TDI Podcast: GeoEconomics with Das (#986)

27:12So they're just sitting there. Whether they can do that for an extended period of time, I don't know. And the other thing is a lot of the world has gone to renewables. If you ever travel through China, it was quite amusing. One of the Chinese state agencies gave reporters, wait for it, an electric vehicle ride west to east in China, all through the whole country. And most of the reporters were rather aghast when they went to the country to say, A, it's large, B, it's highly developed, and C, everything is covered with solar panels. and they actually don't rely. There are towns in China which are not even connected to the grid.

27:54They don't need to be because they use exclusively solar power and other forms of energy. So all of those is going on in the world. And the most puzzling thing, forget about everything else. Think about it from a United States perspective. You have one of the most precious resources on the planet, which is oil or petroleum in some shape or form. And you're now basically exporting it and you're telling yourself that you're rich. But this is a finite resource. Yeah. What's the point of that? It's a finite resource. It's also a resource that is trying to be taken out by renewables, right? And I know that here we don't do it.

28:36It's not because it's nasty and it doesn't work and all that. It's because it does work. Not everything, right? That's right. Not all of it. But windmill's ugly. Okay, I'll give you that. The killing birds. I'll give you that too. But at the same time, the idea that other countries around the world are doing things to proactively reduce their reliance on fossil fuel, which is, as you say, it's not infinite. You know, we have to get another compression age to make that happen, which is going to take a long time. It's over millions of years. Also, you have to eradicate the whole human race and every ecosystem there is.

29:16Right, exactly. Now, let's kind of segue into this, into the peace dividend, because, you know, you talk a little bit about in a few of your articles that you recently wrote and discussions you and I have had about this Cold War, post-Cold War peace dividend, the idea that, you know, now it's changed from a post-war peace dividend to, in fact, where we are today, which is a war tax, right? So, I mean, how does that all play out? Well, I think you have to go back to the numbers. And I think the most interesting thing is, I think there were two things in my lifetime, which are very, very significant.

29:54One is the collapse of the Soviet Union. And the other is obviously the rise of China. I thought you were going to say Chinese food delivery, which is a great invention in my day, but okay. Oh, absolutely. Chinese food delivery was there. What I always have loved about Chinese restaurants, by the way, is they're not polite. So you go in and the guy says to you, what do you want? Yeah. There was none of the maitre d 'eux sort of rushing over and sort of frustrating himself in front of you so you can walk over the top of him. Anyway, I've always loved that. It just feels like hope. Exactly. It feels like hope.

30:31But if you actually look at that, once the Soviet Union collapsed, to give it in perspective, the US defense budget halved from 6 % of GDP to 3 % over the period, say, 1990 to 2000. And that's a dynamic which is not going to be repeated. And Europe was even greater. Europe was even greater. and essentially the peace dividend to Europe was worth probably about$5 trillion over 30 years. And now that's all gone and global defense spending is going to rise. It's right about, say,$3 trillion a year and it's going up by 10%. And on present trends, it's going to reach $7 trillion by 2035. And that's a diversion of resources.

31:20The problem also is we have a new defense mechanism, right? The old defense mechanism was deterrent, right? It was way back, troops. Now it's like bombs. And now we went into very costly, but not as much, easily to replace, not like a missile, because that takes a lot more time, these drones and kind of crazy miniature warfare that it's like Ender's Game. Did you watch the movie Ender's Game? You got to see that. No, I haven't. Yeah, you got to see that movie. You have to understand the movie to understand what I'm saying. But basically, it's like game warfare. It's like joystick control. It's the gamification of everything.

32:02Yeah. Yeah, it's the gamification of everything. Financial markets have become gamified. Now defense is becoming gamified. War is becoming gamified. So there's two types of wars, right? there's the idea of a kinetic war. I'm finding that all of a sudden that phraseology is starting to creep into the news flow. I mean, war was war. It's like, you know, it's war. You know, there was either a cold war, there was a hot war, there was a war, there was a ceasefire, which, you know, but now we have kinetic war, which I think, correct me if I'm wrong, connotes active, death-oriented processes. That's a kinetic war, right?

