2.3 - Geopolitics Flashcards
List and describe the three systems of power distributions among countries
LO 2.3.1
- Unipolarity - exists when the superpower (or the hegemon) creates the rules and conditions for all other countries.
- Bipolarity - there are two competing superpowers, so there is more focus on the economy, which can lead to greater short-term growth.
- Multipolarity - there are more than two countries that each have about the same level of power.
Describe the effects of the three systems of power distribution among countries on macroeconomic stability
LO 2.3.1
- unipolarity is the most coordinated and, therefore, provides the greatest macroeconomic stability.
- Bipolarity results in a bifurcated global economy with the least amount of globalization and moderate level of equilibrium.
- multipolarity creates the least amount of certainty, the most disequilibrium, and the most return volatility. Globalization exists under multipolarity to a greater degree than bipolarity.
List the three domestic political systems
LO 2.3.1
- Laissez-faire - very little government intervention and long-term impacts of reduced inflation, potentially some positive growth and productivity
- Dirigisme - more gov involment in regulations, trade and fiscal policy. Long-term may result in more inflation reduction and similar growth as Laissez-Faire in theory
- Populism - aims to generate short-term nominal growth whil sacrificing other important objectives. Creates higher inflation and lower growth compared to other two.
Describe whether a geopolitical risk premium exist in the markets
LO 2.3.2
The geopolitical risk premium is nullified to the extent that markets normalize risks on a much more rapid basis than expected. Geopolitical risks may remain high while the geopolitical risk premium is reduced substantially.
example is the sudden rise in oil and
wheat prices from Russia-Ukraine conflict, but then prices falling and normalizing to close to pre-conflict prices about six months later.
What challenges do Private market investors in alts face in profiting from geopolitical risk premiums?
LO 2.3.2
Private market investors in alternative investments face a significant challenge in profiting from the short-term nature of geopolitical risk premiums because alternative investments generally have long time horizons. As a result, frequently rebalancing the portfolio to capitalize on geopolitical risks is problematic, which essentially eliminates the possibility of earning geopolitical alpha.
List the three pillars of the constraint-based framework for analysing geopolitical risk
LO 2.3.2
- Materialist analysis - Geopolitical annalysis begins in the material world
- Diagnosticity - analysts and investors must narrow down their data sources to those that are tangible and recurring in nature.
- Social Psychology - In performing geopolitical analysis, the focus should be on the situation rather than the personality of the individual(s) involved.
list the methods to increase the accuracy of long-term forecasts in order to earn geopolitical beta
LO 2.3.3
- Understanding mean reversion because most financial or economic trends are not sustainable forever
- Understanding the relationship between scarcity and innovation in that crises can lead to scarcity that serves as a catalyst to innovation
- Understanding firt-order versus second and third-order effects
list different geoploitical anlysis methods and their errors
Lo 2.3.3
- Linear extrapolation - mistakenly assumes a current situation will persist in the long terms although it is almost impossible to factor in extreme policy changes
- Binarism - simplistic approach in analyzing geopolitical issues, assigning either a 0 (no) or 1 (yes). geopolitical issues are much to subtle and complex to warrant this
- Historical analogies - often innaccurately portrays the current state
Why is it difficult for long term investors to earn geopolitical beta?
LO 2.3.3
it is a significant challenge in practice because historical events do not generally move in a linear fashion.
Describes the macroeconomic effects of multipolarity
LO 2.3.4
- high volatility of returns because with power distributed over many countries, it becomes more difficult to make clear decisions compared to a unipolar system.
- Multipolar systems tend to have both lower growth and lower inflation expectations than bipolar systems. The lower inflation is due to the multipolar systems retaining characteristics of globalization.
Which of the three geopolitical systems provides the lowest inflation
LO 2.3.4
unipolar systems will have the lowest inflation because of the one dominant player, thereby reducing inefficiencies and prices and increasing productivity.
Rank the three political systems in terms of their effects on inflation and growth
LO 2.3.4
Laissez-faire tends to have the lowest inflation and highest growth potential.
Dirigisme is in between the two systems.
Populism tends to have the highest inflation and lowest growth potential.
Provide the geopolitical and political future with the greatest probability of occurrence according to the 3x3 diagram of the future
2.3.4
Explain the concept of diagnosticity within the context of the constraint-based framework.
lo 2.3.2
Diagnosticity looks at the level to which a piece of data can discriminate between a stated hypothesis and the alternative(s). In other words, can sufficient evidence be obtained from the data to determine whether the null hypothesis can be rejected?
Distinguish between geopolitical alpha and geopolitical beta. Describe how geopolitical beta is applied.
LO 2.3.3
Geopolitical alpha can be generated when markets either over- or understate geopolitical risks and opportunities.
geopolitical beta can be generated by accurate forecasting, such as determining short-term changes and long-term trends. Geopolitical beta is applied to growth and inflation expectations when computing expected returns
