How a Geopolitical Analyst Predicts the Outcome of War

23:59Please. Yeah. So there are a few things. So the first is you can observe patterns, right? So Robert Armstrong had sort of this huge success with the taco label. That was amazing marketing, but I have to say we were a little jealous because I think he wrote that in early May and in early April we put out a table with basically every one of the Trump threats. I think there were like 23 or so. It doesn't matter if you don't market it. It's all about that acronym. Anyway, keep going. I was waiting for the invite. So I think Trump had backed down in 21 out of 23 threats or something like that, right?

24:32So the first thing is you can identify patterns. And in fact, actually, truth be told, we ran that same study at the very end of his first term as well. And the takeaway was very, very similar. The question, I think, was, was he going to be tougher his second time around, right? But the point is, you can identify patterns. So taco is one of them. Where it gets complicated, though, is, you know, it's almost like the Economist or Time Magazine cover phenomenon, where by the time the taco thing came out, whether it was from us or from Armstrong, it was already fading. It was already getting arguably less true.

25:03Because if you look at the pattern of Trump's behavior on Jan 20, he had made a bunch of threats against Mexico, Canada, China, et cetera. He completely let them go, right? Nothing happened. He didn't even mention them on Jan 20. Then he postponed them to February 1. He went one step further. He actually signed the executive orders, but nothing happened. Then March 1 comes around or March 4 rather, and he actually implements the tariffs, but he walks them back after a day. Then April 2 comes around and he walks it back after a week on rest of the world and a whole month on China. So the point is there are patterns, but you've got to constantly be reassessing them because the rule that worked yesterday may no longer work today, right?

25:41A second question is, or principle, let's say, is we've been very, we've tried to be very nimble and not have a grand theory, right? So this gets a little bit to the whole Phil Tedlock, Fox versus Hedgehog, not be too attached to grand ideas, but look at each prediction individually. One of the things that's really driven me crazy is this narrative that Trump's trade approach is all about China. That is totally accurate over the course of four years. It is totally useless in the short term. Because if I told you that Trump's trade policy was going to be all about China, which in hindsight is correct, right?

26:16China's got a 45 % tariff. Everyone else has a 10 % tariff. But if I told you that on January 19, and you were, you know, running a hedge fund, you would have been very, very surprised that the first three months of the Trump administration were all obsessed with Mexico and Canada. Basically, this whole China lens would have been useless up until April. So that's a second thing is trying not to take an overarching view, but look at it individually, and try to figure out what's he after in this specific case. So, you know, the best example is if you think he's after tariff revenue, then he's by definition not going to back down.

26:49You can't get revenue if you back down. Right. And the same country can be affected by completely different motivations or, you know, confrontations. So Mexico in the first three months was affected by fentanyl and immigration concerns, which were pretty clearly. I mean, it's always easier to say in hindsight, but pretty clearly transactional. Like Trump just wanted to be able to say that he had done something about those issues. The way that Trump is going to approach Mexico in Q4 this year to try to get them to do USMCA revisions and open up their energy market and change their rules of origin on auto sector issues, that's going to be much, much tougher, right?

27:23So same country, totally different approach. Another is there's this big like talking point, you know, don't take Trump literally, but take him seriously. We hate that one around here. Okay. So, yeah. So first of all, we know not to take him seriously because of taco or, you know, sign them free taco. But I actually think taking him literally has been reasonably helpful, him and some of his advisors, those who repeat his views. So people like Bessent, Ludnick, they actually don't repeat his views. They kind of freelance. But if you take Carolyn Levitt, one thing that really sort of struck us was I think it was on before the February 1 deadline rather than the March 1, but I could be confusing them.

28:00she said there in that press conference the day before on the Friday she said there is absolutely nothing that Canada and Mexico can do to prevent the president from signing the executive order tomorrow signing the executive order they never said they were going to actually implement the terrace right and I know that sounds like a little cute or yeah but there there is something to that effect and and if you listen to Trump I think it's quite interesting if you also look at how his advisors how he lets them talk like speak you know what kind of leash they're on they are allowed to say anything, including the craziest stuff, as long as they don't reduce his optionality.

28:34Right. So he benefits from them going nuts as long as he doesn't get cornered by their comments.

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30:51Ready to bring your visions to life? Learn how at amazonbusiness.com. Let's go back to the recent war and something I'm interested. So looking at the cumulative odds, 20 percent preemptive Iranian capitulation, 45 percent Israeli mission accomplished. When you're coming up with those odds, how much do you really have to know about the size and scale and quality of the respective weapon systems of Israel and Iran? Because ultimately, to some degree, prior to the U.S. intervention, the question was the degree to which one side's missiles or their missile defense was stronger than the others. So how do you learn about that and how important is it to actually have really high quality information about each side's arsenal?