32:51Well, I think the best way to describe kinetic, it's a sort of sanitized version of killing people. But I remember Will Rogers, the great American comedian, once saying that who can't say human beings don't advance? In every war, we find a new way to kill people. That's great. That's a good one. That's a great quote. Yeah, a great one. That's a great quote. Yeah. And so that war is going on. And by the way, the mortality rate in the current war, because of what they call these first-person drones, you get a personal killing machine aimed at you. Yeah. Which is, you know, I think you should feel very privileged.

33:27You know, you're special. This drone is coming for you personally. And, you know, it's this kind of thing. And by the way, that's no different from the delivery drone that, you know, online delivery companies. Ah, good point. Instead of bringing you your pizza, it now brings you a kilo of explosives. It's just absurd. And joking aside, it's a tragedy. And there is that war. But I think the more important war, frankly, and I don't want to ever denigrate human suffering, is the economic war, which is parallel to it. Right. And that is, they're trying to, right now it looks to be that there is a desire to run both concurrently.

34:13Now, let's just get away from Iran for a second. Let's talk about the impact of this economic war, for example, when we look at what's going on in Ukraine and Russia. So the economic war that's happening there, actually, there's winners and losers. You know, you've got to question the amount of money that's being funneled into Ukraine. And is it really all being funneled into just the bombing and the artillery and the defense? Or is that leaking around a little bit? And then also the economic war that we and the rest of the world are imposing on Russia for being the big bad Russia that they are, right?

34:50That has had an impact on the rest of the world too, hasn't it? Well, I think that's right, because essentially, one of the other things that came out of the sort of last period of history was we globalized supply chains. And essentially, everything, bits were built here, bits were built there, they were combined. And if we couldn't do something economically efficiently, and it was too costly, we just got it from somewhere else. But now the system is breaking down because this economic warfare involves things like tariff. I understand that's the US president's favorite word. There are trade restrictions.

35:28It's a beautiful word. It's a beautiful word. He thinks it's beautiful anyway. That's all that matters. And there are investment controls and sanctions and excluding people from the dollar payment system. And the other one is sovereign assets seizure. people forget that one of the big changes that's gone on is countries are seizing each other's central bank assets. I mean, Russian Foreign Minister Sergei Lavrov was basically foaming at the mouth when the Western community confiscated billions of their foreign exchange reserves. And he was asked what he thought. And he basically said in one word, theft.

36:07That's all it is. Right. Because under international law, that was not regarded as permissible. So all of these things are going on. And essentially, what that's doing is adding to the pressure. On the one side, we have the war tax. On the other side, you're starting to break down these supply chains. And it's not only the United States, because in sort of retaliation, China is using rare earths as a very, very competitive tool to try to influence other things. Now, one of the most amusing things about that is that I understand the U.S. Defense Department is trying to up the production of things like interceptor missiles and everything else, except each of those things uses a heck of a lot of rare earths.

36:56And of some of them, China is the sole supplier. So everybody is using this. And, you know, this has obviously geopolitical consequences, but the most important thing that if you go a little bit further down the track is what this is forcing countries to say, well, I can't really rely on anybody else. I just literally cannot rely on anybody else. So I have to do things internally. And that's reversing the logic that was there all along. I can't do that cheaply. Somebody else can do it more cheaply. So I'll buy that in. And so what this is doing is building in an entirely different sort of environment where all costs are going to rise.

37:40And they're going to rise very rapidly, in my view, over the next 10, 15 years as countries go back from globalized trade to the economic term is autarky. And the only country on earth at the moment which has autarky is North Korea. And as I say, this is the North Koreanization of the world. And what I've called this all these years is I create a phrase selective isolationism, which is the use of economic warfare or economic means to try to, one, push other people out and then isolate ourselves from all that impact. One of the interesting things that's happened recently, which I think is fascinating, is for years we have gone, and my listeners have heard me talk about this before, but for years we've gone on and kind of, you know, we've laughed.

