 This is Rob Johnson, president of the Institute for New Economic Thinking. I'm here today with an extraordinary man. Well, I've known back to the days when I worked in finance, but knowing him and being able to keep up with him are different things. This is Jim Chenos. He has his own investment firm, has been involved in the markets now for over 40 years. Recently, he's been teaching a course. I guess recently, for the last 13 years, he's been teaching a course called A History of Financial Market Fraud, A Forensic Approach. Jim has written things on the Inet website and in many other places related to financial instability. He's written about China. And he is one of the people that, when I look at who is successful, independent, high integrity, courageous, and practices what he preach, Jim Chenos fills that bill as well as anyone I've encountered. Jim, thank you for being here today. Well, thank you for that over-the-top introduction, Rob. It's good to be here. Well, you've got to have a bubble for you can have a crash, but we don't have a crash today. But let's start talking about recently the phrase, the golden age of greed. You've talked about what you're observing, what kind of things are happening in the United States and perhaps in the world economy and with a global financial market, it's not even clear where the sovereigns are sometime. But paint the picture for us. What is the golden age of greed? Well, it's actually worse than that. It's the golden age of fraud. And so I coined that term a couple of years ago as I started to see post-pandemic, the excesses really begin to build in the financial markets, both public and private, culminating in 2021, which was the most speculative year that I've experienced in the markets in over 40 years. And one of the things I teach in my class, Rob, is that the fraud cycle follows the business and financial cycle with a lag. That is, the longer you have an expansion, the longer a bull market goes on, the more the incidence of fraud occurs as it matures. And then, of course, once things turn down, you begin to get fraud exposed because many frauds are at their basis a Ponzi scheme and need to raise new and new capital. And so the poster child for that obviously is what we saw happen in crypto last year, which was the red-hot culmination of speculative frenzy, lack of oversight, lack of law enforcement, and just pure unadulterated greed that got caught up and then exposed in all kinds of schemes that they were, at their very nature, simply Ponzi schemes. And I think that now we see another aspect of what I teach in the class, and that is when people ask, where's the regulation? Where's law enforcement? One of the things that is as old as financial markets is that we don't see oversight or new laws and regulations until after people lose money. And that is certainly now the case in crypto, where after the fact we're going to see much more regulation as we speak, the SEC is cracking down now on both onshore and offshore crypto firms and so on. So it dovetails with what I teach in real time. In fact, last year, anecdotally, the now infamous interview in Bloomberg with Sam Bankman Freed was released on a Monday afternoon in April. I teach my class at Yale on Monday afternoons. And I was reading this while I was having my coffee before class, and I ran up to our audio video guys to ask them if they could put this interview that I was reading on my smartphone up on my PowerPoint for that afternoon's class because it's very rare that in real time you see an industry luminary discussing his industry by describing it as a Ponzi scheme, which is exactly what SPF did in that interview in late April with Matt Levine and Joe Weissenthal on Bloomberg. And so it all came together last spring and summer in this particular subspace of the financial markets to prove what we've been talking about and what I teach about these cycles of greed and fraud that occur in financial markets when things go too long and oversight becomes lax. And do you see what you might call a recipe or a vision for a corrective structure of governance that would diminish these, like how overreaches or these calamities that follow with excess? Yeah, it all depends, and I know that's kind of a weasel answer, but in past cycles where we've seen large amounts of speculation and large amounts of fraud, the evidence is mixed. So for example, if we just look at the market since the 20th century, I mean after the crash of 29 and the resultant amount of fraud that was exposed and people forget about that, if you look over my right shoulder back there, there's some stock certificates of Ivar Kruger's firm, the great match king as written about by Frank Portnoy. And the securities acts of 33 and 34, which came after the crash, was not really about the crash. It was about all the various different pieces of paper that were floated on American investors through state regulatory vehicles and so-called blue sky laws that ended up basically being worthless. And so that was the real impetus to get the framework for the SEC and the securities laws that we still use today. So there the backlash was tremendous. But if we go to say the global financial crisis, I mean we got Dodd-Frank, but there was a lot that was undone or not done after that wave of fraud and excess that we saw in the residential real estate market. And of course part of the problem there politically was was that lots of everyday people were committing the fraud. People were lying on their mortgage applications and then Wall Street was packaging, Wall Street was going in on the lie or looking the other way or did willful blindness and looked the other way as these things were packaged into leverage securities and then distributed throughout the global financial system. So it became very, very difficult to prosecute the bad guys when we were