Understanding Geopolitical Risks Like China Trade (w/ Maziar Minovi)
ED HARRISON: Maziar Minovi, very glad to have you here on Real Vision. You are the CEO of Eurasia Group, we actually had in Bremmer talk to us a little while ago. Tell us a little bit-- I noticed your tagline was politics first, tell us a little bit about what you guys do, and how it relates to markets in particular for what you do. MAZIAR MINOVI: Yeah, our hope and aspiration is to be the place where people come to find out about the world. Our approach to that is with politics first. The firm really offers services across a range of clients, our home and the beginnings of the firm 21 years ago was to service financial sector clients. Over the years, that's expanded to corporate clients of all sorts in the US and outside. More recently, the last few years into media with the advent of GZERO Media, where we try to make politics accessible in an unbiased, but smart way, the first part of which is in rare commodity these days. ED HARRISON: Actually, it's interesting because before, we were talking off camera about your background, and it makes a lot of sense that Eurasia was in the finance space before because you were actually in the finance space. We were talking about how you had IMF economists and there's like a merge between understanding non-markets type of economics and the global economy and financial markets. Tell us a little bit about your background and how that came to be that you came to Eurasia. MAZIAR MINOVI: Yeah, actually, the link goes even deeper and earlier than that. I share on my first day on the job as CEO and I was talking to our colleagues, I mentioned that I feel like I'm coming back home again because many in your audience may be ancient history but I grew up as a teenager in the middle of the Iranian Revolution. I saw firsthand when the rest of teenagers around the world were figuring out who their boyfriend or girlfriend would be, the impact of politics on real lives. My father was in the Navy, we had friends escaped, we had friends killed. We stayed there for two and a half years after the revolution and my father had some experiences he'd rather not talk about. I escaped at 16 through the Pakistani border and came to Europe and the US from there. For me from an early age, politics and the way it shaped lives was fundamental and trying to understand it and frankly, in the early stages, trying to control it, understand, to be able to use it to get my country back was one of the things that guided me. I remember in college, I called my dad up, we were separated by an ocean, that I have to decide on a major. What do you think? He said, well, you've done well so far. It's really your choice but just remember one thing, you're not like the other kids around you, you're a refugee. Whatever you pick has to be something that also supports the family. I remember looking around, so I like politics. I like their national affairs, international finance, that seems like it has both of them. That's what really got me into finance and pretty quickly, I trended towards the political economy portion of it. I did my dissertation and privatization in Eastern Europe in '89 to '92, just as things were changing. That got me into finance, financial firms. My first financial firm was Putnam, they were looking to buy and sell sovereign debt of Eastern European countries and Russia. There was no fixed income Eastern European expert in 1994. There I was in finance, and the rest is history. ED HARRISON: Yeah, that is really very interesting I have to say. Actually, I could go on for a long time talking about this the past, but let's fast forward it to the present for a second because the nexus of your background, and what's happening today is it's really driving markets, it's driving the economy. I want to set the stage in terms of what you're seeing in terms of what the preconditions are for the top risks from a geopolitical perspective. You had a presentation that I was going through, and you outlined what the macro background is. One of the things was growth. Tell me a little bit about what the overall growth outlook is. MAZIAR MINOVI: As an investor, you can either take these risks as given and react to them, or you can try to lean in, I've always tried to lean in, in my former life the last 25 years as an investor, and the last year at Eurasia. When you try to understand when geopolitical events have impacts on markets, and really do the survey, one by one, to see the impact, a couple of things come through. One is of course on a country and a regional level, they could have a lot of impact in all sorts of markets. When you widen the lens to geopolitical risks that really makes sustained impact on major markets, US equity market, US bond market, in fact, there are very few that do so and that's even going back to the '60s. Believe it or not, we did. When you do that, really, there are only a few situations where this happens where the impact is persistent and large. They generally hack occur when there is broader economic fragility. Now, there's some other conditions like it has to impact the supply of a major commodity, US has to be involved, but really, none of it happens, unless there's some fragility or imbalance in the global economy at the same time. Perfect example of this is Nixon impeachment, that whole process. You look at the markets, the timing works, I think the equity market in the US tanked 27%. You say, okay, well, here's