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Capital Allocators – Inside the Institutional Investment Industry
[REPLAY] Marko Papic – Geopolitical Alpha at Clocktower Group (Capital Allocators, EP.161)
00:55:55
Marko Papic is the Chief Strategist at Clocktower Group, where he provides research on geopolitics, macroeconomics, and markets. Marko recently published Geopolitical Alpha: An Investment Framework for Predicting the Future, an imminently readable...
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- [00:02]
Ted Seides
Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better as advocates of integrating culture research into the investment process and advancing wide moat investing. With the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their website@wcminvest.com and tune into this slot on the show to hear more about WCM all year long.
- [01:27]
Marko Popich
This testimonial is being provided by Ted.
- [01:29]
Ted Seides
Seides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and is not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle.
- [01:43]
Marko Popich
Past performance is not indicative of future results.
- [01:45]
Ted Seides
Please visit wcminvest.com for WCM's ADV and further information. Capital Allocators is also brought to you by Morningstar. What if data wasn't just a bunch of raw numbers, but a clear and decisive language to help connect investment strategies with long term investor needs in a constantly evolving market landscape. Morningstar created that language bringing order and utility to insight rich data so you can prepare for your next opportunity no matter the asset class or Market. Visit wheredataspeaks.com to see what Morningstar Data can do for you. Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting capitalallocatorspodcast.com My guest on today's show is Marko Popich, the chief strategist at Clocktower Group, where he provides research on geopolitics, macroeconomics and markets. Marco recently published Geopolitical An Investment Framework for Predicting the Future, which is an eminently readable book with colorful examples of political analysis. Marco's approach is akin to Moneyball for politics, challenging the orthodoxy of how others traditionally make investment decisions. Our conversation covers Marco's upbringing, the flaws of most political analysis and its constraints based framework. We then turn to the obvious political topic at hand, next week's US Presidential election. We discuss his views of different possible outcomes on the US Equity market, rates, tech stocks, China, private equity, ESG Europe and emerging markets. Please enjoy my conversation with Marko Popich. Marco, thanks so much for joining me.
- [04:06]
Marko Popich
It's a real pleasure, Ted. It's great to be here.
- [04:08]
Ted Seides
Take me back to how you first got interested in studying economies and politics and markets.
- [04:17]
Marko Popich
We can go way back, really way back. The first conversation I remember as a human being is my mom is giving me a bath and explaining to me why there's Iranian Scuds flying over our heads.
- [04:31]
Ted Seides
And you were where you grew up? Where?
- [04:33]
Marko Popich
I didn't grow up here, but we spent basically like six months to a year in Baghdad. My dad was working there for like an SOE from Yugoslavia. And so I'm in a bathtub and I guess my mom has to explain to me why there's a war between Iran and Iraq. That's literally the first conversation I have as a human. And then I, you know, I go back to Yugoslavia. I was going to be a football goalie, obviously. Why not? Lots of mileage. You can stay in Korea for a long time. Smart kid. And then we get hyperinflation. We get this last stage death throes of the country of Yugoslavia. And I remember, I think I was 7 years old or maybe 8. I go to my dad and I'm like, hey, to solve this inflation, why don't they just collapse everyone's salary and then interrupt the cycle? He just looks at me. Yeah, that's what they probably will do, you know. So my background is pretty messed up. I've lived all over the place, Ted, and I think that's how I got into all this stuff.
- [05:27]
Ted Seides
So where is all over the place?
- [05:29]
Marko Popich
I was in Baghdad for six to 12 months of Iraq when I was very, very young. That doesn't really count. But I grew up in Belgrade, Yugoslavia. And then in 94, as the country was really falling apart. My parents just said, look, we got to get out of here. And the only place we could think of was Jordan. We packed up two suitcases. And I remember you couldn't fly out of the country. The sanctions were so severe. We had to take a bus to Budapest, then fly from Budapest to Cyprus. And then my dad got his residency visas and we got to Jordan. And so I think I'm the one of only human beings ever to escape war by going to the Middle East. And then, you know, I spent three great years in Jordan. I went to American school. I mean, honestly, it was incredible. Probably three best years of my childhood. And then finished up in Switzerland. Three years in Switzerland, which was such a dramatic shift for a kid. And then I went to University of British Columbia in British Columbia, spent six years there, then Texas, and then Quebec, Canada for eight years. And now I'm in California. And out of all of that, I've actually lived in Canada the longest. 14 years.
- [06:31]
Ted Seides
You take all of that very international experience, very different countries, cultures. How did you think about what you wanted to do when you came out of college?
- [06:39]
Marko Popich
I didn't really have a good sense. I mean, I'm kind of like a typical immigrant kid from the third World. You're going to be an engineer, a doctor, a lawyer. And I fall in love, to be honest with you, with my now wife. And so it kind of sideswipes me for a year. And so I'm like, yeah, I'm going to become a professor. You know, money doesn't matter. Like, I'm in love. I was in academia. I was doing a PhD at University of Texas. Learned a lot there. And then we got a kid, and I'm like, oh, yeah, no, money does matter. And so I went to the private sector, and there I was in Stratfor. So Stratfor is a geopolitical analysis firm, lucky for me, based in Austin. I just walked down the street, got in there, learned from some really great, great minds like George Friedman, Peter Zihan. Learned a lot. I was hired to be the Europeanalyst, which is like being completely irrelevant. This is like 2007, 2008. Nobody cares about Europe. Europe's fine. It's integrating. Okay, let's focus on Middle east and China and all these other things. And then, boom, the euro area hits first. Actually, it was a central and Eastern European crisis with Swiss mortgages. And I suddenly find myself, in order to do my job, I got to really understand macroeconomics and also finance at a very high level. And that was Jarring to me because I just wasn't prepared for it. I had to learn on the job. And I realized very quickly during that period in 2009, 2010, that, that there is a problem between these two communities. The finance professionals and political analysts. They don't talk to each other, they don't know each other's language. And I said to myself, wow, there's a market inefficiency that I'd like to resolve.
