Hello, listeners.

Welcome to another episode of the Jacob Shapiro Podcast.

Joining me on the podcast is Matt Gerkin, chief geopolitical strategist at BCA Research, a fellow Stratfor alum.

I was a lowly intern who sat across from Matt when under the.

The flag of the Japanese empire that we sat under under our cubicle while he was a senior analyst doing all sorts of important things.

Thanks, Matt, for coming on.

Listeners, if you want to talk about anything you heard on this podcast or Anything else, it's Jacobacobshapiro.com Otherwise, take care of the people that you love.

Cheers.

And see you out there.

Matt, it's so good to see you.

Are you.

Are you in Kansas right now?

You're home?

Yeah, I'm in Kansas City.

I'm at home.

How cold is it right now?

It's cold.

We've had.

My.

My kids have had seven days of school canceled in 2025, which I can only dream of that as a kid.

You know, just like an entire week, two weeks have been ruined, actually.

Yeah, you're.

What?

You're one day from a Hanukkah miracle right there.

Your kids will be looking back at the eight nights or the eight days of snow you probably saw.

We had a blizzard here in.

In Louisiana, like, last month.

We had more snow in New Orleans than Minnesota did for the month of January.

So the weather is just doing wacky things.

Yeah.

The pictures of Bourbon street were unforgettable.

I loved looking at that.

Yeah, it was wild.

I was.

I was telling.

Matt asked me what we were going to talk about before we got on the podcast listeners.

And I told him, honestly, like, so much is going on that I feel like my job is fairly easy.

I can just throw a dart at the headlines and we can probably talk about them.

But I thought the place that we would start and probably where we'll spend most of our time, is what's happening with US Europe relations and what's happening in the Russia, Ukraine war.

You and I both worked for George Friedman, and one of my favorite things that George taught me, or at least one of my favorite thought experiments he would force us to do as young analysts, was to say, you know, think about this development that you're talking about or writing about, and think about it's 12 months from now.

Is anybody going to remember this?

Like, is that.

Is this newspaper headline actually going to be a headline 12 months from now?

Is anybody going to care?

And most of the time, if you ask yourself that question and force yourself to dive into that perspective, I think the answer is no.

But my sense is the things that have happened in US Europe relations and in the context of the Russia, Ukraine war in the last week, whether it's Hegseth going to NATO, whether it's Vance's speech at the Munich Security conference, whether it's, you know, Trump's conversation with Putin, Rubio showing up in Saudi Arabia negotiating directly with the Russians, it feels like that overused word.

It feels like a big inflection point.

It feels like this is something that we're going to remember for the rest of 2025, and that historians, when they look back and tell the story of geopolitics in the 2000s, that this will be one of the big moments.

Do you think I'm overstating the case there, or do you think it's that level of development?

No, I don't think you're overstating it.

It's one of those moments where we had, you know, we, we, we're you.

I think in the post 2008 period, we're used to making these grand analogies, and they're often, probably too often crap grafted on to 1929 in the 1930s and the build up to World War II, and it's return of great power politics.

And it's the notion that there's, you know, these sluggish, depressed economies that then have to be revitalized and then that.

That starts to lead to trade conflict and military buildups.

But obviously, there is an analogy.

It's just sort of on a miniature scale, and this is definitely a miniature revolution in foreign policy.

And it's, it's a miniature revolution of an election that we had as well.

So not a revolution in the sense of regime change, but a revolution in the sense of a major turning.

And it's typical when outsiders sort of take control of government to start to project their ideas outward.

And that's, I think, also what we're seeing from the Trump administration.

It would have been really surprising if the trip to Europe from Trump's, you know, the rollout of his Europe policy and of his foreign policy, it would have been surprising if that hadn't been shocking and controversial.

But nevertheless, we're all experiencing it this week.

And it's.

It's a lot of.

A lot of change all at once.

Yeah.

And I don't know about you.

I'm finding I'm having a little bit of trouble parsing it because I think one of the things that we've learned about President Trump and one of the things that he's incredibly good at is he will say something so provocative that it completely resets the conversation.

Like he'll say, like, I'm going to take over the Gaza Strip.

The United States is not taking over the Gaza Strip.

But now that's all anybody's talking about.

And the renegotiation board is completely different.

Think about it, with the tariffs with Mexico and Canada, he completely reset the conversation.

He moved the goalpost, and now it's a fundamentally different conversation.

I'm struggling with, with his moves towards Europe, how this actually resets the conversation or what it is he's actually moving towards.

Do you have a sense of what the strategic goal is?

Because it's hard for me to see the strategic goal.

It's hard for me to see how undercutting Europe and insulting Europe and, you know, cutting Ukraine's legs out from underneath it and working directly with Russia, you know, giving them all the concessions at the very beginning, I don't see what the, what he's moving the goalposts for, what the strategy is.

How are you?

Well, actually, you, you made a lot of my own points right off the bat.

They're just like, especially the point about giving concessions at the beginning.

Typically you would.

A typical government, even, even a, even a, a sort of revolutionary government that seizes power to reverse foreign policy and negotiate with the enemy would still typically rally the allies and the domestic and foreign allies to make a brave face of doubling down on the war in order to have more leverage to go into that same negotiation.

And it was extraordinary that they just went right off the bat and said, no, Ukraine's not joining NATO.

And now Hagseth's comments on territory were a little more nuanced than reported.

He did say the pre2014 territory would never.

And we all knew that Crimea was not going to be returned.

So that maybe wasn't as big of a giveaway as it appeared.

But, but they do seem inclined to allow all of the territory to stick with Russia, which I think is also the most likely outcome.

So these are huge concessions at the beginning.

In terms of your question in the strategy, I think, you know, I think with Trump, there's always a lot of rationalization.

You know, there's always a lot of people saying that he's playing three dimensional chess or that he's a master strategist.

You know, I think there's.

But, but at the same time, there's a lot of people who just say, look, it's obvious that he's a Manchurian Candidate and And he's.

Because every single statement or every divisive thing he does toward the US alliance system favors Putin.

