In this episode, I’m speaking with Dr Alan Dupont, who is the founder and CEO of Cognoscenti Group. Alan is a highly respected geopolitical strategist and has advised a wide range of governmental and commercial organisations, including the Northern Territory Government, Asia Society, the Australian Strategic Policy Institute and Outcomes Australia.
He has advised several Australian ministers of defence and foreign affairs, and in 2013 established and led the Abbott government’s defence white paper team. Alan started his career in government, including as an Army officer, intelligence analyst and diplomat.
In this episode, we take a look at the geopolitical turmoil around the world and its impact on economies and investment markets. We discuss the disintegration of Pax Americana, where the US had the balance of power since the Second World War. And we look at the redistribution of power around the world, including the potential of non-state actors to play a role. We examine US President Trump’s use of tariffs and the dollar as financial weapons, and ask the question whether the performance of The Magnificent Seven is related to the tech war between the US, China and Russia.
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Overview of Podcast with Dr. Alan Dupont
04:00 Early interest in geopolitics and working with Michael Hinze at CQS
06:00 We are slap bang in the middle of moving from Pax Americana to another system, which is yet to emerge.
08:30 Kondratiev Cycles and why they are important
10:00 Are we moving into the national security era, where security takes primacy over trade and commerce?
13:00 I don’t think we are on the eve of a new world war. Putin is constrained in what he can do.
17:00 The scope of a fruitful relationship with China is limited by the very nature of its system
20:00 If Australia has to choose between the US or China, then we will get a polarised, deglobalised world and we will have to forfeit a lot of economic benefits from globalisation, which are considerable
21:30 There is a technological and financial war going on
23:00 Trump decided to weaponise the dollar for geopolitical reasons
24:30 Geoeconomics: the use of economic and financial power for geopolitical objectives
28:00 Alan, you called the Iran tensions a few days before the rocket launches happened. What gave you this insight?
32:30 China has its nose in most of the key technologies of the future world. But they are not ahead in the most important one: AI
39:30 Is the technology war part of the reason why the Magnificent Seven have performed so strongly in recent years?
Full Transcription of Episode 117
Wouter Klijn 00:00
Hello and welcome to the i3 podcast: ‘Conversations with Institutional Investors’. My name is Wouter Klijn, and I’m the Editorial Director for the Investment Innovation Institute. For more information about our educational forums for institutional investors, please visit our website at www.i3-invest.com. That’s the letter i and the number three at invest.com. There, you can also subscribe to our complimentary newsletter. I3 insights in which we discuss investment strategy and asset allocation questions with asset owners from around the world. Now, as you all know, we love our disclaimers in this industry, so here’s ours. This recording is for educational purposes only. It does not constitute financial advice and is intended for institutional and wholesale investors only. Please enjoy the show
In this episode, I’m speaking with Dr Alan Dupont, who is the founder and CEO of Cognoscenti Group. Alan is a highly respected geopolitical strategist and has advised a wide range of governmental and commercial organisations, including the Northern Territory Government, Asia Society, the Australian Strategic Policy Institute and Outcomes Australia. He has advised several Australian ministers of defence and foreign affairs, and in 2013 established and led the Abbott government’s defence white paper team. Alan started his career in government, including as an Army officer, intelligence analyst and diplomat.
In this episode, we take a look at the geopolitical turmoil around the world and its impact on economies and investment markets. We discuss the disintegration of Pax Americana, where the US had the balance of power since the Second World War. And we look at the redistribution of power around the world, including the potential of non state actors to play a role. We examine US President Trump’s use of tariffs and the dollar as financial weapons, and ask the question whether the performance of The Magnificent Seven is related to the tech war between the US, China and Russia. Let’s get started. Alan, welcome to the show.
Alan Dupont 02:36
Thanks very much. Wouter, pleasure to be here.
Wouter Klijn 02:40
So I had a little bit of a look at your background, and you have quite a varied background, including starting as an Army officer and intelligence analyst. Is that sort of where your focus on geopolitics today come from? Or is it more related to sort of your study? I think you studied international relations. How does one become a geopolitical strategist?
