What If Everything You Believe About Markets Is Wrong? ft. Demetri Kofinas

[00:00:07] Demetri

When it comes to society, you need to have common action. And in order to have a common action, you need to have a common narrative. And the danger about where we are today is that those systems of common communication, and public communication, and control, and common narrative, and propaganda, have broken down. And the leadership structure doesn’t understand how to use the new systems.

We haven’t kind of figured this whole thing out. And where we are, in America today, is in a place of sort of disintegration of the stories and collapsing of the institutions.

[00:00:38] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll have about investment performance is about the past. And past performance does not guarantee or even infer anything about future performance. Also, understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

[00:01:35] Niels

As tectonic shifts in the geopolitical and financial landscape reshape our world, a new global macro reality is emerging. And in our Global Macro series, my co-host Cem Karsan and I aim to decode what this means for all of us through the lens of the sharpest thinkers out there.

There are moments in time when the world seems to shift beneath our feet, when the foundations we once believed were solid suddenly feel like sand. Our institutions, our money, our leadership, even our sense of reality are all up for debate. And in these moments, you need people who can make sense of the noise, who see the larger arc of history as it’s unfolding in real time.

That’s why Cem and I are so excited to welcome Demetri Kofinas to the podcast, a voice I followed for years, someone whose work doesn’t just report on the chaos, but tries to understand its root causes. Today, we’re not here to talk about the news. We’re here to talk about the end of one world order and the uncertain birth of the next.

Demetri Kofinas, welcome to Top Traders Unplugged.

[00:02:48] Demetri

Thank you so much for having me on, Niels.

[00:02:50] Niels

You know, it’s really not how I normally start my podcast, but I thought in honor of you being on the show, I wanted to do the same very consistent style that you do on your amazing Hidden Forces podcast to make you feel right at home. Did it work?

[00:03:06] Demetri

From the very beginning, I felt very comfortable here. So, thank you.

[00:03:09] Niels

Fantastic, it’s great to have you on the show. Cem and I have really been looking forward to this conversation.

Now, if I think back on the many conversations I’ve had with Cem, over the years, as well as the many episodes I’ve listened to on your podcast, I think it’s fair to say that we all have felt that something big has been brewing in the world and that things have been changing quite dramatically, and also that we may not be able to fully comprehend where it’s heading and certainly not where it will all end.

So, for my part, at least today, I would love to explore kind of a single but urgent question, and that is, what happens to a society when beliefs in the system (financial, political, and moral) collapses all at once? I think that the three of us have all been paying attention to Neil Howe’s work in terms of the Fourth Turning, and have been, in some ways, holding onto this framework to at least try to understand the magnitude of what we’re going through right now.

So, I’m really looking forward to trying to put words on some of the underlying themes to help our audience better appreciate the significance of these changes. Changes that, quite frankly, only come around once every 100 years or so, some of which really started taking shape quite a few years ago, actually, but are only now becoming more clear to the wider public.

So, Demetri, there are so many places we could start this conversation, but I think a good place is to take a step back to when you started talking about the term financial nihilism, as I really think this is something that a lot of people have felt, but perhaps not been able to really define for themselves. When did you first realize this wasn’t just a financial phenomenon, but also a cultural one? And how should people even think about what this term means and what it means to you?

[00:05:10] Demetri

So, early on, during Hidden Forces (I launched the podcast in 2017), I did a number of episodes on crypto in the early days. And I also did a number of episodes on Tesla back in very early 2018, I think, was the first episode that I did on it, or maybe late 2017. And there was something that both of these… Well, one of them was obviously a stock. The other one was an industry, if you could call it that.

What they had in common was that community was very important. And community was a tool that was also used, in the case of Tesla and in the case of a lot of crypto projects, to build equity value into the stock or into the coins that were being emitted. And there was also an important role played by narrative in both of those cases.

And what I noticed, also, was that the story about the fundamentals was less important. And that was, I mean… I suppose, actually, with Tesla, I wouldn’t actually throw Tesla into this mix. There are elements of financial nihilism that was present in Tesla, but with Tesla there was a strong sort of focus on the story – the story of Tesla and what it could achieve.

And this is also true in crypto. But in crypto, I would say, is where I began to see a departure from what we traditionally think of as a tenuous but albeit meaningful relationship between the price of an asset and the underlying company with which it’s associated, or the income flow. We saw a departure from this in crypto to what I later dubbed financial nihilism, which is an investment philosophy that treats the objects of speculation as though they were inherently or intrinsically worthless.

And this is important because I don’t think I’ve ever seen something like this. And we began to see this also bleed into equity markets in the pandemic and post pandemic period, notably with GameStop, and also with Hertz which was a company that went bankrupt and its stock went up. And it was kind of like market participants increasingly (again, a minority of market participants, but a meaningful number of them) began to treat these markets as though they were basically casinos, and the equities as though they were tokens or casino chips. And that was, for me, kind of notable. And it was a departure from anything I had ever read about in financial history.

And so, I guess that was, for me, the starting point of financial nihilism. It was this observation of a phenomenon where market participants didn’t actually believe in the thing they were buying for the traditional reasons that we think about it.

Again, in the 1990s, we had a huge bubble in stocks and in tech stocks. But there was a story there. There was an idea that, okay, these are going to grow into their valuations and there’s a real thing happening here. And there was none of that. And that was especially true in crypto.

[00:08:02] Niels

Yeah. And I’ve also heard you talk about this kind of break between value and price and where these things have just become completely disconnected.

