China, France, and Steel | E197





Weekly Update 89_mixdown

[00:00:00] Jacob Shapiro: Hello, listeners. 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. Before we start the podcast today, I have a favor to ask of you. I don’t normally ask for favors on the podcast.

We don’t charge any money for the podcast. You’ve probably noticed there are no ads on the podcast beyond Rob and I patting ourselves on the back. We’re more likely talking about some of our mistakes in terms of our investment strategies. But I could use Just 120 seconds of your time in the show notes.

There is a link to a survey that we are putting out It’s a survey about us potentially designing a curated exclusive community around things like our research Monthly consultations maybe in person events things like that. We’re really trying to explore whether people want this Whether there’s appetite for it, what types of things people want.

So it’s a five or six question survey. It will literally take you less than two minutes. The link is in the show notes. If you could just stop what you’re doing right now and fill out that survey for me and get back to whatever you’re doing and don’t do that. If you’re driving or if you’re on the trip, if you’re listening to this on the tractor as a listener told me, he likes to listen to the podcast when he’s on the tractor.

I do that when you get back inside. But I would super appreciate if you could just take the time to, to answer those survey questions for us to figure out if this is something that, that our listenership and our community even want. So thank you in advance for doing that. Rob and I are back at it for our weekly chat.

Rob is deep in earnings this week and I’m on the road. So we riffed a little bit. We we talked about China and the U. S. We talked about France. We talked about and of course our usual level of humor is there for you as well. So we also recorded a day early. So we recorded on Wednesday, May 1st. I assume nothing insane is going to happen between now and then, but if anything feels outdated, if we missed any cataclysmic thing that happens on Thursday, which I hope doesn’t happen that’s why, and we will certainly update on it if not immediately next week.

So, not a whole lot else for me to say, take care of the people you love. Cheers and see you out there. Listeners, welcome to the 10th most popular politics podcast in Pakistan. We are happy to be with you. How’s it going, Rob? I thought we were number six in Pakistan. No, we dropped four slots. We are number 10 in Pakistan.

So thank you to all of our many Pakistani listeners. We really appreciate you. We didn’t talk about this ahead of time. Have you seen the heat wave numbers in Southeast Asia over the past couple of days? I have absolutely nuts. It’s particularly brutal. I wrote down some of the temperatures here.

It’s 101. 8 in Manila, 110. 8 in Bangladesh, 114. 8 in Calcutta, and even Japan is having record highs in April of 86 degrees. It’s the 11th https: otter. ai hottest month on record. And 2024 at least for the first couple months of the year looks by far like the hottest year. Since they started keeping a lot of data in the 1940s.

Some of this is because of El Nino and the expectation is that we’re going to go into La Nina towards the end of the summer and the temperatures will come down a little bit. But it’s pretty striking when you look at how hot things are in Southeast Asia. And I gave you some of those temperatures.

That’s just the actual reading. The heat indices are, between 120 and 140 in some places, which that’s apparently the limit of human survival. So jokes aside about being a popular, podcast in Pakistan, the sort of a boiling the frog metaphor when it comes to, to climate change in Southeast Asia seems to be alive and well.

That’s a

[00:03:19] Rob: bummer of a note to start on. Geez.

[00:03:21] Jacob Shapiro: No, I thought you would be excited because I thought you would say that our thesis on air conditioning and emerging markets is going to have a great future with these. That’s a slim Slim compensation, let’s say,

[00:03:33] Rob: but

[00:03:34] Jacob Shapiro: yeah. No, but I do think it, I do think it portends a little bit of a shift or I wonder if it portends a shift in energy markets and power demand and how we think about these things, because for a long time, it’s been the winter that everybody worried about and chase over at pine cone is one of the first people to say this, and I’m not the first to say it at all.

But just thinking about the summer actually, as the. the point in time in which power demand is going to be at its highest. And even thinking of countries like it was the UK a year or two ago where they were having heat waves in the summer. And a lot of people didn’t have air conditioning.

So now you have this general move to, okay we’re going to have to cool the buildings and the structures. Southeast Asia, you expect that kind of high heat. You can go back and read Winston Churchill’s diaries about what it was like to be in India back in the day that they’ve always had these super high heat waves, even if they’re a little bit higher now than they were.

And maybe some of our recent data, but 86 degrees in Japan in April. That’s shocking here. So I feel like it is going to have to change the way that people live and interact with weather and what the environment around them. And I think that means change. Yeah.

[00:04:35] Rob: In all seriousness, it is not only a boon for air conditioning, but if you look at the trends in electricity demand and how that’s been really accelerating Already.

