The Breakdown - The Geopolitical Shifts Shaping the Economy, Feat. Demetri Kofinas

Episode Date: July 21, 2022

  This episode is sponsored by Nexo.io, Chainalysis and FTX US.   NLW kicks off his “Midsummer Macro” series with a deep dive conversation with Demetri Kofinas, host of the “Hidden Forces��� podcast. They discuss the Fed, inflation, the secular shift to stagflation and the tectonic geopolitical shifts that must be understood to truly understand the macroeconomic picture.    Find our guest online: @kofinas | hiddenforces.io    - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Nuthawut Somsuk/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, July 20th, and today we begin the midsummer macro series with Dmitri Kofenis. Before we get into that, however, if you are enjoying the breakdown, please go subscribe. to it, give us a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show,

I also work with FTX. All right, so as I said, I am kicking off something I'm calling mid-summer macro. It is a little mini interview series that's checking in on the state of the big picture. I'm starting today with a conversation with Dmitri Kofinas. He is the host of my personal favorite podcast, Hidden Forces. The conversation started in response to a tweet where Dmitri was arguing that he thought the Fed had a lot more willingness to be hawkish than it seemed like the market was giving them credit for. So that's where we start, but from there we get into some very high-level discussion around topics, including, most interestingly to me, the essential shifts in geopolitics that must be understood as we're trying to make sense of this economy.

I'm incredibly excited to share this conversation with you, so let's dive in. Dimitri, welcome back to the breakdown. How are you doing, sir? I'm good. How are you, Nathaniel? I am doing well enjoying summer. I'm about to go down to Florida, which will be very, very hot. Oh, that's exciting. We're a part of Florida. We are headed down to St. Petersburg, where my great-grandfather lives, because he has got to meet his great-grandson. Great grandfather. How old is your great grandfather? Well, so he's my grandfather. He's turning 90.

Oh, her great grandfather. Exactly. Yeah, exactly. Those are some amazing genes you've got. Yeah, did just celebrate on the other side of the family. Jesse's grandmother turned 100. Wow. Incredible. Well, listen, this is going to be fun. There was a specific prompting that kind of created the context for this.

Basically, you know, the TLDR is that you tweeted something around believing kind of differently than some parts of the market that you thought that the Fed was going to be more aggressive in tightening. It sounded like you kind of were seeing a bit of this sort of theory that they're going to have to shift course really quickly or going to turn on a dime again, and you weren't buying it. And it was sort of this thing that you wanted to talk more about. And so I said, come, let's break it down. Let's talk about it. And so I guess maybe by way of getting into this, let's just talk about what your assessment of where we are right now is relative to kind of macro cycle. and the Fed, which is obviously a tremendously large question, but we'll start big and kind of plum

into it from there. Yeah, I mean, to be clear, that position that I had about the Fed's aggressiveness was something that I've held for quite a while, and I think I was actually very early on. And it's something that I've explored in episodes on the podcast. I don't obviously know what the future will hold, but as it stands right now, I still don't see any evidence for the Fed pivoting anytime soon. Now, anytime soon means what? It just means so long as inflation persists where it is, I think that inflation is the indicator for the Fed. The larger point that I would make is that, and this is the point that I made last year

in justifying my position, was I made one point, which is that I felt that Jay Powell cared very much about what people like Larry Summers and Muhammad Alarion were saying, and that the career risk associated with tightening too early was being supplanted by tightening too late. and he didn't want to be the next Arthur Burns. So that was a big part of my thesis. I also think I thought as part of that, and I continued to feel this way, that the Federal Reserve cares much less about using monetary policy as a tool for sustaining asset prices. It is true, and I have said this before, that the stock market is a political liability for the government ever since they effectively took ownership over it by bailing out the economy

in 2008, and then maybe not bailing out the economy in 2008, but then continuing quantitative of easing and really coddling the yield curve and coddling markets with forward guidance. At a certain point, they took ownership over the stock market in my view. And they're going to have to own that at some point if asset prices declined too far, i.e. they're going to have to institute some types of fiscal policies. And I think it's going to be from the fiscal side. And we can get into this as well, which is that I think monetary policy is a blunt tool for solving issues and for dealing with issues of liquidity, a liquidity capital allocation is no longer

going to be an isolated thing. It's going to be selective tightening, selective easing, what Russell Napier has called or has referred to in his own way, I think, as credit rationing. So anyway, to go back, I think the Fed is not going to be as concerned and has not been as concerned about asset prices. I think they're much more concerned about institutional credibility at this stage because I think that the Fed and institutional Washington, the Beltway consensus, has started to finally get that message, albeit perhaps not as clearly as we still understand it, that the public doesn't trust them. The public in many ways ridicules them, ridicules the central banks, ridicules the government. And I think January 6th, the prospect of a Trump

election in 2024, and the geopolitical crisis with Russia and the larger dynamics of China and the U.S.'s strategic competition with China have really created a lot of anxiety and concern in institutional Washington around the future of the country. And I just think that that's a culture that pervades institutions. I think it impacts the Federal Reserve as well. I just think they're not willing to play with fire anymore at this point, which explains for me and has explained to me why the Fed has been willing to raise so aggressively. If you told people that J. Powell was going to raise by 75 basis points and probably will raise again in 75. I don't think it's going to be 100 next week. People would have said that there's no way.

