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Hello and welcome to another episode of the Oddlocks podcast.
I'm Jill Wisenthal and I'm Tracy Alloway.
Tracy, there's a lot going on in the world.
Are we going to start every podcast with that sentence?
It's sort of a cliche. Now, there's a lot going on in the world. I have to say, you know, I recently were recording this February twenty fifth. I don't know the exact date that's coming out. I recently took a vacation and they did a pretty good job, Tracy, wouldn't you say like being unplugged, Like I probably sent like six or seven tweets. I don't think I responded to any emails or what's that message.
I actually noticed this that the volume of Joe's digital presence, Yeah, was way way down and normally listeners. Normally when Joe is on vacation and sometimes board, he just starts firing off emails saying like, oh, we should do this and we should do that. None of those. This time. It was a vacation for me too.
A vacation from your co host. Yeah, I really did not do much. And then I have to say, like re entry into the world, my thirty five hundred emails catching up. Everything that happened in a week in the world was a lot this time. And I'll just say it's a cliche to say a lot happened, but it was like, Okay, I really have some catching up to do.
It.
I felt it, and it made the re entry from vacation words.
Well, it's not just the number of things that are happening, it's the significance as well. Right, So I imagine one of the things you came back to after your week off was the idea of a rift, a growing rift between the US and Europe. There's all these lingering concerns as well about competing with China AI technology. Big themes to think about. Now.
I saw, like scrolling on my phone, I saw like JD. Evance has given this big speech in Munich, and I'm like, do I want to watch this on the beach? And tuloum, I do not want to watch this on the beach. And so but now I have to understand how the world changes and again from week to week. But big things afoot in the world, and how should we make sense of these and how should we cut through the
noise and all that stuff. Anyway, I'm very excited. We really do have the two perfect guests to discuss big things in the world, like technological changes, especially through the geopolitical lens and this ratum the geopolitics of what will be the nature of the US's relationship with Europe and other countries. We're going to be speaking with Jared Cohen, President of Global Affairs and co head of the Goldman Sex Global Institute, and George Lee, the other co head
of the Goldman Sex Global Institute. So Jared and George, thank you both for coming on Ovlach joining us in the studio.
Thank you, thank you. As I mentioned you before, I'm a longtime listener, first time caller of the pod, so thrilled to be on it with you.
Oh, thank you. I love it when people say that on air. I know I have a question just to begin with, what is the Goldman Sachs Global Institution.
Sure, I'll start, George to pitch in. So, the Goldman sax Global Institute is a new platform at the firm. We formed about two and a half years ago and the goal is to promote the firm's thought leadership at the intersection of technology change, geopolitics, and markets, and the idea is that these factors have become extraordinarily consequential for boards, CEOs,
investment committees and many of our client types. And so this ability to transmit our thinking, be provocative, share a worldview is just a great way to engage our clients. It's been a lot of fun.
The other thing that I would add is for some of the really kind of big strategic clients, Let's take sovereigns as an example, there's a lot of ambitions that they have over the next three to five years, and what the Institute does is we pull together all the expertise that we have at the firm to essentially cover
their ambitions. So when they say, you know, here's at a high level what we want to try to do in the AI space, or here's what we want to try to do in the Indo Pacific region, our job is to be able to respond as a firm, to help them think through and define what that looks like and then to help them make it happen. And through the combination of our banking franchise and our asset management franchise, that's what we try to.
Do Okay, let's just jump right into question. I didn't when I was on the beach watch that JD. Van speech that he made in Munich, and I know there's all this falling out, you know, he's frustrated columns and the Financial Times and stuff like that and all these big things. What was that all about? What happened there?
So I was there, great and tell us and there's a little bit of it before and after. So I was with a number of the European leaders the month before, and they were getting ready for the Trump administration to come into office and dealing also with the first twenty four to forty eight hours. And their biggest concern at the time was that a deal would be struck on Ukraine above their heads and the Ukrainians heads. Now, I think that that was a little bit of a false concern.
It was more of a reflection of the difficulties they thought they'd find in the transatlantic relationship. I think a month later, by mid February, they were surprised that a deal was actually being cut above their heads, not just between the Trump administration and the Russians, but then broker by you know, the Gulf as an honest Broker, and
I think what was interesting about JD. Vance's speech is he gave a speech at a security conference and there was really nothing to offer on the foreign policy front. It was, you know, for all intents and purposes, kind of a lecture about free speech. And I think it was more of a reset in a negative way of the Transatlantic relationship. And I think what I was surprised by is that the Europeans were surprised by the speech.
