The Three Body Problem

Since the second world war, the geopolitical world has been loosely divided into a collectivist bloc ("the East"), and a more individualist grouping ("the West").

This is an oversimplification, of course. Entire continents fall between the cracks. Some countries in the geographical east have been individualist; some in the west have been collectivist. But the cold war was real, and the dichotomy stayed useful even after the Wall fell and China's economy started catching mice.

Things may be changing. Trump's intervention in Venezuela, shortly after the publication in November of the US' National Security Strategy, strengthens the impression that the established geopolitical model has had its day.

I say "may" be changing. We can't know for sure yet – whatever the talking heads say. Trump does not do consistency and coherence (a statement of fact, not a judgement), and US presidents anyway are not in office long enough for us to be sure that their initiatives will prove genuinely strategic rather than impulsive or opportunistic. We often warn against jumping to premature "Big Picture" conclusions.

The potential change has less to do with ethics and legality than is being suggested. The debate raging in Europe in particular is predictable, but perhaps misses the point. Large countries often behave dubiously, even those of whom we otherwise approve, and "international law" is elusive and elastic. Venezuela's position has been pitiable for years, unlike (for example) pre-invasion Ukraine's; the US does not need more oil, even if it does feel compelled to govern who has access to the reserves on its doorstep.

Instead, what is perhaps changing is that "the West" looks less like a single entity with a common purpose, but seems instead to be splitting on transatlantic lines into two parts – a purposeful and active America, and a rudderless, passive Europe. Geopolitics may now have three key players, not two.

This may also be an oversimplification. Connections continue: the US is not retreating wholly to its own hemisphere, but remains invested – politically and economically – in the Middle East, Ukraine, and Asia. NATO is not defunct (though US military action in Greenland would surely make it so). Meanwhile, "the East" is far from monolithic: Russia and China disagreed about building communism even when they believed in it, and their current relationship looks more like dependency than partnership.

Nonetheless, a geopolitical world with three major players, not two, may loom. What might it mean for our clients' portfolios?

A key characteristic of the three-body problem* in physics is its indeterminacy. Whereas the gravitational interactions of two orbiting bodies can be calculated and mapped out with some confidence, those between three (or more) bodies have no unique solutions, but face instead many wildly different (even chaotic) potential outcomes. Interested observers can only wait and see which will likely unfold in practice, and try to take action if/when it seems appropriate.

Political advisers, then, for sure, may have to work a lot harder, and be more nimble. Those super-confident podcasts and op-eds may be more fallible than usual.

In the investment world, however, a three (or more) body scenario is not a bad metaphor for how we see things at the best of times. Apologies to regular readers, but – as we have indeed said so often – the global economy and financial markets have many, many moving parts to begin with. Partly for this reason (and partly also because geopolitical developments often don't have a financial or economic impact anyway) they can be seemingly impersonal, and unaffected by political and humanitarian concerns.

The addition of one more moving part to all the others in the investment world may not change that much, then: it is potentially chaotic to begin with. For the time being at least, with oil prices more likely to fall than rise, and China/Russia's response to America's move unclear, our advice is not to act, but indeed to continue to wait and see how the stars are likely to align…

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