ED HARRISON: Maziar Minovi, very glad to have
you here on Real Vision.
You are the CEO of Eurasia Group, we actually
had in Bremmer talk to us a little while ago.
Tell us a little bit-- I noticed your tagline
was politics first, tell us a little bit about
what you guys do, and how it relates to markets
in particular for what you do.
MAZIAR MINOVI: Yeah, our hope and aspiration
is to be the place where people come to find
out about the world.
Our approach to that is with politics first.
The firm really offers services across a range
of clients, our home and the beginnings of
the firm 21 years ago was to service financial
sector clients.
Over the years, that's expanded to corporate
clients of all sorts in the US and outside.
More recently, the last few years into media
with the advent of GZERO Media, where we try
to make politics accessible in an unbiased,
but smart way, the first part of which is
in rare commodity these days.
ED HARRISON: Actually, it's interesting because
before, we were talking off camera about your
background, and it makes a lot of sense that
Eurasia was in the finance space before because
you were actually in the finance space.
We were talking about how you had IMF economists
and there's like a merge between understanding
non-markets type of economics and the global
economy and financial markets.
Tell us a little bit about your background
and how that came to be that you came to Eurasia.
MAZIAR MINOVI: Yeah, actually, the link goes
even deeper and earlier than that.
I share on my first day on the job as CEO
and I was talking to our colleagues, I mentioned
that I feel like I'm coming back home again
because many in your audience may be ancient
history but I grew up as a teenager in the
middle of the Iranian Revolution.
I saw firsthand when the rest of teenagers
around the world were figuring out who their
boyfriend or girlfriend would be, the impact
of politics on real lives.
My father was in the Navy, we had friends
escaped, we had friends killed.
We stayed there for two and a half years after
the revolution and my father had some experiences
he'd rather not talk about.
I escaped at 16 through the Pakistani border
and came to Europe and the US from there.
For me from an early age, politics and the
way it shaped lives was fundamental and trying
to understand it and frankly, in the early
stages, trying to control it, understand,
to be able to use it to get my country back
was one of the things that guided me.
I remember in college, I called my dad up,
we were separated by an ocean, that I have
to decide on a major.
What do you think?
He said, well, you've done well so far.
It's really your choice but just remember
one thing, you're not like the other kids
around you, you're a refugee.
Whatever you pick has to be something that
also supports the family.
I remember looking around, so I like politics.
I like their national affairs, international
finance, that seems like it has both of them.
That's what really got me into finance and
pretty quickly, I trended towards the political
economy portion of it.
I did my dissertation and privatization in
Eastern Europe in '89 to '92, just as things
were changing.
That got me into finance, financial firms.
My first financial firm was Putnam, they were
looking to buy and sell sovereign debt of
Eastern European countries and Russia.
There was no fixed income Eastern European
expert in 1994.
There I was in finance, and the rest is history.
ED HARRISON: Yeah, that is really very interesting
I have to say.
Actually, I could go on for a long time talking
about this the past, but let's fast forward
it to the present for a second because the
nexus of your background, and what's happening
today is it's really driving markets, it's
driving the economy.
I want to set the stage in terms of what you're
seeing in terms of what the preconditions
are for the top risks from a geopolitical
perspective.
You had a presentation that I was going through,
and you outlined what the macro background
is.
One of the things was growth.
Tell me a little bit about what the overall
growth outlook is.
MAZIAR MINOVI: As an investor, you can either
take these risks as given and react to them,
or you can try to lean in, I've always tried
to lean in, in my former life the last 25
years as an investor, and the last year at
Eurasia.
When you try to understand when geopolitical
events have impacts on markets, and really
do the survey, one by one, to see the impact,
a couple of things come through.
One is of course on a country and a regional
level, they could have a lot of impact in
all sorts of markets.
When you widen the lens to geopolitical risks
that really makes sustained impact on major
markets, US equity market, US bond market,
in fact, there are very few that do so and
that's even going back to the '60s.
Believe it or not, we did.
When you do that, really, there are only a
few situations where this happens where the
impact is persistent and large.
They generally hack occur when there is broader
economic fragility.
Now, there's some other conditions like it
has to impact the supply of a major commodity,
US has to be involved, but really, none of
it happens, unless there's some fragility
or imbalance in the global economy at the
same time.
Perfect example of this is Nixon impeachment,
that whole process.
You look at the markets, the timing works,
I think the equity market in the US tanked
27%.
You say, okay, well, here's a political risk
that impacted markets, but then you look a
little bit before that and really, that happened
on the heels of the quadrupling of oil prices,
and the stagflation that started to take hold
there.
