The following transcript was generated automatically using Descript.
Hello listeners and welcome to another episode of cognitive dissidence. As usual, I’m your host. I’m Jacob Shapiro. I’m a partner in the director of geopolitical analysis at cognitive investments. Rob and I are back at it for our weekly chat. I had some pretty serious tech malfunctions on my end. So as we’re recording, I’m scrambling around trying to save the recording, doing all the research that I had up on my screen disappeared at one point, had to get it back on.
So if I seem a little distracted and flustered, that’s why I’m sure Jacob, our editor will go through and make me sound great. But, we’re, switching. platforms as a result of those troubles and just wanted you to know if you pick up on any of that’s what’s going on in the background.
Otherwise, email me at Jacob at cognitive dot investments. If you have any questions about the services that we provide or you just want to talk about the podcast or have questions that you want us to answer on the air, take care of each other. Cheers. See you out there.
All right. I have survived Mardi Gras, no worse for the wear. When you’re, when you’re the parent of a small one during Mardi Gras, does not mean that you get to enjoy yourself that much. You just get pelted in the Adams out. by lots of beads and other toys and objects and things like that.
So that’s been my experience lately. Happy to take one for the team. How are you? Would you prefer to be an immigration
class? Because we can arrange that. I’ll maybe switch with you if you want.
you mean friendship? No, I would much prefer to be learning how to become a citizen of the great. Republic of France, than being pelted in the Adam’s apple by beads. Why? what’s, your worst story about, about what you’re having to do? Oh,
no, I don’t have any bad stories, but it’s funny being from the U.
S. and being in the class because I’m the only American. There’s two guys from Algeria, and then the rest of the class is all from Mali, Cote d’Ivoire, and Senegal. I feel like I’m cheating, because they’ll ask questions like, is arranged marriages, is that okay to do? And I’m like, no, it’s not.
and then, everyone else in the class is having a debate about it. I don’t know, so it’s, the class is not made for us. We’ll just say, but it’s, pretty interesting to observe.
So this has been a week of vindication for us. we’ve been talking about why we thought inflation wasn’t quite vanquished yet.
the consumer price index in January, 2024 increased 0. 3%. after rising 0. 2 percent in December, Core CPI beat point three nine percent core services. CPI was up point six six percent. we’ve also got the atlanta fed gp gdp forecast is now three point four percent gd pro gdp growth for first quarter of 2024 So put all of that in context with what chase and I talked about the labor market last week the united states economy looks hot.
We also got a question from mike. Who wrote in about whether China undergoing significant deflation was going to be transmitted to the United States and what impact that might have on the economy and just a little bit of data to light your way there. And of course my. thing with data went away. Hold on
because I closed it to reopen this thing. So the Chinese data said the Chinese consumer prices fell at their fastest pace in 15 years, at their fastest pace in 15 years in January, they declined 0. 8%, food prices down considerably. So 5. 9 percent overall. 17 percent slump in pork prices. We’ve talked about pork a little bit in China here on the podcast, but that was a, an eye popping one.
you’ve also got, any way you look at it, prices are falling, factories are cutting prices, producer price index is down. big. I saw one or two analysts who were out there saying some of that is skewed because the lunar new year falls in February rather than January this year.
And, caution people not to think about it in terms of deflation, but maybe to think of it in terms of less inflation than everywhere else. We can get into that in a little bit, but so it’s a two part question, Rob, let’s maybe talk about the United States first and maybe we can back our way into, is China deflating?
What does that mean for the U S economy? All those sorts of good things. But, take a victory lap on the United States if you want.
I will take a victory lap because we have spoken about this. Repeatedly. And now the data is really starting to come in and support what we’ve been saying, which is that inflation is likely to reaccelerate that we were closer to the bottom of the inflation cycle than the top.
And the more important thing is, what does that mean? because we can pat ourselves on the back all we want. What has it meant? It meant, for our clients, we’ve been avoiding bonds like the plague, which was a non consensus view. everyone has been buying bonds in the last six months in particular, in anticipation of a big rate cut cycle.
And year to date, bonds are down, pretty significantly at this point. I don’t have the number in front of me. But that narrative is starting to unwind. And that’s really important. the more important one is when we talk here, we always say. Especially when you’re looking at macro data, you have to look forward, you have to project into the future.
Where are the different hinges in the model going to turn? And if you look forward into the future, it’s not so much what has happened in the January CPI print, it’s what’s going to happen going forward. And if you look at the data coming in. What does it tell you? What’s in the crystal ball? you mentioned core services.
CPI was up, reaccelerated. That’s a, major problem, but at the same time, good CPI was down. So the overall CPI is still getting depressed by goods deflation because, as we’ve said, inventories have been getting worked down for the last 18 months, really, more than that, since mid 2022, goods have been in deflation.
