Steve Muck is the CEO of Brayman Construction, a heavy civil and geotechnical contractor that builds bridges, dams, and other large infrastructure. Steve is also the cofounder of construction-related robotics startups TyBot and Advanced Construction Robotics.
Steve has started or acquired twenty businesses and currently operates a portfolio of entities that in construction-related endeavors alone runs approximately $200 million in revenue annually.
Steve acquired the company over 28 years ago in a leveraged buyout and has since acquired a number of companies as he has expanded his business empire.
In this episode, Steve and Aaron discuss how Steve got started in construction, the company’s ‘Dragon Slayer’ ethos, and how he has upskilled his team in order to escape competition.
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Brayman Construction Website
If you liked this interview, check out episode 412 with Jake Loosararian where we discuss industrial robotics and raising one of Pittsburgh’s biggest Series A financings.
Text Me What You Think of This Episode 412-278-7680
Muck: The trade unions that we interact with the laborers and the ironworkers. When we introduce the products to them, and we started talking about what we were doing, they actually embraced Thai baht because they've had customers like me coming to them, looking for people in the peak season and they don't have them. And it's very frustrating for them to have to tell me as an employer or a customer that we can't send you a five guys cause we just don't have them.
Watson: Hey, this is a very special episode of going deeper with Aaron Watson, my guest, Stephen Muck has taken a company that he acquired over 28 years ago. That was doing $7 million in annual revenue and built it into a multi-faceted diverse powerhouse. Doing more than $200 million in annual revenue. Stephen talks about how he's built the business, the role that robotics and automation will play in the future of construction, and why he trains all of his executives to be dragon slayers. There's a ton here. We didn't have a ton of time with Stephen. So I tried to move it at a really quick pace and think you're going to take a lot away from it. Here is Steven Muck.
Watson: Steve, thanks for coming on the podcast. I'm excited to be talking with you.
Muck: Yeah, it's my pleasure. Happy to be here.
Watson: So I'm going to go back to 1992, you had started your career in investment banking and made the decision to acquire a construction company. How did you make that choice? And can you talk a little bit about the state of that company when you were acquiring it.
Muck: Sure. Let me take you back one step further.
Muck: Okay. Because I think it's relevant and it's maybe a little bit interesting. So when I got out of school undergrad, the first job I took was in economic development. So I actually worked for private, nonprofit corporations doing job creation, economic development, creating small business incubators, assisting companies with developing business plans and funding them using public funding programs to supplement bank funding. So, that was really unique environment because I had sort of the who's who of various communities on my boards. And so those board members became mentors to me in various ways and had a lot of diverse business background.
So when I left investment banking to acquire my first business, Braman construction was a little $7 million rusty construction business that was focused on doing subcontracted, concrete structure work for, the bigger earth movers and things of that nature. So that's kind of where they were when I came on the scene, they had some older superintendents, they had a lot of older equipment. And I was full of piss and vinegar, and ready to rock and roll in and figure out a business that I really didn't know much about.
Watson: And so for folks that are less familiar with contracting generally, subcontractor general contractor, that's relatively self evident, but in terms of the stair-step up, this is how I was thinking about it coming into the interview.
And you just correct me if I'm wrong, a subcontractor. It is somewhat constrained and is relatively, I mean, maybe you're just absolutely world-class in that little sub domain, but there's a lot of competition, a lot of different electricians, carpenters, plumbers that could potentially bid on the general contractors job.
And so, first by climbing up into being a general contractor instead of a sub, and then moving into the different specialties that Raymond has developed underwater, efforts, bridges, dams, these really kind of complex, heavy civil infrastructure projects. It was really a study in differentiation and kind of escaping a lot of the competition in the construction realm.
Muck: Yeah. That's fairly accurate. I mean, as a subcontractor, you need your horse to win the race, and then you need to be the jockey that got the ride. So, that it, your odds, aren't the greatest. And as a general contractor, you have much more control of your own destiny. So we work in both hard bid and negotiated environments.
Most of what we work in are hard bid environments, which means, if you're qualified and you're low, you get the job, which means you have to be efficient, you've gotta be good at what you do. And as a subcontractor, you don't have that luxury. You've got to have a relationship with that general contractor and that general contractor has to be successful. And then ultimately has to select you to do the work for them.
Watson: And so what is the muscle or kind of experience that gets built to be able to consistently land in those in low bid environments, because, you could, you can't necessarily forsake safety or kind of basic like cost of goods sold, or things like that. Where is the competitive edge that allows a company like Braman to win those qualified and low bid type of situations?
Muck: Yeah. It's really experienced people. We're margin hunters, so we built the business on hunting margin, making money, reinvesting that capital in our business, in our business plan and in our target markets.
So we've had to make the money to be able to grow the business and to do that. We kind of focused on higher profit activities and the higher profit activities tend to be riskier in a number of different ways. And you're absolutely right. We keep safety first in everything we do. So you can't soft sell safety in anything that we're doing. And frankly, over the years, we've learned, I've learned that having a safety first environment creates a more productive workforce. They feel secure, they feel safe, they know that we're looking out for them and we expect them to look out for each other.
They tend to be more productive. So, to find the margin, you have to rub up against the risk, and a lot of our businesses are risky businesses. Our foundation business is risky and that you don't know what the subsurface conditions are, and you may have soil borings that give you some indications, but it's not crystal clear.
So, that's a risky business. To the extent that we've learned to develop ways of solving problems in that environment, it lets us mitigate the risks. Maybe more effectively than other contractors, which let us embrace the challenging work, which is really twofold. It creates organizational development and it creates the human development in your people by providing them with unique, interesting challenges, and at the same time we still do mundane sort of straightforward projects, but we're always out looking for things that haven't been done before.
Watson: And so that was kinda the next question I was thinking about where, Hannah and I run a media business. If we want to go run an experiment, we can make media for ourselves. And there's, it takes some time, but there's not some sort of, kind of physical output or outlay that has to be a prerequisite for that type of experimentation. You can't necessarily go just, Hey, we're just going to go build a bridge somewhere else way, way beyond the bounds of some of these possible. So as you try to move an organization in the direction of some of these riskier ventures, these potentially higher margin or less competitive ventures. What is the on-ramp? Is it recruiting the right person? Is it, what gives you the confidence to even say, hey, we can go fill that need that we put the bid in for something like that.
Muck: Yeah. I think, institutionally it's having done it. Before when we started down this road, we were a little $7 million business. So we've, incrementally reached and reached and reached and grown and done more challenging, more interesting work. Another way we approach that is by combining the various expertise that we have.
So, we have our Marine construction capability, we have foundation capabilities. If we combine those, it lets us go after a combination of let's call it a Marine foundation job, which is complex. And there are fewer people who are willing to, or capable of going after that work and having the confidence to know that they can get it done and they can get it done right.
So it's having the right people. It's sometimes acquiring the right business that brings a certain new skill set to us. Sometimes it's hiring an individual, who's got a specialization in a special capability and bringing him into the team. And some of the things that are kind of fun and exciting for us is that we get people joining our team because of the diversity of things that we do.
And good people want to keep learning and developing their skillsets and working with people who can help them. And we've got a, an interesting mix of young folks and some older folks who've got great experience. And so, our young people turn tend to learn up pretty rapidly here in this world.
Watson: Yeah. So in that spirit of the acquisitions that you've had in order to kind of assemble Braman into this company, one of the things that was really interesting to me is in startup culture, there's this celebration of equity sales in the forms of your series A or series B in it. And people are like, oh my gosh, congratulations.
And what you actually did was just sell your equity off to these other kinds of outside investors. Was it, it was a leveraged buyout to, for acquire Braman. Can you talk about the financial construction side of the business? And as you do these acquisitions, is that mostly through debt financing? Is that something that because of your background in investment banking, you kind of had that legibility into how to best do that?
Muck: Yeah, I mean, initially it was, and it was kind of interesting when I finished grad school and I was trying to decide what was next. The banking industry was kind of a nice place to go because ultimately I knew I wanted to be debt developing my own businesses and working for myself. So developing those financing skills and the banking experience really gave you a lot of credibility for that first deal in particular, because I knew what they wanted to see. I knew how they wanted it structured. I knew what was reasonable from a projection standpoint.
So it did give me kind a basis for starting down that road. And then as we've gone, the deals are all a little bit different. But typically we've bought small businesses with a few good people in markets that we weren't currently in. So new products. So whether it was our large diameter drilling business, we acquired that was the first acquisition.
That was a bankrupt company that was owned by, at that point, our bank, had taken them, had taken their assets and we went in and, bought the assets from the bank and went back and picked up some of the people that were cast offs from the bankruptcy and brought them back and started down that road.
So back then, it was very much a bootstrapped diversification because we were still building profits, and building our equity. And we didn't have a lot to work with. So there was a lot of leveraging going on back in that day.
Watson: Makes sense, and that's kind of opportunistic. It's a great deal. Maybe more so than like the perfect strategic compliment, but as you continue to grow, then you can kind of step back in. That really seems like what advanced construction robotics is, is much more of a stepping back, surveying the landscape and saying, this is something that needs to exist. And we're going to apply robotics to construction, which is, is relative to the other industry has been somewhat less automated than many of the other,
Muck: Right. Yeah. That's a great point. And that's a great contrast, that first acquisition being a bankruptcy that was repoed by our financial institution, we bought the assets for dimes on a dollar kind of scenario, and got the business back on its feet.
And then, with advanced construction robotics, it's, 25 plus years of watching the construction industry as a business person, more so than an engineer and looking at it and recognizing that our productivity is we're dropping, our workforce availability was becoming more and more of a problem.
Safety had become more and more of a concern. And we started looking at which activities were repetitive and what the convergence of technology was at that point, which was about four years ago. And really came to the conclusion that the technology had reached a point where, as it was converging, it looked like there was an opportunity to develop solutions for the construction industry and the heavy civil marketplace.
And that's really what started is we looked at it and said, somebody's got to do something and it's much better to develop solutions for problems than develop technology and then go looking for the things that it might do in a marketplace. So we very much focused on the problems in the industry. And then, ultimately I was very fortunate to find the right co-founder and build the right team of mechanical electrical motion control, vision, artificial intelligence, software guys, and pull them together with this vision to be the premier robotics solution provider for the construction industry.
That's kind of, that's the position that we feel that we sit in right now is one of the very few entities who's actually developed and commercialized construction robotics solutions.
Watson: And so when I, researching advanced construction robotics. My mind went to AWS and Amazon where AWS is cloud computing was first. Its first client was Amazon's retail business, that e-commerce website.
And they were able to kind of sit side by side as a very amenable, friendly client to them as they built out the model, and then eventually that spins out and that's wildly more profitable than Amazon's e-commerce business. And it sounds very similar here where, because you're in the business of building bridges and you have the weight to say, hey, you're going to try this robot out of this job where there's probably some skepticism at first.
And take qualitative feedback, see where the opportunity is and get that actual real life laboratory, as opposed to the theoretical laboratory in order to roll out that product.
Muck: Yeah, that integration capability is one of ACR strengths, because of our ability to iterate quickly, and get direct input from the people with boots on the ground that are actually doing the work, we're able to cycle through our prototypes extremely quickly. We understand the parameters that we have to work to from a productivity improvement standpoint, to build a commercially viable product. And our mission is to embed the least amount of technology, necessary to create a robotic solution that has a robust economic impact. And that's really what our focus is. And we're moving on to our second robot now, and we're in prototype development there with full-size, and that next robot is called iron bot and it will carry in place rebar.
So, another very labor intense, strenuous, activity that generates a fair number of injuries because of the need to walk on uneven surfaces, carrying weight, and do it in unison with four or five other people because the rebars long, and then you bend over and put it down and stand up, take a step and over and put it down.
So there's a lot of repetition. So we're solving productivity issues. We're solving manpower availability issues, and we're solving safety issues all at the same time.
Watson: Yeah. I was really curious if you could talk about like the messaging of something like this being implemented, because I know that the labor conversation is all over the place.
