The Case for a Superpower Rapprochement

In October 2021, Pippa Malmgren launched her Substack by arguing that the world was already in World War III. At the time, many readers dismissed the idea. Over four years later, that language has become far more common.

Malmgren, a former White House adviser whose father worked on the Cuban Missile Crisis and advised several US presidents, describes this as a “latency problem.” By the time the wider consensus catches up with what she saw earlier, she has already moved on to the next development. Today, while others are only beginning to recognise the scale of the conflict, she believes the superpowers may already be moving toward a resolution, what she calls the "hug."

Why should investors pay attention? Geopolitical thinking is heavily weighted toward escalation, fragmentation and war. Most people consider the downside in detail, while giving far less attention to the possibility of accommodation or peace. That imbalance in the scenario tree is worth examining.

"It's Either the End of the World or it's a Hug"

Pippa’s argument begins with the reality of nuclear deterrence. A direct military confrontation between nuclear superpowers would be catastrophic, and every major leader understands that. Drawing on Herman Kahn’s work on escalation, she argues that once nuclear weapons are used, events become difficult, if not impossible, to control. That risk creates a powerful incentive to avoid direct conflict.

In her view, this leaves the superpowers with two possible outcomes: destruction or accommodation. History offers examples of leaders choosing the latter. Nixon met Brezhnev when many believed such a meeting was impossible. Reagan and Gorbachev later did the same. In both cases, hostile superpowers eventually found a way to negotiate.

Pippa says her father, who worked on the Cuban Missile Crisis, taught her that when leaders come close to a nuclear exchange, they become acutely aware of the human consequences. Nobody wants to make the final decision that could end millions of lives. That does not mean the path toward an agreement will be smooth. It may remain tense, unpredictable and dangerous, but she believes the pressure created by nuclear weapons ultimately pushes leaders toward diplomacy.

How Today’s Conflicts Could Be Creating the Conditions for a Deal

Pippa believes markets make a mistake by treating Ukraine, Taiwan and Venezuela as separate conflicts. In her view, they are connected parts of a broader strategy aimed at producing peace in Ukraine, an accommodation over Taiwan and, eventually, a wider agreement between the United States and China.

She points to both public developments and quieter diplomatic signals. One example is the alignment she sees between the United States and China on preventing nuclear escalation in Ukraine and keeping global oil markets functioning. She also highlights developments around Kinmen, a Taiwanese-controlled island close to the Chinese mainland, where the movement of people and changes in cross-strait relations may suggest that discussions are taking place behind the scenes.

For Pippa, ending a conflict also requires offering each side a more attractive future. Russia could be brought back into the global economy after a peace agreement. China could gain greater access to US markets and move beyond an economic model based mainly on low-cost exports, building global brands in the way Germany and Japan did after the Second World War.

Many people will disagree with this interpretation. But her broader point is that lasting peace is rarely achieved through pressure alone. It usually requires giving each side a reason to believe that cooperation offers a better future than continued conflict.

Why Investors Should Prepare for Peace or Escalation

There's a lot to learn from this debate on whether peace or escalation is imminent. But perhaps the most useful lesson for investors is about preparation.

Markets reward participants not for knowing exactly what will happen, but for considering a wider range of possible outcomes. At the moment, geopolitical analysis is heavily weighted toward escalation. These risks are heavily discussed, modelled, and hedged. The possibility of resolution receives far less attention.

History shows why this matters. Previous periods of superpower tension eventually gave way to negotiated settlements that many people had considered impossible. For example, the relative peace that followed the end of the Cold War lasted so long that it started to feel normal, even though it was the result of difficult and sustained diplomacy.

You do not have to believe another “superpower hug” is coming to ask whether your portfolio assumptions are prepared for one. The downside scenario already has countless analysts studying it. The upside has far fewer. It's crucial to examine both.

DISCLAIMER: This article is based on a conversation from Top Traders Unplugged and reflects themes, ideas, and perspectives discussed during the episode. The views expressed are those of the guest and participants in the conversation and should not be interpreted as investment advice or as the official views of Top Traders Unplugged.

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