Show Transcript
The current geopolitical and policy climate suggests sustainability, and specifically green technologies, may be a key investment thesis going forward. Kim Parlee speaks with Marko Papic, Partner and Chief Strategist at Clocktower Group, about the big investment themes in the decade ahead.
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[MUSIC PLAYING]
- My next guest has just put a paper out called Race to Zero. And within that paper, he talks about the fact that the next decade could see a policy push in things like sustainability and green technology that could more than equal the Cold War space race, which is a fascinating way to look at where opportunities may be. Marko Papic is a partner and chief strategist at Clocktower Group. He's author of Geopolitical Alpha, which made Bloomberg's 2020 best books list. And he joins me from Los Angeles.
Marko, great to have you with us, as always. And I do want to get to your paper. But before I do, I need to ask you first about Washington and the Capitole, and just your thoughts from your geopolitical standpoint, why we're not seeing more of an impact on markets on what's happening there?
- You know, great to be back. I want to thank you so much. I think we are seeing impact on the markets, especially with the a sell off in the bond market that has been on going. I think that whenever you have an event like this, one of the expectations is that the policy relevance of the civil unrest is going to be the policymakers are going to have to assuage the angst with more spend. I think this is something that we've been seeing all throughout last year as well with the justice protests as well.
I mean, there's a lot of angst. It's wrapped up in specific discreet issues, but also has to do with a broader perspective, that the US hasn't really dealt with income inequality very well over the past decade. Let me put it to you this way, Kim, think about what Canada has done or what Europe have done over the course of the last 75 years. I think one of the biggest macro theses over the next couple of years is going to be that the US is going to have to catch up to that kind of level of redistribution in four years.
So what Europe did in 75 years since Second World War, America now has to do over the next four years. And I think that's better for the bond market.
All right, let's then shift then back to the original reason why we brought you on, and talk a bit about your paper, and the first paper you put out I understand for 2021. What is the Race to Zero? And what zeros are you talking about?
- Many zeros. Many zeros. So Race to Zero is really a way to define a sort of orientation of great powers in the 21st century. Over the last two centuries, the orientation of great powers, the way you would measure strength of different countries was really about scale, about achieving scale in mass production of various goods and services. And I referred to this as the race to scale. And really, what's happening right now is the technological evolution has allowed great powers to really compete on this race to zero, not who's going to produce more with less, but actually who's going to produce less with less. And I think that's going to define the next century.
Can you talk to me a bit what those zeros are? I mean, you talk about scale and the importance of that. But again, this goes back to zero what? Where are the zeros?
- Negative externalities, such as carbon emissions would be the obvious zero. But I think there's other zeros as well. It just inefficiencies. This isn't about putting men in the field with weapons. This isn't about charging the trenches. This is about having far more efficient economies and that means zero imports, zero energy use. It means not full autarchy, the fancy term we learned in E-Con 101, which is a completely closed self-sufficient economy, but something asymptotically approaching autarchy.
And this is really important if you're, for example, China right now, and you're trying to become truly sovereign, and not be exposed to the dominance of the US Navy in terms of access to commodities and energy, alternative energy, EVs, battery technology. It's not just about reducing pollution for China, it's also about sovereignty. And it's about the national security interest. Same with Europe, when Europe looks at, for example, energy independence from natural gas imported from Russia.
And now with the Biden administration running the US, we're starting to see this confluence of forces, where great powers are now looking at what we've seen as green tech from a perspective of preventing climate change, but they're starting to look at these technologies that underpin our green tech in looking at it from a national security perspective as well.
Let me ask you, I mean, one thing that-- I mean, the market obviously is in tune with this. I mean, we've seen, I'll say, green stocks, for example, up about 200% in 2020. But is the best time done? Do you see there's a lot more to come?
- Yes, that's a great interesting question. There's so many things going on on this front that I would love to mention. First of all, on the green tech, yes, stocks are up 200% from the market lows in 2020. We're also seeing copper highly correlated with price of EV stocks, for example. So commodities are starting to catch a bid based on this thesis, too. But I think the reason this is not done is because right now, a lot of investors still look at this as oh, well, you're just betting that people will care about climate change.
This is about Al Gore. This is about Greta. It's about investing on this idea that climate change matters. This is so much more, Kim. This has to do with policymakers trying to increase growth through fiscal spending on ideologically approved spending things, like, trying to prevent climate change is something that most societies right now have decided is really worthwhile. A lot of spending is going to be done with that. But the real underlying reason is to ensure that there's job creation.
