📜 A World Divided and Its Future Consequences (w/ Dee Smith & Raoul Pal)
RAOUL PAL: Dee, good to get you back. I think it is a truly extraordinary time. And we've been talking about this for a while now for several years, actually. And the story of the rising importance of geopolitics is becoming more and more obvious by the day. And it seems to be- I always discounted the geopolitical world as something that was in the dark and in the backgrounds and didn't always worry of me and wasn't something I need to be involved in. And now, it's clearly everybody's involved in everything. Geopolitics seems to be run on Twitter right now as well. What is going on? And I know that's a difficult question. But at a top down level, it feels that everything has changed, which is something that you identified back in The World On The Brink, and had been ongoing, but talk us through it a little bit. DEE SMITH: Well, it's great to be back and great to see you. It is a big question what's going on. And I think there are a number of elements that are interacting. But I do think that we've entered a new age, and I'm calling it the age of splintering. It's an age of fragmentation. And the age we were in before was an age of things coming together, an age of larger structures being built. And I think that we've exited that. I thought two or three years ago that it was fragile, but I think now, we're in a new age. RAOUL PAL: Yeah. Because when you did the documentary for us, The World On The Brink, it was talking about the fragility of the old-world order, the rules basically of the old-world system for want of a better expression. And you identified how fragile it was then, and it looks like that was right. And that fragility has led to a breaking point. DEE SMITH: I think it has. And I think you do get these ages of the world and things change and the ethos, that idea of the conceptual framework changes. And I think you see it across the board. You see it in rising nationalism and populism, mercantilism protectionism. You see it in the fear of supply chains, you see it in the fear of technologies from one place to the other, like 5G from Chinese sources. You see it in the breakdown of the large-scale multilateral institutions, they're still there. But their influence seems to be less and less than the world in which sovereign nations are asserting their independence and even groups within sovereign nations are now wanting to be independent. The catalogs, the wealth- they're just everywhere. And so, it's a global tendency. It's not just- we don't just have Brexit or just have Orban in Hungary or just have Trump in the US or Modi in India. It's ubiquitous, it's everywhere. So, then the question becomes, what is causing that? Why is that? It's not in one country, it's in almost every country. Why? RAOUL PAL: Yeah, and I guess everyone has a different answer to that. And it depends on the lens that you want to look at it through. And I don't think for us really, it's necessary to talk about our lenses, I think there is a broad perspective that people want change. I think that's always the interesting point is, regardless of what it is, people rejecting this order. So, the question is, how does this play out? Let's assume that that is now de facto, that is how happening. How does it play out? We're starting to see a splintering. How do you see this evolving? What are the next steps that we're going to be looking at in the next year or two as this whole situation evolves? DEE SMITH: Well, I think it's a very dangerous time. And I think it's for several reasons. But what I think we need to do is to pan out, go back a little bit and try to understand what are the fundamental driving forces of this fragmentation, the splintering? And I think they're three. And I'm sure there're more but I think there's a coherent explanation. First is technology, which has evolved at a speed and in directions no one ever anticipated. And that has ramped up dramatically in the last 20 years. The second one is just the size of the population. It is literally at a level that humanity has never seen before. And I think that as one dictator once said, quantity has a quality on all its own, you do have a different qualitative thing with a quantity of people. And I think the third element is our legacy human attributes- our fear of change, our nostalgia, our need for simple answers, our desire for a level of understanding that really escapes us and the complexity of things, and how those elements interact with the previous two. So, you have this spiral of things going on. You have technology that's changing faster than ever in making the world both incredibly more complex, but also bewildering to a lot of people. You have a level of population where you can't avoid bumping into other people. And you have our Stone Age minds where we evolved in small groups, we all knew the same people all the time, most of the environments that we lived in were stable over long periods of time. There was abrupt change, but you would go centuries with essentially very little change. And so, that's how we've evolved in our legacy attributes are not really in tune with the world we created. And so, I think that has created an enormous level of stress among people in the world. And I think that is partly or substantially underneath what we see going on. RAOUL PAL: But there's also where this fits in is that the abuse of power by the ruling elite is a prevalent theme that comes and obviously, the bifurcation of wealth, where very few get all of it. Is that a manifestation or is that a thing in itself? And again, on Real Vision, you'll see there's a lot of anger about central banks and how people are dealing with our money. There's a sense that all of this is not within our control. And we're just mere pawns in that whole game. And we're the losers in that game. Where does that fit into that framework? DEE SMITH: Well, everyone's angry. You're absolutely right. And it's at a level that has not been seen within our lifetimes. And I think they feel betrayed because I think they feel that the promises that the social contract as anthropologists, sociologists call it. If you do certain things, you'll be rewarded by society in a certain way- that's broken in country after country, it doesn't work anymore. And I think that people feel that they can't rely on these systems to take them into the future. But I have to back up and say, there is nothing new about income disparity and wealth disparity inequality. And there is nothing new about the elite. RAOUL PAL: Abuse of power? DEE SMITH: -abuse of power, it has always been that way. But what's new- and this goes back to my emphasis on technology. What's new, is in this case, the technology of communication, of connectivity, hyper connectivity, I sometimes call it- and because what that has done is it has made things more transparent. It's made it more visible that we now know how the wealthy live much more than we did 200 years ago. And even then, there were certainly revolutions, revolution being a good example. But it's now much more obvious. And so, there's that awareness that I think was not as prevalent in the past. But also, there is the ability to connect to other people who share your beliefs, and to do so across time and space. And so, used to be if you had some outlandish belief, you probably would have a hard time finding anybody who shared it. Now, you can find many people who do, and that reinforces this belief. So, this echo chamber effect just keeps amping up. And we've been looking at this for two or three, five years, and nothing has been done really to ameliorate it. It's just gotten worse and worse. And so, you have a country like India, where is the latest manifestation, which is WhatsApp, allows people to create mostly impenetrable networks. And as one Indian commentator recently said, it's no longer enough to be nationalist, you've got to be ultranationalists. It's