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00:00Actually, I don't think it's so much a surprise that it's happening.
00:03It's more like, why did it take so long?
00:06And I think a lot of it has to do with higher interest rates exposing the severity of the imbalances.
00:12And from a financial perspective, what we're witnessing right now is an unwind of the capital misallocations going back to 2008
00:20and arguably all the way back to the fall of the Berlin Wall in 1989.
00:25And driving those misallocations, one was the GFC.
00:30The United States had the biggest stimulus, both monetary as well as fiscal,
00:35and it has all the plumbing to be able to accommodate that.
00:39And you can see that if it was in the banking sector, capital markets, all of it attracted that.
00:45The second factor was the MAG-7.
00:47And we're going to talk about defense in a second, but why doesn't Europe have a MAG-7?
00:51It had no military-industrial complex.
00:54Because with that comes GPS, Internet, AI.
00:58All of that are extensions of the military-industrial complex.
01:01And then the third one is we're unwinding the trade imbalances.
01:05What's the flip side of the trade imbalance?
01:07Capital inflows into the United States.
01:09And so what we're seeing is a rebalancing of global capital flows.
01:13And we think we're in the midst of a major capital rotation back towards Europe and towards the rest of the world that was going back to 08.
01:21I mean, your defense spending prediction is massive.
01:25It's $14 trillion.
01:26Does the NATO spending actually help in making that a reality?
01:30Well, let me put this in perspective.
01:33The China boom, the BRICS boom in the 2000s was $10 trillion.
01:37Put it in today's dollars, like $15.8 trillion.
01:39So we're in that magnitude.
01:42Now, the $14 trillion is a do-everything right.
01:44Right.
01:45The worst-case scenario was $4 trillion.
01:47But even $4 trillion, that's a major CapEx boom cycle.
01:51And let's not forget, Europe really hasn't invested in defense going back for 75 years.
01:55So this is a big shift.
01:57And it's not, you know, people, you know, the macroeconomists say, oh, there's no cyclical benefit of defense spending.
02:04That's true from a demand perspective.
02:07But let's think about it from a supply perspective.
02:09I want to go back to why doesn't Europe have a Silicon Valley?
02:12Why was Silicon Valley called Silicon Valley?
02:14The U.S. military needed chips to go in the B-70 bomber and the Minuteman missiles that didn't melt.
02:20So having a defense spending or a military-industrial complex is a boom to productivity, you know, technology.
02:27So there's a lot of side benefits.
02:29And one of the big benefits that we see at Carlyle is why was VC created and private equity created to actually allocate that capital from the U.S. military-industrial complex.
02:41So this is huge.
02:42I'd like to say it's back to the future for private markets.
02:46So does this change everything with Europe, but in what time frame?
02:50Because it takes time.
02:51If you have any industrial plan and then a defense plan, it's time to also find the technology and find the right investments.
02:58Right.
02:58And I think let's go back to the BRICS boom of the 2000s.
03:02It took a decade to allocate that capital.
03:04Once you built the infrastructure to allocate that capital, then you, you know, overkill it and you'll overkill it here as well.
03:10But I think the key point is this is not a flash in the pan.
03:13We're just beginning that process.
03:15And, you know, I've lived through two of these capital rotations, one in 2002-2003 when the capital left the Silicon Valley and went into the BRICS, and then another one in 2014-2015 when it left BRICS and went into the Silicon Valley.
03:29So we're another one of these right now.
03:31And you've been coming on the show and saying, look, we've been underinvested in so many key parts of the economy, including, you know, energy and security in general.
03:39What role can private capital actually play in helping Europe develop its military?
03:43Well, you need an industrial policy to be able to funnel this capital into the right place.
03:48You can't trust something like defense to the vagaries of the public markets, and you don't want to put it all in the hands of a bureaucrat.
03:56That in between the happier medium is the private capital, because it's a way to be able to maintain some type of control, but to make sure that you still get the balances associated with market pressure.
04:07So, you know, that's the reason why the U.S. relied so heavily on it.
