Why Optimism Could Be the Most Contrarian Trade ft. Pippa Malmgren

[00:00:01] Pippa

I think this is one of the most profound questions of our time. It’s something we need to manage because the upside is so valuable and the downside risks are very severe. But I think most people have the downside risk pretty well in their train of focus, and not enough people have the upside, which is why it’s not only how I see the world, but I think it’s important to add that to the repertoire of potential scenarios.

[00:00:32] Intro

Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

[00:01:05] Niels

Pippa, welcome back to the podcast and thank you so much for joining Cem and me today for what I know will be a fascinating continuation of our previous conversation with you. I can’t believe it’s been more than four years since we last had you on.

So super excited about today and of course it was a real treat to meet you in person at Grant’s event in Florida only a few months ago. So very excited to have you here, Pippa. How have you been?

[00:01:30] Pippa

I am great and thank you so much for the invitation to come back and I’m really looking forward to this conversation. And Grant’s thing was fun, wasn’t it?

[00:01:38] Niels

It was amazing. It really was. And well, I will say that you played a big part in me deciding to go all the way from Switzerland to Florida. So, there we are. Anyways.

Now Cem, I know you’ve been traveling. Hopefully the jet lag is not too bad. But if it is, I know that someone who could maybe share a pro tip about jet lag would be Pippa. So, I don’t know.

[00:02:03] Pippa

My advice? Don’t get it happening.

[00:02:07] Cem

Honestly, the way back is always good for me. I find myself up at like 5:30 in the morning going for walks and getting work done. So, it’s been a long day here already for me. I got up early this morning.

[00:02:20] Niels

Okay, good stuff. All right, well, I want to start out not by going back four years, actually. I only want to go back to our meeting in Florida a few months ago, Pippa, because you said many things that stuck with me. One of them was that you felt the balance of power within the US Administration had changed. And if I remember correctly, you said something like, usually it’s the treasury that is kind of the top dog in the administration, but now in this current administration, that had changed and it was now, or it is now the Department of War. And I think that might also help frame the conversation a little bit today perhaps. So am I right in remembering that? And what does that even mean for the US and maybe even for the world, that change?

[00:03:11] Pippa

Yeah, no, I don’t think that’s quite right because my view is, right now, we’re in such an extraordinary moment in history where the administration is recognizing there’s a need for profound change because technology is forcing this change upon us. We’ll go into detail, but Secretary of the Treasury Bessent has a very clear vision of moving the nation from its current financial system onto digital rails to render the economy more visible, but also transparent. And a situation where you can literally figure out where all the money’s going as opposed to where we are right now, where we have all these holes in the budget that nobody can explain.

On the Department of War side, of course, it rises in priority when you’re at war. And we are engaged in a number of foreign policy confrontations and conflicts. And in fact, I argued there, and I continue to argue now, that the market is wrong when they look at each one on a one off basis. They try to assess Ukraine on its own merits, and Taiwan on its own merits, and Venezuela. But in fact, they’re sequenced very carefully and they are related.

It is all about creating the conditions to finally arrive at a peace deal in Ukraine, an accommodation on Taiwan, a rapprochement between the superpowers. And there are many who will disagree with that objective. But that is the objective under this administration. The treasury is playing a materially important role in supporting that process. And you’ll hear Scott Bessent talk about cutting off the access to funding for the IRGC and Iran before the military action begins so that they would be destabilized already. So, there is a clear interaction. They are all rowing in the same direction. But the transition that we’re going through is so remarkable, it’s kind of hard to compare it to any previous period.

[00:05:32] Niels

Sure. And sort of taking us back to our previous conversation, actually, back in 2022, I remember back then you were talking about almost things being kind of off balance sheet in terms of power, activities, relationships, and so on, and so forth. Now in your current writing, and you and I were just chatting about it before pressing record, because it’s pretty deep and you have to maybe read it a couple of times to fully comprehend it. So, I’m sure I will get some of this wrong. But, as you say, clearly it’s going to be much harder to make hidden financial activity because now it’s going to become visible in this new way of thinking about it.

So, I wonder if you can maybe describe, because it really sounds like a regime change of quite some magnitude, so maybe you can describe what it is we should be expecting and then we can sort of dive into the consequences of this because I think it’s pretty profound.

[00:06:40] Pippa

Well, let’s connect the two periods in time. What I didn’t know back in 2013, I didn’t know what we now know, which is that the US Government had mechanisms for funding the war in Ukraine. Now, this is a super controversial topic, but there’s still no doubt that there’s an enormous discussion going on in the United States today about how much of the war in Ukraine was truly organic and how much was literally funded by USAID, NGOs. Right now, I think just this last week, we’ve heard about the administration beginning to raid the offices of these non-governmental organization., and why?

Because the allegation is that they have been effectively conducting their own foreign policy, contrary to the President’s direction of foreign policy. And why were they doing that? Arguably because in the post Cold War period, after the demise of the Soviet Union, the foreign policy intelligence community still believed that it was very important that the United States should win whenever there was an election process or anywhere in the world, and the Communists or former Communists should lose.

And so, a lot of time, effort, energy, money was spent making sure that the old Communist crowd didn’t win. And we saw this in all of these velvet revolutions in Eastern Europe, or the color revolutions in different parts of the world. And we can see now that USAID has been closed down, and people have started to deconstruct their balance sheets, and realized, oh, okay, there was a formidable effort to make these protests against the opposition culminate in a certain election outcome. So why does it matter now?

It matters because the administration takes the view that we can get to a peace deal with the Russians if the United States acknowledges that our hands aren’t entirely clean, that the US played a part in fomenting the conflict in Ukraine. Of course, everyone on the other side, who is in favor of these interventions, which by the way, is not left or right, it’s both left and right. It’s the old establishment that believes it’s very important that the US should win, whether it’s left or right, that their counterparty should be the winner in these local elections in other parts of the world. So, this is a massive division of opinion about what is the right way to conduct American foreign policy.

So, the White House is now trying to demonstrate that it was not totally organic in Ukraine, and therefore, there’s the beginning of walking back into a peace deal, because you can’t really… There are only two ways. You either win outright in the war, or you acknowledge, yeah, we did some bad stuff too. So let’s all agree to get past that and move to a better future. And I suppose where I’m unusual is that I see the efforts to get to that rapprochement. I see the symptoms of acknowledgement that the US played a part. I see the administration trying to crack down on its opponents who disagree with this approach. Um, and I do think that we are getting closer to a deal between the superpowers as a result.

