yeah. Well, let's talk a little bit (24/57)
about Russia because I've always felt, I mean, at least as far back as the debate that Romney had with Obama when Romney identified Russia as being our number one strategic enemy, I've long felt that we lost an opportunity to build a sustainable peace with post-Soviet Russia. Now, maybe that's again kind of bias looking back, and then in fact, the same logic about an inevitable break with China would hold for Russia because of the size of the country, because of the deep sense of nationalism and play something that you talk about in the book. I'm curious how you see this. To what degree are American foreign policy makers responsible? Obviously, they're not as responsible as the everything is America's fault people try to make it out to be, but how responsible are American foreign policy makers for the situation that we find ourselves in with Russia today, which I feel like didn't have to be the case, and we could have had a much more constructive relationship that actually would help (25/57)
the larger framing of America's pivot towards Asia and the focus on China. You know, I think there was always an inevitable conflict between our values and our interests with regards to Russia. Here's the fundamental issue. I actually believe, and I write in the book, that Putin did not set out to be this anti-Western, anti-Americanist that he is today. I actually think that during the early years of the Bush administration, the late period under Clinton, when he had just taken power, he was interested in better relationships with the United States, with Europe on his terms. So he was actually the first leader to call Bush after 9-11 to express his condolences and to actually provide assistance to us in Afghanistan. They provide us maps from the Soviet era of Afghanistan, which we really had very limited intelligence on. They provide us with a route to supply our forces through Central Asia. If it weren't for them, that would have been particularly in the early days, very, very (26/57)
difficult for us. But what he thought he would gain from providing that help is for basically the United States to butt out of what is viewed as his region, Ukraine, Central Asia, the Caucasus, and that he would basically be allowed to do whatever he wanted in a sphere of influence. And he was shocked in 2004 when the Ukrainians revolted against the corrupt election of a pro-Russian candidate in 2004 and launched the first revolution, the Orange Revolution, that brought in the Yushin Co-Government that was more pro-Western. He was convinced that that was a CIA plot, that this was Western interference in his near-broad, which of course was not the case, but we rhetorically certainly supported the pro-democratic movement in Ukraine, gave Ukrainians the new Ukrainian president, a platform in the United States, he came over to see Bush and the like. Putin saw that all as anti-Russian moves. And you could say that was a mistake, but it was also consistent with our values, where we are (27/57)
supporting self-determination of free people to choose their own leadership, we are anti-corruption. So I do think that it was always inevitable that we would face that confrontation of values versus interests. Maybe you could say sort of in the Kissinger real politic mindset that Ukraine didn't matter, that the Caucasus didn't matter, Central Asia didn't matter, leave them all to be controlled and occupied by Russia and will focus on other areas. I think it's inconsistent with our values and not really realistic in today's foreign policy. I don't think there's appetite among Republicans or Democrats to do something like that. So I think that Russia was never ours to win, because Putin was always determined, not necessarily on world domination, confrontation with the West, but domination of his near-broad and reconstitution of the Russian Empire. And that was always going to bring us into a conflict like this. So I don't want to get stuck on this point, but I guess it depends on how (28/57)
you want to define meddling by the United States, because it's not like we have a department of meddling and there's a clearly defined paper trail of what's going on. The US uses NGOs, uses private consultants as part of influence operations in other countries. Other countries are doing it to us, we're doing it to them. So I do think that played some role in this. But what I feel like is sort of missed here, and then we'll move past Russia and get into comparison of the modern Cold War, is Putin put that essay out the summer before he invaded Ukraine. What was the title of that essay again on something larger Russia and Ukraine? The historical. And he also did an interview with Tucker Carlson recently. And what's interesting, and I'm someone who before the invasion of Ukraine had done episodes with folks like my former professor of Soviet history, Stephen Cohen, with John Meersheimer, who became more popular after the invasion, and was critical about some aspects of American foreign (29/57)
policy. I was familiar with George Cannon's warnings after the fall of the Soviet Union about NATO expansion. And yet what's interesting for me is that I've almost come to the opposite conclusion, which is that I feel like I've seen more evidence to suggest that this was not about NATO. And in fact, Putin had two great opportunities to make the point. And he hardly mentions NATO in his interview with Tucker. It was interesting because Tucker kept asking about it and he kept ignoring it, right? I do think, look, I think it's more nuanced than that. I think the Meersheimer view, which I fundamentally disagree with, that was only about NATO expansion is wrong. But the view of the other side that NATO expansion had nothing to do with it is also wrong. I think it contributed. You know, I write in the book that there are five reasons why I became convinced, and we had the conversation on the podcast back in that time, in December of 2021, three months before the Swar, that Putin was going to (30/57)
launch this invasion before the end of that winter. And those five reasons had to do with first and foremost history. His distorted view of history that Ukraine was never a country always belonged to Russia. And he went on for like 40 minutes with Carlson talking about that, clearly motivating, motivating factor. Second was destiny. He felt that it was his destiny and Russia's destiny to rebuild the old Russian Empire, not necessarily the Soviet Union, but the old Russian Empire. And that there was an ego reason as well, because he wanted to do it on his watch. It was very clear. The reason why the war was launched when it was is because he was turning 70, he was starting to think about his own mortality, initially, at least succession of power. And he wanted to have this accomplishment for his legacy, right? That he didn't want someone else to do it. He wanted him to do it and go into the history books as the new Peter the Great that rebuild at least part of the Russian Empire. But (31/57)
there was also reasons of security and geography, which can't be ignored, right? Wars aren't started for usually a single reason. There's multitude of reasons to go into it. And security and geography do play a role. The Russians have always been concerned about NATO expansion going back to Jeltsin's times. It's not just a Putin thing. And we can talk till we're blue in the face that NATO is a defensive alliance, but they certainly don't view it that way. And, you know, they look at coastal. It gives enough offensive operations after the end of the Cold War in 911. Exactly. Exactly. Well, Kosovo is probably the most clear example of that. But also geography, you know, Ukraine has always been looked at as a buffer state by Russia. Perhaps you could argue unfairly because, you know, it's not their state to be a buffer. But nevertheless, throughout history, Russia has experienced numerous invasions from Europe, Hitler, to Tonic Knights, Napoleon, Poles, and many of them have gone through (32/57)
Ukraine to reach Moscow. And the distances between Eastern Ukraine and Moscow are not very, very long. In fact, we got an example of that just last year with the Prugoshnaya Mutiny, right, where Wagner and Prugoshn left their training camps in Eastern Ukraine and occupied Ukraine and traveled to Moscow. And within about half a day, we're on the outskirts of Moscow, right? That is not something that the Russians do not pay any attention to how short those distances are. And in fact, you have drones from Ukraine reaching Moscow now on a regular basis. So they're cutely aware of that vulnerability. Again, I do not believe it is a singular reason. I don't believe it's even the most important reason. I think the history and destiny and ego played a bigger role. But to say that it had no role whatsoever is incorrect as well. What was Prugoshn thinking when he did that? I mean, do we have some idea? Is there a firm conclusion now about what that was ultimately about? And because it eventually (33/57)
led to his demise. He crashed in a not so coincident plane crash with some other Wagner forces not too long after that. Yeah, you know, I wrote a piece on this in foreign policy of what caused his death, which I actually don't think was a direct consequences of the mutiny, obviously followed from the mutiny. Look, the mutiny was all about trying to pressure Putin to replace Shoryugin Gerasimov. It was a very tactical thing. He got increasingly upset that Wagner was getting marginalized in this war, that he felt probably rightly he had contributed enormously to, you know, he took Bakhmut at great cost to the Wagner troops. They lost tens of thousands of people in that fight in these incredibly reckless and insane waves of prisoners that were being thrown against Ukrainian fire and artillery. And, you know, he was getting starved of shells and his empire was getting muscled in on in Africa. So it was a both a wartime decision making that he was opposed to, but also the conflict with (34/57)
Shoryugin that he's had for years now about the business conflicts that they've had. And this was an attempt to try to pressure Putin to get rid of these two guys. And it was a really dumb decision because he I think felt he was way more powerful than he really was. As we saw, Putin's reaction was the exact opposite. Shoryugin Gerasimov is still there and Progosin is no longer with us. But I do think that his death was not a direct consequence of the mutiny. I actually do think that Putin pardoned him. He did not view him in the same way that he viewed, for example, Navalny or other opponents of the regime. He understood that this was not a coup, that this was not an attempt to displace him. He still felt incredibly offended, incredibly angry that someone would confront him this way and try to pressure him in this outrageous way. But I do think that he pardoned him. I do think that there was a price for that pardon, which is that now anything that's yours is going to be mine. And you (35/57)
are going to lose your empire in Africa. You are going to lose Wagner. I'm going to take it all away from you. You can keep your miserable life and go sip mojitos in Jamaica or the Maldives, but you are done. And Progosin did not get that message. So for two months, he met with Putin. He was straddling around St. Petersburg, being very public as opposed to kind of disappearing into the ether. He kept putting out videos. And most importantly, he kept resisting the GRU takeover of the Wagner businesses and militias in Africa, where the mining interests and the support of various dictators in Africa that Wagner was involved in, the GRU was basically a time to take over and telling these leaders in Africa that we are not going to be doing business directly. You don't need to deal with Progosin. And literally, as soon as they would leave, Progosin would fly in and say, no, no, ignore them. I'm still here. We're still going to do business. And Putin was looking at the saying, are you kidding (36/57)
me? I just gave you your life. You were going to pay price for it, and now you're refusing to pay. Well, I can forgive you once. I can't forgive you a second time. You had a funny tweet that you put out, if I remember correctly, something along the lines of like, this should be a Harvard Business School case study for entrepreneurial zeal and determination, because ultimately, Progosin's coup itself was driven by a desire to save his company, to maintain control. It was. It was. I mean, it was a business dispute, like many business disputes in Russia, they ended badly. And it ultimately ended pretty badly for getting Progosin, obviously. So let's move now back to this comparison between Cold War I and Cold War II. So the Cold War between the United States and the Soviet Union emerged out of a hot war that created a power vacuum in what was at the time the center of global power, the European continent. The equivalent today is Asia. But what made that war cold wasn't just the mutual (37/57)
possession of nuclear weapons, which the Soviets didn't acquire until 1949, but it was also the costs imposed by World War II, the human suffering that it imposed, and the surrender of Japan, and the signing of the peace treaties, the Paris peace treaties, and the desire to maintain that hard one piece. How important are those contextual differences, the fact that the Cold Warriors of the 50s and 60s and their fellow countrymen and women had recently endured these unspeakable traumas, whereas the equivalent, quote, Cold Warriors of today are facing a much more theoretical threat? Oh, I think it's hugely important and makes Cold War II potentially more dangerous than Cold War I, because whether you look at the Cuban Missile Crisis or the West Berlin Crisis that preceded it the year earlier, you had two leaders at the time, Khrushchev and Kennedy, that have gone through Cold War, not Cold War, but World War II, and Khrushchev's case had witnessed unimaginable destruction and death. He (38/57)
was at Stalingrad, he was there at Stalingrad's side throughout much of that war. Kennedy, of course, fought in the Pacific and was wounded and lost some crew members on his PT boat. So they knew what war was like and wanted to avoid it at all costs. In fact, my good friend Sergey Ratchengo, a Cold War historian that was written extensively on the Cuban Missile Crisis, writes about how when Khrushchev decided to relents and withdraw missiles from Cuba, Castro in Cuba was unbelievably livid at this and was basically encouraged him to start a nuclear war. And Khrushchev was shocked and he was like, oh, my God, this guy's insane. I'm not starting nuclear war over Cuba, because I'm not going to participate in destruction of the civilization. Today you have leadership both in China and the United States, frankly, that has not gone through that experience. And in China in particular, they have not fought a war since 1979, a war that didn't go so well for them with Vietnam. And we, of course, (39/57)
have fought wars, but not anything on the scale of World War II since time as well. And, you know, I think there's too much cavalier talk about war that happens on both sides in both countries these days. And I do worry, and this book really is the ringing of the alarm bells, if you will, about us marching into this conflict that could be absolutely devastating, right? Two nuclear powers, you don't even know if that conflict would stay conventional. But even if it does the destruction that would be inflicted on lives, on infrastructure, on the world economy, it's just absolutely unimaginable. And, you know, as I said, I was early on, one of the first ones to predict that Putin was going to invade Ukraine. And, unfortunately, it was too late to deter that conflict. I don't think it's too late to deter this coming conflict with China. I think it is preventable, but we're running out of time. When you say it's preventable, you mean a quote, kinetic conflict, something that leads to (40/57)
casualties. Correct. We're going to keep the Cold War. The Cold War is going to remain with us, but it doesn't ever need to go hot. And I worry a great deal that if China moves on Taiwan, that this would mean either a devastating conflict or really the end of American superpower, eventual end of American superpower, because if China takes Taiwan, I think most people don't appreciate this. And I talk about this extensively in the book, the importance of Taiwan to both China and the United States. And it's not just about chips. Reducing Taiwan to chips is actually insulting to the Taiwanese and is a misunderstanding of the geopolitics of that region. But China taking Taiwan would lead to their hegemony in Asia. And hegemony in Asia in the most important region of the world, 50% of the world's GDP, much of the growth and most of the supply chains would lead to their increasing dominance around the world. And it would draw of American power from the world, which would impact us (41/57)
economically, would impact our national security, and something that we've always fought against throughout our history. So the stakes here are incredibly high. So all these are all things that we're going to discuss. I want to push back against the conclusion that you draw around the Cold Warriors of the First Cold War and the Cold Warriors of the day, because it's one of, I've also drawn and I'm pushing back against myself here too, because when I look back on that period, I mean, you're completely correct. John Kennedy's experience in World War II and subsequently his experience from the Cuban Missile Crisis terrified Kennedy. I mean, he became a big proponent of peace after that. But at the same time, many of his top generals, as well as the top brass within the CIA, were willing to take enormous risks with respect to instigating a nuclear war. And though I'm less familiar with the equivalent Soviet history, Khrushchev expressed similar concerns about hardliners within his own (42/57)
government in letters to Kennedy. So I don't know to what extent the proximity to and familiarity with war actually made many American policymakers and military planners actually more willing to go to war than the otherwise would, and that it just happened that the civilian leadership that we had was of a different persuasion. I'm curious, what do you think of that counterfactual? No, I think you're right that it wasn't universally shared in either country, but the leadership was key, right? Ultimately, Kennedy ran the show, not the Pentagon. Khrushchev was in charge of this decision making in the Soviet Union. And I think that mattered, right? And I think that it helped bring us back from a devastating nuclear war that could have been a civilization and a nuclear war in those early 1960s. And I'm not sure that we have that type of leadership in either country today. Yeah, that's a great example is when you look at the Trump period with Kim Jong-un. That whole thing was terrifying. I (43/57)
mean, also another small thing just to bring up, I don't know if you saw this, and maybe I sort of overreacted to it, but when Putin invaded Ukraine, I saw a video that was popularly moving around online of like a fake Putin sort of dancing to house music with a giant cake and a big red button. And it was like a really popular video. People sort of like laughing about the prospect of nuclear war. And by the way, we saw that with Ukraine as well, where a number of people were saying, well, by the way, should we really be scared of Russian nuclear weapons? Maybe they don't even work, which I assure you they almost certainly do work. I think the former ambassador to Moscow, didn't the former ambassador to Moscow say something like that? There was somebody who had a previous important position within the government that was making statements like that. There were a lot of people making statements like that. It was rather terrifying. So one more comparison to draw here between Cold War I (44/57)
and II. So I already mentioned the power vacuum that existed in Europe after the end of World War II, which was important. But so was the fact that the USSR was initially seen as a liberator at the time, in the sense that they had played a critical role in defeating the Germans and liberating Eastern Europe from Nazi occupation, which they subsequently occupied. And there were also strong communist sympathies in Europe. For example, the Italian and French Communist parties controlled significant numbers of seats within their respective parliament. So what is the comparable threat that China poses today? Yeah, that's a great question. So I think there are differences certainly between the Soviet Union and China in that regard. The Soviet Union was intent on world revolution, certainly for the first part of the Soviet Union's involvement in the Cold War. I think it diminished significantly towards the later stages. But I don't think that China is on a sort of let's bring communism to the (45/57)
rest of the world war path. I think they are interested in diminishing American power wherever they can, whether it's Africa or Latin America or the Middle East, they're going to take every opportunity to do so. And I think they are interested in building up authoritarian regimes, less democratic regimes that they feel like they can more easily barter with, that they can bribe, that they can make deals with that won't necessarily be in the interest of their populations. And that they are doing increasingly more of, particularly in Africa, there was news stories in recent years of them setting up leadership schools in Africa for future dictators in Africa of how you run a authoritarian country, how you do population surveillance and engage in propaganda and like. And there you do have some similarities with Soviet Union, different scale, different means and goals. But yes, China is interested in, for very selfish reasons, in promoting a model around the world that conflicts with ours. (46/57)
But I don't see that, I don't think that if you have the scenario of China invading Taiwan, that immediately you have sort of an invasion of Japan or Philippines or not even immediately, but almost ever, because invading Japan is a very big deal, right? I mean, it would have been really, really difficult for the United States to invade Japan in 1945, we're dreading that decision, invading today is even tougher. I don't see China doing that. I don't see anyone else doing that. But you don't need to. And that's, I think, the key point is that China will achieve its hegemony in Asia without that invasion. And the analogy you have to think about is really what's happening in Russia's near abroad, right? All these states in Central Asia, in the Caucasus, Armenia, Azerbaijan, Kazakhstan, etc. They're basically being pulled into Russia's sphere of influence, not because they want to be there, but because they have no other choice, right? They're next to this really powerful, huge neighbor (47/57)
that can threaten them, as they're seeing in Ukraine, as they've seen in Georgia. And they have no alternatives, like the United States is far away, there's nothing we can do for them. And China is not interested in getting involved. So they have to accommodate and appease Russia, right? They're a small state sitting next to a big neighbor that is a bully. And that will be the situation in Asia, because if China takes Taiwan, they'll push the US out of the the Western Pacific, our Navy will be all the way back in Guam. It will make things very, very dangerous for us because they'll be able to put submarines on the other side of that Taiwanese coast sensors that will make life incredibly dangerous for the US Navy. And the Japanese, the Koreans, the Filipinos, they will have to make appeasement decisions with regards to China. They're not going to cave on everything, just like, you know, Kazakhstan or Armenia does not cave to everything on Russia, but a lot of things they will. And in (48/57)
fact, this is not a hypothetical. I've had those conversations with senior leaders in Japan and other places where they have told me that regardless of how if China takes Taiwan, whether it's because we don't fight for it, or we fight for it and lose, that will change everything for them. They're not going to tear up our mutual defense treaty or, you know, trade relations with us. But they basically told me, we're going to act as if we now have a new sheriff in our neighborhood, and we're going to have to figure out a way to live with them and accommodate them in a lot greater ways than we do today. And that will have dramatic ramifications for the United States, because if China is setting the rules of global trade, of global security order, particularly in that region, it will decrease our power economically and our national security. No, the analogy of the Caucasus and Central Asia is a good one. Another analogy you draw on the book is Berlin, Berlin and Taiwan. Tell me a little bit (49/57)
about why you think Berlin is a good analogy for what the United States could be facing in the event of a Chinese uncontested invasion of Taiwan. So this is remarkable, right? And during the Cold War history, people focused so much on Cuban Missile Crisis, and it was certainly an incredibly dangerous time, but it was just 13 days in that fateful October of 1962. And what people often forget is the West Berlin crisis that occurred a year earlier in 1961. It occurred right after the meeting between Kennedy and Hushoff, where Kennedy came away convinced that Hushoff was going to invade West Berlin, right? Hushoff was threatening at the time. And Kennedy made the fateful decision that this was going to be an existential issue for the United States. He went on television at the time in that summer and basically told Americans that we are going to fight for West Berlin, this outpost of freedom and democracy surrounded by East Germany and Soviet troops, right? Really, really difficult place (50/57)
to fight for. And he made the case that this was existential to the United States interests, and he warned the American public of a potential for a nuclear war over West Berlin that he was willing to engage in, right? That's how high the stakes were in his mind over West Berlin. And in fact, the ducking cover drills, the bomb shelter mania that we saw in the 1960s due to the threat of nuclear war started from that episode. It didn't start from the 13 days of the Cuban Missile Crisis. It began much earlier. So we managed to deter that invasion right in the book that there's this amazing episode at the end of that summer when Kennedy has woken up and he's been told that the East Germans are building the wall. And he says, thank God, he sighs in relief, right? What a change to 20 years later, President Reagan saying, Mr. Gorbachev tear down this wall and Kennedy celebrates it at the time, because he says, if they're building the wall, they're not invading. And we have just pulled back (51/57)
from the brink of war. And in fact, yes, it was the year later, the Cuban Missile Crisis, which was really an outgrowth of the West Berlin crisis, as we now know. But after that, the relationship between the United States and Soviet Union stabilized, we got to taunt in the 1970s, we pulled back from the brink of war, the Cold War remained. And we had proxy wars in Vietnam, and conflicts in Africa that we supported and they support in Central America and the like. But the dangers of us going to war, and particularly nuclear war, diminished dramatically. And I write in the book that that is the situation with Taiwan, that if we built sort of metaphorical wall across the Taiwan Straits, if we deter the invasion of Taiwan by China, the Cold War will not go away. The conflicts we face with China, economic conflicts and strategic disagreements about the security order that they want to displace will remain. But the threat of war will diminish dramatically. And we can stabilize the (52/57)
relationship, we can potentially even get to a detente that Neil Ferguson talks about. But you can do that as long as this sort of damocles this handover Taiwan, and as China is preparing to take that island by force. So, Dimitri, I'm going to move us to the second hour of this conversation. There's so much more to discuss. I want to drill down a little bit more into the importance of Taiwan, to understand why you think it's so important. And also, I mean, it's obvious here as we're talking that the key is deterrence. Because if we knew it for a fact that US support for Taiwan would lead to a nuclear exchange, we would just let the Chinese have it. But we don't know that. And so we're trying to do our best to deter that possibility. I assume you agree with that. I mean, you really have three possibilities here, right? And only three. That A, China's deterred from invasion, the Goldilocks scenario, or China is not deterred, and they move forward, and they either lose or they win. And I (53/57)
would argue that those two latter alternatives are going to be an absolute disaster for us, for China, for Taiwan, for the world, right? We're going to lose. Obviously, it's better to win. But even if they lose, I mean, it's better for us to win. But even if the Chinese lose the invasion, we win, it's going to be an absolute disaster in terms of life's loss, destruction of the world economy, decimation of the US Navy in that region, really, really terrible outcome. So we have to do whatever it takes to make sure they never even try. All right, in the book that we have to make sure our policy needs to be to make sure that President Xi is waking up every single day. And as he's looking off in the mirror, he's saying today is not the day. Yeah. I mean, that's a really great way of thinking about it. And this is something that, to go back to the point about numbers two and three being unacceptable, this is something that John F. Kennedy and Khrushchev understood, that the consequences of (54/57)
fighting a nuclear war are so devastating that it should just never even come as a possibility. You should just do everything you can to remove that from happening. So this is something I want to talk about. I also want to talk about what it is that we're fighting for here, because I feel like a lot of Americans and myself included are a little confused about that. And how important is it that we communicate that clearly in an incredible way, not just to our allies, but also to our citizens, because in America today, I grew up in America where the vast majority of Americans did not want to burn down the system. That's no longer true. There is a significant number of people who believe that the system is so rotten and corrupt that they just want to burn it the F down. This is a rallying cry. And this is not a place from which to project strength. And I feel like we have not done enough to strengthen our own country and to build a coalition of people that understand and support the kind (55/57)
of foreign policy that we're describing here. So this is something else I want to talk about. And perhaps we'll also have a chance to talk about some of the contemporary issues that are happening in the world today. The most important issue right now, for example, is what's going on between Israel and Iran. 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 Dimitri, 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. Dimitri, stick around. We're going to move the rest of our conversation onto the premium feed. If you want (56/57)
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 cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (57/57)
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 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. And remember, if you listen to the show on your Apple Podcast app, 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 Demetri 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 (1/57)
but tomorrow and better able to predict what happens next. My guest this week is David Rosenberg, Chief Economist and Strategist for Glusken Chef, a wealth management firm based out of Toronto, Canada. David and I recorded this episode only hours after the FOMC concluded its two-day meeting this past Wednesday, where the committee decided to keep the Fed funds rate unchanged but strongly signaled a willingness to begin easing, possibly as soon as next month. It is David's conviction that the Federal Reserve has over tightened monetary policy during this cycle, possibly by as much as 100 basis points for rate hikes. And that J-PAL and the Board of Governors of the Fed are worried that they may have precipitated the bursting of another bubble, only this time it isn't in housing or consumer credit but rather in the corporate bond market, where multinational corporations have feasted on the issuance of trillions of dollars of new debt used to finance mergers, acquisitions, and share (2/57)
buybacks, all while simultaneously cutting back on the type of capital investment needed to service their debts and grow their businesses. The last 10 years have been a great time for stocks fueled by a bonanza of free money coupled with an implicit guarantee by the Fed that it would support asset prices at all costs. But the question has always lingered, what will happen as the Fed continues to raise interest rates, normalize its balance sheet, and tighten monetary policy? Is this a new paradigm of financialization where fundamentals no longer matter and perpetual liquidity is the name of the game? Or is the global economy's increased reliance on debt financing in order to drive earnings and levitate asset prices no more sustainable today than it has been at any prior point in history? Is this time truly different? As always, subscribers to our Hidden Forces Patreon page can access the overtime to this week's episode, which includes a discussion about how David is positioning himself (3/57)
and his clients for the likelihood of a recession and return to bear market territory for stocks and commodities. We discussed the US dollar, precious metals, currencies, defensive stocks, as well as why David believes that we're going to see yields for 10-year treasuries drop below 1% during the coming downturn. And with that, let's get right into this week's episode. David Rosenberg, welcome to Hidden Forces. Thanks for inviting me on. It's great having you here. How many days are you in New York this time? Oh, well, this particular time I'm here for a couple of days, but we have quite a few clients, a Gluskin chef in the New York area, and invariably I'm asked to give speeches at different events. So I'm probably in New York every four to six weeks. So when people ask me, because I lived here from 02 to 09 when I was Merrill's chief economist, so people ask me to this day, do I miss New York? But I'm here so often that I don't get a chance to. That's interesting. You're from (4/57)
Toronto, right? From Toronto and been back there for the past 10 years. And are you a Raptor fan? Are you a happy Raptor fan? Well, I'm actually a Dallas Mavericks fan. I can explain that, but I hopped on the Raptor bandwagon with full force I might add during the series against the 76ers. How interesting. Yeah, so you think about it as Toronto's team, but it was really Canada's team. What was incredible were all these Jurassic parks and all these different cities, some of them with 20,000 people going crazy at these basketball games. You think of Toronto or Canada as hockey, but basketball is very popular. So David, you're here for the FOMC meeting for quarterbacking, not Monday morning, Wednesday afternoon quarterbacking. Just for those listeners who aren't familiar with you, you're the chief economist and strategist at Gluckenshef and you've been doing that since how long? When did you start the firm? I actually, it's been 10 years and a month. After I left Merrill in May of 09, I (5/57)
was at Merrill combined almost 10 years as well, the first three years in Toronto and the last seven in New York. But been doing this gig at Gluckenshef now for the better part of the past decade. So what do you think? Today I watched, I assume you did, maybe you did, maybe you didn't. I watched the post-Pres Conference, the J-PAL press conference, and we got the right decision. No change in the rate, but the word patience was taken out of the statement for forward guidance and there seems to be some sense that they're taking a more accommodative stance, but that's pretty much it. I mean, what did you get out of this? Well look, the first pivot at the beginning of the year was Powell basically walking back the rate hikes that the Fed was pledging in December when they actually hiked interest rates, hard to believe that they did it when you look at what's happened ever since. Today was just going a step further. The Fed historically is a very incremental institution. And so today was (6/57)
basically, in the old days, we would have called this shifting to an easing bias. So they shifted to basically a directive that's saying that our next move was likely to cut interest rates. And I would refer to this basically as just extra guidance in that direction. The bottom line, I mean, as you mentioned, a no big reaction one way or the other. Well, I guess if anything, the equity market liked it and so did the bond market, but a lot of this was already priced in. And I think you can almost argue that whether you're a policy hawk or a policy dove or you see the Fed on hold indefinitely or you see the Fed cutting interest rates in July, there's really something in the statement and something in the dot plots for everybody today to hang their hat on. So the market's fully priced in a 25 basis point cut in July, right? We're almost there, yeah, absolutely. And basically at least two cuts by the end of the year. But July seems to be baked in the cake. And frankly, I don't have a (7/57)
problem with that. I think the economy is weaker than is generally accepted. And I think that there's a lot of folks in the Fed getting increasingly frustrated over this constant undershoot of the inflation target. And that's their cover to cut interest rates. I would actually just say that based on my analysis, the Fed has over tightened the cycle by three to four hikes. So I would actually say that you got to walk back three or four of these moves just to get back to neutral. I think the Fed is actually on the restrictive side. One of the areas I would have to admit I agree with President Trump on, I might handle communication a little differently. But on the Fed's restrictiveness, you see, I don't think the Fed is at neutral. I think the Fed is actually quite tight. So you're thinking 75 to 100 basis points at least and that they should have already been cutting by now. Well, 100%. I would say actually there's two scenarios here. And if you look historically, here's what happens. (8/57)
Even in a soft landing where the economy slows, the Fed cuts rates as an insurance move and it's successful in forestalling a recession, the Fed never goes once or twice. The Fed goes three times in a soft landing scenario. If this becomes a recession, which is my forecast, historically the Fed cuts the funds rate almost 500 basis points. You could see that if this is something more than just a soft landing, if this is something more than just, oh well, trade concerns or tariffs, but something that's classically late cycle, inverted yield curve, following a Fed tightening cycle, if there's something more to this than just trade and we morph into a recession, then the funds rate is going back to zero. And I would hazard to say back to zero in a pretty big hurry. Do you think that we're already in recession? I think it's a pretty close call. I know that people will say, well, how can that be? We had the real GDP of 3% in the first quarter. Atlanta Fed's taking their number to 2% in the (9/57)
second quarter. Of course, we just had those decent retail sales numbers. People will be surprised to know that the recession call does not come down to GDP. GDP more often than not tends to decline during a recession, but the final arbiters of the recession call or the expansion call is the National Bureau of Economic Research. And I say this with a tip of the hat to Martin Feldstein, who headed that organization for many years, who passed away last week. But there's four basic tenets to the cycle. And guess what? GDP is not one of them. People seem to think that back to back quarters of negative GDP defines a recession. Actually not true. That's a Wall Street colloquial. You'll find plenty of recessions where there are not back to back quarters of negative GDP. It just so happens that GDP is soft, but it is even after decline. If you go back to 2001, where we actually had a recession from March to November of that year, you'd say, where was the recession looking at GDP? Four basic (10/57)
tenets, real business sales that's manufacturing and trade, industrial production, employment, and real personal income excluding government transfers. And three of those four, employment, I'm talking about the Household Survey, which is more accurate than the payroll survey at turning points in the economy in both directions. First employment peaked in December. Nobody seems to talk about the fact that it's down roughly 200,000 year to date all in full time jobs. That doesn't seem to get a lot of play. And in fact, I was surprised that in the press statement, the Fed actually talked about the strong labor market. It's not all about a 3.6% unemployment rate. There's been almost 200,000 household jobs lost this year. Again, I don't see many economists talking about that particular metric. Industrial production peaked in December. It's down at over a 2% annual rate so far this year. We're on the precipice of probably seeing for the first time in three years a sub 50 ISM reading, but (11/57)
industrial production is already in a recession. Thirdly, we have real organic personal income. That peaked in December. It's actually down at a 1.5% annual rate so far this year. The only thing that's really hanging on is real sales. And of course, the retail sales number gave that boost last month. But I would say that the sort of recession I'm defining here is a capital spending led recession. It's not about the consumer this time. That was the last war. It's not about housing, which has already been in a five quarter recession. This is more like a 2001, 2002, what I would refer to as a mild cat-backs led recession. And I think that those are coming out in the capital intention surveys that we're seeing. It's certainly coming out in core cat-backs orders, which are negative 3.5% over the past six months, which is telling you that corporate spending in the real economy is going to be weak for the next several quarters. I go back to the first quarter of this year. People talk about (12/57)
the three-hand only real GDP growth. Of course, you can manufacture that with a surging soybean exports and lower imports and bulleted inventories. But the point I'll make is that the numbers that stuck out to me in the first quarter was the negative 1.1 on capital spending. Are we seeing a lot of slack? Exist capacity? Well not in the labor market. We've hit the wall on the labor market. Industrial absolutely. You can see it in the declining cap U-rate. Right. I mean, it might have ticked up last month with the industrial production number, but the cap U-rate has been declining. And that is reinforcing a view of slack in the industrial sector. And of course, alongside that decelerating pricing power, which is coming through in the profit numbers, which have been steadily revised this year, Q1, Q2, Q3. You mentioned Chairman Powell's point about there being a tight labor market. He said that in the context of consumer spending coming back in the second quarter. And that was part of a (13/57)
larger point he made that he said is a complicated picture, that some of these indicators of consumer spending and a tight labor market suggest that the economy is doing well, but then manufacturing, investment, trade have been weaker. And you're focusing more on the second half of that, mainly the investment. Well, look. And what role does the trade, whatever you want to call it, trade war, trade spat, trade, whatever, play in all of this? It's an added complication, but I was calling for this long before the trade skirmish became a trade battle. Look, we've had 10 recessions in the post-World War II experience. And so the business cycle is the business cycle at the end and then they begin. And the reality is that no two recessions are ever quite the same. So in the last cycle, I frankly wasn't looking at capital goods spending surveys. I was not looking at core cat-backed orders numbers. I was not looking at business sentiment numbers because that's not where the bubble was. That (14/57)
wasn't the root cause of the angst that was going to cause the economy to tip over. The stuff I would be looking at in the last cycle would have been more consumer-oriented, housing-oriented, the stresses in the mortgage market, house prices, so on and so forth. Like I said before, this has more of a feel of 2001, 2002. And investment led boom. Right. Well, not everything goes down together in a recession, just as not everything goes up together in an expansion. So you'd be telling me, well, the economy seems pretty strong and that housing has been in contraction mode for five straight quarters. So there's been other segments of the economy that have offset that, but not everything goes up together in an expansion. Not everything goes down together in a recession. But you see, once you shock one of these components of GDP with a lag, it starts to affect other parts. There is a whole multiplier impact that goes on. It's just like the human body. You affect one part, ultimately, with a (15/57)
lag. It affects other parts of your body. GDP is a body called the economy. So I think that what happened this cycle was the bubble is not on household balance sheets. The bubble's not in the banks. The bubble is on corporate balance sheets. And what people will say is they'll say, well, but there's no excess capital investment. And that's true, like in the dot-com era, massive excess capacity. Dark bandwidth. Yeah. And so we wrapped the world many times over with fiber optics. When people say, oh, well, there's no excesses because there was not a major excessive capital investment cycle that created all this excess capacity, totally misses the point. The bubble is on corporate balance sheets. And the money didn't go into the real economy. It went into share buybacks. You see, this is the perfect symmetry. The symmetry is this. The symmetry is called $4 trillion. $4 trillion of QE equaled $4 trillion of corporate bond issuance, equaled $4 trillion of share buybacks. This is one of the (16/57)
weakest capital spending cycles on record. In fact, you have to think to yourself, how is it with interest rates this low for this long, that when you're a typical CEO of a company, what could possibly have been your ex-anti expected rate of return on invested capital in your company, boring at such low rates? No, instead, I'm not going to invest organically in my company. I'm actually going to go buy back my stock. And this really comes down to how perverse the incentive system is because CEOs get paid on what? They get paid on earnings per share. So this is the mother of all share buyback cycles. So that's where the bubble is. And I would say that you can argue that at least six or 700 points on the S&P 500 have come just from the buybacks this cycle. This certainly hasn't come strictly from dollar billions of earnings, but the fact that the share count in the S&P 500 has been taken down to a two decade low. What about corporate debt too, which has been used in support of that as (17/57)
well? Well, that's what I'm talking about. So the $4 trillion of debt issued to buy back $4 trillion of stock. And you see what the Fed did this cycle was they took out of quantitative easing, they took $4 trillion of safe assets out of the system. And they left a vacuum for the corporate sector to issue this debt. And this is why it's not about the banks. The banks became regular utilities and were constrained this cycle. Right, exactly. They went to the public. So they were relying on the bond market to fund the corporates. And so right now we have the most stretched corporate balance sheets on record. The corporate debt to GDP ratios is over 50%. You look at corporate debt to sales, corporate debt to deep, but you can normalize corporate debt by any measure you want. You can even strip out the cash, which of course is concentrated among a few companies. The story doesn't change. We have the most over leveraged corporate sector in recorded history. And so the point I was making is (18/57)
that because of that, we also have the junkiest investment grade bond market. The investment grade market says a $6 trillion market. Half of that is in triple Bs. Triple Bs right now comprise half of the investment grade market. And they're in the precipice if they get downgraded to be pushed into junk bonds. What's very interesting is that a third of this triple B slice already has a debt to deep ratio that is higher than it is in the entire high yield universe. So they already have a junk balance sheet, but they're not rated as junk yet. So you come out of a fat tightening cycle. And that's a direct consequence of the search for yield. Yeah, it's a direct consequence from the search for yield on the part of investors because they soaked up this debt. But then again, this is a liability on corporate balance sheets. This is going to be the year where they're going to have to meet their debt servicing schedule. This is the first year or five years where we have a tsunami of maturities. (19/57)
You know, three quarters of the corporate market rolls over the next five years starting this year. So this is where the rubber meets the road. So you're either going to stay current on your interest payments or you're going to default or get downgraded coming out of a fat tightening cycle. And this was a very pernicious one, by the way. The fat hasn't even done anything yet except just talk. When you count in quantitative tightening and then you count in the nine rate hikes, it's as if the fat tightened policy by about 375 basis points this cycle. That's very significant. Taking into account the quantitative tightening. Taking into account the balance sheet. The balance sheet. That's the de facto equivalent tightening more often than not with a lag. And those lags can be anywhere from 12 to 36 months. You know, I tend to find, I speak to people that, you know, everybody lives in the here and now, they can't see the tip of their nose. And if the recession is not steering in the face, (20/57)
then it's not going to happen. And I remember that, you know, back in 1989, 80, 80 to nine, the fat tightened, people thought, you know, we're going to extend the cycle. Recessions 1990. Because of the lag. Because of the lag. The lags are between 12 and 36 months. People tend to forget about that. People thought we're going to be just fine. The fat tightened in 99 and 2000. Next thing you know, March of 01, we're in a recession. The fat tightened 0405 and 06. And nobody's a recession that starts in the end of 07. So and the thing is too, when you come off these dramatic easing cycles and remember, we had seven years of free money in this country, you're invariably going to get the bubble. And as Woodward and Bernstein were told by Deepthroat to follow the money, after these prolonged easing cycles, we have to follow the bubble. The bubble this time is not in the mortgage market. The bubble this time is not in the housing market. The bubble this time is not in the banks. It's in the (21/57)
non banks. It's on non financial corporate balance sheets. And that's where the bubble is. The fact that it didn't go into capital investment to me as a material, it went under stock buyback. It's very interesting. And you can only imagine what happens if that train starts to move the other direction. Now I said before, there's no get a jail free card after an extended fat tightening cycle, especially one that was as pernicious as what we came off of. And now it's finished. But now we're in this no man's land where the fed's on hold. And the fed will eventually probably by the end of next month start to cut interest rates. But just remember that the fed started cutting interest rates in September of 2007. And the recession started two months later. The fed started cutting interest rates. And the fed went 50 basis points on January 3rd of 2001. People have to remember this. History matters. They cut rates 50 basis points on the first business day of the year on January of 2001. And the (22/57)
recession started two months later. In March. So it's the case of be careful what you wish for. When the fed is forced to cut interest rates, it's almost like a mea culpa, an admission that we went too far. Now look, maybe we'll look into a soft landing where the economy just meanders and slows and doesn't ultimately contract. I give that 15% odds. There's no such thing as a sure thing. But I think a recession has 85% odds. I think it's the overwhelming base case. But I'm not going to say that it's the only case. But the point I'm making is that companies are going to have a decision to make. And the decision is going to be to cut back on CapEx to stay current in terms of their debt obligations. And you're seeing that across all the surveys. You're seeing that across the data. And you're seeing that across leading indicators. Are we seeing companies rush to refinance now? Have we seen anything like that? I haven't seen anything towards a major refinancing boom. But what I am seeing (23/57)
that's very interesting is not that big of a movement. Considering that the economy has cooled off, the yield curve has inverted, the default cycle and rating cycle has been very muted. And I think that that's what's interesting actually. Very muted. Very. And I think I mentioned before that, say a third of this triple B debt, which is that slice that has me most concerned, that even though a third, say, has a debt ratio, that's what you would normally see in a high yield market, only 5% of this debt is rated or has a negative credit outlook attached to them by one of the three agencies. And you need your reaction to be, well, there goes the rating agencies having the back of the issuer again at the expense of the investor. But I don't think that's what's going on. I think what's going on is that the CEOs and CFOs have gone to the agencies and shown them their capital spending plan for the year. And so the focus is on debt retirement. The focus is on debt repayment, staying current. At (24/57)
a time when we know that we're in a mild profits recession, what comes out of that? Well, either you got a cutback on your share buybacks. Well, that hasn't happened yet. The first thing that's happened is that they cut back on their capital spending plans. And that's what comes out of aggregate demand, otherwise known as GDP. And that is what gets the ball rolling in terms of the economic recession. I mean, it's important to just meditate on that for a moment because it's part of this larger arc towards the financialization of the economy, moving away from the real economy towards the financial economy. This move in terms of share buybacks, focusing on keeping the stock price high at the expense of capital investment. Right. Well, this all started, if you remember, back in October 19th, 1987, which by the way was my first day on Bay Street in Toronto as a financial economist at the Bank of Nova Scotia. And when you go back and read the transcripts of the FOMC meetings, not the (25/57)
minutes, the transcripts, you'll see how October 1987, the stock market collapsed. Right when Greenspan had taken over. Yeah, you just taken over a few months earlier and shook them to the core. And that's when the term Greenspan put was first used in the financial market vernacular. And so usually you had central banks moving rates around more premised on economic data than on the markets. And remember, Alan Greenspan, although he was a speechwriter for Gerald Ford and handed out with inflation now buttons back in the early 70s, he's a markets economist, right? He was plucked out of the private sector. No, he was very successful as well. Yeah. And so he started, got the ball rolling on really having the third mandate of the Fed, full employment price stability. But he added the third one, de facto, which was financial markets. Financial market stability. I have your back. Yeah. So what happened is that the market plunges and Greenspan doesn't cut rates just once or twice. He cuts (26/57)
rates well into 1988 until it's evident that the stock market collapse didn't do anything to the economy. It was a great holiday shopping season at Christmas time. The economy just kept on ripping. The Fed found itself behind the curve and had a high rates, 80, 89. And ultimately we had the recession in 1990. Now we had a similar situation in the next cycle. In that cycle, in the late 80s, of course, the financial or shall we say the asset cycle that took place, the asset and debt cycle was in commercial real estate. We had the LBO craze in the late 1980s. That's for now. LBO is the proliferation of high yield bonds. And of course it was the commercial real estate bubble. That was the bubble. That was the asset and debt cycle. So you're right. That was the way three decades ago from the classic business inventory cycle towards cycles that were based on asset prices. And then we moved to 10 years later to the dot-coms. And we had that asset cycle. And these asset cycles, when they pop, (27/57)
creates a recession. And then what we know is that you don't get a V-shaped recovery. You get an elongated L-shaped recovery. It takes years to actually get into a sustainable expansion long after the official recession actually ends. It used to be, if you go back to the 50s, 60s, 70s, 80s, you had V-shaped recoveries. Low interest rates worked right away. That doesn't happen that way anymore because these are asset cycles. So we had the savings in loan and commercial real estate back in the late 80s. We had the dot-coms in the early 2000s. And then of course we saw what happened in the last cycle. This is the fourth. There's the missing returns. This is the fourth super debt-induced asset cycle. This of course was now back to the equity market. And all the debt that was issued to buy back stock, clearly unsustainable in my opinion. But we know how these asset and debt cycles end. And so this is just a different one. This is not, we're not fighting the last war. This is not about (28/57)
savings and loans. It's not about commercial banks. It's not even about investment banks. But it could be about mutual funds. It could be ETFs. It could be insurance companies, whoever, pension funds, whoever basically is owning a lot of these corporate bonds with very low covenant quality at very tight interest rate spreads, not reflecting the underlying default and ratings risk in these securities. What are we talking about here in terms of contagion, do you think? Because we had a ton of contagion in 2008. And that was a very different, as you said, that was a consumer-led credit bubble. Well, I would say this much. My big concern is this triple B tronch. If it was just, we had a cycle where a whole bunch of credit got downgraded from AA to single A or triple A to double A, I wouldn't be nearly as concerned. But what it means when you have half the investment grade market triple B, there's no maneuvering room. So the whole downgrade is into a different asset class, which is called (29/57)
non-investment grade. And institutions that have quality mandates can't own this paper anymore. And so it's the law of large numbers because you're not talking about even a couple of hundred billion dollars. I mean, you're talking about trillions of dollars that could be put it this way, but you're talking about a trillion dollars in that triple B space. The whole high yield market is a trillion dollars. The high yield market itself could not possibly absorb what could happen if a large proportion of these triple B's end up rolling over into high yields. So the risk is that the high yield market gets overpopulated and spreads wide and out dramatically as a result. Keeping in mind that on average historically, you get downgraded from triple B, triple B minus into junk. Within five weeks, your paper is valued 10% less than the day before the downgrade. That leads to a widening in credit spreads filters back into the equity market. So the underlying cost of capital rises and creates a (30/57)
tightening in financial conditions that will then of course force the Fed to have to cut rates even more. But that's ultimately how that plays out. What about exposure to foreign debt, foreign corporate debt or foreign companies, companies like Alibaba or Tencent? Is that a concern to you? Well, I'll put it this way. This corporate bond bubble that we're talking about is in fact global. It's not just confined to the US. I'm from Canada. It's evident there. You go across Europe. And of course, Europe has had the backstop from the ECB, which can buy more low quality credits than the Fed can. We didn't even talk about drug use announcement yesterday. But anyway, in answer to your question, it's this corporate debt bubble is a global phenomenon. It's not just constrained to the United States. Do you think this is the corporate debt phenomenon is top on the mind of the FOMC? I think that's where their focus is primarily. Well, right now, if you listen to Jay Powell's commentary, and a lot (31/57)
of it was just basically answering the questions, but everybody is just talking about trade right now. Trade, trade, trade. G20, what will Xi and Trump end up meeting about? What will they tweet? The Kumbaya moment, will there be a beautiful remark and a tweet? Who knows? I mean, that's a... But I would say that if you read... Seems unlikely. But if you read the minutes and you read a lot of the speeches on the economy and on the markets, you'll see that hardly a speech goes by where these FOMC officials don't talk about the excesses in the corporate credit market. And they've been rather vocal about it too. So what is on their mind is a top of mind. Maybe right now, trade is more top of mind. You know, I take a look at the FEDs. The opportunity today, I mean, they changed the doplots for the most part, or at least half the membership changed. You want to tell our audience for those who don't know what that is? Oh, that's... And how significant is it really? It's not that significant, (32/57)
but it's... The media has been obsessing over it. It's new. Well, it's been around for... Since 2012, I think. Just the FED, every two meetings gives you... You don't see which individual members provide in the forecast, but they give you an anonymous forecast of where they see interest rates going, where they see the funds rate going for this year and next year. So what happened this time around was that I think for the first time since they started doing this in 2012, you actually have some FOMC members predicting that the funds rate is going to go down from here. So that's great for you. Yeah, about half, eight, I think. About half. Looking for a cut. Seven. And then they still have one person. I'm looking for a hike this year. I wonder who that is. Probably Esther George. And then you have seven, I guess that, are looking for no change. So the way I read it, two things, it's a divided FED, but the press release read very devishly, in my opinion. Look, the market was only priced (33/57)
25%. They would cut rates today. So that's not bad. That's sort of the press conference as well. Yeah, and the press conference as well. The thing that at the press conference, he's really speaking for the FOMC. But at the press conference, there were a few things though, the press conference has stuck out to me. One was he used the phrase, an ounce of prevention is worth a pound of cure, which I thought was rather interesting. And my larger takeaway from it was that the Fed is now focused on sustaining the expansion instead of normalizing policy. That's what it felt like. He had made another comment as well about how certain groups had been somewhat disadvantaged relative to others during the course of this expansion, that now they were beginning to see the fruits of monetary policy and he wanted to try to sustain the expansion. I think he actually used those words. Right. Okay, well, look, here's what I'll say to that. I know it's like motherhood, to sustain the expansion. But what (34/57)
do you mean? Well, the Fed always wants to sustain the expansion. If you go back- Well, Powell was supposed to be a little bit more even-killed. Well, but we'll get back to that in a second. So you'll see how much fun I have on the tarmac. If you go and look at the FOMC transcripts all the way back to the 1960s and you go to the month the recession starts and at the beginning of these FOMC meetings, the Fed staff, the economic staff produces and gives a presentation to the Fed on the economic outlook. And do you know on the month the recession starts, these Fed staffers have never once called the recession. I'm not talking about six months earlier, earlier on the month that it starts. So the view that they want to sustain the expansion, they always want to sustain the expansion. They never intentionally, I mean, maybe Paul Volcker in the first recession in the early 80s. Because he would do them with so much inflation. But the Fed does not want to create recessions, but they just (35/57)
happen to be part of the business cycle. But they don't do it intentionally. But you've got to go back. I mean, Powell race rates nine times. And even as we sit here today, we can talk about, oh, how dovish he sounded and pivot number two and all the rest of it. But they're still draining their balance sheet. He was asking actually about that. He's still what, 35 billion a month this September. So it's funny that we're talking about, oh, the Fed so dovish and yet they're still doing QT, although they're tapering the QT, they're still doing quantitative tightening. It's a little bit of, it's called cognitive dissonance. What are they doing in terms of interest on excess reserves? Well, they didn't make any fresh announcement about that today as far as I saw. There's been no change in that since the crisis or minimal. Just minimal changes. So I don't think that's a major part of policy. I just wonder if they might use that to try to offset some of the contraction of the balance sheet (36/57)
elsewhere. Well, there's something to be said, I suppose, towards making it more incentivizing the banks to free up the reserves too. Because the one thing we do know, well, that's a fair point that you make because that could be a policy tool because we know from the latest us Fed senior loan officer survey that the commercial banks have been tightening up on credit right across the board. You're seeing it actually in the data. Commercial bank lending growth has really dried up, especially for commercial industrial loans. The one thing I will say, though, back to that for a second is this, that you can take the horse to water. It doesn't mean it's going to drink. The horse is what in this case? The banks? Well, the corporate sector. So you can ease up. You can create conditions for the banks to want to lend more money. But if corporations are focused on balance sheet improvement and tightening their belts at the margin, it's not going to matter that much. Back to the point I was (37/57)
making before, A, when we were talking about that the Fed wants to sustain the expansion, of course, there was a very clear statement today in the press release, but that's always their goal. I mean, to me, that was almost an admission that we've over tightened. Something else. You were right about Jay Powell, market's guy, credit market's guy, non-academic, fresh face and a real world guy. He comes in a year and a half ago and only starts talking about his R-star. The neutral Fed funds rate and the need, do you remember back in October, he was talking about we have to get to neutral, get there in a hurry. What's interesting to me is this, back in 2012 and that was not a century ago, the Fed's estimate of the neutral Fed funds rate, the stable equilibrium of Fed funds rate was 4.25%. Can you imagine if they tried to get to 4.25? What sort of presidential tweets we would have been reading? He'd be fired. If he can do it. But over time, see what happened is that the Fed kept on reducing (38/57)
that and they got as low as 2.75 because they realized the constraints on inflation from what? From excessive indebtedness, from what the Latte Liberals and Devils call the fifth industrial revolution technology, aging demographics, all these things, not only structural disinflationary. The Fed collectively takes their estimate of the long run equilibrium funds rate down at 2.75. What's the first thing Powell does at his first meeting last year? He not only raises the funds rate, but he actually starts to raise the neutral long-term rate and he goes in two steps and he goes to 3%. Oops. And now you saw what happened today that was very significant in my opinion was they took that rate down from 2.75 to 2.5. That's interesting. I've done my own work on where the neutral rate is. I'm not at the Fed, but I have a different call than the Fed does. I have a different call on the Fed than the Fed has on their own interest rates because I think that they've over tightened rather (39/57)
significantly. When you look at inflation for goods and services that are measurable and observable because so many of these items are imputed by the statisticians of the government, my estimate of underlying inflation in the United States is well below 1%. And when you look at the scholarly research of where the real funds rate is in real terms, it's 0.5 to 0.6. I would actually posit that the neutral funds rate is closer to 1.5% than 2.5%. And so the premise- A full 100 base points. Well, this will come out on the wash, right? Like I said before, my job has always been and remains to look at the forest past the trees and to stay ahead of the curve. The Fed has made it almost their life's work to fall behind the curve because they're always looking just to current data. Right. I mean, look, how can- They're using lagging indicators. Or how can you totally dismiss the yield curve? How can you do that? It has an 85% historical track record. It's telling you right away what's going to be (40/57)
happening, that the stock market will do what it's going to do because of share buybacks, the stock market's trading more like a commodity on supply and demand than it is as a real economic barometer. The bond market, though, that is the economic barometer. And so the plunge in yields, the inverted curve, the inverted curve along with the fact, what does a plunge in the real five-year treasury yield to 0.3% tell you? To 0.4% in the 10-year treasury yield? What does that tell you? What the bond market's telling you about economic activity is not in the Fed's forecast and not in Mainstream Wall Street's forecast. What percent of the curve is inverted now? Well, there's different segments that are inverted. Of course, because you had this big rally, the big decline in the two-year, so people will look at 5s, 30s, or 2s, 10s, and they'll say, oh, well, those aren't inverted. But they're only not inverted because the two-year has rallied so much on the expectation, the two-year node is (41/57)
screaming at the Fed to cut. The two-year node was telling the Fed, you should be cutting today. But if you're taking a look at, say, Fed funds, I mean, let's Fed funds to 10-year. Let's take a look at three months to 10-year. Most of the curve, at least after the 10-year part of the curve, is inverted. A lot of people I know like to look at the Fed funds two years, three months, two years as a sign of economic stress. Everybody's got their own favorite part of the curve. I look at Fed funds to 10 years, and it's got a great track record. That's telling you that if the recession isn't already here, it's coming in the second half of the year. Now we're standing some of the better tone to the recent economic data. To me, a lot of that is just noise, especially on the production side, which is clearly in a downtrend. They also changed, didn't Pal change some of the language recently? I think he changed the zero lower bound to effective lower bound. I saw some other language changes as (42/57)
well. I've got me thinking a little bit about negative interest rates. Right. Okay. So that's a great point. So the Fed staff last year in the July 31st, August 1st meeting, and this rarely happens, the Fed staff gave a presentation to the FOMC. It's not unusual for that to happen. It's unusual for it to show up in the minutes. And it was all about what you just talked about. Basically how will the Fed fight the next recession? They're already talking about that last year without having to time it. And the answer is that they're going back down to zero. And we're going to spend more time at or near zero for the next several years for people that want to talk about Japanification with all deference of the stock market, which has been breathing fumes from stock buybacks. Leave that aside. We're on the path of Japanese. Well, I think the world is really heading in that direction. Because of the structural deflationary forces that you talked about earlier. There's just too much debt. Look, (43/57)
there's no... And the structural demographic issue. If we had that fiscal stimulus of last year, back when Reagan did it in the mid-80s, when the federal debt ratio was 30% of GDP and not 80, there's just no multiplier impact from fiscal stimulus from these gargantuan debt ratios. So I think the world is still a wash in debt. And that is a fundamental constraint. That's forcing rates down. Well, people who are involved in the economy look at that debt as a future tax liability. So it impedes economic growth. Look, the McKinsey people have written about this, Rogoff and Reinhardt have written about this. It's not linear, okay? But you do head it's basically what economists call the law of diminishing returns. Too much of a good thing becomes a bad thing. Where does Rogoff put it somewhere at 175%? That's for total. I don't just look at a government, but for total. Yeah, but I mean, I don't know many governments as high as 175. Maybe Italy's getting up there, but I don't think even (44/57)
they're that high. But look, the reality is that when you're taking a look at the level of standing debt globally at starting right now, visa V, the peak of the last cycle, and you're taking a look at the level of debt now, visa V, where was the peak of the last cycle? I mean, the level of debt, the increase in the debt in the past decade from the peak in 2007 has outpaced the increase in nominal GDP globally by a factor of four. That acts the fundamental constraint on growth. That acts the fundamental constraint on inflation. You need more and more debt to generate a dollar of GDP. Yeah, it's a law of diminishing returns. That's a very dangerous trend. And look, my good friend Lacey Hunt has written a lot about this. It's fundamentally deflationary. And that's one of the reasons why this neutral fund rates come down so much. Now, back to your point about the negative funds rate. If you actually go on the various Fed district bank websites, you'll find that some of them are beginning (45/57)
to talk about the potential for negative rates in the next cycle. That is, they're going to have to get more and more aggressive. We were talking about this before about these asset and debt cycles. And you can see that each time the Fed has to get more and more powerful. You go back to that period in the early 90s, the Fed takes the funds rate from a peak of nine and seven eights down to three. In the next cycle, to fight the dot com, they go from six and a half percent down to one. Then in the last cycle, they went from five and a quarter down to zero. You see, look at the symmetry here, nine and seven eights to three, six and a half percent to one. Yeah, no, I've seen those. I've seen those. And actually with QT, with QE, sorry, this synthetic negative rate, it went to negative five percent. You see how more aggressive they have to get with these debt and asset cycles. The Fed normally cuts the funds rate 500 basis points to fight a recession. Their starting point is less than two (46/57)
and a half. So they're going to have to get to negative rates somehow. Either they will have to do even more powerful QE or we will go to negative interest rates and people will say, well, it didn't exactly work in Europe. So why would you do it here in the States? And well, the banking system is much stronger. I mean, for all the warts and pimples and scars, the stress tests were more robust and the US banks much better capitalized than the European counterparts. But if you want to scare people into spending money, which is what you want to do, then you'll basically put a tax on money. We did an episode where we either I or my guest, I can't remember who thought of it, but we compared the mechanics of interest rate cuts to the mechanics of classical versus quantum physics. Because things change as you get below zero and it could have perverse effects. If you are a pensioner, if you're someone who needs to save, you could end up saving more money, spending less because you're losing (47/57)
more because you're paying interest to have a bank hold your money or you could take the money out of the banking system entirely and start storing it in your own safer in your own basement or under your mattress. What I really want to point to is there is a logic that seems to exist in terms of how things work that's very mechanical in a very classical way that Fed economists and media pundits rely on when they do the analysis. I just wonder if that really holds as we go lower and lower and as we go below zero. Everything is in theory. You see what I'm saying. I might backfire, but if negative rates were to backfire, they'll just try something else. Do you not see what happened in the last cycle? They started with new acronyms. They had TAF and they had TALF. They went to zero. Then they decided on QE. They didn't do the big bomb, which was debt monetization, the so-called money finance tax cut, which earned Ben Bernanke, the moniker helicopter Ben, and that famous speech he gave in (48/57)
November of 2002. They were supposed to go to QE back then, but they got as low as 1% of the funds rate and then actually we had a massive housing bubble in our hands. The QE started seven years later. Then he did not just one round, two rounds of QE, three rounds of QE, operation twist. They're going to try everything. They'll try negative rates. If it doesn't work, they'll try something else. They'll do more QE. The Fed is increasingly becoming politicized. Maybe the charter will change to help them to buy more assets than just tripping more. That's the question, right? Because the real problem- Just like the ECB. The Fed is going to be very aggressive. As I said before, think proportionally how more aggressive they've had to be. Think outside the box as to what they're going to be doing. Lyle Brainard, who's one of the senior governors on the Fed, gave a speech a couple of months ago where she talked about targeting yields out the curve. Never mind just taking short-term rates down (49/57)
to zero. Short-term rates going to zero only matter insofar as they're successful in taking interest rates down across the curve. The Fed did this back in the 1950s, just the threat. We're going to pin the 10-year note yield at 75 basis points or something along those lines. Now, maybe will it work? It will. Maybe it won't. What does that do to bank lending? Well, those sorts of rates are not exactly great news for the banks as you've seen how the banks have been responding to these ultra-low rates in Europe. Add to that also if they lower interest on excess reserves, how that impacts that as well. It's a double whammy in a way. Look, the reason why it's failed in Europe is that these policies have just failed to ignite a sustainable money and credit flow into the real economy. I think that this is why this modern monetary theory is so interesting. It's just a different form of what Bernanke was talking about. It's fascinating that it's gotten so much traction as a credible solution. (50/57)
Well, I can see it happening. A, I don't believe in fairy tales and I don't believe in the tooth fairy. I believe in the business cycle. I think this one is coming to an end very quickly in my opinion. The Fed is already behind the curve. The bummer gets told you that and they're going to have to be very aggressive. People tend to forget that before QE, they did a lot of other stuff and they will do a lot more. They won't have a choice. They call it modern monetary theory because it's some Democrats way to help fund infrastructure or green technology, but really it's quite simple. It's called debt monetization. It's so old. It's written up in the Old Testament. Basically, the Treasury puts a $5 trillion perpetual coin or a century bond on the Fed's balance sheet. The Fed prints $5 trillion and gives it to the Treasury to do with it what they want. They will retire student debt. Maybe that will finally remove a major obstacle for the housing market, which never fully recovered this (51/57)
cycle. Outside of the initial years when we had this bifurrent cycle, the first time buyer, which historically is driven, the market never showed up. The first time buyer went AWOL because of this huge albatross of student debt. Now I know people will have problems with that. How can you bail out the centers? We removed Emmanuel Kant and Calvinist thought from that in the last cycle when we bailed out the mortgages. There's different things you could do with that money. You can bypass Congress. You can actually give out vouchers with expiry dates on it and get people. The whole thing is to get a multiplier impact on spending. The one thing I think that has to happen is we have to reduce the size of the debt, not just the public debt, but also the private debt. How's that going to happen without there being a recession? As I was talking about before, belt tightening in the private sector and the corporate sector is going to trigger a reduction in capital spending. Coupled with (52/57)
inflation. There's a lot at stake here. There's a lot at stake globally. When you think about how fragile politically from a society standpoint, think how fragile the world is right now. Global trade flows are in retreat. Global direct investment flows have contracted now three years in a row. The world is- The impacts of those things are nonlinear as well. You've got these populist, nationalist, xenophobic. Donald Trump was really more of a symptom what's happening globally. It's interesting that it happened the same year of Brexit and the populist wave that you've seen across Europe. The world is- Geopolitical tensions too. Those are a huge deal. It's just a wide divide. I think that people have to dust off their history books because of this is what we see. If this level of societal tension, look within the United States itself. I don't remember a time when the country was this divided. When you think about what's happening in terms of the hate and the racial situation, this is at (53/57)
the peak of the economic cycle. This is at the 3.6% unemployment rate. We just had a bunch of tax cuts. Imagine what happens. Imagine what happens. I'm talking about from a strictly- What this means for society in general since social stability. I'm talking globally, not just the United States, of all this happens at the peak of the cycle and the low unemployment. Imagine what happens when we cross the other side of the mountain. A lot is at stake here. Beyond just what does the stock market do? Credit markets bond yields the dollar. A lot is at stake here. I think that the Fed, I mean, I would have had a problem with the Fed cutting rates today. The stock market bubble- You would not have. If they would have cut rates today, I would have said, good on you. Maybe that's just too much. You think it's much more serious than markets and pundits and even the Fed perhaps are appreciating at the moment. I think that the economy has a really soft underbelly. You strip out the soybean exports (54/57)
and the inventories and declining imports. Real private final demand in the first quarter was barely better than a 1% annual rate. If Atlanta Fed is right, maybe we're close to 2% because the consumer hung in really well. Housing is in a recession. Commercial construction is in a recession. The recession and capital spending, I think, started in the first quarter of this year from already fairly weak base. When you think about the one thing that should have propelled the economy to new heights last year, what have been capital spending because the tax cuts really geared towards the business sector, well, guess what? They got diverted to stock buybacks. That's been a huge story. David, I want you to stick around. I want to do an overtime with you. For our regular listeners, you know the drill. For new listeners, you head over to hiddenforces.io. Right. I've been writing a daily since 1998. It's called Breakfast with Dave. I actually do two early in the morning. One's called Dispressed (55/57)
So With Dave and that's a wakeer upper and then there's Breakfast with Dave. Feel free to Google that. It'll flash up right away if you ever just Google Breakfast with Dave. What you can do is you can email me and the email is drosenberg at glaskinshaft.com. It's D-R-O-S-E-N-B-E-R-G at G-L-U-S-K-I-N-S-H-E-F-F.com. I know that's a mouthful. Or call me directly at 416-681-8919 and I'd be happy to at least start you off with a complimentary publication. And I'll have a link to David's website in the summary of this podcast. Thank you so much, David, and let's switch over to the overtime. Terrific. And that was my episode with David Rosenberg. I want to thank David for being on my program. Today's episode of Hidden Forces was recorded at Creative Media Design Studio 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 (56/57)
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. 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 dkathiddenforces.io. As always, thanks for listening. We'll see you next week. (57/57)
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. This past week has been one of the most insane news cycles that I've experienced since at least the early days of the COVID-19 pandemic. Where fear was spreading faster than the virus itself, there was an overnight explosion in Twitter accounts claiming expertise in epidemiology and yet no one quite knew what to believe about anything. I kept thinking back to my conversation with John Ascomus about the fragmentation of the media ecosystem and what it means in practice when a society loses its ability to form consensus truths in the context of last week's While the impact of this dynamic on government policy is not the focus of today's conversation, it is an important backdrop that I want you all to keep in mind (1/57)
going forward as we sort through the news cycle together and try and make sense of events as they unfold. The reason I asked Jeff Snyder to come back onto the podcast today is because he has been ringing the alarm bell in anticipation of a panic inducing event like the bank failures we experienced last week for more than a year. In his last appearance on the show, he pointed to what he called a quote increasing sense of dread that he felt was reflected in credit and derivatives markets. That market participants, in other words, were hedged for something, perhaps even a deflationary event in the monetary system like a bank panic that would lead the Fed to prematurely pause its rate hikes and possibly even reverse its policy entirely to stave off another financial crisis. Whether or not the Fed reverses course this week is less important than how the system itself, the banks, brokers, and other financial intermediaries who make up the international financial system change their own (2/57)
behavior as a result of recent events. What this means for asset prices, the prospects for economic growth, inflation, and government policy are all topics that we explore in depth during today's episode. In the second hour, we zoom out to look at the bigger picture, specifically what the system itself ends up looking like coming out the other end of this crisis. Do we get more consolidation, centralization, and government control? Or is there a path to something else? And how does the international security environment make today's crisis and its potential resolution look very different from what we experienced in 2008? 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 half of today's episode by going to hiddenforces.io slash subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, (3/57)
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 yet another awesome and extremely timely episode of Hidden Forces with my guest, Jeff Snyder. Jeff Snyder, welcome back to Hidden Forces. Hi, Dmitry. Thank you for having me back. I really appreciate it. It's great having you back on, Jeff. You're at the very top of my list of people to have on the show, especially after a crazy week like this. Before we start, I want to mention to listeners that I'm hosting a live video Q&A with you and Brent Johnson for members of our Hidden Forces Genius community on March (4/57)
23rd at 5 p.m. Eastern Standard that I am opening up to anyone who wants to join. So if you're interested in joining that call and getting a better sense of what these Q&A calls are like, you can do that using the RSVP link in the summary section to this episode. Also, I want to encourage people who haven't heard your first appearance on the podcast, Jeff. That was episode 289. To go do that, it is a great introduction to your framework and we're going to be relying on that today to talk about this very big event that has unfolded over the last week or so, which is not the failure of Silicon Valley Bank. It's not the deposit flight from regional banks, though that is significant. It's not the new liquidity program set up by the FDIC, the Fed, and the Treasury. And it isn't speculation about a Fed pivot. It is the dramatic repricing of credit risk that we've seen in markets over the last week. Give me and my listeners your take on what we've been experiencing and why these moves have (5/57)
been not only significant, but literally unprecedented in certain instances. Yeah, Dmitri, I think your intuition is right. This is not just about Silicon Valley Bank. Silicon Valley Bank is sort of the most public aspect of what's been going on for some time here, which essentially any elasticity illiquidity across the global monetary system, which has manifested in many different ways. I mean, there are aspects of Silicon Valley Bank that we do want to pay attention to. There are certain things that have gone on there. But as you said, it's not really the huge story here. And if we look at the marketplace and really what the monetary system has been telling us for quite some time, it was basically, hey, look out, there are potholes ahead. And not just small potholes, but really major potholes ahead. So when Silicon Valley Bank came along, the market said, yeah, see, we knew something like this was going to happen. And if that was it, if it was just about Silicon Valley Bank, if it (6/57)
was just that signature bank or maybe first for public, whatever the small regional banks are, the big regional banks that are in the news today, if the Fed was going to come in with its BTFP brand new toolkit and the FDIC and the Treasury Department were going to guarantee all depositors, that was the end of everything. We wouldn't have seen what happened this week. And I think that's the most alarming thing is that all that stuff from last week's the announcement and then the weekend, maybe there's a little bit of nervousness on Monday, but it continued Monday, Tuesday, Wednesday, and even a little bit yesterday and even again today. So as you said, the markets are reassessing the events of the last week and saying, yep, this is exactly what we expect. And because it's exactly what we expected, we expect more down the road. So for people that aren't familiar with this, what are we talking about here? Give us some specifics about the kind of moves that we saw and also put them in (7/57)
historical context for us. Yeah, the moves were just indescribable. I write tons of words, I speak a lot of words, and I have very few words for what happened this week. And I don't want to be alarmist here. I don't want to say that, I don't want you people to think that the world is ending because that's not what we're really talking about. What we're really talking about is, I like the way you framed it, Dimitri, is that repricing of risk because that's really what happened. And it repriced in such a dramatic way that we have, it's very stark, it's very concerning, but it's not the end of the world. Things are going on, things are going in the wrong direction. So let's put it into terms. One of the markets I watch all the time and watch very closely is called Eurodollar Futures, which is tied to three-month LIBOR or in a couple months, assuming LIBOR doesn't survive, three-term SOFR. But essentially, short-run money market rates, what is those money market rates going to be in the (8/57)
future? And because it's a money market rate, because it's a key benchmark rate, and because this is a huge market, it can tell you a lot about what the monetary system itself is perceiving as what's going on either now or in the future. So Eurodollar Futures, just to give you some context, any daily, and on a daily basis, you won't see these contracts move by maybe more than five, six, seven, eight basis points. An extreme day will be 14, 15, maybe 20. You only see more than 20 basis points, moves, and prices, and the prices of the contract on very, you know, a handful of occasions. For example, when Bear Stearns was, they announced that it was in trouble and failed, we had like a 20-some basis point move in most of the Eurodollar Futures contract, which was a, holy crap, something is going on. September 15, 2008, the morning that Lehman Brothers was announced, we had a 40-some basis point move in Eurodollar Futures. Again, prices, daily contract changes, which was a, oh crap, kind of (9/57)
a thing. We got that, again, a 40-some basis point move in a lot of these near-term contracts last Friday, March 10th, which was the day that the Silicon Valley news, or the SBB news came out, which kind of made sense because this was a sort of a confirmation, things were going bad, conditions were accelerating. And so, yeah, that was, that made sense. This was a severe outbreak, something that was expected. But it was the trading on Monday that really shook me up and shook, I think, shook up everybody else was, you know, a 40 basis point is an extreme move on Monday in Eurodollar Futures in a couple of particular contracts, a couple of key contracts like September 23 and December 23. We got more than 100 basis point moves, massive swings in the market. We've never seen any, I mean, it's double the day Lehman Brothers failed, which should give you a sense that the markets were in outright panic mode. Because what are Eurodollar Futures? Eurodollar Futures are essentially a hedging (10/57)
technique. If you're afraid that the economy is going to go into the toilet and you hold a lot of risky assets, you're going to want to hedge those risky assets because you can't sell them when the economy is going to the toilet because markets become illiquid. So you want to buy essentially economy in the toilet insurance. And that's what Eurodollar Futures are. If you buy Eurodollar Futures, betting that the economy is going to be bad or the market's going to be bad, liquidity is going to be bad, whatever the case may be, they're going to pay off when interest rates, money rates go down in the future. So the more that the market wants to hedge in that fashion, the more we know it's afraid of something big. And so again, Lehman Brothers, a 45 basis point swing in Eurodollar Futures, that makes sense because the market was saying, holy crap, I need to hedge my assets because I'm not going to be able to sell them. If I get into some kind of liquidity trouble, I'm stuck with these things (11/57)
I don't want to be. I need some kind of insurance. So Monday, March 13th, after the Fed announcement of its program, after the FDIC action, after signature SBB, all the stuff that should have been past tense, we got massive hedging, which said, again, lots of people in this deep, sophisticated marketplace were saying, holy crap, I need insurance because I don't know if I'm going to be able to sell these riskier assets. And then as bad as that was, we got a little bit of a reprieve on Tuesday, which is the normal pattern. Usually I have a Friday big announcement, Saturday and Sunday, the market kind of stues about it. Monday is the continuation of Friday. And then everybody kind of pauses on Tuesday. Tuesday is the day of reassessing. So we got a little bit of a retracement on Tuesday, and then Wednesday was almost as bad. We had 60, 70 basis point moves in Eurodollar futures on Wednesday. Now, they didn't stay there for the whole day. The September 2023 contract, for example, was up (12/57)
about 80 basis point at one point and finished at around 30-some odd, 35, 36, I think it was. So nearly Lehman Brawlers on Wednesday after double Lehman Brawlers on Monday, after equal to Lehman Brawlers on Friday. So just to give you a sense, this desire, this need, this stampede into essentially catastrophic portfolio insurance continued from Friday right on through into this week. Yeah. I mean, the move was even bigger than what we saw in 9-11. Yeah. And to your treasury, that's another one. Right. The to your treasury yield which drops over 100 basis points down from where it was before this happened. The 30-year down 60 basis points, I think roughly, right? Insane moves in markets, daily swings that are only reserved for the worst type of circumstances. So again, you don't want to panic people and say, this is the end of the world, but the market is extremely concerned. And the one reason why it's extremely concerned is because it saw this coming. What happened with SVB in the (13/57)
wider context is simply this confirmed the suspicions that have been traded in these markets for many months now, that things were going in the wrong direction, illiquidity was building up, problems were building up. And then this happens and it's sort of like, okay, everything that we thought was wrong, absolutely was wrong, but what does that mean for the future? Yeah. Ironically, this move in treasury is probably wiped billions of dollars of losses off the balance sheet of Silicon Valley Bank. If they had had them, that's the thing. The primary reason Silicon Valley Bank was obviously they're being drained from cash, from customer usage. But in response to that, and this gets us into the systemic issues here, in response to that, they made the dumbest move they could make, which was to sell all their treasures. They sold their 20-some billion portfolio of treasures, because that's all they had. As their liquidity was being drained, as their cash cushioned and cash margin (14/57)
disappeared, they sold the whole thing, recognizing a $1.8 billion, I think that's the loss they said, $1.8, $1.9 billion loss, which that was game over. Once the loss was reported, that started the run. But that's not the important issue here. The important issue here is, why couldn't SVB arrange other financing through repo, for example? Because that's usually what happens. You get into a cash situation where your customers are using more deposits than you thought, you go into the wholesale markets to borrow until you can get yourself right again. Why didn't they do that? Why didn't SVB go to the Fed's primary credit window, which used to be called the discount window? Because as the Fed just reported yesterday, this week, everybody else did. We saw $85 billion taken out of the Fed's discount window, their emergency funding window. Why didn't SVB do that? So there's lots of questions here. There's lots of stuff that gives you insight into why the markets, first of all, hedged as much (15/57)
as they did. Why they did so? Because this is not over. There's bigger issues going on here. What do you think that tells us? What is it that the market is so afraid of? Do you think? Well, I think there's a combination of risks. I mean, always it starts with the economic climate, which I mean, if the economic climate is booming, you never really see bank failures, because usually there's no reason for banks to fail. There's a reason why these things always cluster together in bad economic climates, because when things start to go in the wrong direction, money providers, just regular folks who have their money exposed, they start to reassess and reevaluate what they're doing. So that's part of it. The economic climate is not as robust as everyone would like it to be, as the Federal Reserve would tell you, and ECB just did yesterday. So that's the background. But there's also structural and cyclical deficiencies in the way the monetary plumbing works. And the big one is collateral. I (16/57)
think that's what we need to zero in on with SVB is because to go to the Fed's primary credit window, you've got to post collateral. So if SVB, which was on its last legs, last resort, didn't go to the primary credit window, and yes, I know there's stigma attached, but the Fed has worked hard to try to remove that stigma as evidence by what we see this week. Still, why couldn't SVB go to the repo market? Why couldn't the SVB go to the primary credit window? And I think they have a dramatic collateral shortfall. When you say they have a dramatic collateral shortfall, are you referring specifically to the haircuts they would have to take on things like treasuries and agency MBS, and that this would be too great to prevent the stemming of deposit outflow? That's part of it. I think there's also, if you're a bank, like SVB, and you have most of your assets are not liquid securities like treasuries, you have a small portion of your assets in those types of securities, what you really have (17/57)
is a whole bunch of ill liquid loans. But in a pinch, if the wholesale market is operating normally, what you could do is post those loans as collateral to a dealer to borrow US treasuries or some other form of collateral that you could then take into the repo market. So essentially, you would liquefy ill liquid loans through a securities transformation transaction, which happens all the time. This is regular, it's normal, it's a big part of what dealers do. So the question is, why couldn't Silicon Valley Bank do that? Why were dealers so shy about taking ill liquid loans from Silicon Valley Bank and lending them US treasuries that don't belong to the dealer either? Isn't it much more difficult to value those loans in this current environment? Couldn't that be part of it? Yeah, because that's what happens, right? So what you say is in a normal environment, everything is fine. Silicon Valley Bank has a little bit of a cash drain, nothing too big. They go to a dealer and say, I've got (18/57)
100 million in these ill liquid loans, I need some treasuries so I go in the repo market and liquefy these loans. And the dealer will say, yes, I'll give you a haircut of 10%, using round numbers. These are not realistic numbers, but just to prove our example here. So you've got 100 million in loans, the dealer gives you 90 million in treasuries, you can go in the repo market, there's another haircut of one or two percent. So basically, you get say around $88 million in short-term funding from your $100 million in ill liquid loans. But if you do that when conditions are normal, suddenly things start to go wrong, dealers get a little bit risk averse, instead of a 10% haircut on your liquid loans, they now say I need 20% or 25%. Or in extreme cases, like we saw in 2007, 2008, they say, I don't want those liquid loans at all. So you don't have any collateral as SVB to exchange for other collateral that you could then use in the repo market, which essentially cuts you off of these (19/57)
marketplaces. And if you don't have collateral that you can exchange for treasuries, you can't go into repo, you certainly can't go to the Fed's primary credit window either. So your last resort is to just start fire-sailing whatever assets you got that you can sell, you call in whatever loans that you can potentially liquefy, essentially your balance sheet gets into its death spiral. And I think that's what happened. So as far as SVB goes, that makes sense. But the bigger question is what happened that prevented them from using the wholesale emergency release? Why were dealers so against potentially transforming them and letting them give the collateral? And I think that's where we get into the systemic issues, which by the way, one of the most extreme results of this past week was actually the four-week T-bill rate, which is a primary collateral indication. On Wednesday, the four-week Treasury bill rate plummeted by more than 60 basis points at one point. Again, like Eurodollar (20/57)
futures, we've seen these relatively regularly where collateral gets short in the early morning hours, because that's when yesterday's secured financing transactions are unwound. You've got repo and derivatives, you've got unwind yesterday's transactions, you've got collateral calls to make all sorts of things. So when collateral is scarce, it's not unusual, it's not good, but it's become relatively common to see Treasury bill rates sign noticeably in the early morning hours, and then everything gets settled out and they go back to normal. That's usually about one, two, three basis points moves. Maybe in extreme cases, you get four, five, or six. That's one that you say, uh-oh, this is trouble. We got that on Monday. Monday, there was a massive early morning scramble for collateral that was about 15 or 16 basis points, which already told you stuff was going wrong. But then on Wednesday, in the middle of the day, this wasn't even early morning, the four-week Treasury bill yield (21/57)
plummeted by more than 60 basis points at one point. So if 10 basis points is a collateral run, what is 60 basis points in the middle of the day? That's a real huge problem. So again, we're back to collateral shortage, problems with all that parts of the monetary system, which probably I think relate to the systemic background which then left SVB with no other options. So I also want to let listeners know that we're recording this in the morning of Friday, March 17th. So when Jeff is citing Wednesdays and Mondays, he's talking about this week, Jeff, couldn't this just reflect the extreme levels of uncertainty in the market? And some significant amount of this will resolve itself and normalize after the next few weeks pass and we get this FOMC meeting? I mean, you would hope that's the case, but that's never the case. And that's what I call the lesson of Bear Stearns, because that was what led into the eventual fall in 2008. After you go through this type of an event, after you see (22/57)
primary examples of the downside case here, and think about this in terms of individual firms, not in some systemic perspective, but as an individual firm, you run a bank. You run a bank that has a lot of portfolio, your portfolio has a lot of assets and a lot of liabilities that look a lot like what everyone else does, including SVB, including Bear Stearns back in the day. And what you see is that Bear Stearns back in March of 2008, and that's another factor we need to talk about Dmitry, the March bottlenecks, we can come back to that, but March of 2008, Bear Stearns was in the words of Bill Dudley, and this is in the FOMC transcripts, Bear Stearns was a troubled but viable firm one day, and three days later, it was no longer viable. So what that meant is in a very short period of time, you were wiped out. And the Federal Reserve says, we rescued Bear Stearns, we shepherded it into JPMorgan's reluctant arms, we made it all happen, this was a success. When Wall Street looked at, and (23/57)
not really Wall Street, but banks around the world, the monetary system itself looked at Bear Stearns and said, holy crap, we could be wiped out. So from the perspective of bank managers, the downside is, my equity, my money, my job, everything could be wiped out. So how did the system respond to Bear Stearns? The Fed celebrated, they said, this is great. Everything is behind us, we got this massive success that we can build on when the entire monetary system started doing the pro cyclical types of activities that we, that are associated now with monetary crisis, they started to build up cash cushions. Because again, as Bill Dudley said, Bear Stearns went from troubled but viable to unviable in three days. So firms built up cash cushion. And as firms are building up their cash cushion, they're not extending cash into the marketplace. So markets get even more illiquid. And as markets get even more illiquid, guess what firms do? They build up their cash cushion even more. It becomes this (24/57)
pro cyclical self-reinforcing cycle. They began to de-risk their books. They said, okay, what is it that caused Bear Stearns to go down? Well, it was a collateral call. JP Morgan knocked on their door and said, I need $8 billion in treasuries. By tomorrow, you're out of business. So I need to de-risk my book. I need to get the best quality collateral I can get available. I need to do all sorts of those kinds of things. What else do you do? You hedge. You hedge the hell out of what you have available. That's what happened in the wake of Bear Stearns. Building up of cash cushions, de-risking and hedging. What have we seen already this week? Well, we've seen the hedging. We know that happened. We haven't seen the building up of cash cushions, but we can infer that that's been happening because of what's happening in this marketplace. And as far as de-risking goes, we haven't seen that yet, but it's reasonable to assume that's going on too. So again, as I said from the beginning, this was (25/57)
an expected outcome. And now that it's happened, now that it's confirmed everybody's fears, it's leading to all of these knock-on and second-order effects that we're going to have even more profound negative effects down the road, which is why we see this continuing process of hedging. And as you put it, Demetri, from the very beginning, repricing risk in the wake of something that was actually expected, because it's not a one-off thing. You look at what crises actually are. They're not just like the market or the whole economy or the whole marketplace just shuts down all at once and everything happens in just one-off fashion. They're actually stages. It's processes and it's prolonged processes. And what happened this week was simply the next stage and probably the biggest stage heading into this type of a crisis. So this is great because this is kind of where I wanted to get to. The Silicon Valley stuff is something that I think we covered really well in our latest episode with Steven (26/57)
Kelly. So of course, we'll have an opportunity where it's relevant to speak to that. But actually, what I really wanted to get to is how market participants, and in particular financial intermediaries who play an indispensable role in maintaining orderly markets and in the provisioning of credit and liquidity, are adjusting their risk outlook and their behavior as a result of last week's events. Because the last time you were on the podcast, Jeff, I asked you what it would take for the Fed to pivot from the policy path that it's been on over the last year, which has led to the steepest rise in short-term interest rates in over 40 years. And you said that there were two things that could cause the Fed to pivot. One potential thing would be a substantial deterioration in the unemployment data, such that the Fed might say, yeah, CPI has not really returned to target yet, but we can't afford to pay attention to that right now because this economy risks going into a tailspin and (27/57)
unemployment could get completely out of control. Or potentially, something could, quote, break in the monetary system causing an outbreak of deflation that leads to financial volatility, such that the Fed says, yeah, CPI hasn't really returned to target yet, but we can't afford to pay attention to that right now because the financial system risks going to a tailspin. And that would lead to a major economic recession or depression where unemployment would get completely out of control and we're back to square one again. My question for you is, is this what we've experienced this last week? And if not, how will we know it when we see it? In other words, how will we know what a break in the monetary system actually looks like when it happens? Yeah, I think that's exact. I mean, that's what the markets are telling you. I love that this is the way you're thinking because what we really need to do and what I really do is essentially interpret these market signals. What is it the monetary (28/57)
system is telling us that we can use as a useful real-time analysis? What the monetary system has been saying all along, going back a long way before even the Fed started hiking rates was that the probability that, as you just put it, one of two things was going to happen. The Fed was going to stop focusing on consumer prices and start focusing on something else. And something else, I mean, there's really not a lot of options here. There's not a lot of things, a lot of factors that could really change the Fed's from its ultra aggressive hawkish stance to doing something completely the opposite. And okay, obviously, it's not the CPI itself. The CPIs are still way too high. They're marginally improving, but certainly not enough for the Fed. So that's not the issue here. The consumer prices haven't fixed themselves just yet. Obviously, the labor market data looks really good. The unemployment rate is still near 50 or low. So it's not that. It could be that the market is saying that the (29/57)
unemployment rate is going to spike in the near term future. So that's still on the table, but that wouldn't account for what we're seeing in the market. So really, we're left with this deflationary monetary outbreak. But as I said before, SVB, the failure of First Republic, Signature Bank, it's the tip of the iceberg kind of thing. It was, yes, this is the start of the thing that will get the Fed turned around. This is what we're waiting for. And now that it's happened, the chances of the Fed turning around are not just near, I mean, nothing's ever for certain. But it's as near certain in the market as anything could ever be. And not only that, we're seeing the market start to signal that this turning around in the Fed, because of this thing, is closer than many people would like. The Eurodollar futures curve is inverted all the way to the front. So the April contract is the first contract and it is priced below the May as well as the June contract, which is saying the market is not (30/57)
certain, but there's a reasonable expectation that the first rate cut happens in the next couple months. And then once the first rate cut happens, it's going to be a series of rate cuts in quick succession. So what is it that gets the Fed to, first of all, stop hiking rates? Because I mean, the ECB hiked rates yesterday. 50 basis points. Yeah. Yeah. So the ECB said, we're not worried about anything. It's likely the Fed shares the same near term view. So the next week, the Fed gets together, they say 25 basis points, probably just to kind of split the middle there. But after that, what is it that stops the Fed and gets them into aggressive series of rate cuts? It's not Silicon Valley Bank. That's not it. And the market is hedging so persistently for this scenario as it has been all along, we're left with very few conclusions. So really, it's a combination of these two things. Because if we do have this monetary event that continues to go beyond the regional US banks into other banks (31/57)
around the world, let's today's March 17th, China just announced an RRR cut, which is essentially saying, we're a little bit worried about the global monetary system here. So if this continues to go and spread, yes, you'll have financial volatility, but it'll also lead to a sharp rise in unemployment, which will then, at that point, the Fed will have absolutely no choice but to do exactly what the markets are pricing right now. I was worried I was going to trigger you by bringing up the Fed and implying that somehow it mattered or its decision on Wednesday mattered. I'm happy to see that there's some room to explore this. On that point, specific question, what do you think the likelihood is of a 50 basis point hike? I think that's probably zero. So let me tell you what I was thinking about it, and this is not necessarily your expertise, but whatever. We've all been forced to become tea-leaf readers. I wonder if the same forces that have conspired to assault our ability to come to (32/57)
agreement on various social or political issues and form a consensus view of reality are making forward guidance in the monetary policy realm, which I would argue has been the primary tool of central bank policy for the last decade at least, useless, because we've seen this multiple times during the cycle where J-PAL has come out, given a speech, and clearly the reaction of markets has not been what he wanted it to be. And he's had to come out again and again and revise the market's expectations through more statements, through articles published by the Wall Street Journal's Nick Timoreos, and via other members of the FOMC, Heman Hall, and try to get the market to understand what J-PAL seems to be intending to leap this explanatory chasm, in other words. And I wonder if, just like with Paul Volcker's Saturday Night Massacre in 1979, if we aren't seeing a potentially similar setup here today, where PAL uses this opportunity to raise, in this case 50 basis points, if the market doesn't (33/57)
get the message, in order to stamp out once and for all inflation, even if the inflation we're seeing is not a demand-driven phenomenon, because he's not concerned about financial stability because of these liquidity facilities like the bank term funding program, and because he can use the balance sheet to ensure financial stability. Yeah, they're crazy enough to try something like that. I think that's, the Fed doesn't understand the monetary system, it doesn't even understand financials. It thinks lower interest rates are actually stimulus when it's actually the opposite, as we're seeing right now. Inverted yield curves are the exact opposite of loosening financial conditions, but yet every time long-term yields fall because growth and inflation expectations do, they say that we don't like the market loosening it. So yes, there is definitely an impulse or an undercurrent from the FOMC trying to tame the marketplace. What the marketplace is saying is, you're all wrong, you've got this (34/57)
entirely wrong, you've got it completely utterly wrong, we're betting against you. It's not that we need to be tamed, it's that we don't agree with everything that you're saying. That's why the curves are inverted as much as they are, and everything that's happened this week is consistent with markets have been saying. And what they're now saying is, yes, we've heard all about the Fed's reaction function for the last year. And I agree with you, Dmitry. I think Paul Volker-Poser, J. Paul, has intended to try to shock the markets out of what he thinks are loosening financial conditions, which are actually tightening financial conditions. And so yes, there may be a chance next week that he does 50 basis points just to try to stay consistently with his idea. And I think that's been discounted in the marketplace too. So maybe there is a 50 basis rate rate hike, but that still doesn't change the near term scenario. At some point as hawkish and as Paul Volker asked as J. Paul wants to be, the (35/57)
markets are saying, we are near to certain, just as we were near to certain something like this was going to happen, we're even more near to certain now, something bigger is going to happen. Because at that point, if we do get something really big that's really disruptive, there's absolutely no way the FOMC is going to be, J. Paul's not going to be able to come on TV as stock markets are plummeting and say, well, you know what, we're going to hike rates some more. That's just not going to happen. And I think there's also the other politics here. We all know one of the reasons why the Fed got so Volker-esque last year was because of the political pressure put on the Fed. And so if consumer prices are everything that politicians are talking about to get the Fed to move as aggressively as it did, then what happens if consumer prices are no longer the topic of discussion all across the internet and the news media in the public discourse, we're instead talking about, oh my God, the (36/57)
unemployment rate's on its way to 10% or something like that. I'm being hyperbolic for a reason. Then the political pressure doesn't completely 180 degree turn either way. So I don't disagree with your premise, Demetri. I think that's exactly what the Fed wants to do. The question always is, will the Fed be able to do it? This is the conundrum that Ellen Greenspan described, what was it, 18 years ago in February 2005. He was saying, I'm going to do this. And the market was saying, we don't believe you're going to be able to. And so that's what the market is right now in an even more extreme case. We hear you, Jay. We've heard you all year talk about your reaction function and how you want to be hawkish, you want to be Paul Volker. We don't believe you ever get to finish that trend that you started. We think that events are going to overtake the Fed at some point. That's always been the only independent variable here, was when. Not the what. The what has been consistently priced all (37/57)
along. It was always the when. And as I said, last year when the Eurodollar futures curve was inverted to the December 22 contract, this was mid-year last year, but stuff that was going on then. What that said was that there was a good chance the Fed was going to do this turnaround in 2022 toward the end of last year into the start of this year. Well, as it's turning out, it only missed by a couple months. So again, the market is seeing confirmation about everything that's happening. And as it's being confirmed, that's part of the equation. It's not what the Fed wants to do. It's what the Fed will be able to do over enough time where even reality has to enter the FOMC boardroom. So you said this isn't 2008. It's like 2008-like. Kind of flesh that out for me. What do you mean? How is it like or not like 2008? And maybe how are people getting some of the analogies wrong here? Yeah, that's a really good point because history doesn't repeat exactly. I mean, we go through these processes, (38/57)
these cycles that look similar, but they're never exactly the same. So no, I don't think we're going to see another Bear Stearns. We're not going to see another Leven Brothers. I would not put SVB on the same level as Bear Stearns. I think it's the same type of a thing, the same type of reminder, but we don't have the same individual circumstances that are contributing to that type of a thing. I think the big banks around the world are mostly fine, which is one of the things that we didn't see this week. It was a sharp jump in LIBOR because most of the dealer banks themselves are fine, but themselves being fine can still leave everybody else in a big position. So if 2008 was in terms of the monetary system and banking system about these securities firms like Morgan Stanley, Lehman Brothers, AIG, we're not going to see the same thing this time. We're going to see other types of firms, even countries, have funding difficulties. So JP Morgan is going to be fine. You're not going to see a (39/57)
bailout of Citigroup. Credit Suisse is probably the exception that proves the rule here. But you're not going to have those types of big bank failures. It'll be more, in some ways, more insidious because it will be hidden. It's not the big firms that we've come to know and watch. It's these other ones that just pop up out of nowhere. So I think that's the major difference. And where there are similarities, we're in the big picture terms, which what made 2008 into its own sort of brand? I mean, you just used the term. You just say 2008, people immediately know what you're talking about. The reason isn't because of Lehman Brothers. It was because Lehman Brothers represented an extreme outbreak of deflationary money that pummeled an economy that was already in trouble. It was the combination of inelasticity, basically, traditional depression mechanics. You had a bout of inelasticity that was severe and global, an economy that was already in rough shape. Those two things together produced (40/57)
the worst type of economic circumstance. And that's why we remember it compared to other periods where we get a recession like in 2001. Hardly anybody remembers the recession in 2001. They remembered September 11th, but they don't remember the recession. In fact, if you do remember the recession, they think it had to do with September 11th. Whereas in 2008, it was the combination of those two things. And I think that's what's driving the hedging. That's what's driving everything into 2023 is that we have the same scenario, general scenario. We've got an outbreak of inelasticity and deflationary money. We've got an economy that is globally much weaker than people wanted to believe. I think a recession might have even started last year. You also have a major war that's going on in Ukraine. Not to mention you're exactly right. We've got lingering supply problems. We've got food prices. We've got negative factors everywhere. So you put all of these things together in one pot, and it's a (41/57)
2008-like mix. The danger, the downside is that severe, which is why we've seen hedging and repricing of credit that bad, because it's the same type scenario, even if it's not a repeat of 2008. That's severe in what sense? Because the 2008 crisis was a systemic liquidity and solvency crisis that hit the big investment banks who are collectively sitting on hundreds of billions, if not trillions of dollars of illiquid CDOs. That's not what we have here. What we have here is potentially a regional banking crisis driven by deposit outflows and non-performing loans, the parts of the economy like commercial real estate that are under stress, private equity, which is also affected by a rising rate environment. And you mentioned countries like there are countries like Sri Lanka and Pakistan that are especially vulnerable. So what are the areas that you feel like we should be most concerned about here? All of the above. You take it from individual pieces, individual cases. The issue with (42/57)
depositors is, I think, primarily about how many really wealthy individuals had uninsured deposits. And I think that's what really made a big deal at Silicon Valley Bank specifically, was that as the bank started to become more and more troubled, as it started to publicize its troubles through trying to raise capital and other things, trying to rectify its liquidity situation, those who have uninsured deposits said, oh, I need to move my deposits because if this bank goes under, I'm an unsecured creditor, which means who knows what. So there's the issue of uninsured deposits, which is always in the background anyway. It was slightly in the background of 2008, though it didn't really become a big issue then. I'm not sure that's the biggest concern here. I'm not saying it's not a concern because it's going to be a concern for certain people and certain banks that are overexposed to that type of funding. To me, the more interesting question, as it was in 2008, is the systemic breakdown (43/57)
because what happens is, this is not like the old days. A bank run is not like it used to be in the 1930s. A bank run used to mean currency moves from the banking system to the public. The public starts to hold and hoard currency, which provides the banking system of its ability to operate. That's what liquidity meant. Liquidity meant you have currency in a vault that you could exchange for either loan assets or if your customers need it, you can deliver them that kind of liquidity. A bank run was when currency moved from the banking system to the public. That's not what we have today. We have a virtual ledger money system where, if I take my money out of the bank, I don't take any money out of the bank. What do I do? I go to another bank I do like. I set up an electronic account and I set up an electronic transfer. A bank run nowadays is where cash, which is virtual cash, it's not actual cash, migrates through book entry from weaker firms to stronger firms. That happens all the time. (44/57)
It's these wholesale markets that are in place to redistribute that cash backwards needed. We have essentially, over the last year, regional banks have been drained of their cash for a variety of reasons, including their customers using it. They've been drained of their cash, but that cash doesn't disappear. It's not being hoarded by the public because it's virtual cash. It's migrating toward the bigger firms. The more interesting systemic question is, what is preventing the bigger firms who have all this cash from redistributing it back to the smaller firms? Who need it? Not only do they need it, they really need it over the last week. There are systemic issues here. I think a lot of it is about shortfalls and collateral, the inability to liquefy illiquid assets in these portfolios to make them usable in these emergency types of situations. Like Silicon Valley Bank, normally it could take a bunch of its illiquid loans, go to JPMorgan or Goldman Sachs and say, I want to borrow some (45/57)
treasuries, but Goldman Sachs is saying, you want to borrow the treasuries, I'm not going to lend them to you. Why? What is going on there? That hints at other factors beyond just Silicon Valley Bank. Let's dig into that a little bit. Hold on. What is it that you think the Fed is missing that's preventing these larger firms who have the cash from redistributing it to smaller firms? Why are they hoarding collateral? Is it the scale of the economic contraction that they're concerned about that the Fed is not appreciating? If so, what kind of economic downturn are we looking at here? Taking the second part first, how bad is it going to get? That's where we look at the markets. We look at the curves. The curves have said, they've warned all this time this was a big risk. Everything that has happened along the way has only confirmed these suspicions. Where are the curves right now? The curves are in the process of doing the bad steepening, which is where short-term rates go down faster than (46/57)
longer-term rates, which is the absolute worst thing you want to see, because that means that this thing that we've been afraid of all the time, it has already begun. The market's place is saying, everything that we thought was going to happen has actually happened and now it's actually started. The thing that we're worried about has started. How bad can things get? You look around at what happened in the last week and you see some of these occurrences, some of these instances, some of these transactions, daily moves, volatility. I know people in the stock market are thinking, this is no big deal, but in these deep credit and monetary system, it was a gigantic earthquake, which, again, we don't associate these with just normal problems. This is 2020 stuff. This is 2008 stuff. This is the 1970s kind of stuff. As far as the downside case goes, it's pretty far down. Again, it's not the end of the world. It's not like society's going to collapse. It's not going to be like 1930 and 31, but (47/57)
that doesn't mean we're not in for a very, very rough ride ahead. Now, as far as how we're getting there, it really all comes down to how the monetary system works. It's not really about interest rates, in my view. It's about risk aversion amongst those who actually do provide elasticity in the monetary system. That's these money dealer banks. That's why I keep coming back to the most interesting question is, why aren't they doing the job that we need them to do? That includes collateral redistribution. As I said, Silicon Valley Bank or any regional bank usually goes to a dealer and says, I need you to transform my ill-liquid loans into some usable collateral. Usually, the dealer says, that's no problem, but the dealer does undertake some risk in that situation. If the dealers are becoming risk averse, and we'll get to reasons why that might be, but if the dealers are becoming risk averse, has nothing to do with the interest rates. If the dealers are becoming risk averse, they're going (48/57)
to not want to do their dealer activities. We've seen extreme examples of this that have nothing to do with interest rates, like September 2019. The interest rate on repo got extremely high, which should have enticed dealers to move into the marketplace. Instead, they said, ooh, something's really going on here. I'm going to pull my stuff out. That's the type of behavior that we see repeatedly in these financial crises. The money dealers who create currency and liquidity and elasticity, when they're confronted with these types of situations, again, the lesson of bear's turned, they add their own cash cushions. They de-risk, they hedge. If the money dealers are hedging and de-risking, it leaves everybody else exposed to problems in the system, which brings us back to what is it that dealers are so afraid of, that they're de-risking and leaving the entire monetary system exposed to these types of events. That's a number of things, including problems in their own books. It's economic (49/57)
outcomes. It's looking at the economy and saying, China's not looking all that great. Global trade's already collapsing in Asia. There's a number of reasons why dealers would become risk averse, that I don't think we need to bring the Fed into it. If as dealers become risk averse, as I said before, it gets into this self-reinforcing downward spiral, because they become risk averse, the currency system starts to become inelastic, liquidity drops. It has harmful effects on the economy, which only proves the suspicion that dealers had in the first place. They say, everything that we are afraid of has happened. They start to pull more of their balance sheet back, become even more risk averse, and round, and round, and round we go. Every step in stage in the crisis merely serves to confirm the worst fears, which contributes to the next stage down the road. SVB, what happened over the last week, is a prominent stage in that crisis, which is confirming to dealers what they've been worried (50/57)
about all along, which means they're going to be doing like they did in the wake of Bear Stearns, all of the things we don't want them to do. Again, regardless of what J. Powell does with interest rates, the consequences have already been set in motion. You mentioned these liquidity bottlenecks. March is one, and September is one. I wonder if what we're just going to end up seeing here is the expansion of lending through this new term funding program and increasingly new emergency facilities to continue to try and liquefy markets. That's what they're left doing, because at the end of the day, they're not really a central bank. If it's not a central bank in the classical sense, where Walter Badgett said, lend freely at higher rates at good collateral, that's not what the Fed actually does. What the Fed tries to do is they actually admit this. They try to be a market of last resort, because what they're saying is, like Silicon Valley Bank, when the monetary system, when all these dealers (51/57)
start to contract, when any elasticity grows and illiquidity, all that bad stuff happens, what happens to the individual firms? When they can't borrow in repo, when they're stuck and they have no other options, they have to start fire-sailing their assets. As those assets start to be sold in the marketplace, it leads to even more second-order effects where the markets themselves become illiquid and everybody else has to fire-sail more, because prices go down in uncontrolled fashion. What the Fed says, what a classical central bank should do is come in at the beginning and interrupt that process before it even begins, because they'll say, we're going to step into the monetary system before it becomes inelastic at any point. But the Fed can't do that. The Fed is not a central bank. So it tries to come in at the end and say, well, we'll liquefy these markets so that these fire sales don't turn into self-reinforcing spirals. And that's what the BTFP is actually about. That's what FEMA was (52/57)
about in March of 2020. That's what the PDCF was in 2008. But as you'll note, as the Fed comes out with these four-letter programs all the time, they don't work. They don't lead to a resolution of the crisis. The Fed introduced the PDCF in the wake of Bear Stearns. In all summer, you read the transcripts from the FOMC, they said, this PDCF is genius. It's going to prevent any type of crisis. Then Lehman Brothers hit, and guess what? They're the worst ones since the Great Depression. They introduced another one, the Terms Securities Lending Facility just before Bear Stearns failed. That didn't work either. So the Fed comes out with all of these new tools that don't prevent a crisis from happening. You can argue, as the Fed actually does, when you hear what they're saying, we were effective not in preventing the crisis, but in limiting their downside. That's a very different set of circumstances than what people imagine. And it's not a central bank. But so the real thing here, these (53/57)
four-letter tools, they're not liquidity tools. Ben Bernanke said this. He's let the cat out of the bag. I think it was March of 2015, his first blog post at Brookings. He said, when I was at the Fed, I told everybody, I reminded everybody that our job is 98% talk. And that the most valuable tool that we have in our toolkit is not these four-letter stuff that we continue to bring up. It is that talk. If you believe that the Fed's BTFP will be effective, even though you have no idea what it is, no idea how it works, if you're comforted by the Fed doing something, then the Fed believes that your comfort will lead to a, it will help the situation because positive emotions and optimism are, they always come back to emotion. Yeah. Unfortunately, that bullshit doesn't work anymore. Just like forward guidance doesn't work anymore. But that's the thing, Dimitri, that's what the Fed offers. Ben Bernanke was right. It worked to some degree in 2008. It worked to some degree in 2012 when Mario (54/57)
Draghi gave his whatever takes speech. I think that word and you paradigm now, and that's sort of what I was getting at when I mentioned the inefficacy of forward guidance and all of these advisory press conferences that Jay Powell's had to give, and I was sending out all the other FOMC members to talk or Nick Timorese to write an article because the market just doesn't get it because that transmission mechanism is broken. Jeff, I'm going to move the rest of our conversation onto the premium feed. I want to switch gears a bit in the second hour and kind of look big picture at what the system ends up looking like coming out the other end of whatever this is that we're going through right now because it feels like we've been living the last 13 or 14 years in this period of suspended animation post great financial crisis. Now, we're kind of back to dealing with the underlying problems that were never really resolved. Only those problems are now bigger and implicate the efficacy of the (55/57)
monetary system itself, the role of the dollar as a global reserve currency, and the bond market of developed economies like the UK and Japan. At the same time as we're dealing with an open-ended proxy war against Russia and Ukraine and what feels like the footsteps of a new Cold War with China, that could eventually remake the global security environment. 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 Jeff, 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. Jeff, stick around. We're going to move the second hour of our (56/57)
conversation onto the premium feed. All right, can't wait. 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. (57/57)
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 today is Leland Miller, Chief Executive Officer of China Beige Book, which runs the largest private data collection operation in the world, inside China, interviewing thousands of Chinese firms across every major sector and region, focusing not just on the growth picture, but also key dynamics, such as inflation, the jobs market, credit, and shadow finance. Leland, welcome to Hidden Forces. Thanks for having me. I'm very excited to have you on Leland. How are you doing? Doing well, all things considered. Bunkered (1/57)
down, trying to stay safe. How long have you been in quarantine? Now, have you been in quarantine on US time or Beijing time? US time. My team is based in New York, so I have actually been out of New York for the last over three weeks, bunkered down outside of New York, self-quarantining with the family. Our team has spread out everywhere, New York, DC, San Francisco, London, Hong Kong, and doing what we need to do remotely. Yeah. I've been also, I'm based in New York City. That's where our studio is, but I've basically been out of the city for more than a month now. It's wild, and doing all of these interviews remotely, but in some ways I find that people are actually more available because everyone's in quarantine. So I want to discuss China today. Surprise, surprise. But before we do, I'd love for you to give our listeners a sense of who you are. I want to also know obviously what is China-Bajbook, but also how did you get into this business? I mean, were you always a data sleuth, (2/57)
data analyst, someone who was interested in economics? How did you get into this line of work? Yeah, not at all. My background is in China. I've been doing the Chinese language through college. I studied Chinese after college in Taiwan. Did a language fellowship over there, and also did a master's in Chinese history at Oxford University. So I have had my foot in the China world for many years, but after I finished grad school, I went to law school. So I was at the University of Virginia for a number of years, and from there went into law at a big law firm where I was doing transactional work out of both New York and Hong Kong. But while billing these mega law firm hours, I continued to keep active on China. And I was working on China issues in DC. I was writing a lot. I was speaking a lot. I was doing advisory work for buy-side funds even early on. And eventually, I just decided to jump over to something I enjoyed most. I was counseling a buy-side fund once who was asking me some (3/57)
question about official inflation numbers for month to month. And I said, look, none of this matters. And they snapped back at me. And they said, if this doesn't matter, why don't you do something that does matter? So I said, ouch, but good point. And I went back and thought a lot about that. And part of the process got me together with some other people who are similarly frustrated with the state of the China watching industry, basically taking China's numbers, official numbers and telling a story, even though everybody knows they're not the real deal. And I came to this conclusion. This is what I wanted to do. I want to try something big and bold, something that everybody said wasn't possible, which was to go to China, collect data because we couldn't trust anyone else's take, collect big data in China and try to tell the story ourselves. So back in 2010, 2011, I raised funds for China-Beijing book. And we gave it a try. We were told by everybody we couldn't do it. China's a black (4/57)
box. They'll never let you operate. Firms won't tell you what's actually going on. And we were not just pleasantly surprised, but we found that we could get just about any type of information we wanted if we asked the right questions. And we kept making the survey bigger and bigger and bigger. And we didn't target just things like what growth is like, although that's a big portion of what we do. But we were tracking inflation metrics. We were tracking the jobs market. And we were tracking the credit environment, which is something that nobody's ever been able to do before. And within credit, we started tracking shadow finance. So this has really gone in some amazing ways that even we didn't think was possible. And we've been doing this for almost 10 years. So it's quite a lot of fun. I'm very interested in this, what you said about asking the right questions. What do you mean when you say that? Well, I think one of the major problems with going into China is that the people don't know (5/57)
how to survey in China. And I'm going to keep some of this close to a chest because some of these are our proprietary secrets here. But I think the major problem was you typically had people who were China experts trying to get data, or you had poll takers who didn't know China. And there was never the right combination. So when we started this, we had several different arms. We had longtime China experts. We had professional poll takers, people who have done international survey taking for their whole career. And we had financial and data analysts who were able to crunch the data. So when we put all this together, we figured out the right way to do this. And the right way to do it is to not just use a few firms and not just concentrate in popular big cities or on the coast or just large firms. The entire purpose behind China Basebook was doing away with all the other biases that made the rest of the data questionable. So for instance, when you look at the PMIs, the Purchasing Managers (6/57)
Indexes, you've got a state PMI, which overly focuses on big firms and certain geographical locations. And then you've got a private PMI that focuses on smaller firms, often private firms, and the other kinds of geographical locations. And usually one PMI is telling a different story because there's not just one China. There's a lot of different Chinas. And so the purpose of China Basebook was to make something so big and so comprehensive that we were taking in all the different Chinas at once. We were telling their individual stories across major regions, across major sectors, across dozens of subsectors, across private firms and state firms in every firm size. And then we were putting the combined story together to tell the real story of what was going on across all of China. How did you go about approaching these companies? Like initially? Because I imagine now it's easier, right? Well, it's not really understood. Some of this is very sophisticated survey taking methods that I don't (7/57)
think people are aware of. But essentially, one of the problems people have is that they usually go straight to the companies and they go in the front door and they ask someone to fill out a survey and often that person is a party official or a PR official or someone else who's not familiar with the actual lines of business. And then you get information that it's not the real deal. It's not usable information. It's what people or the party or the company want you to be reporting, not what is actually happening at these companies. So we had to find methods to get to the right people at the right companies and then expand it. So it's easy enough to do some survey taking in Beijing or Shanghai or Guangdong. But we had to go to the West and we had to go to the center and we had to go all across China in order to make sure that we weren't telling the story of the coast and not the periphery. So this has taken a lot of time. It took us about two years of on the ground work to get this thing (8/57)
up and running. But now it's entirely electronic. We have an enormous interactive database where all the private data information is used and utilized by clients. Six, five million rows of data, 100,000 different data metrics. This truly big data and I would say it's probably the only big data that exists outside of a handful of China tech companies and Beijing government. Another interesting thing you said was the right people. So the right people and the right questions. That makes sense. That's interesting because the obvious question for someone like me is what stops the CCP or local government officials from basically, if not directly, indirectly communicating to these companies that they should not be communicating directly or honestly with you. I mean, there's a general understanding in China that what the government wants, the government gets, which is why I was asking. That's interesting. So again, at all times, being aware that you have proprietary methods, what can you tell (9/57)
our listeners about how you gather your data? Is your data all surveys, for example? Yes, it is. So what we do is we go to over 3,300 firms at a time. We release data eight times a year, although we've moved towards weekly data releases of late and we go to these thousands of firms and we ask them, how's your business doing? What are you seeing? How much you paying for capital? How often are you accessing it? What are you doing with your workforces? You're firing people, you're hiring people. What are the prices you're paying? What are the input costs that you're paying? The prices you're selling at? All different kinds of questions and then we put together a composite picture of a sub-sector and then from those sub-sectors, we put together a composite picture of the sector, so manufacturing, services, retail, property, commodities, agriculture, etc. And then from that, we put together a comprehensive national picture of the entire macro economy. So basically, we build up from many, (10/57)
many pieces of granular information on the ground and build it up to one aggregate picture of what the true China growth and other dynamics are. So one of the problems with China is there's no benchmark, right? You're not going to compare the accuracy of your data to the official numbers coming out of China, right? So how do you gauge the accuracy of what China-Basebook puts out there? Yeah, that's actually a very astute point because one of the problems we had when we started this out was people would tell us, OK, we believe that you've got the real picture on China, but if they're announcing fake numbers and markets believe or are willing to believe the fake numbers, then what advantage do we have by using your stuff? So it took us a bunch of years to sort of figure out exactly how to navigate this universe. One thing that I was told very early on by a CEO was that, you know, we don't care what China's actual numbers are, we care what markets' perception of those numbers are. And it (11/57)
got us thinking. So, you know, the first thing we had to do was understand how our numbers correlated. So we get our stuff in real time and even official numbers, to the extent they're not manipulated, but they lack so that we were always getting a story several months ahead of what the Chinese data were. Now, they can manipulate them at any given time. They can smooth it out. But eventually, directionally, they're going to tell a story. And so we were always on top of that. But I think we also found out in times like 2013, when there was a credit crisis, 2015, when everyone thought the economy was falling apart, that the Chinese don't announce bad news ahead of time. They're not going to tell you things are falling apart ahead of time. So it only took a handful of times for clients and for companies and for economies to be totally sideswiped by a China growth panic to see, wait a second, we need a canary in the coal mine. So I think the first real group of companies that came to us as (12/57)
clients were one saying, we're sick of not having any understanding of where the messaging is failing. We want to know if there's a problem that's right around the corner. We're not going to get that from official data. You can help us with that. And I think that started it. And from there, we've really been able to get more and more data so that we have correlations to all the major indicators. We just run at two to three to four, sometimes six months ahead of what official data reports. So it's become a, it's a work in progress, but it's something that's been very interesting. And now it's necessary because China's successes and failures dictate global portfolios everywhere. One of the things that I wanted to ask you about has to do with your use of quarter to quarter comparisons in your reports. Is there a reason for that? And do you look at year over year? Sure. So one of the advantages to having this all in one giant database is you can run any type of comparisons you'd like. And (13/57)
one of the things that we do when we write out our analysis is we put the quarter on quarter figure on there. We put the year on year figure there so that the data presented both ways. I think if you, you can't miss the year on year perspective, particularly because that's the way the Chinese government reports its data. But the quarter on quarter is extremely important too, because that gives you a sense of how things have changed over the course of a few weeks or months. In terms of reporting quarterly data or eight times a year data, instead of going into months and weeks, it's, you know, what we found is that when you report data out of China in particular, but this applies to most monthly data, you get an extraordinary amount of white noise. And what, what are the problems with the PMI, which is, which was released monthly. And this is not just a China issue. This is any PMI released monthly. Is it people make a lot of very small movements? You know, you can have a movement in one (14/57)
month that goes up a little, the second month up a little, the third month, a big draw. For two months, you may have tricked yourself into thinking there was some sort of positive momentum, but the real story of the quarter was a more precipitous drop. Or the reverse of that, you know, two baby dips and a large improvement. It's always good to have frequent data. But if you have too much white noise, it won't tell the story. And we, we ran different time periods for this. We settled on the types of periods that were actually proving to us to be forward looking. We could tell it was happening both in, in reality and in Chinese official data, weeks, months, sometimes quarters ahead of what was being announced when we did our data in a certain way. And that's sort of the methodology we settled on. One of the reasons I asked about that specifically about quarter to quarter versus year over year has to do with the incidence of Chinese lunar new year during this most recent quarter that you (15/57)
reviewed in your early look brief. How does that factor into the data? The fact that I assume that was during a time of year where there would be a lull and economic activity? Sure. And you know, the problem is you cannot make much as you say. You can't make much out of January to February comparisons because sometimes lunar new year falls one place. Sometimes it falls the other. Even Beijing has recognized this in the last couple of years by combining Jan Feb data in most instances. So if you're, you're never going to come out with any really important conclusions about jumps in growth or falls in growth between January and February. The most effective way to looking at Q1 is by looking at a quarterly figure. That doesn't mean you can't break apart the figure. So here are the differences when we were looking at what was happening in China as coronavirus was spreading. We broke it apart and we were reporting weekly updates. Here's a share of firms that were reporting back to work by (16/57)
sector by subsector by state versus private. And here are the results that they were telling us in terms of output and sales and sales prices. So you can present certain data, but you can never oversell January to February data as being something major. The most effective way of looking at this is from a quarterly lens. But so long as you understand that, you can break it down into smaller time periods. But this is something that Q1 operates just very different than most other quarters. All right. So let's get into what your report shows for Q1. Q1 is the quarter where China began to enact its lockdowns, right? Did it begin at all in December? When did this start? It really started in January. So you had reports of something fishy happening in Wuhan and a couple other places in December, arguably even in November. But nobody knew what this was. I mean, you've seen epidemics in the past where you've seen swine flu, you've seen diseases wiping out the chickens. You've seen all kinds of (17/57)
things that were just a very small micro China story. They were tragic, but they weren't global issues. And so very few people were paying attention to them before January. I think January is when this became a bigger issue. The Chinese government started to treat it more seriously. You had potential contagion problems simply because on Chinese lunar new year, you have everyone traveling everywhere. And so the potential of a spread of the virus became a bigger issue. And then when people didn't go back to work after lunar new year, that was when I think the entire world took serious notice of this. So it's a Q1 story for China, even though you had some issues before it. So there are two, well, there are multiple aspects of your report, obviously. And right now I'm looking at both the key economic indicators for Q1, but I'm also looking at the credit shadow finance monitor report. Let's go through the economic, the sort of real economy to begin with. What have we seen based on your (18/57)
numbers in terms of economic contraction in the first quarter in China? Yeah, well, the thing that jumped out from the very beginning, when I say that we started reporting numbers in mid-February, that was almost a month, at least two to three weeks before anybody else was putting out any type of numbers on this whatsoever. And the depth of contraction, the breath of weakness, was really eye-popping. These are the worst numbers we've ever seen, and there's never been anything close. Every sector was in severe contraction. Every region we track was in severe contraction. Every sub-sector, I think, except maybe one or two were in severe contraction. Every headline metric we saw was showing severe weakness. So this wasn't something we'd ever seen before. And what was interesting is that it was less surprising looking at the data in February when you were looking at all these firms in lockdown for shutdowns of certain sectors like property and, of course, manufacturing factories being shut (19/57)
down. So you don't expect the numbers to be anything other than terrible during February. What really became interesting is that when we moved into mid-March and the Chinese government started pushing people back to work and started advertising the idea that firms were reopening at this torrid pace and that workforces were back and that things were getting up and running and lights were being turned on, we were reporting all through that period. And what we thought was fascinating is that even as firms were going back to work, and we saw that by our closure rate falling and firms reporting being back to work in a whole or apart, the data kept getting worse. So the output was not going up, firms were still reporting very bad data. And so the idea of a recovery that people had on a v-shaped recovery in March into April, it became very clear very early on that this was never going to happen. Firms were just getting their bearings. Even when they were reopening, they weren't returning to (20/57)
any type of growth. And March data were much, much weaker than people thought. And we saw that from the very beginning in March. So there was less surprise when some of these weak numbers came out even from China's government because it's what we had been seeing all the way through the quarter, getting worse, if anything, not getting better, even as we got into mid-March. Does that mean that a good number of people were not going back to work? Does it also mean that firms in order to appease workers or enact safety measures limited the amount of time and productivity of firms? Is that partly what it is? Is it a reflection of the productivity hit that you get when you have to run a factory with safety and NPIs as non-pharmaceutical interventions, as being a core aspects of your operations? No question that was part of it. But the real problem was that going back to work didn't mean what people thought it meant. So you had these headlines, China's getting back to work on the road to (21/57)
recovery. Well, what does back to work mean? Well, you would have labor forces forced back to work. You had police escorts bringing buses of migrant workers from the countryside into factories in the Rust Belt in order to get factories up and running. You had executives slowly returning from working remotely. You had lights going on. You had factories conveyor belts turning on, but you didn't have anything happening. Output wasn't happening. You weren't seeing any of the internal metrics getting better. Firms themselves were reporting to us that their workforces were coming back and their lights were going on, but they weren't doing anything. I think that's what people were missing early on. They were obsessed with the idea of getting back to work without realizing that getting back to work doesn't mean anything if you're not doing anything when you get there. Well, that leads into a question that I had, which really has to do with what kind of... I mean, are we underplaying or (22/57)
underestimating the psychological barrier to interaction, whether inside or outside of the workplace that people in China will have, especially in Hubei province, where was the epicenter of all of this, and the dampening effect that this could have in terms of Q2 output? Yes. I think that it's not surprising if you think about it, but look, these conditions that they will be returning to and that those of us in the US will be returning to at some point are not the status quo ante. This is not what we saw before. If you're around somebody on your factory line or in a store when you're trying to buy something and someone starts coughing, you're going to run for the door. I mean, I was in a pharmacy the other day and someone walked by me and started coughing and I almost did a cartwheel in the other direction. I was getting away from them so fast. Do you wear a mask when you go out? I have a mask. It's a crappy mask. I do wear gloves. I've got someone hopefully sending me a few masks I (23/57)
can give to my family, but we have been more and more protective of this simply because doing as much work in Asia and in China, we don't see this as odd as I think most Americans see the idea of masks. I remember early on in January, I was walking through the airport and you'd see someone with a mask on, particularly if they're from Asia, and people would recoil even though that was the sensible thing to be doing. Not just the sensible thing, but when I see someone wearing a mask, I think, oh, this person is far more responsible. I have far less to worry about. It isn't even that I've less to worry about because they're wearing a mask and therefore I'm less likely to get an infection from whatever they may or may not have, but the fact it's a way of signaling, hey, I'm extra careful. You're right. That is entirely something that we're not used to here. The West is going to have to learn this lesson. I think that whatever the road to recovery is in the United States and Canada and (24/57)