The economy was already fragile, the Fed was
trying to deal with it.
Fast forward to today, one of the things I
always have in mind is where are we on that
scale?
What is the enabling condition?
When you look at it that way, there are some
signs that are worrying.
Growth this year in 2019 ended around 2.9%
globally, that's the slowest we've had since
the financial crisis and the trends aren't
particularly encouraging.
ED HARRISON: Oh, yeah, that's the real question
for 2020 then.
MAZIAR MINOVI: When you look at the IMF latest
WEOO assessment, they came out I think on
Monday, they have a growth in the advanced
world stabilizing to going down even more.
US is supposed to go down to 1.9 and then
1.7% growth.
That's just a hair's breadth over stall speed.
They have China slowing down.
Europe is also slowing down.
The only places they have going up are emerging
market countries ex-China, which as we were
talking earlier, seems somewhat aspirational.
I haven't seen it my quarter century, that
set of facts very often.
When you dig down bit below it, they expect
some emerging markets that really fell a lot
in 19 to rebound.
I've worked at the IMF.
I know their models are designed to mean revert
to some trend.
Yes, if you slow down a lot, you're forward
looking projections will be to go up.
That seems not necessarily, from a real world
investor perspective, what you should be counting
on and indeed between the October IMF forecast
and the one this week, we already see some
major revisions in the growth most notably
in India.
ED HARRISON: They're down?
MAZIAR MINOVI: As big drop in the projected
growth of India, I believe, is over a percent
in the span of three months road.
That's pretty big revision.
To come back to the main point, the global
economy is fragile.
Yes, is the base case we're going to go into
a recession?
No.
You look at most models in New York Fed and
others, around 25% chance of recession in
the US in the next year.
That compares to an unconstraint 11% in any
given year since '81, when the monetary policy
framework was similar.
From my point of view, well, 25% isn't so
bad.
If you look at the other way, as I have, and
when you talk to people who've been at the
Fed that certainly looked at this, most of
these recession models, almost all of them,
don't wait till 70% or 80% or 90%.
When they pass 40%, historically, we've had
a recession, so being at 25%, or a few months
ago when we were at 30% is not something to
be to sneeze at.
That worries me.
The macro economy is vulnerable to a push
and the ammunition to offset any impact on
growth that comes from loss of confidence
from all of these geopolitical risks, be the
US-China trade or Iran, the room for offsetting
them has dropped.
ED HARRISON: I was going to say actually,
when you say the room for offsetting them,
the first thing that comes to mind for me
is the ability for countercyclical measures,
whether it be fiscal or monetary.
What do you see there in terms of the macro
preconditions?
MAZIAR MINOVI: Just to set the scene for people
who may not be familiar, we've had three rate
cuts in the US this year, and the Europeans
have resorted back to QE.
The Fund, again, its latest assessment said
those moves, the loosening of monetary condition,
really allowed for a boost to the economy
of these countries and to the world of about
half a percent for this year and next year.
That's the order of magnitude we're talking
about impact that monetary policy can have.
The problem is that now, interest rates amongst
the G3 countries and you can add UK to that,
G4 economies, is close to the lowest on average
they've been since the financial crisis.
Where do you go from here?
In Europe, we're already in negative territory.
In Japan, we're in negative territory.
In the US typically, when the Fed faces a
recession, they have five percentage points
to work with.
Now, it's significantly less than that.
The room is less on the monetary policy to
do anything and the bond markets already pricing
in more QE in the future so forward guidance
and promises of buying bonds in the future.
At the margin, the impact of it is minimal
going forward.
On the fiscal policy side, another way governments
can try to push back against loss of confidence.
When we look at the political economy, the
picture isn't pretty.
You tell me in the US, are the President and
the Democrats in the teeth of an impeachment
process going to cooperate to do a fiscal
stimulus?
The political economy of Europe really is
not conducive to meaningful fiscal stimulus.
We can go into that if you like.
Yes, Japan will do their typical supplemental
budgets as they do every year.
We will all suspend disbelief that a country
with 260% GDP government debt, debt to GDP
is sustainable over the long term, but there's
not room for massive surprises.
Neither is there in China, absent a major
crisis.
The global economy has slowed down, the ability
to offset the impact of negative political
risk is lower and that's the environment in
which the sorts of risks we see for next year
and 2021 really concerned me.
ED HARRISON: Let's get into the risks then
because I know I saw a presentation that you
had done just recently on what you would consider
the top 10 macro geopolitical risks.
