What happens when confidence fades and power becomes concentrated in fewer hands? Together with Peter Atwater we explore a world dividing along lines of control and vulnerability. From geopolitical conflict and energy dominance to rising inequality and generational pressure, they describe a system under strain. The discussion connects investor behavior, policymaking, and social dynamics through a single lens: confidence. As those at the top grow more assertive and those at the bottom feel increasingly powerless, tensions build in ways that history suggests rarely resolve smoothly. This is an important and timely conversation about imbalance, reaction, and what may come next.

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Episode TimeStamps:

01:13 - Introduction and framing the confidence discussion

02:53 - The K shaped world and rising vulnerability

04:43 - Behavior at the top vs nihilism at the bottom

06:48 - Confidence and policymaker decision making

09:27 - From hubris to desperation in global systems

12:23 - Iran, energy, and geopolitical motives

17:05 - Leadership confidence and timing of conflict

19:09 - Affordability crisis and consumer pressure

22:43 - War priorities vs economic priorities

25:53 - Control, drafts, and growing tension

29:11 - Authoritarian drift and system constraints

33:51 - Speed of crises in a connected world

39:22 - Overconfidence and blindness to risk

48:15 - Powerlessness as the trigger for change

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Their want for control, their demand for control runs counter to the control the powerless are desperate to maintain.

And so I don't see us getting through this without moments of intense tension between the powerlessness of those at the bottom in conflict with the demand for greater and greater control among those at the top, be they governments, corporations, techno czars. There's a large group.

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Before we begin today's conversation, remember to keep two things in mind. All the discussion we'll have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also, understand that there is a significant risk of financial loss with all investment strategies. And you need to request and understand the specific risks from the investment manager about their product before you make investment decisions.

Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen.

A new world order is becoming clearer by the day and in our Global Macro series, I, along with my co host Alan Dunn, want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro driven world will look like.

We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work in places that others may have missed. And we want to share our journey with you.

Our guest today is no stranger to voicing strong opinions about the future path of the global economy, interest rates and inflation, which is why we enjoy these exchanges of opinions. So please enjoy our conversation with with Stijn Jakobsen.

Peter Atwater, welcome back to the podcast and thank you so much for joining Gemini today for what I'm sure will be a super interesting continuation of our previous episodes with you. I can't believe it's been more than two years since we last had you on and so we're really excited to be speaking with you today. How are you doing?

How have you been?

I'm doing great. Thanks so much for having me back and the chance to talk to the two of you again.

Absolutely. And how are you doing Tim? It's been a little while. I know you've been traveling.

Yeah, I just.

A pleasure, pleasure.

I Everybody's getting my very white voice. I said to you earlier but. But yeah, I just got Back from Brazil, and those who haven't gone got to get out there.

I was in the middle of the Amazon for five, six days. Incredible experience. And then over Rio and sitting on Copacabana.

But tough, tough to come back to Chicago and what's supposed to be spring, but not quite spring here in Chicago yet.

Well, we're certainly glad that you. That you're back and are able to do this, despite feeling maybe a little bit under the weather anyways last time.

In other words, how would you assess the level of confidence in the world? And is it very different depending on where you are located physically? Actually,.

It is different, but I think it's different less by geography than by socioeconomics. I popularized the term the K shaped economy, and to me, that was much more about how people feel versus how they spend money or their incomes.

And today, I would say we have two groups. We have a small group of those at the top who feel invulnerable, and they are now in a growing sea of despair.

The pool of those at the bottom is mounting not just in the United States, but globally.

And I think if there is an overlooked population, it is the vulnerable around the world, because what's happening now geopolitically is yet another headwind, another vulnerability stacked on top of what already felt heavy.

Yeah, just staying with this. The point of confidence, maybe for a second more, or maybe the lack of confidence as well.

How would you say that that shows up in, for example, investor behavior, in the way policy is being made, and of course, in people in general, because it may be different the way that it's expressed, so to speak.

Yeah. Among those at the top, I see a almost deliberate ignorance of risk.

They have so much money, they have so much power, they have an abundance in everything that seems to matter that they. And they. And they've been lucky for a really long time that they now believe that they are geniuses and skillful in everything.

What's interesting about those at the top is that invulnerability brings out both the good and the bad in people. Most of us behave with a sense of greater generosity. But there are those who view invulnerability as an opportunity to settle the score.

And so I Think we have to look at those at the top through two lenses, and we can come back to that at the bottom. We can talk about financial nihilism and the nihilism in general.

But last time I was talking to you, we Talked about the five Fs of the stress center, fight, flight, freeze, follow, and fuck it.

And I'm seeing more and more signs of that last, that fifth F, whether it's in prediction markets, gambling, the financial markets, but there's a real nihilistic undertone that exists among those at the bottom.

Yeah, I'm sure we'll explore a lot more about that before I hand it over to you, Jim, because I have a feeling this is going to be the Peter and Jem show, because last time I remember, you guys had such a great conversation.

But confidence is also interesting in the sense that I know from some of your recent writings that when it comes to policymakers, if they feel, you know, overly confident, they might. They might do things that usually we don't really want to happen in terms of conflicts and so on and so forth.