a political risk that impacted markets, but then you look a little bit before that and really, that happened on the heels of the quadrupling of oil prices, and the stagflation that started to take hold there. The economy was already fragile, the Fed was trying to deal with it. Fast forward to today, one of the things I always have in mind is where are we on that scale? What is the enabling condition? When you look at it that way, there are some signs that are worrying. Growth this year in 2019 ended around 2.9% globally, that's the slowest we've had since the financial crisis and the trends aren't particularly encouraging. ED HARRISON: Oh, yeah, that's the real question for 2020 then. MAZIAR MINOVI: When you look at the IMF latest WEOO assessment, they came out I think on Monday, they have a growth in the advanced world stabilizing to going down even more. US is supposed to go down to 1.9 and then 1.7% growth. That's just a hair's breadth over stall speed. They have China slowing down. Europe is also slowing down. The only places they have going up are emerging market countries ex-China, which as we were talking earlier, seems somewhat aspirational. I haven't seen it my quarter century, that set of facts very often. When you dig down bit below it, they expect some emerging markets that really fell a lot in 19 to rebound. I've worked at the IMF. I know their models are designed to mean revert to some trend. Yes, if you slow down a lot, you're forward looking projections will be to go up. That seems not necessarily, from a real world investor perspective, what you should be counting on and indeed between the October IMF forecast and the one this week, we already see some major revisions in the growth most notably in India. ED HARRISON: They're down? MAZIAR MINOVI: As big drop in the projected growth of India, I believe, is over a percent in the span of three months road. That's pretty big revision. To come back to the main point, the global economy is fragile. Yes, is the base case we're going to go into a recession? No. You look at most models in New York Fed and others, around 25% chance of recession in the US in the next year. That compares to an unconstraint 11% in any given year since '81, when the monetary policy framework was similar. From my point of view, well, 25% isn't so bad. If you look at the other way, as I have, and when you talk to people who've been at the Fed that certainly looked at this, most of these recession models, almost all of them, don't wait till 70% or 80% or 90%. When they pass 40%, historically, we've had a recession, so being at 25%, or a few months ago when we were at 30% is not something to be to sneeze at. That worries me. The macro economy is vulnerable to a push and the ammunition to offset any impact on growth that comes from loss of confidence from all of these geopolitical risks, be the US-China trade or Iran, the room for offsetting them has dropped. ED HARRISON: I was going to say actually, when you say the room for offsetting them, the first thing that comes to mind for me is the ability for countercyclical measures, whether it be fiscal or monetary. What do you see there in terms of the macro preconditions? MAZIAR MINOVI: Just to set the scene for people who may not be familiar, we've had three rate cuts in the US this year, and the Europeans have resorted back to QE. The Fund, again, its latest assessment said those moves, the loosening of monetary condition, really allowed for a boost to the economy of these countries and to the world of about half a percent for this year and next year. That's the order of magnitude we're talking about impact that monetary policy can have. The problem is that now, interest rates amongst the G3 countries and you can add UK to that, G4 economies, is close to the lowest on average they've been since the financial crisis. Where do you go from here? In Europe, we're already in negative territory. In Japan, we're in negative territory. In the US typically, when the Fed faces a recession, they have five percentage points to work with. Now, it's significantly less than that. The room is less on the monetary policy to do anything and the bond markets already pricing in more QE in the future so forward guidance and promises of buying bonds in the future. At the margin, the impact of it is minimal going forward. On the fiscal policy side, another way governments can try to push back against loss of confidence. When we look at the political economy, the picture isn't pretty. You tell me in the US, are the President and the Democrats in the teeth of an impeachment process going to cooperate to do a fiscal stimulus? The political economy of Europe really is not conducive to meaningful fiscal stimulus. We can go into that if you like. Yes, Japan will do their typical supplemental budgets as they do every year. We will all suspend disbelief that a country with 260% GDP government debt, debt to GDP is sustainable over the long term, but there's not room for massive surprises. Neither is there in China, absent a major crisis. The global economy has slowed down, the ability to offset the impact of negative political risk is lower and that's the environment in which the sorts of risks we see for next year and 2021 really concerned me. ED HARRISON: Let's get into the risks then because I know I saw a presentation that you had done just recently on what you would consider the top 10 macro geopolitical risks. Maybe we can cover five or six, but let's go