MIKE GREEN: Mike Green. I'm here in Marin County again, and eventually I'll get a chance to pick up and travel. One of the first places I look forward to going is down to Los Angeles to see my friend Marko Papic. But Marko has been kind enough to join us on screen. Marko, you're the chief strategist slash super intelligent geopolitical thinker at a firm that's near and dear to my heart, the Clocktower Group. Can you just give us a very brief background on what you do at Clocktower and how you've come to the seat that you're in?

MARKO PAPIC: Yeah. I was in sell side research before this. I worked for BCA Research, which is the macro firm that focuses on investment research. Before that, I was in geopolitical risk consulting. So, I come to finance from a little bit of a different background, been to a lot of political risk, and then took that to sell side research. Then I wrote a book, which just came out, bookending that research experience, and then, oh, there it is. Look at that.

MIKE GREEN: Here it is, right here. Geopolitical Alpha, which has one of the best intros of any finance book that I've ever read. It is on par with some of my favorite stories in terms of the dynamic of being called in as a very young employee to answer the question of how important it was that the German President had resigned, and your answer was?

MARKO PAPIC: My answer was, I don't know who the German President is. And, yeah, that's how I started off. That was actually the moment in my career when I realized that the political analysis worlds and the finance worlds were really speaking to one another, because the hedge fund that called me in to answer this question was-- this is like 2000 and this is early in the Euro era crisis, so there was a sense that this could have perhaps been important and relevant. My argument was like, look, gentlemen, I had no idea who the German President is. And the answer of the other side was like, well, that's because you're not a good analyst.

I was like, no, no, you don't get it. It doesn't really matter. But yes, thank you. Yeah, that was an interesting-- I tried to make the book funny, because it's not really a forecast book. It's more a framework book. And who wants to read a framework book? They're boring.

MIKE GREEN: Well, it's interesting, because I would agree with the description. It is a very fun, enjoyable read, particularly for somebody who knows some of the components, but also because what you're hitting on there, while it sounds flippant, is actually a really, really important dynamic. That sounds incredibly powerful. The German President has resigned. That must be something important, but the reality is that the German President, you described in the book as being similar to Queen Elizabeth.

It's largely a figurehead. It doesn't carry the same role as Angela Merkel, for example. It's just not the same job. And so, it sounds really important but one of the biggest challenges in the macro space where you're dealing with an incredible onslaught of data, or information that is coming at you all the time, is exactly that issue, to figure out what is relevant. And part of your framework is, if I don't know who the German President is, there are two choices. I am either terrible at my job, or it's really not that important and this is being brought to your attention, because the news wires have nothing else to say at this point. That's really the core of your message under that that framework, correct?

MARKO PAPIC: You couldn't have put it better. All I would say is, yeah, there's a level of knowledge that you have to have as an investor, and I think more and more, politics and geopolitics matter, obviously in a self-serving way, I think so. But I would also say that if you focus on the material world, the world of constraints, the world of actual leavers and fulcrums that can move the markets, rather than the psychological preferences of leaders, I think that you will just make your life easier and I think you'll have a more investment relevant approach to thinking about these nebulous, political issues.

MIKE GREEN: And so, this meshes very well with the way I tend to think about the world, which is, and people have heard me describe it this way, that a market doesn't measure or provide you with a history of information. It provides you with a history of constraints effectively, people who for one reason or another had to buy and sell, whether that is because they had a mandate. That said, when you receive cash you will buy and you will buy in proportion to XYZ or when you receive a redemption or a margin call or a tap on the shoulder from a risk manager, etc., you're going to be forced to execute.

And I think one of the things that I'm discovering, and it certainly fits with your overall message that macro is gaining in importance, is that fewer and fewer people have true discretion. The world of the Paul Tudor Jones sitting astride or the George Soros sitting astride the macro world, and being able to say, I'm going to do whatever I want, is being fairly rapidly replaced by a world where there's very few true discretionary traders that are not encountering constraints in one form or another. Does that feel fair?

MARKO PAPIC: Well, at Clocktower, we tried to seed discretionary macro managers, so I hope that you're right. We feel the same way, and the reason I say that, I hope you're right is because I do think that there's still value, as you know of course. You've managed money, and you're a pro so I think you would hope that you're right, because it will increase the value of those truly discretionary managers.

MIKE GREEN: That's certainly my sense, is that ultimately, that opportunity for alpha will emerge as you're able to truly think cross asset and you're able to think in the context of risks that exist. But there's also challenges, because those of us who have been trained in the classic discretionary relative value of framework which is those typically what you're focused on, it has been subsumed in some ways by some of the factors that you've heard me talk about, or that you have talked about in terms of the geopolitical dynamics, whether that's a Fed response function, a consensus moving from austerity to surplus, shall we say, large assets, maybe the better alternative to austerity, and the geopolitical conflict between China and the United States.

