There is plenty just now to occupy the armchair general. Geopolitical risk is on the rise after a pause for the pandemic, concludes a recent paper fromResearch. Three proto-conflicts in particular are hogging headlines and testing the resolve of the new administration in Washington. Russia has deployed enough troops to stage fresh incursions into eastern Ukraine. Iran has stepped up its nuclear programme, to the ire of Israel.
Perhaps the most seductive idea to repel is that you have some expertise. Genuine experts are not in short supply. Just about anyone who spent time at the State Department or as a national-security adviser appears to have set up a consultancy. But there are pitfalls for the unwary, as Marko Papic of Clocktower Group, an alternative-investment firm, argues in his book “Geopolitical Alpha”.
At the outset of a geopolitical crisis, events move more quickly than you can trade on them. You read of tensions in the Middle East. So you buy oil futures. But algorithmic traders will beat you to the punch. You could chase the escalation. But now you are a momentum trader, rather than a geopolitical-risk trader. And sometimes there is no obvious trade to execute—or the seemingly obvious trade doesn’t entirely make sense.
The markets can’t value outcomes that it cannot predict. The damage comes when geopolitics actually hinders the operation of the some part or all of an economy in a major way. Many things affect geopolitical strategies and decisions - not just economics.
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