47 Crises in 17 Years | E189

Transcript generated by Descript.

Jacob Shapiro: [00:00:00] Hello, listeners, and welcome to another episode of Cognitive Dissidence. As usual, I’m your host. I’m Jacob Shapiro. I’m a partner and the director of geopolitical analysis at Cognitive Investments. Rob and I are back at it for our weekly chat. I love all our chats, but this was a really good one. We talk about an interesting article about globalization, economic crashes, and use that conceptual framework to talk about Janet Yellen’s visit to China, about the U.

S. China relationship now, and post a potential Trump visit. Presidency, the U. S. [00:00:30] Japan relationship, what Kishida’s visit to Japan means, what is so interesting about it and why we think the end might do something different than what the rest of the market is saying. We are positioned accordingly. And we also talk a little bit about at the end, putting that together and thinking about globalization and the future of globalization in general.

You can email me at jacob at cognitive dot investments. If you want to talk any more about any of the things we talked about here or anything else. It’s on your mind. I love getting your emails. Thank you for sending them in. If you have not left a rating or a review [00:01:00] for the podcast, please consider doing that as well.

Otherwise, take care of the people that you love. Cheers and see you out there.

All right. I’m rejoined by Rob, AKA Nostradamus. Rob, last time we were here, you said that a true black swan scenario would be an earthquake in Manhattan. And before we even published the podcast, lo and behold, there was an earthquake. In Manhattan, so listeners you’re getting the real deal [00:01:30] here. I’ve had a couple of requests from listeners, Rob, about topics that you shouldn’t predict anything about because they’re afraid you’re going to completely upend their lives.

Congratulations on that great call. I’m sure that we made a lot of money going long earthquake futures. Nice to see you.

Rob: What can I say? I’m just that good, Jacob. I just make things happen. George Soros, see your heart out.

Jacob Shapiro: Yes, the Global Zionist Conspiracy had nothing to do with the earthquake, in case listeners were wondering.

I can make that joke because my last name is Shapiro. Calm down if that got your panties. [00:02:00] Okay, everything’s fine. Let’s move on. There’s a lot to talk about today, and I was struggling with how to put it all together. But I think I want to start maybe at the conceptual level, and then we’ll talk about some of the things that are happening.

in the world right now that we think are important. And by conceptual level, if you can’t tell listeners I’m really on a New York review of books reading kick because I subscribed to it earlier this year after a long hiatus and I’ve been loving it. And they had a great article this week by they, Trevor Jackson wrote a great article in the New York review of books for the most recent edition.

And if you would [00:02:30] like access to it, hit me up. I’m, I can share it with you. And it was basically He was reviewing two books that give histories of economic crashes in the 18th, 19th, and 20th centuries, generally speaking. And there were a lot of things in the article that were interesting, but I just want to point out two, because I think they will lead into some of the things we’re going to talk about specifically, which is China and Japan.

The first part, and this does not lead into it, this was just good in terms of vocabulary. They talk about the difference between different types of words to talk about the economy. Specifically, the difference [00:03:00] between a crash. And a panic And a bubble and a crisis. And we use all these words interchangeably today.

But they do a good job of talking about, a crash was actually when something was steeply discounted. Panics were considered outbursts of collective irrationality. So something, crazy happened and there was a reaction and then it went back to it. A crisis was supposed to Or the first time that it was referred to as an economic event was probably by your boy Montesquieu, Rob, one of your favorites.[00:03:30]

He talks about, in his Spirit of the Laws in 1748, talking about monetary manipulations in 1720 and refers to them as a crisis. But the word crisis has a medical or theological meaning that there’s a turning point. You discover that there’s a disease or you discover that Jesus is real or something like that.

And then you rediscover your faith or something happens. So there it’s an inflection point, but then there’s a recovery. It’s not an open ended sort of never ending moment where everything is terrible, which is the way I think we use the word crisis [00:04:00] today. And they also talk about the word bubble.

Which I think is another word that we use a lot here, but that bubble was there was something malicious to it. It was something about deception. Speculators in the 1700s were apparently known as bubblers. And if you got cheated, you got bubbled, which I think we should bring all of that parlance back.

So I thought that was really useful. Cause I think we use, I can’t tell you how many times I go out and talk and it’s, Oh my God, the world is a crisis. Everything is terrible. But I think we’ve lost some of the nuance of describing what things are. And I thought that was really useful. [00:04:30]

Rob: Didn’t Adam Tooze recently use the term poly crisis to describe what’s going on right now?

Am I remembering that right? I think so. I think he said that.

Jacob Shapiro: It’s like crisis squared. Lots of crises. I’m out here using the word multi polarity. I was trying to search for synonyms the other day for multi polarity and apparently poly polarity is one of them. The problem being that doesn’t really help us much.

It still sounds really pretentious and terrible. But the second point in the article that I thought was interesting and will back us [00:05:00] into talking about. Janet Yellen’s visit to China and Kishida’s visit to Biden and some of the things we’re thinking about with China and with Japan was about something I didn’t really know, which was describing the 30 years from 1944 until the end of the Bretton Woods system in the 1970s as the quote unquote 30 glorious years.

And they were glorious because statistically there were fewer economic crises or panics than there were in other periods global GDP growth rates during this [00:05:30] period from 1945 to 1971, or roughly double what they have been since the 1980s. And I think of this time as globalization, but the article made a really good case that this actually was not globalization, that Bretton Woods was actually the United States rejecting globalization, which was seen as a sort of.

idealistic 19th century idea that had brought about the world wars, but was about, creating an alliance network of countries that were sympathetic to what the U S wanted. And that really, it was [00:06:00] actually about restricting movement of people and of capital and things like that. And the article concludes that there’s no going back to Bretton Woods.

