Jacob Shapiro & Roger Hirst - Global Macro Series - February 15th, 2023

[00:00:00] Jacob

I think we’re headed towards a multipolar world. I think the next 10 to 15 years are going to look something like the 1890s and 1900s, which were very, very good years. You had an energy transition happening. You had incredible tech innovations. You had a lot of geopolitical competition. But even Britain and Germany were trading more and more and more with each other right up until the guns of August started. So I think that’s the kind of world that we’re entering, and I’m optimistic about the next five to 10 years.

I am petrified about the world my children are going to inherit. I worry a lot about a US China war 15, 20 years down the line, but for the next 5 to 10 years, I’m far from being in a fetal position. I think there’s a lot of opportunities out there and I like the risk reward of a lot of these multipolar opportunities.

[00:00:50] Intro

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Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:40] Niels

A new world order is becoming clearer by the day, and in our Global Macro Series, I want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world will look like. We want to explore their perspectives on a host of important issues, and hopefully dig out nuances in their work through meaningful conversations.

Our guests today are content creators at Lykeion, where they write a monthly research publication focused on both geopolitics and global macro, and how these worlds intersect. So please enjoy my conversation with Jacob Shapiro and Roger Hirst.

Jacob and Roger, welcome and thank you so much for joining me today for what I’m sure will be an enlightening conversation as part of our Global Macro Series, perhaps with some predictions that may shock or surprise some of our listeners. But since it’s your first time on this podcast, perhaps I could ask you to maybe set the stage a little bit by providing some context for our conversation by just sharing a few highlights from each of your backgrounds, because I think that will be relevant for the conversation and for some of the topics we’re going to talk about afterwards. So I don’t know, Jacob, if you want to jump into it first.

[00:03:07] Jacob

Sure, happy to. Roger and I joined in sort of concentric circles at Lykeion where I’m geopolitics editor and where he’s macro editor. So the other parts of my background are that I work directly with companies, helping them manage their global supply chains via a consulting firm called Perch Perspectives, and then also, I’m a Partner and Director of Geopolitical Analysis at Cognitive Investments. We’re an investment advisor and my money is where my mouth is on a lot of this stuff where we’re directing client assets based on some of these geopolitical insights and some of our things internally.

I’ve been doing geopolitics, it’s crazy to say, for over a decade now. I started at Stratfor. I helped stand up geopolitical futures with George Friedman around 2016, 2017. But the last couple of years, I’ve gone from that mass consumption geopolitics to really more for investors or more for supply chain executives and things like that. The partnership with Lykeion and Roger is to try and offer that geopolitical part of the equation to macro research and thinking about macro because, in our opinion, it’s a real missing piece.

[00:04:09] Niels

Absolutely. What about you, Roger?

[00:04:11] Roger

My background, most recently I’ve been working as Managing Editor for a section of Real Vision, working with third party clients, mainly financial institutions on helping them with messaging and creating some content for particularly video media. But prior to that, I worked within various investment banks like Goldman Sachs, Morgan Stanley, where I mainly covered hedge funds, macro hedge funds, long-short hedge funds from an equity derivatives perspective. Lastly, at Deutsche Bank, I was doing macro strategy, again, from the equity derivative perspective. It became more and more multi-asset macro strategy in sales, again, talking with hedge funds but also those multi-asset institutions.

So, I have got about 30 years’ experience across all of those spaces. I think what was really interesting, in this challenge that we’ve got now, is that for many, many years, the mantra had always been you can’t trade geopolitics. I think that’s changing because if you take out the geo; the politics is certainly becoming much, much more embedded in the way financial markets operate. Inevitably, part of that is the geo part of it as well. So, I think there is this sort of interesting confluence of the macro and the geopolitical that probably means it’s relevant for the first time in 20 years, to bring these together as a trading and outlook thesis.

[00:05:33] Niels

Yeah. I completely agree. It’s great and it’s great to have both of you here today of course. Now, I think a lot of investors are hearing this word ‘uncertainty’ every time they turn on the financial media, and perhaps it is being used a little bit too much at the moment. Often, I guess, it’s used when people can’t explain what the markets are doing. I wanted to ask both of you, and maybe to start off with you, Jacob, from your perspective at the moment, where does the uncertainty really lie?

[00:06:07] Jacob

Sure. Our latest edition of the Lykeion newsletter really goes into this. We are honest about the fact that it’s the second edition of this research product that we’re putting out and we’re saying, hey, there’s a lot of uncertainty here and we don’t feel good about telling you which direction to go, or not. But there are two main areas where I think that uncertainty is lying, even since we published that edition. I think we’ve had some progress on one end, and maybe even more uncertainty on the other end.

So the area where I think we have some more certainty, but which is still an open question is China. There’s the COVID-19 reopening there, you’re seeing Xi Jinping and the Chinese Communist Party, for whatever reason, whether it’s because he got his third term or because the economic growth figures were scary, or maybe it’s the real estate crisis (we can try and parse out the reasons), but China’s reopening seems to be going okay. And their healthcare system, I wouldn’t say it’s great, but it seems to be holding. We’re not getting mass protests in the streets and hospitals being overrun by strange new variants which is something that was really on the table even a month or two ago. So, coming out of the Lunar New Year holiday, it looks like China’s reopening is starting to actually get some legs and we’ll see if it can continue going forward. That’s big uncertainty number one.

Uncertainty number two, in some ways, has gotten even more uncertain in a couple of weeks since we put out that report. The Russia-Ukraine war, even a couple of weeks ago, I think the market was thinking that there was going to be a truce or a frozen conflict of some sort. Just in the last couple of weeks, we’ve got the Americans and the French and everybody else saying they’re going to deliver more ammunition and artillery shells to the Ukrainians.

We’re going to deliver tanks, apparently, to the Ukrainians in the hundreds, maybe even thousands. Politico is already reporting that Western officials are talking about fighter jets and air support. Now, six months ago, tanks were completely off the table than they were on the table. So it’s sort of the same position with fighter jets. Right now, they’re completely off the table but you can imagine a couple months from now, maybe they’re on the table. On the Russian side, you have a power that does not look like it’s slowing down anytime soon.

Russia is mass mobilizing people for a meat grinder conflict and just throwing numbers at Ukraine’s technological superiority and hoping that the Russian tactic on war, which is just we’re going to outlast you and we’re going to be okay with casualty rates that are far higher than you can stomach, it seems to be they’re betting on that going to be the way forward with the war. So gun to my head, I’m thinking we’re actually probably getting a major escalation of the Russia-Ukraine war here in the next couple of months. But if you told me there was a frozen conflict à la 2014, if you told me that Ukraine overwhelmed Russia’s military forces and took all the territory back that was taken after 2014 and beyond, I’d believe that.

There’s just so much uncertainty around the Russia-Ukraine war right now that in some ways, it’s hard to think about the commodity markets that are related to Russia and what European energy looks like. When you start to build out from that big an uncertainty at the core of everything, it’s really hard, I think, to make confident theses at least at a macro level. So, those I think are at least for me, are the two major sources of uncertainty.

[00:09:12] Niels

Yeah, that makes sense. I, of course, didn’t know that you would pick those two but I’m kind of glad you did because I’ve got, certainly, a lot of questions in both regions. But before we get to any of that, from a global macro point of view, Roger, how do you see the world? Where do you think the uncertainty lies in terms of that side of things?

