Marvin Barth of discusses the thematic investing and the Themes driving markets with Mark Farrington of the Global Watchtower, with and without guests as the occasion demands.
How could the Iran conflict reshape global markets, China risk premiums and emerging market capital flows? Marvin Barth and Erik @YWR discuss geopolitics, uncertainty and the investment implications of a changing global order.
In this episode, they explore whether a US-aligned Middle East could reduce geopolitical risk, why emerging markets may benefit from shifting capital flows, and whether China’s equity story changes if Taiwan risk declines. The conversation also examines Europe’s strategic positioning, the future of the dollar, and the broader macro consequences of global power realignment.
Key themes
• Iran conflict and market uncertainty
• China risk premium and valuation debate
• Complexity cascades and tail risks
• Emerging markets and global capital flows
• Europe’s strategic, technological and debt challenges
• Dollar strength, stablecoins and global liquidity
Timestamps
00:00 Intro and why AI was postponed
02:30 Iran conflict and market uncertainty
03:00 Bullish macro view and the “new empire” thesis
04:35 China markets and Taiwan risk premium
07:45 Complexity cascades and tail risk
10:50 Volatility, options and market pricing
12:40 Is containing China bullish for China?
18:30 The Godfather analogy for US strategy
25:20 China’s economic model versus market pricing
28:30 Emerging markets bull case explained
32:00 US versus China, global alignment choices
37:20 EM flows, currencies and investor FOMO
39:00 The end of the old world order
40:30 Europe’s strategic mistakes
43:30 AI regulation and Europe’s competitiveness
47:50 “Europe as the new EM” debate
49:30 Debt, growth and macro positioning
51:00 Dollar outlook and stablecoins
54:00 Europe risks from dollarisation
55:25 Final thoughts and next episode teaser
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Episode 010: Forest fire insurance
Saison 1 · Épisode 10
mercredi 18 février 2026 • Durée 01:14:19
Forest Fire Insurance explores how risk truly builds in financial systems and why volatility is not the enemy it is often portrayed to be.
Marvin Barth and Mark Farrington are joined by David Dredge, CIO of Convex Strategies, to unpack the idea of self organised criticality in markets using the forest fire analogy. The discussion ranges from leverage, correlation and contagion to the failures of Sharpe ratio thinking and the dangers of suppressing volatility.
The conversation moves through convexity, tail risk, demographic decline, central bank policy and the growing fragility of the global financial system. Dredge explains why insurance is cheapest when it feels least necessary and why the real risk lies in accumulated undergrowth rather than the spark that eventually ignites it.
This episode is a deep dive into how systemic risk forms, how it is mispriced and why prudent investors should think less about forecasting outcomes and more about preparing for nonlinear shocks.
Timestamps
00:00 Introduction to Thematic Edge and today’s guest
01:00 David Dredge, Convex Strategies and tail risk investing
03:20 Forecasting versus risk management
05:30 The forest fire analogy and self organised criticality
07:00 What is Sharpe World and why it fails
09:30 Rational Accounting Man versus prudent risk management
12:00 Incentives, leverage and systemic fragility
14:45 Good volatility versus bad volatility
16:00 Convexity, skew and why upside volatility matters
18:50 Why investors are not taking enough risk
Forest management, undergrowth and controlled burns
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Episode 001: Introducing the Thematic Edge
mercredi 10 septembre 2025 • Durée 01:02:12
Mark Farrington of the Global Watchtower and I have kicked off our own podcast on the Themes driving markets. Mark was practicing thematic investing as a portfolio manager long before it became a “thing” and a thematic approach to analysis of the global political economy has been my modus operandi for a quarter century. Mark and I have been debating markets for over twenty years and thought we’d bring that debate into the public.
In this, our first episode we talk about the shifting sands of geopolitics in the wake of China’s Shanghai Cooperation Organization meetings, what it means for the global economy, for emerging markets, and for digital assets. We discuss the surprising and amazing insights into President Trump’s policies from the Bank of Japan, President Trump’s assault on the Federal Reserve and its meaning for markets, and put the recent yield curve steepening in context.
Here are some of the topics and questions we cover:
0:00 Introductions: who we are and why you should listen to the Thematic Edge Podcast.
3:30 Did Donald Trump really drive India into the arms of China and Russia?
14:59 Message and effects of China’s 80th Anniversary military parade.
17:29 Accepting a Russia-India relationship to help separate the former from China.
21:31 What does the Great Game of geopolitics mean for emerging markets?
23:19 Japan as the first “emerging market” and the myth of higher EM returns in a world without globalization.
26:24 2008 to 2012 as the high watermark for emerging market investing.
30:15 Emerging markets in the new world order: FDI, not portfolio, flow driven and the importance of navigating the Chinese versus American spheres amid Global bifurcation.
32:08 The opportunities that crypto and digital assets open for emerging markets, especially Africa.
36:03 Bank of Japan Deputy Governor Himino provides best description of the Trump policy agenda, its motives and its aims.
43:24 When breaking convention becomes necessary in national and international policy.
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Episode 009: Trump 2.1 shock
Saison 1 · Épisode 9
mercredi 4 février 2026 • Durée 01:01:28
Unfortunately, the audio for this episode was terrible, so in addition to the time-stamped table of contents, a full, edited transcript is included below.
In this episode, Marvin Barth and Mark Farrington reflect on a sequence of events that together signal a decisive shift in US strategy, from Venezuela to Greenland, and from emerging markets to monetary policy.
They examine how recent US actions have reasserted strategic deterrence, clarified a new Western Hemisphere doctrine, and forced allies and adversaries alike to confront an uncomfortable reality. Whether welcomed or resented, American power still sets the terms.
The discussion moves from geopolitics to markets, exploring what these shifts mean for asset allocation, the dollar, and global capital flows. Drawing on historical parallels with the 1990s, they unpack the case for a year of two halves, a steepening yield curve, bank outperformance, and a rotation away from debasement trades.
They also assess the implications of a more orthodox Federal Reserve, balance sheet contraction, and deregulation, questioning widely held assumptions about gold, bonds, and portfolio construction.
This is a wide ranging conversation about power, deterrence, and markets in transition, cutting through noise to focus on structure, incentives, and consequences.
Table of contents
00:00 Why this year feels different02:00 Venezuela and the return of US deterrence06:00 Allies have fewer choices than they think08:00 Nigeria and the logic of alignment10:00 Capital leaving China, where it goes next11:30 Greenland, power, and nuclear deterrence15:00 NATO tension is not new19:00 Why Europe wants out of US assets21:00 The 1990s playbook markets forgot24:00 Dollar fear versus earnings reality27:00 What a harder Fed really means30:00 Yield curve, banks, and rotation36:00 Gold is a risk asset, not a hedge Why the 60–20–20 portfolio failed Bonds may matter again Hawk or organiser, redefining the Fed Power, markets, and the next phase
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Episode 008: Nigeria in focus
Saison 1 · Épisode 8
mercredi 21 janvier 2026 • Durée 35:56
Nigeria is the largest economy and population in Africa, is abundant in natural resources, is an emergent cultural and technology center, and increasingly a regional manufacturing hub. Senator Ede Dafinone of Delta Central State (the main oil-producing region) explains the reforms of President Tinubu, the vast potential opportunities they may release, and how this lynchpin of Africa can navigate strategic competition between the US and China.
0:33 Why Nigeria merits your attention.
2:40 Who is Senator Ede Dafinone of Delta Central State?
6:19 The basis of Nigeria’s cooperation with US attacks on ISIS.
9:33 Nigerian perspectives on the shift to a new world order.
14:35 Nigerian views on President Trump.
17:14 President Tinubu’s willingness to challenge the system and reform.
21:00 What will define success and prospects for long-run success.
23:30 Senator Dafinone’s priorities for Delta State and Nigeria.
25:36 Opportunities in Nigeria created by reform.
31:52 Nigeria’s secret weapon: its educated diaspora.
33:52 Fine arts and fashion in Nigeria.
This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thematicmarkets.substack.com/subscribe
Making sense of Venezuela with David Kilcullen
Saison 1 · Épisode 7
mercredi 7 janvier 2026 • Durée 01:27:25
The Thematic Edge opens 2026 with its first guest, David Kilcullen, retired Australian Army colonel, intellectual architect of both the “Surge” in Iraq and Afghanistan, and the world’s foremost authority on counterinsurgency. Colonel Kilcullen helps us make sense of what happened in Venezuela on 5 January and what to expect going forward.
The discussion is structured around three questions that matter for markets.
* First, what actually happened operationally, and what it reveals about escalation control, deterrence, and the limits of legacy air defence systems.
* Second, what the episode signals about US grand strategy, the “Trump corollary of the Monroe Doctrine, the return of gunboat diplomacy, and the use of suzerainty style constraints to shape trade, currency choice, and commercial alignment.
* Third, what long-term “success” means and what must be achieved to meet it, including political stabilisation of Venezuela, establishment of payments systems, control over resources, and how quickly the US needs to move before the window closes.
Along the way, we challenge the prevailing narratives including claims of pre-negotiation with or foreknowledge of China and Russia, implications for the emergent global order, Taiwan, Ukraine, Europe, other regions’ security, who might be “next,” the scramble for resource control, what to watch for, and Venezuela’s potential as a test case for dollarization via stablecoins. With so much to talk about and such an insightful guest, this episode is longer than usual, but it will be required listening/viewing for anyone interested in assessing risks and making informed decisions in today’s rapidly shifting global order.
Full transcript
1
00:00:06.560 --> 00:00:09.120
Marvin Barth: Good evening, and welcome to…
2
00:00:09.150 --> 00:00:25.030
Marvin Barth: the Thematic Edge. We are very excited, to start 2026 with our very first guest on the Thematic Edge. So, this time I’m not only joined by my longtime friend and colleague, Mark Farrington.
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Episode 006: Fed reform & US National Security Strategy
Épisode 6
mercredi 17 décembre 2025 • Durée 01:09:23
After a brief hiatus, the Thematic Edge is back! In the first half of this week’s episode, Mark queries me on Fed reform, a consistent theme of senior Trump officials that hasn’t received sufficient attention given its immense implications: what do they want to do and what can they do without Congress. In the second half we switch roles as I pull from Mark the real international relations implications of the abrupt turn in the latest US National Security Strategy paper.
0:00 Intro
2:23 Who will be the next Fed chairman?
3:23 Fed reform and financial deregulation is more important than low interest rates
8:16 Trump as Mafia don and not as an insult
11:38 Why Warsh stands out: early proponent of Fed reform
16:10 Why we need to do a podcast on the Global Financial Crisis response sometime...
17:04 Why regulatory reform is critical to slimming down the Fed’s balance sheet
20:32 Fed reform is a consistent Administration priority
22:16 The role of regulation in extending banks’ and central banks’ asset duration
24:51 How bank regulation can be unwound by the Fed
27:19 First-order effects of bank deregulation: US banks versus foreign; small versus large banks
29:13 The role of the Reserve Banks in implementation of deregulation
31:12 Implications for bank stock prices
33:20 Yield curves and broader stock prices
35:22 The US National Security Strategy
36:42 Clear continuity of NSS with think-tank analyses showing the need for the US to pull back from imperial overstretch to a more defensive position
38:29 A live war in Europe forces a change in framework: the US no longer can be as transparent as in a period of peace
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Episode 005: Forward guidance’s end
Saison 1 · Épisode 5
mercredi 5 novembre 2025 • Durée 01:12:21
A very lively discussion this week that goes on a bit longer than usual as Mark & I get into a disagreement over the implications of Chinese gold-backed stablecoins. But before the fireworks, Mark & I review what President Trump achieved at ASEAN and APEC, how his earlier successes set him up for it, and what it means for Global bifurcation; then we fire both barrels at the failure that has been central bank forward guidance and our prediction (hope?) that this travesty is about to meet it well deserved, but likely messy, end as fundamentals expose the fundamental errors in central banks’ forecasts and policies.
00:00 President Trump takes La Cosa Nostra Americana to ASEAN and APEC.
02:45 Trump-Xi meeting seen in context of broader strategy and earlier building blocks.
03:28 Cementing ASEAN as part of US sphere was critical final plank ahead of APEC.
07:29 Who backed down & who won what from the Trump-Xi meeting?
09:04 Fentanyl concessions as a win against “hybrid warfare.”
11:13 China’s “own goal” with critical minerals response to narrow US NVIDIA export controls.
14:38 Was the real loser revealed to be Europe and its much deeper weaknesses?
15:59 The depth of China’s fundamental supply-chain leverage and the years it will take to overcome.
16:42 Did Xi and Trump come to a durable understanding?
18:35 Validation of Trumpian “tariff wall” approach over targeted industrial policy.
20:16 Realignment of Western alliances from “US dependencies” to regional alliances with US cooperation.
22:05 Success of La Cosa Nostra American and national interests over foreign policy as a popularity contest.
23:26 Market narratives’ basis in informational asymmetries regarding China and the US.
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Episode 004: Officialdom grudgingly accepts stronger data
mercredi 22 octobre 2025 • Durée 01:02:52
This week, Mark Farrington and I discuss what I learned from the semiannual World Bank-IMF meetings last week in Washington. Where do both policymakers’ and markets’ center of gravity lie?
0:00 Introduction: Impressions of World Bank-IMF meetings
2:25 IMF’s forecasts and embedded biases
4:08 Market participants’ views
6:13 Benchmarked managers more consensus than absolute-return managers
9:14 Strongest pushback on my views? Geopolitics and the dollar
12:00 Consensus take on Chinese rare earth controls is wrong
17:40 Why does the consensus accept that Trump’s economic policies may be working but not his foreign policies?
21:42 IMF forecasts out of date already
24:10 IMF ties themselves in pretzels to justify their forecasts
27:48 US labor supply growth slowing? Or demand?
31:38 2026 surprise will be labor supply constraints’ effects on inflation
33:54 Fed missing labor supply’s role; making a policy error cutting; markets’ price to aggressively
37:07 Strongest alignment of those agreeing with my views is to pay 1y1y interest rates
39:33 Markets failing to price inflation risks
42:07 How will the Fed handle a CPI upside surprise this week?
44:25 Where are the bond vigilantes?
45:07 Are there any “hard money” central banks?
47:53 IMF forecast risk cases: A hammer looking for a nail?
50:52 Is the AI boom Dot.com 2.0?
58:38 Nonbank financial institution risks
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Episode 003: Good & bad government interventions
mercredi 8 octobre 2025 • Durée 01:09:32
This week Mark and I discuss how “we’re all state capitalists now” but that both new Japanese Prime Minister Takaichi and US President Trump make an error when they try to include central banks in that effort. We discuss what markets are missing — inflation — and how that’s likely to be a key risk theme for 2026, and we touch upon whether the current equity boom is Dot.com 2.0, or something different.
0:07 The message of new Japanese Prime Minister Takaichi and what it means for Japan and the yen.
6:23 We’re all state capitalists now, but where do governments need to draw the line.
12:43 Can we run economies hotter? And what did we learn from Stephen Miran?
15:57 Does President Trump want a housing refi cycle or does he just have a time-inconsistency problem?