Like there's no way that we haven't seen anything like that since the 1990s. So I think they are really focused on sending a clear message and the geopolitical dimensions as well, I feel, have made them less reticent on tightening because they understand that there are added benefits to tightening monetary policy and that it aligns very well with the administration's really tough stance on Russia. So three pieces of this that I want to parse out because there's a whole lot there. So there's kind of the dark matter of institutional credibility cuts across all of these. But in specific, you called out the Arthur Burns' 1970s history lesson that they don't

want to fail. They want to have understood the assignment. And so I want to dig into that a little bit. That's certainly the narrative, the linguistic, you know, analogy that they use. The second is the U.S. government's relationship with the stock market and where that really begins and ends and how much they care or not. And then the third part, though, is this geopolitical piece. And maybe let's start on the geopolitical piece because this is sort of a conversation that you began in your overtime with Lev last week on your show, but didn't have necessarily a huge chance to explore. And I guess the way that I would sum up that set of discussions or questions, you're looking at it from two angles. One, are there actual incentives? Are there sort of positive externalities of a faster tightening cycle that align with the U.S.'s goal? So there's sort of that piece. But then there's also the

other side to it, which is even if that's not the consideration, and I think this is the perspective that Leav was more representing, that the fact that there were negative externalities to enemies, people that are now considered enemies, you know, or at least kind of trending that way, is something that we were likely to care less about than we had in the past. So I guess let's talk about how the geopolitics is setting kind of background for all of this in your estimation. I think in so many ways it's obvious. And I don't understand exactly why more people don't necessarily see it. Maybe more people would have seen it if you framed it this way back in late February or early March after the invasion had commenced when really the, I guess the shock of the first territorial

invasion of a European country had occurred. I mean, we're not counting Georgia since when. I don't know, Czechoslovakia, I don't know when the last one would have been. So I think that if you really consider what this means, that we have an ongoing war on the borders of Europe, we have an ongoing energy crisis, a serious energy crisis in Europe. We have the Europeans committing enormous amounts changing policy, dramatically. in terms of defense spending, nowhere, have we seen this more than Germany. We continue to have escalating tensions in the Taiwan Strait.

Everything is pointing towards escalation geopolitically. At what point does the national security threats trump the neoliberal ideology? In other words, when do concerns, do realistic concerns about national security trump the kind of concerns around growth and liberalization and globalization and globalization? these fuzzy concerns that have driven the notions of central bank independence more or less for the last 30 years. When does that happen? And for me, the invasion of Ukraine by Russia crystallized that. I don't think you can no longer responsibly think about monetary policy without taking these other factors into account. And like I said, I also think actually the domestic situation

in the United States is also very important. Maybe it was made clear by the invasion of Ukraine, But I think you can juxtapose these two, domestic unrest, the potential for domestic unrest and even maybe political terrorism with the geopolitical concerns around national security and the breakdown of the global security umbrella that the United States maintained and which was essential for even U.S. global interest in security. In some ways, it feels to me like there is this, the monetary policy dimension of this conversation is kind of just one that hasn't been put in this context, that everything else sort of slowly gets put in the context, right? It's like the nothing in the never-ending story, where the

nothing that's kind of eating everything and setting the context for it is the slow unwinding of an America-led global order. You know, we haven't had a big monetary policy shift in the context of really having that unwinding be the clear and present thing as relates to international geopolitics. Yeah, just to clarify what you're saying. Yeah, let me say, let me try to clarify. So the big shift happening kind of worldwide is trying to understand what the world post unipolar American order looks like, right? This is the sort of agreed upon. Not only is it consensus, it's the thing that people use. I mean, this is like the sort of, you know, bully pulpit that Putin uses to justify and talk about things. This is happening, right? The world is shifting.