kind of all the bad guys. And then you can look at the corporate waves of fraud in the dot-com era with Enron, WorldCom and then also go back to the savings and loan crisis where George Bush Sr. put thousands of bankers into jail for simple loan fraud and back in 1990 and 1991. So it all depends. I mean we've seen pendulum swing where the public gets outraged, loses lots of money and demands change and justice. And then there are other times where the public kind of shrugs and says, ah, they're all crooks, what are you going to do? So we'll see. Yeah, I would guide our audience to look at this or listen to this podcast. It's a six or seven part series by Alex Gibney and David Sarota called Meltdown. And it was not about the meltdown of the financial markets in 2008. It was a meltdown in the confidence of governance regulation and expertise that fostered Tea Party, fostered Occupy Wall Street, a Republican House, a Republican Senate and I guess Donald Trump. And the feeling that everything was rigged, right? That was rigged on behalf of the rich guy and market participants and not rigged to the detriment of the public. But what's really crazy, Rob, is that in the 10 to 12 years that followed that, that the public decided the way they were going to get even was to speculate themselves in crazy securities in 2020 and 2021. So they started buying crypto. They started buying worthless meme stocks. They started buying SPACs. And to get back, and if you get on social media and read what's in the mindset of these small investors is they want to get back at the man. They want to get back at hedge funds and regulators and the SEC and not understanding that in fact they're the ones that are being basically duped again to buy these securities. It's a remarkable experiment in human psychology. It's almost like imitation of the person that harmed you. There's got to be a Freudian term identification with the aggressor, I think, was the Freudian phrase for replicating the practices of those who abuse you. I kept pointing out to a number of them on social media during the meme stock crazes, and there's been a few of them, that overpaying for worthless pieces of paper is not going to stick it to the man. It's going to stick it to your portfolio. And making these statements in the markets can be dangerous. And so it really has become a bit more of the Wild Wild West and certainly so in 2020 and 2021. And I think we're going to be paying for that going forward in maybe some unspecified ways. In the middle of 2021, I was down in Coronado Island for an event celebrating the life of a man that was extraordinary. And one of my friends came up to me and said, you used to be really interested in all these financial markets. And he said, I've been making lots of money. And I said, I didn't know you were a financial guy. I thought you were a surfer. He said, in these financial markets, you get your toes on the nose and you ride the front of the board. And I said, be careful. Be careful. There are sharks out there with their jaws open. But it was just a kind of a silly thing. He was so enthusiastic. This is June of 2021. And he was very, what I'll call, emotionally intoxicated. Well, we're still seeing the echo chamber of that. Option trading is hitting new records. And what has a lot of people like me concerned is that it's now the volume is all coming in what's called zero DTE options, zero days to expiration, meaning people are buying options for stock prices on that day that expire. And so this is like literally gambling, going down and just betting on red and black. And so we've really gotten a casino like culture coupled with the equity culture that is a bit frightening in terms of market structure. And again, I mean, regulators have kept their kind of hands off this. I don't want to date myself too much. But if we go back far enough, one of the ideas was that the Fed was supposed to now take away the punch ball, but was supposed to warn people when things were getting overheated by such indications as raising margin requirements. They're completely quaint and antiquated in today's markets, but nonetheless would send a message. And as we know really since Volcker, the Fed and others have had as their third mandate financial market stability and some might say maintenance. And that's now the unlegislated third mandate for all central banks. And in and of itself after enough years where people get used to that, the so-called Fed put, it breeds its own instability because people take more risks than they otherwise would assuming that the government has their back. And every once in a while they find out to their horror and misery like 2002 and 2008 that doesn't necessarily happen that way. And so it's concerning. And then of course we overlay on that the fact that in this golden age of fraud as I've called it, we're seeing all kinds of egregious corporate actions that I think really should be cracked down on and aren't. The most prominent when people say well where is the fraud occurring right now? The most prominent is right in front of our faces by the aggressive use of pro forma reporting metrics by corporate America. If you look at most corporate reports right now, they do not publish at first and foremost in front and center their gap results. They report adjusted metrics. So GE, Stagial GE is a great example of this. GE put its earnings out two weeks ago. And GE had 16 pages of adjustments in its earnings report for the fourth quarter to get you to the number that they wanted you to get to as to what they thought their profits would be adjusted. Not what they were. What they were adjusted if you take out a bunch of bad stuff. And Silicon Valley has taken this almost to an absurd level. I have companies that are going to report that have 40, excuse me, 80% of their revenues are share based comp expense where they're