down what are the most important? What's the first thing that pops in from a geopolitical perspective risk-wise? MAZIAR MINOVI: Interestingly enough for the first time in the history of Eurasia, we have the US as risk number one. It's not the way you would think of it. It's not about the impeachment process itself. It's not about the outcome of the election. It's more about the impact of this extreme polarization that we're witnessing today. Yes, the impeachment and the election are turbocharging it, but what worries us is that as we approach the election and its aftermath, there will be a crisis of legitimacy in the US, something that US citizens and the markets aren't used to thinking about or pricing. What do we mean by that? When you look at the timeline of the Ukraine affair, it's interesting to note that the President's efforts, based on the evidence so far describe, to try to compel investigations into his competitors in Ukraine started the day after the Muller report was put to bed. Here we are looking at the impeachment and the election timeline is getting closer, we do expect that the President not be convicted in the Senate and we are concerned about what happens a day after. You have a president who has very stable ratings in favorability ratings, but low. What is the strategy, the election strategy that makes sense for any politician in that situation? It's not to go and tack to the middle and bring in independence, people have already made their choices that the range of truly open-minded voters is quite small. What you do is mobilize your base, wait for an opponent and delegitimize them as much as possible to turn down the turnout from the independence and right leaning Democrats. We're very concerned that after the impeachment's over, the President's going to continue his efforts of delegitimizing whomever he sees as his biggest threat and given the experience of the last four years, very likely that there'll be increased allegations of foreign involvement, of using private money in ways that are not typical or possibly legal, certainly in the eyes of the opposition, as we approach election day. You turbocharged the polarization, you get to an election that's very close. In our assessment, the election is going to be very close either way. Right now, gun to head, we think the President would win 60% odds or so, but very close and very likely where we'll have democrats actually win the majority of the votes, possibly with even a wider margin than last time. This fuel to the fire of the polarized environment could create an environment where the opposition whoever loses will have a hard time accepting the outcome. Demonstrations on Washington, court fights in multiple states contradicting each other and it's very unlikely to imagine as we had in 2000, once the Supreme Court speaks, that the opposition is going to say, okay, fine, thank you very much. I'm gone. Just imagine, just to crystallize this, you're on January 19, the day before the inauguration, and still one side hasn't accept the legitimacy of the other, how is the market going to respond to that? How are foreign leaders going to respond to that, enemies and allies? Now, we're not saying the US is we're going to become a banana republic, the institutions will work themselves out but there'll be a very unusual period of uncertainty. ED HARRISON: You could make the argument that this legitimacy that you're talking about has become one where might makes right and in the sense that if you control the numbers, you get to do whatever you want. MAZIAR MINOVI: When we look at the political economy of major countries around the world, you do see that countries with strong civil societies have a much more stable environment and started framing this in the J curve concept as you become this more democratic stability really phrase. Then as you go even further, you get to a place where stability is higher than when you started in autocracy. The US has, the political system, has strong institutions, powers diffused, we've had a history over hundreds of years of these, whether it's the judiciary, whether it's the states, whether it's the offending parties, own party, pushing back when it comes to an extreme, McCarthy era is one. What we're worried about is we may not have seen a situation like this since 1887, where ultimately, they couldn't agree to the President through legal means so they had to make basically an extra legal compromise that brought in [indiscernible] presidency but the [indiscernible] at the North would pull its troupe out of the South and the Reconstruction Era took a different turn. That's just to dramatize what we're talking about, but we will get to a solution. It's just that from here to there, we're worried that markets may have one of those air pocket moments or many of them not knowing what comes next. That is not something that's priced in. When we talk to our clients globally, they want to know if the President's going to get impeached, they want to know who's going to win and inside and outside the US, they want to know, what can Warren do? What damage can Warren do? This is questions from our clients if she becomes president. They are not thinking about this crisis of confidence and the constitutional crisis. ED HARRISON: Interesting. What about the US and the world stage in terms of things that are potential geopolitical risks, whether it be trade, China decoupling, what are the things that you're looking at there? MAZIAR