Capital Wars and the Death of Fiscal Illusions | Paulo Macro & Le Shrub
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What's up, everybody? My name is Demetri Grafinis, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world.

My guests in this episode of Hidden Forces are Paulo Macro and Leshrub, two popular Substack authors with large Twitter accounts who were on the podcast together almost a year ago to the day to discuss their respective frameworks, including the EMF-ification of developed economies,

and their political systems, the search for a new safe asset in a world of worsening fiscal balance sheets, and how the strain on the international system and on American military and financial hegemony could amplify some of the budgetary and political headwinds facing developed economies in the years ahead.

I asked them back on the podcast to revisit that conversation in the context of everything that has transpired in the last year and to plot a series of possible courses for what investors can expect in the year ahead.

In the second hour of our conversation, the three of us discuss what a smashing of the international capital and trading system could mean for investors and for the value of U.S. assets in particular, including U.S. Treasuries and the dollar if exporting countries begin reinvesting more of their current account surpluses in their own economies and in asset classes outside the United States. We also discuss what we think will actually happen from a policy standpoint.

Will the proposed tariffs lead to an escalating trade and capital war, with the endgame being a complete decoupling from and possible hot war with China, as unthinkable as that may have seemed only a few years ago? Will it lead to new bouts of inflation, as national economies seek to stimulate domestic investment in strategic industries,

and find new sources of demand if U.S. consumers retreat behind tariff barriers and fiscal austerity? And how realistic is talk about cutting fiscal deficits in the United States if the economy begins to materially slow or if borrowing costs for the U.S. government remain persistently high or rise precipitously?

If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io slash subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.

Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this entertaining, thoughtful, and highly educational conversation with my guests, Paolo Macro and Le Shrug.

Paolo and Shrub, welcome back to Hidden Forces. Thanks for having us, man. It's good to be back. Timely session. Just make sure you timestamp it because things are changing fast. Right. That's right. We're recording this on Monday, April 14th. And I got to say, the moment we jumped on this call, my anxiety kind of dissipated and I felt, I saw some familiar faces. I feel like maybe this is kind of like not just a...

an investment podcast, but also like a group therapy call. Oh, that is perfect. Paolo, this is what we do every day together, right? That's right. That's right. The frequency with which Rob and I chat on the side and record for our little Substacks

goes up with the stress in the markets and in the world. So it's exciting times, but let the healing begin. Exactly. That's why we write. That's why we speak to each other. That's why we message each other. Right, Dimitri? So this is what keeps us sane. So let's do this. What's cool also is that we've all spent time together in person, though never at the same dinner. You guys have been to separate dinners, but I've got to spend time with both of you guys. So whenever I've consummated a relationship in the analog world,

it makes it feel much more personal when you connect over Zoom. I don't think we should ever get together, the three of us, because that could constitute a singularity. You never know. We actually should. Well, I mean, with me and Paolo, it's easy because we're both in New York, but you're kind of all over the place. I don't know if we know where you are exactly, Shrub. I think you're somewhere outside of the US. Exactly. So Shrub, you had been on the podcast two years ago initially from Athens. We recorded that one.

Then we did another one, which was basically a year ago. It was in May, early May. We recorded it May 7th of 2024, the three of us. I didn't go back and listen to that, but I did go through the synopsis. And it looks like we spoke about EMification of developed economies, which is something that Paolo writes about, which I feel like in some sense we're seeing, but maybe not necessarily in all of the ways that Paolo suggested. The one specific way I'm thinking of it is like the bananification of America.

which I felt like is kind of what happened after the meme coin launch. The need to understand the incentives of policy makers and how those impact interest rates and inflation expectations, as well as credit rationing, which I feel like is totally relevant to today. The strain on the international system and on American military and financial hegemony, which I feel is totally relevant to this conversation. Budgetary and political headwinds facing developed economies in the years ahead, totally relevant.

The conundrum facing policymakers in China, totally relevant. And investment opportunities commodities, which I think is very interesting to talk about because I feel like you could totally script a scenario here where this would be really bad for commodities and commodity economies and commodity currencies. And the search for a new safe asset in a world of worsening fiscal balance sheet, which is totally relevant. But what's interesting is as I was reading this stuff, I was like,

Wow, it feels like we did an episode a year ago that's basically foretold all of this, but in no way do I feel like a year ago I was in any way prepared for the world we live in today, which is kind of like this ... So it makes you kind of wonder, and maybe this is my first question, guys. To what degree are we living in a world that we understood was possible?

But that we just couldn't imagine viscerally, and I'm speaking for myself, right? It's one thing to sit out and say, "These are all problems. These are all things that could happen." A rotation out of US equities because of overvaluations.

risks to the dollar that could be brought about by mistakes made in Washington or by a rejection of the international system, a fraying of the global order, a move from unipolarity to multipolarity, the increased premium for gold because of the need to find some alternate reserve asset because again, of the same things we're talking about here. It's one thing to imagine those things intellectually and to develop frameworks. It's another thing to really believe them viscerally

And while we've talked about this stuff on the show and you guys have done this as well in your respective substacks and with your audiences, it's another thing for me to live through it. And it feels chaotic. And it's, again, I was kind of joking about the group therapy call, but not really. It does produce some concern and anxiety for me. So I'm just curious, Shrub, we'll go with you first, but does any of that resonate in terms of trying to understand where things are going while also the difference between that and actually living through it?

Yeah, look, I think just to start with an obvious comment, you know, the world has been imbalanced for a while. So all the things we talked about a year ago, you know, these are problems that are structural problems. High deficits in the US, in the developed world, the EMification of DMs, that's a structural trend. Then the weakness of institutions, again, that's a structural trend. But there's always a catalyst there.

that just brings everything together. And, you know, just market-wise, because I view it from the perspective of a trader, you know, last year was actually an easy year to be talking about it because I was very bullish equity markets for a simple reason that it's in an election year.

you know, all these high deficits, they're actually good to pump the economy, pump the market. And this is what was happening all of last year. So last year we could ignore all these structural issues and we were just playing along as investors. It's like, oh yeah, let's just ride the wave into the election. Yellen is going to save us on every dip, which she did. And, you know, the election comes.

Then Trump gets elected. There is the sort of like the honeymoon period where everyone gets excited still and talks about a strong dollar under Trump and all that nonsense. But once the honeymoon period ends, that's when you have the hangover. And the hangover, you just remember all the problems that you had.

and all those problems, you actually made them worse. Because I know that it's easy to blame Trump and Besant and the administration about things, but let's just be honest. I mean, these things have been brewing for a while now. And the previous year has been a bit of a disastrous year for the US in terms of giving a bit too much of a juice to the economy to reelect. And to be honest, this is something that emerging markets do, but has been also a very typical reaction in the developed world as well. So here we are again.

I think the biggest problem we have as investors is that we're very near-term focused and they just fail to see the big picture. And they're also very biased. So let me tell you the event to me that was, there were two events that were very, very important this year to accelerate and to act as catalysts to this whole awakening that we're going to get to. So the first awakening was the deep-seek moment of China.

So the US market has been driven a lot by the AI bubble, AI narrative. Let's not call it a bubble, let's call it narrative. So the deep-sick moment of China was a very key catalyst in what I will call the end of American exceptionalism. And the reason why it was a catalyst is because you had companies, the Bank Seven, spending hundreds of billions of dollars in capex.

to win the AI race, you have SoftBank's Masa Shoshisan saying that he's committing 500 billion as if it's like money out of thin air to build Stargate, the AI infrastructure in the US. And then suddenly DeepSeq comes out of nowhere. Well, it didn't come out of nowhere, but they said that they just reproduce everything for a fraction of the cost. So that's a David versus Goliath moment.

whereby you kind of killed the AI dream of the market, which by the way, the Mac 7 are about 50% of the NASDAQ, one third of the S&P. So that was like a first slap in the face.

So that kind of killed the AI dream and people realized it slowly, slowly. And they got there that these things are getting a bit commoditized. The second slap in the face of American exceptionalism, which to me was a very important one. And on that day, my American friends didn't understand it, but my European friends were very well aware of it, was the meeting of Trump, Zelensky and J.D. Vance. So when I was watching that meeting, you know, I was trying to see it with an unbiased view, but, you know, as a European, it was horrific.

because

Trump was so aggressive against... Actually, J.D. Vance was very aggressive. Trump, I thought, was actually quite okay, but it was J.D. Vance was so aggressive against Zelensky telling him, oh, you didn't give thanks. Did you say thank you? And he was so aggressive against a leader who's been invaded by Russia that I thought was a bit of a shocking moment for a European. And bear in mind, again, I was trying to see it from an unbiased perspective. But on that day, I actually got a lot of calls from U.S. friends. And my American friends were telling me,

Zelensky was very rude against Trump and Vance. And my European friends were calling me, telling me, did you see what JD Vance and Trump did to Zelensky? They were so rude and insulting. So I stepped back that day and I just realized that at that point there was a schism between US and Europe. And I just tweeted out that day, the end of American exceptionalism.

And people misunderstood it, but what I was trying to say was that on that day, the US made it clear that they would not be the world's policemen anymore. And I thought it was a very important event. And people downplayed that event. And the proof that it was so important was when the Germans came out a week later and they launched the biggest fiscal stimulus plan since 1990 for a trillion euros. And that was the biggest shift in German finance since the reunification.

That was a key milestone and that was the third slap in the face of end of American exceptionalism. Now, I'm going to tell you the story of how all these things tie up together now, just to visualize it. The third and last element was very important, again, as an accelerant for various reasons. One is that to get the Germans to spend money, I'm sure you have German friends,

That's a very difficult thing to get Germans to spend money. Like they've literally been, even at COVID, they weren't spending anything. They spent like 2% of their fiscal deficit. It was like 2-3% and the US was like 15%. So number one, you got the Germans to spend something. Number two, to get the Germans to rearm and actually invest in weapons. Dude, it takes a lot for them to do that. And third, to unify them on that and the Europeans to wake them up. That was a big wake up call for Europe.

Now, tying it up together to the markets, which is what I care about, I created an imaginary person that I call Klaus. And I think it's good to visualize Klaus. So whereas we traders and the hedge funds in the US, you know, they trade around and monkey around like daily movements and monthly performance numbers. Klaus is actually the representation of the European pension fund industry. And just to give you an idea of the quantum,

The Europeans own 17% of the US stock market and the equity flows into the US since COVID was about 10 trillion euros. And the majority of that was actually from Europe. So Klaus is a European pension fund manager. Say he runs 100 billion in a pension fund. And what Klaus has been doing since COVID was hiding in US assets. Klaus was buying the MAC-7, he was buying treasuries, and he was buying more importantly, the US dollar.

Klaus was hiding in these assets because they were working out for the last five years. Suddenly, Klaus watches on TV J.D. Vance belittling Zelensky. And Klaus is like, oh, shit, we're not allies with the U.S. anymore when it comes to defense. And, oh, man, I mean, you know, the U.S. is not a safe place to do business anymore, maybe for us. So Klaus panics that day.

And he sits down and he says, well, you know, they call the investment committee meeting that's going to take place in June, you know, very European style, three months later. And, you know, just decide on their allocation. And they look at their portfolio and they're like, oh, my God, 70% of my assets are US dollar denominated. And it's mostly in the US. And then suddenly Klaus sees the euro rallying. And he's like, oh, my God, I'm not hedged against the euro.

So Klaus is down as he sees the market going down in the US for the last two months. His euro is also going up, but he's unhedged. So if the Nasdaq is down 20 and the euro is up 10, Klaus is down 30%. And Klaus is like, get me out of here. I need to go back home. I need to bring my money back home and I need to invest it in euros.

And, you know, the other reason why he's doing it, I mean, that's a smaller reason, but, you know, capital goes where it's treated best. So he's got his money in the U.S. and suddenly he's seeing Doge wanting to cut deficits. He's seeing cuts in the U.S. market. He doesn't know what the tariffs are going to be. He doesn't know what the U.S. policy is when it comes to the Europeans.

And suddenly he looks at Europe and he's seeing that Germany is actually going to go fiscal. So they're going to spend a trillion at home. And Klaus is like, oh, my God, I'm underinvested in my home country and I'm overinvested in the other country in the US. So he's trying to do come back home. And that whole repatriation of capital actually accelerates growth.

what we're referring to now as the end of American exceptionalism, which I actually mean by that is a rebalancing of capital.

out of the US into Europe. Because, you know, and after I wrote the piece, I had a lot of conversations with actual Clauses that emailed me and they said, yeah, actually, we have about 70% of our assets and they're unhedged. And we have a big problem. We actually need to repatriate out of the US. So this is a big flow of capital and repatriation. And Liberation Day, by the way, was the last slap on the face of American exceptionalism. Because on Liberation Day, you inserted that uncertainty into

on global trade as well. And that was it because you've already inserted uncertainty on geopolitics with the Zelensky meeting. You've already inserted uncertainty from DeepSick on the Nasdaq.

You've already inserted uncertainty on the capital flows. And then now you have the US assets. And now you've inserted uncertainty on global trade. And this is where we are. And to be honest, we're at a stage right now when, that's why I told you at the beginning of our conversation, timestamp this meeting, this call, because we don't know what's going to happen in the next few hours, right? We're at that stage. And this uncertainty is actually the worst part of all of it.

So, I want to go to Paolo. Before I do, just a quick question. Do you feel like those pension fund managers are sophisticated enough to say, "Oh, US is going to cut back on deficits. Europe's going to blow out deficits, and so that's going to be good for European equities relative to US equities?" Or how much of this is a concern also about impending capital controls in the US and desire to get ahead of that?

I think it's a combination of both, but more importantly, it's the latter. And I think that's the scary part because let's put it this way. In a crisis, the dollar usually goes up and bonds go up. Why? Because in a crisis, every investor, you know, I've been there in 08, you know, 2008, all that stuff, 2022, the dollar gets bit because in a crisis, you want to hide in the dollar. You want to hide in the bonds. Right now, Klaus sees the crisis as,

And he's like, I'm not sure I want to park my money in U.S. treasuries now. I am not sure I want to park my money in dollars. Actually, I want to get my money out of the U.S. dollar. I want to get my money out of treasuries because I actually don't trust the system because capital goes where it's treated best. And, you know, the problem is and this is a problem of communication as well.

The administration doesn't do itself much favor with certain communications. So, for example, you know, there was a thought piece by Steve Miran, who's a great guy, economist. I think he's the head of the economic policy now. You know, fantastic guy, very smart. But he was presenting, you know, five ways to help rebalance, to help share the burden of US economy.

of the US having the dollar as a reserve currency because the US having the dollar as a reserve currency does have a burden as well to it. So he's like, well, we need to find a way to share the burden. And he says, he mentioned a few ways, for example, you know, you have to build your factories in the US, fine. Tariffs, fine. And then he says, well, one way could be to write for foreigners to write checks to the treasury. I'm like, well, actually, hold on, hold on, hold on.

I don't know anyone who wants to write a check to the treasury. That's not a charity. So just to put it out there is not helpful because what you need is the US treasury has to be a safe haven. And when you float ideas like that, you immediately scare people because me as a personal investor, I can just get my money out in like, you know, a few minutes. But imagine you're Klaus that runs 100 billion and you see that and

You're thinking, you know what? I'm not going to risk it. You know, I can't really move my portfolio. It's going to take, I mean, it's going to take him like two years to rebalance. So he's not going to take that risk. So I think we are for the first time, since I remember, we're talking about haircuts in treasury bonds, in treasuries, which is actually stupid. I don't think it's going to happen, but we shouldn't even be talking about it. Because, you know, the old fashioned way of actually haircutting treasuries, by the way,

for the last 50 years is that you just let inflation do it. So the value of the dollar 50 years ago is... The value of the dollar today is a fraction of what it was 50 years ago, because this is the old fashioned way of capitalism. We just let inflation do it. So don't talk about haircuts. Don't talk about these checks to treasuries. This is like the narrative is wrong. Yeah. It's like telling people that you might not have all the money in your bank to cover their deposits.

Well, that's the way of ensuring that you're not going to have it if you tell them that. Absolutely. And you know what? As a Cypriot, I really put this point forward because my American friends don't really appreciate it. But as a Cypriot, I've actually lived through it. We didn't believe it when the Europeans... So people might not know this, but in 2015, Cyprus was financially locked down as a country by the ECB, and they wanted to recapitalize the bank. So they imposed capital controls on the whole country.

And they haircut the deposits of a whole country above 100,000 euros. So people thought it was a fantasy. No one believed it. Not even the president believed it until the last moment. But the Europeans did it. It was a crime, by the way, but they did it.

And, you know, you know, the guy who came up with the plan, you know who he was? It was like an idiot who was a forestry minister of his country, like a complete maximum 10 brain cells. But he did it because, you know, he was the guy who was put in charge. So my point is, you know, you can't trust politicians when they say things like that or when they float things like that, because once you put it in people's heads, they might say, oh, that's a great idea.

So, this is a very dangerous thing. People, like once you talk about something like that, you immediately just, you know, the cat's out of the bag. You just, you know, you have to put the cat back in the bag. So, I have some thoughts, but I'm not going to share them now. I'm going to hold them for later. Paulo, you were there sitting very patiently. I started this episode by just mentioning this, you know,

Having an intellectual framework, but actually living through it. Feel free if you want to address that or not, or just to sort of piggyback off of what Shrub was saying. Sure. So I always love listening to Shrub because he has a great way of kind of simplifying what seems like pretty scary, complex, bigger picture.

into really kind of simple... He's the king of memes for starters, and you kind of have to keep a sense of humor in everything that's going on. And so he does this all quite well. Rather than address your question out of the gate, because in truth, my parents are from Brazil, but I'm born and raised in the US as sort of a first generation. So my experience with

EMification or trustification, as some people are starting to call it after Liz Truss and the, oh my God, revolt moment around UK bonds in late 23, has really just been more as a visitor and as a kind of an observer who sort of has a foot in both worlds.

But I would say, and I'm happy to provide anecdotes, but at the end of the day, like the first thing I would say is, you know, the sun still rises, you know, people do adapt. It's questionable the extent of the sort of damage that the population is in for because they're going to have to learn some lessons pretty fast about what it's like to live in

under a level of economic and fiscal and monetary uncertainty that they're not familiar with, but certainly that their parents, assuming they're immigrants, might be familiar with. But people learn pretty quickly and incentives matter and people are usually pretty good about adapting and following their incentives.

I would say, actually, just listening to everything that Shrub laid out, I have nothing to argue against. He and I, our views kind of dovetail and converge very nicely, and he laid it out well. But I couldn't help but thinking, as you focused on the element of uncertainty and hearing the

shrub respond with the classic statement that capital goes to where it's best treated. And when you step back and you look at what's going on in asset classes all over the world across regions, sometimes you worry when you look at that because you wonder like, where is there to go, right? If the U.S.,

treasury system and the dollar and that collateral, which always used to appreciate in times of a crisis is not available to you. I mean, all roads eventually lead to gold, right? And I hate for this to end up being kind of a gold bug discussion, but I couldn't help but smile and think that

Back to a book that I read a while ago, and I don't remember if I mentioned it in our conversation last year, but it's so apropos now, if you think about tariffs being the big topic on people's minds, it was Herbert Hoover's memoirs about the Great Depression. The president who, under whom we saw the Smoot-Hawley tariffs enacted in 1930, and

And the, you know, the joke is that, you know, we in the West will tend to jack tariffs every hundred years because that's how long it takes for everybody who went through this stuff the last time to die off. And, and then we have to go and relearn these lessons, but there's, there's a chapter, I believe it's chapter seven.

And it's called The Second Phase of the Great Depression, April to August 1931. So you've had the initial crash on Wall Street in the fall of '29. You had the bounce in '30. You had Smoot-Hawley in '30. And then you had the famous failing of the Credit-Einstalt in Austria, where the crisis went global in, I believe, early '31 or mid '31.

So chapter seven on its own, and you can find this for free. If you just Google Herbert Hoover, Great Depression memoirs, the PDF is available from his library. And I would encourage everybody to read this chapter. It's 10 pages. It's fast. And it's written very clearly and simply. But my favorite part is tucked in about halfway through where it says, and I'll just read it. It's a quick paragraph.

"Gold coming into the United States was absorbed at once into our currency and credit structure. When it was withdrawn, it tended to cause a shrinkage in the volume of credit or even endanger our currency coverage.

We were especially pregnant to such movement because of the large foreign deposits in our banks. Deposits not only those of foreign individuals and banks, but also foreign governments. During the years prior to '31, our banks had accumulated a good deal of gold from many smaller nations who sent the reserves behind their currencies with confidence that dollars were as good as gold. But by this device, they earned interest on their currency reserves.

We were later to see our own citizens yielding to spasms of fright and exporting their capital, which moved gold from under our currency and credit structure. To stop gold exports would be in effect a refusal to pay our debts in gold and thus would amount to a repudiation of the standard.

During this new stage of the depression, the refugee gold and the foreign government reserve deposits were constantly driven by fear hither and yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. In fact, there was a mass of gold in short-term credit which behaved like a loose cannon on the deck of the world in a tempest-tossed era."

And I love that because the imagery of this huge wad of capital and global savings pool, not knowing where to go and being tossed hither and yon on the deck of the world, like a loose cannon in a Tempest-tossed era, tells you that the volatility regime today is different, but it's not anything that we haven't gone through before.

And those who study history and can really kind of reach back to an era where these things are more familiar, where you get firsthand accounts of what it was like to live through, what came next, history rhymes, how people adapted under these systems, for me is fascinating because to be a successful operator in the markets, even on a short-term basis as a trader, you have to have a knowledge of history in order to recognize patterns, analogs, what have you. For me,

not having the US dollar or the Treasury bill collateral standard as money good and the shaking of global confidence, whether it's management's not being able to plan properly because now they have to wait a few months to see what Besson and Japan will do and who comes after, whether the tariffs will just change again tomorrow based on what side of the bed Trump wakes up on, what consumers will do in anticipation of potential scarcity or inflation or both on the shelf.

All of this feeds directly into what Shrub was saying about how capital goes to where it's treated best. And the other side of that coin is confidence or the decline therein. And the world we live in today of one where

confidence is declining rapidly in public assets. And by public, I mean public with a capital P, U.S. Treasuries and the currency in which they are based. But also the bonds of other Western nations. As Shrub rightfully mentioned, we saw the largest single day move in German boons since the history of reunification a few weeks ago because they had to change their approach to spending and fiscal completely overnight.

means that it's going to continue to be rock and roll. We are in the era of making macro great again, as I told a friend of ours right when Trump got reelected, or rather elected the second time.

And yeah, for me, it just comes back to trying to predict what skittish capital will do next and the size of it. The amount of money that Klaus, for example, needs to move under Shrub's framework, these numbers are so enormous. I call it elephants through a keyhole. It creates massive opportunities for those who are fast and smaller and have flexibility.

But it also creates a lot of problems. It also means that trends will go on far longer than people ever think possible from here because it will take Klaus forever. It wasn't just five years since COVID. Klaus has been sending money to ride the dollar against the Euro and to ride the exceptionalism of US assets since 2009. I don't know how you change a boat that's been sailing in one direction for almost 16 years overnight.

So, it's going to take a long time and we're going to be talking about these trends for many years. When I was younger, I don't know if you guys had this happen to you as well, but as I've gotten older, I learned something. I guess it happened gradually, which is that things don't happen overnight. When I was younger, I used to feel like things would happen right away. If I saw something or if I thought that a certain dynamic was going to change, it was going to change that day basically.

But now you understand that it takes a long time for these types of shifts to occur. And this is a good example because there are frameworks and systems to allocate capital and there's not one guy that's ... It's a great name, Klaus, but it isn't just one guy.

And so it takes a long time for these investors and these managers to change the way they allocate, especially when we're talking about institutional frameworks here and institutional assets. And so I think that's something important that I wanted to highlight. And the other thing I wanted to ask here to both of you guys, but we'll start with you, Paolo, since you were just talking, how would you articulate what the fundamental problem or crisis is right now?

that investors are really responding to? If we had to sort of try and be as specific and singular as possible, what is it that is causing this change in the dynamic? My answer there is very simple. And I think this is sort of like the ring to rule them all around what we've discussed. And that is for the last 50 odd years,

We have gone from living in a world where governments borrowed money from creditors with the expressed intention of paying that money back and retiring the debt to living in a world where there is no expressed interest to repaying debt ever. A world prior to coming off the gold standard under Nixon in 1971 was an experiment, but also an admission that

that governments would not be retiring their debts in full. And prior to that time, governments always retired debt. It's an amazing thing to think about where you don't just roll it in perpetuity and grow the debt stack, but rather actually pay the money back upon maturity.

And this is a fundamental departure that has affected everything. And in my view, there's a straight line from that point in the decision to retiring debts upon maturity or rolling them in perpetuity and using that debt stack to fund and pull forward consumption in our case, but also growth, has led to everything else that we're talking about. But as you're describing, that's a 50-year dynamic. What I'm asking is right now,

What is the crisis that investors are responding to, if you had to articulate what that is? I think it's a realization that the debts will never be able to be paid back and that the game of the last 55-ish years, we have created common knowledge around the fact that there is no getting this back in the horse. Is that necessarily a problem though?

In other words, is the problem that the debts aren't going to be repaid? Because we've been okay with knowing that they're not going to be repaid, that we're going to have to go through transitory bouts of inflation to burn off that debt. Is that really the issue? Can I tell you what I think my problem is here? Yeah. My problem with this whole thing is that people sometimes shouldn't know how the sausage is made.

in the factory. Like, you don't want to go into the sausage factory to see how the sausage is made. You know how you tell kids... Because you're going to lose your appetite. Dude, you sometimes just don't want to do it. So to me, that's actually a big problem that we're facing now in the short term. And I'll tell you why. Because this is how you piss off people and start wars. So for example, the Zelensky-Trump-J.D. Vance meeting...

You know, when I saw it, a friend of mine said, but dude, these things happen all the time. They just happen behind the scenes. And this time they just televised it. I said, but dude, you don't want the average person to have a look into the sausage factory to how the sausage is made. No, you keep this behind the curtain. Yeah, dude, you keep it behind the curtain. So this is a big problem because this is how you start wars, right?

This is how... And I understand that the whole world is like a reality show right now, but this is what scares me right now. And this is the scary part in the short term, because I actually don't worry about the debt short term. I think they can just muddle along. They can do weird things and just devalue the dollar as they've been doing for the last 50 years. They can keep plodding along with just doing like a milder tariffs, like I think it was intended or like Trump 1.0, but...

You know, doing things out in the open, that's where you introduce a risk. So, for example, you know, this whole China-U.S. confrontation, Xi is a president, leader of a 1.4 billion people country. You know, why are you exposing him to look weak? Do you think he's going to want to look weak to his people? I don't think he's going to want to look weak to his people. So, you know, putting all these things in the open creates a tension between

and something that could become like a negative feedback loop and just blow up the whole system. Because I actually think that the system could just prod along for another decade, no problem. Stig Brodersen: I agree with that. But there's also, you can say the same thing about finance, right? The classic line from, was it Trichet? No, it was Juncker, I think. When it gets serious, you have to lie, right? At the peak of the European crisis.

Is the financial system equivalent of take it behind the curtain, you know, don't slap the guy in front of all the cameras.

And I think we're, you know, people to come back to your question, Dimitri, people are seeing how the sausage is made around the stuff that we're talking about in finance as well, because they're seeing the tariffs on, tariffs off, wax on, wax off, you know, go after this country that day, go after this trade deficit the next day. And it also shakes people's confidence via the element of uncertainty that Shrub mentioned, because

People start to worry that there actually isn't a plan, that they're making it up on the fly as they go along. And I know that there are a lot of arguments on Twitter and social media about, no, he's playing 7D chess and it's the art of the deal. It's like, you're missing the point even arguing whether or not this is the art of the deal or not. The fact that you are arguing over whether or not there is a plan is the problem because it means that there's a problem with confidence.

Normally, you wouldn't have to defend this. We would just assume that these guys know what they're doing.

That's the thing. I mean, on Friday, for example, we didn't know what the rates were. Trump said one thing, then Lutnik came to say something else, Trump came out again. So yeah, I think, yeah, Paolo nails it. So I want to actually propose something here, which is that while the things that you guys brought up are relevant to the problem, I don't think that they strike at the heart of what's going on here. So I want to propose to you guys what I think people are really responding to, whether they're aware of it or not, and then you guys can tell me what you think of it. So I think that ultimately what investors are responding to

is not just a crisis of leadership in the international system. It is a crisis of leadership, but it's a crisis of leadership born out of an accelerated recognition that the United States, and I don't mean Trump, the president was elected twice. He was elected in 2016 and he was reelected in 2024.

So, we have to understand that this is also very important. The first time Trump came into office, there was a sense in Europe that this is transitory, just like the inflation during COVID. It's transitory. They now know it's not, and they know that Trump represents a larger popular will in the United States. And what Trump is proposing, it seems, is the smashing of the international trading and capital system.

And something that investors know better than the public is that current account deficits lead to capital account surpluses. And if you want to change that, if you want to run a current account surplus or you want to get your current account up, you're going to have to get your capital account down. And that has dramatic ramifications, not just for the value of your portfolios,

but it also has ramifications for the role of the dollar internationally. Certainly the role of treasuries as a reserve asset. I mean, we can separate those two things out. But what were you saying, Paolo? And also the broader economy, because if you're not

funded via a capital surplus of others, it means you have to save more yourself and live more within your means. Not just that, but the global... I mean, so this would be a serious drag on global growth if surplus economies cannot readily find new markets for their excess production. That's right. Less consumption by the US and more saving here is going to create a lot of pain suddenly you see. Yeah, I don't know. I mean, I'm the optimist for the rest of the world still.

