Matt Gertken explains the Chinese economy and Taiwan’s future | E180

 

Jacob Shapiro: Hello listeners and welcome to another episode of cognitive dissonance as usual. I’m your host. I’m Jacob Shapiro. I’m a partner and the director of geopolitical analysis at Cognitive Investments. I was really excited to have Matt Gerken join us on the podcast. Matt is chief strategist of geopolitical strategy and U.

S. political strategy at BCA Research. Both Matt and Marco, cousin Marco who’s on this podcast a lot, were not just colleagues of mine at Stratfor, but they were ahead of me in line. I, as an intern, I used to look up to them. So it’s been great to reconnect with Marco on that score and even nicer to reconnect with with Matt.

As I talk about the podcast, we used to share a cubicle. So thanks Matt for coming on the podcast. Also, just an apology in advance, the recording platform that we used for this podcast was giving me a devilish time as we were recording. I’m sure that Jacob, our faithful podcast editor, will go through and clean up a lot of that.

But if it feels disjointed or if there are audio problems, not our fault, we did the best that we could. Otherwise email me at Jacob at cognitive dot investments. If you have any questions about the podcast or what we do at CI and whether we can do things for you, take care of the people you love, cheers and see you.

All right. Continuing the parade of former Stratfor employees on the podcast. But somebody that I’ve actually been wanting to talk to for a long time. I’m not going to throw shade at the other ones and say, I wanted you more than the others, but Matt, it is really good to see you and glad to have you on the show.

Yeah, thanks a lot jacob definitely

Matt: Always a real pleasure to get back Together with those who went through geopolitical bootcamp at Stratfor

Jacob Shapiro: It sure was so for the listeners frame of reference cousin marco has been on the podcast many times marco and matt were both I wouldn’t call you senior analysts But you were you know rising stars at stratfor when I was just starting as an intern and for me marco was on the other side of the cubicle Sort of layout so I would hear him yelling in different languages on his phone at all hours But I couldn’t really see him He was like this mythical force that was like multiple cubicles away you on the other hand We were in the same cubicle They shoved me into your cubicle this little intern taking up your space and I just remember you Trying to figure out, Chinese economics and Chinese markets and me diddling around there as an intern and looking down on 6th Street and everything else and But I guess the first place I wanted to start is because, just by happenstance, the episode before you come on is going to be with Roger Baker, who is still in the land of Stratfor and rain and everything else.

And we’ve had Marco on. We’ve had Simtac on a couple other people. And just, before we get into the brass tacks of geopolitics and markets and everything else, I just wanted to ask. How has your view of geopolitics evolved since I was that little intern in the cubicle Do you feel that you’ve gone more in the george direction?

Are you in the marco direction? Do those directions even mean anything? Are you just in the mad direction? Like i’m curious how your Application of geopolitics has evolved since we were there all those years ago

Matt: Yeah, thanks for that. It’s an interesting question. I definitely always remembered our times chatting there and Enjoyed it I was stressed, you know that I think you know, yeah, that’s you know I was trying to like you say I was trying to learn not only macro but Really try to get deep into what was happening in china And the one thing I guess i’m proud about from that era is all that stress and sweat and blood and tears produced a report that like the first, we didn’t really do authored reports at Stratford, Very frequently, but if you would write the geopolitical weekly, you would get to sign off on it.

And my signed off My first sign off was the one saying That basically china would go through this big centralization after xi jinping took power, you know after the regime change in 2012 and so i’m very proud of that work, but it came out of a lot of stress and those years were good because they put us through Roger and George and the others, they put us through Peter, a lot of, I think what you had to do was you had to really defend your research.

You had to find a way to absorb what you were being told and taught, but you did have to learn to push back and no one made it easy. So pushback was something that had to be developed through really rigorous Analysis and I think that’s ultimately that’s been really good for me. I’ve had a lot of great geopolitical teachers over the years So, not only through straffle so there was always george and peter and I learned a lot from my peers like from you and marco I think You For me what was interesting is I always had one foot in the academic space as well And I was doing all kinds of interdisciplinary work that involved literature and history and propaganda You know I was studying like british empire and the propaganda and the british empire around their grand strategy and their foreign policy And so I got to know some really interesting people on that side as well jeremy black in particular is a historian who’s written.