23:18 Will we see a pivot from President Trump early next year? What form will it take?
27:33 President Trump is delivering the relative price changes his voters want.
33:31 Current central banking philosophy may be a bigger problem than fiscal authorities’ interference.
36:07 Why are central banks getting the labor market so wrong?
49:08 How much of a constraint is slowing labor supply growth on the economy?
52:09 Why aren’t markets more worried about central banks’ continuing mismanagement and pricing more inflation? Is inflation the risk theme for 2026?
59:53 Are markets’ fears about equity valuations valid? Are the comparisons to the Dot.com bubble valid?
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24:30 Geopolitical and financial systems colliding
27:40 Volatility pricing and the cost of insurance
29:30 Japan, debt dynamics and demographic decline
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I’m Marvin Barth, and I’m here with my good friend and colleague, Mark Farrington, The Global Watchtower. We’re back to talk about some of the issues that we discussed in our last few episodes, where we got to interview some very interesting guests. We also changed our environment and are actually together at the Cross Keys Pub in Chelsea. Something I think we should do more often, do this in person.
MARK FARRINGTON
Absolutely.
MARVIN BARTH
What I wanted to start with is looking back at the Venezuela event and the David Kilcullen interview. Because that interview was unbelievable. Though it went way over time we could have talked to Dave for, I think, another hour or two if we had had the time. But for me, Venezuela set the tone for the year in the sense that last year, there was a lot of shock and awe from the Trump Administration, but there was never any clear definition. And I think other than tariffs, people didn’t get the sense of a real change in US strategy and position in the world. And then as we got towards the end of the year, we had the National Security Strategy, which we discussed back in December as widely misinterpreted. But it was abstract. Venezuela made the NSS tangible. First, it brought home very clearly the Trump corollary to the Monroe Doctrine, or the “Donroe Doctrine,” as people have been calling it.
Second, it demonstrated an exceptionally important point Dave made about need for the US to reassert strategic deterrence. After the Afghanistan fiasco after the disaster of Ukraine US strategic deterrence was basically nil and while I’m not saying it’s back and I don’t think Dave was either, I do think it makes it very clear that any adversary around the world has to think twice before they try to counter the US or at least how they go about countering the US.
I also think, and we’ll get into this more later, it also sends a very strong message to allies as well. Especially so given the contrast with how European allies handled the whole Greenland situation, Venezuela, as Dave said, wasn’t a flawless operation, but it was a very impressive show of capabilities, especially relative to the European show of sending a few soldiers to Greenland to, literally lay a towel on the ice. It clearly established to every ally that they cannot do this without the US. So, I think that’s going to be very important given how adversarial Trump administration has been in its rhetoric and actions with allies.
Do you read that differently? Or what are your key reflections from the Kilcullen interview?
MARK FARRINGTON
I definitely agree with all those points, and I think that point that Dave made about re-establishing US deterrence was a very important insight. I didn’t immediately put that together, but, you know, he did, and that was helpful. And I also think, explains a lot of behavior of the Trump Administration around Greenland. There’s also an element of reinforcing nuclear deterrence too. The slight difference I might have to how you described it is that I broke the National Security Strategy into three compartments. I was interested in what it implied for the new corollary, the Western Hemisphere corollary, but also what it means for projection of power in the Pacific, the first island chain strategy, and also what it means for Europe and NATO and the Middle East, etc.
So Venezuela definitely defined the Western Hemisphere doctrine clearly. And I think everyone got the message. It’s received the usual criticism you would expect anytime you use force. But otherwise, I feel like it has been surprisingly well accepted by the world and South America. I think it’s helped to tip elections in Latin America, as we’ve seen Costa Rica, for example, to the right as well. And I think it will be a successful strategy. Also, I would say Rubio deserves a lot of credit for that as well, not just Trump in this case.
And that Latin America views it as a Trump / Rubio strategy, which is helpful. So yeah, I would concur on all the points.
MARVIN BARTH
So, I don’t disagree with any of that. When I say that it was a defining event, I agree that it was a demonstration only in the Western Hemisphere and only of one slice of the broader National Security Strategy, i.e. the Western Hemisphere Trump corollary. But it had a broader implication as the first clear manifestation of the NSS and the complete shift we’re seeing in the US relationship with the rest of the world. That’s what it brought home to me, because one of the problems with the Trump administration is they say so many different things and he’s so good at misdirecting that you often are left questioning what is real. This made the strategy real.
MARK FARRINGTON
It definitely means it’s real for everyone in the Caribbean. Exactly. Cuba is immediately standing to attention.
MARVIN BARTH
But it wasn’t just there. And by the way, you remember Dave said, watch Cuba next.
Another really interesting point from the interview with Senator Dafinone of Nigeria, that you couldn’t join, that we should definitely delve into more here, is this tension between people being shocked and offended by how the Trump Administration treats them but realizing they have no choice because you’re either out in the wild by yourself or you have the protection of the United States. Senator Dafinone put that in very clear terms: the US Christmas Day bombings in Nigeria were not an imposition on Nigeria, we were equal participants; we wanted this. Yes, President Trump may be selling it at home in his own way that he needs to do for his politics. But for we Nigerians, this was about an ongoing counter-terrorism operation, and we were really happy to have a big, powerful friend come join us.
At the same time, however, he did express very clearly they were very concerned about the Venezuela operation. So it wasn’t just in Latin America, it was around the world. People said, whoa!
MARK FARRINGTON
No, it was a strong statement, and it has various implications. And I think that one of the implications can be, that you’re concerned, you’re either aligned with the US or you’re not aligned. But one of the other implications can be that if we have an overlap in our goals, it can be the most useful partnership that you can have. In this case, Nigeria definitely wanted and collaborated with that operation. It supported the government’s goals as well. So, I think the US will be used like that. Not as a policeman, but as the deliverer of the painful, punitive message. And perhaps that’s what the Trump posture will be like. Not a normal policeman, but standing ready to act, to create decisive change in the use of military force.
MARVIN BARTH
By the way, the Dafinone interview brought home another topic we’ve discussed that we need to devote a whole podcast to, which is emerging markets where we both have strong backgrounds. I was fascinated by the opportunity that Senator Dafinone described in Nigeria under the reforms that President Tinubu is undertaking, and in the broader context of these geostrategic realignments, in the competition for these regions’ resources, populations and hearts and minds. That latter point was well illustrated in the news after our interview was that President Tinubu went to visit Turkey and establish relationships with the Turks and increasing trade ties there. Separately, China and Nigeria reaffirmed their strategic partnership. All these pieces are in the mix, and that competition is potentially a huge opportunity in emerging markets.
MARK FARRINGTON
Totally agree. And if you look at the equity flows that we’ve seen so far in the emerging markets, there’s clearly a big outflow from China and then redeployment in emerging markets ex-China. So, for all of the West, which have some restrictions now on being fully invested or invested at all, in China, they’ve made that strategic allocation and so they’re on the search for new stories, stories which maybe are less impacted by geopolitics and where the country or the resources or the sectors have some potential to benefit from this great competition that we see going on now.
MARVIN BARTH
Yes, we definitely need to come back to that one and while we could spend a lot of time just talking about those two interviews, there have been so many other things that have taken place in the last couple of weeks, as has been true through the entire Trump Administration, it has been a very event-packed period. We’re going to want to get on to gold, we’re going to want to get on to the Fed nomination, all of those things. But let’s start with, I think, the next big trauma that started immediately after Venezuela, which was the whole affair with Greenland.
Perhaps you could start with your perspective on what was at stake, what actually was agreed – because I think there’s a lot of confused information about that – but my big picture question is, was this a disaster? Was it a strategic coup, especially when you consider how it landed at Davos for the United States? Or was this a bit of both? I mean, it does seem like they got something out of this and that this was a successful coercion, but I wonder at what cost?
MARK FARRINGTON
I think Davos was on the calendar and the Trump entourage definitely planned months in advance to go there, and now puffed up with overconfidence after Venezuela, they came in large and shocked the hell out of everyone. But I think it’s very strategic. It has been well thought out and planned. And while I think most of the world says, okay, yes, I can see the strategic significance for the US of owning Greenland, helps with the Greenland, Iceland, UK gap, managing all of the submarine traffic from Russia into the Northern Atlantic, the access to minerals, all of these sort of things. Even the clever people who looked deeper and understand the need for a backup substation to Svalbard’s satellite communication...
MARVIN BARTH
You’re referring to island above Norway where NATO has critical arctic radar and communications station...
MARK FARRINGTON
Yes, which could very easily be be sabotaged by Russian naval attack, so building a backup station in Greenland is just smart planning, and this relates to a bigger issue that has nothing to do with all of the theatrics that we saw in Davos and is instead about nuclear deterrent. So, this is a kind of a throwback to the Cold War detente that we had with Russia, where mutually assured destruction is no longer guaranteed because of the development of low-yield nuclear weapons and strategizing about local low-yield theater usage, etc. So Russia deployed intermediate missiles in Belarus last month. And the US needed to respond, Europe needed to respond, NATO needed to respond and they didn’t. So, this is like one of the first times I can remember where our historic Cold War rival incrementally moved the chessboard forward and we did nothing.
MARVIN BARTH
A lot of people watching/listenting aren’t our age, but you and I remember the whole Persian missile push in Western Europe and how controversial that was, but it was exactly what you were talking about. Soviets were moving intermediate range missiles into Europe. The US had to respond with them in Germany, right?
MARK FARRINGTON
Exactly. So, the US I think will not only build the base for its Golden Dome as a backup relay station to Svalbard and Greenland, but it will deploy a nuclear deterrent. That will bring the stakes back in line because detente requires you to remain in balance so that the first strike capability is never an option. And I think people don’t understand that while Denmark has been unbelievably flexible in granting long-term leases and revising the military treaties with the Biden administration, it’s still a part of Denmark, it’s a part of Europe, and it has actually a nuclear-weapons-free zone constitutional backing.
So, the way that the US has always got away with doing what it’s doing on Greenland is for Denmark just to look the other way. But putting nuclear weapons on Greenland during peacetime is actually an outright disagreement with the constitutional stance of both Norway and Denmark. So, I think Europe doesn’t understand how important it is when you have two superpowers which are providing the nuclear deterrent to have freedom to control the narrative, to control the incremental escalations without some second or third party intervening through legal means or constitutional means or just narrative disruptive means, etc.
So, I think this desire, this strategic desire to have Greenland is about the nuclear deterrence and eventually Europe’s going to get it. And eventually NATO will understand it and it will be resolved. I have no fear of a permanent rupture between Europe and the US. I think that this is getting conflated with some of the other end of a world order type of ruptures that our good friend Mr. Carney has put forward that the world is seizing upon. I think on the nuclear deterrence, it’s hard power and hard strategy that dictates things, and even the Europeans understand that.
MARVIN BARTH
Well, I think that you are perhaps more hopeful than me that NATO doesn’t suffer some ruptures, and I think you would probably admit that there are greater underlying issues issues for NATO to deal with.
But I do think that one of the things that is very clear from this whole process, and I think is an underlying issue that we’re going to see over and over in our discussion on all of these issues, whether it was the shock from Venezuela, whether it’s the shock from Greenland, whether it’s the shock around Kevin Warsh’s nomination, that all of these things are transitions back to things that we had before. Many of these things that people think are outrageous and are completely new are actually very much things we’ve lived through before. E.g. the Trump corollary to the Monroe Doctrine (which also had a Roosevelt corollary); these things have repeated a few times through American history here. As we discussed with the Pershing missile example, there was a lot of push back then, but since we have had 30 years of falsely perceived Western ascendancy, where people sort of forgot about all these security issues. And so we’re having to go through a transition to that.
This gets to my point that I worry about the cost of how the Trump Administration pursued this in terms of their aggressive stance on Greenland, threatening Denmark and NATO itself. I’m glad that you’re hopeful, or that you have no doubts that NATO is going to survive this. I am hopeful NATO is going to survive this, because I do think that, again, when push comes to shove, most NATO countries are going to see they have no choice. They have nowhere else to turn, and they are so far away from having the capabilities to defend themselves.
But how do you see that rupture in relations and this transition for asset markets? Because, you know, I’ve been doing a few different client dinners over the course of the last two months, even before Venezuela and Greenland, I have been amazed at European asset managers’ reaction to all of this. They say, “We don’t want anything to do with the US. We’re getting out of the US. We’re done with this.” There is a big narrative out there about de-dollarization, decoupling from the US. There’s an even crazier narrative, by the way, about, how Europe is somehow going to pivot to China as if that was somehow even remotely possible. But talk to me about these narratives, because you’ve managed big portfolios over decades, looking at major asset allocation relationships. How do you view this one and the potential for an asset allocation?
MARK FARRINGTON
Okay, that’s good. I mean, I think that it does favor those who’ve been in the markets for many years and have a little bit of grey hair. Younger people do not appreciate like how to favor the US dollar was and how aggressive the US government tactics were in the early 90s. Most people look back and think of the 90s as this blissful period of the Berlin Wall falling and globalization causing us all to dance around the campfire together and sing Kumbaya. It was not like that at all.
The US was using super 301 tactics to beat the Japanese into submission to open their markets because they wouldn’t import anything from the US, and the US dollar was in a free fall all the way to 1995 until the G7 begged the US to begin the “strong dollar” policy under Treasury Secretary Rubin.
MARVIN BARTH
Yes, you remind me, amid this whole dollar debasement craze, do you remember Lloyd Benson explicitly calling for a weaker dollar? Loyd Benson was President Clinton’s first Treasury Secretary, who before his successor, Bob Rubin, instituted the strong dollar policy directly called for the dollar to depreciate.
MARK FARRINGTON
But that was the tactic back then. It was a two-tracked strategy with Japan and with Germany at the time. We’re going to use Super 301 tariffs to bash open your markets and simultaneously drive the currency down to force you to comply, because we understood that most of their trade barriers were invisible.
We needed to balance the budget. We had a twin deficit problem at that point in time, too. So, you know, the federal deficit was not easy to resolve, so the focus was on the trade. So, we’ve been through this before, and the thing, if you go back and look at the 90s, the dollar can be in a downtrend and still the US asset performance can be fantastic. And that’s what all these emotional reactions from asset managers like those that you have met will soon learn. You can be angry at the politics, you can be offended by the way Trump shocks and behaves in order to create some movement in a frozen debate. But still in the end, you get paid to deliver asset performance in your portfolio. So, you can hedge your currency risk for a while, but then if US equities and US growth stories start to outperform, you’ve got to then lift your hedges and rotate back to the US.
So, the US will do what it always has had to do, which is to justify the strength of the dollar by performing, delivering strong growth and strong asset performance. And during the periods when it’s ebbing or oscillating, market will sell the dollar and then it will buy it back as soon as the asset performance validates it.
So, the first six months of this year is going to be one of those trials. They’ll try to sell the dollar, they’ll be skeptical about whether Warsh is good or bad for the Fed, etc. But then if growth and earnings come through by the second half of this year, the fears of dollar declines under Trump-Warsh investment will dissipate and this will be all forgotten. On the geopolitics, it’s such a longer time frame. I mean, what the US is going to try to do on Greenland is really a 10-year story, of which Trump is only going to be there for another three years. So, at some point, Europe has to start relating to what the long-term story is and who will be the next custodians of this strategy in the next administration, not just Trump. This is a strategic realignment for the US in terms of its nuclear deterrent. and its forward projection of power in the North Atlantic. And it’s going to be owned and carried forward by the whole administration, not just by Trump.