Maybe you can talk a little bit about that and. And maybe you could also put this in perspective with some historical events where you say, yeah, this was a time of low confidence, this happened.

This was a time of maybe high or overconfidence, this happened. I think this is very important for people to be able to visualize and see the links between this.

So it's not just like a term, oh, yeah, we feel confident or we're not feeling confident, but what are the real consequences of this in the hands of the decision makers?

And so we can look at, for example, America's involvement in the Vietnam War as a clear display of extreme confidence. Some would suggest potentially even colonialistic confidence, playing out that sense that we can go in anywhere and create dramatic changes.

And one of the things that I see is that our military decisions are as much political decisions and that want to display the extraordinary confidence that policymakers feel in multiple dimensions, including militarily and that want to expand, to take on potentially more than they should.

And I think we can look at the past several months as the current administration has taken on more and more foes and this sense that we can conquer the world, sort of a mindset.

And if you haven't read it, there's a wonderful Interview by Stan McChrystal in a conversation with David French, and he talks about the three Seductions that leaders fall into. And I would say we are most seduced. They are most seduced when they feel invulnerable.

What about the reverse when there's lack of conflict? What are typically things that policymakers might do in the situation?

Is there similar correlation of certain things that they might do in situations like that?

Yeah, it lows in confidence. What we see is a desperate need to respond to regain control.

So if we look at the moments after the Hamas attack recently, if we look at when the United States opted to go into Iraq after 9, 11, what we see is that those are an impulsive emotional response to extreme feelings of powerless and uncertainty. That the need is, it's unspoken, it's this intense demand to take control without any real concern for long term consequences or anything else.

It's an impulsive response.

Yeah. Well, Jim, over to you.

Well, so when you say confidence or I hear hubris. Right. And, and then we contrast that with that desperation.

There's this moment, you would think, in the grand scheme of things, where there's a, almost a realization of vulnerability from a place of hubris. Right.

And what I actually see happening broadly is, is a transition, a move from an empire who has felt invulnerable for the last 30, 40 years, who in the last five or so years has begun to feel vulnerable, maybe 10 years. Right. And some of that is internal. Right. That there is this to bide the king, if you will.

Some of that is external and a result and connected to that K in the sense that we exported for 40 years our infrastructure, our labor. So I feel that this is what a fourth turning is about. In a sense. It is this move in this big moment of testing of that confidence.

And that's what World War II, in a sense, was about. That's what civil war was about. That's what the Revolutionary war was about. Right. And so I think that's the critical thing.

It's not what we're in this just pure hubrist, hubris, nobody knows what's going on moment.

It's also not that we're in a moment of pure desperation, but there is this moment of transition, realization of, of confidence, of hubris to almost desperation. And I think that's the moment we find ourselves.

Yeah, I, I know we, we don't like this word or we use it differently, but I, I think of this as a period of reformation. We are reforming who we are and not only independently, but with respect to the rest of the world.

And we go through these intense periods of connection and then we have to go through these intense divides. It's the tide comes in, confidence rises, tide goes out.

We're going through this period of disconnection and will result in a period of reforming what it looks like in the process.

Agreed. I think we can bring that back a little bit too. What's happening at this very moment for us for a moment.

And you know, I couldn't think of a more poignant kind of, you know, inflection point potentially than what's happening in Iran. Right. You know, there's been a lot of people, I've had a lot of discussions about the why, why, why are we in Iran now?

As you noted, I think it was Niels, you know, this is not the first time that Israel has made the arguments or we've talked about nuclear weapons in Iran. Many presidents over the years have been brought this kind of agenda and have passed on it, and yet we choose now to do this.

Why?

For me, it speaks to this transition from hubris to almost desperation. When you reach a point where you feel like you must act, you act not just because you're hu, you, you're confident.

You don't just act when you're confident.

Right.

You act when you're confident and then you have. Feel like you have something to lose. And I think there is a sense to me at least of a bit of desperation underneath the hood, a tinge of it.

What do I mean by that? And I'd love to hear your thoughts. Sorry to be so long winded here, but I think, I think it's important to think about why is the US really in Iran?

It's not about nuclear weapons. And you could argue, yes, Israel has an incentive and has for a long time here and that has played a role.

And, and there are other entities with other incentives that have, have swayed and their political incentives. But I would say the greatest is the actual military industrial complex and the inner core of the looking at its role in the world vis a vis China.

This is a proxy war with China. I think most see that at this point, much like Venezuela was a proxy war with China. And they have a very important common thing.

And this by the way, in the national security documents. I'm not, this is not something I've just. They clearly state this, which is to maintain the control of energy and the petrodollar.

The two greatest sources of power for the United States period in the world is our exorbitant privilege of the US dollar. Not even a question on the number one there. And number two, the leverage that comes from having dominance in energy markets vis a vis China.

These are the biggest levers.

And if we are truly heading towards a global conflict of who is going to dominate the next 50 plus years, what system will control the world's general flow? They're both dependent on one thing, which is energy.

Because at the end of the day, exorbitant pledge of the US US dollar depends on trade happening in dollars. And what is the moat around making sure that trade continues to happen in dollars? Energy.

So it's critical, by the way, China has understood this for five years. They have not. This is why Russia and China have come together and also why China has invested in 39 nuclear power plants and why they're power.