38:27We've, oh, China, oh my God, China stuff isn't real because, you know, it's state-owned enterprises. And the idea that the country is going and they're, what are they doing? Well, they're buying into, they're supporting, they're creating a safety net. And that's just not real. And Japan, oh my gosh, look at them with the artificially low rates, sub-zero on JGBs. And then on top of that, they actually are active investing in their markets, in the ETFs inside their markets. And oh my gosh, those aren't real markets. Look at us in the United States. We're so much better than that. And meanwhile, you bring up the point, Das, about critical materials and metals and rare earths.

39:09And what do we do? We decide that we're going to start needing this and we buy into companies. Our government for security purposes and independence requirements, we start buying into these companies. And everybody's like, oh, that's a good idea. the same people that were absolutely horrified at the fact that China does the same thing. Well, I think the interesting thing is that's exactly the problem. And the problem is the West, particularly Europe and the United States and also Australia and basically the Anglo-Saxon world has missed the boat. China started doing this 40 years ago. And Japan started doing it after the Second World War.

40:02And they've got a head start. Yeah, a big head start. It's going to take a long time to catch up. And there's a very famous sort of phrase which essentially Deng Xiaoping, who modernized China really after Mao Zedong, said, is he said, well, other countries have critical resources like oil. Rare earths is going to be our oil. Oh. And he was absolutely right. And how somebody like him saw that far ahead, I don't know. Well, they play a much longer game than we play. We play a four-year cycle. Yeah. They play 50 years. Andrew, Andrew, Andrew, we don't play a four-year cycle. Most businesses, I think the long term is the next quarter.

40:49Next quarter. Well, from a geopolitical standpoint, we play a four-year cycle. From a company standpoint, we play a four-quarters cycle. Yeah. The idea of economic warfare that's happening right now, and you mentioned that prices are going to go up. We have things like choke points and shipping route issues, the critical metals. We have tariffs. We have things like we're going to put them on a no-no list, right? Yes, I know. It's actually the no-no list is right. I understand that Australia is going to have to pay tariffs of 12.5 % because we use forced labor. Forced labor. People are forced to go to work so they can eat.

41:27Exactly. And I think the other thing which is amusing about the forced labor is the minimum wage here is roughly three times what it is in the United States. I said, you know, most people around the world would be happy to be forced labor here at those rates of pay. Yeah. Let's kind of go back. This is just kind of absurd. It's absurd. The whole thing is absurd. The games that are being played. The whole thing is absurd. It's just an absurd game. Let's go back to the Middle East for a second and talk about that, because when we look at the Middle East, there's been a tremendous amount of investment, whether it's a sovereign wealth funds or whether it's been direct investment.

42:02And again, what's interesting about that is for many, many years, we wouldn't allow that due to security and issues with that. Right. We pick our countries that all of a sudden we like and don't like. All of a sudden we're good friends with Saudi Arabia. I don't know. I'm not sure where that exactly happened, but we don't like China. Right. And we don't like, you know, now it's like, OK, well, Russia's bad. But over time, this all happens and we see these changes and this rotation. But the Middle East has been ever since especially sovereign wealth funds became in existence. And on top of that, because of the excess capital they have due to the technology that they produce, they've funded a huge amount of all sorts of projects around the world.

42:48if we have this prolonged conflict which by the way is odd because Iran is now attacking what used to be their friends their allies which are no longer seemingly their allies right if this continues what happens to that investment that may come into does it shift does it go to different places does it turn off how's it going to work well I think you have to come back a stage is that basically what happened in the Gulf was you have to go back to the 1970s and the oil shops. And oil went from nothing and quadrupled in price. And that's a very important point, the quadrupling. Oil can quadruple in price if somebody starts to fiddle around with the supply of it.

