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Hello and welcome to another episode of the Authoughts podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe, do you ever experience a sudden surge in geopolitical analysis emails in your inbox?
Yes, I do. You know, it's funny most years, people like, oh, what do you you know at the beginning of the year, end of the year, things are going good, and it's like, what are you concerned about?
It?
Like, I'm concerned about geopolitical tension. It's just one of these cliches, A classic as a classic, That's what I always say when I have no it's like, well, thanks to fine, but I'm concerned. But in some years, clearly geopolitical tension, war, et cetera is very real. We recently saw the bombing in both directions between Israel and Iran. It seems to be paused for now, but sometimes geopolitical attention becomes outright geopolitical hostility.
Yeah, that was definitely one of those weeks when we both got a lot of emails. Yes, I have a confession to make, which is I read all of those geopolitical analyzes, but I always kind of wonder what I'm supposed to do with that information. You know, if I were a major professional investor, if I'm reading a note about what is the base case for like Iran versus Israel, I am not entirely sure how that influences my own decision making.
Well, I would say I would take it even a step backwards and say, like, you know, when we talked to Wall Street analysts, say a FED forecaster, I have a sort of I think, intuitive understanding of how they e They're like, oh, there's going to be three cuts in the next year, and then I generally have a sort of intuitive understanding of how they might arrive at that. Okay, we look at statements from the FED about what they're
looking for in terms of achieving disinflation. We look at the trajectory of the US economy, and then we say, okay, we combine the FED statement, their sensitivity, etc. The reaction function that's the term I'm looking for, with the data, and then we arrive at a forecast. When it comes to something like a war, I do not really have an intuitive understanding of how the geostrategic or geopolitical analysts whose notes flutter inboxes from time to time, always during
bad periods. How do they arrive at conclusions? Therefore, X, we think the war is going to end this way. I do not know how that can be done systematically, and yet people.
Try, and actually some of them put numbers probabilities on specific outcomes. So I think if I was a geopolitical analyst, I would just put thirty percent chance on everything that seems reasonable.
Yeah, So it used to be that if you were unsure but wanted to sound smart, you say sixty forty, But these days you say seventy thirty. Seventy thirty is the new sixty forty.
That's right, that's right.
But I you know, I don't want to be cynical about it. I am curious about how one could derive a number from things that seem wildly uncertain and rare, because there are not a lot of event studies, and every war is distinct, and therefore the idea of trying to accurately assess the outcome of some conflict strikes me as very difficult. Yeah.
Well, I am very pleased to say that we do, in fact have the perfect guests to talk about geopolitical analysis and how it actually is calculated. I guess are created. We are going to speak with Andrew Bishop. He is a senior partner and global head of Policy research at Signum Global Advisors. So Andrew, welcome to the show.
Hi, thanks for having me.
Why don't we just start with what is Signum?
So?
Signum is a political and geopolitical risk advisory firm that was founded in twenty eighteen by a gentleman named Charles Myers, who was the vice chairman of Evercore i I before founding Signam. And Charles had a career in banking with a focus on emerging markets, but was always sort of one foot in US politics as a fundraiser, as an
advisor to candidates, et cetera. And he founded Signam essentially to try to meld his instincts about how markets work with his knowledge about US politics, and from there he hired me to help build out the sort of global analysis beyond the US.
So I think I started first becoming aware of your commentary recently because Ozon Tarman, who we've had on the podcast, over at the Deutsche Bank, he started forwarding some of your notes over and so then I started reading this stuff and it was like very interesting and compelling. Well, why don't you tell us? Okay, you explained what SIGNAM is. What's your background? How do you develop an expertise in these areas?
So I joined SIGNAM from the Eurasia Group, which is sort of the founding house of political risk. I was there for four years. I first joined Eurasia because I'd met Ian Bremmer through a previous job at the World of Comic Forum. So the DAVS organization and I joined as sort of right hand man to their chairman, Cliff Cupchin, who really taught me a lot in that firm.
In that role, I ended up.
As deputy head of research, and several of the things that I learned from Cliff, or for example, not getting overly excited by every new headline, right so I think, especially when you're at the beginning of good advice for everyone. Yes, I mean to me, the best example of that is the zero hedge type headline about how the first gas contract was denominated or settled the euro instead of dollar, you know, or just the bricks more generally. I started
working when I was twenty two. I'm thirty nine now. The bricks have had a glorious future for you know, almost twenty years, so that was one of the things.