You know, it would have been very easy, by the way, for them to acknowledge that there was no new policy set in the speech. He didn't announce anything on Russia, Ukraine, he didn't announce anything on the Middle East, he didn't announce anything on China. It was just kind of a difficult moment in the Transatlantic relationship. I think part of the reason the Europeans are experiencing so much consternation over this is the lack of economic growth in Europe is
causing Europe to essentially evaporate geopolitically. They don't have a seat at the table on the Middle East, they don't have a seat at the table on Ukraine. They're trying to figure out what tariffs are coming and how to respond. Then they know that lingering on the horizon is a confrontation with the US over them having less dependence on China for manufacturing markets and other issues, and so they're
scrambling figuring out what to do. They're having a hard time acting collectively, which is making it difficult for them to respond in a way that's sufficiently robust to level the playing field with the Trump administration.
You mentioned that you leaders were preparing for the Trump administration late last year. What does that look like? How do you prepare.
Well for starters? Most of them weren't around when he was president last time. And if you look at who is around last time, you had Macron, who Trump doesn't particularly like, Zelensky, who Trump doesn't particularly like, in Victor Orbon who he does like, and so most of these
leaders hadn't dealt with Trump before. I think that one of the things that they're all surprised by is that what they observe and recall from watching the first Trump presidency that this feels less like a second term and more like a totally separate presidency with a four year interregnum in between. And that also shouldn't be surprising because he didn't recycle very many of the same people from the first time around, the world has completely changed in
four years. In this time around, he wasn't surprised to win, and so he's coming in with a very clear doctrine and agenda focus really on reciprocity, so defense spending, trade deficits, you know, areas where he feels like there's an imbalance and other countries haven't been kind of quote carrying their load.
He's then taking a transactional approach to address that. And there's look, there's a little bit of what we've seen you administrations do recently, which is show up with opposite day, which is if the previous administration was for it were against it. But when you look at the policy in the Indo Pacific, that's where you've seen the most consistency. You know, you don't yet have kind of a special envoy on you know, China and Indo Pacific issues. The
meetings with the Quads have persisted. The administration did South Korea a solid amidst their political turmoil by reinforcing the importance of the Japan US South Korea trilateral reinforcement of the Quad and even on tariffs, you know, he's launched a series of trade investigations into China which will culminate in May. Whereas with you know, Canada and Mexico, he's come in hot and heavy. With Europe, he's come in
hot and heavy. In those tariffs look more robust than they did in twenty seventeen and twenty eighteen.
Jared, you you've observed in the past that, well, we don't have the same shock and awe from that community that we had in twenty sixteen. They're kind of used to him stylistically and in his cadence. You know, there is a fundamental difference in that it's unclear who in the administration is running which pieces of the portfolio. And this seems to be more of a Trump forward, you know, policy leadership by him himself. Maybe, is that Yeah?
I think that's right. And by the way, when the forty fifth president was in office, there was also not a ton of clarity on you know, who was going to get fired on the toilet versus you know, who was going to end up running a fiefdom. I do think what George is referring to is a various stute observation, which is the first time around the departments and agencies. The heads of the departments and agencies exerted an enormous
amount of influence, and policy was much more decentralized. Different people had different accounts and different agendas that they were pushing, and occasionally the President would weigh in and there'd be
a recalibration. This time around, you don't see that sort of strength that the departments and agencies, and policy feels much more centralized at the White House, with a sea of special envoys for just about every issue that you can imagine, and policy seems to be set more by the president, with everybody waiting to see what this sort of policy mark to market is before they fast follow and figure out what their agenda is going to be.
Use the word Europe evaporating geopolitically, and it hadn't clicked
to me. This is something we've talked about to the sort of what ails Europe, but you know, even within the context of this most recent episode, like it hadn't clicked to me the sort of elevated role that the Gulf States have had in playing intermediary talk about how the world, whether it's political leaders or business leaders, are like thinking about this reality that what is still you know, one of the richest regions on Earth is at this
moment where like people are asking existential questions about its capacity to be a player in anything.
So look, if you look at the Gulf. I've been traveling there for twenty five years, and for most of that time, the international system was in a global War on terror paradigm, and in that context, the geopolitics were driving the economic interest. And when you talk to these leaders, they would say we wanted to be the other way around that they were stuck in this paradigm, and so the most important conversations that were happening at the political
level were around geopolitics and security. But you had these growing sovereign wealth funds that were kind of off to the side, and so these were countries that had sovereign wealth funds, but geopolitics was front and center. And then a series of new leaders showed up in twenty fifteen and twenty sixteen in Saudi and Cutter and UAE, and they just brought with them a different set of ambitions that are born out of a different generation, where they
wanted to diversify the economies. They wanted to be leaders in science and technology, not followers, and they wanted to broaden the reach and international influence of each of their respective countries, but they were still stuck in a global war on terror framework. And then COVID happened, and it completely shifted the paradigm towards a great return of great power competition and competitive coexistence between the US and China.
And with all of that geopolitical brush cleared, that was the paradigmatic shift where these countries finally had a situation where their economic interests could drive the geopolitics. And what I would sort of say flippantly, that was the moment where they went from being countries with sovereign wealth funds to sovereign wealth funds with countries. And you know, but another way, you know, they're now leading with strategic capital as opposed to being a place where people come to
for capital. And so it's giving them the right to play the chessboard. And we lump the Gulf countries together because that's what historically we've done. These are distinct countries with unique ambitions, and what they have in common is they have a lot of money. After that, each of them are after very different things and they're engaged in their own degree of competition with each other.