no longer enough to be upset at what the Pakistanis do, you got to be outraged. Everything is just amped up to this, because people keep it going. RAOUL PAL: That's right. And we've seen that within social media as a whole. The shift in social media went from getting attention by, hey, I'm here, to, hey, I've got something interesting to say to, hey, I need to say something more outrageous. So, you read me first. And then I have to be more outrageous than the other person being outrageous. And you just had this nuclear arms race of outrage that leads itself into the Daily Mail or whoever creating more and send those headlines all the time to get the click, to get the advertising dollar. And that seems to be writ large globally, and it's the same in politics we've seen. DEE SMITH: And it's infected politics. It has driven politics to the edges. So, you have this centrifugal force that's driving everything to the edges. And there's very little center. And the center can't be heard, because it's not outrageous. And the algorithms are designed to do this. So, you've got this model that the social media companies have developed where they have essentially an almost addictive- has been called addictive by psychologists- that addictive structure, inbuilt structure of reward. And you then have the mining of information on individuals based on this constant flow of data that the social media companies use to fund to- essentially, that's their business model. They use that to sell advertising and to sell information on people to sell advertising and so forth. And then you have the result of that, which is these algorithms that get more and more refined to focus on the more and more outrageous things. So, it's a spiral. RAOUL PAL: And the offense of big data has a lot of behavioral economics, which we talked about before. The rise of behavioral economics has to manifest itself primarily on Facebook first, and it's happening all across social media, is when you got big data and human emotion all put in the same place, you can affect emotion. So, whether it's affected election outcomes, or whether it's just in selling products. At Real Vision, we'd lived this. So, we decided at one point, with the help of Google to start trying to advertise Real Vision within social media. And our competition there had been in the financial world, with people like Agora, who's a publishing business. Now, Agora sold on very sensationalist headlines. So, many people will be familiar with the James Altucher, Bitcoin and it's all about, you can either make a fortune or it's the end of the world. And you need to read this to save yourself. And what it does is it's appealing to raw human emotion. If you amplify that in social media, what you get is very good results. So, these guys have had huge ROIs out of that, because it's emotion, top of emotion, you're using technology and big data to push those buttons endlessly. So, Real Vision came into the equation, we don't have that content. Our modus operandi is to be the central ground to allow everybody from all sides of it to come. Whether we have Nigel Farage on one side and Steve Bannon, populists to people who are centrist and people on the left, we don't care. We'd like a nice even platform of people's opinions that we can learn from, to say, we are the middle ground. And we are the open platform, we don't have a voice, doesn't work in advertising. Because the center ground in this world doesn't work. And it literally doesn't work in quantifiable ROI on ad dollars doesn't work, because we can't compete with somebody saying, look at me, the world's all screwed, you need to read my newsletter, or I'm going to make your million dollars tomorrow by my newsletter. Will not work. DEE SMITH: It's exactly right. And I think that there's an interesting thing going on with this, which is that as the world has been driven into this centrifugal thing where you want things on the edges, you want things that are outrageous, you want things that are demonstrably not sane really. It has fed into something that these two things have dovetailed, that's one. The other one is this feeling that the system is not working anymore. And demonstrably, it isn't working. And this is another very interesting topic that I would like to talk about, but the feeling that it isn't is scary. And it's scary for everybody. It's scary if you're at the top, it's scary- maybe scarier if you're at the bottom, but it's scary all the way through. And so, that ability to channel that fear into anger and outrage feels good. Back to the behavioral economics, it feels like you're doing something. And so, that itself, this has arrived at a moment and that maybe it's a causal factor of the moment, but it's also at a time in which these emotions are running high anyway. And so, it's just amped them up considerably. RAOUL PAL: So, where does that lead to? Does this keep going until what? What do you break at this point? The Catalan separates from Spain, and the Brits separate from Europe and the US separates from the rules based global order system? Where is this going? What is the outcome here? Is the outcome war? DEE SMITH: Well if you go to any military, good military college, they will tell you that nationalism is always a prelude to war. And that is a standard analytical structure. And you do have these things like the potential Thucydides trap between China and the US. And that's a very serious issue. Thucydides was an ancient Greek historian. And he posited that anytime you have a plateaued power, an incumbent power, and you have a rising power that is challenging it, it very often leads to war. So, in his case, it was Sparta was the incumbent power and Athens was the rising power, and it did lead to war. And so, this is called the Thucydides trap. And somebody recently studied this, there have been 16 cases. RAOUL PAL: Christian Adamson, we had him on Real Vision. DEE SMITH: Oh, did you? Okay, yeah. There have been 16 cases of Thucydides trap type situations in the last 500 years. 12 have led to war. So, it is a thing. So, it may lead to war. It doesn't necessarily need to lead to war. The rise of the Soviet Union in the 20th century did not in the end lead to war. RAOUL PAL: But the problem is here, we've got not only the rise of different powers. So, arguably, it's the rise of China and then with others in the wings, probably Russia, Iran, Turkey- there's a whole shift going on, which we'll talk about in a bit. But there's also this domestic call rotting in each country, where it feels like it's collapsing on itself anyway. So, when you've got both things, it feels that- well, I don't know what the outcome is. DEE SMITH: It's really problematic. And you're right and it does, and I think we're reaching the end of a certain- I've talked about this before, we're reaching the end of a certain set of trends in history. Some people call it neoliberal economics where you felt like the opportunities were endless, and that there was always a way to manipulate the economic situation to provide for more growth. And, of course, one of the things that really, I think, distresses me and a lot of people is that what we've done to do that is debt and debt is borrowing from the future to pay for the present. So now, you have this enormous debt overhang- public and private. And we may be just, we may be seeing the beginnings of coming to the end of that, but there's something else going on. And it's hard to put your finger on it. But the thing that I think is both interesting and concerning about this, is that in looking for answers we're saying, well, what we have doesn't work, which is the one state when I found that you can say to anyone in any social, any political group that they will agree with. And you can go to any dinner, any party and you say what we have- it's not working, and everybody will agree. But why are we looking for solutions in old systems? You have