I think a hundred books or more You I mean, extremely prolific and interesting individual does military history and geopolitics. And then the second time I, I left Stratfor briefly to write my PhD. And when I came back I got to work with Robert Kaplan, who I’m sure you worked with as well.

And Kaplan was always just a great influence and his books were awesome. Don’t know, I guess over the years, I think the biggest change is that after I joined BCA research, it really became about. Studying the financial market ramifications and the macroeconomic ramifications of geopolitics.

And that is just a constant trick. I think sometimes the geopolitics and the macro work pretty well together, but the financial markets can just be so mercurial. And so that’s been a challenge. And of course, I learned a ton from Marco on that front. And then recent years, it’s just been a learning experience in the wake of.

You know the ukraine war and what’s now happening in the middle east so I don’t know I guess I would say that i’ve found a way to merge You know studying the enlightenment and studying the humanities broadly With with the great geopolitical teachings that i’ve, you know been privileged to have and it’s generally

Jacob Shapiro: I feel a lot of gratitude I would say it’s funny.

You mentioned jeremy black. I spoke at the same conference as him Pre covid so like many years ago and tried to get him on the podcast and we had some tech Difficulties like either like the app didn’t work or he couldn’t figure it out or I couldn’t figure it out So we didn’t get him on the podcast, but I got added to his distribution list I don’t know if you’re on it and prolific is the right word.

I don’t know how he has time to write any of the stuff that he does and it’s every day It’s like I did these three essays and this new book is coming out and I did these five interviews And i’m like, dude, i’m exhausted just receiving the emails from your distribution list So nice to know somebody else is on the jeremy black distribution list.

Matt: Oh, yeah, and it’s incredible. It’s incredible too because When you hear them That he’s written over 100 books. You think okay. Well I don’t know. I think You might have some sense or some kind of skepticism about how can anyone do that, but read his books. And it’s these are good books.

And in particular, the footnotes are very detailed and he his sourcing is incredible. And he’s always going through the archives like a good historian. So the man’s memory must just be, beyond anything that I can

Jacob Shapiro: comprehend. You were talking about smushing macro and geopolitics together and talking about how sometimes it’s successful and sometimes it’s not.

So we didn’t talk about this before, but maybe to put you on the spot, do you have a go to example for when it worked perfectly and then a go to example for when it really didn’t work?

Matt: Yeah. Yeah, I do. It’s. It’s, I think the great thing about the markets is coming to grips with your wins and losses, and accepting, accepting when you’re wrong and the accountability is important for political analysts, especially in people like me who have a background in the liberal arts, because so much of what is done in those fields is, for better or worse can be classified as gray area.

And the market’s always. Require an answer, and clients always want up or down, if that’s the classic move of a client when they’re consuming this kind of research is to say we’ll go up or down, and it depends on the asset and the timing and the timeframe.

And, but yeah, I think 2022 was a great year for me, it’s very cynical to say that, but I was fully prepared for. A major conflict over ukraine and that happened what happened was in march of 2020 I shifted my u. s. Presidential forecast to say that biden and the democrats would win and then in 20 summer of 2020 Because we had the forecast the democrats would win I then started saying This is also going to lead to a new conflict with russia over ukraine And so that meant that in 2020 By the time 2021 rolled around and the actual buildup on the border started happening I was taking it really seriously and the economists actually made fun of me.

They used me as their they used me as their punching bag for the guy who’s overly alarmist about geopolitical risk And that was in early 2021 when the buildup happened. But then late 2021 it started to get super serious And I had given a 50 percent probability of a, of a major war.

And then in January, after NATO responded to Russia’s ultimatum and rejected it, then I upgraded to 75 percent chance of war. So I was short the ruble. I was I was short, I knew there’d be a risk off in the equity markets. Yeah. I was overweight the US and the US dollar there had been a lot of speculation that the dollar would really drop off, but we were long dollar Anyway, we were bearish all year and it was a bear market all year and at each new juncture we maintained our view so that each downleg in the bear market.