So Jared mentioned this idea of a slowdown in the European economy contributing to all the let's call it existential angs that you see right now. And George, I want to bring you in here because one thing you often hear is this idea that Europe is lagging behind in AI and if AI is going to be the next big thing, the next big economic driver, that's really a problem for them.
Yep, Tracy's a great question. You know, having been in technology for thirty five years and seen my share of platform transitions and new technologies arise, this is really the first one where world leaders have tagged AI as a matter of national destiny really early. It's going to be consequential for their economies, their growth, their culture, their defense. And so we've seen enormous focus and you know, I'm
just back. I was recently at the AI Action Summit in Paris, which was quite an impressive event and coalesced a bunch of investment in within the borders of France's something Macron I think is a real leader on and some of these European countries are a wellspring of enormous intellectual capital think about the grandicles in France, that combination of and statistics that they lead in with excellence. You've
got Cambridge and Oxford and places like that. So there is an enormous amount of intellectual capital emerging from Europe and there's some really inspiring companies like miss Strawl out
of France, et cetera. Whether they can marshal the the intent and capital to really lead in building the infrastructure and they need to support that intellectual capital is the big question, and it's why you saw a lot of the announcements around the AI Action Summit be about bringing capital to France, scaling their lead in atomic energy, which is a great energy source for this, and so everyone's
giving it their best shot. But competing with the energy abundance, capital abundance of the Gulf countries or the just natural tech leadership of the US, I think it's a hard brief for them to compete in the scale that they want to, but make no mistake, they have real assets.
Well, actually, there's a question I want to pose to both of you because whether we're talking about you know, what is it actually take to say commercialize the intellectual capital of Europe or what does it actually take for the EU to be a geopolitical power player, so that they're not taking a backseat and watching all of these actions,
all of these conversations take place above their head. There is this sense that large European organizations have been very good at expanding the number of member countries over time that exist, that they grow out, but that the issue of like internal depth, single rules, market cohesion has really difficult, and the sort of the deepening of these various unions that exist on the European continent. And every once in a while there will be some leader and you know,
to come up with one hundred page report. I think we talked about recently on the podcast. You know, I asked your Mario Dragi issued to big report, and there's always some new report about competitiveness or whatever. I'd love to hear from both of you whether you think that the tides are shifting in Europe in such a way that all of these things that sound good on PDFs and institutional websites can change the way the nature of politics and policy is wrung within the content.
So look, you're getting at a debate that we certainly hear playing out every single day, which is the bearishness on Europe overplayed, right. No, nobody's questioning that the lack of economic growth, and nobody's fooled by the economic rally they've had at the beginning of the year. There's some fundamental questions. I won't try to argue the other side because I'm quite bearish on it. And I'm quite bearish on it because it's not that European leaders don't know what they need to do.
Right.
So let's take geopolitics and defense, and George, you should talk on the AI side and the regulatory side, but on defense, right, it's very clear. I mean, what's interesting about Vance's speech, which you were talking about before. Privately, every European leader said, you know, the US has a point on defense spending, they have a point on migration, they have a point on regulation, and every European leader has an idea for how to fix it, and they
all like drag eas report. The question is implementation, right. So Europe has a number of challenges, one of which is you become prime minister if you get the largest percentage of the vote, which is usually thirteen, fourteen, fifteen percent, or if you're mergency know twenty nine percent with a
blocking minority from the AfD right. And so if you're sitting on top of one of these coalition governments that you can barely scrap together in order to do the meaningful policy changes that you have to do, you're likely going to break the coalition in the process. So you have coalition politics getting in the way. That's one issue. On defense, three percent of GDP is the new two percent.
And in a lot of respects what's happened with Ukraine and the fact that the Europeans now conclude they can't rely on the US for security guarantees, it's made them more comfortable with the idea of three percent or as you move east to places like poll In five percent. The problem again is implementation at a collective level. So you know, there's certain countries that are strong on defense and certain countries that have medium and small sized defense players.
So is the answer that if Europe is going to get big enough from a defense perspective, you're going to have to have cross border mergers and acquisitions and consolidation. Okay, fine, who gets the national champion the EU? Yes, it's a
coalition of countries or a union of countries. These are still national governments underneath it, and you're really going to tell you a medium sized Central European country that they have to give up two of their biggest companies because Sweden's going to get bigger on the defense side, when, by the way, they're closer to the Russian threat. So this is just one example of where it breaks down
implementation within the EU. You still have zo some politics that exist between the national governments, and then that gets exacerbated by the point I made earlier about coalition politics.