So, I think everyone will calm down. I even believe Carney will come around and Canada will join the Golden Dome. I mean, honestly, it’s emotional at the moment, but understandable because Trump speaks in a way that offends first. And then his administration backfills and sooths and delivers performance after the fact.
MARVIN BARTH
Well, you and I were discussing earlier that at Davos it was quite interesting that Friedrich Merz, the Chancellor of Germany, was of course, saying “we’re so offended, this is terrible.” But then went through a whole list of, “but we agree with the Trump administration on X, Y, Z...” Which is often the case with Trump that if you go down the list and stop to think about a lot of things they’re doing, and can step away from it being Trump and the offense his language can cause, there’s a lot that makes sense.
Now, I do want to come back to this point that you said about the dollar in the early 90s. I thought that was quite interesting. Because I think you and I have somewhat different views, but there’s some points of commonality, too. I thought it was interesting that you framed the discussion of the first half, second half of the 1990s, waiting for earnings to come in and see if there’s any follow-up. You’re aware I’ve done this research on what causes these big multi-decade swings in the dollar and the critical element there is the US leading an innovation wave and a related capital build out. And until that CapEx build out in the US peaks, the dollar doesn’t turn. So, I’m still very much in the camp that we’re having some tactical swings in the dollar right now that can be affected by asset allocation. But ultimately, until we see that hand over to the rest of the world, which I don’t see in the near term, we’re not getting a significant dollar down term. But, as I wrote in my yearend outlook, I very much do see this year as a year of two halves, and, so far, things are going my way: I expected the Warsh appointment...
MARK FARRINGTON
Great call. I think you deserve a drink for that.
MARVIN BARTH
Thank you. Wave to the crowd.
MARK FARRINGTON
A hawkish Fed. Who could imagine?
MARVIN BARTH
And now that’s a whole new question we’re going to discuss about what kind of hawk he is and whether he really is, because there’s a whole debate out there. But I definitely think he will end up being hawkish. In my view, watch for his plans for how they’re going to downsize the balance sheet. If you look at the entire Trump administration from day one, whether it was Secretary Bassett, Fed Governor Miran, or President Trump on the campaign trail, this has been the plan, and of course, poster child of this drive, the guy who, as he leaves the Fed in 2011, mic-drop moment, publishes this op-ed in the Wall Street Journal criticizing the Fed’s Q&E policies and saying, this is ridiculous, they’re not doing anything, and it’s just exposing the Fed to politicization. He’s been on this train longer than anyone else. So, I have absolutely zero doubt that they are going to massively downsize the balance sheet, and they can. And the key to that is, as I’ve described in my research, bank regulation reform.
But of course, even though I’m not a big believer that QT has that much effect on rates, I completely acknowledge, and in fact, I have a theme, Being is believing, that, if people believe something’s true, it will manifest. And so, I do expect the first part of the year to be a bear steepening in bond markets. And that was very much like those first few years of the Clinton administration where the dollar was a dog. I just think this is going to be compressed into a year. We’ll have bear steepening to start because I think Warsh has convinced himself that there will be a tightening of financial conditions due to balance sheet consolidation that will allow for lower policy rates.
But the economy is going to be doing well, inflation is going to continue to be above target, and they’re going to have to raise rates because the fundamental real rate underlying the economy is higher than what they think. And that means you’re going to get a bear flattening in the back of the year. It’s impossible for me to see the dollars not do well in that environment. And by the way, I’m saying that fully expecting that equities at best are going to struggle, and at worst are going to have some pretty significant downdrafts due to duration adjustment in real discount rates that I just described.
MARK FARRINGTON
I totally agree with that view, and I think the 90s are a very useful decade analog for this decade. The time compression might be smaller, as you suggest, but the sequence, I feel, is very important. The bear steepener, which takes place in the first half of the 90s,
is driven by the ultra-low rates that Greenspan put in place in the face of the jobless recovery after the S&L crisis.
MARVIN BARTH
Then the low in rates was, I think, like 3%?
MARK FARRINGTON
Yeah, 1% real rates or something. It was, yeah, it was stimulative. And of course, the dollar weakened so much that financial conditions were really very supportive. People forget, you know, dollar 5% or 10% or 50% weaker is also a huge support to financial conditions. It boosts the manufacturing base, earnings, etc. So, then we move into the latter half of the 90s and it’s all about this secular trend of productivity driven by the internet and technology investment, as you mentioned. But the earnings just momentum builds from ‘96, ‘97 until it gets to blow off at the end of the decade. So, I agree with you on the earnings blow off. We’re midway. We’re not at the end because we haven’t got a normal growth high.
I mean, last year, The MAG7 and all the super cash-rich companies were able to spend massively on AI CapEx. But the broad economy was just gaining momentum. This year, normal GDP is going to be very high. All of the businesses are going to deliver profit growth this year, it’s going to be a big earnings year for the US economy across many sectors, not just one sector. And that’s going to be more positive, building this momentum that starts to feel like the end of the ‘90s decade.
So, I’m not so much focused on the time frame, but the sequencing. Bear steepening offers banks an opportunity to engage the carry trade on the yield curve and bank earnings go through the roof. Nominal GDP higher, earnings across all mid-cap, small-caps, all regions of the US economy starting to fire, and then finally, belatedly, the productivity from all the AI investment starts to manifest, and then you get this powerful end to the cycle. So, yeah. I’m saying first half, second half, just because, I have to position and trade the markets and you’re trading a narrative as well as the data. So, it can be slightly longer, slightly shorter. I’m just more interested in the sequencing rather than the timeframe.
MARVIN BARTH
I think that sequencing makes sense to me. You touch upon an element there, rotation, that is another I’ve highlighted, particularly bank outperformance in relative terms, which we already have in Japan and in Europe. We have already seen it in the US, but I think its going to get a much better year for this year because you’re absolutely correctly that is supported by yield curve steepening.
By the way, we now have a positive yield curve from one year out to 30 years for the first time since 2021. That means that banks’ assets are going to pay more than their liabilities, increasing net interest margins.
But the other big support is going to come from how they slim down the balance sheet. As I’ve explained in various research pieces, this is 100% about Basel III regulations. All these people have been fretting that you need all these reserves in the system. No, that is 100% dictated by bank regulations. And the Fed has the authority to dial those back and give the banks more balance sheet for lending. If they have more balance sheets to work with, they don’t have to park it in reserves, they don’t have to park it in Treasury securities, then guess what? They’re gonna be a lot more profitable because those are just a huge drag on their profitability.
So, you get both of those events, the yield curve and the deregulation that are going to support banks. Then there is a separate duration effect. which is what I see this entire event as: a level shift upward in the curve over the course of the year, plus the steepening of term premia caused by concerns over duration supply to the market, all that in the first half of the year.
By the way, I think is a critical element of why gold is sold off: gold is basically a super long-duration real asset. That duration effect carries over across all assets, including equities, which are long duration: they’re basically infinitely-lived, variable earnings coupon bonds, and thus P/E ratios are effectively a measure of equity duration. So, if you go back and look at 2022 when we had the last big duration move it’s almost linear the relationship in terms of the duration of the equity i.e its P/E ratio versus its price decline in 2022. You’ll get the same sort of thing this year that could be very positive, in relative-value terms, for a lot of industrials, materials, especially in this geostrategic environment given state support for materials, and for small and mid-cap, since they’re going to be producing a lot of the things that the US is going to need on its re-industrialization path.
MARK FARRINGTON
That’s all really good insight and I was looking forward to talking to you on this because so far, the market reaction to the Warsh announcement has been mostly about speculative bubbles in the debasement trade collapsing. And so I think that’s a logical response. Maybe the reaction is driven by a number of other market dynamics like China banning the export of silver and things like that. But it really takes the wind out of the sail of this idea that term premium decompression at the long end of the bond markets is a correlated trade with the debasement trade of the dollar.
Because Warsh comes in and makes it interesting. The bear steepener we’re talking about now, which can be construed as this decompression of the term premium, is a very different story than the one that they’re trying to make in buying precious metals and selling the fiat currencies. He’s simultaneously strengthening the balance sheet and it’s a hard money strategy that he’s trying to put in place so the two data points don’t correlate anymore so they have to drop term premium aspect of their other story and they have to accept that he’s going to be at least partially successful and downsizing the balance sheet and for a lot of speculative assets.
I know you argued that the balance sheet doesn’t have that much impact on interest rates and credit creation etc, but it did have a very big impact on risk appetite, that was the thesis of the portfolio channel to drive down risk-free assets and create greater animal spirits in the risk asset classes. So, we’re going to see an unwind of that. So, this meaner version back to a lower level of risk tolerance, if you want to call it that can create some accidents. We’ve already had an accident in precious metals. We’ve had a correction in the AI stocks, partially due to a couple of single names missing on their earnings expectations.
But also, I think you’ll see froth taking out of the market and all of the most positioned risky assets. And as long as that doesn’t get out of control, then I think the stock market will consolidate and then all the other sectors that you mentioned that will benefit from strong nominal growth and a higher duration environment will eventually have time to catch up and deliver the results that will then offset because this rotation is going to be choppy and people will try to construe it as bearish.
But if you’re patient and you wait for the green shoots, then it might end up being positive for the second half of this year in a way that people didn’t expect and actually be a very bullish year for certain things, like even a rotation back to sovereign bonds in a return to a 60-40 portfolio after a big move into a 60-20-20. You just had the silver dagger in the heart after watching precious metals deliver 45 volatility on gold and 100 volatility on silver you, demonstrating that precious metals are not a substitute for bonds. They never have been and they never will be. But you know bonds have been through a bad patch I’m not calling for a bond renaissance or anything like that I think there’s a lot more but a lot of the most aggressive debasement stories about sovereign bonds in the developing world, I think those will now start to be rethought and calibrated.
MARVIN BARTH
Yeah, so that’s actually a really interesting point. I think we should spend a moment to talk about what happened with question for metals and whether we’re going to retest those highs again....
MARK FARRINGTON
Good call, by the way. In your metals piece, you kept flagging the 1980s episode, which is like the most extreme episodes. Everybody was dismissing it. But silver price, which fell on Friday, was the largest since 1980.
MARVIN BARTH
Exactly. It was literally a repeat.
MARK FARRINGTON
Well, of course, it’s still miles above that high, but in terms of percent fall, that was the largest one in decades, so awesome call.
MARVIN BARTH
But you actually had written something about that.
MARK FARRINGTON
Yeah, last summer.
MARVIN BARTH
No, I thought it was later.
MARK FARRINGTON
I wrote the first one in the summer just arguing that precious metals are a risk asset. They’re not a hedge. So, this is this 60-20-20 portfolio was just like, to me, insanity.
MARVIN BARTH
It makes no sense. So let’s come back to that. Let’s also come back to the risk. But I actually, I think the point that you just raised about bonds and then becoming attractive is really interesting here, right? Because, and I can see this coming in the sort of typical wave pattern that happens in the markets.
So, right now, we’re going to go in a direction of sell off, because the momentum is only going to build. There are questions about what Warsh really is, or what he really believes, and things like that. But I am firmly convinced he, the entire Trump Administration want a smaller balance sheet. So this is going to happen. There will be speeches on this. It will become clear, probably after congressional testimony, because you don’t want to rock the boat until you’re confirmed. But this will come along. And so we’re going to continue bear steepening, but at some point, there will be people who say, well, “Gosh,I don’t believe in the strong growth story” that you and I seem to accept for the US. That’s been the persistent bias of market for the whole time. And they’ll say, hey, There’s great deals out there. I’m going to go in and buy into these, you know, especially if we’re moving toward a sounder money environment, I just had to unload my 20% commodity portfolio. All of those things I’ve been supportive.
But I think this is really much more a second half story to your point. That’s what helps give you that bare flattening that I’m talking about in the second half. And it’s almost as much a pivot in the curve as a bare flattening. Because it is really the front end is rising, but the back end will actually rally to some extent, certainly on a forward basis, simply because you are actually dealing with inflation, you are dealing with a lot of the underlying concerns people have about dollars, and to your point, you actually are going to get paid. So there is a pretty good chance of a second half duration rally.
MARK FARRINGTON
I have a question for you on Warsh because like we joked about earlier you know what kind of hawk he is because for sure he’s a balance sheet hawk and for sure he’s we’re going to see a streamlining of regulation, but what he’s going to do on interest rates is not guaranteed. Everybody is constructing their narrative based on what Trump says. and imagining that, Warsh made some secret agreement with him in order to get nominated, which of course is completely unknown. So, if he’s downsizing the balance sheet, deregulating and maybe cutting rates, does that make him a hawk? Or a dove, particularly if the dollar is weak because, all the monetary conditions frameworks are going to show monetary conditions getting easier, while nominal growth is growing higher, and the balance sheet and the deregulation stories take a long time to play out?
So, I wonder, is there a risk that the impression of him as a hawk has flipped? Perhaps because they didn’t really understand what we meant by hawkish, i.e. that he’s more conservative, more orthodox than say Powell or Yellen, and represents a return pre-GFC monetary policy.
MARVIN BARTH
Yeah, so there are several different pieces that I think are quite interesting. And I really like the way you phrased that as he’s really just more orthodox. For a while in the Greenspan years and early post-Greenspan years, there wasthis idea hawks and doves don’t really exist anymore. Everybody’s a hawk now. The differences are how you pursue hawkishness.
MARK FARRINGTON
Everybody can’t be a hawk.
MARVIN BARTH
No, exactly. There’s definitely a significant portion of the current FOMC that are just flat out doves. I have no question, these people are doves. But I do think that there is an element of it’s just two radically different philosophies.
This was sort of brought home to me by Claudia Sahm’s take the Warsh nomination, because she very much embodies this view that I would say has been the dominant paradigm of people who’ve run central banks for the last 15, maybe 20 years, which is this view that they can micromanage everything and that there are no limits to monetary power. She specifically highlights and episode in 2010, where Warsh is critical of taking a big risk extending the balance sheet when rates already are at zero and hope that it somehow affects the economy. He questions whether that’s the right move and suggest that maybe this is where other parts of the policy, like fiscal policy or regulatory policy, need to pick up the slack.
Sahm is critical of his stance, characterizing it as giving up. And this is the philosophical divergence: I’m with Warsh on this, no you actually were at the end of the road for what monetary policy could do. To be fair to Claudia Sahm, at that point, even though we had 10 years of experience with this in Japan, which you were very familiar with, you could potentially argue that we didn’t know for sure QE wouldn’t work, even though Keynes told us it wouldn’t. Some made the argument that Japan just hadn’t tried hard.
MARK FARRINGTON
Or Japan was just too different. You know, just a different market structure.
MARVIN BARTH
But I think, 15 years on, it’s pretty clear that QE was totally ineffective. It did absolutely nothing for inflation. It did absolutely nothing for growth. It was just exactly what Kevin Warsh described it as, and to his point, created a massive political liability.
