ep. 37 - Pippa Malmgren: Co-founder of H Robotics & Fmr. Bush Economic Advisor
Dr. Pippa Malmgren is a trend spotter who advises investors and governments about economic policy and investment strategy. She anticipated the Financial Crisis in 2007, the slowdown in China, Brexit, Trump and the return of inflation. She is also an economist who manufactures, having co-founded a robotics company that makes commercial-use aerial platforms (drones), H Robotics.
She has been named a Non Executive Board Member of the new Department of International Trade in the UK. She also serves on the British Ministry of Defence Working Group on Global Strategic Trends. She serves on several advisory boards and working groups: She Chairs the Lewis PR Advisory Board (LAB) and is an advisor to Real Vision TV, the Greater London Authority Infrastructure Advisory Board and Indiana University School of Public Policy and Environmental Affairs as well as the Indiana University Manufacturing Initiative.
ep. 37 - Pippa Malmgren: Co-founder of H Robotics & Fmr. Bush Economic Advisor
Gail Davis: Today we are lucky to have Dr. Pippa Malmgren visiting in studio. Pippa was in town speaking for one of our clients and she agreed to come in and join us on a podcast. Pippa is the international, best [00:01:00] selling author of a book called Signals. How everyday signs can help us navigate the world's turbulent economy. She specializes in the risk that are hard to quantify. Politics, policy, and geopolitics. We have a lot on the agenda to talk about today.
I do want to point out in addition to being an author she also founded a company that manufactures aerial platforms or drones, H Robotics. [00:01:30] She's a former presidential advisor who served on the national economic council in the White House where she was a point person on Enron, and the terrorism risk to the economy after 9/11. She anticipated the financial crisis in 2007 and the slow down in China and Brexit. She has lots to say what's going to be happening with Mexico so welcome Pippa.
Pippa Malmgren: Thank you. Thank you for having me.
Gail Davis: How is it that you're able to predict these things or see these things that others [00:02:00] don't?
Pippa Malmgren: I am not very mathematical and I live in a world where all economists are highly quantitative. So they're all crunching numbers the whole time. I think the truth lies in the numbers. I am very qualitative and also because I grew up in politics. My father was economic advisor to Kennedy Johnson, Nixon and Ford. I started my career working for Ronald Regan as a White House intern. I realized there are lots of things you can't quantify. You should not go [00:02:30] through life blind in one eye and looking only at the numbers. Whether they're polls or algorithms or econometric models. You should open your other eye which is just common sense. I see things that strike me as so obvious but other people don't see them.
As a small example, when the financial crisis happened I sold everything. My house, my family in a rental accommodation by May 2007. Everybody's like you need a vacation. Have you lost your marbles? What I saw as an example [00:03:00] was I ended up on the wrong floor of Bloomingdale in New York by accident. It was Halloween time. I saw they had 30 different china dinner sets all painted in incredibly gaudy Halloween colors. I'm thinking how many people buy an entire dinnerware set for one day of the year? How big does the house have to be to hold that? Do they have one for Easter and Christmas and I don't know what. How much would it cost to heat that house? I just thought this is a classic example that Chinese are belting [00:03:30] out so much content from the factories and nobody's going to buy another plain white set. They start painting them gaudy colors to attract additional buyer and people are spending more than they earn on a scale that I hadn't even registered. It's got to end, I'm selling my house, I'm moving my family into rental accommodation.
I said to my clients at the time, "The question you need to ask is not just have you sold your portfolio, the question is, is the institution that you work for financially sound?" [00:04:00] That was a year before Lehman Brothers and again people were like are you completely nuts? Sometimes obvious things really help you see stuff coming.
Gail Davis: That's incredible. I love the concept behind Signals and I love you were sharing with us some of the ideas that you have what you thinks going to happen with the economy in Mexico. I think that's really interesting.
Pippa Malmgren: Well, again, just to back up a little bit. It's important to understand the context because a lot of what I say gets laughed [00:04:30] at. When I said financial crisis then I get laughed at. Then I said China's going to have a much harder slow down than people realize, a super hard landing at a time when everybody said China's the future and America's toast. So, that got laughed at. Then, I said Brexit would happen. I said the recovery in the world would happen first and fastest in the Mexico, Texas Midwest corridor. That also sounded completely do-lolly at the time. Then [00:05:00] I said I think Trump is going to win. Which I wasn't in favor of but I thought the popular step rising was so apparent that would happen. Most recently I've been bagging on about inflation is real and it's coming back to life and we all have to really think about that.
In the context of having made all those calls, today, what I see on the landscape is that Mexico is the new China in the sense that the wages are 20 to 30% cheaper than China but their quality control [00:05:30] is vastly higher. In fact, it's pretty much American level quality control. While the Chinese quality control is collapsed because the average Chinese worker now knows that they're not going to be rich in the future. Before, they believed there was a possibility so it was worth working incredibly hard and paying attention to detail. Now, it's pretty obvious to them they're not going to get rich before they get old so they're doing their job but only, you know.
