#1025 - The Biggest Geopolitical Risks to Markets? with Peter Zeihan | Middle East Conflict, China & the U.S. Election

26:19So I'm guessing that this is a longer time frame that you're talking about. I hope so. Are there any military implications from that? Because we know Japan was just in for a state visit. You know, there are always people who are concerned about everyone getting distracted away from what's happening in the South China Sea and that being really where the focus should be. How does that demographic...

27:13is the only part of their society where merit matters, that's a stretch. And we discovered over last summer that the corruption within the procurement system for the Chinese military was every bit as deeply rooted as the corruption within the Russian military procurement system. So I don't think that the Chinese military is the threat that a lot of people think it is. I don't mean to minimize the concern here, but if there was a war, you don't fight it at Taiwan. You fight it in the Indian Ocean because this is a country that imports 80 % of their energy, 80 % of it comes from the Middle East, and 80 % of the components they use to grow their own food follows the same route.

27:59So if there is a war, you send a few ships in the Indian Ocean base and you cut those arteries and China faces a post-industrial collapse complete with a famine in under a year. Now, five years ago, Chairman Xi knew that. But five years ago is about when he purged the last people who would tell him anything that he didn't want to hear. So it's entirely possible after five years of blind propaganda that he's forgotten. So we have a great question because everyone here is worried about. Someone asked, and this is directed at me as much as you, I think. Can you please define investment community, Jack's asking?

28:38Everyone with a 401k? I think yes. When I'm asking Peter about investors, I think then I'm talking more about Wall Street, fund managers, people who manage money. But more broadly, when we're talking about it's all of you. It's all of us, right? We all have money at stake here because we all have to look after ourselves for our pensions in the U.S. If you've got a fixed pension from Europe, good for you. It's pretty much dead here. So all of us, I would consider the investment community. So a bit of both, Jack. I hope that answers your question. But Christopher wrote with that in mind or somewhere, disappeared, but just wondering, so what does this mean for my money?

29:16So instead of going around regionally, I'm going to go more asset class right now, I think, or sort of investment buckets. And let's talk about oil. So there was a spike in a concern when we saw what happened with Israel and Iran. That seems to have subsided, and it didn't get as high as some had feared. We still have Russia banging on, and you were just talking about the Russia-Ukraine situation. You were just talking about how much China is reliant on oil imports. Also, India. There have been some that have suggested that in order to make sure they keep getting what they need, that India has a sort of technology expertise to go into Russia if they need engineers, go into anywhere they need to, Venezuela, anywhere to make sure that these big countries with this big need can find the oil they need.

30:10Well, let me start with the good news in the oil markets and then go to the bad news. The good news is that so far I've been wrong about Russia. They've managed to keep it running. Now, no one else can go in there and help them. The only countries that have permafrost experience are European or American. The Indians can't play there. The Chinese or the Japanese can't play there. But for the moment, that oil is still flowing. And for the moment, the Germans, the Americans are in agreement. They would prefer to not disrupt those flows. So while sanctions and lack of maintenance and war damage remain a threat and may very well bring about the end of the Russian complex in time, in time does not mean today.

30:52It could change tomorrow because there's so many bad things in play, but at the moment, that is stable. The Chinese hitting the skids in terms of consumption has also bought a little bit of room to stabilize things a little bit, which is nice. On the Venezuelan situation, the Maduro government has consciously chosen to make Venezuela a failed state, and there are only three countries in the world that have the technical expertise to keep Venezuelan crew moving. And the Americans are at the moment trying to decide if the two of them that are American are going to be part of that play. Looks like they're probably going to be pulling out, but total exports out of Venezuela have been under a million barrels a day for a while now.

31:33So if that was all to vanish, it wouldn't be a big deal. The last wild card, if that's the right term, is Iran. And we seem to be in a situation now where the Iranians and the Israelis have agreed to let bygones be bygones for the current moment. So from a supply point of view, we look okay. It doesn't look like there's any imminent disruptions. And the Chinese taking a bit of a breather from a demand point of view is giving everyone else a little bit of wiggle room. in terms of longer term nothing looks great because all of the Russian fields are either very old maintained by foreigners or both so we know we need to prepare for a world where that goes away whether that's in 2024 or 2030 I don't know they certainly won't make it to 2035 and that's the world's second largest source as for the Persian Gulf the Iranians and the Israelis may be getting along at the moment, but if Israel, Saudi Arabia, the Gulfies, the Americans, and the Turks have their way, we're going to have basically all of the Arab countries on one side and Iran on the other.

