Why Geopolitical Chaos Is Bullish For the US w/ Eric Wallerstein

Ajouté : 2026-05-19

[00:00:00]It is actually a pretty good growth environment and I think people continue to discount the resilience of the US economy and just the fundamental drivers of growth instead focusing on policies that they either don't like or disagree with. But like at the end of the day, I I think strategists and and certain commentators think that like they write for Vox or they're, you know, a pundant giving political opinions, but that's not what we're paid to do. It's just economic forecasting and outlooks and AI is really important, but there's other things happening outside AI. It's just not happening in the traditional sectors we're used to looking. Everyone has been watching Trump and Xi making deals about planes and beans, but what's going on in Europe? Could the US withdrawing support for NATO lead to the end of the European Union? And what would that mean for investors? Hello and welcome to Milk Road Macro, the podcast that knows that the Donro doctrine might be hard to define, but it definitely includes Diet Coke. I'm your host, John Gillan. Today is Monday, May 18th, and today we are joined by Eric Wallerstein. Eric is the principal and chief macro strategist at Clock Tower Group, where he leads the firm's US strategy team and oversees macroeconomic research. He has served as an adviser at the Federal Reserve Board and the White House Council of Economic Adviserss to very big jobs, especially these days, as well as a reporter for the Wall Street Journal. Eric is going to give us his thoughts on everything going on in macro right now. So, if that all sounds good to you, make sure you like and subscribe. Share this episode with somebody who's going to enjoy it.

[00:01:22]Today's episode is brought to you by Cape, the privacy first mobile carrier and Nexo, earn interest, borrow and trade crypto. And without further ado, welcome to Milk Road Macro, Eric Wallerstein. How are you, sir?

[00:01:33]>> Thank you, John. Great to be here.

[00:01:35]>> I'm really excited to have you. Uh, I think this is going to be really interesting conversation today. Uh, Eric, you've spent a lot of time working with this White House, this administration. I'm curious just your initial reaction off of this meeting between Trump and Xi. any headlines that came out of this that got your attention or maybe headlines that didn't that got your attention?

[00:01:51]>> I think the meeting itself was, you know, Boeings, beans and and beef. It was pretty much to be expected. I think the most important thing for me and for the USChina relationship to come out of the meeting is that, you know, President Trump's comments on Taiwan following it uh to the media. I think it would really be a big strategic misstep for the US to concede anything on Taiwan. Um, our economies are incredibly interlin at this point. If you look at trade with Taiwan, they have a I think it'll approach or if not reach a $200 billion trade surplus with us. Just a bilateral Taiwan to the US. Taiwan is only a trillion dollar economy. So, if you think about it, 20% of GDP is just a bilateral trade surplus with us. And that's obviously due to semiconductors and the entire AI infrastructure buildout. that figure was only $15 billion before the pandemic. So, the runup has been really extreme. And I think I've started to see, I'm sure you've seen uh some large investors and commentators saying, you know, they think that the Taiwan question or issue, it won't really be strategic for the US anymore. Even just a year or two out, we'll have completely hedged our exposure. Uh we won't need it. I don't think that's economically or geographically feasible. I think Taiwan will continue to be not just a critical node but really a fulcrum of, you know, the entire AI program. I think they're a critical ally and I just really hope no concessions are made. I think it would be a detriment for the US economy, a cultural and geopolitical detriment. So that's the most important thing for me for the next couple years uh in the USChina relationship and something I'm watching closely.

[00:03:40]>> If you're not seeing this, you're trading blind right now. There are real moves happening behind the scenes that most people don't see until it's way too late. Inside Milkro Pro, you can track exactly what our analysts are buying, selling, and what's on their watch lists before it moves. Martin recently unloaded 40% of his cash off of one signal, and Melvin is up multiple calls by like 50%. and we're already up 30% this month on some alts. This is all happening every week. You can try it out for just a dollar for 7 days. The link is in the description. Do you think that uh this Thusidities trap that President Xi alluded to in his comments is going to be able to be avoided? It seems like you're saying that um the United States is hoping to sort of hedge our exposure to Taiwan and sort of remove the need for conflict there, but it seems like your comments are saying you you're worried there still might be conflict over Taiwan. What's what's your take on that? Uh so first of all I'm very impressed with how you pronounce that. I have yet to pronounce it properly in my own personal life but you know I think we are in a a war with China essentially right now. It's geoeconomic it's geopolitical it's happening across the board every everywhere other than you know like a hot war. Uh though you could say there are some fragments of that. I wouldn't say the USIran conflict is itself a proxy war between US and China. I don't think that's the right framing. But you could say that if China is supporting Iran, you know, there's some on the margins there's some conflict there that's actually in kinetic in in a kinetic form. I think the US China relationship has reached a detente. I expect and hope it remains there for the next couple years particularly as China retains rare earth leverage at least in the short to intermediate term. I think people have a range of views on what will happen with Taiwan. I think China feels fine biting its time. this is a a country and a party with a very long-term orientation and for them you know something occurring in the next 10 years you know pushing it back to 12 or pushing it back up to eight you know for them that's fine whereas we think in in two to four year political cycles that said I do think as we hedge out that rare earth and critical mineral choke point that China really retains over us right now we'll feel more comfortable at least you know backing up or not conceding on any points regarding Taiwan so sovereignity and independence. So I just hope we maintain that uh going going forward for the next couple years.