[00:09:34] Roger

I think it actually stems from almost an absolute certainty last year of recession. It felt like it was this easy forecast to make. As time has progressed, that certainty has started to dissolve into numerous very, very plausible outcomes. I think part of it is we’ve got this recency bias where we were used to COVID, and prior to that there’s that spat at the end of 2018, and even the Great Financial Crisis in 2008, but it really, really happened in H2 2008 and the beginning Q1 of 2009. We’re so used to things happening so quickly that because the recession everybody wanted and has been predicted for the best part of a year hasn’t yet arrived, that’s created this uncertainty.

So what we’re now seeing is the certainty of recession, now, is actually becoming a plausible scenario where we still get recession early, and it’s a natural recession from where we are today, a natural progression towards recession. Or, equally plausible is that actually things do quite well in Q1 and maybe Q2 and bounce, and the Fed actually has to create a recession or at least tighten financial conditions once more in order to ensure that the inflation genie gets forced back into that bottle. So for me, the uncertainty is simply that the sequencing has taken a long time, from a place where everybody had a very short footing 12 months ago, to something now where I could say that both a downside and an upside scenario are equally plausible.

[00:11:00] Niels

Great point. Now, before we dive into some of these things, you already alluded to it that you come from fields of expertise that were kind of put in the background for a couple of decades because nobody really cared about global macro or geopolitics. But as we know, this has certainly changed in the last year or two. Maybe a little bit of a cheeky question here, but I’m curious what you do if each of your analysis disagree or there is a conflict. As we speak, I can’t think of a concrete example where that would happen but I’m sure you know what I mean, where the one force would be dominant, potentially. How do you settle that between you when you have to decide what you think will have the ultimate impact on the markets, for example?

[00:11:53] Jacob

It’s a great question. And 20, 30 years ago, it’s not that geopolitics wasn’t relevant. It’s just that geopolitics was really boring and it was really just one insight; the United States is the top power in the world, full stop, and nobody’s challenging them. So, if the United States is the top power of the world, then it’s globalization on American terms and everybody’s marching to the beat of the Washington consensus and everybody wants to be part of the WTO and be nice with the IMF. It was that one geopolitical insight, and for 30 years, guys like me were just saying, like, yep, the United States, it’s still top power in the world, that’s the geopolitics. That’s all it is.

As we go forward, all of that is changing; is in flux. I think part of the thing, though, and this is where geopolitics sometimes goes off the rails, is that geopolitics is really a discipline where it’s not about trying to understand investments or making good trades. Geopolitics is about understanding power dynamics between nations.

Now, you can make interesting investment decisions if you know where those power dynamics are going. But geopolitics goes off the rails when you just say, Oh, I have a geopolitical insight, and I’m going to go long soybeans, or I’m going to buy this company and I’m going to go long. It almost never actually works that way.

So, there are oftentimes I think that Roger and I will disagree on various things and part of the discipline of geopolitics is finding the center of gravity of an issue. Sometimes, that center of gravity will be politics or security. In the Russia-Ukraine war right now, it’s all geopolitics and has nothing to do with markets.

There are plenty of other examples, let’s say the relationship between Mexico, the United States and Canada, where a geopolitical analyst is going to come out here and say, “Oh, well, Mexico and the United States, long term geopolitical rivals, and there’s migration, and the Canadians were once sponsored by the British, and the United States government used to have an action plan for a Canadian invasion of Northern USA.” That’s all nonsense.

Everything that’s happening between the United States and Canada and Mexico today is trade and macro and who’s making money and where the profit margins are and whether you can get labor from one place to the other and labor reforms and things like that. So, I think any good geopolitical analyst is aware of their limitations and works with somebody like Roger, or where I work at Cognitive Investments, goes to the guys who see the macro, have the investment thesis, and inserts that insight into their perspective, and then it’s in that sort of cross pollination that you actually start generating some variance with maybe what the market is thinking. That’s how I would view it.

[00:14:18] Roger

From my perspective, what I’m always looking for is a framework. So, to have discourse and actual disagreement is actually quite helpful. There’s always this danger when people are looking at markets that they want the trade idea. In 20 years, the trade idea was useful to maybe 10% of my clients. The other 90% would say, “No, my time horizon can’t address those markets, etc.” So for me, it’s much more important to have a framework, and therefore, the framework is valuable to everybody, a day trader through to a long-term pension investor, whereas a single trade idea is not. Actually, what really helps is to be able to say, look, my framework is this, but this is the risk.

So my framework might be I’m bearish on Europe, and Jacob might say “Yes, but Roger, you’ve got to think that if we get through the next few months of the energy crisis unscathed, then actually, Europe’s in a very strong position.” What we need to do and what I want to do is always put out these ideas. I don’t want to be someone who says, “This is what’s going to happen.” I want to go, “This is what I think but these are the risks to my views because of what Jacob thinks.” So that disagreement, that discourse, helps a framework and hopefully for people who are investing, it helps them understand, from their own perspective, which bits they feel the most relevant to their framework, their time horizon, their trading strategy.

[00:15:32] Niels

Now, again, before we dive into all the nitty gritty stuff, I’m still staying a little bit on the big picture stuff. Because one of our previous guests, very popular on the podcast, on many podcasts, Peter Zeihan, I know that both of you are familiar with his work. He has some very strong views that we are seeing this radical shift in the world, both in terms of geopolitical borders but also as demographics are in for a seismic shift in the coming years in some of these key countries. So I’m just curious, do you agree with his overall view, or maybe do you disagree with what Peter thinks and has described? Maybe Jacob, you need to go first here.

[00:16:19] Jacob

I’ll go first. But in some ways, I’m more curious to hear what Roger’s answer is to that question. But it’s funny, I have a client who heard Peter on a recent podcast and for my weekly report for them just asked me to write a column responding to one of Peter’s interviews, so I actually have all of this fairly well locked in my head. The first thing I’ll say is I worked with Peter at Stratfor. I was a lowly intern making coffee when Peter was one of the top analysts at Stratfor. So in a certain sense to me, Peter is an elder statesman of geopolitics and guys like me don’t have careers if Peter wasn’t blazing a path for using geopolitical analysis. So I’m going to offer some criticism of him, but that criticism actually comes from a place of deep respect because it’s analysts like Peter who made me want to have the career that I have.

I’d also say, there’s two macro areas where Peter and I differ just from a methodological level. The first you already alluded to, which is demographics. Peter really likes demographics. He thinks demographics are destiny and will make a lot of deterministic arguments, I would say, based on demographics. I don’t dismiss demographics at all. But demographics are really, really tricky. It’s very, very hard to know what a given population is going to think about having kids 5 years from now, or 10 years from now. It’s also very hard to know what demographic profiles are going to do at a geopolitical level.

One of my favorite examples of this, if you go back to mid to late 1920s, Germany, their population pyramid looked absolutely terrible. One of the Nazi party’s first campaign slogans was about trying to actually get German women to have more children. Before they got to killing the Jews in the gas chambers and everything like that, they wanted to improve German demographics. If you had just looked at a demographic pyramid of Germany in the late 1920s, you would have said that country is going to collapse into nothingness in 10 years. They didn’t collapse into nothingness at all, they almost conquered the world.

So I use demographics. I think it’s important to engage with demographics, but there’s also a lot of uncertainty and demographics. If you look at the UN projections on demographics, there’s a low, medium, and high variant with those things. You can cherry pick any of those variants you want to make almost any argument that you want. So, demographics, I sort of have a bugaboo about. The second is the title of Peter’s new book that he has. I think it’s something like the world is ending or the ending of the world.