Alan Dupont 03:06
Well, good question, and actually started probably earlier than you think. I always was interested in global affairs when I was even a student at secondary school, and that flowed through into my time as an intelligence analyst, which really whetted my appetite for international affairs, because I was the Vietnam desk officer, and, you know, I was briefing ministers and involved in high level geopolitics from a very early age. And so I re credentialed myself after I got out of the army, I went back to university and decided this is what I wanted to do for the rest of my life. Then the question was, well, how would I be able to do that and earn a sufficient money to keep in the lifestyle that I wanted? Right? So anyway, it all worked out okay, eventually, with a few detours on the way. Yeah, fair enough. So you have a wide range of advisory roles, also to government. But one thing that stood out for me as well is that you are involved with a hedge fund. Michael Heng says, CQ, s, so there’s a bit of an investment angle there. What’s What’s your role with the hedge fund? Yes, well, the the context is that later in life, I was appointed to the chair at Sydney University, and the chair was funded by Michael hinsey. And when I first met him, I said, Michael, do you understand that this is this is actually national security, not financial security? And he smiled as Yes, as I fully understand that. So that began a sort of a long association with Michael, and then one thing led to another, and he invited me to come on to his advisory group to give a geopolitical dimension to his investment decisions, which was quite path breaking at the time. So I agreed to do that, and I served on that advisory group for nearly 10 years. Learned a lot about investment head. Funds, what they do, and I hopefully they learn something about geopolitics. So that was how it all happened.
Wouter Klijn 05:07
I think CQ s is global macro, isn’t it? So it’s more of a more in common with geopolitics than than, say, other types of in strategies.
Alan Dupont 05:15
Well, well, Michael would tell you there, there’s sort of, it’s sort of a multi asset investment platform where geopolitics has taken into the decision making in a way that most other hedge funds don’t. But, you know, really, I really think it’s on the edges, because it’s very hard to find a geopolitical trade, per se. You have to be aware of what’s going on the world, but what’s the trade? You know, it’s quite difficult, so it took us a while to work that one out. But no, no, he’s been quite sort of bit of a thought leader in the sense that he has brought the two dimensions together to the benefit of both. You know, so, and I think more and more investment companies platforms are starting to factor in geopolitics now for pretty obvious reasons.
Wouter Klijn 06:03
Yeah, we’ve seen a lot of developments in that space. And you and I have spoken a little bit over the year about this concept of the end of Pax Americana, the great American Peace, and that there will be a redistribution of powers and potentially multiple power centres coming up, even maybe non state actors. Where are we in that shift away from Pax Americana?
Alan Dupont 06:30
So where? Where we are at the moment is right, slap bang middle in the most disruptive part of this process of moving from one system to another one, which is clearly yet to emerge. So if you look at this historically, there are these great wave cycles that macro cycles that shape history. And every 80 to 100 years or so, the existing system starts to break down, and you get a lot of turbulence and unpredictability, just as we’re experiencing now. And the bad news is it often lasts for 10 and 20 years before the new system emerges. So Max taxi, Americana, the American Peace is a system that was set up by the victors of World War Two in 1945 all our institutions and our norms were shaped by essentially United States and the West, and now that’s under threat from authoritarian challenges and and even under threat from the US president himself, Donald Trump. I mean, in a way, he’s trashing the legacy of his predecessors all the way back to 1945 and he’s the guy who’s really shaking up taxi Americana and saying, we’re not going to be global cop anymore. We’re not going to carry the burden for everyone else. We’re going to look after ourselves, America first, and the rest of the world has to stand up and do what we’ve been doing. And you can understand why he’s doing that, but that’s that’s another reason why Pax Americana is fragmenting. But will we see a Pax Sinica that is a, you know, a Chinese led world order? Possibly, a lot of people think so. I’ve got my doubts about that, but that’s where we’re at the moment.
Wouter Klijn 08:14
So these big cycles in history, I think, that are called comrades cycles. Can you explain a little bit about how they work and why they’re important?
