The New World (Dis)Order - Peter Zeihan - 72nd CFA Institute Annual Conference

The United States will become a net exporter of all energy products by the end of 2019 and the cost of production in American shale fields will drop below Saudi Arabia's production costs by the end of 2020, fundamentally changing American policy preferences from energy market stability to deliberate disruption.

“the United States will be coming that exporter of every source of energy product by the end of this year and the cost of producing in the American shale fields will be below Saudi Arabia by the end of next year which means that the Americans look at energy markets differently it used to be that stability was good to keep the markets in place which was good for the American consumer that relationship no longer holds all of a sudden deliberate disruption in energy markets is good for American business”

The Trump administration is using steel, aluminum, and automotive tariffs as tactical hammers to force cooperation on whatever issue of the day suits American interests, holding them in reserve rather than withdrawing them even when achieving new trade deals, reversing the post-order logic where the US sacrificed economic access for security preeminence.

“the Trump administration has not withdrawn any of the tariffs in those categories that it has imposed even when it finally gets a new trade deal they are being held in reserve as hammers to force cooperation on whatever the issue of the day happens to be it's the global order in reverse it used to be that the United States would sacrifice economic access in order to achieve security preeminence now the United States is acting almost neo imperially when it comes to trade talks and holding these tools back for whatever it needs at any given moment ally or enemy”

Japan has become an export-driven economy through de-sourcing: moving entire chunks of its industrial base to other countries to access favorable currency and political risk conditions, rather than engaging in outsourcing (buying elsewhere) or re-sourcing (building domestic capacity).

“the Japanese have become exports not in outsourcing or in resourcing but in D sourcing picking up entire chunks of their industrial plant and dropping it down into other countries to get on the right side of currency and political risk”

Greece experienced a seven-fold increase in private capital in seven years, resulting in a 40% reduction in GDP, which is worse than the Great Depression, and this loss is ongoing.

“here's Greece seven fold increase in seven years they so far have had a 40% reduction in GDP that's worse than the Great Depression and they are not done”

China's one-child policy created a massive demographic problem: 30 years after implementation, China is running out of 25-year-olds, which is why the Chinese are not nearly as good at mathematics as they claim and why President Xi had to admit to Trump that the US controls all elements that matter for Chinese success.

“they can't become consumption led remember the one-child policy well shocker 30 years after the one-child policy they are running out of 25 year olds the Chinese are not nearly as good at math as they would have the rest of the world believe”

There are only six hard currencies in the world; the pound sterling is the second largest, making Britain a relatively good location for currency stability despite the political turmoil.

“there's only six in the world the pound is the second largest and so you are aw you are in for a rollercoaster ride but there are far worse places to be”

The United States retains capacity to kick any door on the planet at once and not care about what happens the next day, but the United States is shifting from being the greatest source of stability in the global order to the greatest source of disruption, without a guiding policy framework for this transition.

“the United States is the only country that can theoretically support something like the global order and now it's a country that retains the capacity of kicking any door on the planet whenever at once and not care about what happens the next day the United States is shifting from the greatest source of stability to the greatest source of disruption but it doesn't have a policy to guide that at present”

Mexico is a consumption-led demographic complementary to the US, while Canada is a mature export-led demographic that competes with the US, which explains why the Trump administration focuses trade pressure on Canada and negotiates from strength with Mexico.

“this is a complementary system Mexico does the lower-end manufacturing it does the assembly the United States does the design work trade goes back and forth”

Most countries in the Western world and East Asia are already past the point of no return demographically (without significant Millennial populations), making them unsustainable even if the Americans remain involved in the global system, so European and East Asian decline is certain regardless of American policy.

“if you look at the rest of the rich world without the Americans there really aren't all the moment that all that many Millennials this isn't a snake swallowing a watermelon this is a snake swallowing a freight train and most countries in the Western world and in East Asia are already past the point of no return demographically that is enough to kill most countries even if the Americans remain involved”

In World War One, the U.S. lacked a navy so it had to use 'town-class' destroyers (the worst vessels in U.S. Navy history), some of which took on water in drydock; in World War Two, the U.S. again lacked equipment so Churchill requested more town-class ships; FDR agreed but took over every U.S. military facility in the Western Hemisphere as payment, causing three centuries of British imperial expansion to unwind in a single day.