[00:18:32] Niels

The End of the World is Just the Beginning.

[00:18:35] Jacob

Right. The End of the World is Just the Beginning. The title of my report that I sent to my client this week was The World is not Ending. Not only do I not think the world is ending, I think Peter and I see time horizons quite differently. I think Peter sees a lot of disruption and uncertainty and risk here, in the next couple of years, and then thinks we’re going to get to the broad, sunlit uplands of US hegemony returned in the world order. I actually see the exact inverse. I think we’re headed towards a multipolar world.

I think the next 10 to 15 years are going to look something like the 1890s and 1900s, which were very, very good years. You had an energy transition happening. You had incredible tech innovations. You had a lot of geopolitical competition. But even Britain and Germany were trading more and more and more with each other right up until the guns of August started. So I think that’s the kind of world that we’re entering, and I’m optimistic about the next 5 to 10 years. I am petrified about the world my children are going to inherit. I worry a lot about a US China war 15, 20 years down the line.

But for the next 5 to 10 years, I’m far from being in a fetal position. I think there’s a lot of opportunities out there and I like the risk-reward of a lot of these multipolar opportunities. The only other thing I’ll say is Peter said a lot of different things in that podcast, it would take us a whole hour just to go through everything, but the two points where I would disagree with him the most. He said China is going to be gone in 10 years. I admit that that is a possibility. I think it’s a fringe possibility. I think it is much more likely that China has a couple of years of trouble, but then emerges a little bit stronger than it is right now.

Again, if you go back to demographics, Peter would look at a demographic pyramid of China and say, “This is terrible, they’re collapsing.” I grant you that the demographic pyramid looks terrible. But keep in mind that there are hundreds of millions of Chinese people living in the interior of the country who have not enjoyed the prosperity that the coast has in the last decade or so. I think one of the reasons that Xi Jinping has named himself emperor de facto is because he wants to redistribute that wealth from dudes like Jack Ma and all these others, to the guys in the interior.

So that’s hundreds of millions of people who currently live on something like $3 to $6 a day, who, if the Chinese Communist Party can redistribute that wealth, give you the same sort of equivalent of a demographic dividend without having to have a bunch of children. So I think this idea that China’s collapsing, that Xi Jinping is Mao, I don’t see any of that. I think that analysis is wrong.

The second is that Peter talks a lot about food crises and about how in the next decade, we could lose hundreds of millions, if not billions of people to potential famine because of the loss of industrial agriculture inputs. Again, that is a fringe possibility. I can’t tell you that that is completely impossible. But people, going back to Thomas Malthus in the 1700s all the way up to today, have been saying that we’re not going to be able to produce enough food for the global population for literally hundreds of years and they have never been right. They’ve never been right because they just assumed that technology is going to stay the same as it is today 10 years from now. That’s just not the case. There are so many interesting things happening in genomics and alternatives to fertilizer.

If we even cut down on food waste that we grow by about half, we could probably feed the world 1.5 times over if not 2 times over. So those are two key areas where I think Peter is wrong to give that end of the world scenario that’s happening. The last thing I’ll just say about Peter, and then I would love to hear what Roger has to say about this is that all that said, I didn’t think Russia was going to invade Ukraine, and Peter did. He nailed that. He got that 100,000% right and I got that 100,000% wrong. I’ve also had my fair share of humble pie in the last 12 to 18 months.

So I can recognize that even though I’m offering that critique of Peter and even though there are ways in which we differ methodologically right down to specific forecasts, you have recent history where Peter was right and I was wrong on something. So I’ll trust your listeners that they’re smart enough to figure out which one they want to listen to and how they build their own perceptions based on not just me and Peter, there’s others like us out there, Marko Papic, Rodger Baker. There’s a whole school of geopolitical analysts out there and I think you have to listen to all of us and then come to your own conclusions.

[00:22:39] Niels

Yeah. We have had Marko on as well and I think he certainly shares your view that maybe the world isn’t ending right now. But I’d love to hear your thoughts, Roger, about this.

[00:22:53] Roger

You both alluded to it. I grew up in the 1980s listening to The Smiths, and all the time in this world of markets, I always come down to a famous song title which is How Soon is Now? This is the thing with a lot of geopolitics, what is the timeframe? What is the timescale? Because as investors and traders, there are those who are thinking about their pensions long term. But most people think about something like a two-week to maybe a two-year horizon and even embedded in lots of pension funds, it’s a multiple two-year horizon.

But what we just listened to from Jacob is two years is short-term, 10 to 15 years is maybe long-term. So these things, and often in geopolitics, operate in a relatively glacial timeframe compared to things in investing in markets. This is, again, one of the reasons why we went from certainty to uncertainty in terms of recessions. It’s taken 12 months, and for most investors over the last 10 years, that just feels like a lifetime of investing. So, I think the problem with a lot of this is, when we’re looking at these opportunities, and pretty much every time that myself and Jacob are disagreeing, it’s basically what we think is ‘now’.

My idea of ‘now’ is, will I make money on something that expires in three weeks’ time in the futures market? Whereas Jacob might be thinking, is there a buying opportunity in the second half of 2023, for the next 10 years?

When we talk about these different views, the world’s going to end, well, over what time period? The hyperinflation was from 1919 to 1923, that’s four years. Now, looking back, that was a tiny, little, short timeframe. But in that four-year period, that was, for a lot of people, a very long period of time. So for me, and investing for macro and one of the difficulties that we will have all the time is putting a macro overlay on to a geopolitical kind of framework where one is operating as a fast twitch muscle and the other one is going for a marathon.

[00:24:53] Niels

Yeah. By the way, maybe for clarity, maybe some of our listeners have not heard our conversation with Peter. I don’t think when he says the world is coming to an end, he means that it’s coming to an end. He just means that we’re heading into a new regime and the world that the three of us know and a lot of people know is the one that’s coming to an end.

Now, for me, there are few places where it’s kind of a little bit easier to see how global macro and geopolitics intersect, and that’s in some of the big markets we all like to follow like the currencies, the interest rates, gold stocks, to some extent. I would love to hear your views on these markets and how they may be impacted.

But before we go there, I actually really want to start with exploring the regions of the world perhaps. I’m not an expert, but I would like to start with China since you brought it up, Jacob. I think it’s pretty clear, it was certainly one of your points of interest, that it will play a role in what happens from here. So the first question I actually would love to hear a little bit about and that is, in order to assess China, we have to maybe look at some data. I’m just curious whether you feel we can rely on Chinese data and all their revisions or how you account for that maybe they have another way of dealing with data in the first place?

[00:26:34] Jacob

Well, of course, we all know that 72.8% of all statistics are made up, right? I don’t think that China is particularly special in making up statistics. I don’t trust government statistics from anywhere. Now, I will admit that China is a little more stark about it or it’s a little more obvious when you’re looking at it (whatever words you want to use there). It’s fairly obvious that China is lying when it’s making up statistics, but all countries lie. I was trying to look at the Eurostat inflation print today and I couldn’t figure out why Germany wasn’t included in the Eurostat flash PDF that came out.

It turns out Germany says they haven’t been able to submit their inflation figure because of IT problems or something like that and they couldn’t get it in on time, a very small thing relative to China miscounting 150 million people in a census. But the point is just the same. I don’t trust any data. I trust all data against anecdotal observations, against what people are telling me on the ground about all those things that I can see with my own eyes.

