Hello, listeners.

Welcome to another episode of the Jacob Shapiro podcast.

As usual, I'm your host.

I'm Jacob Shapiro.

Rob and I are back at it for our weekly chat.

I have been traveling all over the place and have not been at my desk as much as I want to before, but this episode still turned out pretty well, I think, so we hope you enjoy it.

You can email me at jacobognitive investments if you want to talk about anything you heard here.

Thank you to those of you who have been emailing, and thank you to those of you who have rated or reviewed the podcast.

It is immensely helpful for us.

Take care of the people that you love.

Cheers.

And see you out there.

All right, Rob.

It feels like the world is speeding up, not slowing down.

I don't know if you have that sentiment, but it's good to be back with you, as always.

Good morning.

Great to see you.

Good morning.

Good afternoon.

Blah, blah, blah.

This kind of snuck up on me, so we're recording on October 10.

This will come out tomorrow.

It's a year since October 7, so it's a year since Hamas struck Israel from the Gaza Strip.

It's a year since, I guess the Houthis started firing off a little bit after the fact.

But it's also roughly a year now since we've had disruptions around the Suez Canal and Red Sea shipping.

I thought we might just start this week by taking a few minutes and asking what has changed and what hasn't changed since October 7.

Do you think that it's had a real tangible impact on the world?

Do you think it's just another tragic chapter in the israeli palestinian conflict that we'll remember with all the other tragic chapters in the israeli palestinian conflict?

I was wondering, from your perspective, what you're feeling about this moment, what you're thinking about this moment one year later?

To be honest, Jacob, I don't think much about it.

My experience in the last five years especially, but really in our whole adult lives, has been one of, call it the boiling frog syndrome of you become inured to crazy things.

My formative experience was at 18 years old, my first week of college, the twin towers were destroyed, and that was an oh, my God woman.

Since then, it's all been kind of ratcheting up.

I don't think that this really marks any distinct change or a step change in that process.

It's sort of the same trend continuing.

And we talk about volatility spirals a lot.

We're in the midst of a very big volatility spiral that's probably, probably started around 2000, 2001 and has been continuing and accelerating.

And I think that's a sort of what we're experiencing.

So that's kind of my broad view.

I don't mean to be dismissive of the conflict, but it's something that I see as part of this bigger pattern rather than, oh, my God, everything in a binary way changed a year ago today.

Do you feel the same way or do you?

I know you've been more deep in the weeds on this.

What is your view?

No, I sympathize with that view, and you certainly won't offend me by saying that you're not thinking about it very much, because there's two parts of this.

There's the israeli palestinian conflict part of it, which I think overshadows the actual impact of October 7 in the long run.

I've been saying this in some of the recent presentations that I've been giving to clients and to audiences.

I think when historians look back at 2024, they're not going to be writing about even, I mean, yes, they'll write about the us presidential election.

They'll write about a lot of the things that have happened this year.

But I think arguably the biggest thing that will have happened this year was that the United States Navy was not able to stop the Houthis from shutting down shipping through the Red Sea into the Suez Canal.

When you look at whether it's Suez Canal tolling data or if you look at ship, you know the position, the position of ships, how global trade routes have changed as a result of this conflict, it's absolutely incredible.

And it is different than what happened in the past.

In the late 1980s, Iran itself was actually causing problems with shipping.

And the United States in 1988 directly struck iranian naval targets in the persian Gulf in retaliation for the mining of a us warship.

So however bad we think things are today, Iran is not mining us warships.

The United States is not striking iranian targets.

And even in the context of all that, in the late 1980s, yes, you had, the collapse of the Soviet Union was imminent, and you got this big boost in global optimism as a result.

But the United States was able to really decisively show its power, whether it was opening up shipping in the Red Sea, the first Gulf war showed that United States military power was exceptional.

The collapse of the Soviet Union said that United States soft power and everything else power was doing really well.

So I think for me, the thing that has really changed and the thing that we're not talking about is that the United States has really pulled back from the Middle east, it's not intervening.

It's not opening up shipping again.

And then the second part, and this is the part that's unwritten.

And I've been talking about this on the podcast for a couple weeks now with various guests, but I'm really back to square one on trying to analyze what Israel's next steps are, because last week we had that iranian security analyst on the podcast.

I was shocked by what he said, by how weak Iran's position was.

Even a couple months ago, I was on here talking about how well, Iran and its proxies, they've really got Israel up against the wall, and Israel's defense forces, they're not going to be able to stay deployed, and they're not meant for these long range attacks and things like that.

But you've got Netanyahu threatening the iranian government, threatening the lebanese government.

You've got Israel, you know, wiping the floor with Gaza, now talking about wiping the floor with Lebanon and really remaking the political face of the Middle East.

I do think there are things in that.

So it's not that I'm thinking that much necessarily about October 7, but I do think there's some reorganization happening and some real.

It's no, this idea of multipolarity and de globalization, it's no longer theoretical for me.

It's no longer the prediction.

It's like it's here, which, by the way, is really uncomfortable for an analyst because it means I have to start figuring out the next prediction.

You can't just keep touting the same prediction that you had, like, in the last three years before.

So that was why I wanted to talk about it a little bit, because it does seem to me that some things have materially changed as a result of that.

Jacob, you have to learn from the great investors of the past where all you need to do is get one big call, right, and you can make a whole career out of it.

I once knew a very famous hedge fund manager who made a ton of money.

I forget he was, if he was shorting or buying the yen at some point in the early 1990s.