But that one of the lessons. And the unintentional lessons because the book that the author is reviewing actually make the case that globalization is really good. That globalization is the greatest force for human prosperity and enrichment that the world has ever seen. But the reviewer notes that how do we make sense of that if that period from 1945 to 1971 was actually better in lots of ways than these quote unquote [00:06:30] globalization periods?

Because it seems that we don’t get economic crashes when there are capital controls, when there are strong unions, when you have high taxes, when you have more relative equality and stricter financial regulation to say that succinctly, when capital is weak and labor is strong. I can tell now that the author is a Marxist, obviously, But he has the data to back it up.

So I am sure that you have plenty of responses to this, and I wonder if you were going to take issue with Jackson writing that the unfettered power of capital [00:07:00] might be good for globalization, but it’s inimical to democracy, stability, equality, and even economic growth. Are you going to punch back at that, Rob?

I’m expecting you to, you surprise me sometimes.

Rob: I think it’s a really complicated topic to address. And I guess the way that I would. I guess the way to begin to do so is to frame it in a different way, because I think the author is really compelling when he essentially tears apart the two books in the sense that both of them are trying to put some [00:07:30] kind of narrative around this globalization is the ultimate good.

I forget what the other one was, but it was some silly thing like, we’re, we’re. It’s all about debt and, this mechanism is what causes all the crises and we’re learning from history and we’re going to do less of that. And, there’s always this desire to oversimplify, to to come to conclusions, to too soon with a lot of this kind of analysis.

So I think in that sense, it’s a really good discussion and a good [00:08:00] article. The, um, the way that I would think about it is this, like this guy obviously is making the case that globalization is not positive and especially the globalization of capital. I would agree with that. And I think that’s one of the things that really doesn’t get spoken about nearly enough.

is the fact that something that we hold out in many areas of public discourse to be an unalloyed good, free [00:08:30] capital, free markets globalization, the sort of Economist magazine. Not to pick on them again, but that is the party line, that, that really permeates a lot of what normal people talk about, on a regular basis, unless you live in France.

Really problematic if you look at that. And I think he’s very valid in pointing that out is. It’s the notion that unfettered capital flows has a really rocky history. And if you want to understand the underpinnings of that, all you have to [00:09:00] do is look at Hyman Minsky’s work and especially the way that he interprets Keynes.

Because his sort of framework, his theory, which I find very convincing is centered around the idea of that instability. is endogenous to capitalism. That because you have the freedom to speculate about the future, to anticipate what’s going on in the future and to move your [00:09:30] capital around in accordance with that, that because of the way human beings work, because we’re, wired in this way, you naturally have these panics, crashes, bubbles and that’s just part of the system working.

So I think the criticism of mobile capital in that regard is very valid, but I guess the way that I would spin it differently is. [00:10:00] If it is endogenous to the system, and the system itself has had such a beneficial impact, which I think is hard to argue against, then maybe that’s just the price you have to pay, and how bad are these so called crises after all, which I think we can talk about.

One of the books points out there’s been 47 crises in the last 17 years. It’s was that really a crisis? No, the black death is a crisis. Britain leaving the [00:10:30] European monetary union for two months because they Pinned the currency too high or pegged the currency too high is not exactly I’m going to register on most normal people’s crisis radar screens.


Jacob Shapiro: anyway, that’s well and I take your point because this Goldilocks period from 1945 to 1971 probably only happens because they’re rebuilding after World War II. So it’s a combination of so much stimulus to rebuild what was destroyed. Soldiers coming home and having lots of [00:11:00] babies. So you get a massive demographic dividend over this time period.

Like it might not have anything to do with globalization or deglobalization at all. It might be that Goldilocks period was a result of the cataclysmic crisis that came before it. And of course you were going to get sort of good things for. growth and for labor and all these other things when you had these different things happening.

So I take your point there. But the reason I wanted to start there because I know that you and I could wax philosophical about this for the entire episode is because there’s two things that happened this week [00:11:30] that were pretty important. And I think we’re going to debate a little bit about what their importance was.

And why don’t we start with Janet Yellen’s visit to China, which I did not, which did not stick out to me when I first looked at it. To me, it was a continuation of a trend, but I know that it really excited you. So I’m going to set you up to to talk about it. Before I do, though, I just want to note, I love the way the Chinese media covers Janet Yellen.

They are obsessed with what she eats. They’re obsessed with the way she uses chopsticks. They’re obsessed with the restaurants that she [00:12:00] goes to. They’re obsessed with. Did she get more psychedelic mushrooms? Like I’m here for all the Chinese, Janet Yellen commentary. It really brightens my day when I’m looking through the media, but why don’t you, Janet Yellen was there.

She gave some remarks. Why don’t I set you up Rob to talk about what Janet Yellen said and why you think it’s important. And then I’ll push back a little bit.

Rob: Sure. We can maybe link to the actual statement in the show notes if possible. But Maybe this is blowing things a little out of proportion, but I read her statement, which basically said, [00:12:30] today we’ve decided on a mechanism where we’re going to have regular exchanges, regular collaboration with the Chinese to figure out the problem of imbalances.

That was the gist of it. And to me, that really stuck out as, I think I put in the knowledge platform. It’s like a 1985 Plaza Accord kind of moment where you have imbalances that have been building up for a [00:13:00] very long time. We’ve talked about them a lot.

Everyone is familiar with what they are now. But the fact that major players in the leadership in the US side and obviously on the Chinese side as well, recognize the issue and are actually making an attempt to try to figure it out. And I don’t know how genuine that is or whether it will turn into anything.