The other thing that I learned from Cliff was good analysis, Like basically the key is to have a rigorous and analytical process, and even if you get the call wrong, it's better to have good analysis and a call wrong rather than the other way around, right, because otherwise you could just be throwing darts and you'd be getting elects, you know, fifty percent right half the time, right, which, by the way, gets to this question of what you
mentioned on the probabilities. It's actually harder than just throwing darts or or flipping a coin because most situations have far more than two scenarios, right, So it really is a very very difficult thing to do to predict all geopolitical outcomes, which which I'm sure we'll get to, but just to close off on, you know, sort of background, I joined Eurasia from the World Economic Form and the job I had there was really fun because essentially, you know,
the organization is best known for Davos, but the team I was in, which was their Global Risk team, basically send their team members throughout most frontier and emerging markets to meet with government officials get a sense of where their head was at in terms of their country's sort
of economic future, future economic policies, et cetera. Then meet with the opposition and the business community and think tank community, and essentially write up scenarios about the future of that country at a sort of ten to twenty year outlook, not trying to get it right, not trying to predict it, but trying to essentially force the country to think twice about his business model. As you can imagine, a lot of these were resource dependent countries and that led to
some pretty interesting situations. Like one of the projects we worked on, for example, was about the future of Ukraine, and that was in twenty thirteen, twenty fourteen, so the project was literally interrupted by the Maidan Revolution. Half the people on the board of the project and half the people we'd interviewed were, you know, either fleeing or put
in prison. And I remember we were doing a panel to actually introduce parts of the findings in Davos, and the Prime Minister of Ukraine his plane was he was basically disinvited on the day that the panel was taking place, so his plain was circling over Zurich, not being allowed to land, not being allowed into the room, you know, similarly we had back then.
He was an MP.
Petro Borshenko, who later became the leader of the country, smuggled in a grenade from the Madan Revolutions into the conference hall and sort of held it up to show how the brutality of the regime was working. So it was a really great way to get first hand exposure to to frontier markets.
Yeah, that is definitely first hand exposure. I'm not sure how I would feel being in a conference room or like a big hall with a grenade. I'm hoping it wasn't live, but who knows. Okay, Andrew, one thing I wanted to ask, and I alluded to it in the intro, is when I get your research nodes, if I am a typical client of Signum, what exactly am I doing with that information? Why do I want to get this analysis?
So first thing is about sixty sixty five percent of our clients are financial investors, right that Joe mentioned or alluded to about thirty five percent or so our corporates, and they obviously use this in very different ways, which I'll get into. But I think the first topic that you all sort of touched on is this idea, you know, there's there's a lot of studies that show that you have political risks just don't affect markets, right, like, who
really cares. Frankly, oil's pretty much flat from pre Israel Iron War Viks barely picked up. You know, SMP's at all time highs et cetera. Obviously I have a you know, a bias or I'm rooting for my home team here, but I think that that's a little bit short sighted
for a few reasons. One is, most of these studies typically look at S and P in the long term, and our clients obviously are not trading the S and P in the long term, right, They're trading in the short term, and you've got some pretty violent, sharp moves up and down for a lot of these assets. And
they're also trading obviously more niche assets. So I'm thinking of the tribal and tourism industry, or I'm thinking of the oil and gas industry is rarely shekel, you know, things that are far more niche, and if you look at it at that level, you've got some major major volatility that can be both beneficial or negative depending on how good you're at playing it, which is really what
are our clients are specialists and we're not strategists. We don't give investment advice based on the jeblical research we put out. The other thing is there's this big, you know, talking point, and it was true again last month. There were two weeks ago whenever the Israeli ron war ended, there's sort of this like oil collapses, right, And that's
a counterintuitive outcome. A lot of our clients were actually expecting that, and so what they were trying to figure out was when is this going to end or not end? But when is it going to culminate?
Right?
When is going to be the peak fear level? And that's probably going to be when Iran retaliates for whatever the US does. So again, the fact that it actually drops on the news is not necessarily surprising to most of the folks we speak to. Patreca, you want me to get into a little bit how the clients use us?
Yes, that would be great.
Yeah, I mean, so there's a few ways.
