Geopolitics and Markets
I have to say, in my entire career, I have never seen such a challenging moment in the world of geopolitics. It's quite extraordinary what is happening in the world today. What I want to do with you, with the time that we have, is a very fast run through of what I think is driving our reality. Before we begin, I've been asked to set a question for you and to do a poll - I think this is just going to warm you up - with the Slido. It's a very fundamental question, which is do you think geopolitics really derail markets or do you think that geopolitics actually create real opportunities? I think if you pull up the Slido function, we can get an answer to that and see what your mood is. Then I'm going to ask you the same thing again at the end and see if you've changed your view on this. Yes, very interesting. You are split, like everybody else in the world, including everyone in my country, the United States. Fantastic. Okay, I'm now going to start. Some of you may have seen I've written a few articles trying to explain where we are in the world and why we're here. We are definitely in a hot war and it's not what you think. It's much larger than you think. We are in a hot war, but particularly in cold places. In addition to what you know about Ukraine, we are also in a cold war in hot places. We are in a cold war in places you don't think about usually, like islands all over the world, where the superpowers are competing to have physical presence and influence. I want to walk you through exactly what the heck is going on that's driving all this. I think it begins in space. Now space is a massively investable sector. My experience is most people who are not in it don't know anything about it. I'm going to take a little time to explain to you why the superpowers are competing over space. Why it is that really we've been, and I don't mean to be dramatic, but I do think we have been effectively at war amongst the United States, Russia, and China, in space, for roughly the last five years. What has happened in Ukraine is a spill over of that background. What is happening in space? Number one, we're literally at a once-in-a-species moment, where we're not just going to go back and step on the moon, we are about to inhabit the moon. We are about to build on the moon. There's a massive race between the superpowers as to who gets to establish the physical presence on the moon first. Now why is it anybody cares, right? Every young person also says to me, 'Don't we have problems here on earth we could just solve before we have to go to the moon?' I see everybody laughing in the audience. The answer is yes, but there are things you can fix on earth, in fact, I'd go so far as to say you can solve earthbound problems with space-based solutions. To begin, the context is all the superpowers have been putting up satellites and now they're effectively attacking each other's satellites. We've had several incidents that are really fascinating. Things like anti-satellite tests, right, where you blow up your own satellite, so that you disrupt the other guys' orbits. We've had a very interesting incident with both American and Chinese satellites that have robotic arms on them, and are now capable of reaching into another orbit, grabbing your satellite, and hurling it out into outer space. I know, it's literally Pacman in space, right? These things have been happening, but outside of public view because there are no reporters in space, and this is all classified stuff. You can't really see it very easily. The question is why? Well, let me give you four things that tell you why. Number one, space-based solar power. There is a race to develop space-based solar power. Now what that means is basically putting up massive mirror arrays in space, whether on satellites or on the moon, and this is literally straight out of James Bond, and beaming power to earth. I'd literally, just the other day, took this headline out of the 'Daily Mail' because that's such a respected organisation! It's interesting because it's in the public domain. There it is, in the 'Daily Mail', but in markets, people are like, 'What? Space-based solar power? I never heard of it.' A terrible graphic that, to illustrate what it means, but what it means for all of us in this room is absolutely profound. I personally know some of the guys who are building the prototype for this right now. In three years, we're going to have a working prototype. All of a sudden, you're going to have to think about a world where energy is not scarce. Where it is ubiquitous and it is cheap, and it comes from space. That is what the superpowers are competing for, who's going to get there first? The second thing is satellite-based internet. Now we know this works now. You may say it doesn't work very well, but it's definitely working. Zelensky is communicating with the world for one reason, and that is because he has satellite-based internet. What that means is ubiquitous connectivity. That means you could decide, you know what? I want to be in the middle of nowhere and have, now, world-class internet connectivity. Fundamentally, that is going to lift the value of assets all over the planet. This is a massive uplift for the world economy, in conjunction with ubiquitous energy. Have any of you guys heard about Bennu and Osirus-REx? Probably not. No, okay. Third thing, your iPhones. You all want your iPhones. I want my iPhone and everybody wants the whole world to have them, so we can all be connected and be productive. As you, at State Street, and all of the clients here know, ESG means everyone cares where is it coming from, and how much damage is it doing to the world to rip these core materials out of the earth in order to make them? Asteroid-mining has become a thing. Bennu is an asteroid that was discovered in 2019. In 2021, when we were all locked down with COVID, NASA went up and took samples. Bottom line is there is no need to rip things out of the earth anymore because you can take them off an asteroid. It's literally going to be huge. All of the superpowers are racing to see who can get a hold of the most valuable asteroids first. By the way, Luxembourg has emerged as a major centre for asteroid-mining companies. The sectors here are developing really quickly. Unlimited resources, unlimited power, unlimited internet connectivity. Now we start to understand why are the superpowers competing for space? Why are we going to see these headlines, that China and Russia are racing to set up a military base on the moon? Why is the head of NASA coming out saying, 'You know what? If they do