So this is one reason the Chinese are moving to automation. In fact, this [00:06:00] year, 2017 they will move their economy to automation more than any other economy in the world. They will purchase more robotics than any other economy in the world. That's to compensate for the lack of quality control. On that basis you start to look at Mexico which is just opposed with the hottest, fastest growing economy in America which is Texas. Suddenly you begin to see why investors all over the world are saying the place I want to allocate capital [00:06:30] is this corridor. That's not to say there's not dangers on the horizon. There's going to be a lot of social instability in Mexico because inflation is back. Inflation always causes social unrest, social protest, margin pressure in emerging markets especially. It's not a smooth ride but none-the-less I think the anchor point for capital today is this Mexico/Texas Midwest corridor.
The number two location that money likes is between Birmingham [00:07:00] and Manchester in the United Kingdom which is a part of the country the British are like wait, I thought that was all over. I didn't think there was anything still happening there. The Chinese are moving in so fast in such huge volume, massive infrastructure projects, buying retail, commercial residential properties. Record amounts of capital from China moving in to the UK. Again, why? Well it's the rest of the world doesn't look that great. We can talk about the reasons why but it's always a relative [00:07:30] trade.
Kyle Davis: I've been saying for a long time that Mexico, I have a different reason why I think Mexico's going to blow up in a positive way for their economy. It's a mineral rich country that a lot of people don't know about. It's farming lands are just ridiculous. I think if you're into wine their Mexican wines are coming and they're going to be really, really good. There's just a lot of things going for it and then aside from American policy and Mexico policy. Once that all gets figured out, it'll skyrocket. Now [00:08:00] what you're saying for even having a fracture cross the border logistically it makes more sense having manufacturing closer versus having a trans-oceanic thing from China.
That makes sense. The funny thing is that I look at, when I look at China for instance, in Vice News, the counter culture awesome documentarians that they are, did a phenomenal thing on these ghost towns that China built. You look at the fake Disney Land they have and it's empty. They have a mock [00:08:30] of Paris, empty or three percent occupancy. They're building a mock up of New York City's financial district and it's at 15%. Are the numbers that were coming out of China for the last ten years legit? Moreover when is that going to come and bite them for that kind of building and that fast growth and all that other stuff?
Pippa Malmgren: I think it already has bit them and they know it. In fact, it was very recently that the head of the Chinese statistical service, [00:09:00] the official guy in charge actually wrote an article, not just gave an interview, he wrote an article where he said, "It appears that they junior staff here in this institution have been fudging the numbers and we're going to put an end to this." In other words, the numbers are not right. So that's been an issue for a long time.
China's solution to this has a name. It's called One Belt, One Road. It's a really important thing for everybody to Google this and understand what it is. It's the largest, physical infrastructure build out that the world has ever [00:09:30] seen. They have concluded they are not competitive anymore in the domestic economy. They can not generate the GDP from inside the country that they need to keep the population stable. Jing Jang Ping has promised the public, he's going to double the national incomes by 2020. Not very likely in a world where their not competitive in manufacturing anymore.
So, One Belt, One Road is a physical link between Eastern China. It's a railway, airport, [00:10:00] port. All kind of physical links from Eastern China all the way through the old silk road in Central Asia, into the Middle East, up and into Western Europe, all the way to London. In December 2016, so just a couple months ago, they completed the longest railway journey ever done. It's 18 days from Ye Hou in China all the way to London. That now goes once a week.
A year before that they completed what was then the [00:10:30] longest railway journey from Ye Hou to Madrid. Interestingly, it went loaded with Chinese goods of various kinds. It came back with only one thing, olive oil. You're like olive oil? Why? The answer is because they got a billion people they got to feed. That's what the Spanish had that was edible. Right? So that's the land link.
Then there's the Maritime Silk Road that goes from Eastern China around Asia, around India, into the Middle East. Frankly, [00:11:00] are Africa and increasingly into Latin America as well. So you may have heard about the Chinese wanting to build a canal through Nicaragua, parallel to the Panama Canal so they're not dependent on the United States for that access. They're widening the Suez Canal in Egypt.
This infrastructure build out goes all the way to Mexico. So for example, they have said Okay, Mexico as you say has all these amazing resources including oil and [00:11:30] gas. Interestingly in the US we haven't built a new refinery. I think it's now 36 years last time I checked. This is part of Donald Trump's thing that he's going to take away these regulations so we can build refineries again in the United States. In the meantime, the Chinese and the Mexicans cut a deal. They're going to build five new refineries and I swear to you they're going to be an inch and a half off the US border. These refineries will be the most high tech which means all the heavy, messy crude from the Gulf that [00:12:00] traditionally was very hard to work with, that is going to be dealt with, processed and that, the Chinese expect to ship back to China.
One Belt, One Road has huge implications for global infrastructure and for harvesting these assets. The question is who will get them? I think there will be a competition for where those assets end up. Whether it's food or energy or whatever.
Kyle Davis: Are they still working on those oil pipelines that are running through China and into countries like India? [00:12:30] I know there's another pipeline that goes into Afghanistan so they can get all that copper, giant copper deposit that they bought. Are they still trying to build that out?
