Getting Acquainted with Geopolitics

The Clash of Civilizations and the Remaking of World Order
Samuel P. Huntington

The Next Decade: Where We’ve Been...and Where We’re Going
George Friedman

If it wasn’t obvious by now, the death of Osama Bin Laden was a market non-event. Headlines on Monday morning, May 2^nd, touted the event as the reason stocks were up that day...only to see stocks broadly close slightly lower by session’s end.

Geopolitics is a thorny, tricky issue for investors. It’s virtually always in the news and consistently feels (and can be) hyper-relevant—but actually causes a huge number of investor errors.

The overwhelming majority of geopolitical events—including armed conflict—don’t whack the markets the way folks tend to fear. And that’s the real rub: Geopolitics is mostly a source of investor fear. Change in the order of things causes uncertainty, especially changing the fabric of government and law. But consider: How many geopolitical events have triggered a true, sustained bear market in stocks? You can count them on less than one hand in the modern era—which is profound. It generally takes truly humungous stuff, like world wars. Also consider: When has there been a year in your life where there wasn’t unrest somewhere? Israel, for instance, has been in conflict for all of my life (and that probably won’t change if I live to be 100), yet stocks can, and have, risen despite it.

Even ostensibly “good” changes to the geopolitical landscape cause investor worry. The fall of soviet Russia, for instance, fuelled investor uncertainty. Right now is a case in point: Strife in the Middle East and North Africa is underpinned by the idealistic energy of what we Westerners champion most—liberal democracy. But such a “good” development is right now cause for investor fear because what happens if oil supplies from that region get disrupted?

So, how to view geopolitics as an investor?

Much of investing success is about understanding historical context. Knowing history doesn’t tell you what happens next—it tells you what’s precedented and unprecedented and how people (the substrates of markets) tend to react. To navigate geopolitical strife, you want to give yourself as much context as possible. And among the main, indubitable lessons is: There’s never a dull moment—somewhere in the world there is always something bad geopolitically going on, and most of the time markets march on in spite of it. This works both ways: Geopolitical events have trouble changing the tide of bulls and bears alike.

On that basis, two excellent books:

First, Sam Huntington’s Clash of Civilizations. Originally published in 1998, it’s still ultra-relevant, perhaps more so than ever. Huntington was (and is) part of a fierce debate over the last decades: Is liberal democracy a tide that will sweep over the world, or will cultural differences ultimately preclude it? At the time, Huntington was in opposition to Francis Fukuyama’s End of History. Fukuyama believed that with the fall of Soviet Russia would come an overwhelming tide of democracy across the world. Huntington disagreed, positing that differing cultures across many lands would not readily accept such governance.

Whatever you believe, it doesn’t matter. Put yours and Huntington’s views aside—Clash of Civilizations is foremost a spry and engaging primer on how geopolitical dynamics work and the basic overlay of cultural conflict and interests in the world today. The first portion of the book analyzes the basic categorizations we tend to take for granted about geopolitics: What exactly is the “West”? And how is it different and/or opposed to the “East” in culture, philosophy, economics, etc.? This discussion alone is fruitful in revealing just how complicated such things are. The second part of the book is a rundown of all the world’s regions, perspectives on their cultures, their salient motivations/goals, and how those tend to clash.

The second book is George Friedman’s The Next Ten Years. I reviewed his book The Next Hundred Years last year. This one is every bit as good as the first. By now, Friedman’s writings have become must-reads for me—his pragmatic approach to geopolitics includes history, geography, and analysis of those in power with a consistently pragmatic, well-balanced view. Simply, I am better informed after reading his work.

The Next Ten Years is essentially a rundown of current geopolitics and probable implications for the next decade. Again, the value is not in the accuracy of what Friedman foresees per se, but in the discussion itself. To read this short book will educate you about current global geopolitics as well as any primer out there.

Taken together, Huntington’s book provides a crash course in geopolitical thought and Friedman adds to it with a cogent analysis of here and now. Pick them up to better equip yourself to deal with such events vis-ü-vis your investments.