- [08:16]
Ted Seides
What were those two languages as you perceived them at the time?
- [08:19]
Marko Popich
Finance professionals are trying to generate returns for their clients, for themselves. And so they need an answer on a certain time horizon. It cannot be like over the next 10 years, Mexico will do well. Like, well, no, I need to know where the peso is going, like right now. So I think political analysis professionals don't understand the concept of priced in. They don't understand the concept of having a clear view that can be articulated in the markets. And you may have a very cogent and elegant and parsimonious view on why Poland will do great over the next 20 years. But we got to know right now, is the entry point good is valuations there. That's what political analysis professionals don't really understand. And then on the financial side, there was this sense that politics cannot be systematically analyzed. So the only way that you can do it is to talk to some wise old hand in a smoke filled room or at a cocktail party and that those chatters will generate alpha because otherwise you can't do it. And I always found that very problematic. And thankfully I have political science graduate experience. I mean, I was doing a PhD, I took a lot of courses and I understood that, no, political science is not a science, I mean, obviously, but there are some systematic things about it that we can apply to finance. And what I also found very interesting is that investors had this really negative view of political analysis. Like you cannot do that, you cannot forecast that. But they were making bets, sizable bets in markets that themselves are inefficient and irrational and unpredictable. Because if economics and finance was predictable, if it was just a Newtonian exercise, then folks who have PhDs in finance would be billionaires. And we all know that's not the case.
- [10:05]
Ted Seides
Things that you start writing about in your book that going forward, political analysis will really matter, why is it the case that it should matter now when maybe it hadn't as much in the past?
- [10:20]
Marko Popich
So that's really the key question, right? What's different now? I think politics, geopolitics, social issues have always mattered. So it's not so much that they matter now, but it didn't. It's more that they were tailwinds for investors. They were the wind in our sails. From 1980 until 2010 you had these two really important megatrends. One was American hegemony. And so you could kind of ignore the geopolitical stuff like, you know, Azerbaijan, Armenia go to war in early 90s, much less of an issue than it is today. In early 90s there's no chance of Turkey and Russia going to war because US calls them and says, hey, cool it. So that's the American hegemony part of it. The second one is there was a hegemony of an idea which was the Washington Consensus. And it's a catch all term for everything from independent central banking to countercyclical fiscal policy, deregulation, privatization, free trade, all the good stuff that we think of when we think laissez faire. And why? Well, because Soviet Union collapsed. So if you were a left wing socialist looking at demand style Keynesian policies, you know, I mean you lost, you lost literally and you lost figuratively and ideologically. And so I think that from 1980 onwards there were these two tailwinds and it allowed the investment community to become overprofessionalized. Now most investors will say it was Paul Volcker that did this. And I have a huge problem with that. There's no way that an academic, no matter how freakishly tall they may be, there's no way that they get to crush inflation by inducing a recession and high unemployment. And so this is like a fantasy of people in finance and economics that Paul Volcker did this because he was competent, he did what he did because he was the man for the time. At the time was the politics had swung against the man style policies because they were so disastrous. In the 70s they brought inflation upon us. And so there was this political tailwind. The median voter in the US was okay with what Paul Volcker did. The median voter in the UK was okay what Margaret Thatcher did to the coal miners. There was this pendulum swing. And so we enjoyed this last 40 years of these tailwinds, the twin tailwinds. Obviously for the last 10 years I think they've been eroding and I think with the pandemic now we're in a different situation.
- [12:51]
Ted Seides
So if people need to start thinking more about this, you kind of mentioned that the idea of a guy in a smoke filled room figuring it all out doesn't work. That's generally how a lot of investors have tried to figure out the geopolitical landscape. So first, what part of that is flawed if you do have access to the right people?
- [13:13]
Marko Popich
Okay, so that's why basically I wrote this book. I want to empower investors, whether they're long term or short term investors, I want to empower them to be able to not so much do everything on their own, but also to have better conversations with folks in smoke filled rooms. The first problem I have with that approach to political analysis, you know, relying on these key decision makers or former policymakers, is that what's the statistical significance of that data point? How many people in how many smoke filled rooms and how many cocktail parties are you going to have a conversation with in order to create a mosaic of intelligence to generate alpha? So the first issue is the statistical significance. Like you need to talk to a lot of these people and that's what intelligence agencies do. They talk to sources and they spy on people. Human intelligence, human. That's how you get a mosaic. But we can't do that. We're in the private sector. We don't have the resources. The second problem, and I think, Ted, this is even more important, is that folks who are in the trenches, they will see the trees, not the forest. And so just because somebody was a deputy under secretary of state for whatever, doesn't mean that they didn't understand the constraints and the macro environment in which their view rests. And the final issue is that a lot of these people are no longer getting the tap of information that they used to get in government. And so I think that it's very problematic to reach out and solely rely on that intelligence driven model. I do encourage people to seek out experts and to seek out people who know, but quite often it's the technocrats, it's the academic who's been buried in an ivory tower for the past 30 years looking at this one issue. It's quite often the boring contact that will give you insights, not someone with a name.
- [15:05]
Ted Seides
So what is the framework that you use when you are doing your strategy work to try to figure out the world?
- [15:11]
Marko Popich
It comes down to what are we trying to do as investors. Geopolitics is just a sexy way of saying things that are not macroeconomics. It's like a broad spectrum of things, but really it's about what is the direction policy makers are going to take on monetary, fiscal policy, governance, regulatory affairs and stuff like that. So how do we do that? Well, you don't really care about what they want. That's the key. You don't try to get closer to the preferences of the policymakers. Because human preferences, yours, mine. Preferences are optional. I may want to have a Bentley Coupe gt, but I can act on that preference or not, my life will be okay. And then they're subject to constraints. So in the case of the Bentley Coupe gt, one of the constraints is my wife will see the first monthly payment and then I'll have a choice, you know, I can return it or stay married. So preferences are really not the starting point of analysis because they're a derivative. They're subject to something else. And that's something else is constraints. Because unlike preferences, constraints are not optional. You do not have a choice to choose your constraints in life. And they're also not subject to preferences. The causality works the other way around. So would it be great to know the preferences of policymakers? Absolutely, I would love to. We're in the private sector, we don't work for intelligence agencies, we don't have a full mosaic. So given our own constraints of time and resources as investors, we need to focus on what's more diagnostic, which I think are material constraints.