04:10But the question is, will Europe be as open, right, to PEs and VCs that the U.S. was?
04:17Yeah, yeah, because trying to allocate it directly, particularly with the regulatory framework in Europe, is going to be really difficult.
04:24And so, you know, like Airbus is kind of a Lego approach to, you know, doing aerospace.
04:30And doing that on a larger scale within Europe, across borders and everything, private capital is going to be the most efficient way to make that allocation of capital.
04:39Do you have any specific projects that you think will kickstart, you know, that if those go well, then it will attract even more investors?
04:46I want to emphasize, you know, Carlyle has a long history in aerospace and defense.
04:50You know, we've done 45 deals within the aerospace and defense sector.
04:54You know, at this point right now, you know, it's basically bringing in information, understanding what the space looks like.
05:01But Europe didn't completely get rid of its defense sector.
05:04So there's still a lot of mom-and-pop, private held companies.
05:08France has a database that has over 1,000 companies that are dual purpose, you know, commercial, well as defense.
05:14And so the opportunity in Europe is not as remote as I think people think.
05:19But I think it really starts with the private sector and these smaller type of companies that are more dual purpose.
05:25We've also talked in the past about renewables.
05:28I mean, is it now, you know, energy security?
05:31That is the right word.
05:32But at the end of the day, will money and capital find the same deployment?
05:37Yeah, energy security and, you know, non-fossil fuels go hand in hand.
05:42I'd like to point out that France has the lowest carbon footprint of any industrialized nation in the world.
05:49And it did it in the 70s and 80s when it built all that nuclear capacity.
05:53And why did it build that nuclear capacity?
05:55Not because it wanted to save the climate, but rather because it wanted energy security.
05:59Another thing, take China.
06:01China has cutting-edge nuclear technology, solar, EVs.
06:04We know the list of what they can do.
06:06Why did they develop?
06:07Again, they didn't develop it to save the climate.
06:10They did it for energy security reasons.
06:11And we think about fossil fuels.
06:15Why do we like them?
06:15They're portable and storable.
06:17But why are they dangerous?
06:18And as we witnessed with the potential shutdown of the Straits of Hormuz last week,
06:22it's because they're portable and storable.
06:25And the sun shines for everybody.
06:27The wind blows for everybody.
06:28And nuclear power is the size of your fist to power a city.
06:31You don't have that same risk that you have with fossil fuels.
06:34So I think the energy transition speeds up with this focus on security.
06:39It doesn't slow down.
06:40I mean, isn't it crazy, though, that we're just thinking of security, either energy or defense, in 2025?
06:46We should have seen it like 5, 6, 10 years ago.
06:48Yeah, but again, it goes back to that point.
06:50What has really changed here?
06:53I think a lot of it has to do with the 0% interest rate policies masked a lot of these imbalances.
06:59And now that interest rates are back up 4.5%, 5%, it starts to expose how serious these issues are and why they're hitting the burner today.
07:08And they didn't do it 5, 10 years ago.
07:10Well, what do you think will happen in the Middle East?
07:11I know there's been talk about a possible regime change in Iran, which then would unlock possible a lot of barrels.
07:16I think the existential threat of Israel and Iran definitely is receding right now.
07:21I think that.
07:22But I think an important point here is the U.S. didn't even blink over concerns about the Straits of Hormuz.
07:30And it had to do with the fact that their energy is independent now.
07:34And that's a critical change.
07:35Again, why are these things happening today and they didn't happen 5, 10 years ago?
07:39Five or 10 years ago, the U.S. would have been afraid to go into Iran because what if they did block the Straits of Hormuz?
07:45Now they're not dependent upon oil.
07:47And for Iran, you can't punch the guy that's hitting you if they don't feel any pain from it.
07:53And that's why the Straits of Hormuz weren't an issue for the U.S.
07:58And Iran didn't want to pull it.
08:00I think it goes to a broader point here.
