Episode 280

The Reverse Currency Crisis That Isn’t

This week, Jacob’s caffeinated and Rob is just trying to keep us on track as the duo dive into the so-called “Asian reverse currency crisis,” a spike in Asian FX that’s less a crisis and more the result of twenty-five years of carry trades finally snapping. We break down what it means for the dollar, for diversification, and for the poor bastards running Taiwanese insurance portfolios. Then: Trump wants tariffs on foreign movies (seriously), Saudi Arabia starts pumping oil like it’s 2019, and we finish with why empty shelves might be the most underpriced risk in markets right now. Buckle up.

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Timestamps:

(00:00) - Introduction and Podcast Overview

(00:44) - Recording on a Tuesday: Unusual Timing

(01:53) - Taiwanese Dollar Surge: A Financial Analysis

(03:21) - Asian Financial Crisis: Historical Context

(05:46) - Implications for Global Markets

(22:16) - Investment Strategies for a Multipolar World

(25:26) - Trump's Tariff on Foreign Movies: A Soft Power Debate

(36:38) - US Soft Power: A Decline in Influence

(41:49) - Saudi Arabia's Oil Strategy

(46:25) - Global Oil Market Dynamics

(57:53) - Impact of Tariffs on US Retail

(01:05:41) - Geopolitical Tensions and Future Outlook

(01:06:39) - Conclusion and Contact Information

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Referenced in the Show:

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Jacob Shapiro Site: jacobshapiro.com

Jacob Twitter: x.com/JacobShap

CI Site: cognitive.investments

Subscribe to the Newsletter: bit.ly/weekly-sitrep

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The Jacob Shapiro Show is produced and edited by Audiographies LLC. More information at audiographies.com

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Jacob Shapiro is a speaker, consultant, author, and researcher covering global politics and affairs, economics, markets, technology, history, and culture. He speaks to audiences of all sizes around the world, helps global multinationals make strategic decisions about political risks and opportunities, and works directly with investors to grow and protect their assets in today’s volatile global environment. His insights help audiences across industries like finance, agriculture, and energy make sense of the world.

Cognitive Investments is an investment advisory firm, founded in 2019 that provides clients with a nuanced array of financial planning, investment advisory and wealth management services. We aim to grow both our clients’ material wealth (i.e. their existing financial assets) and their human wealth (i.e. their ability to make good strategic decisions for their business, family, and career).

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This podcast uses the following third-party services for analysis:

Podtrac - https://analytics.podtrac.com/privacy-policy-gdrp
Transcript
Jacob Shapiro:

Hello listeners.

Jacob Shapiro:

Welcome to another episode of the Jacob Shapiro podcast.

Jacob Shapiro:

Uh, Rob and I recorded on Tuesday, not our normal recording time.

Jacob Shapiro:

I think everything still holds, but if things feel even a

Jacob Shapiro:

little out of date, that is why.

Jacob Shapiro:

Um, this was a great episode.

Jacob Shapiro:

Uh, we were both on our, we're, we're always trying to be on our A

Jacob Shapiro:

game for you, but I think we were both on our A game this time and the

Jacob Shapiro:

world is giving us plenty to discuss.

Jacob Shapiro:

You can email me at jacob@jacobshapiro.com.

Jacob Shapiro:

If you have any questions about anything you heard, any books you

Jacob Shapiro:

wanna recommend, you wanna talk about the things we talked about in the

Jacob Shapiro:

podcast, you wanna talk to me about anything else, that's the email address.

Jacob Shapiro:

I read everything and try to reply to everything that comes through.

Jacob Shapiro:

Otherwise, it's crazy out there.

Jacob Shapiro:

Take care of the people that you love.

Jacob Shapiro:

Cheers and see you out there.

Jacob Shapiro:

All right, Rob, we're doing something very dangerous.

Jacob Shapiro:

We're recording on a Tuesday, which is not our normal recording

Jacob Shapiro:

slot, and we have ambitions.

Jacob Shapiro:

Of keeping our cadence of posting this on Friday with the way that

Jacob Shapiro:

things are developing the world.

Jacob Shapiro:

That's a, that's a dangerous, uh, choice that we're making here.

Jacob Shapiro:

And we'll, we'll push it out if we need to beforehand, but if you're

Jacob Shapiro:

listening to this on Friday, it was recorded on Tuesday, so God knows what

Jacob Shapiro:

could change in the world before then.

Jacob Shapiro:

Rob, I saw the videos of that crazy hailstorm in Paris,

Jacob Shapiro:

and you haven't mentioned it.

Jacob Shapiro:

Were, were you around for

Rob Larity:

that?

Rob Larity:

Oh, it was totally wild.

Rob Larity:

There are huge chunks of ice and, you know, building on our windowsill.

Rob Larity:

I was there with the kids watching it and.

Rob Larity:

My son asked if we could open the window.

Rob Larity:

I said no.

Jacob Shapiro:

Probably a good decision.

Jacob Shapiro:

Yeah, well, massive hailstorms in Paris, you know, uh, feet of

Jacob Shapiro:

snow in New Orleans this winter.

Jacob Shapiro:

Who, who says that?

Jacob Shapiro:

Uh, nothing interesting.

Jacob Shapiro:

Dogs and cats living together.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

Um, all right.

Jacob Shapiro:

We've got a busy, uh, we've got a busy set today, and I actually, I

Jacob Shapiro:

was supposed to be up early for an interview that canceled on me at the

Jacob Shapiro:

last second, so I've had lots of time to prepare and many cups of coffee.

Jacob Shapiro:

So, uh, I mean, I'm always on my a game with you, Rob, but I'm particularly

Jacob Shapiro:

ready and rearing to go here.

Jacob Shapiro:

Uh, if, if the listeners are afraid that I'm talking too fast, that's

Jacob Shapiro:

why I am just, I'm really amped.

Jacob Shapiro:

Um, we've got a couple different topics to dive into.

Jacob Shapiro:

The first is the story about the Taiwanese dollar.

Jacob Shapiro:

So I don't know if all of our listeners will be following this particularly

Jacob Shapiro:

closely, but it's blown the Fin Twit community up on social media.

Jacob Shapiro:

Um, and even some of the folks like Louis Gov and some of the others are

Jacob Shapiro:

talking about this, like it's a really big deal and I, I wanted to talk.

Jacob Shapiro:

Threw it with you.

Jacob Shapiro:

Um, the, the short version of it is over the last couple of days, the

Jacob Shapiro:

Taiwanese dollar has surged about 10 to 11%, um, on the US dollar.

Jacob Shapiro:

It's not the only one.

Jacob Shapiro:

There have been some other currencies.

Jacob Shapiro:

So the South Korean one is up about 6.4%.

Jacob Shapiro:

This is now over the last month.

Jacob Shapiro:

The Thai bought up about 5.2% Malaysian ring.

Jacob Shapiro:

It also up about 5.2%, the Singapore dollar, and they're at 4.6%.

Jacob Shapiro:

So all of these different Asian currencies creeping upwards.

Jacob Shapiro:

The Hong Kong dollar has been trying to do this.

Jacob Shapiro:

Um, the Hong Kong monetary authority has been intervening to keep it.

Jacob Shapiro:

It's at the upper.

Jacob Shapiro:

Uh, edge of its band and so far they've been able to keep it there.

Jacob Shapiro:

Um, you might have also seen, uh, China is intervening too, to

Jacob Shapiro:

keep the u the yuan where it is.

Jacob Shapiro:

That was a really interesting headline to me because it's the US that is the

Jacob Shapiro:

chaos agent in China that is coming in stabilizing markets by keeping the

Jacob Shapiro:

uan where it is and not devaluing.

Jacob Shapiro:

Um, anyway, but the, the big story is the Taiwan, um, the Taiwanese dollar.

Jacob Shapiro:

And I was listening to, um, a Louis Go podcast that we'll put, um, we'll

Jacob Shapiro:

put a link to in the show notes.

Jacob Shapiro:

And he was comparing it, Rob, as sort of the inverse of the

Jacob Shapiro:

Asian currency crisis of 1997.

Jacob Shapiro:

And I'm sure you have background here, but for the layman out there, um, in 19

Jacob Shapiro:

97, 19 98, what was happening was that a lot of Asian currencies were pegged to

Jacob Shapiro:

the dollar and there was a carry trade.

Jacob Shapiro:

So you would.

Jacob Shapiro:

Borrow dollars to purchase local currency, and then you'd get

Jacob Shapiro:

higher yields in that local market.

Jacob Shapiro:

The idea being the currency's gonna stay pegged to the dollar, so that's great.

Jacob Shapiro:

Like the currency will stay the same and you get some extra yield in

Jacob Shapiro:

these emerging markets, which is, you know, yielding a couple hundred basis

Jacob Shapiro:

points or whatever it was, um, above.

Jacob Shapiro:

What you would get in the United States.

Jacob Shapiro:

That was all fine and good, except that there was a bubble, uh, in Southeast Asia.

Jacob Shapiro:

It started in Thailand, and it eventually turned out that Thailand didn't

Jacob Shapiro:

have the reserves to defend the peg.

Jacob Shapiro:

And eventually speculators went at it, their currency collapsed.

Jacob Shapiro:

It set off this whole thing.

Jacob Shapiro:

Um, and it was really Thailand, South Korea, Indonesia, is my

Jacob Shapiro:

understanding of the countries that, um, that were most affected.

Jacob Shapiro:

Um, the way that, that Louis was talking about it was that this is sort of

Jacob Shapiro:

an inverse here of what's happening.

Jacob Shapiro:

So what's been happening in Taiwan and in some of these other Asian countries

Jacob Shapiro:

over the last 10 to 15 years, um, is that you had weak Asian currencies

Jacob Shapiro:

relative to the dollar and currencies that were declining in value against

Jacob Shapiro:

the dollar by two to 3%, sort of annually, almost sort of like clockwork.

Jacob Shapiro:

Um.

Jacob Shapiro:

That you had Asian funds, uh, Taiwanese insurance companies, all these other

Jacob Shapiro:

things, they were buying US treasuries.

Jacob Shapiro:

So they were getting the yield off US treasuries, their assets were

Jacob Shapiro:

increasing relative to their local currencies because their currencies

Jacob Shapiro:

were, um, declining on the dollar and.

Jacob Shapiro:

The idea is that this is a huge transfer of purchasing power from west to east.

Jacob Shapiro:

So as these currencies appreciate quickly against the dollar, you know, suddenly

Jacob Shapiro:

some of these Taiwanese insurance companies, which were not hedging as well

Jacob Shapiro:

as they used to, because interest rates, interest rates were rising in the United

Jacob Shapiro:

States over the last couple of years.

Jacob Shapiro:

Um, they've basically lost like two to three years of profits

Jacob Shapiro:

just over the last couple of days.

Jacob Shapiro:

And could some of these insurance companies, should they be hedging

Jacob Shapiro:

their positions, are they gonna have to sell more dollars?

Jacob Shapiro:

Like what is this a, a reverse currency crisis?

Jacob Shapiro:

Like that is the sort of setup that's being talked about, um, out there.

Jacob Shapiro:

So that's the background, um, on our knowledge platform.

Jacob Shapiro:

I saw that you thought that it really wasn't that big of a deal.

Jacob Shapiro:

So I, I was seeing all of this chaos on Twitter and social media

Jacob Shapiro:

and all these people freaking out.