[00:08:11] Demetri

And I should also say, there was something also that was very unique, which is, again, I don’t know to what degree this is true in the late 2000s, but in the late ‘90s. But what I noticed again, especially in crypto (because crypto was ground zero for this), there was a strong self-awareness around narrative. This idea that it’s all just a narrative. It’s all a story that we tell. And if we can believe it hard enough, and convince other people to believe it hard enough, the value of the thing that we own will go up.

In that sense, it was a kind of multi-level marketing scheme, but there was a level of sophistication and self-awareness around the narrative and the belief structure that was, for me, something I’d never seen before.

[00:08:55] Cem

I think this is incredibly fascinating. It kind of dovetails into some things that Niels and I have talked about over the years.

Crypto in particular, you know, I’ve said this before, is really the embodiment of its generation. If you think about it, you know, this generation (meaning millennials on down) have grown up in a time their whole lives… So, since 1982, when interest rates peaked around 20%, they grew up in a period of sustained monetary policy dominance and increasing inequality. And those lower interest rates that they saw for 40 years, secularly declining, led to a technological revolution and globalization.

And so, this generation has grown up for 40 years feeling that… By the way, being labor, because they are the youth, and by definition youth is labor. You know, stuck in mom and dad’s basement, unable to afford a home, start a family. They’re at 30% of the household formation and wealth, at this time in their lives, then baby boomers were.

So, that anger and the resulting nihilism, and the desire for equality, that’s what crypto’s about – fairness. It’s a fair system. Paired with tech being able to solve that problem because all they grew up with was tech solving all the problems throughout that period, paired with a desire to catch up, and to feel like the system is broken, and it needs to be broken by them in order to be fixed. I think it really just embodies this whole 40 year period and a desire to, you know, almost like a revolution to fix it by that generation.

So, I think you’re spot on when you talk about that nihilism. It’s an embodiment of the revolution or the feeling of revolution or the feeling of a need to change, at all costs, whatever it takes, and to catch up, desperately, to catch up financially. And that’s why I think they pulled around… It’s also, like a revolution, when you think about Wall Street bets. And it’s the pooling together to fight something bigger. That, I think, is very poignant. So, I completely agree.

And I think you make a very astute point that this generation’s approach to investing, there’s more underneath it than just investing and making money, although they truly are intent to make convex kind of bets and to try and catch up.

[00:11:44] Niels

Do you think that in some kind of ironic twist here, that financial nihilism is actually giving birth to a kind of radical optimism? Because once you accept that the old system is broken, you’re kind of free to imagine something entirely new?

[00:12:03] Demetri

You know, not to avoid that question. I’d like to come back to it.

[00:12:07] Niels

Okay.

[00:12:07] Demetri

But as Cem was speaking, I was kind of just thinking about what is actually happening or what’s been happening to us in these years? And I feel like, you know, there was a scholar of myth, a famous scholar named Joseph Campbell, who wrote A Hero of a Thousand Faces, a famous book, and who was also famously interviewed on PBS by Bill Moyers back in the 1980s, shortly before he passed away of cancer.

And he talked then about the need for… And he actually recorded this interview series at the Skywalker Ranch, at George Lucas’ Ranch, in California. And George Lucas was a huge fan of Joseph Campbell and his mythological framework of the cosmogenic cycle. And he asked him, do we need… Or maybe Joseph had offered it, and said that we need a new mythological framework that speaks in the language of the present time. That this cosmogenic cycle, one of his presumptions in his work, or one of the conclusions that comes out of his work is that there’s this great hero’s journey; this cosmogenic cycle. And it plays out across all religions and all great stories and myths. And that we just need a myth that speaks in our language, today, that conveys the cycle to people and helps them make sense of their lives.

And he asked them, is Star Wars that mythology? He goes, no, no, because it’s still sort of stuck within that kind of paradigm. And I’ve said for years, and I had done an episode back at the end of 2017, it was a monologue, where I talked about this; that for me, the Matrix, in the late 1990s, was perhaps that sort of mythological framework. And it is remarkable how consistent it is.

But putting that aside, what I do believe is true is that our myths no longer work.The stories that we tell ourselves. And what is a myth? I mean, Elizabeth Vandiver, who’s a great scholar of mythology, who I studied under, though again, in the context of the modern world, not at university, but through the Great Courses series, which was an amazing sort of way to learn these lectures, and she had a course on mythology. And the way that she defined mythology was that myths are the stories that a society tells itself about itself.

And I think that our myths, the stories that we tell ourselves about ourselves, have broken down. And the nihilism is a reflection of that collapse. And so, when it comes to financial nihilism, what is the story that we have told ourselves about ourselves that has bred the nihilism?

And I think that’s neoliberal philosophy. The story that sort of the meaning of our lives is to make markets more efficient, drive prices down, get global GDP up. And that no longer works. It no longer works, maybe, because it never was really going to work because it wasn’t fulfilling on a deep level. But also, it hasn’t actually manifestly raised the income and wealth of everyone in an equal manner and in a way that is sustainable.

So yes, of course it’s raised global GDP, but it’s also resulted in a discrepancy of wealth and income in the United States. And relative wealth and relative income matters. It’s primarily wealth that’s the issue here, it isn’t just absolute levels. And this was, to Cem’s point or Niels’, I don’t know who mentioned it about people living in their parents’ basement.

And then this is also true, of course, when it comes to the story that the United States has told about itself and its role in the world since the fall of the Soviet Union, in the late 1990s. We grew up, I grew up, I was born in 1981, in a world that celebrated international institutions.

The United nations was a really important institution in the 1990s. I love film and I always bring up film because in some sense film is the sort of the myth maker. Hollywood has been the myth maker for the Western world.