Now, the real issue here is the crystal ball is showing us that is turning. We’ve been talking about this a lot with the inventory cycle, and I’ve been saying for the last six months, Ah, I suspect it’s bottoming. I don’t have good data yet, but that’s my suspicion. Now we have good data, and it’s definitely bottoming.
And that’s a very big deal because without getting into all the data, you can look at the ISM manufacturing index. You can look at, railroad, intermodal cars are up. 7 percent year over year for the year to date period, however, you want to slice it, inventories are rebuilding again and, companies have, just getting back to this notion of for every action.
There’s a reaction. Companies have responded to the fact that there wasn’t a recession by becoming more confident and rebuilding their inventories. So what does that mean? It means goods deflation. It means Is not going to remain the case for much longer because now the inventory cycle, the manufacturing cycle is starting to turn upward again.
And this has implications for China as well, but just to stay in the U S what does it mean? It means that this historical analogy, going back to the early eighties that I’ve used several times where, Hey, people began to, began to call victory on inflation. And then there’s this shock, which sends rates much higher as people realize the problem is much more deeply entrenched.
That is, I think the most likely scenario that we’re seeing here, because we’re starting a new up cycle in some ways. And we’re starting at a much higher starting level of inflation of labor market, tightness of everything, that you would use to measure slack. In the economy,
I think you’re being too generous to the narrative because if you open up the wall street journal this morning on top of the fold is the headline, even with fewer rate cuts, you should still buy bonds like they are doubling down on this idea that, oh, like it’s, it’s a little bit like it happened a later than we thought, but like bonds are still a good investment.
So I think the narrative is still that this is going to happen. I remember I was out with a friend. At a Pelicans game in January, and he asked me how many rate cuts I thought there were going to be. Shout out to Jack if you’re listening. and I said, I don’t know, I wouldn’t feel comfortable giving you a number at all.
Have you considered that there might be no rate cuts? And for the record, I’m not sure that’s the most likely scenario. I think the number might be closer to zero than seven, which is what people were pricing it at the time. And he got upset. He was like, how, like, how could you say that? Come on, that’s ridiculous.
and I think that’s there, like even in this, journal article that I’m throwing, some shade at a little bit, they’ve gone from a 66 percent chance that there would be. At least six cuts by the end of the year to now it’s a 35 percent chance, that it’ll be four or fewer by the end of the year, but it’s still a good trade if you’re going to buy bonds.
So I think this is actually much more ingrained in the narrative, than you’re giving it credit for it. Also, I came across, I’m sure you’ve come across this quote and listeners have come across it before too, but it’s John, Kenneth Galbraith said once that the only function of economic forecasting is to make astrology look respectable.
I’ve been thinking about that quite a bit recently, because you see all of these different projections, and you think that. I don’t know if you also saw this, there was and this is where things really start to traverse on politics, because all of this is happening within the context of the U.
S. Presidential election that is going to be hugely consequential for markets, for the future of the United States and for geopolitics in general. And the other part of this is migration. and the congressional office, released a big report on February 7th. That’s their longterm budget and economic outlook.
and it estimates that the labor force is going to be about. 1. 7 million potential workers larger in 2024 and about 5. 2 million more by 2033 accounting for all of the recent migration to the United States and the graph that they give a sort of funny like shoots up and then shoots down and then it’s just flat for a long time.
So there’s that astrology component. We might as well be reading my horoscope cancer, the crab. If you guys are wondering out there. and it talks about how these extra workers are actually you. Going to probably give more tax revenue And that the federal deficit might be smaller by almost a percentage point as a result But also will have effect on inflation and on wages and maybe even lower productivity so so you poke all around and for me The other part to be found in all of this is, what does Biden do if he does get the inflation surprise?
What does that mean for the U S election? What do we see other countries start doing, not just from a monetary policy perspective, but from a political perspective, if they start worrying that this is going to, that Trump is going to ride this into the white house, like all of that, is wrapped into this very dry conversation about inflation and inventory cycles and things like that.
Why don’t we talk about the political side first, because I think that’s very important. as we talked about last time, Jay Powell is a man and he is ultimately the, the buck stops with him in terms of leading the conversation on interest rates. And I think it’s a very interesting question, how much he’s thinking about what sort of pressure might be applied to him.
In the future under a potential Trump administration, for example. I don’t have a strong view on that. And maybe you do, but it’s definitely a factor in shaping how this plays out over the next few quarters. And he’s already taken rates cuts off the table for March and signaled very clearly that’s, not going to happen.
And the most recent data makes that almost a surety. What does that tell us about his thinking? I think those are, major issues and they’re inherently political ones because it’s about the interaction between these huge figures.
this gets a little bit more into psychoanalysis, but we’ve talked about Jerome on the podcast before and you are the one that has. compared him to what, a medieval monk or something like that. Like he’s, made it in the professional world. Like he probably has a duty or feels a duty of service.
