Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Aloway

and I'm Joe Weisenthal. Joe, do you ever experience a sudden surge in geopolitical analysis emails in your inbox?

Yes, I do. You know, it's funny. Most years people like, what do you, you know, the beginning of the year, end of the year, things are going good, and it's like, what are you concerned about?

It's like, I'm concerned about geopolitical tension.

It's just one of these clich. That's what I always say when I have no it's like, well, things seem fine, but I'm concerned.

But then some years clearly geopolitical tension, war etc. is very real.

We recently saw the bombing in both directions between Israel and Iran.

That seems to be paused for now.

But sometimes geopolitical attention becomes outright geopolitical hostility.

Yeah, that was definitely one of those weeks when we both got a lot of emails.

I have a confession to make, which is I read all of those geopolitical analyses, but I always kind of wonder what I'm supposed to do with that information.

You know, if I were a major professional investor, if I'm reading a note about what is the base case for like Iran versus Israel, I am not entirely sure how that influences my own decision-making.

Well, I would say I would take it even a step backwards and say like, you know, when we talk to Wall Street analysts, say a Fed forecaster, I have a sort of I think intuitive understanding of how they they're like, "Oh, there's going to be three cuts in the next year."

And then I generally have a sort of intuitive understanding of how they might arrive at that.

Okay. We look at statements from the Fed about what they're looking for in terms of achieving disinflation.

We look at the trajectory of the US economy and then we say okay we combine the Fed statement their sensitivity etc the reaction function that's the term I'm looking for with the data and then we arrive at a forecast when it comes to something like a war I do not really have an intuitive understanding of how the geostrategic or geopolitical analysts whose notes flood our inboxes from time to time always during bad periods how do they arrive at conclusions therefore X we think the the war is going to end this way.

When it comes to something like a war I do not really have an intuitive understanding of how the geostrategic or geopolitical analysts whose notes flood our inboxes from time to time always during bad periods how do they arrive at conclusions therefore X we think the the war is going to end this way.

I do not know how that can be done systematically and yet people try.

And actually some of them put numbers probabilities on specific outcomes.

So I think if I was a geopolitical analyst I would just put 30% chance on everything.

That seems reasonable.

But these days you say 70.

7030 is the new 6040.

That's right. That's right.

But I you know I don't want to be cynical about it.

I am curious about how one could derive a number from things that seem wildly uncertain and rare because there are not a lot of event studies and every war is distinct and therefore the idea of trying to accurately assess the outcome of some conflict strikes me as very difficult.

And therefore the idea of trying to accurately assess the outcome of some conflict strikes me as very difficult.

Yeah. Well, I am very pleased to say that we do in fact have the perfect guest to talk about geopolitical analysis and how it actually is calculated I guess or created.

We are going to speak with Andrew Bishop.

He is a senior partner and global head of policy research at Signnum Global Advisors.

So Andrew, welcome to the show.

Hi, thanks for having me.

Why don't we just start with what is Signnum?

So Signnum is a political and geopolitical risk advisory firm that was founded in 2018 by a gentleman named Charles Meyers who was the vice chairman of Evercore ISI before founding Signnum.

who was the vice chairman of Evercore ISI before founding Signnum.

And Charles had a career in banking with a focus on emerging markets, but was always sort of one foot in US politics as a fundraiser, as an adviser to candidates, etc.

And he founded Signum essentially to try to meld his instincts about how markets work with his knowledge about US politics.

And from there, he hired me to help build out the sort of global analysis beyond the US.

So, I think I started first becoming aware of your commentary recently because uh Ozan Tarman, who we've had on the podcast over at Deutsche Bank, he started forwarding some of your notes over and so then I started reading the stuff and it was like very interesting and compelling.

and so then I started reading the stuff and it was like very interesting and compelling.

But why don't you tell us okay you explained what signum is, what's your background, how do you develop an expertise in these areas.

So I joined Signnum from Eurasia Group uh which is sort of the you know the the founding house of of political risk.

I was there for four years.

I first joined Eurasia because I'd met Ian Bremer through a previous job at the World Economic Forum.

So at the Davos organization and I joined as sort of right-hand man to their chairman Cliff Cupchin who really taught me a lot in that firm in that role.