43:30It's just one of those things with no elasticity of demand and no elasticity of supplies. If anybody plays with it, it goes up. So they ended up with a lot of this money. And what happened was, what do you do with this money? Because they've got low populations. They don't really, can't use all the funds. So they basically invested it. And that gradually grew to the sovereign wealth funds and so forth. Now, Iran actually is attacking these Gulf countries for a very specific reason, is the Iranians are not quite the Chinese, but they are playing a longer game. And they know that if they can essentially mobilize these nations, and don't forget, almost all of these nations are not democratic.

44:16They're monarchies. And so basically, state funds are your and my wallets. Yeah, exactly. What do we feel like investing in today? Yeah, exactly. Exactly. And so essentially, the attacks are very interesting because they take different forms. In the case of Saudi Arabia, they're obviously disrupting all their oil exports. Their oil exports are down by about 25 percent if I look at Aramco's accounts. and then you attack in the case of the UAE they have this hub the UAE and Qatar are basically airline hubs so you destroy the airport or attack them to because they're trying to diversify away from oil or they don't have as much oil they're getting into aviation and tourism and basically what you're doing is you're disrupting global air traffic movement of people and cargo and Essentially, you're shutting down those economies.

45:12That's what you're doing. In my view, the Gulf economies are going to contract, and they're not short of funds. There were two very telling episodes. One of the Gulf countries borrowed privately from PIMCO. Instead of doing public bond issues, they did a private placement with PIMCO or a semi-private placement because they wanted to hide. They were paying normal, not normal interest. They were paying much higher interest rates to cover their budgetary shortfalls. And essentially what they're going to have to do is they have these massive investment portfolios. And they're going to have to basically, due to the cash flow pressures, do two things.

45:55One is they have to sell and take the money back. And also what they have to do is essentially reassess these strategic relationships because the finance and the geopolitical relationships are aligned. And what Iran is doing is very simple, is they know the only way they can really survive is to turn the Gulf countries around. And it was very interesting to see the three-way agreement between Turkey, Saudi Arabia, and Pakistan. And essentially, that's about moving away from a Western facing to a different alignment of geopolitical powers. And that also means a couple of things. Turkey wants to sell its military technology to Saudi Arabia, which means the funds from Saudi Arabia aren't going to flow to Western arms suppliers, they're going to flow to Turkey.

46:54Right. And also Pakistan, which has got huge economic problems, is looking for Saudi Arabia to invest there. So this huge diversion is going to go on. And by the way, if you take the top 12 sovereign wealth fund, I think from memory, seven or eight of them are from the Middle East. Oh, yeah. No question. And so those funds aren't going to come. And those funds, directly and indirectly, have been underpinning two markets. One is the US Treasury market, and the other is the stock market. Yeah, clearly. Because there's a massive amount of money that's flown in. But that money is now not only not going to be coming in at the same rate, but I think it's going to reverse.

47:39We saw sovereign wealth fund numbers this week. Record numbers of profits, I think, from Norway. One of the largest sovereign wealth funds. I think the largest sovereign wealth fund in the world. It is the largest. And they had, I think,$187 billion of profit over the last period that they've reported, which is enormous. And the idea of a sovereign wealth fund, of course, was two things. One is to diversify in the Middle East in particular. They take the money and the profits from their oil. They put it somewhere else to diversify it away from oil. Then that is good for the country members, if you will, the citizens.

48:13They would pour it back, and they would be able to utilize that. It's being used like a massive hedge fund now. Which is - Well, they are hedge funds. They are. They're basically massive hedge funds. That's what they are. Now, in our previous conversations, we talked about something. We talked about this, I think, unresolved or maybe it's unresolvable issue with regard to extraordinarily high debt levels, sovereign debt levels around the world. and as interest rates are staying higher, the 30-year hit recent highs from decades. And that obviously - 2001, I think it's - Yeah, it's impacting, it's impacting mortgages and it's going the wrong way.