- [16:51]
Ted Seides
Are there broad buckets of what these constraints fall into that you can then diagnose?
- [16:57]
Marko Popich
Yeah, I think so. Basically the most important constraint is political constraints to policymakers. Can you get something through Congress? Can you get something through the legislation? Can you get something without being lynched by a mobile? So those are the kind of things we should always start with. The second is economic. And these are like really macroeconomic constraints. Is your economy based on exports? Say Germany during the euro area crisis, highly export reliant economy. If they had abandoned the euro, The Deutsche Mark 2.0 would have appreciated 20, 30, 40, 50, 60%. And then bye bye Germany. So hell yes, they're going to pay for Greek debt. Like high conviction view. And then you have financial constraints, bond yields go up, the bond market super powerful. And then we have constitutional and legal constraints and finally geopolitical constraints as well. So I would say there's five buckets. Not all of them are as important as the other.
- [17:53]
Ted Seides
Let's turn to an example, because part of the reason we're doing this and turning around quickly is there's this US election coming up. And how are you thinking about the various things you do in the US economy, particularly in the US markets, through the lens of constraints on this upcoming election?
- [18:11]
Marko Popich
The biggest constraint on the US policymakers right now is that the median voter is pissed. Okay, so that's where I would start. And that's because you had 10 years of really low growth, real Wages haven't really gone up for 40 years. So you've got a lot of problems. I mean, you can identify that through income inequality. You can talk about that this, that way. So why is this important? It's important because it means that going back to the Washington consensus in laissez faire, where we favor profits over wages, where we keep seeing profits expand at the cost of labor, I think is we've come to the end of the line of that. So what that means is that I see a megatrend in the US where the median voter is moving to the left on the economic spectrum, irrespective of social cultural issues. Right. So like you can be a Republican, be conservative, but like you don't care about budget deficits anymore. That's what we're talking about. You're not really cool with tax cuts anymore. Now, a lot of people listening to this podcast obviously are cool with tax cuts. We're in a specific epistemic community. But I think the rank and file Republican voters, and you can see this through the polls, are becoming less and less concerned with these things. So the biggest constraint I think is on the kind of policies that are going to be affected over the next 12 to 18 months. So if you're a long term allocator of capital, should you be preparing yourself for the typical kind of return to austerity where Ricardian equivalence kicks in and we have a little bit of a headwind to growth because we start thinking about budget deficits? And my argument would be no. And so to me, this election is not between Donald Trump and Joe Biden. I think both of them are likely to pursue very similar policies that keep fiscal thrust, the G in the GDP equation at a much elevated level than the last cycle, for sure. I think this is an election between pro growth policies and anti growth policies. What would the anti growth policy look like? Well, I would have to admit it would kind of undermine my view of where we're headed, but it would be if Joe Biden was paired with the Republican Senate. And so to me, that's the big question, do we get that? Because if Biden or Trump wins, from a macro perspective, I think dollar's going down, I think 10 year yields are going up. I think US equities are going to do well, but I think global equities are going to do better. Commodities are also going to do extremely well. I think there's a 70% probability subset of that. And I think either a Trump victory or a blue sweep deliver us that global asset allocation view. But There is this 1 in 3 probability that we actually have a little bit of a redux that this kind of long term view of the median voter doesn't pan out. Because Republicans in the Senate delay the articulation of this thesis by being tough on Biden when it comes to fiscal policy over the next six to 18 months.
- [21:04]
Ted Seides
So usually when we think about red victory, blue victory in the Oval Office, you do think of quite different outcomes for the economy. Why is it that you don't think there's going to be that much of a difference outside of the case where you have Biden victory at the Republican Senate?
- [21:19]
Marko Popich
Because I think we're today in a world driven by fiscal policy and I think it's all about fiscal. I think you should spend as little time as possible on monetary policy because we know where it is. We're at zero interest rate and we had the Jackson Hole consensus where the Fed told us what they were going to do, they were going to let inflation overshoot. So fiscal policy will move the markets. Now look, if we want to talk about specific sectors then I totally agree. Biden versus Trump then becomes very relevant. And also then we have to think about legislative constraints. Will Biden be able to pass legislation to affect these five, six sectors? But to me as a macro investor, I think what I'm always passionate about is the big picture. So the S&P 500, the 10 year oil prices, the dollar and the global asset allocation between us and emerging markets. And on that front I think the two of them are quite similar.
- [22:14]
Ted Seides
And to go through those, you said S&P 500 over time you think is higher?
- [22:18]
Marko Popich
Yes, absolutely. I think we can easily be at 7,000 SPX by 2024.
- [22:24]
Ted Seides
The 10 year is an interesting one. There is this case that the reason the valuation of The S&P 500 is as high as it is is because rates are so low. So we don't hear a lot of people say is oh, but rates are going to go up and the S and P is going to go up. So how are you thinking about the relationship between the two?