He’s a dutiful man. He’s not doing this for fun. He’s doing it because he thinks he’s doing something meaningful for his country and using his expertise in some way. And I would imagine that before you even get to Trump. He’s probably thinking about like Biden is the more operative issue because the Biden White House has set themselves up here.
If inflation does what we’re talking about, because their whole narrative is we beat inflation. We figured it out. Biden is a good steward of the economy. Even if people think the economy is not doing right now, once the data comes out, once people start to feel it in their checkbooks and in their bank accounts and things like that, People will come around and we’ll see that Biden is a good steward of the economy and built in that His rate cuts. So if we get to November and there are zero rate cuts Biden won’t do it by tweeting insane things or for trying to you know, subvert the law things like that but you can be sure that he will be putting as much pressure as possible on Powell to cut rates because he wants rates to be cut because that’s the narrative that he’s selling and if We get an inflation spike and things are getting bad from that point of view Like, it’s, the writing is going to be on the wall there for him.
As for Trump going forward, this is the thing, we’ll have to see who Trump appoints. and the same way with the Supreme Court, it’s not something that’s going to happen overnight. It’s going to be the accumulation of appointments and decisions and pressure over time that is going to change things.
I don’t think Jerome is susceptible to Trump influence. The question is if Trump had another four years and he was able to appoint different people to different parts, I don’t know the workings of the Federal Reserve. Maybe you know them as well, but I know that he’ll have certain appointments that will come up that will affect who serves and how they serve and things like that.
Then we could be talking about a Federal Reserve that over time becomes more pliable, but I don’t think that happens on. The day after the election or even the year after Trump gets elected, that’s a longer term story, but it also, boy, does it add fuel to the fire to everybody who talks about, the debasement of currencies and the embracing of crypto and how monetary policy is all rigged and a joke like, like it puts us down that path in a much more serious way and in a much more obvious way than I think we are today.
So that’s my off the cuff response. I wonder how that lands for you. Okay.
I think I’d be inclined to expect much more hawkishness, both on the part of the Fed and on the part of the politicians, because right now, it’s a free lunch to be hawkish. People aren’t concerned about their paycheck. Their paycheck is great.
And especially if you look at the sort of lower third of workers, their real wages have gone up substantially in the last few years. They’re feeling really good on that front. What people are not feeling good about is inflation. And inflation is also much easier to turn into an issue. Everyone can see the price of gasoline.
Everyone can see the price of bread. Those are salient political issues. That are almost certainly going to come up in this, upcoming race. So if you are, president Biden, I think it’s tempting to see this through the prism of the last Trump administration or even the administration before that.
Where we had ongoing deflation, the major concern was lack of growth. Now, as I call it a free lunch, because you can try to raise rates and fight inflation. And right now growth is off the charts. The problem is growth is too resilient. Growth is too, entrenched, which is for now a good problem to have, which is why I think the most likely outcome is.
response to that. That’s probably an overshoot in the other direction. If the sort of duration and magnitude of inflation from here or anything like I think is possible. And again, this is totally a not consensus view. As you point out, everyone still thinks inflation is just melting away that rate cuts have been delayed, but they’re going to happen and they’re going to happen in large size.
call me a little bit cuckoo here, and this is not what you’re going to hear, on the squawk box at a Schwab investor services. But I think that’s the most likely outcome from here. If you really look into where these different pieces of the puzzle are moving. and there’s not a, there’s not a big penalty to be paid in being hawkish right now.
Not yet. There will be in the future, but not now.
and I think a good way to underscore this in a way that, practically that we’re working with clients about is, and you’ve been talking about this for much longer than we’ve been talking about inflation, which is, we’ve gotten used to monetary policy.
Okay. It goes in one direction and then it goes in the other direction. And it’s very it’s very clear. You can look at a chart and see, Oh, interest rates up, interest rates down, like we’re in up cycles. We’re in down cycles. And you’ve been saying for years now. as a result of multipolarity, as a result of de globalization and nearshoring and reshoring and just things and, domestic cycles and things like that, we’re going to bounce around, things are going to be more volatile.
So even if we did, even if our non consensus call here turns out to be incorrect, our broader perspective is. Things are not just going to go down and not just going to go up. We’re probably going to be bouncing up and down, back and forth. And if you’re going to listen to the, just by bonds, like the timing was a little bit wrong.
Like now you’re in seventh day Adventist land. Like you have to be a little bit more active in responding to these things because the direction is not going to be clear either way. I also, we’ve been talking a lot about energy on the podcast. And I just want to, I want to draw a highlight. I want to highlight the energy conversation again here, just to say that one of the reasons that inflation year on year is so low is because energy prices have been down year on year.
and we’ve talked about all of the reasons we think that energy prices could rise again. I think it also, again, shines new light on some of the recent decisions to restrict LNG exports or make that harder. Because if you are the Biden White House and that the, if you kick out lower energy prices from underneath the table, Suddenly inflation is going to rip.