So in some ways, I find with China, the fact that they produce so much data actually gives me something to work with because I know what they want me to think, I know which direction they’re trying to lead me. It’s different from a country, say, like Japan, which sometimes is just a complete and total black box. It’s really hard to get your hands on anything that is meaningful, or a country that is disorganized like, say, India or Nigeria, where good luck if you’re going to get your hands on data at all.

[00:27:57] Roger

What I find interesting about China and Chinese data is that we’re always very cynical about it because we always expect them to juice it positively. What’s good about that is that every now and again, when you see something which is actually an outlier negatively, you can sort of say they’re trying to tell us something through the data, they’re actually trying to say we’re pushing sentiment in a certain direction. Over the last four or five years, it’s this constant cynicism, where if you quote Chinese data, nearly everybody who listens will say but we don’t believe it. So what I tend to do is look outside of China.

So for instance, it’s things like the performance of those markets which are very, very interlinked to the Chinese market. So for instance, Korea is a major exporter to China, obviously being geographically located, being a massive industrial exporter, relatively open economy. When the Korean equity market is doing poorly, it’s normally telling me that maybe the direction of China has shifted.

We saw this very distinctly in 2018, and this is something that’s very relevant to today as well, which is every time China’s starts to reduce its credit, which people see as being positive for growth, they assume, buy commodities, buy cyclicals. And it’s this view that 6.5% GDP growth or 6%, or whatever it is, is always in everywhere equal. So 6.5% a year ago is equal to 6.5% in a year’s time. But it’s not, because if it’s 6.5% focused on urban growth, that’s positive commodities, positive the global macro global commodity stories in cyclicals.

But if, as in 2018, where we saw a peak in urban fixed asset investment, it’s now focused on supporting perhaps the bubble or trying to deflate sensibly the bubble in real estate, support the small businesses that are over leveraged, etc., then that 6.5% GDP growth will be very, very different for global risk assets. We saw those big open exporting economies in equity markets really performing quite badly in 2018. Germany was one, in particular. Korea was another. As of today, we’ve got China reopening, and yes, the Korean equity market is doing well. But it should be outperforming its peers like the German DAX, and it’s not.

So what I tend to do is I tend to look at some of these regional markets which have connectivity to the Chinese market sell, and try and infer out of that, maybe a slight change in direction. So for instance, right here, right now, people are talking about Chinese opening up, getting very, very, very bullish commodities, you should be up to a point. But if they’re opening up, it’s more about services and less about goods and commodities, like what we saw in the US when the US opened up.

So far, that big industrial exporting nation Korea is not outperforming which makes me feel that perhaps this is not the sort of opening up that a lot of people have put their hats on as being the super boost to commodities rather than just a basic boost to commodities. So, that’s how I look at China’s data that tends to be looking at its relationships externally rather than necessarily its data internally.

[00:31:02] Niels

Now, staying with China a little bit, you already touched on it, and Roger actually just spoke a little bit about it. But from your point of view, Jacob, this whole reopening story, are investors getting a little bit ahead of themselves, do you think, or is it going according to plan? One of the things I was thinking of was that, yes, we know that they are now letting COVID run free, more or less.

However, I would imagine that people in the cities are probably a little bit better equipped to deal with it compared to the rural part of China. I don’t know if that has an influence or not. Do you foresee any challenges with this reopening story? Roger pointed out that obviously, it’s probably more services than manufacturing right now. But is there anything else from your perspective that we should be aware of?

[00:32:02] Jacob

Well, look, I was really worried about reopening and was unsure which direction to go because I could see a really compelling case for a downside scenario. This is a country that has not been able to produce effective vaccines at scale, which for all of its authoritarianism, has not even been able to get the bad vaccines into the arms of elderly Chinese people. We’ve got one-child policy, which means we’ve got hundreds of millions of only children who revere their elders who don’t have good hospitals that they can go to and where you have an atmosphere with pollution and all the other things.

It’s just sort of tailor made for a bad way to go with COVID-19 on top of there might be a mutation to the virus. What if it becomes more deadly? Does this overrun Chinese healthcare systems? I think these are some of the reasons that the Chinese Communist Party stuck to zero COVID as long as they did. I think they were afraid of the bottom falling out. I think what we can say is that it looks like they’re getting through the worst of it. It’s a little early yet, but the initial indicators are, as you said, it’s spreading around. They’re doing okay, they’re managing, people are spending money, people are taking flights again, PMI is looking good. All those other things seem to be going well. But the reason I would say that people shouldn’t get too ahead of themselves with the reopening play is great.

So let’s say reopening goes great and everything is gangbusters, that means we still have to deal with the real estate crisis and declining property values. That means we still have to deal with the United States constricting China even more on the trade war front. So just this week, we’ve got the United States saying no more exemptions for companies that are going to export to Huawei. We’ve got the White House leaking left and right. They might go after the entire Chinese tech sector in general. If Joe Biden is going to do anything in the next couple of years, he’s going to have to do it with the Republican House, and one of the only things Americans can agree on is that China is the Boogeyman.

So that probably means any industrial policy or anything that gets through the house is something that is going to be created in the guise of China or in the guise of combating Chinese influence. China doesn’t have any good options right now. They’re still incredibly dependent on imports of Western technology, they are still incredibly dependent on exporting to different Western countries in terms of their economy.

So even if you get the reopening play, we’ve got a real estate crisis bubble that has to work itself out and the trade war. So any way you slice it, I don’t think it’s one story for China. It looks like a difficult couple of years ahead for them. That doesn’t mean there isn’t an opportunity there. It doesn’t mean, to Rogers point, when you get two, three years down the road, that there aren’t places that you might want to be exposed there. But we’re sort of out of the frying pan and into the fire with the reopening story.

[00:34:34] Niels

Yeah. It’s interesting because you jumped to my next topic I just wanted to touch on and that is of course it’s been a little while since we heard the word Evergrande, but it was on the front page of many papers and news outlets a little while ago. I think maybe what people don’t realize, correct me if I’m wrong here, properties are really the main investment area for Chinese people, so as you allude to, there is still some work to be done there. I’m just wondering if you think that it could still derail things a bit, the fact that they may have not fully grappled with all the real estate that they managed to build back then.

[00:35:21] Jacob

This is one of the reasons I think the comparison between Xi and Mao is a bad one. Mao really didn’t like negative data And Mao would kill anyone who gave him negative data and so millions of people died in famines because nobody was willing to tell Mao what he didn’t want to hear.

Xi Jinping seems to have changed his mind on three major things. He changed it on zero COVID, he changed it on punishing the property developers. So he’s gone from punishing the property developers to I need to support them, I need to make sure that the market doesn’t go crazy because Chinese people are going to be in the streets if I don’t. And then there’s the crackdown on the tech sector too. That also seems to be gone. The Chinese government came out and said the tech sector crackdown is literally over a couple of weeks ago.

So for all those reasons, I think you see Xi Jinping realizes the precarious state that he’s in and now he’s moving the Chinese Communist Party to fix some of these, I wouldn’t call them errors, I understand why they wanted to get tough on the property developers. But it’s very difficult, as you said. If most Chinese people are investing in real estate and you’re going to crack down on the property developers, it’s the average Chinese citizen who’s going to get screwed and that doesn’t work for the Chinese Communist Party.