- [22:40]
Marko Popich
It depends why the tenure goes up. If it's driven by higher growth expectations, then both can go up. Now there is a limit. I think there is a rotation that would have to happen and it could be quite painful. So rotation out of the big tech sector, that's obviously benefited from low rate environment for a very long time into more value sector, that rotation is unlikely to be painless. But again on the long term trajectory, I think we've started a new cycle and I think it's going to be favorable for equities now. One thing I would say though, there is a limit though and I think if you think about my view, which is that fiscal policy will continue to dominate, I think there will be a moment when the Fed will have to step in. But when I talk to sort of more short term traders in the macro space, they hesitate to play the yield curve steepening or to be short duration because of expectation that that yield curve control has already kicked in. I don't think it has at 0.8, I don't think it will at one or one and a half. Maybe at two, maybe at some point the Fed steps in as it did in post World War II era. That would be my view. But I think between now and that moment you probably don't want to own long dated bonds.
- [23:56]
Ted Seides
So you mentioned the tech stocks and that's obviously something that lots of people have their eyes on. That whole sector as this election plays its way out, how do you think about that sector and particularly with the big stocks?
- [24:07]
Marko Popich
I think there's a lot of headwinds. I don't want to be the one shorting triple QS or something like that. I'm not smart enough to time it. But I do think there's a lot of headwinds to the sector. The trade war is a headwind. I think a lot of these big tech companies are still being priced in for a global tam, which they will not get. And they won't get it not because China like bans them, but because I think every economic region, every major economy has an incentive to impose non tariff barriers to trade to the current incumbents. So that's the first thing that I think we need to start thinking about. Their TAM is not global. It's probably just the US and some other countries. And if that's the case, are we not already at the peak? The second issue is that obviously there's a stroke of pen risk with the incoming Biden administration. There seems to be this really interesting coalition in the US between diametrically opposed groups, both conservative and liberal, who have a problem with big tech for different reasons. And then finally I think we're going to operate in an environment given that we're starting a new economic cycle where growth is going to surprise to the upside thanks to fiscal policy. And then you don't need to and you don't want to own growth stocks when there's plenty of growth. You want to own them when there isn't. And So I think this has now become a consensus view. It's in a way probably why it's going to be wrong longer than right. So timing it is very difficult. But I think after the election it's going to be pretty clear that we're not going to have the austerity wave we had between 2010 and 2016. That would be my bet. And if that's the case, then you don't need to own growth stocks.
- [25:43]
Ted Seides
Do you have any view on the regulatory perspective in the tech sector?
- [25:47]
Marko Popich
Yes, I mean, I do. I think there's so many different ways to go after these technology stocks. One is of course anti monopoly, but there's also especially the social media companies. So there could be revision of some of the rules that have allowed him to not be liable for things that are said on their platforms. And so I just think that we're going to enter a period where stroke of pen risk is very high. And I don't think it's going to cause a collapse in prices. But I think this may be the apex and it's all downhill from here.
- [26:18]
Ted Seides
You mentioned the trade war. So what do you see playing out with U.S. china relations?
- [26:23]
Marko Popich
My answer to that is going to be perhaps a little bit surprising, especially to those people who have been reading me. When I was on the sell side. When I started at BCA Research in 2011, one of the first things I put my foot down was to say that all this focus in the Middle east was a mistake. The Middle east as a source of geopolitical risk would wane and there was going to be a risk rotation to East Asia because China and us were fundamentally on a collision course. Now I think that scenario has like articulated itself. That forecast is done. We need to kind of now think about what's the next step. And here Tet, I think, is the biggest source of potential geopolitical alpha for the next 10 years. I think that everybody in the investment community is using the analogy of the Cold War when they try to think about the trade war. And so the analogy of the Cold War means that we're going to bifurcate global capitalism and there's going to be Alibaba and Amazon, like camps like NATO and Warsaw Pact. I think there's a problem with this. There's several problems. First of all, it assumes that we live in a bipolar world. And this is important because political science research, especially formal modeling, game theory, show that a bipolar ordering of power, where there's only two countries that really matter, do produce bifurcated outcomes. Fine. But a multipolar ordering where there's multiple countries that kind of have an ability to pursue foreign policy and trade policy on their own, that's an ordering that doesn't produce bifurcation. In fact, enemies have to continue to trade with one another. Why? Fundamentally comes down to this. It's very difficult to keep your allies in check. So in a Cold War scenario, the US could tell Turkey or France or Italy what to do and what not to do. It was very simple. Like you'd get a call from Washington, D.C. you would have to listen today. I'm not sure that's the case. Is France going to stop selling Airbus to China if we stop selling Boeing? I think the answer to that is definitely, definitively no. And so if that's the case, eventually American policymakers realize this is a constraint, this is a huge constraint that they cannot sever their economic relationship from China because if they do, somebody else will pick up the benefits, the revenues. So that's the first major constraint. The second issue is just difference between Cold War and today. I mean, when you think of the Cold War in Soviet union and the U.S. don't forget the starting conditions of this era. The starting conditions of this era where Europe was beset, was completely destroyed, it was filled with millions of refugees. You had Japan, which had two nuclear weapons dropped on it. You had China, which was in the middle of its civil war that didn't end until three years later. And then on top of that, you had India, which was completely irrelevant at the time, and a colony of another country. So when you put all that together, US And Soviet Union emerged. It is so much more preponderance of power so they could set the conditions for the Cold War. That's not where we are today. I mean, obviously Japan and Europe are breathed in deflationary economies and demographics for sure, but they're not destroyed. Someone didn't drop nuclear weapons on them.
- [29:36]
Ted Seides
The implication of China's strength in a multipolar world that you're suggesting is that if US Demand isn't there, someone else's will be. What does that mean for institutional investor who's thinking about the public or private investments in China?
- [29:55]
Marko Popich
Look, right now, from what we understand at Clocktower, the allocation to China is about 2% for real money allocators, and it's like 20, 25% of global economy. So the implication is that what's interesting is that in this kind of a move away from laissez faire economics, we're dropping our interest rates, we're using fiscal policy China's kind of not doing that because the west learned from the last cycle that austerity was implemented too soon. The west learned from the last cycle that there's going to be political repercussions, rise of anti establishment policymakers, for example, if you don't generate some sort of nominal GDP growth. I think China learned the opposite lesson. Did they overstimulate it? Did they cause collapse in productivity growth because they over leveraged their system? So they're actually doing the opposite of what we are and that's going to pull the yield higher. So the yield divergence between us and China is going to favor carry trades in China because they're adopting far less stimulative policies. I mean, they're still stimulating, don't get me wrong, but the central bank is kind of like moderately hawkish. They're cracking down real estate and stuff like that. So you're going to have this yield advantage in China that I think is going to be very difficult to avoid if you're managing long term capital as.