So, then there’s a question. Is this the worst thing to ever happen, or is this the best thing? And again, massive division of opinion on this.

[00:10:50] Niels

Yeah, I’m sure we’ll get to that.

Cem.

[00:10:53] Cem

Yeah. This concept of the superpower hug, as you called it.

[00:10:57] Pippa

Yeah.

[00:10:57] Cem

First of all, I consider myself a very optimistic person. You are maybe the most optimistic person I know, which is. You know, I love that. I love that. But I also want to, like, challenge it, and get under the hood, and understand why we should be so optimistic. Right?

What is it (and you touched on it a little bit there) that really gives you that confidence that this is a rapprochement. I mean, from my perspective, and again, from a lot of people’s perspective, you’re definitely in the outlier, which I love. And I want to challenge beliefs on this. You know, we are at war. We’ve gone to war in a proxy war in Iran, now. We’ve gone to war in a proxy war in Venezuela. We were in a proxy war and still are in Ukraine and Russia. We’ve rebranded the Department of Defense as the Department of War. Why is this a hug? And why should we see this as a hug?

[00:12:01] Pippa

So, first, I’m finding there’s a latency issue that I seem to have. So, my first Substack was, I believe, October 2021. And in that Substack, I said, the reason I’m launching the Substack is I think we’re already in World War Three. And at the time, people were like, what are you talking about? Now, fast forward to today, people are like, oh, my God, we’re in World War Three. Right?

So, there’s this latency that I’m finding where figuring it out, like, what’s happening. So, now I see all of the hullabaloo that you see, but I also see the ways in which that is leading us to a deal. So, here are the key thoughts behind this. So, in other words, other people are only just seeing the war. I’m already… I saw that a while ago. Now I’m seeing the resolution.

Why resolution? Number one, everybody understands that the option for a direct kinetic confrontation between the superpowers literally doesn’t exist because we have so many nuclear weapons now. We have so many weapons of mass destruction, basically, it’s not survivable. And everyone understands that.

And that may help explain why, for example, why Russia hasn’t launched a nuke on Ukraine when that was a fear. It’s a fear to today. Right? It’s a major fear today. But it’s a realization that Herman Kahn was right. He wrote the marvelous book on escalation, which is pretty much the standard explanation, that once you start with nuclear weapons, it’s not linear, and there’s no controlling the process. It’s out of your control. So, given that it would be so catastrophic, there’s a natural break where everybody goes, okay.

So, then they look at other options. The other options are increasingly becoming very difficult as well. For example, we’re in the world of drones and the realization that nobody but Ukraine has enough drones to manage a kinetic conflict. And I actually think that our leaning into drones now is not a mistake, but an incorrect assessment of the future because the reality is that the drone will be AI driven, and therefore it will detect your heart. It will kill you before you even hear it. So, now we have to remove humans from the battlefield altogether.

And I’m actually writing a piece right now on the concept of a bloodless war, that we’re beginning to enter a world where it’s robots on robots. And that’s a very different kind of warfare than what we’re used to. So, as this transition is underway, the superpowers are also kind of all wanting to buy a little time. So, they don’t want to end the world. They do want to buy some time, in order for diplomacy to either work or for diplomacy to buy the time, in order that we don’t end up in a catastrophic outcome.

Finally, I’ll say… And by the way, I have that view in large part because my dad worked on the Cuban Missile Crisis. He was an advisor to the Russians after the fall of the Soviet Union, there was a committee assembled by the mayor of St. Petersburg that included Condi Rice, but also Vladimir Putin. My dad met with him on several occasions. They had dinner. He says Putin is the only head of state he’s ever met who spent nearly three years studying nuclear strategy. He really, really understands nuclear weapons and nuclear strategy.

So, my dad said, what’s really interesting is whenever we get really close to an actual nuclear exchange, everyone becomes very human and nobody wants to hit that button. And the only alternative is to embrace. And that is what happened when Nixon and Brezhnev met. Of course, Kennedy and Khrushchev tried to have that embrace, but Kennedy was killed before it could happen. So, Nixon and Brezhnev, and then when I worked in the White House, initially as a junior intern, Ronald Reagan and Gorbachev.

And each time everyone says, this is impossible. There’s no way the leader of the Soviet Union and the United States are going to meet, let alone embrace. There’s no way we’ll ever get to a meeting, let alone a hug. And yet just look at the photos. Every single time, there they are, embracing. So, this is why it’s either the end of the world or it’s a hug.

So that’s why I’m saying this may not be a smooth path to the hug. Right? It’s full of potholes, it’s noisy, tricky. But fundamentally, the other alternative is impossible. And then finally I’ll just throw in the tech. And again, the tech is becoming so sophisticated and space based. Right? Because land wars are now space wars. Ukraine is a space war. People think it’s a land war because we see the images of tanks on the ground and soldiers. But the reality is that even Ukraine is deeply dependent on mega constellations of satellites in order to do offensive and defensive operations.

So as warfare moves from Earth into space, as it often does right in history, and moved from oceans to land, now land to space, then you need time to recalibrate, reassess, come up with new strategy. But with space as the new commanding heights. We’ve already seen signs that there is warfare in space.

We’ve had events like the Russians blowing up, destroying their own aging weather satellites in order to create these massive debris fields that make it impossible for others to operate in those orbits or areas. We’ve seen the Chinese demonstrate that they have arms on their satellites and they can go up to a satellite, grab it and literally throw it into outer space. And only the Americans and the Chinese have that capability right now. I know, which I find so interesting, just these satellite warfare, as they’re almost like children, throw each other out of the sandbox.

So, this is a whole new thing that requires time. And I think that’s another reason why they’re all moving towards this rapprochement. And finally, maybe also economics. It’s just getting so expensive for everyone. The Russian economy is not in good shape. The Chinese economy is definitely not in good shape. The US economy is in pretty good shape. But we’ve decided we don’t want to spend all our money on wars. We want to spend it on leaping into the future and maybe even moving up one Kardashev level for civilization. So, these are all the reasons taken together.