And again, I think while we talk about dollar dominance and we talk about the dominance of the American military, you could make the argument the most powerful force in America, the most powerful force of an American empire is its soft power conveyed through its cultural institutions, and its cultural practices, and its languages, and its films. And there was a movie that I’ve referenced before, Independence Day, that came out, I think it was 1984, around there. And it was the ‘United Nations’. It wasn’t necessarily the United Nations. It was led by the United States, but it was all world coming together.

And so, this idea that the United States was a first among equals, right? The same way we talk about the Constitution and the role of the president and the executive was the same way we talk about America’s role in the world. And that we were going to be the leader of a global confederation of democracies. And that we were a beneficent power and that we were there to sort of right every wrong and bring people out of poverty through the spread of capitalism and bring democracy to their otherwise backwards countries. And I think we began to be disabused of that.

I mean, some might draw the line at the end of the 1990s in Bosnia, but certainly with the illegal invasion of Iraq in 2003. And I’ve emphasized this point that it was illegal in the sense that, whether or not you believe in international law, I mean, certainly you can make the argument the concept of international illegality is ridiculous, but it was important because it was hypocritical. It assaulted the very institutions that we claim to want to uphold with our military actions.

And so, I think there has been a long process of degradation of the myths and the stories that we’ve told ourselves about ourselves and who we are and what our identity is. And that, I think, whether we’re talking about the American empire, and the support that there was for American empire in 2001, after the September 11 attacks, or whether we’re talking about global capitalism and international financial institutions, I think this is what has bred the nihilism that we have seen in recent years.

And we are now in the eye of the storm. And the only way to address that nihilism is to develop new stories and new myths. And I think that’s what we’re doing.

[00:18:24] Cem

I think that’s an incredibly interesting point, and I think tying in Campbell’s Hero’s Journey is really, really interesting because it zooms us out to 30,000ft. If you think about Campbell’s Hero’s Journey, there are three main parts to it. The hero departs and he leaves his familiar world, and then he’s challenged. And through that challenge and that crisis, he’s transformed and then returns back.

And it’s that crisis part that is really the defining part of the journey. You can’t transform without crisis. And so, if you think about, you know, for 40 years, we haven’t had crisis, not real crisis. Every crisis has been solved here in America. The hero (if you want to pick America as the hero) has not had an opportunity to transform.

This generation has lived through a period of stasis, and through stasis comes entropy. And so, I really think this generation is due its crisis. It hasn’t had its crisis. And through that, we will see if we transform. But I do think that model is incredibly important to this story.

[00:20:05] Demetri

Well, we haven’t heeded the call.

[00:20:07] Cem

And maybe we haven’t had an opportunity to heed the call yet.

[00:20:10] Demetri

I think the opportunity has been knocking. So, there’s a great story… I actually used to write these dreamy intros, but they were just too difficult to do on a consistent basis, so I stopped doing it. And there was an episode I did with Jerry Colonna where we literally… The episode was about The Hero’s Journey. And Jerry’s a coach, and he works with entrepreneurs and stuff. And I was reminded of the story of King Minos of Crete and the story of the Minotaur. So, Campbell wrote about this myth.

And, I think, this speaks to exactly where we are in this country, I think, or where we’ve been, maybe up until very recently. And he says, “Often in actual life, and not infrequently, in the myths and popular tales, we encounter the dull case of the call unanswered. For it is always possible to turn the ear to other interests. Refusal of the summons converts the adventure into its negative. Walled in boredom, hard work, or culture, the subject loses the power of significant affirmative action and becomes a victim to be saved. His flowering world becomes a wasteland of dry stones, and his life feels meaningless. Even though, like King Minos, he may, through titanic efforts, succeed in building an empire of renown. Whatever house he builds, it will be a house of death, a labyrinth of cyclopean walls to hide from himself his Minotaur. All he can do is create new problems for himself and await the gradual approach of his disintegration.”

[00:21:39] Cem

Yeah. Not heeding the call is not heeding the call.

[00:21:42] Demetri

Not heeding the call. And I think that for a long time in America, and then. I want to let you speak, Cem. I just wanted to raise this point. I think for a long time in America, we have not been heeding the call. The parties, the Democratic and Republican parties, had not been heeding the call.

And we saw what happened as a result of the Republican Party not heeding the call. It was killed and decapitated and consumed by Trump and the Maga movement in 2016. And I think we’re going to see something similar with the Democrats in this cycle going forward. I think that the Democrats are now fully in that situation where they have to be reborn. And what comes out of them we shall see.

And I think the country is on that same path as well. And I think perhaps now we’re finally in that situation where we are heeding the call, though we haven’t quite figured it out. We are going through the challenges and trying to pass through the thresholds.

[00:22:33] Cem

I subscribe to your view that we haven’t heeded the call yet and the biggest risk is not heeding the call. But I don’t subscribe to the idea that it is all free will as a society, yes, we all have free will as individuals. But I think there are hidden forces that are forcing us, or this generation, up until now, to not heed that call.

And I’ve pointed before to the Federal Reserve and monetary policy, really up until this moment, to being when we created the Federal Reserve to smooth the business cycle, to not allow for enough energy, enough crisis, for that hero’s journey to be released.

America’s foundation depends on unanimity, to pass laws and to create change because they worry, the founding Fathers worried that it would be too easy to change things and that autocracy would eventually entropy the system. And as a result, our founding fathers would be turning in a graves if they knew we created something like the Federal Reserve, which was largely independent because every time there’s a crisis, we don’t fix the crisis, or the causes of the crisis. We just smooth the business cycle. And the release valve is inequality.