Alan Dupont 08:23
Sure. So there are two theories about the way the world works. One was articulated by a Russian economist named condratia, and the other by his geopolitical equivalent, who said, Well, the same thing is going on the geopolitical space. And when you marry up the two waves, if you like the the ups and the downs, they do tend to coincide. And I think the singular insight by both of them into the way in which the world works is that, like everything in life, things rise and fall. And it’s no surprise that governments, empires, principalities, kingdoms, also rise and fall, as we know now in the distant past, empires like Rome rose slowly and they declined slowly over hundreds of years, whereas in the you know, the sort of Uber accelerated world in which we live, things happen much more quickly. So the theory is that every 60 to 80 to 100 years, the old system exhausts itself. And economically speaking, what happens is, you see, if you think, after the Second World War, the economy, global economy, boomed, tremendous advances economically, then it sort of platted out and lost a bit of steam, and globalisation, which was its handmaiden, started to come under under stress. And now people are saying, well, globalisation is dead or certainly not as prominent as it was before. And now we’re into the national security era, where national security starting. To take primacy over a trade and commerce, and we can see that playing out everywhere, including with Prime Minister Albanese visit to China this week, where he’s caught between a rock and a hard place. On the one hand, he wants more trade with China, but on the other hand, China is hardly classified as a friend, because he’s been doing some rather nasty things against Australia and within the region. So how do you reconcile those two? And it’s, it’s really very difficult to do.
Wouter Klijn 10:27
Yead, and with this shift to national security, I think one of the big impacts, as well as on Europe, where obviously Trump has said, You guys are going to have to spend more on on defence, I think there’s the Ukraine war that sort of made him realise that maybe we should prop up our defences a little bit more. What do you think that is going to mean for the European industry there? We will see sort of a renaissance of the military complex there, or the industry. Is that going to drive growth? Or how do you look at that?
Alan Dupont 10:59
Yes. Look, it’s hard to really fully understand how fundamentally Europe’s security environment has changed over the last few years, primarily because of Putin’s invasion of of of Ukraine, but, but it’s a way, it’s been a wake up call for Europe, about the fact that they’ve been clearly freeloading off the United States for 75 years, and that has to come to an end. And slowly, grudgingly, they’ve come to that conclusion. And now, all of a sudden, with a bang, they’ve finally woken up, and the light bulb has gone off, and they realise that they’ve hollowed out their whole defence industry sector to the point where they can’t even make as much ammunition as a North Korea. Okay, this is a bit of a problem, so that’s been a big wake up cause. So I think this is a fundamental shift that defence the defence industry is going to become. It was already becoming a priority for most of Europe, not all of Europe. The Spanish, for example, said, Hey, we’re not going we’re just not going there because our social welfare state’s too important. But to me, that’s a false premise. It’s not an either or proposition between the caring economy, the welfare state, and defence. You have to do both. It’s a question the balance between them and Europe didn’t have the balance right, and now it’s shifting to rebalance. And that means defence industries, anything to do with defence, broadly defined, is going to get a massive stimulus. And we’ve already seen that, particularly in Germany. I mean, it’s just amazing how much the Germans are now putting into the defence sector, very late in the day. But it is definitely a trend that’s going to consolidate and accelerate, I think, over the next five to 10 years.
Wouter Klijn 12:56
And I read this morning that Trump was apparently has said to Zielinski, when he was on the phone with him that where he basically asked the question, if we provide you the weapons, would you strike Moscow or St Petersburg? And it made me think, could this conflict grow into a broader conflict, potentially a New World War?