So, I think that they will muddle through. I think that they have the tools that they need to figure it out and I think that they have shown a government that, for a communist regime, is fairly flexible and relatively responsive. But I don’t think we should also downplay the seriousness of the issue. China has to get to a place where Chinese people are as comfortable investing in the Shanghai Stock Exchange as they are in real estate. None of us would do that. We’d want hard assets too if we were in China, so getting the average Chinese citizen there is going to take a lot of work.

[00:36:56] Niels

It’s kind of funny, you said this thing about the difference between Xi and Mao, and you said that Mao didn’t like people who were having a different opinion with him. We had Professor Susan Shirk on the show a couple of weeks ago, and she’s a China expert and has been traveling to China since the ‘70s. She was telling us about how Xi had been purging, I think, was the word she used, and basically removed the opposition to President Xi to the point, I think she mentioned, about 5 million people. He’s also done a pretty good job in removing opposition.

I wonder what you think, Jacob, in terms of his ambitions on the geopolitical scene, let’s forget about the economy, and so on and so forth. This concentration of power, what do you think that that might mean? Because there is quite a lot of division in terms of whether they think China wants to expand their borders or not. What’s your view on that?

[00:37:57] Jacob

Well, he certainly has purged people. But he’s also broadly popular in China for purging people because a lot of the people that he purged got rich off of corruption. So some of them are political rivals, but some of them are fat cats who just got to drive Lamborghinis and do sorts of crazy things in Shanghai, when, as I said, hundreds of millions of people were making $3 to $5 a day in the interior. So I wouldn’t discount the fact that he’s purged people. But also remember that Xi’s family suffered from Mao’s craziness. Xi’s father spent time in one of those camps and Xi grew up in this sort of environment where because of how Mao lashed out against people and had this ideology of continuing a revolution that people like Xi had a really bad time.

So, Xi absolutely wants centralized control. I think he wants centralized control to deal with all the things that we just talked about, but he’s trying to balance between not becoming Mao. Maybe he can’t do it, maybe it’ll all fall apart for him, but I think he’s aware of some of the history there and I think we don’t give them enough credit if we don’t think about his background and think about how that plays in. In terms of China’s geopolitical ambitions, this is like one of the biggest questions in the world right now. I don’t think that China wants to displace the United States as a global hegemony. I just don’t.

I think that China wants to be a central economy in the world. I think that it wants control over its sovereign borders. It absolutely thinks Taiwan is part of China, it probably thinks Vladivostok is part of China too. It would like to take all of the lands that the European invaders took away from them, and put them under Chinese control. Let’s say in a world where China gets Taiwan, and gets Vladivostok, and Greater China is completely united, I don’t think that Chinese aircraft carriers are going to come to the Gulf of Mexico and invade here in New Orleans where I’m sitting talking today. I just don’t think that China has those types of ambitions.

I think the United States sees China as the sort of potential rival on a global scale and China’s just trying to say, “We don’t want to challenge you globally. We do want to be top dog in all the places that we think are part of China.” The United States is not willing to give them that for lots of reasons that we can go into.

There’s a delta between China’s geopolitical ambitions and what it can do. A lot of people worry today about China invading Taiwan. I don’t, over the next two to five years, because they don’t have the ships and they don’t have the planes. Wake me up when they can actually get more than 20,000 marines to Taiwan and we can start talking about those types of scenarios.

So there’s an ambition to be able to conquer Taiwan. In the here and now, they literally can’t do it. They literally can’t get the troops there in order to do it. So I honestly worry less about ambitions and more about capabilities, and from that point of view, China is incredibly weak.

[00:40:30] Niels

Now, let’s broaden it out a little bit, go outside China and then we can bring in Roger I’m sure for some of this. We all agree that China plays a big part or a big role in the world economy. If we go back to the great financial crisis, they played an incredibly important role, I think, in igniting the global economy after its challenges. I’m just wondering whether you think they still have that ability today to play that role or if we’re at a different time now in terms of who can actually influence global growth especially when needed, perhaps, in other places? What are your thoughts on this, Roger?

[00:41:23] Roger

Yes. When we talk about the reopening, I’ve always said, which China is reopening? Is it the China that was growth at any cost, which is effectively we’re going to urbanize, we’re going to build cities, we’re going to populate them, or is it the China which is now turning towards much more of an internal consumption model, which is, when we look at things like the property sector, I think what they were actually doing was controlled explosions to see if they could deflate this thing sensibly. It got a little bit out of control, so they stepped back. They did that maybe a little bit more aggressively in the tech sector because it was a little bit more concentrated in fewer hands.

But ultimately, these weren’t intentions to destroy, they were intentions to deflate and create a sustainable footing. China’s gone from (and they’ve realized that) credit was needed in 2009; this credit impulse. They did it again during the European debt crisis, the credit impulse picked up; and then again, after the global commodity and industrial profits recession of 2015, 2016. They were stepping away from a similar type of rise on the credit impulse in around about 2019. It had been going up. COVID hit and they had to just go okay, supply side policies, we’re going back to it, people went to commodities once more. But actually, I think that was just a one-off.

I think the reality is that China wants to move towards sustainable internal consumption. It will still hoover up commodities, but it wants to become a leader in green technologies. It doesn’t necessarily want to build highways to anywhere. That has a fundamentally different prospect for the rest of the world.

So yes, they can and still do grease the economy with total social financing, this credit, and the credit impulse ebbs and flows cyclically. But as 6.5% GDP today is different from 6.5% GDP growth five years ago for the global market, and we’ll have less upward pressure on commodities, there will still be demand. But it won’t be the sort of growth, or rate of change of growth, that we were used to that really, really spurred that cyclical global emerging market story.

I feel that China always has that potential but I think that they are trying, in a sensible way. Emerging markets eventually emerge, 10% growth becomes 5% growth, eventually will settle at 3% growth. They are on that trajectory. It’s no bad thing. But they want sustainability. I think that what we saw, and it goes back to that as investors, people wanted to see the debt market in China implode within a few months and they were disappointed, because when it started to get a little bit dicey, China stepped back and said, “Okay, maybe that’s enough, we need to do this even more control.”

What I don’t think this means, I don’t think it means we’re going to see a reboost of all the terrible things that created too much debt, too much leverage, too many rich individuals through property. I think what we’re going to see is, we’re not letting this deflate in a way which is painful for the middle class, but we do want to see this become more affordable for the lower middle class who want to get onto these ladders. So for me, China is a changing beast, and the reopening China is a different beast today than China of five years ago. I don’t think they’re going back to that. I think they have changed direction and they want to move towards a sustainable internal consumption model.

[00:44:39] Jacob

If I could just piggyback on what Roger said, one of the anecdotes I always use when I talk about this is that when you had the ’08 financial crisis, the People’s Bank of China and the United States Treasury officials, they were on the phone with each other. They were talking to each other. They were coordinating economic policy. They were trying to figure out how to manage contagion and make sure the global economy didn’t go in the tank. Can you imagine if the United States and China had done that around the pandemic, hadn’t jealously guarded information about what was then an epidemic in China because they were worried about it being used in the trade war, worrying about it being used as a sign of weakness?