To me, that’s a very big deal and it’s different from the [00:13:30] discussion that I think we’ve seen so far, which has been speaking across purposes. Not really trying to address the root problems, which is, excess savings overcapacity, all of the issues that we’ve talked about here.

So again, maybe it goes nowhere, but the very fact that they’re talking about this in the sense of tackling this together for the mutual benefit of both countries, and I think that’s really important because it is. As she pointed out in the [00:14:00] statement, it’s not in anyone’s interest for the U. S. and China to decouple.

And China has a gun to its head because it is the current account surplus nation. They are the ones who are exporting their insufficient demand abroad. And they’re the ones who are at the mercy of China. The current account deficit countries, whether that’s through tariffs, whether it’s through capital controls, whether it’s through anything else, China is not playing a strong hand of cards here.

So for [00:14:30] Yellen to open the olive branch, even at some level and say, Hey, let’s figure out how to find some way of alleviating these imbalances together. To me, that seems like a really big deal.

Jacob Shapiro: Yeah, the two words that were used over and over again in her statement and also in the readouts of the Xi Biden phone calls by both sides.

So when both sides are using particular language, I take notice. They’ve been describing all the talks as candid and constructive. [00:15:00] So that is the sort of tenor of the relationship right now. I want to do a brief bit of history. So when the 2008 subprime crisis emerged, one of the first things that U.

S. economic officials did was they called their equivalents at the PBOC or in China. And they said, we need to work together to manage the contagion because it’s not good for anyone if we let this economic crisis go and explode everywhere. And China and the United States did in 2008 work together to limit the contagion of the 2008 financial crisis.

I think one of the reasons [00:15:30] China gets frustrated with criticism. of China in this regard is that part of that was China taking out the stimulus bazooka, and that was their part. They had to consume a bunch of stuff, build a bunch of ghost cities, and prop up prices because they needed the Chinese consumer market to keep revving, and they did their part, and I don’t think they feel like they get credit for that.

Whether that’s true or not, we can debate that another time, but I think that’s in their psyche. The next major change in the relationship comes not with the election of Trump, but with the combination of the African swine [00:16:00] fever, Epidemic in China and then going into covid So if you remember the trump administration is trying to negotiate that phase one trade deal in the midst of those negotiations China reveals that its pork herd has been afflicted by african swine fever.

It’s a holocaust Of chinese pigs. It’s one of the most important protein sources for china and they’re looking for help They’re looking for help in managing this virus They’re looking for more pork supply things like that and rather getting a united States that wants to work with China. The Trump administration uses it as a cudgel for more [00:16:30] concessions in the phase one trade deal.

Aha, you must now buy more pork or more of this or more of that. And we’re not going to talk to you until you agree because we know that you’re the weaker party here and you need help and that bleeds into COVID 19 because COVID emerges. As that deal is the phase one trade deal is being finalized and China doesn’t want to reveal for a lot of different reasons.

But I think one of the reasons was doesn’t want to talk about COVID because it thinks the United States is going to use it against it in the context of trade negotiations, which was not an irrational thing to think based on how the [00:17:00] Trump administration had gone. And relations are frozen in that level of mistrust until last summer.

You might remember last summer was when. Nancy Pelosi was gallivanting around Taiwan on her farewell tour, and nothing really happened. And nothing really happened because shortly after Pelosi got back, and after all the recriminations and things like that, we talked about it on the podcast, there was that article in the Washington Post that said that Biden had reconsidered the relationship, that he did not want to be the author of a second Cold [00:17:30] War, that he thought that U.

S. policy around China needed to change. And at the time, we talked to people and we sent out notes to our clients saying, this is an inflection point. This is something very different. Biden is going to try and walk back from the ledge. And despite all of the problems in U. S. China relations since then, it has been a steady improvement.

So I would tell you that the beginning of this process, this is the culmination of a process. It’s not the beginning of a process. And it goes back to being able to read the tea leaves by being able to find. The leak in the Washington Post while everybody else is [00:18:00] obsessed with Nancy Pelosi and Taiwan and a third world war.

There’s a lesson there in how to think about geopolitics and things in general. So I think we’re seeing the culmination of those efforts in general. And I think you’re absolutely right that it’s a major change and that since that moment, The United States and China have been working more closely together and that U.

S. companies in China have relaxed a little bit and China has relaxed a little bit when it comes to the United States. Now there’s two problems I think with thinking that Yellen’s visit is a continuation and what, an [00:18:30] acceleration, doubling down, whatever you want to, what word you want to use of the U. S.

and China seeing eye to eye. The first is that it’s election season in the United States and Donald Trump is. Probably coming. I shouldn’t say probably coming. That’s a little bit too too sensationalist for me We’re going to talk about the inflation print in a little bit But when I see hot inflation prints that to me is the drumbeat for trump Maybe being re elected and when I look at the polls in the swing states Things are not looking good for biden even before the inflation print So if you’re china, the u.

s. Election is hanging over [00:19:00] the entire dialogue and all the progress that has been made over the last 12 months. So Yellen can eat as many psychedelic mushrooms as she want, as she wants. If Biden loses and Trump gets in there and he gets in there and he’s pissed off because China didn’t follow through on their commitments in the phase one trade deal.

And he follows through on implementing 60 percent tariffs on all Chinese imports. This is going to amount to nothing. This is going to be a laughable thing. The second thing though, and I think this is more of the sort of challenge Is that after Yellen left China came out [00:19:30] and rebutted some of the things that she said.

I think the part of what she said that really probably, Stuck out to you what she was talking about how she discussed with her Chinese counterparts China’s macroeconomic imbalances And I’m quoting her now here. Namely it’s weak household consumption and business over investment aggravated by large scale government support in specific industrial sectors and she goes on to talk about how The United States is trying to avoid what happened with steel, where China made a bunch of [00:20:00] steel, flooded the global market with steel.