that, we are up the creek because they can basically destroy all our satellites from above.' This is geopolitics. Just to finally finish on this subject because I don't want to stay on it for that long, but it is the centre of everything that's happening. Here's just a simple visual. Have any of you guys heard about the Starship? No. Artemis, yes? Okay. Artemis is the NASA mission that is going to put humans on the moon again. Artemis is totally designed to build habitats, launch pads. Of course, you can launch from the moon because there's no gravity, so now we're talking about launching to Mars, launching to other locations. That's why I say it's a once-in-a-species moment that humanity is going to be off-world. That is what's happening. To do that, you need to be able to move stuff between here and the moon. What you need is something called Starship, and Starship is effectively a space truck. It's a 100-tonne payload, which is this big thing on the right. It goes back and forth and that is the foundation for the build process. That's why I say you have to really think about the magnitude of this in human history. You may have seen yesterday's headline, that NASA slamming something into an asteroid to test. Do you really think that that's just about…? Right, this is geopolitics. This is all about geopolitics. Bottom line is that's a lot of earthbound problems that we have just solved from space. Energy, resources, and connectivity. By the way, NASA has also recently announced that they can grow plants in lunar soil. Again, game-changer for this process. Now we're going to leap to a tiny, little island in the Arctic Circle, in the northern part of Norway, called Svalbard. Now why? This is where we move from space-based confrontation that you never heard of, to the beginning of what we see on the ground in Ukraine. Many weeks before Ukraine began, there was a very interesting incident, on January 6th this year, that is there is the fastest internet cable in the world is on that island. You're like, why, on this crazy little place? Answer, because pretty much every satellite connects to earth at that point. It's a double cable, fastest cable in the world. On January 6th this year, basically, someone went in and cut one of the cables. They didn't just cut it in one spot, they cut it in two, and they took away about six-and-a-half kilometres of cable in between, so that no one could confuse this with an accident where it hit a rock. It's a very interesting story behind how it happened. The next day, the chief of the British defence forces came out and basically said, under normal circumstances, this would be considered an act of war. Again, it was in the 'Daily Mail', but not discussed in the financial markets, which was fascinating to me. That was the beginning of this war that we're in now, as far as most people who are in the military space are concerned. This was the beginning of understanding that we were going to be in a pretty direct confrontation between not just the US and Russia, but the US and Russia with China as the friend, which is a very different picture, and something that, frankly, nobody had really thought was possible. It's hard enough to face one. It's very difficult to face two aligned. We all think about the war we're in as this tiny, okay, here we are, Ukraine, there it is, this one spot on the map. The way President Putin thinks about it is like this. He sees a world where he is starting in the Arctic and going all the way to the southern tip of Africa. I've added on Alaska, Sonoma County, and Hawaii because they've also made some claims about those because they were previously Russian. Right, how many of you have had Russian River wine from California? Now I know it sounds crazy, but what's important to understand, the mindset, how is he thinking? He's said the Arctic is the Mecca of resources, which it is on earth, and so there's a huge competition for who controls the Arctic. All the way through Africa, where the Russians in particular have been doing a huge number of deals with local countries - Sudan has just given them access to a port on the Red Sea. We're going to talk a little bit about the Central African Republic deal. Anyway, so when the markets analyse, is Putin going to run out of money? Is he going to run out of steam? Typically, they're looking at the Russian economy. I think we need to look at the Putin economy. The Putin economy is much bigger. Frankly, the cashflows into it are rising very, very rapidly. This is just to give you an idea of the deployment in Africa alone, right, because nobody is thinking the Russians are in Africa, but they are. The Chinese are in Africa, which you know from the Belt and Road Initiative. This is where we are, the West, NATO, versus where the Russians are. You can see we're literally facing off throughout Africa. Mainly, by the way, using private mercenaries, which has become a huge business in the world economy. Let's come back to now where we usually begin the conversation, which is Ukraine. Obviously, right now, the Ukrainians are winning. This is a big problem because that has led to President Putin outright threatening nuclear weapons. Here's the good news. The good news is our team is so good with that material, that basically, I don't think he can do anything. He can't move anything, he can't deploy anything without us knowing that it's coming and preventing it from happening. I'm not actually worried that we're going to end up in some terrible place. By the way, to be clear, in the military world, nobody thinks he's talking about a Hiroshima. He is talking about using a tactical nuke in a very localised context, but nonetheless, nuclear is nuclear. Suddenly, the world is in a different footing because we've escalated to nuclear. Now we're like in the Cuban Missile Crisis period, right now. The good news is every time we've had a Cuban Missile Crisis, how has it ended? Without a nuclear event. I don't think this time is going to be any different, but that doesn't mean there aren't a lot of people right now working incredibly hard to make sure this doesn't happen. It's not only nuclear we have to pay attention to. Notice that Putin often talks more broadly than that. One of the biggest issues on the landscape today is that weapons of mass destruction can be genetic as well. We've heard quite a lot of statements in the last few weeks, from officials in various locations, about this fundamental issue, which is called individualised warfare. That's where you create, from DNA, the ability to create a disease that affects one person. There's a very interesting article that you should read on this subject. It's very old, so I think it's from 2011 or 2012. 