Geo-politics and the art of randomness…

Trying to predict trends across the geopolitical landscape is always interesting, particularly when there is so much noise around, which makes determining what is material and potentially threatening into an exercise in probability-weighted scenario analysis.

Some examples:

Italy: will the pending coalition government of Five Star Movement and Lega Nord, become a comedy of errors or commedia dell’arte?

Malaysia: will Dr. Mahathir Mohamad really be willing to curb his hitherto autocratic tendencies and cede his role to his former protégé and nemesis, Anwar Ibrahim?

Argentina: a call for help to the IMF. Will it result in stabilization, or political defeat for economic reforms?

North Korea: who knew that a hitherto hermit hereditary dictator could be so charming, as well as deeply paranoid (not without reason)?

ZTE: political target; collateral damage; or the excuse for a rapprochement between the US and the PRC?

Of course, history is littered with examples of events that, while noteworthy, did not seem that important at the time, but turned out to have momentous consequences:

– Germany facilitating Lenin’s return to Russia in 1917
– Just another political assassination in Sarajevo in 1914
– Nixon’s visit to China in 1972
– The fashion for garage workshops in the Bay Area in the 1970s

As Kierkegaard said: “Life can only be understood backwards, but must be lived forwards”- at least in this universe. Discerning those events or factors which are truly important is far from simple.

All this makes the life of an underwriter an exciting one, as he or she tries to decide whether what is happening is just a sideshow and distraction; a mask for hidden trends; the first order in a subsequent cascade; or the emergence of a new category of risk.

The ZTE situation is worth pondering. While supply chain risk is not exactly something new, the fact that a significant PRC manufacturer was essentially put out of business overnight through unconstrained executive diktat, and then potentially given a stay of execution on further whim, is evidence that applying logic and rational thought to risk assessment is not always enough. Arguably, there should now be a “ premium” (and not of the beneficial sort) applied to any obligor that is a potential hostage to political fortune and caprice, and not just in relation to the US, as other governments are more than capable of such actions.

And what is one to make of underwriting the risks of exposure to a company, Tesla, whose CEO and dominant shareholder decides that “joking” very publicly about impending bankruptcy, or refusing to answer “boneheaded” questions is an appropriate exercise of management discretion? This may seem containable in risk terms- but, given the Cult of Elon, the failure of Tesla would almost certainly have not just direct industry impact, but also reverberate well beyond the United States, for example potentially calling into question market assumptions for cobalt demand and pricing (and thus affecting the DRC).

Amidst all the cacophony, the Awbury Team continues to focus on originating, analyzing, structuring and pricing risks that are highly unlikely to be “side-swiped by randomness”; ensuring that returns contain an ample safety margin; while constantly scanning our environment for changes that could be material with a view to keeping well ahead of the arc of creative destruction.

The Awbury Team


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