[00:19:27] Cem

I think those are reasons why there are incentives for not, maybe, going to war. But I’ve yet to see any actionable signs that we’re heading in that direction. Generally speaking, I agree with you. If the technologies are even, and both lead to a shared mutual destruction, that is obviously a reason for rapprochement. But there are, in certain fields, asymmetric leverage on one side versus another. And what you see actually is both sides leaning into those areas of asymmetric leverage. In the case of the US we are clearly leaning into our asymmetric leverage of the exorbitant privilege of the US dollar.

That is a huge area of leverage. That is what, in my opinion, Iran, Venezuela, Panama, Philippines, even the talks in Greenland trying to control trade, trying to underpin the petrodollar as well are. And by the way, it’s been said as much, this isn’t just speculation, it’s what we’re doing. And I think the reason is ultimately that is the golden goose. If you can lean on that and print dollars much like Japan did. Right? We can resolve the national debt. We can support the too big to fail equity market. We can also resolve populism ultimately by buying people into equities and sharing that wealth.

And we can invest to compete with China on a lot of the actual things that China’s been investing in for a decade directly. There are solutions here for the US to drive a lever, but against China economically at least. I hear you on kinetic warfare. But there is asymmetry and there’s a direct attempt, in my view, at least the US and China in its own ways, through its manufacturing and its ability to drive a lever there, to compete, and not in a soft way, in an attempt to gain dominance type of way.

I’ve yet to see anything specifically that speaks to a rapprochement by either. And so, I’m curious if you’ve seen anything other than the, yes, I agree at some point there is a line we’re not willing to cross in terms of kinetic warfare directly, even though we’re doing it by proxy. So, I’m just wondering if there’s any, like, direct signs you’re seeing that this is heading that way. I’d love to really get a sense of whether there’s a reason for optimism based on their actions.

[00:22:17] Pippa

Yeah, totally. So those are two different things. One, leaning into supremacy of the dollar. So, I wouldn’t call that warfare outright. That’s a different kind of thing, but it’s still powerful. But I’m talking about physical kinetic confrontation and creating the circumstances under which that could subside.

So, one way of thinking about the strategy of this White House, and of course, many people would be of the view that there is no strategy. The whole thing is random. The President’s lost his mind. We can take that. But I don’t see that as somebody who’s been working in this realm of foreign policy and financial diplomacy for I don’t even know how long, since the ‘80s.

[00:23:03] Cem

There’s clearly a plan. Right?

[00:23:04] Pippa

There’s clearly a plan.

So, part of that plan is a divvying up of the world and trying to create the conditions where China would align with the United States to put pressure on Russia, which I think is definitely happening. So, the way to do it was to begin with the cutting off the oil supply out of Venezuela and also dealing with the whole organized crime element, because most people don’t understand that Hezbollah, Hamas, the IRGC were all super active in eastern Latin America. Actually Ecuador as well, Ecuador definitely as well. And so, if you wanted to put pressure on them, you had to cut off their cash flows.

So, the combination was very powerful for then placing pressure on China. And the message from the White House was very interesting. It was, of course, China can buy all the oil at once from Venezuela. We would never get in the way of that, of course, unless you want to go to war with the United States. If you want to go to war, then now we control the spigot. That’s an important message. It’s very subtle. It’s not spelled out the way I just said it, but it created the conditions where the Chinese are like, yeah. And then the US offers the carrot, which is there’s a deal to be done over Taiwan. And this is the only president in modern history to say that. And he said it back in 2015. He’s saying it again now. So, there’s that offer on the table, kind of, this part of the world is ours and that part of the world is more yours. But there’s still conditions on both sides.

I think one of the conditions on Taiwan is that China needs to become more like Taiwan, not only because of our views in the west about democracy and personal freedoms, but also because the Chinese economy has become very brittle under the pressure of government management. And so, it’s a message to China that the world cannot withstand a serious glitch in the Chinese economy.

And it will keep glitching, which it is doing, unless you bring more market forces into play and you stop with this super tight control approach. That split the leadership in China. And I think the Communist Party are like, ah, yeah, we agree. And particularly the Shanghai branch of the Communist Party, who are very commercial in their orientation.

And so, what signs, what practical signs do we see of that rapprochement? Well, I’ll give you an obvious one and a very subtle one. The obvious one was Trump and Xi meeting in Beijing recently where there was a lot of alignment. Also, because once the action in Iran began, then the oil flow from Iran was interrupted.

But the US and China found themselves on the same side, saying, these people in the Middle east can’t continue to disrupt the global flow. The US says we agree Iran should be sending their oil to China. And in the meantime, we’ll sell the Chinese all the oil they need from Alaska. Right? That’s formally stated. That’s a rapprochement.

And that means the US and China are now aligned on two important things. Number one, no nukes, which has been the Chinese position on Russia and Ukraine, and the US position as well. And number two, we’re all aligned, that we need global oil markets flowing, and anyone who disrupts that is the problem. So, suddenly that also separated the IRGC, Hezbollah, Hamas from China and got China more on the US side. So, there’s an overt example.

But I’ve been intrigued by the subtle signs. Things like, a couple of years ago, I just saw a little news story that US special forces were being positioned on a tiny little island called Kinmen – K i n m e n. And I thought, oh, that’s very interesting, because Kinmen is part of the last island chain of Taiwan.

It’s what we used to call Quemoy, and I think, for 75 years, the United States had said, we’re not defending Quemoy or now Kinmen, because it’s literally like, I think it’s like less than five miles off of the coast of mainland China. Like, it’s insane. It’s basically, you’re in China, so what the heck are Special Forces doing there?

And then I noticed the day after the meeting between Trump and Xi, there was an announcement that tourism would now be allowed between mainland China and Kinmen. And there was a movement of civilians back and forth. And I thought, okay, I get it. There has to have been some diplomacy happening, because if you’re going to have a conversation with China, it’s got to happen very quietly, very behind closed doors.

But these are like a little hint that, ah, there’s been some kind of an interesting dialogue going on about how to begin the normalization of the relationship with Taiwan. Now, of course, there’s a massive fight about that issue, which reveals a deep division in the United States, which is the old traditional establishment foreign policy community, left and right think of Taiwan as effectively almost an extension of America. And they’re like, we’re not giving it up under any circumstances. We don’t care what the Chinese do, it’s ours.