Europe and elsewhere, part of it's going to have to be walking around with a mask for the next several months because this is the new reality. We have to make sure that we're not contagious and other people are not giving us something simply by passing by and having particles pass between us. This is the new reality. I don't think people have thought this through and there are no answers yet, but yes, a mask is going to start becoming a common feature in the weeks and months ahead. Well, one of the things that we've talked about, not to get too far off track here, but it's almost like everything is COVID-19 these days. Something I've talked about on this show and other interviews that I've done is that I think the narrative in the US does not serve us very well because it suggests or it's gotten people thinking that we have to just go through this short lockdown period and once we flatten the curve, then we're done. But that's not actually what's going to happen and people are going to (25/57)
have to learn how to live with this virus. There's no clear evidence that we're not going to have a second wave, for example. In fact, some of the studies I've looked at suggest that the flatter the curve based on mitigation measures and quarantines and things like this, NPIs, the more you can flatten it in the initial phase, the more it peaks later on and that the area under the distribution tends to be pretty much statistically not identical, but the difference is not that great between cities that enact draconian quarantines and those that don't in the long run. So I think there's a concern about a political crisis in the United States when they go to lift the quarantine in some of these cities like New York and the numbers start going up and people start to panic because they've got different ideas in their head. But to this point about a second wave, what are we seeing and what are you seeing with your data and your surveys in terms of this second wave? I've already started seeing (26/57)
there have been reports coming out in mainstream US media outlets. I saw a video today posted online of someone in a Chinese city collapsing. Once again, these are videos that were circulating commonly months ago. What are you seeing in terms of reinfections or rather an increase again in prevalence of the virus now that the quarantines have been lifted? Yeah, it's too early to know. I mean, the second wave can mean a lot of things. It can mean letting up on draconian measures and then seeing social distancing go away and so you get more infections. It can mean allowing more people to travel to China. You see what's happening on the Russian border. They're actually putting new cities into lockdown because people are traveling into China and re-spreading it. There's serious questions about whether you have immunity once you get it. So we could be seeing a first wave now. People could be relaxed. It could either be because of the weather or because of some temporary immunity. And then (27/57)
you could see a reinfection wave hit again a few weeks or months from now. There's just so many questions about this. And so this is what has made economic strategy so difficult around it. We don't know the medical aspects of this. We don't know whether this is going to be a six-month story, a three-month story, an 18-month story, and there's going to be a lot of trial and error here. And I think the lessons we learned from so far is that no one has been able to control this so far. You look at Singapore, which is a success story, Singapore as we speak is going back into lockdown because of some sort of second wave. And that's also probably going to happen other places as they ease up on the original lockdowns. So enormous number of questions right now. That's made the job for policymakers trying to figure out an economic recovery path out of this nearly impossible. So here's a question for you, and I'm going to ask it in a few different ways during the course of this conversation, (28/57)
because I think it's very important. Because on the one hand, there are obviously many difficulties in gathering credible data in real time that tells a backward-looking picture about the Chinese economy. That's challenging enough. It's even harder to make projections about how the economy is going to look. And one of my questions is how do you incorporate the virus, the impact of the virus, and the impact of the monitoring and mitigation measures that will continue to be taken going forward? How do you incorporate that into your economic forecast for China? Well, one way is we collect data on it. So for instance, what we're doing for April is we're going to have an entirely new discrete survey out in the field asking people about supply chain questions, about possible COVID-19 relapse questions, asking about credit conditions, and how the economic stimulus and the aftermath is happening. I mean, we know that they're pumping an enormous amount of money into the economy. Everybody who's (29/57)
seeing this is, but who's being part of this? So what do we know about their stimulus efforts? Because for me, when I've tried to study China, it's almost like I had written out some questions for you and I scratched them all out before I came in here here, because I was like, I'm asking these questions from a Westerners perspective. And the way that the Chinese economy expands credit and the way that credit circulates is totally different than how we think about it here. So what are they doing? And is it in any way unusual or even significantly greater than what we've seen in past economic downturns? Absolutely. This is unprecedented. And I spent a lot of my time explaining the nuances of China's non-commercial financial system and how it differs from Western commercial financial systems and how the West allows risk taking and it's not backstopped by the state and allows firms to fail and all these other things. This is not a time in which any of that applies. I think what you're (30/57)
seeing for the US Fed right now is the same type of approach that China's looking at and everyone else is looking at, which is this is such a massive all-encompassing issue. It's a supply shock couple with a demand shock, the likes of which we've never really seen before, that you have to throw everything at this. So looking at the China example, they are trying to backstop everything. I mean, the biggest threat to the party has always been social unrest. Social unrest comes from people who don't have jobs. So they don't want to lay off workers. They don't want firms to go out of business, but you can't backstop everything. And even if you could, you can't do it all at once. So one of the big questions for us is what are they prioritizing and how fast are they getting this stimulus out and what are they not doing? So one thing we are seeing is we're seeing more stimulus early on going to the usual suspects, manufacturing firms, larger firms, state firms, coastal firms, the bread (31/57)
baskets, the traditional bread baskets of growth. That doesn't mean everybody else isn't going to get it. It just means that those guys are getting priority. Another thing that we've seen is that the credit numbers in the first quarter are actually somewhat deceptive because they're lower than one would think. And that's because of physical disruptions to the credit market. So people could not go out and get the loans they needed. They cannot issue bonds because the economy was in lockdown. Banks were closed. People couldn't travel places. Well, the banks couldn't be open remotely. Why is that something that would seem to be one of those things that wouldn't need to be impacted by the lockdown or at the margin shore? But why would banks be unable to extend credit during a lockdown? Oh, some can. Some can. But the entire Chinese economy, it wasn't in a place, no economy on earth is in a place where you just call up your banker and then every loan would be extended automatically. US is (32/57)
trying to do that right now with the small business loans. But it's not that this stuff isn't happening. It's an enormous logistical nightmare. You've got millions of firms in China trying to access credit. You've got consumers who need to be paid. You need credit too. So it's a logistical nightmare. So what I think you're seeing right now is you're seeing the levels of credit high and will continue to get higher as we go along simply as they run through the priority line. It does a queue for credit and they're going to try to give everybody everything they can. But interestingly, the one thing they have not done yet, but we're watching this closely, is go to the old playbook of heavy infrastructure stimulus. So back in 2016, you saw it awful. You saw a real scare in mid-2015. You saw a total China market panic in early 2016. And one of the ways China recovered from that was building lots of things. Many of these were bridges to nowhere. Others were apartment complexes it wouldn't be (33/57)
lived in. Others were productive things. But basically just building, building, building. This is something that China has done a lot of after that happened. And I think they saw that as a necessary evil because it was in the run up to the party congress where Xi Jinping was cementing his rule. There were some political strength to the economy that was needed for political reasons. After that was done, I think a lot of people in Beijing, a lot of influential people in Beijing said, this is it. We're not going to try to do this anymore. We will stimulate the economy, but we're not going to do it the old school way of just building things. And amazingly, that was what we saw in our data. In 2019, which was a much weaker year than 2018, you actually saw stimulus because you always see stimulus in China, but you didn't see it going into transportation construction or any of these sectors where they're just building. What you saw is broader credit provision to firms. So they would stop (34/57)
firms from going out of business. Small medium sized enterprises who typically couldn't get credit, they were given credit. Private firms who couldn't get as much credit as state firms, they were given credit. Agricultural firms, they were given credit. So there was stimulus, there was more credit provided, but you didn't see a resort to the old playbook of just building things, which is what scares a lot of people in Beijing about the non-performing loans and the debt to GDP ratio. It scares people in Beijing a lot more than it does in the West in terms of views of China's economy. They're much more cognizant of their problems in China than they are outside of China. Well, they've stimulated that sector so much that they've actually had to go abroad to find places to build stuff. That's right. And they know that. And so this, until coronavirus took hold, I think their playbook had moved away from this. They thought it was a danger to the party to continue to rely on this lever. But I (35/57)
think what's interesting now is there are conversations going on in Beijing. How much do we have to fall back into this? Because the story of China's growth is no longer a story of domestic resiliency. Q1 was terrible. They're in severe contraction and they are recovering from that contraction in Q2. But the problem is the rest of the world is shutting down. All of China's trading partners are shutting down one by one. The US and Europe, of course, at the top of the list. So there's no global demand. Export orders are falling off a cliff, which means that the original recovery story they thought they could tell back in January or even February, they can't tell anymore, which means that not only are the party's growth targets way, way, way out of the line of possibility, although they haven't admitted that quite yet. But the idea of how do we spur growth in the absence of demand? Well, we don't know how much of this demand is going to be taken off, lying on for how long. What are we (36/57)
going to need to do that we didn't think we'd need to do before? And that's why we're watching our real estate construction data so closely, because this has not been an option for them for a long time, but it may become an option later in the year when they realize that they're going to have a very difficult time not being in a contraction all through the first half of the year. Jesus, that's the second leg of the story. The virus we talked about and we'll continue to talk about, which is the uncertainty around the virus, the mitigation efforts needed domestically to animate the supply side of this equation. But on the demand side, China has always relied on an export market. They have talked about wanting to transition to a consumer-led economy, but they have not been able to do that effectively. And now they depend on foreign consumers, as they're coming back online because they got this virus late, they're depending on the rest of the world to be available to demand the goods that (37/57)
they can supply. But as we're seeing, the rest of the world is going into lockdown. So what happens in China? You're saying that inevitably, or it increases the likelihood, perhaps a better way of putting it, that you're going to see them roll back to break their previous commitments and try and stimulate their manufacturing sector further. So are you seeing that in the loan uptake figures? What sectors have been taking the most amount of credit early on so far? Yeah, we're not seeing it yet. So we are seeing more loan uptake in manufacturing and we are seeing it from larger and state firms. That's not surprising. But I think that the reason the numbers aren't higher is simply the disruptions of the credit market. They haven't gotten things back. I think as the next few months, as we look into the next few months, I think the credit numbers are going to continue to go up and up and up and up and up. There's this idea that China is resisting the ways of the West right now and they're (38/57)
going to try to do it a lot more gently. They're not going to be able to do it gently. There is no solution to this problem. And even if there was, the Chinese way is to throw an enormous amounts of credit at it. So you're going to see a lot more credit going in the economy. You're going to see a discussion about backtracking into heavy infrastructure stimulus. And you're going to see some very, very difficult decisions being made over who gets the available credit and who gets left out. Because no matter how generous they want to be and no matter how much they want to support everybody, they're not going to be able to. It will be impossible. They cannot backstop everyone and everything. So there are going to be losers in this and those losers are going to do very poorly over the next year. So this is the decision tree that's being worked out in Beijing right now. Who are the losers there could be? This is tough. So I have another question here, which is how is China going to get the (39/57)
dollars it needs to import the raw materials it needs in order to ramp up this export machine? How is that going to work in the current environment? Because US Central Bank has not set up swap lines. It set up swap facilities with many countries, including many new emerging market economies, has not done that with the People's Bank of China. What's going to happen there? Well, I have a somewhat different opinion than others. I mean, yes, the Fed doesn't have a swap line with the PBOC and yes, there would be severe political pushback from the idea of exporting dollars to our adversary China. But the Fed also doesn't have a swap line with other banks of allies. I don't think we have one with Korea, for instance. So the idea that if things got really bad and we're talking about some of these, you know, the idea that this is going to be a great depression, services are dead for the next six months, unemployment, it just goes on and on and on and businesses can't get back to work in any (40/57)
meaningful way. I think a lot of things that were not possible before will become possible. You've already seen that with the type of programs the Fed has released in the last few weeks. I think that there's just no level they won't go eventually in order to stabilize or save the economy. I think that includes extending swap lines to the PBOC eventually. I think that means extraordinary types of fiscal monetary policy in both the US and China and everywhere else. But what would be the reason for doing that? Would it be because they'd be concerned that they would begin to flood the market with US Treasury securities in order to raise the dollars they need? Would it be because they would be concerned that the absence of Chinese manufactured goods would spike inflation at the same time as Americans needed to keep consumer prices low because they're expanding the money supply and expanding fiscal stimulus? I mean, what would be the logic there that the Fed would do that? These are the (41/57)
issues that people are talking about, but the reality is at the end of the day, when things get really bad, the world floods into safety and safety is a US dollar. Now there is an issue, of course, with a lot of Chinese companies having taken out dollar-denominated loans. There is a vulnerability there. It is nowhere near what it was a number of years ago when China was extremely vulnerable on this. But look, you have in a world where the dollar is strong and appreciating, you need to have dollars yourselves. And I think that if the PBOC wasn't able to get access to dollars, you'd have a major problem that would circle back on the rest of the global economy. It would hit emerging markets and then it would hit everyone else. So I think the idea is that the dollar is the flight to safety. And I think if we're going into something truly horrific, then there will have to be access to the dollar from just about every one of the major players. And I think if there was a restriction on that (42/57)
for too long, it would cause a rupture in the system. So here's another question for you. If China's going to go the route of stimulating its manufacturing engine, but the rest of the world isn't really available to purchase the outstanding supply in a traditionally commercial way, would we begin to see China engaged in more of these favors abroad like they've been doing recently, like they gave masks and PPE to countries like Greece and Italy as part of their, I don't know how you would call it, trade diplomacy form policy, because the Chinese economy and the Chinese political system are much more connected than let's say the US is. So maybe this is a way of kind of asking you also how coronavirus and how this entire situation could be an impetus for a narrative shift by the CCP to explain not just its poor growth numbers now, not just its poor growth numbers going back quarters as a result of mistakes that the party has made not on account of the virus, i.e. take advantage of this (43/57)
crisis, but also take advantage of this crisis to further geopolitical ambitions of the party. Yeah, well, on the economic side, what we have counseled them to do for years is take advantage of a slowing global environment and to allow their growth targets to go away to accept slower, healthier growth. The Chinese economy is not growing. Let's just take COVID out of the picture entirely. The Chinese economy is not growing at 6%. It was probably growing at about half that, but they had to advertise it was growing at 6% because the deal the party has made with its people is that we will continue to grow the economy at this pace. And that's why you should trust us as your one party and trust us with your leadership. It's been outdated for a while. They should take advantage of this to say, look, what we're here to do is make China stronger, not faster growing in an unsustainable way. And we were going to buckle down and accept lower rates of growth, some of most of which was foisted on us (44/57)
by circumstances outside of control, whether it's a trade war or a global manufacturing recession or a coronavirus pandemic. And that's what they should do, but they haven't done that yet. So the jury's out on that. In terms of the geopolitical side, this is what they've been doing for years and years and years. People are seeing the masks go out and are thinking this is some new playbook. It just used to be briefcases of dollar bills before. This is always this kind of China's influence diplomacy. They're always trying to do things in order to achieve soft power goals. So they're going to have to be a little bit more aggressive about it because it's a tougher environment out there. But I think this isn't so much a paradigm shift as it's forcing China to do things that before it would rather have done under the radar, away from the public view. And now it's forcing them to be much more public about this type of thing, because quite frankly, people are mad at China because they lied (45/57)
about the coronavirus pandemic spread early on. They wouldn't let the CDC in. They wouldn't let the WHO in a meaningful way. And this thing spread. So there's a lot of people angry about China. And in the aftermath, they tried to secure global leadership of this thing by saying, we cured it in China. It was probably done by the US military anyway. And it really backfired. I mean, this was just absolute incompetent diplomatic management. And as a result, they're clawing back from where they were before and trying to act like a responsible party, which I certainly applaud. But this is nothing new. It's just more difficult circumstances, forcing to light things that the party has done for years and years and years and years. Well, they just issued some new meat guidelines, meat like diet guidelines, and they reclassified dogs as pets, not livestock. So either they are trying to see that. Yeah, exactly. Yeah, as a dog lover, I'm happy to see that. So either they're signaling that this has (46/57)
not come from our bio weapons facility in Wuhan, or that this is not the US military doing it. It's one way or the other. It certainly doesn't bode well for the theory that the US military has done this. But going back to this thing about growth, you kind of made mention of it. It's sort of like a double-edged sword because in some ways, growth is not good for China. If it's not the right kind of growth, and they've had the wrong kind of growth for a while. So this is the dance, I think that a lot of foreigners or people from the outside who are looking and trying to understand this, and it also makes it difficult because I had written here, best case, worst case, base case scenarios for China GDP. But that kind of misses the point, doesn't it? Because the best case scenario for China isn't that it gets the highest level of growth. The best case scenario for China is that it gets the highest level of growth in the direction of what kind of growth that it wants. Even if that growth is (47/57)
less growth, then the worst case scenario would be tons of growth in the wrong direction, right? Yeah, it's accurate. So how do you think about that? In that context, what are the best, worst, and base cases for China's economy going forward? The best case is, and this is not going to happen anytime soon, is that the Chinese economy actually deleverages instead of just announcing a deleveraging campaign, which our data show was not actually deleveraging. It was a few years of slower, additional leveraging, but just to deleverage to the point where your growth can outpace your dead load. Because that's the real problem. When you have the other dynamic, it means that you're cutting down on productivity, and you're in the process of creating a zombie economy, which is what China's on the path towards right now. So what they do not want to do, as you said, is grow fast, because they can't support that other than with more and more and more credit. We have spent years trying to get people (48/57)
away from GDP growth as a measure, and not just in China for everyone. But look, GDP, and here's the real problem, is a measure of aggregate growth. It's not productive growth, which means if you want to hit a certain target, you can hit any target you want by building a bridge, tearing it down, building the same bridge again, tearing it down, building a third time, tearing it down, and go on and on and on and on until you've hit 8%, 6%, 9% growth. Now, your productivity has just fallen off a cliff. Your waste of resources is legendary, but you can still hit your growth numbers. And I think that's the problem that people have fallen into for so long. One, looking at GDP as a sensible measure of anything. And second, lauding the Chinese government for high growth levels when it's actually been very counter productive to the idea where China will create a sustainable growth model and become a true global leader in the future, because what they're doing right now is only done through (49/57)
enormous levels of non-performing loans, non-productivity. It's not sustainable. And what it's doing is forcing them to push good money after bad. So in a non-commercial financial system, one of the reasons you don't just have the thing fall over and a domino effect, it's because you can swoosh huge amounts of capital for one financial system, the other to plug holes, to make problems go away. But what that means is you're always chasing good money after bad. And you're always lowering your level of productivity compared to what you'd be doing if you just let the bad actors fail, the bankrupt firms go bankrupt, the trust products that should be not returning anything go. We can't even do that here, Leland. Hey, look, I'm aspiration. This is crazy, right? I mean, it's not, we're not even doing that here. It's not going to happen there, right? It's not going to happen there. It's not going to happen anywhere. But the difference is that during a time, at least most of the world was (50/57)
pretending to understand that up until now. So now we sort of thrown in the towel. Europe's thrown in the towel. Japan's certainly thrown in the towel. China will throw the towel. It already has, no matter what it says. But they have for years been ignoring this problem, which means they're at a much worse starting point than anybody else's, except arguably Japan. Or maybe they're in a better starting point because we're all moving in that direction. You may need to start doing this for the US. Anything's possible. You might need to do US-based book. Look, here's your new paradigm. It is that there is no longer a failure allowed, bankruptcies are allowed, the government backstops everything, and we're going to see how long that goes until the system implodes. So there's your new paradigm. Yeah, no, in all seriousness, that is a concern, right? And now we're kind of digressing a little bit and we'll get back in. But this is kind of the problem with the debt-fueled growth model that (51/57)
we've had in the US. And again, the something we've talked about on the show before, with rising levels of wealth inequality, the only way you can sustain that is the debt financing. And the only way that you can sustain debt financing in that dynamic is by lowering interest rates. But if you lower interest rates, you eventually divest savers of the capacity to save. You move them out to become speculators. And so everyone moves into the stock market. And then the value of the stock market becomes the health and the wealth of your savers. So then you become invested in the appreciation of the market. And the entire government then begins to buy the index, right? So then you basically, ultimately all roads lead to Rome. It's the same thing. It means government owns more and more of the economy. This is the place that we're going. So it's ironic that we've been having conversations about China moving towards a consumer-led growth model when we here are moving in their direction. So (52/57)
anyway, to bring it back again to what we were talking about, maybe instead of asking you for pine the sky, crazy best case scenarios, what do you think is going to happen? What is your kind of base case? What do you foresee given everything, including the challenges of having to navigate this, what might be a start and stop, stop and go model of containment mitigation with this virus, not just in China, but also in the demand countries that it depends on for its export-led growth model? Well, for a number of years, we've said that the future of China is going towards one or 2% growth at the most. And I think that the difference between what's happened with COVID is it simply just sped this process up. It's getting closer to the point where we're going to get lower rates faster. Look, what I was describing before was that the Chinese economy is based around avoiding failure, avoiding bankruptcy, backstopping everyone and everything. And what that's meant is that productivity has fallen (53/57)
and that the economy is basically stagnating over time. And that means that getting positive growth at all in the next decade from now is going to be very, very difficult. COVID sped that up. The problem here is that I think that that's happening around the rest of the world too. China is just farther ahead on the curve on this. So I think that the idea that China will be growing at anywhere near the rates it has been is quite ludicrous. I think the idea that they're going to be able to grow at half the rates they've been claiming is quite unlikely. I think we're looking at an extraordinarily low growth model coming out of China, at which point it's going to make it harder for the party to operate. And it's making it harder for the party to backstop everything. So they have some real headaches going through. China can get out the other side. They can come out the other side. But the longer they wait to restructure the system and to stop relying on bad debt and stop relying on an (54/57)
investment led model, the harder it's going to be. So Leland, I'm going to move us into the overtime. I want to pick your brain a bit on the geopolitical dimensions of this because I feel that as we move along the horizontal axis of time, more and more of these conversations that have been happening or discussed in economic terms are going to really become political. And so I want to talk about that. I also want to talk about the real estate market in China. I'm fascinated to learn how this has been impacted. Also, to this point about geopolitics, Japan has been incentivizing. This came out today, I think, in the news. We're recording this on Friday, April 10th, 2020. They are incentivizing domestic companies as part of their bailout package to move their operations out of China. So this also, I think, is an interesting phenomenon. 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, Auto-Didact, or Super Nerd (55/57)
Tears, head over to patreon.com slash hidden forces or scroll down to the summary section of this week's episode page and click on the link that sends you to the hidden forces Patreon account where you can continue to listen to my conversation with Leland, including gaining access to the transcript of today's conversation, as well as this week's 22-page rundown, which includes all of the research information that I compiled to prepare for this episode. Also, don't forget, if you haven't integrated the Patreon RSS feed into your podcast application that you use to listen to the regular episode, you need to do that. Overtimes are downloaded directly to your phone and you'll be able to listen to them just like you listen to the regular episodes. Leland, it was awesome talking with you. Stick around and we're going to continue the rest of our conversation in the overtime. We'll do. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's (56/57)
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 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. (57/57)
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 to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Michael Shermer. Michael is the founding publisher of Skeptic Magazine. He hosts his own podcast, the Michael Shermer Show, and he is the prolific author behind many best-selling books that you will recognize by name like The Believing Brain, Giving the Devil His Do, The Moral Ark, The Mind of the Market, and many more. His latest book, Conspiracy, presents an overarching review of conspiracy theories who believes them, why, which ones are real, and what we should do about them. You're going to come away from today's conversation with a framework for thinking about conspiracies, what we mean when we talk about a quote conspiracy theory, the different types of conspiracies that (1/57)
exist, how to distinguish between a conspiracy that's real and one that's imagined, and how to tilt the information landscape towards producing more accurate models of the world around us so that we're elevating theories that more closely converge on the truth without resorting to censorship or policing of thought and information. For anyone new to the program, Hidden Forces is listener-supported. I don't rely on advertisers or commercial sponsors, so if you want access to the second hour of today's conversation, as well as the transcripts and intelligence reports, which include my takeaways from every episode, as well as 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. If you want access to our Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and (2/57)
dinners, feel free to send an email to infoathiddenforces.io, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative and timely conversation with my guest Michael Shermer. Dr. Michael Shermer, welcome to Hidden Forces. Nice to see you. Great to see you too. So you really crushed it with this book. This is very timely. It's kind of a subject that you've written about in different ways than some of your previous books. What makes this one different? Is it just you kind of wanted to start off by building a framework for thinking about conspiracies? Yes, well, conspiracy theories and conspiracies has always been in our wheelhouse of skeptic. We've been around for 30, this is our 30th year, started in 92. And we've covered it over the years, JFK several times, 9-11 Truth, the Obama birther, you name it. We looked into it, the whole militia movement in the 90s was largely based on conspiracy theories about the government building (3/57)
FEMA camps to imprison Americans who own guns. And during the Obama administration, same kind of conspiracy theories about false flag operations as an excuse to take away Americans guns. I mean, that's been in the news recently because that was the Alex Jones, Sandy Hook, false flag conspiracy theory. I'm a writer and a social scientist, so I'm always looking for new projects. I don't want to be one of those authors that writes the same book over and over. I try to move on and my books have dealt with lots of different topics, but I've never focused on conspiracy theories as a problem to solve. That is, namely, why do people believe them? What's the theoretical model there that you can then test empirically? And thankfully, there is a sizable body of literature in the social sciences on conspiracy theories now. That didn't used to be the case in the 90s and early 2000s. It was still kind of on the fringe. Journalists would write colorful articles about the nut jobs that believe this or (4/57)
that. Academics largely steered clear of it. It wasn't really an academic field like it has become in the last 15 years or so where social scientists actually collect data. Who are these people? What are their educational levels? What's the gender ratio? Where do they work? What kind of jobs do they have? What are their ages? Where do they live? Basic demographic data that social scientists collect had never really been done to the extent that it has been recently so that we now have a handle on it. Summarize all that research. The last chapter of the book is my own a massive research survey project on that subject. I love this so much to discuss. I love the demographic part. I love all the data that went into this and the attempt to try and describe likelihoods to different cohorts based on those parameters and whether or not they would be more amenable to conspiracies. I found a lot of that very fascinating and I actually want to look into it. You mentioned the 1990s, the FEMA camps, (5/57)
the black helicopters, the UN takeover of America, German troops spotted in Texas, and Alex Jones. We did an episode with Alex Limoyer, who's a documentarian, who did a documentary recently on Alex Jones. I had gone down on Alex Jones' rabbit hole when I had become disillusioned with, I guess, the world after the 2008 financial crisis. I'm very familiar with him. Were you familiar with Alex Jones back in the 90s or when did he first come across your radar? I think early 2000s after 9-11 is when he came onto my radar. I vaguely remember him, or maybe this is a false memory of him ranting about the Oklahoma City bombing and has the fingerprints of the CIA all over it, or maybe it was the FBI, or the government, or something like that. Although I may be remembering that from that documentary film, but definitely after 9-11. The 9-11 truth thing, it did surprise me because it was so obvious why the buildings collapsed, the planes hit them, and they collapsed right at the point of impact. (6/57)
How could that be spun? Well, it was. It was amusing to watch it unfold in real time, and we documented that, published many articles and skeptic about it, that you really have to reach to make that a conspiracy theory of the US government. Of course, it was a conspiracy by 19 members of Al Qaeda plotting to fly planes into buildings without telling us ahead of time, is orchestrated by Osama Bin Laden. That's a conspiracy by definition, right? But which conspiracy theory is the correct one, that one or the inside job one? That's, I think, when Alex came onto my radar. It was interesting to watch his audience grow as the internet evolved. I think he started what, in cable radio? There was no satellite radio then, right? He's in public access television in Texas. Yeah, that's right, right, in Austin. Yeah. Of course, with the internet, you can reach hundreds of millions of people instantly. I'm often asked, is all this new? No, nothing's new in conspiracism. There's always been (7/57)
conspiracy theories all the way back to ancient Rome when Rome burned down and Nero was the emperor. He was accused of being, he made it happen on purpose, my hop, or he let it happen on purpose, Lyhop, and all these conspiracies. That's not new. It's the speed with which the transmission of conspiracy theories can spread and how many the reach is just astonishing. After 9-11, that homemade movie, Loose Change, that was astonishing. This guy got views that Hollywood producers would die for. Of course, he didn't make any money on it. He didn't charge, but tens of millions, I don't know what it's up to now. There's probably 100 million people have seen this thing. It's astonishing. Then it starts to more fringe to more mainstream audiences where people get used to hearing about these, right? By the time Trump comes along and starts spouting his own conspiracy theories, Obama wasn't born in the United States. I remember when that happened and he's on CNN, astonishing. He could get that (8/57)
kind of coverage. Anderson Cooper is asking him, well, where's the evidence for this? Oh, it's huge. I got people on the ground in Hawaii. You are not going to believe what they found. Well, tell us. Oh, no. I'm saving it. Can you give us a hint of what they found? Nope. Just a lot of people are saying. That's when he started this. A lot of people are saying. And the whole controversy around the long form versus the short form birth certificate. Oh, I had a friend send me that PDF with the whole breakdown. You could tell that this was photoshopped. And here's how you could tell. Then somebody finally that understood how photoshop works did a complete analysis showing why that was just nonsense. I'm concerned that we're already losing people. And this is actually something that we're going to talk about today, which I'm excited to talk about because at no point in the book do you say that conspiracies are by default not true. In point of fact, you go out of your way to say that (9/57)
conspiracies, there are conspiracies that are true. And in point of fact, the reason why we tend to believe conspiracies or one of the theories behind why we think that people tend to believe conspiracies is because that sometimes they are true and you're better off believing in a false conspiracy a lot of times than not believing in a conspiracy that's real and you end up dying because you hate your blind spot. I know Luke Rudowski also and I'm familiar with loose change. I'm also familiar with the documentary film Zeitgeist that came out in that period of time. And as a millennial who was coming of a particular sort of age in that period of time, really Zeitgeist for me was a bigger deal. Loose change was I think, in fact, it wasn't something that I really converged on. A lot of that stuff got roped into things like Zeitgeist or Alex Jones. And this whole community fed each other. Something else that comes up for me when you're recounting this period of time is a sense of reclaiming (10/57)
history, reclaiming power over our education of the world. There was a sense during that time and I think it was amplified by the fact that this information was spreading through the internet and there was this kind of do-it-yourself culture around it, which gave it a sense of authenticity, something that I talked about with Alex Lee Moyer that I think gives Alex Jones credibility as a voice is that he's a hot mess. There's this authenticity to Alex Jones that then sort of bleeds into a lot of the stuff he puts forward, so much of which is, you could call it basis conspiracy, theories without any evidentiary basis, but it's not because they are by fault, quote, conspiracies. And I do want to make that distinction because we're going to talk about a lot of stuff here today. Before we do any of that, because I could start going all over the place, let's start with maybe what a conspiracy theory is. How do we define that? What's a conspiracy theory and how do we spot one in the wild? (11/57)
Right, it's your binoculars. Well, first let me comment, Zeitgeist, because I remember when that film came out, I was researching and writing a lot about science and religion and the origins of religion, the anthropology religion. And then if I recall, the film started off about the secret origins of Christianity and how it really began and what all these things meant. And so I thought, yeah, that could be interesting. But then the guy goes off on, and then this was part of it and that was part of it and through the middle ages, all tied together. It's like, this is too grand a scope. This is not how conspiracies work. But yeah, that was another one of those that in the early days of the internet that really got legs, I think, again, tens of millions of people seemed like people used to send it to me all the time. Okay, so a conspiracy is two or more people plotting a secret to gain an unfair, illegal or immoral advantage over somebody else. It's not complicated. It's by that (12/57)
definition, these things happen all the time. Coalitional plots against people in your group or between groups is quite common in our evolutionary history. So my evolutionary argument is that we evolved a constructive conspiracism that is a kind of paranoia in which in signal detection theory language, it's better to make a type one error in which you assume a conspiracy theory is true when it's not, just in case, versus a type two error where you miss a real conspiracy that could harm you. So there's a kind of a logic, a rationality to it as it were, because the subtitle of my book is why the rational believe the irrational. In many ways, there's a kind of rationality behind most conspiracy theories. There's a tiny little element of truth, even in Alex Jones's crazy rantings about false flag operations at Sandy Hook, there have been false flag operations in the past. I mean, the CAA is notorious for their false flag operations in the 50s and 60s, particularly rigged elections in South (13/57)
American countries in which we favor fascist dictators over communist dictators because they're going to be friendlier to US business interests in those countries, less likely to nationalize the company like a communist dictator would and so on. And so before you know it, we're funding a lot of these programs that Congress didn't approve, oftentimes didn't even know about it, much less the public, right? Or the famous Northwoods document that was given to President Kennedy by his own administration, top people in his administration saying about all the different kinds of false flag operations we could perform as an excuse to invade Cuba again after the Bay of Pigs fiasco, but really ramp it up. I mean, a total invasion and assassinate Castro, decapitate the entire regime. That would have involved terrorist attacks on Miami. Yes, right. Shooting down like an American airline. I mean, what? To his credit, Kennedy said, we're not doing anything. This is crazy, right? But that that CAA and (14/57)
in his top of administration people were proposing this tells us that this kind of thing is not totally out of left field. This does happen. I mean, I talk about MKUltra, the CAA dosing American citizens with psychoactive drugs like LSD is a form of research on mind control, out of fear that in addition to the missile gap, there was the mind control brainwashing gap with the Russians and the Chinese and the North Koreans. We got to get on this. CIA did that or the Cointel pro of the counterintelligence program by the CIA of planting spies in social justice movements in America, like the American Indian movement aim, many feminist movements, the Black Panthers and so on. And these are pretty much probably illegal, certainly immoral. And certainly Congress never approved these actions. And again, this was in the 60s and 70s, all the way up to the 90s before Congress kind of cracked down on the sorts of espionage things that the CIA could do. But even there, homeland security has been (15/57)
conducting warrantless wiretapping and monitoring of U.S. citizens, email, phones, and so on under Obama, Mr. President transparency. So it's like when someone like Alex is ranting to a lot of people that know some of this stuff, they think, yeah, that seems plod, that's not completely crazy, could be. Absolutely. So again, like I said, there's so much to discuss. You mentioned constructive conspiracism. There's actually a section in your book where you you actually come at this subject from a lot of different angles. In the case of constructive conspiracism, you actually break down three different types of conspiracies in this category, proxy conspiracism, tribal conspiracism, and constructive conspiracism, which I would like to discuss. You also layer on top of that certain psychological or sociological forces that can exacerbate this. And so I want to get to that conversation as well. Before we do, maybe just to set the context here, how widespread is this phenomenon? I've always (16/57)
kind of wondered just how many people believe in things for which there's no real evidence to support it. That's how I tend to think of this. And because these also these conspiracies break down, you know, like along a spectrum. So you've got sort of paranoid conspiracies that you talk about versus quote conspiracies or things that are much more plausible. Help me understand that. Lay the landscape out for me and our listeners, and then let's start to break into the different types of conspiracies and why people believe in them. Right. Well, first of all, it's not fringe. A survey show that everybody believes at least one conspiracy theory. I mean, if you do a survey and you have 30 different conspiracy theories, none of them are zero. Everybody takes at least one of the boxes. So that shows it's not a fringe thing. It's not tin foil hat wearing overweight guys in their parents' basement age 40. That's kind of the stereotypical conspiracy theorists in people's minds. No, it's all of (17/57)
us. And again, for good reason, you know, there are reasons we should be suspicious of government activities, corporate insider trading and shenanigans to gain an unfair profit over other companies. So on this, this sort of thing happens all the time. So then from there, you can kind of try to break it down. So you mentioned some of those causes here. I'm making a distinction between proximate causes and ultimate causes. Proximate causes are like which races or genders or ages or political orientation are more or less likely to believe conspiracy theories. And the answer is it depends which ones. So race, for example, is not a predictor of overall conspiracism, but it is of specific conspiracies. African Americans more likely to believe that the CIA planted crack cocaine in inner cities or invented AIDS to decimate black populations. Whites are less likely to believe that, but whites are more likely to believe that the government or some nefarious organizations are plotting to take (18/57)
away our Second Amendment rights or build FEMA camps to imprison Americans with guns. You know, usually something constitutional like that. Liberals are more likely to believe that Republicans, that conservatives are up to no good, you know, unfairly gain a profit and make more money. And conservatives are more likely to think those libtards are trying to turn America into a communist nation, communist state and, you know, those kinds of things. It depends on the specific conspiracy theory of what predicts it. Education attenuates conspiracism a little bit, but not massively so. I mean, if you only have a high school education versus an undergraduate versus graduate, the more education you have, the fewer conspiracy boxes you take on a survey, but not that many. You know, it's not like the percentage drops dramatically, again, because it's not unreasonable. It's not irrational to believe at least some conspiracy theories. And if anything, smart people, educated smart people, are even (19/57)
better at rationalizing beliefs that they hold for really non-smart reasons. That is to say, most of us don't have the means to check if a conspiracy theory is true or not. You know, so you hear somebody like an Alex Jones ranting, you know, I got people on the ground there, reporters are discovering amazing things, much like Trump did. And, you know, how would I know? I don't know anybody in Sandy Hook or at this voting district in Georgia. And, you know, I only have this to go on. And, you know, well, the New York Times, well, the New York Times, you know, they're run by a bunch of liberals. And I don't trust them. And, you know, you kind of get these rationalizations that people have in their head for why they would believe this. And in their mind, it is rational. You know, I'm fond of saying no one in the history of the world has ever joined a cult. They join a group that they think is going to be good. No one in the history of the world has ever self-identified as a pseudo (20/57)
scientist going down to their pseudo lab to collect pseudo data to support their pseudo theory. They think they're onto something true and big. And so same with conspiracy theories. No one thinks this is a crazy conspiracy theory. They think I have detected a true conspiracy and I am going to expose it and take Watergate. You know, I was just watching this new Netflix doc called the Martha, what's her name? Sorry, I just tweeted about this this morning because it was so good in terms of how the Watergate thing was exposed first by journalists, but also Martha Mitchell, yeah, the wife of the attorney general of Nixon's cabinet. You know, she was instrumental in exposing that what was really going on. And at first she was being gaslighted by people in her circle, including Nixon. But then it turns out later when the Nixon tapes, you know, Nixon was taping his White House conversations, it came out that her own husband was in on the gaslighting of her. Right? So if you hear enough of (21/57)
this, it's like, all right, all right, what's really going on? I mean, you want to talk about conspiracy? I've heard a lot of those Nixon tapes. There's actually a great reservoir of them on C-SPAN and I'm sure elsewhere too, obviously at all the individual libraries. So I've heard a lot of them from the Nixon administration, Kennedy, LBJ, and I believe Ford as well. Nixon was like, you want to talk about conspiracies. I mean, Nixon was constantly imagining conspiracies. Very paranoid. You know, just this thing about education is interesting to me. Is it not significant enough to comment on or is it significant enough? And then one has to wonder, is the reason that education makes you less prone towards believing conspiracies? Or maybe you have a higher threshold because you have some appreciation for the empirical method? Or is it a kind of groupthink and maybe a sort of a greater degree of submissiveness or belief in authority? I have you thought about that at all? Is it relevant or (22/57)
is it just not significant enough to comment on? Let's clarify it, that it's an on average effect, more education, less conspiracism, but not related to any particular conspiracy theories. Not like, you know, the 9-11 truthers are all idiots or the flat earthers are dumb and educated. You can't make those generalizations about any conspiracy theory because you can always find very educated people. I mean, a number of the 9-11 truth or conspiracy theories were promoted by college professors. I mean, David Ray Griffin at the Claremont College. Book up two of his books here, the WT7 book and another book on both on the claims as to why the towers were imploding. Yeah. Or most of the JFK books are written by lawyers and professors and whatnot. I mean, really smart. Or Robert Kennedy Jr. Right. Yes, right. Exactly, right. So if anything, those people are even better at rationalizing beliefs that they hold usually for non-rational reasons, right? You know, they employ the confirmation bias (23/57)
and the hindsight bias and the myside bias and all these things that I talk about in the book, even better than less educated people do. So anything, the effect could go the other way. Are more educated people more likely to believe in, let's say, a conspiracy that the founding fathers set up the country to privilege white people? That's interesting because we asked that question, right, in our survey. And yes, well, so they're probably your political orientation. Liberals are more likely to think that, right? And conservatives are less likely to think that. So how important is political affiliation in predicting either general willingness to believe? Because for example, I want to mention this, we did a great episode a year and a half ago or so with David Shore, who was, he was kind of nicknamed as like the Nate Silver of the Obama team back in the 2012 election, kind of a statistics whiz. And one of the things that I learned in the process of preparing for that conversation and (24/57)
having it subsequently is the degree to which people who tend to vote right today are distrusting of others and may be also increasingly fearful. So it's difficult to also draw out how much of it is actually political, i.e. ideology, and how much of it is these other things like fearfulness, distrusting of others, feeling marginalized. I thought about that as well when I was reading through, because again, it sounds like it wasn't very significant, but in your data set, it did seem that people that were Hispanic or Black tended to believe in general more so than others. Maybe I misread it. And I wondered, is that maybe because marginalization, if you're an immigrant, for example, you're more likely to feel somehow alienated and therefore you're less trusting, more paranoid. I wondered about that. I'm curious, can you draw out some meaningful inferences for us? Yeah, like any other human behavior or thought, it's a rat's nest of interacting causal variables. Nothing humans do has one (25/57)
cause. And that's certainly the case with conspiracism. I mean, you mentioned several there. Yes, political orientation directs you to believe certain conspiracy theories more than others. The obvious two big ones are 9-11 truthers was believed by more liberals than conservatives. The Obama-Birther movement was more conservatives than liberals. And pretty much the flip side was like 70, 30, 30, 70 on each of those by political orientation. Again, it's not just your political orientation, but that's nudging you to which stories fit the narrative. Again, we can't check these things. Most of us can't check these things ourselves. We're going to take the reason one this week with the story about the public schools having kitty litter boxes for children who identify as cats. So this fit the conservative narrative of what the libtards are doing with their confused gender sex. It's all a spectrum and we're going to teach these children how to be the opposite sex and how to perform sex acts (26/57)
young. And you can identify as anything you want, including the cat. This is one of these classic urban legends. No one found any schools anywhere with litter boxes for kids, but it fit the narrative. It's like, yeah, that's the kind of thing those liberals would do. So I call this proxy conspiracism. Even if the specific conspiracy theory is not true, it's the kind of thing they would do because look what else they did that we know that they did. So I use this for the pizza gate as my type specimen there, that Hillary and other dams are running a secret satanic cult out of a pedophile cult out of a pizzeria in Washington, DC, Comet, Ping Pong, pizzeria. And does anyone really believe that? Well, one guy did, Edgar Welch. He went there with his gun to break up the crime, which is what you would do if you really believed it. There was a crime being committed against these children and no one was doing anything about it. I mean, this guy, Edgar Welch, he made a video. He drove three and (27/57)
a half hours and made a little home video for his daughter saying, I'm going in. I would do this for you if I thought somebody was doing something harmful like this to you. I'm going to help these children. But most people I think are just like, yeah, I don't know, but I don't like those Democrats. It's the kind of thing that Clintons would do, such that even if I took you there and said, look, there's no basement, there's nothing going on here, it's not like you're going to go on that case, I'll vote for Hillary. You were never going to vote for Hillary, right? So it's just kind of a stand-in if it fits the narrative arc of your tribe. So this is the my side bias. It kind of fits the way your side thinks. I think it's so true and to bring up Alex Jones again, I've seen Alex Jones do this all the time where he rationalizes why he gets things wrong because, well, whatever, they've done all this other stuff. So who cares if I'm wrong about this one specific thing? I'm on a mission to (28/57)
educate people about the danger of this group. So who cares if I miss this thing or if I miss that thing, right? Exactly. Another thing that came up when you were giving your answer there was a study that was in the book. I don't know if you want to call it a study or a depiction of something that happened, which was that particular cult that believed that the world was ending and that the aliens were going to come and they were hanging out. And then what I found so instructive about that and so useful was the way in which they rationalized their prophecy not coming true. And this was a very specific prophecy. This was the world will come to an end at a particular time and place. And then it didn't come to an end and some people kept on believing. Can you tell me how, first of all, let's talk about that phenomenon and tell me a little bit about how powerful and important that is in explaining why we believe things with absolutely no evidence or no meaningful amounts of evidence. Right. (29/57)
Well, that particular example was from Leon Fessinger's book, When Prophecy Fails. He is a young psych professor, was curious about these end-of-the-world cults. And this one in particular was this woman in suburbs of Chicago that was channeling some alien that told her that the world would come to an end on December 21st, of course, the Winter Solstice of 1954. So he thought, okay, well, this is very specific. I'm going to go there. He got permission to join the group and then go up there with his clipboard to take notes or whatever he used and wait for the mothership to come after which there'd be massive floods and earthquakes in the Midwest and that'd be the end of it. And of course, it didn't happen. And so he was curious to see what these people would do when they go, wow, that was a dumb idea. I'm going to go back and get my job and get my car back and stuff. They gave away their belongings and whatnot. But no, in fact, they went back and doubled down on their beliefs. So he (30/57)
called this cognitive dissonance. So you have a belief that's very strong and then you're confronted with contradictory evidence. Something has to give. You either say, I was wrong or I was right, but this apparent contradictory evidence can actually be rationalized away. Often this is done with these end of the world cults of miscalculate. Oh, we miscalculate. I forget to carry the one. It's next year. We'll be back here next year. Or it was a test of our faith and God granted us that we can continue because we went all the way to the edge right there. And then he pulled back and so on. So there's half a dozen of these rationalizations. And the doubling down is a way of reminding yourself, you're not wrong, you're not wrong. And Carol Tavers' book on this, Mistakes Were Made, But Not By Me is the best source on this whole subject of cognitive dissonance, which is one of the most well-researched areas in psychology. It has survived the replication crisis quite nicely. It's a real (31/57)
effect. And it happens all the time. I mean, if you think about it, I also- Politics is, it's one giant cognitive dissonance. Politician coming out. I mean, George Carlin had this great bit about that where he talked about mistakes were made, mistakes were made. Let's move past it now. Let's go. Let's move past. It's time to move past it now. Let's put it behind us. Let's put it all behind us. Yeah, both sides do it for sure. And so here's what we call a proportionality bias or this sort of cognitive dissonance of cause and effect not being in properly alignment. So we want big effects to have big causes. So if you take like the Holocaust, one of the worst crimes committed in history caused by what? The Nazis, one of the worst criminal political organizations in history. So there's kind of a harmony there that makes sense. But if you take 9-11, people tell me, you're telling me 19 guys with box cutters pulled this off? No way. It's got to be huge. This is a huge thing. It must have (32/57)
been the Bush administration and all these people or JFK gunned down by a lone nut, Lee Harvey Oswald just doesn't resonate. It's like that just doesn't feel right. It's a big effect, tiny little cause. So this is the proportionality bias, Princess Diana, cause of death, drunk driving, speeding, no seatbelt. Well, come on, that's how normal people die. 40,000 plus a year on American highways alone. But it has to be the MI6 and the Royal Family and this and that kind of. David Eich's given a whole thesis as to how there were a lot of satanic symbols and patterns involved in the crash. By the way, David Eich, who has put forward the reptilian theories as to the nature of the ruling class, what percentage of people believe in those kinds of conspiracies? That like the elites are interdimensional child molesters? Yes, thankfully, those are very low in percentage. And also you have to remember the limitations of survey data. This is self-report data. People that again tick the box famously, (33/57)
that Princess Diana was murdered are also more likely to tick the box that she faked her death and she's still alive somewhere with Doty Fiest. Just like Tupac. They're alive in Southern Argentina with Elvis and Marilyn Monroe. Elvis. Elvis. So actually, let's talk a second here about a very specific conspiracy, which was 9-11. You say it was a conspiracy, but it wasn't a conspiracy of the sort that people believe. I had one of the 9-11 commissioners, one of the members of the 9-11 commission on, Senator Bob Kerry. And we talked about 9-11. And what he said was, and this was also at the time that Bob Graham, I believe, was coming out and making some similar statements that actually we didn't know the whole truth, that we were effectively lied to or that things were kind of covered up. But the specific thing that Bob focused on was that, and this straight from the quote from our conversation, which was public, that 9-11 was a conspiracy that went all the way to the top of the Saudi (34/57)
government. And what I had asked him on that show was, if that was the case, and I'd asked him, why did the Bush administration fly the Bin Laden family, as many Bin Lads they could out of the country as their number one priority? He goes, I don't know. He goes, why didn't they answer questions? I don't know. You'd have to ask them. And the thing with the 9-11 is, there were a lot of things that give people pause. And I'm not talking necessarily about WT7, which I think stuff like that, it's very easy to go down these rabbit holes. I told Alex Lemoyer this in our conversation about Alex Jones, that when you're on the outside, you look at the stuff that he says, and you say, this is insane. How is anyone believing this? I cannot empathize with the person. But when you start listening to him and you start listening to things that he says, he feels increasingly plausible, there's a sense that you feel like it's true. It's less about, like, I can rationalize it. You do kind of find a way (35/57)
to rationalize it, but it feels true. Those things aside, I think the conditions around 9-11, the proximity of the Bush family to the Saudis, statements like this that have come out after the fact with Bob Kerry, and the fact that we know that there was a conspiracy by the administration to invade Iraq and concert effort to lie to the public, I think it's understandable for people to really not know for sure. And if you put a gun to my head, I would not say that I believe that the Bush administration, so to speak, the executive branch was responsible for the 9-11 attacks. But I would wonder if some, quote, deep state network of people in the intelligence community interfacing with the Saudi royals in some weird nexus of interests collaborated to either let it happen on purpose or made it happen on purpose, as you say. So I guess the concrete question that comes out of that entire rant, Dr. Schermer, is is it not just is it reasonable for people to feel that way, let's say, about this (36/57)
particular case, but also like, is it possible for us to know if there wasn't a nefarious involvement by elements of the, quote, deep state in something like 9-11? Certainly it's possible to know. Look, I mean, we have found out about a lot of things the US government has done. Watergate is an example I gave. And, you know, we know what happened now, thanks to whistleblowers and the persistent work of journalists like Woodward and the other guy. Yeah, Bernstein. Bernstein, Bernstein Woodward. Dustin Hoffman. It's right, Dustin Hoffman, right, and Robert Redford, right. Yeah, so I mean, a lot of these things, like I mentioned, Cointel Pro, you know, of planting agents in these social groups. See, I did that, that came out. A lot of it does come out thanks to whistleblowers, which is why we need whistleblower laws. Could there be others? Yes, of course, there could be others. I wouldn't call the invasion of Iraq by the way a conspiracy. I mean, it was right out in the open. I mean, he (37/57)
sent, you know, he got the approval of the UN, you know, under the UN resolution. But what I mean is the sending out the Secretary of State to talk about mushroom cloud being yellow cake. Yeah, the yellow cake, the sending Powell out to the UN to testify about uranium and the nuclear weapons program or the weapons of mass destruction. I can't even remember. I mean, I know subsequently having studied the period that there were considered efforts on the part of the administration to push a very specific agenda that ran overtly counter to the public narrative that they were putting forward and their attempts to conflate the threat of al-Qaeda with Saddam Hussein. Maybe that's not a conspiracy, but it. Yeah, yeah, it's something for sure. Did Powell know that this was a lie about the yellow cake and the evidence that Saddam had weapons of mass destruction or was there just a lot of intel and they selected the intel that supported the narrative that we want to invade Iraq? We need an (38/57)
excuse. We're going to use these pieces of intel here instead of those over there that show he doesn't. I think it's probably more likely something like that, right? And, you know, foreign affairs, you know, public foreign affairs is a messy business. You know, so like you mentioned the Saudis, you know, I'm sure there's a lot going on there that we don't know about even now. You know, there are things that we do for national interest, either safety or oil. You know, so all this, you know, behind the 9-11 inside job is the, you know, the need for oil profiteering from war. That's a world conspiracy. That's a world conspiracy, right? Yeah, so, but it's not completely crazy. You know, we do know like Halliburton, for example, with Dick Cheney, you know, he ran that company. Then all of a sudden, you know, we invade Iraq and all of a sudden, you know, Halliburton has the exclusive rights to, you know, rebuild the country after we bombed it. And so that looks pretty bad. You know, whatever (39/57)
their intentions are, we can't get in the heads of other people to know what they're really thinking. I mean, Bush in his memoir said that was the biggest mistake of his presidency, believing the weapons of mass destruction story, you know, and then the UN goes in there, and they don't have any. Oh, oops. Again, it's probably more likely with intelligence, memos, you get, you know, thousands of them. It's more likely, you know, confirmation bias. I'm selecting the ones that I think tell what I want to hear because this is what I want to do. I want to invade Iraq, damn it. So I call that capitalized on what happened on purpose, cow hop. Instead of lie hop or my hop, it's cow hop. Capitalized on what happened on purpose. Like Roosevelt wanted to support Great Britain against the Nazis, but he couldn't. He needed a pretext. And so the attack on Pearl Harbor, he didn't let it happen on purpose. He didn't make it happen on purpose, but he was so glad that he could then do something about (40/57)
that. And same thing with Bush, with Iraq and all presidents do that, all of them, not just Democrats, Republicans, they all do it. Yeah, this is so fascinating. I want to ask you about Jeffrey Epstein, by the way. I don't want to forget. So we're talking about conspiracies. That's one I have a question about specific. I wonder, well, let's do that because we were just talking about Pizzagate. You know, this whole that Democrats are running a secret satanic pedophile ring with children. Okay, so we do know that Clinton, Bill and other prominent Democrats did fly on Jeffrey Epstein's plane to that island where he had what not children, but he did have underage women, right? Apparently his preferred age was like age 14, 15, maybe 17, right? So they're not little five-year-old children. So you can see how the story kind of like, okay, Clinton on the airplane, Epstein has children, then that transmogrifies to the pizza place with the little children instead of teenage girls and so on. I (41/57)
thought that was fascinating. You talk about that in the book. I actually thought that was insightful. I hadn't thought of that, that there's this kind of bleed factor, very interesting. Also, the drinking the blood, well, that's an old blood libel about that Jews are killing Christian babies to drink their blood and so on. And then there was a few years ago that kind of movement in tech billionaires to achieve immortality by taking certain hormones or the blood of young children. Yeah, transhumanism and it's still, but it's, right, that's an extreme, but that's still going on. They're obsessed with living for it. Right, right. So there you just throw that in. Oh, well, why are these people doing this? Oh, because they want to live forever or something like that, right? So you kind of mix in all these different, you know, the satanic panic of the 1980s. Sex craze. Yeah, the satanic panic of the 1980s. You know, that's again, one of these kind of urban legends that, you know, turned (42/57)
into a mass hysteria in which the FBI finally said, all right, we better go expose, check, look into this, say to every city in America as a satanic cult. Well, none of them did. They couldn't find any, right? So it's a little bit like that as well. Right. I remember, what book was it where I read about the gorgeous family, the popes and the kind of insane satanic behavior that went on in the very center of the Vatican, you know, like, I mean, you know, so again, constructive conspiracies, some conspiracies are real. I mean, even if you want to go full Dan Brown, you know, that Jesus didn't really die, this was an actual conspiracy theory before Dan Brown, he got it from these other two authors of that book, Holy Blood, Holy Grail, that, you know, he was kind of put into a coma through some special chemicals. And then he woke up three days later and they whisked him off out of the tomb after France, where he marries Mary Magdalene as sweetheart, and they have kids and so on. You know, (43/57)
that's actually a kind of a conspiracy theory, right? But it's in this case, it's just entertaining. Yeah, I should say that too. A lot of these stories are entertaining. I mean, Alex Jones is before he went really dark, you know, he was pretty fun to watch. I mean, it was really just amusing to watch him rant. And 100%. So I want to add something there and then we can either go down the entertainment route or we can just button something up on Jeffrey Epstein, because my Jeffrey Epstein comments weren't about the pedophile island, they were about the death of the very suspicious circumstances around his death. With respect to entertainment, I couldn't agree more. And in fact, there have been periods of time where we have found conspiracies to be far more entertaining or the entertainment value of conspiracies to be much higher. And that's something that Alex Limoy and I discussed, which is that, and her documentary made me feel it transported me back to the living room of my childhood (44/57)
watching unsolved mysteries and X-Files, you know? And so I couldn't agree more and I'd love to talk about that. But to just button this up on Jeffrey Epstein, just for me, like just looking at this, like everybody else, that looked really suspicious. The fact that there were two attempts on his life, the first failed. It was by an ex-cop who was jacked up on steroids and bunked with him. The second one succeeded. The kind of stuff I looked at, and I have to be fair here to this point, it's very easy to look at some explanations, select coronary reports, et cetera, and be like, this looks like a suspicious hanging that wouldn't work. But no camera footage. I mean, like the guy that was on staff was gone. I mean, the level of incompetence that had been required for such a high profile case seems hard to understand. Now, perhaps when you investigate the bureaucracy at Rikers and you get into the details, you say, actually, this turns out to be much more plausible, for example, like the (45/57)
Oswald conspiracy, which we can talk about as well. What is your reading of this? Did you spend time? Because I tried. I reached out to his lawyers. God help me, I tried to get as much information on this story as I could, but it was just, I think people didn't want to touch it. Interesting. Yeah. Well, so when I read the story about the second camera going out, I posted something on Twitter, like, yeah, that's pretty suspicious. One camera, cameras go out. Two of them, that sounds like a pattern. So I say, well, this one could be true. This conspiracy theory could be true. He was murdered. But then somebody wrote me who had worked at Rikers Island. He goes, oh, this place is a dump. I mean, nothing works there. Cameras go out all the time. The people that work there are like totally incompetent. They're sleeping on the job. They leave. They, you know, whatever. I'm like, oh, okay, never mind. So that's the conspiracy principle, never attribute to malice, what can be explained by (46/57)
incompetence and chance, right? A lot of the world operates on randomness and chance. It's almost impossible for us to detect randomness. We're not good at that. We didn't evolve that. We evolved to be pattern finders, not randomness, understanding, right? The stories I tell, like the famous iPod shuffle feature that Jobs introduced, and then Apple got complaints from customers. It's not random because certain songs come up more than others. That's randomness, right? There's a pattern. And so they reprogrammed it to make it come out where each song is played the same number of times in your playset. You actually have to program that in to be non-random, right? The stars in the sky are random, but we see patterns of big and small dippers and scorpions and horses and whatnot. So, or even cancer clusters. It doesn't seem possible that in this town where there was this big industrial plant with a lot of leakage of their toxic chemicals, there's a cluster of certain kinds of cancers there. (47/57)
Actually, that is usually random. You know, if you throw a handful of pennies in the air and you let them land on the ground, they're not going to be evenly distributed. There's going to be clusters of pennies, right? So, which is why the cover, this is the cover, right? It's just kind of these random dots that, you know, we piece them together into some sort of pattern. But in fact, setting aside the fact that conspiracies do happen, the theories we have are probably not true. It's just random dot connecting, patternicity. So then it becomes a signal detection problem. Well, then how do you know which ones, which signals are real and which are just noise? And so it's hard to tell. You know, there's a great chapter in James Glake's book, The Information, where he talks about random numbers. And there's a whole philosophical exploration of what constitutes a random number. And there's, you know, to your point, there's a huge difference between that. There's all difference between what (48/57)
looks random versus what actually is random. Something can look extremely non-random and actually be completely random. But it's really about a set of probabilities and order. And that, again, speaks to pattern, patternicity, and our desire to find patterns in the noise. And we're so good at it. Actually, that's a great question. Before we moved to the entertainment thing, because I guess we kind of closed off on Epstein, has anyone looked into understanding whether or not people who by their nature tend to see patterns more than others, if those people tend to be more conspiratorially minded than other people? Right. Yeah. So people that see patterns that are not there, called illusory patterns, are more likely to believe conspiracies. Or, because which way does the causal arrow point, could be that people that believe conspiracies are more likely to find illusory patterns in random dots. I mean, that is what the research shows. You put subjects into a condition of feeling anxious. (49/57)
Just remember a time in your life when you had no control and you felt out of control and you were anxious about your future. Now, here's some random dot patterns, some of which are not random, some of which actual are patterns like just degraded pictures of fish or planets or whatever. And here's some that are completely random. People in those conditions of uncertainty are more likely to see illusory patterns. Right? It's Jennifer Whitson's research that I write about in the book. But we don't know what's the cause. I mean, they could be self-selecting in one direction or the other. And just the Jeffrey Epstein thing, of course, telling a probable story doesn't really tilt the probability calculation of committing suicide versus murder. But it makes the narrative sound better. Like, why would somebody murder him? Oh, because he's got a little black book with all the names in it, you know, Clinton and whoever was in on that sex trade thing. And so that's when we start to spin stories (50/57)
like that that make it seem more plausible. But that doesn't help in the calculation. All you need to know is, well, what's the base rate? How many people commit suicide in prison? How many are murdered? People spout off ideas like this and tell stories without knowing what the base rate is. Yeah, that's a great point. And also, another important question to ask, and it can go either way, is are people who are famous or in the news for some reason more likely to be murdered in prison or are they less likely to be murdered in prison? For example, Jeffrey Dahmer was murdered in prison. And I think a lot of people, myself included, saw this initially and said, no way. I mean, it was way too important. There's no way that this thing could have just been allowed to happen. That was my initial instinct, right? But maybe a point of fact, just like the argument for why Jack Ruby murdered Oswald, that people's reaction initially was, whoa, no way, this guy, this mafia guy who owned a local (51/57)
nightclub, went out and shot the most wanted man in America live on national television just to do it. But then again, you have the exact types of incentives that drive that kind of behavior. And after the fact, only after the fact, do we look for those kinds of things, hindsight bias, right? Let's say Oswald had missed and Kennedy survived or somebody else on the grassy know was wounded or whatever, would there be a cottage industry of who was behind Oswald trying to kill Kennedy and he failed? No, there wouldn't be. We know because of the counterfactuals. There's no conspiracy theories about Hinckley shooting Reagan, for example, or Squeaky Fromm shooting President Ford because they didn't die. So everybody accepted the explanation. Well, they were crazy, right? Squeaky Fromm was a member of the Manson family. You know, John Hinckley wanted to impress Joni Foster by shooting the president. I mean, people go, oh, yeah, he's an idiot, right? But had they succeeded? Oh my gosh, then (52/57)
okay, who was behind Hinckley? Who planted him there? Look which way he turns left and then there's a shadow over there and you can kind of see this thing and there was this memo, right? Or if in Dealey Plaza, it was the mayor of Dallas that was assassinated. Would people be going to the grassy knoll and the picket events and writing books and shooting films and making a hit JFK film? No. The John Hinckley example is great as is the attempt on Ford's life and all these attempts to your point. The most compelling conspiracy theory I ever heard around JFK was one that was widely, I think, held, among those that were held, it was widely held in kind of, I think, circles of educated elites. It was one that I had read a number of times as well as in Gore Vidal's biography, which was that Operation Mongoose, which was the CIA sponsored operation run out of Robert Kennedy's office to assassinate Castro and Cuba, basically that assets in that operation were turned around and used to kill (53/57)
Kennedy. And that this is why Robert didn't try to expose the conspiracy, because if he did, it would violate the terms of the agreement, the informal agreement that the Kennedy administration came to terms with, with Khrushchev to end the Cuban Missile Crisis, one of which was, we want to assassinate Fidel Castro. I think, I guess what I want to say here is everything you're saying makes sense to me. And there's no but associated with, I'm not going to say everything makes sense, but everything makes sense. I mean, there's this incredible rabbit hole. There's an entertainment value. There is also this inability to, I think this is a big one, this just unwillingness to believe that something so seminal could have been an act of random violence. And this is where I want to take the second part of our conversation, Michael. I think what's important here now is to really focus on trying to understand, well, what can we know? First of all, how well can we know something? And this is (54/57)
something I actually want to ask at the very top, on the other side of this conversation, which is, can we also draw a distinction between ontological truth, which I would argue is unknowable, or you can't, maybe not know it's unknowable, I would argue that it's impossible to prove definitively whether something is real in the ontological sense. But I think we can talk about epistemic truth. We can set a certain number of foundational assumptions about the world, and then from there come to certain consensus truths about reality. And within that framework, within an epistemic framework, how can we arrive at agreements about what is and what is not true? Because I think that is the fundamental issue that is at work in our society today, even more so than quote conspiracies. It's really about an inability to come to any kind of confident view on what a quote fact is, you know what I mean? So that's really what I want to take this discussion. How do we know what we know? How can we know (55/57)
something to be true? How can we investigate things? And then lastly, well, I guess two things. One, how do we argue effectively against someone who's not actually interested in really getting at quote the truth? Is it even possible? And then the people that are may be interested in getting at the truth, but they're simply misinformed. They don't have the right epistemic framework. How do we work to engage them constructively? And then lastly, I think this is a problem that I want to explore with you. It's something we've explored on this podcast with lots of guests. Most notably comes to mind is Shoshana Zuboff back in, I think, episode 79, which is the technological landscape that exists today that is informed by decades of research into the behavioral sciences, which I would argue tilts the landscape towards misinformation. So how do we engage constructively as citizens to promote a landscape, an information landscape, an information playing field that doesn't tilt towards (56/57)
misinformation, but ideally tilts towards real information or tilts towards truth finding? That's something that you don't actually explore in the book, but I would actually love to talk to you about in the second part of our conversation. 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 Michael, as well as the episode transcripts and intelligence reports, head over to hiddenforces.io and check out our episode library, where you can also become a premium subscriber today. Michael, stick around. We're going to move the second part of our conversation onto the premium feed. Thank you for listening. We'll see you next time. (57/57)
What's up everybody? Welcome to another episode of Hidden Forces with me, Dimitri Kofinas. Today I speak with Joan Freese. Joan is a professor of national security affairs at the U.S. Naval War College. She's been a faculty member at the Asia Pacific Center for Security Studies and the Air War College, which emphasizes the employment of air, space, and cyberspace in joint operations. Professor Freese has also served on the Space Studies Board of the National Academies of Science and has often testified before Congress on space security issues. She is the author of multiple books on space security. Among them, Heavenly Ambitions, America's Quest to Dominate Space, the Chinese Space Program, A Mystery Within a Maze, and her latest book, Space Warfare in the 21st Century. In this episode, we go into outer space, not just into the low Earth orbit of the International Space Station, but all the way to high geostationary orbits, more than 22,000 miles above the Earth's equator, where some (1/57)
of our most valuable and vulnerable satellites operate. We will look at what the United States, China, and Russia are doing in space, what our militaries are doing. We learn about ASATs, kinetic orbital strikes, and kinetic kill vehicles. We learn that the use of current anti-satellite technologies could create a wall of debris in Earth's orbit so thick that we would be unable to launch anything into space, including satellites, our space station, and any space missions to Mars and beyond for generations. Any and all satellite communications would go dark. Global distribution networks, including our food supplies, energy, and transportation would grind to a halt. The global banking and financial system would collapse. Our communication infrastructure would be devastated. The implications of war in space are catastrophic. And yet, the public is largely unaware of the dangers orbiting right above our heads. It's high time we take notice. As always, you can gain access to reading lists (2/57)
put together by me ahead of every episode by visiting the show's website at hiddenforcespod.com. If you are listening to this show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want a sneak peek into how the sausage is made, or for special storylines told through pictures and questions, like us on Facebook and follow us on Twitter and Instagram at Hidden Forces Pod. Lastly, there are a number of moments in this interview where you may hear changes in our guests' audio. We did our best to fix the problem, and I hope it will not detract from your enjoyment of this incredibly valuable discussion. And now, time for this week's conversation. One of the things that fascinates me is the lack of not necessarily publicly available documents. The documents are there, but contextualized documents and engagement with the public. This is an area that's remarkably, there isn't a great deal of exposure to the public, and it's ironic given the fact (3/57)
that space is an area of intrigue and excitement and romance as it's fictionalized on screen and how the public thinks about it, and also with SpaceX and Blue Origin and what the private sector is doing. But one of the things I was doing before we spoke, before we had a chance to speak again today, is I looked at some testimony you gave. And that really to me was a very instructive experience, seeing the breadth and variety of opinions, also seeing of course the congressional industrial apparatus at work, and then but also seeing the spectrum of sort of posturing and positioning of different people, and that's something I want to get into. So I guess at the top, what I'd like for you to do for us is to give us sort of that context that I felt was so missing in my own research. Give us a framework for understanding sort of the issue or the problem. I mean, if you could frame the dilemma that we face in space in one concise statement, and I know that's a difficult ask, but if you could (4/57)
frame that at a very high level, top level, and then we can drill down, I'd love to hear what you have to say about that. 95% or more of space technology is dual use technology, and that fact alone sets the context for the space development, space security dilemma, because what dual use technology means is that a single piece of hardware or software can be used for either civilian or military purposes. And if it's used for military purposes, it's very difficult to tell if it's for offensive or defensive purposes. So what that means is a remote sensing satellite doesn't know or care if it's taking imagery for urban planning or weapons targeting, but the people who control that technology care very much. And that sets up a dilemma because you have an entire group of people who rely on space technology for civilian everyday life. And of course, the best example of that is the way we have integrated GPS into our life. While on the other hand, you have a group of individuals who would like (5/57)
to protect and keep separate as much of this technology as possible, because it has the potential to be used against national interest and in fact as a weapon. All right, so in what you just said, you're touching on a few things. So dual use refers to, of course, the fact that anything for the most part could be a weapon in space. Anything that has the capacity to move its position in fact can be a weapon and it can use, I think, I don't know if you said it, but it's called kinetic energy or something to that effect, which is basically you could just slam a satellite into another satellite or you could have functionality on a satellite that enables you to move to a neighboring satellite and drag it to some other location or jam its software, which is actually another thing I want to get into, which is to what extent do you even need to deal with a satellite in physical space and simply attack it via the internet or via software or the ground station so we can get into that as well. So, (6/57)
but what I think is interesting and I want to make sure our audience gets sort of the full scope of this as we're talking, what you're touching on with this respect to dual use is the fact that there are a certain number of actors who are interested in space. So of course, there are us, just normal people, maybe you're sort of professionally employed in the area, so it's a bit different, but for the vast majority of people, we have an interest in space, we have an interest in space in the, in a, in a, roughly in the same way that we have an interest in air or we have an interest in our environment, something that it's a common area. But there, then there are other actors as well. There is the United States military, there's the Chinese military, there are militaries all over the world, there are commercial entities, so there are these different actors. Talk to us a little bit also about what that ecosystem looks like. And I'd love to also, because this is something else that I realized (7/57)
when I delved into this a bit deeper. And again, to add an extra point of what fascinates me so much about the subject, to me, this feels like a strong holdover from the Cold War, one of the few areas perhaps along with nuclear, the nuclear arsenal and nuclear deterrence that we still have a lot of systems, protocols, technologies in place that were Cold War, pre-Cold War technologies, pre-Cold War protocols that we still have today. And so there are interested parties that are still acting largely, to what extent there is accountability is something that I'd like to talk about, because I'm not sure. I know that certainly there's a lot of concern on the US side as far as what is the accountability on the Chinese side, because that seems to be, that's how the American military seems to define the Chinese People's Liberation Army and the government as their prime adversary. To what extent there is communication between the army and the government on their end. So there are all these (8/57)
different actors, all these different interests competing. Can you try and give us your best sort of overview of what that ecosystem is? Well, you're correct that space security and space development is one of the last vestiges of Cold War thinking. And that again goes back to the, because it's dealing with dual use technology. But space did not develop in a normal way. In fact, since the 50s, people have been talking about space development and the normalization of space development. What that means is in areas like aircraft, you had the public sector, the government making an initial investment to allow the technology to develop its seed money. And then you had the private sector taking over and taking it forward. So with airplanes, there was the, there were contracts given for private sector entities to deliver the mail. And if they could deliver the mail, they got paid and they could develop further technologies. But with space that hasn't happened. It's been dominated by (9/57)
government actions, government development. The fact that we're still using basically have been using the same kind of rockets as we used during the Gemini and Apollo program. Now 50 years plus later says that we haven't developed as we would with airplanes, with cars, with computers. And that's largely again, because space is very expensive and very high risk. And it's only been governments that have been able to make that kind of investment. The commercial companies that developed were there to feed into government plans. Ray Theon and those companies. Yes, Boeing, Lockheed, Ray Theon, they feed in. And again, going back to dual use, they would feed in through a space division, which would be building technology to launch satellites. And they would feed in through a defense division, which would be building missiles. And one of the things I always present to my classes is what's the difference between a rocket that has a very futuristic and positive connotation and a missile, which (10/57)
is of course a payload. And it's largely trajectory and payload. There are some other differences, but it's for the most part payload. So if you look at it from that respect, you've got this giant government program that is fed into by the commercial entities that developed to accommodate. And they can make a lot more money in the defense side than they can the space side and the civilian side. So that sets up right there a huge lobby and part of this environment that can make a lot of money from keeping space, primarily a defense realm. And when you were saying earlier how little information there is that puts it into context, it's because it is primarily an area of defense and it's very high tech. So it's easy to just basically tell the public, don't worry, we got it. This is too complicated. And you start throwing around words like exo-atmospheric and dregs and all those things. And people say, yes, yes, you just go handle it, we're fine. So there's been this commercial government (11/57)
synergy that has a very strong defense portion to it, which has also created a revolving door between the government and the commercial side in terms of most of the people who run the commercial sector, especially the defense sector, our former members of the military or part of the government security sector. So there's a very much of a vested interest in self-serving actions. And then more recently, you have these what are called new space companies where you have billionaires basically investing their own money to go beyond this environment that has been prolonged much too long and start saying, no, we're going to start investing in the space side and the development side that has really never occurred before. And we're going to build new rockets and we're going to build habitats and we're going to do things like mining. And it really sets up the kind of development that many people expected to happen 50 years ago and never did. The Falcon 9 rocket developed by SpaceX is a full (12/57)
thrust, partially reusable launch system. So that's further to your point. Right. Also, again, you have these think tanks that provide reports in terms of what's needed, how do we do it. And most of these think tanks are funded by the commercial sector that supports the government. So there's this self-perpetuating threat and need to address the threat. And there's a lot more money to be made in building missiles and technology than there is diplomacy. And I mean, that's the classic military industrial congressional complex that Eisenhower warned about. Eisenhower would be rolling over in his grave right now at what has happened with the military industrial complex in this space film area. You also touched on this notion of congestion or contestion or competitive sort of this changing aspect with respect to some of these private companies. So the other thing, though, that I wanted to say before we move on from the sort of that context that we're describing is I noticed something else (13/57)
in my research for this, which is in addition to this being a holdover from the Cold War period, in that same sense, it also is a holdover, it seems, from the period right after the fall of the Cold War and the notions of full spectrum dominance and this desire by the United States military to achieve a level of superiority in this, in this, get the high ground, which in this sense, quite literally is the high ground. And to maintain that type of a posture, it seems that that still is the mentality among certain people in the military, and perhaps even in the government and in the Congress. Could you speak a little bit about that as well in terms of what the variety is of views of not just the inevitability of war in space, which is something I want to get into, that there are people that actually feel that it is completely inevitable and that we just simply have to prepare for it. And also what the aims and objectives are of people within positions of power and how that really affects (14/57)
the entire process of diplomacy, which from my perspective, having coming at this really as a layperson entirely, it seems given the vulnerabilities of space, given the vulnerabilities of satellite technology and the vulnerability of society as a whole and its dependence on space, it seems that diplomacy is the only way forward because any war in space would be catastrophic for our satellites. And I'll also ask within that context as well, from what it seems to me, we have about half of, half of, half of satellites in space are American, whether they're civilian, commercial or government, military. So it would also be, it would be worse for us. But anyway, that was a bunch of stuff I threw at you. I just wanted to get it out there. Please continue. So let's go to the description of space that you clearly found that's used repeatedly, congested, contested and competitive. It is increasingly congested because previously the only two countries that could really afford to put anything into (15/57)
space was the United States and the Soviet Union. Again, it's very high, high risk, very expensive. And so it's been this government domain. And now, increasingly, other countries are intent in not being left out of the advantages of space. And those are primarily, again, through information technology. And so it's not just the United States and the Soviet Union, now Russia, but China has a great interest in having space technology available to their population and to their military. Most of the countries in Europe, you have countries like Vietnam wanting to launch their own satellite because having a satellite is a very prestigious event. And it basically says we are developing. So you have Nigeria and Vietnam and other countries becoming very involved. And the more that's put up into space, the more congested it is. Well, there's a downside to that. You have to be very careful to monitor where things are so that you don't have collisions. But that also indicates that more people are (16/57)
using space. It's more or less inevitable through development unless we have intended that space was going to be the exclusive purview of the United States. Which seems to be an idea that some do have in the military and in government. Well, exactly. And that's because, again, when only the United States and the Soviets could go into space, we began to put very high value satellites into a very high orbit. And we refer to it as the sanctuary orbit. We refer to the satellite as exquisite satellite. And you're referring to high orbit, like satellites in geostationary or geosynchronous orbit? Yeah, it's basically high orbits that are very valuable geostationary. And we refer to it. The fact that we refer to it as sanctuary orbits basically says it's ours. As other countries are getting better at their technology, they are getting closer to those orbits, which we have deemed ours. And that is seen as a major security risk. Well, that basically is saying we have claimed this real estate as (17/57)
only and according to the outer space treaty, which the United States has signed, everyone has equal free access to space. So there's a contradiction there. So that's congested. Then there's competitive. Well, again, that basically says it's no longer the United States and the Soviet Union, Russia. And that that's inherent if you're going to develop the part that is most focused on by the security community is the contested. And that basically goes back to that sanctuary orbit of that sanctuary orbit, basically saying things that we considered ours and only ours aren't just ours anymore. Other people are contesting our right to exclusivity. And that is that is a major threat to the security community. So you have this environment of congested, contested and competitive, which can either be viewed as threatening, or it can be viewed as an inevitable portion of developing space. And it really has to be viewed as both. But how do you deal with that? So there are many people who view that, (18/57)
again, the United States must have full spectrum dominance, including the high ground. Well, let's talk about the high ground for a minute. If you're in the Army and you get on to the high ground, the assumption is it's a good place to be because you can see everybody else and you can hide, you can get behind that rock and people can't get to you. But the high ground in space is basically saying you are a bright, identifiable object traveling in a certain pattern or orbit against a dark, dark sky. You're sitting duck. It doesn't give you the same kind of high ground. Now what it will do, what what satellites will do, is give you 24 seven access in terms of reconnaissance to areas that you might not have access to otherwise. So this high ground analogy goes only so far. And then there's the inevitability piece is space war inevitable. And of course, we owe that attribution to Donald Rumsfeld, who basically argued that all other domains, ground, air and sea have become battlefield. (19/57)
Therefore, it is inevitable that space will as well. That's also the expressed view of the commander of US strategic command, John Hayden. Yeah, it went away for a little while, and now it's back in full force. And it came back after the Chinese had a launch in 2013, which nearly reached the sanctuary orbit. And basically, that kind of changed the entire US posture from one of strategic restraint, where we won't develop technology if you won't develop technology, certain threatening technology, because we've never, the United States and or any other country has never crossed the line, crossed the Rubicon from developing dual use technology that could be used as weapons to overtly developing weapons. And there's now this push. And ironically, as this is rather 1984 ish, we are still not saying we're going to develop weapons. Instead, we say we're going to develop offensive counter space technology. I didn't immediately catch that Orwell reference. I thought you were referencing the 1985 (20/57)
ASAT test where we shot down Seoul wind and created all that debris. We have, we have tested ASAT in the 80s. We've tested ASAT. Far more recently, we used missile defense technology to shoot down one of our own satellites that was malfunctioning after the Chinese tested their satellite or their anti satellite technology in 2007. So we don't have space weapons. We have offensive counter space technology. Think about that for a minute. What does that mean? What is offensive counter space? That means if we feel threatened, we have the technology to defend ourselves. Well, that's a weapon. And the fact that you can use it offensively says we might not even wait for somebody else to use theirs first. Offensive counter space. So that's where we are right now with this large group of vested interest individuals and those who are very sincerely concerned about US national security don't get me wrong. Pushing harder than we have since the George W. Bush administration for a position of space (21/57)
war is inevitable. And this is being fed blatantly by certain media reports. There was one on 60 minutes. Oh, I saw that. Yeah. Which are basically advertisements for the Air Force budget. We need more money so we can build more stuff to defend you against this inevitable threat, which is looming. So you reference those two, the two Chinese tests. I think it's important for our audience, many who won't necessarily know what you're referring to. One is the 2007 test in which the PLA blew up their own satellite creating much larger debris field than anything we've done. And we've done plenty ourselves. And by we, I mean the US military and the US government, they created tremendous debris field, which is only now beginning to, from what I understand, affect our satellites and affect our international space station. We've, from what I understand, we also move the ISS, the space station out of the way of our own debris every year or more. And so now we have that in addition with China and (22/57)
the debris field is something I want to get into. But I also want to use that as part of a question as well around communication because what I think we saw with respect to the Chinese test was them sort of sending us a signal, sending us a message. And I wonder, and there's some alarm for me when I look at this subject, I wonder to what degree we really understand the Chinese and what to what degree we seem to be on an institutional level, even interested in understanding the Chinese and their intentions when it seems Congress has gone out of its way to make it explicitly clear that we should have very limited engagement with China and our company should have limited engagement with the Chinese when it comes to space. Right. In 2007, the Chinese blew up one of their own satellites very irresponsibly in a high orbit that is going to, it doubled the amount of debris in orbit and it's going to affect space operations for a very long time. A little bit of background on that. The Chinese (23/57)
ASAT was built by their General Armaments Division, which is part of the military. It develops technology. They're roughly equivalent to DARPA in some ways in that it's their job to build new stuff. Well, they're a bunch of engineers. What do engineers want to do when they build something? They want to test it. They want to use it. So the Chinese before doing the kinetic impact test did flybys, very obvious flybys that they knew the United States government could monitor. They did at least two, maybe three, I honestly don't remember. But they did these flybys and the United States said nothing. Which I find remarkable having also read about that. I find that absolutely remarkable. Well, it could be for a variety of reasons. It could be because we wanted to see how good their technology was. We could have been because we wanted to not acknowledge how closely we could watch what they were doing. It could also be just for political reasons of let's see what they'll do. They finally did (24/57)
the, again, kinetic test, which hitting a satellite in that hive and orbit was bound to create debris. The Chinese knew they were creating debris. They're actually, their debris calculations were right on target. But when it was presented to the decision makers, it was presented in such a way that it seemed reasonable and they went ahead and did the test. There's also a bit of an irony there as well, maybe not so much an irony, but of course our expectations around communication and concepts of distance stem from our technological innovations over the decades and specifically in the domain of the military. The space represents the center of our command and control infrastructure for the U.S. military and of course for the Chinese to the extent to which they want to modernize their military. I mean, one of the things that seems very scary about space that sticks out to me in particular, making it worrisome, is that any type of engagement in space that could create unforeseen (25/57)
consequences in terms of collateral damage could knock out communication infrastructure that then effectively turn the United States or the Chinese or any modern military into a very large, dangerous and erratic military machine blind and deaf. Absolutely. How large of a concern is that? Well, that's one of the, every year there is a space war game called the Schriever game and what is released after that, the Schriever games, there's an unclassified report and then much of it is classified. But what we know from the unclassified reports is that escalation happens quickly because there are these doubts about what happened and we can't wait to see if it was nefarious or not. We have to assume, especially what if it's one of our early warning satellites that becomes defunct, malfunctions. Do we assume that that was nefarious so that we couldn't see a missile launch or a nuclear launch? And that's one of the big concerns is this tendency towards rapid escalation. Oh, of course. And (26/57)
historically, there are many reasons for us to worry about the information coming from our early warning systems, even if they're functioning. I'm just thinking of the 1979 case where a technician had accidentally run a war game at NORAD and we almost went to war or 1983, the false alarm on the USSR side. Yes, exactly. Just as there is a, just as when engineers build technology, they want to use it. When you have a weapon in your arsenal and you are unsure of where the threat is coming from, there's a tendency to use it. All right. And just to clarify, we've used the term ASAT frequently during this interview. ASATs refer to anti-satellite weapons. And when you're talking about kinetic again, to reiterate, when you were saying that the Chinese were flying by their other satellite, what they were doing was they were, the threat was that they would ram into their satellite, and that is how they disabled it and broke it into pieces. I want to clarify one other thing on debris, and then I (27/57)
want to move to other weapons. Specifically, I've read a little bit about this idea of rods from God, this notion that there is an interest in weaponizing space for more traditional purposes, and to sort of, I want to get your take a little bit on to what degree that is actually real or science fiction. But with respect to debris, I do want to wrap this part up and make sure that our audience understands the significance of it. What I've read, and I would like you to illuminate me on this, what I've read about the debris field and its potential. I mean, we've only destroyed a fraction of the satellites that exist in orbit. We also create debris when we go into space, when we release boosters from our rockets. But the amount of potential debris out there is huge. And the amount of debris that we would create in the event of hypothetical war scenarios in space, I've read could be so devastating that we would not be able to exit Earth orbit for hundreds, if not many more years. How (28/57)
accurate is that? Is that an understatement? Is that an overstatement? Most people are familiar with space debris from the movie Gravity, where they took some fictional license and began the movie with one satellite hitting another, creating debris which then hit other satellites, and this chain effect took over, and everything was blowing everything else up. And that was, again, there was definitely some fictional license going on there. But there is this idea that when something, when there's debris in orbit, it can become itself a weapon. The space shuttle, on a regular basis, used to have its windshield replaced after being hit by something the size of a paint fleck from a rocket boost. Which is a remarkable point. I mean, a paint chip, because of the fact that it was moving at such speed, was able to generate a force large enough to crack a windshield, which is remarkable. Right. And something the size of a quarter could be catastrophically damaging. So, there is this very real (29/57)
risk in terms of, it's interesting, General Hyten has now said that the one thing that he is adamant about is do not create debris. So, there is a recognition in all communities that debris creation could have catastrophic results and could cripple, basically, not only the military, but cripple satellites that we rely on every day for daily life. So, yes, debris is an acknowledged within all communities as something to be avoided. There are different technologies to be considered, but then you have to start thinking about, do you want to go for the really big pieces? Do you want to send up something that's like a grappling hook to reach out and grab on to an old rocket booster that's the size of a school bus? Interesting, the legal issues involved there. There are no salvage laws in space, so everybody owns every piece of junk floating around. And you can't just go up and clean it up. But then maybe you want to go for the small stuff, and you want to try and clean out all that paint (30/57)
debris and the little stuff that can be just as damaging. And some of the ways that have been suggested to do that is to basically put out a foam cloud that would catch it all, and then you deorbit the foam cloud. So, there's different ways to do it, but what would it take? It takes a lot of money, and it takes a lot of international cooperation, which we are not... We don't have a lot of right now. How would that's interesting? So, you just illuminated me. How would that work? So, a few things. One, I don't know if you know the exact number. I don't, but from what I've been able to gather from low to high earth orbit, the volume of that space is much larger than anything we encounter on earth in order to manage that, it seems an overwhelming task. And I certainly did not come across any information about technology, so that's very interesting. How does that work? And how realistic is that proposal? Well, there's lots of proposals. There's proposals to use lasers to basically, if you (31/57)
want to deorbit a large piece of debris, you slow it down, and it will fall from orbit and burn up in the atmosphere. But when you start shooting lasers into space, that makes people very nervous. So, there's laser technology. There is, again, this idea of a grappling hook, but you latch onto something that's been in orbit for 40 years, it could just crumble. You could create debris rather than solve the problem. And of course, these are large pieces of debris you're describing. They're not the, you know, the paint chips or the quarters. These are school bus size pieces of debris. And then again, there's the smaller debris that you... There's proposals to capture them with the foam. There's proposals to capture them with basically a vacuum. There's... And it's interesting, the scientists working on these different proposals are very cooperative with each other for the most part. It's the governments that can't cooperate. I mean, I think we could make the technology happen. But it's the (32/57)
politics that's the stumbling block. That's interesting. I'm... After this interview, I certainly am going to go read into those technologies, because again, and that just speaks to the challenge I face. And I think to some extent, you may not even be familiar with this because of the fact that you work in this field and you're so aware of this information and where to get it. But I can tell you that coming to it from my perspective, I have not had harder time researching a subject that I know little about than this. For example, that the space debris information is going to be in very technical journals. It's not information that citizens lay people generally come across unless there's an occasional article in popular science or popular mechanics or something of that nature. It's all very technical. And this is all integrated. Space is integrated with every other weapons platform and system that the US military has, and I guess increasingly the Chinese and the Russians, to which they (33/57)
look to expand their capabilities. And so it's not so much where does space, from my understanding, where does space reside on a hierarchy of importance, it's that all these pieces are interconnected and having a negative outcome in space could create all hosts of problems, including just issues with communication and protocol and exchange and first strike, etc. There's the point that's usually made on that is information from space technology isn't somewhere, it's everywhere. That's kind of the simple statement of what you said in more words. It's that space is not an entity to the side. Space is a provider of information critical across the board for the US military and for the populace. I mean, I don't think people understand that when they go use their bank card, they're using GPS. Yeah, when you pay for your gas at the gas pump, you're using space technology. That when a fire truck leaves the firehouse, it finds you through space technology. The fact that you can watch the (34/57)
Olympics on television real time. Again, it gets into, is space is integrated into our everyday life to an extent that if it were suddenly not available, it would be far more painful than people realize. I think that absolutely. I think that that's actually increasingly true for many aspects of society because we've increasingly scaled our society with technology and rely increasingly on all these different complex systems that we don't understand and that are vulnerable, increasingly vulnerable. In terms of the military, it's interesting to note that the United States has integrated space into its military platforms and its military operations to the point that the Chinese refer to it as our potential Achilles heel. They are integrating space technology into their military operations with a very keen eye towards not becoming as dependent upon it as the United States has. We demonstrated that really with Gulf War I. I think that was the first place where we really showed our (35/57)
capability. Increasingly, with every war since, the number of precision guided weapons that are used from the first Gulf War to current operations has just increased substantially. That again, that pumps up the we must protect these assets because we are so reliant on them, which is a very real threat. But the problem comes back to how do you protect, what is the best way to protect this valuable space technology? Now, to go back to a reference I made earlier to Raj from God, this proposal by members of the military community to put actual weapons into space that could hit targets on earth without the need for payloads, but that would actually generate the equivalent destructive power of a megaton nuclear bomb. Is this something the military is seriously considering or is this total science fiction? Because this takes it to another level beyond our conversation about ASATs and attacks from satellite to satellite or affecting communications. Rods from God is a concept. As far as we (36/57)
know, it's never been built. I'm quite confident it hasn't, but it's a concept that's been discussed because what it would do, it would fire these tungsten rods to earth so that the impact would be that of a nuclear weapon, but without the radiation. So when would you use something like that? They're bunker busters. They could get deep into the earth without causing the radiation that is associated with nuclear weapons. It has been at various times billed as a rapid response, but what scientists have shown is we could do much the same thing quicker and faster from earth with land-based missile systems. So some of this gee-whiz stuff is the function of people whose jobs it is to sit around and think of gee-whiz stuff. And much of that in the military, that's your job. It's not necessarily to build it and use it, but to what could I possibly do? We joke about somebody has the job of trying to invent unobtainium or impossibilium, and rods from God was one of those gee-whiz crazy ideas (37/57)
which I think luckily was not built. The idea of having this weapon orbiting above people's heads to fire these rods down, I think would be terrifying. It's the idea of putting a laser in space. That too would be terrifying for a lot of people, and rightly so. So do we need to cross this Rubicon of space weapons? And how do we define a space weapon? Is it just those that are ground to space that are by kinetic impact, or is it using cyber technology to interfere with the communications? Or again, taking out the ground station so that you can't receive the information. Because we cannot or we have not been able to define a space weapon, there is this large community that says, well, then it's beyond the realm of arms control. If you can't define what it is, you can't subject it to arms control. And that further pumps up the spiral of inevitability, of full spectrum, of high ground, of all of that that feeds into the weapon scenarios. So I want to get to that sort of rules of the road (38/57)
thing, sort of how we could go about creating some type of diplomatic framework, rules framework around this arms control framework. But I want to contextualize that with a unique challenge. So was I correct when I initially stated that the Chinese are, according to the US military, they perceive the Chinese as the main threat, main adversary in the 21st century? Yes, that's correct that the Chinese are perceived as the biggest threat to US space assets. So I want to get to this question of how we would create a diplomatic framework on arms control, or what discussions are happening within the diplomatic community on that front. But I think it's important to contextualize that within this larger theoretical game paradigm that many in the military and in Congress and in think tanks in Washington seem to be operating within. What's commonly referred to as the Thucydides trap, and how it specifically relates to China, with whom we would need to negotiate any meaningful arms control (39/57)
measures in the first place? Well, Thucydides trap basically looks at the idea of a rising power threatening a power in existence. And inherently, in other words, just simply, yeah. Yes, there will inevitably be conflict with a rising power challenging a sitting power. And where the sitting power in China is the rising power? Right. And Graham Ellison, Professor at Harvard University did a study, I think it's probably a year or two ago now, looking at that, has this idea of Thucydides trap held true? And he looked at a sample number of conflicts and found that more often than not, it does hold true that there is conflict that this rising power will eventually either challenge the sitting power or the sitting power will feel threatened and try to defeat the rising power. But he also, the study that was done, that was an Atlantic magazine basically said it's not inevitable. But what it takes is a change of perception and attitudes that goes beyond trying to use trying to use band-aids to (40/57)
cure cancer, you know, China is not going to go away. China is not going to say, you know, never mind, we won't, we won't keep pushing development for our 1.3 billion people. It would require the United States and China to make a new security arrangement. So it's not viewed as rising and sitting power that it would be viewed as how can we both coexist? That gets hard politically because for the United States, that would be likely perceived and presented as acquiescence that we are bowing to the Chinese. Remarkable. So remarkable. I want to ask you about that. Go ahead, sir. Yeah, well, it would, that would be very, especially in the current political environment. That won't happen. That's another problem. Indeed, you touched on that as well. I mean, that's remarkable to me. I understand that for you it probably isn't because you, again, you've testified before committees. Like I said, I watched one of your testimonies. I used to watch C-SPAN, I used to watch testimonies, congressional (41/57)
testimonies quite often on C-SPAN in the past, but the ones that happen in these more obscure committees are even more remarkable for their variants. But I mean, I find this sort of conversation fascinating and remarkable for two primary reasons. One, when we talk about us, when we talk about the US, when we talk about us, I think it's a very limiting term because really, who stands to benefit and who stands to lose from these types of escalatory, aggressive postures? One, I endeavor to think that the average person stands to lose a great deal. And what do we really have to gain from this sort of notion of winning or maintaining empire? It's unclear to me. And also, I don't understand how the press in particular, because clearly, I can understand a general or a person in the military having a more cynical, mindset with respect to war's inevitability and the facilities trap in China. But the fact that there is this pervasive cynicism around China from a military standpoint, I mean, on (42/57)
the one hand, commercially, we have a great relationship with them. Well, it's fraught with issues. There's no question. I mean, the recent election brought that up. Trade is an issue. Espionage is an issue. Commercial espionage, IP, those things are all problems. But we've managed to create these interlocking trade and supply chain relationships and production relationships with the Chinese that have really brought us much closer together. And our world is much more interconnected and our cultures are much more interconnected than they were before. But on the government, on the sort of, on the international government military side, there is this seemingly unchanged, if not further calcified cynicism that pervades the culture with respect to China. And now we see increasing with respect to Russia. And it's as if we only look at the one side, which is, and it's also as if we're talking about it as though we're a game, that in fact, there aren't these devastating consequences to an (43/57)
actual conflict, so much so that we'd be kidding ourselves to suggest that conflict is even an option. And so, you know, that I just, that was a bit of a rant. That was me kind of just expressing my opinion on this as someone who is coming to it from the outside. But, you know, what is your view on that sort of, what that culture is, how you relate to it in your capacity, testifying and trying to educate people. And I don't know exactly what your opinion is and how you feel on this. I think it is in US national interest to have a stable relationship with China. We will agree with them on some things, probably largely related to economics and trade, or at least we have, and we will disagree with them on other things, primarily political and military. But I think the ultimate US goal should be stability. It does nobody any good to have China and the United States in any kind of military confrontation. Part of the reason, I had very interesting conversations in both the United States and (44/57)
in China regarding how we are in this Cold War deadlock still. And a couple years ago, I was in China, and I was having lunch with some young academics from a variety of fields, economics and politics government. And one of them said to me, he said, you know, I just don't understand why the United States has a hard time, such a hard time working with us. And I said, well, you know, with all due respect, the United States has a hard time working with communist authoritarian governments. And they all looked at me and said, well, people don't really believe that we're still communists, do they? And I said, oh, very much so, very, very much so. To them, to many of them, communism, it's a single party authoritarian system, but it's not an ideology that they are capitalist. It's not ideological any longer. In the United States, if you read testimonies or statements from a lot of our members of Congress who are very adamant about not working with China in space, it includes rhetoric like the (45/57)
United States does the United States does not work with communist countries. The United States does not work with authoritarian countries. Well, of course we do want to benefit us. Well, in fact, in the testimony that you gave that I saw, I forget the subcommittee, but in fact, one of the congressmen openly laughed and said, you know, I find it tremendously ironic that a Chinese general was at Davos, a capitalist forum, and for my communist country. And I thought, clearly, you haven't really been to China recently or not really understand that China is not communist, that they're authoritarian, certainly. And they're a single party system, and that single party happens to be communist. Yeah, but they're certainly capitalists. Yeah. So there are these real holdover notions. And now in China, I gave a talk at one point, and it was on space, and afterwards, an older man got up, and I don't speak Chinese, but my interpreter basically conveyed that he was pretty much calling me a running (46/57)
dog, running capitalist dog. Running a running as opposed to a stationary. It was right out of central, he was right out of central casting. But the younger people in the room very carefully came up to me and said, you just have to wait until it's our turn. To speak or to rule. There are these hard positions on both sides. There's hard ideological positions on both sides. There's hard political, I mean, there are those in the Chinese government, the Chinese military, who do not wish the United States well. They see us as keeping them down, and they do not wish as well. Just as that position holds true in the United States regarding the Chinese, there are those in China who want very much to cooperate with the United States. China is no more a monolithic, philosophical, or ideological view than is the United States. So that to me, that's an interesting thing that you touch on. How pervasive is that, and how independent is that of public accountability? In other words, we elect (47/57)
congressmen, we elect senators, we elect presidents. To a certain extent, the government has its own inertia, it has its own momentum. To what extent is that sort of mentality embedded in the departmental and institutional apparatus of the United States government, and how much of that is a force that we're contending with when we want to try and introduce arms controls and rules of the road, which is something I want to get into in this conversation as well? Well, bureaucratic politics is a fact of life. I mean, the Pentagon is the largest bureaucracy in the United States, and the number one goal of every bureaucracy is self-perpetuation. So if you have, if suddenly you were to say, the Chinese are not a threat to US-based assets, that would make a big drop in the Air Force budget. So there is a bureaucratic impetus to constantly see a rising threat. Now, that doesn't mean it's not there, it just means that the bureaucracy is going to emphasize threats and de-emphasize opportunities. (48/57)
Okay, so in that case, let's talk about opportunities, because I mean, I did want to make sure that we captured the threat and the seriousness of this, because it is very serious, and I don't want our audience to glaze over it as I have for so many years without kind of looking into it in more detail. But let's talk about the, so we talked about the high ground school, essentially, folks that see space as this location above the earth, where once you get there, you have control of the domain and etc., etc., people that see space war as inevitable, and therefore we have to prepare for it. It seems to me also that that's sort of how John Highton sees it. I'm not sure if you agree, but just based off of the interviews that he's given, he seems to be in that inevitability camp, which is scary, again, because he's commander of US strategic command, but so there's also the arms control school of thought. Those, I assume that that includes people, perhaps that includes yourself, I'm not sure, (49/57)
and these are against stereotypes and categories, but that seems to include folks who are basically acknowledging that space war and conflict would be catastrophic, because again, space wars and space conflict, the use of space conflict and space, that also carries with it the strong likelihood or increased likelihood of nuclear weapons exchange, and that's something that would be catastrophic and devastating here on physical planet earth. So, you know, what is, what has happened so far there in that respect? And I should also mention from what I've been able to find, we have consistently, I don't remember the name off hand of the UN resolution or the UN agreement that is put forward every year since 1959 or 1957, I'm not sure since when, but we consistently refuse to sign that. So what can be done, what has been proposed, what is the most logical, reasonable framework that exists that we can think about, that the public should be aware of? In a, in a idyllic arms control world, you (50/57)
have a treaty, a treaty that would ban space weapons, but again, we've talked about what would that entail, how do you define a space weapon? Dual use problem. There's that problem, and then there's the problem of the United States, generally speaking, has not been in the mood to ratify treaties for a very long time, and it's basically because treaties are viewed to restrain, largely restrain the United States because we're already on top. So if we say, okay, nobody can do any more than the United States has done, well, that gives a lot of people a lot of room to advance and it holds us treading water. And in fact, that I've often, you know, asked the question when I have members of Congress ask me, well, how are we going to get the Chinese to act as a responsible actor in space? And I like to respond by saying, what would that look like? What is a responsible actor in space look like? Can we use ourselves as a model? If we are the model for a responsible actor in space, then countries (51/57)
can build missile defense, they can build lots of reconnaissance satellites, they can use all orbits. So, and the answer is always no, no, no, that's not what it means. So basically, the United States has set itself up to have a policy of do as we say, not as we do, and that that is simply not sustainable. So we're not going to do a treaty. So what's next? What's the options? Well, there's something called soft law, which is it's, it's kind of not a treaty, but you're working in that direction. And a lot of this has been done through the United Nations, where the Chinese and the Russians have proposed every year for several years, a treaty to ban space weapons and space. But the treaty that they have proposed is quite frankly, a self-serving treaty from their perspective, the way it's currently written. And it would not, it is not in the interest of the United States to sign that particular treaty. I think other countries feel that they can go ahead and sign on because they know the (52/57)
United States is not going to sign on and it's not going to happen. So they are acting a little self-servingly in that respect as well. But okay, so if you take the treaty off the table, then there are these soft law options. And if you look around for what might we use as a model, well, there are, there are rules that are used on the sea, which is also a global common, that basically say you can't bring your boat any closer to mine than this distance, or I can infer nefarious intent. And you have to tell me where you're going. And it's just basically setting up expectations for traffic. And again, with space becoming more congested, there's the idea that we at least need to have ideas of where people are and what, what others can expect of them. That suddenly if your satellite is approaching mine, and you haven't told me about it, and you get closer than, than a certain distance, I could go ahead and defend myself. So we've been working on this a few years ago. The Europeans took the (53/57)
initiative to begin pushing an international rule to the road. Secretary Clinton got behind it for the United States. The military got behind it because they really have no interest in a wild West environment. But several countries, including China, Russia, Brazil, India, felt that they had not been duly consulted when the original document was drawn up, and it was not in their interest. And the Europeans were unable to push it diplomatically and it died. What year was this? I'm sorry. Oh, it was, I want to say, it was Secretary Clinton signed it for the United States. Like 2009 or 2010 or something. Yeah. These efforts through the United Nations have come about where it's basically committees in the United Nations have set up technical councils. So rather than fight your way through the politics, which never works, they set up technical committees to say, deal with, with very specific issues. Because as I said before, you can get the scientists and the engineers to agree on how to (54/57)
safely operate. They, they have a vested interest in working together. It's just at the political level. So there's been these efforts to set up these technical rules of the road, and they divided them into categories of kind of low hanging fruit, harder and hardest, and made great progress in getting through kind of the first two categories, including with China. And at the last minute, the Russians tried to blow it up. I personally believe the Russians are far more obstructionist regarding space rules of the road and space methods of conduct than are the Chinese. But even that has been overcome. And there's, there's, we are showing that progress can be made diplomatically. But I would also point out that the amount of manpower and money spent on diplomacy through either the State Department or the Defense Department on space is a drop in the bucket compared to what is spent on GWIS technology ideas in the Pentagon. It also see, am I also correct in having read that the, there are, (55/57)
are there budget cuts for the State Department? They're in line for budget cuts. Yes. Which is a great irony in the, in the context of this conversation. I know you have a hard stop. So I'd like to at least end with getting your summary thoughts and maybe what you'd like to see happen going forward with respect to US policy and US military's posture in space. I would like to see the United States maintain a position of strategic restraint. Because whatever we do, other countries are meant to follow. If we develop weapons, overtly develop weapons, other countries will as well. So if we maintain a position of strategic restraint where we do the research, we certainly keep pushing with research. We just don't move into a rapid development and deployment phase. And at the same time, put equal weight, equal being the key word there, weight on diplomatic efforts. And try to move away from this policy of do as we say, not as we do. We gain a position of leadership where countries want to (56/57)
model us while keeping that strong defensive posture. I'm in no way saying this should go away. But don't move into the develop and deploy technology which others are going to follow suit on. And at the same time, again, put more, not less effort into the diplomatic efforts. And is there some particular, I mean, is the most promising thing you've seen what the Europeans are doing? I think you said it was the USA. What's going on now through two committees at the United Nations is the most promising. All right. Well, thank you for taking the time to speak with me, Dr. Fries. Sure. Thank you. And that was my conversation with Professor Joan Fries. I want to thank the professor for being on the program. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation on Facebook, Twitter and Instagram at HiddenForces Pod or send me an email at dk at hiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
What's up everybody? My name is Dmitri Kafinas 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 Jim Bianco, president and macro strategist at Bianco Research, where he writes about monetary policy, government's role in the economy, fund flows, financial positioning, and much more. I invited Jim on the podcast to discuss the recent rise in bond yields, factors contributing to that rise, as well as a host of other macro variables influencing the US's, Europe's, and China's economies, investors' portfolios, and much more. We devote the first hour to understanding the sources of the recent rise in long-term interest rates, not just in the US, but across the developed world. We discuss the Fed, concerns about government debt and deficits, inflation, tariff policy, and (1/57)
economic growth expectations in the context of some of these potential headwinds. In the second hour, Jim and I focus our attention on the impact that some of the changes discussed in the first hour may have on people's portfolios. Specifically, we examine the resiliency, or lack thereof, of the 60-40 portfolio and explore strategies to reduce portfolio volatility in a world where stocks and bonds spend more time trading in tandem than they do trading apart. We also explore the sources of continued dollar strength, US equity concentration risk, recession risk, and what the Chinese bond market, which has seen an accelerated decline in yields over the last several months, continues to signal about the health of the Chinese economy. 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 (2/57)
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 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 or my guest are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this wide ranging and thoughtful conversation with my guest, Jim Bianco. Jim Bianco, welcome to Hidden Forces. Thanks for having me. This is a long time in (3/57)
the making, Jim. We've known each other for a long time. I looked back on my emails because I could have swore that we had something scheduled in the past and we did, but I don't entirely know what led to us having to cancel and we never rescheduled. So I'm glad we were able to finally make this happen. Yeah, I am too. I've been a long-time listener of Hidden Forces and I think you do a great job with your interviews and I'm looking forward to it. I appreciate it, Jim. So for people who either know you, because like lots of people know you, you're always on, you're one of these people that sort of achieved escape velocity in media and you were in legacy media before mainstream, before alternative media took off where like everybody got on media. So you still make appearances on CNBC. How did you get started in this business? I got started in this business out of college. I graduated in 1984 and I got started on Wall Street in the late 1980s and from there, I started in the Equity (4/57)
Research Department at First Boston. That's before it was known as Credit Suisse. I worked there for a couple of years. I moved to UBS, Phillips and Drew in around 1989, 1990. And I say that because that's, you know, became UBS Warburg and now it's not just known as UBS. When I worked at UBS, Phillips and Drew, it was less than 100 employees in New York. Now it's thousands. And then in 1990, I moved back to Chicago, which is where I'm born and raised. And I started working with a little brokerage firm located here, an institutional brokerage firm called Arbor Research and Trading. And from 1990 to 1998, I was their director of research. And then after 1998, we spun me off into Bianco Research. Media, you know, it's interesting. I got to know Jim Grant in the 1990s. I got to know Ron Insana in the 1990s. And Insana was probably the guy that got me on the CNBC kind of in the mid to late 90s. And then it just started to, you know, kind of go from there. I was, you know, a regular on (5/57)
those. And then there was this old network. You might remember CNN Financial News, CNNFN. And when they started up in like 97 or something like that, I actually had a weekly bit called James on the Bond, where I'd come on every Friday and talk about the bond market. And I did that for like about four years. And then, you know, it just kind of kept growing from there. And you know, then came the rise of alternative media. And that was smart enough to jump on that, you know, with Twitter and YouTube and the like. Yes. Now I'm ubiquitous. I'm kind of everywhere at the same time. So just a couple of these questions before we head into a discussion about markets, Jim, what was that like for you back then? Because like I said, everybody now is like, anyone can have a voice now. Anyone can have a Twitter account. People thread all the time on Twitter. It's so easy to get on a podcast, you know, they're all sorts of podcasts you can get on. But you were doing media back when there was a real (6/57)
barrier to entry. And only so many people could do it. What was that like being on TV at that time? Was it cool for your parents? Like what? Yeah, no, it was cool. It was cool for my parents. It was cool for me. You know, fortunately in my case, you know, I'm in Chicago. I was in the loop at the time and it was easy because all the networks, you know, they had Chicago affiliates and or there was a couple of independent studios that were all within a block of my office. So it was really easy to kind of walk over there and just do it and stuff. But it was, you know, and the old joke I used to say is to people is, of course I know what I'm talking about. I'm on television, you know, and that was kind of the joke. Now today with the rise of social media and stuff like that, that doesn't mean anything. But back then it did, you know, so that people would look at you and go, oh, he was on TV. And I always used to have this joke, you know, I used to say, people say, oh, I saw you on TV and (7/57)
I'd always ask them, well, what did I say? And they'd go, I liked your tie. It's basically what they'd say. They'd never, ever remembered what you said. But, you know, if you were wearing a funny tie or your hair wasn't combed right, they'd always remember that. Yeah. And you learn very quickly that what works in person is not the same thing that works on television and you have to be more exaggerated on television across the board. And I still think that there's something special about being on a TV set that's very different from being, you know, behind a zoom camera. So all right, that was just me indulging a little bit in some personal questions for you, Jim. Yeah. I agree with you that being in the studio or being, you know, on a live set is very, very different. As far as zoom goes, I like to say it's better than not zoom. But that's about us. It's more convenient, but there it's a totally different experience being on live television and live television, especially. It's exciting (8/57)
I bet when $Leo gets near 1 dollar, Surge will sell out. It would be very hard not to lock in those gains. It could be that passive income we all strive to achieve.
I'm sick of the 9 to 5 type of life, how about you? 🦁
Digital cash Rundown 201
Live in 45 minutes!
Carlos Cano comes back on the Digital Cash Rundown to talk about whether time is running out for Strategy's Michael Saylor
Dash Podcast 220
John Gotts of the Digital Gold Foundation comes on the Dash Podcast immediately after to talk about why Dash's fair value is significantly higher.
Join the #threadcast!
#crypto #dash #bitcoin
I’m in. Do you think Saylor eases up if we go sideways for a while, or does he buy more, and will John share any concrete plans for real Dash use, not just price talk?
That's not what John is for.
Good to see you, Joel with the Podcast 201. Didn't know you will be on today, hope to learn something the little time I will be here.
Cheers!
Dash Podcast about to start now!
Oh, okay, that was just a session with Carlos.
Yes indeed
Almost live!
Here's the Odysee link:
https://odysee.com/@DigitalCashNetwork:c/digital-cash-rundown-201:2
Carlos is just wrapping up the last podcast, be there shortly.
Two podcasts back-to-back this early. What a morning......
Almost....
We're live!
Here it is on X
About to switch over in a couple minutes.
Aaaaand now!
Anyone use a crypto ATM?
Saylor printer go brrrrrr
Anyone here buy MSTR? 😆
It's insane that anyone bought this stuff, especially with Bitcoin.
Homeboy gonna get a lot of maxis rekt
Somehow, he managed to sell a bunch of shitcoins to maxis. It's beautiful.
Does Saylor make another cycle?
Horseshoe theory: shitcoiners and maxis are the same.
Who criticized Saylor before it was cool?
Here will be the stream:
Live!
Here it is on X:
@dashpay is the elephant in the room 🐘
Its funny because we get more $LEO in our bags which supports the entire LEO ecosystem. Red is temporary lions, we soon see green again! 🦁👊
#leostrategy #lstr #leo #surge
Red is good because USD is coming in and buys more $LEO.
That totally conflicts with peopls beliefs, so we need to keep remind them about it 🦁
That is why most are not wealthy. They want to have long term enormous gains yet panic when markets pull back.
Leostrategy can help them over come that by taking the decisions out of their hands.
Priceless reaction. 🤣
Made this just for u , enjoy
#grindsquad #duo #dook #aideep
https://inleo.io/threads/view/bradleyarrow/re-bitcoinman-2mdkw45fz
That is Fracking Awesome Sauce :) !BBH !PIMP
Looks good for a wallpaper
usually can't really use a gif as a wallpaper without some tricks
The trick is a screenshot 😆
Remember when we could stack thousands of LEO per month from our HP delegations alone?
How are you finding the new reality of earning LEO?
Man, those were the days with huge LEO stacks from delegations! Now it feels like a grind, but I’m digging the challenge. Gotta hustle with content and engagement to earn. How’re you adapting to the shift? 🚀
I think this is kinda discouraging for some users, but those who knows the real value of this project will remain stick to it.
Price going up is discouraging?
Well that's a new one ;)
Getting LEO at the present time is indeed difficult compared to past time.
Buttt its also worth a lot more than before.
Good tradeoff?
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 19.1% weight.
👇. https://inleo.io/@forexbrokr/the-new-reality-of-earning-leo-5e9
332.427 $LEO and 32.36 $LSTR has been earned by LEO POWER delegators to @lstr.voter 🦁
https://inleo.io/threads/view/lstr.voter/re-leothreads-t1755867633517-cot
Just started to delegate yesterday!! i hope im now late ! #LEO #lstr
GM
good morning Khal! Let’s make some volume on Leodex!
Those are some rather nice trading volumes
😂
https://inleo.io/threads/view/leostrategy/re-leothreads-2fy4i4wrw
Who is hungry for a GM gif ?🤣
#freegifs4leo
#grindsquad #duo #dook #aideep
looks good enought to lick my screen.
lol made something fresh just for u
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 9.78% weight.
🦁 🦁 🦁
Triple threat. 🦁
!surge stats
📊 SURGE Token Statistics
💵 SURGE Price: $0.830 (4.000 HIVE)
💰 Circulating Supply: 500,000 SURGE
👥 Holders: 164
📈 Stated Yield: 15%
🟢 Effective Yield: 18.062%
💎 Yield Distributed:
🪙 4.399 LSTR
🪙 95.071 HBD
💵 $139.338
!SURGE holders
🚀 SURGE.YIELD Bot Commands
•
!SURGE me- To see your info•
!SURGE stats- To see yield statistics.•
!SURGE hbd- To set payout to HBD•
!SURGE lstr- To set payout to LSTR•
!SURGE richlist- To see the richlist•
!SURGE help- Show this message💡 How it works:
• Hold SURGE tokens to earn 15% APR
• Weekly distributions every Monday
!SURGE richlist
🏆 Top 10 SURGE Holders
🔗 View full richlist
“AI Agents will be the primary consumer and customer of the Web going forward”
The former CTO of Twitter understands this
So does INLEO
As AI agents become the dominant web participants ,reading, transacting, curating , platforms like INLEO that build with this future in mind will lead.
The future is agentic
Get busy agenting or get busy dying
Absolutely, agentic AI is the next frontier! By 2030, we'll see autonomous systems driving innovation at 5x the current pace, turning scarcity into abundance. It's the greatest time to build solutions and embrace the future
Elon Musk talked about how we are moving into a world of abundance. He feels AI coupled with robots will generate economic output that provides people with most of what they need.
He even mentioned this on the earnings call with reference to Optimus, Tesla's humanoid bot.
Spot on! Elon’s vision with Optimus shows how AI and robotics will redefine abundance. By 2035, we could see humanoid bots handling 50% of manual labor, freeing humans for creative pursuits. It’s the dawn of an incredible era
Where did that 50% projection come from?
Is that your forecast or did you get that from Musk (or someone else)?
That's my own projection based on current trends in robotics and AI adoption rates. I’m estimating that with exponential growth, we could hit 50% automation of manual labor by 2035. No direct quote from Musk, just my analysis of the trajectory
Ah ok.
Do you foresee white collar jobs being eliminated at a rate that outpaces those of blue collar?
Many speculate this is the case.
I've started calling this game Crab Souls because it's hard af
https://inleo.io/threads/view/l337m45732/re-leothreads-5gthmcjs
Getting ready to watch Vincent Moon live for the second time this week 🥹
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 7.46% weight.
Today on #Motherhood we get slapped in the face with a question we knew was coming but weren't prepared for! #LSTR 1/3
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 5.25% weight.
The birds and the bees are an age old question we know is coming but are we ever truly prepared? I'd like to get some advice from other parents 2/3
Find out more on #InLeo built on the #Hive blockchain 3/3
https://inleo.io/@melbourneswest/a-birds-and-the-bees-conversation-i-wasnt-ready-for-9vh
Did you make it to the Top 30 RICH list of #LSTR. If not then you still have time before it gets too late. #LSTR is trading at a discounted price. Grab them and make it to the RICH list.
#leo #lstr #leostrategy
lol everyone is on there !LOLZ but not top 10 :^ )
lolztoken.com
It's just something I can see myself doing.
Credit: reddit
@gungunkrishu, I sent you an $LOLZ on behalf of ben.haase
(6/10)
Delegate Hive Tokens to Farm $LOLZ and earn 110% Rewards. Learn more.
Welcome back, Welch! I missed you (and the whole band too).
Check out what's coming up on Florence + The Machine's next album Everybody Scream.
Just click on the link (in the comments section of this thread 👇) to read my article.
https://inleo.io/@wiseagent/florence-and-the-machine-invites-you-to-scream-b1g
Bitcoin Testing the 112K Support...
Cat is literally AFK for the next 8 hours, hope I don't miss anything wild. #btc
Bitcoin testing 112K support is a critical level to watch. If it holds, we might see a bounce, but a break below could signal deeper correction. Market sentiment feels shaky right now, so risk management is key
That thread cause it to happen - whatever it is !LOLZ
lolztoken.com
but you didn't like it.
Credit: reddit
@scaredycatguide, I sent you an $LOLZ on behalf of ben.haase
(8/10)
Farm LOLZ tokens when you Delegate Hive or Hive Tokens.
Click to delegate: 10 - 20 - 50 - 100 HP
Happy Friday all :) At the office #bbh
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 5.11% weight.
Beach Dood
Such a cute creature.
I am bored. And I do stupid stuff when I am bored.
I want to know what kind of stupid act you do in such a time.
Do stupid trading usually. lol
!BBH
send me your active key please
You would shit if I did ;) !BBH
Don't cut of your dick !LOLZ
lolztoken.com
It takes screen shots.
Credit: marshmellowman
@bradleyarrow, I sent you an $LOLZ on behalf of ben.haase
(7/10)
Delegate Hive Tokens to Farm $LOLZ and earn 110% Rewards. Learn more.
That would hurt plus Cathy will kill me if I got rid of that ;) !BBH
!summarize
🎉 Thank you for holding LSTR tokens!
Your post has been automatically voted with 5.75% weight.
Step aside peasant I'm counting my divs 🤣
#grindsquad #duo #dook #aideep
What aspects of our current daily life will seem strange to future generations?
The fact that mutually assured destruction is even a possibility.
Human beings are fucking morons.
That's a wild thought. The idea that we could wipe ourselves out and still keep those weapons around is just insane. Future generations might look back and wonder how we even survived this long.
This cracked me up 😂😂😂
The imaginations of this generation is void of common thinking.
As stated in this Thread, we have just initiated a powerdown of (most) of our LEO POWER
LeoStrategy can and will never sell our LEO. Our fund is keeping 100,000 LEO powered up for Threads curation while moving the rest of our LEO to Arbitrum to be staked for sLEO
This LEO will remain permanently staked in the sLEO contract. sLEO's USDC rewards begin paying out exactly 1 month and 1 day from today, so we will ensure our entire LEO stack (except for the 100k LEO POWER) is staked and earning on day 1
As LeoDex grows, USDC rewards will be earned by LeoStrategy. 100% of our USDC inflows from staking rewards will purchase LEO on Maya Protocol and stake it for more sLEO (Autocompounding daily).
This creates daily buy pressure on LEO and also accretes pristine LEO Per Share to our balance sheet for LSTR holders to enjoy a continuously up-and-to-the-right effect on LSTR tokens' LEO value
https://inleo.io/threads/view/leostrategy/re-leothreads-2rxwieisf
the fees is still 10.5%?
How exactly are you transfering LEO from Hive Engine to sLEO?
1/🧵 Not Just Another Office Romance: "Love Scout" K-Drama Review
"Love Scout" is a 2025 Korean series having 12 episodes of romance, workplace and family drama based genres. The series is starred by "Lee Jun-hyuk" as a single dad and "Han Ji-min" as a single workaholic CEO. #outreach #threadstorm #moviereview
https://img.leopedia.io/DQmem3vm1FkjaHrh3p7L9XBoAoyB8vtmzH9mdc5b61Yg6Ta/MV5BZDY4MjFiZTMtMzI0My00MmU0LTk0ZjktMTdjNDc5ZTlhMDAzXkEyXkFqcGc@.V1.jpg
2/🧵
The series is a beautiful definition of an all round chemistry. There is not just the chemistry between the female and male lead but also the chemistry between the father and his daughter and the one between the CEO and her secretary's daughter. This is a storyline you'll keep smiling to.
3/🧵
Read more about the post here #gosh
https://inleo.io/@merit.ahama/not-just-another-office-romance-love-scout-kdrama-review-fot
#Newfoundland
A nice day in store
This could be a good time to start Powering Down $LEO to stake it as sLEO on Arbitrum. I'm personally torn about the decision to leave #ineo social media. I want to reward the users who are engaging with me.
On the other hand, I see a lot of potential for #leo in the cross chain DEX space. The progress we have been having is genuinely excellent.
https://inleo.io/threads/view/leostrategy/re-leothreads-2rxwieisf
I didn't get it? Are you leaving inleo?
Leaving in terms of LEO stake; not in terms of engagement.
We've known Dash punches above its weight class for some time now, but it'll be interesting to hear what the Digital Gold Foundation has to say.
Tune in, two hours from now!
#dash #crypto
🤯 We know, we know #Dashto5000
https://inleo.io/threads/view/italiadash/re-leothreads-32xxwvozu?referral=italiadash
When we look up, sometimes there are details that surprise us.
#lights, #details, #bbh
Please can someone remind me the address for Leo premium, so that I don't make mistakes please
Argentina is projected to reach its population peak in 2050, while Brazil will hit its peak in 2042, according to UN projections.
GM Lions
We fixed the @lstr.voter distributor issues. A payout is being force pushed as we speak for the past 5 days of payouts
Our new update uses a different methodology to resolve payouts, so this issue will not happen again
The new methodology sends all of the LEO held in @lstr.voter as opposed to trying to resolve the exact curation rewards received by it. Since the main source of rewards for @lstr.voter is Curation Rewards anyways, it doesn't make sense to try and resolve the exact amount
This also gave us an idea: we can put together @lstr.voter blog posts once per day or week and if those blog posts get curated, then 100% of the rewards earned would be automatically split to @lstr.voter LEO POWER delegators
If you like this idea, comment below!
It’s a smart idea 👍
That is a great idea. Help to keep feeding the apps and getting the numbers growing. It also adds greater utility to delegating to @lstr.voter.
Smart move. I would do a daily post.
#FrIyAy'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 #20250822
This is the full transcription of podcast 'Hidden Forces'.