just issuing stock instead of cash to their employees. And under the current guys, companies add that back to their P&L. They say it's not an expense. So increasingly it gets to this equity based, you know, equity based world that we're in. More and more companies, particularly aggressive companies are paying their employees lavishly in stock because they don't consider it an expense. And the SEC has guidelines on this that it is just not enforcing. And so routinely you'll hear someone like an Uber or a company like that talk about we are now adjusted profitable and this is the first time in 10 years we're a profit. And then you look at the financial statements closely and you realize they're still losing money. And that is to me kind of black is white and white is black. And I think it's something that the SEC and other regulators should have cracked down on a long time ago. I'd love to report to my partners our investment results without the bad stocks. I guess Ronan Jailer might do that. Yeah. Yeah. It's an interesting dilemma to see all these machinations that you can be because of your expertise alert to. We're also seeing a lot of the public that you mentioned a few minutes ago wanting to catch up but they don't have that insight or that equipment. And then you have let us say the large number of people that don't do much beyond subsistence. And as the despair in all these categories starts to rise and the loss of faith in governments like you'd said system is red which was kind of a mantra of Donald Trump's 2016 campaign. And I always encourage people to look at the video of the three-minute speech that he made on the night of Game 7 of the World Series which was the Sunday before the Tuesday election when the Chicago Cubs were striving to overcome. I think they had one since early like 1904 or something. And the turnout for those games were huge. He played this ad six or seven times over the course of the game to the national audience and he kept saying the system is rigged and the only people strong enough who could band together to fix it are the American people. And it was this piece of propaganda that showed Lloyd Blankfein with Hillary Clinton or Hillary Clinton with Xi Jinping or George Soros and others in the background. And he's casting all of this we call discord and then saying we're going to fix it. And a lot of people bought into that. The guy who took six or seven of his companies bankrupt and I was short a number of his securities in the 90s and the early millennium in the junk bond market and the equity market and being short Donald Trump's companies was like watching numerous slow moving ocean liners hitting multiple icebergs repeatedly. I said that on a fundraiser and President Obama loved that and stole the line. But it's true. To have Donald Trump give us a lecture on the system being rigged is high comedy in my eye. There's nothing to do with his other politics. It's just as an observer of financial markets he was a master of that. And so it really is ironic. But what's even more frightening as we've alluded to is that the outrage of 2009 and 2010 which was Occupy Wall Street and Tea Party as you mentioned has turned itself into well I'm just going to go to the casino myself and put it all on red. And you know that to me is even more frightening because it's as if someone said this the other day at a meeting I was at he said it's kind of like the public is that guy at 3 a.m. in the casino at the roulette table with eight or nine drinks in him and half his stack is gone but he's going to be damned if he doesn't get his money back before he goes to bed. And you know he's going to lose everything. And I just worry that where this is going to put it politically come the next true bear market where a lot of these small retail investors who are in the market like never before you get wiped out and they're going to get wiped out. And so I think that that that would worry me as an observer of political economy through the lens of finance and then what will the backlash be what will people want to do at that point. And so will it be will it be anti Wall Street will it be anti corporate America will it be some combination of both. And how will the politicians on both sides of the aisle you know stoke that fear. Yes. Well Martin Wolf the famous columnist for the Financial Times has just released a book on the crisis of capitalist democracy and I've worked with him quite actively on the book and we just did a podcast a couple weeks ago. It just came out on 7th of February and he's he comes from a family not his mother and father but the Nazis who were destroyed by the Nazis. And the ominous sense that he has it's not it's not even what will the government do it what kind of government will people submit to in the despair say in the after the fall down of the markets in the next recession or bubble breaking deeply. And then the last piece I guess I want to add to make this tension even greater is we have the baby aging out now and those people with 401ks or whatever if those all evaporate given the cost of elder health care what kind of crisis are we going to have when the people who need support money evaporated and the size of the working age population relative to the retired population is at an all time low. There's a lot of stress on the horizon. So two thoughts there so the first one on on on Martin Wolf's book and I look forward to reading it is that what was really terrifying and what brought forth the 30s particularly in Germany and Italy was the and even Soviet Union was was the first crisis of the early 20s right and then amplified by the global crash in 29. And so you had you had in Germany and Italy and of course through civil war in Soviet Union you had this horrible wipeout of savings and capital in the early 20s in Germany through hyper inflation and in Italy