‘How Soon Is Now?’ The Promise (and the Futility) of Forecasting in a Global Economy
- Geopolitics hasn’t always been thought of as relevant to market forecasts. But a recent “confluence of the macro and political” has changed that, says Roger Hirst of financial media startup Lykeion.
- Roger and his colleague Jacob Shapiro write a newsletter for Lykeion, a digital platform for discussion about the intersection of business, finance and geopolitics. Their most recent issue addresses the uncertainties of China’s “re-opening” after last year’s COVID outbreak and the Russia-Ukraine war.
- They joined me on an episode of Top Traders Unplugged to talk about what “uncertainty” really means, their outlook for Q1 and why they don’t buy arguments about the end of the world as we know it.
“I think that’s changing — because if you take out the ‘geo,’ the ‘politics’ is certainly becoming much more embedded in the way financial markets operate. … There is this interesting confluence of the macro and the geopolitical that probably means it’s relevant, for the first time in 20 years, to bring these together as a trading and outlook thesis.”
The original Lykeion (pronounced lie-key-on), aka the “Lyceum,” was a temple where ancient Greek philosophers like Plato, Socrates and Aristotle gathered to debate the topics of the day.
The team behind the modern-day digital platform Lykeion wants it to be a high-level forum for discussion about finance — specifically, the intersection of business, finance and geopolitics. Lykeion’s flagship product is a newsletter Roger writes with his colleague Jacob Shapiro, who serves as the publication’s geopolitics editor.
Roger, a 30-year investment banking veteran who is also the managing editor of Real Vision Creative Studios — and Jacob, a partner and director of geopolitical analysis at Cognitive Investments and founder of consulting firm Perch Perspectives — joined me for a recent installment of our Global Macro series on Top Traders Unplugged.
“My money is where my mouth is on a lot of this stuff,” says Jacob. “We’re directing client assets based on some of these geopolitical insights.”
Roger, Jacob and I talked about China and its capacity to influence global growth; whether “deglobalization” could happen and why; and the potential of Latin America in today’s geopolitical landscape.
Below are selected highlights from our discussion, centered mostly on the concept of “certainty” in an uncertain world, the nature of geopolitical time, their criticisms of Peter Zeihan’s bleak forecasts and their insights on the two issues to watch in what’s left of Q1: China’s COVID “reopening” and the war in Ukraine.
COVID uncertainty in China
Every time I turn on the financial media, I hear the word “uncertainty.” My guess: It’s used when people can’t explain what the markets are doing.
I asked Jacob to give me his perspective about where the uncertainty in the world of finance really lies.
He thinks there are two major geopolitical uncertainties in the world today: China’s opaque COVID-era economy and the Russia-Ukraine war.
Coming out of the Lunar New Year holiday, China appears fairly stable. Chinese Communist Party leader Xi Jinping won a third term last fall amidst “scary” economic growth figures and a real-estate crisis. The government abruptly reversed its draconian “zero-COVID” policy in January, and the country’s health system — though it’s not great overall — “seems to be holding,” says Jacob.
“We’re not getting mass protests in the streets and hospitals being overrun by strange new variants, which was really on the table even a month or two ago. … We’ll see if [management of COVID and positive economic growth] can continue going forward,” Jacob adds.
Russia, Ukraine and the balance of power in Europe
Uncertainty number two is the Russia-Ukraine war, which has escalated since Lykeion put out its Q1 report on January 21.
Jacob says that just last month, the market seemed to anticipate “a truce or a frozen conflict of some sort,” he explains. But in recent weeks, “the Americans and the French and everybody else [are] saying they’re going to deliver more ammunition and artillery shells to the Ukrainians.”
Six months ago, providing tanks and air support was “completely off the table.” But on January 25 President Biden announced that the U.S. will deliver dozens of tanks to the Ukrainians; Politico reported on January 28 that Western officials are talking about fighter jets and air support. And “on the Russian side, you have a power that does not look like it’s slowing down anytime soon,” Jacob says.
“Russia is mass-mobilizing people for a meat grinder conflict and just throwing numbers at Ukraine’s technological superiority.”
The Russian strategy is simply to outlast its enemy and “to be okay with casualty rates that are far higher than you can stomach,” he adds. “I’m thinking we’re probably getting a major escalation of the Russia-Ukraine war in the next couple of months.”
However, “if you told me there was a frozen conflict à la 2014, if you told me that Ukraine overwhelmed Russia’s military forces and took all the territory back that was taken after 2014 and beyond, I’d believe that.”
There’s just so much uncertainty about the Russia-Ukraine war that “it’s hard to think about the commodity markets that are related to Russia and what European energy looks like,” Jacob notes.
“When you start out from that big an uncertainty at the core of everything, it’s really hard to make confident theses — at least at a macro level.”
Recency, sequencing and recession
Roger’s global-macro point of view on what’s “uncertain” in today’s world differs from Jacob’s.
Last year, a recession seemed like “almost an absolute certainty,” says Roger. “It felt like it was this easy forecast to make. But as time has progressed, that certainty has started to dissolve into numerous very plausible outcomes.”
He argues that this miscalculation is the result of a “recency bias”: We are accustomed to major events unfolding quickly. COVID is a prime example, but even the financial crisis of 2008/2009 seemed to change everything all at once.
“We’re used to things happening so quickly that because the recession everybody wanted and has been predicting for the best part of a year hasn’t yet arrived, it’s created uncertainty,” Roger explains.
