Geopolitical Alpha
Geopolitical Alpha

Geopolitical Alpha

For most of the past three decades, the investment and geopolitical communities rarely communicated, in part because they struggled to understand each other. (Location 516)

I got lucky. The place was fast-paced, young, and brutal. It taught me not to waffle, to digest information quickly, and to create knowledge shortcuts. But I was still missing the sense that I was making a difference in anybody's life. (Location 527)

And yet … I had a reason for dismissing this news. I had a framework, and it had taught me to push hard against the Eurosceptic narrative for months. (Location 575)

The framework boils down to this: Niccolò Machiavelli was wrong. No amount of Virtù will help the Prince overcome Fortuna. So don't study the Prince. Study his constraints. (Location 579)

And human. And over-professionalized. To become an investment professional in 2010, one had to be confident in a lot of subjects, but a basic grounding in political science was not among them. (Location 597)

First, the president was constrained by Germany's constitutional irrelevance. Second, I already had a framework for what German policymakers and voters would be forced to accept in the Euro Area crisis. (Location 605)

After downloading the constraint-based framework, the reader will be able to stop relying on the news flow for analysis. (Location 611)

I take one chapter to describe this framework. The punchline: investors (and anyone interested in forecasting politics) should focus on material constraints, not policymaker preferences. (Location 614)

I go over these paradigm shifts rather quickly because, at the time of this writing, the idea that “we're not in Kansas anymore” is obvious. (Location 619)

The focus of the rest of the book is on the framework itself. While I initially built the constraint framework to help investors make sense of geopolitics – and make money in the process – the C-suite can also use it to make long-term investment decisions. Journalists can use it to find the right buttons to push in an interview, and voters to become more politically informed. (Location 623)

The book concludes by operationalizing the framework in a process that gives us the title: Geopolitical Alpha. Alpha, in the context of this book, refers to a return on an investment against a benchmark, in finance-speak, rather than the leader of a pack or someone spending too much time in a gym. (Location 632)

That potential absence of a knowledge base is why I include a chapter on how to use expert judgment. (Location 637)

This is a methods book. I offer up my framework because many investment professionals have found it useful. But I am not a prophet, nor will focusing on constraints make anyone else a prophet. (Location 639)

The geopolitical gravy train ended and Genex's edge with it. The firm's entire corporate strategy was leveraged to the geopolitical status quo. (Location 694)

Thanks to the combination of a massive geopolitical paradigm shift and epic mismanagement, Yugoslavia in the 1990s was worthy of a chapter in Jared Diamond's Collapse. (Location 696)

Thankfully, my dad saw it coming, so he quit Genex a few years before the deluge. He got a job in a direct sales company selling cooking pots. He went from faux IBM to essentially Tupperware. (Location 709)

If you are a CIO of an institutional investment fund, a portfolio manager in an asset management firm, or a C-suit executive, you also face geopolitical paradigm shifts that will, at best, make your work more challenging. (Location 713)

In his seminal work, The House of Rothschild, Niall Ferguson describes how the Rothschild family – well-versed in geopolitical analysis – became the richest and most powerful family of the nineteenth century. (Location 721)

For centuries, success in business and investing required the skills of both long division and sensitivity to political and geopolitical change. Yet today the curricula of most MBA programs – and the CFA curriculum in its entirety – ignore the latter. (Location 728)

Politics and geopolitics still played a role, but in the background, working as a tailwind in the sails of investors. Events and paradigm shifts played out into the hands of the multinational corporate and financial communities. (Location 734)

By the time I entered the financial industry in 2011, few if any of my clients and colleagues had ever had to make an investment decision based on geopolitics. (Location 741)

One country that rejected the supply-side revolution was France. In 1981, in the midst of the rightward policy turn in the UK and the US, France elected socialist François Mitterrand. Mitterrand ran on an unabashedly left-wing policy package called the “110 Propositions for France.” (Location 776)

On the geopolitical front, hegemonic stability – in the words of Charles Kindleberger – prevailed.15 The George H.W. Bush and Bill Clinton administrations enforced that stability when they engaged with the rest of the world. (Location 787)

By ushering in stability and globalization, the US allowed countries to set aside their challenges to US hegemony and focus on economic development. (Location 796)

Multipolarity is a concept from political science that describes a world in which no single entity (unipolarity) – and no two entities (bipolarity) – possess a preponderance of power with which to impose order in an otherwise anarchic system. (Location 800)

