Bridgewater Alum Paul Podolsky on What Russia Tells Us About the Future of the Global Order—and What It Means for Investors
February 22, 2024
Bridgewater alum, author, and investor Paul Podolsky shares how he’s assessing Russia and its threat to the global order following the death of Alexei Navalny, what it takes for economies to succeed in the modern world, and the implications for investors.
Editor’s Note: The views of external guests do not necessarily reflect the views of Bridgewater.
One of the defining dynamics we have addressed in the Daily Observations for some time now is the implications for investors during this era when a rules-based, US-led world order is under threat. The pressures have been building for years—whether it’s Russia’s invasion of Ukraine and what that says about changing international borders by force, the turmoil in the Middle East, or tensions between the US and a China that is aligned with Russia and has its own territorial designs. Meanwhile, global stocks are reaching new highs, led by a dominant US market where risk premiums look particularly tight. Should investors worry about this confluence of circumstances? And what will the global order look like in the coming decades?
To discuss these questions, BDO editor Jim Haskel sat down last week for a podcast discussion with Bridgewater alum Paul Podolsky, who many of our listeners will remember from his years as a senior portfolio strategist and as head of our China research. Paul has broad experience in a number of today’s geopolitical hotspots, particularly in Russia, where he started his career as a journalist in the 1990s, writing for the Moscow Times and other outlets. Later, in the US, Paul worked at Dow Jones and the Wall Street Journal before beginning a long career in the investment management industry, most of which was with us.
Since leaving Bridgewater in 2020, Paul has become a writer and podcaster, publishing two books with a third upcoming. He is the founder of Still Press, a media company, and Kate Capital, an investment management firm. On his Substack, Paul shares his research on a range of topics regarding the economy, geopolitics, and his own investing. Anyone who knows Paul will know that he is an independent thinker, often with strong views, some of which are controversial. And as you’ll hear Jim describe, while he finds himself disagreeing with Paul probably as much as agreeing, he finds that less important than the feeling that he’s always a better thinker after talking to Paul.
Today’s podcast was sparked by a Substack post Paul wrote following the death of imprisoned Russian opposition leader Alexei Navalny, titled “Putin Is Evil, but He Won’t Win.” You’ll hear Paul give not only his perspective on Russia and whether it’s winning or losing its fight against the West, but, more importantly, his big-picture thoughts on what it takes for economies to succeed in the modern world, and the implications both for the global order and for investors. Along the way, Paul also shares how he’s assessing China’s economy, the US domestic political landscape, and what he calls “the uncomfortable truth about money.”
TRANSCRIPT
Note: This transcript has been edited for readability.
“There is some non-zero possibility that this war escalates in a way that is really, really, really dangerous. So the investment implication of this thing is, first of all, in any portfolio, I think you need to think about some assets that could protect you in that type of scenario. The second thing is, I think it’s very instructive for the way people think about emerging markets. In other words, Russia looked pretty darn good before this. Emerging markets basically means places that are less wealthy, largely because they have weaker rule of law, and the risk of carrying those in your portfolio is significant. I just think that you need to apply a geopolitical filter on your choices in terms of investment and be pessimistic.”
—Paul Podolsky, Bridgewater alum, author, and investor
Jim Haskel
I’m Jim Haskel, editor of the Bridgewater Daily Observations. One of the defining dynamics we’ve repeatedly come back to in the BDO for a long time now is the implications for investors during this era when a rules-based, US-led world order is under threat. The pressures have been building for years, whether it’s Russia’s invasion of Ukraine and what that says about changing international borders by force, or whether it’s the turmoil in the Middle East or the tensions between the US and a China that is aligned with Russia and has its own territorial designs.
Meanwhile, global stocks are making new highs, led by a dominant US market where risk premiums look particularly tight. So the question is: should investors worry about this? And what will the global order look like in the coming decades?
In today’s BDO podcast, I decided to turn to Bridgewater alum Paul Podolsky, a person that many of our listeners will remember from his years as a senior portfolio strategist and also head of our China research. Paul has broad experience in many of today’s geopolitical hotspots, particularly in Russia, where he started his career as a journalist in the 1990s, writing for the Moscow Times and other outlets. It was there, in fact, that he met his wife, Marina. Later, in the US, Paul worked at Dow Jones and the Wall Street Journal before beginning a long career in the investment management industry, most of which was with Bridgewater.
Since leaving Bridgewater in 2020, Paul has become a writer and podcaster, publishing two books with a third in the hopper, and sharing his research on a wide range of topics on the economy, geopolitics, and his own investing. He travels widely around the world to make sense of things for himself. I highly recommend his Substack. Anyone that knows Paul will know that he is an independent thinker, often with strong views, some of which are very controversial. While I find myself disagreeing with Paul probably as much as agreeing with him, I find that less important than the feeling that I’m always a better thinker after talking to Paul.
And so in today’s podcast, I’m sharing a conversation I recently had with Paul that started with a Substack post he wrote following the death of imprisoned Russian opposition leader Alexei Navalny, titled “Putin Is Evil, but He Won’t Win.” And what you’ll hear is not only Paul’s perspective on Russia and whether it’s winning or losing its fight against the West, but more importantly, his big-picture thoughts on what it takes for economies to succeed in the modern world and the implications of this for both the global order and for investors. And along the way, he also shares how he’s assessing China’s economy, the US domestic political landscape, and what he calls the “uncomfortable truth about money.”
Again, Paul’s perspective is not meant to represent Bridgewater’s thinking, but I thought his perspective was really interesting, and we thought our listeners would think so as well.
So without further ado, let’s get right into my conversation with Paul Podolsky.
Chapter 1: What’s Going On in Russia and Why Putin Won’t Win
Jim Haskel
Paul, welcome. It’s great to have you on the Daily Observations podcast. I’ve been meaning to do this for quite some time, but it was your Substack column on the death of Alexei Navalny and the importance of that that really caught my attention. So I want to welcome you again back to Bridgewater.
So let me start with that. You know, the title of your column was “Putin Is Evil, but He Won’t Win.” And it’s really interesting because a lot of the popular press right now has almost the opposite synthesis—that actually Putin is starting to win. He’s eliminating opposition in Russia, and he’s starting to win territory in Ukraine. So let me just ask you to go ahead and give us a little bit about what you’re seeing going on in Russia and the future of Putin, and why you think he won’t win.