Maybe we can cover five or six, but let's
go down what are the most important?
What's the first thing that pops in from a
geopolitical perspective risk-wise?
MAZIAR MINOVI: Interestingly enough for the
first time in the history of Eurasia, we have
the US as risk number one.
It's not the way you would think of it.
It's not about the impeachment process itself.
It's not about the outcome of the election.
It's more about the impact of this extreme
polarization that we're witnessing today.
Yes, the impeachment and the election are
turbocharging it, but what worries us is that
as we approach the election and its aftermath,
there will be a crisis of legitimacy in the
US, something that US citizens and the markets
aren't used to thinking about or pricing.
What do we mean by that?
When you look at the timeline of the Ukraine
affair, it's interesting to note that the
President's efforts, based on the evidence
so far describe, to try to compel investigations
into his competitors in Ukraine started the
day after the Muller report was put to bed.
Here we are looking at the impeachment and
the election timeline is getting closer, we
do expect that the President not be convicted
in the Senate and we are concerned about what
happens a day after.
You have a president who has very stable ratings
in favorability ratings, but low.
What is the strategy, the election strategy
that makes sense for any politician in that
situation?
It's not to go and tack to the middle and
bring in independence, people have already
made their choices that the range of truly
open-minded voters is quite small.
What you do is mobilize your base, wait for
an opponent and delegitimize them as much
as possible to turn down the turnout from
the independence and right leaning Democrats.
We're very concerned that after the impeachment's
over, the President's going to continue his
efforts of delegitimizing whomever he sees
as his biggest threat and given the experience
of the last four years, very likely that there'll
be increased allegations of foreign involvement,
of using private money in ways that are not
typical or possibly legal, certainly in the
eyes of the opposition, as we approach election
day.
You turbocharged the polarization, you get
to an election that's very close.
In our assessment, the election is going to
be very close either way.
Right now, gun to head, we think the President
would win 60% odds or so, but very close and
very likely where we'll have democrats actually
win the majority of the votes, possibly with
even a wider margin than last time.
This fuel to the fire of the polarized environment
could create an environment where the opposition
whoever loses will have a hard time accepting
the outcome.
Demonstrations on Washington, court fights
in multiple states contradicting each other
and it's very unlikely to imagine as we had
in 2000, once the Supreme Court speaks, that
the opposition is going to say, okay, fine,
thank you very much.
I'm gone.
Just imagine, just to crystallize this, you're
on January 19, the day before the inauguration,
and still one side hasn't accept the legitimacy
of the other, how is the market going to respond
to that?
How are foreign leaders going to respond to
that, enemies and allies?
Now, we're not saying the US is we're going
to become a banana republic, the institutions
will work themselves out but there'll be a
very unusual period of uncertainty.
ED HARRISON: You could make the argument that
this legitimacy that you're talking about
has become one where might makes right and
in the sense that if you control the numbers,
you get to do whatever you want.
MAZIAR MINOVI: When we look at the political
economy of major countries around the world,
you do see that countries with strong civil
societies have a much more stable environment
and started framing this in the J curve concept
as you become this more democratic stability
really phrase.
Then as you go even further, you get to a
place where stability is higher than when
you started in autocracy.
The US has, the political system, has strong
institutions, powers diffused, we've had a
history over hundreds of years of these, whether
it's the judiciary, whether it's the states,
whether it's the offending parties, own party,
pushing back when it comes to an extreme,
McCarthy era is one.
What we're worried about is we may not have
seen a situation like this since 1887, where
ultimately, they couldn't agree to the President
through legal means so they had to make basically
an extra legal compromise that brought in
[indiscernible] presidency but the [indiscernible]
at the North would pull its troupe out of
the South and the Reconstruction Era took
a different turn.
That's just to dramatize what we're talking
about, but we will get to a solution.
It's just that from here to there, we're worried
that markets may have one of those air pocket
moments or many of them not knowing what comes
next.
That is not something that's priced in.
When we talk to our clients globally, they
want to know if the President's going to get
impeached, they want to know who's going to
win and inside and outside the US, they want
to know, what can Warren do?
What damage can Warren do?
This is questions from our clients if she
becomes president.
They are not thinking about this crisis of
confidence and the constitutional crisis.
ED HARRISON: Interesting.
What about the US and the world stage in terms
of things that are potential geopolitical
risks, whether it be trade, China decoupling,
what are the things that you're looking at
there?
MAZIAR MINOVI: In our top 10 risks, risk two
and three really are focused on this China
issue.
One is the great decoupling.