Jacob Shapiro:

And of course, you, the sober one over here talk, you know, thinking

Jacob Shapiro:

about Oliver Cromwell and other things that are more important.

Jacob Shapiro:

So break, break down for me.

Jacob Shapiro:

What's signal, what's noise?

Jacob Shapiro:

Like how, how are you thinking about this?

Rob Larity:

Yeah.

Rob Larity:

Um.

Rob Larity:

I, I think it's not a big deal in the sense that it doesn't signal anything

Rob Larity:

particularly bad and certainly not for these, uh, Asian currencies that are the

Rob Larity:

focus, um, which we'll get to in a second.

Rob Larity:

But I'm glad that Louis Gav brought up the Asian financial crisis.

Rob Larity:

'cause I think it's really important history and context for this.

Rob Larity:

Um, in large part because like, it's funny, markets are these reflexive

Rob Larity:

things where, um, something happens and then people respond to what's

Rob Larity:

happened and that creates some new set of conditions that, you know,

Rob Larity:

makes a response to the response.

Rob Larity:

Right?

Rob Larity:

And in the case of the Asian financial crisis, really what we've observed is

Rob Larity:

we've seen the after effects of the Asian financial crisis for the last 25 years.

Rob Larity:

And what I mean by that is the Asian financial crisis came about

Rob Larity:

because at that time, capital markets were working kind of the way that

Rob Larity:

they're supposed to, which was.

Rob Larity:

Capital from the rich world goes into the emerging markets.

Rob Larity:

And those emerging markets like Thailand was the poster child of this.

Rob Larity:

At the time they were running big current account deficits 'cause they were

Rob Larity:

absorbing investment capital and they were investing domestically and building hotels

Rob Larity:

and factories and all the sorts of things you know, that you, that you do with FDI.

Rob Larity:

And when you had a sudden stop during the Asian financial crisis,

Rob Larity:

you had a risk off move and risk off meant fleeing back into the dollar.

Rob Larity:

And because they didn't have the reserves built up because they

Rob Larity:

were running these current account deficits, they were vulnerable.

Rob Larity:

So their currencies, you know, it was an outsized response and

Rob Larity:

the Asian currencies collapsed.

Rob Larity:

And we all kind of know that story.

Rob Larity:

Um.

Rob Larity:

What you've seen since then has been a really deliberate move by, uh,

Rob Larity:

southeast Asian nations in particular.

Rob Larity:

Um, you know, China is a unique example, but they're also, you know, the embodiment

Rob Larity:

of this, which is to run by, by default current account surpluses to accumulate

Rob Larity:

US dollar reserves because they're fighting the last war, essentially.

Rob Larity:

You know, you gotta build up those reserves so that if you have

Rob Larity:

another, uh, sudden stop outflow, then you can protect your currency.

Rob Larity:

And protecting currency, especially in these nations, is so important

Rob Larity:

because you don't want inflation, you don't want a currency crisis, and all

Rob Larity:

of a sudden, you know, rice prices are up 40% because you know, the bot

Rob Larity:

has collapsed, that sort of thing.

Rob Larity:

So that's sort of the background to this.

Rob Larity:

And what you had was because of this.

Rob Larity:

Accumulation of currency that because of the running of current account deficits

Rob Larity:

or, uh, current account surpluses in order to do that, and we've talked

Rob Larity:

about this many times, you know, they were directing accumulated capital

Rob Larity:

like a fire hose into the United States and accumulating that position.

Rob Larity:

And it's really important to remember, and this is why I say partly this

Rob Larity:

is why it's not a big deal, is.

Rob Larity:

These are not necessarily net assets.

Rob Larity:

These are not unencumbered, it's not wealth.

Rob Larity:

This is like a basis trade.

Rob Larity:

So set against those US dollar assets are local currency liabilities.

Rob Larity:

So some people call it carry trades, but carry trade to me implies like

Rob Larity:

something that a speculator is doing, deliberately borrowing in one currency

Rob Larity:

and buying in another currency.

Rob Larity:

That's not what's going on here.

Rob Larity:

These are institutions, mostly boring institutions like Taiwanese life

Rob Larity:

insurers, Japanese life insurers, you know, Korean life insurers, basically,

Rob Larity:

companies that manage big pools of assets, but they have no choice

Rob Larity:

because that's how the math works out.

Rob Larity:

If you're running a big current account surplus, someone has to be.

Rob Larity:

Taking that currency side of the of, of the trade and what you've seen in the

Rob Larity:

last few days, and this is getting to why, like the move is not a huge deal

Rob Larity:

from a financial, plumbing standpoint, is because of the sudden move in the dollar.

Rob Larity:

That's kind of thrown a big ripple in those offsetting assets and liabilities

Rob Larity:

because if the dollar starts to drop, then the value of your assets against

Rob Larity:

those liabilities, all of a sudden you get turned upside down 'cause your assets are

Rob Larity:

going down in value, your liabilities are going up, and then you have a, you have a

Rob Larity:

problem and you need to unwind that trade.

Rob Larity:

So what you've seen is all of these, you know, highly, highly levered players

Rob Larity:

who are running these massive balance sheets, massive balance sheets with

Rob Larity:

assets on one side and liabilities on the other, and not necessarily.

Rob Larity:

Equity, but running these massive balance sheets, having to unwind that.

Rob Larity:

And that's why you're seeing sort of a panic buy of Asian currencies and

Rob Larity:

it's exacerbating the sale of the US dollar assets 'cause you're selling your

Rob Larity:

assets to buy back your liabilities.

Rob Larity:

That's, that's hard to explain verbally without having like

Rob Larity:

a diagram, but hopefully.

Rob Larity:

That clarifies a little bit, sort of some of the movements you're seeing here.

Jacob Shapiro:

No, I, it does to me.

Jacob Shapiro:

But, so the question then to me is, so what happens next?

Jacob Shapiro:

So is this just like a market, a brief moment of market turbulence

Jacob Shapiro:

and things will equalize?

Jacob Shapiro:

Are we, are we now gonna get a 23 year period where these countries

Jacob Shapiro:

are gonna fight now this war where they're accu, where they're

Jacob Shapiro:

accumulating the local currencies?

Jacob Shapiro:

Um, what does this mean?

Jacob Shapiro:

Like, I mean, we've been, you've been ahead of this on dollar weakness

Jacob Shapiro:

here for the course of the year.

Jacob Shapiro:

Um, you know, in our own, uh, strategies, we have heavy exposure in

Jacob Shapiro:

particular to the Singapore dollar.

Jacob Shapiro:

So this has been a nice pat on the back for us from that point of view.

Jacob Shapiro:

So, I mean, I mean, maybe take it from that practical point of view.

Jacob Shapiro:

Are you now looking at the Singapore dollar and saying, thumbs up, time

Jacob Shapiro:

to think about the next thing?

Jacob Shapiro:

Or are you more like, okay, like we are at the very early stages of a bigger move

Jacob Shapiro:

that might have more to unwind before we get to some kind of, um, you know, stasis?

Rob Larity:

Yeah, it's a little of both.

Rob Larity:

Um, it's, it's the end of the beginning.

Rob Larity:

I think what we've seen in the last, um, in the last week or so is a very

Rob Larity:

strong signal that validates the thesis because like I just explained the

Rob Larity:

mechanics of what happened and why, like, it's not a crisis, it's not, you

Rob Larity:

know, the next Asian, like none of this.

Rob Larity:

It's fine.

Rob Larity:

Um, but at the same time it signals something very, very important.

Rob Larity:

And so I'm gonna take, put the mechanic side over here

Rob Larity:

and go to the analysis side.

Rob Larity:

The analysis is the US dollar is no longer the risk off asset.

Rob Larity:

You do not flee into the dollar when things are going bad.

Rob Larity:

Now the US dollar people are fleeing out of that and, and because things are

Rob Larity:

going bad and that's something that we've not experienced in the last 40 years.

Rob Larity:

That is a big, big, big change and what you're going to see in, in all

Rob Larity:

likelihood over time, this is not an overnight process, is the post Asian

Rob Larity:

financial crisis kind of playbook that I just described is going to

Rob Larity:

be unwound because these countries, first of all, can no longer rely.

Rob Larity:

On the United States to be the consumer, you know, into which

Rob Larity:

they export, you know, by choice.

Rob Larity:

Um, but also they can't rely on the value of the dollar like that, that

Rob Larity:

basis trade is no longer reliable.

Rob Larity:

It's moving in the opposite direction, or at least much of the time it will be.

Rob Larity:

So it's not so much that, oh, now they're gonna pile into something else.

Rob Larity:

I think it's an unwinding of this imbalance that had been growing over the

Rob Larity:

last 25 years post Asian financial crisis.

Rob Larity:

And what that means overall is just, you know, more variety in sort of

Rob Larity:

the, uh, surplus or deficit position of these nations based on, you know,

Rob Larity:

other factors rather than just, you know, we're gonna accumulate reserves

Rob Larity:

and plow them into treasuries.

Rob Larity:

Um, on the whole, most of these currencies will be stronger in part, and this

Rob Larity:

is getting to the Singapore dollar thing, you know, through the back door.

Rob Larity:

We have to remember that most of these currencies are managed floats.

Rob Larity:

Singapore dollar is a managed float, and it's not managed against the dollar, it's

Rob Larity:

managed against a basket of currencies.

Rob Larity:

So, um, one of the things that we've seen in the last week, so in the case of

Rob Larity:

Singapore, they had been really holding back the reigns on that initial move in

Rob Larity:

April when all of the currencies ran.

Rob Larity:

Um, in part because, uh, they're mindful of managing prices in the country.

Rob Larity:

So they don't like really sharp moves in any one direction.

Rob Larity:

But the other thing is, all these country, all of these currencies that

Rob Larity:

are sort of quasi pegged to the dollar, like Hong Kong for instance, Taiwan,

Rob Larity:

these are, you know, sort of soft pegs.

Rob Larity:

They're, they're dirty, dirty floats, right?

Rob Larity:

They're very managed by the, by the central banks.

Rob Larity:

Um, one of the things that they will worry about is this notion of being

Rob Larity:

tethered to a decline in currency.

Rob Larity:

So if you look, um, you know, the, the value of the Euro, for instance,

Rob Larity:

against the Singapore dollar, against the Taiwanese dollar has absolutely

Rob Larity:

searched in the last six weeks.

Rob Larity:

Um, and that's a problem because that's importing inflation, not from the us.

Rob Larity:

No one imports from there anyway, but from all these other countries.

Rob Larity:

So if you're, if you're anchoring yourself to this sinking ship, um, that causes

Rob Larity:

problems from an inflation standpoint.

Rob Larity:

So that's another factor that all of these nations have to take into

Rob Larity:

account is like, you can't have inflation rise because all of a sudden

Rob Larity:

the thing you were gonna import from, you know, Japan or the EU is 20% more

Rob Larity:

expensive in local currency terms.

Jacob Shapiro:

Mm-hmm.

Jacob Shapiro:

Man, I, I have a few more questions there.

Jacob Shapiro:

So, I mean, I'll throw three questions at you and you take them in whatever

Jacob Shapiro:

order or whichever way you want.

Jacob Shapiro:

So the first is that, you know, you just said that these are,

Jacob Shapiro:

you know, uh, what did you say?