Paul Podolsky
Sure. And thanks for having me here. It’s good to see you all again.
So I think what’s going on in Russia and what happened with Navalny is relatively simple. It’s just so unfamiliar to people who haven’t spent time in Russia and places like Russia that they get a little tripped up, from my perspective. And they ascribe a narrative there that is more complex than what is going on, which is that Putin is some great strategist and that there’s this fundamental threat to the West, and I just don’t think that that’s accurate at all.
The difficult thing to understand about Russia—and it took me a while to make sense of it as well—is that, despite the fact that Russia sends people to outer space, and that they have great chess players, and great ballerinas, and great mathematicians, the political culture in Russia is about 500 years behind the West. It’s medieval. And I don’t just say that to be provocative; I think it’s accurate. In other words, if you have a system where there is a king, and the king kills the people who disagree with him, that’s not that unfamiliar for Europe in the 1400s and 1500s. And the entire process of the Bill of Rights in the United States and the Declaration of the Rights of Man in France, these are 18th century constructions, and they all have to do with preventing a single person from having the exact type of powers—and abuse of powers—that Putin has right now.
So that’s how it operates. And Navalny might have gone in thinking that he was going to be one of the people who had objected to the Soviet times, somebody like Solzhenitsyn or Sakharov, who were hounded by the state, but they were not murdered. But Putin kills the people who disagree with him, and he kills them quite publicly. In other words, when he killed the spy Litvinenko in London, he’s doing this to send a message. So Stalin had to kill millions and millions of people, and I think Putin’s thought is you could accomplish basically the same by killing a few people and making it be horrific, and broadcasting it because it has the same basic effect.
So the right framework—and this is something that I learned at Bridgewater—the right framework to understand something explains so much. And the right framework for Russia and interesting other places like Russia, is that it’s medieval.
Now, why is that not amenable to success in the modern world? The answer is that success in the modern world is not about stealing land from your neighbors. In other words, the United States is not going to become a more powerful place if it tries to take British Columbia from Canada or Tijuana from Mexico—that’s not what leads to wealth. What leads to wealth is innovation, and innovation requires a whole series of preconditions.
First of all, there has to be rule of law and protection of intellectual property. There need to be deep, functioning capital markets that are able to be resolved through disagreements, through legal ways—not through violence. And you need to have very complex supply chains that thread through multiple countries to be able to produce the type of wealth that the United States right now is producing. Russia literally has none of that. If you go to a Bloomberg machine, and you try to see what the price is of the Russian ruble or a Russian bond, it used to have somewhat functioning capital markets. Those things are all over now. It’s become a pariah state that is aligned with Iran, with North Korea. And then, I think, it’s interesting—we can talk about that in a minute—certain countries are aligning with Russia.
But the basic thing people are missing with Russia is a) literally how it operates and b) what creates wealth in the modern world. And what Putin is doing is directly in conflict with that. And Navalny, I think that what happened to him was biblical, in a way, if you want to use that metaphor. It sounds very grand, but I think it’s accurate, which is that he was a truth teller. He was trying to say that there’s endemic corruption. If you look at objective measures, like Transparency International has really good—I think the last time I looked, Russia was something like 120 or 130 out of 180 countries in corruption, i.e., it’s horribly corrupt. Navalny showed in detailed, data-driven ways how that corruption worked, and he was killed for that. So that’s Russia in a nutshell.
Jim Haskel
But when you say Russia won’t win, I guess the question is what’s the definition of winning? Global investors are not pouring money into Russia. In fact, if anything, they’re trying to get money out of Russia if they haven’t already. So I really think it comes down to the nature of the regime. And the nature of the regime—maybe winning is creating disruption in the global order. In that respect, is Russia winning?
Paul Podolsky
To a very limited degree, I think they are. And if you look at this with a more geopolitical military lens, also what’s going on is relatively simple, which is that Russia is a little bit like the abusive bully in high school. We all recognize that type of person. And Ukraine is the person we all know in high school who for no good reason got picked on. I say that having been to Ukraine this summer and having enormous respect for the sacrifice that they’re putting them in.
But the economy is weak in Ukraine, their ability to defend themselves is weak—very different than Israel. If you look at Ukraine before this happened, it was one of the only places of the former Soviet Union where GDP per capita was lower after the collapse of the Soviet Union rather than higher. If you compare Ukraine to Poland, radically different outcomes.
So Russia attacks Ukraine, the bully attacks somebody who is vulnerable, from some sort of very distorted view of how the world works. Off to the side, though, is literally—in the high school example, the bully attacking the weaker person—off to the side is the Krav Maga team or the black-belt karate team who could just destroy the bully if they choose. And this relates to modernity. So if the Western military wanted to take out Russia and stop what was going on there, they could do it very, very quickly. And it would be a picture a little bit like what we saw in the Iraq War in 1991—if you remember that—where there was all this concern with the US was going in, how would they do against Soviet military technology? And they obliterated them. They obliterated them because of much better technology, and that is true today.
So if the US wanted to do this or NATO wanted to do this, they could. The only reason they’re not doing it is because of Russia’s nuclear weapons. And Putin is smart enough to know that the only reason they’re not doing this is because of the nuclear weapons. So he’s picking on somebody weak and disrupting the world. He’s doing enormous damage to Russia because all of the talent is fleeing Russia. But he’s playing a little bit of this game of chicken, because if it becomes too terrible, NATO could attack, but then NATO will be worried about this. So his strength, I think, is deceptively weaker than it actually is, because he’s not actually taking on the opponents that could really take on the Russian military and do great harm to it.
Chapter 2: Investment Implications
Jim Haskel
So you’ve laid out how you’re seeing this conflict from a geopolitical and economic perspective, but you’re also an investor, Paul, so are there any investment implications from how you’re processing all of this?
Paul Podolsky
Well, there’s two things I’d say about that. So the first thing is, is that there is some non-zero possibility that this war escalates in a way that is really, really, really dangerous. Right now, it’s like a really bad version of Yugoslavia, basically. Tens of thousands of people are dying. I visited the Ukrainian graveyards over the summer, and it is just absolutely heartrending to see these people, the age of many of our children, who are dying in the prime of their life, tens of thousands of them, for no good reason.