08:01These energy security issues, the U.S. no longer has a concern to police global sea lanes to protect the oil trade because they're not dependent upon it anymore.
08:12Yeah.
08:12But so what kind of, I mean, they still, if you think of the shale in the U.S., they need a certain level.
08:18Otherwise, it just doesn't work.
08:20Yeah.
08:20So does it balance, you know, does it balance out if you go into strikes and Iran?
08:24Well, I think the, you know, the U.S. definitely needs prices above 65, 70, kind of basically where they are today.
08:32And you'll notice the administration went from 50 to 55, 60, and now it's 70.
08:37So they're kind of getting that message that you need to be in these levels.
08:40But I think people are very bearish because they believe there's this big surge of OPEC production.
08:46I want to emphasize, you know, the 30 years I've been doing this, I've only seen two bear markets driven by supply,
08:51one in 14, 15, another one in 1986.
08:55Producers don't shoot themselves in the foot usually.
08:58And I think in this case, OPEC's going to use, be very data dependent, watch what's going on.
09:04And by the way, demand everywhere is surprising to the upside.
09:07In fact, I think we're on the position to see global synchronous growth for the first time in nearly a decade
09:12because you have the U.S. is actually looking much stronger right now.
09:16China's been surprising retail sales, exports, container traffic.
09:20And now Europe has released the debt break on fiscal spending.
09:23We could actually see all three growing at the same time.
09:26And that kind of demand growth could accommodate that type of supply growth.
09:29And this is against all expectations, is it?
09:31Yeah.
09:31I mean, despite the tariffs.
09:33So what's, I mean, is it structurally that the economy is so different than we thought it was?
09:37Or is it that it actually just focused the minds of politicians and CEOs?
09:41I think that when we look at the environment was when you're in a face with a high uncertainty,
09:48you do more spot, less term, meaning you're going to keep buying.
09:52And we saw this in 2018 when the last trade war, is that the hard data was very positive
10:00and the survey data was really negative.
10:02Survey data reflects how people feel.
10:04The hard data reflects what's actually happening.
10:07As they see the fear, they retract and go more to a spot basis, less on term, and you get that disparity.
10:14And as we saw, by the time you got to the 19, that gap closed and the economy was doing well.
10:19Then COVID struck, obviously.
10:21But I think we're in a similar type of setup.
10:23Jeff, I remember this iconic interview that you gave me like over 12 months ago.
10:27You said, you know, we're running out of everything and no one's realizing.
10:29And you were talking like copper, lithium, and everything, rare earths that we need to help with the energy transition.
10:35Is there now, is investment back?
10:37No, it's not.
10:39And I think you look at drilling in the U.S., it's off.
10:41Russia clearly hasn't been investing in oil.
10:43They've been fighting a war.
10:45Saudi Arabia is focused on Vision 2030.
10:48So there's 50% of the world's oil production.
10:51They're not focused on massive investment right now.
10:54And then you look at the rest of the world, they're not investing.
10:56By the time you get 26, 27, we haven't invested in refineries, drilling for oil capacity, and I don't want to get going on the other commodities.
11:03But I think when we look at the misallocation of capital, look at a ratio of equities to commodities or any financial market to commodities.
11:11You're just grinding lower and lower.
11:13This is going to reverse.
11:14I'm very confident in that view.
11:16Obviously, the timing, I think we go back to that view.
11:19It worked initially into 22 and early 23.
11:22But why did it stop?
11:24I think one of the reasons to stop is the prices went too high, too quick, created a marginal increase in supply.
11:30Interest rates went up because of the inflationary pressures.
11:33And that slowed down, particularly the property sector in China.
11:37And now we're rebalancing.
11:39That story we talked about in 21 and 20, it's still there.
11:43The question is what kind of demand growth will expose it.
11:46And maybe we see that this year.
11:48There we go.
11:51Well, we said there's smaller industries.
11:53There we go.
11:53I know what we do.
11:54I know that there's bigger, bigger problems.
11:55Well, what do we go?
11:55We've gone through with them, but they're looking forیا.
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