The first, and I would say least often and least sort of savvy or useful way is for the predictions themselves. Right, So what I'm saying is basically, most clients don't use us for the actual outcome prediction. It's better if we get it right. But if they were only going to use us for that, they could probably go to prediction markets, right. I think their prediction markets are a little bit overestimated these days, which we can get into, but they're not bad, right, Yeah,
So that's not the main reason. The main reason that the way that a client put it to me, and this was years ago and it stuck, is like they're an F one driver and we're helping them on the sort of you know the training tracks right like on the on the training loops before the actual race, to literally memorize every single turn and know when they can accelerate, when they've got to cut a corner, et cetera, so that when the events start unfolding, they're already prepared to
you know, hit the brakes or accelerate depending on what's happening. The difference here, of course, is that the track is not fixed. But the point is, you know, in a situation like Israel Iran, you've got multiple calls, right or multiple call basically just means prediction. You've got multiple situations. So you've got is Israel going to strike, then you've got the question. Okay, so we know they're striking, it's all over Twitter, et cetera. Is this a shot across
the bow or is this the big one? Is the US actually going to get involved after twelve hours? Is Iron going to retaliate forcefully or in a you know, some bolock way. Is this war going to last three days or is it going to last three weeks? Is the US going to get involved at that point?
You know?
And so on and so forth. And so they're not, like most clients, don't expect us to get every single one of those calls right. I mean, that would be insane. What they want is for us to lay out arguments that are not necessarily just convincing, but that help them do the mental gymnastics around all the possible outcomes, and then, of course is better if you get it right.
Wait, I have a very short quick question. Do you see anyone in your clients who are actually in the prediction markets looking for opportunity there yet because some of these are getting to be big sized, or do you see this as a future growth area for you? People looking for mispriced contracts on the prediction markets.
So you mean clients that would actually be putting on trades.
Yeah, you say there's forty percent of X happening, the prediction market is sixty percent. Maybe there's an opportunity anyone doing that yet.
So short answer is that I'm aware of NOK and the main reason is still liquidity, despite the fact that it's getting bigger.
As you say.
What's really interesting, of course, is that that with this intermediate the market's reaction function.
So I'm looking back at a note. This is just a random one that I'm found in my inbox, but there were several that I read in July. Oh sorry, Jane June. By the way, I should say we were recording this on July first, and given that the world is an uncertain place by the time this episode comes and I don't know the exact date, who knows what's going to happen by the time you're listening to this.
But I'm reading a June sixteenth note, and you gave these odds twenty percent preemptive Iranian capitulation, forty five percent Israeli mission accomplished, followed by Iranian capitulation, twenty five percent chance US intervention, and ten percent Iranian nuclear breakout. Surprise.
Why do you go give us through your thinking in the middle of June, how you arrived at some of these numbers, and then, given where we are today on July first, how did you do or what surprised you or what didn't surprise you to talk about sort of where you were then and where you are in it.
So the first thing is Tracy was asking about how do we ascribe probabilities? And there's I could give you a fancy answer about Monte Carlo simulations, et cetera.
But the reality is neither we, nor as far.
As i'm where anyone in the sort of market actually models this stuff, and the few that do use predictive analytics rather than historical data. And the reason is there just aren't that many case studies to go off of, right, So let's just get that out of the way.
So the way we.
Use probabilities, and I'll absolutely answer your question about the that specific case study in a second, but there are three main ways that I think the probabilities can be useful. The first is if you're drawing out scenario trees and you're assigning you know, before you publish, right, you're assigning probabilities to various sub events before getting to the total cumulative outcome. Basically, if the math doesn't add up, that can highlight a p in your logic. Right, it's not
a math problem. Who cares if the math doesn't add up from a mathematical standpoint, But if you end up with above one hundred or below one hundred or whatever, that means that you're probably overstating one aspect of the dynamic or understating another.
That's one.
A second that can be quite interesting and problem you know, not problematic, but useful for the user is clustering.
Right.
So we had a recent scenario or recent situation with an election, I think it was in Uruguay where the base case was perhaps market constructive, but if you aggregated all the non base case scenarios, you actually had a more likely outcome of a market negative bottom line.
Right.
So that's those are a few of the ways.
Now, the way that I would approach a situation like the Israeli ra on one is basically break it down into an equation. So if you're trying to answer the question is the US going to intervene in the war and bomb for it?
Out right?
To me, the odds of that would be start with one hundred, and then you take out whatever the odds are that Iran is going to capitulate at the diplomatic table. So you know, we can talk about how you can come up with that view, but the idea is, are the Iranians going to take the diplomatic off ramp that Trump is giving them on that Friday? Geneva Right, So those odds might be low, but they're not zero, So
you get to say twenty percent. Now that leaves you with eighty percent of that The question becomes is Israel going to.