people looking at socialism and communism, a 150-year-old system, devised for which arguably never worked anyway. And that's what the 20th century was, it was an experiment in that and it did not actually work. But it was devised for a set of problems that are entirely different from what we have. And every other system we're looking at is even older, maybe we need to break the mold. Maybe we need to look at something new that can give us- and I don't have that answer. But I do think it's distressing that so many people, including young people in the US and Europe are looking backwards at these old solutions, which I just think they're in a posit, I think they're not going to work in the current problems that we have. RAOUL PAL: And I think much in the same way that technology has created some of the problems that will create some of the potential. I think we've talked about this, and the things that are happening, for example, in blockchain and cryptocurrency and cryptography and closed systems and the ability to protect your own data- all of this stuff feels like it's all part of a larger potential outcome. Privacy is a huge issue for people these days. And China's gone the complete extreme where there is no privacy for anybody. And it's a big brother style world. Now, knowing how the West works, yes, the governments may want to try that. But the private sector will try its hardest to give us our privacy back. And I think even some of the technology that we know, Facebook and stuff, Google will get broken up in these processes as I've been talking about for some time, but I feel that technology is going to be part of the solution as well as part of the problem. DEE SMITH: I agree with you. And I think it has to be. But if you look at the Chinese, for example, what you have there is their greatest fear is the fear of social disorder. And so, it makes sense for them with that mindset. And that's a traditional Chinese mindset, buttressed by the introduction of communism and social control and so forth. But then it makes sense for them to put these things in place that they feel they can use to control it. But underneath that is the situation that China cannot feed itself and China cannot provide for its own energy. And so, those- they see those as sovereign threats, they see them as threats to their sovereignty. And it's very difficult for them to address. And this, I think, is what's behind the One Belt, One Road initiative is that they have no choice given the size of their population, given their demographic crisis, which is that they're moving into a world where there will be one working person supporting two retired parents and possibly four retired grandparents, because demographically, age, lifespan has extended so much. Given those issues, they are really between a rock and a hard place in terms of food and energy. And so, then you put in a threat like what's been going on for the last few months with the African swine virus that a lot of people don't even know about but has decimated the pig farming. And that's a trilliondollar industry in China. And nobody knows what the outcome is. It's highly contagious, it's now spreading around Asia. And they had called a million pigs by January and it's still a growing problem. And so, the problem when you get to these situations where you've got everything spread so thin, is that one thing- an orthogonal torpedo from the side can create a huge issue. RAOUL PAL: My view on this is the more they try and suppress the volatility of the population to avoid the outcome that they fear, which is a volatile population, I always said that suppressed volatility always leads to hyper volatility in the end. We say every revolution has been essentially that. If you have a free society, you don't have revolutions, because you don't need one. So, the thing is, is the more you suppress the natural order of volatility of a population, people need the right to vent themselves and do all of these things. To stop that, you create it, and then anything can be kindling, whether it's a food crisis, whatever it may be, and before you know it, everything has changed. DEE SMITH: That's exactly right. You increase the brittleness of society. RAOUL PAL: Exactly. DEE SMITH: And it is actually paradoxical because people think by increasing control, they're increasing stability, and they're not actually. They're creating a brittle system that can break with a blow that would not have broken it before. And so, you do have had these situations that it's interesting, because, for all its flaws, this has been often said- democracy works because it allows you to voice that skepticism. You can say, throw the buns out. And that, in fact, the US has not done that twice. I think it's very interesting that what's happened- a lot of people who voted for Obama then turned around and voted for Trump, because they were both seem to be outside the system. And so, what I'm concerned about social stability in the US too, very concerned. But the western democracies do have that relief valve where people can express their anger or their fear. And they can even do it by changing the government and that's not true in an autocratic state, and therefore, they are more brittle. RAOUL PAL: So, we've got a world now that China, as you rightly pointed out, has to expand its sovereign territory in order to maintain its sovereignty. DEE SMITH: It has to expand. At least it has to expand the resource capital that it owns, and it can draw upon. And so, you see this and now, Belt and Road, which is supposed to be about Asia. There are countries in Latin America signing up for it, Italy is signing- it has become a global system. And it is exactly what you said, it is securing those resources so that they don't face the sovereign threats that they will if resources are cut off. And what I'm saying is that is already beginning to run into roadblocks, because people are finding out what it's like to have the Chinese lend you billions of dollars for a port, and then you can't pay it and they say, okay, well, we'll then we'll take the port. And this has happened. RAOUL PAL: And the problem is, is the Chinese actually don't have much money either. So, as we know, they have a shortage of dollars. The RMB is not a global reserve currency, clearly, by trying to build One Belt, One Road, they're trying to get more people into their own financial system. But as a share of the global economy, the RMB, I think has been falling in global share these days. So, they got a problem, is they can't finance their grand ambition. So, I don't know what happens. And that worries me as well, when they have a desperate need to not upset the population, they have a need for resources to continue what they're doing, yet they don't have the wherewithal to pay for it, potentially. That in itself has a lot of fragility built into it. DEE SMITH: They have and you're right. And it's not just the Belt and Road, it's the Asian Infrastructure Investment Bank. And all this, they've been trying to turn the world towards themselves with very limited success, because people are beginning to understand what that means. And so, they're very skeptical about it. And yes, you're right. And this is again, I hate to say, here's another indicator pointing towards war, but what's the last resort when a country begins to fall apart, it's often a military adventure. Now, there's some things going on in China that mitigate against that. And one of the biggest ones is the one child policy, because so many people- and that's changed now, but it'll be decades before you see the effect of that. But so many people have one child, and they don't want that one child who's going to support them in their old age to be killed in a war. So, there's an oil on the water effect, I think, to some extent of that. But the problem is when you get an autocratic regime feeling really threatened, it's an easy thing to do to whip up