'Hacking the President's DNA.' It was all about how do you create diseases that affect only one person or one haplogroup? It's broader than just nuclear. All this is happening at a time in history when we just don't have the hotlines that we used to have. Who are you talking to in Russia right now? Who are you talking to in China? It's just a very different world than we've had in the past. What we have is the Ukraine effect, and the Ukraine effect is when they're winning, this creates a superpower problem. Even though one may want Ukraine to win, it is creating superpower stress. You all know from watching the news lately that what's happened is all of President Putin's closest allies, President of Serbia, obviously, President Xi of China, the head of Chechnya, President Erdoğan, every single one of them, the moment he threatened nuclear, they all stepped away. President Xi began with, 'We want a truce and we want to see constructive negotiations.' Suddenly, President Putin is finding himself isolated. That's leading to these rumours of a coup. The last couple of days, I have to say, my phone has been ringing off the hook because for a couple of days nobody knew where President Putin was, and nobody knew where President Xi was either. Suddenly, that created the rumour mill that you've all seen in the last few days about is there a coup? I want to walk you through a little bit what I think is happening on that front. I think that we're going into, the big party conference in China in November. The issue for the politburo has been that President Xi is, number one, not delivering on the promise to the public, which is we'll make you rich before you get old. They're not thinking they're going to get rich before they get old now. None of us are thinking we're going to get rich before we get old, given what's going on in the world. That's been a real problem because how do you contain social unrest and social pressure if you aren't able to deliver a better future? Number two, for some years now the military have been reporting to President Xi personally, not to the party, not to the state, but to him personally. That's a lot of power. It's a lot of power at a moment in history when they see the leader is aligning with Russia so tightly and the Russians are now threatening nuclear weapons. This raises national interest questions in China. This is why we saw this rumour that when Xi went to Samarkand for the Shanghai Cooperation Organisation meeting, which was his first trip abroad since COVID, first opportunity where he's got more limited protection, he came back and was put under house arrest. They removed control of the military from him. Now is that true? Looks like maybe not. Is it a rumour that Xi wanted to start because it would expose all the people who went, 'Yay!' and what you have is the beginning of a Night of the Long Knives purge, where he removes all his opposition and consolidates power? Now why does he want to do that? He wants to do that because there's an opportunity, in my opinion, for him to take greater control of Russia. People ask me, 'Tell me about this unlimited friendship between Xi and Putin', which by the way, looks pretty limited now. Well, it's kind of like two guys in a bar, and one of them says, 'I'm really mad and I really want to punch this other guy, and I want to have a fight.' That would be Putin. Xi goes, 'You should do that. That's a very good idea. Go, you should definitely hit that guy.' Then a fight breaks out, and I go back to President Xi, and he's like, 'Hey, I just met the guy in the bar.' Right? What's interesting is, so basically, Russia maybe - I mean, sorry, China encouraged Russia to go down this road, and they got a huge amount out of it. Now they know all our reaction times. They understand how does public opinion respond? Putin has weakened himself in this process, and maybe this is an opportunity for China to expand. What did Xi say at the Shanghai Cooperation Organisation meeting, in Samarkand, a few weeks ago? He said, rather bluntly, 'Central Asia, all the 'stans', used to be Russian backyard, but now it's our front yard.' Very important message there. Very important message. This is all part of, of course, the Belt and Road Initiative and the expansion Chinas has had. Maybe one way to think about the relationship between China and Russia is the Chinese build the infrastructure, digital and physical, in all parts of the world, including particularly Africa, and the Russians provide the security and get paid for that because the Chinese don't want to put people on the ground. This is a very interesting relationship, but if Russia falters, will China just go, well, then we can't have our infrastructure on the ground because there's no security? No, they're going to continue. Central Asia starts to be in play between Russia and China. This is a very interesting moment in history. Again, not surprising that we start to get a lot of rumours about what the heck is going on in China? Especially because Xi was scheduled, in November, to be not just renamed as the leader, but the permanent lifelong leader. The new Mao. Not surprising to see a lot of noise around this. I think what China wants, ultimately, and what the political leadership of China ultimately want, is to get back to a world economy where people can be making money. Where all of us are going to China and where trade is restored. I do think that after the mess we've been in, we're going to find that the Chinese are a whole lot more flexible and open to conducive talks. It doesn't mean we won't have our arguments, but it does mean that maybe China is going to look a little different than we thought. Personally, I do think that Xi admires the North Koreans. He admires the control. He admires the fact you can get everybody to do the same thing at the same time, but ultimately, that doesn't really jive with an economy that's functioning well. I think that is the internal struggle that they will continue to have. From Xi's point of view, if he can go from a world that looks like the one of the left, to one that looks like China actually expands to control everything on the right - and by the way, that will never be announced. It will just happen, just occur. That's very good for China. Suddenly, you don't have to be as liberal in your economics because you've got so many more resources to work with. So many more cashflows to work with. I think China comes out of this particularly well. Russia, in the meantime, not as