So the investment implication of this thing is, first of all, in any portfolio, I think you need to think about some assets that could protect you in that type of scenario, depending on the weights you put on it. So, you know, Bridgewater doesn’t run this portfolio, but people who run portfolios that are stock-only, I couldn’t possibly imagine having a portfolio like that in this environment. You want to have some sort of things in the portfolio—and now it’s actually much easier to get that protection than it was—an allocation to short rates, possibly some out-of-the-money calls on oil or something like that, or natural gas. So I think having some protection against the worst-case scenario makes sense. This could go south. I think that the likelihood of it is relatively low, but it could. And by the time that’s priced into markets, you won’t have time to blink; the stock market would be down 20%, 30% in a nanosecond.
The second thing is, I think it’s very instructive for the way people think about emerging markets. In other words, Russia looked pretty darn good before this. If you were to look at the risk premium on Russian banks compared to US banks, they were unbelievably attractive. Russia was paying much higher dividend yields, had much higher real yields. If you looked at it from a portfolio optimization standpoint, there was a really good argument for having some exposure to Russia ahead of this.
By the way, if you looked at Russian assets in 1916, before the 1917 revolution, you’d see the same thing. If you compare US stocks to Russian stocks from the end of the Civil War until 1916, Russian stocks keep pace with US stocks and are lowly correlated to them. Then came 1917. So I think there’s a very, very powerful message for Russia about what does emerging markets really mean. Emerging markets basically means places that are less wealthy, largely because they have weaker rule of law. That’s it. And the risk of carrying those in your portfolio is significant.
And so for me, I’ve had different amounts of EM in my portfolio over time, and I actually had a portion of my portfolio in Russia ahead of the invasion. I pulled the entire thing out because I said, “Listen, the risk of Putin invading is low, but if it happens, I’m never going to get my money back.” I would apply that prism to every single EM asset you have in your portfolio right now. And people right now, many of them are saying, “Oh, you know, EM assets are extremely attractively priced throughout the developed world.” And I’m like, “It’s for a reason.” And it might get worse. I personally don’t have significant exposure to EM—I have a little bit of Brazilian bonds in my portfolio—but overall, I’m avoiding EM because what’s going on in Russia and how people align with Russia is a little bit of a litmus test. You know, South Africa has been sympathetic to them, China has been sympathetic to them. To me, the policy makers could be great in these places, but the leadership shows a real misunderstanding of what creates wealth.
Jim Haskel
You’ve defined emerging market countries as those that are less wealthy, largely because they have a weaker rule of law. And there are some countries you would clearly put into that category. But I also want to clarify something, because I assume you’re not saying never invest in an emerging market country. Because there are emerging market countries—including some you have in your own portfolio—where the risk doesn’t seem as robust, especially relative to the attractiveness of the pricing and the overall investment opportunity. Do you agree with that—like, are you painting the brush too wide?
Paul Podolsky
I do. I just think that you need to apply a geopolitical filter on your choices in terms of investment and be pessimistic. And by the way, the book I have coming out—my third book that’s coming out this fall—it’s called The Uncomfortable Truth About Money. And the core element there is that there is no stable asset allocation, and there is no stable storehold of wealth. It does not exist. And developed world countries can become emerging market countries. In other words, what happened in Germany in the ’30s is an example of that, and I think that if it happened in Germany, it can happen anywhere.
So you could get these breakdowns. I think that Russia is a very similar example to what happened in Germany. Going there repeatedly over time, the descent into Putinism did not happen in one day. It happened very, very gradually. Very, very small steps. And Germany, too. If you look from the end of World War I and the Beer Hall Putsch, etc.—people who know their German history—it was years between when the first really radical elements rose and then when Hitler became chancellor in 1933. So it could happen in any country. All I’m saying is, be very aware of how, when it happens, you have to move quick to get your wealth out. And the typical relationship, you would think, “Oh, worse than expected outcome? I want to hold bonds.” Well, in Russia if you did that, you would get wiped out, essentially. And I know EM investors who still have money stuck in Russia—years later.
Chapter 3: Comparing Russia and China
Jim Haskel
Let’s apply what you’re saying to the rest of the world. You mentioned earlier that how countries align with or against Russia is a bit of a litmus test and that China has been sympathetic to Russia. Now, you’ve studied and spent time in both countries. So I’m just wondering how you’re seeing Russia and China today in comparison with each other.
Paul Podolsky
Well, I think that they’re both similar and they’re different. I think that the right framework to look at China is that it is Confucian hardware—Chinese cultural hardware—with Soviet software.
So the core elements of Russian culture and history are different than Chinese culture and history, and it impacts them. Russia is commodity-rich, China is commodity-poor, and the productivity of the supply chains in China is unbelievable. There’s a reason why people are only very slowly replacing them. The work ethic is totally different. The emphasis on education is different. So they are very, very different.
But they share Soviet software. And Soviet software is basically a king-like system modestly adapted for the modern world. So in Russia, person number one is Putin and everything matters there, and in China person number one is Xi. And so if you’re invested there, you’re taking a huge bet on that person.
Now, that could go well or poorly. China’s system under Deng Xiaoping could produce unbelievable wealth, and it produced an enormous amount of billionaires. But if person number one begins to shift what their priorities are, then it shifts what the investment risks and opportunities are there. And from my perspective, the Chinese leadership right now is putting much more emphasis on political orthodoxy than economic dynamism, and that’s being reflected in asset prices.
Chapter 4: Assessing China’s Economy and Its Global Impact
Jim Haskel
I want to double-click on something you touched on briefly, which is China’s economy. You noted that China at this stage is emphasizing political control over economic dynamism. So how are you assessing China’s economy today and its implication for the rest of the world?
Paul Podolsky
Weak is the first answer, and deflationary is the second answer. I think it relates to where the pressure is going to be on central banks. The income in China is significantly challenged for a number of reasons. First thing is they have a shrinking population—a legacy of terrible Soviet-era policy, you know, the one child thing way back when. But that has direct impact for the vibrancy of the economy.
The second thing is they have a very significant brain drain. In other words, the innovative people, particularly the entrepreneurs, are rattled by the policy of Xi, and even—this is more difficult to prove, but certainly all of my contacts are saying it—afraid of actually making money because it could make them a target. So if you have entrepreneurs that are worried about making money, this is clearly not good for productivity and innovation. So that’s on the income side. And on the borrowing side, you’ve had this massive real estate bubble, and getting out of that, I think, is going to take a long time. So the forward-looking picture for China in terms of income and borrowing, I think, when you look at their total debt to GDP, it’s roughly where the US is but more of it clogged in certain sectors. So I don’t think it’s good.