support among the populations. Putin found that in Ukraine. RAOUL PAL: So, how do Russians figure into this global situation now? To me, they've been the antagonizers, they've done everything necessary. I think they perceive the fragility of the global system right now. And they've always been on the outside of it, antagonizing it, and it feels like they can feel the House of Cards swaying, and they're pushing at every angle. DEE SMITH: Yeah. And I think that's exactly right. I think they're the spoiler, they're the gadfly in international relations. And there's a reason for that. There's two or three reasons. One is that Russia has always felt threatened from every direction. And in fact, that's true. They always have been threatened from east and west, and that goes back centuries. So, that's a cultural mindset. That's never going to change in our lifetimes, maybe ever. But also, their biggest fear right now is the American political class and the American government that goes across many, many administrations, the American predilection for regime changed. And they see that this has happened in Iraq, it's happened in Libya, it's happened in Syria- try to do it in Syria. And they're now talk about it in Iran, and they were afraid that they'll be the subject of that in the future. And so, one of their approaches to try to mitigate that threat of American regime change turning on Russia is to sow discord within the US, which they've done very successfully for pennies on the dollar, with the social media campaigns and all these things that we're talking about. RAOUL PAL: On all sides of the political equation? DEE SMITH: On all sides. They try to whip up both sides, all sides. They support the anti-vaxer, it's just whatever they can do that stirs dissension, that's what they do. But they also do it between the US and its allies. There's some islands off the coast of Japan, between Japan and Russia, that Russia cedes at the end of World War II, and that Japan has always claimed, and the Russians have now started talks to give those back to Japan. And again, it's clearly to try to break the steadfast relationship between Japan and the US. They want to do whatever they can to weaken the US, because they're afraid that a strong US eventually will turn on them and say, we need regime change in Russia. And that whole model, they're very clever in how they use resources, because they don't have a lot. So, the Syrian intervention, there have never been more than 25 airframes, there are 25- RAOUL PAL: They have a lot of resources, meaning natural resources, but notDEE SMITH: Right, yeah. But they've got a declining population. And they do have, they're very good at technology, but they're very good at pennies on the dollar kind of things. So, they make this big intervention, making all this noise in Syria, but it's tiny, it's 25 planes. It's never been more than that they rotated them in and out, but yet they created this huge effect with it. So, they're very smart are about how they use resources. And there's a story and I think it's apocryphal, but because I think they're the reasons it wouldn't actually be true, but it captures this is that the US- when they started the International Space Station, supposedly spent more than a billion dollars- or sorry, more than a million dollars on a pen that would write in space, and the Russians bought a pencil. Now, that's probably not true, because pencil heads can break off in space, but it captures the idea of what the Russians do it cheaply and they do it with effect, whereas the US does overkill. RAOUL PAL: And the grandiose statements. DEE SMITH: Exactly, yeah. RAOUL PAL: So, looking at that region as well, how does the rest of Asia play out within China, which is now as we know, trying to be the central focus point of the region? We talked about splintering Asia, in some respects, where does that all fit in? And then how does India fit into that whole part as well? DEE SMITH: Well, India is very interesting place right now. And there's a lot going on. India is going to surpass China in terms of population in the near future. India has a culture that is really in many ways more relevant to the Western world, related to the west, because of its history. Not just that it speaks English, that's only about 10% of the Indian population, but nevertheless, it has a lot of things that make it very interesting from a business standpoint, and very interesting from the standpoint of what it can do in Asia. Now, right now, like the rest of the world, it is experiencing some hyper nationalization tendencies, those are being whipped up. And those were problematic, particularly with its relationship to the powers, to its west, Pakistan and so forth. But I think that there's a lot more going on in technology in India. There's an entrepreneurial spirit there. There's an experimental spirit there. The rise of frugal technology, not to be confused with Jugar, which is work around technology, but really, people inventing things like a baby monitor that can be sold for $3 and then frees up women to work. And those have implications here in the West too, because I would rather pay $3 or $5 for baby monitor than 30, it's just does the same thing. But there are some other examples of that that are really interesting in India. India also, and spreading out enough to the east into Southeast Asia, Southeast Asia is benefiting from the US-China trade war, because it's seen as outside that polarity. And so, manufacturing is moving to those countries- in many cases, labor is cheaper. And they're seen now as paradoxically as more stable than China, at least in the context of the China-US thing. So, I'm actually pretty bullish on Southeast Asia and on India with some reservations. And I think that they're actually in a position albeit there are issues going on, there's radical Islam, there're all these different things that are happening there like everywhere else. But nevertheless, there's some things going on I think that are actually positive. RAOUL PAL: As China and America have split apart, which is what they seem to be forcing themselves away from each other to have some distance, how big that distance end up being, we don't know yet. You're seeing it that that ends up being a great opportunity for everywhere else, as supply chains break, and people don't know the strength of a relationship between China and America now. They're deciding, okay, well, let's go to Vietnam. Let's go to India, let's go to somewhere else. DEE SMITH: Right, finding inefficiencies and unexploited inefficiencies and just change itself is something that has huge economic opportunity. And I think people are afraid of change, but I think that they should rethink that at least in terms of investable opportunity. This is a thing that we track a lot in my company's strategic insight group. And we look at these dichotomies, these changes, these unexplored or unexploited or underexploited inefficiencies. Those are things that can really have huge opportunity. And so, you're seeing that now in Asia, because you're seeing this breakup of the US and China, you're seeing resistance to the Chinese overlordism, if you want to call it that, in Southeast Asia, Malaysia being a good example of that. And so, there are opportunities now in the rest of Asia, from India all the way down through Southeast Asia, that are, I think, are really interesting. RAOUL PAL: So, if you're looking at it like a 20-year view, let's assume that this splitting apart of China and America continues- by your framework, it makes it clear to me regardless of the downsides of India, it is really India's opportunity to waste here. They get all the opportunity, because you've got a big stable country with rule of law and all of the bits and pieces and a democracy. So, if you look at FDI development from global powers, India's got to be a more in this space. Yeah, that there's a bunch of bureaucracy