well. I think one of the most interesting stories about this period of history is how is it that a little country is able to take on a superpower and win? I was, as you mentioned, in the Whitehouse when 9/11 happened. We literally had, in the United States, spent trillions of dollars on defence equipment. It's just unimaginable how much we have spent over the decades on our defence industry. What is it that overcame us? Box cutters that you can buy at a hardware store, for a couple of bucks. It's very important to understand that actually being big is not necessarily better. I know it's like an old story, old as the hills, but in Ukraine, for me, one of the most interesting stories was how is it that they are winning? How is it that there's so many Russian generals not with us anymore? The answer came back, yoga mats. I'm like, yoga mats, what? Yes, it turns out that particular qualities of a yoga mat are that if you put it over your head, all those satellites I talked about earlier, can't see the heat signature. They can't see you sneak up on the tank, drop your bomb, and run away. They can't see you sneak up on the general. Yoga mats are what have overcome President Putin in this instance. Just as box cutters overcame us. I think this is going to change the way the security world thinks about things going forward. Now, having said all of that, let's now get into the real meat and potatoes because we're all investors here, of what do we do and where are we going next? My personal view is that the timing of these events is not random. That both China and Russia together were looking for an opportunity to basically punch the West, and they picked a perfect moment. Why was it perfect? Well, you guys know better than anybody, we've been overwhelmed by debt, not just in the US, but in the industrialised world. We have had inflation, which was already present well before events began in Ukraine. Some of you who know my work know that I've been banging on about inflation for some time. The world depends on, particularly wheat, but food. The process of creating a world where we didn't have control over the biggest flows of, for example, wheat, I don't think this is random. I think this was incredibly well thought through. Now we have a world where we're having to think about food shortages in different locations and the geopolitical impact of that. Right? Remember the Arab spring was fundamentally triggered by the wheat price going up. The whole region depends on that. Also, we are in a world, obviously, where everybody cares about oil. That's what Russia has. China needs this. In fact, both of them because it can't feed itself and it doesn't have enough energy. Hence their focus on space-based solar power because it would diminish this constraint. The two of them together, Russia and China, have been talking about shifting to a world where they're more focused on real assets, even gold, versus a world the United States offers, which is all financialised assets, which are basically burning, with inflation, with debt, with all kinds of problems. It's digital gold as well, it's not just physical gold. That's where the Central African Republic deal is super-interesting, and you should look at that, where Russia has done a deal to create a crypto hub in the Central African Republic, backed by gold. That, I think, reflects the thought process of China and Russia saying, 'We want a world where we're not beholden to the financial structures presented by the United States. We'll create our own.' That leads us to CBDC, which China has now introduced extremely successfully. It's very interesting how they did it. They literally dropped it in the middle of the night, air-dropped it into people's phones. Literally, you wake up in the morning and it says, 'You have $1,000 you didn't have before. It's a gift from the government.' You're like, 'Oh my gosh. I want that.' Now you register, you click, and you're in the system. It's an incredibly attractive thing for governments. They love it because they don't just track, now they can track you and everything you do. Not just your location, but everything you do on your phone becomes visible to them as well. CBDC is the answer, and that's also part of how they expand the economy. That's why I say blockchain is part of this. It's about combining money and the tracking system. It's super-attractive in the West as well. The British and the Americans were all thinking about doing it as well. One little detail is that we're democracies, that care about individual rights, so it's not quite so simple. We are in a world that's producing these digital twins, and the digital twin version of yourself is of more interest to governments now than you are personally. By the way, what your digital twin gets up to matters much more than what you get up to personally because it reflects not just your actions, but your thought process that you're not even aware of. This idea that you start to get people caught in digital prisons. That's one reason I don't think this is going to work for China ultimately, because you can't ask people to be super-creative at work, but don't express any thoughts that are not consistent with the party. That's just not how human beings are. With all that data, the other race besides the space race is the race for computational power. I remember when we talked a couple of years ago, before COVID, about this race for computational power, and the spin-offs from that, which I think will be incredibly powerful and valuable for the private sector, that is all in motion. That is why the Chinese are so focused on the digital aspects of what they're doing, not just the physical, commercial aspects. That leads me to Taiwan. Obviously, this is still hanging in the balance and everybody wants to know, are we going to have a conflict there? I'll just very quickly say, I think that Xi might want to have a conflict. Not because they actually want to take Taiwan. If you look at Taiwan, it's like the vast majority of the population already make most of their living from the relationship with China anyway. It's not the Chinese way to go after things with bullets. Their way is long. They play a long game. They can do things very gently and get to the same result. Witness Hong Kong. Why is there rumour something might happen with Taiwan? I think it's for domestic reasons. As I said earlier, Xi still has a party that's not super-comfortable with the military reporting to him. He has a country that's like, 'Hey, where are the promises? How come we're not getting the better life?' If you want to deal with the domestic