And so you really need energy prices to stay low right now. So if that means restricting LNG exports, if that means making up with the Saudis, if that means signing a defense security treaty with the Saudis and bending over backwards, do whatever they want in the Middle East. this feels less like a conspiracy theory now and more a, okay, I get why we’re pushing this direction because you need those energy prices to stay low.
If the narrative on the economy is going to be able to survive. The, jumps that we’re talking about here, the only silver lining I see in all this from an inflation standpoint is, shipping prices seem to a flat line for now. there was a remarkable statistic in, Nikkei today that was 90 percent of container ships are avoiding the Suez canal.
which I have different thoughts about that because I don’t know if you knew this, Egypt got. Roughly 10 billion in transit fees, over the last 12 months from the Suez. So 90 percent of container ships are no longer going through the Suez. blows my mind and makes me think Egypt, is on the verge of economic collapse, but they’ve been on the verge of economic collapse for a while.
I digress. but 90 percent of the container ships are already taking the long way around. So maybe that’s already priced in, or maybe we get more disruption, or I don’t know, but at least the shipping conversation, even with the Red Sea still closed, at least it’s looking like it’s stalling out, but I don’t know how secure to feel about that.
Although it may stall out in one place. tightness emerge in other places. I think that’s getting to your point about sort of action and reaction things being unstable things swinging back and forth, so We saw the Huthi attacks happen because of instability, you know They saw an opportunity that caused the issues in the Red Sea.
So now As you mentioned, ships are going around and not going through the red sea. what does that mean? It means that not only is that increasing container shipping prices, even though that may be leveling off now, but now you’re seeing a response by companies who are putting more capacity into air freight, and that has its own bottlenecks.
So you’re likely to see air prices go up in response. the system is complex and interconnected. And I think one of the recurring opportunities is going to be like this, where people say, Oh, this narrative is done. So now it’s, everything’s going to go back to some equilibrium. There is no more equilibrium.
There’s going to be some crazy shit happening in some part of the machine every week that we do these calls for. Years and years. That’s my prediction. And, that’s the recurring opportunity is identifying and anticipating that rather than being backward looking and focusing on one part too much at the expense of the others that are, that are moving in response.
Yeah, and that’s not even a prediction. just look at what’s happening in the world today I couldn’t whittle down the list of things we needed to talk about on the podcast today because so much shit is going on Just the Chinese economy and Russia Ukraine by itself would fill up every single weekly podcast We do we’ve got Israel stealing up to go after Rafa on the border with Egypt and all sorts of political tension back and forth between Israel and Egypt and between Israel and the United States.
That’s an episode in and of itself that’s going to affect everything. We then have Indonesia’s elections, Pakistan’s elections, Venezuela threatening Guyana, we have Myanmar calling for Forced military conscription, which suggests maybe the military junta is losing some of its force. And what does that mean for, different powers in the region?
There’ve been crossover attacks in China. There’ve even crossover attacks at India. That’s on, on, on the Indian ocean. We’re talking about shipping and disruption. Before we even get to European politics and what’s happening with Germany’s like you go down the list like so many things are happening And it’s really hard to put it together And I’ll also just say listeners.
We usually not usually we always keep the pod The podcast content about what’s going on in the world. I will just say if the things that Rob just talked about make you wanna understand what we advise clients to own, where to own, how to own, my email address you can write in at any time. So we just wanted to say that because we got that call particularly right.
And it means a whole bunch of other different things we’re not gonna bore you with on the podcast. But if some of this. Cause it’s a light bulb to go off in your head and you just want to talk about it. please feel free to reach out to us. That’s literally why we’re here, doing some of these things.
maybe let’s move to the China part of the conversation, Rob. And I know we’re always going to be in danger of doing the treadmill conversation over again, but I think it’s maybe useful to talk specifically about, do you think China’s in deflation? And if you do, how do you think that is going to affect the United States or other economies in the world?
I
thought a lot about this question before the call because I was trying to prepare some answer to this. And I think it’s a very difficult question to respond to because there’s no straightforward answer. To be in deflation, more generally means something very different from what we’re seeing right now.
Just to clarify, first of all, everyone is talking about China and deflation, and this has been all over the headlines. There was a piece in the Wall Street Journal a few days ago, a headline piece. China is actually not in deflation right now. Month over month, prices are up 0. 3%. Everyone’s just focused on the year over year number because of the year ago comparison, now it’s negative.
So Maybe this whole conversation is moot. I don’t think so, but I just want to point that out how silly some of the framing around this can get. that isn’t to say that they’re not in deflation, however you want to define that, but I think you really have to get your head out of the mindset of the United States and the narrative and the conversation that we all had for the last.