Pippa Malmgren: Listen, on every asset you can imagine. Every mineral, every bit of energy, everything in the ground. Yeah. There's a huge race on for all that stuff. By the way, Russia is part of this game as well. The Russians are hugely involved in what you might call pipeline diplomacy about what's going to be developed and what isn't going to be developed.
I think personally, one of the most interesting [00:13:00] locations on the planet that nobody is paying attention to is the Eastern Mediterranean. People are like what are you talking about? We just go to the beach there right? No, it turns out the Russians have said they want a permit naval presence to move their military into the Eastern Mediterranean. Why? Because they've found these massive mew gas fields. If they're developed then Russia loses it's ability to turn the temperature dial down on Western Europe in February every year. Which is incredibly useful if you want [00:13:30] to get the Europeans to jump. Interestingly, the Israelis own the licenses to develop but Cypress actually owns the assets and everybody knows Cypress can't defend anything. They're broke.
Suddenly we're seeing the US and Russia a little more confrontational over a part of the world that you just don't think of. Meanwhile North Africa is less stable then it used to be. The Russians are holding the first military exercises in El Alamein. A place you haven't heard about since World War II. [00:14:00] Why? Because if Libya's unstable who's going to control all that oil? So these are things that are, from my mind on the landscape. Most people don't even know what's going on. It's potentially very important.
Kyle Davis: Yeah, there's giant movements that they have in Western Egypt, pretty interesting. Another thing too, that I was thinking about is all the development that China does in Africa with regards to infrastructure building with all the roads and things. Like the super highways that they're building [00:14:30] to go get all the minerals and the Congo and whatnot. My friend Zack, he's a real expert on China and Asia politics and geopolitics but he basically said China's really good at fighting wars with money. They love buying stuff.
Gail Davis: They say, Chinese have a saying, "Wars are fought with silver bullets."
Pippa Malmgren: Yeah, you fight wars with cash.
Kyle Davis: That's what they're doing. They're laying the ground work in Africa, they're laying the ground work in there so I'm just wondering is, when [00:15:00] you're looking at a US policy or Greater NATO policy or Western policy, are we doing enough? Or have we been doing too much? Or what's going on with that?
Pippa Malmgren: Yeah. Again, back to this core idea of One Belt, One Road and to understand what they're doing is building special economic zones outside the country so they can both harvest resources they require but also generate income. Also, [00:15:30] find a place to sell all the excess capacity because as you say, they've been building all these cities that are completely uninhabited in China. So, what are they going to do with the labor? What are they going to do with the excess steel and concrete? Now they have a place to export all that to including labor. That's been the big complaint in Africa, is that Chinese labor in Africa rather than giving jobs to the Africans so they're having to be more careful about that. But I would say Africa is a little bit yesterday's story [00:16:00] because that model they're taking to many other locations in the world. From Central Asia to Latin America. Frankly, even the United States.
The one thing that the Chinese are very keen to invest in is physical infrastructure. The one thing they definitely don't want to own anymore are US treasuries. They're view is the US has led the way in moving towards more inflation. The way we decided to solve the debt problem [00:16:30] was to introduce a bit more inflation. That's been the feds core position. Faced with that, they're view is we will get hurt by this because if food prices go up in the world, which they definitely have in emerging markets then we can't keep our population stable. We have to build this global strategy and the question is what does that mean for the rest of the world? So they've said we okay, we don't want to buy treasuries anymore because if you're going to inflate that's just stupid. Why would we buy treasuries, [00:17:00] why would we buy bonds? Cash is crazy if inflation is going up.
We want hard inflation protection assets. So they're interested in physical infrastructure in the United States. They're interested in companies like Smith Field. The biggest acquisition in history ever done by the Chinese of a US company was Smith Field. It's the biggest pork producer. What's the most important food stuff in China? It's pork. And did they buy it to have access to that [00:17:30] supply? Absolutely. They also bought it to learn about the technology of growing pork. Although, at the end of the day you still need water and they still haven't got any. So, they have to import all the stuff from abroad.
Kyle Davis: When you look at these countries like Russia or China that they do have tangible resources whether it be labor, if you want to say that for China and oil and gas for Russia. What do Ceno, Russian, I forgot what [00:18:00] the code word for Russia is now but what does that relationship look like in the greater geopolitical landscape? It almost seems in my opinion that they're both trying to develop some sort of regional ageminy for each ones and it seems like Russia's trying to do this new Russia thing. So they're trying to do that where China is trying to we're going to build off the Senkaku Islands, or I forget the name of the word but they're trying to build on that. [00:18:30] So what does that look like? They're still not the global powers. China has what? One aircraft carrier that's assimilated from 1960s?
Pippa Malmgren: This is such an interesting subject. First, let's start with this. Here's the thing we have to remember, a billion people in China believed they were going to be better off. Now it looks like it's going to be really, really hard to get the life they expected. We can not expect those billion people to just [00:19:00] go home quietly when we say, "I'm sorry but you're just not competitive anymore. You let me know when you have a better business model." No, they're not going to go home quietly. So, we have to think about how do we incorporate these people into the world economy successfully.