When we’re talking about that multipolar world, that moves away from a globalized world, I think the COVID 19 pandemic is the perfect example and it’s the real sort of black and white. Okay, we’re in a different timeframe right now, because if we’d had ’08 kind of geopolitics, we probably could have managed this and maybe kept us inside of China. This is where the “geo” part of the politics is really important. Some countries are going to benefit from China reopening, some countries are not. The United States, probably not. China is going to do everything they can to not be dependent on the United States and not benefit US farmers and their agricultural commodities or US companies with access to all those hundreds of millions of people in the Chinese middle class that McKinsey was talking about for so long.

But if I’m a Brazilian farmer who sells soybeans or corn, I’m feeling great. I see that China just approved Brazilian corn for import a couple of weeks ago. I see that China doesn’t want to import soybeans from the United States anymore so suddenly, I’m feeling great, because I’m going to be the benefactor of China reopening in that sense. So we’re getting to a place where if you’re in a country that has nominally good or even pragmatic relations with China, you get to enjoy that reopening.

If you’re a US company that is based in China right now, maybe you have some time because they’re dependent on whatever technology you have or something like that, but as soon as they can jettison you, they will and they’re not interested in being part of a global order that makes them do all the things that the United States is trying to make them do in the context of the trade war. So, that emergence of different blocks and rival spheres of influence, that’s all also going to depend… Roger makes the point about which China is reopening and who are they reopening to? It’s not going to be to everyone.

[00:46:47] Niels

I think that’s a great point as well. Now, we may get to this globalization-deglobalization debate in a few minutes. But before, the other thing you mentioned earlier, Jacob, today in terms of uncertainty, you mentioned Russia. Of course, it’s very evident for everyone to see. So my question is not so much, at least right now, about Russia itself, but it’s actually between the relationship between Russia and China. Where do you think it stands and where do you think it’s heading in terms of that?

[00:47:21] Jacob

They’re not natural allies. From China’s perspective, Russia is just one of several European powers like the United Kingdom and Portugal and everybody else who took advantage of China’s century of humiliation. China and Russia fought a brief border war in the 1960s. There was no love lost between Mao and Stalin and the Chinese Communist Party and the Soviet Communist Party and all those other things. That said, the United States has said that Russia and China are pure competitors, and that US foreign policy is going to be geared towards resisting the threat that the two of them pose. So China doesn’t want to lose Russia, aside from all of its commodity wealth, for the simple fact that Russia is another balancer on the chessboard with the United States.

If Russia were to collapse into nothingness or become a Western ally, suddenly China feels more isolated. So, I think that China has every interest in making sure that Russia doesn’t fall apart. On the other end, and I’ve been saying this since Putin invaded Ukraine (I think it was accurate then, and it’s accurate today), Vladimir Putin has transformed Russia from a great power into China’s gas station. That is its greatest hope for its future right now. China has all the leverage, it has all the power, it has all the economic influence over Russia going forward and I think Russia is just going to become a commodities depot for the things that China wants, and China will use Russia as long as it sees that it’s in its interest to do so.

For as long as the United States is going to treat Russia and China like the same problem (and I don’t see that changing anytime soon), China and Russia will sort of be strange bedfellows, who for now, will cooperate with each other.

[00:48:50] Niels

Roger, let me throw this at you. This whole globalization-deglobalization debate, and again, I certainly want to hear Jacob’s view whether we are heading towards deglobalization. But from your perspective, are we? If we are, what does that mean for the markets in a global macro sense?

[00:49:13] Roger

Well, I think the area’s biggest contention, and something which I’ve always said in terms of currencies, is where a lot of this geopolitical thinking starts to formulate. I think the biggest discussion that goes on here (and you’ll hear it all the time) is this, “The dollar is dead. Is the dollar going to die?” What becomes a real problem here, when we’re thinking about this landscape, is there’s a magnificent difference between the relevance of the dollar in the global economy and the actual level of the price of the dollar. You often hear people say the dollar is going to zero, which is sort of ridiculous. What they mean is it’s becoming less and less important.

Well, it might be at the margin, but these things again, these are glacial changes when you’re talking about replacing something which has taken decades upon decades to get to where it is. To dismantle that, you don’t do that in a couple of years. But people see the weakness in the dollar over the last couple of quarters, particularly last quarter, and they go “Oh, there it is.” It’s nothing to do with that. This is simply that its policy changes, relative policy changes, versus Europe and the energy crisis, or lack of, for the European markets.

Now, my own feeling here is the biggest risk is that as fewer dollars trade in the global system, either because we start to trade some commodities outside of the dollar system or because we go into a recession and there are a fewer dollars changing hands, that could actually mean the dollar goes up in value, because there are x trillion, I think it’s 12 trillion (according to the BIS) of cross border dollar denominated debt outside of the US, with many arguing that double that size on balance sheet. That doesn’t go away. That’s a short dollar position and if you’ve got a few dollars going around greasing the world trade system, then there’s going to be a scramble to get those dollars to pay off your debts which are in dollars.

That’s just a function of the way that the current global funding system is set up. It has nothing really to do with the total relevance of the dollar. Actually, as the dollar falls in total volume trading on a daily basis, that risks that the value of the dollar could go up. But that’s the crux that we’ve got here. So, fluctuations in the dollar today have nothing to do with that relative to the importance of the dollar. What I do think is yeah, I think that it makes sense that if we become more regionalized and less globalized, so that we have these pods of regions or pods of groups that trade with each other, they will want to trade in whatever their common currency is. That also makes sense.

Again, there’s going to be a lot of people very disappointed about how slowly these changes take place. I would much rather trade what J. Powell says about where he thinks interest rates are going for my view on the dollar and the euro than whether I think it’s the end of globalization.

[00:52:01] Niels

Yeah. Cool. Jacob, do you have a few words before we jump into maybe some more market specific type areas?

[00:52:07] Jacob

Yeah, I think Roger just about nailed all of it. But I’ll just say two very short things. The first is, yes, globalization is dead. But we’re also just reglobalizing, to Roger’s point. There’s going to be more regional integrations between some of these groups and between some of these spheres. If you look at trade as a percentage of GDP, for countries like China or even like India, that’s been declining since 2008, and that’s a real example of globalization receding. It’s also been increasing in some areas though.

If you’re a country like Mexico or you’re a country like Brazil, trade actually is becoming a more important part of your economy and that’s because all those companies that sent their jobs to China, because that was where you had the cheapest labor and the best incentives and the rule of law and all those other sorts of things, now they’re looking for different places. So Brazil, Mexico, all these other parts of the world are actually now getting a little bit of a globalization dividend even though we’re in, I think, the beginning stages of an era of deglobalization.

The second thing I would just say, I agree with everything that Roger just said about that we can talk about deglobalization, these highfalutin terms. It’s very, very hard to trade on that. One thing I would say, though, is that if the deglobalization thesis is right, and if you see companies moving factories from one place to the other, or people have to source commodities from a smaller set of countries than the global menu that they had before, then you’re going to have supply-side driven inflation. I think one of the issues with inflation right now is yes, there’s demand side, and yes there was the pandemic, and yes it was a decade of easy money, all that is in the inflation that we’ve seen.

But there’s also just as if we’re rejiggering supply chains around the world, maybe inflation is going to be a little more resilient than people are thinking. Also, the central bank’s toolkit can’t do anything about it. Interest rates are not going to help you rebuild a supply chain from China to Mexico. And if you hold off the CapEx to do that, because you have interest rates too high, maybe you engineer some kind of recession that shouldn’t be there in the near term.