The President takes the view it’s not really ours. We’ve treated it as if it’s ours. But if we’re going to have peace in this world, that foothold, for the United States, is actually causing more trouble than causing gains. And now we’re moving the semiconductor production, and the personnel, and the machines, from Taiwan to Texas and Arizona. And therefore, this ceases to have the strategic importance.

And the solution is, you say, Japan becomes the big brother overseer. So, if China tries to have a go at Taiwan, Japan is now going to be fully armed (which, of course, they’ve announced), they’re going to be the front line. So, now the US has removed itself from the immediate confrontation. We’re not the tripwire anymore. But it’s clear that if it gets bad, the US will be back in.

And, by the way, I see the same thing happening with Poland, with regard to Ukraine as being the partner that we choose to do the frontline tripwire work instead of us. So, that equals the US is backing away, giving more space. And China, under the current leadership, is viewing that as a thing they can work with that’s better than what they were being offered before.

[00:30:23] Niels

I heard you mention three presidents a few minutes ago trying, in relation to peace, Reagan, Kennedy, Trump, One got assassinated, the other two have had attempts on their lives. Is this just a coincidence here or… I know we don’t want to go… I don’t want to get you into trouble here, but it just those three names, I thought they have something in common.

[00:30:49] Pippa

I think, look, we have lots of attempts on presidents lives. I think being president by nature invites attempts on one’s life. So, I wouldn’t say that it’s because those presidents were trying to seek peace deals, but it may be that it played some part. But we don’t have any evidence of that. And the reality is that we have arrived at peace deals.

We did get a peace deal between the United States and the Soviet Union under Nixon. We did get a more peaceful outcome after the fall of the Berlin Wall. In fact, we had a 30 year run of peace that we now think is normal, but actually was very hard fought, not in a military sense, but in a diplomatic sense.

And today, as we’re veering towards, but have not yet arrived at a superpower conflict, I see all these superpowers looking at each other going, let’s figure out something so that we don’t have to confront each other directly. And I think that is clear that this is a negotiation.

Let me add one last thing to this. The thing is, you also don’t negotiate these peace deals only on their own merits. You have to offer a vision of a better future. So, this is the key that I think many in the markets are missing. They’re not understanding what is the offer. Because the past approach, particularly under Biden, but under several presidents, was, let’s just cancel China. Right?

And you could argue that the beginning of the Trump administration was also, let’s just cancel China, let’s just raise the tariffs to such an extent that their economy cannot function. But the thing is, you can’t cancel 1.6 billion people. They’re still there. They still need to eat. They still need to have a belief that their future will be better than today. So, you will continue to have a problem unless you can address that.

So, what is the offer today? The offer is, to Russia, that if we could get to a peace deal on Ukraine, Russia will be brought back into the world economy, restored as a member of the family of nations. And before I go on, let me just also say, I know everybody’s going, oh, my God, no, we’re not going to let Putin back in. But let’s think about how hated President Trump is by many people. Would every American like to be held accountable for the actions of President Trump forever? Probably not.

And in the same way, Russians probably don’t want to be held accountable for the actions of President Putin. So, there’s an element of forgiveness that has to happen and always happens at the end of wars.

You know, I’ve written about this where I talked about lustration, and conciliation, and truth and reconciliation commissions. These are all methods for forgiveness. Because if you continue, you will get back in the fight again.

So, what are we offering China? We’re offering China much greater access to U.S. markets.

The president’s announced the establishment, with Xi Jinping of a board to review which Chinese companies can be brought into the US under more favorable terms. And that’s important because the message is, China is going to do exactly what Europe did and exactly what Japan did at the end of the Second World War.

You’re going to move away from making cheap toys, or in the case of Japan, or machine tools in the case of Germany, and you’re going to move up into more sophisticated products like Mercedes and BMWs in the case of Germany, and sophisticated automobiles in the case of Japan. And what you’re doing is fundamentally saying the product will no longer be stamped made in Japan or made in Germany. It will be stamped, owned by Japan, owned by Germany. Because now you’re talking about building global brands.

And the only way to lift national incomes, especially in a poor country, is by moving up the value-added ladder and building global brands. So, the export model isn’t going to work anymore. We’ve seen the politics are not sustainable. So, the US is saying, we will help you come into building global brands. If there’s one thing we know how to do in America, we know how to build global brands.

And notice the president specifically drew attention to their fast-food companies, saying, your fast food, one of your fast-food companies is bigger than our entire fast-food industry. Bring them in and let’s work together. We’ll upgrade American fast food by the competition, and you build a global brand. And we don’t have the same old issue because now you are operating inside the United States.

So, one again can argue with all of this, but I’m just saying these are offers that are about a better future together.

[00:36:06] Cem

I think the problem is, not all times are created equal. We are sitting at a period of immense populism because of the inequality that’s been created for the last 40 years. And that inequality forces a level of populism globally, which, by definition, becomes about our people versus your people getting things back. Right? And the fact that we shipped all these jobs abroad. Right? That we went to a market dominant position pushing money to corporations, this helped drive the Pax Americana. This helped drive the growth of China and the ascendance where, to your point, there was a better solution for everyone at that moment, but the time matters.

We have gone through that period and now there is a big question. How do our people (this is that populist rhetoric) do better? And this is what drives protectionism. This is what drives, then, competition. There is a lack of ability to cooperate and improve the lot of each of our people without driving a supply side corporate response. And populism is in direct conflict with this idea of detente or rapprochement.

[00:37:45] Pippa

Well, I’m not sure that’s true. I don’t agree that it’s direct conflict.

[00:37:49] Cem

Why not?

[00:37:50] Pippa

Well, in fact, because one of the key elements of this is, back to technology. So, you can produce vastly more GDP if you now have new sources of energy. So, what is the US doing? The US is lifting all the regulations on the new nuclear. Also, the old nuclear, the Three Mile Island, is just back online again. But that’s not the really important part.

The important part is the new nuclear, which means what I call a star in a box. That’s where you’re harnessing nuclear power in a very small device, either half the size of a car, or probably the size of my office here.These are small modular reactors. These are small nuclear capabilities. And the US has been clear that we’re actually very close.