MARK FARRINGTON
It was an unbelievable call. I read some of Sahm’s comments on Twitter and for me it was embarrassing. It’s so clear she’s just data mining the minutes because she wasn’t there and she wasn’t part of the conversations and everybody knows the minutes are a distilled version of the actual conversation that was going on. It could have been even Bernanke asking Warsh to play devil’s advocate and talk about the risks on the other side. It could have been anything. He did put...
MARVIN BARTH
I think it was pretty clear he actually was adversarial.
MARK FARRINGTON
I think he would have volunteered to be devils advocate at that point. But they needed pushback from someone, and he was giving pushback. But if you attended the Monetary Policy Forum every year for 30 years like I did, you would see how the consensus, the debate, the devil’s advocacy, etc. changed all through that period. And the people who were constantly pushing back were very well known. It wasn’t one year, one meeting. It was this incremental induction to the cult that was going on post global financial crisis. And it just became so divorced from the guardrails for monetary policy before 2008 that any reasonable-minded person from the ‘90s or pre-2008 would have the same criticism. So, people’s ex-post opinions, like some who come back 10 years after the event with no connection to that phase in history...
MARVIN BARTH
She would not have been at FOMC meetings, but she was an economist at the Federal Reserve Board at the time. But I totally agree with you, and I think that’s kind of my point in terms of your question about, Is he a hawk? Is he a dove? My point is that it isn’t a hawk or a dove thing. It’s a philosophical divide: He was just saying, we’ve reached the limits of monetary policy, and I would say, the world has proved him right. And so that’s very different from him thinking that, as I do, that quantitative tightening is not going to actually have that significant effect. I think the rhetoric that you’ve seen people are ascribing it to a political pivot to curry favor with Trump – and there may be some aspect of that, everybody plays politics a little bit, nobody wants to admit that, but everybody does to some extent...
MARK FARRINGTON
If you’re in Washington, you have to. You have to.
MARVIN BARTH
...But I think it’s more than politics. He has actually convinced himself that indeed he’s going to be able to keep low rates with balance sheet reduction because it’s going to have this effect on financial conditions and that’s why I have this view of how it’s going to change over the year as he is going to stick with a relatively low rates profile in the front part of the year as they try and slim down the balance sheet and by the back half of the year, they’re going to realize, my goodness, the economy is still booming, inflation has not come down, we are not getting the balance sheet effects that we expected, and thus they’re going to have to raise rates.
That’s what I meant about everybody’s a hawk in that sense but the philosophy is different. And he will want to see inflation come down. No Fed chairman wants to be seen, as I’ve described Jay Powell, as the second coming of Arthur Burns, right? Nobody wants to be seen as that. And he’s going to be no different. He’s a rich, relatively young man. He’s gonna want to protect his legacy. So, I think, look at that. The other thing that I thought you said that was interesting is it’ll take a while for bank regulation. The Board, and especially if they start to get some of the presidents, I think this is the critical issue, start watching the presidents turnover. Because the Board, and particularly the chairman, can have a big, heavy finger to press on the dial of who gets those presidents. The New York Fed is probably going to come up soon. John Williams, thank God, will hopefully retire. Worst pick ever. That’s on the record!
MARK FARRINGTON
I always liked him as economist, but yeah, he his world view definitely deviated massively in the last five years from mine.
MARVIN BARTH
I’ve known him since our days together at the Fed and would not be that charitable, but anyway I would say that, first of all, they have the ability to change regulation very quickly. And the second thing is, if you go back and look, and you’re actually old enough to remember this, you remember the 1981 bank controls and bank deregulation and how quickly that turned the banking system on and off in 1981.
MARK FARRINGTON
I was a college student. I didn’t know $h!t.
MARVIN BARTH
This is a family podcast, Mark.
It was radical. It happens very quickly. Those regulations are super powerful. So, this is another reason why I think you will have less of an effect from that balance sheet effect than people think. Because if it’s accompanied at the same time by deregulating the banks, it’s going to be a big thing.
MARK FARRINGTON
Interesting okay that’s good to know, one last thing on Warsh: I’ve always understood your your point of view that QE has limited impact on rates and credit creation therefore QT in the reverse direction should be treated in the same way in my opinion what’s missing from that is that doing QE in an emergency scenario after a global financial crisis, which was to address seized up interbank market that was not functioning, is one type of QE. But when you started to do QE, in increments that were supposed to be equivalent to a 25 basis point rate cut, because you were at the lower bound of nominal rates, then QE became another animal, and that broke with a precedent that had never been done before. And that is what fed the animal spirits and the change of risk appetite. It was the break of precedent. It wasn’t the size or the incremental amount.
So, in my opinion, that is when the debasement vigilantes were born. And they have been running with that thesis through DeFi and Bitcoin and precious metals ever since. QT then should be treated equally as un-impactful as QE on the way down until we cross back through that threshold of orthodoxy and we get some commitment from a Warsh Fed that, for example, says we’re not going to do this again. We will, of course, be the backstop, we will come to the rescue if the market sees up and fails to function. But we will never again equate $300 billion of balance sheet expansion with a 25 basis point rate cut. If he makes that pledge, that’s putting the genie back in the bottle. I actually think that is different.
MARVIN BARTH
Look, I think everybody now calls any type of balance sheet expansion QE, but it isn’t. Central Banking 101, going back 150, 200 years was that in a crisis, you, the central bank, are the lender of last resort. That was the original function of central banks, not managing inflation. That’s financial stability stuff. I’m willing to take on all your assets when nobody else will.
MARK FARRINGTON
Exactly.
MARVIN BARTH
Of course, in a crisis, that has an effect. I’m saying exactly what you just said, that when you start saying, there’s no crisis here, I’m just buying assets for assets’ sake. First of all, it doesn’t have the risk effect that everybody thinks. Yes equity and corporate bond prices rose, but that was the effect of falling discount rates. If you look at what happened to credit spreads or the equity risk premium, they showed the opposite of the portfolio balance sheet effect: they widened in each bond buying session, because you’re taking away the risk-free asset from markets, and thus making the whole market portfolio riskier, and thus the only way to de-risk is to sell off the risky asset. That’s actually what happened.
Now, what did seem to change things was the rate cuts in 2019. If you look at that period, when the Fed very clearly showed that they were convinced that r-star was much lower and that they were always going to err on the side of cutting rates and easing conditions, it changed markets reactions. At the time, it didn’t look like inflation was getting out of control. And so as a result, if you look at that period, you do see the relationship between term premium and volatility flip. That is, instead of volatility leading to higher term premium, i.e., risk uncertainty priced into bonds, you the opposite because people expect exactly the effect we’re talking about. I think we are slowly unwinding that right now and, you’re right, a Warsh Fed, if it does what you and I are expecting it will be the final nail in the coffin and we will finally get some normalization that will allow us to have that bond rally that we were talking about.
MARK FARRINGTON
So, does normalization of the Fed mean normalization of finance market volatility Because if we go back to risk assets having higher, structurally higher vol, and risk free assets having structurally lower vol, then we’d go back to normality in terms of portfolio construction.
MARVIN BARTH
Yeah, and I do think that that’s part of, instead of having a floor-based policy rate system, we’re going back to a corridor-based system that even well into the late 90s and early 2000s on triple witching Wednesday could have fed funds rate spike to 35% as a normal occurrence, and nobody flipped out about it.
MARK FARRINGTON
Yeah, volatility was part of lives back in the ‘90s, it really was never the systemic you know canary in the coal mine that it has become and in modern markets.
MARVIN BARTH
We’re gonna have to call it off here and I think this has been a good discussion, as I said there was so much to cover today, so thank you again for joining me, Mark, and thank you to our audience for watching us here on The Thematic Edge and we look forward to seeing you again in two weeks.
Marvin Barth: Who’s going to join me in asking some of the questions of our guests.
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Marvin Barth: But I’m also joined by another very old friend of mine, David Kilcolon, and we are very fortunate to have him.
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Marvin Barth: for reasons we can discuss another time. My nickname for him is the International Man of Mystery, and most of that has to do with the fact that I can never get ahold of him, and he seems to be in some crazy place without cell phone connections.
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Marvin Barth: So we’re very lucky to have him, because he is exactly the right person to talk to
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Marvin Barth: about the events in Venezuela that occurred over the weekend. David is a retired colonel from the Australian
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Marvin Barth: Army. He, was a key advisor in both the Bush and Obama administrations. He has a consulting business, Cordillera Applications Group.
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Marvin Barth: That consults to many of the leading militaries, military alliances.
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Marvin Barth: and companies, around the world on security issues. He is universally acknowledged as the world’s foremost authority on counterinsurgencies.
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Marvin Barth: And he also happens to be a tremendously good, grants strategist, as illustrated by his last book, The Dragons and the Snakes. All his books are fantastic. I highly encourage you to go out and
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Marvin Barth: read them.
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Marvin Barth: David, welcome, and thank you for joining us.
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David Kilcullen: Thanks, Marvin. It’s an honor to be here, and my publisher thanks you for that very blatant plug of my books.
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Marvin Barth: well-deserved. I mean, if you want to understand any of the military or geostrategic developments of the last 20 years.
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Marvin Barth: you have to read David Gilkullen’s books. You know, Counterinsurgency is literally the field manual for counterinsurgency, not only for the U.S. military, but for most militaries around the world at this point.
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Marvin Barth: Out of the Mountains really described many of the things that we are now seeing take place, whether it was in Gaza or Ukraine. All of those things were basically forecast by David over a decade ago in that book.
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Marvin Barth: And in terms of the best possible framework for thinking about the geostrategic environment and the challenges that Western democracies face.
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Marvin Barth: Both militarily, economically, and strategically. You know, The Dragons and the Snake was second to no book out there, so, you know…
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Marvin Barth: I’ll give you another plug there. Now, before we… Before we go on,
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Marvin Barth: The, I do want, to remind everyone that nothing on this podcast should be considered, financial advice. You need to do your own research. We are providing information here, and especially on this topic, where we are literally in the fog of war, even though it’s an undeclared war.
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Marvin Barth: You should not rely on any of this information as being factual, because everything is up in the air right now, and we are doing our best to make sense of the information that is available.
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Marvin Barth: So with that, let’s start with, I actually wanted to structure this in sort of 3 segments that I think
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Marvin Barth: best fit your expertise, Dave. The first is just, like, diagnostic. What actually happened? You know, if you were a theater commander or something, and you were getting in this, this information, or you were,
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Marvin Barth: the head of the PLA trying to figure out what the heck the Americans just did.
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Marvin Barth: How would we assess what actually happened?
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Marvin Barth: Based on the information we have, today, the 5th of January. The second is really getting to that geostrategic point.
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Marvin Barth: you know, what are the grand strategy implications of this, not just for the U.S. and for the region, but globally, and then finally get back to where you are the, you know, clear, acknowledged expert, on counterinsurgency, which is really, and you’ve emphasized this over and over, really about creating a stable society, which is what it’s going to take to make this operation ultimately successful. So we want to get that.
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Marvin Barth: And in the end, I think we’ll get to, if we have some time, some, markets issues, which, feel free to, ask Mark and I questions around that.
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David Kilcullen: Absolutely.
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Marvin Barth: So let’s start with… I mean…
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Marvin Barth: One of the things that has been floated around a lot, is that this was somehow, pre-arranged, right? That this was a negotiated.
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Marvin Barth: settlement. And, you know, there are several signs, at least to my untrained eye, that suggest that. One, the strikes that were… that took place were actually quite limited, it seems.
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Marvin Barth: And there are a lot of, anti-aircraft weapons in, Venezuela. Their army may not be fabulously trained, but they’ve got lots of, equipment from, all their, foreign friends. And yet you were able to have a helicopter-led,
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Marvin Barth: exfil within a couple of hours without losing anybody. And then there’s also the sort of confidence that President Trump displayed in his press conference, suggesting that, you know, they’re basically going to run things under the new regime.
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Marvin Barth: Do you see this as a prearranged, or a negotiated settlement, or… and how did that work, or do you have other theories about what was going on?
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David Kilcullen: So…
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David Kilcullen: So I’ll put that caveat out there to start with. But I think it’s pretty clear…
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Marvin Barth: Dave, you froze for a second, so if you wouldn’t mind, what was that caveat again?
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David Kilcullen: Sorry, I was just saying that, the short answer to many of these questions is we don’t know, right? Or we don’t know yet. So, we should just bear that in mind as we’re… as we’re talking about it.
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David Kilcullen: The… I think the…
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David Kilcullen: it’s not a secret that there’s been ongoing negotiation between the US government and the Venezuelan government over almost a year now about a set of issues, but the one that’s become the sticking point was the stepping down
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David Kilcullen: of Maduro. As far as we know, about a week ago.
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David Kilcullen: that set of negotiations reached an impasse, where Maduro was essentially offered
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David Kilcullen: safe passage to exile, perhaps to the Middle East, or to Russia, where Bashar al-Assad is right now, of course. And this has seemed to have been a…
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David Kilcullen: preferred playbook from the Trump administration to offer a way out and a graceful exit with as much cash as you can carry, you know, to a comfortable retirement somewhere else.
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David Kilcullen: by the way, watch that space for Zelensky’s future, too, depending on how things go in Ukraine. But, I think the, the ultimate breach came about a week ago, when Maduro
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David Kilcullen: essentially said, no, I’m not stepping down under any circumstances, and then engaged in a fairly public trolling of
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David Kilcullen: the Trump administration by dancing on…
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David Kilcullen: television and, talking about, you know, let’s make love not war, or let’s make peace not war. And that seems to have been the trigger, for the move on the operation, which of course had also been set up in a military sense for several months beforehand.
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Marvin Barth: Okay, and now, there’s another whole set of conspiracy theories around this, that this was all some sort of quid pro quo with the Russians and the,
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Marvin Barth: Chinese. In fact, this goes back to some of the issues that Mark and I discussed in our last episode of the Thematic Edge.
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Marvin Barth: where we talked about a lot of the misperceptions of the latest national security strategy, that seemed to suggest the U.S. is going to pull back and leave everybody else with their spheres of influence.
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Marvin Barth: And… that…
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Marvin Barth: has led a lot of people to think that’s what this was all about, and that basically, you know, Taiwan is now going to be given free rein to… you know, China’s going to be given free rein on Taiwan, Russia’s going to be given free rein in Ukraine.
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Marvin Barth: How do you read this? Do you think that the Chinese or Russians were involved in this, that there was any sort of quid pro quo, or were they completely unaware of this, or were they aware but just couldn’t do anything about it?
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David Kilcullen: So again, we don’t know, but the evidence we have so far suggests that they probably were not aware of it ahead of time, or at least aware of the specifics. They knew something was coming, and we’ve seen comments, like warnings from Beijing and Moscow over the… and Tehran, by the way, over the past…
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David Kilcullen: few weeks, attempting to warn the US off the operation. So, and then we saw a very vociferous response.