“quick war story and world war two World War one the Americans as we tend to be we're late to the game and when we finally got involved we didn't have a navy kind of a problem so we floated these guys the town class by far the crappiest vessels that have ever served in the US Navy some of them actually were taking on water while they were still in drydock which should not be possible when they would sail by a British vessel in the North Atlantic the British sailors would get up on deck and take bets as to whether or not the American vessel would have to call for assistance because it broke down luckily they did not see a lot of combat and at the war's end we brought them all back to the States put tarps over them forgot that they ever existed because it was just humiliating World War two rolls around we're late to that party too and Churchill calls up FDR and says hey if you're not gonna get in this fight at least give us some equipment aft er he's like well we have the town class after having a minor stroke Churchill says thank you and on his way out the door after he's like oh no no no no those aren't free as payment we will take every single military facility you have in the Western Hemisphere and three centuries of imperial expansion unwound in a day”

The post-WWII American security arrangement was intentionally subsidized and economically disadvantageous to the US—it could never work for American economic benefit because then it wouldn't function as a bribe to keep allies aligned.

“the Americans create an environment that subsidizes the alliance to fight the Soviets but it doesn't use that for its own economic purposes because then it wouldn't be a bribe I could give you a thousand reasons why the United States will be just fine without the global structures that we've all become used to but really you only need one”

Donald Trump's core point—that the post-1940s global order no longer serves American strategic interests—is fundamentally correct, even though Trump himself may be a problematic figure, and this insight drives all the disruption currently occurring.

“the glory the horror of Donald Trump is that at his core he has a really good point the global order the Americans created in the 1940s no longer serves American strategic interests”

London's advantage as a global financial hub rests on two factors: a friendly, predictable business environment with reliable rules, and location within the European Union providing access to eurozone capital seeking outlets. Brexit destroys both advantages because it removes regulatory reliability and EU affiliation, and money will relocate to Sydney, Auckland, Singapore, Hong Kong, or New York.

“London's advantage the reason that London is a global financial hub is is twofold number one friendly business environment very regular very reliable everyone knows the rules of the game second there in the European Union so London has become the first stop for capital flight from the euro zone to the wider world with brexit all of that leaves”

The credit adjustment in China will be triggered either internally (demographic contraction reducing domestic demand) or externally (Russian speed increase causing energy crisis, Iran-Saudi conflict, Japanese trade agreement allowing control assertion, or US rule changes), and demographic contraction is already beginning, which would turn China's disinflationary environment into Japanese-style deflation with severe consequences for asset prices and political stability.

“demographically we are going to be seeing a contraction in Chinese domestic economic activity simply because of demographic within the next five years we're already at the peak right now for what that market is able to sustain and so that would be more than enough to take what has been a disinflationary environment and turn into a japanese-style deflationary environment”

Germany is in the sweet spot as long as the global system persists: it has high value-added workers and access to end markets. But removing market access removes this advantage, and in 10 years the German demographic bulge moves into mass retirement, making Germany vulnerable post-system collapse.

“Germany's in the sweet spot lots of high value-added workers as long as they have access to an end market there are okay but you remove that market and it goes away and in 10 years that bulge moves into mass retirement this was never gonna last”

Italian non-performing loans are approximately 80 times larger than US non-performing loans at the height of the subprime crisis when adjusted for different national definitions, and this bad loan stack could kill the European financial system tomorrow—there is not enough money on the planet to bail out this system.

“Italy and the United States define an NPL differently in the u.s. if you're 31 days late you're in arrears and if you're 91 days late you go into foreclosure and pee on the u.s. 91 days in Italy if you are 271 days late but you have made a partial payment you're still in good standing that uses that definition which means in relative terms the Italian bad loans stack is eighty times eight zero times what it was in the United States at the height of subprime”

China is now the most over-credited country in human history in both absolute and relative terms; the small amount of tightening the Chinese have done in recent months will not end well.

“here's the People's Republic of China let me bring that down for you yeah China is now the most over credited country in human history and both absolute and relative terms you've all heard about the tightening they've done the last few months that's that little bit of a fallback at the top yeah that's not going to end well folks”

Robert Lighthizer, Trump's trade representative, is the only Trump administration official present from the beginning with autonomous power, and he is infamous for not giving interviews and has a track record of aggressive trade enforcement dating to his work under Reagan on the Plaza Accords and forced Japanese yen revaluation.

“the guy using these tools as Robert light Heiser he is the only person in the Trump administration who has been there from the beginning and the only one with any sort of autonomy now light Heiser is kind of infamous in American circles for not giving interviews and this is not his first stint in government he used to work for Reagan you guys remember the plaza Accords”

Europe is fundamentally an export union: it depends absolutely on American security commitment to export, because without American security, Europe loses its ability to export globally and cannot sustain its aging, consumption-dependent periphery.