[00:06:04]You know, President Trump is a business first president. That's how he thinks about the world in geopolitics. That comes with a lot of pros, also comes with a lot of cons. And I I just hope on this issue specifically, we realize that Taiwan is much more important than just TSMC. And you know, we continue to be a credible partner economically uh and in defense terms for them.

[00:06:26]>> Gotcha. Okay. So, both sides are still maneuvering and trying to get leverage in the situation using tools like rare earth and other things, but we'll kind of see how that plays out because it's it's still to be determined. Uh you you brought up the conflict in Iran. Uh Xi said at the meeting that he's willing to do whatever is necessary or anything that he can do, I think was his his words, um to help bring about a resolution to the conflict and reopen the straight of Horde moves. Do you think that that is going to help get a quicker resolution here? Because that seems to be where Trump is focused now that he's back from his trip to Taiwan or his trip to China. Sorry.

[00:06:57]>> I don't think much is going to come out of the U the USChina meeting on Iran. I think a it was too short of a trip with predefined outcomes uh which were mostly going to be along bilateral trade lines and whether we have a board of investment and board of trade. Maybe that'll be a longer term outcome. I don't think anything really is going to come out of it with Iran because China's constrained in two ways. On one hand, they would love for the strait to be reopened. You know, it's important for them to get energy and other other materials. And also, they're highly indexed to global growth. This is an export-driven model. You know, consumption in China, investment in China that's outside of state directed lines, uh is is waning and incredibly weak, uh even in nominal terms. So retail sales recently have been falling and are nearly flat um even incorporating inflation. So this is a a very weak domestic economy that depends on foreign absorption foreign absorption of its products. On the other hand, they can't withdraw support for Iran. I think a common thread across China's, you know, foreign engagement is that they're not really that great of a partner. If you look at the belt and road loans, they you know they have pretty tight covenants on them. They ask for their money back. These are not really forgivable loans like US and multilateral loans to emerging markets typically are. So Iran is one of their most important partners and this is a world where Venezuela and a lot of their western hemisphere influence is is receding and waning as well. So they need to continue to support Iran. They also want the war to end.

[00:08:38]I think I've seen, you know, some reports and there's speculation that China is helping Iran. That wouldn't surprise me. So, I don't I think they're going to continue to be this kind of geopolitically a geopolitical middle power, whereas economically they're clearly, you know, the largest, you know, one of the largest countries and most important countries outside of the US and they're just going to stay a little backfooted um and not really intervene as much. And so again, it just continues to be a US story and and when President Trump feels like this there's been enough wins so to speak um in the war to to let things settle or when they can reach a bilateral agreement between the US and Iran.

[00:09:20]>> Gotcha. Okay. So um I I curious your thoughts on going back to the the conversation around China and the meeting there. Trump decided to bring an enormous amount of US CEOs with him to this meeting and it seemed to me like a lot of the announcements didn't really have a whole lot to do with those tech CEOs being there. What was your read of that decision and what do you think the US gained by bringing so many leaders from our business community to this meeting in China?

[00:09:44]>> I think uh I didn't really read too much into it frankly. I think that's been the general tone of most of President Trump's foreign engagements to make it, you know, a business first, um, investment first type of meeting. And for for all of these CEOs, they want to engage with China. They all have, you know, business relationships there, whether it's internally or their client relationships. And it looks a little better if you go with the US government as opposed to just going on your own and continuously engaging with your Chinese counterparts. At the end of the day, um, the most interesting CEOs for me were were Mastercard and Visa CEOs because those are very large payment rails. Uh, the US has also been treating them kind of as US type of utilities. Like for instance, if there was an incursion against Boeing or JP Morgan, I think the US would treat that as a threat against itself.

[00:10:38]We've done something similar in Brazil where uh I'm not sure if you're familiar with, but Pix is the Brazilian payment system or payment rails that's run by the central bank, but it's really quick.

