February 27, 2025 • 51 mins
The first month of the Trump administration has been noisy and novel by basically any measure. But perhaps the biggest shockwaves have been in the realm of geopolitics. Europeans were caught off guard by a recent speech given by Vice President JD Vance in Munich, calling into doubt the future of the Trans-Atlantic partnership. Meanwhile, when it comes to tariffs, the Trump administration has actually been tougher on Mexico and Canada than it has been on China. Then add into all of this the anxiety over AI domination, as a result of the hype around DeepSeek. So how should we understand these novel risks? And how should investors incorporate them into their thinking? On this episode we speak with Jared Cohen and George Lee, the co-heads of the Goldman Sachs Global Institute. They discuss the future of Europe, what they're expecting from the Trump administration, the rise of the Gulf powers, AI, undersea cables, and the opportunities in identifying what they call "geopolitical swing states" like Japan and India.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Oddlocks podcast.
Speaker 3 (00:21):
I'm Jill Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:24):
Tracy, there's a lot going on in the world.
Speaker 3 (00:26):
Are we going to start every podcast with that sentence?
Speaker 2 (00:29):
It's sort of a cliche. Now, there's a lot going
on in the world. I have to say, you know,
I recently were recording this February twenty fifth. I don't
know the exact date that's coming out. I recently took
a vacation and they did a pretty good job, Tracy,
wouldn't you say like being unplugged, Like I probably sent
like six or seven tweets. I don't think I responded
to any emails or what's that message.
Speaker 3 (00:50):
I actually noticed this that the volume of Joe's digital presence, Yeah,
was way way down and normally listeners. Normally when Joe
is on vacation and sometimes board, he just starts firing
off emails saying like, oh, we should do this and
we should do that. None of those. This time. It
was a vacation for me too.
Speaker 2 (01:10):
A vacation from your co host. Yeah, I really did
not do much. And then I have to say, like
re entry into the world, my thirty five hundred emails
catching up. Everything that happened in a week in the
world was a lot this time. And I'll just say
it's a cliche to say a lot happened, but it
was like, Okay, I really have some catching up to do.
Speaker 3 (01:32):
It.
Speaker 2 (01:32):
I felt it, and it made the re entry from
vacation words.
Speaker 3 (01:35):
Well, it's not just the number of things that are happening,
it's the significance as well. Right, So I imagine one
of the things you came back to after your week
off was the idea of a rift, a growing rift
between the US and Europe. There's all these lingering concerns
as well about competing with China AI technology. Big themes
(01:58):
to think about. Now.
Speaker 2 (01:59):
I saw, like scrolling on my phone, I saw like JD.
Evance has given this big speech in Munich, and I'm like,
do I want to watch this on the beach? And tuloum,
I do not want to watch this on the beach.
And so but now I have to understand how the
world changes and again from week to week. But big
things afoot in the world, and how should we make
sense of these and how should we cut through the
(02:20):
noise and all that stuff. Anyway, I'm very excited. We
really do have the two perfect guests to discuss big
things in the world, like technological changes, especially through the
geopolitical lens and this ratum the geopolitics of what will
be the nature of the US's relationship with Europe and
other countries. We're going to be speaking with Jared Cohen,
(02:41):
President of Global Affairs and co head of the Goldman
Sex Global Institute, and George Lee, the other co head
of the Goldman Sex Global Institute. So Jared and George,
thank you both for coming on Ovlach joining us in
the studio.
Speaker 4 (02:55):
Thank you, thank you. As I mentioned you before, I'm
a longtime listener, first time caller of the pod, so
thrilled to be on it with you.
Speaker 3 (03:01):
Oh, thank you. I love it when people say that
on air. I know I have a question just to
begin with, what is the Goldman Sachs Global Institution.
Speaker 4 (03:09):
Sure, I'll start, George to pitch in. So, the Goldman
sax Global Institute is a new platform at the firm.
We formed about two and a half years ago and
the goal is to promote the firm's thought leadership at
the intersection of technology change, geopolitics, and markets, and the
idea is that these factors have become extraordinarily consequential for boards, CEOs,
(03:34):
investment committees and many of our client types. And so
this ability to transmit our thinking, be provocative, share a
worldview is just a great way to engage our clients.
It's been a lot of fun.
Speaker 5 (03:47):
The other thing that I would add is for some
of the really kind of big strategic clients, Let's take
sovereigns as an example, there's a lot of ambitions that
they have over the next three to five years, and
what the Institute does is we pull together all the
expertise that we have at the firm to essentially cover
their ambitions. So when they say, you know, here's at
a high level what we want to try to do
in the AI space, or here's what we want to
(04:07):
try to do in the Indo Pacific region, our job
is to be able to respond as a firm, to
help them think through and define what that looks like
and then to help them make it happen. And through
the combination of our banking franchise and our asset management franchise,
that's what we try to.
Speaker 2 (04:20):
Do Okay, let's just jump right into question. I didn't
when I was on the beach watch that JD. Van
speech that he made in Munich, and I know there's
all this falling out, you know, he's frustrated columns and
the Financial Times and stuff like that and all these
big things. What was that all about? What happened there?
Speaker 5 (04:39):
So I was there, great and tell us and there's
a little bit of it before and after. So I
was with a number of the European leaders the month before,
and they were getting ready for the Trump administration to
come into office and dealing also with the first twenty
four to forty eight hours. And their biggest concern at
the time was that a deal would be struck on
(04:59):
Ukraine above their heads and the Ukrainians heads. Now, I
think that that was a little bit of a false concern.
It was more of a reflection of the difficulties they
thought they'd find in the transatlantic relationship. I think a
month later, by mid February, they were surprised that a
deal was actually being cut above their heads, not just
(05:21):
between the Trump administration and the Russians, but then broker
by you know, the Gulf as an honest Broker, and
I think what was interesting about JD. Vance's speech is
he gave a speech at a security conference and there
was really nothing to offer on the foreign policy front.
It was, you know, for all intents and purposes, kind
of a lecture about free speech. And I think it
(05:44):
was more of a reset in a negative way of
the Transatlantic relationship. And I think what I was surprised
by is that the Europeans were surprised by the speech.
You know, it would have been very easy, by the way,
for them to acknowledge that there was no new policy
set in the speech. He didn't announce anything on Russia, Ukraine,
he didn't announce anything on the Middle East, he didn't
announce anything on China. It was just kind of a
(06:05):
difficult moment in the Transatlantic relationship. I think part of
the reason the Europeans are experiencing so much consternation over
this is the lack of economic growth in Europe is
causing Europe to essentially evaporate geopolitically. They don't have a
seat at the table on the Middle East, they don't
have a seat at the table on Ukraine. They're trying
to figure out what tariffs are coming and how to respond.
Then they know that lingering on the horizon is a
(06:27):
confrontation with the US over them having less dependence on
China for manufacturing markets and other issues, and so they're
scrambling figuring out what to do. They're having a hard
time acting collectively, which is making it difficult for them
to respond in a way that's sufficiently robust to level
the playing field with the Trump administration.
Speaker 3 (06:48):
You mentioned that you leaders were preparing for the Trump
administration late last year. What does that look like? How
do you prepare.
Speaker 5 (06:56):
Well for starters? Most of them weren't around when he
was president last time. And if you look at who
is around last time, you had Macron, who Trump doesn't
particularly like, Zelensky, who Trump doesn't particularly like, in Victor
Orbon who he does like, and so most of these
leaders hadn't dealt with Trump before. I think that one
of the things that they're all surprised by is that
(07:18):
what they observe and recall from watching the first Trump
presidency that this feels less like a second term and
more like a totally separate presidency with a four year
interregnum in between. And that also shouldn't be surprising because
he didn't recycle very many of the same people from
the first time around, the world has completely changed in
four years. In this time around, he wasn't surprised to win,
(07:39):
and so he's coming in with a very clear doctrine
and agenda focus really on reciprocity, so defense spending, trade deficits,
you know, areas where he feels like there's an imbalance
and other countries haven't been kind of quote carrying their load.
He's then taking a transactional approach to address that. And
there's look, there's a little bit of what we've seen
(07:59):
you administrations do recently, which is show up with opposite day,
which is if the previous administration was for it were
against it. But when you look at the policy in
the Indo Pacific, that's where you've seen the most consistency.
You know, you don't yet have kind of a special
envoy on you know, China and Indo Pacific issues. The
meetings with the Quads have persisted. The administration did South
(08:21):
Korea a solid amidst their political turmoil by reinforcing the
importance of the Japan US South Korea trilateral reinforcement of
the Quad and even on tariffs, you know, he's launched
a series of trade investigations into China which will culminate
in May. Whereas with you know, Canada and Mexico, he's
come in hot and heavy. With Europe, he's come in
hot and heavy. In those tariffs look more robust than
(08:43):
they did in twenty seventeen and twenty eighteen.
Speaker 4 (08:45):
Jared, you you've observed in the past that, well, we
don't have the same shock and awe from that community
that we had in twenty sixteen. They're kind of used
to him stylistically and in his cadence. You know, there
is a fundamental difference in that it's unclear who in
the administration is running which pieces of the portfolio. And
this seems to be more of a Trump forward, you know,
(09:07):
policy leadership by him himself. Maybe, is that Yeah?
Speaker 5 (09:11):
I think that's right. And by the way, when the
forty fifth president was in office, there was also not
a ton of clarity on you know, who was going
to get fired on the toilet versus you know, who
was going to end up running a fiefdom. I do
think what George is referring to is a various stute observation,
which is the first time around the departments and agencies.
The heads of the departments and agencies exerted an enormous
(09:32):
amount of influence, and policy was much more decentralized. Different
people had different accounts and different agendas that they were pushing,
and occasionally the President would weigh in and there'd be
a recalibration. This time around, you don't see that sort
of strength that the departments and agencies, and policy feels
much more centralized at the White House, with a sea
of special envoys for just about every issue that you
(09:53):
can imagine, and policy seems to be set more by
the president, with everybody waiting to see what this sort
of policy mark to market is before they fast follow
and figure out what their agenda is going to be.
Speaker 2 (10:21):
Use the word Europe evaporating geopolitically, and it hadn't clicked
to me. This is something we've talked about to the
sort of what ails Europe, but you know, even within
the context of this most recent episode, like it hadn't
clicked to me the sort of elevated role that the
Gulf States have had in playing intermediary talk about how
(10:42):
the world, whether it's political leaders or business leaders, are
like thinking about this reality that what is still you know,
one of the richest regions on Earth is at this
moment where like people are asking existential questions about its
capacity to be a player in anything.
Speaker 5 (11:00):
So look, if you look at the Gulf. I've been
traveling there for twenty five years, and for most of
that time, the international system was in a global War
on terror paradigm, and in that context, the geopolitics were
driving the economic interest. And when you talk to these leaders,
they would say we wanted to be the other way
around that they were stuck in this paradigm, and so
(11:20):
the most important conversations that were happening at the political
level were around geopolitics and security. But you had these
growing sovereign wealth funds that were kind of off to
the side, and so these were countries that had sovereign
wealth funds, but geopolitics was front and center. And then
a series of new leaders showed up in twenty fifteen
and twenty sixteen in Saudi and Cutter and UAE, and
(11:42):
they just brought with them a different set of ambitions
that are born out of a different generation, where they
wanted to diversify the economies. They wanted to be leaders
in science and technology, not followers, and they wanted to
broaden the reach and international influence of each of their
respective countries, but they were still stuck in a global
war on terror framework. And then COVID happened, and it
(12:02):
completely shifted the paradigm towards a great return of great
power competition and competitive coexistence between the US and China.
