Geopolitical Alpha: An Investment Framework for Predicting the Future

Marko’s seminal, investor-focused work is superb, reminiscent of the brilliant Blackstar deep-cut, “What’s Beef,” when Mos DEFtly raps how “oil prices and geopolitics” are a source of global conflict. Had Black Dante received a very, very advanced copy of Geopolitical Alpha to consider the preferences and constraints of global superpowers at-odds? We may never know, but what is clear is that in a similarly compelling fashion, Geopolitical Alpha lays out -- in convincing detail -- a novel and elegant framework to utilize for investment and decision analyses. Notably, Marko writes persuasively and humorously (strong correlation!), as well as accessibly; Street poet-philosophers, like Pretty Flacko, and Wall Street analysts, insert today’s top Sell-Side researcher, alike can benefit a great deal; that said, perhaps buyside portfolio managers will benefit most from Marko’s perspectives – his work cuts through the noise of political talking heads materially. It’s also worth mentioning that young professionals and graduate students too can find tremendous value from Geopolitical Alpha, in addition to Marko’s aspirational career trajectory, navigating international relations academia and real-world, mark-to-market finance industry trigger-pulling. All in all, this book covers a key concept of investment risk – geopolitics – that, as Marko mentions, isn’t covered in the CFA curriculum, but which is no-less important to an investment due-diligence process. Taken together, Marko and Geopolitical Alpha are valuable guides to help you develop your own investment processes and frameworks – give a man a trade vs. teach a man to trade – so to conclude this PSA: Cop the book, whether you work in finance at hedge fund XYZ or in international relations at the Blackstar Embassy in Wakanda, Marko’s work is straight fire!

This book was a fantastic read and very well written. But a lot of books are. What sets this book apart is that it takes a very abstract subject matter which usually falls under the qualitative lens and gives you formulas one can use to make quantitative decisions about the macro landscape. Marko covers some of the biggest macro events of the past few decades with detail and shows you exactly how to assign probabilities to certain events unfolding and how to act on them.Most people would shy away from taking market positions on complicated macro turmoil because they have no roadmap to even analyze them. This books shows you precisely how to do just that. Even if you are not a pure macro trader/investor, at the very least, you'll understand how certain events are likely to play out and will have less stress about them going forward. I have yet to find another book that accomplishes this task on this subject matter.

The basic idea of the framework is to not focus on the ‘claims’ of politicians, what they say they want to do - which mostly is the focus of media and pundits - but on the constraints they operate in, for you to assess what they actually ‘can’ do. This makes a lot of sense and is applicable.Next to the framework, the book is an entertaining and insightful read on global politics, containing good explanations of the mechanics of for example the Greek debt crisis amongst others.The problem is, the author also writes with great confidence on topics where he is not an expert, such as the COVID pandemic. Therefore it is hard to assess what information can be relied on and what may be presented with over-confidence. The pandemic being the only topic where he gave a short-term forward looking assessment he missed/ misinterpreted important variables (written in March 2020). He wrongly assumed that COVID only affects the elderly, he left out the effect of exponential growth on our health systems.Therefore it’s a worthwhile and helpful read, but take the insights with a grain of salt and don’t forget to make up your own mind.

The author was born in the former Yugoslavia and when it fell apart while he was a boy, his father accepted a job in Amman, Jordan. As he puts it; "Yes, you read that right. We ran away from war by going to the Middle East." Fn. pg.5. Since then he has lived in a number of places which, in my opinion, gives him perspective that I, and most others, don't have.His methodology is to look for constraints on policymakers, not policymaker preferences. He repeatedly cites: Preferences are optional adn subject to constraints, whereas constraints are neither optional nor subject to preferences. To employ the framework outlined by this mantra takes a lot of work. He argues that geopolitics is not a "nice to have", but rather is essential to much investing. The "alpha" refers to seeking excess returns in investing.His approach rests on three pillars. The first is a "materialist dialectic". Sounds communist. He cites Karl Marx as preferable to Machiavelli. The author is not a communist, but he seeks reality in constraints and Karl Marx is one of his muses - enjoy the ride. The second pillar is diagnosticity of constraints, which are observable and empirical. But you have to look for them and observe them dispassionately. The third pillar is to avoid sttribution errors by looking at the person in the situation, not just at the person. The person may do things that are contrary to preferences because of fundamental constraints, which override preferences.He applies this framework to politics, the economy and the market, geopolitics (waves that cross borders), legal constraints (generally weak, but sometimes decisive) and the effect of time on constraints (when preferences can "run out the clock"). He looks at the current COVID pandemic (the book was largely written during the first half of 2020) beginning at page 178 and following. He argues that people will lose their of COVID and society will reopen sooner than some elites would like. In March 2021 as write this, this may be happening now.In the chapter on The Wizards of Oz he observes that many "experts" who frequent the media are, in fact, not forecasting accurately. He gives examples. Why does he look at this? Because to find and understand constraints, one must look dispassionately at the world and put off ideological blinders (the author "bathes himself in nihilism"). Even very successful investors can be blinded by their political and ideological biases. The book aids in fighting these mental limits. The constraint framework gives an investor a way to look at the world and hopefully find ways to adapt and improve their returns.I have the hardback. I read it twice. I highly recommend it. Even if you are not an investor, his insights and methodology will aid you as you try to make sense of events in your home country and geopolitically. Read the book.