He thinks the uncertainty is about sequencing.
The prior “certainty” of a recession is now “actually becoming a plausible scenario,” but it’s a natural progression towards recession.
Equally plausible: “Things do quite well in Q1 and maybe Q2 and bounce — and the Fed has to create a recession or at least tighten financial conditions once more in order to ensure the inflation genie gets forced back into the bottle.”
The end of the world as we know it?
Peter Zeihan, a previous guest on Top Traders Unplugged and author of “The End of the World is Just the Beginning,” forecasts a radical, seismic global shift in geopolitical borders and demographics of key countries in the coming years.
Jacob happened to send a report called “The World Is Not Ending” to a client this week, which directly refuted that claim.
“Not only do I not think the world is ending,” he says, “but I think Peter and I see time horizons quite differently. He sees a lot of disruption, uncertainty and risk in the next couple of years, and then thinks we’re going to get to the broad, sunlit uplands of U.S. hegemony returned in the world order.”
Jacob predicts that the next 10 to 15 years will “look something like the 1890s and 1900s, which were very, very good years,” –– and that “we’re headed towards a multipolar world.”
The fin de siècle of the end of the 19th century was an era of energy transition, technological innovations and geopolitical competition. “Britain and Germany were trading more and more with each other, right up until the ‘Guns of August,’” he says. “I think that’s the kind of world we’re entering … I’m optimistic about the next five to 10 years.”
Unfortunately, his optimism has an expiration date.
“I am petrified about the world my children are going to inherit,” Jacob says. “I worry a lot about a U.S.-China war 15 or 20 years down the line.”
The redistribution of wealth … and food for thought
Jacob thinks that Peter Zeihan would look at a demographic pyramid of China and argue that it’s collapsing.
“I grant you that the demographic pyramid looks terrible,” Jacob admits. “But keep in mind that there are hundreds of millions of Chinese people living in the interior of the country who have not enjoyed the prosperity the coast has in the last decade or so. One of the reasons Xi Jinping named himself emperor de facto is because he wants to redistribute that wealth from dudes like Jack Ma and others … to the guys in the interior.”
The interior includes “hundreds of millions of people who currently live on something like $3 to $6 a day, who, if the Chinese Communist Party can redistribute that wealth, will [create] the same sort of equivalent of a demographic dividend without having to have a bunch of children. This idea that China’s collapsing — that Xi Jinping is Mao — I don’t see any of that. I think that analysis is wrong.”
Jacob also disagrees with Zeihan’s arguments about food crises: that in the next decade, we could lose hundreds of millions, if not billions of people to famine due to loss of industrial agriculture inputs.
That’s a “fringe possibility,” although not impossible, says Jacob. However, for literally hundreds of years, economists have suggested the world would be unable to produce enough food for the global population and “they’ve never been right,” he notes, explaining that historical arguments assumed technology would stay the same.
But that’s unlikely. Technology marches on.
“There are so many interesting things happening in genomics and alternatives to fertilizer,” Jacob says. “If we cut down on food waste we grow by about half, we could probably feed the world one and a half times over if not two times over.”
When you say it’s going to happen now … well, when exactly do you mean?
Again, Roger doesn’t completely agree with Jacob, but has plenty of compelling thoughts about the nature of geopolitical time.
“I grew up in the 1980s listening to The Smiths,” says Roger. “In this world of markets, I always come down to the famous song ‘How Soon Is Now?’”
That’s the thing with geopolitics, he says: “What is the timeframe? Because as investors and traders, there are those who think about their pensions long-term. But most people think about something like a two-week to maybe a two-year horizon. … In geopolitics, things operate on a relatively glacial timeframe compared to [investments] in markets.”
This crawling pace is one of the reasons why last year’s recession “certainty” has become uncertain. But 12 months feels like a lifetime for some investors.
Pretty much every time Roger and Jacob disagree on an investment opportunity, it’s basically about what they each think “now” means.
Roger’s idea of “now” means he might make money “on something that expires in three weeks’ time in the futures market,” whereas Jacob might wonder, “Is there a buying opportunity in the second half of 2023 [that will pay off in] the next 10 years?”
Geopolitics as a methodology
In response to even the most pessimistic forecasts, like Peter Zeihan’s argument that the world is ending, Roger says: Well, over what time period?
He points to the hyperinflation in Germany from 1919 to 1923 — an economic disaster in the Weimar Republic that led to the rise of the Nazi party — to illustrate his point.
“Looking back, that was a tiny little timeframe,” he says. “But that four-year period was, for a lot of people, a very long period of time.” (Not to mention, a market downturn that indirectly led to the Second World War.)
“One of the difficulties we have all the time,” Roger adds, “is putting a macro overlay onto a geopolitical kind of framework where one is operating as a fast-twitch muscle and the other one is going for a marathon.”
And sometimes, that leads even the most seasoned economists to admit they just don’t know — at least right now. Uncertainty is a catalyst for seizing opportunity as soon as the picture becomes more clear.
In Lykeion’s latest newsletter, Jacob writes:
“Geopolitics is not an objective force. It is a methodology for understanding relations between nations. Geopolitics should never tell you what to think – if it has, it has gone off its methodological rails. Geopolitics directs you on how to think, and over the next three months, it’s directing you to pay careful and humble attention to the Russia-Ukraine War and the China COVID-19 situation, and to be ready for a range of possibilities so that once better data is available, you can be among the first to react.”
How soon will that be? Any time now — watch this space.
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.
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