Just look at their charts of power investment. It goes flat and then it takes off.

Right.

The problem is in the next five to 10 years, power can only substitute for oil for maybe 60, 70% of things. And for military might, oil is still incredibly essential. So this is a very concerted effort.

First kinetic war between China and the U.S. in my opinion, right at a moment that the U.S. feels vulnerable and feels like it has to protect the one leg it stands most importantly on and defend its moat. Okay, but again, now back to confidence. Right? Why? Why? Because it feels vulnerable.

It feels that there is this rising ascended Chinese power that is intent to build power and move into a position of control. And the US still larger still, militarily, slightly maybe more dominant. Right.

It feels this continuation of confidence, maybe hubris, that it can move and do this at this moment. And so I think this is a very important kind of moment that speaks to, kind of that, that. Anyway, I'll let you take it from there.

Peter, tell me your thoughts or. And what does that invoke in terms of other confidence and things that you're thinking about?

Yeah, I mean, I think that the, the chessboard is pretty clear. And at the same time, when I look at the, the moment, the decision to act.

If I think about policymakers whose personal confidence is linked to their financial markets and their own successes, both President Trump and Mr. Netanyahu, the charts align. Of course, they feel extremely powerful. Now is the moment.

What is going to be so interesting to watch in this though, is that the impact now economically is incredibly asymmetric between those that are owners of assets and those who are consumers of assets.

And we know that nothing acts like kryptonite to consumer confidence like those large neon letters by the side of the road, those numbers by the side of the road.

And I think that policymakers woefully underappreciate that as the first number moves from three to four to five, that confidence plummets along with that. At the same time, those at the bottom have already announced that there's an affordability crisis.

This is happening against a backdrop that was intensely visible as we came into this year that we were already amid of affordability crisis.

And so I think policymakers need to do something to acknowledge that because the longer they hold off, the longer they deny that there's a mounting problem, the more the problem will take care of itself in terms of how people behave.

So this K, obviously, as you have highlighted as well, is not just a K of stratification, it's a cave generation. And I think that generational divide is, I would think of it as, you know, demographics or destiny.

Those demographics of that cohort that sits at more the bottom of the K is now becoming to political dominance. And I think that will increase, we know that for the next 10 years.

And so I think that force is just ticking every election cycle, every two years, every four years, we are seeing that just ramping up regardless, by the way, of what's actually happening under the hood. So there's this one major force which I think we cannot, that's almost like.

And then there's the other part, which is kind of, I think, part of what you're talking about. And there's this confluence of now you have AI, Right.

Which by the way is not a coincidence that this is lining up, in my opinion, generally because AI and the technological boom is a result of supply side economics is 0% interest rates for 40 years. It's the ultimate terminus, right?

Like if you take interest rates to zero, if you send money to capital for 40 years, you create greater and greater inequality, assets go up. But we also get infinitely exponential technological development. So we've hit this kind of moment where AI is, is. Yes, it's massively deflationary.

Yes, it's obviating labor, right? That's kind of the whole point of capital versus labor is to obviate labor and your cost so you get more profit.

And at that moment this accelerating force is driving essentially an incredible amount of top of the K, although not the very, very tip top of the K down. I would say we're, we're taking the large capital K down to a lowercase K right?

Now that top 10%, which was kind of the mode in a sense of the, of, of the top, the more balanced kind of political reality, that top 10% which had become 50 of consumption by the way, is now getting torn down by the actual as well as by the actual technology that's that they were benefiting from economically in terms of the assets. So the question now is will that top of the K come down to the, that lowercase K eventually become an H?

Right?

Where just the, the, the very top tip top is still there and it's, it's now so heavy on the bottom that all that's left is to take it, tear it, tear the eye, the line down to a little lowercase. And.

You know, another thing that might impact the K. I'd love to hear your thoughts on this.

About a month ago I went to this wonderful One Day, at least one Day for Me event that our mutual friend Grant Williams hosted along with Stephanie Pomboy.

And one of the guests is another, I think mutual, maybe not so much personal friend, but I think Peter, you know him better than even Jim and I, which is Pippa Malmgren. We've had her on the show and so on and so forth. She said something I've never heard before, but I think is relevant.

She said that usually when you have an administration, the top ministry or department, so to speak, is always going to be the Treasury. They're the ones that kind of calls the shot. But she said in this administration that's changed. It's the Department of War.

And that means essentially that there will be decisions made that takes really no account of what that does to the economy.

And I would imagine that that actually can make, I don't know what, what letter this will be, but it could be even expand further the K away from each other because it's going to hit, it's not going to make economic sense, the decisions that are being made. So it's going to hurt even more than usual. And maybe this is part of all fourth turnings, I have no idea.

But I think it, it was a very interesting insight from, from Pippa about that because I think it has massive ramifications. But it also explains a lot as to what Jim was putting out saying, you know, why, you know, there are some other forces at play here.

There are and I want to weave a couple of things together around that.

So I joked the other day that all these TSA lines are making people well aware that they're really not on the arm of the K. All these folks who once thought they were flying first class no longer really gives you the benefits you thought it did. But one of the things we know about war is that it adversely impacts both those at the bottom and the young.