And with all of that geopolitical brush cleared, that was
the paradigmatic shift where these countries finally had a situation
where their economic interests could drive the geopolitics. And what
I would sort of say flippantly, that was the moment
where they went from being countries with sovereign wealth funds
(12:24):
to sovereign wealth funds with countries. And you know, but
another way, you know, they're now leading with strategic capital
as opposed to being a place where people come to
for capital. And so it's giving them the right to
play the chessboard. And we lump the Gulf countries together
because that's what historically we've done. These are distinct countries
with unique ambitions, and what they have in common is
(12:45):
they have a lot of money. After that, each of
them are after very different things and they're engaged in
their own degree of competition with each other.
Speaker 3 (12:53):
So Jared mentioned this idea of a slowdown in the
European economy contributing to all the let's call it existential
angs that you see right now. And George, I want
to bring you in here because one thing you often
hear is this idea that Europe is lagging behind in
AI and if AI is going to be the next
big thing, the next big economic driver, that's really a
(13:16):
problem for them.
Speaker 4 (13:17):
Yep, Tracy's a great question. You know, having been in
technology for thirty five years and seen my share of
platform transitions and new technologies arise, this is really the
first one where world leaders have tagged AI as a
matter of national destiny really early. It's going to be
consequential for their economies, their growth, their culture, their defense.
(13:37):
And so we've seen enormous focus and you know, I'm
just back. I was recently at the AI Action Summit
in Paris, which was quite an impressive event and coalesced
a bunch of investment in within the borders of France's
something Macron I think is a real leader on and
some of these European countries are a wellspring of enormous
intellectual capital think about the grandicles in France, that combination
(13:59):
of and statistics that they lead in with excellence. You've
got Cambridge and Oxford and places like that. So there
is an enormous amount of intellectual capital emerging from Europe
and there's some really inspiring companies like miss Strawl out
of France, et cetera. Whether they can marshal the the
intent and capital to really lead in building the infrastructure
(14:23):
and they need to support that intellectual capital is the
big question, and it's why you saw a lot of
the announcements around the AI Action Summit be about bringing
capital to France, scaling their lead in atomic energy, which
is a great energy source for this, and so everyone's
giving it their best shot. But competing with the energy abundance,
capital abundance of the Gulf countries or the just natural
(14:45):
tech leadership of the US, I think it's a hard
brief for them to compete in the scale that they
want to, but make no mistake, they have real assets.
Speaker 2 (14:53):
Well, actually, there's a question I want to pose to
both of you because whether we're talking about you know,
what is it actually take to say commercialize the intellectual
capital of Europe or what does it actually take for
the EU to be a geopolitical power player, so that
they're not taking a backseat and watching all of these actions,
(15:14):
all of these conversations take place above their head. There
is this sense that large European organizations have been very
good at expanding the number of member countries over time
that exist, that they grow out, but that the issue
of like internal depth, single rules, market cohesion has really difficult,
(15:34):
and the sort of the deepening of these various unions
that exist on the European continent. And every once in
a while there will be some leader and you know,
to come up with one hundred page report. I think
we talked about recently on the podcast. You know, I
asked your Mario Dragi issued to big report, and there's
always some new report about competitiveness or whatever. I'd love
to hear from both of you whether you think that
(15:56):
the tides are shifting in Europe in such a way
that all of these things that sound good on PDFs
and institutional websites can change the way the nature of
politics and policy is wrung within the content.
Speaker 5 (16:10):
So look, you're getting at a debate that we certainly
hear playing out every single day, which is the bearishness
on Europe overplayed, right. No, nobody's questioning that the lack
of economic growth, and nobody's fooled by the economic rally
they've had at the beginning of the year. There's some
fundamental questions. I won't try to argue the other side
because I'm quite bearish on it. And I'm quite bearish
(16:33):
on it because it's not that European leaders don't know
what they need to do.
Speaker 4 (16:38):
Right.
Speaker 5 (16:38):
So let's take geopolitics and defense, and George, you should
talk on the AI side and the regulatory side, but
on defense, right, it's very clear. I mean, what's interesting
about Vance's speech, which you were talking about before. Privately,
every European leader said, you know, the US has a
point on defense spending, they have a point on migration,
they have a point on regulation, and every European leader
(16:59):
has an idea for how to fix it, and they
all like drag eas report. The question is implementation, right.
So Europe has a number of challenges, one of which
is you become prime minister if you get the largest
percentage of the vote, which is usually thirteen, fourteen, fifteen percent,
or if you're mergency know twenty nine percent with a
blocking minority from the AfD right. And so if you're
sitting on top of one of these coalition governments that
(17:20):
you can barely scrap together in order to do the
meaningful policy changes that you have to do, you're likely
going to break the coalition in the process. So you
have coalition politics getting in the way. That's one issue.
On defense, three percent of GDP is the new two percent.
And in a lot of respects what's happened with Ukraine
and the fact that the Europeans now conclude they can't
(17:43):
rely on the US for security guarantees, it's made them
more comfortable with the idea of three percent or as
you move east to places like poll In five percent.
The problem again is implementation at a collective level. So
you know, there's certain countries that are strong on defense
and certain countries that have medium and small sized defense players.
So is the answer that if Europe is going to
get big enough from a defense perspective, you're going to
(18:04):
have to have cross border mergers and acquisitions and consolidation. Okay, fine,
who gets the national champion the EU? Yes, it's a
coalition of countries or a union of countries. These are
still national governments underneath it, and you're really going to
tell you a medium sized Central European country that they
have to give up two of their biggest companies because
Sweden's going to get bigger on the defense side, when,
(18:24):
by the way, they're closer to the Russian threat. So
this is just one example of where it breaks down
implementation within the EU. You still have zo some politics
that exist between the national governments, and then that gets
exacerbated by the point I made earlier about coalition politics.
Speaker 4 (18:39):
Yeah, I'm struck. I've been at a couple of Golden
Sex gatherings where you bring together CEO level leaders in
Europe in a couple different countries. I was struck by
the degree of pessimism and almost resignation about their ability
to influence policy that provides more of a pro growth
environment for them. Look, I think that you know, hopefully
events over take some of this inertia, because the competitive
(19:02):
impulse for these countries is going to get increasingly important
and challenging, and so maybe it will mediate some change
and more collective, more effective collective action. But the business
leaders are are certainly frustrated, and one of the things
they reflect on is how Europe's leadership and AI in
some ways perceptually has been defined by its leadership on
(19:23):
AI safety. By the way, that's a.
Speaker 2 (19:25):
Worthy and important goal.
Speaker 4 (19:26):
One of my observations in the world of AI they're
kind of fascinating, is you know, chat GPT emerged in
November twenty two, and there was an immediate outcry about
AI safety, existential risk, a lot of headlines, a lot
of inks, build a lot of time and energy. Fast forward.
Now we have machines that are one hundred to a
thousand times more powerful, and it's a much more muted
dialogue about those risks. Interestingly, but there's frustration in Europe that,
(19:50):
you know, kind of characteristic focus on privacy, regulatory bounds,
safety is retarding their progress in something that now has
really become kind of a commercial, military, and cultural arms
race across the face of the earth.
Speaker 3 (20:04):
This is what always happens, Joe. The US invents the technology,
China maybe improves on it, and Europe writes the regulations
and the thought pieces about it. Jered. Just going back
to a point that you made about the European response.
You use that word transactional earlier to describe the Trump
administration's approach to geopolitics, and funnily enough, we just recorded
(20:27):
an episode yesterday where we said the exact same thing.
I guess I'm wondering, do you see any signs that
the approach is actually working, because so far, when you
look at the response from EU leaders, it's all about
increasing their own domestic defense spending. No one seems to
be taking the bait just yet about you know, well,
(20:49):
we'll work with Trump and then in return we'll get
security protection.
Speaker 5 (20:53):
Well, I don't think anyone in Europe believes that that's
a doable trade, at least in the short term. And
I think realizing this time around that they were maybe
naive to last time around is I don't think that
they look at any bilateral relationship and assign a historic
premium to it as special. So this nostalgia for the
(21:15):
transatlantic relationship, which I certainly have, and this feeling that
certain bilateral relationships are special, which I certainly believe in
many others certain believe, there's no evidence that they're showing
up with that as a set of assumptions, and I
think the Europeans are quickly realizing this. I think, honestly,
this is a playbook that they're not quite used to.
(21:35):
It's the same in Canada and Mexico. By the way,
we haven't talked talked about they don't have a playbook
for a scenario where they're being threatened with twenty five
percent tariffs that could lead to double digit unemployment. And
that's like a serious conversation. So I think everybody's kind
of gone off script in a sea of democratic countries
(21:56):
where you're not used to having to go off script
with each other. And this to sort of another debate
we talked about how one of the debates that's playing
out is are we too bearish on Europe? Another debate
that's playing out is should we maybe relax our skepticism
about the forward direction of travel in the US China relationship.
I there also subscribe to the view that I think
(22:16):
the relationship is going to get worse for longer. So
the question then is why do things seem slightly calmer
in that relationship right now? Well, I think if you're hijinping,
you're watching all the dynamics play out in North America
between the US, Canada and Mexico and in the transatlantic relationship,
and you're enjoying an early Q one economic boom and
(22:38):
tariffs on your country have been sort of punted until
we get an outcome from these trade investigations, And you're
thinking to yourself, I don't really need to insert myself
in this, but the fundamental issues in terms of the
tension between the US and China, I think persist. It's
still the case that America's most formidable adversary is also
its third largest trading partner. It's still the case that
(22:59):
short term geopl thinking on both sides are coming at
the expense of medium and long term economic consequences. And
it's therefore still the case that both countries are capable
of doing something that's incredibly economically foolish in service of
some of those short term geopolitical goals. I just don't
think we're going to see that excite in the short term.
(23:19):
I think that's much more of a medium term horizon.
Speaker 4 (23:21):
This brings back this interesting intersection set that Jared and
I operate in technology and geopolitics, because one of the
key dimensions of the US China relationship is this battle
for supremacy around AI and I know on your pod
you've beaten the deep Seak topic to death.
Speaker 2 (23:35):
No, never enough deep sea time.
Speaker 4 (23:37):
Yeah, I just actually think, when you step back from it,
I think the technology exploits, while impressive, are part of
a continuum of improvements in AI and not super extraordinary.
Impressive but not super extraordinary. The greatest provocation of deep
seek may well be the open source decision under the
MIT super permissive License. And you know, I'm sort of
paraphrasing Mark Andresa and no I heard recently talk about this,
(23:59):
which the irony of a country that we believe to
be generally more closed in orientation creating the most abundantly
available open source model in the world.
Speaker 2 (24:09):
While the US an.
Speaker 4 (24:10):
Open society has obviously meta in the open space, but
by and large hosts research shops that have more closed orientation.
And so this impact of a Chinese model that is
freely available, distillable, tunable, very low cost, that's a real
provocation in this competition and relationship.
Speaker 2 (24:28):
So when deep seek made headlines and it had been
percolating for a while and then suddenly everyone was talking about.
Speaker 3 (24:34):
It, everyone was a deep Seek bro.