Steel prices get super depressed. U. S. Steelmakers get hurt by it. They don’t want that to happen with solar panels and EVs and battery materials and all these other things. So that is the thing that Yellen was there primarily wanting to work together with the Chinese about. And after she left the Chinese response to that was not really in keeping with those things.

For instance, there was one Chinese think tank that said, Oh, they can’t win the race. So they’re trying to slow us down. China’s finance [00:20:30] ministry said that China’s, China had already fully responded to her concerns. And that. This really wasn’t about trying to dumping lots of products into the global markets that, that China was just more competitive in these areas than the United States was, and that this is really all market driven and pointing to, the U S government and the EU government is pointing, putting all these subsidies in to encourage manufacturing of exactly these things.

things and that the overcapacity that the U. S. is railing about is really just a manifestation of market mechanisms at [00:21:00] work where supply demand and balance is the norm. And that it, the United States is casting stones in its own house. If it’s saying, Oh, China can’t do this because China’s just doing exactly what the United States did.

So those are the two reasons that I’m cautious of saying anything is going to come out of the Yellen visit. I will say, however, if Biden ekes it out, This is another lily pad on the way to the scenario that you’re talking about. And that scenario would be good. It would be good if the United States and China were on the same page.

It would be good if this was the start of a plaza accord for the [00:21:30] global economy in general. But those are the reasons I’m skeptical. And I saw it in the vein of, Ah, all right, this is part of Biden’s thing. But like for this to happen, Biden has to win. And he’s not really getting the stuff that he needs to win, at least in my view at this point.

This, that might be a good segue for inflation, or I’ll let you riff about that. No,

Rob: I guess, I think there’s different constituencies within on the Chinese side, first of all. So it’s hard to tell, what the consensus view is to the extent that there is [00:22:00] one. Second of all, I think a lot of the people, there’s a lot of money to be made just like there was a lot of money to be made on the property side, which is now deflating and they do not want to reinflate.

There’s a lot of money to be made on. The industrial side where industries are being supported and encouraged to build capacity to go abroad and, compete in global markets. So Yeah. The people who benefit from that are naturally going to be more vocal. It’s a very visible thing, [00:22:30] but I think that the most of the people who know what’s going on in China probably recognize that is not big enough to buoy the whole economy and to outgrow their problems.

And it’s also something that’s not quite as sustainable. So like property development, for example, they had a 15 year run. And, you building ghost cities and building [00:23:00] second and third apartments for people who are going to, plow their excess savings into them. That’s a much easier thing to do than to build a lot of EV companies and have them go abroad, because you very quickly run into the limits of that strategy and it’s a much more visible one.

If you’re building excess capacity in apartment buildings, no one outside of China really gives a shit, and they’re very happy because they can sell you all the inputs to go into that, and the cement [00:23:30] companies and iron ore companies, everyone’s, applauding you for it. There are only, three years into this strategy on EVs, for example, then they’re already running into major roadblocks and the Europeans are coming out, the Americans are coming out and saying, no way, this is not gonna, this is not gonna fly.

So I think you’ll see some chest thumping around, they’re just trying to slow us down, but. But assuming that the people who are pulling the levers [00:24:00] in the regime are really smart, and they are I think they’re probably more worried about this than they let on or people think. I think they’re trying to figure out what to do and to get any sort of peaceful lifeline from the U.

S. or even a, an opening. No, I don’t know. I would be looking for signs that they would be trying to engage more and take advantage of that.

Jacob Shapiro: No, I think that’s what China wants, and I think China would [00:24:30] prefer to keep going down this road. But I see them prepping for either scenario. They, If they get another Biden victory, great, then they’ll work together with the United States and maybe even Europe on things like overcapacity and China could certainly use lots of help in that regard.

It would not be good if semiconductor supply chains and AI and critical technologies were cut off from them as they have been in recent years. It’s hurt Chinese companies. I think they’re also, though, setting the table for if Trump wins and let’s say he imposes the 60 percent tariffs, I think he, she is [00:25:00] setting the table for, okay, look, we tried.

And again, the barbarians betrayed us. We’re just going to have to take some really harsh medicine here and reformulate our economy the same way that Huawei did during the first Trump administration. It’s going to be really hard, but rally around the Chinese flag because we are dealing with people that we can’t trust and can’t be hypocrites for.

So it’s where the U S domestic political politics, I think it’s going to have really long term impacts because if you’re China, you have to prepare for the diametrically opposed outcomes of Biden versus Trump. And I see in this, the [00:25:30] seeds of that as well rather than any firm commitment, but I think you’re right.

I think all things being equal, China would like the Yellen path. There’s a reason like they’re dining out on her mushrooms and why they’re talking about Chinese public opinion about the United States improving during this time period in general. Which is probably, I wanted to make a segue here to Japan because and maybe we’ll, I can’t decide if we’ll talk about inflation in the context of Japan or if we’ll do it afterwards.

Cause it’s hard to put these things together. But another thing that I think cuts against [00:26:00] the U S and China plaza accords, 2. 0. potentiality is it wasn’t just Yellen that was in China. It was Kishida came to Washington for a big state visit. Lots of fanfare. One of the gifts that the Bidens gave to the Kishida family was a volume LP set signed by music legend, Billy Joel.

So now Billy Joel making his way into global geopolitics. What a Great thing for him at the end of his career. The New York Times also reports that the meal for the evening was house cured [00:26:30] salmon, a dry aged ribeye steak with blis with blistered shishito pepper butter. So they’re eating very well in the White House.

