Marko Papic Talks ‘Geopolitical Alpha’ and the Future of the Global Economy

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• The academic discipline of macroeconomics can only go so far when developing market insights. Political and geopolitical analysis is increasingly necessary to understand the global economy and market forces that impact anyone who invests.
• That’s what Clocktower Group Partner and Chief Strategist Marko Papic argues in his book “Geopolitical Alpha: An Investment Framework for Predicting the Future.”
• Marko joins host Hari Krishnan to discuss geopolitical analysis as a tool for making business and investment decisions, as well as his team’s outlook on China’s zero-COVID policy and its impact on the country’s industries.

The first chapter of Marko Papic’s 2020 book “Geopolitical Alpha: An Investment Framework for Predicting the Future,” is called “We’re Not in Kansas Anymore” — an extended “Wizard of Oz”-inspired metaphor for tornado-like global disruptions and the media’s financial-analyst hucksters “behind the curtain.”  

It’s also the story of what happened after the fall of the Berlin Wall and the Iron Curtain: the collapse of the Communist system. Born in Belgrade, Yugoslavia (now Serbia), Marko learned firsthand how geopolitics can impact financial markets — and our everyday lives. Wracked by internal conflicts, mismanagement, inflation, currency devaluation and foreign military intervention, his homeland disintegrated before his eyes. 

In 1986, Marko’s father joined Genex, Yugoslavia's biggest (and state-owned) export company. He had a successful career and achieved an upper-class lifestyle for his young family. He was stationed in London for a few years, where Marko and his sister learned English. 

But by the mid-’90s, “the near first-world life that my family built in Belgrade descended into hell in weeks,” Marko writes in “Geopolitical Alpha.” In 1994, the Papics escaped to Amman, Jordan with just two suitcases. 

Today, after a decade of studying history, political science and government — and another decade in the financial industry — Marko is partner and chief strategist of Santa Monica, California-based Clocktower Group, an alternative asset management platform in public markets and an investor in early-stage fintech disrupters and companies tackling climate change. He leads markets coverage and macro intelligence for Clocktower. 

On this episode of Top Traders Unplugged, guest host Hari Krishnan welcomed Marko to discuss his career in research and how geopolitical analysis can prepare investors for the future. They talked about why Bayesian analysis is Marko’s tool of choice, why he believes tech companies will begin to massively underperform and why he’s hedging against the dollar — as well as his belief that the war in Ukraine will soon enter stasis, and much more. 

Here, I share some key points from their talk, including Marko’s insights on China’s zero-COVID policy and the erosion of the “Washington Consensus.”

Objective analysis 101: ‘Every side should be angry’

Marco began his career as an analyst at Stratfor under the firm’s cofounder, George Friedman, one of the world’s most famous and cited geopolitical analysts. 

Friedman taught him that writing a great analysis means “every side should be angry,” Marko says. He learned how to: do research, be objective and “think beyond the headlines,” create CEO sound bites and stage press conferences that tend to feature heavily in geopolitical intelligence reports for the business and finance worlds. 

In 2011, he joined BCA Research (“the oldest and largest investment research firm in the world,” he notes), where he learned “how to be an investor and how to be an investment strategist,” Marko says. “Everything I learned about the markets really comes from that.”

Marko says one of the great things about BCA is a massive library of its own research that goes back to the 1950s, when charts for research reports were hand drawn. 

“That was incredibly valuable for me and for my experience,” he recalls.

Because BCA is purely focused on writing and research, it has the “level of independence that I think is really critical in this industry,” he adds. “Also, it was off Wall Street — in that it was headquartered in Montreal, which I initially thought was really weird. When I moved there, I was like, How am I going to actually learn anything? Then I realized … it’s frozen winter for six months of the year. You have nothing to do but hit the books.”

Macroeconomic insights are a ‘craft, not a science’

At BCA, Marko launched a geopolitical strategy service, the first and only of its kind in the financial industry, aiming to avoid bias in investment forecasts. The analytical framework he mastered there considers geopolitics as either risks or opportunities, with a focus on the need to preserve capital and make profits when risks are mispriced.

It was a new methodology for BCA’s researchers, who previously relied on the academic discipline of macroeconomics to develop market insights. Marko calls then-CEO Bashar Al Rouhani “an innovator” who “pushed for someone like me to join the firm” — someone whose life experience and background could provide new perspectives on emerging markets and the political forces at play in our global marketplace.

“Everybody there was open to using other methodologies and frameworks to truly craft the views [it provides to clients],” he says of BCA. “That’s something that I think a lot of investors have to understand: We’re in the business of a craft; it’s not a science. And it’s not totally bullshit.”

Marko tells Hari that his experience at BCA taught him to “embrace the consilience of our industry — the marriage of different views in order to craft your view.” 

That’s readily apparent in “Geopolitical Alpha,” which (as eloquently described in a review of the book by SpecialEurasia) Marko defines “as the practice of ignoring media-told narratives, smoky room insights and most policy advisors — and instead focusing on the measurable and meaningful constraints facing policymakers.”

So what are those stories we’re being told, and what does Marko see as the real, data-backed truth?