- [31:12]
Ted Seides
You flow through to some of the other major potential implications. The world over seems enamored with private equity right now. And there's a question of in a Biden administration, really, what's the role of Elizabeth Warren?
- [31:24]
Marko Popich
That's a great point. Well, I would suggest that everybody reads through some of her legislation that she's proposed. One of them was the Stop Wall street looting Act of 2019 where basically this proposal really focused on private equity. And in particular it looks to make it much more difficult for private equity companies to sell the debt of portfolio companies. It's also looking to require PE firms to assume pension liabilities. And so it's going to make roll ups and LBOs much more difficult. There's a good chance that legislators start looking into this and I think that that's going to cause a shift in allocation to much more smaller players into private space, more VC investments and other more exotic strategies that don't rely on kind of roll ups.
- [32:13]
Ted Seides
We're going to take a break in the action to tell you more about Morningstar Data isn't just a byproduct of your business, it's the driving force. But where's it taking you? Morningstar Data clears the way forward. A decisive language of insights for investment professionals to implement conviction led strategies across both public and private markets. Visit wheredata speaks.com to see what Morningstar Data can do for you. And now back to the show. Yeah, interesting. The other big megatrend everyone's talking about these days is sustainability and ESG investing. How are you thinking about how that plays through this election?
- [32:54]
Marko Popich
Well, I think it's very macro. I think it's very geopolitical too. I think the election will obviously impact EV or green companies which have been signaling through their rally that Biden's going to win. Obviously there's going to be like an immediate impact after the election if Trump were to win. But I think that the longer term trend here, Ted, is towards more policy tailwinds for anything that has to do with sustainability. Alternative energy, China, Europe, Japan, everyone's on this. And so it's funny because, you know, you talk to some folks in finance community and some say, Marco, come on, this is like, okay, even if I believe in climate change or global warming, this is like a 80 year kind of a thing. How does this make an impact? And to me it doesn't really matter. I don't have an answer to that question. I'm not a scientist, but I don't care. I try to get on these political trends and it's kind of to me like the moon landing. Let me tell you what I mean by this. When United States of America decided to send a man to the moon, that was one of the most wasteful, idiotic and inefficient human endeavors in the history of mankind. Pause for effect. Okay, what? How can you say that? Well, because we never went back. When was the last time we were on the moon? Like 72 or something? Like we never went back, we found nothing there, we wasted all this money to go somewhere and it was complete waste of time. However, the ancillary technological innovation that has spilled out of that endeavor has been amazing. When I think of what's going on right now with climate change and sustainability, I think of it in the same way. Policy tailwinds are going to be so massive that I think investors have to start thinking about it. The technologies we're going to discover in trying to address these problems, whether it's food quantity and quality, whether it's obviously climate change, whether it's water availability, whether it's poverty, I think as a long term investor, you just have to be behind that effort. Now the problem I have though is that in the public markets there's clearly this kind of rubber stamp of ESG that I think a lot of investors have already figured out is almost meaningless because you have these ESG indices that are like everybody but Forex Song. So everybody fits into this bucket and I don't see the value of that. I don't see an edge there. I think the edge is going to be in the private sector, and that's how investors should start thinking about that now.
- [35:15]
Ted Seides
Marco, one of the things you do regularly in your writing is compare what you see as managers view on markets around the world to your view and Clocktower's view. And I was wondering if we could take a quick tour around the world in what you're seeing managers are saying and what you're saying. And I'll just let you have at it and we'll go from there.
- [35:33]
Marko Popich
Okay, cool. Well, I wish you had asked me this question like two months ago, though, because divergence was huge. So I think right now, unfortunately, the divergence is not that great. And that worries me a little bit. If we think today. I think most managers does agree that the blue wave would be very bullish for the market. But where I think there is a little bit of a divergence is that I think my view would be unique or differentiated is that I am worried about the Senate divergence. I think there's not enough written about that that Senate could scuttle the plans. And that's why I think it's more prudent this time around to be a little bit more careful. Also, I think there is not that much enthusiasm for oil, I found, even though managers are pretty bullish commodities. But on oil prices, you know, everybody kind of generally thinks that 45 to 50, maybe 55 is okay. I think there's a lot of upside potential in oil markets, and that's both because there's this risk, upside, risk to oil prices of a Trump victory. Why? Because I think that what nobody's really talking about right now is Iran. Iran has patiently waited for this election, but I think they're running out of time and their economy has been really severely impacted by the sanctions. And so I think if Trump wins again, they see the writing on the wall. And I don't think they're going to reach out by thinking of, oh, let's negotiate with the U.S. i think there's geopolitical potential risk in the Middle east, which is, again, interesting because everyone's focused on Asia and China, US But I'm really worried what happens on that front. So I would say those are some of the differences between the macro universe and my views.
- [37:08]
Ted Seides
One of the things we haven't touched upon is the ongoing negotiations with Brexit. So we'd love to hear what you're thinking about Europe in general and then particularly with the UK Well, Europe in.