[00:24:09] Demetri

I think it’s interesting. I mean, there are a few things there to really focus in on. First of all, I think that’s a really interesting observation about whether or not we can actually apply the cosmogenic cycle, and the hero’s journey, to a society. I don’t think we can perfectly apply it, you’re right, because I think that there are different dynamics in a herd.

Herds need to be pushed in a specific direction. And I think the conditions, I don’t think you can heed a call, preemptively heed a call the way a hero has to heed the call. His world does need to become (however Campbell described it) a world of cyclopean walls to hide from him his minotaur. You have to be pushed in that direction. I think that’s what history tells us about societies.

As far as the Federal Reserve is concerned, it’s interesting also to wonder out loud whether or not it was actually the Fed that had been primarily responsible for enabling this deferment of having to reckon with reality. And how much it was the nature of the international monetary system and the recycling of dollars into the United States that is primarily responsible. In other words, could the Fed have played the same role that it did if the rest of the world wasn’t growing at such a rapid rate and capital wasn’t flooding into the United States, keeping interest rates low? So, I kind of wonder about that.

I do agree with the general idea that the Fed has transgressed the boundaries that its founders would have initially thought appropriate for it, and it has abused its role as a lender of last resort to have become, basically, a central planner trying to manage the price of money across the economy. And I don’t think that was ever the intention of its founders.

I think the intentions of the founders of the Federal Reserve saw it really as a mechanism to smoothen maybe cyclical periods of illiquidity, and as a lender of last resort, not even to set interest rates, which is a practice that began much later in the Fed’s history.

[00:26:16] Cem

I don’t think it’s bad or that it’s even necessarily gone too far. I actually disagree. I think it’s core founding principle, of smoothing the business cycle, causes us not to have a crisis. I mean we created it to avoid crisis.

[00:26:35] Demetri

But we had recessions, though, since the founding of the Fed.

[00:26:38] Cem

No, no big crisis. 2008 should have been a decade-long crisis. It was a one year, one-and-a-half-year issue that we papered over and never solved the problems of it. The greatest generations crisis, the Great Depression, the crises that necessitate change, the Civil War, the things that ultimately drive real change in society.

We haven’t had a constitutional amendment in forever. Why, why do you think that is? Because we haven’t had that need or the unanimity to change the world we live in.

[00:27:14] Demetri

Well, so I think though, I think the intentions of the founders, as you say, was to smoothen the business cycle, but that also required tightening during periods of exuberance. I think that’s where the Fed has failed in practice because it is a political animal and it has been too slow to take the punch bowl away during periods of booms and has been willing to print like crazy in anticipation of busts. So, maybe that’s where it has failed.

[00:27:38] Cem

If we smooth the business cycle period. Whether we’re doing it better or worse, we are not allowing the underbrush to be cleared.

[00:27:46] Demetri

Yeah, well, again, that’s why I believe, and I’ve said this before, and I tried to suggest it now, which was, I don’t think the intention of the founders was to set the price of interest rates, which I think is an important part. Yes, there was a desire to smoothen the business cycle, but it also matters what tools do you deploy in your effort to do that.

And setting the price of money was not actually one of the founding core objectives of the people who created the Federal Reserve. That came later as a practice. And so did things like quantitative easing, and so did things like forward guidance.

So, I think we’ve just gotten more and more hands-on in managing that business cycle. And so, I guess where I would fall on that is that the effort to smoothen the business cycle, in principle, somehow, may not necessarily be the issue. It’s more a matter of how hands-on have you tried to be in doing that? And maybe that’s really the issue.

But anyway, I would just say my general view is the Fed should only play the role of lender of last resort. I think it’s absolutely important to have a central bank that plays the role of lender of last resort. I didn’t always feel that way. I used to be, I think, much more of a libertarian. I think there’s an important role to be played there.

But I think that the big mistake is that the Fed has been in the job of trying to set interest rates. The Fed should be out of that job. There’s no good reason to do that.

[00:29:14] Niels

So let me try and move things along a little bit. But staying with the themes, you talked, both of you, a lot about the crisis that we’ve been through. Normally when there’s a crisis, you would think that someone would raise their hand, take responsibility, be held accountable, and you would expect some kind of consequence for doing that. Now, I haven’t been through all the crises you mentioned, but certainly some of them I remember quite vividly.

But if there’s one thing I think, whether it’s failed wars or financial crisis, we just haven’t really seen any accountability. And when this happens, I think that something inside society starts to kind of rot if people can get away with stuff. So, I’m curious to know what you think we’ve lost, both of you, in a sense, in this vacuum of consequence? How does that play in?

[00:30:13] Demetri

Yeah, well, how can you have meaning without consequences? If your actions don’t have any consequences, then where’s the meaning? Where can you find meaning in that? Capitalism without bankruptcy is like Christianity without hell.

And I think that’s also something that we saw, really, in my experience 2008 was unique in that it shattered so many of the myths that we had about market failures and about the consequences of making imprudent decisions. And it also taught us that, actually, what we thought were hard rules were actually not, and that the Fed is fundamentally a political institution and it’s there to protect the ruling class and the ruling elite.

And when the system was threatened, the central bank didn’t just play an impartial, independent role to maintain the system, it did more than that, and it saved particular actors. And so, I think that lack of accountability, whether it was in finance, whether it was with the Iraq War – complete lack of accountability.

