The Twelve Day War, 5 Percent? Get Bent, Dead Dollar Bounce
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Coming up this week... Nothing ever happens. Or does it? A week on from a one-act play of a war, we pick through the charred remains of the Fordo nuclear site. We're looking for clues. A smouldering nothing burger here, or a flambéed Middle Eastern order over there.

Meanwhile, Daddy got his 5%. NATO members have signed up to splash the cash on the next generation of weaponry. But is this wise defense spending, or just a fully armored hypersonic pork barrel? Finally, the SMP has rallied this week, just as the dollar has dipped enough to offset the winds. Now, with bond deals also on the up, we're into an era of two snakes for every ladder.

Is this a weird blip or the first horseman of de-dollarization? But first... The 12 Day War

Well, we're back this week after last week doing a whole episode on the potential for an Iran-Israel conflict. Lovely, we recorded last week and then basically less than 24 hours later the whole thing mysteriously evaporated in a way that I don't think any of us really saw coming. It doesn't mean the conflict's over, I don't think the conflict is over. We can talk about it, but there's still a lot of pressure in DC at the moment to...

for the Americans to intervene again. It's been put to bed for now, so it's not like a grand peace bargain's been made or anything like that. But the whole thing kind of came apart very quickly. Obviously, the reason that we were pretty amped up last week, as I think most people who were paying attention were, the markets, everyone on Twitter, etc., etc.,

is because the Trump administration struck Iran's nuclear facilities for the first time in history. So that was American planes directly bombing Iran. And in the first few hours after it happened, it was very unclear what had taken place. And so it seemed like it was a massive escalation of the conflict that would demand a response by Iran, which we went through last week probably would have meant something different

ranging from significant ballistic missile attacks on US bases all the way up to closure of the Strait of Hormuz. But nothing happened, basically. I mean, there was a, I think, a minor strike on a US base in Qatar, but there was advance warning. I don't think there was any casualties or anything like that. So we're kind of in the "what happened?" What actually happened with the 12-day war?

Well, there's the kind of actually what physically happened question, and then there's the lay of the land afterwards. And I think it's the lay of the land afterwards that's more interesting. But let's start with what appears to have happened. I mean, I'll just come out and say it. I think the Trump administration basically did a kind of a theatrical strike on Iran, basically.

I don't think their nuclear program is gone. I mean, the Trump administration is trying to convince everybody of that. And I think anyone who's not interested in a war in the Middle East should be glad that the Trump administration is doing that. I think some of the actual Democrats who claim to be against a war in the Middle East who are pushing the Trump administration on the truth

of the destruction of the nuclear program are acting really irresponsibly. If you're not interested in a war in the Middle East, spiraling oil prices and so on, I think we should all thank the Trump administration for cooling the situation, even if it was a very unusual method of doing so. So I think it was basically a symbolic strike. There was a lot of pressure on the Trump administration to do something.

And so he did it, but the chances of that wiping out the nuclear program are very, very low. Almost non-existent. It looks like basically they hit a bunch of above ground targets, which, I don't know, they're probably warehouses or something full of rubbish or something. And then they dropped some sort of ammunition, it's not really clear what it was, on the four down nuclear site, which will not have penetrated a mountain or anything like that.

So basically, it's kind of a nothing burger in terms of the strike, but it's really the immediate, the aftermath that's so interesting. It feels to me like in DC, they've tried to take a little bit of air out of a very overinflated balloon, tried to put the forces of war back in their box, to mix metaphors, and they've succeeded in doing so for now. Now, how long that'll last is anyone's guess, but they have succeeded in doing so for now,

The issue, to my mind, is more so on the Iran side. The Iranians, I think, have backed off. They don't want a war with the United States, that's very clear. But they've also said, on the one hand, they are not going to give up the nuclear program.

And actually I saw today that they were in the process of kicking out the IAEA. So previous to this we had a nuclear program that had a lid kept on it basically and had IAEA monitoring of the situation. Now we basically have a black box of a nuclear program in Iran. So that's kind of counterproductive move number one.

And then counterproductive move number two is the Iranian defense minister went to China, where he met the Chinese defense minister and the Russian defense minister. And the rumor is, and I think it's a fairly credible rumor, is that Iran is finally looking for a completely integrated extensive air defense system.