Alan Dupont 13:19
Look, a lot of people think that it could. I’m not one of them. I’ll tell you why. Putin’s calculation is that he could get away with the invasion of Ukraine, because the West would never stand up to him, because he had nuclear weapons, so he rattled the nuclear weapons case for the last four years. But the reality is, if Putin was foolish enough to use nuclear weapons, it would be a suicide note for Russia, because he’s not the only one with nuclear weapons, right? Yeah, so that would actually destroy his dream of making Russia great again. What’s the point of blowing everyone else up, if you blow yourself up, right? Yes, I think they’re always been constraints on what Putin will do in Europe, and the fact that the Europeans and and even the US were reluctant to take him on only encouraged him to keep pushing the envelope. But if the Europeans are standing up and Trump is starting to reverse his position. Now suddenly the task of, you know, making Russia great again becomes much more difficult and counter productive for Putin’s own rule. So my argument is contrary to the view that we should concede to Putin the most effective way of stopping him from doing what he’s doing in Ukraine and in beyond is to be stronger, to deter him and make him realise that he can’t win. And I think Europe and the US combined are capable of doing that. It’s not their economies combined. Economies are 10 times the size of Russia’s Russia’s economy. Is only slightly bigger than Australia’s, so it would be completely foolhard here for him to study. Then go right now, I’m going to invade Europe, you know. So, so that’s why I don’t think it will escalate. My concern is we’ll go into this. No, you know, sort of no man’s land. Of nobody’s winning, but nobody’s losing sufficiently to bring about a peaceful settlement, which is what everybody wants. Yeah, it has a rings as well of the old Vietnam War to it, where it was a much longer drawn out conflict than people expected, correct? Yeah, yeah, interesting. So what’s, what’s the role of China in all of this? Because we have seen some support from China for for Putin. There’s also, of course, concerns around the Taiwan situation, whether that would escalate and how that would draw other parties into the conflict. What are your thoughts around that? So my view is that China is a greater problem for democracies than Putin for the simple reason that China is the only near competitor to the United States. It’s an emerging superpower, and it It dwarfs the capacity of Russia in any field, economic, financial, militarily, and why I see China as a problem is that fundamentally, its values and interests are completely opposed to those of Australia’s and the US and most democracies. Now that’s not a reason for not trading with them or having a stable relationship with them, but there are clear constraints about how far Democrats can go in having constructive relations with China. If China continues to be as assertive and aggressive as it is globally, trade coercion against Australia, what it’s doing in the South China Sea. I mean, I could give you a whole list that. So it’s not that I’m anti China or anti anti Xi Jinping, but I just see, think that the scope for a fertile relationship with China is limited by China’s China’s the the nature of China, China’s system and its actions. But now the second point is this, China plays on a global chessboard, and all these conflicts are connected. What happening in Ukraine is clearly connected to to the Indo Pacific. China is supporting Russia. It’s pretty clear. It’s been careful not to go too far, but it’s providing all sorts of material to Russia in the war against Ukraine. It’s flooding Europe with cheap goods, subsidised goods, okay? It manipulates the market. Critical minerals is a classic example. One of the reasons why our critical minerals miners is having struggling with prices, because China has artificial depressed them to keep them to keep them out of the market. So all those sorts of things are going on in the economic sphere, and then in the financial domain, China would like to see the US dollar dethroned and replaced by preferably by the yuometer knows that that won’t be possible, but certainly by a bricks currency, or some other alternative that doesn’t favour the United States. So is that in Australia’s interest? I wouldn’t have thought so. But anyway, that’s debatable one, I suppose. So my bottom line is that China wants to be number one. It wants to be the preeminent state in the system. It’s entitled to have that aspiration. But the problem for the rest of us is, what does that mean for the rest of us? If China’s going to be number one, well, then we’re presumably going to be number 234, and five, right? And is that, if you’re happy about living in the China world, that’s probably great, but I personally would not be.
Wouter Klijn 18:54
So how do these tensions interact with sort of, the broader trend of de globalisation? And I think you also, more recently, mentioned a term geoeconomics. How does that all tie together?