through economic depression and in Soviet Union through civil war and then just as things were sort of maybe trying to write themselves even though politically it polarized those countries well certainly Germany and Italy then you had the crash of 2932 and that's what brought Hitler in for example was the fact that that not only did people lose their life savings in the hyper inflation in 23 but then everybody hit the bread lines in 1930, 31, 32 and at that point people said I have nothing to lose. I'm going I'm going to either vote communist or or national socialist and we know what happened and and and that's the that's what worries me is that that if this occurs you know within within anyone's memory of 0809 and and and then the backlash is going to be I think significant number one number two is it turns out 401 case and health care costs. I really do think that that that one of the other aspects of what we've seen in the the equitization of society and the finance financialization of society is is beyond just the Fed put in the markets is now a general sense particularly post-pandemic that well if worse comes to worst the government will will send me a check will make me whole will will open up the flood gates and we'll get national health care or whatever it might be and and that is that is the flip side monetarily and inflation deflation side of of what happened post-pandemic we now have a belief in light of what the government did to stem the pandemic what makes people actually think they won't open up the floodgates in the next depression or recession and and probably they will and that's fine but I'm just saying that that we now can see a different script from the deflationary 40 years from 1979 to to 2020 when I got on Wall Street in 1980 rates were 14% going to zero and and that's not going to be repeated and so we saw labor ascendant in the late 70s I was earning $14 an hour working in a steel mill in Milwaukee Wisconsin to pay for my college education and I got all the hours I wanted at night weekends holidays because the union workers there were making a lot of money and all had you know lake homes and whatever and and you know when I got on Wall Street in 1980 I made more money in two months in the summer of 79 working in steel than I made my first full year on Wall Street imagine that today but that was that was the peak of labor that was Thatcher's election in 79 and Reagan in 80 and the pendulum has swung back and now of course it's all capital and no labor and and if that pendulum swings back the other way and you know we've seen it happen a couple of times in American society in the last hundred and fifty two hundred years you know people are going to be wrong footed and and there will be like we've seen when those things change you know wholesale societal changes and political changes so it will be very interesting you know and the movement they now are calling de-globalization may play a role in that that might it might indeed would get to our friends in China yes well you know the how would I say people like Bronko Milanovic and others have made a good point which is God wasn't necessarily born in Pittsburgh in Detroit and the globalization development did create a rising tide for living standards for many many people on planet earth but that process perhaps was maturing but also with some of the breakdowns related to adversarial nationalism and the pandemic and so forth I would edit he may not have been born in Detroit or Pittsburgh but he ended up vacationing in Davos yeah man the yeah Peter Goodman will have to put that on the jacket of his paperback edition of Davos men but I think the the sense that I have now is that we are in a what I'll call an unstable dynamic and there is all kinds of tension directed at governance I know a lot of people the other night who said the state of the union address was brilliant but can we practice what we preach and and I said somebody said to me later and it reminded me of your comment moments ago Trump preached what he practiced but with a mask and Biden has put out something whether it's dealing with the cost of medical care for elders or financial transparency or he just went through a whole laundry list of things but the the sophisticated people I know are saying how is he going to implement that in the world of money politics and I don't want to fan the flames of cynicism and drive us further towards that authoritarian alternative and I do myself find myself grateful that the president of the United States did shine a light on directions he would like to see us go for a better balance not necessarily every single thing he said but the thrust of it but but nonetheless his stepping out like that made me think we really are in a treacherous place that the the impetus to his breaking away and making that speech is probably related to concerns of despair within the White House yeah I can't you know I can't speak to that I don't know but I would say that you know the inability now obviously like most presidents he got whatever legislation he's going to get through he got through in the first half of his term and now you know it's going to become incredibly difficult with the Republican House so it has to be via executive action and the regulatory system and so that's why you see the initiative about things like junk fees and and things like that but but even then I mean it becomes more and more difficult and and and politicized as we get closer to a presidential election because if the White House does do that and I think they should in many cases you know it will be painted as as regulatory overreach and big government stomping down on business and and so it's it's a tough road to hoe without a doubt politically yeah well as I mentioned Bill Greider used to say the Fed is independent he'd say the independent from whom and now