And that's an area where you and I have had some pretty significant conversations in the past couple of years. Your general characterization is that yes, the US and China would like to be able to disaggregate themselves. There's compelling reasons under national security frameworks that the two need to move towards separation. They're ultimately not compatible, but they're caught right now. And you probably better than anyone else, I know, have articulated this, that there really is no alternative, COVID brought this out in spades, where when the US decided, hey, PP and E is really important, we suddenly had to turn to China for all of our suppliers, many of our pharmaceuticals, similar type dynamics.

Where is your thinking today in terms of that framework? Can China and the US move apart more aggressively? Are they moving apart, or are they locked in this dance that's going to keep the world in a geopolitical unity for an extended period of time?

MARKO PAPIC: Well, I always start off with a theory and the big picture. And so, one of the things that the viewers of Real Vision who have seen us spar on this before will know, I will start off with what is the distribution of power in the world like? I start with the assumption which could be wrong, that the world is more multipolar than bipolar or unipolar. A multipolar world simply means that there are numerous countries that can pursue their national interests, which includes economic interests, independent of one another.

Why is this significant? It's significant, because we know from pretty robust research and political science, like scientific research and political science, which is rare. As a political scientist, I can say very little science there. But a game theory shows that if you have a multipolar distribution of power between states, it's very difficult to get complete bifurcation. Yeah, if you have a multipolar distribution of power, it's very difficult to get complete bifurcation. And the reason is simply that allies cheat.

I think the first time you and I talked about this was 2019 and at the time, I said it was going to be very difficult for the US to compel its allies, to follow through on some of the Trump administration policies towards China. Now, in some ways, that was wrong. For example, Huawei, and anything related to 5G. I think compliance has been slow, but generally moving in the right direction. But in other things, compliance has been terrible.

We know, for example, that Samsung is building two different production lines, one for China, one for US to avoid some of these sanctions. You have a lot of semiconductor CapEx firms, Netherlands, Japan, that initially were quite in line with the Trump administration policies but have since abandoned them. And that has created pressures domestically in the US, because it means that very significant portions of the US industrial capacity will lose out, not to China, but to allied companies, and that will impact American geopolitical power.

What do I mean by that? Well, if an American semiconductor CapEx firm doesn't get a contract in China, it doesn't get the revenue. You can't spend that revenue in R&D, it can be taxed by the US government, which can then use those resources to develop more robust containment infrastructure around China. And so, in a multipolar world, because of this ally drift, you get continuous trade.

A chart that I brought with me today for you is a historical example of this, and not just theoretical, but you can see two charts that I brought. On the left, you can see that before World War I, UK, France, and Russia all traded with Germany right up until the start of the war. And on the right side of the chart, you can see that Japan and the US traded all the way up until the start of the Second World War. So, this is a good example for us where I think we're headed.

You can also use the example of Japan and China, which have had a very acrimonious relationship for a long time, but it's specifically after the Senkaku Island dispute, 2010 to 2012. Yes, Japanese FDI and exports to China peaked 2011, 2012 but they haven't collapse since then. They've stabilized. And so, I think the world we're entering is one where you will see continued trade and continued investment in the two economies, but a bifurcation in specific technologies that I would call 21st century goods.

MIKE GREEN: When you think about that type of dynamic, there's an interesting challenge, because you're simultaneously building two production lines where a larger production line could serve this two separately, together effectively, with higher productivity and higher efficiency, and that broadly has defined the era of globalization. We've been able to move to economies of scale where a single large semiconductor facility can produce for the entire world. Now, you're describing a scenario in which two effectively medium pizzas replace a single extra-large pizza.

MARKO PAPIC: That's a great analogy. I'm going to steal that.

MIKE GREEN: Yeah, you should. Domino's, two for $5. Come on. The underlying features of that can be interpreted in two separate ways. When things are humming, I have two facilities now that are giving me greater robustness, reducing some of the risks of a single production facility going down, so it is a more robust creation, but it is less efficient in the same way that there's fewer toppings relative to dough in two medium pizzas versus a single extra-large.

How do you think about that in the dynamic of how the world changes, both in terms of does that create more inflationary conditions? Does it lower corporate profitability? Does it create conditions under which there is less pressure or more pressure in terms of the need to either come back together or separate?

MARKO PAPIC: As an investor, I'm just very excited about this world. Because it's a world that will be like the late 19th century, we will have to contemplate things like politics and geopolitics. I'll give you two discretionary ideas that I have based on this world. First, I think that this is not a bullish world if you're making semiconductors. You're talking about that already.

MIKE GREEN: If you're making semiconductor manufacturing equipment.

MARKO PAPIC: Oh, that's right. And that would be my first trade recommendation. The chart that I have here is a semi CapEx index that we created as a macro signpost and you can see, it's done really, really well since November. And actually, even better than like the Fangs and so on. I think that semi CapEx plays are going to do really well. That's the first thing.