Alan Dupont 19:09
Yeah, okay, well, the concern of a lot of people is that, okay, if there’s not a game changer here, we’re going to see a bifurcated world, okay, the sort of a bit like a rerun of Cold War, of a Cold War, and a lot of people think it’s just cold war too. And I I’m sympathetic that I don’t know quite whether it’s a cold war, but it’s pretty close to it. So if China wants to be number one, that means China has to be the dominant economy. It has to be the rule setter, rather the rules taken. It’s all about establishing the rules and enforcing the rules. So it is conceivable the world could divide into, you know, a pro China world and a pro kind of Western world, and they grow further apart, and then we start to have serious decoupling. Of the economies, which has already started, we start to get protectionism, right? We’re seeing that play out. I mean, Trump is the chief villain here with with his tariffs, but also China has been doing similar things in other ways, right? So both are responsible for that. So a divided world is not a good word for Australia to live in, because we want the benefits of both, as do most other countries. So if you have to choose between two different systems, that’s bad news. So you just get a polarised, deglobalized world where we have to forfeit a lot of the economic benefits of globalisation, which were considerable, and then it starts to play into very it plays into everything, including technology, for example. Now AI, like is a classic example. So everybody goes around and says, whoever is the dominant player in AI is the, is the key technology of the future will rule the world. Putin’s then she said that. So there’s a arms race going on, the technology space. AIS is the crown jewel, if you like. But across the board, quantum, all, sort all, every major technology that’s fundamental the future economy, China wants to dominate. It said that clearly, and so the US has said, Well, hang on, we’re not going to let you dominate, because that means we’re number two and we’re subordinate to you, so so that. So the in the technology space, there’s a war. There’s an undeclared war going on. People call talk about the tech war, and there’s a lot of truth to that. There’s definitely an economic war going on, and a financial one as well. War as well. Now they’re not what I use the term war. I use it loosely, you know, it’s definitely competitive, adversarial behaviour. It’s not it’s not collaborative behaviour anymore. Yeah, and, and unfortunately, the trend is more of this rather less of it. So how do you break that nexus? Nobody’s got the answer. My feeling would be somebody’s going to have to win and come out on top, and that’s the way it’ll happen.
Wouter Klijn 22:02
Yeah, I think in this financial war, you’ve spoken about Trump’s willingness to use the US Dollar as a weapon, can you explain a bit your thoughts around that?
Alan Dupont 22:13
Yeah, well, up until 2016 before Trump was elected, the first time, the US was very reluctant to use the principal tool, and it’s geopolitical Toolkit, which was the US dollar. Yeah, that was a no no. Obama and predecessors didn’t want to go. They didn’t felt they had. Feel they had to go there, because they felt they still had. They were leading China comfortably. But as China developed and started to close the gap. When Trump came to office, he recognised, unlike his predecessors, that the the main sort of leverage that the US had over China was this was its reserve currencies. The US Dollars reserve currency status, which means, you know, most of the world’s international transactions in US dollars overwhelmingly. So I think the yuan is still only about 4% of of international transactions. Us is about 60 something percent, right? So, so Trump decided to weaponize the dollar for geopolitical reasons, and he’s any on the second time around Trump, 2.0 he’s continuing with that. For example, he’s threatened the bricks, the bricks plus group, that if you guys go down the road of a bricks currency, we’re, we’re going to whack 100% tariffs on you. All right, so he’s using every tool at his disposal to reinforce America’s position in the world, just as China has been doing for the last 20 years. So he’s taken a life and lead from China’s book, right? Yeah, this is unheard of for democracy to think like that. But that’s, that’s the way Trump’s gone. And in a way, in my view, he had to go down that route because China was playing a different game to everybody else, and that meant everybody else is going to lose now, China subsidises everything. Strategically, it’s China Inc. There’s no such thing as a private company, as we would understand it in China, everything is subservient and subordinate to the will of the Chinese Communist Party, and Xi Jinping pulls the Levers as required for geopolitical purposes. So us is starting to do the same thing, and this is where geo economics comes in. That geo economics essentially means the use of economic and financial power for geopolitical objectives. It’s been done before. If you go back to the 1930s no if you go back even further to prior to World War One, Germany, Imperial Germany, did it and then. Hitler’s Germany did it, and other countries have done it historically. It’s not new, but just the way. But the capacity to weaponize your currency in a globalised world is far greater. Okay, so that’s so I don’t this is we’re going to see more of this in the future. I have no doubt of that. Yeah, it has turned out that especially the tariff weapon has is proven to be quite powerful. I mean, Trump has threatened, in many different ways to put different tariffs on then he, you know, goes back a little bit. But then there’s, I think, with most countries still a 10% tariff China is higher.
Wouter Klijn 25:39
Was it sort of clear that this could be wielded to such a great extent.