[00:10:49]Um, and it's really helped inspire uh a burgeoning of the fintech industry in Brazil and even I think Colombia is is considering adopting it as their own payment system. So, it's it's really incredible. But the Trump administration recently told Lula that you know they feel like it's an affront to Visa and Mastercard and that it's actually like geopolitical or geoeconomic warfare just the existence of Pix because it's a central bank program. So China has this complete alternative rail system to the US. You can use the SIPs which is like the alternative to Swift the inter you know it's how payments happen internationally essentially for me given how much they've they've put and also an Mbridge which is their central bank project to and they have all these swap lines they're trying to create an like an X dollar system right they don't want to replace the dollar but they want to be hedged from sanctions. Uh so it was really interesting to me that those two CEOs were there and I'm sure they had a ton of conversations on the sidelines.

[00:11:47]I'm not sure what those looked like, but I think that was very important. And I I don't really buy the whole R&B, new reserve currency or dollar dollar waning as a reserve currency. I don't buy any of that, but it is certainly interesting what can happen when the payment system bifrocates uh and multiple rails emerge.

[00:12:07]So that was interesting for me.

[00:12:09]>> Okay. So what you're saying is that Mastercard and Visa CEOs being there kind of gives got some of your attention because there's this fight for dollar hegemony and people building alternatives to the US system, the dollar system. Um that's a good call out. I hadn't really thought of it in those terms. Um so I appreciate that that observation there. I I want to get your thoughts on the Donro doctrine because a lot of has a lot of talk has been made of this idea of the Dondro doctrine and people debate what it means and what the implications of that are and I'm curious your thoughts on on what that is first of all and then implications coming out of this meeting um for for the progression of that policy path and what that means for the United States here.

[00:12:46]>> Yeah. So uh Don Row doctrine I mean it was we kind of called it Monroe Doctrine 2.0. I'm sure the president just thought, you know, Monroe sounded like Donroe when he was on stage and it stuck. You know, he he does that quite often. So, the Donro doctrine or or Monroe 2.0 is a reassertion of US hijgemony in the Western Hemisphere. You can think of it along a lot of different lines. Um, the one that I'm talking about here is Chinese investment.

[00:13:12]China's tried to be a partner to other emerging markets.

[00:13:15]um they also take a lot of raw materials and process them in China which has really become a national security and economic threat to the US. So we're trying to re-engage with our partners in Latin America, invest um both in critical infrastructure there, but also you know just build better defense and economic partnerships. I mean, if you think about immigration, drugs, like these are all the all all things of importance to the administration and because it comes from our backyard more more often than not, um it's important to engage with those problems where they occur upstream rather than just dealing with the consequences and the symptoms downstream. So, I think we've seen a ton of re-engagement with Latin America over the past year. Much more will come. Uh you're seeing it in the the DFC, the International Development Finance Corporation, XM, the Export Import Bank, various investment units of the DO. I think it's great. I think it's a it's a huge positive for economic growth in Latin America. It's important to build new partnerships, especially as other ones, you know, Wayne or the world becomes a little more bifurcated. So this is probably a trend in my view that'll continue regardless of what happens in the coming elections.

[00:14:31]this year, 2 years from now, four years from now. I think it's a long-term here to stay trend.

[00:14:36]>> What do you anticipate the implications of this being for Cuba? There's been a lot of speculation and you know, the president has made comments about maybe like Cuba's next, things like that. Uh, talk to me about how Cuba fits into the strategy and what you think happens there.

[00:14:49]>> Yeah, so Cuba is next is something that we keep hearing from pol not only just commentators but policy makers on TV. I think Lindsey Graham dawned a hat like saying Cuba is next or something to that effect. Um, my grandparents, my grandparents actually immigrated from Cuba. Uh, along with I want to say an uncle and an aunt. Uh, my father was born here. So, it's a story that's very important to me. Cuba is a essentially it's not just a pariah state, it's a failing state.

[00:15:19]What I I think it will be next, quote unquote. And I think the goal is that that model looks much more like the Venezuela Maduro, you know, regime replacement or, you know, just reopening bilateral ties and getting more investment.