I think literally this morning, the new labor numbers dropped of simultaneously more people, unemployed and more companies struggling to like find people to fill their roles. And that's something that the construction industry is not, it's no stranger to. So can you talk just in broad strokes about how you've managed that through your different construction entities, and when something like this gets rolled out and you, maybe when your guys it's like taking a sideways glance editor or more maybe having a harsh word, like what is the messaging coming from leadership in this type of environment?
Muck: Yeah. It's interesting. There's, I mean, the construction industry. It is very slow to adopt new technology. There's a real desire to kind of do it the way we've always done it before, because we get an adequate result. And some of that comes from the fact that our products are engineered in significant detail because they're carrying traffic and there's human life type issues involved in safety issues. And so there's a reason for that, but there are also opportunities to adopt new technology and we're trying to push that forward.
So, one of the really interesting things as we were introducing the robot was that the the trade unions that we interact with the laborers and the ironworkers, when we introduce the products to them, and we started talking about what we were doing, they actually embraced Thai baht, because they've had customers like me coming to them, looking for people in the peak season and they don't have them.
And it's very frustrating for them to have to tell me as an employer or customer that we can't send you a five guys cause we just don't have them. So they looked at the robot as a solution for that labor scarcity. And when you drive it down to the individual level, the guys really don't like the work.
I mean, it's strenuous, it's repetitive, it's boring. There are higher and better uses of skilled construction labor than doing these tedious, repetitive activities. So most of the manpower are happy to see these tools come into play. Now the nuance is if the construction industry is slow and I have some of my people sitting on the bench per se, so not actively employed in the workforce, then, I may let that technology set bring my people back to work first.
And then once we run out of our skilled labor, then we go back and we say, okay, now we're going to use those robots. As the robots become more and more economically compelling. Hopefully the construction industry is picking up and, and busier. And so, we're happy to have those robotics solutions, but we have seen that ebb and flow and in a robust construction environment, we see a real poll for those solutions, in a very slow construction environment where maybe there's people, looking for work, then there's a little more hesitancy from the contractors and employers because they want to keep their steady people busy first. And we get that cause we live in that world. So we have seen those kinds of nuances.
Watson: So do you see from your vantage point, those type of labor shortages, and we've talked about something similar without one of the third-party logistics providers about the kind of shortage or the trouble with retention for truck drivers and some of these industries.
Do you see that as like, if there were the kind of different variables, the just kind of way a generation was raised, everyone was like center sent to college in certain ways. Blue collar work was like disrespected, and in certain educational circles, you see that as a demographics thing. Do you see that?
Like how do you try to piece apart the why behind those types of shortages or is it just cyclical? And it's like this macro cycle is in a high build versus a low built type of state. There’s gonna be $2 trillion infrastructure bill or something like that.
Muck: Yeah, no. I think traditionally, we've assigned certain stigmas to working with your hands.
As a society, at least in the US, and probably in most of the developed countries. And we've pushed kids towards higher education. I think there's a real opportunity right now from a trade skill standpoint. I mean, we have guys working with their hands, making six figures and doing very well.
I see other young people come out of college with degrees and they're having a hard time finding a job and a fair amount of time and a fair amount of debt. Right. So, I mean, I really think that as an industry, we need to do a better job of kind of sharing the opportunities.
I described the construction industry as the last bastion of the wild, wild west. And what do I mean by that? Well, we're an environment where, if you're a good gunslinger and you're willing, really willing to work hard, and you're a young person, you can get ahead.
Very rapidly in this construction marketplace, it's a matter of really putting your heart and soul into it and applying yourself, but there's so much opportunity. I’ve got three or four people running profit centers that are in their mid thirties, and some of them started in those roles in their early thirties, and I guess it's become sort of one of my philosophies because when I did do my first leverage buyout, I was 31.
So I don't discriminate against 31 year olds running businesses. As a matter of fact, one of our philosophies here is, we like to teach our young people, not just the work that we do, but the business we're in. So how the business works, the upside with that as we get some very energized and involved young people who not only understand how to build construction projects, but actually understand the way the levers push and pull to make the business grow and develop and how we generate profits and, and how we plan for the future.
Watson: And ultimately, you said you started as a $7 million business when, at least from what LinkedIn said over 200 million in annual revenue now, and the only way you scale to something like that is by developing people that can make good decisions on your behalf. You have only so many hours in the day. So many brain cells, you can't make every decision.
And so, it’s only through that legibility into the org and how it functions that those people are going to be trusted to make those types of goods.
Muck: Yeah, absolutely. I mean, that's one of the things I joke about. I've got a lot of people running around with my wallet, and my credit card and the message I give them is spend it like it's your money, treat it like it's your own, and we'll never get sideways. Just when you make decisions to why you're making it and have good thought process. Get good feedback and go get it done.
Watson: Right on. Well, I wanna be respectful of your time. We'll ask our kind of last wrap up questions here in a second. But before I do that, I've got one question that did not plan on asking until I entered this room that we're seated. Can you explain what a dragon Slayer is and how important that is to your org?
Muck: Oh, that's colorful. So, it comes from me sitting around our construction meetings. At the end, I used to tell the guys still do to go slay dragons, which simply means go do the difficult things that you need to. So the dragon slayers have evolved into our senior management team and the thought process behind them is they're standing back to back in a circle with their swords out towards the dragons or the enemies or the challenges of any day, week, year.
And inside that circle is our corporate family. So all of our people, our employees’ kids, our employees’ spouses, all the college tuition payments, all the car payments, all the mortgages, and our mission is as senior managers are to protect and grow the business and take care of that society.
So, it's a little bit gothic, maybe. But it's really about the other saying that we have here, that you may have seen somewhere on the wall is we, what we killed. So the saying there is simply to call out to our people that we live and work in a very competitive world.
And it's either our lunch or it's somebody else's lunch. And we have friends in the industry, but at the end of the day, we’re in a competition. And so I like for them to have that in the back of their mind and recognize that edge, that there's winners and losers and we're in a competitive world, so let's get after it.
Watson: Beautiful. Well, hopefully the winds can continue to keep piling up and the team continues to grow. Before we ask our standard last two questions that I prepped you for, Steve. Anything else you were hoping to share that I didn't give you a chance to?
Muck: No, I think you've asked great leading questions and we've really covered a lot of it. You've clearly pulled out our tradition of heavy civil construction projects and, tied in my interest in technology and driving technology into the construction world and marketplace. That's a real passion of mine. So I'm happy to have got the opportunity to share that.
Watson: Beautiful. Well, hopefully we can do this again sometime, and I can learn more about building a business empire and building a dam and all these other cool things that you've been up to. But, for folks that want to learn more about Braman, about you, the different things that you do, what digital corners can we point people towards?
Muck: Yeah, I mean, I would just point them at our website, at braman.com and at ACR bots, to follow both the high-tech part of our business and the core construction elements. Through those websites, they'll find links to the various companies that we have and the businesses we're in.
Watson: Beautiful. We're going to link that in the show notes. For this episode, you can find it in the app. We are probably listening to this or going deep in with Aaron dot com/podcast for every single episode of the show. Before I let you go, Steve, I'd like to give you the mic a final time to issue an actionable personal challenge for the audience.
Muck: Hm. Okay. Actionable, personal challenge. Take a look, take a risk, and put it out there and go after your dreams.
Watson: I took it. Can you tell me about when you made that decision to do the leveraged buyout of Braman and whatever the perception of risk was at that point in time? Can you just talk through, like how you navigated that?
Was there a point at which you were unsure if it would occur or if it would be capable to come through? Like what, like when you were at the riskiest point, what was the kind of mental self-talk that got you through that situation?
Muck: Yeah, I think, any deal you do has points at which you think you may or may not get it done.
So I think that the concern was that I had a really great job. I was doing a strategy for nations bank. So I was buying banks and assets for the bank reporting to an EVP who reported to the CFO who reported the chairman. So I was basically four seats away from the chairman and I would get calls occasionally from the chairman asking about different deals we were working on.
So a super cool job that I walked away from and they were a little stunned when I did. So I guess I was concerned about making sure that I was doing a good job for them while I was working on this deal, and the deal was pretty personal and pretty consuming. And so it was my job. So balancing those two, was probably the biggest challenge, I think. Because I wanted to make sure I was doing the right thing for my current employer. And I was very passionate about what we were doing and the deals we were working on.
Watson: Right on. I love the side hustle. That's another, a consistent theme throughout the different interviews that we've done.
I really appreciate you taking the time to be on the show. Like I said, I hope we can do it again, and appreciate you giving us some of your time.
Muck: Yeah, absolutely. My pleasure.
Watson: We just went deep with Stephen Muck. Open out there has a fantastic day.
Hey, thank you so much for listening to the end of my interview with Steven. If you were interested in our conversation about how robotics can impact heavy industry, move people out of dangerous work and fill gaps in labor shortage. I think you'll also enjoy our conversation with Jake Luciferian from gecko robotics.
His company builds robots that inspect large energy infrastructure, keeping humans out of dangers, arenas and making the inspection process simultaneously more thorough and more efficient. He talks about that in the interview. Go check it out. It's linked in the show notes and hit subscribe because we've got a bunch of great interviews coming down the pipe.
Thanks for listening. Connect with Erin on Twitter and Instagram at Aaron Watson, 59.
Jon Pastor is the SVP for Consumer Solutions at RealPage, a leading global provider of software and data analytics to the real estate industry. RealPage was trading publicly at over $10 billion market capitalization before being taken private by Thoma Bravo.
Jon’s entrepreneurial career started when he cofounder RentJungle with previous guest Geng Wang. That company was acquired in 2014 and Jon chose to stay on and lead the acquiring company as President.
Four years later, that company was acquired by RealPage.
In this conversation, Jon and Aaron discuss the lessons from all these acquisitions, the challenges facing the real estate industry, and the incentives that guide successful organizations.
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If you liked this interview, check out episode 474 with Geng Wang where we discuss three startups, social enterprise, and where to find motivation.
Text Me What You Think of This Episode 412-278-7680
Jorge Mazal is the Chief Product Officer for Duolingo. Duolingo is a free language-learning website and mobile app with over 500 million downloads, 40 million monthly active users, and a valuation over $1 billion.
Jorge previously worked on the product for Zynga, MyFitnessPal, and Kleiner Perkins. Today he blends skills in design, gamification, and leadership to manage a product team that has 10xed in size since he joined the company.
In this episode, Jorge and Aaron discuss how Duolingo makes product decisions, the importance of interpersonal skills, and how Jorge’s background has prepared him to excel in this role.
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Jorge Mazal’s Challenge; Find some time to go help someone, with no expectation of anything in return.
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If you liked this interview, check out our conversation with Jason Wolfe where we discuss tech products, leadership, and entrepreneurship.
Text Me What You Think of This Episode 412-278-7680
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Watson: So thanks for coming on the podcast, man, I'm really excited to be talking with you.
Mazal: Thank you, Aaron. Thank you for having me. I'm excited to be here with you.
Watson: So I want to start off. I have to imagine that almost everyone that might be listening to this is aware of what Duolingo is. But maybe we can just start off, you know, this is an app with over fifth, I'm sorry, 500 million downloads, 40 million monthly active users, that has taught just loads of people, how to speak all sorts of different languages. Can you talk a little bit more just about what the apps mission is oriented around and the role that you play as chief product officer?
Mazal: Sure. Yeah. So what the app does, is it's just languages and you can basically pick up Duolingo and just, even if he's just used Duolingo to learn a language, you can replace up to four, maybe even five semesters worth of college credit, worth of language education, which we're super proud of.
And the reason why we do that. Well, we teach languages -- there are actually several reasons. We're a very mission-driven company. So we care a lot about the impact that language learning has on the world. And the truth is that the impact is different depending on who you are. So for a lot of people learning English, It's very transformational so they can access better jobs, better educational opportunities.