people are saying how how are we going to protect freedom when the only freedoms that seem to be protected are things like a space program for Elon Musk or Jeff Bezos on his own and where's the common good this where's where's the protection of students from the profits of gun makers and I'll go one step further with Tesla and that's the company we're short in the interest of full disclosure is is NHTSA allowing them to test their full self driving beta software on roads that you are you and I are on where other other automakers you know legitimately use test tracks and test for years he's testing them on our highways and and you know I think it was any other company if it was Toyota doing this the federal regulatory apparatus would have told them to stop it immediately but because it's Elon Musk he gets a pass and part of that gets back to the equitization of this country and the financialization of this country that I talked about he's held up as a as a hero and Tesla is the most owned stock by retail investors in the world and so he's going to get he's going to get I think special treatment yeah I think that's an interesting hypothesis I hadn't thought about that broad based retail coalition that might be underpinning it and he can play the he can play the common man in the theater of the financial markets now that's it wow the limit let me reach back a little bit in history my former wife was the head of Japan analysis in the 80s for the Federal Reserve under first Volcker and then Greenspan and we watched that bubble burst and we watched that country aging and yet when you look at satisfaction in life you look at surveys longevity whatever measures you want the Japanese didn't collapse and I guess I want to contrast that with some of the ominous things that you and I have put on the table how was Japan and how they say these are still dynamic things the the downturn could still be tomorrow but were they able to step aside and have a u.s. China positive multiplier be the rising tide that raised all boats and sustained them to avoid a crash or or are there things we can learn from them so that we don't fall off the cliff well one thing that everyone forgets about and the Japan analogy is somewhat apt I think it's more apt as it applies to China than the U.S. but what everybody forgets about that the 30 40 years no 35 years at this point that Japan has stagnated is that Japan has had declining population so it's flat GDP over that period are up slightly on a per capita basis is actually up in line with the EU and the United States is or not far off and so that that because the company the country is shrinking again the math way the math works is people really have it individually felt it and so that's a really important point people should consider however I mean Japan in 1989 at its peak had eerily lease is eerily similar to China in terms of the economic model I have a slide in my China deck about this you know Japan was was heavily heavily an investment driven GDP model although nothing like China it was at its peak it was investing about 30% of its GDP in investment China is in the mid 40s and has been for better part of 15 years it was investing in greater Asia now in China's case they're investing internally but greater China is supporting that in terms of Hong Kong and Singapore and South Korea it had a basically government driven economic model if you remember we were directing investments by corporate Japan in many cases it had an export driven economy and with a pretty controlled currency so there were a lot of similarities between the Japanese economic model of the late 80s which was the miracle and the Chinese economic model from say 5 to 10 years ago when it was still putting up those big numbers and then the final similarity which is the most ominous was Japan had a real estate bubble and had a banking system that peaked out at about 400% of GDP in terms of assets and now let's go to China and take a look at what happened in China over that period so when China entered the WTO in 2001 it had an economy about $1 trillion US in terms of GDP it had a banking system that was about $1 trillion US in assets 40% of those assets were bad they were loans to state owned enterprises that ultimately had to be worked out over time they wrote some of them off over time because they had to recapitalize their banking system in the western financial markets in Hong Kong and in New York and so it took them a while to work that out of their banking system fast forward to today Rob and China's economy is about $15 trillion US and assets in their banking system are roughly well actually over $60 trillion so they're 4x that's very similar to where Japan was at the peak it's very similar to where some of the bad European countries were in 0708 like Ireland and Spain and Iceland and so you start to get up to a banking system that's 4 or 5 times the size of your economy and it's the banking system that the banking system tail that wags the economic dog and how does this happen well it almost always happens because of real estate which is a leveraged asset class I joked that Chinese apartment prices are the second most important price you gotta know other than US treasury rates because it's roughly a quarter of China's residential real estate and China is still building 20 million flats a year even though it doesn't need them and the declining population yeah and I joked long that China's the only advanced country that knows its annual GDP on January 1 of that year they can preset it legally right it's an accounting identification if half of your economy's investment you can literally direct investment to make a GDP number if you never write off the bad investments but I guess what you're saying in a dynamic sense these buildings or what you might call excess apartments don't add to productivity and