MINOVI: In our top 10 risks, risk two and three really are focused on this China issue. One is the great decoupling. We're already seeing in the tech field, in 5G, the beginnings of a decoupling between the tech ecosystem of the US and around US technology and Chinese technology. Our concern is that this will metastasize and grow beyond the confines of a few sectors in tech. Given the structural confrontation between the two sides and the increased need for countries to take aside that we will see media, telecommunications and other sectors more and more have to pick sides. ED HARRISON: Interesting. Like for instance in the UK, recently, they were talking about Huawei and like if we don't choose Huawei, who do we choose? I think it was Boris Johnson's call to the United States. Is that the thing that you're talking about? MAZIAR MINOVI: It is. The question almost will become, who will be? Where will the next Berlin Wall, the tech Berlin Wall fall, and which countries are on which side of it? UK, Japan. For countries like Korea, South Korea and Taiwan, it's going to be a very difficult choice because they're already tied into the value chain in China as well as penetrated China's final demand market. Where do they fall? On 5G obviously, right now, the Chinese and Huawei is slightly ahead in terms of commercializing the technology. If a country has to pick sides, they'll have to look down the road that if they do this, then they may lose access to other parts of the US ecosystem that they truly value. We think at the end of the day, most western countries will gravitate around the US orbit, even Japan for security reasons given their long history of enmity with the Chinese. The most interesting part is who are the other ones that are on the edge? It's clear to us that Sub-Saharan Africa and Southeast Asian countries will probably choose the Chinese ecosystem. As I mentioned, Taiwan, Korea will be on the cusp, but this is what the intensification of this bifurcation of technology and sectors is the future. It's a structural trend and it's just going to metastasize. ED HARRISON: I have two questions in that. One is, how much of this is driven by whether Trump is reelected? The second is, what have the Chinese decided in terms of decoupling in terms of we're definitely going to decouple or maybe we could go back and recouple? What do you see on both of those fronts? MAZIAR MINOVI: This is not a Trump phenomenon on many levels what we're experiencing globally. On the tech side, in particular, I'll tell you a story. In 2017, right after the President was elected, I had a chance to speak with Ash Carter, who was the Secretary of Defense under the Obama administration, the serious heavyweight professional, not taken to hyperbole, actually a rocket scientist by training in and out of government. Back then in 2017, when we were talking with him, he said one of his biggest regrets is how Washington and the politicians are not taking seriously the threat to critical infrastructure of the US from Chinese and Russian technology. That globalization and the market's considerations have dulled the sensibility to vulnerability of the US. That was from a Secretary of Defense of democratic administration. Among the very few things in DC that you find now unanimity about is this issue that our critical infrastructure has to be protected. We have to be much more mindful of this. Even if the President is a Democrat, maybe the temperature comes down but the national security leg of this is going to continue with more or less the same intensity that we've seen. ED HARRISON: Does that have any implications in terms of balkanization of the internet and tech giants and where they stand from a valuation perspective? MAZIAR MINOVI: Yeah, it certainly does. You and I's professional career has been defined by a world that's constantly globalizing, we're getting closer and closer to optimizing economic activity and investments, and it's hard for us to process, no, this can go the other way. Another way of putting what you said is, are we headed to a world where we'll have suboptimal outcomes, and our tech is not going to be as cheap as it could have been in a globalized world? Absolutely, or as accessible. When people make these choices, countries make these choices, they're going to have to choose between cheap, but far less privacy, or more expensive. In our current context, think of Apple versus an Android device. If you want privacy and more quality, you have to pay for it. ED HARRISON: You could look at the trade front as a second front there in terms of this US, Chinese tete a tete, but it's also beyond-- when you talk about deglobalization, it's beyond just US-China. It's also USEurope. Literally just the other day in Davos, Trump was like if they don't do X, then they know that I'm going to put tariffs on them so they're going to do X. Is that where things are headed? Where does that stand on your list of geopolitical risks? MAZIAR MINOVI: The trade component of it is what has obviously fueled the fire and really brought this issue to the fore in the most recent period, but it's not a new development. I wish I could remember verbatim the speeches by President Johnson about how the European auto industry was sucking the lifeblood out of the US and that was actually why the US imposed 25% tariffs on trucks in the '60s on European so this is not a new phenomenon. The Airbus Boeing debate has been going on. In the context of that, clearly, the