pressure, there's nothing so useful as having a conflict outside the country. If we do get into any kind of a spat, I would imagine it's not going to go very far. The bottom line is the US Navy and the Chinese Navy and Chinese military actually have very close connections. They know each other incredibly well personally. They do have very deep dialogue, even if it's unofficial. The risk here, I think, is much less than, for example, with Russia, where all those relationships no longer apply. Nobody knows who to talk to on the other side. China, everybody knows who to talk to. Remember too that if you have a conflict, there's no greater full-employment policy than the military. Right? Everybody has a job. Is it part of creating the circumstances, where you expand the military, with the probability of a conflict that you don't actually really want to have happen? I would say that's more the situation there. We come back to they want a thriving economy again, just like we all want China to have a thriving economy again. That's why they're cutting deals all over the world. We see them cutting deals with the Saudis, who just brokered the prisoner swap between Russia and the West. They've been doing deals in all sorts of places. I think the deal they've done with Erdoğan and Turkey is really worth your attention. I've written some pieces on that, hot Turkey and cold Turkey, explaining why is Turkey now so important in the world economy? Which you'll find, I have a column on Substack that will just, in a few pages, take you deeply into that relationship. Here I've put the flag of the Solomon Islands. You're like, where the heck are the Solomon Islands? Answer, back to, I mentioned earlier the superpowers are competing for relationships with islands because that's all about strategic supply lines. It's also because this is not a world where these superpowers are fighting with their armies, leaving aside Ukraine. Actually, technically we're not fighting there. This is a world where it's naval. I think for all of us in the financial markets, we're so used to assessing geopolitics as if it's on the ground and it's army. The new geopolitics is in the ocean and in space. It's naval and it's space. Very different from what we've seen in the past. There we have Ukraine. Now to finish, with the last few minutes that we have, I'll come to my wonderful country, the United States. Now all of this has been occurring against the backdrop of an America that's so profoundly divided. I've just been on a speaking tour in the US for the last, I don't know, almost six weeks. Everywhere I go, Americans say, 'I don't want to talk to or live with the other half of the country anymore.' This is totally preoccupying the Whitehouse. One reason why, in response to the nuclear threat, we really only got one statement out of the Whitehouse, which was, 'Don't, don't, don't', which I'm sure President Putin took very seriously! The Whitehouse is so preoccupied by domestic politics, they do not have the bandwidth to deal with what I've just described to you. They just don't. Is there a profound deep dialogue happening? Answer, no, because also, Washington's attitude is Putin will run out of money and steam, so this will just go away at some point. China, once Russia's no longer there, we can go back and figure out how to deal with that and come to an accommodation at some point. That is far beyond the next election, I can't think about that right now. They're focused on today. Today what we have is Donald Trump may be not in office, but he is in power still. It's very important to understand, he is still in power in the United States. He still has 75 million voters, who think - and it's very interesting, this is a subtle but important point - they don't just think that President Biden is a bad president. They think the country is occupied, illegally occupied. That it's been a coup. It's very interesting. They're willing to go to almost any lengths to return to what the Constitution stands for. It's really fascinating. I'm not saying they'll do it, but January 6th, ironically the same day as the Russians did the Svalbard cable cut, the January 6th events may not be over. We still have an America that is so divided, and some of those folks think that overturning Washington would actually restore the United States to its proper and right position. Now that's a very tricky world of geopolitics because usually, we depend on the United States to answer the question, what's going to happen next? Now we don't have that. What we have is Tish James. How many of you have heard of Tish James? Well, you need to know about Tish James. She has been the New York Attorney General and she is the one bringing the legal cases against President Trump. The danger here is this could end up like South Africa. This could end up you try to prosecute the president of the country, or the former president of the country, but the public support for them is so huge that cities start going up in flames and you can't prosecute them. Tish James is taking on Donald Trump on a multitude of different fronts. I think, for us as investors, the thing to watch is not the legal process here, but what is the public reaction to the legal process? Again, China and Russia are watching this and saying, 'You guys are distracted.' The fact is this is true. If Tish James wins the legal cases that she is bringing against Donald Trump and his family, she will be presidential material herself. Not for this next election, but the one after that. Keep an eye on this person for the Democrats. By the way, with our elections, we love electing people you never heard of three years before the election. Nobody ever heard of Bill Clinton three years before he became President. No one heard of Barack Obama three years before he became President. I worked for George W. Bush and people were like, 'That's ridiculous, he's not going to be President.' Look for the ones that are not obvious. Fundamentally, the divided America may be a bigger issue for all of us as investors than what I've described about global geopolitics. If we get what I opened with, a world where we're, through technological means, ending up with ubiquitous power, ubiquitous connectivity, ubiquitous access to resources, is that going to deepen or diminish the pressure on geopolitics? I would say it's going to diminish it. All of that is highly disinflationary as well. Highly deflationary. Personally, I'm like, if any of what I've described on the technology front happens, this is huge for the world. It's an inflation killer. If I'm right about China, that