15 years about deflation because those are two very different phenomena. And the Chinese situation is very different. So let’s look at all the individual components, because when you analyze this, you have to look at the different parts. the biggest driver, as you pointed out as food, that’s not a bad deflation.
that’s, you don’t need me to tell you that, the. So leaving that aside, that’s been the driver. the other Jews have not really started to drop, but in all likelihood they will. So what does that mean? What is deflation in the Chinese context? And how does that impact the U. S.? The first thing to know is, uniquely, China has already been Exporting deflation to the U.
S. for many years. in some ways, this is almost a change in that direction. And we can talk about why. But if you look at what China has done, the amount of supply capacity they’ve built across all sorts of industries. Particularly manufacturing, as everyone knows, and the sort of subsidies that have gone into those industries, whether you talk about, subsidized capital, compressed real wages, everything has been put to the advantage of the exporters in China.
And that has driven down prices. the whole business model of Sheehan and Timu, which are the emerging disruptive new players in us e commerce is based on, cutting out the middleman and just giving you direct access to those ultra cheap Chinese manufacturers. That deflationary trend has been in place for a very long time, and now we’re seeing the hypothesis with the emergence of these two players.
I don’t know if you follow that, but just to put a bottom up, anecdote to make this more real, right? so, that is the background. the real issue around deflation in China, which isn’t even in the numbers yet, but it’s worth talking about is around debt and is around asset price deflation.
And those are very different things. the asset price deflation is primarily around property. As we know, and I think this gets to the question of equity markets in China, because as you point out, people in China have their, assets, their savings in property for the most part, and equity markets are viewed as a lottery, right?
A gambling casino. so what happens as you have, this debt burden? That is enormous. And they try to work it out as property prices begin to slowly deflate over time. I don’t have all the answers to that. And I think there’s an open question of to what extent this, this relives the Japanese experience of the 1990s and their post bubble, pop.
that is an open question, but, what I’m focused on is how do they manage. The decline in household savings, because if you read, I think it was in the financial times in the last day or two, there was a piece about a Chinese woman. She put 80, 000 into a wealth management product.
She was informed by the bank selling her that wealth management products that she’s not going to get her money back. That is the problem. That is the deflation. That is the problem staring Chinese households and the regime in the face. anyway, I don’t have a nice way to tie this up, but those are a lot of the moving parts and threads that I’m trying to think about in that regard.
I think it’s useful also because China is so big and it is a political boogeyman in lots of different ways. But, I can’t believe I’m about to cite the economist, but I’m about to cite the economist because they had a very, short piece about they called the China’s heroic micro industrialists and the statistic that.
Sort of jumped off the page to me, where that small firms with fewer than 300 employees accounted for 79 percent of China’s job creation and 68 percent of its exports. So we think about China, the Chinese Communist Party, staying on economy, authoritarianism, driving, all these major goals about artificial intelligence and things like that.
And it’s actually. The small mom and pop shops that actually make it work within China. And a lot of them have had to deal, or at least are focused on exports. And as exports start to dry up to places like the United States, now they’re having to deal with, do we export to Russia? They’re at least going to be willing to pay in Chinese Yuan.
Can we get to Europe? we have product standards that are going to hurt things like that. the story that they talked about was a small bicycle making shop. And as you can imagine, like they, they were making kids bicycles. And because of the one China policy, if you’re a kid’s bicycle maker, not a really good business to be in China right now, because there’s no children to ride the bicycles.
So now they’re like trying to retrofit like. Bicycles for old people who have balance issues, so that you can sell the bikes to the older people, but you still The other thing about kids bikes is, as the kids get older, they have to get bigger sizes, so you start selling them more. You sell, a bike to a 75 year old, even if it’s the greatest bike in the history of the world.
they’re not gonna need a new bike in 10 years. They’re probably gonna be dead in 10 years. But the point I just wanted to make there is that, And I think you underscored this in what you’re saying. It’s really How is this affecting the woman who puts 80, 000 in the wealth management fund?
And that’s the real question for China right now, because Xi Jinping’s future and China’s future is going to be on how well he can redistribute all of that wealth that’s been generated in the coast into the actual bank accounts of these small mom and pop shots. It’s not about the glittering high speed rail and the beautiful AI solutions and the.
Incredible cities on the coast that I would probably want to live in rather than my dilapidated city that’s falling apart at the seams. what does rural China look like? What is the woman who has that 80, 000? Where does she put her money and how does she grow her wealth? that really is the question there.
And the economists like it, it ended with its usual, it was actually sort of optimism. It said, these are grim times for China’s micro industrial micro industrialists, but their resilience is a wonder to behold. And I, the last point here that just circles back on something you talk about all the time, which is China at least knows how to make things.