I mean, so many of the people that were responsible for that debacle continue to get plenty of press time today. They’ve just kind of changed their skin. And I think that, when there’s a lack of accountability, it breeds nihilism. Because it brings us back to that observation that I made in the very beginning, which is people kind of come to realize, oh, it’s just a story. It doesn’t actually matter. It doesn’t actually mean anything. There’s no substance behind it. And we’ll just change that story and come up with something else.

So, I think that observation that you make, Niels, about accountability is integral to understanding the growth of nihilism in our society.

[00:31:53] Cem

The hero’s journey necessitates accountability. It necessitates rising to the challenge and courage, and courage. And so, without that accountability, you continue to just entropy. You continue to not… And by the way, it’s a narrative, to your point. Without that accountability, there is no narrative.

[00:32:17] Demetri

You stagnate.

[00:32:18] Cem

You stagnate.

[00:32:19] Demetri

I mean, you stagnate. And the life force in our society has been draining. And I think the danger is that when people feel that, they feel a sense of agitation, a sense of restlessness, and you can feel that in our society. And it matters where it is outwardly directed.

And that is always a danger when nihilism crops up in societies. It’s that it is directed in the wrong places or the wrong stories, because, again, stories are important.

There’s another great story. I don’t want to go too far afield here in philosophizing, but Elizabeth Anscombe, I can’t remember her last name exactly, who’s a student of Wittgenstein’s. And I remember she tells a story about how he asked her once, why do you think that people used to believe that the sun orbited the Earth?

And she said, well, because it looked that way from someone standing on Earth. He goes, well, what would it have looked like if the Earth was orbiting the sun? And the point I think that Wittgenstein was trying to make is that it actually looks the same as it did 2,000 years ago to people that thought it was a different process entirely. The phenomenon was the same, but the framework we had in our head, and the story we told ourselves about what it was, was fundamentally different.

[00:33:39] Niels

So, the other thing that this leads to, lack of accountability, and all of that, is this kind of moral vacuum that we find ourselves in, and also this kind of this basic question about who can we trust? Because, you know, it’s not just that people nowadays don’t really trust the system, but it’s almost like we expect them to lie to us.

And I think that’s a big change, at least from when I grew up, to now. And I wonder what the consequences of this… And I know this is not really directly related, but I just saw a post, I think this morning or yesterday where someone was posted, it’s not like people are surprised that their iPhones are listening to them, but it’s the fact that they don’t worry about it anymore. The fact that their phones are listening to what they say.

It’s this kind of complete crazy world that we’re kind of heading to or are in the middle of.

[00:34:45] Demetri

Can you just elaborate what you mean when you say, ‘they expect’. You said that we want people to lie to us, but we didn’t used to want them to lie to us.

[00:34:54] Niels

It’s almost like when you.. Just take the media, for example, or (I wouldn’t say the Fed specifically) institutions. I think there’s a difference between knowing that maybe they’re not telling us the truth and to, now, to having this feeling that every time they speak they’re lying to us. There’s this little… It’s a step further in the wrong direction.

What does that mean? What does it do in this whole collapse of trust in the social contract, I guess?

[00:35:31] Demetri

I don’t know if you guys are familiar with Peter Pomerantsev?

[00:35:34] Niels

I’m not.

[00:35:34] Cem

No, I’m not.

[00:35:35] Demetri

Peter is… He’s not a historian by training, but in effect, he’s a cultural historian and a philosopher of sorts. He was a television producer in Moscow in the 2000s. And I believe he left Russia in 2013.

And leaving Russia and his experience in Russia inspired him to write a book that he published in 2015 titled Nothing is True and Everything Is Possible. And what he observed in Russia during his time there, which coincided with the rise of Vladimir Putin, was a society that was in kind of narrative collapse. They had lost their faith in everything and their belief systems were breaking down.

And so, what Peter observed when he came back to his home country of the UK was that he was beginning to see the sorts of things that he was seeing in Russia happening in the UK. And some of those things were the rise of all sorts of charlatans, and conspiracies, and all sorts of things to explain reality; all sorts of competing narratives, because there wasn’t one sort of common story.

And I’m not talking about necessarily the common story that sort of the Soviet Union is on the right path to history, but I’m talking about even some of the most basic stories we tell ourselves. For example, in the US we’ve seen in recent years the rise of the flat earthers, and flat earthism as a framework for explaining the shape of the planet. It’s one thing when we’re in our daily individual lived reality, the narratives we tell ourselves about the world while important, very important (and this is something I’ve talked about on the show with guests like Iain McGilchrist, when we talk about the left and the right brain), the schemas that we construct to navigate the world are very important in our individual lives, very important. And I would argue that we wouldn’t survive without them.

But I would argue that they’re even more important when it comes to the societal level, because otherwise, how do we organize ourselves as a society if we don’t have common narratives and structures to explain who we are, what we’re doing, why we’re coalescing together.

For example, if you show up at a football stadium and you’re with another 10,000 people all jam packed next to each other, the only reason that you’re not freaked out is because you have a common framework that tells you why the people next to you aren’t going to kill you or run all over you. The same thing happens when you’re driving a car down the street. You have a concept that the other drivers are going to adhere to the signals on the road. They’re not going to cross over to your divide, to your side of the traffic.

And so, I Think that what we saw in Russia and what we’re seeing here is a breakdown of those common belief systems, that common structure of reality.

[00:38:25] Cem

Demetri, I want to jump in here because what you just said is so important. I want to highlight this. We were talking about the hero’s journey. Not to bring it full circle to that again, but I think it’s important. And we touched all of a sudden on this idea that as an individual, the hero’s journey, that to heed the call means courage. But as a society, what is courage? It’s summoning unity-of-will to heed the call. If you sow disunity, if we sow chaos and nihilism, you can’t get a unity of narrative, a unity of belief, to summon the courage societally to heed the call. I think that’s so important. How do we rise to the challenge as a society, much like an individual would, to embark on the hero’s journey, to heed the call?