But he made a ton of money on this one big trade, and that was it.

Made his career.

He coasted on that for like 25 years and just lost more and more of it over time because he really was not a very good manager.

But he had that one trade.

Everyone knew him.

He was super famous, super well respected, and that was it.

So you got to be more like that guy.

You're the multipolarity guy.

Yeah.

I don't think there are any multipolarity futures.

We really should have deployed more capital that winter when everybody said Europe was going to freeze over and we were like, no, Europe is not going to freeze over.

That might have been our.

We could have been the Europe gas guys.

But.

Oh well.

But just one thing on that is, even though, how do I say, there may not be another big idea, I think what we've seen and the importance to get to your original question of a lot of the events of the last twelve months are that I think they really confirm your thesis around multipolarity that you've been laying out for the last four or five years.

And the task now is not to find some other big theory, because these things are not going to change soon.

The task is to get into the yeoman's work of identifying.

Okay, this thesis has been confirmed.

How then shall we act?

How should we allocate capital?

How should we make decisions?

And that's less sexy when you're giving a keynote speech, but it's much more interesting from an actual implementation standpoint.

Yeah.

So speaking of that, and this is not a perfect segue, but before we leave the Middle East, I just want to talk about one thing that caught my eye as I was sort of doing my morning reading this morning, and I want to see the look on your face when I tell you this.

Rob, did you know that Iraq is set for a bumper harvest and a 1.5 million metric ton wheat surplus this year?

I did not know that.

Iraq is one of the countries that the United nations puts among the five most vulnerable countries in the world to climate change and food security generally.

And I was sort of stopped in my tracks by trying to understand, okay, what exactly happened here.

And it's a combination of a few different things.

But the first and most important is that the iraqi government has prioritized food self sufficiency in the last two years and they've rolled out a bunch of policies to try and achieve food self sufficiency.

And that is another trend that I've been talking about for a long time.

And there have been little blips of it here and there.

You had Ethiopia promising this a couple of years ago at the height of their.

Of the Tigray war.

They managed to achieve it.

You've got China talking about this all the time, but Iraq has actually pushed forward on this.

And it seems that the way that they did this was the iraqi state is buying wheat from iraqi farmers at double the price.

So a bunch of iraqi farmers started planting more, and they started planting more also with the help of the iraqi government, which was giving subsidies for seeds for fertilizer and things like that.

There has been pretty good rain in the region in the last year or two, so that's helped a little bit.

But the other thing that I thought was kind of disturbing as I was digging a little bit deeper here, is that iraqi farmers, because there is this profit to be made in the government buying wheat, they are literally going out into the desert and they are digging wells 100 meters into the desert and they're getting water from those wells.

And now land that didn't produce anything before is producing double what some of the best land on the Euphrates river was producing in the past.

There's this great vignette from a Reuters article where they're interviewing this farmer, and the guy is saying, it's a golden year.

It's a golden season, while wearing a traditional white robe and reflective sunglasses as he walks through his field and notifies the benefits of getting the water from the desert.

You don't have to be a geopolitical analyst to know that this is not going to end well, because that water that is sitting beneath the desert that they're drilling for, I mean, I'm not a scientist.

I doubt it will last more than five years, certainly like ten years.

This is water that's probably been building up for literally thousands of years.

And so on the one hand, it's an incredible story about how even countries like Iraq can make moves towards food self sufficiency by doing basic things like encouraging farmers to use modern seed technology or fertilizers and subsidizing the cost of wheat.

But it also just shows you that if the be all, end all is food self sufficiency and you're not thinking about long term planning, you might make a really bad situation even worse.

So I don't know.

That really struck me.

I just wanted to throw it at you because it's not very often that when I'm doing my morning reading, I get completely stopped in my tracks.

And I discovered that I have to figure out what the heck is going on here.

But when I saw that Iraq had a wheat surplus, I was like, something is wrong.

I need to fit.

Is this April fools?

What's going on?

Well, I hadn't seen the Iraq news, but I do find it interesting, and I will try to tie it into some of the other things that we've been talking about, and more broadly into the notion of investing and mal investment in the kind of environment that we're in.

Because if you really look at this, what this represents is, as you said, the be all, end all is food self sufficiency.

You have an incentive that overrides economic calculation.

And that's what warfare is, that's what defense is.

If you look historically, when countries have destroyed their surplus and wealth and mal invested, you don't want to say mal invested.

But from a purely economic standpoint, spending all of your capex to build tanks and planes and stuff to blow up things is not productive economic investment.

That's warfare.

This is a form of that where you have this overriding strategic defensive initiative or need that overrides economic reality.

And I think you're right.

If you didn't have these subsidies, if you didn't have this sort of requirement to become secure because food self sufficiency is about safety and security, it's a form of defense, then you wouldn't do this because you're destroying the country's wealth by doing this.

Because it's not economic to dig these wells.

It's not economic to grow massive amounts of wheat in Iraq.

And I think this is the theme that you're seeing all over the place, everywhere you look.

When we talk about replicating supply chains just for safety, when we talk about trying to achieve food self sufficiency, all of this is connected.

And the net result is you're going to see a lot of wealth be destroyed in the process.

Because creating efficiently new wealth and protecting the wealth that you have is nothing.

The be all, end all, as you say, there's something else that becomes paramount.

Yeah, I don't want to pick on this guy, but in one of the articles I read about Iraq, they had this quote from the director general of Iraq's grain board.

And they asked him, okay, well, so the government's buying for 850,000 iraqi dinar.