We were fighting little battles quarterly battles So that was all good. But then you know the Past year hasn’t been quite as good, you know geopolitically. We’ve been fine because after ukraine You know I rotated to the middle east and I really highlighted the things we’re going to start blowing up With iran and israel specifically I didn’t predict of course the exact hamas attack on october 7th, but I did Underscore that we had a major instability building in the region.

So geopolitically our forecasts have still been on But the markets have surprised me, you know So I expected that the slowdown in china would have a bigger global impact You And that the manufacturing recession would metastasize into less capex and also, that the The savings that consumers built up over the covid period would be depleted faster and those things did not come to pass So, I think it’s interesting.

I think geopolitical My geopolitical calls have been great on, honestly on russia china and the middle east over the past few years but this You Exuberance we’re seeing now is not what I expected.

Jacob Shapiro: Exuberance can disappear very quickly. So it may just be an issue of time, like in a month’s time, you may be feeling a lot better about it.

Matt: Yeah. I would say that, and I, and I’m not just defending a view here, but, like when you’re playing chess, every time someone makes a move, it’s a new game and you have to let go of the past and now analyze the board as it stands.

And so I would say that even though last year the markets did a lot better than I expected do think this year there’s still really significant risk Like for example, if you give a 45 probability that president trump is going to be reelected Which is not a very controversial stance.

I mean you could put it at 55 or whatever then you have to assume that means that within 12 months we’re going to have a trade shock

Jacob Shapiro: And that’s definitely not priced right now. No it’s definitely not. I wanted to underscore something you said before we go down. That rabbit hole because and I’m not saying this pejoratively to anyone.

I just want to draw a line between geopolitical analysts like you and me and Marco that relish the humility that markets give us because it tells us in real time. Were you right? Were you wrong? What? What was your call? Like it’s been really liberating in some ways to not have to worry or benchmark forecast.

The market is actually telling you whether the forecast is right or not versus, your Peters and folks that are out there that to me are honestly in the entertainment business that might it’s throwing shade. It’s not like I think it’s important from a heuristic perspective to have challenging ideas and to think differently about things and to force people to think in different ways.

But I do think there is this real differentiation between those that are involved. In markets and having to be kept honest by that. And those who are primarily out there, selling a new book or selling a new idea or something like that. I don’t know if that resonates with you at all.

Matt: I want to write a book, so, I’m working, I’m always working on a book.

It’s like the Bob Dylan song. When I paint my masterpiece, I’m also working, I’ve been working on my book for five years. Yeah. Yeah. Yeah. So I, I. I think there it’s interesting if you know what it really goes to it goes to audience it really goes to When we think over long periods of time and people we’ve never met before and people from totally different walks of life we want to have a view that is expressed in terms of political philosophy and history and in understanding our world better and hopefully in pursuit of peace and prosperity, and When we’re not writing a book and when we’re not talking to people a hundred years from now when we’re dead, you know We are talking to living people who are trying to manage their savings, And that is a totally different audience and they really can’t they don’t have time for your political philosophy they what they really have time for is actual insight into And hopefully quantifiable Analysis of what the impact of a new decision will be or a new event will be so I think it really boils down to audience and i’ve just learned so much working at bca and with the strategist there but one thing that I really have picked up and stuck with and i’ve learned a lot from my clients I go around the world and I talk to people and I just learn so much from people and one thing is clear that giving a crystal Clear concise view is it informs the person even if they’re if they don’t agree with you, right?

And even if you end up being wrong it informs them Of a clear train of thought so that then they are forced to formulate their thoughts in a different way But it’s also clear so clarity pays off for everybody. Accountability pays off for everybody, And that’s why we should never run away from it and that’s why it’s also a very cheap shot to just you know Dismissively slam someone because they got something wrong because what that means is that they swung the baseball bat and actually tried to hit the ball

Jacob Shapiro: into the bleachers.