Without a single hegemon to enforce rules of behavior, globalization reached its apex in the past decade. This sequence of events did not require the election of a populist to divine. (Location 812)

Finally, the Great Recession of 2008 and rising income inequality in the developed world undermined the laissez-faire economic system. (Location 817)

The pandemic has simply accelerated the paradigm shifts that began in the 2010s: geopolitical multipolarity, deglobalization, and the end of the Anglo-Saxon laissez-faire consensus. (Location 837)

The reason policymakers were not behind the curve when it came to monetary and fiscal stimulus had little to do with the nature of the crisis. They were already primed to respond with extraordinary measures by the paradigm shifts of the last decade, particularly shifts away from the Washington Consensus. (Location 844)

The COVID-19 crisis may have accelerated the inevitable, but America's turn from a laissez-faire economy into a dirigiste one had begun much earlier. For investors and businesses, geopolitical analysis became more important than ever. (Location 848)

The quarter-century between 1985 and 2010 was a great time to be an investor. With geopolitics and politics on autopilot, running a business or a portfolio became routine, iterative, and mathematical. The Goldilocks Era allowed for the professionalization of the investment industry in unprecedented ways. (Location 854)

During a quarter-century of self-selection, hiring managers favored industry entrants who were comfortable with quantitative modeling and engineering. (Location 858)

By the 1990s, economics had won the war of social sciences. It dominated academia to the point that political scientists no longer produced research that any policymaker, business person, or investor paid attention to. (Location 867)

selection: As investment decisions became more and more akin to engineering problems, the industry stocked up with engineers. (Location 871)

However, laissez-faire ideology often comes with a disdain for government and politics that denigrates the very act of political analysis. (Location 878)

Of course, investors should still use quant tools and approach their craft with scientific rigor. But the Goldilocks Era of geopolitical tailwinds allowed investors to become overly focused on macroeconomics and the markets. (Location 882)

Further, investors were generally blind to a major irony in their own ignorance of politics. It was politics and geopolitics that played a major role in the “Great Moderation,” which saw inflation tamed and economic volatility dissipate. (Location 886)

That such moderation was actually underpinned by globalization, massive expansion of the global labor supply, adherence to laissez-faire policies, and global stability enforced by American hegemony is a heretical view.21 (Location 888)

In my experience, the political consultancy business is dominated by advocates of the “intelligence model.” The major consulting firms hire former technocrats and occasionally former policymakers. (Location 904)

The first is the “statistical significance” problem. To make a reasonable forecast or net assessment, public (government) agencies rely on signals from electronic and human signals (data points), creating a mosaic of information and sources that approaches some reasonable level of statistical significance. (Location 910)

Instead of a mosaic of intelligence, the investor quite often gets an over-the-hill technocrat looking to cash out. (Location 914)

Similarly, getting (legal!) policy intelligence on a particular regulatory matter may indeed generate alpha. (Location 920)

I will spend a lot more time on this question of “supply” of political analysis – and how to talk to “experts” – in Chapter 3. (Location 923)

For now, the point is that investment-relevant political and geopolitical analysis is not something that should be outsourced to a former State Department deputy assistant secretary of European and Eurasian affairs. (Location 928)

That I am now a chief strategist of an alternative asset management firm is a foreboding outcome for the world of finance. (Location 939)

Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences. (Location 947)

The criticism I've heard most often is that “political analysis is a nice-to-have, but it is not a must-have.” It is marginal to the decision-making process – at best, a handy tool when an exogenous event threatens one's strategic decisions. (Location 1019)

Since 1949, BCA Research has offered its clients an interesting proposition: getting the macro forces in the economy right is more effective than trying to pick individual stocks. (Location 1032)

The macro DNA behind BCA's success is credit cycle analysis. Getting the credit cycle right is still the backbone of macro investing. (Location 1034)

Yes, even in 2011, BCA Research had “stacks” of academic journals and books, some going back over a century. (Location 1048)

At the end of this apprenticeship period, I sat down with the mild-mannered gentleman who was my mentor. It was time to sell my strategy and earn my place at the shop. (Location 1051)

I was disappointed. I had a gut feeling that most Black Swan events were irrelevant, a feeling later confirmed by quantitative research. (Location 1059)

academia. If this guy wanted me to write about Black Swan events, why rock the boat? That job is simple enough: take my colleagues' view of the markets as a fait accompli and apply some probability profile from the geopolitical risk smorgasbord. (Location 1071)