Apparently, from what I've heard, they've turned this down before. They've turned down a fully integrated air defense system because they see it as impinging on their independence. Because I think it will basically stitch them into a foreign air defense network. China is committed to non-proliferation in the region. We can talk more about that. So it feels to me like the logical next step is for Iran to get some sort of extensive air defense system.

So yeah, I mean, from the perspective of Israel or Washington, I really can't see what's been achieved here. The situation with the nuclear development is more volatile, not less, although I think optimistic reading would be the Russians and the Chinese will try and keep a lid on that by offering the Iranians an extensive air defense system. If they do get that air defense system, the Israel strike capacities on Iran are going to diminish extensively.

The one thing I'd also say is the whole, I mean, we said it on the show last week, the whole Iranian society's rallied around the government, probably making it a lot stronger. And a lot of the older generals who were killed were probably the ones waving the Iranian flag and saying, we don't want integrated air defense system because they're foreign influence or whatever. And my guess is, just looking at the data,

the situation, the younger people who will now come up will be much more open to these ideas. So from a strategic point of view, I really don't see that this is a win for the United States or Israel. I'm still kind of baffled by the whole thing. I'm not quite as baffled as I was last week, because last week I just thought this is actually getting crazy, but I'm still kind of baffled from a strategic point of view. What on earth was the point of all this?

Look, I'm a little bit more open than perhaps you are to the idea that the US and Israel between them seriously degraded Iranian nuclear capacity. I would say, though, first of all, that they didn't destroy it forever. They delayed it, even in a best-case scenario. And secondly, that wasn't the purpose of the strikes to begin with. The purpose of the strikes from an Israeli perspective was overtly

regime change operation. The idea would be that they would be able to deal the regime in Iran a blow as tactical defeat and that would allow the discontent with the regime after that defeat had been delivered, after the war was over, to then bubble up supported by Mossad and the CIA and finally overthrow the regime in Iran which

the Americans at least have been trying to do since 1979, so some 26 years now. So I think to say that it's failed because it hasn't destroyed Iran's nuclear capacity, I think that would be mistaken because that wasn't really the goal. Of course, one of the upshots of a messy regime change or indeed a full-blown civil war or ethnic conflict given Iran is indeed a multicultural nation

The upshot of that would be that, like Syria, it would be far too weak, first of all, to provide any of the militias and proxy forces such as Hezbollah and Hamas and the Houthi militia, any kind of Syria support from Tehran. But the secondary point was that, again, it would be too chaotic and poor to have a serious nuclear weapons or indeed probably domestic civilian nuclear energy program.

And I think that was the purpose. So far that's failed, but, you know, I don't know, maybe at some stage in the future they can undertake some kind of revolution supported from outside. I don't know. It doesn't look like that at the moment. And I would say that Iran is somewhat different as a nation to countries like Syria and Libya, which were very much kind of cobbled together in

after the First World War without any serious consideration of traditional boundaries. Iran is an ancient nation like England or Russia or France, you know, it's been around for a very long time and although the borders of Persia have shifted over time, the concept of a nation

that is Iran now has been around for millennia. And I think that sort of regime, especially one with the kind of institutions that Iran has, would be harder to bring down than in a country like Syria or even a former Soviet republic has happened frequently in the 1990s. I think Iran's position now is very clear. They must have a nuclear weapon. From their strategic point of view, I personally think

very against the idea of Iran getting nuclear weapons. I'm very against the idea of anybody getting nuclear weapons. I'm very much in favour of international non-proliferation efforts. But if I'm sitting in Tehran now making decisions, it's very clear now that I must have a nuclear weapon. I must be able to offer some kind of deterrence against Israel's dominance within the region. Even Israel, despite its tremendous risk tolerance and the backing of the US...

would surely be reluctant to go to war with a nuclear-armed Iran. That would be something that it would be extremely reluctant to do. So, how do they get a nuclear weapon? Well, first of all, it's very clear that the country has been thoroughly penetrated by Mossad, and in addition to that, Israel has access to really extensive US satellites and electronic intelligence capacity.

So it's going to be extremely difficult to hide that from either Israel or the United States or Europe. So what they need to do first is, as you quite rightly say, Philip, they need to get themselves an integrated air defense network that will involve individual air defense units and area denial anti-access units as well.

