“An investor who has all the answers doesn't even understand all the questions. A know-it-all approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if you can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change and the wise investor recognizes that success is a process of continually seeing answers to new questions.”
- John Templeton
“Nothing endures but change”
“Education is a progressive discovery of our own ignorance”
- Will Durant
A. Geopolitical Alpha
Marko Papic is one of my favourite thinkers. He’s currently the Chief Strategist at Clocktower Group, and was previously at BCA Research and Stratfor.
His new (and 1st book) is titled Geopolitical Alpha: An Investment Framework for Predicting the Future.
The reason Marko wrote this book now is because he believes that “we aren’t in Kansas anymore”. The world is undergoing paradigm shifts on multiple fronts: political, geopolitical, generational, and technological.
For centuries, success in business and investing required the skills of both long division and sensitivity to political and geopolitical change, but recently for the last quarter century, elections made little difference to the price of assets or company earnings.
Since the mid-80’s, the twin tailwinds of laissez-faire economics and American geopolitical hegemony created the ultimate Goldilocks scenario for investors.
But hegemony sows the seeds of it’s own decline, and after the Great Recession and COVID-19, a messy & multi-polar world has replaced American hegemony.
To quote Marko’s book:
Multi-polarity is a concept from political science that describes a world in which no single entity (unipolarity) - and no two entities (bipolarity) - possess a preponderance of power with which to impose order in an otherwise anarchic system. Instead multiple countries pursue their national interests independently, an arrangement that forecasters know - from history and political science theory- produces high geopolitical volatility.
Without a single hegemonies to enforce rules of behaviour, globalisation reached its apex in the past decade. This sequence of events did not require the election of a populist to divine. Deglobalization is structural and thus difficult to reverse. For globalisation to persist, one or more states need to bear the high cost of global public goofs, such as defence of trade routes, global economic policy coordination, the role of a consumer of last resort, and the continued dense of rules of behaviour, such as state sovereignty and noninterference.
Finally, the Great Recession of 2008 and rising income inequality in the developed world undermined the laissez-faire economic system. While globalisation lifted billions out off poverty across the world, it also expanded the global supply of labour, weighing on wages for the middle class across the developed world.
The chart below from Christopher Lakner and Branko Milanovic, paper: Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession”
In my opinion, this is why Chinese don’t want democracy and why the West wants socialism or populism.
The developed middle class has been left behind by democracy and globalisation.
Once you see the potential catalysts for geopolitical change ahead of us. You then realise that the financial industry of today is likely ill prepared for the geopolitical paradigm shifts ahead for three reasons:
Focus on quantitative data - if it ain’t in excel it doesn’t matter
Self-selection - finance is now full of engineers and optimisers of mathematical rules. But what if the rules aren’t fixed and liable to change.
Ideology - current investment professionals are all Economist & FT readers believing in laissez-faire economics and associated disdain for government and politics.
There is huge potential for geopolitical change ahead and the current system is likely not well prepared, this creates the opportunity for alpha generation.
Marko’s framework for understanding Geopolitical change can be summarised into this sentence:
Preferences are optional and subject to constraints, where as constraints are neither optional nor subject to preferences.
This is the Constraint Framework and rests on Three Pillars.
A. Understand what the real constraints of the actors & parties
B. Focus on data that is concrete and iterative, rather than ephemeral data
C. When context and situation collide with personal preference, the context and the situation drive human behaviour not personal preference.
Diving deeper, one of the most important constraints Marko identities is Politics, with a focus on the Median Voter Theorem (MVT).
Developed in the 1950s, MVT is one of the few codified theories of political science. It posits that to win an election or stay in power, parties and politicians approximate the policy choices of the median voter.
The theory posits that, to win and maintain power, policy makers should follow a three step process:
1. Identify the central issue of the day
2. Ascertain the median voters position on that issue
3. Asymptotically approach the median voter’s position, outflanking opponents in the process.
What are the central issues of the day in the US election? and what is the median voters position on them?
Marko summarises this concept with: The media voter is the price maker in the political marketplace. Politicians are price takers.
There are four other constraints that Marko would have us focus on (I’m generalising chapters into sentences):
Economic - countries and economies are more intertwined and inter-connected than most people understand. Politicians will need to account for this in their decisions.
Geography - you can have a foreign policy preference, but much of what is possible is dependent on your geographic constraints .
Constitutional and Legal - do not matter as much as you think. Where there is political will there is a way. Think TARP, ESF, CARES act as examples of things that were impossible until they were done.
Time - Is the constraint that can break or disable the other constraints. If median voters believe that COVID-19 will kill them and their children, that belief is a material constraint. Policymakers have to respond to such a fear with measures that may cause an economic depression. The mass hysteria of voters is an imminent constraint, but an economic depression is further afield, further down the risk curve. As such, a even a rational policy maker, grounded in material reality, can be forced to pursue polices that may have disastrous long-term implications.
I’m interviewing with Marko about his book on November 5th for Pi Capital, email of you’d like to join.
B. Naval Ravikant
Naval Ravikant was back on the Tim Ferris Show. I’ve been a fan of Naval’s writing and thinking for a long time.
He is the co-founder, chairman and former CEO of AngelList and an early investor in many well known technology businesses including Uber, FourSquare, Twitter, Wish.com.
Tim & Naval discussed methods for increasing happiness and reducing anxiety, and the state of the crypto market and Naval’s crypto investment strategy.
Loved the idea that all effective self-help books can be boiled down to one lesson: play long-term games.
Some other quotes I liked:
Not wanting something is as good as having it
In life, you want to choose your games very careful so you aren’t playing games you don’t care about
If you haven’t read his tweet storm from two years on How to Get Rich (without getting lucky), it’s a must read:
On Crypto, I agreed with his quote that:
“It’s very liberating to disconnect wealth creation, wealth storage, and wealth protection, from the state and that’s what cryptocurrency is really enabling”
You may have caught some big Bitcoin headlines in the last week, including:
A. PayPal ($240bn market cap) will allow customers to hold and pay using cryptocurrency.
B. Square put $50mm (1%) of it’s balance sheet into Bitcoin.
C. Bitcoin is hitting prices last seen in the surge up in 2017 and crash in 2018.
C. A Few Things Worth Checking Out
1. This Invest Like the Best podcast discusses how regulations can create new businesses and destroy others, while unlocking investment opportunities, then dives into the cannabis industry and how to think about where regulation could unlock value.
I’ve been trying to learn a lot more about CBD, CBT, THC industry as we slowly head towards legalisation globally. If you have good reads, please share.
2. Stephanie Kelton, author of the book The Deficit Myth was on the Macro Voices podcast discussing how Modern Monetary Theory (MMT) can enable more government spending. This is an idea you need to watch.
3. Sam Altman (CEO of Open AI, and previously President of Y Combinator) was on Azeem Azhar’s Exponential View podcast discussing GPT-3. Now that some of the initial hype has died down, this was great discussion on how GPT-3 will impact our future and how more broadly we should create Artificial General Intelligence (AGI).
4. My friend Faisal Alibhai (and CEO / Founder of Qineticare) was kind enough to interview me a few weeks back on some Lessons Learned. We reviewed some lessons from Europe’s billionaires, what I’ve learnt on Wall Street, and how I’ve learnt to live in flow.