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David Kilcullen: from Chinese, state-controlled media, which is…
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David Kilcullen: basically all media in China, and from the Russians, in the last couple of days since the operation. So I don’t think they were involved in the operation, or I don’t think that there was any effort given to, you know, get their permission or make them okay with it. That doesn’t mean
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David Kilcullen: that the Trump administration isn’t going to offer them some kind of a sweetener in the next few weeks as a way of minimizing.
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Marvin Barth: Pushed…
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David Kilcullen: And that’s quite possible. But I think, they were probably… Either decided not to…
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David Kilcullen: resist, and not to assist, Venezuela in aid of not picking a fight with the US in its own backyard, or they potentially were unable to, and this is one of the technical questions
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David Kilcullen: that’s going to have to come out, about the performance, in particular, of Chinese and Russian air defense systems, over Caracas during the operation. And we can talk about that more if you want, but that’s a key issue.
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David Kilcullen: the Chinese have been, riding high a little bit since the Indo-Pakistan conflict in 2025, because of the better-than-expected performance of their air and air defense systems. And, I think it’s going to be an interesting question to see exactly
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David Kilcullen: what comes out once a bit more detail comes out. We can talk about that in a military sense, if you’re interested.
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Marvin Barth: Actually, I mean, I think this was a question that Mark had raised with me earlier, definitely, and, you know, it does relate to a broader set of questions that I had on sort of tactical lessons that we learned from this operation. What did we learn about
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Marvin Barth: the U.S, you know, there were also reports that
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Marvin Barth: you know, several, U.S,
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Marvin Barth: targets were, missed or hit, civilian infrastructure that was unintended, things like this. So even in what seemed a very permissive environment.
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Marvin Barth: From, an air superiority perspective.
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Marvin Barth: there were mistakes on the U.S. side, despite what the Trump administration is casting this as. What lessons did we learn there? And then, exactly to this point, you know, that gets to one of these critical questions.
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Marvin Barth: About it being a negotiated settlement, or were there failure of systems?
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David Kilcullen: Yeah. So, why don’t we just baseline it by talking a little bit about what we know right now about how the operation went down, and then we can talk a little bit in more detail about it. So, for several months now, the US has had a build-up going on in the region of Venezuela.
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David Kilcullen: At its peak, in the last few weeks, you had
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David Kilcullen: A, an aircraft carrier battle group.
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David Kilcullen: You had an amphibious ready group, which is basically a big-deck amphibious ship with a marine organization on there, and lots of helicopters and other ancillary…
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David Kilcullen: material. Almost certainly there were submarines, and a number of other assets in place, because you don’t risk those kinds of assets without that sort of protective envelope around them.
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David Kilcullen: In addition, we saw the build-up of Special Operations Forces on islands close to Venezuela, and a build-up of Marines in Puerto Rico. So we saw a sort of regional build-up.
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David Kilcullen: of Army, Navy, Marines, Air Force, Space Force, Cyber, all those assets building up overtly in the region. It now appears, and I think not surprisingly at all, that there was also a CIA team on the ground in Venezuela.
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David Kilcullen: And almost certainly a special operations paramilitary team as well. So a special warfare team, and of course, when we talk about the CIA, it’s a bit unusual.
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David Kilcullen: in terms of global intelligence services, but it has both a paramilitary arm and a traditional intelligence arm. And I think we saw both of those potentially play a role here.
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David Kilcullen: So what essentially seems to have happened is that the operation began by knocking out command and control systems, probably some cyber and space-based activity, and signals, disruption of the Venezuelan systems, followed by a very large-scale
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David Kilcullen: what we call a SEAD package, Suppression of Enemy Air Defenses package, coming from the ships and from a variety of land bases, at least 150 aircraft, approaching Caracas from multiple directions, which is something you do in order to throw off
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David Kilcullen: radar systems when you’re about to do a SIAD mission, and then striking various air defense systems. Russian S-300, S-400,
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David Kilcullen: Chinese systems, probably some others, a lot of guns as well, like anti-aircraft guns, essentially trying to black out Caracas and knock out its air defenses. And then while that was going on.
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David Kilcullen: We saw low-level helicopter insertion.
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David Kilcullen: of Delta Force, which is the Army’s, Tier 1, strike organization. Probably some other assets as well.
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Marvin Barth: What is Delta Force’s official initials, I think?
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David Kilcullen: with ODD, Special Forces Operational Detachment Delta, right?
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Marvin Barth: Aren’t they also called something like Combat Oper…
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David Kilcullen: Oh my god.
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Marvin Barth: group.
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David Kilcullen: Combat Applications Group, yes, they have been called that in the past. They have various.
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Marvin Barth: No relation to, to, to.
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David Kilcullen: relationship.
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Marvin Barth: Applications great.
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David Kilcullen: Any resemblance to CAG is purely accidental.
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David Kilcullen: But, yeah, so those guys came in, raided the palace where…
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David Kilcullen: President Maduro and his wife were located. He seems to have attempted to enter a safe house, but was… or a safe room, but wasn’t able to do that. He was extracted.
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David Kilcullen: they then got into a gunfight, in Caracas as they were attempting to extract, which is rather a similar scenario to Black Hawk Gown, for those who remember that incident 30 years ago. But it went much better. Some Americans were injured.
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David Kilcullen: no one was killed, as far as we know. About 40 civilian and military people were killed on the Venezuelan side, and they successfully extracted the
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David Kilcullen: The president and his wife.
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David Kilcullen: to the USS Iwo Jima, at sea, and then from there, he’s just arrived in New York and is about to appear, in court. So, basically a…
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David Kilcullen: I wouldn’t say flawless, but a very well-executed and competently executed multi-domain operation, as we call it, resulting in the seizure of a high-value target, and
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David Kilcullen: basically no remaining U.S. forces on the ground. So, even though right now there’s discussion coming out that the…
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David Kilcullen: Venezuelan vice president is the US preferred candidate. She’s also the natural person that would have taken over just in the normal course of events if Maduro had been hit by a bus, right? So, it’s not that the US has imposed its preferred candidate, it’s just that they’ve expressed
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David Kilcullen: likely satisfaction with the candidate who is going to step into that spot anyway. So we can talk about that in a bit more detail, but I think the… the… the tactical execution
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David Kilcullen: was not necessarily flawless, but was very competent and effective. The real question is, what next, right? What happens now? And, what did Trump mean when he said, we’re going to run Venezuela? I have my ideas on that.
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David Kilcullen: Does he mean the same thing by that as Marco Rubio does? Does she understand that? You know, what are we looking at here? And I think a general theme, maybe to lead into the next phase of the conversation, is that we’re seeing
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David Kilcullen: a move away from the concepts, or more rightly, the rhetoric, of democracy promotion and the international rules-based order that we saw under the Bush administration, the Obama administration, and the Biden administration, to something that’s more late 19th century, early 20th century, of
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David Kilcullen: Gunboat diplomacy.
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David Kilcullen: what we call suzeraine, which we can talk about, and, and protectorate status, right? Something much more akin to, say, the Banana Wars of the 1920s, or the, the Platt Amendment that governed
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David Kilcullen: U.S. relationships with Cuba after the Spanish-American War. So not occupation, not regime change, not democracy promotion, but basically putting a protectorate status over a country where we say.
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David Kilcullen: US commercial interests are going to have primacy, there are going to be limits on your foreign policy options, and there’s going to be some limits on your economics. For example, you have to do business in dollars rather than yuan, for example. And other than that.
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David Kilcullen: in terms of your own internal governance, we’re not going to interfere. This is, what the Chinese would describe as tributary status, which we historically have talked about as suzerainty, which is where a country asserts control over another country’s
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David Kilcullen: foreign policy to a greater or limited degree, but not in terms of internal administration. Now, whether that works is a different question, but it seems to be…
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David Kilcullen: both what the Trump administration has in mind for the next stage politically, and also very well aligned with what you guys talked about on your last podcast about the national security strategy. So anyway, that’s a possible segue to a broader discussion.
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Marvin Barth: I definitely want to go in that direction, that’s where we want to go next, but I think just…
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Mark Farrington: touch a few more, sort of tactical and what happened issues. Mark, did you want to ask about the specific Chinese example, or… or an…
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Marvin Barth: Yeah.
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Mark Farrington: Yeah, yeah, I think that, you know, there’s a lot of interest to see what we can glean out of this operation that has relevance for the other theaters, whether it be in Europe, but probably primarily surrounding Taiwan.
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Mark Farrington: I mean, obviously, the kind of build-up that you articulated so well that the U.S. has been put in place for the last 3 or 4 months in the Caribbean.
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Mark Farrington: is not the way that the U.S. would approach a conflict with a geopolitical rival like China or Russia. So, you know, I don’t think it’s the formation, the structure, and the stealth that is as relevant, but there is, I think, interest in, you know, any sort of what can be called, you know, hardware or software failures or, you know, rival power.
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Mark Farrington: failures. So, and as far as you know, were the anti-aircraft missiles, the radar, early warning systems, etc, were they top shelf, the best that Russia and China have available, or were they third, fourth generation old that had been sold to generate… sold to Venezuela years ago?
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Mark Farrington: or the cheapest that they could afford. And so, therefore, we can’t really extrapolate too much about what happened and how easily it was taken out by the U.S. attack.
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David Kilcullen: So, great question, and again, I think we don’t know for sure yet, but what we are seeing so far suggests that it wasn’t necessarily the latest gen
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David Kilcullen: of Russian, or Chinese material. The one that’s been focused on is S300, that’s a 30-year-old system. The S400 is 20 years old.
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David Kilcullen: There are… there was also a fairly widespread usage of SA7s or, handheld or shoulder-launched.
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David Kilcullen: Air defense systems, which, are actually harder to counter than some of these larger scale systems, but are less effective in disrupting the kind of, stealth
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David Kilcullen: heliborn-type assault. Helicopters are big, they move slowly, they generate an enormous radar signature because of the,
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David Kilcullen: speed of the rotor tips, which generates this huge echo on radar. So it’s really hard to hide a helicopter insertion against a functioning air defense system, what we would call an integrated air defense system that includes
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David Kilcullen: Sensors and a command and control system, radars, audio sensors, that kind of thing, as well as,
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David Kilcullen: you know, guns and other systems for shooting down aircraft. So what you need to do is disaggregate that system. That’s what a CAD mission is, right? You’re trying to blind the command and control, knock out the radar sensors, confuse the guys that are running the system.
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David Kilcullen: and then separately knock out the actual shooters, and I think we saw a fairly effective takedown here. I would be surprised if…
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David Kilcullen: you would see a similar success in an attempt to, hypothetically, knock out Russian systems in the Baltic, or
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David Kilcullen: Keningrad, or to knock out Chinese systems in Fujian or Guangzhou, in the event of a Taiwanese example, just to take two random,
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David Kilcullen: ideas. I think I’d be… I’d be skeptical that you would see similar performance against a peer Tier 1 adversary, because it’s not a matter of having the platforms, it’s also a matter of
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David Kilcullen: Who was running them? Did the Russians have crews on the ground to run those? Did they pull them out at the last minute because they were worried about being caught up in a direct conflict with the US? If they didn’t have crews on the ground, how good was the training of the Venezuelan crews? You know, there’s all these kinds of questions that will come out, but just haven’t come out yet in detail.
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Mark Farrington: Okay, that’s fantastic. That’s what I assumed, but it’s good to hear it from the expert. And then just one other small question. It looked to me like the footprint of where all of the missile strikes were in Venezuela, that there was a few that were quite far away from the palace and the fort where the extraction event took place, and so I was just wondering, is it known, were those all just communication satellites.
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Mark Farrington: outposts, or was there actually another target that is not being discussed that we took out,
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Mark Farrington: Simultaneously under the cover of the extraction mission.
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David Kilcullen: So it’s fairly clear that, yeah, that’s a great question, and it’s fairly clear that not only were they targeting
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David Kilcullen: Air defenses and the palace itself.
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David Kilcullen: they were targeting what we call the QRF, the Quick Reaction Force, that would have been able to inter… interfere with the extraction. And…
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David Kilcullen: Some of those sites were probably communications nodes, some of them may have been, QRF locations. There’s a fairly extensive documentation of Cuban.
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David Kilcullen: and other, special forces in, Venezuela, not all of whom would have been in Caracas. So I think, again, more details will come out, but for sure, they would have been trying to…
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David Kilcullen: not only prevent any interference with getting the raid team in, but also, perhaps even more importantly, preventing, like, a Blackhawk Down scenario, and ensuring that it could actually get back out to the, to the ships, and knocking out, the…
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David Kilcullen: Venezuelan Air Force, not just air defenses, and knocking out, QRFs, I think would be a… would have been an important element there.
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Mark Farrington: Okay, that’s excellent, thanks for that.
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Marvin Barth: Following up on one quick point that you mentioned.
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Marvin Barth: you know, Cuban Special Forces. I mean, there… there were… there are…
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Marvin Barth: a number of different foreign forces and, you know, advisors, on the ground in Venezuela, Cubans first and foremost among them, and I think often seen as
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Marvin Barth: enforcer elements within the regime. You obviously have Russian forces there, North Korean, Iranian, Hezbollah.
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Marvin Barth: Were any of… or do we have any information? Were any of those… foreign forces targeted.
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David Kilcullen: So we don’t have any close… any detailed information on that as yet. I would be very surprised if the Cubans were not caught up in it, because they provided
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David Kilcullen: a close personal protection element, amongst other things, to the… to the Chavez regime, and then to the Maduro after that. They’ve got a long-standing relationship going back to Chavez and going back to what’s called the
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David Kilcullen: continental Bolivarian movement, which is the sort of general Shavista tendency in, northern South American politics. So, I think the Cubans, for sure. I’d be surprised if the Russians were directly involved,
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David Kilcullen: Or the Chinese, but it’s possible. And then the North Koreans, have allegedly had some special forces
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David Kilcullen: working with the collectivos Chavistas, the Chavista Collectives, which are these paramilitary forces that have been working, for the regime, probably also working with other elements of the regime. No evidence yet
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David Kilcullen: that they were targeted, and there’s actually some dispute about whether they were even really there. So, I think for sure the Cubans, probably not the Russians or the Chinese, probably not the North Koreans. Iran and Hezbollah.
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David Kilcullen: The Iranians and Hezbollah were both involved in export of drone technology to Venezuela
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David Kilcullen: And in a couple of other areas of military tech, so I’d be surprised, again, if they weren’t caught up, but I’m not sure they would have been directly targeted as part of this.
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Marvin Barth: Let’s move to that second discussion, which you already sort of provided the launch pad for, in that, you know.
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Marvin Barth: Mark and I have talked about before, and, you know, I’ve written about it extensively, and
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Marvin Barth: you know, frankly, building on one of your books that I mentioned earlier, The Dragons and the Snake, that, you know, the Dragons and the Snakes, that the post-war liberal order is already dead. It’s been dead for a while.
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Marvin Barth: And in many ways, I look at Donald Trump’s election in 2016 as sort of
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Marvin Barth: The church bell ringing to tell you it’s dead. Not that he brought it down.
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Marvin Barth: But here you clearly see that the Trump administration
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Marvin Barth: And I think many people will read it as, this is the end of the post-war liberal order. I would say, no, this is the…
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Marvin Barth: an attempt to establish a new world order that, as you put it, does have a lot of similarities with the, sort of, late Victorian era.