32:38And in that sort of environment, both sides will perceive it's in their best interest to inhibit oil exports because it would drive up the prices for whoever is able to keep the market supplied. So when you have the oil producers entering a situation where they see disruption as a positive, very different world. So it sounds like you think oil prices are going to head higher based on that. In time, yes. But this is based on a whole series of political calculations that are done day by day by day. And at the moment, no one has made the decision in that direction. Ethan, I think that answers your question and the thing to really focus on there is just because you have tech, not tech from what you're saying, Peter, just because you have technological expertise or engineering or technologists or all of that, It depends on the type of oil and how it's drilled.

33:27The physical environment, the geology, the climate, and the legal environment. And in those four cases, what's going on in northern Russia and what goes on in Venezuela are unique. They have no parallel anywhere in the world. Very specialized knowledge base. So in terms of Russia and Ukraine, we have a question in here from William or a comment. the Russians are clearly winning the war and all that NATO supplied equipment failed to deliver very much. Does it seem like Russia is winning this war? At the moment, the Russians are certainly on a high. What's been going on for the last roughly four to six months, just to round it out, is the Russians have been able to push things into the front without fear of artillery.

34:11And artillery is always in a land where we're going to be the determining factor in the big picture. However, the Russians have not been able to capitalize on a single place where they broke the Ukrainian front, which is really confusing. A lot of the Russian generals, of which there are a lot, they're not very competent, have seared into their minds what happened when they advanced too quickly in the early weeks of the war, and they just had their troops cut to ribbons by guerrilla forces. And the Russians have never been good at advancing quickly with armor because it's primarily an infantry heavy force and the infantries are all conscripts.

34:48Also, every troop that the Russians began the war with are either now dead or injured and off the field and everyone else who's come in has had at most two months of training before they get thrown into the meat grinder. So there's low morale, there's low capacity, there's low aggression, there's low ambition, there's low competence. And so you've seen gains simply because they're not getting shot back in a way that inhibits their attack. So after almost a year with almost no artillery shells, Kiev should be gone. I mean, that's the scale of the disruption to Ukraine supplies. But starting tomorrow, the first supplies from D.C.

35:29will make it to the front again, and we're probably going to have a very different conflict. Does that mean there's going to be a Ukrainian breakthrough? Anyone who thought they knew how this war was going to go, myself included, has been proven wrong. And then we all reassessed and made new forecasts, and we were all wrong again. So the best any of us can hope for is to highlight where things are changing and where there can be a breakthrough. And at the moment, I don't see a potential breakthrough on either side. So this just grinds on? At the moment. The Ukrainians and the Russians are both trying out new strategies.

36:02Because the Ukrainians didn't have artillery, they started making literally tens of thousands of two-pound drones a month that are basically anti-personnel. And if you throw four or five of them into a tank tread, it can blow off the tread too. So it's a completely new weapon we've never seen conflict, and the Ukrainians are already using it at a large scale. They're also using more traditional drones to do deep strikes into the Russian rear, not just going after military logistics like they've been doing since the beginning, but going after oil refineries. And they took 15 % of capacity offline.

36:33That is one of the sort of things could actually eliminate a lot of Russian output because if you take off more capacity for processing, that means there's not as much capacity left for throughput. And all it takes is one pipe backing up all the way to the fields to shut down entire sections of the Russian system forever because the Russians don't have the technology to do the actual drilling anymore. They can only maintain. So that's something that if they hit the right thing at the right time in the right combination, you could see one to three million barrels of Russian crude fall offline within a week.

37:04Hasn't happened yet. And then, And of course, on the Russian side, the Russians have proven, once again, that casualties are not. They're the deciding factor. And they've started to put glide bomb kits onto their fab bombs from the Cold War. These are explosive bombs that have like a ton or two of explosive within them, like four, five, six, eight times what U.S. bombs have. They've always been dumb bombs before. That's why they haven't been using them, because if you throw a bomb and it doesn't even hit within a half a mile of where you're aiming for, it's a little embarrassing. But with the glide kits, it's hitting within a couple hundred feet.