But I guess I would, I would just make two comments.

One, he clearly rode to power on this wave of disenchantment that's been boiling for many years.

And, and, you know, people elected him in 2016 because the economy was too sluggish and inflation was too low, but they elect him in 2024 because the economy is too hot and inflation is too high.

So obviously, the American people are just discontented, and he capitalizes on that.

But in the current context, he wants to deliver tax cuts.

He's got to find a way to pay for.

For them.

In one area where people agree that can be cut is foreign aid, including military and economic aid.

And so I think he's going to cut Ukraine, and that makes everything else sort of a done deal.

If he's domestically motivated to cut taxes and try to find ways to save and pay for it, then Ukraine loses a lot of its funding, and then it's sort of driven into a very difficult negotiating position.

So I think there's that, but that's still pretty domestic focused and tactical.

So I guess if we were going to try to give him the benefit of the doubt and say that he's a very stable genius, then we would say, okay, he's trying to do a reverse Kissinger maneuver where he befriends Russia in order to isolate China.

And I think that that strategy won't work.

But I do think that that's the only way you could try to ennoble what otherwise looks like a pretty crass abandonment of, of a, of a partner.

Well, and, and not just, I mean, Ukraine, to your point, is not in NATO, is not in the eu There is no US Defense treaty with Ukraine or anything like that.

I mean, you can see why it would be in the United States's interest to support Ukraine in general.

But, like, there's no sort of commitment on paper.

But the way that united.

And by the way, if it had just stopped at Hegseth's comments, everything would have been pretty normal.

I didn't find Hegseth's comments out there at all.

It was a couple hours later.

It was, oh, Trump is negotiating directly with Putin without telling anybody.

And then it was, you know, J.D.

vance telling the Europeans the biggest threat to Europe is not China or Russia, but censorship.

And by the way, we need you to spend more on your military so that you can help us with the China threat and with the Russia threat.

Like, there's this like circular logic that didn't make any sense to me.

But I guess what this really comes down to is something I've been saying for a while, which is the future of Ukraine was never going to hinge on the United States.

The United States was going to get tired of Ukraine eventually it was going to come down to Europe.

And I don't know if you saw Boris Johnson is out there tweeting and trying to tell the Europeans to stop clutching their pearls that Trump is saying this all for effect so that the Europeans will get up and do something.

There was that emergency meeting in Paris where some European leaders got together and agreed to have another meeting to talk about the things they're going to do to support Ukraine.

What are your feelings about Europe right now?

Do you think this is the moment where Europe puts on its big boy pants?

Or is Zelensky sort of looking at the table and Europe's not going to be there and he's in a lot of trouble?

Yeah, yeah.

Well, great, great question.

I, I, I do think in general this is a strategic crisis in, in the way that, you know, 2010 was a financial crisis.

And so there will be an overall European response and they'll kind of blunder through it, but they'll end up in a place where Europe is more united and more coherent after all of it.

And I say that specifically because we've seen some interesting developments over the years where the so called populist parties or anti establishment parties, they manage to get elected, but they do so by sort of changing their policies so that they're more amenable to most European voters.

And then that, that enables, that enables the EU to broaden the tent basically.

And, and so we've seen a lot of that, particularly in Italy.

And it, it suggests, and like in Germany, for example, we have an election coming up now the leadership is going to remain with the centrist parties, but you know, that means that Germany won't really be drastically changing policies over the coming years other than to increase defense spending and, and probably try some, some, you know, deregulation and some pro economic growth policies.

So anyway, but the point is Xi Jinping and Vladimir Putin and Donald Trump are all playing this big boy game and this great power game and they're sitting at a table and there's no, there's no single European leader to come along and play the strong man.

And Europe isn't structured that way.

So even if Macron tries to sort of seize the mantle as the strategic power, the one with nuclear weapons, the one with the great history of diplomacy and clearly more of an international leader than Olaf Scholz, who may not even be around, you know, who won't be around.

You know, Macron doesn't fully fit the bill.

And it's just structural.

I mean, I think he could, if Europe were structurally different, I think he could play the role, but it's not.

So.

So anyway, they're dipping around, trying to find space in their budgets for defense spinning.

And I think that they, I think they have two basic things that aren't being talked about.

One is that the US has not actually betrayed Europe so far.

You made the point that US, you know, walking away from Ukraine is, it is an abandonment, but they're not a treaty ally.

But the news sometimes goes to the other side of that and says, well, the US Is abandoning Europe.

Well, so far we, we don't have that happening.

It is possible that Trump could vitiate the collective security with NATO in Europe.

And so we have to, I think we have to watch for that in the coming years.

But I also think that's where the US Establishment and the political parties and people in the government would start to really try to clip his wings.

The other thing is that if, if, if, if the US Actually is not yet abandoning Europe's security or the alliance, and then meanwhile, how likely is Russia to invade another country or to try to invade the rest of Ukraine?

That's also not really all that likely.

They've spent a fortune and they've killed 70,000 young men.

So this is a lot of evidence that Russia has really already stretched themselves quite thin and that the regime probably needs to embrace the olive branch that Trump is offering in order to try to stabilize its own domestic affairs.

So I guess what I'm saying is if the US Is not truly abandoning the alliance, and if Russia isn't planning on invading the Baltics, then what we could see is that Europe contributes a little bit more defense spending for now, and then this crisis sort of passes and we don't get the drastic changes or revolutionary changes in Europe that, that maybe some people were expecting.

But I think if you apply that long term test and you say you come back 10 or 20 years later, I do think it was probably a turning point where Europe has to cohere more and has to spend more on defense.

I was arguing with some analyst friends who were making fun of me.

They were like, oh, Jacob, you're pro Europe again.

We thought you gave that up in 2023, or was it 2024?

And like, whatever I can change my mind on this stuff.

You know, bite me.

But I wanted to ask something that you said there, which is, so long as Europe doesn't invade the Baltics.

And one of the thought experiments they threw at me was, so what happens, you know, why shouldn't Russia just invade Moldova right now or invade the Baltics?