America First policies is sort of like happens on both sides of the aisle. That unwind is happening to some extent. The different people have different theories on A, whether it should be, B, how fast it's happening, C, the specifics, right? Like you get a full range of different takes there. But it's clear that there sort of is an American withdrawal from the world. The interesting dimension of the monetary policy piece is that this is the first time that there's been sort of a real need for America to shift monetary policy quickly and aggressively. And it seems to be doing so with less consideration for the ramifications around the world. Sort of like the soft weaponization of the dollar, right? If the hard weaponization of the dollar is what we saw with Russia and sanctions, the sort of soft is just the not caring of the implications that reverberate as the system tries to shift. Yeah, I think that's true. And I think that's true

for two primary reasons. One, I think the U.S. is going to care less about the rest of the world in general. There's a natural inclination to want to care less because I think the politics will lead in that direction. To the extent that it does care, which it still does, absolutely, and in fact, it's doubled down in the European theater. To the extent that it does, it can use swap lines to selectively bail out countries that it supports. And maybe it doesn't really reach too far into its bag of goodies for countries that aren't necessarily playing by the rules. So it can have additional added benefits. And ultimately, swap lines are a geopolitical weapon. They can be a weapon. They're like a stick. A stick can be a tool and it can be a club. Depends on how you use it and under

what conditions. So that's sort of how I would describe it. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, Chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence,

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One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. So let's move off the geopolitics side. And by the way, for anyone who's listening, Dimitri and his guest's love from last week, get deep into swap lines and where they came from. so go check out that episode. Let's talk about the specter of history. Do you think the 1970s are something that is really front and center for Powell and the Fed, or is it just a really convenient rhetorical device? I think it's both. I think it's a convenient rhetorical device for

everyone in the media, ourselves included. And it's very easy to fall back on that. I think it's also a very convenient framework for investors who really don't know where to look to understand the present moment. Look, I don't know Jay Powell. I can't get in his head. I'm very humble about how confident I can feel in any of these types of projections. But I think it's not a crazy thing to imagine. And I have in how I think about this, that Jay Powell is very much haunted by that possibility. Maybe haunted is a strong word. But he's concerned about it. He doesn't want to be seen as the guy that screwed it all up. You know what I mean? Like, I don't think that's what he wants to have happened. And back to my point, the government has already shown. after the pandemic, that it is willing and able to use its balance sheet, the Treasury's balance sheet, to support the economy. And fiscal policy can be much more selective in how it helps. So, by the way, can the Fed, depending on what assets it chooses to target, the way in which perhaps it forgives loans of the banking system or supports loans or guarantees loans, this is

something I feel also very strongly about, which is you're going to see a much more unorthodox monetary policy. And in this sense, perhaps the 1970s is maybe less instructive. Certainly, it's instructive insofar as we did institute price controls, but maybe the breadth and creativity that we saw post-2008 in terms of mailout facilities, both in the U.S. and Europe, is something that we're going to see, but in a much more granular sense and maybe targeting specific areas of the economy. So, I mean, that's something that I feel like is kind of inevitable because of the fact that we're going to have to make tradeoffs. And you might be seeing that already in Europe. How much will the Europeans be able to raise interest rates and how much will they be able to contract their balance sheet?

Well, maybe they can raise interest rates on the one hand, but then also focus on expanding their balance sheet in order to bail out peripheral countries or even central countries. I mean, Germany is running a budget deficit now. I'm not trying to be hyperbolic here. But my point is, and the fact that the Germans are running a budget deficit, maybe that makes them more amenable to ease your monetary policy. Who knows? I think that we ain't seen nothing yet in terms of central bank creativity. The part of where the conversation started was around people's short-term assessments. And obviously, you put you and me together in a room and we're going to jump 80 years down the line and try to figure out what that looks like. But let's try to bring it back to shorter term.

What is the point? Is it just the inflation number? Is the Fed going to keep its foot on the break for as long as it takes to do inflation? How do you think short-term politics, you know, political considerations around the midterms impact things. What's your kind of base case there? Let's take the first one first. I think there are a number of things that influence Fed policy. One, to go back to my point is, who are the people that are hobnobbing with at cocktail parties? I always look to hear what they have to say. I think that's always very important. If they're beating the drum saying, pal, you completely messed up. Now you're way ahead of the curve and you need to loosen. That's a huge data point.

In other words, that's another way of saying that I don't think it's just about CPI or PPI or the Michigan Consumer Confidence Index. It's a lot of factors. But for the time being, I think that inflation continues to be their primary concern. All sorts of other forward indicators begin deteriorating. I think that could give them cause to change their rhetoric, maybe do what they did recently. For example, you got hints that they might raise 100 basis points. My feeling is that they're not going to raise 100.