that needs sorting out, there's a whole load of things and it's not perfect, but it just feels that the world will shift away from what both America and China think it's going to shift to, and it shifts to somewhere else. DEE SMITH: Yeah, it's India's to lose. It is. I agree with you. And the flying you want going to go on all these things is the specter of war. So, you as long as the split of Chimerica, and the Chinese-American dissolution is not accompanied by physical violence or cyberwar, which is a huge concern. As long as that kind of thing doesn't happen, then yes, I think you're right, it becomes an opportunity in the rest of Asia. And I think that as long as India doesn't get into a war with Pakistan or two nuclear armed powers there then again, you do have instabilities, you do have problems, but you've got enormous opportunity there. So, I think you can project forward 20 years that India becomes the pinnacle, the guiding light of Asia, not China, because China will have so many problems. And their gaze is going to be turned more and more internally as their problems become increasingly onerous. RAOUL PAL: And they can't pay for the ability to look externally, I guess. DEE SMITH: Yeah. RAOUL PAL: So, the other big thing that is going on in the world, because there's a lot geopolitically going on, it's the nexus of Turkey, Saudi, Iran. How is this all playing out? And what is the endgame here and what is going on? Because obviously, that House of Saud has now become expansionist in its philosophies. And it is clearly now threatening Iran, is trying to get the west to distance itself from Iran. Iran obviously has supporters in Russia and China as well. And India. Iran has always been the epicenter of the world stage, Turkey has been, now, Saudi is, I guess, a relative newcomer to that equation. How is this going to play out? Because this worries me, if there's a war coming, it's somewhere between these three. DEE SMITH: It's very worrisome, and the Middle East is an intractable set of problems. And it's so complex, because you have all these different dynamics going on, you've got the Sunni-Shia one. And you've got the fundamentalist, traditionalist one. But you've also got a lot of others, you've got Turkey and the rest of the Arab world. And that is an animosity that goes back to the Ottoman Empire. You've got Iran and Saudi Arabia, which is part of the Sunni-Shia thing, but it's also different from that, or it adds on to that. You've got the US and foreign powers who have been causing problems in the Middle East since at least that SykesPicot Agreement at the end of World War I that split up the whole region into these artificial countries that cut across the cultural units, so that they could be easier to control. And those borders are now the borders we have, and they changed a bit over the last 20 and 30 years as wars have happened, but pretty much fixed. And they don't function, they're not functional for the purposes of what the Middle East should be given its history. So, you've got this huge complex situation of roiling and highly emotional conflicts that have huge histories, huge long tails. And it's an almost intractable set of problems. So, between Saudi Arabia and Iran, the temperature has been hiked up over the last few years. The US now has an idea in the current administration, that goes back to the problems with Iran in the '70s, that the US wants to see regime change there, depending on who you talk to. Depending on who you talk to, it is or it isn't looking to deploy a huge number of troops. So, we're back to the situation of before the Iraq War in some ways. RAOUL PAL: Iran is such a bigger powerful country. DEE SMITH: It's the regional hegemon. RAOUL PAL: That's right. DEE SMITH: And it would not work to try to take it on. And that has been the conclusion of every thoughtful analysis of foreign policy in the last 40 years, is that Iran is just such a large power and it has so much developed capability that you can't take it on by force. Now, Saudi Arabia is much smaller in terms of population, it has more money, it has more access. There's now this Saudi Arabian-Israeli friendship that's happening. Enemy of an enemy is a friend kind of thing. And although, I think it's more complicated than that. And you've got the Saudi adventurism in Yemen, which is a proxy war with Iranians. And so, it's highly, highly inflammable. The only thing I think that might contain it is, I think that everybody realizes that it's a balance of power situation and everybody's going to be hurt badly by war. And they don't really know what the US is going to do in that case. RAOUL PAL: My fear is, I don't know, for some reason, I just feel like the Saudis want to do this. The Iranians haven't basically invaded anybody inDEE SMITH: No. RAOUL PAL: -I don't know, whether it's centuries, but certainly longer than my entire lifetime. DEE SMITH: It's not like the Persians off the Greek case. RAOUL PAL: No. So, the aggressors get, yes, they are playing on the political playing field, they're doing things that they shouldn't be doing in a whole bunch of other countries feels that Saudi's going to start that fight. If they go to war, that's a proxy war for the whole world. There's a World War in the making in the middle of that, because everybody has skin in that game somewhere. DEE SMITH: Everybody does. It's interesting that the US has less skin in the Middle East than it used to, because of the development of hydraulic fracking. And that has changed the balance. RAOUL PAL: But that's unsettled, the Middle East, right, because the US basically be pulled out? DEE SMITH: Exactly. But this is another one of these technological feedback loops, where nobody saw that coming. And suddenly, the US has arguably the largest supply of oil in the world, and we can dial it up and dial it down. And so, the importance, the urgency of the US involvement in the Middle East, driven primarily by the need for the oil is dialed down. And this feeds into a narrative that's been going on in the US for at least three administrations since the end of the Bush administration, which is we need to pull back, we can't be policeman of the world anymore. And you do have, in every administration, you have the yin and yang of that. You have the desire to go out and do things, but also the desire to pull back. But I think the population as a whole, feels exhausted. And I think that people don't want the US to be head of these military adventures anymore. And so, you can see that thread going consistently from late Bush II through Obama through Trump. And yes, there are things that mitigate against that. But on the whole- but with the fracking thing, then added to okay, well now, the reason's gone that we should be- we're friends with the Israelis. And we're friends with the Saudis supposedly. But the urgency of it is no longer there, because we don't really need the oil. Our allies need the oil. But then the US is in the process of not being as interested in allies as it was, at least under the current administration. RAOUL PAL: Yeah. That's right. And then, moving across the world, we get to Europe, which is- and I don't even know where Europe's from- this is an extraordinary situation. We're talking around the world in a way that I've never seen before, because there were certain structures in place that meant there was some global cohesion. And that cohesion seems to be falling apart. And Europe is one of the areas that is literally falling apart in front of our eyes. It hasn't got to the worst stage, but Britain is the first stage of that, I think. But it can't even leave the EU and it can't stay. It's in this mess. And I don't know what's going to happen, how Germany's going to play out once Angela Merkel's out, and all of this, whether it can hold together through a recession or not. DEE SMITH: The EU is the poster child for this age of splintering that I'm talking