And I said, well, Moldova sort of fits in the camp of Georgia and Ukraine.

Probably nobody outside of Romania cares about Moldova.

But the Baltics, the Baltics, that would, wouldn't that trigger NATO's collective defense?

And wouldn't the United States and wouldn't we have troops on the ground?

And they all laughed at me.

They were like, oh, come on, Jacob.

Trump has shown you that he's not going to do anything.

He doesn't care about this.

And the Europeans are weenies.

They don't have the capability deploy anything.

Do you think that's true?

Because I was pushing back against them and they were like, almost gaslighting me to be like, you're insane, Jacob.

Like, they just showed that they don't give a crap about the Baltics.

How, how do you respond to that one?

Yeah, no, I think that that's an overstatement.

I think that, you know, and similar things have been said about, you know, US Allies in Asia, but let's keep it in Europe for now.

I, I, I think that the US Would defend NATO and, and would defend the alliance.

I think there is a situation where Russia does some gray zone and pretty minor stuff and Trump ignores it or turns a blind eye.

And to be honest, Biden was doing that too.

Remember, Biden promised that he would defend every inch of NATO territory, but apparently that did not include subsea cables.

You know, so there has been a little turning of the eye just because nobody really wants an escalation to NATO Russia conflict.

And I don't just mean they don't want it.

I mean, all wars, you know, happen regardless of people want them or not.

But, but I mean that, that Russia can get away with a little monkeying around, but they can't get away with, with, with something really significant, like if they seize a railway in Lithuania, you know, to get to Kaliningrad, for example.

And in that case, we could have a scenario where Trump turns a blind eye and then the next day reverses himself because he's been given a very stern talking to by pretty much everyone around him.

And I could see something like that happening or even a week of, of power vacuum.

But I don't think that Trump is in a position to simply Walk away from Article 5 of the NATO treaty.

I just don't think he.

He is in that position, if he does, would be the perfect match to the insanity of Putin actually attempting to invade the Baltics.

Right.

In other words, at that point, we really are just dealing with madmen who are behaving like medieval kings and have no.

Who don't listen to their advisers and have no inhibitions.

And.

And.

And that could happen.

Like, I.

I mean, one thing, I think that people.

I think sometimes scholars can be overly reliant on rational actor theory.

So I'm alive.

Like, I studied the Middle Ages for a while.

I mean, I'm pretty alive to the possibility that humans just revert to chieftains and start attacking each other.

But I don't see the evidence that we're really there yet.

And, I mean, it goes to what you said.

Like, first of all, Ukraine got attacked because they weren't in NATO.

That.

And the risk was that they were going to be in NATO or de facto in NATO, and they were getting the wet by de facto in NATO.

They were getting weapons that were starting to tip the military balance and make it more and more costly for Russia to intervene.

So Russia felt like they needed to intervene sooner, and that wasn't an intervention against NATO.

And we just saw three years of war in which NATO lines generally were not crossed.

And so that gives us a basis for assuming that Russia doesn't intend to violate NATO lines.

And then in terms of Trump, you know, he is unpredictable, but if he abandons the Baltics and we have a strategic crisis in the region, he then becomes a liability to the United States, and then it's sort of all bets are off.

What happens within the turmoil within the US Halls of power.

Mm.

I was joking that probably the next real estate development for Trump, like, he's got the Gaza Strip, five stars.

Next will be Kaliningrad.

We'll call it Kalinologo maybe, or, I don't know, Marigrad.

I'm trying to work with the things there.

Just completely solve the situation.

Yeah.

That way there'll be a statue of Immanuel Kant and then right next to it, a statue of Donald Trump.

Stranger things have happened.

There is one great power, and I would call them a great power at this point, weighed in here, which we haven't talked about yet, and that is Turkey.

Erdogan came out and he pledged that support for Ukraine's full territorial integrity.

Now, he also said that Turkey would be there to support, you know, the.

Any kind of peace deal or whatever.

So he came off of that a little bit, but he did go out there and say very publicly, no, no, Turkey supports the territorial integrity of Ukraine going forward.

And then, you know, talking about, well, I guess not medieval times, but sort of, well, is it medieval times with the Ottomans, like going into Europe and, and trying to sack Vienna and getting stuff.

Be interesting.

If Turkey was the one that came to Europe's aid here and was the thing that actually pushed it back.

What do you think Turkey is up to here?

Do you think they have any kind of pull or are they just kind of playing on the side for concessions?

Because it seems to me that if Turkey wants to play ball here, it has some serious leverage it can use over the Russians, but they haven't, haven't moved in that direction recently.

Yeah.

Wow.

Yeah, that's a great question.

Well, okay, so I guess you know this, but just for those listening, it is important to state that Turkey, even though Erdogan and Putin have had a pretty decent relationship historically, Turkey has been afraid of Russia.

Just Russia's ambitions and pretensions around the entire Black Sea and Stalin's desire to get hold of the Bosphorus and Dardanelles.

This is a long term Russian desire to gain access to warm water ports.

And this is sort of vintage geopolitical material here where Russia thinks that they can get into the eastern Mediterranean and they would really have to do that at the expense of Turkey.

And Turkey has over and over again been in conflict with Russia over, over that and, and other issues, you know, like in the caucuses or whatever.

And, and of course you can imagine some historic situation where, or I mean, a replay of a historic situation where Putin is not only threatening eastern Ukraine, but he's threatening Odessa, he's threatening Moldova, he's threatening, you know, Romania.

But again, this is where NATO comes into play.

So with all that said, what we've seen from Erdogan is mostly just balancing through rhetoric and, and primarily focusing on his domestic economy and maintaining a pretty effective military.

So he sort of, he sort of carries a big stick, but he speaks loudly and, and I think we'll just see more of that because I, I don't see any inclination to actually get involved in conflict with Russia.

And, and I don't see any inclination to, to vitiate NATO either.

You know, like, and in fact, where we really started to almost reach a breaking point in relations with the U.S.

what we did see was Erdogan, just over the past few years, especially since his reelection, correcting course to try to make sure that he's, you know, not grossly offending the Americans.