They can get those from either Russia or China. And it'll also probably involve the kind of package that the Pakistanis bought from the Chinese, which involves modern strike aircraft, very modern beyond visual range missiles, and modern airwax, airborne early warning and command systems. You know, those planes that have the big rotating discs sticking out of the top of them like mushrooms.

have something like that now i have read that iran and pakistan both went window shopping in china at the same time for such a system the pakistani signed on the dotted line and got this whole integrated system which as i say involved modern fighter jets modern air-to-air missiles modern awac systems and indeed even some air defense systems

And they performed quite effectively and in fact won a beyond visual range battle against a peer adversary in India that was flying top-end European fighter jets. Okay? Iran, as you rightly say, has pursued really a kind of a policy. I wouldn't say isolation, but a policy based on the idea that they are Iran.

They oughtn't to be reliant on any other great power because if you know if you buy your air defense from China or Russia or the United States for example then those countries have a big say in your Defense policy and your even your foreign policy right like country like Britain can't sway too far from American foreign policy because

Well the Americans can stop sending us spare parts for example the Americans can cut off access to Certain bits of crucial software that we need to run the stuff that we bought from the US Okay, it's got like a look like that's one of the reasons the US likes selling weapons It's not just for the export dollars that come into the country that help it with its horrendous current account problems or trade deficit problems you might say and

It's also because of the massive leverage that it provides over countries. And Iran was obviously very leery of this. But it's very clear now from Iran's perspective that they cannot delay this any longer and they're going to have to swallow this.

they're going to have to essentially become a Chinese or Russo-Chinese client state in the Middle East. They can no longer attempt to run a kind of a great power operation. They're going to have to do what Israel has done. Israel is a US client, but Israel still maintains significant leverage. And I think that Iran would be able to too. So that'll be the first step is it'll be to go to China and buy super modern Chinese fighter jets with highly effective,

beyond visual range air-to-air missiles. It'll be probably to buy air defense systems that can be integrated into the whole thing. It'll be to buy AWACS systems. And it'll be to get that up and running without the Israelis smashing it to pieces, like strangling the baby in the carriage. And once they've got that up and running, and probably once in a parallel process, they've rooted out a fair bit of Mossad and his general Western penetration,

then they can look to go forward on their nuclear weapons program, because then they can defend that nuclear weapons program against any attacks, any attempts to destroy it against their will. I suppose, though, that what that does is it provides a window of opportunity for anyone who might want to do a deal with Iran, because between the time that they can actually defend their airspace,

And now there's going to be some period of time. That is the period under which Western powers, if they were so minded, would be able to do a deal with Iran to forestall a nuclear weapon. Whether that's possible anymore after what's gone on, I don't know. It would probably be good for the Europeans and certainly Britain. You know, I'm British and it's certainly within Britain's interest to try to do that.

But it seems to me that the Iranians have been handed a few lessons that they're going to take heed of. And that's the general process. And, you know, I think China and Russia would be delighted to help them, given how Israel's pull within the United States means that it's possible that Israel could always bog the U.S. down in the Middle East and

which would be greeted with great delight in Moscow and Beijing. Yeah, I agree on the deal thing. The window is fast closing on that if it hasn't closed already. I don't think that they can actually get the extensive air defense systems that they need from probably from China at this stage, maybe from Russia, and develop a nuclear weapon. I just think the two things are mutually exclusive. The Chinese are pretty heavily committed to non-proliferation in the region, and there's a very...

There's a very clear reason why that is, because the fear is that if Iran get a nuclear weapon, Turkey, Saudi Arabia, etc. will get nuclear weapons. And then if anything ever kicks off in the region, it turns into like a glowing green

pile of sand and the Chinese can't get their oil out of there. So the Chinese are pretty serious about non-proliferation in the region. That's why I think the most likely outcome is probably that the Iranians go to Beijing or whatever and talk to the Russians and the Chinese and say, hey, look, we're thinking of developing this nuclear weapon. It's the only way to defend ourselves. And they go, no, no, no, no, no, please don't do that. Here's a new way to defend yourself.