I thought you guys might like to know that. I’m always curious what these guys are eating and these things. Ribeye strikes me as a strange choice. I think I’d want something a little more tender. So I wasn’t like, Chewing gristly fat like during the context of a meeting, but maybe I’m not giving the White House chefs enough credit Maybe they’re gonna marinate it and make sure everything’s fine.

Anyway, sorry I’m if you can’t tell I like want to be Anthony Bourdain and I keep on trying to bring food back into it And it’s not happening. [00:27:00] So But the United States is talking about this visit as the biggest thing Since the signing of the u. s. Japan Security Treaty in 1960 That’s the type of language that Biden is using about this visit.

And when you start reading sort of the reporting on both sides in the United States and in Japan both leaders are fairly weak when you look in the polls. Kishida might not last the rest of his government. His party will, but he might not be there the whole time. And Biden, as we’ve discussed, is facing an election challenge.

And one of the themes [00:27:30] seems to be establishing some level of permanence in the U. S. Japan relationship that Trump could not overturn, that Biden wants one of his enduring legacies To be that he strengthened the U. S. Japan relationship. And this was actually one of the first times that I’ve seen sort of the Biden White House, even if it was anonymously, even if it was in the context of this meeting, say to the New York times, we’re trying to create as much permanence as possible before the election.

That’s them saying, Oh, we could lose. So I wonder if we’re going to see things from the Biden White House, reading the poll numbers and [00:28:00] doing damage control in addition to trying to win the elections. But some of the things that they agreed to greater coordination and integration between the military forces of Japan and the United States, the formation of a joint defense council they’re going to discuss more defense related exports of equipment that can be produced in Japan, new cooperations in space, in research on artificial intelligence.

semiconductors and clean energy, all the things that the United States has problems with China about. And [00:28:30] then they’re meeting today. They’re welcoming Mr Marcos Jr from the Philippines for a trilateral meeting to talk about a more aggressive effort to isolate China, to push back against what China is doing in the South China Sea and to protect specifically the interests of the Philippines, but also all countries in the South China Sea that have these differing sort of territorial spats with China as well.

All of which is to say, okay, you’re sending Yellen to China to play nice. Meanwhile, you’re hosting China’s biggest rival [00:29:00] historical enemy and saying, Hey, we’re going to make a bunch of weapons with you and we’re going to upgrade our security treaty with you. And we’re going to also let the Philippines in on it.

And we’re going to start doing even more aggressive actions in the South China Sea. If I’m China, like I’m looking at Yellen’s visit and everything that she said, and then I’m looking at the Japan development and my blood is boiling. Because you’re very clearly setting things up there.

So that’s the geopolitics side of it. There’s also the economic side and maybe I’ll let you riff on it from there or we can talk about the geopolitics side if you want, before we get into [00:29:30] the economic side.

Rob: No, let’s, since they’re so tied in together, why don’t we, what’s your take on the economic side as well?

Jacob Shapiro: Let’s, I just wanted to lean into why we chose this week to, to make a really big bet on the yen and to explain that to the listeners, I think probably it starts with the March, 2024 CPI report from the United States up 0. 4 percent over the last months last 12 months, it is up 3. 5%. Basically, everything [00:30:00] rose.

Energy was up 1. 1%. Food was actually relatively flat. Shelter, services, you name it not a good inflation print in general. If you look back at changes from the previous year it really is core CPI and services were leading the charge here rather than food and energy, which hovered around 2%.

And as a result, the market is now not pricing in as many rate cuts as they were before. I think they’re still pricing in two or something like that, but it’s not going to be the next one. Treasury yields are up and the yen starts deflating. And I’ll [00:30:30] let you take the story from there and why we saw this as an opportunity and how it ties into these other things.

Rob: Purely on the economic side there’s a few interesting elements out of this. I guess the first is. The fact that the narrative around U. S. inflation is now just durably changing and that’s been the thing that we’ve been harping on every week from, the last 18 months or the last year or so and that’s gone from us speculating about it to it’s happening, whether you look at market pricing, whether you look at [00:31:00] the narrative in the media, I think, The consensus is beginning to adopt our thesis about re accelerating inflation, re starting the hawkish rate cycle all of these things, and that’s what juiced the dollar against foreign currencies, is that reset in in rate expectations, because when rates go up, the currency tends to appreciate because you can earn higher U.

S. dollar yields all else equal. So you have this [00:31:30] re accelerating cycle in the U. S., and I’m sure you’ll speak to the political issues around that. But specifically when it comes to Japan, there’s a few important things to think about here. The first is from a monetary policy standpoint.

And part of the reason why we did take a big position in the yen this week is the Bank of Japan has come out and really for the first time said something different. And what they said was because remember the currency is not the Bank of [00:32:00] Japan’s remit. That’s the Ministry of Finance. It’s always been the Ministry of Finance and the Bank of Japan technically is not supposed to worry too much about the currency.

Like they intervene. At the ministries behest, but it’s not part of monetary policy per se. And what they said this week is a bit of a twist on them because they, multiple members came out and said. Basically, hey, we’re going to take into account [00:32:30] the currency and potential moves in the currency in response to what we say when we’re formulating monetary policy.

So in other words, if you think of like reflexivity, the traditional definition is when a, the price of something in the market impacts the fundamentals, the bank of Japan is beginning to think in these terms. And it’s beginning to think, Hey, if the currency goes down, that’s going to accelerate inflation.

On its own, and that has never really been [00:33:00] explicitly part of their decision function. And now it is they’ve always come and, talked it down a little bit and said, Hey, if the currency depreciates too much, that’s a problem. But now they’re clearly saying we’re going to change what we do and what we say.