It's selling for 450,000 dinar.

And he says, well, but that's not a loss because the grain is staying in the country.

There's no loss considering that the money is spent inside the country and in iraqi currency, employing workers and flour mills and blahdemeadhe and abandoning flour imports from Turkey and the Emirates.

And it's like, you have to stop for a second and it's like, okay, so one plus one is not two.

Cool.

I think that's exactly what you're saying.

But jokes aside, I was in Boston very briefly this week.

Not even long enough to do a micro geopolitics on it.

But speaking at Chile Mos, which is this connection between Massachusetts and Chile for tech entrepreneurship and tech innovation.

And this ties directly to what we're talking about here.

You'll see how in a second.

And I shared with them a slide that showed gross domestic spending on research and development for all of the OECD countries as a percentage of GDP.

So it's a relatively exceptional slice of the global economy to be in the OECD.

Iraq is not going to be in the OECD anytime soon.

Well, I'll ask you a little trivia.

Do you know which two countries were the top?

This is 2021 data.

It's the latest data they have available.

Rob, can you guess the two countries in the OECDe with the top level of domestic spending on research and development?

Percentage of GDP?

I mean, wildly guessing, I would say the US.

And.

The US is number two.

So who gets the top slot?

I don't know.

I'm gonna bring it back to October 7.

It is at almost 6%, and you've got countries like Japan and even Germany and the UK that are relatively high above the average.

I poked fun at the chilean audience because Chile was second to last.

Costa Rica was dead last.

So I told the Chileans, hey, not only are you not spending enough on R and D, you don't even get the prize for being the best at not spending on R and D.

You're second worst.

If you're going to go this direction, you should go underneath Costa Rica.

You don't want to be second to worst.

But then after me, somebody who was connected to the government, I think, got up and was talking about how the United States is really a good model for this, because the public sector in the United States, in his description, sets the problems that have to be solved.

And then the private sector, whether it's through DARPA or through the Department of Energy, they work in public private partnerships to address those problems.

And he talked about how one of the problems that Chile has, and that a lot of countries have that are not spending enough on R and D is that they invert this.

They think that it's the government's job to identify the problems and then to go out and find public institutions that are going to partner with them on the solutions that they identified.

And I thought it was a really good point because he was telling the audience, look, if this is going to work for Chile, if Chile is going to achieve all of its massive potential, which it has massive potential, if the key to economic growth is cheap energy, Chile is sitting on the solar lottery, the wind lottery, the lithium lottery, the geothermal lottery, you go down the list, they're going to have very, very cheap energy in the future.

But one of the things he pointed out was, unless the public sector is setting direction for where private or governmental sources are going to throw revenue, you're probably not going to get that much headway.

That was an interesting way to think about it, because when you're thinking about this Iraq wheat story, sure, I'm sure the public sector wanted more food security, but that was very much a top down.

Okay, the iraqi people need food security.

We will do x, y and z policies in order to ensure food security.

China is this on a much larger level, like, we will be the kings of the EV industry.

We will now go forth and do all the things that have to be done as a result of that.

I thought that was an interesting way of thinking about how governments can be involved in approaching some of these problems without creating the kind of malinvestment that you're talking about.

It is a really important distinction.

And when I was saying that about warfare and sort of government dictated incentives overriding economic ones, I was thinking about Japan.

Because the famous phrase in Japan during the Meiji restoration and the initial period of industrialization was strong economy, strong army.

And that was the sort of motto that they kept repeating, strong economy, strong army.

So in other words, only by becoming rich can we defend ourselves and keep out these foreigners who are knocking on our doors.

And Japan, and in a different way, China and Korea, they did a remarkably good job of taking what were essentially non economic initiatives, like we said, non economic incentives.

So basically, it wouldn't make any sense, if you are sort of a classical liberal economist, to say, oh, Korea in 1980, should they should become a steel giant.

Like, you would never say that Korea was an ass backward country that was very poor, had no natural advantages, and that would have been wrong because they were able to do that and they became a very successful country in the process.

So what I'm getting at is some countries deliberately have the right recipe, like Iraq, for instance, is a bad example because they're not going to get really good at producing wheat and become a global export champion of wheat.

That's just not going to happen.

But in the case of Korea with steel, or Japan with cars or electronics, or pick the industry, when you have that recipe of, okay, we're going to make this a national priority, but we're going to enforce the discipline of competing on the global market.

We're getting up the learning curve.

We're going to learn to be better than the people, than the countries, the companies that are leading in this area, thats where youve had these extraordinary growth miracles.

So I dont want to paint it all with the same brush.

And its a gray line sometimes between one persons malinvestment as another persons long term investment in moving up the scale, which you could look at China today and say, wow, theyve really destroyed a ton of wealth through malinvestment and ghost cities.

But at the same time, they have accumulated a massive amount of know how, and that's really what matters in the end.

So anyway, I'm going on and on, but you get it.

No, but I think it's important, too, because it goes back to what has changed this year, and it's not something that has necessarily changed this year.

It's arbitrary where you draw lines and distinctions.

But I do think the years from roughly 1990 to 2020 were a rare period in history where maybe it wasn't defense or governments or security that was animating ideas.

Maybe it was in Russia starting around 2008 when they invaded in Georgia.

Maybe it's always been that way for a place like North Korea, which is literally throwing every penny they have or won they have or whatever they have at a nuclear program.

But for the most part, when you think about the advances and the economic successes of the 1990s and through about 2020, it's all about globalization.