So I think understanding the extent to which it’s supply side, the extent to which it’s demand side, the extent to which companies say they’re moving versus if they’re actually moving, that all gives you data that you need if you’re actually trying to construct trades on a week or month-long timeframe.

[00:52:11] Niels

Very good. As I said earlier, I do think that there is an easy way to visualize some of these forces that are intersecting with each other, and that is through the global markets. Recently, we had, he’s certainly one of my favorite commodity experts, Jeff Currie from Goldman Sachs on the show. We also had some conversations last year with Adam Rozencwajg, and they both seem to agree that commodities could move a lot higher from their perspective, not least, energy, but maybe even also food, even though I do take note of what you mentioned earlier, Jacob.

I think Jeff Currie went as far as saying that he believes that the commodity super cycle is still in force, even though we’ve had some corrections. So I was just curious, either one of you can take this for a spin, whether you think that actually (and to your point about inflation being a little bit more sticky or resilient), we could see another spurt to the upside in global commodities for these various reasons, the fact that the world just is different and it’s perhaps harder to get the commodities that we were used to?

[00:55:36] Roger

If I kick off on that one, I think as Jeff said, decarbonization is with us whether we like it or not, and it is a major generational multi-decade factor that we have to build in. Anecdotally, so I don’t know if it’s true, I heard that to reach our decarbonization goals, we’ll need to dig up as much copper in the next 30 years as we’ve dug up in history. So it’s probably not doable. This is going to be a pressure. Fundamentally, there is an enormous tailwind behind a significant number of commodities. One of the primary reasons for the supply-side problems that we have today is that since the commodity industrialization bust of 2015/16 and with the greenification concepts that have come through, we have seen underinvestment.

You can see these things in things like the ETFs for oil services, oil production versus just energy majors. The energy majors over the last two years have bounced, the others have bounced, but very anemically or they have been left behind. This has been a problem of pure commodities, prices are going up, but volumes have not been there because we’ve not been able to get the volume out of the ground. So, it’s been a price on the physical more than it’s been a real play on a lot of the commodity equities and the services and industrial companies that look after them.

But that said, we also have to be cognizant that commodity inflation is normally only a short term impact on true inflation. I think of it as, is it commodity inflation or is it higher price? Inflation is a subset of higher prices. There’s lots of ways you can have high prices, of which inflation is one of them only. We’ve had supply shocks which are causing high commodity prices. We saw stormingly higher commodity prices between 2003 and 2008. We got to 150 on WTI oil, which inflation-adjusted, is significantly higher than the highs that we saw, but we only got CPI of 5%. High commodity prices can be subsumed within CPI data without causing a massive painful hit, as long as it doesn’t get into wages that spiral out of control.

So, that was a long-winded way of saying I think there is a great structural story for commodities. It’s multi-decade. There has been underinvestment, there is greenification, carbonization stories which are there, but it’s not a one way ticket. If we start to get month and month increases in commodity prices impacting inflation again, the Fed has to go harder again. They will want to tighten financial conditions again, and almost every single time that we’ve seen a recession in the short term, this is that trading view, that recession supersedes the long term tailwind of that greenification story.

So, the way I look at this is that I still think a recession is either coming naturally or more likely will have to be manufactured because of these bounces in commodities and you will get a better opportunity to get into a lot of these commodity plays through that next true slowdown or recession. I don’t think it’s happened yet. I think it’s still ahead of us.

[00:58:56] Niels

I think that’s a fair point. I want to hear Jacob’s views as well. But one thing I, and I know you cut it off a little bit earlier than maybe I would have done for my question at least, and that is the policy. What I find interesting about the commodity side is that obviously it’s about volume, right? When I spoke with Jeff, he made the point that inflation is really driven by low income groups. The response from policymakers back in ’08 was really to austerity and remove credit and all of that stuff.

But this time around, at least up until now, yeah, okay, interest rates have gone up, but we’re pumping liquidity to the people who are in most need, which is obviously a very noble thing to do and so on and so forth, but it changes the dynamic when it comes to commodities specifically, because if they go and spend that money on goods, the volume changes. I don’t know how it’s going to play out, but it is an interesting observation about the difference in policy response this time around.

[01:00:08] Roger

I’ll just add one more line. The way I summarize exactly what Jeff was saying is that it’s that shift from capital, the wealthy and monetary, to fiscal, the politics and labor. That’s the shift. So, fiscal gives money to labor, it gives money to the working person, and that’s inflation. As he’s saying, in the 1970s, it was unionization that helped drive it then. So yes, I would agree with that. I think it’s this case of, are we seeing this geopolitical shift away from monetary and capital towards fiscal and labor? I think we are and that could be where you get the stickier long-term inflation from.

[01:00:48] Niels

Yeah. What are your thoughts there, Jacob?

[01:00:49] Jacob

I love this conversation because the irony is that now Roger is the one thinking in decades and I’m going to think much more short-term, because I don’t think you can talk about commodities at that level and I don’t think all commodities are created equal. The price of soybeans is completely different from the price of copper, it’s completely different from the price of cobalt, and has all sorts of different variables that connect it. So just two very small examples. Over on the CI side, Roger and I have not talked about this, but at Cognitive Investments where I’m a partner and director of geopolitical analysis, we are long copper right now.

We are not long copper because of the copper super cycle and because we think over the next 10 years, we’re going to have to get all this copper out of the ground. It’s because Peru, the number two largest copper exporter in the world, is under a state of emergency and might be headed towards a military coup, maybe even a civil war, if you believe some of the Peruvian analyst experts that are out there. The Peruvian copper supply chain then bleeds into the Chilean copper supply chain, and suddenly, two of these huge suppliers of copper to the world, they’re offline for a couple of weeks or months. What does that mean?

So we’re thinking about that and that’s a very well defined, yes, there’s the broader commodity super cycle trend, but I’m not going to buy copper today and hold it for 20 years. I’m going to look for those moments where the geopolitics goes with the macro cycle and lines up. Another where I haven’t able to land on a thesis yet, but I’ve been speaking to a lot of agriculture audiences here in the United States in the last couple of months, and this is where energy and food come together. We only eat 55% or 60% of the food that we grow in the world. A lot of the rest of it is used in biofuels or even an animal feed.

In the United States right now, folks that are growing soybeans are wondering if the EPA is going to increase quotas for renewable diesel, because they want to sort of have soybeans have their ethanol moment of the 1990s. Suddenly, instead of sending their soybeans to China for China to crush them however they want, they want to crush them here in the United States, sell the soybean oil to all these crushing facilities that want to create renewable diesel and biodiesel and these other things. The byproduct of that is that suddenly you have a bunch of extra soybean meal that is just sitting there.

So if you’re a hog producer or a poultry producer, are you just looking at abundant supplies of cheap feed that wasn’t there even 5, 10 years ago. All circling back to, is the United States government really going to do that when it’s not energy insecure? Ethanol policy in the 1990s was because the United States was hopelessly dependent on the Middle East for oil. We’re not dependent on anyone for oil, natural gas, anything anymore. So are we really going to grow soybeans to create renewable diesel instead of going to things like hydrogen or nuclear, some of these other interesting things?

I think there’s a trade there probably in the next three to six months depending on what you think the EPA is going to do and whether Biden is going to castigate Exxon Mobil on the one hand, but then say, oh, I’m going to support soybean renewable diesel, biodiesel policies, which all of these US oil companies are embedded within in the United States system itself. So I think when you get into commodities, the opportunities in commodities, you need that sort of broad view, and I think it’s generally accurate to say, yes, we’re going to need more of lots of these different types of commodities.