Yeah, I'm struck. I've been at a couple of Golden Sex gatherings where you bring together CEO level leaders in Europe in a couple different countries. I was struck by the degree of pessimism and almost resignation about their ability to influence policy that provides more of a pro growth
environment for them. Look, I think that you know, hopefully events over take some of this inertia, because the competitive impulse for these countries is going to get increasingly important and challenging, and so maybe it will mediate some change and more collective, more effective collective action. But the business leaders are are certainly frustrated, and one of the things they reflect on is how Europe's leadership and AI in some ways perceptually has been defined by its leadership on
AI safety. By the way, that's a.
Worthy and important goal.
One of my observations in the world of AI they're kind of fascinating, is you know, chat GPT emerged in November twenty two, and there was an immediate outcry about AI safety, existential risk, a lot of headlines, a lot of inks, build a lot of time and energy. Fast forward. Now we have machines that are one hundred to a thousand times more powerful, and it's a much more muted
dialogue about those risks. Interestingly, but there's frustration in Europe that, you know, kind of characteristic focus on privacy, regulatory bounds, safety is retarding their progress in something that now has really become kind of a commercial, military, and cultural arms race across the face of the earth.
This is what always happens, Joe. The US invents the technology, China maybe improves on it, and Europe writes the regulations and the thought pieces about it. Jered. Just going back to a point that you made about the European response. You use that word transactional earlier to describe the Trump administration's approach to geopolitics, and funnily enough, we just recorded an episode yesterday where we said the exact same thing.
I guess I'm wondering, do you see any signs that the approach is actually working, because so far, when you look at the response from EU leaders, it's all about increasing their own domestic defense spending. No one seems to be taking the bait just yet about you know, well, we'll work with Trump and then in return we'll get security protection.
Well, I don't think anyone in Europe believes that that's a doable trade, at least in the short term. And I think realizing this time around that they were maybe naive to last time around is I don't think that they look at any bilateral relationship and assign a historic
premium to it as special. So this nostalgia for the transatlantic relationship, which I certainly have, and this feeling that certain bilateral relationships are special, which I certainly believe in many others certain believe, there's no evidence that they're showing up with that as a set of assumptions, and I think the Europeans are quickly realizing this. I think, honestly, this is a playbook that they're not quite used to.
It's the same in Canada and Mexico. By the way, we haven't talked talked about they don't have a playbook for a scenario where they're being threatened with twenty five percent tariffs that could lead to double digit unemployment. And that's like a serious conversation. So I think everybody's kind of gone off script in a sea of democratic countries where you're not used to having to go off script
with each other. And this to sort of another debate we talked about how one of the debates that's playing out is are we too bearish on Europe? Another debate that's playing out is should we maybe relax our skepticism about the forward direction of travel in the US China relationship. I there also subscribe to the view that I think the relationship is going to get worse for longer. So the question then is why do things seem slightly calmer
in that relationship right now? Well, I think if you're hijinping, you're watching all the dynamics play out in North America between the US, Canada and Mexico and in the transatlantic relationship, and you're enjoying an early Q one economic boom and tariffs on your country have been sort of punted until we get an outcome from these trade investigations, And you're thinking to yourself, I don't really need to insert myself in this, but the fundamental issues in terms of the
tension between the US and China, I think persist. It's still the case that America's most formidable adversary is also its third largest trading partner. It's still the case that short term geopl thinking on both sides are coming at the expense of medium and long term economic consequences. And it's therefore still the case that both countries are capable of doing something that's incredibly economically foolish in service of
some of those short term geopolitical goals. I just don't think we're going to see that excite in the short term. I think that's much more of a medium term horizon.
This brings back this interesting intersection set that Jared and I operate in technology and geopolitics, because one of the key dimensions of the US China relationship is this battle for supremacy around AI and I know on your pod you've beaten the deep Seak topic to death.
No, never enough deep sea time.
Yeah, I just actually think, when you step back from it, I think the technology exploits, while impressive, are part of a continuum of improvements in AI and not super extraordinary. Impressive but not super extraordinary. The greatest provocation of deep seek may well be the open source decision under the
MIT super permissive License. And you know, I'm sort of paraphrasing Mark Andresa and no I heard recently talk about this, which the irony of a country that we believe to be generally more closed in orientation creating the most abundantly available open source model in the world.
While the US an.
Open society has obviously meta in the open space, but by and large hosts research shops that have more closed orientation. And so this impact of a Chinese model that is freely available, distillable, tunable, very low cost, that's a real provocation in this competition and relationship.
So when deep seek made headlines and it had been percolating for a while and then suddenly everyone was talking about.
It, everyone was a deep Seek bro.
Yeah, I declared myself as such. For one week I switched my default to deep sink. But so here's something I always thinking about then like that moment, like you had this hit to the stock market and there was this where oh, this is, in fact, it's more efficient. What's it going to mean for Nvidia demand, et cetera. But then the other the bold case from a sort of pure market standpoint is, look, this moment established the
idea of the race. And if you think that we're in a quote race, that's not going to mean less spending. This is where right, like, this is going to mean a lot of spending and we can't lose this, et cetera. But then that made me wonder, and you said something in the beginning, this idea that government's embraced AI is destiny, and I wonder do we have to accept this premise.
