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The Artisan Podcast: Key Geopolitical Risks That Could Change Everything

Updated: May 6, 2023

In this episode of Northland's - The ARTISAN Podcast: Explore with us the topic, "Key Geopolitical Risks That Could Change Everything", with Northland's Co-CIO Joseph Abramson and our guest speaker, Clocktower Group's Chief Strategist Marko Papic.

Key issues to be discussed on this podcast include:

- US vs. China: who will win?

- Middle Eastern instability: how bad can it get?

- Canadian elections: key insights

Partner and chief strategist, Clocktower Group
Marco Papic of Clocktower Group

Guest: Marko Papic is a Partner and Chief Strategist at Clocktower Group, an alternative investment asset management firm based in Santa Monica, California. He leads the firm’s Strategy Team, providing bespoke research to clients and partners on geopolitics, macroeconomics, and markets. He’s also the author of Geopolitical Alpha: An Investment Framework for Predicting the Future. Prior to joining the firm, Marko founded BCA Research’s Geopolitical Strategy practice (GPS) in 2012, the financial industry’s first dedicated political analysis investment strategy.



Marko Papic, Joseph Abramson

Joseph Abramson 0:05

Welcome to the artisan podcast where we share insights from the world's leading investors and strategists. Today you're in for a real treat. We have Marco Papic, strategist for the clock tower group out of Santa Monica, California, Enjoy. Marco is a regular guest on CNBC, published author, advisor to many of North America's leading pensions, and one of the most profound and insightful thinkers I've ever known. Marco. Welcome. So let's get down to brass tacks. Marco, tell us, What are the three major geopolitical risks that could change everything?

Marko Papic 0:54

Well, I think definitely the number one risk is any sort of a conflict between the US and China. I don't think you need me on your show to talk about that. I think everybody's pretty much aware of that at this point. I think that's definitely something that should be number one on everyone's mind. And I think it is. And that's why we probably don't have to talk about it that much. Because it already is, in everybody's mind. I think the second issue is that I think maybe we have spent too much time thinking about US and China. What I mean by that is while while measurably and quantitatively Yes, definitely, if US and China got into some sort of a military crisis, that would be the most market relevant risk out there.

I do think that we have taken our eye off the ball. And what I mean by that is that the domestic political risks are bubbling in both the US and China. And in fact, I find it quite, quite kind of interesting that what's happening in China right now with regulatory crackdown on the TMT sector. As an example, we saw them, you know, banned, like playing computer games for more than three hours. Last, yesterday. This crackdown continues, it's really reached in this rhetoric of fighting income inequality. But that's the same rhetoric that follows the Biden administration, many of its policies. And that's because I think fundamentally, both Chinese and American policymakers are in a very similar predicament when it comes to the extremes in their own socio political experiment, which is that income inequality has become the number one risk to the two countries. And so some sort of a domestic political crisis, I think, would be the second risk. And then the third risk is that we get dragged back into this world of democracy being retrenched. And so that's something that also I think a lot of people don't really focus on.

But you have very large economies that a lot of you know, my clients, my LPs, my investors, myself, are invested in you have countries like Turkey, India, Brazil, they may slide backwards from democracy, from this sort of approach to governance that is more inclusive and towards some form of dictatorship. Not and not and I don't mean, like Erdogan is a dictator, not at all. I mean, like, straight up, coup d'etat that like, toppled democratic governments, that's something we haven't seen in a while. But I think that he may be back in vogue over the next five years.

Joseph Abramson 3:31

let's tie together, you know, to two of the second points, and, you know, a lot of times the millennials are criticized as being nothing against you, Fabian, as being snowflakes, and not being able to take, you know, criticism and difficult times. You know, whereas the previous generations had been through wars and the depression. And so, you know, if there was some difficulty, you know, at work or, or in society, then then they could handle it and work through it, you know, and so, if we take a step back and look, most recently, you know, at the pandemic, you know, the economic shock was big, but it was it was extremely short lived, governments felt that they needed to have a massive response in terms of fiscal and monetary. In fact, if you compare it to the previous crisis, which was the worst in 70 or 80 years, you know, the fiscal response was even larger and the monetary was similar. So, if we look at that, you know, how do you think see things, you know, playing out from that perspective and in terms of the response of the various monetary authorities and fiscal authorities.

Marko Papic 4:53

Okay, so I'm going to share a screen with you if that's okay. Sure, because that's exactly one of the charts that I've brought Today, so as you can see here, and I hope everyone can see it, I don't want to blow it up necessarily because

I do want to have this panel on the left. But what you can see here is that on the left side is your fiscal stimulus story. In 2020 COVID recession produced more fiscal stimulus than the past, not just the last recession. But the last 1, 2, 3, 4, 5 recessions combined. So the increase in the budget deficit during amidst this last recession was five times greater, more, six times greater. And in terms of the increase in fed holdings of US Treasuries, it was similar that 10 years under Bernanke and Yellen produced an expansion of 1.7 trillion, and then four months during COVID recession produced 1.8. I think most investors believe that this is COVID related. That's the reason that policymakers, you know, were so aggressive this time around is because we were fighting a pandemic everybody can get behind stimulus parties and squabbles fall aside, when there's threats to, you know, Americans and so on. I disagree.

I think that, of course, the virus had a role to play in motivating policymakers to do this. But I think that actually what motivated policymakers to spend as much money as they did and print as much debt as they did, what motivated them were the events of the past 10 years, and in particular, populous surprises like Brexit, like the election of Donald Trump in November 2016. There is a sort of acquired knowledge that politicians in the US and around the world, but particularly in the US have have acquired from the last 10 years and that acquired knowledge is that well, to put it bluntly, Joe, that people are pissed that there's this agita this angst on wheat, that the median American voter feels and so I don't really care what kind of a recession we had, honestly, we could have had a shallow recession, in my view, was that we would have had an unnecessarily large fiscal and monetary response, even if it was just a shallow recession Now obviously, wouldn't have been this big.