And I think, by the way, it’s not a coincidence that you’re bringing up Russia and Putin, because the KGB, actually, well documented, had a clear ideology of sowing disunity. Actually, well documented in today’s current situation that there’s lots of bots that are used by Russia to emphasize loud, opposing voices, to sow disunity. I’m not saying this is in a conspiratorial way.

But the reality is, if you can sow disunity, if you can stop the hero from summoning the courage, then you can create stasis and entropy and avoid the hero rising to the challenge. And I think that’s such a critical, critical, important idea right now.

There was a lot of work done, in the 1960s, about social proofing. I’m sure you’ve kind of followed this. But at the end of the day, you know, if you make a very simple act that shows disorder, it creates more disorder. And the line between chaos and order is very thin. And so, one of the greatest, most powerful ways to deal with an adversary, in terms of a society, is to sow disorder.

[00:41:07] Demetri

Yeah, I think you’re actually onto something here. There’s a book by Thomas Rid, I had him on the show years ago, called Active Measures, which documents Soviet counterintelligence and disinformation. And one of the arguments that Thomas makes in his book is that the Soviets and the KGB were far less accountable to themselves and to the sort of Soviet governing structures and therefore to the public than the CIA was. Now, whether or not that’s true, I think it is true.

But what I think is important is the argument that I would make, which Rid doesn’t make, which is that the CIA and the US Intelligence community, and in general, the way we classify information, has led to less accountability over the years in this country. And so, I think that is another area where we see this kind of loss of confidence in what is true.

And to your point, Cem, which I think is really an astute observation about the hero’s journey and the cosmogenic cycle and how it relates to societies, is that collective action is much more difficult than unitary action. And if you want to cross the threshold and heed the call, you need to have an organizing principle, organizing story that compels action. And that often takes much more of an external intervention than is possible when the unitary actor is working. An individual can take preemptive actions in a way that’s very difficult for societies to do. What did it take? And a unified narrative.

And so, you look at World War II, the leaders in the United States, Roosevelt, of course, understood that we were getting closer and closer to a war with Nazi Germany and with the Japanese. And there were steps taken to try and prepare us for that eventuality. But for the public to actually fall in line, it took Pearl harbor, and they fell immediately in line.

And I think that’s the important, I think, distinction between applying it to individuals and applying it to societies, that when it comes to society, you need to have common action. And in order to have a common action, you need to have a common narrative.

And the danger about where we are today is that those systems of common communication and public communication and control and common narrative and propaganda have broken down. And the leadership structure doesn’t understand how to use the new systems. They have struggled to figure out how to do this.

We saw this, for example, with the Twitter files, and we’ve seen it with public campaigns, the politicians themselves, too. And Trump has been masterful in using it. He understands how to communicate directly to the public. But we haven’t figured this whole thing out.

And where we are in America today is in a place of sort of disintegration of the stories and collapsing of the institutions.

[00:43:56] Cem

Maybe our leaders have figured it out, but that they’re trying to not have unity.

[00:44:04] Demetri

I think that’s an interesting observation. Trump, I do think, absolutely benefits from a climate of chaos. He’s just operating in this manner. And so, maybe for him, actually, he is a creature of the time and isn’t someone who is necessarily going to foster the creation of some common comment. I don’t know. I think it’s a good observation, though.

[00:44:29] Cem

It depends on your goals. Right? If your goal is to bring unity and to have the country rise to its challenge. And re-instill the blessings of liberty to ourselves and our posterity, then you want the unity. But if you want autocracy or you want to have more power as an individual, maybe you don’t.

[00:44:51] Demetri

Well, I think you do if you want more powers. I think, again, the dangerous thing about talking about Trump is getting all the hate mail and all the…

[00:44:57] Cem

I hear you, and I’m not trying to be political. And, by the way, we could be talking about Biden, we could be talking about Putin, we could be talking about Xi.

[00:45:07] Demetri

I think it’s an interesting observation, though, because I think, again, Trump, if you look at how he’s operated in the private sector, before he became president, he enjoyed and benefited from creating sort of climates of chaos, suing his antagonists, kind of going after them, being very aggressive. He’s kind of like a full court press. Trump operates a lot like a full court press in basketball. He likes to apply pressure and keep the pressure on.

And that isn’t necessarily consistent with what we’re describing here. Though I don’t know that that is consistent with autocracy. I think, actually, if you want to be an effective autocrat, if you want to be a dictator or totalitarian or a despot, you want to create common stories.

[00:45:49] Cem

Once you are an autocrat. But how do you take a democracy and become autocratic?

[00:45:54] Demetri

Yeah. I mean, I don’t know that it’s inconsistent with his objectives. Anyway, we could probably leave this point, but I don’t know that it’s inconsistent with the objectives of autocracy to try and create a unifying narrative. I think you also want to have a common enemy, which I think, again, there have been opportunities for this administration, in its previous iteration during the COVID period, to focus in on antagonists or an enemy and use that to congeal a popular narrative and drive society forward. That didn’t necessarily happen. What the reason is, I’m not sure, but I certainly think that the modes of…

I think maybe the single most important thing, and this is something I’ve harped on for years on Hidden Forces, is around social media and technology platforms. And I think that the nature of public communication today is vastly different than what it was when I was growing up.