This could have a major impact on that if you just think about the spike potential for electricity demand around air conditioning, both as new people adopt it who are lower down the income spectrum because it’s a, it’s an essential good. It’s like the 1st thing you buy as soon as you can in in any country.

Like this but then just the increased demand as cooling degrees days go up so dramatically in some of these places. I mean, it’s a pretty, it’s a pretty high potential, uh, demand. Supercharger for electricity. You could say for sure.

[00:05:25] Jacob Shapiro: And I think it also fits with some of our, in our innovation strategy, trying to find places where people are innovating and like people are going to innovate around this.

We are not going to see Bangladesh and the Philippines and India and Pakistan empty of its people and go to other places like that’s too many people. It’s not simply going to work. I think people are right to bring up, what does this mean for humans living there? What does this mean for agriculture in these areas?

But the answer is probably that we’re going to innovate or these countries and scientists are going to innovate their way out of it. They are going to find ways to adapt to their environment just like human beings have all the time. But it’s just, I think you’re getting a picture of the scope of the problem in the future and the kinds of solutions that are going to be there.

Yeah. And I don’t think I don’t think enough people are talking about that and they’re not talking about it because we’ve had these sort of high temperatures for years. It’s the sort of thing that backs into your consciousness. Oh, over there. It’s really hot. And I don’t know. I just thought it’d be worthwhile to start there to Rob.

I know you’re in earning season and you’re the short seller, but I want to take a little victory lap here. My call. A year ago that Starbucks was not going to be good because their coffee is shit They are down 12 in the pre market. Did you take my advice over at off wall street or did you pass on that one?

[00:06:34] Rob: I pitched them on their honey. I pitched them on your shit coffee thesis, but They thought it wasn’t sufficiently rigorous. Yeah.

[00:06:43] Jacob Shapiro: Early bird gets the worm there. Not that I actually put in capital to deploy there as well. All right. Sorry. We’ve been joking a little bit. There’s three main things I want to get to here and Rob’s in earning season and I’m on the road this week.

So we’re a little all over the place. But the first place we haven’t talked about the Chinese economy in a minute, Rob, and we’ve changed some of our or We added some Chinese exposure to one of our strategies this week. We’ve been thinking a little bit more about China in the long term. I thought it was funny.

There was a spate of reporting earlier, early in the week about the Chinese communist party. I’m going to read from Bloomberg here, just cause I love how wishy washy this language is. They are vowing to explore new measures to tackle a protracted housing crisis. They are going to research ways to deal with.

There are problems as well as make flexible use of tools to support the economy and lower overall borrowing costs. So this was like front page of Bloomberg online. So they’re going to explore new measures and research new ways to deal with problems. Wow. This is really cutting news. And there’s also a, there’s a diagram in this article.

I wish I’ll put it on the YouTube channel. People want to see it there where they take the December policy statement and the April policy statement. And they have the quotes, on fiscal policy on monetary policy, macroeconomic policy, and they’re literally parsing the words like, Oh, in December, they said proactive and stepped up appropriately.

Now they’re saying proactive fiscal and maintain necessary fiscal spending intensity. What could this possibly mean about the changes that the Chinese government is going to push through in order to support the economy? All of which is to say there’s a lot of bullshit here, but the two things that don’t seem to be bullshit is that the Chinese government is, their growth rates exceeded what people thought.

So grew at about 5. 3 percent for the first quarter which was interesting. And they’re vowing to continue some of the support and pushing the economy forward. And then the second thing that I don’t think you can argue with is the market. Is acting like something has changed in China. There’s been a, an about face there and what has been a down and to the right trend for over a year.

So pick it up from there, Rob, and explain what looks interesting to you and how serious we should take some of this.

[00:08:52] Rob: There’s a few different areas to get into. I guess you could talk about fundamentals and then you can talk about. The market action and what it tells you. Let’s start with the last one first, cause it’s the simplest one.

Something is changing in the Chinese equity markets. So being short China or out of China has been the consensus trade for the last two years, really. And we’ve been. In all disclosure, we’ve been out of China and our international strategies, very deliberately and done very well with that.

So we’re definitely part of the crowd on this one, but being part of the crowd means you have to be watchful for when that, Consensus train is starting to break down and I’m just looking at the market action. You can see in the last two months, Chinese equities, whether you’re looking in Shanghai or in Hong Kong, they’re trying to hammer out a bottom here.

And on a number of measures, the Shanghai index appears to have broken a lot of downtrends in the last week with this move. And that’s a big deal that should cause people to pay attention because the sentiment is pretty one sided. And when Mr. Market starts to gain, say the sentiment, it’s worth taking a look at that.

That’s one reason why it should be on the radar screen. And so if you start with that and then look fundamentally and try to back into it, cause this is often how we do things, what are potential theories or theses that could explain market action? And we adopt to the ones that, that seem to work and throw out the ones that don’t.