I’ve been putting up on Twitter lately all the announcements of the key accomplishments. They’re running toward the finish line of having the ability to deliver virtually unlimited energy anywhere, anytime. And these things can be mobile as well. Now, if you have effectively a brand new source of energy, then two things become obvious. Number one, you try to go to war with that then we’ll all be dead much faster. And number two, if you can use that for civilian purposes, the economy can grow like crazy.

And so, do the Chinese have the same thing? Yes. Could the Russians have it? Yes. I don’t think they are there yet. Their technology has fallen behind for many reasons, but they’re perfectly capable of it.

So, the offer, again, is let’s all build this nuclear capability through agreement that we’re not going to go to war with each other. And I think that was also part of the discussion between Trump and Xi. And it’s part of the conversation with Russia as well. And I think in our markets, people have not clocked this. They’re not looking at companies like Valar Atomics in California, watching Oklo in Austin. There’s a bunch of them. And so, I don’t think people have understood how transformational this is.

In fact, you mentioned earlier the word petrodollar. Yeah, we don’t have a petrodollar anymore. The petrodollar is done. What we have now is a world where money comes into the United States because we are at the cutting edge of innovation and technology and, specifically, power generation. And I would go further and say there’s a very interesting discussion about nuclear fusion. I think we are either very close or we already have it.

There’s a big debate about that. Lots of the traditional scientists will say, oh, we’re 50 years away. But that was before artificial intelligence and new materials. With AI, you can do millions, if not billions of scenarios, like per minute. So, now you can proceed vastly faster than ever before. And new materials we are now creating atom, by atom, by atom, so you can create the containers for fusion. And then there’s a big discussion about, do we already have it in the national labs but they haven’t been willing to release it because they see it as a national security advantage.

And that is part of the reason the White House announced the Genesis Mission, which is a strategy of opening the data in the national labs to artificial intelligence, so they connect the dots within the labs and across the labs. And then some say, oh, the labs will never let that happen.

And I’m like, wait, don’t the labs report to the President and Congress? And they say, no, but we’re too critical. We can’t tell the public what we’re doing. The president saying the public paid for it, and yes, you can.

He sees it as a Robin Hood. We’re going to take whatever discoveries you’ve made, and instead of having them behind the national security wall, we’re going to bring them into the public domain and allow the public to benefit from them. So that’s the answer is populism can absolutely have its needs met if you have a new source of super cheap energy.

[00:42:21] Cem

Yeah, agreed, if we have a level of abundance that we’ve never seen before, where everybody can have as much as they want and then some, and live without global constraints. If we transcend these shackles of history, of constraints. Then I agree with you.

I will say we’ve had nuclear capability for 80 years. Nuclear has been the solution for 80 years. I don’t know why, all of a sudden, that we should believe… I agree with you. That there is progress happening. But part of that is because we’ve had such cheap money and such like venture driven, market driven dynamic that’s driven technological booms across many different areas.

But historically, these periods of supply side driven periods end with populism as interest rates go higher and ultimately capital stops flowing or slows down to venture and technologies. If we can overcome that historic trend, we can continue to exponentially grow technological development and get infinite abundance, I suppose.

But we are human and ultimately, historically, we fall into these very predictable cycles of falling back into the natural constraints of competition, of resource scarcity, of speed, of being able to technologically develop in the ways that we’re talking about. I think we always see the exponential curve looking up at the speed of growth since the time of the wheel and expect that to continue at that pace.

But inevitably, we see again and again throughout history that this exponential growth that’s happening, then it slows, and then we see another arc again. And a lot of this go has to do with the flow of capital. The flow of capital is the key. And that flow of capital, money flowing to capital, as opposed to people, is the driving force.

You start sending money to people again, you fall into this populist, just natural impulse. Right? And naturally that drives inflation, that drives a structural… Send money to people, people are going to spend it, as opposed to corporations who are going to invest in new stocks, equities, investments, etc. So, my point to you is, we are in a period of immense populism, an immense demand for more fairness. And that drive for more fairness inevitably, throughout history, has always (and this time may be different), has always driven to higher cost of capital. And a higher cost of capital drives money away from capital and technological development and slows. This is what leads to antitrust and to all the things we’ve seen throughout history.

And I think to ignore that pressure at this moment, and 40 years in, where the technology and the money’s flowing is actually missing kind of the constraints of history and of humankind. Thoughts?

[00:45:48] Pippa

So interesting, because I think we’ve been in populism for a decade. Right? Trump came to power in 2015, so…

[00:45:56] Cem

2010 is when it started. There’s a populace timeline. Because the people that believe in that populism are just coming to political dominance now.

[00:46:09] Pippa

Oh, I disagree. I think they’ve been in political dominance for quite a while. And now that’s really accelerating, particularly across Europe and some other parts of the world.

But let’s go back to that you need more capital to do more technology. Because I think that’s an old formula. The combination of vastly more computational power and artificial intelligence means you can build amazing things with very little money. So, again, if I look at one of the nuclear companies that I know here in Austin, they created a small modular reactor, which you’re right, has been around since the ‘50s. It’s the same thing we’ve had in American US Navy submarines. But it was not allowed to be developed for the public. It was considered super classified. But they’ve allowed it now to be developed, and they’ve built a small modular reactor with fewer than 300 engineers in less than 365 days.

Now that totally changes the equation, because when you say nuclear power plant, people think US$30 billion, 30 years, this is 300 people, 365 days. This is an unbelievable collapse in the cost and the time. So, in that sense, I’m still with Peter Diamandis. And it took me a long time to get there with his abundance view.

But the more I look at the technology, I’m like, oh my gosh, we really are able to solve problems at a record pace. This is not like anything in the past. We’re not on a normal trajectory. We’re at a very steep incline of capacity to problem solve right now. So, that’s one of the things that makes this not the same and not easily derailed by what you call populism.

[00:47:59] Cem

Can I ask a question? Sorry to interrupt you, but who is going to gain from the growth of AI? I mean, from an economic perspective. Right? I think we can’t skip over that reality. This happens with all new technologies. Who benefits?

[00:48:17] Pippa

Well, agreed. So let’s take for example, the big populist fight against data centers, right? People don’t want them in their backyard. They’re using too much water, too much energy drawing from the state, brownouts, etc.

So, one can understand where that anger is coming from. And, at the same, time, if you now can use these small modular reactors to do that, and provide more than enough energy for the rest of the state, that populist concern literally disintegrates because you don’t have a tradeoff anymore.