As such, they relied on private-sector relevering to get out of each slowdown. Their over-reliance ushered in what BCA Research later called the “Debt Supercycle” (which, incidentally, didn't end until 2008).9 (Location 1080)

The only way to incorporate geopolitics was to recognize its pervasive influence. It affects everything it touches – from market forces down to the individuals who analyze them. (Location 1107)

“We are going to make market calls and forecasts based not on what policymakers want to do, but on what they must do given their material reality.” (Location 1111)

Machiavelli posits that governance is an interplay between Fortuna – fate and all things beyond the control of the Prince – and Virtù – the Prince's ability to navigate Fortuna. (Location 1119)

The Prince is not a treatise on forecasting politics and geopolitics. It is a manual for the acquisition and preservation of power. (Location 1130)

ago. If forecasters could predict the flow of that river, would they not be more than halfway to predicting policymaker behavior? (Location 1138)

Marx – as an analyst, not a prophet of doom – is an essential teacher in analyzing the terrain upon which Fortuna flows, and his analysis is the first pillar of the constraint method. (Location 1146)

While the conclusions of Das Kapital are interesting, and much ink (and blood) has been spilled debating them, it is the engine that powers these conclusions that is most relevant to the constraint framework. This engine is “dialectical materialism.” (Location 1155)

For Hegel, the starting point of the search for truth is human thought: ideas. Like Machiavelli, Hegel sees the human actor as possessing agency. According to Hegel's worldview, the ideological preferences of both the powerful few and the masses influence history. (Location 1159)

The innovation of Marx's Das Kapital is that it rejects the notion that ideas dictate human history. Marx and his collaborator, Friedrich Engels, posited that the material world, not ideas, must be the starting point of analysis. (Location 1166)

What makes the materialist dialectic a dialectic? In Marxist thought, the material world – the society's modes of production – is the concrete foundation upon which all thought, norms, values, and institutions ultimately rest.16 (Location 1168)

Ideas serve materials. If Hegel's theory says the idea egg came before the chicken, Marx's counters that it was the material chicken that got the idea egg rolling. (Location 1174)

The framework's starting point of analysis is the material world, not the world of ideas. Material conditions create human reality. (Location 1178)

Thought systems (philosophy, religion, political parties, etc.) develop around this material condition and are therefore a derivative of it. (Location 1179)

People cannot “think” or “prefer” their way out of material constraints. (Location 1180)

Some – including myself – would say that the world is at an unsustainable extreme between the share of the economy going to corporate profits and the share going to labor (Location 1183)

For investors used to quantification, a focus on the material world should be welcome. Constraints are observable and therefore empirical. (Location 1190)

Not all observable data is created equal, and more information often does not produce superior forecasting results. The quality of the data matters more than its quantity, especially in circumstances where a complete data set is impossible to obtain. (Location 1192)

“Judgement is what analysts use to fill gaps in their knowledge. It entails going beyond the available information and is the principal means of coping with uncertainty.” Heuer goes on, “While the optimal goal of intelligence (Location 1200)

His career in intelligence forced him to rely on the fuzzy, the qualitative, and the soft, as opposed to the clear, the quantitative, and the hard, data. (Location 1205)

First, having more information does not necessarily help one's forecast. More information sometimes only contributes to a higher level of conviction, not necessarily forecast accuracy. (Location 1210)

Diagnosticity is “the extent to which any item of evidence helps the analyst determine the relative likelihood of alternative hypotheses.” (Location 1213)

Diagnosticity helps analysts eliminate unlikely, or competing, hypotheses (a process known as “competing hypotheses analysis”). A nondiagnostic variable is one that does not help eliminate any of the hypotheses. (Location 1220)

Preferences are not diagnostic variables because they are optional; the policymaker chooses whether to act on them. Such variables are nondiagnostic because it is impossible to eliminate hypotheses based on a variable that may not affect the outcome at all. In contrast, constraints are the gatekeepers that determine whether preferences affect the outcome. Constraints have high diagnosticity because preference-based outcomes are subject to them. (Location 1222)

Trump's preference to repeal Obamacare was subject to two material constraints: the risk of losing popular support, and congressional math. (Location 1231)

Given the preference of President Trump and the Republican party to eliminate Obamacare, this outcome surprised most investors. (Location 1237)