So, so I guess it's just a balancing game and I don't think it's decisive.

But it does underscore the fact that even if you removed the US from NATO, NATO would still be an extremely large and powerful military alliance.

And so that's one of the, one of the key points that's missing in U.S.

discussions about NATO.

As if they could just, I mean, discussions like within the MAGA camp, as if we could just walk away from NATO, but the truth is that we could walk away from it, but then we'd start looking at it and thinking, well, actually it would be, it would be advantageous to be part of that alliance.

Yeah.

And I mean, I've also made the point where it's like, I can't get over this whiplash where it's like there's a reason the Germans don't spend more than 2% of GDP on their military.

We didn't want them to spend more than 2% of GDP on their military.

Do you remember the last time the Germans militarized?

Is this really the thing that you want to push them to do?

That seems a little bit nuts to me.

I'll say also just about Turkey.

I mean, Turkey still imports a lot of food from Russia, a lot of energy from Russia.

Like it's, it's a complicated relationship.

But Turkey has been pursuing like, you know, subsea gas reserves and it has been trying to increase its agricultural self sufficiency.

It's been building up its military.

It shot down, down a Russian jet inside of Syria.

The fall of the Assad regime, very, very good for Turkey.

Like that's Turkey winning in the long run in the Middle East.

So maybe Turkey's looking at the board and saying, just hold on a second, like abandoning Ukraine to the wolves is not in our interest.

That doesn't necessarily mean we want the war to continue.

But if somebody needs to step in here and give Zelensky a little bit of COVID or he needs some more drones or he needs some more military equipment, well, here's a Turkish manufacturing complex that would probably love to provide all sorts of goods to the Ukrainians.

And if it's paid for in Euros, the better, that's fine too.

And if it annoys the Russians, but we have plausible deniability.

Like you can see, like maybe he's trying to play the things off of each other and he's dealing with a Putin and a Russia, which to your point is fundamentally weakened.

This is not the Putin in Russia of six years ago, if you're Turkey, this is a Russia that has basically taken a big loss on the overall Ukraine operation, even if this negotiation goes in the right direction.

So I don't, I'm watching carefully with Turkey.

I feel like something, something is up there.

I wanted to go.

Oh, go ahead.

Oh, yeah.

Well, let me just say, first of all, I think it's a great point and I'll follow your tip on that.

But also, just to be clear, one, one really bad outcome would be if Trump is continuing to just offer giveaways to Russia and we end up with the Black Sea being a Russian lake.

Now, this is a threat to Ukraine in the sense that they wouldn't, if they can't reliably export goods from Odessa and from their other ports, then they can't be economically viable.

And then it's very hard to reconstruct.

And, you know, Europe and others don't want to lend them money because they're, they're not going to be able to get a return.

And from Turkey's point of view, that would also be an issue if, if, if the Americans sort of seed their traditional maritime supremacy by allowing Russia to just be blockading Ukraine at a whim.

That means that Ukraine, and of course Ukraine has, you know, Russia has obtained Sebastopol, which is in, in many ways what this whole thing is about.

That is a long term problem for Turkey.

So I do agree with you that they, they need to make sure that they raise a stink if Trump looks like he's going to just flub up the entire negotiation and, and, and give Putin his heart's desire.

Yeah, the maritime supremacy of the United States.

Another one of these classic geopolitical tropes.

Let me try out a hot take on you.

I'm not sure that this is fully cooked yet, but you're a good audience to try this out on because somebody, I gave this speech yesterday recording February 19th.

This will be out on Friday, so it'll still be pretty current.

But, so somebody asked me after my speech yesterday, hey, Jacob, have you read Peter Zeihan's work?

And I was like, yes, I've read Peter Zion's work.

I've worked with Peter Zion.

He's like, well, what do you say about him about the much vaunted United States Navy and how it controls and protects global trade and things like that?

And I said, I mean, the United States has already ceded naval supremacy.

It hasn't even shut down the Houthis from shutting down shipping in that part of the world.

We don't build ships anymore.

Shipbuilding capacity in the United States as a percentage of the global total is something like less than 2%.

Maybe we have, you know, 300 or 250 of the best ships in the entire universe, but what happens when China builds 3,000 and just sails them into our ships and we have none left?

Are we going to build more?

Are we going to be able to do it?

It seems to me that in some ways we've already, maybe this is the world's best kept secret.

Like the US Navy can't be the global policeman as it was anymore.

And so maybe the Black Sea is up for grabs.

And maybe if you are a Russia or a Europe or a Turkey, you're waking up to the point of wow, if the Americans can't even shut down the Houthis, what the Black Sea is up for grabs?

Like, maybe we need to make a play here.

Maybe we need to position ourselves accordingly.

Think I'm too, too hot?

Take there.

Or do you think I'm onto something?

Maybe a little too hot.

You're on to something.

But, but I do think that I like.

Okay, a few things.

First of all, I think it was a Biden administration foreign policy failure not to, you know, shut down the Houthis when they started attacking international shipping.

The US should have said, look, this is totally separate from everything else.

You know, going back to the Barbary pirates.

We just don't let people do that, shut them down and basically say, and basically reassert the, the traditional U.S.

interest there, which is to maintain free navigation.

And, and that that was honestly inexplicable for Anyone that studies U.S.

foreign policy history or geopolitics.

So it was an abnegation and it shows that Biden administration was paralyzed.

And I made this argument a lot during the time that they were really paralyzed.

They were paralyzed because of the domestic political situation they were in.

They just really did not want things to escalate in the Middle east and they were willing to take all kinds of punches to prevent that from happening.

But it resulted in, in a power vacuum and Israel was all too happy to fill the vacuum.

So we now we know what happened anyway.

What that means though, is that if I'm right, Trump will actually quite quickly and we actually have seen a few Americans, in fact, in December after the election, Biden did crack the Houthis once.

But I think also Trump would be very quick to do that.