Speaker 2 (24:36):
Yeah, I declared myself as such. For one week I
switched my default to deep sink. But so here's something
I always thinking about then like that moment, like you
had this hit to the stock market and there was
this where oh, this is, in fact, it's more efficient.
What's it going to mean for Nvidia demand, et cetera.
But then the other the bold case from a sort
of pure market standpoint is, look, this moment established the
(24:58):
idea of the race. And if you think that we're
in a quote race, that's not going to mean less spending.
This is where right, like, this is going to mean
a lot of spending and we can't lose this, et cetera.
But then that made me wonder, and you said something
in the beginning, this idea that government's embraced AI is destiny,
and I wonder do we have to accept this premise.
(25:18):
I'm very impressed with AI tools a lot, but when
you say AI is destiny, or when you compare it
to who gets the nuclear bomb, you're guaranteed that there's
just a flood of money. And that's great for private companies.
Do we ever have to pause here and say, yeah,
this is a great narrative if you're a private AI company,
or if you're selling power, or if you're selling chips,
et cetera. And should we pause and say like, yeah,
(25:41):
it's quol tech for doing various things. But can we
question the premise that AI is in fact this destiny
that a country must win in order to be powerful
in the future.
Speaker 4 (25:52):
Absolutely, And look, I should stipulate we are two and
a half years in to this, and so if you
put that in comparison the public face dimension of generative A,
if you put that in comparison to other technology shifts,
we were at a very primordial state in those other
shifts two and a half years later, and we still
are now. And so this is moving very fast. It
(26:12):
feels super consequential, but there's uncertainty we may reach some
glass ceiling of improvement and the impact of this technology
to be less profound than we expect. I personally don't
think that will be the case. I think the ability
just to think about your own personal use cases the
way you consume information, you're having a machine interlocutor that
(26:32):
is helping you understand the world, and it's transmitting a
notion of culture that's embedded in that machine. And so
if you think about that from a country perspective, and
you have your citizens accessing an information source to help
them understand the world, make sense of the world and
those values are being so those cultural values embedded in
that machine are being set in some other part of
(26:52):
the world. Just that alone is important. Now we can
debate about whether it is going to be really profound,
fast moving a canomic impact, or whether it's going to
be slower. We should talk more about that. And already
we see evidence that generative AI technology on the backs
of more traditional forms of AI and machine learning, are
having a real impact on the way that defense systems work,
(27:16):
how warfare is being conducted, and the shape of the
battlefield in the future. So yes, I think it's really
good to take a deep breath and pause and not
get over our skis. And yet I believe it's going
to be very consequential. Evidence of the fact that we
all might be slightly over our skis is just the
very deep seek reaction you mentioned in and of itself,
the reflexivity of markets. This is so much uncertainty today,
(27:40):
but when there's a possible disruption or interruption, the market
seems to like self first and ask questions later and
then recalibrate. We saw that with deep seek. We saw
that even this week with a sort of I think
misconstrued remark out of Microsoft and one of the analysts
someone in the endless community about Microsoft data center leasing activities.
So the market, it's twitchy it. The market is supporting
(28:02):
this heavily. People are heavily invested in it, and when
these moments of uncertain or disruption emerge, it causes very
significant market ripples.
Speaker 5 (28:09):
One way to think about this question of AI being
a country's destiny is there's a category of country that
George and I talk a lot about that we sort
of describe as geopolitical swing states, right, and these are
countries that, in a world where the US and China
are locked in competition and need other countries to gain
the extra edge, countries that have a differentiated part of
(28:31):
the supply chain, an abundant amount of flexible capital, and
are attractive economically for near shoring, offshoring, and friend shoring.
Are in a position with the right leader where they
can kind of set an agenda that's independent of Washington
and Beijing and swing on an issue by issue basis.
In these countries, rather than the non aligned movement of
the Cold War, they kind of tend to go itt
more alone, and they're leaning into this particular paradigm of
(28:53):
great power competition and their status of geopolitical swing states
to achieve a certain level of mobility. Right, And so
not all geopolitical swing states possess an advantage when it
comes to AI. But the golf countries, which I think
are quintessential geopolitical swing states, are looking at the attributes
that they have to make them competitive with AI, which
(29:13):
is unlimited capital, regulatory environments. They control the ability to
do massive infrastructure at scale very quickly, and sovereign ambition
and again the ability to kind of play both sides.
And they see a once in a generation opportunity to
differentiate themselves in the AI space and leapfrog generations of
(29:35):
geopolitical status.
Speaker 3 (29:36):
Right.
Speaker 5 (29:36):
But you're seeing this When I spent a lot of
years at Google and Alphabet and Saudi Arabia cutter UAE,
these countries were nowhere on anyone's radar screen. They were
not relevant technological players, They were not part of the conversation.
There was no evidence they were ever going to be
part of the conversation in a favorable way. Now there's
not a single major deal in the AI space. There's
(29:59):
not a single a conversation of any real significance that
doesn't involve one of the three big sovereign countries in
the Middle East, and Kuwaita is not far behind, as
they're on the precipice of certain transformations nine months post
dissolving parliament, and so for them, AI is destiny because
that destiny is geopolitical mobility.
Speaker 4 (30:20):
And you know, we wrote a companion piece to our
Geopolitical Swing States thesis around AI swing states, and clearly
the Gulf is frontally involved in all of that. But
some others might surprise you. I mean the Netherlands, the
home of ASML, that makes that extremely strategic and relevant
in the world. Who would have thought semi conductor capital
equipment would become so geopolitically relevant. South Korea the home
(30:41):
of sk Telecom, the biggest provider of high band with
a memory, which there's going to be extraordinary demand for
going forward. India with all its APEX, technical talent and
a huge population, how they deploy and understand AI is
going to be critical to the world. So the Gulf
is you know, in the headlines, but there are many
other nations for whom this is, you know, really important
(31:03):
to their strategies.
Speaker 3 (31:20):
I want to try to connect, I guess the old
geopolitics with some of the new stuff that's happening, especially AI.
Can we talk maybe about subc cables. I've had people
tweeting at me for the past week saying we need
to do an episode on subse cable warfare. So consider
this maybe a preview for something longer that's coming up.
Speaker 2 (31:41):
Yeah, asolutely.
Speaker 5 (31:41):
If you think about two topics that are discussed a lot.
One topic is trade and the other topic is AI.
And if you look at global trade, eighty percent of
it flows above the ocean, and then ninety five percent
of all data flows on seven hundred and fifty d
thousand miles of undersea cables that are the equivalent of
(32:04):
circling the earth thirty times. So what does that actually mean?
That is ten trillion dollars of daily transactions, that's all
the instant messages, that's offshore energy, and by the way,
that's national secrets. And there's one hundred and fifty cable
breaks on average a year. And that number is going up,
not just in terms of volume, but in terms of
(32:24):
geopolitical sensitivity. So just to give you an example from
you know, let's call it the last six months, right,
so in November, a Chinese vessel dragged and anchor one
hundred miles in the Baltic Sea, severing an undersea cable
that connected Sweden to Lithuania and also Finland to Germany.
A month later, Russian vessel, as part of the sort
of Russian ghost fleet, also in the Baltic Sea, did
(32:46):
the same thing, cutting an undersea cable from Finland to
Estonia and had to be seized by Finnish authorities. And
so these things continue to happen. What's interesting is the
multilateral architecture that was established for repairing undersea cable. It
predates the tech competition between the US and China. Undersea
cables you know, started being laid in the eighteen fifties,
(33:06):
and so the ocean is broken up into different zones.
So you can have an undersea cable that breaks in
the South China Sea and the Chinese have the authority
to bring their repair vessels to repair it. Now, that's
a very tricky thing when you start worrying about malware
being thrown undersea cables. It's not the sexiest technology in
the world, but it's in a lot of respects. I
(33:27):
think the most one of the most important geopolitical features
of the AI conversation and the technology conversation. But it's
heavily dominated by Western players. So there's three companies, you know, Subcommon,
the us NEC in Japan, and Alcatel in France that
have eighty seven percent of the market share. And then
you know, China has a minority player in this. And
(33:48):
the US has actually been very successful at thwarting China's
efforts to take control of subse cables, right, So they
use a combination of incentives, threats, telegraphing potentials, actions to
ensure that that China doesn't win the bid for some
of these cables. And it's been quite it's been quite effective.
The other thing that's interesting is the hyperscalers have increasingly
(34:11):
been forming these consortiums with the big telecom companies to
play a role in subse cables. And so Google, for instance,
is either a hole or part owner of thirty three
different subse cables. And so I think we're going to
see more and more breakage. And by the way, it's
not just state actors, right, So when the Huthi started
firing missiles into the Red Sea, they hit a commercial
(34:31):
vessel that sank and it's anchor broke two of the
subse cables in the Red Seed. Ninety percent of data
traffic from Europe to Asia carries through fourteen cables in
the Red Sea. So again this isn't a highly talked
about space, but when so much of our digital information
moves under sea, five miles below the surface, in some cases,
(34:52):
it's a very important theater.
Speaker 4 (34:53):
It's interesting to reflect us the Jared as your guy
as it comes to subse cables. He knows a lot
about it, studied it a lot, but to me at
a high levels are fascinating. That subse cable complex is
kind of the silk roads of the information you know, economy,
And so just like the soak roads securing them, the
interstate transit that occurred, the international transit occurred there like
(35:14):
the same dynamic as playing out here. These are the
roads that our economy is traveling today.
Speaker 2 (35:19):
By the way, I just have to say, in the
year twenty twenty five, the existence of subse cables actually
still blows my mind. And the fact that the first
one was laid down in the eighteen fifties. There are
various things in the past I can't wrap my head around.
I can't wrap my head around in the Hunting tunnel
or whatever, how they build a tunnel Brooklyn Bridge. The
(35:40):
fact that in the eighteen there's a great book, the
Victorian Internet. The great Book's fantastic about that. It's also
why the US UK exchange rate is called a cable anyway.
That always, sorry, that always just blows my mind. I
have one very random quick question for you, Jared, and
I know there's a little off topic, but you mentioned it.
You know, China's gotten little free pass. Trump really seems
(36:02):
to have it out for Canada, at least with Mexico.
It's obviously a source of significant drug traffic and there's
a lot of migration that comes through the southern border.
What is up with the antipathy for Canada? Which I
just don't think much about.
Speaker 5 (36:18):
So some of it is interpersonal. He and Justin Trudeau
never got along particularly well, which is also part of
why I think Germany might be taking the wrong lesson
from Prime Minister Trudeau going tomorrow Lago amidst the concerns
about Trump tariffs and trying to figure things out, only
to be you know, on the receiving end of even
(36:40):
harsher treatment. Their view was that means you need to
show up with a loaded gun and be ready to
pull the tariff trigger. I think they're underestimating how much
of this is interpersonal. But I also think it gets
back to look. I don't claim to be an armchair
psychologist for the forty seventh president, but I don't think
he's necessarily hiding this principle of reciprocity. That's a key
(37:01):
feature of his administration. And if you look at defense
spending in Canada and you look at the trade deficit
with Canada, it falls right in Trump's line of site,
and I think he's if you sort of add the
context that his starting point is not that there's a
special relationship between the US and Canada and you're just
looking at the numbers. I'm not saying it starts to
(37:23):
make sense, but you're asking me kind of what's up
with Canada. That's my best guess. What I will say
also is if you look at the tariffs, I think
they fall in three categories. I think there's tariffs that
are based on things we've seen in the past, with
a lot of detail that they announced that they intend
to implement and they will implement. Then you have what
happened with Columbia, where it's clear that the tariffs are
either something retroactive in response to an action that a
(37:47):
country took that the administration doesn't like, or they're used
as a negotiating tactic. But it's this third category, and
I think the tariffs on Canada and Mexico, which we'll
find out more about in the next week, fall into
which is they announced with enough detail that it's clear
they want to implement them, and they intend to implement them,
but they go beyond precedent, and the second and third
(38:08):
order economic implications are not yet understood, nor are the
responses from the countries that have never found themselves in
this situation. And so what you don't know is this
going to be a six month headfake to the market
that ultimately, you know, ends up getting walked back because
the economic pain is too much, or is it in
fact going to get implemented. And I think the market's
(38:29):
going to have to learn to be a little bit
patient and whether the volatility, but I think given so
many countries have never been in this situation before, there's
a ton of room for miscalculation, right, and miscalculation, you know,
happens when countries are forced to go off script, and
that's where you can have unforced errors, and that's where
you can have unnecessary chaos.