They're going to raise 75 and that they wanted the markets to hear that they were going to raise 100 to make them feel when the 75 basis point come cuts that it's not as bad because I think that that's another way of trying to ease the markets a little bit. I'll tell you what, if they raise 100, then we're full on the train of aggression. But look, it's so hard to talk about this because then we get to this area of like tea leave reading and that's not something that I do. I often feel, and I almost have to caveat it on the show, we do do this unbelievable amount of tea leaf reading. To some extent, I think it's just like the media complex, but the market looks forward as well, right? Yeah. Man, the fact that the last time inflation was above 9% was 1981 and the last time they raised rates by a full percent was 1981, boom, media narrative established, right? So it's very hard to not fall into that pattern of assessing over the small details. But I think that what you're trying to say is, This is one of the big powers of the Central Bank, of the Federal Reserve in the U.S. is the self-fulfilling prophecy piece, trying to move people without having to make actual policy changes. Yeah, and I think this is also important. I want to make this point.

We managed to get oil prices below $100 a barrel, right, which was pretty big. Okay, so let's separate these things out. First, let's just look at demand and supply. So the oil bulls focus very much on the supply side story and with good reason, because there's only so much. that the Fed can do to impact the price of oil absent inducing a massive recession. But no one quite knows what that is on the margin. So understanding that, that there are limits to what can be done on the demand side, the Fed is currently trying to reduce price inflation, and they are looking at the price of inputs

like food and energy in their calculus. So you have to look at those prices when you think about how much they're going to continue to tighten. But you also have to be realistic about what they can actually do. Qualitatively speaking, if oil prices start to trend upwards again, how much will the Fed continue to tighten in the face of that? I mean, at some point, policy is going to have to change. I don't believe in a long-term deflation. I could be wrong, but I actually think long-term we're going to be in a period of stagflation. I felt this for a long time. And I think this is just based on the math, based on the debt levels, based on the levels of structural inequality and the distributions of wealth.

I think those are all bullish for inflation over time. And I think the fact that we have such an outstanding level of debt is going to induce a kind of low growth environment for a long period of time. But in kind of the short term, I continue to be heavily in cash. I've started allocating. I allocated some of my position kind of rotating into commodities in the summer of 2021, which I've talked about on the show. I've also said I wish I'd put more in.

But at this stage where I'm at, I made some other allocations. I've talked about this in a recent use letter in terms of my own portfolio. But for the most part, I remain heavily in cash because I feel like there are so many indicators and warnings and flash signs for uncertainty around economic growth, around asset prices. I mean, crypto is kind of rising again. And I think that's fine. that's kind of to be expected in some sense. I mean, the markets have taken a big bath. The dollar's been super strong. I also had a position in UUP that I closed out because I just felt like it was too

much exposure to the dollar trade. But I continued to lean in that direction because I just think that with this kind of tightening interest rate environment, the ongoing war, yes, there are risks that the war could end, which I pray happens. I'd rather that happen. I'd rather be positioned for it not happening than it happening. And I'm much happier for it. So I want to go back to the point that you were making around listening to who the Fed listens to, right, rather than just kind of reading the news about things they're saying. What is your take on that right now? And maybe I guess I'll just put the crypto context. And maybe you can read it into equities.

But, you know, one of the things that some folks you'll hear say are, you know, the markets are already down, you know, 80% or 60% or 70% or whatever. And of course, like, you're seeing a lot of pain, but at least in crypto, one of the things that is just very true or very clear here is that the people who were at the beginning of the cycle who started in crypto, you know, before things went up are still like net up huge, right? And not just kind of from like a profit rotation standpoint. And so, you know, I'm not hoping for this obviously, but sort of the ability for people to sustain pain still relatively high. Like nothing is broken. Obviously, I'm not talking about Luna or anything like that, but just in general. And I think you see something similar with equities where it's like, yeah, prices are way lower than they were at these historic highs and a huge amount of net worth or wealth has been destroyed. But at the same time, we haven't seen people kind of ruined or at least that's not the sentiment out there. It's just Netflix is way less valuable than it was last year, you know. My point being that like certainly as much as has come off the top of the stock market, it doesn't feel like that's a huge pressure source on Powell to turn around. And I agree. And I would be selling this rally. I don't know what price I'd be selling it, but I think it's an interim rally in crypto. And I think that we're set up possibly for a rally in stocks, like I said, also for the dollar to take a breather. But I think these are all the temporary trends. I'm not a numbers guy. I'm not a data guy.

I'm not a quantitative person. So I don't have the numbers of national debt off top my head and total outstanding private sector debt, the leverage on the planet overall, China's housing market, Europe's finances, but the finances of the world are pretty bad. And the finances of the world also are a kind of reflection of trade balances and globalization of the course of several decades. And, well, longer than that, but in particular the last several decades where we've been globalizing and becoming more interconnected. I think the world is becoming less interconnected or is de-globalizing, however you want to talk about that. A lot of these countries are focusing on transitioning from a world where,

where you're constantly looking to take advantage of every new efficiency to building residencies. And that's inherently inflationary. So, and on top of that, you have this changing multipolar world. Of course, a unipolar world was great for asset prices. A multipolar world while we transitioned from a unipolar world during that transition is going to put downward pressure on asset prices. There are all these countervailing forces, of course.

