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Insights from “The End of the World is Just the Beginning.”

“The world of the past few decades has been the best it will ever be in our lifetime. Instead of cheap and better and faster, we’re rapidly transitioning into a world that’s pricier and worse and slower. Because the world—our world—is breaking apart.”

- Peter Zeihan

Why is this worth your time? Geopolitical strategist Peter Zeihan has just published a pretty dark assessment of the current global landscape over the near future.

Source: Getty Images.

What’s the book about? Market downturns like the one we’re in always see a resurgence in the popularity of scarcity-based narratives. But it doesn’t necessarily mean Zeihan is wrong. It’s always worth understanding any well-reasoned argument before dismissing it. Despite its sometimes sensationalist tone, if Zeihan hits on even a small number of his forecasts, we’re looking at a world with considerably more downside risks. It should also be an unpleasantly inflationary, commodity-positive environment. He thinks U.S. inflation will remain this high for at least the next five years.

This book makes a stimulating companion to Vaclav Smil’s recent book How the World Really Works (insights here). Smil argues we simply don’t understand the complexity and energy intensity of our modern world. Zeihan argues we don’t understand quite how bad the unravelling of globalization will be. This podcast with Meb Faber will be a good indicator of this book for you.

Our mantra at The KCP Group is that a valuable expert can tell you precisely what’s happening right now, only then will they offer their forecast.

Although it’s good to be wary of extreme predictions, a lot of demography is already baked in the cake. This is one area where I find Zeihan, and his visuals, particularly useful. Smil believes that demographics, specifically fertility rates, are one of an extremely small family of indicators that can reliably produce long-term forecasts. Smil notes that at some point in the early 2020s, we’ll pass the tipping point where half of the world will be living in countries whose total fertility rate is below the replacement level. Watching demographics is a bit like getting run over by a steamroller. It’s obvious from miles away what’s coming, but it still hurts like hell when it gets there. Demographics are destiny, and the U.S. and China are facing particularly divergent fortunes.

Here are some of my extremely high-level takeaways from what is a dense and thoroughly-researched book.

He believes America is ludicrously well-positioned.

If the world is going to deglobalize and fracture, the most self-contained countries will dominate. The U.S. has a unique combination of internal resources, decent demographics, favorable geography, and political stability. Even though it may not always feel like it. Zeihan makes the wry point that “America’s strengths allow her debates to be petty, while those debates barely affect her strengths.”

As you can see below- America’s demography is pretty great; a thicker base to the pyramid means a younger population.

The boomers had kids when many of their global peers did not. While we often hear about the U.S. retirement crisis, Zeihan thinks it’s at least relatively better than in other countries.

“American Boomers aging into mass retirement will break the bank. But between their smaller relative size as compared to global norms and their offspring’s increasing contribution to the government’s bottom line, their financial hammer blows are nothing compared to the meteor swarm of challenges that will utterly destroy the governing systems of countries as diverse as China, Korea, Japan, Thailand, Brazil, Germany, Italy, Poland, Russia, and Iran. Meanwhile, American Millennials’ very existence means the United States will at least in part recover from its financial crunch in the 2030s, and probably its labor crunch in the 2040s. But for the rest of the world, it will never get better than it was in the 2010s. Never.”

Looking ahead, the relationship with Mexico is especially beneficial:

“The Western Hemisphere’s (the world’s) most demographically stable developing country- Mexico- is already heavily integrated with the hemisphere’s (the world’s) largest economy and most demographically stable developed power- the United States. The two buttress one another in ways unparalleled in the modern world.”

Zeihan makes a rather dark observation that the superior U.S. demographic position gives it a unique vantage point into the 2050s to watch the rest of the world “brawl over the shattered remnants of a collapsed economic system.” They can then see which path is best to follow for internal stability.

China is in deep demographic trouble.

Zeihan notes that the China of 2022 is the fastest-aging society in human history. For example, Shanghai and Beijing currently have the lowest birth rates in the world. Their population pyramid is considerably more unbalanced:

“China is amazing, just not for the reasons most opine. The country will soon have traveled from preindustrial levels of wealth and health to postindustrial demographic collapse in a single human lifetime. With a few years to spare….
….In the best-case scenario, the Chinese population in the year 2070 will be less than half of what it was in 2020. More recent data that’s leaked out of the Chinese census authority suggests that date may need to be pulled forward to 2050. China’s collapse has already begun.”