And then China has certain aspects of what it does that are world-class and has amazing people. You know, I love spending time in China. I love talking to my Chinese contacts just like I do the Russians, actually. The people are fantastic in both places, but I think that that’s a real challenge to growth going forward. And I’m a little bit skeptical about the GDP numbers, but the inflation numbers seem spot on to me, which is that there is no inflation.
And this is really a radical change to the boom that was in the backdrop of global growth in the ’80s and the ’90s. It’s the second-biggest economy in the world, but if you look at the contribution to GDP growth, China was the most significant factor because the volatility of their growth—even though the overall level of growth was less than the United States, the vol around it was higher. So they drove more of global growth. I think that a lot of the weakness you’re seeing in global commodity prices and the goods deflation, all of that stems from China. And I think that that’s going to get actually more acute going forward than it has been. That then relates to what expected monetary policy will be out of the West. I think that the deflationary sucking sound from China could be profound. It also relates to, what are inflation pressures in Japan and Australia, where do you want to be in fixed income, etc.
Chapter 5: The Struggle Between “Closed” and “Open” Societies
Jim Haskel
I want to go back to the points you made about the similarities between Russia and China and how they represent more “closed” societies in contrast with more “open” Western societies that favor the rule of law and democracy. We spoke about whether Putin will win in terms specifically of the viability of Russia, but let’s also consider that question more broadly. Who’s actually winning the struggle between these two different societal models?
Paul Podolsky
The West is, unambiguously. The easiest measure of this is in per capita GDP and something else I track, which is the movement of people. In other words, literally, the Soviet Union was an involuntary union. The European Union is a voluntary union. Ukrainians are literally giving their lives in large numbers to say, we don’t want to be part not only of the Soviet Union but anything related to the Soviet Union; we want to be part of the European Union. And just like in Europe, they have to fight to keep people out. The same thing is happening in the United States.
That doesn’t mean the United States doesn’t have massive problems. It does, and it always has. And it has had huge political crises—the Civil War, the Great Depression, and then Vietnam, etc. The US has always had crises and all countries have crises, so I don’t want to act like one place is perfect, the other place is flawed. But if you look at this in terms of where people are going to, per capita GDP, depth of capital markets, rule of law, infrastructure, etc., the West is crushing it.
Now, the West may implode for reasons we could get into, but my point is that when it comes to knowing the conditions that create wealth, it’s not a secret at all. And that’s the reason why the West won the Cold War; the Soviet Union lost. The 2.0 versions of the Soviet Union, both in China and Russia, are that “we will maintain authoritarian control but we will develop capital markets.” But what you can see is, is that to have capital markets function, you need to have free-flowing information. And if you have free-flowing information, it immediately becomes a threat to that type of rule. And that’s what the tension is. The minute that they full-bore try to control the information, you begin to see the wealth begin to reduce, and all the talented people flee. The smartest people in Russia have gotten out.
Jim Haskel
Yes.
Paul Podolsky
And this is a huge gain to the countries they go to, but it is a massive, massive loss—if the most talented people flee, it has huge long-term consequences for the growth of the place. Productivity and growth are basically income and borrowing. The income comes from productivity and cleverness. The borrowing comes from functioning capital markets. If those two things get broken, it’s unambiguous what happens next.
Jim Haskel
But at the same time, the West is encountering a very volatile period itself. We see this in the US domestic political alignment right now. Almost by definition, if these two candidates are going to be the nominees of their parties—Donald Trump and Joe Biden—they’re highly unpopular, even within their own parties. And so, even though you say that the sort of axis of resistance is losing, that could quickly change, could it not, if we have a breakdown in order or a predominance of isolationist thinking in, let’s say, the US, the leading economic and military power? If that isolationism becomes acute—do you factor that into your assessment of risk as an investor around the world?
Paul Podolsky
Yes, and it’s obviously something you could track through certain hard measures, but also it’s a judgment measure. But it almost reinforces what I’m saying, which is that, in the United States, if you can’t stand somebody, you sue them, which can be an awful process, you know? Trump is being sued, and Trump supporters think that it’s unfair, and the people who can’t stand him think that it should go more quickly. And Biden is being sued for or being whatever—there is this investigation for all this stuff. But that’s fundamentally different than murdering people.
And so my point is, yes, we have horrible conflicts, but I think that there’s a broad agreement—by enough of the population—that murdering people for disagreeing with them is not OK. And that’s a fundamental difference. That broke down during the Civil War, which didn’t happen that long ago. We had fundamental disagreements with people. We really went to war and slaughtered hundreds of thousands of people. So if it begins to go to that stage or, I think, if fundamental notions of voting break down, then the risks could shift very, very quickly.
So that’s why I’ve watched very carefully to see whether election integrity holds up. If election integrity holds up and somebody is elected, the people believe—they hate the person—but they believe the process was legitimate, they’ll wait it out. And then I think asset markets will be fine. The risks become—if the political process begins to break down, as it has in Russia, as it has in Venezuela, as it did in Germany, that is a disease that can spread, and it’s a disease that could land anywhere. So I always think you have to have a mind open for that as an investor, which goes back to the uncomfortable truth about money that there is no reliable—zero, does not exist, and has never existed—storehold of wealth.
Chapter 6: Closing Thoughts
Jim Haskel
Well, Paul, this has been a great conversation. And I just want to ask you if there are any last thoughts you’d leave our listeners with?
Paul Podolsky
I think what’s going on—to circle back to Russia—is Russia is being dragged, kicking and screaming, into modernity. And modernity is very disconcerting. I actually think the election in the United States, the pressure is literally about, in a way, what does modernity look like? But the very broad expanse of this over the last couple of hundred years is that allowing innovative, disruptive technology to do its thing, to move from canals to combustion engines to electricity to computers—destroys tons of jobs, creates tons of jobs, freedom of information. That is the wealth-creation machine. And if you look over a couple-hundred-year time frame, it’s obvious. It’s not the least bit secret. And so what’s happening now is that certain parts of the world are being forced into that, and it’s unfamiliar. In other words, if you look at Russia’s development in the 19th century, when all of this really began, it really had not changed significantly in 1,000 years. So it was 1,000 years behind; now, it’s probably 500 years behind. But it will eventually get there, because these forces are way more powerful than any leader.