I'm very impressed with AI tools a lot, but when you say AI is destiny, or when you compare it to who gets the nuclear bomb, you're guaranteed that there's just a flood of money. And that's great for private companies. Do we ever have to pause here and say, yeah, this is a great narrative if you're a private AI company, or if you're selling power, or if you're selling chips, et cetera. And should we pause and say like, yeah,
it's quol tech for doing various things. But can we question the premise that AI is in fact this destiny that a country must win in order to be powerful in the future.
Absolutely, And look, I should stipulate we are two and a half years in to this, and so if you put that in comparison the public face dimension of generative A, if you put that in comparison to other technology shifts, we were at a very primordial state in those other shifts two and a half years later, and we still are now. And so this is moving very fast. It feels super consequential, but there's uncertainty we may reach some glass ceiling of improvement and the impact of this technology
to be less profound than we expect. I personally don't think that will be the case. I think the ability just to think about your own personal use cases the way you consume information, you're having a machine interlocutor that is helping you understand the world, and it's transmitting a
notion of culture that's embedded in that machine. And so if you think about that from a country perspective, and you have your citizens accessing an information source to help them understand the world, make sense of the world and those values are being so those cultural values embedded in that machine are being set in some other part of
the world. Just that alone is important. Now we can debate about whether it is going to be really profound, fast moving a canomic impact, or whether it's going to be slower. We should talk more about that. And already we see evidence that generative AI technology on the backs of more traditional forms of AI and machine learning, are having a real impact on the way that defense systems work, how warfare is being conducted, and the shape of the
battlefield in the future. So yes, I think it's really good to take a deep breath and pause and not get over our skis. And yet I believe it's going to be very consequential. Evidence of the fact that we all might be slightly over our skis is just the very deep seek reaction you mentioned in and of itself, the reflexivity of markets. This is so much uncertainty today, but when there's a possible disruption or interruption, the market seems to like self first and ask questions later and
then recalibrate. We saw that with deep seek. We saw that even this week with a sort of I think misconstrued remark out of Microsoft and one of the analysts someone in the endless community about Microsoft data center leasing activities. So the market, it's twitchy it. The market is supporting this heavily. People are heavily invested in it, and when these moments of uncertain or disruption emerge, it causes very significant market ripples.
One way to think about this question of AI being a country's destiny is there's a category of country that George and I talk a lot about that we sort of describe as geopolitical swing states, right, and these are countries that, in a world where the US and China are locked in competition and need other countries to gain the extra edge, countries that have a differentiated part of the supply chain, an abundant amount of flexible capital, and
are attractive economically for near shoring, offshoring, and friend shoring. Are in a position with the right leader where they can kind of set an agenda that's independent of Washington and Beijing and swing on an issue by issue basis. In these countries, rather than the non aligned movement of the Cold War, they kind of tend to go itt more alone, and they're leaning into this particular paradigm of great power competition and their status of geopolitical swing states
to achieve a certain level of mobility. Right, And so not all geopolitical swing states possess an advantage when it comes to AI. But the golf countries, which I think are quintessential geopolitical swing states, are looking at the attributes that they have to make them competitive with AI, which is unlimited capital, regulatory environments. They control the ability to do massive infrastructure at scale very quickly, and sovereign ambition and again the ability to kind of play both sides.
And they see a once in a generation opportunity to differentiate themselves in the AI space and leapfrog generations of geopolitical status.
Right.
But you're seeing this When I spent a lot of years at Google and Alphabet and Saudi Arabia cutter UAE, these countries were nowhere on anyone's radar screen. They were not relevant technological players, They were not part of the conversation. There was no evidence they were ever going to be part of the conversation in a favorable way. Now there's
not a single major deal in the AI space. There's not a single a conversation of any real significance that doesn't involve one of the three big sovereign countries in the Middle East, and Kuwaita is not far behind, as they're on the precipice of certain transformations nine months post dissolving parliament, and so for them, AI is destiny because that destiny is geopolitical mobility.
And you know, we wrote a companion piece to our Geopolitical Swing States thesis around AI swing states, and clearly the Gulf is frontally involved in all of that. But some others might surprise you. I mean the Netherlands, the home of ASML, that makes that extremely strategic and relevant in the world. Who would have thought semi conductor capital
equipment would become so geopolitically relevant. South Korea the home of sk Telecom, the biggest provider of high band with a memory, which there's going to be extraordinary demand for going forward. India with all its APEX, technical talent and a huge population, how they deploy and understand AI is going to be critical to the world. So the Gulf is you know, in the headlines, but there are many other nations for whom this is, you know, really important to their strategies.
I want to try to connect, I guess the old geopolitics with some of the new stuff that's happening, especially AI. Can we talk maybe about subc cables. I've had people tweeting at me for the past week saying we need to do an episode on subse cable warfare. So consider this maybe a preview for something longer that's coming up.