Alan Dupont 25:44
So I think that people misread Trump views on tariffs. I actually wrote a piece saying this when, when he late last year. So a lot of people thought, one, that he wouldn’t do it, that is impose new tariff regime. And secondly, that even if he did, it would be largely ineffective, because they only saw this being wielded in a kind of narrow economic sense. What they didn’t understand that he’s using for political and geopolitical reasons, right? And he’s he’s come out quite clearly and stated that so not only does he think that the US is going to make more money from this and level the trade playing field, because he feels the US has been ripped off by all these people countries that are running large surpluses, but he sees tariffs as a geopolitical tool to leverage America’s strengths to get what it wants. And so he’s using that as a big stick to beat people on the head. Now everyone’s throwing up their hands saying, This is outrageous, which it is okay, and, and, and then there was the a period of time when they talked about taco, taco Trump. You know that he talked a lot, but didn’t deliver. Okay, but then, after he struck Iran’s nuclear facilities, no one’s talking about that anymore. So the point is, Trump now people realise that he will do it. Yes, he might back off, he might play around with timings, and so on. But the end of the day, the world is going to be confronted with the highest level of tariffs that we’ve seen since the 1930s minimum level, base level, 10% probably on average, is going to be closer to 15 to 20% on on most goods traded with the United States. So that’s a major imposition on free trade, and it’s very, very consequential in a negative way for Australia as a trading nation. It’s a big problem.
Wouter Klijn 27:48
Yeah, for sure. So you mentioned Iran there, and it made me think you spoke a couple of weeks ago at our insurance investment forum, and that was before Israel launched rockets on Iran. And you already reflected then that there was this concern about the level of enrichment that Iran could do and whether that would lead to a more more conflict in the region. And then, not that long after it actually broke out. How did you predict that?
Alan Dupont 28:20
Well, you know, as I think I said to you once, that it’s always dangerous to make predictions, especially about the future. Okay, so I usually don’t make projection predictions, but what I what I do do, is draw people’s attention to things that have a higher probability of happening than other things, right? So I think the time, I think it was about two or three days before the strike, I could see that there was a window, a brief window of opportunity for Israel and the United States to basically do severe damage to Iran’s nuclear enrichment facilities. And that window would close reasonably soon, and the the window had opened for two reasons. One, because Israel had taken out a lot of Iran’s air defence systems in a previous attack. And secondly, the Israelis had inflicted enormous damage on Iran in other areas too, and its proxies, and so was relatively weak and right for the taking. The only thing was, how do they get Trump on board? And I think was sold to Trump on the basis that, hey, you can do it, and if you do it, you will have done what no other US president has ever had the guts to do, because Trump likes that kind of talk, right? Yeah, yeah. And we can take him out, and you’ll be a hero, right? And we’ll clear the path for you. So, I mean, it was, and then Trump will just basically said, Okay, we’ll do it, much to a lot of people’s surprise. And then, of course, we’ve had the subsequent debate about, well, what damage is really done, and can, can Iran get nuclear weapons very quickly, again, etcetera, which is. Separate issue. But the point is, in doing so, Trump demonstrated that when push comes to shove, he will take action, and so it’s best to actually take him at his word and not just be dismissive of him as just all talk no action.
Wouter Klijn
So no taco Trump then?
Alan Dupont
well, I think that was always a very foolish acronym to be honest.
Wouter Klijn 30:23
Fair enough. So I want to go back to earlier comment you made about technology and the role of technology in geopolitical tensions. Potentially a technology war AI plays a big role in that. And I think you’ve mentioned earlier as well that there is this report or paper by the Australian strategic policy institute that looks at key technologies, and it assesses 44 key technologies, and basically concluded that China is ahead on 37 of them. And if you look at some of the main ones that China is ahead on, it includes like advanced aircraft, engines, drones, advanced robotics, anonymous systems, they all seem to be technologies where one AI is important in but also that potentially have a dual use and a military angle to it. What should we read into this?