It's all about cost efficiency.

So Taiwan becomes a semiconductor fab, or Korea becomes this island of prosperity in the Asia Pacific because you're not really worried about security anymore.

Things like the Internet and the maturation of microchip technology, all the things that allow us to function today.

That's all stuff that came from the sixties and seventies and missile programs and the space program, and it was okay.

Now private industry, just do whatever you want, go crazy.

There's no borders anymore.

There's no governments.

It's all democracy.

Everyone's going to liberalize.

This is great.

And I think there's been a real sea change.

And you could date it at the Russia Ukraine war.

You could date it at the pandemic.

Maybe October 7 was the nail in the coffin.

But I don't think that's true anymore.

And I think it's going to be something that these tech companies in particular are going to have to deal with because they are built for a world where there are no borders and you can go and do anything that you want and you don't have to think about partnering with the government in these particular ways.

And now I think that has changed remarkably.

One other point that I think is really important on this.

Just getting back to the RMD conversation, it's very easy to point to some of these countries.

Chile.

Let's take Chile, for example.

They're the second lowest r ending spenders in the OECD.

That sounds terrible, but I'm not sure that's really the prism to look at it through.

Because what is R and D?

Like?

What is it really?

It's companies that are reporting R and D spending because they have people who are basically developing new products like R and D is not really research, it's development.

So, you know, that's an important distinction.

It's implementing new stuff at the margin.

And for a country like Chile or most countries that are not on the technological frontier, not the richest countries in the world, in other words, they don't really need to do that.

And if you look at the examples of incredible growth that have been the true growth miracles up until recently, I would say China probably didn't spend that much on R and D, and certainly Japan didn't during its period of ascendancy when it was a much poorer country, you know, decades ago, because they weren't.

They didn't need to do it.

They needed to copy.

And that's why I say the thing that matters is know how.

It's knowing how to do stuff.

I mean, that sounds so basic, but essentially either getting people to come to your country who know how to do things or literally sending your people.

And Japan was famous for this, and China was famous for this in the 1920s.

They sent all these people to Paris.

I mean, Deng Xiaoping lived in Paris for like ten years because all of these Chinese were sort of out.

And it was part of the modernization period and obviously wasn't successful because then they wanted to tip into civil war.

But during the same period, Japan famously sent people out to Germany.

They sent them to the US, they sent them to Britain to learn, okay, what are these countries doing?

How do they do it?

And how can we basically just copy them?

And to a great extent, the same thing is true today.

Take Chile for a very specific example.

So I have a friend who, you know, who, he's an entrepreneur down in Chile, and he developed sort of a.

Not a super high tech, but a laser based measuring system that you would use for mining.

And for many years, he told me the story of he tried to sell this system to Codelcodelco.

Yeah.

Okay.

And he said, oh, and they were so conservative, they didn't want to do it.

He said, even though it was obviously a positive roi, it was a good thing.

It was clearly working, blah, blah, blah.

And I'm not sure that that's such a negative thing, because Koudelko doesn't need to do the new thing.

They just need to copy what the companies at the efficient frontier are doing.

And the same goes for most companies in Chile.

I find it striking that were bashing them for having very low R and D.

But at the same time, youre giving this speech at an institute thats literally been created to go into Cambridge and steal ideas and to bring people from Chile, just like Japan sent people to Cambridge, Massachusetts, 100 years ago and to go meet people, go to Mitzvah, you know, look behind the desk.

Hey, what are you doing here?

Oh, that's interesting.

Maybe we could do that at home.

That's kind of the process.

So that's not really captured in R and D, but in many ways that is by far more important when you're talking about kind of catch up growth, which Chile is still in that rag.

Well, I think it's also about making the government a force multiplier for that, because you can have all the little groups that you want running around trying to copy.

If you don't have the japanese government behind it saying, this is good, we are going to cut the red tape, we're going to throw money at the problem.

We're going to open up new markets for the thing that you're doing, or we're going to protect you from a competitor because we want this thing to be protected.

You need that national support behind you, which I think is part of what's going on there.

Then the other thing, yes, one thing that Chile has, and we'll see if this is an advantage or a disadvantage.

This is actually an interesting segue into what we were going to say about Ireland, which is that, yes, a country like chile can go out there and copy.

But the thing that Chile has, which almost no country has in the world, is that it has the promise of cheap energy.

I was looking at, for instance, at how cheap it might be to produce green hydrogen in Chile as a result of their solar potential and their wind potential and everything else.

And it's orders of magnitude cheaper than Australia, the Middle east, the United States, China.

It's almost half of what it would cost to produce it in Europe.

If you're a country that wants to attract talent from everywhere in the world, or if you want to attract, you know, if you want to be that, that force of gravity bringing things into the country, that is something that a country like Chile can really offer.

They might, if they can capitalize and have, you know, investment into their grid and into some of these energy technologies, they could be a renewable Saudi Arabia.

And what, what can you do with the data centers that you're going to put in Chile with that?

What are, what are the AI bros going to say when they're like, ugh, I can just like, put a data center here and it's going to be basically free.

There's some interesting things there.

But I'll make the segue to Ireland, because Ireland did that itself, not via solar or wind technology, but by virtue of tax policy.

So why don't I leave?

I'll tee that up for you and let you cook on that one, because this is all you.

I don't know if it's all me, but I'll start us off.

I'm really worried about Ireland.

And we spoke at length about Ireland, I don't know, 18 months ago, a year ago on the podcast, I forget, and sort of spoke to all the advantages, and those advantages are still there, but all of the developments since then, I think, have been very concerning.