So if you’re inclined to say, okay what’s changing in China? I think one of the big things is simply the global economic cycle is turning outside of the U S previously, remember we’ve spoken about how the tectonic plates are moving in opposite directions in a way they never did before.

So previously the U S was on fire and has It’s pretty much continued to be on fire and the rest of the world was absolutely in the dumps because the U. S. was shedding inventories and the global manufacturing cycle was very weak. Now you’re starting to see things shift in the opposite direction. So both pendulums have gone to their extremes and the U.

S. you’re seeing some incremental data showing a little bit of a slowdown from where things had been, which was very strong. And outside of the U. S. things are really rebounding. So European ISM indices for manufacturing and services are both rebounding and China manufacturing is kicking back into gear again, nothing gangbusters, but relative to what it had been, this, the sort of second derivative is moving positive.

That’s a big deal because, that’s going to drive a lot of risk assets, especially outside of the U S and it’s the, probably the number one Risk assets in the U S. But then within China itself, I think there’s a growing awareness that the treadmill to hell issues with the property, are understood, that’s going to be a slow motion train wreck that takes place over a very long period, as we’ve said.

And yet at the same time, they’re shifting their gears to trying to promote and encourage positive, manufacturing activity and exports in other areas, just try to take up the slack. Now, I don’t think they’re going to be successful in that in any truly fundamental way, as we’ve talked about. But in the meantime, it’s driving some growth.

It’s passing the buck from the property side to other areas, within central government control and influence. And that’s pretty good. That’s buying them some time. So I don’t think there’s been a massive structural change where, Oh, China’s out of the woods. I don’t think they’re going to be out of the woods ever, but within that sort of longer term problem set, how do things get rid of relatively better or worse over time?

And I think we’re heading into a, a partial Sunrise, if you want to describe it as that.

[00:12:57] Jacob Shapiro: Yeah. I read the Bloomberg article and I’ve, I want to emphasize like, there’s really nothing here that has changed. They’re, a more supportive fiscal stance. They’ve had a supportive fiscal stance, a pledge to expand domestic demand by supporting consumer product trade ins and equipment upgrades, they’ve been talking about that forever highfalutin words about the new productive forces in the economy again. We’ve been talking about this sort of forever. So something has changed sentiment wise. But I don’t see that anything that we’ve seen actually matters that much, except the one thing I would say is you, There’s been a lot of talking Chinese press.

This is the stuff that doesn’t make it to Bloomberg. Boring stuff about reform in the securities market and thinking about the Chinese stock market becoming a place that, Chinese investors themselves could be more comfortable parking their assets. But those goals, they have goals for 2030, 2035 becoming a sophisticated market and dealing with.

a lot of the fraud that is out there right now. So that’s not something that’s going to happen anytime soon, and that’s also sort of pie in the sky stuff. So there is something there as well. I was at dinner last night with some folks at this conference that I’m at, and I talked about how the U.

S. economy has been running hot and the U. S. consumer has been doing better than before. And one of the guests there challenged me on that. He said, okay, I hear you from a market’s perspective, but isn’t the U. S. middle class declining? And Isn’t the U. S. consumer, the average U. S. consumer, actually doing worse?

I went back and did my homework here, but I thought I’d lob up that softball for you before I tell you what’s actually been going on.

[00:14:21] Rob: You mean you know the answer, but you’re going to ask me to guess how the class is doing?

[00:14:26] Jacob Shapiro: I have an answer and I think I know what your answer would be, but I wanted to know if you were in the room with me there, how you would have answered that question.

[00:14:38] Rob: I think you could look at, I don’t want to go on and on, but there’s a number of measures you could look at that suggest that real wages for many people are doing better than they’ve done in a very long time. And much depends on what you. Considered to be middle class or, that’s this fantasy concept anyway, but I think if you look around most people, unless you’re, a new couple looking to buy a home in this crazy time, most people are doing quite well.

inflation notwithstanding.

[00:15:10] Jacob Shapiro: Yeah, the reason I wanted to ask your gut take was because even two, three years ago, one of the very first slides that I would put up when I was doing presentations was a chart of U. S. wealth inequality. And I would throw out the incredibly impressive statistic that U.

S. wealth inequality was greater than at any other point in recorded U. S. history. It was greater than in in the 1920s greater than, or going into the great, it was greater than the period in the 1920s that we go into the Great Depression with and that usually, made people stop in their tracks.

I had to take that slide out of the deck because it hasn’t been true anymore. And between 2019 and 2023 there have been wealth gains for almost every segment of the U. S. Population. But Folks that were earning less or who were in racial and ethnic groups that had sizable wealth gaps, they’ve seen increases.