Because the hole in the economy wouldn't have been as big, but it would have been unnecessarily large. Now, to your point about millennials? No, I would I would disagree, because I am also the oldest, the oldest of the millennials. To defend Fabian here a little bit. I will say one thing, this onwy that you have in the median American voter, first of all, I think, is intergenerational. But yes, it may be most felt in the Gen Z and millennials. But let me point out something very important, which is kind of my North Star, my guiding star for the cycle. This is a chart that shows you the top 10% income share of total income of three countries. So how much of the total GDP accrues to the top 10%? Basically. And what's fascinating about this chart is not the endpoint because we all know what the endpoint looks like the US isn't top 45% of GDP in the US actually higher than that, it's about 47% of US GDP goes to the top 10% of the population, UK somewhere in the middle. And there's you know, quote unquote, socialist France at the bottom. But what's interesting to me, Joe, is that this wasn't always the case. In fact, in 50s, and 60s, France, had a slightly higher share accruing to the top 10% than the US did. And then over the course of 60s, but particularly 70s, the French otherwise the socio political experiment to change this. This socio political experiment was a product of the 1968 revolution, which was a revolution primarily by the workers and the baby boomers. It just to be clear in 1968, baby boomers were, you know, the millennials of the age, they hadn't experienced the war. They were born into massive prosperity. Their parents were the ones that had suffered, but they basically went to Woodstock and got high. And then they went to college, and they were like, oh, life here is unequal. Let's burn down Paris. You know, like, obviously, I'm paraphrasing. But my point is that the subsequent 10 years of French history saw and that's why I circled it, this incredible effort to redistribute wealth. And what's important for your listeners to understand is that when did socialists actually take over France? When did the socialist president actually get elected? It was right here at the end of this process, okay. And that's important, because what it tells you is that it doesn't matter what party is in power doesn't matter if Biden or Trudeau or whoever, I don't really care. I couldn't care less. What matters, for policy and where matters for investors is where's the median voter? My my point where this chart is that the median voter of America is exact where the median voter of France was in 1968. We had a revolt in a revolution in America in 2020. Both during the summer, the social justice protests, and January 6, the storming of Congress, politicians in the US, I think are going to continue to strive or, or err on the side of left wing redistribution and stimulus whether you know, Biden's in power or someone else.

Joseph Abramson 10:23

Yeah, I think that is the exact point that I was trying to make that in a certain sense, we are all Millennials now. And there isn't that much difference between, you know, the left and the right, if we looked at the 1970s. You know, there was a very clear left, and then we had the creation of the right in the 1980s. You know, in contrast to that, and by the 1990s, both sides, were kind of similar, and in a certain sense. Now, we are all socialists, you know, whether it's left or right, there needs to be, you know, large government spending, and, and, you know, fiscal excesses. So I guess the question is, if both sides are in agreement with that, and if that's what society is demanding, what what's the end point? You know, I mean, trees, you don't don't grow to through the sky, like, you know, how does this complete itself?

Marko Papic 11:25

Well, you know, I think, first of all, I don't know, if we need more redistribution. I just tried to forecast kind of where we're headed. I know, we're headed towards, I think, I think like every pendulum ultimately, you know, swings too far. And I think that and, by the way, for those of you who don't know, this, I don't think you mentioned this, you start, you lead off the introduction of me Joe by saying, I'm on CNBC, which I think like, probably knocks me down a few pegs with most sophisticated listeners, I think you should have led with the fact that you and I worked for a very long time together. And I remember when I started working at BCG research in 2011, you took me out for coffee, and you told me about, you know, the pendulum and you were 100%. Right. I mean, at the time, your point was, look, the pendulum is gonna swing to the left. And it's gonna swing to the left very, very dramatically over the next, you know, decade. And I think you've been proven really correct. I remember just conversations it was yesterday. And and I think that it's going to end with inefficiencies, for sure. I think he's going to end in the US case. And this is an important point. A lot of people have the view that you and I share here, everyone's socialist. Now, a lot of people have this view. Bridgewater has been writing about this, for example, the largest hedge funds in the world. Ray Dalio has been talking about populism for a long time. So it's not like we're, you know, breaking new ground today on the podcast on the webinar. But what I would say is that my view is nuanced, because what I'm seeing, Joe, is that this is happening in America at a much higher degree than anywhere else. That's what I would argue, I would argue that, yes, there is on we, there's agita. There's this malaise in every single society, but is actually by degrees, by considerable degrees, the highest in the US. And so you will see the US swing the furthest to the left, relative to where it's starting. So I'm not saying that, you know, America is gonna become Sweden in the next four years. I'm saying that from where it is starting in terms of where it is on the socio political spectrum of how it has designed its economy and the redistribution system, I think that the US will move most dramatically. I don't think the markets are prepared for this. And the reason I say that is for two reasons, the dollar is actually holding up quite well. And the tenure yield is still very well bid. And I think that when you think of the scale of fiscal stimulus that we've already had, and that I think is still coming.