Based on our expectations for how the currency markets are going to interpret that. Now that sounds subtle, but it’s a big change. And I think it shows that they’re really worried about what’s going on in [00:33:30] you, in the U S with inflation, with rates going up and that interest rate differential, because depreciate too much or too quickly.

Because that’s cost push inflation going into Japan. That’s not the kind that they want. They don’t want energy prices in Japan to go up. They want wage push inflation. They want accelerating wages to push, demand. And demand, causes everyone’s expectations for growth to go [00:34:00] up.

That’s the kind of inflation that they want to engineer. And if you get too much currency driven inflation, where the cost of everything is just going up, Then that could really sidetrack that whole process, this virtuous circle that we’ve been talking about that they finally maybe are starting to engineer in the country.

That’s a big difference, and I don’t think people are focused on that because if you look at the speculative positioning and the Japanese yen right now, the spec futures [00:34:30] position is the biggest short position since 2007. Really the biggest short position ever, except for a very brief period in 2007, so everyone is on the other side of the boat.

And if you get any move from here, for the, for intervention in the end or any signaling that things are going to start to turn around, I think you could potentially have a stampede in the opposite direction.

Jacob Shapiro: I’ve made this point before, but I’ll [00:35:00] make it again. People often make fun of Chinese statistics and say how hard it is to get information about the Chinese economy and Chinese thinking about things.

And I’ve always said that’s not true. There are so many different resources, whether it’s China Beige Book or the Chinese government itself it’s very clear what the Chinese government is thinking and what the Chinese government is doing. That’s never been true of Japan. I think there’s a real dearth of understanding about what makes Japan tick in English media and all you have to really do, and you can do this with Google translate.

I didn’t learn Japanese [00:35:30] overnight. Just go and look at what the Japanese papers are saying, and you will see a different world completely described because like you’re saying in, in, in Western markets, okay, everybody’s speculating about the yen’s going to get weaker, but if you go to Japanese papers, it’s the yen’s depreciation has gone too far.

Japan warns that all options are on the table. And there was even one, bank of Japan survey that said the Japanese companies expect the dollar To trade at 141. 42 yen by March 2025 for that to be the [00:36:00] average out to March 2025 it’s at what flirting with 153 right now So that’s exactly the move that you’re talking about right there.

So I think for a lot of different reasons, people get Japan wrong. Not because there’s anything so complicated about Japan, but because people just don’t take Japan on its own terms and it’s really unique geopolitics on its own terms. The other thing I would say, and this is not necessarily directly tied to this, but there’s a steady drumbeat of Stories coming out about what Japan is doing to reclaim its position at the [00:36:30] forefront of the semiconductor industry And lots of different countries are doing this passing subsidies and trying to encourage TSMC and other companies to Gear up for being more self sufficient when it comes to when it comes to semiconductors But there was one article this week that was basically talking about a fairly small Japanese farm town that Japan is going to transform, or at least is trying to transform into a semiconductor supply chain hub.

And it’s one of the few places [00:37:00] in Japan where population is going up. Real estate prices are surging. Local universities are teaching people how to work in some of these semiconductor companies. It’s, their TSMC is bringing over hundreds of workers and paying salaries that are 30 percent higher than other manufacturing jobs in the area, just so that you can get sort of semiconductor renaissance there.

Japan, it seems to me as the one country that is actually cashing the checks on the semiconductor industry that a lot of others are writing. And that sort of thing. Re globalization, whatever you [00:37:30] want to call it, like that should be good for Japan’s virtuous cycle, to your point, if they can ward off the risks that they have from having to import so many things and having to be exposed to prices in that way.

Rob: And just to tie this back into, the notion of rebalancing and China and the geopolitical side of Japan and the U S and what they’re speaking about this week, one of the things that people often forget is Japan is china, the ghost of China’s future. Japan was China in the eighties and has shown us the [00:38:00] way or one possible way for how China might progress from here on out, because it’s a very similar model.

But in many ways, Japan is still trapped in the same imbalances that China needs to address in arguably a more severe way. But Japan also has a deficiency in demand. It’s also a current account surplus nation perpetually. And that’s weird. Japan is a major developed economy. There’s no reason why it should run perpetual current [00:38:30] account surpluses other than internal dynamics within the Japanese economy that are similar to what’s happening in China.

We always think of Japan Oh, it’s a democracy and it, no, it’s not. It’s very much more similar to the Chinese model than the U. S. model, even though, they try to, in a cosmetic way, paint themselves as a Western, capitalist semi laissez faire economy, it’s very much not, right?

So you know, one of the issues in a [00:39:00] quieter and more dependent way, Japan needs to find a way to, it needs demand. It needs to go out and find demand in the world. And the U S is that source of demand. And I think just bringing this to geopolitics for a long time, I think Japan was hopeful that China was going to be that source of demand and they’ve increased their integration with the Chinese economy.

China has grown in terms of importance as a Japanese market. But [00:39:30] if they are concluding wow, China, they’re really not going to figure this out. And in balancing, rebalancing, pardon, is going to be a really tall order. They might be throwing their hat back in, full bore with the United States, thinking that the United States is really their only hope for achieving that balance.

Jacob Shapiro: Yeah, I think that’s exactly right. But I want to problematize this a little bit because first of all, and this is I’m not frustrated with the White House for this, but [00:40:00] I am frustrated with all of the U. S. major publications that are covering the Kishida visit for sort of not digging a little bit deeper.

So Biden is talking about this is the biggest thing since 1960s, since Eisenhower signed the security treaty, blah, blah, blah. That was a renegotiation of a quote unquote, treaty in 1952, which basically said the United States may have troops in Japan whenever it wants. And that 1952 agreement, which was the end of direct U.