So for instance, if you look at black families, median wealth, that’s up 66 percent since 2019. Hispanics is up 30%. 38 percent since 2019. The one thing that I think is interesting and these numbers are from the St. Louis Fed and this I did not know because I was going back to double check myself to make sure I wasn’t crazy because my answer to this guy was, I think the data shows that actually people are doing well.

Now they’re, it’s starting from a really high place of inequality. And maybe you could say that some of the narrowing of the wealth gap is because of COVID 19 stimulus. And maybe those things will reverse, but at least for the past couple of years my impression is that things have been going pretty well.

The one place where things have not been going well is the spread between wealth and young families and old families. Now, young, Households themselves have seen a huge increase in their median wealth. What is defined as younger families by the St. Louis Fed, by the St. Louis Fed, that’s up 137 percent since 2019.

Middle aged families up 22%. But what has increased pretty significantly is the gap in dollars between younger and older families. So older families are just significantly wealthier than younger families relative to where they were before. It makes sense that older families are going to have more wealth than younger families, but that gap has gotten significantly wider despite the gains for younger and middle aged families in the current environment.

And I, I think that’s an interesting thing to focus on because I hadn’t really thought of that. And if there was this sort of. Demographic gap opening up between the older generation and the younger generation right down to, you know The money that’s actually in their bank accounts and in their pocketbooks Maybe that’s something I should have known but the data just stuck out to me when I went back to double Check my answer

[00:17:38] Rob: I think it’s interesting to look historically at periods like this because And it’s something that, different generations will have different policy preferences based on what their wealth base looks like.

It used to be in the U S that we would have a hard money faction, which was old rich guys and they would prefer the gold standard and they wanted, Disciplined lending and hard money because they own the assets and they knew that if there was an inflation that they would be the ones to get screwed.

And that’s usually how it is for owners of wealth, especially because traditionally owners of wealth primarily own debt. They own government bonds. They owned, maybe some railroad stocks, like there just weren’t many options. And it’s funny because you don’t really see that constituency anymore.

And I think because the owners of great wealth today are the, our own equity, because the ability to do so in a diversified way is just so much greater than it once was. And that creates different incentives. Those people are very happy with the current way of things because their home prices are going up.

Their stock portfolios are going up, their bonds are getting killed, that’s not a huge portion, relatively speaking of their total asset base compared to what it once was. I think it’s worth thinking about what are the, what is the boomer generation want and what is the younger generation want in terms of optimal growth, inflation, volatility, social volatility.

Like we talked about, like one of the things I was thinking about recently, cause I was reading some history stuff was like, it’s very unusual. How great. That’s right. And like you’re saying it’s all about this. It’s all about it’s about the, it’s the foundation of people being human. Like your, the foundation of a human is we, if we have to look at more than just the physical aspects of our humanity, that’s what we have to do.

We have to look at the mental tasks. We have to look at the moral tasks. We have to look at the emotional tasks. We have to look at the spiritual tasks. A 20 year old today takes for granted. And even at our age, I think it’s weird. Like that’s probably a good sign for dynamism and social volatility and all this stuff that we talked about last time.

And it also means that the intro generation. Fight is probably going to be more more fierce than it has been in the last generation, if that makes sense, like things were so stagnant, we were too similar to our parents is what I’m getting at, because our experiences weren’t that much.

different relative to modern history.

[00:20:27] Jacob Shapiro: I hadn’t thought of that. While you were talking, I also was looking up what percentage of America, cause you, you said that, wealthy people are holding equities now, whereas before they might’ve held debt and things like that. What percentage of Americans do you think own stock?

[00:20:42] Rob: I would guess 40%.

[00:20:46] Jacob Shapiro: Okay. So it’s this is from Pew. So It’s 61 percent own stocks directly or indirectly and the ethnic breakdown there is remarkable. 66 percent of white families do versus 39 percent of black families, 28 percent of Hispanic families, but 61 percent overall own stock directly or indirectly.

Only 21 percent of Americans own stocks directly themselves. And that has increased from roughly 15 percent in 2019. So there’s a pretty sharp increase there in general. But we’re still talking about, the Americans who own stocks directly. So I would take that to mean who aren’t just invested in ETFs and things like that in their retirement accounts.

We’re talking about one fifth of the population. Why don’t we pause there. That was a nice dovetail of China and the U. S. And let’s move on to Emmanuel Macron keeps doing stuff on Thursdays and Fridays, and it’s interesting, and I want to talk about it on the podcast, but then we’ve already recorded, and we don’t get to talk about it.

So I want to talk about his speech last week at the Sorbonne and I want to I take it you did not go, Rob. They probably didn’t let you in, I would think.