Speaker 3 (38:49):
So on that note, I have a theoretical, I guess,
big picture type question, and I think given that you
guys said you're all about connecting geopolitics with technology and markets,
you are the perfect people to ask this. But markets
seem to really struggle with geopolitical uncertainty. It's such a
huge topic. The possibilities are almost endless. You can get
(39:12):
almost infinite permutations of geopolitical events and situations. It seems
really hard to price and incorporate into your strategy. How
do you actually go about doing that? So this conversation
that we just had, which was great and very interesting,
if I'm an investment manager, what do I actually do
with this info?
Speaker 4 (39:33):
Yeah, well, Jarji Jumpins, we have an opportunity to talk
some of the leading investors in the world around these topics.
You know, it's funny began to undertake a study to
try to discern what are the market impacts of you know,
really profound geopolitical events. First of all, as you know,
as students of the market, it's very hard to isolate
any given effect among the panoply of different things that
(39:54):
drive stock prices and interest rates, et cetera. So we
struggled with that. The second observation it wasn't really deep
enough to be publishable or verifiable, is just that markets
actually wait quite a while for clarity and then act
as that clarity emerges. And so while I described the
impulse in the AI world is a little bit sell
(40:15):
first and ask questions later, in geopolitics it seems to me,
at least and in jaredmation your world, it's a little
bit like ask questions first and then sell later. Seems
to be the dynamic. And Jared, do you agree with that?
Speaker 5 (40:26):
Yeah, I'll make two points on this, and I think
it depends. It's kind of a tale of two geopolitical stories.
There's the downside risk part of the story, or the
downside risk volatility. And what you know, George and I
always tell clients is when it comes to geopolitics, you
can't predict what's going to happen on Tuesday or what's
going to happen on Thursday. And if somebody does that,
you should kick them out of the room. What you
can do is say here's the shocks to the system
(40:46):
that tell you that this thing has gone off script.
So here's what you should be looking for, and here
are the key inflection points and the geopolitical time sequence
that they're likely to happen in. So this happen. This
occurs a lot in the context of the Middle East
when people are sort of thinking about, you know, will
Israel bomb Iran? Like nobody knows, right, but you can
tell them warning signs that they might look for and
(41:08):
certain inflection points that increase the likelihood that that might happen.
So that's the downside risk part. I personally think we
spend too much time on downside risk volatility.
Speaker 2 (41:19):
There's a more if people listen to geopolitical analysts, they
would stay uninvested entirely. This is why you got to anyway, Sorry,
keep going.
Speaker 5 (41:26):
It's just another volatility variable, right, And so let's take
a more affirmative look at geopolitics. And you know, George
and I have talked a lot about how geopolitics is
pushing some pretty attractive economic environments into a situation where
they're eventually going to trade at a geopolitical premium. So
let's take India and Japan as an example. So India
(41:48):
and Japan already very attractive environments for all the reasons
that I think your listeners understand quite well. But if
you double click on Japan as an example that geopolitics
have brought them out of their shell. It used to
be Japanese investors investing in Japanese companies or Japanese companies
merging with other Japanese companies. The geopolitics have made them
much more interconnected around the world. They're also massively increasing
(42:11):
defense spending relative to what they've done before, which is
giving them a defense renaissance. They're recognizing that they're going
to be one of the big beneficiaries of reshoring in
different parts of the AI value chain and other technology
value chains, and it's triggering a bunch of reforms in
how these companies are governed with regards to the value
that they return to shareholders. So Japan as a result
(42:35):
of the geopolitics is undergoing a bunch of changes that
over time are going to create more opportunities for investment.
So I talk to a lot of strategic investors around
the world that are pulling money out of Europe and
they're reallocating the capital towards the US, which they're bullish on,
but then they're worried they're over allocated towards the US,
and so where else are they putting capital. They're putting
capital in places like Japan and India. Why because they
(42:58):
understand that the geopolitics are making places like Japan and
India pockets of certainty and predictability amidst a geopolitical moment
where it feels like there's a lot of uncertainty. But
if things get worse between the US and China, which
is the primary reason why you have all this geopolitical volatility,
it's only going to benefit Japan and India because both
(43:18):
countries are able to play both sides, and yet the
US has telegraphed their long term commitment to both. So
to take as an example with India, US is heavily
reliant on India for pharmaceutical supply chains. India is highly
reliant on certain elements from China that they require to
produce their pharmaceuticals, and they have no interest and are
not going to diversify from China. So they maintain a
(43:39):
posture of strategic ambiguity with regards to most of the
US's ambitions or policies towards China unless it pertains to
their land disputes with China. And so I think that
affirmative case for riding the geopolitical volatility towards kind of
new investment thesis is quite attractive.
Speaker 4 (43:58):
You know, one thing it sharts and remarks around inflection
points reminds one of the techniques that we use in
the Golden Sech Global Institute to engage clients is our
simulations and wargames. We bring together policy makers, corporate leaders,
and investors. We introduce a scenario, we introduce perturbations to
that scenario. We ask people to really engage, help make decisions.
(44:20):
And then at the end of these sessions we get
to reflect on what we all learned through that game
turn And that's a place where I've seen investors really
step back and go like wow, Actually, when you scope
out and think about all the chain of events we just described,
I should be more attentive to inflationary impulses or you know,
allocation across geographies. And so it's actually interesting not to
(44:42):
get caught up too much in the minutial movements of
one geopolitic move or not, but then to just scope
out fifty thousand feet, think about the inflection points, and
then reason about your portfolio and your investing strategy.
Speaker 3 (44:55):
Can we come play the wargames?
Speaker 2 (44:58):
We want to do a wargames epit.
Speaker 4 (45:00):
That would be gretz a great. It's such a fascinating technique,
and in an era where we're all a little bit overconferenced,
the lean forward engaged dimension of wargames with clients really fun.
Speaker 2 (45:11):
We'll make that happen. I hadn't even thought about that.
With India in the sort of middle between the raw commodities,
I knew about the role of the supply chain anyway,
fascinating conversation. We could just keep talking about all this
stuff for hours. It does feel like I'm not crazy,
or that we're not crazy, that things are a little
bit crazier these days, or unprecedented times, interesting times. Jared Cohen,
(45:35):
George Lee of the Goldman sax Global Institute, thank you
so much for coming.
Speaker 3 (45:39):
Me from up on.
Speaker 4 (45:40):
Thank you guys. It's great.
Speaker 2 (45:54):
Crazy. I really like that conversation. You know, as I mentioned,
it always feels, oh, there's a lot going on. These
are unprecedented times. It's nice to talk to some professionals
and like, no, you're not going crazy. These are kind
of unprecedented times.
Speaker 3 (46:10):
It is different right now. Yeah, yes, So two things
stood out to me from that conversation, and one of
them is it is truly remarkable just how quickly countries
are moving at a strategic level when it comes to AI,
and that everyone seems to agree this is important both
strategically from a geopolitical perspective for national security, et cetera,
(46:31):
and also for their respective domestic economies. The second thing
that I find really interesting, and we've spoke about this before,
we did that episode with Acquired, but it's the sort
of intermingling of corporations with political power. So the idea
that some of the hyper scalers are now in the
(46:52):
subse cable business too, and subse cables are incredibly important
to all those strategic AI missions that I just laid out.
That seems different as well.
Speaker 2 (47:03):
You know what I thought was another interesting thing in
why it's good to talk to geopolitics people sometimes like
you and I, when we think about, like, I don't know,
the last fifteen or twenty years, you know, how do
we usually segment up we think about the Great Financial Crisis?
The COVID shock, the recession that happened for about ten
(47:24):
minutes and twenty and then the boom that turned really hot. Right,
when you talk to geopolitics people, it's the war on Terror,
and which never comes up, but the idea of the
War on Terror being this very significant sort of economic
story of impairing the economic ambitions for a long time.
Speaker 3 (47:42):
The war on Terror in finance land is the era
of Greenspan imbalances.
Speaker 2 (47:47):
Yeah right, but the idea of like this was a
fetter on the economic ambitions of golf states, which are
now so huge and not really something I think much about.
And then this idea of COVID, which again we usually
talk about from a sort of economic standpoint. We've done
a million episodes on that as marking the sort of
starting gun of what we now call, you know, great
(48:09):
power competition and their idea of geopolitical swing states. So
I like the people coming at it from a different perspective.
Break up ears of history in a way that's distinct
from the way econ and market people do.
Speaker 3 (48:23):
Absolutely, and I do want to go into Goldman to
play those war games. And I've always been curious, like
no I know how to actually work.
Speaker 4 (48:31):
Well.
Speaker 2 (48:31):
I want to play war games, and I also want
to do the ones like with the actual board or
like with the board games, or like they roll the
dice and it's like, okay, you have a seventy percent
chance of your amphibious mission actually working. Do you actually
do that?
Speaker 3 (48:44):
I want to wait, does that mean you're going to
go to one of those board game clubs with me?
Speaker 2 (48:48):
No, Tracy, I'm not going to know you want to.
I want to do like a serious one with like researchers.
I'm not going. I'm sorry, I'm not too cool. That's
what you're saying, playing like you know, Settlers of Katan
and all that stuff. And then the one other thing
that really, I'm sorry, you just angered bunch of our listeners.
(49:08):
I'm sorry, I love you all.
Speaker 3 (49:10):
Sorry.
Speaker 2 (49:11):
The one other thing that I just think is like
a stunning word to hear. Jared used the word evaporate
to talk about the sort of status of Europe, which is,
you know, one of the richest areas of the world,
and you know it's Europe, and to hear the word
like evaporates, like actually, you know, there's no sign that
(49:33):
the bariss has gotten too far, which he described really
well due to the nature of the parliamentary dynamics in Europe.
Speaker 3 (49:43):
It's bleak, it is extreme, that kind of word. But
on the other hand, I think everyone would agree we're
sort of living in an era of extremes. So here
we are on that happy note. Shall we leave it there?
Speaker 2 (49:55):
Let's leave it there.
Speaker 3 (49:56):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (50:01):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Kerman Rodriguez at Kerman Ermann dash Ol
Bennett at Dashbot, and kill Brooks at Kilbrooks. More odd
Lots content, go to Bloomberg dot com slash odd Lots,
where we have a daily newsletter and a blog. You
can find all of our episodes and you can chat
about all of these topics, including geopolitics, there's and defense
(50:24):
and AI. There's so much in there in our discord
where our listeners are chatting twenty four to seven. Check
that out at discord dot gg slash od loots.