Jacob Shapiro:

Uh, soft peg, dirty floats.

Jacob Shapiro:

Maybe that's the title of the podcast.

Jacob Shapiro:

I don't know, title of your memoir.

Jacob Shapiro:

Soft Peg, dirty Floats.

Jacob Shapiro:

That sounds like bathroom humor right there.

Jacob Shapiro:

Uh, but it's not, it's actually extremely sophisticated analysis

Jacob Shapiro:

of, uh, financial markets.

Jacob Shapiro:

Um.

Jacob Shapiro:

So, you know, the, these banks don't like sudden moves, but, uh,

Jacob Shapiro:

I, what's happened in the Taiwanese dollar over the past week sure.

Jacob Shapiro:

Seems sudden to me it would seem to be the thing that they don't want.

Jacob Shapiro:

So what's driving that?

Jacob Shapiro:

Is it literally, like, were they okay with that?

Jacob Shapiro:

There has been speculation that that's a signal to the Trump administration

Jacob Shapiro:

for some kind of free trade deal or some kind of, you know, special dispensation

Jacob Shapiro:

because it's Taiwan and blah, blah, blah.

Jacob Shapiro:

Um, Chinese Yuan has only gone up less than a percent since April 2nd.

Jacob Shapiro:

That seems to be the elephant in the room or the dragon in the room to me.

Jacob Shapiro:

Um, do you think that we're gonna see a move in the Chinese yuan and

Jacob Shapiro:

do you think that China might, is, is this part of the negotiations?

Jacob Shapiro:

Are they holding back?

Jacob Shapiro:

Like how do we think about Yuan here?

Jacob Shapiro:

And then the other thing is the saving grace, and this gets to a topic we're

Jacob Shapiro:

gonna back into later in the podcast, is yes, like, I guess you're worried

Jacob Shapiro:

about some imports being more expensive, but oils hanging out below 60, like

Jacob Shapiro:

OPEC plus is surging production.

Jacob Shapiro:

Like some things out there are looking pretty, pretty deflationary.

Jacob Shapiro:

So we'll get to oil in a little bit, but, but talk to me about the suddenness

Jacob Shapiro:

of the Taiwanese dollar move and the yuan and, and whether there's enough

Jacob Shapiro:

reprieve from deflationary forces for some of these commodities out there that

Jacob Shapiro:

will help, um, I guess cushion the blow.

Rob Larity:

Yeah, so there's been some talk about, you know, oh, it's a new

Rob Larity:

plaza, accord or ti the Taiwanese are trying to put a shot across the US'

Rob Larity:

bows, or, or they're trying to signal, oh, we're gonna allow our currency to

Rob Larity:

appreciate, so therefore give us better treatment from a tariff standpoint.

Rob Larity:

Um, I don't really think any of that is what's going on.

Rob Larity:

I mean, this was way too sudden.

Rob Larity:

Um, if you look at the, the problem with Taiwan in particular is relative to the

Rob Larity:

size of the economy, which is tiny, the amount of balance sheet is enormous.

Rob Larity:

So, you know, this is like Luxembourg, like they're a very small economy.

Rob Larity:

That's why you saw this happen in Taiwan, this sort of sudden break,

Rob Larity:

I think relative to like a Korea or, you know, a, a larger economy because

Rob Larity:

the sheer volume of, uh, assets and liabilities that are matched against

Rob Larity:

each other is so huge relative to.

Rob Larity:

You know, the actual economic activity going on.

Rob Larity:

So what I'm getting at is like, this was market forces moving as an

Rob Larity:

unstoppable force in one direction, and they just had to let it go.

Rob Larity:

Because even though in this case it's like, it's, it's totally opposite.

Rob Larity:

If you're trying to defend your currency, like there you have to husband

Rob Larity:

your reserves and make sure you're not, like, that's a whole, that was

Rob Larity:

the Asian financial crisis scenario.

Rob Larity:

This is the opposite.

Rob Larity:

You're literally, it's just, well, how quickly can we sell Taiwanese dollars to

Rob Larity:

stop this appreciation from happening?

Rob Larity:

But when you have sort of a, basically a short covering situation, which is what

Rob Larity:

this is, um, it's, you know, at some point you just, you just have to let it go and

Rob Larity:

sort of, you know, let it, let the market find its place and then work it back.

Rob Larity:

So I think this is mostly kind of a boring mechanical explanation.

Rob Larity:

I don't think that the.

Rob Larity:

You know, the politicians who would be, have the authority to send a shot

Rob Larity:

across the Americans bows or whatever you, you know, you wanna call that

Rob Larity:

would even have had the wherewithal or the time to make that kind of decision.

Rob Larity:

Like, this is, this happened very quick.

Rob Larity:

So I wouldn't draw strong political conclusions from this.

Rob Larity:

I think the, but it doesn't take away from the sort of underlying reality,

Rob Larity:

which is this is representative of that major change in relationships.

Rob Larity:

And that's a much longer term, much bigger and, and honestly much more

Rob Larity:

important than any political signaling.

Rob Larity:

Like, it, it's, it's truly the tectonic plates of the global economy

Rob Larity:

lurching in a different direction.

Rob Larity:

And that's really big.

Jacob Shapiro:

Hmm.

Jacob Shapiro:

What about the, the, the Japanese have since walked this threat back,

Jacob Shapiro:

but there was the hint of a threat last week to sell US treasuries.

Jacob Shapiro:

Um, like I said, I, they've walked it back in the last day or two,

Jacob Shapiro:

but how does that fit in here?

Jacob Shapiro:

'cause Theen obviously not one of the currencies that I, I mentioned there.

Rob Larity:

It is a good question.

Rob Larity:

I think you'd need a, a specialist Japanese analyst to understand

Rob Larity:

all of the stuff at play there.

Rob Larity:

I think they're scared.

Rob Larity:

Um, I think, I think they realize that they have limited

Rob Larity:

cards that they can play.

Rob Larity:

They're under a lot of pressure to show that they're not bending over for the us.

Rob Larity:

Um, I don't really think that their treasury position is a weapon per se.

Rob Larity:

As we talked about before, the US is not dependent on foreigners to serve, to

Rob Larity:

finance its current account or to finance.

Rob Larity:

Its, its deficits.

Rob Larity:

It know, we, we had a big conversation about this like a

Rob Larity:

month ago, so, and Japan knows us.

Rob Larity:

They know if they see like maybe they'll have an impact on the short

Rob Larity:

term, but it's not really a weapon.

Rob Larity:

Um, so I think it's, I think it's more them searching

Rob Larity:

for some source of leverage.

Rob Larity:

Um, like what I just said, probably Trump doesn't know, or like he doesn't,

Rob Larity:

you know, the people around him aren't exactly other than Bessant.

Rob Larity:

Um, they don't really, uh, they, they probably might take that as a real

Rob Larity:

threat or, you know, it's perceived as, as a threat, but, uh, it's not,

Rob Larity:

they don't really have any true leverage and none of these countries

Rob Larity:

do, um, beyond the very short term.

Rob Larity:

So I wouldn't read too much into it other than kind of.

Rob Larity:

Verbalizing stuff for political reasons.

Jacob Shapiro:

I appreciate your non descent being, uh, the, the smarter one

Jacob Shapiro:

in the room, but I, I would say he's not covering himself in glory, uh, right

Jacob Shapiro:

now with how he's, uh, with some of the interviews that he's given in the last

Jacob Shapiro:

couple of days, kind of seems like he and may, maybe he knows things academically,

Jacob Shapiro:

but like I, I don't know that he knows, uh, what's, what's going on either.

Jacob Shapiro:

Um, last question on this.

Jacob Shapiro:

This is not investment advice, but you know, we're sitting with big clients.

Jacob Shapiro:

We were talking about institutions and pension funds and insurance

Jacob Shapiro:

funds and things like that, but a lot of the listeners here

Jacob Shapiro:

are not in that rarefied air.

Jacob Shapiro:

If you're just a normal human being who's thinking about like your

Jacob Shapiro:

account or something like that.

Jacob Shapiro:

Is this just something, is it just a passing thing?

Jacob Shapiro:

Like you're not gonna go out there and accumulate Singapore dollars, I assume.

Jacob Shapiro:

Is it, is it really like no impact on, on the smaller investor or if

Jacob Shapiro:

you're a smaller investor, like what are, what are some things

Jacob Shapiro:

to think about in this context?

Rob Larity:

Well, I think the playbook for the smaller

Rob Larity:

investor is a version of what I.

Rob Larity:

We're doing for much, much larger investors, which is diversification away

Rob Larity:

from the US because much like you know, we talk about financial markets fighting

Rob Larity:

the last war, the investment industry is always fighting the last war because they

Rob Larity:

will sell you what has worked in the past.

Rob Larity:

So if you look at the average allocation from any US based

Rob Larity:

advisor, it's overwhelmingly us.

Rob Larity:

And that has worked for a very long time.

Rob Larity:

'cause the, the rubber band stretching between the US and the rest of the world

Rob Larity:

in terms of valuation and sentiment and all this stuff that we've talked

Rob Larity:

about, everyone kind of knows us now that is stretched to the limit.

Rob Larity:

But sort of the next step is to really look and think about,

Rob Larity:

okay, well what is my portfolio?

Rob Larity:

What is my exposure right now?

Rob Larity:

If you have 80% of your portfolio in the us, that's too much.

Rob Larity:

That's not representative of the world in any way, shape, or form.

Rob Larity:

And it's gonna put you on the wrong side of things as that rubber band

Rob Larity:

stretches back in the other direction and you get that reversion to the mean.

Rob Larity:

And ultimately what that probably looks like is overvalued US assets.

Rob Larity:

Kind of just chop that off over the course of years.

Rob Larity:

And it's not gonna be some collapse, it's not gonna be some dramatic event.

Rob Larity:

It's just gonna be sort of the boiling frog syndrome where they

Rob Larity:

just don't do very well and the rest of the world catches up,

Rob Larity:

you know, and continues to grow.

Rob Larity:

So if you don't have that exposure, if you don't have that diversification

Rob Larity:

to the rest of the world, which makes up, you know, 75% of the

Rob Larity:

GDP and 96% of the population.

Rob Larity:

Then what are you doing?

Rob Larity:

You have the ability to do that.

Rob Larity:

Just, that's not the default setting for most institutions.

Rob Larity:

And you know, many people are out there saying, oh, well China's not investible.

Rob Larity:

Um, someone I, I, I, someone was telling me about this gave Cal,

Rob Larity:

uh, interview and, and that he was talking about international and

Rob Larity:

some said, well, you can't put money into Europe 'cause they're dying.

Rob Larity:

Like, all, like that's nonsense.

Rob Larity:

And that is the consensus view and it's nonsense like in plain terms.

Rob Larity:

So international diversification, thinking globally, um, and this is

Rob Larity:

just like if you believe we're entering a multipolar world, which is, you

Rob Larity:

know, one of the main themes of what you've been talking about for years.

Rob Larity:

If you, if you're drinking Jacob's Kool-Aid, then you have

Rob Larity:

to do that from an investment standpoint to, to benefit from it.

Rob Larity:

'cause now events are proving a. That were right basically.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

Don't, don't drink any kids, don't, don't do drugs and don't drink Kool-Aid.