31:40So that actually gets a little bit back to what is Signum and who we are. Because I'd say there are different types of shops in our industry, right? There are shops that are based on Intel, right? So it's like what we're hearing in Congress or I play golf with, you know, Scott Besson or whatever. That's not us. We do access events and a bunch of, you know, really cool stuff. We took clients to Ukraine to meet with the Ukrainian government and get a sense of what post-war reconstruction type policy might be. We do that stuff, but it's not part of our research, right? And that's because Intel, in addition to, you know, potentially if you've got MNPI, et cetera, that gets legally dubious.

32:18In addition to that problem, it doesn't make for good predictions, right? Because Scott Besson himself didn't know on April 8th whether Trump was going to back down the next day. He knew he was working on him, but he didn't know. Assad was not sure whether he was going to be toppled or not. Right. So there's that. And then there's shops that are very focused on country expertise. So it's like, you know, I lived in Venezuela for 15 years. So here's my take on whether Juan Guaido's coup is going to succeed or not. And don't get me wrong. Like we've got regional experts. We have a Mexico office with a Mexican guy leading it years and years of experience in LATAM, et cetera.

32:50So it's not that we don't do that. But the point is where we think our value add is, is on the process. And we've basically adopted like a few principles. One is the Phil Tetlock principle that I mentioned earlier, which is it's not really about who you are, it's how you proceed, right? So it's precisely what is your model? Like what is your process? And that's where another guy comes into focus, which is Brisbane of the Mesquita that a lot of people will know about political scientists very focused on essentially the logic of political survival, right? Like leaders will always put their own advantage ahead of anything.

33:25And that's why, you know, you've got situations where like Netanyahu is never going to agree to a hostage deal because it would risk his coalition. And why would he risk his coalition? Or, you know, why would he risk losing power just to satisfy Trump? That's where it gets interesting, though, is none of these rules is fail proof, right? Because using that logic, one of the pushbacks I got on our ceasefire calls in the past was, why would Hamas ever give up the leverage of hostages? Right? And that sounds like a conversation under. The truth is they've given up hostages twice now, right? You've got to stay pretty nimble and humble.

33:58There is no perfect answer, but that sort of process approach can be helpful. Now, to get back to your initial question about how much knowledge you need, you do need technical knowledge, but you don't need to have it in-house. So we don't ever outsource any of our analysis. No one external has ever come up with a prediction for us or written any of our notes. But what we do is we break down a big issue into sub questions, and then we go out and try to find the answer. And some of that will be an open source, some of that will be trying to speak with an expert on XYZ missile range. So yeah, the answer is you do need it.

34:35But you can break it down and not make it part of your core business model. And instead, just sort of have it as a research process. You mentioned being humble just then. And I'm wondering, so, you know, in the Iran situation, you published probabilities and your base case and all of that. And I think events didn't pan out quite the way you expected. What happens when you're just wrong about a particular prediction? So, you know, you've laid out your analysis. Maybe you had a really great way of reasoning around scenarios and things like that. But nevertheless, something happened that you did not expect.

35:13What do you do? So there's a couple answers to that. Well, there's several. The first couple are deflection. The third is the real answer. So one is, in any of these situations, you've got lots of different predictions, right? So for example, we didn't expect that Trump would actually go in and bomb Ford out because we expected the Israelis to do it on their own. But we were on the right side of the regime change call. We were on the right side of the Hormuz call. We were on the right side of Israel staying away from trying to knock out Iranian oil production, which looked hairy during that first weekend and so on and so forth.

35:45So that's one. The second is you basically have to try to figure out why you got it wrong. Right. And from there, you can typically learn something for the next time. So in this instance, for example, I was far too focused on the Israelis capabilities and whether or not the Israelis were going to be able to do this on their own and not focused enough on Trump's appetite to get involved for political reasons. Right. And where it gets really ironic is part of the reason I was of the view that the Israelis would be able to go out and knock out Florida on their own is because for the previous 12 months, I've been telling clients the Israelis have the capability to strike Iran on their own, and they are going to do it.

36:25And it's going to be a bolt from the blue. I didn't expect it to be exactly when they did it because the nuclear talks were still ongoing. But the point is, back then, the big pushback I would get constantly was the Israelis don't have the planes to reach Iran. They don't have the refueling capability, you know, and so on and so forth. And so that gets back to this thing that there is no like one rule that you can like, you know, to sort of one rule to rule them all. Right. There is no such thing. You've got to constantly be reassessing. You know, when we talk to economists and market practitioners, you know, one of the terms that comes up a lot is regime change.