And the decision that will be made there is basically based on what you've just said. Whether they're willing to become more of a client state. Until now, as you say, they've been very proud of their Persian heritage, etc, etc, and they've wanted to be this independent power, but it's long been kind of unrealistic. Iran is nowhere near as weak as some people in the West think, but Iran is probably not as strong as some of the more fanatical Iranian nationalists think.

and they've just learned that lesson. So I really do think it's tending toward them getting advanced air defense systems and maintaining themselves at this kind of threshold nuclear state. Just really quickly on that, why I don't think they've destroyed the program. It's actually a very technical reason that I've been reading about. It doesn't seem to be getting much play, but I'm not surprised given the fact that there's a very extensive campaign

to try and say that the nuclear program's been destroyed. When you actually enrich uranium yourself using centrifuges, at the beginning of the enrichment process, when you're getting it up to 20% or something like that, it takes an enormous amount of centrifuges. You need like tons, like say a thousand or something like that.

As you get it up the chain of enrichment, you need less and less centrifuges. And my understanding is by the time you've got it up to close to 60% or over 50%, you need extensively less centrifuges in order to refine it at that point. Why does that matter? Because think of it this way, right? Iran had to build like whatever, a thousand centrifuges. I don't know the number, but a thousand, call it a thousand centrifuges.

And right now they only need like 100 to get the full enrichment done. So understanding that, you realize the time to knock out a nuclear program is when you need all of the equipment, not when you need about 10% of it. My understanding is this was probably made clear to the Trump administration when the bombing campaign was put forward. So unless you assume that they can wipe out like 95% of the centrifuges or something like that,

It's pretty difficult to see the reality of that. The other point is that my understanding as well is that the amount of uranium, when it's that much enriched, the overall size of it can fit in like the back of a small van or something like that.

So, like, yeah, I really, really don't think there's much to that. And I think there's very technical reasons to believe that, you know, five bunker busters or six bunker busters, if they were bunker busters, and a couple of cruise missiles can wipe out, extensively wipe out a nuclear program. It just doesn't seem very credible. But that said, look, Iran probably still has complete capability to go nuclear right now as we speak.

but the Chinese and the Russians will be trying to constrain them. So it all hinges on what you said, whether they want to continue to slightly LARP being a great power, to be honest, like, I mean, you know, they've made some impressive weapons achievements and so on, but great power, they are not. They cannot build their own extensive integrated air defense system. They can't do it. So they can either continue to kind of LARP with being a great power or they can become super,

an in-between client state. And a client state with a lot of autonomy, but a client state all the same. And I don't think anyone outside of Russian, Chinese, and Iranian circles knows what the decision makers on Iran are thinking about. But we'll probably find out in the next six months. And it will probably shape the future of the Middle East for the next half century.

Just to add very briefly to that, I think the chances of maybe arranging a deal are pretty good here because, as you, again, quite rightly say, Philip, both Russia and China are against proliferation, nuclear weapons proliferation. Neither of them are in favor, and they have very good reasons for that.

China especially does not want Taiwan to get a nuclear weapon if China went and gave or acquiesced to Iran having a nuclear weapon Then what would stop the Taiwanese getting you can open absolutely nothing we you know We shouldn't forget that the Taiwanese had annex or the Republic of China as they call themselves had an extensive Nuclear weapons program right up until the late 1980s like they had

Got all of the parts for a nuclear weapon in place. All they needed to do was assemble and test it. That's it. That's how close they were. And I have to look this up, but I think I'm right in saying that. What happened was some kind of chief scientist or military man defected to the US. And he had been an American intelligence asset. And he basically revealed the whole thing and provided evidence for it. But that's how close the Taiwanese have been, you know, like 30, 40 years ago to getting a nuclear weapon.

So it wouldn't take them a great deal of effort. Now, it would be much easier for the Taiwanese, I guess, than the Iranians, for instance. That's the same with Russia, with Ukraine, right? Like, if they hand Iran a nuclear weapon, where do they stand then in saying that Ukraine can't have one? So all of these countries have real incentives to back the non-proliferation agreement, and

This has happened in the past. Russia supported American resolutions in the United Nations to sanction North Korea for its nuclear weapons program. And it was only the South Koreans getting involved in the Ukraine war that saw Russia back down from that, especially given it's well known now that the non-proliferation efforts with North Korea have failed. That horse has bolted. But this is the point. I think it is entirely possible that

There can be some agreement here because all of the European countries, obviously the Americans, obviously the Israelis, but also Russia and China are also in favor of non-proliferation broadly. So it is possible that there can be some kind of agreement, especially, as you say, if Iran gets the sort of system that it feels is cast iron enough to secure it against any kind of Israeli aggression in the future.