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Marvin Barth: I mean, is that the way that you see it? Is that where we’re going? Or what do you see as the direction of the world order at this point?
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David Kilcullen: So I think it’s very clear, and we’ve talked about this before in other circumstances, that
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David Kilcullen: globally, we’re seeing a transition to a multipolar world system, and that doesn’t necessarily mean China, Russia, or Iran replacing the United States as the primary actor in an international system. It may see…
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David Kilcullen: a series of… I don’t actually like the term spheres of influence, but let’s go with that temporarily. A series of regional orders, rather than a single world order, in which each of the major players
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David Kilcullen: Arrogates to itself a very high degree of agency in its own region.
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David Kilcullen: still wants to do things in other regions, but accedes to other great powers having stronger interests in those regions that are closer to them. So, clearly in the case of the Trump administration.
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David Kilcullen: The region with which the administration is most heavily concerned is the Western Hemisphere.
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David Kilcullen: And, of course, the Western Hemisphere runs all the way from the North Pole to the South Pole, right? It is, by definition the same size as the other half of the Earth, so there’s a lot going on in there. And, you know, I noticed the Danes are…
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David Kilcullen: I don’t know what the Danish for pearl clutching is, but they’re engaging in a certain amount of concern this morning about could Venezuela be a template for the Trump administration to move on Greenland?
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David Kilcullen: The short answer is yes, it could, but it’s highly unlikely, right? The… another way of thinking about this is that this move was about…
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David Kilcullen: securing a re-entry of U.S. oil companies to Venezuela, reopening the lower Venezuelan crude, which, of course, US Gulf Coast refineries are well-structured to
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David Kilcullen: process that sulfur-heavy, you know, viscous oil that we see from Venezuela, the other main source of that is Canada, right? So, Canada can be seen potentially as an ideological adversary right now of the Trump administration.
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David Kilcullen: That’s a slight overstatement, but you could argue that there’s a significant difference of opinion there. So, this is also a way of…
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David Kilcullen: de-emphasizing Canada’s economic role in U.S. oil refinery operations. So, basically, what we’re seeing here is, and I think President Trump was accurate here, we’re seeing a restatement or a re-emphasis of the
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David Kilcullen: Monroe Doctrine, which, of course, in its original form was about keeping the present, the military presence of European powers out of
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David Kilcullen: the Western Hemisphere. Then became, under the, first corollary, the Roosevelt corollary to that doctrine in 1904,
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David Kilcullen: an assertion that the US could intervene at will in the region for reasons of democracy promotion, stability, or other good reasons, you know, sort of responsibility to protect type reasons.
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David Kilcullen: what we’re seeing with the Trump, corolli is basically saying, and we can do that for economic reasons, for our own…
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David Kilcullen: relatively narrow, U.S. commercial interest, and we are not even going to tolerate the commercial presence or the ownership of infrastructure by great power rivals within that very narrowly defined geographical region.
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David Kilcullen: of the Western Hemisphere. I think that’s a… an important…
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David Kilcullen: development, but it’s a linear development. It’s not some kind of, astoundingly atrocious Trump innovation. It’s a linear progression on what has effectively been Trump, been, US policy for…
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David Kilcullen: almost 200 years now, so I don’t think this is necessarily the departure that some people think it is, but it’s certainly a way to think about how the administration might operate in the future.
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Mark Farrington: David, can I just jump in here for a second? I mean, I had the same extrapolation that you laid out there from the Roosevelt corollary, which was that,
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Mark Farrington: this idea that the U.S. reserved the right to intervene in order to avoid instability and to defend against the European powers moving in the Western Hemisphere.
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Mark Farrington: with the Trump corollary being the addition of offense. So not just a defensive corollary, it’s an offensive corollary that gives them the right to kick out non-hemispheric players that are already there, that have actually taken advantage of the instability that’s, you know, that the U.S. has tolerated over the last couple of decades. And so that’s why it looks, perhaps, more aggressive
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Mark Farrington: In the beginning, because there’s this role of kicking out the unwanted players in the region, before it will then start to become a bit more, like.
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Mark Farrington: dollar diplomacy, where you’re trying to encourage stability and democracy through U.S. investment, and particularly led by private sector companies rather than, you know, government military bases or something like that. Do you think that makes sense, that there is an offensive component that didn’t exist before?
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David Kilcullen: Well, I do think… I do think it makes sense. I would offer a couple of caveats. One,
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David Kilcullen: the US and the United Kingdom almost went to war in the late 19th century over Venezuela, as it happens. And one of the triggers for that was a potential French rival canal and a British rival canal to what became
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David Kilcullen: the Panama Canal. Panama, at the time that the canal was constructed, was part of Colombia, and the US went in, in its sort of original use of gunboat diplomacy.
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David Kilcullen: on the pretext of, Bogota oppressing its northern province, and seized that province, took it away from Colombia, and created the independent country of
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David Kilcullen: I’m making air quotes for those that are listening, of Panama, and the US-controlled Panama Canal Zone.
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David Kilcullen: as a result of that, and Roosevelt, in 1904, articulated his corollary to the Monroe Doctrine after the fact, right? So, they… they… I think perhaps the…
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David Kilcullen: the most significant departure here is one of presentation, right? Because in theory, the original Roosevelt corollary was, we’ll do it for your own good, right? We’re doing this for your own good, for democracy and for stability, and yes, there’ll be a side effect of
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David Kilcullen: benefit for, the United States.
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David Kilcullen: Trump’s been fairly clear that he reserves the right to intervene purely for U.S. national interest, whether or not it’s in the interest of local populations in the region, and that he will do so to pursue U.S. commercial interests. And again, I don’t think of much of a substantive departure, but a difference of…
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David Kilcullen: presentation, to be sure. So, I agree, though, with your first point about…
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David Kilcullen: Will we see a period of, of,
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David Kilcullen: offensive action, before we potentially see a more stability-focused approach. I would say that if a Trump administration official was here on this podcast with us, they would probably say, well, what we’re doing here is rolling back
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David Kilcullen: unacceptable hybrid warfare offensive, advances by adversaries in the region, and we only are doing it because the Biden administration signally failed…
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Mark Farrington: Is that, there we go. You froze again. I lost you there for the last 5 seconds.
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David Kilcullen: Sorry.
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David Kilcullen: Obviously getting jammed… obviously getting jammed by the, the Russians here. No, I was saying, I think that their position would be…
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David Kilcullen: the Trump administration’s position would be that they had to do this because the Biden administration allowed such inroads by Iran, Russia, and China to the region, and they’re in a forced phase of rollback. You can debate that, but I think from a military standpoint, and leaving aside the political
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David Kilcullen: trolling that’s implicit in that. The military point would be that the Trump administration is also broadening the notion of the Monroe Doctrine beyond conventional military engagement to what we call hybrid warfare, right? So.
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David Kilcullen: Political warfare, economic warfare, cyber, you know, unconventional presence, that kind of stuff, is now going to be considered…
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David Kilcullen: part of a spectrum of action that the US reserves the right to use military force to respond to.
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Mark Farrington: Excellent.
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Marvin Barth: So this… I mean, one of the clear, sort of.
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Marvin Barth: you know, justifications, if you want, for this. If you think about it in the context you just laid this out, is that
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Marvin Barth: you know, Venezuela was a center of a lot of serious threats to the U.S.
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Marvin Barth: So, you have, you know, a government that is aligned with
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Marvin Barth: multiple key strategic adversaries abroad. Russia, China, throw in regional, the Iranians, the North Koreans.
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Marvin Barth: It is also aligned with a bunch of, narco groups, right? There are various factions of the Maduro regime were associated with different, drug cartels, that are heavily armed.
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Marvin Barth: and, you know, effectively are NGO armies, in the same way that, you know, Hezbollah or Hamas or others were used as asymmetric assets by Iran in the Middle East.
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Marvin Barth: You also have a whole social phenomenon in terms of the impact of the drugs they’re pushing into the United States in terms of deteriorating
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Marvin Barth: and breaking down U.S. society, all of those things, combined with, Chinese monopolization, increasingly of the… forget about the oil, right? The U.S. actually is
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Marvin Barth: flooding the world with oil right now. It doesn’t really need much oil. Yes, it’s refineries.
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Marvin Barth: Can use, doesn’t have to, heavy oil.
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Marvin Barth: but it’s really, you know, one of the critical issues here is the critical minerals that they’re increasingly finding in the Orinoco. So, you look at all those different things, and it says, this is a place we need to make sure our adversaries don’t control and cannot use as a staging ground
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Marvin Barth: for, asymmetric attacks on the United States.
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Marvin Barth: And so… the question I would take from that for you is.
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Marvin Barth: That’s been true for quite a while, right? So, what changed? Did… is it… there’s at least some things I’ve read out there who are saying, oh, well, this has now become a critical issue, or one or more of these issues has become critical.
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Marvin Barth: I’m not sure I read it. I read it as a regime change within the United States in terms of its view, and it was manifest in the Trump administration’s second-term first national security strategy.
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Marvin Barth: Am I wrong to look at it that way? Was there something that critically changed recently that forced this action, or was this just… is this part of what you’re seeing as this is, defining a, new order relative to the collapse of the post-war liberal order?
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David Kilcullen: So, yeah, there’s a lot to unpack in there, but I will just start this discussion by flagging that.
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David Kilcullen: the US, under the Biden administration, suffered what most strategists would agree was a loss of deterrence capability, right? So, partly through the unmitigated fiasco of the collapse in Afghanistan,
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David Kilcullen: Perhaps more so by the fact that no one was held accountable for that, loss, and that the Biden administration tried to spin it as a successful evacuation when literally everybody knew that it was a defeat and the loss of the war on terror.
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David Kilcullen: After 20 years. And then the second big one was that within 6 months of that collapse in Afghanistan, the Russians invaded
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David Kilcullen: full-scale invasion of Ukraine over very stark warnings not to do so by the Biden administration, which, basically
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David Kilcullen: leaving aside the party politics of Democrats versus Republicans left the US in a much less powerful position in terms of deterrence vis-a-vis other great powers than it had been until that point. So one of the imperatives for an incoming Trump administration
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David Kilcullen: Was to reestablish deterrence.
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David Kilcullen: Another third… a third area where there was, a loss of, face, as it were, was in the Red Sea, where both a European and a US task force failed to reopen the Red Sea and the Baba Mendeb Strait to, to civilian commercial shipping.
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David Kilcullen: against a, basically ragtag Houthi army funded by and supported by Iran. So there was a need to demonstrate something in order to re-establish, deterrence.
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David Kilcullen: moving into Europe.
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David Kilcullen: to reestablish deterrence by hitting back against Russia is not a Trump goal, right? His goal, rather, is to find a modus vivendi with the Russians, and to stabilize the situation in Ukraine without allowing the US to be
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David Kilcullen: gone into it, so that was a non-starter. He’s also trying to disengage, to some extent, from funding, European, action.
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David Kilcullen: Moving on Taiwan, also not a viable model because of the leverage that China holds economically over the United States. They would have been able to hit back even harder in that attempt. But a lot of the things that we’ve seen over the last 12 months have been… I mean, this is a…
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David Kilcullen: To be a bit disrespectful, but have been…
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David Kilcullen: thematically linked by the theme of the US casting around for something that it could do to re-establish deterrence without directly picking a fight with Russia or China. And I think…
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David Kilcullen: what we just saw in Venezuela does that, right? It says, we can still carry out a competent military operation, we can still generate a massive effect. Hey, by the way, your hardware didn’t perform very well.
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David Kilcullen: Also, we showed restraint by not striking directly on the Wagner Group or any of the Russians that are on the ground. And, you know, don’t screw with us, because, if we can do that in our region…
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David Kilcullen: maybe we can do it in yours, but do you really want to take that chance, right? So it’s trying to establish a very high degree of deterrence and agency in its own regional, quote-unquote, sphere of influence. But,
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David Kilcullen: at the same time as the NSS made clear, giving a lot of rope to great power.
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David Kilcullen: adversaries in their own regions. That’s why I don’t really like the notion of sphere of influence, because the US is actually asserting global
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David Kilcullen: control over certain functional areas, whilst asserting regional hegemony, right? Again, loaded term, but regional suzerainty, right, in its own region, over other countries. Now, whether other countries are willing to go along with that is a different question.
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Mark Farrington: Yeah
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Mark Farrington: That’s an excellent point, David, because I also thought that it wouldn’t be too long before the analyst community began to link the Truman Doctrine to the Trump NSA as well, because
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Mark Farrington: You know, they have made an effort to fund and finance some of the frontline allies that they have against the great powers, like
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Mark Farrington: dialing up the military investment in Philippines, for example, and, you know, offering the financial support that it has to various peripheral points of the NATO alliance, etc. So, it’s not full proxy war, like we saw in the first Cold War.
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Mark Farrington: But it is a Truman-like response to, you know, China’s countermoves, and so it’s… I always struggle to understand why Trump has been described as isolationist, because both the expanded Trump corollary and this,
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Mark Farrington: pushback on China and Russian influence globally in a Cold War-like framework is not isolationist. It’s active, but it’s selective, you know what I mean?
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David Kilcullen: I would agree with that. I think the Trump administration has a degree of neuralgia about
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David Kilcullen: multilateral alliances, like NATO, that tend to enmesh the United States in collective decision-making processes, where it’s not in a position to pursue its own interests or to selectively engage. That’s one of the big beefs about NATO.
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David Kilcullen: coming from Trump people, irrespective of the money issue, which has been an issue back to, you know, the… the Nixon era. So that’s a… that’s an example of the type of alliances that the…
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David Kilcullen: the Trump administration doesn’t like, particularly.
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David Kilcullen: in the Western Pacific, and in the Asia Pacific, in the Indo-Pacific, what we’re seeing are a series of bilateral relationships, in which the US has much greater agency, much greater decision-making flexibility, and in many cases, these so-called alliances don’t actually do what the other party of the alliance thinks they do. Like, Australia’s a great example of that, right? Australians talk about
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David Kilcullen: the ANZUS Alliance as being a de facto security guarantee from the US to Australia. It’s no such thing, it never has been. It just says that the two parties will consult with each other, right? That’s it. So, the Trump administration’s basically not really changing the
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David Kilcullen: Letter of these alliances, but it’s changing the spirit in which
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David Kilcullen: they’ve operated in the past. But again, another action
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David Kilcullen: of the last few weeks that you may have already talked about, I don’t know, was that, just a couple weeks ago, the Trump administration gave the largest ever arms transfer to Taiwan.
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Mark Farrington: Yeah.
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David Kilcullen: $1.1 billion worth of weapons, in the midst of the Chinese having a very intensive war of words with Japan about Japan, upgrading its likely response to a move on Taiwan. So we’re seeing a generalized theme of the Trump administration trying to reestablish,
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David Kilcullen: deterrence to establish this notion of selective engagement on US terms rather than somebody else’s terms, and then…
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David Kilcullen: being… having a much lower threshold for engagement in its own region, and a higher threshold for interfering with other great powers in their own regions. And all of that is in the NSS, right? In the national security strategy from a month ago. So what we’re seeing, to some extent, is the…
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David Kilcullen: You know, the emergence of flesh on the bones from that document from a month ago.
