2.3 Geopolitics Flashcards
The three systems of power distribution among countries are:
1. u -
most c__, most s___ and the greatest amount of g___ and e____.
historically x and x have been h____, with both periods resulting in increased GT.
u between 1980-2020 kept i___ under control.
- b -
greater focus on x which can lead to more x
but i___ is a risk if there are too many ____
existence of c____ can lead to more R+D, which may increase _____
Overall results in the least g___ and a moderate level of eq_____ - m
out of three systems, this creates the most u____, d_____, return v_____.
greater emphasis on r____ and EOS - in this regard, g____ exists to a greater degree under m than b.
- unipolarity, meaning one country (the superpower/hegemon) possesses most of the power. unipolarity is the most coordinated, and, therefore, most stable (macroeconomic) and has greatest amount of globalization and equilibrium.
US and UK where both hegemons - with both periods resulting in increased global trade.
Unipolarity between 1980-2020 kept inflation under control. - bipolarity
greater focus on the economy, which can lead to more short-term growth.
but inflation is a risk if there are too many fiscal stimulative policies or if they are not properly allocated.
existence of competition can lead to more research and development spending, which may increase long term productivity.
results in the least globalisation and a moderate level of equilibrium - multipolarity
creates the most uncertainty, disequilibrium, and return volatility.
greater emphasis on regionalisation and economies of scale. in this regard, globalisation exists to a greater degree under multipolarity than bipolarity.
Developing a geopolitical framework of analysis leads to the determination of GB, which is applied to G and IE when computing ER.
Developing a geopolitical framework of analysis leads to the determination of geopolitical beta, which is applied to growth and inflation expectations when computing expected returns.
What are the three domestic political systems?
1. LF
- little __ and makes use of WC
- popular over last
- risks: o, i, l.
- long term: reduced __ and positive G and P
- D
- much more ___ on things like r, t, fp
- e.g. govt tries to improve c___ by changing t, b2t, cv
- long term: more reduced ___ and similar level of G to LF. But could be significant G if certain _____ (although this risks greater i____ due to use of FP). - P
- aims to generate ____ for _____ while _____
- due to effects of MR there are i____ which create higher ___ and lower ____ than LF and D
- laissez faire.
- little govt intervention, uses policies of the Washington Consensus
- popular over the last 40 years
- risks of oligopolies, income inequality and high leverage
- long term, should lead to reduced inflation, positive growth and productivity - dirigisme.
- much more government intervention on things like regulation, trade and fiscal policy
- e.g. government tries to improve competitiveness by changing tariffs, barriers to trade and currency values
- long term: more reduction in inflation and similar growth to laissez faire, but could have significant growth if certain industry goals are targeted (but risks high inflation use to use of fiscal policy) - populism
- aims to generate short term nominal growth (for political gains) while sacrificing other objectives
- due to effects of mean reversion, there are inefficiencies which create higher inflation and lower growth than with laissez faire and dirigisme
When were Washington Consensus policies developed and implemented? Where? What did they include (ICB, D, P, CFP, FT)
US economic policies developed and implemented in the 1990s in many democratic countries.
Included independent central banking, deregulation, privatisation, countercyclical fiscal policy and free trade.
Why do investors in alts face challenges in profiting from the short-term nature of geopolitical risk premiums?
Alternative investments generally have long time horizons, so frequently rebalancing the portfolio to capitalize on geopolitical risks is problematic and essentially eliminates the possibility of earning geopolitical alpha.
Also less able to liquidate their positions, so they must be cognizant of the worst-case scenario.
Investors are left with little choice but to try earning geopolitical beta over the long term
How can public market investors take advantage of the decay in geopolitical risk to earn geopolitical alpha?
Because of information asymmetry and the mainstream media’s tendency to exaggerate political and geopolitical risks, alpha could be earned by taking the opposing position to the worst-case scenario.
What are the three pillars of the constraint-based framework to geopolitical analysts?
- MA
- D
- SP
- materialist analysts
- diagnosticity (data)
- social psychology
Some material constraints that limit policymakers are as follows:
1. pol
2. mac
3. geo
4. mil
5.soc
- Political: the need to maintain power and the positions of special-interest-groups.
- Macroeconomic: degree of economic disequilibrium, productivity levels, inflation, unemployment, and distribution of wealth.
- Geopolitical: gradually changing aspects such as demographics and the amount of natural resources.
- Military: strength and ability to succeed in an armed conflict.
- Social media: resources required to counter the false narratives spread quickly by “fake news.”
What are three errors that are typically likely to occur when analysing geopolitical data?
1. LE
2. B
3. HA
- linear extrapolation - mistake of assuming that a current situation will persist in the long term, but can’t factor in policy changes. e.g. COVID-19 turned from financially negative to positive due to policy
- binarism - simplistic approach treating outcomes as 1 or 0. But geopol issues are too subtle and complex
- reliance on historical analogies - e.g. comparing 1918 spanish flu to COVID - but often inaccurately portrays the current state, and these analogies only exist for extreme situations
1 and 2 are the most errors that can be made in analyzing geopolitics
How can geopolitical conflict sometimes have positive economic benefits?
There may be increased growth due to sudden productivity increases.
Methods to increase the accuracy of long-term forecasts include:
1. understanding MR
2. understanding the relationship between S and I
3. understanding f/s/t o effects
- mean reversion - Most financial or economic trends are not sustainable forever, so there will eventually be a reversal - timing this is difficult so public market investors with short time horizon should not try to predict. Also too simplistic and naïve to conclude that reversals will occur when there are crises. Private market investors may be able to profit from trend reversals using alternative investments in sectors such as technology and energy
- scarcity and innovation - e.g. England’s Industrial Revolution in the late 1700s stemming from a potential energy crisis (i.e., lack of firewood), and continental Europe suddenly and significantly strengthening its abilities to import natural gas to avoid reliance on Russia
- first, second and third order effects - e.g. COVID first order was recession, but second order was quick recovery from policy, third was inflation as a result of the second
When can geopolitical alpha be generated (vs geopolitical beta)?
Geopolitical alpha can be generated when markets either over- or understate geopolitical risks and opportunities. i.e. buy low when market overstates risk.
In contrast, geopolitical beta can be generated by accurate forecasting (e.g., determining short-term changes and long-term trends).
Is it easier for public/private market investors to generate geopol beta? Why?
Easier for public market investors to generate geopol beta, due to the more liquid strategies available to them.
May be difficult for private market investors to generate geopol beta, as they are often faced with illiquid strategies and must look at factors with a long-term impact
What polarity geopol system generates the most volatile returns?
Multipolarity (vs most stable being unipolarity).
Multipolar systems tend to have both ____ growth and _____ inflation expectations than bipolar systems. The _____ inflation is due to the multipolar systems _______
Lower growth and lower inflation.
Lower inflation is due to the multipolar system retaining characteristics of globalization.
