How Geopolitics and Crises Shape the Market
Why does the market keep rising despite the current geopolitical tensions?
Why does the market keep rising despite the current geopolitical tensions?
Because the market thinks there is no risk of spillover.
It could be useful to compare the COVID situation based on my professional experience in the health sector in Italy.
Based on the hospitalization data from China in January 2020, one could estimate the global impact of COVID and predict the need for widespread lockdowns by looking at the rates of intensive care admissions.
Apart from the deniers, including many doctors, the rest knew well that at that time in Italy there were only 5000 ICU beds and in the event of a national epidemic they would have run out quickly, leaving without assistance all the victims of accidents or heart attacks, the post-op patients, etc.
Until Codogno1 we lived in the illusion that it could be possible to control COVID by measuring the temperature at airports, knowing well that all viruses have an incubation period aimed precisely at spreading without showing symptoms.
That Thursday there was the signal… for the whole world. The lockdown scenario became the most likely one.
The market does not predict the future.
In fact, until that day it continued to rise despite the risks.
It tends, nevertheless, to select the information, precisely because the movements that discriminate a bear market from a bull market are made by those we define as whales (in the sense of funds that move the bulk of the money) whose operational will is based on concrete data without any bias (to some extent…).
It is clear that they also make mistakes but they reprocess the information and adapt.
An example is the news on the omicron variant: it caused an initial violent drop but it quickly turned out to be the decisive variant to exit the lockdowns in the West. Since then COVID has no longer influenced the American and European stock market.
Let’s come back to the present day.
As long as the market analyzes the current tensions and considers them confined to conflicts of a merely regional nature, no matter how bloody and unacceptable, we will always be in a situation similar to February 20, 2020, when COVID was limited to some areas of China and in the West was…“business as usual”.
…But now a question arises as a consequence.
Why does the market tend to perceive current conflicts as regional and pay less attention to the risk of a global war?
To answer this question, a clear definition of multipolarity is needed.
Does it reflect the current state of the world or is it a political view that does not correspond to the facts?
To have a multipolar system, the main rules and dynamics must be determined mostly by three or more states that are roughly equal in power at the top.
The United States and China are the two strongest countries, but there must be at least one more country that is close to their level for multipolarity to exist.
This is where the idea of multipolarity breaks down.
None of the countries that could potentially rank third (France, Germany, India, Japan, Russia, the United Kingdom) is anywhere near a rough match for the United States or China2.
That holds regardless of which criterion one uses. Polarity could be evaluated using military spending and GDP. But even by those basic measures, the system is not multipolar, and it is very unlikely that it will be for many decades.
A simple calculation shows this: unless either the United States or China collapses completely, the distance between those countries and any of the other contenders will not narrow anytime soon. All but India are too small in population to ever be in the same league, while India is too poor; it will not possibly reach this status until much later in this century, if ever.
Before 1945, multipolarity was the usual state. International politics involved constantly changing alliances among roughly equal great powers.
The balance of power could shift quickly since joining or leaving a great power in an alliance had more impact than what any single state could achieve internally to boost its influence in the short run.
In multipolar eras, the fairly equal distribution of power meant that states were often surpassing one another in strength, leading to long periods of change in which many subjects claimed to be the best, and it wasn’t clear which deserved the title.
For instance, right before World War I, the United Kingdom could say it was the greatest power based on its global navy and huge colonial territories, but its economy and army were smaller than those of Germany, which itself had a smaller army than Russia, and all three countries’ economies were outshined by that of the United States. The easily imitable nature of technology, meanwhile, made it possible for one great power to quickly close the gap with a superior rival by copying its advantages.
Thus, in the early twentieth century, when Germany’s leaders wanted to lower the United Kingdom’s status, they had little trouble quickly building a fleet that was technologically competitive with the Royal Navy, and only after a few years from a crushing defeat they rapidly rose from a weak and restricted power to almost dominating Eurasia.
A fictionalization of this dynamic is shown by the prequel of the movie “Kingsmen” set before and during the First World War.
The result was a precarious balance on the constant brink of a catastrophic war, compared to which the conflicts in Ukraine and Palestine show all their relative insignificance.
So the claim that the establishment of a multipolar world order could lead to a decrease in conflicts and the nuclear danger should be taken with a pinch of salt.
Not surprisingly, the doomsday clock was the farthest from the apocalypse in 1991 when the world was undoubtedly perceived as unipolar3.
We are currently 90 seconds to midnight
Image by Wikimedia Commons
As long as the world lives in a kind of Mexican standoff regardless of the perception, regional conflicts are unlikely to turn into global wars.
At least for now.
It was the evening of February 20, 2020, when the hospital of Codogno Italy discovered the first case of Covid in a young man of 38 years, Mattia Maestri, who was then called by everyone the ‘Patient 1’
Anyway, Europe acting as a whole is congenitally tied to the USA. At least for now.
It should be noted that the doomsday clock also takes into account the problems caused by climate change.