So like they’re not starting from zero here, like they have been making things not just for the Chinese market, but for the world for a long time now. And we don’t think there’s going to be that next phase of globalization. We don’t think India is going to become the next China. So they do have this know how that maybe they’re going to be able to make work in the context of what they’re doing, but it’s going to be very difficult.
Just to follow up on a few things there, because I think there’s a few elements to, to poke into the first is. There, in a lot of this discussion, people are confusing a cyclical issue with a secular issue. as we’ve talked about, the U. S. manufacturing economy has, and the U. S. inventory cycle has been in a depression for the last 18 months, period.
it’s not a surprise that Chinese export oriented manufacturing has been Weak and that is dragging on Chinese growth. it is an enormous and enormously important part of the economy because as you’ve pointed out in the past, the U. S. And China have not decoupled despite all of the talk and the political blather.
That is just not we’ve become more dependent on each other in that time.
and to your point, I don’t know if you saw everybody and their mom was sharing that data about how Mexico has surpassed China as the biggest source of Imports to the United States. And if you actually dig into the data a little bit, it’s just stuff that was made in China that went to Mexico that came up.
So it’s like we’re changing what things say on paper to make all the politicians happy. But, decoupling itself, like you’ll be paying a lot more money for your goods to go back to the inflation conversation. If we start having real decoupling, which if Trump rides an inflation spike into the White House and he, does some of the tariff things that he’s talking about, that will happen anyway.
But go ahead.
I think it also makes it less likely that he will, if things really do progress as I think it’s going to be a different situation from the last time, just thinking about trade policy and tariffs, because previously we were coming out of deflation, there was all sorts of talk about what was the proper solution to that.
I think it’s going to be a lot harder to come into an inflationary environment. With the cycle turning up and say, okay, now we’re going to layer tariffs on top of everything else, because that’s, not a winner, politically speaking, but, but getting back to China, I think that’s one issue.
So a lot of these problems, a lot of the deflation talk is going to go away, is my prediction in the next six months, the narrative is going to change as the cycle changes. But I think just getting to what you said about China making things, this is a really important point when you’re thinking about geopolitics, when you’re thinking about decoupling and sort of conflicts between states is China has done something that is very rare and happens very rarely because it’s so durable and that is it’s created a cluster of countries.
Human capital, a cluster of people who know how to do things, and that is very durable and very powerful, relationships, know how all of this doesn’t go away easily and if they can survive and, it looks like they have. This cyclical downturn, which took place on top of the COVID shutdowns, which really made things hairy for a while, but now we’re coming out of it.
And I think they’re mostly fine. we talked a few months ago about layoffs and low end manufacturing in China and how that was a worrying sign. I’m less concerned about that than I was. but assuming they get through this, that asset for China is not going to go away. And it’s not going to be replicable by almost anyone else because it’s so durable.
the United States should know this better than anyone else because the United States did this at the end of the 1800s and in the early 1900s, the rise of the U S economy was laid in the accumulation of this human capital and expertise and being at the front of making things after the civil war.
And going into World War One. I also, just anecdote. I don’t know, this might not be true in France. Annie has been reading lots of little books lately. She has four different copies of Brown Bear. And she has to read every single one. Every single one was made in China. I know that some people from the tissue conference, maybe you’re listening, I know that, cardboard paper is not the same as tissue paper and toilet paper and things like that.
But it’s like astounding to me that you have like, literally, I went through all of her, kid books after I saw that all the brown bears were made in China, every single one of her kid books, the ones that are a little harder so that they don’t just tear and things like that. Every single one of them was made in China.
And that’s like a small, insignificant thing, like if, if we lose access to cardboard children’s books as a result of the US China war, like the world is not going to change and things like that. But it just, it gets to your point about know how because everything is made there. Even the little things you don’t think anything about.
Yeah, I think people are going to look back at Deng Xiaoping’s, visit to the South in their, I think, what was it, 1992 as, the pebble that created the landslide of good things in many ways. but as you say, that’s not going away. And it’s going to remain a durable asset for China, and it’s not gone away, despite all of the decoupling talk, as we’ve said, so that is definitely a positive in their corner, but the issue.
What just thinking about deflation, the issue is not about these manufactured goods. The issue is about the wealth management product, as we said. as Walter Baggett said, financial crises don’t destroy capital. They just reveal the extent to which it’s already been destroyed. And, that is the issue here, is that.
All of that wealth in China, when that woman gave her 80, 000 to that bank, That wealth was gone. Because China’s been throwing the wealth down a hole, by building shit they don’t need. To put it in economic terms. So how do you resolve that, I think is the question. And when it gets to equity markets, I think it’s an interesting question because they’re obviously trying to put a stopper in equities and keep them from going down further.
And that’s a really important sort of outlet for them, because when you think about wealth, what is wealth in many ways, like there’s real wealth and then there’s paper wealth. And paper wealth is what matters here. If that woman thought her 80, 000 was still there, we wouldn’t have a problem. paper wealth is the promise that someone’s gonna come and give you 80, 000 in exchange for whatever the hell you hold.