China is expanding to take over quite a bit of Central Asia and Russia, is that good for the world economy? I think, yes, we're going to find this is the second wave of billions of new people entering the world economy and pushing down wages and prices. We had that once when the Soviet Union fell apart. We're going to get a second shot. In fact, I would go so far as to say that what we're witnessing, what I've just described to you is the actual end of the Soviet Union. We thought that happened on the day after Christmas in 1991, right? Yes, Soviet Union, no longer exists, we're done. Maybe what actually happened is the Soviet Union continued to exist because they didn't reform the institutions or the infrastructure. Instead, basically, a bunch of savvy people got a hold of the system - we call them oligarchs now - the intelligence services of Russia. Did they run it in a way that delivered to the general public? No, they ran it in a way that delivered to a particular group of people. If that is going to change, is that good for the world economy? I'd say it's really good for the world economy. Really good. If we get innovation in Russia, that means we no longer have a small group running everything. We have a broader distribution of the gains. Inflation versus innovation. Now this is the race that we're in. I think all of us in this audience, when we're talking about investing, this is what you have to think about. This is exactly what the Fed was thinking in the aftermath of the financial crisis, and when they made the decision to go to zero interest rates and to keep pumping money into the system, well beyond when many people thought was reasonable, because they were making a bet on this race. Their bet, which at the time I have to say I criticised - I've been very much an anti-inflation person, saying, 'You've set the stage where it's going to be inevitable, we're going to get inflation.' Okay, that turned out to be true, but what I misjudged is their bet. Which was if we flood the market with money, and we accept that inflation is going to rise a little bit, it actually funds all the tech entrepreneurs who are doing amazing things, including building things in space that solve earthbound problems. That can't happen if we're too focused on inflation. Let's let inflation rip a little bit, on the hope that technological innovation will solve these problems.' Maybe they were right. Who were these entrepreneurs building space-based solar power? What are they funded by? They're funded by Janet Yellen and the Fed's free money. That's where we are. I think part of that too is the move to the digital dollar. The Fed and the Bank of England, and everybody in the West now realises that if you want to expand monetary policy, it's much easier to do it with a digital dollar than it is with a physical dollar. Again, you need, as market investors, to understand digital money is not the same as real money, and that is a profoundly different monetary policy than we've ever seen before. I've had hedge fund guys say to me, 'This is nothing to do with us.' I'm like, you know what? You can double or half the money supply with a single keystroke. It has everything to do with you. Can you expand monetary policy when you want to create more innovation and then turn it off? Yes, but you don't announce interest rates anymore, you can do it individually, by everybody's phone. You get to keep a lot of money because we like your entrepreneurial project. You, no, we're taking your money away. Invisibly. No announcement, no news. That's a different world. Like I said, the money will show up in the middle of the night for all of us. It will be air-dropped into our phones. That is the beginning of a new monetary policy world. By the way, crypto, everybody in the markets is like, 'Well, crypto is dead because we had a crypto crash.' Meanwhile, there's Xi and Putin cutting crypto deals in Africa, backed by gold. Do we need to worry about this anymore? Answer, yes. The FBI and the Department of Justice have announced that they have an enforcement division. They've done their first, basically, they've taken crypto assets off of bad guys, in such huge amounts that I would bet the US Government is going to end up being the biggest holder of bitcoin in the world, basically through asset confiscation. Now when you confiscate it, you don't want to say it's not worth anything. You're going to go, it has to have a value. It can only have a value if you regulate it. Step one is enforcement. Step two is we're going to actually say if it's compliant with what the US wants, right, no anonymity, has to be declared, but if you do that, it's okay. What will fund tomorrow's economy, fractionalised finance. A world where if you don't have the amount of money it requires to buy one share of Apple, you only have $100, you can buy Apple. It's only possible if we get into that world of digital money. I'll finish, we just have a couple of minutes left. I know it sounds so outrageous, but in markets, we're so accustomed to the way things are done. We can't imagine that something can happen in a new way. The last time I've seen a radical change on the level I'm explaining to you now, was in this country in 1834, when we'd, for 1000 years, used this system of money and accounting, which was called tally sticks. This was a record of your whole personal history, on a piece of wood. You would miniaturise it, to hang on your pocket, so that you could show what you were worth. Every tax payment, every ownership of an asset. You can't inflate with this system, and they needed to inflate because of various war costs. If you go down to parliament, they still have these down there. The public, basically, when they announced, 'We're going to do a new technology with money. It's called paper money', and the public went, 'Are you out of your mind? I'm not giving up my personal record, to take a piece of paper that doesn't have my name on it.' They said, 'Fine. We're going to take your tally sticks, take them to parliament, we're going to burn them, so you can't use them anymore.' That is because parliament burnt to the ground in 1834. It was the destruction of the system of money and accounting and the introduction of a new one. This time, it's going to happen when it air-drops into your phone. Same thing. You need to think about this now. Also, this may mean the end of incorporating, this may mean a world where smart contracts replace the 400-year-old East India Company model. If you're a bright, young person, creating an entrepreneurial venture now, with the connectivity I've described, in a