I ended up as deputy head of research and several of the things that I learned from Cliff were for example not getting overly excited by every new headline.

Right.

So I think when especially when you're at the beginning of your journey advice for everyone.

Yes. I mean to me the best example of that is the zero hedge type headline about how the first gas contract was denominated or settled in euro instead of dollar

you know or or just the bricks more generally.

I I you started working when I was 22. I'm 39 now.

the bricks have had a glorious future for you know almost 20 years.

So that was one of the things.

The other thing that I learned from Cliff was good analysis.

Like basically the key is to have a rigorous and an analytical process and even if you get the call wrong, it's better to have good analysis and a call wrong rather than the other way around.

Right?

Because otherwise you could just be throwing darts and you you'd be getting elections, you know, 50% right half the time.

Right.

Which by the way gets to this question of of what you mentioned on on the the probabilities.

It's actually harder than just throwing darts or flipping a coin because most situations have far more than two scenarios, right?

So it really is a very very difficult thing to do to predict all geopolitical outcomes which which I'm sure we'll get to.

But just to to close off on on you know sort of background, I joined Eurasia from from the World Economic Forum and the job I had there was really fun because

essentially you know the the organization is best known for Davos.

But the team I was in which was their global risk team basically send their team members throughout most frontier and emerging markets to meet with government officials, get a sense of where their head was at in terms of their country's sort of economic future, future economic policies, etc.

then meet with the opposition and the business community and think tank community and essentially write up scenarios about the future of that country at a sort of 10 to 20 year outlook.

Not trying to get it right, not trying to predict it, but trying to essentially force the country to think twice about its business model.

As you can imagine, a lot of these were resource dependent countries.

And that led to some pretty interesting situations.

Like one of the projects we worked on, for example, was about the future of Ukraine.

And that was in 2013 2014.

So the project was literally interrupted by the Maidan revolution.

Half the people on the board of the project and half the people we interviewed were you know either fleeing or put in prison.

and I remember we were doing a a panel to to actually introduce parts of the findings in Davos and the prime minister of Ukraine his plane was he was basically disinvited on the day that the panel was taking place.

So his plane was circling over Zurich, not being allowed to land, not being allowed into the room.

You know, similarly, we had back then he was an MP uh Petro Porchenko who later became the leader of the country, smuggled in a grenade from the Maidan revolutions into the conference hall and sort of held it up to show how the brutality of the regime was working.

So it was a really great way to get firsthand exposure to to frontier markets.

Yeah, that is definitely firsthand exposure.

I'm not sure how I would feel being in a conference room or like a big hall with a grenade.

I'm hoping it wasn't live, but who knows?

Okay, Andrew, one thing I want to ask, and I alluded to it in the intro, is when I get your research notes, if I am a typical client of Signnum, what exactly am I doing with that information, why do I want to get this analysis?

So first thing is about 60 65% of our clients are financial investors, right?

That Joe mentioned or or alluded to.

Uh about 35% or so are corporates and they obviously use us in very different ways which I'll I'll get into.

But I think the first topic that you all sort of touched on is is this idea, you know, there's there's a lot of studies that show that geopolitical risks just don't affect markets, right?

Like who really cares?

Frankly, oil's pretty much flat from pre-Israel Iran war.

VIX barely picked up.

You know, S&P's at all-time highs. etc.

Obviously, I have a, you know, a bias or I'm I'm rooting for my own team here, but I think that that's a little bit short-sighted for a few reasons.

One is most of these studies typically look at S&P in the long term.

And our clients obviously are not trading the S&P in the long term, right?

They're trading in the short term.

And you've got some pretty violent sharp moves up and down for a lot of these assets.

And they're also trading obviously more niche assets.

So I'm thinking of the travel and tourism industry or I'm thinking of the oil and gas industry, Israeli shekele, you know, things that are far more niche.

And if you look at it at that level, you've got some major major volatility that can be both beneficial or or negative depending on on how good you are at at playing it, which is really what our our clients are specialists in.

which is really what our our clients are specialists in.

We're not strategists, so we don't give investment advice based on the geopolitical research we put out.

The other thing is there's this big, you know, talking point and it was true again last month or two weeks ago whenever um uh the Israel Iran war ended.

There's sort of this like oil collapses, right?