[00:21:45] Rob: No, I did not. I was invited, but I I was busy that day.

[00:21:50] Jacob Shapiro: Yeah, you probably would have needed at least three of those coffees to stay awake, because you went on for quite some time, apparently.

There was a lot of interesting things in the speech. I actually put out a link to it in the SITREP last week for people to read. I’m going to read one quote from it right here. And then I want to get into the substance of what he said. He said that, he, he did some self congratulatory pats on the back for what Europe has accomplished over the past couple of years.

And then he gets to this sort of crescendo that his message today is simple. At the end of World War I France knew that, knew that our civilizations are mortal. We must be clear about that fact today that our Europe is mortal. It can die. It can die. And it all depends on our choices. These choices have to be made now.

And the three things that he talks about in terms of Europe’s mortality, he talks about, he uses the word capacity. What he really means here is military capacity. And he talks about how France has doubled its defense budget, but that everybody else in Europe has not responded accordingly and needs.

I thought it was interesting. He called out the United States in that section. He said the U. S. had two priorities. America first, which he describes as legitimate, and China. And he doesn’t say anything about China. I don’t know whether that was just a mistake in the sort of the translation, if it was herky jerky in the English, or if he meant to say America first is legitimate, but this whole thing about China, eh, not so much.

I’m not sure how to read that one. The second change that he talked about, though, is the economic model. And he talks about how it’s not sustainable at all. And it’s interesting to see him compare and really lionize Europe’s desire to take care of people, like its social security network and things like that.

But saying that how Europe works right now is not competitive with China and the United States. And that Europe can’t have these environmental and social standards invest less than their competitors, have a more naive trade policy than them and think that they’re going to continue to grow jobs. It just doesn’t make sense.

So he talks about, thinking seriously about how to get tough with the United States and China because they are no longer moving in the same direction and Europe’s behaving like they are, like everybody’s trying to join the WTO and hold hands. And then the last thing he gets really introspective about what he calls the culture war, the battle of imaginations, narratives and values.

And it’s refreshing to hear a European leader say, we thought that our model was irrepressible and it’s been shown to us that it’s not that that our model is being increasingly criticized that there’s a reversal of values, that we are vulnerable to all of these approaches because the things that we’ve been taught.

And that Macron thinks are good in some place are being defeated in the narrative marketplace and the ideological marketplace and that this is something that Europe really needs to focus on. It’s just a speech at the Sorbonne. Macron likes to make lots of speeches. This speech was a follow up to his speech in 2017 where he laid out a bunch of stuff.

But it was very striking. We’ve talked about Macron trying to have France lead the way here. And if what you want is a stronger, more coherent Europe that is going to behave in a way that is more explicitly geopolitical. He said all the right things. So you’re in France. I wanted to get your take on what Macron said.

How much of his how much of it is realistic? How much of it is, Macron setting his legacy as he starts to look towards the end of his time in office? Tell me a little bit how you react to all that.

[00:25:03] Rob: I think Mario Draghi said very similar things in his recent speech and has been, echoing a lot of the same sentiments, even back when he was the ECB head, before every meeting, he would make similar comments about European unity and fiscal spending and reform and these sorts of things.

My concern, just seeing things. To get politics to move their way. And I think that is something that elites will recognize ahead of time, and Macron is the elite of the elite, and he’s clearly trying to change the narrative and get people focused on what he views as the most important challenges, but that elites will struggle to get to get politics to move their way.

And to implement some of the things that need to be implemented. And it reminds me if you read about France in the 1930s, for example it just wasn’t politically possible to create a coherent policy, both because and because the politics internally were so vicious that everyone was looking to stab each other in the back, even as the Nazis were basically on the doorstep, everyone is still saying how am I going to put this to my political advantage until none of that even mattered anymore?

And it was too late. But when I say the capacity, just the sense, and this is, has been true in the U S politics historically as well. That in order to make big changes, I think historically you need to have big crises. And one of the reasons why I was very positive on European integration and reform and investment coming out of the Russia invasion was I thought that would be a sufficient catalyst to really scare people.

And wake them up. I, I don’t think that was right. That’s not my sense. And I’m not sure what that catalyst would be to get drastic change or drastic levels of investment in what’s viewed as strategic priorities. I don’t know. What do you think?

[00:27:15] Jacob Shapiro: You don’t think a second Trump presidency would would basically make that case for itself?

[00:27:22] Rob: I thought the same about Russia and I thought the same about the first Trump presidency. Maybe a second Trump presidency would. We’re farther down the path than we were then, obviously. It’s been almost 10 years. But I also am wary of overestimating how much people care. Until, speaking of boiling frogs, until something is really at crisis levels.