And I think Trump will also have to have a very forward policy in the Persian Gulf because He's shutting down.

You know, he's, he's actually exercising the restrictions on Iranian oil exports now.

And that means they're going to be striking back, just at least symbolically, to sort of try to put pressure on him and tell him not to enforce the sanctions.

So I think we're going to see him exert the traditional maritime influence.

I do worry about the Black Sea, and I think that'll be a great test of this.

You know, then we'll know.

Because if, if he does sort of allow Putin to run a constant blockade on Ukraine and, and dominate the Black Sea in that way, then that would speak to your point that the Americans are basically ignoring, you know, things and.

Living on reputation, not on actual power.

Yeah, yeah.

So that, that, I agree with that.

That would be a big one.

But also, of course, if we look at what's been happening in East Asia, US has been very vigilant, and that's been true across administrations, and I think it will be true with Trump.

A lot of the funding that they're trying to, you know, about 200 billion that they're trying to write into the next defense bill would be for building ships and, and building up the Navy.

Now, you can scoff at that because of course, we know the US Is going to be borrowing that money.

And we also know that the capacity to build ships, as you said, is a lot smaller than it used to be.

But I also would just point out that the US Has a lot of allies who are effective at building ships, too.

Right.

So we've got the South Koreans and the Japanese, and currently we can defend them.

So in a way, you could argue that this is exactly what Trump is trying to address is the weakness that you pointed out, which is that a traditional American interest, pretty much bedrock in US grand strategy, has been neglected because of a commercial interest that predominated for about 40 years.

And my best guess is that Aukus and, and other initiatives will result over a 10 or 20 year period and the US having a fairly sustainable industry for its defense.

And I think that's what where the rubber meets the road here.

And Trump's discussions of manufacturing and trade are a lot of times throwing out red herrings and stuff.

But what America really does need is to have a sort of reliability on its, on its defense industry.

I completely agree with what you said about the Biden misstep on the Houthis.

I have been surprised that the Trump administration hasn't corrected that yet.

I was expecting obliteration of the Houthis, like relatively early in the Trump administration.

It hasn't been forthcoming.

Maybe they're trying to position themselves next to Iran.

Because here's one of those situations where the Trump administration doesn't seem to, hasn't decided what it wants.

It wants to drill, baby drill and export, baby export.

So it wants good enough prices for US Oil exporters to make a lot of money, but then it also wants really cheap oil so that the US Consumer doesn't have to pay higher prices and inflation doesn't keep going up.

And if you obliterate the Houthis and piss off the Iranians, at least one leg of that chair is fallen.

We don't even know what they want the chair to look at.

But, yeah, it's, it's, it's a, it's a thing of some consternation to me that three weeks in or four weeks in that Trump hasn't corrected Biden's mistake there at all.

And it makes me want to double down on the take, which is to say, well, not even the Trump administration is going to, is going to do it.

And if they're not going to take out the Houthis fairly early on, like, what are we talking about here?

Well, look, this is, this is very small poker here, but I'll go for it because, and we don't have to bet necessarily.

But I'm just saying, like, my guess is that the easiest way for Trump to get a few claps and a little, little early sign of his willingness to use military power would be, you know, but, but let's not forget that the Israelis have hit.

Hodeida was hit pretty hard, and Biden did actually end up taking some actions after the election.

So it may be that you and I just need to, to look into the details of what, what's actually, you know, how much the Houthis have actually.

Been degraded, not degraded enough that shipping has recommenced as it was before the attacks, like that, that to me, is where the rubber meets the road.

And if people, if insurance companies aren't willing to ensure ships going through there, if ships aren't willing to take the risk of going through there, like, that's all I really need to know there.

But I want to go back to something you said after our little Black Sea Persian Gulf interlude, which is you said that we're probably going to get a centrist German government.

Any, any percentage chance that CDU, CSU looks at the AFD like maybe they get 31% and then AFD gets 20% and they, they say, okay, like Maybe this is game on for us.

No chance at all.

1%.

Oh, no, I would definitely give it a chance.

I mean, I, and that's what Friedrich merits immigration bill was about, was sort of broaching that topic and, and doing it before the election to, as a trial balloon and as just a breaking of taboos.

So, so I would give it a chance.

But what he saw, what happened was that more conservative, well, let's say, I don't know, more centrist CDU members defected from his coalition on the second vote in that immigration kerfuffle.

And so what it showed is that he can't hold the center together if he goes in that route to try to build that coalition.

So that's why we, that's why I agree with you that it's very low probability.

So I guess I would say, you know, 10% chance.

If, if the only way to put together a coalition Is with the AfD and they've got the numbers and they can do it, then I think, I think they'll at least have some discussions.

And those discussions will of course be highlighted by the media and there will be a lot of wailing and gnashing of teeth, but I think it will be discussed.

And what that does is it puts it into play for future political cycles.

Yeah, it just seems to me that trading one traffic light coalition for another traffic light coalition doesn't give us a Germany that can be that leader of Europe.

To your point, if Macron hadn't failed in that election gambit last year, maybe he could have, you know, played at the great power table, but he's so weak at home domestically, EU structures don't let it work.

But if you had a strong German government that was reforming at home, getting rid of the debt break, and then also saying, enough of this, you know, of Europe being weak, like we're actually going to assert ourselves, like, that's an interesting scenario, but it requires a German government that is not negotiating with the SBD and the Greens and trying to give, you know, be everything to everyone at the same time.

I'll also just note because I wanted to ask you, just both you and I are also in the investment world here, so we can nerd out about the geopolitics all we want, but with all the talk of German de industrialization and it's the end of Germany as we know it.

German Stock Exchange is beating the S&P 500 the last couple of months.

Mr.

Market seems to be quite happy about what's happening in Germany and the prospects of things to come here.

So talk to me about what you think about what's going to happen with the German election.

And, and maybe let's talk a little bit about Mr.

Market and whether there's an opportunity there or whether that's fool's gold.

Yeah, I mean it's been a really research macro.