Yeah, asolutely.
If you think about two topics that are discussed a lot. One topic is trade and the other topic is AI. And if you look at global trade, eighty percent of it flows above the ocean, and then ninety five percent of all data flows on seven hundred and fifty d thousand miles of undersea cables that are the equivalent of circling the earth thirty times. So what does that actually mean?
That is ten trillion dollars of daily transactions, that's all the instant messages, that's offshore energy, and by the way, that's national secrets. And there's one hundred and fifty cable breaks on average a year. And that number is going up, not just in terms of volume, but in terms of
geopolitical sensitivity. So just to give you an example from you know, let's call it the last six months, right, so in November, a Chinese vessel dragged and anchor one hundred miles in the Baltic Sea, severing an undersea cable that connected Sweden to Lithuania and also Finland to Germany. A month later, Russian vessel, as part of the sort of Russian ghost fleet, also in the Baltic Sea, did the same thing, cutting an undersea cable from Finland to
Estonia and had to be seized by Finnish authorities. And so these things continue to happen. What's interesting is the multilateral architecture that was established for repairing undersea cable. It predates the tech competition between the US and China. Undersea cables you know, started being laid in the eighteen fifties, and so the ocean is broken up into different zones. So you can have an undersea cable that breaks in the South China Sea and the Chinese have the authority
to bring their repair vessels to repair it. Now, that's a very tricky thing when you start worrying about malware being thrown undersea cables. It's not the sexiest technology in the world, but it's in a lot of respects. I think the most one of the most important geopolitical features of the AI conversation and the technology conversation. But it's heavily dominated by Western players. So there's three companies, you know, Subcommon, the us NEC in Japan, and Alcatel in France that
have eighty seven percent of the market share. And then you know, China has a minority player in this. And the US has actually been very successful at thwarting China's efforts to take control of subse cables, right, So they use a combination of incentives, threats, telegraphing potentials, actions to ensure that that China doesn't win the bid for some of these cables. And it's been quite it's been quite effective.
The other thing that's interesting is the hyperscalers have increasingly been forming these consortiums with the big telecom companies to play a role in subse cables. And so Google, for instance, is either a hole or part owner of thirty three different subse cables. And so I think we're going to
see more and more breakage. And by the way, it's not just state actors, right, So when the Huthi started firing missiles into the Red Sea, they hit a commercial vessel that sank and it's anchor broke two of the subse cables in the Red Seed. Ninety percent of data traffic from Europe to Asia carries through fourteen cables in
the Red Sea. So again this isn't a highly talked about space, but when so much of our digital information moves under sea, five miles below the surface, in some cases, it's a very important theater.
It's interesting to reflect us the Jared as your guy as it comes to subse cables. He knows a lot about it, studied it a lot, but to me at a high levels are fascinating. That subse cable complex is kind of the silk roads of the information you know, economy, And so just like the soak roads securing them, the interstate transit that occurred, the international transit occurred there like the same dynamic as playing out here. These are the roads that our economy is traveling today.
By the way, I just have to say, in the year twenty twenty five, the existence of subse cables actually still blows my mind. And the fact that the first one was laid down in the eighteen fifties. There are various things in the past I can't wrap my head around. I can't wrap my head around in the Hunting tunnel or whatever, how they build a tunnel Brooklyn Bridge. The fact that in the eighteen there's a great book, the
Victorian Internet. The great Book's fantastic about that. It's also why the US UK exchange rate is called a cable anyway. That always, sorry, that always just blows my mind. I have one very random quick question for you, Jared, and I know there's a little off topic, but you mentioned it. You know, China's gotten little free pass. Trump really seems to have it out for Canada, at least with Mexico.
It's obviously a source of significant drug traffic and there's a lot of migration that comes through the southern border. What is up with the antipathy for Canada? Which I just don't think much about.
So some of it is interpersonal. He and Justin Trudeau never got along particularly well, which is also part of why I think Germany might be taking the wrong lesson from Prime Minister Trudeau going tomorrow Lago amidst the concerns about Trump tariffs and trying to figure things out, only to be you know, on the receiving end of even harsher treatment. Their view was that means you need to show up with a loaded gun and be ready to pull the tariff trigger. I think they're underestimating how much
of this is interpersonal. But I also think it gets back to look. I don't claim to be an armchair psychologist for the forty seventh president, but I don't think he's necessarily hiding this principle of reciprocity. That's a key
feature of his administration. And if you look at defense spending in Canada and you look at the trade deficit with Canada, it falls right in Trump's line of site, and I think he's if you sort of add the context that his starting point is not that there's a special relationship between the US and Canada and you're just looking at the numbers. I'm not saying it starts to make sense, but you're asking me kind of what's up
with Canada. That's my best guess. What I will say also is if you look at the tariffs, I think they fall in three categories. I think there's tariffs that are based on things we've seen in the past, with a lot of detail that they announced that they intend
to implement and they will implement. Then you have what happened with Columbia, where it's clear that the tariffs are either something retroactive in response to an action that a country took that the administration doesn't like, or they're used
as a negotiating tactic. But it's this third category, and I think the tariffs on Canada and Mexico, which we'll find out more about in the next week, fall into which is they announced with enough detail that it's clear they want to implement them, and they intend to implement them, but they go beyond precedent, and the second and third order economic implications are not yet understood, nor are the responses from the countries that have never found themselves in
this situation. And so what you don't know is this going to be a six month headfake to the market that ultimately, you know, ends up getting walked back because the economic pain is too much, or is it in
fact going to get implemented. And I think the market's going to have to learn to be a little bit patient and whether the volatility, but I think given so many countries have never been in this situation before, there's a ton of room for miscalculation, right, and miscalculation, you know, happens when countries are forced to go off script, and that's where you can have unforced errors, and that's where you can have unnecessary chaos.