Now, some people might respond and say, well, yeah, Dmitri, but it wasn’t always the way it was when you were growing up. We didn’t always have three broadcast networks. We’ve gone through periods in society where information was organized in a much more decentralized fashion. And I would say, yes, that’s true, but society itself was more decentralized. And there were no… this is important, we didn’t live in a world of nuclear weapons and mutually assured destruction.

And so, the danger of our information ecosystem decentralizing and becoming more anarchic and chaotic, as the societies are at the highest level of scale they’ve ever been, to me is worrisome.

[00:47:16] Cem

Yeah, I feel like technology can always be a driver of both unity and disunity, of growth or stasis. It’s a magnifier. But I do believe that the way it is magnifying things currently, obviously, is to sow disunity.

[00:47:35] Demetri

There was recently an article in the New York Times titled Meta’s Digital Companions Will Talk Sex with Users, Even Children. And people can kind of guess what it’s about. But it was essentially, you know, observing that there are bots on Facebook and maybe Instagram, and they can, as part of their algorithm (maybe not intentionally) engage in sexual conversation with kids.

And I think this goes back to some of the same drivers of nihilism that we talked about earlier, which is like, who are we as a society? What is it that we value? What matters to us? This is a thing that comes up a lot. This sort of like, we’ve seen a kind of depravity in our moral frameworks as a society. And we’ve seen all sorts of rampant, depraved behavior manifest on social media, and all sorts of afflictions that coincide with the rise of social media.

And the response has generally been to arguments for some type of regulatory oversight. It has been kind of like, we can’t meddle with the free market, because once the government gets involved, then it’s like a slippery slope. And it really is so ridiculous when you actually look at it. Because the argument I’ve made is that we’re not talking about the government calling balls and strikes. We’re talking about creating a regulatory framework in which these types of private actors can exist because they amass so much power.

And is really the argument that we fall back on that we really can’t do anything to arrest the depravity and to arrest the decline into disinformation, because that’s the cost of liberty?

And part of the problem, also, is that because we’re in this situation where our systems of communication are devolving and the common narratives that are devolving, it’s making the problem of exercising oversight and regaining control of a common narrative ever that more difficult. So, I don’t think that the solution is we just kind of let the unraveling continue. I don’t buy that argument.

I understand people’s hesitations about exercising oversight, but I think one way or the other, that’s going to happen. And the question is, is it going to happen in a manner that’s in the public interest, or is it going to happen in a manner that furthers the private interests of a cabal of actors?

And I think right now, in the United States, we are on the trajectory of going down the road of creating a government or creating a system of rule that is to the benefit of a few over the benefit of the many.

[00:50:05] Cem

Yeah, I mean, I think at the end of the day, no government is benefiting a few at the cost of the many. That’s survival of the fittest. That is the natural system. We take away government. This is the problem with libertarianism, like, at some point we’d all like to just have no government. Government’s inefficient, it constrains, blah, blah, blah. Let’s go to the natural system. Well, you know, nature is raw and tooth and claw. At the end of the day you allow nature just to take control and, you know, all the masses get subjugated at the will of the few. That’s why democracy was created. That’s why the founding fathers of the United States created this elaborate structure. Because the natural system is a dog-eat-dog world where the, the rich dominate, or the powerful dominate.

And so, government by definition is to protect the weak, to create some level of fairness and justice and liberty. And, by the way, your parents told you since you were a baby, life is not fair because it’s not a natural construct, but we believe it to be important.

[00:51:21] Demetri

Yeah. This is also another misunderstanding that a lot of people have, which is that somehow economic systems are natural, whereas that there is somehow a natural economic state. And that anarchal capitalism or libertarianism is closer to that, and that’s just not true. Those are the products of political organizations.

There’s a reason why there’s never been libertarianism in China. And there’s a reason that libertarianism showed up in the United States where there was a huge frontier and so much land to be conquered and places for people to go out into the wild. It matters, the world that you seek to create governing frameworks in matters, and that will inform the nature of your economic systems.

[00:52:04] Cem

I think at the end of the day, if there is no government, in a system with unlimited resources, yes, you can have libertarianism.

[00:52:13] Demetri

Exactly right. There’s an exit. There’s an exit valve.

[00:52:17] Cem

But in a world of competition, in a world of constrained resources…

[00:52:23] Demetri

Good luck finding libertarianism in a prison. There’s a reason why you don’t find libertarian governing organizations inside of concrete walls.

[00:52:30] Cem

And so, by definition, government is about making it such that society can work together within a constrained environment. Now the opposite is a problem, obviously. This is why we have the pull between left and right, because if it’s all control or all fairness, then we’re removing the natural system completely from everything. And we all know that’s inefficient and impractical and leads to, you know, ultimately autocracy in its own way.

[00:53:11] Niels

We started this segment by talking about, you know, Russia wanting to sort of disunite the US. I just want to say I think there are other actors that probably have been doing the same to achieve that with the Western world.

But I want to try and take it, as we sort of start slowly to head towards the end of our conversation, we’ve talked about all the things where we’re heading in the wrong way and where things probably are going to decline a lot further, and where both of you have talked about, we need that final crisis that really breaks things completely. And it really takes me back to the conversations I’ve heard both on other podcasts, but also the one we had, ourselves, on Top Traders Unplugged with Neil Howe.

And I remember from that conversation he really talks about. Yes, but it’s really in that complete despair disruption that the next generation realizes this does not work. We have to come together in order to rebuild. And that’s the first turning we get to.

I’m curious to know, you’ve probably spoken with Neil since I’ve spoken to him, Demetri, but I’m curious to know how far you think we have to go, still, in the fourth turning? When could we hope for a first turning? And if you have any ideas of what that “journey” is going to look like before we get there? Because I think there’s a little bit of time left, unfortunately.