Yeah, exactly right. And yeah, and I think that happens more and it’s funny to me. I speak to a lot of audiences and I think you’re exactly right. Sometimes I feel. Like it’s cheating because I sometimes feel like I’m learning more from the audience that they’re learning from me like they think the things that we’re thinking about are so esoteric, for us, geopolitics is not that esoteric.

It actually has rules and laws and immutable concepts that it all follows throughout time. It’s you know what the farmers are seeing on the ground or what the tech executive is thinking about the challenges that they’re facing. It’s informant. Let’s go maybe from the highfalutin to China because I share some of your surprise that it.

Really just an abysmal Chinese economy has not been metastasizing really throughout the world. It’s almost like it’s completely isolated in on itself. Talk to me a little bit about what you’re seeing with the Chinese economy and what you think the outlook is for China here over the next 12 months.

Matt: Yeah, it’s a good one. One thing I’ll say right off the bat is, and I have had this view for a while now is that I think they’re holding a little dry powder in terms of the market definitely wants fiscal stimulus. A lot of investors are looking for that reaction. I think they’re very well aware and have been that the U S could take a more aggressive turn in the trade war.

And, so I think that’s one reason to keep some dry powder for next year. I don’t think it’s the only reason because ultimately if their internal economy is collapsing then they have to act anyway, regardless of what’s happening in the U S. But I think when you put together. The fact that they’re able to out a four or five percent growth rate and that they can artificially prop up property prices so that they don’t plummet in the way that happened in Japan in 1990.

That has enabled them to avoid a massive fiscal stimulus and that’s going to change, but I just, I’m not convinced it’ll happen this year. It could though, it’s more likely this year than last year I was very sort of high conviction on that they weren’t going to stimulate in a massive way and and that stemmed from a whole series of analyses like basically in 2022 the my argument was that Xi Jinping would remove the COVID controls rapidly after he consolidated power at the 20th National Party Congress then we’d get some enthusiasm about a reopening But that’s when everyone would have the rude awakening that the property sector is in fact failing and it’s a massive bust And so that was that all worked out.

Me, but the problem was then my expectation was That the rest of the world would then go into a panic because the Chinese economy is failing But they did get a little bit of a benefit from reopening and they also provided monetary easing and they have provided incrementally fiscal support in infrastructure and so Now we at the end of last year We saw the turn where they issued a central government treasury bond and highlighted that the central government is going to become more active in using You Fiscal policy and I think that was the signal So now we’re going to get more of that and that’s what’s needed to be done because the local governments are still having a Huge coordination problem and are still very afraid to take on new risk um, but they don’t have but they’re still behind the curve because There could be a global recession.

There could be a trade shock early next year So so I think there’s They’re doing they’re going to do more this year in terms of fiscal stimulus, but I don’t think it’s going to be the big one and that means that it really when we see The u. s. Economy cracking is when I think they’d be starting to expect that now we’re going into a global recession type environment and that’s when They’re going to have to seriously step up the fiscal support But having said all of that’s still a, that’s a view where you’re trying to trace these mini cycles.

And the problem is that structurally like the IMF shows that the augmented budget balance for China is very deeply negative. And it depends on which measure you use. They have one that says that it’s a negative 16 percent of GDP deficit, which is just, unimaginable. But even if you use the more conservative estimates.

You’re talking about a six to 9% of GDP budget deficits. So the point is that they are doing a lot of fiscal spinning and also Japan in the nineties, similar situation, did a lot of fiscal spending. They did three stimulus packages. It enables you to maybe tread water or prevent a collapse, but it is not a substitute for private sector animal spirits.

It’s not a, it’s not a substitute for consumer spending and it’s not a substitute for private businesses investing. And so when the big fiscal stimulus does eventually come, I think it’ll be important for China’s creating a avoiding a total collapse, but I don’t think it’s going to be I don’t think it’s going to galvanize a multi year trend in, in anything.

I think it’s actually just going to. Slide right into what is like this already the second lost decade for the chinese economy The

Jacob Shapiro: only silver lining i’ve been able to glean out of china in the last 12 months is you probably saw that recent data that For lunar new year spending is finally at the pre covid levels.