President has his own very unique views about what trade means and what trade deficits mean. We would expect from the US side, this issue on auto tariffs where they currently have a truce to rear its ugly head sooner rather than later, maybe not this year, but if not this year, and he's reelected next year, the President's focused on countries that have large bilateral deficits with the US and he seems especially focused on heavy industry. Steel, aluminum, autos, and you look at that, and the Venn diagram falls straight on Germany. That tension is not going to go away, but it will be going beyond that. We have now the Germans really getting serious on carbon taxes and reducing emissions. Well, project forward a year or two, if they're shifting to that, they don't want to disadvantage their companies because they have to be operating in a much more sustainable basis. Guess what's coming next in our future? Carbon equalization tax, effectively a tariff on carbon. Guess where the biggest emitters of carbon, US economy coming out of a Trump administration, the Chinese. These issues are going to be with us to stay and actually worsen in the future. ED HARRISON: Again, is that a Trump related phenomenon, or let's say that Elizabeth Warren, Bernie Sanders, Joe Biden, whoever it might be, gets the nod, do you see that persisting? MAZIAR MINOVI: We do see it persisting, the targets may change, and in some places, the temperature may change. A President Biden is going to have advisors that are far more in line with mainstream economics that trade deficits by themselves are not negative. You see right now this USMCA or NAFTA, NAFTA 2.0 that just got passed that many populist Democrats and Congress were happy about this. It actually goes towards what they've been wanting to do all the time. Now, from a macroeconomic point of view, from an efficiency point of view, it's a suboptimal outcome. Really, NAFTA hasn't changed much, but in ways it has, it's going to make things more expensive, but Democrats are all-- some portion of populist Democrats, Warren's, Schumer on trade, Sanders, like many aspects of this, and it was already hard to get a trade deal through. It's going to be even worse after a Trump presidency. ED HARRISON: I looked at your list of your top 10 geopolitical events. One thing that I think was interesting when we talked about the IMF and the fact that they're downgrading between October and January, India, you mentioned was downgraded 1% in three months. For me, this is a topic-- and I think actually at Real Vision in general, that we don't talk about enough. India is a huge economy and we don't really have a good hold on what's going on there, both economically and politically. Can you give us a sense of what are the risks there? MAZIAR MINOVI: Sure. The way we rank these risks are a combination of the probability of them happening and the impact they'd have globally. India's risk was number five, because of exactly the size that you mentioned. One of the joys of leaving my former employer, Goldman, coming to Eurasia is the titles can be so much more interesting. At Goldman, the title of this risk would have been India's economic outlook the year ahead. Here, we have India modified. The point we're trying to make is in Modi's first administrations, despite fears of his now nationalist tendencies and then some of the policies he had pursued in his home state, he actually took on some of the sacred cows of economic reform in India. Yes, it's a messy democracy. What came out of the sausage factory was far weaker than what was hoped for, but he finally got a nationwide BAT reform through, that's been something they've been trying to do for 20 years, and many other small reforms along the way, which fueled huge capital inflows and gains for investors. What we worry about is in his second term, in order to maintain his grip on power, he's now had to rely more on policies that are attractive to certain segments of his coalition policies like route stripping the special status of cashmere, what looks like a religious test for citizenship, although they have different wording for it, which on the face of it obviously from a human rights perspective are very concerning, the problem is that the parties that that appeals to are also the most anti-reform parties in India. Not a surprise that at the same time this was happening, India withdrew from the RCEP, which is the a trade agreement in Asia which China's involved in to try to lower barriers between Asian countries. India, at the insistence of these coalition parties, removed itself from those. You have an India going into 2020 that, because of this turn towards nationalism, is going to come under international scrutiny. We can see more sanctions, in fact, on India from the US and Europe coming on, and when you think about the political economy of it, they're a proud country, they're a large country, the Nationalist parties are going to agitate for a response. That's only going to worsen this cycle. Meanwhile, they are buying S-400 missiles from the Russians. There's US legislation that forces sanctions because of that. We think the era of incremental reforms are over. In fact, we could see it backpedaling. All of that is happening while India's growth is tanking as you started out, saying. That combination is concerning to us. We put it at risk number five. Does this mean necessarily that India is going to implode this year? No. The fragility is rising and