48:57You have Kevin Warsh who said, you know what, hey, let the markets decide on what the rates are gonna be. And I heard that, I'm like, oh, wow, don't do that. You know, at least have a little bit of something in there because you let the markets go do that, they're gonna test you pretty well. with all the excess amount of required defense spending that's going to happen, with the cost of funding being the highest it's been in decades, with funding being the highest ever, how does all that happen? Explain that to me. Well, I'll give you, this is actually playing out right in front of our eyes, but it's playing out in an interesting place.

49:39I've always said you have to watch Japan. The reason you have to watch Japan is Japan got into these troubles that we all face now 40 years ago. When their bubble burst, they started to use the policies that we've used to sort of massage our economy, which is things like massive fiscal deficits, loose monetary policies, low rates, quantitative easing. All of those policies came from Japan. and Japan's sovereign debt, the actual government debt is now 250 % of GDP. And I always said, this is like the great experiment. Now, does this work or does this work? What Japan? And as you know, the Bank of Japan and the US Federal Reserve had to intervene.

50:25Oh, that was great. When Besant had, I mean, the yen hit 160 plus, 164, was it? 164. I think it's 164. and that means it's weak, by the way. Just to be clear, when we talk about the yen moving up, it's actually against the dollar, but it's reverse and upside down trade, meaning the yen was weak and has been weak in 40-year level on the downside, on the weakness scale, if you will. What was interesting was, I don't know if this was an accident or if this was purposefully done. During a meeting, Treasury Secretary Scott Besant was sitting there and he had a little notepad out, right? Just a little notepad, small thing.

50:58And one thing was scribbled on it. Buy 10 to$20 billion worth of yen. or something like that. Well, I don't think it was accidental. That's the first comment I would make. Right. The second thing was that I think you have to look at how far the yen has come. Oh, it's unbelievable. The yen since 19, from 100 to 164. That's a 60 % devaluation. It's unbelievable. That's massive. That's a massive devaluation. Meanwhile, the stock market's doing well. The economy seems to be doing well. Nobody's the wiser. Nobody cares. The yields have been higher than they've been for 40 years or something like that.

51:34And still, the government is still managing to pay their debt. No downgrades, by the way. The reason for that is very simple. About 90 plus percent of their debt is financed domestically. It is not financed outside. The stock market has much, much more significant foreign ownership. But basically, their debt doesn't. Now, this is the interesting thing about this. because essentially, normally, you have the central bank intervening, not everybody else. And essentially, the only time I can think of that you have concerted efforts was like the Plaza Accord and the Louvre Accord when they were trying to realign all the currencies across the board.

52:16They're not trying to do that here. But the interesting thing is why Japan is worried about the actual weakness of the end because it helps their stock market because they're exporters. Yeah, clearly. It doesn't actually hurt them in that sense. And it also helps in the sense that they have a lot of foreign investments, which obviously in the end terms have gone up in value now. But the real issue was, is Japan faces rising inflation. And one of the causes is high energy prices, because the cost of oil and gas, that is all imported. Now in the end terms, it's gone up. But the thing is, if you have high inflation, then you need to push up interest rates.

52:53But they can't do that because their economy is weak and they've got these massive, basically, government borrowings. And also, their stock market is owned roughly a third by foreigners. But if the yen keeps weakening, and you said, quite correct, that the Japanese stock market has gone up. But if you translate that back into dollar terms, it doesn't look so squeezy for obvious reasons. Right. So they have to manage that. But the problem that they have is a parallel problem in the US. Because essentially, if the yen goes down and the dollar goes up, then that reduces US export competitiveness.