And that's kind of, my lived experience has been bad. And also Luis, the CEO, has a similar life experience as well. And then also for a lot of people who maybe already know English, learning another language helps them connect with the world better. We have lots of users who are learning a language because that's the language that their in-laws speak, or maybe they want to learn Japanese so they can read manga in Japanese, or learn Korean to listen to K-pop or something. So there's this many reasons why people learn a language and we're excited to support all of those reasons.
Watson: Yeah. I mean, those are exactly the two things I was just thinking about before we hopped on was number one, economic opportunity. We actually at Piper just hired our first international team member who just blew me away with his proficiency in English, despite that not being his native tongue. And that is, you know, part of how things get done. You need to be able to communicate, but at the same sense, you travel different places.
And obviously that's usually--if it's a tourism related type of company-- that's part of the job, is to be able to bring people in and have that multi-lingual skillset. But it's also a way to connect. You know, there's a difference in walking through Tokyo and reading the signs in Japanese versus having someone translate it to you.
You're getting that kind of layer of distance before you can really connect with the place.
Mazal: Absolutely. Yeah. I mean, it's impossible to have an authentic experience when you travel unless you know some of the language at least.
Watson: A hundred percent. So I'm super curious to learn more about the role of chief product officer. And later on, we'll talk kind of about how you've built up your skills and experiences to land in such a cool position. But, I guess maybe as a starting point, I think that, you know other roles, I think it's very legible how one is evaluated as an executive. So if you're a chief revenue officer, you need revenue to go up, right. If you've got maybe like a head of HR, it's are we hiring adequately? Do we have the kind of diverse team that we're pursuing with product that there seems like so many different kinds of lanes and avenues that it can go down. Particularly for something like we said, over 500 million, half a billion downloads of the app, all these different languages being taught.
You could be, and I'm not saying this is the case, but just as an example, you could be killing it at teaching people Turkish. And maybe it's not as effective at teaching people French or whatever the thing may be. So how are you as a chief product officer evaluated, and then maybe we can connect that to how you actually spend your day in order to accomplish those goals.
Mazal: Yeah. I mean the, the role of chief product officer, I think it's not standardized. I think it means different things in different companies. And at Duolingo, what that means is I lead three functions, which are product management, data science, which is kind of like early advanced, sophisticated product analytics that we do here and also UX research. So understanding our users and what makes them tick and all of these functions together are focused on really driving product market fit and constantly improving that fit.
And also we know what's unique about Duolingo, and we have founders that are very technical, very product minded. So, you know, they're very involved in product, especially the recent CEO. And it's a very collaborative kind of way to make decisions with him, with chief designer, with our SVP of engineering, Natalie. So basically all of us together and our teams come up with a roadmap. Right. And execute on that in terms of, how am I evaluated in terms of performance? I swear it's different each time I get it back evaluated, it just depends on what matters at the time. Right.
So, there's basically everything matters and whatever is not working well. That's the thing I need to be focusing, you know, next. So it's a matter of how well the business metrics start doing, and we care about, you know, user growth. We care about revenue growth and we care about teaching better. So we're always doing those three things.
And at this point we're lucky that all those things are going really well. And we're just getting better and better at those things. And then there's also all of the people's side. Are we hiring the right people? Are they happy? Are they growing? And are they working well with others and creating the culture that we want?
So, as my job has evolved, when I joined Duolingo, I came in as director of product and it was a very small team and that team has grown almost 10 X than it used to be. And so now a lot of my focus is on ultra, and how they make sure that people have the guidelines, have the principals, have the tools, the support system, so they can be increasingly more and more autonomous and more effective on, us teams.
Watson: Yeah, I think we, in the pre-interview we talked to, when you joined, it was like 90 people and now it's over 500 people on the team.
Mazal: Part of the whole company. Yes.
Watson: Yeah. Crazy. So I was trying to guess, like some of those metrics, we referenced the monthly active users. And I guess the reason it's such a kind of moving target and those metrics changes, you know, something that maybe conventionally people understand for a Tik Tok or a Facebook or some of these other super apps that are at the top of the charts, because they are advertising based, more time on the app going from 30 to 40 minutes on average--it's time, someone spends on the app-- is really impactful because that increases the ad load that they can be shown.
But at the same time, if you're also evaluating like the efficacy of people continuing to come back, you know, if it becomes this thing that eats up more and more of their day, maybe their kind of consistent habit of actually going and even making a daily practice of learning the new language is at odds with that. So that's a kind of a really interesting tension to kind of be playing with as a product lead.
Mazal: Yeah. There's always a lot of different tensions and between the metrics that we care about, right. You could do something that helps with revenue, but hurts retention. You can do something that helps retention, but hurts the number of minutes per day they spend on the app and then those learning, going to the mix as well.
So the way we balance that is we have teams that are -- some teams that are kind of metrics driven and they have like a goal to optimize revenue, for example, and that's the target metric revenue. And then we have guard rail metrics, which tend to be the target metrics of other teams. So if you run an experiment, cause everything we do gets AB tested and ran an experiment that helps you target metric, you gotta make sure that it doesn't hurt any of the guard rail metrics. So they have to be the velvet intuition. Teams have to develop an intuition of how other teams metrics move.
So they know not to mess up with them and not to bring them down. So we basically create a system where everyone's incentivized to move everything up and not at the expense of something else.
Watson: Gotcha. That makes a ton of sense because yeah, you're juggling all those metrics, but if we're talking to down to like the team level or the individual level, you can't have everyone looking at all things. They need that element of focus. So tell me a little bit about, you know, you joined the company a few years ago, it's been growing like a weed and there's a lot of excitement in Pittsburgh in particular about, you know, a potential future IPO. And that love what that means just for the Pittsburgh tech scene. But can you paint a little bit of a picture of where the product was when you got here, changes that have been made, that kind of take us to the present and then maybe we can talk a little bit about where it's going in the future.
Mazal: Sure. Yeah. I mean, the product has made tremendous strides. Since I joined-- I don't want to take credit just because I joined is like correlation or share has custody, but it has been a tremendous amount of progress on the product side. Cause I mean, it's very collaborative. Everyone's involved in this, but you know, we were struggling in many fronts, honestly. Like we were trying to figure out a way to monetize. We weren't exactly sure how to do that, growth was a little bit like stagnating. And we were kind of stuck on how to teach better.
Honestly, we were like trying to figure out all of these problems and everyone that tremendous amount of effort to turn all of these things around a little by little. So first on the morning, on the morning, the station side, we landed on the subscription business that has been very successful and we're able to continue to grow, on a consistent basis.
On the growth side, we came up with-- I won't get into the details too much, but we have a fairly sophisticated growth model, that has a bunch of different metrics that we identified. We run modeling on it and identified a metric that turns out to be super high leverage, which is called CRR, CRR is the retention rate. And we put a team just optimized on that, to focus on that to optimize that metric. And that has resulted in people just staying with a product a lot longer.
So when they come into the product, they get hooked on having like a Duolingo streak. And those, the number of people with a streak of seven days or longer, used to be about 20% of our DAUs and now it's about 60%. So people are just a lot more engaged with the products. They stay longer telling their friends more about it. And that has really super-charge our user growth. And what's cool about it is that it's growing faster than ever. It's growing super fast, but it's growing with better users, better and more engaged users.
Right. Which is really a really healthy way to grow. So that was a lot of research by a lot of people and just a lot of creativity and problem solving. And then on the learning side, I think probably about half of our product teams in the company, work on learning. And that is really challenging because it's hard to measure learning.
So we have to use a lot of just learning science research, intuition of the product ourselves, and coming up with kind of proxy metrics, provoke, believe your percents learning, and combining all of that together. And also being very systematic about how we think about languages and what is the language and how do you break up a language into its components and different levels of proficiency. So you can think about languages as vocabulary, a combination of vocabulary and grammar for enunciation, understanding sounds and being able to have skills like with that, like speaking, writing, reading, listening, and able to do that different levels of proficiency from beginner to advanced.
And then we've systematically basically thought about that matrix of skills and levels of proficiency. And targeted each of those cells and just got better and better at all those things. And that has made a tremendous difference in how well we teach, where I think Duolingo is known for as the way to get started with a language and over time, we have more and more people say, wait, you can go a lot more, you can go a lot further with your language to Duolingo, than people in the past thought of or realized.
Watson: And so as we kind of chart into the future, it sounds really like that ramp up from beginner, moderate, into really high level proficiency is the aspiration for where the product is going?
Mazal: Yeah, that's a big part of it. We want you to be able to pick up Duolingo and get all the way to proficiency, to full proficiency, where you can go to a country and study there, or work there, travel there, and just feel like you're fully prepared, just using Duolingo. We're like maybe three quarters of the way there. Maybe I'm being a little bit generous on myself, but we're getting close.
Watson: All right. So in terms of where the product falls, as we think more from like a business standpoint, this is very much in the category of like a consumer facing app individuals downloaded. They kind of have their own personal goal and that's where the interaction lies. But we started this off talking about the economic opportunities and the, you know, the potential, I would imagine for things more aligned at a kind of enterprise or B2B type of level. Is that-- how does that come into the consideration for Duolingo? Where does that kind of fit into the whole product framework?
Mazal: It's a great question. And I'll answer it. Sorry to run it that way a little bit, but we have another product called the Duolingo English test. And this is a computer adaptive, fully online, AI proctored and human Proctored two test that you can take. It measures your English proficiency and that is accepted as as a sign of language proficiency in over 3000 universities and colleges.
So it's become a significant part of our business now. It grew in the thousands of percent during the pandemic, which was pretty cool, because our competitors, you have to go to a testing center and you have to sign, and all those shut down. And it just became basically the only way you could demonstrate your English proficiency in the whole world for, for a few weeks.
So, we believe that, how this connect to your question is, people who need to learn English, they need to also be able to demonstrate, certify that they know English. That needs to be in the resume, that needs to be when they're talking to employers or potential employers. Right? So them doing an English test, plays a big part on that economic opportunity angle.
And what we're trying to do is that we call it," closing the loop," basically teaching well enough on the Duolingo app, that you can take the Duolingo English test and do very well on it. And we're just beginning getting to that point.
Watson: So, I want to now kind of hone in on this role that you find yourself in because, you know, feedback that I've heard from listeners of the show is man, I love, you know, understanding what it takes to be the founder of a office, furniture wholesaler, or a tech startup, or what have you. To be chief product officer-- I keep saying the number, cause to me, this is just, almost anxiety inducing when I think of the scale of it-- but to be teaching languages to tens, hundreds of millions of people is an immense responsibility and a really kind of, I'd imagine, fantastically, intellectually stimulating role in which to be.
So I I'd like to unpack a little bit and you can start wherever you know makes sense to you. But to me, you know, you have this background, you worked at Zynga which was a digital game company, MyFitnessPal-- I've used that to track a few runs, back when I was more into running, I haven't had the consistent habit, like you're aspiring to with Duolingo. But, and that's more a me thing than the product thing, can you talk a little bit about these past experiences and, you know, if chief product officer was the goal, like how did this come together to make you capable of filling this seat?
Mazal: Yeah, so definitely a chief product officer was not the goal. And I was actually surprised when Louis said, Hey, I think I want to promote you to chief product officer. And it's like, really? Same thing happened with VP of product. I was like, what, you want to do this?
So the--but to get to your original question of, how did it get here? It was just so many different things in life that build up to this. And I think it's just great coincidences in a way, you know. You can go as back as like, high school. I was learning English, I didn't grow up speaking English. And I was lucky enough to go to a school that did a pretty good job teaching English, and came to the US and realized I didn't understand. I could understand actually pretty well, but I couldn't really say much. And so I had that experience as an adult, of really being able to empathize with people who are learning a language and how hard it is and all the things that kind of catch you by surprise. Like, you know, for years, I could not understand the difference between a bag and a bug. I was just like, to me, it was the same word. It was like, people were just making fun of me. So anyway, I could empathize a lot with that experience.
Then after I graduated from college, I ended up working in nonprofit, in the education sector, eventually leading an education program and coming up with curriculum and mentoring programs and just really diving into how people learn. Then went to grad school, discovered this thing called product management. Also, I did a master's in decision science. So I'm always being curious about how people think, how people make decisions and how you can influence people's decision-making for their own good. And so I studied kind of public policy and decision making together.