Jim Haskel
Paul, thank you so much for your time. We really appreciate it, and we’ll certainly have you back.
Paul Podolsky
Well, thank you for having me. Good to see you all.
Editor’s Note: The views of external guests do not necessarily reflect the views of Bridgewater.
One of the defining dynamics we have addressed in the Daily Observations for some time now is the implications for investors during this era when a rules-based, US-led world order is under threat. The pressures have been building for years—whether it’s Russia’s invasion of Ukraine and what that says about changing international borders by force, the turmoil in the Middle East, or tensions between the US and a China that is aligned with Russia and has its own territorial designs. Meanwhile, global stocks are reaching new highs, led by a dominant US market where risk premiums look particularly tight. Should investors worry about this confluence of circumstances? And what will the global order look like in the coming decades?
To discuss these questions, BDO editor Jim Haskel sat down last week for a podcast discussion with Bridgewater alum Paul Podolsky, who many of our listeners will remember from his years as a senior portfolio strategist and as head of our China research. Paul has broad experience in a number of today’s geopolitical hotspots, particularly in Russia, where he started his career as a journalist in the 1990s, writing for the Moscow Times and other outlets. Later, in the US, Paul worked at Dow Jones and the Wall Street Journal before beginning a long career in the investment management industry, most of which was with us.
Since leaving Bridgewater in 2020, Paul has become a writer and podcaster, publishing two books with a third upcoming. He is the founder of Still Press, a media company, and Kate Capital, an investment management firm. On his Substack, Paul shares his research on a range of topics regarding the economy, geopolitics, and his own investing. Anyone who knows Paul will know that he is an independent thinker, often with strong views, some of which are controversial. And as you’ll hear Jim describe, while he finds himself disagreeing with Paul probably as much as agreeing, he finds that less important than the feeling that he’s always a better thinker after talking to Paul.
Today’s podcast was sparked by a Substack post Paul wrote following the death of imprisoned Russian opposition leader Alexei Navalny, titled “Putin Is Evil, but He Won’t Win.” You’ll hear Paul give not only his perspective on Russia and whether it’s winning or losing its fight against the West, but, more importantly, his big-picture thoughts on what it takes for economies to succeed in the modern world, and the implications both for the global order and for investors. Along the way, Paul also shares how he’s assessing China’s economy, the US domestic political landscape, and what he calls “the uncomfortable truth about money.”
TRANSCRIPT
Note: This transcript has been edited for readability.
“There is some non-zero possibility that this war escalates in a way that is really, really, really dangerous. So the investment implication of this thing is, first of all, in any portfolio, I think you need to think about some assets that could protect you in that type of scenario. The second thing is, I think it’s very instructive for the way people think about emerging markets. In other words, Russia looked pretty darn good before this. Emerging markets basically means places that are less wealthy, largely because they have weaker rule of law, and the risk of carrying those in your portfolio is significant. I just think that you need to apply a geopolitical filter on your choices in terms of investment and be pessimistic.”
—Paul Podolsky, Bridgewater alum, author, and investor
Jim Haskel
I’m Jim Haskel, editor of the Bridgewater Daily Observations. One of the defining dynamics we’ve repeatedly come back to in the BDO for a long time now is the implications for investors during this era when a rules-based, US-led world order is under threat. The pressures have been building for years, whether it’s Russia’s invasion of Ukraine and what that says about changing international borders by force, or whether it’s the turmoil in the Middle East or the tensions between the US and a China that is aligned with Russia and has its own territorial designs.
Meanwhile, global stocks are making new highs, led by a dominant US market where risk premiums look particularly tight. So the question is: should investors worry about this? And what will the global order look like in the coming decades?
In today’s BDO podcast, I decided to turn to Bridgewater alum Paul Podolsky, a person that many of our listeners will remember from his years as a senior portfolio strategist and also head of our China research. Paul has broad experience in many of today’s geopolitical hotspots, particularly in Russia, where he started his career as a journalist in the 1990s, writing for the Moscow Times and other outlets. It was there, in fact, that he met his wife, Marina. Later, in the US, Paul worked at Dow Jones and the Wall Street Journal before beginning a long career in the investment management industry, most of which was with Bridgewater.
Since leaving Bridgewater in 2020, Paul has become a writer and podcaster, publishing two books with a third in the hopper, and sharing his research on a wide range of topics on the economy, geopolitics, and his own investing. He travels widely around the world to make sense of things for himself. I highly recommend his Substack. Anyone that knows Paul will know that he is an independent thinker, often with strong views, some of which are very controversial. While I find myself disagreeing with Paul probably as much as agreeing with him, I find that less important than the feeling that I’m always a better thinker after talking to Paul.
And so in today’s podcast, I’m sharing a conversation I recently had with Paul that started with a Substack post he wrote following the death of imprisoned Russian opposition leader Alexei Navalny, titled “Putin Is Evil, but He Won’t Win.” And what you’ll hear is not only Paul’s perspective on Russia and whether it’s winning or losing its fight against the West, but more importantly, his big-picture thoughts on what it takes for economies to succeed in the modern world and the implications of this for both the global order and for investors. And along the way, he also shares how he’s assessing China’s economy, the US domestic political landscape, and what he calls the “uncomfortable truth about money.”
Again, Paul’s perspective is not meant to represent Bridgewater’s thinking, but I thought his perspective was really interesting, and we thought our listeners would think so as well.
So without further ado, let’s get right into my conversation with Paul Podolsky.
Chapter 1: What’s Going On in Russia and Why Putin Won’t Win
Jim Haskel
Paul, welcome. It’s great to have you on the Daily Observations podcast. I’ve been meaning to do this for quite some time, but it was your Substack column on the death of Alexei Navalny and the importance of that that really caught my attention. So I want to welcome you again back to Bridgewater.
So let me start with that. You know, the title of your column was “Putin Is Evil, but He Won’t Win.” And it’s really interesting because a lot of the popular press right now has almost the opposite synthesis—that actually Putin is starting to win. He’s eliminating opposition in Russia, and he’s starting to win territory in Ukraine. So let me just ask you to go ahead and give us a little bit about what you’re seeing going on in Russia and the future of Putin, and why you think he won’t win.
Paul Podolsky
Sure. And thanks for having me here. It’s good to see you all again.