“Europe is an export union piece in Europe a whole Europe a Free Europe is dependent on American security commitment and without that Europe loses its ability to export you can see it in the demographics why that's essential consumption led growth a recovery and the periphery is now flat-out impossible”

The United States has 11 supercarriers and all other navies combined have 11 supercarriers, with 21 total jump carriers in the world of which 11 are American, giving the US overwhelming naval dominance that won't be equaled until 2040-2050 even if all other navies combined their resources.

“there are 21 jump carriers in the world eleven are American there are 11 super carriers in the world all are American at current rates of global naval build-out the combined navies of the rest of the planet will roughly equal American naval power in the year 20 to 40”

Millennial consumption has kept the United States out of recession since 2009, and the US would have experienced three recessions otherwise; this consumption pulse has another four years of momentum left, and Millennials can fill the tax-paying class in ways Gen X never did, providing light at the end of the fiscal cliff tunnel.

“millennial consumption has kept the United States out of recession since 2009 the u.s. probably would have had three recessions since then otherwise and they're young enough and there's enough of them that that consumption pulse has another four years left to run”

The United States has only been militarily threatened by three countries in its history—Mexico (which it defeated in two wars and forced into permanent subordination), the Soviet Union (which it sought to dominate after the Cold War), and the United Kingdom—and this historical antagonism will make the Trump administration treat the UK harshly in trade negotiations, despite nominally friendly rhetoric about special relationships.

“there are only three countries in American history that have ever threatened the mainland Mexico we defeated in two wars and forced into a subordinate economic position that we will never let them out of the Soviet Union threatened us with nukes and so we took a certain amount of Glee in the 1990s when we turned the screws and we will never admit them back into any version of a system that we run in the third country is the United Kingdom”

The Chinese Politburo will choose internal coherence and national unity over maintaining links to the international system if forced to choose, because the historical precedent of Chinese unity under foreign system participation versus disunity under isolation suggests that holding the center—maintaining territorial integrity and political unity—is the primary objective.

“if the Chinese Politburo has to choose between a China that had it retains links to the international system but risks spinning apart or one that closes itself off and becomes much poorer but can hold together I mean there's not a discussion to be held in China on that topic holding the center is what all of this has always been about China's got 3,000 years of history but it's only actually been a unified entity for about one tenth of that half of that was under the Mongol occupation and the other half is under the american-led order”

If the eurozone imposes euro-denominated clearing within eurozone territory, the Federal Reserve has made clear it will retaliate by requiring dollar-denominated clearing within US territory, which would devastate euro trade since more trade within Europe is conducted in dollars than euros, making European attempts to assert clearing control futile.

“now the Americans are gonna get their piece the Europeans will get a little but every time that the Europeans have floated the idea that they're gonna force clearing on euro issues into the euro zone the Federal Reserve calls them up is like you're it's totally legal for you to do that you do whatever you think is right but just so you know that if you force euro clearing to be in the euro zone we will force dollar clearing to be in the dollar zone and more trade within Europe is done in dollars than it is done in euros much less beyond”

The smart thing for China to do would be to steadily rein in credit volume, but every time it attempts this, it sees sharp contraction in economic growth that is politically unsustainable for the Politburo (which maintains power by controlling large numbers of unemployed people). Therefore, fixing the credit bubble through slow deflation 'sailed 20 years ago' and the ship has passed—there is no gradual exit.

“the smart thing to do would be what the Chinese have been trying to do ever since she came to power and steadily rein in the credit volume but every time that happens they see a very sharp contraction and economic growth that they find to be politically unsustainable remember that the people who are in the Politburo now and who have been in the Politburo for the last several decades they got their jobs by organizing large numbers of unemployed people and marching down the government so they want to make sure that that never happens so I would argue that fixing this in a slow-motion deflationary not deflationary but like deflating the bubble I think that I think that ship sailed 20 years ago”

The United States is not a trading nation and maintains the lowest involvement as a percentage of GDP in international commerce of any country on the planet, which gives it unique freedom to abandon global structures.

“the United States is not a trading nation and as long as that is the case as long as the United States is the country on this planet with the lowest involvement as a percentage of GDP in international commerce it can go its own way”

The United Kingdom, trapped in a never-ending Brexit negotiation process, retains all the costs and restrictions of EU membership while losing the benefits of association, particularly the ability to negotiate from a position of strength with outside powers, and faces American pressure that will crush the London financial sector.

“the United Kingdom is trapped in this never-ending BRICS tension process where it still has all the costs and restrictions of the EU but the benefits are leaking away especially the ability to negotiate from a position of strength with anyone in the outside world”

The baby boomer generation is the largest generation as a percentage of US population in American history, and this capital-rich demographic pushed down cost of capital and rate of return for all investors, which is why investors are searching for the mythical extra 1% of returns.