But I got into product management somehow. This company, Zynga, that makes video games, I thought, I was like, oh, what an interesting laboratory of how people make decisions. And so I went to work there, really enjoyed the aspect of making games and how collaborative and creative it could be and how cross-functional, right. We had a team of, like, I remember for one feature, it was probably like 10, 12 people and everyone did something different. There was no two of the same. And, you know, you have artists and illustrators and animators and engineers and game designers. And it was just so fun.
And then at some point, I remember people-- they brought to the office, some of our most valued users, which were people who had spent probably like over 50,000 to a hundred thousand dollars on this game. And I was like, to be able to spend that much money on a free to play game. This has to be consuming their entire lives. And I felt really terrible about it. I felt like, oh, I can't, I don't know that I can be part of this and feel good about it. As much fun as I was having making games, just seeing the impact that a very addictive thing could have on someone just didn't feel right. It wasn't what I wanted to be doing in my life.
So soon after that, I quit and I went to work at MyFitnessPal, which you mentioned. And that was again, trying to use behavior change and decision science to make people have habits. But I wanted to make sure that these were habits that were good for them. So that's how I got into that job and enjoyed it. It felt like I learned a lot there. Then, you know, eventually moved, worked at a different company. I helped them build a PM function at that other company.
And then Duolingo reached out, out of the blue and my mom was using Duolingo at the time to learn English. I was like, sure, well, let's chat and, it was like, I came here to Pittsburgh. I really liked the city, you know, coming through from the tunnel from the airport into Pittsburgh at night. And it's just like the lights. It was like, wow, this is like really cool. And the people are super nice, you know, it made me think a lot of just, east coast city, in terms of things that are available culturally. But the niceness and kindness of the people is very kind of Midwestern. And, it was like just the perfect combination. So yeah, I like the city, and I also felt like you brought everything together, right? That the language learning experience, dedication experience that I had, the gaming experience, experience building a PM function, product management, function, everything into one.
So a lot of the things when I joined Duolingo came really intuitively. I just understood a lot of the things that people were talking about because I had lived them myself. And I think that has really helped being able to have impact at the company. And I would say--so I may be like rambling way too much, you can stop me at any time.
Watson: I mean, the way you told that story, it reminds me a lot of the Steve Jobs' Stanford commencement address, when he talks about how you could have never planned it as you were moving forward. But looking in reverse, there's this very kind of obvious sequential interrelated amount of lily pads that kind of landed you at this current Lily pad. And I think that the, you know, I'm thinking about some different things: I'm thinking about habit building, I'm thinking about just like good design principles generally, and then I'm also really thinking about, you know, the human side of this. Which is there's the human users that you kind of had this experience at Zynga, seeing the effect on the humans in that regard.
But then there's also the humans that work with you that work kind of on your respective teams and learning how to really get the most out of them, because it's very different than an entry level product role, where you're kind of got your little corner of responsibility. And now overseeing everything, it's much more about how do I coach, how do I incentivize, how do I recruit so that these product goals that I'm responsible for basically get fulfilled by the team members there. They're doing most of the heavy lifting. So tell me a little bit about that, tell me about the development as a leader and kind of how you've added that realm of skills.
Mazal: Then how I help others become leaders, how I grew as a leader, or-
Watson: I mean, I would say your growth as a leader is your ability to help other people become leaders and take that responsibility on.
Mazal: Yeah, absolutely. That's a good point. So I think to be a good leader, you gotta be authentic to who you are. And for me, I'm someone who is very reserved and introverted. Someone who thinks a lot about feelings, and also very driven and ambitious, which is I think like a weird combination that throws people off.
But so my approach to leadership is to basically understand what makes, well, what people are, what makes people tick, right? Why are they here? You know, why they're showing up to work to get what? And help them get that, whatever that is. Some people they-- and I do that because I care about them and I just, don't judge what it is they're here for. It's like, whatever it is that matters to them, I help them get there, because, you know, I care about them. And I think that makes people keep showing up at work and keep doing their best work. And that requires listening with empathy. It requires not judging. It requires honestly trying to help. So that's kinda my approach. Also, I think it requires taking care of their feelings, right?
Like when you got to say something hard, you got to make people change their mindset or something. Some managers will be like, "Hey! You know, you got to change. This is not--you're not getting what you want, like deal with it." And I was like, well, what can I-- I don't go and do that. I just take some time and think, how can we turn this into a win-win situation? Right. And I was like, "hey, you're not, maybe you're not getting the thing that you wanted, the win that you wanted, but can we create another win that can help you grow in other ways that you also wanted to grow?
So. That's one part, right? And then the other part now is helping managers to be able to do that for the people that they're managing and encouraging them to really get to know the reports and listen to them and to understand not just how they feel, but why they feel the way they do. How are they seeing the world, that the facts are being interpreted in a way that generates the feeling that they're having, and help them understand where in that needs to be worked on.
And we're like, well, maybe we need to change the facts. Maybe we need to change the way the facts have been interpreted with, with new facts that they're not aware of. And we need to help them and understand that the feelings they are having are reasonable, but there's other feelings that could be reasonable to have as well, right? And focus on the thing that makes you happy, right, and grow from there. So anyways, that's like a bit of a rambling answer, I apologize, Aaron, but happy to dig into any of those things more deeply if that would be helpful.
Watson: Yeah. But it really, you know, what I'm hearing again, is one of your metrics for the app is retention, right? And part of retention is predicated on being deeply empathetic to the user. If you understand what they're actually looking for, and you're able to give it to them, then that's going to keep them coming back cause you're delivering the goods. And it's the same idea where, you know, the empathy for those team members.
And that's a huge topic of conversation. I feel like it's been that type of conversation for a decade now, but it's like people are job hopping. People are, you know, going from thing to thing. And one of the biggest advantages or levers, or kind of points of opportunity for a company, is the ability to recruit and then retain great talent. It's part of how you beat your competition, is we were a team with chemistry that had been thinking about this problem for three, four, or five, six years, as opposed to six months, 12 months, 18 months. It's just going to lead to better decision making. And, you know, it's the same. Those two things are obviously interrelated, but it requires the same kind of core skillset of empathy.
Mazal: Absolutely. Yeah. And, I'll tell you something that I've learned at building in terms of that. I never really grasped this before working here, and it's: my imperfections generate some sort of pain or discomfort or problems for other people, and then having empathy for the pain I generate on them, and being humble about that. It's something that I've been learning, and it's been very transformational for me to like just lean in into that uncomfortable situations, like, oh, I am the cause of your pain. I'm the cause of your discomfort -- and listening to change.
And that's been something really great about working at Duolingo where I felt like they--Louis has had patience with me, as I worked through the things that I need to work on. And I realized that at some point I have felt like embarrassed or wanting to hide those things, but it actually doesn't help. Like the more open and transparent you can be by the things you're working on, the better others feel about sharing what they're working on, the more they feel they can share it. And also they're going to have more patience with you, because they know at least you're working on it, right, and that really helps keep a team together.
Watson: Beautiful. I have one more line of questioning and then we can kind of aim towards wrapping up here. And that's the idea of constraints. We've been-- we've explored this in so many different ways, you know, a nascent startup they've got every constraint in the book, but you know, all the way up to people making geopolitical decisions. There's always some sort of constraint that's in place for a company like Duolingo. And more specifically for someone in the role that you are as chief product officer, your team, like you said, has grown 10 X. Since you've joined the team, I don't know the exact number, but you as a company have raised tens of millions of dollars. How would you list or prioritize or explain the constraints that are facing you, in the present, as a company that has, you know, more funding than 99% of, of startups out there? And, you know, these kind of other obvious resources that unlock some constraints, what are the constraints that face the org and maybe you as the chief product officer generally?
Mazal: Hmm. Great question. So the major constraint almost in a way, it's like what-- your mission, right? Like the, who you're trying to be and what you're trying to do. You could think of it as a constraint as well. That tells you lots of things you cannot do, because you don't want to do them because they're against who you want to be and why you want to achieve.
The next step, there, I think is we're constrained by the amount of information that we have. And that's something that I've been very proactively trying to work on at Duolingo, by building new functions, like data science and UX research, and really being an advocate for like our learning science team as well. Because the more information we have... at the beginning, it really felt constrained by, we don't know a lot. We need to learn more faster. So information I think is key, and making sense of that into frameworks, into strategies, into plans, et cetera-- so processing that information too.
The next big constraint is people, right? Getting the right talent on the right seats at the right time is obviously extremely challenging, and there's lots of things that we would want to do more of, but maybe we can't because we haven't found the right person for it. So hiring is key. And I think-- that's it, yeah.
Watson: Interesting. Yeah. I mean-- one of the lessons of life that I've slowly come to realize is everyone has the constraints. There is no kind of boundless entity, God, that that's walking through the world in some way or shape or form unconstrained-- maybe Bezos, maybe one day I'll get to ask Bezos what his constraints are-- but the planet earth, perhaps with the blue origin, rocket or whatever. But, yeah, it's an interesting kind of thing to reflect on.
And, I I'm guessing that you won't make any sort of comment on this whatsoever, but I do suspect that there is a kind of next chapter for Duolingo as a company, generally hitting the public markets at some point in the future, that I know that the folks in Pittsburgh are very excited for, and what that will mean as for the city of Pittsburgh, for the company, Duolingo, for all the constraints that you guys continue to face and hopefully unlocking some of those.
Mazal: Sure. I hope so, yeah.
Watson: Cool. Well, before we ask our standard last two questions, is there anything else you were hoping to share today that I just didn't give you the chance to?
Mazal: We're hiring? Yes, Duolingo's always hiring. So check out our job post on our website.
Watson: Right on. Well, that's the next question-- digital coordinates where people can connect, learn more, follow along with what you're doing. Obviously, download the app and start learning another language if you aren't already doing so, but what other coordinates can we point people towards?
Mazal: Yeah. I would say download the app and find me and follow me, I'm Jorge Mazal on the Duolingo app, you can find me there.
Watson: Right on. We're going to link that in the show notes. I'm actually not quite sure how to link that one, usually I'm like, oh, it's just a LinkedIn profile or something, but I'm going to try to figure out how to do that with the Duolingo profile, if I can make an external link or not.
But, that's all going to be linked, going to put their.com/podcast for every single episode of the show. Or in the app, or you're probably listening to this right now, but before I let you go, I want to give you the mic one final time to issue an actionable personal challenge to the audience.
Mazal: Hmm. So I had a wonderful experience last week where I really took like a significant amount of time to help someone with something that they really needed. And it was-- It was great. It just felt so good, especially if they're being isolated for so long in the pandemic to do something that-- we're just helping someone feel better. And the challenge that I would have for the audience is can you block three hours, half a day to do something that will make someone else feel really good, without having any expectation of return. And just getting that perspective again, that we're all in this planet together. Service is what makes us human and it makes you feel best at the end of the day. So that's my challenge.
Watson: Yeah. Have you ever heard of the book, the five love languages?
Mazal: I have. Yeah.
Watson: Yeah. So acts of service, I'll go to the grave saying it's the most underrated one in terms of being able to convey love. Not that there's anything wrong with gifting or words of affirmation or any of those other ones, but it definitely takes I would argue more of a lift than some of the other stuff .And so I absolutely love that challenge and I hope that a bunch of people will take it right. Well, thank you so much for coming on the podcast, Jorge. I really, I learned a ton and I am excited for the future, you and the company.
Mazal: Thank you, Aaron. It's been a pleasure. Anytime--happy to come back anytime.
Watson: Awesome. We just went deep with Jorge Mazal, hope everyone out there has a fantastic day.
Marko Papic leads the strategy team at Clocktower Group, an alternative investments firm. Clocktower offers long-term strategic investment strategies to their clients, investment managers and institutional allocators.