But for me, I don't look at investing anymore and think like I did, you know, for the last so many years and think, okay, there's a Fed put out there. And net, net, you want to be invested because the central banks, monetary policy, baby boomers, et cetera, driving asset prices up. The baby boomer story is also an interesting one because that's a headwin on asset prices. And at the same time, as I said, I don't believe the government's going to let 401ks and retirement accounts just go to zero. Wouldn't go to zero, but there's a good. there's a pain point because I think they see them as a political liability. So this just goes to show you how complex all of this is. Again, putting a disclaimer out there that I'm not claiming

to know with any kind of deterministic detail how policymakers are going to react. What I do believe in what you saw in the 1970s is that ideologies out the window, framework out the window, because so much stuff isn't going to be working. And I think policymakers are going to be much more ad hoc, much more on the fly. You saw this during the Great Depression as well. That was a big pillar of FDR's policy, campaign framework, which was experimentation. Let's experiment. Things aren't working. We're going to keep trying things until they work. I think you're going to see that again. And I think you need to be nimble, vigilant. If you're not a trader, like me, I am not a trader. You have to really decide how much risk you want to take to my point about

closing my positions in UUP in the dollar index position because I was like, all right, what am I doing here? Like, I'm not a trader. I don't know what I'm doing here. So I've made plenty of money this trade, I'm just going to stop and I'm just going to kind of wait and try to allocate intelligently. At this point, that's all I'm trying to do. I have a macro framework where I think things are going long term, what the long term cycles are. And in the terms of short term, I try to follow certain people in order to help me decide when to get into those trades. But I would never, ever, ever want to buy a rally in what I feel like is a counter movement. You know what I mean? So I wouldn't be buying crypto here, for example. Or I didn't buy Ether

at a thousand, let's say. Yeah, regular listeners to the show certainly know that I do not profess to know how to trade either, which is why I'm big on the long-term theses. But I want to bring politics into this a little bit. And so first, if and how you think the midterms have any impact on this at all. And then two, more broadly, there's something that you kind of said that's interesting. You said ideology out the window, right? And you're talking specifically about policy responses as relates to, you know, monetary policy in the Fed. But there's an interesting question of whether one of the big gaps in America right now is having two leading parties that kind of don't have a coherent ideology, right? I think that the Democrats absolutely have no coherent ideology.

There's lots of little parts within the party trying to kind of project things that they want, but I wouldn't call them an ideology. And I think that the Republicans sort of, by and large, the ideology has for a long time just been win and get in front. power. And I don't know that there's sort of more beyond that, especially if you move outside of religious influence conservatives, which is a whole different category. But let's maybe start with the midterm question. It's a lot smaller than the larger question. Yeah. You know, this is not something that I've spent time on exploring on the show. It's something I absolutely do intend to, and I'm kind of late to the game and I've wanted to. From what I would expect, just based on what I've read and

the performance of this administration and a lot of important, to be fair, when I say the performance, of this administration, the perceived performance of this administration by the public, I would imagine that Republicans would win more seats in the midterms. On the larger point, of which I have a more meaningful perspective, on the larger point of 2024 and Donald Trump, I think Donald Trump, for the Washington Beltway consensus, represents an existential threat, perceived existential threat, whether or not he's an existential threat, I have no idea. I can tell you my general feelings about Trump and whether I think he's a good faith actor, which would then, of course, elicit the comparison of, well, who is a good faith actor, et cetera. But in terms of just

the perceived threat, I think that he's perceived as an existential threat against the republic by many Democrats and many Republicans, traditional Republicans. He threatens to undermine the independence of certain institutions in Washington. And of course, he really throws into question the entire credible guarantee of American backing for our allies abroad. So like if the war in Ukraine broke out under a Trump presidency, there are real questions about how he would respond to that. And this has been, of course, made even more cloudy as a result of the fact that the Democrats fearmongered around the ties to Russia and all of that stuff. And that's a whole other can of worms. My view on this is that like guys like Jay Powell probably don't want Donald Trump to become

president in 2024. And I think institutional Washington generally doesn't. So my sense on this is also that when we talk about central bank policy, I feel like if the Fed knew, if Jay Powell knew what the right approach would be to prevent a Trump presidency in 2024, he would do it. I just don't think that there's a clear answer for them on that because of the fact that they're kind of stuck between a rock and a hard place. They have inflation now. They have real meaningful consumer price inflation for the first time and forever. And they have to take that into account, respect to easing or easing policy. So that's a much more difficult risk-reward paradigm to navigate because unlike inducing a recession globally and a run on the dollar, a run for dollars,