A Turning Point for Value Investing Mark Holowesko.done #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 learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Mark Holuesco, the founding partner and chief executive officer of Holuesco Partners, a Bahamian-based value-oriented investment firm that invests across a wide variety of industries, geographies and market capitalizations. This is one of a series of episodes that I'm recording with value investors motivated by my concerns about how the direction of the global economy and the ongoing geostrategic competition between the US and China will impact asset markets in the years to come. In the first hour, Mark and I discuss his macro framework and approach to value investing, his concerns about government debt and its implications for interest rates and inflation, trends in global (1/57)
liquidity, the future direction of the US dollar and why he believes that 2022 marked a long-term turning point for value with huge implications for investors. In the second hour, Mark and I discuss some of the more promising investment opportunities that exist outside the United States, in particular within the UK and Japan, as well as how to assess similar opportunities in China, whether the country is investable and the risks investors face when putting capital to work in Chinese companies and the Chinese market. We also discuss more about Mark's investment framework, his views on the role of gold in one's portfolio, opportunities within the US energy sector and much more. 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 (2/57)
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, 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. 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. 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 thoughtful and extraordinarily valuable conversation with my guest, Mark Haleuesco. Mark Haleuesco, welcome to Hidden Forces. Thanks very much. Nice to be here. I'm excited to have you on, Mark. This is part (3/57)
of a series of episodes that I'm doing on value investing, informed by a macro framework that sees the future that we're embarking on as being one that may be more favorable to that investment style. And so I think I want to expose our audience to it and explore some of the work that folks like you are doing in this area. Before we start, I'd love to talk a little bit about your career because you seem like someone whose career progressed very quickly. And I'm curious to learn a little bit more about you and how you got your start in this business. I guess I started very young. I guess when you say it progressed very quickly, I started working for a trust company while I was in college and high school here in the Bahamas. I grew up in the Bahamas. And when I came back from getting a master's degree, started working for the trust company and basically decided I didn't want to be a trust employee. So reached out to Sir John Templeton, who was on the island, famous global international (4/57)
investor. And he turned me down initially for a job. And then I decided I would get him to sponsor me for the CFA exam, chartered financial analysis exam because there were only two CFA's on the island. He was one. You needed to get a CFA to sponsor you. So I wrote him back and said, geez, thanks very much for turning me down, but would you sponsor me for a CFA? And he agreed that a year later when I passed the first level of the CFA, I wrote him back. Thanked him for sponsoring me, told him I passed the first level and he invited me in. After a conversation and a Saturday morning in his office, which used to be in the attic of a shopping center, he offered me a job. And so that certainly changed my professional life and my life in many respects. And I guess my career developed rapidly because at the time it was just Sir John and I in the office on the investment side, he had two accountants, two secretaries and receptionist. And we had an office in Fort Lauderdale with more analysts, (5/57)
but Sir John and I, we were it in terms of the investment staff in the Bahamas. So I got to work next to him and he became comfortable with me and gave me more and more responsibilities. I started off researching companies for him. He would come in, lay a piece of paper on my desk. Normally it was hotel stationary because that was the cheapest way of getting stationary, was to take some from a hotel you stayed in. And he'd write me little notes saying, you know, do this or do that. And I would do it, put it on his desk. And yeah, so he just kept giving me more and more responsibilities, became a research analyst for the group, took over the management of some of the portfolios that he ran for private individuals. And then in May of 87, so I started working for him in 85, in May of 87, he came in and put all of his mutual funds on his desk and said, from now on, you figure out what should go in these portfolios and leave the trade tickets on my desk. And that was 11 o'clock in May of (6/57)
that got you interested in finance or what was the source of your early fascination with this business? I really couldn't figure it out. I grew up in the Bahamas. My mother's family has been here since the 1700s. So long history in the Bahamas. I did all the typical things you do when you grew up in the Bahamas. I worked on a dock pumping gas. You know, I worked for a mechanic on boats and I decided that working outside and the blazing heat in the summer really wasn't for me. My mother knew somebody at a trust company and got me a job there. And honestly, I was in the file room when I first started. But I was just always fascinated by the idea that somebody could give you their money and you could grow it over time. And honestly, at the time, the trust company that's no longer in existence really didn't do that well. Both of my parents were lawyers. I decided I didn't want to be a lawyer. So I was just fascinated by it. And I was also fascinated by the fact that every day you woke up, (8/57)
you know, if you're an architect and you're designing a building, you can put those plans down. You can walk away. And the design is exactly where it was when you left it two weeks ago. If you're a portfolio manager or a research analyst and you put your portfolio down, you go away for two weeks. You're two weeks behind. So I enjoyed the fact that it was, I'm a very competitive person. So I enjoyed the fact that you could quantify what you do and you can compare it to other people. I was also fascinated by the fact that it changed every day. It was very fast paced, in my opinion, at the time. So I didn't really have an aha moment in terms of getting into the finance business. What did I say to Sir John? You know, it was interesting. When I first wrote to Sir John, he turned me down. So he'd never met me. And I wrote him back a year later and thanked him for sponsoring me. You know, I think part of asking me in was he wanted to see if I could pass the first level of the CFA, even though (9/57)
I had a master's degree. He also caught him at the right time. He really needed help, needed staff, although he could have hired anybody anywhere in the world. But it was interesting. When I sat down with Sir John on that Saturday morning and he interviewed me in an office with butterflies all over the wall, which was sort of fascinating. He had a pink jacket on, yellow pants, you know, suspenders and butterflies all over the wall. He didn't ask me any investment questions. I'd prep for a week to answer all sorts of investment questions. And I guess he felt that because I passed the first level of the CFA and I got a master's degree with a concentration of finance, technically I should know what I'm doing. You know, his first question was, you know, where did I go to church? So it was really, hopefully, an interview of character, of work ethic, you know, talked to me about team sports that I did in school and extracurricular activities, my family, things of that nature. And you know, I (10/57)
was so excited when he offered me a job on the spot and he didn't tell me what the salary would be. And I went home and I very excitedly told my dad, I got a job with a great Sir John Templeton. The first thing out of his mouth was, what's he going to pay you? And I said, I don't know. My father thought I was an idiot because I didn't know what I was going to get paid. But actually it was paid by the hour too. My first raise was a dollar and fifty cents an hour. I joined him in the early summer, in the late summer it came to work and there was an envelope on my desk. And I thought, well, it's not working out too well. I opened up the envelope and it said, due to your hard work and diligence, I'm happy to raise your salary by a dollar and fifty cents an hour, effective September 1st. So I was paid by the hour. I got my first raise, it was a dollar and fifty cents and it sort of went off from there. I love that you didn't ask him how much money you made. I wonder if that also was an (11/57)
important indication, not only of your character and motivations in seeking employment with him, but also an indication of maybe what he saw in you or what he was looking for in someone to mentor, which was someone that was passionate about the work and not necessarily motivated by making money, which is a common motivation in finance. At twenty-five, fresh out of school, trying to start a family, you obviously worry about money, but quite honestly, I had struggled trying to find a good job coming out of college. When I finished college in 82, the US was in a recession. And I didn't really know anybody in Boston and New York and thought that was the route to go if you wanted to get into the financial service sector. So I went straight to business school to a school that would take you without any full-time work experience. And so I was just happy when I got the job that I was going to actually learn that, obviously, Sir John had such a great reputation. And to me, if anybody worked for (12/57)
Sir John Templeton, whether it was for a month or six months or six years, it's sort of like going back to school and the reputation that he had would be so valuable. So I wanted to be able to eventually buy a car. I was sort of going to work on a motorcycle, which was difficult in the rainy season, but at the time, money really wasn't that important. Yeah, you had a long-term perspective. You said that you got a master's and then you said business school. I'm assuming the master was a master's in business. What did you study in college? Economics. I went to Holy Cross College studying economics. But really, what I really studied was crew. I was on the crew team. And although I majored in economics, I learned so much in athletics and rowing crew and the camaraderie, the teamwork, the joy of working hard, accomplishing goals, things of that nature. I got as much out of rowing crew and college than I did at a classroom. My parents hate to hear that after spending all the money to send me (13/57)
to college. But I started economics in college. If you had to identify one, the most valuable lesson from your time in athletics, could you pick one specific thing? Was it overcoming challenges? Was it the teamwork? What was it? For me, it was learning the joy of hard work. A lot of people shy away from hard work. When I consider how hard we had to work and prepare to row, I still sort of get tingles. We had an amazing coach who basically taught us the value and the beauty of hard work. For me, I always like to tell people I'm not really smarter than most people. I'm just willing to go the extra distance. I'm willing to work harder than most people. Have you taken four steps? I'm willing to take five, that sort of thing. Well, if anyone's inspired by that, I recommend they go back and listen to our conversation with Tim Grover, who was Michael Jordan's strength coach for a conversation about what it takes to be a winner, one of my favorite episodes ever. Last background question, Mark, (14/57)
which is, what led you to start your own fund in 2000? What was your vision then? What were you hoping to accomplish with that? I started off with Templeton and it grew very rapidly. It turns out in 1992, Sir John sold the business. I became a director of the firm, the head of global equities, but my main job was running the global equity division and managing the mutual funds that was assigned to me. Then in 1992, Sir John sold the business to Franklin, became Franklin Templeton. They were fantastic and they grew the firm rapidly. The funds that I was managing grew extremely rapidly. We had about 19 billion of assets when we sold to Franklin. As my funds grew, I gave them up to other people to manage. By 2000, I was running the Templeton foreign fund, which is about 15 billion, and Templeton growth fund, which is about the same size. The group that I was managing, we had about another 40 or 50 billion. It seemed like I was becoming a manager of people as opposed to a manager of (15/57)
assets. I was in a unique position where I had a great relationship with the Johnson family who owned Majority Stake at Franklin. I told them that, look, we had grown rapidly. We'd had great success, but I wanted to concentrate on picking stocks and doing it with a few people for a few clients. That's what I truly love. I truly love coming to work and turning on the computer and seeing what's going around the world. I didn't enjoy the 70 people that reported to me nine different locations around the world. I mean, they were fantastic people, but it involved an enormous amount of travel and administrative work. I found my time on research was shrinking and my time on administration was growing. I just love investing. I had an agreement with them that I would start a new subsidiary. I would get 60% of the profits. They would get 40, and we would concentrate on running a global equity long short fund. That was also at a time in 2000 when the markets were, we had the bubble, and there was (16/57)
a great opportunity to start that fund. We eventually started a long only fund, and then eventually I bought the majority of the business off of them. Really, I decided to start my own business because of the love of investing and the lack of love of managing large groups of people. Also, remember, when I started working for Sir John, it was just Sir John and I and five other people in the office. The decision making was so quick, and my boss was just next door. Then when you get into a larger organization with people all over the world and committees, and it was just a phenomenal people, but just a different environment. I wanted to go back to the environment that I found myself in when I first joined John Templeton. What an interesting conversation that would be. We're not going to have that because we're here to talk about investing, but what an interesting conversation that would be to discuss, the difference between running a large and small organization, especially in the (17/57)
investment world. I'm glad that you said that you love investing because that's what we're here to talk about. Let's start with frameworks, which is something I always try to pull out of people to get to first principles in terms of how they see the world, how they see investing. You invest with a value-oriented framework, and you also have a macro overlay that you bring to your investing. How would you describe each of those? Let's begin first with your value framework. People describe value investing different ways. I guess I would describe it as that we try to compare a company's price to its intrinsic value. Intrinsic is an important part of the phrase. What's the company worth? An intrinsic value can encompass growth, encompass breakup value. To us, it's not just investing based on momentum or growth per se. What is this company worth? Where's the stock price? Now, very simplistic description, but very complicated process. When we do that, we try to come up with a price target. If (18/57)
I'm right, I think the stock can go to this level. More importantly, we come up with a risk target. If I'm wrong, how much money am I going to lose? In the investment business, it's really that component that I think distinguishes us from other people. In an enormous amount of time, on what if I'm wrong? How much money am I going to lose? If you have a collection of stocks and your upside is 50% and your downside is 10, you don't have to be right more than half the time to make good money. If your upside is 25% and your downside is 25%, well, you've got to be right a vast majority of the time to make money. The framework is that let's try to find things that are intrinsically cheap where our upside to downside ratio is skewed to the upside. That gives me a sense of how much risk I'm taking to the portfolio. I remember coming out of the bubble in 2000 and at one point, stock markets had dropped I think 15% one year and 20% the next year. We got to the point where in a hedge fund, we (19/57)
were 90% net long, which hedge funds don't get 90% net long. Somebody says, well, that's an enormous amount of risk you're taking in the portfolio. I thought to myself, wow, it's the least amount of risk I think I've ever taken a portfolio because my downside on the collection of 40 or 45 names that I have in my portfolio was single digits. My upside was more than 50%. From my perspective, it was the least amount of risk I'd ever taken in the portfolio, although when you look at the net exposure I had in the fund, people say, well, you're taking a lot of risk. There's a couple of points there. I guess one is that we look at risk as the possibility of losing money. That's the risk. When an analyst recommends a name, I talk about what is the catalyst for this name in terms of how will we achieve the upside and what will convince you if you're wrong and what do you think can go wrong? For a bank, it may be that the analyst is using a downside that reflects a recessionary environment. Then (20/57)
it's my job as the portfolio manager to decide when that may occur and when that risk in that stock may occur. Or if you're the energy analyst, you might be using $80 upside for oil and $40 downside. Then it's my job, more of the analysts, to think about under what scenario could oil prices get down to $40, which would make that a poor investment. I guess that's where some of the top-down work comes into play. It's intrinsic value as opposed to value. Sometimes that incorporates growth, sometimes it doesn't. If I'm listening to you correctly, it sounds like in addition to the importance of how you define value, it's also important how you define risk. Do you believe you can do more to limit the downside than you can to control the upside? I would say we're more aware of the downside. I don't know if we have control over it because a lot of times we have no control over markets. But I have more control on how I put my portfolio together. I can manage the risk in my portfolio by limiting (21/57)
the amount of names that I have that have lots of downside. In this business, as you know, if you're right two thirds of the time, that's a phenomenal batting average. But you don't have to be right two thirds of the time if you limit your downside. Once again, if you really do your work and you're going to be wrong on the downside two thirds of the time, when you pick an upside, you're going to make mistakes or something's going to happen that you don't anticipate. Same thing on the downside. We're constantly trying to adjust our upside and downside. To me, it gives a framework for how much potential reward and risk I'm taking and how aggressive I need to be. If I've got tons of names all over the world and I can put together a portfolio with 50% upside and 10% downside, that's a great ratio. If you get to a point in the United States where you have very frothy markets and it's difficult to find a portfolio that has that type of ratio, most of the names in the US are more up 50 down (22/57)
50, unfortunately. That tends to move you and push you to other markets around the world. A lot of times your framework decides how you allocate assets, both in terms of types of names and the geographic places that you might look. I poorly framed that question about relative measures of control and managing upside versus downside risk. Let me see if I can ask it again. Is your focus on mitigating risk of the downside reflect a broader recognition that over many cycles the benefits of being invested outweigh those of being in cash? Focusing more of your attention on what can go wrong so you can remain in the game, so to speak, makes sense. I think my history has given me a better appreciation for downside. When I took over the funds from Sir John Templeton, I took them over in May of 87. I don't know if you remember what happened in October of 87. That was six, but yes, I've read about it. I always joke with people that Sir John Templeton was a better market timer than people think he (23/57)
was. He gave up all of his funds in May of 87 and in October he said, we had the great crash. We ran both global money and international money. We ran the Templeton foreign fund was a non-US equity mutual fund. We were investing outside of the United States during the Asian crisis, the Latin American crisis. If you grew up in the 1980s and early 1990s, you saw an enormous amount of damage in equity markets outside of the United States. I guess I was somewhat conditioned by the environment that I grew up in professionally where I'm perhaps too concerned about the downside. I would say that's probably, if you say, what's one of the faults of your approach or what's one of the downsides to your approach, I would say that we're too much of a nervous nally sometimes. You started the fund in 2000, which was a great year to begin a fund, a value investment fund. It's like, if I were to put some dates together, it seems that 2000, 2007 or so was a good period for value. What explains why value (24/57)
investing has underperformed and lost so much favor with investors, especially over the last five to 10 years in your view? It's underperformed dramatically over the last five or 10 years and that's because we've just been in an unusual interest rate environment more than anything, in an unusual liquidity environment. When you have massive liquidity and when you have interest rates to the extent they are, historically you've always unfortunately had these periods like this. If you're a company and your cost of capital is 2%, you only need to make 3% to borrow capital. You get all of these inefficient companies that are out there that compete effectively with more efficient companies, more profitable companies. But really, we just had unusual amounts of liquidity in the system. Liquidity leads to speculation. You've also had a real lack of growth. Look at last year, I think the MAG7 in the United States, the earnings grew 36%, something along those lines. The other 493 companies, NSP (25/57)
500, grew their earnings low single digits. There's really been a lack of growth, not only outside of certain stocks in the US, but outside of the US. As a result of that, people have overpaid for growth. But if you look at a graph of value versus growth investing over time and starting the 1970s, there were periods of underperformance for value, but nothing as prolonged as what happened after the financial crisis when they just brought rates down to unusually low levels and flooded the system with money and after COVID. I would say those are two extremely unique events. We're slowly trying to figure out how to move away from that period. With a higher cost of capital, I think you're going to see a major change in that environment between value and growth. Liquidity and rates really have driven this fascination with growth versus value investing. I've heard you say that 2002 marked a turning point for value. Why do you feel that way and what would you point to specifically to support (26/57)
that argument? I think rates pretty much bottomed back then. I think that as rates normalize and as liquidity starts coming out of the system, the two of those events, which I think have already started, you can say, okay, well, rates have gone up or down. I would say that that marked a low point in terms of rates and a high point in terms of liquidity. There's such a disparity now between value and growth all over the world. There's so much concentration of people's portfolios on growth versus value. To me, it's cost of capital and liquidity. The things that have caused this disparity in performance have changed. In terms of liquidity, there's different ways of looking at liquidity. If you take the US, the Federal Reserve balance sheet, that's rolled over. It's still massive, but it's moving, whether it's on an absolute basis or a percentage of GDP it's shrinking. You look at government spending, it's completely out of control. We've never had government spending these budget (27/57)
deficits, 6% of GDP when you have basically a good economy and low unemployment. Obviously, there's a new administration trying to get that under control. There's absolutely no way you can continue with 6% budget deficits as a percentage of GDP. You've got the Federal Reserve balance sheets are starting to turn, government spending is going to turn, the Treasury with the way they've been issuing government securities on the short end versus long and provided massive liquidity. The other area would be bank credit. Bank credit is also changing. I just feel that liquidity is all the things that provided excess liquidity in the system are beginning to change. The other thing too is that government debt is so high in the United States, it's just high everywhere in the world. It's the same level as it was coming out of World War II. Back then, the government basically inflated their way out of the debt problem. There are very few ways of solving the debt problem rather than growing the (28/57)
economy and trying to inflate your way out of the problem. To me, that argues for sustainably higher rates than people anticipate as the world also struggles with lower liquidity levels. Is that another way of saying that the reason why you think we're in a period of structurally higher rates is because of the refinancing costs reflected in part in government deficit spending and the size of national debts? That's a part of it, but I think people's view on rates is conditioned by what's happened over the last 10 or 15 years. What has happened over the last 10 or 15 years is completely abnormal. People who haven't been in business in the financial sector, who haven't been alive for more than 50 or 60 years, just think that the post-financial crisis era was normal. It's not. I just think that we're going back to a more normal level of rates prior to the 2008 period. Part of that is, yes, sustainably higher inflation. That doesn't mean inflation is going to be 6%, 7%, 8%. But if you have (29/57)
3% to 4% inflation or even 2% to 4% inflation, you add some risk premium on top of that. Rates today are much more normal than people realize. This idea that rates need to continue to come down, I don't think we're going to go back to 2% on the US Treasury. For a while. The inflation in your view would be driven by monetization, government spending. And spending has certainly provided massive amounts of impotence to inflation. We've had too much money in the system, and a lot of that money has been provided by the US government. And unfortunately, a lot of the employment is provided by the US government as well. If you look at the employment statistics in the United States and look at changes in employment and how much that's been created by the government, tariffs cause slightly higher inflation, although the administration will tell you it won't. There's so many different elements out there that are adding to inflation. The government's got a real tricky job in the United States now (30/57)
to try to grow the economy without letting inflation rise too much. But at the same time, the only way you're going to get out of this debt problem is to let inflation help and inflate your way out of the debt problem. So this is a problem obviously that's not unique to the US. However, there is an outstanding concern about the value of the dollar. You've written about this as well. How does this factor into the value of the dollar? Because the dollar has been very strong in recent years. Yeah. So as a global investor, obviously if you invest outside the United States, you have to take currency and consideration. The great thing about investing outside the United States today is that you can hedge away most of that risk and it doesn't cost you anything. So when you hedge, if you use the forward markets, basically the cost of hedging is normally the differential interest rates. And because of where US rates are today versus most countries around the world, you don't really have to take (31/57)
much currency risk. So that's interesting and helpful. However, currency does a lot of different things to different companies in different parts of the world. We had a morning meeting today. We were discussing how a change in yen value impacts the book value of Japanese companies. And you have to be aware that currencies have a major impact on how companies report. It's a global economy. BMW and Germany does 40% of its business in China. It has a large business in the United States. Although you're investing in a euro-based company, its actual business exposure to the euro is very low relative to its dollars and Chinese currency. You have to take all that consideration, figure out whether or not the companies hedge themselves and then whether or not you want to overlay a hedge on top of that. So currency is something you take into consideration when you're evaluating a company, the risk to that company in terms of where it's doing business. It gets very complicated, particularly when (32/57)
companies themselves are hedging. And then you have to decide whether or not I want to hedge again. But it's just one of those macro factors that you need to take consideration. I just believe that purchasing power, powerity, which a lot of people look at doesn't really tell you where the currency is going to go. It tells you what the environment is in a particular country at any point in time. There's the famous Big Mac index. What would a Big Mac cost in the US versus Japan? And if it's cheaper or more expensive in Japan, maybe it tells you something about the purchasing power of the currency over there. But really differences in interest rates and what business people decided to do is what drives the currency in the short run and the medium term. And right now, I think that it's difficult to say with tariffs being imposed that the dollar is going to weaken substantially because normally the dollar, if you put a tariff on a foreign country, their currency tends to adjust somewhat to (33/57)
take into consideration that tariff. But over the long run, it seems as if to me that the dollar is one of the most consensus trades in the world. Our funds are based in dollars, so we have to take that into consideration when we invest overseas. But if you look at the DXY, the trade weighted basket of currencies, generally these levels, you know, Sir John has an interesting graph he gave me a long, long time ago. It basically showed the trade weighted dollar going up. And on one side, he wrote time to invest in US names. It showed the trade weighted dollar going down and he wrote on the side time to invest in foreign companies. And in 1990, when he gave me the graph, it was at a low and he wrote on the side time to invest in US companies again. Well, we're at a point in time where the currency buys you a lot overseas and the dollar is very sort of crowded. So I'm happy to slowly be looking to increase non-dollar weightings in our funds. I'm actually interested to ask you about this (34/57)
because I think I've heard you say that you own a small percentage of US-based companies or you aim to own a small percentage. Do I have that right? No, we don't aim to own any percentage in any country. We just try to look around the world and see what's cheap. And 20% of the names around the world are in the US, but the US is 70% of the index. We were 20%. So in a long-only fund, we're roughly 20% in the US in our hedge fund because we can also short securities on a net basis. We're single digit. And that's pretty unusual. However, when I joined Sir John in the late 1980s, I ran the Templeton Foreign Fund. It was a fund that invested outside the US. And at one point in time, the EFIT index, which is the index of non-US stocks, was 70% Japan. And I went to zero and people thought, wow, that's incredibly risky. You're being compared to an index that's 70% Japan, a year zero. And my response was, wow, you're taking an enormous amount of risk. You're investing half of your portfolio in a (35/57)
country that you know is substantially overvalued just because it represents 70% of an index. How could you do that? I looked like an idiot for a year or two in the Templeton Foreign Fund when I was so underweight Japan. But quite honestly, for most of the 1990s, it didn't matter what I did, I outperformed the index because Japan peaked out and it started to drop. The same thing today in the United States, people say, geez, you're taking an enormous amount of risk. You only have 20% of a long portfolio in the United States that represents 70% of an index that you're compared to. Isn't that risky? But once again, I define risk as the potential to lose money. And from my perspective, when I look around the world, the downside in the US is much greater than the downside in a lot of the companies that I'm investing in, Japan, UK, etc. So in the short term, maybe it's risky in the long run, it helps your career. So I have a few more questions I want to ask about rates and tariffs, but this (36/57)
benchmarking has come up a number of times on this conversation. And it sounds to me like something that's been very important in your career is not just what you've benchmarked to, but not being wedded to benchmarks that everyone else is focused on, which is also another way of saying being a contrarian, being willing to go your own way. Would you agree with that? And how important has that been in terms of your success as an investor? You know, I was thinking about this the other day because they asked me what characteristic makes you a good investor. And I said, well, you have to be rational versus emotional. And to a certain extent, you have to sort of enjoy being off on your own. If you're comfortable in a crowd, if you enjoy waking up on a Saturday and going playing golf with everybody on the golf course and dressing like they all dress and playing with all the rules and sitting around the golf shop afterwards with everybody. I find that incredibly uncomfortable, quite honestly. (37/57)
I'd rather be out sailing on a windsurfing by myself. Or at the same time, you have to have the ability to work with other people, go back to the crew analogy. You have to have this love of working with people, but being uncomfortable, being with the crowd. I heard someone describe it that if you're in the jungle and a tiger approaches you, you want to run away with everybody away from the tiger, but at the same time, you don't want to be running over the cliff when everyone's running over the cliff. So I think you have to have this comfort level about doing things by yourself and an uncomfort being in the crowd. So I think that's a characteristic that's really helpful as a global money manager. And it goes to the index. I want to be in business. I want to make money. And I don't want to lose money. And I want to be... When I started my business, somebody says, why are you starting it now? I said, look, I don't want to be a long only money manager and be down 20% when the market's down (38/57)
50 and say, wow, what a great job I did. I want to make money. And so for me, I think over the long... There are going to be periods, sometimes long periods where you want to perform the index. But over the long run, if you can stick to what you're doing, regardless of what the index said you should be doing. And if you're not worried about that index and the composition of that index, you can only get different results from other people by doing things that are different from other people. And it's easier doing that when you're not following the index. Is it also fair to say that you're less concerned about career risk than most people? You're always worried about your clients and you don't want to disappoint your clients. One of the things you have to be careful of is you get older and more established and more comfortable that you actually take risk. In this business, you're not avoiding risk. You're just managing risk. You're understanding risk. And sometimes as you get older and (39/57)
you're more comfortable financially, you're not willing to take risk. But you have to take risk and you have to manage that risk. So yeah, it's easier to do that if you're financially comfortable and if your clients have been with you for a long time. 80% of our clients have been with us since the first year we started our hedge fund. And that's helpful. So I mentioned that... Well, hopefully we'll have a chance in the second hour to talk more about your process and philosophy. But I mentioned that I had a couple more questions about rates and tariffs. So you mentioned earlier in our conversation that it's likely that we're moving into a higher, structurally higher inflationary environment and an environment of higher rates. The question I have for you is, what do you see for real rates? Does that still mean a positive rate environment or is the inflation indicative of structurally negative real rates? I'm just curious how you see that. Well, it would be better for the government. If (40/57)
we had negative real rates. And you think, is that speaks to the discussion we had earlier about the debt and deficits and government spending and some of the outstanding liabilities that need to be financed? Look, the new Treasury Secretary, who is I think an incredibly capable guy, smart as a whip, probably one of the better Treasury secretaries the US has had for a long time, he's got this 3-3-3 approach. And one of his 3s approach is they want to get the budget deficit down to 3%, minus 3%. That's still a budget deficit. So he's still talking about adding to the debt. So for me, the only way they're going to get debt under control is to inflate their way out of the problem. So I'm not a rate expert, but to me, it means negative real rates. So tariffs, I'm confused. I mean, I do feel like there is some obvious way in which tariffs are used in this administration for political or geopolitical purposes. I don't necessarily see the larger strategic game plan for revitalizing the (41/57)
American economy and how tariffs are being used in that context. They still seem to be more of a tactic than a strategy, a tactical deployment than a strategic use. How do you view tariffs being used in this administration? Is there some way in which you expect them to be used? I mean, do you have some confidence around how they'll be deployed and what impact they're going to have going forward? Well, I agree with you. I think they are tactical. And I also agree that they don't really improve the competitive structure of the companies they're trying to protect longer term. Why are they tactical? I think these numbers aren't exactly right, but they're close. I think something like 80% of all exports from Mexico go to the United States, and it represents something like 25% of GDP. Mexico is very, very vulnerable to rates. If you wanted to negotiate with Mexico and you threatened to slap tariffs on Mexico, that's huge. Same thing for Canada, I think something like 70% of all exports from (42/57)
Canada go to the United States, and it's also a very large percentage of GDP. However, you've got to be very careful because if you look at the percentage of cars being produced by US manufacturers in Mexico, it's a very large percentage for General Motors. I think it's like 35% or 40% of the cars sold in America come from Mexico. So you're also damaging US companies to a certain extent. It's interesting, an investment in BMW. BMW is actually quite good in terms of its domestic production versus its Mexican and Canadian production versus the US manufacturers. So I would say BMW is in a better situation to not get hurt by these tariffs than the US companies that you're trying to protect. And the other thing it does is that, as I mentioned, higher tariffs also impact the currency. So the currencies tend to adjust a little bit, not by the same extent as the tariff, but to some extent, depending on the country. So if you put a 10% tariff on certain goods coming out of a country, it tends (43/57)
to weaken that currency to offset the cost of the tariff. But that makes the dollar stronger, which makes your goods in the United States less competitive overseas. So yes, I think it is a negotiating tactic. And I believe that a better scenario for the United States in terms of its competitive industrial base is to remove regulations, what they're doing quite rapidly, keep the tax rate low, which they're trying to implement, but also not keep the dollar so strong. I mean, obviously, if the dollar weakens, that's to your benefit as an exporter around the world. So I think the tariffs are creating a lot of confusion. I think they are a tactical negotiating tool. However, there are some countries that dump things into the United States. Sometimes they don't dump them directly into the United States. And tariffs on certain goods from certain countries, even when they come indirectly, some goods come from China to Canada, and then from Canada to the US. And so it might appear as if you're (44/57)
putting tariffs on Canadian companies, but it's actually goods coming from China. It's very complicated, but I would say it's a tactical tool. It's going to create confusion. Confusion is good if you're a long-term investor, because it creates abnormal price movements. And if you can take advantage of that from a longer term perspective, then that's okay. I've heard what feels like mixed messages coming out of this administration on the dollar. It sounds like there is both a desire for a strong dollar, maybe because it sounds good, and then also some policies to weaken the dollar. I'm curious if you have a sense of any kind of clear direction in this area. Look, I think that nobody in the administration is going to come out and say they want a weak dollar. Just like the current Treasury Secretary has come out and said he's not going to change the allocation of government debt when it rolls over more to the long end. Although when he was in the Treasury Secretary, he was criticizing the (45/57)
then Treasury Secretary because they didn't roll a lot of the debt into the long end to take advantage of low rates. So no one's going to come out and say, I think they want a weak dollar. I don't think that politically is acceptable, but I think it would be to their benefit to have a weak dollar. And it would be much better longer term than tariffs, just as if they could get long-end rates down. Yes, they would love to roll this enormous amount of debt coming to this year into the long end of the Treasury, but they're not going to tell you that up front. So let's go back to this question of valuations, the valuation of U.S. companies versus companies in the rest of the world, Japanese companies, companies in Europe. You're quite a bit about how there are a lot of opportunities in the U.K. We touched on this a little bit, but what explains, if you had to be specific and summarize this, what explains the over valuations in the U.S. in your view? The over valuations in the U.S. is just (46/57)
liquidity and low rates and the concentration around the world and the fact that the United States has been a place dominated by companies that are growing. So to a certain extent, the success has caused the overvaluation. Some of the valuation is justified, but not the extent. Companies selling at 20 and 25 times revenues. We have companies out there that are $250 billion in size that are generating a billion dollars in cash flow. At some point valuations became stretched in the United States. But the success and the differentiation between growth in the U.S. and a lot of countries around the world has caused this over concentration on U.S. assets and the overpricing of U.S. assets. There's a sort of momentum trade associated with this. Very much so. How much do you factor in systematic passive flows into this equation? And do you have any concern that value will continue to struggle as those flows continue to dominate the pricing relative to discretionary allocation decisions of (47/57)
active managers like you? Yeah, it's interesting because it works both ways, right? It works on the way up. And then when you get some of these companies reporting poor earnings and the MAG-7 starts to struggle, it's going to work on the way down too. So you think that cost of capital that we talked about earlier, some of the underlying structural economic effects are going to ultimately be the spark that serves as a catalyst and then that momentum will go into reverse? Look, you never know what the catalyst is going to be for the system. You might be identified for companies generally. But look at AI. Look at all of a sudden the information that's come out on Chinese development of AI. Totally unexpected and what that did for those companies. And if those companies, there's such an over concentration and if people start pulling that and they start shrinking as a percentage of the index, then it's sort of self-fulfilling, right? The index starts to shrink in that area. And so it's (48/57)
difficult to say what's going to cause it. We're even having companies that are reporting great numbers and beating and they're dropping. Once again, I think it's just over concentration in people's portfolios. They've gotten too big and they need to quote unquote rebalance. But generally, I would say higher cost of capital, you know, the percentage of companies in America that don't make money is at an all-time high while the market is at an all-time high valuation. And that's interesting. I love that you brought up deep seek because I also had that reaction. The market got so spooked. And besides the fact that it didn't entirely make sense why it was selling off, given the fact that the software innovations made by deep seek weren't necessarily bearish. If any, you could argue they were bullish for the need for further compute. It just shows you how fragile this bull market is, I think. And it also reveals something else. I'm curious if you agree with this. I think it reveals an (49/57)
underlying anxiety about America's place in the world, our geo-strategic positioning, our national security state, our geopolitical power. And so that kind of, you know, brings me to another question, which is how do you factor these things in? Politics, national security, how do you factor these things in when you consider where to invest? Understanding that government regulations may change in line with the needs of the national security state, and that could impact the value of your investments. Well, I guess the greatest example of that today is China and Taiwan. You know, a lot of people say China is investable. There are other people out there that say because investors say China is uninvestable, it's actually a great investment. You know, the risk to your Chinese investments is that a situation happens like Russian investments. I'm on the board of a company in Europe that manages funds for individuals, and they had some exposure to Russian-vated Ukraine. You couldn't trade those (50/57)
assets. You had to price them at zero. So that's the geopolitical risk. Obviously, the biggest geopolitical risk today is China-Taiwan. And, you know, the impact that would have, obviously, on the semiconductor sector is massive given the strength of Taiwan semi-manufacturing. So it goes back to that upside-down side. I mean, when you get to the point where companies get close to net cash, and in the course of a year or two or three, you feel you can get that investment back in terms of cash returned from a company. You know, your job as a portfolio manager is to decide, well, is that geopolitical risk reflected in that? And, okay, I'm not certain about what China will do with Taiwan. So how much do I want to have in China? Do I want to take that risk? And will it be 5% of my portfolio, 15% of my portfolio? So I'm willing to take some risk with Chinese investments, but it's not 10% of my portfolio. But, you know, what most people don't realize is, you know, we mentioned BMW earlier, (51/57)
40% of their business is Chinese. You know, most people's investments in China are much greater than they realize, even if their portfolio manager says, oh, we don't invest in China. Oh, heck, you do invest in China. You know, you go down to your portfolio and you look at all the investments that these companies have and all the revenue and income that's generated in China, most people would be shocked. So my direct investment in China is about 4.5%, but my indirect investment in China is probably closer to 15%. So I love that you brought that up. I mean, first of all, how confident are you in that 15% number? Because as we saw, even the US government, even the military, didn't understand how vulnerable its supply chains were. They had to cancel or halt production of the F-35 fighter at some point because they discovered that a magnet, a critical magnet was being produced in China. How confident are you about the vulnerabilities of the companies that you invest in, given how (52/57)
interconnected this world has been and how globalized it's been? Well, I hate being compared to the US military because I believe you they've never been able to complete an audit. So I mean, I don't know that they're the best comparison. So look, let's look at some of our investments in China. Outside of the political risk in China, there are industry risk in China like real estate. The real estate industry is a mess. The banking industry is a mess. So one of our largest investment series, Yum China, they have the Kentucky Fried Chicken and the Pizza Hut franchise in China. Net cash balance sheet, this time last year, it was like 25% of its balance sheet. Now it's a little bit smaller because they've just raised their dividend 50%. They're opening new stores and the population continues to become wealthier and able to afford eating out more. It's a company that basically you can look at the growth of its store base and the amount of cash it generates and the amount of cash you're (53/57)
getting back. What's the geopolitical risk of Kentucky Fried Chicken and Pizza Hut as opposed to real estate or finance, et cetera? But you can be pretty comfortable. It takes a lot of legwork. I've been to China, visited the management of Yum China in China. I remember the first time I ever went to Hong Kong, I went with a gentleman by the name of Mark Mobius who ran our emerging markets group. And we were chatting with an analyst in Hong Kong and they'd invited some companies there and one manufacturer of a company was talking about his watch facility and it was pretty close to the border. So we decided we'd go check it out. Turns out it wasn't there. Didn't have a watch manufacturing facility where he said he had it. So a lot of information is available if you're just willing to read through annual reports and go visit companies. So we're pretty comfortable with what our indirect exposure is to China. That's our job. Our job is to figure out where these companies make or where they (54/57)
generate revenue, how they generate profits, what competitive advantages they have, what are the risks to that business, both politically, technology, or corporate-wise and then sort of adjust accordingly. It also sounds like you might be more willing to invest in a Chinese company if its operations are primarily overseas or its factories are located outside of China or it's listed outside of China. Those are all nuanced ways of assessing the risk of the particular company. Somewhat, correct. So I'm going to move us to the second hour mark. I want to talk a little bit about opportunities outside the United States. I asked you, for example, what accounts for the overvaluations in the U.S. I'm curious to ask you the opposite question of what accounts for some of the undervaluations, especially in places like the U.K. I also would like to discuss more about your investment process and your investment philosophy, as well as some of the unique opportunities that are in the U.S. I think (55/57)
you've written quite a bit about the energy sector. 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 to access the second hour of today's conversation with Mark, 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. Mark, 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 (56/57)
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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Why Did the Future Arrive First in Russia Peter Pomerantsev #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
believing in ideologies, all those things about meaning, the fear of death, the needing to feel that you're something bigger than yourself, none of that goes away. Those raw things have to be satisfied. And when we talk about Putin's expansionism, that's what he's channeled that into. And I think the other fact that you'd invoke there is identity as a process of psychology and almost psychoanalytics. I think that plays a very big role as well. It's a weird pattern of an authority that humiliates you, like an abusive parent, which is very, very evident in Russia, every day when you live there, but also historically, and then you compensate the resentment to build up from that through an expansionism. So there's this weird social psychological dynamic going on as well, based around humiliation and aggression. So all those things that are happening, and yeah, and Putin's continued international adventures are to do with two things. One of them, again, is signaling. If I can go in and bomb (46/57)
increasingly paranoid about everything, myself included, I feel this way. And I've come to the view that what's responsible is a breakdown in shared belief systems, that what's happened is that the stories that we tell ourselves about each other and about who we are in a deeply communal sense are breaking down. Not only are they breaking down, but they no longer work, and they've been shown in many instances to be frauds. Whether we're talking about the lip service, paid to democracy and human rights, as justifications for wars of aggression and occupation, or the idea that somehow trillions of dollars can be conjured out of thin air to support asset prices, but that somehow we have to go on pretending that it's really about supporting the economy and that we really do live in a free market capitalist system. I invited Peter onto the podcast today because he wrote about this world years ago, during his time living and working in Russia. And not long after the publication of his book (2/57)
conditions that made this possible? What sort of vacuum existed? How did Russian society find itself in such a vacuum, a cultural vacuum, for lack of a better term or a sort of state of nihilism, where a regime like this and stories like this could emerge and try to compete as the dominant narratives of society? First of all, there's a big historical legacy in a certain way that Soviet Union did this as well. So we are talking about a lot of historical conditioning and a lot of people understanding the kind of the gospels of the Soviet Union were nonsense, but having to repeat them and understand that they are a way of communicating power. We're talking about propaganda theory, this idea of propaganda as messaging as in trying to convince people. There's also propaganda as signaling. It's a signal. This is what we say is the truth and if you want to survive, you better not. So it's not about persuasion, it's kind of like communicating power. But would you say that it was that (28/57)
Aleppo to Smith-A-Reeves, don't you dare doing anything at home. If I can push Biden around, just think what I'll do here to you at home. So there's definitely a messaging back. I'm big and scary internationally, they're alone at home. But also, without a doubt, it brings a certain amount of pleasure and fulfillment to ordinary Russians. And I'm not saying Russians want war. I don't think they do. I think there's a low threshold for self-sacrifice, but the going around swinging your genitals on the international stage does help people feel fulfilled and that they have, if not meaning, then some sort of satisfaction. This is so fascinating to me because you touched, again, just to wrap up the point about power. I think it's also so important for me to clarify what I mean when I talk about it, because in the absence of a belief system, it seems to me that the only thing that's left to hold society together is raw power. That human beings have the capacity to live in a society of millions (47/57)
What's up, everybody? My name is Dmitri 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 Peter Pomerotsev, a Soviet-born British journalist and former TV producer who has written two extraordinary books, which together have done more to help me understand the predicament in which we find ourselves today with respect to our relationship to truth, identity, and meaning. Then probably anything else I've read since starting this podcast, and that's saying a lot because I've read a lot of books and articles and listened to a lot of podcasts trying to figure out what it is that's really happening to us. What is it that's responsible for this creeping sense of unreality, where so many of the things that we've taken for granted no longer seem to work and where people feel (1/57)
describing that experience, he began to notice that some of the things that he wrote about, the cynicism, the sense of surreality, the nostalgia, and what he described as an aggressive apathy, were also showing up in Western countries. And he began to ask himself a question which, to this day, whenever I say it, it makes the hair stand up on the back of my neck. Why did the future arrive first in Russia? And that's the central question that has preoccupied me ever since I heard him say it, and which forms the foundation for today's conversation. Because as you will hear, some of the same forces that were operational in the late Soviet Union and in early post-Soviet Russia are at work in Western societies today. And if we want to understand what the future might look like when trust in institutions has completely deteriorated, when grounding notions of identity and meaning have all been disappeared, when any independent standard of truth has become so elusive that people are willing to (3/57)
believe in anything, and the only thing left to unify us is raw and unbridled power, then we would be wise to not only understand the path that Russia has followed in the last several decades, but to do everything in our power to avoid following it any further. Because it leads to only one place, and that is a repressive society that uses the language and institutions of democratic capitalism for authoritarian ends. For both existing subscribers and anyone new to the podcast, we've moved our premium subscription off of Patreon and onto Supercast, which you can now access directly through the Hidden Forces website at hiddenforces.io and get immediate access to the second half of my conversation with Peter and every other guest in a single unified episode, which will be delivered directly to your podcast app of choice every week or whenever we publish anything new. Subscribers to our Super Nerd Tier will also have access to the human transcriptions of both the first and second parts of (4/57)
my guest conversations, as well as the all new intelligence reports, which are the cliff notes of 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 each and every conversation, along with my takeaways from every episode. And with all of that out of the way, please enjoy this deeply enlightening conversation with my guest, Peter Pamarantsev. Peter Pamarantsev, welcome to Hidden Forces. Thank you for having me. I'm so excited to have you on, Peter. The reason I asked you to come on the podcast is because I want to see if you can help me and my listeners answer a question that I first heard you pose in a lecture or it might have been an interview you gave, but which you also ask in your second book on propaganda, which is, why did the future, i.e. the world we're living in today in Western society, why did that (5/57)
future arrive first in Russia? And for those who haven't read your books, that question may not make sense immediately, but I promise that it will shortly. But before we delve into answering that or trying to answer it, I'd love for you to give me a sense of who you are, your background, and your connection to Russian society insofar as it's relevant to today's conversation. Sure. So the story is actually my second book, which is partly a mix of family memoir and kind of analysis of contemporary propaganda. So I was one in Kiev, actually, in 77. And when I was nine months old, my parents were who were they were being arrested a lot for sort of essentially giving out copies of censored books, which sounds absurd today, but that carried a sense of around sort of seven years, but giving out copies of books by Nabokov and Solzhenitsyn, talking about sort of hand-printed copies that people gave to each other. And there was a time when a lot of kind of dissidents would be exiled rather than (6/57)
put into prison and camps or other people that were often given the option. The policy was trying to get rid of minor kind of troublesome elements. And so they were exiled and really accidentally, after a period of wandering around Europe, sort of politically homeless, they ended up in London because my father got a job at the BBC World Service. So I grew up accidentally British. And then I went back to the former Soviet Union, but to Russia, to Moscow, after university. I went to film school there, worked in think tanks there, and then interested in them, as you can already tell, both in policy and in arts and storytelling, kind of at the same time as I continued to be, and ended up working in Russian entertainment TV in the kind of the first draft of the Putin era when Russia was still pretending to be a democracy. So I came to Moscow in 2001, right after September the 11th, I remember it very well, because hardly anybody was in the plane, people were scared to fly. And then I was at (7/57)
film school and, you know, working on British documentaries about Russia until around 2006, and then 2006, 2010, stroke 11 was when I actually worked inside the Russian entertainment industry. And I mean, my great ambition was to make kind of feature films, but like all people who dreamt of making all featured documentaries, I ended up making factual entertainment shows, reality shows. It was a very exciting time in Russian entertainment, because a lot of these kind of Western formats, like the Apprentices, for example, or Love Island, or Stand Up Comedy, or sitcoms, were coming to Russia for the first time. And it was a time of kind of quite broad cultural experimentation, which was both an elite art and an entertainment. But yeah, my first book was about that world, but also seeing this new kind of authoritarian regime take hold that was really modeled in some ways on reality shows and entertainment, but certainly tried to be entertaining as well as oppressive, and that was really (8/57)
invested in TV as its main medium, but also in a weird way as it saw itself as a TV show. It didn't just use TV, it saw its own exercise of power as a sort of reality show, which definitely seemed to anticipate reality show hosts becoming president of the US. So in that sense, they seem to have kind of clicked on to some sort of truth that we all live in now. So yeah, but I left Russia in 2011 for many reasons, but partly because it was, you know, the turn towards dictatorship was already apparent, even though it was actually still the Medvedev era. So Russia was still playing nice, and officially, it was still moving towards the West, but everybody on the ground could tell that things were going really dark. People were starting to leave. Now it's obviously just an out and out dictatorship. And yeah, and I kind of like moved away from TV back towards policy, and have ended up kind of gravitating towards academia, I ended up working at the London School of Economics. Now I work at (9/57)
Johns Hopkins University, studying propaganda, studying the weird coming together of media and policy, both about Russia, but really across the world, and kind of thinking what media can do, how do we create TV and other types of media that are actually good for democracy? That kind of ended up being the question I sort of asked myself. So we know what the other side are up to. But, you know, we have a lot of assumptions about how media is meant to help democracy, but how do you tell stories, or how do you create shows that are good for democracy? And I can't say I've solved that, but that's kind of the big question that I explore these days. So you said that when you arrived in Russia, it was kind of the first draft of the Putin era, which was an interesting choice of words, given the fact that you also said it later when you were describing television that, in a sense that the Russian state saw itself through television, where you described sound a lot like a hall of mirrors. What (10/57)
role does television, and did it then and does it play now, in Russian culture and Russian society? And to that point, would you have the views that you have today, or the depth of understanding that you have today, not just as a result of the fact that you were an expat, but how instrumental was it that you were actually working inside of the machinery of television? I mean, look, there's other people who've written very, very good analyses of Russian propaganda without working in the television industry. So Arkady Ostrofsky's brilliant The Invention of Russia covers the 1990s, and the role that media and TV played in securing this new model of power. Andrew Wilson has written a great book called Virtual Politics, all about that as well. So it clearly didn't have to to write about this. I suppose it gave me a sense of the texture and the sense of the characters, and a sense of the kind of attitude of your regular TV workers who actually start this, and who are kind of like the sort of (11/57)
the media soldiers in the middle of it. So I never worked on political shows, because I wouldn't as a foreigner, to be frank, but also as an individually, maybe I wouldn't as well, given my background. But I certainly saw a lot of people who were making news shows and current affairs shows and documentaries supported the regime. And I'd go drinking with them, or I sit in an edit suite with them, or, you know, I'd have an editor on my show that just got off working from a piece of state propaganda. So I talked to them all the time, without writing a book, just they were just the people I knew, and the people I hung out with. So I got to know their attitudes, and their worldviews were kind of, you know, very important, because they're the sort of people that kind of reflected and both reinforced the kind of governing attitudes of the country. So I suppose that was a big added value. But in terms of the regime, and it's actually to TV, you've got to go back to the 1990s, when you have (12/57)
this chaotic period in Russian politics, democratic in a kind of, you know, chaos theory of democracy. And around 96, when Yeltsin, who's the president at that time, is really on the ropes, very famously, all the oligarchs unite behind him to stop the communists from getting into power. And they unite behind him and put their resources in, and the main thing they do is capture TV. Before that TV is used in a very chaotic way. You know, there are other forms that were more important to the Soviet regime. The Soviet regime was very invested in propaganda. But, you know, TV was pretty lame, basically. But they realized that, look, this is a moment where you could take advantage of TV, and they all the main TV channels which are controlled by oligarchs get behind Yeltsin and play an important role in securing his victory. And what is a sort of genuine vote at that point? Then in 1999, Putin is a nobody. He has a rating of, you know, I think it was like below 10%, when he's made Prime (13/57)
Minister by Yeltsin. And he's transformed into a vote winner via a huge TV campaign and a kind of a war in Chechnya, which is kind of a made for TV war in the sense that he is made into a war leader on TV. And he's completely aware of that. He's very aware that he's a no one. And that it's the power of television that has given him this aura, this charisma, which nobody thought he had. He's not a Chavez. He's never gone on the streets to rabble rouse. You know, he's not a populist in that sort of bottom up way. It's all created through TV. And he's completely aware of that. And so kind of almost one of the first things he does in the early 2000s, even before he takes control of the oil industry, which becomes obviously his key lever, even before he takes control over all the security forces, the first thing he goes for to take over as TV. And it happens bit by bit. It happens, you know, quite, you know, lots of things happen as some of the he does it overnight. But that's the direction (14/57)
he goes in. And he secures power over the main TV channels and the oligarchs he gets rid of are the ones that control TV. So Berezovsky, Gysinski, before he goes for the ones that control oil and gas. So he prioritizes media control. And the journey to securing media control is really at the top of his securing of authoritarian power. And, you know, we could say that since 1213, the internet also plays a big role. But really up to then, it's really all about TV. And really quite rapidly, he secures central control over TV. You know, first, all the big channels come under him, some smaller channels are left to their own devices. And slowly, all of that is collected into a fairly centralized system. So, you know, they prioritize it. They on a deeper level, what their spin doctors talk about is that they felt very weak in the 1990s. And to compensate for that weakness, they had to create the aura of power, even though the state was very weak. And the way you do that through TV, you're (15/57)
constantly reaffirming the central role of the Kremlin, you're doing show trials, you know, against oligarchs to show, haha, look, you know, we do have control. And so kind of informational dominance becomes a way to compensate for a sense of insecurity. I mean, now they pretty much have everything under wraps. But in the 90s and early 2000s, when oligarchs were very strong, when local governors were very strong, when, you know, security forces were very disorganized and redo the bidding of whoever would pay them the most rather than central power, you almost compensate for that by having, you know, hegemony over at the imagination. So that's another kind of deeper reason they invest in information dominance so much. I'm interested in exploring this reliance on storytelling. And also what it sounds like you're describing the aesthetics of power. And maybe something else, which we think about in Western capitalism as kind of fake it till you make it, sort of create the appearance of (16/57)
success and then sort of become successful through that process of having created the perception in the minds of other people. That's a very nice parallel. I hadn't thought about that, but that's not a bad parallel. That's not bad. So describe for me and my listeners what it is that we're talking about here, what it is that you describe in your first book through your experience of living and working in Russia. What is the sort of cultural manifestation that we're describing? And then what I would like to do is try to understand its origins, its progression from the end of communist Russia, because interestingly enough to get to ahead of ourselves, I did another episode with my friend Simon Mihailovich, who emigrated to the United States in the 1970s. And he sees the beginning of this unraveling actually in the period of destilization, but then really accelerating with Perestroika and then through into the early 1990s. What is it that you experienced that you write about that we're (17/57)
trying to get our arms around today in this conversation? Well, look, again, we're talking about phase one Putinism. So now we're on a different model. So, but it's a very important one to understand because it's one that's been imitated by a lot of people by Viktor Orban in Hungary, by Vucic in Serbia, by Erdogan in Turkey. And when we think about nightmare scenarios of the US, which I think is still nightmare scenarios, but there's the scenarios, we're talking about Putin phase one. And Putin phase one is something that was nicknamed managed democracy, which is still the veneer of democracy, but actually underneath it's becoming a dictatorship. Now it's just an open dictatorship. Again, aesthetics, the aesthetics of democracy. It's interesting. Again, I just want to point this out, aesthetics plays a really powerful role, I think in your book and in this conversation. And I think it says actually very interesting. I think when we look at politics, we always lead towards sort of a lot (18/57)
of explanations based on self interest or based on power. I think aesthetics and psychology, psychoanalysis might be interesting additions to how we think about these things. We've definitely started talking about psychoanalysis a lot more in America. We still don't a lot in geopolitics. But anyway, coming back to Putin, so the idea was to have the veneer of democracy, but actually still controlled. So if you were to switch on a Russian channel in 2007, eight, you would see actually a very lively debate show between different political parties in a way much more intense than an American one, much more kind of Jerry Springer like, you know, with a lot of rowing and shouting. But all those parties were actually to a greater or lesser extent either created or controlled by the Kremlin. Real opposition were already being forced out and would soon just be not allowed on TV altogether. That ends up being nebarnly. But before that, that's lots of stages. And the idea was to reflect different (19/57)
bits of society. So everybody felt represented. But to make sure that none of them could ever really compete with Putin. So the overall point of this reality show was there is no alternative to Putin. But you had your crazy communists who were meant to kind of soak up some of the resentment of pensioners. But everybody else was meant to look at them and go, oh, my God, they're crazy old commies. And then there was the really far right guy, Zyrunovsky, who was created by the Kremlin literally, who would play the role of like the crazy far right Steve Bannonny kind of character. And he would get, by the way, like 17% of the vote. But most people go, oh, my God, he's crazy. And he would say outrageous things, crazy things that part of the population would like, but anybody normal will go, whoa, he's mad. And then you had a kind of liberals who were always a little bit effete and a bit kind of, you know, very un-Russian. And they would, you know, get their 6% of the kind of liberal elite (20/57)
votes. But it was very clear that they didn't represent real Russia. They weren't real men. They were, you know, they were nerds. And, you know, they clearly didn't reflect normal Russians. Interesting. Real men also something really to sit on a bit and to think about in the course of this conversation, this notion of masculinity. Oh, yeah, that obviously plays a huge role, almost to kind of a camp sort of way with Putin's photographs of him being so virile and riding horses and going around bare-chested. And so you were meant to look at that and go, wow, Putin is just so much better compared to all of this. And there is no real alternative to him. But we do have some sort of debates. They don't want politics to be boring. It's not meant to be fun. You know, there were stories around these parties and these characters and they were all, you know, these fun debates and, you know, you got to vent a lot of spleen. Though ultimately, when it came to any big decisions, all these parties (21/57)
were completely loyal. So they came to sort of arresting an oligarch, they'd all be on board. So that was the model. I suppose the twist to give to all of this was that this was done quite openly. So it was openly telegraphed that all these parties are loyal and controlled and part of the Kremlin. So this is a very, very interesting layering of messages. Yes, we do have some freedom, but actually it's all controlled and don't you get any ideas. So Koav, who was the kind of guy who was running all of this, who was kind of in charge of media policy and in charge of running the so-called parliament, would leak photos of his own office with, you know, telephones to all these party leaders, making it very clear that he was in charge. And then it's kind of hard to, sometimes I find it hard to grasp for, for Westerners. This wasn't about conning people. This was about saying, this is a game. These are the rules of the game. These are the limits of the game. And then on an even more subtle (22/57)
level to say, look, democracy is actually always controlled. We have democracy, but it's really controlled by our own deep state, so to speak. And it's the same over there in America. They do have democracy, but it's controlled by a deep state or in Britain, it's actually all controlled. So this is the package. And sort of saying that the alternative was the 1990s, which was chaos. Do you want that? Of course you don't. So always bouncing off like, you know, that democracy was just chaos. This is what it is. You know, this is sort of command and control democracy. And, you know, we can have some fun with it. You know, there's some color. Elections are definitely not up for it, but you can go and say some crazy stuff. You can even criticize bits of the, maybe not Putin, you can criticize the government. You don't criticize Putin, who's sort of almost above politics, but you can have a go with the government. You're allowed to do that. So there are some bets, you know, there's ways to (23/57)
express dissent. But please know that actually at the end of the day, it's limited. Is the distinction that you just can't speak too truthfully, that you can't break the third wall? Is that the real distinction that it's okay to dissent? Just don't really use language from the world as it is, from reality. You have to continue to play act in this larger sort of masquerade. Is that the distinction? Exactly, exactly. So I think you've really put your finger on it there. And when we think about power, it's getting people to play along, which shows you have power. And by people playing along, you kind of weirdly break them. And people by agreeing to play along, people become part of it and sort of commit it to it. And I think if we think about power and dictatorial power, it's getting people to play along, which is the secret, because actually only so much your repressive organs can do. There's only so many people you can arrest. So it's getting people to play along, which is the key. It (24/57)
was also in the Soviet period. And so it was interesting. So when I was there, if you wanted to speak the full truth, you weren't at that moment usually killed. You were just off TV. Yeah. And being on TV was being relevant. So there were opposition people like Boris Nemtsov, who was on TV for a long time. And then he started to go too far. And then there were just blacklists. There were blacklists of people who cannot get on TV. And Nemtsov eventually got into those lists. And people sort of think about, talk about the real opposition, which meant not being on TV, which meant being irrelevant. So you weren't killed for it at that point. You weren't put in prison for it. You were just made irrelevant. You were not in the reality show. You weren't in the Big Brother House. Instead of like Orwellian Big Brother is the Big Brother House. If you want to be in the Big Brother House, you've got to play along. And you're right. And that's what I try to get at in my book. It's not a top down (25/57)
system of coercion. It's a way of getting everybody playing along, which in a very subtle way breaks you, because you become part of it. And there's actually been a lot of anthropology about this. I'm not the first person to notice this. There's been very good anthropology about this, about the Assad regime, for example, in Syria, the first father. So I'm certainly not the first person to tweak this. But my book is in many ways about what it's like living in that, I suppose. So I actually want to pull a quote from your book. I have so many quotes on this rundown. I have quotes from both, this is not propaganda and from Nothing is True and Everything is Possible. This quote speaks to what you were describing just a moment earlier. Let's see where I want to start to pull it from. But even when you know the whole justification for the president's war is fabricated, even when you fathom that the reason is to create a new political technology to keep the president all powerful and forget (26/57)
about the melting economy, even when you know and understand this, the lies are told so often on Ostankino that after a while you find yourself nodding, because it's hard to get your head around the idea that they are all lying quite as much and quite so brazenly and all the time. And at some level, you feel that if Ostankino can lie so much and get away with it, doesn't that mean that they have real power, a power to define what is true and what isn't, and wouldn't you do better just to nod anyway? Now, this speaks to two things. One, it speaks directly to what you were describing before, which is that in a sense, the power to define reality is a power that's so awesome that it instills in the listener or in the viewer, at the very least a healthy sense of fear, fear of going against a power that's so powerful that it has the capacity to define what's real. But it also speaks to something else, which is really what I want to get to and draw it from you, which is what were the (27/57)
distinction was always equal or did it begin where more people were convinced and over time it just became the signal for power? In other words, the form of propaganda and did people's conviction in the story deteriorate over the course of the USSR's history so much so that by the time of the collapse in the 1990s, there was a sense that like again to the title of your book, nothing is true and everything is possible. So I think we can look, we can go all the way back to the start and look at sort of peaks and crests in this. If we're talking about the period that I'm kind of bay concerned with, which is the Cold War period and post-war period, there was probably a moment in the 1960s where there was a real hope for socialism with a human face. There was a certain amount of optimism. There was real economic progress and there was a certain amount of liberalization and a certain amount of reformers, especially in the culture sections, which might make you think that it was possible. By (29/57)
the 1970s, it's clear that it's sort of the breaching of era, complete cynicism. By the way, the time it gets to the 80s and 90s, it's lost all its meaning. So I'm concerned with that bit. I mean, you could then go back to the 20s to the Stalin period. 20 people seem to believe it, but the Stalin period is just about power. So maybe this is a cycle, I don't, you know, we'd have to do a lot of kind of deep right for that. But in what I'm concerned with, which is that period, then I think that's the kind of arc. But coming back to what I was saying exactly about the Soviet one, the difference between the Soviet one and the Putin one is that because communism itself was meant to be a rational enlightenment philosophy, which was meant to respect evidence, it claimed to be scientific, you know, it claimed to be an enlightenment, the ultimate enlightenment experiment. A, there was a normative position that you could criticize it from. You could say, well, you've promised to give us socialist (30/57)
utopia, but you have not. And here's the evidence. And they would then try to produce other evidence, say, well, actually, we have, look at these statistics and the Soviet system had all these think tanks trying to prove the economy was working well. You know, it was quite bizarre. They came up with the idea that people weren't unemployed, they just had so much free time, that showed it was doing well. I mean, it was like, because it was a system which was meant to have values, you could attack it for that. You could say that you are creating a better society. Why are these people in prison? And because they signed up to various human rights norms, you could criticize them for that. The dissidents used to say that we're going to hold you accountable by your own laws. There were laws around freedoms in the Soviet Union, which were clearly ignored, but they were there. So because it was a coherent philosophy and an enlightenment philosophy, there was a normative standpoint that you could (31/57)
criticize it from. The difference with the picnic era is like, they don't believe in anything. They can be left wing, right wing, they can be nihilist, they can be idealistic, they can change, they can be completely situationist. I think nihilism actually is a coherent philosophy. I think that cynical, cynical, if you look at the kind of definitions of cynical, it means you can believe lots of things. It's not believing in nothing. It's like, belief is so thin that you can do this thing in the morning and this thing in the afternoon. That's the world that I lived in. That's interesting though. So what is the distinction between believing in anything and believing in nothing? So nihilism is still a coherent worldview. I mean, nihilists were 19th century, kind of like heart. I mean, there's Russian novels about nihilists, their belief in the blackness is a commitment. They make a commitment to their nihilism, like grunge fans or something. There's a philosophy there. This is about being (32/57)
a nihilist at one moment and then putting on a business suit and being a kind of liberal rationalist the next. There's a coherence to nihilism. Here, we're talking about just being different things. It's more a masquerade that you're constantly indulging in. I mean, there is an emotional logic there. There's a psychological logic there, which I think we couldn't try to sort of find. So I'm not saying there's nothing there in terms of an engine, but in terms of belief systems that you can translate into words and ideas and facts and debates, there isn't a stable one. And I'm always asked, what does Putin believe and what do Russians believe? And I'm like, if you're asking that question, you've understood nothing. The point is they can believe lots of things and none of them matter. And that's hard for, again, in a Western culture where we're brought up from school age to say, what do you think? Yeah. And to re-hardening our sense of self, it's very hard to understand a culture where the (33/57)
opposite is valued. And that was actually already embedded in the Soviet educational system, where nobody asks you what you thought. You were just meant to power it back Soviet dogma, whether you believed in it or not. So that was already there in the Soviet system, but it's kind of multiplied. And if anything, and what I try to get to in the book is what they would say that all your beliefs in the West are bullshit, what I would always hear from, and there are kind of elite because, you know, people who work in media, create media are sort of elites, was that you don't understand, Peter, they would tell me, all that stuff about human rights, all your stuff about a liberal world order that you've grown up with, it's bullshit. Your elites don't believe in it either. It reminds us of the Soviet Union, where they would parrot these things, but no one believed in it. And actually, below all this are just games, manipulation, and the same kind of, I think I call it culture as zero gravity (34/57)
in the book, that we have here. And you will find that out soon. And I remember listening to them going, oh, you just have, you know, you're, this is sour grapes. We have politicians who still believe in facts and ideas, they're corrupt, whatever, but they still believe in stuff. And I suppose the story of my second book is coming back to the West and going, Oh, my God, did they actually have a point? Because you just have this explosion of a lack of belief in anything and a very similar attitude towards facts. So I suppose that the symptom of this world view is that facts lose their meaning because facts become instrumentalized, all ideas are instrumentalized. They only, you know, they're not a thing in itself in this world. There's something to hit people with or confuse people with or intimidate people with, but they're not something that you kind of use to debate because there's nothing to debate about. Facts lose their meaning. And if anything, there's this kind of celebration of (35/57)
sending a big middle finger up to factual language and a reveling in nonsense speech and a reveling in just saying the most absurd things and saying, that's kind of almost your kind of your badge of honor. And, you know, we see some of that in the West now, which was, you know, what kind of struggling to deal, how you deal with leaders who don't care if they're caught lying. That was one of the agonies for my liberal friends in Russia. You know, they really believed in holding truths of power. And they would produce this evidence about Putin's corruption or about, you know, the fact that the elections were rigged. And the Kremlin would go, So what? Yeah, we're lying. And that resonated with people. Most people in Russia said, Yes, so what? None of your ideals matter. Democracy was a nightmare or a sham. What is this evidence that you're producing? What does it mean? It means nothing. We live in a world of chaos and let's speak about it that way as well. And I remember so many of my (36/57)
friends just being like, you know, because they believed in democracy. And they were like, no, but here's the evidence. And it just didn't mean anything. And that was a very dizzying moment. But now I think we see it everywhere. What kind of what was used to it now, where the evidence has stopped meaning anything. So much to pick apart here or to reflect on. First, again, I want to pull a quote out from your book that actually speaks directly to what you said. This is not propaganda. Were you right? I returned to London because in my naivete, I wanted to live in a world where, quote, words have meaning, where every fact was not dismissed with triumphant cynicism, or as, quote, just PR or quote, information war. Here are the two sort of things I want to highlight. One is it seems that what you're describing is a society that feels as if it has gone through the apocalypse. And what it has discovered in the course of doing so is a deeper truth, which is that there really is no truth, that (37/57)
everything is relative, that nothing has underlying substance or meaning. And so that the truly enlightened people are the ones that understand that and in a sense believe in nothing, not in an ideological way, but truly deeply nothing. So that's one observation. And I also want to reflect on whether that's actually true or not, because you can approach that question from two different perspectives and both I think can carry some a lot of intellectual weight. And the second thing I want to sort of reflect on is a more practical question, which is what shattered that mythology? We don't have to necessarily try to extract that from the Soviet experience, because I think in some ways we tried to address it a bit and we talked about the Stalinization or Perestroika or the 1990s where communism collapsed and all of a sudden you had these overnight billionaires, you know, running around town with Maybachs, as you describe in the book, but maybe more to the point, what shattered this myth in (38/57)
the west? Because as you pointed out, your colleagues in Russia would say, you will discover this soon too. And this is the question, right? Have we discovered this? Is that what's happened here in the west that we discovered it at some point? And I would say in a sense we have, but then that brings us back to the deeper question, which is, did we discover a deeper underlying truth? Or in fact, have we in a sense deluded ourselves? And then further to the point, if in fact we discovered a deeper underlying truth that really there is no truth that we can discern, what does that say about our need for mythology? And can we erect myths and live by them knowing this deeper truth? Because this is the, this then brings us all the way back to some of the fundamental sort of foundational issues with the Enlightenment and the death of God. And our attempt to, in a sense, construct a society very much along the lines of communist Russia, highly scientific, but full of so many contradictions. And (39/57)
you sort of wonder, where does this leave us? So I said a lot, but I'm curious, I want to allow you to just reflect on what I said and respond however you want. And we'll see where it takes us. Yeah, look, there's so many issues here. So what happens when you realize that like the myth is hollow? I think there's different ways of reacting to it. So the working out of the communist in Russia, the communist myth was hollow. And the attempt at creating democracy in the early 90s was disastrous in so many ways. Ended up with people who believed in nothing. But doesn't mean that they were free. And here's a big paradox. And we see this all the time in the West with people who don't believe mainstream media. They're not free. They end up embracing conspiracy theories as a way to make sense of the world. So we still need a way to make sense of the world on some psychological level. So if it had led to real freedom, that would be interesting. But it didn't. If anything, the opposite, you go to (40/57)
a kind of, I want to try and describe in the book, was almost a medieval sort of psychology, where, you know, instead of the kind of mix of myth and reason that Enlightenment democracy had, you just have pure myth. And conspiratorial thinking replaces ideology as a way of... And in a sense, you fully invest yourself in the story that there is an all-powerful elite and that they control the world and that you certainly can't do anything about it. But in somehow, in your sort of recognition of that, that you somehow are exercising a level of freedom. If anything, you'll have completely helpless. So this is the paradox. In order to kind of be free, you need to trust at least a little bit. And we see that everywhere in the West and you see that in Russia as kind of dominant. And I think that even though the various messages the Kremlin can do, they can believe or not believe in them, the conspiratorial world view is genuine. I mean, that is... That's not a world view as in as like a (41/57)
philosophy, that's like a psychological, you know, crutch, basically. And the need for identity is still there. And the need for fake community is still there. And all those things are still there. If anything, they've kind of been made naked. You just have the psychological pulsating needs now with no veneer of ideology or much less of a veneer of ideology. And I think you see the same here. When they came up trying to come up with a name for the Putin Youth Group, which was openly modeled on the Hitler-Yugand, they didn't call it young Komsomol or Hitler-Yugand or young whatever, they just called it Nashi. Us. So there's us and there's them. So the need to define yourself, or none of that goes away. The psychological underbelly, if anything, is revealed. So as long as there's nothing in freedom, there's just these psychological needs and fears and inability to make sense of the world. And, you know, the need for warped, sadomasochistic father figures, all that stuff is there. So in (42/57)
that sense, that's the Esquistle very relevant to understand it all. Just the ideological bit and the kind of stuff of democracy about debates and reason, evidence that's all gone. And I think you see some of that here as well. You have these kind of political movements, which obviously they're tied to in America, problems about race and all that kind of stuff, because that's the sort of history that we live in here. But their essence is just expressed through pure belonging, almost sometimes almost without ideology. I mean, is Trump right? Is he left? Well, I mean, we can't really tell anymore. It's just this need for certain types of authority figures and a certain type of experience of, you know, I'd say pseudo community. So that's kind of what we're left. And again, I'm certainly not the only people to notice this that as ideology and the politics of ideology goes away, everything becomes about identity in and of itself. And I think we have to think a lot more about what is (43/57)
identity, and what is healthy identity and what is destructive identity. But, you know, Fukuyama's got a whole book about this, you know, about how ideology went away. So now you're just left with pure dynamics of belonging and what belong. And again, Russia got to that very, very early. This idea, they twig very early that Putin doesn't can't be ideological, because people don't believe in any ideologies. And also, like, he needs to cobble together a lot of other people. And so they come up with this idea of creating what they call the Putin's Coeblitions Tour, which is translated as the Putin majority, but it's much closer to what Trump refers to as the American people, the real people, the true people. It's this amorphous emotional thing that anybody can project themselves into, which is really defined by what it's not the enemies, the enemies of the states. First, it's the oligarchs, then it's the West, it can move around. So it really is about giving people that sense of belonging (44/57)
really outside of a, in a very kind of jello like emotional construct, which is constantly changing its kind of messages. But the emotional structure is very similar. Yeah, it's interesting because you also mentioned identity, which I think is the other half of this story. Because I think that what creates the vacuum is the destruction of both identity, a sort of sense of communal identity, and meaning, and its replacement with one thing, power, a sort of raw power that can define both identity and meaning and is foundational to both. Yeah, and I think that's pretty evident from Russian foreign policy. When in 2011-12 there's huge protests demanding reforms in Russia and concrete reforms and reforms which will end up loosening the power of the Kremlin, whoever's in there. Putin's response is to set off on a bunch of imperialist adventures, and they are all about that. Let's compensate because people do need meaning. Again, none of those things go away, by the way, even when you stop (45/57)
of people, if they have shared beliefs, those things allow them to form expectations about people's behavior and their own behavior, et cetera. But absent that, you need the sort of Leviathan. And then the other point is interesting about entertainment because in a sense, it seems to me, in the world you describe in the book, and I want to also use this as an opportunity to begin to shift our attention towards the West, it seems that entertainment very much plays that role of quelling the inner-term oil of inspired by meaninglessness or just filling the void of the emptiness of everyday existence, that there's something to that, that it's central in that way. And I feel like we've seen that happen in the West. We've seen it happen in the stock market with the transformation of the stock market from something that actually performs a very basic utility function of reallocating capital to being actually increasingly a casino and a place in which to act out the dramas that begin in some (48/57)
ways, quite literally in online communities with the example of like GameStop or some of these cryptocurrencies, people looking for communities and fusing them with financial markets, also with the election of Donald Trump and increasingly Rand Paul and Anthony Fauci, and everything becomes increasingly a drama, everything becomes increasingly a form of entertainment. So actually, this, one, love your thoughts on that. And then I want to ask that question when maybe we'll move this to the second half of our conversation and I'll ask it, we'll keep it for there, but when did you first begin to see some of the characteristics of this sort of post-Soviet Russian culture emerge in the West? So, well, the revolutionary year of 2016 is obviously the one that is the inflection point. Both Trump and Brexit happening, but we already saw elements of it on the fringes. But without a doubt, the Trump moment is huge. Then you see the emergence of Duterte in the Philippines, who's 2015, very, very (49/57)
recognizable, Bolsonaro or bad, you know, there's another pattern here, by the way, these are all men of a certain age. So I didn't, there's another kind of like through line here when it comes to identity. Which I'd love to explore. I just think it's just pretty self-evident, isn't it? I don't even know what to say. It's so obvious that there are a certain type of men, you know, projecting a certain type of masculinity and appealing to people who feel under threat, I suppose. But we can go deeper, you're right. So all those things are very similar. But then I'd say also that the rise of conspiratorial narratives, aside from the power bit, the appeal of conspiratorial narratives, so again, throughout Eastern Europe, about Vucic here, the rise of it, I mean, the US, and really conspiratorial thinking being the thing that replaces ideology. So we always have conspiracy theories. The Soviets had their conspiracy theories that the bourgeoisie were behind everything. But that conspiracy (50/57)
theory was that's buttress in ideology. The Nazis had the Jews behind everything. But again, the conspiracy theory was a subset to the ideology. Here you have almost conspiracy thinking for the sake of conspiracy thinking. The conspiratorial mindset is the ideology and the conspiracy theory can change. One moment it's the imperialist, the next moment is the Jews, then it's the aliens, then it's Q. It's always changing. There's a lovely statistic about most people who follow QAnon didn't actually understand the details of QAnon. So it was just about being in the conspiratorial world that they derived fun out of. There's lots of research showing that conspiracy theories are very related to when people feel there's no sense of future anymore. Which I think here is the key. Those ideologies, well, for all their obvious faults, were future-orientated. We were heading somewhere and you could sort of judge facts and evidence in comparison to that. The facts show that our society is (51/57)
progressing, or the facts show it's not progressing. We need to progress better. Just a whole idea of progress kind of pushes you towards a slightly more rational discussion. When that disappears, conspiratorial narratives tend to rise. There's very good research in Hungary about how after the 2008 crisis, which is one of the other big moments, I think, which undermined faith and liberal democratic progress, after the 2008 crisis, which hits Hungary very hard, people stop believing in the future and conspiratorial narratives go up. So these things, I think, are very connected. So I'd say if 2016 is the moment where the new unreality maybe becomes impossible to ignore, and if the rise of conspiratorial narratives is the thing to track as a kind of growth, I think obviously 2008 is the big moment, which undermines for a whole generation any sense of a future. I think that's a very obvious thing to say, but I think it's very interesting to see where it hit hardest. I mean, it hit hardest (52/57)
in bits of America, where people had their savings wiped out. It hit hardest in Hungary. Hungary was really hit by the financial crisis, and Orban is a really interesting reaction to that, definitely the most Putin-esque politician in Europe, and so on. So I think that's the big kind of moment when we realize that what was an ideology has become a myth. We think we're heading towards this happy, globalized village, but actually, A, we're not getting there, and B, loads of people are unhappy about it, and loads of people feel left out by it, and there's a whole generation of young people who can't even buy houses, and the myth becomes, it's seen as empty, but again, it takes a while for a crisis to sort of percolate into culture and politics. So 2008 is the shock. It kind of percolates through around the 13th century. So many thoughts that I want to try to articulate before I move it to the second half of our conversation, Peter. One, I love this observation. You made it in the book as (53/57)
well, which is that in the absence of agreement, in the absence of societal consensus, the future becomes impossible, and so in this sense, this also somewhat explains why there's an appeal for the sort of nostalgic leader who looks back towards the past to give people something that's stable, something that's in a very physical sense solid to hold on to. I also, I just love, and I want to reflect on it in the second half of our conversation, this observation about, one, the sort of evidence that we had entered this world with the 2016 election as an example, and distinguish that from looking to understand where did this process begin to go off the rail, so to speak. What are the causal factors? I think 2008 absolutely ruptured in a sense, people's belief, but I think 2001 and the invasion of Iraq, using words like freedom and democracy was in some ways more devastating because so much of who we are in the West is based on this idea of Western liberal democracy and capitalism is the (54/57)
second part of that equation, which 2008 completely destroyed or our response to 2008 and the self-dealing that was so evidently on display by those who supposedly were entrusted with the responsibility of protecting us and safeguarding the overall integrity of the system. I think you can look at the entire progression of Western society throughout the 20th century, from monarchy and Christianity and monotheism to rationality, nationalism, and capitalism to now where I feel like we're in another period of transition where who we thought we were isn't exactly who we are, and that's the space I want to explore with you in the second half of our conversation, Peter. 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 to access the second half of my conversation with Peter, as well as the transcripts and intelligence reports, which (55/57)
include additional notes, resources, links, and other material that will help you get the most out of each and every episode, head over to hiddenforces.io and become a premium subscriber today. Peter, stick around. We're going to move the second half of our conversation into the subscriber over time. Okay, that's great. 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 full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io. 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 (56/57)
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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
The Measure of All Things Phenomenology, Design, and the Human Experience Christian Madsbjerg #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
concept of what consciousness is. I think of AI as applied philosophy. I think of it in that sort of a way. What do you think of this other culture that and this could bring us into a larger discussion about Silicon Valley bubble thinking and sort of how it is or is not representative of the largest society. What do you think about this immortal this quest for immortality that is finding new life in Silicon Valley? I think it's laughable and stupid. It's just the more bubble-esque they become in Silicon Valley. The bigger the goals. It's no longer curing cancer. It's ending death. It's no longer fixing this world. It's going to Mars. And I think it's great to go to Mars but thinking about it as some sort of philanthropic endeavor is ridiculous. So that's the first and the second thing is that the heart of that problem is the singularity idea. It's this idea that everything is exponential and that technology will happen exponentially. And if it does then we can eventually in the day a (32/57)
mean? You know, and you cannot deny that that is a human experience. It takes denial to push that out of your model. And again, that's because I think in large part it's inconvenient. And it requires a tremendous amount of work and effort. So before we wrap up this interview, Christian, I do want to talk a little bit about some of the great interesting stuff that you do with your company, at least one case. Now, what role have you played with Ford? I'm fascinated with Ford because I'm fascinated. You mentioned Lincoln and the New Lincoln's specifically the continental has stood out for me. I mean, I've seen that car on the street and there's no other car. Volkswagen has a nice new model somewhere I've seen. It's not out yet. It's a concept car. But like that car, when I hit the street, I was wowed by it. And when then I read your book and I realized that this was, you know, obviously it must have been, but this was a conscious decision by the company to reinstate luxury in the brand. (51/57)
we're interested in. So that's the big story, the smaller story, which is what I'm trying to talk about in my last book is it's also very practical and helpful. So people talk about art, particularly in America, about art and music and museums as something you do on Sundays in your spare time. That is sort of a luxury for the wealthy. And that is there's something to be said about that it's very luxurious to do. Yet I think engaging with art is the most advanced way of learning about others and engaging with other times and other ways of thinking. It also provides the context for understanding everything. Right. But it also, if you want to understand how to sell cars in China, it's nice to understand what it's like to be a Chinese driver or somebody buying the first car in the history of the family. If you want to sell mobile phones in Brazil, it's nice to understand what it is like to be a 17 year old woman that's buying her first mobile phone and what her life is like in order to (15/57)
and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter and Instagram at hiddenforcespod or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kaphinas. Today, we speak with Christian Mesbia. Christian is founder of Red Associates, a consultancy group focused on helping companies bridge the qualitative divide between themselves, their products, and their customers. The sociologists, anthropologists, economists, journalists, and designers who make up Red employ the methods of social science to study human behavior. Instead of minimizing complexity, they embrace the non-linearities, helping companies reinvent themselves and their products from the bottom up. In this episode, we examine the world from the perspective of human experience, what philosophers call phenomenology. Rather than try to objectify reality, we will revel in its subjectivity. Rather than discount our senses in favor of hard data, we will discount the data in favor of our experience. Experience matters. Reality is messy. Data is fuzzy. The problem of consciousness is hard. Try (1/57)
as we might to fit the world to our models. Reality has a stubborn way of eluding even the most disciplined researcher. The most experienced traders don't make decisions off a spreadsheet. They use their intuition. The same intuition that you use when deciding who you can trust, if the price you are paying for something is too high, or if there's just something off about a room, or a scene, or a story you've just heard. To discount the authoritative wisdom that comes from lived experience is to discount the value of the very question that has led you down the path of inquiry. It is to discount everything that makes life meaningful. And if we want to understand the world around us, why we do what we do, then that journey must begin and end with the human experience. As always, you can gain access to reading lists put together by me, ahead of every episode, by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to this show on iTunes or Android, make sure to (2/57)
subscribe. If you like the show, write us a review. And if you want to sneak peek into how the sausage is made, or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at hiddenforcespod. And now, let's get right into this week's conversation. So Christian Mesbia, it's wonderful having you studio. Thank you very much for coming. Thank you for having me. Yeah. I met you and first, in fact, heard you speak at David Kirkpatrick's Techonomy conference, which our listeners know because David was on our program. He was actually our episode one on the show. And I really liked what you had to say. I found a deep level of kinship with your approach to... It's difficult for me to even kind of express it. Our listeners will know some of what I'm referring to from the episode on philosophical mathematics, Wittgenstein. It's a challenge for me to express what it is exactly that I found appealing with your perspective. But why (3/57)
don't you tell us a little bit first about who you are, and then we can proceed further in this discussion. Where would you like to take it? I suppose that I should have been an academic philosopher, but I was so bored in university. I found it dreadful and political, and it seemed like people were fighting over very small things. So instead of that, I chose to figure out a way to do philosophy or be interested in the kinds of topics that I was interested in, in other ways than the traditional way. So I founded a consultancy when I was 22 or 23, and I sold that and I did another one, and that was merged with a bigger company and so on. So this is my third or fourth version of the same company, really, which is trying to use sophisticated theory about human beings to understand us and understand our life and use that to figure out how to make things, how to make cars and phones and medicine and all kinds of things. You found a way to make philosophy profitable. You bridge the... Another (4/57)
way, would it be fair to say, is you bridge the qualitative divide between us and data, us and the quantified world. Right. So the big deal right now in the business world is, of course, that there's a new set of data we can get our hands on, and that is the data that tracks us while we click on where we move, and in your phone you would have 80 different things that it can measure and know about you. And that's a huge step forward in terms of the way that we've understood markets before, because the way we understood markets before was by asking people, and we're notoriously poor at figuring out what we want or like or even what we do. So when we say we cook in a certain way, it's probably untrue, and when we say we dress in a certain way, it's probably untrue. So the big data world and the new data sets that come about are exciting, yet they're not a truth machine, and that's sort of my critique of it is that people think that the data sets that we now have from the digital world is (5/57)
a map of the world, which it definitely isn't, and it also matters who asks questions and how we ask questions to that data, and that is largely overlooked, and that's why we make so many mistakes. You're saying it is a map, it is not the world, or it is not a map? It's a map, but it's not of the world. Exactly. It's a map of some part of the world, but not the entire thing. It's interesting that you say that because another thing I was thinking about while reading your book in preparation for this interview is the distinction between the map and the territory, and I do think that we do suffer from this conditioning increasingly in a digital world where we've mistaken the map for the territory. So I want to get into that, and we will, but before we do that, I want to ask you something because I am curious. You described it very well. You are a very philosophical person, and you found a way to apply philosophical principles and ideas and thinking, and introspection and a certain (6/57)
humility. I think you have a good sense of humility around what is knowable. I mean, we'll get into Heidegger and being because I think that's very relevant as well to this, and phenomenology and experiential knowledge, and authoritative wisdom that comes from lived experience. I think that's very powerful. But when I was reading you, I couldn't help but sort of empathize again with some, like when I saw you speak at the economy, I empathized with some of your perspectives, and I thought to myself, well, what was this person's life like growing up? And I am curious about that. So you're from Denmark. I don't know what other culture is like there and how people respond to philosophical inquiry if they think it's a waste of time. If they don't, in America, I think for the most part it's considered kind of a waste of time. You're asking questions that don't have answers or whatever. I certainly was very sort of introspective, very curious. I had these big questions as a kid and no real (7/57)
answers, and I felt very alone in that journey for me. I'm curious, what was that like for you growing up, and when did you begin to ask these questions? When did you start looking at the world, and when did you realize that you were looking at the world differently than others, and did you have people in your life to sort of make you feel that this was or was not normal or whatever else? Right. That was 17 questions in one, but I'll take it from one end. I think I've always been a reader, and I've loved the actor reading. Probably some of the times I'm most happy is when I read what happened 200 years ago or what other people thought about something, and I find it amazing that people had the same thoughts and feelings that I have right now in Syria 400 years ago. Isn't that amazing? It's just time travel almost, and I very early on found that. I think some people say that there's a correlation between literary criticism and asthma. I think one of the reasons ... And asthma. Yeah, (8/57)
because the more asthma you have, the more books you read. I had asthma as a kid, so I ended up reading a lot. It's not though in Denmark there isn't an anti-intellectual culture. You have at least half of the population would be interested in books and would be talking about it, and it's a completely reasonable thing to spend your time on. There's a concept of being cultured, which is part of the culture that is okay to know about music and our songs and our stories and so on. That's part of being a human being, and even though that's not productive in the most crude sense of the word, it certainly is part of life to know what kind of music they played and made up in the 1890s and so on. I didn't have probably the loneliness that you described, but I was probably a bit more excessive in the area of reading than most people. Then I found very early that I liked seeing patents and things. I liked seeing how, why people do what they do and so on. So I started being an observer and a (9/57)
listener more than a speaker and a doer, and I like sort of waiting a little bit before I make conclusions and cast judgments. I think I found that the people that understood things were the ones that listened a lot. Casting judgment is something that is necessary, but only at the point where you know, and I just felt that people did it very fast. In America, when I moved to America around a decade ago, I found a culture where people have the decision before they've even done the inquiry and then try to spend a lot of time on fitting the data to that conclusion. I found that sort of unhelpful and weird. Well, especially in media, that's definitely true. I also worked for a really wonderful man, but he used to say, we're going to do a bunch of focus groups, we're going to do all this and that, and then we're going to do whatever we want anyway, which made him very human. So listening to you talk, one of the things that struck me is, and I just wanted to say this, again, I find kinship (10/57)
with this idea that you found companionship in the works of other people who had written perhaps lived millennia before you, which I relate to that very much. I also was thinking when you were talking, I was thinking about Denmark, which is an interesting case because Denmark has for a very long time been a very homogeneous culture. It's very interesting that you are partly in the business of bridging cultural gaps and cultural divides, which is something that I will want to get into. There's something to that though, that it's also the most open economy in the world, which means that you can't stay and build walls around yourself if you want to survive. Because it's so small. It's so small. So you have to trade and you have to, it's been a sort of a trading seafaring nation. So language is important. Nobody speaks Danish. So you have to learn Russian and you have to learn German and you have to learn French and so on. If you want to trade with anybody and if you want to trade with (11/57)
them, you also need to understand where they come from and what their world is like. So even though it's a very homogeneous country, it's also a country that is so weak and have lost every single war for a thousand years that since the Vikings really, it's only gotten smaller. And that means that you have to compete in other means and cultural understanding and learning languages and so on is one way. Those northern Nordic countries are beautiful, gorgeous countries. In the summer, right? A couple of weeks in the summer. Yeah, just but also like just in general, the architecture, the interiors of the homes, I imagine in large part because so much of the time must be spent inside because of the winners. And also because there's more material wealth that can be accumulated because less of it is spent sort of, you know, I think I'm Greek and I think about how in Greece people would traditionally spend so much money sort of having a great time. But there's so much beauty increased to spend (12/57)
your time outside, you know, to go and spend it by the beach or whatever else. So let me ask you this. So in the context of what we're saying, now we're talking about philosophy, we're talking about sort of how your progression and these questions and there's something that comes up in your books and when I've heard you speak and that deals with the humanities. And this is where I would like to take this now because you also cite a number of people in your work who have given you inspiration or with whom you connect. One of who is Edward O. Wilson, the famous biologist. I've actually read, I assume you may have as well his book on the meaning of human existence. And there's this great quote in that book that deals with the humanities where he specifically says that if aliens were to visit us, what they would take from our society would not be our science, they would find it dismal and useless. They are far, have sparser past us. They would instead be fascinated with our humanities. And (13/57)
so that's where I would like to kind of move us now to discuss sort of what the humanities are to you. And then let's have a conversation about what the humanities are to us. What is the significance of the humanities? Because you have some very great things to say about that in your book. Yeah. So there are two sides to that story. There is the big story, which is the meaning of our culture is the way we create beauty and the way we create, try to understand the world we live in. And I think Winston Churchill said that when he was asked to cut the budgets during the darkest times of the Second World War, he was asked to cut the budgets of the national endowment of the arts and humanities. And he said, well, what are we fighting for then? No, what's the point? And I think that's the big story here that you can listen to our shared world by listening to the music that we've created. And you can understand where our life was at. If you read the novels and the poetry of whatever time (14/57)
service that person. So I think the command is not the only place, but it's the most advanced and the best place to learn about the skills of putting yourself into other people's world and engaging with that world in a sophisticated way. So I just find that the people that are most helpful for me in my company and that we hire are trained in history, art history, literature. There's a study you cite from a company called or a research outfit called PayScale. I see, is that correct? And what did they find? What was the... Not surprisingly, they find that if you come out of college with a computer science degree, your likelihood of making money and getting a job is higher in the first years compared to people coming out of the humanities. But if you take the top 5%, if you take the best earners, the people that make most money in the country and you can care about that or not, but it's sort of one measure of success. And there's an over... There's a big weight on people with a humanities (16/57)
background. So if you look at the people that run our banks, if you look at the people who run the big financial institutions, they have a history or a French background. They're rounded people. Theater. Exactly. They're interested in so many things. Anthropology, psychology, philosophy. Exactly. So what I've seen in the big corporations that I worked in, there is a glass ceiling for people without a rounded understanding of culture and language and so on. And if you don't have that, which is something you get from being in the humanities, you have a hard time competing on the top jobs. And that just comes out in that data. It comes out that people with a humanities background at the very top are overrepresented three times over engineering. And that obviously is not because they have a piece of paper that says, I had a degree in philosophy from Yale. It is because the proof is in the pudding. Exactly. It's because it makes a substantive difference if you've studied humanities and (17/57)
you've reflected on questions of being and human being. So in that sense, when I've sort of over time reflected on this process and investigated this turn, I do actually, and I wonder if you feel the same way. I think that the point in which this started to change, this is a very difficult sort of thing to discuss because of course the enlightenment was very important. And before that, there was a lot of darkness. So I don't mean to suggest that we were on the right path before the enlightenment. The enlightenment was wonderful. I'm not throwing the baby out with the bathwater, but clearly there was this move towards a more scientific worldview in which we looked increasingly to model the world and to find ways to create deterministic systems and ways of understanding everything. And that's something that we've discussed on the show often with complexity and Newtonian mechanics and Newtonian principles and neoclassical models and economics, et cetera. But there has been this (18/57)
abandonment of phrenesis, so to speak. So, you know, I look at it really since the enlightenment, but do you see it as a sort of a more or less linear trend? Or do you see that there have been certain periods, for example, the Industrial Revolution or even today where we've been hastier in our sort of jettison of these humanities or of these non-scientific ways of spending our time and thinking about the world? I think I am an empiricist. I am into science in so many ways. And I think natural sciences have been spectacularly successful since the enlightenment. Yet there is a fundamental mistake in thinking that we humans can be our not our bodies, but our shared world and our culture can be studied with the same technique and the same tools as you study bacteria or asteroids. I think you have to have a difference between the clear difference between the natural world and you can call the universe and our world, the human world and what Heidegger, who is one of my sort of the people I'm (19/57)
interested in, calls worlds. So that would be the world of finets, the world of media, the world of radio, the world of art and so on. They have their worlds that are human and designed by humans and created by humans and are not helpfully understood through the means of natural science. And I get a problem when you start using natural science techniques on that. That's when you see the most misunderstanding and the most absurdities. I mean, I think economics is the area of economics is the area that sort of systematically gets things wrong because they use, I mean, almost every time it's just ridiculous because they use the wrong techniques to understand the human being. Absolutely. So I'm not saying that I'm against science and I'm against the enlightenment, but I think there was a mistake in the enlightenment, which was in René Descartes, really. And that came from Plato, which is this idea that all we are are thinking things and that we have complete transparency to our brains and (20/57)
through our brains, we have transparency to our preferences, to our will, to what we want in life. And I think Heidegger was the first one to sort of show that that's not true. He sort of reversed that 180 degrees and said, we are not described very well by thinking. We are doing things. We are engaging in worlds. And that's a different thing than sitting back and thinking through things. We can do that. We can sometimes look at objects and say, I wonder what that is. You know, and his example is, of course, hammering. So you can look at a hammer and you can say, that's a weird wooden shank with a metal blob at the end. But it's rare we do that. It's more likely that we know what a hammer is, that it's connected to wood and nails and houses and carpentry and so on. And that's the world of carpentry. And we know how to engage with objects in that way, which is exactly not the way that René Descartes or Plato or others talk about objects. So for me, he was sort of a break with a 2000 (21/57)
year misunderstanding of human beings and everything since, you know, being in time was published in the end of the 1920s has been about that. It's either been in the world of philosophy. It's been a reaction against it or a development of it in my book. And you can read the history of Western philosophy through that lens as sort of a different description of who we are as human beings. And all we've done in my company is we've said, we've taken that seriously and said, well, if it's true that we engage in the world and we need to study people in a different way, then asking them because we don't know, which is why surveys are wrong, which is why we can't predict elections, which is why focus groups, as your old boss said, should be neglected and why you should observe people and try to make sense of them in a different way. Reality is messy. It is. And data is fuzzy. Yeah. No, no, I feel you on that. And so what you're describing there in terms of the progression of Western philosophy (22/57)
is that fuzzy divergence between those who seek to find a very deterministic, quantifiable measure of self, of world, of object, of value, et cetera. And those like Heidegger or Wittgenstein who take a more qualitative picture, a qualitative view, and certainly with what you're describing there with the hammer, experience matters. Exactly. And it's not a black box where we say, okay, you know, it doesn't matter what's going on in the inside. We can ignore the problem of consciousness. There's actually this really great, I love Terrence McKenna. I think he's got such incredible, he has hit so many beautiful things. One of which was, and I just know this because I was looking for some stuff on my social media to create social media because I had this tremendous amount of work actually doing social media to exhaust me. I found this great interview of his and I took a short clip of it where he said it's a failure of the theory of evolution that it cannot account for human consciousness, (23/57)
which after all created the theory of evolution. So I think we can't get away from that, that fundamental problem, which is that we are the measure of reality of all things. We are the ones having the experience. Right. Yeah. So Heidegger would, so that he would say, well, there, there will be planets and there will be objects in the world without us, yet they wouldn't be called planets and forks and rivers. They would just be stuff. And it's us that gives it names and categorizes it and so on, which is a meaningful thing to study as well. And the problem with that is that you can't, there's no view from nowhere with that. You can't, you can't be a robot and study it. You have to be a human to understand that that's a river and that's a fork. And you have to understand what is relevant right now. Is the dust on the floor relevant or is it the conversation happening right here that's relevant? Figuring that out is very hard. And that's why they in Silicon Valley run into the problems (24/57)
with AI all the time is that they can't crack the problem of that you talk about, which is consciousness and they can't figure out generalized AI, right, which is wanting to do something, having being startled about something, being wonder about the universe, wanting to understand how to create warp speed things that could send us to Alpha Centauri, all those kinds of wishes to do things, something that they can't figure out. And they're not an iota closer to that than they were in the sixties. They've been much better at creating close systems, algorithmic things that you basically could do on a piece of paper. They can just do it with a computer way faster and then we can. But the human problem and the problem of the really hot problem they haven't gotten closer to and I don't think they want it. Let's talk about this because you and I, we spoke a little bit before this and we've both read Boostrom's book and it sounds like you're very into this subject. And it's been something I've (25/57)
wanted to cover on the show and I have not found the right guess to do it. But I'd love to have a little bit of a conversation with you on this right now. What is the hard problem of AI? And first of all, we're talking about general AI versus narrow AI. We're talking about AI in the way that the public and the popular culture conceptualizes it, which is a so-called superintelligence, computer intelligence that is competitive with or surpasses human intelligence. Right. They used to be good old fashioned AI in the sixties or fifties. That was the term, good old fashioned AI. Yeah, go-fi, basically. And that was the idea that you can feed a machine with enough information for it to have a complete map of the world. And we thought that, or humans thought that, especially humans attending the University of MIT, thought that our brain was a map of the world with concepts that we then projected onto the world. So when you saw a fork, you would say fork because of that, because you would sort (26/57)
of add up all the aspects of the fork to become a fork. And they found that that was a dead end and it was dead for 30 years. And now they're back, in a way, with a split of the concept of AI, from being AI to being general AI and specific or more specific AI. And more specific AI is really just advanced software. It's just like a spreadsheet is better at calculating than I am and has been since the early eighties. It's just a very advanced version, very fast. And an element of machine learning there as well. Yeah, right. But there was machine learning. There's been machine learning for a long time. The really hard problem is the other side, which is we can have the will to say, wouldn't it be wonderful if we could go to other galaxies? Or wouldn't it be wonderful if we could cure cancer? Something like that. Getting a machine to have will, to have Inspiration. Wonder, to have inspiration, to want to learn. That's the really hard problem. And that's something that Heidegger calls it, (27/57)
that we are the only being in the known universe that takes a stand on its own being, that thinks about its own identity all the time. So as far as we know, a fox doesn't think, I wonder if I should be more wolf-like today. Or something like that. And an asteroid don't have sort of internal social strife with whether it got dressed well this morning. It doesn't have a sort of social panic over the wrong haircut. Yet we as beings have that all the time. We have a constant dialogue with ourselves in terms of who we are and where we are and so on. And we engage in the world, in worlds that are constructed in a particular way that he describes in his book. And I think that is something that they have a hard time figuring out. Which world are we in? Are we in the world now of radio? Are we in the world of philosophy? Are we in the world of birthday parties? What's the world you are in getting a machine to understand that now I'm in the world of birthday parties but I'm talking about AI or (28/57)
whatever it is, that's really hard for them. So the direction of the intent behind a direction, you can get a machine to figure out by feeding it a lot of pictures. You can get it to figure out whether a mold is benign or not. But wanting to do that in the first place is the hard problem. Yeah and will and interest in leaning in to a particular area. What Brochram is saying in his book is the really scary problem is if we get just an ounce of that, just the minimal version of that, what would that look like? And his example is, let's say we tell an AI that it has to make paper clips. And his example is paper clips. And it starts replicating itself because it really wants to make paper clips. And it doesn't have anything else in its world than paper clips. Then you start replicating itself and it will start getting rid of things that's between it and making paper clips. And suddenly you have a world made of paper clips very, very fast because of the replication capabilities of (29/57)
computers. That's its goal. Or I think he has another one as well which is okay well what if you know that's silly and we don't, someone will say well okay no one's going to say paper clips. What if you know the goal, the central goal, axiomatic goal of this AI is to generate human happiness? Well what if the AI decides that human beings would be maximally happy with a slightly lobotomized brain? And you said something essentially to that regard. Which is probably true. Goes back to your point about an asteroid doesn't have internal conflict. Exactly. So the day I see a computer having social stigma or something like that, I, or being startled about something, playing goal, right? If it gets startled over a move, I'll be willing to talk about, you know, we have a real situation now. But before that it's just software in my book. It's very advanced software but it's just software. And of course that doesn't get to the other dilemma which is we have no idea and we can't know what a (30/57)
machine is or is not feeling and is there is not experiencing. So that brings us back to square one in many ways. Right. There's a Werner Herzog movie called Low and Behold out right now. Is it documentary? Is that documentary, right? And he has a question he asks everybody. It is does the internet dream of itself? Which is exactly a good question, right? It's does it have those kinds of weird human things which is we can dream of ourselves and if you think about your dream world it's a rather complex thing that we don't even understand. So how about we spend some time on understanding that rather than thinking we can have the machines do it. What do you think about because this is to me I find it a little nuts what I'm about to talk about now and it delves it has to do with the discussion on AI which is this other popular notion which is that we can simply upload our consciousness to a server. To me that one is the easiest one to simply debunk. It's most basic level. We have no (31/57)
few days before Ray Kurzweil dies, he can upload himself to the. It's interesting that it's always before the profit dies that this kind of thing will happen in his own prophecy. When you're just for our listeners who may not know when you refer to the singularity, you're referring to the term coined. Was it coined by Ray Kurzweil? Yeah, it was. Which is that roughly around the year 2050 but it's not, it doesn't have to be a specific date but there's a point in which machine intelligence will surpass human intelligence. So I think it's moving back the sicker he feels earlier it becomes. He thinks like what, 5,000 supplements a day? He takes a ton of pills. In order to sustain himself till the day where he can upload himself to the cloud and download himself into a new body. There's a great documentary. I don't know if you've seen the documentary on him. This is very interesting in the context of our conversation right now because when I watched that documentary, I don't know the man (33/57)
personally. I saw a person who was dealing with the grief, the grief of having lost his father. And the fear that is so common that we've dealt with human beings have dealt with since they became aware of death, which is the fear of death, the fear of the unknown. And he's dealing with all of those things like all of us but it's very interesting to see how it manifests in his life, which is this pursuit for the holy grail, for the, what's the term in mythology for the fountain of youth? I mean one thing is that you have bunkers, people like that walking around and I think they're sort of interesting to listen to but that they become the ideology of a economic powerhouse like Silicon Valley. And it's the only really driving idea out there is too much. I was pitched by an editor to write a book called The Singularity is Far, Far Away because they're not getting closer to- That's a playoff of Kurt Schwa's book The Singularity is Near. Exactly. But the editor has strong PR instincts. (34/57)
Exactly. And I thought that was a fun idea but it's just that they haven't gotten closer to the core and hardest problem. They've gotten way better at other things but what's so wrong about that? What's so wrong about celebrating all the things we can do with the technology rather than wishing we go to Mars and ending death? I think there are other things to do. And I think even the notion of ending death is within, for me it's within the realm of scientific inquiry. What seems to me where I totally see no capacity for understanding is when I'm told about uploading consciousness. I just find that so absurd on its face because it's, you can't tell me that you even know what that is. You have no concept of it. And in fact you have no idea what an upload is within the concept of the fact that you don't know- I mean we could go real deep into this fact. I have no idea where I am. I'm living in a matrix of my own brain. This is not in dispute. So to look through a microscope and tell me (35/57)
that you see what you see, well you're also looking through your eye and where are you even in this scenario and who is you and what am I? I mean these are basic philosophical questions and yes, I think to bring it back to how we started this conversation, I think everyone who is very brilliant and doing tremendous work in Silicon Valley and everywhere else would benefit tremendously from reflecting on and taking courses in the humanities and in philosophy because these are essential questions. I would actually say it's in Silicon Valley they focus on small things or extremely large out of the way things. So either it is big brains dealing with small things like how do we share pictures or how do you know that sort of thing or very very large things like Mars and Endless Life. And I think there might be a slice in between those two like how do we yield and how do we deal with our healthcare system and how do we create food for enough people and so on. That are also worthy of some (36/57)
attention. Who was it now I'm blanking she's a writer, Gillian Tett. Right. Do you remember what she said to the economy? I wasn't there. Oh you okay you weren't there. Okay so she said something well I would love to have her on the show I spoke to her maybe you can help me and she said something really great that stuck in my head which was that the culture of Silicon Valley today reminds her not exactly but close to the culture in finance in prior to 2008 and I really related to that. I said yes I feel that as well I do sense that sort of I mean that was the notion in the derivatives market and in the mathematical modeling of securities that were somehow able to take risk and just dispense it into the ether which defied logic. It's wanting a truth machine. It's the machine that can watch over us in its grace and make sure that we have no risk in our markets and we can get our marketing algorithms perfectly tuned and we can get everything sort of tuned into a system that will tell us (37/57)
what the future will be like and I don't understand why they so wish for that but it certainly is. It's a religious desire. It is. It's a religious desire. It's for the father for God. I mean there's so much of this it feeds into the same rudimentary mechanism whatever that is of human being search for for meaning and that's why it's so important I think to reflect on these to recognize that you're not the first person to have these thoughts and that the way in which you're expressing them is your particular expression but you know make no mistake there is something here that is universal. All right. So let me ask you this in the context of the fact so we're describing one culture which is Silicon Valley. Let's talk about because and I do want to get into what you do because you have some fascinating case studies that you've presented in your book and I'm aware of as well with your company. Tell me how you view culture overall. It's such a difficult question to sort of for me to (38/57)
express right because I mean where do you even begin. I live in this bubble of New York. It's hard enough for me to get out of the New York culture to think about the wider American culture. There was so much shock in the large cities of the United States over the most recent election. How do I even wrap my head around the way that people live in Africa or Indonesia or in China. Tell me a little bit about how you view the world culturally and yeah that's the best I can do to express my question. Right. So we are asked by companies and sometimes public institutions or mostly companies about what is going on among our customers or our customers customers or whatever it is. And in order to do that we have to get out of our bubble. Anthropology is one technique that is developed over the last hundred years of going and spending enough time with and in another culture in order to understand and see the world the way they see it. So that's what we do. And I think the only answer to your (39/57)
question is I don't know but I can send skilled people to go and try to understand what's going on in Western China when it comes to how they eat or something like that. We can study cultural phenomena fairly rigorously and actually empirically by observing reality and we can use that to understand what that phenomena looks like and how that works. So let's say you want to study tea in China. Tea to the Chinese is as advanced as wine is to the French. It's something that you drink for particular conversations particular type of tea for particular situations. There's a particular price point of tea or fanciness of the tea and so on. So understanding that whole world is a pretty big deal if your world is sweetened peach flavored cold bottled tea. Right. And understanding brewing techniques and so on that takes a while and you can't just send out a questionnaire through SurveyMonkey and then people click a little bit and say tell you that you have to go and experience what it's like and (40/57)
understand by being quiet for a little bit and just observing and listening. So we're big proponents of being introverted listeners and looking at the world and trying to make sense of it and see what makes sense for these people and truly put yourself into their shoes. And the reason why I talk so much about the humanities is that's what you're doing when you're a historian. When you're a historian you want to understand Napoleon or the Duque Windsor. You go into peace together their world through pictures and paintings and objects that you find from the time and notes that people have written down and you try to peace out or create a picture of what that was like to be the Duque Windsor and saying no to the English crown or being Napoleon and losing in Waterloo. What was that like? What was his life like? What was his world like? So piecing it together through a set of different sorts of data not just quantitative but aesthetic, practical, all kinds of objects and situations and (41/57)
practices that are going on in the in the cultural field and figure out what makes sense to that and what makes sense to them in their world. What are the way they construct their world? And that is immensely helpful if you are a CEO of a big company and you have several layers between you and the world. People will prepare everything for you and you will lead a very comfortable life that is far away from the reality of these people. So if it was somebody selling tea in China it's helpful to know what's tea to them. Right? And what language do they use and what practices do they have? And that's also the you're touching on numerous occasions that you're touching on that distinction between Descartes and Heidegger. And is our introspection enough to tell us what we need to know about the world or do we need to go out and experience? Exactly. Or can we ask them to introspect? Can we send out, you know, 3,000 questionnaires to people and ask them to introspect about how they do something? (42/57)
You know, we don't know why we do something. Do you know how you drive? Do you know how you don't know those things? It's funny when you're talking, you know, I make you're reminding me when I work on the technology side of television on application development and design and user experience. And when I was overseeing a focus group in 2009, it was for a brand new remote that we were designing that was a motion remote that went along with this new interface that we had been building for the set top box. And I remember being so, so exhausted by all the different people's opinions, I thought to myself, how am I supposed to make sense of all of this? You know what I mean? And I think that again speaks to there's also a simple desire to just come with an answer that works, that so often is what drives these outcomes, which is I need to jam the solution into this narrow model, into this confining sort of thing, which I think also speaks to something else that I think about often. And I (43/57)
wanted to speak with you about as well, which is to what extent are we actually just creating a world that is more adapted for machines and less adapted for human beings rather than us, you know, being able to merge with machines or whatever else. I mean, I feel like in many ways, we're building a society that increasingly pushes away the things that make us human and the things that matter. That's why I wrote the book. I mean, I know there are snake soil people everywhere and at any time, but I just found that the brain scanning people and the data people were saying things that they couldn't prove at all. And that's not such a big problem. The big problem is that somebody took notes, you know, smart people took notes from nonsense as long as it was natural science looking. And I just found, have we lost our ability to be critical? Have we lost our ability to have undermined our innate ability to be in touch with others? And I think we are educating our kids out of it. I think we are (44/57)
undermining the research in the area right now and the floor and in the house. There's a bill to take out the rest, the remaining small percentage of humanities, federal funded humanities research, the national diamond of the arts gone. So we are undermining our own ability, our innate ability to do these things. And that's not good. And it's sort of boring too. Some of the best programming in the United States has come out of PBS. Because it doesn't have to rely on advertising. Sesame Street. I mean, I could name a number of programs. Yeah. And what culture doesn't have museums and publicly funded research in in our art history? I think that should be part of any civilized place. You know, to bring back, there's something else I wanted to mention that I didn't want to forget when you were speaking, which is I think another central problem here is the reason why there is this bias towards quantification is because the qualitative doesn't scale as well as quantitative. That sort of (45/57)
problem of how do we deal with a market that views T in the way that we view Y. And that's a difficult bridge to gap. You know, people want easy solutions. Again, so much of this is about laziness. Yeah. You would have to go to Western China. It would be rather uncomfortable. You'd get stomach disease from the spicy food. You would have to sit in an airplane. You would have to engage with people that doesn't speak English very well. You know, that's messy. Wasn't it one of George Soros' traders at Quantum Fund who at one point he left the fund or I don't think he was still part of the fund, but he went and lived in Sweden for a while? In Finland. Yeah. Phil Robert Johnson, yeah. Right. Who said that in order to understand what the Finnish government would do and so on, we would need to be in Finland. He was also the one that talked about the difference between the German and the British culture and why the Germans wouldn't let the British change the collaboration on the pound and the (46/57)
Deutsche Marken and so on. So that's a cultural perspective on finance that was helpful enough to bring down the Bank of England. That's a great story. Regardless, I should do an episode on this show just on that. You're talking about... He's getting Robert in. I mean, he's... That would be great. Well, that's a great story. You're talking about when Quantum Fund, when George Soros essentially, he gained notoriety as the man who broke the Bank of England because he shorted the British pound during the period of ERM when the UK was sort of moving towards entering the Euro and that was an incredible story. Right. So basically, they bet on the Germans wouldn't give the British the flexibility to devalue the pound because they were pissed at the British and so they bet on a cultural feel rather than an analytical... And on George Soros' back pain. Exactly. Notoriously always gets back pain. His son's... I don't know if you mentioned that in your book. I don't remember seeing that, but his (47/57)
son always says that, you know, my father will give you all sorts of logical reasons why he makes a decision, but in the end, he moves out of a position based on lower back pain. Right. But it's interesting to think about that because you also, I'm sure, get... have a feeling of the market. It might maybe be your stomach or it's somewhere else, but we all have an ability to align ourselves and adjust ourselves to the mood around us. So the mood of the nation is something we feel. The difference between us and George Soros is that he listens to it. So he listens to it. He has the conviction. And the balls. And the balls. To bet three times capital. Oh my God. On something like that. And he's done it over and over again because he sees himself as a reflection of the market and he relates to that kind of knowledge, which is a kind of knowledge. It's a knowledge to feel that New York feels different now than it did six months ago before the election. But we can feel it. It's a real fact (48/57)
that New York feels different. Just like you can say a party is great or a party is good or the mood in the room is downwards or whatever it is. It's something that we can discuss and talk about and relate to. And that has a lot to do with markets. So what they bet on is interesting. They bet on the reactions to the reactions of something, right? So you have an event, then people react to it, and then other people react to those reactions. And that's what you want to know. And that's why they're so extremely successful because they look somewhere else than everybody else. Well, that's a great point because one of the arguments I often get into with some of my friends when we have little arguments about this is you're not trading based on what you think markets will do in response to XYZ. You're making a bet based on what you think the market thinks is someone else is going to do. It's a multi-order derivative decision-making process. So it's very out there as far as not being (49/57)
quantifiable. And the difference sores and others is that he's honest about it. He's honest about the fact that it is a qualitative. That's the case. You know, there's also this great one of our other guests that we had here, Sebastian Malibu, who is the biographer of Alan Greenspan, has this great moment in his book where Alan Greenspan is now, you know, who is a classic data sleuth. He got a seat on the exchange across the street from his office and he went down there and he decided to cut out the middleman and basically make some additional profits because he wouldn't have to go between an intermediary broker. And what he found was he was getting slaughtered and he started listening to sort of understanding why was this happening and he's hearing these guys saying, you know, I really feel that, feel the market's getting choppy. He's like, what do you mean? You, what do you mean? What do you mean it's getting choppy? What do you mean if you feel you feel it's bottoming? What do you (50/57)
Tell me a little bit about this process because I think this is an interesting story. Right. So luxury is many things, right? To many people, it can be an apple in season or it can be a spa or it can be whatever. So we looked into among the target group of the people that buy these kind of cars that are $60,000 and up, what's luxurious to them? And if you look at the industry, it seems like if you look at BMW or Mercedes or anybody, it seems like it's driving really fast in a really fast car on an empty road. That's sort of the experience of among beautiful mountains. That's the luxurious experience yet then spend time with people that have luxurious cars. First of all, they don't drive it themselves. They have drivers, particularly in China and India. And secondly, they sit in traffic all day and they're just stuck in traffic. So we thought about what would a different luxurious experience be? If we want to be quiet, you'll want to be very clean because the cities of the world are not (52/57)
that anymore. If we want where you can work, it'll be one where you can have meetings. It'll be one that's rather different from sitting right up and driving a really fast car. So the idea was to move the entire luxurious experience towards something that was low, chunky, very quiet, very clean. It is chunky. It's funny you say that. It's sort of a flight rather than a drive. And it has sort of a, the seats are thick and big and comforting. So the idea was to sort of create a whole other focus on luxury. And then also on top of that, build a range of services that would make owning the car feel luxurious and that the value of the car would go up the longer you owned it because we would add services all along. So the idea was to redefine what luxury was based on an understanding of spending time with people in the big cities of the world and look at how to create a quiet flight rather than a fast ride out of the experience. And that's, and out of that has come a whole range of things, (53/57)
but the last launch and the next launch of the navigator will be focused on that. But the real deal will happen after 2020 when we can do much more around assisted driving. And we can do a whole, I mean, we don't know about driverless cars yet because there's still a whole lot of technology problems and everybody has those problems, by the way. But given certain technological breakthroughs, we would be able to do a whole lot with a car that would make it delightful again to be in a car because right now it's not fun. Because you're stuck in traffic all the time. Yeah. And you know, there are people saying, why do you put speedometers that go above 30 miles an hour? We're never ever going above 30 miles an hour because we're stuck in traffic all the time. It's a good vision to run 100 miles an hour down an empty country road, but it's just not my reality. That's such a great point. I never thought of it that way. So the idea was to switch to a relevant kind of luxury that would be very (54/57)
different from all the German sort of cars. You also, when you were speaking and comparing it to an airplane, I thought about an innovation. I don't remember who, for some reason, I have it in my mind connected with Richard Branson and Virgin, but it was the idea to put Wi-Fi into airplanes because, okay, you're going to spend six hours. Would I rather have six hours in a flight with nothing to do? Or would I rather have seven hours on the flight on Wi-Fi? That's a big question. And so that's an innovation that has to do with the experience, right? Right. Richard Branson is the master of taking something completely standard and then tweaking two, three experience buttons that completely changes the experience. So an airplane becomes a nightclub or whatever it is, just by changing the lights. Oh, man. Yeah. And he does the cheapest things with the most massive impact really well. That's his real genius, I think, other than his balls. I mean, he's just press balls and tons of things he's (55/57)
doing. He has, well, also his branding model is, was he the first to really take that approach, which was to take a particular brand, an experience and move it across sectors? Yeah. The only area he didn't do it was the condoms. He didn't think Virgin would be a relevant name for that, but he had thought about it. Yeah. They thought about Virgin condoms and they thought that maybe that's problematic, but, but everything else, I mean, Virgin bride and Virgin phones and Virgin everything. That would be problematic. Yeah. It's sort of, it's at least it stops you in a drag killer. Well, Christian, I really appreciated having you on. This was a great conversation. Yeah. A rare radio conversation. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Well, thank you very much. And I should look to get Jilly and Ted on, but thank you very much for coming on. Thank you very much. And that was my episode with Christian Mesbia. I want to thank Christian for being on my program. Today's episode was produced by me (56/57)
Awesome to see the community feeding #leoai with such cool content! Loving the vibe of training it together 🚀 Can't wait to see how it evolves with all these data snacks 🍪
This is the full transcription of podcast 'Hidden Forces'.
The Chinese Financial System and the Prospects for a Hard Landing in China Anne Stevenson-Yang #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kofinas. Today, we speak with Anne Stevenson Yang and is the co-founder of J Capital Research which conducts ground up primary research for institutional money managers, unequities and the Chinese economy. She is the former co-founder of Blue Bamboo Ventures and also founder and operator of the CRM software company Clarity Data Systems. And she is the creator of 66 Cities, a publishing company whose flagship magazine is City Weekend, one of the highest circulated English magazines in China. Anne first moved to the Middle Kingdom in 1985, making her family and home in China for the next 25 years. She is the author of China Alone, China's emergence and potential return to isolation, a subject that we will cover in depth today. In this episode, we take a trip to the other side of the world, to the land of China, the territory that one in every five people calls home. Our conversation concerns itself with (1/57)
certainly I am, to this China of the post-Cold War. But of course, there was a pre-Cold War China. Reforms did not begin after 1989 nor have they ended. What has that process been like in China? Where can we pinpoint some of the most significant turning points? It's an interesting question. Reform is a word that we attach to essentially all government change in China since 1979 when Deng Xiaoping began the current program of opening. I think that in the West, we graft on to that word the idea of increasing liberalization and openness when in reality that's not really what's behind it. But I think the way we should look at China is 1979 to 89 and then 1989 on. 1979 was when Deng Xiaoping essentially walked out of prison and into Zhongnanhai, the leadership compound in Beijing and became the government leader and began to liberalize China in a whole lot of unexpected ways. Allow people to stop, if they met their quotas for growing grain, for example, then they could begin to grow cash (12/57)
what type of property is constitutes investable. In a technical sense, all the land is owned by the government. So the major distortion is that land is owned by the government and local governments on the local level. So the government has a key interest in high land values. How does that work? Let's say you, if you're in China and you want to own something, how does that work? I still don't understand it. Well, the government's issue leases on the land. So you get a lease on the land for 20 years, 40 years, or 70 years. Most residential property will be 70 years. And then you own the building that's built on top of the land, but the government will have the right theoretically to take back that land at the end of the lease. It hasn't happened in most localities. In a few it has. A couple of them have tried to impose new fees. And the people who own the houses got really upset. They retracted it or they impose much lower fees. It's kind of a negotiation. So there's a quality like (46/57)
them completed, but almost none of them occupied, all of them, mostly all of them sold. And these are projects that specifically are pitched to the Chinese aspirational investor. So they're not supposed to be places you really want to live. They're supposed to be places that you buy because in some mythical future, there will be wealthy people who will want to live here and commute to their wealthy jobs in their wealthy cars, and you'll sell your unit to them for a lot of money. So all of... Sound like a Vegas. Yeah, but way bigger, way bigger. All of Vegas would fit into one ever grand development. It's just totally... Let's not even pick on ever grand. Let's just go to any interior city. There's a city that I've been to called Shryan, which is in Podongkube, way off in the west of Hubei province. And Shryan, for complicated historical reasons, it lost its core industry. So they were in a panic to invest. So they invested in all this real estate. There's one real estate company that (35/57)
sinister. It's like brokerages, private equity funds, public equity funds, trusts, all sorts of non-banking financial institutions. But what essentially happened from 2009 was the governments wanted more capital than the banks could lend with any reasonable prudence. And so what would happen is a trust would lend the money. Like you're a developer, you're very risky. We're not really sure what's going to happen, but you'll pay 9%. So I'm the trust. I'll lend to you at 9% and then I will sell that loan to the bank tonight. And I'll give the bank 7%. So I keep the 2% spread. It's on the bank's balance sheet. I don't have risk. And then I do it again tomorrow. Yeah. So something similar in the United States with the CDO market and the sort of disintermediation of loans and ownership and everything else. Yeah. In a sense, it's like that. So where are we today? What does the picture look like? You mentioned 2015. What was the drop there? 60, about 2 thirds of the Shanghai composite? I think (28/57)
where China changed its tax system, it changed its customs, it changed the way local governments managed their budgets. It changed really personnel appointments within the party in order to aggregate more power to Beijing. And they did it in a very clever way. For example, under the old system, localities' provinces would have a negotiation with Beijing every year and decide how many taxes they would pay to Beijing. So what Beijing did was they went to the provinces and they said, look, you're paying us, let's say, 25% of your gross national product of Shanghai every year, and that's, let's say, $100 million. So let's fix your payment at $100 million. And what we're going to do is we're going to impose a VAT tax and an income tax, and Beijing is going to collect all of it and then rebate to you the portion that's due to you. Initially, the localities were fine with that because the cost was the same. Over time, it became very unbalanced so that the lower the level of the government, (15/57)
the contemporary changes in Chinese society that came after the death of Chairman Mao, beginning with the ascendancy of Deng Xiaoping, the architect of a new brand of thinking that combines socialist ideology with pragmatic aspects of market economics that the Chinese have called socialism with Chinese characteristics. What changed in the 10 years between the beginning of these economic reforms and the events in Tiananmen Square? And how do the Chinese government's reaction to the uprisings in 1989 alter the opening of Chinese society? How do the Chinese response differ from the Soviet reaction in the same year to the fall of the Berlin Wall and what has set China apart in its path of development since? Some have called it a miracle and by any measure it has been exactly this, the Chinese miracle. The size of the Chinese economy has increased more than 25 fold in the last 25 years from 6% of US GDP in 1992 to 60% today, an accomplishment that defies all principles of economic gravity. (2/57)
Loan growth in China has averaged 16% in the last 20 years, reaching an all-time high of 35% of GDP in June of 2009 amidst the greatest economic contraction the world has seen in almost a century. Total debt in China recently surpassed 300% of GDP, making Western finances seem frugal by comparison. In the first seven years since the financial crisis, bank liabilities in China grew by nearly $15 trillion, the near equivalent of the consolidated size of all US commercial banks. China has used more cement in three years building and overbuilding than the US did in all of the 20th century. Hundreds of thousands of meters of unsold residential real estate, the size of Singapore, massive industrial overcapacity, go cities by the hundreds. The Chinese economy is in terrible need of a recession, a recession that it cannot afford but one that it cannot avoid. How will the citizens of China, its trading partners, emerging markets and developed economies react when the reckoning finally arrives (3/57)
and how much longer can the Chinese government continue to postpone the inevitable? As always, you can gain access to reading lists put together by me ahead of every episode by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to the show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want a sneak peek into how the sausage is made or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at HiddenForcesPod. And now let's get right to this week's conversation. So Ms. Anne Stevenson Yang, thank you so much for coming on the HiddenForces Podcast. Welcome. Well, thank you. And just Anne is good. Okay, Anne. All right. So Anne, before we begin, our listeners should know and maybe you can clarify for me as well. Now you have lived in China for the last 30 years, is that about correct? Yeah, people keep adding on for me, but yeah, that's about (4/57)
right. It's about right. You've raised your children in China. That's right. The second one was born there. Your husband is Chinese. Yep. And you speak fluent Mandarin. Yep, always trying, but I would call it pretty fluent. And what is your background besides that? I mean, what did you start off with? I mean, how did you find your way in China and what is your background? I'm a mutt. I started out as a journalist in New York and I just floated over to China because I thought it was, I was actually politically interested in what was going on at the time and I got offered this job at the Chinese government foreign languages press and I thought, why not for a year? That will be fun. How did you live? That was 1985. 1985, wow. Yeah, so yeah, I met my husband there, got married so that, and then just the growth of the Chinese economy kind of sucked me back. So I would say I'm an economic migrant. Very adventurous of you. Why did you choose China specifically because you found what was going (5/57)
on there politically interesting or how had you studied the country for a long time? Okay, well, this is really embarrassing, but this is my age, right? So I grew up in the 1970s. Mao Zedong was a hero. We didn't really know that much about China. I went to a parochial school. I had a copy of the Little Red Book in my blazer pocket. I thought, this is finally the version of communism where they understand the peasants, right? I know it's really embarrassing, but I thought that this was a model that would work and I wanted to see it. So when I was working, I was actually working a night shift at business week on the desk in New York and I just, I had a break. So I went out, I went to China Books and Periodicals, which existed then. I bought all the magazines and I wrote to them and said, I want to go work for you. And then I forgot about it. But one of them sent me a telegram like six months later. So I thought, why not? Yeah, telegrams existed then. That's exciting. Very exciting. (6/57)
Yeah, it was kind of. And how long after you moved to China did you meet your husband? Well, we worked in the same building, but I wasn't really aware of him until we got sent. OK, you really want to know this? Sure. In 1987, there was a county in Jiangsu province that was growing fruit trees for the first time and they'd gotten sort of relatively rich and they wanted propaganda about this. So they invited, you know, so-called journalists from Beijing to come and visit. And so I was sent with my interpreter and the guy who worked at our magazine, the Indian guy was sent. And he had his interpreter, who is now my husband. He spoke, he was an Hindi interpreter because he'd been in the Chinese army, had been trained in Hindi to be in the army on the border with India. So we spent three weeks together traveling around Jiangsu, you know, going to communes and, you know, learning about tea growing and, you know, congratulating people on their factory accomplishments. And then I don't know, (7/57)
we just got married. The rest is history. Yeah. All right. So, well then, let me ask you, what's going on in China? What's going on? Basically in China, every man, woman and child, government, private, dog cat is focused on trying to make sure that the government, that the Chinese economy rises in value, that prices rise, that assets stay high and rise, and that there's enough stimulus to create growth. That's a maniacal focus of basically every human being in China right now, not on value, not on creating something new, but on making sure that asset prices stay high. So what is the timeline of events that have sort of raised concern for people in China? Because there's something else that, you know, I've picked up on, which is usually I like to cover subjects that are controversial, aren't necessarily consensus, but I feel like the case with China is one where there isn't much controversy around the idea that there is a bubble in China. Certainly I've been hearing about a bubble in (8/57)
coastal real estate for like 10 years or more. This isn't something where many people are going to come out and say, you're a whack job for saying this, or you're crazy for suggesting that the hard landing in China is a possibility. That's true, but it's fairly new. I would date that general apprehension from summer of 2015. So prior to that, you were pretty much a heretic if you didn't believe in the ever-growing value and strength and emergence into the sunlight of the Chinese consumer and the Chinese economy. But what happened in 2015 is, number one, the Chinese stock market crashed. In spite of the Chinese government's insistence that they would hold the stock value at $4,500, it went down below $3,000. The second thing is that the reminB devalued by 3%. That shocked the world and it indicated that the Chinese government, in fact, is not in control of the whole economy, which basically the Western world believed. You mentioned the first part of why it was a shock. Why did the (9/57)
reminB crash? It didn't crash. It declined by 3%. That was just really because the PBOC, you have an offshore reminB and an onshore reminB. The offshore reminB was trading at a premium or at a gap with a gap. That's not legal under IMF rules. China very much wanted to become a reserve currency for the IMF. So they decided, okay, we're just going to close that gap and we're going to depreciate the onshore reminB by 3%. They didn't realize that all hell would break loose. The offshore reminB is for the tradable goods sector. There's one currency for the service sector in China and one. What is the breakdown there? The offshore reminB is really quite small. It's just trying to testing the waters to try to consider whether they might make the reminB convertible at some point. They've actually retracted the offshore reminB quite a bit since that time. At its height, I would say there was ... I don't even remember the numbers, but let's say 3 trillion reminB offshore one place or another, (10/57)
which is really, if you think about it, quite small. There is some currency arbitrage discrepancy between certain class of people in China and others. From what I understand, there's one market for the vast majority of people when it comes to exchange and then for another part. Is that incorrect? Well, there are people who have access to reminB offshore. If you have an account in Hong Kong or if you have export earnings or for some reason you're exposed to the international economy, then you may have access to offshore reminB. To that extent, you may have more window on the foreign economy than the average Chinese person. Otherwise, it's really just who has access to hard currency, dollars, and who doesn't. Let's begin at the beginning, which is reform in China. I'm fascinated by this. Reading your book and preparing for this interview, it put me into a place of thinking about the Chinese economy and the Chinese political system in a way that I never had before. We're used to, (11/57)
crops and sell them. Allow people to have some private markets. Allow people to start taking over bust factories and run them for profit as long as they paid off the debts and paid the workers, things like that. The country really blossomed in a lot of ways. And then you came up to 1989. So essentially what happened was that this really worked very well. People got a whole lot richer. In many ways it was confusing, but it was also exciting. There was a lot of cultural opening, whereas in the past it had been impossible to listen to Western music or read Western newspapers or wear Western clothes. All of a sudden these things were coming in. There was experimental theater. There was what they used to call disco dance. There was art. There was all sorts of stuff. There was Qigong, which is a type of quasi-spiritual physical exercise that became very, very popular. And all of this led to a almost chaotic opening and to a concurrent demand for more rights, more political rights. And it (13/57)
culminated in 1989. We all know what happened in 1989. And 1989 was followed very quickly by the breakup of the Soviet Union in 1990. And essentially what happened was that the Chinese central government grew terrified that China would go the way of the Soviet Union and would crack up. And so they prioritized re-centralizing the apparatus. When you're talking about 1989, you're talking about Tiananmen Square. We know that the government cracked down heavily on the society after that, after the uprisings. But is there much information that is available? Because I know in China you can't get much of anything, right? Even if you Google Tiananmen Square, there's nothing there. Yeah, of course. You can't get a lot of information on what precisely the crackdown consisted in. There are very wide-ranging estimates on how many people were killed, how many people incarcerated. But I think for my purposes, what's really interesting is what happened in the years culminating in 1995 thereafter, (14/57)
the less money you had. So the government made a deal with the people, but was that sort of an explicit offering that the government did that they said, look, not in these exact words, but leave us in power and we will reform certain parts of the economy that many of you had wished we would in order to expand economic growth? What was the conversation that happened internally in the country around that cataclysmic sort of event? Well, I think there's a little bit of a misunderstanding embedded there. A system like the Chinese system is not concerned with what people think. The interlocutors are not individuals. The interlocutors are entities, state-owned enterprises, and local governments, and those are the constituents for the national government and the people they have to talk to. The individuals will follow. So what the central government did, it was a process of negotiation, not one of strong arming, although it was pretty clear who had more power than whom. So the central (16/57)
government would go to the localities and negotiate over tax authority, negotiate over appointments authority, and gradually, gradually, gradually, they pulled more budget authority and appointments authority up to the central government so that they would have control. Is there any comparative framework in the United States that would help us to understand the functioning of the Chinese state? No, and I think that that's very important because we tend to think that it's similar. There's a national government, there are provincial governments, there are local governments, but it's a unitary system. It's not a federal system. So for example, local governments don't have the authority to make their own budgets, to collect taxes and make their own budgets. The chief reason why we've got this huge property bubble, because local governments are stuck with the tab for schools and hospitals and roads and bridges and water processing and all that sort of thing. And yet the money trickles down (17/57)
to them from the center, goes to the province first and then to the city level. The prefecture, there are five levels of government in China, and so the prefecture at the bottom is stuck with all the costs and yet it doesn't have the right to keep most of the revenue. So what can they do? They had to raise money through debt. Wow. How would you compare it to the Soviet system pre-1991, pre-1989? You know, I don't know enough about the Soviet system to be able to tell you. Let's just say that the Chinese system is, they're very, very different in a lot of different ways. The Union was and is a petroleum state. So they have a lot more natural, unitary organization to their government and also it has radically lower population, what, 130 million or so, compared with 1.3 billion, with a territory that's much, much larger and tributaries, you know, rivers and a few railways that connect all the key cities. So that's very different. The kind of power that you can exercise over Russia and the (18/57)
former Soviet Union is very different from what you can exercise over China. Right. And the research point being important, which is that the Soviets would be able to raise living standards by selling natural resources with greater ease or commodities than the Chinese who needed to build, for whom building an industrial economy was much more important. I suppose you're suggesting. I think that's true. Also, the Soviets would be more capable of using repressive power to control their public. The Chinese, that's true out in the less populated areas in the far west, but in the densely populated areas along the coast, that's not what's going to fly. What's going to fly is raising investment capital because in a place where you have, let's say, you know, 30 million people living in a fairly dense area to build a road or bridge raises economic performance very rapidly and that creates unity and support. And that brings us really to the crux of this conversation, which is debt. Because debt (19/57)
and the financial system is the mechanism through which you can exercise control over people in a non-coercive manner. Yeah, I think that's right. And I think it's, there's some brilliant person named Goodheart. I can't remember who it is exactly who said that. Goodheart's law. Yeah. I wrote that right here actually to begin with for this conversation because I felt when a measure becomes a target, it ceases to be a good measure. Exactly. Great minds think alike. I thought to myself, that sounds like a Confucian saying, but I think, I know I wrote that there when I was thinking about this conversation, I kept coming back to that, which is that the Chinese have an obsession with numbers, with hitting targets. And I was astounded when I looked into this fact further. I mean, one of the things has to do with the measure of GDP in China. We're not trusting the GDP numbers that began measuring electricity. I'm telling you things that I'm sure you know. And that in short order, it turned out (20/57)
that the Chinese government was encouraging contractors and builders to leave the lights on in these places in order to present false figures of electricity consumption. Yeah, it's not even that complicated a lot of the time. A lot of the time you simply invent the number that you need. This is important to remember about GDP and so many other numbers in China, that these numbers are organizational tools and targets. They're not calculated results of a data set, whether or not you distort the calculation. The point is, you use something like GDP to mobilize people and to indicate what production levels should be. And if you were to drop the GDP target, it's a self-fulfilling prophecy. And they have pretty much relied on that number as their prime point of national pride. And as the calling card for the entire point of their existence as a legitimate authority in China. I mean, that seems to be so connected to their legitimacy. Yeah, you could say that. And I think it has a couple of (21/57)
purposes. One purpose is that organizational purpose. So your principal constituency, if you're the Chinese government, are state-owned enterprises. And state-owned enterprises make their budgets with reference to the GDP target, and they receive their investment capital with reference to the GDP target. The GDP target is measured against historical industry performance next to GDP. And then you sort of do a calculus and you figure out how much investment capital this company should get. So they're required to use that when they make their budget. So on one hand, it's a campaign tool. On the other hand, it's an external messaging tool for investors. So incoming capital investment and portfolio investment, whether it's FDI or portfolio, is very, very important to the Chinese economy. How are you going to get capital investment if your economy is only growing, say, 3% and Brazil's is growing 5%. So you've got to show growth that outstrips other developing countries. Is there FDI's (22/57)
foreign direct investment? Is there a lot of foreign direct investment? I mean, there are so many aspects of this and that I want to get into. And hearing you talk, I'm trying to figure out how to get in without getting lost in the weeds. Sorry. No, no, no. Don't apologize at all. I feel like this has been an overwhelming task for me to try to figure out how to come in here. But there are so many interesting aspects of this, one of which is the extent to which the Chinese boom has been led by domestic savings. It seems from my research that it is even more than it was the case in the Japanese boom. The Chinese boom has been largely fueled by domestic savings. Is that correct? Yeah, that is correct. I think it tends to mislead people by leading them to think that it's all about thrifty individuals storing their money in the bank when really it's just a measure of the amount of capital domestically as opposed to the amount of capital washing over the shores. But that's true. China pulled (23/57)
off really quite a remarkable feat, which was to increase its investment. I think you noted that simply the increment in bank assets in China between 2009 and 2013 exceeded the total bank assets in the United States. Yes. The economy that's 40% larger and that's been building its bank assets for 150 years. So it's a remarkable number. As they were doing that, generally speaking, as you increase your investment to that degree, you're going to depreciate your currency because you're expanding the pool of currency. But China actually has the command and control ability to build so much stuff that it could actually increase demand for investment even as it was investing so much money. So the currency was appreciating, returns on investment domestically were rising very high. It was attracting hot capital. It's a Ponzi scheme. That sounds like a Ponzi scheme to me. Yeah, you could put it that way. It certainly does. The focus, I mean, then I say it, and here are a couple of other numbers (24/57)
I've got for you. The total amount of concrete used between 2011 and 2013 in Japan far exceeded. I've got the numbers here. It looks like 4.5 gigatons was what the United States used for 100 years between 1901 and 2000. And 6.6 was used by China for just two years. That sound right to you? About close to 50% of the economy's construction, less than half of the economy's slightly less than half of its construction. Is that also right? I think that that's an exaggeration. I would put construction and real estate at about 20 to maximum 25% of the economy. It's not really fair to count all building materials because they also go into ships and automobiles and other sorts of things. But it's very significant. As for the amount of cement, yeah, I've heard that as well. It is phenomenal. It's taken a very severe toll on China's natural environment. Eventually that will end, but one hopes it will end sooner rather than later. On the thing to bring it back a little bit, you were talking about (25/57)
the growth of bank assets. I think you said from 2009, I mean that was the number that I had found as well from 2009 to recently the amount of assets generated by the banking sector. In other words, a reflection of the growth and liabilities was the total amount of U.S. bank assets. It basically is a reflection of loan growth. And that suggests a great amount of malinvestment. It suggests it without proving it because it's very difficult to expand that type of credit in particular in the face of an economic contraction, which is what the world was experiencing globally at that time. I mean, things like that about China alarm me. And again, I speak very humbly because unlike you, I do not live in China. I don't know the country. I don't speak Mandarin. But just on the very high level, it seems to me to defy every principle of common economic sense. Well, this is the thing about China. It's tremendous size in its centrality. So China can create growth phenomena that exceed anything the (26/57)
world has ever seen. It can also create disasters that are greater than the world has ever seen. And it's important to remember that it's not just the bank assets because the central government was really panicked to create, to pour investment into the economy and to avoid the downturn that the rest of the world was seeing. But they were also committed optically to sound banks with good bank assets. So they had to create a shadow sector that became far, far larger than it ever had been before. It had been something like 5% of the financial system. It grew at the height to 55% of the financial system. And that's really because you insist on having banks that are making prudent loans. And yet you need four times as many loans as prudently can be made. You create a shadow sector, the banks buy the loans back, and then everybody's happy. How does that shadow sector operate? Are you talking about the SEOs? Companies like the trust companies. Shadow makes it sound sinister. It's not (27/57)
it was 40%, maybe? I have reversed. Maybe 45%. I have reversed. Okay. So close to half. The market collapsed in China. So what have we seen since then? Well, essential stability for them. The central government and its deputies spent trillions of RMB supporting the Shanghai market value to make sure that they couldn't quite pull off 4500 for the index, but they pulled off 3000. So it's been hanging out at that level. And they've been keeping all the debt rolling over. So you essentially have a situation where China, the return on capital invested just goes down every year. So in the best of circumstances, you have roughly seven to one ratio for investment to GDP growth. So you have to invest 40% of the economy to get a 6%, 6 to 7% GDP growth. That's a reflection also of the inefficiency of the deployment of the capital. Exactly. So you figure that, if you put it in really simplistic terms, you figure that GDP growth should be roughly on a par with lending growth. So if you were to (29/57)
bring lending growth down to 6.5% or so of GDP, then you would see GDP growth of 1 seventh that, so no more than 1%. So that figure is where organic GDP growth is now. So in other words to say this is basically the Chinese government is committed to a certain growth rate. It has political reasons for wanting that. These are real people in positions of power who want to maintain their position of power. And the way that they're attempting to do that is to continue to force an otherwise unsustainable situation to go on a bit longer. Yeah, that's right because you have a situation where just it's in nobody wants to put their hands on that tar baby. So everybody has the intellectual realization that it's not really a good thing, that the quality of life for the average Chinese person has declined, not improved, that education standards, health standards, environmental standards, all of those things are not improving even as GDP growth rises. That's something I actually wanted to ask you (30/57)
about because we see video footage from China constantly. And we see people with smartphones snapping pictures. We see lots of lights. We see all these buildings. And it's impressive. It's something I often wonder about, which is what has been the improvement in the quality of life in China over the past 30 or 50 years when measured in the total sense of that word, given the pollution and given the urbanization? The fact that people have moved from the rural parts of the country, this mass, which is also really remarkable, the fact that hundreds of millions of people have actually migrated, physically moved through that country, it speaks again to the power of the Chinese state, which is pretty remarkable and I think difficult to comprehend as an American. But really, what has been the real improvement in the quality of life? Where can we see improvements in quality of life and where can we not see that? Or have we seen a decline in quality of life? Well, there's significant (31/57)
improvement via the better communication system, the fact that there's an internet, that there are smartphones that are universal now. The roads and the transportation networks are phenomenal and that greatly improves the quality of life. But as to the other things, yes, you can replicate the hardware. I mean, I'll give you an example. I've been to three replica Manhattan's in China. That's the idea. One of them quite large and two others kind of smaller, but still replica Manhattan's. I've been to a replica Hong Kong. I've been to a replica Venice, although they call themselves Florence. How do we think of them? No, it's not like a toy. It's the real thing. I know, but I mean, okay, this is why I ask that. It's astounding. I've seen the replica Paris. I mean, that to me looks like a full blown town or city. Is that what it is? In the middle of Anhui, yeah. And it's sort of... What is it for? And what I understand is it the equivalent of a suburb in so far as it's another community (32/57)
with a town and people that can commute from there to other work? What is it itself supposed to be? And what is the... But see, this is the point that you can replicate the hardware, but it's not the same thing as having the original. I cut you off, but I also want you to, if you can address at some point this, which is, do they have any idea what they're doing? Does the leadership, are they just sort of wanting... Because we see this all the time, we wonder, right? People ask that about Bernie Madoff. I'm not drawing a direct relationship, but for me personally speaking, there is a Ponzi aspect to this. And I think that just the point in which you're in so deep that you just hope that you can keep it going before you die. Is that sort of what the dynamic has been, is in China? Yeah, I think Bernie Madoff is an apt comparison not to say anything about the ethical quality of Chinese leaders, but you start out by thinking, well, isn't this a great thing? All this portfolio investment we (33/57)
can capture from overseas if we just pretend that China Mobile is a real company. We sort of paste together all our post offices and call them China Mobile and we'll list it and we'll gain a billion dollars, that's a great thing. And then over time, you get caught in it. And so now they're in a situation where if they don't continue to reinvest and to raise the amount of investment capital, then a whole lot of credits just go bust. And nobody is willing to accept the consequences of that because nobody knows how far systemically it will go. Well, how far systemically will it go without knowing exactly? I mean, what do you think? It is really tough to say. It's really tough to say. Why? Because there are so many contingencies, and dependencies, and so many things we don't know. But let's take one company ever grand, which is a company I love to hate. There's a real estate company that has projects in 170 cities, probably has 250 projects or so. Ongoing? Not all of them ongoing, some of (34/57)
actually tried to recreate Niagara Falls. And Shryan is in the mountains. There's no water. This is in the mountains. They actually tried to dig Niagara Falls as a sort of ornament to the real estate development. There's a development in Yunnan where they dug a 150 kilometer canal so that they could have a moat around the five star hotel in the development. Just totally loco things. But what happens is you have to finance these things. And the ultimate... You finance them maybe originally with bank loans and then with shadow bank loans, but then generally over time those things get securitized and sold to the general public. And it runs like a river, tributaries all over the country. So you really don't know which grandmother in which small town owns the security that will go bust if Niagara Falls is never built. And you just can't take that on. How are you going to deal with that? Because the guy who sold her that security might well be a government official in that town. And how are (36/57)
you, as the provincial government and the central government, going to say to her, oh, that... We didn't mean that. That wasn't us. That was him. That's on you. You lose all your savings. You don't have a pension. Sorry, lady. So a few things I'm thinking about. When you talk about the Niagara Falls, I thought about the fact that I discovered recently that there is a mock Dubai in China. Are you familiar with that? No, which one is that? I'll find the pictures I'll show you. I mean, unless this is fake news. But... Everything can happen there. And to me that sort of signified that... Because for me Dubai is Dubai. Dubai is already a mock Dubai. Exactly. Exactly. They're building fake islands. It was in fact in the center of the city was the fake island Dubai sort of palm tree. Oh, I know what you mean. Bay High. Okay. Yeah, it's way down in the south. Talk about a derivative. Talk about really going... I mean, that to me reflects... That's wild. So I think that's fascinating, right? (37/57)
Because it's one thing to replicate Venice and to call it Florence or whatever. And it's a whole other thing to replicate a replica. You know, that's... How meta. Anyway. But the other thing, you know, again, you're talking there and this is something that I've spoken about for years. It's not even just something recently, but I did speak about it recently in a conversation with Mark Fawber. Well, although I don't think I expressed it explicitly, which is I find that the use of debt and the financial sector, in particular in China, specifically in China, is very much meant to coerce through other means to get these people to work way harder than they would otherwise work with the expectation that they will be able to reap the rewards that are sitting in their savings account. But those savings that they experience as being theirs are not actually theirs. They are the states, right, to do whatever they want to with. I mean, that's a particularly harsh way of putting it, but you can (38/57)
certainly say that the Chinese government is very focused on capturing savings and retaining them within China for these mad projects. So wouldn't it be nice if a Chinese person could instead buy a mutual fund overseas and eventually, I don't know what, send their kids overseas for education? People do do that, but it's a very small proportion. Well, I guess what I mean is, and I definitely want you to correct me if I'm wrong here, I guess what I'm thinking is there seems to be no respect by the financial sector in China for the savings of the people that are putting the money there. It seems that they feel that they can wield that for investments at their will. Well, they can because there's a universal backstop, right? So nothing is ... Well, we have that here in the US as well, but there is the pretense that it's your money. I mean, that pretense seems more specious in China. Well, we sort of do, but losses are borne by investors here, and they're really not borne by investors in (39/57)
China. In small places where you don't hear about the people, like a bunch of people invest in a private P2P platform in some locality, sure, those people lose, but if you go to your bank and you buy a wealth management product that's actually not sold by the bank, but it's not the bank's product, maybe it's some dodgy coal firm that actually went bust two years ago, you're not going to lose on that because the government won't let you. So all of the investment managers know that, and they take risks accordingly. Do you spend any time thinking about, I'm sure to some extent you do, the context of China within the global economy? Sure, of course. Yeah, it would make sense. I mean, I'm just throwing it out there because we were so bogged down here in China itself, but what do you see as the effect of Fed policy, for example, and any type of contraction in US GDP, or if we have any kind of recession here, what would be the knock-on effects in China and emerging economies, and how does (40/57)
that all sort of play itself out? Because at some point we're going to have recession, there's nothing wrong with it, it's a normal, healthy thing to have recessions, and the Fed is supposedly trying to raise interest rates and contract the size of their balance sheet. If they continue to go down that path, there is of course the dollar carry trade. There are many things that can impact a company like China. So what is ... It's interesting that you call it a company, I wouldn't argue. A country. No, did I call it a company? You might have been afraid in. I mean, that leads to a lot of inestimables. So will the Fed really raise how many times and will it really contract its balance sheet? We hope so, but as the United States demonstrates, once you have a fiat currency, it's very, very tempting to use it to fund all sorts of liabilities, and we have plenty of liabilities going forward. So that is really the biggest question for China. If the US dollar does strengthen, then China is (41/57)
cooked. But if the United States relents, turns around, and puts more cash into the world economy, then you could have another, I don't know how long of this in China. Have you ever think about how the Chinese government would react if in fact they lost control of the economic levers, or really not able to hit that target and unrest began to come out? And I say that why. I say it because, again, looking at the history and thinking about the totality of the decades that have preceded this, and also the way in which the Chinese government and Chinese society tends to think of itself in much grander, sort of larger scale terms, would it be an exaggeration to imagine that the Chinese government may turn inward in a much more repressive manner than anything we've seen for decades? I think it will certainly try. I think that we've already seen that going on for the last several years, the attempts to constrict the capital account and make it harder to get money out, the attempts to control (42/57)
the internet with much greater force than was true in the past, the really almost complete lack of cultural development and exchange. Really the only cultural events that are available in China are the big international events that come for a day or two, but there's really no room anymore for the development of Chinese arts. For people to gather and exchange ideas politically has become much harder than it used to be. So I think we've already seen that happen. Could they go back to 1975? I don't know. Certainly that will be the preferred path of the party, certainly rather than dissolution, but there are many other paths that could be taken and it's impossible to know which one will be more likely. Do you ever imagine how long this could go on for further? In other words, how much longer they can maintain this sort of illusory growth? Well I think that question is really the Japan question. Can you keep putting money into the economy to keep the debt rolling over, never recognize the (43/57)
debt, what happens to the economy in those circumstances? In some sense that's been already going on since 2011 and you see it in the sort of decline of spending power domestically of the average Chinese person and the decline in sort of the standard of living. But there's a key element that still needed that Japan went through that China has not gone through, which is a significant depreciation of the value of assets. So if the Chinese government is willing to see the Chinese people see their apartments go from 100,000 square meter to 20,000 square meter, then yes that could happen. You could have a long, long, long grind. But I think that that's not very likely and I think much more likely China is going to hit a wall. The currency will suddenly depreciate and assets will drop much faster than people would like. And they've never seen that. The people that have seen depreciation and prices in China, they've never seen a price decline before, right? The property market has only (44/57)
existed since 2000. So in reality it's one generation. And also it's, despite the phenomenal construction and development of commercial property, the proportion of Chinese population who really live in the commercial property economy is kind of small. There are a lot of people who own these apartments, but most people have either rural dwellings that they inherited from their parents and one where another that don't really belong to them but they have the right to live in or urban apartments that came from the work organization of themselves or their parents. Let me ask you this about the real estate. You touched on it a little bit before, but what is the mechanism through which, because the way I understand it, the real estate market in China is particularly inflated due to the fact that it was one of the early parts of the economy to be liberalized, right? Liberalized to be privatized rather. And there's some other also, some weird mechanics and dynamics around who can have property, (45/57)
eminent domain, but it's obviously much more engaged. Yeah, that's right. So that's the chief distortion is that the government's on the land, but there's also types of property rights. Basically, every long-term urban dweller in China owns an apartment in one way or another, but that apartment very likely may not be saleable because of the different shades and gradations of rights that are attached to that apartment. And so I'm not going to push you anymore about making projections. I mean, I'm curious. It's to me, I'll tell you another reason why I have many friends who are very pessimistic as I have been for a very long time on the US dollar and on the US bond market and et cetera. But I don't see that being a problem anytime soon because when I look at the countries like China or when I look around the world, I still feel that in the next crisis, the US bond market would still appear rather attractive to a lot of people. And another great example, as you mentioned, this question (47/57)
around property rights, the Chinese citizens don't have a bill of rights. They don't have the same right over their property that we do. And so that is sort of reflected in a way in the capital flight that's leaving the country. They know many wealthy people who have made a lot of money in China know that they're not necessarily going to be able to keep that money and they're looking to get it out. Right? Yeah, I think that's right. And I think that that's a key and underappreciated point that everybody, remember all the columnists who starting from 2009 were warning about the US dollar and how we're going to induce this terrible inflation and the US dollar wasn't going to be... Well, that hasn't really happened. You don't see Americans trying to buy assets overseas or trying to emigrate. And that's because in the end, it's about the degree of trust in the government and it's about the quality of life within the country. And on a relative basis, the US is still looking pretty good. (48/57)
Yeah, relative, exactly. That's the key. Relative is key, right? That may change with the current political situation. And though we've had inflation, certainly in asset prices, that can quickly turn to deflation and we've been fighting deflation or the Federal Reserve and central banks in the West have been fighting that with their monetary policy. Yeah, that's right. And probably with less effect than they really think. I would say... Yeah, I'm not sure we solved anything, but... No, I mean, I was trying to basically... I wanted to see if we could try and sort of create some hypothetical scenarios here about where things would go. I mean, there are so many factors, there are so many variables. There's North Korea, of course, which is a big variable and our president is another variable walking and talking and tweeting variable. I'm trying not to take that bait. No, I don't want you to take that bait. I actually don't talk about Donald Trump on the program because I find that it's (49/57)
very difficult to do so effectively and usefully. I mean, a lot of times... Without having people's blood pressure rise. And also, I just think most of the commentary around him is not very useful. There is actually... I don't know if you're familiar with Sam Harris. He talks about him too much. I mean, but there are times in which he describes his criticisms in a way that I find useful. But I think for the most part, conversations around him are not very useful. I want to mention one more point on bringing back to China before we end, which is we were talking about loan growth. I've got two charts here in front of me. One is of loan growth in China. And another one is of percent year over year annual GDP growth since 2007. And what is indisputable based on these charts is that annual GDP, the trend for annual GDP growth has been down, whereas right now, loan growth looks pretty flat, but it had a huge jump in 2008. Are we going to continue to see every year it's going to be much more (50/57)
challenging to generate growth in China? Yeah, I think if you were to draw that top chart using including corporate bonds and including all sorts of quasi loans like short term private equity, then you would find that the two lines are in opposition to each other. And the reason is simply because you require more capital every year to drive the same amount of GDP growth and you have a target, so you just have to put in more capital. And that's why I think that they're going to hit a wall because it's very important politically for whatever reason to fulfill the promise to the Chinese people that GDP will double by 2020. I guess the starting point was 2010, I don't know. And what that means is that you have to have 6.53% GDP growth every year. So they're just damn well going to hit that target. And that's unfortunate because the quality of growth, it's kind of like people talk about digging holes and filling them in again or building a Mexican wall. But essentially that's what you're (51/57)
doing. You're putting a tax on every Chinese citizen. Well supposedly the Soviet Union in its heyday produced cars that had negative equity because they actually had to take the cars apart for the parts. The actual commodity that went into creating the car was worth more than the final product. Yeah, exactly. And you get a lot of that with Chinese comparisons between steel that's of less value than cabbage and things like that. Think of the amount of energy and resources that were required to dig all that iron ore out of the ground in Western Australia, stick it on barges, haul it up to China, put it into these towers. And then you're going to, I'll tell you, there's a city in Ordos County in Inner Mongolia which is the biggest county for coal in China where their solution to the bubble breaking was actually to blow up the buildings to rebuild them. That's very funny. And that was proposed. I don't know whether they eventually did it. They ended up with these huge... There was some (52/57)
similar proposals less serious here in the United States. And in fact, I opened one of my early television shows years ago by having a bulldozer bulldozing a house and it was a mock solution to the housing crisis. Yeah. The idea was you create jobs by putting people in bulldozers and then you create jobs by rebuilding the house. Exactly. They've done that. There's another county in Ordos where they had built all these towers and they couldn't find people to live in them. So they actually, I swear to God, this is true, they actually exploded, blew up schools in neighboring counties. Nobody in them, of course. So that the kids would have to go to that county to go to school. That's a real story. Yeah. And then you'd find these kids, you know, of course for them it was a dream because they were living 50 miles from their parents. They're like 14 years old. They have their own little Moto scooters and they're squatting in these like dark towers with maybe a hot plate, battery run with four (53/57)
students living in this like weird empty apartment together. Where are they going to school? In the model school in this new county because they built a model school so they were down well going to enroll in that. I mean, totally insane. And that is the extreme sort of version of what many in the United States propose. I mean, that's the idea of digging holes and filling them back up. I mean, that's not a radical idea in certain sort of Kinsien circles. Well, I mean, let's not go overboard. The U.S. U.S. infrastructure does look, you know, it is decrepit. People are dying in train accidents that looks 60 years old because it is 60 years old. Whereas in China, it's all brand, brand, brand new. And that's the difference. But you know, in the same way, if we were to raise $3 trillion to build, you know, a wall around the perimeter of the United States, yes, that would raise GDP. How would that raise the quality of life? Well, also, but I'm remembering specifically when I was living in (54/57)
D.C. that there were some people coming out in the New York Times saying that the snowstorm would actually be good for the economy because it employs people. But this is an asinine idea. People say the same thing about war all the time, whereas Adam Smith believed that defense industries should not count toward GDP because they were detracting from GDP. From wealth. They destroy wealth. Exactly. I think something that many people fail to recognize that, again, we talk about good heart and the notion that just because we can measure GDP doesn't mean it's a useful measure for any of the things that matter to us. And we could be growing an economy just like we could be growing cells in our body, but whether those cells are malignant or benign is a completely different question. And I think that that's what's so frightening about, to me, looking at China, looking at these ghost cities, these hundreds of ghost cities, it's just as terrifying the fact that they've deployed capital, (55/57)
resources, and labor to generate massive amounts of so-called wealth. But in fact, in a contraction, it could turn out to be that huge amounts of land that was once arable is no longer arable because they've built slabs of concrete on it. They've polluted their environment tremendously. And it's just a frightening picture. I think in some ways, the Chinese economy, to me, is a national representation of the human animal in some ways, very out of balance with its ecosystem. I think it represents in some ways what we do collectively to the planet. And maybe I'm going off the rails a little bit, but it sort of reminds me of that in a way. No, I understand what you mean. I think, to me, it's a representative of how political systems excessively centralized go off the rails. Yeah, I know. I agree with that as well. So, Annie, it was great having you on. Thanks, Dmitry. Thank you. And that was my episode with Ann Stevenson Yang. I want to thank Ann for being on my program. Today's episode (56/57)
was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter, and Instagram at HiddenForcesPod, or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
What Happened at OpenAI & Why It Matters Nathaniel Whittemore #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
a note. This was a, the board no longer has faith in him because of ways that he's communicated and we don't trust him. And he's gone. And by the way, Greg Brockman has been demoted from chairman of the board. He's no longer on the board and he is now going to be just an employee of the company. We're also, they elevated CTO or former CTO, Miram Arati to the CEO position, the interim CEO position and said, they'd figure it out from there. This was a neutron bomb. I mean, whatever, pick your hackneyed language of a huge massive explosion for reasons that I think will probably spend the rest of this conversation unpacking. But it was the just act one of an incredibly sort of dramatic moment. The rest of the night was spent sort of with people trying to figure out what the hell was going on. There was about, I don't know, a five or six hour period where we hadn't heard from any of the principles involved. And the speculation at that time, I think, was my interpretation was that there must (10/57)
company. They have a very specific mandate that has nothing to do with that. So I think that it means there are competitive pressures. So the competitive pressures seem to be the bigger problem. And the talent drain that happened at OpenAI is like a perfect example of that. Well, there's a larger question of just how inescapable the absolute vortex of the AI arms race is from a commercial perspective. I think that's a really reasonable question. By the way, this is Hinton's main point when he left Google is that it's an all-consuming thing that he can't imagine how we're going to get out of. I mean, it's a black hole of pressure. The question is whether Sam and the leadership of OpenAI would have more power to resist that pressure, at least in some way, from where they were versus where they are. My general feeling is that as the pole position industry and generation defining startup, which they were, I mean, it is a remarkable achievement that won. Not only did they kick this whole (27/57)
potential for impact. And it took him about 10 minutes to decide that he was going to be the guy. And it kind of seems like they did because one, he had the qualification of agreeing with them on AI safety things. And two, he was the guy that said, yes, it's come out subsequent to Nat Freeman, who used to run GitHub has said no. I think one thing that I will note about Emmett, and again, I have a very strong feeling that Emmett's story in this is ultimately going to be a very, very small footnote. But one thing that is notable is that in the sort of, you know, six paragraph or whatever note that he sent out on Twitter last night, like 4am, he said, PPS, before I took the job, I checked on the reasoning behind the change that board did not remove Sam over any specific disagreement on safety. Their reasoning was completely different from that. I'm not crazy enough to take this job without board support for commercializing our awesome models. So again, this leaves everyone with the (21/57)
that's coming together in December. I decided to pull the trigger on it. Well, I'm very excited to hear about that, Nathaniel. So thank you so much for coming on, man. This was awesome. I really appreciate it. Yeah, always love chatting to me, Tree. All right, have a good one. Bye, everybody. Yeah, you too. (57/57)
question of then what the hell was it? Was it just someone didn't like Sam or didn't like how what Sam was doing? What could possibly justify this? And the board has been unwilling to make a case. So I'm going to hold this question. But what I wanted to say is that I think it opens up the door to a conversation about open AI's role as a nonprofit organization, and its relationship to Microsoft and how workable that was. And maybe, and I'll ask this question, then I want to take a few questions. We have some great questions that have already come in. Are we too quick to attack the board here and not give them enough of a benefit of the doubt? In other words, their point was that what they said was that Sam was not being transparent, that they couldn't trust him, right? So couldn't there be a lot of truth there? And that maybe in part because of the nature of the enterprise, the fact that it wasn't nonprofit. I mean, Sam says he has no shares. I don't really know how that works. But that (22/57)
Welcome everybody. Today's call is part of a series of live Q&As that I host regularly for members of our Hidden Forces Genius community and sometimes I open them up to our newsletter subscribers. The newsletter is free and you can subscribe to it and get special invitations like these at hiddenforces.io by scrolling all the way down to the bottom of the page or just waiting for the pop-up. Besides these audience Q&As that we do several times a month, community members also get invites to in-person events and dinners that I host all over the world with many of the same guests that you've heard on the Hidden Forces podcast before. And if you want to learn more about that and the Hidden Forces Genius community, you can do that at hiddenforces.io slash subscribe. So Nathaniel, the reason that I asked you to come on the show, as you know, on such short notice, and we're recording this on the evening of Monday, November 20th, is because beginning at around this time on Friday. So a few (1/57)
days ago, we learned that Sam Altman, the CEO and co-founder of OpenAI, was fired by his board of directors. And since then, we've heard all sorts of rumors and explanations for the firing, as well as the perspective rehiring and then refiring again. It almost feels like of Sam amid a total mutiny at the company. For those of you who don't know Nathaniel Whittemore or who need a more formal introduction, Nathaniel is the founder of the Breakdown Network, which encompasses an assortment of podcasts, including the AI Breakdown, as well as other content that explores the big picture power shifts remaking our world. So Nathaniel, quickly do me a favor and introduce yourself and just add anything that I've left out. And then let's get into a few questions that I have. And then I really want to encourage our members and other listeners who are joining for this call to drop any questions that you have in the Q&A box, because I really want to take audience questions today. This is what these (2/57)
calls are all about. After all, I have plenty of opportunities to ask questions of my guests on the podcast. So these are really for you. So Nathaniel, quick introduction, and then let's start to work our way through as many of these questions as we can. Absolutely. I mean, listen, you did a great job. The thing that I always come back to if I'm doing this fast is this idea of big picture power shifts that's always been what's interested in me. I was a history major. I love big patterns of history. It's why Hidden Forces has very long been my favorite podcast. And for me, exploring it through media, through news analysis is what I've done. So the Breakdown, it came out at a time where I was spending all of my time in and around Bitcoin and crypto, and particularly in the context of what it meant to have a non-sovereign monetary system and how that played into other global changes, the fragmentation of the American-led global order and yada, yada, yada. And so for me, it was a vehicle (3/57)
to explore all those things. And I had a very similar experience around this time last year that many up people did when ChatGPT came out. And there were a number of other products that were emerging at the same time. There were these image generation tools that were starting to arise. And I had the experience of playing around. I think actually for me, the sort of unstable diffusion and mid-journey were even more transformative the first time I tried them from the standpoint of just seeing magic presented in front of my eyes. And I started to explore all of these new generative AI technologies, got very convinced very quickly that, like me, people were having these zero to one moments where they were understanding that they were going to impact how they worked and what they worked on and were racing to try to figure that out. And that was the sort of genesis of the AI Breakdown. So ever since that show started, which is actually only April, believe it or not, I've been spending every (4/57)
day looking at what's happening, trying to contextualize it, understanding it in the context of the new technology itself, but also the big sort of economic issues that surround it, policy issues that surround it, social issues that surround it. There's going to be a million dimensions, which obviously is sort of part of why I think people are so intrigued to spend more time on this. I had a personal moment that sort of drove at home for me a little bit. I mean, you have different experiences that drive at home and I was sent a version of my podcast in Greek, which I can speak Greek and I understand Greek, and it was with a guest who's not Greek, who's Iranian, and they dubbed us two. Now, I know how I sound in Greek, so I didn't sound like I sound. He sounded the way I would have expected him to sound like he was speaking Greek and it was very good. The generative AI company that did it is run by a Greek person, so he kind of made some edits, but I can see how this is going to quickly (5/57)
get to a place where it's going to be perfect and it made me realize like two things. One, I've had this idea in my head that I'm really lucky because I speak English. English is a language that can reach lots of people with the podcast, so I have a competitive advantage that this is a language that I understand natively. Then I realized, whoa, we're going to be in a world where people are able to compete with me from any country because they're going to be able to translate into perfect English. It also made me think about this is an area where, and I feel like you probably have recognized this as well, you want to understand where these trends are going because you want to try and take advantage of them sooner than later because as an example, as soon as this technology is up to snuff and that could be really within just a few years, and it probably is in some of the other languages, more difficult in Greek because there isn't as much text on the internet. I could take this podcast (6/57)
and I could reach new listeners. I could expand my audience because all of a sudden I've translated it into like 100 different languages, which is like a modality of thinking about audience expansion that you wouldn't have otherwise. Yeah. I mean, I think I barely had time to wrap my head around this, but it feels like translation is actually one of the most solvable things. I mean, it is just really happening. I don't know what the implications are of a world where the default will be you get to consume content in whatever language you're experiencing the world through regardless almost of what they did. Now, of course, I think that by and large content creators will still be the drivers of those change. You will opt into using Wondercraft or whatever, when Spotify integrates these types of features to do that sort of dubbing and translation initially, but I can also see a world where it's platform mediated and it's just even if you don't do that, all you have to do, it's almost like (7/57)
an opt out for Spotify or something like that where they're just naturally doing that. I think there are some pretty profound implications probably of language ceasing to be a barrier in the way that it's been a barrier for the entire history of human experience. Again, so I recommend people follow your work and follow the AIA breakdown because you cover these big picture trends and that's what the podcast is about. So let's apply your expertise and the things that you spend your time on to this. I mean, this has all the makings of a great story. It has human drama. It's consequential in the sense that it's grappling, not only is the industry so important, but it's grappling with some of the decades-long themes like the tension between entrepreneurs and founders on the one side and the board and investors on the other and the empowerment of the founder. And also this larger question that's been in the public consciousness for some time now, which is this battle between, though it has (8/57)
been articulated in this way until recently, the battle between the AI safety people and the acceleration is. So give us a recap starting with, I think it was noon Pacific Standard Time on Friday that the news broke that Sam had been fired. So just bring us up to speed. When did this start and where are we now in this story and what's happened in between? As an aside, I got to tell you, I was very happy to not be intimately involved with the chaotic multi-billion dollar value destruction Sam episode of this November as opposed to last year. So I was thinking about this. I think let's do maybe the literal 60-second bullet point version of just what happened so that we can go back in on Peele because there's so many layers. So Demetri, to your point, noon Pacific Time, 3pm on the East Coast, maybe just after, but consequently before the close of markets, let's put it that way, Open AI, the board announces that Sam Altman has been fired. He's leaving to spend time with his family kind of (9/57)
be something enormously egregious that happens. I thought it was some sex scandal with Chad J.B. D. or something. I didn't even think a sex scandal was a big enough thing. I mean, the amount of sheer value destruction that was going to be created by this seemed to me to be something where either A, there was like Sam was keeping state secrets or B, AGI had literally been invented and he had kept it from the board. Something of that sort of level of significance. It's the only thing that made sense. But then as the night wore on, we started to get commentary one, Greg Brockman quit in flames. Basically, he said, not a chance I'm sticking around to just be an employee with this. And Sam had sent sort of some nice gracious tweets or whatever, but very clearly was, you could feel the intensity of things going on. And part of the reason for that was that it was very clear that no one had been consulted in this. It doesn't really seem like counsel was consulted in this. It was the investors (11/57)
weren't consulted, Microsoft wasn't consulted, Microsoft did their sort of nice little statement kind of a thing where they said, sure, we're excited about the new leadership, excited about this partnership, whatever the thing they have to say, basically. You could almost feel the happenings going on behind the scenes. So Friday night, everyone's still grappling with this. By Saturday, early to mid-afternoon, it's clear that this is not a done deal and there are battles going on. There are conversations, I think the Verge maybe broke it at 4 or 5 p.m. East Coast time on Saturday, that the board was now actively back in conversations to bring Sam and Greg back. And that as part of that, they were demanding kind of understandably the resignation of the rest of the board. And we're now kind of at the 24-hour mark of not having had any meaningful explanation from the board around why Sam had been fired, which of course just leaves everyone to be speculating wildly about what it might be. (12/57)
But at that point, 24 hours goes by, the speculation had shifted from, okay, did Sam do something crazy terrible too? Was there just some sort of internal power struggle? I think that the most common explanation at this point was around the idea that perhaps there was just some huge disagreement around safety questions and around risk questions. And it started to be sort of interpreted as the effective altruists on the one hand versus the accelerationists, the EACCs on the other hand. That started to be Tell people a little bit just quickly for people that don't know, what do we mean by accelerationists? Accelerationists who are not scared of the risks of AI and AGI in particular and think that it leads to a world of abundance. Now, there's infinite variations within that. There's just people who are sort of broadly techno-optimist accelerationists who think that technology is going to be a net good force for humanity, but maybe who still have some questions on the specifics here. (13/57)
There's other people who are like, bring on the super intelligent gods and let humans be consigned to a secondary species. It's not a term that has full a singular meaning. In fact, and I think in some ways right now, what it means is not the guys trying to slow down AI, not the guys trying to pause AI. So we're kind of getting this interpretation of it being a safety issue and reinforcing that as the fact that at the center of it seems to be Ilya, who's one of the board members, Ilya Sutsgever, who was a chief scientist at Open AI. And he has expressed various concerns. He was at the time leading the super alignment team, which was Open AI's effort to get to actual alignment with super intelligent AGI over the next four years. They had kind of set their moonshot project. He also worked under Jeffrey Hinton, right? Yes, he was at Google. And Jeffrey had resigned from Google famously over concerns about safety. Yeah. Elon Musk says that his friendship with Larry Page ended over (14/57)
recruiting Ilya away from Google to Open AI originally way back when it happened. So Ilya being at the center of this seemed to reinforce for some people that this was a disagreement around safety questions, but it also kind of started to seem like maybe there was a lot of just the very classic garden variety interpersonal struggle stuff, right? Ilya had been demoted about a month ago in terms of how much authority he had. Clearly didn't like that. And so personally, I was left wondering, is it actually these AI safety questions or is it not? So going into sort of Saturday night, we have what's clear is that there's a sort of a groundswell of people trying to get Sam back in in power in Open AI. There's a sticking point with the board doesn't want to resign, or maybe it's that they don't know who's going to replace them on the board. And so there's a lot of intransigence. And then on Sunday, Sam is back at Open AI to actually try to figure this thing out and negotiate. He's in the (15/57)
building. He holds up, he tweets out a picture of him holding a guest badge and says, this is the first and last time I'll wear one of these. Satya Nadella from Microsoft is literally mediating these conversations, right? And again, throughout sort of the afternoon, we start to get more of a trickle of information. Really, honestly, not much happened until very late at night actually on Sunday, where apparently Mira, the former CTO who had been elevated to interim CEO had determined at some point over the preceding two days that she was going to use her new authority to bring Greg and Sam back, which obviously the board wasn't happy about because they had just fired Sam at least and demoted Greg. And that apparently caused a battle with Adam DiAngelo, who was one of the board members who's the CEO of Quora, who was formerly at Facebook. And that led to the news that we got around midnight last night that Emmett Shear, the former CEO of Twitch, had been hired to lead the company as new (16/57)
CEO. So we've gone from Sam on Friday morning to Mira on Friday night through Sunday afternoon to Emmett Shear on Sunday night. And we can talk about Emmett and what it might represent. But the final part of this story from Sunday night early into this morning was that at, I think, 3 a.m. East Coast time, 2.57, because I spent a lot of time looking at this tweet. Satya Nadella basically tweeted out that they were looking forward to getting to know Emmett and the new OpenAI leadership team, but that Sam and Greg were coming to work at Microsoft, which is just, I mean, an outcome that I don't think many people had, even as they started to look at the full spectrum. I think that the absolute default assumption, should they be unsuccessful and wrenching control back of OpenAI itself, was that these two guys were going to go start their own startup to compete with effectively a blank check from any investor that they wanted. Now, just to finally wrap this up so we can get into whatever (17/57)
questions you want to take the direction of. This is where things were this morning at around 8.15 as I set off to drive my daughter to school, to kindergarten. And then when I get back, it turns out that OpenAI employees are not content with the arrangement and the way that this is done and had signed a letter demanding the board's resignation, the return of Sam and Greg, and very impressively, something like 500 out of the 770 employees had signed that when it was announced at like 8.30 AM. But even more impressively, it turns out that it was only signed by 500 because most of them were sleeping. And so I think at the time that we're recording this, or the last number that I saw from an hour ago, it was something like 735 of the 770 employees had basically said, the board needs to go or we're leaving and we're going to Microsoft with Sam and Greg, or at least not staying here, which is astounding because that's probably a higher percentage of the people than Microsoft would have (18/57)
gotten to come over if they had actually acquired the company. So it's just this massively strange situation. It is very clear that there is still a battle being waged behind the scenes. Sam has been dropping kind of cryptic tweets that don't say much, just sort of vaguely trying to reassure the developer community, I guess, in some ways, but we are still unresolved. And in fact, every time someone announces something that sounds like a resolution, it has turned out not to be and has been sort of upended within six to 12 hours. Yeah. I mean, so great summation. Ilya's participation in that final letter saying that he wanted to, that he'd lost confidence of the board is the one that's like most perplexing. But again, I feel like it just highlights our ignorance at the moment. We're still trying to put pieces together. So we still don't understand to what degree he was pushing for this. He also tweeted out, I guess this was this morning, he tweeted out, I deeply regret my participation (19/57)
in the board's actions. I never intended to harm open AI. I love everything we've built together and I will do everything I can to reunite the company. Quick question on Emmett's qualifications. Is Emmett's qualifications Emmett, former Twitch CEO, are his qualifications mainly that he's on the AI safety camp? I mean, that is the interpretation. So if you read like Kara Swisher is very clear to her, that's what the big thing is. Now, people who know Emmett, I don't have a dog in that is Emmett a good CEO or not fight. He was CEO of a very dynamic company that sold to Amazon sort of before and after the sale for 11 years, which is not nothing. He built that company from scratch as a CTO. He's got a reputation as being a very good leader, as a good engineer. And he's also got a reputation as being very thoughtful and interesting. But the flip side of this is of course that this is one of, if not the most significant startup in the world right now, it certainly has the sort of biggest (20/57)
he was, let's say, engaging in other deals on the side in order to try to get pieces of other companies that he's potentially working on and trying to start. And that that was also interfering with the board's ability to exercise governance. So there's actually two questions embedded here. One is, is it possible that there was a reasonable justification for this based on the actual facts that we haven't heard? And the answer, of course, is yes, because we haven't heard. But the second question is whether it's reasonable to give the benefit of the doubt when the stakes are this high, when the board refuses to articulate what that is. And the board hasn't even, by the way, come out and said it's too sensitive and could cause harm if we explained what he was being deceptive about. They've just said nothing. And so I have a hard time with the argument. Like, look, I think it's a big sort of well, actualism on Twitter right now when people are like, well, the nonprofit board is just (23/57)
exerting their right to do it. It's like, yeah, sure. But they're not explaining why. And so it's all right as everyone else to say that that sounds like total bullshit from where we're sitting. I mean, listen, Andre Carpethy said this in a tweet as well during the middle of the whole thing. Someone said something to the effect of, it's weird that Andre, who's kind of right after the set of people, I mean, he's as well known as prominent as important as any of these folks in many ways. And someone said, it's weird that he hasn't said anything. And he basically said, I haven't had anything to add because the board has, you know, not taken their chance to explain what their logic was. And so we just kind of have to assume it is what it looks like. And I think that that's a pretty reasonable place to be. Again, they haven't even gone so far as to say something like, there was a safety disagreement that's too important to give publicly, but we stand behind our conviction. They've just said (24/57)
nothing. And it sort of has left everyone to assume that it is actually less significant. And I don't think that people care whether it was technically in the rights of the non-profit board to do this thing. Lawyers will care when there are, you know, the lawsuits that are inevitably coming down the line. But in the court of public opinion, the board is basically fully wrong. And I don't feel bad for not giving them the benefit of the doubt, given that they haven't taken the chance to actually make an argument. So I'm going to take some listener questions. Richard asks, how does Microsoft's increased influence and Samsung UROL impact the speed and trajectory of open AI? What does this say for direction, control, and security? And I would add to that, Nathaniel, just a larger question of this, does Microsoft ultimately come out, you think, as the biggest winner in all of this? I think that it certainly puts more pressure on commercialization. I don't think that Satya is lying when he (25/57)
said, you know, in his initial tweet that they've learned a lot over the last half decade around how to let companies sort of function on their own, more or less, you know, between LinkedIn and GitHub and this sort of thing. I think that they have done a good job of sort of shifting that. Microsoft is no longer a pariah where like your company, when you sell to it, goes to die in quite the same way that it would have been a decade ago, in large part due to changes that have sort of happened on Satya's watch. But at the same time, it's a huge company, right? When this happened, it wiped out $48 billion of market cap in a matter of minutes, right? That's an enormous amount of pressure and not just pressure, but fiduciary responsibility. Microsoft is structured in a way where it's their job to think about AI safety issues. Now, they might decide to take it to shareholders and say, we should all be thinking about these issues. But right now, it's not their job because they're a public (26/57)
thing off with chatGPT, I'm just absolutely burying the faces of everyone else with egg. GPT-4 hasn't even been close to touched, subsequent to that. Google has just continued to delay Gemini. Amazon is theoretically training something on, that's even bigger than GPT-4, but we haven't seen it yet, although it could be announced in the next couple of weeks. Olympus is the code name, apparently. But they were really in the pole position coming into this and had a huge influence in shaping the nature of the industry. And I think that they lose that in a lot of ways with this. I think it creates an opening that allows for more of that commercial pressure, not less to come in. I also think that, maybe I'll invert your question a little bit. I think it's possible that Microsoft's the bigger winner, but I still think it's, I think that Microsoft had already done a phenomenal job. I mean, listen, Microsoft's relationship with OpenAI kind of reset the way that startups and big tech think about (28/57)
each other for this generation of companies. It was a new precedent. It was not an acquisition. It wasn't just a straight investment. It was very clearly something different, but the model has now been sort of semi-copied by Amazon and Google in terms of Anthropic. And part of it's just the reality of limited compute resources to go around. But I think that they were in a pretty good position already. I mean, they were making more money from OpenAI. And I think that anything that sort of sows chaos in the lead that they had, even if yes, they own sort of more of it ultimately, I kind of don't think there's any real winners in this basically. I think the biggest loser is the AI safety field. We'll have to get to that. So I'm going to take another Microsoft question here and skip around a bit. Nima asks two really great questions. So one is, if the majority of the OpenAI team moves to Microsoft and others are poached by competitors, what do you believe will be the impact of this event on (29/57)
the competitive dynamic and landscape in artificial intelligence? Could it in fact better level the field among large language models? And then the second question is, if a regulatory movement grows to slow down acceleration, is Microsoft a more susceptible target for regulatory scrutiny? So both really great questions. Yeah, my answer is yes and yes. So yes, I think that it does have the potential to create less of a, I mean, listen, by weakening the company that I was sort of arguing is in the poll position, you inherently create a space where there is more, there's more equivalence, let's say, right? There's more room to catch up. And I think that that is almost a, I don't see how that doesn't happen to some extent in the sense that developers in particular who OpenAI had just extra one over with Dev Day relative to where they had sat before November 6th, have to be very questioning what they're going to do kind of going forward and how much they're going to invest in the chat GPT (30/57)
and OpenAI ecosystem versus working with other models, whether they're closed or open. And so there's an argument that it's ultimately a good thing for the world to not have a single dominant force. The flip side is I think that that's probably counteracted a little bit by increased concentration in the hands of Microsoft. I think a frenemy relationship between OpenAI and Microsoft is probably not better for the world than a fully absorbed relationship. But it's hard to say those things are going to take a while to blame out. But I think that the question of whether there's going to be more, if it creates more of a target for regulatory scrutiny is absolutely, there's a question of sort of, will it actually be able to happen exactly as intended or will there be antitrust suits? It creates all sorts of new questions that they were always probably going to have to deal with at some point as that relationship evolved, but are coming a lot faster now. So Sundeep asks, if the Accelerate and (31/57)
Commercialized crowd wins out at OpenAI, do you see dangers of AI going the route of nuclear energy? Some scary near misses end up setting progress back by decades. The Silicon Valley mindset seems to be that absolutely nothing can be permitted to hold back tech by even one extra day. What are your thoughts on that? Yeah, there's a couple things in here that I think are really interesting and worth pulling out. And Dmitry, this is a conversation that you and I actually have a lot. I do think that Silicon Valley does represent the position almost always that tech is sort of a natural good that benefits the world, that the net byproduct of almost all technology is good for the world. And they have lots of evidence that they point to, but that is sort of Silicon Valley's position. They've done a good job over the last 20 years of basically dragging the rest of the world along with them that nothing should slow down or impede progress and that technology is kind of coming at you whether (32/57)
you want it or not. Now, I would argue, and this is a little bit of probably out of scope of this conversation, that that was not just Silicon Valley sort of stumbling into power, but also had to do with sort of big political decisions such as the decision to sort of, I mean, globalization decisions and the way that that impacted the economics of America. We traded the sort of jobs for cheaper stuff and a lot of what has come from technology, we're not so sure actually sort of net benefited us, but Silicon Valley is always going to represent that position. I don't think it's particularly unusual or surprising. I think a bigger question is sort of where the rest of the world is going to fall when it comes to that. And frankly, that's why I think you're seeing such intense and vicious narrative warfare between sort of the forces of pause, slow down, AI safety, effective altruism, whatever subdivision of that whole set of things. And on the other hand, the sort of accelerationists because (33/57)
they know there are big stakes at play here. These are positions held by sub 5% of the world or call it America if we just want to define the parameters of Americans who are going to be involved in American policy decisions. I think that the vast, vast majority of people don't really have a strong perspective on this yet because A, it's new, B, it's complicated, C, it's kind of a reasonable default position to take to say if a lot of researchers are at least reasonably concerned that there's a lot of risk here, we should probably take that seriously even if we also see a lot of the upside. I think a lot of people are finding themselves in the middle and an admittedly uninformed middle as they're trying to get up to speed with it. And so the two poles are really aggressively trying to pull them in either direction. Silicon Valley because I think it's existential in a way that's not just about AI but it's about whether the tech industry can continue to sort of dominate the conversation (34/57)
and sort of do no wrong or at least get its way even if it's been sort of said to do wrong. And on the other hand, it's existential because the people literally think it's existential from the standpoint of whether humanity survives. So the narrative stakes are quite high. Yeah, that's a really great point. I mean, the existential side is well established, but this idea that Silicon Valley is banking on this as being the new technological paradigm and the ability to develop that unencumbered or the fear that they might be encumbered in trying to develop that is something that's freaking out a lot of people. It is. And it's interesting to me why that is. I don't have a good explanation yet for why there is sort of such intensity around this. I think that it's probably like anything, a variety of positions where I think that there are probably in the same way that there are people on the side of sort of AI safety who very genuinely believe they're P doom to use sort of the expression (35/57)
that's used in those circles a lot, their probability of doom, the percentage chance they ascribe to sort of a human life ending event is very high and they believe that realistically. I think that there's probably the inverse of that on the acceleration aside who think that genuinely AI will, if given the chance in 10 years, solve cancer and solve, you know, and all these things would sort of prevent human flourishing. And so it becomes, you know, Mark Andreessen literally argued that it's a form of violence to not allow this to proceed in his techno-optimist manifesto. Then I think you have others who are just sort of generally think that the AI safety folks are sort of crying about nothing and making fallacious arguments and it's stupid, you know, and then you have sort of the libertarian set who doesn't want sort of government to be involved in this and say, you know, if they do this, then, you know, where does it stop? And, you know, so there's all these different dimensions. It's (36/57)
not a coalition per se. Yeah, those people are always way, way off center. The sort of no regulation this is like David Crockett's America is so totally missing the ball. Actually, you know, this point about power I think is actually central and I've something I've talked about. It's not a coincidence that we got democratic reforms and moved towards more pluralistic systems of representation after the end of the bubonic plague and the price of labor went up. Labor was empowered and with the empowerment of labor, you got the empowerment of civic bodies and the population, people. And I think that it's also not a coincidence that we've seen increased fragmentation and rising populism and political dissatisfaction in Western democracies since the fall of the Berlin Wall and the rise of globalization, which disempowered labor in these Western countries and also technology also appropriated more power towards capital against labor. And so you've seen this move of disempowerment of labor (37/57)
relative to capital and AI represents the apotheosis of this. You know, it is the singularity, you know, not to just a quote Ray Kurzweil, but truly it's a massive concentration of power. And I do wonder to what degree we're also what we see in the case of the acceleration is just a recognition of that recognition that they are on the cusp of a massive, and I don't mean it in a twirling your moustache kind of way. I just mean it in a kind of fundamental way. They see it. This is where it's going. They want to be on the side of the people that have the power in what could end up being a feudalistic type of global society, which again reverses all the gains of the breakdown of feudalism that happened after the end of the bubonic plague in Europe. So another question Michael asks, if the board is motivated by safety concerns, is it naive for a software vendor to think that they have any meaningful influence over the trajectory of AI technology when hardware progress will inevitably (38/57)
continue producing improvements and capabilities for the foreseeable future? So I'm not entirely sure. I think I understand where he's going, but I don't quite get it as a question, but maybe you do. So what do you think of that? What's your response to that, Nathaniel? Maybe I'll reframe it a little bit and apologies to the person who asked the question if this is not the direction that it was going. But I feel like the question is, is it naive for anyone to swim against the tide when the tide is so clearly pointed in the other direction? Is it naive for this board to have thought that this would meaningfully impact anything even if they were completely successful and Sam and Greg just quietly went into the night? Sort of is the answer a little bit. Mostly in terms of execution, though, not in terms of principle. I think one of the real travesties of this, if it really was executed the way that it was, which is there not being some insane egregious inflection point moment when it (39/57)
comes to AI safety and the capacity of these systems, is that this body spent their most powerful tool on bullshit, it seems like. Listen, the structure that they set up theoretically to create a nonprofit that could fire the CEO of this incredibly important startup, WorkDish, in the sense that they did fire the CEO of this thing, but was this the right time to do it? It feels like it's just going to end up turning some amount of narrative against the AI safety folks because they look very chicken little-ish. The fact that it seems likely that Sam's going to consolidate power after this and no longer be an ally to that group in any meaningful way, certainly Silicon Valley is now on a McCarthy-esque witch hunt to try to root out all the effective altruists at their organizations. Of course, I'm overstating the case to make the point, but I don't know, it's not naive on the very broadest level to think that there are chances to drag the world toward the better a little bit. You're never (40/57)
going to convince humans that they can't do that. It's what makes us who we are to be optimistic about the capacity to divert things which seem like they have momentum such that they can't possibly be diverted. That's very American. That's very American. Not necessarily very human. I don't know. It's certainly more American, but I think it's fairly human in terms of the sense of agency to exert will over the world. I think that's pretty quintessential to humanity, but the poor way I feel now. George has a question on governance that I want to ask before that. Kelly asks a question about Elon and anything we know about Elon's involvement. Elon, we do know, was involved in OpenAI and its founding. He's also recently started a AI company. I don't know to what degree is just a lark or some kind of thing, performative act, again, to generate a media hype and excitement, whatever, and how much of it's substantive. But is there any involvement for Elon here? Elon's always trying to find some (41/57)
way to get some kind of action, whatever it is, whether it's attention or whether it's material. But how has he featured in this story at all? My read is no in this particular instance. How I'll qualify it is that Elon has two chaos modes. Either I create the chaos or I benefit from the chaos. I don't think that he created the chaos here. I think that this was done outside of him. However, he is enormously talented at benefiting from the chaos. There was a while before Ilya sent that message this morning where I thought one of the most natural outcomes for this would be Ilya moving over to XAI. Great prediction. And sort of, I mean, Elon has taken a stance of being closer to what it appears that Ilya feels relative to Sam, certainly not a full sort of pause or anything like that, but at least giving lip service to that side of things. But Elon is never far from the surface of things, and he's going to be a major player in this. For those who aren't paying attention closely, outside of (42/57)
even just GROC and sort of like the anti-woke chat, GPT bot and stuff, Tesla has some of the most advanced artificial intelligence in the world. The way that they are doing full self-driving is they're inferring on site, right? They are taking in all of that information from all of the cameras on that vehicle and making decisions in real time, which is a real world sort of AI that basically no one else has the way that they do. And it's not hard to start to see how this incredible trove of conversational data from Twitter slash X, plus that sort of inference capacity that comes from real world data in the form of all the fleet of Tesla cars that are out there collecting it, combines into their robot, which brings sort of all of these things together into, who would you say are the big players in the AI for among AI foundation models? It's a very small handful. There's open AI, there's Anthropic, which was a split out from open AI. There's XAI who is new, but you would just have to give (43/57)
Elon credit and call that sort of the representative of the entirety of Elon's stuff. And his LLM is Grock, right? Yes, inclusive of Grock and Tesla and all that. Microsoft is really sort of aligned with open AI on that. They do technically have, they just announced the next generation of their sort of LLM, but it's so clearly secondary to what they're doing with open AI. And then there's Google who are sort of far behind at this point, which is the whole very interesting thing. Meta, who are sort of have taken this sort of leadership position in the open space approach. And Amazon, who again, they sort of got pushed out of the way by open AI, but are now, they've sort of moved into professional services with bedrock and helping enterprises sort of train models. But it seems like their ambition to have a competitor is still there. Obviously, they need it to power sort of Alexa devices and things like that to some extent. Apple's a big question mark. They are now from all reports (44/57)
spending millions of dollars a day training their own models, although it still seems unclear exactly what they're going to do. It kind of seems like their focus is to get the technology sufficiently advanced that they can actually run these things on device so they don't have to deal with the cloud. And then there's a whole cadre of sort of open source approaches too numerous to list, but there's Mistral, there's stability, there's all the hugging face models. I mean, there's a huge array of things building in that space as well. So all of you can hear just how well versed Nathaniel is in this industry. So he is the AI explainer. If you need a podcast to listen to where you can download stuff every five minutes, it's Nathaniel. So George asks, is this a symptom of problems with governance both in the tech space and in the nonprofit space? I'm troubled because nonprofit does not mean you are, quote, doing good the way many folks think. It just means you essentially get to dodge (45/57)
taxation and operate under less regulatory scrutiny. Yeah, I think that there are indictments to go around in terms of governance here. But I think that for me, to the extent that we are looking for things which we should sink our teeth into and ask questions of how we're going to sort of not do this again or fix this, I think that it comes back to questions of AI governance specifically. And really, it's an even more simple question is what are, if anything, the guardrails around these sort of frontier models and the advancement of this space? And in many ways, I think that you can view OpenAI's nonprofit sort of weird structure as a self-regulatory approach trying to create those guardrails in the absence of there being a state-level guardrail or anything like that. And it has clearly not worked. And I think it's very hard to argue after this that the approach that they set out to do sort of worked without consequence. It's being put to the test as we speak. But again, to me, it's (46/57)
less relevant almost whether or not OpenAI's model worked and more like what is going to be the set of guardrails around this, if anything. And that's in many ways with the battle around the ASafety question is, who's going to get to determine what companies can and can't do in this space? So Leo asks a question about adoption. Do you see this impacting AI adoption anyway? I don't see it. If anything, it just accelerates it. Yeah, I think the thing that makes AI weird relative to other hypey technologies, of which I have a lot of familiarity with previous hypes is that it's just actually good. I think one of the most dismissible opinions to me when it comes to AI is the sort of, well, actually, it's not even that good. It's just predicting words and all the sort of stuff. It's really good. These things are transformational technologies. I don't think that homework is ever going to happen again. As it happened when we were growing up, I think that the way that writing happens is totally (47/57)
going to change. I think, blah, blah, blah, blah, I could go on for an endless list. But those things aren't mandated from above and they're not just from hype there because people try these things and they're like, oh, that's a much better, more efficient, more powerful way to do things that I was doing and in fact opens up new things that I could never do before. So this is a question from Michael, which I think is interesting. He says, it doesn't seem like the policy regulation narrative for semiconductor export controls and AI safety have been coordinated. Hidden forces has covered some of the semiconductor controls and AI safety voices haven't come up. Are there people interested in AI safety or in the effective altruism community or anywhere else that are advocating for hardware controls in the interest of AI safety? So I would just say, obviously, there are in the sense that the semiconductor export controls are in some ways a attempt to slow down progress in AI, but (48/57)
specifically for the Chinese based on limiting their exposure to hardware. But the question is, is that also something that regulators are looking at, Nathaniel, do you know with respect to US and American corporations? Yes. So one of the potential regulatory approaches, and this is a fairly extreme one, but it's something that's sort of a potential outcome even at the executive order, is the US government at least having visibility into who's using compute. So one of the easy vectors for them to start having some amount of control is to force the cloud computing providers, so the Amazons and Googles of the world, to let them know when a certain customer is using over a certain threshold of compute. Now, this is something that's going to be fought incredibly viciously. I mean, just insanely tooth and nail fought. But if the government's trying to understand who's doing massive training runs before they happen and want visibility into that, they do have access to this information (49/57)
potentially through the compute providers to get that. So the short answer to the question is, yes, the government is looking into ways to have access to that sort of hardware level visibility, at least if not straight up control. I haven't seen proposals yet to give the government authority to actually green light, the usage of compute. Most of the sort of green lighting type proposals or licensing type proposals are farther downstream where if maybe there's a sort of a red teaming requirements, testing requirements, and the government gets to say, no, you can't deploy that sort of model because it's too advanced or something. But I haven't seen yet a restriction of compute, but an observation of compute is definitely on the agenda. So what is in your opinion, if you had to guess, what is the next use case or next small number of use cases that you think are going to serve as the next kind of paradigm shift in the consumers or the user's mind about really how transformative this (50/57)
technology is going to be? So I think that we've spent a lot of this year following along the progress of like a new thing to come out every few days. And I think a lot of next year is going to be about integrating the stuff that's already here into workflows in really practical ways. So building interfaces on top of things like chat GPT and Anthropics Claw that are custom purpose for profession X or role Y that are just add a layer. Again, it's almost a UX layer. The capacity of GPT-4 is very high. And of course, engineers are going to be excited and focused on GPT-5, but there's so much in GPT-4. But if right now, the only way that people are interacting with it by and large is sort of a blank screen that's a cursor that says, what can I help you with? And I think that that's going to change a lot this year. And I think that we'll move from just a pure kind of early adopter set, although there's tens of millions, if not hundreds of millions of early adopters doing all sorts of (51/57)
experiments with these things to, I don't know, accountants. I'm just saying, here's how we use this tool and other accountants copying them hundreds and hundreds and hundreds and thousands of times. I think you'll see social media managers say, here's how we do content calendaring, blah, blah, blah, blah. I think actually it's going to be a much more boring sort of integrated period. Now, it'll be punctuated by like mind blowing things, the likes of which you've never seen, but that'll be sort of contrasted with just the sort of steady flow of these tools into actual human workflows. So I have one last question for you, Nathaniel. Give us the name of one or more books, and this might be hard because this is such a new field, books that you would recommend for people that are interested in learning about this field, and also other sources, like how do you educate yourself in real time and stay up to date? What are some good journals, some good online magazines, some good people to (52/57)
follow besides you that you follow to help stay up to breast on this industry? Yeah, I don't know if books are the right way to for this. I think where books can be helpful is books can create a really good grounding for particularly some of the AI safety debates. There's a lot of text there, it kind of delves into philosophy. Nick Bostrom's Super Intelligence, we came out about seven years, eight years ago. Yeah, exactly. That sort of thing is there. In terms of keeping track of this, it's fascinating because there's this whole new core of content creators that are sort of just emerging now, and I think they're actually quite good. You don't have the sort of shilliness, I mean a little bit on X because that's just the nature of the platform, but you don't have the same sort of shilliness that you see with crypto YouTubers that you do with AI YouTubers. There's some great people like Matt Wolf who have created these channels that are just pure value. Matt Berman is another person who (53/57)
explains things, he's more technical. There's a handful of those now, there's a dozen or something like that. I think in terms of people to follow from a news standpoint, I think that, I'm sort of not biased, I go wherever the information is good. The information, just the information.com is by a million light years the best newsroom when it comes to AI. I mean, it's just- Yeah, everyone is citing them, everybody's citing them. Every scoop is them. Now, I think that is testament to the fact that AI has brought tech back to San Francisco and Silicon Valley specifically in a way that looked like maybe it had lost during COVID because it matters once again to have this incredible concentration of actual frontier brainpower. It's sort of returned and the information is where they're strong is in those actual geographic ecosystems where there are people who are writing for them, have relationships with people who would go into those companies and things like that, but they're a great (54/57)
source. On Twitter, it sounds silly, but one really great resource is Robert Scoble. He's been a tech obsessed guy. He loves technology, always has been an evangelist for various things. He just created a new show called Unaligned, which I actually haven't even seen, but what he's been doing is trying to curate the entire world of ex-users on AI into lists. He's got a list for ex-companies. He's got a list for ex-artists. I've found that lists don't usually stick as the way that people sort of interact with Twitter, but they're a great way to, if you're trying to figure out who you actually like, you go check out one of Scoble's lists and then you end up finding two or three people who come up over and over and over again and you follow them and you're in a good spot. It's a field that rewards finding new voices and new people, but it's going to keep changing too, I think. How do people follow you besides following NLW at NLW on Twitter or X as you call it? I still haven't internalized (55/57)
it. I know. I'm meaning that. I'm working on it. How else do people follow you? How do they find the podcast? What's the best way to take advantage of all the things that you have to offer, Nathaniel? If you are an audio listener, the AI Breakdown, if you search the AI Breakdown, you'll know it's mine because it's got an old retro futurist, kind of like 50s image on the cover with a little robot guy at the center of a family. You can find it on any podcast platform. The YouTube is, I think it's youtube.com slash at AI Breakdown or AI Breakdown Pod, maybe or something like that. If you search my name, Nathaniel Whittemore, you search the AI Breakdown it'll be there. If you're a visual consumer, every podcast episode is actually two videos on YouTube. Breakdown.network has all the information about other stuff. There's a Discord, there's a newsletter, and then there's also, we're now kind of moving into the world of learning communities. I've got a beta educational learning community (56/57)
This is the full transcription of podcast 'Hidden Forces'.