post-COVID world, where we can do everything online, if you're a young Chinese or Russian, and you have the opportunity to create something, are you going to incorporate, and ultimately go to an IPO in the New York Stock Exchange or the Nasdaq? No, not after everything we've been through. Are you going to go to a smart contract? Maybe. Now think about the implications for this room. Geopolitics creates potentially record opportunities for innovation, as I've described, but is it going to come in the form of a tech entrepreneur, who lets you buy into the first round and takes you to an IPO, or is it going to be a world where everything happens through smart contracts? It will be all an insider's game and you'll never get the chance to invest in it in public markets. This has huge implications for the shift from private market, sorry, from public markets to private markets. That's why I think you can be dismissive of the crypto crash, bitcoin and NFTs, but I would look again because I think that is not only not going away, it's going to end up very foundational to the future of the world economy. I have a bunch of other things to say about the implications of this, including, in that world, everything you do is tracked. That includes if you buy ice cream in the middle of the night. That becomes part of your digital record. That is also a different world for investors. It's a world where, for example, a Citigroup knows that you're going to get divorced before you know you're going to get divorced. That is already true. The question is how we manage in this new world. What I'm seeing is nobody wants to work for a single employer anymore. They're saying, 'You know what? I want to be an entrepreneur and take care of my own future', because all of the mess I've described is so difficult to manage, and so we're seeing the rise of the portfolio worker. We're seeing the rise of the digital nomad, who doesn't have to be based anywhere in particular to be able to create value and wealth. All of that is hugely positive for the world economy. To finish, messy in the short run. Potentially, a world that we can hardly imagine, which has ubiquitous energy, ubiquitous resources, ubiquitous connectivity. Potentially, a wave of people from the emerging markets entering the world economy in ways that are productive. I leave this picture incredibly optimistic about where we're going, even though it's very noisy along the way. We can switch to now my question that I opened with, if we can jump to that, which is so now, let's see what your feeling is about are geopolitics creating a world that are going to give us amazing opportunities, or are geopolitics going to leave us in a mess much longer? Okay. Well, this is good. I wanted to leave you understanding the opportunities in front of us are massive. With that, we're going to now do a conversation. I'm super-open to whatever questions you have. Obviously, there's a ton of things I haven't covered. Shall we go ahead?
First, a round of applause for the most optimistic geopolitics talk in a while. Nobody else can talk about tactical nukes and leave the audience smiling, so that's a remarkable skill, Pippa. We're going to do an almost speed-dating style Q and A. We only have ten minutes. You have opportunities online and on the app, on the event app, to submit a question if you want. I've had a few come in. This will be like a quiz show on television. You'll be not surprised that a lot of the audience wants to take you back from outer space, from the moon back to gravity, to markets where they are here and today. I think the first question is not surprisingly around Russia and Ukraine, which is, you implied, from an energy point of view, the worst case happened, they cut off the gas. Europe has an energy crisis. Some countries maybe even having, facing worse, a balance of payments crisis. You implied that we shouldn't be too worried about tactical nukes. From a financial markets point of view, is the worst of the risks over from the Ukraine war?
Not yet, because we do have an outright threat of, by a superpower, that they're going to deploy their nuclear weapons. It is a Cuban Missile Crisis moment. It's very similar to what happened in the Cuban Missile Crisis. It just happens, my dad was literally in charge of the missile trajectories, and one of Kennedy's advisors during the Cuban Missile Crisis. I've talked to him at length about what it was like then. He said, 'At one point, we got down to four hours. In that four hours, the pressure, the realisation that the whole world economy might get, I mean the whole world might get blown sky high, everyone buckled.' Which was the realisation that you might lose your life, you're going to lose your family, we'll lose earth, and they all stopped. Subsequently, every time we've had one of these, the human factor, in the end, stops it from happening. Even the military officials, they just don't execute the orders. They just won't do it. I think we're not going to face this, but then the question is if we do, what's the response? The extremes there are huge. If we get into that space, the last thing you guys will be worrying about is your portfolio. It becomes a non-relevant question. It becomes an existential question for humanity. In a way, don't worry about it. Just keep doing what you're doing, and the professionals who are dealing with this will deal with this. My guess, it will pass, just as all the previous ones have passed. If you think about it, how has it passed? It disappeared, and next thing you know, the leader of the United States and the country threatening it are literally bear-hugging. They're hugging, usually in Finland or Iceland. Right? Today's Finland and Iceland are Turkey and Saudi. I anticipate this will end with photographs of everyone hugging.
Okay. Basically, for investors, a little bit of tail risk is left, but don't price it too highly.
How can you price a nuclear event? In a way, you can't. A true existential…
The next one is around China because you spoke about how they looked at this whole scene as a lab experiment. Investors are worried about, okay, Ukraine war, we've seen that triggers an energy crisis. Taiwan would be a much bigger global recessionary effect, in terms of disruptions to global supply and global capital flows. What do you think the Chinese saw in the last seven months when they witnessed our support, Western support for Ukraine, the sanctions, public opinion? You mentioned they're looking at it as a lab experiment. What do you think was the lab diagnosis, and what does that mean for when they think about Taiwan?