which the central bank can selectively ease using swap lines, they can't do that with this. Or there isn't a similar paradigm domestically speaking, except for the government, like I said, selectively bailing out 401k, selectively bailing out certain sectors, selectively easing in different areas. And I think you will eventually see that as well. There's little glimpses of it already, right? The college loans being kind of written down as an example of that, I think. So did they proceed with that yet? Or is that still, I haven't made a clear decision on that yet, right? I haven't been keeping track. Yeah, I don't think they have. But I think they bring this up. But I think that speaks Nathaniel to the fact that populism is now a two-party phenomenon. It's not just the Republicans that

are populists. It's the Democrats, too, because both parties are responding to a public that feels increasingly fed up for different reasons. And the media collectively stokes this kind of rage and anger. Again, the wealth divide is a huge one. Like I've said for many times, I mean, the gap in wealth and then the gap between wealth and income, which is the spread between asset values and the underlying cash flows of the assets that you're buying, have gotten to be so extreme that I think they are in part. driving the populism, and populism and those types of divergences are inflationary long term, which goes back to my point, which is long term, I don't want to be in cash. I'm just looking

for entry opportunities to get into things that I feel like are going to protect me for the long term. That kind of makes sense. It's not advice for other people, but it makes sense, you know? It sounds like the short answer to the midterm question is don't see it having a huge deterministic impact. The bigger question is going to be around 2024 as regards to monetary policy. Yeah. I mean, to the extent that you get sort of Trump acolytes in Washington in the midterms, that's an issue, but that's become an issue already for the Democrats and for sort of more traditional Republicans. Remember how much oxygen Trump sucked out of the room when he was president? This is not something that people really have top of mind right now because we haven't gotten to that cycle. Wait till that starts again. Wait till that whole 2024 election cycle starts again because Trump is so good at dominating the use cycle and really highlighting the hypocrisy of the Democrats and so many of the areas where their policies are failing. And dude, on top of that, you have Biden. I've been saying this for a long time.

I wasn't the only one, man. Tons of people were saying it was the most obvious thing that he just was very old and kind of not really on it. And you continue to see that. I don't know. If you're like me, you've checked out of politics because it's really hard to just deal with it on both sides of the aisle. Or if you're not like me, a lot of Americans double down on their eco-chambers. and they've just gotten more radicalized. So we haven't really seen that sort of internal political radicalization front and center

because we've had other things that have been top of mind for people recently. But that's going to reenter the new cycle, and that's going to drive a lot of stuff. And if you don't think that's going to impact monetary policy, it is. But I just think it's a little bit more complicated when it comes to monetary policy because it's not clear what that policy response should or would be, which again, I think it will ultimately be the Fed erring on the side of being aggressive, Again, it totally depends on what happens to inflation, but airing on the side of it being aggressive, whereas the government and Treasury and will use fiscal policy to try and offset that.

And again, monetary policy could play a role as well. We saw that during the pandemic with the loan guarantees. But it'll be much more selective, much more targeted. And if it was a Trump administration, for example, you could see selective subsidies of oil and natural gas industry. For example, this could be a place where you could use that because there are issues around the availability of oil, natural gas, especially for the Europeans. One of the things that makes you have such a unique perspective is the fact that each week you go way, way in depth to understand a different person, at least once a week, you know, sometimes more, which is different, right? even when I do interviews, I have not structured to go in depth the way that you do. The meta frame of everything for the last coming up on six months since Ukraine has been these big,

big shifts, you know, and obviously it's not all Ukraine and geopolitics shows, but it's sort of market ramifications and energy and things like that. What are some of the most interesting non-consensus perspectives, you know, ideas that you've had surface, you know, in this period? on the show. I mean, we've talked about some of them right now. My view on the Fed being aggressive and the things that inform my personal investment decisions in the lead up to 2022 in the summer and fall were informed by that, by some of the things we talked about. They were not consensus now. They've become much more consensus now. I guess the geopolitical thing, the fact that I think geopolitics is playing a role, and I don't think people see that and eventually they're going to see it,

that still qualifies possibly as non-consensus. I mean, off the top of my head, I don't, I don't know. It doesn't have to just be, I guess maybe I'll reframe from non-consensus, because that's kind of like you want the contrarians to just like, maybe things that you think are kind of clear and present, but that people aren't talking about enough. Well, look, I mean, I'm doing an episode with the lead author of the 2018 National Security Review for the Pentagon. I think they do those every four years. And that conversation is going to be about this larger reality that I just don't think people has really sunk in for people. It's no longer necessarily America's century. And forget even that, America's century. It's no longer like this