Furthermore, Obamacare became popular in mid-2017, right when Republicans finally held the political capital to extinguish it. (Location 1242)

Later in his book, he points out that “when observing another's behavior, people are too inclined to infer that the behavior was caused by broad personal qualities or dispositions of the other person and to expect that these same inherent qualities will determine the actor's behavior under other circumstances. (Location 1250)

Ross and Nisbett offer other examples and research to prove their overall point that time and time again, the situation is a better indicator of the outcome than the person. The context in which an individual finds himself has more influence on his behavior than his character, background, religion, upbringing, etc. (Location 1276)

Political analysis provides fertile ground for the fundamental attribution error. The news media is partly to blame because it personalizes events and tells human rather than situational stories. (Location 1285)

Observers of the situation made a big deal of the personalities of both Prime Minister Netanyahu and Iranian President Mahmoud Ahmadinejad. (Location 1309)

Investors placed too great an emphasis on the rhetoric coming from both sides, ignoring constraints. (Location 1312)

The third pillar of the constraint framework is the recognition and avoidance of fundamental attribution error. To forecast politics and geopolitics, analysts have to avoid the fundamental attribution error and focus on the situation, not the person. (Location 1332)

There is a philosophical (materialist dialectic), practical (hypothesis testing), and empirical (social psychology) method in the madness. (Location 1340)

The Materialist Dialectic: The starting point for geopolitical analysis must always be rooted in the material world. While that reality does not necessarily need the Marxist emphasis on “means of production,” it does need to be empirical. Investors should always seek the immutable reality – the constraints – in a situation. While the economic constraint is not always the most important one, some other tangible barrier will be. (Location 1343)

Diagnosticity: Given paucity of information and poor data quality, investors (and others seeking to forecast politics) must focus on the data that is concrete and iterative, rather than ephemeral data locked away in someone's brain. To properly falsify a hypothesis, investors should focus on data that has a high level of diagnosticity. Policymakers' preferences are not diagnostic. Constraints are. (Location 1346)

Social Psychology: Social psychology makes a strong case that the context and the situation, not the person, drive human behavior. Therefore, investors and others seeking geopolitical insights should focus on constraints over preferences. (Location 1350)

Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences. (Location 1353)

But I feel obliged to have some formal logic in the book if only to preserve my street cred among fellow forecasters. (Location 1358)

What is the point here? The additional factors – the constraints – mean that these two equations are not the same, and thus predict different outcomes. (Location 1384)

Leaders taunt each other and signal aggressive policy when they may have no intention to follow through on their threats. Sometimes the intention of the rhetoric is the exact opposite – to get one's opponent back to the negotiating table. (Location 1420)

Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences. (Location 1423)

As such, investors need to study the constraints, not the preferences. (Location 1424)

As such, a preference-based analysis is the starting point of a forecast. But it is something that analysts need do only once or twice per public figure. It is not an iterative process. (Location 1439)

I define five material constraints that are particularly crucial in forecasting events: political, economic, financial, geopolitical, and constitutional/legal, as well as the constraint wild cards: terrorists and pandemics. (Location 1441)

“The most valuable commodity I know of is information.” — Gordon Gekko, Wall Street (Location 1561)

Because politics, from this viewpoint, is unpredictable, the only path to clarity is through intelligence-gathering. Billions are exchanged each year for fireside chats with wise old men (almost always men, almost always old – but rarely as wise as advertised) who spin a good yarn from their experiences or extensive Rolodex. (Location 1564)

I personally consume plenty of on-the-ground research from political consultants. And I have a fairly strong opinion on which ones are actionable and value-added and which ones are not. (Location 1574)

The way to differentiate a good political consultant from the bad is humility. Not necessarily humility of behavior, but intellectual humility – doubt – built into his or her analysis. (Location 1591)

Second, political and geopolitical paradigm shifts discussed in Chapter 1 have moved the market-relevant questions from the frontiers of economic development to the core. (Location 1596)

In fact, a highly connected person in such an economy may mislead the investor; the contact's view can waylay the insight-reliant investor by reinforcing his pre-existing bias – giving him artificially high conviction in an inaccurate forecast. (Location 1600)

Third, intelligence-driven forecasting can lead to “funneling,” the oversimplification and mass dissemination of information from a handful, or even just one, source. (Location 1602)