So we’re at least through like the covid I guess we can call it a three year period where Chinese consumption just fell off a cliff. Now, consumption is still not where it needs to be, obviously, but at least the Chinese consumer is now consuming on the trajectory that they thought they were going to be consuming in 2019.

I think you hit the, oh, sorry. Go ahead. Yeah. Yeah.

Matt: Oh, go ahead. Yeah I just, I was just going to jump in and say, there’s that. There’s also, I do think it’s an important point that the property prices in general have not collapsed. You hear all these. Terms thrown around like liquidity trap balance sheet recession Secular stagnation, etc But I think one really key point is that in japan when you get the balance sheet recession It’s because the asset prices fall if china prevents that from happening And then gradually starts to produce more monetary and fiscal accommodation Then you don’t actually have companies underwater to the same extent that they were in japan which means that In a way you could see things stabilized sooner.

I think I, I don’t think it prevents a decline in property prices, like gravity still operates, but it could draw it out for a longer time period. And then that would mean that companies, they’re not facing the same, just complete inversion of their balance sheets that they suffered in Japan, which was such a catastrophic shock.

So anyway, that may still only point to a mini upcycle. Beginning in 2024, 2025 or something but it is interesting and it’s also, I would say it’s not a solution either because, it, construction activity still grinds to a halt in an environment where inventories are large because the government won’t let people, Discount their excess property.

Jacob Shapiro: I want to go down the Trump rabbit hole. So whether it’s 45 percent or 55%, whatever the percentage is, I think you’re right. That at least for China, it’s the biggest thing, because if you just read the policy papers on trump47. com or whatever it is, he’s not shy about, and it’s not just China, it’s going to be a trade war on the entire world, but China is going to earn the force of a Trump administration’s higher.

And I guess The unorthodox question I want to ask you is, in some ways, would that be the best thing for China? Because then Xi Jinping has the justification for big structural changes. He says, hey, this is the big bad evil American empire is punishing us. We really do have to turn inward. We don’t have control over this.

Or do you think that the threat is just so existential that it’s honestly what China’s scared the most of? And that maybe you’ll see a charm offensive from China if things start going in the Trump direction, to try and placate him in whatever way that they can.

Matt: Yeah, that’s a tough one, so first of all, for the year 2024 and going into the election, I think China is prepared for either outcome. I think they have a mature perspective, which is that

the two

Matt: US political parties are two faces of the same American.

And.

Matt: They’re going to have to deal with that either way.

And so I, so what I’m saying is I don’t think they’re going to take actions that are meant deliberately to manipulate the U S election. Russia might do that, but I think China’s view is I don’t think they’re going to offer Biden any kind of help or rescues or anything like that. But I also don’t think that they’re going to try to sabotage him because that would backfire if he were reelected.

And. And they seem to Be aware of different risks like so for example with biden. It’s a more gradual Process of so called de risking rather than decoupling and he’s negotiable he’s constantly reaching out to them and trying to find different ways that they can still engage and cooperate and he could even change his tune, the chinese might believe There is a substantial Basis for thinking that if the trump phenomenon fails convincingly in 2024, then some of the elements that have been in hiding in the United States that are in favor of U.

S. China engagement, they’ll start coming out again, because the Republicans will be in the woodwork I’m sorry, the Republicans will be in the wilderness, trying to recover from this failure of populism, and then basically you could have U. S. China detente actually get some legs at that point.

So what I’m saying is, they’re ready for either outcome, but Biden is a little bit less disruptive. And Trump would be more of a shock. And I think that they’re, I think since China’s looking for a more gradual adjustment as well, in a way they can agree to that. But I wouldn’t want to take that so far as to say that they actually prefer Biden, because Biden is more effective at galvanizing a coalition of democracies.

Thanks. He’s not going to be slapping tariffs on allies. So that means that one or two years into the second Biden term, if things aren’t going so well, then it could be very bad for China because it could actually be the culmination of Biden’s diplomatic efforts with the Netherlands and with Japan and with others.

And you could suddenly start to, if you’re Chinese, you could suddenly start to feel truly encircled. You know what? These democracies, Europe, America, they’re all, Japan, they’re all working together and they all really are coalescing. And so therefore they really will be able to constrain our access to technology.