you already have an economy and a financial system that's battered because of banking vulnerability and scandals in the last year or two. The Spidey sense in the back of my neck certainly starts tingling that all of these things are going in the wrong direction and a direction that a year ago investors would not have imagined. ED HARRISON: I obviously missed the number four risk, what was the number four risk before India? MAZIAR MINOVI: That's a risk that we thought most people would be surprised to see on our list, which is about multinational corporations. Really, the idea there is in line with what we're talking about, over the last two or three decades, multinational corporations have been seen as the solution to problems in countries. Let's bring Apple in to invest in our country and that will increase our level of technological superiority, or let's attract FDI into our country, but increasingly in this polarized environment, both politically but also from a social perspective as income inequality is rising and fueling populist movements, people are looking inward and we're starting an era where multinational corporations, large corporations are seen rather as the problem in the major economic areas of the world. What we're flagging is that be it in the US with all the concerns both about privacy with the tech company, but as well as the reach of multinationals from China, etc. In Europe, certainly a world leader in data privacy issues. In China, response to the US is decoupling. Companies have to become far more aware of the politics around them and how it impacts them and politics and geopolitics increasingly will find its way into the boardroom as you decide as a firm where are you going to grow? Where are you going to fall on this in this tech Berlin Wall that we're going to face? ED HARRISON: As you say that, immediately I think back to the previous point that you were making about the fact that Europe, in particular, with regard to the trade war, will have to decide how they're going to deal with things like the carbon tax, or as an example, privacy issues. Clearly, they can attack via the multinational route, that is the Googles, the Apples, the Facebooks of the world, or in terms of polluting the American oil industry, whatever it might be. They can use that as the way to create a we're now a much more-- we're willing to wield the power that as the US and the UK leave the diplomatic space globally, the EU may step into that and use multinationals as the way to take the lead. MAZIAR MINOVI: Yeah, as an investor and an analyst, our job is to see the world as it is and predict what will happen. The direction you're talking about is the direction that we see it going without any changes to the policy outlook of the major actors. We do nothing, this is where it's going to go, increased friction, and friction begets friction. If a European company is constrained in the US, you can bet that the next EU Commission anti-competition effort will be focused on a US company. Then you have the Chinese angle of this for sure, both on tech, and in the other areas you talked about. This could go another way. In fact, in our GZERO summit in Japan a few months ago, where we bring together 500 of the most senior corporate executives in Japan, the Foreign Minister was there and the senior people and actually gave a speech to suggest another way. In the data area, if you think about this world that we're going towards, a tech decoupling, the US and China are the most innovative in terms of developing these new technology, in terms of market cap, the top 10 five are US, five are Chinese, the Europeans have the best regulators. In the US, nobody wants their child to grow up to become a regulator. In Europe, in fact, the best students go to the best schools and then go into government and not surprisingly, they are ahead of everyone and regulating tech and thinking about privacy issues. In Japan, because of their shrinking population and their high income and their openness to innovation, they're a hotbed of experimentation. Can you use robots to comfort senior citizens as society ages? Instead of sitting back and taking it as it comes, should these three economic blocks try to get together and create something like the WTO but for data, the international data organization? Set common standards, and really lean into the problem of trying to make the best of this environment and make it vibrant, makes norms and standards that companies in all these areas can adhere to, and something so attractive that will be a counterweight to the cheaper goods and the inducements that the Chinese ecosystem would create, and possibly in some day long log in the future, even compel the Chinese to rethink their approach. ED HARRISON: Interesting. What do you think? Do you think that that has a chance of working or do you think that it's unlikely that they'll move in that direction, you have a rise in supply? MAZIAR MINOVI: Well, when you look at political economy of the changes that really impact and create the financial infrastructure, it doesn't happen in a straight line. Generally, things have to get much worse before they get better. The IMF and the World Bank were created in the aftermath of World War II. People saw the abyss, lived the abyss, and then the consensus for that emerged and same thing for GATT and then the WTO. These are, I think, early thoughts that are going to take a while to germinate and really flower and it's going