In the meantime, the Chinese are pursuing the strategy I mentioned and part of that is a military strategic security approach as well. They can pursue their national interest. [00:19:30] Yes, it's true, they have one old soviet air craft carrier that they refitted. So, by one measure it's no threat. I would turn it around though and say look, here's the bottom line, we are seeing a record jump in spending, particularly defense spending all over the world. Where is that spending going? In space, cyber space, and the high seas.
Now, why is it space? Why is everybody in a space race? The Russians, the Americans, [00:20:00] the Chinese. Answer because whoever controls the high altitude military satellites, controls the military arena. If you take out America's military level satellites guess what? Nobody knows how to navigate all of our aircraft carriers. You can hit the little red button all you want but no weapons are going to fire in the absence of GPS.
Interestingly, 2017 is the first year the US Naval Academy is reintroducing celestial navigation. They realized [00:20:30] our strength is also our vulnerability. The incredible, technological advantage that the US has over everybody else is also the point of vulnerability. This is also true with the Russians. Both Russians and Chinese I think, from a strategic security point of view, their basic strategy is to deny you the use of the use of your own weapon systems. They're not trying to match us aircraft carrier for aircraft carrier. They're trying to figure out what kind of weapons would eliminate GPS [00:21:00] from the environment for a period of time and leave you dead in the water.
I think that's a different way of thinking about the strategic risk landscape. It's not the way militaries are accustomed to thinking about strategic risk. My own perception is that, cause I advise the British Ministry of Defense and I've been writing about these issues for a long time. My senses, the British, the Americans, NATO, they're under so much budgetary pressure and then [00:21:30] they're also conducting wars. So this takes all their bandwidth and they don't have time to think about these bigger issues.
We come back to your core question where we with the Russians, and the Chinese. The answer is they're competing with each other for resources as well. I would say to people, take a look at the arctic which just sounds so remote and why do I care? But the Russians have said that the Arctic is the mecca of resources for them. They're building record number of military bases there. They've been [00:22:00] very active in the Baltic, challenging the west in many ways there. A lot of real confrontation issues. What do you find in the Arctic and the Baltic in addition to oil, gas, and that sort of stuff? You find fish.
In a world where inflation is happening, food prices, protein starts to matter. Right now the Russians are paying 50% of their income on food alone post sanctions. The value of an average size salmon in Norway is actually worth more than [00:22:30] a barrel of oil. You wonder why the Russians are showing up in Norwegian fishing waters all the time. These things I find are all interconnected but this is not the typical way people think about these things.
Kyle Davis: I think one of the things that I wrote down as a note to myself, you can initially GPS satellites in our military grade encryption satellites that we have floating around and doing some really cool stuff.
What will surprise some people is that a lot of our [00:23:00] ICBMs, our Intercontinental Ballistic Missiles actually run off of floppy disc.
Pippa Malmgren: It's so true. It's true.
Kyle Davis: But there's a reason behind it.
Pippa Malmgren: The parts come off Ebay for some of this stuff because they're all programed in Four Tran which is a computer language. They don't even teach it in universities anymore. Actually, I think whoever these scientists are that are running these programs, they're geniuses.
Kyle Davis: Oh it's brilliant.
Pippa Malmgren: It's incredible.
Kyle Davis: People don't understand why it's so smart. I'll let you tell them. This is your podcast, I'm just here, talking ahead. I just love the sound [00:23:30] of my own voice. I'll let you tell why floppy disc are actually a redundant brilliant idea.
Pippa Malmgren: Again, it's so interesting that sometimes really old technology is safer. I'll let you do the floppy disc but I'll tell you this, one thing that's interesting. The Russians, we tease them all the time, when they sent Flotilla, part of their fleet, recently from Russia around to the Mediterranean, the guys on the US Navy side all joked. Do you think their ships will sink on the way or on the [00:24:00] way back? Which of course drives the Russians insane. What's interesting is the Russians use very old valve technology, particularly on their submarines. Guess what? It works perfectly in sub-freezing water. So if you care about the Arctic, great. So you can laugh it's old fashion but it works. You tell me the floppy disc thing.
Kyle Davis: You can't hack a floppy disc.
Pippa Malmgren: Well, that's true. You can't.
Kyle Davis: At the end of the day you can't hack a floppy disc.
Pippa Malmgren: You can't recover it either if anything goes wrong.
Kyle Davis: You can't but you can't hack [00:24:30] a floppy disc. That's the interesting thing about it for people wondering why floppy disc matter.
Pippa Malmgren: Totally.
Gail Davis: I'd love for you to talk about the company that you founded. H Robotics. I also know that I read somewhere that you believe every deal involves technology. So I'm curious about the founding of that company and then why you say every deal involves technology.
Pippa Malmgren: Sure. I got a bit tired of all these economist who talk about the economy and usually, incredibly negatively. Economists [00:25:00] are a very dire group of people typically. I got tired of talking about it, they don't do it. They don't build it. When I wrote my book Signals, I basically said in the book everybody asks me, what's going to happen to the world economy. The president of the United States, my cousin, everybody. The honest answer it depends on you. If you decide to hunker down into fear then we're going to get one economy. If you decide to build your dream, to build something in the economy, to reach for something [00:25:30] that you can't currently quite grasp, then we're going to get a different economy. I thought, well I can't tell people to go build the economy and not do it myself.
