Robert D. Kaplan: How to Invest Wisely in an Age of Permanent Crisis
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Hi everyone, I'm business coach Steve Sandusky for Barron's Advisor, The Way Forward podcast. I want to preface today's episode with a little bit of context. This episode and several after this are part of a new series that I'm doing called The Geopolitical Edge. Now, I'm well aware that geopolitics has never been high on the priority list for most financial advisors. And sure, we pay attention when there's a war or sanctions announcement or a headline grabbing election. But

But in the end, markets have always found a way to grind higher. So why worry about geopolitics when the S&P 500 keeps marching on? I bought my first stock in 1978. And ever since then, I've been an investor in and a student of the markets and the economies.

Four years later, in August 1982, began what is arguably the greatest bull market of all time. And almost every advisor working today has only known the favorable winds that have been in place since the 1980s. I was very lucky to have been born at a point in time where the United States was the great power, where the inflation of the 1970s gave way to massive disinflation that led to near zero interest rates and

and soaring stock markets, where the globalization of the economy kept inflation low, where technology advancement has led to a rising standard of living, where the spending boom and then the retirement wave of the baby boomers kept the economy humming, and a world order that was kept in check by the United States. It's been a glorious period to be an investor.

But as we all know, not everybody benefited from this growth. As a result, the United States in particular and the world in general are experiencing massive change. So my question is, what if we are entering a new era, one where the assumptions that carried us through the past 40 years of globalization, relative stability, and the U.S.-led world order are

What if that no longer holds? What if the forces shaping markets today, such as fragmenting supply chains, economic statecraft, rising nationalism, political polarization, cultural wars, and great power rivalry, what if these aren't just temporary disruptions, but signals of a more profound structural shift? That's the central question we're tackling in this Geopolitical Edge series of episodes.

These episodes are nonpartisan and are designed to give you the background information, the context, and the historical perspective you need so that you can connect the dots about what's happening. And as my first guest said, prediction is impossible. It is only through coming to terms with the past and vividly realizing the present that we can have premonitions about the future. Now, none of us know what will happen tomorrow.

But with a greater understanding of the past and the present, we can have informed premonitions about the future and prepare our clients' portfolios appropriately. If you're a high-performing financial advisor guiding clients through long-term wealth strategies, I don't think we can afford to treat geopolitics as just simply background noise anymore. Social media, big egos, performative politics, it's turning politics into air, meaning it's everywhere. We can't escape it.

So in this series, I brought together several of the sharpest minds working at the intersection of global power, finance, and strategy.

First up today is Robert D. Kaplan. He's the best-selling author of 23 books on foreign affairs, including his latest one, Wasteland. He holds a chair in geopolitics at the Foreign Policy Research Institute. For three decades, he reported on foreign affairs for the Atlantic. He was a member of the Pentagon's Defense Policy Board and the U.S. Navy's Executive Panel. Foreign Policy Magazine twice named him one of the world's top 100 global thinkers.

Today's conversation with Robert is about helping you develop a strategic worldview. Robert brings the historical, philosophical, and geopolitical context that allows you to move from reacting to news to building portfolios and client narratives that are durable across regimes, ideologies, and cycles of crisis. With that, please enjoy my conversation with Robert Kaplan.

Many financial advisors don't pay a whole lot of attention to geopolitics. And the reason being that they've looked at the financial markets, they've looked at what happens in geopolitics, and they say, you know, as you and I are talking here today in late June, the markets are only two or three percentage points away from an all-time high. And so financial markets tend to just grind higher, regardless of what happens in the geopolitical arena. So I'm wondering, you know,

Based on your expertise, based on all the research that you've done, if you look back at the post-World War II period where the United States has been somewhat of a benevolent dictator, we've been able to keep some kind of semblance of world order, do you think that we can simply extrapolate over the past 80 years and say, hey, we're going to continue this thing and we don't have to worry too much about geopolitics from a financial market standpoint? Or

Or do you think that there really is something different about where we are now where we can't rely on the past as a good indicator of the future? Are we at some kind of pivot or inflection point today? I would answer it this way, Steve.