I think that I'm not sure that I really did it makes really sense that the US dollar holds up as much as it has. The other issue is that I think that monetary policy is very interesting. I think that Jay Powell is trying his best to maintain an orthodox Central Bank, I think the June FOMC statement, certainly kind of broke this conception that the Fed is going to be massively behind the curve. And I think that at some point over the next 12 months, he's going to be forced to backtrack, his orthodoxy. In other words, I think that the median voter is not really ready for Orthodox monetary policy is not ready for normalization. And neither is the Biden administration. And so I think the pressures on the monetary policy will also pick up over the next 12 months and you will see policymakers on both fiscal and monetary side constantly kind of revert back to unorthodoxy and towards easing now, let me give you just one chart before Are we going to move further. Is this priced in? Do investors believe this? I would say no, I would say that most investors have lost, like the median investor has lost the enthusiasm for this populism trade. And you can see this here on the right side, on the right hand side is a chart that so the yellow line is the cumulative revision to budget balance. So this is expectation of where the budget balance is going to go. And what you can see is here in January, with the Georgia election, and the subsequent passage of you know, $1.9 trillion of kind of unnecessary spending, you see the revisions go up. So we're gonna have more budget deficit. And then in March, there's this loss of expectation of more fiscal policy. In fact, the revisions are not coming down, there's this expectation that budget deficit in the US will go down, like they're not going to spend anymore. You can see that the tenure reacted very similarly to that the tenure basically peaked the yield. Also in March, where this like fiscal response was exhausted. Now, there's other reasons that the tenure has gone down. I'm not saying this is, you know, one to one correlation there. You know, this, we both worked at BCA research, we know how to manipulate a chart. My point is, though, it does matter. And I think there's been this loss of confidence in American policymakers to be socialist, they're not really going to do that. They're not going to spend any more money, you know, again, no, it's complicated. Congress is complicated. It's like, no, no, it's not complicated. Biden still has 50 seats, majority in the Senate, he's going to ram that $3.5 trillion reconciliation package through Congress, one way or another. His needs to do so has been increased by the failures in Afghanistan, he has to show some, some success somewhere, they're going to pass 3.5 trillion, they're gonna pass the 800 billion infrastructure path plan, and then another 250 billion in the Endless Frontier act. And I really compare what's happening today to what happened in 2017. I was writing about this obesity research, same chart on the left hand side, but 2016 17, you see, President Trump gets elected in November, the yellow line goes up expectations, you know, deficit increase, we've got a populist in the White House doesn't care about budget deficits. And then over the summer of 2017, again, over the summer, people lose confidence in the ability of Trump administration to really blow up the deficit. And then he gets all his ducks in a row and passes that unnecessary. pro-cyclical fiscal stimulus at the end of 2017, the tax cut the tenure reacted the same way. So I would say that there's this loss of confidence right now in the populism theme. That's a loss of confidence in the ability of political political politicians in the US to actually spend more money and there's this view that the Fed is somehow going to be orthodox for the rest of the cycle. I think both of those are going to be proven incorrect at some point over the course of the next 12

Joseph Abramson 18:00

months. So would it be safe in terms of the US to say, we should be betting on additional fiscal stimulus from here? And, you know, we saw Powell have say, We're gonna move towards tapering by year end, but that, you know, rate increases will be slower than the market? expects, would that be kind of bottom line for the US?

Marko Papic 18:23

You know, we'll see, Joe, it depends on what you think. And what I mean by this is, if you think that tapering is going to cause, you know, any, any impact on the economy, then you're gonna have to delay it. And so I think that's, that's, to me, the issue is this, they're going to stay behind the curve. Okay. Very good. You know, that's, that's how we should conceptualize, I think where we're headed. I think what's very important is when, right when they they stopped tapering right now from what I understand, and I'm not an expert in monetary policy, but the hawks and the Fed wanted to add in middle of 2022. So that they can have the luxury of raising rates, basically, by the beginning of q2, like beginning, the end of q2. And if you look at the Euro Eurodollar futures, you can see that the there is an expectation out of basically two rate hikes by March of 2023. So there's this expectation that we're going to start raising rates at the end of 2022, beginning with 2023. And the only thing I will say to that, again, I'm not an expert in monetary policy, but I am an expert in politics, and here's what I say. Like, we're going to raise rates in 2023. Okay, that's a cool story. We'd like never done that. Okay. Like this is a chart basically of how many, you know rate hikes there are before an election and the average number of rate hikes 18 months before election is like 20 basis points. So I'm supposed to believe that in the middle of this new paradigm, where the median American is concerned about income inequality, not your clients, but the median American, you know, the Fed is going to be hawkish 18 months before the election, like, okay, you know, maybe, but I wouldn't bet on it. So I think they're going to remain behind the curve, while inflation continues to surprise to the upside, which I was expected to continue. And so what do we do with that, like you tell me, Joe, if they're behind the curve, inflation expectations go up? Inflation surprised to the upside? What's the investment implication of that?

Joseph Abramson 18:25

Well, I think the the argument would be to fade the Fed and to bet bearish US dollar, which sounds like how you're positioned.

Marko Papic 20:35

That would be my bet, too. But that that hasn't really worked out, you know, and that's what's interesting to me. It worked. It hasn't really been working out for most of this year. And I think if you look at positioning right now, it's actually fascinating. So the reflation trade, I talked to hedge funds a lot. It's part of my job is just to continue to nurture our network of really brilliant macro managers and to seed new ones. So that's part of the things that we do here. And it's it's so interesting, everybody just had so much clarity in q1 2021 Everybody was aligned in position to the reflation trade, which is really long commodities. You know, both vanilla stuff like oil, but also coffee, long em FX, short US dollar, long cyclicals shorts, growth stuff. And everybody was aligned, the entire head, macro hedge fund community had all of this in q1. And then march was the first hiccup with the tenure peeking. And then of course, June FOMC, caught a lot of people off off site. So I'm with you. That's that's a clear investment implication. But it hasn't worked. And I think the reason it has to work is because we as an epistemic community, like the financial community, are still wedded to the last set of paradigm. And so people bring up these concerns like, what about household deleveraging? What about secular stagnation? What about, you know, where am I supposed to invest? If not, the banks, like all of these things weigh heavily on us as a community. And I would argue that the reason they weigh on us so heavily is that if you're still investing today, if you're still an investor today, if you're live in this, in this brutal industry, it's because you got the last 10 years, right. Because you cut your teeth. And because you were short bonds, I'm sorry, you were long bonds on every increase in yields, because you were long enough to hear fangs and nothing else. And because you held your nose and moved away from emerging markets in Europe and said, That's all crap. That's why you still have a job in the financial industry, because you got those calls, right. And I think that it's difficult for us as a professional community to then say, like, oh, well, it's different now, you know, because populism. And so you see this, like hesitancy to really, like, move with where I think politics are headed.