Speaker 3 (50:32):
And if you enjoy odd Lots, if you think that
Joe should actually go and play risk with me in
a Board Game Cafe. Then please leave us a positive
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is find the Bloomberg channel on Apple Podcasts and follow
the instructions there. Thanks for listening in
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Oddlocks podcast.
Speaker 3 (00:21):
I'm Jill Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:24):
Tracy, there's a lot going on in the world.
Speaker 3 (00:26):
Are we going to start every podcast with that sentence?
Speaker 2 (00:29):
It's sort of a cliche. Now, there's a lot going
on in the world. I have to say, you know,
I recently were recording this February twenty fifth. I don't
know the exact date that's coming out. I recently took
a vacation and they did a pretty good job, Tracy,
wouldn't you say like being unplugged, Like I probably sent
like six or seven tweets. I don't think I responded
to any emails or what's that message.
Speaker 3 (00:50):
I actually noticed this that the volume of Joe's digital presence, Yeah,
was way way down and normally listeners. Normally when Joe
is on vacation and sometimes board, he just starts firing
off emails saying like, oh, we should do this and
we should do that. None of those. This time. It
was a vacation for me too.
Speaker 2 (01:10):
A vacation from your co host. Yeah, I really did
not do much. And then I have to say, like
re entry into the world, my thirty five hundred emails
catching up. Everything that happened in a week in the
world was a lot this time. And I'll just say
it's a cliche to say a lot happened, but it
was like, Okay, I really have some catching up to do.
Speaker 3 (01:32):
It.
Speaker 2 (01:32):
I felt it, and it made the re entry from
vacation words.
Speaker 3 (01:35):
Well, it's not just the number of things that are happening,
it's the significance as well. Right, So I imagine one
of the things you came back to after your week
off was the idea of a rift, a growing rift
between the US and Europe. There's all these lingering concerns
as well about competing with China AI technology. Big themes
(01:58):
to think about. Now.
Speaker 2 (01:59):
I saw, like scrolling on my phone, I saw like JD.
Evance has given this big speech in Munich, and I'm like,
do I want to watch this on the beach? And tuloum,
I do not want to watch this on the beach.
And so but now I have to understand how the
world changes and again from week to week. But big
things afoot in the world, and how should we make
sense of these and how should we cut through the
(02:20):
noise and all that stuff. Anyway, I'm very excited. We
really do have the two perfect guests to discuss big
things in the world, like technological changes, especially through the
geopolitical lens and this ratum the geopolitics of what will
be the nature of the US's relationship with Europe and
other countries. We're going to be speaking with Jared Cohen,
(02:41):
President of Global Affairs and co head of the Goldman
Sex Global Institute, and George Lee, the other co head
of the Goldman Sex Global Institute. So Jared and George,
thank you both for coming on Ovlach joining us in
the studio.
Speaker 4 (02:55):
Thank you, thank you. As I mentioned you before, I'm
a longtime listener, first time caller of the pod, so
thrilled to be on it with you.
Speaker 3 (03:01):
Oh, thank you. I love it when people say that
on air. I know I have a question just to
begin with, what is the Goldman Sachs Global Institution.
Speaker 4 (03:09):
Sure, I'll start, George to pitch in. So, the Goldman
sax Global Institute is a new platform at the firm.
We formed about two and a half years ago and
the goal is to promote the firm's thought leadership at
the intersection of technology change, geopolitics, and markets, and the
idea is that these factors have become extraordinarily consequential for boards, CEOs,
(03:34):
investment committees and many of our client types. And so
this ability to transmit our thinking, be provocative, share a
worldview is just a great way to engage our clients.
It's been a lot of fun.
Speaker 5 (03:47):
The other thing that I would add is for some
of the really kind of big strategic clients, Let's take
sovereigns as an example, there's a lot of ambitions that
they have over the next three to five years, and
what the Institute does is we pull together all the
expertise that we have at the firm to essentially cover
their ambitions. So when they say, you know, here's at
a high level what we want to try to do
in the AI space, or here's what we want to
(04:07):
try to do in the Indo Pacific region, our job
is to be able to respond as a firm, to
help them think through and define what that looks like
and then to help them make it happen. And through
the combination of our banking franchise and our asset management franchise,
that's what we try to.
Speaker 2 (04:20):
Do Okay, let's just jump right into question. I didn't
when I was on the beach watch that JD. Van
speech that he made in Munich, and I know there's
all this falling out, you know, he's frustrated columns and
the Financial Times and stuff like that and all these
big things. What was that all about? What happened there?
Speaker 5 (04:39):
So I was there, great and tell us and there's
a little bit of it before and after. So I
was with a number of the European leaders the month before,
and they were getting ready for the Trump administration to
come into office and dealing also with the first twenty
four to forty eight hours. And their biggest concern at
the time was that a deal would be struck on
(04:59):
Ukraine above their heads and the Ukrainians heads. Now, I
think that that was a little bit of a false concern.
It was more of a reflection of the difficulties they
thought they'd find in the transatlantic relationship. I think a
month later, by mid February, they were surprised that a
deal was actually being cut above their heads, not just
(05:21):
between the Trump administration and the Russians, but then broker
by you know, the Gulf as an honest Broker, and
I think what was interesting about JD. Vance's speech is
he gave a speech at a security conference and there
was really nothing to offer on the foreign policy front.
It was, you know, for all intents and purposes, kind
of a lecture about free speech. And I think it
(05:44):
was more of a reset in a negative way of
the Transatlantic relationship. And I think what I was surprised
by is that the Europeans were surprised by the speech.
You know, it would have been very easy, by the way,
for them to acknowledge that there was no new policy
set in the speech. He didn't announce anything on Russia, Ukraine,
he didn't announce anything on the Middle East, he didn't
announce anything on China. It was just kind of a
(06:05):
difficult moment in the Transatlantic relationship. I think part of
the reason the Europeans are experiencing so much consternation over
this is the lack of economic growth in Europe is
causing Europe to essentially evaporate geopolitically. They don't have a
seat at the table on the Middle East, they don't
have a seat at the table on Ukraine. They're trying
to figure out what tariffs are coming and how to respond.
Then they know that lingering on the horizon is a
(06:27):
confrontation with the US over them having less dependence on
China for manufacturing markets and other issues, and so they're
scrambling figuring out what to do. They're having a hard
time acting collectively, which is making it difficult for them
to respond in a way that's sufficiently robust to level
the playing field with the Trump administration.
Speaker 3 (06:48):
You mentioned that you leaders were preparing for the Trump
administration late last year. What does that look like? How
do you prepare.
Speaker 5 (06:56):
Well for starters? Most of them weren't around when he
was president last time. And if you look at who
is around last time, you had Macron, who Trump doesn't
particularly like, Zelensky, who Trump doesn't particularly like, in Victor
Orbon who he does like, and so most of these
leaders hadn't dealt with Trump before. I think that one
of the things that they're all surprised by is that
(07:18):
what they observe and recall from watching the first Trump
presidency that this feels less like a second term and
more like a totally separate presidency with a four year
interregnum in between. And that also shouldn't be surprising because
he didn't recycle very many of the same people from
the first time around, the world has completely changed in
four years. In this time around, he wasn't surprised to win,
(07:39):
and so he's coming in with a very clear doctrine
and agenda focus really on reciprocity, so defense spending, trade deficits,
you know, areas where he feels like there's an imbalance
and other countries haven't been kind of quote carrying their load.
He's then taking a transactional approach to address that. And
there's look, there's a little bit of what we've seen
(07:59):
you administrations do recently, which is show up with opposite day,
which is if the previous administration was for it were
against it. But when you look at the policy in
the Indo Pacific, that's where you've seen the most consistency.
You know, you don't yet have kind of a special
envoy on you know, China and Indo Pacific issues. The
meetings with the Quads have persisted. The administration did South
(08:21):
Korea a solid amidst their political turmoil by reinforcing the
importance of the Japan US South Korea trilateral reinforcement of
the Quad and even on tariffs, you know, he's launched
a series of trade investigations into China which will culminate
in May. Whereas with you know, Canada and Mexico, he's
come in hot and heavy. With Europe, he's come in
hot and heavy. In those tariffs look more robust than
(08:43):
they did in twenty seventeen and twenty eighteen.
Speaker 4 (08:45):
Jared, you you've observed in the past that, well, we
don't have the same shock and awe from that community
that we had in twenty sixteen. They're kind of used
to him stylistically and in his cadence. You know, there
is a fundamental difference in that it's unclear who in
the administration is running which pieces of the portfolio. And
this seems to be more of a Trump forward, you know,
(09:07):
policy leadership by him himself. Maybe, is that Yeah?
Speaker 5 (09:11):
I think that's right. And by the way, when the
forty fifth president was in office, there was also not
a ton of clarity on you know, who was going
to get fired on the toilet versus you know, who
was going to end up running a fiefdom. I do
think what George is referring to is a various stute observation,
which is the first time around the departments and agencies.
The heads of the departments and agencies exerted an enormous
(09:32):
amount of influence, and policy was much more decentralized. Different
people had different accounts and different agendas that they were pushing,
and occasionally the President would weigh in and there'd be
a recalibration. This time around, you don't see that sort
of strength that the departments and agencies, and policy feels
much more centralized at the White House, with a sea
of special envoys for just about every issue that you
(09:53):
can imagine, and policy seems to be set more by
the president, with everybody waiting to see what this sort
of policy mark to market is before they fast follow
and figure out what their agenda is going to be.
Speaker 2 (10:21):
Use the word Europe evaporating geopolitically, and it hadn't clicked
to me. This is something we've talked about to the
sort of what ails Europe, but you know, even within
the context of this most recent episode, like it hadn't
clicked to me the sort of elevated role that the
Gulf States have had in playing intermediary talk about how
(10:42):
the world, whether it's political leaders or business leaders, are
like thinking about this reality that what is still you know,
one of the richest regions on Earth is at this
moment where like people are asking existential questions about its
capacity to be a player in anything.
Speaker 5 (11:00):
So look, if you look at the Gulf. I've been
traveling there for twenty five years, and for most of
that time, the international system was in a global War
on terror paradigm, and in that context, the geopolitics were
driving the economic interest. And when you talk to these leaders,
they would say we wanted to be the other way
around that they were stuck in this paradigm, and so
(11:20):
the most important conversations that were happening at the political
level were around geopolitics and security. But you had these
growing sovereign wealth funds that were kind of off to
the side, and so these were countries that had sovereign
wealth funds, but geopolitics was front and center. And then
a series of new leaders showed up in twenty fifteen
and twenty sixteen in Saudi and Cutter and UAE, and
(11:42):
they just brought with them a different set of ambitions
that are born out of a different generation, where they
wanted to diversify the economies. They wanted to be leaders
in science and technology, not followers, and they wanted to
broaden the reach and international influence of each of their
respective countries, but they were still stuck in a global
war on terror framework. And then COVID happened, and it
(12:02):
completely shifted the paradigm towards a great return of great
power competition and competitive coexistence between the US and China.