And the young already feel largely powerless and they can't afford homes, they can't afford this or that, they've got student loans and we have a volunteer army today that again disproportionately impacts those at the bottom.

But as we think about a dominance of the Department of War to, to use Pippa's term, I think we have to think about ultimately the imposition of a draft.

And if a draft arrives, that is yet another message to those at the bottom that they are powerless and that they once again their plight in life is impacted by those above. And I, you know, I'm not suggesting good or bad. I just think we need to, to recognize that it is on top of what many are already experiencing.

I think there's a, this incredibly important point and I'm sure our listeners have also seen the news about, in the US about lifting of the draft age and waiving of certain things that really came out last couple of days. Probably not a coincidence given what's happening right now. So very relevant points.

But I think this idea here which is so critical about this move towards authoritarianism has moved towards imposition of control over, over the masses and the removal of kind of democratic processes and in, in multiple ways. Right Is, is so important. Why are these things happening? Why are leaders moving in that direction?

Answer is because the their ability to appeal and to get what they want or what the people around them want and also to avoid the costs of rebalancing which are incredible for all can only be avoided by avoiding and circumventing democracy. At this point, we know what the cycles look like. They do too. We know what's happening. We're talking about it.

Trust me, people at the top echelons also are talking about it. Right. The reality is that once you know that, there's no way out other than to avoid what the people want.

And so if we're not going to prioritize median outcomes, which is what people want, and instead are unwilling to do that because of the cost that that will take, there's only one way out, which is to do it by force. And that is the biggest question, right? Are we going to avoid the authoritarianism circumvented? Is the will of the people going to.

Going to force the outcome that the larger forces, the people want and increasingly want as we move the next five, 10 years and increasingly want or are desperate to have, or are we going to move to a moment of the coliseum and other things, distractions and pure force and that. That people just give up in a sense and. And continue.

I think that's an important point in point given where we are and I think this connection between the will, the people, this k. Will it be. Is it inevitable that we lead down that path?

I would have said the difference between the 60s and 70s was the Democratic process was largely in place. Right. And I think that is one critical point in my question. When I try and think about the next 20, 30, 40 years, what is.

Are we heading more towards authoritarianism? Are we going to avoid the kind of the rebalance that would normally happen in a. Not normally, but in the most recent democratic experience?

Or is this going to turn more into something like Rome or some other long, long history where the power of authoritarianism helps avoid some of those rebalances and it can go worse for another 80 years? And I think that's a big question.

We're already seeing oppression as it relates to the movement of labor and goods. And so I think there is a tendency to see that progress continue at the same time.

And this is a point I make whenever I'm talking about confidence with first responders, which is that their want for control, their demand for control, runs counter to the control the powerless are desperate to maintain.

And so I don't see us getting through this without moments of intense tension between the powerlessness of those at the bottom in conflict with the demand for greater and greater control among those at the top, be they governments, corporations, technosaurus. You know, there's a large group.

Yeah, I.

The difference was one was incredibly deflationary, the other one was incredibly inflationary. Why was one inflationary versus the other? Introduction of the Federal Reserve. Introduction of fiscal, not Federal Reserve, I apologize. Fiat.

And a Federal Reserve that could then.

Use a fiat currency to then monetize and inflate away what I like to call, it's illusion of, you know, these are, this is not the real realities are not seen by the public. So it's a nominal illusion. Sorry, that's the term I was trying to, trying, trying to come up with.

So, so I think we lived through a 60s and 70s of a nominal illusion where we psychologically were allowed to control and manage the desperation because the numbers themselves didn't look as bad or as you look at what happened to the Great Depression and that we still talk about, right. The term itself, Great Depression was incredibly painful, but the pain was actually in terms of markets and whatnot as, as big in 62 to 82.

So importantly, I, I, I wonder now that you know, we are still in this fiat world. We are still in a world where the, we have the ability to control and smooth these outcomes.

And I'm getting to the point here where that desperation can be more controlled monetarily by the powers that be. And so I worry that we may not be able to easily get to the desperation, let's say, of the Great Depression as easily. We need a crisis.

That's what America is built on, the ability to have a crisis. By the way, like if we didn't have a crisis, we, we don't solve and we don't come together.

We don't create new laws, new amendments, we don't reform the system, it just entropies. But the Federal Reserve was created to smooth the business cycle, to avoid crises. And so guess what, we're at a massive period of entropy.

And so we're an extension in a sense of that desperation and the smoothing of that desperation. But you need a cathartic desperate moment. And so the question is, will we get that and how long will it take?

And where the powers of B be able to control, despite some mild desperation, the outcome? I think those are the big questions, right?

I think in a natural democratic system, without smoothing and control and management of the system, there is a cycle. But. But the lovers are very powerful.

Well, and I think we've already seen that in this world where social media and the markets are connected, policymakers, policymaking is slow and ineffective. The crowd can meme something before policymakers can move.

And so I wonder about the moments given the real time, widespread understanding of what's happening everywhere at once and the crowd's impulsive and emotional response creating a crisis that policymakers and others are forced to respond to.

We moved risk taking away from those that we could control into the hands of those that could care less.

I mean, I think just from a market observation point of view, just the fact that one of the largest markets in the world, in a sense, oil markets, have moved almost 100% in just a matter of days. I mean that would be unthinkable.