[00:15:33]I think where Cuba is different than Venezuela is Venezuela has a very large tradable sector. you know, they they've had a lot of underinvestment in energy, but they still have a large they have huge reserves and they do have a functioning um oil extraction and transportation and export business that simply reopening and re-engaging and getting more business relationships will will just mechanically improve their current account, help them build FX reserves and get back on their feet and hopefully, you know, acrue gains to the rest of the population. I think the issue with Cuba is they don't really have tradable sectors or at least ones that are functioning in any semblance of normaly um between you have sugar tobacco some energy critical mineral stuff but not really um healthcare they used to trade doctors with Venezuela and or or Mexico and that was an export they haven't had enough investment um or training or proper materials for so long that I I fear it's not even a reasonable services export So, it's a great opportunity for I'm just speaking economically other than, you know, I think the Cuban people have suffered a lot and I really hope that we can alleviate the situation. It'll be a real estate story, a services and tourism story and that takes time to rebuild and replenish. It's not so simple as pumping more out of the ground. So, the micro there's this thing called Msmemes, which are micro and small enterprises in Cuba. They drive a lot of the economic growth. I mean, they're literally called microenterprises. So, it's going to it's not easy. It's a very fragmented landscape. It's not it's not as simple as just giving them capital, but I think the goal is, you know, if we're thinking about our own backyard, Cuba is literally right there. Um, so I'm very hopeful and I think, you know, Secretary Rubio is obviously very engaged with this subject that we can, you know, bring Cuba back up to the 21st century.

[00:17:26]>> Gotcha. Okay. So you're saying that the DNR doctrine is about American hegemony in the Western Hemisphere trying to push out Chinese and foreign investment or influence and that you know you'll we'll see come some kind of effort to bring Cuba back into that and to to reinvest and reinvigorate that economy. Um I'm curious to see what that looks like cuz I think it's still uncertain at the moment. Um but I want to bring this back to America here um because I have a lot more questions for you on a lot of things. uh you've personally attended multiple FOMC meetings and we have a new chairman coming in in Kevin Worsh. Uh there's been a growing amount of division on the board of governors of the Federal Reserve about the best policy path on monetary policy here. I'm curious your take on this situation at the Fed, what worse is walking into and what path you expect the the policy um from the Fed to be here. Just Yeah. Just any thoughts you want to share on any of that >> from Cuban policy to Fed policy transition.

[00:18:18]>> We're staying in the same hemisphere, you know. Yeah, exactly. That's a good point. So, you know, I think actually not that much has changed preIran, post Iran for the Fed. It's really just accentuated whatever divisions existed.

[00:18:32]I still think the bias is for, you know, cut a couple more times to get to the neutral rate. Wait and see from there.

[00:18:41]There are I think it's kind of the the bifurcation exists along the lines of I think how quickly to go and the worry that their own credibility will be threatened if inflation doesn't really get to 2%. I think most people think it will. If you just look at shelter inflation, it mechanically should fall uh much lower and drag the overall index. It's not even an inflation forecast. It just mechanically follows where new leases have been happening in the have been going and trading in the economy. you know, 18 to 24 months out.

[00:19:12]So, it should happen. Obviously, Iran complicates that. But I still think, you know, what is an oil shock fundamentally? It hurts growth. It raises inflation. We already had the labor market started to look like it was weakening. We're it's an open-ended question. Inflation, you know, once we're on the other side of the oil shock, will should continue to falling. We're unsure where it'll fall to. Um, but does that warrant restrictive policy? And I think the majority of the people on the committee don't think so. Just about the the meetings themselves, I mean, they're pretty they're very premeditated a little bit. You know, people, you know, have their policy views. They write them down. They state them. I think it was very interesting when I was there. There was a lot of real debate happening about the balance sheet and and what to do there because we ended quantitative tightening. We restarted reserve management purchases which are not QE, but you are fundamentally adding liquidity. It's an open-ended question, what to do with the balance sheet long term. There's questions about, you know, how do we manage reserve volatility and repo market volatility using the desk in New York. So, that was very interesting for me and really reminiscent of um I joined the New York Fed back in 2019 and was there during COVID as well. And I really feel like it was the same exact situation that it was in 2019 when repo rates blew out that it was today. So super interesting for me to be in the room and hear that debate um and hopefully help you know play some part in it. But the rest of them are pretty boring. They're boring meetings by and large.

[00:20:42]>> Yeah. Well, I would hope central banking is a more or less boring activity uh when done properly. Um Eric, you uh like you said, you spent some time at the Fed. You spent some time at the White House Board of Economic Advisors. I'm curious about the collaboration between the Fed and Treasur here and what you expect that to look like because um balance sheet management at the Fed has some been something that uh Scott Bessant and Kevin Worsh and Steven Meyer and others have have talked a lot about and I'm curious what policy path you think they're going to pursue around balance sheet management.