So on that note, I have a theoretical, I guess, big picture type question, and I think given that you guys said you're all about connecting geopolitics with technology and markets, you are the perfect people to ask this. But markets seem to really struggle with geopolitical uncertainty. It's such a huge topic. The possibilities are almost endless. You can get almost infinite permutations of geopolitical events and situations. It seems really hard to price and incorporate into your strategy. How
do you actually go about doing that? So this conversation that we just had, which was great and very interesting, if I'm an investment manager, what do I actually do with this info?
Yeah, well, Jarji Jumpins, we have an opportunity to talk some of the leading investors in the world around these topics. You know, it's funny began to undertake a study to try to discern what are the market impacts of you know, really profound geopolitical events. First of all, as you know, as students of the market, it's very hard to isolate any given effect among the panoply of different things that drive stock prices and interest rates, et cetera. So we
struggled with that. The second observation it wasn't really deep enough to be publishable or verifiable, is just that markets actually wait quite a while for clarity and then act as that clarity emerges. And so while I described the impulse in the AI world is a little bit sell first and ask questions later, in geopolitics it seems to me, at least and in jaredmation your world, it's a little bit like ask questions first and then sell later. Seems
to be the dynamic. And Jared, do you agree with that?
Yeah, I'll make two points on this, and I think it depends. It's kind of a tale of two geopolitical stories. There's the downside risk part of the story, or the downside risk volatility. And what you know, George and I always tell clients is when it comes to geopolitics, you can't predict what's going to happen on Tuesday or what's going to happen on Thursday. And if somebody does that,
you should kick them out of the room. What you can do is say here's the shocks to the system that tell you that this thing has gone off script. So here's what you should be looking for, and here are the key inflection points and the geopolitical time sequence that they're likely to happen in. So this happen. This occurs a lot in the context of the Middle East when people are sort of thinking about, you know, will
Israel bomb Iran? Like nobody knows, right, but you can tell them warning signs that they might look for and certain inflection points that increase the likelihood that that might happen. So that's the downside risk part. I personally think we spend too much time on downside risk volatility.
There's a more if people listen to geopolitical analysts, they would stay uninvested entirely. This is why you got to anyway, Sorry, keep going.
It's just another volatility variable, right, And so let's take a more affirmative look at geopolitics. And you know, George and I have talked a lot about how geopolitics is pushing some pretty attractive economic environments into a situation where they're eventually going to trade at a geopolitical premium. So let's take India and Japan as an example. So India and Japan already very attractive environments for all the reasons
that I think your listeners understand quite well. But if you double click on Japan as an example that geopolitics have brought them out of their shell. It used to be Japanese investors investing in Japanese companies or Japanese companies merging with other Japanese companies. The geopolitics have made them much more interconnected around the world. They're also massively increasing defense spending relative to what they've done before, which is
giving them a defense renaissance. They're recognizing that they're going to be one of the big beneficiaries of reshoring in different parts of the AI value chain and other technology value chains, and it's triggering a bunch of reforms in how these companies are governed with regards to the value that they return to shareholders. So Japan as a result of the geopolitics is undergoing a bunch of changes that over time are going to create more opportunities for investment.
So I talk to a lot of strategic investors around the world that are pulling money out of Europe and they're reallocating the capital towards the US, which they're bullish on, but then they're worried they're over allocated towards the US, and so where else are they putting capital. They're putting capital in places like Japan and India. Why because they understand that the geopolitics are making places like Japan and India pockets of certainty and predictability amidst a geopolitical moment
where it feels like there's a lot of uncertainty. But if things get worse between the US and China, which is the primary reason why you have all this geopolitical volatility, it's only going to benefit Japan and India because both countries are able to play both sides, and yet the US has telegraphed their long term commitment to both. So to take as an example with India, US is heavily
reliant on India for pharmaceutical supply chains. India is highly reliant on certain elements from China that they require to produce their pharmaceuticals, and they have no interest and are not going to diversify from China. So they maintain a posture of strategic ambiguity with regards to most of the US's ambitions or policies towards China unless it pertains to
their land disputes with China. And so I think that affirmative case for riding the geopolitical volatility towards kind of new investment thesis is quite attractive.