So, a part of my work is trying to spot trends early. I had said about five years ago that financial services, a component of GDP, is going to shrink. Society was going to force it to shrink after the losses that had happened, the regulators were going to make it shrink. It's like a cull. A lot of very talented people [00:26:00] would no longer be permitted to stay and they would take their talent and skills into the real economy cause that's the only place they could go. My bet, was that they would make more money in the real economy then they ever made in financial markets. At the time people were like are you crazy? That's impossible. Now, I think this is exactly what's happening.
By, one of my clients who's now my business partner said, "I definitely have an idea and I may be one of those guys. Let me tell you my thought." His idea [00:26:30] was to build drones. Five years ago people were like what's a drone? They weren't even available in toy shops at that point. He'd been an oil trader so he's the last guy on the planet you would think could build these things. It turns out a very important thing, his father ran the largest construction company in Western Australia and he grew up learning builder skills. How to do electrical wiring, how to pour concrete.
This is one of my big arguments about the economy we'd all [00:27:00] be better off if we taught these practical skills to everybody at a young age. We've made a terrible mistake saying university followed by a white collar career is the only path to success.
At any rate, he has these skills and he was born in 68. His parents, when he was 13 refused to buy him a dog. So he built a robotic dog with a sniffer nose that followed him around. I'm like sweetie, this is before Steve Jobs and Bill Gates [00:27:30] were on the cover of Time magazine. If you want to build this thing I'm in, that just sounds great. If you were doing that at 13 then okay.
We basically have built a Swiss Army Knife in the sky in the sense that it's a stable platform with a lot of attachments so it can be used in multiple industries. Highly stable, and it sends all of the data to a highly stable platform that's in the cloud. You can overlay all your data with any kind of off the shelf software. [00:28:00] It's literally an industrial tool in a world where 95% of everybody in the drone space are making toys for retail consumers. At best, they started to make souped up toys for companies but they don't really work cause they're not rugged enough, they're not data management intensive enough. That's how we decided to do it. It was a hell of a bet, we built it from scratch, we funded it ourselves. Today, we have actual clients who paid full price [00:28:30] who are using it in the field as far as Africa.
By the way, if any economist wants to argue with me about how the future of the economy is going to be hell in a hand basket. I'm like bring it on sunshine cause I'm part of building this sucker and I can tell you people are building. You can make things even if they economy is weak. In fact, sometimes when the economy is at it's weakest is the best possible moment because you can get everybody the stuff, the rent, everything's cheap. [00:29:00] There's always a way to build the economy of tomorrow no matter how bad it gets.
Kyle Davis: One of the things you talked about the other day when you were in the office speaking with the team was the presence of luxury goods and how really what stands in the economic crisis, I think a lot of people understand why that is. But if you could expand on that and if you can also talk about, it's not peaks and values. You can really find your way and navigate and do whatever you need to do in the economy so long as you have [00:29:30] a solutions or in it approach.
Pippa Malmgren: Totally, so one of my favorite, favorite stories is about a bottle of perfume called Joy. It is the second best selling perfume in history after Chanel No 5. The story is the french owner, Jean Pateu, in 1929 realized that he lost his entire customer base in the crash of 29. He decided to shut down his clothing business, he invented nit wear, [00:30:00] you know for ties and tennis costumes and things like that. They decided to shut all that down but to keep the perfume business and in fact, to launch the most expensive perfume ever made. Apparently it took 10,000 Jasmine flowers and 5,000 rose petals. It was expensive on a scale that was unimaginable. The bet that he took was that he believed no matter how bad the economy got, [00:30:30] somebody would figure out how to make money and have money to spend. They would want the highest quality perfume available.
Can you imagine making the bet to make the most expensive perfume ever made in the middle of the biggest crisis of that century. It launched, it was immediate success and like I said, it's been the number two selling perfume, Chanel No. 5 ever since. This is a wonderful encapsulation. It's important too for the people who work in the fashion and luxury good world because [00:31:00] they are important signals about confidence in the future.
If you ever call Christian Dior and his amazing new look it was called. Which was these incredible dresses introduced in the early 1950s. In the aftermath where rationing was still going on, people had been in depravation for such a long time because of two world wars. Then he introduces this dress that uses more yards of expensive fabric [00:31:30] then every military tent anybody's seen during the whole war. It was so extravagant. It was outrageous. Yet, people went the future will be better. We will have enough fabric to make dresses. I think if you're in that world you need to understand that your decisions really influence.
Today, what I see. I'm speaking at a luxury goods conference fairly shortly. Today, what do we see? Okay. Hemlines. [00:32:00] Usually if they're short the economy's good, if they're long the economy's bad. That may be a cliché but what's fascinating is what's super popular today are A symmetric hemlines that are both. I was fascinated Melania Trump, on the day of the election, she wore a dress that was A symmetric hemline from the shoulder all the way to the floor. I do think that is a common sense signal that I see with that non-quantitative eye, that non-quantitative lens that tells me there's a high [00:32:30] degree of uncertainty. People really don't know where is the economy going. But, fashion and luxury goods can be great signalers of the future and reflectors of the moment as well.