“you've got the baby boomers which are the largest generation is a percentage of the population in American history and that bulge and that capital rich demographic has made the United States capital rich unprecedented Lee capital rich exorbitantly capital rich perhaps a little too capital rich because all those boomers and that capital rich demographic trying to get ready for a retirement have pushed down their cost of capital pushed down the rate of return this is why we're all here right you're trying to find that mythical extra 1% of return”

There is no version of Brexit that will lead anywhere other than a hard divorce because European policymaking requires unanimous consent from all member states (full veto power for each country), making it impossible to satisfy Ireland, Spain, Germany, the Netherlands, and France simultaneously on Brexit terms.

“there is no version of brexit that will lead anywhere other than a hard divorce European policymaking gives every individual country a full veto on the important stuff brexit is an important thing there's no version of a deal that will satisfy Ireland and Spain and Germany and the Netherlands and France this was always going to be a hard crash out”

Canadian Foreign Minister Chrystia Freeland, recognizing that Trump requires being the smartest person in the room and that her intelligence and capability threatened this, deliberately placed Prime Minister Justin Trudeau in front as the trade negotiator specifically because he is less intelligent and would defer to Trump, creating what Canadians call the 'hug offensive'.

“she knew that she needed someone to put in front with a tight outfit and great hair and a nice smile who does not and smile and never open their damn mouth and she found the perfect person Justin Trudeau is by far Donald Trump's favorite leader because he just stands to the side and does a lot of this but Canadians call it the hug offensive”

Chinese President Xi Jinping's anti-corruption campaign during his first five-year term was not primarily designed to eliminate corruption but rather to ensure that no regional powers could stand up to him once he begins tightening political and economic control, consolidating power before the system tightens.

“the anti-corruption effort of his first five-year term was not really designed to root out corruption any of you who have been doing business in China can understand how and that is but it was to make sure that there were no powers on a regional basis that were sufficiently potent that they might be able to stand up to him once he starts tightening the screws”

Friendships purchased through investment work only as long as payment continues; once payment stops, former friends abandon the relationship, as Russia discovered in the 1990s when it lost allies it had paid for.

“kind of like what the Russians did in the 1990s but as the Russians discovered as soon as you stop paying people to be your friends they are no longer your friends”

Canada held out on accepting Trump's terms for six days after Lighthizer's seven-day ultimatum because Canada's historical security arrangement (ICBM flight path from Soviet Union) gave it leverage; however, this leverage disappeared because the Trump administration sees Canada as a competitor rather than a security asset.

“when light Heiser came back from Mexico and called up to Canada and said we've got a bilateral deal with the Mexicans you have seven days to accept our terms the Canadians caved in six why did they hold out for so long and then cave so quickly well it has to do with this map this is how Canada has always seen itself in the world or at least nine since 1945 Canada is on the flight path for the International intercontinental ballistic missiles that would fly from the Soviet Union to the United States so there is never ever a version of American security in the Cold War that did not reflexively also protect Canada the Canadians could have been security free riders to their credit they were not they were always the first ones there to help but that doesn't mean they didn't use their leverage somewhere else so whenever there was a security crisis the Canadian PM would call up the American president commit forces and say oh by the way we could really enjoy some extra access to your market for québécois cheese and all of these incidental concessions were rounded up and put into the original laughs toe cord they were all removed from NAFTA - and because the Trump administration sees Canada is more of a competitor and Mexico is more of a partner they had no choice about that their environment has changed and now the trade relationship has as well”

The United States will quadruple the cost of capital in 2022 when the majority of baby boomers move into retirement, shifting from being net contributors to the investment network to net takers, eliminating the decade-long period of pushed-down cost of capital.

“the year 2022 is the year that the majority of the boomers move into retirement which means that the cost of capital in that year well at least quadruple”

The U.S. and China made more progress in bilateral relations in the 11 months following Xi's first summit with Trump than in the previous 20 years, but this progress is now falling apart.

“and the US and China made more progress in bilateral relations in the next 11 months than we had in the previous 20 years it wasn't enough and now it's falling apart”

China's credit situation mirrors Japan's 1980s bubble playbook almost exactly, which is not reassuring given Japan's two-decade stagnation outcome.

“I must say having spent a lot of my career in Japan what's happening in China in many ways with the credit bubble looks so similar to what happened in Japan in the 1980s it's like that almost exactly the same playbook which is not reassuring”

South Korean President Moon acknowledged that there is no version of a future without America in the world where his country survives, and therefore agreed to renegotiate the Korea-US trade deal by caving on essentially all American demands without knowing if this would be sufficient to guarantee future American security commitment.