And that's a counterintuitive outcome.

A lot of our clients were actually expecting that.

And so what they were trying to figure out was when is this going to end or not end, but when is it going to culminate, right?

When is going to be the peak fear level?

And that's probably going to be when Iran retaliates for whatever the US does.

So again, the fact that it actually drops on the news is not necessarily surprising to to most of the folks we we speak to.

But Tracy, do you want me to get into a little bit how the clients use us?

Yes, that would be great.

Yeah. I mean, so there's a few ways.

The first and I would say least often and and least sort of savvy or useful way is for the predictions themselves, right?

So what I'm saying is basically most clients don't use us for the actual outcome prediction.

It's better if we get it right.

But if they were only going to use us for that, they could probably go to prediction markets, right?

I think they're prediction markets are a little bit overestimated these days, which we can get into, but they're not bad, right?

Interesting.

Yeah. So, so the the that's not the main reason.

The main reason that the way that a client put it to me, and this was years ago, and it stuck, is like they're an F1 driver, and we're helping them on the sort of, you know, the training tracks, right? like on the on the the training loops before the actual race to literally memorize every single turn and know when they can accelerate, when they've got to cut a corner, etc.

So that when the events start unfolding, they're already prepared to, you know, hit the brakes or accelerate depending on what's happening.

The difference here, of course, is that the track is not fixed.

But the point is, you know, in a situation like Israel, Iran, you've got multiple calls, right?

Or multiple call basically just means prediction.

You've got multiple situations.

So you've got is Israel going to strike?

Then you've got the question, okay, so we know they're striking.

It's all over Twitter, etc.

Is this a shot across the bow or is this the big one?

Is the US actually going to get involved after 12 hours?

Is Iran going to retaliate forcefully or in a, you know, symbolic way?

Is this war going to last 3 days or is it going to last 3 weeks?

Is the US going to get involved at that point?

You know, and so on and so forth.

And so they're not like most clients don't expect us to get every single one of those calls right.

I mean, that would be insane.

What they want is for us to lay out arguments that are not necessarily just convincing, but that help them do the the mental gymnastics around all the possible outcomes.

And then, of course, it's better if you get it right.

Wait, I have a very short quick question.

Do you see anyone in your clients who are actually in the prediction markets looking for opportunity there yet?

Because some of these are getting to be big size and or do you see this as a future growth area for you?

people looking for mispriced contracts on the prediction markets.

So you mean clients that would actually be putting on trades?

Yeah.

You say there's 40% of X happening, the prediction market is 60%.

Maybe there's an opportunity.

Anyone doing that yet?

So short answer is that I'm aware of no.

And the main reason is still liquidity despite the fact that it's getting bigger as you say.

What's really interesting of course is that that would disintermediate the market's reaction function.

So, I'm looking back at a note.

This is just a random one that I found in my inbox, but there were several that I read in July or sorry,

in June.

By the way, I should say we are recording this on July 1st.

And given that the world is an uncertain place by the time this episode comes, and I don't know the exact date, who knows what's going to happen by the time you're listening to this,

but I'm reading a June 16th note, and you gave these odds.

20% preemptive Iranian capitulation, 45% Israeli mission accomplished, followed by Iranian capitulation, 25% chance US intervention, and 10% Iranian nuclear breakout surprise.

Why don't you go give us through your thinking in the middle of June, how you arrived at some of these numbers and then given where we are today on uh July 1st, how did you do uh or what surprised you or what didn't surprise you?

Talk about sort of where you were then and where you are today.

So the first thing is Tracy was asking about how do we ascribe probabilities and there's I I could give you a fancy answer about Monte Carlo simulations etc.

But the reality is neither we nor as far as I'm aware anyone in the sort of market actually models this stuff and the few that do use predictive analytics rather than historical data.

And the reason is there just aren't that many case studies to go off of. Right?

So let's just get that out of the way.

So the the way we use probabilities and I'll I'll absolutely answer your question about the that specific case study in a second.

Sure.

But there are three main ways that I think the probabilities can be useful.

The first is if you're drawing out scenario trees and you're assigning prob, you know, before you publish, right?

You're assigning probabilities to various sub events before getting to the total cumulative outcome.

Basically, if the math doesn't add up, that can highlight a problem in your logic, right?