Marko brings his constraints framework, outlined in his book Geopolitical Alpha, to analyzing the geopolitical trends of the day. His ability to accurately forecast major political events has enormous ramifications for portfolios.
In this episode, Marko and Aaron discuss how the future of China-US conflict, Turkey’s geopolitical prospects, and how to break into the geopolitical analysis field.
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Aaron Watson: Well, Marco, thanks for coming on the show, man. I'm really excited to be speaking with you.
Marko Papic: Absolutely! Same here. Real pleasure.
Aaron Watson: So, I want to start off just explaining for folks specifically, the, the role that you play at the Clocktower Group, maybe a little context of the Clocktower Group generally. And then, we can kind of move into this really, really good book here, Geopolitical Alpha, the concepts, the, the impetus behind it. But to start off, what's the kind of role you play in this financial firm?
Marko Papic: Sure. So I'm a, I'm a partner and a chief strategist at an alternative investment management firm. We're based in Santa Monica, California. And what we do is we specialize in turning macro big picture ideas into you know, relatively illiquid alternative investment strategies.
So those would be, for example, seeding macro hedge funds or investing in early stage fintech companies around the world. We've just launched a fund dedicated to Latin America. In that particular sphere. And also we have interesting businesses in China. We're also taking our approach to seeding macro hedge funds, and we're taking that to China.
So most people, when they think of macro investors, they think of investors that deal with, you know, public markets that trade copper or dollar these kind of big asset classes. We also think about big ideas, but we didn't articulate it in these kind of illiquid strategies.
Aaron Watson: And mostly if folks were trying to wrap their head around the client that you're serving, it is the capital allocators at some form of a large institution, be that an endowment or some sort of, you know, pension system or something like that.
Marko Papic: Yeah. So it would be institutional investors, exactly what you're describing. And that's because, you know, you know, retail investors are not going to have the patience and the mandate for something as exotic as these illiquid strategies. But also in the U.S. In particular there's a lot family offices that would be the kind of investors that would do this in family offices, of course, are high net worth individuals that have basically an office managing their assets. They would, they would also be interested in, in private delegation or illiquid allocation.
Aaron Watson: Gotcha. So the reason I was so excited to have you on, as we've discussed previous to the recording, I really enjoyed the book, Geopolitical Alpha, and outside the context of how someone might know me professionally, which is, you know, we're helping people with media production and marketing my kind of Intellectual recreation is usually around geopolitics.
And so being able to come at the world of investing with this geopolitical lens is a very kind of interesting intersection of ideas that we explore on this show. And just perhaps a framework that people aren't as used to incorporating into their investing strategy. Maybe they'll say, "Hey, I'm going to go into emerging markets," or "I'm going to have a U.S. Centric index fund that I'm investing in," but really having to have a, a sharp edge to the tools with which they are evaluating the geopolitical changes of the day is becoming increasingly more relevant than I think that's why he wrote the book. That's why you've kind of found yourself in this position.
Can you talk a little bit maybe give you a little bit of a history lesson as to why that's becoming so salient, and then we can kind of move into the constraints framework that you're using.
Marko Papic: Yeah, sure. Well, I think what's happening. I mean, first of all, someone with my background and my skillsets and my methodological bias would likely not have a job in finance, you know, 20 years ago or 30 years ago.
And that's not entirely true. Macro hedge funds have always been very sensitive to politics and geopolitics. But for, for a run-of-the-mill, you know, investors, usually do not have to concern themselves with these issues. And why is that? It's very simple, because we adopted the west adopted a set of policies, a set of best practices they had to do with macroeconomic policy.
So for example, fiscal policy should be countercyclical. That means you only really stimulate when there's a recession. Or monetary policy became very orthodox, very focused on, you know, a preemptive rise in interest rates, and the first sign that the economy is overheating. Free trade, you know, became kind of a best practice laissez-faire economic system, where the government takes a back seat to regulation or industrial policy.
All of these were really established in the eighties. And this is a really important period of time because the 1980s saw the world leave a very turbulent decade where inflation had overshot expectations where policy was largely incoherent. There was a lot of unorthodoxy that led to suboptimal outcomes.
You know, we had very high rates of inflation throughout the 1970s. And so the way to curb that, of course, Paul Volcker raised interest rates, which is a very foundational moment for many people's careers in finance. And at that point, 1980s saw this adoption of these best practices that many economists and journalists and kind of professors have dubbed the Washington Consensus.
That was a really, really important moment in history. And then from 85 to 90, the Soviet Union collapsed. So as the west is adopting these policies of capitalism, the alternative, which is institutionalized socialism and communism, collapses. And so then the rest of the world says, well, which, which system works, we'll take the Washington Consensus.
And that's what the IMF and the World Bank starts propagating the set of best practices around the world. So what's changed? What's changed is that those best practices after 2008, after the great financial crisis and awkward this year have been brought into question. And that means that fundamentally the government got pushed aside by those best practices, the role of government and finance and economics it's coming back. And that's where politics and geopolitics are now. Again essential to being an investor and not just a fancy hedge fund trader, but like if you're an investor, you have to have some understanding of politics and geopolitics.
Aaron Watson: And the framework that you introduced in the book, you talked about it being a constraints based framework and on all sorts of previous conversations we've had on the show, we've talked about constraints is very familiar probably to the people listening to this, but usually in the context of their business.
So, you know, it's hard to find the marginal additional talented person to employ or cash flow or distribution for their message or all these things that small business owners are very, very accustomed to having to negotiate. It's all constraints informed.
Can you talk, you know, that's more of like a micro level. Can you talk about when we take that up to a macro level and evaluate a nation state, how that same idea of constraints is applied to these much, much larger entities?
Marko Papic: You know what, I'll, I'll explain it from a different perspective that I don't think I've ever really used to explain this before.
There's really two sets of groups of people who analyze geopolitics. There's policy makers, like, who are in the game. They're within the same realm. And so they rarely think of constraints because it's a little bit, like, ego deflating. If you know, you overlook constraints in other policymakers, because you don't want to believe them yourself.
So, and what this means is that very rarely is an intelligence agency of a sovereign nation state to say, ah, don't worry about it. You know, they're constrained. They focus a lot on what policy makers want to do, what politicians want to do. So if you go to an, a former member of the intelligence world or a former politician, they're rarely going to talk to you about what they can't do because they've spent their whole lives, trying to overcome that.
And you know, like, like that's why we elect many of these people. That's why we hired them. So did they came to do better than your constraints? And so they're wired in a certain way. Then on the other side, you have the investment community that when, when the investment community tries to do approach goepolitics again, because the last 40 years were so clear for many investors, what they needed to learn and they get basically needed to get a CFA.
They needed to know how to value things, you know, mathematically, like it became very mathematical routine, kind of a job that very few of them really looked at geopolitics and politics in a systematic way. And so they started to think of geopolitics as a realm of food, where you got to go and find a former politician to tell you what's happening, you know?
And so you had this real mismatch in cultures where on one hand, investors are extremely systematic, frameworks driven, objective, quantitative. But when they're faced with geopolitics and politics, these suddenly become like chicken on trail readers, you know, and they, and they visit these websites. And I don't want to name, but are really, really subpar in the kind of information they're giving you.
It's basically conspiracy theories. And I found this really fascinating when I joined the financial industry, I was like, "Really?" Like, "You'll read this crappy blog to find out what's going on in the world. And yet you're so focused on systematic framework driven approaches in finance?" That was bizarre to me.
And so, what I settled on is just focusing on constraints because they're observable, they're quantifiable. And because in my experience, you know, preferences are both optional and subject to constraints. Whereas constraints are neither optional nor subject to preferences. And that goes back to your example, which is like, if you're running a business, you can wish to have more cashflow to hire more people.
You can desire it, but that's your preference. The reality is the constraint. And then you operate within those constraints. And that is a tool for forecasting politicians, policymakers, as good as we have available to us.
Aaron Watson: Yeah, I would love the Nike advertising and marketing budget, but just because I want, it doesn't necessarily mean that that's going to be able to come into being.
Marko Papic: Exactly.
Aaron Watson: So just to maybe get a little bit more specific, and then I kind of want to go around the world with you and talk about the kind of practical application of this framework to a couple of different elements of geopolitics. Some of these constraints might be, or correct me if I'm wrong. You know, the, the general kind of sentiment of voters.
So it doesn't matter if you want to do something wildly to one extreme left or right. If there's kind of a, a median voter or the average consensus of the voters, you can't stray too far from that without exposing yourself to real risk in non authoritarian dictatorships.
There's the core geography of the country. There's the demographics, how old or young and the general skill, what other kinds of constraints when you're looking at a country? Not that you're going to discover a new country necessarily, but when you come to it analyzing country, what are the main things that you're honing in on?
Marko Papic: You know, it really depends on the question you're trying to answer. So if I'm trying to forecast weather, like, Russia is going to militarily invade Ukraine again, you know, there's one set of constraints specific to that issue. If you're trying to forecast whether India is going to be able to do pro-business structural reforms, there's a set, there's a different set of constraints.
And the book kind of like as you list yourself, the good, the book goes through all of these. And I give empirical examples. I give examples of how these constraints work in, in, in reality. I guess what I would say for listeners of this podcast though, I would just kind of like bring you back back to the kind of like big picture and simply simplify it to this.
If you can measure it, it's a constraint. You know, if you have to read a book about some politician's views, it's not a constraint. So I'll give you an example of this, like 2016, 2017. I went in, I was working in what's called south side research. I was working at a different firm and I was producing research for investors.
And so I would go on these road shows where you go and you basically pitch your, your wares, your, your views and ideas. And I went to Asia, you know, Hong Kong, Singapore China, Tokyo, and I, we were talking about the trade war and everyone told me now we're good. We're not worried. Okay. You're not worried about the trade war?
Why is that? Well, because we read The Art of the Deal, the book that, you know, Donald Trump wrote, and we know what's going to happen. It's all good. Don't worry about it. Like, we're good. And I was like, oh, really? So you read a book and that makes you feel confident that Trump is not going to pursue a significant trade war?
Like yeah. Yeah. He's not really serious. He's just, you know, trying to get a little bit of better terms. And I was like, "Yeah, this isn't about his preference." The median American had moved against laissez-faire economics, had moved against free trade. And we had the data to back this up. This wasn't about Trump's preferences.
He was simply a political vessel for the American media voter to express their desire, to have basically, you know, confrontational view, a much less openly globalist policies. And, you know, he was just the right person for the right time. But yeah, this kind of like a nonchalant, well, don't worry about it. There'll be a little bit of a scaffold and nail here. He'll get a deal with China. Like, turned out to be really wrong. We were headed for a recession, even before COVID, largely because the animal spirits had sapped from the economy. You could see this through numerous of indicators because the trade war had been much more significant than people thought.
And that's a great example of how even the smartest people who make a lot of money and they have great education overemphasize the ephemeral, the qualitative, and it really reminds me of that scene from the movie Moneyball I don't know if there's any fans of Moneyball here, but when Billy Bean is sitting around surrounded by these octogenarians you know, baseball scouts for talking about baseball players, based on these completely qualitative indicators, like this ballplayer player is not going to be good because he has an ugly girlfriend.
That's literally a scene in the movie. And you're just like, wait, what does that have to do with how, oh, it shows a lack of confidence, you know, like, okay, maybe that flew in 1963, but that is a non-diagnostic variable. And you will be surprised how many people in positions of serious power who manage a lot of assets, make the same kind of statements about politics.
It's just not systemic, no framework. Just I read a book or I read a blog.
Aaron Watson: Yeah. Speaking of the ephem- of the ephemeral, at least to me, it feels like there is a new headline or something associated with the Strait of Taiwan and some ship sailing through. And that being basically pointed to as the potential flash point or hot point associated with rising tensions between the U.S. And China, but at the same time, one, one thing you did a really great job in the book of talking about was the actual constraints of popular consensus that still affects the Chinese Communist Party, despite a less sophisticated person looking at the, well, either a single party, they've got no competition.