Basically finish the job on its own? Right?
I e.
Can the Israelis destroy for it out on their own, either through bombing without the most advanced bunker busters or through a ground operation like they conducted in Syria the previous November, which is something that I and a few others had on their radar. And if they can't, then presumably the President will intervene. Right now, you were asking about scoring myself. That's a perfect example. Those odds get
you below fifty percent of US intervention. You, on top of that have to add the fact that the president might want to intervene even if he doesn't have to, right because you might see political opportunity and being associated with a victory. And that's the part that in this instance, for example, I'd underestimated. Now where it gets really interesting,
and I'll stop here. What gets really interesting is even if your take is that the president is actually not dying to get involved and that he doesn't really see this as a big opportunity, and you therefore only ascribe it, you know, whatever thirty percent odds, you're still going to end up above fifty percent overall. So that can tell you that, because there's so many ways of getting to an outcome, you can get tipped over fifty without it
being your modal scenario. I'm same with odds of regime change. You can get regime change through palace coup, you can get regime changed through Israeli bombing, you can get regime changed through a revolution. Our base case was that there would be no regime change in Iran, and I think that's that's what played out so far. But the point is you've got to compound all those odds because they are independent variables.
Okay, you have the probabilities. I get that. The way you just laid it out was very clear, But how do you actually come up with, I guess the range of scenarios because that's what seems practically unlimited nowadays. And also you mentioned Trump just then. In Trump World, I kind of feel like anything is possible, right, Like there are a lot more tail risks out there that now seem plausible in various ways. How do you take into
account the unpredictability of anything can happen? And then how do you actually confine yourself to This is a set of realistic scenarios that I'm going to talk about.
So first thing I'd say is, to me, that's one of the reasons why prediction markets aren't that useful yet, and especially to clients. They can actually be ironically more useful I think, to the analyst than to the recipient or user of the final product.
And what I mean by that.
Is the prediction markets will tell you where the tariff level is going to end up on July thirty first, right, But what if the cutoff that's relevant is not July thirty first. What if it's you know, a completely different date because Trump is visiting. Like let's say that it's a ceasefire in Gaza and the cutoff date is Trump's
visit to Saudi Arabia or whatever. So the point is the rigidity of the prediction markets, and it's a trade off, right because the reason they do that way is so that they can be easily falsifiable and you can compare predictions, et cetera. But that rigidity, I think narrows the value. So then to your question on how do you even
frame the issue. That's a major problem for Trump tariff situations. Indeed, so if you take July eight for example, you can't really and you know, we've struggled with this everyone does. It's hard to make a call on whether he is going to escalate or postpone his deadline because there are sixty countries involved. So first of all, you theoretically would
have to make sixty individual calls, right or predictions. Second thing is what if he says, you know, we're escalating the tariffs but they're kicking in on July fifteenth, is that a punt or is that him at actually having increased the arras and so on and so forth. So, I mean, the short answer, Tracy is there is no perfect way of doing it. And that's actually been one of the issues with Trump, is that framing the initial
question is almost as hard as predicting his behavior. Trade ironically is one of those situations though that we've had a pretty good track record with. So I'm happy to talk a little bit about how we've tried to like get into Trump's brain if you want, please, Yeah. So there are a few things. So the first is you can observe patterns. Right, So Robert Armstrong had sort of this huge success with the taco label that was amazing marketing.
But I have to say we were a little jealous because I think he wrote that in early May, and in early April we put out a table with basically every one of the Trump threats. I think there were like twenty three or.
So, doesn't matter if you don't market, it's it's all about that acronm anyway, keep going.
I was waiting for the invite, so I think Trump had backed down in twenty one out of twenty three threats something like that.
Right.
So the first thing is you can identify patterns, and in fact, actually truthly be told, we ran that same study at the very end of his first term as well, and the takeaway was very, very similar. The question I think was was he going to be tough for his second time around, right, But the point is you can
identify patterns, So taco is one of them. Where it gets complicated, though, is you know, it's almost like the Economist or Time magazine cover phenomenon, where by the time the Taco thing came out, whether it was from US or from Armstrong, it was already fading. It was already getting arguably less true because if you look at the pattern of Trump's behavior. On jan twenty, he had made a bunch of threats against Mexico, Canada, China, et cetera.
