A new world order is shifting the global economy’s balance of power. These tectonic shifts are the likely fault lines of future geopolitical events and conflicts.
In this special edition of Real Conversations, influential economist, best-selling author and former White House economic advisor Dr. Pippa Malmgren discusses her current outlook with Hedgeye CEO Keith McCullough.
Below is the entire 19-minute interview and an excerpt transcribed from their discussion.
Keith McCullough: In everything you write you’re trying to identify the big tectonic shifts, whether that be a change to the world order or societal changes like social media.
Let’s start right there on the international world order.
So many have thoughts on trade wars and Trump’s tweets. How would you characterize where we are today specifically about China and Russia?
Pippa Malmgren: I wrote about this in my book Signals. There is a challenge to the world order, to institutions like the World Bank and the IMF, the World Trade Organization, and the rules of the game they represent. A lot of nations, China and Russia specifically, but many nations are kind of thinking ‘Is this still serving us? Are the rules resulting in the right outcomes?’ So there’s a huge challenge and the question is ‘Do we survive this challenge to those institutions?’
Obviously, when it comes to the United States, outright challenging these institutions is a brand-new question. There’s always some kind of construct. The question is what will it look like?
I think the Chinese take the view that whatever the American-led structures have been in the past they’re unlikely to suit their needs. So they’re creating their own institutions, like the Asian Infrastructure investment bank. The Russians are trying to create their own institutions too. For example, when we kicked them out of SWIFT, they said, ‘Fine, we’ll just create our own payment system that’s separate.’
So we’re now in a period where there’s just a lot of competition for what the rules of the game are going to be. People don’t like that uncertainty. But it takes time and commitment to keep them stable and sound. Now we’re in a period testing and challenging them.
McCullough: It’s a tough answer, when asking about volatility, but do you think this perpetuates short-term volatility in search of longer-term stability in terms of how the Chinese and Russians think about this new world order?
Malmgren: I don’t think the policymakers really understand how the business community and the real economy is going to respond to this. They overestimate the impact. They think that any change to the world order will be so disruptive that it will destroy the world economy. I don’t think that’s true.
It’s amazing how well businesses adapt when their supply chain is threatened by a world change. Policymakers also underestimate the agility of businesses. I think it’s a challenging time but we’ve been through trade wars before and I suspect we’ll survive this one too.
McCullough: I know you’re interested in how Technology is changing some of these dynamics. Let’s talk about cryptocurrencies.
If you take the Technology of cryptocurrencies and you bridge it with this New World Order you’re talking about how do you think about that in terms of how the Chinese might perpetuate a cryptocurrency or how these might work in the future state?
Malmgren: Crypto is part of a bigger issue. Governments are figuring out that they can use Technology to manage the society. Some want to do this in ways that are potentially positive and there are others I have questions about.
The Chinese approach is to gather as much information about individuals and manage society. It’s not so consistent with what we think about in a democratic society but that’s the path they’re on. They like crypto, and a national fiat version of it, because that way they can actually track every single transaction in the economy. It kills the black market economy. It makes everything totally transparent.
We’re doing it in the West as well. Governments like the idea of the blockchain because that gives total transparency to the point where one day you might not have to file tax returns because they will just be able to automatically deduct taxes at the point of transaction.
So this is a very powerful event in the world economy, this shift into a new form of money, a new technology that is not only electronic but is tagged to you and your specific behaviors.
McCullough: So another big topic that’s related to all this is the capturing of data. Let’s talk about big data and the future there.
Malmgren: I would strongly recommend people to look at the Chinese company SenseTime. It’s the most valuable artificial intelligence start-up in the world. It’s valued at $4 billion now. They can recognize your emotional reaction out of a crowd of 10,000 people. They can look at the screen like we’re on right now with a CEO talking about their company and identify microfacial movements that can detect if you’re lying and set the algorithm to short the stock immediately.
That’s the world that we’re in.
So imagine all these data points come into a holographic sphere of information and we’re going to learn how to navigate the sphere of answers literally like a crystal ball. It is a totally different economy.
McCullough: So this is basically putting a process around what was previously done by humans.
When I was at Carlyle we interviewed FBI agents about interrogation techniques and facial patterns to help us find out if executives were lying. But it was people driven. We would have to read all the books and have our own opinion. It wasn’t systematically imputed and able to be replicated at scale. Isn’t that where we’re at? We’re taking about a bunch of new technologies that are putting things previously done by humans in a scalable technological process that we can use.
Malmgren: Like anything else, it’s automating the judgement of humans. And this is what we’ve had a problem with technologically. The internet is great at the quantitative but it’s not great at the qualitative.
McCullough: What do you think will become a readily available investing idea as it relates to this trend over the next 6-9 months in terms of systematically capitalizing on human behavior?