Fourth, policymakers and the markets enjoy a reflexive relationship, meaning policymakers often use the markets to force action from their political counterparts. (Location 1607)

Policymakers often “talk their own book.” As such, what they say – and what political consultants report they said in smoke-filled rooms – should be taken with a large grain of salt. If you wouldn't believe a CEO's spin on a quarterly call, why would you believe a government official? (Location 1610)

My buddy Bayless pranked the BBC World Service radio broadcast that goes out to hundreds of millions of people. (Location 1649)

The media sells narratives, yet another reason to consume with caution. (Location 1658)

Journalists know how to craft and push narratives. Not because of some conspiracy cooked up in a French château, but because narratives generate “clicks,” the all-important currency they depend on now that Google and Facebook have starved them for ad revenue. (Location 1660)

Research shows that the more an expert appears in the media, the less likely he is to produce accurate forecasts. (Location 1664)

In addition to sharing Tetlock's disregard for forecasters in news media, I also disdain those who publish opinion pieces. (Location 1667)

While the Tory Party had a new leader with potentially radical preferences, the material constraints against a no-deal Brexit remained – chiefly, that such an outcome had neither popular support nor a commanding majority in Westminster. (Location 1731)

Investors and journalists love 180-degree turnaround stories, but they rarely happen in politics. Macri was such a story. (Location 1739)

Despite these contextual constraints on Macri's new policies, the buzz in financial circles throughout 2019 was that he would win another term and double down on reforms. (Location 1755)

First, the Argentine “misery index” spiked in 2019 – a lot (Figure 3.4). On its own, the misery index is a crude measure of political risk. Its main flaw is that some countries chronically experience high levels of unemployment and inflation. (Location 1762)

Second, I noticed a strange lack of public opinion polling around March. Bloomberg caught the same thing and published a piece in June titled, “Argentina Election More Uncertain as Pollsters Go Dark.” (Location 1766)

When the primary elections showed that Alberto Fernández and Cristina Fernández de Kirchner smoked Macri by 16%, markets vomited. (Location 1778)

Ideological bias played a role in this carnage. I was nearly thrown out of a large hedge fund's office because the CIO thought I was a socialist who did not believe in reforms when I dared cast doubt on Macri's prospects.22 (Location 1785)

I hit the road in early 2017 with these two theory-disproving charts in my deck, and pounded the pavement with one forecast: corporate tax cuts are coming. They will be profligate, and thus stimulative. (Location 1813)

His tacit permission was a crucial bellwether. If the leader of the congressional Tea Party faction was cool with blowing out the budget, what was all the consternation about? (Location 1825)

As for the insider I met in the Hamptons: he runs a political consultancy that provides forecasts to investors. He continues to flout his access to the president, continues to make disastrously wrong predictions, and continues to remain in business. (Location 1869)

The CIA can make forecasts based on actual intelligence because it has so much quality data that it becomes statistically significant. (Location 1875)

Once these expert analysts leave the public sector, their value to private firms is uncertain. Even a briefing from high-profile, retired policymakers or intelligence operatives is tricky. (Location 1880)

A true professional will be humble and focus on a scenario-driven approach to analysis. (Location 1887)

These experts will downplay their unique sources and insights. They will provide you with a framework from which you can follow the developing forecast and exercise your own judgment. (Location 1890)

Most investors think that the way to political or geopolitical insight is through access to intelligence. No matter how many times they get burned, they keep buzzing back to dive-bomb the “intelligence” streetlamp. (Location 1897)

They just need to approach all aspects of that outside world with healthy skepticism. (Location 1906)

Academics: Academia is filled with undervalued and underappreciated assets. Instead of talking to some slick geopolitical consultant over an overpriced meal at a Mayfair restaurant, email an academic who spent the last 20 years of his life researching the topic at hand. (Location 1908)

Just be careful to put their views into your own constraint-based net assessment. Don't let the actual expert tell you what the market is going to do. They do not know. (Location 1912)

Technocrats: Talk to retired policymakers and insiders, but adjust your expectations. Know it is impossible to create a mosaic robust enough to have a statistically significant intelligence-driven forecast. (Location 1913)

The top personnel are often ideological, legacy-driven, and disconnected from the analysts and information that made them valuable forecasters. (Location 1916)

Regulators: Sector-specific insights do exist and are valuable. If you need sector intelligence, hire a consultant that specializes in regulatory analysis. (Location 1919)