Kyle Davis: This is a great segway into ... I was going to talk about LVMH but let's not do that. When you're talking about these signals, there's a famous book I'll talk about, Black Swan and having this kind of contrarian thinking.
Pippa Malmgren: I know Nassim Taleb, the author.
Kyle Davis: [00:33:00] If you want an awesome intensive read, read footnotes and end notes, that's a good one. Would you say the way that you look at these signals is it this contrarian black swan style of thinking or is it more of a tilting your perspective and just letting your mind run and them coming to a different solution, different answer.
Pippa Malmgren: I actually write about, I think Nassim would have a heart attack if he read my book because his view is you can not predict the future so we might as well go down to the bar and get [00:33:30] a bit drunk because there is no way. My view is I agree, you can not predict the future but you can absolutely be better prepared for it. One of the ways in which you are better prepared is to stop just looking at math, open the other eye and bring some common sense cause then you have a holistic view. That's one thing. Also, data by the way is all about the past. Since you can not extrapolate the data into the future [00:34:00] because history may repeat itself but it's typically not linear so that doesn't work. You have to begin to look for hints about the future which I call signals, that give you an idea of what's not yet in the data but will potentially be up there.
Maybe the most important thing is to use your imagination. This sounds really wacky but there was a fascinating moment where the Queen of England, after the financial crisis, went to open the lecture [00:34:30] theater at my university in London School of Economics. She asked the economists a simple question, how did you all miss this? How did you all miss the financial crisis? How is it possible the entire economics profession missed the biggest financial catastrophe in modern history. She's so clever right? It took six months for the British Academy to reply to her and in the reply they said the answer was a singular lack of imagination.
[00:35:00] I think this is really important. I love the little section in Alice in Wonderland where the queen says to Alice, you have to use your imagination more and Alice says well I can't do it really. The queen says I often imagine as much as six impossible things before breakfast every morning. That's what we should practice. I think that's why maybe I see the world a little more differently then other people. I'm looking for qualitative signals as well as quantitative. I am prepared to engage in imaginative [00:35:30] leaps about what's possible. What is the human condition capable of generating. A lot of people, I guess, they just don't have that imagination. I think that's the key.
Let me put it this way cause I think this is going to be the topic of my next book actually. GDP is not a number. GDP is an act. It is the moment when you realize I want to do this thing. I want to learn a language or I [00:36:00] want to run a company or I want to move across the country and take a job in a different field. A million different things qualify that create GDP and to get there, what you have to do is go deep in your soul and balance your hubris which is your ego, that wants more money, wants more achievement, against the risk of failure. Which we have a name for the ancient Greeks called nemesis. So you balance your hubris against your nemesis. [00:36:30] Then you look inside yourself and judge what are my personal qualities, skills, capabilities that would let me accomplish this task that maybe somebody else wouldn't do. Everybody has their own risk DNA that's different then the next guy. When you do this and then you reach for that goal, if you do it well this is where GDP definitely comes from. That's how the economy grows, that's how your personal life grows.
If you fail, you still create GDP and you learn lessons [00:37:00] as well. So it's not a useless task even if you fail.
Kyle Davis: You mention the ancient Greeks and you said a word that I really like. I'm going to give a short little story. I actually have a friend in town visiting and some people may or may not know this but I was a history major and a large part of my focus was the ancient Greece and things like that. I'm a big fan of laconic phrases.
Pippa Malmgren: I have to tell you, I did ancient Greek military history at Yale. Seriously, I studied the Peloponnesian wars. We have to talk.
Kyle Davis: We're going to do a little talking [00:37:30] about Phillip the second of Macedon when he went in to Sparta or Lactacidemia and he goes in, I believe he's talking to, I want to say Leonidas but I could totally be wrong. He goes if we come in here and if we defeat you we're going to take your women, we're going to kill the men, we're going to take all your resource, this, that, the other. Just the most horrific stuff. The Spartan response is a laconic phrase so it's short and powerful. [00:38:00] If. It just leaves you wondering, thinking, so many people think it's going to happen. This is almost certain.
You look at tech startups in San Francisco and this is a space I know quite well. You have your technical founders and when I mean technical founders, I mean they're so into the technology, they're so understanding of what they developed and that's their little baby that they can't consider an outside thought, they can't consider an outside [00:38:30] criticism, they can't consider stuff. You have these people sitting on phenomenal technology and they limit themselves.
Pippa Malmgren: Totally.
Kyle Davis: They get their series A, they get their series B and it just goes no where. Then you get these founders who are open, willing to learn. Maybe they're technical, maybe they're not. They could be a Travis Kalanick of Uber who's not a technical founder from my understanding. Or it could be Mark Zuckerberg who is a guy who taught himself Mandarin, who's now visiting all 50 states in the US and [00:39:00] he's open to new ideas. These are two giant companies regardless of how you feel about them. They're always constantly expanding, constantly thinking, constantly improving and thinking about different ways to evolve. I think that's what's missing for a lot of these people cause you talk about economist they're so quantitative and it's just the hardcore developers.