On the geopolitical front, as I mentioned, there's a national security component here. We don't want another country to take a lead on these technologies. So there's actually going to be a huge legislative push across the major economies behind this endeavor, so it's a really serious one. And therefore, I say this kind of tongue in cheek, but I think we're like in the year 1994 of the NASDAQ here. This is not 1998, 1999, or 2010. We're at the beginning of a very long at pocomania, if you will, in this thesis.
I want to bring in, if I could, a chart that I understand that you put together because, I mean, and I want to make sure we get to all this because we've only got a few minutes left. But you talk a bit about, and you can see here, the global green initiatives, the size of the spend, and this is great, Marko, every human endeavor ever undertaken. It's really that big.
Not a hyperbolic chart at all. Just joking. That is a tiny cheat chart. I can't see that that's properly priced every human endeavor ever undertaken. But the seriousness of this is that there truly has never been, Kim, a bigger spend on anything. Apollo Program is dwarfed by the amount of money. Manhattan Project is a rounding error of how much policy support these themes have. Now look, you don't have to go out there and buy Tesla. That's not what I'm saying. I'm not a stock picker. I don't pick individual stocks.
There's other ways that you can articulate this thesis. One is commodities, particularly mining. You're going to need to dig up a lot of metals out of the ground to make this shift to alternative energy. The second one, for example, is industrials. Industrials have had their lunch eaten by the IT and communications sector. What I see over the next decade is the software SaaS businesses and tech, and their outperformance relative to industrials, I think it's going to shift as some of this innovation and some of these technologies allow industrials to really innovate and improve the profit margins in their earnings at the end of the day.
Marko, I've only got about 30 seconds. But for people who can take a look at this paper, you like as you say industrials, but also oil, which is of keen interest to a lot of Canadians.
- Yes. Yes, well, so that is the irony here. I think for a very long time, Kim, there was this view that oil producers were going to pump as much as they could because they see the ESG train coming. So they were going to dump the oil they have in the ground on the open market. I don't see that happening. I don't see Saudi Arabia doing this. I actually see them investing in infrastructure projects like now half a trillion which is a play on these new technologies.
I actually think that we're going to get into a world where Capex is going to drop so much into energy production, into oil production that supply will be eroded before demand does. And because of that, we could actually have a steadily increasing oil price even as demand is destroyed, which will only encourage an ever faster adoption of alternative energies and EVs.
Marko, great to have you with us. Thanks so much.
- A real pleasure. Always a pleasure. Thank you.
[MUSIC PLAYING]
- My next guest has just put a paper out called Race to Zero. And within that paper, he talks about the fact that the next decade could see a policy push in things like sustainability and green technology that could more than equal the Cold War space race, which is a fascinating way to look at where opportunities may be. Marko Papic is a partner and chief strategist at Clocktower Group. He's author of Geopolitical Alpha, which made Bloomberg's 2020 best books list. And he joins me from Los Angeles.
Marko, great to have you with us, as always. And I do want to get to your paper. But before I do, I need to ask you first about Washington and the Capitole, and just your thoughts from your geopolitical standpoint, why we're not seeing more of an impact on markets on what's happening there?
- You know, great to be back. I want to thank you so much. I think we are seeing impact on the markets, especially with the a sell off in the bond market that has been on going. I think that whenever you have an event like this, one of the expectations is that the policy relevance of the civil unrest is going to be the policymakers are going to have to assuage the angst with more spend. I think this is something that we've been seeing all throughout last year as well with the justice protests as well.
I mean, there's a lot of angst. It's wrapped up in specific discreet issues, but also has to do with a broader perspective, that the US hasn't really dealt with income inequality very well over the past decade. Let me put it to you this way, Kim, think about what Canada has done or what Europe have done over the course of the last 75 years. I think one of the biggest macro theses over the next couple of years is going to be that the US is going to have to catch up to that kind of level of redistribution in four years.
So what Europe did in 75 years since Second World War, America now has to do over the next four years. And I think that's better for the bond market.
All right, let's then shift then back to the original reason why we brought you on, and talk a bit about your paper, and the first paper you put out I understand for 2021. What is the Race to Zero? And what zeros are you talking about?
- Many zeros. Many zeros. So Race to Zero is really a way to define a sort of orientation of great powers in the 21st century. Over the last two centuries, the orientation of great powers, the way you would measure strength of different countries was really about scale, about achieving scale in mass production of various goods and services. And I referred to this as the race to scale. And really, what's happening right now is the technological evolution has allowed great powers to really compete on this race to zero, not who's going to produce more with less, but actually who's going to produce less with less. And I think that's going to define the next century.