Joseph Abramson 23:11

Okay, so let's change tack a little bit, and get down to kind of a big, you know, value issue, and a big investor question that we've been kind of internally arguing about, and, and having discussions with, with clients. And so the idea was to be, you know, pretty negative on emerging markets and China for much of the past decade. But that, you know, you should be moving into a more positive view, but it's too early right now, to make that shift. So from a markets point of view, you know, you look last year, China was one of the best performing markets in the world, em outperformed this year, disaster, you know, the worst performing market in the world, and, you know, five sigma, oversold. So maybe let's just start off with what's going on in China?

Marko Papic 24:14

Well, I think, first of all, you know, we have a business to China, by the way, so we have a lot of underground research that comes out of there. And that's, that was a decision we made in 2014. We set up an office in Shanghai. And our expertise is illiquid alternatives. So what we do is we map out the manager space. In China, basically, the hedge fund manager space, I put quotes because, you know, you can't really be a hedge fund, although the rules are changing. And so early this year, and really late last year, you know, we we had a clear view that what China was doing was deleveraging.

They basically said, look, COVID is done. We solved that. We're awesome. They did that by the end of q1 all Last year, they became the, you know, they're already factory of the world. And they just were on steroids because we were just sitting at home pressing Amazon. So Chinese economy recovered very briskly. And it was really export LED. So Chinese policymakers felt that they didn't really need to do anything in terms of supporting the economy, they normalized, both fiscal and monetary policy very quickly in 2020. And they went into 2021, basically flagging that they wouldn't adjust any of their policy, they would actually continue to be quite hawkish. This was the irony, you know, like, the Chinese learned, the Chinese policymakers learned a different lesson from American policymakers, American policymakers learned a lesson they didn't stimulate enough. After 2008 2009, the Chinese learned the lesson that they stimulated too much. Now, that was unsustainable. And almost our entire network in China started talking about income inequality around February and March of this year, you could hear it from the grapevine, you know, like hedge fund managers were talking about it, policymakers were talking about it, journalists were talking about it, there were a lot of examples of households really starting to hurt. And that's because China provided no support for households at all. So households income in China collapsed the way they're supposed to in a recession. Ours went through the roof, which is the first time in human history, that you had a recession where incomes are like going through the roof. And so in China, the pain of this recession has really been felt, particularly for those who don't work in the export oriented industry, which of course, went up. And so my point here is just to say that the reason to be short China in 2021, has nothing to do with the regulatory crackdown. It's that policymakers entered this year, already on a very hawkish footing. So they were already set on a hawkish footing now, what's then what then happened is that Xi Jinping needs to win an election 12 months from now, now, a lot of people in the West think that China's already become a Maoist dictatorship, that there is no sort of like political contest in the Chinese Communist Party there is he's not showing yet. He needs to stabilize the economy. And he has to have a narrative that makes him you know, like, the obvious choice and that narrative is, oh, look, you know, they woke up to this reality that income inequality in China is is extreme. And so he has steered policy towards that. And that means two things. One, it means China is moving away from deleveraging. So from a macro perspective, this is really important, because when we talk about, you know, when we talk about this reflation trade ending when we talk about like commodities, you know, like not appreciating after March, after April, May, when we talked about the tenure peaking, one of the reasons that's happened is the China had a policy setting too tight. They're now easing on that front. But the other issue that I think is also interesting is that China has now convinced itself, that the Americans fooled them, that the Silicon Valley model of development doesn't work for them. So this isn't just about like policy setting on interest rates or fiscal, it also has to do with what developmental model are we going to adopt? And what she should pick is arguing. And I think this is permanent. And I think this will matter for sectoral selection in China. What Xi Jingping is arguing is that look, Silicon Valley model of growth is not appropriate for China, we shouldn't have our manufacturing, our employment is percent, our percent of employment in manufacturing dropped below 19% where it is today. That's a path to even greater income inequality. We don't want to become an America, and we don't need a cheeseburger delivered at 3am. That's not a sign of a sophisticated advanced economy. We need hard tech. Okay, and this is something to Chinese policymakers have been guiding since 2018 2019. But they're now really accelerating. What they're basically telling us, Joe, is that they want to be Germany. They want to be Japan, they don't want to be America. And so I think that the regulatory setting in China is going to continue to be to to steer investors towards, towards sort of hard tech sectors. What does this all mean? I think it means that when you think about policy setting, plus regulatory setting, I think the worst part is done in China. I think policymakers are going to ease policy not as much as they have done in the past. So don't expect huge infrastructure spending, but they're definitely going to cut interest rates. We think not just our IRR, we actually think real interest rate, like the their their main their main policy, policy, interest rate is going to be cut. So that's the first issue which is good for stock markets. But the other issue is we think that the Chinese Communist Party is giving you as the investor sectoral allocation, they're telling you invest in these sectors don't invest in these. It's like the easiest place in the world to basically invest, because the government has said what they favor. And I think that that's going to be the next story of China. And you can already see this, by the way, I just want to show you this chart. So basically, what sectors am I talking about? So when when they say hard tech, they really mean, you know, anything that has to do with green technologies. We've even heard rumors that they're going to do a green interest rate cut, which will basically favor banks that lend to EV battery solar companies. You can see what's happened to solar companies, in terms of against a share benchmark. Since the regulatory crackdown, they've basically gone through the roof. Same with semiconductors. Anything that has to do with with this kind of a hard tech space is probably going to go much right.