And that could create a panic point as well. So what I’m saying is either way, the confrontation is building up. Trump holds out the possibility of a bigger shock in, initially, but then he’ll lack allies and partners and he may not be as effective ultimately. Whereas Biden is more gradual, but it could actually be a problem later because it’s a sort of constriction.

It’s a constrictor, bull constrictor type Process and you don’t let the snake wrap itself all around your neck before it starts squeezing, you know You actually have to at some point start to remove when you’re talking

Jacob Shapiro: to the western investor who has a long time horizon And is wondering where to put their savings.

Are you do you find yourself in the camp that? Look, China has all these structural problems, and there’s all these political problems between Washington and Beijing, and who knows whether you’ll even be able to own some of these Chinese shares at one point stay away? Or do you find yourself saying, look China has problems, but if we’re projecting out 20 years, this is still a billion plus people, it’s still all of these, if we’re looking in grand, sort of strategic terms China’s at the beginning, probably, of a process of, Empowering itself, not at the end of the process.

At least I would make that argument. How are you advising that person who’s thinking about their savings and thinking, ah, I have 20 years. Should I throw some money into the Chinese stock market or should I run for the hills and by the hills, I mean to Google or Nvidia or whatever else is the hills.

Matt: Yeah yeah. Again, also a tough one. So I’ve been very uncomfortable with the term uninvestable because It implies that something can be, it seems like there’s a price for almost everything, right? And So I want to hold out the possibility that someday I can turn a buyer of Chinese assets again and so but I would say that short of using that term I’ve been very bearish and I’ve been that way for a long time.

10 years, right? So the problem is that where we find ourselves now The market has priced a lot of the bad news And I can see that from evaluation perspective, people are just really chomping at the bit, but I don’t think from a, and again, this is, a bias, but from a geopolitical perspective, I don’t think we’ve reached the phase where I can give a green light and say, now is the right time to go ahead and buy those assets on this 20 year timeframe, because what I see is, The Chinese reaction to the changes in the world being extroverted, meaning that since Xi Jinping came to power, the slowdown in the potential GDP growth has led to an increase in assertive foreign policy.

And regardless of what we can say about China 500 or 1, 000 or 2, 000 years ago, this China today does show the inclination to be more outwardly aggressive. As they lose legitimacy at home based on economic growth that’s and we can debate that, But that’s that’s a set of observations i’ve made over the past 10 years and I think it still holds And then meanwhile the u.

s We’ve got this extreme, peak polarization And I think the thing there is that the americans so badly need a common enemy to justify their reunion That I think these two things coinciding are very dangerous. Basically, the Americans are going to confront China and rub salt in the wound and kick them while they’re down with this debt deflation.

And meanwhile, the Xi Jinping regime is going to continue to develop naval power and and cyber power and steel technology and circumvent U. S. sanctions and. So I just don’t think we’ve reached a point yet where we can declare a detente and I and by the way Going back to what I said earlier.

When does that detente come? If biden is re elected and we have two years of negotiations and we come to a real settlement And a new mode of living with each other then i’ll probably believe in that a little bit at least for a while But I think we have to have that happen first because I think it’s actually more likely that we get two years into the second biden term You And China starts to panic because his foreign policy containment policy is is bearing fruit.

Jacob Shapiro: Matt, that’s as good as a, that’s as good of a back way into the piece that you wrote about Taiwan recently as I think we could get. Because I don’t know if you have this experience without question, the sort of audience response that I most often get is, okay when is China going to invade Taiwan?

And I usually do the whole dance of it’s probably not going to invade Taiwan. It doesn’t have the capacity to invade Taiwan. It probably wants to do the Hong Kong strategy. Like I do that whole song and dance, but I was particularly interested in your conclusion, which was, Taiwan, the business fundamentals are good, but In the short term, if you’re thinking short term investment, like if NVIDIA is going to the moon, TSMC should probably go to the moon too.