53:32And the US has tried to devalue the dollar to avoid that. And the other thing is, if you have higher Bank of Japan rates, Japanese investors, who by the way, are the largest holders of US treasury bonds, may switch back to their domestic bonds. and that would push up American rates and reduce demand for new issues. And the other big thing here is the carry trade because every hedge fund around the world borrows yen and buys higher-yielding assets in other currencies. And you may remember in August 2024 when the Japanese central bank increased rates by, wait for it, from zero to 0.25, the Japanese Nikkei fell about 12%.

54:16And it triggered a massive global period of instability. So essentially now, the US is sitting there going, holy hell, if they push up interest rates, you've got a big problem. So essentially what the US Federal Reserve and Scott Bessent is trying to do is avoid a destabilization. And central to that is how are they going to intervene? that we're going to have to get dollars to sell. But nobody's talking about fixing the problem. Everybody's talking about making sure that it's covered up, making sure that it doesn't explode. You started with the Botox economy. This is the classic example of the Botox economy.

54:59We just want to cover it up. I always say that there may be a beautiful-looking piece, a mound of a chocolate-layered cake with this great topping of chocolate on it. But the truth of the matter is, underneath that thin veneer of chocolate is just a pile of dog shit. And that's kind of like what we're looking at, you know, this idea that we can try to paper this over and it's worked. Look, look, look, it's worked. Let's be honest. It's worked for a long time. And yes, there are those moments in time. Take COVID out of it. Take COVID totally out of this discussion. Great financial crisis. Let's look at 2024 when, or 2020, 2022, 2024, 2024, when nothing worked out, right?

55:44Because the yields were starting to come up so dramatically. You know, look at some of the times in 2008 when, you know, we couldn't stop the ball rolling down the hill. But that's all this is. And it's really, it's terrible for us as investors that we ignore all this and we don't really focus on it because we don't want to feel any pain. And that's the deal, right? Don't feel any pain, no pain. Yeah, nobody wants to pain. But coming back to this point, you're saying you're absolutely right. It's covered up. And the U.S. and as you know, Scott Besson's background is he worked in a hedge fund as a trader for a while.

56:25and the interesting thing is he's running u.s finances in many ways very similar to a hedge fund right he shortened the maturity of all the debt to lower the cost so the u.s has to refinance a third of its debt every year and basically they're going to have to refinance around about 25 percent of gdp to say around 10 bill say about eight or nine billion trillion dollars every year And so basically the U.S. is now trapped. Japan is now trapped. All these countries are trapped. And so all we're doing is what you and I have discussed for the better part of 15 years. It's trying to kick the can further and further down the road.

57:08That's what it is. It's like the game I played when I was a kid. Kick the can. Exactly. And the problem is that there is no more road left. And we're getting towards the end of the road and the end of the economic game. And realistically, the only option is to return to credible commitments to fundamentally sound fiscal and monetary disciplines. But no government's going to do that. They're not going to take the decisive action for ideological reasons as well as the fact that if you do that, the financial economic costs are going to be huge. Can you imagine if everybody says, I'm going to go back to those types of sound policies, what asset prices would be?

57:50No, not at all. And I'll give you the number because in Japan, when they increased interest rates from four to six and the bubble economy collapsed, Japanese stock prices went down by 80%. And they didn't come back for decades, by the way. It was decades. Well, the urban land prices have never come back. And the stock market only came back in the last couple of years. Yeah, exactly. Crazy. Sanjay Das, my good friend, author, will tease the fact there's a book coming up in October, which we'll bring you back for. But I appreciate you as a friend, as a colleague, as an educator, and as a great guy all around.

58:31Thank you so much for joining us today. It's my great pleasure, Andrew. Have a great day. All right, thanks. Ah, the best, the best. And if you haven't heard Das before, now you know why he's a fave of our listeners. Thanks for joining me this week and every week. And of course, if you do have an NUA situation, net unrealized depreciation, where your company stock has increased dramatically inside your 401k plan, let's do something about it. Thanks for joining me this week and every week. I'll see you again real soon. This podcast is intended for informational purposes only and does not constitute personalized investment advice.

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