It's not a math problem.

Who cares if the math doesn't add up from a mathematical standpoint?

But if you end up with above 100 or below 100 or whatever, that means that you're probably overstating one aspect of the of the dynamic or understating another.

That's one.

A second that can be quite interesting and problem, you know, not problematic but useful for the user is clustering.

Right?

So we had a recent scenario or recent situation with an election I think it was in Uruguay where the base case was perhaps market constructive but if you aggregated all the non-base case scenarios you actually had a more likely outcome of a market negative bottom line right so that's those are a few of the ways now the way that I would approach a situation like the Israel Iran one is basically break it down into an equation so if you're trying to answer the question is the US going to intervene in the war and bomb for right.

so that's those are a few of the ways now the way that I would approach a situation like the Israel Iran one is basically break it down into an equation so if you're trying to answer the question is the US going to intervene in the war and bomb for right.

now the way that I would approach a situation like the Israel Iran one is basically break it down into an equation so if you're trying to answer the question is the US going to intervene in the war and bomb for right.

so if you're trying to answer the question is the US going to intervene in the war and bomb for right.

Yeah.

To me, the odds of that would be you start with 100 and then you take out whatever the odds are that Iran is going to capitulate at the diplomatic table.

So, you know, we can talk about how how you can come up with that view, but the idea is are the Iranians going to take the diplomatic offramp that Trump is giving them on that Friday in Geneva, right?

So, those odds might be low, but they're not zero.

So, you get to say 20%.

Now that leaves you with 80%.

Of that the question becomes is Israel going to basically finish the job on its own right i.e. can the Israelis destroy Ford on their own either through bombing without the most advanced bunker busters or through a ground operation like they conducted in Syria the previous November which is something that I and a few others had on on their radar.

And if they can't then presumably the president will will intervene. Right

Now, you were asking about scoring myself.

That's a perfect example.

Those odds get you below 50% of US intervention.

You on top of that have to add the fact that the president might want to intervene even if he doesn't have to, right?

Because you might see political opportunity and being associated with a victory.

And that's the part that in this instance, for example, I' I'd underestimated.

Now, where it gets really interesting, and I'll stop here.

What gets really interesting is even if your take is that the president is actually not dying to get involved and that he doesn't really see this as a big opportunity and you therefore only ascribe it, you know, whatever 30% odds, you're still going to end up above 50% overall.

So that can tell you that because there are so many ways of getting to an outcome, you can get tipped over 50 without it being your your modal scenario.

And same with odds of regime change.

You can get regime change through a palis coup.

You can get regime change through Israeli bombing.

You can get regime change through a revolution.

Our base case was that there would be no regime change in Iran.

And I think that's that's what played out so far.

But the point is you got to compound all those odds because they're independent variables.

Okay.

You have the probabilities. I get that the way you just laid it out was very clear.

But how do you actually come up with I guess the range of scenarios because that's what seems practically unlimited nowadays.

And also you mentioned Trump just then in Trump world I kind of feel like anything is possible right like there are a lot more tale risks out there that now seem you know plausible in various ways.

And also you mentioned Trump just then in Trump world I kind of feel like anything is possible right like there are a lot more tale risks out there that now seem you know plausible in various ways.

like there are a lot more tale risks out there that now seem you know plausible in various ways.

How do you take into account the unpredictability of anything can happen and then how do you actually confine yourself to this is a set of realistic scenarios that I'm going to talk about.

So, first thing I'd say is to me that's one of the reasons why prediction markets aren't that useful yet and especially to to clients.

They can actually be ironically more useful I think to the analyst than than to the recipient or user of the final product.

And what I mean by that is the prediction markets will tell you where the tariff level is going to end up on July 31st, right?

But what if the cutoff that's relevant is not July 31st?

what if it's, you know, a completely different date because Trump is visiting like let's say that it's it's a ceasefire in Gaza and the cutoff date is Trump's visit to Saudi Arabia or whatever.

So the point is the rigidity of the prediction markets and it's a trade-off, right?

Because the the reason they do them that way is so that they can be easily falsifiable and you can compare predictions etc.

But that rigidity I think narrows the value.

So then to your question on how do you even frame the frame the issue that's a major problem for Trump tariff situations indeed.