Researchers have loved to talk about Europe over the past decade because European stocks are very cheap, but they haven't beat American stocks.

And it's happened over and over again.

You know, so it's, it's not a new discussion.

But I, I am aware of what you're referring to and to be clear, in my own publications, I have not been, you know, participating in the doom and gloom about Europe recently.

Like specifically since Trump was, you saw, it was sort of like a light switch where as soon as Trump got elected then the, the news media started really lamenting, you know, the fate of Europe.

And some of it's a little bit overdone.

I mean the main thing is that this election will bring a more market friendly government into power.

And that's, that's not only by bringing Freedom American and the CDU back in to power, but it's also that this, that the spd, the socialist Social Democrats, they, they are a party that can lean in a pro market direction when they need to.

And having been thrust out of power and then now likely joining this coalition, they'll, they'll, they'll necessarily need to be in a pragmatic mode.

And so that means they'll have to endorse some deregulation and some, some like pro business rhetoric.

They'll need to try when they, when they try to get business support for spending that's going to be based on the manufacturing industry which needs to adjust to the China, ongoing China shock.

And I think they can get some support there.

And then of course they're, they're going to be behind defense spending.

So, so I think we'll see a, a more, you know, we'll have a loosening of the debt break.

We'll have more and more defense spinning which go together and that will be more overall more government support for, for aggregate demand.

And then meanwhile you'll have some cutting of red tape and potentially some other reforms.

And I think obviously this is going to coincide with cracking down on immigration and all of these things are things that basically need to be done.

And everyone who's watching Germany and Europe recognizes that this is sort of the zeitgeist and this is what's going to come out of this government so all of that has been a minor relief.

And the question though is what is the sustainable basis for a rally in German assets?

You know, like, we can grant that a ceasefire in Ukraine and a new government that's pro business.

These are, this is a tailwind in the short term.

We can also say that if Trump is afraid to use tariffs extensively, or if Trump is clearly using tariffs just as a negotiating tool, then some of that can, some of that risk can be overrated.

And maybe it's already priced in.

But you still don't have a German economic model in the wake of what, what was their previous model.

You know, you still don't have a normalization.

They can't return to Ost Politik in detente with Russia.

They can't completely throw themselves in with China because of what China is doing at home.

And that's something we should talk about later.

But China is not making structural reforms or concessions that involve broadening its market access to exporters like Germany.

So you still don't really have, you don't have technological leadership.

So there, there still just isn't really a great path forward for Germany.

And so that's why I would view this as a counter trend rally that's happening right now.

But everything depends on time frame.

And given the huge disparity in the valuations between the US And Europe, of course, I think that from a risk reward perspective, it makes more sense to be taking on risk in European equities.

I'm just saying we shouldn't get ahead of ourselves in terms of whether there is a durable, long term productivity boom in Germany.

Yeah, I mean, the uncomfortable way that the German model would continue is to open up new markets and add new markets to the EU and extend the supply chains out and get cheaper and cheaper labor, which.

So maybe Russia is off the table.

But boy, would it be nice to have Ukraine in the cards there.

Boy, would it nice to be in charge of rebuilding Ukraine.

Let's go after the Balkans too.

Maybe we can start looking at North Africa.

Like, I don't know, it just starts to ring true there.

I think you're exactly right about needing to turn to China, though.

So let's talk about China a little bit.

I think, you know, the way that China's dealt with Trump so far and the way they've dealt with the United States so far, pretty much a master class.

I mean, none of the melodrama of, you know, Canada's leaders or Mexico's leaders, just, you know, very sober statements, you know, relatively minor tariffs on Things the Chinese don't import that much from.

And, oh, like we'll deal with it and we're going to continue to go on steadily along our way.

How are you thinking about China right now?

Well, I don't disagree that the best play for them is to retaliate proportionately or slightly less than proportionately so as to signal to President Trump that he's only damaging himself and that, you know, raising tariffs will have consequences in the midterm elections, etc.

I don't disagree with that.

But, but I, I do, I find, and I, this may not apply to you, Jacob, but I find that there is still a very strange unwillingness in the Western media to talk about China's domestic politics.

And it, I guess it has to do with the fact that we just don't know that much about China's domestic politics or in some cases, you know, it's a black box and you're sort of doing piology and, you know, guesswork.

But the other element is that now that Xi Jinping has consolidated power so thoroughly, maybe some people feel that, well, there's nothing much to say, it's just Xi Ping's opinion.

And so we can't really talk much about Chinese politics.

But, but my point is that when you look at what they have been doing, China's clearly of the view that they do not need to rebalance their economy.

And I, I, I never thought they would.

So this is from someone who always sort of argued that rebalancing was overrated.

Right.

But here we are.

You know, it's, it's literally 13 years after the hubbub around China rebalancing.

And every single time that dream just gets squashed.

And what we saw in the, in the numbers in this, in the National Bureau of statistics for 2024, what we saw is China fell back on exporting.

Exports were a huge, they were a 40% contribution to growth in the, in the last quarter.

They also fell back on infrastructure spending, you know, which they need to, because nothing else is going on.

But I mean, the point is that this is a regime that is falling into a debt deflation trap and its solution is sort of negligent.

You know, they're, they're not really willing to, and, and, and let's put it this way, if they were willing to just do the Keynesian route and provide massive fiscal spending and helicopter money in these things to try to, to redistribute to the households and rebalance that way, that's still, that's still an option.

But what's interesting is that requires giving the household some more influence and creating a new faction, a new, a new layer of society that would be like a nouveau riche that would then have all kinds of opinions and influence.

And that's something the Communist Party has been afraid of.

They also have been afraid of inflation.

They see that Biden and team did helicopter money and a lot of spending, and it got them kicked out of office.

So they're sort of paralyzed on that front.

But at the same time, deflation, debt, deflation is manifestly going to lead to higher unemployment.

So there's no answer coming out of the regime other than the idea that, well, we can just keep engrossing global manufacturing because the Western governments are so topsy turvy.

They change, they forget, they roll over, and in the end, they don't do anything.