So, the question is, how fast can these new nuclear reactors come online? And honestly, we have not seen nuclear come online at all, let alone at this sort of speed that we’re seeing right now. And I don’t think that subsequent American administrations are going to reverse, because once you have that kind of power, it’s too valuable to turn it off.

[00:49:14] Cem

But that assumes… I mean, just look at what Gavin Newsom came out with just this week. Gavin Newsom, in the Democratic Party, is considered centrist. He’s not on the far left wing of the party. Look at what Bernie Sanders, on the further left wing, is talking about. He’s talking about taking 50% ownership of all AI businesses. And by the way, these are popular.

If you pull on these things, they’re very popular, particularly among the cohort that is going to be determining the election in two and a half years and then again in six and a half years. I’m telling you this AI’s growth, if untouched, will benefit a very small pocket in what is already a very… From an economic perspective, it’ll benefit everybody. Don’t get me wrong. And new technology has helped everybody since the beginning of time.

I want to be clear. We all live better than Kings did just 100 years ago. I’m not disagreeing with that fact. But that’s not what your average person thinks about when they think about voting or benefits. They look at that we’re all relative value machines. Right? We look at those, in the top 0.1% and look at the percentage of ownership of equities and wealth, and people get angry. That populism will not disappear. If anything, it’s being accelerated by the profits accruing to the owners of AI, and the redistribution of that wealth will be incredibly inflationary.

[00:51:00] Pippa

So, this is really important point that I made in my last Substack, talking about Kevin Warsh and what he means by regime change. And I said there are two formulas, mathematical formulas that have underpinned monetary policy or that there’s one that tend to underpin monetary policy in particular, and that is more money in the system equals more inflation. So, when you put more money in the system, you have to raise interest rates to pull it out of the system.

And Kevin Warsh is now saying this has changed because of the incredible impact of these new technologies. And if we can put more money into, as you say, not the consumer, but into the innovations, then we’ll get a collapse in the cost of energy, a collapse in the cost of labor, a collapse in the cost of materials, all of the things that are the key inputs to growth. Therefore, we can have abundance. So, their view is now the formula reads, more money in the system equals deflation.

[00:52:06] Cem

This isn’t a new formula. This is the formula of the last 40 years. This is what drove the massive inequality. It’s supply side economics. We’ve been sending money to planet Palo Alto for 40 years and all we get back are cheaper technologies and goods that ultimately cause greater and greater inequality.

Yes, we have massive technological development. Yes, we are proceeding and growing technologically into a land of abundance, but a land of massive inequality. The K shaped economy that we live in is because we continue to print more and more money and send it to the very top 0.1%. Because that doesn’t cause inflation.

Yes, that creates a Federal Reserve outcome where we, maximize employment and we reduce costs. That sounds wonderful, except that the employed are making less and less because they’re competing with technology year. Absolutely. That’s the numbers, lay that out, in the last 40 years, median income growth is 0.75% per year in real terms for 40 years.

[00:53:19] Pippa

I agree with that because we decided to offshore manufacturing, but we’re starting to see inflation in wages picking up. So, this is a really important point because we have to get to the heart of the matter, which is, does robotics and AI reduce jobs or create jobs? So, I’m in the camp where I look at it from the first robotic tool in 1834, the Jacquard weaving loom. And I go right to where we are today, which is the two countries with the highest level of implementation of robotics and AI. South Korea and Sweden have generated jobs since this process began.

So, there’s a very profound disagreement about what is the cause of job losses or whether a job loss and a job change should be held with the same weight. Because I think jobs are constantly changing. There is no guaranteed single job. But I agree with you, and I think the White House agrees with you that an active decision was made to outsource production and that undercut the income of American workers for a very long time.

And so, your question now is like, can that be reversed or is this automatically just going to enrich the owners of capital and not follow through to the workers?

[00:54:53] Niels

I actually have a question from a very dear friend of mine, and it’s somewhat related to AI, and I’d love to hear your thoughts about this.

He’s asking, looking back, if we were in 2035, so another eight years or so from now, what do you think will have the biggest strategic, or what will have been the biggest strategic mistake small, wealthy, open democracies made in responding to AI? Was it speed, dependency, sovereignty, institutional adaptation, or something deeper about the foundations of prosperity?

[00:55:32] Pippa

I think the Key is, to your point, people need to learn how to use this stuff, just as all the time in the past. Technology is constantly moving, and we do better in periods where we include everybody in using it, bring them up to speed with how to use it, allowing imagination and creativity to play the part it always plays in innovating. And so, this is the key. Do we create methods, ways?

The good news is more and more people, I won’t say everyone, but more and more people do have access to computation. And with computation, whether that’s your smartphone, or a laptop, or the computer at the library, the capacity to create with that is more enhanced today than we’ve ever seen in history. The question is, who will use it? Who will do it? Are people capable of doing this? And in my experience, younger people are figuring this out.

I think that the entryways are easier than they have been in the past, but it doesn’t mean that it’s uniform or that everybody’s guaranteed. It still is an effort to bring people into modern technology. But I don’t think that’s the argument here. You’re arguing that there are no circumstances under which this will benefit society at large. This will only benefit a few at the top.

[00:57:12] Niels

Yeah, that was the point that Cem was making. I think this question was a little bit different.

The other thing, I’ve got a couple of selfish questions actually, before we wrap up. And just to pivot a little bit away from populism and that train of thought. Globally, a lot of things have changed in the last four years. One of them is pretty close to my own heart, because it has to do with a place you traveled to not that long ago, it’s pretty cold, and it’s Greenland.

So, I was curious if you were advising the Danish and the Greenlandic government vis a vis. How do we deal with this? What is it exactly that you think Trump wants to be blunt, and is there a way to accommodate and not blow things completely up between countries that have been aligned for so many years? What are your thoughts on that?

[00:58:10] Pippa

Yeah. So first, one has to understand the reason why Greenland is suddenly important, and that is to do with technology, because we come back to space being the key to the transformation of the Earth economy. Because space represents the possibility of unlimited energy, unlimited resources, unlimited Internet connectivity. It’s the commanding heights for the conduct of war on Earth. And it represents access to the finest physics lab that humanity has ever had.