5% get banned. Daddy came to Europe this week and got his 5% of NATO spending. All of the European countries finally decided to pay and stopped taking completely unfair advantage of the United States' kindness. They finally decided to start paying their way. That's the headlines. But hang on a second. Let's look at this a little bit more seriously. The first thing to say is

is that in 2014, all of the European NATO members agreed to pay 2%. And there are still countries that are not paying 2% of GDP as military spending. And it's not just small countries like Luxembourg. It's countries like Italy, which only spends 1.5%. Belgium, who only spend less than 1.3%.

Slovenia, Croatia, Canada, all of these countries, Portugal, are spending less than the 2% that they agreed to in 2014. So that's a decade ago. They've had a decade to bring spending up to levels that are fairly modest by historical standards, 2%. And they haven't done it. They've failed to do it.

The other point to say is that Europe already spends loads of money collectively on defense, right? Like it spends a phenomenal amount of money. Since the fall of the Soviet Union, so in the last 35 years, Europe has spent almost $9 trillion in 2023 terms on defense. $9 trillion, that is an eye-watering amount of money.

They just hardly get anything for it. Like for instance the Germans spend, you know 85 billion dollars per year on defense almost as much as the Russian Federation They have in theory 200,000 soldiers Okay, and yet they would struggle to put a couple of or three brigades into the field fully armed like a single division and

into the field fully armed capable of fighting a high-intensity warfare struggle in fact, sorry I take that back they wouldn't struggle they couldn't do it Okay, despite spending like 85 billion dollars like what on earth is happening here? Like why can't Europe get bang for its buck when it comes to military spending because it's clearly not at the moment It's clearly not at the moment. And the third thing to say is that

In fact, this 5% headline figure isn't really 5%. Like many other things that happen in Europe, you've got to look beyond the headline to see what's really happening. And in fact, it's not 5% on the military. It's 5% on the military and other security-relevant spending.

Okay, so remember that this is a continent that produces France who once protected the yogurt maker Danone from foreign purchase by calling it a strategic industry. Okay, so what do you think Europe can manage to call defense and security related strategy? I mean like

Maybe let's build a road and a rail line and some logistics because you've got to get soldiers from one end of the continent to the other, right? So road building can be counted and knocked off that 5%. Train line building can be counted and knocked off that 5%. Telecommunications build-out can be knocked off that 5%. Maybe energy security can be knocked off that 5%.

There is a whole way of massaging these figures to claim that you're spending 5% on the military. But those are the three points to make about this. First of all,

Some countries haven't even caught up to the 2014 promise to spend 2% on their military. So how are they going to spend 5% or 3.5% or whatever the real number is? Secondly, Europe already spends loads and it's just because of the dysfunctional way that the European procurement happens as a whole and within individual nations. British Ministry of Defence, I'm looking at you.

That means that they just don't get bang for their buck. You know, even the US with horribly, horribly, grotesquely inefficient Pentagon procurement system still gets more bang for their buck than the Europeans do.

And the third thing, of course, is that other stuff can be counted as military spending. Like I say, road building, telecommunications, energy build-out, all of this can be counted. So I think when we see this, this kind of 5%, we really have to take it with a big pinch of salt, Philip Pilkington.

Yeah, I mean, we've said it since the beginning of all this, like NATOs or the non-American NATO members are going to ramp up their military spending. It's all a giant scam. The whole thing is like a scam. It's just a big scam and it's a way to milk budgets and a way for the EU to issue weird bonds so that Ursula von der Leyen can buy a bigger crown or whatever. Like, it's a joke. It's all a complete joke. And it's now getting to the point where I saw today...

Maloney's government in Italy wants to classify a bridge between Italy and Sicily as some sort of military lark or whatever. There you go, you see? There you go. Like, anything can count, right? Well, I said to my friend who sent it to me, like, I kind of support that because at least they're not going to throw it at, like, scam defense industries who are going to scam them.

at least you get a bridge from Italy to Sicily it might actually have some use, it might help Sicily develop economically or something like that, it might make cigarette smuggling operations easier oh no, wait, sorry, I won't say that that's a joke guys, sorry to my Italian listeners the fact of the matter is that the

whole thing is a giant scam, it's always been a giant scam, and the forces pushing for this are scammy, and they'll get scammier as time goes on. So right now, the entire military spending hoopla, which was started by Friedrich Merz effectively,

is being looked at by every vulture circling around the towers of Brussels to figure out how to pull a little bit of meat off the carcass. It's another big boondoggle bill, just like the COVID one. Anything that's ever centralized in Brussels has no accountability whatsoever if you give them the capacity to issue debt to finance any of this stuff, which I don't think is currently being done, but a lot of people in Brussels want to do it. That'll make the situation even worse.