He completely let them go, right, nothing happened, He didn't even mention them on Jan twenty. Then he postponed them to February one. He went one step further, he actually signed the executive orders, but nothing happened. Then March one comes around, or March four rather, and he actually implements the terrors, but he walks them back after a day. Then April two comes around and he walks it back after a week on rest of the world and a
whole month on China. So the point is there a patterns, but you've got to constantly be reassessing them because the rule that worked yesterday may no longer work to today.
Right.
A second question is or principle, let's say, is we've been very We've tried to be very nimble and not have a grand theory.
Right.
So this gets a little bit to the whole like phil tedlock fox versus hedgehog, like not be too attached to grand ideas, but look at each prediction individually. One of the things that's really driven me crazy is this narrative that Trump's.
Trade approach is all about China. Right.
That is totally accurate over the course of four years. It is totally useless in the short term because if I told you that Trump's trade policy was going to be all about China, which in hindsight is correct, right, China's got a forty five percent tariff, everyone else has a ten percent tariff. But if I told you that out in January nineteen and you were, you know, running a hedge fund, you would have been very, very surprised that the first three months of the Trump administration were
all obsessed with Mexico and Canada. Basically, this whole China lens would have been useless up until April. So that's a second thing is trying not to take an overarching view, but look at it individually and try to figure out what's he after in this specific case. So, you know, the best example is if you think he's after a teriff revenue, then he's by definition not going to back down.
You can't get revenue if you back down, right, And the same country can be affected by completely different motivations or you know, confrontations. So Mexico in the first three months was affected by fentanyl and immigration concerns, which were pretty clearly I mean, it's always easier to say in hindsight, but pretty clearly transactional like Trump just wanted to be able to say that he had done something about those issues.
The way that Trump is going to approach Mexico in Q four this year to try to get them to do USNCAA revisions and open up their energy market and change their rules of origin on auto sector issues, that's going to be much much tougher, right, So, same country, totally different approach. Another is there's this big like talking point, you know, don't take Trump literally, but take him seriously.
We hate there one around here.
Okay.
So yeah, so first of all, we know not to take seriously because of Taco or you know, signum pre taco. But I actually think taking him literally has been reasonably helpful him and some of his advisors, those who repeat his views. So people like vest and Lutnik, they actually don't repeat his views. They kind of freelance. But if you take Carolyn Lovett, one thing that really sort of struck us was I think it was on before the February one deadline rather than the March one.
But I could be confusing them. She said.
They're in that press conference the day before, on the Friday, she said, there is absolutely nothing that Canada and Mexico can do to prevent the present from signing the executive order tomorrow. Signing the executive order, they never said they were going to actual implement the terraces, right, And I know that sounds like a little cute or yeah, but
there is something to that effect. And if you listen to Trump, I think it's quite interesting if you also look at how his advisors, how he lets them talk like speak, you know what kind of leege they're on. They are allowed to say anything, including the craziest stuff, as long as they don't reduce his optionality, right, So he benefits from them going nuts as long as he doesn't get cornered by their comments.
Let's go back to the recent war and something I'm interested, So looking at the cumulative odds twenty percent preemptive Iranian capitulation, forty five percent Israeli mission accomplished. When you're coming up with those odds, like how much do you really have to know about the size and scale and quality of the respective weapons systems of Israel and Iran? Because ultimately, to some degree, prior to the US intervention, the question was the degree to which one side's missiles or their
missile defense was stronger than the others. So how do you learn about that? And how important is it to add trually have really high quality information about each side's arsenals.
So that actually gets a little bit back to what is Signum and who we are because I'd say there are different types of shops in our industry, right. There are shops that are based on intel, right, So it's like what we're hearing in Congress, or I play golf with you know, Scot Besson or whatever, that's not us. We do access events and a bunch of you know,
really cool stuff. We took clients to Ukraine to meet with the Ukrainian government and get a sense of what post war reconstruction type policy might be reduce that stuff. But it's not part of our research, right, And that's because Intel in addition to you know, potentially if you've
got HIMNPI, et cetera, that gets legally dubious. In addition to that problem, it doesn't make for good predictions, right because Scott Besson himself didn't know on April eight whether Trump was going to back down the next day, he knew he was working on him, but he didn't know asad was not sure whether he was going to be toppled or not. Right, So there's that, and then there
are shops that are very focused on country xes. So it's like, you know, I lived in Venezuela for fifteen years, so here's my take on whether Juenguido's kup is going to succeed or not. And don't get me wrong, like we've got regional experts. We have a Mexico office with a Mexican guy leading it, years and years of experience from Latin em et cetera. So it's not that we don't do that. But the point is where we think our value add is is on the process, and we've
basically adopted like a few principles. One is the fill tetlock principle that I mentioned earlier, which is not really about who you are, it's how you proceed, right, So it's precisely what is your model, like, what is your process?