But it's not just the market. It's the fact that the market is now the economy. Because if you watch the prices at the pump, they're moving in tandem.

And so we live in a time where the speed between a geopolitical event and the consumer is shorter than ever before.

Yeah.

And more prone to excess and overreaction.

But to be clear, that's tied directly again to that 40 year supply set economic where we depended on financialization to lift the whole system without people. Right. So 100% agree. It's all about the market now. It's all about, I mean we have $500 trillion now of long assets.

The Reagan, the supply side economic model that started in 82, all of that has led to this massive I call sumo market, this dramatic inflating of the financial market where that's all that matters.

And so reflexive now, where the biggest driver of liquidity in the world is not the Federal Reserve, it's not the treasury, it's not even close, it's financial markets. Because of that, $500 trillion goes down 10%, that's $50 trillion of collateral set on the system that dwarfs like any other entity that can.

So everybody's just trying to manage the market so they can manage liquidity. But that's a circle. And as we know anything that's a circle becomes, can be a spiral down and a doom loop as well.

And as we've seen, if it can be monetized and it matters, it can be weaponized.

And I think that if there is a lesson to be learned from the last three weeks, it is that in a hyper financialized economy, the weaponization of what matters is going to happen in the markets.

And so if you're a policymaker, you now have two opponents, you have the real enemy and you have investors who are speculating on what's happening around you.

So I wanted to ask you a couple of things. Here we talk a lot about confidence and I think intuitively people think, well, it's definitely a strength to be confident.

We know that if we go into a meeting or whatever, you know, the more confident we are, the, the better. But I wanted to ask whether there is a point in time where confidence might signal, you know, that something is being missed.

It's sort of changes its character.

But also if you had to pick something right now, one signal, would you trust what's going on in the markets or how people are feeling about what's happening? Those two things I'm, I'm curious about.

Yeah, I always think that overconfidence should come with a surgeon general's warning that it causes blindness because we don't focus, we don't have to. When we feel invulnerable, there's no need to scrutinize. And so we are either ignorant, we're overlooking.

The amount that we don't pay attention to when we're overconfident is immense. And that is what I worry most about.

That the backdrop to all of this year's geopolitical events was an environment of extreme overconfidence among policymakers, investors, you name it. What confidence measures do I trust? It depends on who I'm looking at.

I try to come up with proxies for different groups because I don't think there is a single proxy today. And so if I'm looking at the financial elite, I might look at American Express as a, as a reasonable proxy. The upper middle class.

Let's look at Carnival Cruise Lines.

As I start to think about the lower tier, then I switch to Google and Google searches, you know, what are searches for things like cheapest gas near me, telling me I've been watching as searches for surcharges are skyrocketing, which tells me small business is worried. So there's something that matters to every group and the challenge is always what's the proxy for it?

If I'm thinking about the Saudi royal kingdom, the royal family, I'm watching oil. Everybody has something that matters, that has a price on it, and that, that tells me everything about how they feel.

Before I hear what you think on this, Jim, we talked about what we might be missing, right? We get blinded. Is there something you suspect we might be missing? A direction?

You're looking and saying, yeah, I think we're completely ignoring the risks over here.

I think the risk that people are overlooking is populism more broadly and the fact that those on the left and right at the bottom have so much in common. And yet we're spending so much of our focus thinking that they're in opposition now they have much more in common.

And one of the consequences of COVID I think, is blindness that those at the top no longer see those at the bottom.

In a world where things are delivered via Amazon or via doordash, the only place I see those at the very top and the very bottom interact is in the emergency room of a hospital. They don't take the subway together, they don't go to church together, they're not involved in clubs together.

We live in an environment where we're stratified experientially by socioeconomics, that the rich can go to the game in person or the concert in person. The poor have to watch it on tv.

And I think the result is that those at the top have no grasp, none whatsoever, of what's happening among those at the bottom.

I think that's an incredibly astute point, Peter, I really do.

We had this conversation with Dimitri Kofinas, and in that we had a kind of a really interesting unlock for me, which was kind of talking about the hero's journey and how societally the hero's journey can be embodied to whether we heed the call. And heeding the call for me is, you know, and the human is like summoning the courage. Right.

We even use those terms like bringing yourself together to rise to a challenge in a society. It's like coming together. It's a building of strength to attack what needs to be attacked.

What's been happening for a long time, I think, is this dividing of people explicitly.

There's been an attempt to do that by other countries to the U.S. we know this is well documented as well as it's attempt to divide politically as well. But technology has amplified that reality as you highlight. And I think one of the greatest challenges in the West.

I think the liberal democracy has everything at its disposal and it's a more popular system by definition for the people. But its biggest vulnerability is division and people not seeing each other and not being able to come together.

This is why a politician can be incredibly powerful. That's why narrative is so critical to the outcomes that lie before us. But I think you're absolutely right.

We sit at one of our greatest challenges at this moment in history is the bringing together and the divide. You know, 60s, 70s, we had a divide, but, you know, people.

Walter Cronkite and people talked to the world and brought people together, told one story, talked about, you know, the Kennedys of the world. Right. You know, did. Did a similar thing. So I think, and it was a different time, we were less divided. But you touch on such a critical point.