I think that the market nervousness about, for instance, the Israel-Iran war is a buying opportunity. All other things being equal, the market not being overvalued, overpriced or whatever. I agree partly that many geopolitical events have been very impressively priced in by world markets.

The war in Ukraine, the war in the Middle East, in Gaza, those things, they're interesting to debate about and people get very emotional about them, but they don't affect your retirement statements very much, if you notice. And even with an Israel-Iran war, it's going to affect oil markets somewhat. The markets will recover. But there's one big exception to this rule.

That is any military conflict in the Western Pacific.

If you had a high-end, meaning with missiles and submarines, conflict between the world's two largest economies, China and the United States, in the South China Sea or Taiwan, where the world's greatest sea lines of communication are, where supply chains are most crucial for the world,

and where, say, for instance, in Taiwan, all the semiconductors are produced. If you had a high-end conflict there, it could be devastating for world markets. And that would be an event that would register dramatically in people's 401k retirement statements.

And then we would be in a different world. People think they're very excited and energized and emotional about the Israel-Iran war or the Russia-Ukraine war. They have no idea how much worse a conflict in the Western Pacific would be. And I would go further.

I would say that what keeps the peace in the Western Pacific, ironically, is the very fear of China and the United States of such an effect on world financial markets. It's not just us. It's the Chinese, too, who are terrified of a market meltdown.

So it keeps the peace in a way that the fear of atomic bombs kept the peace in Europe throughout the Cold War. So that's where we're at. So basically, it's a 50-50 thing regarding your question. It's generally true that geopolitics matter less than the hype, but there's one big exception.

So it sounds like when we had the Cold War, we had mutually assured destruction that sort of kept us all in place. And now you're saying maybe it's semiconductors in Taiwan that might be mutually assured financial destruction if we have a war there. Yeah, combined, of course, with all the trade and supply chains and all of that. So that as long as there's peace in the Western Pacific,

I would think that markets can successfully or adequately price in conflicts elsewhere.

I don't mean to put you on the spot, but I'm going to quote you from your book here, your latest book, Wasteland. You said, prediction is impossible. It is only through coming to terms with the past and vividly realizing the present that we can have premonitions about the future. So as it relates to a potential conflict in the Western Pacific, do you have any premonitions about the future of that happening?

I would say that the possibility of an actual high-end war between the U.S. and China and the Western Pacific is about 1 in 20. But that's high, actually. It should be 1 in 40 or 1 in 70 when you think about it. So it's something to keep your eye on. But again, I will emphasize, it's the very fear of this happening that ironically keeps the peace.

And I want to talk about prediction here for just a moment, too, since we're on this topic. Another quote from your book, you said, the problem with predicting the future is that it usually descends into linear thinking, the mere extension of current trends. That's why the best futurology may be a description of an aspect of the present that is ignored by the media and beyond the conventional reach of television cameras.

Do you have any ideas of what might be an aspect that most of us are ignoring today that we should be paying more attention to? Yeah. If you look at forecasting firms generally, what they do eight out of 10 times is make linear predictions. They just assume the current trend is going to continue and therefore this is going to happen.

Non-linear predictions are rare, actually. When they occur, they make big news. Like when Sam Huntington came out with his clash of civilizations theory in the midst of the euphoria of the post-Cold War, that was a non-linear prediction that got everyone's attention, so to speak, because it was long before 9-11 happened.

or anything like that. I made a nonlinear prediction when I wrote about Africa and Turkey in The Coming Anarchy in The Atlantic in 1994, also in the midst of post-Cold War euphoria and thinking that the world was going to be happy and democratic. And I said, that's a very European way of looking at things. If you look at things from Africa, from Turkey, from other places,

It doesn't say that at all, so to speak. So what's an example of a nonlinear kind of event now? One could be an uprising, a revolution in Iran.