[00:21:11]>> Yeah, I think the new Treasury Fed accord um is a little overblown. I think there are a lot of lines between Treasury and the Fed, open lines of communication, especially on bank regulation. It doesn't it doesn't take a an economist with a PhD to see that Treasury issuance and the Fed's balance sheet are interrelated and interact with each other. It's a you know it's a consolidated government balance sheet between the Fed and the Treasury. So I just think being more proactive in thinking about you know where does issuance happen along the curve? How does the Fed's B how does a maturity profile the Fed's balance sheet interact with the real and financial economies? I really think it's more about that and thinking more thoroughly with Treasury and DMO, the debt management office. You know, how do we deal with where is demand along the curve? How do we deal with the Fed's current holdings? What do we do in future crises? Because during COVID, it was really just unleashing the Kraken. coming up with a taking everything we had in the in the financial crisis, but coming up with facilities that really started to get towards where the BOJ is where you're just buying anything and everything and pumping liquidity to solve issues that have other fundamental problems. So, you know, I think Kevin had experience on the inside. He obviously wasn't a big proponent of QE. I don't expect the Fed to ever withhold QE from the Treasury market in terms of Treasury market dislocations, but I'm hoping for and expecting a much more restrained use of it in other assets that are outside of the Fed's purview and more deliberate talk about, okay, what should the Fed's balance sheet look like longer term? How does that interact with Treasury issuance? Where is demand coming from from the investment community? because like the the whole blind eye to what Treasury does down the street from the Fed. Well, it's it's like a 20-minute walk, but you know, they're so they're so important to each other and actually there's a lot of personnel overlap. You know, people going from New York Fed or the board to Treasury and vice versa.

[00:23:07]So, it's one of the most important things. These are both important economic bodies, the two most important economic bodies for the country. I just think more deliberate conversation that's open to the public is what makes sense and much better for transparency.

[00:23:22]>> Gotcha. Okay. So, the dialogue is a good thing there. Um, Eric, we've seen recent prints on CPI and PPI that have been very hot to say the least. Higher than almost any analyst expectations. Do you think that this is going to shift the Fed in favor of rate hikes? Because a lot of analysts are saying that they're now leaning towards rate hikes coming from the Fed in 2026 at some point. Are you in that camp or do you think that they're going to kind of stay at this neutral quote unquote place here? What's your view on that? No, I mean I think the most restrictive thing they can do is just hold policy here given the median estimate of neutral is probably 50 basis basis points lower than we currently are. So if you're just holding rates steady then you're exerting enough restrictiveness I think on the economy and inflation forecasts still have it coming down to 2%. I don't think hiking is what you do to an to an oil shock, especially this is a much diff much more different paradigm than we were in the 70s. And I think the big confirmation factor for me is is wage growth. So real wage growth is still above zero. So we're still beating inflation for bluecollar or non-managerial workers.

[00:24:30]We're still around 1%. It's been falling. It's been falling though. And nominal wage growth is falling as well.

[00:24:36]So that suggests to me two things. One, the inflation shock from Iran is not expected to, you know, proliferate and become protracted and lead to a spiral.

[00:24:46]And on the other hand, that the labor market is not strengthening. It's still in a strong place, but it's definitely cooling. So I just think you just keep policy where it is. And the Iran war certainly I think extends how long the easing the entire easing cycle has to go because they'll wait longer to hike and make sure that remains the case. But ultimately I you know I think they cut a couple more times and then leave things there barring any other exogenous shocks.

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[00:26:37]>> Gotcha. Okay. Yeah. Well, I haven't had a good Fed whisperer on the show in a while, so I wanted to get your take on this because I think you're pretty close to that institution. Uh, very helpful. I want to spend the the remainder of the interview on this uh research piece you wrote, the the most recent one that you published at Clock Tower Group. It's titled post EU NATO uh or post EU NATO's collapse will fragment the European Union. And in this you basically put forward this thesis that you think the European Union is going to disband. Tell us about this thesis where this is coming from for you and just walk us through this this idea here. Yeah. So I think everyone now sort of expects or foresees that the US could implicitly or tacitly or you know withdraw from NATO whether that means fully leaving or just withdrawing enough troops and moving them around moving armaments to you know the Indoacific or the Western Hemisphere or other parts of the world and basically say that okay Europe you're not going to hold your end of the bargain. I don't think their commitment to spending 5% of GDP on defense or even 3% really holds. And you've actually seen more divergence among the European states in their commitment to both fiscal spending to defense spending and also to the US by bilateral so to speak relationship between the US and the EU.