Joseph Abramson 30:56

Okay, so if we strictly from a markets point of view, for for China, there's kind of two questions. There's the internal question and the external question. So yeah, let's, for a moment, just focus on the external question. You know, usually, the economy has bottomed six to nine months after social financing or, or liquidity growth. That's very important for the Canadian investors. Because Chinese growth is very tied to commodities. It's very commodities very tied to the Canadian dollar to the Canadian stock market. So have we basically seen the trough in terms of reflation, and we'll see accelerating reflation from here. So for those more traditional reflation bets, should we be starting to allocate money? Now?

Marko Papic 31:52

I mean, you know, if you have the components for it, yes. I don't know about the CONUS. We have a long time horizon. Well, yes, then if you have a long time horizon, I think it's fine. I mean, I was gonna say, why not wait for a month or two? To see what happens? What happens on the US side? You know, I think it's going to take a month or two, for the US side of equation to be resolved. And I think the US side of equation is important. And well, let me let me see what I mean. I don't think I have a chart in this here, but I'll just describe it. Sure. We're talking about total social financing in China. So if you if you advanced total social financing by six months, yeah, it has a perfect correlation with a 10 year yield up until up until August of 2017. And then it gets wacky. There's still some correlation, but it's wack. Now, this is kind of a nerd talk here between two former like, sell side sharp guys, but let's just Just hear me out because this is important. Okay. TSF used to lead the US Treasury yield one to one. I used to joke if you left me on a deserted island. If for some reason you gave me a Bloomberg terminal with a connection, but only one indicator with which to build my asset location, I would have asked for TSF Sure. Yeah. And that was because in the last cycle of household deleveraging, in America of malaise of onwy, of secular stagnation, the only game in town was China and Chinese credit. Okay, we all know that. Okay. But that diverged, Joe in August 2017, because that was when the United States of America confirmed that it was no longer in the Washington consensus. It's where the United States of America confirmed that he was going to do pro-cyclical unnecessary annual cycle fiscal stimulus. And that was when investors realized that, yes, President Trump will get the Tea Party to blow out the budget deficit unnecessarily, for no good reason. And we've been in that paradigm I think ever since not because of Trump or Biden, but because the median American voter is basically piston wants nominal GDP growth. So what I'm getting at here is that I think that you we cannot basically gauge performance of commodities, or the Canadian dollar or the US dollar anymore, purely with TSF. Because TSF has been tanking for much of this year, but commodities actually held up quite well. Okay. You know, and even copper, which of course, Valley it kind of rebounded as well. And that was a good example, to me of how you know, Chinese TSF is no longer the only game in town. It's very relevant. The other issue that's interesting is that Chinese imports, Chinese imports. So China importing goods have also held up fairly well. Now they've rolled over as all things have rolled over, but Chinese imports have held held up even though PSF has collapsed. That chart is another alligator Jaws chart and we have a lot of those by the way, in this new paradigm. A lot of things are not kind of correlations are not sticking. That's an interesting one. Why are trying He's corporates basically importing goods when TSF is going down. And my my view is that they have basically gorged themselves on our dollars over the last 18 months. And they're buying imports, especially intermediate goods for export off of their balance sheet, not on credit. And that's because, of course, the Chinese economy basically was recapitalized by a surge of demand for what they produce. So, in other words, I think that TSF is going to start normalizing. I think there, it's not going to keep continued declining. But even the decline itself has not produced the kind of dollar rally and commodity collapse it would have in the past.

Joseph Abramson 35:45

Okay, so basically, from a forward looking perspective, China is bottoming but the rest of the world, including the US may slow does that mean you should be favoring emerging market stocks over US stocks?

Marko Papic 36:00

Well, you know, I thought that for since COVID, started, you know, that was my like, number one. View, as you said it worked last year didn't work out this year. Yeah. And so yeah, exact same. Yeah, no, listen, I think I think definitely emerging market stocks are going to do well, we actually, we have a bunch of illiquid alternative businesses. And we launched. I mean, this is this is, I mean, we're putting our money where our kind of macro mouth is, we launched the Latin America FinTech fund this year, because of this macro view. You know, in part, it was the easiest funds to raise money for in the history of our firm. So earlier this year, we raised money for this fund. And it like went by so quickly. And I think that a lot of investors have this view. And the problem, though, is that the positioning again, positioning for reflation trades, was at historic highs earlier this year, we're having this washout right now, I would maintain my view than for the next, you know, X amount of, you know, 12, to 24 months, 36 months horizon, I do think emerging markets are still a good buy, valuations are their current accounts are in a surplus, current accounts are in a surplus. currencies are cheap, you know, so yeah,

Joseph Abramson 37:16

but just Just be careful with some of the broader relationships that used to work in the past, they might not be working now, because the US has, has changed. We are seeing some questions come in, from our viewers. And in particular, you know, about the Mideast. So, you know, you had said quite some time ago that the US, you know, was pivoting away from the Middle East, you know, towards Asia. And, you know, now we're starting to see some issues in the Middle East, with Afghanistan and so on. How do you see things playing out? Let's say over the next year or two in the Middle East?

Marko Papic 38:01

Well, you know, I think that what's been happening in the Middle East has been the like, there's been a continuation pretty much a policy, from Obama to Trump to, to Biden, in terms of against that the US has really no interest anymore, in sinking resources into Afghanistan. And so, you know, if you if you guys zoom out, and ignore what's happened over the last two weeks, which is an intelligence failure. And really, it's it's a what's what happened in Afghanistan over the last few weeks is just, you know, it was a tactical issue. And I mean, obviously, that sounds callous people have died. But you know, like, people have been dying in Afghanistan for 20 years. So including American soldiers. So, you know, like, this is now just headline risk. The issue here is that the US was always going to withdraw from Afghanistan, the only question was how it was going to do that. And he could have obviously done it much, much better. And that's going to be something that the Biden ministration is not going to have to deal with. But fundamentally, I would argue that there's absolutely no risk to the US from withdrawing in Afghanistan. And there are like this idea China and India are going to come in and have influence in Afghanistan. Okay, cool story. Like, what is the winner get? Yeah. Afghanistan is literally on the way to nowhere. Yeah, you know, so like,