about, really. And as you say, it's again, it's so complex. Germany, the rise of Germany in the late '20s, since the 1990s, has been another one of these Thucydides trap things that has not led to war. It's cited as such. And so, but you have huge imbalances in Europe. You have huge dissension in countries like France and Italy. And then you have Brexit and you have the potential of all these breakaway parts of it, because I think if Brexit happens, it's not unlikely that then Scotland and Wales will break apart and it'll go from Great Britain to Little England. RAOUL PAL: So, Europe right now, I'm not really so worried about the splintering. Yes, getting there is painful. UK may have to go through decades of issue. But in the end, small agile economies may work well. Europe used to be that. It was only in the last hundred years that all clumped together. And so, maybe small, agile economies is the way forward that we need so you can account for all of these tribal differences that we all have. And therefore, even wars don't become so cataclysmic because you have smaller people fighting with each other. DEE SMITH: Right. This is a whole very interesting. RAOUL PAL: Builds more anti-fragility. DEE SMITH: Yeah. And so, you do have indeed a situation in the last century where Europe was very fragmented, and then it clumped together into what we're seeing as culturally coherent units- Italy, Germany, and then they all went to war. And they did that twice. And so, the goal of the European Union was to avoid that happening again. And so, it was a project of the last century, of the middle of the last century, really, and it just kept developing. And closer and closer integration, it's became the mantra and it was something that was- again, it's part of this 20th century concept that things need to be pulled together, they need to be larger, they need- that that's the world that we're in. And I think there was the psychologyRAOUL PAL: Yeah. Because we had the Soviet Union, we had Europe, Pax Americana, all of those things, they all clumped together. DEE SMITH: Yeah, that's right. And now, we're simply seeing the reversal of that. But to your point about smaller units, there are people who are saying that that city is the model of the future, because cities are human and scale. Even if they're huge, they're still easier to understand. They have their own culture. I live in Texas, and every city- you've got Houston, Austin, Dallas, Fort Worth, San Antonio, El Paso- they all have their own culture. They're very different from one another. And if you don't like one, you can go down the road to another one. And they run in a different way. They have different ideas there. They connect to different parts of the world. And so, the idea that we need to break into smaller political units is something that some people are talking about. RAOUL PAL: That's interesting, because if you look at the- I would argue the most successful economies of the last 30, 40 years have been city states. DEE SMITH: Yeah. Singapore. RAOUL PAL: Singapore, Abu Dhabi, Dubai- these are all basically, one horse towns that have done extremely well on the world stage. Hong Kong. Yeah, amazing. DEE SMITH: And the question is, can that be replicated? Can you have a world like that? RAOUL PAL: Dee, do you have to have an actual construct? Or can you have it inside the construct? DEE SMITH: That's a good question. Yeah. RAOUL PAL: Because if we're talking about abandoning what we know about the world and moving forwards, maybe within cyber constructs, you could have city states, essentially. And we've seen this, even with the advent of cryptocurrency is anybody can have the currency now. You don't have to have a central bank. And there's a whole bunch, the world has changed. I don't think we figured out what the world is yet. But almost anything is doable. DEE SMITH: That's right. And this is now we're getting into what I'm interested in, in the sense of not looking to old models. But looking to new models, and they're over the horizon. We can't see- I love that saying with Michelangelo, that he never carved a statue, he just chipped away at the marble till he got to the statue. We haven't chipped away enough marble yet to actually, but we know there's a statue in there. But we're not going to get to it if we just fall back on old models. And so, I think this kind of thinking is what needs to happen. And now, city states are an old model, but they're a very old model, not something that hasRAOUL PAL: Or, okay, forget the city state and say, okay, let's accept everybody's different. And people want to hang around with their own group of people. Or why can't the- we've used this in discussions before where it's easy. The Roth Viola lovers, they can have their own currency. And they can speak to each other in their own platform, they can have their own language they developed over time. And the [inaudible] lovers, they've got their own currency and they can trade with each other. There's no reason we have to use borders as constructed now as opposed to psychological borders where social media has created this now anyway. DEE SMITH: Yeah. I agree with you. And this is really out there radical thinking, because people will say, no, you simply can't just ditch all these things that are existing incumbent structures. But I think the world has often done that. RAOUL PAL: Of course, it has, religion was ditched as a ruling structure. DEE SMITH: Yeah. And so, you do have that kind of thing going on. And I think that this age of splintering, as I like to call it, is one of the key things is the connectivity revolution, and I'm saying beyond social media, but that's a big part of it- of creating these on the one hand, bad echo chambers that exacerbate hyper partisan things. But on the other hand, you can get all oenophiles together, you can get all the butterfly collectors or whatever they all are. And they have these commonalities and their communities. So, it's really virtual communities that you're trying to have. Now, where are the opportunities in that? Because they're huge ones, huge ones. But we're not thinking that way. And I think that a lot of people who are in charge of investing money, or who are in charge of political development, or who want to be, they're not thinking that way. They're thinking within the existing structures. And it does not have to be a violent change. And we're speculating here, obviously. But you can see that these things could evolve, that there is a pathway where things can evolve, and it can be positive. There's huge other problems we haven't talked about- climate change being the elephant in the room, but those are going to have to be dealt with. And so, how do we best deal with them? Is it these large incumbent structures? Or is this something new? Is there some other statue there in the marble that we need to carve out? RAOUL PAL: And I think if I'm trying to tease apart themes that are happening, there is fragmentations, there's disintermediation, there's the evolution of power into certain things. So, if the world was doing this, it's now doing that in every way, shape, or form. So, I think the answer is going to be in all of those things, that that fragmentation may look like the most terrifying thing, but maybe all the answers lie within that. And as you said, I think both you and I are very keen to not look at this and say, well, the world's fox, it's to actually look at this and say, the world is changing, there's going to be opportunity. And where the best place to apply our intelligence is look at where the opportunity lies, because those opportunities are enormous. DEE SMITH: They are absolutely enormous. The problem for ourselves and our children, and hopefully, not our grandchildren or great grandchildren, is that we are in one of these transitional periods now. And those things are very difficult to deal with. That the wars of Europe, the religious wars of