And I think this is an issue that is not recognized by investors and no one's really talking about it.

And let me tell you why I'm concerned in the historical parallels that I see.

So for those who don't follow Ireland in super close detail, shame on you.

The background is that really three things to know in Ireland?

The first is there's a terrible housing shortage and cost of living has continued to skyrocket, and no one has found solutions.

That's just not gotten really any better.

The second thing is there's a political discussion.

The dominant political discussion, I should say, is around what to do with their enormous surplus because the word is out that the government is running an enormous budget surplus because of this tax policy, because of this windfall that they've gotten from large american tech companies for the most part.

And now the debate is about, well, who's going to get this money?

And primarily, the debate has not focused on resolving the supply side issues that Ireland faces, which is lack of people, lack of space, difficulty in building stuff, inability to build stuff.

If you were to try to build 60,000 homes a year in Ireland, which is what the new government is saying that they're going to do, you physically could not do that because all of the little building companies went out of business after the 2007 bubble burst, and they've never been replaced.

So you have a variety of, and it's not just in building, it's along a lot of different ways of looking at it.

There's just major supply side constraints and inefficiencies in Ireland and it's really showing up in cost of living and those things which makes this political discussion really concerning, because all of the solutions are who are we going to hand the money out to?

We're going to give it to young people, to first time homebuyers, to people with children, to social programs, basically spend, spend, spend, demand side.

And that is really concerning because historically that's been a terrible, terrible thing for most countries.

We've talked about dutch disease in the past.

It's a form of dutch disease.

What Ireland is really starting to exhibit, another example that you could look historically if you want to go farther back, is after the Germans took France in 1872 and they negotiated the huge reparations.

Not reparations, its not the right word, but basically massive amounts of gold coming from Paris into german coffers to buy them off after.

After the war.

Ironically, Germany had a terrible decade because what they did was they took all this money.

It was like the american gold coming into Spain after the discovery of the new world.

It basically just caused inflation and supply side constraints.

And France managed to outgrow Germany in the decade after that, despite the fact that Germany was the winner.

So I see Ireland showing a lot of these same symptoms, and if you look politically, no one seems to be focused on the right things.

Sinn Fein was sort of in the ascendant, as you know, and has since fallen dramatically in the polls because of a bunch of blunders and trying to navigate from a yemenite, you know, their traditional position on the far left to embracing kind of the anti immigrant zeitgeist.

The existing parties are basically just competing as to who can give away more of this money and buy votes for that.

This is all very bad, and I'm really worried about Ireland.

That's the bottom line.

How would you compare it to the United States?

Because I've been, in a different way thinking about dutch disease for the United States as a result of all of the energy that it has found that the shale revolution, while it has powered maybe an american decade of growth and things like that.

Like you said, this classic, it's a different presentation, obviously, what you're suggesting of it with Ireland, but this classic case of, oh, you have this resource or you have this sudden influx of wealth and you think it's going to do good things, but actually it's the exact opposite.

It actually depresses growth or it causes people to not be willing to make the investments that they need in the future.

Maybe I'm stretching there, but that's been on my mind a lot, and I wonder how you would compare the two.

I don't think it's a very good comparison, and here's why.

So dutch disease really describes a situation where you have not just a windfall of wealth, but inflows of capital.

And in the case of the dutch disease story, it's when the Dutch discovered gas and there were huge inflows of capital because all of a sudden theyre exporting all this gas.

You lost your internal competitiveness because real labor costs went up dramatically, because you had inflation, prices didnt adjust, and the rest of your economy stagnated and suffered.

Thats dutch disease.

So in the case of Germany in 1872, is very similar, where you had this huge inflow of gold, money supply expanded dramatically.

Wages and real wages actually increased dramatically.

And german industry was on its back for some period of time.

Ireland, same thing, except instead of gas or going and conquering England and getting reparations, theyre getting the inflow from pharmaceutical companies and apple and places like that.

The US case, I think, is quite different because the shale is not.

It's not an export revolution per se.

It's not causing, how do I say the dollar is not strong because we're exporting a lot?

The dollar is strong because we are the sinkhole into which every country on earth pours its excess capital.

And thats a very different disease and in many ways a much more difficult one to deal with.

In fact, as a brief aside, I dont know if you saw, but Michael Pettis published at the Carnegie Endowment, this 35 page paper this week that was, I forget it was titled something that was pretty provocative, fair trade for tariffs, for fair trade or something.

I was like, oh, wow.

And in it they explained a lot of the same stuff that we already know that we talk about all the time.

And it said, and we're going to recommend what the United States should do to fix this.

And I'm thinking, oh, wow, this is going to be really cool.

And the recommendation from the report was basically that the US should tax capital inflows.

And they're like, there are really no good solutions to this dilemma.

Probably the best one is to put a tax on capital inflows into the US.

And I'm thinking there's just no fucking way that's ever going to happen, and that's the best solution that they have.

How depressing is that for the United States?

I mean, I don't mean to be a downer, but when you think about a lot of the issues that we talk about week in, week out, about the hollowing out of american industrial might, labor shifts within the United States, the too strong dollar, all of these issues, and Michael Pettis, the guy who's, you know, the doctor who's diagnosed so much of this, that's the best solution.

He has something that's just politically never going to be on the table.

And I don't know what to say other than we should prepare for.

Just more of saying.

I think I know a little of what to say there.