We're already seeing in the tech field, in
5G, the beginnings of a decoupling between
the tech ecosystem of the US and around US
technology and Chinese technology.
Our concern is that this will metastasize
and grow beyond the confines of a few sectors
in tech.
Given the structural confrontation between
the two sides and the increased need for countries
to take aside that we will see media, telecommunications
and other sectors more and more have to pick
sides.
ED HARRISON: Interesting.
Like for instance in the UK, recently, they
were talking about Huawei and like if we don't
choose Huawei, who do we choose?
I think it was Boris Johnson's call to the
United States.
Is that the thing that you're talking about?
MAZIAR MINOVI: It is.
The question almost will become, who will
be?
Where will the next Berlin Wall, the tech
Berlin Wall fall, and which countries are
on which side of it?
UK, Japan.
For countries like Korea, South Korea and
Taiwan, it's going to be a very difficult
choice because they're already tied into the
value chain in China as well as penetrated
China's final demand market.
Where do they fall?
On 5G obviously, right now, the Chinese and
Huawei is slightly ahead in terms of commercializing
the technology.
If a country has to pick sides, they'll have
to look down the road that if they do this,
then they may lose access to other parts of
the US ecosystem that they truly value.
We think at the end of the day, most western
countries will gravitate around the US orbit,
even Japan for security reasons given their
long history of enmity with the Chinese.
The most interesting part is who are the other
ones that are on the edge?
It's clear to us that Sub-Saharan Africa and
Southeast Asian countries will probably choose
the Chinese ecosystem.
As I mentioned, Taiwan, Korea will be on the
cusp, but this is what the intensification
of this bifurcation of technology and sectors
is the future.
It's a structural trend and it's just going
to metastasize.
ED HARRISON: I have two questions in that.
One is, how much of this is driven by whether
Trump is reelected?
The second is, what have the Chinese decided
in terms of decoupling in terms of we're definitely
going to decouple or maybe we could go back
and recouple?
What do you see on both of those fronts?
MAZIAR MINOVI: This is not a Trump phenomenon
on many levels what we're experiencing globally.
On the tech side, in particular, I'll tell
you a story.
In 2017, right after the President was elected,
I had a chance to speak with Ash Carter, who
was the Secretary of Defense under the Obama
administration, the serious heavyweight professional,
not taken to hyperbole, actually a rocket
scientist by training in and out of government.
Back then in 2017, when we were talking with
him, he said one of his biggest regrets is
how Washington and the politicians are not
taking seriously the threat to critical infrastructure
of the US from Chinese and Russian technology.
That globalization and the market's considerations
have dulled the sensibility to vulnerability
of the US.
That was from a Secretary of Defense of democratic
administration.
Among the very few things in DC that you find
now unanimity about is this issue that our
critical infrastructure has to be protected.
We have to be much more mindful of this.
Even if the President is a Democrat, maybe
the temperature comes down but the national
security leg of this is going to continue
with more or less the same intensity that
we've seen.
ED HARRISON: Does that have any implications
in terms of balkanization of the internet
and tech giants and where they stand from
a valuation perspective?
MAZIAR MINOVI: Yeah, it certainly does.
You and I's professional career has been defined
by a world that's constantly globalizing,
we're getting closer and closer to optimizing
economic activity and investments, and it's
hard for us to process, no, this can go the
other way.
Another way of putting what you said is, are
we headed to a world where we'll have suboptimal
outcomes, and our tech is not going to be
as cheap as it could have been in a globalized
world?
Absolutely, or as accessible.
When people make these choices, countries
make these choices, they're going to have
to choose between cheap, but far less privacy,
or more expensive.
In our current context, think of Apple versus
an Android device.
If you want privacy and more quality, you
have to pay for it.
ED HARRISON: You could look at the trade front
as a second front there in terms of this US,
Chinese tete a tete, but it's also beyond--
when you talk about deglobalization, it's
beyond just US-China.
It's also USEurope.
Literally just the other day in Davos, Trump
was like if they don't do X, then they know
that I'm going to put tariffs on them so they're
going to do X.
Is that where things are headed?
Where does that stand on your list of geopolitical
risks?
MAZIAR MINOVI: The trade component of it is
what has obviously fueled the fire and really
brought this issue to the fore in the most
recent period, but it's not a new development.
I wish I could remember verbatim the speeches
by President Johnson about how the European
auto industry was sucking the lifeblood out
of the US and that was actually why the US
imposed 25% tariffs on trucks in the '60s
on European so this is not a new phenomenon.
The Airbus Boeing debate has been going on.
In the context of that, clearly, the President
has his own very unique views about what trade
means and what trade deficits mean.