“at his first opportunity president moon of South Korea walked into the Oval Office said there is no version of a future without America in the world where my country survives so you want to renegotiate the course trade deal fine what do you want we will cave on everything didn't have a choice now was that enough is this New Deal enough to make sure that when the rubber hits the road the Americans will be there President moon doesn't know Donald Trump doesn't know no one knows”

India and Turkey have already elected ethno-nationalist leaders and used racial violence and riots killing hundreds of people to serve tactical political purposes; they have not yet begun their credit adjustment, making future crises likely.

“here's Indian Turkey two countries who have already elected ethno nationally Tirana think twice about spawning race riots that kill a couple hundred people a pop when they feel it serves their tactical political purposes they have yet to begin their credit adjustment”

President Xi Jinping admitted to Trump in a private summit at Mar-a-Lago that he does not want to meet in the White House because the US controls everything that matters: trade access, maritime access, energy markets, and financial markets, and that there is no version of Chinese success without American largesse.

“President Xi finally had his first summit with Donald Trump he called ahead and said that he did not want to meet in the White House he had some things he needed to say in private so they went tomorrow lager where Trump could control the environment and she's like you control everything that matters in this relationship trade access maritime access the energy markets the financial markets there is no version of my country being successful or safe or secure United that does not involve some degree of American largesse”

Mexican President Andrés Manuel López Obrador, despite his nationalist ideology, deliberately avoided a pissing match with Trump and instead cooperated with Trump and his predecessor, facilitating NAFTA renegotiation into USMCA because he understood that defining his presidency through conflict with Trump would be strategically damaging.

“when he became president he was elected in a landslide and everyone was convinced that there was gonna be a pissing match between him and Donald Trump because they're both nationalists but ironically they're in lied the opportunity Obrador was smart enough to know that if he picked a fight that that would define his presidency so he reached out to his predecessor into Trump and said that if you two guys can figure out what's next what NAFTA too happens to be I'll get it ratified”

Brazil is experiencing a lost decade and will experience a second lost decade because the country's political system cannot get the politics right, as evidenced by a recent presidential election where one candidate campaigned from prison and the other advocated Nazi-like authoritarianism.

“this is what a lost decade looks like and that assumes they get the politics right spoiler alert they're not I don't know how many of you follow Brazilian politics I find it delightful they had a presidential election last year in which the two final candidates one was campaigning from prison where he had been convicted of corruption not indicted convicted you can still run and the other dude at one of his final public rallies said that the real problem with the Nazis is that they were just far too soft on their domestic foes”

Japanese Prime Minister Shinzo Abe believed he had secured a strategic security partnership with Trump through early meetings and security agreements, but Trump's imposition of steel and aluminum tariffs six months later destroyed Japanese expectations, revealing that Trump operates on tactical issue-by-issue leverage rather than maintaining strategic alliance structures.

“Shinzo hobby thought he had a deal he was the second world leader to visit Trump post inauguration and they hit it off splendidly they had a series of agreements on security cooperation intelligence sharing obby went home thinking everything was great and then six months later Donald Trump leveled steel and steel and aluminum tariffs”

As long as British strategic thinking prioritizes security and economic access above all else, the United States has maximum leverage; if Britain had simply cut the cord and left the EU without ongoing BRICS negotiations, it would have significantly more leverage in figuring out what comes next.

“as long as security and economic access is going to be first and foremost in the British mind that gives the United States all the leverage specifically since you didn't didn't just cut the cord had Britain cut the cord and just left they would have a lot more leverage and figuring out what's next just kind of dragging it on is a big problem”

After Trump negotiated deals with Korea, Mexico, and Canada, Japan realized that three of its four largest trading partners had already rearranged themselves into a post-order network, with China being the fourth. Japan then capitulated and agreed to similar terms.

“and obby realizes that three of Japan's four largest trading partners had already rearranged themselves into a post-order network and the last country was China he caved those talks will probably finish up later this summer”

The strategy of putting Trudeau as a charming figurehead worked for Canada until the G7 summit where Canada hosted and Trudeau had to speak publicly, breaking Trump's internal positive narrative and causing relations to collapse within an hour.

“Justin Trudeau is by far Donald Trump's favorite leader because he just stands to the side and does a lot of this but Canadians call it the hug offensive and it was working gloriously until Canada had the honor of hosting the g7 summit last summer and for the first time as host Trudeau had to speak and the internal monologue that Trump had been using to fill in the gaps that was all very complimentary did not match what he was hearing and relations literally fell apart in an hour”