This book presents a framework for how to assess insights and intelligence. It equips you with the tools to evaluate the insights of even the most well-placed sources you come across. (Location 1925)

Tetlock's book is encouraging because it means laypeople don't need insights from smoke-filled rooms to make actionable forecasts. Due to experts' forecast inaccuracy, everyone else has high odds of making a comparable prediction. Which means everyone – “experts” included – can improve their predictions by reading my book. (Location 2028)

For Tetlock, the high scorers are those who “know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible ‘ad hocery' that require stitching together diverse sources of information.”4 (Location 2037)

The working framework I detail in this and following chapters encourages the forecaster to maintain discipline; to focus on the observable, material phenomena; and to focus on constraints rather than preferences. (Location 2047)

Not all constraints are created equal, and power is the most important constraint – a lesson learned from years of applying the framework. Power is more important than wealth, the economy, markets, geopolitics, demographics, etc. (Location 2055)

Tags: orange

Politics is the study of power: a force that compels others to do something they would prefer not to do. (Location 2064)

Political power is difficult to quantify or – most relevant for investors – compare across economies. (Location 2067)

Policymakers with ample political capital can expend it on unpopular policies, such as structural reforms. Though painful, these policies tend to have a positive impact on the economy, domestic assets, and the country's currency over the long run. (Location 2072)

It helps to think of structural reforms – or any controversial or unpopular policy – in terms of a “J curve” (Figure 4.1). (Location 2077)

A parsimonious political capital index would have to work across time, place, and political system. Absent this magical one-stop-shop indicator, I use an ad-hoc approach that works just fine. (Location 2092)

Popularity: Policymakers who enjoy public support have political capital in the bank. Even authoritarian and semiauthoritarian states care about popularity: (Location 2096)

President Vladimir Putin made a huge effort to regain political capital in 2014, when the tensions in Ukraine led to a surge in support for his government (Figure 4.2). His 2014 campaign was a (successful) attempt to correct his decades-low popularity. (Location 2100)

Time in power: If leaders are not vigilant, their time spent in power can drag down their popularity. The longer they are the ones to beat, the more opportunity for the public to beat them with social media, votes, protests, or more physical means. (Location 2107)

In contrast, leaders who have just ascended to power – democratically or otherwise – have the most capital to burn thanks to the “honeymoon period.” (Location 2110)

For a leader who ascends to power in a coup d'état, the best time to strike is while the opposition is cowed. (Location 2115)

Legislative math: In democracies, room to maneuver depends on the legislative math. If the head of government does not command a legislative majority, to pass laws at all, she must curry favor with coalition partners and (in a minority government) the opposition. (Location 2117)

Economic context: A good economic crisis may help spur reforms, but it is difficult to see the incumbent ever benefiting. (Location 2119)

Similarly, Spanish Prime Minister Mariano Rajoy pushed through aggressive supply-side reforms in the early 2010s thanks to the economic crisis that preceded his election in late 2011. (Location 2123)

Investors were “traveling with events.” News coverage directed their journey, and it kept up a barrage of the outdated Eurosceptic narrative – while ignoring the populist revolt brewing in the two English-speaking countries. (Location 2197)

Developed in the 1950s, MVT is one of the few codified theories of political science.21 It posits that to win an election or stay in power, parties and politicians approximate the policy choices of the median voter. (Location 2200)

But for investing, I find it extremely useful as an approximation of the harder-to-quantify political capital and thus political constraints. (Location 2204)

Voters' preferences are “single-peaked,” meaning voters prefer one policy outcome over all other potential outcomes. (Location 2207)

Preferences are considered over a single policy dimension. For example, a voter either supports gun legislation or not, or wants a greater or smaller role for the state in the economy. (Location 2208)

Politicians want to attain, or retain, political capital above everything else, including consistent policy and positive societal outcomes (Location 2211)

To the shock of most pundits, the American median voter was far less supportive of globalization (free trade and immigration) than assumed.23 Finally, Trump catered correctly to the median voter's position and won as a result. (Location 2219)

Buchanan's loss indicates that the US median voter was shifting toward globalization in 1992. (Location 2223)

Median voter theory is such a powerful tool for predicting outcomes because it forces all policymakers to shift to the median position, lest they become irrelevant political outliers. (Location 2227)

The median voter is a more powerful indicator of market behavior than the individual policymaker's preference. (Location 2247)