Pippa Malmgren: It's unimaginative.
Kyle Davis: It's unimaginative. I know my coding language, I know this product. But you didn't think about design which is something we talked about the other day. You didn't think about the clicks. You didn't think about the movement. You [00:39:30] didn't think about the user experience. You didn't think about what's three evolutions passed us? What's secondary, tricheary, what's the fourth order effect that's going on here. No thought goes into that.
Pippa Malmgren: Exactly. So let me tie these together because one of the stories I write about in my book is the story of the Gordian Knot. A Gordian Knot is just an ancient Greek story about a knot that is ... Well, there's a little guy called Gordius and the oracle in the town basically says [00:40:00] when the eagle lands on a cart that guy becomes king. So the eagle lands on his cart and then he wants to tie it up so nobody can take it away so he gets to stay king. He creates this incredibly complex knot and the harder you pull on it, the tighter it gets. Someone, a marauder comes and wants that cart because he wants to become king. There's only one way, you can't untie it. You have to slice it. Nobody thinks you can cut the knot just by cutting with a knife through the [00:40:30] know.
I think today there's several things in the landscape where we're going to cut through that Gordian Knot. Where the leap of imagination is going to be big. I'll give you one example I think is super timely.
One way that you can deal with this overwhelming debt problem that exists in every major industrial economy today. To be clear, it's so big it can't be paid down. If you tax 100% of the citizens of the US or Japan or Britain or Europe, 100% of their income you still [00:41:00] have a hole. Basically it can't be paid. How can you resolve it? Well there are a number of different ways, inflation is one. But one way is you actually change the entire system of accounting and money. That sounds so shocking. But we already know what the new name of the money and accounting system is going to be. It's E-money, electronic money and block chain.
Now, the Indians, as in the government of India has just in the last [00:41:30] three months, moved a billion people to cash paper money onto electronic money, literally in about three weeks and with no warning whatsoever. The Prime Minister stood up one day in November, 2016 and he said, "we are now going to electronic money and I'm giving you people six weeks to make the transition." They have done it.
So the idea that you can actually change the entire system of money is now proven. [00:42:00] Every government in the world is talking about going to electronic money because it gives them full transparency over every transaction, kills any black market, makes tax collection much easier. Now, add to that what's called Block Chain which is super techy for a lot of people. But, it's basically a data management system where every single transaction is tracked so you don't need accountants anymore because it's actually clear where every part of the transaction occurred. My concern about [00:42:30] that is so the conversion rate from your current assets to the future system might not be one to one. That's one way you can deal with the debt problem. Also, it brings a lot of social issues.
I'll finish with this, the Chinese have just announced a new social credit system. It's kind of an Uber score for individuals. The way it works is they take all RFID chips that are in your clothes which are literally one third the size of a dimple [00:43:00] of a golf ball. You can try and get them out but they're in there. Retailers use them to track how you are wearing it, where are you wearing it, what are the conditions. They will also triangulate using the signature on your cell phone, the CCTV cameras, the car and it's license. So you borrow your moms car, you pull it in to the disabled parking bay because you've had that permit there even though it's not your to drop off the package for two seconds. Now that clocks [00:43:30] that you've done it. Deducts from your personal Uber score, now the price of your mortgage is going to be a different one then it was before. I would highly recommend that everybody watch the episode of Black Mirror called Nose Dive. That's what that looks like.
Kyle Davis: I believe for those with a Netflix account it's season three episode one.
Pippa Malmgren: There you go. It's important question, what do we want our society to look like in economics and technology come together [00:44:00] to define. We have to use our imaginations to choose what is the future that we want.
Kyle Davis: One of the conversations that we had with Herb Meyer who's on our podcast episode number four. We were talking about developments and how things shift. He's talking about the way to define current situations is a rush towards modernity. I'll accept that promise. One of the things that was really interesting and the way you just [00:44:30] skip stuff is if you look at Africa with regards to banking and how banking in Africa, it wasn't brick and mortar banks it was hard to do. The cell phone came along and they have the highest rate of online banking via mobile devices anywhere in the world. They don't have brick and mortar banks. They do it all on their phone.
I'm not talking like Iphones. I'm talking like your Samsung brick phone that you used to play snake on. They're just crushing it.
Pippa Malmgren: Totally. Bangladesh, a friend of [00:45:00] mine runs one of those business, money transfer business that works via a very basic cellphone. It's growing at a pace that would make most Americans envious. It's incredible.
Kyle Davis: They thought we have to develop these internet systems, we have to lay wires and cables, build roads. Why do you have to do that? Cell phone tower in one area and you cover a couple hundred miles.
Pippa Malmgren: Totally. Actually, I would take this even a step further. One of my big things is we just don't develop the latent potential [00:45:30] in people in our economies. That's a thing that holds us back. In the US, for example, we seem to have this idea of high tech corridors and high tech counties. I'm like no, we need a high tech country. Forget localizing this thing. People's like well there's only talent in this one place.