[00:54:51] Demetri

You know, the short answer is I think, you know, I don’t know. I think that’s the sort of the nature of questions like these. And the, the fourth turning framework sort of resembles more like fractals. It’s more of a pattern. And some of these cycles can be elongated. Obviously, I worry about what I think everyone worries about, which is that there’s some kind of war.

That the privileged position that we’ve been in for so many years in this country, where we’ve lived in peace while we’ve exported most of the destruction and disunity to the rest of the world, will come home. What I would say is that what I would look for is (I would bring us back to our conversation about common narrative), I would look for some kind of significant crisis that would result in people coming together because we’re still in a place of disunity in this country. And so long as we’re in a place of disunity, we’re not going to be in a place of resolution.

Now, can we remain in a place of disunity and kind of go through this kind of L shaped recession of sorts (to bring that to mixed metaphors) and eventually kind of come out of it, this sort of long deleveraging? Can we do that, or does it require a crisis? Does it require a kind of more V shaped recession (again, to mix metaphors)? And does that V shape require more than just an economic depression or slowdown? Or does it require something more existential?

So, I think that it could be a ways to go. But I also think that the way that these crises work out is that eventually, when they do resolve, they can resolve very quickly.

[00:56:25] Cem

I think people look at this time that we’re in now and they feel like, oh my gosh, this disunity, this chaos. But that perception is tied to the recent time. I would beg people to think about how the greatest generation felt and the crisis that they went through.

You know, we talk about how we feel like we’re being pulled apart the seams. How did the people feel in 1969 with race riots and you know, all of the Vietnam War? I don’t think we’re even close to that yet. We feel like we’re not even close.

So, you know, crisis is a perception relative to where you are, and think a real crisis is coming. The question is how deep it will be.

And the last thing I want to kind of say here is I do think we can kind of time it a little bit. Not exactly, because it is fractals, and there’s a lot of uncertainty, and it’s about path.

But I do think the part that… You know, Neil Howe talks about generations, he mentions time, and that happens to tie this all back to our idea of how different an individual heeding the call is to a statistical society heeding the call and coming together, developing the courage to respond to the crisis at hand. I think that timing is quite clear, to me in general, as a decade at least, because millennials overcome baby boomers.

There’s a societal noise that’s happening because baby boomers are dying and millennials are coming to political dominance. And this is what Howe talks about. There’s a clear time frame for that.

You know, in 2033, 2034, 2035, the overwhelming majority of voters will be millennials on down. And I think that’s when you begin to get that unanimity, a little bit more of it.

So, again, we can’t say the years, but you can generationally begin to see how this generally plays out. So that would be my kind of view. And I do think there’s a crisis. There has to be. The question is, when will we as a society heed the call?

And I guess the last part, to your last comment, is will that lead to existential change and the rollover of a society like a leadership globally in the thoughts of Ray Dalio, that this is a handing over of dominance relative to another 80 years, and a refresh and a reinvigoration of the system that’s here.

[00:59:03] Demetri

It’s a good comparison comparing 1969 or 1968 to today. Because what we know about the time from interviews and videos and scholarly texts is that it was a very turbulent time for society. But there’s a sense in which the turbulence that existed in the late 1960s was more of a bottoms-up turbulence.

If we think of society as a kind of almost like a petri dish with a container. The petri dish was bubbling up. There was a lot of volatility in society, in the grassroots, among the public. But the container itself was integral. Which is to say, the political structure wasn’t at risk, and I don’t know that it necessarily felt at risk. I mean, certainly there was volatility within politics, but there was no hemorrhaging of… The parties themselves were not being remade and refashioned in the way that we’re seeing today.

And there was still a level of political stability such that only a few years later, if you will recall, Barry Goldwater and the Republicans came into the White House and told Nixon that he had to resign the presidency. There was unity within the ranks of the elite.

I think today what’s unique is that it seems to be that there’s both chaos and disorder and volatility within the body politic. But we also see it within the ranks of the elite.

And so that, I think, if I were to again, as a non-scholar of history, I would just say that my superficial reading of history is that that’s the key distinction, that today it’s across the board. And, importantly, there is disunity in the ranks of the elite such that we don’t quite know what our political system will look like and how those changes will manifest in the organization of our society.

[01:00:47] Cem

Yeah, I’d agree with that. I think there’s more potential energy in national debt and other alternatives to the US and its ascendancy. There are a lot of reasons, I agree, to think this is more than 1969.

[01:01:03] Demetri

That’s right. We’re much more interconnected with the rest of the world at the same time as the president of the United States and the administration seem to be trying to break that system apart. That also is something that’s very new.

[01:01:18] Niels

Well gentlemen, this is fascinating. If this is the end of one world order, then maybe it’s also the beginning of another. But that world won’t be built by AI or policies alone. It will be built by people who care enough to ask the hard questions. Not just people like Demetri and Cem, but people like you, our listeners.

Demetri and Cem, we overcame a lot of technical challenges, but this has been a fantastic, very insightful, hopefully thought provoking to many conversation. I really thank you for your time today. I really thoroughly enjoyed that we had a chance to discuss some of these very important questions.

Before we go, let me just encourage everyone to follow and subscribe to the amazing content that Demetri produces on his Hidden Forces podcast and of course Cem’s highly valuable Twitter feed that everybody loves.

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 to stay well informed.

From Demetri, Cem and me, thanks so much for listening. We look forward to being back with you as we continue our Global Macro series. And in the meantime take care of yourself and take care of each other.

[01:02:36] Ending

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