Europe are good example of that. 130 plus years of conflict, they ended up killing 30% of the European population. And that was with early modern weapons, not postmodern weapons. But because people fear change, and they hold on to, they have nostalgia often for things that never existed in the first place. But they don't want it to change, they're afraid they're going to lose what they have. They're afraid of the implications of it. And so, you have many, many, a large set out of any population that wants to hold on. And they're the ones- even when the forces of change, the structural forces of change are so enormous that they in the end can't be resisted, you're going to have a huge psychological problem on the part of large groups who now can interconnect and act together in doing this. So, I think that you've got State A, which is where we were, and are just leaving, and you've got, let's say, State C, which is some new, this thing we're talking about, whatever it is. In between that, you've got State B, which is going to be chaotic, incredibly difficult and dangerous and hard to navigate. And that's what we're entering. But it doesn't mean there's not a lot of opportunity there. There's a huge amount of opportunity there, maybe more than there was in the past, but it's going to be much less predictable. And it's going to be much more dynamic, and that can be good or bad. But you're going to have things that are going to come up and challenge. The rise of the migration crisis. It's a good example. We haven't talked about that. And I would now turn the conversation to Latin America. RAOUL PAL: I'm just about to ask about Venezuela and Latin America as a whole. DEE SMITH: So, Latin America is an interesting region right now. I remember sitting here in New York in the foreign policy meeting about five years ago, and the subject was Latin America I remember. And somebody said, Well, the thing about Latin America is there are no geopolitics in Latin America. And everybody agreed in how the world has changed. Latin America is awash in geopolitics right now. And there are countries that have done very well and seem to have solidified their progress, Chile being a good example. There are countries that have done well but are faltering now. Colombia and Mexico are being example. I'm going to put Brazil into that category. And then of course, there are countries where they're really either in or plunging into crisis. Venezuela being the poster child for that. But look at Nicaragua, which is almost in the same situation. Venezuela is and it's gotten there much faster. And the problem with all these states, and we know this from the Middle East, failed states infect the states around them. And people thought, well, that's not going to happen in Latin America. And it's absolutely not correct. It is happening in Latin America. There are more than a million and a half refugees from Colombia. And they are the state- I mean from Venezuela. And a large number of them go into Colombia, and they are destabilizing a lot of the progress that Colombia has made. RAOUL PAL: Because they also bring- because they come with no rules from society, because they've walked out society, you bring a massive influx of crime generally. And this is what leads whether it's the cartels and everything else, it comes from that weak government. DEE SMITH: It's not just crime, because sometimes that is there. And surprisingly, sometimes it's not as much as you would think. But it's also the resentment that it builds in a population in the area into which the migrants would be coming- now, Colombia is such an interesting case in this sense because a lot of the migrants coming from Venezuela into Colombia were actually Colombian a generation or two ago when they left Colombia, because Venezuela was more stable. And so, they're ethnically Colombian, but they come back in and you have all the same problems that you have in Europe and other places that these people aren't paying taxes, and they're getting benefits, and we're not getting them, and we are paying taxes. And so, there's the resentment even though they're the same people. So, there's something going on with migration that's not just cultural, there's something else going on. And I think it's really interesting. It's troubling, but it's very interesting how this is playing out in Colombia. But that is beginning to affect all the countries around it in the Venezuela situation. Nicaragua is also beginning to infect all the countries around it. And if you had a similar number of people exiting Nicaragua and depending on how things go, you could be looking at half a million refugees, half a million migrants. RAOUL PAL: And where they go? Costa Rica, which is the stable place, and then they're going to get it all. DEE SMITH: And it's starting to happen there. And you are starting to have them, but they'll also go north. And in the current climate, can you imagine what two or 300,000 people arriving at the Mexican border of US would do? Then you really do have a real crisis. And then you've got the northern, the so-called northern triangle- so Guatemala, Honduras, and El Salvador- that are having huge issues already leaving aside Nicaragua. Part of this is related to climate change, because there's a dry zone, and the coffee crop is being dramatically affected. I've been in Guatemala twice in the last six months. And it is a place that is under huge stress, and the rise of drugs, of gang activity in general, bad government which has always been there. And so, you do find that while the number of people trying to immigrate to the US migrate to the US from Mexico is way down, it's at net zero, really, that they are maybe just coming above that. But the number of people who are coming through Mexico into- from Central America into the US has risen enormously, and that this is as a result of these crises. So, as situations, destabilize, you're going to have these migrant crises all over the world. And that feeds into this fear of change and the groupism, whatever you want to call it. RAOUL PAL: I'm a product of mass migration. So, my father moved to England in the early '60s, England imported enormous numbers of people from India and from Jamaica. It took until I got to about 30 years old before almost all of those- for the Indian population to be mainly digested, the West Indian population, probably they still had riots and still have issues going on for maybe another 10 years after that. And then finally, they've been integrated because then Eastern Europeans turned up and then that's been integrated, so then unified everybody else, and it's like the new people have come in. So, I've gone through it. And that was, it takes a generation pretty much to integrate a large wave of people. And the world has seen a huge amount of this. And it takes time, but repeated movements of people on top. So, the problem is, is Europe faced- the Eastern Europe, first, they got the war countries- Albania, Croatia, etc., the ex-Yugoslavian countries. That happened, then there was the new Member States of Europe. So, that happens, so the polls and et cetera came in. And then there was the Arabs spring and the Syrian situation. So, they have basically four waves of immigration in a record short period of time and no wonder, it's difficult to absorb, it's going to take time. DEE SMITH: And that may be the tip of the iceberg. And this is the problem when you're looking at a world with another hundred million or 200 million or 300 million migrants, forced migrants in some cases, sometimes internal migrants within countries, but sometimes immigrants people going from one country to another. It's an enormously destabilizing situation. RAOUL PAL: And we may get climate migrants as well. DEE SMITH: And we already are getting climate migrants. Central America is the first example of that. And whatever you want to believe about climate change or its causes, it