to take things getting much worse before they really get energy behind them to operationalize. ED HARRISON: We have a limited amount of time, but I there were two other regions that I wanted to cover in your list that I thought were interesting. In particular, one is Turkey. I thought it was very interesting because when you look at Modi, when you look at some of the nationalist tendencies here in the US with Donald Trump, I saw in your analysis similarities in terms of what Erdogan has going for him from an economic perspective backdrop and then the nationalism. What's happening in Turkey and not just in Turkey, but also how does that impinge on what's happening in the Middle East as well? MAZIAR MINOVI: Actually, I have a soft spot in my heart for Turkey because it was the first market I ever invested in back in late '94 I believe. The lira was 34,000 to the dollar and by that same denomination right now, it's at 6 million. It's a fascinating, fascinating country, which from 2002-'03, until I'd say three or four years ago, constantly surprising investors to the upside. We're sad to put it as a risk. It's risk number 10 because of its relatively modest size, but in terms of probability of a significant crisis or slowdown happening, it's higher than almost all of our other risks. The political economy in Turkey is fraying in an accelerating way. You already have a country that is one of the most vulnerable to a stoppage in capital flows. It's reliant on short term private external funding to keep it going. Turkey and Malaysia constantly rescreen as country's most vulnerable in those ways. ED HARRISON: This is the private or the public sector or both combined? MAZIAR MINOVI: Private sector, corporations and banks. The government is reliant on short rolling over of its domestic debt, domestically by retail investors and local banks. It doesn't have a big debt to GDP, but it's very short term. That's the problem. You have to not just pay the interest but keep borrowing the principal over and over again. That's what makes the challenge higher. Already, it's economically viable, vulnerable. Then you have a president that is used to having his way who is politically wounded and weakening even further. He even lost Istanbul which was the city he's rose to power in as the mayor, even when he said out no, fair we're going to do the election again, tried everything possible, he lost again. Turkey, one of its fascinating parts is that despite the attempts of Erdogan in the last few years, civil society there still keeps pushing back. Now, you have many of the previous senior people in the ACT Party, his party, splintering and creating their own political power races. Now, none of them are going to win, but it's just going to reduce his domestic political support. Here, he thought he was going to be the next Ataturk and be able to impose his will on the country. A wounded, unpredictable, ambitious Erdogan sitting on top of an economically vulnerable economy is the genesis of this risk. We think what we're going to see as more and more adventurous foreign policy moves to distract the population, we already saw him move troops into northern Syria, to try to push back against the Kurdish forces there, with the US pullback from the region, the vacuum that creates that risk only increases and there could be other elements there like drilling in the Mediterranean in disputed gas territories that could create pushback from the EU or others. More than that, his tangle, his conflict with the US could worsen. They're already under sanctions for buying them as well as 400 missiles. We have in the next year coming up the trial of Hawk Bank, one of the largest banks, tied in very closely to him and his party and the US Bank courts are most likely going to convict them of funneling money to try to circumvent Iran sanctions. This could really reach quite high up in his political apparatus, including his family. A wounded Erdogan's response to that is very much of concern. Remember what happened in the aftermath of the imprisoning of Pastor Brunson and the US sanctions, the Turkish currency tanked 20%, 30% in the ensuing few months, so we see the risk of that thing increasing. Then on top of it, he wants to remain popular, so he's trying to juice up the economy. Turkey's economy is very flexible. If he's able to do it, and his main tool would be forcing state-owned banks and other banks to increase the lending to favored industries, there's only one thing that will happen happens over and over again in Turkey's economic history, the current account deficit's going to widen. Then you already have a vulnerable economy people have a hard time lending to as it is, they see a large current account deficit. They see the threat of more sanctions from the US and Europe, it's just all set up for a significant crisis, be it a banking crisis or an economic crisis and indeed, the IMF's article for report, the annual review they do of every country in the world has a beautiful line in there. It's going to start out its assessment buzz, the situation in Turkey, the common Turkey is fragile, and we would understand that's a polite way of describing the risk we're worried about. ED HARRISON: Oh, you call it number 10, but as you were going through that, one of the reasons I pulled it out was when you look at it from a geopolitical perspective, not just in economic perspective, it seems to rank higher. The nexus between Syria, Iran, the fact that they are