Why worry about politics? A paradigm shift is happening — now

“I’m going to make a bunch of statements, and I suspect you will disagree with all of them,” Hari tells Marko. “But I’d like to hear your comments as they refer to the book.” 

First up: “Geopolitical analysis, if it is valid, in terms of trading or investing in markets is only really required in emerging markets — or, say, before elections in emerging markets, because politics are a dominant factor in sovereign yield spreads and so on,” Hari says. “But in developed markets, we don’t really care. Because even if there is a seismic event like 9/11, it may create a shock, but it dissipates every time. So why worry about it?”

That statement is correct, Marko says — but only because over the course of our careers (and the careers of most of us at Top Traders), the influence of politics took a backseat. He thinks the last 40 years were an anomaly: We didn’t really need to know the political and geopolitical landscape to invest wisely. 

But throughout history, understanding politics has been a requirement for successful investing. And Marko thinks there are “paradigm shifts” playing out right now, “such as the move away from laissez-faire economics and the Reagan-Thatcher revolutions, which created a set of best practices referred to as the ‘Washington Consensus.’”

The erosion of the ‘Washington Consensus’

The Washington Consensus practices are currently being eroded, evidenced by the U.S. government “explicitly getting involved in who wins and who loses even at the sectoral level,” Marko argues. “Things like state aid, which are illegal, according to the WTO — the EU Commission used to sue countries in Europe when they offered state aid to industries — now we’re doing it willy-nilly.”

Another example: The CHIPS and Science Act. 

“Literally, the United States of America is telling foreign companies: Don't trade with China,” Marko explains. “But it's cool, because we'll give you hundreds of billions of dollars if you come and build a factory in our country … How is that legal by the WTO [standards]? At the same time, Like, who cares what the WTO says?” he says facetiously. 

“We are now in a different world, Hari,” he adds. “I'm very clear in the book. As an investor, you still need to start with valuations. You still need to start with a bottom-up understanding of where the earnings are going to come from. You still need all the stuff the CFA taught you. My claim is modest. Just add a little new tool into that tool kit: political and geopolitical analysis.”

‘Insider’ info and policymakers’ double-talk

Our guest host puts forth another idea to Marko: “If you want geopolitical analysis, go to the former insiders,” Hari says. “They might be ‘out,’ but they know how the system works.”

“You know how to push my buttons,” Marko replies. 

“Look, we just had an interesting situation over the last couple of days that I’m very proud of, because … my team crushed it. It wasn’t me, it was my colleague who runs our Shanghai office, a brilliant young strategist … who basically put his foot down and said that ‘zero COVID’ is going to end sometime between March and June.”

That’s a much earlier deadline than most forecasts from experts and Chinese policymakers. Marko says policymakers in China would say the government is serious about its zero-COVID policy. In early November 2022, headlines stated that the State Council of China was refusing to modify its policies. Then, “boom — on November 11, they come up with these 20 new modifications, which are telling us the cat is out of the bag, we’re moving towards fewer zero-COVID [restrictions].” 

So how can geopolitical analysts make the right predictions — especially when it comes to a country like China, with a notoriously opaque, authoritarian government?

“Not by talking to policymakers,” Marko says. “We figured out that provinces are running out of money. They can’t do PCR testing. They’re asking people to pay for their own quarantine.”

He calls these draconian zero-COVID policies a “French Revolution [style] risk for China.”

Binge-buying is so over, and other insights from an analyst 

The Western consumer is no longer “bingeing on goods,” a trend wrought by COVID lockdowns and by economic stimulus packages. This means Chinese exports are downshifting, says Marko.

What’s interesting about zero COVID, he adds, is that “we in the West enabled Chinese policymakers to do zero COVID, because [China’s] growth was dependent on external demand.”

Now, the economic slowdown in the U.S. and the recession in Europe creates a “shift away from goods to services, so the fundamental macro constraints are forcing a shift [away from] zero COVID.” 

How did his team get it right? 

“They looked at the material constraints that forced policymakers into the political path of least resistance, and we didn’t have to talk to a single individual in China [to make that call],” Marko says.

He doesn't discourage investors from paying for advice from policymakers, but he does encourage them to read his book first — and preferably, go to a trained analyst like himself instead.

“Policymakers not our friends. They’re not our allies. They’re not our sources of research,” says Marko. “They’re the subject of our analysis.”

“They are the children of the Enlightenment,” he says of policymakers. 

“They believe that human agency can improve mankind. My point to investors is, That's cool. We love them for that. But the truth of the matter is this: Material constraints will always win over policymaker ingenuity. Focus on constraints first, then focus on preferences.”

He says policymakers are “trained to overcome constraints,” but he believes that constraints are the key to predicting where the market goes next. 

Marko identifies four critical constraints that directly affect the market: political economy, macro-economy and financial markets, geopolitics, and constitutional and legal position — as well as two wildcards (terrorism and pandemics).

He adds that policymakers are nationals who love their countries and defend the interests of their countries. 

But “you don’t want that as an investor,” Marko says. “You want someone who has a geopolitically promiscuous mind, who can think in a rational way. Because you’re trying to invest, you’re not trying to defend the national interest of the United States of America. And if you conflate the two, well — then, good luck investing.”

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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. Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.