- [37:18]
Marko Popich
General, I think, is going to continue to integrate and this is one of the most controversial views and has been for a decade. I mean, as you read the book, you see that that was really a formative part of my career, getting that call right for the last 10 years. I think it continues. I think Europe has enormous incentives to integrate because in this multipolar world, it's a world that demands economies of scale. And so, yes, state sovereignty matters, and yes, you'll lose some of it to Brussels. But you know what you're going to lose? You're going to lose a lot more of it to Beijing or Moscow or the U.S. if you don't integrate. So if you're sitting in Italy and you're worried about losing some sovereignty to Brussels, hey, at least you have a say in it. Whereas the other potential alternatives, there's a lot more downside. So I think Europe will continue to integrate. I'm just not sure if that is enough of a catalyst to be bullish Europe. I am bullish the Euro. I think that if you are bearish on the dollar for the next decade, you got to be bullish on something. There's obviously gold, which I would be bullish on. But I think the Euro is interesting. And no, this doesn't mean that it's a reserve currency argument at all. They're simply the other side of the ledger on Brexit, I think it's interesting Brexit negotiations with the EU and this phase four stimulus negotiations show the importance of the constraint framework. The reason you don't listen to policymakers is because they're selling their own book and they're trying to beat their own chest, move the markets and then get their opponents to do something. All we've heard for the last three months is how negotiations are done. They don't like each other, blah, blah, blah. And apparently today, October 21st, there's a little bit of a breakthrough in negotiations. Look, I think the odds are that we do get some sort of deal, likely a deal on a skeleton that they will then negotiate through 2021. But even if UK concludes a Canada style FTA instead of an Australia style, that's still a very hard Brexit. And even with a Canada style fda, what's interesting to me is that the UK will have one of the weakest economic relationships in all of Europe for a non EU country. And so I think the consequences of even what people will hail as a successful conclusion to the negotiations, I think even the consequences of that would probably be negative for the UK economy.
- [39:34]
Ted Seides
We haven't heard that much of late. About emerging markets other than their continued underperformance, maybe outside of some select tech sector in Asia. So what are you seeing in emerging markets?
- [39:46]
Marko Popich
I'm bullish. It's interesting because I've never been bullish on emerging markets since I joined financial industry, although I haven't been in the industry for that long, so it doesn't mean much. But from 2011 until this year, I've been very bearish and I was greatly influenced by my colleagues at BCA Research, especially Arthur Budhagayan, the EM strategist there. Great mind, and he's been bearish for as long as I know him. So for good reasons. The emerging markets had a great decade between 2001 and 2011, and part of that was this industrialization of China play, where commodities obviously entered an epic bull market. And then there was a lot of misallocation of capital, very little governance reform. They kind of wasted that decade, didn't do much in terms of governance. And so when we got the great financial crisis, they didn't have the valuation reset that they really needed, in part because unfortunately for them, commodities stayed in a bull market for an extra three years after the recession for metals and another five, six years for oil. So there was never a reset in terms of the currency valuations and in terms of their overall valuations as markets in equities and so on. So you had a really terrible decade. Now, this pandemic has given that valuation reset, especially in terms of currencies. Currencies completely collapsed earlier this year. I think that's super positive. We're starting this new economic cycle with commodities at much lower levels. Unlike in 2010, 2011, we're starting this commodity cycle with currencies in emerging markets at much lower level. And we're starting with pessimistic and bearish views. I talked to institutional investors who are thinking of closing their offices around emerging markets. And there's generally a really pessimistic view. I think that's really positive. And that's because I think people think this trade war between China and the US is somehow going to be negative for emerging markets, that rewiring of supply chains is going to be negative for emerging markets. And I think that's kind of silly. I think the rewiring of supply chains is growth positive. It's positive for commodities. You have to build new factories, you have to move stuff around. Look, at the end of the day, when China joined global trading system, we had to rewire supply chains to welcome it. And so if now we're going to rewire away from it. There will be more opportunities for emerging markets, both because commodities I think will get a bid and because some emerging markets could fill the role of China a little bit, not too much. I think China can't really lose all of its opportunities, but there will be a little bit of a rewiring that will benefit some countries, like Mexico for example.
- [42:20]
Ted Seides
How does that thesis dovetail with your very high level idea that we've moved from a very globalized world to a deglobalized world? If the emerging market nations increasingly have to stand on their own because there isn't as much globalization, how do they manage through that?
- [42:37]
Marko Popich
Well, it's not binary globalization to deglobalization. I wouldn't characterize my view as a view that we will have de globalization. I would say my view is that we had apex of globalization and we won't reach it again. And because I don't think we're in a bipolar world, because I think we're in a multipolar world, I think there'll be these constraints on full deglobalization so we'll have less globalization. And what that means is that economies of scale will matter. And so I think emerging markets that can achieve those economies of scale will be interesting for investors. I think Latin America is a good place, it has economies of scale. And what I mean by that is speak two languages only. There are cultural commonalities across and although they do depend on exports for current account balances and a lot of profits, especially in public markets, they are actually quite closed economies in terms of exports as a share of gdp. Also, I think that when you think about de globalization, I think you have to think not just about commodity prices, but also how certain commodity supplies will be taken off of the global markets. And so what I mean by that is that we may not have a global market for X, Y and Z, which will increase prices of those markets because consumers won't be able to source them on a global market. Rather they'll have to source it on a more regional market which will benefit producers as they'll be able to jack up prices. So just as a silly example, I mean, if China basically says on its own to Australia, look, we're not going to take your coking coal and then turn to Mongolia and be like, okay, so we'll take yours. Mongolia could very well say, well, well, it's a little bit more pricier now. I think you could have that across a slew of different commodities that emerging markets export.
- [44:27]
Ted Seides
There are two parts of emerging markets. We haven't really touched on Africa and India. And I know in the book you wrote a fair amount about applying the constraints based framework to your prognosis for India. Why don't you walk through some of your thoughts on India?
