The New Geopolitical Order and the Barrage of Black Swans
In the annals of history, the year 2024 will be remembered for its relentless cascade of profound events, reshaping the geopolitical landscape with unprecedented ferocity.
On Saturday, July 13th, a startling attempt on the life of former President Donald Trump sent shockwaves through the American political arena. Concurrently, rumors of a heart attack afflicting Chinese President Xi Jinping went viral, propagated by Russian media, and a widespread failure in cybersecurity servers, stemming from a misconfigured update by CrowdStrike, demonstrated the fragility of our digital infrastructure. These events underscore the profound vulnerability of our systems to potential large-scale cyberattacks, heralding a new era of uncertainty.
Defining the Black Swan
Nassim Nicholas Taleb's seminal concept of the "Black Swan" event is crucial to understanding our current predicament. Taleb defines a Black Swan as an outlier, an event so rare and unpredictable that no past data can convincingly forecast its occurrence. These events carry severe impacts and, despite their improbability, are often rationalized post-factum, creating an illusion of predictability.
Key Characteristics of a Black Swan:
Rarity: Events that are extraordinarily rare and defy prediction based on historical data.
Severe Impact: These events have profound and far-reaching consequences.
Retrospective Predictability: In hindsight, we often concoct explanations, making the events seem less random than they truly are.
Taleb, though a brilliant generalist, is known for his contentious demeanor and disdain for many economists and professionals. Yet, one intellectual he respects is Didier Sornette, Professor Emeritus at ETH Zurich. Sornette's concept of "Dragon King" events further enriches our understanding of extreme outliers.
Dragon King Events: Beyond the Black Swan
Didier Sornette introduced the term "Dragon King" to describe rare, extreme events fundamentally different from regular, predictable system behavior. Unlike Black Swans, which are outliers that follow a power-law distribution, Dragon Kings represent events that go beyond the power law, standing out as exceptions even within the tail of the distribution. These events are generated by distinct mechanisms, making them significantly deviate from expected statistical distributions. Dragon Kings often signal systemic changes, bubbles, and crashes, indicating an underlying transformation in the system's dynamics.
Key Characteristics of Dragon Kings:
Uniqueness: Dragon Kings are singular and unique, standing out from regular patterns.
Predictability: Despite their rarity, Dragon Kings may be preceded by identifiable precursors or early warning signals.
Distinct Mechanism: Generated by different mechanisms than those producing normal outliers.
The Rise of Protectionism
Trump, seen by many Americans as a hero, channels a sentiment for increased protectionism. This sentiment is not confined to the United States; Europe witnesses a resurgence of nationalism in France, Germany, Poland, and Hungary. The problem in Europe is more complicated because of the clash of two religions and systems: the clash of Islam against Christian Western society. The Austro-Hungarian Empire attempted the experiment of coexistence of both cultural systems, and we all know how it ended. The Eurozone is the Austro-Hungarian Empire of our times.
This wave of protectionism heralds a new era of geopolitical and economic shifts. Protectionism could weaken national treasuries and ignite large-scale currency wars. The historic devaluation of the yen raises critical questions: Is this a strategic move by the Japanese government to gain a competitive edge, or merely a consequence of the current macroeconomic environment?
The Dollar and the Magnificent Seven
Amidst this chaos, the US dollar remains strong against other fiat currencies. The United States enjoys increased productivity and a degree of energy independence unmatched by its allies. The "Magnificent Seven," the key players in the AI revolution, are all based in the US. While these companies dominate the current narrative, many analysts question them as a bubble. However, the biggest risk may not lie in the AI giants. The pressing question is which companies, countries, and assets will suffer in a new protectionist regime.
A Decade of Conflict
We are entering a decade marked by currency wars, trade wars, technological battles, and proxy conflicts. Emerging markets face fragility, where protectionism without productivity gains could lead to runaway inflation or currency collapse.
When trust in states collapses, traditional safe havens like gold reemerge. Meanwhile, a significant number of enthusiasts gather at the Bitcoin conference in Nashville, seeking to create an escape route for citizens in countries where the social contract is failing. Though the conference itself is small, it represents the spirit of millions who yearn for financial freedom. For the first time, citizens can invest in a digital contract with clear rules, offering a potential escape from collapsing national currencies.
The Political Capitalization
This movement will inevitably be politically capitalized upon by various representatives. Figures like Donald Trump, Robert Kennedy, Senator Bill Hagerty, Senator Marsha Blackburn, and Vivek Ramaswamy will seek to harness this sentiment, shaping the future geopolitical landscape.
Conclusion
The new geopolitical order is defined by the emergence of Dragon King events and a barrage of Black Swans, reshaping our world in unpredictable ways. As we navigate this turbulent era, the importance of remaining adaptable, insightful, and prepared cannot be overstated. Recognizing these seismic shifts as Dragon King events allows us to better understand and anticipate the profound changes ahead, enabling us to adapt and thrive in a rapidly evolving world.
FLEXIBILITY, LIQUIDITY, AND CONTRARIAN THINKING WILL BE THE MOST IMPORTANT ATTRIBUTES FOR EVERY SINGLE MONEY MANAGER.
Thanks for reading,
Guillermo Valencia A
Cofounder of Macrowise.
June 21st, 2024