Wealth management product, project, wealth management product, an apartment, in a third tier city, whatever it is. that is the dilemma that they face is how do they rebuild that, I don’t want to use the word pyramid, but that pyramid of promises that is crumbling. And they can, but I don’t know if they will.
Exactly. and something that Chase said has stuck in my mind too, which relates to what you just said. Cause think about this in the context of the U S where us equities have just been ripping since the bottom last October, like many people are feeling much different than they did in October because they’re 401ks and they’re in retirement accounts or like they’re up like what?
30 percent 40 percent things like that. so that maybe also leads into the inflation thing. Cause I think a lot of people on paper are feeling a lot better than they did. even six months ago. we don’t have a ton of time here, so what I’m going to do is I’m just going to paint a sketch of what’s going on in the rest of the world.
And Rob, you can pick at some of it, or we can decide to close, because I know you have to present to a client here soon. I just want to I’ll try to go in geographic order. I don’t think this made it into the podcast last week, but you mentioned it, and I thought it was worth talking about how we’ve got three states that have decided to lead ECOWAS, which is the economic community of West African states.
so Burkina Faso, Guinea, Mali and Niger have all had coups. Guinea is still in, but Burkina Faso, Mali and Niger leading, or leaving ECOWAS. it’s useful to think about just in terms of what this means in terms of African trade integration. ECOWAS was one of the real. Institutions that had some way to it in Africa and especially going into the big hopes about the expansion of the African continental free trade area to see that fall apart at the seams is pretty depressing from that point of view.
Go a little bit further over there. We’ve been talking about the Red Sea for a long time. People are still not talking about Ethiopia and hunger in Ethiopia continues to increase. You’ve got millions of people who are not doing well. Hunger increasing even as Ethiopia has been able to surge wheat production.
So don’t lose sight of the fact that and I haven’t even mentioned Sudan, a conflict that looks incredibly grisly. And I think we’ll look back, like somebody will write the book about Sudan 10 years from now and we’ll all look at each other and say, did you know that was happening in Sudan? it’s just, if we spent a 10th of the amount of time talking about Sudan as we do about what’s going on in the Middle East, I think we’d be waking up to the fact that how horrible are the things that are happening there.
I talked about Pakistan, Imran Khan, the cricketeer who’s in jail, his PTI party got the most seats in the election, which was a surprise. I think it was 93 seats in total, but it looks like the establishment is going to cobble together a coalition and it’s going to be in power. you’ve seen some streets and some violence in Pakistan, but it hasn’t blown up yet, but that’s something to really keep an eye on because the PTI, which is Imran Khan’s party, is saying that there was all of this malfeasance.
and this new government is going to have to make cuts to secure IMF funding and all sorts of other things. like the Pakistan election didn’t blow up, but that’s just simmering. It hasn’t gone away. move a little bit over to Myanmar. I already mentioned it, but I’ll just say Myanmar called for mandatory Conscription for soldiers, starting in April.
that sort of stopped me in my tracks. You could say that maybe they’re just trying to build capacity and things like that, but if it’s internal insurgencies are so bad that the junta is. Requiring that everybody serve in the military. are they losing soldiers that quickly? Where are their resources going?
What does that mean in the context of that region? It’s been fairly quiet, but there are also ramifications there. the last time Myanmar got violent, we talked on the podcast about how tin ore, like some, I think it was what, 60 percent of tin ore gets mined in Northern Myanmar and gets taken into China.
And you’ll see. See it start to bounce around in global commodity markets and things like that. And then finishing up with Indonesia, we’ll have an Indonesia expert on the podcast in the next week or two to talk about it. a remarkably quiet election. What everybody thought was going to happen, happened.
Prabowo won. And now we’re going to see. Just how much, the current president, Chokwi, is cool with this, transition of power. So some people thought that Chokwi was going to try and stay on, try and change the constitution, maybe stay on extra judicially. He didn’t. And Prabowo has some really interesting policies that he’s throwing out there.
I’m, speaking at a dairy conference in a month, and I, one of, His promises on the campaign trail was he’s going to provide free milk to expecting mothers and children throughout the country. The dairy industries of the world should rejoice that Indonesia is suddenly wanting to have access to all of this milk.
but it’s a country of 270 million people. and it’ll be interesting to watch whether Prabowo continues with Jokowi’s policies, which we’ve talked about here have been relatively successful or. Whether, and he’s, got a little bit of a shady past in terms of his participation in, before democracy and the dictatorship and things like that.