So I think, you know, more than ever the ability to unite, which will be easier in crisis, which will be more likely to be accomplished when people feel some level of desperation, some coming together, but still essential. And will we heed the call is really the ultimate question. You know, will we. This is our kind of global hero's journey.

And if not, by the way, there's no, it's not all fairy tales. The hero doesn't always heed the call.

No. And I think what people miss is that the leader is born in crisis, that the crowd comes together spontaneously, impulsively, emotionally.

There's a need to be there to act that is feeling based. And I talk to people and they're like, well, who's going to lead it? It's like the crowd is going to lead it. And from that leaders will be born.

But I think again, those at the top underestimate crowd behavior and the fact that the triggering events don't have to be significant. I mean, Tom Hanks getting Covid triggering this massive response, especially in this day and age.

You know, to your point, social media can also be an accelerant. Right. It is not a means of just control and authoritarianism. It is a means of potential democratic. Right. Freedom.

Right.

And rebellion. Yeah, I think that's like really the critical point. I do feel like for some reason though, to your, to your earlier point, people feel powerless.

People feel unable to move the needle, though I think more than ever in any time in history, the ability for no one to become someone and change the narrative is more powerful than ever.

Do you have historical context on that, Peter, in terms of when this sense of powerlessness turns? How it turns, I don't know. I feel like a feeling of powerless by definition feels powerful. Is it inevitable? Is there? So how do we turn out of that?

What tends to happen?

Yeah, so if we look at the rise of the Arab Spring, we can clearly chart that against food inflation. And economists like to talk about inflation as an economic experience.

I think of it as a psychological one, particularly as it relates to inelastic goods like food. And why we feel powerless in inflation is we're imprisoned by it. Even worse is if we introduce scarcity.

If you didn't like the high price, wait till you have none.

If you want to see what sudden powerless feels like, turn off the lights in your house, pull the breaker at 9 o' clock at night or 8 o' clock when you're getting ready to eat, and suddenly you'll see the impact of powerlessness. And so what's happening for those at the bottom is they feel voiceless.

So they've seen a political system that has not been responsive in any meaningful way. For healthcare, for childcare, for education, for housing. We can go through the list. And now they're feeling powerless.

With food and energy prices, it's not a single event, it's a compounding event. And so we can see it that ultimately it's that powerlessness that trips. I would argue, Jim, and this is going to make some people uncomfortable.

I almost feel like it's more a feeling of powerlessness now. At least then there was some level of response. I feel like with the ICE stuff, like the response was for a second and then people moved on.

I mean, again, not exactly the same thing.

I don't mean to liken them to each other, but there is a noticeable difference in the speed of which we are willing to just say, oh well, that guy was. Those two people were killed without cause and we're going to move on.

So as confidence falls, those moments of for now turn into moments for action.

You mentioned something interesting just before, Peter, about supply. Right now we've talked a lot about inflation, higher prices and all of that.

We haven't really even talked about what if we just don't have enough oil now in the US that may not be something that you're going to experience because you have oil in Europe, that's not quite certain. I think we've seen one, maybe two European countries, smaller though, but restricting energy supply.

Given what's going on right now, who knows where the conflict will go.

And to your point, Peter, I think we often fortunate enough to live in the Western world, in countries where we've never really for a long, long time have had to deal with these things. Of course, during the Second World War our parents did, but we've never had to deal with this.

But maybe we're not that far away from something like that happening even in our world. And then the people that we thought, no, we're above this powerlessness. It's never going to hit us. It'll hit us out of the blue.

I think that's not to be alarmist, but it's not an impossibility.

So, Niels, I'm watching Europe really closely.

I thought it was very interesting that the first headlines with Slovenia, I believe is the first country was the insertion of the word first, as if there will is the expectation that others will follow, even though it's the only. So I think that's really telling in terms of the mindset.

I also think it's unbelievably important if we're going to think about the response to remember that it wasn't that long ago in Europe with Ukraine, that prices shot up, that recency bias suggests that whatever response we see will be even more dramatic and emotional and impulsive. So shortages, high prices are nothing new. And so the potential for hoarding will be even that much greater.

So these are real systemic threats that I think, again, people underestimate how quickly they can be triggered. And, and, you know, if you talk to somebody with ptsd, the trigger doesn't have to be big. It's what it triggers that's big.

And as a result, yeah, I would argue this. It is first, because I think there's an understanding that it's. It's almost an inevitability.

If what I said is correct earlier, that this is really the first kind of kinetic war between China and the US Which I strongly believe to be true, the Strait of Hormuz is not going to open up for free trade again anytime soon. We could have a taco moment where, oh, we're in a ceasefire, yada, yada. But if it's really about the control of that straight.

And by the way, for the US the worst case is it stays close, right, because the US doesn't get hurt by that. And actually, Trump, interesting. Said tweeted something along the lines like, not our problem. Who goes in there, closes it basically creates a mess.

And then it's like, okay, everybody else that matters to you guys, you guys deal with it. I think that's by design.

The reality is the intent, in my opinion, was always to get the price of WTI to gap dramatically from Oman oil because China got 40% of its energy from the Strait of Hormuz, only 10, 15 from Iran. By the way, it's the Strait itself. That's the. That's the. The desire. So there is a. I think an explicit goal to divert.