So what we're looking at is this steamroller of the Chinese manufacturing sector, you know, and it does make improvements, enhancements, and it's walking right into the United States electing a, an avowedly protectionist leader who has a penchant for tariffs.

And so I look at this as when we, when we sort of separate the noise.

And it goes back to some of your earlier questions as well, like, what is Trump's strategy?

We can't entirely explain what Trump is trying to do with Russia, but if you read the confirmation hearings of his officials and if you look at, like, his national security adviser, Mike Waltz, and what he's written, this team believes that what they're doing is making a ceasefire in Ukraine so that they can pivot to containing China.

That's what, that's what the administration believes.

And I can't see how we're not going further down that path.

China's not making any of the changes.

The Americans are getting more confrontational.

And, and we see that as they progress on the technology side, the Americans are going to be more likely to double down on third parties actually trying to enforce the, the export restrictions.

So, to me, this is likely to lead to one of the surprises in the Trump administration, which is that we're still in a conflict with China and that we're sort of sleepwalking into a conflict.

Yeah, that's interesting.

And I'm with you on people's unwillingness to talk about Chinese politics.

And I think there's actually a lot to talk about.

Everybody talked about JD Vance's speech at the Munich Security Conference.

I thought more interesting was Wang Yi's speech afterwards in which he talked about multipolarity and China as A partner China sounding like the more innocuous one in terms of, you know, projecting values and power on the European continent.

I thought that was interesting.

I thought Xi Jinping's meeting last week with a bunch of the tech overlords, including Jack Ma, was super interesting because it was five or six years ago that he was bringing them all to heel and slapping them on the wrist and telling them they needed to follow, you know, the party's directives.

And now he's saying, you guys are going to be the vanguard, you guys are going to push forward.

How can the Chinese government, like, be there to support you in these endeavors and things like that?

So, I mean, there have been some interesting things happening with Chinese politics.

I also wonder, you know, if I wasn't one of these people who believed that there was a sea change coming at the end of last year.

That was a narrative that was out there, and I think it's been pretty well rebuked at this point.

But I will say, part of me wonders if China the whole, the whole time knew exactly what you did, which was, no, Trump is a protectionist president.

He knows that we didn't meet our phase one requirements last time.

He's probably going to take out the tariffs and go for us this time.

We need to save, like, our big helicopter money and our big moves for when he actually tries to crack down.

And when we do that, we'll be able to do that in the context of rally around the flag, you know, the west is trying to humiliate us again, blah, blah, blah.

That, that might be rose tinted glasses like, that.

I might be guilty of what people were guilty of last year, which is, oh, finally China's doing it.

But I do wonder if there's something to the idea that they're keeping their powder dry because they know a bigger crisis is coming.

So, so I appreciate you mentioning that, because that was my argument in 23 and 2024, which was basically keeping the powder dry.

Like, first of all, where they really are going to save up their powder is for when there's a global recession, whatever the cause may be.

Second of all, they knew that Trump might get elected, impose sweeping tariffs on them, so they needed to have some for that as well.

I, we have seen a change in the rhetoric for sure.

The, the, the key issue still is the coordination problem between local governments and the central government and, and households and private businesses.

Meeting with the CEOs was notable, definitely a change in, in the signaling.

But, but what has happened over and over again for China watchers is, you know, this past decade is they'll do these little gestures and signals and they're sort of trying to tap into, often they're tapping into nostalgia for when Dung Sha Ping would make a famous trip and you know, to the south of China and herald the coming of capitalism.

You know, but what's interesting is that with Xi Ping, there's no delivery.

It's, it's the signaling without the delivery when it, when it comes to, to capitalism and when it comes to business and, and private sector.

So they, so anyway, I, I would.

But anyway, for, for the purposes of our discussion, I think in this coming People's Congress in March, I think we will see more robust support and is specifically, it'll be fiscal support for the household sector.

I think they have to do that.

And the tariffs just add additional catalyst.

I, I don't think it'll be gigantic or a bazooka yet.

I still think that a global recession is when they would really wheel out helicopter money or, or, or, or, you know, a credit and fiscal impulse greater than 10% of GDP.

But they're, they're, they have to do more.

And, and then finally, when it comes to making a play for Europe, here's the really key thing.

The great opportunity for China to make a strategic play to embrace Europe in the light of American protectionism was back in the first Trump term and especially in the wake of COVID But what was so interesting was to see them basically alienate Europe and confront Europe in a way that now we have rising European tariffs on Chinese imports.

So I think what we're witnessing is this machinery, the machinery of the Chinese production clashing with the desire of Europe to maintain its manufacturing and not de, industrialize.

And I'm not, I'm not really expecting them to get along.

They don't have the same security dilemmas that the US And China have.

They don't have the same military tensions in the, in the, in the East Asia sphere.

But, but they, they do have the trade tensions and I think it'll get worse.

Yeah, we've, we've talked about Europe, we've talked about China.

What, what we've got time for one more topic.

What do you think is the, the third important thing of the week or, or of the year so far that you think listeners should, should focus on?

You know, I think we, we probably should talk about Iran in the Middle East.

I know that, I know that this.

Job security, I love it.

Yeah.

I mean it's a perennial, it's a perennial issue.

But one thing I'VE tried to explain as an intro to this topic with especially people in the investment community is, look, I mean, and you know too, because we've been following this saga for a long time.

I mean, I've been following this saga for 18 years and it goes up and down.

But we're really reaching a critical juncture because of the succession process in Iran.

You know, Khomeini is not going to be around forever and he, he has to try to prolong the Islamic Republic.

And if he fails at that, well, fine, he fails.

But the reality is that a leader like him and the way that he's lived his life is he's trying to perpetuate this revolution and this regime.

And the ultimate pathway to regime survival is nuclear weapons.

He's expanded the centrifuges, he's expanded the highly rich uranium.

If, and of course they're now openly discussing the possibility of doing some of the formal things that they would do to signal that they're going this direction, like removing the fatwa or, you know, walking out of the non proliferation treaty.

All of these things are provocations.