But the geopolitical outlook is extremely poor. And this is something I’ve been thinking about for a long time, but wondering if you could maybe expound a little bit on the implications for Taiwan of everything you just said about China. Cause I also agree with you, like there is And there’s an aggressiveness to China right now because they’ve never been so dependent on importing things from abroad so they can no longer just be the middle kingdom and sit there and expect that they’re going to be safe.

So there is that compunction to go out into the world, but I don’t know how you see that in terms of what Taiwan’s future is.

Matt: Yeah I do agree with you. I said the same. I said they wouldn’t invade. But that they would start to they would apply pressure because I do think that they want to undermine president Lai and They want to build on the gains that the guomintang made in the election when they get to the midterm election in 2026 You want the congress to be even more fully controlled by a pro engagement faction?

And ultimately you want a guomintang candidate or someone who’s in favor of engagement to win in 2028 So they’re going to undermine this administration repeatedly, and it’s mo mostly economic, but obviously it does, it entails the ongoing military saber rattling we’ve seen, just to make it clear to all the Taiwanese people that there are consequences if you go too far in this, in, in any kind of independence direction.

And the thing is, ev every thing you read in the mainstream news media and even a lot of experts. They say that and it’s a cop out. It’s we’re going to get more of the same, so they’re going to cross the little median line, in the Taiwan, it’s okay. But I, what I highlighted was, I think a demonstration in which China erodes some of Taiwan sovereignty is what we should expect.

And so I pointed to the outlying islands of Taiwan, such as it to ABBA in the South China Sea or like Kinmen and Matsu. And I have been very intrigued that there is an incident unfolding right now, as we speak around in men and, and it did involve the death of two Chinese mainland Chinese fishermen.

And then the boarding of a Taiwanese vessel by coast guard authorities. So this is something I’ve written about a lot. And I think it is now unfolding, which is that. During the 2024 election cycle, the U. S. is very distracted and China can put pressure on Taiwan with limited repercussions.

During the lamed up phase of Tsai Ing wen between now and May 20th is a great time to you can punish the outgoing lamed up government because they’re useless and you’re simultaneously sending a signal to the incoming government. We you know, we really mean business and you better not cross any red lines and I hope you learn From what’s happening now so that when your administration starts we can have a productive conversation, you know So I think that’s the approach china’s taking and and so then the fact that there is now an incident as always that Raises my conviction a little bit more that this is the correct view So I think and it may not be a full scale invasion of one of those outlying islands, but it certainly could be You Because that was the approach that russia took which was Do a hybrid military action that involves taking a bite and it’s a minor conflict and there’s some really you know fake but deniable there’s some deniability and then see how the americans react the americans don’t really have the appetite to send, you know us marines You To die over kin men, Not to so so there’s a debate about taiwan, but not necessarily about kin men.

So So I think they could take a bite and then when you take a bite of taiwan’s sovereignty Then all the people in taiwan have to think okay. We actually are losing territory now We’re not just losing, diplomatic allies in central america And it doesn’t solve the problem in any way, because of course the Taiwanese are going to defend their liberty and they’re going to defend their security.

But they also are going to be marginally dissuaded from any kind of radical thinking. And that in the opinion polling, which is that there really isn’t strong support for independence. It’s, it’s about a third or a little less of the population. So I think that from china’s point of view, that’s a great way to hobble the new administration Make the new administration afraid to be too aggressive I think they will I think china will be the one eroding the economic cooperation framework agreement so that there is less free trade and I think all of that will be in the service of producing a worse economy so that the guomintang can gain further positioning in 2026 and 2028 and all of it points to Something that doesn’t attract A lot of attention from americans, but but does bring closer a period where taiwan has a full government change a presidential change and has to resign itself to accommodating china and then that pushes the invasion timeline even further out because Think about it if i’m talking about a guomintang president say or someone like that from 2028 To 2032, maybe he gets reelected 2036, incumbents usually are reelected in presidential systems so probabilistically you could see a period of Tensions that are then resolved into new trade agreements and in new diplomatic discussions Through a lot of the 2030s, but in the end, is there a solution?