Joseph Abramson 39:24

I guess, you know, a deeper question. In a post oil world, right, where you're getting this big shift to EV. Does the Middle East matter anymore? Yes,

Marko Papic 39:35

yes. Yes. Yes, it really does. And the reason it matters, you know, Joe is because so my highest conviction view. We're 40 minutes into the call and I'm giving you just now my highest conviction view. My highest conviction view is green tech, and anything that has to do with sustainability and no no because I think the world is gonna warm up and we're all gonna be cooked like frogs all the yes, that's too. Let's leave that aside. That's been the case for the past 20 years, nobody has cared. No Al Gore, Greta Thornburg have been on our case for last 20 years, nobody has cared. The difference now is threefold. First and foremost, we we have technological breakthroughs. You know, when you have low interest rates at zero, and when you sink capital into a theme, you're gonna get innovation. All right, like, that's just gonna happen. That's how we got shale revolution because interest rates were at zero for 10 years. And there was, you know, geopolitical risk in the Middle East. Why do you think Americans discovered shale, first of all, was 1940s technology that was refined thanks to low interest rates and a geopolitical risk somewhere else and boom, we got innovation. So we have technological innovation in the green space. It's serious, it's legitimate. It's not a liberal conspiracy. Like we're getting real technological innovation, point 1. Point 2, is there is a populist demand for nominal GDP growth that I was talking about earlier, like, people want growth. Okay. So if you're a politician, what are you gonna spin up? Okay, green retrofitting buildings. Sounds awesome. Let's sink money into this green infrastructure business, because he's going to employ plumbers and you know, scaffolders and contractors. Cool. Okay. So there's this requirement for nominal GDP growth, like Europe is basically allowing you to spend as much as you want, if it's on green stuff, China, as I said earlier, it's going to create a green interest rate cut. Alright, so that's the second point. The third point, which I think is most important, is China and America don't like each other. Okay, what does that have to do with green technology and oil and all that stuff? Well, it has to do with a lot because of this chart right here. And it's that as America is geopolitically deleveraging, out of the Middle East, guess who's leveraging up, China. This chart on the left shows you crude oil imports, by China from different places, and the purple line is the Middle East. So here's the US invasion in in in Iraq and Afghanistan in the early 2000s. Middle East wasn't that important. In fact, North Africa and Middle East were pretty much to supply China with same amount, as Chinese economy has grown. And as America has the leverage from the Middle East, specifically, as the shale revolution has allowed the US to stop importing from the Middle East. China has really leveraged higher. Now that's a big vulnerability to China geopolitically, this is a huge, huge vulnerability for China. And they can resolve it two ways. They can build a deep blue water Navy, to compete with America in order to secure the Straits of Hormuz for themselves, because let me just be very blunt here. Today, this barrel of oil from the Middle East is secured by the US Navy, the US Navy is securing the passage of Chinese oil through the Straits of Hormuz, that's what that's little American taxpayers are making sure the China gets its energy so you can invade Taiwan. Okay, so there's two things that can happen. China can either build a navy to secure the Straits of Hormuz force itself, which is going to cost a gargantuan and obscene amount of money and time. Or they can just plow every single resource they have to EV greenstuff saw starts, which is why those are blowing up. So there there is a geopolitical component to the green, the green revolution as well shine. China's doing this for real now, what does that mean? Does Middle East still matter? Well, yes, because Joe, over the next two to three years, there's no way we can adopt EVs fast enough for them to matter. In other words, I think this is the biggest trend in the world for the next decade, the green stuff, sustainability tech, we're starting a fund, by the way, on this thesis, we're again putting our money where our mouth is. So let's leave that aside. I think it's awesome. But

in the next two to three years, you can't actually ramp up demand for you're not going to like lose enough demand for oil, but you can instantaneously destroy capex in the energy sector. And so I actually think that for the next two to three years, oil prices are going higher. And so I do think that this this, and they're going higher specifically because of this thesis, because while demand for energy and oil are going to stay relatively the same. The capex necessary to meet that demand is not going to show up, it's going to be dried up, no one's going to invest in a 20 year project and off the coast of Brazil, you know, drilling 3000 meters, you know, underwater, no one's going to invest in that in this climate where we all know where we're headed for the next 10 years. So there's this pocket of oil prices going higher, where it doesn't matter what happens in the Middle East. Specifically, it matters whether America continues to deleverage geopolitically, and that means negotiations with Iran are the next big thing. If Biden rushed out of Afghanistan, he's probably going to rush into a deal with Iran as well. And so that's something to watch right now. That's the next big issue.

Joseph Abramson 45:18

You think, if just focus on Iran, and oil supply, the risk for oil supply, would be to the upside, because you think a deal will be quicker than people expect?

Marko Papic 45:34

Yes, I think the deal will be quicker. But I don't know how much Iran can bring online. So right now, their export numbers show. They're exporting like 300,000 barrels. But there's this like half a million barrels, that's probably going to China that's just not recorded. Right. So I think that Iran is probably exporting some are 800,000 to a million. So when the deal happens, when the deal happens, they're going to just say, Oh, here's 500,000. And then China's gonna say like, we're not going to import this half a million from Oman and Malaysia, the magically showed up, right? You don't I mean, so like, how much supplies Iran going to bring online after deal? Okay, I'm not sure I don't think it's going to be enough to satisfy the demand that is recovering with the economy. So net net, I think oil prices are not going to drop significantly below $60 Over the next 12 to 24 months. And I think the upside, is much higher risk.

Joseph Abramson 46:39

Okay. And another question coming in, of course, our clients are predominantly Canadian, is about Canadian election. And, you know, the surprise is that the conservatives and liberals on the national polls are neck and neck. So any kind of thoughts in terms of potential outcome of the election, you know, winner, majority minority coalition, and what the implications of that are?