that would bring in a government that, while not necessarily democratic, would be much more civil than this one and would unleash 85 million Iranians into the global market, into globalization. And companies would be rushing in to invest, essentially. Because remember, had the Shah not been toppled,

In 1979, Iran would have evolved into a Middle Eastern version of South Korea, probably today. But that didn't happen. Another thing is we could add the deaths.

of a world historical leader, Vladimir Putin or Xi Jinping or something, which would change dramatically the trajectory of politics in Moscow or Beijing. Those are things that always affect history, but they're impossible to predict. Another thing along those lines that you write about in your book is politics.

how media has changed over the years. So you talk about how back in, say, the print and the typewriter age, cooler heads prevailed in the sense that there was more opportunity to read in depth, to think about things versus today where we've got social media, we send a tweet out and that can change the course of world events just through one tweet. So how has social media changed

impacted geopolitics? How has it impacted the leaders of, say, Xi Jinping or Putin or Trump, how they've been able to use media as a way that might be different today than it was 30 to, say, 50 years ago? Yeah. In the print and typewriter age gave rise to our great Cold War presidents like Eisenhower, Nixon, and others, and who were basically moderates in the center.

Social media is about emotion and passion and brevity. And emotion and passion are the enemies of analysis.

And when you really get down to it, so social media, which affects our politicians and affects politicians everywhere, is a destabilizing force, essentially. You much more want a politician who's influenced by the print and typewriter age, reading documents and reading into the nuances of things than someone who's influenced in his decisions by tweets or

or something like that. So the very change in the technology of the media has in a way destabilized geopolitics. And how big of an impact do you think that will have? It's pretty clear we're not putting the genie back in the bottle when it comes to that. And it seems like so many of our politicians are

are almost going to self-select. If I want to be a, quote, successful get-elected politician, I'm going to have to be adept at social media. I'm going to have to polarize my base to get elected. So how do you see that potentially rolling out over time? Yeah, well, you see that with the current president, President Trump, who is a creature of the social media digital video age. He's impossible to imagine in the print and typewriter age, I would argue.

And he didn't come out of nowhere. He's the product of changes in the media, of globalization that has split America into sort of a globalized cosmopolitan class on one 50% of the country and the other 50% has been left behind.

So I think you're going to get politicians who are less stable, actually, more influenced by this or that passing emotion. And related to that, one of the things that you talk about in Wasteland is this idea of the importance of order and moderation. And another quote from your book, you said, this fragile, finite earth of ours rests above all on moderation. Which

which this new age of technology is fundamentally undermining. This is what at root fuels our permanent crisis. So talk to me a little bit about

moderation, how technology is undermining that and what impact that has on what you're calling a state of permanent crisis. - When you think about it, even if you're a Democrat living in a democracy, order is more important than freedom because without order, there is no freedom for anybody. Most Americans, the overwhelming majority of Americans have never experienced real disorder.

The words anarchy and chaos are thrown around quite a bit, but they've cheapened the words. I've experienced anarchy and chaos in sub-Saharan Africa, in Iraq, in other places. And when people are not sure about where they're going to get their next meal, where

where there are no police on the street, you know, the governments do not control any territory outside of a few hundred yards from the Capitol in the capital city. That's real chaos. And that really exists. And the founders of the American Revolution considered it.

They were very aware of this. They understood that it wasn't a democracy they wanted, but a republic that divided up power.

between executive, legislative, and judicial because they knew that just a pure democracy where there were opinion polls all the time and elections all the time was a recipe for chaos. And we have a little of that now. We've had a little bit of that. Look at it this way. Remember the days when the party bosses in smoke-filled rooms decided our candidates? That was a republic.

They never would have chosen Donald Trump in 2016. They would have chosen Jeb Bush, who would have gone on to govern like his father and not like his brother. And the same level of stability and seriousness would have been maintained.