A Turning Point for Value Investing Mark Holowesko #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 learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Mark Holuesco, the founding partner and chief executive officer of Holuesco Partners, a Bahamian-based value-oriented investment firm that invests across a wide variety of industries, geographies and market capitalizations. This is one of a series of episodes that I'm recording with value investors motivated by my concerns about how the direction of the global economy and the ongoing geostrategic competition between the US and China will impact asset markets in the years to come. In the first hour, Mark and I discuss his macro framework and approach to value investing, his concerns about government debt and its implications for interest rates and inflation, trends in global (1/57)
liquidity, the future direction of the US dollar and why he believes that 2022 marked a long-term turning point for value with huge implications for investors. In the second hour, Mark and I discuss some of the more promising investment opportunities that exist outside the United States, in particular within the UK and Japan, as well as how to assess similar opportunities in China, whether the country is investable and the risks investors face when putting capital to work in Chinese companies and the Chinese market. We also discuss more about Mark's investment framework, his views on the role of gold in one's portfolio, opportunities within the US energy sector and much more. 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 (2/57)
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, 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. 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. 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 thoughtful and extraordinarily valuable conversation with my guest, Mark Haleuesco. Mark Haleuesco, welcome to Hidden Forces. Thanks very much. Nice to be here. I'm excited to have you on, Mark. This is part (3/57)
of a series of episodes that I'm doing on value investing, informed by a macro framework that sees the future that we're embarking on as being one that may be more favorable to that investment style. And so I think I want to expose our audience to it and explore some of the work that folks like you are doing in this area. Before we start, I'd love to talk a little bit about your career because you seem like someone whose career progressed very quickly. And I'm curious to learn a little bit more about you and how you got your start in this business. I guess I started very young. I guess when you say it progressed very quickly, I started working for a trust company while I was in college and high school here in the Bahamas. I grew up in the Bahamas. And when I came back from getting a master's degree, started working for the trust company and basically decided I didn't want to be a trust employee. So reached out to Sir John Templeton, who was on the island, famous global international (4/57)
investor. And he turned me down initially for a job. And then I decided I would get him to sponsor me for the CFA exam, chartered financial analysis exam because there were only two CFA's on the island. He was one. You needed to get a CFA to sponsor you. So I wrote him back and said, geez, thanks very much for turning me down, but would you sponsor me for a CFA? And he agreed that a year later when I passed the first level of the CFA, I wrote him back. Thanked him for sponsoring me, told him I passed the first level and he invited me in. After a conversation and a Saturday morning in his office, which used to be in the attic of a shopping center, he offered me a job. And so that certainly changed my professional life and my life in many respects. And I guess my career developed rapidly because at the time it was just Sir John and I in the office on the investment side, he had two accountants, two secretaries and receptionist. And we had an office in Fort Lauderdale with more analysts, (5/57)
but Sir John and I, we were it in terms of the investment staff in the Bahamas. So I got to work next to him and he became comfortable with me and gave me more and more responsibilities. I started off researching companies for him. He would come in, lay a piece of paper on my desk. Normally it was hotel stationary because that was the cheapest way of getting stationary, was to take some from a hotel you stayed in. And he'd write me little notes saying, you know, do this or do that. And I would do it, put it on his desk. And yeah, so he just kept giving me more and more responsibilities, became a research analyst for the group, took over the management of some of the portfolios that he ran for private individuals. And then in May of 87, so I started working for him in 85, in May of 87, he came in and put all of his mutual funds on his desk and said, from now on, you figure out what should go in these portfolios and leave the trade tickets on my desk. And that was 11 o'clock in May of (6/57)
that got you interested in finance or what was the source of your early fascination with this business? I really couldn't figure it out. I grew up in the Bahamas. My mother's family has been here since the 1700s. So long history in the Bahamas. I did all the typical things you do when you grew up in the Bahamas. I worked on a dock pumping gas. You know, I worked for a mechanic on boats and I decided that working outside and the blazing heat in the summer really wasn't for me. My mother knew somebody at a trust company and got me a job there. And honestly, I was in the file room when I first started. But I was just always fascinated by the idea that somebody could give you their money and you could grow it over time. And honestly, at the time, the trust company that's no longer in existence really didn't do that well. Both of my parents were lawyers. I decided I didn't want to be a lawyer. So I was just fascinated by it. And I was also fascinated by the fact that every day you woke up, (8/57)
you know, if you're an architect and you're designing a building, you can put those plans down. You can walk away. And the design is exactly where it was when you left it two weeks ago. If you're a portfolio manager or a research analyst and you put your portfolio down, you go away for two weeks. You're two weeks behind. So I enjoyed the fact that it was, I'm a very competitive person. So I enjoyed the fact that you could quantify what you do and you can compare it to other people. I was also fascinated by the fact that it changed every day. It was very fast paced, in my opinion, at the time. So I didn't really have an aha moment in terms of getting into the finance business. What did I say to Sir John? You know, it was interesting. When I first wrote to Sir John, he turned me down. So he'd never met me. And I wrote him back a year later and thanked him for sponsoring me. You know, I think part of asking me in was he wanted to see if I could pass the first level of the CFA, even though (9/57)
I had a master's degree. He also caught him at the right time. He really needed help, needed staff, although he could have hired anybody anywhere in the world. But it was interesting. When I sat down with Sir John on that Saturday morning and he interviewed me in an office with butterflies all over the wall, which was sort of fascinating. He had a pink jacket on, yellow pants, you know, suspenders and butterflies all over the wall. He didn't ask me any investment questions. I'd prep for a week to answer all sorts of investment questions. And I guess he felt that because I passed the first level of the CFA and I got a master's degree with a concentration of finance, technically I should know what I'm doing. You know, his first question was, you know, where did I go to church? So it was really, hopefully, an interview of character, of work ethic, you know, talked to me about team sports that I did in school and extracurricular activities, my family, things of that nature. And you know, I (10/57)
was so excited when he offered me a job on the spot and he didn't tell me what the salary would be. And I went home and I very excitedly told my dad, I got a job with a great Sir John Templeton. The first thing out of his mouth was, what's he going to pay you? And I said, I don't know. My father thought I was an idiot because I didn't know what I was going to get paid. But actually it was paid by the hour too. My first raise was a dollar and fifty cents an hour. I joined him in the early summer, in the late summer it came to work and there was an envelope on my desk. And I thought, well, it's not working out too well. I opened up the envelope and it said, due to your hard work and diligence, I'm happy to raise your salary by a dollar and fifty cents an hour, effective September 1st. So I was paid by the hour. I got my first raise, it was a dollar and fifty cents and it sort of went off from there. I love that you didn't ask him how much money you made. I wonder if that also was an (11/57)
important indication, not only of your character and motivations in seeking employment with him, but also an indication of maybe what he saw in you or what he was looking for in someone to mentor, which was someone that was passionate about the work and not necessarily motivated by making money, which is a common motivation in finance. At twenty-five, fresh out of school, trying to start a family, you obviously worry about money, but quite honestly, I had struggled trying to find a good job coming out of college. When I finished college in 82, the US was in a recession. And I didn't really know anybody in Boston and New York and thought that was the route to go if you wanted to get into the financial service sector. So I went straight to business school to a school that would take you without any full-time work experience. And so I was just happy when I got the job that I was going to actually learn that, obviously, Sir John had such a great reputation. And to me, if anybody worked for (12/57)
Sir John Templeton, whether it was for a month or six months or six years, it's sort of like going back to school and the reputation that he had would be so valuable. So I wanted to be able to eventually buy a car. I was sort of going to work on a motorcycle, which was difficult in the rainy season, but at the time, money really wasn't that important. Yeah, you had a long-term perspective. You said that you got a master's and then you said business school. I'm assuming the master was a master's in business. What did you study in college? Economics. I went to Holy Cross College studying economics. But really, what I really studied was crew. I was on the crew team. And although I majored in economics, I learned so much in athletics and rowing crew and the camaraderie, the teamwork, the joy of working hard, accomplishing goals, things of that nature. I got as much out of rowing crew and college than I did at a classroom. My parents hate to hear that after spending all the money to send me (13/57)
to college. But I started economics in college. If you had to identify one, the most valuable lesson from your time in athletics, could you pick one specific thing? Was it overcoming challenges? Was it the teamwork? What was it? For me, it was learning the joy of hard work. A lot of people shy away from hard work. When I consider how hard we had to work and prepare to row, I still sort of get tingles. We had an amazing coach who basically taught us the value and the beauty of hard work. For me, I always like to tell people I'm not really smarter than most people. I'm just willing to go the extra distance. I'm willing to work harder than most people. Have you taken four steps? I'm willing to take five, that sort of thing. Well, if anyone's inspired by that, I recommend they go back and listen to our conversation with Tim Grover, who was Michael Jordan's strength coach for a conversation about what it takes to be a winner, one of my favorite episodes ever. Last background question, Mark, (14/57)
which is, what led you to start your own fund in 2000? What was your vision then? What were you hoping to accomplish with that? I started off with Templeton and it grew very rapidly. It turns out in 1992, Sir John sold the business. I became a director of the firm, the head of global equities, but my main job was running the global equity division and managing the mutual funds that was assigned to me. Then in 1992, Sir John sold the business to Franklin, became Franklin Templeton. They were fantastic and they grew the firm rapidly. The funds that I was managing grew extremely rapidly. We had about 19 billion of assets when we sold to Franklin. As my funds grew, I gave them up to other people to manage. By 2000, I was running the Templeton foreign fund, which is about 15 billion, and Templeton growth fund, which is about the same size. The group that I was managing, we had about another 40 or 50 billion. It seemed like I was becoming a manager of people as opposed to a manager of (15/57)
assets. I was in a unique position where I had a great relationship with the Johnson family who owned Majority Stake at Franklin. I told them that, look, we had grown rapidly. We'd had great success, but I wanted to concentrate on picking stocks and doing it with a few people for a few clients. That's what I truly love. I truly love coming to work and turning on the computer and seeing what's going around the world. I didn't enjoy the 70 people that reported to me nine different locations around the world. I mean, they were fantastic people, but it involved an enormous amount of travel and administrative work. I found my time on research was shrinking and my time on administration was growing. I just love investing. I had an agreement with them that I would start a new subsidiary. I would get 60% of the profits. They would get 40, and we would concentrate on running a global equity long short fund. That was also at a time in 2000 when the markets were, we had the bubble, and there was (16/57)
a great opportunity to start that fund. We eventually started a long only fund, and then eventually I bought the majority of the business off of them. Really, I decided to start my own business because of the love of investing and the lack of love of managing large groups of people. Also, remember, when I started working for Sir John, it was just Sir John and I and five other people in the office. The decision making was so quick, and my boss was just next door. Then when you get into a larger organization with people all over the world and committees, and it was just a phenomenal people, but just a different environment. I wanted to go back to the environment that I found myself in when I first joined John Templeton. What an interesting conversation that would be. We're not going to have that because we're here to talk about investing, but what an interesting conversation that would be to discuss, the difference between running a large and small organization, especially in the (17/57)
investment world. I'm glad that you said that you love investing because that's what we're here to talk about. Let's start with frameworks, which is something I always try to pull out of people to get to first principles in terms of how they see the world, how they see investing. You invest with a value-oriented framework, and you also have a macro overlay that you bring to your investing. How would you describe each of those? Let's begin first with your value framework. People describe value investing different ways. I guess I would describe it as that we try to compare a company's price to its intrinsic value. Intrinsic is an important part of the phrase. What's the company worth? An intrinsic value can encompass growth, encompass breakup value. To us, it's not just investing based on momentum or growth per se. What is this company worth? Where's the stock price? Now, very simplistic description, but very complicated process. When we do that, we try to come up with a price target. If (18/57)
I'm right, I think the stock can go to this level. More importantly, we come up with a risk target. If I'm wrong, how much money am I going to lose? In the investment business, it's really that component that I think distinguishes us from other people. In an enormous amount of time, on what if I'm wrong? How much money am I going to lose? If you have a collection of stocks and your upside is 50% and your downside is 10, you don't have to be right more than half the time to make good money. If your upside is 25% and your downside is 25%, well, you've got to be right a vast majority of the time to make money. The framework is that let's try to find things that are intrinsically cheap where our upside to downside ratio is skewed to the upside. That gives me a sense of how much risk I'm taking to the portfolio. I remember coming out of the bubble in 2000 and at one point, stock markets had dropped I think 15% one year and 20% the next year. We got to the point where in a hedge fund, we (19/57)
were 90% net long, which hedge funds don't get 90% net long. Somebody says, well, that's an enormous amount of risk you're taking in the portfolio. I thought to myself, wow, it's the least amount of risk I think I've ever taken a portfolio because my downside on the collection of 40 or 45 names that I have in my portfolio was single digits. My upside was more than 50%. From my perspective, it was the least amount of risk I'd ever taken in the portfolio, although when you look at the net exposure I had in the fund, people say, well, you're taking a lot of risk. There's a couple of points there. I guess one is that we look at risk as the possibility of losing money. That's the risk. When an analyst recommends a name, I talk about what is the catalyst for this name in terms of how will we achieve the upside and what will convince you if you're wrong and what do you think can go wrong? For a bank, it may be that the analyst is using a downside that reflects a recessionary environment. Then (20/57)
it's my job as the portfolio manager to decide when that may occur and when that risk in that stock may occur. Or if you're the energy analyst, you might be using $80 upside for oil and $40 downside. Then it's my job, more of the analysts, to think about under what scenario could oil prices get down to $40, which would make that a poor investment. I guess that's where some of the top-down work comes into play. It's intrinsic value as opposed to value. Sometimes that incorporates growth, sometimes it doesn't. If I'm listening to you correctly, it sounds like in addition to the importance of how you define value, it's also important how you define risk. Do you believe you can do more to limit the downside than you can to control the upside? I would say we're more aware of the downside. I don't know if we have control over it because a lot of times we have no control over markets. But I have more control on how I put my portfolio together. I can manage the risk in my portfolio by limiting (21/57)
the amount of names that I have that have lots of downside. In this business, as you know, if you're right two thirds of the time, that's a phenomenal batting average. But you don't have to be right two thirds of the time if you limit your downside. Once again, if you really do your work and you're going to be wrong on the downside two thirds of the time, when you pick an upside, you're going to make mistakes or something's going to happen that you don't anticipate. Same thing on the downside. We're constantly trying to adjust our upside and downside. To me, it gives a framework for how much potential reward and risk I'm taking and how aggressive I need to be. If I've got tons of names all over the world and I can put together a portfolio with 50% upside and 10% downside, that's a great ratio. If you get to a point in the United States where you have very frothy markets and it's difficult to find a portfolio that has that type of ratio, most of the names in the US are more up 50 down (22/57)
50, unfortunately. That tends to move you and push you to other markets around the world. A lot of times your framework decides how you allocate assets, both in terms of types of names and the geographic places that you might look. I poorly framed that question about relative measures of control and managing upside versus downside risk. Let me see if I can ask it again. Is your focus on mitigating risk of the downside reflect a broader recognition that over many cycles the benefits of being invested outweigh those of being in cash? Focusing more of your attention on what can go wrong so you can remain in the game, so to speak, makes sense. I think my history has given me a better appreciation for downside. When I took over the funds from Sir John Templeton, I took them over in May of 87. I don't know if you remember what happened in October of 87. That was six, but yes, I've read about it. I always joke with people that Sir John Templeton was a better market timer than people think he (23/57)
was. He gave up all of his funds in May of 87 and in October he said, we had the great crash. We ran both global money and international money. We ran the Templeton foreign fund was a non-US equity mutual fund. We were investing outside of the United States during the Asian crisis, the Latin American crisis. If you grew up in the 1980s and early 1990s, you saw an enormous amount of damage in equity markets outside of the United States. I guess I was somewhat conditioned by the environment that I grew up in professionally where I'm perhaps too concerned about the downside. I would say that's probably, if you say, what's one of the faults of your approach or what's one of the downsides to your approach, I would say that we're too much of a nervous nally sometimes. You started the fund in 2000, which was a great year to begin a fund, a value investment fund. It's like, if I were to put some dates together, it seems that 2000, 2007 or so was a good period for value. What explains why value (24/57)
investing has underperformed and lost so much favor with investors, especially over the last five to 10 years in your view? It's underperformed dramatically over the last five or 10 years and that's because we've just been in an unusual interest rate environment more than anything, in an unusual liquidity environment. When you have massive liquidity and when you have interest rates to the extent they are, historically you've always unfortunately had these periods like this. If you're a company and your cost of capital is 2%, you only need to make 3% to borrow capital. You get all of these inefficient companies that are out there that compete effectively with more efficient companies, more profitable companies. But really, we just had unusual amounts of liquidity in the system. Liquidity leads to speculation. You've also had a real lack of growth. Look at last year, I think the MAG7 in the United States, the earnings grew 36%, something along those lines. The other 493 companies, NSP (25/57)
500, grew their earnings low single digits. There's really been a lack of growth, not only outside of certain stocks in the US, but outside of the US. As a result of that, people have overpaid for growth. But if you look at a graph of value versus growth investing over time and starting the 1970s, there were periods of underperformance for value, but nothing as prolonged as what happened after the financial crisis when they just brought rates down to unusually low levels and flooded the system with money and after COVID. I would say those are two extremely unique events. We're slowly trying to figure out how to move away from that period. With a higher cost of capital, I think you're going to see a major change in that environment between value and growth. Liquidity and rates really have driven this fascination with growth versus value investing. I've heard you say that 2002 marked a turning point for value. Why do you feel that way and what would you point to specifically to support (26/57)
that argument? I think rates pretty much bottomed back then. I think that as rates normalize and as liquidity starts coming out of the system, the two of those events, which I think have already started, you can say, okay, well, rates have gone up or down. I would say that that marked a low point in terms of rates and a high point in terms of liquidity. There's such a disparity now between value and growth all over the world. There's so much concentration of people's portfolios on growth versus value. To me, it's cost of capital and liquidity. The things that have caused this disparity in performance have changed. In terms of liquidity, there's different ways of looking at liquidity. If you take the US, the Federal Reserve balance sheet, that's rolled over. It's still massive, but it's moving, whether it's on an absolute basis or a percentage of GDP it's shrinking. You look at government spending, it's completely out of control. We've never had government spending these budget (27/57)
deficits, 6% of GDP when you have basically a good economy and low unemployment. Obviously, there's a new administration trying to get that under control. There's absolutely no way you can continue with 6% budget deficits as a percentage of GDP. You've got the Federal Reserve balance sheets are starting to turn, government spending is going to turn, the Treasury with the way they've been issuing government securities on the short end versus long and provided massive liquidity. The other area would be bank credit. Bank credit is also changing. I just feel that liquidity is all the things that provided excess liquidity in the system are beginning to change. The other thing too is that government debt is so high in the United States, it's just high everywhere in the world. It's the same level as it was coming out of World War II. Back then, the government basically inflated their way out of the debt problem. There are very few ways of solving the debt problem rather than growing the (28/57)
economy and trying to inflate your way out of the problem. To me, that argues for sustainably higher rates than people anticipate as the world also struggles with lower liquidity levels. Is that another way of saying that the reason why you think we're in a period of structurally higher rates is because of the refinancing costs reflected in part in government deficit spending and the size of national debts? That's a part of it, but I think people's view on rates is conditioned by what's happened over the last 10 or 15 years. What has happened over the last 10 or 15 years is completely abnormal. People who haven't been in business in the financial sector, who haven't been alive for more than 50 or 60 years, just think that the post-financial crisis era was normal. It's not. I just think that we're going back to a more normal level of rates prior to the 2008 period. Part of that is, yes, sustainably higher inflation. That doesn't mean inflation is going to be 6%, 7%, 8%. But if you have (29/57)
3% to 4% inflation or even 2% to 4% inflation, you add some risk premium on top of that. Rates today are much more normal than people realize. This idea that rates need to continue to come down, I don't think we're going to go back to 2% on the US Treasury. For a while. The inflation in your view would be driven by monetization, government spending. And spending has certainly provided massive amounts of impotence to inflation. We've had too much money in the system, and a lot of that money has been provided by the US government. And unfortunately, a lot of the employment is provided by the US government as well. If you look at the employment statistics in the United States and look at changes in employment and how much that's been created by the government, tariffs cause slightly higher inflation, although the administration will tell you it won't. There's so many different elements out there that are adding to inflation. The government's got a real tricky job in the United States now (30/57)
to try to grow the economy without letting inflation rise too much. But at the same time, the only way you're going to get out of this debt problem is to let inflation help and inflate your way out of the debt problem. So this is a problem obviously that's not unique to the US. However, there is an outstanding concern about the value of the dollar. You've written about this as well. How does this factor into the value of the dollar? Because the dollar has been very strong in recent years. Yeah. So as a global investor, obviously if you invest outside the United States, you have to take currency and consideration. The great thing about investing outside the United States today is that you can hedge away most of that risk and it doesn't cost you anything. So when you hedge, if you use the forward markets, basically the cost of hedging is normally the differential interest rates. And because of where US rates are today versus most countries around the world, you don't really have to take (31/57)
much currency risk. So that's interesting and helpful. However, currency does a lot of different things to different companies in different parts of the world. We had a morning meeting today. We were discussing how a change in yen value impacts the book value of Japanese companies. And you have to be aware that currencies have a major impact on how companies report. It's a global economy. BMW and Germany does 40% of its business in China. It has a large business in the United States. Although you're investing in a euro-based company, its actual business exposure to the euro is very low relative to its dollars and Chinese currency. You have to take all that consideration, figure out whether or not the companies hedge themselves and then whether or not you want to overlay a hedge on top of that. So currency is something you take into consideration when you're evaluating a company, the risk to that company in terms of where it's doing business. It gets very complicated, particularly when (32/57)
companies themselves are hedging. And then you have to decide whether or not I want to hedge again. But it's just one of those macro factors that you need to take consideration. I just believe that purchasing power, powerity, which a lot of people look at doesn't really tell you where the currency is going to go. It tells you what the environment is in a particular country at any point in time. There's the famous Big Mac index. What would a Big Mac cost in the US versus Japan? And if it's cheaper or more expensive in Japan, maybe it tells you something about the purchasing power of the currency over there. But really differences in interest rates and what business people decided to do is what drives the currency in the short run and the medium term. And right now, I think that it's difficult to say with tariffs being imposed that the dollar is going to weaken substantially because normally the dollar, if you put a tariff on a foreign country, their currency tends to adjust somewhat to (33/57)
take into consideration that tariff. But over the long run, it seems as if to me that the dollar is one of the most consensus trades in the world. Our funds are based in dollars, so we have to take that into consideration when we invest overseas. But if you look at the DXY, the trade weighted basket of currencies, generally these levels, you know, Sir John has an interesting graph he gave me a long, long time ago. It basically showed the trade weighted dollar going up. And on one side, he wrote time to invest in US names. It showed the trade weighted dollar going down and he wrote on the side time to invest in foreign companies. And in 1990, when he gave me the graph, it was at a low and he wrote on the side time to invest in US companies again. Well, we're at a point in time where the currency buys you a lot overseas and the dollar is very sort of crowded. So I'm happy to slowly be looking to increase non-dollar weightings in our funds. I'm actually interested to ask you about this (34/57)
because I think I've heard you say that you own a small percentage of US-based companies or you aim to own a small percentage. Do I have that right? No, we don't aim to own any percentage in any country. We just try to look around the world and see what's cheap. And 20% of the names around the world are in the US, but the US is 70% of the index. We were 20%. So in a long-only fund, we're roughly 20% in the US in our hedge fund because we can also short securities on a net basis. We're single digit. And that's pretty unusual. However, when I joined Sir John in the late 1980s, I ran the Templeton Foreign Fund. It was a fund that invested outside the US. And at one point in time, the EFIT index, which is the index of non-US stocks, was 70% Japan. And I went to zero and people thought, wow, that's incredibly risky. You're being compared to an index that's 70% Japan, a year zero. And my response was, wow, you're taking an enormous amount of risk. You're investing half of your portfolio in a (35/57)
country that you know is substantially overvalued just because it represents 70% of an index. How could you do that? I looked like an idiot for a year or two in the Templeton Foreign Fund when I was so underweight Japan. But quite honestly, for most of the 1990s, it didn't matter what I did, I outperformed the index because Japan peaked out and it started to drop. The same thing today in the United States, people say, geez, you're taking an enormous amount of risk. You only have 20% of a long portfolio in the United States that represents 70% of an index that you're compared to. Isn't that risky? But once again, I define risk as the potential to lose money. And from my perspective, when I look around the world, the downside in the US is much greater than the downside in a lot of the companies that I'm investing in, Japan, UK, etc. So in the short term, maybe it's risky in the long run, it helps your career. So I have a few more questions I want to ask about rates and tariffs, but this (36/57)
benchmarking has come up a number of times on this conversation. And it sounds to me like something that's been very important in your career is not just what you've benchmarked to, but not being wedded to benchmarks that everyone else is focused on, which is also another way of saying being a contrarian, being willing to go your own way. Would you agree with that? And how important has that been in terms of your success as an investor? You know, I was thinking about this the other day because they asked me what characteristic makes you a good investor. And I said, well, you have to be rational versus emotional. And to a certain extent, you have to sort of enjoy being off on your own. If you're comfortable in a crowd, if you enjoy waking up on a Saturday and going playing golf with everybody on the golf course and dressing like they all dress and playing with all the rules and sitting around the golf shop afterwards with everybody. I find that incredibly uncomfortable, quite honestly. (37/57)
I'd rather be out sailing on a windsurfing by myself. Or at the same time, you have to have the ability to work with other people, go back to the crew analogy. You have to have this love of working with people, but being uncomfortable, being with the crowd. I heard someone describe it that if you're in the jungle and a tiger approaches you, you want to run away with everybody away from the tiger, but at the same time, you don't want to be running over the cliff when everyone's running over the cliff. So I think you have to have this comfort level about doing things by yourself and an uncomfort being in the crowd. So I think that's a characteristic that's really helpful as a global money manager. And it goes to the index. I want to be in business. I want to make money. And I don't want to lose money. And I want to be... When I started my business, somebody says, why are you starting it now? I said, look, I don't want to be a long only money manager and be down 20% when the market's down (38/57)
50 and say, wow, what a great job I did. I want to make money. And so for me, I think over the long... There are going to be periods, sometimes long periods where you want to perform the index. But over the long run, if you can stick to what you're doing, regardless of what the index said you should be doing. And if you're not worried about that index and the composition of that index, you can only get different results from other people by doing things that are different from other people. And it's easier doing that when you're not following the index. Is it also fair to say that you're less concerned about career risk than most people? You're always worried about your clients and you don't want to disappoint your clients. One of the things you have to be careful of is you get older and more established and more comfortable that you actually take risk. In this business, you're not avoiding risk. You're just managing risk. You're understanding risk. And sometimes as you get older and (39/57)
you're more comfortable financially, you're not willing to take risk. But you have to take risk and you have to manage that risk. So yeah, it's easier to do that if you're financially comfortable and if your clients have been with you for a long time. 80% of our clients have been with us since the first year we started our hedge fund. And that's helpful. So I mentioned that... Well, hopefully we'll have a chance in the second hour to talk more about your process and philosophy. But I mentioned that I had a couple more questions about rates and tariffs. So you mentioned earlier in our conversation that it's likely that we're moving into a higher, structurally higher inflationary environment and an environment of higher rates. The question I have for you is, what do you see for real rates? Does that still mean a positive rate environment or is the inflation indicative of structurally negative real rates? I'm just curious how you see that. Well, it would be better for the government. If (40/57)
we had negative real rates. And you think, is that speaks to the discussion we had earlier about the debt and deficits and government spending and some of the outstanding liabilities that need to be financed? Look, the new Treasury Secretary, who is I think an incredibly capable guy, smart as a whip, probably one of the better Treasury secretaries the US has had for a long time, he's got this 3-3-3 approach. And one of his 3s approach is they want to get the budget deficit down to 3%, minus 3%. That's still a budget deficit. So he's still talking about adding to the debt. So for me, the only way they're going to get debt under control is to inflate their way out of the problem. So I'm not a rate expert, but to me, it means negative real rates. So tariffs, I'm confused. I mean, I do feel like there is some obvious way in which tariffs are used in this administration for political or geopolitical purposes. I don't necessarily see the larger strategic game plan for revitalizing the (41/57)
American economy and how tariffs are being used in that context. They still seem to be more of a tactic than a strategy, a tactical deployment than a strategic use. How do you view tariffs being used in this administration? Is there some way in which you expect them to be used? I mean, do you have some confidence around how they'll be deployed and what impact they're going to have going forward? Well, I agree with you. I think they are tactical. And I also agree that they don't really improve the competitive structure of the companies they're trying to protect longer term. Why are they tactical? I think these numbers aren't exactly right, but they're close. I think something like 80% of all exports from Mexico go to the United States, and it represents something like 25% of GDP. Mexico is very, very vulnerable to rates. If you wanted to negotiate with Mexico and you threatened to slap tariffs on Mexico, that's huge. Same thing for Canada, I think something like 70% of all exports from (42/57)
Canada go to the United States, and it's also a very large percentage of GDP. However, you've got to be very careful because if you look at the percentage of cars being produced by US manufacturers in Mexico, it's a very large percentage for General Motors. I think it's like 35% or 40% of the cars sold in America come from Mexico. So you're also damaging US companies to a certain extent. It's interesting, an investment in BMW. BMW is actually quite good in terms of its domestic production versus its Mexican and Canadian production versus the US manufacturers. So I would say BMW is in a better situation to not get hurt by these tariffs than the US companies that you're trying to protect. And the other thing it does is that, as I mentioned, higher tariffs also impact the currency. So the currencies tend to adjust a little bit, not by the same extent as the tariff, but to some extent, depending on the country. So if you put a 10% tariff on certain goods coming out of a country, it tends (43/57)
to weaken that currency to offset the cost of the tariff. But that makes the dollar stronger, which makes your goods in the United States less competitive overseas. So yes, I think it is a negotiating tactic. And I believe that a better scenario for the United States in terms of its competitive industrial base is to remove regulations, what they're doing quite rapidly, keep the tax rate low, which they're trying to implement, but also not keep the dollar so strong. I mean, obviously, if the dollar weakens, that's to your benefit as an exporter around the world. So I think the tariffs are creating a lot of confusion. I think they are a tactical negotiating tool. However, there are some countries that dump things into the United States. Sometimes they don't dump them directly into the United States. And tariffs on certain goods from certain countries, even when they come indirectly, some goods come from China to Canada, and then from Canada to the US. And so it might appear as if you're (44/57)
putting tariffs on Canadian companies, but it's actually goods coming from China. It's very complicated, but I would say it's a tactical tool. It's going to create confusion. Confusion is good if you're a long-term investor, because it creates abnormal price movements. And if you can take advantage of that from a longer term perspective, then that's okay. I've heard what feels like mixed messages coming out of this administration on the dollar. It sounds like there is both a desire for a strong dollar, maybe because it sounds good, and then also some policies to weaken the dollar. I'm curious if you have a sense of any kind of clear direction in this area. Look, I think that nobody in the administration is going to come out and say they want a weak dollar. Just like the current Treasury Secretary has come out and said he's not going to change the allocation of government debt when it rolls over more to the long end. Although when he was in the Treasury Secretary, he was criticizing the (45/57)
then Treasury Secretary because they didn't roll a lot of the debt into the long end to take advantage of low rates. So no one's going to come out and say, I think they want a weak dollar. I don't think that politically is acceptable, but I think it would be to their benefit to have a weak dollar. And it would be much better longer term than tariffs, just as if they could get long-end rates down. Yes, they would love to roll this enormous amount of debt coming to this year into the long end of the Treasury, but they're not going to tell you that up front. So let's go back to this question of valuations, the valuation of U.S. companies versus companies in the rest of the world, Japanese companies, companies in Europe. You're quite a bit about how there are a lot of opportunities in the U.K. We touched on this a little bit, but what explains, if you had to be specific and summarize this, what explains the over valuations in the U.S. in your view? The over valuations in the U.S. is just (46/57)
liquidity and low rates and the concentration around the world and the fact that the United States has been a place dominated by companies that are growing. So to a certain extent, the success has caused the overvaluation. Some of the valuation is justified, but not the extent. Companies selling at 20 and 25 times revenues. We have companies out there that are $250 billion in size that are generating a billion dollars in cash flow. At some point valuations became stretched in the United States. But the success and the differentiation between growth in the U.S. and a lot of countries around the world has caused this over concentration on U.S. assets and the overpricing of U.S. assets. There's a sort of momentum trade associated with this. Very much so. How much do you factor in systematic passive flows into this equation? And do you have any concern that value will continue to struggle as those flows continue to dominate the pricing relative to discretionary allocation decisions of (47/57)
active managers like you? Yeah, it's interesting because it works both ways, right? It works on the way up. And then when you get some of these companies reporting poor earnings and the MAG-7 starts to struggle, it's going to work on the way down too. So you think that cost of capital that we talked about earlier, some of the underlying structural economic effects are going to ultimately be the spark that serves as a catalyst and then that momentum will go into reverse? Look, you never know what the catalyst is going to be for the system. You might be identified for companies generally. But look at AI. Look at all of a sudden the information that's come out on Chinese development of AI. Totally unexpected and what that did for those companies. And if those companies, there's such an over concentration and if people start pulling that and they start shrinking as a percentage of the index, then it's sort of self-fulfilling, right? The index starts to shrink in that area. And so it's (48/57)
difficult to say what's going to cause it. We're even having companies that are reporting great numbers and beating and they're dropping. Once again, I think it's just over concentration in people's portfolios. They've gotten too big and they need to quote unquote rebalance. But generally, I would say higher cost of capital, you know, the percentage of companies in America that don't make money is at an all-time high while the market is at an all-time high valuation. And that's interesting. I love that you brought up deep seek because I also had that reaction. The market got so spooked. And besides the fact that it didn't entirely make sense why it was selling off, given the fact that the software innovations made by deep seek weren't necessarily bearish. If any, you could argue they were bullish for the need for further compute. It just shows you how fragile this bull market is, I think. And it also reveals something else. I'm curious if you agree with this. I think it reveals an (49/57)
underlying anxiety about America's place in the world, our geo-strategic positioning, our national security state, our geopolitical power. And so that kind of, you know, brings me to another question, which is how do you factor these things in? Politics, national security, how do you factor these things in when you consider where to invest? Understanding that government regulations may change in line with the needs of the national security state, and that could impact the value of your investments. Well, I guess the greatest example of that today is China and Taiwan. You know, a lot of people say China is investable. There are other people out there that say because investors say China is uninvestable, it's actually a great investment. You know, the risk to your Chinese investments is that a situation happens like Russian investments. I'm on the board of a company in Europe that manages funds for individuals, and they had some exposure to Russian-vated Ukraine. You couldn't trade those (50/57)
assets. You had to price them at zero. So that's the geopolitical risk. Obviously, the biggest geopolitical risk today is China-Taiwan. And, you know, the impact that would have, obviously, on the semiconductor sector is massive given the strength of Taiwan semi-manufacturing. So it goes back to that upside-down side. I mean, when you get to the point where companies get close to net cash, and in the course of a year or two or three, you feel you can get that investment back in terms of cash returned from a company. You know, your job as a portfolio manager is to decide, well, is that geopolitical risk reflected in that? And, okay, I'm not certain about what China will do with Taiwan. So how much do I want to have in China? Do I want to take that risk? And will it be 5% of my portfolio, 15% of my portfolio? So I'm willing to take some risk with Chinese investments, but it's not 10% of my portfolio. But, you know, what most people don't realize is, you know, we mentioned BMW earlier, (51/57)
40% of their business is Chinese. You know, most people's investments in China are much greater than they realize, even if their portfolio manager says, oh, we don't invest in China. Oh, heck, you do invest in China. You know, you go down to your portfolio and you look at all the investments that these companies have and all the revenue and income that's generated in China, most people would be shocked. So my direct investment in China is about 4.5%, but my indirect investment in China is probably closer to 15%. So I love that you brought that up. I mean, first of all, how confident are you in that 15% number? Because as we saw, even the US government, even the military, didn't understand how vulnerable its supply chains were. They had to cancel or halt production of the F-35 fighter at some point because they discovered that a magnet, a critical magnet was being produced in China. How confident are you about the vulnerabilities of the companies that you invest in, given how (52/57)
interconnected this world has been and how globalized it's been? Well, I hate being compared to the US military because I believe you they've never been able to complete an audit. So I mean, I don't know that they're the best comparison. So look, let's look at some of our investments in China. Outside of the political risk in China, there are industry risk in China like real estate. The real estate industry is a mess. The banking industry is a mess. So one of our largest investment series, Yum China, they have the Kentucky Fried Chicken and the Pizza Hut franchise in China. Net cash balance sheet, this time last year, it was like 25% of its balance sheet. Now it's a little bit smaller because they've just raised their dividend 50%. They're opening new stores and the population continues to become wealthier and able to afford eating out more. It's a company that basically you can look at the growth of its store base and the amount of cash it generates and the amount of cash you're (53/57)
getting back. What's the geopolitical risk of Kentucky Fried Chicken and Pizza Hut as opposed to real estate or finance, et cetera? But you can be pretty comfortable. It takes a lot of legwork. I've been to China, visited the management of Yum China in China. I remember the first time I ever went to Hong Kong, I went with a gentleman by the name of Mark Mobius who ran our emerging markets group. And we were chatting with an analyst in Hong Kong and they'd invited some companies there and one manufacturer of a company was talking about his watch facility and it was pretty close to the border. So we decided we'd go check it out. Turns out it wasn't there. Didn't have a watch manufacturing facility where he said he had it. So a lot of information is available if you're just willing to read through annual reports and go visit companies. So we're pretty comfortable with what our indirect exposure is to China. That's our job. Our job is to figure out where these companies make or where they (54/57)
generate revenue, how they generate profits, what competitive advantages they have, what are the risks to that business, both politically, technology, or corporate-wise and then sort of adjust accordingly. It also sounds like you might be more willing to invest in a Chinese company if its operations are primarily overseas or its factories are located outside of China or it's listed outside of China. Those are all nuanced ways of assessing the risk of the particular company. Somewhat, correct. So I'm going to move us to the second hour mark. I want to talk a little bit about opportunities outside the United States. I asked you, for example, what accounts for the overvaluations in the U.S. I'm curious to ask you the opposite question of what accounts for some of the undervaluations, especially in places like the U.K. I also would like to discuss more about your investment process and your investment philosophy, as well as some of the unique opportunities that are in the U.S. I think (55/57)
you've written quite a bit about the energy sector. 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 to access the second hour of today's conversation with Mark, 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. Mark, 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 (56/57)
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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
A Recession, More Inflation, or Both Eric Basmajian #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
economy is rolling over and their margins are getting compressed, they say, crap, what do we have to do? We have to cut costs or raise prices. And then the prices start to go up and everyone says, look, corporations are passing on price increases, but really that's just the lagged effect. Fascinating. So it's like a blow off top in inflation as we head into a recession. Exactly. There's something else that's counter intuitive, which I think is also interesting and striking. I just want to mention it. And again, I want you to stay on course here, Eric, which is when we're at the very beginning of our conversation, we were talking about the longer leading indicators. One of those were was monetary aggregates. Another one of those was interest rates. And interestingly enough, the Fed focuses on indicators like inflation and employment, which are late to the game, in order to adjust their behavior, which are actually the leading indicators, which is monetary policy. Exactly. Which I think (48/57)
said, I see signs that the economy's slowing, but there's no signs of recession. And you know what Bernanke was most concerned about in February of 2008? Inflation. He said inflation is going to be our problem now because oil prices were out $100 a barrel and they were contemplating the market was actually pricing in potential rate hikes because of the high inflation. And his main concern at that time was inflation. And we were basically six months ahead of catastrophic deflation. So here we are again, where inflation is very high, it's way too high. It's obviously being impacted by supply issues, geopolitical issues, and also the lagged effect of economic growth. So the Fed has to bring down the rate of inflation, but because of the lag nature of it, by the time they see that inflation is coming down in the CPI, that means the economy will have already been slowing for a year. And that's what we're seeing now. So I think that while the current headlines are about inflation, the (54/57)
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 this week's episode is Eric Besmejian. Eric is an economic cycle analyst and the founder of EPB Macro Research, an economics-based research firm focused on inflection points in economic growth and the impact on asset prices. His research has been featured across major financial media outlets and has been kind enough to provide a sample of his latest cyclical trends monthly update report for premium subscribers to our Super Nerd Tier that you can get through this week's episode page on our website at hiddenforces.io. This conversation is the latest in a series of episodes that I've been releasing on markets and investing with an especially strong focus this time on the macroeconomy and in particular the (1/57)
secular and cyclical trends in the rate of growth and inflation. Secular forces are things like demographics that the GDP levels, trends in globalization and the regular and predictable doubling in computing power commonly referred to as Moore's law. Long term trends in other words that remain in place through multiple economic cycles. Cyclical trends on the other hand are the six to 18 month fluctuations in growth determined by things like income, production, consumption and employment. We can anticipate changes in the direction and magnitude of these trends by relying on a variety of what are known as leading as well as coincident economic indicators. Things you've probably heard of before like building permits, new manufacturing orders, non-farm payrolls, personal consumption, industrial production, stuff like that. Understanding where you are in an economic cycle and what the long term secular forces are that are pulling you or pushing you in any particular direction is as (2/57)
important to investors as the weather and the ocean currents are to the navigator of a sailboat. They inform the allocation strategies and performance expectations of a variety of asset classes, business models and policy choices over time. My objective in bringing you this conversation today is to expose you to a framework for thinking about the macroeconomy that is empirical, data oriented and very much based in reality. One that you can use to forecast major economic inflection points and the resulting impact on asset prices as you try and manage your own portfolios and make your own investment decisions. As most of you already know, Hidden Forces is listener supported. I don't rely on advertisers or commercial sponsors. So the second part of today's conversation with Eric is available to premium subscribers only. You can access that part of the conversation as well as the transcripts and intelligence reports to each episode by visiting our website at hiddenforces.io selecting the (3/57)
episode that you're interested in and clicking on the premium extras where you can then sign up to one of our premium content tiers. Since some of this episode deals with investing, it should be absolutely clear that 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 week's episode with my guest, Eric Besmajan. Eric Besmajan, welcome to Hidden Forces. Hey, Dimitri. Thanks for having me. It's my pleasure having you on, Eric. You're a brilliant guy, man. I really, really appreciate your work. It's something I haven't been able to find readily anywhere else and I've looked for it for quite a long time. Before we get into your work, I'm curious, I want to know a little bit more about you and how you got into doing this because you have like this almost a passion for economic indicators that I (4/57)
haven't really seen anywhere else. So how did that come about? Yeah, thanks. It's a little bit of a roundabout story. So I started studying economics at New York University and when I was there, I took a course on financial crises and it resonated with me so deeply because there were these repeated crises that happened throughout history and every single time that one of these crises happened, it was always somewhat unexpected or it caught everyone by surprise, but they all had very similar characteristics which were excessive levels of debt for the most part. The basis of the crises was some buildup of debt in some sector or many sectors of the economy. And I thought to myself, you have to at least have a foundation to understand when these financial crises have the potential for occurring because if you're in 2007, let's say, and you're doing bottoms up fundamental analysis on a company and then the crisis occurs, your analysis really doesn't matter. All the companies are going to go (5/57)
down. All equities are going to go down. So whether you're a stock specific analyst, no matter what market you're in, you have to have a foundation for understanding what I would call these secular economic trends or these long term economic trends that are basically signs of excess. So that really got me down the road of studying these debt buildups, the concept of debt deflation, and just the longer term secular economic trends, which are mainly a function of debt and demographics. So that was sort of how I got the wheels turning on the long term economic process. After school though, I went over and I worked at a quantitative hedge fund in Midtown, wasn't macro. It was a quantitative fund scanning for mispriced equity derivatives. So we would scan 60, 70, 80,000 options per day and look for what we thought were mispricings. And even though it was a little bit different than my macro background, I learned a great deal about statistical analysis, a little bit of computer programming. (6/57)
And while I was there, I was still sort of more passionate about macro. So I would read all the research on the street and I would read all of the prevailing macro analysis that was out there. And I thought it was quite poor in terms of spotting these major inflection points. Most of it seemed to go one direction. It generally seemed to be bullish until it was glaringly obvious that being bullish was not the right outcome. So I continued to study these economic trends. And I came across Jeffrey Moore, who was dubbed as the father of leading indicators. He co-founded the Economic Cycle Research Institute. And what was interesting about studying Jeffrey Moore's work is he was laser focused on what we call these leading economic indicators and trying to anticipate turns in the business cycle. And that was extremely insightful for me because I was working at a hedge fund that needed to mark performance on a quarterly and yearly basis. So I was sensitive to the fact that you couldn't stay (7/57)
laser focused on these 10 year trends. It was important to know, but you couldn't have your entire process be a 10 year trend because you needed to have some ability to mark performance on a shorter term basis. So I dug deeper into these leading economic indicators and I started to merge the two processes of these long term secular economic trends and these business cycle indicators, trying to spot these inflection points on a more timely basis. And when I did that, I started to sort of put these models together in my head. And I saw that there was really nobody that I could find that was doing it. There were some people who I view as mentors to me who were doing these long term economic trends brilliantly. There were people that were doing the shorter term business cycle work, but nobody was combining the two of them together. So I thought that there was a really good opportunity. And when I left the fund, I started publishing this work and the audience that I was publishing to just (8/57)
the community of investors was extremely receptive to the combination of this long term economic trends, sort of the gravity, I call it, but also the more timely cyclical inflection points. And I just continued to publish this work. I got a good reception from it. So that sort of developed into what I'm doing now, which is publishing these long term secular economic trends, establishing what the gravity in the economy is, but then also alerting investors to the more timely cyclical inflection points so that they can prepare for what's coming over the next couple of quarters. I love it. So a couple of thoughts and some questions that come out of this. One, I also want to highlight your use of the word gravity for listeners, because that's something that you commonly refer to. And you use it as an analogy to describe the secular trends. Is another way to think about secular versus cyclical as a difference between climate versus weather? I think that's a really good description, actually, (9/57)
because the secular economic trends are the longer term forces that are very, very, very slow moving. The secular economic trends will not change tomorrow or a year from now, even if you put processes in place to try and change them. So for example, demographics is a secular economic trend. Even if we put in place a policy that was geared around having a lot of babies today, it still wouldn't impact these secular trends for another five, 10, 15 years as that new class of babies came up through their early years and the economy had to divert more investment and more resources. So even though you can put policies in place today, it still takes some time. It's almost like they move at glacial speed. So I think that's a very good analogy is that the long-term trends are just very slow moving and you can make a difference over time, but they're very slow and it takes quite a bit of persistence to change them. Would you also put things like, so you mentioned debt demographics for secular (10/57)
forces, would you also put something like Moore's Law in that bucket as well as, let's say, globalization? So we had decades of increased globalization. Now we're moving into a period where in some ways the world is showing clear trends of de-globalization. Would those qualify secular trends? Yeah, I would consider anything that is a consistent directional pattern over three to five or longer years to me would be a secular trend. The reason that I always describe them as demographics is because I'm focused on economic growth and if I had to boil it down to just two main factors, it would be the debt and the demographics or more specifically, productivity and demographics, debt being the most influential factor on productivity. So I think that there is a larger basket of things that you can put into these secular trends. My focus on demographics is not trying to be overly exclusive. It's just if I had to boil it down, I try and make the process as simple as I can. Those who I would say (11/57)
are the two major forces, but we definitely have a confluence of factors that drive the secular trend. So correct me if I'm wrong here, but when we talk about indicators, what we're really talking about here is cyclical indicators. In that regard, we have what we broadly call leading indicators, which give us information about what's going to happen in the future. We have coincident indicators, which tells us what's happening right now. We have lagging indicators that are like the forensic evidence that we can look at after the fact, after the event has occurred to say, ah, there was for example, a recession between this date and this date. And is it also fair to say that lagging indicators are actually the most accurate indicators? Yes, I think that was a perfect description. And there's a part in an economic process for all the indicators, the leading, the coincident and the lagging. The lagging indicators tend to be lagging one in terms of where they move in the sequence, but they (12/57)
also tend to be lagging in terms of their methodology or the way in which they're reported. So the most reliable economic data tends to be the government data, but it can be lagging because when it's first announced, then it gets revised, then usually it gets revised a second time. And then usually there's an annual benchmark revision. And then sometimes there's a five year benchmark revision. So when we do the forensic evidence looking back over many decades, the government data tends to be far and away the most accurate, but it takes a long time for it to increase in its accuracy once they move from a survey estimation to actually tabulating the information. The leading economic indicators can be much more volatile. They can be much more noisy, but they're reported on a more timely basis and they tend to move earlier in the sequence. So the leading coincident lagging process is one about the economic sequence, but it's also about the way in which economic data is reported as well. So (13/57)
I think that's a great point. All right. So I think now would be the appropriate time for you to explain your framework and walk me through how you try to understand the economy and walk me through that sequence and where we are in that sequence today. Okay. So before I get into the cyclical or the leading indicators, I always start with the secular economic trend because as I mentioned, that's economic gravity. And even though we're mainly concerned about what's going to happen over the next couple of quarters, it's very easy to overlook these secular economic trends. And I think that you do yourself a huge disservice if you don't first analyze the secular trends because you need to understand where the gravity in the economy is. Why is that important? The cyclical economic trends are the fluctuations in growth that happen on top of the secular trend. However, if gravity is pulling you down, you have to approach the data with a bias that the cyclical upturns will be more fleeting or (14/57)
shorter lasting and the cyclical downturns will last longer or will be harder to break. And the evidence of that is that if you go back over the last 30 years, since the early 1990s, the economy has only spent 42% of the time in a cyclical upturn. It's spent 58% of the time in a cyclical downturn. And the way that you can rationalize that is because the secular trends are declining. Debt levels are increasing, population growth is declining, that puts downward pressure on economic growth. Therefore, when we move to the cyclical trends, we have to approach the data with a bias that cyclical upturns will fade faster and will be shorter, cyclical downturns will last longer. Further evidence of that is that going back again to the 90s over the last three decades, cyclical upturns in economic growth have lasted 13 months on average, while cyclical downturns have lasted 18 months on average. So we have to be aware that the downturns are going to be lasting longer than the upturns because of (15/57)
that economic gravity. So once I establish the secular trends, then I move to the cyclical trends trying to understand where the economy is today. So let's now define the cyclical trend today. The cyclical trend is defined by what I call the four corners of the economy. The four corners of the economy would be consumption, income, production, and employment. Every economy has these four corners. Some have more than others, right? So China would have more production and less consumption. The United States would have more consumption and less production. But every economy has all four of those corners and they work in a cycle, right? So if you have more consumption, that means you need more production. If you have more production, you need more employment. If you have more employment, then you would generate more income. If you generate more income, that feeds through again to more consumption. And that will be what we call a virtuous economic cycle. It's cycling upwards. It could also (16/57)
work in reverse though, right? So if you have less income, then you have less consumption, you have less production, then you need fewer employees, and that feeds through again to lower income. So the economy is always cycling upwards or cycling downwards. And the combination of those four corners is what defines the cyclical trend. It's important to look at all four corners of the economy because when you look at something like GDP, for example, or real GDP, it's not entirely comprehensive. It's what we use to define the business cycle broadly. But GDP doesn't take into consideration the income side of the equation. For that, we use GDI or Gross Domestic Income. It doesn't really take into consideration employment. And these are all different corners that really influence the way that the economy is cycling. The way that the economy is cycling. So it's important to look at all four corners and the comprehensive movement in which that these indicators are cycling. So you look at things (17/57)
like non-farm payrolls. You look at things like real personal consumption. You look at things like industrial production or real personal income. And the combination or the blend of those coincident indicators defines the current trend. So if we take where we are today in July of 2020, we have a strong deceleration in the growth rate of real personal income. Obviously inflation is quite high. It's damaging people's real incomes. The growth rate of real income is trending definitively lower. As the stimulus payments wear off, real consumption growth is starting to trend down in a really meaningful way. And that in turn is pulling production growth down. And employment is the last leg to fall. We see jobless claims starting to rise. So employment in turn will follow the other three corners. We're in a very clearly defined cyclical downturn. Now, quick question. Let's take employment since it's the last of the four to turn. At what stage in the economic cycle are we when we begin to see (18/57)
fall offs in employment? When you start to see fall off in employment or like a negative non-farm payrolls number, most likely at that point you're already in a recession. So by the time you see a contraction in these four coincident indicators, at that point you're basically at the start of a recession. When I define the trend, the trend is about the direction of economic growth. So if growth moves from 5% to 2%, that's a cyclical downturn. Even though growth isn't negative, 2% is still positive, that's a directional decline. The momentum in the economy is moving lower. So where we are now is the direction of the economy or the momentum of the economy is strongly to the downside. But we're not technically in a recession yet because employment growth unless it gets massively revised is still running at about 3% to 4% positive. So directionally economic growth is moving down. We're in a cyclical downturn but we're not quite in a recession yet. The reason I'm able to, what I feel is (19/57)
confidently assert that a recession is an extremely high likelihood is because I know that the trend is down but now we have to study the leading indicators because the trend just tells you what's happened last month or what happened as of the most recent economic data. The leading indicators tell you where you're going and if we're moving downwards, if the growth rate is decelerating, you're dangerously close to the zero bound in terms of positive or negative growth and the leading indicators tell you that you're going to keep moving down, then the chances are you're going to slice right through zero and growth will be negative on all four of those corners. So I love this. Give me a second here so I can clarify it. The coincident indicators give us a month to month view of where the economy is. And while they're not telling us where it's going, they can tell us important information about the trend that we've been experiencing month to month. So that is in some sense a way of thinking (20/57)
about what the future is going to hold. It's telling us the momentum. And then you couple that with indicators that are more predictive, the leading indicators, correct? Exactly. So a lot of people talk about leading indicators now and I think that there is a strong tendency with a lot of the chart work that we see to sort of overlay two lines and if one leads the other one, people say that's a leading indicator and it may be, but the process of leading indicators, as I was schooled through my study of Jeffrey Moore, is a little bit more in depth than that. It's the correlation doesn't equal causation, right? Like the price of Bitcoin and avocados, right? In my process, that would be disqualified because we have to see a consistent lead time across history, but it also has to make sense. It has to make logical sense in the economic sequence. So for example, hours worked or weekly hours worked would be a logical leading indicator of employment because a employer would slash somebody's (21/57)
hours before they took a more binding and permanent step of firing or hiring somebody. Another example would be building permits. You need a permit before you start construction. So it would be logical that the trend in new permits would lead something like construction employment or construction spending. So you need to have a logical correlation and then it needs to be proven across history and not just five years or 10 years, the longer, the better, obviously. So once we know the coincident trend or the momentum, we study the leading indicators to say, hey, is that momentum going to continue or are we nearing an inflection point where things are actually going to start, the momentum is going to change. And those inflection points are everything. All the money is really made or lost at these inflection points because the crowd is going one way. Everyone sort of extrapolates what's happening today into the future. Most economic models like what the Fed uses are really based on these (22/57)
linear extrapolations of what happens or what's happening now is going to continue happening in the months ahead. That's why whenever growth is strong, people always confuse a cyclical trend for a new secular trend. Like when Trump was in office, growth accelerated from 0% in 2016 to almost 3% in 2018. Everyone said, this is it. We're going to hit a scape velocity. We're going to hit a 5%. Yeah, we're going to hit a 5%. We're going to hit a scape velocity. But as soon as growth was hitting 3%, you saw the leading indicators start to crest and start to move lower, which gave you strong confirmation that, no, this is not a secular change. This is just a cyclical trend. So the leading indicators, I separate them into two buckets, what we would call longer leading economic indicators and shorter leading economic indicators. And I do that for two reasons. One is because when you study leading indicators, some happen to have longer leads and some happen to have shorter leads. So it's good to (23/57)
break them up into two buckets, which is what I do. It also gives you a secondary confirmation. If you see longer leading indicators inflect, and then you see shorter leading indicators inflect in a logical sequence with historically consistent lead lag times, then you have that much more confidence that, hey, long leading moved, short leading moved, coincident data, or the trend is about to change versus just having one step, you have a confirmation step. So in other words, there's a historical sequence across the entire historical dataset that we have going back. I don't even know. Maybe you can tell us how far back the dataset goes, where we have enough data to look at all of these different indicators. But there's a consistent sequence and the tighter it adheres to that sequence, the more data points that you have fall in line, the more confident you can feel. Exactly. So for example, I got a question the other day on a client call that somebody said, I know that industrial metals (24/57)
like copper are declining really fast right now. But don't you think it could be a one-off because of XYZ factor? And my answer was that it could be a one-off factor, but if I have a basket of eight long leading indicators and all eight or seven out of eight move lower, and then copper or industrial metals would be a shorter leading indicator, and it starts to decline exactly as you would expect with the historical sequence, exactly on schedule in a predictable pattern that gives you a lot more confidence that this is not a one-off, this is actually part of a broader economic cycle or a broader economic sequence. Okay, so where are we now? We know that the current trend is lower and we're dangerously close to the zero bound in terms of positive or negative growth. So any further deceleration will put the economy into a recession. What are the latest growth trends right now? Like where are we? So based on the composite of consumption, production, income and employment, growth is (25/57)
trending at about 1% right now. And it's being held up by employment, which we know is generally the last leg to fall. A lot of people think that two negative quarters of real GDP is a recession. It generally works. It's a good rule of thumb, but it's not the actual definition of a recession. Actual definition is a decline or negative growth across those four indicators that I suggested. We're going to likely have two negative quarters by the time this is over. We may see two negative quarters, but and I'm not trying to justify a way weakness in the economy because we are trending lower, but the first two quarters are pulled significantly lower by inventory components. So these two negative quarters of GDP may very well reflect a recession, but it's not exactly the definition. So when you say they're pulled lower because of inventory components, are you saying because companies stocked up on inventories heading into those two quarters that they didn't buy as much during that period? (26/57)
Exactly. So they didn't buy as much than when the inventory clears those shelves that acts as a drag on economic growth. And was that stocking up on inventory driven by how much of that was the result of the fact that there were supply chains issues, so companies were trying to get ahead of disruptions and they ended up stocking up on inventory? I think huge. I mean, we saw record inventory builds. So I mean, you always have over time, the inventory component of GDP nets to zero. It neither adds nor subtracts from GDP over the long term, but we saw three or four consecutive quarters of inventory adding a whole two points or a whole three points to GDP growth. And now that's unwinding. So GDP growth in this second quarter is subtracting about 2% as of the latest estimate. So if you look at real final sales, which is just GDP excluding the inventory component, it's probably actually going to be slightly positive in the second quarter. But again, that's not to discount the weakness that (27/57)
we're seeing. Growth is trending at about 1% right now. So we're very, very close to that zero bound. Any further deceleration is going to knock us below zero and that will officially be a recession in the NBER's eyes. But recession or no recession is less significant than the direction. Where's the momentum heading? And the momentum is lower and we're about 1% right now. So then we go to our leading indicators. And let's start with the longer leading indicators. The longer leading indicators are generally your monetary aggregates, your credit aggregates, your changes in interest rates and the housing sector. Things that are very interest rates sensitive technically because the Fed, people may have heard the term, when the Fed engages in tightening or easing monetary policy, it has long and variable lags. That sort of gives you your first clue there that those long and variable lags are longer leading indicators. So when we look at the monetary and credit aggregates right now, they're (28/57)
declining at really a historic pace, the fastest since the 1980s because this is, you know, the fastest and most aggressive tightening cycle since the 1980s. So we'll look at things like the monetary base, you can look at other deposit liabilities in the banking system. And what I like to do, a really strong indicator that I use is I take a composite basket of mortgage rates, treasury rates and corporate rates because that sort of captures the entire economy. Everyone is going to feel a change in those interest rates no matter where you sit, whether you're a household, a corporate or the government. So the change in treasury rates, mortgage rates and corporate rates, the rate of change. So are the interest rates higher or lower than 18 months ago, let's say. And we see that the interest rates across that composite basket are about 300 basis points higher than 18 months ago. And that is the most extreme magnitude of change in interest rates since the 1980s. Can I ask you something else (29/57)
there, Eric? Also, I want to mention something for listeners who either heard our episode with Levin and or didn't, which is we discussed the challenges of measuring broad money supply because of the role of shadow banking and the expansion of dollar liquidity that goes far beyond the US banking system. So the focus on interest rates is important in that context because that allows you to measure the price of money versus the supply of money, which is in the form of monetary aggregates. The other thing I just want to also point out and ask you, and then please I want you to continue, I don't want to interrupt this flow, is, I mean, how important is it that the nominal value of the interest rate rise today versus in the early 1980s comes from a much lower level of interest rates? So the impact that it has is much greater because you're starting at such a lower level and that reflects the larger levels of outstanding debt in the economy. Exactly right. So it's the largest change in (30/57)
interest rates in terms of absolute change, 300 basis points in 18 months since the 1980s. But exactly like you just mentioned, in 1980, the last reference point, aggregate debt to GDP was 150%. It's 370% now. So we're trying to push the same interest rate shock onto the economy with 200% more debt as a percentage of GDP. So that's likely to have an even larger effect than the 300 basis point change in the 1980s because there's going to be that much more debt that has to roll into those higher interest rates. When we think about how interest rates affect the economy, a lot of people talk about how there's a lot of fixed rate debt out there and that's certainly true. But the weighted average maturity of this massive debt pile that we have is still around five years with 20% of it rolling every two years. So if interest rates are 300 basis points higher than 18 months ago, that's almost two years ago, there's a significant amount of debt that's going to have to roll into those higher (31/57)
rates. And since that number that I'm quoting is a blend, it's going to impact how the government rolls their debt. They have a significant amount of short-term debt that they roll. It's going to impact the household sector and it's going to impact the corporate sector. We know that the corporate sector rolls debt extremely frequently and that's going to impact their earnings. It's going to impact their margins and that's why it's a leading indicator because they feel the impact and now they have to respond. So what's their response going to be? And we'll get to that as we move through the sequence. And I also want to mention that the important part about this process is that it's a basket approach. As you mentioned, there can be some differences in how monetary aggregates act today versus 20 or 30 years ago and that's why it's important to never make these inflection point determinations off one single indicator. When the whole collective basket is moving together, that also gives you (32/57)
increased confidence that this is a cyclical or an economic event that's causing all of these longer leading indicators to move in the same direction. Whenever I look at the basket of longer leading indicators, I'm looking at the magnitude of the change like we just mentioned, but I'm also looking at the breadth of the change. Is it just one of six indicators that's moving or is it seven out of eight? Seven out of eight is a lot different than two out of eight, let's say. So now we have a significant tightening through monetary aggregates, we have a significant tightening in our credit aggregates, and we have a record rate of change increase in interest rates. The other long leading indicator is the housing sector because, not surprisingly, the housing sector is very sensitive to those changes in credit availability and interest rates. And what do we see going on right now in the housing sector? It's basically absorbing all of the headlines. We see a very significant slowdown in the (33/57)
volume of housing transactions. Now, a lot of people jump in right there and they say, but prices are still going up. If we think about where inflation is in the economic sequence, inflation comes at the end. It's a lagging economic indicator. Inflation often peaks in the middle of a recession. And when we talk about the housing sector, we have to separate volume versus price. Volume leads price. So we're always going to see a significant decline in the volume of the housing sector before we see a decline in prices. When you say the volume of the housing sector, what do you mean? Volume of transactions. So we see new home sales, for example, down 30% from peak. We see existing home sales down 25, 30% from peak. And the reason that's important, it's actually kind of funny. Existing home sales, by that I mean a home that's already been built that someone is living in, the transactions in the existing home sale market only make up about 90% of the total housing volume. But it really (34/57)
contributes almost nothing to economic activity. The economic activity comes from new construction. It's the building, it's the labor, it's the ordering of new supplies. So even though the new home sale market is only about 10% of the volume, it's all of the economic activity. So we see a substantial decline in the volume of new home sales. We're starting to see a decline in building permits. I have a question just there again for my own interest here. The decline in volume is a way of understanding what that means. Does that suggest that buyers are not getting the price they want and so they're pulling there, they're not necessarily transacting at those prices. So there's a period of time that sellers or buyers need to get comfortable with the new pricing dynamics in the market. Is that what that reflects? So it can reflect a lot of different things. It could reflect buyer hesitation because prices have increased too high. So they've sort of hit their threshold of we can't afford (35/57)
prices at these levels. We have to wait for them to come down before we're ready to start transacting again. It could mean something as simple as home building companies are getting worried about the environment. So they're putting less supply on the market. They're building less homes. So there's less available to transact. Whether it's supply or whether it's demand, people always ask me, it doesn't really matter because the impact of the economy is in the aggregate activity. It's in the volume of transactions. If there's less transactions going on, you think about a new home and this is why housing is a longer leading indicator. If a new home gets sold, you have to build it. You need labor to build it. You need to order raw materials to build it. And then once the house is built, somebody moves into it, then what happens? Somebody needs to order new furniture. They need to order new appliances and that comes up as new orders and that is exactly where we move from longer leading (36/57)
indicators to shorter leading indicators. So now the housing sector is either cycling upwards or cycling downwards and that's going to impact how many new orders that customers or companies are placing. And those new orders are generally for durable manufactured goods. It's for home appliances. It's for furniture. It's for all of these things that require a manufacturing process. So the next part of the sequence as you transition from longer leading to shorter leading is you start to see a change in the volume of new orders that is in the same direction as the longer leading indicator. So moving where we are in our sequence today, we're cycling downwards on the current trend. We see a very significant decline in the longer leading indicators, meaning the monetary credit and interest rate aggregates and the housing sector. So then the next place that you would expect this slowdown to show up is in the volume of new orders. And what did we see on the last report, Dmitri? ISM new orders (37/57)
fell to 49.2. That's a contraction in the volume of new orders exactly when you would expect it. So that's not a one-off. That would be, okay, that's moving exactly when we would expect it. What else is a shorter leading indicator? The general sentiment of manufacturers would be a shorter leading indicator because the ones feeling our customers ordering more, are they not ordering more? Are we worried about the future? Are we less worried about the future? So you have manufacturing sentiment. And then you also have your industrial raw commodities because if they have less new orders, they know that they're going to produce less over the next couple of months. So they're going to have less demand for these raw materials to build those durable goods. And what do we see happening right now? Massive declines in copper. And it's not just copper. I look at a whole basket of industrials, which includes rubber, rosin, tallow, wool tops, zinc, everything that generally goes into a manufacturing (38/57)
process. And those prices are falling at a very precipitous rate. See, that's actually great. So just to highlight that, whereas certain types of commodities are traded in futures markets and benefit from an enormous amount of speculative liquidity, something like wool tops don't. Exactly. Exactly. How significant is that looking at those types of indicators and how does all that fit into your model? And then please continue. Like I said, I don't want to interrupt the trend. It's super important. I get that question all the time. They say, well, isn't copper depressed because there's so many speculators? And yes, when we differentiate between these commodities that are traded very actively on futures markets versus commodities that aren't, if we're seeing a discrepancy, that's something to note. But the fact that we're seeing these lesser traded commodities like rosin, rubber, wool tops, they're trending down and copper's trending down, then you have more confidence. Again, this whole (39/57)
process is about building confidence as you move through the sequence. You say, well, if rosin, rubber, tallow, wool tops, all those are going down and copper is going down. Well, it's probably not speculators. It's probably part of this broader sequence where all of these industrial commodities are moving lower. Notice how I didn't say oil though. Oil tends to be a little bit more service sector based. It definitely contributes largely to manufacturing processes, but it's also like airlines, driving, that's more service sector. So when we study this sequence, the fact that oil is still elevated while these industrial commodities are plunging is actually very historically consistent. Oil tends to fall once the recession arrives because the service sector really only starts to contract in a recession. Service sector almost is very non-cyclical. So the fact that we have industrial commodities going down, but oil prices staying elevated, yes, there's a supply component, there's a (40/57)
geopolitical component. But as far as the economic sequence, we've seen oil come down for about 120 to the 90 range. It's come off a little bit, but it's not falling at the same speed as the industrials makes a lot of sense with the economic sequence. So now we've moved from the longer leading to the shorter leading. Now we're seeing declines in new orders, industrial materials. We're also seeing inventories start to bloat at retailers. You're seeing these reports from Walmart, these reports from Target, these reports from major retailers that are saying, hey, look, we have a little bit too much inventory. What does that mean? If you have sales that are starting to come down, but you have too much inventory, that is a leading indicator of future production, because they're going to have to order less in the future. So all of this is happening very timely with the historical consistency. So if we see longer leading indicators moving down, it's transitioned to shorter leading indicators. (41/57)
We have a high degree of confidence that what's going to happen next, those coincident indicators that we defined first are going to take another leg lower. Why is that? Because if Walmart, for example, has too much inventory and the housing sector is slowing, for example, people are going to need to order less of those goods that they have too much inventory of. So they're going to call their manufacturers and they're going to slow their rate of production. And when they slow their rate of production, you're going to see that show up in industrial production, which would be our coincident indicator. If production starts to slow and manufacturers are pumping out less unit volume, they're going to hang on to these employees as long as they can, because it's very difficult to fire and hire people. It's a lot of friction involved with that. But if production keeps slowing, eventually they're going to say, we just don't have enough work. We don't have enough units to pump out. And then (42/57)
employment starts to come down. So you can start to get the picture of how we move from Fed tight ends. It contracts monetary aggregates. It contracts our credit aggregates. It pushes higher interest rates across the economy. That slows the housing sector. And then the housing sector feeds through to our new orders, our manufactured goods, our inventory components from retailers. And then they are forced to slow their rates of production, which causes the output at manufacturers to go down and eventually the employment to go down. We just looked at that from the housing sector. But we can also look at it, and I'll do this a little bit more quickly, from the corporate sector. I just looked at it from the lens of the housing sector and mortgage rates. But let's say that that basket of interest rates that we took includes corporate rates. So a corporation issued debt at 2.5%, 18 months ago. Now they're staring at 5.5% percent rates that they have to roll that debt into. So if they're (43/57)
going to roll debt at 300 basis points, higher interest rates, that's going to massively increase their interest expense. What do we know about the duration of outstanding corporate debt today? How does it compare to the past? And what can we infer about the severity of the recession based on that duration? Great question. And the need to roll it over. Yeah, we know for sure that the average maturity in the corporate sector has lengthened. There's no question that it's lengthened. But that still doesn't mean that zero debt rolls every single year or every two years. Is that a result of corporate borrowing increasingly moving into the bond market? It is. And it's also, they've felt every single time they go to issue, they feel that interest rates are very low. So they try and lock in these rates in the future. But because of this secular trend that we've talked about, because of this gravity, they always find themselves with lower and lower and lower interest rates. That actually makes (44/57)
a lot of sense. That actually makes more sense than what my life is. Exactly. So they have tried to extend their maturity outwards for sure. But a significant portion still does have to roll because there were some companies that issued five years ago or seven years ago, and now that debt's coming due. But you do bring up an important point, which is the magnitude of the change in interest rates is very important in terms of determining the severity of the economic slowdown. But the duration that interest rates stay elevated is also a very important consideration. So if we go through a tightening cycle like 2018, let's say, interest rates kind of went up and they came down very quickly. We had the Powell Pivot in 2018. There wasn't a whole lot of time for lots and lots of corporates or lots and lots of households to roll into that debt. But if the Fed feels that they need to stay on this tightening path longer and more aggressively, and interest rates stay elevated for 18 months, 24 (45/57)
months, 36 months, now there's less and less people that are going to be able to avoid rolling into that higher debt. So magnitude is important, but the duration that interest rates stay elevated is also important. And we're at a point now where we have interest rates that are starting to be up for quite a while. When you have such an indebted economy, when interest rates stay up for six months, a year, 18 months, it starts to really be impactful. So going back to our example of a corporate, they're going to roll their debt into a higher interest rate, let's say 300 basis points. That's going to dramatically increase their interest expense. So this is a longer leading process. Another longer leading indicator would be corporate margins. Why is that? Because if their interest rates are going up, their interest expense is going up, but the momentum in the economy is falling. So their revenues aren't really increasing. If you have flat and declining revenues, but higher interest expense, (46/57)
that's going to compress your margins. It's going to reduce your earnings. So compressed corporate margins would be a long leading indicator. So you see margins falling. And when did margins peak? Q3 of 2021, longer leading indicator. So a corporation is now going to feel that their margins are getting squeezed. And Wall Street punishes you if you have declining gross margins. So what does a company have to do in order to preserve those margins? They have to cut costs somewhere. First, they try and maybe scale back some of their investment, which shows up again as new orders because they're going to invest less and maybe plant and equipment or invest less in the economy, which requires less ordering. So they're going to do all these marginal things to try and preserve their margins. Another thing that they're going to try and do is they may try and raise their prices. They may try and raise their prices, which shows up as inflation, which comes later in the economic sequence. So as the (47/57)
is actually so interesting when you think of it that way. But again, please continue where you are. I don't want to take us on track. No, you nailed it. Their mandate is employment and inflation. Two lagging indicators. So by the time that those indicators move, we're well on the way of going down that sequence. So we're in some cases, we're already in it. We're already in the recession when it comes to employment. So by the time employment declines, the Fed's going to say, okay, now we're in a recession, we have to stop raising interest rates. But if they stop then, you're still going to have this sort of tidal wave of slowing that's going to hit the economy from the rate hike that they just did. And actually, I just want to say something else. Again, for listeners, because this reminds me of a conversation that we had with Muhammad Al-Aryan last year. And of course, Muhammad is not the first, this is like a well-known fact. But one of the concerns about Fed policy is always around (49/57)
how ahead or behind of the curve they are, because the extent to which they are can exacerbate the economic cycle. And you end up getting caught into a situation where you're tightening too late, and then you end up loosening when you should be tightening. And then the Fed ends up in a situation where it's constantly playing catch-up, and you end up having these exacerbated peaks and drops. Exactly. They make booms bigger and they make busts worse. Because if you think about what happened coming out of COVID, the economy was coming out of COVID out of the summer of 2020. All the leading indicators were moving significantly higher in the summer of 2020, certainly by September, October, November of 2020. And then we got into 2021. The economy was absolutely ripping in the early part of 2021, but they didn't see inflation yet. Inflation was going to come because it comes later in the sequence, so they kept easing, and they kept easing, and they kept easing. Then by the time they saw (50/57)
inflation come, the economy was already accelerating for a year and a half. So yeah, their mandate, basically, by design means they're always going to miss it, which is unfortunate in the way that we've structured it. Out of curiosity, why do you think that is? It's not like, I've made this point before, the central banks have the most PhDs, certainly economics PhDs in any institution in the world. Why is it that they're wedded to these indicators? Is it just because of the mandates? Is it just because of the mandates that Congress and the government have provided them, or is there some other reason for it? Yeah, I don't think that the mandates necessarily are the problem. I think that they're good mandates. I would wish that employment wasn't part of their mandate. I wish it was a single mandate, which is just inflation, because we get into a situation like now where their two mandates are in conflict, and they're not going to be able to solve for both at the same time. So then how do (51/57)
you pick? In the description of their mandate, there isn't a preference over one of the other. They're supposed to try and solve for both of the problems, but you wind up in a situation like we are now where it's virtually impossible for them to solve for both variables, and then you get into a conflict of which one to pick. So I don't think it's the mandate. I think that they're correct in their targeting of inflation. I just think that the way in which they go about spotting these trends is flawed. They are using more of these point estimate type models, like the Phillips curve, and things where you put a whole bunch of inputs into a model, and it spits out what the number or what the inflation rate should be. And that gets to our earlier discussion about these cyclical inflection points is every time you get to an inflection point, let's say we go back to our Trump example of the economy was accelerating from 2016 to 2018, when the Fed puts in all of these numbers into their model (52/57)
in 2018, they're all very good numbers, it spits out a very high number. But that is a linear extrapolation of what's happening at the moment when the economy is cyclical, all free markets cycle. So their models aren't designed to pick up these inflection points. They're always basically putting in the inputs that we have today, which are pushing out outputs that are giving you sort of more of the same, we're actually telling you that it's going to continue going in that direction. So when we were in 2018, the economy was slowing hard, we were getting to the end of 2018, markets started to get really chaotic. Before the Fed pivoted actually in November of 18, the Fed ended up cutting rates four to six months later. But at that time in November, the market and the Fed was pricing rate hikes, three or four rate hikes into 2019. Again, you go back to 2008, in February of 2008, and this kind of is ironic, which where we are now, in February of 2008, Bernanke didn't see a recession. He (53/57)
current risk right now that most people feel is inflation, if the Fed continues on this path, which it looks like they're going to six to 12 months in the future, we may bring back the fear of deflation again, because of how hard they're tightening and the impact that that's going to have on the economy. So I actually want to dig into that in the second hour of our conversation, Eric. I'm going to move that part to the premium feed. And when we get to the other side, I want to finish off what we were discussing with respect to the corporate sector, and when we can expect to see earnings downgrades and the impact on corporate earnings as a result of the kind of things that we're describing here, which will eventually lead us to the part of the conversation that I'm most excited about and interested in, which is using these indicators to then make probabilistic assessments about the Fed's reaction function, the impact on the stock market, bonds, gold, etc. and how to use these indicators (55/57)
as part of a broader portfolio strategy. 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 Eric, as well as the episode transcripts and intelligence reports, head over to hiddenforces.io and check out our episode library. You can also become a premium subscriber today. Eric, stick around. We're going to move the second part of our conversation onto the premium feed. 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 full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription (56/57)
available through the Hidden Forces website at hiddenforces.io. 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 HiddenForcesPod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Simon Winchester a History of Precision Engineering and the Making of the Modern World #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
will three days after you've written it will be lining the bottom of a parrot's cage or wrapping up fish and chips or something like that. Whereas a book, at least, there's a possibility of some posterity. Books remain. I mean, yes, you see these big sales of books outside libraries, but most of them are fiction, body-sripping fiction, which has a very short lifespan. But non-fiction books can last for many years. I mean, for instance, I wrote a book about the eruption of the volcano Krakatoa. And I think, I don't know what to sound conceited about this, but that'll probably be the definitive book about Krakatoa for many, many years. Which volcano is that? Where is that? Krakatoa is a big, huge volcano which erupted between Java and Sumatra in 1883, August the 27th. And it was the first event, it was the beginning of the global village because of an interesting fact that they had just completed the submarine cable. The news of Lincoln's assassination in 1865 took 12 days to reach (53/57)
And he belongs in the same hall of anti-heroes that Elizabeth Holmes belongs in now. I listened to another interview of yours and I learned that you studied geology in school, correct? And you had gone to Africa originally to practice as a geologist, or is that you were doing your PhD there? No, I wasn't clever enough to do a PhD. I got a degree that in England is called a Desmond, because it's a play on words of Desmond 2,2. It was a 2,2, meaning second-class degree and a second tier of that class. And armed with a Desmond, you could certainly never go off and do a PhD. So I went off to be a geologist in Africa in Uganda. And well, an extraordinary story, far too long to tell here, but I was not very good at my job. I mean, I was supposed to be looking for copper in the foothills of the Ruinsori Mountains, which are beautiful on the Congo-Uganda border. And I didn't find any copper and I was there living in a tent in a little village called Kyan Jojo. And I was obsessed with (41/57)
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. 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 remember, if you listen to the show on your Apple podcast app, you can give us a review. This review helps more people find the show and join our amazing community. And with that, please enjoy this week's episode. Few things are as responsible for the making of the modern world as precision engineering. And yet, it remains invisible. We live customizable lives, expecting the universe to conform to our expectations. And yet, beneath this manifold exterior exists a world of exactness so precise that it passes largely unnoticed. It is this world of increasing perfection, uniformity, and repetition that we speak about today in a conversation on the (1/57)
genius brought to bear by humanity in reshaping the world, as well as an homage on the craftsmanship and personal touch that gives our world its meaning. Our endless striving for that which is flawless is most human. Yet try as we might, we cannot rid the world of all its imperfections. Humanity, after all, is by its very nature hopelessly, beautifully, fatally flawed. To err is human, said Alexander Pope. Perfection is divine. This week on Hidden Forces, Simon Winchester, Precision, and the Making of the Modern World. So they're bound to be listeners to this show who have read your books. I'm sure of it, obviously. Absolutely. And like I said, confession, I've only read the perfectionists, but you've written the Professor and the Mad Men. Just here, let me look here on Amazon. This has got 900 reviews and you have basically five stars, which is, I've seen a lot of books and I know that's right up there. But you have such a variety of work. The men who, what is it? The men who united (2/57)
the states. The men who united the states. The map that changed the world. That looks amazing. I feel like I would love that. I heard an interview you did talking about your book on the Pacific. I just thought, amazing. You basically, what it seems to me is looking at your work, let's say, if I were looking for books, it seems that you take something that doesn't necessarily seem like a topic and you turn it into one. And that's what I felt about the perfectionists. When I first saw it, I said, wow, that's a book I want to read, like a history of precision engineering. But I never would have imagined to do something like that. How did the idea for this book come together? It came from a reader. The only book thus far where a complete stranger sent me an email out of the blue, a chap called Colin Povey, who lived in Florida, a place called Clearwater. And he said, I've read all your books, which is nice, and I've liked them, which is even nicer. And I've often wondered whether someone, (3/57)
and I think it should be you, should write a history of precision, which is integral to all of our lives. And yet it's sort of invisible. It's like the air we breathe or the language we speak. So we don't think about it rather like you said. And I put it to my editor, Harper Collins, my publishers, and they said, yes, it sounds a good idea, but we can't quite see the sort of narrative thrust, the through line, as they call it. In other words, you could write it as a series of sort of episodic essays, but that wouldn't be very satisfactory. So does precision have a beginning? Does it have a middle? Does it have a conclusion? And in doing some research, I was able to find out. And I think without cheating as well, that it does have a specific... When you say cheating, what do you mean? Well, I mean, you could fudge these things. In theory, you could always invent a through line. But I came up with a through line, which was real. And what I did was, I looked at the very first thing, which (4/57)
one can say legitimately was precise. And that was a cylinder made in 1776 on May the 4th, which people remind me now, of course, is Star Wars Day. May the 4th be with you. Not my joke, theirs. And that was made for James Watt by an extraordinary eccentric Englishman called John Wilkinson. And he made it with an exactness, a tolerance, if you like, between the outer wall of the piston, what I wanted to put in it, and the inner wall of the cylinder that he had invented, of the thickness of an English shilling, which in those days, 1776, was one-tenth of an inch. And with that number, 0.1, I thought there's the beginning of a through line, because that would be chapter one. And chapter two would be 001, and chapter three, 00001. So each chapter would be more precise, if you like. It would be more exacting tolerances up to the very present day, when they're, what I believe, are the limits of precision engineering. Things are being machined to one to the minus 28 zeros, and then a one. So (5/57)
very, very tiny little tolerances. So that gave me the narrative thrust of the book, and the editors seemed to think it was a reasonable idea. And mercifully, the reviewers have too, so everyone wins. So to clarify for our audience, we're talking about tolerances. What do you mean? Well, if you like, the easiest way is how well it fits. Our shoe has got a tolerance, if I don't know about your feet, but let's say, an eighth of an inch. Tolerance of error. Tolerance of the amount of allowable error between the size of your foot and the size of your shoe. Obviously, with a shoe, it's a great deal. But with a tiny piece of, let's say, a motor car, the tolerances are tiny. I mean, they would be 1,000th of an inch. With a jet engine, they would be 1,000th of a millimeter. So tolerance is a crucial and critical aspect of precision engineering. And I should, perhaps, at this point, tell your listeners the difference between precision and accuracy, which people often get confused with. So it's (6/57)
boring, but let's get the boring part out of the way. No, it's actually not. I didn't know this either, and I found it very educational. Well, in the English language, there are no synonyms, and precision and accuracy are not synonyms. Accuracy, the best way of sort of realizing it, is to think of a dartboard. Your intention when you throw arrows or fire bullets at a target is to hit the center. And if you do that, if you have achieved your intention, then that is accuracy. If however you fire bullets or arrows or whatever at the target, and they all, perhaps, don't hit the center, but they all hit the same place, let's say, 10 o'clock, and you do it the same time, time, time, time, time, time, time, time, you've achieved great precision. If you can achieve precision and accuracy, then you're absolutely off to the races. But there is a difference, and the crucial sort of to take this a little way forward aspect of doing the same thing time, time, time, time, time, time, is the making (7/57)
of pieces of whatever, whether it's a carburetor or a piece for a refrigerator or a television or an iPhone, that are exactly the same, are crucially, and the word is interchangeable, the making of interchangeable parts, such that if a part fails, you just get another one out of the box and it fits perfectly. So those things, tolerance, interchangeable parts, accuracy and precision, lie at the center of this book. The book is about a great deal more than that, but those four concepts are important to know about. Is it fair to say the way I think about it also is that in order to achieve precision, you need to have ... I mean, it's very much something where you've got tools that allow you to be precise. The accuracy is more a human methodological approach. It's about, first of all, you could have very precise tools, but be highly inaccurate, because you don't have the right theory and how to approach it, say ... Well, I mean, a good example is maybe this will be later on in the (8/57)
discussion, but I'm in the making of the Hubble telescope. Right, exactly. So it was the mirror when it was ground, was ground very precisely, but it was inaccurate, because it was one-fiftieth of the thickness of a human hair flatter than it should have been. In other words, your intention was to make it a certain dimension, and what actually came out was incredibly precise, but it was wrong. So it was precisely inaccurate. What was it, the Mars rover in 98? What year was it, or 2001? There was a piece of equipment in outer space that was sent by NASA that cost hundreds of millions of dollars or billions of dollars, and they got one digit off. They rounded in the wrong air, and I think it was because they were translating from the metric system to ... Well, the classic example of that on Earth is a Canada flight that filled up with kerosene flying from ... I think it actually was an American, rather, Canadian plane, flying from let us say Chicago to Winnipeg, and it loaded the fuel in (9/57)
gallons, whereas what was required was ... Was liters, and they overfilled the plane. Well, the other way around, they put in liters. I think it was there for flying from Canada to the United States. He said, I want 10,000 gallons, and they put in 10,000 liters, and he ran out of fuel. He ran out of fuel. Oh, my God. And he had to make an emergency landing somewhere in South Dakota or somewhere you don't want to be. That's wild. I have a question for you before we proceed along with the substance of the book, and that has to do with how you write something like this. At first, when I began to read the book, I didn't understand why you put the precision numbers there. I mean, I sort of understood it as I started reading along. The structure of the book came together for me as I started to read it. You created this structure within which that was relevant to the material. I wonder, do you do that with your other books, and how did you have that thought? Well, I think the three components (10/57)
to write a successful nonfiction book. First of all, you've got to have a good idea. So there's no point in writing about your grandmother who collects moths or something. No one's going to be very... How do you judge a good idea? Well, I suppose that comes to... That's the talent. That's something. That's the mystery. And you might think that the second component is good writing. I mean, good writing is important, but I think it's not the most... Not the second most important thing. First important thing is the structure of the book. You can write lyrically about an incredible idea, but if you get the structure wrong or inappropriate or clumsy, you'll lose the reader. And that's what you don't want to do. You want a sort of on, on, on, you know, the reader is compelled to say, what next? And you, I think... I mean, maybe I'm flattering myself, but because you know that the next chapter is going to be about things even more accurate than the one you've just read, you think, well, I'd (11/57)
better, you know, before I go to sleep tonight, I'd better look at chapter five. So with, for instance, a book like... I did books on the Atlantic and the Pacific. And in the Atlantic, you know, gigantic subject, well, how do you corral all this information into one coherent structure? And what I decided to do was to do it sort of chronologically, but based it on the seven ages of man from Shakespeare, from as you like it. And if you remember from school, you know, it was the infant and then the schoolboy and then the soldier and then the lover and then the judge and the old man and the return to childhood. And it seemed to me that you could look at the ocean from its origins, its childhood. The school child is us getting to know about the ocean. In other words, educating ourselves about the ocean. The soldier would be about all the wars fought across the ocean, you know, everything from Trafalgar to the Vikings to modern warfare. And so it would go on. And similarly with the men who (12/57)
united the States, I decided, and you know, it obviously has to be in a discussion with your editor, I decided I'd do America looking at it as it were, not necessarily through foreign eyes, although I'm English, so they're sort of foreign, although I'm American now. But through the structure given to me by the Chinese philosophical elements of earth, air, water, fire and metal. And you could, it worked out very neatly because you could begin by looking at America in context of earth, geology, mountains, plains, all the rest of it. And then ending up in metal, which would be things like telegraph wires and the computer age and that sort of thing. And so getting the structure. The book was about all the people who over the centuries brought the country closer together. Yes, it was the physical uniting of the States. This is what I mean. Your books are so, what a creative idea. What a creative way to think about things. Not many people do that. And that's a common theme throughout all (13/57)
your books, huh? I try to make it that moment. It's obviously not quite when I wrote a book about the Yangtze River. And that simple travelogue, except that the structure there was that I realized, which I used to live in China, that going upstream from Shanghai towards Tibet, where it rises 4,000 miles away, you're actually going back in Chinese time because Shanghai is an ultra modern city. You get to Nanjing. That's famous or infamous in the 30s and 40s. Wuhan, that's famous in 1911, the time of the Chinese Revolution. And then you go up into Western China. It becomes really old fashioned, full of old temples. And there's a lot of Buddhism there, a lot of Taoism. And so the structure of the book is not simply a travelogue, but it's looking at the river as a vehicle for exploring Chinese history. That's interesting. You say as you go up, you go back. Exactly. There's something similar that I experienced while reading your book, which is that as I went into further detail, as the (14/57)
chapters moved from more and more precise towards more and more precise, I found that I was moving further and further away. And it felt like there was some level of conscious influence on your part as well, moving further away from what made sense. In a sense, the book is both story about precision, but it's also an homage to imprecision. I'm so glad you got that. What I did not want the book to be was a sort of a pion to precision, saying precision is good in all of its manifestations. I wanted to say particularly, and you spotted it so well, thank you, that as you get more and more precise, you want to say, wait a minute, is this good for us? And aren't we forgetting things that we were once very good at, like craftsmanship and working with wood and working with our hands and doing things which are imprecise and which nonetheless remind us of our soul, because we were imprecisely made and yet we're beautiful. I'm not, but some people are very beautiful. There's no straight lines in (15/57)
landscape, and yet landscape is very beautiful. Whereas precision is all based with perfect spheres, perfect straight lines, perfect flatness, perfect fit, is perfection in the end a bit tedious and robbing us of our humanity. So I didn't want to make that. I didn't want this book to be a scold. I didn't want this to be shrill. But I wanted particularly in the later stages, when you're looking at really, really precise devices, I wanted to say, is this what we really want? You know what came to me now? Your wife is Japanese, correct? Yes. What came to me now when you were speaking, have you seen the man in the high tower? Yes, I have seen the man in the high tower. So I'm sort of reminded when you're speaking that the world of sort of maximum precision is the... The western side. Well, the Nazi, this future fictitious Nazi regime and that the imprecise is the Japanese. It's the Japanese one. And you would in a funny sort of way, you would think it might be the reverse. But no, the (16/57)
Japanese revere, and I try and make this point in the later chapters of the book, to this day, although they're known for, you know, Nikon and Canon and all these highly precise manufacturing companies, they also, the government awards the title of living national treasure to usually rather elderly people who have spent their lives devoted to craftsmanship, making things of woodwork and lack aware and flower arranging and things which are elementally human and have nothing to do with engineering. And I think that's wonderful. It's also wonderful that... And I do remember that from the book. And I think one of the things that we lack in society is a place for the wise. The older people that have come before who have something to share. And in many cases, especially in these busy cities, they become a burden as opposed to anything else. And that's the case in Japan as well. They all have become a burden of society. It's so interesting you'd say that. I've often thought, but I don't think (17/57)
I'm clever enough to do it, that I should do a book wandering around the world interviewing elders in societies that have... Oh, wow, that's amazing. ...and revere elders. And a woman I met in Hawaii, who is very much inclined to talk to Hawaiian elders, said that if she ever did such a book, or if I ever do such a book, the title is obvious. It would be called The Original Instructions, because these people sort of have the wisdom to know what the world really should be all about. I think it would be too difficult a book to do. And you might find you were going back to what we said earlier about you can sort of fudge things. I think you might end up being tempted to almost put words in people's mouths, because you would be talking to a lot of shamans in Indonesia and elderly people in the Andaman Islands and things. And you wouldn't quite understand it, you wouldn't quite get it, and there would be a temptation to say, make him say something that makes my point. It's so interesting (18/57)
that you make that point. Yes, that's a good point. Something else that came to me while you were talking, and it goes back to this distinction between precision and accuracy. In some sense, it could be that as our lives become more precise, they become less accurate, that they are less aligned with our intentions, with the type of life that we want to live, that we may... We have forgotten and overlooked. Yeah, I mean, it's a... We don't have to know how we want to live anymore. Yes. We're too sort of subsumed in the world of buying new iPhones and televisions and things. There's less intention. There's less intention. There's a sort of Socratic argument to be made about... There's an argument to be made of letting life take you along a certain path, rather than necessarily demanding of it things that you think you ought to want, but perhaps deep down you don't. That was something else that I thought about when I was reading your book, which was... And I wrote it down somewhere here. (19/57)
I had a few things, a precision, efficiency, optimization, and order, this need to order. And I think that the common thread for me was the human's mind desire to bend the world to its will. And I think that sort of would become so expert at that. And living, as you say, in a world where there is a certain level of flow, we surrender to life in a sense is difficult. And I think it's more difficult than it used to be because we've gotten so good at putting order around the world, the way we want things to be. Well, I think that's why I live, or try to live the way I do. I mean, far from living a blameless life, but I live a deliberately rural life that I've... Yes, I've got a small apartment here in New York, so I can come down and do things like talk to you. I live on a very remote farm in a very remote village in Western Massachusetts. It's totally non-fashionable. And I have chickens and bees and all that sort of thing. And I love old-fashioned things like stamp collecting. I'm a (20/57)
real nerd, I'm afraid. Good, then you're... And I think I mentioned in the book my Sunday morning ritual. And this is being recorded on a Thursday, I think, isn't it? Yes. I have eight clocks in my house, and I've got a barograph that I've been religiously keeping a record, clockwork record of the rises and falls of atmospheric pressure in the village since 2001, I think. And I wind them all up on Sunday morning and set them correctly. So I love the ritual. It takes about an hour, and the clocks are different designs. Some of them chime and some of them don't. But by eight o'clock, by breakfast time on Sunday morning, all of them are, as they say, in rate. And they're still in rate on Monday, but by Tuesday they're starting to fall out of rate. And by Wednesday and Thursday it's a complete shambles. And then on Sunday I have to move the hands forward or backwards. But it reminded me of a lovely line, which I quote, I think, two or three times in the book, in a novel which I've always (21/57)
liked, a detective story by a woman called Dorothea Ell Sayers. It's called Gordy Night, and it's set in Oxford. And she talks about walking through Oxford late on a summer's night and listening to the college clocks chiming midnight, as she put it, chiming midnight in friendly disagreement. And I love that. Now, it's a beautiful quote. I remember that from your book. There's also another great quote of yours in the book, which I want to say to our audience because it sort of puts a bow in the sense on what we were just discussing, where it speaks to what we were just discussing. Is such a wish for perfection truly essential to modern health and happiness a necessary component of our very being? I thought that was a great quote. I think it's a question which increasingly we need to ask for philosophical reasons, for sort of spiritual reasons, if that doesn't sound too pretentious to say so. But also because it seems that we're demanding maybe too much of our devices, both our (22/57)
mechanical devices and our electronic devices, that we're pushing our abilities to machine things to the edge, I mean, and dangerously so. And I give an example of a jet engine, a Trent 900 Rolls-Royce Trent. There were four of them powering a Qantas A380, a big double-decker, fully laden jet going from Singapore to Sydney in 2010. And they were at 7,000 feet and the engines were spooled up to full power, heading obviously for a 35,000-feet cruising altitude, when suddenly the number two engine that won closest to the Fuse Lodge on the port side, left-hand side of the aircraft, exploded. Well, it ended happily, immersively, except the ruined engine, $50 million worth. But when they investigated, they found that the culprit was a tiny titanium pipe about the size of a drinking straw, which had been miss-machined by a fellow in Hucknell in Northern England and passed by the inspectors. And the wall of the tube was a fraction of a millimeter too thin. And it ruptured and spewed hot oil (23/57)
onto the titanium. Rotocort fire, all sorts of mayhem resulted. And one wonders whether our ability to machine things down to that level of precision is taxing our mechanical abilities. And whether we've reached, we should say, OK, our jet engines are powerful enough, they're fast enough. Let's just, until we never find new materials or something like that, let's just not push things. And oddly enough, since the book was written, I guess I finished it last December, this problem has really gathered momentum. And at the moment, as we speak, there is something like 110 jet aircraft waiting for engines in Toulouse, in France, in Boeing factories in Washington State and down in South Carolina, because no engines can be made that are good enough and free of these kind of mechanical faults because the technology of building these engines is becoming so difficult. So in a funny sort of world, the way the physical world is telling us, maybe you've gone far enough, let's pause for a moment. (24/57)
Interesting. And that actually, if I remember correctly, that's the middle of the book, that chapter, right? It's approximately the middle. And then that's where you, sort of as a reader, you say, wow, you know, I've never put that much thought into what goes into these engines on which I relied to fly from here to there. And then we get to the satellite and we get to the microprocessor and the transistors. What was that research like for you? I mean, the last chapter is, I can't even remember the number off the top of my head. It was, I mean, I couldn't even say it out, the tolerance level. I have it here for the microprocessor. What did you learn about, I guess what I'm thinking is, we've experienced this exponential rate of change in society and we attribute it to Moore's law and to the microprocessor. But what the book also does is it shows that this is a trend that started before that really, right? Because there is an exponential trend that occurs in terms of our level of precise (25/57)
engineering. There are certain years when both mechanical and electronic, but it is now getting, as I've hoped, I've sort of tried to explain in the mechanical world, starting to get out of hand. And in the electronic world, it's becoming near absurd, the levels we're talking about. I mean, Moore's law, yes, the ever, the doubling every couple of years, it seems to be going on and within the microprocessor community, they insist that it'll continue going on. But the reality is that there are, you know, my iPhone 8 here has a chip in it, the A11 chip, which is an Apple proprietary chip made in Taiwan, has 4.3 billion transistors in it, in something about as big as the nail on my pinky finger. I think the most remarkable statistic that I learned and Intel confirm it, that there are now more transistors in the world. And bearing in mind, the transistor was only invented in 1948 and the first transistor was about the size of my fist. They're now so small that there are more transistors (26/57)
operating in the world today than there are leaves on all the trees in all the world. Now to get here to the studio today, I was driving down the Massachusetts turnpike and it's just wall-to-wall trees on either side of you. And you think there must be unimaginable numbers of leaves, so that statistic must be wrong. But it is right. They're making 13 trillion transistors a day. The numbers are such that if you know you're Heisenberg and you probably know it far better than I do, but you're operating now down at levels which are subatomic. And so things start behaving peculiarly. I mean, it's all quantum, it's quantum mechanics basically, which as Richard Feynman famously said, no one really understands. And how do materials, how does electric current, how does it all behave at that level? Are we possibly reaching a limit in the world of electronic precision? The engineers say, no, no, no, no, no, within this quantum computing there's optical computing. We can get faster, we can get (27/57)
cleverer. One wonders. And of course then that leads on to the, in my view, it's out of the realm of this book and I didn't write about it at all, but artificial intelligence and robotics. And then combining those two things with ever-increasing levels of precision and ever-fine tolerances. And the world starts to descend not necessarily into nightmare, but into a world which seems potentially dystopian. Was that near your mind while you were writing this book? It wasn't at all, but I do have this very clever Japanese wife who kept saying to me, reminding me that the Japanese have it in perspective. In other words, as I mentioned earlier, have a love for the imprecise. They worship bamboo in just the same way that they worship titanium. Both are to be revered. But she would say to me increasingly, as I would come back from my study and say, I've made this extraordinary discovery about GPS or about optical glassware or the LIGO observatories, she would say, well, yes, just hold on a (28/57)
minute. I mean, are there limits? Are we going too far? Are we crazily worshipping precision? Are we fetishizing precision? She's kept me on the straight and narrow and saying, to write this book properly, you need to consider and remind people of the joys of the imprecise as well. One of those is the Rolls Royce. That's what's so interesting. Another point I wouldn't have thought it. If you had asked me, I would have said this is a very precise machine. But in fact, in the contemporary analog would have been Henry Ford and the Ford Motor Company. You draw that parallel. Can you tell us a little bit about what you write in the book with respect to the Rolls Royce, the process that went into and I guess no longer does. I assume they no longer make them by hand. No, they don't. And what I do quite deliberately is to compare two iconic motor cars which were built almost exactly the same period of time from 1908 to 1927. And on the one hand is the Rolls Royce Silver Ghost, which is (29/57)
reckoned to be the sort of ... What a beautiful car. ... Stunning. I had no idea what that car was until I read your book. It was just a wonderful machine. It's so beautiful. And nearly all of them that were made, 8,000 were made, nearly all still exist and are running today, which is extraordinary. Incredible. 120 years later, 115 years later. So you look at that, which was a machine made by hand, lovingly made by old ... Lovingly made. Literally lovingly. I remember the first time I have a sort of professional relationship with Rolls Royce, which came about ... You have to get into this too. This is great. It's great for you to tell our audience whether now or later your history as a writer in LA with the LA gangs and your use of the Rolls Royce. Oh, yes. Well, this is probably best to dispose of that now. Basically, what happened, I was a reporter for the London Sunday Times and back in the mid-80s when editors, commissioning editors spent money like drunken sailors. They came to me (30/57)
one day and said, Winchester, we'd like you to write a series of articles about Europe because the English don't like Europe. I don't know anything about it. I didn't want to know even less. But we think we have a responsibility to tell the English what Europe's all about. Will you please get a photographer and go on six journeys around Europe, any way you like and by any form of transportation, make each one different and write a 5,000-word essay on each of these journeys. And the first thing I did, I got hold of a yacht and sailed from Stockholm to Helsinki. Then I got to the photographer and my BMW motorbikes in Munich and rode them to Turin. That must have been a lot of fun. It was tremendous fun. Patrick is still an agent of the goggles. By bad of full face helmets. I didn't know goggles. My lips going crazy. And then I got two horses and we rode them through the Black Forest of Southwest Germany. Wow. Then we walked, or at least I walked, Patrick took the car. I walked from Cadiz (31/57)
to Gibraltar around the southwestern rim of Spain. Then I rode on the train from Victoria Station in London to the Victoria Hotel in Briege in Switzerland on the Italian border. And then we went to a club I belonged to in London to sort of see what we had got in the bag as it were and then discussed the journey that was going to be the lead story, which was a motor car journey from the westernmost point of Europe, which we defined as the cliffs at the edge of Finnisterre in western France. Because this was the Soviet Union time. The easternmost point in Europe would be the city of Astrakhan, which is where the vulgar meets the Caspian Sea. So we had lunch and we obviously dined rather well because at the end Patrick said, do we have to take your not an old Volvo? And I said, no, I tell you what, why don't we see if we can get hold of a Rolls Royce? I can't believe you get that pay to do this. This is remarkable. Really, I mean, you would have got a kind of an assignment today. So I (32/57)
rang up Rolls Royce PR people and they said, call you back in half an hour and half an hour later they did, true to their word. And so we have a silver spirit in ocean blue and it's on the coming off the production line tomorrow. It's a cancelled order. And if you'd like to come up to crew, we'll show you around the factory and you can take the car for three months. So I went up to the factory and talking about the loving assembly of these cars. There was a man there that showed me a crankshaft, beautifully forged piece of steel, perfectly, perfectly well polished by hand with chamois leathers. And he had made it such that no one side of it was even a fraction of a gram heavier than any other. So if you put it between two bearings and started it spinning, it theoretically would never stop. Well, obviously friction would do for it in the end, but no one side was heavier than another. So it wouldn't have a tendency to slow down. And so I've always remembered that. And anyway, I picked up (33/57)
the Rolls-Royce and the only embarrassing thing was the registration number, which was RRM1 for Rolls-Royce Motors 1. But the parking meter people outside the Sunday Times office thought it was Rupert Murdoch's car, so they never gave it a ticket. And I lived in a little village in Oxfordshire and whenever I drove it home, all the villagers would gather outside the gates because they thought that Roger Moore had come to stay. Well, this was what year again? 84. And they were beautiful cars then. I don't like them now. No, I don't like them at all. They're nothing to do with whether or not. But those were beautiful. They were still beautiful. The Silver Spirit was a lovely car. But the Silver Ghost, I mean, the upshot of that story was they were so pleased with the publicity. They kept giving me Rolls-Royce's or lending. Took them back in the end. But so what I decided to do in this chapter was to compare these two cars, which sort of represented the way in which the use of precision in (34/57)
the automobile industry had diverged because the Rolls-Royce, the Silver Ghost, 1908 to 1927, was all made by hand. And so if a piece didn't fit, the man who was making it by hand would simply file it down until it did fit. Whereas Henry Ford, the car that I chose that was made from 1908 to 1927 was, of course, the Model T. And instead of there being 8,000, that was the number of Rolls-Royce's, 16 million Model T's were made on assembly lines. And if the pieces which were meant to be, and this harks back to the very beginning of our conversation, were meant to be interchangeable all exactly the same time, after time, after time, after time, if one piece wasn't, then it wouldn't fit in whatever, you know, the carburetor or the brake lining or the transmission or steering gear. And the production line would stop and investigators would fan out trying to find what was the offending part, replace it, all the workers would stand around smoking and being bored. It would cost a lot of money. (35/57)
And so precision turns out to have been much more important for the production, the mass production of inexpensive, popular motor cars than for the hand-making of ultra-luxurious cars like Rolls-Royce's. And the interesting thing is that during those years from 08 to 27, the price of a Rolls-Royce went up dramatically. But during those same years, the price of a Model T went down from $809 in 1908 to 217 in 1927. So everything that Ford wanted when Ford first came up with the idea of I want to make motor cars, his whole ethos, unlike Henry Royce, who said, I want to make the best car in the world. Henry Ford said, we live in a beautiful country. I want every American to be able to get on the road and see it. This is a car for the common person. Well, the common people required more precision than did the aristocracy and the rich. What was the name of the Frenchman who did the same thing for muskets? Yes, he was called Blanc. And he was an interesting story, really. I mean, this is in (36/57)
the years immediately after John Wilkinson had made his cylinders and after a man called Joseph Brammer had made locks and after a man called Henry Maudsley had been making what were called pulley blocks for the Royal Navy, which were the first attempts to mass produce very precise things. Over in Paris, this man, Honoré Blanc, said, well, a piece of very well used, critically important engineering does not take advantage of these methods, which Wilkinson and Maudsley and Brammer had pioneered. And that is in the making of muskets of guns, specifically flint locks. And a flint lock has 10 parts beginning with the trigger and then the thing that actually strikes the spark on the flint. And there's a spring and there's something called a frisen pan. And if you were fighting in the heat of battle, let's say in 1814, let's say 1800, and your trigger broke, then your rifle, your gun was as good as useless, because you'd have to take it back to the Armourer and have a completely new gun (37/57)
made. But Honoré Blanc said, why don't we make all the parts of the flint lock mechanism identical? So that if you break your trigger, you simply go to a box of triggers and get another trigger and slip it in its place. And so he did this using jigs and things made sure that every part was exactly the same time after time after time. And I mean, I know I'm sounding rather boring saying this, but this is crucial. And he laid on a demonstration in a basement of a castle, which still exists in Paris. And he invited all the great and the good to come and see how you could have a box of 50 triggers and 50 springs and 50 frissons and 50, all the various bits. And you could take any pieces and assemble them together. And lo and behold, you've got the makings of a gun. And one of the people who this was demonstrated to was the American minister to France. And that was Thomas Jefferson and Jefferson. And I've always, I mean, hugely admired Jefferson anyway. But this was an indication of his (38/57)
prescience and his intelligence. He realized this was something that should be told to the gun makers of America. And so he wrote a letter by hand, obviously, and had it transported across the Atlantic to the Secretary of War in Washington saying, we have two armories in America, one in Springfield in Massachusetts and one in Harpers Ferry in Virginia. Tell them that they must start making these components for our guns interchangeably. And so the War Department took a long time because of bureaucracy, but they got the message and they held a competition and they said, who wants to give us a demonstration of the making of flintlocked muskets interchangeable parts? And a man stuck up his hand and that was Eli Whitney. And Eli Whitney was famous because he invented the cotton gin, but it never patented it and so was relatively poor. He needed the money and so he knew if he successfully engineered this demonstration, he would get the contract to make 8,000 guns for the US Army, but he (39/57)
cheated. So he laid on a demonstration. It would be too boring to give you the details of what he did, but he essentially hoodwinked all the people that came to his demonstration. By the way, having read that, he sounds like a modern-day Silicon Valley entrepreneur, sort of pitching investors. Well, I mean, he's seen equivalent of Elizabeth Holmes at Theron House. Exactly. Yeah, exactly. That's a great point. And he hoodwinked them and they didn't know what they were seeing. Much as the people who sent for the nice Wall Street Journal reporter who read the book, they said, okay, Mr. Whitney, you've made a demonstration which certainly is convinced to all of us. So here's your contract for 8,000 guns. And he made them and they were five years late. None of them worked properly. And so to the engineering community, and this was a news to me, because I thought in common with nearly all American schoolchildren, that Eli Whitney was a great hero. He's not. He is a charlatan. He's a villain. (40/57)
mountaineering. And I would go every two or three weeks to a British council library in a place called Fort Portal about 30 miles away and get any books I could about climbing. One day I got a book called Coronation Everest by a man called James Morris. And I read it in one go by the campfire late that night and early into the morning. James Morris had been the London Times correspondent on the expedition to Mount Everest that got to the summit in 1953, 31st of May, 1953. And he had never climbed before in his life, but he got up to 26,000 feet. And using an elaborate system of codes, he got the news of the success of the expedition back to London to be published in his newspaper, The London Times, on the morning of the Queen's coronation. I mean, I remember that as a little boy, the Queen, who's still on the throne today. This was her big day. And to have as an additional piece of news the fact that a British expedition had got to the summit of the world's highest mountain just sort (42/57)
of added cream and jam to the wonderful cake the coronation was going to be. So I thought, my God, this is an amazing story of James's. I wasn't any good at traveling around the world with a hammer and bottle of sulphuric acid and a magnifying glass. But maybe all I had to do was to travel around the world with a pencil and a notebook. And that would be an agreeable way to spend a life. So I wrote to James Morris, who I'd never heard of. And I said, dear Mr. Morris, I've just read your book. I'm a 21 year old geologist living in East Africa. And my basic question is, can I be you? And he wrote back very kindly. And he said, if you're serious, then quite honest to being a writer, you'll never get very rich, but you'll have an extraordinarily valuable, worthwhile and amusing and fun life. So my advice to you is on the day you receive this letter, not next week, not next month, but the day you receive it, give up your job in Africa, come back to England, get a job on a small local (43/57)
newspaper and write to me again. Well, to cut a very long story short, I did indeed leave Africa. Got a job in the far north of England as a reporter on a daily newspaper. And he was amazed and said things like, never lose your sense of wonder, never bothered to learn short. He was amazed that you had done it. You had actually done it. Taken his advice. He was, you've done that, my God, you know. I feel sort of in Locco parentis now. So never lose your sense of wonder. Don't become cynical and jaded. Don't bother to learn shorthand. Everyone will tell you you must, but it's a waste of time. And then this was the kicker, really. Every month or so, send me the clippings of the stories you've written for your paper. And down to me, and he lived in a village in North Wales. And I will annotate them and send them back to you. And with any luck, turn you into a halfway decent writer. And he did that. He did for starting in 1967. And we wrote to each other once a month until 1974. Wow. When (44/57)
we met for the first time. And Watergate was finished. I had reported on Nixon leaving the White House. And I hadn't reported on Ford pardoning him. Because on that particular day, the 8th of September, 1974, I was covering evil, conneval, attempting to jump over the Snake River Canyon in Idaho. Big mistake. But anyway, then Washington went quiet. So I decided to take a holiday and I was still a climber. So I went to North Wales with an Australian or rather South African girlfriend of mine. And on the way up to North Wales, she said, doesn't your friend James Morris live here? It was everyone knew that James had created the monster that I turned into. And I said, yes. And she said, are you going to see him? And I said, I've never spoken to him. The relationship has entirely been by letter. She said, this is ridiculous. Were you nervous to meet him? I was. I was terrified. And Jackie, her name was Jackie Leishman, picked up that when we got to the little hotel we were staying in, picked (45/57)
up the phone and found his number and dialed his number and put the receiver to my ear. And he said, hello. And I said, hello. This is Simon Winchester. And this person said, well, this is James, my God. I mean, I read you every morning from Washington. You're, I created you. You're my protege. Are you calling from America? And I said, no, I'm calling from the Penny Gouraud Hotel down the road. And anyway, a long conversation. He said, you must come for tea tomorrow. So Jackie and I, the next morning, we went climbing and came down from the hills at about three and motored to this little village called Clanny Stumdwee, found this beautiful house, parked the car, walked across the gravel to the front door. And you could see the sort of the parquet flooring and the carpets and so forth in the living room. And we were filthy dirty. So I suggested we take our climbing boots off and I pressed the doorbell. And we were kneeling down on the front doorstep and the door opened and a woman (46/57)
appeared. And I said, oh, hello. I'm Simon Winchester. And this is Jackie Leishman. You must be a Mrs. Morris. And this person said, no, I'm James, actually. And there was this brief moment of disbelief. But then we stood up and this person said, I'll get my wife. And I thought, now this is spiraling out of control because James, you know, he'd climbed to 26,000 feet on Mount Everest, had been a captain in the British army and the Brigade of Guards, had fathered four children, had walked alone across the Hadramat in the southern part of Arabia. So whoever was going to come down the stairs, would I? Assume be a bearded person with a Yukon Jack shirt. Not at all. Down the stairs comes a middle-aged lady with a little girl in tow. And we all troop off into the drawing room to have tea with me, fairly obviously a man and Jackie, fairly obviously a young woman and Elizabeth Morris. Middle-aged lady and Suki, a little nine-year-old girl. And my hero, my mentor, twinsett and pearls, little (47/57)
hanky tucked up her sleeve, tweed skirt, legs decorously crossed, little court shoes and all the chesty accoutrements of rather substantial accoutrements, I might say, of womanhood. But, you know, being Britain, of course, nothing was said about this. We just drank our tea and talked about other things and then we left at about six. And Jackie said to me as we passed through the gates, what was all that about? I said, I have not the foggiest idea. And the next morning a note was pushed under my door at the hotel. Dear Simon, I'm sorry to have put you and your friend through a somewhat awkward social situation, but the fact of the matter is that I've decided to change sex and I'm going to Casablanca, which back in the 70s, that's when it was all done, chop and change surgery. And if everything's successful, I'm going to return to Britain with the name Jan Morris. And I hope you and I can be friends. Well, Jan and I, she's now 91. We've written a book together on British architecture in (48/57)
India. And we're, I suppose it'd be idle to say that we're bosom friends, but we're good friends. And she now lives with Elizabeth as they used to be sisters in law, but they were now allowed to remarry about 10 years ago. And for years afterwards, The Guardian, if it ever got an application from someone to be a reporter, they said it's very easy to become a reporter on The Guardian. All you need to do is to go to Oxford and get a bad geology degree and then make friends with the transaction. That's so funny. That's remarkable. And that must have been quite a shock. I mean, it was, sure, it was the 70s. It was on the heels on the tail of the counterculture, but still, you know, today, I wouldn't say it's common, but we're becoming more educated about this part of the national conversation. Yeah. Jan wrote a wonderful book called Conundrum about it published in 76, I think, still in print today. And I urge anyone that's curious about this to know because, you know, there's an awful lot (49/57)
of gender reassignment surgery going on these days, and it's become, I wouldn't say tedious, but it almost commonplace, whereas in 74, no one knew about it. And her book is a very tender treatment of the whole thing. I'm always amazed. Amaze isn't even the right word. It's, I don't know how someone finds the courage to do that. No, well, I've never had the urge, but I think, no, but I mean, Jan talks about sitting under the piano as a four-year-old saying, why am I dressed like a boy? I'm a girl. I want to be a girl. And so, although he went through all the accepted rituals of getting married and having children, and he didn't want to do any of those things, and had this incredibly sympathetic wife who is still the wife. Remarkable. That's also remarkable. What I hear about that, that's also. That is the most extraordinary thing. Elizabeth's story is, to me, the more compelling story. Really? To me, yes. Has she considered writing a book about it? I don't think so. She's a very (50/57)
different woman. She's wonderfully capable, clearly very, very tolerant. And I don't know, it's Macabre, to think who will go first. I mean, they're both in their nineties. Elizabeth is a little bit older. I mean, and I think gender reassignment places all sorts of stresses on the body. Imagine it would. So, how long the two of them will survive, I don't know. But Jan is still writing. She wrote a book about the battleship Yamato, Japanese super battleship, just last year. You all have a lot in common. Well, I think so, except I check myself in the shower each day. We don't have that much in common. Well, I have another question for you. When you read James's book, so you are a non-fiction writer, you've never written fiction, correct? I've written one book of fiction, but it's so... It was a mistake. Well, I was asked to write what was called a future history about writing it from the perspective of 2020, or what had happened after Hong Kong passed back to China in 1997. Oh, (51/57)
interesting. It was sort of quite an interesting thesis. There was a war between China and Japan, which could yet happen. It's not something... Which book was that? It was called A Pacific Nightmare, and it was published in, I think, 1993 or there. That was the sequel to the Pacific book. Well, oddly enough, I'd written a book about the Pacific in early 90s, then Pacific Nightmare, and then the new Pacific. So I'm all Pacific now. Pacific doubt. I'm curious though, so you read James's book, you read the story of a person who piggybacked off the expedition and wrote about it. What was it about that that you said, this is what I want to do? Well, it was Jan, I suppose. Yes, that's the name. I'll give her, because I think most of the advice subsequent to my getting to know her really well came when she was a woman. She said, you've got to write books, because writing for newspapers, yes, it's immediately satisfying, but you have to accept that what you write will be in a newspaper that (52/57)
London. The news of Krakatoa's eruption, an operator working for Reuters sent a message saying Krakatoa erupting, as it was happening as he was on the sender, many feared dead and then the line went dead and he was killed. But the message got to Jakarta. Then it went on the cable under the sea to Singapore, from Singapore to Colombo in Ceylon or Sri Lanka. Then up to Suez in the Red Sea, then across the Mediterranean to Gibraltar, then through into the Atlantic and up to Beirut, then up to Cornwall, then up to London. And that message saying Krakatoa erupted many dead was on the desk of the London Times four minutes later. And that meant that it was published with obviously embellishment once. Research had been done the next morning in the London Times and people were sitting in their horse-drawn carriages going to work, reading about places in the world that they'd never heard of, Java, Sumatra, Krakatoa, things that had happened just hours before with the same easy familiarity that (54/57)
they might have been talking about, Bayswater or Mayfair or Liverpool. And so I believe, well I am absolutely certain of it, that it was the first major news event in the world that was known about all over the world within minutes of it occurring. That period in the last quarter of the 1800s of the 19th century and then towards the beginning of the 20th century, there was such a reorganization. I mean, I know it from American history of American life and dealing with the railroads and then the telegraph and the telephone, it was a remarkable time. I mean, that's what you're sort of capturing there. Oh, and that's sort of what I was saying in the men who united the states. Exactly, that's what I was thinking about when you were saying that. The way that the country suddenly developed quite extraordinary and of course this is another period when things are changing, the paradigm is shifting. I'd read this book by, I can't remember the name of the author, but I read this book called The (55/57)
Land of Desire. I don't know if you're familiar with it, but it's a history, it was written in 1992. It's a history of consumer capitalism from the late 19th century to the early 20th. And I remember this one particular scene when he tied abstract art, the rise of abstract art, to not specifically people riding in railcars, but the experience of riding in a rail car and seeing the landscape move so quickly by was an abstract experience of the land. And that just that stuck out to me when you were talking. Mr. Winchester, I really appreciate you coming onto the program. Thank you so much. It's a great pleasure. I just enjoyed it enormously. Thank you. Thank you very much. And that was my episode with Simon Winchester. I want to thank Mr. Winchester for being on my program. 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, take a moment to (56/57)
review us on Apple Podcasts. Each review helps more people find the show and join our amazing community. Today's episode was produced by me and edited by Stylianos de Colau. 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 hiddenforces.io. As always, thanks for listening. We'll see you next week. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
What Climate Science Tells Us, What It Doesn’t, and Why It Matters Steven Koonin #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
their respective roles as alternatives to fossil fuels in the coming decades. And with that, please enjoy this timely and informative conversation with my guest, Stephen Kunan. Dr. Stephen Kunan, welcome to Hidden Forces. Happy to be here. Happy to be talking. Thank you. My pleasure to have you on. So can you give me and my listeners a sense of your background, how you became interested in this field of climate science, and what roles you've held in both the private and public sector? Yeah. So let's see a brief bio. I grew up in New York City, was educated in New York City public schools, particularly Stuyvesant High School, which is a special high school for science and math. That was about 50 years ago and had a wonderful education there. Went off to Caltech for undergraduate work, bachelor's in physics. I went to California because it was the late 60s and it was the thing to do. Ph.D. at MIT in theoretical physics, then back to Caltech as a professor, starting in 1975 for just about (5/57)
30 years. The last nine of those years I was the provost at Caltech as well, with responsible for the research and education programs across the Institute. In 2005, I went to become the chief scientist for the oil company BP. It was a big transition, but taught me about the private sector. I knew energy would be important and I went there to help them figure out what beyond petroleum really meant. I did that for five years based in London and then returned to the US when my friend Steve Chu became secretary of energy. He asked me to come help out and I became the under secretary for science in the Department of Energy during the First Obama Administration. After two and a half years, which is about the average time in government, I left the government and came to NYU to start a center about big data for big cities. I did that for six years and now I'm just a professor at NYU teaching energy and climate science at the graduate level. There was a famous physicist, Leo Zalard, who was (6/57)
What's up, everybody? My name is Dometrick Afinas, and you're listening to Hidden Forces, a podcast that helps investors, entrepreneurs, and everyday citizens get an edge by equipping themselves with the knowledge needed to anticipate the challenges and opportunities of tomorrow. By sharing my critical thinking approach and by challenging consensus narratives about the power structures shaping our world, I help you make the connections to see the bigger picture, empowering you to make smarter decisions. On this week's episode, I speak with Stephen Kuhnen, director of NYU's Center for Urban Science and Progress, who also served as undersecretary of science at the U.S. Department of Energy under Barack Obama and as chief scientist at BP, where he was a strong advocate for research into renewable energies and alternative fuel sources. The subject of climate change, or more specifically the science of climate change, has become like almost everything else in our society a matter of (1/57)
political identity. A recent Pew Research study found that Democrats are more than three times as likely as Republicans to say that dealing with climate change should be a top priority. And yet, if you ask people, independent of party affiliation, for their views on climate change and why they believe what they believe, most of them will struggle to give you a coherent answer. Very few people, and this goes for politicians, journalists, and even academics, have actually read the reports put out by organizations like the IPCC and others responsible for doing the actual research that we all cite when we talk about, quote, the science. And I am as guilty on this as anyone. After all, why would I want to spend a minute of my time learning about exactly why we are so screwed? Or how exactly we've destroyed the planet and, quote, broken the climate? I've read all the headlines. Climate catastrophe, climate disaster, the earth is burning. But how true is that exactly? Are we really facing a (2/57)
climate apocalypse? Is climate science really, quote, more reliable than physics? Something that journalist David Wallace-Well said in a recent appearance on the Joe Rogan podcast? Not according to my guest, but more importantly, as he would say, not according to the science, which, to borrow from the book's title, is very much unsettled. Now, before you react to that very provocative headline, no one is saying that climate change is a hoax or that anthropogenic warming isn't real. The purpose of this conversation is not to surreptitiously undermine the consensus view nor to troll those who believe strongly in it. Rather, it is simply meant to inform and educate me, and those of you like me who either haven't read the reports or are simply skeptical about just how bad the situation is and what's required from us in order to solve it. For the record, this is a subject that concerns me deeply, but the doom and gloom narrative surrounding it, I think, is actually counterproductive to (3/57)
helping us actually address the problem. This is a very complicated subject, and we spend the next two hours between the first half and the overtime, working our way through the data, what it says and what the models predict about not only future warming, but also the incidence of droughts, forest fires, hurricanes, rising sea levels, climate-induced migration, and pandemics driven by a warming planet. In the subscriber overtime, we focus most of our attention on the incentives that account for these widely divergent narratives on climate, the importance of morals and values in thinking about how we structure climate policy, and the missing components of costs and trade-offs that we need to think about when coming to decisions on how best to adapt our societies and ourselves to the changing climate. We also discuss geoengineering, including carbon extraction and the use of aerosols to dampen the sun's rays, as well as alternative sources of energy like wind, solar, and nuclear, and (4/57)
most famous in the early 20th century for having written the letter that Einstein sent to Roosevelt to start the Manhattan Project. Zalard was quite a character. He had his own 10 commandments and one of them is you should reinvent yourself for 36 years. I've sort of taken that to heart over the last couple of decades of my life. I totally feel that. What was your role as under secretary of science in the Obama Administration? What were you tasked with? I was fortunate not to have to deal with the nitty gritty of budgets and such. I was at one level a strategist for the department. I wrote the first technology plan for the government in energy technologies. What technology should the government be investigating? How should it think about its investments and so on? In another way, I was the scientific conscience for the department. Many people say I was Steve Chew, Steve Chew. Steve is certainly a fine scientist, but he needed somebody to push back against him sometimes scientifically. (7/57)
That was another one of my roles. If I look at where I'm coming from, I'm a physicist. I love understanding how the world works and I've applied that to many different areas of science. I'm an educator. My greatest joy is seeing faces light up when I teach somebody something and been doing that in the classroom now again for a couple years after hiatus of about 20 years. Maybe most importantly for the present discussion, I've got experience as an advisor on science and technology to decision makers. In previous decades, I've weighed in on the human genome project for the government, on various weapons systems, on radiological terrorism. I testified to Joe Biden in the early 2000s on dirty bombs when he was running the Foreign Relations Committee. I've had a long involvement in the stewardship of the nuclear weapons stockpile that this country has. Then in the private sector, I was again advising the chief executive of BP. I still advise numerous energy companies. All of those come (8/57)
together now in the particular take on climate science that I'm trying to educate the public about. Tell me a little bit more about that. How does that all come together? What led you to both become interested in this field and then ultimately to write a book with such a subtle, I'll admit, but nonetheless controversial title, given the view among many scientists and members of the media that the science is quote, settled when it comes to anthropogenic climate change? Yeah. Of course, I've been interested in the subject for a long time. I even started an observational program in the early 90s to try to measure one aspect of the climate. For the time I was in BP and then in the government, the focus was on the technologies that we might be able to develop and deploy in order to forestall the worst of climate change. I really had not dug deeply into the science. Starting in late 2013, 2014, I was asked by the American Physical Society, which is the professional society representing (9/57)
50,000 physicists both in the US and worldwide, to have a look at the statement that they had put out on climate change. They had put one out in I think 2007 and 2008. It was rather controversial at the time because it said the evidence was intolerable. We've got to act now, et cetera, et cetera. Incontrovertible really gets a physicist's attention because it means we understand this absolutely. Many people at the time, although I was not one because I was busy with other things, took issue with that. They in fact had to reissue an explanatory text for the statement in about 2009. Anyway, 2013 comes along and I get asked to chair a committee to reissue, update the statement. I decided rather than simply endorse what you have cited as the consensus, we were after all physicists and we were going to dig deeply into the issue. I convened a workshop in January of 2014, three consensus scientists, many of them IPCC authors, and three people who took issue with that consensus. Then a number (10/57)
of others of us who were on the committee to consider the statement. We talked for a day. We had presentations and discussion. There's a transcript up on the web that one can find. I came away from that meeting really shaken, unsettled to use the book's title, if you're like, that the science was nowhere near as solid as what had been portrayed in the media or certainly what the politicians were talking about. I wrote a op-ed for the Walt Street Journal in September of 2014 in which I laid out some of the concerns and issues I had understood. A lot of response over 2000 online comments to that article in the journal. Many of them supportive, but some saying, of course, you idiot, you don't understand, et cetera, et cetera. I started paying close attention, not only to the science, but the way it was being portrayed in the media and the politicians, their discussion of it. The way I like to summarize the statement is, I'd like to adapt a line from the movie, The Princess Bride. And one (11/57)
of the characters keeps using the word inconceivable. And at some point in Ego Montoya, who is the principal character in the movie, says, you keep using that word. I do not think it means what you think it means. And I think the adaptation to the current situation is, I don't think the science says what you think it says. Everybody quotes the science. The president, President Biden, who is a fine leader, he keeps saying, it's a policy of my administration to listen to the science. And then you've got John Kerry, who said, there's no doubt in anybody's mind that the science is absolutely certain. And so you have various people like Bernie Sanders, Mark Carney, the former head of the Bank of England, Bill Gates, my good friend, Ernie Moniz, who was secretary of energy in the second Obama administration. They're all talking words, existential threat, climate crisis, climate emergency, climate disaster. And in fact, when you actually read the literature and the reports, there is no (12/57)
support for that kind of hysteria at all. And so I think people really want to understand, should be understanding, what does the science really say? And that's why I've written the book to highlight some of the things that are in the popular perception that just ain't so. So what does the science say? And perhaps just as importantly, what do we mean when we say or when we talk about the science? I think in the popular discussion, the science is what is presented in the assessment reports. So these are reports that are issued periodically by the United Nations Intergovernmental Panel on Climate Change and the US government every four years in the National Climate Assessment. And these reports are meant to survey, summarize, and make concise or understandable for non-experts exactly what we know and what we don't know about the science. And the problem is that there is a long game of telephone that goes on, which starts with the peer-reviewed literature, the reports of the basic (13/57)
research written by scientists for scientists peer-reviewed. There is then the process of putting the assessment reports together, which can go on for a couple years typically, involve hundreds if not thousands of people contributing. They are a narrative, if you like, that are meant to convey things to non-experts. Then there are the summaries for policy makers of the assessment reports, which further distill the understanding down. And then finally you get to the media, which translated for the general public. And very few people actually read the assessment reports. And so there's ample opportunity for mischief along that chain of refining and filtering to spin things one way or the other. And in fact, if you look at certainly the media and the summaries for policy makers, there are a lot of things they don't tell you, or there are things that they misrepresent when you actually go read the assessment reports or even the underlying literature. And so that's what people mean by the (14/57)
science. And my guess is that I don't know for sure, but certainly Bernie Sanders, John Kerry, maybe even Bill Gates, I don't know, have not actually read the reports, let alone the underlying literature. So that's actually a good segue because I wanted to spend some time getting really clear on what it is that we do know. And also to clearly differentiate between what the reports themselves say, in other words, what the data says, and the assumptions that are baked into that data and the wide variety of projections, because there are so many different types of projections based on different types of models. And these models diverge dramatically in some cases. I think people would be surprised to learn just how much they diverge. So I'd love to get into that. Okay, but let's try to separate the conversation into what we've observed about the climate over the last century, century and a half, and even further back through proxies, the models themselves, and then the projections going (15/57)
forward. So let me tell you some things that are in the report that might come as a surprise to many people who've only gotten their information from the media. And these are direct quotes from the most recent UN report. We have low confidence regarding the sign of the trend in magnitude or frequency of floods on a global scale. We have low confidence in any global scale trend in droughts or dryness since the middle of the 20th century. We have low confidence in trends in small-scale severe weather phenomena like hail or thunderstorms. And we have low confidence in large-scale changes in the intensity of mid-gladitude storms since 1900. And then you dig a little bit deeper into some of the other phenomena. US heat waves are now no more common than they were at the beginning of the 20th century. And the warmest temperatures in the US have not gone up in the past 50 years. Global wildfires have declined more than 25% since 2003, and the last year 2020 was one of the least active years in (16/57)
the wildfire record. There's no detectable human impact on hurricanes over the past century. And the one that is in many ways a bottom line is that the net economic impact of warming of three degrees, which is twice the Paris goal, if it happened would be minimal. And all of these statements are not Steve talking, but they are in fact exactly what's in the assessment reports or the recent quality peer-reviewed literature. So the statement that we've already broken the climate is just not supported by the data. So maybe it would be best if we tried to separate some things out here by order of importance. Let's focus on temperature for a moment, because I think that's the metric that's most top of mind for most people and most directly related to warming. What have we seen in terms of rising temperatures on the planet over not just the course of the last 100 or 200 years, but going as far back as we have records? And what do we know about the effects that that warming had on the planet? (17/57)
Right. So first of all, when we talk about temperature, the temperature is different everywhere and every time. And so we generally talk about a global average temperature. And we talk about the anomaly in that average temperature, namely how much does it differ from expectations? And what we've seen since about 1900 or 1880, the time when we started to have good global records of temperature, of course they get better as the decades go on from 1880, is that the global average temperature of the earth has risen by about a degree centigrade, which is 1.8 degrees Fahrenheit for US listeners. But that rise has not been steady. You know, it rose pretty rapidly from 1910 to 1940, actually went down from 1940 to 1970, 1975, and then started going up again. But in the last decade or so has been relatively flat. I mean, still increasing, but relatively flat. So we've seen a warming not steady of about a degree over the last century, last 120 years. For that, if you go back to the 1600s, we had (18/57)
what was called the little ice age. And while there's some controversy about whether that was a global phenomenon still or not, I think most people, almost everybody, and certainly the assessment reports say it was about half a degree to a degree cooler than it was at the beginning of this century. I'm sorry, the beginning of the 20th century. And then if you go back even further, there are periods in the past over the last many thousand years since the end of the ice age where it was, in fact, we think as warm as it is today. So variations in the temperature are not at all unusual. What is really the issue for us is whether the recent warming that we've seen over the last century, to what extent is that driven by human activities? Or is it part of the natural variation of the system? You can go back further. There are the glaciers, the ice ages, popularly. If you go back to the last time, we were not in a glaciation, the so-called Emean period, about 125,000 years ago. The temperature (19/57)
was two degrees warmer, we think, and sea level was up to six meters higher, 20 feet higher than it is today. So variations in the climate are not at all unusual. The real question, as I said, is to what extent are the recent changes influenced by humans? Let's look at just 1940 to 1970, where temperatures actually dropped, because I think that raises some interesting questions, because clearly the world was already industrialized. We weren't generating as many hydrocarbons and releasing molecules into the atmosphere at the rate that we have been after, let's say, 1980. But certainly it wasn't an insignificant contribution. How do scientists explain that? They don't. If you look at the official assessment reports, not Steve talking, they will say it's some combination of natural variability, and we should talk a little more about natural variability in a moment, human influences and bad data. And that's why we have no explanation of that. So my own sense is that there is demonstrable (20/57)
long-term variability in the system. We see cycles over 60 years, 70 years, and unless you understand those cycles, they can pollute or contaminate your understanding of what's going on. Is that another way of saying that there is a lot of noise on the channel and that we're trying to focus in on this one signal of human contribution to climate change, and we're trying to draw a direct causal connection between the warming that we've been observing over the last 40 to 50 years in particular and human activity? And then on top of that, there seems to be a strong view that if we can get our act together, so to speak, as a global community and make significant changes to how we operate at scale, that we can effectively reverse the warming that's expected. Do I have that right? I mean, how did that view come about? So I think the first thing we need to understand is that humans exert both a warming and a cooling influence on the planet. The warming influence we exert is through the (21/57)
greenhouse gases largely that we put into the atmosphere, most of that CO2 from the use of fossil fuels. We exert a cooling influence by the aerosols, the particles that we put into the lower atmosphere by burning dirty coal, for example, putting sulfur up into the atmosphere. And those two play against one another. And the net human influence is the difference between the two about comparable to the CO2 influence net. The other thing to understand is that those human influences are physically small. They are about 1% of the natural energy flows in the system. So we've got this big system and we are tickling it a little bit. We're tickling it in a constant way. We're always adding net warming influence. But nevertheless, it's very small at the level of 1%. The third thing to understand is that there's a lot of noise in the channel, natural variability on all scales from year to year, from decade to decade, from century to century. And then finally, you have to understand that we have (22/57)
good observations with a precision comparable to what we need to understand the response to human influences. We only have that for about 120 or 130 years. And even then, it's not great. The oceans are one of the most important parts of the climate system. And of course, they're very difficult to observe. And we don't have really good ocean data, except for the last 20 or 30 years. On ocean temperatures, is that what you mean? Temperature, salinity, currents, those are the things that are important in the ocean. And so the consensus does as good a job as they think they can. And they would say that at least half of the warming since 1950 is due to human influences. But could it be, as I look at it, could it be a third or a quarter? Yeah, it could be. Well, when you say it could be, here's where I want to pull out. Because what often times occurs in these conversations is because the consensus view is so strong, when they hear someone say could be, what they're really hearing is this (23/57)
person's just throwing shade. They're just basically saying, oh yeah, it could be, anything could be. I could be made of silicone. But when you say could be, what are we talking about here in terms of likelihoods? Yeah, so of course, all of these statements are probability statements. And there's no firm number. We can at best give a range, saying there is a 10 to 90% chance that the number is in this interval. Those things have shifted around a lot as we understand more, as the models get better and as our understanding improves. So could we see warming as much as four degrees? Yes, but we could also see warming as good as one and a half degrees. And uncertainty is an intrinsic, perhaps the central part of science. The general public doesn't understand that, then the politicians want certainty. So there is this kind of clash of cultures between the probabilistic thinking of scientists and the need for certainty that people naturally have. Well, so a couple of thoughts. I think this is (24/57)
a good opportunity to get into the modeling. But I also want to say that I think part of the reason why these conversations become so emotional for people and seem so morally clear cut is because we're presented with projections of what we think will happen if we don't act, expressed as near-certainties, while at the same time the costs of action are either deemed to be incalculable or they're ignored entirely. And I absolutely agree that our discomfort with uncertainty is a big driver here. And it is, I would argue, impairing our decision-making, regardless of what the proper course of action is, exactly because we're assigning incomplete values to the things that we're discussing. So to that point, I'd like to focus in on the uncertainty and have you explain to me and to my audience how the earth warms, how that process works, because it's a complex process that begins with the sun. It also involves the molecular constituency of greenhouse gases in the atmosphere, as well as the (25/57)