And that's where another.
Guy comes into focus, which is one of the mesquita that.
A lot of people will know about.
Political scientists very focused on, essentially the logic of political survival, right, Like leaders will always put their own advantage ahead of anything, and that's why, you know, you've got situations where like Nitagna, who's never going to agree to a hostage deal because it would risk his coalition, and why would he risk his coalition? Or you know, why would he risk losing
power just to satisfy Trump. That's where it gets interesting, though, is none of these rules is failed proof, right because using that logic, one of the pushbacks that got on our Ceespire calls in the past was why would Hamas ever give up the leverage of hostages?
Right?
And that sounds like a conversation under the truth is they've given up hostages twice now, right, You've got to stay like pretty nimble and humble. There is no like perfect answer, but that sort of process approach can be helpful. Now to get back to your initial question about like how much knowledge you need? You do need technical knowledge, but you don't need to have it in house. So we don't ever outsource any of our analysis, Like no one external has ever come up with a prediction for
us or written any of our notes. But what we do is we break down a big issue into sub questions and then we go out and try to find the answer. And some of that will be an open source. Some of that will be trying to speak with an expert on XYZ missile range. So yeah, the answer is you do need it, but you can break it down and not make it part of your core business model and just sort of have it as a research process.
You mentioned being humble just then, and I'm wondering, so, you know, in the Iran situation, you published probabilities and your base case and all of that, and I think events didn't pan out quite the way you expected. What happens when you're just wrong about a particular prediction. So you know you've laid out your analysis. Maybe you had a really great way of reasoning around scenarios and things like that, but nevertheless, something happened that you did not expect. What do you do?
So there's a couple answers to that, Well, there's several. The first couple are deflection. The third is the real answer. So one is, in any of these situations, you've got lots of different predictions, right. So for example, we didn't expect that Trump would actually go in and bomb Ford out because we expected these reels to do it on their own. But we were on the right side of the regime change call. We were on the right I said,
the horror mooze call. We're on the right side of Israel staying away from trying to knock out Iranian oil production, which looked harry during that first weekend, and so on and so forth.
So that's one.
The second is you basically have to try to figure out why you got it wrong right, and from there you can typically learn something for the next time. So in this instance, for example, I was far too focused on these Raelis capabilities and whether or not the Israelies we're going to be able to do this on their own, and not focused enough on Trump's appetite to get involved
for political reasons. Right where it gets really ironic is part of the reason I was of the view that the Israelis would be able to go out and knock out for it on our own is because for the previous twelve months I've been telling clients the Israelis have the capability to strike on their own, and they are going to do it, and it's going to be a bolt from the blue. I didn't expect it to be exactly when they did it, because the nuclear talks were
still ongoing. But the point is, back then, the big pushback I would get constantly was the Israelis don't have the planes to reach are on. They don't have the resheeling capability, you know, and.
So on and so forth.
And so that gets back to this thing that there is no like one rule that you can like, you know, to sort of one rule to rule them all, right, There is no such thing.
You've got to constantly be reassessing.
You know.
When we talk to economists and market practitioners, you know, one of the terms that comes up a lot is regime change. And in this case, I gotta be careful. I don't mean literally like the question of whether the
Iranian regime changes. But this idea of like regime change in markets, like does the relationship between bonds and stocks change over time or is the fed and inflation fighting mode or deflation fighting mode whatever, like these are certain relationships, relationships change, and I'm curious, like there are many people who perceive and perhaps the medium term future that maybe the US Israel relationship is going to change, that maybe
there are parts of growing louder contingents within the Republican Party and both parties really, but within the Republican or that do not want to deploy US military assets or resources in the same way the same level of support to Israel in the past, and who knows how that
is going to transpire. But I'm curious, like how you think, like, Okay, there's some relationship the two countries might have, but all relationships could change, and if that relationship does change, then it changes the short term expectation on any given war.
And so I'm curious in your process or internally you think about this idea of relationship regime change and could at some point down the future, and we don't know when, could some of these alliances or partnerships or you know, friend relationships change and then that force a calculation change when an acute event happens.