Alan Dupont 31:18
I think what the US has has read into it, and and it should read into it is the fact that not only has China closed the gap on a whole range of strategic technologies, but it’s possibly ahead in several and the gap may actually widen in the future because of the enormous resources China’s putting into this. I mean, they have, I think they have more engineers, software engineers, and the rest of the world put together. So they’ve got just, it’s just the sheer magnitude of the effort they’re putting into the stuff is closing the gap. And so the consequence of this is that if they should come to dominate all these fields and increase the gap, then then they’ve won the race to be number one. I mean, you know, you can’t come back from that if you get that, if they get too far ahead now. So the next thing I’d say is that that was one report by ASPI. It’s a It’s authoritative. It’s well researched. I’ve had a look at it. But there are others who say, Well, they’re not ahead in all those areas, or they’re not as far ahead, and it’s a bit bit more of a line ball. My own view is that China has got its nose ahead in the majority of the key technologies that will determine the future, the future world, but in the most important one, AI, they are not ahead, not withstanding deep seek and all the hyperbole around some small, little Chinese startup with a few million bucks somehow outperformed all the the monolithic tech companies, big tech that are spending billions of dollars on these frontier, you know, sort of models. I don’t think that has happened, but I understand that China has certainly got, you know, impressive capabilities growing all the time. But I would say my own assessment is that the US is probably, probably three to four years ahead across the AI macro system, and it has no intention of losing that edge. So watch this space.
Wouter Klijn 33:27
Yeah, yeah. So the US still ahead in AI China is quite good in sort of electrical vehicles. Do you think that that could cross over into, you know, military applications, where you combine electric vehicles, anonymous vehicles, with drones and potentially longer battery lifespans, where it becomes a problem?
Alan Dupont 33:50
Obviously, they’re all connected. I mean, there’s a term that they use, the tech stack, yeah. So what that means is, if you really want to be a dominant player in any particular space or silo or sector. It’s no good just producing the best widget for this year, you know, or the best bit of software for for last year, you’ve got to actually dominate the whole sector and all its manifestations. So the tech stack, you know, so, like in an EV, so it’s not just the car, the drive system, it’s sort of the robotics, the battery, you know, the battery technology, etc, etc. You need to have pull that together and be leading edge in all that, right? If you really want to win, that’s what China’s done, and it’s very impressive, you know, you got to give them full marks for that. Whereas we, the rest of us, are sort of, you know, have a much more tactical, short term approach to these things. The Chinese take losses, subsidise and they for 20 years until they actually get to the point where they become, they occupy the dollar. On the position. That’s the Chinese modus operandi right now. It’s only dawned on its competitors, probably in the last 10 years, that’s how they operate. So on scrambling around to catch up. But we don’t have the capacity, the monopoly capacity, that the Chinese state does as an authoritarian state, that they can just decide and Xi Jinping can sit down with his Politburo and go, we’re going to do A, B and C, and it just rolls out, yeah, you can’t do that in the West. So we have to come up with an effective counter that plays to our strengths. And my answer to that is, okay, just as China has leapfrogged a lot of technologies to become leading edge or close to it, we need to leapfrog the tech stacks that China has assumed will be in place for the next 10 or 20 years. For example, EVs and battery technology. What happens in EVs? The kind of EVs we’ve got today aren’t the EVS that everyone wants. In 20 years, there’s new forms of breakthrough technology that transformed it. Batteries are different, no matter what. Even need batches and some other drives, a drive system critical minerals. You know, that’s another area where China has a dominant position. But we need to ramp up in terms of producing magnets, the neodymium precio Dean magnets, which drive everything, getting from wind turbines to cars and to the military side. So this is your point about dual technology. People talk about, oh, the in the defence area or in this area, and that. Sorry. They’re all connected these days, right? So if you look at defence spending, most of it goes on what, what I would call dual use infrastructure and technology. I’ll give you a quick example, a ship lift. Lifts ships. Okay, it lifts any kind of ship by weight, not because it’s a Navy ship versus a merchant ship or a fishing vessel. So, so if the Navy wants to lift the Navy ship, why should it build a navy only ship? Lift that, you know, a billion dollars, when it can use a civilian ship, lift that already exists. So when China builds the world’s biggest ship building industry. Produces 50% of the world’s big ships. All that capacity is there for their Navy as well, and that’s why they’ve got such a large and growing navy. We in the West, the US, produces about 2% of the world ships. It cannot build enough ships. Honey builds any ships can’t build enough submarines. You can only build just under one submarine a year, nuclear powered submarine. The Chinese are cranking out two or three of these a year, right? So you can see how these dual use capabilities energises and strengthens your military capabilities. That’s how the US won the Second World War. The West, it out produced Germany, China is out producing the west by orders of magnitude on just about everything. And so therefore we have to have an asymmetric status strategy where we think, okay, we’re not going to have a big, massive conveyor belt churning out ships or whatever it is. We’re going to have 3d printers. Okay, lots of 3d printers, all decentralised, all producing bits and pieces for the big ship or the submarine. And that’s starting to happen, but we need to ramp that up, scale it up. And it means you have to have some manufacturing capacity to do that.