a member of the NATO Alliance, and then there are inter-NATO vulnerabilities, sanctions from the US, the EU and the drilling. It sounds to me like Turkey's at the nexus of a lot of geopolitical tensions and potentially, could rank higher at least from a political perspective. MAZIAR MINOVI: There's always a challenge in these lists. For instance, if you had a top 10 risk ranked by human misery, you would certainly put large swathes of the Middle East and Africa on top of that list. As I said, we look at it as a combination of the probability of a risk happening but the impact it would have on the global economy or markets. Yes, it's a big issue but really the impact of an implosion in Turkey at this stage is pretty much confined to the markets and the economy of Turkey and the surrounding countries. Could an adventurous foreign policy venture by Erdogan reignite the Syrian civil war? Possible. Is that really going to impact markets? Is that really going to impact the economy of major countries around the world, not, unless it impacts oil? It's obviously a horrendous way of from a human perspective to look at it. I know and as right now in Davos, speaking on a panel with the head of the UNHCR, talking about the human toll of the unrest in the Middle East created by the vacuum of the US pulling back. That certainly is in our minds but from a global economy perspective, the impact, I think the ranking is justified. ED HARRISON: The other reason that I was talking about that I mentioned was Latin America. Particularly, I thought it was interesting because you mentioned NAFTA and USMCA earlier. Mexico, what's going on there in terms of what they're doing from a fiscal perspective, and what are the economic outcomes that you see? MAZIAR MINOVI: Mexico is unusual in the region, principally, because its leader is actually liked. His favorability, Andres' favorability ratings are in the 70s. Clearly, he's capturing the mood of the country, unlike the leadership in many of the other countries in the region that has led to the demonstrations we've seen over the last few months in the region. In fact, as a longtime investor and observer of the country, it's exactly a time like this that worries me about Mexico because the honeymoon is coming to an end. He truly wants to fulfill his campaign promises, which require significantly larger investments in education and infrastructure and his favorite projects, but still large investments. At the same time, he's promised to not allow the budget deficit to widen beyond a certain point. These two things in a slowing economy with reduction in oil exports are incompatible. He has to start making choices about which one is more important, fiscal prudence or his promises. We think he will choose his promises. If he wants to keep the optics of the fiscal picture, still all right. That means he's going to have to increasingly resort to unorthodox measures using Pemex as a piggybank. One of the reasons Mexico and the peso are the most heavily traded currencies in emerging markets is because of their well-developed fixed income market, fueled by investments of their growing pension funds, which have very clear rules and regulations to guide their activities. Could he be tempted to tweak those regulations to allow or direct the pension funds to spend some of their money on domestic infrastructure projects? Then what will happen to the bond market? If we do have a hiccup and confidence, then 10s of billions of dollars of pension fund money from US and European investors could flee quite rapidly again, in the context of an economy that's slowing down. In the oil services area, he's, if not shut down, significantly curtailed the opening to allow private investors to come in and he wants to concentrated all through joint ventures with Pemex, which means more and more inefficiency, and most worrying of all would be if he starts to muck around with the independence of the central bank. He's already appointed a few governors. In the next year or two, he's going to have more appointments. So far, their reaction function has stayed the same, but a president that has the ability through the votes in Congress to change the charter of the central bank and make it more political and to impact the people who are running monetary policy, that's a worrying combination. We're going to be focused laser like on when he faces this tradeoff which way it goes. Let's not forget the IMF, thanks to the much more market friendly policies of the previous government, has given them what they call an FCLFF, flexible gridline of a massive magnitude, 10s of billions of dollars, SDRs. It's supposed to be for countries who do great policies to use as a line of credit. As they start moving in the wrong direction, is the IMF going to continue to endorse the economic policies of Mexico? If they don't, and they withdraw it, what signal does that send to the market? The future is quite dicey for Mexico. ED HARRISON: You're actually talking about Italy, and a bunch of other stuff. We've ran out of time, unfortunately. We'll definitely have to have you come back. That is a massive overview that you've given us today of the geopolitical risks. I really thank you for coming in. It's been a pleasure. MAZIAR MINOVI: My pleasure. I'm like a kid in a candy store in this new job. It's like, figuring out the best things you enjoy looking at and mixing it with what you knew before, so always happy to talk about it. ED HARRISON: Thank you.