We would expect from the US side, this issue
on auto tariffs where they currently have
a truce to rear its ugly head sooner rather
than later, maybe not this year, but if not
this year, and he's reelected next year, the
President's focused on countries that have
large bilateral deficits with the US and he
seems especially focused on heavy industry.
Steel, aluminum, autos, and you look at that,
and the Venn diagram falls straight on Germany.
That tension is not going to go away, but
it will be going beyond that.
We have now the Germans really getting serious
on carbon taxes and reducing emissions.
Well, project forward a year or two, if they're
shifting to that, they don't want to disadvantage
their companies because they have to be operating
in a much more sustainable basis.
Guess what's coming next in our future?
Carbon equalization tax, effectively a tariff
on carbon.
Guess where the biggest emitters of carbon,
US economy coming out of a Trump administration,
the Chinese.
These issues are going to be with us to stay
and actually worsen in the future.
ED HARRISON: Again, is that a Trump related
phenomenon, or let's say that Elizabeth Warren,
Bernie Sanders, Joe Biden, whoever it might
be, gets the nod, do you see that persisting?
MAZIAR MINOVI: We do see it persisting, the
targets may change, and in some places, the
temperature may change.
A President Biden is going to have advisors
that are far more in line with mainstream
economics that trade deficits by themselves
are not negative.
You see right now this USMCA or NAFTA, NAFTA
2.0 that just got passed that many populist
Democrats and Congress were happy about this.
It actually goes towards what they've been
wanting to do all the time.
Now, from a macroeconomic point of view, from
an efficiency point of view, it's a suboptimal
outcome.
Really, NAFTA hasn't changed much, but in
ways it has, it's going to make things more
expensive, but Democrats are all-- some portion
of populist Democrats, Warren's, Schumer on
trade, Sanders, like many aspects of this,
and it was already hard to get a trade deal
through.
It's going to be even worse after a Trump
presidency.
ED HARRISON: I looked at your list of your
top 10 geopolitical events.
One thing that I think was interesting when
we talked about the IMF and the fact that
they're downgrading between October and January,
India, you mentioned was downgraded 1% in
three months.
For me, this is a topic-- and I think actually
at Real Vision in general, that we don't talk
about enough.
India is a huge economy and we don't really
have a good hold on what's going on there,
both economically and politically.
Can you give us a sense of what are the risks
there?
MAZIAR MINOVI: Sure.
The way we rank these risks are a combination
of the probability of them happening and the
impact they'd have globally.
India's risk was number five, because of exactly
the size that you mentioned.
One of the joys of leaving my former employer,
Goldman, coming to Eurasia is the titles can
be so much more interesting.
At Goldman, the title of this risk would have
been India's economic outlook the year ahead.
Here, we have India modified.
The point we're trying to make is in Modi's
first administrations, despite fears of his
now nationalist tendencies and then some of
the policies he had pursued in his home state,
he actually took on some of the sacred cows
of economic reform in India.
Yes, it's a messy democracy.
What came out of the sausage factory was far
weaker than what was hoped for, but he finally
got a nationwide BAT reform through, that's
been something they've been trying to do for
20 years, and many other small reforms along
the way, which fueled huge capital inflows
and gains for investors.
What we worry about is in his second term,
in order to maintain his grip on power, he's
now had to rely more on policies that are
attractive to certain segments of his coalition
policies like route stripping the special
status of cashmere, what looks like a religious
test for citizenship, although they have different
wording for it, which on the face of it obviously
from a human rights perspective are very concerning,
the problem is that the parties that that
appeals to are also the most anti-reform parties
in India.
Not a surprise that at the same time this
was happening, India withdrew from the RCEP,
which is the a trade agreement in Asia which
China's involved in to try to lower barriers
between Asian countries.
India, at the insistence of these coalition
parties, removed itself from those.
You have an India going into 2020 that, because
of this turn towards nationalism, is going
to come under international scrutiny.
We can see more sanctions, in fact, on India
from the US and Europe coming on, and when
you think about the political economy of it,
they're a proud country, they're a large country,
the Nationalist parties are going to agitate
for a response.
That's only going to worsen this cycle.
Meanwhile, they are buying S-400 missiles
from the Russians.
There's US legislation that forces sanctions
because of that.
We think the era of incremental reforms are
over.
In fact, we could see it backpedaling.
All of that is happening while India's growth
is tanking as you started out, saying.
That combination is concerning to us.
We put it at risk number five.
Does this mean necessarily that India is going
to implode this year?
No.