Now that he’s in office, is he going to show us his true colors and start to consolidate power and move in a direction that Jokowi really didn’t? And Jokowi has a lot of populist support. So it looks good right now, but it’s just one thing to watch about and we’ll do a whole deep dive into that in general.
so I just wanted to paint, that’s before I ignored. Israel and Gaza and Russia and Ukraine and Europe specifically there, because just as you’re painting a broad, stroke across, the world’s geography, like there’s a lot going on everywhere there. So is there anything I didn’t mention or anything you want to talk about a little bit further, or do you want to say, let’s prep for the client call and we’ll get back to the listeners next week.
No, nothing big.
I did want to ask about Venezuela Guiana. What if you thought that was, an imminent, issue, that was pretty much it in the Western hemisphere.
Yeah. I’d recommend people go back and listen to the episode with Sim Tak about this and we’ll have Sim, Sim back on too.
Sim usually talks about Russia and Ukraine and he does in that episode, but we talked a little bit about Venezuela and Guyana and for a little context here, Guyana has discovered a fairy tale amount of oil. it has territorial disputes going back to the late 1800s with, with Venezuela and by extension, Great Britain and the United States.
There’s a long sort of tortured history there. But Venezuela is threatening to go and seize some territory from Guyana and it has deployed military forces to the border with Guyana and is threatening to do that. you had the United States come out last week and promise all sorts of weapons, not military aid, but weapons to Guyana to defend itself.
and I said this in last week’s SITREP, I’m not going to make the same mistake I made with Russia Ukraine and say, Oh, they’re just deploying the military forces to send a political message because they want some kind of negotiation. Like they’ve deployed the military forces. So to me, the threat is credible.
and if you’re Venezuela, and you look out at what’s happened in the world, Azerbaijan has seized territory from Armenia. Didn’t really get more than a slap on the wrist. Look at what Israel is doing in Gaza. I know there is a lot of. Self righteous indignation about that Israel’s not getting anything but a slap on the wrist or, angry headlines from Oh, the relationship between Netanyahu and Biden is boiling over like whatever Israel’s doing whatever it wants and it’s not getting, punished by anyone externally.
So if you’re Venezuela and you’re seeing Oh, we see all these other countries that are doing things and settling scores. Why don’t we settle some scores of our own? Like you can see how the Venezuelan mindset would be to maybe go after that. I think the real question here is Brazil. I think this is a real opportunity for Brazil to flex some geopolitical muscle and say, no, that’s not going to work.
And we’re going to make sure that’s not going to work. Now I said to go back and listen to the episode. Because he talks about how Brazil’s military capability probably can’t handle what we’re talking about here. Because what you’re talking about is you’d probably have to get Marines and an expeditionary force and land them and protect from Venezuela, which is much closer there, and which is a regime that has done nothing but really, thuggishly.
extract resources from its own population here for decades. and Guiana is not exactly set to stand up to them. and then in the context of all of that, you have the United States took down or delayed some sanctions on Venezuela a couple of months ago. They’re starting to reinstitute some of them because it doesn’t look like Venezuela’s elections are going to be particularly fair.
They’re disqualifying the main opposition candidate who would probably win if it was a fair shot. So how does the United States balance the economic incentive versus does it intervene militarily? Things like that. the pushback here would be, is the United States really going to let that happen?
Is the United States really going to let Venezuela overrun Guyana? On the one hand, Russia, Ukraine, Israel, Gaza, worried about China, like the list of problems grows pretty long and you would have to deploy some serious resources probably to turn Venezuela back and maybe Venezuela is angling for something.
But, for me, it’s. It’s very concerning. I would take Venezuela seriously here, and just because Latin America and South America has been quiet relatively geopolitically doesn’t mean it will continue to be and, the thing that I am watching most of all is, can Lula figure this out?
Can he deter Venezuela out? with political means. And if that fails, can Brazil or some other country in the region do something without the support of the United States? Because now, then we’re in a truly, the whole multipolar thesis gets advanced. So those are just some, thoughts about that particular issue,
just to add two quick things.
yeah. First on the Brazilian military, in 2021, I stayed at an Airbnb in Minas Jedis that overlooked a Brazilian military base. And, those are some pretty tough dudes. I have to say, everyone imagines the typical Brazilian. As a, flip flop wearing laid back guy, but, that was pretty, I got to wake up to the bugle, at five o’clock every morning.
So that’s a memory that will always stick in my head. So I’m, bound to overestimate how tough the Brazilian military is just based on that. but more, more seriously, the, I think this Venezuela Guiana issue was really worth. Singling out among all of the issues, as you point out, because to my mind, the U.
S. has it with the Red Sea issues and allowing those to go on, to the extent that ships are just not using the Suez, I think that’s an abrogation of its number one geopolitical role in the world. And this seems to be the first real test of what they’ll do. is this, is the Monroe Doctrine, still in place?
are we going to be the top dog in the whole Western Hemisphere? Are we going to, allow something to happen? I don’t know what that is, but that’s why I asked about this one in particular because it seems like a. Big question.
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