Marko Papic 47:12

You know, I'm not sure that I mean, it's very difficult to handicap elections like Canada. And the reason for that is because of the first pass the post kind of system that it has, plus plus the parliamentary, you know, so basically, you have single districts and you have parties, it's it's very difficult to see how that happens, how it articulates itself, United Kingdom is very similar as well, very difficult to forecast which way things go. I think the fact that, you know, conservatives have gone up in the polls, both pretty poorly for Trudeau, I think he made a mistake. And really, every early election is usually a mistake by the incumbent. You know, it's always a risk. People don't I mean, this is something that I would have, like, if someone asked me, I would have said, look, I mean, nobody wants to go through the polls early. Usually, you have this an arrow on wheat, if you're being asked drag to the polls, plus, you know, there is a surge, and that looks bad on Trudeau as well. And I think that, you know, like, he's he's building his campaign on this idea that candidates handled COVID. Well, right. But then why are you doing an election in kind of a middle of the delta wave, you know, which, again, Canada is handled much better than most other countries, but there is still technically a delta wave going on? So sure, I would say that he made a really, I think the Liberals made a mistake, I think there is a chance of a Conservative government or a minority government or some sort of a coalition. The only question and I mean, obviously, we know where this is going to be decided this is going to be decided in Quebec. And this is going to be decided also in British Columbia, I think those are the two provinces that are going to be really, really important for the Liberals to try to win some seats. And But all that said, I don't think it really matters that much for policy. I think, ultimately, Canadian markets are at the whim of global forces. And that means total social financing in China, and the US dollar or more important to what happens to Canadian markets. They're cruising in power in Ottawa. And I see that as a proud Canadian. You know, by the way, by the way, I say that as a proud Canadian, the last time I was in Canada, I flew from Santa Monica to give my oath to the Queen. That was the last time I was able to enter Canada as the end of 2018. I've actually lived in Canada longer than any other country. So and most of it in Quebec, so, you know, I follow Canadian politics out of interests more than out of you know, professional reasons. And that's because ultimately Canadian assets don't response to who's in power.

Joseph Abramson 49:47

Right. You're, you're arguing they're more globally focused, unless things are extremely dire, which they don't appear to be, you know, at at this Moment. Something else, you know, our clients are interested in that that is an area of expertise. And I'll tack on something that we're interested in from an investment perspective. Is climate change legislation going forward? I guess, particularly in the US or EU, or maybe even China? Do you see what do you see kind of incrementally from here. And just a quick point on trading of carbon credits, which I've heard is a very interesting strategy. Because it's not correlated to anything else. And at least at this point, particularly in California, you can get excess returns, but I really know very, very little. So kind of climate change legislation going forward. And a quick point on carbon credits, is it a good investment. And if we can, let's try and limit to, let's say, three minutes.

Marko Papic 51:05

So carbon credit, I think it also first of all, six, eight months ago, a lot of the sophisticated macro hedge funds that we track that we've seen it, so a number of them start investing in carbon credits in both Europe and California. So yes, some of the biggest names that you can think of are playing these markets, and are very, very enthusiastic about them. My concern, my concern, though, is that they're rising in prices. And that's not what policymakers really wants. They don't want the prices of these carbon credits to go so far up that industry is stifled. So you have to understand that the supply of these credits is controlled by the government, and they can flood supply and drop prices whenever they want. So that's a huge risk now to getting into these markets as they hit some record highs. The other issue is that look, my point, the reason it's my highest conviction view to invest in green technology, is because this game is over. You know, I don't care if Attila the Hun becomes the prime minister of Canada, I don't care who gets con becomes the prime minister of Canada, like Canada's not going to reverse climate policy, like forget it. Like if you're a climate skeptic, and you're on this call, be very, very careful. What did I say at the beginning? This isn't about what Greta Thornburg or Al Gore wants you to do. This is not about moral normative, let's save our children from climate change anymore argument. No, no, no. It's based on three hard facts. One, green technology works, just don't argue, just trust me. Two, policymakers want to generate nominal GDP growth, they need a reason to spend money. green stuff seems like a good idea. You may not like it, for Believe me, there is more policy, fiscal space expanding on this than ever in human history or in any other endeavor. There's just you're just plowing money into this in China, Europe and the US. And finally, there's a geopolitical component. I don't care if, you know, like I said, Donald Trump gang has kind of till the Hunkin become presidents of us or prime minister of China doesn't have Canada doesn't matter. Because when China starts plowing money and effort into achieving E Vs and batteries, America is going to fall. You know, America is not going to sit back and say like, I know, let's let's stick with internal combustion engine, like what that will be like saying the early 20th century like now this this internal combustion stuff the Germans can have and we're gonna stay in the horse and buggy because we're really good and producing buggies. It's not going to happen. You got to take your ideology out of this argument. You know, I see that because as you said, a lot of your clients are Canadians, I assume some are climate skeptics, maybe somewhere in Alberta sitting there stewing that everyone's become a green liberal environmentalist. You have to take ideology out of it. This is the biggest trend that we have right now. Is it stupid? Yeah, it might be. You know, we are in an ice age, by the way, like, you know, it might be stupid, let's find is just, I'm not here to argue ideological issues. I'm here to tell you where politics is going. And there's no way that like some random Conservative Prime Minister of Canada is going to stand in the way of a massive wave of global legislation like, this is the biggest falsy issue for the next decade. No one's going to do a 180 We're going to keep plowing massive amounts of tax dollars into these technologies, which means that there will innovate and there'll be new stuff. Now the good news is there you can bottom fish energy assets. As I said, I'm bullish and old because of this thesis. Ironically, and and particularly Canadian oil sands have become a lot more environmentally sustainable, actually. And Alberta has massive amounts of infrastructure that can be used in the production of hydrogen as an example. So there are some plays here, especially in Alberta that I think will actually benefit from this. And when I go to Texas, and I give this view, by the way, and I do this quite often, a lot of Texans grumble and they're like wearing pinko-commie liberals, you know, like in their green stuff, and then they're like, oh shit, you know what our pipeline infrastructure is actually going to benefit because we're going to flare all this methane, we're going to produce hydrogen and then ship it to the Okay, cool. I like this story. So and by the way, they don't need me to tell them this, they're telling me what they're doing. And a lot of families who have built their wealth through fossil fuels in Texas are playing this theme. Massively. Why? Because they're not letting ideology impact their wealth and impact their returns.