- [44:43]
Marko Popich
I mean, it's really simple. I think India comes down to investment. This is an under invested economy. And what China has showed is that you don't need necessarily FDI. You can also have very large SOEs whose profits you kind of recycle back into the economy. So China is a great example of an economy that has both used its corporate sector and its household savings for a great amount of investment. And it's done brilliantly with that. India has just not done that. It hasn't created the conditions domestically either through force or through incentives to be an investment friendly economy. And I think until they do that, I am bearish on India. But I think that with Modi's second term there are some good things going on. I think the first term there was more rhetoric and headlines. They were positive than actual things. Well, we really need two things. India needs new labor laws and property in particular real estate laws. That's what needs to be done so that it encourages investment in manufacturing and encourages relocation of some factories. And that is already happening on some scale, but we need to see a lot more of that. So I am looking very much into whether the government of India pursues those two reforms.
- [46:00]
Ted Seides
Why do you think it hasn't happened yet?
- [46:01]
Marko Popich
I think because it's politically painful. I think that's where the constraint comes in. And the constraint is that India is a very low income country still and it's very difficult to do away with labor protections and very difficult to have land reform in a country like that. China has managed to do it for obvious reason. I mean, China didn't really have to worry about the median voter in the 70s and 80s when it did most of the important stuff. I think China now does have constraints. Middle class is a huge portion of its economy. People say it's not a democracy, but there's other ways to voice your displeasure. And I think China is very cognizant of that. So China has its constraints. For India, the usual answer to your question is I think still applicable, which is that they democratize before they advanced economically. And this is something that Samuel Huntington wrote about in the 1960s, this idea that democracy should come after you've managed to grow. Now I don't want to put too much on that because I don't think that's Necessarily the case. I think India might be able to overcome it soon. It just might take a little bit longer.
- [47:07]
Ted Seides
And how about Africa?
- [47:08]
Marko Popich
Well, I think Africa is interesting. You know, some of the best years for Africa were during the Cold War. And by the way, Latin America, too, my own country that I grew up in, that doesn't exist anymore. We all used to suck at the teeth of the Cold War geopolitical competition. It was great. It was gravy, you know, like, oh, we need a new bridge. Maybe we'll go communist. Oh, thank you very much, America. Thank you for that bridge. You know what? We also need a new port. Maybe we'll become capitalist. So this is a dance that a lot of countries did very well, and I think that Africa gets a chance to play this dance again. So let me give you an example. I spoke recently with a large institutional investor, and they were very concerned about Chinese loans to African countries, the Belt and Road. And one of the things they said was, well, the more borrowing one has done, a country has done with China, the less likely we are to invest in there. And I said, why? I don't understand the logic. Well, you know, they have to repay. And my point was like, look, if you go back to the Cold War and see what happened, I mean, these countries didn't get invaded for debts. They got a blank check. And I think you saw what happened in Zambia, which was an interesting macro story. They basically said, look, we're going to default on Chinese borrowing, on Chinese loans. I don't see China preparing itself to invade them. In fact, it may very well lead to more favorable loans. And so I think that this great power competition between China and the US and potentially other countries mixed in creates a really interesting environment for frontier markets like Africa, maybe some of the less developed countries in Latin America and Asia as well, because they can play all sides together. And I think investors should start actually taking a look at them very closely.
- [48:52]
Ted Seides
So, Marco, you make a point in your book to state that you are a strategist, that you will express opinions, but you are not the guy who's making the call in the markets. You leave that to the managers. What have you seen in the many managers that you speak to that differentiates the ones who are good at that from the ones who aren't as much.
- [49:17]
Marko Popich
Yeah, I have an immediate answer to that question. To complete and utter indifference. Like, I mean, to the elegance of their view, to the parsimony of their theory, to the ideological alignment of their ideas. It's just pure focus on alpha. And you Say that and it says of course, but no, that's tough. Okay, fine, I'm not ideologically biased. Yeah, but are you biased towards the elegance of your view? So you're a short duration because of this beautiful fiscal view that you have, but then it doesn't work out because Biden has to deal with Republican Senate. Are you willing to pivot? And so that's why I think some of the best managers are not necessarily people who went to the best schools or not necessarily people who are the best educated in terms of, like, the length of their education. They're all extremely smart, but they're promiscuous intellectually because they put as primal performance over intellectual prowess being kind of like rewarded for their elegance of their thinking. And so, yeah, I think that's what it comes down to.
- [50:24]
Ted Seides
Well, Mark, I want to turn to some closing questions. So let's start with what's your favorite hobby or activity outside of work and family?
- [50:32]
Marko Popich
I think it's pretty clear after you read my book Very Much basketball. So there's a section where I use some math to show constraints. And my example is this lack of fighting in the NBA. So I would say, yeah, basketball. Watch it. I used to coach it, played it, Tore my ACL this year while playing it. So there's nothing more that I enjoy than basketball.
- [50:53]
Ted Seides
I'm going to save for our premium members. I'll have you tell the story of what that mathematical model was for fighting in the NBA. But until then, what's your most important daily habit?
- [51:02]
Marko Popich
I think drinking a cup of coffee. I'm sorry, it's nothing better than that. But get a little healthier. But if I don't have my coffee in the morning, I'm useless.
- [51:12]
Ted Seides
All right, what's your biggest pet peeve?
- [51:14]
Marko Popich
I think my biggest pet peeve, and this happens a lot in these podcasts, and when I do something on YouTube or something, people hear me say something, say I said Biden's gonna win. And then they just assumed my answer on a whole slew of other points. I can't stand that. I really cannot stand that. I have a very low beta between my views. Like, they do not correlate in any way. I wish we all would give each other more time to hear our views out and to understand where we're coming from, because then we would understand that there they're unique. They're not all the same.
- [51:49]
Ted Seides
What teaching from your parents has most stayed with you?
- [51:51]
Marko Popich
My dad grew up in Yugoslavia. He was in corporate affairs and business, and he taught me a Lot of things. I think my ability to kind of analyze things comes from my dad. And one of the things he always used to say, it's all Hollywood, but with, like, a thick Serbian accent. It's all Hollywood. It's all Hollywood, and I love that because you have to kind of, like, understand there's theater going on, you know, like, UK EU negotiations. You ask me about, like, yeah, it's all Hollywood. So that's the first. The second is I think I have a chip on my shoulders because of my upbringing and because of just where I'm from and everywhere. I've always been an outsider, a foreigner, an immigrant since I was 12. And I think my parents encouraged that, and I think that was good.