And with all of that geopolitical brush cleared, that was
the paradigmatic shift where these countries finally had a situation
where their economic interests could drive the geopolitics. And what
I would sort of say flippantly, that was the moment
where they went from being countries with sovereign wealth funds
(12:24):
to sovereign wealth funds with countries. And you know, but
another way, you know, they're now leading with strategic capital
as opposed to being a place where people come to
for capital. And so it's giving them the right to
play the chessboard. And we lump the Gulf countries together
because that's what historically we've done. These are distinct countries
with unique ambitions, and what they have in common is
(12:45):
they have a lot of money. After that, each of
them are after very different things and they're engaged in
their own degree of competition with each other.
Speaker 3 (12:53):
So Jared mentioned this idea of a slowdown in the
European economy contributing to all the let's call it existential
angs that you see right now. And George, I want
to bring you in here because one thing you often
hear is this idea that Europe is lagging behind in
AI and if AI is going to be the next
big thing, the next big economic driver, that's really a
(13:16):
problem for them.
Speaker 4 (13:17):
Yep, Tracy's a great question. You know, having been in
technology for thirty five years and seen my share of
platform transitions and new technologies arise, this is really the
first one where world leaders have tagged AI as a
matter of national destiny really early. It's going to be
consequential for their economies, their growth, their culture, their defense.
(13:37):
And so we've seen enormous focus and you know, I'm
just back. I was recently at the AI Action Summit
in Paris, which was quite an impressive event and coalesced
a bunch of investment in within the borders of France's
something Macron I think is a real leader on and
some of these European countries are a wellspring of enormous
intellectual capital think about the grandicles in France, that combination
(13:59):
of and statistics that they lead in with excellence. You've
got Cambridge and Oxford and places like that. So there
is an enormous amount of intellectual capital emerging from Europe
and there's some really inspiring companies like miss Strawl out
of France, et cetera. Whether they can marshal the the
intent and capital to really lead in building the infrastructure
(14:23):
and they need to support that intellectual capital is the
big question, and it's why you saw a lot of
the announcements around the AI Action Summit be about bringing
capital to France, scaling their lead in atomic energy, which
is a great energy source for this, and so everyone's
giving it their best shot. But competing with the energy abundance,
capital abundance of the Gulf countries or the just natural
(14:45):
tech leadership of the US, I think it's a hard
brief for them to compete in the scale that they
want to, but make no mistake, they have real assets.
Speaker 2 (14:53):
Well, actually, there's a question I want to pose to
both of you because whether we're talking about you know,
what is it actually take to say commercialize the intellectual
capital of Europe or what does it actually take for
the EU to be a geopolitical power player, so that
they're not taking a backseat and watching all of these actions,
(15:14):
all of these conversations take place above their head. There
is this sense that large European organizations have been very
good at expanding the number of member countries over time
that exist, that they grow out, but that the issue
of like internal depth, single rules, market cohesion has really difficult,
(15:34):
and the sort of the deepening of these various unions
that exist on the European continent. And every once in
a while there will be some leader and you know,
to come up with one hundred page report. I think
we talked about recently on the podcast. You know, I
asked your Mario Dragi issued to big report, and there's
always some new report about competitiveness or whatever. I'd love
to hear from both of you whether you think that
(15:56):
the tides are shifting in Europe in such a way
that all of these things that sound good on PDFs
and institutional websites can change the way the nature of
politics and policy is wrung within the content.
Speaker 5 (16:10):
So look, you're getting at a debate that we certainly
hear playing out every single day, which is the bearishness
on Europe overplayed, right. No, nobody's questioning that the lack
of economic growth, and nobody's fooled by the economic rally
they've had at the beginning of the year. There's some
fundamental questions. I won't try to argue the other side
because I'm quite bearish on it. And I'm quite bearish
(16:33):
on it because it's not that European leaders don't know
what they need to do.
Speaker 4 (16:38):
Right.
Speaker 5 (16:38):
So let's take geopolitics and defense, and George, you should
talk on the AI side and the regulatory side, but
on defense, right, it's very clear. I mean, what's interesting
about Vance's speech, which you were talking about before. Privately,
every European leader said, you know, the US has a
point on defense spending, they have a point on migration,
they have a point on regulation, and every European leader
(16:59):
has an idea for how to fix it, and they
all like drag eas report. The question is implementation, right.
So Europe has a number of challenges, one of which
is you become prime minister if you get the largest
percentage of the vote, which is usually thirteen, fourteen, fifteen percent,
or if you're mergency know twenty nine percent with a
blocking minority from the AfD right. And so if you're
sitting on top of one of these coalition governments that
(17:20):
you can barely scrap together in order to do the
meaningful policy changes that you have to do, you're likely
going to break the coalition in the process. So you
have coalition politics getting in the way. That's one issue.
On defense, three percent of GDP is the new two percent.
And in a lot of respects what's happened with Ukraine
and the fact that the Europeans now conclude they can't
(17:43):
rely on the US for security guarantees, it's made them
more comfortable with the idea of three percent or as
you move east to places like poll In five percent.
The problem again is implementation at a collective level. So
you know, there's certain countries that are strong on defense
and certain countries that have medium and small sized defense players.
So is the answer that if Europe is going to
get big enough from a defense perspective, you're going to
(18:04):
have to have cross border mergers and acquisitions and consolidation. Okay, fine,
who gets the national champion the EU? Yes, it's a
coalition of countries or a union of countries. These are
still national governments underneath it, and you're really going to
tell you a medium sized Central European country that they
have to give up two of their biggest companies because
Sweden's going to get bigger on the defense side, when,
(18:24):
by the way, they're closer to the Russian threat. So
this is just one example of where it breaks down
implementation within the EU. You still have zo some politics
that exist between the national governments, and then that gets
exacerbated by the point I made earlier about coalition politics.
Speaker 4 (18:39):
Yeah, I'm struck. I've been at a couple of Golden
Sex gatherings where you bring together CEO level leaders in
Europe in a couple different countries. I was struck by
the degree of pessimism and almost resignation about their ability
to influence policy that provides more of a pro growth
environment for them. Look, I think that you know, hopefully
events over take some of this inertia, because the competitive
(19:02):
impulse for these countries is going to get increasingly important
and challenging, and so maybe it will mediate some change
and more collective, more effective collective action. But the business
leaders are are certainly frustrated, and one of the things
they reflect on is how Europe's leadership and AI in
some ways perceptually has been defined by its leadership on
(19:23):
AI safety. By the way, that's a.
Speaker 2 (19:25):
Worthy and important goal.
Speaker 4 (19:26):
One of my observations in the world of AI they're
kind of fascinating, is you know, chat GPT emerged in
November twenty two, and there was an immediate outcry about
AI safety, existential risk, a lot of headlines, a lot
of inks, build a lot of time and energy. Fast forward.
Now we have machines that are one hundred to a
thousand times more powerful, and it's a much more muted
dialogue about those risks. Interestingly, but there's frustration in Europe that,
(19:50):
you know, kind of characteristic focus on privacy, regulatory bounds,
safety is retarding their progress in something that now has
really become kind of a commercial, military, and cultural arms
race across the face of the earth.
Speaker 3 (20:04):
This is what always happens, Joe. The US invents the technology,
China maybe improves on it, and Europe writes the regulations
and the thought pieces about it. Jered. Just going back
to a point that you made about the European response.
You use that word transactional earlier to describe the Trump
administration's approach to geopolitics, and funnily enough, we just recorded
(20:27):
an episode yesterday where we said the exact same thing.
I guess I'm wondering, do you see any signs that
the approach is actually working, because so far, when you
look at the response from EU leaders, it's all about
increasing their own domestic defense spending. No one seems to
be taking the bait just yet about you know, well,
(20:49):
we'll work with Trump and then in return we'll get
security protection.
Speaker 5 (20:53):
Well, I don't think anyone in Europe believes that that's
a doable trade, at least in the short term. And
I think realizing this time around that they were maybe
naive to last time around is I don't think that
they look at any bilateral relationship and assign a historic
premium to it as special. So this nostalgia for the
(21:15):
transatlantic relationship, which I certainly have, and this feeling that
certain bilateral relationships are special, which I certainly believe in
many others certain believe, there's no evidence that they're showing
up with that as a set of assumptions, and I
think the Europeans are quickly realizing this. I think, honestly,
this is a playbook that they're not quite used to.
(21:35):
It's the same in Canada and Mexico. By the way,
we haven't talked talked about they don't have a playbook
for a scenario where they're being threatened with twenty five
percent tariffs that could lead to double digit unemployment. And
that's like a serious conversation. So I think everybody's kind
of gone off script in a sea of democratic countries
(21:56):
where you're not used to having to go off script
with each other. And this to sort of another debate
we talked about how one of the debates that's playing
out is are we too bearish on Europe? Another debate
that's playing out is should we maybe relax our skepticism
about the forward direction of travel in the US China relationship.
I there also subscribe to the view that I think
(22:16):
the relationship is going to get worse for longer. So
the question then is why do things seem slightly calmer
in that relationship right now? Well, I think if you're hijinping,
you're watching all the dynamics play out in North America
between the US, Canada and Mexico and in the transatlantic relationship,
and you're enjoying an early Q one economic boom and
(22:38):
tariffs on your country have been sort of punted until
we get an outcome from these trade investigations, And you're
thinking to yourself, I don't really need to insert myself
in this, but the fundamental issues in terms of the
tension between the US and China, I think persist. It's
still the case that America's most formidable adversary is also
its third largest trading partner. It's still the case that
(22:59):
short term geopl thinking on both sides are coming at
the expense of medium and long term economic consequences. And
it's therefore still the case that both countries are capable
of doing something that's incredibly economically foolish in service of
some of those short term geopolitical goals. I just don't
think we're going to see that excite in the short term.
(23:19):
I think that's much more of a medium term horizon.
Speaker 4 (23:21):
This brings back this interesting intersection set that Jared and
I operate in technology and geopolitics, because one of the
key dimensions of the US China relationship is this battle
for supremacy around AI and I know on your pod
you've beaten the deep Seak topic to death.
Speaker 2 (23:35):
No, never enough deep sea time.
Speaker 4 (23:37):
Yeah, I just actually think, when you step back from it,
I think the technology exploits, while impressive, are part of
a continuum of improvements in AI and not super extraordinary.
Impressive but not super extraordinary. The greatest provocation of deep
seek may well be the open source decision under the
MIT super permissive License. And you know, I'm sort of
paraphrasing Mark Andresa and no I heard recently talk about this,
(23:59):
which the irony of a country that we believe to
be generally more closed in orientation creating the most abundantly
available open source model in the world.
Speaker 2 (24:09):
While the US an.
Speaker 4 (24:10):
Open society has obviously meta in the open space, but
by and large hosts research shops that have more closed orientation.
And so this impact of a Chinese model that is
freely available, distillable, tunable, very low cost, that's a real
provocation in this competition and relationship.
Speaker 2 (24:28):
So when deep seek made headlines and it had been
percolating for a while and then suddenly everyone was talking about.
Speaker 3 (24:34):
It, everyone was a deep Seek bro.
Speaker 2 (24:36):
Yeah, I declared myself as such. For one week I
switched my default to deep sink. But so here's something
I always thinking about then like that moment, like you
had this hit to the stock market and there was
this where oh, this is, in fact, it's more efficient.
What's it going to mean for Nvidia demand, et cetera.
But then the other the bold case from a sort
of pure market standpoint is, look, this moment established the
(24:58):
idea of the race. And if you think that we're
in a quote race, that's not going to mean less spending.