isn't, America can't just do whatever it wants. You know, like the Turks, for example, transactional negotiated over the entry of two new NATO members in order to try to get something else for themselves. The Saudis are basically holding court with Biden coming to kiss the ring of MBS after he excoriated him and said that he was going to make him a pariah. I mean, this is something that we really were not used to seeing. And in some ways, I would say, we haven't seen at the very least since the 1970s where America felt in some ways weak. And you had that famous, you know, Jimmy Carter, crisis of confidence, malaise speech that

he gave during his presidency. And that eventually led to a counterreaction and the presidency of the presidency of Ronald Reagan, right? And it's morning again in America, but I don't think that's going to happen this time. And we're not anywhere near there. As a country, we need to really get on the same page about who we are, what fights are worth having. I mean, this is the thing, too, because we, you and I, especially, we're like a perfect example this week. So many of our views around American foreign policy and our political views at large were informed by the 2003 invasion of Iraq. And this came during a time when America was the unipolar actor.

Everything was more or less America's fault. I mean, for a lot of people, that's still the case, and that's a whole other conversation. It was America's world to lose, in a sense. And that's no longer the case. And yet many people continue to see things that way and to distrust the government, understandably. You shouldn't necessarily trust the government. But the reality is that there are real threats in the world today.

And we are not the sole deciders of the pace. of events, other actors can dictate those events to us. And we saw that in the case of Russia invading Ukraine. That dramatically changed so many things, so many projections, so many financial models. There are so many other things that can happen in the world today that are actor-driven, not pandemics. So this isn't really answer your question, but it kind of gets to where my head is at, which is I want to help my listeners begin to understand what the big stakes are, what the trade-offs are, because it's not, again, a unipolar world where we can do a bunch of things at the same time, where we can run two wars in the Middle East, maintain the NATO alliance and structure a new

kind of economic framework in Asia. No, no, no. We have to make some really hard choices, and we have to decide where we want to focus on. The U.S. is really going to have to pivot away from Europe. And it's in a much better position to do that today than it was a year ago because the Europeans are spending more on their security. The Russians no longer look 10 foot tall. And And, you know, that gives the U.S. and the U.S. is also pulled out of Afghanistan. There is an increasing kind of cooperative relationship between the Saudis and the Israelis and a kind of new paradigm maybe building in the Middle East. It's still a disaster. But, you know, I think there's, the U.S. has an, can have an easier time to pivot to the Asian theater, which I think is where the focus is going to have to increasingly be. And I think that's not going to be an easy challenge because you've got different people making very coherent arguments on both. sides of this. You've got the people that say, look, this is China's backyard. You know, we wouldn't be okay with people, you know, after 1823 telling us what to do in Latin America. And we should think, why do we expect that the Chinese shouldn't have the same attitude to Asia,

which sounds very reasonable. And also those same people will say the risk of a nuclear exchange and the end of the world coming with trying to confront China is very real. And that's totally true. When the Cold War began, the Soviets didn't have nuclear weapons. And we had to get to a stable equilibrium that took quite a while with the Soviets. And still, we were always on the verge of nuclear war. But then the people on the other side of that argument, guys like Elbridge Colby, who authored the 2018 National Security Review, who I'm going to speak with tomorrow, will make the case that look, if the Chinese take Taiwan, they're not going to stop at Taiwan and that they have global ambitions and living in a Chinese century where the Chinese effectively exercise the same level of sway

over international institutions that we did in the 20th is not going to be very great for us, especially in a world where you have kind of magic-like technologies of control and surveillance. Both arguments are extremely compelling. Because, again, to go back to the first argument that says, listen, we can't afford to start this fight, you have guys like Peter Zahan quite compellingly make the argument that, that the Chinese are also not 10 feet tall. And that's the other thing too, which is Nathaniel, that this is where it gets so complicated, you and I both know this.

I mean, you and I haven't actually talked politics, but we grew up during a time where it became very clear that the American military industrial complex and the paranoia of the American military defense mindset saw threats everywhere. And it caused us to overreach and overstep. And it led to disasters like the one in Iraq. The same could be true with Taiwan. It could lead the United States into a strategic disaster and a half-assed attempt at defending Taiwan and absent kind of nuclear catastrophes. It could lead to the U.S. losing in Taiwan and being in a much worse place strategically. And this has happened

to empires in the past. So it's not really clear what the public should or shouldn't support. What is absolutely clear is that the world is changing. We are no longer primary authors of the world, there are other people that make decisions that have autonomy. It's going to require much more political wrangling. The results of adroit diplomatic wrangling and dealmaking is going to be much bigger. And we're going to have to make hard choices about how we allocate our governments, our military's budget, what we procure and the tradeoffs between national security and domestic privacy surveillance, all those typical things. I think it's going to become much more difficult. And all this is happening amid a time when the public is more divided than at any time in our lifetimes.