That's a great question, but I would say that there is a pretty big difference I think, I mean, I'm not in the markets, but I think there's a big difference with financial markets, which is the regime changes happen, but they happen much more slowly and so you have a lot more time to bake them in.
Right.
So you know, you started the podcast by sort of talking about how there are these like talking points that come up over and over right the world, like jee, political risk is going to be big in twenty twenty five, right. A big one of those is multipolar world, right, yeah? Or jizu a world like this idea that it's like the breakdown of global order and so on and so forth. So those only happen every twenty or thirty years, Or.
That the US may not want to be the hedgemon at some point, that it may not have the same appetite to be a global police. And so for example, you know, the Tucker Carlson wing of the Republican Party very loud against this idea, like why should the US have such a global military footprint? Things like that at some point that could be a dominant strain of thought, and we if it becomes one, we might not necessarily know when the flipping point.
Is totally agreed.
But going back to how it's a slow process, I think Trump was a really interesting and like, literally what happened over the past month was a very very good test case for that right. And the fact that Trump himself, who is known to be not just isolationists but also pacifist, you know, one can chuckle, but like he does have a pacifist instinct I think, and pretty stingy in terms of use of American power and use of American money
and resources, et cetera. The fact that even he intervened, I think tells us something about how slow that process is going to be.
Sure, Okay, we mentioned cliches a couple of times, and I think this is probably a cliche too, But you know, cliches can be true. Maybe that's why they become cliches. But when it comes to geopolitical risk analysis, do things feel more difficult to you nowadays versus when you perhaps started in the industry, Does the world seem more complex? And I guess given the Trump administration and some of
the unpredictability that we discussed earlier. Do things seem more volatile, more uncertain and just harder to sort of get a handle on.
Yes, I think that is absolutely fair and it really does sort of echo back to Joe's question in the sense you take something like the relationship between Russia and China pre Ukraine War or pre twenty twenty two version of the Ukraine War. For fifteen years before that, there had been an established talking point amongst pretty much all political analysts, which was, it's an alliance, it's an access
of convenience. Right, they get along, they work together, but they don't really trust each other, they don't really love each other, and so you knew that when push comes to shove, when they had to like put their interest above the other, etcetera, you knew which way.
It was going to go.
That was very unclear for the first like year, and frankly some could argue it's still unclear post Russia invasion, right or Ukraine invasion.
Are they now in it forever?
And sort of Russia basically China is grooming Russia to help it when it goes after Taiwan, or is it still very much an access of convenience where the Chinese might cut off, you know, drone inputs to the Russians for the right price, if there's American export control lifting
or something like that. Right, And your question, Tracy, the fact that so much stuff is changing so fast means that you have even less historical background or historical data, which, as we said earlier, you're already starting with very very small data sets, right, And so the temptation there is to kind of just make it up as you go, and that's where things get dicey.
Do you think that's possible, like that China has a price for which it would hold back on Russian access to drawing materials and such.
So my answer to that would be, in a way that one is actually not that hard because even if there were a price, we are so far from being willing to pay that price that it's not gonna it's never gonna be delighted with day.
What's the surprise thing that you think is not on anyone's radar right now geopolitically that you think we should be focusing more on. This is my way of so listening ideas for future episodes.
By the way, Yeah, yeah, no, so I actually I love that question because but I hope this is not going to be disappointing, but it is. I always say, like the whole black Swan thing is irrelevant, Like black Swan's almost never happened. This stuff that blows up in our face is stuff that is visible pretty far ahead, like not necessarily far ahead of time, but that is
pretty obvious. And the difficulty is for the analysts predicting the details right, like in what month is put and get invade or whatever, or what part of Ukraine is he going to invade? And the other difficulty for clients, of course is how to trade that right, given that
you can get radically different outcomes. But the events themselves, I mean, there were four or five months of Russian build up in front of Ukraine and in December January people were still debating what it's going to happen or not. And another example is COVID. People talked about COVID as a black Swan. I mean, if you read any of those, you know, World of Form global risk reports for the past like fifteen years, pandemics were always top ten like
or even top five. People knew that pandemics were a major potential business risk. So again, it's it's more like the details rather than something's going to just pop up in our face.
In the next I don't know, five years. Do you expect China to invade Taiwan?