I know you love Pettis, and I love Pettis, too, but I find that beneath his brilliance, there's also, like, politics requires a little bit of.

Of imagining how things could be different.

So I take his point, and things absolutely do have to change.

But I think you've already seen the answer a little bit, which is, it's okay if the United States is a sink for all this capital, as long as it has a political understanding with all the countries whose capital is coming in.

So the problem with the United States and China right now is that understanding is gone.

Whereas in 2008, the PBOC and the Fed were hand in hand trying to solve the 2008 subprime real estate crisis, in 2024, even under a Biden administration that has tried to lower the temperature with China, these are countries that are basically on a collision course, that have geopolitical aims that are just not going to work together in the long run, whether it's Taiwan or the South China Sea or intellectual property.

Like, you go down the list, like, there's just not going to be an understanding between those two countries.

And China's rising in power and wealth and thinks it deserves a seat at the global table and that some of the rules should benefit it.

So it seems to me that the answer to the question that you're talking about is, will you have to limit capital flows to only the countries that are going to work with you or that are going to share some of your political aims, which is a really highfalutin way of describing what near shoring or reshoring really is.

Like when we're talking about deglobalization, we are not talking about the United.

It's not realistic for the United States to build everything in the United States forever.

Like, those jobs are not necessarily coming back.

One of the big things that I flagged this week, too, was that Foxconn announced that they're going to build a massive new manufacturing facility for bundling Nvidia's key AI chips on the Blackwell computing platform in Mexico.

Despite Steinbaum's judicial reforms and despite that the mayor of some mexican city got murdered four days into his regime, and despite this new defense plan that's going to codify the National Guard, what looks like a mini sort of presidential guard within Mexico, despite all the bads about Mexico, it's like, oh, okay, we're going to build this massive factory in Mexico, and these things are going to go back and forth across the border.

Maybe that's too simplistic, but it seems to me that that is the answer that the United States is moving towards.

I don't really agree that that's a solution, and let me tell you why.

One of the things that struck me about your interview with Marco last week was when he said he thinks that Trump is going to strike a deal to have the Chinese build factories in the United States, and that's going to be very bullish for China, and it's going to represent a resolution and blah, blah, blah, blah, blah.

I don't buy that.

And here's why.

Without resolving the structural imbalances, it's not economic for China.

The chinese cost advantage which emerges from the subsidies that chinese companies receive, that doesn't go away.

So we've already seen this before.

The Japanese were in a very similar situation in the eighties.

And throughout most of the 1990s, they were building car manufacturing plants throughout all of the southeast and Tennessee and places like that.

To the extent that japanese brands dominate us car sales today, most of those cars are made in the United States.

The United States trade deficit and manufacturing employment has not gotten appreciably better.

And that's just one example.

But if China were to do the same thing today, I think you would see the same issue.

And we talked about this last week about robotics and how the US has managed to maintain some manufacturing base, a significant one, primarily by increasing the amount of capital per unit of labor, because thats an area that we have more of an advantage.

But without resolving the fact that the dollar is just too strong for the US to have a balanced current account.

And without a balanced current account, it's like the US has been running a fever for the last 70 years, like a low grade fever.

I think that's the best metaphor.

And it's just getting worse and worse.

And the symptoms are slowly getting worse and worse and in the form of debt going up, because that's your fever unless you're going to shrink.

This is how things used to be.

And after World War two.

This is why I, John Maynard Keynes, really tried to get Bancor instituted as a global unit of account to balance out these trade deficits because he recognized that these things could persist for long periods unless you have a mechanism to make them go back.

And it used to be that gold was the mechanism, but obviously not anymore.

So getting back to my metaphor from last week of the seesaw, both China and the US are on these imbalance seesaws.

And in order to keep the seesaw from tipping over, you have to keep pushing it up with debt and with debt and with more debt and more debt in the US.

And thats why were in the situation were in where government debt for the richest nation, large nation in the world, government debt is over 105% now and its rising dramatically year by year.

Corporate debt has risen dramatically.

Household debt has come down from the late 2000 peaks, but is still quite high.

And you need that, you need all forms of debt.

People get shocked here in France by this notion that people want you to borrow money in the United States.

Here they guard their money like it's the pot of gold.

And it's hard to explain like, oh yeah, you get these credit card offers in the mail all the time and they really want you to use the credit card here.

You have to literally pay to have a freaking card.

But that's a silly little example.

But that's representative of the problem, the fever.

And unless you cure the fever, you're not going to fix the underlying issue, no matter how many factories or how many deals or whatever.

And to use the Foxconn example in particular, thats great that theyre building it in Mexico because they think that thats an economic place to do it.

But the problem is thats not the United States.

And then you eventually get to the point where people say, hey, what the hell, now were importing all this stuff from Mexico and our current account deficit is shifting from China to Mexico.

Its all going ultimately to the same thing.

And us deficit in absolute isnt changing.

Its just a mexican deficit now as opposed to a chinese deficit.

And you're in the same freaking place unless the US has such a hold over these allied countries where they can say, oh, we're going to tax your country, you're going to pay us, you're going to pay us to be part of our supply chain, which is never freaking going to happen.

Obviously absent serious conflict.

Is it not going to happen?

Well, because I mean, another one of the things that flagged my list this week was obviously because they're afraid of what Trump will do if he comes into office for a second time.

South Korea agreed to an 8.3% increase in what they pay the United States for the stationing of american military personnel there.

So that's almost.

It's going to be over a billion dollars that South Korea is going to be giving every year to the United States just to make sure that us, the us military is there.