- [52:33]
Ted Seides
All right, last one on this set. What life lesson have you learned that you wish you knew a lot earlier in life?
- [52:39]
Marko Popich
I think to be an optimist, I come from a very pessimistic place, and I think one of the problems with that is that you will not have confidence in your vision, and so you will settle a lot. And I think one of the greatest things about coming here, joining Clocktower Group especially, is my partner and boss, Steve Drobny. He's a true Californian, and he's very optimistic. So when he came to me and said, marco, you should write a book. Here's why. Here's how I've written a great book. Like, I was like, nah. Who's going to read my book? That's crazy. That's insane. Why would I do that? I got all this other stuff, and I am smart enough to know that I'm not naturally an optimist. And so I seek out people who are optimistic to surround myself with so I can kind of COVID for my deficiency.
- [53:25]
Ted Seides
Marco, thanks so much.
- [53:27]
Marko Popich
It's a real pleasure, Ted. This was great. Thank you.
- [53:30]
Ted Seides
All right, we're going to keep going a little bit for our premium members, and we're going to start right here on the NBA. So why don't you go ahead and talk about that analysis about fighting in the NBA and constraints.
- [53:40]
Marko Popich
Oh, my God. Yeah. So I asked one of my closest friends. He's a professor of quantum physics, Dan Green at UC San Diego. And we basically grew up together in Vancouver during our college years. And I said to him, hey, listen, man, I need to put some math into this book. He was like, why? Well, because it looks cool. Formulas look just cool. And one of the things that we have a bond between each other is basketball. So I have to admit, it's his example, but he wrote it because he knows how absolutely psychotic I am about the NBA. The example is that in the NBA, you no longer have any fights. And one of the constraints to fighting is teammates. So teammates hold the players back. And so what you see is that when there are no teammates to hold players back, when, for example, someone goes for a layup on a breakup and they get fouled really hard, you don't see them get as aggressive. They're kind of waiting, waiting for everyone to come from the other side. And then they're like, hey, what'd you do? And then that constraint prevents fighting. And of course, Dan and I have to give it to him. I mean, you know, everybody knows I didn't write this formula, but he made a very elegant equation. And I welcome everyone to read that section because it's awesome.
- [54:51]
Ted Seides
So do you think that the players never wanted to fight and that's why they're doing it, or is there something else driving that behavior?
- [54:58]
Marko Popich
I think the real constraints, rather than their teammates, the real constraint to fighting is really the fines. For fun, I listen to really good podcasts. Like, Bill Simmons has a great podcast on this, and he discussed this all the time. The fines just got huge in the 80s. The fines were small, whatever. So, you know, Kurt Rambis gets clotheslined, and all the good stuff that we saw in the 80s, Shaq and Charles. Now, the constraint to fighting is really monetary. It's a serious one. So what you're gonna do is you're gonna wait for your teammates to show up so that you can hold me back.
- [55:31]
Ted Seides
Marco, what advice do you give people early in their career?
- [55:34]
Marko Popich
I've thought about that a lot. So when I said that basketball is my passion, it really came from coaching. I wasn't that great at playing, but I really think I could have been a basketball coach. And one of the things that I always thought about is that if you're not very good at something, just find a niche. So if you want to be on the court, set picks really hard. And I would say the same thing for people starting their career. Just if you're in a firm, don't necessarily try to replicate what the successful people in that firm are doing because they're doing it and they're successful. Rather find something that the firm is missing. And I was very lucky at STRATFOR, you know, 2007, when I joined the firm, nobody cared about Europe, as I said. And I said, look, I'm going to own this. I know everyone's focused on the Middle East, Iraq, things going on in East Asia, but I'm going to own Europe and I'm going to crush it. And then the BCA research, obviously I owned the geopolitical analysis from an investment perspective and so on and so on. And I think that's really important. When you are just starting your career, make sure that the enterprise you work for becomes addicted to you and what you provide.
- [56:43]
Ted Seides
So you talk to a lot of money managers and I'm curious, outside of just your views and how you're thinking about markets, what do they come and talk to you about when they're asking for advice?
- [56:53]
Marko Popich
I think developing talent is probably one of them. Aside from markets and things like that. I think it's developing talent and growing businesses. How do you grow talent? How do you articulate a vision in a way that will appeal to the institutional investor community? So that's something that I speak to them a lot about.
- [57:12]
Ted Seides
What's your favorite book or thing that you read online?
- [57:16]
Marko Popich
So my favorite book, which would be, I think applicable to everyone, is why Nations Fail. I don't say that just because it's applicable to everyone here, but I think what Acemoglu and Robinson do is really powerful and it's a really, really good book and it really tries to distill like a thousand years of history of successful countries down to really one thing, setting up institutions that will allow successful people to fail. It's like enshrining creative destruction. That's what I got from it and I think it's one of the best books, especially if you start thinking about long term investments and where you want to put your money, like in emerging markets and so on.
- [57:59]
Ted Seides
What's the biggest mistake you've made and what did you learn from it?
- [58:02]
Marko Popich
Definitely putting my job in front of my family for the last 10 years. So great. I got a book out of it, but not a good idea. And I think we all need to find a better way to balance things out. I think so. Yeah, that's what I would say. I mean, in my acknowledgments I said I have nothing to thank my children for, but I just want to apologize to them for the last decade.
- [58:25]
Ted Seides
Great. Marco again, thank you so, so much. Really enjoyed it.
- [58:28]
Marko Popich
Thank you so much. Ted, real pleasure.
- [58:31]
Ted Seides
Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you'd like what you heard, please tell a friend and maybe even write a review on itunes. You'll help others discover the show and I thank you for it. Have a good one and see you next time.