So to forecast policy, focus on the median voter, not the policymaker. If the median voter is shifting her preferences, it means that all parties, not just those in power, will respond and shift toward the median voter. (Location 2247)

The US and UK median voter had moved away from laissez-faire capitalism toward something else. (Location 2251)

In the 2020 global context of low growth and deflation – and a severe recession thanks to the COVID-19 pandemic – the pendulum of economic policy is swinging to the left. (Location 2257)

The deterioration of the middle class combined with the end of the Debt Supercycle has shifted voters to the left in both economies. (Location 2259)

Policymakers' divergence from traditional conservative party rhetoric suggested that a paradigm shift was afoot, and the fulcrum constraint of the median voter was steering it.25 (Location 2265)

They are betting that the 2020 median voter is much more left of center. They are predicting that the median voter is amenable to experimentation with long-lost demand-driven policies. (Location 2269)

Even Joe Biden, who presents himself as a centrist on the campaign trail, is only centrist relative to self-described socialists. (Location 2271)

The American and British median voter spoke loudly in 2016. As of 2020 in these countries, populist economic policies that diverge from laissez-faire orthodoxy are the median voter's preferred policy setting. (Location 2277)

When historians canonize 2020 decades later, I predict they will blame the erosion of laissez-faire on COVID-19. (Location 2282)

Eleven years later, with the median American now openly contemplating policies that would have been deemed “socialist” in the past, the zeitgeist is dramatically different. (Location 2293)

In the short-term, confounding policy variables obscure voter median preferences. Governing coalitions, gerrymandered electoral results, and policy prerogatives of individual parties all mask the long-term influence of the median voter. (Location 2300)

However, his only substantive legislative accomplishment by February 2020 was a pro-corporate, conservative tax cut. And the cut did not align with median voter preferences. (Location 2303)

The episode illustrates how MVT allows for policy to deviate from the median voter in the short term, but not in the long term. (Location 2308)

The US continues to stand out negatively on measures of income inequality and social mobility (Figure 4.5) as well as on measures of “middle class as percent of population” (Figure 4.6). (Location 2310)

For investors, these metrics mean that even if the US sees a return of President Trump for a second term, the era when Americans embrace laissez-faire policies relative to the rest of the world is over. (Location 2322)

And the US median voter demands dirigiste, left-leaning, demand-driven policies across the ideological divide. (Location 2325)

But their adoption of unorthodox fiscal and monetary policies is bipartisan, as their response to the COVID-19 calamity attests. (Location 2327)

I believe that investors should err on the side of expecting greater government intervention in the economy, broadly defined – not just regarding the COVID-19 pandemic, but also in other future contexts. (Location 2331)

Even if the COVID-19 recession is sharp but brief, as I have expected it to be from its beginning, policymakers will fight to the last man and respond like it is 2008. (Location 2337)

Neither Trump nor his opponents will wait around to see who the American public elects in 2024. Instead, they will try to get ahead by introducing a steady stream of ever more unorthodox policies to stimulate the economy. (Location 2341)

Independent central banking, counter-cyclical fiscal policy, laissez-faire regulatory framework… all of these policies have a singular point in common: they remove the role of elected officials from economic policy. (Location 2347)

Over the next decade, I would expect more unorthodox fiscal and monetary policy, an increase in antitrust cases, further fiscal easing, selective regulatory pressures, and higher taxes on both capital gains and high-income taxpayers. (Location 2365)

The transition from the Washington to Buenos Aires Consensus will dominate markets over the next decade. This transition is more relevant than the US-China geopolitical rivalry, risks to European integration, and technological change. (Location 2368)

With US profit margins and valuations at historical highs, long-term investors should probably begin underweighting US assets on a multiyear horizon. (Location 2372)

While I would remain bullish on US equities in absolute terms, I'd use the “churn” of 2020 to reposition to European, Japanese, and EM equities on a decade-long strategic asset allocation. (Location 2376)

The collapse of the Soviet Union in 1991 jarred Chinese policymakers; if the Soviet Union could fall apart, so could China. And officials knew if this thought had occurred to them, it had also occurred to the Chinese median citizen. (Location 2385)

There is one tenet of the MVT that does not apply to China: short-term competition. (Location 2451)

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This suggests that there are soon to be bottom-up pressures for greater political representation, particularly if policymakers lose credibility due to an economic, financial, or pandemic crisis. (Location 2466)