Painfully few countries, like France, Sweden, and New Zealand also exist in a development and demographic sweet-spot. [The UN has a cool demographic pyramid generator for every country and region that you can explore here]

While places like Sub-Saharan Africa are in a great place demographically, if trade collapses, their circumstances rapidly become pretty dire. Mismanagement in Venezuela and Zimbabwe illustrates what happens when commodity exporters can’t earn enough to import. Moreover, Zeihan makes the point that the industrial technologies that have reduced mortality and raised living standards can disappear as their wealth evaporates. By 2030, two billion people will be living in slums. This makes climate and economic migration a dominant factor for coming decades.

Parag Khanna’s recent book MOVE makes the point that a deglobalizing world will see an acceleration of migration. This will be climate and necessity-driven at the low end, and opportunity-driven at the high end. The implication is that the U.S. will not only become an attractive safe-haven for capital, but also for a mix of refugee manual labor and high-end talent.

A deglobalizing world has a lot of interesting and unusual features.

A fracturing of global energy supply chains would force a resurgence in locally-sourced coal. Like Smil, he’s pretty sobering on the promise of clean energy.

“Greentech in its current form simply isn’t able to shave more than a dozen or so percentage points off fossil fuel demand, and even this “achievement” is only possible within geographies fairly perfect for it.”

If the U.S. withdraws from policing global shipping routes, insurance becomes prohibitive and piracy explodes. Smil has noted that the tripling of shipped mass between 1973 and 2019 required a near quadrupling of the global merchant fleet capacity. If long-haul shipping becomes more expensive, that’s massively inflationary.

Most importantly, when asked what keeps him up at night, Zeihan’s answer is famine. Agriculture is arguably the most globally interconnected and fragile of any system. He thinks the next fifty years will be the ways we tackle impending food shortages. France, Canada, and the U.S are relatively self-sufficient. But globally, his forecast is dystopian, and China is once again in the crosshairs.

“Likely in excess of 1 billion people will starve to death, and another 2 billion will suffer chronic malnutrition. Some two-thirds of China’s population faces one of those two fates. And remember, China is also history’s most quickly aging society. The people who will be called upon to manage- or suffer through- mass malnutrition and famine are going to be old.”

Some personal thoughts and practical applications:

  • If I were a global leader reading this book: I would do one thing immediately, and that’s BUILD. The post-COVID world has made the costs of external reliance obvious. As I have argued recently, it’s already pretty clear that fiscal stimulus is the only game in town for many developed economies. It’s probably not a coincidence that China is aggressively pivoting back to making strategic heavy industry internally.

    The other thing I’d do, if it wasn’t too late, is make it far easier to have kids. After expanding access to affordable child care and paid parental leave, Germany’s fertility rate increased to 1.54, up from 1.3 in 2006. Sadly Zeihan notes that these policies haven’t historically been very effective. It still takes eighteen years to produce an eighteen year-old worker…

  • If I were an investor or business owner reading this book: I would do what I’ve been writing about since Covid. I would reassess the definition and valuation of resilience. If Zeihan is even half right, slack in the system will move from an inefficiency to a necessity. ESG so far has been about shoehorning companies to fit often arbitrary external categories. This next stage should be about companies realizing they need to mimic resilient natural systems for their own long-term survival.

  • If I were a concerned, wealthy individual reading this book: I’d be looking for an apartment in Buenos Aires. To anyone with any knowledge of financial history that seems foolhardy, but Zeihan had a darkly funny justification on the Meb Faber podcast:

    “If we’re moving into a world where rule of law breaks down and where trade becomes constrained, and there’s shortages of the basic things that make industrialized life possible, the Argentines are already there. This is like their average Thursday…. So, I can see it’s not so much that they rise to go to the middle, it’s that the middle falls to them. And all of the things that the world is going to have in shortage, food stuffs, raw commodities, energy, the Argentines have all those things.”

Final thoughts:

Philosophically, I tend to side much more with Smil’s balanced thesis that we’ll just muddle on much as we have before.

A key component of Zeihan’s forecast is that the U.S. will increasingly disengage from the world. But the European response to Russia also gives me cause for hope. It seems to have produced a greater international willingness to coordinate against zero-sum actors. The immense U.S. aid package also makes me more skeptical that they intend to fully withdraw from a role as global cop.

Decentralization isn’t always negative. Real-life examples like Utah suggest that returning from globalization to the resilient local unit is likely to be a long-term positive.

At the highest level, I also have deeply strange and optimistic instincts about the potential for a global phase change. The problem is that they are typically preceded by a “dark night” of chaos and suffering. Where both Zeihan and Smil both provide most value is in helping us understand the gargantuan physical SCALE of today’s global transitions. Moreover, the degree of interlinkage makes negative ripple effects much more widespread. The shockwaves from Ukraine have proven that absolutely beyond doubt. Zeihan’s book is a troubling examination of how bad it might get.

I’d love to hear your thoughts.

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