Jacob Shapiro:

I, I have to confess to you, I am so uncomfortable with the

Jacob Shapiro:

move towards a multipolar world because I am a contrarian at heart.

Jacob Shapiro:

And when things are happening that confirm what I thought, like

Jacob Shapiro:

I wanna zag the other direction.

Jacob Shapiro:

So I like literally am sitting here torturing myself about

Jacob Shapiro:

all the ways I'm wrong and not, not being able to find them.

Jacob Shapiro:

Anyway.

Jacob Shapiro:

We don't need to do a, we don't, I don't need to get on the,

Jacob Shapiro:

the psychoanalyst couch here.

Jacob Shapiro:

Um, okay.

Jacob Shapiro:

That was great.

Jacob Shapiro:

Let's move on to our next topic.

Jacob Shapiro:

Um, this is gonna start a little bit silly, but I, I

Jacob Shapiro:

think it's actually serious.

Jacob Shapiro:

I'm curious, um, how you'll react to this.

Jacob Shapiro:

'cause we haven't talked about this yet.

Jacob Shapiro:

Uh, Rob, um, so President Trump, uh, this is two days ago now, on May the fourth.

Jacob Shapiro:

May the fourth be with you, uh, had a truth social post in which he talked

Jacob Shapiro:

about the movie industry capitalized.

Jacob Shapiro:

I don't know why he capitalized those letters in America

Jacob Shapiro:

dying a very fast death.

Jacob Shapiro:

And he said that he wanted, I. The Department of Commerce and the US Trade

Jacob Shapiro:

Representative to immediately begin the process of instituting a 100% tariff on

Jacob Shapiro:

any and all movies coming into the United States that are produced in foreign lands.

Jacob Shapiro:

We want movies made in America.

Jacob Shapiro:

Again, Howard Lutnick responded.

Jacob Shapiro:

We're on it.

Jacob Shapiro:

Uh, I don't need to say anything else about Howard Lutnick.

Jacob Shapiro:

Um.

Jacob Shapiro:

It, it seems silly.

Jacob Shapiro:

And, and by the way, when I was looking at sort of the

Jacob Shapiro:

background of this, I missed this.

Jacob Shapiro:

Did you know that in January he appointed some special envoys to Hollywood?

Jacob Shapiro:

Uh, John Voight, Sylvester Stallone and Mel Gibson were tasked with

Jacob Shapiro:

bringing Hollywood back bigger, better, stronger than ever before.

Jacob Shapiro:

I'm not kidding.

Jacob Shapiro:

This is an actual thing that happened.

Jacob Shapiro:

I just totally missed it.

Jacob Shapiro:

Um, so like there, there's sort of that thing in the background.

Jacob Shapiro:

There's also the larger like entertainment piece where I know for

Jacob Shapiro:

a fact that you know, lots of movies.

Jacob Shapiro:

Either get made or don't get made based on whether they can

Jacob Shapiro:

be sold in China in the future.

Jacob Shapiro:

Like China in particular has become a very big player in this.

Jacob Shapiro:

Like there's a reason in Top Gun Maverick China is not the bad guy.

Jacob Shapiro:

It's like some unnamed country somewhere far away.

Jacob Shapiro:

Like if you start putting China as the bad guy, like you're not gonna sell in China.

Jacob Shapiro:

And then like, all this math doesn't work.

Jacob Shapiro:

So there are things like that.

Jacob Shapiro:

Um, I also confess to you, I've been reading on Protracted War by Mao at night.

Jacob Shapiro:

'cause the Chinese, uh, the People's Daily said You should be reading that more.

Jacob Shapiro:

So I'm listening to 'em.

Jacob Shapiro:

Actually, my, my 2-year-old picked up the package from Amazon and was reading on

Jacob Shapiro:

protracted war on our living room floor, uh, budding communist that she is, I

Jacob Shapiro:

guess, or whatever, whatever mount was.

Jacob Shapiro:

Anyway.

Jacob Shapiro:

Um, but it's funny 'cause in the very introduction, Mao uses

Jacob Shapiro:

propaganda not as a dirty word.

Jacob Shapiro:

He talks about propaganda being a force for good, a force for uniting the country

Jacob Shapiro:

together and that the Chinese Communist party's propaganda was not good enough.

Jacob Shapiro:

And that was an interesting flip in my mind, but I'm bringing it up

Jacob Shapiro:

because Hollywood and the US music industry, they are extremely powerful.

Jacob Shapiro:

Back when I was at GPF, one of my favorite pieces that I wrote, um,

Jacob Shapiro:

I was talking about propaganda around the Russian interference

Jacob Shapiro:

claims, and I compared sort of the.

Jacob Shapiro:

You know, Russia, today's YouTube channel, which had 800 million views over 10 years.

Jacob Shapiro:

That was back in 2015 when I wrote this.

Jacob Shapiro:

And I, I compared that to Justin Bieber having 2.5 billion

Jacob Shapiro:

views on just one of his songs.

Jacob Shapiro:

So it's like, okay, like, yes, there is propaganda, but like, really if

Jacob Shapiro:

you just like, listen to American music or watch American movies, like

Jacob Shapiro:

that's always been much stronger than authoritarian propaganda.

Jacob Shapiro:

I, I will remember vividly, I was in, um, Bucharest in Romania at an event

Jacob Shapiro:

years ago now, and I was seated next to this guy and he had heard on a

Jacob Shapiro:

podcast or something that I liked, um, you know, led Zeppelin and Pink Floyd.

Jacob Shapiro:

And he told me this story about how he used to pay smugglers at the port

Jacob Shapiro:

to lift Alice Cooper and Led Zeppelin like records off the ship so that

Jacob Shapiro:

he could listen to it in his house.

Jacob Shapiro:

And he was worried that his parents would get taken to the Gulag if they knew that

Jacob Shapiro:

he was listening to this forbidden music.

Jacob Shapiro:

And it's because like this, like America centric, but also Western music

Jacob Shapiro:

and I, all these ideas were really, really attractive to most of the world.

Jacob Shapiro:

All of which is, so there is like something in there.

Jacob Shapiro:

But the problem with that is like Hollywood and music and all those

Jacob Shapiro:

other things, it's effective propaganda because it's not propaganda.

Jacob Shapiro:

It's not the president telling you make a song that makes people feel

Jacob Shapiro:

things about the United States.

Jacob Shapiro:

It's literally just musicians like making things that they feel and people wanting

Jacob Shapiro:

to associate with those feelings and then wanting to be in a society where

Jacob Shapiro:

they can have those feelings freely.

Jacob Shapiro:

So if like you're really, like, there's that sort of, uh, rabbit

Jacob Shapiro:

hole that I wanted to go down here.

Jacob Shapiro:

But then the second thing I wanted to ask you about, and this

Jacob Shapiro:

I took from Justin Wolffer, who I've only recently discovered.

Jacob Shapiro:

He's a, a economist I think at U Michigan.

Jacob Shapiro:

Um, he's been doing some great interviews lately.

Jacob Shapiro:

I've.

Jacob Shapiro:

Found 'em really entertaining and I invited him on the podcast.

Jacob Shapiro:

Hopefully he will come on.

Jacob Shapiro:

But he raised the idea that this might actually be a backdoor into tariffs on

Jacob Shapiro:

services because it doesn't really, like what is a tariff on movies actually mean?

Jacob Shapiro:

It's not clear that it's legal.

Jacob Shapiro:

Is that a good, is that a commodity?

Jacob Shapiro:

Is it a service?

Jacob Shapiro:

Like are we talking about the actual like camera work and

Jacob Shapiro:

things like that that go into it?

Jacob Shapiro:

Um, and here is sort of something I think that we haven't talked about very much.

Jacob Shapiro:

We've talked about it a little bit, but services account for more

Jacob Shapiro:

than 70% of US economic activity.

Jacob Shapiro:

And last year the United States exported over a trillion dollars worth

Jacob Shapiro:

of services to the rest of the world.

Jacob Shapiro:

And it might be more than that.

Jacob Shapiro:

Um, the US Bureau of Economic Analysis had a whole report about how it's kind of

Jacob Shapiro:

hard to track services and their estimate might be that it was over $2 trillion for

Jacob Shapiro:

services that the United States exported.

Jacob Shapiro:

We import roughly, um, a little less than a trillion, so around 800 billion.

Jacob Shapiro:

In the same way that there's this leverage, um, you know, the United

Jacob Shapiro:

States maybe has leverage or not.

Jacob Shapiro:

You know, if, if you're thinking about goods, tariffs on goods,

Jacob Shapiro:

the opposite is the case, uh, when you're thinking about services.

Jacob Shapiro:

So what is to stop, for example, countries from coming out and saying, okay, in

Jacob Shapiro:

response to Liberation Day, we will now have retaliation day and we will impose

Jacob Shapiro:

tariffs on all of these US services and we will support European and Chinese, and.

Jacob Shapiro:

Singapore investment, uh, professionals and insurance professionals and

Jacob Shapiro:

accountants and everything sort of else.

Jacob Shapiro:

So it, it just seems like Trump is opening a Pandora's box here with the service.

Jacob Shapiro:

Like, I don't even know if he realized it.

Jacob Shapiro:

Maybe just, you know, Sylvester called him one night and said, yo, man, I, I really

Jacob Shapiro:

need a truth social post about how we need to make movies in America again, again.

Jacob Shapiro:

So anyway, uh, riff any way you want on that.

Jacob Shapiro:

Maybe take the, the, the services thing, whether that's something to be scared of

Jacob Shapiro:

and if you wanna riff on, on Hollywood and things like that, feel free to,

Rob Larity:

well, what you're describing is really, um, in some ways this notion

Rob Larity:

of soft power that everyone talks about.

Rob Larity:

Um, as an American who does not live in America, I can tell you it's hard to find

Rob Larity:

really good examples of soft power, at least here in France, which is an outlier

Rob Larity:

in terms of its own cultural production and its view of America for sure.

Rob Larity:

But when you think.

Rob Larity:

Just to give you an example, like people in our generation, most of them know

Rob Larity:

lots and lots of American music and they don't even know what the words mean,

Rob Larity:

but they know the music by heart, right?

Rob Larity:

That's not really the case for the younger generation is my impression.

Rob Larity:

Like for reasons that are specific to music that are specific to MO movies, you

Rob Larity:

know, just from a bottom up standpoint, I think there's been just less clout anyway.

Rob Larity:

Um, so that's kind of a factor that's been going on in the background.

Rob Larity:

Anyhow, sort of, uh, irrespective of all the sort of tariff stuff, the other

Rob Larity:

thing to keep in mind with services is.

Rob Larity:

Not only is the US more exposed in terms of its actual balance, like

Rob Larity:

yes, part of the reason why the US has 4% unemployment and, you know,

Rob Larity:

our manufacturing sector has shrunk dramatically in terms of how many people

Rob Larity:

work there, as we've talked about is because everyone works in services.

Rob Larity:

So by definition that's where your exposure is.

Rob Larity:

And a lot of those services are directed abroad and it's easy to forget

Rob Larity:

how that's a form of soft power too.

Rob Larity:

Um, it's not just movies, it's not just cultural productions

Rob Larity:

and things that we think of.

Rob Larity:

It's also, you know, consulting firms and, um, you know, technology firms

Rob Larity:

and everything, you know, professional that is exporting their work abroad.