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The central government has blamed economic mismanagement, corruption, pollution, and even the COVID-19 response on provincial officials. (Location 2481)

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Abroad, Beijing signaled a retreat from competition with the US when it agreed to the Phase One deal – a capitulation, considering the terms allow the White House to keep most of the tariffs on Chinese exports. (Location 2489)

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Chinese leaders are worried about their growth trajectory and the sustainability of a move up the value curve. (Location 2503)

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The concepts of political capital and the median voter help extract the motivating political constraints behind domestic policies. (Location 2513)

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Its lack of uniformity in measure means it falls short in comparative study – for the time being. I hope in the near future, someone can offer a back-tested, actionable, political capital index that works across time and space. (Location 2515)

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My first experience of macroeconomic and market constraints came early, at seven years old. It was 1989, and Yugoslavia's last prime minister, Ante Marković, was trying his best to hold the country together. (Location 2644)

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Unfortunately for Yugoslavia's balancing act, a succession of external shocks destabilized the economy. (Location 2652)

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Inflation was stopped in its tracks in 1990, falling to zero. Marković's austerity gambit worked! (Location 2668)

I learned what inflation was before my baby teeth fell out. The consensus view in the West is that Yugoslavia fell apart because of ethnic hatred. Yes, there was a lot of that. But for many, their ethnicity was not a huge aspect of their identity. (Location 2674)

Since leaving Yugoslavia, I have lived, studied, and worked in a number of places with an underlying thread of ethnic and sectarian tensions. And yet none of them resorted to the type of bloodletting that occurred in the country of my birth. Why? (Location 2678)

The authors do not mention the bubbling nationalism and ethnic tensions, but their clinical dissection of the spiraling economic crisis is wreathed in foreboding. (Location 2682)

Yugoslavia had many problems – and yes, ethnic tension was one of them – but the macroeconomic environment limited how much political capital was available for the federal government to solve these problems. (Location 2683)

Reformers like Marković may have had more maneuvering room to buy the loyalty of federal armed forces and move against the nationalists with force. (Location 2686)

One of the greatest challenges of geopolitical analysis is that forecasters are often not well-versed in economics and finance. (Location 2689)

The doom-and-gloom prognosticators did not account for constraints on the breakup of the European monetary union. (Location 2697)

The deep geopolitical logic behind the union remained, regardless of peripheral economic struggles. Rather than creating centrifugal forces sufficient to send each country in a different direction, economics and finance actually played a centripetal force, playing a key role in the Euro Area's perseverance. (Location 2699)

with two constraints: macroeconomics and finance, or the market. The two exist in what George Soros calls a reflexive relationship, where investor perceptions can alter the economic fundamentals. (Location 2702)

Macroeconomic Constraints: To identify macroeconomic constraints, I rely on economic fundamentals: What are the main drivers of growth? Is productivity high, or is most growth a function of labor force growth? Are there structural imbalances in the economy – long-term unemployment and underemployment, over-regulation, protectionism of domestic industries, wealth inequality? (Location 2705)

I use macroeconomic fundamentals like a doctor uses the indicators of health (blood work, resting heart rate, etc.). A single red flag – high cholesterol – is easy enough to deal with in isolation. (Location 2711)

But if there are multiple markers off course, the doctor orders more work done. Like the doctor, if I find enough surprising answers to diagnostic questions, I investigate more thoroughly to find the root cause (my net assessment of India in Chapter 9 is a good example of this process). (Location 2712)

Finance Constraints: A country can have poor macro fundamentals for a very long time, but investor enthusiasm can keep the economy going. (Location 2715)

While they are in place, investor inflows mask the underlying imbalances – like ibuprofen masking a fever. (Location 2716)

However, investors ignored the fundamentals and plowed into its assets – particularly the bond market – regardless. Investor enthusiasm allowed policymakers to grow complacent. (Location 2718)

In the case of Mediterranean Europe in the 2000s, investors cheered the advent of the European monetary union, plowing into the bond markets of each member state. The yield convergence that this process initiated rewarded policymakers through no effort of their own (Figure 5.1). The market failed in its job. When the market finally woke up, it did so with a scream. Bond yields can be more powerful than missiles. (Location 2724)

I illustrate why macroeconomic fundamentals and market forces acted as constraints to any country's preference to exit – even though the contemporary consensus was that such factors encouraged countries to exit the EU. (Location 2733)