S. management of Japan in the context of conquering them after World War II and giving them [00:40:30] a little bit more autonomy back, caused lots of protests. Japan hated it. They were very angry that the United States was being too heavy handed. So it wasn’t that 1960 was, oh, we’ve become friends, everything is great.

It was, wow, we’ve created so much animosity in Japan and we need Japan in the context of the Cold War that we need to figure this out and we need to give them a little bit more agency. So when you’re saying this is the biggest development since 1960, 1960 was a response to a crisis to bring us full circle to the language that we’re using here.

It wasn’t a, we’re best [00:41:00] friends. And this is where it’s really interesting to think about Japanese intentions because Japan has bet big on China. And I think that one, and I’ve talked about this also before, but I think it, it warrants mentioning again, the West is very much you’re with us or you’re against us.

It’s Jedis and Siths like it’s, you’re one axis of evil. All that sort of thinking, whereas Japan has never been like that. And I think. And maybe I’m wrong about this. Maybe something has fundamentally changed in Japan. But I think Japan wants both. I think Japan [00:41:30] wants to say, yes, we want a deeper relationship with the United States.

And also, yes, we want Chinese consumers consuming our products as well. Because if we can, say get at the front of the semiconductor industry, Commanding heights of the semiconductor economy. Great. That means China is going to be dependent on us rather than Taiwan. We want to have that economic integration, even as at the political level and at the security level, they’re our biggest rival.

Japan has historically with its foreign policy, been much more comfortable with gray areas, with discrepancies. They [00:42:00] don’t need things to line up perfectly. Whereas again, with the United States and Biden is More nuanced than Trump. Trump has had no nuance. And I don’t just mean Trump here.

The U. S. isolationist wing that Trump has become the manifestation of, there’s no nuance there. There’s just one black and white viewpoint. That might be some of what’s going on, or maybe Japan really is making a shift. But I think that’s an interesting part of this. To what extent is Japan really signing up for all this?

To what extent, Are they worried about changes to the relationship because of changes in the Japanese and US [00:42:30] governments? To what extent is just Japan saying what it needs to say so it can continue on its own road as a more sovereign, more independent power from the US Alliance network? I’m not quite sure.

And then the last thought I would just say here is, this relates back and is why I wanted to start with the conceptual conversation about globalization is that Japan. Came to its current position in the context of that Goldilocks period. So Japan rebuilds its economy from 45 to 71, which again, those authors are making the point.

That’s not an era of globalization. [00:43:00] That’s the United States doing battle with the Soviet Union in the context of the Cold War and helping to rebuild the Japanese economy. When you actually open up the world to more competition, China wins, because China has more people. And China does not have any liberal democratic trappings.

If they want to have special economic zones that have rules that bring people in, they will have the special economic zones. So it’s not a coincidence that That as soon as you get the turn towards globalization, China starts to do all the things that Japan used to do and assumes the role [00:43:30] that Japan did.

I would just note that China didn’t do it the way Japan did it. They didn’t do it as a U S ally, as part of this sort of closed garden of liberal democracies. They did it in that globalization era. And maybe that will have implications for where it goes from here. Maybe they’re in the same place. Japan is the ghost of future past, but I do think that’s noteworthy that China emerged in a very different world. And if the world is going away from globalization that cuts against China’s strengths are massive consumer market, a billion people, they can say [00:44:00] X and a dam gets moved from a river, even though they have to move 10 million people, like that works in a world where globalization is the bottom line.

It does not work in a world where considerations besides cost or what are driving these decisions.

Rob: Again, just to start at the conceptual level and then bring it all the way back to, the Japanese stock market today. In, in some ways, and I’m going to struggle to say this clearly, I think we’re seeing the after effects of the 20th [00:44:30] century only now.

And what I mean by that, just getting to his discussion in the article about the period post World War II, the, the 30 glorious years. Where capital movements were constrained that was a period where you started to see the splitting between the two types of systems. You had the globalized system, the U.

S. The US is the epitome of the open system and we’re the ones who absorb the capital from the [00:45:00] rest of the world. We’re running like we’re at the apex of the globalized, side of that. And then you had countries like Japan, like China, who like the very definition of that development model. And the way that they got rich was by not doing that, was by not relying on outside capital, was by turning the, putting up the walls against that and extracting capital from their own system, from their own [00:45:30] population and being self sufficient autarky.

And that’s That is, I don’t, again, it’s, controversial to lump the Chinese and the Japanese together in this way, but they’re so similar in some ways because that is a non liberal mentality. That is a control and repression mentality because you’re literally squeezing capital out of your population and using it to invest rather than trying to get it from countries that already have capital.

Like the rich United States, like the [00:46:00] rich Europeans. That’s not how they did it. It’s not how they got rich. And that was able to work and to thrive because the U. S. was this indulgent superpower that would maintain its position as the sort of liberal consumer of everything that they wanted to.

To produce and send our way. And that’s been the story since post World War II. And now like those tectonic plates are [00:46:30] shifting and the U S if you want to look at all the crises that we’ve had, speaking of crises and how they’re connected with debt, so many of those crises are related to the fact that.

The U. S. needed to balance that out somehow, so we created debt internally. Every ridiculous promotion, the housing bubble of the early 2000s, like every stupid thing that Americans have done in the last 40 years, in many ways, have been because interest rates were too low. We have a [00:47:00] system that creates bubble after bubble, and that’s how you keep demand.

Going sufficiently to balance out, the insufficient demand from these other countries. So Japan and China now face these tectonic plates that are shifting because the U. S. That’s why I think this Yellen thing is interesting because they’re supposed to be the pro China party.