So, for all these reasons, the superpowers are jockeying to be in space. And therefore, being inside the Arctic Circle is critical. Why? Because this is where the polar satellites are most efficient at dealing with data from the critical orbits. And so bottom line is, there’s a premium on access to space via data links through the Arctic. , this is why Svalbard, in Norway, is of such high priority.

But the thing is, the treaty that governs Svalbard, the Svalbard Treaty, which dates from the Treaty of Versailles period, specifically says that this, this area should not be militarized. And the thing is, all this data is dual use.

So, you can make the argument that it is being used. This is what the Russians have been saying, that the US uses it for conduct of the war in Ukraine and it is militarized. The Norwegians are increasingly uncomfortable about this whole issue. So, the US is saying we need a place of our own in the Arctic. Alaska, we already have, but it’s too far on the other side for the second issue. And the second issue is, if there’s no resolution of the war in Ukraine, then we can fully expect the Russians are going to amp this up. And that means they’ll begin to potentially put nuclear assets, whether submarines or ships, into the Atlantic. Now, there’s only one way that that’s going to happen. It’s through the GIUK Gap, the Greenland, Iceland, UK gap.

And when you look at that map and you put in those letters, you will see they have to go past Greenland, Iceland and the UK. And so, therefore, the US is saying, if the Europeans absolutely refuse to allow a resolution of the war in Ukraine, then we have to have much closer eyes on the GIUK Gap. In order to do that, we have to renew the American presence on Greenland.

And then when I sat down with the Greenlandic politicians, policymakers, it was interesting because they said, look, we expect the United States to deliver strategic security protection. Like, nobody’s ever argued that that’s not the case. But we like the Danish welfare state, and we’d like to keep that. And I can understand that too. And I’m like, there are only 65,000 or 68,000 of you. I think you can have both. Right?

The issue isn’t so much between the Greenlanders and the Americans, at least the way I understood it from that, the issue is more between the US and Denmark. And it’s interesting, the collision of views, because from an American perspective, and certainly a White House perspective, their view is, but Denmark was trying to offload Greenland for years. They were saying, it’s too expensive, we don’t want to pay for it anymore. You guys, we’re going to devolve parliamentary powers to you. You’re on your own. And so, the US is like, great, we’ll work with the Greenlanders. And then suddenly Denmark is like, no, it’s ours.

So, the US is confused by that. Denmark is confused because the US had it. They have full legal right to be there under the treaty of 1947. And why are they coming back, number one, and number two, why don’t they just come back? Why are they asking for sovereign space?

And then you have this strange situation that actually happened while I was there, which is the Germans and the Danes send troops to ostensibly protect Greenland from the US. And the US is like, wait, I thought we were in NATO. Like, why are we the bad guys? And meanwhile, the big war in Ukraine, you guys oppose ending it, but you don’t have the means to conduct it.

So all of this creates a kind of hostile, confused outcome that is really hard, and, in a way, harder to get a rapprochement on this than on the superpowers.

[01:02:59] Niels

Well, we’ll follow that, and maybe that’ll be part of our next conversation. I want to give you a chance to talk about things that. you want to bring up, because obviously there are so many things we could have started out with, and if there’s anything that Cem wants to bring up.

But before going there is one thing. It’s a little bit of a personal question. I hope you don’t mind, but, I mean, your father must have given you an extraordinary education in economics, diplomacy, reading, power, what it looks like. And, obviously as parents, you want to pass on something to your children. I know your father passed sadly last year. What would you say is the biggest things you took with you from him?

I also know you’ve talked about there are things he didn’t tell you until the very last days of, you know, if there’s anything you can share in terms of that, in terms of what the importance of that was, and also maybe what signal would he be telling you to look for today based on all the things that he experienced in his extraordinary career?

[01:04:20] Pippa

Wonderful. I’m so delighted by the question. And thank you for your comment about my dad. He had an extraordinary life working for so many presidents, and I didn’t even realize, until those later days, that he had also been working, and he was very close with Jimmy Carter and Mondale, particularly Mondale, his vice president. And then he was apparently also working for Ronald Reagan, but I didn’t know it at the time. So, he had this incredible life, very much behind the classified wall for all of it. And he was immensely into technology.

And, for example, he was the economic witness to Judge Green on the breakup of the AT&T lab case. And he was the only one who argued against breaking it up. He said, we’re not ready. We need the AT&T lab to maintain our technological prowess. Which I think was probably right. But at any rate. So, I grew up with. With him telling me all the time about new technologies and how they would be transformative.

And then I saw them become transformative and maybe, Cem that’s why I’m more optimistic, because I have watched this closely my whole life. But this process is invisible to most. Right? He taught me how to see it. So, that’s one thing.

But more importantly, he always said all this foreign policy stuff, it’s humans. So, the most important thing is the human-to-human connection. So, when he met with the Soviets over the years, and then the Russians, to treat them as other human beings, to have this sort of heartfelt, honest, we’re all trying to get to a better place. We may totally disagree on how we see the world, but there are ways that we can align.

I remember he told me once a story, and it sounds so silly and ridiculous now, but back in the ‘60s, he was negotiating with the British and he and his counterpart were negotiating the tariffs of that era. And in the end, they couldn’t get to an agreement. And they looked at each other. It was late in the night. They were both been drinking port. In those days you were drinking as you were negotiating. That’d never be allowed now. And they looked at each other and basically said, whoever has to go to the bathroom first wins. And that is how they resolved that particular issue that day.

Now, absurd as that sounds, what they’re doing is establishing a human level rapport, a trust. We both agree that we’re at a stalemate. Let’s figure another way to move forward because our nations are waiting for an answer from us. And let’s not forget the Cold War, you know, was not won with bullets and missiles. It was won with rock and roll and blue jeans. It was culture that caused the Russians to want to be part of the West. It was the Beatles. Right? And that we mustn’t forget that the cultural contact beats military confrontation every day. That’s just a fact. So, forming personal relationships, trust, having empathy. Like I said, maybe we don’t want to hold every single Russian to account for what the leaders’ decisions have been. Maybe we want to hold some Russians to account, but maybe not all. And same for the US. Maybe not every American is a function of Donald Trump. Maybe some people have a different view. Right?