[00:27:49] Jacob Shapiro: Yeah, this was actually one of the other parts of McCrone’s speech that I thought was useful. And I’ve been doing some research for some other reasons about human psychology and about the human preference for remembering bad things over good things. There was this one study that I was reading from the 1970s where they, It’s an interesting study.

They have lottery winners, and then they have people who had recent accidents that resulted in amputations, so really bad accidents, and then a control group where nothing that serious had happened to them. And a year later, they found that, not surprisingly, the people who had the terrible accidents were pretty miserable, and they were thinking about their life before.

The control group was the control group, and the lottery winners were just as miserable as they had been when they won the lottery. It was like they had adjusted to winning the lottery, and all their problems were still the fact that they had done so They didn’t remember what things were like before, if anything, their tastes had increased and they needed more expensive and better things in order to derive the same pleasures that they did before.

And I say that because the first half of Macron’s speech, he talks about everything that Europe has achieved in the last couple of years since Russia’s invasion of Ukraine and since the COVID 19 pandemic. And it’s an impressive list. He talks about the joint issuance of debt, which was a red line that would have never been crossed, then suddenly was crossed and about the financial unity that really opened.

He called it a Hamiltonian moment for those of you who are Hamilton nerds here in the United States. He talked about the coordination of health policy in regards to, COVID and how that really helped in general, he talked about laying the foundation for technological and industrial sovereignty and all the agreements that they have with Germany in pursuing some of these things.

He talked about the green new, he goes down the list of all the things that Europe has accomplished over the last six or seven years. And his point is none of it is enough. But we have done these things, like we have been spurred by crises to do these things. We have to take it a step further because we are faced with a United States that we can’t depend on, a China that is trying to eat our lunch money, and we have bigger crises that are going to come down the road.

So I take your point that, they had COVID, okay, they breached financial unity, but we then it stalled. Then they had Russia invades Ukraine. Okay, there have been some increases there, but things have stalled out a little bit or the weapons actually being supplied at the rates that they needed to be for the Ukrainians, et cetera.

But the way the world is working right now, I assume there will be a third crisis at some point. And if there is a blueprint. that they can pull out when they have that kind of political support to push through some of the changes that are more unsavory then maybe it works. And, there are ways or things that Europe can do right now that are currently under crisis.

Think about all these farmer protests that have been happening inside Europe in general. Macron goes after agriculture in a big way in this speech. He talks about how Europe can’t be dependent on other sources, how it needs to protect its agricultural market. It needs to protect its farmers and deregulate and make it easier for them to do things that it’s ridiculous what the European Union is doing to them.

That is not the language of Brussels. You wouldn’t have imagined somebody who is the elite of the elite. Speaking farmer’s language and talking about making life simpler for them and protecting them and not having them as an also throw in trade deals and things like that. So I take your point like it’s not far enough and it’s not enough.

But I assume there will be other crises for Europe to push forward on. And at least it looks like for now, In 2024, they’re going in the right direction. To me, the more concerning thing is that Macron can’t run again. And if you look at who’s waiting in the wings in French politics, it’s nobody that is super Europhilic.

And when you look at support for the European Union in general, When you look at all the Euro barometers, usually France is at the bottom, like it’s usually Poland and those other countries who feel better about the European Union and Germany has been ambivalent. So I do worry that this is a flash in the pan that Macron in the same way that this is a stretch of an example, but think of the way Obama pushed the Iran nuclear deal and then wasn’t around to see it through.

And somebody came in and abrogated it and changed his entire policy, whether it was the right policy or not, I don’t want to debate that. Just that, he had a policy. He couldn’t get it in the form of a treaty. It was weak. And so it got torn up by his successor. A speech at the Sorbonne, no matter how well articulated is not going to protect the next French government from doing whatever it decides to do.

And Macron is the outlier here. He’s always been the outlier. So I take your point. There’s a limited amount of time and there’s probably not enough. Momentum for France to lead the European Union in this direction while they have a leader who is articulating these principles.

[00:32:12] Rob: On France specifically, I think I wouldn’t underestimate their ability to affect change.

I think when Macron first came into office, he was viewed as more of a technocratic kind of guy. He’s shown himself To be different than that. And to really like the executive power in France is quite strong. And this is one of the things that de Gaulle always spoke about was like creating the fifth Republic solved the fundamental flaw that’s been plaguing France since 1789, which is, how do you strike the balance between, Centralized top down power and, growing community socialist type power.

And that compromise that they came across is a fairly strong executive. So I don’t think it’s too surprising that someone with the personality and force of Macron could come in and really do a lot of stuff, even stuff that were, was widely panned by everyone and was stupid, like the pension reform.