So I think what’s going on in Russia and what happened with Navalny is relatively simple. It’s just so unfamiliar to people who haven’t spent time in Russia and places like Russia that they get a little tripped up, from my perspective. And they ascribe a narrative there that is more complex than what is going on, which is that Putin is some great strategist and that there’s this fundamental threat to the West, and I just don’t think that that’s accurate at all.
The difficult thing to understand about Russia—and it took me a while to make sense of it as well—is that, despite the fact that Russia sends people to outer space, and that they have great chess players, and great ballerinas, and great mathematicians, the political culture in Russia is about 500 years behind the West. It’s medieval. And I don’t just say that to be provocative; I think it’s accurate. In other words, if you have a system where there is a king, and the king kills the people who disagree with him, that’s not that unfamiliar for Europe in the 1400s and 1500s. And the entire process of the Bill of Rights in the United States and the Declaration of the Rights of Man in France, these are 18th century constructions, and they all have to do with preventing a single person from having the exact type of powers—and abuse of powers—that Putin has right now.
So that’s how it operates. And Navalny might have gone in thinking that he was going to be one of the people who had objected to the Soviet times, somebody like Solzhenitsyn or Sakharov, who were hounded by the state, but they were not murdered. But Putin kills the people who disagree with him, and he kills them quite publicly. In other words, when he killed the spy Litvinenko in London, he’s doing this to send a message. So Stalin had to kill millions and millions of people, and I think Putin’s thought is you could accomplish basically the same by killing a few people and making it be horrific, and broadcasting it because it has the same basic effect.
So the right framework—and this is something that I learned at Bridgewater—the right framework to understand something explains so much. And the right framework for Russia and interesting other places like Russia, is that it’s medieval.
Now, why is that not amenable to success in the modern world? The answer is that success in the modern world is not about stealing land from your neighbors. In other words, the United States is not going to become a more powerful place if it tries to take British Columbia from Canada or Tijuana from Mexico—that’s not what leads to wealth. What leads to wealth is innovation, and innovation requires a whole series of preconditions.
First of all, there has to be rule of law and protection of intellectual property. There need to be deep, functioning capital markets that are able to be resolved through disagreements, through legal ways—not through violence. And you need to have very complex supply chains that thread through multiple countries to be able to produce the type of wealth that the United States right now is producing. Russia literally has none of that. If you go to a Bloomberg machine, and you try to see what the price is of the Russian ruble or a Russian bond, it used to have somewhat functioning capital markets. Those things are all over now. It’s become a pariah state that is aligned with Iran, with North Korea. And then, I think, it’s interesting—we can talk about that in a minute—certain countries are aligning with Russia.
But the basic thing people are missing with Russia is a) literally how it operates and b) what creates wealth in the modern world. And what Putin is doing is directly in conflict with that. And Navalny, I think that what happened to him was biblical, in a way, if you want to use that metaphor. It sounds very grand, but I think it’s accurate, which is that he was a truth teller. He was trying to say that there’s endemic corruption. If you look at objective measures, like Transparency International has really good—I think the last time I looked, Russia was something like 120 or 130 out of 180 countries in corruption, i.e., it’s horribly corrupt. Navalny showed in detailed, data-driven ways how that corruption worked, and he was killed for that. So that’s Russia in a nutshell.
Jim Haskel
But when you say Russia won’t win, I guess the question is what’s the definition of winning? Global investors are not pouring money into Russia. In fact, if anything, they’re trying to get money out of Russia if they haven’t already. So I really think it comes down to the nature of the regime. And the nature of the regime—maybe winning is creating disruption in the global order. In that respect, is Russia winning?
Paul Podolsky
To a very limited degree, I think they are. And if you look at this with a more geopolitical military lens, also what’s going on is relatively simple, which is that Russia is a little bit like the abusive bully in high school. We all recognize that type of person. And Ukraine is the person we all know in high school who for no good reason got picked on. I say that having been to Ukraine this summer and having enormous respect for the sacrifice that they’re putting them in.
But the economy is weak in Ukraine, their ability to defend themselves is weak—very different than Israel. If you look at Ukraine before this happened, it was one of the only places of the former Soviet Union where GDP per capita was lower after the collapse of the Soviet Union rather than higher. If you compare Ukraine to Poland, radically different outcomes.
So Russia attacks Ukraine, the bully attacks somebody who is vulnerable, from some sort of very distorted view of how the world works. Off to the side, though, is literally—in the high school example, the bully attacking the weaker person—off to the side is the Krav Maga team or the black-belt karate team who could just destroy the bully if they choose. And this relates to modernity. So if the Western military wanted to take out Russia and stop what was going on there, they could do it very, very quickly. And it would be a picture a little bit like what we saw in the Iraq War in 1991—if you remember that—where there was all this concern with the US was going in, how would they do against Soviet military technology? And they obliterated them. They obliterated them because of much better technology, and that is true today.
So if the US wanted to do this or NATO wanted to do this, they could. The only reason they’re not doing it is because of Russia’s nuclear weapons. And Putin is smart enough to know that the only reason they’re not doing this is because of the nuclear weapons. So he’s picking on somebody weak and disrupting the world. He’s doing enormous damage to Russia because all of the talent is fleeing Russia. But he’s playing a little bit of this game of chicken, because if it becomes too terrible, NATO could attack, but then NATO will be worried about this. So his strength, I think, is deceptively weaker than it actually is, because he’s not actually taking on the opponents that could really take on the Russian military and do great harm to it.
Chapter 2: Investment Implications
Jim Haskel
So you’ve laid out how you’re seeing this conflict from a geopolitical and economic perspective, but you’re also an investor, Paul, so are there any investment implications from how you’re processing all of this?
Paul Podolsky
Well, there’s two things I’d say about that. So the first thing is, is that there is some non-zero possibility that this war escalates in a way that is really, really, really dangerous. Right now, it’s like a really bad version of Yugoslavia, basically. Tens of thousands of people are dying. I visited the Ukrainian graveyards over the summer, and it is just absolutely heartrending to see these people, the age of many of our children, who are dying in the prime of their life, tens of thousands of them, for no good reason.
