Link: http://investorfieldguide.com/zeihan/
About Peter: Peter Zeihan.
Transcription: Otter.ai
Natural Advantages
- “crunchy on the outside, gooey in the middle”: mountains/ocean borders, arable land throughout. Temperate winters to deter disease. Rivers which can transport at 1/12 the cost of land. US has better factors than any preceding powers inc Russia, France, Germany, UK, Japan, and “certainly China”
4 Periods
- Imperial: handful of nations dominate the globe. Era of most technological advancement and ultimately WWII
- US picks up peices and instead of silo’d imperial cores, US with a magnitude of order stronger Navy ensures safe trade in return for alliance during the Cold War.
- Third stage is winding down and was the ‘autopilot’ stage which saw globalization, unprecedented degree of capital formation, and technological advancements.
- The age that is approaching. Recognition that has been 30 years in the making that US has little need for the current global structure in which the US needs to ensure guarantee trade and acts as planet cop. No clear foreign policy but recognize that it can afford to be more isolationist
Picking up the Pieces after WWII
- Bretton Woods agreement was bringing the world into the US capitalist sphere. Basically a bribe in which the US would secure the seas for trade in exchange for inclusion. With a safe ocean, international transport become cheaper, and the manufacturing base expands. Supply chains stretch from where they are most naturally efficient. “iPhone touches 1200 different facilities and 50 different countries today. And that’s allowed us to have a huge advancement in the human condition, and to spread wealth and democracy far and wide. This is all an inadvertent outcome of the strategic order the American setup. But this was never the goal. This is a side effect.” Global trade is up 1000x since 1930, 95% by sea.
- With the exception of the US and UK, every superpower’s entire Navy was blown out in WWII. And after the war, with the US guaranteeing the oceans, nations did not have an incentive to rebuild especially since they were impossibly behind. Although the Chinese are rebuilding now, they are generations behind at current rates of Navy building esp with the US now rolling out the latest supercarriers. US Navy is stronger that 10x the rest of the world combined.
- With the US less dependent on this arrangement this process of improving economies of scale moves in reverse if we see a “collapse of global manufacturing from these far flung dangly multi continent supply chain systems into much more constrained networks were inputs, production consumption aren’t simply physically secure, where the CO located right now the only place on the planet that happens is North America.”
US trends towards isolation
- Increasing politically: 4 presidents in the making culminating with Trump.
- Increasing militarily: we have cut the number of ships in half while concentrating them about 11 supercarriers. This gives us 11 mobile bases of unrivaled strength but sacrifices a speedy fleet designed to police trade routes. We are slowly becoming less able to perform that task and it will reach a tipping point in which it will be apparent that the US is not securing global commerce, inviting an international free for all on the open seas.
- US trade is 10-15% of GDP and most of that within NAFTA. China is 2x, Germany is 3x! The rest of the world relies on a secure sea far more than the US
- The 2007 crash and loose lending that accompanied it was symptomatic of the immense availability of capital stemming from demographics and its accompanying appetite for investment. Excess capital meant lower hurdle rates, more speculative projects, and massive acceleration in horizontal drilling. Shale boom means that US is largest producer of natural gas, near the top in crude oil and largest exporter of refined product.
- Light vs heavy oil product mix is clever arbitrage. We import the less expensive heavy oi (mostly from Canada and Venezuela), refine it and export as refined products. We produce light oils and shale is “infant oil”. Since it’s trapped in rock it’s uncontaminated. Given recent prices and the glut of light oil in the US we are retoolling our refineries to process light oil, making us far less dependent on global supplies.
Breakdown of order
- “We’re in a system right now, where global norm is stability, that’s not normal. That’s just normal in our lifetimes. If you go back to the world before 1946, the world was not a single financial space. Direct arbitrage among the various markets was thin and nonexistent. And markets, not to mention countries went to zero, often all the time.”
- What does the end of the EU look like?”The European Union is an institution that is 100% dependent upon the global order without American strategic largest and I’m access to the global market. The Europeans cannot hold together as a single entity because they can’t defend themselves they start competing and that is the end. For example ,look at Southern Europe. Everybody knows their indebted; everybody knows their indebted in euros, do you really think they’re going to keep in Northern European dominated currency when the system ends? So then the question becomes what are all these loans denominated in. So if you’re in Italy do you want keep paying in euros when your own currency is devaluing, which means that you will default which means that the Northern European banks will go to zero, or do you pay in lira, in which case the Northern European banks [also] go to zero. I mean, there’s no way out of this…The more you haven’t danced under these global structures, the greater but distance you have to fall”
France
France is on the extreme western end of Europe, it has never integrated to the degree with the rest of the European structures that say the Germans have, they’ve got an independent military capacity and independent food supply system and independent energy supply system. So I don’t mean to suggest that the French aren’t going to suffer significantly when the earth system cracks. But it’s going to be nothing compared what happens in Germany, or Poland.