Rob Larity:

It's not like a a something you put on a pallet and put in a container

Rob Larity:

and ship it across the sea and no one ever sees you or interacts with you.

Rob Larity:

Services are by definition.

Rob Larity:

In many ways, much more personal.

Rob Larity:

They are a form of soft power.

Rob Larity:

They're a form of engaging with the world.

Rob Larity:

So yeah, I mean, from an economic standpoint, it's really stupid because

Rob Larity:

we are exposed, we're vulnerable.

Rob Larity:

It's like, you know, bringing a, throwing a rock and you live in this glass house.

Rob Larity:

I mean, that's essentially what we're doing.

Rob Larity:

But it also just kind of accelerates the withdrawal.

Rob Larity:

And I know some people have this view that American soft

Rob Larity:

power has never been greater.

Rob Larity:

Like I don't really know that I buy that.

Rob Larity:

Um, Tyler Cowen has said that many times in the last three or four years, for

Rob Larity:

example, he's a very highly followed, you know, commentator on these things.

Rob Larity:

So there's definitely a counter thesis out there, but I don't really see it.

Rob Larity:

Um, and, and this is not gonna be good for it, you know, no matter what happens.

Rob Larity:

So, yeah.

Rob Larity:

Um, it's, uh, it's definitely an own goal and it's also

Rob Larity:

kind of another confirmation.

Rob Larity:

Not only from an economic standpoint, but just in terms of cultural

Rob Larity:

integration, people interacting with each other, that that tide is receding.

Rob Larity:

Um, and you know, local services emerging to take its place.

Rob Larity:

Um, yeah, that's multipolarity.

Rob Larity:

There's your catchphrase.

Jacob Shapiro:

Yeah, I guess so.

Jacob Shapiro:

Um, I, I wish I had a different catchphrase.

Jacob Shapiro:

I really don't like that word and I still can't find a word to replace it.

Jacob Shapiro:

One, one thing that was interesting, um, if you look at China, China's

Jacob Shapiro:

services, PMI, it fell to its lowest in September, 2024.

Jacob Shapiro:

Um, and it's at the weakest level in the last seven months, even while in

Jacob Shapiro:

the United States, the services sector has actually picked up, um, despite

Jacob Shapiro:

the threat of tariffs, despite all of the pol, despite all the policy

Jacob Shapiro:

volatility coming outta the White House.

Jacob Shapiro:

So there is an underlying strength here for the United States, and I

Jacob Shapiro:

do get the sense that maybe a lot of these countries aren't talking about

Jacob Shapiro:

services in part 'cause they want deals with the United States and they know

Jacob Shapiro:

that if they threaten services, like things might actually get real or I

Jacob Shapiro:

don't know, maybe they don't have the ecosystems yet ready to replace them.

Jacob Shapiro:

But, um,

Rob Larity:

well, well just to, just to jump in on that, because

Rob Larity:

like we have to remember, for most countries, services are not an export.

Rob Larity:

Like services in China are like picture the little, the guy with the little

Rob Larity:

crappy shop on the corner, like he's not exporting to the United States.

Rob Larity:

Um, and that's the case in most countries in the world.

Rob Larity:

Like here in France, most services are small business, serving, domestic

Rob Larity:

in many cases, just local markets.

Rob Larity:

Um, that is the norm.

Rob Larity:

So those two things are not, those are two very different things.

Rob Larity:

Um, in terms of the tradable services sector, which is

Rob Larity:

very specific and very small.

Rob Larity:

And where countries like the US really dominate because they have these

Rob Larity:

huge organizations, big businesses that are performing work abroad.

Rob Larity:

You know, KPMG is doing, you know, accounting and audit work

Rob Larity:

in 200 countries or whatever, you know, they can boast about like

Rob Larity:

that is what we're talking about.

Rob Larity:

Versus most other countries, they just don't have that developed yet.

Rob Larity:

And maybe they will over time.

Rob Larity:

Like that's kind of what we're, what we're talking about.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

And, and this notion of us soft power never being stronger.

Jacob Shapiro:

I, I don't know.

Jacob Shapiro:

I, I would push back against that.

Jacob Shapiro:

I mean, some of this.

Jacob Shapiro:

You know, beauty is in the eye of the beholder.

Jacob Shapiro:

So like, I'm obviously gonna think that us soft power is not good if

Jacob Shapiro:

you're appointing people like Mel Gibson and Sylvester Stallone to

Jacob Shapiro:

rec to represent what is supposed to be best about the United States.

Jacob Shapiro:

Like, uh, Mel Gibson's just an easy one.

Jacob Shapiro:

Like I hope, I don't need to tell you all the reasons that I would be,

Jacob Shapiro:

Jacob Shapiro would be uncomfortable with Mel Gibson being a representative

Jacob Shapiro:

here of United States soft power.

Jacob Shapiro:

Um, but, you know, all that said, I, I, I think I would also try and be

Jacob Shapiro:

serious for a second and, and say that my impression from being around the

Jacob Shapiro:

world and talking to people around the world is, is not that us soft power.

Jacob Shapiro:

Um, is that any kind of zenith?

Jacob Shapiro:

I'm not saying it's gone and I'm sure there were Nas before.

Jacob Shapiro:

I'm sure if you were talking to people in the immediate aftermath of the Vietnam War

Jacob Shapiro:

or even the later stages of the Vietnam War, that opinions about the United

Jacob Shapiro:

States would've been extremely negative.

Jacob Shapiro:

But it seems to me that, you know, the, the companies or the things

Jacob Shapiro:

that have their, their finger on the pulse this way are these large.

Jacob Shapiro:

Tech companies that are associated with things like AI and social

Jacob Shapiro:

media and, and all these other things, like, it seems to me that

Jacob Shapiro:

that's where the real soft power is.

Jacob Shapiro:

Um, not in the form of the US government and the US representing a better way

Jacob Shapiro:

of life because demonstrably like, whether it's in education outcomes

Jacob Shapiro:

or health outcomes or all these different things, the United States

Jacob Shapiro:

can't make that argument anymore.

Jacob Shapiro:

And even in terms of freedom, like, okay, like we, the United States invaded.

Jacob Shapiro:

A Iraq and, and deposed a dictator on false terms.

Jacob Shapiro:

It's now picking a trade war after it profited from globalization for however

Jacob Shapiro:

many, like all these different things, like these things add up over time.

Jacob Shapiro:

Now most of those tech companies are US companies and are, you know,

Jacob Shapiro:

the benefactors of US innovation and research and things like that.

Jacob Shapiro:

But the United States is cutting that out from underneath itself too.

Jacob Shapiro:

So I, I have a hard time wrapping my mind around the idea that US

Jacob Shapiro:

soft power, um, is ascending.

Jacob Shapiro:

It seems to me that soft power has actually sort of transferred

Jacob Shapiro:

to these larger companies.

Jacob Shapiro:

And, and this is something you and I talked about years ago,

Jacob Shapiro:

like when, when the first Trump administration was going after Huawei.

Jacob Shapiro:

I sort of made the argument at the time, Huawei has more in

Jacob Shapiro:

common with Microsoft than it does with any other Chinese company.

Jacob Shapiro:

Like those are the, the peers and, and in and in fighting Huawei to like

Jacob Shapiro:

improve the situation of US companies, you actually kind of delinked like

Jacob Shapiro:

an interesting sort of network.

Jacob Shapiro:

Anyway, I'm rambling a little bit there, but, um, I, I would push back against

Jacob Shapiro:

the notion that US soft power, um, is, is it, is that a zenith right now?

Rob Larity:

Yeah.

Rob Larity:

And just, uh, a final thought on soft power.

Rob Larity:

I mean, obviously it's very difficult to measure and people can argue

Rob Larity:

both ways of like, there's no way to judge, but one thing that you said

Rob Larity:

earlier was soft power is not forced.

Rob Larity:

Like, and I think that's a really important thing, like America is

Rob Larity:

squandering so much of its soft power here by just disengaging with the world.

Rob Larity:

Like soft power is being the beacon on the hill.

Rob Larity:

That was what the Soviets could never match, was, you know, as, as all the

Rob Larity:

former, you know, Soviet people will say when interviewed like the blue

Rob Larity:

jeans, the fucking blue jeans killed us.

Rob Larity:

Like, but you know, that wasn't like a CIA op, it was just, it was

Rob Larity:

just, it just wasn't what it was.

Rob Larity:

And it was open and it was, it was there for everyone.

Rob Larity:

And this notion that, you know, we're gonna somehow increase America's soft

Rob Larity:

power by doing what we're doing from a policy standpoint, it's clearly

Rob Larity:

gonna have the opposite effect.

Rob Larity:

And I think you're, you're seeing that in a major way.

Rob Larity:

Like, let me tell you what soft power is.

Rob Larity:

To me.

Rob Larity:

Soft power is, you know, I live in Paris, I see TAs come here from all over

Rob Larity:

the world, and they have like their, what I call their Paris experience.

Rob Larity:

Like, you could just see them like women, they dress in a, they, I don't know,

Rob Larity:

they don't dress like this at home.

Rob Larity:

That's true.

Rob Larity:

But they put on like what they think is like the, the, the Paris thing to wear.

Rob Larity:

And they're walking around and they're like, eyes are big and they're taking

Rob Larity:

selfies and oh my God, for some of them it's like the experience of a lifetime.

Rob Larity:

It's a dr. Like that soft power is like to have the allure, the o Yeah.

Rob Larity:

That's kind of a silly example, but you know, that's not

Rob Larity:

something that you can dictate.

Rob Larity:

Um.

Rob Larity:

Even though Macron, I'm sure has a, has a 40 point PowerPoint

Rob Larity:

plan to, to increase it.

Rob Larity:

But yeah,

Jacob Shapiro:

I'm sure he does.

Jacob Shapiro:

Did.

Jacob Shapiro:

There was an article in the New York Times over the weekend about how Macron

Jacob Shapiro:

is trying to be more personable talking to local shopkeepers and things like that.

Jacob Shapiro:

Probably sharing his 40, his 40 point deck and you know, and it's been a few episodes

Jacob Shapiro:

since we referenced, uh, blade Runner.

Jacob Shapiro:

But I will say, like I, I'm gonna be really curious to see if Asian soft power

Jacob Shapiro:

rises here in the next couple of decades.

Jacob Shapiro:

Like if you, if you think back to the original Blade Runner and the intermix

Jacob Shapiro:

of specifically Japanese a little bit.

Jacob Shapiro:

Chinese of, of like, you know, futuristic, dystopian la like, I

Jacob Shapiro:

wonder if China will have soft power.

Jacob Shapiro:

Uh, I've turned on Chinese movies before 'cause I think they're kind of fun.

Jacob Shapiro:

Um, especially like the shitty action ones, but some of the other, like, there's

Jacob Shapiro:

a lot of good stuff coming outta China.

Jacob Shapiro:

I don't think that's a mainstream thing, but it, it'll be interesting to see if

Jacob Shapiro:

China can grow any soft power right now.

Jacob Shapiro:

'cause really China doesn't have much, or at least it doesn't have

Jacob Shapiro:

much in most areas of the world.

Jacob Shapiro:

It might in places like Singapore, like some of these other places,

Jacob Shapiro:

but it's, it's pretty restricted.

Jacob Shapiro:

Um, okay.