The fragility is rising and you already have
an economy and a financial system that's battered
because of banking vulnerability and scandals
in the last year or two.
The Spidey sense in the back of my neck certainly
starts tingling that all of these things are
going in the wrong direction and a direction
that a year ago investors would not have imagined.
ED HARRISON: I obviously missed the number
four risk, what was the number four risk before
India?
MAZIAR MINOVI: That's a risk that we thought
most people would be surprised to see on our
list, which is about multinational corporations.
Really, the idea there is in line with what
we're talking about, over the last two or
three decades, multinational corporations
have been seen as the solution to problems
in countries.
Let's bring Apple in to invest in our country
and that will increase our level of technological
superiority, or let's attract FDI into our
country, but increasingly in this polarized
environment, both politically but also from
a social perspective as income inequality
is rising and fueling populist movements,
people are looking inward and we're starting
an era where multinational corporations, large
corporations are seen rather as the problem
in the major economic areas of the world.
What we're flagging is that be it in the US
with all the concerns both about privacy with
the tech company, but as well as the reach
of multinationals from China, etc.
In Europe, certainly a world leader in data
privacy issues.
In China, response to the US is decoupling.
Companies have to become far more aware of
the politics around them and how it impacts
them and politics and geopolitics increasingly
will find its way into the boardroom as you
decide as a firm where are you going to grow?
Where are you going to fall on this in this
tech Berlin Wall that we're going to face?
ED HARRISON: As you say that, immediately
I think back to the previous point that you
were making about the fact that Europe, in
particular, with regard to the trade war,
will have to decide how they're going to deal
with things like the carbon tax, or as an
example, privacy issues.
Clearly, they can attack via the multinational
route, that is the Googles, the Apples, the
Facebooks of the world, or in terms of polluting
the American oil industry, whatever it might
be.
They can use that as the way to create a we're
now a much more-- we're willing to wield the
power that as the US and the UK leave the
diplomatic space globally, the EU may step
into that and use multinationals as the way
to take the lead.
MAZIAR MINOVI: Yeah, as an investor and an
analyst, our job is to see the world as it
is and predict what will happen.
The direction you're talking about is the
direction that we see it going without any
changes to the policy outlook of the major
actors.
We do nothing, this is where it's going to
go, increased friction, and friction begets
friction.
If a European company is constrained in the
US, you can bet that the next EU Commission
anti-competition effort will be focused on
a US company.
Then you have the Chinese angle of this for
sure, both on tech, and in the other areas
you talked about.
This could go another way.
In fact, in our GZERO summit in Japan a few
months ago, where we bring together 500 of
the most senior corporate executives in Japan,
the Foreign Minister was there and the senior
people and actually gave a speech to suggest
another way.
In the data area, if you think about this
world that we're going towards, a tech decoupling,
the US and China are the most innovative in
terms of developing these new technology,
in terms of market cap, the top 10 five are
US, five are Chinese, the Europeans have the
best regulators.
In the US, nobody wants their child to grow
up to become a regulator.
In Europe, in fact, the best students go to
the best schools and then go into government
and not surprisingly, they are ahead of everyone
and regulating tech and thinking about privacy
issues.
In Japan, because of their shrinking population
and their high income and their openness to
innovation, they're a hotbed of experimentation.
Can you use robots to comfort senior citizens
as society ages?
Instead of sitting back and taking it as it
comes, should these three economic blocks
try to get together and create something like
the WTO but for data, the international data
organization?
Set common standards, and really lean into
the problem of trying to make the best of
this environment and make it vibrant, makes
norms and standards that companies in all
these areas can adhere to, and something so
attractive that will be a counterweight to
the cheaper goods and the inducements that
the Chinese ecosystem would create, and possibly
in some day long log in the future, even compel
the Chinese to rethink their approach.
ED HARRISON: Interesting.
What do you think?
Do you think that that has a chance of working
or do you think that it's unlikely that they'll
move in that direction, you have a rise in
supply?
MAZIAR MINOVI: Well, when you look at political
economy of the changes that really impact
and create the financial infrastructure, it
doesn't happen in a straight line.
Generally, things have to get much worse before
they get better.
The IMF and the World Bank were created in
the aftermath of World War II.
People saw the abyss, lived the abyss, and
then the consensus for that emerged and same
thing for GATT and then the WTO.
These are, I think, early thoughts that are
going to take a while to germinate and really
flower and it's going to take things getting
much worse before they really get energy behind
them to operationalize.
ED HARRISON: We have a limited amount of time,
but I there were two other regions that I
wanted to cover in your list that I thought
were interesting.