But the end of the smoke-filled rooms, the primary system, brought us away from being a republic to being more of a pure democracy, which the founders were afraid of.

because to them, democracy tempted anarchy. They wanted a mixed system, a mixed regime of both elites governing and people who had a chance to change the elites once every four years or so. So what we've had when you widen the aperture is

And you look at the downfall of age-old empires after World War I and the rise of mass democracies, which led to fascism in Central and Eastern Europe.

What is our world today is less and less stable. It's less and less predictable, stable. And so we face a paradox. The freer we are, the more unstable we are, essentially. And the founders would be tearing their hair out about opinion polls, about tweets and all of these things. This was what terrified them.

And when you talk about you need order to have freedom, how does that order come about? Because we're seeing strongman politics around the world. Do you view strongman politics as a way to bring order? Or is it back to our three branches of government here in the U.S. where there needs to be checks and balances? How does the order come about in a way that is good for society? There first has to be an autocrat. But the moment you have an autocrat, you have to go about weakening him.

essentially prying away privileges from him so that you get the perfect mix between order and freedom and democracy. Remember, in Asia, you had enlightened autocracies

in South Korea, in Taiwan, and Singapore, which gave way to very stable, successful democracies because the autocracies created middle classes. That stabilized society. And then you could introduce elections.

so to speak. So Asia is like the perfect model for this. This was what Deng Xiaoping was trying to do in China after Mao died, to bring about an enlightened collegial autocracy. And that lasted for a few decades, but ultimately broke down. There are no easy solutions to this. Winston Churchill once said,

that had the Habsburg Empire in Austria and the Hohenzollern Empire in Germany and the Wittelsbach in Bavaria, and for that matter, the Ottomans in Turkey, had they stayed on the throne after World War I, there would have been no Hitler. The writers of the Versailles Peace Treaty in 1919 in Paris wrote,

thought that they were bringing about a better world by getting rid of all these royal houses, but they were actually bringing about a more unstable world, which led to fascism in World War II. You also make reference in your book to imperialism.

And the height of imperialism likely being the beginning of the end for a country. And so we think about today, we've got Trump who's making overtures about Greenland and Canada and the Panama Canal. You've got Putin who's trying to expand in Europe. You've got Xi who's building up in the Pacific there. So how do you think about this idea of imperialism?

and where that may eventually lead us over the decades. Yeah. The truth is that the overwhelming majority of human history has occurred under empires.

And most of the progress has occurred under empires. We only left the imperial age after World War I, which brought in more democracy, more freedom, and that led to World War II, essentially. America, though, since 1945, has, in a functional sense, been an empire.

Americans hate the word empire. They would never describe their country as an empire. But we have been in an imperial-like situation for 80 years now. Now it's changing.

President Trump has questioned the viability of NATO. He's done away with trying to promote democracy around the world. The American empire still exists, but it's going through a transformation.

And what we may be headed for is a kind of system of great powers of the United States, China, and Russia carving up the world. But I don't think that's stable because Trump will not be president forever. Xi and Putin are both in their 70s. And each ruler in China, each ruler in Russia has brought about a different system.

So things could change very dramatically and in a nonlinear way, but it's very hard to put your finger on it and very hard to predict. You also talk about transitions in your book, and you said all ages are ages of transition, but never have such monumental transitions been advanced at such an uneven pace as they are now. So what are some of these transitions that you're seeing now?

What I'm seeing is there's the first world, the United States, the Western Pacific, which is deep into the 21st century. But you have the Middle East where you have underdeveloped states. You have a rich Persian civilization which is governed by a medieval autocracy, essentially. You have fragile dictatorships in the Arab world.

And the world is going about at a very uneven pace. And everything is speeded up. Everything is, as I said, the world is more claustrophobic, more anxious. We're more on top of each other. We're stuck with each other as never before. And that's what I think is the root of this permanent crisis.

Now you're deep into history. You study, this is your whole life, your whole career from a professional standpoint.