Jacob Shapiro:

Last big topic we should talk about.

Jacob Shapiro:

Um, and this is something I'm a little confused about, so I'm gonna give you

Jacob Shapiro:

some scenarios and then ask you to think about, or at least tell me what you're

Jacob Shapiro:

thinking about this right now, Rob.

Jacob Shapiro:

Um.

Jacob Shapiro:

Oil prices, um, continue to flounder.

Jacob Shapiro:

I think we're below 60 a barrel, Brent Crude here on, uh, Tuesday, May 6th.

Jacob Shapiro:

Um, I don't know where it's jumped and maybe it'll be different on Friday.

Jacob Shapiro:

Um, but over the weekend, um, OPEC Plus said they were gonna add, I. Almost half

Jacob Shapiro:

a million barrels of oil a day in June.

Jacob Shapiro:

Uh, so you've basically got OPEC Plus saying we're gonna pump more.

Jacob Shapiro:

Um, and it's a little bit confusing, um, why they would wanna do that,

Jacob Shapiro:

because if you're putting more supply on the market, that means you're

Jacob Shapiro:

gonna drive the price of oil down more, and that's gonna be really bad.

Jacob Shapiro:

In particular for Saudi Arabia.

Jacob Shapiro:

Um, I was trying to find the breakeven price for Saudi Arabia's

Jacob Shapiro:

budget, what they need oil to be at in order to balance their budget.

Jacob Shapiro:

And the numbers are all over the place, but I found a range

Jacob Shapiro:

from about 80 to $96 a barrel.

Jacob Shapiro:

As I said, we're sub 60 right now, so Saudi Arabia is nowhere

Jacob Shapiro:

near balancing their budget.

Jacob Shapiro:

They actually just posted their biggest fiscal deficit since

Jacob Shapiro:

2021 on a quarterly basis.

Jacob Shapiro:

That's, uh.

Jacob Shapiro:

Roughly, I mean, they've had consecutive deficits now, 1, 2, 3,

Jacob Shapiro:

4, 5, 6, 7, 8, 9 quarters in a row.

Jacob Shapiro:

I mean, it's not looking particularly good.

Jacob Shapiro:

Um, their, their, their deficit for just Q1 was almost $16 billion.

Jacob Shapiro:

That's half the government's expected gap for 2025.

Jacob Shapiro:

Um, and that you've got Goldman Sachs saying their deficit could sort of 67

Jacob Shapiro:

billion this year because of oil prices.

Jacob Shapiro:

So it's a little bit strange that Saudi Arabia is the one pushing this.

Jacob Shapiro:

Um, there are a couple different theories out there about

Jacob Shapiro:

what Saudi Arabia is doing.

Jacob Shapiro:

The first idea is that, um, the rest of OPEC and OPEC is always a

Jacob Shapiro:

prisoner's dilemma, has not been following through with production cuts,

Jacob Shapiro:

uh, specifically Kazakhstan in Iraq.

Jacob Shapiro:

Uh, so Saudi Arabia is saying, okay, enough of this.

Jacob Shapiro:

Like if you're gonna continue to not abide by what we all agreed

Jacob Shapiro:

on to cut to keep prices up.

Jacob Shapiro:

So you're selling oil, uh, when you shouldn't be, and we're

Jacob Shapiro:

the ones taking it on the chin.

Jacob Shapiro:

Fine.

Jacob Shapiro:

You want to get into an oil price war with Saudi Arabia.

Jacob Shapiro:

We can do this for a couple of quarters.

Jacob Shapiro:

You can't, by the way, I should have said their most recent

Jacob Shapiro:

deficit seems like was funded by borrowing, which is an interesting

Jacob Shapiro:

sort of wrinkle to throw in there.

Jacob Shapiro:

Not going back to reserve.

Jacob Shapiro:

So maybe they can borrow more than they used to be able to.

Jacob Shapiro:

Maybe that's a really negative sign.

Jacob Shapiro:

Uh, just, just put that in the back of your mind too.

Jacob Shapiro:

So option one is punishing Kazakhstan in Iraq.

Jacob Shapiro:

Uh, option two.

Jacob Shapiro:

Is they just decided that they wanted more market share.

Jacob Shapiro:

And this is actually what was happening in global markets,

Jacob Shapiro:

right before Covid Lockdowns.

Jacob Shapiro:

It was really big.

Jacob Shapiro:

You had Saudi Arabia and Russia engaging in an oil price war because Saudi Arabia

Jacob Shapiro:

was like, fine, let's cut it to 20.

Jacob Shapiro:

Like, how low do you want to go?

Jacob Shapiro:

Russia, we wanna squeeze you out.

Jacob Shapiro:

We wanna seize market share.

Jacob Shapiro:

The idea being Saudi Arabia can last longer than some

Jacob Shapiro:

of these other competitors.

Jacob Shapiro:

So that argument is, it's much, it's more, it's about much

Jacob Shapiro:

more than Kazakhstan in Iraq.

Jacob Shapiro:

It could be about Russia, it could be about the US shale producer.

Jacob Shapiro:

It's about saying, no, let's drive oil really, really low.

Jacob Shapiro:

See who's left standing after, I don't know, $40 barrel

Jacob Shapiro:

oil a couple months later.

Jacob Shapiro:

And let's see, you know, Aramco will be up to the task.

Jacob Shapiro:

We'll figure it out.

Jacob Shapiro:

Um, and then the last theory out there is this is really about aligning with

Jacob Shapiro:

the United States that President Trump wants lower oil prices, and Saudi

Jacob Shapiro:

Arabia and the UAE in particular are in a, are in a position to deliver that.

Jacob Shapiro:

And in return, they will get all sorts of defense goodies

Jacob Shapiro:

and, and maybe other things.

Jacob Shapiro:

And maybe they won't have to be so hard on the Palestinians too, in

Jacob Shapiro:

order to get their defense deals and security contracts and shiny weapons

Jacob Shapiro:

from the United States as well.

Jacob Shapiro:

And maybe even other considerations that we're, that we're really not thinking of.

Jacob Shapiro:

Um, I don't know why this flash in into my mind too, the, the rejoinder

Jacob Shapiro:

to the American soft power thing.

Jacob Shapiro:

Rob, you probably remember in the first Trump administration when, you know,

Jacob Shapiro:

president Trump was in Saudi Arabia and Toby Keith, uh, may he rest in peace, uh,

Jacob Shapiro:

you know, playing, playing a concert in Saudi Arabia and dancing with the Swords.

Jacob Shapiro:

There's soft power.

Jacob Shapiro:

Jacob stick that, uh, where, uh, Toby, Keith told the terrorist to put it.

Jacob Shapiro:

Anyway, so I'm, I'm, you can tell that I've had a lot of coffee today.

Jacob Shapiro:

I'm feeling great.

Jacob Shapiro:

So talk to me about oil.

Jacob Shapiro:

Rob.

Jacob Shapiro:

Are, are you like.

Jacob Shapiro:

Because I, I'm a little befuddled here, like it makes sense that oil prices

Jacob Shapiro:

would be low if we're headed towards recession and everybody's worried about

Jacob Shapiro:

the global trade war and things like that.

Jacob Shapiro:

But Saudi Arabia cutting like this and like really, I mean, their, their balance

Jacob Shapiro:

sheet looks really ugly here, um, in this month ahead, you know, maybe an

Jacob Shapiro:

Iran deal lurking behind the corner too.

Jacob Shapiro:

What if Iranian barrels are back on the market in any kind of meaningful way?

Jacob Shapiro:

Like it, a lot of these things are not quite lining up to me.

Jacob Shapiro:

Are any of those explanations convincing or, or do you have others?

Rob Larity:

Um, I don't find the last explanation convincing that

Rob Larity:

they're doing this to please the us.

Rob Larity:

I think that's implausible.

Rob Larity:

Um, the way I would think about this is sort of taking

Rob Larity:

a company bottom up analogy.

Rob Larity:

Like we've been talking about this recently with, um, last time we talked

Rob Larity:

about US profit margins and how a lot of these companies have been riding

Rob Larity:

on very high margins, and yet I.

Rob Larity:

Have signaled that they're willing to eat the tariffs to give up margin in

Rob Larity:

order to protect and gain market share.

Rob Larity:

And this is what happens with cartels.

Rob Larity:

Um, you know, what I just described is sort of a very soft cartel,

Rob Larity:

you know, price competition.

Rob Larity:

How intense is it, you know, or not?

Rob Larity:

And cartels are always easier to do when fundamentals are moving in your favor.

Rob Larity:

Like, look at when OPEC first emerged, like global oil demand

Rob Larity:

was just secularly increasing.

Rob Larity:

Like that was a great backdrop.

Rob Larity:

The problem right now is really twofold.

Rob Larity:

Um, the first is you have the secular issue, which is that the largest country

Rob Larity:

in the world in terms of, you know, population and number of cars on the road.

Rob Larity:

Um, eight out of 10 new cars is now a battery electric car.

Rob Larity:

And like.

Rob Larity:

Oil consumption in China is already peaked.

Rob Larity:

Um, so anyone who's paying any attention is looking at what BYD is doing is looking

Rob Larity:

at the fact that Toyota just released a $15,000 ev, uh, vehicle, that it will not

Rob Larity:

be selling in the us but it's selling, you know, everywhere else in the world and

Rob Larity:

looking at the amount of capacity that's getting built in the battery supply chain.

Rob Larity:

And you're not feeling super enthusiastic about the long term,

Rob Larity:

uh, outlook for crude oil demand.

Rob Larity:

So that's sort of in the back of everyone's mind.

Rob Larity:

In the short term, you have a major cyclical problem, which we didn't

Rob Larity:

talk about this, but you know, the, this inventory cycle, all the

Rob Larity:

cyclical indicators are not good.

Rob Larity:

You know, for reasons that are, that are obvious and you know, compiling those two

Rob Larity:

things, or compounding them I should say, is that you have this cartel dynamic.

Rob Larity:

And the cartel dynamic is when things are bad, cartels break and things are bad.

Rob Larity:

In most parts of the world right now, Russia, they don't give a

Rob Larity:

shit about maintaining the cartel.

Rob Larity:

They need revenues.

Rob Larity:

And this is the same thing with companies.

Rob Larity:

Like if you do any analysis of like, especially cyclical companies,

Rob Larity:

companies that have high fixed costs and relatively low operating expenses,

Rob Larity:

they will produce the shit out of whatever they're making when they

Rob Larity:

need to protect their market share.

Rob Larity:

And if they have financial distress, especially like this is just textbook

Rob Larity:

finance, if a company is levered, they will cut price to keep the

Rob Larity:

revenues flowing and keep the volumes flowing because absorbing that

Rob Larity:

fixed capital, that fixed cost base.

Rob Larity:

Overwhelms all of their considerations.

Rob Larity:

And I think that's what you're hap what you're seeing here is things are

Rob Larity:

not good for many of these countries.

Rob Larity:

Um, you know, a country like Nigeria is hanging on by a thread.

Rob Larity:

They have major, major issues.

Rob Larity:

Do you think that they're thinking long term?

Rob Larity:

It's just like, you know, it's just human behavior.

Rob Larity:

When things are bad in the short term, you think about the short term and you

Rob Larity:

prioritize, Hey, you need a dollar in your pocket today and forget about costs.