36:59And in this case, I got to be careful. I don't mean literally like the question of whether the Iranian regime changes. But this idea of like regime change in markets, like does the relationship between bonds and stocks change over time or is the Fed in inflation fighting mode or deflation fighting mode? Whatever, like these are certain relationships, relationships change. And I'm curious, like, there are many people who perceive in perhaps the medium term future that maybe the U.S.-Israel relationship is going to change, that maybe there are parts of growing louder contingents within the Republican Party and both parties, really, but within the Republican Party that do not want to deploy U.S.

37:39military assets or resources in the same way, the same level of support to Israel in the past. And who knows how that is going to transpire. But I'm curious, like, how you think, like, okay, there's some relationship that two countries might have, but all relationships could change. And if that relationship does change, then it changes the short-term expectation on any given war. And so I'm curious in your process or internally, you think about this idea of relationship regime change and could at some point down the future, and we don't know when, could some of these alliances or partnerships or, you know, friend relationships change and then that force a calculation change when an acute event happens?

38:19That's a great question. But I would say that there is a pretty big difference. I think, I mean, I'm not in the markets, but I think there's a big difference with financial markets, which is the regime changes happen, but they happen much more slowly. And so you have a lot more time to bake them in, right? So, you know, you started the podcast by sort of talking about how there are these like talking points that come up over and over, right? The world, like geopolitical risk is going to be big in 2025, right? A big one of those is multipolar world, right? Yeah. Or just your world. Like this idea that it's like the breakdown of global order and so on and so forth.

38:52So those only happen every 20 or 30 years. Or that the U.S. may not want to be the hegemon at some point, that it may not have the same appetite to be a global police. And so, for example, you know, the Tucker Carlson wing of the Republican Party, very loud against this idea. Like, why should the U.S. have such a global military footprint? Things like that. At some point, that could be a dominant strain of thought. And if it becomes one, we might not necessarily know when the flipping point is. Totally agreed. But going back to how it's a slow process, I think Trump was a really interesting and like literally what happened over the past month was a very, very good test case for that.

39:29And the fact that Trump himself, who is known to be not just isolationist, but also pacifist, one can chuckle, but he does have a pacifist instinct, I think, and pretty stingy in terms of use of American power and use of American money and resources, etc. The fact that even he intervened, I think, tells us something about how slow that process is going to be. Sure. Okay. We mentioned cliches a couple of times, and I think this is probably a cliche too, but you know, cliches can be true. Maybe that's why they become cliches. But when it comes to geopolitical risk analysis, do things feel more difficult to you nowadays versus when you perhaps started in the industry?

40:15Does the world seem more complex? And I guess, given the Trump administration and some of the unpredictability that we discussed earlier, Do things seem more volatile, more uncertain, and just harder to sort of get a handle on? Yes, I think that is absolutely fair. And it really does sort of echo back to Joe's question in the sense that you take something like the relationship between Russia and China, pre-Ukraine war or pre-2022 version of the Ukraine war. For 15 years before that, there had been an established talking point amongst pretty much all political analysts, which was it's an alliance, it's an axis of convenience, right?

40:52They get along, they work together, but they don't really trust each other. They don't really love each other. And so you knew that when push comes to shove, when they had to put their interests above the other, et cetera, you knew which way it was going to go. That was very unclear for the first year. And frankly, some could argue it's still unclear post-Russia invasion or Ukraine invasion. Are they now in it forever and sort of Russia, basically China is grooming Russia to help it when it goes after Taiwan? or is it still very much an axis of convenience where the Chinese might cut off, you know, drone inputs to the Russians for the right price if there's American export control lifting or something like that, right?

41:31And to your question, Tracy, the fact that so much stuff is changing so fast means that you have even less historical background or historical data, which, as we said earlier, you're already starting with very, very small data sets, right? And so the temptation there is to kind of just make it up as you go. And that's where things get dicey. Do you think that's possible, like that China has a price for which it would hold back on Russian access to drone materials and such? So my answer to that would be in a way that one is actually not that hard, because even if there were a price, we are so far from being willing to pay that price that it's not going to it's never going to be the light of day.

42:10What's the surprise thing that you think is not on anyone's radar right now geopolitically that you think we should be focusing more on? This is my way of soliciting ideas for future episodes, by the way. Yeah, yeah, yeah. No, so I actually, I love that question because, but I hope this is not going to be disappointing, but. It is. I always say like the whole black swan thing is irrelevant. Like black swans almost never happen. The stuff that blows up in our face is stuff that is visible pretty far ahead. Like not necessarily far ahead of time, but that is pretty obvious. And the difficulty is for the analysts predicting the details, right?

42:48Like in what month is Putin going to invade or whatever, or what part of Ukraine is he going to invade? And the other difficulty for clients, of course, is how to trade that, right? Given that you can get radically different outcomes. But the events themselves, I mean, there were four or five months of Russian buildup in front of Ukraine. And in, you know, December, January, people were still debating whether it's going to happen or not. And another example is COVID. People talked about COVID as a black swan. I mean, if you read any of those World Economic Forum global risk reports for the past 15 years, pandemics were always top 10 or even top five.