therefore income to service that growth in the balance sheets of the banks and financial institutions so if they were investing in productivity enhancing resources human capital or physical capital or whatever you might have a more optimistic sense which they were in the Deng Xiaoping reforms after Tiananmen Square and even in the first 10 years of the new millennium after they entered the WTO it wasn't until after the GFC that this went crazy and we've seen this massive increase in banking assets and apartments and apartment loans driving GDP a lot of it was government driven they needed to make numbers the way the Communist Party worked was the local party was set targets by the National Party you need to grow 7 or 8% this year what's the easiest way to grow 7 or 8% stick a shovel in the ground the problem with this you can't segue into a consumer driven services economy which is what most modern economies are because you remember your macroeconomics Rob s equals i so the fact that if you're going to invest 46% of your economy every year you've got to save 46% and thus the problem the segue to a consumer driven economy will create speed bumps the like of which no Chinese premier wants to encounter and every time that they try to sort of reign this in they've tried three times since I've been following China closely in 09 three times they've tried to hit the brakes and all three times they've let up and hit the accelerator again because the economy immediately goes into stall speed and they panic and I've called it the treadmill to hell they can't get off it and there's no other playbook and so the inevitable reset is going to happen it's just a matter of when and from what level we're like Japan Japan hit this reset in 89 and Japan's alternative is to muddle through for 40 years with no growth I don't know if China has the cohesion internally and politically and they might to do that and that is either that or you're going to have to face severe downturn clean out the system clean out the bad deaths and start over I don't know if they have the stomach to do that and or if they don't try to find foreign adventures to offset that risk you know starting 2019 in Hong Kong now the saber rattling over Taiwan that's always a possible response policy wise as well yeah I'm going to for all parts particularly with an end game of nuclear threat it's interesting to me I spent a lot of time going back to the time of Tiananmen Square in China and I remember there was a place probably around 2012 where a lot of professors at universities were saying to me we had this old model where you'd run around the country say the equivalent of high school students and test who are the best and the brightest to bring them in and teach them to be the government but now in the advent of the digital age there's a whole lot of what I'll call private sector potential and there are a lot more people who want their children educated whether it's in engineering or you know the skills the 3 Rs or what have you and these professors were talking to me about their frustration that the economics of the support for the universities by the state wasn't what I will call working to upgrade human capital where all the potential lied and they said you know we've had a lot of people migrate from the farms to the cities and they work many times with their hands and then they moved in manufacturing in the beginning then they've moved to construction of infrastructure and construction of real estate but we're not building the human capital and I think I guess just to conclude that vision the way in which Jack Ma has been dethroned is sending a very negative signal about technology is creating what I'll call freedom and independence that maybe the government doesn't want the society to inhabit. Well as we know from our own wrestling with big tech big tech becomes a power center literally in and of itself and that's the one thing the Chinese Communist Party won't broach right, it won't broach any political power by a new power base technology, entrepreneurs, big technology companies like Alibaba, Baidu, Tencent and so that's why we saw that those companies and those executives were getting fabulously wealthy and that became a political threat that the CCP was just not going to tolerate so that's number one number two it's coincided with the deglobalization as you called it you know and a little bit more hard headed look at Chinese technology through the national security lens and whether or not we want Huawei equipment or TikTok on our phones and so increasingly that's going to be an issue and so you know it's tough because the Chinese labor market having gotten wealthier has priced itself out of making sofas and bicycles and things like that those are made elsewhere for Walmart and really they were supposed to go up the value change through technology and more advanced products but with this deglobalization trend that's going to be more problematic for China and so they have a series of issues on their table that are not pleasant and alternatives that aren't that pleasant right now and that's what makes me worry a little bit about the saber rattling because one of the classic misdirections for any authoritarian government is to set up enemies outside the border that's the cause of our problem not our own policies Yes and I know my friend Orville Schell who's spent a lot of time studying China and he wrote a book with John DeLarie called Wealth and Power and it was about what he saw as a coming crisis between the US and China which was from the humiliation they call the century of humiliation from the opium wars through the Japanese invasion the idea that China has what you might call regain its stature at the head table is very powerful at the same time you have the United States leading the western system doesn't want to be a partner it wants