Joseph Abramson 55:32

So who do you think is going to collect the rents in terms of in terms of that theme? So if there's, you know, a lot of innovation and so on, you don't necessarily know who the winner is. But maybe in some areas, it's there's either going to be a monopoly or oligopoly, or there's some people with technology that others just won't be able to catch up, or there's infrastructure like, who who's going to be the one making the excess profits? I like

Marko Papic 56:04

pipelines, pipelines are going to be required for a lot of the carbon sequestration technology. So so like pipelines are a really good investment. And that's why I mentioned Alberta has the infrastructure for it is I also think that, you know, this is a SAS, this isn't software, so don't worry too much about investing in monopolies. You know, you're really investing in tam in this in this world. Okay. So like, for example, like Beyond Meat, you know, which was a fantastic investment, if you had gotten in early Beyond Meat, you know, like, can you have a competitor to be can Beyond Meat have a monopoly? Of course not. It's been ridiculous to have it. But the TAM is like people who desire protein, oh, the human population of the earth is your TAM . So you're like, I think that that's something that we should stop worrying about the way we invest in software, I don't think it's going to be the same here. That's the difference between software atoms and bits. Like we're investing in atoms here. The 10 is the whole world and technological innovation that's coming through this thesis is going to really be broad based. So will there be a monopoly of battery producers? No, I don't think so. Will there be an EVs? No, of the infrastructure? Not really. But I think that other than pipelines, I really can't think of anyone else that will have a monopoly. So you should really prepare yourself for a different type of investing, which is, which is to focus on Tam.

Joseph Abramson 57:31

Okay. And one last question, probably the most difficult question. And we're going to try and keep you again, to two or three minutes. If our listeners look back 10 years from now, what are they going to say? This is the thing that Marco said that nobody else was saying. And he's so right. And this is how I made gobs and gobs and gobs of money.

Marko Papic 58:01

I need, like 10 seconds. Oh, the only thing is I'm not sure that I'm the only one saying it. But it's just energy. Sorry. It's green stuff. Just green stuff. Green Tech. I think in 10 years, there's no more now stack. He doesn't exist. There's a green stack. That's it. Here is where everyone was talking, oh, you know, solar stocks. And all this stuff is in a bubble? Sure. Probably whatever. If you have a long term horizon, just close your eyes, shut up and ply your money to this stuff, especially if you don't like it for ideological reasons, then you should put all your money in this because you're biased against it. And it's you're going to be wrong. This is your NASDAQ. This is what it looked like from 1994. To today. This is where we are, I think with MSCI alternative energy index. Now, that said, that said the one thing I will say is I do think public markets when it comes to green stuff are in a bubble. Yeah. And that's because, again, I'm not the only one saying this, everyone's saying this, everyone's ESG, this ESG that most of that is snake oil, most of that is fraud. And so you have a lot of demand for this stuff, but not enough supply in the public markets. So that's why we are adopting a strategy of focusing on Green Innovation, green tech innovation to the private side, which is where I think, which is where I think some of these, you know, like revolutionary companies are going to be if you're playing this theme in the public markets, you're probably buying MySpace, you're probably not buying Facebook, Facebook of the Green Revolution is private.

Joseph Abramson 59:30

Okay, so that's, that's fantastic. Thank you so much for the very, very insightful talk. I'm sure that our viewers will will benefit vastly. I think just to kind of summarize and you can tell me if I'm wrong on on any of these points. Marco is extremely bullish on on EV. Maybe it should be your only investment it that that wouldn't be our argument. We're into diversification that also can open up some near term opportunities, let's say over the next couple of years in energy and energy related assets, which is also quite bullish for the Canadian dollar, and we are, you know, positive on the currency. And the last would be that, Emerging Markets, versus the developed markets, you know, looks quite interesting. From here due to, you know, relative performance relative valuation, but the fact that China has started to reflate and will do so. Additionally, Marco Did Did I miss anything?

Marko Papic 1:00:49

I mean, I would just say that when you talk about green technology, you know, it's much more than Evie. Alright, I know, I know, you're being just, you know, like kind of brisk. But I would say that there's a whole slew of things that are happening, whether that's hydrogen, carbon sequestration, whether it's software and enterprise solutions to make things more efficient. There's like a really big green technology kind of stream. Think of it. Think of it like in the 90s. When people talk about software, he was like, multifaceted, same here, a lot of a lot of things fall under this purview. So I would, I would just modify that, and everything else. I think you're right. Everything else you put it really well. I mean, one thing we didn't talk about is how this green technology push will help emerging markets because commodities will go higher. That's another thing that you can talk about. I'm willing to share the 58 page chart pack with your clients. So I'll email it to you, Joe. And you know, they can peruse through the charts.

Joseph Abramson 1:01:47

That's fantastic. Thank you so much. And to our viewers, if you have any follow up questions, then please feel free to contact, Northland wealth, we'd be more than happy to find the answers for you. So thank you and have a wonderful day.

Marko Papic 1:02:05

Thank you, Joe.


Policymakers, Geopolitical, China, Afghanistan, America, US, Canada, Debt, Socialist, Populist, Family Wealth, Family Enterprise, Dedicated Discussion, Family Enterprise Advisor,


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