Now, that's a little different than what you're talking about, but I don't think it's a huge jump from, oh, we're going to pay to have us forces guard us here, versus the North Koreans, who also, by the way, one of the weirdest things that happened this week is that North Korea announced that it's going to cut off all roads and railways with South Korea and fortify its border with strong defense structures.

Really strange.

I have no idea what to make of that, but it seems to me it's not that big of a jump from, hey, pay us a billion dollars to have us forces here, and, hey, if you also want access to the us market, there's also going to be a tax, or you have to pay.

Trump's whole thing about pay us for the wall, to build the wall.

It was nonsensical at the time, but there's a little grain of, oh, you probably could do something to get countries to pay you if what they need is access to your tech or your markets or things.

I'm stretching.

Intuitively, that's correct.

But a billion dollars, the us current account deficit, I don't have a number in front of me, but it's like $300 billion.

So it's okay to get 1 billion, like, you can reach in the couch and get that from your allies.

But 300 billion, that's going to take some arm twisting.

Yeah.

I mean, South Korea is also relatively small, but.

Yes, I agree with you, but it's the precedent, is what I'm talking about.

It will force the United States to become more.

What's the right word?

More explicitly imperial, where there are going to be certain costs for getting defense from the empire and certain costs for having access to the empire's technology and markets.

Like, that's how economics used to work.

And it seems to me that's what we're going back to.

And it's why I often, you know, I often compare the world that we're going to see unfold in front of us over the next ten years to the 1890s, which was a scramble for empire all around the world.

I am.

I'm always rooting for countries like Chile, because I think the alternative is what you're seeing in places like the DRC where, you know, internal politics is going to pull things apart and foreign actors are going to come in and take whatever mineral commodities they want or, or have factions against each other because there's going to be this global race to acquire those assets.

I mean, it's sort of a classically mercantilist worldview that is building out.

And I guess that's the other thing to say to Pettis.

Yeah.

Debt is a feature of the system that we're talking about.

If you want to go.

There are not a lot of great systems.

If you want to go back to the other systems, they have warts and flaws that are arguably worse.

Maybe they're not, I don't know.

But it seems to me that what came before was not so great.

Yeah.

And just getting back to something you just said, I think you kind of stumbled on another potential outlet for this, which is essentially an empirical one.

I'm sorry, an imperial one, not an empirical one.

And what I mean by that is the US doesn't have to necessarily extract dollars directly.

It can do what Great Britain used to do, which was, hey, you're our colony.

We're going to take your physical stuff and you're going to buy our goods and you're going to be a captive market of our manufactured stuff in some form.

That's another potential way to do this where the US can basically compel certain countries to buy american.

But again, we're stretching.

We're stretching in a major way here.

I mean, ultimately, at the end of the day, the politically possible resolution, and you can see this happening today.

So I don't think this is a stretch.

And this is why when they do campaigning in the midwest and sort of the rust belt of America, they don't call it the rust belt for nothing.

It's because it's all rusted out and disused and broken.

It's around these notions of like, hey, we used to build stuff here and now we don't.

The factory is closed.

The Chinese have taken our jobs.

Before it was, the Japanese have taken our jobs.

Probably the only politically possible and reasonable way that that's going to result in policy is through tariffs, which is a very blunt and not a very effective policy, which we've talked about in a specific episode on this in the past.

So we won't rehash it, but that's what's going to happen.

So that's what you should really prepare for.

Well, on that rosy note.

Rob, do you want to say any words about Pakistan and where we begin with sort of Middle East, South Asia politics, or do you want to save it for next?

Do we have any happy stories we can talk about?

I feel like I'm a real bugbear today with the us balance of payments.

And Pakistan is.

I mean, Ireland is totally screwed.

The United States has a fever.

It's never going to go away.

There's a lot of great things in the world, too.

But, yeah, Pakistan is.

Well, I mean, this week, I'm not sure.

I mean, I'm looking at the knowledge platform right now.

It's been a tough week.

Hurricane Milton and EU, problems between Orban and von der Leyen.

The UK spy chief says IsiS is back.

Great.

Just what we were missing.

The only positive thing I have this week is.

It's interesting, actually.

So there's been an outbreak of Marburg virus in Rwanda.

I promise this will get optimistic here in a second.

Absolutely terrifying disease, terrible, transmitted to people by fruit baths and spreads through person to person contact.

Mortality rate of 88%.

Where's the happy you're talking about?

Well, basically, a nonprofit has delivered its first Marburg vaccines to the country.

And the way they got it was they acquired it from GSK in 2019 and developed it with funding from the US Biomedical Advanced Research and Development Authority, which is targeting research around Ebola and Marburg.

So the traditional market, big pharma, they just didn't see an incentive in creating vaccines for diseases like Ebola and Marburg.

People die too quickly.

It's starting in places in Africa where people probably can't pay huge dollars.

So, eh, like, let's.

Let's do more ozempic or, you know, make people skinnier.

We're going to make more money off of that than eradicating things like Marburg and, um, and Ebola.

But anyway, so this nonprofit, like, it got it, it developed it, and it's delivering vaccines after a request from.

From Rwanda.

Um, and it says that it can release more doses over time.

So there's a version of a group taking the system and saying, okay, we're going to do some good here and we're going to take all of this and then go get the government support that I was talking about, alluding to that, Chile, how innovation works in the United States, and go do something.

So there's a nice, heartwarming story before you want to go into the Pakistan death spiral, or we can end there if you don't want to be depressed.