37:41And for a two-ton bomb, that's plenty. So not only are they using those on the front to break up the Ukrainian defense, they've started throwing them into civilian areas, specifically going after power plants. And if you get hit by an Iranian Shahid drone, you might lose a transformer that you can replace. If you get hit by a two-ton bomb, there's not even a wall left to rebuild. So if the Ukrainians are rearmed and we're going to face a new phase of this, we didn't see those commodity – we were just talking about how they kept the oil going. We also didn't see some of those commodity shortages or spikes the first time around.

38:23Does this look like a sort of grinding war of attrition with massive casualties going on, but in most cases the supplies of natural resources and commodities keeps moving because everyone's kind of turning a blind eye and letting it? I think that's a dangerous forecast to bet on. For a lot of people, that is their bet, and a lot of people in positions of political power. But there's so many things that can go wrong, and all the things I remember I outlined to you two years ago when this was starting, they are all still accurate. They just haven't happened yet, much to my surprise in many cases.

38:59uh if if if this becomes a grinding war of attrition then the russians will in time win because unless the ukrainians can inflict more than an eight to one casualty ratio consistently the russians just have more troops and more tanks it's just an issue of math and so that the degree of damage the ukrainians have to do in that sort of environment is extreme about a number of battles where they've pulled that off but not all of them for ukraine to win this has to be a war of movement where their inferior numbers can be compensated for with precision. And that requires a lot of support from the outside, which as we've seen in the last year in the case of the United States, is not something they can always bet on.

39:42Does it feel like having gotten that package through? What about Europe? Where's Europe's support? I mean, is Ukraine nervous that each time this might be the last time? For the United States, yes, because the The Russians have been uniquely capable of penetrating into our political sphere and basically writing the talking points for a number of people in Congress, which from any number of points of view as an American I find problematic. The Europeans less so. I don't mean to suggest that there's not concerns about the wars, specifics, and generalities in Europe. There are. But there's a greater appreciation for the scale of the challenge in front of them.

40:17And so for each and every month for the last 11, the Europeans have given more money and more equipment than the Americans have. and we're also seeing significant spin-ups of their military industrial complex. The problem is that they're starting from such a low base. The United States, for all its faults, has been fighting the war on terror for the last 20 years and so we have tooled up a lot of our military equipment manufacturer over that time and now we're repurposing it. For Europe, a number of countries, first and foremost, the Germans, thought that history was done and war was over forever and basically shut down the Defense Department.

40:52And now they're having to go back and from scratch start up their military industrial complex. That's hard to do in a short time frame. Yeah. What about Japan? Japan is in a situation where they really, really, really, really wish everybody would stop looking at them because they're quietly, quietly, quietly, quietly trying to become a normal country again. And if they're going to become a normal country again with a normal military again that does normal deployments again, Ukraine is not their issue. China's their issue. They've just put into full sea trials one of their new carriers, which was supposedly a helicopter destroyer, stupid marketing.

41:35It's now been converted to do fighter jets for real. So Japan has rejoined the ranks of countries that have fully functional aircraft carriers. And that is something that is going to give the Chinese heartburn as long as they're around. Yeah. Do you feel like the relationship between Japan and the U.S. is at a different stage now because of the threat of China? Yes. Well, it's not just because of China, although that was definitely a prompt. For the last 15 years, the Japanese have seen the writing on the wall demographically around the world. They know that the global growth story that was driven by consumption is over.

42:08And then they see China, whether it's rising or going out with a bang, as a problem. And so they know that if there is a future for them economically or strategically, it has to be hand in glove with the United States. And so they cut a trade deal that was humiliating with the Trump administration and unique among all the countries that Trump got a trade deal with. The Japanese did not push for changes as soon as the Biden administration came in, something that Joe Biden's team greatly appreciated. And so the question now is how fast can we fold Japan into our defense strategies? I don't think they're ready yet.