So the investment implication of this thing is, first of all, in any portfolio, I think you need to think about some assets that could protect you in that type of scenario, depending on the weights you put on it. So, you know, Bridgewater doesn’t run this portfolio, but people who run portfolios that are stock-only, I couldn’t possibly imagine having a portfolio like that in this environment. You want to have some sort of things in the portfolio—and now it’s actually much easier to get that protection than it was—an allocation to short rates, possibly some out-of-the-money calls on oil or something like that, or natural gas. So I think having some protection against the worst-case scenario makes sense. This could go south. I think that the likelihood of it is relatively low, but it could. And by the time that’s priced into markets, you won’t have time to blink; the stock market would be down 20%, 30% in a nanosecond.
The second thing is, I think it’s very instructive for the way people think about emerging markets. In other words, Russia looked pretty darn good before this. If you were to look at the risk premium on Russian banks compared to US banks, they were unbelievably attractive. Russia was paying much higher dividend yields, had much higher real yields. If you looked at it from a portfolio optimization standpoint, there was a really good argument for having some exposure to Russia ahead of this.
By the way, if you looked at Russian assets in 1916, before the 1917 revolution, you’d see the same thing. If you compare US stocks to Russian stocks from the end of the Civil War until 1916, Russian stocks keep pace with US stocks and are lowly correlated to them. Then came 1917. So I think there’s a very, very powerful message for Russia about what does emerging markets really mean. Emerging markets basically means places that are less wealthy, largely because they have weaker rule of law. That’s it. And the risk of carrying those in your portfolio is significant.
And so for me, I’ve had different amounts of EM in my portfolio over time, and I actually had a portion of my portfolio in Russia ahead of the invasion. I pulled the entire thing out because I said, “Listen, the risk of Putin invading is low, but if it happens, I’m never going to get my money back.” I would apply that prism to every single EM asset you have in your portfolio right now. And people right now, many of them are saying, “Oh, you know, EM assets are extremely attractively priced throughout the developed world.” And I’m like, “It’s for a reason.” And it might get worse. I personally don’t have significant exposure to EM—I have a little bit of Brazilian bonds in my portfolio—but overall, I’m avoiding EM because what’s going on in Russia and how people align with Russia is a little bit of a litmus test. You know, South Africa has been sympathetic to them, China has been sympathetic to them. To me, the policy makers could be great in these places, but the leadership shows a real misunderstanding of what creates wealth.
Jim Haskel
You’ve defined emerging market countries as those that are less wealthy, largely because they have a weaker rule of law. And there are some countries you would clearly put into that category. But I also want to clarify something, because I assume you’re not saying never invest in an emerging market country. Because there are emerging market countries—including some you have in your own portfolio—where the risk doesn’t seem as robust, especially relative to the attractiveness of the pricing and the overall investment opportunity. Do you agree with that—like, are you painting the brush too wide?
Paul Podolsky
I do. I just think that you need to apply a geopolitical filter on your choices in terms of investment and be pessimistic. And by the way, the book I have coming out—my third book that’s coming out this fall—it’s called The Uncomfortable Truth About Money. And the core element there is that there is no stable asset allocation, and there is no stable storehold of wealth. It does not exist. And developed world countries can become emerging market countries. In other words, what happened in Germany in the ’30s is an example of that, and I think that if it happened in Germany, it can happen anywhere.
So you could get these breakdowns. I think that Russia is a very similar example to what happened in Germany. Going there repeatedly over time, the descent into Putinism did not happen in one day. It happened very, very gradually. Very, very small steps. And Germany, too. If you look from the end of World War I and the Beer Hall Putsch, etc.—people who know their German history—it was years between when the first really radical elements rose and then when Hitler became chancellor in 1933. So it could happen in any country. All I’m saying is, be very aware of how, when it happens, you have to move quick to get your wealth out. And the typical relationship, you would think, “Oh, worse than expected outcome? I want to hold bonds.” Well, in Russia if you did that, you would get wiped out, essentially. And I know EM investors who still have money stuck in Russia—years later.
Chapter 3: Comparing Russia and China
Jim Haskel
Let’s apply what you’re saying to the rest of the world. You mentioned earlier that how countries align with or against Russia is a bit of a litmus test and that China has been sympathetic to Russia. Now, you’ve studied and spent time in both countries. So I’m just wondering how you’re seeing Russia and China today in comparison with each other.
Paul Podolsky
Well, I think that they’re both similar and they’re different. I think that the right framework to look at China is that it is Confucian hardware—Chinese cultural hardware—with Soviet software.
So the core elements of Russian culture and history are different than Chinese culture and history, and it impacts them. Russia is commodity-rich, China is commodity-poor, and the productivity of the supply chains in China is unbelievable. There’s a reason why people are only very slowly replacing them. The work ethic is totally different. The emphasis on education is different. So they are very, very different.
But they share Soviet software. And Soviet software is basically a king-like system modestly adapted for the modern world. So in Russia, person number one is Putin and everything matters there, and in China person number one is Xi. And so if you’re invested there, you’re taking a huge bet on that person.
Now, that could go well or poorly. China’s system under Deng Xiaoping could produce unbelievable wealth, and it produced an enormous amount of billionaires. But if person number one begins to shift what their priorities are, then it shifts what the investment risks and opportunities are there. And from my perspective, the Chinese leadership right now is putting much more emphasis on political orthodoxy than economic dynamism, and that’s being reflected in asset prices.
Chapter 4: Assessing China’s Economy and Its Global Impact
Jim Haskel
I want to double-click on something you touched on briefly, which is China’s economy. You noted that China at this stage is emphasizing political control over economic dynamism. So how are you assessing China’s economy today and its implication for the rest of the world?
Paul Podolsky
Weak is the first answer, and deflationary is the second answer. I think it relates to where the pressure is going to be on central banks. The income in China is significantly challenged for a number of reasons. First thing is they have a shrinking population—a legacy of terrible Soviet-era policy, you know, the one child thing way back when. But that has direct impact for the vibrancy of the economy.
The second thing is they have a very significant brain drain. In other words, the innovative people, particularly the entrepreneurs, are rattled by the policy of Xi, and even—this is more difficult to prove, but certainly all of my contacts are saying it—afraid of actually making money because it could make them a target. So if you have entrepreneurs that are worried about making money, this is clearly not good for productivity and innovation. So that’s on the income side. And on the borrowing side, you’ve had this massive real estate bubble, and getting out of that, I think, is going to take a long time. So the forward-looking picture for China in terms of income and borrowing, I think, when you look at their total debt to GDP, it’s roughly where the US is but more of it clogged in certain sectors. So I don’t think it’s good.