Yes, I mean the word invade is the one that bugs me, which is not going to surprise you, because I think that it's more likely to be a blockade, for example, than an actual amphibius invasion. So that view, for example, is pretty I think. But now right, the problem is again from the perception of how do you manage it. One of the things that I think is totally underappreciated is everyone knows that a blockade is a risk, right, But the part that's totally under appreciated is that the
Chinese could roll it out literally overnight. So I think what is underappreciated is We're not going to get any build up. We're going to wake up one morning and it's going to be done. So that's one problem. A second problem is a bloodless blockade that lasts, you know, three months or six months, that is essentially a continuous anaconda squeeze on Taiwan, and the Taiwan's economy could actually
be far worse from a purely market perspective. Forget about you know, normative aspects far worse than a one month war, regardless of the outcome, right, because it's the length of the eruption for business operations that could be most problematic. So again, it's how you look at it. I think that they can make a difference.
Back in college, I wrote an essay slash dissertation on the chances of China, you know, invading Taiwan or going after Taiwan, and I think I had my base case was they were going to do something before the two thousand and eight Olympics.
So yeah, I empathize with the difficulty of timing.
I totally do. Andrew, that was fantastic. Thank you so much for coming on all thoughts.
Thanks Andrew.
That was great.
Thank you, Joe.
There was a lot to pick out of that conversation. I think one of the things that struck me. Okay, first of all, you know, he was talking about black swans, and this is something that teleb himself pointed out at our recent live event, which is we shouldn't really be worried about black swans because they are by their very nature unknowable. We should be worried about the gracewans like
a pandemic. I think that makes a lot of sense. Secondly, the emphasis on motivation was really interesting to me because this is something that I have wondered about the tariffs. If Trump needs to have a bunch of tariff deals to have his trade war seem to be a success, then what does that mean on the revenue side, because he has also talked about how tariff revenue is going to offset a bunch of tax cuts and things like that. So I do think it's important and I still haven't
figured out that one particularly. And then the other thing is he was talking about Trump's advisors, and this is something I hadn't realized, but he's right. The one thing they can't do is limit the president's optionality. It seems like they can throw out pretty much any scenario, any response, any possibility that they want, but they can't do anything that would box him or pigeonhole into one position. That was interesting.
Yeah, you know, by the way, just going back to Andrew's note that we kept referencing on June sixteenth, he had underestimated the odds that the US would intervene as he did. However, to his credit, here were his final takeaways. US intervention is certainly possible, but still not base case. Okay, it did happen, However, he says likewise, regime changes plausible,
but still unlikely. So he was right on that. And then he said the overwhelming majority of scenarios end in a negotiated around capitulation with no meaningful damage done to global oil supply or golf assets. I think that's a pretty good conclusion that at the end of the day, because if you figure people care about the markets and oil supply more or less, a useful conclusion to have
been able to make on June sixteenth. I have to say the speed with which Andrew answered yes, there is going to be something Taiwan that I was like, I was hoping that he would hum in Hawe a little bit about that, and then this idea that's just going to happen so quickly, it'll be overnight, there's we're not going to get any signs of it, and then the world is going to change dramatically the next morning in ways that we don't really know.
Well. On the other hand, there are people like me who have been saying, yeah, with great confidence that this is going to happen for a while and it doesn't. So maybe that's that's some hope for you, Joe.
I mean for me, I mean for lots of people, certainly hope there is anyway.
The other thing I was.
Didn't like how comfortably he was Yeah, in five years, Yes, he didn't have seemed to have any doubt.
The other thing I was thinking, we probably should have asked this, but the time frames for things, because you mentioned regime change in Iran, like, okay, well it hasn't happened, but it's also been two weeks since we had this big, big event that happened, and I don't think it's necessarily off the table, So I'd be curious to figure out how he thinks about like the time frame of possibilities
as well. But oh well, we already spoke for about forty five minutes, so we should probably leave it there.
Let's leave it there.
This has been another episode of the Audthlots podcast. I'm Chracy Alloway. You can follow me at Chacey Alloway.
And I'm Jill Wisenthal. You can follow me at the Stalwart. Follow our guest Andrew Bishop. He's at Andrew Underscore d Underscore Bishop follow our producers Carmen Rodriguez at Carman armand dash El Bennett at Dashbot and kill Brooks at Kilbrooks. From more odd Lots content, go to Bloomberg dot com slash odd Lots, where you have a daily newsletter and all of our episodes, and you can chat about all of these topics twenty four seven in our discord discord dot gg slash odlocks.
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