nevertheless, the climate there has changed, it's much drier and the coffee can't- and that is an area where coffee is a very important crop. It's happening in Chiapas too. It's about 70% lower coffee crop. Chiapas is the southern state of Mexico, used to be part of Guatemala, borders on Guatemala. So, the pressures were happening even within Mexico. And as this gets amped up and I'm really concerned for how the world is going to deal with it. Because as the Colombian thing shows, they can be the same people. And they come in and they seem to be from another place and they're not paying taxes, and it still creates just as much of aRAOUL PAL: And so, does that not force the US to play a larger role in its region? Because it has been incredibly hands off for since the early '80s. It's basically not done anything in the region, not been involved. They had a little bit with Noriega, and a couple of bits and pieces here. And that's it. They've been completely uninvolved, disengaged in the region. Why do they not get more involved in their own region, stabilize it, take advantage of the Venezuela situation, now, there's enormous amounts of natural resources there as well, and then create a Western Hemisphere, strengthen the alliance? DEE SMITH: There are two opposing threads going on through that. And they're often in the same person if you talk to people in Latin America. One is the resentment of the US as the hegemon and the Monroe Doctrine, which basically said, that is our backyard and we need to control it, and so forth. And then on the other hand, there are people in Latin America- and I've spoken with them in positions of high influence, who think the US should intervene militarily in Venezuela. So, you get these two opposing things. And literally, sometimes you have the same person saying this two different things, which is not unusual these days for somebody to say, you hear it all the time on Real Vision. But I'm starting with the Carter administration and as a reaction to the Iran contra, all those things that went on that- well, that was actually after Carter, but starting with the Carter administration, there was a feeling of the desire to pull back from a direct involvement in Latin America. And it's been turned up and down a bit over time, and Reagan administration turned it up, some because of the feeling of a threat from the Soviet Union. But generally speaking, I think the attention was directed elsewhere. Asia was becoming the area that had the most promise and the Middle East becoming the area that had the most problems, and we were dependent on the oil from there. And so, it became an area where people didn't pay much attention. And I think that Latin America got used to that. And so, it was out of sight out of mind. And I think that's changing. And I think that there is a case for saying, let's make the Western Hemisphere really strong and really coherent as a whole. And there's a lot to be said for that. Those are all Western cultures in essence as much as the US is. They're a Western European culture overlaid on top of a native Indian culture, which is often very, almost not there, but still where it started. And you can go from Alaska to Tierra del Fuego, and you can read the street signs, and you can recognize the buildings, and you've got courts and churches and all these things that are recognizable. So, there is much less cultural dissension, there's much less cultural difference from someone immigrating throughout the Americas than there is from someone immigrating, let's say, from the Middle East into Europe. It's a culturally coherent zone, in one way of looking at it. RAOUL PAL: Yeah. And I've noticed over time that more and more people I've come into contact with have made that move, as America has become more difficult for, let's say, an aging population. There are a bunch of people moving to Costa Rica, even Nicaragua, Mexico, Brazil, Argentina, Chile, all of these places, because they can receive a cheaper, simpler, but pretty high-quality life in many of these countries. And things that there's good facilities, good services, all of that kind of stuff. So, I do think as you said, maybe there's a cohesion that can grow over time, then again, that's another realm of opportunity, there may be risk with it, but I think opportunity of time over long-forgotten reason, and investors don't really care. They got burnt in Brazil and burnt in Argentina, yet again, and outside of that, don't really care. So, maybe something will happen. DEE SMITH: Yeah, I think the thing that probably people don't understand about Latin America is the way the cultures work down there, which does affect business. And that is that in Latin America, you have a tradition of a patron system to use that. And so, you have a- and this affects a whole bunch of things, including how we see corruption as a huge problem in Latin America, there's a lot to say about that. But one of the elements is that, so you have these social pyramids, and the top of it has the patrons, usually male, sometimes female, and that person's job is to get money any way they can, they keep a lot of it for themselves, but they also feed it all the way down to the street sweepers. And so, you have this social pyramid that's dependent, is hierarchical and is dependent on this person or this small group at the top. And so, it is actually seen to be morally defensible or even right for them to do whatever they need to get money to support their whole structure. And so, that creates a different, it does several things, it creates a different environment in terms of how government is seen, and authority is seen and so forth. But it also means that if you're investing in Latin America, the Latin American economies are pretty much divided among the social pyramids. Some of them are taller, some of them are smaller, but even the smaller ones are not going to grow much more because the taller ones- they'll tolerate them, but they'll keep- but if you get in bed with the wrong group, you're simply going to find your growth constrained. And so, you really need to understand how the culture works, and who's who and who is really untouchably corrupt and who is within the system, but you can work with them, and not violate the laws of your own country and so forth. But mainly, just who's in a position of influence and who isn't in these countries. And I think what happens with a lot of Western businessmen is they go over there, and they're ignorant of it. They assume that it works like the US or much of Europe. And it doesn't. And so, again, that's where you've got to have an informed view of this sort of thing. But there's a bigger picture here too about corruption. And that is that- and Bernard Lewis, a great historian of the Middle East, pointed this out. He came to a little bit different conclusion that I would come to, but his analysis was that the West is corrupt in the same way that other countries are, but it goes in a completely different direction. So, in countries in Latin America and Middle East and so forth, you use political power to get money, that's a common pathway. In the West, you use money to get political power, but it's an equation, they're equivalent. And he thought that the Western way was less damaging, I would argue that it isn't. That they are really equivalent. RAOUL PAL: I think we're proving that as part of the things we've talked about. Part of the backlash is that Western system is proven to be unacceptable to people. But, Dee, it's fascinating as ever to have a spin around the world and look at this. And I think there's so many things to navigate over time, I would love to get you back and start navigating, digging into particular situations as when they develop and again, to look for the risks, but also to the opportunities, which I think is key in all of this. DEE SMITH: Absolutely. It's always a pleasure. RAOUL PAL: Brilliant, thanks, Dee. DEE SMITH: Thank you.