So if you take July 8 for example you can't really and and we've you know we've struggled with this everyone does it's hard to make a call on whether he is going to escalate or postpone his deadline because there are 60 countries involved.

it's hard to make a call on whether he is going to escalate or postpone his deadline because there are 60 countries involved.

So first of all you theoretically would have to make 60 individual calls right or predictions.

Second thing is what if he says, you know, we're escalating the tariffs, but they're kicking in on July 15th.

Is that a punt or is that him actually having increased the tariffs and so on and so forth?

So, I mean, the short answer, Tracy, is there is no perfect way of doing it.

And that's actually been one of the issues with Trump is that framing the initial question is almost as hard as predicting his behavior.

Trade, ironically, is one of those situations though that we've had a pretty good track record with.

So I'm happy to talk a little bit about how we've tried to like get into Trump's brain if you want.

Please.

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.

Doesn't matter if you don't market it.

It's all about that.

It's all about that acronym.

Anyway, keep going.

I I was waiting for the invite.

Um, so I think Trump had backed down in 21 out of 23 threats or something like that, right?

So, the first thing is you can identify patterns.

And in fact, actually, truth be told, we 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 the Economist or Time magazine cover phenomenon where by the time the taco thing came out, whether it was from us or or from Armstrong, it was already fading.

where by the time the taco thing came out, whether it was from us or or from Armstrong, it was already fading.

It was already getting arguably less true because if you look at the pattern of Trump's behavior on Jan 20, he had made a bunch of threats against Mexico, Canada, China, etc.

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 to today.

Right?

A 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 like Phil Tedlock fox versus hedgehog like not be too attached to grand ideas but look at each prediction individually.

so this gets a little bit to the whole like Phil Tedlock fox versus hedgehog like 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 right 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?

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?

because if I told you that Trump's trade policy was going to be all about China, which in hindsight is correct, right?

China's got a 45% tariff.

Everyone else has a 10% tariff.

But if I told you that on January 19th and you were, you know, running a hedge fund, you would have been very, very surprised that the first 3 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.

You can't get revenue if you back down right and a same country can be affected by completely different motivations or or you know confrontations.

and a same country can be affected by completely different motivations or or you know confrontations.

So Mexico in the first 3 months was affected by fentinel 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.

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 USNCA 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?

So, 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, so first of all, we know not to take him seriously because of taco or or you know, signum pre- taco.

But I actually think taking him literally has been reasonably helpful him and some of his advisers, those who repeat his views.

So, people like Bess and Lutnik, they actually don't repeat his views.

They kind of freelance.

But if you take Carolyn Levit, one thing that really sort of struck us was I think it was on before the February 1 deadline rather than the March one, but I could be confusing them.

She 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 terrorist, 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 advisers, 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, right?

So, he benefits from them going nuts as long as he doesn't get cornered by their comments.

Let's go back to uh the recent war and something I'm interested.

So looking at the cumulative odds, you 20% preemptive Iranian capitulation, 45% Israeli mission accomplished.

when you're coming up with those odds, like 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 US 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 arsenals?

So, that actually gets a little bit back to what is Signum and who who we are because I'd say there are different types of shops in 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, etc., that that gets legally dubious.

In addition to that problem, it doesn't make for good predictions, right?

Because Scott Besson himself didn't know on April 8 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 are 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 Huaido'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 LAM, etc.

So, it's not that we don't do that, but the point is where we think our value ad is is on the process.

And we've basically adopted like a few principles.

One is the Phil Tetlock principle that I 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 Brisbeno de Mskita that a lot of people will know about political scientists very focused on essentially the logic of political survival right

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 and 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.

like leaders will always put their own advantage ahead of anything and 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 failroof, right?

Because using that logic, one of the push backs I got on 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 and the truth is they've given up hostages twice now, right?

You've got to stay like pretty nimble and humble.

there there is no like perfect answer but that sort of process approach can can be helpful.

Now to get back to your initial question about like how much knowledge you need.

You do need technical knowledge but you don't need to have it inhouse.

So we don't ever outsource any of our analysis like 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 in 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, but 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.

What do you do?

So, there's a couple answers to that.

Well, there's several.

The the first couple are deflection.

The third is the real answer.

Um, 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.