43:22People knew that pandemics were a major potential business risk. So, again, it's more like the details rather than something's going to just pop up in our face. In the next, I don't know, five years, do you expect China to invade Taiwan? Yes. Yes. I mean, the word invade is the one that bugs me, which is not going to surprise you, because I think that it's more likely to be a blockade, for example, than an actual amphibious invasion. So that view, for example, is pretty, I think, banal, right? The problem is, again, from the perception of how do you manage it, one of the things that I think is totally underappreciated is everyone knows that a blockade is a risk.

44:00But the part that's totally underappreciated is that the Chinese could roll it out literally overnight. So I think what is underappreciated is we're not going to get any buildup. We're going to wake up one morning and it's going to be done. So that's one problem. A second problem is a bloodless blockade that lasts three months or six months that is essentially a continuous anaconda squeeze on Taiwan and the Taiwanese economy could actually be far worse from a purely market perspective. Forget about normative aspects. Far worse than a one-month war regardless of the outcome, right? Because it's the length of the disruption for business operations that could be most problematic.

44:39So again, it's how you look at it, I think, that can make a difference. Back in college, I wrote an essay slash dissertation on the chances of China, you know, invading Taiwan or going after Taiwan. And I think I had my base case was they were going to do something before the 2008 Olympics. So, yeah. So you empathize with the difficulty of timing. I totally do. Andrew, that was fantastic. Thank you so much for coming on All Thoughts. Thanks, Andrew. That was great. Thank you.

45:19Joe, there was a lot to pick out of that conversation. I think one of the things that struck me, okay, first of all, you know, he was talking about black swans. And this is something that Taleb himself pointed out at our recent live event, which is we shouldn't really be worried about black swans because they are by their very nature unknowable, we should be worried about the gray swans, like a pandemic. I think that makes a lot of sense. Secondly, the emphasis on motivation was really interesting to me because this is something that I have wondered about the tariffs. If Trump needs to have a bunch of tariff deals to have his trade war seem to be a success, then what does that mean on the revenue side?

46:03Because he has also talked about how tariff revenue is going to offset a bunch of tax cuts and things like that. So I do think it's important and I still haven't figured out that one particularly. And then the other thing is he was talking about Trump's advisors. And this is something I hadn't realized, but he's right. The one thing they can't do is limit the president's optionality. It seems like they can throw out pretty much any scenario, any response, any possibility that they want. but they can't do anything that would box him or pigeonhole into one position. That was interesting. Yeah. You know, by the way, just going back to Andrew's note that we kept referencing on June 16th, he had underestimated the odds that the U.S.

46:48would intervene as he did. However, to his credit, here were his final takeaways. U.S. intervention is certainly possible, but still not base case. OK, it did happen. However, he says, likewise, regime change is plausible, but still unlikely. So he was right on that. And then he said the overwhelming majority of scenarios end in a negotiated Iran capitulation with no meaningful damage done to global oil supply or Gulf assets. I think that's a pretty good conclusion that at the end of the day, because if you figure people care about the markets and oil supply, more or less a useful conclusion to have been able to make on June 16th.

47:24I have to say the speed with which Andrew answered, yes, there is going to be something in Taiwan. It's boring, isn't it? I was hoping that he would hum and haw a little bit about that. And then this idea that it's just going to happen so quickly, it'll be overnight. We're not going to get any signs of it. And then the world is going to change dramatically the next morning in ways that we don't really know. Well, on the other hand, there are people like me who have been saying with great confidence that this is going to happen for a while and it doesn't. So maybe that's some hope for you, Joe.

47:58I mean, for me, I mean, for lots of people certainly hope there is not. Anyway, the other thing I was like how comfortably he was. Yeah. In five years. Yes. He didn't have seemed to have any doubt. The other thing I was thinking, we probably should have asked this, but the time frames for things, because you mentioned regime change in Iran. Like, OK, well, it hasn't happened, but it's also been two weeks since we had this big, big event that happened. And I don't think it's necessarily off the table. So I'd be curious to figure out how he thinks about like the timeframe of possibilities as well.

48:33But oh, well, we already spoke for about 45 minutes. So we should probably leave it there. Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracey Alloway. You can follow me at Tracey Alloway. And I'm Jill Wazenthal. You can follow me at The Stalwart. Follow our guest, Andrew Bishop. He's at Andrew underscore D underscore Bishop. Follow our producers, Carmen Rodriguez at Carmen Armand. Dashiell Bennett at Dashbot and Kale Brooks at Kale Brooks. For more OddLots content, go to Bloomberg.com slash OddLots, where we have a daily newsletter and all of our episodes.

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