Germany
“Germany is the quintessential example of the country that can thrive under the global order because the global order remove the need for the Germans to be well to be blunt, German, it’s like all of a sudden didn’t have to fight for anything everything that they fought for in World War Two, market access and resource access, the Americans just walked in and said, ‘Yeah, you can have that you have to be on our side against Soviets.’ And so for the first time, the German didn’t have to worry about strategy or military tactics at all. The Americans took care of that. And they could just focus all of their attention on manufacturing, lo and behold, they kick some serious ass. What happens when that ends? The the supply chain system is spread throughout a dozen countries in Europe, the military system is a joke, it’s it’s arguable that they don’t even have a Navy and Air Force right now. Their energy comes from Russia from the Middle East, very little of it from within Europe itself. So the Germans in a day have to go from being basically Scandinavian socialists to be in German again and you want to talk about something that’s going to rewrite the face of Europe.”
Rest of the world
Not enough to go around if world trade breaks down. Not enough resources, not in the right proportions. Local conflicts, wars of disintegration (ie Syria)
Possible Major Wars
- A desperate Russia vs Europe. Expect minimum of 7mm barrels of oil to go offline
- Iran vs Saudi Arabia with the Asians picking sides!”We’re in this very strange position right now where Iran has become the country of order in the Middle East, they basically one and now they’re kind of like the dog that caught the car, they just don’t know what to do. The Saudi strategy is basically to burn the whole place down because if the entire Middle East is on fire there on the other side of the desert, so we now are at least the Trump administration for now is allied against the country that is trying to hold up some sort of civilization and allied with the country that wants to burn civilization down. This is not a sustainable position for the Middle East. This is not a sustainable solution if the United States but this is currently happening right now, no matter how that conflict goes, energy is going to go offline, whether it’s Iranian Kuwait, Iraq, you saw it all of the above, and that just leaves Northeast Asia. Now the Northeast Asians import almost all of the recruitment Persian Gulf, there’s just nowhere near enough production locally. If you take all of the energy production put together, it’s only about a quarter of what they actually need. So you get the Japanese, the Taiwanese, the Chinese, sailing their ships to the Persian Gulf picking sides and a centuries old blood feud that has turned into a knife fight, loading the crude themselves and then shipping at home and probably rating each other along the way those three conflicts or nothing less than the end of the world that we know that’s the end of global financing, global energy and global agriculture and global shipping”
What about Hans Rolling and all this talk of the world getting better?
The world’s natural historical state is conflict. It has improved in countless ways in past 50 years but it all relied on the unchecked economic growth and trade that relied on relative peace.
Japan
Navy with the second largest range. It would be demolished in a toe to toe confrontation in Asian seas against China but if they positioned ships further away would be able to win easily, cutting Chinese energy supplies. Japanese productivity leadership has allowed them to overcome awful demographic headwinds that have existed since the 1960s. They are relatively less exposed to the new order since their domestic market has managed to grow dramatically.
China
15% of the arable land of the US midwest. Shortage of water where it is needed. Its “breadbasket is in a slow motion collapse”. Only one navigable river whose surrounding politics differe greatly from the northern powers. The south is fragmented by mountains and climate changes. 3 part strategy in trying to “hold things together”
- Immediately put down dissent
- Lots of economic “throughput” even if unproductive
- Acceptance by Nixon into the global order as an ally against Russia. It’s rise into modernity has coincided with the most abnormal historical period of order. It’s overlevered so an unwinding of that order is highly threatening.
Argentina
Generally favorable view of their prospects. They have been poorly managed but maintain similar geographic advantages to the US. If they can turn around their management in the new order, they will thrive, if not they are probably not worse off than now.
Canada and Mexico
NAFTA is really based on numbers and very important agreement but has remained secure. No major changes, but there could have been if these agreements had broken down. This would have been a major blow to all parties.
Current US Political Climate
Going through upheaval but is ultimately positive and natural and has followed many historical transitions (War of 1812, Reconstruction, Great Depression). System is being reformed in realtime. Groups are searching for the next major thing that can form the nucleus of what the emergent parties will coalesce around. Until that happens, the framework will not be addressing the most pressing, cohesive, long-terms needs.
Our most pressing issues
- Navigating the new world order. What happens in the next decade will shape the century
- The transition of baby boomers from tax payers to tax takers as they age will be transformative and challenging. And whatever challenge this is for us, the rest of the world is in a worse situation. Our millennial is an enormous generation to pass the baton to, but they have no counterpart in Asia or Europe leaving them as the sole earning power in the developed world for the next few decades.
- Infrastructure: decrepit, needs and upgrade. Roads (easy problem if you can get the money). “Mississippi is about 13,000 miles of navigable waterway that is more than the combined systems of the rest of the planet. Now, most of the locks on our system that allow it to be navigable are in excess of 60 years old, and a scary proportion of them over a century, replacing all of them wholesale, every little bit would cost only about $200 billion. So in terms of cost benefit, that’s cheap.”
Technological advances he’s excited about
- Digitization of customs cuts shipping costs by 15%. Huge impact
- Facial recognition software used on agriculture. Cameras —> automation in the field —> much more effficient chemical use (1/10th). So less pollution
The impact of technology on foreign reporting
In the past 25 years, decline of foreign offices for large media companies. Decline of journalism budgets and the need for large foreign infrastructure to support reporters in the field. That leaves us with less news and more opinions. In the US, Bloomberg is by far the best but worse than they were due to a recent editorial change. Next best is Al-Jazeera but ironically unreliable for Middle East news. Xinhua news is good as long as not reading about China or US. France One remains strong. The upside of the digitization is a proliferation of good but harder to find decentralized sources that can be aggregated to a feed.