Why would they have to worry about public sentiment, but can maybe you bring the constraints framework specifically to tensions in Taiwan and the, you never going to say concretely, but the likelihood of things escalating there in some way, shape or form.
Marko Papic: Although I would, I would. You know, like this is what I have to do for a living. So I, I would say overtly what, what the probabilities are. I mean, I think I would say the probabilities of conflict between U.S. and China or let's say co crisis, some sort of a crisis, you know, Berlin Crisis, Berlin Airlift Crisis, or Cuban Missile Crisis are good analogies. I think the probability over the next six months is, is actually quite high.
I would say about 20%, which is significant, you know, that's, that's like a, basically a one in five chance that we have some, some crisis that is derived from the, the, the tensions in the straits of Taiwan or, or just South China Sea and so on. Why is this? Well, because I think China is adjusting to a new America and, you know I think it was relatively easy for Beijing to to, to, you know, like interpret the, the, the Trump administration as an anomaly.
But now that the Biden administration is doubling down on many of the same sort of pieces of rhetoric, but actually making it even more uncomfortable for China by stressing human rights and stressing geopolitics, which Trump didn't really do until 2020 it's it's going to cause the period of adjustment.
And China is adjusting to this new rhetoric and strategy. This reality that the U.S. and China are indeed rivals. And so in the near term, I would say the probability of a crisis is, is elevated, but I think it will dissipate and then we'll have this interregnum. So once we've passed the first six months, all the adjusting to a new administration, I think us and China will settle into some sort of, you know, more stable equilibrium.
And then only in the longer curve can the probability of conflict rise again. If, if China does manage to, you know, rival the U S in terms of raw geopolitical power, so it's a U-shape probability. Now, why does it dip? Why doesn't it just increase linearly? Well, because of the constraints that I think many commentators are just completely ignoring. And there's two sets of constraints, what is a mega constraint, which is the fact that we don't exist in a world where only China and the U.S. matter.
There's other countries with significant independence in pursuing their foreign and economic policy. And you might say, "Well, I mean, that's always the case." Well, no, it's not in 1945. I can tell you, there were only two countries on the planet. The matter there was Moscow and there was Washington DC, nobody else got asked anything.
You know, like us sort of like kindly asked London and Paris what they thought, but not in a serious way. In fact, when France or the United Kingdom tried to pursue an independent foreign policy in the Suez Crisis they were threatened by the U.S. to back off because it was causing problems in its relationship with the Soviet Union.
So the bipolar nature of the Cold War, or it's something that's unlikely to be replicated the us and the Soviet Union had incredible hold on their allies. I wouldn't even call them allies. They were really vassal states, you know, NATO and the Warsaw Pact were not alliances of equals. They were. You know, there was the center and then the periphery. Today, China, the U.S. are nowhere near the same level of power in relative terms.
And that means that the constraint on the two of them carving up the whole world is that their own allies are not going to abide by their policies. So imagine in a world where the U.S. for example said, "Okay, you know what, we're going to stop trading with China." You know, the Congress Department says to Boeing, "Hey, no more selling airplanes to China."
What's going to happen? Like, is Airbus going to follow the United States? Of course not. There's no way. France is going to say like, "Oh, that's a cool story. We're going to go and sell them more now airplanes. Yes, that's awesome." And this is by the way, what happened in the 19th century, precisely the same dynamic happen.
And you had this world where Germany continued to trade with the UK, France, and Russia, because those three countries couldn't coordinate on these matters on their own. So that's the first constraint. The second constraint is what you alluded to, which is China itself is constrained in being extremely assertive.
A lot of the policies that are emanating from Beijing suggests that they're moving towards a more consumer-based society. And one of the reasons that - economy - consumer based economy. And the reason they want to do that is they want to become more independent. They don't want to rely on the American consumer demand or economic growth, but that's going to take time.
And last year, and this year it's exports that have led the recovery in China. The household spending has actually been hit quite a bit. China did not stimulate its economy the way we did. There were no stimulus checks kind of flowing into the Chinese economy. And so if China wants to have economic stability, it's going to have to play ball with the rest of the world because the end consumer, the final demand, is still external to its economy. Even as its exports, a share of GDP has fallen. So China has this real difficult balance. It's not ready yet to become, you know, fully assertive. And I think a lot of the commentary, especially in theU.S. Overstates both Chinese assertiveness and its ability to be as aggressive as people think it will be.
Aaron Watson: Yeah, that makes a ton of sense. As a, as you talked about those different analogies, you know, thinking cold war and vassal states either aligned with the Soviet Union in the U.S. I almost thought more like American football where it's kind of the head coach and everyone is just pieces on the head coaches board in terms of where they might move and this multipolar environment where there's maybe two stars.
If, if you want to call China and U.S. the stars but all these other capable, independent actors, more like a basketball game where maybe, you know, things rotate around the Steph Curry or the LeBron, or what have you. But, you know, some guy might just decide to go off and do their own thing and, and throw the entire game out of whack just because they have that autonomy.
Marko Papic: You know what, like, listen, I'm a sucker for sports analogies, as you know, like you plant, like I can tell - the book is full of them. Some of them were funny, I think. So I would say that you know, soccer is a really good example of what we're collecting. You know, like I think basketball is perhaps a poor analogy itself.
Do I see the Coca-Cola - coach point? Basketball is just like five, five dudes with the ball, you know, so like one person really does make a big difference in basketball, but soccer, like you can be the best soccer player in the world as Messi has been for the last, you know, like 10, 15 years. And yet you cannot really contribute to your team as much as Michael Jordan or as a coach in football.
And that's the world we're in today. It's a world where the us is going to have to work, to get its allies on board on a number of different things. And I think one of the things that you've seen American commentators really tried to stress is the threat of China. And the problem with that is two-fold.
One Japan has been living next to China think forever. And you know, I mean, Tokyo is sitting there and listening to Biden and Trump and like, "Really? You know, like that's really cool story. Yeah. We've been dealing with this for a very long time." So Japan is actually quite pragmatic, even after some serious confrontations with China that almost did lead to the blows, like in 2011 and 12, over to Diaoyu Senkaku Islands, you know, Japan has continued to trade and invest in China.
Look, I'll bite that a lower trajectory, but Japan has, has learned to live with a very powerful in a certain China. And so they're not going to freak out over that overnight because suddenly America tells them to. And then you, and the other side Europe, which is so far away from China, you know, I see some of these comments, the theaters in the U.S. talking about debt-traps and so on.
And a lot of this stuff is just honestly nonsense. No one, I feel like no one in Eastern Europe is worried about becoming indebted to China and then China showing up with a gunboats and seizing factories. And Europe is so far away that, you know, there's obviously concerns about property rights, intellectual property, about technology theft, all those things, but for Europe, Japan, even South Korea this, this new kind of verbiage out of America is just difficult to agree with.
In other words, China would have to do a lot more to prove the U.S. correct in the eyes of the rest of the world. And that's why coordination against China is going to be much different from coordination gives the Soviet Union
Aaron Watson: And so, that would kind of lead into people, very familiar with NATO as this kind of way of trying to block in the Soviet Union. And there's this similar noise made about the Quad: India, Australia, Japan, the U.S. kind of coming together to try to form a similar type of containment to China generally. And you would just say that that's not really going to operatein a similar way?
Marko Papic: No no way. I mean, you know, like NATO has. Has a mutual defense clause which has triggered automatically Quad is nowhere near being that kind of a level of a military alliance.
And so I think, I think it's just going to take a lot more time and it would, it would require China to, to make some severe mistakes in terms of foreign policy. So it's not impossible. For example, trying to reunify with Taiwan militarily would certainly accelerate some of these efforts. And then I think that would, that would change my my view considerably. But short of that, I mean, it's just, you know, there's, there's no level of threats that's equivalent and I'll give you an example of this.
The Soviet Union had something like 70 tank divisions ready to burst through the Baltic gap, and take Frankfurt in like half an hour, you know? And there was actually no way conventionally, at least this was the thinking at the time, it was later revealed to have been perhaps a little too alarmist, but the conventional view, in the sixties, seventies and eighties, was that there was no way to prevent the conventional war against the Soviet Union. There was like no way to stop them. And so the United States did not have a no first use policy towards nuclear weapons. Why? Because he plans to use them in Europe who stopped Soviet attack, which tactical nuclear weapons, which were positioned throughout European continent.
So the Union on the other hand was very magnanimous and they said, "No, no, no, we will never use first because we, you know, we'll be in Paris in a week." And so this was like not some sort of a theoretical threat. "Oh one day China will have dominance of 5g and then they'll spy on our kids through tick-tock and then our kids will be brainwashed," you know, like, no, no, no, no, no.
There was a tank! A Soviet tank, like over there, you could see it and it was going to come over here. And so that's where NATO was born, you know? So like the equivalence here is, is, is honestly. Like comical, I'll give you another one. There were parties like political parties in Europe, in Paris, in Rome, in 1940s and fifties that owed their allegiance to Moscow.
You know? So like this wasn't again, academic, this was actual parties. Oh, in loyalty to an enemy. And you know, the Communist Party of France, Communist Party of Italy, like, look it up. They didn't win elections, but they weren't like 20, 30% of the vote. So today, you know, people freak out about China, like you know, using money in different ways to influence people.
Of course that's happening of course, but the level of like espionage and influence, which is much different. In fact, that's why the us launched the Marshall Plan to ensure that Italy and France did not turn towards communism as their operating system in the late 1940s and 1950s.
And so Europeans who understand history and have experienced these, these geopolitical tensions. It's just going to be very difficult to convince the Italian government that there's this existential risk. Well, when it comes to China, it's basic. What's going to be possible. It's going to be possible to show up in Rome as a member of theU.S. State department and say like, look, China's like critical. You need to stop trading with them. It's just not, it's literally not going to happen. Trump didn't succeed, Biden won, and that's going to then create the constraint that American policymakers in how much they can really be leveraged from their own relationship with China. Now this doesn't mean the war doesn't happen.
This is something very important. It sounds like I'm pretty dovish. It sounds like. I think that world's going to basically just sing kumbaya. The problem with that is that I'm absolutely historically empirically, correct? It's like the argument is practically unassailable, but my example from the 19th century, how did it end up.
Yes, Germany traded with the UK would France and Russia right up until summer of 1914, and then it went to war with it. So that's something to just keep in mind that, you know, you can still have these nonlinear outcomes, even for the, even if for the next five to 10 years. You know, there may not be economic bifurcation between the U.S. and China, and that's something to keep in mind.
Aaron Watson: So I'm going to spin around the globe again and touch on a couple of things you've said. So there's these very capable, other independent actors around the globe. And there's another country that has been a part of NATO, but has kind of been up to their own stuff, which is Turkey. And to me, this is at least in my reading of the news or my perception as an American, the biggest blind spot, generally for Americans, just in terms of influential actors elsewhere on the globe.
You know, there's all the, all the drama in the Mid - Middle East with Iran. Obviously we talked about China and have an awareness of world war, you know, Europe because of learning about World War ll somewhat in our history classes, it seems like an enormous blind spot. I, I can't and don't even really know who I would talk to in my life about Turkey in some way, shape, or form. So can you kind of take us from like a rudimentary level up to the constraints and the challenges that Turkey's facing?
Marko Papic: I mean, wow, Turkey's facing a lot of different cross-currents. I think Turkey is facing one of the largest mismatches between what it aspires to do and what its actual capabilities are.
And so, you know, Turkey has a pretty advantageous geographical position between two key continents. It had great economic relationship with countries like Syria and Iraq to which it provides a lot of services, a lot of you know, manufactured and consumer goods. So it has a potential to be a pretty significant, you know hub of technological, consumer manufacturing, prowess, and it has a lot of potential markets that it could dominate because it understands those markets culturally linguistically in case of, you know, some central Asian economies and so on.
At the same time, it has a real problem. And then real problem is that in terms of energy, it's completely dependent on Russia, more or less. It has really no imports, massive amounts of oil and natural gas. And then finally, it, it never really managed to integrate itself into the European economy because it did not really satisfy all the kind of political and sociopolitical, you know, rules and norms that Europe was asking it to do.