It is a nice story.

Then talk about non economic incentives taking the forever.

On a sort of related note, to go down a rabbit hole, very briefly, there was an interesting piece about a company and startup in France that raised capital this week.

And it was very interesting because it's a group of young researchers.

They started this company based on a process that they developed that basically you couldn't do seven years ago without the computing power and other tools that we have developed just recently.

And it combs through massive amounts of dirt to break down and analyze the naturally occurring molecules that bacteria are producing because a lot of them are very useful as vaccines like penicillin was discovered through a mold.

So essentially taking that same approach, but using the growing scale and the declining cost of compute, to do that at massive size and speed, exponentially more than you ever could before.

So it doesnt have to just be non economic, social or government or defense related incentives driving some of this innovation.

And good stuff.

You also have the economics are changing very quickly because you have these revolutionary technologies that are just plummeting in cost exponentially.

And compute is obviously one of them.

So against the background of all this, things are really getting quite good.

But that said, Pakistan is really fucked, and let me tell you why.

So the only thing I want to say about Pakistan is, and we didn't talk about this, we had exchanged notes on the knowledge platform, so we'll do it in real time.

Two things worry me.

Number one, so they're negotiating this IMF bailout right now, and as part of that, they have to incur some pretty onerous tax increases and tariff increases on electricity and stuff like that to try to get their budget balance and order.

The problem with this is the death spiral that you alluded to, and you want to make the connection to Hawaii.

Hawaii is sort of the canary in the coal mine of this in the US, because it's the place where electricity prices were very, very high for geographic reasons.

And was one of the first examples of one of these sort of death spirals playing out.

Because in a death spiral, what happens is you have increasingly cheap solar entices people to get off the grid and develop and generate their own electricity, which means all of the remaining people on the grid have to pay more to cover the fixed costs of the grid, which raises everyone's prices who is still on the grid, which causes more people to get off the grid and get solar panels.

I mean, in a self reinforcing death spiral.

And you're seeing this in Pakistan is the story.

Pakistan has had a huge boom in solar panel imports every business, anyone with any money at all, basically is installing solar panels everywhere they can in Pakistan because they're trying to get off the grid.

And that's a major, major problem because it's not getting any better.

And the solutions that they're trying to implement in accord with this IMF bailout are exacerbating the death spiral, not making it better.

And I don't think that's understood.

And I only say that because Pakistan is a huge and important country.

And I know people tune it out.

The sort of thing you read in the economist every week, oh, another military coup, and this guy took power, and there's protests and blah, blah, blah, and it sort of fades into noise eventually.

I think this is very, very bad for Pakistan, even relative to its normal operating procedure.

So just flagging there.

No, I think we talked about it once or twice last year when things got really bad, when Imran Khan got thrown in jail, and you saw the protests around it.

They've also had just a slew of bad luck, whether it's extreme high temperatures or the flooding from last year.

You're absolutely right that they're an important country.

I mean, we're talking almost 250 million people.

We talk optimistically on here all the time about Indonesia.

Pakistan in terms of population is roughly the same size.

They also have nuclear weapons.

So, like, you start going down the list of things, it's really concerning.

I guess the two things that I responded to you with on the knowledge platform is I agree with you that it looks bad, but part of me thinks that they've already been through the worst.

Maybe.

I mean, the inflation numbers have come off the boil.

They're relatively high compared to the rest of the region, but they're not where they were even eight to twelve months ago.

And maybe that's going to get worse here as the actual cuts come through as a result of the IMF package.

But like, it does seem like they've backed away a little bit, at least from the inflation abyss.

You've also had Saudi Arabia making real noise about investing in Pakistan in just the last couple of weeks, which tells me that it's not just the IMF coming through with 7 billion.

The Saudis, like they have for Egypt, seem to be coming very soon.

And you can think about what that means for saudi strategy.

They have long had a relationship with Pakistan around this, but the thing that Saudi Arabia needs in sort of hard, geostrategic terms more than anything else, is soldiers.

And if Saudi Arabia is thinking about how it's going to prepare for a world in which Turkey and Iran and Israel and all these countries are doing all these things, if you can call in some debts from countries like Egypt and Pakistan, that's probably a pretty good thing that you're going to want to be able to do.

So I don't discount what you're saying, but part of me, and maybe use the word a nerd at the beginning of the podcast, I'll use it now.

I feel like I've been paying attention to Pakistan for the last 18 months, and it's a little better now than it was twelve months ago.

Twelve months ago I was really worried about the entire edifice falling apart.

Now it's like, okay, they just seem to be kicking the can, but maybe I'm being a little too.

A little too complacent.

Well, on that rosy note, anything else you want to say to the listeners, Rob?

No, I think we've hit them with enough for one week.

Hit them with enough.

All right, we'll say goodbye.

See you all later.

The views expressed in this commentary are subject to change based on market and other conditions.

This podcast may contain certain statements that may be deemed forward looking statements.

Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Cognitive Investments, LLC is a registered investment advisor.

Advisory services are only offered to clients or prospective clients where cognitive and its representatives are properly licensed or exempt from licensure.

For additional information, please visit our website at www.

Dot cognitive DOT investments.

The information provided is for educational and informational purposes only and does not constitute investment advisors and it should not be relied on as such.

It should not be considered a solicitation to buy or an offer to sell a security.

It does not take into account any investors particular investment objectives, strategies, tax status, or investment horizon.

You should consult your attorney or tax advisor.