But I think the strategy is quite similar with North Korea where the, ideally you want to get a nuclear weapon but not get bombed in the process.

Right.

So that's the strategy.

And that means that there could be a negotiation with Trump.

And Trump is very negotiable.

You know, he, he loves to think that he could somehow do better than the 2015 nuclear deal that Obama negotiated.

My problem with all this is that I just think Israel is, has an enormous opportunity.

And I think even if Netanyahu vanished from the face of the earth, that the next prime minister would also recognize that this is, this is a once in a generation opportunity to undermine the regime and set back the nuclear program.

So unless Trump preemptively restrains Israel, I think we will find that Israel continually pokes and prods and, and, and provokes and escalates this crisis.

Because, because if they don't, you know, then, then, you know, if they allow Trump to negotiate a short term, sort of superficial deal, Iran freezes their nuclear program.

But of course they don't really get rid of it, then, you know, it could be five years down the road and Iran could be in a much better position than they are today.

So, so I'm, I'm afraid this is leading to a larger conflagration.

Yeah, I've, I've been guilty of underestimating Israel's capabilities significantly since October 7th, but that doesn't make me think that they have the capability to go after Iran's nuclear program meaningfully.

Like, maybe they can set it back a bit.

But it seems to me that, you know, trying to do what they did to Hezbollah, to Iran, that feels like a bridge too far.

But, you know, I, I, I've been wrong about them so far.

So, so maybe I'm seriously underestimating their capacity.

Well, we, we don't know.

And, and, and to be clear, I do, I know where you're getting at there, because I'm not saying that they can.

Obviously, you know, like, the famous example is they need the bunker busters from the US and this is a constant discussion.

The US did transfer some bunker busters to take out the tunnels that Hamas had been building, but that was, those are much lower grade.

My point is they can go for regime change by, by striking critical infrastructure.

And as the conflict intensifies, there is a threshold at which the United States will be drawn in to resolve the issue.

The US doesn't have an interest in Iran getting a nuclear weapon either.

Now, Trump could end up, you know, sticking to his sort of campaign slogan, which is, which is, we don't need any more forever wars.

We don't need any more quagmires in the Middle East.

So he could end up being true to that line.

But I think what would be a really rich irony of the Trump administration would be if, if, when all is said and done, yes, he shuts the border, and that's his sort of claim to fame.

But if he, otherwise, if he just cuts taxes and bombs Iran, then he's about as conventional of a Republican as you can get.

And, and that could very well happen.

And I think there's a lot of deep state actors who would be very pleased to direct the President's attention to the nuclear program there, as opposed to, say, breaking up the NATO alliance.

Yeah, I mean, and they sort of did this the first time around with North Korea.

I mean, I think they came much closer to attacking North Korea than people actually realize at the time in the first term.

So, so maybe they're looking for number two.

It's, I don't want to be too cynical here, but I'll indulge me here.

Let's say everything you say comes to pass.

Does it matter for the world?

Like, if Israel and Iran and I are taking potshots each other across the Middle East?

If I'm China, I'm, like, cool.

Like, as long, as long as I can still get oil from somewhere and I've got Russia, like, right up here.

Probably willing to sell me cheap oil.

Like, why do I care?

Like, good that the United States is going to get dragged into that morass.

And you know, the ironic we're going to pivot away from Europe to focus on China, but we're going to take care of Iran on our way there.

Like, that's probably great from Beijing's perspective.

Well, I, I agree that I, so a few things.

One, I, I do agree that it would be a window of opportunity for China if the US Got sucked into yet another fiasco or conflict in the Middle East.

Now it, I, I wouldn't be quite so flippant about it in the sense that it, as of today, they still import 45 or 50% of their oil from the Middle East.

So, and they can't project their own power in the Middle east to, to guarantee that supply.

So I think they're actually still very sensitive to what happens in the region, but they can't affect it.

And, and I, and I agree with you that they wouldn't, they wouldn't be, you know, all that sad to see the US Go down that path because it just exacerbates a lot of the domestic and internal divisions that the US has been experiencing.

And, and the, you know, the world is funny, the world would not thank the, obviously, the world's not going to thank the US for taking away Iran's nuclear weapons.

Right.

Like, obviously Israel and the US Would come off looking like the, the bad guys and they, in a way they would be, especially if they act preemptively.

So, no, I, I recognize all that and I think that's, you know, that, and that's where Trump's, that's, this is where, you know, an individual with immense power at a critical juncture can have an influence because Trump can decide that the US Is simply not going to fight that fight.

And it, it really may be his decision because it, it, because it could very well be the case that what the intelligence agencies and Department of Defense are saying is, well, look, you're going to be the one on whose watch Iran violated an American red line and got a nuclear weapon.

And, and that's, you know, that's happened with many other countries before.

It's Israel in this case.

That would really be different about it and try to take exception and make a change.

So that's where I'm watching.

But last point on that, with regard to China and whether it matters, I always tell clients, like, when I talk about the Middle east, that's just a conflict.

Right.

And we've had multiple Middle Eastern conflicts.

If you're looking for global stability, like global stabilization, it's not a ceasefire in Ukraine.

That doesn't really matter.

It's not a nuclear deal with Iran or even airstrikes on Iran's nuclear program.

What really matters is for the United States and China to form a new mode of living with each other.

And that will not be just a phase two trade deal.

You need some combination of reasserting the status quo over Taiwan, negotiating a phase two trade deal, and, and a, and, and a joint communique that is an, a strategic understanding not to attack each other's ways of life and not to, not to violate each other's sovereignty.

And those things can happen.

I don't know that.

I don't really think that's what's going to happen under the Trump administration.

But if it does, then I would be the first one to say, well, look, Trump has effectively bought the world, you know, a decade of a peace dividend, perhaps.

Well, Matt, I think we'll leave it there.

I think that's plenty for us to chew on and I hope you'll come back on soon.

I have no doubt that the world is going to give us plenty to talk about as we go forward.

Yeah.

Thank you.

Thanks for having me, Jacob.

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