And it. The fact that it's sort of an advantageous geographically almost as a detriment because it can't decide which sphere of influence to fit into. And it's continuously tries to carve out its own before it reaches a certain level of material wealth. And so that's what I would argue has been the problem with the policy of, of Ankara over the past 10 years, it chose to make a bid or a sphere of influence of its own before he was capable of doing so.
It abandoned its bid for the European union, thinking after 2008, 2009, while the West is declining anyways, why do we need them look at them? They're about to collapse. We're going on our own. All of those decisions were probably made even earlier than 2008. And they basically struck out on this view like, well, we're going to carve out our sort of proto sort of Neo-optimum sphere of influence that we had in the past, which is really north Africa, the Middle East, Central Asia, Caucuses, and the Balkans.
And the problem with that strategy is that it upset way too many actors, whether it's the United States, whether it's Saudi Arabia in some of its moves after Arab Spring in Egypt, whether it's Russia and basically all those attempts to carve out the sphere of influence have largely failed through the detriment of its economy.
And it's a really good example of why geopolitical power ultimately rests on material wealth. You know, like, and a lot of geopolitical strategists, mis - mistake this. There's this view that economics is irrelevant for some, some, somehow subservient to geopolitics, to demographics, the geography, and Turkey is just a good example that you can have great geography and just be at the mercy of you know, actors around you that have a larger surplus that they can carve out of their economy and dedicated, to geopolitical endeavors. And so Turkey has just been biting off more than they can chew in a world where other powers still have a lot of interests.
Aaron Watson: That's so funny. Once again, the analogies to like small businesses and startups, the ability to have focus versus kind of spreading yourself too thin on too many projects. Yeah. I'd argue that Uber was guilty of that, but some of the endeavors that they've pursued and they're kind of learning that lesson painfully now.
I have one other question kind of, as we talk about places around the globe, and then I want to talk about this career that you found yourself in, how you got into it and all that good stuff.
There's another idea out there, which is the notion of the rise of the city state, and maybe the sterling example of that is a place like Singapore, and, you know, you see attempts at this happening around the Persian Gulf. And, you know, even the, the, some hype, at least in like tech startup circles around Miami versus San Francisco and these other types of places. There's, I guess a somewhat arg- obvious constraint in that these city states usually cannot raise anything, resembling a substantial military to defend themselves. However, they do have some really substantial capacity for wealth generation. And so I'm curious if you kind of buy into that idea of the rise of the city state narrative or if you could maybe just talk as, as you think about those different types of endeavors, if you see them still as either vassals to a more powerful entities or the ways in which those types of frameworks are constrained.
Marko Papic: You know, I think every period in history had city states or neutral places to do business. I don't know how to define it because you know, some of them are not necessarily cities, but they're like those little enclaves. So I think that I'm not sure that there's anything unique in history through the current mo - - moment. There are always places that managed to leverage their relevance, human capital, geography, and neutrality to the great benefit.
You know, also like you think of Singapore today, you can think of Venice as well in the late middle ages. You know, so there are examples of this throughout history. You have the Switzerlands of the, of the world and by the way, Switzerland and Singapore have a pretty similar population, even though one is a country, the other one is a city state.
So I don't think there's anything really unique about this. What's interesting is what gives rise to these entities. And I'm not sure that there's anything you need again about current conditions. You know, like you could argue that Singapore is very much leveraged to globalization. And you might think that in a world where we have de-globalization over globalization has kind of reached its apex. Maybe we won't have as many city states, but I don't, I don't think that's the case. I think that you will always have places in the world that because of their interesting mix of regulation, the human capital become, you know, important in some way.
So Miami is a really good example because of advantageous taxation, because, because of a idiosyncratic really issue that most people probably don't think when they think of Miami, but after 2008, the United States cracked down on financial, safe havens on places where, you know, you could do tax avoidance. Where a lot of wealth was basically hidden, whether it was Switzerland, the Caribbean, and ironically, all this money basically flooded back to the U.S. whether consciously or subconsciously the U.S. created this incredible effect and, and a lot of it from the Caribbean and Latin America did go to Miami.
And so I would, I would say that was the first step in this latest iteration of Miami that combined with low corporate tax rate would interesting, you know, multicultural scene. I think that's given to Miami, this rise that you're witnessing right now. I think this will always happen. I don't think it's unique to this current period.
And, you know, it'll be interesting to find out which ones are the next ones.
Aaron Watson: And, and they do to some degree make themselves a target by accruing that wealth and influence perhaps evidenced by the kind of absorption of Hong Kong by China recently, where if you are that kind of economic driver and some particularly powerful geopolitical forces nearby, you, you kind of put a target on your back.
Marko Papic: But I'm not sure that Hong Kong is going to dissipate as, in terms of influence. I mean, I've changed my view on this. I've written some reports where I've said it will. I mean, you know, it depends. I actually think, you know, Hong Kong could continue to be relevant, especially in a world where, you know, investors want to access China, but they require interlocutors to which to do it. So I understand the argument that China of course has, you know, like interest in boosting Shanghai of Guangzou or Hainan island.
Some of their latest measures are really focused on Hainan, which is really interesting. Maybe that's the next, you know, kind of a city state. But, you know, it's, it's, it remains to be seen what happens to Hong Kong. And I think the human capital aspect of this is, is really, really relevant. I don't think that city-states are possible without human capital, and that's what Singapore got right really well.
Aaron Watson: Right on.
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Aaron Watson: I could probably talk about these different types of places with you forever. But I do want to spend some time because this is a show that it's categorized as a careers one, and how you found yourself in this role with the Clocktower Group. You're very candid in the book about how you were going down the conventional PhD professorship type of track, and then have taken all sorts of different diversions.
I wanted to start basically, just talking about your time at Stratfor and explaining for a little bit about people, what Stratfor is was, and how you kind of found yourself there.
Marko Papic: Yeah, so Stratfor is in the political risk industry. Just like you raise your group as well. And so when I got disillusioned with academia and said, well, I should probably learn how to, you know, I should probably have a real job at some point before I decide to go into academia.
It was just obvious. It just made a lot of sense. And so I joined it. This industry is not that big, you know, that's, what's interesting about it. It's it's actually really small. And so, you know, getting a foothold in, in the kind of a political risk space, it's much more difficult than people think. And so it doesn't really exist as a profession.
And so I was very fortunate to be able to, you know, spend some time at Stratfor, and, and learn some of the ins and outs of how one actually, you know does political risk analysis. And what I found while I was there was that it was kind of useful for a lot of CEO's and a lot of corporates as a background, but I didn't feel like it was really you know, it was nice to have, not a need to have, the political kind of analysis that we were doing.
And I felt that there was a way to do it in a way where it could actually generate alpha. That's the name of the book, which is returns above a certain benchmark in finance. I felt that there was actually a way to use political analysis to beat the markets in certain, you know, cases. And so that's why I decided to cross over more specifically into finance. But I definitely get a lot of questions all the time from people in LinkedIn or young people studying international relations and political science, like, "Hey, how do you actually enter this industry?"
Aaron Watson: And yeah, you mentioned it being such a small world. I didn't even quite realize it. I first saw one of your interviews on RealVision, but you know, the Stratford that's where Peter Zion's come out of George Friedman. It seems like an exceptionally, a small circle of characters that you know, have the ears of those decision makers and have done the work to kind of prove that they can make a call. You can have some confidence in it know that it's it's well researched.
One of the other parts that was interesting to me in the intro was I, I believe it was your partner there, the Clocktower group, Steven, who said that you were this nihilist. You had this nihilistic approach to analysis and in different interviews, we've kind of talked about that in, in, in a different context, not in geopolitics is potentially being harmful, but can you talk about how general nihilism about geopolitical analysis has behooved you in this profession?
Marko Papic: Yeah. And I think that's the, if I, if there's one thing that I would take from the book and proselytize, it's that we need more, nihilists. Now not in your behavior as a human being, but in your profession. Why? Well, even if you're running an NGO and it's trying to fundamentally change the world, you can't be blind through the constraints that face you, you know, and in fact, I think the way to be successful in any endeavor that has to do with the real world, which is messy and doesn't obey Newtonian physics. And so you can't just outsmart it through math. So whenever you're dealing with societies or humans, I think it's really important to separate the analysis from your action and agents. And so I talk a lot about this. I call it a loop in difference, my partner, Steve calls it nihilism, and I mean, I do too, but the idea behind it is that in order to forecast where the world is going, you need to really wash away all the biases that you have. And that's a really difficult thing to do. And very few places will teach you how to do that. And once you do that, once you can kind of forecast where the world is going indifference to, whether that's good or bad, you know, putting passion aside only then can you actually figure out, well, how do I change that?
But if you go into the analysis already biased or already focused on changing the world, you're just going to fail in my view. And you see this a lot, you see this in politics all the time. You have the zealots. Yeah. illogically committed zealots who basically come in and say, this is how we're going to do it.
And they faced oposition because obviously they do .Now from their own personal self-interest and many of them want. They admit this they're really not trying to change the world. They're just trying to make themselves feel better by kind of washing themselves with their own preconceived biases and views.
But if you want to change the world, you have to understand the constraints you're operating inside and then try to change those. But that, that starting point of a loop in difference, I think, is most critical in this analysis or really in any endeavor that has to do with, you know, human agency. Now the reason this is very difficult to acquire is because while we're humans and we're biased. But the second reason is that again, the political risk industry is very, very small.
So most people who've been international relations or political science, or are interested in this. They either go into government, you know, we're obviously they don't get trained in nihilism. We'll loop in different. I think it'd be, I think they should be, you know but they don't. Or they go and go into kind of the international organization NGO world, whereas you definitely don't get instructed on this method. Or you go into business or you're in finance where you would think where you would think that people are instructed in how to think analytically and separate themselves and their own views from their analysis, but they actually don't.
And so there's still this kind of indignance and just kind of you know judgmental quality, even in finance to viewing the markets as right or wrong, or what policymakers are doing is stupid. You know, things like that. Then, you know, you get faced with this, even if finance where it's like, it's not stupid, it's just is, so act accordingly.
And I think that it's very difficult to train this. How do you train it? I think the way you train it is you try to use empathy a lot in your analysis, and you try to put yourself in the shoes of those who you even really disagree with. This is really critical. To becoming desensitized to yourself and to be able to start looking at concrete data and objective facts in forecasting where the world was going. That's where it starts.
Aaron Watson: Well, it sounds like you are though optimistic about the ability to train someone towards that because I would, I would struggle almost with differentiating, you know, the right team culture, where leaders and the, the norms have been set, that we're all gonna, you know, point out each other's biases and kind of correct when someone's being too ideological and a view that would be one kind of arena where you can hopefully develop other people to operate that way.
But then there's also like my mind goes to almost just like, you know, they have a different kind of psychological personality profiles and someone that just is oriented around disagreeableness is going to be much less likely to land in an environment where everyone's kind of nodding along. So if you kind of have that, that disagreeableness off the bat, you're more comfortable being like, well, that's a ridiculous tape that doesn't have any sort of grounding and the actual facts on the ground.
Marko Papic: I'm not sure if it matters if you're disagreeable or not, you know, maybe even make an argument that disagreeable people are more likely to have a counterintuitive view. Like I think it comes down to this. I mean, I've, I've worked with disagreeable people and agreeable people who both equally were unwilling to think outside the box. It requires several things. I think, one, it requires you to have, at some point in your life, been the other. I do think you cannot do this without it is extremely difficult to have a level of aloof indifference that's required for forecasting the future without having been othered at some point. Whether that means that you grew up in Arkansas and then you will land in Manhattan.
Like that's good enough for me. I'm not asking for you to live abroad or something like that, but you have to have sometimes been out of, like, out of place. Because that act of sort of cultural and social, social, you know, otherness gives you the necessary level of a now analytical capability to then understand that everything is relative and how somebody can act under constraints in a certain way.