A smart framework to analyze geopolitical dynamics. The author presents a logical perspective to monitor and make sense of world events, and use it for investment decision making. Fun read with interesting examples

This book fills a much-felt void for anyone passionate about finance and geopolitics. As of 2023, these two areas are running in parallel. Economists and finance specialists view the geopolitical realm as a mere type of risk, one of the many "unpleasant" distortions that influence their perfect interpretation of the world from a quantitative and financial perspective. Geopolitical analysts, on the other hand, are highly specialized in international relations but rarely have a grasp of economic and financial dynamics.Marko Papic has devoted his career and this book to an extraordinary purpose: he has successfully brought together these compartmentalized worlds under a single cognitive scope and brilliantly explains how they mutually influence each other. Moreover, the author goes beyond merely demonstrating this relationship. In fact, he endeavors to present a conceptual framework to analyze and even predict the dynamics that occur between finance and geopolitics. I am sure that in the future, when the self-imposed "Chinese walls" between these sectors fall, Papic's work will be seen as that of a pioneer in explaining how to analyze these dynamics. Congratulations to the author, whose profound knowledge of geopolitics, economics, finance, history, and dare I say, even anthropology, is evident from this text.

This book provides a comprehensive mental model to frame decisions of politicians, central bankers and/or the key decision makers (policymakers) that influence important macro variables.Typically, its a tall order to make actionable & definitive judgements given the nuances involved when politicians &/or central bankers (or 'key opinion leaders') speak due to their spiels often laden with sweeping statements and or contradictory signals, which up until I read this book, often led to one believing the reliance on 'domain experts' was critical; this is especially due to all kinds of behavioural biases of the person interpreting that information.Geopolitical Alpha provides a framework that forces you to first identify & then separate preferences & material constraints of politicians/policymakers (no PhD or access to "smoke filled private rooms" needed), a process which Marko walks through with several examples step by step, thus helping one to extract insight from information. The process forces you to aggregate and weight information to assess likelihood of that what is being said vs. understanding how feasible it is to implement based on the constraints of the office policymaker occupies. That's why this is one of the most important books ever written alongside works of Michael Pettis, Hyman Minsky & Charles Kindleberger.

Geopolitical Alpha begins with a simple premise: “Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences.” This fundamental asymmetry leads to the main idea of the book: If you wish to forecast geopolitical trends do not focus on what policymakers want to do but rather what they can actually do.Elegant as this framework might be, the devil is in the details. The value of the book not only comes from the framework itself but from its application to real world scenarios. Marko shows through numerous case studies how to use his constraint framework - as well the insights of political science like game theory and the median voter theorem - to forecast geopolitical trends. Moreover, he gets down to the nitty-gritty: when should political experts be (or not be) trusted, how voters preferences and economic and financial conditions determine policy maker actions, how in certain scenarios the constraint framework might fail in producing an accurate forecast.And yet, what makes this book unique in the genre is that it goes one step further. Whereas a political strategist will stop at making predictions, Marko understand from his experience in the investment world that this is not enough. Success in markets is not making the right forecast, but actually making money from your predictions. With this in mind, he adapts his geopolitical framework to the realities of the market, making it a much more useful book for investors who wish to apply his insights when managing their portfolios.Finally, the book is both personal and wonderfully written, peppered with wit, history and hilarious anecdotes. Overall, if you wish to gain an understanding of how to predict geopolitical trends and how to use these forecast to make money in financial markets, I would definitely recommend this book.