It's just a giant looting operation, and we're starting to see that already. In terms of the politics of it, I mean, good lord, if you are a European and you saw that NATO conference, you mentioned the Daddygate, shall we call it, if you are a European and you saw that conference, you have to be ashamed. This is really getting pathetic at this stage. These people are...

are really desperate cases. The lack of self-awareness, like "Daddy, come protect me" stuff, it's weird. It's actually gotten to the point now where you're seeing stranger political developments than you saw in the Yeltsin period when he's falling around drunk in Russia. We're at that point in the play here with Mark Rutte going like "Oh, Daddy, come and protect me." It's getting really weird.

I know it's kind of funny, we all got a good laugh at Mark's expense, but like, come on guys, this is a continent that we're supposed to be living on here. I mean, this is really turning into a joke. I guess the leaders, by buttering up Trump, which is what they did, Trump released Ruta's fawning text messages. This was

pre-daddy gate releases these fawning text messages on Truth Social to brag and probably just to humiliate Ruta a little bit because they just like doing that and Ruta seems to like being humiliated it's a really weird dynamic actually we won't speculate about that but you know watching watching all that fawning and stuff and you gave the Iranians a hiding and all this obviously the plan for what it is is to try and butter Trump up

with a fake commitment to spending 5% by 2035, by the way. So even if you go and you take into account all the fact that this is going to be a giant grift and a scam, which it will be, 2035, like, come on, guys, where are we? 2025, we'll have forgotten all about this when there's a new shiny object by late 2026 or something like that.

So, you know, a kind of a fake commitment and then butter up Trump a ton and tell him how powerful and muscular and fatherly he is after he sorted out the Middle East. And the hope, I guess, is that he does something magical in Ukraine or down the line when, you know, the Russians cross a certain boundary point, the Europeans try and pull Trump into Ukraine.

But honestly, at this point, the Europeans are only fooling themselves. It's all a show put on for a small number of people in Europe who still believe in a failed program, while, as I said, vultures just circle overhead and cynically pick the bones of the carcass. And everybody else in the world can see this. Everybody else in the world can see this. The Americans can see it. That's why they're making fun of the Europeans. The Chinese, the Russians, everybody can see this.

And it's a giant embarrassment, and I wish it would all stop as soon as possible. But sadly, until the war is over, it's not going to stop. Philip, you might have a better grip on this than me, but my impression is that there are doubts as to whether the European economy could even absorb 3%, 4%, 5% of GDP on military spending if they did, in fact, get serious about this, if they were...

run by highly competent individuals who could Realistically pump that amount of GDP in the current economic circumstances in to defense My impression is the European economy would struggle to absorb that they're going through a deindustrialization Process at the moment and it's quite broad range you you seeing it most markedly in Germany But it's happening throughout Europe and that's because of the higher energy prices caused by

by a combination of their own green policies, and especially in the last few years, by their sanctions on Russia. And because of that, it would be extremely difficult and it would take time to rebuild the industrial capacity needed to rearm in this way if they were going to build all of this stuff in Europe. Because it's not just industry, it's things like chemicals and materials science and all of these things that go into making modern military equipment.

Or I guess they could also buy stuff from abroad. I mean, the Poles have bought from America and South Korea, but that's just going to whack up the trade deficit, isn't it? So in both scenarios, either the continent cannot absorb it or they intend to import a lot of this stuff from places like the US and I guess the US is the main one, but also perhaps places like South Korea.

In both cases, it's going to lead to inflation for different reasons. One, because you're pumping more money into the economy than it has the capacity to absorb because of that lack of industrial capacity. And one, because you're going to weaken the euro and import a whole bunch of stuff, which is also going to lead to inflation. So it can end up being kind of self-defeating in that sense. Right, Philip? I mean...