Wouter Klijn 38:41
When you look at sort of these developments in these trends, and then you take into consideration what happens in the equity markets, and I particularly think of the US equity market we’ve seen in the last couple of years, that the rise of the Magnificent Seven on the back of AI, but there’s clearly, you know a broader trend going on there, where you know technology becomes more and more important. Do you think that the technology war and the war for chips and AI did that has correlations with the rise of the Magnificent Seven, and going forward, that technologies will be probably the drivers of equity markets, or is that a stretch?
Alan Dupont 39:23
There’s some interesting points there. So the way I look at it is, Look The Magnificent Seven, you know, are clearly, they’re all American, so they’re all, you know, the US wants to see their dominant position maintained. But the problem is on the social side of the house, there are real concerns about monopoly control, about protection of privacy of our data, etc, etc. So, so it’s not like the US is 100% any us, even the Trump administration has. Concerns about them becoming too powerful. So what is, again, the balance between having leading edge big companies with huge resources that are essentially American or Western, you know, driving the tech revolution has shifting from China’s. So yes, you want to see more of that. But how do we get the best out of both? And how do we put sufficient controls into protect privacy, which is important in democracies. The Chinese don’t worry about privacy. It’s not a factor for them. Okay, so, so how do we get that balance right but still win the technology race or be competitive anyway, in the technology race against the country doesn’t have to worry about a lot of things that we worry about, so it has much more of a free hand. That’s a real dilemma. And you can see that playing out in all sorts of ways. And then the final point I make on this in terms of dilemma, is what the what the US realised in the first Trump administration when they started to put blacklist some Chinese companies like Huawei, for example, to prevent them attaining a monopoly position or getting unfair advantage, what they found was they were shooting their own economy in the foot because so much of the export revenue earned by the Magnificent Seven came out of China. Yeah, Nvidia, for example, is a classic example sell, you know half? Well, I don’t know about half, but certainly a large proportion of chips are bought by China. So Nvidia says, Well, hang on a minute. If we, if we sort of now blacklist, essentially China, we’re going to lose a quarter of our revenue. How does that going to work? So you’re going to subsidise, you know? So these are the problems you get. And the other thing is, if you completely cut China out of the market, then the Chinese will be incentivized to develop their own which is what they’re doing. Yes, what’s the balance? You know? So, I mean, I’ve got an answer for that, but that’s, that’s the that’s the question, that’s a problem.
Wouter Klijn 42:09
Yeah, yeah. And I think we’ve seen already some of that. Again, earlier this week, some of the bands were lifted on the sale of certain high-end chips. So Nvidia is allowed to sell certain chips again to China, and immediately stock price goes up. Correlation there, right?
Alan Dupont 42:29
Yeah, exactly. So it’s not easy. It’s very complicated world out there now.
Wouter Klijn 42:33
It is indeed well. Alan, thank you very much. I know you’re very busy, so I’ll leave it at this, but we could talk for hours on end. But thank you very much for your insights, and it was great to talk to you as always.
Alan Dupont 42:46
Okay, thanks, Wouter. It’s a pleasure to talk to you.
Wouter Klijn 43:02
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe. The [i3] podcast is available on Apple Podcast, Spotify, Amazon Music, YouTube Music, or your favourite podcast platform.