First goal is stop China from getting that energy, that oil. Second goal would be to send it to the west and to. To European, Europe, India, Japan, allies, you know, et cetera. But that's a secondary goal.

And the point is China's goal is just to open, though, open the straight and get it back to normal. And so my point is, it's. This is not going to end soon, I guess, is my point to you. It is.

It is another step in this global conflict, but it's one that is centered directly around energy now. Directly. And at what. At probably the most critical choke point in the world. And so if we think we're going to get back to normal anytime soon there.

And I do think talk about powerlessness turning into desperation. You're right. Inflation is the trigger. It has since been since the beginning of time.

And food stuff, which is the eventual ultimate kind of there's a lag there. Energy is first. Fertilizer, food stuff comes six, nine months later. But that's the real thing to watch.

I think we're likely to compound it in terms of looking to increase the volume of ethanol, which means we divert corn from food to energy. We have a bunch of tactical responses that are very knee jerk and we're not thinking about the implications as we never do during a crisis.

Is this what you refer to as war beta by the way? Peter?

Yeah, I'm fascinated when crises hit that investors immediately go into this game of Where's Waldo? What's connected to this and how is it connected and correlated?

And if I look at the market behavior over the last couple of weeks, I see everything being measured in terms of war beta. That oil is 2x3x is a levered trade. Other things are not affected.

We saw the same thing with AI but the challenge with that is that the longer this goes on, the more things get tied. And so we see this growing volume of trades that are now dependent on every missile or bomb that is propelled back and forth.

I think there's this increasing lock step. We see it obviously bonds and oil, but it's now bonds. Oil and fertilizer and corn, it's now bond.

It just keeps growing and the result is it's growing in amplitude as well.

We haven't talked about that at all on here Niels for like four or five years at all, have we? The reality is this is what we've been saying and I think we are in a war time economy. That's the reality.

If you were early to that story, you have become incredibly wealthy in the last three, four years. But it's still early for some people. And that will be the case for the next five, ten years in my opinion.

And so once you realize that that means all resources are being diverted from what would normally have been the regular free market economy to the allocator assets is the state.

And the state's goals are to compete and to, to try and you know, and this is between multiple bidders, China, US and and all the proxies around them. So I think there's. Yeah, it is about war beta in a sense it is what, how tied are you to that war reality?

And, and what does that mean for your outcome? Much more than it is market up, market down.

And I think ch, you raise a really good Point. I know you get a lot of hate mail for it, talking about things like price controls.

But in a war environment, policymakers have no choice but to be oppressive. And they do not have friends, they have interests.

And one of the things I've been saying for quite some time is we live in a time where it's the interest of maybe a dozen men that are driving the global economy today. And so you as an investor need to think about in this environment, what do they want, what do they need and are you in their way?

You need to recognize that they, they will make decisions that they believe is in their best interest.

Yeah. Investors in China have been first and foremost thinking about what dear leader wants for a long time.

I will say I think in the free market world, right, we are, people are waking up to that. That is actually probably more important than what X number is going to say tomorrow or what earnings number is going to say the next day.

Because that decision dramatically changes the outcome, you know, of any, of any asset.

And the more we lead towards that authoritarian type kind of state run kind of outcome, which is what happens in war, by the way, by definition, you know, the more you have to be focused on those things. So it doesn't hurt, by the way, to know what that dear Leader is going to say, you know, 15 minutes before a dear leader says it.

That is true. I had a couple of questions before we start to, to wrap up. Just want to hear your thoughts on. We talked about Europe kind of being affected by this.

We haven't talked about the Middle east being affected by it. In a sense that a lot of money has been invested in tourism, huge airline hubs, etc. Etc.

And because of course, those countries, the Emirates and so on and so forth, being now targeted and so and so on, that changes the way I think a lot of people think about, oh, do I really want to move my family there, live there? A lot of firms have set up shop there. A lot of firms in the industry, in the financial industry have set up shop in these areas in recent years.

And I'm not saying that this is kind of like a butterfly effect, that this will, you know, have, you know, huge consequences. But I feel it'll have huge consequences for those countries, at least for now. I'm curious whether you think that this will be.

I mean, it's almost like we've forgotten that the whole world closed down during COVID Right.

I mean, I think it's part of, during COVID when airplanes had like three people on board, you thought, no, people are never going to fly in these machines again. And then, you know, 12 months later you can't get a seat unless you pay premium price. Right.

So I mean, is this again one of those times where when we get past all this bad stuff we've been talking about today that actually will be pretty quick to forget about all of this, or is this time different, in lack of a better phrase? Curious about that.

I don't think this time is different at all. But I would say again, the backdrop of invulnerability at the top was immense.

And if there's a segment of the market that I think is woefully oversupplied, it was the high end travel and entertainment space. And nowhere is that better seen than in the, the air travel world that you, they couldn't put first class seats in fast enough.

But they never envisioned what's already starting to happen, which is scarcity of jet fuel. And if the war intensifies, jet fuel becomes not available to commercial travel. It's prioritized to the military.