to be the captain and the United States from what I'll call a Cartesian Enlightenment system the Taoist Confucius the eastern philosophy in China means that it's quite possible for the two sides to misunderstand each other because they make projections from their own imaginative mindset on to the other that Subigna Brzezinski talked about this a great deal in 2010 and 11 that it was going to be very hard to have a G20 but as this distrust is reinforced by what you might call a stammering or sputtering economy and discord within both the United States and China that Bismarck recipe find something that you can dislike outside and unify the people behind you seems to be as a matter of fact one of the other teachers at Yale Steven Roach formerly of Morgan Stanley I did a podcast with him a couple of months ago about these questions and I read something by Chas Freeman last week about what you might call a lose-lose framework unnecessary losses that might be on the horizon don't underestimate also the fury that China has toward our ally Japan who's announced a rearmament program for whatever differences between West and East there are in philosophies and the ability to misunderstand each other in any kind of policy square off there is just outright hatred in China for the Japanese much of it legitimate I might add for what happened in World War II and we forget that there was a massive land war while we were fighting our way across the Pacific via our Navy and Marines there was a massive land war going on in China between the Japanese army and the Chinese army replete with many of the atrocities we saw from the Third Reich that has not been forgotten in China I can assure you the fact that Japan is now embarked upon a new policy to rearm itself is raising strategic issues in Beijing that here to for it didn't worry that much about it, worried about the US but a re-armed Japan is a different animal in the Pacific so it's something they talk about a lot more than we do obviously Yes and I guess it's hard to figure for me what the Chinese government thought it was doing inciting with Russia and so many of their trading partners are on the other side I've wondered if that decision while it's a way of showing how to say beating your breast or stiffening your spine in some simple way if it's not going to exacerbate the economic stresses because the Australia's, the EU and others are going to step back themselves Well keep in mind that Xi Jinping the first thing he did when he became the leader back in 2013 was give a speech about the weakness of the Soviet Union in allowing perestroika and how it was one of the biggest disasters of the 20th century was the fall of the Soviet Union and there's actually an institute for the study of the fall of the Soviet Union in China but perhaps more interestingly and ominously remember that the only major foreign leader that attended the Sochi Winter Olympics that were Putin's showcase was Xi Jinping and this was before the Ukrainian invasion so there has been a growing warmth between Russia and China because of shared interests against the West for a while now Yes, I think that's right and in my own work when I was running the Quantum Emerging Growth Fund I used to ride around all of these countries in emerging Asia and read their novels and watch their movies and seen from that, how do you say the analyst reports but I also like to get the cultural vibe that's coming forward and one of the things that haunted me in recent years was the movie Wolf Warrior 2 which absolutely characterized China as the savior of the global south from the global north led by America but America and Europe oppressors and all kinds of things including the National Museum exhibit in China we're emphasizing more and more and more which I call pride on their side and defiance and it feels to me like at a very subtle level but it's now accelerated that these tensions that Orville Schell and you and others have foreseen are quite ominous they're really coming to the surface what would you do if the president called you in tomorrow and said what do we gotta do to take the steam out of this how do we come back to a win-win situation well it's tough because I mean we have one major obviously issue sitting there right in the south China sea called Taiwan and Taiwan is important not just because we have back Taiwan but because Taiwan along with South Korea and to a lesser extent Japan is the center of the most important commodity in the global economy right now which is semiconductor chips semiconductor chips are to the economy today what oil was to the global economy in the 70s and 80s and it's crucial that we keep that supply going now we are trying to you know build up domestic production but if there were to be a shooting war in Taiwan and or Korea that would disrupt global chip supplies I mean it would make it would make the you know the pandemic look like child's play in terms of how quick everything would would collapse and so that's a problem and I think that first and foremost you know I think the west needs to buy time to de-globalize in effect and onshore the importance of semiconductor chips that are essential to our economy that's number one so Taiwan is everything and how you diffuse that I don't know because the rhetoric is getting more and more bellicose you know what if China puts a what if China does enable blockade around it I mean you know what we do I mean there's lots of scenarios that are at pay grades above my level that I'm sure you know the national security apparatus is kind of trying to think through as it relates to financial and economic policy China is kind of got the best of all worlds with access to western financial markets without being a full participant one of the things I rail about in finance is the Chinese VIE structure for example which has enabled companies