He had the ability to push that through. It’s TBD to see who’s going to rise up and maybe take that role now that the two kind of center right and center left parties have basically just disappeared. Like it’s a fairly open playing field for. Political entrepreneurs and individuals, because it’s up for grabs.

Like the far left is very out of the mainstream. The far right is big, but also easily can hemorrhage voters to a center right party. The it’s very open to see what’s going to go on. The thinking about Europe more broadly and specifically from an investment standpoint, I’m as I said, not super optimistic that this is going to happen in the short term.

And by this, I mean accelerated structural reform, accelerated centralization, shared fiscal sovereignty, these sorts of things. But I’m also used to thinking in terms of shading areas of risk. And in this regard, I think this is really positive because Europe has been out of favor for it.

Like my whole career, international stocks and Europe in particular has been just the beating, the beating horse of every investor and pundit. Oh, structural decline and demographic weakness. And there, Oh, did you see, it takes eight months to fire someone and the whole thing.

Don’t think that sentiment has gotten much better despite the fact that a lot of things on the ground have gotten better. And much like we’ve talked about with Japan, which is, farther along in that process, because I think there’s more people excited about Japan. But three years ago, when we were talking about Japan publicly, I think at the time we said, Hey, Japan’s been out of favor for a generation and everyone hates it.

And they’re not paying attention to these things that are getting better beneath the surface. Something’s changing. I think Europe is similar. And I also think the risk profile is skewed in our favor, because as you said, Some crazy shit is going to happen in the next couple of years, just statistically, just the way that the world is set up right now, and that could very well create the opportunity to, have European politicians coalesce around certain ideas or an urgency to act and implement some of the things that have been on the drawing board, the alternative is, What everyone expects to happen anyway, which is nothing.

In investing, it’s all about what are the expectations and then what’s going to happen relative to those expectations here, the expectations have been set very low. So if something happens, people are going to be pleasantly surprised. And if you look at the gap in valuations or just performance long term between Europe and the U S or, you know, however you want to measure that, there’s a lot of ground to be made up.

So I still think if you. Throw a dart 10 years from now, I would take some of these international markets over some of the high priced, high value high valuation U. S. stuff that’s out there and universally loved.

[00:36:15] Jacob Shapiro: And maybe the next crisis for Europe is a true black swan. Don’t talk about any earthquakes in London or anything like that, Rob.

We don’t want to upset people. But just two thoughts before the Russian invasion of Ukraine and COVID and all those other things. I think I’ve said this on the podcast a couple of times. You probably remember this. There was an incident where, France and Turkey are on opposite sides of the Libyan civil war and Libya and French and Turkish.

Naval ships locked on to each other in the Mediterranean because they had a dispute about somebody bringing weapons in to support their side. These were two NATO allies who literally, locked horns in the Mediterranean. Nothing happened, but there was a moment where the ships, like the radars, were on.

So I think the role of Turkey here in the future is one potential place for a crisis. The other one might already be happening in slow motion. What’s happening in Sub Saharan Africa in terms of violence, in terms of food security, in terms of political security, I think we’re only just beginning to see the migration numbers crest for Europe and I think the migration crisis that Europe is facing is going to be orders of magnitude worse than say the United States is facing right now and which has become such a big part of the, this political election cycle and in some ways it’ll be good for the European countries that can integrate migrants or screen them so that they can improve some of their demographics.

pictures, but I don’t know maybe the crisis is already there. Maybe we’re going to see some of those changes in general. Before we end, Rob we talked a little bit about steel last week and I want to pick it up where we left off. And the reason I want to do that is because we’ve now in the last couple of weeks Joe Biden.

And the White House announced an increase in tariffs on Chinese steel and aluminum threefold a couple of weeks ago. But we’ve got a couple more countries now that are joining in. So Mexico has talked about raising tariffs on imports of steel. That’s probably aimed at China. Brazil has decided to step up protections for its steel makers.

It’s actually increasing its quotas up to about 25%. The current tariffs are around 11%. Chile has also imposed what they call temporary anti dumping tariffs on Chinese steel. So that’s now, four countries in the Americas who are suddenly raising tariffs on steel, worried about China flooding their markets with steel.

And this is an old story. China has made too much steel for itself to consume and it’s been exporting it out into the market. And I know you’re going to tell me that even though steel is costly to export China has so much of it and they’re trying to get something for the steel that they produce that it is out there.

And in a market like Brazil, where it’s super cheap, it can get there and it can start to affect the market a little bit. But it struck me that we had four different countries in the Americas now talking about steel tariffs. So this is no longer just, Oh, Biden trying to win some voters in the Midwest or in steel country in the United States.

It feels like something else is happening here. And I wanted to get your take on that.