And then China has certain aspects of what it does that are world-class and has amazing people. You know, I love spending time in China. I love talking to my Chinese contacts just like I do the Russians, actually. The people are fantastic in both places, but I think that that’s a real challenge to growth going forward. And I’m a little bit skeptical about the GDP numbers, but the inflation numbers seem spot on to me, which is that there is no inflation.
And this is really a radical change to the boom that was in the backdrop of global growth in the ’80s and the ’90s. It’s the second-biggest economy in the world, but if you look at the contribution to GDP growth, China was the most significant factor because the volatility of their growth—even though the overall level of growth was less than the United States, the vol around it was higher. So they drove more of global growth. I think that a lot of the weakness you’re seeing in global commodity prices and the goods deflation, all of that stems from China. And I think that that’s going to get actually more acute going forward than it has been. That then relates to what expected monetary policy will be out of the West. I think that the deflationary sucking sound from China could be profound. It also relates to, what are inflation pressures in Japan and Australia, where do you want to be in fixed income, etc.
Chapter 5: The Struggle Between “Closed” and “Open” Societies
Jim Haskel
I want to go back to the points you made about the similarities between Russia and China and how they represent more “closed” societies in contrast with more “open” Western societies that favor the rule of law and democracy. We spoke about whether Putin will win in terms specifically of the viability of Russia, but let’s also consider that question more broadly. Who’s actually winning the struggle between these two different societal models?
Paul Podolsky
The West is, unambiguously. The easiest measure of this is in per capita GDP and something else I track, which is the movement of people. In other words, literally, the Soviet Union was an involuntary union. The European Union is a voluntary union. Ukrainians are literally giving their lives in large numbers to say, we don’t want to be part not only of the Soviet Union but anything related to the Soviet Union; we want to be part of the European Union. And just like in Europe, they have to fight to keep people out. The same thing is happening in the United States.
That doesn’t mean the United States doesn’t have massive problems. It does, and it always has. And it has had huge political crises—the Civil War, the Great Depression, and then Vietnam, etc. The US has always had crises and all countries have crises, so I don’t want to act like one place is perfect, the other place is flawed. But if you look at this in terms of where people are going to, per capita GDP, depth of capital markets, rule of law, infrastructure, etc., the West is crushing it.
Now, the West may implode for reasons we could get into, but my point is that when it comes to knowing the conditions that create wealth, it’s not a secret at all. And that’s the reason why the West won the Cold War; the Soviet Union lost. The 2.0 versions of the Soviet Union, both in China and Russia, are that “we will maintain authoritarian control but we will develop capital markets.” But what you can see is, is that to have capital markets function, you need to have free-flowing information. And if you have free-flowing information, it immediately becomes a threat to that type of rule. And that’s what the tension is. The minute that they full-bore try to control the information, you begin to see the wealth begin to reduce, and all the talented people flee. The smartest people in Russia have gotten out.
Jim Haskel
Yes.
Paul Podolsky
And this is a huge gain to the countries they go to, but it is a massive, massive loss—if the most talented people flee, it has huge long-term consequences for the growth of the place. Productivity and growth are basically income and borrowing. The income comes from productivity and cleverness. The borrowing comes from functioning capital markets. If those two things get broken, it’s unambiguous what happens next.
Jim Haskel
But at the same time, the West is encountering a very volatile period itself. We see this in the US domestic political alignment right now. Almost by definition, if these two candidates are going to be the nominees of their parties—Donald Trump and Joe Biden—they’re highly unpopular, even within their own parties. And so, even though you say that the sort of axis of resistance is losing, that could quickly change, could it not, if we have a breakdown in order or a predominance of isolationist thinking in, let’s say, the US, the leading economic and military power? If that isolationism becomes acute—do you factor that into your assessment of risk as an investor around the world?
Paul Podolsky
Yes, and it’s obviously something you could track through certain hard measures, but also it’s a judgment measure. But it almost reinforces what I’m saying, which is that, in the United States, if you can’t stand somebody, you sue them, which can be an awful process, you know? Trump is being sued, and Trump supporters think that it’s unfair, and the people who can’t stand him think that it should go more quickly. And Biden is being sued for or being whatever—there is this investigation for all this stuff. But that’s fundamentally different than murdering people.
And so my point is, yes, we have horrible conflicts, but I think that there’s a broad agreement—by enough of the population—that murdering people for disagreeing with them is not OK. And that’s a fundamental difference. That broke down during the Civil War, which didn’t happen that long ago. We had fundamental disagreements with people. We really went to war and slaughtered hundreds of thousands of people. So if it begins to go to that stage or, I think, if fundamental notions of voting break down, then the risks could shift very, very quickly.
So that’s why I’ve watched very carefully to see whether election integrity holds up. If election integrity holds up and somebody is elected, the people believe—they hate the person—but they believe the process was legitimate, they’ll wait it out. And then I think asset markets will be fine. The risks become—if the political process begins to break down, as it has in Russia, as it has in Venezuela, as it did in Germany, that is a disease that can spread, and it’s a disease that could land anywhere. So I always think you have to have a mind open for that as an investor, which goes back to the uncomfortable truth about money that there is no reliable—zero, does not exist, and has never existed—storehold of wealth.
Chapter 6: Closing Thoughts
Jim Haskel
Well, Paul, this has been a great conversation. And I just want to ask you if there are any last thoughts you’d leave our listeners with?
Paul Podolsky
I think what’s going on—to circle back to Russia—is Russia is being dragged, kicking and screaming, into modernity. And modernity is very disconcerting. I actually think the election in the United States, the pressure is literally about, in a way, what does modernity look like? But the very broad expanse of this over the last couple of hundred years is that allowing innovative, disruptive technology to do its thing, to move from canals to combustion engines to electricity to computers—destroys tons of jobs, creates tons of jobs, freedom of information. That is the wealth-creation machine. And if you look over a couple-hundred-year time frame, it’s obvious. It’s not the least bit secret. And so what’s happening now is that certain parts of the world are being forced into that, and it’s unfamiliar. In other words, if you look at Russia’s development in the 19th century, when all of this really began, it really had not changed significantly in 1,000 years. So it was 1,000 years behind; now, it’s probably 500 years behind. But it will eventually get there, because these forces are way more powerful than any leader.
Jim Haskel
Paul, thank you so much for your time. We really appreciate it, and we’ll certainly have you back.
Paul Podolsky
Well, thank you for having me. Good to see you all.