But I think the opportunities are in those short-term areas where you can find either geopolitical disruptions or policy variances where you can create opportunities. Also, we don’t necessarily know which of these commodities is going to be important going forward. I personally don’t think electric vehicles really scale. So yes, the price of cobalt is sky high today. The fact that 70% of it is in the Democratic Republic of Congo probably tells you that we’re either going to find an alternative or that’s not going to work.

So you’re not going to be holding cobalt futures. I don’t even think you can hold cobalt futures. But if you could, you wouldn’t be holding cobalt futures for the next five years because that just doesn’t make sense. So I think there’s opportunity in commodities and I think there’s very interesting opportunities to fuse geopolitics with commodity stories, but it’s almost the inverse of what we were talking about before where the commodity market tells you the macro story and geopolitics is like, hey, it’s the next two months in Peru. Let’s just figure that out and maybe there’s a trade to express there.

[01:01:18] Niels

Now, we’re going to switch back to the long-term view, Jacob, so maybe you are going to feel comfortable about that because we’re going to jump to equities as we start to round up the conversation a little bit here. Stanley Druckenmiller famously came out, I think, the end of last year in a CNBC interview saying he could see stocks really just trading in a big range for the next decade or so, nothing really that’s going to happen. So I’m kind of curious, and maybe this is probably a question more for you, Roger. But I’m curious in terms of big picture stuff, which, obviously, our audience also loves to hear about, what are your thoughts about the prospect for all of these changes that we see? How could they end up impacting equities in this case?

[01:05:40] Roger

What we’re looking at there and I think what people are alluding to is an increase in macro volatility. What I mean by that is, we’ve been used to 10 years between cycles, so was it 1991 to 2000, 2008 to 2020. It feels like if you’ve got inflation, which is slightly sticky and slightly higher, you’re going to have interest rates which are going up and going down; cyclicality shortens itself. Therefore, instead of having these very, very long and extended and supported by monetary policy bull markets, what you get is you get the sell off, and some of these will be a little bit long. This is what happened in the ’60s and ’70s. You had a series of ups and downs, I think the sort of analogy that Druckenmiller was talking about.

I’ve always told this as a more of a hit and run market, which is you’re going to get some very, very good upside, but I don’t think you’re going to get the two to three times off the lows to where we were and doubling the previous peak. It might be a little bit more like what we saw in 2008 and then we obviously went to the races after that. But I think this will be much more, you trade it, you don’t sit there and think for a 10 to 15-year view, you basically sit there and you plan for the worst, hope for the best. You go into something thinking this might be a one-year rally. If it becomes two and becomes three, great, but you don’t sit there, put your money in, and walk away because you might have to constantly trade this.

It means I think everyone’s got to be more active. I think the markets will become much more active at a point where they become intrinsically more passive. At this moment in time in the US, something like 57% of assets are rules based passively run versus actively managed by your classical old school managers. I think that shift will move back. But again, it will be a slow shift. We will not suddenly go from 57% passive to 40% passive in a year. But I think that’s where it goes. So for me, it’s a case of if markets become more cyclical, they become more volatile. It doesn’t mean that volatility indices like the VIX suddenly go through the roof, but you get shortened cycles and much more tradable cycles, and therefore, individual investors have to be a little bit more actively involved in these markets.

[01:07:55] Niels

That’s a good point. I want to maybe leave you with a question in terms of the fact that there were so many things we could have talked about today and it’s kind of hard to narrow down two large subjects on their own. So maybe Jacob, from your point of view, is there anything that we left out that you think it’s important to just touch on before we close down?

[01:08:22] Jacob

I just think that at the geopolitical level, the region that everybody says they want to hear about, but then when you actually talk about it, you don’t get the number of clicks on the podcast you put out at the article that you write about is Latin America. Latin America is the region that I think is going to tack more to the United States. To the extent the United States is able to maintain its status as a global power, it’s going to depend in large part on how it’s able to shift away from parts of East Asia and more towards Latin America. I think that you need to be spending a lot more time thinking about Brazil and I think we need to be spending lots more time talking about Mexico or Chile or Peru, even places like Colombia. These are places that most English papers, even the papers that are local there, don’t do a very good job talking about.

When you think about Mexico, you probably think about cartels and tequila, and maybe if you’re lucky, you know who the president of Mexico is. You don’t think about, what are Mexican labor reforms doing to profit margins for US companies that are operating there? What does Brazil’s long trending lower interest rates relative to its baseline mean for maybe a generation of new Brazilian entrepreneurs who until now have lived in a very conservative society where a small number of people owned most of the land and most of the wealth? Is Peru really about to come apart at the seams? Does that have any regional implications either for Brazil and Argentine economic prospects or for the lithium triangle, which is right there in the center of all this or for copper and some of these other commodities?

So I would say that if you’re in the English-speaking world, if you are weary of China and Russia and you should be there’s a lot of uncertainty there, we should be spending a lot more time actually digging into Latin America and talk hearing about it because I think that’s a story that just isn’t being told very well in global media.

[01:10:07] Niels

I love that point. Roger, what about you? What did we not talk about yet?

[01:10:14] Roger

There’s something which slightly echoes there which is, are we going to see the leadership pattern in equities removed from the US? And if so, is it going to be to emerging markets as many people expect? If so, which ones? We’ve seen this before, 1989 was a peak in Japan relative to everywhere. 1999 was a peak basically in Europe relative to everywhere. 2008 was emerging markets, and then recently post-COVID, is that the US? People are saying, now, that the US is over. But normally, the Phoenix rises out of the ashes of a sell off for a recession, which hasn’t actually happened yet.

Are we going to move into an environment where that tech sector driven, that mega cap US driven outperformance has now ended? I think it has, but I don’t believe that means we should just discard the high quality tech names. They’re going to do well, they’re just going to do well in a way that any good company should do well. I think that it will be an opportunity to move into specific parts of emerging markets. I don’t think this will be like 2001 to 2008, which was, “Buy anything because China’s buying up everything from emerging markets.” It’s going to be about diversification within emerging markets and maybe even diversification within, for instance, Europe is going to be pick countries, not regions.

But it’s going to be (and this is what I think is exciting for macro), that it’s not going to be buy US tech, close your eyes, and go away for 10 years. There is going to be far more choice. You’ve got far more choice in fixed income markets than you had for so many years. I think there will be much more opportunity to say that country will do well, that country will do well, that bond market will do well, whereas before, it was one trade and it was all based on US monetary policy and it’s basically tech with bond yields falling, bonds rising. I think that’s changed to something much more dynamic, something much more exciting, and with far more opportunity.

[01:12:08] Niels

I completely agree. I do actually think that we are heading into a much more divergent world and not so synchronized as it used to be a few decades ago. So a great place to end our conversation, at least for now. Jacob and Roger, this has been a great conversation. Thank you so much for doing this today. I’ve thoroughly enjoyed it and I’m sure all our listeners will as well.

Before we go, let me just encourage you to go and follow Jacob’s and Roger’s work. I will of course put links in today’s show notes because as you can tell from today’s conversation, we are living in a truly global macro driven world, and it is perhaps more important than ever before that you stay well informed. From me, thanks so much for listening. We look forward to being back with you as we continue our Global Macro Series. In the meantime, take care of yourself and take care of each other.

[01:13:00] Ending

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