In particular, one is Turkey.
I thought it was very interesting because
when you look at Modi, when you look at some
of the nationalist tendencies here in the
US with Donald Trump, I saw in your analysis
similarities in terms of what Erdogan has
going for him from an economic perspective
backdrop and then the nationalism.
What's happening in Turkey and not just in
Turkey, but also how does that impinge on
what's happening in the Middle East as well?
MAZIAR MINOVI: Actually, I have a soft spot
in my heart for Turkey because it was the
first market I ever invested in back in late
'94 I believe.
The lira was 34,000 to the dollar and by that
same denomination right now, it's at 6 million.
It's a fascinating, fascinating country, which
from 2002-'03, until I'd say three or four
years ago, constantly surprising investors
to the upside.
We're sad to put it as a risk.
It's risk number 10 because of its relatively
modest size, but in terms of probability of
a significant crisis or slowdown happening,
it's higher than almost all of our other risks.
The political economy in Turkey is fraying
in an accelerating way.
You already have a country that is one of
the most vulnerable to a stoppage in capital
flows.
It's reliant on short term private external
funding to keep it going.
Turkey and Malaysia constantly rescreen as
country's most vulnerable in those ways.
ED HARRISON: This is the private or the public
sector or both combined?
MAZIAR MINOVI: Private sector, corporations
and banks.
The government is reliant on short rolling
over of its domestic debt, domestically by
retail investors and local banks.
It doesn't have a big debt to GDP, but it's
very short term.
That's the problem.
You have to not just pay the interest but
keep borrowing the principal over and over
again.
That's what makes the challenge higher.
Already, it's economically viable, vulnerable.
Then you have a president that is used to
having his way who is politically wounded
and weakening even further.
He even lost Istanbul which was the city he's
rose to power in as the mayor, even when he
said out no, fair we're going to do the election
again, tried everything possible, he lost
again.
Turkey, one of its fascinating parts is that
despite the attempts of Erdogan in the last
few years, civil society there still keeps
pushing back.
Now, you have many of the previous senior
people in the ACT Party, his party, splintering
and creating their own political power races.
Now, none of them are going to win, but it's
just going to reduce his domestic political
support.
Here, he thought he was going to be the next
Ataturk and be able to impose his will on
the country.
A wounded, unpredictable, ambitious Erdogan
sitting on top of an economically vulnerable
economy is the genesis of this risk.
We think what we're going to see as more and
more adventurous foreign policy moves to distract
the population, we already saw him move troops
into northern Syria, to try to push back against
the Kurdish forces there, with the US pullback
from the region, the vacuum that creates that
risk only increases and there could be other
elements there like drilling in the Mediterranean
in disputed gas territories that could create
pushback from the EU or others.
More than that, his tangle, his conflict with
the US could worsen.
They're already under sanctions for buying
them as well as 400 missiles.
We have in the next year coming up the trial
of Hawk Bank, one of the largest banks, tied
in very closely to him and his party and the
US Bank courts are most likely going to convict
them of funneling money to try to circumvent
Iran sanctions.
This could really reach quite high up in his
political apparatus, including his family.
A wounded Erdogan's response to that is very
much of concern.
Remember what happened in the aftermath of
the imprisoning of Pastor Brunson and the
US sanctions, the Turkish currency tanked
20%, 30% in the ensuing few months, so we
see the risk of that thing increasing.
Then on top of it, he wants to remain popular,
so he's trying to juice up the economy.
Turkey's economy is very flexible.
If he's able to do it, and his main tool would
be forcing state-owned banks and other banks
to increase the lending to favored industries,
there's only one thing that will happen happens
over and over again in Turkey's economic history,
the current account deficit's going to widen.
Then you already have a vulnerable economy
people have a hard time lending to as it is,
they see a large current account deficit.
They see the threat of more sanctions from
the US and Europe, it's just all set up for
a significant crisis, be it a banking crisis
or an economic crisis and indeed, the IMF's
article for report, the annual review they
do of every country in the world has a beautiful
line in there.
It's going to start out its assessment buzz,
the situation in Turkey, the common Turkey
is fragile, and we would understand that's
a polite way of describing the risk we're
worried about.
ED HARRISON: Oh, you call it number 10, but
as you were going through that, one of the
reasons I pulled it out was when you look
at it from a geopolitical perspective, not
just in economic perspective, it seems to
rank higher.
The nexus between Syria, Iran, the fact that
they are a member of the NATO Alliance, and
then there are inter-NATO vulnerabilities,
sanctions from the US, the EU and the drilling.