like Alibaba and others to raise billions of dollars in the west in what's basically a fraudulent kind of a structure, a governance structure the Chinese courts do not recognize the VIE structure and for the listener and the viewer what it means is is that western investors cannot own the corporate assets outside of China by law for the most part there's some exceptions but Elon Musk for example owns his plant in Shanghai so go figure but for the most part you and I can't own Alibaba's actual assets within the People's Republic so what they've done is they set up this artifice where they set up a holding company in the Caribbean in the British Virgin Islands the Cayman Islands and you can buy the stocks and bonds in that holding company the only asset you have is a piece of paper and a safe in the British Virgin Islands that says you will share in the economics of this enterprise in some sort of unspecified way going forward proportionate to your ownership but it doesn't really mean anything legally in China so to the extent that something happens in China to those corporate assets you have no recourse the Chinese courts won't recognize you so for example years and years ago when Yahoo and SoftBank owned a piece of Alibaba and one day they woke up and they found out that the financial arm of Alibaba had been stripped and sold to a group of affiliates of Jack Ma for a bargain price and the company said well the Chinese regulators told us we can't have western indirect investors in financial services so we had to do this well to this day they've never told people what those are shown those people what those regulations were what the order was and the western investors in Alibaba were left holding the bag with no recourse and so this is the problem right that they have access to our financial markets but we have no governance on their companies so all these kinds of things are going to play into any future you know increasing level of conflict with China and I mean obviously I tell my clients to be as disassociated with China as you possibly can in any case because the risks are worth the rewards it is interesting to me say I'm thinking about directions of innovation when Silicon Valley starts and it starts moving towards China not just the plants for assembly but the use of I don't know things like smartphones or laptops or what have you you can see the benefit to the consumer then I remember meeting with Chinese leaders who said a little bit like the movie that Tristan Harris and others made the social dilemma you are the product and they started saying okay these are platforms for commerce but they're also data sets for intelligence and we got to figure out how how those are governed how those are blended but what I'm seeing now is there are things for instance some of the things Huawei's created with the 5G stuff and so on that the direction of this tension has reversed now some of those things could be deployed in the continental United States but is it opening a window to espionage and surveillance on the part of the Chinese well I mean look at just two big examples TikTok which is owned by a Chinese company which is one of the largest social media platforms and of course we're not on it right now but Zoom how many Zoom calls have you been on since the pandemic? I don't have enough fingers and toes to count over and over again a lot of those calls get routed through China through Chinese servers so it's interconnected in many ways and these are all issues that people are thinking about in terms of the deglobalization and our interconnectedness with China as you point out but I guess what I'm alluding to is there are potential losses for the well-being unless which you might call a technological firm in America can imitate those things and put them into the marketplace very quickly the source of all innovation in the early Silicon Valley days was largely the United States now the source of innovation is more spread around like what happened with the auto industry where Japan and Korea started to take the lead in some respects the good news is that like Japan the Chinese financial situation is probably not a huge contagion risk unlike the US and EU financial situation and the global financial crisis where we were all interconnected and lending to each other and distributing highly leveraged products to West German Landesbox and Norwegian pension funds that's not the case by and large with the debt the real estate debt in China that's held on the Chinese banking system for the most part but for the most part the contagion risk is like Japan it's basically centralized in their banking system so they can deal with it internally by flooding their own economy with currency but there's not as much transmission risk as there was in 08 between western banks Jim I remember I just wanted to how I say take our audience on a broader voyage they can look at your reading lists and so forth piece of Yale in your course I listened to a podcast with an Irishman I think his name was David McWilliams that she did recently that explored some of the things we have but other dimensions also quite vivid and I particularly want to encourage our young scholars to engage in following your writings and your interviews and so forth and think about the financial markets which you might call depth and breadth that you do because there's a whole lot of pressure to just be a member until like you've said several times here until the boat goes over the waterfall and then you find out you got hoodwinked again and you're not getting hoodwinked and you're about as good at smelling a rat and also seeing the prize as any finance here I've ever met thank you Rob thank you for being here today and I look forward to another episode and guiding our young people young scholars initiative to learn from your example thanks my pleasure