What are some, I don't mean frameworks, but like, are there some telltale signs or signals or where should people be looking? And I'm thinking particularly financial advisors as they're trying to think through a decade ahead and they're trying to think through anything that we should be doing differently as it relates to perhaps how we're investing our portfolios for the long term. Are there any things that they should be looking out for that might be signals or clues that

Maybe the future is going to be a little bit different than it was in the past. And maybe a 60-40 portfolio allocation is not the best going forward. Well, I cannot comment on 60-40 allocations and technical things like that. I will say that America, despite the debate about tariffs, is a better place to invest than other places.

I would much rather have America's problems than Europe's problems, essentially. Europe has Russia on its east. It has migration and refugees from the greater Middle East and sub-Saharan Africa on its south and southeast.

It has less innovative governments, essentially. The genius of our system is you have 50 state governments that can experiment and tinker with things, even if the federal government is a bit uncreative in a way. So I think despite all the tumultuousness, America is a good place to invest in.

I think the Middle East, at some point, there will be a new regime in Iran that will be better at some point. And that will change the Middle East profoundly and make it perhaps a good place to invest. As I said, there's one big problem.

black hole in globalization. That's 85 million Iranians, highly educated, urbanized, who have not been allowed to participate in the global economy. And at some point, that is going to change.

There's a strong military buildup around the world. Here in the US, we've got peace through strength, so we're increasing our budget. We've got Trump is really encouraging NATO members to dramatically step up their military spending. Of course, you've got Putin in Russia, you've got Xi in China building up their militaries.

Does all of this military build up around the world? Does it increase the likelihood that there's going to be a war? Does it decrease it because nobody wants to go first and mutually assure destruction? Or where does all of this military build up? I think it increases the likelihood of war because you train, you acquire weapons. There's the likelihood that you will use them.

at some point. That's why I'm very worried about the military buildup in the Western Pacific. Although we have this mutually assured destruction in a financial sense that I spoke about earlier in the conversation,

The very buildup of high-end weaponry, missiles, submarines, from Japan in the north to Australia in the south is very worrisome. We've been conditioned to think about the Pacific as the place where people go in business suits and travel business class or first class and make a lot of money. But that's changing. And that has been changing ever since the first few years of Xi's rule.

China is not as welcoming as it used to be. You've been known to be somewhat pessimistic in terms of all of the things that you talk about, but I think you do that strategically. So tell me a little bit about how you think about pessimism and how that's actually a good attribute.

I think pessimism saves more lives than optimism. Pessimism would not have led us to believe we could change Iraq into a democracy. Pessimism would have allowed us to build up our forces far earlier before World War II. I call it constructive pessimism.

or anxious foresight. Remember, in our lives, we often worry all the time about things that could go wrong. But the things we worry about often turn out okay because we've worried about it, we've taken steps to avoid it. Some things we can avoid, but a lot of things we can't. So what tends to go wrong in our lives are things we never thought about. Geopolitics is similar. Yeah.

It kind of reminds me of Andy Grove from Intel back in the day where he wrote a book called Only the Paranoid Survive. And so just that type of thinking that we have to think about worst case scenarios. We have to plan for those. And the more you plan, the more adaptable you're going to be if some of those things do happen, or you may be able to prevent them from happening as you just described here. Yeah, I agree with that. Robert, as we wrap up here, tell us a little bit about your new book, please.

A Wasteland, A World in Permanent Crisis. The title comes from T.S. Eliot's poem of 1922 about a world that's in disarray, which is very fragile and where people don't understand each other. They all speak a language that nobody understands, essentially. But it's also a very beautiful poem, and I think it, I hope it summarizes the feeling in my book.

And this is one of what, approximately 20 books that you've written over the years? This is my 23rd book. 23rd book, which is fantastic. Again, Robert, appreciate you being on the show here today. And I can definitely vouch for the book as I've read it and appreciate you coming here and sharing some of the insights from it. Thank you very much, Steve. Pleasure being with you.

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