And I don't think that industry was so blind to risk three months ago. If there's an industry that I think is a real pending shitstorm, pardon my French, it is the airline industry.

And I put luxury hotels right next to it. They, they could not imagine anything other than the best of times ahead. And they, they didn't hedge their fuel, they didn't hedge. I'll stop.

And I was given that. Sorry, go ahead.

No, I'm just going to say, Jim, before, I love to hear your thought, but just to give you a fact, because I read it the other day, apparently the 20 largest airlines have lost $53 billion in market cap value since the beginning of the war. And that's even a few days ago.

Yeah. But especially given the confluence of the effects of AI right in this top of the K, now for the first time really starting to potentially see pain.

One last thing I wanted to ask and I think I'd be remiss and I hope it doesn't take us two years to have another conversation. But if I didn't ask, it now would be, you know, AI Obviously you've alluded to the top of that K starting to feel vulnerability for the first time.

Right. And things are moving fast on kind of the AI front.

And we're I believe, starting to see a significant kind of amount of degradation of the invulnerability of that, that top of the, the K. Do you see that? How do you see that playing out? Let's look forward A year or two. I mean the next two years will be very important as it relates to those effects.

So I look at AI as a classic example of the extraordinary abstract technology, innovative technology that we crave at peaks in confidence. So it fits the mold of exactly what you would want. This world changing technology.

Its problem is that it's incredibly abstract and psychologically distant from Main Street. If it showed up for Thanksgiving, you wouldn't know how to talk to it around the table. Worse, it's now threatening to take my job.

All of that to me makes AI intensely vulnerable to populism.

And so I'm expecting in the not too distant future a wild backlash where all the bads of AI are all over the screen and the tech space doesn't see what's coming. You're already seeing it with energy costs. But there's a long list of things yet to be thrown across the headlines.

I totally agree.

Actually one of the things that's surprise me to date, and I guess I understand it's just not a full surprise because technology has been the generational kind of 40 year zeitgeist.

There's been a support among this political cohort for technology and these technology companies that is out of step in some ways from other political populous times. We have yet because of that, to see any antitrust or any government versus corporation activity.

I think it is likely, given the AI push that we at some point see government turn on companies. It will come at a greater point of desperation. I think we're getting there.

But I'm guessing that that political lever will begin to be pulled at some time in the next, call it six years, four to six years, probably sooner rather than later. And I think when it does, then you start to see this fly in the ointment to the AI story, which is how do you make money? Who owns the AI?

Is this the profits of AI for the people you know, how do you regulate it? I think those things are again, we look at it in the abstract in a vacuum, and it doesn't exist in a vacuum.

The last thing I'll say about it, people think it's incredibly deflationary. Yes, all technology is deflationary since the beginning of time. And yes, AI would be deflationary in that sense.

But I think the important thing to think about that very few people do is much like Covid was obviously at its core a deflationary force. The response, which was much bigger than the actual thing, was actually what dominated, which was the inflationary long term response.

And I would argue that AI is going to be a deflationary force that leads to a dramatic given the populist environment, inflationary fiscal response, ubiquitous price controls, you know, all kinds of things that, that will be deployed. It will be a political catalyst probably more than anything. And I think that's the thing that very few people talk about.

Everybody's talking about the deflationary effects, I think, and I think now you add in the disruptive effects, global conflict, everything else, how those things will and, and again, I think everybody got caught in this deflationary, short term, one year, one half year mindset again. And as we highlighted, here comes another wave.

Yeah, and I, and I think to your point, it's going to be sooner rather than later. The political party in charge isn't going to matter. This is going to come from the left and the right together. It'll be a response to populism.

I agreed and I think it comes out of control too.

If we're heading towards an authoritarianism route at some point, government and those in power are actually themselves threatened by corporate power. And so I think there's an inevitable kind of collision course there.

Yeah, and I see the same thing, by the way, with social media. I think it's only a matter of time before what we see today with the FCC and the networks ultimately is turned onto social media.

On that point, I think it's probably time to wrap up. We could go on for a long time, but I think it's better to bring you back more often, Peter, than go for another two or three hours.

Today I will just ask, just our curiosity before we end, is there another book in you?

There is.

What I'm finding is that the Confidence Map, which I thought was targeted to business leaders and policymakers and investors, has turned out to be a really valuable resource for individuals, that it's helped folks better understand anxiety, understand why they feel the way they feel. And so one of the things I'm looking at is a book that more of a workbook in terms of how to use the framework.

Well, that would be awesome. And so when it's ready, we are ready as well. For sure, Peter. But anyway, thank you so much to both of you for a wonderful conversation.

Really appreciate that as I'm sure all our listeners do. And by the way, make sure you go and get a copy of the Confidence Map. It's such an important book and as so useful as as Peter was just alluding to.

Also make sure to go and follow Peter's Twitter feed. It is wonderful. It has lots of great content as well.

Of course, if you're not already doing it, Jim's Twitter feed, which is also a a wealth of of information and I'm sure you can tell from today's conversation we do live in a truly global macro driven world. Confidence driven world perhaps. And so staying up to speed on these topics is really important. From Jim, Peter and me, thanks so much for listening.

We look forward to being back with you as we continue our global macro series. And in the meantime, as usual, take care of yourself and take care of each other.

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