And what it means to be an American is something that feels much more unsettled, much more unclear. All that stuff's happening right now. And it's just going to lead to a lot of uncertainty everywhere. What of Peter Zion's arguments? I mean, the foundation of his argument, historically speaking, is that we never had a national conversation after the end of the Cold War about what now we wanted our role in the world to be. Right. We just started doing stuff, obviously. But that's his sort of argument that we didn't come together and say, here's what we want to be. Now, we very rarely have those conversations. More, they're sort of like, they tend to be defined in opposition to things. We didn't want to be, let the Nazis take over.

You know, that was the American national conversation then, you know, more or less versus like some kind of projection of idea. So I don't know that it's necessarily fair that like, you know, have we ever had that conversation as a country? But I think it's kind of important now. I mean, to your point of like, what is what's actually important for us. Who does America want to be in the world? Yeah. So I don't know what exactly Peter says. And I agree with your point about do we ever really have that conversation in this definitive way. But we did have that conversation after the end of the Cold War. There was conversations that the peace dividend, how much military spending did we actually want to do. Did we need to do? The Europeans had that as well. Bush's state of the Union after the

end of the Cold War was where we got the phrase, New World Order. We had the Iraq War in 1991, Persian Gulf War, that was a big part of it. It was very clear that that war was part of the new world order, and that was also an entirely new kind of military dominance on display, integrated warfare. So there was much more of a conversation than there is today. Today, you don't really hear that. The people that talk about a multipolar world are kind of people like Peter Zahan and Ian Bremmer and some of these wonks, but it isn't the president of the United States coming out and saying, at least not in some coherent way that I've heard in a way that transcends the noise of the media, to kind of say, hey, look, this is our vision. This is my administration's

vision for the future. This is my coherent vision. Here is what's strategically important. This is how the withdrawal from Afghanistan fits into it. This is how our posture in Europe fits into it. This is why we're prioritizing these particular things in our fiscal policy. This is why we're spending XYZ on climate change. All of this stuff is part of an integrated national security vision, a whole of government approach. to this big challenge that we face. We had that during the Cold War. To Peter Zahan's point, it clearly didn't exist in the same way after the end of World War I.

We didn't have this immediate thing in front of us to catalyze and galvanize public attention. And we weren't just exiting from a war that we fought where we could easily just pivot into a new one. There's so many more things that are going to have to happen and will happen. Anyone who's thinking this is all going to go back to where we were pre-pandemic or even post-pandemic with the, you know, stimulus and markets going up, I think they're running a big risk. Well, that seems like a pretty good note to close this time on. I think we should do this again in a few months and see how things are changed because certainly they could change a lot. And I also want to say this too, that I pray that we get some pleasant surprises. It's not

impossible. And I would be the happiest person in the world for that. And I think we should all be happy for that, regardless of what positions we've held or how we're leaning or not leaning into such scenarios financially. I remember when the Russians invaded Ukraine, I was on vacation in Mexico, and it was such a dark time to watch that unfold. And not just because of the new risks, the new heightened risks around nuclear war and weapons of mass destruction that had introduced into the public consciousness, but to just see Twitter and the way that people were on Twitter leading up to the invasion and subsequently, and the paranoia, the distrust of government, even after the invasion, the cheap political shots, the inability to come together. So that is even

scarier. And I think that's the undertone that we're talking about here, which is that you've got the geopolitical order and it's changing. There's so much uncertainty in risk globally. But domestically, the domestic politics in the U.S. and in Europe are so fragile. And the order of the The political order domestically is so fragile that no one knows how this is going to turn out. But something's going to have to happen to bring people closer together. Until that happens, I would feel very anxious. You know, it would be fun at some point, maybe after the midterms, but way before the full 2024 cycle happens to kind of like do a show just looking at the potential figures, potential outcomes,

almost like lay out the set of possibilities for the next two years, way before it becomes so caustic that. That would be cool. And maybe we could co-moderate something, Nathaniel, where we bring on certain folks. I've been thinking quite a bit about this because I wanted to put on some panels in New York City, guests who focus on kind of some of these different things, the politics. I mean, I had David Shore on, who I thought was really great on this, really putting forward a coherent theory as to what drove the 2020 election outcome and the distrust of institutional Washington and what devised Democrats and Republicans, someone like Russell Napier, who's done such a great job. I think really kind of helping me and others think about how monetary policy and fiscal policy can really act in unorthodox ways. I just think there's a lot to explore here and bringing

people together from different schools of thought that focus on different areas of this. Actually, I think is super helpful. Yeah, absolutely. Well, listen, man, always great to have you on the show. Appreciate you taking the time and keep up the great coverage. Thank you, man. You too. Thanks so much for having me. Hey guys, back to NLW here. I just wanted to give one more big thank you to my guest, Dmitri Kofenis, to my sponsors, nexo.io, chain alysis, and FTX, and to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.