earth's reflectivity. And then let's get into how the models are developed. So let's talk a little bit of science about the temperature of the earth. And the temperature of the earth at the surface is set by a balance between the warming influence of the sunlight that gets absorbed by the earth and the heat radiated by the earth. After all, if it's absorbing the sunlight, it's got to get rid of the energy somehow, and it does that by radiating heat. On the sunlight side, the warming influence, about 30% of the sunlight is reflected by the earth, by the land, the oceans, importantly the clouds and the snow and ice toward the polar regions. And the balance of that sunlight, 70%, is absorbed by the planet and what goes to drive the weather systems, the currents in the ocean and so on. In order to balance that warming, the cooling influence is the heat radiated by the earth. And the basic physics of that heat radiation, namely infrared radiation, was well understood. It was established by (26/57)
some physicists, Stefan and Boltzmann in the 19th century, and it's understood that as the temperature of the earth goes up, it radiates more. And so it is a natural thermostat, if you like, that sets the temperature of the planet. If there's more sunlight absorbed, then the temperature will go up, there will be more heat absorbed. And if you go through that balance quantitatively, as you do in any simple climate class, you discover that the average temperature of the earth is 255 Kelvin. If I could translate that into ordinary human temperature scales, it's about minus 20 degrees centigrade. And that's much colder than what we observe. It's actually about 15 degrees centigrade positive that we see in the earth. That's what the temperature would be if there were no atmosphere. Atmosphere, that's correct. And what is keeping the temperature at its observed value of about 15 degrees centigrade is in fact the so-called greenhouse effect. And that is some molecules in the atmosphere, (27/57)
particularly water, but also CO2 and some other less common molecules, intercept the heat that's radiated from the ground and slow its progress out to space and therefore make the planet warmer than it would be. Just like the insulation provided by a jacket or a blanket which impedes the flow of your body heat and hence keeps you warm. And what humans are doing is adding carbon dioxide and other gases to the atmosphere that are increasing the effectiveness of this insulation and so slowing the progress of heat back out into space and therefore warming the surface of the planet. We should realize that the warming is not uniform over the globe. It's warming much more rapidly in the polar regions, in particularly the North Pole or the Arctic. It's also warming more rapidly on the land than it is over the oceans. And as we mentioned, the average warming has not been steady at all but has gone up and gone down a bit over the last century, century and a half. So what accounts for the more (28/57)
rapid warming at the poles and on land versus the ocean? Do we understand that? The land has a smaller heat capacity. It responds more rapidly to warming influences. The oceans take a longer time to warm. And in the poles, we're seeing a lot of it is what's called the isalbedo feedback where in fact that as the ice becomes less common, the reflectivity goes down and so the poles warm a bit more rapidly than the equator. Because the ice sheet reflects more sun and as the ice sheet dissipates, the oceans begin to take in much of that warming. So let's get into the modeling now, how the modeling is actually done because this was actually for me one of the more fascinating parts of the book. I had no clue how to any significant extent how climate models are actually developed, what they look like and most importantly, the extent of the subgrid assumptions that are made. So what goes into that? The popular perception is, heck, it's just physics, right? We understand physics very well and so (29/57)
we should be able to do a wonderful job of modeling. In fact, it's not at all like that. It is an enormous challenge to model the climate on the scales that are useful for understanding how it responds to human influences. The way in which it's done is to cut the earth, both the atmosphere and the oceans, into small bits, voxels, volume elements like pixels, but three dimensions. And there are hundreds of millions of these that you need to cover the earth. You then use the basic laws of physics to move the energy, the atmosphere, the momentum, the matter through these voxels, time step by time step, as small as 10 minutes sometimes, and watch the climate evolve under solar heating, greenhouse gases, infrared radiation, and so on. And we build these physical processes in. There are, however, a number of practical problems that make it very difficult to do this in a useful way. Because computer power is not infinite, we have a significant computer power these days, but nowhere near (30/57)
enough to do the job, right? You can't make the boxes too small, otherwise you get too many of them for the computer to handle. Remember, we've got to step these through 10 minutes at a time over centuries. So that's an enormous, let's say a billion time steps or something. So the computational impact of that is exponential? It's enormous. And the runs of the modern models take months to run on the fastest supercomputers. So we can't make the boxes too small, otherwise we get too many of them and we can't compute. But there are many processes in the climate system that happen on distances smaller than the typical 60 miles of a box. Clouds are the most important one. And clouds are a couple of miles across. I'm looking out my window here in the Hudson Valley at the moment, and they're probably, I don't know, half a mile, quarter mile across, and of course they're varied across the sky. And because you can't describe those explicitly in the computer, you have to make assumptions about (31/57)
what the clouds are doing in the boxes. And depending upon the kind of assumptions you make, you'll get different answers. So that's one of the major sources of uncertainty. Let's just talk about that example. What are those assumptions based on? And in the case of clouds, how significant and important are clouds in contributing to warming or cooling? Yeah. So the clouds can warm or cool. In general, high clouds warm because they're a little more effective in trapping heat than the atmosphere around them. Low clouds in generally cool because they reflect more of the sunlight and don't have so much influence on the heat interception. The assumptions that need to go in, so you've got this box, actually you've got a whole stack of boxes up in the atmosphere over a particular part of the ocean or the land. The box is 60 miles on a side, but in general is very thin. The boxes need to be thin in order to describe the atmosphere, which is really a thin layer on top of the planet. So I've got (32/57)
these basically layers in which I've got to make assumptions. How many clouds are there? Given the temperature and humidity in the box and other things in the surrounding boxes, how many clouds are there? And what are their properties? How much height do they let through? And people try to make those assumptions based upon basic physical understanding, observations. We have some spots on the globe where we try in detail to observe the clouds and laboratory experiments of how clouds are formed. So basically sample size the clouds in one region and extrapolate out and generalize patterns that you can use in your assumptions for other boxes. If there's this temperature and this humidity, how many clouds do I have of what type and so on? And there's a lot of variability in those assumptions. And a lot of the art of model building has got to do with how you make those subgrid scale assumptions. So the clouds are really important in the models and the experts say that the clouds and in (33/57)
particular the way clouds interact with aerosols, the particles that we're putting up in the atmosphere, are the biggest uncertainty in the models. How much uncertainty are we talking about here? Well, one common measure of the models is how much will the temperature go up if we doubled carbon dioxide? And the previous estimates ranged anywhere from one and a half degrees to four and a half degrees. And the most recent generation of models, which will inform the next UN assessment report to be issued in July, are even more uncertain than that. Some of them say the temperature would go up as much as six degrees and others say the temperature would go only up by one and a half degrees if we were to double carbon dioxide from the pre-industrial. So on the face of it, that doesn't make sense, right? I mean, most people are going to hear that and they're going to say, how can more advanced models give us a wider range of outcomes? Right. Well, we are trying to understand the response of the (34/57)
system to a less than 1% influence, it's chaotic, it's multi-scale, and we have incomplete observations. So it's not surprising that the science is unsettled. How much of this is also because we're talking about a complex dynamic system that exhibits feedback? So when you push on one part of the system, when you affect the value of one variable, that then can lead to a series of positive reinforcements that exacerbate that initial movement causing indirect effects. Right. Indeed, the feedbacks are really important. They are thought to amplify the direct warming effect of greenhouse gases by a factor of two or three. However, they're not something that we can measure or compute from first principles. We have to see them emerge from the models, of course we have some guidance from observations, but that's one of the trickiest things that the models have to get right. So are methane bombs an example of that? The phenomenon of melting permafrost leading to the decomposition of organic (35/57)
material, releasing methane into the atmosphere leading to further warming? Right. So methane is a very potent greenhouse gas. Most of what's emitted is actually from agriculture rather than from fossil fuels, but nevertheless, it's very important. There is a lot of methane tied up in the permafrost and under the ocean, and people are concerned that if the temperature gets warmer, it will start to be released from the permafrost. I can't say we've got much definitive evidence of that right now. It's one of the things that some people think are working out there. When you say there isn't much definitive evidence, what is the uncertainty around that exactly? Because it seems pretty straightforward. I don't know the precise numbers, but I don't not believe that we've seen a great deal of methane outgassing from the Arctic regions, which is where you would expect it to show up. So we have instrumental readings on that data? Of course, people are trying to measure the methane coming out of (36/57)
the tundra. Okay, so let's get back to the modeling here a second, because I think this is also a good opportunity for us to differentiate between weather and climate. When we talk about or when you talk about the chaos that exists in these simulations, this is something that we have firsthand experience with as daily consumers of weather forecasts. As the days pass, it becomes incrementally difficult to forecast the weather with any degree of accuracy. How much of this is similar to how we make projections about the Earth's climate? Yeah, it's quite different, although many people use the same computer codes to describe climate as they do weather. Let me tell you why they're different. Weather is largely what we call an initial value problem. If you know the state of the atmosphere now, you can pretty well use the basic laws of physics. If your computer model has got a fine enough description to do a reasonable job of predicting a couple days out. And our ability to predict or (37/57)
forecast to be more technically correct has gotten better over the last 50 or 60 years, largely due to finer and more sophisticated computer models, but also better knowledge of the weather today in order to let us forecast what's going to happen tomorrow. Even still, the ability, the accuracy of our forecasts, the skill pretty well gives out after about 10 days or 12 days or so. And that's because the weather system is chaotic. Small changes in what we think the atmosphere is today can lead to large changes in our forecast 10 days out, 12 days out. And this is the famous butterfly effect or chaos that was discovered by Lorenz at Lorenz at MIT in the early 60s. Is that part of what we mean or what scientists mean when they talk about tuning the models? Does that relate to starting conditions? No, that's a different discussion. And we can talk about tuning in a bit. But let me continue on weather and then discuss its difference with climate. The other difference in weather is that the (38/57)
dynamics of the ocean, the changes in the ocean, don't matter at all for the next 10 days or 12 days. The ocean doesn't change. The temperatures, the ocean are fixed during that time are essentially fixed. And so we don't have to worry about the dynamics of the ocean in forecasting weather. Climate is completely different. Its time scales are decades to centuries over which it changes. In fact, the official definition of climate is a 30 year average. And so on those time scales, we very much need to know about how the ocean is changing. And also on those time scales, the detailed initial conditions hardly matter because they get washed out or forgotten after 10 days or two weeks. And so it's a very different kind of problem. And people who say, well, we can predict weather and therefore we should be able to understand climate, they just don't know what they're talking about. So are you saying that setting initial conditions is a much bigger challenge when thinking about climate? And if (39/57)
that's true, how much of that is because climate is happening on a much bigger scale? I mean, am I thinking about that correctly? Yeah. The analogy I like to use, which is almost a physical analogy for the weather, is a boiling pot of water. If you try to describe the bubbles in detail, which is like the weather, it's very difficult to do that. And of course, it changes rapidly and it's chaotic and so on. On the other hand, if you want to talk about how the average level of the water will decline as the water evaporates, we can predict that with fair confidence. In other words, the macro observations are easier to predict than the micro observations. Yes, except that the macro phenomena we're looking at are small changes that happen over decades. And we also want to understand how those changes impact the micro phenomena, things like hurricanes, tornadoes, droughts. So that actually leads me to another question. I don't want to do rail list because I want to make sure that you can (40/57)
continue explaining what else you want to say. But one of the other areas where there are clearly a lot of assumptions baked in here is how changes in temperature will impact ecosystems. And in turn, there's an additional set of assumptions, which is how changes in ecosystems will impact human beings. And that's when we get to questions about climate, refugees, migrations, wars, et cetera. Right. Would you like to continue on the models? Sure. Let's continue on the models and we can pick up on that later. So having set up your models and the grid and the basic laws of physics and made some decisions about the subgrid scale parametrizations, you're still faced with two other problems. One is, how do I initialize the model? After all, we don't know the detailed state of the atmosphere or the oceans a thousand years ago. And so what people do is to start up the models sometime very far in the past with no human influences at all and run them for some number of centuries until they come (41/57)
into balance. That the ocean currents on a large scale look right. You get a jet stream, the temperature, the planets about right and so on. And then you say, okay, I'll take this arbitrary point in time as the starting point. Let me now start applying human influences. Let's say over the last 250 years as we have observed them and watch how the climate changes. And of course, there is some arbitrariness and importance as to exactly when you choose that starting point. And so what people do is take many different starting points and just average the results together. And of course, the results can differ wildly depending upon how you start them. The last thing that needs to be done is to tune the model. The subgrid parametrizations all have parameters in them. How much does the albedo or the forest change when there's snow on it, for example, or exactly how much water vapor is transported upward in convection in the warm equator from the sea surface, things of that sort. And we don't (42/57)
know those numbers. They're adjustable. We can make reasonable guesses, but the precision that we need to understand the climate system with mandates that we fiddle with those numbers in order to get things to look about right. And so there's a good deal of tuning that goes on. In some cases, the parameters need to be set very differently than what we thought they would be. In other cases, the models are tuned to kind of give the results that people expect. And so it is a pretty subtle business that is necessary, but not often discussed. So here's a question I have, because early on in our discussion, you said that the models, the last generation models gave us a range of roughly one and a half to 4.5 degrees of warming. And I assume the 21st century, is that right? No, no, that's what's called the equilibrium, namely if you took the unperturbed planet and you double the carbon dioxide, how much would the new temperature be? That's not the warming during the last century. No, no, not (43/57)
the last century, projecting forward. These are projections about what would happen over the course of 100 years if you doubled the warming or this would just be immediately warming. That's correct. Well, they actually do it several different ways, but one way is to just suddenly double the CO2 and ask how much the temperature went up. So in both of those cases, the lower bound is close to or roughly at the maximum threshold that a broad part of the scientific community engaged in this subject have identified as sort of critical. Maybe that number is two degrees of warming. I've seen the UN, I think it is that put it out, nor that maybe it was under the Paris Climate Accords, 1.5 to 2 degrees. Yeah, the Paris Accords started out at, they started out at two degrees and more recently they've set a goal of keeping the warming due to human influences down to one degree, one and a half degrees. So now if we were to agree that one and a half to two degrees, anything above that would be (44/57)
catastrophic, then it seems in some ways much more reasonable to look at these models and say, well, there's a lot of uncertainty, but the uncertainty is on the upside. It's not on the downside. And so the question is how much do we know about what the effect of two or three degrees of warming or four degrees of warming on the planet would be? And how in line are people's understandings of what the effects would be versus what the data and the models actually say they would be? Yeah, that's a really tricky question because you start compounding our uncertainties in future emissions and concentrations, so future human influences, then that gets fed into what the future climate is going to be and events associated with the climate. And then that compounds into how the ecosystems are going to respond and then finally how human society is going to respond. And it's extraordinarily murky from what I read. One of the few quantitative predictions is in the models, is the net economic impact (45/57)
of warming both on the US and globally, and even for warming two or three times the Paris goal. When you say two or three times, do you mean four to six degrees of warming? Yes, correct. Or let's say up to, well, one and a half times three is four and a half, let's say five degrees of warming. The net economic impact is six or 7% of GDP in 2090 or roughly 100 years from now. Annual every year or in just one year, total absolute impact. In other words, the economy would be 6% less in 2090 than it would have been otherwise. Where is that data coming from? Where are those projections coming from? Well, that's not data, that's projections. And it's the kind of best guess that the economists can make on what the influence of temperature is going to be. Is this in the actual climate reports? Absolutely, absolutely, both in the US report and in the UN reports. And in the book I give reference, I actually show the figures. So now let's say 6%, that sounds like a lot, right? If the US economy (46/57)
is $80 trillion a year, which it would be in 2090 if it grows at 2%, a year, that sounds like a lot. But it is only three years worth of growth in 2090. Namely, our growth in the economy in the US, for example, would be delayed by only two or three years for warming that's much greater than what the Paris Accord aspires to limit us to. Now, you can disbelieve the economists, all right? On the other hand, that's what the science currently says. What about ecosystem decline? How much of that is climate related? Like, what is our degree of certainty around that and how it'll be impacted by rising temperatures? Do we have some idea? Yeah, I have not studied the ecosystem parts of the UN or US government reports in great detail. My impression is the science is on the standards of physical science certainly is pretty murky. And again, you have a lot of trouble disentangling natural variability from effects caused by rising temperatures, which may or may not be caused largely by human (47/57)
influences. So very tough, I think, for me to give an informed opinion about that. So I want to ask you one more question before we move it to the overtime professor, because in the book, among some of those projections that we discussed like economic costs, you also discussed the effect on agricultural yields and food supply. This is a huge concern for people. And one of the reasons why we have projections around climate refugees and migration, for example, there's a very popular book on this subject whose author was on Joe Rogan a couple of years ago. I heard the episode recently and he cited a number of a billion climate refugees by the end of the century. A lot of that has to do with the expectations that warming will lead to significant crop failures, lower yields, and starvation for hundreds of millions or over a billion people. So what do we know about the impact that rising temperature and climate change, based on projections that have been made, what effect that would have on (48/57)
yields of crops and our capacity to carry the population of the earth by providing enough food to feed them? Yeah. So of course, it's a murky business like many of these impact things are. Nevertheless, the UN in its so-called working group II, or its special report on climate change and the land, certainly discusses what has been and what might be in the future. Again, let's start with what has been first, if you look since 1960, the yields and the production of food has just gone through the roof. And the yields, for example, of corn in the US, corn globally, rice, wheat, they've all gone up strongly due largely to technology, to agricultural practices, and to breeding of the crops. Now, what the report says is that if the temperature hadn't gone up, well, the yields would have gone down by a few percent rather than having gone up by 100 percent, they would have gone up by, let's say, 93 percent or something. As a scientist, I would say, how do you know that? That's a counter (49/57)
factual, as we say in the business, and it's extraordinarily difficult to opine with that with any degree of credibility. You've got to know how things would have happened if the climate hadn't changed, for example, how would agricultural practices have changed and so on. But the bottom line for me in that is that the projected impacts or the predicted impacts were small. Now, we can talk about going out in the future, and they don't say much. It's very hard to find quantitative statements. One of the few quantitative statements that they do say is that we could see an increase in food prices by 2050 under moderate scenarios, an average of 7 percent increase in the price, but anywhere between 1 and 23 percent in grain prices. To me, that's a ridiculous- From their current levels, inflation adjusted? Well, they don't say probably what they would have been otherwise. But to me, that's a ridiculous statement because the price depends on the balance of supply and demand, which are two big (50/57)
numbers, and the difference is what determined the price. But even if you believe the 23 percent impact, when you look historically at how grain prices have fluctuated over the last century, it's by much more than 23 percent. So I think, like many things associated with climate impacts, small and in the noise is what one can conclude from that. Again, not Steve talking. This is what's in the reports and in the book, of course, I give the references and the graphs and so on. Something I actually forgot to ask you, and I want to ask you before we move into the overtime, deals with back testing. How effective are these models across the board? How good are they at predicting warming in the past, exposed using historical data? So, hindcasting, as it's called in the business, is to take the state of the climate in some point in the past and then run it forward under what we think are the human influences and see whether we match the observations that we've had from that point in the past up (51/57)
to the current. And for the global temperature record, on average, it produces about the amount of warming that we have seen, although there's some amount of tuning that goes into that in order to get that result. But the detailed behavior over, let's say, several decade periods is quite wrong. It misses the strong warming at the beginning of the 20th century. It doesn't do a great job on the slight cooling. And of course, it does pretty well over the last 30 or 40 years, in part, because as some of the experts will admit, there's some amount of tuning that goes on in order to get that. When you start to look beyond the global temperature at things on a regional scale, for example, rain in California, temperature extremes, they get pretty bad. And I would say the uncertainties are large enough to be effectively useless in trying to understand how we're going to respond in the future. But you would say that they're pretty effective in predicting future warming? Global temperature. Well, (52/57)
we talked about the uncertainties in the future warming, just because you've gotten the last 40 years right doesn't mean you're going to get the next 100 years right. And one of the big uncertainties is this balance between sensitivity to greenhouse gas warming and aerosol cooling. And the other big uncertainty is an inability to reproduce these multi-decade natural oscillations of the climate system. So I'm going to move the second half of our conversation into the overtime, Professor. I want to delve deeper into some of these extreme weather phenomena, because I think there are a lot of interesting cases in the book. We haven't had a chance to discuss sea levels. I know that's a really big one for people. We touched on hurricanes early on, and we touched on forest fires. I think droughts are also relevant. I don't know to what degree we already discussed those. I also want to explore the incentives that might account for some of the diverging narratives that exist. Who are the (53/57)
stakeholders? Why has this view become such a prevalent view? And I think that also relates to morals and values and how we think about costs, because there are costs to making this a global priority if we can manage to do that. There are also questions about whether that's even possible, and what are the most effective ways to allocate our time, because I think that's very important. I think a lot of times when this is discussed, people don't take that into account, and I think that that's unrealistic. I also want to ask you about geoengineering, because I assume some of that relates to your work when you were at BP. You probably learned a lot about where the technology was at that time, and I assume you've stayed abreast. You discussed solar radiation management in the book. I want to ask you about that. That has to do a lot with, I suppose you would call it reflectivity of the Earth's atmosphere, the albedo of the Earth, and carbon dioxide removal, which is something carbon (54/57)
captures, so to speak, that people are pretty familiar with. I want to delve into those, because I really want to get specific on what the costs are, how realistic these technologies are. There are reports recently that Bill Gates is an investor in one particular company out of Boston, where they're focused on actually trying to increase the Earth's albedo. So I'm curious to know what you think the costs would be to actually implement something like that, how realistic, and then what the risks are. Of course, we're going to be discussing alternative sources of energy, including the viability of nuclear, because I want to know what your thoughts are on that, and if we can really reach any of these ambitious emission targets without building more nuclear power plants. 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 (55/57)
second part of my conversation with Stephen, as well as to the transcripts and rundowns to this episode and every other episode we've ever done, head over to hiddenforces.io to check out our episode library, or subscribe directly through our Patreon page at patreon.com.com slash hiddenforces. 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. Stephen, stick around. We're going to move the second half of our conversation into the subscriber overtime. That's great. Not going anywhere. 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 (56/57)
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 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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
The 1990s and the Cancellation of the Future Chuck Klosterman #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
thing. Within that though, the phone mattered less. Nobody loved their phone the way people love their phones now. Nobody would buy a new phone every other year. That would never happen. The phone was an appliance. It was like a television or a dishwasher or a radio. It was just kind of in your house. Now the phone has a totally different meaning. It's sort of like if you ask somebody, what would you rather lose, your wallet or your phone? Everybody would say, I would rather lose my wallet because at least I can cancel the stuff with my phone. Your phone is the most important thing that's on your body. It seems now that life of course was slower in the 90s and that it was more like that what I recognize now is that you were able to sort of be an autonomous being in a way that's become difficult. You didn't need to express your opinion about anything that happened. People didn't care if you never did. In fact, it was kind of seen as somewhat obnoxious if you were constantly telling (41/57)
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 Chuck Klosterman, a best-selling American author and essayist whose work focuses on American popular culture. His most recent book about the decade of the 1990s was an instant New York Times bestseller, and reading it conjured up in me a wellspring of beautiful memories about a time that I've often described as feeling like it was almost a dream. What it is about the 1990s that makes it feel this way is something that Chuck and I explore in this conversation. It was, after all, the last truly analog decade. There was no YouTube, no social media. Most people didn't even own a cell phone, and the internet was still a place that you had to go to, which often meant dialing up from a (1/57)
landline at home or going to an internet cafe. The feeling of the era writes Chuck Klosterman, and what that feeling supposedly signified isolates the 90s from both its distant past and its immediate future. It was a period of ambivalence defined by an overwhelming assumption that life, and in particular American life, was underwhelming. That was the thinking at the time. It's not the thinking now. Now the 90s seems like a period when the world was starting to go crazy, but not so crazy that it was unmanageable or irreparable. It was the end of the 20th century, but also the end of an age when we control technology more than technology controlled us. It was, as Chuck Klosterman writes, a good time that happened long ago, although not nearly as long ago as it seems. This conversation fits into a series of episodes that we've published over the years on television history and culture, technology and the human experience, and the transformation in our perceptions of the world and what it (2/57)
means to be a human being. You can find these and other related podcasts on this week's episode page at hiddenforces.io, where you can also access the second part of today's conversation by joining one of our three content tiers. This gives you access to our premium feed, which you can use to listen to the second part of today's conversation 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 absolutely wonderful episode with my guest, Chuck Closterman. Chuck Closterman, welcome to Hidden Forces. It's (3/57)
my pleasure to be on the Hidden Forces. Am I now a Hidden Force? Does this make me a Hidden Force? I don't even... Were you ever hidden? Maybe when you were up in Fargo, you were a Hidden Force. Well... It's been uncovered and discovered and you're a very acclaimed author. So that's actually my first question for you, Chuck, before we get into the book itself. I'm curious, when you meet people who haven't... Not just haven't met you before, but don't even know who you are. They might have read your work, but didn't know it was you. How do you describe who you are and what you do? So you're saying if I meet someone who doesn't know who I am or if I meet someone who doesn't... You're like you're invited to a dinner by your wife or something and no one knows who you are or you're like at a cocktail party and no one knows who you are and you get that question. So what do you do, Chuck? Oh, I would just say, well, I'm a writer. I was a newspaper journalist for about eight or 10 years and (4/57)
then I worked in magazines for a while and then I write books. And the follow-up question to that is, well, what do you write about? I would say, well, the only book you might have heard about came out about 20 years ago. It had a title called Sex, Drugs and Cocoa Puffs. People remember that title. If you know who I am, it's probably because of that, but don't read that book. So the reason that you're here today is that you've written your latest book, which is titled The 90s. People can guess what it's about. It's a wonderful book. I so enjoyed reading it. I was a child of the 90s. I was born in 1981, so I was 10 years old in 1991, which begins your formal decade. People get into that and how you chose it. And I graduated college as a teenager. High school as a teenager. So I came of age in a sense in the 1990s. And therefore, my experience of the decade was somewhat different than the experience of, say, someone like you, who was, I guess, how old were you when the decade started? (5/57)
Yeah, I graduated high school in 1990. So I was 18 in 1990. And then the decade ends. I was living in Akron, Ohio in my late 20s. So really, the 90s do encapsulate the first stage of my adulthood. So you were kind of the age of Ben Stiller and Ethan Hawke's characters in reality bites, right out of college in the middle of the decade. I went to reality bites the last semester I was at college. The movie was about kids finishing college and going into life. That's the exact status me and my friends were at. It was like it was in the spring. I very clearly remember the group of us who went to that. Yeah. So what was the hardest thing about writing this book? Well, the hardest thing, I guess, was not so much the process. Well, I mean, OK, the first thing was I had never written a book like this, right? I had done some books that are about the 90s. I guess, you know, eating the dinosaur was kind of about 90s type stuff. The Coco Puffs book was. But those were all my personal experience of (6/57)
that period. Like everything I wrote about all the media, all the culture I wrote about were essentially connected to my experience with those things, like almost explaining what my life was like through these things that I was into. This book had, you know, more detach. There was more detachment to it. This book also sort of, I mean, comprehensive is the wrong word to use because you can't be comprehensive about a time period like that. It's just impossible. But the fact of the matter is the other 11 books I've done, you could say they're good, you could say they're bad. The one thing you would have to say is like, I'm the only person who could have written them. Like they're very personal or specific to me. But there have been books like the 90s before, you know, there's a book called The 60s. There are books about the 70s. David Helvisch Dam famously wrote The 50s, you know, the book I was doing sort of already has a template to what the expectation is. So I guess for me, that was (7/57)
the hardest part, where in the past, my gauge of how successful a book was was simply how much it matched my kind of interior idea of what it should be. Like if the book in my mind and the book that came into existence were somewhat similar, I was satisfied. But this one was a little different in that way, in that my perception of it really isn't enough. Like if you're trying to write contemporary history in a way that will accurately sort of reflect the actual experience of living through that period, you can't only use yourself as a guide. So I mean, that was hard in a sense. It was hard to sort of realize that the success or failure of this book is less connected to me than the other ones I have done. I guess I also knew that it was probably going to be read by people who typically don't read my books. I mean, this is the kind of book where someone's walking through an airport or looking on Amazon or, you know, and they see a book about a time period and they're like, oh, the 90s, I (8/57)
lived through that. Or I came just after that or whatever the case may be. They have no interest in sort of me as the person doing it. They're interested just in the subject matter. So I kind of realized this has to be done in a way that extends sort of beyond who I typically think reads my books to a different kind of person. So that was actually going to be one of my next questions, which is how do you differentiate between your subjective experience of a time period and this fuzzy collective sense or objective sense of what it was? How did you go about trying to apprehend that? Well, you know, it's an interesting thing in that. So I was a journalist in the 90s, a straight newspaper journalist. And at that time, the goal was objectivity. And over time, that concept has sort of been, the common was pejorative, that there is now sort of this sense that no one can be objective. It's impossible. It's an impossible goal. So you should actually be as subjective as possible. You should kind (9/57)
of steer into that subjectivity. But that's to me the wrong way of looking at objectivity. Like the goal of objectivity is not to be perfect. It's to come as close to that as possible by sort of thinking of your biases, recognizing them and sort of implementing that into the way you investigate or explain a situation. So when you're working from a subjective point of view, you are the arbiter, you are the judge, you are the jury, you are the executioner, you're all of it. OK, if something feels true to you, like there are things, I wrote a book called Frogger Rock City about listening to like hair metal bands growing up in the Midwest. And if I had a feeling about Cinderella or I had a feeling about Judas Priest, that was enough. What I'm trying to translate is that feeling. When you're working in a more objective paradigm, you're not trying to translate a feeling. You're hoping that a feeling emerges from the fact that you are looking at this thing from a degree of attachment and (10/57)
detachment and separation. And how do you do that? Well, you just try to stay constantly aware of what you think personally about a situation and recognize that that understanding or that perception is in your consciousness and that you can't let that thing that's there, this idea that's there kind of preexisting way you feel about it. Emotively, you have to try to keep that from coloring what you end up writing. That's not a great explanation. I realize it doesn't feel that unnatural to me, though, because that was just kind of so ingrained in me when I was a young reporter. That was that was just that was everything, you know, and that I wanted to move into book writing to get away from that. But now all these years later, I find myself gravitating back toward it. It's interesting because when I was preparing for this conversation, I didn't just rely on your book and reading the book, but I also went back and watched some of the clips that you referenced, watched a couple of movies, (11/57)
listened to a lot of music and tried to immerse myself in the cultural milieu of the decade. And that made me wonder about how do we separate the feeling of what it was like to live through a time versus how we remember that time later on as we've retrieved the memory, worked it over, integrated it with other people's memories and fiction that references the decade and makes it mean something that it didn't necessarily mean for the people who lived in it. So how do you differentiate between those two things and which one were you trying to capture? Well, I mean, that's an excellent question because what you're really talking about is the problem of nostalgia. OK, so someone looks at a book called The Nineties. They see a picture of this old phone on the cover. Their natural inclination is to see this as probably an exercise in nostalgia and that maybe that they will enjoy the book or maybe be repelled by the book because they assume it's probably going to traffic and nostalgic ideas (12/57)
and and sort of the whole concept basically of reliving the life that you once lived. But honestly, this book isn't nostalgic at all. And I say that because I, at least to me, have a very specific definition of what nostalgia is. Nostalgia is not just remembering something that happened to you. Nostalgia is looking back on an event that you experienced and injecting sort of this emotional memory of the person you were at the time and then thinking about the event differently because of that. This is why someone can look back at a really terrible period of their life with a sense of nostalgia because they can look back on it with this understanding that the event made them who they are and sort of built the way they think about the world and that they were a person who experienced that that they kind of miss. And then they remember the event itself. I mean, you just my dad would talk about the Great Depression with a sense of nostalgia. And he's always, of course, was talking about how (13/57)
terrible it was. But what he was really talking about was his memory of being like a six year old and a seven year old kid and the things that he did in this time that sort of just gone forever. You know, that's what nostalgia is. Nostalgia is changing the meaning of the thing. And I would say my principal goal with this book was not to do that to the 90s. There is a real desire now with contemporary history to look at it through this subjective lens and kind of take the way we think about the world now and push it back through the expanse of time. So the way we would understand any issue about society or film or, you know, identity, any of these things. Now, the desire is to look at the past and kind of jam those ideas into it and then re experience the time as if like almost we're inventing what 1994 was like or what 1997 was really like. My hope was to reflect the way it felt at the time to live through this period. This is why I didn't do a bunch of new interviews for this book. If (14/57)
you talk to somebody about, you know, what the 1996 election was like and you talk to some political analysts now, they will take their understanding of the world now and say, well, OK, I see these fragments of this in the 96 election and that there's certain things about Bill Clinton and Bob Dole and all this that we that we kind of understand now because we see how the world is unspooled. What I wanted to do was talk about something like the 1996 election. The way it felt at the time and the way to do that is to go back through what was written and said about these things as they were happening. For instance, like when I read about Y2K, I don't know how many people listening this are familiar with this, but when we were moving from the year 1999 to the year 2000, there was sort of a widespread panic that computer chips were going to all fail because they were designed to understand time through two digits. So it was like 79, 80, 81, 82, up through 99. And then we went to the year (15/57)
sense, you can't. But what I was hoping to do is that by kind of sticking to what seemed like straightforward information from the time that the texture that once existed could be sort of recreated, that it wasn't a new kind of understanding of the 90s, but an accurate one. Yeah. So many thoughts about that. One, obviously, I'm reminded. I mean, the quintessential movie that captures our obsession and concern over Y2K was Office Space, where literally the guy's job was to recompute the numbers or transfer the dates to new spreadsheets so that the world wouldn't come to an end. And what's interesting also about that movie is there was this kind of sense of like real boredom. And so I'm curious, looking back on it, what do you feel were the actual feelings that pervaded the time? What did people feel during the 1990s? If we could talk about something like that in the aggregate, what was the feeling of the time? Well, I mean, Office Space is an interesting example, because you say there (17/57)
was this this sense of kind of tedium of boredom, of being sort of trapped by your job. OK. The Cold War had ended, history had ended, everything just kind of felt safe, cocooned. Is that just us looking back on it now? Or was that actually something that we felt? Maybe not realizing it, but we did. At the time, there was a sense in the culture that life was somewhat underwhelming. That the 1990s, if you're using like the broadest possible strokes, are kind of categorized by this idea that people were potentially optimistic about their own life, but generally pessimistic about society. There was a sense there was an interest in the 1970s. And part of that is because there's just always an interest in every generation about a generation that happened just before they were born. So you always kind of go in the 70s, people were interested in the 50s. In the 80s, people were interested in the 60s. In the 90s, people were interested in the 70s. So in some ways, it was the natural (18/57)
progression. But I think part of it had to do with the sense that during the 80s, there was a shift. And the organic nature of culture was no longer a legitimate force, that now every decision was pre-made or manufactured or very consciously created. So you were looking back at the 70s almost with this idea, not that it was a pure time or that it was like an easier time or any of these things or more political or less political time. It was just that, well, it seems like if there was a blockbuster movie like Jaws or Star Wars or whatever, that happened naturally. It was legitimate interest from people and that they made these things happen. Whereas in the 80s, we got used to the idea that, well, we make blockbusters every summer. People assume that there's going to be a movie that's designed for them to see 14 times if it works. There was a kind of a belief that we were now kind of in America on autopilot, that the Cold War had ended so we were the only superpower and things were just (19/57)
going to kind of continue to be in sort of this kind of static. I don't know how to describe it. Like now it's tough, of course, is the idea that like, well, are these things that we are now saying retroactively or do we actually feel at the time? Not everybody did, but I mean, it seemed pretty symptomatic of living through that period. That it was an easier time to be alive because the stakes were lower, but we didn't recognize that in the moment. It was a very luxurious decade. You know, there was a feeling in which I always point to the movie, Smack in the Middle of the Decade, Independence Day, where basically all the battles that Earth had to wage had been waged in one. And now we had to look outside the Earth to find an adventure. And so I think we took my senses, reflecting on this also in preparation for this conversation. I do feel like looking back, we didn't really realize how incredibly privileged we were living through that time and maybe living through such a comfortable, (20/57)
luxurious time also created not just a sense of complacency, but a kind of boredom that made it not necessarily worth living. Because I feel like there was also that sense of it too. Before we go any further, there's something I want to do, which is to actually delineate what we're talking about here. Like, what is the 90s? And you start the book by saying that the quote, 90s began on January 1st of 1990, except for the fact that, of course, they didn't. What delineates a decade? How do you decide what the start point and the end point, the bookends of a decade are, so to speak? This seems like a strange answer, but in a way, a decade is built around sort of framed by the period where our cliche and caricature of that time begins and when that cliche and kind of caricature ends. And what I mean by that is, say you're going to a 1960s themed costume party. Everyone knows, hey, we're dressing like people from the 60s. No one's going to dress like it's 1962. That's not going to happen. (21/57)
People are going to dress like it is like they're a beetle or they're hippie or these things that really start around 1964 moving forward. You know, there is a sense about the 90s that like that, at least the sense I'm projecting in this book, I guess, is that when we think of that time period, but we're really thinking about as kind of a way of life and a way of being that comes after the release of Nirvana is never mind. I mean, like a lot of historians will say that the 90s really began with the fall of the Berlin Wall. That makes a lot of sense to say like, okay, so the Berlin Wall falls in 1989 and then 9 11 happens in 2001. And this is really the framework we use to understand the 90s. The fact of the matter is 1990 was still very much like the 1980s. When you look at like that, you know, Cheers was the biggest show. Joe Montana was still the best quarterback in the NFL. You know, like, you know, like Twin Peaks had come up that out that year, but Twin Peaks seemed like a real (22/57)
kind of fringe thing. You know, like Warrent was touring with Trickster and, you know, all these bands like the New Kids on the Block had a major tour. A lot of these things that we think about as kind of like 80s ideas, they were still happening in 1990. But starting with the release of Nevermind, there was a real shift in what the way it was perceived to understand a young person. Then in order to understand the modern young person, you almost had to understand it through Kurt Cobain and through the idea of these kind of the aesthetics and the values being propagated by this movement in music. You know, Nirvana was the most important band in the 90s, but not for musical reasons necessarily. I mean, their music was important, but more so had to do with non-musical reasons. This idea that the most important thing about Nirvana was that they perceived their success as humiliating, that they were embarrassed to be the biggest band in the world, and that they were constantly seemingly (23/57)
trying to undercut that despite essentially staying in the same cultural spot. You know, and that to me is when the 90s really start, when that attitude becomes normative. So explain that. And before you do actually, let me see if I can find a quote where you actually say something like this. Right. So you say, in the 90s, doing nothing on purpose was a valid option, and a specific brand of cool became more important than almost anything else. The key to that coolness was disinterest in conventional success. The 90s were not an age for the aspirant. The worst thing you could be was a sellout, and not because selling out involved money. Selling out meant you needed to be popular, and any explicit desire for approval was enough to prove you were terrible. So where did that come from? This idea that trying too hard or wanting to be somebody was so bad. A lot of it comes from, I guess, the sort of splitting of the culture into a clear underground and mainstream to these two sort of (24/57)
adversarial channels that happened during the 70s and the 80s. You mean that dichotomy emerged in the 70s? Well, yeah. I mean, say you look at in 1967, who was the most critically accepted band? It was the Beatles. Who was the biggest band? It was the Beatles. OK, those things could exist simultaneously. This begins to widen as we move into the 70s and even more so in the 80s, where there's an idea that there's things for the mainstream audience, which became to mean an unserious casual consumer. Somebody who basically just accepted what was given to them through marketing or through media. And then sort of this uncompromising underground culture. For people who have taste? Well, people who have taste or people who more often just disliked what they saw as a mainstream idea. That they, you know, these things split, right? And then you get these weird situations where a band like Nirvana is like the Beatles again very briefly. They're the most beloved band by critics and they're the (25/57)
biggest band. And that kind of causes a sort of a paralysis of self identity. Like the anxiety Nirvana seemed to feel from the position they occupied in the culture was very palpable. And that then sort of like, you know, became kind of endemic with with anybody who wanted to be interested in culture. This idea that when you looked at, say, the previous decade where there was a real desire for hugeness, where like the idea of being commercially big in any idiom of art. The idea of being big almost like the ends just for the means or whatever. It's like if you're you're massively successful, the meaning of what you're doing almost becomes secondary to the proof that you are succeeding. And the 90s had a discomfort with that, that a lot of people saw that as really kind of cheap. And that's the whole idea of like selling out. The idea of selling out has existed for a very long time. I mean, you know, people would say Bob Dylan sold out by going electric, you know, the whoever record (26/57)
called the who sell out. And this was way back, like, you know, 30 years before this were, but it was at its apex in the 90s. And I do think that in a lot of ways it was psychologically damaging to, you know, people who sort of experienced it. This idea that if you wanted to do something, there was kind of an emptiness in having what you do succeed because it illustrated a kind of desperation on the part of the creator. That it was less artistic to sort of look at what you were doing as a commodity of any sort. So you always had to fight against that, even though you also understood it was ridiculous. It made no sense to make something and have no one experience it, you know. So that was the huge sort of like just crazy thing about the idea of selling out, which is that everyone understood it to be ludicrous. And yet you still had to play within those rules. Like you had to accept something and try to almost perform this thing that you consciously understood to be crazy. So I'm curious (27/57)
to understand, I don't want to dwell on it too much because there's so many other things that I really do want to talk about. But did that stem from the fact that 90s culture was predominantly and this actually gets us into a secondary question, which is also very important and elicited some confusion for me. During the course of reading the book around generations because I'm technically a millennial and you had these two different generations that kind of remembered this period that were old enough to remember it and live it and be culturally influenced by it, which is the Gen X and the millennials. Is the reason that this allergic reaction to mainstream success in the sense that somehow if my artwork is assimilated and becomes mainstream, that it's something happens to it, that it's no longer what it was. Is that in part because the mainstream culture, at least to begin the decade, was Gen Xers and Gen Xers were a smaller cohort and they felt sort of bullied by the larger cultural (28/57)
forces of their previous generation of the baby boomers? Huh. I wouldn't say that. I can understand that argument being made. But I don't know if that was really the case. I mean, this is always the things you got. This is why a book like this is complicated to do. First of all, we have the idea of what a Gen Xer is and what a Gen Xer wants and what are the values of Generation X and all of these things. But of course, with any generation, be it millennial, baby boomer, whatever the fuck you use is your generational example, a small sliver of that generation actually adopts all the characteristics they're supposedly supposed to hold. I mentioned how we look at someone like Courtney Love as a real 90s figure. Shania Twain in the 90s sold 14 times as many records as Courtney Love. My so-called life is almost like a defining Gen X show, like Angela Chase and like Jared Leto's character in that, you know, in Brandt Crackauer and all this. These are almost like these Gen X teens from (29/57)
Central Casting in a way. When that show came out, it was on ABC on Thursday night and I watched every episode. I was really into that show from the very first episode, but the show that its rival that was new on NBC was Friends. Okay. I think it's pretty clear that my so-called life lasted one year and has still some kind of, you know, cultural residue. But Friends became one of the biggest sitcoms that ever existed. Okay. Now Friends is a weird example of something from the 90s in the sense that these are young people in their 20s trying to find, you know, their way in the world. It seems like that should be very indicative of the Gen X mindset and it should be a Gen X show, but it's not. That show kind of exists out of time. The characters on Friends don't look like Ethan Hawke and reality bites. They don't have those kind of conversations. They almost exist as though, you know, we could be living through any period of time. The problems we're dealing with, the relationships we're (30/57)
having could have happened in the 60s, 70s, 80s, 90s or beyond. And as a consequence, Friends was much more popular and is still popular today in a way that my so-called life can't be. Yes. So first of all, whenever we're talking about like, like just these these ideas of like what, how a Gen X person thinks or whatever, we're just talking about the kind of person who actually cared about those things. You know, it's actually kind of a small, you know, everybody had some elements of it, but few people had them all. So when you're talking about like, is this idea of selling out does ever do with the 90s or does it have to do specifically with this Gen X mindset? I see what you're saying, but like throughout the 90s the Gen X person was the center of youth culture. And that's what we're always talking about with generations. We're always talking about the youngest adults. You know, it's always, it's very interesting, you know, we think about like what people were like in the 80s, you (31/57)
know, like, you know, we think about, oh, you know, there's all this cocaine and people just wanted to get rich and MTV sort of became the way we understood everything. We're not really talking about 75 year old people in the 80s though. Like when we talk about people of the 80s, we're talking about young people of the 80s. When we talk about the 90s, we're talking about young people of the 90s. You're saying like, you're a millennial, right? I think it's hard for people to accept that millennials are now in their 40s. It doesn't seem like that should be how it is. Millennials are supposed to be 20 year olds. Yeah, who don't want to, you know, upset at work or whatever, you know, but that's hard for people to get around these cliches. I mean, and that's the trouble. Like there are a lot of people who say like generations are stupid. These ideas that all people share characteristic, it's not that different than astrology, you know, like it makes no sense that everyone born in March (32/57)
would have the same personality or whatever. They're like, it's the same way with Generation X. Just to apply these characteristics to the entire populace is like, you know, idiotic. And I understand that. I actually don't think it's idiotic. I think it's idiotic to deny it. I look at people that are my exact age and we share so many cultural reference points. I mean, we're able to just flow in memory and remember things and things that spread like wildfire throughout our generation, throughout our age group from school to school. No one had met anyone else, but we all had some of the same reference point jokes, the same things made sense. I mean, there's a real intelligence that travels there in the culture. No, it's an interesting deal. I think like the movie The Big Chill from the 1980s, which is a movie about the 60s, is interesting in this regard because that's a movie about people later in life realizing that these shared ideas that they had in the 1960s are kind of falling apart (33/57)
and dissolving underneath their feet. And it's sort of the recognition that like some of the things that we all believed in that we sort of remember as being important and integral to society were very flawed and sort of false and all of these things. You're probably having the same experience with people your age now. It's like a lot of the things that you might see as connecting fluid, you would not have identified as such at the time. You know that at the time it just seemed like, well, I like this and my friends like this, but it doesn't have a lot of meaning. But when you get older and you start seeing that everybody seemed to have some understanding of this, and it's so hard in life to find these unilateral points of understanding that when you do find something, almost amplifies its significance. Some people who read this book have said like, in fact, strangely high number. I said, like, why don't you talk about pogs? I don't remember what those were. There were this thing in (34/57)
the 90s that people were into. It was like a little game. It was sort of like, I think it predates magic, the gathering, although I don't know. It was something that I remember. I remember them happening, but I no way thought of it as a significant thing. But to some people it was, more people than I would have guessed. Yeah. Another thing that strikes me is when we talk about this kind of a version to success and concepts of selling out, I'm struck by the comparison to the 80s where success really was kind of the celebrated thing. A lot of these 80s movies, whether it was Michael J. Fox, The Secret of My Success, it was a lot of characters kind of made it, made a lot of money. Money was a big deal in the context of those films. And it kind of makes sense also when you combine it with the Reagan Revolution and the end of the 1970s and the reduction of taxes and deregulation. So like, the political elements are really interesting. I want to quote you one more time here because there's (35/57)
something that you said that kind of reminded me of this. So this is a quote also from the introduction, actually, I think both the quotes that I pulled from the introduction. You write, for much of the decade, Seinfeld was the most popular, most transformative live action show on television. It altered the language and shifted the comedic sensibilities and almost every random episode was witnessed by more people than the 2019 finale of Game of Thrones. Yet, if you missed an episode of Seinfeld, you simply missed it. You had to wait until it was reared the following summer when you could try to manually record it on VHS videotape. If you missed it again, the only option was to go to a public archive in Los Angeles or Manhattan and request a special viewing on 8mm videotape. But of course, this limitation was not something people worried about because caring that much about any TV show was not a normal thing to do. And even if you did, you would pretend you didn't because this was the (36/57)
90s. I love that paragraph. I'm not sure what it was that you said that made me think of it. It may have been this idea of like, what was a normal thing to do? Because now we're so used to having these kind of like, you want to talk about multiple tiers? I mean, there are niche groups of people that are obsessed with one particular thing. And with the internet and YouTube and the reduction in the cost of storage space on hard drives, you have the ability to access all sorts of content from all sorts of periods. And, you know, if you want to watch all the Seinfeld, you can do it. It's not a problem. And it's easy to forget that the 90s was the last time. And this is something that I I'd like to reflect on with you, where it really feels like the last analog decade, the last period where being human felt a certain way, where life felt grounded, and where our sense, and this is where I really wanted to take it, our sense of time and space felt the way it had. I mean, look, there's no (37/57)
doubt that technology alters this. There are wonderful accounts of the invent of the locomotive and people's, the transformation of time and space, the ability to go from one place to another. But something about the digital revolution, the introduction of mobile computing and hyperconnectivity and always on technology that collapsed time and space, outward time and space in the world, and also dissolved the barrier between our internal world and this external world that has collapsed into a singularity. And in fact, it's the inviolability of the internal world in the 1990s that sat with me the most in preparation for this conversation, thinking about the phone. I didn't actually have a phone in my room, but, you know, we had a phone in the house. And if someone was going to call me, and I was expecting the phone call, I was going to stand by the phone and be physically there. If I was going to go on the internet, I was going to physically go on the internet, you know? And so there was (38/57)
this, I bring that up, I guess, there's no clear question. I do this sometimes, I try and avoid doing it. But I'm, I'd like to kind of talk about that, how the feeling of living in a time where you still, you were kind of grounded in the physical world and not in this kind of world that we've moved in today. Okay, that's very interesting. I guess I have a lot to say on this. I'll try to be brief and not get off on too far a tangent. But okay, first of all, the feeling you're discussing is a retroactive feeling that you did not have in the 90s. And I can kind of prove why that was. You look at a book like Generation X, the subtitle of that book is Tales from an Accelerated Culture. The idea of the acceleration of culture was an omnipresent concept presented through the media throughout the 1990s. There was this idea that culture was accelerating too fast for us to fully sort of control, that we were losing control of these things as they were happening, or that we already had. Now what (39/57)
they're talking about are things like the proliferation of cable television. That was seen as almost like too much media, right? We have 24 hours of channels now. We have 24 hour sports. How could this be? The phone is a massive thing. I think from a day-to-day experience, nothing has changed more about being alive from the 90s to now than the phone, even in some ways more than the internet. Because the phone was anchored you to a place that if you wanted to be able to communicate with people who were not in front of you, you had to be in your house. Long-distance calling used to cost money, right? People would complain over how much long distance calls cost. Maybe they thought it was too high, but nobody thought it should be free. Nobody was like calling should be limitless. People would go to college and they'd break up because they went to different colleges and they couldn't afford to make long-distance calls. Things like that, the centrality of the phone to our lives was a huge (40/57)
people, broadcasting your ideas about the world. I always think it's funny when people who love Twitter, they'll say it's like, well, it's sort of like a huge party for all the world. It's like the town square. Can you imagine a party where somebody stands on the table and just spouts political ideas for four straight hours? They would not get invited to a lot of parties. Twitter is not like a party. It is not like any kind of actual human interaction because humans don't do that when they've actually got to be people. I think that as we look back, when people say they miss the 90s, what they're really saying is they miss the thing you described. This idea that just the experience of being a person, of being a singular person or whatever separate from technology was still possible. But this is what's always tricky when it was actually happening in, say, 1995, which is a real key year for the internet because of Amazon starts, Craiglist starts, a lot of things begin in 1995. Nobody in (42/57)
1995 felt as though life was placid and slow. It only seemed to be accelerating. We then hit a point where things changed so radically that moving back in time almost seems going back to 1992 now, I think almost feels like to people like going back to 1952 because everything would be different. 1900. I feel like it's 100 years ago. It feels like to me, when I look back at that period of time, I actually feel like it was a dream. It feels like it didn't happen. It feels like the memories have populated, but it can't possibly be. This is the most interesting thing about being, I mean, you're, I guess, on the cusp of this, but of being like a generation X person or a baby boomer or I guess a older millennial, is that we are going to be the only people in the history of humankind who understand both experiences of pre and post internet that we just by chance happen to live through this period of this transformation. There's been other people like this. I mean, people who remember pre and (43/57)
post television, that also had to be just a crazy thing that in the past, before television existed, the idea of seeing a non-live sporting event or a a political convention or what any event happening anywhere, which is it wasn't even something you missed. It was just an impossible thing to have. You know, then all of a sudden, it was possible. It's the same way with this. I mean, there's all these things now that the internet allows that we didn't really even, it wasn't even like something that was fantasized about before that. It was like no one ever thought of this, you know, no one ever thought that like, if somebody was say like the internet was the coming internet was described to someone in 1988, you went back to 1988 and you say, the internet's coming. This is what it's going to be. I think it's unlikely that the first thing they would think like, boy, that's really going to change pornography. You know, they are like, it's really going to alter our ability to gamble on sports (44/57)
or whether all these things that have happened that they weren't like things that we were waiting to see, you're waiting to sort of, they just changed and all of a sudden, they became completely normal. Yeah. I mean, I totally agree. I'm sitting here trying to think about really what made the internet and really for me, it wasn't just the internet. The internet alone isn't really sufficient to bring about the kind of socio-psychological spiritual shift in the zeitgeist that we've experienced and we've lived through. I think it was the combination of the internet and mobile. The ability, not just mobile now, but this is now where all devices have increasingly become intelligent and the combination of machine intelligence, increasing levels of machine intelligence and ubiquitous connectivity has to go back to what I mentioned earlier, kind of broken the seal between the external and the internal. And what's interesting about that, I'm curious what you have to say about this. First of (45/57)
all, I think it has violated our sense of privacy. People don't feel like there really is anywhere that they can be safe where they can actually be. I mean, I feel like you need to literally leave your phone at home, but even if you leave your phone at home, you've taken an action that's so unnatural that that in itself conveys important information about what you're going to do. So there's a sense of having lost much of that internal, private, sacred space. And at the same time, a kind of expectation that the external world should conform to your internal subjective experience of it. And there's a kind of rolling disorientation that I feel like we're all living through as a result of that. And I'm curious, I don't know if you agree with that, if that speaks to something that you think's accurate or maybe kind of overshoots. Well, I mean, okay, several things. First of all, the thing you mentioned about turning your phone off, that's really insightful. I mean, I know this guy who (46/57)
allegedly murdered these people in Moscow, Idaho, you know, you hear this about the like one of the things. Oh, well, this guy, he murdered a bunch of some college students in Idaho. This is recently or yeah, like a month ago. And one of the things that I have heard about this, I have tangentially heard about this. Going to be used against him is like during the time of the crimes, like his phone was turned off during that period, like turning your phone off now makes you suspicious. A privacy thing is a fascinating deal. And I write about this in the book, like the idea of doxing, for example, okay, you know, it is now actually perceived as a form of violence to dock someone online, to say where they are, to give their location, to give their real name. It's beginning of the 90s, most people dox to themselves, your name, your address, and your phone number was in a phone book. You had to pay money to keep it out of the phone book. You had to pay extra if you wanted an unlisted number. (47/57)
If you called up the operator, and if you knew the area code of the person you're looking for, they would just connect you to that person, you know, now that is seen as absolutely like beyond the pale, like you would never in a possibility. Now what changed? Did life become more dangerous from 1994 to 2004? It did not. It did not become more dangerous. All evidence shows that it didn't. But it's this idea that somehow because we haven't like we're complicit in this organism, this internet organism, that there is just this different kind of risk. I mean, it used to be that like nobody wanted to give their credit card over the internet. Like you didn't want to buy a book on Amazon, maybe you're like, I don't know. I don't want to do that. I'd call a bookstore and give them my credit card number, but I didn't want to put it into the internet. The magnitude and the size of it made it seem dangerous. And there was a third thing I wanted to discuss. I can't remember what was, you were (48/57)
talking about just sort of like the, well, this kind of sense of alienation, you know, it is weird. It's like we become alienated by this thing that in some ways we can't live without. I mean, I used to always use this example just about television and film. So how long have humans existed? You can use a whole bunch of different figures, 25,000 years, 250,000 years, all depends on what you consider when hominids start. We go to East Africa and decide like this is the first person. Okay. Regardless of when you pick, it's an extraordinarily long time or anything a person sees that's moving is there. That if you see a tiger walking in the grass, that means you're in front of a tiger. Everything about your physiology and your biology and the way your brain is constructed has been sort of built to recognize that if you see something in front of you, it's because it's happening. Then we start with film in the early 20th century. You know, they talk about, you know, the great train robbery. (49/57)
The first time people see that movie, a train is coming at them. They jump out into the aisles. They think a train is coming out of the screen. A guy shoots a gun at the screen. People duck. You know, it's like they can't fucking believe that they're seeing something that's not happening in front of them, you know, but that normalizes real quick. We completely understand now the difference between seeing someone in real life and watching an episode of The Sopranos. We totally understand that like, I'm looking at you now on Zoom and you're not here. Okay. I have complete conscious understanding that things that I see are very often not real. Okay. But because we're conscious of that, we think that our body has also adopted this. I suspect our body has not. I suspect that technology has evolved faster than a person. And there is something inherently unsettling to us about constantly being put in a world that is more mediated than not. That we are always sort of psychologically dealing (50/57)
with the fact that our brain is triangulating the fact of what it knows consciously and what it feels unconsciously. And that is sort of why I think people who are on the internet all day and maybe who love the internet and view it as like the thing that saved their life are still vaguely unhappy and feel a little bit weird. I've used this example before. Are you a sports fan at all? Sure. Okay. Not much, much anymore. I don't have the time for it. But yes. Imagine a basketball game in your mind right now. Okay. What are you imagining? Are you imagining the way it looks on television? No, I was actually, no, but that's a really great opportunity. Well, no, it's interesting. You're a real exception to this. Almost everyone has played basketball, right? At some point, even like in elementary school, or they went to a game in high school or their friend, even they hate sports, but their friend bottom to one. Everybody has experienced basketball to some degree in real life in the United (51/57)
States. And yet when you ask most people to imagine a basketball game, myself included, the first thing I think of is the way basketball looks on television. I think of a specific game from 1984 when someone says, think of a basketball game. I just think of it instantly. I think it's now become more natural for our first thought to be the fabricated version of something as opposed to the thing that we experience in reality. And I wonder if that leads to a kind of mental unease. Yeah, you kind of touch on that in the book when you talk about hyper-reality. Something else that comes to mind for me, and I feel like I have seen studies referenced about this, but maybe you can confirm it for me. My sense is that digital experiences are less memorable than analog or physical experiences. That in other words, if you spend your time playing, we're talking about the 1990s and you're sitting in front of your PlayStation, or your Nintendo, or your Sony Genesis, and you're playing a video game and (52/57)
spending all day playing it, I wonder if there's something less memorable about that. And in general, in the world that we live in today, populated as it is by digital experiences, where lots of people spend time in isolation and the social component of their experiences is also digital. In other words, that isn't me and my friend coming over and we're playing Madden NFL for four hours straight. It's me by myself in a room and getting on a multiplayer room and constantly just losing myself in this immersive experience over many, many hours. Over many, many hours, I wonder if it has the same memorable quality. And that speaks to a larger phenomenon that I feel like I've experienced the more time I spent immersed in the digital world. And I'm reluctantly immersed because it's good for my business and I need to spend a certain amount of time on Twitter, et cetera, et cetera, et cetera. That's an observation that I want to maybe hold and explore as we move to the second hour. I also want (53/57)
to make another observation, which is I think actually that one of the larger is beyond simply the interface, the intermediation of reality through this digital layer where you and I, for example, are now talking on Zoom. There is a lot of loss there. There's less information that's being conveyed. It's a very different experience. But I think that even more profound than the intermediation, the difference in the actual experience of what life is like when it's digitized is the increasingly the intelligence that's in the background of everything that's been growing year after year, ever more and greater, and influences our decision making and our lives and our reality in ways that don't rise to the surface. But we all either are aware of it on some level or were aware of it until recently it slipped to a subconscious part of our lives. I think that is what makes the change from where we are today to where we were in the 90s uniquely all-consuming and transformational and not (54/57)
necessarily in a good way. And that's another question, Chuck, which is like, can we make normative statements about, can we say that the 90s were better objectively than today because of this fact? But there are a number of other things. We're not going to get to all of them. There are a lot of interesting things in your book, like celebrity. Also, another thing that I thought about, which is the ladder of success. Me, I spent my life moving from career to career and made my own career in media and really was able to do that because of the tools of blogging and social media and podcasting and video and all this stuff, something that would have been available to me. I had to go through the ladder of traditional media. And so there's something interesting about how our ability to exercise power over our career and all this stuff, how that's changed conspiracies and the move of conspiracy being this private thing that I used to listen to Coast to Coast AM. And I used to watch Unsolved (55/57)
Mysteries and X-Files, but there wasn't like this tribal cult that I could join and form my identity around. So there's so many interesting things that you talk about in the book. And we'll try to get to as many of them as we can in the second hour. For anyone who's 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 Chuck, 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. Chuck, stick around. We're going to move the second part of our conversation to the premium feed. If you want to listen in on the rest of today's conversation, head (56/57)
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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
How to Invest in an Inflationary Recession Paulo Macro & Le Shrub #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
because you just didn't do anything. You just sat there. Maybe the next 15 years looks like something very different. Yeah. And if you want a little bit of food for thought of that, imagine the 6040, so it's 60, you know, the 6040 portfolio. So imagine 5% of the SMP, I think is Nvidia. And if you put commodities and energy is probably what, around 5% as well. So imagine we do have that inflationary environment, the portion that's going to carry you out and help you is less than one of the Mac 7. So that passive portfolio is not going to help you out if we do get that, you know, the environment we're talking about. So that's what I want to talk about in the second hour, guys. I certainly want to talk about your commodity thesis, both of your commodity thesis, but especially yours, Paolo, on whether we're not transitioning into commodity bull market, what similarities it may have to the 1960s and 70s. In other words, how instructive is that period to helping us think about what we're (54/57)
to our audience. But Paulo, since you're going to be introducing yourself for the first time, I would love to have you just tell us a little bit about who you are and what your story is. And also, both of you, this is relevant. People that heard Leshrub's episode know, and these are anonymous names. He's got an anonymous Twitter account, like a number of really smart people in the modern age. They have Twitter accounts that they interface with. You guys both have substacks as well now. You're also an anonymous account on Twitter. So tell us a little bit about who you are or what your story is for those who aren't familiar with you or your work. Thanks Dimitri and real pleasure to be here. Thanks so much for having me on, guys. My background can probably be best summarized as just over 20 years in finance and assortment of roles. I'm a little bit of a misfit toy in the industry in that I've pivoted my career over the years a few times. I started in the early 2000s in a global macro role (5/57)
What's up everybody? My name is Demetri Kaphinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guests in this episode of Hidden Forces are Paulo Macro and La Shrub, two very popular authors with large Twitter accounts who also published their market commentary and investment ideas on paulomacro.substack.com and shrubstack.com respectively. This is a conversation about not only ideas and investment frameworks, but also about process and how these two investors with 40 years of market experience between them seize investment opportunities and manage risk, including one of the largest risks of all, you, you, and the behavioral biases that can so often lead all of us to make bad decisions at the worst possible time. In the first hour of our conversation, I asked Paulo and La Shrub about some of their (1/57)
respective frameworks, including the e-mification of developed economies and their political systems, and the need to understand the incentives of policymakers, how their toolboxes have changed in the years since the COVID-19 pandemic, and how that should inform your expectations about interest rates, inflation, credit rationing, and much more. In the second hour, we explore how the contemporary strain on the international system and on American military and financial hegemony could amplify some of the budgetary and political headwinds facing developed economies in the years ahead. We discuss the conundrum facing policymakers in China, the investment opportunity in commodity the search for a new safe asset in a world of worsening fiscal balance sheets, and what it feels like to be financially gaslighted during an inflationary recession where prices rise as your living standard declines. If you want access to that part of the conversation and you're not already subscribed to Hidden (2/57)
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. 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. 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, (3/57)
please enjoy this highly entertaining, thoughtful and educational conversation with my guests, Paulo Macro and Leshrub. Paulo, Macro and Leshrub, welcome both to Hidden Forces. Great to be here. Good to be back. Good to be back. You remember the last one? Why do we called it? What was it the best investment podcast ever? Right. But now we have Palo on, so we're going to make it the best one. Exactly. So it's great having you guys both on. Leshrub, you were on last summer. I think in August we did it in studio in Athens, right? Yeah, it was a face-to-face and it was a turning point in the markets. We had a bit of a bearish stance back then, I think that things were getting a bit too hot and there was a correction afterwards. And then the policymakers took a decisive stance in October and got us where we are today. So we're going to have a chance to talk about that. Paulo, you haven't been on the podcast before, so I'm going to have both of you have an opportunity to introduce yourselves (4/57)
on the sell side with a major bank and then moved to the buy side to a group of mutual funds focused on international equities as an analyst. Moved back to the sell side for the big trading floor fund at a major bulge bracket bank that morphed into kind of more of an original ideas cross asset role with focus on commodity related equities. And following Lehman moved back to the buy side this time as a marketer raising assets for hedge funds. And didn't particularly like that role though, loved the people I worked with and learned a lot sort of went to hedge fund college behind the scenes helping managers raise money. And then from there I spent the last 10 years focused on Latin America as my name Paulo or pseudonym implies my background and passion really is for the macro and understanding how the big picture meets the bottom up. And my background is Brazilian. My parents are from there. So I grew up speaking Portuguese in the house and kind of a foot in both worlds. I live in New (6/57)
York. I'm born and raised in New York. So I'm a rare breed of New Yorker who's actually from here. But with the Brazilian background and the dual citizenship and the passport and the sort of up close understanding of Latin America and Brazil and my focus in the last 10 years was as a Latin America specialist again for major banks. So I've moved around a little bit over the years and put different sort of perspectives in my experience set in my bag. Today now sort of a free agent with an interesting year of transition ahead and earlier this year right around the time shrub did something similar. I moved over to sub stack after a few years of getting to know people on Twitter really out of the desire to write more long form free moving thought pieces. It was something that I particularly enjoyed when I worked for banks and hedge funds and very happy doing it today while just focusing on managing my own money. So when did you start tweeting? I know you've had the account since I think (7/57)
2013, but when did you actually start like putting content out on Twitter? A couple of years ago really I think got more active after COVID. You know, we're all shut in our rooms waiting for the world to end wondering when we can come back out. And for me it was it was a weird departure because at the time I was working as a broker for a bank and suddenly being thrown into a full zoom work from home environment you start to want to reach out to people and Twitter ended up being a fascinating way to connect and sort of discovered from there variety of individuals from sell side and buy side and all over the place globally that were exchanging ideas on the macro, on individual equities, on credit and it kind of grew from there really out of nothing. I started with a couple of dozen followers and I'm still shocked that people find it interesting but managed to meet a lot of interesting people over the last few years doing it. But it was really around COVID. I tweeted a little bit before (8/57)
COVID on a couple of particular subjects but never really developed much of a following or a real close engagement with the platform until after COVID hit. And LeShrop what about you? I said, you know, you were on the podcast, we did an episode in August either published in late August or you might actually might have been September. I don't remember when the Athens dinner was exactly. I think it was in August but we might have published it in early September. But for people that haven't heard that or who might just want to refresh her on who you are, what's your deal? Kind of what's your story? Yeah, sure. So I started in, I did a brief stint in investment banking just to learn the basics. And then I was lucky enough to move to a hedge fund in 2006 and I was working for one of the big shorts, you know, the one of the famous people in the big short. So I spend the next five years at that hedge fund going through, you know, the whole subprime crisis but also going through the recovery (9/57)
and both were equally useful lessons for what came after obviously. But you know, my background is in special situations event driven investing and this was the driver of all of all our trades, including the big short and including the recovery trades. And then after that, I spend the next 10 years again in hedge funds as a portfolio manager and lately running a family office again with a very flexible mandate. And I think what changed in the last few months, I've actually decided to write more and stay at home and spend more time with the kids for the next few months. I actually had like a little existential crisis that I didn't spend time with my two year old daughter before she goes to school. So I decided to just take some a few months off from managing other people's money after, you know, 16 years. So I'm just running my own portfolio and running after the kids for now. And in the meantime, it just gives me a chance to write more on the sub stack, which I'm actually really (10/57)
enjoying because it's just helping me frame my thoughts in a more clear way. Like I just tried to write in a way that people can understand and relate and it's kind of my trading diary. And it's, you know, I try to make it funny as well because it's, you know, you need to have fun while you're doing this. So it's actually something I wanted to ask you guys, how much of your writing and communication, public communication is something that you do because it allows because of the benefits that come with it? It's 100% beneficial to my process. So that's the driver for you. It isn't necessarily that it's enjoyable in and of itself that makes you want to do it. I'm enjoying it at the same time, but I find it very beneficial to my process. That's why I started tweeting because it's kind of weird, but I started tweeting my trade ideas. And I noticed that the trade ideas I was tweeting out had a much higher hit ratio than the trade ideas I wasn't tweeting out. And I realized is because I was (11/57)
feeling like, you know, I felt that my tweets were going out to an average person and I kind of didn't want anyone to get hurt by stupid trade or something. So maybe subconsciously I was just only sharing my best ideas that had a high probability of success. You know, just thinking like on the other side of the tweet could be like an old lady reading it and, you know, does something stupid with it. So I found myself sharing like having a very high hit ratio on that. And then whatever I wasn't tweeting, maybe I was a bit more lazy about it. So I had a lower hit ratio. So that's what got me to write more and more because, you know, I just feel like I'm being more responsible almost because, you know, at the end of the day, when you're in a hedge fund, you have a team, you brainstorm with each other. So that brainstorming creates an investment process. But when you're trading by yourself and your own portfolio, you know, it can be quite a lonely process. And that's why, you know, I call a (12/57)
palo once in a while, you know, we just catch up and we brainstorm because we're kind of recreating the same thing. But, you know, that's the important thing about writing. You put it on paper and you become more accountable as well. So I found, I've actually found out that, you know, I started writing in October. And the reason why I sat down to start writing was because if you remember towards the end of October, there was the big pivot of Yellen and Powell. So I think at that time, you know, yields were blowing up to 5%. The market was at its lowest. Duration was getting sold off. Biotech was getting sold off. So I actually thought that was like a great opportunity in buying long duration, buying biotech, which I affectionately called the biotech Rosemary's Baby. Because it's kind of like devil's offspring of long duration in some ways. Like that's why it's long duration, like a Rosemary's Baby. So anyway, so it got me to think, you know what, this is a great opportunity. I want to (13/57)
put it on paper. So that helped me to frame my thinking. And that's when I bought a lot of those things and it worked out. But actually that's how I started writing long form because it kind of, I saw the opportunity. I wanted to put it on paper and that's how it started really. And I kept going. I thought that I would run out of things to write about, but actually, you know, this market just gives you something to write about all the time. Well, what's great is that you have such a unique voice. Paulo, would you say that, does that explain the shrubs explanation, capture the reasons that you write and how much of that is actually something that you enjoy and maybe you would do irrespective of the benefits to your trading and investing? Yeah, he's spot on in more ways than just the writing. We both have kids around the same age. So we're, you know, our lives are sort of kind of charmed here in the sense that we get to do what we love, which is observe and transact in the financial (14/57)
markets and write about it for people who care and want to read how we think, but also spend more time with our families. It's amazing where we were just a few years ago and having this kind of independence at a time when a lot of people barely see their kids. So I'm for one very grateful and I know exactly what shrub is getting at in terms of that side of the picture. For me, the writing, as he also laid out so well, is part of the flywheel of operating better in the marketplace. I tend to find, you'll hear other people say this as well, but writing something down kind of immortalizes it or keeps you honest. Sometimes you have a million thoughts running through your head, especially with markets as wild and interconnected as we have today in macro and it's hard to keep your thoughts straight. If I wasn't writing for others, I would be writing in a diary just to try to keep myself honest about what I was thinking when. The idea that you can have this sort of digital trail that at your (15/57)
fingertips, in 10 years, we're going to look back at these post shrub and just face palm our foreheads and be like, what were we thinking? We were playing JV ball or in way, but right now it's so helpful because and I also say this is someone who learned to write late in life. English was always my worst subject, writing and composition and despite having sort of multiple languages in my life, I had a lot of mental blocks as a writer early on and I learned to write almost overnight from a college roommate who sat me down, looked over my shoulder at me struggling with a one or two pager and he said, listen, throw all this away. What were you trying to say? And I told him and he was secretly recording me and he played it back for me. He said, this is perfect. Now literally dictate, like write down what you just dictated to me and don't change a thing. And it was like something clicked. Suddenly there were no blocks because I was speaking what I was thinking and I was writing what I was (16/57)
speaking. And as long as those three things think, speak, write are in alignment, you can write well. The added trick that I've only grown to appreciate over the last few years is that the more I write and think about the market, the better my speculation seem to get. And then those developments in the marketplace and in my own trading and investing, boomerang back on more of a desire to write and around we go. So writing is absolutely essential for me in terms of the flywheel of being able to think well and then operate well in the market. So what about conversations like these and further to the point podcasting in general, because you guys have a podcast that you do together. As far as I know, unless I missed a recent one, you released two so far where you guys basically get on a call, you riff, you exchange ideas. It seems like that is in some ways really just a publication of a private process that you guys go through, like Leshrab was saying, they'll give you a call, you guys (17/57)
will exchange ideas and think things through. How useful is that and is that what also led you to launch the podcast? Yeah, so basically, I've been speaking with Paolo for a while and I really enjoy exchanging ideas with him. I have a lot of respect for him. But also, the reason why we speak is because not only because we're aligned, but actually it's because sometimes we differ. I find that we sometimes have the same ideas, but with different timings. So when something big happens, like when there's a major event, we will just speak about something. And then at some point, we were like, dude, why don't we just record it? I mean, we just record it and we put it on a sub stack. I mean, we have these conversations anyway, so let's just record one of them and just put it on. So I can't remember what it was the reason for the first one, Paolo, but we recorded it and we rift around it and we really enjoyed it ourselves. And then there was another incident, I think it was maybe after the (18/57)
inflation data and during Yellen's visit to Asia or something and we recorded another one. But the whole idea behind it was, we called it the fly on the wall. So it's basically Paolo and I having a phone call and just recording it and sharing it with our readers. Yeah, it's amazing in 2024 what you can find at your fingertips that kind of open or replicate certain environments. It used to be that if you wanted to build a real intellectual horsepower, you would hire some of the sharpest analysts you can find and put them in a room, you'd have the morning meeting, you'd all have to be in the same place. And then every once in a while, you'll chat with your buddy who runs another fund and trade notes, compare an idea. The idea that someone like shrub and I can not only strike up a friendship from other areas of the world, but then get to know each other and start riffing as if we were fellow investors in situations. And we, despite the fact that we have a lot of similarities in some of (19/57)
the stuff we write about and we tend to agree more often than we disagree, where it gets interesting, as he said, is we come at situations very differently sometimes. And that's for me, the real value add is not only do we interface great and I happen to really like shrub on a personal level. I think he's terrific and all around great guy, but a guy who you feel like he makes you smarter and just trading notes and thinking out loud, again, is part of the process that helps you be sharper in the market. And it's also nice to have a few allies who, when you're having the inevitable tough day and getting blasted in the market, like you can call up and be like, man, today really kind of sucked. And then you shake it off. And so much of what we do is emotional self-control and focus that you really want, guys that you feel like you can depend on in bouncing ideas off of. And he was right. It was actually his idea. He's being modest that it would be a great idea just to record it. And it's (20/57)
helpful too, because I went back and listened to one of them. And not only did I find myself smiling at some of the funny stuff, but it's, again, like in the spirit of keeping a diary, it's a great way to go back and hear yourself talking with someone else about what was going through your head at that point in time. I just can't imagine having this kind of replication 10, 15, 20 years ago. There's just so much power in being able to communicate with someone like shrub and save it for posterity and then share it with people who seem to get something out of it as well. Again, it keeps you honest. It helps me trade better. Yeah, that's invaluable. I've had a few different people in my life over certain periods that I've called on a regular basis. And I haven't had someone like that since before the pandemic. And I feel like for me, the quality that I look for in someone like that besides very smart, someone that's very intelligent and knowledgeable, is also someone that's deeply curious (21/57)
and humble. Because even though we talk about humility in general and how valuable it is on the show and as a quality trait, I think in private where there's less consequences than not being humble, maybe there isn't some direct decisions that's coming out of it. But there's something about having that kind of humility in those kinds of conversations that allows them to be really useful because you're talking to somebody else who also doesn't have the answers and knows they don't have the answers and they're trying to figure out. And they're also excited at the prospect of figuring it out. And now with these AI note-taking apps, before if you record these conversations, I don't know, how many people are actually going to go back over time and sort through this is what I said. Unless you're some really great note-taker. But now, I just feel like we're on the cusp of just a huge change in intellectual productivity. And for people like us that deal on ideas and thinking through problems, (22/57)
it's just going to change our lives in ways that I think are difficult to imagine. Since you mentioned humility, by the way, I'd like to think that after 20 years in the markets, both Paulo and I have been humbled enough by the market to just acquire a sense of humility to respect the market itself. So I think the market is a... What would be the right term, Paulo? Is it like a humiliating mechanism or it's just... Or it's a humbling mechanism? It just... It kind of grounds you. I've seen very wealthy people being humbled by the markets. And I mean, I've been humbled many times and I constantly am being humbled. But I think it's like... You know how I compared the market to the sea because I come from an island, I love the sea. And the sea has to be loved and respected at the same time. And the market is in a way very similar. It changes its moods, it has its storms and it has its calms. But it has to be respected. And you have to go with the flow when it comes to that. Yeah, I'm still (23/57)
paying tuition to the market. And I'm trying to set up my life and I do this consciously where I've taken so many hits over the years in my P&L. And I tend to run a lot of all. I have a very high tolerance for risk. That's wildly inappropriate for most people. And I tell that to people up front. But in that context, you have to take the punches with the good. But I also find with experience that certain behaviors that I exhibit at certain points in time are very good red flags for when something is about to go wrong. And now that I'm aware of those things, and it comes down to like a simple cheer or a chest thump even. I took a very large loss last year. I had a good year, but it was a great year that ended up being a good year. And which is an unusual kind of feeling because, hey, what are you complaining about? You still had a great year. But the money that was left on the table, I know exactly how I lost it. And afterwards, in talking about those losses with shrub and a couple of (24/57)
other people, I'm trying to set up in my life. I literally told these friends one on one. A, I never imagined that the tuition could be so expensive. And a good buddy of mine responded with, yeah, if the tuition weren't egregiously expensive, you wouldn't learn the lesson. And that was a big takeaway for me in managing risk and getting out of a loss early. But the other one was, I told this to a few friends and they thought I was kidding. I said, no, I'm serious. If you ever see me this confident around a dinner table or over drinks again, you need to call my wife. You need to tell her what I just did. And she needs to walk me to the computer and start trading at like forcing me to trade out of stuff. I need you to do that for me to protect me from myself. Like, don't ever let me be that confident in my positions ever again, because the loss is literally right around the corner. And people thought I was kidding. I have that arrangement now with more than one person where they will call (25/57)
my wife and get me out. And I need that because this market will destroy you emotionally and put you through hell. And the only thing you have at the end of the day is the humility to accept that you are going to make mistakes. These mistakes will cost real money and just insulate yourself at every turn from your worst self so that you have a shot at really taking money out of the market over the long run, while keeping your sanity and remaining a good person. At this point, if anything happens to me that really starts to screw with my emotional equilibrium, I just start getting out. I have a huge tolerance for risk, but I also have a dwindling tolerance for things that really screw me up mentally. Who is it that I've heard you quote saying that whenever he gets a certain feeling when he gets too excited or too overconfident, he literally goes and lies down until the feeling passes? That's an old market wizard. Pre-dates like the Commodities Corp guys. There was a trader named Stanley (26/57)
Kroll, and he was quoting someone else where he was saying it more in the context of there are certain commodity futures that he just doesn't understand. For him, it was platinum. He says, whenever I feel like trading platinum, I just go lie down until the feeling passes. I love that. That's more tongue-in-cheek. There's actually a lesson in that exactly to this point. Know yourself, know that you are tempted to speculate on stuff that you lose money on more often than not, and that your best course of action in that corner of the market is just not to be there and force yourself to stay away. It's tongue-in-cheek, but it's hilarious the way he thinks about it, but it's also so true. Just protect yourself from yourself. When Paolo told me that thing about the platinum story, I freaked out because platinum, I'm very bullish platinum, and I was very long platinum when he told me the story. I'm like, oh my God, I'm so bullish platinum, and now Paolo just messed my brain. As an aside, (27/57)
Soros said the opposite. So Soros, he said whenever he had a, you know, whenever he had, he was feeling a bad back or a pain in his back, he would just go and close all the positions. Yeah, so this is the opposite thing. I think it's just a question of knowing yourself. Like Soros is obviously the God of trading. So Soros' built-in algorithm was telling him trouble, and that was exhibiting through a pain in his body. Whereas in my case and Paolo's case to a degree, you know, actually we are getting overconfident, right Paolo? So we're building up our confidence, and we have the opposite effect, but you know, after years, you kind of know, damn it, I'm getting a bit too confident, I need to just pair back my risk. But it's just funny how it exhibits in different ways to different people, and it's all just about knowing yourself and protecting yourself. Like my default mechanism is when I feel something is going wrong, I sell a lot of stuff and I just increase my cash position. And I (28/57)
keep writing about this, that you know, I feel as cash as my hedge when I feel uncertain, I just pair back and I just observe. So let's do some observing. I'd love to get a sense of kind of where each of you are focused right now, and what are the big macro questions or themes that you've been focused on, and what are those narratives that you feel are either appropriately descriptive of what is going on, or maybe have it wrong, and you guys are taking an opposite tact on it. So maybe we can, let's go with you shrub, kind of where has your mind been at recently, and you know, what are some of the areas maybe where you and Paolo are in agreement? Yeah, sure. So since the October, November pivot of Paolo and Yellen, I've been framing it like this, that this is a reelection cycle. And the policymakers are just incentivized to get their candidates elected, as simple as that. So, you know, I affectionately called policymakers tamagotchi like that Japanese toy, because the tamagotchi has a (29/57)
very simple reaction function. So, you know, in the case of a policymaker, they want very simple things, like in the case of Yellen, for example, in October, why did she pivot? She pivoted because the 10 years spiked above 5%. So, her reaction function triggered and said, I got to get the 10 year below 5%, because I need to get my candidate reelected. So, simple as that. So what did we see since the November pivot? We saw a very determined treasury and a very determined Fed, whereby they're just trying to do everything possible to patch things in the financial markets, and create a stability, low volatility until the election day, and get people incentivized to vote for their guy. They did that through various ways. You know, they issued more bills than coupons in the quarterly refunding announcement. They drew down the TGA. They, you know, all sorts of tricks that we didn't really care before, or, you know, now they're doing it QT tapering. So, they're quantitative tightening, they're (30/57)
tapering quantitative tightening from 60 billion to 25 billion, because, you know, what's the most visible problem we have right now is we have a big deficit of more than 2 trillion a year. So, by doing patchworks like tapering the QT, that by itself reduces supply by about 400 billion. I mean, that's not a long-term fix. It's a short-term fix, but it kind of like reduces volatility in the bond market until we get to election time. So, my framework was observe what the policymakers are doing, and it's not just on the monetary policy side. It's also on other policies. For example, at the beginning of the year, I bought cannabis stocks because I saw that almost 80, 90 percent of Americans were in favor of marijuana reform. And I was expecting policymakers to be very driven to reschedule marijuana from schedule one drug to the schedule three drug, which they're in the process of doing. And, you know, the marijuana stocks had like a 50 percent rally since, but that's just a function of (31/57)
policymakers being driven. The other sector that, again, which was more on the monetary side, was immigration reform. So, you know, the prison stocks that had a very big run as a result of immigration being a major problem that they're trying to tackle. And the other thing that just came up, which I think is very, very, very important, and I'm shocked that it appeared only on page 14 of the Financial Times this weekend, is that there is a possibility for a major housing reform, whereby Freddie Mac applied to the FHFA, the Federal Housing Association, to offer secondary mortgages to people. So, just to make it simple, right now, the Fannie Freddie, they only offer primary mortgages. And there's a lot of equity that's trapped in the housing market. Now, if you have a mortgage with Freddie, you can, what Freddie wants is they want you to come to them and you take an additional mortgage at a favorable rate and you release equity from your house. So, Meredith Whitney wrote this article that (32/57)
was very eloquent, where she said, look, if this passes, it can add a trillion of consumer stimulus in the economy. And if Fannie also joins in, that could add two trillion of consumer stimulus by the end of the year. And the funny part is, it doesn't need Senate approval from what I understand. There's like a 60-day consultation period. And if the FHFA does not block it, then this will pass. So, this is basically Freddie Mac and FHFA becoming political again, just in line with the policymakers and providing what could be a significant consumer stimulus in the economy, just in line with the reelection cycle. Why they're doing it now, I really think it has to do with where we are in the election process, because right now, the housing market is very, very tight. We're still trying to tackle inflation, so this doesn't really do much except make homeowners very happy. And I think it's more than almost 70% of Americans own a home, so it's obviously very beneficial for consumers. So, in (33/57)
summary, that's where I'm at. I'm thinking about it in a very simple way, because I want to have a framework that helps me invest, and also I found that simple things make the best results. It's a very simple thing. It's a reelection cycle. The policymakers are very incentivized to keep this together until the election. After the election, that's a different conversation we can have later. But until the election, I think everyone is motivated to just keep this together. And Shrub and I actually, our views come together around a lot of what he just said in an interesting way. I'm happy to accentuate on some of the points. Sure. Yeah, well, I'll tell you what I was going to ask and then feel free to add to it. What I was going to say is that this kind of seems to kind of fold into a framework that you have. You could refer to it as, I mean, I would call it America's Becoming Brazil. That's sort of the way I think of it. But it aligns with a more emerging market framework where in (34/57)
countries where you tend to see this in countries with weaker institutions, where there's more patronage and currying favor through the political system to interest groups in order to get reelected. This isn't something that I feel like we've seen to this degree. Of course, we've seen it to various degrees in the United States, but it seems like it's more true today and that the gloves are off in a way that it wasn't the case before. And I'm curious in your answer if you can incorporate some reflection on that. And to what degree does this actually align with this larger framework that you have, which is that in order to understand the U.S. economy and financial markets today, it helps to understand emerging markets because a lot of what we've seen in EM we're seeing now in developing countries. 100%. Actually, that's where I was going because with shrub sort of conceptualization of political expediency driving so many decisions. And I suppose on some level, in the term political (35/57)
economy, the word political comes first, but we sort of ignored that in 20 or 30 years of a structural bull market in America's exceptionalism, our equity market, our bonds, which the world couldn't seem to get enough of over the last 40-ish years. And here we are at a point where debts have, certainly in the public space, have grown to an unsustainable level between what we've already issued and the contingent liabilities that we've promised, particularly to the boomers. And actually, to shrub's point about the housing reform that is being discussed, these are real numbers. The interesting thing to me on top of everything he mentioned is that millennials, their household formation is going through the roof right now. The tip of the millennial spear is sort of just crossed 40. And people waited to get married and have a kid in part because of the great financial crisis in the way that kind of delayed things from a household formation perspective. But now, like the rubber meets the (36/57)
road, if you're a millennial and you even remotely thought about starting a family like the clock's ticking, right? And yet the profile of the American demographics is fascinating because you have 20% of Americans or boomers. The millennials are a bigger cohort around 25-ish percent, but boomers have over half of the net worth of America and the asset base. So no wonder you're hearing more stories of millennials buying their first home with help from their parents. The boomers know that they have to let go at some point. And if they don't help their kids, the government's going to make them through wealth taxes down the line, through dropping the inheritance tax ceilings from the 13 million or so down to two or three. The wealth will be transferred one way or the other. But we're also looking down the barrel of just exploding contingent liabilities on the social security and Medicare side that are just starting to move through the big part of the bulge, the plateau of boomers from 1954 (37/57)
to 1959-ish. And the beauty is boomers vote in droves, right? Because it's their goodie bag. Young people tend to vote far less than older people. And who does this housing program target? The boomers who are probably down to 20 or 30 percent LTV, you know, they're in their 60s, 70s, they pay down almost the entire mortgage. And now the government's literally saying, well, your house price exploded and you're in the kind of salad years of your life, you're probably about to take retirement. And here's another couple of hundred grand from Freddie Mac that you can borrow against your house and you don't need to worry about that because when you die, the bank will just sell the house to get their money back and whatever's leftover passes to your kids. The boomers always win. And this is another case where because they vote in droves, this policy is going to be wildly effective in buying votes because people can now go out and we're reliving the 2000s second mortgage HELOC phenomenon where (38/57)
people borrowed insanely against their homes. And now you're telling people, you have all this untapped equity in your home, you've always wanted an RV, like maybe the time is now, like you've only got another 10 or 20 years and you can't take it with you. So go have some fun in your twilight years. Like everything that Trump said, and then you think like, man, this actually benefits the boomers more than anybody because they're the ones with the untapped equity. Yeah, stuff like this swings in election. To come back to your question about my framework, some people call it the e-mification of the West. We've lived for a long time in America, certainly since the great financial crisis in no way in fear of Japanification in the US, that demographics inevitably we're going to follow Western Europe, Italy, Japan down into the kind of twilight. From there, the debts are unsustainable. The country is low growth, no growth. How do we avoid the kind of perennial, disinflationary, deflationary (39/57)
trap that the West seems to be stuck in? And then COVID changed everything. It's taken a while surprisingly for people to come around to the view that the fiscal really matters. And when the fiscal starts to matter more than monetary policy, usually the two are sort of in balance, then you end up quickly, especially considering the size of the initial conditions of the debt in a place where we start, yes, we still have the senior age and the privilege of the world's reserve currency. But we know from history that that doesn't last forever and that capital centers move around the world over time. Capital moves to where it's best treated. And if capital is getting abused through tax policy, fiscal policy, monetary policy, or all of the above, capital will start to move. The concept of fiscal dominance, where the fiscal, imagine two people sitting in a rowboat and they're rowing in opposition to one another. The fiscal is this huge Arnold Schwarzenegger at this point, and still is, who's (40/57)
rowing massively while you have Jay Powell and team at the FOMC rowing in opposition, trying to restrain the inflation in the system from the overconsumption and excess demand created by the insane borrow and spend on public accounts. And there's only so much that he can do. And this is an experience that Brazilians, Turks, South Africans, and other EMs know very well. It doesn't end in outright disaster and the world ends and like, where do I move to? Like, should I buy a gun? Life does go on, but it's not actually an experience that Americans are familiar with. And certainly nobody alive here who's never had any kind of experience in these sort of frontier-ish emerging markets that are profoundly cyclical. But they're learning. And just the fact that people now start to know what fiscal dominance means and that it's gaining attention suggests to me that this is a longer-term trend that is catching fire and is changing the way we need to think about managing risk. It's changing long- (41/57)
term trends. There's a lot of money to be made as capital shifts amidst those trends. And the vast majority of people will take a long time to figure this out. The people who get there first and get the joke early will probably make the most amount of money. Can I just add something here actually on Paolo's thing? Because my old boss used to say something that really stuck with me. And he said it in 2008. He said, every crisis is different. And because, as investors, we have this recency bias about what we live through. So I think as a result of most investors being scarred by 2008, I mean, people our age, a lot of us were scarred by 2008, there's a lot of current market participants that still expect the next crisis to be 2008. And it's not because the toolbox has changed, the incentives have changed. The policymakers discovered QE, the monetary authorities discovered QE, and the fiscal authorities discovered they can get away with 6% deficits. So the next crisis is going to look (42/57)
completely different. That's why I really appreciate Paolo's view emerging markets framework. And the funny thing is, he said that we were afraid of Japanification initially. But look at what Japanification is today, not what it was before. Today it is covert depreciation of currencies, covert debasement of currencies, negative real rates, a form of yield control, and then pretend that you care about your currency. So today the US has positive real rates of what, 2%? Well, the Japanese have negative real rates of 2%. They're doing yield curve control, and they pretend that they care that the yen has depreciated by 30%, but actually they don't really care because the exports are doing better. So Japanification of the past is very different than the Japanification of today. It's actually, Japan is also stealing a bit the emerging market. It's so funny, shrub. This is not your father's Japan, you know? Exactly. Not your father's Japan, but they're doing it so eloquently because they're a (43/57)
developed market. They're saying, we're going to intervene. We can't stand having the yen at 155. It's like, guys, if you don't want to have the yen at 155, why don't you raise your rates by 200 bips because your rates are currently at zero? So this is it. Why, you know, you have a country with zero rates, negative real rates. They could have arrested the decline in the yen just by raising their rates, but they're not doing it. You know, they're saying, we can't have our yen depreciating. Yeah, because you actually want to deflate your debt away. Is it difficult to imagine a future in the US that looks a lot like that, where we have negative real rates and they just pretend and they just deflate their debt away? I mean, that's not a 2008 scenario, right? That's like the complete opposite. That's right. And the reaction function of policymakers as well, the classic generals fighting the last war, look at the clear bias with the FOMC. The moment things get a little shaky, it's, whoops, (44/57)
like we need a new line of credit for X, Y and Z or boy, like, you know, maybe it won't be seven cuts this year, it'll be three or four. Like, how about hikes, guys? Like, you want to get inflation back in the box and wrestle the bond market into submission and try to kick the can down a little while. And why not just stop talking completely and say, it's all on the table. The playing field is wide open for monetary policy going forward, including the right tail. Like, if we have to take it up again in the second series of rate hikes, but people are starting to get the joke on the political side as well, the bias is clear that these guys are still worried about 2008 coming back, right? The captains of industry are still biased towards rates are going up, but they'll always come back down. You know, the US media always says, oh, you know, Powell does not want to be like Arthur Burns. And I'm like, guys, Powell also doesn't want to be Trichet. Yeah. Remember Trichet? I mean, Trichet was (45/57)
raising rates and, you know, during 08. So it's a fine balance. And I think policymakers would prefer to be burns than being Trichet. And by the way, this is why you and I are bullish commodities, right? Because you want to hedge that tail where they just say, you know what, screw it, we're not going to hike rates, we're just going to cut rates. That's why you want to be long. Some real assets as a hedge. And the bias here goes back a long way, right? You remember under Bernanke, he said several things that still kind of echo in history, like, you know, contained in talking about subprime. But as they started to, you know, do QE full bore coming out of the crisis, you know, his big thing was, you know, if inflation becomes a problem, we can raise rates in 15 minutes. It's like, wow, you are so confident you can get that genie back in the bottle. Have you ever been to Brazil or Turkey? Because when the fiscal is rolling against you, it takes a little more than 15 minutes, buddy. But (46/57)
it's okay now, we went through transitory for a year and a half, and it's all under control. Like, good job. I don't know, I've seen competent and incompetent and experienced and inexperienced central bankers. I think there's a real lack of institutional knowledge at the Federal Reserve. But a lot of lip service being paid to the Arthur Burns mistakes of the 70s. And these guys don't realize even what we're going through now is not the 70s. This one feels a little different to me, although I didn't trade and live through the 70s, because again, the initial conditions were different, at least, you know, when Volcker jacked rates to the teens around the time I was born, the national debt was still 25, 30% of GDP. So the interest expense wasn't compounding at anywhere near the rate it is today. I mean, we're looking at potentially a trillion dollars and 25, just an interest expense. Think about the amount of money that is in Saudi Arabia, Japan's and the US savers pocket. It's massively (47/57)
stimulative and self defeating in terms of trying to write the ship on the credit of the United States for a country that funds itself abroad, which is the craziest part. So it's going to be a dynamic couple of years. Not just that, but the spending needs are going up at the same time as the cost of borrowing is going up. And at the same time as the system that has provided the recycling of dollars internally to fund the deficits is coming under strain. So where it does feel and it's felt for some time that we're moving towards some kind of singularity and people feel this. And I think that underlying anxiety informs a lot of what we see also in terms of public conversations and in kind of some of the cultural exposés of like film and some of these apocalyptic films. People feel it and it shows up in our politics, it shows up in the economics and it shows up in the geopolitical realm. I want to move us to the second hour guys. Before I do, I just have a question, which is, it kind of (48/57)
goes off this point about Japanification. Are either of you familiar with a paper by Charles Goodhart and Manoj Bradan from 2017 on demographics? They also published a book in 2020 on the subject and I had Charles on the Dr. Goodhart on the podcast. But are you guys familiar with this? Because they pushed back, I mean they wrote the original paper in 2017. So this was in the thick of secular stagnation, but they pushed back against what was a popular thesis at the time, that aging demographics would have the same effect in the decades to come as they had in Japan's lost decades. They pushed back against the consensus, few in other words, that aging demographics are necessarily deflationary by looking in part at the political incentives that may result in a world where real interest rates rise, inflation and wage growth pick up and inequality falls. Which is in line with Leshrub's observation about using a government-sponsored enterprise like Freddie Mac to offer boomer second lean home (49/57)
equity loans or lines of credit. So I'm curious how if you guys are familiar with that, their work at all. I think it does make sense. I didn't read the paper, but I read something similar. It does make sense. I mean this is actually how socialist countries work. I think Paolo is more suited to talk about this, but you look at Italy or extreme example, Venezuela. I think Paolo, you probably know Venezuela. I think they're having declining population, but they're highly inflationary environment obviously. So the same thing is probably going to happen with Europe at some point, I would think. But Paolo, you know more about Venezuela than I do. Yeah, I'm also not familiar with the paper and have not read the book. The thing I would kind of keep in mind in all of this, it's very easy to get depressed at the outlook for various of these trends because there just doesn't seem to be any sort of political appetite to really address the key sources of a lot of these imbalances and problems. (50/57)
Absent a crisis. I think it's Michael Hartnett from Merrill Lynch is one of my favorite quotes. He likes to say that the markets stop panicking when politicians start panicking. And nobody's panicking in DC over the deficit. In fact, I don't think anybody discusses it at all outside of a handful of people because there's simply no appetite by the American public to address deficits because money was free for so long. I tend to think most people just think it drops from the sky and that we can continue to live beyond our means while funded by the good graces of foreign creditors without consequence. And then one day the bond market will take notice or the dollar will take notice. And all throughout this, you have that hiss and the radio white noise in the universe of demographics increasingly aging in the US. But you've also got the crosswind of immigration, especially the broadening labor availability at the low end. And so there's a lot to keep track of in all of this. But I think we (51/57)
also had a saying on the desk when I was focused more on Brazil 10 years ago, for a while there when Brazil was really going into the hole in 2015, somebody turned to me and said, yeah, Brazil is becoming Argentina. Argentina is becoming Venezuela and Venezuela is becoming Zimbabwe. And I couldn't stop laughing. But then it occurred to me like there are different grades of this process, right? It's not like, oh, my God, we're all going to die and we need to protect ourselves by gold. Like we're going to hyperinflate. This process will take years of kind of rolling crack ups, occasional blowouts in bond yields, occasional corrections in the equity market, occasional reps in commodities. We're kind of entering a golden era of active management and portfolio management in that sense, because I could see a world we're in 10 to 15 years from now, everything is exactly where it is today, sort of real price wise, or you know, nominal price wise. But it's been a very long and interesting road (52/57)
to nowhere, where you have 50% corrections in equities, you have commodities that triple and then come back. That's one world. There are certainly other worlds where commodities rewreck higher because the dollar is persistently debased and not and, you know, currencies don't come back when you've cut them in half or down 90 in real terms. It's usually it tends to be one way when you start down that road. But the idea of buy and hold of the last 40 years in duration, in equities, especially in large cap US, let your sitting do the work. The autopilot that is, you know, people's 401ks, especially the boomers, again, they win again, right? They've had 40 years of, yeah, okay, oh wait, it was nasty. 2001 wasn't pleasant. But we always come back and make new highs within, you know, two or three years. So you get conditioned to think that the arrow always points up into the right over time and that your wealth will compound in real terms and give you more spending power the older you get (53/57)
moving into today, this concept of rolling crackups. And also, I want to go back and talk a little bit more about what we were discussing in the beginning of the conversation about weakening institutions. Because you know, like I think the way that we're used to dealing with problems in the United States is we kind of deal with them like adults. You know, I don't want to be disparaging of emerging markets. But in general, what you tend to see is that countries that are successful have politicians that put forward long term, more strategic solutions to problems. And while FDR was a populist leader, many of the programs that he instituted have stuck around, whether it's social security, some of the regulations, the Glass-Steakle that was passed in the early 1930s. And whereas emerging markets with weak institutions, it's much more like every election cycle is different. There's much more variability. And that higher level of variability is really bad for business because business people (55/57)
feel a lot of uncertainty and it makes it really difficult to invest for the long term. So that's something else I want to talk about in the second hour as well as a number of other themes that both of you guys talk about. 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 to access the second hour of today's conversation with Paolo and the shrub, 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. Guys, stick around. We're going to move the second part of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to (56/57)
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 Nuznico Laos. 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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Living In Wonder Finding Mystery and Meaning in a Secular Age Rod Dreher #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
were 1984, Orwell's 1984, you would have had O'Brien torturing Winston Smith to make him, you know, accept big brother. But Mustafa Mahnd doesn't say that to John the Savage. He just says, it sounds like you're fighting for your right to be unhappy. You're welcome to it. Goodbye. So that answers your question. I think Dmitri, John the Savage had it. Aldous Huxley, the author of Brave New World, understood that there was something about struggle and suffering and dealing with imperfection and pain that was required to make us fully human. And I'll end with this. There's a Live Not By Lies is coming out. There's a documentary coming out in April from Angel Studios. And in it, we talked to this young man, Timo Krishka, in Bratislava. He was a filmmaker and a photographer who was raised after communism. And he got involved in a project to go interview elderly Christians, Catholics who had suffered in communist prisons. Many of them are living in great poverty today. They never really (54/57)
and the more you talk with them, I've been with some of them on their rounds. And you have to work really hard to dismiss this all and come up with some sort of materialistic explanation for the things they see all the time and that I've seen in their company. But when I was working on the book Dmitri, I got this email from a friend who's a Vatican journalist, Catholic, and he said, look, I know you think that the whole UAP-NHI thing is nonsense, but I'm telling you, there's a lot going on here that you don't realize, and it is fundamentally a religious story. I said, okay, fine, what should I read? Well, the first thing you told me to read was Dana Posulka's book, American Cosmic. All right, I picked it up. I read it on a flight to Brussels for a conference, and it knocked me flat. I realized that my own understanding of UAPs, that whole world, was basically stuck in the early 90s, first season of X-Files. And I didn't take it seriously, but you can't read that book and hear the (14/57)
entities. And we're basically being re-enchanted in a medieval way, whether we want it or not. The question is, are we as a people, as Christians and as non-Christians, are we prepared for this? So, there are so many things to respond to there. First, I want to give voice to those in the audience who heard some of what you had to say about the presence of apparitions and other paranormal phenomena, and who are struggling with really taking that in. And I want to say that I too have a difficult time relating to this, probably because I've never had an experience like what you've described, and it's hard for me to take your comments literally, despite the fact that this is not the first time I've heard stories like this. Lua Lozando shared something similar with me when he was on the podcast, and I've explored themes like these to various degrees, the folks like Joshua Schreie, Megan O'Giblin, Teresia Bill Burton, and even Ian McGillchrist, who I love very much and whose work has had a (20/57)
Community on Circle and it's so resonated with me on multiple levels. And so has your book and we're going to have a chance to talk about that. But before we do, I'd love to learn a little bit more about you. You have a very long Wikipedia page. One of the longest... Some of it is actually accurate, Dimitri. So tell me what is accurate. What can you tell us about your background? Well, I'm coming to you today from Budapest in Hungary, which is a long way from where I was born, a small town in South Louisiana on the Mississippi River. And I've just sort of traveled a lot as a journalist. I started my journalism career in Washington and then moved to New York. I was a film critic in New York and a columnist. Moved then to Dallas, Texas to work for the Dallas Morning News on the editorial page and ended up back in my hometown in 2012, a town of like 2,000 people after my younger sister died. I wanted to get close to the family and be part of that. Moved there with my wife and kids and it (4/57)
love, and how to find mystery and meaning in a world that for many has come to feel empty and soulless. In the second hour, Rod and I discuss what the Eastern tradition of Christianity can tell us about how we should live in the world, how those lessons apply to the culture wars, how to confront evil, and the appropriate role he thinks Christianity should play in policy and politics. 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 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 (2/57)
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 learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Rod Drear, an American conservative writer who has written about religion, politics, film, and culture in the American conservative national review, the weekly standard, the Wall Street Journal, and other notable publications. He's also the author of several extremely successful books on Christianity and religion, such as How Dante Can Save Your Life, The Benedict Option, Live Not By Lies, and his most recent book that we are here to talk about today, Living in Wonder, Finding Mystery and Meaning in a Secular Age. Rod and I spend the first hour of our conversation engaging on fundamental questions about the nature of existence, the nobility of God, the centrality of (1/57)
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 evocative and thoughtful conversation with my guest, Rod Dreher. Rod Dreher, welcome to Hidden Forces. It's great to be here. Thanks for having me on. I'm super stoked to have you on, Rod. I apologize to listeners for my voice. I've been dealing with a cold the last week or so, but I think we'll be fine and it's definitely worth the conversation to have. So Rod, as I said, I'm super excited to have you on. I found your book initially when I was perusing Amazon some months ago and I put it on a list, a long list of books that I wanted to read and to reach out to the authors. But what actually motivated me to have you on was that a member of our Genius Community posted one of your sub-stack articles about UAPs and NHI to our Genius (3/57)
all went to hell. It's kind of a Southern Gothic story about the dog secret of the family. Turns out that they didn't actually want us back there and I got really sick from the shock of all this. Got chronic mono for three years and the thing that brought me out of it more than anything else was reading Dante, the divine comedy and reading it at a very deep level, trying to apply the lessons of the Commedia to my own life. And I did after three years find healing, but all of that just destroyed my marriage. My wife and I, now ex-wife, we fought the good fight for 10 years to try to save the marriage, but it just couldn't be done in the end. So after she filed for divorce, I moved with my older son to Europe and I work for a think tank in Budapest now and my son's in graduate school in Vienna and I write books and I write a daily sub-stack. And the stuff that interests me more than anything is religion and its intersection with culture and politics, things like that. I've written about (5/57)
six or seven books, but the ones that I'm best known for are my last three, the Benedict option, which came out in 2017, it's in 11 languages, Live Not Buy Lies 2020. I had the great good fortune, if that's the right phrase, to publish it during COVID and after the summer of George Floyd. And it's a book about what people who came to America to escape Soviet communism, they were starting to see totalitarianism, a different form of it emerge in America with wokeness and all of that. And they were trying to warn Americans, but nobody would listen to them because our idea of totalitarianism was based on George Orwell 1984, the Soviet Union and what we're dealing with is a different kind of totalitarianism. I call it soft totalitarianism. Well, unlike the Benedict option, which got tons of media coverage in 2017, this one got zero mainstream media coverage because it was calling out wokeness as totalitarian. But it's sold far more than any of my other books. It's sold 210,000 copies in the (6/57)
US and a lot overseas. In fact, a documentary film is about to come out from Angel Studios in April based on this. We actually went back to Eastern Europe and interviewed some of these Christians who had stayed behind and resisted totalitarianism. Some of them went to prison for it. Then of course, this third book that came out in 2024, Living in Wonder, it's sort of the capstone of what I didn't intend to be a trilogy, but it's turned out to be and a trilogy about how to be faithfully Christian in a post-Christian, postmodern world. And this is about recovering enchantment. And what I mean by enchantment is the sense that as we Orthodox say, and you grew up Orthodox. I grew up Greek Orthodox, yeah. Yeah, yeah, I'm an Orthodox Christian, a convert. We say that God is everywhere present and filling all things. And I think that's true. That's a metaphysical truth. And what I'm trying to do in this book is open the eyes of Christians in the modern West which has become very desacralized, (7/57)
very disenchanted in the sense that people don't have a sense of the sacred everywhere around them. I want to turn that around because I don't think the faith will survive without it. But also I go into some pretty weird places. I know we'll get into in today's conversation, but you can't have enchantment, good enchantment, light enchantment without dark enchantment as well. When you take down the buffers, the psychological buffers that modernity has provided against the idea of the spiritual world, you can let God back in, but you also let in darker spirits. So anyway, I'm living in 58 years old, living in Budapest, enjoying writing and just seeing what's going to happen next. And this is, of course, Dimitri, an incredibly exciting and scary time to be alive. I was just in London at the ARC Conference Alliance for Responsible Citizenship, the Jordan Peterson thing. There were 4,600 people there from all around the world. Not everybody agreed on everything and there were people there. (8/57)
I saw Curtis Jarvin, Minceus Mulbug in the audience and there were also some Christian leaders there. And Coptic Archbishop and David Brooks of the New York Times, Neil Ferguson and others. But everybody's coming together because there is a sense that the story that we've all been living by in the post-war period, the sort of managerial liberalism that's both on the left and the right, has come to an end and we don't know what's next. So it was fun to get together with these people and talk, make friends, talk about things and figure out where we go from here. So that was a wonderful answer. You mentioned a number of things that I intend for us to talk about. And I do want to talk about some of the political implications or some of the policy questions that come out of, some of the practical questions that come out of engaging in the subject that we're going to talk about today. But I'd like to at least spend the first hour trying to set a foundation for the discussion. And I think (9/57)
maybe the best way to do that, as I mentioned that I'd read an article that one of our members shared from your sub-stack where you mentioned UAPs and NHI. So my first question ties into that, but it also deals directly with this idea of living in wonder because in the first few pages of the book, you tell a story of a man who you call Nino, who had a series of paranormal encounters with what some today might call UAPs or NHI. His accounts sound very similar to some of the encounters described by people like Dan and Pasulka, who's been on the podcast and her book Encounters. Something with Jim Larkatsky and Skinwalkers at the Pentagon, as well as Lua Lozondo, who ran the Advanced Aerospace Threat Identification Program in his book Eminent. He actually describes encounters that he had as a result of his trying to investigate this phenomenon. What's interesting is for people that haven't actually trying to understand what these folks are actually talking about, much of what this (10/57)
phenomenon is described as sounds a lot more like paranormal events, more like Ghostbusters than like X-Shorts. In any case, as a result of these encounters, Nino came to realization that, quote, materialism is false and that the core of the world is not what we think it is. That phrase, the world is not what we think it is, gets to one of the core arguments of your book, which you say is about living in a world filled with mystery. Unpack that for me and let's start first with what is it that you think most Westerners think that the world is and how is that tied up with materialism? Yeah, well, there's a guy, you might have even had him on your show once, Jeffrey Kripel. He's an academic at Rice University who writes about religion and he decries what he calls the iron cage of rationality that we all live in in the contemporary world, meaning that we are so bound by an enlightenment way of seeing the world, this disenchanted way of seeing the world, that we just push outside of our (11/57)
consciousness and outside of taking seriously anything that goes against the idea of materialism, which is to say that the world is made up entirely of matter, that matter doesn't have any meaning and there's nothing that if you can't measure it scientifically, it doesn't really exist. Well, Kripel is not a Christian, but he's been fighting against us for most of his career. And I agree with him. I am an Orthodox Christian, but I think he's completely right. Even a lot of Christians in the United States today and in the West live a fundamentally disenchanted life. We tend to think of Christianity as nothing but morals, ethics, and of course, prayer. God is up there, but he doesn't bother too much with the material world. And the idea of angels, demons, that sort of thing, it just seems arcade to a lot of people and they don't like to talk about it. Well, I think we have to talk about it because this stuff is real. There's a fantastic book that came out a year or two ago called They (12/57)
Flew, F-L-E-W, by Carlos Eyre. I think E-I-R-E. He's a Yale University historian, National Book Award winner, a really solid, respected guy. And he writes about how getting into the archives, the counter-reformation in Spain, he saw many, many, many written testimonies signed in some cases by hundreds of witnesses who saw monks, nuns, priests fly. We don't know why it happened, but it happened. And what Eire, I mean, he's right, he has a distinguished historian. He said that there is no other area of intellectual inquiry in which we would completely dismiss written testimonials like this from lots and lots of people other than religion, other than things that violate the tenets of materialism. And the fact that Eire wrote this being a man of his stature, and it's paradigm changing. And this connects with the whole UAP-NHI thing in ways that I hadn't anticipated when I started working on the book. I mean, the book also has a chapter about exorcism. I've known exorcists for many years, (13/57)
testimonies of people like Gary Nolan, Dr. Gary Nolan, and others without realizing that something's going on. And that this stuff is being taken seriously at high levels of the US government. And so that, it maybe finally decided to write another chapter about this, and I'd started tweeting about it when I first read the book, and that's when this Nino guy reached out to me. He's a lawyer in his 30s, very conservative Catholic, and he wrote me the story. It's the first story in the book, in fact, and I wanted to go there as the first story and not tell a conventional Christian story of miracles, because it speaks to this moment of enchantment that we're all in now, of re-enchantment of the entire culture. Nino said that when he was a teenager growing up in New England, he was driving down a country road, saw a huge spaceship over, hovering over a field. He pulled, or what he thought was a spaceship. He pulls over and stares at it, then drives on, doesn't tell a soul because he thinks (15/57)
they won't believe him. Seven years later, he's sitting in his apartment, he's in law school, and he's studying for a test at his kitchen table. Suddenly, a portal, as he describes, it opens up on the bare wall of his kitchen, and through this portal came two shimmering humanoid beings that look like they were made out of energy that's flowing like water. And he said they communicated with him telepathically, and it wasn't anything important. They just said things like, a bird is about to land on your windowsill. That happened. A car is about to backfire on the street. That happened. Then they went away. Well, Nino is a good rationalist, though a Catholic, a rationalist. He goes straight to the hospital, demands a brain scan, demands a blood test. He thought he was losing his mind, but he was fine. Well, these things kept coming back, usually in periods he said of emotional stress in his life. And he said that after he got married, his wife saw them too. So he knew this wasn't a (16/57)
hallucination. When he reached out to me, he was just at the point of great distress over this. He and his wife had just gone on vacation to Colorado, and all this poltergeisty type stuff that you hear all the time in these UAP or in HI encounters, that was happening to them. He said, I want to tell my priest, my parish priest about this, but I'm afraid he's going to laugh at me. And I said, well, let me tell you that in talking to Exorcist for researching my book, this happens to a fair number of Christians who encounter these things. And I said, let me ask you, you're a man of prayer. Did you ever pray in the presence of these things? Well, yeah. So what happened? Well, they went away. I said, did that not indicate to you there might be something demonic here? He said he hadn't thought of it that way. He thought if they were demons, they'd want to fight him. He said, look, bypass your parish priest, call the Exorcist of your archdiocese, because in the Catholic Church, every diocese (17/57)
is supposed to have an exorcist. Then let me know what happens. So he did this. The Exorcist told him, yeah, we've seen this before. Prayed over him. They never came back. I met him in person a year later. I said, so what happened? He goes, yeah, I found so much peace. Those things tried to drive me away from Christ, but it actually drove me to Christ. So I put that in the book, Demetri, because I want the reader who's maybe picking it up in a bookstore to understand that when we talk about reenchantment, we're not simply talking about miraculous healings, the appearance of angels, things like that. We're talking about the appearance or reappearance of the paranormal and the uncanny. I recently heard, I listened to Mark Andreessen's podcast, Mr. Andreessen on Joe Rogan, and he mentions to Rogan that he was talking to a Catholic university professor who said to him that a medieval peasant would be better able psychologically to cope with the world that is fast moving towards us than an (18/57)
average modern person. Well, it turns out this professor I found out later is a friend of mine. I said, so what did you mean by that? He said that in the Middle Ages, the average peasant understood that we lived in a world where we weren't the only intelligence, that there's God, there's angels, there's demons, there's all kinds of things. But he knew that this was something that had to be navigated. It didn't freak him out, that there were ways of navigating through this world that you could do without losing your mind or losing your soul. That's the sort of mindset, said my professor friend, that people today are going to have to develop. And it's not just about demons and NHI, it's about things like artificial intelligence, which is progressing so quickly that people will start to treat them as if they were gods, even if they believe that these are merely machines. They're going to, we can get into this later if you want, but they're going to establish themselves as God-like (19/57)
profound impact on me, as I know it's had on you. Maybe the best way for me to approach this subject and to try to penetrate it from a perspective that does resonate with me is to do so via a critique. And that would be a critique of the mainstream materialist or materialist atheist or materialist secularist view that science has anything definitive to say at all about the ontological nature of the world and the nature of our own existence. This is a view, the view that science can give us answers about these sort of foundational truths that I have long rejected, and it's one area where Ian McGillchrist's framework works so beautifully, because while science can help us build models of the world that we can use to make predictions and exercise power over it, it cannot tell us who we are. It certainly cannot speak to the mystery of existence or to the nature of reality, and certainly it cannot say anything about the existence of God. So I'm curious how you would answer the assertion or (21/57)
respond to the assertion that science cannot make definitive statements about ontological truth. So we cannot reason our way to God or to knowledge about the nature of reality, and that only through revelation and the truth of authoritative experience can such knowledge be conveyed to us. Yeah, that's a massive question, and I'm so glad that you're familiar with Ian McGillchrist's work. He's been a huge influence on me, and he's one of the heroes of my book, Living in Wonder. Well, I was just last weekend in Cambridge in the UK and present at a talk Jordan Peterson gave at Clare College, and he was talking about this himself, and he said that science presents us facts, but we have to know which facts to which we should attend, and in what degree to which we should attend to them, and you can't really do that without focusing your attention. Well, how do we know to what we should attend? The way we make those decisions are about the stories that we have in our head, right? And for me, (22/57)
let me go back to my college years when I was wrestling with Christianity. I wasn't a Christian. I was raised Methodist, but we were Eastern and Christmas Methodist. When I got to be a teenager, my faith, what faith I had dissolved, but I went to the cathedral at Chatra when I was 17 years old and was just completely bowled over by the glory of God in that medieval cathedral. I knew nothing about that cathedral. I'd never seen a cathedral. I was 17-year-old kid raised in 1970s and 1980s America, small town America, and I perceived at some deep level that God is present here, and all of my teenage agnosticism just went right out the door. Now, I didn't leave there as a Christian, but I left there on a search. I felt like there was some truth, some presence there that I could not account for intellectually in the sense of, you know, rationally. And that sent me on a search. One of the big points of my pilgrimage was when I was in college and read Kierkegaard for the first time, you know, (23/57)
the Danish 19th century Protestant philosopher. And he's probably most famous for something he said, truth is subjectivity. Now, when I first heard that, I thought he's saying that there is no such thing as truth, that, you know, we all have our own views. That's not what he meant by it. What he meant by the kind of truths for which we live and we die are truths that can only be known by the heart, by the perceiving subject. I forget the phrase he used, he was a difficult writer. It's like passionately appropriating a truth claim inwardly. That's how you know what's true. And that made sense to me. And I thought, you know, I keep trying to find the right argument that's going to convince me to be a Christian. But Kierkegaard's saying there is no argument. The argument is living. And you're not going to be able necessarily to demonstrate this with logical propositions. And, you know, in fact, you know, premise, premise, premise, conclusion. But you can still know it. I ended up becoming (24/57)
a Christian in my mid 20s. But it wasn't really until reading Ian McGillchrist many years later, I first discovered McGillchrist a few years ago, that I understood what Kierkegaard was trying to say. And it was this, that there are domains of truth, that we have the left brain and the right brain. The right brain is the perceptive faculties or as orthodox would say, the noetic faculties of the human person, by which we take in sense data from the outside, outside our heads. It refers it to the left brain, the analytical side, which analyzes it and in a properly working brain, the left brain sends it back to the right for integration into a picture of the world. Well, McGillchrist says, as you well know, your audience is familiar with him. Yeah, he's been on the podcast. Okay, good. Well, so as you know, then he says that our problem in the West is we've gotten stuck in the left brain because it's given us a lot of power. You've all know a Harari has this great phrase in which he says (25/57)
that in modernity, we exchanged meaning for power in early modernity, which is to say, if we decide that there is no meaning outside our heads, only the meaning that we choose to give it to the material world, then we can do whatever we want with the material world. And that is the basis of the scientific revolution. And that has given us immense practical power over the world. It's made us rich and power, all of these things. But it has now, in the 21st century, it has left us on a blasted heath to use Shakespeare's phrase, where we don't know what to believe. We've lost a sense of purpose. We've lost a sense of wonder, and we are falling apart. So I would say to sort of wrap this up, that to think about there being two ways to understand truth, I mean, all truth is one ultimately. But McGilchrist says that there are truths that can only be known through the senses, like the truths that come to us through music, through dance, through liturgy, through art, through religion, through a (26/57)
participation with the truth. This is what Kierkegaard meant to by truth is subjectivity. And this is what is at the basis of enchantment. It's not to say scientific truth is lesser, but it is to say that it's a different kind of truth, a different way of engaging with ultimate reality. And we need both to be, not only fully human, but we need both to be, to learn as much about the nature of reality as we possibly can in our limited condition as human beings trapped in time. So I'm going to try to speak to a few things. First of all, I couldn't agree more. I think, again, this is the challenge, like what do we mean when we talk about knowing something in our hearts? Right? Like, do we literally mean the beating heart that we understand that's made up of atoms and flesh and blood? Or do we mean something else? Or maybe it's both of those things, but there is something there that resonates with me. I also think there's something that's true about knowing versus being able to prove. Being (27/57)
able to provide a logical proof of something, you may not be positive. Here's actually a great line from a movie I was called to watch, again, after reading your book, which was the movie Contact. You remember that movie with Jodie Foster? Yeah, yeah, yeah. Right. I saw it recently, too. Right, perfect. So Matthew McConaughey was a priest and Jodie Foster played this sort of like rational left brain scientist. And there was this beautiful scene where they were out in the balcony. I don't know if you remember this, they were out in DC at some function. And I also love that they're both sort of attracted to each other and she's very hesitant. She's like, why am I attracted to this barbarian priest? And she's trying to convince him, you know, to not believe in God. It's just very interesting. She's trying to work him over to sort of renounce his religion. And she says at one point, you know, like, how do you know that God exists? Like, I would want proof. And then he says to her, did you (28/57)
love your father? And she says very much. He goes, prove it. And I love that line. And it speaks to something that I think philosophers like Kirk Gertl and Ludwig Wittgenstein have both spoken to Gertl through his incompleteness theorems and Wittgenstein in his comments about the limits of language, the limitations of our ability to capture the totality of the world and all of its essence within the descriptive confines of logical forms. And McConaughey's character's challenge is a perfect example of that. You know, prove to me that you love your wife. Prove to me that you love your father. You can't. So the question- Before we go away from that, let me jump in here. This is something that we struggle with, we English speakers, because we only have one word for to know. But in French and in German, they have different words for to know, for the verb to know. In French, it's savoir and connaître. So to know something in the savoir sense is to know it as a fact. But to know something in (29/57)
the connaître sense is to know it personally. Like, I, you and I would know each other in the connaître sense. But I would know that you're a podcast or a Greek American podcast, or that's a savoir sense. And religion is primarily about connaître, knowing God in the connaître sense. Marshall McLuhan, the great Marshall McLuhan, many people don't know that he was a faithful, daily mask going Catholic, you know, this great media theorist, he said that this speaks to what we were just discussing. He said there are two ways of understanding truth, truth as percept and truth as concept. It's right brain, left brain. He said that people forget, academics especially, forget that religion is primarily percept. And if they forget that, if religion becomes nothing but concept, but propositions and you know, dogmas, things like that, and that's all it is. It has to be that at some level. But if that's all it is, it begins to die. McLuhan said that every person he ever knew who lost the faith (30/57)
did so by first ceasing to pray, ceasing to open themselves up to the perception of the presence of God. And they thought that it was enough to think the right thoughts and eventually their faith disappeared. If English had better words to help us understand what it means to know, I think the problem and the solution to the problem would be clearer. So I love that. You know, when I was a young man, I was very interested in epistemological questions and questions about the nature of the world, less so about questions of ethics. And maybe because I was Greek and I grew up in a Greek home, I was especially attracted to Plato's philosophy. And what happened to me in my college years was that I got to this place where I think I became very nihilistic, because I had this idea in my head that I could reason my way to God, that I could sort of use my mind to figure out the nature of existence. And also the subtext here was that I didn't want to die. So I also wanted to find some way, some (31/57)
explanation that eased my existential angst. And what I came to realize later in my life, through experiences that I've talked about, I'm a survivor of a brain tumor. I had surgery and radiation after losing, I had developed severe dementia. And something I learned that I didn't know until I had to go through this experience was that you cannot know God or you cannot know, again, I also feel uncomfortable using the word God, because I feel like it's, for me, it's more of a, this is probably too big of a can of worms to open, but it's more of a metaphor for me that transcends human thought. Again, it brings us back to like the limitations of my mind. But I've come to believe that you can only know that mystery through revelation, that the only things you can know rather definitively about the ontology of the world, about the nature of reality, are things that can be revealed to you through revelatory experience, through the authoritative experience, and not through reason. And I think (32/57)
that unless you've had that experience, or something proximate, you struggle to be able to understand what I'm saying. I feel like whenever I have conversations with people that haven't, that don't sort of intuitively get that, we struggle to have a conversation because everything ends up being, has to be premised around certain scientific and logical constructs. So I'm curious, how that relates to you and how you've seen that in your own life. Yeah, that's man, that's so profound and important. Well, I'll tell you this, I came to believe in God as a Christian. The journey started in Shatra with this revelation of awe and wonder that I wasn't expecting. And that told me there is something beyond and it is real and it wants to know you, it. And it finally, I came to a conclusion, decided I've got to commit my life to Jesus Christ. Seven or eight years later, when as a young journalist, I was sent to interview an elderly Catholic Monsignor who was in a nursing home. He was in his (33/57)
mid-90s, he had been born in the 1890s. He was in his mid-90s and my editor sent me to talk to him because before he became a priest in midlife, he had been an artist of some renown and an art scholar. And they just wanted to know about that part of his life. So I went to see this old man, I go into his apartment and he's like Yoda, right? He's a little short man, very old, but has had so much light in his face, very gentle, invited me to sit down. I just started asking him typical journalistic questions. And he told me his life story and how he had come to America from Guatemala, study in the Ivy League, lost his faith, was an atheist for a while, then went back to Guatemala when his father was dying. His father was a coffee planter and they had a mass of reconciliation with the church. Monsignor Sanchez, Carlos Sanchez, his name, he told me that, you know, when he went to Neil to receive communion, he didn't believe any of it, but he wanted to honor his parents by hiding from them (34/57)
that he was an atheist. The priest held the host out, the consecrated wafer. A burst of light came out and covered him and he audibly heard a voice say, I have always loved you. Instantly he was reconverted. He comes back to America, he was teaching in Dartmouth, begins living a life as a diligent Catholic. And then after a few years, begins to feel a calling for the priesthood, but he kept putting it off and thinking, yeah, it doesn't make sense. This was like the 1940s. They didn't need priests like they do today. It made no sense. He goes back to Guatemala later for a second visit of the family, knelt to receive communion this time as a believer. Same thing happened. But this time the voice said, why don't you do as I ask? Well, he knew that he had to become a priest. He did become a priest ordained at the age of 51, which is really strange in those days. But he had to come to America because in his home country, there was a communist revolution underway or a rebellion. They put his (35/57)
name on a hit list. Now, I tell you that story because I was sitting there listening to this as a 24-year-old man and watching this elderly Guatemalan priest sob as he's telling this story. These are about events that happened 50, 60 years ago and it might as well have happened last week. And I realized this man is a witness. Something happened to him and I could accept the truth of what he had to say because he had radically changed his life. He had become a Catholic priest because of it. Now, could I prove it? No, but I felt that this was the bookend to what had begun, the journey that had begun at Chatra when I had a revelation of God's presence. I felt it was happening a second time through the life and the presence of this man. Now, I ended up becoming a Catholic. I started studying to be a Catholic and I became, I was received into the Catholic Church in 1993. I was 26 years old. I was in Washington, D.C. and I became a very conservative Catholic, very ideologically Catholic. And (36/57)
I thought because I was thinking all the right Catholic thoughts and I went to church, I prayed, I did all of that, that my faith was fine, nothing could destroy it. And then we get to 2002. I was working in New York for a national review and the abuse scandal happened. And I remember talking to a priest back then, a good man, Father Tom Doyle, who had basically sacrificed his clerical career to defend victims. After our interview, he said, look, Rod, I can tell you're serious about your faith. And I want to warn you that if you keep going down this path of investigation, you are going to go to places darker than you can imagine. I said, well, Father, I appreciate that. Thanks for the warning. But I feel like I have to do this as a Catholic, as a journalist, and as a new father. He said, well, look, God bless you, I'll help you any way I can, but you better get ready. This is going to be dark. Dimitri, I had no way of knowing how dark it was going to be. I couldn't write but about a (37/57)
tiny bit of what I learned because people, priests and others would tell me stories, but they wouldn't go on the record. I knew they were true. I wouldn't go on the record. Three years later, my faith, my Catholic faith, was in ruins. But I learned something important about epistemology in that. I ended up becoming Orthodox, not by the way, because I thought the Orthodox Church was without sin, no church is, but because that was the only option open to me, I just lost my capacity to believe as a Catholic. But I learned this, that I had always thought that my faith would be unassailable if I had all the logic, the logical arguments for Catholicism solid in my head. It didn't work out that way. What I did not realize until I was put through that agonizing test is that all sorts of facts and collections of facts, they can be completely airtight. But if your heart is unable to integrate them into your life because of whatever, it doesn't matter. So when I became an Orthodox Christian, I (38/57)
had been intellectually humiliated, frankly, by the way I had believed as a Catholic. But I came in saying that I cannot allow myself to get stuck in my left brain with my faith. It's not to say you should never think deeply and intellectually about religious matters as an Orthodox Christian or any Christian. But it's rather to say, be humble and realize that the way to know God and to integrate God into your own heart and yourself into the life of God, it's not primarily through mastering propositional arguments, but by praying and going to liturgy and living the life, fasting, doing good works for people and allowing the faith by doing so to be sedimented into your bones. And I'm not capable of believing in an institution as I once believed in an institution as a Catholic. But then again, I knew so many of my Catholic friends were just as outraged about the scandal as I was, but they didn't lose their Catholic faith. And I think they didn't lose their Catholic faith because they had (39/57)
lived a much less cerebral Catholic life than I had done. Again, so many questions for you and I'm trying to do my best to think about how to walk this conversation in a constructive way. Let me ask you this, we've mentioned now the Eastern and Western traditions a few times. How would you describe what the distinction between those two traditions are and what is the story you would tell that would explain how these two traditions broke off from each other? What explains the different ways in which each branch of the church tackles and has tackled these questions about the nature of the world and our own existence? Yeah, that's a great question. And it's one that I thought I understood from the outside as a Catholic, but I really didn't. I mean, I just assumed that Orthodoxy was basically an Eastern form of Catholicism, maybe a little more mystical, but basically the same. And that's just not true. And I say that as someone who has great love and respect for the Catholic Church. Look, (40/57)
I'm a man of the West and even though I'm an Eastern Orthodox Christian, the fate of the West, I believe, rests primarily on the health of the Catholic Church. So I don't want to discourage Catholics. Nevertheless, when I was received into the Orthodox Church in 2006, I remember talking to a priest in the Cathedral in Dallas where I came in and I said, also give me some books to read so I can learn how to be Orthodox. And he just smiled at me and said, well, I can give you some books to read, but it's going to take you 10 years to be Orthodox. Like, what does that mean? And he tried to explain to me that being Orthodox is not about mastering a set of facts, theological facts about Orthodox Christianity. It's about living it. It's about absorbing knowledge through lived experience. And of course, it's important to read things, of course, read the Bible, but also read the Church Fathers and educate yourself about your faith. But knowing about the faith and knowing God are two very (41/57)
different things. And I think that speaks to a basic difference between Eastern and Western Christianity. And the West is so analytical in its approach to Christianity and everything else. That's one of the strengths about the West. But it's very, very easy to fall into thinking as a Western Christian, to fall into thinking that you know God, when in fact, you really know about God. And in the East, it's so much more about conversion of the heart. Now, I would have thought as a Western Christian hearing that from the outside, I would have thought that sounds very emotional and simplistic, but that's not it at all. It all has to do with the way the Church of the East thinks about who the human person is. And I mentioned earlier the word noetic faculty. Well, when Orthodox Christians talk about the heart, they don't mean the organ in your chest. They're talking about the quality of the human mind that is sort of like the receiver for things of the Spirit. And to be a sinner is to have a (42/57)
noose, no US, it's a Greek word that is somehow blocked that the Holy Spirit cannot flow into you. As you purify yourself through holy living, through repentance and all of the things, your news becomes more clear. A saint is someone whose news is almost entirely clear and he's filled with the presence of God. I would say that that elderly Catholic priest, Monsignor Sanchez, the fact that he just seemed to have so much light coming out off of him was a sign of a man whose news had been greatly cleared, which is to say his heart. Now, these are really complicated and way beyond my pay grade to talk about philosophically and theologically what the particular differences are. But I think it is really less about intellectual differences between East and West and more about experiential differences because there are Catholics, Eastern-Rite Catholics in Ukraine and elsewhere, who in my experience are much more like the Orthodox than they are like Western Catholics. They still use the liturgy (43/57)
of St. John Chrysostom, by the way. But when you talk to Catholics of the Middle East, for example, they in the experience of the Orthodox are much more about the news, about the heart, knowing God that way. And it is not as Westerners might have it, all about sentimentality and emotion. That is a fundamental misconception that people in the West, I was the same way, have about Orthodox Christianity. So, you know, I think, again, just to sort of aid listeners here, I think also many Westerners are familiar with this mode of knowing the mystery through things like meditation or some of the other Eastern traditions like Vedic traditions or Buddhism. And anyone that's been in a deep state of meditation where there's an awareness that arises, an awareness of the mind and the thoughts that you're having and the compulsive thoughts that you're having, can, I think, in some ways relate to what we're describing here. I want to go back to something I mentioned at the beginning, which was when I (44/57)
started analytical philosophy in college and I had this sort of existential crisis in my life as a senior. And I became kind of very solipsistic. I would say I experienced existential dread and terror because I got to this place of analysis where I realized that according at least to the methodology I was applying to my analysis, that I had no proof of anything other than my own existence. The only thing that I could say definitively was that I exist and nothing else. Kogito ergo sum. Exactly, which I think explains people's fascination with the simulation hypothesis because as a thought experiment, if we were in fact living in a simulation and it were convincing enough, we'd have no way to prove it, which goes back to my earlier point that science cannot provide you with definitive truth is about the ontological nature of the world. That truth can only come to you through revelation. And something that was revealed to me through my experiences of suffering that we touched on earlier (45/57)
is that love is truth, that somehow this presence or source energy that's at the heart of creation and our own consciousness that we've been referring to as God in this conversation is somehow tied up in love, not eros, not romantic love, but love in the deepest sense of the word, God's love. Does that resonate with you and where does love factor into this conversation in your opinion? Yeah. Boy, that's a massive question there. Well, in the book, in Living in Wonder, I used the the model that this wonderful contemporary orthodox theologian Timothy Patizus talks about in his book, The Ethics of Beauty, where he talks about finding our way to God through beauty, through desire for beauty, and through eros for beauty. And he says that that's one thing that we all have, we have desire, that's what makes us human. We usually use the word eros to describe sexual desire, but that's not the whole of it. You have kind of eros for food and just desire. But through purification, through the (46/57)
Christian, climbing the ladder of perfection, it gets purified to love for others and eventually gets to the highest form of agape, which is completely self-sacrificing love. And that's what the church says that Christ gave for us. He poured himself out for us. And if you take it from a Christian perspective, I mean, here is the incarnate God coming to earth to take on the finitude of human existence for the sake of saving us. Kierkegaard calls this the absolute paradox, the idea that the infinite could become finite, the eternal could become temporal. Christ is the absolute paradox. And not only did he incarnate, but he took on the worst of our suffering so he could defeat death. You might remember from your Orthodox church going as a child, at the Paschal Liturgy, at Easter Liturgy, we sing Christ's Risen from the dead, trampling down death by death, and upon those in the tombs restoring life. And this is something that was kind of new to me when I became Orthodox 19 years ago. The (47/57)
idea that Christ conquered death, I had heard that in Western Christianity, but it's taken so seriously in the East that all of the effects of death had been conquered by God loving us so much that he took on death to defeat it for us. So you ask about love, that is the purest expression of love imaginable from the source of love itself, God. And I can only really understand love as in a Christian framework because that's really the only way I've thought about it for most of my adult life. And it has to require sacrifice. I think of this scene in the great Terence Malick film, A Hidden Life. Did you ever see that? I didn't. I've seen the thin red line. I've seen Tree of Life. What was the movie you said? Oh, it's called A Hidden Life. It came out five or six years ago. It's based on a true story of an Austrian farmer, Catholic farmer Franz Jägerstader. And Franz really lived. In fact, his case is up for canonization now. He lived in an Alpine village in Northern Austria and went to (48/57)
church like everybody else. And then the Nazis came to town. Almost everybody in town became a Nazi, but not him. Not him and his wife. He couldn't do it. He thought that swearing allegiance to Hitler would be like swearing allegiance to the Antichrist. There's a scene in the film where he goes, and this is pure care regard. Malick invented this himself, but Franz, the farmer, goes into the village church and there's an artist there painting biblical scenes on the wall. And Franz compliments him on that. The old artist says, you know, people come in here all the time looking at these biblical scenes and they admire it. They admire the artwork. They admire Jesus for all the good things he did. The problem is, said the artist, Jesus did not come to call admirers. He came to call disciples. And the way to tell the difference between an admirer and a disciple is willingness to suffer. Well, this is a foreshadowing of what Franz goes through. He eventually was arrested by the Nazis and (49/57)
executed it as a traitor. And you know this going into the film because he really did live. And so what the film is trying to illuminate is the hidden life inside this simple Austrian farmer. Why was he the only churchgoing Catholic in that city who resisted the Nazis? It's because of his faith. It's because he loved God so much that he was willing to die to himself in everyday life so that when he was put to the test, he passed it. And there's an aspect of love in that, you know. And my book, Live Not By Laws, when I went into Eastern Europe and into Russia to talk to Christians who suffered under communism, and I talked to this one man in Alexander Ogorodnikov in Moscow. His face is partially paralyzed from the beatings he took from the guards. They all said that the only way that they got through prison and kept on to their faith was their ability to bear suffering because they knew that no matter what, God was real and he loved them. And they loved him so much they were willing to (50/57)
take on the sufferings of Christ for the sake of that love. And if you can do that in prison, being, having the hell beaten out of you by guards, then how much easier is it to do it in everyday life with your family, with your neighbors, with the people around you? The answer is it's hard. I struggle with this all the time. But this is why we must become perfected in love. And this is why when you believe that God is ultimately love, as I do as a Christian, you have to know that that love makes demands on you and those demands are often sacrificial. One more question before we move into the second hour rod, since we're talking about suffering, is suffering necessary in your view for spiritual growth? Absolutely. You know, I, when I was here in Budapest in 2019 doing interviews for Live Not By Lies with Christians who had suffered in Hungarian communist prisons, I was on a tram with my translator. She's a young Catholic and she said, you know, Rod, I really do struggle. I can't even (51/57)
talk to my Catholic friends about what I'm going through in life. If I tell them that, oh, my husband and I are fighting lately or our little boy is not letting us sleep, we don't know what to do with his behavior problems. They cut me off and say, oh, you got to get a divorce. You got to put your kid in daycare. You deserve to be happy. And she said, I'll tell them, wait, I am happy. I'm happily married. I'm happy being a mom, but a happy life is not a life without anxiety, without stress, but they don't even understand that. I looked at her and said, Anna, it sounds like you're fighting for your right to be unhappy. She said, that's it. Where'd you get that phrase? It's chapter 17 of Huxley's Brave New World. I don't know if you, when the last time you read that was, but that's the chapter when John the Savage, the dissident from this perfect society, is dragged before Mustafa Mahnd. He's the world leader for Europe. And then unlike in Orwell's dystopia, which is a dystopia of fear (52/57)
and torture and police, Brave New World is a dystopia of perfect pleasure. They keep you entertained. They give you drugs to be happy. You know, everything is taken care of. And Mustafa Mahnd brings John the Savage there and says, why won't you come join us? I mean, we give you everything you want. Mustafa even describes their society as, quote, Christianity without tears. Well, John the Savage, who's been raised in the woods reading nothing but Shakespeare, he tells him, that's the problem with you people. You could stand to have more tears. And what he goes on to say, John, does is that we have to have suffering, the prospect of suffering, to have love in beauty and art and poetry and all the good things in life, the things that make us fully human. It's not to say that suffering is a positive good, but it is to say that we do need that suffering and that struggle in order to purify ourselves, to perfect ourselves and to live a fully human life. Well, you would think that if this (53/57)
recovered from it. But as he went and talked to these people, he realized that almost all of them had an inner joy and an inner peace that had completely escaped him, even though he was raised in liberty and prosperity. And that drew him in so much deeper into realizing how because they were able to offer their suffering to God, it purified them and left them not broken but healed in a paradoxical way. And it affected him so strongly that today, Timo Krishka, he's stayed friends. He's studying to be a Greek Catholic priest. So, Ron, I'm going to move us to the second hour. I do want to touch a bit more on the simulation hypothesis and why you think this age-old thought experiment that goes at least as far back as Plato's allegory of the cave is showing up in this new technological form. Is it just because this is the language of the time or is there something more going on here? I'd also like to discuss the practical implications of what we've been talking about today and how your (55/57)
Christian faith applies to politics and the culture war, which is raging across Western societies as people, I think, try and grapple with both the speed of cultural change and their need to find meaning in a world that has come to feel for so many devoid of it. 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 Rod, 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. Rod, 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 (56/57)
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 Nicolau. 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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Why Did the Future Arrive First in Russia Peter Pomerantsev.done #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
he goes in. And he secures power over the main TV channels and the oligarchs he gets rid of are the ones that control TV. So Berezovsky, Gysinski, before he goes for the ones that control oil and gas. So he prioritizes media control. And the journey to securing media control is really at the top of his securing of authoritarian power. And, you know, we could say that since 1213, the internet also plays a big role. But really up to then, it's really all about TV. And really quite rapidly, he secures central control over TV. You know, first, all the big channels come under him, some smaller channels are left to their own devices. And slowly, all of that is collected into a fairly centralized system. So, you know, they prioritize it. They on a deeper level, what their spin doctors talk about is that they felt very weak in the 1990s. And to compensate for that weakness, they had to create the aura of power, even though the state was very weak. And the way you do that through TV, you're (15/57)
my guest conversations, as well as the all new intelligence reports, which are the cliff notes of 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 each and every conversation, along with my takeaways from every episode. And with all of that out of the way, please enjoy this deeply enlightening conversation with my guest, Peter Pamarantsev. Peter Pamarantsev, welcome to Hidden Forces. Thank you for having me. I'm so excited to have you on, Peter. The reason I asked you to come on the podcast is because I want to see if you can help me and my listeners answer a question that I first heard you pose in a lecture or it might have been an interview you gave, but which you also ask in your second book on propaganda, which is, why did the future, i.e. the world we're living in today in Western society, why did that (5/57)
that sense, that's the Esquistle very relevant to understand it all. Just the ideological bit and the kind of stuff of democracy about debates and reason, evidence that's all gone. And I think you see some of that here as well. You have these kind of political movements, which obviously they're tied to in America, problems about race and all that kind of stuff, because that's the sort of history that we live in here. But their essence is just expressed through pure belonging, almost sometimes almost without ideology. I mean, is Trump right? Is he left? Well, I mean, we can't really tell anymore. It's just this need for certain types of authority figures and a certain type of experience of, you know, I'd say pseudo community. So that's kind of what we're left. And again, I'm certainly not the only people to notice this that as ideology and the politics of ideology goes away, everything becomes about identity in and of itself. And I think we have to think a lot more about what is (43/57)
ways, quite literally in online communities with the example of like GameStop or some of these cryptocurrencies, people looking for communities and fusing them with financial markets, also with the election of Donald Trump and increasingly Rand Paul and Anthony Fauci, and everything becomes increasingly a drama, everything becomes increasingly a form of entertainment. So actually, this, one, love your thoughts on that. And then I want to ask that question when maybe we'll move this to the second half of our conversation and I'll ask it, we'll keep it for there, but when did you first begin to see some of the characteristics of this sort of post-Soviet Russian culture emerge in the West? So, well, the revolutionary year of 2016 is obviously the one that is the inflection point. Both Trump and Brexit happening, but we already saw elements of it on the fringes. But without a doubt, the Trump moment is huge. Then you see the emergence of Duterte in the Philippines, who's 2015, very, very (49/57)
What's up, everybody? My name is Dmitri 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 Peter Pomerotsev, a Soviet-born British journalist and former TV producer who has written two extraordinary books, which together have done more to help me understand the predicament in which we find ourselves today with respect to our relationship to truth, identity, and meaning. Then probably anything else I've read since starting this podcast, and that's saying a lot because I've read a lot of books and articles and listened to a lot of podcasts trying to figure out what it is that's really happening to us. What is it that's responsible for this creeping sense of unreality, where so many of the things that we've taken for granted no longer seem to work and where people feel (1/57)
increasingly paranoid about everything, myself included, I feel this way. And I've come to the view that what's responsible is a breakdown in shared belief systems, that what's happened is that the stories that we tell ourselves about each other and about who we are in a deeply communal sense are breaking down. Not only are they breaking down, but they no longer work, and they've been shown in many instances to be frauds. Whether we're talking about the lip service, paid to democracy and human rights, as justifications for wars of aggression and occupation, or the idea that somehow trillions of dollars can be conjured out of thin air to support asset prices, but that somehow we have to go on pretending that it's really about supporting the economy and that we really do live in a free market capitalist system. I invited Peter onto the podcast today because he wrote about this world years ago, during his time living and working in Russia. And not long after the publication of his book (2/57)
describing that experience, he began to notice that some of the things that he wrote about, the cynicism, the sense of surreality, the nostalgia, and what he described as an aggressive apathy, were also showing up in Western countries. And he began to ask himself a question which, to this day, whenever I say it, it makes the hair stand up on the back of my neck. Why did the future arrive first in Russia? And that's the central question that has preoccupied me ever since I heard him say it, and which forms the foundation for today's conversation. Because as you will hear, some of the same forces that were operational in the late Soviet Union and in early post-Soviet Russia are at work in Western societies today. And if we want to understand what the future might look like when trust in institutions has completely deteriorated, when grounding notions of identity and meaning have all been disappeared, when any independent standard of truth has become so elusive that people are willing to (3/57)
believe in anything, and the only thing left to unify us is raw and unbridled power, then we would be wise to not only understand the path that Russia has followed in the last several decades, but to do everything in our power to avoid following it any further. Because it leads to only one place, and that is a repressive society that uses the language and institutions of democratic capitalism for authoritarian ends. For both existing subscribers and anyone new to the podcast, we've moved our premium subscription off of Patreon and onto Supercast, which you can now access directly through the Hidden Forces website at hiddenforces.io and get immediate access to the second half of my conversation with Peter and every other guest in a single unified episode, which will be delivered directly to your podcast app of choice every week or whenever we publish anything new. Subscribers to our Super Nerd Tier will also have access to the human transcriptions of both the first and second parts of (4/57)
future arrive first in Russia? And for those who haven't read your books, that question may not make sense immediately, but I promise that it will shortly. But before we delve into answering that or trying to answer it, I'd love for you to give me a sense of who you are, your background, and your connection to Russian society insofar as it's relevant to today's conversation. Sure. So the story is actually my second book, which is partly a mix of family memoir and kind of analysis of contemporary propaganda. So I was one in Kiev, actually, in 77. And when I was nine months old, my parents were who were they were being arrested a lot for sort of essentially giving out copies of censored books, which sounds absurd today, but that carried a sense of around sort of seven years, but giving out copies of books by Nabokov and Solzhenitsyn, talking about sort of hand-printed copies that people gave to each other. And there was a time when a lot of kind of dissidents would be exiled rather than (6/57)
put into prison and camps or other people that were often given the option. The policy was trying to get rid of minor kind of troublesome elements. And so they were exiled and really accidentally, after a period of wandering around Europe, sort of politically homeless, they ended up in London because my father got a job at the BBC World Service. So I grew up accidentally British. And then I went back to the former Soviet Union, but to Russia, to Moscow, after university. I went to film school there, worked in think tanks there, and then interested in them, as you can already tell, both in policy and in arts and storytelling, kind of at the same time as I continued to be, and ended up working in Russian entertainment TV in the kind of the first draft of the Putin era when Russia was still pretending to be a democracy. So I came to Moscow in 2001, right after September the 11th, I remember it very well, because hardly anybody was in the plane, people were scared to fly. And then I was at (7/57)
film school and, you know, working on British documentaries about Russia until around 2006, and then 2006, 2010, stroke 11 was when I actually worked inside the Russian entertainment industry. And I mean, my great ambition was to make kind of feature films, but like all people who dreamt of making all featured documentaries, I ended up making factual entertainment shows, reality shows. It was a very exciting time in Russian entertainment, because a lot of these kind of Western formats, like the Apprentices, for example, or Love Island, or Stand Up Comedy, or sitcoms, were coming to Russia for the first time. And it was a time of kind of quite broad cultural experimentation, which was both an elite art and an entertainment. But yeah, my first book was about that world, but also seeing this new kind of authoritarian regime take hold that was really modeled in some ways on reality shows and entertainment, but certainly tried to be entertaining as well as oppressive, and that was really (8/57)
invested in TV as its main medium, but also in a weird way as it saw itself as a TV show. It didn't just use TV, it saw its own exercise of power as a sort of reality show, which definitely seemed to anticipate reality show hosts becoming president of the US. So in that sense, they seem to have kind of clicked on to some sort of truth that we all live in now. So yeah, but I left Russia in 2011 for many reasons, but partly because it was, you know, the turn towards dictatorship was already apparent, even though it was actually still the Medvedev era. So Russia was still playing nice, and officially, it was still moving towards the West, but everybody on the ground could tell that things were going really dark. People were starting to leave. Now it's obviously just an out and out dictatorship. And yeah, and I kind of like moved away from TV back towards policy, and have ended up kind of gravitating towards academia, I ended up working at the London School of Economics. Now I work at (9/57)
Johns Hopkins University, studying propaganda, studying the weird coming together of media and policy, both about Russia, but really across the world, and kind of thinking what media can do, how do we create TV and other types of media that are actually good for democracy? That kind of ended up being the question I sort of asked myself. So we know what the other side are up to. But, you know, we have a lot of assumptions about how media is meant to help democracy, but how do you tell stories, or how do you create shows that are good for democracy? And I can't say I've solved that, but that's kind of the big question that I explore these days. So you said that when you arrived in Russia, it was kind of the first draft of the Putin era, which was an interesting choice of words, given the fact that you also said it later when you were describing television that, in a sense that the Russian state saw itself through television, where you described sound a lot like a hall of mirrors. What (10/57)
role does television, and did it then and does it play now, in Russian culture and Russian society? And to that point, would you have the views that you have today, or the depth of understanding that you have today, not just as a result of the fact that you were an expat, but how instrumental was it that you were actually working inside of the machinery of television? I mean, look, there's other people who've written very, very good analyses of Russian propaganda without working in the television industry. So Arkady Ostrofsky's brilliant The Invention of Russia covers the 1990s, and the role that media and TV played in securing this new model of power. Andrew Wilson has written a great book called Virtual Politics, all about that as well. So it clearly didn't have to to write about this. I suppose it gave me a sense of the texture and the sense of the characters, and a sense of the kind of attitude of your regular TV workers who actually start this, and who are kind of like the sort of (11/57)
the media soldiers in the middle of it. So I never worked on political shows, because I wouldn't as a foreigner, to be frank, but also as an individually, maybe I wouldn't as well, given my background. But I certainly saw a lot of people who were making news shows and current affairs shows and documentaries supported the regime. And I'd go drinking with them, or I sit in an edit suite with them, or, you know, I'd have an editor on my show that just got off working from a piece of state propaganda. So I talked to them all the time, without writing a book, just they were just the people I knew, and the people I hung out with. So I got to know their attitudes, and their worldviews were kind of, you know, very important, because they're the sort of people that kind of reflected and both reinforced the kind of governing attitudes of the country. So I suppose that was a big added value. But in terms of the regime, and it's actually to TV, you've got to go back to the 1990s, when you have (12/57)
this chaotic period in Russian politics, democratic in a kind of, you know, chaos theory of democracy. And around 96, when Yeltsin, who's the president at that time, is really on the ropes, very famously, all the oligarchs unite behind him to stop the communists from getting into power. And they unite behind him and put their resources in, and the main thing they do is capture TV. Before that TV is used in a very chaotic way. You know, there are other forms that were more important to the Soviet regime. The Soviet regime was very invested in propaganda. But, you know, TV was pretty lame, basically. But they realized that, look, this is a moment where you could take advantage of TV, and they all the main TV channels which are controlled by oligarchs get behind Yeltsin and play an important role in securing his victory. And what is a sort of genuine vote at that point? Then in 1999, Putin is a nobody. He has a rating of, you know, I think it was like below 10%, when he's made Prime (13/57)
Minister by Yeltsin. And he's transformed into a vote winner via a huge TV campaign and a kind of a war in Chechnya, which is kind of a made for TV war in the sense that he is made into a war leader on TV. And he's completely aware of that. He's very aware that he's a no one. And that it's the power of television that has given him this aura, this charisma, which nobody thought he had. He's not a Chavez. He's never gone on the streets to rabble rouse. You know, he's not a populist in that sort of bottom up way. It's all created through TV. And he's completely aware of that. And so kind of almost one of the first things he does in the early 2000s, even before he takes control of the oil industry, which becomes obviously his key lever, even before he takes control over all the security forces, the first thing he goes for to take over as TV. And it happens bit by bit. It happens, you know, quite, you know, lots of things happen as some of the he does it overnight. But that's the direction (14/57)
constantly reaffirming the central role of the Kremlin, you're doing show trials, you know, against oligarchs to show, haha, look, you know, we do have control. And so kind of informational dominance becomes a way to compensate for a sense of insecurity. I mean, now they pretty much have everything under wraps. But in the 90s and early 2000s, when oligarchs were very strong, when local governors were very strong, when, you know, security forces were very disorganized and redo the bidding of whoever would pay them the most rather than central power, you almost compensate for that by having, you know, hegemony over at the imagination. So that's another kind of deeper reason they invest in information dominance so much. I'm interested in exploring this reliance on storytelling. And also what it sounds like you're describing the aesthetics of power. And maybe something else, which we think about in Western capitalism as kind of fake it till you make it, sort of create the appearance of (16/57)
success and then sort of become successful through that process of having created the perception in the minds of other people. That's a very nice parallel. I hadn't thought about that, but that's not a bad parallel. That's not bad. So describe for me and my listeners what it is that we're talking about here, what it is that you describe in your first book through your experience of living and working in Russia. What is the sort of cultural manifestation that we're describing? And then what I would like to do is try to understand its origins, its progression from the end of communist Russia, because interestingly enough to get to ahead of ourselves, I did another episode with my friend Simon Mihailovich, who emigrated to the United States in the 1970s. And he sees the beginning of this unraveling actually in the period of destilization, but then really accelerating with Perestroika and then through into the early 1990s. What is it that you experienced that you write about that we're (17/57)
trying to get our arms around today in this conversation? Well, look, again, we're talking about phase one Putinism. So now we're on a different model. So, but it's a very important one to understand because it's one that's been imitated by a lot of people by Viktor Orban in Hungary, by Vucic in Serbia, by Erdogan in Turkey. And when we think about nightmare scenarios of the US, which I think is still nightmare scenarios, but there's the scenarios, we're talking about Putin phase one. And Putin phase one is something that was nicknamed managed democracy, which is still the veneer of democracy, but actually underneath it's becoming a dictatorship. Now it's just an open dictatorship. Again, aesthetics, the aesthetics of democracy. It's interesting. Again, I just want to point this out, aesthetics plays a really powerful role, I think in your book and in this conversation. And I think it says actually very interesting. I think when we look at politics, we always lead towards sort of a lot (18/57)
of explanations based on self interest or based on power. I think aesthetics and psychology, psychoanalysis might be interesting additions to how we think about these things. We've definitely started talking about psychoanalysis a lot more in America. We still don't a lot in geopolitics. But anyway, coming back to Putin, so the idea was to have the veneer of democracy, but actually still controlled. So if you were to switch on a Russian channel in 2007, eight, you would see actually a very lively debate show between different political parties in a way much more intense than an American one, much more kind of Jerry Springer like, you know, with a lot of rowing and shouting. But all those parties were actually to a greater or lesser extent either created or controlled by the Kremlin. Real opposition were already being forced out and would soon just be not allowed on TV altogether. That ends up being nebarnly. But before that, that's lots of stages. And the idea was to reflect different (19/57)
bits of society. So everybody felt represented. But to make sure that none of them could ever really compete with Putin. So the overall point of this reality show was there is no alternative to Putin. But you had your crazy communists who were meant to kind of soak up some of the resentment of pensioners. But everybody else was meant to look at them and go, oh, my God, they're crazy old commies. And then there was the really far right guy, Zyrunovsky, who was created by the Kremlin literally, who would play the role of like the crazy far right Steve Bannonny kind of character. And he would get, by the way, like 17% of the vote. But most people go, oh, my God, he's crazy. And he would say outrageous things, crazy things that part of the population would like, but anybody normal will go, whoa, he's mad. And then you had a kind of liberals who were always a little bit effete and a bit kind of, you know, very un-Russian. And they would, you know, get their 6% of the kind of liberal elite (20/57)
votes. But it was very clear that they didn't represent real Russia. They weren't real men. They were, you know, they were nerds. And, you know, they clearly didn't reflect normal Russians. Interesting. Real men also something really to sit on a bit and to think about in the course of this conversation, this notion of masculinity. Oh, yeah, that obviously plays a huge role, almost to kind of a camp sort of way with Putin's photographs of him being so virile and riding horses and going around bare-chested. And so you were meant to look at that and go, wow, Putin is just so much better compared to all of this. And there is no real alternative to him. But we do have some sort of debates. They don't want politics to be boring. It's not meant to be fun. You know, there were stories around these parties and these characters and they were all, you know, these fun debates and, you know, you got to vent a lot of spleen. Though ultimately, when it came to any big decisions, all these parties (21/57)
were completely loyal. So they came to sort of arresting an oligarch, they'd all be on board. So that was the model. I suppose the twist to give to all of this was that this was done quite openly. So it was openly telegraphed that all these parties are loyal and controlled and part of the Kremlin. So this is a very, very interesting layering of messages. Yes, we do have some freedom, but actually it's all controlled and don't you get any ideas. So Koav, who was the kind of guy who was running all of this, who was kind of in charge of media policy and in charge of running the so-called parliament, would leak photos of his own office with, you know, telephones to all these party leaders, making it very clear that he was in charge. And then it's kind of hard to, sometimes I find it hard to grasp for, for Westerners. This wasn't about conning people. This was about saying, this is a game. These are the rules of the game. These are the limits of the game. And then on an even more subtle (22/57)
level to say, look, democracy is actually always controlled. We have democracy, but it's really controlled by our own deep state, so to speak. And it's the same over there in America. They do have democracy, but it's controlled by a deep state or in Britain, it's actually all controlled. So this is the package. And sort of saying that the alternative was the 1990s, which was chaos. Do you want that? Of course you don't. So always bouncing off like, you know, that democracy was just chaos. This is what it is. You know, this is sort of command and control democracy. And, you know, we can have some fun with it. You know, there's some color. Elections are definitely not up for it, but you can go and say some crazy stuff. You can even criticize bits of the, maybe not Putin, you can criticize the government. You don't criticize Putin, who's sort of almost above politics, but you can have a go with the government. You're allowed to do that. So there are some bets, you know, there's ways to (23/57)
express dissent. But please know that actually at the end of the day, it's limited. Is the distinction that you just can't speak too truthfully, that you can't break the third wall? Is that the real distinction that it's okay to dissent? Just don't really use language from the world as it is, from reality. You have to continue to play act in this larger sort of masquerade. Is that the distinction? Exactly, exactly. So I think you've really put your finger on it there. And when we think about power, it's getting people to play along, which shows you have power. And by people playing along, you kind of weirdly break them. And people by agreeing to play along, people become part of it and sort of commit it to it. And I think if we think about power and dictatorial power, it's getting people to play along, which is the secret, because actually only so much your repressive organs can do. There's only so many people you can arrest. So it's getting people to play along, which is the key. It (24/57)
was also in the Soviet period. And so it was interesting. So when I was there, if you wanted to speak the full truth, you weren't at that moment usually killed. You were just off TV. Yeah. And being on TV was being relevant. So there were opposition people like Boris Nemtsov, who was on TV for a long time. And then he started to go too far. And then there were just blacklists. There were blacklists of people who cannot get on TV. And Nemtsov eventually got into those lists. And people sort of think about, talk about the real opposition, which meant not being on TV, which meant being irrelevant. So you weren't killed for it at that point. You weren't put in prison for it. You were just made irrelevant. You were not in the reality show. You weren't in the Big Brother House. Instead of like Orwellian Big Brother is the Big Brother House. If you want to be in the Big Brother House, you've got to play along. And you're right. And that's what I try to get at in my book. It's not a top down (25/57)
system of coercion. It's a way of getting everybody playing along, which in a very subtle way breaks you, because you become part of it. And there's actually been a lot of anthropology about this. I'm not the first person to notice this. There's been very good anthropology about this, about the Assad regime, for example, in Syria, the first father. So I'm certainly not the first person to tweak this. But my book is in many ways about what it's like living in that, I suppose. So I actually want to pull a quote from your book. I have so many quotes on this rundown. I have quotes from both, this is not propaganda and from Nothing is True and Everything is Possible. This quote speaks to what you were describing just a moment earlier. Let's see where I want to start to pull it from. But even when you know the whole justification for the president's war is fabricated, even when you fathom that the reason is to create a new political technology to keep the president all powerful and forget (26/57)
about the melting economy, even when you know and understand this, the lies are told so often on Ostankino that after a while you find yourself nodding, because it's hard to get your head around the idea that they are all lying quite as much and quite so brazenly and all the time. And at some level, you feel that if Ostankino can lie so much and get away with it, doesn't that mean that they have real power, a power to define what is true and what isn't, and wouldn't you do better just to nod anyway? Now, this speaks to two things. One, it speaks directly to what you were describing before, which is that in a sense, the power to define reality is a power that's so awesome that it instills in the listener or in the viewer, at the very least a healthy sense of fear, fear of going against a power that's so powerful that it has the capacity to define what's real. But it also speaks to something else, which is really what I want to get to and draw it from you, which is what were the (27/57)
conditions that made this possible? What sort of vacuum existed? How did Russian society find itself in such a vacuum, a cultural vacuum, for lack of a better term or a sort of state of nihilism, where a regime like this and stories like this could emerge and try to compete as the dominant narratives of society? First of all, there's a big historical legacy in a certain way that Soviet Union did this as well. So we are talking about a lot of historical conditioning and a lot of people understanding the kind of the gospels of the Soviet Union were nonsense, but having to repeat them and understand that they are a way of communicating power. We're talking about propaganda theory, this idea of propaganda as messaging as in trying to convince people. There's also propaganda as signaling. It's a signal. This is what we say is the truth and if you want to survive, you better not. So it's not about persuasion, it's kind of like communicating power. But would you say that it was that (28/57)
distinction was always equal or did it begin where more people were convinced and over time it just became the signal for power? In other words, the form of propaganda and did people's conviction in the story deteriorate over the course of the USSR's history so much so that by the time of the collapse in the 1990s, there was a sense that like again to the title of your book, nothing is true and everything is possible. So I think we can look, we can go all the way back to the start and look at sort of peaks and crests in this. If we're talking about the period that I'm kind of bay concerned with, which is the Cold War period and post-war period, there was probably a moment in the 1960s where there was a real hope for socialism with a human face. There was a certain amount of optimism. There was real economic progress and there was a certain amount of liberalization and a certain amount of reformers, especially in the culture sections, which might make you think that it was possible. By (29/57)
the 1970s, it's clear that it's sort of the breaching of era, complete cynicism. By the way, the time it gets to the 80s and 90s, it's lost all its meaning. So I'm concerned with that bit. I mean, you could then go back to the 20s to the Stalin period. 20 people seem to believe it, but the Stalin period is just about power. So maybe this is a cycle, I don't, you know, we'd have to do a lot of kind of deep right for that. But in what I'm concerned with, which is that period, then I think that's the kind of arc. But coming back to what I was saying exactly about the Soviet one, the difference between the Soviet one and the Putin one is that because communism itself was meant to be a rational enlightenment philosophy, which was meant to respect evidence, it claimed to be scientific, you know, it claimed to be an enlightenment, the ultimate enlightenment experiment. A, there was a normative position that you could criticize it from. You could say, well, you've promised to give us socialist (30/57)
utopia, but you have not. And here's the evidence. And they would then try to produce other evidence, say, well, actually, we have, look at these statistics and the Soviet system had all these think tanks trying to prove the economy was working well. You know, it was quite bizarre. They came up with the idea that people weren't unemployed, they just had so much free time, that showed it was doing well. I mean, it was like, because it was a system which was meant to have values, you could attack it for that. You could say that you are creating a better society. Why are these people in prison? And because they signed up to various human rights norms, you could criticize them for that. The dissidents used to say that we're going to hold you accountable by your own laws. There were laws around freedoms in the Soviet Union, which were clearly ignored, but they were there. So because it was a coherent philosophy and an enlightenment philosophy, there was a normative standpoint that you could (31/57)
criticize it from. The difference with the picnic era is like, they don't believe in anything. They can be left wing, right wing, they can be nihilist, they can be idealistic, they can change, they can be completely situationist. I think nihilism actually is a coherent philosophy. I think that cynical, cynical, if you look at the kind of definitions of cynical, it means you can believe lots of things. It's not believing in nothing. It's like, belief is so thin that you can do this thing in the morning and this thing in the afternoon. That's the world that I lived in. That's interesting though. So what is the distinction between believing in anything and believing in nothing? So nihilism is still a coherent worldview. I mean, nihilists were 19th century, kind of like heart. I mean, there's Russian novels about nihilists, their belief in the blackness is a commitment. They make a commitment to their nihilism, like grunge fans or something. There's a philosophy there. This is about being (32/57)
a nihilist at one moment and then putting on a business suit and being a kind of liberal rationalist the next. There's a coherence to nihilism. Here, we're talking about just being different things. It's more a masquerade that you're constantly indulging in. I mean, there is an emotional logic there. There's a psychological logic there, which I think we couldn't try to sort of find. So I'm not saying there's nothing there in terms of an engine, but in terms of belief systems that you can translate into words and ideas and facts and debates, there isn't a stable one. And I'm always asked, what does Putin believe and what do Russians believe? And I'm like, if you're asking that question, you've understood nothing. The point is they can believe lots of things and none of them matter. And that's hard for, again, in a Western culture where we're brought up from school age to say, what do you think? Yeah. And to re-hardening our sense of self, it's very hard to understand a culture where the (33/57)
opposite is valued. And that was actually already embedded in the Soviet educational system, where nobody asks you what you thought. You were just meant to power it back Soviet dogma, whether you believed in it or not. So that was already there in the Soviet system, but it's kind of multiplied. And if anything, and what I try to get to in the book is what they would say that all your beliefs in the West are bullshit, what I would always hear from, and there are kind of elite because, you know, people who work in media, create media are sort of elites, was that you don't understand, Peter, they would tell me, all that stuff about human rights, all your stuff about a liberal world order that you've grown up with, it's bullshit. Your elites don't believe in it either. It reminds us of the Soviet Union, where they would parrot these things, but no one believed in it. And actually, below all this are just games, manipulation, and the same kind of, I think I call it culture as zero gravity (34/57)
in the book, that we have here. And you will find that out soon. And I remember listening to them going, oh, you just have, you know, you're, this is sour grapes. We have politicians who still believe in facts and ideas, they're corrupt, whatever, but they still believe in stuff. And I suppose the story of my second book is coming back to the West and going, Oh, my God, did they actually have a point? Because you just have this explosion of a lack of belief in anything and a very similar attitude towards facts. So I suppose that the symptom of this world view is that facts lose their meaning because facts become instrumentalized, all ideas are instrumentalized. They only, you know, they're not a thing in itself in this world. There's something to hit people with or confuse people with or intimidate people with, but they're not something that you kind of use to debate because there's nothing to debate about. Facts lose their meaning. And if anything, there's this kind of celebration of (35/57)
sending a big middle finger up to factual language and a reveling in nonsense speech and a reveling in just saying the most absurd things and saying, that's kind of almost your kind of your badge of honor. And, you know, we see some of that in the West now, which was, you know, what kind of struggling to deal, how you deal with leaders who don't care if they're caught lying. That was one of the agonies for my liberal friends in Russia. You know, they really believed in holding truths of power. And they would produce this evidence about Putin's corruption or about, you know, the fact that the elections were rigged. And the Kremlin would go, So what? Yeah, we're lying. And that resonated with people. Most people in Russia said, Yes, so what? None of your ideals matter. Democracy was a nightmare or a sham. What is this evidence that you're producing? What does it mean? It means nothing. We live in a world of chaos and let's speak about it that way as well. And I remember so many of my (36/57)
friends just being like, you know, because they believed in democracy. And they were like, no, but here's the evidence. And it just didn't mean anything. And that was a very dizzying moment. But now I think we see it everywhere. What kind of what was used to it now, where the evidence has stopped meaning anything. So much to pick apart here or to reflect on. First, again, I want to pull a quote out from your book that actually speaks directly to what you said. This is not propaganda. Were you right? I returned to London because in my naivete, I wanted to live in a world where, quote, words have meaning, where every fact was not dismissed with triumphant cynicism, or as, quote, just PR or quote, information war. Here are the two sort of things I want to highlight. One is it seems that what you're describing is a society that feels as if it has gone through the apocalypse. And what it has discovered in the course of doing so is a deeper truth, which is that there really is no truth, that (37/57)
everything is relative, that nothing has underlying substance or meaning. And so that the truly enlightened people are the ones that understand that and in a sense believe in nothing, not in an ideological way, but truly deeply nothing. So that's one observation. And I also want to reflect on whether that's actually true or not, because you can approach that question from two different perspectives and both I think can carry some a lot of intellectual weight. And the second thing I want to sort of reflect on is a more practical question, which is what shattered that mythology? We don't have to necessarily try to extract that from the Soviet experience, because I think in some ways we tried to address it a bit and we talked about the Stalinization or Perestroika or the 1990s where communism collapsed and all of a sudden you had these overnight billionaires, you know, running around town with Maybachs, as you describe in the book, but maybe more to the point, what shattered this myth in (38/57)
the west? Because as you pointed out, your colleagues in Russia would say, you will discover this soon too. And this is the question, right? Have we discovered this? Is that what's happened here in the west that we discovered it at some point? And I would say in a sense we have, but then that brings us back to the deeper question, which is, did we discover a deeper underlying truth? Or in fact, have we in a sense deluded ourselves? And then further to the point, if in fact we discovered a deeper underlying truth that really there is no truth that we can discern, what does that say about our need for mythology? And can we erect myths and live by them knowing this deeper truth? Because this is the, this then brings us all the way back to some of the fundamental sort of foundational issues with the Enlightenment and the death of God. And our attempt to, in a sense, construct a society very much along the lines of communist Russia, highly scientific, but full of so many contradictions. And (39/57)
you sort of wonder, where does this leave us? So I said a lot, but I'm curious, I want to allow you to just reflect on what I said and respond however you want. And we'll see where it takes us. Yeah, look, there's so many issues here. So what happens when you realize that like the myth is hollow? I think there's different ways of reacting to it. So the working out of the communist in Russia, the communist myth was hollow. And the attempt at creating democracy in the early 90s was disastrous in so many ways. Ended up with people who believed in nothing. But doesn't mean that they were free. And here's a big paradox. And we see this all the time in the West with people who don't believe mainstream media. They're not free. They end up embracing conspiracy theories as a way to make sense of the world. So we still need a way to make sense of the world on some psychological level. So if it had led to real freedom, that would be interesting. But it didn't. If anything, the opposite, you go to (40/57)
a kind of, I want to try and describe in the book, was almost a medieval sort of psychology, where, you know, instead of the kind of mix of myth and reason that Enlightenment democracy had, you just have pure myth. And conspiratorial thinking replaces ideology as a way of... And in a sense, you fully invest yourself in the story that there is an all-powerful elite and that they control the world and that you certainly can't do anything about it. But in somehow, in your sort of recognition of that, that you somehow are exercising a level of freedom. If anything, you'll have completely helpless. So this is the paradox. In order to kind of be free, you need to trust at least a little bit. And we see that everywhere in the West and you see that in Russia as kind of dominant. And I think that even though the various messages the Kremlin can do, they can believe or not believe in them, the conspiratorial world view is genuine. I mean, that is... That's not a world view as in as like a (41/57)
philosophy, that's like a psychological, you know, crutch, basically. And the need for identity is still there. And the need for fake community is still there. And all those things are still there. If anything, they've kind of been made naked. You just have the psychological pulsating needs now with no veneer of ideology or much less of a veneer of ideology. And I think you see the same here. When they came up trying to come up with a name for the Putin Youth Group, which was openly modeled on the Hitler-Yugand, they didn't call it young Komsomol or Hitler-Yugand or young whatever, they just called it Nashi. Us. So there's us and there's them. So the need to define yourself, or none of that goes away. The psychological underbelly, if anything, is revealed. So as long as there's nothing in freedom, there's just these psychological needs and fears and inability to make sense of the world. And, you know, the need for warped, sadomasochistic father figures, all that stuff is there. So in (42/57)
identity, and what is healthy identity and what is destructive identity. But, you know, Fukuyama's got a whole book about this, you know, about how ideology went away. So now you're just left with pure dynamics of belonging and what belong. And again, Russia got to that very, very early. This idea, they twig very early that Putin doesn't can't be ideological, because people don't believe in any ideologies. And also, like, he needs to cobble together a lot of other people. And so they come up with this idea of creating what they call the Putin's Coeblitions Tour, which is translated as the Putin majority, but it's much closer to what Trump refers to as the American people, the real people, the true people. It's this amorphous emotional thing that anybody can project themselves into, which is really defined by what it's not the enemies, the enemies of the states. First, it's the oligarchs, then it's the West, it can move around. So it really is about giving people that sense of belonging (44/57)
really outside of a, in a very kind of jello like emotional construct, which is constantly changing its kind of messages. But the emotional structure is very similar. Yeah, it's interesting because you also mentioned identity, which I think is the other half of this story. Because I think that what creates the vacuum is the destruction of both identity, a sort of sense of communal identity, and meaning, and its replacement with one thing, power, a sort of raw power that can define both identity and meaning and is foundational to both. Yeah, and I think that's pretty evident from Russian foreign policy. When in 2011-12 there's huge protests demanding reforms in Russia and concrete reforms and reforms which will end up loosening the power of the Kremlin, whoever's in there. Putin's response is to set off on a bunch of imperialist adventures, and they are all about that. Let's compensate because people do need meaning. Again, none of those things go away, by the way, even when you stop (45/57)
believing in ideologies, all those things about meaning, the fear of death, the needing to feel that you're something bigger than yourself, none of that goes away. Those raw things have to be satisfied. And when we talk about Putin's expansionism, that's what he's channeled that into. And I think the other fact that you'd invoke there is identity as a process of psychology and almost psychoanalytics. I think that plays a very big role as well. It's a weird pattern of an authority that humiliates you, like an abusive parent, which is very, very evident in Russia, every day when you live there, but also historically, and then you compensate the resentment to build up from that through an expansionism. So there's this weird social psychological dynamic going on as well, based around humiliation and aggression. So all those things that are happening, and yeah, and Putin's continued international adventures are to do with two things. One of them, again, is signaling. If I can go in and bomb (46/57)
Aleppo to Smith-A-Reeves, don't you dare doing anything at home. If I can push Biden around, just think what I'll do here to you at home. So there's definitely a messaging back. I'm big and scary internationally, they're alone at home. But also, without a doubt, it brings a certain amount of pleasure and fulfillment to ordinary Russians. And I'm not saying Russians want war. I don't think they do. I think there's a low threshold for self-sacrifice, but the going around swinging your genitals on the international stage does help people feel fulfilled and that they have, if not meaning, then some sort of satisfaction. This is so fascinating to me because you touched, again, just to wrap up the point about power. I think it's also so important for me to clarify what I mean when I talk about it, because in the absence of a belief system, it seems to me that the only thing that's left to hold society together is raw power. That human beings have the capacity to live in a society of millions (47/57)
of people, if they have shared beliefs, those things allow them to form expectations about people's behavior and their own behavior, et cetera. But absent that, you need the sort of Leviathan. And then the other point is interesting about entertainment because in a sense, it seems to me, in the world you describe in the book, and I want to also use this as an opportunity to begin to shift our attention towards the West, it seems that entertainment very much plays that role of quelling the inner-term oil of inspired by meaninglessness or just filling the void of the emptiness of everyday existence, that there's something to that, that it's central in that way. And I feel like we've seen that happen in the West. We've seen it happen in the stock market with the transformation of the stock market from something that actually performs a very basic utility function of reallocating capital to being actually increasingly a casino and a place in which to act out the dramas that begin in some (48/57)
recognizable, Bolsonaro or bad, you know, there's another pattern here, by the way, these are all men of a certain age. So I didn't, there's another kind of like through line here when it comes to identity. Which I'd love to explore. I just think it's just pretty self-evident, isn't it? I don't even know what to say. It's so obvious that there are a certain type of men, you know, projecting a certain type of masculinity and appealing to people who feel under threat, I suppose. But we can go deeper, you're right. So all those things are very similar. But then I'd say also that the rise of conspiratorial narratives, aside from the power bit, the appeal of conspiratorial narratives, so again, throughout Eastern Europe, about Vucic here, the rise of it, I mean, the US, and really conspiratorial thinking being the thing that replaces ideology. So we always have conspiracy theories. The Soviets had their conspiracy theories that the bourgeoisie were behind everything. But that conspiracy (50/57)
theory was that's buttress in ideology. The Nazis had the Jews behind everything. But again, the conspiracy theory was a subset to the ideology. Here you have almost conspiracy thinking for the sake of conspiracy thinking. The conspiratorial mindset is the ideology and the conspiracy theory can change. One moment it's the imperialist, the next moment is the Jews, then it's the aliens, then it's Q. It's always changing. There's a lovely statistic about most people who follow QAnon didn't actually understand the details of QAnon. So it was just about being in the conspiratorial world that they derived fun out of. There's lots of research showing that conspiracy theories are very related to when people feel there's no sense of future anymore. Which I think here is the key. Those ideologies, well, for all their obvious faults, were future-orientated. We were heading somewhere and you could sort of judge facts and evidence in comparison to that. The facts show that our society is (51/57)
progressing, or the facts show it's not progressing. We need to progress better. Just a whole idea of progress kind of pushes you towards a slightly more rational discussion. When that disappears, conspiratorial narratives tend to rise. There's very good research in Hungary about how after the 2008 crisis, which is one of the other big moments, I think, which undermined faith and liberal democratic progress, after the 2008 crisis, which hits Hungary very hard, people stop believing in the future and conspiratorial narratives go up. So these things, I think, are very connected. So I'd say if 2016 is the moment where the new unreality maybe becomes impossible to ignore, and if the rise of conspiratorial narratives is the thing to track as a kind of growth, I think obviously 2008 is the big moment, which undermines for a whole generation any sense of a future. I think that's a very obvious thing to say, but I think it's very interesting to see where it hit hardest. I mean, it hit hardest (52/57)
in bits of America, where people had their savings wiped out. It hit hardest in Hungary. Hungary was really hit by the financial crisis, and Orban is a really interesting reaction to that, definitely the most Putin-esque politician in Europe, and so on. So I think that's the big kind of moment when we realize that what was an ideology has become a myth. We think we're heading towards this happy, globalized village, but actually, A, we're not getting there, and B, loads of people are unhappy about it, and loads of people feel left out by it, and there's a whole generation of young people who can't even buy houses, and the myth becomes, it's seen as empty, but again, it takes a while for a crisis to sort of percolate into culture and politics. So 2008 is the shock. It kind of percolates through around the 13th century. So many thoughts that I want to try to articulate before I move it to the second half of our conversation, Peter. One, I love this observation. You made it in the book as (53/57)
well, which is that in the absence of agreement, in the absence of societal consensus, the future becomes impossible, and so in this sense, this also somewhat explains why there's an appeal for the sort of nostalgic leader who looks back towards the past to give people something that's stable, something that's in a very physical sense solid to hold on to. I also, I just love, and I want to reflect on it in the second half of our conversation, this observation about, one, the sort of evidence that we had entered this world with the 2016 election as an example, and distinguish that from looking to understand where did this process begin to go off the rail, so to speak. What are the causal factors? I think 2008 absolutely ruptured in a sense, people's belief, but I think 2001 and the invasion of Iraq, using words like freedom and democracy was in some ways more devastating because so much of who we are in the West is based on this idea of Western liberal democracy and capitalism is the (54/57)
second part of that equation, which 2008 completely destroyed or our response to 2008 and the self-dealing that was so evidently on display by those who supposedly were entrusted with the responsibility of protecting us and safeguarding the overall integrity of the system. I think you can look at the entire progression of Western society throughout the 20th century, from monarchy and Christianity and monotheism to rationality, nationalism, and capitalism to now where I feel like we're in another period of transition where who we thought we were isn't exactly who we are, and that's the space I want to explore with you in the second half of our conversation, Peter. 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 to access the second half of my conversation with Peter, as well as the transcripts and intelligence reports, which (55/57)
include additional notes, resources, links, and other material that will help you get the most out of each and every episode, head over to hiddenforces.io and become a premium subscriber today. Peter, stick around. We're going to move the second half of our conversation into the subscriber over time. Okay, that's great. 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 full episodes, transcripts, and intelligence reports, which include additional notes, resources, links, and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io. 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 (56/57)
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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
The Measure of All Things Phenomenology, Design, and the Human Experience Christian Madsbjerg.done #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
few days before Ray Kurzweil dies, he can upload himself to the. It's interesting that it's always before the profit dies that this kind of thing will happen in his own prophecy. When you're just for our listeners who may not know when you refer to the singularity, you're referring to the term coined. Was it coined by Ray Kurzweil? Yeah, it was. Which is that roughly around the year 2050 but it's not, it doesn't have to be a specific date but there's a point in which machine intelligence will surpass human intelligence. So I think it's moving back the sicker he feels earlier it becomes. He thinks like what, 5,000 supplements a day? He takes a ton of pills. In order to sustain himself till the day where he can upload himself to the cloud and download himself into a new body. There's a great documentary. I don't know if you've seen the documentary on him. This is very interesting in the context of our conversation right now because when I watched that documentary, I don't know the man (33/57)
what the future will be like and I don't understand why they so wish for that but it certainly is. It's a religious desire. It is. It's a religious desire. It's for the father for God. I mean there's so much of this it feeds into the same rudimentary mechanism whatever that is of human being search for for meaning and that's why it's so important I think to reflect on these to recognize that you're not the first person to have these thoughts and that the way in which you're expressing them is your particular expression but you know make no mistake there is something here that is universal. All right. So let me ask you this in the context of the fact so we're describing one culture which is Silicon Valley. Let's talk about because and I do want to get into what you do because you have some fascinating case studies that you've presented in your book and I'm aware of as well with your company. Tell me how you view culture overall. It's such a difficult question to sort of for me to (38/57)
with this idea that you found companionship in the works of other people who had written perhaps lived millennia before you, which I relate to that very much. I also was thinking when you were talking, I was thinking about Denmark, which is an interesting case because Denmark has for a very long time been a very homogeneous culture. It's very interesting that you are partly in the business of bridging cultural gaps and cultural divides, which is something that I will want to get into. There's something to that though, that it's also the most open economy in the world, which means that you can't stay and build walls around yourself if you want to survive. Because it's so small. It's so small. So you have to trade and you have to, it's been a sort of a trading seafaring nation. So language is important. Nobody speaks Danish. So you have to learn Russian and you have to learn German and you have to learn French and so on. If you want to trade with anybody and if you want to trade with (11/57)
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kaphinas. Today, we speak with Christian Mesbia. Christian is founder of Red Associates, a consultancy group focused on helping companies bridge the qualitative divide between themselves, their products, and their customers. The sociologists, anthropologists, economists, journalists, and designers who make up Red employ the methods of social science to study human behavior. Instead of minimizing complexity, they embrace the non-linearities, helping companies reinvent themselves and their products from the bottom up. In this episode, we examine the world from the perspective of human experience, what philosophers call phenomenology. Rather than try to objectify reality, we will revel in its subjectivity. Rather than discount our senses in favor of hard data, we will discount the data in favor of our experience. Experience matters. Reality is messy. Data is fuzzy. The problem of consciousness is hard. Try (1/57)
abandonment of phrenesis, so to speak. So, you know, I look at it really since the enlightenment, but do you see it as a sort of a more or less linear trend? Or do you see that there have been certain periods, for example, the Industrial Revolution or even today where we've been hastier in our sort of jettison of these humanities or of these non-scientific ways of spending our time and thinking about the world? I think I am an empiricist. I am into science in so many ways. And I think natural sciences have been spectacularly successful since the enlightenment. Yet there is a fundamental mistake in thinking that we humans can be our not our bodies, but our shared world and our culture can be studied with the same technique and the same tools as you study bacteria or asteroids. I think you have to have a difference between the clear difference between the natural world and you can call the universe and our world, the human world and what Heidegger, who is one of my sort of the people I'm (19/57)
as we might to fit the world to our models. Reality has a stubborn way of eluding even the most disciplined researcher. The most experienced traders don't make decisions off a spreadsheet. They use their intuition. The same intuition that you use when deciding who you can trust, if the price you are paying for something is too high, or if there's just something off about a room, or a scene, or a story you've just heard. To discount the authoritative wisdom that comes from lived experience is to discount the value of the very question that has led you down the path of inquiry. It is to discount everything that makes life meaningful. And if we want to understand the world around us, why we do what we do, then that journey must begin and end with the human experience. As always, you can gain access to reading lists put together by me, ahead of every episode, by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to this show on iTunes or Android, make sure to (2/57)
subscribe. If you like the show, write us a review. And if you want to sneak peek into how the sausage is made, or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at hiddenforcespod. And now, let's get right into this week's conversation. So Christian Mesbia, it's wonderful having you studio. Thank you very much for coming. Thank you for having me. Yeah. I met you and first, in fact, heard you speak at David Kirkpatrick's Techonomy conference, which our listeners know because David was on our program. He was actually our episode one on the show. And I really liked what you had to say. I found a deep level of kinship with your approach to... It's difficult for me to even kind of express it. Our listeners will know some of what I'm referring to from the episode on philosophical mathematics, Wittgenstein. It's a challenge for me to express what it is exactly that I found appealing with your perspective. But why (3/57)
don't you tell us a little bit first about who you are, and then we can proceed further in this discussion. Where would you like to take it? I suppose that I should have been an academic philosopher, but I was so bored in university. I found it dreadful and political, and it seemed like people were fighting over very small things. So instead of that, I chose to figure out a way to do philosophy or be interested in the kinds of topics that I was interested in, in other ways than the traditional way. So I founded a consultancy when I was 22 or 23, and I sold that and I did another one, and that was merged with a bigger company and so on. So this is my third or fourth version of the same company, really, which is trying to use sophisticated theory about human beings to understand us and understand our life and use that to figure out how to make things, how to make cars and phones and medicine and all kinds of things. You found a way to make philosophy profitable. You bridge the... Another (4/57)
way, would it be fair to say, is you bridge the qualitative divide between us and data, us and the quantified world. Right. So the big deal right now in the business world is, of course, that there's a new set of data we can get our hands on, and that is the data that tracks us while we click on where we move, and in your phone you would have 80 different things that it can measure and know about you. And that's a huge step forward in terms of the way that we've understood markets before, because the way we understood markets before was by asking people, and we're notoriously poor at figuring out what we want or like or even what we do. So when we say we cook in a certain way, it's probably untrue, and when we say we dress in a certain way, it's probably untrue. So the big data world and the new data sets that come about are exciting, yet they're not a truth machine, and that's sort of my critique of it is that people think that the data sets that we now have from the digital world is (5/57)
a map of the world, which it definitely isn't, and it also matters who asks questions and how we ask questions to that data, and that is largely overlooked, and that's why we make so many mistakes. You're saying it is a map, it is not the world, or it is not a map? It's a map, but it's not of the world. Exactly. It's a map of some part of the world, but not the entire thing. It's interesting that you say that because another thing I was thinking about while reading your book in preparation for this interview is the distinction between the map and the territory, and I do think that we do suffer from this conditioning increasingly in a digital world where we've mistaken the map for the territory. So I want to get into that, and we will, but before we do that, I want to ask you something because I am curious. You described it very well. You are a very philosophical person, and you found a way to apply philosophical principles and ideas and thinking, and introspection and a certain (6/57)
humility. I think you have a good sense of humility around what is knowable. I mean, we'll get into Heidegger and being because I think that's very relevant as well to this, and phenomenology and experiential knowledge, and authoritative wisdom that comes from lived experience. I think that's very powerful. But when I was reading you, I couldn't help but sort of empathize again with some, like when I saw you speak at the economy, I empathized with some of your perspectives, and I thought to myself, well, what was this person's life like growing up? And I am curious about that. So you're from Denmark. I don't know what other culture is like there and how people respond to philosophical inquiry if they think it's a waste of time. If they don't, in America, I think for the most part it's considered kind of a waste of time. You're asking questions that don't have answers or whatever. I certainly was very sort of introspective, very curious. I had these big questions as a kid and no real (7/57)
answers, and I felt very alone in that journey for me. I'm curious, what was that like for you growing up, and when did you begin to ask these questions? When did you start looking at the world, and when did you realize that you were looking at the world differently than others, and did you have people in your life to sort of make you feel that this was or was not normal or whatever else? Right. That was 17 questions in one, but I'll take it from one end. I think I've always been a reader, and I've loved the actor reading. Probably some of the times I'm most happy is when I read what happened 200 years ago or what other people thought about something, and I find it amazing that people had the same thoughts and feelings that I have right now in Syria 400 years ago. Isn't that amazing? It's just time travel almost, and I very early on found that. I think some people say that there's a correlation between literary criticism and asthma. I think one of the reasons ... And asthma. Yeah, (8/57)
because the more asthma you have, the more books you read. I had asthma as a kid, so I ended up reading a lot. It's not though in Denmark there isn't an anti-intellectual culture. You have at least half of the population would be interested in books and would be talking about it, and it's a completely reasonable thing to spend your time on. There's a concept of being cultured, which is part of the culture that is okay to know about music and our songs and our stories and so on. That's part of being a human being, and even though that's not productive in the most crude sense of the word, it certainly is part of life to know what kind of music they played and made up in the 1890s and so on. I didn't have probably the loneliness that you described, but I was probably a bit more excessive in the area of reading than most people. Then I found very early that I liked seeing patents and things. I liked seeing how, why people do what they do and so on. So I started being an observer and a (9/57)
listener more than a speaker and a doer, and I like sort of waiting a little bit before I make conclusions and cast judgments. I think I found that the people that understood things were the ones that listened a lot. Casting judgment is something that is necessary, but only at the point where you know, and I just felt that people did it very fast. In America, when I moved to America around a decade ago, I found a culture where people have the decision before they've even done the inquiry and then try to spend a lot of time on fitting the data to that conclusion. I found that sort of unhelpful and weird. Well, especially in media, that's definitely true. I also worked for a really wonderful man, but he used to say, we're going to do a bunch of focus groups, we're going to do all this and that, and then we're going to do whatever we want anyway, which made him very human. So listening to you talk, one of the things that struck me is, and I just wanted to say this, again, I find kinship (10/57)
them, you also need to understand where they come from and what their world is like. So even though it's a very homogeneous country, it's also a country that is so weak and have lost every single war for a thousand years that since the Vikings really, it's only gotten smaller. And that means that you have to compete in other means and cultural understanding and learning languages and so on is one way. Those northern Nordic countries are beautiful, gorgeous countries. In the summer, right? A couple of weeks in the summer. Yeah, just but also like just in general, the architecture, the interiors of the homes, I imagine in large part because so much of the time must be spent inside because of the winners. And also because there's more material wealth that can be accumulated because less of it is spent sort of, you know, I think I'm Greek and I think about how in Greece people would traditionally spend so much money sort of having a great time. But there's so much beauty increased to spend (12/57)
your time outside, you know, to go and spend it by the beach or whatever else. So let me ask you this. So in the context of what we're saying, now we're talking about philosophy, we're talking about sort of how your progression and these questions and there's something that comes up in your books and when I've heard you speak and that deals with the humanities. And this is where I would like to take this now because you also cite a number of people in your work who have given you inspiration or with whom you connect. One of who is Edward O. Wilson, the famous biologist. I've actually read, I assume you may have as well his book on the meaning of human existence. And there's this great quote in that book that deals with the humanities where he specifically says that if aliens were to visit us, what they would take from our society would not be our science, they would find it dismal and useless. They are far, have sparser past us. They would instead be fascinated with our humanities. And (13/57)
so that's where I would like to kind of move us now to discuss sort of what the humanities are to you. And then let's have a conversation about what the humanities are to us. What is the significance of the humanities? Because you have some very great things to say about that in your book. Yeah. So there are two sides to that story. There is the big story, which is the meaning of our culture is the way we create beauty and the way we create, try to understand the world we live in. And I think Winston Churchill said that when he was asked to cut the budgets during the darkest times of the Second World War, he was asked to cut the budgets of the national endowment of the arts and humanities. And he said, well, what are we fighting for then? No, what's the point? And I think that's the big story here that you can listen to our shared world by listening to the music that we've created. And you can understand where our life was at. If you read the novels and the poetry of whatever time (14/57)
we're interested in. So that's the big story, the smaller story, which is what I'm trying to talk about in my last book is it's also very practical and helpful. So people talk about art, particularly in America, about art and music and museums as something you do on Sundays in your spare time. That is sort of a luxury for the wealthy. And that is there's something to be said about that it's very luxurious to do. Yet I think engaging with art is the most advanced way of learning about others and engaging with other times and other ways of thinking. It also provides the context for understanding everything. Right. But it also, if you want to understand how to sell cars in China, it's nice to understand what it's like to be a Chinese driver or somebody buying the first car in the history of the family. If you want to sell mobile phones in Brazil, it's nice to understand what it is like to be a 17 year old woman that's buying her first mobile phone and what her life is like in order to (15/57)
service that person. So I think the command is not the only place, but it's the most advanced and the best place to learn about the skills of putting yourself into other people's world and engaging with that world in a sophisticated way. So I just find that the people that are most helpful for me in my company and that we hire are trained in history, art history, literature. There's a study you cite from a company called or a research outfit called PayScale. I see, is that correct? And what did they find? What was the... Not surprisingly, they find that if you come out of college with a computer science degree, your likelihood of making money and getting a job is higher in the first years compared to people coming out of the humanities. But if you take the top 5%, if you take the best earners, the people that make most money in the country and you can care about that or not, but it's sort of one measure of success. And there's an over... There's a big weight on people with a humanities (16/57)
background. So if you look at the people that run our banks, if you look at the people who run the big financial institutions, they have a history or a French background. They're rounded people. Theater. Exactly. They're interested in so many things. Anthropology, psychology, philosophy. Exactly. So what I've seen in the big corporations that I worked in, there is a glass ceiling for people without a rounded understanding of culture and language and so on. And if you don't have that, which is something you get from being in the humanities, you have a hard time competing on the top jobs. And that just comes out in that data. It comes out that people with a humanities background at the very top are overrepresented three times over engineering. And that obviously is not because they have a piece of paper that says, I had a degree in philosophy from Yale. It is because the proof is in the pudding. Exactly. It's because it makes a substantive difference if you've studied humanities and (17/57)
you've reflected on questions of being and human being. So in that sense, when I've sort of over time reflected on this process and investigated this turn, I do actually, and I wonder if you feel the same way. I think that the point in which this started to change, this is a very difficult sort of thing to discuss because of course the enlightenment was very important. And before that, there was a lot of darkness. So I don't mean to suggest that we were on the right path before the enlightenment. The enlightenment was wonderful. I'm not throwing the baby out with the bathwater, but clearly there was this move towards a more scientific worldview in which we looked increasingly to model the world and to find ways to create deterministic systems and ways of understanding everything. And that's something that we've discussed on the show often with complexity and Newtonian mechanics and Newtonian principles and neoclassical models and economics, et cetera. But there has been this (18/57)
interested in, calls worlds. So that would be the world of finets, the world of media, the world of radio, the world of art and so on. They have their worlds that are human and designed by humans and created by humans and are not helpfully understood through the means of natural science. And I get a problem when you start using natural science techniques on that. That's when you see the most misunderstanding and the most absurdities. I mean, I think economics is the area of economics is the area that sort of systematically gets things wrong because they use, I mean, almost every time it's just ridiculous because they use the wrong techniques to understand the human being. Absolutely. So I'm not saying that I'm against science and I'm against the enlightenment, but I think there was a mistake in the enlightenment, which was in René Descartes, really. And that came from Plato, which is this idea that all we are are thinking things and that we have complete transparency to our brains and (20/57)
through our brains, we have transparency to our preferences, to our will, to what we want in life. And I think Heidegger was the first one to sort of show that that's not true. He sort of reversed that 180 degrees and said, we are not described very well by thinking. We are doing things. We are engaging in worlds. And that's a different thing than sitting back and thinking through things. We can do that. We can sometimes look at objects and say, I wonder what that is. You know, and his example is, of course, hammering. So you can look at a hammer and you can say, that's a weird wooden shank with a metal blob at the end. But it's rare we do that. It's more likely that we know what a hammer is, that it's connected to wood and nails and houses and carpentry and so on. And that's the world of carpentry. And we know how to engage with objects in that way, which is exactly not the way that René Descartes or Plato or others talk about objects. So for me, he was sort of a break with a 2000 (21/57)
year misunderstanding of human beings and everything since, you know, being in time was published in the end of the 1920s has been about that. It's either been in the world of philosophy. It's been a reaction against it or a development of it in my book. And you can read the history of Western philosophy through that lens as sort of a different description of who we are as human beings. And all we've done in my company is we've said, we've taken that seriously and said, well, if it's true that we engage in the world and we need to study people in a different way, then asking them because we don't know, which is why surveys are wrong, which is why we can't predict elections, which is why focus groups, as your old boss said, should be neglected and why you should observe people and try to make sense of them in a different way. Reality is messy. It is. And data is fuzzy. Yeah. No, no, I feel you on that. And so what you're describing there in terms of the progression of Western philosophy (22/57)
is that fuzzy divergence between those who seek to find a very deterministic, quantifiable measure of self, of world, of object, of value, et cetera. And those like Heidegger or Wittgenstein who take a more qualitative picture, a qualitative view, and certainly with what you're describing there with the hammer, experience matters. Exactly. And it's not a black box where we say, okay, you know, it doesn't matter what's going on in the inside. We can ignore the problem of consciousness. There's actually this really great, I love Terrence McKenna. I think he's got such incredible, he has hit so many beautiful things. One of which was, and I just know this because I was looking for some stuff on my social media to create social media because I had this tremendous amount of work actually doing social media to exhaust me. I found this great interview of his and I took a short clip of it where he said it's a failure of the theory of evolution that it cannot account for human consciousness, (23/57)
which after all created the theory of evolution. So I think we can't get away from that, that fundamental problem, which is that we are the measure of reality of all things. We are the ones having the experience. Right. Yeah. So Heidegger would, so that he would say, well, there, there will be planets and there will be objects in the world without us, yet they wouldn't be called planets and forks and rivers. They would just be stuff. And it's us that gives it names and categorizes it and so on, which is a meaningful thing to study as well. And the problem with that is that you can't, there's no view from nowhere with that. You can't, you can't be a robot and study it. You have to be a human to understand that that's a river and that's a fork. And you have to understand what is relevant right now. Is the dust on the floor relevant or is it the conversation happening right here that's relevant? Figuring that out is very hard. And that's why they in Silicon Valley run into the problems (24/57)
with AI all the time is that they can't crack the problem of that you talk about, which is consciousness and they can't figure out generalized AI, right, which is wanting to do something, having being startled about something, being wonder about the universe, wanting to understand how to create warp speed things that could send us to Alpha Centauri, all those kinds of wishes to do things, something that they can't figure out. And they're not an iota closer to that than they were in the sixties. They've been much better at creating close systems, algorithmic things that you basically could do on a piece of paper. They can just do it with a computer way faster and then we can. But the human problem and the problem of the really hot problem they haven't gotten closer to and I don't think they want it. Let's talk about this because you and I, we spoke a little bit before this and we've both read Boostrom's book and it sounds like you're very into this subject. And it's been something I've (25/57)
wanted to cover on the show and I have not found the right guess to do it. But I'd love to have a little bit of a conversation with you on this right now. What is the hard problem of AI? And first of all, we're talking about general AI versus narrow AI. We're talking about AI in the way that the public and the popular culture conceptualizes it, which is a so-called superintelligence, computer intelligence that is competitive with or surpasses human intelligence. Right. They used to be good old fashioned AI in the sixties or fifties. That was the term, good old fashioned AI. Yeah, go-fi, basically. And that was the idea that you can feed a machine with enough information for it to have a complete map of the world. And we thought that, or humans thought that, especially humans attending the University of MIT, thought that our brain was a map of the world with concepts that we then projected onto the world. So when you saw a fork, you would say fork because of that, because you would sort (26/57)
of add up all the aspects of the fork to become a fork. And they found that that was a dead end and it was dead for 30 years. And now they're back, in a way, with a split of the concept of AI, from being AI to being general AI and specific or more specific AI. And more specific AI is really just advanced software. It's just like a spreadsheet is better at calculating than I am and has been since the early eighties. It's just a very advanced version, very fast. And an element of machine learning there as well. Yeah, right. But there was machine learning. There's been machine learning for a long time. The really hard problem is the other side, which is we can have the will to say, wouldn't it be wonderful if we could go to other galaxies? Or wouldn't it be wonderful if we could cure cancer? Something like that. Getting a machine to have will, to have Inspiration. Wonder, to have inspiration, to want to learn. That's the really hard problem. And that's something that Heidegger calls it, (27/57)
that we are the only being in the known universe that takes a stand on its own being, that thinks about its own identity all the time. So as far as we know, a fox doesn't think, I wonder if I should be more wolf-like today. Or something like that. And an asteroid don't have sort of internal social strife with whether it got dressed well this morning. It doesn't have a sort of social panic over the wrong haircut. Yet we as beings have that all the time. We have a constant dialogue with ourselves in terms of who we are and where we are and so on. And we engage in the world, in worlds that are constructed in a particular way that he describes in his book. And I think that is something that they have a hard time figuring out. Which world are we in? Are we in the world now of radio? Are we in the world of philosophy? Are we in the world of birthday parties? What's the world you are in getting a machine to understand that now I'm in the world of birthday parties but I'm talking about AI or (28/57)
whatever it is, that's really hard for them. So the direction of the intent behind a direction, you can get a machine to figure out by feeding it a lot of pictures. You can get it to figure out whether a mold is benign or not. But wanting to do that in the first place is the hard problem. Yeah and will and interest in leaning in to a particular area. What Brochram is saying in his book is the really scary problem is if we get just an ounce of that, just the minimal version of that, what would that look like? And his example is, let's say we tell an AI that it has to make paper clips. And his example is paper clips. And it starts replicating itself because it really wants to make paper clips. And it doesn't have anything else in its world than paper clips. Then you start replicating itself and it will start getting rid of things that's between it and making paper clips. And suddenly you have a world made of paper clips very, very fast because of the replication capabilities of (29/57)
computers. That's its goal. Or I think he has another one as well which is okay well what if you know that's silly and we don't, someone will say well okay no one's going to say paper clips. What if you know the goal, the central goal, axiomatic goal of this AI is to generate human happiness? Well what if the AI decides that human beings would be maximally happy with a slightly lobotomized brain? And you said something essentially to that regard. Which is probably true. Goes back to your point about an asteroid doesn't have internal conflict. Exactly. So the day I see a computer having social stigma or something like that, I, or being startled about something, playing goal, right? If it gets startled over a move, I'll be willing to talk about, you know, we have a real situation now. But before that it's just software in my book. It's very advanced software but it's just software. And of course that doesn't get to the other dilemma which is we have no idea and we can't know what a (30/57)
machine is or is not feeling and is there is not experiencing. So that brings us back to square one in many ways. Right. There's a Werner Herzog movie called Low and Behold out right now. Is it documentary? Is that documentary, right? And he has a question he asks everybody. It is does the internet dream of itself? Which is exactly a good question, right? It's does it have those kinds of weird human things which is we can dream of ourselves and if you think about your dream world it's a rather complex thing that we don't even understand. So how about we spend some time on understanding that rather than thinking we can have the machines do it. What do you think about because this is to me I find it a little nuts what I'm about to talk about now and it delves it has to do with the discussion on AI which is this other popular notion which is that we can simply upload our consciousness to a server. To me that one is the easiest one to simply debunk. It's most basic level. We have no (31/57)
concept of what consciousness is. I think of AI as applied philosophy. I think of it in that sort of a way. What do you think of this other culture that and this could bring us into a larger discussion about Silicon Valley bubble thinking and sort of how it is or is not representative of the largest society. What do you think about this immortal this quest for immortality that is finding new life in Silicon Valley? I think it's laughable and stupid. It's just the more bubble-esque they become in Silicon Valley. The bigger the goals. It's no longer curing cancer. It's ending death. It's no longer fixing this world. It's going to Mars. And I think it's great to go to Mars but thinking about it as some sort of philanthropic endeavor is ridiculous. So that's the first and the second thing is that the heart of that problem is the singularity idea. It's this idea that everything is exponential and that technology will happen exponentially. And if it does then we can eventually in the day a (32/57)
personally. I saw a person who was dealing with the grief, the grief of having lost his father. And the fear that is so common that we've dealt with human beings have dealt with since they became aware of death, which is the fear of death, the fear of the unknown. And he's dealing with all of those things like all of us but it's very interesting to see how it manifests in his life, which is this pursuit for the holy grail, for the, what's the term in mythology for the fountain of youth? I mean one thing is that you have bunkers, people like that walking around and I think they're sort of interesting to listen to but that they become the ideology of a economic powerhouse like Silicon Valley. And it's the only really driving idea out there is too much. I was pitched by an editor to write a book called The Singularity is Far, Far Away because they're not getting closer to- That's a playoff of Kurt Schwa's book The Singularity is Near. Exactly. But the editor has strong PR instincts. (34/57)
Exactly. And I thought that was a fun idea but it's just that they haven't gotten closer to the core and hardest problem. They've gotten way better at other things but what's so wrong about that? What's so wrong about celebrating all the things we can do with the technology rather than wishing we go to Mars and ending death? I think there are other things to do. And I think even the notion of ending death is within, for me it's within the realm of scientific inquiry. What seems to me where I totally see no capacity for understanding is when I'm told about uploading consciousness. I just find that so absurd on its face because it's, you can't tell me that you even know what that is. You have no concept of it. And in fact you have no idea what an upload is within the concept of the fact that you don't know- I mean we could go real deep into this fact. I have no idea where I am. I'm living in a matrix of my own brain. This is not in dispute. So to look through a microscope and tell me (35/57)
that you see what you see, well you're also looking through your eye and where are you even in this scenario and who is you and what am I? I mean these are basic philosophical questions and yes, I think to bring it back to how we started this conversation, I think everyone who is very brilliant and doing tremendous work in Silicon Valley and everywhere else would benefit tremendously from reflecting on and taking courses in the humanities and in philosophy because these are essential questions. I would actually say it's in Silicon Valley they focus on small things or extremely large out of the way things. So either it is big brains dealing with small things like how do we share pictures or how do you know that sort of thing or very very large things like Mars and Endless Life. And I think there might be a slice in between those two like how do we yield and how do we deal with our healthcare system and how do we create food for enough people and so on. That are also worthy of some (36/57)
attention. Who was it now I'm blanking she's a writer, Gillian Tett. Right. Do you remember what she said to the economy? I wasn't there. Oh you okay you weren't there. Okay so she said something well I would love to have her on the show I spoke to her maybe you can help me and she said something really great that stuck in my head which was that the culture of Silicon Valley today reminds her not exactly but close to the culture in finance in prior to 2008 and I really related to that. I said yes I feel that as well I do sense that sort of I mean that was the notion in the derivatives market and in the mathematical modeling of securities that were somehow able to take risk and just dispense it into the ether which defied logic. It's wanting a truth machine. It's the machine that can watch over us in its grace and make sure that we have no risk in our markets and we can get our marketing algorithms perfectly tuned and we can get everything sort of tuned into a system that will tell us (37/57)
express right because I mean where do you even begin. I live in this bubble of New York. It's hard enough for me to get out of the New York culture to think about the wider American culture. There was so much shock in the large cities of the United States over the most recent election. How do I even wrap my head around the way that people live in Africa or Indonesia or in China. Tell me a little bit about how you view the world culturally and yeah that's the best I can do to express my question. Right. So we are asked by companies and sometimes public institutions or mostly companies about what is going on among our customers or our customers customers or whatever it is. And in order to do that we have to get out of our bubble. Anthropology is one technique that is developed over the last hundred years of going and spending enough time with and in another culture in order to understand and see the world the way they see it. So that's what we do. And I think the only answer to your (39/57)
question is I don't know but I can send skilled people to go and try to understand what's going on in Western China when it comes to how they eat or something like that. We can study cultural phenomena fairly rigorously and actually empirically by observing reality and we can use that to understand what that phenomena looks like and how that works. So let's say you want to study tea in China. Tea to the Chinese is as advanced as wine is to the French. It's something that you drink for particular conversations particular type of tea for particular situations. There's a particular price point of tea or fanciness of the tea and so on. So understanding that whole world is a pretty big deal if your world is sweetened peach flavored cold bottled tea. Right. And understanding brewing techniques and so on that takes a while and you can't just send out a questionnaire through SurveyMonkey and then people click a little bit and say tell you that you have to go and experience what it's like and (40/57)
understand by being quiet for a little bit and just observing and listening. So we're big proponents of being introverted listeners and looking at the world and trying to make sense of it and see what makes sense for these people and truly put yourself into their shoes. And the reason why I talk so much about the humanities is that's what you're doing when you're a historian. When you're a historian you want to understand Napoleon or the Duque Windsor. You go into peace together their world through pictures and paintings and objects that you find from the time and notes that people have written down and you try to peace out or create a picture of what that was like to be the Duque Windsor and saying no to the English crown or being Napoleon and losing in Waterloo. What was that like? What was his life like? What was his world like? So piecing it together through a set of different sorts of data not just quantitative but aesthetic, practical, all kinds of objects and situations and (41/57)
practices that are going on in the in the cultural field and figure out what makes sense to that and what makes sense to them in their world. What are the way they construct their world? And that is immensely helpful if you are a CEO of a big company and you have several layers between you and the world. People will prepare everything for you and you will lead a very comfortable life that is far away from the reality of these people. So if it was somebody selling tea in China it's helpful to know what's tea to them. Right? And what language do they use and what practices do they have? And that's also the you're touching on numerous occasions that you're touching on that distinction between Descartes and Heidegger. And is our introspection enough to tell us what we need to know about the world or do we need to go out and experience? Exactly. Or can we ask them to introspect? Can we send out, you know, 3,000 questionnaires to people and ask them to introspect about how they do something? (42/57)
You know, we don't know why we do something. Do you know how you drive? Do you know how you don't know those things? It's funny when you're talking, you know, I make you're reminding me when I work on the technology side of television on application development and design and user experience. And when I was overseeing a focus group in 2009, it was for a brand new remote that we were designing that was a motion remote that went along with this new interface that we had been building for the set top box. And I remember being so, so exhausted by all the different people's opinions, I thought to myself, how am I supposed to make sense of all of this? You know what I mean? And I think that again speaks to there's also a simple desire to just come with an answer that works, that so often is what drives these outcomes, which is I need to jam the solution into this narrow model, into this confining sort of thing, which I think also speaks to something else that I think about often. And I (43/57)
wanted to speak with you about as well, which is to what extent are we actually just creating a world that is more adapted for machines and less adapted for human beings rather than us, you know, being able to merge with machines or whatever else. I mean, I feel like in many ways, we're building a society that increasingly pushes away the things that make us human and the things that matter. That's why I wrote the book. I mean, I know there are snake soil people everywhere and at any time, but I just found that the brain scanning people and the data people were saying things that they couldn't prove at all. And that's not such a big problem. The big problem is that somebody took notes, you know, smart people took notes from nonsense as long as it was natural science looking. And I just found, have we lost our ability to be critical? Have we lost our ability to have undermined our innate ability to be in touch with others? And I think we are educating our kids out of it. I think we are (44/57)
undermining the research in the area right now and the floor and in the house. There's a bill to take out the rest, the remaining small percentage of humanities, federal funded humanities research, the national diamond of the arts gone. So we are undermining our own ability, our innate ability to do these things. And that's not good. And it's sort of boring too. Some of the best programming in the United States has come out of PBS. Because it doesn't have to rely on advertising. Sesame Street. I mean, I could name a number of programs. Yeah. And what culture doesn't have museums and publicly funded research in in our art history? I think that should be part of any civilized place. You know, to bring back, there's something else I wanted to mention that I didn't want to forget when you were speaking, which is I think another central problem here is the reason why there is this bias towards quantification is because the qualitative doesn't scale as well as quantitative. That sort of (45/57)
problem of how do we deal with a market that views T in the way that we view Y. And that's a difficult bridge to gap. You know, people want easy solutions. Again, so much of this is about laziness. Yeah. You would have to go to Western China. It would be rather uncomfortable. You'd get stomach disease from the spicy food. You would have to sit in an airplane. You would have to engage with people that doesn't speak English very well. You know, that's messy. Wasn't it one of George Soros' traders at Quantum Fund who at one point he left the fund or I don't think he was still part of the fund, but he went and lived in Sweden for a while? In Finland. Yeah. Phil Robert Johnson, yeah. Right. Who said that in order to understand what the Finnish government would do and so on, we would need to be in Finland. He was also the one that talked about the difference between the German and the British culture and why the Germans wouldn't let the British change the collaboration on the pound and the (46/57)
Deutsche Marken and so on. So that's a cultural perspective on finance that was helpful enough to bring down the Bank of England. That's a great story. Regardless, I should do an episode on this show just on that. You're talking about... He's getting Robert in. I mean, he's... That would be great. Well, that's a great story. You're talking about when Quantum Fund, when George Soros essentially, he gained notoriety as the man who broke the Bank of England because he shorted the British pound during the period of ERM when the UK was sort of moving towards entering the Euro and that was an incredible story. Right. So basically, they bet on the Germans wouldn't give the British the flexibility to devalue the pound because they were pissed at the British and so they bet on a cultural feel rather than an analytical... And on George Soros' back pain. Exactly. Notoriously always gets back pain. His son's... I don't know if you mentioned that in your book. I don't remember seeing that, but his (47/57)
son always says that, you know, my father will give you all sorts of logical reasons why he makes a decision, but in the end, he moves out of a position based on lower back pain. Right. But it's interesting to think about that because you also, I'm sure, get... have a feeling of the market. It might maybe be your stomach or it's somewhere else, but we all have an ability to align ourselves and adjust ourselves to the mood around us. So the mood of the nation is something we feel. The difference between us and George Soros is that he listens to it. So he listens to it. He has the conviction. And the balls. And the balls. To bet three times capital. Oh my God. On something like that. And he's done it over and over again because he sees himself as a reflection of the market and he relates to that kind of knowledge, which is a kind of knowledge. It's a knowledge to feel that New York feels different now than it did six months ago before the election. But we can feel it. It's a real fact (48/57)
that New York feels different. Just like you can say a party is great or a party is good or the mood in the room is downwards or whatever it is. It's something that we can discuss and talk about and relate to. And that has a lot to do with markets. So what they bet on is interesting. They bet on the reactions to the reactions of something, right? So you have an event, then people react to it, and then other people react to those reactions. And that's what you want to know. And that's why they're so extremely successful because they look somewhere else than everybody else. Well, that's a great point because one of the arguments I often get into with some of my friends when we have little arguments about this is you're not trading based on what you think markets will do in response to XYZ. You're making a bet based on what you think the market thinks is someone else is going to do. It's a multi-order derivative decision-making process. So it's very out there as far as not being (49/57)
quantifiable. And the difference sores and others is that he's honest about it. He's honest about the fact that it is a qualitative. That's the case. You know, there's also this great one of our other guests that we had here, Sebastian Malibu, who is the biographer of Alan Greenspan, has this great moment in his book where Alan Greenspan is now, you know, who is a classic data sleuth. He got a seat on the exchange across the street from his office and he went down there and he decided to cut out the middleman and basically make some additional profits because he wouldn't have to go between an intermediary broker. And what he found was he was getting slaughtered and he started listening to sort of understanding why was this happening and he's hearing these guys saying, you know, I really feel that, feel the market's getting choppy. He's like, what do you mean? You, what do you mean? What do you mean it's getting choppy? What do you mean if you feel you feel it's bottoming? What do you (50/57)
mean? You know, and you cannot deny that that is a human experience. It takes denial to push that out of your model. And again, that's because I think in large part it's inconvenient. And it requires a tremendous amount of work and effort. So before we wrap up this interview, Christian, I do want to talk a little bit about some of the great interesting stuff that you do with your company, at least one case. Now, what role have you played with Ford? I'm fascinated with Ford because I'm fascinated. You mentioned Lincoln and the New Lincoln's specifically the continental has stood out for me. I mean, I've seen that car on the street and there's no other car. Volkswagen has a nice new model somewhere I've seen. It's not out yet. It's a concept car. But like that car, when I hit the street, I was wowed by it. And when then I read your book and I realized that this was, you know, obviously it must have been, but this was a conscious decision by the company to reinstate luxury in the brand. (51/57)
Tell me a little bit about this process because I think this is an interesting story. Right. So luxury is many things, right? To many people, it can be an apple in season or it can be a spa or it can be whatever. So we looked into among the target group of the people that buy these kind of cars that are $60,000 and up, what's luxurious to them? And if you look at the industry, it seems like if you look at BMW or Mercedes or anybody, it seems like it's driving really fast in a really fast car on an empty road. That's sort of the experience of among beautiful mountains. That's the luxurious experience yet then spend time with people that have luxurious cars. First of all, they don't drive it themselves. They have drivers, particularly in China and India. And secondly, they sit in traffic all day and they're just stuck in traffic. So we thought about what would a different luxurious experience be? If we want to be quiet, you'll want to be very clean because the cities of the world are not (52/57)
that anymore. If we want where you can work, it'll be one where you can have meetings. It'll be one that's rather different from sitting right up and driving a really fast car. So the idea was to move the entire luxurious experience towards something that was low, chunky, very quiet, very clean. It is chunky. It's funny you say that. It's sort of a flight rather than a drive. And it has sort of a, the seats are thick and big and comforting. So the idea was to sort of create a whole other focus on luxury. And then also on top of that, build a range of services that would make owning the car feel luxurious and that the value of the car would go up the longer you owned it because we would add services all along. So the idea was to redefine what luxury was based on an understanding of spending time with people in the big cities of the world and look at how to create a quiet flight rather than a fast ride out of the experience. And that's, and out of that has come a whole range of things, (53/57)
but the last launch and the next launch of the navigator will be focused on that. But the real deal will happen after 2020 when we can do much more around assisted driving. And we can do a whole, I mean, we don't know about driverless cars yet because there's still a whole lot of technology problems and everybody has those problems, by the way. But given certain technological breakthroughs, we would be able to do a whole lot with a car that would make it delightful again to be in a car because right now it's not fun. Because you're stuck in traffic all the time. Yeah. And you know, there are people saying, why do you put speedometers that go above 30 miles an hour? We're never ever going above 30 miles an hour because we're stuck in traffic all the time. It's a good vision to run 100 miles an hour down an empty country road, but it's just not my reality. That's such a great point. I never thought of it that way. So the idea was to switch to a relevant kind of luxury that would be very (54/57)
different from all the German sort of cars. You also, when you were speaking and comparing it to an airplane, I thought about an innovation. I don't remember who, for some reason, I have it in my mind connected with Richard Branson and Virgin, but it was the idea to put Wi-Fi into airplanes because, okay, you're going to spend six hours. Would I rather have six hours in a flight with nothing to do? Or would I rather have seven hours on the flight on Wi-Fi? That's a big question. And so that's an innovation that has to do with the experience, right? Right. Richard Branson is the master of taking something completely standard and then tweaking two, three experience buttons that completely changes the experience. So an airplane becomes a nightclub or whatever it is, just by changing the lights. Oh, man. Yeah. And he does the cheapest things with the most massive impact really well. That's his real genius, I think, other than his balls. I mean, he's just press balls and tons of things he's (55/57)
doing. He has, well, also his branding model is, was he the first to really take that approach, which was to take a particular brand, an experience and move it across sectors? Yeah. The only area he didn't do it was the condoms. He didn't think Virgin would be a relevant name for that, but he had thought about it. Yeah. They thought about Virgin condoms and they thought that maybe that's problematic, but, but everything else, I mean, Virgin bride and Virgin phones and Virgin everything. That would be problematic. Yeah. It's sort of, it's at least it stops you in a drag killer. Well, Christian, I really appreciated having you on. This was a great conversation. Yeah. A rare radio conversation. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Well, thank you very much. And I should look to get Jilly and Ted on, but thank you very much for coming on. Thank you very much. And that was my episode with Christian Mesbia. I want to thank Christian for being on my program. Today's episode was produced by me (56/57)
and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter and Instagram at hiddenforcespod or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
The Chinese Financial System and the Prospects for a Hard Landing in China Anne Stevenson-Yang.done #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
China. In small places where you don't hear about the people, like a bunch of people invest in a private P2P platform in some locality, sure, those people lose, but if you go to your bank and you buy a wealth management product that's actually not sold by the bank, but it's not the bank's product, maybe it's some dodgy coal firm that actually went bust two years ago, you're not going to lose on that because the government won't let you. So all of the investment managers know that, and they take risks accordingly. Do you spend any time thinking about, I'm sure to some extent you do, the context of China within the global economy? Sure, of course. Yeah, it would make sense. I mean, I'm just throwing it out there because we were so bogged down here in China itself, but what do you see as the effect of Fed policy, for example, and any type of contraction in US GDP, or if we have any kind of recession here, what would be the knock-on effects in China and emerging economies, and how does (40/57)
debt, what happens to the economy in those circumstances? In some sense that's been already going on since 2011 and you see it in the sort of decline of spending power domestically of the average Chinese person and the decline in sort of the standard of living. But there's a key element that still needed that Japan went through that China has not gone through, which is a significant depreciation of the value of assets. So if the Chinese government is willing to see the Chinese people see their apartments go from 100,000 square meter to 20,000 square meter, then yes that could happen. You could have a long, long, long grind. But I think that that's not very likely and I think much more likely China is going to hit a wall. The currency will suddenly depreciate and assets will drop much faster than people would like. And they've never seen that. The people that have seen depreciation and prices in China, they've never seen a price decline before, right? The property market has only (44/57)
former Soviet Union is very different from what you can exercise over China. Right. And the research point being important, which is that the Soviets would be able to raise living standards by selling natural resources with greater ease or commodities than the Chinese who needed to build, for whom building an industrial economy was much more important. I suppose you're suggesting. I think that's true. Also, the Soviets would be more capable of using repressive power to control their public. The Chinese, that's true out in the less populated areas in the far west, but in the densely populated areas along the coast, that's not what's going to fly. What's going to fly is raising investment capital because in a place where you have, let's say, you know, 30 million people living in a fairly dense area to build a road or bridge raises economic performance very rapidly and that creates unity and support. And that brings us really to the crux of this conversation, which is debt. Because debt (19/57)
What's up everybody? Welcome to another episode of Hidden Forces with me, Demetri Kofinas. Today, we speak with Anne Stevenson Yang and is the co-founder of J Capital Research which conducts ground up primary research for institutional money managers, unequities and the Chinese economy. She is the former co-founder of Blue Bamboo Ventures and also founder and operator of the CRM software company Clarity Data Systems. And she is the creator of 66 Cities, a publishing company whose flagship magazine is City Weekend, one of the highest circulated English magazines in China. Anne first moved to the Middle Kingdom in 1985, making her family and home in China for the next 25 years. She is the author of China Alone, China's emergence and potential return to isolation, a subject that we will cover in depth today. In this episode, we take a trip to the other side of the world, to the land of China, the territory that one in every five people calls home. Our conversation concerns itself with (1/57)
the contemporary changes in Chinese society that came after the death of Chairman Mao, beginning with the ascendancy of Deng Xiaoping, the architect of a new brand of thinking that combines socialist ideology with pragmatic aspects of market economics that the Chinese have called socialism with Chinese characteristics. What changed in the 10 years between the beginning of these economic reforms and the events in Tiananmen Square? And how do the Chinese government's reaction to the uprisings in 1989 alter the opening of Chinese society? How do the Chinese response differ from the Soviet reaction in the same year to the fall of the Berlin Wall and what has set China apart in its path of development since? Some have called it a miracle and by any measure it has been exactly this, the Chinese miracle. The size of the Chinese economy has increased more than 25 fold in the last 25 years from 6% of US GDP in 1992 to 60% today, an accomplishment that defies all principles of economic gravity. (2/57)
Loan growth in China has averaged 16% in the last 20 years, reaching an all-time high of 35% of GDP in June of 2009 amidst the greatest economic contraction the world has seen in almost a century. Total debt in China recently surpassed 300% of GDP, making Western finances seem frugal by comparison. In the first seven years since the financial crisis, bank liabilities in China grew by nearly $15 trillion, the near equivalent of the consolidated size of all US commercial banks. China has used more cement in three years building and overbuilding than the US did in all of the 20th century. Hundreds of thousands of meters of unsold residential real estate, the size of Singapore, massive industrial overcapacity, go cities by the hundreds. The Chinese economy is in terrible need of a recession, a recession that it cannot afford but one that it cannot avoid. How will the citizens of China, its trading partners, emerging markets and developed economies react when the reckoning finally arrives (3/57)
and how much longer can the Chinese government continue to postpone the inevitable? As always, you can gain access to reading lists put together by me ahead of every episode by visiting the show's website at hiddenforcespod.com. Lastly, if you are listening to the show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want a sneak peek into how the sausage is made or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at HiddenForcesPod. And now let's get right to this week's conversation. So Ms. Anne Stevenson Yang, thank you so much for coming on the HiddenForces Podcast. Welcome. Well, thank you. And just Anne is good. Okay, Anne. All right. So Anne, before we begin, our listeners should know and maybe you can clarify for me as well. Now you have lived in China for the last 30 years, is that about correct? Yeah, people keep adding on for me, but yeah, that's about (4/57)
right. It's about right. You've raised your children in China. That's right. The second one was born there. Your husband is Chinese. Yep. And you speak fluent Mandarin. Yep, always trying, but I would call it pretty fluent. And what is your background besides that? I mean, what did you start off with? I mean, how did you find your way in China and what is your background? I'm a mutt. I started out as a journalist in New York and I just floated over to China because I thought it was, I was actually politically interested in what was going on at the time and I got offered this job at the Chinese government foreign languages press and I thought, why not for a year? That will be fun. How did you live? That was 1985. 1985, wow. Yeah, so yeah, I met my husband there, got married so that, and then just the growth of the Chinese economy kind of sucked me back. So I would say I'm an economic migrant. Very adventurous of you. Why did you choose China specifically because you found what was going (5/57)
on there politically interesting or how had you studied the country for a long time? Okay, well, this is really embarrassing, but this is my age, right? So I grew up in the 1970s. Mao Zedong was a hero. We didn't really know that much about China. I went to a parochial school. I had a copy of the Little Red Book in my blazer pocket. I thought, this is finally the version of communism where they understand the peasants, right? I know it's really embarrassing, but I thought that this was a model that would work and I wanted to see it. So when I was working, I was actually working a night shift at business week on the desk in New York and I just, I had a break. So I went out, I went to China Books and Periodicals, which existed then. I bought all the magazines and I wrote to them and said, I want to go work for you. And then I forgot about it. But one of them sent me a telegram like six months later. So I thought, why not? Yeah, telegrams existed then. That's exciting. Very exciting. (6/57)
Yeah, it was kind of. And how long after you moved to China did you meet your husband? Well, we worked in the same building, but I wasn't really aware of him until we got sent. OK, you really want to know this? Sure. In 1987, there was a county in Jiangsu province that was growing fruit trees for the first time and they'd gotten sort of relatively rich and they wanted propaganda about this. So they invited, you know, so-called journalists from Beijing to come and visit. And so I was sent with my interpreter and the guy who worked at our magazine, the Indian guy was sent. And he had his interpreter, who is now my husband. He spoke, he was an Hindi interpreter because he'd been in the Chinese army, had been trained in Hindi to be in the army on the border with India. So we spent three weeks together traveling around Jiangsu, you know, going to communes and, you know, learning about tea growing and, you know, congratulating people on their factory accomplishments. And then I don't know, (7/57)
we just got married. The rest is history. Yeah. All right. So, well then, let me ask you, what's going on in China? What's going on? Basically in China, every man, woman and child, government, private, dog cat is focused on trying to make sure that the government, that the Chinese economy rises in value, that prices rise, that assets stay high and rise, and that there's enough stimulus to create growth. That's a maniacal focus of basically every human being in China right now, not on value, not on creating something new, but on making sure that asset prices stay high. So what is the timeline of events that have sort of raised concern for people in China? Because there's something else that, you know, I've picked up on, which is usually I like to cover subjects that are controversial, aren't necessarily consensus, but I feel like the case with China is one where there isn't much controversy around the idea that there is a bubble in China. Certainly I've been hearing about a bubble in (8/57)
coastal real estate for like 10 years or more. This isn't something where many people are going to come out and say, you're a whack job for saying this, or you're crazy for suggesting that the hard landing in China is a possibility. That's true, but it's fairly new. I would date that general apprehension from summer of 2015. So prior to that, you were pretty much a heretic if you didn't believe in the ever-growing value and strength and emergence into the sunlight of the Chinese consumer and the Chinese economy. But what happened in 2015 is, number one, the Chinese stock market crashed. In spite of the Chinese government's insistence that they would hold the stock value at $4,500, it went down below $3,000. The second thing is that the reminB devalued by 3%. That shocked the world and it indicated that the Chinese government, in fact, is not in control of the whole economy, which basically the Western world believed. You mentioned the first part of why it was a shock. Why did the (9/57)
reminB crash? It didn't crash. It declined by 3%. That was just really because the PBOC, you have an offshore reminB and an onshore reminB. The offshore reminB was trading at a premium or at a gap with a gap. That's not legal under IMF rules. China very much wanted to become a reserve currency for the IMF. So they decided, okay, we're just going to close that gap and we're going to depreciate the onshore reminB by 3%. They didn't realize that all hell would break loose. The offshore reminB is for the tradable goods sector. There's one currency for the service sector in China and one. What is the breakdown there? The offshore reminB is really quite small. It's just trying to testing the waters to try to consider whether they might make the reminB convertible at some point. They've actually retracted the offshore reminB quite a bit since that time. At its height, I would say there was ... I don't even remember the numbers, but let's say 3 trillion reminB offshore one place or another, (10/57)
which is really, if you think about it, quite small. There is some currency arbitrage discrepancy between certain class of people in China and others. From what I understand, there's one market for the vast majority of people when it comes to exchange and then for another part. Is that incorrect? Well, there are people who have access to reminB offshore. If you have an account in Hong Kong or if you have export earnings or for some reason you're exposed to the international economy, then you may have access to offshore reminB. To that extent, you may have more window on the foreign economy than the average Chinese person. Otherwise, it's really just who has access to hard currency, dollars, and who doesn't. Let's begin at the beginning, which is reform in China. I'm fascinated by this. Reading your book and preparing for this interview, it put me into a place of thinking about the Chinese economy and the Chinese political system in a way that I never had before. We're used to, (11/57)
certainly I am, to this China of the post-Cold War. But of course, there was a pre-Cold War China. Reforms did not begin after 1989 nor have they ended. What has that process been like in China? Where can we pinpoint some of the most significant turning points? It's an interesting question. Reform is a word that we attach to essentially all government change in China since 1979 when Deng Xiaoping began the current program of opening. I think that in the West, we graft on to that word the idea of increasing liberalization and openness when in reality that's not really what's behind it. But I think the way we should look at China is 1979 to 89 and then 1989 on. 1979 was when Deng Xiaoping essentially walked out of prison and into Zhongnanhai, the leadership compound in Beijing and became the government leader and began to liberalize China in a whole lot of unexpected ways. Allow people to stop, if they met their quotas for growing grain, for example, then they could begin to grow cash (12/57)
crops and sell them. Allow people to have some private markets. Allow people to start taking over bust factories and run them for profit as long as they paid off the debts and paid the workers, things like that. The country really blossomed in a lot of ways. And then you came up to 1989. So essentially what happened was that this really worked very well. People got a whole lot richer. In many ways it was confusing, but it was also exciting. There was a lot of cultural opening, whereas in the past it had been impossible to listen to Western music or read Western newspapers or wear Western clothes. All of a sudden these things were coming in. There was experimental theater. There was what they used to call disco dance. There was art. There was all sorts of stuff. There was Qigong, which is a type of quasi-spiritual physical exercise that became very, very popular. And all of this led to a almost chaotic opening and to a concurrent demand for more rights, more political rights. And it (13/57)
culminated in 1989. We all know what happened in 1989. And 1989 was followed very quickly by the breakup of the Soviet Union in 1990. And essentially what happened was that the Chinese central government grew terrified that China would go the way of the Soviet Union and would crack up. And so they prioritized re-centralizing the apparatus. When you're talking about 1989, you're talking about Tiananmen Square. We know that the government cracked down heavily on the society after that, after the uprisings. But is there much information that is available? Because I know in China you can't get much of anything, right? Even if you Google Tiananmen Square, there's nothing there. Yeah, of course. You can't get a lot of information on what precisely the crackdown consisted in. There are very wide-ranging estimates on how many people were killed, how many people incarcerated. But I think for my purposes, what's really interesting is what happened in the years culminating in 1995 thereafter, (14/57)
where China changed its tax system, it changed its customs, it changed the way local governments managed their budgets. It changed really personnel appointments within the party in order to aggregate more power to Beijing. And they did it in a very clever way. For example, under the old system, localities' provinces would have a negotiation with Beijing every year and decide how many taxes they would pay to Beijing. So what Beijing did was they went to the provinces and they said, look, you're paying us, let's say, 25% of your gross national product of Shanghai every year, and that's, let's say, $100 million. So let's fix your payment at $100 million. And what we're going to do is we're going to impose a VAT tax and an income tax, and Beijing is going to collect all of it and then rebate to you the portion that's due to you. Initially, the localities were fine with that because the cost was the same. Over time, it became very unbalanced so that the lower the level of the government, (15/57)
the less money you had. So the government made a deal with the people, but was that sort of an explicit offering that the government did that they said, look, not in these exact words, but leave us in power and we will reform certain parts of the economy that many of you had wished we would in order to expand economic growth? What was the conversation that happened internally in the country around that cataclysmic sort of event? Well, I think there's a little bit of a misunderstanding embedded there. A system like the Chinese system is not concerned with what people think. The interlocutors are not individuals. The interlocutors are entities, state-owned enterprises, and local governments, and those are the constituents for the national government and the people they have to talk to. The individuals will follow. So what the central government did, it was a process of negotiation, not one of strong arming, although it was pretty clear who had more power than whom. So the central (16/57)
government would go to the localities and negotiate over tax authority, negotiate over appointments authority, and gradually, gradually, gradually, they pulled more budget authority and appointments authority up to the central government so that they would have control. Is there any comparative framework in the United States that would help us to understand the functioning of the Chinese state? No, and I think that that's very important because we tend to think that it's similar. There's a national government, there are provincial governments, there are local governments, but it's a unitary system. It's not a federal system. So for example, local governments don't have the authority to make their own budgets, to collect taxes and make their own budgets. The chief reason why we've got this huge property bubble, because local governments are stuck with the tab for schools and hospitals and roads and bridges and water processing and all that sort of thing. And yet the money trickles down (17/57)
to them from the center, goes to the province first and then to the city level. The prefecture, there are five levels of government in China, and so the prefecture at the bottom is stuck with all the costs and yet it doesn't have the right to keep most of the revenue. So what can they do? They had to raise money through debt. Wow. How would you compare it to the Soviet system pre-1991, pre-1989? You know, I don't know enough about the Soviet system to be able to tell you. Let's just say that the Chinese system is, they're very, very different in a lot of different ways. The Union was and is a petroleum state. So they have a lot more natural, unitary organization to their government and also it has radically lower population, what, 130 million or so, compared with 1.3 billion, with a territory that's much, much larger and tributaries, you know, rivers and a few railways that connect all the key cities. So that's very different. The kind of power that you can exercise over Russia and the (18/57)
and the financial system is the mechanism through which you can exercise control over people in a non-coercive manner. Yeah, I think that's right. And I think it's, there's some brilliant person named Goodheart. I can't remember who it is exactly who said that. Goodheart's law. Yeah. I wrote that right here actually to begin with for this conversation because I felt when a measure becomes a target, it ceases to be a good measure. Exactly. Great minds think alike. I thought to myself, that sounds like a Confucian saying, but I think, I know I wrote that there when I was thinking about this conversation, I kept coming back to that, which is that the Chinese have an obsession with numbers, with hitting targets. And I was astounded when I looked into this fact further. I mean, one of the things has to do with the measure of GDP in China. We're not trusting the GDP numbers that began measuring electricity. I'm telling you things that I'm sure you know. And that in short order, it turned out (20/57)
that the Chinese government was encouraging contractors and builders to leave the lights on in these places in order to present false figures of electricity consumption. Yeah, it's not even that complicated a lot of the time. A lot of the time you simply invent the number that you need. This is important to remember about GDP and so many other numbers in China, that these numbers are organizational tools and targets. They're not calculated results of a data set, whether or not you distort the calculation. The point is, you use something like GDP to mobilize people and to indicate what production levels should be. And if you were to drop the GDP target, it's a self-fulfilling prophecy. And they have pretty much relied on that number as their prime point of national pride. And as the calling card for the entire point of their existence as a legitimate authority in China. I mean, that seems to be so connected to their legitimacy. Yeah, you could say that. And I think it has a couple of (21/57)
purposes. One purpose is that organizational purpose. So your principal constituency, if you're the Chinese government, are state-owned enterprises. And state-owned enterprises make their budgets with reference to the GDP target, and they receive their investment capital with reference to the GDP target. The GDP target is measured against historical industry performance next to GDP. And then you sort of do a calculus and you figure out how much investment capital this company should get. So they're required to use that when they make their budget. So on one hand, it's a campaign tool. On the other hand, it's an external messaging tool for investors. So incoming capital investment and portfolio investment, whether it's FDI or portfolio, is very, very important to the Chinese economy. How are you going to get capital investment if your economy is only growing, say, 3% and Brazil's is growing 5%. So you've got to show growth that outstrips other developing countries. Is there FDI's (22/57)
foreign direct investment? Is there a lot of foreign direct investment? I mean, there are so many aspects of this and that I want to get into. And hearing you talk, I'm trying to figure out how to get in without getting lost in the weeds. Sorry. No, no, no. Don't apologize at all. I feel like this has been an overwhelming task for me to try to figure out how to come in here. But there are so many interesting aspects of this, one of which is the extent to which the Chinese boom has been led by domestic savings. It seems from my research that it is even more than it was the case in the Japanese boom. The Chinese boom has been largely fueled by domestic savings. Is that correct? Yeah, that is correct. I think it tends to mislead people by leading them to think that it's all about thrifty individuals storing their money in the bank when really it's just a measure of the amount of capital domestically as opposed to the amount of capital washing over the shores. But that's true. China pulled (23/57)
off really quite a remarkable feat, which was to increase its investment. I think you noted that simply the increment in bank assets in China between 2009 and 2013 exceeded the total bank assets in the United States. Yes. The economy that's 40% larger and that's been building its bank assets for 150 years. So it's a remarkable number. As they were doing that, generally speaking, as you increase your investment to that degree, you're going to depreciate your currency because you're expanding the pool of currency. But China actually has the command and control ability to build so much stuff that it could actually increase demand for investment even as it was investing so much money. So the currency was appreciating, returns on investment domestically were rising very high. It was attracting hot capital. It's a Ponzi scheme. That sounds like a Ponzi scheme to me. Yeah, you could put it that way. It certainly does. The focus, I mean, then I say it, and here are a couple of other numbers (24/57)
I've got for you. The total amount of concrete used between 2011 and 2013 in Japan far exceeded. I've got the numbers here. It looks like 4.5 gigatons was what the United States used for 100 years between 1901 and 2000. And 6.6 was used by China for just two years. That sound right to you? About close to 50% of the economy's construction, less than half of the economy's slightly less than half of its construction. Is that also right? I think that that's an exaggeration. I would put construction and real estate at about 20 to maximum 25% of the economy. It's not really fair to count all building materials because they also go into ships and automobiles and other sorts of things. But it's very significant. As for the amount of cement, yeah, I've heard that as well. It is phenomenal. It's taken a very severe toll on China's natural environment. Eventually that will end, but one hopes it will end sooner rather than later. On the thing to bring it back a little bit, you were talking about (25/57)
the growth of bank assets. I think you said from 2009, I mean that was the number that I had found as well from 2009 to recently the amount of assets generated by the banking sector. In other words, a reflection of the growth and liabilities was the total amount of U.S. bank assets. It basically is a reflection of loan growth. And that suggests a great amount of malinvestment. It suggests it without proving it because it's very difficult to expand that type of credit in particular in the face of an economic contraction, which is what the world was experiencing globally at that time. I mean, things like that about China alarm me. And again, I speak very humbly because unlike you, I do not live in China. I don't know the country. I don't speak Mandarin. But just on the very high level, it seems to me to defy every principle of common economic sense. Well, this is the thing about China. It's tremendous size in its centrality. So China can create growth phenomena that exceed anything the (26/57)
world has ever seen. It can also create disasters that are greater than the world has ever seen. And it's important to remember that it's not just the bank assets because the central government was really panicked to create, to pour investment into the economy and to avoid the downturn that the rest of the world was seeing. But they were also committed optically to sound banks with good bank assets. So they had to create a shadow sector that became far, far larger than it ever had been before. It had been something like 5% of the financial system. It grew at the height to 55% of the financial system. And that's really because you insist on having banks that are making prudent loans. And yet you need four times as many loans as prudently can be made. You create a shadow sector, the banks buy the loans back, and then everybody's happy. How does that shadow sector operate? Are you talking about the SEOs? Companies like the trust companies. Shadow makes it sound sinister. It's not (27/57)
sinister. It's like brokerages, private equity funds, public equity funds, trusts, all sorts of non-banking financial institutions. But what essentially happened from 2009 was the governments wanted more capital than the banks could lend with any reasonable prudence. And so what would happen is a trust would lend the money. Like you're a developer, you're very risky. We're not really sure what's going to happen, but you'll pay 9%. So I'm the trust. I'll lend to you at 9% and then I will sell that loan to the bank tonight. And I'll give the bank 7%. So I keep the 2% spread. It's on the bank's balance sheet. I don't have risk. And then I do it again tomorrow. Yeah. So something similar in the United States with the CDO market and the sort of disintermediation of loans and ownership and everything else. Yeah. In a sense, it's like that. So where are we today? What does the picture look like? You mentioned 2015. What was the drop there? 60, about 2 thirds of the Shanghai composite? I think (28/57)
it was 40%, maybe? I have reversed. Maybe 45%. I have reversed. Okay. So close to half. The market collapsed in China. So what have we seen since then? Well, essential stability for them. The central government and its deputies spent trillions of RMB supporting the Shanghai market value to make sure that they couldn't quite pull off 4500 for the index, but they pulled off 3000. So it's been hanging out at that level. And they've been keeping all the debt rolling over. So you essentially have a situation where China, the return on capital invested just goes down every year. So in the best of circumstances, you have roughly seven to one ratio for investment to GDP growth. So you have to invest 40% of the economy to get a 6%, 6 to 7% GDP growth. That's a reflection also of the inefficiency of the deployment of the capital. Exactly. So you figure that, if you put it in really simplistic terms, you figure that GDP growth should be roughly on a par with lending growth. So if you were to (29/57)
bring lending growth down to 6.5% or so of GDP, then you would see GDP growth of 1 seventh that, so no more than 1%. So that figure is where organic GDP growth is now. So in other words to say this is basically the Chinese government is committed to a certain growth rate. It has political reasons for wanting that. These are real people in positions of power who want to maintain their position of power. And the way that they're attempting to do that is to continue to force an otherwise unsustainable situation to go on a bit longer. Yeah, that's right because you have a situation where just it's in nobody wants to put their hands on that tar baby. So everybody has the intellectual realization that it's not really a good thing, that the quality of life for the average Chinese person has declined, not improved, that education standards, health standards, environmental standards, all of those things are not improving even as GDP growth rises. That's something I actually wanted to ask you (30/57)
about because we see video footage from China constantly. And we see people with smartphones snapping pictures. We see lots of lights. We see all these buildings. And it's impressive. It's something I often wonder about, which is what has been the improvement in the quality of life in China over the past 30 or 50 years when measured in the total sense of that word, given the pollution and given the urbanization? The fact that people have moved from the rural parts of the country, this mass, which is also really remarkable, the fact that hundreds of millions of people have actually migrated, physically moved through that country, it speaks again to the power of the Chinese state, which is pretty remarkable and I think difficult to comprehend as an American. But really, what has been the real improvement in the quality of life? Where can we see improvements in quality of life and where can we not see that? Or have we seen a decline in quality of life? Well, there's significant (31/57)
improvement via the better communication system, the fact that there's an internet, that there are smartphones that are universal now. The roads and the transportation networks are phenomenal and that greatly improves the quality of life. But as to the other things, yes, you can replicate the hardware. I mean, I'll give you an example. I've been to three replica Manhattan's in China. That's the idea. One of them quite large and two others kind of smaller, but still replica Manhattan's. I've been to a replica Hong Kong. I've been to a replica Venice, although they call themselves Florence. How do we think of them? No, it's not like a toy. It's the real thing. I know, but I mean, okay, this is why I ask that. It's astounding. I've seen the replica Paris. I mean, that to me looks like a full blown town or city. Is that what it is? In the middle of Anhui, yeah. And it's sort of... What is it for? And what I understand is it the equivalent of a suburb in so far as it's another community (32/57)
with a town and people that can commute from there to other work? What is it itself supposed to be? And what is the... But see, this is the point that you can replicate the hardware, but it's not the same thing as having the original. I cut you off, but I also want you to, if you can address at some point this, which is, do they have any idea what they're doing? Does the leadership, are they just sort of wanting... Because we see this all the time, we wonder, right? People ask that about Bernie Madoff. I'm not drawing a direct relationship, but for me personally speaking, there is a Ponzi aspect to this. And I think that just the point in which you're in so deep that you just hope that you can keep it going before you die. Is that sort of what the dynamic has been, is in China? Yeah, I think Bernie Madoff is an apt comparison not to say anything about the ethical quality of Chinese leaders, but you start out by thinking, well, isn't this a great thing? All this portfolio investment we (33/57)
can capture from overseas if we just pretend that China Mobile is a real company. We sort of paste together all our post offices and call them China Mobile and we'll list it and we'll gain a billion dollars, that's a great thing. And then over time, you get caught in it. And so now they're in a situation where if they don't continue to reinvest and to raise the amount of investment capital, then a whole lot of credits just go bust. And nobody is willing to accept the consequences of that because nobody knows how far systemically it will go. Well, how far systemically will it go without knowing exactly? I mean, what do you think? It is really tough to say. It's really tough to say. Why? Because there are so many contingencies, and dependencies, and so many things we don't know. But let's take one company ever grand, which is a company I love to hate. There's a real estate company that has projects in 170 cities, probably has 250 projects or so. Ongoing? Not all of them ongoing, some of (34/57)
them completed, but almost none of them occupied, all of them, mostly all of them sold. And these are projects that specifically are pitched to the Chinese aspirational investor. So they're not supposed to be places you really want to live. They're supposed to be places that you buy because in some mythical future, there will be wealthy people who will want to live here and commute to their wealthy jobs in their wealthy cars, and you'll sell your unit to them for a lot of money. So all of... Sound like a Vegas. Yeah, but way bigger, way bigger. All of Vegas would fit into one ever grand development. It's just totally... Let's not even pick on ever grand. Let's just go to any interior city. There's a city that I've been to called Shryan, which is in Podongkube, way off in the west of Hubei province. And Shryan, for complicated historical reasons, it lost its core industry. So they were in a panic to invest. So they invested in all this real estate. There's one real estate company that (35/57)
actually tried to recreate Niagara Falls. And Shryan is in the mountains. There's no water. This is in the mountains. They actually tried to dig Niagara Falls as a sort of ornament to the real estate development. There's a development in Yunnan where they dug a 150 kilometer canal so that they could have a moat around the five star hotel in the development. Just totally loco things. But what happens is you have to finance these things. And the ultimate... You finance them maybe originally with bank loans and then with shadow bank loans, but then generally over time those things get securitized and sold to the general public. And it runs like a river, tributaries all over the country. So you really don't know which grandmother in which small town owns the security that will go bust if Niagara Falls is never built. And you just can't take that on. How are you going to deal with that? Because the guy who sold her that security might well be a government official in that town. And how are (36/57)
you, as the provincial government and the central government, going to say to her, oh, that... We didn't mean that. That wasn't us. That was him. That's on you. You lose all your savings. You don't have a pension. Sorry, lady. So a few things I'm thinking about. When you talk about the Niagara Falls, I thought about the fact that I discovered recently that there is a mock Dubai in China. Are you familiar with that? No, which one is that? I'll find the pictures I'll show you. I mean, unless this is fake news. But... Everything can happen there. And to me that sort of signified that... Because for me Dubai is Dubai. Dubai is already a mock Dubai. Exactly. Exactly. They're building fake islands. It was in fact in the center of the city was the fake island Dubai sort of palm tree. Oh, I know what you mean. Bay High. Okay. Yeah, it's way down in the south. Talk about a derivative. Talk about really going... I mean, that to me reflects... That's wild. So I think that's fascinating, right? (37/57)
Because it's one thing to replicate Venice and to call it Florence or whatever. And it's a whole other thing to replicate a replica. You know, that's... How meta. Anyway. But the other thing, you know, again, you're talking there and this is something that I've spoken about for years. It's not even just something recently, but I did speak about it recently in a conversation with Mark Fawber. Well, although I don't think I expressed it explicitly, which is I find that the use of debt and the financial sector, in particular in China, specifically in China, is very much meant to coerce through other means to get these people to work way harder than they would otherwise work with the expectation that they will be able to reap the rewards that are sitting in their savings account. But those savings that they experience as being theirs are not actually theirs. They are the states, right, to do whatever they want to with. I mean, that's a particularly harsh way of putting it, but you can (38/57)
certainly say that the Chinese government is very focused on capturing savings and retaining them within China for these mad projects. So wouldn't it be nice if a Chinese person could instead buy a mutual fund overseas and eventually, I don't know what, send their kids overseas for education? People do do that, but it's a very small proportion. Well, I guess what I mean is, and I definitely want you to correct me if I'm wrong here, I guess what I'm thinking is there seems to be no respect by the financial sector in China for the savings of the people that are putting the money there. It seems that they feel that they can wield that for investments at their will. Well, they can because there's a universal backstop, right? So nothing is ... Well, we have that here in the US as well, but there is the pretense that it's your money. I mean, that pretense seems more specious in China. Well, we sort of do, but losses are borne by investors here, and they're really not borne by investors in (39/57)
that all sort of play itself out? Because at some point we're going to have recession, there's nothing wrong with it, it's a normal, healthy thing to have recessions, and the Fed is supposedly trying to raise interest rates and contract the size of their balance sheet. If they continue to go down that path, there is of course the dollar carry trade. There are many things that can impact a company like China. So what is ... It's interesting that you call it a company, I wouldn't argue. A country. No, did I call it a company? You might have been afraid in. I mean, that leads to a lot of inestimables. So will the Fed really raise how many times and will it really contract its balance sheet? We hope so, but as the United States demonstrates, once you have a fiat currency, it's very, very tempting to use it to fund all sorts of liabilities, and we have plenty of liabilities going forward. So that is really the biggest question for China. If the US dollar does strengthen, then China is (41/57)
cooked. But if the United States relents, turns around, and puts more cash into the world economy, then you could have another, I don't know how long of this in China. Have you ever think about how the Chinese government would react if in fact they lost control of the economic levers, or really not able to hit that target and unrest began to come out? And I say that why. I say it because, again, looking at the history and thinking about the totality of the decades that have preceded this, and also the way in which the Chinese government and Chinese society tends to think of itself in much grander, sort of larger scale terms, would it be an exaggeration to imagine that the Chinese government may turn inward in a much more repressive manner than anything we've seen for decades? I think it will certainly try. I think that we've already seen that going on for the last several years, the attempts to constrict the capital account and make it harder to get money out, the attempts to control (42/57)
the internet with much greater force than was true in the past, the really almost complete lack of cultural development and exchange. Really the only cultural events that are available in China are the big international events that come for a day or two, but there's really no room anymore for the development of Chinese arts. For people to gather and exchange ideas politically has become much harder than it used to be. So I think we've already seen that happen. Could they go back to 1975? I don't know. Certainly that will be the preferred path of the party, certainly rather than dissolution, but there are many other paths that could be taken and it's impossible to know which one will be more likely. Do you ever imagine how long this could go on for further? In other words, how much longer they can maintain this sort of illusory growth? Well I think that question is really the Japan question. Can you keep putting money into the economy to keep the debt rolling over, never recognize the (43/57)
existed since 2000. So in reality it's one generation. And also it's, despite the phenomenal construction and development of commercial property, the proportion of Chinese population who really live in the commercial property economy is kind of small. There are a lot of people who own these apartments, but most people have either rural dwellings that they inherited from their parents and one where another that don't really belong to them but they have the right to live in or urban apartments that came from the work organization of themselves or their parents. Let me ask you this about the real estate. You touched on it a little bit before, but what is the mechanism through which, because the way I understand it, the real estate market in China is particularly inflated due to the fact that it was one of the early parts of the economy to be liberalized, right? Liberalized to be privatized rather. And there's some other also, some weird mechanics and dynamics around who can have property, (45/57)
what type of property is constitutes investable. In a technical sense, all the land is owned by the government. So the major distortion is that land is owned by the government and local governments on the local level. So the government has a key interest in high land values. How does that work? Let's say you, if you're in China and you want to own something, how does that work? I still don't understand it. Well, the government's issue leases on the land. So you get a lease on the land for 20 years, 40 years, or 70 years. Most residential property will be 70 years. And then you own the building that's built on top of the land, but the government will have the right theoretically to take back that land at the end of the lease. It hasn't happened in most localities. In a few it has. A couple of them have tried to impose new fees. And the people who own the houses got really upset. They retracted it or they impose much lower fees. It's kind of a negotiation. So there's a quality like (46/57)
eminent domain, but it's obviously much more engaged. Yeah, that's right. So that's the chief distortion is that the government's on the land, but there's also types of property rights. Basically, every long-term urban dweller in China owns an apartment in one way or another, but that apartment very likely may not be saleable because of the different shades and gradations of rights that are attached to that apartment. And so I'm not going to push you anymore about making projections. I mean, I'm curious. It's to me, I'll tell you another reason why I have many friends who are very pessimistic as I have been for a very long time on the US dollar and on the US bond market and et cetera. But I don't see that being a problem anytime soon because when I look at the countries like China or when I look around the world, I still feel that in the next crisis, the US bond market would still appear rather attractive to a lot of people. And another great example, as you mentioned, this question (47/57)
around property rights, the Chinese citizens don't have a bill of rights. They don't have the same right over their property that we do. And so that is sort of reflected in a way in the capital flight that's leaving the country. They know many wealthy people who have made a lot of money in China know that they're not necessarily going to be able to keep that money and they're looking to get it out. Right? Yeah, I think that's right. And I think that that's a key and underappreciated point that everybody, remember all the columnists who starting from 2009 were warning about the US dollar and how we're going to induce this terrible inflation and the US dollar wasn't going to be... Well, that hasn't really happened. You don't see Americans trying to buy assets overseas or trying to emigrate. And that's because in the end, it's about the degree of trust in the government and it's about the quality of life within the country. And on a relative basis, the US is still looking pretty good. (48/57)
Yeah, relative, exactly. That's the key. Relative is key, right? That may change with the current political situation. And though we've had inflation, certainly in asset prices, that can quickly turn to deflation and we've been fighting deflation or the Federal Reserve and central banks in the West have been fighting that with their monetary policy. Yeah, that's right. And probably with less effect than they really think. I would say... Yeah, I'm not sure we solved anything, but... No, I mean, I was trying to basically... I wanted to see if we could try and sort of create some hypothetical scenarios here about where things would go. I mean, there are so many factors, there are so many variables. There's North Korea, of course, which is a big variable and our president is another variable walking and talking and tweeting variable. I'm trying not to take that bait. No, I don't want you to take that bait. I actually don't talk about Donald Trump on the program because I find that it's (49/57)
very difficult to do so effectively and usefully. I mean, a lot of times... Without having people's blood pressure rise. And also, I just think most of the commentary around him is not very useful. There is actually... I don't know if you're familiar with Sam Harris. He talks about him too much. I mean, but there are times in which he describes his criticisms in a way that I find useful. But I think for the most part, conversations around him are not very useful. I want to mention one more point on bringing back to China before we end, which is we were talking about loan growth. I've got two charts here in front of me. One is of loan growth in China. And another one is of percent year over year annual GDP growth since 2007. And what is indisputable based on these charts is that annual GDP, the trend for annual GDP growth has been down, whereas right now, loan growth looks pretty flat, but it had a huge jump in 2008. Are we going to continue to see every year it's going to be much more (50/57)
challenging to generate growth in China? Yeah, I think if you were to draw that top chart using including corporate bonds and including all sorts of quasi loans like short term private equity, then you would find that the two lines are in opposition to each other. And the reason is simply because you require more capital every year to drive the same amount of GDP growth and you have a target, so you just have to put in more capital. And that's why I think that they're going to hit a wall because it's very important politically for whatever reason to fulfill the promise to the Chinese people that GDP will double by 2020. I guess the starting point was 2010, I don't know. And what that means is that you have to have 6.53% GDP growth every year. So they're just damn well going to hit that target. And that's unfortunate because the quality of growth, it's kind of like people talk about digging holes and filling them in again or building a Mexican wall. But essentially that's what you're (51/57)
doing. You're putting a tax on every Chinese citizen. Well supposedly the Soviet Union in its heyday produced cars that had negative equity because they actually had to take the cars apart for the parts. The actual commodity that went into creating the car was worth more than the final product. Yeah, exactly. And you get a lot of that with Chinese comparisons between steel that's of less value than cabbage and things like that. Think of the amount of energy and resources that were required to dig all that iron ore out of the ground in Western Australia, stick it on barges, haul it up to China, put it into these towers. And then you're going to, I'll tell you, there's a city in Ordos County in Inner Mongolia which is the biggest county for coal in China where their solution to the bubble breaking was actually to blow up the buildings to rebuild them. That's very funny. And that was proposed. I don't know whether they eventually did it. They ended up with these huge... There was some (52/57)
similar proposals less serious here in the United States. And in fact, I opened one of my early television shows years ago by having a bulldozer bulldozing a house and it was a mock solution to the housing crisis. Yeah. The idea was you create jobs by putting people in bulldozers and then you create jobs by rebuilding the house. Exactly. They've done that. There's another county in Ordos where they had built all these towers and they couldn't find people to live in them. So they actually, I swear to God, this is true, they actually exploded, blew up schools in neighboring counties. Nobody in them, of course. So that the kids would have to go to that county to go to school. That's a real story. Yeah. And then you'd find these kids, you know, of course for them it was a dream because they were living 50 miles from their parents. They're like 14 years old. They have their own little Moto scooters and they're squatting in these like dark towers with maybe a hot plate, battery run with four (53/57)
students living in this like weird empty apartment together. Where are they going to school? In the model school in this new county because they built a model school so they were down well going to enroll in that. I mean, totally insane. And that is the extreme sort of version of what many in the United States propose. I mean, that's the idea of digging holes and filling them back up. I mean, that's not a radical idea in certain sort of Kinsien circles. Well, I mean, let's not go overboard. The U.S. U.S. infrastructure does look, you know, it is decrepit. People are dying in train accidents that looks 60 years old because it is 60 years old. Whereas in China, it's all brand, brand, brand new. And that's the difference. But you know, in the same way, if we were to raise $3 trillion to build, you know, a wall around the perimeter of the United States, yes, that would raise GDP. How would that raise the quality of life? Well, also, but I'm remembering specifically when I was living in (54/57)
D.C. that there were some people coming out in the New York Times saying that the snowstorm would actually be good for the economy because it employs people. But this is an asinine idea. People say the same thing about war all the time, whereas Adam Smith believed that defense industries should not count toward GDP because they were detracting from GDP. From wealth. They destroy wealth. Exactly. I think something that many people fail to recognize that, again, we talk about good heart and the notion that just because we can measure GDP doesn't mean it's a useful measure for any of the things that matter to us. And we could be growing an economy just like we could be growing cells in our body, but whether those cells are malignant or benign is a completely different question. And I think that that's what's so frightening about, to me, looking at China, looking at these ghost cities, these hundreds of ghost cities, it's just as terrifying the fact that they've deployed capital, (55/57)
resources, and labor to generate massive amounts of so-called wealth. But in fact, in a contraction, it could turn out to be that huge amounts of land that was once arable is no longer arable because they've built slabs of concrete on it. They've polluted their environment tremendously. And it's just a frightening picture. I think in some ways, the Chinese economy, to me, is a national representation of the human animal in some ways, very out of balance with its ecosystem. I think it represents in some ways what we do collectively to the planet. And maybe I'm going off the rails a little bit, but it sort of reminds me of that in a way. No, I understand what you mean. I think, to me, it's a representative of how political systems excessively centralized go off the rails. Yeah, I know. I agree with that as well. So, Annie, it was great having you on. Thanks, Dmitry. Thank you. And that was my episode with Ann Stevenson Yang. I want to thank Ann for being on my program. Today's episode (56/57)
was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation at Facebook, Twitter, and Instagram at HiddenForcesPod, or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
What Happened at OpenAI & Why It Matters Nathaniel Whittemore.done #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
way to get some kind of action, whatever it is, whether it's attention or whether it's material. But how has he featured in this story at all? My read is no in this particular instance. How I'll qualify it is that Elon has two chaos modes. Either I create the chaos or I benefit from the chaos. I don't think that he created the chaos here. I think that this was done outside of him. However, he is enormously talented at benefiting from the chaos. There was a while before Ilya sent that message this morning where I thought one of the most natural outcomes for this would be Ilya moving over to XAI. Great prediction. And sort of, I mean, Elon has taken a stance of being closer to what it appears that Ilya feels relative to Sam, certainly not a full sort of pause or anything like that, but at least giving lip service to that side of things. But Elon is never far from the surface of things, and he's going to be a major player in this. For those who aren't paying attention closely, outside of (42/57)
Commercialized crowd wins out at OpenAI, do you see dangers of AI going the route of nuclear energy? Some scary near misses end up setting progress back by decades. The Silicon Valley mindset seems to be that absolutely nothing can be permitted to hold back tech by even one extra day. What are your thoughts on that? Yeah, there's a couple things in here that I think are really interesting and worth pulling out. And Dmitry, this is a conversation that you and I actually have a lot. I do think that Silicon Valley does represent the position almost always that tech is sort of a natural good that benefits the world, that the net byproduct of almost all technology is good for the world. And they have lots of evidence that they point to, but that is sort of Silicon Valley's position. They've done a good job over the last 20 years of basically dragging the rest of the world along with them that nothing should slow down or impede progress and that technology is kind of coming at you whether (32/57)
Welcome everybody. Today's call is part of a series of live Q&As that I host regularly for members of our Hidden Forces Genius community and sometimes I open them up to our newsletter subscribers. The newsletter is free and you can subscribe to it and get special invitations like these at hiddenforces.io by scrolling all the way down to the bottom of the page or just waiting for the pop-up. Besides these audience Q&As that we do several times a month, community members also get invites to in-person events and dinners that I host all over the world with many of the same guests that you've heard on the Hidden Forces podcast before. And if you want to learn more about that and the Hidden Forces Genius community, you can do that at hiddenforces.io slash subscribe. So Nathaniel, the reason that I asked you to come on the show, as you know, on such short notice, and we're recording this on the evening of Monday, November 20th, is because beginning at around this time on Friday. So a few (1/57)
days ago, we learned that Sam Altman, the CEO and co-founder of OpenAI, was fired by his board of directors. And since then, we've heard all sorts of rumors and explanations for the firing, as well as the perspective rehiring and then refiring again. It almost feels like of Sam amid a total mutiny at the company. For those of you who don't know Nathaniel Whittemore or who need a more formal introduction, Nathaniel is the founder of the Breakdown Network, which encompasses an assortment of podcasts, including the AI Breakdown, as well as other content that explores the big picture power shifts remaking our world. So Nathaniel, quickly do me a favor and introduce yourself and just add anything that I've left out. And then let's get into a few questions that I have. And then I really want to encourage our members and other listeners who are joining for this call to drop any questions that you have in the Q&A box, because I really want to take audience questions today. This is what these (2/57)
calls are all about. After all, I have plenty of opportunities to ask questions of my guests on the podcast. So these are really for you. So Nathaniel, quick introduction, and then let's start to work our way through as many of these questions as we can. Absolutely. I mean, listen, you did a great job. The thing that I always come back to if I'm doing this fast is this idea of big picture power shifts that's always been what's interested in me. I was a history major. I love big patterns of history. It's why Hidden Forces has very long been my favorite podcast. And for me, exploring it through media, through news analysis is what I've done. So the Breakdown, it came out at a time where I was spending all of my time in and around Bitcoin and crypto, and particularly in the context of what it meant to have a non-sovereign monetary system and how that played into other global changes, the fragmentation of the American-led global order and yada, yada, yada. And so for me, it was a vehicle (3/57)
to explore all those things. And I had a very similar experience around this time last year that many up people did when ChatGPT came out. And there were a number of other products that were emerging at the same time. There were these image generation tools that were starting to arise. And I had the experience of playing around. I think actually for me, the sort of unstable diffusion and mid-journey were even more transformative the first time I tried them from the standpoint of just seeing magic presented in front of my eyes. And I started to explore all of these new generative AI technologies, got very convinced very quickly that, like me, people were having these zero to one moments where they were understanding that they were going to impact how they worked and what they worked on and were racing to try to figure that out. And that was the sort of genesis of the AI Breakdown. So ever since that show started, which is actually only April, believe it or not, I've been spending every (4/57)
day looking at what's happening, trying to contextualize it, understanding it in the context of the new technology itself, but also the big sort of economic issues that surround it, policy issues that surround it, social issues that surround it. There's going to be a million dimensions, which obviously is sort of part of why I think people are so intrigued to spend more time on this. I had a personal moment that sort of drove at home for me a little bit. I mean, you have different experiences that drive at home and I was sent a version of my podcast in Greek, which I can speak Greek and I understand Greek, and it was with a guest who's not Greek, who's Iranian, and they dubbed us two. Now, I know how I sound in Greek, so I didn't sound like I sound. He sounded the way I would have expected him to sound like he was speaking Greek and it was very good. The generative AI company that did it is run by a Greek person, so he kind of made some edits, but I can see how this is going to quickly (5/57)
get to a place where it's going to be perfect and it made me realize like two things. One, I've had this idea in my head that I'm really lucky because I speak English. English is a language that can reach lots of people with the podcast, so I have a competitive advantage that this is a language that I understand natively. Then I realized, whoa, we're going to be in a world where people are able to compete with me from any country because they're going to be able to translate into perfect English. It also made me think about this is an area where, and I feel like you probably have recognized this as well, you want to understand where these trends are going because you want to try and take advantage of them sooner than later because as an example, as soon as this technology is up to snuff and that could be really within just a few years, and it probably is in some of the other languages, more difficult in Greek because there isn't as much text on the internet. I could take this podcast (6/57)
and I could reach new listeners. I could expand my audience because all of a sudden I've translated it into like 100 different languages, which is like a modality of thinking about audience expansion that you wouldn't have otherwise. Yeah. I mean, I think I barely had time to wrap my head around this, but it feels like translation is actually one of the most solvable things. I mean, it is just really happening. I don't know what the implications are of a world where the default will be you get to consume content in whatever language you're experiencing the world through regardless almost of what they did. Now, of course, I think that by and large content creators will still be the drivers of those change. You will opt into using Wondercraft or whatever, when Spotify integrates these types of features to do that sort of dubbing and translation initially, but I can also see a world where it's platform mediated and it's just even if you don't do that, all you have to do, it's almost like (7/57)
an opt out for Spotify or something like that where they're just naturally doing that. I think there are some pretty profound implications probably of language ceasing to be a barrier in the way that it's been a barrier for the entire history of human experience. Again, so I recommend people follow your work and follow the AIA breakdown because you cover these big picture trends and that's what the podcast is about. So let's apply your expertise and the things that you spend your time on to this. I mean, this has all the makings of a great story. It has human drama. It's consequential in the sense that it's grappling, not only is the industry so important, but it's grappling with some of the decades-long themes like the tension between entrepreneurs and founders on the one side and the board and investors on the other and the empowerment of the founder. And also this larger question that's been in the public consciousness for some time now, which is this battle between, though it has (8/57)
been articulated in this way until recently, the battle between the AI safety people and the acceleration is. So give us a recap starting with, I think it was noon Pacific Standard Time on Friday that the news broke that Sam had been fired. So just bring us up to speed. When did this start and where are we now in this story and what's happened in between? As an aside, I got to tell you, I was very happy to not be intimately involved with the chaotic multi-billion dollar value destruction Sam episode of this November as opposed to last year. So I was thinking about this. I think let's do maybe the literal 60-second bullet point version of just what happened so that we can go back in on Peele because there's so many layers. So Demetri, to your point, noon Pacific Time, 3pm on the East Coast, maybe just after, but consequently before the close of markets, let's put it that way, Open AI, the board announces that Sam Altman has been fired. He's leaving to spend time with his family kind of (9/57)
a note. This was a, the board no longer has faith in him because of ways that he's communicated and we don't trust him. And he's gone. And by the way, Greg Brockman has been demoted from chairman of the board. He's no longer on the board and he is now going to be just an employee of the company. We're also, they elevated CTO or former CTO, Miram Arati to the CEO position, the interim CEO position and said, they'd figure it out from there. This was a neutron bomb. I mean, whatever, pick your hackneyed language of a huge massive explosion for reasons that I think will probably spend the rest of this conversation unpacking. But it was the just act one of an incredibly sort of dramatic moment. The rest of the night was spent sort of with people trying to figure out what the hell was going on. There was about, I don't know, a five or six hour period where we hadn't heard from any of the principles involved. And the speculation at that time, I think, was my interpretation was that there must (10/57)
be something enormously egregious that happens. I thought it was some sex scandal with Chad J.B. D. or something. I didn't even think a sex scandal was a big enough thing. I mean, the amount of sheer value destruction that was going to be created by this seemed to me to be something where either A, there was like Sam was keeping state secrets or B, AGI had literally been invented and he had kept it from the board. Something of that sort of level of significance. It's the only thing that made sense. But then as the night wore on, we started to get commentary one, Greg Brockman quit in flames. Basically, he said, not a chance I'm sticking around to just be an employee with this. And Sam had sent sort of some nice gracious tweets or whatever, but very clearly was, you could feel the intensity of things going on. And part of the reason for that was that it was very clear that no one had been consulted in this. It doesn't really seem like counsel was consulted in this. It was the investors (11/57)
weren't consulted, Microsoft wasn't consulted, Microsoft did their sort of nice little statement kind of a thing where they said, sure, we're excited about the new leadership, excited about this partnership, whatever the thing they have to say, basically. You could almost feel the happenings going on behind the scenes. So Friday night, everyone's still grappling with this. By Saturday, early to mid-afternoon, it's clear that this is not a done deal and there are battles going on. There are conversations, I think the Verge maybe broke it at 4 or 5 p.m. East Coast time on Saturday, that the board was now actively back in conversations to bring Sam and Greg back. And that as part of that, they were demanding kind of understandably the resignation of the rest of the board. And we're now kind of at the 24-hour mark of not having had any meaningful explanation from the board around why Sam had been fired, which of course just leaves everyone to be speculating wildly about what it might be. (12/57)
But at that point, 24 hours goes by, the speculation had shifted from, okay, did Sam do something crazy terrible too? Was there just some sort of internal power struggle? I think that the most common explanation at this point was around the idea that perhaps there was just some huge disagreement around safety questions and around risk questions. And it started to be sort of interpreted as the effective altruists on the one hand versus the accelerationists, the EACCs on the other hand. That started to be Tell people a little bit just quickly for people that don't know, what do we mean by accelerationists? Accelerationists who are not scared of the risks of AI and AGI in particular and think that it leads to a world of abundance. Now, there's infinite variations within that. There's just people who are sort of broadly techno-optimist accelerationists who think that technology is going to be a net good force for humanity, but maybe who still have some questions on the specifics here. (13/57)
There's other people who are like, bring on the super intelligent gods and let humans be consigned to a secondary species. It's not a term that has full a singular meaning. In fact, and I think in some ways right now, what it means is not the guys trying to slow down AI, not the guys trying to pause AI. So we're kind of getting this interpretation of it being a safety issue and reinforcing that as the fact that at the center of it seems to be Ilya, who's one of the board members, Ilya Sutsgever, who was a chief scientist at Open AI. And he has expressed various concerns. He was at the time leading the super alignment team, which was Open AI's effort to get to actual alignment with super intelligent AGI over the next four years. They had kind of set their moonshot project. He also worked under Jeffrey Hinton, right? Yes, he was at Google. And Jeffrey had resigned from Google famously over concerns about safety. Yeah. Elon Musk says that his friendship with Larry Page ended over (14/57)
recruiting Ilya away from Google to Open AI originally way back when it happened. So Ilya being at the center of this seemed to reinforce for some people that this was a disagreement around safety questions, but it also kind of started to seem like maybe there was a lot of just the very classic garden variety interpersonal struggle stuff, right? Ilya had been demoted about a month ago in terms of how much authority he had. Clearly didn't like that. And so personally, I was left wondering, is it actually these AI safety questions or is it not? So going into sort of Saturday night, we have what's clear is that there's a sort of a groundswell of people trying to get Sam back in in power in Open AI. There's a sticking point with the board doesn't want to resign, or maybe it's that they don't know who's going to replace them on the board. And so there's a lot of intransigence. And then on Sunday, Sam is back at Open AI to actually try to figure this thing out and negotiate. He's in the (15/57)
building. He holds up, he tweets out a picture of him holding a guest badge and says, this is the first and last time I'll wear one of these. Satya Nadella from Microsoft is literally mediating these conversations, right? And again, throughout sort of the afternoon, we start to get more of a trickle of information. Really, honestly, not much happened until very late at night actually on Sunday, where apparently Mira, the former CTO who had been elevated to interim CEO had determined at some point over the preceding two days that she was going to use her new authority to bring Greg and Sam back, which obviously the board wasn't happy about because they had just fired Sam at least and demoted Greg. And that apparently caused a battle with Adam DiAngelo, who was one of the board members who's the CEO of Quora, who was formerly at Facebook. And that led to the news that we got around midnight last night that Emmett Shear, the former CEO of Twitch, had been hired to lead the company as new (16/57)
CEO. So we've gone from Sam on Friday morning to Mira on Friday night through Sunday afternoon to Emmett Shear on Sunday night. And we can talk about Emmett and what it might represent. But the final part of this story from Sunday night early into this morning was that at, I think, 3 a.m. East Coast time, 2.57, because I spent a lot of time looking at this tweet. Satya Nadella basically tweeted out that they were looking forward to getting to know Emmett and the new OpenAI leadership team, but that Sam and Greg were coming to work at Microsoft, which is just, I mean, an outcome that I don't think many people had, even as they started to look at the full spectrum. I think that the absolute default assumption, should they be unsuccessful and wrenching control back of OpenAI itself, was that these two guys were going to go start their own startup to compete with effectively a blank check from any investor that they wanted. Now, just to finally wrap this up so we can get into whatever (17/57)
questions you want to take the direction of. This is where things were this morning at around 8.15 as I set off to drive my daughter to school, to kindergarten. And then when I get back, it turns out that OpenAI employees are not content with the arrangement and the way that this is done and had signed a letter demanding the board's resignation, the return of Sam and Greg, and very impressively, something like 500 out of the 770 employees had signed that when it was announced at like 8.30 AM. But even more impressively, it turns out that it was only signed by 500 because most of them were sleeping. And so I think at the time that we're recording this, or the last number that I saw from an hour ago, it was something like 735 of the 770 employees had basically said, the board needs to go or we're leaving and we're going to Microsoft with Sam and Greg, or at least not staying here, which is astounding because that's probably a higher percentage of the people than Microsoft would have (18/57)
gotten to come over if they had actually acquired the company. So it's just this massively strange situation. It is very clear that there is still a battle being waged behind the scenes. Sam has been dropping kind of cryptic tweets that don't say much, just sort of vaguely trying to reassure the developer community, I guess, in some ways, but we are still unresolved. And in fact, every time someone announces something that sounds like a resolution, it has turned out not to be and has been sort of upended within six to 12 hours. Yeah. I mean, so great summation. Ilya's participation in that final letter saying that he wanted to, that he'd lost confidence of the board is the one that's like most perplexing. But again, I feel like it just highlights our ignorance at the moment. We're still trying to put pieces together. So we still don't understand to what degree he was pushing for this. He also tweeted out, I guess this was this morning, he tweeted out, I deeply regret my participation (19/57)
in the board's actions. I never intended to harm open AI. I love everything we've built together and I will do everything I can to reunite the company. Quick question on Emmett's qualifications. Is Emmett's qualifications Emmett, former Twitch CEO, are his qualifications mainly that he's on the AI safety camp? I mean, that is the interpretation. So if you read like Kara Swisher is very clear to her, that's what the big thing is. Now, people who know Emmett, I don't have a dog in that is Emmett a good CEO or not fight. He was CEO of a very dynamic company that sold to Amazon sort of before and after the sale for 11 years, which is not nothing. He built that company from scratch as a CTO. He's got a reputation as being a very good leader, as a good engineer. And he's also got a reputation as being very thoughtful and interesting. But the flip side of this is of course that this is one of, if not the most significant startup in the world right now, it certainly has the sort of biggest (20/57)
potential for impact. And it took him about 10 minutes to decide that he was going to be the guy. And it kind of seems like they did because one, he had the qualification of agreeing with them on AI safety things. And two, he was the guy that said, yes, it's come out subsequent to Nat Freeman, who used to run GitHub has said no. I think one thing that I will note about Emmett, and again, I have a very strong feeling that Emmett's story in this is ultimately going to be a very, very small footnote. But one thing that is notable is that in the sort of, you know, six paragraph or whatever note that he sent out on Twitter last night, like 4am, he said, PPS, before I took the job, I checked on the reasoning behind the change that board did not remove Sam over any specific disagreement on safety. Their reasoning was completely different from that. I'm not crazy enough to take this job without board support for commercializing our awesome models. So again, this leaves everyone with the (21/57)
question of then what the hell was it? Was it just someone didn't like Sam or didn't like how what Sam was doing? What could possibly justify this? And the board has been unwilling to make a case. So I'm going to hold this question. But what I wanted to say is that I think it opens up the door to a conversation about open AI's role as a nonprofit organization, and its relationship to Microsoft and how workable that was. And maybe, and I'll ask this question, then I want to take a few questions. We have some great questions that have already come in. Are we too quick to attack the board here and not give them enough of a benefit of the doubt? In other words, their point was that what they said was that Sam was not being transparent, that they couldn't trust him, right? So couldn't there be a lot of truth there? And that maybe in part because of the nature of the enterprise, the fact that it wasn't nonprofit. I mean, Sam says he has no shares. I don't really know how that works. But that (22/57)
he was, let's say, engaging in other deals on the side in order to try to get pieces of other companies that he's potentially working on and trying to start. And that that was also interfering with the board's ability to exercise governance. So there's actually two questions embedded here. One is, is it possible that there was a reasonable justification for this based on the actual facts that we haven't heard? And the answer, of course, is yes, because we haven't heard. But the second question is whether it's reasonable to give the benefit of the doubt when the stakes are this high, when the board refuses to articulate what that is. And the board hasn't even, by the way, come out and said it's too sensitive and could cause harm if we explained what he was being deceptive about. They've just said nothing. And so I have a hard time with the argument. Like, look, I think it's a big sort of well, actualism on Twitter right now when people are like, well, the nonprofit board is just (23/57)
exerting their right to do it. It's like, yeah, sure. But they're not explaining why. And so it's all right as everyone else to say that that sounds like total bullshit from where we're sitting. I mean, listen, Andre Carpethy said this in a tweet as well during the middle of the whole thing. Someone said something to the effect of, it's weird that Andre, who's kind of right after the set of people, I mean, he's as well known as prominent as important as any of these folks in many ways. And someone said, it's weird that he hasn't said anything. And he basically said, I haven't had anything to add because the board has, you know, not taken their chance to explain what their logic was. And so we just kind of have to assume it is what it looks like. And I think that that's a pretty reasonable place to be. Again, they haven't even gone so far as to say something like, there was a safety disagreement that's too important to give publicly, but we stand behind our conviction. They've just said (24/57)
nothing. And it sort of has left everyone to assume that it is actually less significant. And I don't think that people care whether it was technically in the rights of the non-profit board to do this thing. Lawyers will care when there are, you know, the lawsuits that are inevitably coming down the line. But in the court of public opinion, the board is basically fully wrong. And I don't feel bad for not giving them the benefit of the doubt, given that they haven't taken the chance to actually make an argument. So I'm going to take some listener questions. Richard asks, how does Microsoft's increased influence and Samsung UROL impact the speed and trajectory of open AI? What does this say for direction, control, and security? And I would add to that, Nathaniel, just a larger question of this, does Microsoft ultimately come out, you think, as the biggest winner in all of this? I think that it certainly puts more pressure on commercialization. I don't think that Satya is lying when he (25/57)
said, you know, in his initial tweet that they've learned a lot over the last half decade around how to let companies sort of function on their own, more or less, you know, between LinkedIn and GitHub and this sort of thing. I think that they have done a good job of sort of shifting that. Microsoft is no longer a pariah where like your company, when you sell to it, goes to die in quite the same way that it would have been a decade ago, in large part due to changes that have sort of happened on Satya's watch. But at the same time, it's a huge company, right? When this happened, it wiped out $48 billion of market cap in a matter of minutes, right? That's an enormous amount of pressure and not just pressure, but fiduciary responsibility. Microsoft is structured in a way where it's their job to think about AI safety issues. Now, they might decide to take it to shareholders and say, we should all be thinking about these issues. But right now, it's not their job because they're a public (26/57)
company. They have a very specific mandate that has nothing to do with that. So I think that it means there are competitive pressures. So the competitive pressures seem to be the bigger problem. And the talent drain that happened at OpenAI is like a perfect example of that. Well, there's a larger question of just how inescapable the absolute vortex of the AI arms race is from a commercial perspective. I think that's a really reasonable question. By the way, this is Hinton's main point when he left Google is that it's an all-consuming thing that he can't imagine how we're going to get out of. I mean, it's a black hole of pressure. The question is whether Sam and the leadership of OpenAI would have more power to resist that pressure, at least in some way, from where they were versus where they are. My general feeling is that as the pole position industry and generation defining startup, which they were, I mean, it is a remarkable achievement that won. Not only did they kick this whole (27/57)
thing off with chatGPT, I'm just absolutely burying the faces of everyone else with egg. GPT-4 hasn't even been close to touched, subsequent to that. Google has just continued to delay Gemini. Amazon is theoretically training something on, that's even bigger than GPT-4, but we haven't seen it yet, although it could be announced in the next couple of weeks. Olympus is the code name, apparently. But they were really in the pole position coming into this and had a huge influence in shaping the nature of the industry. And I think that they lose that in a lot of ways with this. I think it creates an opening that allows for more of that commercial pressure, not less to come in. I also think that, maybe I'll invert your question a little bit. I think it's possible that Microsoft's the bigger winner, but I still think it's, I think that Microsoft had already done a phenomenal job. I mean, listen, Microsoft's relationship with OpenAI kind of reset the way that startups and big tech think about (28/57)
each other for this generation of companies. It was a new precedent. It was not an acquisition. It wasn't just a straight investment. It was very clearly something different, but the model has now been sort of semi-copied by Amazon and Google in terms of Anthropic. And part of it's just the reality of limited compute resources to go around. But I think that they were in a pretty good position already. I mean, they were making more money from OpenAI. And I think that anything that sort of sows chaos in the lead that they had, even if yes, they own sort of more of it ultimately, I kind of don't think there's any real winners in this basically. I think the biggest loser is the AI safety field. We'll have to get to that. So I'm going to take another Microsoft question here and skip around a bit. Nima asks two really great questions. So one is, if the majority of the OpenAI team moves to Microsoft and others are poached by competitors, what do you believe will be the impact of this event on (29/57)
the competitive dynamic and landscape in artificial intelligence? Could it in fact better level the field among large language models? And then the second question is, if a regulatory movement grows to slow down acceleration, is Microsoft a more susceptible target for regulatory scrutiny? So both really great questions. Yeah, my answer is yes and yes. So yes, I think that it does have the potential to create less of a, I mean, listen, by weakening the company that I was sort of arguing is in the poll position, you inherently create a space where there is more, there's more equivalence, let's say, right? There's more room to catch up. And I think that that is almost a, I don't see how that doesn't happen to some extent in the sense that developers in particular who OpenAI had just extra one over with Dev Day relative to where they had sat before November 6th, have to be very questioning what they're going to do kind of going forward and how much they're going to invest in the chat GPT (30/57)
and OpenAI ecosystem versus working with other models, whether they're closed or open. And so there's an argument that it's ultimately a good thing for the world to not have a single dominant force. The flip side is I think that that's probably counteracted a little bit by increased concentration in the hands of Microsoft. I think a frenemy relationship between OpenAI and Microsoft is probably not better for the world than a fully absorbed relationship. But it's hard to say those things are going to take a while to blame out. But I think that the question of whether there's going to be more, if it creates more of a target for regulatory scrutiny is absolutely, there's a question of sort of, will it actually be able to happen exactly as intended or will there be antitrust suits? It creates all sorts of new questions that they were always probably going to have to deal with at some point as that relationship evolved, but are coming a lot faster now. So Sundeep asks, if the Accelerate and (31/57)
you want it or not. Now, I would argue, and this is a little bit of probably out of scope of this conversation, that that was not just Silicon Valley sort of stumbling into power, but also had to do with sort of big political decisions such as the decision to sort of, I mean, globalization decisions and the way that that impacted the economics of America. We traded the sort of jobs for cheaper stuff and a lot of what has come from technology, we're not so sure actually sort of net benefited us, but Silicon Valley is always going to represent that position. I don't think it's particularly unusual or surprising. I think a bigger question is sort of where the rest of the world is going to fall when it comes to that. And frankly, that's why I think you're seeing such intense and vicious narrative warfare between sort of the forces of pause, slow down, AI safety, effective altruism, whatever subdivision of that whole set of things. And on the other hand, the sort of accelerationists because (33/57)
they know there are big stakes at play here. These are positions held by sub 5% of the world or call it America if we just want to define the parameters of Americans who are going to be involved in American policy decisions. I think that the vast, vast majority of people don't really have a strong perspective on this yet because A, it's new, B, it's complicated, C, it's kind of a reasonable default position to take to say if a lot of researchers are at least reasonably concerned that there's a lot of risk here, we should probably take that seriously even if we also see a lot of the upside. I think a lot of people are finding themselves in the middle and an admittedly uninformed middle as they're trying to get up to speed with it. And so the two poles are really aggressively trying to pull them in either direction. Silicon Valley because I think it's existential in a way that's not just about AI but it's about whether the tech industry can continue to sort of dominate the conversation (34/57)
and sort of do no wrong or at least get its way even if it's been sort of said to do wrong. And on the other hand, it's existential because the people literally think it's existential from the standpoint of whether humanity survives. So the narrative stakes are quite high. Yeah, that's a really great point. I mean, the existential side is well established, but this idea that Silicon Valley is banking on this as being the new technological paradigm and the ability to develop that unencumbered or the fear that they might be encumbered in trying to develop that is something that's freaking out a lot of people. It is. And it's interesting to me why that is. I don't have a good explanation yet for why there is sort of such intensity around this. I think that it's probably like anything, a variety of positions where I think that there are probably in the same way that there are people on the side of sort of AI safety who very genuinely believe they're P doom to use sort of the expression (35/57)
that's used in those circles a lot, their probability of doom, the percentage chance they ascribe to sort of a human life ending event is very high and they believe that realistically. I think that there's probably the inverse of that on the acceleration aside who think that genuinely AI will, if given the chance in 10 years, solve cancer and solve, you know, and all these things would sort of prevent human flourishing. And so it becomes, you know, Mark Andreessen literally argued that it's a form of violence to not allow this to proceed in his techno-optimist manifesto. Then I think you have others who are just sort of generally think that the AI safety folks are sort of crying about nothing and making fallacious arguments and it's stupid, you know, and then you have sort of the libertarian set who doesn't want sort of government to be involved in this and say, you know, if they do this, then, you know, where does it stop? And, you know, so there's all these different dimensions. It's (36/57)
not a coalition per se. Yeah, those people are always way, way off center. The sort of no regulation this is like David Crockett's America is so totally missing the ball. Actually, you know, this point about power I think is actually central and I've something I've talked about. It's not a coincidence that we got democratic reforms and moved towards more pluralistic systems of representation after the end of the bubonic plague and the price of labor went up. Labor was empowered and with the empowerment of labor, you got the empowerment of civic bodies and the population, people. And I think that it's also not a coincidence that we've seen increased fragmentation and rising populism and political dissatisfaction in Western democracies since the fall of the Berlin Wall and the rise of globalization, which disempowered labor in these Western countries and also technology also appropriated more power towards capital against labor. And so you've seen this move of disempowerment of labor (37/57)
relative to capital and AI represents the apotheosis of this. You know, it is the singularity, you know, not to just a quote Ray Kurzweil, but truly it's a massive concentration of power. And I do wonder to what degree we're also what we see in the case of the acceleration is just a recognition of that recognition that they are on the cusp of a massive, and I don't mean it in a twirling your moustache kind of way. I just mean it in a kind of fundamental way. They see it. This is where it's going. They want to be on the side of the people that have the power in what could end up being a feudalistic type of global society, which again reverses all the gains of the breakdown of feudalism that happened after the end of the bubonic plague in Europe. So another question Michael asks, if the board is motivated by safety concerns, is it naive for a software vendor to think that they have any meaningful influence over the trajectory of AI technology when hardware progress will inevitably (38/57)
continue producing improvements and capabilities for the foreseeable future? So I'm not entirely sure. I think I understand where he's going, but I don't quite get it as a question, but maybe you do. So what do you think of that? What's your response to that, Nathaniel? Maybe I'll reframe it a little bit and apologies to the person who asked the question if this is not the direction that it was going. But I feel like the question is, is it naive for anyone to swim against the tide when the tide is so clearly pointed in the other direction? Is it naive for this board to have thought that this would meaningfully impact anything even if they were completely successful and Sam and Greg just quietly went into the night? Sort of is the answer a little bit. Mostly in terms of execution, though, not in terms of principle. I think one of the real travesties of this, if it really was executed the way that it was, which is there not being some insane egregious inflection point moment when it (39/57)
comes to AI safety and the capacity of these systems, is that this body spent their most powerful tool on bullshit, it seems like. Listen, the structure that they set up theoretically to create a nonprofit that could fire the CEO of this incredibly important startup, WorkDish, in the sense that they did fire the CEO of this thing, but was this the right time to do it? It feels like it's just going to end up turning some amount of narrative against the AI safety folks because they look very chicken little-ish. The fact that it seems likely that Sam's going to consolidate power after this and no longer be an ally to that group in any meaningful way, certainly Silicon Valley is now on a McCarthy-esque witch hunt to try to root out all the effective altruists at their organizations. Of course, I'm overstating the case to make the point, but I don't know, it's not naive on the very broadest level to think that there are chances to drag the world toward the better a little bit. You're never (40/57)
going to convince humans that they can't do that. It's what makes us who we are to be optimistic about the capacity to divert things which seem like they have momentum such that they can't possibly be diverted. That's very American. That's very American. Not necessarily very human. I don't know. It's certainly more American, but I think it's fairly human in terms of the sense of agency to exert will over the world. I think that's pretty quintessential to humanity, but the poor way I feel now. George has a question on governance that I want to ask before that. Kelly asks a question about Elon and anything we know about Elon's involvement. Elon, we do know, was involved in OpenAI and its founding. He's also recently started a AI company. I don't know to what degree is just a lark or some kind of thing, performative act, again, to generate a media hype and excitement, whatever, and how much of it's substantive. But is there any involvement for Elon here? Elon's always trying to find some (41/57)
even just GROC and sort of like the anti-woke chat, GPT bot and stuff, Tesla has some of the most advanced artificial intelligence in the world. The way that they are doing full self-driving is they're inferring on site, right? They are taking in all of that information from all of the cameras on that vehicle and making decisions in real time, which is a real world sort of AI that basically no one else has the way that they do. And it's not hard to start to see how this incredible trove of conversational data from Twitter slash X, plus that sort of inference capacity that comes from real world data in the form of all the fleet of Tesla cars that are out there collecting it, combines into their robot, which brings sort of all of these things together into, who would you say are the big players in the AI for among AI foundation models? It's a very small handful. There's open AI, there's Anthropic, which was a split out from open AI. There's XAI who is new, but you would just have to give (43/57)
Elon credit and call that sort of the representative of the entirety of Elon's stuff. And his LLM is Grock, right? Yes, inclusive of Grock and Tesla and all that. Microsoft is really sort of aligned with open AI on that. They do technically have, they just announced the next generation of their sort of LLM, but it's so clearly secondary to what they're doing with open AI. And then there's Google who are sort of far behind at this point, which is the whole very interesting thing. Meta, who are sort of have taken this sort of leadership position in the open space approach. And Amazon, who again, they sort of got pushed out of the way by open AI, but are now, they've sort of moved into professional services with bedrock and helping enterprises sort of train models. But it seems like their ambition to have a competitor is still there. Obviously, they need it to power sort of Alexa devices and things like that to some extent. Apple's a big question mark. They are now from all reports (44/57)
spending millions of dollars a day training their own models, although it still seems unclear exactly what they're going to do. It kind of seems like their focus is to get the technology sufficiently advanced that they can actually run these things on device so they don't have to deal with the cloud. And then there's a whole cadre of sort of open source approaches too numerous to list, but there's Mistral, there's stability, there's all the hugging face models. I mean, there's a huge array of things building in that space as well. So all of you can hear just how well versed Nathaniel is in this industry. So he is the AI explainer. If you need a podcast to listen to where you can download stuff every five minutes, it's Nathaniel. So George asks, is this a symptom of problems with governance both in the tech space and in the nonprofit space? I'm troubled because nonprofit does not mean you are, quote, doing good the way many folks think. It just means you essentially get to dodge (45/57)
taxation and operate under less regulatory scrutiny. Yeah, I think that there are indictments to go around in terms of governance here. But I think that for me, to the extent that we are looking for things which we should sink our teeth into and ask questions of how we're going to sort of not do this again or fix this, I think that it comes back to questions of AI governance specifically. And really, it's an even more simple question is what are, if anything, the guardrails around these sort of frontier models and the advancement of this space? And in many ways, I think that you can view OpenAI's nonprofit sort of weird structure as a self-regulatory approach trying to create those guardrails in the absence of there being a state-level guardrail or anything like that. And it has clearly not worked. And I think it's very hard to argue after this that the approach that they set out to do sort of worked without consequence. It's being put to the test as we speak. But again, to me, it's (46/57)
less relevant almost whether or not OpenAI's model worked and more like what is going to be the set of guardrails around this, if anything. And that's in many ways with the battle around the ASafety question is, who's going to get to determine what companies can and can't do in this space? So Leo asks a question about adoption. Do you see this impacting AI adoption anyway? I don't see it. If anything, it just accelerates it. Yeah, I think the thing that makes AI weird relative to other hypey technologies, of which I have a lot of familiarity with previous hypes is that it's just actually good. I think one of the most dismissible opinions to me when it comes to AI is the sort of, well, actually, it's not even that good. It's just predicting words and all the sort of stuff. It's really good. These things are transformational technologies. I don't think that homework is ever going to happen again. As it happened when we were growing up, I think that the way that writing happens is totally (47/57)
going to change. I think, blah, blah, blah, blah, I could go on for an endless list. But those things aren't mandated from above and they're not just from hype there because people try these things and they're like, oh, that's a much better, more efficient, more powerful way to do things that I was doing and in fact opens up new things that I could never do before. So this is a question from Michael, which I think is interesting. He says, it doesn't seem like the policy regulation narrative for semiconductor export controls and AI safety have been coordinated. Hidden forces has covered some of the semiconductor controls and AI safety voices haven't come up. Are there people interested in AI safety or in the effective altruism community or anywhere else that are advocating for hardware controls in the interest of AI safety? So I would just say, obviously, there are in the sense that the semiconductor export controls are in some ways a attempt to slow down progress in AI, but (48/57)
specifically for the Chinese based on limiting their exposure to hardware. But the question is, is that also something that regulators are looking at, Nathaniel, do you know with respect to US and American corporations? Yes. So one of the potential regulatory approaches, and this is a fairly extreme one, but it's something that's sort of a potential outcome even at the executive order, is the US government at least having visibility into who's using compute. So one of the easy vectors for them to start having some amount of control is to force the cloud computing providers, so the Amazons and Googles of the world, to let them know when a certain customer is using over a certain threshold of compute. Now, this is something that's going to be fought incredibly viciously. I mean, just insanely tooth and nail fought. But if the government's trying to understand who's doing massive training runs before they happen and want visibility into that, they do have access to this information (49/57)
potentially through the compute providers to get that. So the short answer to the question is, yes, the government is looking into ways to have access to that sort of hardware level visibility, at least if not straight up control. I haven't seen proposals yet to give the government authority to actually green light, the usage of compute. Most of the sort of green lighting type proposals or licensing type proposals are farther downstream where if maybe there's a sort of a red teaming requirements, testing requirements, and the government gets to say, no, you can't deploy that sort of model because it's too advanced or something. But I haven't seen yet a restriction of compute, but an observation of compute is definitely on the agenda. So what is in your opinion, if you had to guess, what is the next use case or next small number of use cases that you think are going to serve as the next kind of paradigm shift in the consumers or the user's mind about really how transformative this (50/57)
technology is going to be? So I think that we've spent a lot of this year following along the progress of like a new thing to come out every few days. And I think a lot of next year is going to be about integrating the stuff that's already here into workflows in really practical ways. So building interfaces on top of things like chat GPT and Anthropics Claw that are custom purpose for profession X or role Y that are just add a layer. Again, it's almost a UX layer. The capacity of GPT-4 is very high. And of course, engineers are going to be excited and focused on GPT-5, but there's so much in GPT-4. But if right now, the only way that people are interacting with it by and large is sort of a blank screen that's a cursor that says, what can I help you with? And I think that that's going to change a lot this year. And I think that we'll move from just a pure kind of early adopter set, although there's tens of millions, if not hundreds of millions of early adopters doing all sorts of (51/57)
experiments with these things to, I don't know, accountants. I'm just saying, here's how we use this tool and other accountants copying them hundreds and hundreds and hundreds and thousands of times. I think you'll see social media managers say, here's how we do content calendaring, blah, blah, blah, blah. I think actually it's going to be a much more boring sort of integrated period. Now, it'll be punctuated by like mind blowing things, the likes of which you've never seen, but that'll be sort of contrasted with just the sort of steady flow of these tools into actual human workflows. So I have one last question for you, Nathaniel. Give us the name of one or more books, and this might be hard because this is such a new field, books that you would recommend for people that are interested in learning about this field, and also other sources, like how do you educate yourself in real time and stay up to date? What are some good journals, some good online magazines, some good people to (52/57)
follow besides you that you follow to help stay up to breast on this industry? Yeah, I don't know if books are the right way to for this. I think where books can be helpful is books can create a really good grounding for particularly some of the AI safety debates. There's a lot of text there, it kind of delves into philosophy. Nick Bostrom's Super Intelligence, we came out about seven years, eight years ago. Yeah, exactly. That sort of thing is there. In terms of keeping track of this, it's fascinating because there's this whole new core of content creators that are sort of just emerging now, and I think they're actually quite good. You don't have the sort of shilliness, I mean a little bit on X because that's just the nature of the platform, but you don't have the same sort of shilliness that you see with crypto YouTubers that you do with AI YouTubers. There's some great people like Matt Wolf who have created these channels that are just pure value. Matt Berman is another person who (53/57)
explains things, he's more technical. There's a handful of those now, there's a dozen or something like that. I think in terms of people to follow from a news standpoint, I think that, I'm sort of not biased, I go wherever the information is good. The information, just the information.com is by a million light years the best newsroom when it comes to AI. I mean, it's just- Yeah, everyone is citing them, everybody's citing them. Every scoop is them. Now, I think that is testament to the fact that AI has brought tech back to San Francisco and Silicon Valley specifically in a way that looked like maybe it had lost during COVID because it matters once again to have this incredible concentration of actual frontier brainpower. It's sort of returned and the information is where they're strong is in those actual geographic ecosystems where there are people who are writing for them, have relationships with people who would go into those companies and things like that, but they're a great (54/57)
source. On Twitter, it sounds silly, but one really great resource is Robert Scoble. He's been a tech obsessed guy. He loves technology, always has been an evangelist for various things. He just created a new show called Unaligned, which I actually haven't even seen, but what he's been doing is trying to curate the entire world of ex-users on AI into lists. He's got a list for ex-companies. He's got a list for ex-artists. I've found that lists don't usually stick as the way that people sort of interact with Twitter, but they're a great way to, if you're trying to figure out who you actually like, you go check out one of Scoble's lists and then you end up finding two or three people who come up over and over and over again and you follow them and you're in a good spot. It's a field that rewards finding new voices and new people, but it's going to keep changing too, I think. How do people follow you besides following NLW at NLW on Twitter or X as you call it? I still haven't internalized (55/57)
it. I know. I'm meaning that. I'm working on it. How else do people follow you? How do they find the podcast? What's the best way to take advantage of all the things that you have to offer, Nathaniel? If you are an audio listener, the AI Breakdown, if you search the AI Breakdown, you'll know it's mine because it's got an old retro futurist, kind of like 50s image on the cover with a little robot guy at the center of a family. You can find it on any podcast platform. The YouTube is, I think it's youtube.com slash at AI Breakdown or AI Breakdown Pod, maybe or something like that. If you search my name, Nathaniel Whittemore, you search the AI Breakdown it'll be there. If you're a visual consumer, every podcast episode is actually two videos on YouTube. Breakdown.network has all the information about other stuff. There's a Discord, there's a newsletter, and then there's also, we're now kind of moving into the world of learning communities. I've got a beta educational learning community (56/57)
that's coming together in December. I decided to pull the trigger on it. Well, I'm very excited to hear about that, Nathaniel. So thank you so much for coming on, man. This was awesome. I really appreciate it. Yeah, always love chatting to me, Tree. All right, have a good one. Bye, everybody. Yeah, you too. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
A World On The Brink of Total War Dmitri Alperovitch #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? My name is Dmitriy Kofinas, 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 Dmitriy Alparovitch, the co-founder and executive chairman of Silverado Policy Accelerator, the co-founder of leading cybersecurity company CrowdStrike and the author of the soon-to-be-released World on the Brink, How America Can Beat China in the Race for the 21st Century. In the first hour of our conversation, Dmitriy makes the case that we are already in the midst of a new Cold War, and that Taiwan is the strategic flashpoint that risks triggering a devastating conflict between two nuclear powers in a way that West Berlin nearly played during America's last Cold War with the Soviet Union. We discuss the similarities and differences between Cold Wars I and II, (1/57)
including the role played by the USSR as a liberator in Europe, and the strong appeal of communism as a competing ideology in the early decades of the first Cold War. We also discuss how we lost an opportunity to build a sustainable peace with post-Soviet Russia, and how that has made the new Cold War with China all the more challenging and dangerous. The episode's second hour begins with a discussion about the importance of Taiwan and a thought experiment about what would happen in the event of an uncontested Chinese takeover of the island. We discuss the philosophical underpinnings of American supremacy and arguments for its preservation, the need to build national unity by addressing legitimate political grievances, military industrial reform, immigration, and what it will take to deter a Chinese invasion of Taiwan that the major beliefs could happen before the end of this decade. If you want access to that part of the conversation, and you're not already subscribed to Hidden (2/57)
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, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative and sobering conversation with my guest, Dmitri Alperovic. Dmitri Alperovic, welcome back to Hidden Forces. It's great to be back. Thank you. And you're back, and you're back with a new book, your first book. Congratulations. (3/57)
Thank you. Maybe first and only, we'll see how it goes. It's a lot of work. We're just talking about that. I can only imagine. I don't even know how people write books. I mean, first of all, it's a lot of work, period. But while you also have a full-time job and you've got a gazillion other responsibilities to write a book, it's insane. The biggest challenge I faced is just the stress of the prolonged process to have to republish it, because the book was, for all intents and purposes, locked down back in August. And it's taking this long to get it out. And I was able to make small changes to it, but I was in pins and needles of something big happens. If Xi Jinping dies, a lot in the book has a change, and there's not an opportunity to do so. Yeah. I mean, you did update it for October 7th. I don't know how far into the conflict you actually did update it, but you got that in there. So before we get into the book, or the title of the book is World on the Brink, How America Can Beat (4/57)
China and the Race for the 21st Century, we'll get into the book. But real quick, you talk a little bit about your bio in the book, and I don't think you and I have had a chance to actually discuss this on air at all. You immigrated from the Soviet Union when you were in high school, correct? No, not in high school. I was a teenager. Yeah, teenager. So tell us a little bit about that experience. What's sort of your background? Yeah. So I was born in the former Soviet Union in Moscow in the 1980s and was able to come over from my family. Ultimately, I ended up in Chattanooga, Tennessee, which was an interesting experience, going from Moscow, a city of 10 plus million people to the deep south, and a city of 150,000. It was done in the 1990s. So it was after the fall of the Soviet Union, and things were much more relaxed. So this was not sort of the escape from the Communist Soviet Union of the 1970s, as a number of people have done. Yeah. So how good was your English at that time? It was (5/57)
pretty good. I had studied it since second grade in Russia. So English was actually not the problem. It was just more of a cultural experience, and particularly of the deep south, because the south is different. It's not like the rest of the United States. So I can only imagine what it was like for you to be arriving at a high school like that, and also for those kids. Like how they probably stereotyped you in their head. I mean, did you have a heavy Russian accent? Like fill us in a little bit on that. Like what was the cultural experience like for you and for them? Well, I'll tell you a quick anecdote. So we didn't go straight to the United States because our immigration system is, unfortunately, a mess. And we actually initially immigrated to Canada. So I was in Toronto for about a year, and then my dad ended up getting a job in Chattanooga, and that's why we moved there on an H1B visa for him. And my first day in school in Chattanooga in Toronto is actually pretty easy to (6/57)
assimilate. You know, it's a big city. Again, my English was great. So I didn't have many problems there. But my first day in school in Chattanooga, this kid comes up to me and he says, where are you from? And I sort of hesitate because, you know, if I say Russia or Soviet Union, again, this is the South, it is the 90s, early 90s, but it's still the South. And, you know, we just came out of the Cold War. So, you know, I answer truthfully, but not fully. I say, I just arrived from Canada and the guy says, where's that? And I knew that my answer was irrelevant. Wow. That was, it was probably a good move. So let's move now to the subject of the book. As I mentioned, the title of the book is World on the Brink, How America Can Beat China in the Race for the 21st Century. The book describes a new security paradigm defined by China's rise as an economic, military, and technological power that threatens the power and authority that the United States has amassed since the end of the Cold War (7/57)
and cemented really through the unipolar period. You call this paradigm Cold War II. And before we discuss the term Cold War II, why you chose it, and whether or not it's appropriate, I'm curious to understand your perspective on how we got here. Yeah, absolutely. I've been passionate about this issue for well over a decade now. In fact, my first exposure to the fight with the PRC was actually in 2010 when I was in the field of cybersecurity at the time. And I got a call from this company you may have heard of called Google. And they had just been infiltrated by China and they were asking me to work with them on this investigation, which I ended up naming Operation Aurora, actually named for the Russian battleship of the 1917 Bolshevik Revolution that fired the shot. There was a signal to Lenin to launch the revolution. And that was often called the shot heard around the world, the shot to change history, the course of the 20th century. And I felt very strongly at the time that this (8/57)
was the first time that you had seen a nation state like China infiltrate American companies, steal intellectual property. At least it was something that was first revealed in our investigation. As we learned later, it actually had been going on for many years. We were ignoring that and that it was a dramatic moment. It certainly changed the course of my life and my career and I think of the entire cybersecurity industry and really set us on the path of acknowledging that China is not on a path to being a friend, that it is an adversary. It took several years for the Obama administration to finally get to that acknowledgement publicly. And then, of course, the Trump administration picked it up and took it further and the Biden administration has largely adopted Trump administration's policies on China. But the appreciation that we were in a pretty existential fight I've had for a while. But as I write in the book, the Cold War term, I think is the only one that is appropriate. In fact, (9/57)
what we have between the United States and China literally is the dictionary definition of a Cold War. Literally, I can tell you the definition from just the Oxford dictionary is that a Cold War is a state of political hostility between countries that is characterized by threats, propaganda. And other measures short of warfare, open warfare. I mean, I would challenge any of your listeners to tell me that that is not the exact definition of the state of relationships between our two countries right now. But beyond that, we go through the history of Cold War one, as I call it, the Cold War and compare and contrast to what's going on today in China. And I was actually struck doing the deep research for this book of how almost identical the two conflicts are on just every single part of the competition that defined the first Cold War, whether it's the global competition for supremacy between the two nations, whether it's the arms race, right? We're in a nuclear arms race, we're in a (10/57)
conventional arms race, we're in a space war and a space race that characterized, of course, the 1960s. We are both preparing for war over a flashpoint, a regional flashpoint in the first Cold War, it was West Berlin and a little bit Cuba. And today it's Taiwan. We have an ideological struggle. It's not communism versus capitalism, but it's authoritarianism versus democracy. In fact, President Biden even acknowledges that even though he won't accept the term Cold War, we have a scramble for military basis in the region. We are deploying bases now once again on the Philippines, expanding our presence in Japan and on our territories in Guam. And Chinese are doing the same with Pakistan, with Cambodia, with Djibouti. So on almost every level, we are in the struggle and even on economic dependence. As I write in the book, a lot of people make this argument that we can't possibly be in a Cold War in China, with China because of all this trade that goes on and we didn't have that in the (11/57)
Soviet Union and actually debunk that. Certainly the magnitude of trade with China is, you know, off the charts in terms of the scale and Farx seeds, anything we had with the Soviet Union. But there was quite a bit of trade with the Soviet Union and very important trade for them in particular, because as I write in the book, virtually the entire oil and gas industry, the fossil fuel industry of the Soviet Union, that financed the regime, that financed the arms race, that financed the guerrilla movements, you know, communist guerrilla movements that they were sponsoring around the world, was running off technology, Western technology that was sold to them. Right. I write about how we had sold them key components for weapons systems throughout the Cold War, how the Europeans provided loans to sustain the regime in exchange for oil and gas, in exchange for wheat that was being exported. So not on the same level as China, but there was quite a bit of trade and dependence that existed even (12/57)
throughout the Cold War. So the two conflicts are very, very similar. And the reason I call Cold War two, and it's Roman numeral two, not two, not two dot oh, this is not a continuation of the first one. It's a different conflict entirely. But it is in a way sort of like World War One and World War Two, different conflicts, different parties involved, different causes of it. But they're both World Wars and these are both Cold Wars and both great Cold Wars. So, you know, the first one is Roman numeral one, the second one is Roman numeral two. You know, those are great points. And I want to delve into some of them in more detail. And I also want to draw out some of the distinctions between the first Cold War and what you call the second Cold War and get your thoughts on that. Before we do that, one more question on how we got here. So looking back, was it the euphoria of the 1990s? That was it primarily that just the the vibes, so to speak, of that decade that led us to believe that the (13/57)
Chinese would become more like us and that they would feel comfortable in a position of subordination to American power? I think it goes further than that. Probably defining a moment of the relationship is actually Tiananmen Square was 1989. Right. So as the Soviet Union was falling apart, as the Berlin Wall was coming down later that year, you had this confrontation with the students in Beijing and the Chinese regime, unlike the regimes in Eastern Europe, chose to brutally suppress it and kill untold number of people. Perhaps we'll never even know the full death toll there. And there was a momentary sort of shock in America of, oh, my God, you know, maybe we got these people wrong, but it lasted all of five seconds. Right. We stopped selling the weapons, which we were doing throughout the 1980s. Just remarkable that we were actually selling blackout helicopters and other weapons platforms to China that they promptly reverse engineered and produce indigenous copies of, which are (14/57)
creating enormous problems for us now in the Pacific. So we stopped doing that. But we basically continued fully trading with them through the 1990s and 2000s, ignoring the fact that this is a country that had no intention of liberalizing, had no intention of really tamping down its anti-Americanism, which was latent, but always there. And, you know, I write in the book that we also got the start of the Cold War one wrong because, you know, many people think it started sort of in 1945, right as the Second World War ended, or, you know, 1946, with the famous speech by Churchill in Fulton, Missouri, talking about an iron curtain that has descended on Eastern Europe. And as I write in the book, I actually think that's wrong. I think the first Cold War began in 1920 as the first hot war between the United States and Russia ended. A lot of Americans don't know this or have forgotten, but we actually fought a war with Russia where we sent American troops to the end of the First World War (15/57)
into Siberia, into the Far East, to intervene in the Russian civil war against the Bolsheviks and try to help the white forces ultimately failed. Of course, the Bolsheviks won. We left, promptly forgot about that conflict in which almost 500 American soldiers have perished in Russia. And the Russians didn't. And I quote their writings at the time saying that the lesson they took away from that intervention is that they're in an existential conflict with the capitalist West and they had to fight to the death. And they started building their military forces, their economy for that fight. And what do we do? We started trading with them. We started to have American and British and German industrialists going over to the Soviet Union, providing the intellectual property, building factories, you know, the Volga Limousines that the Soviet leadership would drive in the parades on Red Square that, you know, everyone had seen videos of where they would inspect the troops and the military (16/57)
systems. Those Volga Limousines came out of a factory that was built by, you know, who Henry Ford, who came over to the Soviet Union, build initially tractor factory. Later that was expanded to an automobile factory, nationalized by the Soviets. Of course, the steel plan in Mariupol. We've talked a lot about the war in Ukraine, the Azov style steel facility, this enormous steel facility that was the last hold out for Ukrainian forces before they were overrun by the Russians in Mariupol in the start of the war. That was an exact copy of a steel plant in Gary, Indiana that was basically brought over by American industrials to build in the Soviet Union to help Stalin industrialize this country. And there are so many numerous examples of that where we were at literally helping their economy throughout the 1920s, 1930s at the same time as they were doing what? Stealing intellectual property. Not through cyber, of course, cyber didn't exist, but through traditional means. The Chinese scaled (17/57)
that up massively, of course, including in cyber. But the similarities between the two conflict are numerous. And just as in the first Cold War, I believe the second Cold War started a lot earlier than we realized. It didn't start with a Trump tariff war of 2017, 2018. It began much earlier, I think in potentially 70s, 80s, could be even earlier, where the Chinese, you look at their writings, were focused on this conflict, were focused on taking Taiwan. And we really ignored it and pretended that the problem didn't exist. And now the chickens are coming to roost. So a strategic ambiguity, an example of an expedient policy solution that's now coming back to bite us, the decision to try and walk a middle path between. Strategic ambiguity is interesting. And I write about the sepidosa in the 1970s, which I think is widely misunderstood. This whole Nixon Kissinger opening up China that some China hocks believe was a mistake, some people believe that it was a phenomenal move against the (18/57)
Soviet Union. I think that whole episode is widely misunderstood because what happened there, and I think it was the right move by Nixon Kissinger is they went over to China. They came up with this concept of strategic ambiguity on Taiwan, this phrasing that we used to this day of the one China policy, which means that we acknowledge and we use the word acknowledge. We do not accept, we do not recognize, but we acknowledge that people in Taiwan and China believe there is one China. That is it. That is our entire policy and which does not recognize that Taiwan is a part of China or China is a part of Taiwan, as was for many years that the feeling on Taiwan, it just acknowledges that there are people that feel that way. Right. So it was brilliant phrasing that gave the Chinese a pretense that we support their position when in reality we did nothing of the sort. Right. And what we got out of that out of that statement is the Soviet Union getting deeply scared by this growing alignment (19/57)
between the United States and China in 1972, which Kissinger very brilliantly leveraged immediately. Almost as soon as he left Beijing, what did he do? He turned around and flew to Moscow to meet with Brezhnev and to strike a detente deal with the Soviet Union. Mao, in fact, was livid. He thought he was completely snuckered by Kissinger. He talked about how this is a duplicitous man that can be trusted. So funny because now, of course, he's been heralded as this great friend of China. But at the time, Mao was absolutely astonished that he would be betrayed in this way, where he thought that they were building a partnership with America against the Soviet Union. China had just fought a border conflict with the Soviet Union in 1969. What does Kissinger do? He leverages that and improves the relationship with the Soviet Union and doesn't actually pay China anything. This is the mistake that people make, that China was not opened up by Nixon and Kissinger. It was not recognized. The trade (20/57)
did not open. We did not withdraw from Taiwan until 1979, which was not Kissinger and Nixon. It was Carter and Brzezinski that decided to pay for the improved relationship with China that Kissinger and Nixon secured, pay years later, seven years later, Kissinger throughout his time, both in the Nixon administration and the Ford administration kept pushing the Chinese off because they kept saying, well, when are you going to withdraw from Taiwan? When are you going to recognize us? And he was like, just wait, just wait, we'll get to it. Right. And Brzezinski and Carter come in and they say, why don't we pay them? Even though we've already secured the price, which was the detente with the Soviet Union, why don't we open up China? We draw from Taiwan, recognize China, and we are where we are today because of that fateful decision for which we really, except for the economic benefit, then I don't want to underestimate them. They were certainly significant to our economy, but from a (21/57)
national security perspective, we paid a huge price for it. We really got nothing for it because by that point in 1979, the Soviet Union and China were already reconciling. So that period of tensions was diminishing. In fact, a few years later, under Gorbachev, they would already start to rebuild their relationships to a great extent and the time was failing because Soviet Union at that point invaded Afghanistan. So the whole landscape was changing from what it was like in 1972 that Kissinger and Nixon leveraged. And I think it was a huge mistake by Carter and Brzezinski to actually open up China. We draw from Taiwan. And in fact, most of our problems, we can talk about this with regards to Taiwan's defense stem from that critical decision of 1979. What's interesting is that Carter and Brzezinski also armed the Mujahideen, which came back to bite the Americans. I mean, hindsight is always 2020, but- That was more on Reagan and fairness, but yes. Well, what's interesting about that is (22/57)
it brings up 9-11. So to bring it back to how we got here, the Bush administration, the second Bush administration, Bush W, the son, came into office with an intention to focus on China. And like is often the case, intentions are assaulted by reality. You get punched in the face, your game plan goes out, you change. How important was 9-11 in determining where we are today? And how do you think American foreign policy would have been different and the challenges that we would face today would be different had that not occurred? Yeah, the counterfactual is always really hard, right? We don't know what path history would have taken, but we do have some indications. And people have forgotten this, but just as President Bush, the junior, came into office, we had an enormous confrontation with China, right? They shot down effectively, well, it didn't shoot down, but basically forced down one of our spy planes in international waters that landed in Hainan Island in China, where they basically (23/57)
held the crew hostage and took all the equipment from that plane, reverse engineered it later on, which was a big problem. So we had this incredible tension with China in April of 2021, months before 9-11, of course. And it ultimately got resolved, but there was a lot of anti-China feeling coming into the Bush administration that was completely put on the back burner as 9-11 occurred and preoccupied us for the next 15 years plus as we pursued this war on terrorists. So I do think that 9-11 absolutely distracted us. I mean, it was obviously a huge conflict and we had to respond to it, but we dropped our eye of the ball. I think there was a feeling of the Bush administration that we were all now, the whole world was now united against terrorism. It was an attempt, of course, to mend the relationships with Russia. He famously said he looked into Putin's eyes and saw his soul, and the same thing was happening with China, and they got both of these wrong. Yeah. Well, let's talk a little bit (24/57)
about Russia because I've always felt, I mean, at least as far back as the debate that Romney had with Obama when Romney identified Russia as being our number one strategic enemy, I've long felt that we lost an opportunity to build a sustainable peace with post-Soviet Russia. Now, maybe that's again kind of bias looking back, and then in fact, the same logic about an inevitable break with China would hold for Russia because of the size of the country, because of the deep sense of nationalism and play something that you talk about in the book. I'm curious how you see this. To what degree are American foreign policy makers responsible? Obviously, they're not as responsible as the everything is America's fault people try to make it out to be, but how responsible are American foreign policy makers for the situation that we find ourselves in with Russia today, which I feel like didn't have to be the case, and we could have had a much more constructive relationship that actually would help (25/57)
the larger framing of America's pivot towards Asia and the focus on China. You know, I think there was always an inevitable conflict between our values and our interests with regards to Russia. Here's the fundamental issue. I actually believe, and I write in the book, that Putin did not set out to be this anti-Western, anti-Americanist that he is today. I actually think that during the early years of the Bush administration, the late period under Clinton, when he had just taken power, he was interested in better relationships with the United States, with Europe on his terms. So he was actually the first leader to call Bush after 9-11 to express his condolences and to actually provide assistance to us in Afghanistan. They provide us maps from the Soviet era of Afghanistan, which we really had very limited intelligence on. They provide us with a route to supply our forces through Central Asia. If it weren't for them, that would have been particularly in the early days, very, very (26/57)
difficult for us. But what he thought he would gain from providing that help is for basically the United States to butt out of what is viewed as his region, Ukraine, Central Asia, the Caucasus, and that he would basically be allowed to do whatever he wanted in a sphere of influence. And he was shocked in 2004 when the Ukrainians revolted against the corrupt election of a pro-Russian candidate in 2004 and launched the first revolution, the Orange Revolution, that brought in the Yushin Co-Government that was more pro-Western. He was convinced that that was a CIA plot, that this was Western interference in his near-broad, which of course was not the case, but we rhetorically certainly supported the pro-democratic movement in Ukraine, gave Ukrainians the new Ukrainian president, a platform in the United States, he came over to see Bush and the like. Putin saw that all as anti-Russian moves. And you could say that was a mistake, but it was also consistent with our values, where we are (27/57)
supporting self-determination of free people to choose their own leadership, we are anti-corruption. So I do think that it was always inevitable that we would face that confrontation of values versus interests. Maybe you could say sort of in the Kissinger real politic mindset that Ukraine didn't matter, that the Caucasus didn't matter, Central Asia didn't matter, leave them all to be controlled and occupied by Russia and will focus on other areas. I think it's inconsistent with our values and not really realistic in today's foreign policy. I don't think there's appetite among Republicans or Democrats to do something like that. So I think that Russia was never ours to win, because Putin was always determined, not necessarily on world domination, confrontation with the West, but domination of his near-broad and reconstitution of the Russian Empire. And that was always going to bring us into a conflict like this. So I don't want to get stuck on this point, but I guess it depends on how (28/57)
you want to define meddling by the United States, because it's not like we have a department of meddling and there's a clearly defined paper trail of what's going on. The US uses NGOs, uses private consultants as part of influence operations in other countries. Other countries are doing it to us, we're doing it to them. So I do think that played some role in this. But what I feel like is sort of missed here, and then we'll move past Russia and get into comparison of the modern Cold War, is Putin put that essay out the summer before he invaded Ukraine. What was the title of that essay again on something larger Russia and Ukraine? The historical. And he also did an interview with Tucker Carlson recently. And what's interesting, and I'm someone who before the invasion of Ukraine had done episodes with folks like my former professor of Soviet history, Stephen Cohen, with John Meersheimer, who became more popular after the invasion, and was critical about some aspects of American foreign (29/57)
policy. I was familiar with George Cannon's warnings after the fall of the Soviet Union about NATO expansion. And yet what's interesting for me is that I've almost come to the opposite conclusion, which is that I feel like I've seen more evidence to suggest that this was not about NATO. And in fact, Putin had two great opportunities to make the point. And he hardly mentions NATO in his interview with Tucker. It was interesting because Tucker kept asking about it and he kept ignoring it, right? I do think, look, I think it's more nuanced than that. I think the Meersheimer view, which I fundamentally disagree with, that was only about NATO expansion is wrong. But the view of the other side that NATO expansion had nothing to do with it is also wrong. I think it contributed. You know, I write in the book that there are five reasons why I became convinced, and we had the conversation on the podcast back in that time, in December of 2021, three months before the Swar, that Putin was going to (30/57)
launch this invasion before the end of that winter. And those five reasons had to do with first and foremost history. His distorted view of history that Ukraine was never a country always belonged to Russia. And he went on for like 40 minutes with Carlson talking about that, clearly motivating, motivating factor. Second was destiny. He felt that it was his destiny and Russia's destiny to rebuild the old Russian Empire, not necessarily the Soviet Union, but the old Russian Empire. And that there was an ego reason as well, because he wanted to do it on his watch. It was very clear. The reason why the war was launched when it was is because he was turning 70, he was starting to think about his own mortality, initially, at least succession of power. And he wanted to have this accomplishment for his legacy, right? That he didn't want someone else to do it. He wanted him to do it and go into the history books as the new Peter the Great that rebuild at least part of the Russian Empire. But (31/57)
there was also reasons of security and geography, which can't be ignored, right? Wars aren't started for usually a single reason. There's multitude of reasons to go into it. And security and geography do play a role. The Russians have always been concerned about NATO expansion going back to Jeltsin's times. It's not just a Putin thing. And we can talk till we're blue in the face that NATO is a defensive alliance, but they certainly don't view it that way. And, you know, they look at coastal. It gives enough offensive operations after the end of the Cold War in 911. Exactly. Exactly. Well, Kosovo is probably the most clear example of that. But also geography, you know, Ukraine has always been looked at as a buffer state by Russia. Perhaps you could argue unfairly because, you know, it's not their state to be a buffer. But nevertheless, throughout history, Russia has experienced numerous invasions from Europe, Hitler, to Tonic Knights, Napoleon, Poles, and many of them have gone through (32/57)
Ukraine to reach Moscow. And the distances between Eastern Ukraine and Moscow are not very, very long. In fact, we got an example of that just last year with the Prugoshnaya Mutiny, right, where Wagner and Prugoshn left their training camps in Eastern Ukraine and occupied Ukraine and traveled to Moscow. And within about half a day, we're on the outskirts of Moscow, right? That is not something that the Russians do not pay any attention to how short those distances are. And in fact, you have drones from Ukraine reaching Moscow now on a regular basis. So they're cutely aware of that vulnerability. Again, I do not believe it is a singular reason. I don't believe it's even the most important reason. I think the history and destiny and ego played a bigger role. But to say that it had no role whatsoever is incorrect as well. What was Prugoshn thinking when he did that? I mean, do we have some idea? Is there a firm conclusion now about what that was ultimately about? And because it eventually (33/57)
led to his demise. He crashed in a not so coincident plane crash with some other Wagner forces not too long after that. Yeah, you know, I wrote a piece on this in foreign policy of what caused his death, which I actually don't think was a direct consequences of the mutiny, obviously followed from the mutiny. Look, the mutiny was all about trying to pressure Putin to replace Shoryugin Gerasimov. It was a very tactical thing. He got increasingly upset that Wagner was getting marginalized in this war, that he felt probably rightly he had contributed enormously to, you know, he took Bakhmut at great cost to the Wagner troops. They lost tens of thousands of people in that fight in these incredibly reckless and insane waves of prisoners that were being thrown against Ukrainian fire and artillery. And, you know, he was getting starved of shells and his empire was getting muscled in on in Africa. So it was a both a wartime decision making that he was opposed to, but also the conflict with (34/57)
Shoryugin that he's had for years now about the business conflicts that they've had. And this was an attempt to try to pressure Putin to get rid of these two guys. And it was a really dumb decision because he I think felt he was way more powerful than he really was. As we saw, Putin's reaction was the exact opposite. Shoryugin Gerasimov is still there and Progosin is no longer with us. But I do think that his death was not a direct consequence of the mutiny. I actually do think that Putin pardoned him. He did not view him in the same way that he viewed, for example, Navalny or other opponents of the regime. He understood that this was not a coup, that this was not an attempt to displace him. He still felt incredibly offended, incredibly angry that someone would confront him this way and try to pressure him in this outrageous way. But I do think that he pardoned him. I do think that there was a price for that pardon, which is that now anything that's yours is going to be mine. And you (35/57)
are going to lose your empire in Africa. You are going to lose Wagner. I'm going to take it all away from you. You can keep your miserable life and go sip mojitos in Jamaica or the Maldives, but you are done. And Progosin did not get that message. So for two months, he met with Putin. He was straddling around St. Petersburg, being very public as opposed to kind of disappearing into the ether. He kept putting out videos. And most importantly, he kept resisting the GRU takeover of the Wagner businesses and militias in Africa, where the mining interests and the support of various dictators in Africa that Wagner was involved in, the GRU was basically a time to take over and telling these leaders in Africa that we are not going to be doing business directly. You don't need to deal with Progosin. And literally, as soon as they would leave, Progosin would fly in and say, no, no, ignore them. I'm still here. We're still going to do business. And Putin was looking at the saying, are you kidding (36/57)
me? I just gave you your life. You were going to pay price for it, and now you're refusing to pay. Well, I can forgive you once. I can't forgive you a second time. You had a funny tweet that you put out, if I remember correctly, something along the lines of like, this should be a Harvard Business School case study for entrepreneurial zeal and determination, because ultimately, Progosin's coup itself was driven by a desire to save his company, to maintain control. It was. It was. I mean, it was a business dispute, like many business disputes in Russia, they ended badly. And it ultimately ended pretty badly for getting Progosin, obviously. So let's move now back to this comparison between Cold War I and Cold War II. So the Cold War between the United States and the Soviet Union emerged out of a hot war that created a power vacuum in what was at the time the center of global power, the European continent. The equivalent today is Asia. But what made that war cold wasn't just the mutual (37/57)
possession of nuclear weapons, which the Soviets didn't acquire until 1949, but it was also the costs imposed by World War II, the human suffering that it imposed, and the surrender of Japan, and the signing of the peace treaties, the Paris peace treaties, and the desire to maintain that hard one piece. How important are those contextual differences, the fact that the Cold Warriors of the 50s and 60s and their fellow countrymen and women had recently endured these unspeakable traumas, whereas the equivalent, quote, Cold Warriors of today are facing a much more theoretical threat? Oh, I think it's hugely important and makes Cold War II potentially more dangerous than Cold War I, because whether you look at the Cuban Missile Crisis or the West Berlin Crisis that preceded it the year earlier, you had two leaders at the time, Khrushchev and Kennedy, that have gone through Cold War, not Cold War, but World War II, and Khrushchev's case had witnessed unimaginable destruction and death. He (38/57)
was at Stalingrad, he was there at Stalingrad's side throughout much of that war. Kennedy, of course, fought in the Pacific and was wounded and lost some crew members on his PT boat. So they knew what war was like and wanted to avoid it at all costs. In fact, my good friend Sergey Ratchengo, a Cold War historian that was written extensively on the Cuban Missile Crisis, writes about how when Khrushchev decided to relents and withdraw missiles from Cuba, Castro in Cuba was unbelievably livid at this and was basically encouraged him to start a nuclear war. And Khrushchev was shocked and he was like, oh, my God, this guy's insane. I'm not starting nuclear war over Cuba, because I'm not going to participate in destruction of the civilization. Today you have leadership both in China and the United States, frankly, that has not gone through that experience. And in China in particular, they have not fought a war since 1979, a war that didn't go so well for them with Vietnam. And we, of course, (39/57)
have fought wars, but not anything on the scale of World War II since time as well. And, you know, I think there's too much cavalier talk about war that happens on both sides in both countries these days. And I do worry, and this book really is the ringing of the alarm bells, if you will, about us marching into this conflict that could be absolutely devastating, right? Two nuclear powers, you don't even know if that conflict would stay conventional. But even if it does the destruction that would be inflicted on lives, on infrastructure, on the world economy, it's just absolutely unimaginable. And, you know, as I said, I was early on, one of the first ones to predict that Putin was going to invade Ukraine. And, unfortunately, it was too late to deter that conflict. I don't think it's too late to deter this coming conflict with China. I think it is preventable, but we're running out of time. When you say it's preventable, you mean a quote, kinetic conflict, something that leads to (40/57)
casualties. Correct. We're going to keep the Cold War. The Cold War is going to remain with us, but it doesn't ever need to go hot. And I worry a great deal that if China moves on Taiwan, that this would mean either a devastating conflict or really the end of American superpower, eventual end of American superpower, because if China takes Taiwan, I think most people don't appreciate this. And I talk about this extensively in the book, the importance of Taiwan to both China and the United States. And it's not just about chips. Reducing Taiwan to chips is actually insulting to the Taiwanese and is a misunderstanding of the geopolitics of that region. But China taking Taiwan would lead to their hegemony in Asia. And hegemony in Asia in the most important region of the world, 50% of the world's GDP, much of the growth and most of the supply chains would lead to their increasing dominance around the world. And it would draw of American power from the world, which would impact us (41/57)
economically, would impact our national security, and something that we've always fought against throughout our history. So the stakes here are incredibly high. So all these are all things that we're going to discuss. I want to push back against the conclusion that you draw around the Cold Warriors of the First Cold War and the Cold Warriors of the day, because it's one of, I've also drawn and I'm pushing back against myself here too, because when I look back on that period, I mean, you're completely correct. John Kennedy's experience in World War II and subsequently his experience from the Cuban Missile Crisis terrified Kennedy. I mean, he became a big proponent of peace after that. But at the same time, many of his top generals, as well as the top brass within the CIA, were willing to take enormous risks with respect to instigating a nuclear war. And though I'm less familiar with the equivalent Soviet history, Khrushchev expressed similar concerns about hardliners within his own (42/57)
government in letters to Kennedy. So I don't know to what extent the proximity to and familiarity with war actually made many American policymakers and military planners actually more willing to go to war than the otherwise would, and that it just happened that the civilian leadership that we had was of a different persuasion. I'm curious, what do you think of that counterfactual? No, I think you're right that it wasn't universally shared in either country, but the leadership was key, right? Ultimately, Kennedy ran the show, not the Pentagon. Khrushchev was in charge of this decision making in the Soviet Union. And I think that mattered, right? And I think that it helped bring us back from a devastating nuclear war that could have been a civilization and a nuclear war in those early 1960s. And I'm not sure that we have that type of leadership in either country today. Yeah, that's a great example is when you look at the Trump period with Kim Jong-un. That whole thing was terrifying. I (43/57)
mean, also another small thing just to bring up, I don't know if you saw this, and maybe I sort of overreacted to it, but when Putin invaded Ukraine, I saw a video that was popularly moving around online of like a fake Putin sort of dancing to house music with a giant cake and a big red button. And it was like a really popular video. People sort of like laughing about the prospect of nuclear war. And by the way, we saw that with Ukraine as well, where a number of people were saying, well, by the way, should we really be scared of Russian nuclear weapons? Maybe they don't even work, which I assure you they almost certainly do work. I think the former ambassador to Moscow, didn't the former ambassador to Moscow say something like that? There was somebody who had a previous important position within the government that was making statements like that. There were a lot of people making statements like that. It was rather terrifying. So one more comparison to draw here between Cold War I (44/57)
and II. So I already mentioned the power vacuum that existed in Europe after the end of World War II, which was important. But so was the fact that the USSR was initially seen as a liberator at the time, in the sense that they had played a critical role in defeating the Germans and liberating Eastern Europe from Nazi occupation, which they subsequently occupied. And there were also strong communist sympathies in Europe. For example, the Italian and French Communist parties controlled significant numbers of seats within their respective parliament. So what is the comparable threat that China poses today? Yeah, that's a great question. So I think there are differences certainly between the Soviet Union and China in that regard. The Soviet Union was intent on world revolution, certainly for the first part of the Soviet Union's involvement in the Cold War. I think it diminished significantly towards the later stages. But I don't think that China is on a sort of let's bring communism to the (45/57)
rest of the world war path. I think they are interested in diminishing American power wherever they can, whether it's Africa or Latin America or the Middle East, they're going to take every opportunity to do so. And I think they are interested in building up authoritarian regimes, less democratic regimes that they feel like they can more easily barter with, that they can bribe, that they can make deals with that won't necessarily be in the interest of their populations. And that they are doing increasingly more of, particularly in Africa, there was news stories in recent years of them setting up leadership schools in Africa for future dictators in Africa of how you run a authoritarian country, how you do population surveillance and engage in propaganda and like. And there you do have some similarities with Soviet Union, different scale, different means and goals. But yes, China is interested in, for very selfish reasons, in promoting a model around the world that conflicts with ours. (46/57)
But I don't see that, I don't think that if you have the scenario of China invading Taiwan, that immediately you have sort of an invasion of Japan or Philippines or not even immediately, but almost ever, because invading Japan is a very big deal, right? I mean, it would have been really, really difficult for the United States to invade Japan in 1945, we're dreading that decision, invading today is even tougher. I don't see China doing that. I don't see anyone else doing that. But you don't need to. And that's, I think, the key point is that China will achieve its hegemony in Asia without that invasion. And the analogy you have to think about is really what's happening in Russia's near abroad, right? All these states in Central Asia, in the Caucasus, Armenia, Azerbaijan, Kazakhstan, etc. They're basically being pulled into Russia's sphere of influence, not because they want to be there, but because they have no other choice, right? They're next to this really powerful, huge neighbor (47/57)
that can threaten them, as they're seeing in Ukraine, as they've seen in Georgia. And they have no alternatives, like the United States is far away, there's nothing we can do for them. And China is not interested in getting involved. So they have to accommodate and appease Russia, right? They're a small state sitting next to a big neighbor that is a bully. And that will be the situation in Asia, because if China takes Taiwan, they'll push the US out of the the Western Pacific, our Navy will be all the way back in Guam. It will make things very, very dangerous for us because they'll be able to put submarines on the other side of that Taiwanese coast sensors that will make life incredibly dangerous for the US Navy. And the Japanese, the Koreans, the Filipinos, they will have to make appeasement decisions with regards to China. They're not going to cave on everything, just like, you know, Kazakhstan or Armenia does not cave to everything on Russia, but a lot of things they will. And in (48/57)
fact, this is not a hypothetical. I've had those conversations with senior leaders in Japan and other places where they have told me that regardless of how if China takes Taiwan, whether it's because we don't fight for it, or we fight for it and lose, that will change everything for them. They're not going to tear up our mutual defense treaty or, you know, trade relations with us. But they basically told me, we're going to act as if we now have a new sheriff in our neighborhood, and we're going to have to figure out a way to live with them and accommodate them in a lot greater ways than we do today. And that will have dramatic ramifications for the United States, because if China is setting the rules of global trade, of global security order, particularly in that region, it will decrease our power economically and our national security. No, the analogy of the Caucasus and Central Asia is a good one. Another analogy you draw on the book is Berlin, Berlin and Taiwan. Tell me a little bit (49/57)
about why you think Berlin is a good analogy for what the United States could be facing in the event of a Chinese uncontested invasion of Taiwan. So this is remarkable, right? And during the Cold War history, people focused so much on Cuban Missile Crisis, and it was certainly an incredibly dangerous time, but it was just 13 days in that fateful October of 1962. And what people often forget is the West Berlin crisis that occurred a year earlier in 1961. It occurred right after the meeting between Kennedy and Hushoff, where Kennedy came away convinced that Hushoff was going to invade West Berlin, right? Hushoff was threatening at the time. And Kennedy made the fateful decision that this was going to be an existential issue for the United States. He went on television at the time in that summer and basically told Americans that we are going to fight for West Berlin, this outpost of freedom and democracy surrounded by East Germany and Soviet troops, right? Really, really difficult place (50/57)
to fight for. And he made the case that this was existential to the United States interests, and he warned the American public of a potential for a nuclear war over West Berlin that he was willing to engage in, right? That's how high the stakes were in his mind over West Berlin. And in fact, the ducking cover drills, the bomb shelter mania that we saw in the 1960s due to the threat of nuclear war started from that episode. It didn't start from the 13 days of the Cuban Missile Crisis. It began much earlier. So we managed to deter that invasion right in the book that there's this amazing episode at the end of that summer when Kennedy has woken up and he's been told that the East Germans are building the wall. And he says, thank God, he sighs in relief, right? What a change to 20 years later, President Reagan saying, Mr. Gorbachev tear down this wall and Kennedy celebrates it at the time, because he says, if they're building the wall, they're not invading. And we have just pulled back (51/57)
from the brink of war. And in fact, yes, it was the year later, the Cuban Missile Crisis, which was really an outgrowth of the West Berlin crisis, as we now know. But after that, the relationship between the United States and Soviet Union stabilized, we got to taunt in the 1970s, we pulled back from the brink of war, the Cold War remained. And we had proxy wars in Vietnam, and conflicts in Africa that we supported and they support in Central America and the like. But the dangers of us going to war, and particularly nuclear war, diminished dramatically. And I write in the book that that is the situation with Taiwan, that if we built sort of metaphorical wall across the Taiwan Straits, if we deter the invasion of Taiwan by China, the Cold War will not go away. The conflicts we face with China, economic conflicts and strategic disagreements about the security order that they want to displace will remain. But the threat of war will diminish dramatically. And we can stabilize the (52/57)
relationship, we can potentially even get to a detente that Neil Ferguson talks about. But you can do that as long as this sort of damocles this handover Taiwan, and as China is preparing to take that island by force. So, Dimitri, I'm going to move us to the second hour of this conversation. There's so much more to discuss. I want to drill down a little bit more into the importance of Taiwan, to understand why you think it's so important. And also, I mean, it's obvious here as we're talking that the key is deterrence. Because if we knew it for a fact that US support for Taiwan would lead to a nuclear exchange, we would just let the Chinese have it. But we don't know that. And so we're trying to do our best to deter that possibility. I assume you agree with that. I mean, you really have three possibilities here, right? And only three. That A, China's deterred from invasion, the Goldilocks scenario, or China is not deterred, and they move forward, and they either lose or they win. And I (53/57)
would argue that those two latter alternatives are going to be an absolute disaster for us, for China, for Taiwan, for the world, right? We're going to lose. Obviously, it's better to win. But even if they lose, I mean, it's better for us to win. But even if the Chinese lose the invasion, we win, it's going to be an absolute disaster in terms of life's loss, destruction of the world economy, decimation of the US Navy in that region, really, really terrible outcome. So we have to do whatever it takes to make sure they never even try. All right, in the book that we have to make sure our policy needs to be to make sure that President Xi is waking up every single day. And as he's looking off in the mirror, he's saying today is not the day. Yeah. I mean, that's a really great way of thinking about it. And this is something that, to go back to the point about numbers two and three being unacceptable, this is something that John F. Kennedy and Khrushchev understood, that the consequences of (54/57)
fighting a nuclear war are so devastating that it should just never even come as a possibility. You should just do everything you can to remove that from happening. So this is something I want to talk about. I also want to talk about what it is that we're fighting for here, because I feel like a lot of Americans and myself included are a little confused about that. And how important is it that we communicate that clearly in an incredible way, not just to our allies, but also to our citizens, because in America today, I grew up in America where the vast majority of Americans did not want to burn down the system. That's no longer true. There is a significant number of people who believe that the system is so rotten and corrupt that they just want to burn it the F down. This is a rallying cry. And this is not a place from which to project strength. And I feel like we have not done enough to strengthen our own country and to build a coalition of people that understand and support the kind (55/57)
of foreign policy that we're describing here. So this is something else I want to talk about. And perhaps we'll also have a chance to talk about some of the contemporary issues that are happening in the world today. The most important issue right now, for example, is what's going on between Israel and Iran. 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 Dimitri, 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. Dimitri, stick around. We're going to move the rest of our conversation onto the premium feed. If you want (56/57)
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 cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
David Rosenberg Betting Against the ‘Powell Put’ and the Return of the 'Risk-Off' Trade #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 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. And remember, if you listen to the show on your Apple Podcast app, 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 Demetri 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 (1/57)
but tomorrow and better able to predict what happens next. My guest this week is David Rosenberg, Chief Economist and Strategist for Glusken Chef, a wealth management firm based out of Toronto, Canada. David and I recorded this episode only hours after the FOMC concluded its two-day meeting this past Wednesday, where the committee decided to keep the Fed funds rate unchanged but strongly signaled a willingness to begin easing, possibly as soon as next month. It is David's conviction that the Federal Reserve has over tightened monetary policy during this cycle, possibly by as much as 100 basis points for rate hikes. And that J-PAL and the Board of Governors of the Fed are worried that they may have precipitated the bursting of another bubble, only this time it isn't in housing or consumer credit but rather in the corporate bond market, where multinational corporations have feasted on the issuance of trillions of dollars of new debt used to finance mergers, acquisitions, and share (2/57)
buybacks, all while simultaneously cutting back on the type of capital investment needed to service their debts and grow their businesses. The last 10 years have been a great time for stocks fueled by a bonanza of free money coupled with an implicit guarantee by the Fed that it would support asset prices at all costs. But the question has always lingered, what will happen as the Fed continues to raise interest rates, normalize its balance sheet, and tighten monetary policy? Is this a new paradigm of financialization where fundamentals no longer matter and perpetual liquidity is the name of the game? Or is the global economy's increased reliance on debt financing in order to drive earnings and levitate asset prices no more sustainable today than it has been at any prior point in history? Is this time truly different? As always, subscribers to our Hidden Forces Patreon page can access the overtime to this week's episode, which includes a discussion about how David is positioning himself (3/57)
and his clients for the likelihood of a recession and return to bear market territory for stocks and commodities. We discussed the US dollar, precious metals, currencies, defensive stocks, as well as why David believes that we're going to see yields for 10-year treasuries drop below 1% during the coming downturn. And with that, let's get right into this week's episode. David Rosenberg, welcome to Hidden Forces. Thanks for inviting me on. It's great having you here. How many days are you in New York this time? Oh, well, this particular time I'm here for a couple of days, but we have quite a few clients, a Gluskin chef in the New York area, and invariably I'm asked to give speeches at different events. So I'm probably in New York every four to six weeks. So when people ask me, because I lived here from 02 to 09 when I was Merrill's chief economist, so people ask me to this day, do I miss New York? But I'm here so often that I don't get a chance to. That's interesting. You're from (4/57)
Toronto, right? From Toronto and been back there for the past 10 years. And are you a Raptor fan? Are you a happy Raptor fan? Well, I'm actually a Dallas Mavericks fan. I can explain that, but I hopped on the Raptor bandwagon with full force I might add during the series against the 76ers. How interesting. Yeah, so you think about it as Toronto's team, but it was really Canada's team. What was incredible were all these Jurassic parks and all these different cities, some of them with 20,000 people going crazy at these basketball games. You think of Toronto or Canada as hockey, but basketball is very popular. So David, you're here for the FOMC meeting for quarterbacking, not Monday morning, Wednesday afternoon quarterbacking. Just for those listeners who aren't familiar with you, you're the chief economist and strategist at Gluckenshef and you've been doing that since how long? When did you start the firm? I actually, it's been 10 years and a month. After I left Merrill in May of 09, I (5/57)
was at Merrill combined almost 10 years as well, the first three years in Toronto and the last seven in New York. But been doing this gig at Gluckenshef now for the better part of the past decade. So what do you think? Today I watched, I assume you did, maybe you did, maybe you didn't. I watched the post-Pres Conference, the J-PAL press conference, and we got the right decision. No change in the rate, but the word patience was taken out of the statement for forward guidance and there seems to be some sense that they're taking a more accommodative stance, but that's pretty much it. I mean, what did you get out of this? Well look, the first pivot at the beginning of the year was Powell basically walking back the rate hikes that the Fed was pledging in December when they actually hiked interest rates, hard to believe that they did it when you look at what's happened ever since. Today was just going a step further. The Fed historically is a very incremental institution. And so today was (6/57)
basically, in the old days, we would have called this shifting to an easing bias. So they shifted to basically a directive that's saying that our next move was likely to cut interest rates. And I would refer to this basically as just extra guidance in that direction. The bottom line, I mean, as you mentioned, a no big reaction one way or the other. Well, I guess if anything, the equity market liked it and so did the bond market, but a lot of this was already priced in. And I think you can almost argue that whether you're a policy hawk or a policy dove or you see the Fed on hold indefinitely or you see the Fed cutting interest rates in July, there's really something in the statement and something in the dot plots for everybody today to hang their hat on. So the market's fully priced in a 25 basis point cut in July, right? We're almost there, yeah, absolutely. And basically at least two cuts by the end of the year. But July seems to be baked in the cake. And frankly, I don't have a (7/57)
problem with that. I think the economy is weaker than is generally accepted. And I think that there's a lot of folks in the Fed getting increasingly frustrated over this constant undershoot of the inflation target. And that's their cover to cut interest rates. I would actually just say that based on my analysis, the Fed has over tightened the cycle by three to four hikes. So I would actually say that you got to walk back three or four of these moves just to get back to neutral. I think the Fed is actually on the restrictive side. One of the areas I would have to admit I agree with President Trump on, I might handle communication a little differently. But on the Fed's restrictiveness, you see, I don't think the Fed is at neutral. I think the Fed is actually quite tight. So you're thinking 75 to 100 basis points at least and that they should have already been cutting by now. Well, 100%. I would say actually there's two scenarios here. And if you look historically, here's what happens. (8/57)
Even in a soft landing where the economy slows, the Fed cuts rates as an insurance move and it's successful in forestalling a recession, the Fed never goes once or twice. The Fed goes three times in a soft landing scenario. If this becomes a recession, which is my forecast, historically the Fed cuts the funds rate almost 500 basis points. You could see that if this is something more than just a soft landing, if this is something more than just, oh well, trade concerns or tariffs, but something that's classically late cycle, inverted yield curve, following a Fed tightening cycle, if there's something more to this than just trade and we morph into a recession, then the funds rate is going back to zero. And I would hazard to say back to zero in a pretty big hurry. Do you think that we're already in recession? I think it's a pretty close call. I know that people will say, well, how can that be? We had the real GDP of 3% in the first quarter. Atlanta Fed's taking their number to 2% in the (9/57)
second quarter. Of course, we just had those decent retail sales numbers. People will be surprised to know that the recession call does not come down to GDP. GDP more often than not tends to decline during a recession, but the final arbiters of the recession call or the expansion call is the National Bureau of Economic Research. And I say this with a tip of the hat to Martin Feldstein, who headed that organization for many years, who passed away last week. But there's four basic tenets to the cycle. And guess what? GDP is not one of them. People seem to think that back to back quarters of negative GDP defines a recession. Actually not true. That's a Wall Street colloquial. You'll find plenty of recessions where there are not back to back quarters of negative GDP. It just so happens that GDP is soft, but it is even after decline. If you go back to 2001, where we actually had a recession from March to November of that year, you'd say, where was the recession looking at GDP? Four basic (10/57)
tenets, real business sales that's manufacturing and trade, industrial production, employment, and real personal income excluding government transfers. And three of those four, employment, I'm talking about the Household Survey, which is more accurate than the payroll survey at turning points in the economy in both directions. First employment peaked in December. Nobody seems to talk about the fact that it's down roughly 200,000 year to date all in full time jobs. That doesn't seem to get a lot of play. And in fact, I was surprised that in the press statement, the Fed actually talked about the strong labor market. It's not all about a 3.6% unemployment rate. There's been almost 200,000 household jobs lost this year. Again, I don't see many economists talking about that particular metric. Industrial production peaked in December. It's down at over a 2% annual rate so far this year. We're on the precipice of probably seeing for the first time in three years a sub 50 ISM reading, but (11/57)
industrial production is already in a recession. Thirdly, we have real organic personal income. That peaked in December. It's actually down at a 1.5% annual rate so far this year. The only thing that's really hanging on is real sales. And of course, the retail sales number gave that boost last month. But I would say that the sort of recession I'm defining here is a capital spending led recession. It's not about the consumer this time. That was the last war. It's not about housing, which has already been in a five quarter recession. This is more like a 2001, 2002, what I would refer to as a mild cat-backs led recession. And I think that those are coming out in the capital intention surveys that we're seeing. It's certainly coming out in core cat-backs orders, which are negative 3.5% over the past six months, which is telling you that corporate spending in the real economy is going to be weak for the next several quarters. I go back to the first quarter of this year. People talk about (12/57)
the three-hand only real GDP growth. Of course, you can manufacture that with a surging soybean exports and lower imports and bulleted inventories. But the point I'll make is that the numbers that stuck out to me in the first quarter was the negative 1.1 on capital spending. Are we seeing a lot of slack? Exist capacity? Well not in the labor market. We've hit the wall on the labor market. Industrial absolutely. You can see it in the declining cap U-rate. Right. I mean, it might have ticked up last month with the industrial production number, but the cap U-rate has been declining. And that is reinforcing a view of slack in the industrial sector. And of course, alongside that decelerating pricing power, which is coming through in the profit numbers, which have been steadily revised this year, Q1, Q2, Q3. You mentioned Chairman Powell's point about there being a tight labor market. He said that in the context of consumer spending coming back in the second quarter. And that was part of a (13/57)
larger point he made that he said is a complicated picture, that some of these indicators of consumer spending and a tight labor market suggest that the economy is doing well, but then manufacturing, investment, trade have been weaker. And you're focusing more on the second half of that, mainly the investment. Well, look. And what role does the trade, whatever you want to call it, trade war, trade spat, trade, whatever, play in all of this? It's an added complication, but I was calling for this long before the trade skirmish became a trade battle. Look, we've had 10 recessions in the post-World War II experience. And so the business cycle is the business cycle at the end and then they begin. And the reality is that no two recessions are ever quite the same. So in the last cycle, I frankly wasn't looking at capital goods spending surveys. I was not looking at core cat-backed orders numbers. I was not looking at business sentiment numbers because that's not where the bubble was. That (14/57)
wasn't the root cause of the angst that was going to cause the economy to tip over. The stuff I would be looking at in the last cycle would have been more consumer-oriented, housing-oriented, the stresses in the mortgage market, house prices, so on and so forth. Like I said before, this has more of a feel of 2001, 2002. And investment led boom. Right. Well, not everything goes down together in a recession, just as not everything goes up together in an expansion. So you'd be telling me, well, the economy seems pretty strong and that housing has been in contraction mode for five straight quarters. So there's been other segments of the economy that have offset that, but not everything goes up together in an expansion. Not everything goes down together in a recession. But you see, once you shock one of these components of GDP with a lag, it starts to affect other parts. There is a whole multiplier impact that goes on. It's just like the human body. You affect one part, ultimately, with a (15/57)
lag. It affects other parts of your body. GDP is a body called the economy. So I think that what happened this cycle was the bubble is not on household balance sheets. The bubble's not in the banks. The bubble is on corporate balance sheets. And what people will say is they'll say, well, but there's no excess capital investment. And that's true, like in the dot-com era, massive excess capacity. Dark bandwidth. Yeah. And so we wrapped the world many times over with fiber optics. When people say, oh, well, there's no excesses because there was not a major excessive capital investment cycle that created all this excess capacity, totally misses the point. The bubble is on corporate balance sheets. And the money didn't go into the real economy. It went into share buybacks. You see, this is the perfect symmetry. The symmetry is this. The symmetry is called $4 trillion. $4 trillion of QE equaled $4 trillion of corporate bond issuance, equaled $4 trillion of share buybacks. This is one of the (16/57)
weakest capital spending cycles on record. In fact, you have to think to yourself, how is it with interest rates this low for this long, that when you're a typical CEO of a company, what could possibly have been your ex-anti expected rate of return on invested capital in your company, boring at such low rates? No, instead, I'm not going to invest organically in my company. I'm actually going to go buy back my stock. And this really comes down to how perverse the incentive system is because CEOs get paid on what? They get paid on earnings per share. So this is the mother of all share buyback cycles. So that's where the bubble is. And I would say that you can argue that at least six or 700 points on the S&P 500 have come just from the buybacks this cycle. This certainly hasn't come strictly from dollar billions of earnings, but the fact that the share count in the S&P 500 has been taken down to a two decade low. What about corporate debt too, which has been used in support of that as (17/57)
well? Well, that's what I'm talking about. So the $4 trillion of debt issued to buy back $4 trillion of stock. And you see what the Fed did this cycle was they took out of quantitative easing, they took $4 trillion of safe assets out of the system. And they left a vacuum for the corporate sector to issue this debt. And this is why it's not about the banks. The banks became regular utilities and were constrained this cycle. Right, exactly. They went to the public. So they were relying on the bond market to fund the corporates. And so right now we have the most stretched corporate balance sheets on record. The corporate debt to GDP ratios is over 50%. You look at corporate debt to sales, corporate debt to deep, but you can normalize corporate debt by any measure you want. You can even strip out the cash, which of course is concentrated among a few companies. The story doesn't change. We have the most over leveraged corporate sector in recorded history. And so the point I was making is (18/57)
that because of that, we also have the junkiest investment grade bond market. The investment grade market says a $6 trillion market. Half of that is in triple Bs. Triple Bs right now comprise half of the investment grade market. And they're in the precipice if they get downgraded to be pushed into junk bonds. What's very interesting is that a third of this triple B slice already has a debt to deep ratio that is higher than it is in the entire high yield universe. So they already have a junk balance sheet, but they're not rated as junk yet. So you come out of a fat tightening cycle. And that's a direct consequence of the search for yield. Yeah, it's a direct consequence from the search for yield on the part of investors because they soaked up this debt. But then again, this is a liability on corporate balance sheets. This is going to be the year where they're going to have to meet their debt servicing schedule. This is the first year or five years where we have a tsunami of maturities. (19/57)
You know, three quarters of the corporate market rolls over the next five years starting this year. So this is where the rubber meets the road. So you're either going to stay current on your interest payments or you're going to default or get downgraded coming out of a fat tightening cycle. And this was a very pernicious one, by the way. The fat hasn't even done anything yet except just talk. When you count in quantitative tightening and then you count in the nine rate hikes, it's as if the fat tightened policy by about 375 basis points this cycle. That's very significant. Taking into account the quantitative tightening. Taking into account the balance sheet. The balance sheet. That's the de facto equivalent tightening more often than not with a lag. And those lags can be anywhere from 12 to 36 months. You know, I tend to find, I speak to people that, you know, everybody lives in the here and now, they can't see the tip of their nose. And if the recession is not steering in the face, (20/57)
then it's not going to happen. And I remember that, you know, back in 1989, 80, 80 to nine, the fat tightened, people thought, you know, we're going to extend the cycle. Recessions 1990. Because of the lag. Because of the lag. The lags are between 12 and 36 months. People tend to forget about that. People thought we're going to be just fine. The fat tightened in 99 and 2000. Next thing you know, March of 01, we're in a recession. The fat tightened 0405 and 06. And nobody's a recession that starts in the end of 07. So and the thing is too, when you come off these dramatic easing cycles and remember, we had seven years of free money in this country, you're invariably going to get the bubble. And as Woodward and Bernstein were told by Deepthroat to follow the money, after these prolonged easing cycles, we have to follow the bubble. The bubble this time is not in the mortgage market. The bubble this time is not in the housing market. The bubble this time is not in the banks. It's in the (21/57)
non banks. It's on non financial corporate balance sheets. And that's where the bubble is. The fact that it didn't go into capital investment to me as a material, it went under stock buyback. It's very interesting. And you can only imagine what happens if that train starts to move the other direction. Now I said before, there's no get a jail free card after an extended fat tightening cycle, especially one that was as pernicious as what we came off of. And now it's finished. But now we're in this no man's land where the fed's on hold. And the fed will eventually probably by the end of next month start to cut interest rates. But just remember that the fed started cutting interest rates in September of 2007. And the recession started two months later. The fed started cutting interest rates. And the fed went 50 basis points on January 3rd of 2001. People have to remember this. History matters. They cut rates 50 basis points on the first business day of the year on January of 2001. And the (22/57)
recession started two months later. In March. So it's the case of be careful what you wish for. When the fed is forced to cut interest rates, it's almost like a mea culpa, an admission that we went too far. Now look, maybe we'll look into a soft landing where the economy just meanders and slows and doesn't ultimately contract. I give that 15% odds. There's no such thing as a sure thing. But I think a recession has 85% odds. I think it's the overwhelming base case. But I'm not going to say that it's the only case. But the point I'm making is that companies are going to have a decision to make. And the decision is going to be to cut back on CapEx to stay current in terms of their debt obligations. And you're seeing that across all the surveys. You're seeing that across the data. And you're seeing that across leading indicators. Are we seeing companies rush to refinance now? Have we seen anything like that? I haven't seen anything towards a major refinancing boom. But what I am seeing (23/57)
that's very interesting is not that big of a movement. Considering that the economy has cooled off, the yield curve has inverted, the default cycle and rating cycle has been very muted. And I think that that's what's interesting actually. Very muted. Very. And I think I mentioned before that, say a third of this triple B debt, which is that slice that has me most concerned, that even though a third, say, has a debt ratio, that's what you would normally see in a high yield market, only 5% of this debt is rated or has a negative credit outlook attached to them by one of the three agencies. And you need your reaction to be, well, there goes the rating agencies having the back of the issuer again at the expense of the investor. But I don't think that's what's going on. I think what's going on is that the CEOs and CFOs have gone to the agencies and shown them their capital spending plan for the year. And so the focus is on debt retirement. The focus is on debt repayment, staying current. At (24/57)
a time when we know that we're in a mild profits recession, what comes out of that? Well, either you got a cutback on your share buybacks. Well, that hasn't happened yet. The first thing that's happened is that they cut back on their capital spending plans. And that's what comes out of aggregate demand, otherwise known as GDP. And that is what gets the ball rolling in terms of the economic recession. I mean, it's important to just meditate on that for a moment because it's part of this larger arc towards the financialization of the economy, moving away from the real economy towards the financial economy. This move in terms of share buybacks, focusing on keeping the stock price high at the expense of capital investment. Right. Well, this all started, if you remember, back in October 19th, 1987, which by the way was my first day on Bay Street in Toronto as a financial economist at the Bank of Nova Scotia. And when you go back and read the transcripts of the FOMC meetings, not the (25/57)
minutes, the transcripts, you'll see how October 1987, the stock market collapsed. Right when Greenspan had taken over. Yeah, you just taken over a few months earlier and shook them to the core. And that's when the term Greenspan put was first used in the financial market vernacular. And so usually you had central banks moving rates around more premised on economic data than on the markets. And remember, Alan Greenspan, although he was a speechwriter for Gerald Ford and handed out with inflation now buttons back in the early 70s, he's a markets economist, right? He was plucked out of the private sector. No, he was very successful as well. Yeah. And so he started, got the ball rolling on really having the third mandate of the Fed, full employment price stability. But he added the third one, de facto, which was financial markets. Financial market stability. I have your back. Yeah. So what happened is that the market plunges and Greenspan doesn't cut rates just once or twice. He cuts (26/57)
rates well into 1988 until it's evident that the stock market collapse didn't do anything to the economy. It was a great holiday shopping season at Christmas time. The economy just kept on ripping. The Fed found itself behind the curve and had a high rates, 80, 89. And ultimately we had the recession in 1990. Now we had a similar situation in the next cycle. In that cycle, in the late 80s, of course, the financial or shall we say the asset cycle that took place, the asset and debt cycle was in commercial real estate. We had the LBO craze in the late 1980s. That's for now. LBO is the proliferation of high yield bonds. And of course it was the commercial real estate bubble. That was the bubble. That was the asset and debt cycle. So you're right. That was the way three decades ago from the classic business inventory cycle towards cycles that were based on asset prices. And then we moved to 10 years later to the dot-coms. And we had that asset cycle. And these asset cycles, when they pop, (27/57)
creates a recession. And then what we know is that you don't get a V-shaped recovery. You get an elongated L-shaped recovery. It takes years to actually get into a sustainable expansion long after the official recession actually ends. It used to be, if you go back to the 50s, 60s, 70s, 80s, you had V-shaped recoveries. Low interest rates worked right away. That doesn't happen that way anymore because these are asset cycles. So we had the savings in loan and commercial real estate back in the late 80s. We had the dot-coms in the early 2000s. And then of course we saw what happened in the last cycle. This is the fourth. There's the missing returns. This is the fourth super debt-induced asset cycle. This of course was now back to the equity market. And all the debt that was issued to buy back stock, clearly unsustainable in my opinion. But we know how these asset and debt cycles end. And so this is just a different one. This is not, we're not fighting the last war. This is not about (28/57)
savings and loans. It's not about commercial banks. It's not even about investment banks. But it could be about mutual funds. It could be ETFs. It could be insurance companies, whoever, pension funds, whoever basically is owning a lot of these corporate bonds with very low covenant quality at very tight interest rate spreads, not reflecting the underlying default and ratings risk in these securities. What are we talking about here in terms of contagion, do you think? Because we had a ton of contagion in 2008. And that was a very different, as you said, that was a consumer-led credit bubble. Well, I would say this much. My big concern is this triple B tronch. If it was just, we had a cycle where a whole bunch of credit got downgraded from AA to single A or triple A to double A, I wouldn't be nearly as concerned. But what it means when you have half the investment grade market triple B, there's no maneuvering room. So the whole downgrade is into a different asset class, which is called (29/57)
non-investment grade. And institutions that have quality mandates can't own this paper anymore. And so it's the law of large numbers because you're not talking about even a couple of hundred billion dollars. I mean, you're talking about trillions of dollars that could be put it this way, but you're talking about a trillion dollars in that triple B space. The whole high yield market is a trillion dollars. The high yield market itself could not possibly absorb what could happen if a large proportion of these triple B's end up rolling over into high yields. So the risk is that the high yield market gets overpopulated and spreads wide and out dramatically as a result. Keeping in mind that on average historically, you get downgraded from triple B, triple B minus into junk. Within five weeks, your paper is valued 10% less than the day before the downgrade. That leads to a widening in credit spreads filters back into the equity market. So the underlying cost of capital rises and creates a (30/57)
tightening in financial conditions that will then of course force the Fed to have to cut rates even more. But that's ultimately how that plays out. What about exposure to foreign debt, foreign corporate debt or foreign companies, companies like Alibaba or Tencent? Is that a concern to you? Well, I'll put it this way. This corporate bond bubble that we're talking about is in fact global. It's not just confined to the US. I'm from Canada. It's evident there. You go across Europe. And of course, Europe has had the backstop from the ECB, which can buy more low quality credits than the Fed can. We didn't even talk about drug use announcement yesterday. But anyway, in answer to your question, it's this corporate debt bubble is a global phenomenon. It's not just constrained to the United States. Do you think this is the corporate debt phenomenon is top on the mind of the FOMC? I think that's where their focus is primarily. Well, right now, if you listen to Jay Powell's commentary, and a lot (31/57)
of it was just basically answering the questions, but everybody is just talking about trade right now. Trade, trade, trade. G20, what will Xi and Trump end up meeting about? What will they tweet? The Kumbaya moment, will there be a beautiful remark and a tweet? Who knows? I mean, that's a... But I would say that if you read... Seems unlikely. But if you read the minutes and you read a lot of the speeches on the economy and on the markets, you'll see that hardly a speech goes by where these FOMC officials don't talk about the excesses in the corporate credit market. And they've been rather vocal about it too. So what is on their mind is a top of mind. Maybe right now, trade is more top of mind. You know, I take a look at the FEDs. The opportunity today, I mean, they changed the doplots for the most part, or at least half the membership changed. You want to tell our audience for those who don't know what that is? Oh, that's... And how significant is it really? It's not that significant, (32/57)
but it's... The media has been obsessing over it. It's new. Well, it's been around for... Since 2012, I think. Just the FED, every two meetings gives you... You don't see which individual members provide in the forecast, but they give you an anonymous forecast of where they see interest rates going, where they see the funds rate going for this year and next year. So what happened this time around was that I think for the first time since they started doing this in 2012, you actually have some FOMC members predicting that the funds rate is going to go down from here. So that's great for you. Yeah, about half, eight, I think. About half. Looking for a cut. Seven. And then they still have one person. I'm looking for a hike this year. I wonder who that is. Probably Esther George. And then you have seven, I guess that, are looking for no change. So the way I read it, two things, it's a divided FED, but the press release read very devishly, in my opinion. Look, the market was only priced (33/57)
25%. They would cut rates today. So that's not bad. That's sort of the press conference as well. Yeah, and the press conference as well. The thing that at the press conference, he's really speaking for the FOMC. But at the press conference, there were a few things though, the press conference has stuck out to me. One was he used the phrase, an ounce of prevention is worth a pound of cure, which I thought was rather interesting. And my larger takeaway from it was that the Fed is now focused on sustaining the expansion instead of normalizing policy. That's what it felt like. He had made another comment as well about how certain groups had been somewhat disadvantaged relative to others during the course of this expansion, that now they were beginning to see the fruits of monetary policy and he wanted to try to sustain the expansion. I think he actually used those words. Right. Okay, well, look, here's what I'll say to that. I know it's like motherhood, to sustain the expansion. But what (34/57)
do you mean? Well, the Fed always wants to sustain the expansion. If you go back- Well, Powell was supposed to be a little bit more even-killed. Well, but we'll get back to that in a second. So you'll see how much fun I have on the tarmac. If you go and look at the FOMC transcripts all the way back to the 1960s and you go to the month the recession starts and at the beginning of these FOMC meetings, the Fed staff, the economic staff produces and gives a presentation to the Fed on the economic outlook. And do you know on the month the recession starts, these Fed staffers have never once called the recession. I'm not talking about six months earlier, earlier on the month that it starts. So the view that they want to sustain the expansion, they always want to sustain the expansion. They never intentionally, I mean, maybe Paul Volcker in the first recession in the early 80s. Because he would do them with so much inflation. But the Fed does not want to create recessions, but they just (35/57)
happen to be part of the business cycle. But they don't do it intentionally. But you've got to go back. I mean, Powell race rates nine times. And even as we sit here today, we can talk about, oh, how dovish he sounded and pivot number two and all the rest of it. But they're still draining their balance sheet. He was asking actually about that. He's still what, 35 billion a month this September. So it's funny that we're talking about, oh, the Fed so dovish and yet they're still doing QT, although they're tapering the QT, they're still doing quantitative tightening. It's a little bit of, it's called cognitive dissonance. What are they doing in terms of interest on excess reserves? Well, they didn't make any fresh announcement about that today as far as I saw. There's been no change in that since the crisis or minimal. Just minimal changes. So I don't think that's a major part of policy. I just wonder if they might use that to try to offset some of the contraction of the balance sheet (36/57)
elsewhere. Well, there's something to be said, I suppose, towards making it more incentivizing the banks to free up the reserves too. Because the one thing we do know, well, that's a fair point that you make because that could be a policy tool because we know from the latest us Fed senior loan officer survey that the commercial banks have been tightening up on credit right across the board. You're seeing it actually in the data. Commercial bank lending growth has really dried up, especially for commercial industrial loans. The one thing I will say, though, back to that for a second is this, that you can take the horse to water. It doesn't mean it's going to drink. The horse is what in this case? The banks? Well, the corporate sector. So you can ease up. You can create conditions for the banks to want to lend more money. But if corporations are focused on balance sheet improvement and tightening their belts at the margin, it's not going to matter that much. Back to the point I was (37/57)
making before, A, when we were talking about that the Fed wants to sustain the expansion, of course, there was a very clear statement today in the press release, but that's always their goal. I mean, to me, that was almost an admission that we've over tightened. Something else. You were right about Jay Powell, market's guy, credit market's guy, non-academic, fresh face and a real world guy. He comes in a year and a half ago and only starts talking about his R-star. The neutral Fed funds rate and the need, do you remember back in October, he was talking about we have to get to neutral, get there in a hurry. What's interesting to me is this, back in 2012 and that was not a century ago, the Fed's estimate of the neutral Fed funds rate, the stable equilibrium of Fed funds rate was 4.25%. Can you imagine if they tried to get to 4.25? What sort of presidential tweets we would have been reading? He'd be fired. If he can do it. But over time, see what happened is that the Fed kept on reducing (38/57)
that and they got as low as 2.75 because they realized the constraints on inflation from what? From excessive indebtedness, from what the Latte Liberals and Devils call the fifth industrial revolution technology, aging demographics, all these things, not only structural disinflationary. The Fed collectively takes their estimate of the long run equilibrium funds rate down at 2.75. What's the first thing Powell does at his first meeting last year? He not only raises the funds rate, but he actually starts to raise the neutral long-term rate and he goes in two steps and he goes to 3%. Oops. And now you saw what happened today that was very significant in my opinion was they took that rate down from 2.75 to 2.5. That's interesting. I've done my own work on where the neutral rate is. I'm not at the Fed, but I have a different call than the Fed does. I have a different call on the Fed than the Fed has on their own interest rates because I think that they've over tightened rather (39/57)
significantly. When you look at inflation for goods and services that are measurable and observable because so many of these items are imputed by the statisticians of the government, my estimate of underlying inflation in the United States is well below 1%. And when you look at the scholarly research of where the real funds rate is in real terms, it's 0.5 to 0.6. I would actually posit that the neutral funds rate is closer to 1.5% than 2.5%. And so the premise- A full 100 base points. Well, this will come out on the wash, right? Like I said before, my job has always been and remains to look at the forest past the trees and to stay ahead of the curve. The Fed has made it almost their life's work to fall behind the curve because they're always looking just to current data. Right. I mean, look, how can- They're using lagging indicators. Or how can you totally dismiss the yield curve? How can you do that? It has an 85% historical track record. It's telling you right away what's going to be (40/57)
happening, that the stock market will do what it's going to do because of share buybacks, the stock market's trading more like a commodity on supply and demand than it is as a real economic barometer. The bond market, though, that is the economic barometer. And so the plunge in yields, the inverted curve, the inverted curve along with the fact, what does a plunge in the real five-year treasury yield to 0.3% tell you? To 0.4% in the 10-year treasury yield? What does that tell you? What the bond market's telling you about economic activity is not in the Fed's forecast and not in Mainstream Wall Street's forecast. What percent of the curve is inverted now? Well, there's different segments that are inverted. Of course, because you had this big rally, the big decline in the two-year, so people will look at 5s, 30s, or 2s, 10s, and they'll say, oh, well, those aren't inverted. But they're only not inverted because the two-year has rallied so much on the expectation, the two-year node is (41/57)
screaming at the Fed to cut. The two-year node was telling the Fed, you should be cutting today. But if you're taking a look at, say, Fed funds, I mean, let's Fed funds to 10-year. Let's take a look at three months to 10-year. Most of the curve, at least after the 10-year part of the curve, is inverted. A lot of people I know like to look at the Fed funds two years, three months, two years as a sign of economic stress. Everybody's got their own favorite part of the curve. I look at Fed funds to 10 years, and it's got a great track record. That's telling you that if the recession isn't already here, it's coming in the second half of the year. Now we're standing some of the better tone to the recent economic data. To me, a lot of that is just noise, especially on the production side, which is clearly in a downtrend. They also changed, didn't Pal change some of the language recently? I think he changed the zero lower bound to effective lower bound. I saw some other language changes as (42/57)
well. I've got me thinking a little bit about negative interest rates. Right. Okay. So that's a great point. So the Fed staff last year in the July 31st, August 1st meeting, and this rarely happens, the Fed staff gave a presentation to the FOMC. It's not unusual for that to happen. It's unusual for it to show up in the minutes. And it was all about what you just talked about. Basically how will the Fed fight the next recession? They're already talking about that last year without having to time it. And the answer is that they're going back down to zero. And we're going to spend more time at or near zero for the next several years for people that want to talk about Japanification with all deference of the stock market, which has been breathing fumes from stock buybacks. Leave that aside. We're on the path of Japanese. Well, I think the world is really heading in that direction. Because of the structural deflationary forces that you talked about earlier. There's just too much debt. Look, (43/57)
there's no... And the structural demographic issue. If we had that fiscal stimulus of last year, back when Reagan did it in the mid-80s, when the federal debt ratio was 30% of GDP and not 80, there's just no multiplier impact from fiscal stimulus from these gargantuan debt ratios. So I think the world is still a wash in debt. And that is a fundamental constraint. That's forcing rates down. Well, people who are involved in the economy look at that debt as a future tax liability. So it impedes economic growth. Look, the McKinsey people have written about this, Rogoff and Reinhardt have written about this. It's not linear, okay? But you do head it's basically what economists call the law of diminishing returns. Too much of a good thing becomes a bad thing. Where does Rogoff put it somewhere at 175%? That's for total. I don't just look at a government, but for total. Yeah, but I mean, I don't know many governments as high as 175. Maybe Italy's getting up there, but I don't think even (44/57)
they're that high. But look, the reality is that when you're taking a look at the level of standing debt globally at starting right now, visa V, the peak of the last cycle, and you're taking a look at the level of debt now, visa V, where was the peak of the last cycle? I mean, the level of debt, the increase in the debt in the past decade from the peak in 2007 has outpaced the increase in nominal GDP globally by a factor of four. That acts the fundamental constraint on growth. That acts the fundamental constraint on inflation. You need more and more debt to generate a dollar of GDP. Yeah, it's a law of diminishing returns. That's a very dangerous trend. And look, my good friend Lacey Hunt has written a lot about this. It's fundamentally deflationary. And that's one of the reasons why this neutral fund rates come down so much. Now, back to your point about the negative funds rate. If you actually go on the various Fed district bank websites, you'll find that some of them are beginning (45/57)
to talk about the potential for negative rates in the next cycle. That is, they're going to have to get more and more aggressive. We were talking about this before about these asset and debt cycles. And you can see that each time the Fed has to get more and more powerful. You go back to that period in the early 90s, the Fed takes the funds rate from a peak of nine and seven eights down to three. In the next cycle, to fight the dot com, they go from six and a half percent down to one. Then in the last cycle, they went from five and a quarter down to zero. You see, look at the symmetry here, nine and seven eights to three, six and a half percent to one. Yeah, no, I've seen those. I've seen those. And actually with QT, with QE, sorry, this synthetic negative rate, it went to negative five percent. You see how more aggressive they have to get with these debt and asset cycles. The Fed normally cuts the funds rate 500 basis points to fight a recession. Their starting point is less than two (46/57)
and a half. So they're going to have to get to negative rates somehow. Either they will have to do even more powerful QE or we will go to negative interest rates and people will say, well, it didn't exactly work in Europe. So why would you do it here in the States? And well, the banking system is much stronger. I mean, for all the warts and pimples and scars, the stress tests were more robust and the US banks much better capitalized than the European counterparts. But if you want to scare people into spending money, which is what you want to do, then you'll basically put a tax on money. We did an episode where we either I or my guest, I can't remember who thought of it, but we compared the mechanics of interest rate cuts to the mechanics of classical versus quantum physics. Because things change as you get below zero and it could have perverse effects. If you are a pensioner, if you're someone who needs to save, you could end up saving more money, spending less because you're losing (47/57)
more because you're paying interest to have a bank hold your money or you could take the money out of the banking system entirely and start storing it in your own safer in your own basement or under your mattress. What I really want to point to is there is a logic that seems to exist in terms of how things work that's very mechanical in a very classical way that Fed economists and media pundits rely on when they do the analysis. I just wonder if that really holds as we go lower and lower and as we go below zero. Everything is in theory. You see what I'm saying. I might backfire, but if negative rates were to backfire, they'll just try something else. Do you not see what happened in the last cycle? They started with new acronyms. They had TAF and they had TALF. They went to zero. Then they decided on QE. They didn't do the big bomb, which was debt monetization, the so-called money finance tax cut, which earned Ben Bernanke, the moniker helicopter Ben, and that famous speech he gave in (48/57)
November of 2002. They were supposed to go to QE back then, but they got as low as 1% of the funds rate and then actually we had a massive housing bubble in our hands. The QE started seven years later. Then he did not just one round, two rounds of QE, three rounds of QE, operation twist. They're going to try everything. They'll try negative rates. If it doesn't work, they'll try something else. They'll do more QE. The Fed is increasingly becoming politicized. Maybe the charter will change to help them to buy more assets than just tripping more. That's the question, right? Because the real problem- Just like the ECB. The Fed is going to be very aggressive. As I said before, think proportionally how more aggressive they've had to be. Think outside the box as to what they're going to be doing. Lyle Brainard, who's one of the senior governors on the Fed, gave a speech a couple of months ago where she talked about targeting yields out the curve. Never mind just taking short-term rates down (49/57)
to zero. Short-term rates going to zero only matter insofar as they're successful in taking interest rates down across the curve. The Fed did this back in the 1950s, just the threat. We're going to pin the 10-year note yield at 75 basis points or something along those lines. Now, maybe will it work? It will. Maybe it won't. What does that do to bank lending? Well, those sorts of rates are not exactly great news for the banks as you've seen how the banks have been responding to these ultra-low rates in Europe. Add to that also if they lower interest on excess reserves, how that impacts that as well. It's a double whammy in a way. Look, the reason why it's failed in Europe is that these policies have just failed to ignite a sustainable money and credit flow into the real economy. I think that this is why this modern monetary theory is so interesting. It's just a different form of what Bernanke was talking about. It's fascinating that it's gotten so much traction as a credible solution. (50/57)
Well, I can see it happening. A, I don't believe in fairy tales and I don't believe in the tooth fairy. I believe in the business cycle. I think this one is coming to an end very quickly in my opinion. The Fed is already behind the curve. The bummer gets told you that and they're going to have to be very aggressive. People tend to forget that before QE, they did a lot of other stuff and they will do a lot more. They won't have a choice. They call it modern monetary theory because it's some Democrats way to help fund infrastructure or green technology, but really it's quite simple. It's called debt monetization. It's so old. It's written up in the Old Testament. Basically, the Treasury puts a $5 trillion perpetual coin or a century bond on the Fed's balance sheet. The Fed prints $5 trillion and gives it to the Treasury to do with it what they want. They will retire student debt. Maybe that will finally remove a major obstacle for the housing market, which never fully recovered this (51/57)
cycle. Outside of the initial years when we had this bifurrent cycle, the first time buyer, which historically is driven, the market never showed up. The first time buyer went AWOL because of this huge albatross of student debt. Now I know people will have problems with that. How can you bail out the centers? We removed Emmanuel Kant and Calvinist thought from that in the last cycle when we bailed out the mortgages. There's different things you could do with that money. You can bypass Congress. You can actually give out vouchers with expiry dates on it and get people. The whole thing is to get a multiplier impact on spending. The one thing I think that has to happen is we have to reduce the size of the debt, not just the public debt, but also the private debt. How's that going to happen without there being a recession? As I was talking about before, belt tightening in the private sector and the corporate sector is going to trigger a reduction in capital spending. Coupled with (52/57)
inflation. There's a lot at stake here. There's a lot at stake globally. When you think about how fragile politically from a society standpoint, think how fragile the world is right now. Global trade flows are in retreat. Global direct investment flows have contracted now three years in a row. The world is- The impacts of those things are nonlinear as well. You've got these populist, nationalist, xenophobic. Donald Trump was really more of a symptom what's happening globally. It's interesting that it happened the same year of Brexit and the populist wave that you've seen across Europe. The world is- Geopolitical tensions too. Those are a huge deal. It's just a wide divide. I think that people have to dust off their history books because of this is what we see. If this level of societal tension, look within the United States itself. I don't remember a time when the country was this divided. When you think about what's happening in terms of the hate and the racial situation, this is at (53/57)
the peak of the economic cycle. This is at the 3.6% unemployment rate. We just had a bunch of tax cuts. Imagine what happens. Imagine what happens. I'm talking about from a strictly- What this means for society in general since social stability. I'm talking globally, not just the United States, of all this happens at the peak of the cycle and the low unemployment. Imagine what happens when we cross the other side of the mountain. A lot is at stake here. Beyond just what does the stock market do? Credit markets bond yields the dollar. A lot is at stake here. I think that the Fed, I mean, I would have had a problem with the Fed cutting rates today. The stock market bubble- You would not have. If they would have cut rates today, I would have said, good on you. Maybe that's just too much. You think it's much more serious than markets and pundits and even the Fed perhaps are appreciating at the moment. I think that the economy has a really soft underbelly. You strip out the soybean exports (54/57)
and the inventories and declining imports. Real private final demand in the first quarter was barely better than a 1% annual rate. If Atlanta Fed is right, maybe we're close to 2% because the consumer hung in really well. Housing is in a recession. Commercial construction is in a recession. The recession and capital spending, I think, started in the first quarter of this year from already fairly weak base. When you think about the one thing that should have propelled the economy to new heights last year, what have been capital spending because the tax cuts really geared towards the business sector, well, guess what? They got diverted to stock buybacks. That's been a huge story. David, I want you to stick around. I want to do an overtime with you. For our regular listeners, you know the drill. For new listeners, you head over to hiddenforces.io. Right. I've been writing a daily since 1998. It's called Breakfast with Dave. I actually do two early in the morning. One's called Dispressed (55/57)
So With Dave and that's a wakeer upper and then there's Breakfast with Dave. Feel free to Google that. It'll flash up right away if you ever just Google Breakfast with Dave. What you can do is you can email me and the email is drosenberg at glaskinshaft.com. It's D-R-O-S-E-N-B-E-R-G at G-L-U-S-K-I-N-S-H-E-F-F.com. I know that's a mouthful. Or call me directly at 416-681-8919 and I'd be happy to at least start you off with a complimentary publication. And I'll have a link to David's website in the summary of this podcast. Thank you so much, David, and let's switch over to the overtime. Terrific. And that was my episode with David Rosenberg. I want to thank David for being on my program. Today's episode of Hidden Forces was recorded at Creative Media Design Studio 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 (56/57)
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. 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 dkathiddenforces.io. As always, thanks for listening. We'll see you next week. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Is the Banking Crisis Over or Has It Just Begun Jeff Snider #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. This past week has been one of the most insane news cycles that I've experienced since at least the early days of the COVID-19 pandemic. Where fear was spreading faster than the virus itself, there was an overnight explosion in Twitter accounts claiming expertise in epidemiology and yet no one quite knew what to believe about anything. I kept thinking back to my conversation with John Ascomus about the fragmentation of the media ecosystem and what it means in practice when a society loses its ability to form consensus truths in the context of last week's While the impact of this dynamic on government policy is not the focus of today's conversation, it is an important backdrop that I want you all to keep in mind (1/57)
going forward as we sort through the news cycle together and try and make sense of events as they unfold. The reason I asked Jeff Snyder to come back onto the podcast today is because he has been ringing the alarm bell in anticipation of a panic inducing event like the bank failures we experienced last week for more than a year. In his last appearance on the show, he pointed to what he called a quote increasing sense of dread that he felt was reflected in credit and derivatives markets. That market participants, in other words, were hedged for something, perhaps even a deflationary event in the monetary system like a bank panic that would lead the Fed to prematurely pause its rate hikes and possibly even reverse its policy entirely to stave off another financial crisis. Whether or not the Fed reverses course this week is less important than how the system itself, the banks, brokers, and other financial intermediaries who make up the international financial system change their own (2/57)
behavior as a result of recent events. What this means for asset prices, the prospects for economic growth, inflation, and government policy are all topics that we explore in depth during today's episode. In the second hour, we zoom out to look at the bigger picture, specifically what the system itself ends up looking like coming out the other end of this crisis. Do we get more consolidation, centralization, and government control? Or is there a path to something else? And how does the international security environment make today's crisis and its potential resolution look very different from what we experienced in 2008? 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 half of today's episode by going to hiddenforces.io slash subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, (3/57)
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 yet another awesome and extremely timely episode of Hidden Forces with my guest, Jeff Snyder. Jeff Snyder, welcome back to Hidden Forces. Hi, Dmitry. Thank you for having me back. I really appreciate it. It's great having you back on, Jeff. You're at the very top of my list of people to have on the show, especially after a crazy week like this. Before we start, I want to mention to listeners that I'm hosting a live video Q&A with you and Brent Johnson for members of our Hidden Forces Genius community on March (4/57)
23rd at 5 p.m. Eastern Standard that I am opening up to anyone who wants to join. So if you're interested in joining that call and getting a better sense of what these Q&A calls are like, you can do that using the RSVP link in the summary section to this episode. Also, I want to encourage people who haven't heard your first appearance on the podcast, Jeff. That was episode 289. To go do that, it is a great introduction to your framework and we're going to be relying on that today to talk about this very big event that has unfolded over the last week or so, which is not the failure of Silicon Valley Bank. It's not the deposit flight from regional banks, though that is significant. It's not the new liquidity program set up by the FDIC, the Fed, and the Treasury. And it isn't speculation about a Fed pivot. It is the dramatic repricing of credit risk that we've seen in markets over the last week. Give me and my listeners your take on what we've been experiencing and why these moves have (5/57)
been not only significant, but literally unprecedented in certain instances. Yeah, Dmitri, I think your intuition is right. This is not just about Silicon Valley Bank. Silicon Valley Bank is sort of the most public aspect of what's been going on for some time here, which essentially any elasticity illiquidity across the global monetary system, which has manifested in many different ways. I mean, there are aspects of Silicon Valley Bank that we do want to pay attention to. There are certain things that have gone on there. But as you said, it's not really the huge story here. And if we look at the marketplace and really what the monetary system has been telling us for quite some time, it was basically, hey, look out, there are potholes ahead. And not just small potholes, but really major potholes ahead. So when Silicon Valley Bank came along, the market said, yeah, see, we knew something like this was going to happen. And if that was it, if it was just about Silicon Valley Bank, if it (6/57)
was just that signature bank or maybe first for public, whatever the small regional banks are, the big regional banks that are in the news today, if the Fed was going to come in with its BTFP brand new toolkit and the FDIC and the Treasury Department were going to guarantee all depositors, that was the end of everything. We wouldn't have seen what happened this week. And I think that's the most alarming thing is that all that stuff from last week's the announcement and then the weekend, maybe there's a little bit of nervousness on Monday, but it continued Monday, Tuesday, Wednesday, and even a little bit yesterday and even again today. So as you said, the markets are reassessing the events of the last week and saying, yep, this is exactly what we expect. And because it's exactly what we expected, we expect more down the road. So for people that aren't familiar with this, what are we talking about here? Give us some specifics about the kind of moves that we saw and also put them in (7/57)
historical context for us. Yeah, the moves were just indescribable. I write tons of words, I speak a lot of words, and I have very few words for what happened this week. And I don't want to be alarmist here. I don't want to say that, I don't want you people to think that the world is ending because that's not what we're really talking about. What we're really talking about is, I like the way you framed it, Dimitri, is that repricing of risk because that's really what happened. And it repriced in such a dramatic way that we have, it's very stark, it's very concerning, but it's not the end of the world. Things are going on, things are going in the wrong direction. So let's put it into terms. One of the markets I watch all the time and watch very closely is called Eurodollar Futures, which is tied to three-month LIBOR or in a couple months, assuming LIBOR doesn't survive, three-term SOFR. But essentially, short-run money market rates, what is those money market rates going to be in the (8/57)
future? And because it's a money market rate, because it's a key benchmark rate, and because this is a huge market, it can tell you a lot about what the monetary system itself is perceiving as what's going on either now or in the future. So Eurodollar Futures, just to give you some context, any daily, and on a daily basis, you won't see these contracts move by maybe more than five, six, seven, eight basis points. An extreme day will be 14, 15, maybe 20. You only see more than 20 basis points, moves, and prices, and the prices of the contract on very, you know, a handful of occasions. For example, when Bear Stearns was, they announced that it was in trouble and failed, we had like a 20-some basis point move in most of the Eurodollar Futures contract, which was a, holy crap, something is going on. September 15, 2008, the morning that Lehman Brothers was announced, we had a 40-some basis point move in Eurodollar Futures. Again, prices, daily contract changes, which was a, oh crap, kind of (9/57)
a thing. We got that, again, a 40-some basis point move in a lot of these near-term contracts last Friday, March 10th, which was the day that the Silicon Valley news, or the SBB news came out, which kind of made sense because this was a sort of a confirmation, things were going bad, conditions were accelerating. And so, yeah, that was, that made sense. This was a severe outbreak, something that was expected. But it was the trading on Monday that really shook me up and shook, I think, shook up everybody else was, you know, a 40 basis point is an extreme move on Monday in Eurodollar Futures in a couple of particular contracts, a couple of key contracts like September 23 and December 23. We got more than 100 basis point moves, massive swings in the market. We've never seen any, I mean, it's double the day Lehman Brothers failed, which should give you a sense that the markets were in outright panic mode. Because what are Eurodollar Futures? Eurodollar Futures are essentially a hedging (10/57)
technique. If you're afraid that the economy is going to go into the toilet and you hold a lot of risky assets, you're going to want to hedge those risky assets because you can't sell them when the economy is going to the toilet because markets become illiquid. So you want to buy essentially economy in the toilet insurance. And that's what Eurodollar Futures are. If you buy Eurodollar Futures, betting that the economy is going to be bad or the market's going to be bad, liquidity is going to be bad, whatever the case may be, they're going to pay off when interest rates, money rates go down in the future. So the more that the market wants to hedge in that fashion, the more we know it's afraid of something big. And so again, Lehman Brothers, a 45 basis point swing in Eurodollar Futures, that makes sense because the market was saying, holy crap, I need to hedge my assets because I'm not going to be able to sell them. If I get into some kind of liquidity trouble, I'm stuck with these things (11/57)
I don't want to be. I need some kind of insurance. So Monday, March 13th, after the Fed announcement of its program, after the FDIC action, after signature SBB, all the stuff that should have been past tense, we got massive hedging, which said, again, lots of people in this deep, sophisticated marketplace were saying, holy crap, I need insurance because I don't know if I'm going to be able to sell these riskier assets. And then as bad as that was, we got a little bit of a reprieve on Tuesday, which is the normal pattern. Usually I have a Friday big announcement, Saturday and Sunday, the market kind of stues about it. Monday is the continuation of Friday. And then everybody kind of pauses on Tuesday. Tuesday is the day of reassessing. So we got a little bit of a retracement on Tuesday, and then Wednesday was almost as bad. We had 60, 70 basis point moves in Eurodollar futures on Wednesday. Now, they didn't stay there for the whole day. The September 2023 contract, for example, was up (12/57)
about 80 basis point at one point and finished at around 30-some odd, 35, 36, I think it was. So nearly Lehman Brawlers on Wednesday after double Lehman Brawlers on Monday, after equal to Lehman Brawlers on Friday. So just to give you a sense, this desire, this need, this stampede into essentially catastrophic portfolio insurance continued from Friday right on through into this week. Yeah. I mean, the move was even bigger than what we saw in 9-11. Yeah. And to your treasury, that's another one. Right. The to your treasury yield which drops over 100 basis points down from where it was before this happened. The 30-year down 60 basis points, I think roughly, right? Insane moves in markets, daily swings that are only reserved for the worst type of circumstances. So again, you don't want to panic people and say, this is the end of the world, but the market is extremely concerned. And the one reason why it's extremely concerned is because it saw this coming. What happened with SVB in the (13/57)
wider context is simply this confirmed the suspicions that have been traded in these markets for many months now, that things were going in the wrong direction, illiquidity was building up, problems were building up. And then this happens and it's sort of like, okay, everything that we thought was wrong, absolutely was wrong, but what does that mean for the future? Yeah. Ironically, this move in treasury is probably wiped billions of dollars of losses off the balance sheet of Silicon Valley Bank. If they had had them, that's the thing. The primary reason Silicon Valley Bank was obviously they're being drained from cash, from customer usage. But in response to that, and this gets us into the systemic issues here, in response to that, they made the dumbest move they could make, which was to sell all their treasures. They sold their 20-some billion portfolio of treasures, because that's all they had. As their liquidity was being drained, as their cash cushioned and cash margin (14/57)
disappeared, they sold the whole thing, recognizing a $1.8 billion, I think that's the loss they said, $1.8, $1.9 billion loss, which that was game over. Once the loss was reported, that started the run. But that's not the important issue here. The important issue here is, why couldn't SVB arrange other financing through repo, for example? Because that's usually what happens. You get into a cash situation where your customers are using more deposits than you thought, you go into the wholesale markets to borrow until you can get yourself right again. Why didn't they do that? Why didn't SVB go to the Fed's primary credit window, which used to be called the discount window? Because as the Fed just reported yesterday, this week, everybody else did. We saw $85 billion taken out of the Fed's discount window, their emergency funding window. Why didn't SVB do that? So there's lots of questions here. There's lots of stuff that gives you insight into why the markets, first of all, hedged as much (15/57)
as they did. Why they did so? Because this is not over. There's bigger issues going on here. What do you think that tells us? What is it that the market is so afraid of? Do you think? Well, I think there's a combination of risks. I mean, always it starts with the economic climate, which I mean, if the economic climate is booming, you never really see bank failures, because usually there's no reason for banks to fail. There's a reason why these things always cluster together in bad economic climates, because when things start to go in the wrong direction, money providers, just regular folks who have their money exposed, they start to reassess and reevaluate what they're doing. So that's part of it. The economic climate is not as robust as everyone would like it to be, as the Federal Reserve would tell you, and ECB just did yesterday. So that's the background. But there's also structural and cyclical deficiencies in the way the monetary plumbing works. And the big one is collateral. I (16/57)
think that's what we need to zero in on with SVB is because to go to the Fed's primary credit window, you've got to post collateral. So if SVB, which was on its last legs, last resort, didn't go to the primary credit window, and yes, I know there's stigma attached, but the Fed has worked hard to try to remove that stigma as evidence by what we see this week. Still, why couldn't SVB go to the repo market? Why couldn't the SVB go to the primary credit window? And I think they have a dramatic collateral shortfall. When you say they have a dramatic collateral shortfall, are you referring specifically to the haircuts they would have to take on things like treasuries and agency MBS, and that this would be too great to prevent the stemming of deposit outflow? That's part of it. I think there's also, if you're a bank, like SVB, and you have most of your assets are not liquid securities like treasuries, you have a small portion of your assets in those types of securities, what you really have (17/57)
is a whole bunch of ill liquid loans. But in a pinch, if the wholesale market is operating normally, what you could do is post those loans as collateral to a dealer to borrow US treasuries or some other form of collateral that you could then take into the repo market. So essentially, you would liquefy ill liquid loans through a securities transformation transaction, which happens all the time. This is regular, it's normal, it's a big part of what dealers do. So the question is, why couldn't Silicon Valley Bank do that? Why were dealers so shy about taking ill liquid loans from Silicon Valley Bank and lending them US treasuries that don't belong to the dealer either? Isn't it much more difficult to value those loans in this current environment? Couldn't that be part of it? Yeah, because that's what happens, right? So what you say is in a normal environment, everything is fine. Silicon Valley Bank has a little bit of a cash drain, nothing too big. They go to a dealer and say, I've got (18/57)
100 million in these ill liquid loans, I need some treasuries so I go in the repo market and liquefy these loans. And the dealer will say, yes, I'll give you a haircut of 10%, using round numbers. These are not realistic numbers, but just to prove our example here. So you've got 100 million in loans, the dealer gives you 90 million in treasuries, you can go in the repo market, there's another haircut of one or two percent. So basically, you get say around $88 million in short-term funding from your $100 million in ill liquid loans. But if you do that when conditions are normal, suddenly things start to go wrong, dealers get a little bit risk averse, instead of a 10% haircut on your liquid loans, they now say I need 20% or 25%. Or in extreme cases, like we saw in 2007, 2008, they say, I don't want those liquid loans at all. So you don't have any collateral as SVB to exchange for other collateral that you could then use in the repo market, which essentially cuts you off of these (19/57)
marketplaces. And if you don't have collateral that you can exchange for treasuries, you can't go into repo, you certainly can't go to the Fed's primary credit window either. So your last resort is to just start fire-sailing whatever assets you got that you can sell, you call in whatever loans that you can potentially liquefy, essentially your balance sheet gets into its death spiral. And I think that's what happened. So as far as SVB goes, that makes sense. But the bigger question is what happened that prevented them from using the wholesale emergency release? Why were dealers so against potentially transforming them and letting them give the collateral? And I think that's where we get into the systemic issues, which by the way, one of the most extreme results of this past week was actually the four-week T-bill rate, which is a primary collateral indication. On Wednesday, the four-week Treasury bill rate plummeted by more than 60 basis points at one point. Again, like Eurodollar (20/57)
futures, we've seen these relatively regularly where collateral gets short in the early morning hours, because that's when yesterday's secured financing transactions are unwound. You've got repo and derivatives, you've got unwind yesterday's transactions, you've got collateral calls to make all sorts of things. So when collateral is scarce, it's not unusual, it's not good, but it's become relatively common to see Treasury bill rates sign noticeably in the early morning hours, and then everything gets settled out and they go back to normal. That's usually about one, two, three basis points moves. Maybe in extreme cases, you get four, five, or six. That's one that you say, uh-oh, this is trouble. We got that on Monday. Monday, there was a massive early morning scramble for collateral that was about 15 or 16 basis points, which already told you stuff was going wrong. But then on Wednesday, in the middle of the day, this wasn't even early morning, the four-week Treasury bill yield (21/57)
plummeted by more than 60 basis points at one point. So if 10 basis points is a collateral run, what is 60 basis points in the middle of the day? That's a real huge problem. So again, we're back to collateral shortage, problems with all that parts of the monetary system, which probably I think relate to the systemic background which then left SVB with no other options. So I also want to let listeners know that we're recording this in the morning of Friday, March 17th. So when Jeff is citing Wednesdays and Mondays, he's talking about this week, Jeff, couldn't this just reflect the extreme levels of uncertainty in the market? And some significant amount of this will resolve itself and normalize after the next few weeks pass and we get this FOMC meeting? I mean, you would hope that's the case, but that's never the case. And that's what I call the lesson of Bear Stearns, because that was what led into the eventual fall in 2008. After you go through this type of an event, after you see (22/57)
primary examples of the downside case here, and think about this in terms of individual firms, not in some systemic perspective, but as an individual firm, you run a bank. You run a bank that has a lot of portfolio, your portfolio has a lot of assets and a lot of liabilities that look a lot like what everyone else does, including SVB, including Bear Stearns back in the day. And what you see is that Bear Stearns back in March of 2008, and that's another factor we need to talk about Dmitry, the March bottlenecks, we can come back to that, but March of 2008, Bear Stearns was in the words of Bill Dudley, and this is in the FOMC transcripts, Bear Stearns was a troubled but viable firm one day, and three days later, it was no longer viable. So what that meant is in a very short period of time, you were wiped out. And the Federal Reserve says, we rescued Bear Stearns, we shepherded it into JPMorgan's reluctant arms, we made it all happen, this was a success. When Wall Street looked at, and (23/57)
not really Wall Street, but banks around the world, the monetary system itself looked at Bear Stearns and said, holy crap, we could be wiped out. So from the perspective of bank managers, the downside is, my equity, my money, my job, everything could be wiped out. So how did the system respond to Bear Stearns? The Fed celebrated, they said, this is great. Everything is behind us, we got this massive success that we can build on when the entire monetary system started doing the pro cyclical types of activities that we, that are associated now with monetary crisis, they started to build up cash cushions. Because again, as Bill Dudley said, Bear Stearns went from troubled but viable to unviable in three days. So firms built up cash cushion. And as firms are building up their cash cushion, they're not extending cash into the marketplace. So markets get even more illiquid. And as markets get even more illiquid, guess what firms do? They build up their cash cushion even more. It becomes this (24/57)
pro cyclical self-reinforcing cycle. They began to de-risk their books. They said, okay, what is it that caused Bear Stearns to go down? Well, it was a collateral call. JP Morgan knocked on their door and said, I need $8 billion in treasuries. By tomorrow, you're out of business. So I need to de-risk my book. I need to get the best quality collateral I can get available. I need to do all sorts of those kinds of things. What else do you do? You hedge. You hedge the hell out of what you have available. That's what happened in the wake of Bear Stearns. Building up of cash cushions, de-risking and hedging. What have we seen already this week? Well, we've seen the hedging. We know that happened. We haven't seen the building up of cash cushions, but we can infer that that's been happening because of what's happening in this marketplace. And as far as de-risking goes, we haven't seen that yet, but it's reasonable to assume that's going on too. So again, as I said from the beginning, this was (25/57)
an expected outcome. And now that it's happened, now that it's confirmed everybody's fears, it's leading to all of these knock-on and second-order effects that we're going to have even more profound negative effects down the road, which is why we see this continuing process of hedging. And as you put it, Demetri, from the very beginning, repricing risk in the wake of something that was actually expected, because it's not a one-off thing. You look at what crises actually are. They're not just like the market or the whole economy or the whole marketplace just shuts down all at once and everything happens in just one-off fashion. They're actually stages. It's processes and it's prolonged processes. And what happened this week was simply the next stage and probably the biggest stage heading into this type of a crisis. So this is great because this is kind of where I wanted to get to. The Silicon Valley stuff is something that I think we covered really well in our latest episode with Steven (26/57)
Kelly. So of course, we'll have an opportunity where it's relevant to speak to that. But actually, what I really wanted to get to is how market participants, and in particular financial intermediaries who play an indispensable role in maintaining orderly markets and in the provisioning of credit and liquidity, are adjusting their risk outlook and their behavior as a result of last week's events. Because the last time you were on the podcast, Jeff, I asked you what it would take for the Fed to pivot from the policy path that it's been on over the last year, which has led to the steepest rise in short-term interest rates in over 40 years. And you said that there were two things that could cause the Fed to pivot. One potential thing would be a substantial deterioration in the unemployment data, such that the Fed might say, yeah, CPI has not really returned to target yet, but we can't afford to pay attention to that right now because this economy risks going into a tailspin and (27/57)
unemployment could get completely out of control. Or potentially, something could, quote, break in the monetary system causing an outbreak of deflation that leads to financial volatility, such that the Fed says, yeah, CPI hasn't really returned to target yet, but we can't afford to pay attention to that right now because the financial system risks going to a tailspin. And that would lead to a major economic recession or depression where unemployment would get completely out of control and we're back to square one again. My question for you is, is this what we've experienced this last week? And if not, how will we know it when we see it? In other words, how will we know what a break in the monetary system actually looks like when it happens? Yeah, I think that's exact. I mean, that's what the markets are telling you. I love that this is the way you're thinking because what we really need to do and what I really do is essentially interpret these market signals. What is it the monetary (28/57)
system is telling us that we can use as a useful real-time analysis? What the monetary system has been saying all along, going back a long way before even the Fed started hiking rates was that the probability that, as you just put it, one of two things was going to happen. The Fed was going to stop focusing on consumer prices and start focusing on something else. And something else, I mean, there's really not a lot of options here. There's not a lot of things, a lot of factors that could really change the Fed's from its ultra aggressive hawkish stance to doing something completely the opposite. And okay, obviously, it's not the CPI itself. The CPIs are still way too high. They're marginally improving, but certainly not enough for the Fed. So that's not the issue here. The consumer prices haven't fixed themselves just yet. Obviously, the labor market data looks really good. The unemployment rate is still near 50 or low. So it's not that. It could be that the market is saying that the (29/57)
unemployment rate is going to spike in the near term future. So that's still on the table, but that wouldn't account for what we're seeing in the market. So really, we're left with this deflationary monetary outbreak. But as I said before, SVB, the failure of First Republic, Signature Bank, it's the tip of the iceberg kind of thing. It was, yes, this is the start of the thing that will get the Fed turned around. This is what we're waiting for. And now that it's happened, the chances of the Fed turning around are not just near, I mean, nothing's ever for certain. But it's as near certain in the market as anything could ever be. And not only that, we're seeing the market start to signal that this turning around in the Fed, because of this thing, is closer than many people would like. The Eurodollar futures curve is inverted all the way to the front. So the April contract is the first contract and it is priced below the May as well as the June contract, which is saying the market is not (30/57)
certain, but there's a reasonable expectation that the first rate cut happens in the next couple months. And then once the first rate cut happens, it's going to be a series of rate cuts in quick succession. So what is it that gets the Fed to, first of all, stop hiking rates? Because I mean, the ECB hiked rates yesterday. 50 basis points. Yeah. Yeah. So the ECB said, we're not worried about anything. It's likely the Fed shares the same near term view. So the next week, the Fed gets together, they say 25 basis points, probably just to kind of split the middle there. But after that, what is it that stops the Fed and gets them into aggressive series of rate cuts? It's not Silicon Valley Bank. That's not it. And the market is hedging so persistently for this scenario as it has been all along, we're left with very few conclusions. So really, it's a combination of these two things. Because if we do have this monetary event that continues to go beyond the regional US banks into other banks (31/57)
around the world, let's today's March 17th, China just announced an RRR cut, which is essentially saying, we're a little bit worried about the global monetary system here. So if this continues to go and spread, yes, you'll have financial volatility, but it'll also lead to a sharp rise in unemployment, which will then, at that point, the Fed will have absolutely no choice but to do exactly what the markets are pricing right now. I was worried I was going to trigger you by bringing up the Fed and implying that somehow it mattered or its decision on Wednesday mattered. I'm happy to see that there's some room to explore this. On that point, specific question, what do you think the likelihood is of a 50 basis point hike? I think that's probably zero. So let me tell you what I was thinking about it, and this is not necessarily your expertise, but whatever. We've all been forced to become tea-leaf readers. I wonder if the same forces that have conspired to assault our ability to come to (32/57)
agreement on various social or political issues and form a consensus view of reality are making forward guidance in the monetary policy realm, which I would argue has been the primary tool of central bank policy for the last decade at least, useless, because we've seen this multiple times during the cycle where J-PAL has come out, given a speech, and clearly the reaction of markets has not been what he wanted it to be. And he's had to come out again and again and revise the market's expectations through more statements, through articles published by the Wall Street Journal's Nick Timoreos, and via other members of the FOMC, Heman Hall, and try to get the market to understand what J-PAL seems to be intending to leap this explanatory chasm, in other words. And I wonder if, just like with Paul Volcker's Saturday Night Massacre in 1979, if we aren't seeing a potentially similar setup here today, where PAL uses this opportunity to raise, in this case 50 basis points, if the market doesn't (33/57)
get the message, in order to stamp out once and for all inflation, even if the inflation we're seeing is not a demand-driven phenomenon, because he's not concerned about financial stability because of these liquidity facilities like the bank term funding program, and because he can use the balance sheet to ensure financial stability. Yeah, they're crazy enough to try something like that. I think that's, the Fed doesn't understand the monetary system, it doesn't even understand financials. It thinks lower interest rates are actually stimulus when it's actually the opposite, as we're seeing right now. Inverted yield curves are the exact opposite of loosening financial conditions, but yet every time long-term yields fall because growth and inflation expectations do, they say that we don't like the market loosening it. So yes, there is definitely an impulse or an undercurrent from the FOMC trying to tame the marketplace. What the marketplace is saying is, you're all wrong, you've got this (34/57)
entirely wrong, you've got it completely utterly wrong, we're betting against you. It's not that we need to be tamed, it's that we don't agree with everything that you're saying. That's why the curves are inverted as much as they are, and everything that's happened this week is consistent with markets have been saying. And what they're now saying is, yes, we've heard all about the Fed's reaction function for the last year. And I agree with you, Dmitry. I think Paul Volker-Poser, J. Paul, has intended to try to shock the markets out of what he thinks are loosening financial conditions, which are actually tightening financial conditions. And so yes, there may be a chance next week that he does 50 basis points just to try to stay consistently with his idea. And I think that's been discounted in the marketplace too. So maybe there is a 50 basis rate rate hike, but that still doesn't change the near term scenario. At some point as hawkish and as Paul Volker asked as J. Paul wants to be, the (35/57)
markets are saying, we are near to certain, just as we were near to certain something like this was going to happen, we're even more near to certain now, something bigger is going to happen. Because at that point, if we do get something really big that's really disruptive, there's absolutely no way the FOMC is going to be, J. Paul's not going to be able to come on TV as stock markets are plummeting and say, well, you know what, we're going to hike rates some more. That's just not going to happen. And I think there's also the other politics here. We all know one of the reasons why the Fed got so Volker-esque last year was because of the political pressure put on the Fed. And so if consumer prices are everything that politicians are talking about to get the Fed to move as aggressively as it did, then what happens if consumer prices are no longer the topic of discussion all across the internet and the news media in the public discourse, we're instead talking about, oh my God, the (36/57)
unemployment rate's on its way to 10% or something like that. I'm being hyperbolic for a reason. Then the political pressure doesn't completely 180 degree turn either way. So I don't disagree with your premise, Demetri. I think that's exactly what the Fed wants to do. The question always is, will the Fed be able to do it? This is the conundrum that Ellen Greenspan described, what was it, 18 years ago in February 2005. He was saying, I'm going to do this. And the market was saying, we don't believe you're going to be able to. And so that's what the market is right now in an even more extreme case. We hear you, Jay. We've heard you all year talk about your reaction function and how you want to be hawkish, you want to be Paul Volker. We don't believe you ever get to finish that trend that you started. We think that events are going to overtake the Fed at some point. That's always been the only independent variable here, was when. Not the what. The what has been consistently priced all (37/57)
along. It was always the when. And as I said, last year when the Eurodollar futures curve was inverted to the December 22 contract, this was mid-year last year, but stuff that was going on then. What that said was that there was a good chance the Fed was going to do this turnaround in 2022 toward the end of last year into the start of this year. Well, as it's turning out, it only missed by a couple months. So again, the market is seeing confirmation about everything that's happening. And as it's being confirmed, that's part of the equation. It's not what the Fed wants to do. It's what the Fed will be able to do over enough time where even reality has to enter the FOMC boardroom. So you said this isn't 2008. It's like 2008-like. Kind of flesh that out for me. What do you mean? How is it like or not like 2008? And maybe how are people getting some of the analogies wrong here? Yeah, that's a really good point because history doesn't repeat exactly. I mean, we go through these processes, (38/57)
these cycles that look similar, but they're never exactly the same. So no, I don't think we're going to see another Bear Stearns. We're not going to see another Leven Brothers. I would not put SVB on the same level as Bear Stearns. I think it's the same type of a thing, the same type of reminder, but we don't have the same individual circumstances that are contributing to that type of a thing. I think the big banks around the world are mostly fine, which is one of the things that we didn't see this week. It was a sharp jump in LIBOR because most of the dealer banks themselves are fine, but themselves being fine can still leave everybody else in a big position. So if 2008 was in terms of the monetary system and banking system about these securities firms like Morgan Stanley, Lehman Brothers, AIG, we're not going to see the same thing this time. We're going to see other types of firms, even countries, have funding difficulties. So JP Morgan is going to be fine. You're not going to see a (39/57)
bailout of Citigroup. Credit Suisse is probably the exception that proves the rule here. But you're not going to have those types of big bank failures. It'll be more, in some ways, more insidious because it will be hidden. It's not the big firms that we've come to know and watch. It's these other ones that just pop up out of nowhere. So I think that's the major difference. And where there are similarities, we're in the big picture terms, which what made 2008 into its own sort of brand? I mean, you just used the term. You just say 2008, people immediately know what you're talking about. The reason isn't because of Lehman Brothers. It was because Lehman Brothers represented an extreme outbreak of deflationary money that pummeled an economy that was already in trouble. It was the combination of inelasticity, basically, traditional depression mechanics. You had a bout of inelasticity that was severe and global, an economy that was already in rough shape. Those two things together produced (40/57)
the worst type of economic circumstance. And that's why we remember it compared to other periods where we get a recession like in 2001. Hardly anybody remembers the recession in 2001. They remembered September 11th, but they don't remember the recession. In fact, if you do remember the recession, they think it had to do with September 11th. Whereas in 2008, it was the combination of those two things. And I think that's what's driving the hedging. That's what's driving everything into 2023 is that we have the same scenario, general scenario. We've got an outbreak of inelasticity and deflationary money. We've got an economy that is globally much weaker than people wanted to believe. I think a recession might have even started last year. You also have a major war that's going on in Ukraine. Not to mention you're exactly right. We've got lingering supply problems. We've got food prices. We've got negative factors everywhere. So you put all of these things together in one pot, and it's a (41/57)
2008-like mix. The danger, the downside is that severe, which is why we've seen hedging and repricing of credit that bad, because it's the same type scenario, even if it's not a repeat of 2008. That's severe in what sense? Because the 2008 crisis was a systemic liquidity and solvency crisis that hit the big investment banks who are collectively sitting on hundreds of billions, if not trillions of dollars of illiquid CDOs. That's not what we have here. What we have here is potentially a regional banking crisis driven by deposit outflows and non-performing loans, the parts of the economy like commercial real estate that are under stress, private equity, which is also affected by a rising rate environment. And you mentioned countries like there are countries like Sri Lanka and Pakistan that are especially vulnerable. So what are the areas that you feel like we should be most concerned about here? All of the above. You take it from individual pieces, individual cases. The issue with (42/57)
depositors is, I think, primarily about how many really wealthy individuals had uninsured deposits. And I think that's what really made a big deal at Silicon Valley Bank specifically, was that as the bank started to become more and more troubled, as it started to publicize its troubles through trying to raise capital and other things, trying to rectify its liquidity situation, those who have uninsured deposits said, oh, I need to move my deposits because if this bank goes under, I'm an unsecured creditor, which means who knows what. So there's the issue of uninsured deposits, which is always in the background anyway. It was slightly in the background of 2008, though it didn't really become a big issue then. I'm not sure that's the biggest concern here. I'm not saying it's not a concern because it's going to be a concern for certain people and certain banks that are overexposed to that type of funding. To me, the more interesting question, as it was in 2008, is the systemic breakdown (43/57)