Es gibt eine Vielzahl von Analysten, deren Job es ist, die Zukunft zu prognostizieren, damit Investoren ein gutes Gefühl bei ihren Entscheidungen haben. So richtig zielsicher sind die meisten Analysen nicht.Marko Papic stellt mit diesem Buch ein Framework bereit, um ein eigenes Analyse-Universum zu entwickeln. Denn: Als Investoren können wir unsere treuhänderische Pflicht nicht an jemand anderen auslagern. Die Verantwortung für die Prognosen liegt letztlich bei uns.Die grundlegende These ist, dass Entscheidungen von Politikern und Managern nicht positiv und aktiv über ihre Vorlieben, sondern aufgrund von Randbedingungen (constraints) gefällt werden: „Präferenzen sind optional und unterliegen Beschränkungen, wohingegen Beschränkungen weder optional sind noch den Präferenzen unterliegen.“Mit dieser Logik entwickelt Papic sein Framework:Erste Säule: Materialistische DialektikMaterielle Bedingungen schaffen die menschliche Wirklichkeit. Gedankensysteme (Philosophie, Religion, politische Parteien usw.) entwickeln sich um diese materiellen Bedingungen herum und sind daher ein Derivat von ihnen. Die Menschen können sich nicht aus den materiellen Zwängen "herausdenken" oder "vorziehen".Zweite Säule: Diagnostik der SachzwängePräferenzen sind keine diagnostischen Variablen, weil sie optional sind; der Entscheidungsträger entscheidet, ob er auf sie reagiert. Solche Variablen sind nicht-diagnostisch, weil es unmöglich ist, Hypothesen auszuschließen, die auf einer Variablen basieren, die das Ergebnis möglicherweise gar nicht beeinflusst.Im Gegensatz dazu sind Beschränkungen die Torwächter, die bestimmen, ob Präferenzen das Ergebnis beeinflussen. Beschränkungen haben eine hohe Diagnostizität, während präferenzbasierte Ergebnisse ihnen unterliegen.Dritte Säule: Person versus SituationDie Situation, die ein Individuum vorfindet, hat mehr Einfluss auf sein Verhalten als sein Charakter, sein Hintergrund, seine Religion, seine Erziehung etc.Auf diesem Grundgerüst aufbauend erfolgt die weitere Untersuchung der Randbedingungen, aufgeteilt in folgende Kapitel- Politik- Ökonomie und Märkte- Geopolitik- Gesetze und Gesetzgebungsprozesse- Zeit als RandbedingungDie vielen Beispiele und Geschichten machen die Ideen greifbar und eröffnen dem Leser eine neue Welt der Vorhersehbarkeit von Politik. Besonders spannend war für mich die Erläuterung zum Medianwählertheorem, wobei Papic zusätzlich eine zeitliche Komponente einführt, um daraus die Randbedingungen bzw. Einschränkungen abzuleiten.Die Einblicke in die konkreten Konflikte China/USA, Geopolitik Iran, die vielen historischen Beispiele sind aufschlussreich und überzeugend. Ich habe das Buch genossen und regelrecht verschlungen, und kann die Lektüre nur empfehlen.Papics Einschätzung aus dem Sommer 2020 zur aktuellen Covid Krise werden wir in Zukunft gemeinsam bewerten können:„Wenn alles gesagt und getan ist, werden die Investoren in Jahrzehnten auf das Jahr 2020 zurückblicken und erkennen, dass es der Beginn eines neuen Paradigmas war. Das wichtigste Makrodiagramm des Jahres 2020 wird nicht die Epi-Kurve von COVID-19 sein, sondern vielmehr (..) der Übergang vom Washington Consensus zum Buenos Aires Consensus (…) Es zeigt, wie in den Monaten nach der globalen Finanzkrise 2008-2009 auf geldpolitische Stimuli schnell die Leitplanken der Austerität folgten.“ Ab 2017 haben sowohl die USA als euch Europa eine sehr expansive Geldpolitik betrieben und es ist unklar, wie zu den Grundsätzen der Austerität zurückgefunden werden kann.Aber die beste Prognose nützt nur etwas, wenn es gelingt etwas zu kaufen, an das andere noch nicht glauben. Die gute Prognose ist also immer noch nur ein kleiner Teil einer guten Investitions-Entscheidung: „Der Schlüssel zum Ernten von geopolitischem Alpha liegt darin, gegen den Spread zu wetten und nicht zu versuchen, vorherzusagen, wer das Spiel gewinnt.“Dem ist nichts hinzuzufügen.