42:44They don't have the expertise. They certainly don't have the crypto defense that is necessary for real deep intelligence and technological sharing. But these are things that they're working on. So where do you see opportunity? It sounds like everything is filled with risk. Is there any opportunity? Almost every risk has an opportunity on the other side. So, for example, if I'm right about China, about the way this is all going to end, if we still want manufactured goods, we just have to build them ourselves. And I would argue that the business community has been at least subconsciously moving in that direction for a few years.

43:20We've seen industrial construction spending increase by a factor of 10 in the last five years, which means it predates Biden and it predates the CHIPS Act. So I'm not suggesting that government can't be, theoretically at least, a positive contributor to this trend. but it isn't necessarily necessary. And we have a lot of industrial plant to build and there's enough for everyone if they want to play. Some places will - So the private sector, is it because they are making their supply chain more resilient? They're just doing it themselves? Motivations vary company by company and sector by sector.

43:58That is definitely one of the top three. So it's because there have been some people who suggested this sort of deglobalization is actually, there's more rhetoric about it than actuality, than reality, that it's not happening to the extent that people like to talk about it or specifically campaign about it. I think we're still in the early days. We haven't seen the major disruptions because of political reasons. I think we will get there this year when it comes to things like EVs. So you see anyone who can own their own manufacturing as being attractive or somebody that can seize the opportunity or are manufacturing themselves?

44:37The challenge we're seeing already is that the model's shifting. So the model we had during the Cold War, and especially during the hyper-globalization period of 2005 to 2020, was you broke down every bit of manufacturing into the greatest number of steps. So each individual widget or part of a widget was made somewhere differently, and then you would bring them together into intermediate assemblies, than final assembly. And so you would take a product that maybe used to be done in two or three facilities and break it down into 100 to get those absolute lowest cost, highest throughput manufacturers.

45:16Well, when you start introducing national security and concerns about jobs and reliability and strategic competition to it, that's a horrible model. And so when these things are coming back, it's not coming back as partial widgets. It's a more consolidated manufacturing model. And everyone is scared of going too far because they don't know how much of China is going to fail. But everyone also wants to be first. So we're seeing a new model and a different scale with more consolidated manufacturing and fewer steps that are close to the end consumer. But everyone still wants to like tap Vietnam for some of the stuff that requires it.

45:57It sounds like you sound bullish about the U.S. on that, but wouldn't it just go to the next low-cost, low-wage country? If the model doesn't change, then yes. The problem is even if the model doesn't change, there's not a billion industrial workers somewhere else in the world. So you pull it out of China regardless of what the reason is. It's going to look different. And whenever you're going to change the industrial model, the product set, you're going to be taking risk. But the people who get it right, wow. They're going to really get it right. What about India in this? We haven't brought them up, but they are in the middle of most of the conflicts.

46:36Not the middle, but they are not committed to each side. They've managed to try to stay. The Himalayas are wonderful things. It insulates them from all kinds of crap. Yeah. So the Indians need to do the same thing that we have to do in North America. They need to vastly expand their industrial plant in order to make sure they have the manufactured goods they need. The problem with India is that everyone hates India, and India hates everyone, especially in their own neighborhood. So India is the only country on the planet that doesn't have a free trade agreement with anyone. Even North Korea has one with China.

47:10So everything that we need to do, we can get help from Canada and Japan and Korea and Mexico, probably the United Kingdom before long, Colombia. India just has India. Now, yes, there's a billion and a half Indians, and it's basically a half a dozen countries all in one anyway. But when you have to do it all yourself, it's going to take longer. It's going to be messier. It's going to be more expensive. And you know what I call that? India. This is an environment that Indians are very comfortable with. It is a huge growth story. It is an Indian story. They will not be integrating with anyone else.

47:46because there are a lot of people who look at that and say, oh, that's a great investment opportunity. Until you realize that capital markets in India are scary. What do you make of the situation with gold? Are we just seeing that? Has anyone brought that up to you? Are we just seeing that happen because people are so unsure how to game out? Because everything that we've touched on, hard to see how it goes. There are big question marks with Russia, Ukraine, big question marks with the Middle East, with China, on the timeline, with Japan? I personally find it a little silly. We're not in an environment anymore where there aren't a lot of really clear, positive investment plays because of all the industrial build-out that has to happen.