Rob Larity:

We'll figure it out later.

Rob Larity:

Oh, it's just depreciation.

Rob Larity:

What does that matter?

Rob Larity:

That's not a cash cost.

Rob Larity:

Oh, you know, whatever.

Rob Larity:

We can scrap those assets and, and sell it.

Rob Larity:

You know, we need to produce volumes.

Rob Larity:

We need to have money flowing in.

Rob Larity:

And in many cases, you know, this is how a lot of these more shitty

Rob Larity:

regimes finance themselves is like, you need to have cash flow.

Rob Larity:

The cashflow then needs to be sent out to all of your cronies and all

Rob Larity:

of the people who are supporting your regime come hell or high water.

Rob Larity:

'cause if that cashflow dries up, then you have coups and political upheaval

Rob Larity:

and all this stuff that, um, that a lot of these, I'm not talking about Saudi

Rob Larity:

Arabia, but lower quality regimes, you know, that's a major consideration.

Rob Larity:

So, you know, all of this applies and it's just going to probably get worse.

Rob Larity:

I mean, cyclical deviations, not withstanding, like if we have a

Rob Larity:

rebound, it'll get better for a while.

Rob Larity:

But this is, I think, kind of the long-term trajectory of what we're seeing.

Rob Larity:

And, and Saudi, you know, I think they're in a very tough spot.

Rob Larity:

Uh, they, they, they talk about Dutch disease.

Rob Larity:

You know, we talked about that a while ago.

Rob Larity:

Like they've been living with Dutch disease for 70 years, which is.

Rob Larity:

They made all this easy money on oil, and it's very difficult to diversify

Rob Larity:

your economy away when it's so small.

Rob Larity:

You know, Neo or whatever ain't gonna do it.

Rob Larity:

I wouldn't be holding my breath for the line, let's just say that much.

Rob Larity:

Um,

Jacob Shapiro:

no.

Jacob Shapiro:

Although, you know, to, I, I, uh, I'll, I'll take the s opposite

Jacob Shapiro:

side for devil's advocate.

Jacob Shapiro:

I mean, at least they're trying.

Jacob Shapiro:

Uh, they are, they are meaningfully trying to diversify and to get away from this.

Jacob Shapiro:

And there have been some big cultural changes in Saudi Arabia

Jacob Shapiro:

over the last couple of years.

Jacob Shapiro:

I mean, you, you said the thing about high quality regimes, I

Jacob Shapiro:

mean, there basically was a coup in Saudi Arabia a couple years ago.

Jacob Shapiro:

Just 'cause you put the, the targets of your coup in the Ritz-Carlton

Jacob Shapiro:

doesn't make it not a coup.

Jacob Shapiro:

So like, there's a very,

Rob Larity:

very nice coup,

Jacob Shapiro:

lovely coup.

Jacob Shapiro:

Like we should all be so lucky.

Jacob Shapiro:

Uh, but, you know, Saudi Arabia is also not the worst off here because

Jacob Shapiro:

they are, you know, the, it, their break even for oil is expensive.

Jacob Shapiro:

Not because it's expensive for them to get oil out of the ground.

Jacob Shapiro:

It's because they have all of these grand commitments and things like that, but

Jacob Shapiro:

they're still one of, if not the cheapest country to get oil out of the ground.

Jacob Shapiro:

They've got a war chest of hundreds of billions they can rely on good credit,

Jacob Shapiro:

like all these other different things.

Jacob Shapiro:

It's not like a, a Nigeria as you referenced, or, or some of these others.

Jacob Shapiro:

So they at least have some.

Jacob Shapiro:

Like they have enough, they have a, an ambition to get away from

Jacob Shapiro:

this and enough resources to where it's not completely unrealistic.

Jacob Shapiro:

It's, I think you and I are both skeptics on it, but hey, like

Jacob Shapiro:

maybe there's a positive scenario.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

And just, but if you're, if you're a Kazakhstan though, or in Iraq,

Jacob Shapiro:

like, geez, this sucks, doesn't it?

Jacob Shapiro:

Sorry, go ahead.

Rob Larity:

It is worth, 'cause it, it is a little unfair from me, uh,

Rob Larity:

with regard to Saudi Arabia because the other Gulf states have shown that

Rob Larity:

it is possible to bridge that gap.

Rob Larity:

Like, look at Dubai.

Rob Larity:

Dubai by any standards where Abu Dhabi have been success stories in terms of,

Rob Larity:

um, becoming these entrepreneur nations.

Rob Larity:

And I think that's what Saudi Arabia is trying to recreate

Rob Larity:

with a lot of these things.

Rob Larity:

Like, and maybe that could work.

Rob Larity:

And a lot of them, like if you look at a country like Dubai,

Rob Larity:

Dubai used to be based on pearls.

Rob Larity:

Like the whole economy was just pearls, like literally getting pearls

Rob Larity:

out of the ocean and selling them.

Rob Larity:

And then I. And then you had artificial pearls and they were fucked and they,

Rob Larity:

they found a way and they pivoted to oil.

Rob Larity:

Like, so these smaller nations, like, you know, I talk about the Dutch disease

Rob Larity:

and stuff, but one of the benefits of being small is that you can pivot

Rob Larity:

like that and sometimes, you know, if you're lucky and you're thoughtful

Rob Larity:

about it, it can be successful.

Rob Larity:

So I don't want to be, um.

Rob Larity:

I don't want to be unfair to the Saudis, but they do have a difficult task.

Rob Larity:

And part of the problem is they're competing now with the other Gulf states

Rob Larity:

who have already sort of taken that playbook and established themselves.

Rob Larity:

So it is a different situation.

Rob Larity:

And yes, Kazakhstan, Iraq, Nigeria, you know, ju just for everyone to know

Rob Larity:

in our internal notes, we have like notes on every individual company or

Rob Larity:

country, and Jacob's notes for Nigeria are just dumpster fire, stay away.

Jacob Shapiro:

Is that what they were?

Jacob Shapiro:

I I maybe, I don't remember.

Jacob Shapiro:

'cause I, I thought I was a little kinder.

Jacob Shapiro:

I thought I put poor man's India, which is really saying something

Rob Larity:

that is much kinder.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

I'm, I'm a diplomat.

Jacob Shapiro:

What can I say?

Jacob Shapiro:

Um, well Rob, who do you think is.

Jacob Shapiro:

Has the most to lose or is going to feel the pain the worst from low oil prices.

Jacob Shapiro:

Is this like the US shale producer's going to take it over the barrel, if you will?

Jacob Shapiro:

Is this, like we said, these Iraq, Angola's, Nigerias,

Jacob Shapiro:

are these gonna be the worst?

Jacob Shapiro:

Um, I mean, you know, there are also, you know, there are Norwegian oil companies

Jacob Shapiro:

out there, Brazilian oil companies.

Jacob Shapiro:

Like the, who do you think is, because I don't think the Saudis are gonna be hurt.

Jacob Shapiro:

The worst.

Jacob Shapiro:

They're gonna be hurt, but they're pushing this right now because they

Jacob Shapiro:

know that they have way more to fall back on than some of these other

Jacob Shapiro:

countries that they're going after.

Jacob Shapiro:

May, maybe it's Russia too, with all the sanctions.

Jacob Shapiro:

Like where would you be watching for negative impact of low oil prices if this

Jacob Shapiro:

continues on for months and quarters?

Rob Larity:

Um, I mean, not to be too simplistic about it, but the higher

Rob Larity:

cost producers like Saudi will be the last man standing because they're the

Rob Larity:

lowest cost producer in the world.

Rob Larity:

Um, and US Shale, you know, all else equal is, is pretty low down the stack as well.

Rob Larity:

So, you know, really I think you're looking at.

Rob Larity:

Offshore areas with, in, in, in lower quality geologies, like anything

Rob Larity:

that's gonna be negatively impacted by inflation more than others.

Rob Larity:

Like, it's easy to look at the, the price of West Texas crude, which is right now

Rob Larity:

just below $60, which is where it was five years ago on an inflation adjusted basis.

Rob Larity:

That is a 20, that's like the lowest since 1999, I would reckon.

Rob Larity:

I don't have an, I don't, didn't do the calculation, but it's way lower in real

Rob Larity:

terms than it's been for a generation.

Rob Larity:

So there's gonna be ramifications and, um.

Rob Larity:

You know, you're gonna see marginal production, uh, drop in cases

Rob Larity:

where, um, it's not overwhelmingly a political decision to keep

Rob Larity:

producing come hell or high water.

Rob Larity:

Um, so yeah, I mean, everyone kind of knows the, the countries that are oil

Rob Larity:

dependent and lower quality and, and at the margin, um, those will be the first

Rob Larity:

ones to really have major, major problems.

Rob Larity:

Uh, and that'll probably give a lease on life to a nation like, like Saudi, because

Rob Larity:

that's gonna be production that, you know, over some time period is gonna, is

Rob Larity:

gonna decline or go away, but it's gonna be a rocky road between here and there.

Jacob Shapiro:

And don't forget Guiana, uh, ever.

Jacob Shapiro:

My, uh, one of my emerging markets that if you could get access to would be fun.

Jacob Shapiro:

Uh, we should probably do a whole episode on artificial pearls and things like that.

Jacob Shapiro:

Like I, I went down this rabbit hole once upon a time 'cause my wife's

Jacob Shapiro:

wedding ring is an artificial diamond.

Jacob Shapiro:

And I was convinced that the diamond industry would completely collapse once

Jacob Shapiro:

people realized that you can literally make a diamond in a lab and not worry

Jacob Shapiro:

about, you know, where it came from and who died to get it and which child, you

Jacob Shapiro:

know, slave labored it out of the ground.

Jacob Shapiro:

Um, but yeah, maybe we should have a whole episode just on why,

Jacob Shapiro:

or, I don't know, maybe you think diamonds are gonna die a slow death.

Jacob Shapiro:

Just like, just like, uh, pearls.

Jacob Shapiro:

I don't know.

Jacob Shapiro:

They

Rob Larity:

are dying a slow death.

Jacob Shapiro:

They're diamond.

Rob Larity:

Yeah, diamond prices are down like 20% year over year because of.

Rob Larity:

Emerging competition from Lab Grown.

Rob Larity:

Look at, we were short signet, uh, at off Wall Street, um, at the end of last year.

Rob Larity:

And they're in a tough spot, uh, with this artificial diamond

Rob Larity:

business, that's for sure.

Jacob Shapiro:

All right, there you go.

Jacob Shapiro:

Um, last thing, just, and we can do this really quick.

Jacob Shapiro:

Um, this is on my, you know, uh, uh, sort of radar in terms of we've had Liberation

Jacob Shapiro:

Day, tariffs have been in place for a while, but now we're starting to see the

Jacob Shapiro:

actual impact in terms of either ships not arriving or empty ships, things like that.

Jacob Shapiro:

Um, port of Los Angeles, um, if you're looking at the data, which I

Jacob Shapiro:

just had in front of me, but which just went away, hold on, listeners.

Jacob Shapiro:

Um, if you're looking at Port of Los Angeles data.

Jacob Shapiro:

Um, you know, change from previous year for May 4th to May 10th, down 35% change

Jacob Shapiro:

from previous week 16, almost 17%.

Jacob Shapiro:

Um, next week down 10%, this is in terms of vessels that are arriving,

Jacob Shapiro:

but then the week of May 18th, up 65% from the previous year.