So, that 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.

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 and 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 push back 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 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.

And I obvious 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 oh 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 USIsrael 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 US military assets or resources in the same way, the same level of support to Israel in the past.

like oh 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 USIsrael 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 US military assets or resources in the same way, the same level of support to Israel in the past.

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 USIsrael 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 US military assets or resources in the same way, the same level of support to Israel in the past.

and I'm curious like there are many people who perceive in perhaps the medium-term future that maybe the USIsrael 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 US military 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 the 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?

It's a great question but I would say that there is a pretty big difference.

I I think I mean I'm not I'm not in the markets but I think there's a 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 the world like geopolitical risk is going to be big in 2025 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 the world like geopolitical risk is going to be big in 2025 right

the the world like geopolitical risk is going to be big in 2025 right

a big one of those is multipolar world right

or zero world like this idea that it's like the breakdown of global order and so on and so forth

So those only happen every 20 or 30 years

or that the US may not want to be the hedgeimon 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 US have such a global military footprint?

Things like that.

At some point that could be a dominant strain of thought and we 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 and like literally what happened over the past month was a very very good test case for that, right?

And the fact that Trump himself who is known to be not just isolationist but also pacifist, you know, one can chuckle, but like 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 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?

Does 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 to Joe's question in the sense that you take something like the the relationship between Russia and China pre Ukraine war or pre2022 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?

They get along, they work together, but they don't really trust each other.

They don't really love each other.

And so you you knew that when push comes to shove, when they had to like put their interest above the other, etc. You knew which way it was going to go.

That was very unclear for the first like year.

And and frankly, some could argue it's still unclear post Russia invasion, right?

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 access 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

and 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.

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 see the light of day.

What's a 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. No, I so I actually I love that question because but I I hope this is not going to be disappointing, but I 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 analyst predicting the details

right like 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 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 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 CO.

People talked about CO as a black swan.

I mean if you read any of those you know world economic reform global risk reports for the past like 15 years pandemics were always top 10 like or even top five.

People knew that pandemics were a major potential business risk.

So again it's it's more like the the details rather than something's going to just pop up in our face.

In the next I don't know 5 years.

Do you expect China to invade Taiwan?

Yes.

Uh if if I mean the word invade is the one that bugs me, okay, which is not 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 So that view for example is pretty I think banel, 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, right?

But 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, you know, 3 months or 6 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, you know, 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 that could be most problematic.

So again, it's it's how you look at it, I think, that that can make a difference.

Back in college, I wrote an essay/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, uh, yeah, I I you empathize with the difficulty of timing.

I totally do, Andrew.

That was fantastic.

Thank you so much for coming on Off Lots.

Thanks, Andrew.

That was great.

Thank you,

Joe. 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 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?

Because he has also talked about how tariff revenue is going to offset a bunch of tax cuts and things like that.

So, I 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.

Yeah.

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 pigeon hole into one position.

That was interesting.

Yeah, you know, by the way, just going back to Andrew's note that we kept referencing on uh June 16th, he had underestimated the odds that the US would intervene as he did.

However, I to his credit, here were his final takeaways.

US intervention is certainly possible, but still not base case.

Okay, 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, cuz 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.

I have to say the speed with which Andrew answered, "Yes, there is going to be something in Taiwan." It's boring, isn't it?

freaked that I was like 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.

There's 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 that's some hope for you, Joe.

I mean for me I mean for lots of people certainly hope there is not anyway

um the other thing I was I just didn't like how how comfortably he was asked because I in five years yes he didn't have seem to have any doubt

the other thing I was thinking we probably should have asked this but the time frames for things cuz you mentioned regime change in Iran like okay well it hasn't happened but it's also been 2 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 curious to figure out how he thinks about like the time frame of possibilities as well.

and I don't think it's necessarily off the table so I'd be curious curious to figure out how he thinks about like the time frame of possibilities as well.

But 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 Tracy Aloway.

You can follow me at Tracy.

And I'm Joe Wisenthal.

You can follow me at the stalwart.

Follow our guest Andrew Bishop. He's at andrew_d_bishop.

Follow our producers Carmen Rodriguez at Carmen Arman, Dashel Bennett at Dashbot, and Kale Brooks at Kalebrooks.

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