48:26I usually only think of gold when I have no idea what's going on. And it's very clear that we're seeing a huge industrial build-out in Southeast Asia and especially in North America. So there are ways to play this. And in an inflation index terms, gold over the long haul It doesn't look all that hot, but it doesn't look all that bad. I've heard of dumber ideas. What about Bitcoin? Somebody asked me about Bitcoin. We have not talked about that, you and I. Let me give you the very short version. It's the beanie babies without the stuffed animals. Move on. I'm going to take that. You're not a fan.

49:03You're not a beanie. No, it's just pointless. It had its moment when the baby brewers hadn't quite retired, and now it's just fluff. So as we wrap this up, what are you going to be watching for most closely? We started out by saying, what are you worried? What's sort of top of mind for you when we're talking about opportunity? Well, it definitely sounds like your bearish financial, the financial sector that services some of this just because we don't have that capital again until 2035. buy bullish manufacturing because of what's happening. So as we wrap this up, what is the thing that you're going to look for in the coming months?

49:42Sure, I'll give you two. In Russia, I've been waiting for the other shoe to drop for two years. Still hasn't dropped. It's going to. Don't know when. Keeping my eyes on it. On Russia, we always talk about that wild card being the fact they have nuclear weapons. Is that still as much of a threat? Because if you see the conversation, at least in Washington, it seems like there's so much more attention on Israel and Iran and Russia's really moved to the back burner. The American foreign policy community really has a hard time focusing on more than one thing at a time. And in an election year, to be perfectly blunt, Jews sell more votes than Russians.

50:22So that'll be the focus. But you would still be concerned about the fact that - Very, very. There's nuclear. Yeah. Sorry, I interrupted you. So you're keeping an eye on Russia? The second thing, and this shoe is in the process of dropping. The various bureaucratic support elements within the U.S. executive branch, as well as the European Commission in Europe, are drafting how they want to attack the Chinese industrial base and the export surge. The question is not whether, it's the specifics of how and when. And we're going to see movement on that easily before the elections. And what's the response from China?

51:02What does that look like for consumers? If we're not getting their cheap goods, what's the alternative? The problem is that the best way that the Chinese can retaliate is to do something that restricts their exports. And that's not something that helps them. So they have to look for something where they have a bit of leverage, where it doesn't translate into a direct boost for American-European manufacturing. I think the place you'll see that the most is in processed materials. So, for example, turning bauxite into alumina, turning steel into pig iron, turning lithium concentrate into lithium metal.

51:40If you remember to last year, they did this with germanium and gallium. Products like that are places where the Chinese do have some very real leverage in the system. Keep in mind, rare earths are not in that category. Rare earths are not rare. Processing capacity exists across the world. It's just not on. If we did have a shortage of rare earths, it would be spun up in 6 to 12 months. But there are other things that are very, very real. Peter, it's always super thought-provoking to have you on. We love catching up with you. We had some great questions. Appreciate all of your deep thinking to those who are watching.

52:16Fantastic stuff. And we hope we get a chance to talk to you again because this election is going to be one for the books, I think. One for the books. Who knows what's going to happen? So we'll check in with you as we get closer. Awesome. Thanks so much. And programming note for all of you. I wasn't here at the end of last week, but I think Ash gave you an update that we have a new product, a crypto product out. Even though Peter says it's Beanie Babies, there are a lot of people who disagree with him and are interested in it. So if you're earlier on the journey, you can check it out. Just go to our platform or our website, and you can find out where you need to see all of that and learn about it.

52:57And we'll be back tomorrow. Join us then. In the meantime, good luck and take care. If you want to participate in the upside of crypto, but don't have the time or the inclination to go truly down the rabbit hole, then Real Vision crypto might just be for you. New from Real Vision, an RV crypto subscription gets you access to a trading basket complete with risk management strategy, technical analysis updates, private discord channel, monthly drinks online and more. And it's led by a team of RV favorites, including Chris Bullock, Jamie Coutts, Peter Pinkassov, and more to be announced soon. So, barely have time to listen to the end of this ad, but want to take part in this crypto cycle without having to dedicate all of your time to figuring it out?

53:42Go to realvision.com forward slash RV crypto. That's realvision.com forward slash RV crypto to see if RV crypto is the right fit for you. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments.

54:20S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus 500. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus.