Episode #419: Peter Zeihan – Deglobalization, Depopulation, & What It Means Going Forward
Guest: Peter Zeihan is an expert in geopolitics: the study of how place impacts financial, economic, cultural, political and military developments. His newest book is The End of the World Is Just the Beginning: Mapping the Collapse of Globalization.
Date Recorded: 5/24/2022 | Run-Time: 1:00:50
Summary: In today’s episode, Peter talks about the two main themes he sees in the world today: deglobalization and depopulation. He touches on what countries set up to thrive or suffer based on these trends. Peter shares why he’s extremely bearish on China and the implications of this on a possible invasion of Taiwan.
Then we get into the war between Russia and Ukraine and related issues within the energy markets, supply chains and food shortages, all of which he thinks aren’t going away any time soon.
As we wind down, we quickly touch on things like inflation, the shale revolution, nuclear energy, and why he thinks the head of the Russian Central Bank may be the smartest person in the world today.
Comments or suggestions? Interested in sponsoring an episode? Email us [email protected]
Links from the Episode:
- 1:11 – Intro
- 2:15 – Welcome to our guest, Peter Zeihan
- 2:55 – Crazy guy running down the steps at Red Rocks Amphitheatre
- 3:27 – The End of the World is Just the Beginning
- 6:04 – How much de-globalization is influenced by the war in Ukraine
- 8:05 – Episode #313: Rob Arnott, Research Affiliates
- 15:27 – Why can’t governments incentivize a higher the birth rate?
- 18:09 – The countries that have the best and worst demographics
- 19:58 – Why Peter is very bearish on China
- 30:32 – Will companies start to optimize purely for survival?
- 34:07 – Will famine be avoidable amidst supply chain disruption?
- 38:21 – Peter’s expectations for the Russia/Ukraine war
- 44:35 – What non-consensus belief does he hold that no one is talking about?
- 46:31 – Something he’s changed his mind on from his first book
- 48:00 – Whether or not we can expect a reversal in nuclear energy perspectives
- 56:15 – Where to go to learn more about geopolitics
- 57:47 – Learn more about Peter; zeihan.com; Twitter
Transcript of Episode 419:
Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Sponsor Message: Today’s podcast is sponsored by The Idea Farm. Do you want access to some of the same investment research as the pros? The Idea Farm gives you the same marketing research usually reserved for only the world’s largest institutions, funds, and money managers. These are reports from some of the most respected research shops in investing, many of them cost thousands of dollars and are only available to institutions or investment professionals. But now, they’re yours for free. Are you ready for a new investing edge? Visit theideafarm.com to register for free.
Meb: Welcome, my friends. We have a phenomenal show today. Our guest is Peter Zeihan, a geopolitical expert who may be the best person to talk about these secular changes happening in the world today. His newest book, “The End of the World is Just the Beginning: Mapping the Collapse of Globalization” will be released on June 14th. Pick up a copy, I promise it’s awesome. In today’s episode, Peter talks about the two main themes he sees in the world today, deglobalization and depopulation. He touches on what country’s set up to thrive or suffer based on these trends. Peter shares why he’s extremely bearish on China and the possibility of an invasion of Taiwan.
Then, we get into the war between Russia and Ukraine and related issues within the energy markets, supply chains, food shortages, famines, all of which he thinks aren’t going away anytime soon. As we wind down, we quickly touch on things like inflation, the Shale Revolution, nuclear energy, and why he thinks the head of the Russian Central Bank may be the smartest person in the world today. Please enjoy this episode with Peter Zeihan.
Meb: Peter, welcome to the show.
Peter: Great to be here.
Meb: So, let our listeners know where’s here.
Peter: I live in South Morrison, just above the Denver Metro.
Meb: Spent a lot of time at the Morrison Inn with my kid and relatives. But question, what’s been the best show that you’ve seen at Red Rocks yet? Because you better have seen one, because if you haven’t seen a show, Peter, you’re going to be in real deep trouble.
Peter: I haven’t been, no. I moved here, then COVID happened and they shut the whole place down. As soon as everyone decided in January that they were done, my travel schedule exploded. So, I have not actually been at home much.
Meb: Well, shame on you. But also, this is great because this is a world-class venue and you have this to look forward to. And there’s a crazy guy who’s really famous on social media, who runs down the steps. We’ll have to find a, we’ll add a link to the show notes listeners, if you’ve ever been to Red Rocks, you’ll know how crazy that is. All right, so before we get started, one last question that’s relevant to the Colorado people. It’s May, which means, in Colorado, sunny skies but also snowstorms. I want to hear the secret to the recipe for the snowball margarita. Is it simple as it sounds? It’s just tequila and snow? Is that about it? A little lime?
Peter: Well, the real trick is Ancho Reyes, but yes.
Meb: All right. Listeners, Peter, who, if you’re not familiar, you should be, he’s been one of the voices of reason and depth over the past couple years. “The End of the World is Just the Beginning,” as I was saying to my five-year-old son last night, he said, “Dad, what are you reading?” I said, “The End of the World is Just the Beginning,” and he had a long pause. And he said, “What does that mean?” So, I said, “I’m going to turn it around and ask the author tomorrow for you, and see if he can describe in his own words.” Let’s get started. What’s the meaning of this book you just put out? What is this? You’re like 5th? 4th? How many books you put out?
Peter: This is number four.
Meb: Congrats man, it’s awesome.
Peter: Thank you. I’m just glad it’s done.
Meb: Yeah. So, let’s hear it, give us the intro. What was the inspiration? And what’s the meaning behind this? As you say, you’re an optimist. That’ll sound a little different prior to this, but let’s get going.
Peter: There are two big threads that underline everything that I do, the first one is deglobalization. The United States changed the way the world worked at the end of World War II. Instead of an imperial trading network, that was everybody maintained their own system, we used our Navy to patrol the global oceans so that anyone could go anywhere at any time. And access any commodity or market, and trade with any partner. That had never happened before, but there was a catch. We did this if you allowed us to write your security policies in order to better fight the Soviets. It was a guns-for-butter trade. We are now 75 years on from that, Cold War ended 30 years ago and the Americans have lost interest. And so, we’ve been drifting into ever more strategic ambiguity ever since.
And then the second big piece is depopulation. Normally, you have more teens than 20 somethings and 30 somethings, and 40 somethings, and on. But when the world started to globalize, people didn’t have to be on the farm. They could move into town and take manufacturing or service jobs, and they did this on a global scale. And when you live on a farm, kids are free labor, but when you move into town, they are very, very expensive pieces of mobile furniture. Well, adults aren’t stupid, so they had fewer kids. Everyone had fewer kids.
And 75 years on, the baby bus has now been so long ago, and so entrenched that most of the world’s major economies are past the point of no return with their demographics. You put these two things together and the idea that you can have a global interconnected system that has a balance between young workers and consumers, and older workers, and their investments, that’s just gone. It’s not possible anymore. And so, we’re heading to a fundamentally new age that breaks everything that we understand of how trade and economics, and agriculture, and manufacturing, and transport, and the rest works.
Meb: It’s funny because I’ve been reading your material and listening to you for a while. It’s unfamiliar for me right now because I listen to podcasts at like 2X. So, talking to you in real time, it’s like talking to a different person, but I hear you as I read. And looking at the themes of this book, but also your last couple, it’s interesting watching kind of the news coming out of Davos and other places. Because two of the phrases you mentioned, this deglobalization and depopulation, you’re starting to hear a lot. Like this isn’t something that I feel like people have been talking about a ton over the past decade, but it seems to be entering the vernacular. Is that because of the events in Europe? Or is it just the world slowly kind of reading Peter’s work? Or what’s the sort of…why are people waking up to this just now?
Peter: Well, Davos is always a lagging indicator. By the time they get to the point that they’re chatting about it at Davos, it’s already past the point of no return. And we passed that point of no return probably around 2012, and in the case of some countries, even earlier. It’s just that, now, we’re feeling the effects of it, and part of that’s demographic. When you have a drop in your birth rate, it takes time to play through the system, because if your birth rate halves in one year, you don’t have the reduction in 30-year-olds for 30 years. So, most countries in the advanced world passed the point of no return in roughly the ’90s, and the Chinese in the early 2000s. And we are now to the point that we are noticing that we are running out of young workers.
When you run outta children, no one really pays attention because they’re not part of the economy in the normal sense. But when you start having labor shortages among people in their 20s and 30s, that changes the math. And in some of the advanced world, it’s now to the point that they’re literally running out of 40 somethings. So, Davos is noticing something finally that has been coming since the ’60s, but we are now at the point that we’re not just at a point of no return, that was decades ago. We’re now at the point where we’re feeling the real and very immediate effects of a consumption class that is just gone.
Meb: We had a guest on a couple years ago I love, Rob Arnott, one of my favorite thinkers in the investment space, but he had a piece called “Demographics is Destiny.” And talking about this concept, granted, he’s talking specifically about it in the investing world, but thinking about history of these two concepts, in my head, they seem to be concepts that may move at sort of glacial speed. But often, the events of the world, in particular, economics and geopolitical events, seemingly happen at a much quicker speed than just demography. Like how do those line up? And like, how do you think about how much of that is destiny and how much of it is the interplay of those two forces? Is there one that trumps the other one? “Trumping” the wrong word, but is there any one that outweighs the other one, perhaps?
Peter: It depends upon where you are. Every country has their own demographic structure. Every country started the industrialization and urbanization process at a different time and moved at a different pace. Part of that is because when the Industrial Revolution first happened, it was just in one country, Britain. And then, eventually, it came to the United States and, eventually, it went to other places. The countries that started it later were able to follow the path laid down from those who came before. So, with the Brits, it started with sewing spindles. We then moved into steam powered, moved into railways, and it took seven generations for them to complete the entire process because they were the first ones doing it. The United States was a little faster, it took us only about five. The Chinese have done it in one. The more you compress the timeframe, the greater the growth you get, because it’s not just economic activity from the consumption of goods, it’s building up the physical infrastructure that you need to support the new technologies.
That’s roads, that’s skyscrapers, that’s rail lines, that’s steam ships, that’s, you know, diesel ships. When the Chinese did that in one generation, they got seven generations of economic activity squished into one. So, of course, they experienced breakneck, record-breaking growth, but it also means they condensed seven generations of economic activity into one demographic generation. And they went from living in pre-industrial subsistence farms to high-rise condos in less than 40 years. So, their birth rate went from five or to seven children per woman, to less than one in a single generation. So, we’re watching China now going from pre-industrial to post-industrial collapse in a single human lifetime. As for the geopolitical issue, it really depends upon where you are. If you are bordering a country that is central to your economic activity and they collapse, or that they’re very aggressive and they branch out, you’re going to face some very serious issues.
So, anyone who’s dependent on Chinese trade on one side or who’s in the Russian borderlands on the other, has a very tough fight on their hands just to maintain their systems in their current forms. But if you’re on a continent that faces no real security threats, and that continent is self-sufficient or even an exporter of food and energy, say, South America, deglobalization isn’t going to be nearly as rough. In fact, as competing producers of food stuffs and energy fall offline, you might actually experience a boom. So, the story’s different everywhere for different reasons.
Meb: Yeah. And I think about, as you talk about this… And listeners, I don’t want to spoil the book because it’s really great. So much, as we think about the world, whether it’s regions, countries, but even within the United States, so much of it I reflect back on my history, as well as the heritage of my family. Going back, we have some old articles from like the 1800s and it was a very classic American story, European immigrants, farmers settling in Nebraska. But reading some of the history where they had seven kids, three make it to like adulthood and the challenges of just life back then. But also, the evolution to no one working on the farm anymore, the young kids certainly don’t want to. The towns that used to be populated and thriving are now kind of ghost towns. Anyway, your book felt very personal on many levels, but talk to me a little bit about…I feel like a lot of what you write is non-consensus.
Peter: That’s fair.
Meb: Okay, good. It feels non-consensus to the way the world thinks, a lot of it we tend to agree with. But the concept of things being perfect, I feel like it’s some grandpa sitting back being like, “Back in my day, in the last 75 years, you don’t know how good you had it.” You have this take where you’re like the last while, there was this perfect moment in time and it’s not going to be that way in the future. So, let Peter, the optimist, put his hat on and tell us like what’s the main driving force of why things may not look as good as they have over the past handful of decades and generation or two.
Peter: Roughly, from 1980 to 2015, we were in the perfect moment. The Cold War was winding down and then it was over, so the security situation of the world was great. The United States was still patrolling the oceans, we didn’t have to worry about any commercial shipping getting attacked, except for a few pirates off of Malacca or East Africa, and that was a minor issue. At the same time, because different countries started their demographic decline at different points, we had a balance between countries that had a lot of folks in their 40s and 50s who were very industrious and productive, and a lot of countries that were in their 20s and 30s that had the lower cost labor, but were consuming all kinds of stuff. So, we had a good balance between investment and consumption, and production, and trade in a manner that had never existed in human history before.
Our mistake wasn’t living in that moment. Our mistake was thinking that that moment was permanent, when it was very temporary because the foundations of that, demographically and geopolitically, are now gone. We’re now aging into a period where we won’t have the same levels of exchange, we cannot possibly have the same levels of consumption, and production is going to get broken up. So, the economies of scale of the global whole are going away. Now, there are parts of the world that are in a good geographic position to profit from this, these are the countries that did really well before the global order. I’m talking about France. I’m talking about Japan. I’m talking about Turkey. I’m talking about the United States. But if you’re a country that was dependent upon that peaceful interaction and that large volumes of investment or large volumes of consumption that were somewhere else, you now have to figure out a fundamentally new way to operate.
We don’t have an economic theory or model for how this might work because everything since 1500, in the start of deep-water navigation in the Columbus era has been based on the concept that the population is going to increase. And so, there’s going to be more interaction and more interconnectivity, and more consumption, just bigger and more, more, more, more. We’re now dealing with less. We don’t know how to play that game. Now, for the United States, we have a continent that is safe, where we had the best parts of it. We have the healthiest demography in the advanced world, and Mexico has the healthiest demography in the advanced developing world. This is great. We’re going to have, in the worst-case scenario, at least another 35 to 40 years before we are in a situation like Germany, or Korea, or China today. We’re going to be able to watch what happens to them and, hopefully, we’ll pick out a few lessons.
Meb: You talk about a number of things that are interplaying in the book, and we’ll get to those kind of in a second, particularly, with energy, with AG, and what’s going on, we’re starting to see the effects currently. But one last question before we move on to that is why can’t the governments of the world, say, you’re in some of these countries that are particularly challenged, just say, “You know what? Everybody’s going to get laid. Come on, we’re going to celebrate this. It’s time to start procreating. We’re going to have tax incentives. Let’s pump out some kids.” Is it something that you had to have done 20 years ago? It’s just too late? Is that the sort of situation?
Peter: There are a lot of countries that have tried that. The problem is once you’ve urbanized, the cost of raising kids is extreme, and the sort of benefits that you have to offer have to be huge. A couple of examples, the Russians had the worst demography in the world until the Chinese passed them by about 15 years ago. Now, they’re only the second worst. And they tried back in the 2000s when Putin really realized how bad the demographic picture was going to be. They offered cash prizes basically to every woman who would have a 2nd or a 3rd or 4th child. And so, what happened is the women would have those child, they’d get their check and they’d drop the kid off at the orphanage. And so, there are now about a million and a half to 2 million either street children or orphans in the Russian system. A one-time payment doesn’t do it.
The Swedes tried something significantly more robust, where they offered increasing durations of maternity leave based on the number of kids you have. So, by the time you get to your 3rd kid, it was like 18 months of maternity leave. Well, that meant that no Swedish employer would hire a woman who was under age 35, because there’s a chance that if she got pregnant three times, she would be out of the workforce for an excess of four years and you still had to pay her. So, we got the highest split in unemployment rates in the world. The scale of what you need to do is huge, and we have yet to find kind of the magic numbers, and I think it’s too late. Not just because of demographics and aging, and that the problem is too big, but we now have so many countries that are moving into mass retirement, that the financial system isn’t there anymore.
You have your maximum financial impact in the last decade before you retire. Incomes are high, your expenses are low, your house is paid for, the children are gone. It’s a good time to be an investor. Income stops, your tax payments stop and your investments that are stocks and bonds get liquidated as you move into safer things. That’s now happening in so many places that governments don’t have the income that’s necessary to attempt a large scale pro-natal system.
Meb: Real quick, who’s got the best-looking demographics? I mean, everyone talks about Africa, you said the U.S. looks okay. Who’s at the tail end of the spectrum? Really good, really bad, really problematic?
Peter: In terms of really good, for the first world, it’s probably a tie between New Zealand, France, and the United States. All countries that have a little bit more elbow room than most countries and a tradition of being in larger geographic footprints per family, so there’s still room to grow in those three. In the developing world, Argentina hands down wins that one. One of the perks of Peronism is that it subsidizes a lot of the basic expenses of life. And while this has put Argentina into all kinds of financial trouble, it does mean that their birth rate has been high sustainably for the last century.
On the flip side, back in the 1990s and early 2000s, the worst was Japan because they were the country that urbanized the fastest in the early 1900s, with the Germans just barely behind them. In the last 15 years, both the Russians and the Chinese have screamed past the Japanese and the Germans.
The Russians, we don’t have nearly as good of data anymore. They stopped collecting demographic data about 10 years ago and just started making things up. So, on paper, they have a lot of children that are probably not existing. China is by far in the worst position. We now know from Chinese data that the Chinese population probably peaked back in 2003 and that they over counted their population in excess of 100 million people. You combine that though with the one-child policy and China is facing down demographic collapse in this decade. And by that, I mean an incapacity to play their role in manufacturing or have a modern state. We’re in the final years of the Chinese state’s existence.
Meb: We could spend an entire podcast series on China alone. It’s fascinating, because they’re such a large player and have had such massive impacts in my world on so much of the global economy of the past couple decades. But let’s say we got China, big listeners of the “Meb Faber Show,” they say, “Oh, my God, we got to talk to this guy because we see what he’s saying. We want to pay him a $10 million consultant fee.” What does Peter say to China? If they were to listen to you, what do you say? Okay, I’m going to wave my wand and going back earlier to the discussion with Russia and some of the… I love the old Charlie Munger quote, like, “You show me the incentives, I’ll show you the outcome,” when it comes to like some of these policies and the one-time payment, etc. You get to talk to China, what do you tell ’em? You say, “You guys are going down a dark path.” Is this inevitable? If they were to listen, what would you say?
Peter: Well, there are not a lot of people left in China to listen. Chairman Xi has now instituted a cult of personality that is far tighter than anything we have anywhere else in the world, and it’s tighter than any cult of personality in Chinese history, including Mao. There is now a buffer between him and any information. He doesn’t even have advisors that give him constant updates anymore because he literally shot the messenger so many times that nobody wants to provide him with information. Not information that might upset him, information at all. I think the best example of that was just before the Olympics when Putin was in China. Xi met with him, it was the first world leader that Xi had met with in over two years, and Putin lied to his face about what was about to happen to Ukraine. And his staff didn’t dare challenge Putin’s words, and so, Xi was apparently completely flabbergasted when the war started.
And the Chinese now know that everything that they thought was true about the world is wrong. The Russians aren’t as tough as they were, their weapons don’t work as well. The west is willing to stand up for countries that get invaded, not just countries, companies, boycotts, that’s something they never even thought was possible. The idea that a shareholder or a consumer could pressure a company to change their global position. They now know that taking Taiwan would be harder, they know that Taiwan would have more support. If the sanctions that were put on the Russians were put on the Chinese, that would destroy the country because Russia, despite all its faults, is an energy and food exporter. China’s a massive importer of all of that stuff, so decivilize within a year. So, everything that Xi thought was true, everything that the Chinese had been preparing for the last 40 years, they’ve been doing it wrong.
And since Xi no longer has a group of smart people that he can put into a back room with some pizza and bourbon to come up with a plan B, all Xi can do is slam his head into the wall over, and over, and over until something cracks. And so, we’re seeing failure points across the entire Chinese system now. Even if Chairman XI was to duct tape himself to a lawn chair and jump in the pool, I don’t think this could be fixed, or at least not in the amount of time that China has left. Xi has been so successful with his purges, that he’s removed all potential leadership and intelligence capability within two generations of the Chinese system. And the next generation down, people aged 30 and under have been gutted by the one-child policy, so it’s a tiny group in relative terms. Some degree of disintegration of the Chinese state is now baked in and that’s before you consider the general breakdown of their economic model.
The Chinese system is based on over financing in order to shove capital into the coffers of every individual company so that they can employ people, even if there’s nothing for them to do. Give people jobs so they don’t rebel, but even that is dependent upon an export strategy that no longer works. China imports the vast majority of its energy, or the inputs for its food system, or the inputs for its manufacturing system, and then is dependent upon the sales of those manufacturers the world over. The only way China can play in that game is if the U.S. Navy encourages it, which we have been doing since 1980. All the United States has to do, if the goal is to crush the Chinese, is to go home. And even if the U.S. continues to play, the demographic situation combined with cult of personality is more than enough to drive this system into the ground.
Meb: You sound a little bit like…if anyone’s ever reads “Asimov’s Foundation,” Harry Seldon, they’re asking him, they’re like, “Is this inevitable? What can we do?” And he’s like, “Look, it’s inevitable. This is what psychohistory…prehistory…” I can’t remember what he called it. Anyway, he says, “However, there’s some measures we could take to lessen the blow.” So, is there anything…like, again, if China allowed you in and paid you…let’s up it to 20 million bucks, $10 million is not enough. Twenty million bucks, says, “What can we do to help soften this struggle we’re going to go through?” What would you tell ’em?
Peter: Unless you can figure out human cloning that spits out 20-year-olds who have already been educated, I really don’t see it. Beijing and Shanghai have the lowest birth rates of any urban center throughout all of human history already.
Meb: If anyone has been doing cloning, it’s got to be the Chinese. Like that can’t be that far off. All right, so I’ve heard you do podcasts with some big-tech optimists, would say the least. And one of these groups recently tweeted that AI is going to cause GDP growth in the U.S. to go from 3% to 4% growth, 3% to 5% growth to 30% to 50% growth per year. Not over like a decade, per year. Is there any scenario where, whether it’s tech, AI, magic, fusion, energy or something, anything that can make this situation, for them in particular, less inevitable?
Peter: Chinese? I don’t think so. Their problem is, simultaneously, investment in labor, and import and exports. And most of the problems they face are either past the point of no return or they’re dependent upon the actions of countries they can’t influence. So, that’s one of the reasons why we’re seeing such horrific lockdowns and such horrific internal purging, is they’re preparing for a world where the economy is no longer the basis of credibility for the CCP, nationalism is. And in nationalism, you don’t have to have a job, you don’t even have to eat, as long as you’re loyal to the party. Will it work? For a while, but, ultimately, when you see a breakdown on the scale that we’re facing here, this is a national collapse issue, not a recession issue.
Meb: Yeah. One of the things that kept popping in my head as I was thinking about your book was, I remember these old…like Milton Freidman talking about like the globalization and specialization of labor, and free markets. And like talking about the pencil, that was like his famous thing, all these various inputs that go into making the modern pencil. And then, thinking about it globally now, where parts of the pencil may come from 10 different remote locations all over the world, and that seems like a modern marvel, which seems unique to this very specific point in time we’ve had in the past number of decades.
And going forward, reading your book, it actually seems like a microcosm for being a very fragile supply chain situation for thousands of things all around the world that people need. And you’re kind of seeing some of that with the last year or two. Talk to us a little bit about the disruptions that are starting to occur, that potentially can occur on a lot of these inputs and some of the first deglobalization impacts we’re going to see in the coming years.
Peter: Well, with the Russians and the Ukraine war, we’re obviously seeing that with energy markets right now. We’re only down by about a million barrels per day with the Russians, but it’s probably going to increase to a 5-million-barrel-per-day deficit. And since most of the Russian crude is produced in permafrost, once you’ve shut down those wells, you really can’t reopen them. They get damaged when they freeze and thaw, so that’s gone forever.
Meb: And for the listeners, why would they be shutting those down? It’s just loss of competence and people helping to run ’em? Or what’s the…?
Peter: There’s a problem on the production side that most of Russian output in the last 15 years has been courtesy of the investment and the work done by the services firms like Baker Hughes, or Shell, or Brooge, or Halliburton. So, that’s definitely a problem, especially the further east you move in the country. On the Western side, the pipelines are either ending in countries that are weaning themselves off, or they’re emptying into a warzone where ships can’t load because they can’t get insurance. So, pressure is building up through the pipes all the way back to the wellhead. It’s gotten bad enough to the point that Russian refineries are starting to shut down because they can’t sell their product anywhere, because they can’t get it outta the country. So, whether it’s external demand or internal demand, both are failing at the same time, and that’s going to result in massive shut-ins. That’s just one sector.
The COVID lockdowns that are happening in China are happening because the Chinese vaccine really doesn’t work versus Omicron at all. So, you’ve got a population that has not been exposed to the virus, so there’s no natural immunity. And if the vaccine doesn’t work, you’re talking about massive death rates should they remain open, so that’s lockdowns. Shanghai shut down on April 1st, the soonest they’re talking about maybe reopening is June 1st. That’s two months that the world’s largest trans-shipment hub and largest manufacturing zone has been offline. And we’re now even seeing countries that have doubled, tripled, and quadrupled down on China, despite the writing on the wall that we’ve been seeing for moral reasons and genocide reasons, and trade reasons, and logistics reasons for the last five years, they are finally now starting to move.
Apple’s probably quintessential of that group, and that they get 90% of their components from the PRC. And they’re realizing that there won’t be another iPhone unless they can relocate and do so quickly, so we’re seeing that cascade throughout the manufacturing sector. The Chinese also have shut off phosphate exports because they’re having a food insecurity issue. At the same time, the Russians have shut off potash exports and nitrogen exports because of the war.
So, we also have a global fertilizer shortage that is now coming to the fore, that is going to generate far lower crop yields on a global basis this calendar year. So, we’re already seeing all of these threads that used to be woven together into this tapestry of globalization being pulled out, and each time you pull out one, it drags four or five more with it. And we’re seeing a broad-scale collapse about what makes globalization work, from the top and from the bottom at the same time, independent of the demographic question.
Meb: Is a part of the solution to that simply redundancy? If you’re operating a country or a company even, just saying, “Look, we’re going to do this, but we’re going to have five levels, or attempt to have five levels of partnerships or suppliers so that we’re not dependent on one,” as opposed to just like, “Hey, we’re going to find the lowest cost, maximize profit margins.” Are we going to start to see companies and countries really focus more simply on optimizing for survival and trying to build up the robustness of surviving versus maximizing profit? Like, what’s the, kind of, some of these major trends we’ll see take place?
Peter: There’s a couple paths forward. One of the things that dominated manufacturing supply chains in the globalization era was this concept of just in time. The shipments transport were cheap, they were safe and they were, above all, reliable. And so, you could maintain a small inventory of product that would only allow you to function for two weeks to four weeks. And you could place orders with your suppliers, knowing, relying upon their shipments of your components to arrive in a week or two, and you could just plan on that entire supply chain feeding through. You had very low inventory, as soon as you made a product, you shipped it out the door, everything worked in perfect harmony. That’s no longer possible. And there’s two ways that you can try to get around this. The first one is, like you said, the diversity of suppliers. The problem with that is it faces all the same restraint, in terms of capital and labor, in order to achieve the end goal.
So, you’re talking about prices for the components being doubled if you have twice the number of suppliers, tripled if you have three times the number of suppliers. You’d have to build all of that out in order to get the same economies of scale. The second option is just to do away with economies of scale altogether, and nearshore or onshore. And go with a different manufacturing system that, instead of being just in time, is based on just in case. And then you and all of your suppliers maintain independent inventories and have a supply chain system that is closer to the end consumer that ideally has fewer steps. Now, that first step, the diversity of suppliers, that is something that the Japanese and the Koreans are definitely pursuing, because it allows them to maintain, more or less, their same operational structures. The Europeans are not doing that because they don’t have anywhere else to go.
Take the German manufacturing system for automotive for example, it taps into existing labor pools in Poland, Slovakia, Czech Republic, Hungary in order to maintain access to different price points and labor skill sets to optimize. Well, there isn’t a second place in the vicinity of Europe that could fill that role, so they can’t do that at all. They also can’t really do the just-in-case system because they, for the most part, are not the end consumers of their product, it is exported somewhere else. So, that entire germanocentric manufacturing system is not designed for the world that we’re coming to, and they really don’t have an alternative. On the flip side, you’ve got the United States and Mexico where the consumption is primarily local and a lot of the production scales, if it’s not electronics, are already done on continent.
So, every time you bring back another incremental piece, you get more network effects in a place that has one third of global consumption. So, the U.S. can maintain a little bit of that just in time, but it can go to just in case a lot easier because the end product, and the energy, and the inputs, and the consumers are all, more or less, in the same place.
Meb: We talk a lot about investing but also entrepreneurship, and we’d say the biggest compliment you can give an investor or company is not what’s the maximum compounding or growth, but rather that you survived. Because so many of these cycles, if you’re an old enough investor with enough scars, you know the graveyard is large, and ditto for startups. But sadly, this applies to regimes, and countries, and everything else, too. The scariest part to me in the book, certainly from someone who has a farm background, was thinking of famine. And going back, not too long ago, AG prices…I’m trying to remember the date, 2012 perhaps, somewhere, but within a decade or so, started to have some real geopolitical earthquakes and reverberations, the Arab Spring. We’re back at those levels currently and geopolitical revolutions, that’s one thing, but actual mass deaths and famine is another.
How avoidable is that? Like is that a situation that’s simply, hey, look, the world’s not food insecure, we could actually feed everyone, it’s just a question of desire and cost? Or is it a situation that, oh, no, like the situation and disruption’s going on might actually create inability to feed the population currently? Like how do you look out to the horizon and kind of what’s going on and thoughts there?
Peter: It’s an ugly discussion. Let’s start with the short term before going to the long term. The Chinese stopped phosphate exports late last year, and they were the world’s largest exporter. The Russians largely stopped potash exports in the first month of the war, because most of their export points go through the Black Sea, which is a war zone. And ships are having trouble getting insurance indemnification, so the ships just won’t go there. Or if they do go there, they have to get a sovereign indemnification from another country. The third type of fertilizer is nitrogen-based, the Russians were the biggest exporter of the components for that. And the Europeans have stopped producing nitrogen fertilizer because natural gas prices in Europe are now seven times what they are in the United States, and it’s not economically viable.
So, even if all of this magically went away today, we already have had too many months of interruptions to the supply system, and it’s already too late for the planting and harvest years of 2022. So, we know already, from what has been planted or not, and what has been fertilized or not, that we are going to have a global food shortage that’s going to begin in the 4th quarter of this year. We only, for example, have two months, roughly, of global wheat storage, half of that is in China and the Chinese storage system sucks. And it’s probably all rotted, just like it has been every time they’ve tried to build a grain reserve before. So, we’re going to chew through our backup very quickly when it becomes apparent that the harvest season this year just isn’t going to be that great. Replacing or augmenting fertilizer production is not something you do in a season.
Phosphate and nitrogen infrastructure for the processing and creation takes a minimum of two years, three years is probably more realistic. And for a potash mine to be brought online, you’re talking a decade. It’s just not something that we’re capable of fixing anytime soon, and this is just disruption from one part of the world. One of the really dark things about agriculture is that the supply-chain system is so integrated with everything else that if you have a failure at any point in the process, you immediately get an agricultural crisis. If you have a financial shortage, farmers aren’t able to finance their seed and their inputs. If you have a manufacturing crisis, they lose access to equipment. If you have an energy crisis, they can’t fuel the equipment, they can’t make things like pesticides. If you have an industrial-commodities shortage, fertilizer is removed from the equation.
It doesn’t matter where it happens, it doesn’t matter what the scale is. You pull that thread out and it pulls a lot else out with it, and that means some farmers in some parts of the world simply can’t produce what we expect. We have exceeded the carrying capacity of the world if it demobilizes. There is no way, in the best-case scenario, that we get out of this without losing a billion people.
Meb: All right, well, there’s the dark part from the optimist, I like to say, Peter. But this is a topic that there’s a few people on Twitter in my world that have kind of been banging the drum about is for a while. Part of it is, I’m closer to it. And we talk a lot about real assets and inflation, which is an economic environment that the vast majority of people investing today haven’t invested in that world since the 1970s. And it’s been kind of a declining inflation environment, and that very quickly has changed on the implications there, too. But the very real impact of the AG sector, which, for a long time, energy in the whole AG sector got to, I think, a 2% of the S&P 500, which, I think at its peak, was 30%. So, had really been decimated and rebounding now, but here we are.
Okay, so I don’t want to give away parts of the whole book, and we’ve kept you for a while. As we look out to the horizon, further than kind of the rest of the year, you were one of the few that, reading your older books, talked a lot about where we are with Ukraine and Russia. Do you have any general insights on how that potentially resolves from a probabilistic standpoint?
Peter: The Russians always had to try this. The Russian state, in its current form, is indefensible, but if they can expand out through Ukraine to places like Poland and Romania, they can concentrate their forces in the geographic access points to the Russian space. Their idea is if they can afford a position like that, then the Russian state can exist longer. And I think, overall, that is a broadly accurate assessment on the Russians’ part. So, it’s not that they’re not going to stop until they have all of Ukraine, is that they’re not going to stop when they have all of Ukraine. Ukraine’s just like step four of a seven-part process that involves a general expansion. Here’s the problem for this year. We know, from the way that the Russians have failed tactically in the war, that in a direct confrontation between American and Russian forces, the Russian forces would be obliterated. And would leave them with only one option, escalation, to involve nuclear weapons.
And so, we have to prevent that from happening. That’s the primary reason why the Biden Administration in specific and all the NATO countries in general are shipping so many weapon systems into Ukraine for the Ukrainians to use. We just have to prevent anything that would make American forces face off against Russian forces. And since the Russians, ultimately, are coming for NATO countries, that means we have to try to kill the Russian military completely in Ukraine, and that is now official policy. That’s basically what Secretary Austin said a couple of weeks ago. Now, the problem we’re facing is that the United States military has not had to use a supply chain for general warfare since the ’70s, since Vietnam. We’ve had short, intense conflicts where we’ve gone against non-peer powers, and the sort of war of attrition that we now find ourselves backing in Ukraine requires a different sort of equipment sourcing.
I think the best example are the javelin missiles, which the Ukrainians love, which have been very effective. We have already given the Ukrainians a quarter of our total store of that weapon system. And if we operate the existing supply-chain system to max out production, we do not have enough to replace that system for over two years. The stingers are even worse, we’ve already given the Ukrainians a third of our stinger stockpile. We don’t even have a manufacturing supply chain for those anymore because our army doesn’t use it, because we have an actual air force. We provide stingers to third countries that are fighting a different sort of conflict from the kind that we design. Just establishing a new supply chain for a weapon that’s basically been decommissioned from the U.S. Army’s point of view, that’s going to take a year just to get going. So, we are looking at the primary weapon systems that we are providing, that the cupboard is going to be bare sometime before the end of this summer, maybe into the fall.
And if the Ukrainians have not managed to break the Russian military in that timeframe, then this war of attrition, the Russians have more guns, they have more tanks, they have more people, and they will roll over Ukraine. So, at some point, in probably let’s call it September, October, the math of this war is going to change dramatically. Either the U.S. is going to have to up its game in terms of involvement and risk that direct conflict, or it turns into a partisan war where the Ukrainians have fallen, and they’re fighting from behind enemy lines now, trying to savage the Russian deployments from within. Either way, the level of risk goes up substantially.
Meb: So, as we looked, do you think the Chinese are just going to sit out for a while, watching this situation and say, look, Taiwan, we’re going to just let this play out over a few years before we do anything? Or do you think there’s potential for Russian and China to get even closer?
Peter: I think it’s actually going the opposite direction. The Chinese now know that everything that they thought was true about international conflicts has been proven wrong, whether it’s sanctions or boycotts or how the other side fights. And unlike Ukraine, which has a very long land border with the Russian space, Taiwan’s a moat. So, the scale of casualties that the Chinese would suffer would be at least a factor of five more than what the Russians have suffered just to get to the island. The Chinese now know that they couldn’t capture Taiwan quickly, they couldn’t impose a done deal on the rest of the world, they would be subject to sanctions and boycotts. And every step of that process would de-industrialize the Chinese system. So, they have to come up with another plan and it’s now clear that they can’t. And strange of strange, the Chinese are actually boycotting the Russians more in many sectors, it’s like energy, than the Europeans are.
They don’t want to get fought because state companies in China do not want to fall to American sanctions or boycotts. They are too integrated and too dependent. And so, we’ve actually seen a drawdown in the number of Chinese contracts with the Russians since the war started.
Meb: As we start to wind down here, I’m going to ask some kind of quicker questions. Listeners, there’s a lot more in the book. So, certainly go check it out.
Peter: I do love a good speed round.
Meb: “The End of the World is Just the Beginning.” I’m actually the world’s worst at the speed round, so kudos, but I get to be on the other side. I can’t answer anything in a short fashion. I’m not going to ask you what keeps you up at night, but I’m going to ask you a variant of that. What’s a belief you hold that’s non-consensus, that you think no one is talking about? We’re starting to have people talk about…it feels like AG prices, we’re starting to have people talk about deglobalization, depopulation, those are entering the vernacular. What’s something that like you’re mulling over that you don’t think is starting to hit the airwaves?
Peter: Well, the book is full of things like that, but I would say the biggest one of the moment isn’t just that inflation is high. It’s that this is the lowest inflation is going to be for the next five years in the United States.
Meb: Well, my least popular tweet of the year, and I have a lot of unpopular tweets, but…and this was a purely factual tweet. I had no opinions, but my God, the responses. And this was earlier in the year in January, you know, I said, “Look, historically speaking, looking at just valuations in price-earning multiples, long-term, 10-year PE ratios on U.S. tax, Shiller CAPE ratios, we call ’em, adjusted for inflation, historically, they’re in like the low twenties when inflation is tame.” But I said, “Traditionally, inflation has spent about a third of the time over 4%, and you start to kind of go off a cliff on what people are willing to pay for stocks. And then above 8%, the PE ratio is usually down around 10.” And I said, “At the time, PE ratio is at 40.” And I said, “That’s a long way from here to there.” And the good news is now we’re down to 30, but still 30 is a long way from 10.
So, we’ll see how that plays out, but if inflation stays high, stocks, I think, have a big potential to rerate. But anyway, people really did not like that, so I’m glad that looked to show notes. Okay, what have you changed your mind about since the first book? Over the years, you’ve been writing about geopolitics, demographics, what’s something you’re like, “You know what, now I think this, that I didn’t?”
Peter: Oh, sure, that’s easy. Shale revolution has proved to be far more economically viable than ever I thought. When the first book came out, I got a lot of crap for being overly exuberant about the cost of production in the shale fields and how much production could expand. I was generally on the far extreme in terms of optimism of that. And the prices have come down faster and expanded faster, and been more stable than anything that you and I would’ve predicted. We now have large portions of the Marcellus and the Permian Basin that are cost competitive with the Saudis. And we’re seeing production schemes, the wells may draw down very quickly, most of their output comes in the first year. But the capacity of the shale sector to get more and more oil out of each individual well has expanded massively.
It used to be that a good shale well was 100 barrels a day. Now, we’re regularly topping 2000 and 3000. So, everything that people say about shale, in terms of cost structure is being questionable and different from conventional, is true, but it hasn’t mattered because the technology has advanced so quickly. And that makes the United States’ oil patch the only industry in the energy sector globally that can expand output in a reasonable amount of time. They’re probably going to add a million to a million-and-a-half barrels of fresh production this year. It’s not enough to make up for what’s fallen off the Russian system, but it’s a good start.
Meb: We’re seeing, obviously, just absolute massive change in Europe with their perspective on energy. Do you think this is a moment where there’s potential for nuclear to get rebranded or to have a reversal of sort of the political attitude in the U.S. or elsewhere?
Peter: It seems like an easy fix, doesn’t it? The Europeans have a significant amount of spare nuclear capacity, things that have been mothballed in Germany, for example. I think the person to watch is the German foreign minister, Annalena Bearbock, she is one of the co-leaders of the Green party. And her party, from its very foundation during the Cold War, has been anti-nuclear everything, to the point that the Greens have even supported lignite coal mining over nuclear power. Now, Ms. Bearbock, her first foreign trip after becoming foreign minister in the first of the year was to Russia, to interface with the Russian foreign minister specifically on the issue of Ukraine. And before she could say anything, Sergey Lavrov, the Russian foreign minister, insulted her country, her party, her person and her gender in the most personal ways that he could. Just saying that there’s no reason you should be here, you’re incompetent, you represent a horrible party and a broken country. And really, I just need to talk to the Americans because that’s where you get your marching orders from anyway.
The Green party in Germany has long been pro-Russian. The Russian natural gas helps them get away from nuclear power. So, she went back home humiliated and angry and has been the driving force of German foreign policy as regards to the Ukraine war ever since. She has built up, in a very short period of time, a huge amount of gravitas and earned respect from multiple aspects of the German political spectrum. And so, when she decides that we have to go back to nukes, it’s going to happen because she now has the political strength to make that decision. So, right now, the Germans are trying to figure out how to get by without Russian coal, without Russian oil, without Russian natural gas. And the very short answer is they can’t do it this year unless they turn the nukes back on, and Ms. Bearbock is the one who’s going to be able to make that decision.
She doesn’t want to. This has been the core issue for German Greens going back to the beginning, but she is in the right position at the right time to make that decision. And so, what we’re going to have is, later this year, there’s going to be interruptions to the oil and natural gas flows from any number of reasons. It’s either going to be cut off because of insurance, cut off because of the permafrost, or cut off because the Ukrainians blow up the lines. One way or the other, the stuff is all going away, and the Germans will have a choice between no electricity or nuclear-powered electricity. And they’re not stupid.
Meb: Yeah, well, hopeful. I think we needed a better branding. You’re seeing the attitude change in the U.S. I think a little bit, too.
Peter: Absolutely. I mean nuclear, from a greenhouse emissions point of view, can absolutely be part of the solution. But one of the very first things that the Soviet propaganda machine did back in the 1960s is make Americans, make Westerners, Europeans distrustful in nuclear power because it increased Russian control of the energy space. And it worked very well for them, it’s still working very well for them, but I think we’re going to have a break in that later this year, at least in Germany.
Meb: All right, a couple more quick ones. I think one of the things that’s surprising a lot of people on social and elsewhere is the Ruble. I know you’ve talked a little bit about the central bankers in Russia, but also, that’s been a volatile currency. You got any thoughts on why the Ruble’s now back to higher levels than it was pre-invasion?
Peter: It’s, again, one person, Elvira Nabiullina, she is the central bank chief. I honestly think she…if not the smartest person on the planet right now, she’s certainly the smartest central banker. She tried to quit when the war started and Putin made it very clear that he did not recognize her resignation. He immediately posted her to another five-year term. Nabiullina is the person who has had to struggle with an increasingly economically dysfunctional and increasingly nationalist Russia over the last five years. And the fact that there has not been a broad scale economic collapse in Russia is largely at her feet with her policies. Specifically, what’s going on now, Ms. Nabiullina has forced every Russian company that exports to put 80% of their currency earnings into the Central Bank to be converted into Rubles. And that full transfer is used to stabilize the Ruble, and that is why the Ruble…after the initial fall, she put in this policy into place and it’s risen back to pre-war levels, and actually a little bit higher.
And that’s because the Russians are spending almost all of their foreign currency to support the Ruble. And that works, that keeps inflation under control, it makes the pain of the sanctions a little bit less. But it also means that Russian companies have no spare foreign currency that they need to maintain their operations or expand, so it’s kind of a starvation diet in the long run, but for now, it’s working.
Meb: What country…you mentioned, Argentina, you mentioned, obviously, the U.S., so not the U.S., but what country would you say could be most bullish about its prospects over the next 10 years to 15 years, that you think will be able to survive the new world order? Not the United States.
Peter: Sure. If we remove the United States, I’ll give you two, France and Argentina. First, France. France thinks of the European Union as a political project, not an economic one. It’s kind of their equivalent of what the U.S. has done with the global order. They maintain a degree of stability, they use it just to make a platform that France can project power from, which means if the EU suffers a breakdown, the French never really integrated their economy with it the way that the Dutch, or the Germans, or the Polls have, and so they won’t suffer as much when it falls. But they also have the military economic and demographic capacity to dominate most of the countries that they border. Now, there’s any number of ways they can go wrong, but the point is that that conflict, that race, that contest is France’s to lose.
They have all the things in place that most of their border countries don’t have. They have food security, they have energy security, they have a projection-based military. They can play in a lot of ponds and do very well. Argentina, second best geography in the world to the United States. Self-sufficient in most of their energy needs, definitely all of their food needs, and they have a very educated population. Now, their domestic economic management has been disastrous for pretty much the last century. But if we’re moving into a world where rule of law breaks down and where trade becomes constrained, and there’s shortages of the basic things that make industrialized life possible, the Argentines are already there. This is like their average Thursday.
So, I can see it’s not so much that they rise to go to the middle, it’s that the middle falls to them. And all of the things that the world is going to have in shortage, food stuffs, raw commodities, energy, the Argentines have all those things. And they can be a much larger player in what’s left of a much smaller global system.
Meb: Yeah. Argentina is fascinating for the market historians out there. If you go back to like 1900, Argentina would’ve been one of the horses you really wanted to bet on. And, say, of course, in the investment side, it’s been a shitshow, but seemingly, they get their act together every 10 years, and then they just go full Argentina again.
Peter: Yeah. In World War I, they were the 4th richest country in the world.
Meb: Yeah. Two more super-fast ones. One, you mentioned you’re a cook and your Thanksgiving spread is a fusion. You know, I tried this, I like to dabble in cooking and anytime I’ve gone away from the classics, I love… For me, my favorite dish is green bean casserole and whatever, like the Campbell soup, just high sodium, just absolute terrible for you, crowd pleaser. Anytime I’ve gone off the variant and tried to do like a fancy one, it’s universally hated. So, what’s your go-to dish? I want to hear what’s Peter’s favorite.
Peter: Well, it’s different every year. The biggest successes have been the truffle-butter turkey, the pineapple chipotle sweet potatoes, and the parmesan pepper compound butter that people just put on everything.
Meb: My God. All right, well, we might have to hit you up for some of the recipes there. Now, for the people who are listening, where does Peter go for information? Is this just like CNBC and “Fox News?” Like if you’re a real geopolitical demographer, how do you find the needles in the haystack and what’s true out there? What’s your daily consumption?
Peter: We cheat a little bit in that we’ve built this model of how the world works and how everything fits together, and how if you pull on a strand on one side, things on the other side move. And we spend about a third of our time looking for ways to prove it wrong. It’s not very comfortable for the ego, but it makes you not fall in love with your own forecasts. We also have a slate of a couple hundred clients and that forces us to relearn everything we think we know every single day, constantly challenging our own assumptions.
In terms of news, for people who research instead of this, this is not a full-time job. In the switch of the last 25 years from the fax machine to email, to attachments, to social media, to algorithms, media has removed the human element from the producing of stories bit by bit by bit, to the point that, now, it’s mostly opinion pieces.
So, you have to go back to local news sources if you really want to find out what’s going on, and that’s very time consuming. I would say that the best bar-none global media left that is still a media company in the way we understand the term is “Al Jazeera” outta the United Arab Emirates. What they write on the Middle East is crap, because that’s all biased, but what they do on the rest of the world is actually very good. But “France 24” in 2nd place.
Meb: Lastly, where do people find you? Best places to find out more on your thoughts and hire you, reach out? Other than the book, where do they go?
Peter: On Twitter, I’m @peterzeihan. So, last name is spelled Z-E-I-H-A-N, and I am as active my life allows me to be. Also, the website, zeihan.com, allows you to sign up for the newsletter and the video logs, which are free and will always be free.
Meb: Secret snowball margarita recipe will be in the 3rd email, listeners, that I’ll send you. Peter, it’s been a joy, you’ve been very generous with your time. Thanks so much for joining us today.
Peter: My pleasure.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us a message at [email protected], we love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.