Setting the Stage: Balaji v Zeihan
Embers Vol 1: State of Affairs, Worldviews, and Balaji v Zeihan
Welcome to Embers – I’ve spent the past few weeks building a backlog of ideas to share. Moving forward you’ll see a more consistent cadence as I share what I’m thinking about.
One note on structure: some themes I introduce will have a short description; these are for ideas that I will be visiting frequently.
Writing in the Dark
When I first announced Embers, I mentioned two challenges I have when writing:
Writing is really hard. It's this battle between repeating what others wrote and sprinkling in your own ideas. If you're like me, it's even worse because you want to exhaust every possible angle before you publish, and this usually means you write way too much.
Writing is also hard because you have all these thoughts swimming in your mind, but you have to physically punch the keys in order to pour them out. The problem is that this is more of a drip, since you're frequently searching for the backspace.
There's one more challenge that I hadn't mentioned – refinement.
It's hard to share your work if you don't think it's ready, but it's also important to recognize that writing is never truly complete.
Withholding your writing is like building with LEGOs in the dark. You can feel each piece in your hands, and you can hear the swirling of pieces as you move your hand through the pile, but you can't really see what you're building.
After a while, you need to hold up a light and show others what you're working on. It might not be that good, but at least it’s not sitting in the dark.
So, after spending the past few months accumulating a collection of thoughts, I'm grabbing a handful of embers and holding them to the light.
Writing, like most skills, is an intensely iterative process. If something stands out as especially good, or exceptionally bad, let me know! Coachability is paramount to performance, and I wouldn't have gotten to where I am today if I couldn't handle feedback.
Finally, this is an experiment for me, in the truest sense of the word. Usually, I have an understanding of where I'm going and how to get there. This is much more amorphous, which feels strange. But life is an unending journey of figuring things out along the way, and this seems like a useful way to explore.
As I move forward you'll see a more consistent cadence as I share what I'm thinking about. I’m excited to learn with you along the way.
State of Affairs: This World Isn't Sustainable
In order to be a successful investor you need to understand the landscape. You need to understand how the world works and how it’s changing. State of Affairs is an ongoing theme exploring how we got here, and which forces are influencing where we’re going.
A number of people smarter than I have proposed that the world order of the past ~80 years is coming to an end. This is important because decisions have been based on a default set of assumptions about the world, and if this world order changes, then these decisions will need to be changed as well (and quite rapidly).
After World War II, the world had to recalibrate, and the U.S., being the largest unscathed global power, took the lead. Most of the world was physically destroyed, and countries needed help rebuilding, which meant they needed growth.
Adam Robinson explained recently on The Business Brew podcast that there are two ways to grow: you can grow 1) your population, or 2) your spending.
The post-war baby boom addressed the first driver; the American Dream addressed the second. Adam expands:
America wasn’t destroyed, so we could export our vision abroad. The dream was: I want what mom and dad had, I just want more of it...
...and I’m willing to go into debt to get that.
The debt part is important, because it’s a defining characteristic of the current state of affairs. As individuals, corporations, and nations, we’ve pilled up enormous amounts continuously from WWII.
Debt is useful when you can grow your way out of it. That’s what the U.S. did following WWII. The challenge is what happens when you stop growing.
I have some other ideas relevant to this topic I will cover in future volumes, but for now I’ll just say that what matters is that demographic trends across the world are pointing to population collapse, and with it, reduced consumer spending. The two biggest drivers of economic growth are reversing.
Balaji v Zeihan | Technology v Geography:
Part of my focus on State of Affairs is identifying worldviews that tell us how the world is changing so that we can figure out what will happen next.
The thesis I've been spending the most time on recently is a more expansive one: I'm finding the middle ground between Balaji Srinivasan's and Peter Zeihan's worldviews. Balaji is a techno-optimist who previously was the CTO of Coinbase, as well as a former partner at Andreessen Horowitz. Peter is a geopolitical strategist who’s three books detail how America rose to power, largely due to its geography.
Balaji believes technology is flattening the world, while Peter asserts that geography and geopolitics will once again dominate world outcomes over the next few decades, after being largely ignored for the last 80 years.
There's truth to both of their visions, and I'm keen on figuring out how things will shake out by evaluating which factors to weigh more.
For example, if you agree with Peter that global free trade is becoming vulnerable, then you'd likely have already begun repatriating supply chains, ahead of the recent activity since the start of the pandemic. The countries with more resilient manufacturing will survive in an increasingly volatile geopolitical landscape. But, what happens when 3D printing reaches sufficient scale? Would that obviate many of the geographic and logistical constraints for supply chain repatriation?
These are the types of questions that I’m trying to answer.
In order to do that, we need to see the world through their respective eyes; as such, I’ve been spending more time consuming geopolitical and technoprogressive books, essays, and podcasts. As I’ve immersed myself in both worldviews, I’ve begun to see more events in a different light.
Geopolitics in Action
Geopolitics is intellectually alluring because it provides a simple yet seemingly effective way to understand the world. The simplicity serves as a strength, but also has its limitations.
It does, to some degree, account for 0 to 1 technology changes, though less than I would like, hence the primary purpose of Balaji v Zeihan.
But the reason I still take it seriously is that geography is one of the last great nemesis of humanity. We’ve waged war and won against most of our foes - plague, pestilence, and predators for example are largely solved problems.But we haven't won this geographic battle yet.
We have taken some victories against geography. The railroad condensed our cross country treks, the telegram transmitted our transcriptions, and the Internet connected all of our cohorts. And yet, even with these advances, geography is still a very real obstacle for us - in the literal and figurative sense.
For example, I recently finished Prisoners of Geography, which was a fantastic introduction to geopolitics. A week after I finished, the recent Israel Palestine conflict broke out in Gaza.
I am terribly under-informed on this topic, and I'm not exploring the merits of the conflict. Instead, I'm sharing a passage in the book I had highlighted that week prior:
The West Bank is almost seven times the size of Gaza but is landlocked. Much of it comprises a mountain ridge that runs north to south. From a military perspective, this gives an advantage to whoever controls the high ground of the coastal plain on the western side of the ridge and the Jordan Rift Valley to its east. Leaving to one side the ideology of Jewish settlers, who claim the biblical right to live in what they call Judea and Samaria, from a military perspective the Israeli view is that a non-Israeli force cannot be allowed to control these heights, as heavy weapons could be fired onto the coastal plain, where 70 percent of Israel’s population lives. The plain also includes its most important road systems, many of its successful high-tech companies, the international airport, and most of its heavy industry.
This is why I'm inclined to believe there's merit to geopolitics. Now, you should be weary of ascribing geopolitics to preordained outcomes, but you can use geopolitics to understand why complex things happen.
Productivity improvements are another way you can grow (make more using less). I think this will be of significance in the next few decades as demographic changes and spending behavior put downward pressure on growth. Automation is the likely winner here.
Of course, COVID-19 illustrates we haven’t completely defeated these enemies. But overall, we’ve been able to largely triumph against these examples.
Productivity and automation....the incentive to invest in productivity-increasing equipment is considerably driven by the ratio of two quantities: labor cost, and cost of capital. If you're paying $25/hour and the interest rate is 4%, there will be a lot of projects that make sense that don't make sense when you're paying $4/hour and the interest rate is 8%. (There was an interesting study of differential adoption of the Spinning Jenny in England, France, and India under the influence of these factors)
Historically, there has been a benign positive feedback loop in the US between mechanization and wage rates. This loop has I think been to some degree interrupted by offshoring.
Anticipating Part 2, Grant!