[00:39:01] Rob: Part of this is the fallout from the treadmill to hell situation, because the reason why China has so much damn steel capacity is because they built, the equivalent of a medium sized city every month for the last 20 years.

So that’s going to be a looming and major problem politically and economically is what do you do with this over capacity in steel? Now that bubble is falling apart. Steel is very unique. Steel is weird. Steel is not just any other commodity. I think historically steel has been the thing that countries that are first industrializing learn to do first.

If you can make your own steel, you can do a lot. You can make cars, you can make buildings. It’s a major component of everything that we do. So there’s a strategic element to steel. Particularly because you need it to make weapons, for example that doesn’t exist with, air conditioners or whatever, other manufactured good you want to talk about.

So it’s not too surprising that countries are particularly sensitive about it. It’s also a sign of how strategically important it is that steel is made in so many different places. Like all those countries that you listed, Chile makes its own steel, really? There’s a reason for that in part. And it’s, not just the difficulty in shipping it around, like it’s not the most easily tradable good, given how, sort of weight to, to value elements there.

So yeah, I would flag this for sure as a looming political issue. And an economic issue the barriers are going up, we talked about new core last week this Chinese overcapacity issue, I think will, it’ll be difficult to contain with tariffs because of trade clearing multilaterally yeah, sure.

The U S can put tariffs on Chinese steel, but what if China, diverts its exports to Vietnam and then Vietnam has to send its exports somewhere, like these things are a daisy chain of relationships. So I’m not too optimistic that anyone will be successful in just putting up barriers and.

Making the problem go away. So I think it really depends on which nations have the capacity to be most aggressive in protecting themselves against what’s going on. And right now, this is not an urgent issue at all. Like the U S steel industry is always bitching and moaning about Chinese steel, like even when times are really good.

But I don’t think there’s a huge urgency to deal with this because. Steel profits have been off the charts for the last few years. Like these companies are quite healthy. Even US Steel, the perpetual limping, giant. So yeah it’s gonna be a major issue.

[00:41:50] Jacob Shapiro: One of my favorite stats to trot out there is that this is the status from 2019.

So it’s actually probably increased since then, but China manufactured more steel between 2017 and 2019 than the British empire did in the entire, in its entire history starting in the 1870s. So just to give you like a sense of just how much steel China is producing and now that they’re not building ghost cities and they’re trying to be fiscally conservative or whatever the new languages.

Out of the politburo, like all that steel has to go somewhere. So I don’t know, maybe it’s

[00:42:22] Rob: not just trying to, to just I’m sorry to interrupt you, but when you think about the sort of after effects of this, think about Japan. Cause one of the things that is under recognized is how much Japan has leveraged China’s growth.

to sop up its own overcapacity. Japan built a ton of steel production capacity during the sixties and seventies. And after 1989, the demand for that started falling off a cliff. So lucky for them, China showed up and they’ve done a very brisk business in sopping up this excess capacity.

And selling the steel into China, in fact, when China, when the commodity cycle peaked in 2011, which was when Chinese growth, in in absolute terms, in terms of growth rate peaked. And since then it’s been decelerating, but still positive. growing. Now we’re going over the cliff. There were people, like Hugh Hendry at the time, I remember he had a big thesis about Japanese steel producers that they were going to go bankrupt.

And he was buying credit default swaps on Japanese steel producers because they were so leveraged to this Chinese bubble. Now, fast forward, it’s 13 years later. I haven’t looked at the balance sheets of these Japanese steel producers. I’m guessing they’re not great. They’re in the same situation.

So when you talk about mopping up your historical messes and kicking the can down the road from the East Asian growth model, not only do you have skeletons in the closet in China, but you have really old skeletons in the closet from Japan and probably Korea too.

[00:44:00] Jacob Shapiro: I gotta think I gotta think this would be good for some Central Asian country like Uzbekistan that wants to build a bunch of stuff and doesn’t have a lot of steel of their own. Can’t they just be like, Hey, send us the steel. We’ll build skyscrapers. We want them.

[00:44:12] Rob: Cheap steel is going to be good for them for sure.

[00:44:17] Jacob Shapiro: Anything else you want to tell the listeners, Rob, before I let you get back to earnings and I go give the speech?

[00:44:23] Rob: No, I don’t think so. We’ve got to jump into the, it’s nice to get an ability to. Step back once a week and look at big picture stuff. Cause the rest of the time I have my head so far up the butt of tiny little corporate details that it’s nice to get some fresh air.

[00:44:38] Jacob Shapiro: Just remember you you can do all that due diligence. But ultimately, if the coffee sucks, eventually the market’s gonna figure it out. We’ll talk to you later. Thank you so much for listening to the Cognitive Dissidents Podcast, brought to you 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.

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 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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