Jacob Shapiro:

Um, uh, my, my mother-in-law was one of the many people who, uh, you know,

Jacob Shapiro:

went to the, the car, uh, the auto.

Jacob Shapiro:

Uh, where do you buy cars?

Jacob Shapiro:

Not the car shop dealership.

Jacob Shapiro:

Auto dealer, Jesus Christ.

Jacob Shapiro:

I need more coffee.

Jacob Shapiro:

Like, went to the car dealership, uh, in order to get a car

Jacob Shapiro:

because she was worried, oh my God, there's not gonna be cars.

Jacob Shapiro:

This seems to be a thing that's happening throughout the United States where

Jacob Shapiro:

people are stocking up on furniture and umbrellas and shoes and all those

Jacob Shapiro:

things that are made in China that are not gonna be made in the United

Jacob Shapiro:

States, uh, economically, guys, uh, but.

Jacob Shapiro:

You had, I think you were the one who brought up to me, you know, Walmart and

Jacob Shapiro:

Home Depot and all those guys coming to the White House and conferring with Trump.

Jacob Shapiro:

And you've got some port data now saying, well, two weeks from now

Jacob Shapiro:

it looks like some shipments are up and the Chinese are backing off.

Jacob Shapiro:

And Bestin is out there giving bumbling answers that, oh, well, you

Jacob Shapiro:

know, we're not talking, but this is unsustainable in the long run.

Jacob Shapiro:

So, um, do you think this is gonna be a quick reprieve, that it's just

Jacob Shapiro:

gonna be like a two week crazy period?

Jacob Shapiro:

Um, or do you think that it's gonna last longer than that?

Jacob Shapiro:

Because I was thinking it would be a longer gap than that, but that LA

Jacob Shapiro:

Port data sort of made me sit up in my chair a little bit to think, well,

Jacob Shapiro:

maybe, maybe there was just a two week blockage and maybe like, yes, for

Jacob Shapiro:

two weeks, like there'll be no toilet paper on the shelves and you won't

Jacob Shapiro:

be able to order things on Amazon.

Jacob Shapiro:

But maybe things go back to normal after that.

Jacob Shapiro:

I don't know.

Jacob Shapiro:

Like, what do you think?

Rob Larity:

I think people are really underestimating the actual scale of the

Rob Larity:

damage, um, that's happened here already.

Rob Larity:

And I don't think markets are really pricing this in.

Rob Larity:

Um.

Rob Larity:

So there's a few misconceptions out there.

Rob Larity:

The first is people are thinking that there's been a lot of pull forward demand

Rob Larity:

ahead of these tariffs that were just announced, um, by like inventory builds.

Rob Larity:

I mean, so the tariffs were announced and oh, everyone's rushing.

Rob Larity:

All these businesses are rushing to buy stuff now.

Rob Larity:

There's no evidence of that.

Rob Larity:

And that's really concerning because you saw in January, through the, really,

Rob Larity:

through the back half of last year as we were heading into the election, and we

Rob Larity:

talked about this at the time, you started to see businesses were accumulating

Rob Larity:

inventory in advance of Trump's election.

Rob Larity:

Accumulating.

Rob Larity:

Accumulating.

Rob Larity:

This was growing throughout.

Rob Larity:

December and really peaked in January.

Rob Larity:

Like January was a huge blow off top.

Rob Larity:

And you know, we spoke with some members of the CI club who work for

Rob Larity:

industrial companies and they were saying, yeah, you know, we went out

Rob Larity:

in, in January and we bought a lot of inventory because we're dependent

Rob Larity:

on Canada, we're dependent on Mexico.

Rob Larity:

These tariffs are coming through and we needed to really, you know,

Rob Larity:

ramp up our inventory levels.

Rob Larity:

Like that was four months ago now.

Rob Larity:

And since then, the, uh, indicators of inventory build have been really bad.

Rob Larity:

And I think what people miss is that you're having the opposite effect, which

Rob Larity:

is almost spooky, is businesses are not building their inventories ahead of.

Rob Larity:

This tariff increase.

Rob Larity:

They're anticipating bad things and they're letting their inventories run out.

Rob Larity:

So that's number one thing.

Rob Larity:

Number two thing is everyone in markets are looking at these consumer

Rob Larity:

companies and they're saying, okay, first half of the year is gonna be

Rob Larity:

tough, but they're all, you know, for the most part, modeling improvement

Rob Larity:

in the second half of the year.

Rob Larity:

Well, the problem is a lot of these retailers aren't gonna have anything

Rob Larity:

to sell in the second half of the year.

Rob Larity:

And like we always forget, like we model out these different parts of the

Rob Larity:

economy and like we talk about freight a lot in shipping and inventories.

Rob Larity:

Well, like that's important because managing a retail business is a tricky

Rob Larity:

balance between having just enough inventory to drive sales, but not too

Rob Larity:

much inventory that you have to discount.

Rob Larity:

Mm-hmm.

Rob Larity:

And now we're totally swinging to the level of you're gonna see empty shelves

Rob Larity:

in the next I. You know, coming weeks, depending on where you are, like East

Rob Larity:

Coast, this is probably gonna happen soon because the numbers you just cited,

Rob Larity:

like it takes time for these ships to get, like everyone focuses on the long,

Rob Larity:

long beach and, and LA 'cause those are the, you know, the Western shipping hubs.

Rob Larity:

But it takes time for this stuff to reach the East coast, which is where most

Rob Larity:

of the population is consuming stuff.

Rob Larity:

And like all these analysts in New York are in Manhattan and they're like, oh

Rob Larity:

well Dwayne Reed has plenty of stuff.

Rob Larity:

So no big deal.

Rob Larity:

Like, it's coming like you.

Rob Larity:

It's very, we think people are so smart and observant, all these

Rob Larity:

finance guys, but like I think we give them a little too much credit.

Rob Larity:

So a little, I think there's, yeah.

Rob Larity:

Well.

Rob Larity:

I'm, I'm being diplomatic now.

Rob Larity:

Um, you go, but you know, there's, there's complacency there.

Rob Larity:

I think retail is really in a difficult spot.

Rob Larity:

Um, the damage has already been done, in other words.

Rob Larity:

And really the thing to watch is to what extent do you have this

Rob Larity:

ripple through into, okay, now you're starting to get job cuts.

Rob Larity:

There's some early indications of like large scale layoffs.

Rob Larity:

Um, not huge data points yet, 'cause it's early.

Rob Larity:

That's always the last thing to happen.

Rob Larity:

Like the employment cycle is always a lagging indicator.

Rob Larity:

So I wouldn't be looking there yet, but the inventory cycle is looking very bad

Rob Larity:

and that consequentially is bad for.

Rob Larity:

Consumer and retail, which is, as you pointed out, a huge part of the economy.

Rob Larity:

The other shoe to drop or thing to watch is what happens with

Rob Larity:

investment, fixed investment.

Rob Larity:

CapEx.

Rob Larity:

You know, meta came out and made a big thing, oh, we're gonna spend

Rob Larity:

$80 billion on CapEx next year.

Rob Larity:

We're not slowing down on ai.

Rob Larity:

And God bless 'em, because if that represents what all businesses are doing

Rob Larity:

and they're looking through it, then that will be definitely a mitigating factor.

Rob Larity:

But if businesses are turning around and saying, whoa, there's

Rob Larity:

way too much uncertainty here.

Rob Larity:

We don't know what this guy's gonna do from one day to the next.

Rob Larity:

We have to reign in our CapEx budget, reign in our consulting budget

Rob Larity:

reign in our software budgets.

Rob Larity:

That's a big sign.

Rob Larity:

And, and one data point on that in the last week, the information, which is

Rob Larity:

really good, uh, thing to read by the way, for, for people who are wondering.

Rob Larity:

It's, I, I love that.

Rob Larity:

Uh, they ran a piece where they kind of got the scuttlebutt

Rob Larity:

ahead of the annual, um.

Rob Larity:

There's a a period where all the advertisers get together and the, the

Rob Larity:

upfront they call it, and they kind of hash out their ad budgets for the

Rob Larity:

coming year and everyone gets together.

Rob Larity:

They have these, you know, they present like, what are the big

Rob Larity:

pieces of content in the coming year?

Rob Larity:

It's a big hoo-ha and the scuttle, but ahead of this was that TV and streaming

Rob Larity:

ad budgets we're gonna be down 10% year over year, which is a, that's a

Rob Larity:

worrying and that's a canary in the coal mine of business spending confidence.

Rob Larity:

All this stuff that we kind of know is getting hit, like now you're starting

Rob Larity:

to see some of this actually show up in the investment data That's very bad.

Jacob Shapiro:

Well, on that Rosie note, I mean, honestly, we've only like

Jacob Shapiro:

touched what's going on in the world.

Jacob Shapiro:

Like Israel's talking about seizing Gaza and firing back

Jacob Shapiro:

and forth with the Houthis.

Jacob Shapiro:

Friedrich Merz failed in his first, uh, vote to be chancellor.

Jacob Shapiro:

He got through and the second vote, but boy was that a, a shot to our Germany

Jacob Shapiro:

thesis, at least on the, on the front end, uh, Australia elections, Canada elections.

Jacob Shapiro:

The UK and India just agreed to a free trade deal.

Jacob Shapiro:

So.

Jacob Shapiro:

Lots of stuff out there, but I think What about

Rob Larity:

Pakistan?

Rob Larity:

India don't like, is that something we should be worried about?

Jacob Shapiro:

Uh, you know, we had an India analyst on last week.

Jacob Shapiro:

I'm talking to Kamran in two hours to tell him.

Jacob Shapiro:

So why don't I give you the answer next time we talk?

Jacob Shapiro:

I thought so.

Jacob Shapiro:

'cause they, they were saying, oh, like they're, it's starting to feel like a hold

Jacob Shapiro:

me back fight Ra rather than a real fight.

Jacob Shapiro:

Doesn't look like both sides are, are willing to go at it.

Jacob Shapiro:

But yes, anytime nuclear arm powers are threatening each other, we should probably

Jacob Shapiro:

also be at least a little bit worried.

Jacob Shapiro:

I would think.

Jacob Shapiro:

So.

Jacob Shapiro:

It's not great.

Jacob Shapiro:

So lots of things to talk about going forward.

Jacob Shapiro:

All right.

Jacob Shapiro:

I gotta run.

Jacob Shapiro:

Cheers.

Jacob Shapiro:

Rob, I

Jacob Shapiro:

thank you so much for listening to the Jacob Shapiro podcast.

Jacob Shapiro:

Uh, the show is produced and edited by Jacob Mian, and it's

Jacob Shapiro:

in, in many ways, the Jacob Show.

Jacob Shapiro:

Um, if you enjoyed today's episode, please don't forget to subscribe.

Jacob Shapiro:

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Jacob Shapiro:

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Jacob Shapiro:

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Jacob Shapiro:

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Jacob Shapiro:

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Jacob Shapiro:

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Jacob Shapiro:

I'm also on, on X for now with the handle.

Jacob Shapiro:

Jacob Shap.

Jacob Shapiro:

That's Jacob.

Jacob Shapiro:

SHAP.

Jacob Shapiro:

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Jacob Shapiro:

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Jacob Shapiro:

Um, see you out there.

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