My sense is that even if they wanted to, they couldn't do it. And actually what they need if they really want to be serious about rearming is they need to take a whole of society. Look at this. They need to look at, first of all, what industrial capacity they need. What training do they need to do? Like how many employees do they need to train?

on the special welding that you need to make a tank, for example. You know, making a tank is a specialist job, isn't it? I mean, I'm not saying that you need to be Isaac Newton to figure out how to do it, but it takes time to train. So like what training and skills do they need? What industrial plants do they need to build up? What capital goods are they going to need to import or build to create that plant?

And then how are we going to tax? What's going to be cut within the economy to pay for this all? What borrowing is going to be done? It needs to be really thought out, like this idea that you can just go like and say, OK, from now on, we're going to spend 5% of GDP. And that's that problem solved. And next we'll do

global energy. Next we'll do world hunger. I mean, this seems really infantile to me, Philip. I mean, I'm not an economist, so maybe you have better ideas on that. No, it'll all be fine. Daddy will sort it out. There's nothing else to say to it. This is Yeltsin falling around a stage drunk. It's shameful and it's pathetic and Europeans shouldn't tolerate what's going on.

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Dead dollar bounce. Well, finally, we are going to the US of A, which has enjoyed something of an equities rally of late. Or has it? Well, you've probably seen a lot of hype around US equities markets doing well. Big kind of like financial run up, all the scary stuff around trade wars and so on is now in the rear view mirror. And we're looking forward to a greater day.

And all those scare merchants who are talking about some sort of unwind of the financial system or anything like that have been put in their place by a delicious bull market rally. Well, actually not so much. There was an interesting chart in Bloomberg this week showing that although the S&P has rallied back to its previous high in dollar terms,

If you adjust for any other currency, pretty much any other relatively developed currency like the euro or the RMB or the Swiss franc or anything like that, you'll see that no, the rally's been pretty muted.

And I think that says a lot. I've been hearing about this now for about two weeks, that portfolio managers and so on, people who are kind of watching very closely what's going on and thinking about how to allocate their capital, are becoming increasingly interested in diversifying into other currencies. So looking into kind of getting more Euro-denominated assets and so on. And actually we're seeing...

a mini stock rally in Europe, which is what my boss in finance used to call the tallest dwarf syndrome. Clearly people are pouring money into Europe because they see it as having a few different aspects of risk profile than the United States. The other thing that's happened at the same time, and these two things are related, is basically equity yields, which I won't go into too much, but it's expected annual returns on an equity. The equity yield is now below the US Treasury yield.

And what that means is that you're better off, at least if you just look at it straightforwardly, you're better off investing in a US Treasury bond and just taking the 4.4, 4.5% that you get every year than putting money in equities. Now, this happened before back at the height of the dot-com boom. But the issue there was that the equities were so overvalued that the equity yield fell substantially.

Equity market is pretty overvalued probably at the moment, but the issue now is more so that the interest rates are quite high. And so what that is ultimately doing is telling you that you're better off loaning money to the US government than you are putting it in equities.

And at the same time, you're looking at your portfolio as an international investor and you're saying, wow, like half the rally that's taken place so far has been offset by a falling dollar.

And so all this says to me, this is basically my kind of headline takeaway. Now we can't be sure about this. You can never be sure about these things, but tracking it and trying to interpret it is still worthwhile. What all this says to me is that the consequences of de-dollarization are beginning to hit financial markets. And what financial people, investment people and so on are learning, we're all learning, is that that doesn't necessarily just mean a giant equities market crash.

It means all these little changes around the edges that you can't really rely on dollar strength, for example, during an equity rally. You're better off putting money, lending to the US government than into equities and so on. And so all these little things are happening that by themselves probably wouldn't be that unusual, but they're all happening at once. And I really do think people are starting to get a sense that there's been a fundamental change in the way that US capital markets work.

and that they're starting to look around the world and saying, can we spread a bit more money out all around the place? Yeah, I found this quite interesting, Philip, because as far as I understand, the kind of the preeminence of the equities market in the public imagination when it comes to the world of finance and capital markets in general is a relatively recent phenomenon. Like the bond market is much older than the equity market, and the bond market has traditionally been

much more important it was only as far as I understand in the kind of 1970s maybe the 80s where the equities market really took off as a as a destination of captain really became much bigger and more important and a driver of you know Wall Street profits I'm not saying that it was never that you know it was a kind of like a backwater or anything like that but

Until relatively recently, you know, like the late 70s, early 80s, the bond market was the kind of the primo capital market as far as I understand anyway. And it might be interesting, this idea that if the US has to return to paying a slightly higher cost of capital because it's not the sole reserve currency, the sole currency of unit of trade throughout the world...