You know, one thing it sharts and remarks around inflection points reminds one of the techniques that we use in the Golden Sech Global Institute to engage clients is our simulations and wargames. We bring together policy makers, corporate leaders, and investors. We introduce a scenario, we introduce perturbations to that scenario. We ask people to really engage, help make decisions.
And then at the end of these sessions we get to reflect on what we all learned through that game turn And that's a place where I've seen investors really step back and go like wow, Actually, when you scope out and think about all the chain of events we just described, I should be more attentive to inflationary impulses or you know,
allocation across geographies. And so it's actually interesting not to get caught up too much in the minutial movements of one geopolitic move or not, but then to just scope out fifty thousand feet, think about the inflection points, and then reason about your portfolio and your investing strategy.
Can we come play the wargames?
We want to do a wargames epit.
That would be gretz a great. It's such a fascinating technique, and in an era where we're all a little bit overconferenced, the lean forward engaged dimension of wargames with clients really fun.
We'll make that happen. I hadn't even thought about that. With India in the sort of middle between the raw commodities, I knew about the role of the supply chain anyway, fascinating conversation. We could just keep talking about all this stuff for hours. It does feel like I'm not crazy, or that we're not crazy, that things are a little bit crazier these days, or unprecedented times, interesting times. Jared Cohen, George Lee of the Goldman sax Global Institute, thank you so much for coming.
Me from up on.
Thank you guys. It's great.
Crazy. I really like that conversation. You know, as I mentioned, it always feels, oh, there's a lot going on. These are unprecedented times. It's nice to talk to some professionals and like, no, you're not going crazy. These are kind of unprecedented times.
It is different right now. Yeah, yes, So two things stood out to me from that conversation, and one of them is it is truly remarkable just how quickly countries are moving at a strategic level when it comes to AI, and that everyone seems to agree this is important both strategically from a geopolitical perspective for national security, et cetera,
and also for their respective domestic economies. The second thing that I find really interesting, and we've spoke about this before, we did that episode with Acquired, but it's the sort of intermingling of corporations with political power. So the idea that some of the hyper scalers are now in the subse cable business too, and subse cables are incredibly important to all those strategic AI missions that I just laid out. That seems different as well.
You know what I thought was another interesting thing in why it's good to talk to geopolitics people sometimes like you and I, when we think about, like, I don't know, the last fifteen or twenty years, you know, how do we usually segment up we think about the Great Financial Crisis? The COVID shock, the recession that happened for about ten
minutes and twenty and then the boom that turned really hot. Right, when you talk to geopolitics people, it's the war on Terror, and which never comes up, but the idea of the War on Terror being this very significant sort of economic story of impairing the economic ambitions for a long time.
The war on Terror in finance land is the era of Greenspan imbalances.
Yeah right, but the idea of like this was a fetter on the economic ambitions of golf states, which are now so huge and not really something I think much about. And then this idea of COVID, which again we usually talk about from a sort of economic standpoint. We've done a million episodes on that as marking the sort of starting gun of what we now call, you know, great power competition and their idea of geopolitical swing states. So I like the people coming at it from a different perspective.
Break up ears of history in a way that's distinct from the way econ and market people do.
Absolutely, and I do want to go into Goldman to play those war games. And I've always been curious, like no I know how to actually work.
Well.
I want to play war games, and I also want to do the ones like with the actual board or like with the board games, or like they roll the dice and it's like, okay, you have a seventy percent chance of your amphibious mission actually working. Do you actually do that?
I want to wait, does that mean you're going to go to one of those board game clubs with me?
No, Tracy, I'm not going to know you want to. I want to do like a serious one with like researchers. I'm not going. I'm sorry, I'm not too cool. That's what you're saying, playing like you know, Settlers of Katan and all that stuff. And then the one other thing that really, I'm sorry, you just angered bunch of our listeners. I'm sorry, I love you all.
Sorry.
The one other thing that I just think is like a stunning word to hear. Jared used the word evaporate to talk about the sort of status of Europe, which is, you know, one of the richest areas of the world, and you know it's Europe, and to hear the word like evaporates, like actually, you know, there's no sign that the bariss has gotten too far, which he described really well due to the nature of the parliamentary dynamics in Europe.
It's bleak, it is extreme, that kind of word. But on the other hand, I think everyone would agree we're sort of living in an era of extremes. So here we are on that happy note. Shall we leave it there?
Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Jill Wisenthal. You can follow me at the Stalwart. Follow our producers Kerman Rodriguez at Kerman Ermann dash Ol Bennett at Dashbot, and kill Brooks at Kilbrooks. More odd Lots content, go to Bloomberg dot com slash odd Lots, where we have a daily newsletter and a blog. You can find all of our episodes and you can chat about all of these topics, including geopolitics, there's and defense and AI. There's so much in there in our discord
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