So, countries are not monoliths. I’m always asked, what is the American view, what is the Chinese view, what is the Russian view? And I’m like, what makes you think there’s only one view? We have to understand in each location there’s a multiplicity of views. And he taught me how to navigate in that world where there were many different views that had to be accommodated. It’s a juggling process and it is not easily amenable to the way press talks about news these days.

So, he used to always say there’s the front page of the Washington Post story and there’s what actually happened. And we are very good at the news headline, oh my gosh. But we don’t necessarily dig into, yeah, but what really happened? What’s the subtlety of what’s going on? And maybe that’s why I see, sometimes, these signals and signs that other people miss. I’m like, ooh, look underneath, there’s something interesting there.

[01:09:05] Niels

I think certainly your writing, your beautiful writing reflects what you just said. So yeah, that’s a good way to describe it. I mean, we kind of chose a few topics. There are many more we could have talked about. Is there anything you think, at this time, is important, that you think we should…

[01:09:28] Pippa

Yeah, so, I think there is one final topic that is extremely interesting and potentially important. And that is, it’s a super strange topic, and one my father raised with me before he passed, which is this whole issue of what we’re calling non-human intelligence. And I’m starting to write a bit on that it’s so extraordinary that we’re spending trillions of dollars racing towards artificial intelligence, but still non-human intelligence, which AI is, is treated as almost still a somewhat taboo subject.

And it’s very fascinating that the White House has been so actively declassifying documents. We’ve now had three tranches from the Department of War. They’ve had over a billion unique visitors, making it the single most popular topic ever for the US government, on any subject.

And so, there’s been polling done recently. The Disclosure foundation did a poll and it was like 85% of Democrats and 85% of Republicans agree there should be more transparency on this issue, they want disclosure, they want transparency. So, I’ve been looking at it not so much as a question of culture and even reality. What is the nature of our reality?

Have we understood it properly, but more as a way of understanding where we are in history. So, our eyes are only capable of seeing a limited vision perspective, right? We can’t see X rays, so we use tools to widen our view, right? We use telescopes. So now we can see deep into space. With the James Webb telescope and the Voyager. We’re using microscopy to see deep into the atomic substructure. So, suddenly we’re widening the aperture of our view. And as we do that, we start to see things that we didn’t see before. And this has happened in history.

I love the image that William Rontogen took, a photograph, I believe, of his wife’s hand when he did the first X ray. And there’s this. You see the hand, but you see the bones in the hand, and you see the wedding ring on her finger. And it’s fascinating because that one image sparked off the whole spiritualist movement where people were suddenly holding seances all over the place. Why? Because we knew there were bones in a human before, obviously.

But the idea that you could see the bones without the person being dead was a miracle. And people couldn’t explain it. They’re like, how can we see this? How could we not have seen it before? And I wonder whether we’re going through a similar period of uncomfortable adjustment. Because now you can’t say it’s imagination.

Now we have Navy pilots who’ve triangulated on phenomena that’s, you know, traveling 17,000 miles an hour, turning on a nickel. And you can see it with infrared camera, FLIR camera, radar targeting, multiple sets of very qualified pilot eyes. So that’s not imagination. That is data that is triangulated.

So, then that raised the question, is it us? Do we have these super sophisticated capabilities? In which case, my question is, why are we having any wars? If we have that, why are there any wars at all? We should be just acing it before it even begins.

If it isn’t us, what is it? And if it isn’t us and we’re shooting at it, my question is, if it is a form of intelligence, is the right way to open the conversation to shoot at it? And let’s be clear, this is really important. We humans, we are surrounded by non-human intelligence, meaning we know that, for example, slime is literally an intelligent phenomenon.

There have been these fabulous studies of how slime mold works its way around the Tokyo subway network, and it clearly is solving spatial problems in a highly intelligent manner. We know that tree roots talk to each other. Mycelium is a global network that is transmitting data. We know that whales and orcas are communicating.

In fact, AI has recently cracked the language of. I think it was the sperm whale. And what I thought was so fascinating was they discovered not only is it intelligible and has a grammatical structure, but that the whales had independent, individual, replicated names for each of the marine biologists that are studying them. And the marine biologists are so psyched. They’re like, oh, my God, what’s its nickname for me?

And I’m like, did anybody actually think to talk to the whale? Like, these things have been around for, you know, longer than we have. What does the whale have to say? What is it thinking? I don’t know if that conversation set has begun, but I think that is where we’re heading.

So, when we say non-human intelligence, what do we mean exactly? I think we need to think about broadening the definition, especially as artificial intelligence advances and we’re getting closer to AGI. Then where’s the line between NHI and AGI? I think this is one of the most profound questions of our time.

And even if there’s no ‘there’, there, there’s about to be something there as AGI comes to life. So, then I finish with the standard view right now is AI is going to kill us all. And I, as you know, take the opposite view. I think it can, but I think that it is also probably the key to enlivening us, extending our mortality, improving our standards of living, delivering a world where maybe even war itself gets disintermediated.

And so, there are many, like all technologies. In fact, I’ve got a book I just put up on the fact that technology always cuts both ways. I just finished putting my bookshelves together, having moved. But tech always cuts both ways. The car can transport your family safely from A to B, or the car can run your family down and kill you all. So, it’s a management process, but it’s something we need to manage because the upside is so valuable and the downside risks are very severe.

But I think most people have the downside risk pretty well in their train of focus.

And not enough people have the upside, which is why it’s not only how I see the world, but I think it’s important to add that to the repertoire of potential scenarios.

[01:16:53] Niels

Excellent place to finish and also definitely a teaser for hopefully another conversation at some point to unlock some of these potential futures. Pippa, thank you ever so much for spending all this time with us today. We really do appreciate it, and I know our listeners will as well. And, I mean, you do such important work and I really can’t say enough good things about it.

So, to everyone listening, I do encourage you to go and subscribe to the Substack Pippa’s Pen and Pencil… is that the correct word?

[01:17:31] Pippa

And pen.

[01:17:32] Niels

There we are. And anyways they will find you on Substack or wherever you choose to publish in the future. And as people know from our conversation, it’s truly a global macro driven world we live in, so it is important to stay well informed. No better place to do it than following Pippa.

From Cem, Pippa, and me. Thanks ever so much for listening. We look forward to being back with you as we continue our global macro series. And in the meantime, as usual, take care of yourself and take care of each other.

[01:18:04] Ending

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