Sound Money

Excellent book where Marko Papic outlines his geopolitical investment framework. An educational and enjoyable read with plenty of examples. Three elements that really struck me; nihilism, constraints and the multipolar vision.

Nietzschean Nihilism

Marko is a powerfully nihilistic analyst. It makes his research incisive, differentiated, entertaining and valuable. Something to strive towards as an analyst. Personally, I have been unable to distance my emotions from policymaking to this degree. Perhaps this is because I grew up in South Africa and could witness the government destroying livelihoods, dividing the country and robbing us blind? Or perhaps I’m just too inexperienced. Obviously, I distance my personal opinions from investment management, but the influence is difficult to sever entirely. Relocating to America, I’ve already become a little more distanced in the last year… progress?

Nevertheless, I think it’s important to help individuals, businesses and investment houses in understanding the pernicious consequences of unsound money. In other words, I don’t envision myself upgrading to Nietzchean Nihilism. It would be contrary to my nature and I’m ok with that recognition.

Fiduciary responsibility and asset allocation positioning comes first. But I also think that asset owners have a responsibility to educate clients on these consequences of these unsound policies and contribute towards the global debate. I think there’s an ethical imperative to play this role. Plus, understanding allows clients to appreciate changes in positioning, particularly when you’re implementing non-consensus trades.

Constraints > Preferences*

The repeated focus on constraints over preferences is elegant. Marko brings tonnes of experience to the table in generating the constraints and balancing them against each other, but the outcome for the reader is deceptively concise. The constraint approach is foundational in geopolitics but is usually focused on geographical constraints. Marko broadens the constraints to economic, social and political constraints to determine the boundaries to policymaker decision making. It does matter what politicians prefer, they’re bound by their constraints! Seen through this lens we can appreciate why Macri failed to hold power in Argentina, why Putin shifted military activity from the Ukraine to Syria and why the US and China may not escalate conflict to the degree many expect.

*This is the crux of the matter. I won’t do justice to the book.

Multipolar rather than Bipolar

A recency bias (cognitive bias that favors recent events over historic ones) leads many analysts to forecast a return to the bipolar politics of the 1960s-1980s as the US withdraws from its position as global hegemon and China rises in the East. History shows that multipolar global politics is much more common, though. It’s also rare to shift from a unipolar world with a hegemon into a bipolar world straight away. A multipolar world is more likely, and has implications worth considering:

1. There’s less global oversight, policing and intervention. I wonder what implication this has on global bitcoin regulation, which I view as an increasingly important geopolitical issue over the coming 10 to 20 years. I think that the probability of coordinated global regulation is lower than it would’ve been. This may allow bitcoin to continue developing in a reasonably unconstrained manner which is positive for this burgeoning asset class.
2. Perhaps I’m suffering from confirmation bias (because this is a high conviction view of mine) but I think less global policing supports a higher volatility regime. We can imagine a world where investors, businesspeople and politicians are taking chances, pushing the boundaries of the murkier regulatory regimes, which should create both winners and losers, good outcomes and bad.
3. A multipolar world should imply murkier global alliances, rather than the East vs. West iron curtain where nations fell neatly into camps. This combined with low rates of real economic growth implies more competition amongst nations and more frequent defection from trade alliances. So, while political conflict between the US and China is certainly on the rise (and will remain intact under either Trump or Biden), trade between the nations will likely remain robust. US corporates will strive for each Chinese contract and visa versa, otherwise European or SE Asian competition will snap it up. This implication leads Marko to be more pragmatic than doomsday about the US and China relationship, which is a very useful lens.

I’m glad I got to meet Marko before reading as it gave me a firsthand insight into his humour, which is a welcome addition to this investment book. There are plenty of people who I’ll recommend it to.