It sounds to me like Turkey's at the nexus
of a lot of geopolitical tensions and potentially,
could rank higher at least from a political
perspective.
MAZIAR MINOVI: There's always a challenge
in these lists.
For instance, if you had a top 10 risk ranked
by human misery, you would certainly put large
swathes of the Middle East and Africa on top
of that list.
As I said, we look at it as a combination
of the probability of a risk happening but
the impact it would have on the global economy
or markets.
Yes, it's a big issue but really the impact
of an implosion in Turkey at this stage is
pretty much confined to the markets and the
economy of Turkey and the surrounding countries.
Could an adventurous foreign policy venture
by Erdogan reignite the Syrian civil war?
Possible.
Is that really going to impact markets?
Is that really going to impact the economy
of major countries around the world, not,
unless it impacts oil?
It's obviously a horrendous way of from a
human perspective to look at it.
I know and as right now in Davos, speaking
on a panel with the head of the UNHCR, talking
about the human toll of the unrest in the
Middle East created by the vacuum of the US
pulling back.
That certainly is in our minds but from a
global economy perspective, the impact, I
think the ranking is justified.
ED HARRISON: The other reason that I was talking
about that I mentioned was Latin America.
Particularly, I thought it was interesting
because you mentioned NAFTA and USMCA earlier.
Mexico, what's going on there in terms of
what they're doing from a fiscal perspective,
and what are the economic outcomes that you
see?
MAZIAR MINOVI: Mexico is unusual in the region,
principally, because its leader is actually
liked.
His favorability, Andres' favorability ratings
are in the 70s.
Clearly, he's capturing the mood of the country,
unlike the leadership in many of the other
countries in the region that has led to the
demonstrations we've seen over the last few
months in the region.
In fact, as a longtime investor and observer
of the country, it's exactly a time like this
that worries me about Mexico because the honeymoon
is coming to an end.
He truly wants to fulfill his campaign promises,
which require significantly larger investments
in education and infrastructure and his favorite
projects, but still large investments.
At the same time, he's promised to not allow
the budget deficit to widen beyond a certain
point.
These two things in a slowing economy with
reduction in oil exports are incompatible.
He has to start making choices about which
one is more important, fiscal prudence or
his promises.
We think he will choose his promises.
If he wants to keep the optics of the fiscal
picture, still all right.
That means he's going to have to increasingly
resort to unorthodox measures using Pemex
as a piggybank.
One of the reasons Mexico and the peso are
the most heavily traded currencies in emerging
markets is because of their well-developed
fixed income market, fueled by investments
of their growing pension funds, which have
very clear rules and regulations to guide
their activities.
Could he be tempted to tweak those regulations
to allow or direct the pension funds to spend
some of their money on domestic infrastructure
projects?
Then what will happen to the bond market?
If we do have a hiccup and confidence, then
10s of billions of dollars of pension fund
money from US and European investors could
flee quite rapidly again, in the context of
an economy that's slowing down.
In the oil services area, he's, if not shut
down, significantly curtailed the opening
to allow private investors to come in and
he wants to concentrated all through joint
ventures with Pemex, which means more and
more inefficiency, and most worrying of all
would be if he starts to muck around with
the independence of the central bank.
He's already appointed a few governors.
In the next year or two, he's going to have
more appointments.
So far, their reaction function has stayed
the same, but a president that has the ability
through the votes in Congress to change the
charter of the central bank and make it more
political and to impact the people who are
running monetary policy, that's a worrying
combination.
We're going to be focused laser like on when
he faces this tradeoff which way it goes.
Let's not forget the IMF, thanks to the much
more market friendly policies of the previous
government, has given them what they call
an FCLFF, flexible gridline of a massive magnitude,
10s of billions of dollars, SDRs.
It's supposed to be for countries who do great
policies to use as a line of credit.
As they start moving in the wrong direction,
is the IMF going to continue to endorse the
economic policies of Mexico?
If they don't, and they withdraw it, what
signal does that send to the market?
The future is quite dicey for Mexico.
ED HARRISON: You're actually talking about
Italy, and a bunch of other stuff.
We've ran out of time, unfortunately.
We'll definitely have to have you come back.
That is a massive overview that you've given
us today of the geopolitical risks.
I really thank you for coming in.
It's been a pleasure.
MAZIAR MINOVI: My pleasure.
I'm like a kid in a candy store in this new
job.
It's like, figuring out the best things you
enjoy looking at and mixing it with what you
knew before, so always happy to talk about
it.
ED HARRISON: Thank you.