I think, number one, the lab diagnosis was the West is very quick to innovate, and so you can create this energy problem, but they overcome it really, really quickly. They figure out a solution. We're not figuring it out in months, it will take time. For example, look at Rolls-Royce's production of miniature nuclear power plants, that are six foot by six foot by six foot, and can power 5000 homes for five years. Previously, that was viewed as a military technology that was classified. Now it's like, okay, in this world, we're going to have to roll that out. By the way, they'll be taking those to the moon as well. I think that's partly what will power it, are these miniature nuclear power plants. I think they've realised you can try and hit the West or choke them, but they're so innovative and creative, they'll figure out how to get beyond it, which is what's happening. Number two, they realise that the US is really good militarily. We can fight wars without you even knowing we're there. Do they really want to take on the United States or do they really want China to grow? That's why I think their realisation is let's expand into Central Asia, let's expand into whatever parts of Russia are now weak, and get back on track with growth. Okay, so plenty of other expansion opportunities. I liked your map. There's no need to seek confrontation in areas that are basically contested. Go to areas that are uncontested and where they have primacy. Maybe that, although I see time is running out…
I know, I'm so sorry.
Two more questions. One is on the US because you did flag the idea of civil war becoming hotter. From an investor's point of view, one of the pushbacks I get is that that may be very unpleasant as a US citizen, maybe geopolitically negative. For investors, at the end of the day, it's not like you have capital versus labour facing off and there's a risk that capital will be penalised. In many ways, capital could be the one thing that's protected in the shared asset. From an investor's point of view, how much do we have to worry about the ripple effects? It's not like there will be production that will cease as a result of the US polarisation.
It's not regulation will confiscate or nationalise private property. That's not the risk here. What's the risk for investors?
No, so I think there's a reason that everyone in the world is investing capital into the US. When you talk to Americans, they're like, 'Who would invest here? This is just a disaster.' The answer is it's still the best picture out there. It's partly because all of the pressures I've described, including politics, including inflation, including geopolitics. If you're a bright person, your answer to all of this is the same, I need to build my own future. It's not only young people who are creating tech companies. The fastest growing component of the US labour market are the over-55s. Everybody's living longer. They're healthier. This mess has happened. They're not sure if they're going to outlive their pension plan. Their answer is go back to work. I think it makes total sense to me that everybody's investing in the US. The domestic politics can get as messy as they like. The worse it gets, the more entrepreneurial the people will become. The worse it gets, the more entrepreneurial Americans will become. By the way, I think this is global. This is what will happen, Russians will become more entrepreneurial. Chinese will become more entrepreneurial. That's why I'm like, you know what? It's messy right now, but what we're headed for is a world supported by smart contracts. Supported by connectivity. Supported by power. Where the individual can build their future much more easily than at any time in history.
I've not managed to dent Pippa's optimism yet. I'm leaving the darkest, gloomiest question for last. What are your thoughts about the UK?
Okay, again, it's so interesting and weird. Internationally, everybody is bringing all their deals to the UK because Hong Kong is no longer available, as a legal infrastructure location. The view is Singapore is too tightly aligned with the Chinese to be sure that your data, information isn't going to end up there. Brexit, no Brexit, the world trusts British rule of law. It's just left over from the Empire period. The only other choice is the United States, but the problem with the US is, number one, if you take your business there, you may well face a jury trial. That's a problem for major corporations. You will definitely face the US tax authorities and with the tax system, you're either 100 per cent in or 100 per cent out. The decision, do you want to be 100 per cent in? A lot of people are going, you know what? Britain. Now, let's add Liz Truss and the Chancellor and what we see, Britain's really cheap. I think a lot of people are going, 'You know what? Now's the time to buy a property. Now's the time to take a business.' Meanwhile, and now we have one minute left, I have to say, the level of innovation happening in the UK is mind-blowing, but the British don't see it. It's really interesting. Somebody I think said that the British, their best export is pessimism, which probably is true. What I see is Britain has emerged already. It's not a coming maybe, they are already absolutely at the cutting edge in biotech. They're absolutely already at the cutting edge in precision manufacturing. They are emerging as a major power in the quantum computing space. Britain already was super-strong in the creative industries. The British cannot see that, actually, there's a very strong foundation here. Now, is the current Prime Minister going to mess this up a bit? Maybe. The way the rest of the world is looking at it is, you know what? Where else am I going to go? It's getting cheaper and that's the time to buy. That's the oldest lesson in the book. Why do we love buying high and selling low? Why do we humans love that? Let's buy low for a change.
You heard it here, today's the day, buy sterling. On that note, thank you very much Pippa. Please join me in…
State Street LIVE: Research Retreat offers a wide range of academic expertise and timely market insights.
The superpowers are at odds, but this is giving new life to investments in space, real economy manufacturing and transformational technologies. The high price of oil is accelerating the development of space-based solar power, mini nuclear tech and new materials. The digital revolution and the fractionalization of finance are only just beginning, and will create investment opportunities and markets that could not have existed before.
Pippa Malmgren, former presidential advisor and bestselling, award-winning author, shares why globalization is becoming "glocalization," a faster-moving, shorter set of supply chains that will help jobs and innovation spring up locally everywhere.