[00:27:54]I think the trade war has accentuated this. China is another complicating factor where it's pulling countries or it's attempting to pull countries into its orbit. The allure of cheap goods obviously helps and these are now no longer just cheap intermediate inputs or lowcost goods. These are, you know, innovative companies like operating on the edge. Like BYD, Huawei are innovative companies. And if they're offering you a telecom infrastructure that's just as good as the next guy, but it's 30% cheaper, then that's attractive and it's attracting some some countries like Spain despite the fact that there's national security and economic risk associated with it. So for me, I think this let's say NATO is no longer the same as it used to be and the US chooses to deal with countries on a more bilateral basis rather than the EU or NATO as a whole. I think it actually increases the fractures happening within Europe rather than you know inspiring this congealing and convergence and inspiration to spend more and do more fiscal do more defense have a capital markets union facilitate more crossber M&A because the time to do that was two years ago and there's been continuous I don't want to say assaults but continuous things thrown at the EU where you'd expect them to respond in some way shape or form and nothing's happened.

[00:29:14]Literally nothing h nothing has happened. There's not enough joint bond issuance or there's no framework for that. You know, there's no like euro bonds coming out and so they're just not reacting the right way. And I think will the EMU continue to exist in four years for sure. But I expect a couple exits um from it over the next couple years as countries and leaders decide that, oh, this actually isn't good for my economy.

[00:29:37]I'm not benefiting from this. I want to choose trade, investment, immigration, whatever policies on my own terms. And obviously the the breakdown or fracturing of the EMU or the EU are not in people's base case. They're not even like really tail scenarios on people's radars. So I'm just trying to raise this point like you know the investment implications of this are the complete opposite of what we've seen for the past two years if not the past 20 years which is convergence in European bond yields.

[00:30:08]you know, Germany and France basically underwriting, well, mostly Germany, basically underwriting the fact that these countries don't have to spend anything on investment or defense because they can just do pension spending in whatever. It's a it's a tail case that I, you know, I think most people would give like a half a percent or a 1% chance of happening that I think is like 50%.

[00:30:27]>> So, you're saying the US seems to be drawing fiscal support from N withdrawing fiscal support from NATO, which tacitly or directly means they're kind of pulling back from NATO. this heightens the fractures and conflicts within the European Union. Where do you see that crack actually starting to form? In other words, what nations do you think are going to be the ones to first be like, you know what, we're going to pull out of this and just what does that, you know, quote unquote failure mode for the European Union look like in your mind?

[00:30:53]>> I mean, I think Spain is first to go.

[00:30:55]Pedro Sanchez has cozied up with China and I think doesn't understand what he's doing. He was in China, made his fourth trip to China, I think in April, and in his public speech was was calling out unsustainable trade imbalances and calling on China to, you know, be more fair. It's it's asinine, frankly. And for him to do that while also, you know, leaving or kind of hedging his, you know, US exposure, so to speak, I think is crazy. the I want to say the Spanish current account deficit so their trade deficit is about 3% of GDP so negative like 75% of that is China they have a huge bilateral trade deficit with China and China does not care they're not going to import Spanish goods you know I guess more tourism could show up as as importing Spanish tourism that's a possibility but Spain has really benefited so much from not spending literally anything on defense they have one of the highest pension um entitlement whatever mandatory spending uh in in the world among developed countries. They have the lowest defense spending and you know they basically just take what the US provides them or Germany provides and then they end up spending it to giving it to the welfare state. It would be a really rude awakening for them to you know withdraw because they want to do more trade and investment with China.

[00:32:18]They don't want to have to abide by the US defense requirements and they'd realize, oh, I have no military, you know, I'm I'm gonna partner more with China and then you have a completely imbalanced relationship rather than one of a a benefactory one. And so I think Spain would be first to go. I think depending on the political outlooks of a couple other countries, that would be the main one because they're more within like the core of Western Europe a little bit despite the fact that there is a they're a periphery country. But I mean political outcomes could could totally change the framework. Think about France. Mcronone is doing everything. So I think 2027 people are worried about Mcronone's party losing and he's doing everything to basically cement his his own influence. So he just tapped his former chief of staff to run France's central bank which is sublimated to the ECB and less important but still pretty intent pretty insane.

[00:33:13]Uh as a form of central bank dep central bank independence. Uh he wants to replace Lagarde before her term is over just to make sure that they have someone in there and the new French government can't you know put their finger on the scale so to speak. So they're just kind of flailing a little bit. And I think you're going to see some countries that increase their ties with the US. I think countries that are in Europe, but kind of outside of the EMU, Poland, Sweden, Norway, countries with fiscal and monetary autonomy, actual defense spending, a real way of governing themselves essentially, and they're used to doing bilateral trade deals, and they're outside of Brussels purview a little bit, I think will come out as the winners. And you're going to see we're going to go from 20 something years of EU convergence to you know a new normal of EU divergence along you know what these countries fundamentals actually look like.