Can you talk to me a bit what those zeros are? I mean, you talk about scale and the importance of that. But again, this goes back to zero what? Where are the zeros?
- Negative externalities, such as carbon emissions would be the obvious zero. But I think there's other zeros as well. It just inefficiencies. This isn't about putting men in the field with weapons. This isn't about charging the trenches. This is about having far more efficient economies and that means zero imports, zero energy use. It means not full autarchy, the fancy term we learned in E-Con 101, which is a completely closed self-sufficient economy, but something asymptotically approaching autarchy.
And this is really important if you're, for example, China right now, and you're trying to become truly sovereign, and not be exposed to the dominance of the US Navy in terms of access to commodities and energy, alternative energy, EVs, battery technology. It's not just about reducing pollution for China, it's also about sovereignty. And it's about the national security interest. Same with Europe, when Europe looks at, for example, energy independence from natural gas imported from Russia.
And now with the Biden administration running the US, we're starting to see this confluence of forces, where great powers are now looking at what we've seen as green tech from a perspective of preventing climate change, but they're starting to look at these technologies that underpin our green tech in looking at it from a national security perspective as well.
Let me ask you, I mean, one thing that-- I mean, the market obviously is in tune with this. I mean, we've seen, I'll say, green stocks, for example, up about 200% in 2020. But is the best time done? Do you see there's a lot more to come?
- Yes, that's a great interesting question. There's so many things going on on this front that I would love to mention. First of all, on the green tech, yes, stocks are up 200% from the market lows in 2020. We're also seeing copper highly correlated with price of EV stocks, for example. So commodities are starting to catch a bid based on this thesis, too. But I think the reason this is not done is because right now, a lot of investors still look at this as oh, well, you're just betting that people will care about climate change.
This is about Al Gore. This is about Greta. It's about investing on this idea that climate change matters. This is so much more, Kim. This has to do with policymakers trying to increase growth through fiscal spending on ideologically approved spending things, like, trying to prevent climate change is something that most societies right now have decided is really worthwhile. A lot of spending is going to be done with that. But the real underlying reason is to ensure that there's job creation.
On the geopolitical front, as I mentioned, there's a national security component here. We don't want another country to take a lead on these technologies. So there's actually going to be a huge legislative push across the major economies behind this endeavor, so it's a really serious one. And therefore, I say this kind of tongue in cheek, but I think we're like in the year 1994 of the NASDAQ here. This is not 1998, 1999, or 2010. We're at the beginning of a very long at pocomania, if you will, in this thesis.
I want to bring in, if I could, a chart that I understand that you put together because, I mean, and I want to make sure we get to all this because we've only got a few minutes left. But you talk a bit about, and you can see here, the global green initiatives, the size of the spend, and this is great, Marko, every human endeavor ever undertaken. It's really that big.
Not a hyperbolic chart at all. Just joking. That is a tiny cheat chart. I can't see that that's properly priced every human endeavor ever undertaken. But the seriousness of this is that there truly has never been, Kim, a bigger spend on anything. Apollo Program is dwarfed by the amount of money. Manhattan Project is a rounding error of how much policy support these themes have. Now look, you don't have to go out there and buy Tesla. That's not what I'm saying. I'm not a stock picker. I don't pick individual stocks.
There's other ways that you can articulate this thesis. One is commodities, particularly mining. You're going to need to dig up a lot of metals out of the ground to make this shift to alternative energy. The second one, for example, is industrials. Industrials have had their lunch eaten by the IT and communications sector. What I see over the next decade is the software SaaS businesses and tech, and their outperformance relative to industrials, I think it's going to shift as some of this innovation and some of these technologies allow industrials to really innovate and improve the profit margins in their earnings at the end of the day.
Marko, I've only got about 30 seconds. But for people who can take a look at this paper, you like as you say industrials, but also oil, which is of keen interest to a lot of Canadians.
- Yes. Yes, well, so that is the irony here. I think for a very long time, Kim, there was this view that oil producers were going to pump as much as they could because they see the ESG train coming. So they were going to dump the oil they have in the ground on the open market. I don't see that happening. I don't see Saudi Arabia doing this. I actually see them investing in infrastructure projects like now half a trillion which is a play on these new technologies.
I actually think that we're going to get into a world where Capex is going to drop so much into energy production, into oil production that supply will be eroded before demand does. And because of that, we could actually have a steadily increasing oil price even as demand is destroyed, which will only encourage an ever faster adoption of alternative energies and EVs.
Marko, great to have you with us. Thanks so much.
- A real pleasure. Always a pleasure. Thank you.
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