Because I actually think that capital of Klaus, it's a big pool of capital. It is. So that pool of capital will come home and get invested. And I'll just give you a little bit of an anecdote here. But when I lived in London in early 2000s, Milan was a financial center. Paris was a financial center. Madrid was a financial center. And these were on par with, not on par with London, but close enough. And then suddenly these centers got hollowed out

buy London and London just sucked in all that liquidity and London became the place to be and the other places actually just really withered during the Eurozone crisis and they became hollowed out. Well, guess what happened after Brexit? They started getting revived. Milan now is back to thriving. Athens is a financial, well, mini financial center. Milan is doing very well. Madrid is doing very well.

Paris is doing okay, in spite of all the fear mongering and on Twitter. But, you know, my point is that that capital that left London after Brexit, it actually went back to like Frankfurt, Milan, all these places. So they're doing okay. They're doing better than London. I mean, I actually get depressed when I go to London nowadays. So I think just to be a bit optimistic here, because my view is that what we're living now is the end of American exceptionalism as expressed in terms of capital and

getting reallocated throughout the world to where it once came from, I think that we shouldn't be too depressed about the rest of the world because that capital would get invested in the home countries of Clauses unless

If something goes wrong with a 1930 Redux or a Pearl Harbor Redux, which God forbid, that's why I don't like these public negotiations and I would prefer that they keep making the sausages in the factories without having webcams in the factory, right? Yeah. I agree. No, so I don't disagree with that. So maybe I should have stated it a little differently.

Maybe for global wealth creation. Can I just add one point there? Yeah, go ahead. Very important. The one thing I've been warning about throughout this process is that if you want to think about your capital preservation and your wealth as an individual, you have to be really scared during this reallocation of capital. You have to be thinking about two words that are scary, and this is wealth destruction.

And I've experienced it as well in the last few months, you know, where I was very careful. I think I did very well, reallocated my assets in euros and all that stuff and yen. But even my US dollar portfolio, for example, you know, it's lost 10% in euro terms and I'm euro based. So what I'm trying to get to is Klaus, he was long NASDAQ down 20. Well, the NASDAQ might bounce, but the euro is also up 10%.

and the dollar is down 10 so he's lost 10 on his currency this year so far but let me get to it though if they really want to do a rejig the global stage there's going to be an accord somewhere like a plaza accord and all these things what happens after any time you hear the word accord you should be scared about the dollar because that's what the accords do so the plaza accord

caused a 50% decline in the dollar. So what I want people to just remember from this conversation is that this can lead to wealth destruction. This is the real scary part. Yes, exactly. Not the Nasdaq going up or down. It's actually you come in one day and you're like, oh, crap.

"My dollars are worth 50% less." Even if the NASDAQ is up 10, you just lost 40% of your wealth. This is the scary part that's going on here. Totally. And the risk of that has grown substantially in the recent months. And I think that is what investors are responding to because, going back to my point, the person in Washington, Washington is the center of the empire of the current global international capital and trading system that we've been living under that's created all this wealth.

seems to be intent on smashing that system. That's not a value statement, it's just an observable fact. It's in fact what he was elected to do. And the story that, well, Trump says one thing, but he's going to react differently when the markets move against him, that's a lie that we've been disabused of.

And so now the question is, what does that mean? And what I want to talk about in the second hour, guys, is exactly that. I want to answer that question. What does that mean? And also, what is the policy? Because we're in this phase of uncertainty now, where markets are really unclear. And that uncertainty itself has long-term ramifications irrespective of what policy path Trump chooses. So I want to talk about what effect that uncertainty has had already that will persist.

What policy choices Trump's going to follow? What can we sort of hypothecate about that? What effect will those have? And I absolutely want to talk about the dollar because I think there's been so much dollar FUD for so many years. And one of the things that I've talked about on this podcast,

is that if the dollar was ever going to lose its role as the global reserve currency, it was going to happen not because the rest of the world rejected the dollar, but because the United States decided to pull out of that system. I think that's what we're actually seeing today. Those are the things that I want to talk about in the second hour.

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