[00:34:04]>> Europe as a entire continent right now is facing a big uh economic pressure from the energy scarcity caused by this closure in the straight of Hormuz. Uh there was a movement from Belgium recently to nationalize their nuclear power plants. And you know, one of the big features of the European Union was this sort of resource sharing and collective effort economically. Um, and this seems like a move by Belgium to sort of withdraw from that. Do you think we're going to continue to see things like this of like nationalizing resources and nations in Europe like prioritizing themselves as opposed to the EU and the collective and just like how does that play into this in your mind?

[00:34:39]>> I mean, I think it's probably a global trend rather than just a European one.

[00:34:42]You're seeing increasing state capitalism, interventionism, public as I think as economic and national security become more intertwined with the private sector, you're just going to see more public private whether it's partnerships, more government engagement with the private sector, more government stakes in these companies. It can be outright nationalization or it can be, you know, the is the US taking a 10% stake in a public company nationalization? Not really, but it's it's certainly intervention. So I think that'll happen more and more and you've seen in the wake of Iran that the US government has tried to use, you know, natural gas in negotiations on on trade or investment deals. I think that could inspire certain countries whether in Europe or elsewhere to to think, okay, what do I do about my my current energy dependence? Because on one hand, they still all take Russian gas or Russian energy. on the other hand, they're seeing, okay, well, the US is a much more credible partner, but I still don't want to have to do things I don't want to just to acquire energy. So, I'm sure you'll see more things like that. I won't go through every nation in Europe, but you know, you just kind of gave a little bit of your case for your short Spain position. Um, but I also saw in your research, you're very long on Poland and bullish on them as they the the as this situation plays out and things evolve here. What's the thesis on Poland for you? Why are you so bullish on them? Yeah. So, I mean Poland is they spend the most on defense as a portion of GDP. It's about four and a half percent. Um, but because they're one of these economies that are much closer to Russia, there is some research recently about the two Europes are not exactly core periphery. It's actually the countries that are closer to Moscow.

[00:36:19]They spend way more on education.

[00:36:22]Basically, everything that is productivity enhancing versus the welfare state. So pensions uh like we would think of it as Medicare, Medicaid but just welfare they spend much more on actually like productive endeavors so defense investment education uh whereas more more western Europe economies spend way more on things that are unproductive. So Spain is actually one of the largest you know pension outlays as a percent of GDP in the developed world whereas a country like Poland or Norway or Sweden is it's much less. So I just think those are the economies that are going to benefit and especially if you see any fragmentation of the EU, you'll get remigration as people leave the shenen zone because it has less benefits. You'll see increased cap increasing capital flows to more not austere countries but just countries without a fiscal like fiscal doom you know like the UK or France. So, I think they've done they've made a really smart decision and not wanting to adopt the euro. And I think those currencies that are in Europe but just outside the EMU and don't have the euro are going to see a lot of appreciation over the next few years as a result of other factors which are just a much better, you know, federal outlay diagram or or composition.

[00:37:38]>> Gotcha. Okay. Um, helpful framing there.

[00:37:40]So the the fiscal policy and I guess the legislative path that the these nations have picked is going to have vastly different outcomes and situate them to perform differently if the EU breaks up.

[00:37:52]And that's kind of a lot what's driving the thesis there. Really helpful. Eric, I want to bring this back to the American situation, the domestic situation here because our stock market is obviously um you know had one of the most bullish 30-day periods in its history really. um and without seeing a lot of signs of slowing down. Um you know, we talked a little bit about the bilateral trade deals with China that we've made. We've talked about consolidating American hijgemony in the Western Hemisphere and sort of this breakdown of the EU. How do you see this setting up America, you know, for the the short to medium-term here? And just what's your outlook for for the US performance in this this uh landscape that you've laid out here?

[00:38:27]>> Yeah, so I've been pretty bullish on US nominal growth the whole time. So I left the Fed right after the January FOMC and I basically joined Clock Tower the next week. My kind of thesis at that point and the first slide in my deck was that there's going to be a nominal growth reaceleration. You could see it. I think there's been a great deregulatory framework broadly but also spec specifically for banks over the last year and a half or so. And there's been more CNI lending you know more lending to the real economy as that capital has been freed up manufacturing indexes. So many people talked about tariffs and they were like, "Oh, tariffs are going to kill the American economy.

[00:39:04]Manufacturing is dead." They were seeing 5 to 10,000 payrolls being shed at a month in that sector. Could have very easily been a result of negative net migration as opposed to actual, I don't know, weakness in the sector. So, if you're seeing a lot more output and a lot a little less employment, then that's a huge productivity boom. Um, it takes time for that to actually play out and for you to confirm or deny that. But manufacturing has looked really good both in the soft surveys like PMIs and in the hard data like industrial output.