No, there’s no solution. There’s no hong kong Style solution the taiwanese people will not ultimately sacrifice their liberty and security And china will ultimately insist that they be absorbed And so that’s why I think that’s why i’m very pessimistic over the long run, but i’m not sure it’s happening right now and honestly, people always point to how xi jinping invented a midway point between His term and the 2049 hundredth birthday of the people’s republic, you know So 2035 has started to gather this Aura of inevitability and maybe that’s a realist.

Maybe what we should say is to be sufficiently Guarded about this serious risk is that 2035? Is a time frame in which it’s it’s not unrealistic to say we could have a war before that time.

Jacob Shapiro: All right. Matt turning away from taiwan Another recent report that you put out that I thought was super interesting was you tried to imagine True black swan scenarios for the year ahead and you put four different scenarios In there, I know there was Russia Ukraine.

There was something about Iran. So why don’t I just let you pick and choose? Which of your scenarios would you like to talk about going forward?

Matt: Okay. I just would I would say something about We’ve already talked about a lot of the other dynamics, And one that I think you’ll probably be able to talk to with a lot of people is The option of the fact that the U.

S. is ready for different leadership, but we’re not getting it this year. So a classic Black Swan would be when all of the ingredients are there for a younger person to take charge of the United States, for the U. S. to have a Macron moment, like Emmanuel Macron in France a centrist moment Dean Phillips calling to talk with Nikki Haley about running a joint ticket, those kinds of things.

So I think that’s very interesting. And of course it’s not what any of the evidence shows, it’s just that if the ingredients, structurally are moving in that direction, which is generational change, then maybe it’s going to happen sooner than any of us expect, and that would be the black swan, that would be the surprise.

I’d call attention to that, but I also just want to squeeze in one other one, I know you just said one, but Russia, I just keep reminding people about what happened in 1964, which was that the U. S. was engaged in a Showdown with russia a nuke essentially a nuclear showdown with russia. It was after the cuban missile crisis but it was still in a context of fear and lyndon b johnson was able to characterize barry goldwater as Way outside the mainstream too far to the right and you don’t want this guy to have control of the nuclear buttons When we’re having a nuclear showdown with russia And so what I put in that report was this is a dynamic that we could very easily see in 2024 Where the biden administration?

effectively continues to be very hawkish toward Russia, and if there’s any showdown as a result of that it actually reinforces their ability to say, you don’t want to have Donald Trump get control of the nuclear weapon in this environment. And they would, naturally, they would see a rally around the flag effect if there’s a showdown with Russia.

So my point was, That the administration will not be talking about a ceasefire, Russia after the election in Russia, March 17th in Russia, they might be interested in all kinds of ceasefire talks just to get the lay of the land. But the United States, the current administration is actually very happy to confront Russia because they know that Russia can interfere in the election.

And I think it’s a dynamic we should be aware of. I don’t actually think it’s going to necessarily save biden but I wouldn’t dismiss it either because I do think it would be a rally around the flag effect and so this report now that they want to mount a nuclear weapon in outer space, which is just Such an absurd report and we can talk about that But point being the fact that the u.

s is making a big deal out of this and now warning russia. Don’t do It actually does suggest that we could have some nuclear brainsmanship this year that would truly be reminiscent of the 1960s And so I don’t know exactly how it would play out and I don’t even know exactly how it would affect the election Dynamic, but I don’t think a foreign policy confrontation is negative for the president unless he somehow is humiliated just he gets outplayed or if it comes back to hurt our pocketbooks, like if there’s an oil shock from iran that hurts people’s pocketbooks That’s bad for the president But if it’s just a showdown with russia and there’s no Economic consequence and the president looks firm defending american interests.

Then it obviously That could reinforce the administration.

Jacob Shapiro: All right, Matt, I could talk to you forever, but unfortunately, because of the tech difficulties, I think we’re just going to have to call it a shot there. So you’ll just have to promise to come back on. And really great to be in touch.

Thanks for taking the time.

Matt: Yeah, absolutely. Jacob. I appreciate it. Thanks for inviting me.

Jacob Shapiro: 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 dot investments. That’s cognitive dot investments. You can also write to me directly if you want at Jacob at cognitive dot investments.

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