I think that's, that's like the starting point. You have to have felt that at some point, or maybe you were born just different, you know, you're, you're a kid in a family full of football fans. You're like you're rebelled and you're like ice hockey. Like that's good enough for me, you know, but the point is that at some point you'd like, you have to have felt that. Once that's done, then you have to kind of seek it out because the, the critical point of analyzing societies and then making a difference is being able to forecast correctly, policymaker moves without thinking that they're stupid or that they're driven by this or that. You know, once you're there, you can then focus on the objective facts.
And that's why I keep saying, like, even if you're running an NGO, that's, you know, focused on climate change, even if you're, even if you're extremely like focused on normative and value-driven issues, you can still be pretty nihilist in your analysis right up until the point where you then have to act on your analysis of how to change the world.
Aaron Watson: Right on. Well, my last question before we ask our standard ones for wrapping up is precisely the opposite of nihilism. You mentioned being a basketball fan, a soccer fan as well. Where do your fandoms lie and what are your expectations for the 20 21 NBA season?
Marko Papic: Well, I'm a huge Laker fan. I had this before I could speak English growing up in Serbia, huge basketball fan.
And so I think, you know, The Lakers will probably win again. I guess I'm hopeful of that, but but you know, it's, it's a great season and it could go either way. That's that's what's interesting about this. We'll see. Okay.
Aaron Watson: Yeah. If we get a, a, another Katie-LeBron showdown in the finals, that would be absolutely stunning.
Marko Papic: Right? That will be awesome. I think, I think that would be really good.
Aaron Watson: Cool. Well, before we ask the, in the last few questions, Marco, anything else you were hoping to share today that I just didn't give you a chance to?
Marko Papic: I guess you know, one thing I would say, just in terms of this, this industry political risk industry I do want to spend maybe just a little bit more time on that because I do think it's a growing industry.
I just think that a lot of people who tried to get into it go about it the wrong way. And the reason I say that is that, you know, they see someone like Ian Bremmer or someone like George Friedman or Peter Zion or myself. And they say like, "Oh, I want to do that." But the issue is that you're looking at the end of the line, you know, like you're looking at the end of the assembly line and what you should be thinking is how do I enter the assembly line?
And the only way to really enter the industry of political or geopolitical risk analysis is to become an expert on something pretty small. Don't think big picture, you know, don't try to become a global strategist on day one gain an expertise, especially in parts of the world that are not. You know, interesting right now.
So you know, like learning Mandarin in 2021 is the wrong time. You know, if you're an American student, you know, it'd be like learning like Arabic in 2011, like bad time to do that. So start thinking about, you know, where the world is going, what matters. For example, climate change is something that I think is a really big issue.
I think that policy makers are reacting to it. And I think that that's going to require a level of investment in commodities that we haven't really seen in awhile. And we're starting suddenly going to start caring about things like nickel or cobalt or lithium, and guess what the good news for someone who's young is that a lot of these things are found in places that no one's really spent any time studying for a very long time.
So if you're interested in Latin America or Africa, I think that your time will come. And so, you know, Focus on developing an expertise in a skillset, in something that's digestible that you can study. And from there, you can eventually become, you know, someone who has a global purview. But thinking that you're going to start off with a global perspective, you know, right out of university or right after a master's even is just, it's not feasible. It's not realistic. I mean, as I write in the book, I started off as a European analyst, which was about as interesting as being an Admiral of a Swiss Navy know, always make fun of myself for that, but it ended up being really fortuitous. I got lucky that the EU crisis hit, but I developed a competency in something that nobody else really wants to touch to be quite Frank with you.
So I, that would be my advice for a lot of people trying to get into this field, find a niche and the niche doesn't have to be a geographic. It doesn't require language study necessarily all the time. It might be something in, you know in technology that's emerging, it might be something in a policy that's emerging. That's cross-regional cross-country but focus on developing an expertise first and then thinking about branching out to more regional and global issues.
Aaron Watson: I love it. We've hit on focus twice. It's one of the most important ideas. Marko, if folks want to learn more about all the work that you're doing we're going to link to the book in the show notes for people, if they want to check that out, but any other digital coordinates that you want to provide for folks that want to learn more?
Marko Papic: No, I actually don't have any. If I had any advice, it would be stop listening to people like me. There's this, you know, like there's this huge obsession would following the right people. Ultimately anything that you get from me in the, in the sort of ether of the internet, is going to be not really that useful to be, to be quite honest with you.
I think. Focus on learning from yourself. And I think my book was written specifically to empower, you know, mainly investors, but it can be anyone with this idea that you yourself can do the hard work. So I actually am not available anywhere outside of the book all the research that I produced is really for a select group of institutional investors.
And so, yeah, I mean, and, and what I would say is like, you know, maybe whatever, however many people you're following, cut it in half and do more deep reading and deep analysis yourself.
Aaron Watson: I take that. Can you talk about some of the sources that you go back to most frequently when you're trying to get to that ground truth?
Marko Papic: Yeah, that's a great question. Always primary, primary, primary, primary, primary, primary documents. Always! I don't know what they teach history classes, but it's not how to go to the primary document. Like I can tell, you know, like this is key. This is key. You cannot go to a blog post. You cannot go to New York Times. You cannot go to Financial Times. It's not research. It's just not. You know, it's entertainment first and foremost. The only place where you can find true truth is the primary document. So if you are trying to figure out what's going to happen with the fiscal stimulus in the United States of America, don't go and read what New York Times says about it or Axios or Politico or The Hill.
Although those are especially The Hill, very good sources of information, you want to go and actually read them. And if you're starting out and, you know, like the reason I really love this podcast Aaron, and the reason I want to do it is because I do want to talk to young people trying to get us into in this industry.
What I would say is like, read less of stuff that's easy to read. Read more of stuff that's really difficult to read. And you know, it's difficult to read? A bill! A c- c- congressional bill. A House or a Senate bill. Oh my God. It's one of the most boring things you can do in your life, but that's where you're going to start, you know, like, can you read like five of them, you're going to start seeing like interesting tidbits, interesting knowledge that other people have not picked up.
And that's something that a lot of, of my mentors, like my partner here at Clocktower, Steve Drobny have said, I mean like, you know, the median person you're competing with is lazy and they're not going to do the hard work of going through the primary documents. And so put in the effort to do it. So how do you collect information?
How do you become more aware of what's going on in the world? I would say there's like, there's three levels. One is read the news you know, just headlines. I prefer to use Reuters for that or the wire services, like a AFP or AP, like the, the less analysis there is in the news, the more I liked it. I don't need someone to pre digest the news for me and give it to me a little slices. I just want the actual thing that happened. So that's first.
The second is talk to people. Get a group of friends that you really admire. Get people who can, you know, where you can talk out ideas and what's going on in the world where you can have this iterative dialogue, because that's where you're going to get great ideas.
So basically you get the news, you hear what happened, you run it through a filter of really important people that you admire. Hopefully some that are older, different perspectives, more experienced, whatever the case is, then you come up with ideas and you pursue those ideas by doing deep, deep knowledge and deep analysis in deep breathing.
That means academic papers. It means books, and it means primary sources. When you read academic papers and when you read books, read the footnotes. Occasionally there'll be funny if you read my book, for example, there'll be many in there that are funny and some that are not. Why do I have funny footnotes?
Because I want you to hope that every footnote is worth reading. And most of them are because that's how you get to other sources of information. Some of the best thinking that I've done in my life, in some of the things that have made my career were found in footnotes. Where you read an article about why an academic piece, about why issue Y and then you get to issue X because of that footnote, and it blows your mind.
So that's what I would say. I mean, the questions that you are posing, Aaron I get it a lot. What do you read? And my answer is I don't read anything that can really be read very quickly. I don't read any of the things that you would expect, like the economist, foreign affairs, foreign policy, all that stuff is not useful.
I think obviously if you are, you know, building a company, that's doing something specific where you don't have to be a geopolitical risk strategist, right? Definitely. You should read the economist. Like that's my favorite. Like for sure if it's just something you want to have on your mind, that makes sense. But if you want to do this professionally, what I'm doing, this is the only way to do it.
Aaron Watson: I dig that. Well, part, part of my game is to try to get around really smart people. And I'm not afraid to say something that's probably not correct and let them correct me on it. That's one of the ways I like to go to the source as well.
But I I really, really appreciate you taking so much time to talk with me and share your stuff with the audience. I prepped you for the challenge at the end. I feel like we got a couple here. So if there's still another challenge that you want to shoot the audience this is your chance on the mic.
Marko Papic: Yes, definitely. So my whole thing is the hardest part about this job, the toughest part of this job is to really try to be as, as unbiased as possible. And I've tried to do that in my life by surrounding myself, by people who I disagree with, you know, On on some important issues. Although I don't have anyone in my life was a Clipper fan and I never will, no, I'm not.
No, but so what does that mean? What's the challenge? Well, I think there's two parts of the challenge. I think one is trying to do what I said and I mean, this is, this is so important, whether you are, you know, hoping to have a geopolitical risk kind of analysis career or finance career or not. But I think spending time abroad is really useful.
And I know that's been said before, and I'm sure I'm probably not the first or the last, who will say that as a challenge. But I would say that right now, I mean, this summer is a really good time. Spend some time abroad. If you were at a university, do it for sure. Like, this is probably the most useful thing you can do at the university.
The second thing I would say is, you know, if that's, it's like too big, like I can't do that tomorrow or this weekend then do something different. You don't like go to a, like a political meeting. Or go and talk to someone who is on the exact opposite political spectrum from you and spend some time to listen to that.
And don't really just ask questions, you know, like spend like as much time as you can just listening. And if you can't find anyone, which would be really sad, if you can't then just watch the TV channel you deeply disagree with for like a week, make it like almost like a medicine you take before you go to sleep every night.
And the reason I say that is because you really need to learn. I think in life, you put yourself in the shoes of those who think differently and act differently than you, because that act in of itself will make you a much better analyst. I mean, that's that, that's kind of the core. I mean, my book has a bunch of pants, examples of finance and all this stuff, but fundamentally speaking, if you're going to be in the industry of analyzing politics or geopolitics for living.
You have to be able to have a baseline level that's analytical and in order to produce outcomes and produce forecasts, then you can, you know, what you do with that is obviously what you want. You can change the world with that. You can be extremely non nihilist with it, but the analysis itself has to be done from that baseline level of a loop difference.
And it's impossible to do that unless you practice.
Aaron Watson: Right on. Well, hopefully many listeners will take the challenge, practice it and have a bunch more nihilists walking around.
Marko Papic: Well no! Not necessarily nihilists. Just analytical nihilists. But then what you do with that - please I'm not trying to say...
Aaron Watson: Yeah, yeah, yeah, I'm just joshing you. Marco, this has been great. Thank you so much for coming on the show.
Marko Papic: Okay. Awesome. Thank you for the opportunity, Aaron. And I hope that you know, I hope it was helpful.
Aaron Watson: It absolutely was. We just went deep with Marco Popic. Hope everyone out there has a fantastic day.
Andy Norman is a researcher focused on studying how ideologies short-circuit minds and corrupt moral understanding.
His studies have led him to develop a toolkit of methods for improving reasoning and share them in his book, Mental Immunity.
His hope is that a collection of academic research can be lassoed together to serve as the foundation of a new scientific field, Cognitive Immunology. Cognitive immunology would explore the ability of researchers to develop a mind vaccine to inoculate individuals against dangerous ideas.
In this conversation, Andy and Aaron discuss the dangers of loneliness, the importance of dialogue, and the future of viral ideas.
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Andy Norman’s Challenge; Learn to treat your ideas as houseguests. Perhaps one day they will depart, and you will be glad.
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Mental Immunity: Infectious Ideas, Mind-Parasites, and the Search for a Better Way to Think by Andy Norman
Tribe by Sebastian Junger
The Righteous Mind by Jonathan Haidt
The Selfish Gene by Richard Dawkins
If you liked this interview, check out episode 472 with Demetri Kofinas where we discuss epistemic truth, geopolitics, and.
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