And they’re coming and saying look, this is a major problem. Like we cannot abide this. We are [00:47:30] losing elections because of this because of UREVs, because of, The perception that we’re being had, and that is the major change here. So everything I think needs to be seen in that framework. What is China going to do?

What is Japan going to do? Because they either have to reform those systems internally, and each of them has their own issues in doing that, or they need to find ways to try to perpetuate that status quo as long as possible. And the Japanese are [00:48:00] notoriously good at manipulating the United States into, You know, basically supporting them and thinking that we think that we know what they are all about.

And they do we know so little about Japan. It’s shocking. If you really look at how few American experts there are who like really are embedded in Japanese society and speak fluent Japanese and really understand, there’s a dozen people that we always rely on for the same views and stuff.

Like it’s a remarkably close society, even after all this time. I’m going on and on at the conceptual level, [00:48:30] but to bring that and zoom it in today, look at the Japanese stock market right now. The Japanese stock market is reflecting the idea. That status quo is going to perpetuate because Japan, Japanese corporate profits are based on, like that’s why stocks always go up when the end goes down, because they say, Oh, exports are going to go up.

So that’s going to be an interesting test if they have to change [00:49:00] that, or if they can find a way to. To double down and to build more semiconductors, to build more capacity, to sell into the U. S. and replace the Chinese boogeyman. Even though they’re they’re the old uncle of the boogeyman who’s over the hill and changed his ways a bit.

But still hasn’t really, hasn’t really stopped doing what he used to be doing. That’s a weird analogy, but

Jacob Shapiro: no, but it’s right. Like Japan, like people thought Japan was going to take over the world in the United States until they had their property crisis. And then [00:49:30] it was a joke that hasn’t worked for China.

China’s had its property crisis and its bubble is deflating and because of Taiwan and because of all these other issues China is still seen as the boogeyman, but I think you’re also, I think we should underline exactly what you said there, which is that these are illiberal policies in the sense that it’s about extracting capital from the economy itself.

And you’re right. Both us political parties want to do this. Biden wants to do this by taxing the wealthy and Trump wants to do this with tariffs. which is [00:50:00] taxing the people who consume these products. Like those are both extractive policies. No matter what you think, like there, there’s no dog in the fight.

If what you want is free trade. Let’s put that a little finer. There’s no dog in the fight. If what you want is yes, give us the Chinese EVs. We want the glut of solar panels. I don’t want it to cost 50, 000 to put solar on my house here in New Orleans, which is what it would cost here. I looked into that a year or two ago.

I want it to cost 5, 000 with those cheap Chinese solar panels. It does nothing for me if they’re made in the United States or if they’re made [00:50:30] in China. I’m, making a point sort of tongue in cheek there. And that’s what, that’s what we’re pushing against. That’s how the world is changing.

And it’s not a fight the, I don’t know, it’s not a fight that the United States has historically been good at outside of wars. It usually takes a war for us to all be enough on the same page to make autarky work. As soon as you get out of World War I, or as soon as you get out of World War II, you could argue the Cold War there a little bit.

Like you said, China and Japan are better at these things, but apparently we’re copying their model here. It starts to get confusing.

Yeah, [00:51:00] I don’t

Rob: I don’t have an answer

Jacob Shapiro: for that one. He doesn’t have an answer for that one. All right. I think we should probably close it there. Any other parting thoughts for the listeners, Rob? Maybe you want to, we’re going to have a conversation about AI disruption next week. You want to plant a little seed about what that’s about and how people can sign up for more?


Rob: So we’re going to talk about AI because, a lot of people don’t realize this, but a significant portion of our work is around technology and technology disruption both on the positive side at [00:51:30] Cognitive, where we’re building portfolios for clients to harness the positive.

Technology, the positive aspects of technology revolutions. And if you remember on the negative side, I’m also director of research at off wall street, which is, the longest standing and most successful under the radar, short short selling research firm and in the U S and we do a lot of work looking at technologies, disruption on the dark side, who gets hurt, who are the losers, who gets displaced, [00:52:00] who becomes obsolete.

Who is the the Eastman Kodak of the AI generation. We’re going to have a conversation about AI and some of those disruptive elements next week. But in the meantime I wrote a memo for off wall street clients that we are making public and going to, every quarter.

Share our memo of where we see sort of disruption where we see value destruction in markets And if people would like to sign up to receive that you’re [00:52:30] welcome to because as I said It’s it is for the public if you would like to do that You can email Jacob at cognitive dot investments we’ll talk about it next week to give you a sense of the sort of work that we’re doing.

That’s that’s something that we’re going to be focused more on in public to match how much we’re focused on it behind the scenes.

Jacob Shapiro: Sounds good. Any last second black swan predictions has something come as a spider sense come to you in the last month that there’s going to [00:53:00] be a tornado in the Arctic and it’s going to destroy the poles and we’re all going to be floating upside down or something this time.

I don’t know. I’m

Rob: feeling like one of Saturn’s moons might do something weird this week. We’ll have to say, Oh

Jacob Shapiro: gosh, Saturn’s moons buckle your seat. I don’t know if that’s a bubble or a crisis or a panic. Maybe it’s all three. When Saturn’s moons get involved hopefully I’ll talk to you side up next week.

Thank you so much for listening to the Cognitive Dissidence podcast brought to you [00:53:30] by Cognitive Investments. If you are interested in learning more about Cognitive Investments, you can check us out online at Cognitive. Investments. That’s Cognitive. Investments. You can also write to me directly if you want at jacob at Cognitive.

Investments. Cheers and we’ll see you out there. 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 [00:54:00] 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.

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