Well look what Mark Zuckerberg has been doing, he's been supporting this company called Andella which is developing coders [00:46:00] in Nigeria. The idea was that in Bangalore in India were actually becoming too expensive. There weren't enough coders in Silicone Valley so they went less go find a new less expensive place, let's go teach some of these young people and see if we can build some coders there. Huge success because it turns out, Nigeria, a country of hundreds of millions of course there's talent. I'm of the opinion that if you tried to find coders in Oklahoma [00:46:30] or Montana they're there as well. The issue is not the lack of talent around. It's our inability to develop it, to nurture it and bring it out. We need to exercise more imagination to that end.
Kyle Davis: My friend Jimmy Tusant, I'm going to give him some credit here, he has a company called Ad Com Mobile. When we were at school together in Columbia he went to all of these startup events they had at Princeton, Columbia, [00:47:00] Harvard, NYU. What he was doing, what he was noticing because his family is from Haiti, that Hatians and all these other countries where the world is developing, they don't buy contracts with cell phones, they buy minutes. So what he created was a company called AdComm Mobile where you allow them to play an ad while the phone rings, unless you're dying like emergency services then there's no ad.
You have to listen to the ad while it connects. Then you go okay [00:47:30] it's a pizza ad. Then it begins to using a machine learning, figure out who you are. Because you don't have a contract you have a pay as you go phone. This phone is a male, this phone is a female. So then you start getting targeted phones and by listening to an ad you get a boost in your minutes by 10 or 15% points. It's all doing that. His largest funder for evaluation was a VC fund out [00:48:00] of Legos, Nigeria. All of his coders are there. It's all brilliant stuff.
Pippa Malmgren: Another piece of this puzzle just to finish on this, I feel really strongly about is, go back to these practical skills. There's a company out of San Francisco that I just adore called Tech Shop. I found them when I was taking my dad out to dinner in Washington D.C. I walked passed this huge warehouse on a Friday night. There was line of young people. They were like around [00:48:30] the corner. I was like what is this? A nightclub? Are people lining up?
It turned out they're going in to pay $60 to $90 to learn a manual skill. Whether that's how to paint metal with a metallic finish, whether that is to use a metal lathing machine, whether that's how to sow. Real practical skills. I do think until we reintroduce that into our school system [00:49:00] and not only that, treat the people who are good at these things with respect. Not treated as a second class endeavor. In fact, require white collar people to have some idea of how you actually make stuff and run a business. I think our policy makers and our politicians would be completely different in the way they approach public policy if they had any idea what's required to actually invent, construct, and build [00:49:30] real things and real businesses. It's a bug there of mine but I think it's a really important thing.
Kyle Davis: I'll give some praise to you and some praise to my mom. My mom made me get a job, my first job ever was working at a place called Quick Car where I had to change oil. 16 year old kid changing oil. I also took a class in high school for auto body shop which was getting my hands dirty and figuring out do we knock that dent out? Do we cut it out and then put in new aluminum and weld it in? [00:50:00] Or do we fill it with apoxy and sand it down? How do you do it?
What I think is really interesting, to your point about learning these manual skill labors where you have to use your hands is that it changes the way you think and you go to problem solving. If someones a hands on person, giving them the ability to learn a new language, and I'm not talking about German or Arabic or Mandarin. I'm talking do you want to learn Rubion Rails or Phython HTML CSS. What do you want to learn because that will change the way [00:50:30] you think logically and another one will change the way that you problem solve.
To my benefit, I don't work on cars anymore but I can change my oil. I can change a battery, I can tell you what the problems are and I got a degree in history and work in tech.
Pippa Malmgren: So there you go. Yeah.
Gail Davis: You know Pippa, every now and then we have a guest that's so engaging that we're like you have to come back. This is definitely, definitely one of those situations.
Pippa Malmgren: Thank you.
Gail Davis: Pippa spoke for us this week and to reinforce this concept of her coming back I want to share some [00:51:00] of the feedback that we got from some of the client literally within the hour of her speaking. I'm just going to skip to the really good part. This morning's speech was easily one of the best I've heard, if not the best. The feedback that I've received thus far has been stellar as well. I honestly think that Pippa could still be fielding questions from the audience if we had enough time to allow it. That's the kind of feedback we like to get and we're going to have you back many, many times I have a feeling. We love working with [00:51:30] you and it's just been a delight to have you here in the studio today.
Pippa Malmgren: You guys are great. Thank you so much.
Gail Davis: Thank you.
Kyle Davis: So if y'all are interested in booking Pippa for your next event you can do so by contacting GDA Speakers at 214-420-1999 or visiting GDA Speakers dot com. If you'd like to see the transcript for this podcast or even buy Pippa's book Signals how everyday signs can help us navigate the world's turbulent economy you can do so by going to GDA podcast dot com when this [00:52:00] episode is available. Other than that I will say that if you want Pippa to talk about geopolitics, she can do so. We can talk about anti access area denial all day. We can talk about econometrics and what a joke it is. I'm joking. You can talk about whatever you want.
We had a guy on the other day who's a Renaissance man, well I had to say that you're whatever the equivalent is, if not better. So, thank you for joining us today.
Pippa Malmgren: Thank you.
Gail Davis: [00:52:30] Thank you.