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Mark Farrington: Excellent, yeah.
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Marvin Barth: I want to, ask, you know, we’ve talked a lot about the U.S. intent here. What about the other two great strategic powers here, particularly China, but also, to some extent, Russia, which, you know.
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Marvin Barth: the U.S, I think, is, you know, trying to peel away from China.
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Marvin Barth: You know, one… on the Russian front, one interesting implication of this, people talk about, oh, it’s an invasion for oil, or whatever, which I don’t really buy, but it is kind of interesting, if you think about it, that the U.S. already
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Marvin Barth: If you think that it has effective control, given pipelines and things like that, over Mexican and Canadian oil.
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Marvin Barth: plus the US does 22% of the world’s oil itself.
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Marvin Barth: has… You know, produces or has control of a third of the world’s oil production already.
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David Kilcullen: No.
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Marvin Barth: add in Venezuela, even though Venezuela’s small now, it could be a very large producer in the future. Plus, you’re establishing this precedent
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Marvin Barth: with the Brazilians, the Colombians, the Ecuadorians, the Guyanans, who you already effectively control, the Trinidad, all of that. You’re talking 40% of the world’s oil supply right now. That is a very powerful economic weapon to wield against both Russia
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Marvin Barth: the Iranians, even to keep the Saudis in line. It’s also potentially a weapon against importers like China.
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Marvin Barth: So one question, and I’m gonna go through these in a couple and let you take… pick whatever you want, because we’re gonna run out of time soon. The other is, is China.
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Marvin Barth: how do they look at this? And, you know, to the point of this area of suzeranity, does this give them greater flexibility? Also, you know, I’m sure that they would have used whatever excuse they could
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Marvin Barth: But the… the… there’s a lot of noise that the Chinese delegation visiting
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Marvin Barth: was effectively an unwitting participant in the, operation, because it helped them pin down where, Maduro was to do this, which…
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David Kilcullen: You know, is a pretty insulting move.
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Marvin Barth: And one, it does suggest to me that, A, the Chinese didn’t actually know this was happening, or, you know, obviously knew something was in the air, but didn’t know this specific operation. But the other is, what does this say to them?
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Marvin Barth: So, those are sort of two big questions. How should Russia be looking at this, especially given they are so dependent on resources and the U.S. is actively controlling a lot more resources through this process?
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Marvin Barth: And B, how does China look at this in terms of spheres of influence and also sort of the affront to them?
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David Kilcullen: So the Russians, I think, are,
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David Kilcullen: quite concerned about the impact of this on the Dark Fleet oil, transfers, which have been, part of the recent
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David Kilcullen: you know, pre-strike behavior by the task group down in, in the Caribbean over the past few weeks. And I think that, in terms of resources, the worry…
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David Kilcullen: for the Russians is that their ability to access, for example, Chinese or other sources of natural gas and oil is going to be limited. I think that’s less of a concern, frankly. I think…
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David Kilcullen: For the Russians, the… The more important issue here is that, the…
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David Kilcullen: So, you may be aware, Russia has quite a presence in Cuba, and including signals intelligence and a number of other things, and the big impact of disruption of Venezuelan oil flow in the region is to Cuba.
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David Kilcullen: And Cuba could very well, suffer significantly and have to make an accommodation with the US.
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David Kilcullen: As a result of this, in a fairly short order, in a matter of months, rather than longer term. For China, I think the issue is twofold, and there’s pluses and minuses.
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David Kilcullen: On the one hand, it’s gonna be very difficult for
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David Kilcullen: the US to go against China’s assertion of limited suzerainty over, countries in its region, including potentially Taiwan, when it’s just done the same thing in,
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David Kilcullen: in Latin America, and I think that that won’t stop the US from saying, well, this is different. But, I think we’ve already seen in the Chinese media
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David Kilcullen: an assertion that if this is okay for the US, then, you know, it would be double standards for the US to go against a Chinese move on other countries in its region. I think the nuance there is that…
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David Kilcullen: Trump didn’t invade Venezuela, he didn’t occupy it, he didn’t do regime change, but he did seize the head of state and impose policy changes and economic changes on
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David Kilcullen: the behavior of the Venezuelan government. That’s a limited option that some Chinese strategists have been talking about for a number of years. To the extent of people even saying, why are you even talking about invading Taiwan? This is crazy.
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David Kilcullen: we would turn the country into a smoking hulk, and it’d take us a generation to rebuild it. We need to go after a much more limited objective. So that’s one option, one issue for China, and I’d say a relatively positive one. The negative one is about Chinese presence.
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David Kilcullen: In the region. And again, this goes back to… John has spent…
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David Kilcullen: 15 years, really trying to build its presence in Central America and South America, gaining control over commercial assets and over infrastructure, looking at alternatives, port construction.
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David Kilcullen: At one point, they were considering another canal, a whole bunch of different things in the region, doing deals with people for, commodity, deals in yuan rather than dollars, you know, a bunch of things going on in the region, and now.
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David Kilcullen: Trump is very much pushing back on that and saying, no, that’s not acceptable, and we are going to be economically as well as, as well as in security terms, we’re going to be dominant in economic terms in, in the region. I think that does have significant negative implications for the Chinese.
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Marvin Barth: Yeah.
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Mark Farrington: David, I think that, one of the things that I was hoping is going to come out of this, you know, once the smoke clears from the military operation.
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Mark Farrington: is in order to prevent that precedent from increasing the odds of a military seizure of Taiwan, the U.S. should be emphasizing the Roosevelt corollary and the dollar diplomacy aspect, which was to intervene in unstable and falling regimes so that it doesn’t become a playground
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Mark Farrington: for external parties to come in and cause trouble in the US’s backyard. Taiwan is the exact antithesis of that. It’s, you know, it’s more successful, it’s more rich, it’s more stable than the mainland, so you don’t have that same pretext of intervention in order to stabilize a potential, you know, basing ground for your enemy. It would be the opposite.
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Mark Farrington: If they can make that point clear, they can hopefully block that precedent.
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David Kilcullen: I think that’s a great point, and I would also get back to something Marvin said, the…
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David Kilcullen: I think that this is not necessarily about increasing Venezuelan production, it’s about… nor is it about denying Venezuelan production to the Chinese. It’s about U.S. control over that production. So, you might find that…
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David Kilcullen: Trump now has a bargaining counter to say, hey, we’ll give you a great deal, right, on Venezuelan oil, and we’ll give you, all the oil you can stomach at prices that you find acceptable.
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David Kilcullen: But we have to be in charge of it, right? And that then, to your point earlier, Marvin, offers a bargaining counter for the rare earths and other things that have become a big source of Chinese leverage, right? So again.
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David Kilcullen: We… we are used to rhetoric that says that economic security is national security. This is Trump putting that into practice, and saying that we reserve the right to
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David Kilcullen: you know, use bombs and Delta Force to enforce economic warfare goals, right? While using economic goals to enforce our national security goals. And it’s a… it’s a…
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David Kilcullen: US adoption of a style of operating that it’s accused other people of doing for a long time. arguably the US has been doing it forever too, but now it’s explicit. So I do think it’s new, and although we often say, well, the rhetoric’s different, but the substance is the same.
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David Kilcullen: changing the rhetoric as… actually does bring a substantive change to how people behave, right, in the international system. So, and I think the other people that you’ve mentioned in passing that we need to watch is the Europeans, right? Because Europe’s been quite quiet on this, with the exception of the Danes over Greenland, and it’s almost like they’re struggling to figure out
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David Kilcullen: how to react here. And I think, you’ve seen some analysts
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David Kilcullen: in Germany and in Russia, saying, you know, the real loser here is actually Europe, because it’s now being excluded from a peace deal over Ukraine.
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David Kilcullen: and the possible future of Taiwan, and now the oil and energy systems that power the modern world, right? So, where does that leave Europe in this framework?
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Marvin Barth: Well, this is definitely something Mark and I… I think it was actually in our last discussion, Mark, where we’re… it was, because we were both saying, look, the risks of a serious European crisis have gone up massively since the NSS, and this is just another episode, because Europe is…
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Marvin Barth: As much as they don’t want to admit it, totally irrelevant to
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Marvin Barth: the geopolitical framework at this point. They don’t have any ability to project force anywhere significantly.
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Marvin Barth: they don’t have significant resources, and, you know, they’re falling behind in the technological battle. Europe really has taken a severe backseat for the first time in probably 500 years.
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Mark Farrington: Hmm. Yes.
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David Kilcullen: That’s an interesting take, and I think we would have to distinguish the EU from countries located in Europe, right? So, Poland, the UK, to a certain extent, playing…
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Marvin Barth: hope for the UK. I’m a resident and citizen.
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David Kilcullen: Yeah. Well, the UK has an extraterritorial or extra-European role because of its role in AUKUS, and because of its possessions worldwide, like territorial possessions. The other big European player that has that same level of extraterritorial role is France, right? So I do think there’s gonna be…
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David Kilcullen: exceptions, right? Or there are going to be differences. You know, France’s role in Africa has been under threat a lot lately, but it has, you know, it’s the largest European power in the Pacific, right? In terms of territorial possessions and military presence.
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David Kilcullen: Australia and France between them, own all the key sub-Antarctic islands, which are really important now for missile defense. You know, there’s a bunch of stuff where I think Europe will still be a player, but not as it has been, right? And the rhetoric of successive European… Sorry, US governments about the importance of Europe.
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David Kilcullen: is being, you know, gainsayed in a hundred ways by everybody from J.D. Vance to U.S. tech giants to the national security strategy to, you know, the discussion over Ukraine, and I think Europe needs to come to grips with
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David Kilcullen: its role in a new, more multipolar world order. And I’m not sure that we’ve seen that yet.
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Marvin Barth: Yeah, I just, I, I… we are rapidly running out of time. We’ll probably run over a little bit here, but, and I really want to get to the rebuilding phase, like, what, what comes next? But I just, one, quick
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Marvin Barth: Last thought on… You mentioned Greenland earlier. You also sort of alluded that
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Marvin Barth: Cuba is now going to be starved of oil.
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Marvin Barth: Who’s next, or is there a next?
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David Kilcullen: The place that I would watch, and I don’t think it’s a next exactly, is Colombia. So the current president of Colombia, Petro, has a very, or had a very close relationship with Maduro.
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David Kilcullen: He comes from a similar political background, he’s a former M19 terrorist. There are millions of Venezuelans in Colombia.
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David Kilcullen: In addition, the ELN, one of the… the National Liberation Army, a so-called narco-terrorist group, but actually a Marxist insurgent group that happens to also do drug trafficking, has major base areas in
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David Kilcullen: Venezuela, and also when the peace deal was put in place by the former president, President Santos, in Colombia, that resulted in a formal end to the war with the FARC,
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David Kilcullen: seven FARC so-called dissidentias,
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David Kilcullen: mobile FARC military groups refused to accept the peace deal, and some of them relocated some or all of their presence into Venezuela. So you… and there’s an argument amongst many
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David Kilcullen: analysts that, these aren’t really dissident FARC groups, they’re actually the FARC military reserve, as it takes part in electoral politics, but if it loses electoral politics, it’s got that as a backup. There is a May 2026 presidential election coming up.
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David Kilcullen: leading anti-Petro candidates has already been assassinated. The former president, who happens to share the same name, but is not a relative of the guy who was assassinated, Uribe, has been put under house arrest.
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David Kilcullen: by the Petro regime, sorry, Petro government, and there is a certain degree of concern in Colombia that this could be a pretext for a massive crackdown on
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David Kilcullen: any opponent of the left-wing tendency in Colombian politics ahead of that May presidential election. So that would be the one to watch in the short term. There are others too, Ecuador, in particular, and a couple other places.
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Marvin Barth: So, let’s go to the next topic, which is, what’s next? I mean, we’ve talked… you and I personally have talked about this in the past, that, you know, you’ve never had a failed state of the size
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Marvin Barth: and complexity of Venezuela. And in many ways, I think.
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Marvin Barth: It probably… its ability to maintain cohesion and some semblance of state
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Marvin Barth: Over the last several years has been a surprise. Certainly to me, I think… I don’t want to put words in your mouth, but I’m guessing probably to you as well.
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Marvin Barth: And… You now have…
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Marvin Barth: the Trump administration, obviously very interested in seeing it become a cohesive and stable and friendly, i.e. under their suzeranity.
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Marvin Barth: nation-state. That is a really, really difficult thing. You know, there’s all sorts of people who think, well, you know,
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Marvin Barth: Maria Carina Machado, you know, just needs to come in and take over and all this, and because somebody pulled a bunch of election buttons, this magically will happen.
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Marvin Barth: That’s not the way you actually run a government or build a state.
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Marvin Barth: How… what needs to happen here? What does the Trump administration need to do? What needs to happen on the ground? How is this going to be a success, Dave?
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David Kilcullen: Yeah, well, it may not be, right?
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Marvin Barth: If it’s going to be a success, how would that happen?
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David Kilcullen: And of course, if it wasn’t a success, that would give us an unbroken record of failure going back to World War II, so that would be, you know, the way to bet. But I think,
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David Kilcullen: the Trump team, and I, you know, I worked with Pete Hegseth when he was in the military in Afghanistan. I don’t know Marco Rubio, but I’ve read a lot of things he said, and I know people that know him well. J.D. Vance, you know, combat veteran from Iraq.
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David Kilcullen: One of the things that the Trump team are particularly allergic to is the notion of
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David Kilcullen: foreign wars of choice involving pro-democratic regime change and U.S. occupation forces on the ground, right? What they sometimes shorthand as forever wars.
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David Kilcullen: And they, with the exception of Gaza, but there’s always an Israel exception in US politics, right? With the exception of Gaza, there hasn’t been any appetite on the part of the Trump administration for putting any US troops on the ground. And I think that is still likely to be the case for Venezuela. So…
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David Kilcullen: what I think we’re seeing… is very limited.
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David Kilcullen: regime behaviour change being the goal, not regime change. Trump has already come out and dissed the chances of Maria Corina Machado coming back as president, said she doesn’t have the legitimacy or the support.
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David Kilcullen: She also has the prize that he wanted to have, right? The Nobel Peace Prize, so that ain’t gonna go well. So…
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Marvin Barth: He offered it to him.
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David Kilcullen: I know, but as would I have if I’d been given that prize, because she probably saw this coming, right? But I think the, most likely outcome is your personnel stay the same.
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David Kilcullen: Vice President Deli becomes president.
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David Kilcullen: maybe you back off a little bit on some of the socialist crackdowns. You certainly allow back in the big US oil companies, and you knock off the economic warfare and political warfare against the United States. As long as you make those changes.
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David Kilcullen: the Colombian… The Venezuelan military, and the…
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David Kilcullen: key lessons that people in the Trump administration have taken from our experience in Iran… sorry, in Iraq and Afghanistan, right? So, one of the big lessons is we shouldn’t have disbanded the Iraqi military.