This is where right, like, this is going to mean
a lot of spending and we can't lose this, et cetera.
But then that made me wonder, and you said something
in the beginning, this idea that government's embraced AI is destiny,
and I wonder do we have to accept this premise.
(25:18):
I'm very impressed with AI tools a lot, but when
you say AI is destiny, or when you compare it
to who gets the nuclear bomb, you're guaranteed that there's
just a flood of money. And that's great for private companies.
Do we ever have to pause here and say, yeah,
this is a great narrative if you're a private AI company,
or if you're selling power, or if you're selling chips,
et cetera. And should we pause and say like, yeah,
(25:41):
it's quol tech for doing various things. But can we
question the premise that AI is in fact this destiny
that a country must win in order to be powerful
in the future.
Speaker 4 (25:52):
Absolutely, And look, I should stipulate we are two and
a half years in to this, and so if you
put that in comparison the public face dimension of generative A,
if you put that in comparison to other technology shifts,
we were at a very primordial state in those other
shifts two and a half years later, and we still
are now. And so this is moving very fast. It
(26:12):
feels super consequential, but there's uncertainty we may reach some
glass ceiling of improvement and the impact of this technology
to be less profound than we expect. I personally don't
think that will be the case. I think the ability
just to think about your own personal use cases the
way you consume information, you're having a machine interlocutor that
(26:32):
is helping you understand the world, and it's transmitting a
notion of culture that's embedded in that machine. And so
if you think about that from a country perspective, and
you have your citizens accessing an information source to help
them understand the world, make sense of the world and
those values are being so those cultural values embedded in
that machine are being set in some other part of
(26:52):
the world. Just that alone is important. Now we can
debate about whether it is going to be really profound,
fast moving a canomic impact, or whether it's going to
be slower. We should talk more about that. And already
we see evidence that generative AI technology on the backs
of more traditional forms of AI and machine learning, are
having a real impact on the way that defense systems work,
(27:16):
how warfare is being conducted, and the shape of the
battlefield in the future. So yes, I think it's really
good to take a deep breath and pause and not
get over our skis. And yet I believe it's going
to be very consequential. Evidence of the fact that we
all might be slightly over our skis is just the
very deep seek reaction you mentioned in and of itself,
the reflexivity of markets. This is so much uncertainty today,
(27:40):
but when there's a possible disruption or interruption, the market
seems to like self first and ask questions later and
then recalibrate. We saw that with deep seek. We saw
that even this week with a sort of I think
misconstrued remark out of Microsoft and one of the analysts
someone in the endless community about Microsoft data center leasing activities.
So the market, it's twitchy it. The market is supporting
(28:02):
this heavily. People are heavily invested in it, and when
these moments of uncertain or disruption emerge, it causes very
significant market ripples.
Speaker 5 (28:09):
One way to think about this question of AI being
a country's destiny is there's a category of country that
George and I talk a lot about that we sort
of describe as geopolitical swing states, right, and these are
countries that, in a world where the US and China
are locked in competition and need other countries to gain
the extra edge, countries that have a differentiated part of
(28:31):
the supply chain, an abundant amount of flexible capital, and
are attractive economically for near shoring, offshoring, and friend shoring.
Are in a position with the right leader where they
can kind of set an agenda that's independent of Washington
and Beijing and swing on an issue by issue basis.
In these countries, rather than the non aligned movement of
the Cold War, they kind of tend to go itt
more alone, and they're leaning into this particular paradigm of
(28:53):
great power competition and their status of geopolitical swing states
to achieve a certain level of mobility. Right, And so
not all geopolitical swing states possess an advantage when it
comes to AI. But the golf countries, which I think
are quintessential geopolitical swing states, are looking at the attributes
that they have to make them competitive with AI, which
(29:13):
is unlimited capital, regulatory environments. They control the ability to
do massive infrastructure at scale very quickly, and sovereign ambition
and again the ability to kind of play both sides.
And they see a once in a generation opportunity to
differentiate themselves in the AI space and leapfrog generations of
(29:35):
geopolitical status.
Speaker 3 (29:36):
Right.
Speaker 5 (29:36):
But you're seeing this When I spent a lot of
years at Google and Alphabet and Saudi Arabia cutter UAE,
these countries were nowhere on anyone's radar screen. They were
not relevant technological players, They were not part of the conversation.
There was no evidence they were ever going to be
part of the conversation in a favorable way. Now there's
not a single major deal in the AI space. There's
(29:59):
not a single a conversation of any real significance that
doesn't involve one of the three big sovereign countries in
the Middle East, and Kuwaita is not far behind, as
they're on the precipice of certain transformations nine months post
dissolving parliament, and so for them, AI is destiny because
that destiny is geopolitical mobility.
Speaker 4 (30:20):
And you know, we wrote a companion piece to our
Geopolitical Swing States thesis around AI swing states, and clearly
the Gulf is frontally involved in all of that. But
some others might surprise you. I mean the Netherlands, the
home of ASML, that makes that extremely strategic and relevant
in the world. Who would have thought semi conductor capital
equipment would become so geopolitically relevant. South Korea the home
(30:41):
of sk Telecom, the biggest provider of high band with
a memory, which there's going to be extraordinary demand for
going forward. India with all its APEX, technical talent and
a huge population, how they deploy and understand AI is
going to be critical to the world. So the Gulf
is you know, in the headlines, but there are many
other nations for whom this is, you know, really important
(31:03):
to their strategies.
Speaker 3 (31:20):
I want to try to connect, I guess the old
geopolitics with some of the new stuff that's happening, especially AI.
Can we talk maybe about subc cables. I've had people
tweeting at me for the past week saying we need
to do an episode on subse cable warfare. So consider
this maybe a preview for something longer that's coming up.
Speaker 2 (31:41):
Yeah, asolutely.
Speaker 5 (31:41):
If you think about two topics that are discussed a lot.
One topic is trade and the other topic is AI.
And if you look at global trade, eighty percent of
it flows above the ocean, and then ninety five percent
of all data flows on seven hundred and fifty d
thousand miles of undersea cables that are the equivalent of
(32:04):
circling the earth thirty times. So what does that actually mean?
That is ten trillion dollars of daily transactions, that's all
the instant messages, that's offshore energy, and by the way,
that's national secrets. And there's one hundred and fifty cable
breaks on average a year. And that number is going up,
not just in terms of volume, but in terms of
(32:24):
geopolitical sensitivity. So just to give you an example from
you know, let's call it the last six months, right,
so in November, a Chinese vessel dragged and anchor one
hundred miles in the Baltic Sea, severing an undersea cable
that connected Sweden to Lithuania and also Finland to Germany.
A month later, Russian vessel, as part of the sort
of Russian ghost fleet, also in the Baltic Sea, did
(32:46):
the same thing, cutting an undersea cable from Finland to
Estonia and had to be seized by Finnish authorities. And
so these things continue to happen. What's interesting is the
multilateral architecture that was established for repairing undersea cable. It
predates the tech competition between the US and China. Undersea
cables you know, started being laid in the eighteen fifties,
(33:06):
and so the ocean is broken up into different zones.
So you can have an undersea cable that breaks in
the South China Sea and the Chinese have the authority
to bring their repair vessels to repair it. Now, that's
a very tricky thing when you start worrying about malware
being thrown undersea cables. It's not the sexiest technology in
the world, but it's in a lot of respects. I
(33:27):
think the most one of the most important geopolitical features
of the AI conversation and the technology conversation. But it's
heavily dominated by Western players. So there's three companies, you know, Subcommon,
the us NEC in Japan, and Alcatel in France that
have eighty seven percent of the market share. And then
you know, China has a minority player in this. And
(33:48):
the US has actually been very successful at thwarting China's
efforts to take control of subse cables, right, So they
use a combination of incentives, threats, telegraphing potentials, actions to
ensure that that China doesn't win the bid for some
of these cables. And it's been quite it's been quite effective.
The other thing that's interesting is the hyperscalers have increasingly
(34:11):
been forming these consortiums with the big telecom companies to
play a role in subse cables. And so Google, for instance,
is either a hole or part owner of thirty three
different subse cables. And so I think we're going to
see more and more breakage. And by the way, it's
not just state actors, right, So when the Huthi started
firing missiles into the Red Sea, they hit a commercial
(34:31):
vessel that sank and it's anchor broke two of the
subse cables in the Red Seed. Ninety percent of data
traffic from Europe to Asia carries through fourteen cables in
the Red Sea. So again this isn't a highly talked
about space, but when so much of our digital information
moves under sea, five miles below the surface, in some cases,
(34:52):
it's a very important theater.
Speaker 4 (34:53):
It's interesting to reflect us the Jared as your guy
as it comes to subse cables. He knows a lot
about it, studied it a lot, but to me at
a high levels are fascinating. That subse cable complex is
kind of the silk roads of the information you know, economy,
And so just like the soak roads securing them, the
interstate transit that occurred, the international transit occurred there like
(35:14):
the same dynamic as playing out here. These are the
roads that our economy is traveling today.
Speaker 2 (35:19):
By the way, I just have to say, in the
year twenty twenty five, the existence of subse cables actually
still blows my mind. And the fact that the first
one was laid down in the eighteen fifties. There are
various things in the past I can't wrap my head around.
I can't wrap my head around in the Hunting tunnel
or whatever, how they build a tunnel Brooklyn Bridge. The
(35:40):
fact that in the eighteen there's a great book, the
Victorian Internet. The great Book's fantastic about that. It's also
why the US UK exchange rate is called a cable anyway.
That always, sorry, that always just blows my mind. I
have one very random quick question for you, Jared, and
I know there's a little off topic, but you mentioned it.
You know, China's gotten little free pass. Trump really seems
(36:02):
to have it out for Canada, at least with Mexico.
It's obviously a source of significant drug traffic and there's
a lot of migration that comes through the southern border.
What is up with the antipathy for Canada? Which I
just don't think much about.
Speaker 5 (36:18):
So some of it is interpersonal. He and Justin Trudeau
never got along particularly well, which is also part of
why I think Germany might be taking the wrong lesson
from Prime Minister Trudeau going tomorrow Lago amidst the concerns
about Trump tariffs and trying to figure things out, only
to be you know, on the receiving end of even
(36:40):
harsher treatment. Their view was that means you need to
show up with a loaded gun and be ready to
pull the tariff trigger. I think they're underestimating how much
of this is interpersonal. But I also think it gets
back to look. I don't claim to be an armchair
psychologist for the forty seventh president, but I don't think
he's necessarily hiding this principle of reciprocity. That's a key
(37:01):
feature of his administration. And if you look at defense
spending in Canada and you look at the trade deficit
with Canada, it falls right in Trump's line of site,
and I think he's if you sort of add the
context that his starting point is not that there's a
special relationship between the US and Canada and you're just
looking at the numbers. I'm not saying it starts to
(37:23):
make sense, but you're asking me kind of what's up
with Canada. That's my best guess. What I will say
also is if you look at the tariffs, I think
they fall in three categories. I think there's tariffs that
are based on things we've seen in the past, with
a lot of detail that they announced that they intend
to implement and they will implement. Then you have what
happened with Columbia, where it's clear that the tariffs are
either something retroactive in response to an action that a
(37:47):
country took that the administration doesn't like, or they're used
as a negotiating tactic. But it's this third category, and
I think the tariffs on Canada and Mexico, which we'll
find out more about in the next week, fall into
which is they announced with enough detail that it's clear
they want to implement them, and they intend to implement them,
but they go beyond precedent, and the second and third
(38:08):
order economic implications are not yet understood, nor are the
responses from the countries that have never found themselves in
this situation. And so what you don't know is this
going to be a six month headfake to the market
that ultimately, you know, ends up getting walked back because
the economic pain is too much, or is it in
fact going to get implemented. And I think the market's
(38:29):
going to have to learn to be a little bit
patient and whether the volatility, but I think given so
many countries have never been in this situation before, there's
a ton of room for miscalculation, right, and miscalculation, you know,
happens when countries are forced to go off script, and
that's where you can have unforced errors, and that's where
you can have unnecessary chaos.