[00:39:34]I expect that to continue. AI is a huge driver and stock market earnings per share growth was one of the most insane outside of like a recession rebound things we've ever seen uh in the first quarter. it is actually a pretty good growth environment and I think people continue to discount the resilience of the US economy and just the fundamental drivers of growth instead focusing on policies that they either don't like or disagree with. But like at the end of the day, I I think strategists and and certain commentators think that like they write for Vox or they're, you know, a pundant giving political opinions, but that's not what we're paid to do. It's just economic forecasting and outlooks and AI is really important, but there's other things happening outside AI. It's just not happening in the traditional sectors we're used to looking. Like residential real estate is really bad, but consumption is great. People go into the K-shaped economy like, "Oh, well then it can't sustain itself."

[00:40:29]Wealth gains are pretty incredible just on that, you know, it can sustain itself. But even real wage growth, like I mentioned earlier, if blueco collar workers are beating inflation with wage gains, they're going to continue to spend. So I'm pretty bullish on the US.

[00:40:43]I think Iran in absolute terms, it probably lowers growth a bit, but in relative terms, it lowers growth a lot more for Europe or emerging American economies in Southeast Asia or China or whomever, much more than the US. And we benefit from the obviously the exports, any geopolitical gains, whatever. So, I've been bullish on the US. I continue to be. I think certain economies could easily outperform the US, but it won't be those big developed countries that people are used to looking for investment opportunities. It'll be kind of some newcomers.

[00:41:16]>> Eric, our audience is a pretty well-informed, savvy group of people, but they're mostly self-directed investors. And this year has been one of the most emotionally charged and volatile years for investors. You know, there's midterms coming. There's all these major geopolitical events happening. Um, you know, just if you're going to speak to our audience about how to think about navigating the rest of 2026 from either portfolio allocation or just a mindset outlook, I'm curious what would you say to them because a lot of people are trying to find where do I put my capital? How do I get through all this stuff? And I'd just like to hear your your mindset or your point of view on on getting through the rest of 2026 for for our audience.

[00:41:50]>> Yeah, I think it's definitely a complicated environment. The institutional investor community is dealing with huge gains and then wondering, okay, is this exhausted? what do I do from here? How much room is there left to go? And then if you pull back and then the market rallies another 10 20%, then you feel really bad and then you probably buy the top and it's just uh a doom cycle emotionally and you probably lose out just by not staying the course. I mean I think for any US investor, you're the most you're probably the most indexed to just like the US stock market. I would stick with that. And you know, if you're going to trade discretionarily and buy other assets or individual companies or or try and trade macro, just do it on top of a core beta allocation. And it doesn't have to be just the US. You can own other countries stock markets or just the entire world or whatever. Fortunately, there's a lot of cheap index products to do that. But just, you know, have that core exposure and then, you know, trade on top of that, whether that's, you know, some smaller portion of your portfolio. But, um, it's a lot of fun. You know, don't rely on conventional wisdom. I think it's really cool that AI has compressed the barriers to entry for investors to do more sophisticated research. That's a lot of fun. But also try and understand what you're doing. If you're investing in an individual company or country, try and do the research, understand okay like how does a DCF work for instance or like how do I evaluate macroeconomic fundamentals if you're investing in a currency and then use AI to augment yourself rather than relying on it um completely. So build a core position, educate yourself, use the tools and technology available to you. Uh all great advice, Eric, I really appreciate you coming on the show and sharing such a wealth of knowledge, experience and perspective with our audience. I think people are really going to appreciate this. Where can we send people to find more of you and your work online?

[00:43:39]>> Yeah, so you can follow me on Twitter.

[00:43:41]My handle's right there. Uh, Clock Tower mostly provides research to institutional investors. But you can always email me or DM me. Um, and I'd be happy to follow up and and chat about whatever, send you a piece of my research. But yeah, thank you so much, John. It's really been great. And I hope your audience gets some value out of this.

[00:43:58]>> I'm sure they all will. Thanks, Eric. I hope we can do this again soon. And uh, thank you all for joining us. I hope you all learned something today. Until next time, stay safe, stay educated, stay bullish, and we will see you all on the next episode of Milk Road Macro. Thanks for being here, everybody. Bye. Want insights on what's really moving markets and how we're trading each event?

[00:44:15]Subscribe to our channel, then join the Milk Road Macro and Macro Pro newsletters. This show is for educational purposes only. Nothing we say is financial advice. Investing is risky. Never invest more than you can afford to lose.