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David Kilcullen: And sent them all home to become the source of the new insurgency. We shouldn’t have…
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David Kilcullen: Disrupted a secular regime.
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David Kilcullen: in Syria and in, Iraq, and allowed it to be replaced by a theocratic opponent, right? We shouldn’t have…
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David Kilcullen: Engaged in a massive generational
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David Kilcullen: nation-building effort in Afghanistan, which we turned out to lack the ability to pursue. So I think what they’re doing is they’ve taken a really significant appetite suppressant as a result of that negative experience of the war on terrorism, and what you’re likely to see is,
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David Kilcullen: what David Ignachev, you know, 20 years ago called Empire Light, L-I-T-E, where all they’re doing is, hey guys, we’ve got certain policies we want to see in place, we’ve got other policies we don’t want to see in place, there are some personnel changes we’d like to see. Other than that.
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David Kilcullen: You get to keep doing what you’re doing. And we’re not going to be promoting democracy in your country, nor will we be trying to engage in
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David Kilcullen: Regime change, and the quid pro quo is you guys get to keep your, you know, your pensions and your position, and keep running the country, as long as you make these small, you know, tributary or protectorate-style changes to your foreign policy.
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David Kilcullen: Again, you know, you’re dealing with a very proud people here in Venezuela.
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David Kilcullen: You may find some machado that says, no, we’re not gonna do that, or machismo, but, that’s…
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David Kilcullen: you know, not necessarily a given. You might just see people accommodating that in order to, get the benefits of what Trump’s offering them. Time will tell.
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David Kilcullen: For sure, we don’t want to get into a counterinsurgency. It would be a massive losing proposition. We can talk numbers if you want, but highly unlikely to succeed. And I don’t think it’s on the agenda for the US government either.
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Marvin Barth: You said that the Trump administration took these lessons from
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Marvin Barth: you know, Iraq, Syria, and Afghanistan.
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Marvin Barth: you know, you were actually critically involved in U.S. decisions in those three theaters.
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Marvin Barth: Do you…
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Marvin Barth: David Kilculin take the same lessons, or do you draw different lessons, and would you advise them differently?
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David Kilcullen: So, I’ve shifted my position on this since I was fighting in Iraq to now, but I think it’s very… I’ve always been an opponent of the idea of going into Iraq. I think that that was a unforced error.
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Marvin Barth: You did not use the F word.
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David Kilcullen: On the record.
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David Kilcullen: Hold on the record. But I think the, so I, as I’m on the record, I think that, the invasion of Iraq was an extremely serious, self-inflicted strategic error.
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David Kilcullen: Afghanistan was slightly different. There was a lot of international support for intervention in Afghanistan. When the US abandoned that effort and turned to Iraq.
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David Kilcullen: the Europeans and the UN and others stepped in via the mechanism of the Bond Conference and imposed, basically, a modernization and Europeanization agenda on the Afghan state.
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David Kilcullen: that tried to turn it into something that they had no mandate or local Afghan legitimacy to do. And that then led to, you know, 20 years of…
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David Kilcullen: of engagement in Afghanistan. I believe we could have succeeded in Afghanistan, I think we actually did succeed, and then the Biden administration threw it away, with strong help from the Trump administration, by the way, the first administration. So it wasn’t a partisan thing, it was a failure of will.
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David Kilcullen: In the United States. Iraq was never gonna work. Syria was never going to work. Libya, we didn’t even try to make work. So I think…
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David Kilcullen: The lesson there is
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David Kilcullen: invading other people’s countries, trying to restructure them, occupying them forever, even for a country with the unprecedented level of power of the United States, is just a bridge too far, and even if you can succeed in doing it.
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David Kilcullen: it distracts you from all these other things that you need to be doing. And in The Dragons and the Snakes, I talk about how we were so distracted by the war on terrorism that we missed and were not able to respond to.
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David Kilcullen: the rise of China and Russia. So, I… The dragons. The dragons, yeah. I fully support the…
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David Kilcullen: the lessons coming out of Iraq and Afghanistan without necessarily agreeing with the particular way that the Trump administration’s going about acting on those lessons. And I think this is a general theme on the second Trump administration generally.
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David Kilcullen: He is often react… his administration is often reacting to real problems that are genuine and need a solution, which the other party in power has failed signally to address, but that doesn’t necessarily mean that the solutions that they’re coming up with are the right solutions.
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David Kilcullen: It doesn’t mean they’ve thought them through, and it doesn’t mean that they’re going to have the stick-addedness to make those solutions work, right? So, I think USAID’s a great example, right? USAID, no one would have wanted to see USAID blown up and consigned to the dustbin of history in quite the way
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David Kilcullen: That it was stunned, but…
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David Kilcullen: the other side had 20 years to fix it, and failed to fix it, and most people agreed that USAID had all sorts of problems, right? So,
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David Kilcullen: Same’s true of healthcare, same’s true of tax systems, same’s true of deindustrialization, right? And arguably the same in a military sense is true here, that they’ve identified a real problem.
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David Kilcullen: But their actions may not necessarily solve it. So, you know, this is one of these ones where we need to perhaps, have another conversation in another 6 months and see how it’s played out.
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Marvin Barth: Whoa…
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Mark Farrington: I must say, if I can just jump in here for a second, Marvin, like, I hope that the lessons from Afghanistan and Iraq and Syria don’t frighten the U.S. off.
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Mark Farrington: from the mission that they’ve now, taken on. As Trump said, we own this now, we’re going to make sure after the… not so much sacrifice, but the risk of sacrifice, we’re not going to walk away. Because, I mean, Latin America is close enough
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Mark Farrington: culturally to America, and it does have sufficient history in democracy, and all of its constitutional framework is based on our same constitutional framework. And religiously and culturally, the similarities are there. You have a potential to actually succeed if you invest as much time and energy in Latin America as you did in the Middle East, you know?
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Mark Farrington: So I hope they’re not completely put off, because, you can just as easily get caught in a decade-long political quagmire as you can a military quagmire. And I think, given how high the populist sentiment and support is for
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Mark Farrington: people like Machado and people who have actually, you know, gone through the democratic process and been validated, Guido and Gonzalez, all of these, that the U.S. has to be careful not to lose all the hearts and minds of the people and all of the international support on this, simply because they’ve learned their lesson that nation building is a forever war path they don’t want to go down, because I think they’re…
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Mark Farrington: You can probably force through enough change.
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Mark Farrington: with the existing regime, exactly along the lines you said, but with a few more demands. Like, for example.
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Mark Farrington: restructuring the judiciary. You know, the Supreme Court was completely stacked, and that’s what started the constitutional crisis, and that’s what, you know, started the successive, completely false, democratic elections that Maduro oversaw. So if they could just
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Mark Farrington: Purge the court, for example, of all of the false appointees, and have at least one branch of government
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Mark Farrington: offering some checks and balances, and then, you know, make the same sort of deal with the rest of the regime. That might be enough to give it a fighting chance, and the democracy can emerge organically out of that.
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David Kilcullen: Yeah, so I think,
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David Kilcullen: you highlight a really good point, Mark, which is what you might shorthand as the danger of overcorrection, right? By the Trump administration. One thing to watch, and I don’t know what’s going to happen here, but one thing to watch is, is there a request or an insistence by the Trump administration that opposition political figures
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David Kilcullen: are allowed to return to Venezuela and cannot be targeted by the regime in the way that they have been. And also, is there a requirement
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David Kilcullen: or a request or a demand that, expat Venezuelans in the United States should have the right of return. And that may be…
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David Kilcullen: for… Illegal immigrants getting expelled, as we’ve seen with Trenda Aragua people from…
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David Kilcullen: The first year, but it might also be members of the Venezuelan diaspora who are Democratic and Republican and not interested in
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David Kilcullen: pursuing, criminal activity in the United States. Many of them are legally present, and… or almost all of them are legally present. Many of them are actually US citizens now, so that’s almost like a fifth column of…
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David Kilcullen: pro…
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David Kilcullen: Democrat pro-US Venezuelans, of whom there are now millions overseas, who could… you could insist that they have to come back and be, not targeted. Again, though.
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David Kilcullen: everything they’ve said so far suggests to me that that would be a bridge too far for the Trump administration, because they just don’t want to get drawn into the kinds of military demands on them that might be implicit in making that request of the Venezuelan government.
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David Kilcullen: So I think it’s.
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Mark Farrington: It’s certainly not a Phase 1 demand, but it can be potentially a Phase 2 demand, because as you’ve seen Trump always indicate.
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Mark Farrington: they’re gonna… they want private company money to come in and rebuild the oil sector. They’re gonna need private sector money to rebuild the economy as well. And all of that… all the Venezuelan diaspora will be that entrepreneurial energy that come with their own capital to reignite the economy. So I think the fifth column analogy you used is perfect.
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David Kilcullen: And for sure, the current regime in Caracas sees that too, so how they’re going to react to that, I think, is really important.
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Mark Farrington: You mean they see it positively, or they see it negatively?
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David Kilcullen: They see… they see it as a potential threat.
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Mark Farrington: That’s right.
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David Kilcullen: Oh, yeah.
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David Kilcullen: Anyway, much more detail will probably come out in the next few weeks, and there’ll probably be…
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David Kilcullen: the normal Trump triumphalism, you know, no one’s ever seen an operation like this. It’s unprecedented in history. Everybody says so, you know, it’s beautiful. But that’s what he said about the 12-Day War against Iran, and over the months since, it’s emerged that it was a lot less comprehensive.
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David Kilcullen: than initially claimed, right? So, let’s just see how it plays out, I think.
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Marvin Barth: Yeah, so on that front, you know, brass tacks here, like.
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Marvin Barth: You know, how long do they have?
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Marvin Barth: to actually
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Marvin Barth: Stabilize things, affect change, if they’re going to get this to go in a direction, and what are the things we should watch for?
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David Kilcullen: days to get their language right and come to some agreement with the, the current ruling clique in Caracas, and…
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David Kilcullen: probably weeks, no more than months, to put in place the kinds of deals we were just talking about over energy export, US presence, treatment of opposition groups, that kind of thing.
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David Kilcullen: And that’s because, when something like this happens, there is a temporary period of plasticity in the political system, where all kinds of things can take place and then congeal. This kind of shock wears off really quickly, and things go back to how they were, unless they’ve been
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David Kilcullen: jolted into a new, structure. So, it’s… it’s a fairly short period of time. And, the, the fly in the ointment there will be what happens with the actual criminal case in New York against, Maduro and his wife. So, I think, I would say…
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David Kilcullen: I’m hoping that we’re going to see clear statements this week, and probably by the end of this quarter, have some kind of structure in place. That’s if Trump doesn’t get distracted by something else, and go off and do that instead, right? So, and again, he doesn’t have a great track record of
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David Kilcullen: maintaining, attention on… on one issue. So let’s see how that… that plays out, too.
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Marvin Barth: Okay, and I don’t think we’re gonna… I mean, we’re already well over, so, I don’t think we’re gonna get to talk about markets, I just do want to mention
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Marvin Barth: one thing, which, I’ll toss out to both of you and ask you about. I mean, I’ve… I’m on the record as suggesting that the Genius Act is going to go down as one of the great foreign policy moves of…
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Marvin Barth: U.S. history.
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Marvin Barth: this seems like a perfect test case. Am I not correct here? I mean, this… you have a non-functioning economy, that is in need of money supply and payment systems, and, already has a high degree of absorption of,
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Marvin Barth: crypto, infrastructure.
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Marvin Barth: Your… your final thoughts, each of you?
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David Kilcullen: Let me defer to Mark on that. I mean, I think that non-traditional assets like Bitcoin and other crypto are going to be different from traditional assets, but, I’m also looking, as I think you guys are, to see a dollarization agenda be imp… or maybe even a currency conversion, be imposed on… on Venezuela. And what do you think, Mark?
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Mark Farrington: Yeah, I agree with that. I think that, you know, there should be part of the initial wish list that the Trump administration sends off.
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Mark Farrington: to Venezuela is that they just accept U.S. dollar as official currency in the country, like you have in Ecuador and El Salvador and countries like that, and that will just immediately eliminate the restrictions. There is a dollar shortage already in Venezuela, but
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Mark Farrington: you know.
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Mark Farrington: the crypto remittance path is well open, and I do think a lot of the Venezuelan diaspora, you know, have been waiting for this moment. They’ve been keeping their powder dry, they have capital, and there’s actually a lot of families who’ve had their private property seized and things like that, so, you know, there’s gonna be an impetus to get money in and to buy things up while they’re cheap, or reclaim what was historically yours.
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Mark Farrington: So, if they open the channels, I think the dollars will flow in, and that will help the economy tremendously. So, first fix is to legalize dollar as official currency.
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Marvin Barth: Well, and by the way,
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Marvin Barth: Dave, to your point, I mean, this… it’s not that you’d be using cryptocurrencies, you’d be using the dollar on crypto payment rails, so…
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Mark Farrington: The payment rails are.
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Marvin Barth: Stablecoins, all of those things are traded on Bitcoin, Ethereum networks, right? So, the whole point is that, and, you know, I’m sure you have plenty of anecdotes from the early days in Iraq.
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Marvin Barth: you know, how did you actually pay people with dollars? You actually needed physical dollars at the time, because you don’t have a functioning banking system, you don’t have a functioning payment system.
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Marvin Barth: But stablecoins built on crypto payment rails are already there, and are a very effective, payment system. This is the whole point of the Genius Act, right? It’s basically opening up
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Marvin Barth: A new dollar-based payment system for the world, and particularly for countries like this.
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Mark Farrington: Well, the public sector is still paid in boulevards, and that’s probably, you know, not going to change. What they can hope to do, is to close the gap with the black market, because the black market rate, you know, went ballistic, of course, in the last week, as you would expect, out of fear of the unknown, and as this starts to become a more known outcome, that will stabilize. But you need dollars to flow into the country.
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Mark Farrington: Addressing the boulevard, you know, valuation and hyperinflation is going to come down the track.
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Marvin Barth: Okay, well, look, this has been a long discussion, but I think a very fruitful one. I’m very appreciative of you coming on, Dave, and your patience to give us this much of your wisdom.
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Marvin Barth: This has been fantastic. Mark, thank you again, as always, for joining, and to all our, listeners and viewers out there, I,
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Marvin Barth: Look forward to you joining us again in two weeks. In the meantime, Dave, if people want to find out more about you, or reach out, where are the best channels for you?
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David Kilcullen: The two best would be, Cordillera, our consulting firm, Cordillera Applications Group.
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David Kilcullen: And it’s Cordiera, C-O-R-D-I-L-L-E-R-A hyphen apps.com. And then the other one is our new venture, Scenario AI, which is an AI-enabled
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David Kilcullen: wargaming platform that we’ve built for NATO and for other allies, but also businesses are using it to do capability assessment, and that’s, scenario AI,
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David Kilcullen: All one word, dot tech. T-E-C-K. T-C-H.
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Marvin Barth: Fantastic. Okay, great. Well, thank you again, Dave, and, Happy New Year to everyone. Best wishes for 2026.
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David Kilcullen: Thanks, and it was an honor to be on your podcast, Marvin and Mark.