because what happens is, this is not like the old days. A bank run is not like it used to be in the 1930s. A bank run used to mean currency moves from the banking system to the public. The public starts to hold and hoard currency, which provides the banking system of its ability to operate. That's what liquidity meant. Liquidity meant you have currency in a vault that you could exchange for either loan assets or if your customers need it, you can deliver them that kind of liquidity. A bank run was when currency moved from the banking system to the public. That's not what we have today. We have a virtual ledger money system where, if I take my money out of the bank, I don't take any money out of the bank. What do I do? I go to another bank I do like. I set up an electronic account and I set up an electronic transfer. A bank run nowadays is where cash, which is virtual cash, it's not actual cash, migrates through book entry from weaker firms to stronger firms. That happens all the time. (44/57)
It's these wholesale markets that are in place to redistribute that cash backwards needed. We have essentially, over the last year, regional banks have been drained of their cash for a variety of reasons, including their customers using it. They've been drained of their cash, but that cash doesn't disappear. It's not being hoarded by the public because it's virtual cash. It's migrating toward the bigger firms. The more interesting systemic question is, what is preventing the bigger firms who have all this cash from redistributing it back to the smaller firms? Who need it? Not only do they need it, they really need it over the last week. There are systemic issues here. I think a lot of it is about shortfalls and collateral, the inability to liquefy illiquid assets in these portfolios to make them usable in these emergency types of situations. Like Silicon Valley Bank, normally it could take a bunch of its illiquid loans, go to JPMorgan or Goldman Sachs and say, I want to borrow some (45/57)
treasuries, but Goldman Sachs is saying, you want to borrow the treasuries, I'm not going to lend them to you. Why? What is going on there? That hints at other factors beyond just Silicon Valley Bank. Let's dig into that a little bit. Hold on. What is it that you think the Fed is missing that's preventing these larger firms who have the cash from redistributing it to smaller firms? Why are they hoarding collateral? Is it the scale of the economic contraction that they're concerned about that the Fed is not appreciating? If so, what kind of economic downturn are we looking at here? Taking the second part first, how bad is it going to get? That's where we look at the markets. We look at the curves. The curves have said, they've warned all this time this was a big risk. Everything that has happened along the way has only confirmed these suspicions. Where are the curves right now? The curves are in the process of doing the bad steepening, which is where short-term rates go down faster than (46/57)
longer-term rates, which is the absolute worst thing you want to see, because that means that this thing that we've been afraid of all the time, it has already begun. The market's place is saying, everything that we thought was going to happen has actually happened and now it's actually started. The thing that we're worried about has started. How bad can things get? You look around at what happened in the last week and you see some of these occurrences, some of these instances, some of these transactions, daily moves, volatility. I know people in the stock market are thinking, this is no big deal, but in these deep credit and monetary system, it was a gigantic earthquake, which, again, we don't associate these with just normal problems. This is 2020 stuff. This is 2008 stuff. This is the 1970s kind of stuff. As far as the downside case goes, it's pretty far down. Again, it's not the end of the world. It's not like society's going to collapse. It's not going to be like 1930 and 31, but (47/57)
that doesn't mean we're not in for a very, very rough ride ahead. Now, as far as how we're getting there, it really all comes down to how the monetary system works. It's not really about interest rates, in my view. It's about risk aversion amongst those who actually do provide elasticity in the monetary system. That's these money dealer banks. That's why I keep coming back to the most interesting question is, why aren't they doing the job that we need them to do? That includes collateral redistribution. As I said, Silicon Valley Bank or any regional bank usually goes to a dealer and says, I need you to transform my ill-liquid loans into some usable collateral. Usually, the dealer says, that's no problem, but the dealer does undertake some risk in that situation. If the dealers are becoming risk averse, and we'll get to reasons why that might be, but if the dealers are becoming risk averse, has nothing to do with the interest rates. If the dealers are becoming risk averse, they're going (48/57)
to not want to do their dealer activities. We've seen extreme examples of this that have nothing to do with interest rates, like September 2019. The interest rate on repo got extremely high, which should have enticed dealers to move into the marketplace. Instead, they said, ooh, something's really going on here. I'm going to pull my stuff out. That's the type of behavior that we see repeatedly in these financial crises. The money dealers who create currency and liquidity and elasticity, when they're confronted with these types of situations, again, the lesson of bear's turned, they add their own cash cushions. They de-risk, they hedge. If the money dealers are hedging and de-risking, it leaves everybody else exposed to problems in the system, which brings us back to what is it that dealers are so afraid of, that they're de-risking and leaving the entire monetary system exposed to these types of events. That's a number of things, including problems in their own books. It's economic (49/57)
outcomes. It's looking at the economy and saying, China's not looking all that great. Global trade's already collapsing in Asia. There's a number of reasons why dealers would become risk averse, that I don't think we need to bring the Fed into it. If as dealers become risk averse, as I said before, it gets into this self-reinforcing downward spiral, because they become risk averse, the currency system starts to become inelastic, liquidity drops. It has harmful effects on the economy, which only proves the suspicion that dealers had in the first place. They say, everything that we are afraid of has happened. They start to pull more of their balance sheet back, become even more risk averse, and round, and round, and round we go. Every step in stage in the crisis merely serves to confirm the worst fears, which contributes to the next stage down the road. SVB, what happened over the last week, is a prominent stage in that crisis, which is confirming to dealers what they've been worried (50/57)
about all along, which means they're going to be doing like they did in the wake of Bear Stearns, all of the things we don't want them to do. Again, regardless of what J. Powell does with interest rates, the consequences have already been set in motion. You mentioned these liquidity bottlenecks. March is one, and September is one. I wonder if what we're just going to end up seeing here is the expansion of lending through this new term funding program and increasingly new emergency facilities to continue to try and liquefy markets. That's what they're left doing, because at the end of the day, they're not really a central bank. If it's not a central bank in the classical sense, where Walter Badgett said, lend freely at higher rates at good collateral, that's not what the Fed actually does. What the Fed tries to do is they actually admit this. They try to be a market of last resort, because what they're saying is, like Silicon Valley Bank, when the monetary system, when all these dealers (51/57)
start to contract, when any elasticity grows and illiquidity, all that bad stuff happens, what happens to the individual firms? When they can't borrow in repo, when they're stuck and they have no other options, they have to start fire-sailing their assets. As those assets start to be sold in the marketplace, it leads to even more second-order effects where the markets themselves become illiquid and everybody else has to fire-sail more, because prices go down in uncontrolled fashion. What the Fed says, what a classical central bank should do is come in at the beginning and interrupt that process before it even begins, because they'll say, we're going to step into the monetary system before it becomes inelastic at any point. But the Fed can't do that. The Fed is not a central bank. So it tries to come in at the end and say, well, we'll liquefy these markets so that these fire sales don't turn into self-reinforcing spirals. And that's what the BTFP is actually about. That's what FEMA was (52/57)
about in March of 2020. That's what the PDCF was in 2008. But as you'll note, as the Fed comes out with these four-letter programs all the time, they don't work. They don't lead to a resolution of the crisis. The Fed introduced the PDCF in the wake of Bear Stearns. In all summer, you read the transcripts from the FOMC, they said, this PDCF is genius. It's going to prevent any type of crisis. Then Lehman Brothers hit, and guess what? They're the worst ones since the Great Depression. They introduced another one, the Terms Securities Lending Facility just before Bear Stearns failed. That didn't work either. So the Fed comes out with all of these new tools that don't prevent a crisis from happening. You can argue, as the Fed actually does, when you hear what they're saying, we were effective not in preventing the crisis, but in limiting their downside. That's a very different set of circumstances than what people imagine. And it's not a central bank. But so the real thing here, these (53/57)
four-letter tools, they're not liquidity tools. Ben Bernanke said this. He's let the cat out of the bag. I think it was March of 2015, his first blog post at Brookings. He said, when I was at the Fed, I told everybody, I reminded everybody that our job is 98% talk. And that the most valuable tool that we have in our toolkit is not these four-letter stuff that we continue to bring up. It is that talk. If you believe that the Fed's BTFP will be effective, even though you have no idea what it is, no idea how it works, if you're comforted by the Fed doing something, then the Fed believes that your comfort will lead to a, it will help the situation because positive emotions and optimism are, they always come back to emotion. Yeah. Unfortunately, that bullshit doesn't work anymore. Just like forward guidance doesn't work anymore. But that's the thing, Dimitri, that's what the Fed offers. Ben Bernanke was right. It worked to some degree in 2008. It worked to some degree in 2012 when Mario (54/57)
Draghi gave his whatever takes speech. I think that word and you paradigm now, and that's sort of what I was getting at when I mentioned the inefficacy of forward guidance and all of these advisory press conferences that Jay Powell's had to give, and I was sending out all the other FOMC members to talk or Nick Timorese to write an article because the market just doesn't get it because that transmission mechanism is broken. Jeff, I'm going to move the rest of our conversation onto the premium feed. I want to switch gears a bit in the second hour and kind of look big picture at what the system ends up looking like coming out the other end of whatever this is that we're going through right now because it feels like we've been living the last 13 or 14 years in this period of suspended animation post great financial crisis. Now, we're kind of back to dealing with the underlying problems that were never really resolved. Only those problems are now bigger and implicate the efficacy of the (55/57)
monetary system itself, the role of the dollar as a global reserve currency, and the bond market of developed economies like the UK and Japan. At the same time as we're dealing with an open-ended proxy war against Russia and Ukraine and what feels like the footsteps of a new Cold War with China, that could eventually remake the global security environment. 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 Jeff, 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. Jeff, stick around. We're going to move the second hour of our (56/57)
conversation onto the premium feed. All right, can't wait. 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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Surveying the Damage The State of China’s Economy in the Wake of COVID-19 Leland Miller #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 today is Leland Miller, Chief Executive Officer of China Beige Book, which runs the largest private data collection operation in the world, inside China, interviewing thousands of Chinese firms across every major sector and region, focusing not just on the growth picture, but also key dynamics, such as inflation, the jobs market, credit, and shadow finance. Leland, welcome to Hidden Forces. Thanks for having me. I'm very excited to have you on Leland. How are you doing? Doing well, all things considered. Bunkered (1/57)
down, trying to stay safe. How long have you been in quarantine? Now, have you been in quarantine on US time or Beijing time? US time. My team is based in New York, so I have actually been out of New York for the last over three weeks, bunkered down outside of New York, self-quarantining with the family. Our team has spread out everywhere, New York, DC, San Francisco, London, Hong Kong, and doing what we need to do remotely. Yeah. I've been also, I'm based in New York City. That's where our studio is, but I've basically been out of the city for more than a month now. It's wild, and doing all of these interviews remotely, but in some ways I find that people are actually more available because everyone's in quarantine. So I want to discuss China today. Surprise, surprise. But before we do, I'd love for you to give our listeners a sense of who you are. I want to also know obviously what is China-Bajbook, but also how did you get into this business? I mean, were you always a data sleuth, (2/57)
data analyst, someone who was interested in economics? How did you get into this line of work? Yeah, not at all. My background is in China. I've been doing the Chinese language through college. I studied Chinese after college in Taiwan. Did a language fellowship over there, and also did a master's in Chinese history at Oxford University. So I have had my foot in the China world for many years, but after I finished grad school, I went to law school. So I was at the University of Virginia for a number of years, and from there went into law at a big law firm where I was doing transactional work out of both New York and Hong Kong. But while billing these mega law firm hours, I continued to keep active on China. And I was working on China issues in DC. I was writing a lot. I was speaking a lot. I was doing advisory work for buy-side funds even early on. And eventually, I just decided to jump over to something I enjoyed most. I was counseling a buy-side fund once who was asking me some (3/57)
question about official inflation numbers for month to month. And I said, look, none of this matters. And they snapped back at me. And they said, if this doesn't matter, why don't you do something that does matter? So I said, ouch, but good point. And I went back and thought a lot about that. And part of the process got me together with some other people who are similarly frustrated with the state of the China watching industry, basically taking China's numbers, official numbers and telling a story, even though everybody knows they're not the real deal. And I came to this conclusion. This is what I wanted to do. I want to try something big and bold, something that everybody said wasn't possible, which was to go to China, collect data because we couldn't trust anyone else's take, collect big data in China and try to tell the story ourselves. So back in 2010, 2011, I raised funds for China-Beijing book. And we gave it a try. We were told by everybody we couldn't do it. China's a black (4/57)
box. They'll never let you operate. Firms won't tell you what's actually going on. And we were not just pleasantly surprised, but we found that we could get just about any type of information we wanted if we asked the right questions. And we kept making the survey bigger and bigger and bigger. And we didn't target just things like what growth is like, although that's a big portion of what we do. But we were tracking inflation metrics. We were tracking the jobs market. And we were tracking the credit environment, which is something that nobody's ever been able to do before. And within credit, we started tracking shadow finance. So this has really gone in some amazing ways that even we didn't think was possible. And we've been doing this for almost 10 years. So it's quite a lot of fun. I'm very interested in this, what you said about asking the right questions. What do you mean when you say that? Well, I think one of the major problems with going into China is that the people don't know (5/57)
how to survey in China. And I'm going to keep some of this close to a chest because some of these are our proprietary secrets here. But I think the major problem was you typically had people who were China experts trying to get data, or you had poll takers who didn't know China. And there was never the right combination. So when we started this, we had several different arms. We had longtime China experts. We had professional poll takers, people who have done international survey taking for their whole career. And we had financial and data analysts who were able to crunch the data. So when we put all this together, we figured out the right way to do this. And the right way to do it is to not just use a few firms and not just concentrate in popular big cities or on the coast or just large firms. The entire purpose behind China Basebook was doing away with all the other biases that made the rest of the data questionable. So for instance, when you look at the PMIs, the Purchasing Managers (6/57)
Indexes, you've got a state PMI, which overly focuses on big firms and certain geographical locations. And then you've got a private PMI that focuses on smaller firms, often private firms, and the other kinds of geographical locations. And usually one PMI is telling a different story because there's not just one China. There's a lot of different Chinas. And so the purpose of China Basebook was to make something so big and so comprehensive that we were taking in all the different Chinas at once. We were telling their individual stories across major regions, across major sectors, across dozens of subsectors, across private firms and state firms in every firm size. And then we were putting the combined story together to tell the real story of what was going on across all of China. How did you go about approaching these companies? Like initially? Because I imagine now it's easier, right? Well, it's not really understood. Some of this is very sophisticated survey taking methods that I don't (7/57)
think people are aware of. But essentially, one of the problems people have is that they usually go straight to the companies and they go in the front door and they ask someone to fill out a survey and often that person is a party official or a PR official or someone else who's not familiar with the actual lines of business. And then you get information that it's not the real deal. It's not usable information. It's what people or the party or the company want you to be reporting, not what is actually happening at these companies. So we had to find methods to get to the right people at the right companies and then expand it. So it's easy enough to do some survey taking in Beijing or Shanghai or Guangdong. But we had to go to the West and we had to go to the center and we had to go all across China in order to make sure that we weren't telling the story of the coast and not the periphery. So this has taken a lot of time. It took us about two years of on the ground work to get this thing (8/57)
up and running. But now it's entirely electronic. We have an enormous interactive database where all the private data information is used and utilized by clients. Six, five million rows of data, 100,000 different data metrics. This truly big data and I would say it's probably the only big data that exists outside of a handful of China tech companies and Beijing government. Another interesting thing you said was the right people. So the right people and the right questions. That makes sense. That's interesting because the obvious question for someone like me is what stops the CCP or local government officials from basically, if not directly, indirectly communicating to these companies that they should not be communicating directly or honestly with you. I mean, there's a general understanding in China that what the government wants, the government gets, which is why I was asking. That's interesting. So again, at all times, being aware that you have proprietary methods, what can you tell (9/57)
our listeners about how you gather your data? Is your data all surveys, for example? Yes, it is. So what we do is we go to over 3,300 firms at a time. We release data eight times a year, although we've moved towards weekly data releases of late and we go to these thousands of firms and we ask them, how's your business doing? What are you seeing? How much you paying for capital? How often are you accessing it? What are you doing with your workforces? You're firing people, you're hiring people. What are the prices you're paying? What are the input costs that you're paying? The prices you're selling at? All different kinds of questions and then we put together a composite picture of a sub-sector and then from those sub-sectors, we put together a composite picture of the sector, so manufacturing, services, retail, property, commodities, agriculture, etc. And then from that, we put together a comprehensive national picture of the entire macro economy. So basically, we build up from many, (10/57)
many pieces of granular information on the ground and build it up to one aggregate picture of what the true China growth and other dynamics are. So one of the problems with China is there's no benchmark, right? You're not going to compare the accuracy of your data to the official numbers coming out of China, right? So how do you gauge the accuracy of what China-Basebook puts out there? Yeah, that's actually a very astute point because one of the problems we had when we started this out was people would tell us, OK, we believe that you've got the real picture on China, but if they're announcing fake numbers and markets believe or are willing to believe the fake numbers, then what advantage do we have by using your stuff? So it took us a bunch of years to sort of figure out exactly how to navigate this universe. One thing that I was told very early on by a CEO was that, you know, we don't care what China's actual numbers are, we care what markets' perception of those numbers are. And it (11/57)
got us thinking. So, you know, the first thing we had to do was understand how our numbers correlated. So we get our stuff in real time and even official numbers, to the extent they're not manipulated, but they lack so that we were always getting a story several months ahead of what the Chinese data were. Now, they can manipulate them at any given time. They can smooth it out. But eventually, directionally, they're going to tell a story. And so we were always on top of that. But I think we also found out in times like 2013, when there was a credit crisis, 2015, when everyone thought the economy was falling apart, that the Chinese don't announce bad news ahead of time. They're not going to tell you things are falling apart ahead of time. So it only took a handful of times for clients and for companies and for economies to be totally sideswiped by a China growth panic to see, wait a second, we need a canary in the coal mine. So I think the first real group of companies that came to us as (12/57)
clients were one saying, we're sick of not having any understanding of where the messaging is failing. We want to know if there's a problem that's right around the corner. We're not going to get that from official data. You can help us with that. And I think that started it. And from there, we've really been able to get more and more data so that we have correlations to all the major indicators. We just run at two to three to four, sometimes six months ahead of what official data reports. So it's become a, it's a work in progress, but it's something that's been very interesting. And now it's necessary because China's successes and failures dictate global portfolios everywhere. One of the things that I wanted to ask you about has to do with your use of quarter to quarter comparisons in your reports. Is there a reason for that? And do you look at year over year? Sure. So one of the advantages to having this all in one giant database is you can run any type of comparisons you'd like. And (13/57)
one of the things that we do when we write out our analysis is we put the quarter on quarter figure on there. We put the year on year figure there so that the data presented both ways. I think if you, you can't miss the year on year perspective, particularly because that's the way the Chinese government reports its data. But the quarter on quarter is extremely important too, because that gives you a sense of how things have changed over the course of a few weeks or months. In terms of reporting quarterly data or eight times a year data, instead of going into months and weeks, it's, you know, what we found is that when you report data out of China in particular, but this applies to most monthly data, you get an extraordinary amount of white noise. And what, what are the problems with the PMI, which is, which was released monthly. And this is not just a China issue. This is any PMI released monthly. Is it people make a lot of very small movements? You know, you can have a movement in one (14/57)
month that goes up a little, the second month up a little, the third month, a big draw. For two months, you may have tricked yourself into thinking there was some sort of positive momentum, but the real story of the quarter was a more precipitous drop. Or the reverse of that, you know, two baby dips and a large improvement. It's always good to have frequent data. But if you have too much white noise, it won't tell the story. And we, we ran different time periods for this. We settled on the types of periods that were actually proving to us to be forward looking. We could tell it was happening both in, in reality and in Chinese official data, weeks, months, sometimes quarters ahead of what was being announced when we did our data in a certain way. And that's sort of the methodology we settled on. One of the reasons I asked about that specifically about quarter to quarter versus year over year has to do with the incidence of Chinese lunar new year during this most recent quarter that you (15/57)
reviewed in your early look brief. How does that factor into the data? The fact that I assume that was during a time of year where there would be a lull and economic activity? Sure. And you know, the problem is you cannot make much as you say. You can't make much out of January to February comparisons because sometimes lunar new year falls one place. Sometimes it falls the other. Even Beijing has recognized this in the last couple of years by combining Jan Feb data in most instances. So if you're, you're never going to come out with any really important conclusions about jumps in growth or falls in growth between January and February. The most effective way to looking at Q1 is by looking at a quarterly figure. That doesn't mean you can't break apart the figure. So here are the differences when we were looking at what was happening in China as coronavirus was spreading. We broke it apart and we were reporting weekly updates. Here's a share of firms that were reporting back to work by (16/57)
sector by subsector by state versus private. And here are the results that they were telling us in terms of output and sales and sales prices. So you can present certain data, but you can never oversell January to February data as being something major. The most effective way of looking at this is from a quarterly lens. But so long as you understand that, you can break it down into smaller time periods. But this is something that Q1 operates just very different than most other quarters. All right. So let's get into what your report shows for Q1. Q1 is the quarter where China began to enact its lockdowns, right? Did it begin at all in December? When did this start? It really started in January. So you had reports of something fishy happening in Wuhan and a couple other places in December, arguably even in November. But nobody knew what this was. I mean, you've seen epidemics in the past where you've seen swine flu, you've seen diseases wiping out the chickens. You've seen all kinds of (17/57)
things that were just a very small micro China story. They were tragic, but they weren't global issues. And so very few people were paying attention to them before January. I think January is when this became a bigger issue. The Chinese government started to treat it more seriously. You had potential contagion problems simply because on Chinese lunar new year, you have everyone traveling everywhere. And so the potential of a spread of the virus became a bigger issue. And then when people didn't go back to work after lunar new year, that was when I think the entire world took serious notice of this. So it's a Q1 story for China, even though you had some issues before it. So there are two, well, there are multiple aspects of your report, obviously. And right now I'm looking at both the key economic indicators for Q1, but I'm also looking at the credit shadow finance monitor report. Let's go through the economic, the sort of real economy to begin with. What have we seen based on your (18/57)
numbers in terms of economic contraction in the first quarter in China? Yeah, well, the thing that jumped out from the very beginning, when I say that we started reporting numbers in mid-February, that was almost a month, at least two to three weeks before anybody else was putting out any type of numbers on this whatsoever. And the depth of contraction, the breath of weakness, was really eye-popping. These are the worst numbers we've ever seen, and there's never been anything close. Every sector was in severe contraction. Every region we track was in severe contraction. Every sub-sector, I think, except maybe one or two were in severe contraction. Every headline metric we saw was showing severe weakness. So this wasn't something we'd ever seen before. And what was interesting is that it was less surprising looking at the data in February when you were looking at all these firms in lockdown for shutdowns of certain sectors like property and, of course, manufacturing factories being shut (19/57)
down. So you don't expect the numbers to be anything other than terrible during February. What really became interesting is that when we moved into mid-March and the Chinese government started pushing people back to work and started advertising the idea that firms were reopening at this torrid pace and that workforces were back and that things were getting up and running and lights were being turned on, we were reporting all through that period. And what we thought was fascinating is that even as firms were going back to work, and we saw that by our closure rate falling and firms reporting being back to work in a whole or apart, the data kept getting worse. So the output was not going up, firms were still reporting very bad data. And so the idea of a recovery that people had on a v-shaped recovery in March into April, it became very clear very early on that this was never going to happen. Firms were just getting their bearings. Even when they were reopening, they weren't returning to (20/57)
any type of growth. And March data were much, much weaker than people thought. And we saw that from the very beginning in March. So there was less surprise when some of these weak numbers came out even from China's government because it's what we had been seeing all the way through the quarter, getting worse, if anything, not getting better, even as we got into mid-March. Does that mean that a good number of people were not going back to work? Does it also mean that firms in order to appease workers or enact safety measures limited the amount of time and productivity of firms? Is that partly what it is? Is it a reflection of the productivity hit that you get when you have to run a factory with safety and NPIs as non-pharmaceutical interventions, as being a core aspects of your operations? No question that was part of it. But the real problem was that going back to work didn't mean what people thought it meant. So you had these headlines, China's getting back to work on the road to (21/57)
recovery. Well, what does back to work mean? Well, you would have labor forces forced back to work. You had police escorts bringing buses of migrant workers from the countryside into factories in the Rust Belt in order to get factories up and running. You had executives slowly returning from working remotely. You had lights going on. You had factories conveyor belts turning on, but you didn't have anything happening. Output wasn't happening. You weren't seeing any of the internal metrics getting better. Firms themselves were reporting to us that their workforces were coming back and their lights were going on, but they weren't doing anything. I think that's what people were missing early on. They were obsessed with the idea of getting back to work without realizing that getting back to work doesn't mean anything if you're not doing anything when you get there. Well, that leads into a question that I had, which really has to do with what kind of... I mean, are we underplaying or (22/57)
underestimating the psychological barrier to interaction, whether inside or outside of the workplace that people in China will have, especially in Hubei province, where was the epicenter of all of this, and the dampening effect that this could have in terms of Q2 output? Yes. I think that it's not surprising if you think about it, but look, these conditions that they will be returning to and that those of us in the US will be returning to at some point are not the status quo ante. This is not what we saw before. If you're around somebody on your factory line or in a store when you're trying to buy something and someone starts coughing, you're going to run for the door. I mean, I was in a pharmacy the other day and someone walked by me and started coughing and I almost did a cartwheel in the other direction. I was getting away from them so fast. Do you wear a mask when you go out? I have a mask. It's a crappy mask. I do wear gloves. I've got someone hopefully sending me a few masks I (23/57)
can give to my family, but we have been more and more protective of this simply because doing as much work in Asia and in China, we don't see this as odd as I think most Americans see the idea of masks. I remember early on in January, I was walking through the airport and you'd see someone with a mask on, particularly if they're from Asia, and people would recoil even though that was the sensible thing to be doing. Not just the sensible thing, but when I see someone wearing a mask, I think, oh, this person is far more responsible. I have far less to worry about. It isn't even that I've less to worry about because they're wearing a mask and therefore I'm less likely to get an infection from whatever they may or may not have, but the fact it's a way of signaling, hey, I'm extra careful. You're right. That is entirely something that we're not used to here. The West is going to have to learn this lesson. I think that whatever the road to recovery is in the United States and Canada and (24/57)
Europe and elsewhere, part of it's going to have to be walking around with a mask for the next several months because this is the new reality. We have to make sure that we're not contagious and other people are not giving us something simply by passing by and having particles pass between us. This is the new reality. I don't think people have thought this through and there are no answers yet, but yes, a mask is going to start becoming a common feature in the weeks and months ahead. Well, one of the things that we've talked about, not to get too far off track here, but it's almost like everything is COVID-19 these days. Something I've talked about on this show and other interviews that I've done is that I think the narrative in the US does not serve us very well because it suggests or it's gotten people thinking that we have to just go through this short lockdown period and once we flatten the curve, then we're done. But that's not actually what's going to happen and people are going to (25/57)
have to learn how to live with this virus. There's no clear evidence that we're not going to have a second wave, for example. In fact, some of the studies I've looked at suggest that the flatter the curve based on mitigation measures and quarantines and things like this, NPIs, the more you can flatten it in the initial phase, the more it peaks later on and that the area under the distribution tends to be pretty much statistically not identical, but the difference is not that great between cities that enact draconian quarantines and those that don't in the long run. So I think there's a concern about a political crisis in the United States when they go to lift the quarantine in some of these cities like New York and the numbers start going up and people start to panic because they've got different ideas in their head. But to this point about a second wave, what are we seeing and what are you seeing with your data and your surveys in terms of this second wave? I've already started seeing (26/57)
there have been reports coming out in mainstream US media outlets. I saw a video today posted online of someone in a Chinese city collapsing. Once again, these are videos that were circulating commonly months ago. What are you seeing in terms of reinfections or rather an increase again in prevalence of the virus now that the quarantines have been lifted? Yeah, it's too early to know. I mean, the second wave can mean a lot of things. It can mean letting up on draconian measures and then seeing social distancing go away and so you get more infections. It can mean allowing more people to travel to China. You see what's happening on the Russian border. They're actually putting new cities into lockdown because people are traveling into China and re-spreading it. There's serious questions about whether you have immunity once you get it. So we could be seeing a first wave now. People could be relaxed. It could either be because of the weather or because of some temporary immunity. And then (27/57)
you could see a reinfection wave hit again a few weeks or months from now. There's just so many questions about this. And so this is what has made economic strategy so difficult around it. We don't know the medical aspects of this. We don't know whether this is going to be a six-month story, a three-month story, an 18-month story, and there's going to be a lot of trial and error here. And I think the lessons we learned from so far is that no one has been able to control this so far. You look at Singapore, which is a success story, Singapore as we speak is going back into lockdown because of some sort of second wave. And that's also probably going to happen other places as they ease up on the original lockdowns. So enormous number of questions right now. That's made the job for policymakers trying to figure out an economic recovery path out of this nearly impossible. So here's a question for you, and I'm going to ask it in a few different ways during the course of this conversation, (28/57)
because I think it's very important. Because on the one hand, there are obviously many difficulties in gathering credible data in real time that tells a backward-looking picture about the Chinese economy. That's challenging enough. It's even harder to make projections about how the economy is going to look. And one of my questions is how do you incorporate the virus, the impact of the virus, and the impact of the monitoring and mitigation measures that will continue to be taken going forward? How do you incorporate that into your economic forecast for China? Well, one way is we collect data on it. So for instance, what we're doing for April is we're going to have an entirely new discrete survey out in the field asking people about supply chain questions, about possible COVID-19 relapse questions, asking about credit conditions, and how the economic stimulus and the aftermath is happening. I mean, we know that they're pumping an enormous amount of money into the economy. Everybody who's (29/57)
seeing this is, but who's being part of this? So what do we know about their stimulus efforts? Because for me, when I've tried to study China, it's almost like I had written out some questions for you and I scratched them all out before I came in here here, because I was like, I'm asking these questions from a Westerners perspective. And the way that the Chinese economy expands credit and the way that credit circulates is totally different than how we think about it here. So what are they doing? And is it in any way unusual or even significantly greater than what we've seen in past economic downturns? Absolutely. This is unprecedented. And I spent a lot of my time explaining the nuances of China's non-commercial financial system and how it differs from Western commercial financial systems and how the West allows risk taking and it's not backstopped by the state and allows firms to fail and all these other things. This is not a time in which any of that applies. I think what you're (30/57)
seeing for the US Fed right now is the same type of approach that China's looking at and everyone else is looking at, which is this is such a massive all-encompassing issue. It's a supply shock couple with a demand shock, the likes of which we've never really seen before, that you have to throw everything at this. So looking at the China example, they are trying to backstop everything. I mean, the biggest threat to the party has always been social unrest. Social unrest comes from people who don't have jobs. So they don't want to lay off workers. They don't want firms to go out of business, but you can't backstop everything. And even if you could, you can't do it all at once. So one of the big questions for us is what are they prioritizing and how fast are they getting this stimulus out and what are they not doing? So one thing we are seeing is we're seeing more stimulus early on going to the usual suspects, manufacturing firms, larger firms, state firms, coastal firms, the bread (31/57)
baskets, the traditional bread baskets of growth. That doesn't mean everybody else isn't going to get it. It just means that those guys are getting priority. Another thing that we've seen is that the credit numbers in the first quarter are actually somewhat deceptive because they're lower than one would think. And that's because of physical disruptions to the credit market. So people could not go out and get the loans they needed. They cannot issue bonds because the economy was in lockdown. Banks were closed. People couldn't travel places. Well, the banks couldn't be open remotely. Why is that something that would seem to be one of those things that wouldn't need to be impacted by the lockdown or at the margin shore? But why would banks be unable to extend credit during a lockdown? Oh, some can. Some can. But the entire Chinese economy, it wasn't in a place, no economy on earth is in a place where you just call up your banker and then every loan would be extended automatically. US is (32/57)
trying to do that right now with the small business loans. But it's not that this stuff isn't happening. It's an enormous logistical nightmare. You've got millions of firms in China trying to access credit. You've got consumers who need to be paid. You need credit too. So it's a logistical nightmare. So what I think you're seeing right now is you're seeing the levels of credit high and will continue to get higher as we go along simply as they run through the priority line. It does a queue for credit and they're going to try to give everybody everything they can. But interestingly, the one thing they have not done yet, but we're watching this closely, is go to the old playbook of heavy infrastructure stimulus. So back in 2016, you saw it awful. You saw a real scare in mid-2015. You saw a total China market panic in early 2016. And one of the ways China recovered from that was building lots of things. Many of these were bridges to nowhere. Others were apartment complexes it wouldn't be (33/57)
lived in. Others were productive things. But basically just building, building, building. This is something that China has done a lot of after that happened. And I think they saw that as a necessary evil because it was in the run up to the party congress where Xi Jinping was cementing his rule. There were some political strength to the economy that was needed for political reasons. After that was done, I think a lot of people in Beijing, a lot of influential people in Beijing said, this is it. We're not going to try to do this anymore. We will stimulate the economy, but we're not going to do it the old school way of just building things. And amazingly, that was what we saw in our data. In 2019, which was a much weaker year than 2018, you actually saw stimulus because you always see stimulus in China, but you didn't see it going into transportation construction or any of these sectors where they're just building. What you saw is broader credit provision to firms. So they would stop (34/57)
firms from going out of business. Small medium sized enterprises who typically couldn't get credit, they were given credit. Private firms who couldn't get as much credit as state firms, they were given credit. Agricultural firms, they were given credit. So there was stimulus, there was more credit provided, but you didn't see a resort to the old playbook of just building things, which is what scares a lot of people in Beijing about the non-performing loans and the debt to GDP ratio. It scares people in Beijing a lot more than it does in the West in terms of views of China's economy. They're much more cognizant of their problems in China than they are outside of China. Well, they've stimulated that sector so much that they've actually had to go abroad to find places to build stuff. That's right. And they know that. And so this, until coronavirus took hold, I think their playbook had moved away from this. They thought it was a danger to the party to continue to rely on this lever. But I (35/57)
think what's interesting now is there are conversations going on in Beijing. How much do we have to fall back into this? Because the story of China's growth is no longer a story of domestic resiliency. Q1 was terrible. They're in severe contraction and they are recovering from that contraction in Q2. But the problem is the rest of the world is shutting down. All of China's trading partners are shutting down one by one. The US and Europe, of course, at the top of the list. So there's no global demand. Export orders are falling off a cliff, which means that the original recovery story they thought they could tell back in January or even February, they can't tell anymore, which means that not only are the party's growth targets way, way, way out of the line of possibility, although they haven't admitted that quite yet. But the idea of how do we spur growth in the absence of demand? Well, we don't know how much of this demand is going to be taken off, lying on for how long. What are we (36/57)
going to need to do that we didn't think we'd need to do before? And that's why we're watching our real estate construction data so closely, because this has not been an option for them for a long time, but it may become an option later in the year when they realize that they're going to have a very difficult time not being in a contraction all through the first half of the year. Jesus, that's the second leg of the story. The virus we talked about and we'll continue to talk about, which is the uncertainty around the virus, the mitigation efforts needed domestically to animate the supply side of this equation. But on the demand side, China has always relied on an export market. They have talked about wanting to transition to a consumer-led economy, but they have not been able to do that effectively. And now they depend on foreign consumers, as they're coming back online because they got this virus late, they're depending on the rest of the world to be available to demand the goods that (37/57)
they can supply. But as we're seeing, the rest of the world is going into lockdown. So what happens in China? You're saying that inevitably, or it increases the likelihood, perhaps a better way of putting it, that you're going to see them roll back to break their previous commitments and try and stimulate their manufacturing sector further. So are you seeing that in the loan uptake figures? What sectors have been taking the most amount of credit early on so far? Yeah, we're not seeing it yet. So we are seeing more loan uptake in manufacturing and we are seeing it from larger and state firms. That's not surprising. But I think that the reason the numbers aren't higher is simply the disruptions of the credit market. They haven't gotten things back. I think as the next few months, as we look into the next few months, I think the credit numbers are going to continue to go up and up and up and up and up. There's this idea that China is resisting the ways of the West right now and they're (38/57)
going to try to do it a lot more gently. They're not going to be able to do it gently. There is no solution to this problem. And even if there was, the Chinese way is to throw an enormous amounts of credit at it. So you're going to see a lot more credit going in the economy. You're going to see a discussion about backtracking into heavy infrastructure stimulus. And you're going to see some very, very difficult decisions being made over who gets the available credit and who gets left out. Because no matter how generous they want to be and no matter how much they want to support everybody, they're not going to be able to. It will be impossible. They cannot backstop everyone and everything. So there are going to be losers in this and those losers are going to do very poorly over the next year. So this is the decision tree that's being worked out in Beijing right now. Who are the losers there could be? This is tough. So I have another question here, which is how is China going to get the (39/57)
dollars it needs to import the raw materials it needs in order to ramp up this export machine? How is that going to work in the current environment? Because US Central Bank has not set up swap lines. It set up swap facilities with many countries, including many new emerging market economies, has not done that with the People's Bank of China. What's going to happen there? Well, I have a somewhat different opinion than others. I mean, yes, the Fed doesn't have a swap line with the PBOC and yes, there would be severe political pushback from the idea of exporting dollars to our adversary China. But the Fed also doesn't have a swap line with other banks of allies. I don't think we have one with Korea, for instance. So the idea that if things got really bad and we're talking about some of these, you know, the idea that this is going to be a great depression, services are dead for the next six months, unemployment, it just goes on and on and on and businesses can't get back to work in any (40/57)
meaningful way. I think a lot of things that were not possible before will become possible. You've already seen that with the type of programs the Fed has released in the last few weeks. I think that there's just no level they won't go eventually in order to stabilize or save the economy. I think that includes extending swap lines to the PBOC eventually. I think that means extraordinary types of fiscal monetary policy in both the US and China and everywhere else. But what would be the reason for doing that? Would it be because they'd be concerned that they would begin to flood the market with US Treasury securities in order to raise the dollars they need? Would it be because they would be concerned that the absence of Chinese manufactured goods would spike inflation at the same time as Americans needed to keep consumer prices low because they're expanding the money supply and expanding fiscal stimulus? I mean, what would be the logic there that the Fed would do that? These are the (41/57)
issues that people are talking about, but the reality is at the end of the day, when things get really bad, the world floods into safety and safety is a US dollar. Now there is an issue, of course, with a lot of Chinese companies having taken out dollar-denominated loans. There is a vulnerability there. It is nowhere near what it was a number of years ago when China was extremely vulnerable on this. But look, you have in a world where the dollar is strong and appreciating, you need to have dollars yourselves. And I think that if the PBOC wasn't able to get access to dollars, you'd have a major problem that would circle back on the rest of the global economy. It would hit emerging markets and then it would hit everyone else. So I think the idea is that the dollar is the flight to safety. And I think if we're going into something truly horrific, then there will have to be access to the dollar from just about every one of the major players. And I think if there was a restriction on that (42/57)
for too long, it would cause a rupture in the system. So here's another question for you. If China's going to go the route of stimulating its manufacturing engine, but the rest of the world isn't really available to purchase the outstanding supply in a traditionally commercial way, would we begin to see China engaged in more of these favors abroad like they've been doing recently, like they gave masks and PPE to countries like Greece and Italy as part of their, I don't know how you would call it, trade diplomacy form policy, because the Chinese economy and the Chinese political system are much more connected than let's say the US is. So maybe this is a way of kind of asking you also how coronavirus and how this entire situation could be an impetus for a narrative shift by the CCP to explain not just its poor growth numbers now, not just its poor growth numbers going back quarters as a result of mistakes that the party has made not on account of the virus, i.e. take advantage of this (43/57)
crisis, but also take advantage of this crisis to further geopolitical ambitions of the party. Yeah, well, on the economic side, what we have counseled them to do for years is take advantage of a slowing global environment and to allow their growth targets to go away to accept slower, healthier growth. The Chinese economy is not growing. Let's just take COVID out of the picture entirely. The Chinese economy is not growing at 6%. It was probably growing at about half that, but they had to advertise it was growing at 6% because the deal the party has made with its people is that we will continue to grow the economy at this pace. And that's why you should trust us as your one party and trust us with your leadership. It's been outdated for a while. They should take advantage of this to say, look, what we're here to do is make China stronger, not faster growing in an unsustainable way. And we were going to buckle down and accept lower rates of growth, some of most of which was foisted on us (44/57)
by circumstances outside of control, whether it's a trade war or a global manufacturing recession or a coronavirus pandemic. And that's what they should do, but they haven't done that yet. So the jury's out on that. In terms of the geopolitical side, this is what they've been doing for years and years and years. People are seeing the masks go out and are thinking this is some new playbook. It just used to be briefcases of dollar bills before. This is always this kind of China's influence diplomacy. They're always trying to do things in order to achieve soft power goals. So they're going to have to be a little bit more aggressive about it because it's a tougher environment out there. But I think this isn't so much a paradigm shift as it's forcing China to do things that before it would rather have done under the radar, away from the public view. And now it's forcing them to be much more public about this type of thing, because quite frankly, people are mad at China because they lied (45/57)
about the coronavirus pandemic spread early on. They wouldn't let the CDC in. They wouldn't let the WHO in a meaningful way. And this thing spread. So there's a lot of people angry about China. And in the aftermath, they tried to secure global leadership of this thing by saying, we cured it in China. It was probably done by the US military anyway. And it really backfired. I mean, this was just absolute incompetent diplomatic management. And as a result, they're clawing back from where they were before and trying to act like a responsible party, which I certainly applaud. But this is nothing new. It's just more difficult circumstances, forcing to light things that the party has done for years and years and years and years. Well, they just issued some new meat guidelines, meat like diet guidelines, and they reclassified dogs as pets, not livestock. So either they are trying to see that. Yeah, exactly. Yeah, as a dog lover, I'm happy to see that. So either they're signaling that this has (46/57)
not come from our bio weapons facility in Wuhan, or that this is not the US military doing it. It's one way or the other. It certainly doesn't bode well for the theory that the US military has done this. But going back to this thing about growth, you kind of made mention of it. It's sort of like a double-edged sword because in some ways, growth is not good for China. If it's not the right kind of growth, and they've had the wrong kind of growth for a while. So this is the dance, I think that a lot of foreigners or people from the outside who are looking and trying to understand this, and it also makes it difficult because I had written here, best case, worst case, base case scenarios for China GDP. But that kind of misses the point, doesn't it? Because the best case scenario for China isn't that it gets the highest level of growth. The best case scenario for China is that it gets the highest level of growth in the direction of what kind of growth that it wants. Even if that growth is (47/57)
less growth, then the worst case scenario would be tons of growth in the wrong direction, right? Yeah, it's accurate. So how do you think about that? In that context, what are the best, worst, and base cases for China's economy going forward? The best case is, and this is not going to happen anytime soon, is that the Chinese economy actually deleverages instead of just announcing a deleveraging campaign, which our data show was not actually deleveraging. It was a few years of slower, additional leveraging, but just to deleverage to the point where your growth can outpace your dead load. Because that's the real problem. When you have the other dynamic, it means that you're cutting down on productivity, and you're in the process of creating a zombie economy, which is what China's on the path towards right now. So what they do not want to do, as you said, is grow fast, because they can't support that other than with more and more and more credit. We have spent years trying to get people (48/57)
away from GDP growth as a measure, and not just in China for everyone. But look, GDP, and here's the real problem, is a measure of aggregate growth. It's not productive growth, which means if you want to hit a certain target, you can hit any target you want by building a bridge, tearing it down, building the same bridge again, tearing it down, building a third time, tearing it down, and go on and on and on and on until you've hit 8%, 6%, 9% growth. Now, your productivity has just fallen off a cliff. Your waste of resources is legendary, but you can still hit your growth numbers. And I think that's the problem that people have fallen into for so long. One, looking at GDP as a sensible measure of anything. And second, lauding the Chinese government for high growth levels when it's actually been very counter productive to the idea where China will create a sustainable growth model and become a true global leader in the future, because what they're doing right now is only done through (49/57)
enormous levels of non-performing loans, non-productivity. It's not sustainable. And what it's doing is forcing them to push good money after bad. So in a non-commercial financial system, one of the reasons you don't just have the thing fall over and a domino effect, it's because you can swoosh huge amounts of capital for one financial system, the other to plug holes, to make problems go away. But what that means is you're always chasing good money after bad. And you're always lowering your level of productivity compared to what you'd be doing if you just let the bad actors fail, the bankrupt firms go bankrupt, the trust products that should be not returning anything go. We can't even do that here, Leland. Hey, look, I'm aspiration. This is crazy, right? I mean, it's not, we're not even doing that here. It's not going to happen there, right? It's not going to happen there. It's not going to happen anywhere. But the difference is that during a time, at least most of the world was (50/57)
pretending to understand that up until now. So now we sort of thrown in the towel. Europe's thrown in the towel. Japan's certainly thrown in the towel. China will throw the towel. It already has, no matter what it says. But they have for years been ignoring this problem, which means they're at a much worse starting point than anybody else's, except arguably Japan. Or maybe they're in a better starting point because we're all moving in that direction. You may need to start doing this for the US. Anything's possible. You might need to do US-based book. Look, here's your new paradigm. It is that there is no longer a failure allowed, bankruptcies are allowed, the government backstops everything, and we're going to see how long that goes until the system implodes. So there's your new paradigm. Yeah, no, in all seriousness, that is a concern, right? And now we're kind of digressing a little bit and we'll get back in. But this is kind of the problem with the debt-fueled growth model that (51/57)
we've had in the US. And again, the something we've talked about on the show before, with rising levels of wealth inequality, the only way you can sustain that is the debt financing. And the only way that you can sustain debt financing in that dynamic is by lowering interest rates. But if you lower interest rates, you eventually divest savers of the capacity to save. You move them out to become speculators. And so everyone moves into the stock market. And then the value of the stock market becomes the health and the wealth of your savers. So then you become invested in the appreciation of the market. And the entire government then begins to buy the index, right? So then you basically, ultimately all roads lead to Rome. It's the same thing. It means government owns more and more of the economy. This is the place that we're going. So it's ironic that we've been having conversations about China moving towards a consumer-led growth model when we here are moving in their direction. So (52/57)
anyway, to bring it back again to what we were talking about, maybe instead of asking you for pine the sky, crazy best case scenarios, what do you think is going to happen? What is your kind of base case? What do you foresee given everything, including the challenges of having to navigate this, what might be a start and stop, stop and go model of containment mitigation with this virus, not just in China, but also in the demand countries that it depends on for its export-led growth model? Well, for a number of years, we've said that the future of China is going towards one or 2% growth at the most. And I think that the difference between what's happened with COVID is it simply just sped this process up. It's getting closer to the point where we're going to get lower rates faster. Look, what I was describing before was that the Chinese economy is based around avoiding failure, avoiding bankruptcy, backstopping everyone and everything. And what that's meant is that productivity has fallen (53/57)
and that the economy is basically stagnating over time. And that means that getting positive growth at all in the next decade from now is going to be very, very difficult. COVID sped that up. The problem here is that I think that that's happening around the rest of the world too. China is just farther ahead on the curve on this. So I think that the idea that China will be growing at anywhere near the rates it has been is quite ludicrous. I think the idea that they're going to be able to grow at half the rates they've been claiming is quite unlikely. I think we're looking at an extraordinarily low growth model coming out of China, at which point it's going to make it harder for the party to operate. And it's making it harder for the party to backstop everything. So they have some real headaches going through. China can get out the other side. They can come out the other side. But the longer they wait to restructure the system and to stop relying on bad debt and stop relying on an (54/57)
investment led model, the harder it's going to be. So Leland, I'm going to move us into the overtime. I want to pick your brain a bit on the geopolitical dimensions of this because I feel that as we move along the horizontal axis of time, more and more of these conversations that have been happening or discussed in economic terms are going to really become political. And so I want to talk about that. I also want to talk about the real estate market in China. I'm fascinated to learn how this has been impacted. Also, to this point about geopolitics, Japan has been incentivizing. This came out today, I think, in the news. We're recording this on Friday, April 10th, 2020. They are incentivizing domestic companies as part of their bailout package to move their operations out of China. So this also, I think, is an interesting phenomenon. 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, Auto-Didact, or Super Nerd (55/57)
Tears, head over to patreon.com slash hidden forces or scroll down to the summary section of this week's episode page and click on the link that sends you to the hidden forces Patreon account where you can continue to listen to my conversation with Leland, including gaining access to the transcript of today's conversation, as well as this week's 22-page rundown, which includes all of the research information that I compiled to prepare for this episode. Also, don't forget, if you haven't integrated the Patreon RSS feed into your podcast application that you use to listen to the regular episode, you need to do that. Overtimes are downloaded directly to your phone and you'll be able to listen to them just like you listen to the regular episodes. Leland, it was awesome talking with you. Stick around and we're going to continue the rest of our conversation in the overtime. We'll do. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's (56/57)
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 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. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Conspiracy Theories Why the Rational Believe the Irrational Michael Shermer #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 to learn how to think critically about the systems of power shaping our world. My guest in today's episode is Michael Shermer. Michael is the founding publisher of Skeptic Magazine. He hosts his own podcast, the Michael Shermer Show, and he is the prolific author behind many best-selling books that you will recognize by name like The Believing Brain, Giving the Devil His Do, The Moral Ark, The Mind of the Market, and many more. His latest book, Conspiracy, presents an overarching review of conspiracy theories who believes them, why, which ones are real, and what we should do about them. You're going to come away from today's conversation with a framework for thinking about conspiracies, what we mean when we talk about a quote conspiracy theory, the different types of conspiracies that (1/57)
exist, how to distinguish between a conspiracy that's real and one that's imagined, and how to tilt the information landscape towards producing more accurate models of the world around us so that we're elevating theories that more closely converge on the truth without resorting to censorship or policing of thought and information. For anyone new to the program, Hidden Forces is listener-supported. I don't rely on advertisers or commercial sponsors, so if you want access to the second hour of today's conversation, as well as the transcripts and intelligence reports, which include my takeaways from every episode, as well as 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. If you want access to our Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and (2/57)
dinners, feel free to send an email to infoathiddenforces.io, and I or someone from our team will get right back to you. And with that, please enjoy this incredibly informative and timely conversation with my guest Michael Shermer. Dr. Michael Shermer, welcome to Hidden Forces. Nice to see you. Great to see you too. So you really crushed it with this book. This is very timely. It's kind of a subject that you've written about in different ways than some of your previous books. What makes this one different? Is it just you kind of wanted to start off by building a framework for thinking about conspiracies? Yes, well, conspiracy theories and conspiracies has always been in our wheelhouse of skeptic. We've been around for 30, this is our 30th year, started in 92. And we've covered it over the years, JFK several times, 9-11 Truth, the Obama birther, you name it. We looked into it, the whole militia movement in the 90s was largely based on conspiracy theories about the government building (3/57)
FEMA camps to imprison Americans who own guns. And during the Obama administration, same kind of conspiracy theories about false flag operations as an excuse to take away Americans guns. I mean, that's been in the news recently because that was the Alex Jones, Sandy Hook, false flag conspiracy theory. I'm a writer and a social scientist, so I'm always looking for new projects. I don't want to be one of those authors that writes the same book over and over. I try to move on and my books have dealt with lots of different topics, but I've never focused on conspiracy theories as a problem to solve. That is, namely, why do people believe them? What's the theoretical model there that you can then test empirically? And thankfully, there is a sizable body of literature in the social sciences on conspiracy theories now. That didn't used to be the case in the 90s and early 2000s. It was still kind of on the fringe. Journalists would write colorful articles about the nut jobs that believe this or (4/57)
that. Academics largely steered clear of it. It wasn't really an academic field like it has become in the last 15 years or so where social scientists actually collect data. Who are these people? What are their educational levels? What's the gender ratio? Where do they work? What kind of jobs do they have? What are their ages? Where do they live? Basic demographic data that social scientists collect had never really been done to the extent that it has been recently so that we now have a handle on it. Summarize all that research. The last chapter of the book is my own a massive research survey project on that subject. I love this so much to discuss. I love the demographic part. I love all the data that went into this and the attempt to try and describe likelihoods to different cohorts based on those parameters and whether or not they would be more amenable to conspiracies. I found a lot of that very fascinating and I actually want to look into it. You mentioned the 1990s, the FEMA camps, (5/57)
the black helicopters, the UN takeover of America, German troops spotted in Texas, and Alex Jones. We did an episode with Alex Limoyer, who's a documentarian, who did a documentary recently on Alex Jones. I had gone down on Alex Jones' rabbit hole when I had become disillusioned with, I guess, the world after the 2008 financial crisis. I'm very familiar with him. Were you familiar with Alex Jones back in the 90s or when did he first come across your radar? I think early 2000s after 9-11 is when he came onto my radar. I vaguely remember him, or maybe this is a false memory of him ranting about the Oklahoma City bombing and has the fingerprints of the CIA all over it, or maybe it was the FBI, or the government, or something like that. Although I may be remembering that from that documentary film, but definitely after 9-11. The 9-11 truth thing, it did surprise me because it was so obvious why the buildings collapsed, the planes hit them, and they collapsed right at the point of impact. (6/57)
How could that be spun? Well, it was. It was amusing to watch it unfold in real time, and we documented that, published many articles and skeptic about it, that you really have to reach to make that a conspiracy theory of the US government. Of course, it was a conspiracy by 19 members of Al Qaeda plotting to fly planes into buildings without telling us ahead of time, is orchestrated by Osama Bin Laden. That's a conspiracy by definition, right? But which conspiracy theory is the correct one, that one or the inside job one? That's, I think, when Alex came onto my radar. It was interesting to watch his audience grow as the internet evolved. I think he started what, in cable radio? There was no satellite radio then, right? He's in public access television in Texas. Yeah, that's right, right, in Austin. Yeah. Of course, with the internet, you can reach hundreds of millions of people instantly. I'm often asked, is all this new? No, nothing's new in conspiracism. There's always been (7/57)
conspiracy theories all the way back to ancient Rome when Rome burned down and Nero was the emperor. He was accused of being, he made it happen on purpose, my hop, or he let it happen on purpose, Lyhop, and all these conspiracies. That's not new. It's the speed with which the transmission of conspiracy theories can spread and how many the reach is just astonishing. After 9-11, that homemade movie, Loose Change, that was astonishing. This guy got views that Hollywood producers would die for. Of course, he didn't make any money on it. He didn't charge, but tens of millions, I don't know what it's up to now. There's probably 100 million people have seen this thing. It's astonishing. Then it starts to more fringe to more mainstream audiences where people get used to hearing about these, right? By the time Trump comes along and starts spouting his own conspiracy theories, Obama wasn't born in the United States. I remember when that happened and he's on CNN, astonishing. He could get that (8/57)
kind of coverage. Anderson Cooper is asking him, well, where's the evidence for this? Oh, it's huge. I got people on the ground in Hawaii. You are not going to believe what they found. Well, tell us. Oh, no. I'm saving it. Can you give us a hint of what they found? Nope. Just a lot of people are saying. That's when he started this. A lot of people are saying. And the whole controversy around the long form versus the short form birth certificate. Oh, I had a friend send me that PDF with the whole breakdown. You could tell that this was photoshopped. And here's how you could tell. Then somebody finally that understood how photoshop works did a complete analysis showing why that was just nonsense. I'm concerned that we're already losing people. And this is actually something that we're going to talk about today, which I'm excited to talk about because at no point in the book do you say that conspiracies are by default not true. In point of fact, you go out of your way to say that (9/57)
conspiracies, there are conspiracies that are true. And in point of fact, the reason why we tend to believe conspiracies or one of the theories behind why we think that people tend to believe conspiracies is because that sometimes they are true and you're better off believing in a false conspiracy a lot of times than not believing in a conspiracy that's real and you end up dying because you hate your blind spot. I know Luke Rudowski also and I'm familiar with loose change. I'm also familiar with the documentary film Zeitgeist that came out in that period of time. And as a millennial who was coming of a particular sort of age in that period of time, really Zeitgeist for me was a bigger deal. Loose change was I think, in fact, it wasn't something that I really converged on. A lot of that stuff got roped into things like Zeitgeist or Alex Jones. And this whole community fed each other. Something else that comes up for me when you're recounting this period of time is a sense of reclaiming (10/57)
history, reclaiming power over our education of the world. There was a sense during that time and I think it was amplified by the fact that this information was spreading through the internet and there was this kind of do-it-yourself culture around it, which gave it a sense of authenticity, something that I talked about with Alex Lee Moyer that I think gives Alex Jones credibility as a voice is that he's a hot mess. There's this authenticity to Alex Jones that then sort of bleeds into a lot of the stuff he puts forward, so much of which is, you could call it basis conspiracy, theories without any evidentiary basis, but it's not because they are by fault, quote, conspiracies. And I do want to make that distinction because we're going to talk about a lot of stuff here today. Before we do any of that, because I could start going all over the place, let's start with maybe what a conspiracy theory is. How do we define that? What's a conspiracy theory and how do we spot one in the wild? (11/57)
Right, it's your binoculars. Well, first let me comment, Zeitgeist, because I remember when that film came out, I was researching and writing a lot about science and religion and the origins of religion, the anthropology religion. And then if I recall, the film started off about the secret origins of Christianity and how it really began and what all these things meant. And so I thought, yeah, that could be interesting. But then the guy goes off on, and then this was part of it and that was part of it and through the middle ages, all tied together. It's like, this is too grand a scope. This is not how conspiracies work. But yeah, that was another one of those that in the early days of the internet that really got legs, I think, again, tens of millions of people seemed like people used to send it to me all the time. Okay, so a conspiracy is two or more people plotting a secret to gain an unfair, illegal or immoral advantage over somebody else. It's not complicated. It's by that (12/57)
definition, these things happen all the time. Coalitional plots against people in your group or between groups is quite common in our evolutionary history. So my evolutionary argument is that we evolved a constructive conspiracism that is a kind of paranoia in which in signal detection theory language, it's better to make a type one error in which you assume a conspiracy theory is true when it's not, just in case, versus a type two error where you miss a real conspiracy that could harm you. So there's a kind of a logic, a rationality to it as it were, because the subtitle of my book is why the rational believe the irrational. In many ways, there's a kind of rationality behind most conspiracy theories. There's a tiny little element of truth, even in Alex Jones's crazy rantings about false flag operations at Sandy Hook, there have been false flag operations in the past. I mean, the CAA is notorious for their false flag operations in the 50s and 60s, particularly rigged elections in South (13/57)
American countries in which we favor fascist dictators over communist dictators because they're going to be friendlier to US business interests in those countries, less likely to nationalize the company like a communist dictator would and so on. And so before you know it, we're funding a lot of these programs that Congress didn't approve, oftentimes didn't even know about it, much less the public, right? Or the famous Northwoods document that was given to President Kennedy by his own administration, top people in his administration saying about all the different kinds of false flag operations we could perform as an excuse to invade Cuba again after the Bay of Pigs fiasco, but really ramp it up. I mean, a total invasion and assassinate Castro, decapitate the entire regime. That would have involved terrorist attacks on Miami. Yes, right. Shooting down like an American airline. I mean, what? To his credit, Kennedy said, we're not doing anything. This is crazy, right? But that that CAA and (14/57)
in his top of administration people were proposing this tells us that this kind of thing is not totally out of left field. This does happen. I mean, I talk about MKUltra, the CAA dosing American citizens with psychoactive drugs like LSD is a form of research on mind control, out of fear that in addition to the missile gap, there was the mind control brainwashing gap with the Russians and the Chinese and the North Koreans. We got to get on this. CIA did that or the Cointel pro of the counterintelligence program by the CIA of planting spies in social justice movements in America, like the American Indian movement aim, many feminist movements, the Black Panthers and so on. And these are pretty much probably illegal, certainly immoral. And certainly Congress never approved these actions. And again, this was in the 60s and 70s, all the way up to the 90s before Congress kind of cracked down on the sorts of espionage things that the CIA could do. But even there, homeland security has been (15/57)
conducting warrantless wiretapping and monitoring of U.S. citizens, email, phones, and so on under Obama, Mr. President transparency. So it's like when someone like Alex is ranting to a lot of people that know some of this stuff, they think, yeah, that seems plod, that's not completely crazy, could be. Absolutely. So again, like I said, there's so much to discuss. You mentioned constructive conspiracism. There's actually a section in your book where you you actually come at this subject from a lot of different angles. In the case of constructive conspiracism, you actually break down three different types of conspiracies in this category, proxy conspiracism, tribal conspiracism, and constructive conspiracism, which I would like to discuss. You also layer on top of that certain psychological or sociological forces that can exacerbate this. And so I want to get to that conversation as well. Before we do, maybe just to set the context here, how widespread is this phenomenon? I've always (16/57)
kind of wondered just how many people believe in things for which there's no real evidence to support it. That's how I tend to think of this. And because these also these conspiracies break down, you know, like along a spectrum. So you've got sort of paranoid conspiracies that you talk about versus quote conspiracies or things that are much more plausible. Help me understand that. Lay the landscape out for me and our listeners, and then let's start to break into the different types of conspiracies and why people believe in them. Right. Well, first of all, it's not fringe. A survey show that everybody believes at least one conspiracy theory. I mean, if you do a survey and you have 30 different conspiracy theories, none of them are zero. Everybody takes at least one of the boxes. So that shows it's not a fringe thing. It's not tin foil hat wearing overweight guys in their parents' basement age 40. That's kind of the stereotypical conspiracy theorists in people's minds. No, it's all of (17/57)
us. And again, for good reason, you know, there are reasons we should be suspicious of government activities, corporate insider trading and shenanigans to gain an unfair profit over other companies. So on this, this sort of thing happens all the time. So then from there, you can kind of try to break it down. So you mentioned some of those causes here. I'm making a distinction between proximate causes and ultimate causes. Proximate causes are like which races or genders or ages or political orientation are more or less likely to believe conspiracy theories. And the answer is it depends which ones. So race, for example, is not a predictor of overall conspiracism, but it is of specific conspiracies. African Americans more likely to believe that the CIA planted crack cocaine in inner cities or invented AIDS to decimate black populations. Whites are less likely to believe that, but whites are more likely to believe that the government or some nefarious organizations are plotting to take (18/57)
away our Second Amendment rights or build FEMA camps to imprison Americans with guns. You know, usually something constitutional like that. Liberals are more likely to believe that Republicans, that conservatives are up to no good, you know, unfairly gain a profit and make more money. And conservatives are more likely to think those libtards are trying to turn America into a communist nation, communist state and, you know, those kinds of things. It depends on the specific conspiracy theory of what predicts it. Education attenuates conspiracism a little bit, but not massively so. I mean, if you only have a high school education versus an undergraduate versus graduate, the more education you have, the fewer conspiracy boxes you take on a survey, but not that many. You know, it's not like the percentage drops dramatically, again, because it's not unreasonable. It's not irrational to believe at least some conspiracy theories. And if anything, smart people, educated smart people, are even (19/57)
better at rationalizing beliefs that they hold for really non-smart reasons. That is to say, most of us don't have the means to check if a conspiracy theory is true or not. You know, so you hear somebody like an Alex Jones ranting, you know, I got people on the ground there, reporters are discovering amazing things, much like Trump did. And, you know, how would I know? I don't know anybody in Sandy Hook or at this voting district in Georgia. And, you know, I only have this to go on. And, you know, well, the New York Times, well, the New York Times, you know, they're run by a bunch of liberals. And I don't trust them. And, you know, you kind of get these rationalizations that people have in their head for why they would believe this. And in their mind, it is rational. You know, I'm fond of saying no one in the history of the world has ever joined a cult. They join a group that they think is going to be good. No one in the history of the world has ever self-identified as a pseudo (20/57)
scientist going down to their pseudo lab to collect pseudo data to support their pseudo theory. They think they're onto something true and big. And so same with conspiracy theories. No one thinks this is a crazy conspiracy theory. They think I have detected a true conspiracy and I am going to expose it and take Watergate. You know, I was just watching this new Netflix doc called the Martha, what's her name? Sorry, I just tweeted about this this morning because it was so good in terms of how the Watergate thing was exposed first by journalists, but also Martha Mitchell, yeah, the wife of the attorney general of Nixon's cabinet. You know, she was instrumental in exposing that what was really going on. And at first she was being gaslighted by people in her circle, including Nixon. But then it turns out later when the Nixon tapes, you know, Nixon was taping his White House conversations, it came out that her own husband was in on the gaslighting of her. Right? So if you hear enough of (21/57)
this, it's like, all right, all right, what's really going on? I mean, you want to talk about conspiracy? I've heard a lot of those Nixon tapes. There's actually a great reservoir of them on C-SPAN and I'm sure elsewhere too, obviously at all the individual libraries. So I've heard a lot of them from the Nixon administration, Kennedy, LBJ, and I believe Ford as well. Nixon was like, you want to talk about conspiracies. I mean, Nixon was constantly imagining conspiracies. Very paranoid. You know, just this thing about education is interesting to me. Is it not significant enough to comment on or is it significant enough? And then one has to wonder, is the reason that education makes you less prone towards believing conspiracies? Or maybe you have a higher threshold because you have some appreciation for the empirical method? Or is it a kind of groupthink and maybe a sort of a greater degree of submissiveness or belief in authority? I have you thought about that at all? Is it relevant or (22/57)
is it just not significant enough to comment on? Let's clarify it, that it's an on average effect, more education, less conspiracism, but not related to any particular conspiracy theories. Not like, you know, the 9-11 truthers are all idiots or the flat earthers are dumb and educated. You can't make those generalizations about any conspiracy theory because you can always find very educated people. I mean, a number of the 9-11 truth or conspiracy theories were promoted by college professors. I mean, David Ray Griffin at the Claremont College. Book up two of his books here, the WT7 book and another book on both on the claims as to why the towers were imploding. Yeah. Or most of the JFK books are written by lawyers and professors and whatnot. I mean, really smart. Or Robert Kennedy Jr. Right. Yes, right. Exactly, right. So if anything, those people are even better at rationalizing beliefs that they hold usually for non-rational reasons, right? You know, they employ the confirmation bias (23/57)
and the hindsight bias and the myside bias and all these things that I talk about in the book, even better than less educated people do. So anything, the effect could go the other way. Are more educated people more likely to believe in, let's say, a conspiracy that the founding fathers set up the country to privilege white people? That's interesting because we asked that question, right, in our survey. And yes, well, so they're probably your political orientation. Liberals are more likely to think that, right? And conservatives are less likely to think that. So how important is political affiliation in predicting either general willingness to believe? Because for example, I want to mention this, we did a great episode a year and a half ago or so with David Shore, who was, he was kind of nicknamed as like the Nate Silver of the Obama team back in the 2012 election, kind of a statistics whiz. And one of the things that I learned in the process of preparing for that conversation and (24/57)
having it subsequently is the degree to which people who tend to vote right today are distrusting of others and may be also increasingly fearful. So it's difficult to also draw out how much of it is actually political, i.e. ideology, and how much of it is these other things like fearfulness, distrusting of others, feeling marginalized. I thought about that as well when I was reading through, because again, it sounds like it wasn't very significant, but in your data set, it did seem that people that were Hispanic or Black tended to believe in general more so than others. Maybe I misread it. And I wondered, is that maybe because marginalization, if you're an immigrant, for example, you're more likely to feel somehow alienated and therefore you're less trusting, more paranoid. I wondered about that. I'm curious, can you draw out some meaningful inferences for us? Yeah, like any other human behavior or thought, it's a rat's nest of interacting causal variables. Nothing humans do has one (25/57)
cause. And that's certainly the case with conspiracism. I mean, you mentioned several there. Yes, political orientation directs you to believe certain conspiracy theories more than others. The obvious two big ones are 9-11 truthers was believed by more liberals than conservatives. The Obama-Birther movement was more conservatives than liberals. And pretty much the flip side was like 70, 30, 30, 70 on each of those by political orientation. Again, it's not just your political orientation, but that's nudging you to which stories fit the narrative. Again, we can't check these things. Most of us can't check these things ourselves. We're going to take the reason one this week with the story about the public schools having kitty litter boxes for children who identify as cats. So this fit the conservative narrative of what the libtards are doing with their confused gender sex. It's all a spectrum and we're going to teach these children how to be the opposite sex and how to perform sex acts (26/57)
young. And you can identify as anything you want, including the cat. This is one of these classic urban legends. No one found any schools anywhere with litter boxes for kids, but it fit the narrative. It's like, yeah, that's the kind of thing those liberals would do. So I call this proxy conspiracism. Even if the specific conspiracy theory is not true, it's the kind of thing they would do because look what else they did that we know that they did. So I use this for the pizza gate as my type specimen there, that Hillary and other dams are running a secret satanic cult out of a pedophile cult out of a pizzeria in Washington, DC, Comet, Ping Pong, pizzeria. And does anyone really believe that? Well, one guy did, Edgar Welch. He went there with his gun to break up the crime, which is what you would do if you really believed it. There was a crime being committed against these children and no one was doing anything about it. I mean, this guy, Edgar Welch, he made a video. He drove three and (27/57)
a half hours and made a little home video for his daughter saying, I'm going in. I would do this for you if I thought somebody was doing something harmful like this to you. I'm going to help these children. But most people I think are just like, yeah, I don't know, but I don't like those Democrats. It's the kind of thing that Clintons would do, such that even if I took you there and said, look, there's no basement, there's nothing going on here, it's not like you're going to go on that case, I'll vote for Hillary. You were never going to vote for Hillary, right? So it's just kind of a stand-in if it fits the narrative arc of your tribe. So this is the my side bias. It kind of fits the way your side thinks. I think it's so true and to bring up Alex Jones again, I've seen Alex Jones do this all the time where he rationalizes why he gets things wrong because, well, whatever, they've done all this other stuff. So who cares if I'm wrong about this one specific thing? I'm on a mission to (28/57)
educate people about the danger of this group. So who cares if I miss this thing or if I miss that thing, right? Exactly. Another thing that came up when you were giving your answer there was a study that was in the book. I don't know if you want to call it a study or a depiction of something that happened, which was that particular cult that believed that the world was ending and that the aliens were going to come and they were hanging out. And then what I found so instructive about that and so useful was the way in which they rationalized their prophecy not coming true. And this was a very specific prophecy. This was the world will come to an end at a particular time and place. And then it didn't come to an end and some people kept on believing. Can you tell me how, first of all, let's talk about that phenomenon and tell me a little bit about how powerful and important that is in explaining why we believe things with absolutely no evidence or no meaningful amounts of evidence. Right. (29/57)
Well, that particular example was from Leon Fessinger's book, When Prophecy Fails. He is a young psych professor, was curious about these end-of-the-world cults. And this one in particular was this woman in suburbs of Chicago that was channeling some alien that told her that the world would come to an end on December 21st, of course, the Winter Solstice of 1954. So he thought, okay, well, this is very specific. I'm going to go there. He got permission to join the group and then go up there with his clipboard to take notes or whatever he used and wait for the mothership to come after which there'd be massive floods and earthquakes in the Midwest and that'd be the end of it. And of course, it didn't happen. And so he was curious to see what these people would do when they go, wow, that was a dumb idea. I'm going to go back and get my job and get my car back and stuff. They gave away their belongings and whatnot. But no, in fact, they went back and doubled down on their beliefs. So he (30/57)
called this cognitive dissonance. So you have a belief that's very strong and then you're confronted with contradictory evidence. Something has to give. You either say, I was wrong or I was right, but this apparent contradictory evidence can actually be rationalized away. Often this is done with these end of the world cults of miscalculate. Oh, we miscalculate. I forget to carry the one. It's next year. We'll be back here next year. Or it was a test of our faith and God granted us that we can continue because we went all the way to the edge right there. And then he pulled back and so on. So there's half a dozen of these rationalizations. And the doubling down is a way of reminding yourself, you're not wrong, you're not wrong. And Carol Tavers' book on this, Mistakes Were Made, But Not By Me is the best source on this whole subject of cognitive dissonance, which is one of the most well-researched areas in psychology. It has survived the replication crisis quite nicely. It's a real (31/57)
effect. And it happens all the time. I mean, if you think about it, I also- Politics is, it's one giant cognitive dissonance. Politician coming out. I mean, George Carlin had this great bit about that where he talked about mistakes were made, mistakes were made. Let's move past it now. Let's go. Let's move past. It's time to move past it now. Let's put it behind us. Let's put it all behind us. Yeah, both sides do it for sure. And so here's what we call a proportionality bias or this sort of cognitive dissonance of cause and effect not being in properly alignment. So we want big effects to have big causes. So if you take like the Holocaust, one of the worst crimes committed in history caused by what? The Nazis, one of the worst criminal political organizations in history. So there's kind of a harmony there that makes sense. But if you take 9-11, people tell me, you're telling me 19 guys with box cutters pulled this off? No way. It's got to be huge. This is a huge thing. It must have (32/57)
been the Bush administration and all these people or JFK gunned down by a lone nut, Lee Harvey Oswald just doesn't resonate. It's like that just doesn't feel right. It's a big effect, tiny little cause. So this is the proportionality bias, Princess Diana, cause of death, drunk driving, speeding, no seatbelt. Well, come on, that's how normal people die. 40,000 plus a year on American highways alone. But it has to be the MI6 and the Royal Family and this and that kind of. David Eich's given a whole thesis as to how there were a lot of satanic symbols and patterns involved in the crash. By the way, David Eich, who has put forward the reptilian theories as to the nature of the ruling class, what percentage of people believe in those kinds of conspiracies? That like the elites are interdimensional child molesters? Yes, thankfully, those are very low in percentage. And also you have to remember the limitations of survey data. This is self-report data. People that again tick the box famously, (33/57)
that Princess Diana was murdered are also more likely to tick the box that she faked her death and she's still alive somewhere with Doty Fiest. Just like Tupac. They're alive in Southern Argentina with Elvis and Marilyn Monroe. Elvis. Elvis. So actually, let's talk a second here about a very specific conspiracy, which was 9-11. You say it was a conspiracy, but it wasn't a conspiracy of the sort that people believe. I had one of the 9-11 commissioners, one of the members of the 9-11 commission on, Senator Bob Kerry. And we talked about 9-11. And what he said was, and this was also at the time that Bob Graham, I believe, was coming out and making some similar statements that actually we didn't know the whole truth, that we were effectively lied to or that things were kind of covered up. But the specific thing that Bob focused on was that, and this straight from the quote from our conversation, which was public, that 9-11 was a conspiracy that went all the way to the top of the Saudi (34/57)
government. And what I had asked him on that show was, if that was the case, and I'd asked him, why did the Bush administration fly the Bin Laden family, as many Bin Lads they could out of the country as their number one priority? He goes, I don't know. He goes, why didn't they answer questions? I don't know. You'd have to ask them. And the thing with the 9-11 is, there were a lot of things that give people pause. And I'm not talking necessarily about WT7, which I think stuff like that, it's very easy to go down these rabbit holes. I told Alex Lemoyer this in our conversation about Alex Jones, that when you're on the outside, you look at the stuff that he says, and you say, this is insane. How is anyone believing this? I cannot empathize with the person. But when you start listening to him and you start listening to things that he says, he feels increasingly plausible, there's a sense that you feel like it's true. It's less about, like, I can rationalize it. You do kind of find a way (35/57)
to rationalize it, but it feels true. Those things aside, I think the conditions around 9-11, the proximity of the Bush family to the Saudis, statements like this that have come out after the fact with Bob Kerry, and the fact that we know that there was a conspiracy by the administration to invade Iraq and concert effort to lie to the public, I think it's understandable for people to really not know for sure. And if you put a gun to my head, I would not say that I believe that the Bush administration, so to speak, the executive branch was responsible for the 9-11 attacks. But I would wonder if some, quote, deep state network of people in the intelligence community interfacing with the Saudi royals in some weird nexus of interests collaborated to either let it happen on purpose or made it happen on purpose, as you say. So I guess the concrete question that comes out of that entire rant, Dr. Schermer, is is it not just is it reasonable for people to feel that way, let's say, about this (36/57)
particular case, but also like, is it possible for us to know if there wasn't a nefarious involvement by elements of the, quote, deep state in something like 9-11? Certainly it's possible to know. Look, I mean, we have found out about a lot of things the US government has done. Watergate is an example I gave. And, you know, we know what happened now, thanks to whistleblowers and the persistent work of journalists like Woodward and the other guy. Yeah, Bernstein. Bernstein, Bernstein Woodward. Dustin Hoffman. It's right, Dustin Hoffman, right, and Robert Redford, right. Yeah, so I mean, a lot of these things, like I mentioned, Cointel Pro, you know, of planting agents in these social groups. See, I did that, that came out. A lot of it does come out thanks to whistleblowers, which is why we need whistleblower laws. Could there be others? Yes, of course, there could be others. I wouldn't call the invasion of Iraq by the way a conspiracy. I mean, it was right out in the open. I mean, he (37/57)
sent, you know, he got the approval of the UN, you know, under the UN resolution. But what I mean is the sending out the Secretary of State to talk about mushroom cloud being yellow cake. Yeah, the yellow cake, the sending Powell out to the UN to testify about uranium and the nuclear weapons program or the weapons of mass destruction. I can't even remember. I mean, I know subsequently having studied the period that there were considered efforts on the part of the administration to push a very specific agenda that ran overtly counter to the public narrative that they were putting forward and their attempts to conflate the threat of al-Qaeda with Saddam Hussein. Maybe that's not a conspiracy, but it. Yeah, yeah, it's something for sure. Did Powell know that this was a lie about the yellow cake and the evidence that Saddam had weapons of mass destruction or was there just a lot of intel and they selected the intel that supported the narrative that we want to invade Iraq? We need an (38/57)
excuse. We're going to use these pieces of intel here instead of those over there that show he doesn't. I think it's probably more likely something like that, right? And, you know, foreign affairs, you know, public foreign affairs is a messy business. You know, so like you mentioned the Saudis, you know, I'm sure there's a lot going on there that we don't know about even now. You know, there are things that we do for national interest, either safety or oil. You know, so all this, you know, behind the 9-11 inside job is the, you know, the need for oil profiteering from war. That's a world conspiracy. That's a world conspiracy, right? Yeah, so, but it's not completely crazy. You know, we do know like Halliburton, for example, with Dick Cheney, you know, he ran that company. Then all of a sudden, you know, we invade Iraq and all of a sudden, you know, Halliburton has the exclusive rights to, you know, rebuild the country after we bombed it. And so that looks pretty bad. You know, whatever (39/57)
their intentions are, we can't get in the heads of other people to know what they're really thinking. I mean, Bush in his memoir said that was the biggest mistake of his presidency, believing the weapons of mass destruction story, you know, and then the UN goes in there, and they don't have any. Oh, oops. Again, it's probably more likely with intelligence, memos, you get, you know, thousands of them. It's more likely, you know, confirmation bias. I'm selecting the ones that I think tell what I want to hear because this is what I want to do. I want to invade Iraq, damn it. So I call that capitalized on what happened on purpose, cow hop. Instead of lie hop or my hop, it's cow hop. Capitalized on what happened on purpose. Like Roosevelt wanted to support Great Britain against the Nazis, but he couldn't. He needed a pretext. And so the attack on Pearl Harbor, he didn't let it happen on purpose. He didn't make it happen on purpose, but he was so glad that he could then do something about (40/57)
that. And same thing with Bush, with Iraq and all presidents do that, all of them, not just Democrats, Republicans, they all do it. Yeah, this is so fascinating. I want to ask you about Jeffrey Epstein, by the way. I don't want to forget. So we're talking about conspiracies. That's one I have a question about specific. I wonder, well, let's do that because we were just talking about Pizzagate. You know, this whole that Democrats are running a secret satanic pedophile ring with children. Okay, so we do know that Clinton, Bill and other prominent Democrats did fly on Jeffrey Epstein's plane to that island where he had what not children, but he did have underage women, right? Apparently his preferred age was like age 14, 15, maybe 17, right? So they're not little five-year-old children. So you can see how the story kind of like, okay, Clinton on the airplane, Epstein has children, then that transmogrifies to the pizza place with the little children instead of teenage girls and so on. I (41/57)
thought that was fascinating. You talk about that in the book. I actually thought that was insightful. I hadn't thought of that, that there's this kind of bleed factor, very interesting. Also, the drinking the blood, well, that's an old blood libel about that Jews are killing Christian babies to drink their blood and so on. And then there was a few years ago that kind of movement in tech billionaires to achieve immortality by taking certain hormones or the blood of young children. Yeah, transhumanism and it's still, but it's, right, that's an extreme, but that's still going on. They're obsessed with living for it. Right, right. So there you just throw that in. Oh, well, why are these people doing this? Oh, because they want to live forever or something like that, right? So you kind of mix in all these different, you know, the satanic panic of the 1980s. Sex craze. Yeah, the satanic panic of the 1980s. You know, that's again, one of these kind of urban legends that, you know, turned (42/57)
into a mass hysteria in which the FBI finally said, all right, we better go expose, check, look into this, say to every city in America as a satanic cult. Well, none of them did. They couldn't find any, right? So it's a little bit like that as well. Right. I remember, what book was it where I read about the gorgeous family, the popes and the kind of insane satanic behavior that went on in the very center of the Vatican, you know, like, I mean, you know, so again, constructive conspiracies, some conspiracies are real. I mean, even if you want to go full Dan Brown, you know, that Jesus didn't really die, this was an actual conspiracy theory before Dan Brown, he got it from these other two authors of that book, Holy Blood, Holy Grail, that, you know, he was kind of put into a coma through some special chemicals. And then he woke up three days later and they whisked him off out of the tomb after France, where he marries Mary Magdalene as sweetheart, and they have kids and so on. You know, (43/57)
that's actually a kind of a conspiracy theory, right? But it's in this case, it's just entertaining. Yeah, I should say that too. A lot of these stories are entertaining. I mean, Alex Jones is before he went really dark, you know, he was pretty fun to watch. I mean, it was really just amusing to watch him rant. And 100%. So I want to add something there and then we can either go down the entertainment route or we can just button something up on Jeffrey Epstein, because my Jeffrey Epstein comments weren't about the pedophile island, they were about the death of the very suspicious circumstances around his death. With respect to entertainment, I couldn't agree more. And in fact, there have been periods of time where we have found conspiracies to be far more entertaining or the entertainment value of conspiracies to be much higher. And that's something that Alex Limoy and I discussed, which is that, and her documentary made me feel it transported me back to the living room of my childhood (44/57)
watching unsolved mysteries and X-Files, you know? And so I couldn't agree more and I'd love to talk about that. But to just button this up on Jeffrey Epstein, just for me, like just looking at this, like everybody else, that looked really suspicious. The fact that there were two attempts on his life, the first failed. It was by an ex-cop who was jacked up on steroids and bunked with him. The second one succeeded. The kind of stuff I looked at, and I have to be fair here to this point, it's very easy to look at some explanations, select coronary reports, et cetera, and be like, this looks like a suspicious hanging that wouldn't work. But no camera footage. I mean, like the guy that was on staff was gone. I mean, the level of incompetence that had been required for such a high profile case seems hard to understand. Now, perhaps when you investigate the bureaucracy at Rikers and you get into the details, you say, actually, this turns out to be much more plausible, for example, like the (45/57)
Oswald conspiracy, which we can talk about as well. What is your reading of this? Did you spend time? Because I tried. I reached out to his lawyers. God help me, I tried to get as much information on this story as I could, but it was just, I think people didn't want to touch it. Interesting. Yeah. Well, so when I read the story about the second camera going out, I posted something on Twitter, like, yeah, that's pretty suspicious. One camera, cameras go out. Two of them, that sounds like a pattern. So I say, well, this one could be true. This conspiracy theory could be true. He was murdered. But then somebody wrote me who had worked at Rikers Island. He goes, oh, this place is a dump. I mean, nothing works there. Cameras go out all the time. The people that work there are like totally incompetent. They're sleeping on the job. They leave. They, you know, whatever. I'm like, oh, okay, never mind. So that's the conspiracy principle, never attribute to malice, what can be explained by (46/57)
incompetence and chance, right? A lot of the world operates on randomness and chance. It's almost impossible for us to detect randomness. We're not good at that. We didn't evolve that. We evolved to be pattern finders, not randomness, understanding, right? The stories I tell, like the famous iPod shuffle feature that Jobs introduced, and then Apple got complaints from customers. It's not random because certain songs come up more than others. That's randomness, right? There's a pattern. And so they reprogrammed it to make it come out where each song is played the same number of times in your playset. You actually have to program that in to be non-random, right? The stars in the sky are random, but we see patterns of big and small dippers and scorpions and horses and whatnot. So, or even cancer clusters. It doesn't seem possible that in this town where there was this big industrial plant with a lot of leakage of their toxic chemicals, there's a cluster of certain kinds of cancers there. (47/57)
Actually, that is usually random. You know, if you throw a handful of pennies in the air and you let them land on the ground, they're not going to be evenly distributed. There's going to be clusters of pennies, right? So, which is why the cover, this is the cover, right? It's just kind of these random dots that, you know, we piece them together into some sort of pattern. But in fact, setting aside the fact that conspiracies do happen, the theories we have are probably not true. It's just random dot connecting, patternicity. So then it becomes a signal detection problem. Well, then how do you know which ones, which signals are real and which are just noise? And so it's hard to tell. You know, there's a great chapter in James Glake's book, The Information, where he talks about random numbers. And there's a whole philosophical exploration of what constitutes a random number. And there's, you know, to your point, there's a huge difference between that. There's all difference between what (48/57)
looks random versus what actually is random. Something can look extremely non-random and actually be completely random. But it's really about a set of probabilities and order. And that, again, speaks to pattern, patternicity, and our desire to find patterns in the noise. And we're so good at it. Actually, that's a great question. Before we moved to the entertainment thing, because I guess we kind of closed off on Epstein, has anyone looked into understanding whether or not people who by their nature tend to see patterns more than others, if those people tend to be more conspiratorially minded than other people? Right. Yeah. So people that see patterns that are not there, called illusory patterns, are more likely to believe conspiracies. Or, because which way does the causal arrow point, could be that people that believe conspiracies are more likely to find illusory patterns in random dots. I mean, that is what the research shows. You put subjects into a condition of feeling anxious. (49/57)
Just remember a time in your life when you had no control and you felt out of control and you were anxious about your future. Now, here's some random dot patterns, some of which are not random, some of which actual are patterns like just degraded pictures of fish or planets or whatever. And here's some that are completely random. People in those conditions of uncertainty are more likely to see illusory patterns. Right? It's Jennifer Whitson's research that I write about in the book. But we don't know what's the cause. I mean, they could be self-selecting in one direction or the other. And just the Jeffrey Epstein thing, of course, telling a probable story doesn't really tilt the probability calculation of committing suicide versus murder. But it makes the narrative sound better. Like, why would somebody murder him? Oh, because he's got a little black book with all the names in it, you know, Clinton and whoever was in on that sex trade thing. And so that's when we start to spin stories (50/57)
like that that make it seem more plausible. But that doesn't help in the calculation. All you need to know is, well, what's the base rate? How many people commit suicide in prison? How many are murdered? People spout off ideas like this and tell stories without knowing what the base rate is. Yeah, that's a great point. And also, another important question to ask, and it can go either way, is are people who are famous or in the news for some reason more likely to be murdered in prison or are they less likely to be murdered in prison? For example, Jeffrey Dahmer was murdered in prison. And I think a lot of people, myself included, saw this initially and said, no way. I mean, it was way too important. There's no way that this thing could have just been allowed to happen. That was my initial instinct, right? But maybe a point of fact, just like the argument for why Jack Ruby murdered Oswald, that people's reaction initially was, whoa, no way, this guy, this mafia guy who owned a local (51/57)
nightclub, went out and shot the most wanted man in America live on national television just to do it. But then again, you have the exact types of incentives that drive that kind of behavior. And after the fact, only after the fact, do we look for those kinds of things, hindsight bias, right? Let's say Oswald had missed and Kennedy survived or somebody else on the grassy know was wounded or whatever, would there be a cottage industry of who was behind Oswald trying to kill Kennedy and he failed? No, there wouldn't be. We know because of the counterfactuals. There's no conspiracy theories about Hinckley shooting Reagan, for example, or Squeaky Fromm shooting President Ford because they didn't die. So everybody accepted the explanation. Well, they were crazy, right? Squeaky Fromm was a member of the Manson family. You know, John Hinckley wanted to impress Joni Foster by shooting the president. I mean, people go, oh, yeah, he's an idiot, right? But had they succeeded? Oh my gosh, then (52/57)
okay, who was behind Hinckley? Who planted him there? Look which way he turns left and then there's a shadow over there and you can kind of see this thing and there was this memo, right? Or if in Dealey Plaza, it was the mayor of Dallas that was assassinated. Would people be going to the grassy knoll and the picket events and writing books and shooting films and making a hit JFK film? No. The John Hinckley example is great as is the attempt on Ford's life and all these attempts to your point. The most compelling conspiracy theory I ever heard around JFK was one that was widely, I think, held, among those that were held, it was widely held in kind of, I think, circles of educated elites. It was one that I had read a number of times as well as in Gore Vidal's biography, which was that Operation Mongoose, which was the CIA sponsored operation run out of Robert Kennedy's office to assassinate Castro and Cuba, basically that assets in that operation were turned around and used to kill (53/57)
Kennedy. And that this is why Robert didn't try to expose the conspiracy, because if he did, it would violate the terms of the agreement, the informal agreement that the Kennedy administration came to terms with, with Khrushchev to end the Cuban Missile Crisis, one of which was, we want to assassinate Fidel Castro. I think, I guess what I want to say here is everything you're saying makes sense to me. And there's no but associated with, I'm not going to say everything makes sense, but everything makes sense. I mean, there's this incredible rabbit hole. There's an entertainment value. There is also this inability to, I think this is a big one, this just unwillingness to believe that something so seminal could have been an act of random violence. And this is where I want to take the second part of our conversation, Michael. I think what's important here now is to really focus on trying to understand, well, what can we know? First of all, how well can we know something? And this is (54/57)
something I actually want to ask at the very top, on the other side of this conversation, which is, can we also draw a distinction between ontological truth, which I would argue is unknowable, or you can't, maybe not know it's unknowable, I would argue that it's impossible to prove definitively whether something is real in the ontological sense. But I think we can talk about epistemic truth. We can set a certain number of foundational assumptions about the world, and then from there come to certain consensus truths about reality. And within that framework, within an epistemic framework, how can we arrive at agreements about what is and what is not true? Because I think that is the fundamental issue that is at work in our society today, even more so than quote conspiracies. It's really about an inability to come to any kind of confident view on what a quote fact is, you know what I mean? So that's really what I want to take this discussion. How do we know what we know? How can we know (55/57)
something to be true? How can we investigate things? And then lastly, well, I guess two things. One, how do we argue effectively against someone who's not actually interested in really getting at quote the truth? Is it even possible? And then the people that are may be interested in getting at the truth, but they're simply misinformed. They don't have the right epistemic framework. How do we work to engage them constructively? And then lastly, I think this is a problem that I want to explore with you. It's something we've explored on this podcast with lots of guests. Most notably comes to mind is Shoshana Zuboff back in, I think, episode 79, which is the technological landscape that exists today that is informed by decades of research into the behavioral sciences, which I would argue tilts the landscape towards misinformation. So how do we engage constructively as citizens to promote a landscape, an information landscape, an information playing field that doesn't tilt towards (56/57)
misinformation, but ideally tilts towards real information or tilts towards truth finding? That's something that you don't actually explore in the book, but I would actually love to talk to you about in the second part of our conversation. 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 Michael, as well as the episode transcripts and intelligence reports, head over to hiddenforces.io and check out our episode library, where you can also become a premium subscriber today. Michael, stick around. We're going to move the second part of our conversation onto the premium feed. Thank you for listening. We'll see you next time. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
Space Warfare and the Weaponization of Outer Space Joan Johnson-Freese #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? Welcome to another episode of Hidden Forces with me, Dimitri Kofinas. Today I speak with Joan Freese. Joan is a professor of national security affairs at the U.S. Naval War College. She's been a faculty member at the Asia Pacific Center for Security Studies and the Air War College, which emphasizes the employment of air, space, and cyberspace in joint operations. Professor Freese has also served on the Space Studies Board of the National Academies of Science and has often testified before Congress on space security issues. She is the author of multiple books on space security. Among them, Heavenly Ambitions, America's Quest to Dominate Space, the Chinese Space Program, A Mystery Within a Maze, and her latest book, Space Warfare in the 21st Century. In this episode, we go into outer space, not just into the low Earth orbit of the International Space Station, but all the way to high geostationary orbits, more than 22,000 miles above the Earth's equator, where some (1/57)
of our most valuable and vulnerable satellites operate. We will look at what the United States, China, and Russia are doing in space, what our militaries are doing. We learn about ASATs, kinetic orbital strikes, and kinetic kill vehicles. We learn that the use of current anti-satellite technologies could create a wall of debris in Earth's orbit so thick that we would be unable to launch anything into space, including satellites, our space station, and any space missions to Mars and beyond for generations. Any and all satellite communications would go dark. Global distribution networks, including our food supplies, energy, and transportation would grind to a halt. The global banking and financial system would collapse. Our communication infrastructure would be devastated. The implications of war in space are catastrophic. And yet, the public is largely unaware of the dangers orbiting right above our heads. It's high time we take notice. As always, you can gain access to reading lists (2/57)
put together by me ahead of every episode by visiting the show's website at hiddenforcespod.com. If you are listening to this show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want a sneak peek into how the sausage is made, or for special storylines told through pictures and questions, like us on Facebook and follow us on Twitter and Instagram at Hidden Forces Pod. Lastly, there are a number of moments in this interview where you may hear changes in our guests' audio. We did our best to fix the problem, and I hope it will not detract from your enjoyment of this incredibly valuable discussion. And now, time for this week's conversation. One of the things that fascinates me is the lack of not necessarily publicly available documents. The documents are there, but contextualized documents and engagement with the public. This is an area that's remarkably, there isn't a great deal of exposure to the public, and it's ironic given the fact (3/57)
that space is an area of intrigue and excitement and romance as it's fictionalized on screen and how the public thinks about it, and also with SpaceX and Blue Origin and what the private sector is doing. But one of the things I was doing before we spoke, before we had a chance to speak again today, is I looked at some testimony you gave. And that really to me was a very instructive experience, seeing the breadth and variety of opinions, also seeing of course the congressional industrial apparatus at work, and then but also seeing the spectrum of sort of posturing and positioning of different people, and that's something I want to get into. So I guess at the top, what I'd like for you to do for us is to give us sort of that context that I felt was so missing in my own research. Give us a framework for understanding sort of the issue or the problem. I mean, if you could frame the dilemma that we face in space in one concise statement, and I know that's a difficult ask, but if you could (4/57)
frame that at a very high level, top level, and then we can drill down, I'd love to hear what you have to say about that. 95% or more of space technology is dual use technology, and that fact alone sets the context for the space development, space security dilemma, because what dual use technology means is that a single piece of hardware or software can be used for either civilian or military purposes. And if it's used for military purposes, it's very difficult to tell if it's for offensive or defensive purposes. So what that means is a remote sensing satellite doesn't know or care if it's taking imagery for urban planning or weapons targeting, but the people who control that technology care very much. And that sets up a dilemma because you have an entire group of people who rely on space technology for civilian everyday life. And of course, the best example of that is the way we have integrated GPS into our life. While on the other hand, you have a group of individuals who would like (5/57)
to protect and keep separate as much of this technology as possible, because it has the potential to be used against national interest and in fact as a weapon. All right, so in what you just said, you're touching on a few things. So dual use refers to, of course, the fact that anything for the most part could be a weapon in space. Anything that has the capacity to move its position in fact can be a weapon and it can use, I think, I don't know if you said it, but it's called kinetic energy or something to that effect, which is basically you could just slam a satellite into another satellite or you could have functionality on a satellite that enables you to move to a neighboring satellite and drag it to some other location or jam its software, which is actually another thing I want to get into, which is to what extent do you even need to deal with a satellite in physical space and simply attack it via the internet or via software or the ground station so we can get into that as well. So, (6/57)
but what I think is interesting and I want to make sure our audience gets sort of the full scope of this as we're talking, what you're touching on with this respect to dual use is the fact that there are a certain number of actors who are interested in space. So of course, there are us, just normal people, maybe you're sort of professionally employed in the area, so it's a bit different, but for the vast majority of people, we have an interest in space, we have an interest in space in the, in a, in a, roughly in the same way that we have an interest in air or we have an interest in our environment, something that it's a common area. But there, then there are other actors as well. There is the United States military, there's the Chinese military, there are militaries all over the world, there are commercial entities, so there are these different actors. Talk to us a little bit also about what that ecosystem looks like. And I'd love to also, because this is something else that I realized (7/57)
when I delved into this a bit deeper. And again, to add an extra point of what fascinates me so much about the subject, to me, this feels like a strong holdover from the Cold War, one of the few areas perhaps along with nuclear, the nuclear arsenal and nuclear deterrence that we still have a lot of systems, protocols, technologies in place that were Cold War, pre-Cold War technologies, pre-Cold War protocols that we still have today. And so there are interested parties that are still acting largely, to what extent there is accountability is something that I'd like to talk about, because I'm not sure. I know that certainly there's a lot of concern on the US side as far as what is the accountability on the Chinese side, because that seems to be, that's how the American military seems to define the Chinese People's Liberation Army and the government as their prime adversary. To what extent there is communication between the army and the government on their end. So there are all these (8/57)
different actors, all these different interests competing. Can you try and give us your best sort of overview of what that ecosystem is? Well, you're correct that space security and space development is one of the last vestiges of Cold War thinking. And that again goes back to the, because it's dealing with dual use technology. But space did not develop in a normal way. In fact, since the 50s, people have been talking about space development and the normalization of space development. What that means is in areas like aircraft, you had the public sector, the government making an initial investment to allow the technology to develop its seed money. And then you had the private sector taking over and taking it forward. So with airplanes, there was the, there were contracts given for private sector entities to deliver the mail. And if they could deliver the mail, they got paid and they could develop further technologies. But with space that hasn't happened. It's been dominated by (9/57)
government actions, government development. The fact that we're still using basically have been using the same kind of rockets as we used during the Gemini and Apollo program. Now 50 years plus later says that we haven't developed as we would with airplanes, with cars, with computers. And that's largely again, because space is very expensive and very high risk. And it's only been governments that have been able to make that kind of investment. The commercial companies that developed were there to feed into government plans. Ray Theon and those companies. Yes, Boeing, Lockheed, Ray Theon, they feed in. And again, going back to dual use, they would feed in through a space division, which would be building technology to launch satellites. And they would feed in through a defense division, which would be building missiles. And one of the things I always present to my classes is what's the difference between a rocket that has a very futuristic and positive connotation and a missile, which (10/57)
is of course a payload. And it's largely trajectory and payload. There are some other differences, but it's for the most part payload. So if you look at it from that respect, you've got this giant government program that is fed into by the commercial entities that developed to accommodate. And they can make a lot more money in the defense side than they can the space side and the civilian side. So that sets up right there a huge lobby and part of this environment that can make a lot of money from keeping space, primarily a defense realm. And when you were saying earlier how little information there is that puts it into context, it's because it is primarily an area of defense and it's very high tech. So it's easy to just basically tell the public, don't worry, we got it. This is too complicated. And you start throwing around words like exo-atmospheric and dregs and all those things. And people say, yes, yes, you just go handle it, we're fine. So there's been this commercial government (11/57)
synergy that has a very strong defense portion to it, which has also created a revolving door between the government and the commercial side in terms of most of the people who run the commercial sector, especially the defense sector, our former members of the military or part of the government security sector. So there's a very much of a vested interest in self-serving actions. And then more recently, you have these what are called new space companies where you have billionaires basically investing their own money to go beyond this environment that has been prolonged much too long and start saying, no, we're going to start investing in the space side and the development side that has really never occurred before. And we're going to build new rockets and we're going to build habitats and we're going to do things like mining. And it really sets up the kind of development that many people expected to happen 50 years ago and never did. The Falcon 9 rocket developed by SpaceX is a full (12/57)
thrust, partially reusable launch system. So that's further to your point. Right. Also, again, you have these think tanks that provide reports in terms of what's needed, how do we do it. And most of these think tanks are funded by the commercial sector that supports the government. So there's this self-perpetuating threat and need to address the threat. And there's a lot more money to be made in building missiles and technology than there is diplomacy. And I mean, that's the classic military industrial congressional complex that Eisenhower warned about. Eisenhower would be rolling over in his grave right now at what has happened with the military industrial complex in this space film area. You also touched on this notion of congestion or contestion or competitive sort of this changing aspect with respect to some of these private companies. So the other thing, though, that I wanted to say before we move on from the sort of that context that we're describing is I noticed something else (13/57)
in my research for this, which is in addition to this being a holdover from the Cold War period, in that same sense, it also is a holdover, it seems, from the period right after the fall of the Cold War and the notions of full spectrum dominance and this desire by the United States military to achieve a level of superiority in this, in this, get the high ground, which in this sense, quite literally is the high ground. And to maintain that type of a posture, it seems that that still is the mentality among certain people in the military, and perhaps even in the government and in the Congress. Could you speak a little bit about that as well in terms of what the variety is of views of not just the inevitability of war in space, which is something I want to get into, that there are people that actually feel that it is completely inevitable and that we just simply have to prepare for it. And also what the aims and objectives are of people within positions of power and how that really affects (14/57)
the entire process of diplomacy, which from my perspective, having coming at this really as a layperson entirely, it seems given the vulnerabilities of space, given the vulnerabilities of satellite technology and the vulnerability of society as a whole and its dependence on space, it seems that diplomacy is the only way forward because any war in space would be catastrophic for our satellites. And I'll also ask within that context as well, from what it seems to me, we have about half of, half of, half of satellites in space are American, whether they're civilian, commercial or government, military. So it would also be, it would be worse for us. But anyway, that was a bunch of stuff I threw at you. I just wanted to get it out there. Please continue. So let's go to the description of space that you clearly found that's used repeatedly, congested, contested and competitive. It is increasingly congested because previously the only two countries that could really afford to put anything into (15/57)
space was the United States and the Soviet Union. Again, it's very high, high risk, very expensive. And so it's been this government domain. And now, increasingly, other countries are intent in not being left out of the advantages of space. And those are primarily, again, through information technology. And so it's not just the United States and the Soviet Union, now Russia, but China has a great interest in having space technology available to their population and to their military. Most of the countries in Europe, you have countries like Vietnam wanting to launch their own satellite because having a satellite is a very prestigious event. And it basically says we are developing. So you have Nigeria and Vietnam and other countries becoming very involved. And the more that's put up into space, the more congested it is. Well, there's a downside to that. You have to be very careful to monitor where things are so that you don't have collisions. But that also indicates that more people are (16/57)
using space. It's more or less inevitable through development unless we have intended that space was going to be the exclusive purview of the United States. Which seems to be an idea that some do have in the military and in government. Well, exactly. And that's because, again, when only the United States and the Soviets could go into space, we began to put very high value satellites into a very high orbit. And we refer to it as the sanctuary orbit. We refer to the satellite as exquisite satellite. And you're referring to high orbit, like satellites in geostationary or geosynchronous orbit? Yeah, it's basically high orbits that are very valuable geostationary. And we refer to it. The fact that we refer to it as sanctuary orbits basically says it's ours. As other countries are getting better at their technology, they are getting closer to those orbits, which we have deemed ours. And that is seen as a major security risk. Well, that basically is saying we have claimed this real estate as (17/57)
only and according to the outer space treaty, which the United States has signed, everyone has equal free access to space. So there's a contradiction there. So that's congested. Then there's competitive. Well, again, that basically says it's no longer the United States and the Soviet Union, Russia. And that that's inherent if you're going to develop the part that is most focused on by the security community is the contested. And that basically goes back to that sanctuary orbit of that sanctuary orbit, basically saying things that we considered ours and only ours aren't just ours anymore. Other people are contesting our right to exclusivity. And that is that is a major threat to the security community. So you have this environment of congested, contested and competitive, which can either be viewed as threatening, or it can be viewed as an inevitable portion of developing space. And it really has to be viewed as both. But how do you deal with that? So there are many people who view that, (18/57)
again, the United States must have full spectrum dominance, including the high ground. Well, let's talk about the high ground for a minute. If you're in the Army and you get on to the high ground, the assumption is it's a good place to be because you can see everybody else and you can hide, you can get behind that rock and people can't get to you. But the high ground in space is basically saying you are a bright, identifiable object traveling in a certain pattern or orbit against a dark, dark sky. You're sitting duck. It doesn't give you the same kind of high ground. Now what it will do, what what satellites will do, is give you 24 seven access in terms of reconnaissance to areas that you might not have access to otherwise. So this high ground analogy goes only so far. And then there's the inevitability piece is space war inevitable. And of course, we owe that attribution to Donald Rumsfeld, who basically argued that all other domains, ground, air and sea have become battlefield. (19/57)
Therefore, it is inevitable that space will as well. That's also the expressed view of the commander of US strategic command, John Hayden. Yeah, it went away for a little while, and now it's back in full force. And it came back after the Chinese had a launch in 2013, which nearly reached the sanctuary orbit. And basically, that kind of changed the entire US posture from one of strategic restraint, where we won't develop technology if you won't develop technology, certain threatening technology, because we've never, the United States and or any other country has never crossed the line, crossed the Rubicon from developing dual use technology that could be used as weapons to overtly developing weapons. And there's now this push. And ironically, as this is rather 1984 ish, we are still not saying we're going to develop weapons. Instead, we say we're going to develop offensive counter space technology. I didn't immediately catch that Orwell reference. I thought you were referencing the 1985 (20/57)
ASAT test where we shot down Seoul wind and created all that debris. We have, we have tested ASAT in the 80s. We've tested ASAT. Far more recently, we used missile defense technology to shoot down one of our own satellites that was malfunctioning after the Chinese tested their satellite or their anti satellite technology in 2007. So we don't have space weapons. We have offensive counter space technology. Think about that for a minute. What does that mean? What is offensive counter space? That means if we feel threatened, we have the technology to defend ourselves. Well, that's a weapon. And the fact that you can use it offensively says we might not even wait for somebody else to use theirs first. Offensive counter space. So that's where we are right now with this large group of vested interest individuals and those who are very sincerely concerned about US national security don't get me wrong. Pushing harder than we have since the George W. Bush administration for a position of space (21/57)
war is inevitable. And this is being fed blatantly by certain media reports. There was one on 60 minutes. Oh, I saw that. Yeah. Which are basically advertisements for the Air Force budget. We need more money so we can build more stuff to defend you against this inevitable threat, which is looming. So you reference those two, the two Chinese tests. I think it's important for our audience, many who won't necessarily know what you're referring to. One is the 2007 test in which the PLA blew up their own satellite creating much larger debris field than anything we've done. And we've done plenty ourselves. And by we, I mean the US military and the US government, they created tremendous debris field, which is only now beginning to, from what I understand, affect our satellites and affect our international space station. We've, from what I understand, we also move the ISS, the space station out of the way of our own debris every year or more. And so now we have that in addition with China and (22/57)
the debris field is something I want to get into. But I also want to use that as part of a question as well around communication because what I think we saw with respect to the Chinese test was them sort of sending us a signal, sending us a message. And I wonder, and there's some alarm for me when I look at this subject, I wonder to what degree we really understand the Chinese and what to what degree we seem to be on an institutional level, even interested in understanding the Chinese and their intentions when it seems Congress has gone out of its way to make it explicitly clear that we should have very limited engagement with China and our company should have limited engagement with the Chinese when it comes to space. Right. In 2007, the Chinese blew up one of their own satellites very irresponsibly in a high orbit that is going to, it doubled the amount of debris in orbit and it's going to affect space operations for a very long time. A little bit of background on that. The Chinese (23/57)
ASAT was built by their General Armaments Division, which is part of the military. It develops technology. They're roughly equivalent to DARPA in some ways in that it's their job to build new stuff. Well, they're a bunch of engineers. What do engineers want to do when they build something? They want to test it. They want to use it. So the Chinese before doing the kinetic impact test did flybys, very obvious flybys that they knew the United States government could monitor. They did at least two, maybe three, I honestly don't remember. But they did these flybys and the United States said nothing. Which I find remarkable having also read about that. I find that absolutely remarkable. Well, it could be for a variety of reasons. It could be because we wanted to see how good their technology was. We could have been because we wanted to not acknowledge how closely we could watch what they were doing. It could also be just for political reasons of let's see what they'll do. They finally did (24/57)
the, again, kinetic test, which hitting a satellite in that hive and orbit was bound to create debris. The Chinese knew they were creating debris. They're actually, their debris calculations were right on target. But when it was presented to the decision makers, it was presented in such a way that it seemed reasonable and they went ahead and did the test. There's also a bit of an irony there as well, maybe not so much an irony, but of course our expectations around communication and concepts of distance stem from our technological innovations over the decades and specifically in the domain of the military. The space represents the center of our command and control infrastructure for the U.S. military and of course for the Chinese to the extent to which they want to modernize their military. I mean, one of the things that seems very scary about space that sticks out to me in particular, making it worrisome, is that any type of engagement in space that could create unforeseen (25/57)
consequences in terms of collateral damage could knock out communication infrastructure that then effectively turn the United States or the Chinese or any modern military into a very large, dangerous and erratic military machine blind and deaf. Absolutely. How large of a concern is that? Well, that's one of the, every year there is a space war game called the Schriever game and what is released after that, the Schriever games, there's an unclassified report and then much of it is classified. But what we know from the unclassified reports is that escalation happens quickly because there are these doubts about what happened and we can't wait to see if it was nefarious or not. We have to assume, especially what if it's one of our early warning satellites that becomes defunct, malfunctions. Do we assume that that was nefarious so that we couldn't see a missile launch or a nuclear launch? And that's one of the big concerns is this tendency towards rapid escalation. Oh, of course. And (26/57)
historically, there are many reasons for us to worry about the information coming from our early warning systems, even if they're functioning. I'm just thinking of the 1979 case where a technician had accidentally run a war game at NORAD and we almost went to war or 1983, the false alarm on the USSR side. Yes, exactly. Just as there is a, just as when engineers build technology, they want to use it. When you have a weapon in your arsenal and you are unsure of where the threat is coming from, there's a tendency to use it. All right. And just to clarify, we've used the term ASAT frequently during this interview. ASATs refer to anti-satellite weapons. And when you're talking about kinetic again, to reiterate, when you were saying that the Chinese were flying by their other satellite, what they were doing was they were, the threat was that they would ram into their satellite, and that is how they disabled it and broke it into pieces. I want to clarify one other thing on debris, and then I (27/57)
want to move to other weapons. Specifically, I've read a little bit about this idea of rods from God, this notion that there is an interest in weaponizing space for more traditional purposes, and to sort of, I want to get your take a little bit on to what degree that is actually real or science fiction. But with respect to debris, I do want to wrap this part up and make sure that our audience understands the significance of it. What I've read, and I would like you to illuminate me on this, what I've read about the debris field and its potential. I mean, we've only destroyed a fraction of the satellites that exist in orbit. We also create debris when we go into space, when we release boosters from our rockets. But the amount of potential debris out there is huge. And the amount of debris that we would create in the event of hypothetical war scenarios in space, I've read could be so devastating that we would not be able to exit Earth orbit for hundreds, if not many more years. How (28/57)
accurate is that? Is that an understatement? Is that an overstatement? Most people are familiar with space debris from the movie Gravity, where they took some fictional license and began the movie with one satellite hitting another, creating debris which then hit other satellites, and this chain effect took over, and everything was blowing everything else up. And that was, again, there was definitely some fictional license going on there. But there is this idea that when something, when there's debris in orbit, it can become itself a weapon. The space shuttle, on a regular basis, used to have its windshield replaced after being hit by something the size of a paint fleck from a rocket boost. Which is a remarkable point. I mean, a paint chip, because of the fact that it was moving at such speed, was able to generate a force large enough to crack a windshield, which is remarkable. Right. And something the size of a quarter could be catastrophically damaging. So, there is this very real (29/57)
risk in terms of, it's interesting, General Hyten has now said that the one thing that he is adamant about is do not create debris. So, there is a recognition in all communities that debris creation could have catastrophic results and could cripple, basically, not only the military, but cripple satellites that we rely on every day for daily life. So, yes, debris is an acknowledged within all communities as something to be avoided. There are different technologies to be considered, but then you have to start thinking about, do you want to go for the really big pieces? Do you want to send up something that's like a grappling hook to reach out and grab on to an old rocket booster that's the size of a school bus? Interesting, the legal issues involved there. There are no salvage laws in space, so everybody owns every piece of junk floating around. And you can't just go up and clean it up. But then maybe you want to go for the small stuff, and you want to try and clean out all that paint (30/57)
debris and the little stuff that can be just as damaging. And some of the ways that have been suggested to do that is to basically put out a foam cloud that would catch it all, and then you deorbit the foam cloud. So, there's different ways to do it, but what would it take? It takes a lot of money, and it takes a lot of international cooperation, which we are not... We don't have a lot of right now. How would that's interesting? So, you just illuminated me. How would that work? So, a few things. One, I don't know if you know the exact number. I don't, but from what I've been able to gather from low to high earth orbit, the volume of that space is much larger than anything we encounter on earth in order to manage that, it seems an overwhelming task. And I certainly did not come across any information about technology, so that's very interesting. How does that work? And how realistic is that proposal? Well, there's lots of proposals. There's proposals to use lasers to basically, if you (31/57)
want to deorbit a large piece of debris, you slow it down, and it will fall from orbit and burn up in the atmosphere. But when you start shooting lasers into space, that makes people very nervous. So, there's laser technology. There is, again, this idea of a grappling hook, but you latch onto something that's been in orbit for 40 years, it could just crumble. You could create debris rather than solve the problem. And of course, these are large pieces of debris you're describing. They're not the, you know, the paint chips or the quarters. These are school bus size pieces of debris. And then again, there's the smaller debris that you... There's proposals to capture them with the foam. There's proposals to capture them with basically a vacuum. There's... And it's interesting, the scientists working on these different proposals are very cooperative with each other for the most part. It's the governments that can't cooperate. I mean, I think we could make the technology happen. But it's the (32/57)
politics that's the stumbling block. That's interesting. I'm... After this interview, I certainly am going to go read into those technologies, because again, and that just speaks to the challenge I face. And I think to some extent, you may not even be familiar with this because of the fact that you work in this field and you're so aware of this information and where to get it. But I can tell you that coming to it from my perspective, I have not had harder time researching a subject that I know little about than this. For example, that the space debris information is going to be in very technical journals. It's not information that citizens lay people generally come across unless there's an occasional article in popular science or popular mechanics or something of that nature. It's all very technical. And this is all integrated. Space is integrated with every other weapons platform and system that the US military has, and I guess increasingly the Chinese and the Russians, to which they (33/57)
look to expand their capabilities. And so it's not so much where does space, from my understanding, where does space reside on a hierarchy of importance, it's that all these pieces are interconnected and having a negative outcome in space could create all hosts of problems, including just issues with communication and protocol and exchange and first strike, etc. There's the point that's usually made on that is information from space technology isn't somewhere, it's everywhere. That's kind of the simple statement of what you said in more words. It's that space is not an entity to the side. Space is a provider of information critical across the board for the US military and for the populace. I mean, I don't think people understand that when they go use their bank card, they're using GPS. Yeah, when you pay for your gas at the gas pump, you're using space technology. That when a fire truck leaves the firehouse, it finds you through space technology. The fact that you can watch the (34/57)
Olympics on television real time. Again, it gets into, is space is integrated into our everyday life to an extent that if it were suddenly not available, it would be far more painful than people realize. I think that absolutely. I think that that's actually increasingly true for many aspects of society because we've increasingly scaled our society with technology and rely increasingly on all these different complex systems that we don't understand and that are vulnerable, increasingly vulnerable. In terms of the military, it's interesting to note that the United States has integrated space into its military platforms and its military operations to the point that the Chinese refer to it as our potential Achilles heel. They are integrating space technology into their military operations with a very keen eye towards not becoming as dependent upon it as the United States has. We demonstrated that really with Gulf War I. I think that was the first place where we really showed our (35/57)
capability. Increasingly, with every war since, the number of precision guided weapons that are used from the first Gulf War to current operations has just increased substantially. That again, that pumps up the we must protect these assets because we are so reliant on them, which is a very real threat. But the problem comes back to how do you protect, what is the best way to protect this valuable space technology? Now, to go back to a reference I made earlier to Raj from God, this proposal by members of the military community to put actual weapons into space that could hit targets on earth without the need for payloads, but that would actually generate the equivalent destructive power of a megaton nuclear bomb. Is this something the military is seriously considering or is this total science fiction? Because this takes it to another level beyond our conversation about ASATs and attacks from satellite to satellite or affecting communications. Rods from God is a concept. As far as we (36/57)
know, it's never been built. I'm quite confident it hasn't, but it's a concept that's been discussed because what it would do, it would fire these tungsten rods to earth so that the impact would be that of a nuclear weapon, but without the radiation. So when would you use something like that? They're bunker busters. They could get deep into the earth without causing the radiation that is associated with nuclear weapons. It has been at various times billed as a rapid response, but what scientists have shown is we could do much the same thing quicker and faster from earth with land-based missile systems. So some of this gee-whiz stuff is the function of people whose jobs it is to sit around and think of gee-whiz stuff. And much of that in the military, that's your job. It's not necessarily to build it and use it, but to what could I possibly do? We joke about somebody has the job of trying to invent unobtainium or impossibilium, and rods from God was one of those gee-whiz crazy ideas (37/57)
which I think luckily was not built. The idea of having this weapon orbiting above people's heads to fire these rods down, I think would be terrifying. It's the idea of putting a laser in space. That too would be terrifying for a lot of people, and rightly so. So do we need to cross this Rubicon of space weapons? And how do we define a space weapon? Is it just those that are ground to space that are by kinetic impact, or is it using cyber technology to interfere with the communications? Or again, taking out the ground station so that you can't receive the information. Because we cannot or we have not been able to define a space weapon, there is this large community that says, well, then it's beyond the realm of arms control. If you can't define what it is, you can't subject it to arms control. And that further pumps up the spiral of inevitability, of full spectrum, of high ground, of all of that that feeds into the weapon scenarios. So I want to get to that sort of rules of the road (38/57)
thing, sort of how we could go about creating some type of diplomatic framework, rules framework around this arms control framework. But I want to contextualize that with a unique challenge. So was I correct when I initially stated that the Chinese are, according to the US military, they perceive the Chinese as the main threat, main adversary in the 21st century? Yes, that's correct that the Chinese are perceived as the biggest threat to US space assets. So I want to get to this question of how we would create a diplomatic framework on arms control, or what discussions are happening within the diplomatic community on that front. But I think it's important to contextualize that within this larger theoretical game paradigm that many in the military and in Congress and in think tanks in Washington seem to be operating within. What's commonly referred to as the Thucydides trap, and how it specifically relates to China, with whom we would need to negotiate any meaningful arms control (39/57)
measures in the first place? Well, Thucydides trap basically looks at the idea of a rising power threatening a power in existence. And inherently, in other words, just simply, yeah. Yes, there will inevitably be conflict with a rising power challenging a sitting power. And where the sitting power in China is the rising power? Right. And Graham Ellison, Professor at Harvard University did a study, I think it's probably a year or two ago now, looking at that, has this idea of Thucydides trap held true? And he looked at a sample number of conflicts and found that more often than not, it does hold true that there is conflict that this rising power will eventually either challenge the sitting power or the sitting power will feel threatened and try to defeat the rising power. But he also, the study that was done, that was an Atlantic magazine basically said it's not inevitable. But what it takes is a change of perception and attitudes that goes beyond trying to use trying to use band-aids to (40/57)
cure cancer, you know, China is not going to go away. China is not going to say, you know, never mind, we won't, we won't keep pushing development for our 1.3 billion people. It would require the United States and China to make a new security arrangement. So it's not viewed as rising and sitting power that it would be viewed as how can we both coexist? That gets hard politically because for the United States, that would be likely perceived and presented as acquiescence that we are bowing to the Chinese. Remarkable. So remarkable. I want to ask you about that. Go ahead, sir. Yeah, well, it would, that would be very, especially in the current political environment. That won't happen. That's another problem. Indeed, you touched on that as well. I mean, that's remarkable to me. I understand that for you it probably isn't because you, again, you've testified before committees. Like I said, I watched one of your testimonies. I used to watch C-SPAN, I used to watch testimonies, congressional (41/57)
testimonies quite often on C-SPAN in the past, but the ones that happen in these more obscure committees are even more remarkable for their variants. But I mean, I find this sort of conversation fascinating and remarkable for two primary reasons. One, when we talk about us, when we talk about the US, when we talk about us, I think it's a very limiting term because really, who stands to benefit and who stands to lose from these types of escalatory, aggressive postures? One, I endeavor to think that the average person stands to lose a great deal. And what do we really have to gain from this sort of notion of winning or maintaining empire? It's unclear to me. And also, I don't understand how the press in particular, because clearly, I can understand a general or a person in the military having a more cynical, mindset with respect to war's inevitability and the facilities trap in China. But the fact that there is this pervasive cynicism around China from a military standpoint, I mean, on (42/57)
the one hand, commercially, we have a great relationship with them. Well, it's fraught with issues. There's no question. I mean, the recent election brought that up. Trade is an issue. Espionage is an issue. Commercial espionage, IP, those things are all problems. But we've managed to create these interlocking trade and supply chain relationships and production relationships with the Chinese that have really brought us much closer together. And our world is much more interconnected and our cultures are much more interconnected than they were before. But on the government, on the sort of, on the international government military side, there is this seemingly unchanged, if not further calcified cynicism that pervades the culture with respect to China. And now we see increasing with respect to Russia. And it's as if we only look at the one side, which is, and it's also as if we're talking about it as though we're a game, that in fact, there aren't these devastating consequences to an (43/57)
actual conflict, so much so that we'd be kidding ourselves to suggest that conflict is even an option. And so, you know, that I just, that was a bit of a rant. That was me kind of just expressing my opinion on this as someone who is coming to it from the outside. But, you know, what is your view on that sort of, what that culture is, how you relate to it in your capacity, testifying and trying to educate people. And I don't know exactly what your opinion is and how you feel on this. I think it is in US national interest to have a stable relationship with China. We will agree with them on some things, probably largely related to economics and trade, or at least we have, and we will disagree with them on other things, primarily political and military. But I think the ultimate US goal should be stability. It does nobody any good to have China and the United States in any kind of military confrontation. Part of the reason, I had very interesting conversations in both the United States and (44/57)
in China regarding how we are in this Cold War deadlock still. And a couple years ago, I was in China, and I was having lunch with some young academics from a variety of fields, economics and politics government. And one of them said to me, he said, you know, I just don't understand why the United States has a hard time, such a hard time working with us. And I said, well, you know, with all due respect, the United States has a hard time working with communist authoritarian governments. And they all looked at me and said, well, people don't really believe that we're still communists, do they? And I said, oh, very much so, very, very much so. To them, to many of them, communism, it's a single party authoritarian system, but it's not an ideology that they are capitalist. It's not ideological any longer. In the United States, if you read testimonies or statements from a lot of our members of Congress who are very adamant about not working with China in space, it includes rhetoric like the (45/57)
United States does the United States does not work with communist countries. The United States does not work with authoritarian countries. Well, of course we do want to benefit us. Well, in fact, in the testimony that you gave that I saw, I forget the subcommittee, but in fact, one of the congressmen openly laughed and said, you know, I find it tremendously ironic that a Chinese general was at Davos, a capitalist forum, and for my communist country. And I thought, clearly, you haven't really been to China recently or not really understand that China is not communist, that they're authoritarian, certainly. And they're a single party system, and that single party happens to be communist. Yeah, but they're certainly capitalists. Yeah. So there are these real holdover notions. And now in China, I gave a talk at one point, and it was on space, and afterwards, an older man got up, and I don't speak Chinese, but my interpreter basically conveyed that he was pretty much calling me a running (46/57)
dog, running capitalist dog. Running a running as opposed to a stationary. It was right out of central, he was right out of central casting. But the younger people in the room very carefully came up to me and said, you just have to wait until it's our turn. To speak or to rule. There are these hard positions on both sides. There's hard ideological positions on both sides. There's hard political, I mean, there are those in the Chinese government, the Chinese military, who do not wish the United States well. They see us as keeping them down, and they do not wish as well. Just as that position holds true in the United States regarding the Chinese, there are those in China who want very much to cooperate with the United States. China is no more a monolithic, philosophical, or ideological view than is the United States. So that to me, that's an interesting thing that you touch on. How pervasive is that, and how independent is that of public accountability? In other words, we elect (47/57)
congressmen, we elect senators, we elect presidents. To a certain extent, the government has its own inertia, it has its own momentum. To what extent is that sort of mentality embedded in the departmental and institutional apparatus of the United States government, and how much of that is a force that we're contending with when we want to try and introduce arms controls and rules of the road, which is something I want to get into in this conversation as well? Well, bureaucratic politics is a fact of life. I mean, the Pentagon is the largest bureaucracy in the United States, and the number one goal of every bureaucracy is self-perpetuation. So if you have, if suddenly you were to say, the Chinese are not a threat to US-based assets, that would make a big drop in the Air Force budget. So there is a bureaucratic impetus to constantly see a rising threat. Now, that doesn't mean it's not there, it just means that the bureaucracy is going to emphasize threats and de-emphasize opportunities. (48/57)
Okay, so in that case, let's talk about opportunities, because I mean, I did want to make sure that we captured the threat and the seriousness of this, because it is very serious, and I don't want our audience to glaze over it as I have for so many years without kind of looking into it in more detail. But let's talk about the, so we talked about the high ground school, essentially, folks that see space as this location above the earth, where once you get there, you have control of the domain and etc., etc., people that see space war as inevitable, and therefore we have to prepare for it. It seems to me also that that's sort of how John Highton sees it. I'm not sure if you agree, but just based off of the interviews that he's given, he seems to be in that inevitability camp, which is scary, again, because he's commander of US strategic command, but so there's also the arms control school of thought. Those, I assume that that includes people, perhaps that includes yourself, I'm not sure, (49/57)
and these are against stereotypes and categories, but that seems to include folks who are basically acknowledging that space war and conflict would be catastrophic, because again, space wars and space conflict, the use of space conflict and space, that also carries with it the strong likelihood or increased likelihood of nuclear weapons exchange, and that's something that would be catastrophic and devastating here on physical planet earth. So, you know, what is, what has happened so far there in that respect? And I should also mention from what I've been able to find, we have consistently, I don't remember the name off hand of the UN resolution or the UN agreement that is put forward every year since 1959 or 1957, I'm not sure since when, but we consistently refuse to sign that. So what can be done, what has been proposed, what is the most logical, reasonable framework that exists that we can think about, that the public should be aware of? In a, in a idyllic arms control world, you (50/57)
have a treaty, a treaty that would ban space weapons, but again, we've talked about what would that entail, how do you define a space weapon? Dual use problem. There's that problem, and then there's the problem of the United States, generally speaking, has not been in the mood to ratify treaties for a very long time, and it's basically because treaties are viewed to restrain, largely restrain the United States because we're already on top. So if we say, okay, nobody can do any more than the United States has done, well, that gives a lot of people a lot of room to advance and it holds us treading water. And in fact, that I've often, you know, asked the question when I have members of Congress ask me, well, how are we going to get the Chinese to act as a responsible actor in space? And I like to respond by saying, what would that look like? What is a responsible actor in space look like? Can we use ourselves as a model? If we are the model for a responsible actor in space, then countries (51/57)
can build missile defense, they can build lots of reconnaissance satellites, they can use all orbits. So, and the answer is always no, no, no, that's not what it means. So basically, the United States has set itself up to have a policy of do as we say, not as we do, and that that is simply not sustainable. So we're not going to do a treaty. So what's next? What's the options? Well, there's something called soft law, which is it's, it's kind of not a treaty, but you're working in that direction. And a lot of this has been done through the United Nations, where the Chinese and the Russians have proposed every year for several years, a treaty to ban space weapons and space. But the treaty that they have proposed is quite frankly, a self-serving treaty from their perspective, the way it's currently written. And it would not, it is not in the interest of the United States to sign that particular treaty. I think other countries feel that they can go ahead and sign on because they know the (52/57)
United States is not going to sign on and it's not going to happen. So they are acting a little self-servingly in that respect as well. But okay, so if you take the treaty off the table, then there are these soft law options. And if you look around for what might we use as a model, well, there are, there are rules that are used on the sea, which is also a global common, that basically say you can't bring your boat any closer to mine than this distance, or I can infer nefarious intent. And you have to tell me where you're going. And it's just basically setting up expectations for traffic. And again, with space becoming more congested, there's the idea that we at least need to have ideas of where people are and what, what others can expect of them. That suddenly if your satellite is approaching mine, and you haven't told me about it, and you get closer than, than a certain distance, I could go ahead and defend myself. So we've been working on this a few years ago. The Europeans took the (53/57)
initiative to begin pushing an international rule to the road. Secretary Clinton got behind it for the United States. The military got behind it because they really have no interest in a wild West environment. But several countries, including China, Russia, Brazil, India, felt that they had not been duly consulted when the original document was drawn up, and it was not in their interest. And the Europeans were unable to push it diplomatically and it died. What year was this? I'm sorry. Oh, it was, I want to say, it was Secretary Clinton signed it for the United States. Like 2009 or 2010 or something. Yeah. These efforts through the United Nations have come about where it's basically committees in the United Nations have set up technical councils. So rather than fight your way through the politics, which never works, they set up technical committees to say, deal with, with very specific issues. Because as I said before, you can get the scientists and the engineers to agree on how to (54/57)
safely operate. They, they have a vested interest in working together. It's just at the political level. So there's been these efforts to set up these technical rules of the road, and they divided them into categories of kind of low hanging fruit, harder and hardest, and made great progress in getting through kind of the first two categories, including with China. And at the last minute, the Russians tried to blow it up. I personally believe the Russians are far more obstructionist regarding space rules of the road and space methods of conduct than are the Chinese. But even that has been overcome. And there's, there's, we are showing that progress can be made diplomatically. But I would also point out that the amount of manpower and money spent on diplomacy through either the State Department or the Defense Department on space is a drop in the bucket compared to what is spent on GWIS technology ideas in the Pentagon. It also see, am I also correct in having read that the, there are, (55/57)
are there budget cuts for the State Department? They're in line for budget cuts. Yes. Which is a great irony in the, in the context of this conversation. I know you have a hard stop. So I'd like to at least end with getting your summary thoughts and maybe what you'd like to see happen going forward with respect to US policy and US military's posture in space. I would like to see the United States maintain a position of strategic restraint. Because whatever we do, other countries are meant to follow. If we develop weapons, overtly develop weapons, other countries will as well. So if we maintain a position of strategic restraint where we do the research, we certainly keep pushing with research. We just don't move into a rapid development and deployment phase. And at the same time, put equal weight, equal being the key word there, weight on diplomatic efforts. And try to move away from this policy of do as we say, not as we do. We gain a position of leadership where countries want to (56/57)
model us while keeping that strong defensive posture. I'm in no way saying this should go away. But don't move into the develop and deploy technology which others are going to follow suit on. And at the same time, again, put more, not less effort into the diplomatic efforts. And is there some particular, I mean, is the most promising thing you've seen what the Europeans are doing? I think you said it was the USA. What's going on now through two committees at the United Nations is the most promising. All right. Well, thank you for taking the time to speak with me, Dr. Fries. Sure. Thank you. And that was my conversation with Professor Joan Fries. I want to thank the professor for being on the program. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation on Facebook, Twitter and Instagram at HiddenForces Pod or send me an email at dk at hiddenforcespod.com. Thanks for listening. We'll see you next week. (57/57)
This is the full transcription of podcast 'Hidden Forces'.
What’s Driving the Rise in Long-Term Bond Yields Jim Bianco #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Dmitri Kafinas 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 Jim Bianco, president and macro strategist at Bianco Research, where he writes about monetary policy, government's role in the economy, fund flows, financial positioning, and much more. I invited Jim on the podcast to discuss the recent rise in bond yields, factors contributing to that rise, as well as a host of other macro variables influencing the US's, Europe's, and China's economies, investors' portfolios, and much more. We devote the first hour to understanding the sources of the recent rise in long-term interest rates, not just in the US, but across the developed world. We discuss the Fed, concerns about government debt and deficits, inflation, tariff policy, and (1/57)
economic growth expectations in the context of some of these potential headwinds. In the second hour, Jim and I focus our attention on the impact that some of the changes discussed in the first hour may have on people's portfolios. Specifically, we examine the resiliency, or lack thereof, of the 60-40 portfolio and explore strategies to reduce portfolio volatility in a world where stocks and bonds spend more time trading in tandem than they do trading apart. We also explore the sources of continued dollar strength, US equity concentration risk, recession risk, and what the Chinese bond market, which has seen an accelerated decline in yields over the last several months, continues to signal about the health of the Chinese economy. 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 (2/57)
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 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 or my guest are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this wide ranging and thoughtful conversation with my guest, Jim Bianco. Jim Bianco, welcome to Hidden Forces. Thanks for having me. This is a long time in (3/57)
the making, Jim. We've known each other for a long time. I looked back on my emails because I could have swore that we had something scheduled in the past and we did, but I don't entirely know what led to us having to cancel and we never rescheduled. So I'm glad we were able to finally make this happen. Yeah, I am too. I've been a long-time listener of Hidden Forces and I think you do a great job with your interviews and I'm looking forward to it. I appreciate it, Jim. So for people who either know you, because like lots of people know you, you're always on, you're one of these people that sort of achieved escape velocity in media and you were in legacy media before mainstream, before alternative media took off where like everybody got on media. So you still make appearances on CNBC. How did you get started in this business? I got started in this business out of college. I graduated in 1984 and I got started on Wall Street in the late 1980s and from there, I started in the Equity (4/57)
Research Department at First Boston. That's before it was known as Credit Suisse. I worked there for a couple of years. I moved to UBS, Phillips and Drew in around 1989, 1990. And I say that because that's, you know, became UBS Warburg and now it's not just known as UBS. When I worked at UBS, Phillips and Drew, it was less than 100 employees in New York. Now it's thousands. And then in 1990, I moved back to Chicago, which is where I'm born and raised. And I started working with a little brokerage firm located here, an institutional brokerage firm called Arbor Research and Trading. And from 1990 to 1998, I was their director of research. And then after 1998, we spun me off into Bianco Research. Media, you know, it's interesting. I got to know Jim Grant in the 1990s. I got to know Ron Insana in the 1990s. And Insana was probably the guy that got me on the CNBC kind of in the mid to late 90s. And then it just started to, you know, kind of go from there. I was, you know, a regular on (5/57)
those. And then there was this old network. You might remember CNN Financial News, CNNFN. And when they started up in like 97 or something like that, I actually had a weekly bit called James on the Bond, where I'd come on every Friday and talk about the bond market. And I did that for like about four years. And then, you know, it just kind of kept growing from there. And you know, then came the rise of alternative media. And that was smart enough to jump on that, you know, with Twitter and YouTube and the like. Yes. Now I'm ubiquitous. I'm kind of everywhere at the same time. So just a couple of these questions before we head into a discussion about markets, Jim, what was that like for you back then? Because like I said, everybody now is like, anyone can have a voice now. Anyone can have a Twitter account. People thread all the time on Twitter. It's so easy to get on a podcast, you know, they're all sorts of podcasts you can get on. But you were doing media back when there was a real (6/57)
barrier to entry. And only so many people could do it. What was that like being on TV at that time? Was it cool for your parents? Like what? Yeah, no, it was cool. It was cool for my parents. It was cool for me. You know, fortunately in my case, you know, I'm in Chicago. I was in the loop at the time and it was easy because all the networks, you know, they had Chicago affiliates and or there was a couple of independent studios that were all within a block of my office. So it was really easy to kind of walk over there and just do it and stuff. But it was, you know, and the old joke I used to say is to people is, of course I know what I'm talking about. I'm on television, you know, and that was kind of the joke. Now today with the rise of social media and stuff like that, that doesn't mean anything. But back then it did, you know, so that people would look at you and go, oh, he was on TV. And I always used to have this joke, you know, I used to say, people say, oh, I saw you on TV and (7/57)
I'd always ask them, well, what did I say? And they'd go, I liked your tie. It's basically what they'd say. They'd never, ever remembered what you said. But, you know, if you were wearing a funny tie or your hair wasn't combed right, they'd always remember that. Yeah. And you learn very quickly that what works in person is not the same thing that works on television and you have to be more exaggerated on television across the board. And I still think that there's something special about being on a TV set that's very different from being, you know, behind a zoom camera. So all right, that was just me indulging a little bit in some personal questions for you, Jim. Yeah. I agree with you that being in the studio or being, you know, on a live set is very, very different. As far as zoom goes, I like to say it's better than not zoom. But that's about us. It's more convenient, but there it's a totally different experience being on live television and live television, especially. It's exciting (8/57)
This is the full transcription of podcast 'Hidden Forces'.
The Hype Machine The Promise and the Peril of Social Media Sinan Aral #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
This is the full transcription of podcast 'Hidden Forces'.
Why Is the Recession Taking So Long to Show Up Bob Elliott #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
This is the full transcription of podcast 'Hidden Forces'.
Dangerous Dependency Apple & the Rise of China Patrick McGee #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
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Your post has been automatically voted with 15.03% weight.
It was indeed funny.
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so glad the DHF helped fund this.
https://inleo.io/threads/view/finpulse/re-leothreads-2zw37bckw
Coinbase's Eth layer 2?
yeah
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Its a great development in the game
really the one that got DHF funding to onboard players to Hive and we were told would help the Hive price.
This is an example of everything wrong with Hive.
Microbes are speeding up the melting of Arctic glaciers, leading to what might be an irreversible decline.
!vote
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Looks like we have new players!
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Ice is just cold Water. #statingtheobvious
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The valid participants of the @alive.chat 3-weekly task got the following extra rewards from me:
#cent #bbh
Link ⬇️
https://ecency.com/category/@dmhafiz/extra-rewards-for-the-alive