Speaker 3 (38:49):
So on that note, I have a theoretical, I guess,
big picture type question, and I think given that you
guys said you're all about connecting geopolitics with technology and markets,
you are the perfect people to ask this. But markets
seem to really struggle with geopolitical uncertainty. It's such a
huge topic. The possibilities are almost endless. You can get
(39:12):
almost infinite permutations of geopolitical events and situations. It seems
really hard to price and incorporate into your strategy. How
do you actually go about doing that? So this conversation
that we just had, which was great and very interesting,
if I'm an investment manager, what do I actually do
with this info?
Speaker 4 (39:33):
Yeah, well, Jarji Jumpins, we have an opportunity to talk
some of the leading investors in the world around these topics.
You know, it's funny began to undertake a study to
try to discern what are the market impacts of you know,
really profound geopolitical events. First of all, as you know,
as students of the market, it's very hard to isolate
any given effect among the panoply of different things that
(39:54):
drive stock prices and interest rates, et cetera. So we
struggled with that. The second observation it wasn't really deep
enough to be publishable or verifiable, is just that markets
actually wait quite a while for clarity and then act
as that clarity emerges. And so while I described the
impulse in the AI world is a little bit sell
(40:15):
first and ask questions later, in geopolitics it seems to me,
at least and in jaredmation your world, it's a little
bit like ask questions first and then sell later. Seems
to be the dynamic. And Jared, do you agree with that?
Speaker 5 (40:26):
Yeah, I'll make two points on this, and I think
it depends. It's kind of a tale of two geopolitical stories.
There's the downside risk part of the story, or the
downside risk volatility. And what you know, George and I
always tell clients is when it comes to geopolitics, you
can't predict what's going to happen on Tuesday or what's
going to happen on Thursday. And if somebody does that,
you should kick them out of the room. What you
can do is say here's the shocks to the system
(40:46):
that tell you that this thing has gone off script.
So here's what you should be looking for, and here
are the key inflection points and the geopolitical time sequence
that they're likely to happen in. So this happen. This
occurs a lot in the context of the Middle East
when people are sort of thinking about, you know, will
Israel bomb Iran? Like nobody knows, right, but you can
tell them warning signs that they might look for and
(41:08):
certain inflection points that increase the likelihood that that might happen.
So that's the downside risk part. I personally think we
spend too much time on downside risk volatility.
Speaker 2 (41:19):
There's a more if people listen to geopolitical analysts, they
would stay uninvested entirely. This is why you got to anyway, Sorry,
keep going.
Speaker 5 (41:26):
It's just another volatility variable, right, And so let's take
a more affirmative look at geopolitics. And you know, George
and I have talked a lot about how geopolitics is
pushing some pretty attractive economic environments into a situation where
they're eventually going to trade at a geopolitical premium. So
let's take India and Japan as an example. So India
(41:48):
and Japan already very attractive environments for all the reasons
that I think your listeners understand quite well. But if
you double click on Japan as an example that geopolitics
have brought them out of their shell. It used to
be Japanese investors investing in Japanese companies or Japanese companies
merging with other Japanese companies. The geopolitics have made them
much more interconnected around the world. They're also massively increasing
(42:11):
defense spending relative to what they've done before, which is
giving them a defense renaissance. They're recognizing that they're going
to be one of the big beneficiaries of reshoring in
different parts of the AI value chain and other technology
value chains, and it's triggering a bunch of reforms in
how these companies are governed with regards to the value
that they return to shareholders. So Japan as a result
(42:35):
of the geopolitics is undergoing a bunch of changes that
over time are going to create more opportunities for investment.
So I talk to a lot of strategic investors around
the world that are pulling money out of Europe and
they're reallocating the capital towards the US, which they're bullish on,
but then they're worried they're over allocated towards the US,
and so where else are they putting capital. They're putting
capital in places like Japan and India. Why because they
(42:58):
understand that the geopolitics are making places like Japan and
India pockets of certainty and predictability amidst a geopolitical moment
where it feels like there's a lot of uncertainty. But
if things get worse between the US and China, which
is the primary reason why you have all this geopolitical volatility,
it's only going to benefit Japan and India because both
(43:18):
countries are able to play both sides, and yet the
US has telegraphed their long term commitment to both. So
to take as an example with India, US is heavily
reliant on India for pharmaceutical supply chains. India is highly
reliant on certain elements from China that they require to
produce their pharmaceuticals, and they have no interest and are
not going to diversify from China. So they maintain a
(43:39):
posture of strategic ambiguity with regards to most of the
US's ambitions or policies towards China unless it pertains to
their land disputes with China. And so I think that
affirmative case for riding the geopolitical volatility towards kind of
new investment thesis is quite attractive.
Speaker 4 (43:58):
You know, one thing it sharts and remarks around inflection
points reminds one of the techniques that we use in
the Golden Sech Global Institute to engage clients is our
simulations and wargames. We bring together policy makers, corporate leaders,
and investors. We introduce a scenario, we introduce perturbations to
that scenario. We ask people to really engage, help make decisions.
(44:20):
And then at the end of these sessions we get
to reflect on what we all learned through that game
turn And that's a place where I've seen investors really
step back and go like wow, Actually, when you scope
out and think about all the chain of events we just described,
I should be more attentive to inflationary impulses or you know,
allocation across geographies. And so it's actually interesting not to
(44:42):
get caught up too much in the minutial movements of
one geopolitic move or not, but then to just scope
out fifty thousand feet, think about the inflection points, and
then reason about your portfolio and your investing strategy.
Speaker 3 (44:55):
Can we come play the wargames?
Speaker 2 (44:58):
We want to do a wargames epit.
Speaker 4 (45:00):
That would be gretz a great. It's such a fascinating technique,
and in an era where we're all a little bit overconferenced,
the lean forward engaged dimension of wargames with clients really fun.
Speaker 2 (45:11):
We'll make that happen. I hadn't even thought about that.
With India in the sort of middle between the raw commodities,
I knew about the role of the supply chain anyway,
fascinating conversation. We could just keep talking about all this
stuff for hours. It does feel like I'm not crazy,
or that we're not crazy, that things are a little
bit crazier these days, or unprecedented times, interesting times. Jared Cohen,
(45:35):
George Lee of the Goldman sax Global Institute, thank you
so much for coming.
Speaker 3 (45:39):
Me from up on.
Speaker 4 (45:40):
Thank you guys. It's great.
Speaker 2 (45:54):
Crazy. I really like that conversation. You know, as I mentioned,
it always feels, oh, there's a lot going on. These
are unprecedented times. It's nice to talk to some professionals
and like, no, you're not going crazy. These are kind
of unprecedented times.
Speaker 3 (46:10):
It is different right now. Yeah, yes, So two things
stood out to me from that conversation, and one of
them is it is truly remarkable just how quickly countries
are moving at a strategic level when it comes to AI,
and that everyone seems to agree this is important both
strategically from a geopolitical perspective for national security, et cetera,
(46:31):
and also for their respective domestic economies. The second thing
that I find really interesting, and we've spoke about this before,
we did that episode with Acquired, but it's the sort
of intermingling of corporations with political power. So the idea
that some of the hyper scalers are now in the
(46:52):
subse cable business too, and subse cables are incredibly important
to all those strategic AI missions that I just laid out.
That seems different as well.
Speaker 2 (47:03):
You know what I thought was another interesting thing in
why it's good to talk to geopolitics people sometimes like
you and I, when we think about, like, I don't know,
the last fifteen or twenty years, you know, how do
we usually segment up we think about the Great Financial Crisis?
The COVID shock, the recession that happened for about ten
(47:24):
minutes and twenty and then the boom that turned really hot. Right,
when you talk to geopolitics people, it's the war on Terror,
and which never comes up, but the idea of the
War on Terror being this very significant sort of economic
story of impairing the economic ambitions for a long time.
Speaker 3 (47:42):
The war on Terror in finance land is the era
of Greenspan imbalances.
Speaker 2 (47:47):
Yeah right, but the idea of like this was a
fetter on the economic ambitions of golf states, which are
now so huge and not really something I think much about.
And then this idea of COVID, which again we usually
talk about from a sort of economic standpoint. We've done
a million episodes on that as marking the sort of
starting gun of what we now call, you know, great
(48:09):
power competition and their idea of geopolitical swing states. So
I like the people coming at it from a different perspective.
Break up ears of history in a way that's distinct
from the way econ and market people do.
Speaker 3 (48:23):
Absolutely, and I do want to go into Goldman to
play those war games. And I've always been curious, like
no I know how to actually work.
Speaker 4 (48:31):
Well.
Speaker 2 (48:31):
I want to play war games, and I also want
to do the ones like with the actual board or
like with the board games, or like they roll the
dice and it's like, okay, you have a seventy percent
chance of your amphibious mission actually working. Do you actually
do that?
Speaker 3 (48:44):
I want to wait, does that mean you're going to
go to one of those board game clubs with me?
Speaker 2 (48:48):
No, Tracy, I'm not going to know you want to.
I want to do like a serious one with like researchers.
I'm not going. I'm sorry, I'm not too cool. That's
what you're saying, playing like you know, Settlers of Katan
and all that stuff. And then the one other thing
that really, I'm sorry, you just angered bunch of our listeners.
(49:08):
I'm sorry, I love you all.
Speaker 3 (49:10):
Sorry.
Speaker 2 (49:11):
The one other thing that I just think is like
a stunning word to hear. Jared used the word evaporate
to talk about the sort of status of Europe, which is,
you know, one of the richest areas of the world,
and you know it's Europe, and to hear the word
like evaporates, like actually, you know, there's no sign that
(49:33):
the bariss has gotten too far, which he described really
well due to the nature of the parliamentary dynamics in Europe.
Speaker 3 (49:43):
It's bleak, it is extreme, that kind of word. But
on the other hand, I think everyone would agree we're
sort of living in an era of extremes. So here
we are on that happy note. Shall we leave it there?
Speaker 2 (49:55):
Let's leave it there.
Speaker 3 (49:56):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (50:01):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Kerman Rodriguez at Kerman Ermann dash Ol
Bennett at Dashbot, and kill Brooks at Kilbrooks. More odd
Lots content, go to Bloomberg dot com slash odd Lots,
where we have a daily newsletter and a blog. You
can find all of our episodes and you can chat
about all of these topics, including geopolitics, there's and defense
(50:24):
and AI. There's so much in there in our discord
where our listeners are chatting twenty four to seven. Check
that out at discord dot gg slash od loots.
Speaker 3 (50:32):
And if you enjoy odd Lots, if you think that
Joe should actually go and play risk with me in
a Board Game Cafe. Then please leave us a positive
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Joe Weisenthal
Tracy Alloway
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