The second thing that I would say as a recommendation is I think that Made in China and Made in US firms are going to do well but let me just explain what I mean. Not in every sector, just in those sectors where currently, Chinese producers lead certain consumer sectors in the US and vice versa, certain American or Western producers lead in Chinese sectors. It doesn't mean that Apple will stop selling phones in China. It just means that their TAM is probably close to being maxed out, and I think that's the way that we can construct these Made in China-Made in US indices.

That's a very exciting moment, but it doesn't mean that we will onshore completely the toys and T-shirts and toaster oven supply chain from China. I think that's just not going to happen. There'll be the selective offshoring of very, very high tech manufacturing. But as I said earlier, you're already starting to see companies break ranks. And not because they're putting commercial imperatives over geopolitical, it's not because they're subverting American national interests, if you were a US manufacturer of CapEx goods for the semiconductor industry, and you're locked out of China completely, you can't even supply them with machinery that will allow China to produce semiconductors, these 14 nanometers, which is in no way technologically advanced.

We're talking like 2014 era chips. You're going to cripple domestic CapEx, semiconductor CapEx industry, and that's not in the national security interest of the US. I think that the Biden administration, and we're already starting to see this in some of the moves they've taken, is starting to adopt, I think, what's a little bit more of a nuanced position between the doves and the hawks, I think that for the most part, you will start to see industry players have more of a say in the decisions that are made, and not in somewhat callous, flippant way that there was the case in the 1990s, where the commercial imperative just completely took over, but in a more meaningful and thoughtful approach.

That's potentially going to also reduce some of the tensions because China will not be starved of some of the technology that it requires to continue with its export-oriented economic model, it just won't have as much of an access to the most high tech of tech.

MIKE GREEN: When you think about that dynamic, China having limited access to the most high tech components, does that mean that it is going to be onshored back to the United States? Is it going to be redirected into "neutral" countries like a Korea or a Taiwan? How are you thinking about that?

MARKO PAPIC: First of all, that's a very complicated question. I don't know if I have an--

MIKE GREEN: We only go for complicated questions, I want simple and direct answers in response.

MARKO PAPIC: Maybe, just joking. Look, I think here's what I would say. I would say that currently, there are some parts of the US strategy that I think don't make sense, and they're actually quite dangerous. I'll give you an example. Forcing Taiwanese semiconductor manufacturers to build fabs in the US is, I think, just headline political of like, yay, we did something. But it's actually quite dangerous, because it reduces the value of Taiwan to the US. So, there's an unintended consequence of wonton onshoring, without thinking about it.

And one of those things is that right now, Taiwan is like a basket with of all these semiconductor eggs of the world in it. That really increases value of that place to a lot of different entities, not just China, but US and Europe and Japan. If somebody broke this basket, and all the eggs fell out, a lot of countries in the world would meaningfully be upset about that. If the US administration for political reasons, for New York Times headline reasons, forces Taiwan to build $20 billion dollar plants in Arizona and this continues to happen, it will devalue the geopolitical and economic significance of Taiwan, which makes it less likely that anyone will care what happens to this island in the future.

You see, there's unintended geopolitical consequences of some of the moves that are happening right now. The other thing is that I think it's also very simplistic to think that China can be prevented from having high tech semiconductors, and therefore they will somehow be slowed in their geopolitical power or their eventual rise. The Azerbaijan-Armenia War that happened in Nagorno-Karabakh is a very good example of why you don't need five nanometers semiconductors to conduct a pretty modern war. Azerbaijan, the military of Azerbaijan performed, like really profoundly, much better than anyone thought using very simple drones, most of them imported from Turkey and Israel.

And I can assure you, these drones did not have the most sophisticated semiconductors in them. So, the idea that this is somehow critical and that the whole world hinges on it is, one, wrong. China doesn't need five nanometer chips to be a sophisticated military adversary of the United States. First and foremost, that's a fact, and two, by focusing on this obsessively, there are unintended consequences, they could actually be meaningfully problematic for some of US allies in the region, such as like forcing Taiwan to build our fabs leads to unintended consequences that are just unnecessary.

MIKE GREEN: I agree with that. I'm not sure that that changes the gameplay though. If I'm the United States, and I'm faced with the choice of do I remain vulnerable to a China attack on Taiwan because Taiwan is integral as a physical presence not as an intellectual presence in my supply chains, is it worthwhile maintaining that risk in order to not provoke effectively? Because this is exactly my concern with Taiwan is that if I look out two to three years down the road, a significant quantity of the IP and value of Taiwan to the United States is going to be removed.

Ironically, for China, that suggests that the right time to move is perhaps earlier, not to wait until those events are in place unless you really think that they don't care about the impacts, the ability to put the US on its back foot.

MARKO PAPIC: It's obviously always difficult to put ourselves in the shoes or the mind space of leaders of other countries, but