therefore countries don't need constant supply of dollars to actually do their trade or a constant supply of dollars to Make sure they've got imports covered for three months or however much reserves they ought to keep if that's no longer the case and the u.s Has to start paying a slightly higher cost of capital Whether we'll go back to those days where the bond market was the preeminent market, you know, the slightly less risky markets were preeminent or

Where equities, you know, they're going to have to pay much higher dividend yields. They're going to have to come down a long way to start kind of competing with the kind of the higher interest rates that the US government is providing, right? They're going to have to just pay more in dividends in relation to the cost of their shares.

I think this is very interesting. I mean, you might, you'll know a lot more about that than me. I'm a kind of a layman looking in from afar here. No, I think you're right. I mean, the inflation of the US capital markets, as you say, happened in the 1980s. And everybody says, oh, well, it's because they deregulated. Well, yeah, that was a necessary condition, but it wasn't a sufficient condition. The sufficient condition was a flood of dollars into the world that had to be recycled. Right.

That was basically what did it. And that's what's given rise to Wall Street. And as you've alluded to there, U.S. equities have always had kind of gold plating on them, even if the underlying companies weren't particularly impressive or they were fine, you know, totally fine company, but no more impressive than a French equivalent or a Japanese equivalent or whatever. They'd still get kind of a premium. They'd have usually a slightly higher price to earnings ratio, for example, and so on.

And the Americans kind of got high off this for a while. I always thought it was very pernicious to the underlying economy to get addicted to kind of selling a prestige product. From an economic perspective, a rational perspective, you don't want your equities to be consistently overvalued because it'll create bubbles, for one. It'll misallocate capital. It'll make your industry potentially sclerotic and vulnerable and so on. But, you know, people on Wall Street and stuff

they often saw this as kind of a point of pride actually. I always thought it was a very misplaced pride, but they did think that way. I worked around it for years.

Well, the chickens probably are coming home to roost a little bit now. And it is, as you say, you might be better off just whacking your money into high yielding government bonds, high yielding because the borrowing costs of the United States have gone up. But also you might be better off just, you know, buying companies that are very similar to American companies, denominated in other currencies that have basically the same profile. But, you know, you no longer have the gold plating on the American company.

I'll just say very short term, this is only for like hardened financial watchers, but the hope at the moment on Wall Street for things to renormalize is for the Fed to lower rates actually, because there's a sense that that could actually bring the whole situation back to normal basically.

If they lower rates, the equity yield will be once again higher than the interest rate and so on. And there's other reasons that they want them to lower rates. Of course, Trump wants them to lower rates too. I just say two really quick things about that in case you're following the news and there's developments in that direction. Number one, it all hinges on the idea, I would say the hope, that the Trump tariffs don't actually create any inflation at all.

That's possible, but seems kind of unlikely to me. Also, the dollar has just fallen substantially. That's going to create some inflation, too. Energy prices are still low. That's probably offsetting it. That's fine, et cetera, et cetera. But betting right now that those two dynamics have no inflationary effects, I don't think is a great bet. And actually, that's not what the markets are actually betting on, but it is what kind of people are hoping on.

The second thing to be said about that is even if the Fed does lower interest rates, I don't think it makes any difference. It just means that the signals look right, right? But we've already kind of seen that the signals have looked wrong.

And so you can't really put the genie back in the bottle from my perspective. I think once the engine light has gone on, what you're basically doing is your engine light goes on and then you're asking the Fed to just like disconnect the engine light and pretend that there's nothing wrong with the engine. That will be my reading on it. Lowering interest rates will make everything look normal, but it won't actually do anything fundamental to the underlying drivers of what's going on.

So this is worth watching. Again, like when you're watching in real time the potential collapse of the US dollar as a reserve currency, you want to be very cautious about making too confident any predictions and any claims. All we can say is this is weird, this is weird, this is weird. And it all fits into the kind of overarching narrative. And that's definitely where we are right now. But it probably won't become clear if this is really, if the goose is really cooked

for maybe another one to three years. But we'll see. There's signal after signal that this is going on. And as I said, if the Fed do decide to lower rates and everybody says everything's back to normal, nothing's back to normal. You've just reached behind the dashboard and taken the wire out of the warning light. You haven't done anything else.