Not Another Political Discussion
October 22, 2020
Wait, there’s an upcoming election? This is the first I’m hearing about it…
Don’t you get a little fatigued talking about the United States all the time? To be blunt, the result of the upcoming election means relatively little for most of the planet. Investors with a long-term mindset should be paying closer attention to the global geopolitical landscape than the American political landscape.
Geopolitically speaking, the United States is boring. It’s one of the only countries that is both energy secure and food secure. It has two long land borders with two friendly neighbors, two coastal borders with two separate oceans, one of the world’s only deepsea navies, more aircraft carriers than the rest of the world combined, and the ability to project power to any point on the globe. By contrast, China can barely project power a few hundred miles from its borders (see: the necessity to build islands in the South China Sea).
The United States doesn’t have to worry about sourcing energy, growing enough food for its population, or being invaded. Boor-ring. Of course, boring results in stability, which has enabled the Americans to create and lead the global order through the Bretton Woods agreement.
At the end of World War II, the United States wanted to combat the rise of the Soviet Union. The Americans, with their navy and consumer market intact, offered to guarantee the security of global trade in exchange for deference on defense decisions. The result was a global order where geopolitical advantages and disadvantages — which have dictated much of history — have been largely put on hold.
We all know how history turned out. The Soviet Union collapsed within five decades of the Bretton Woods agreement. The problem is that the Americans have failed to replace it with any coherent foreign policy strategy for the last three decades. That has resulted in discontent at home (ironically stemming from the side effects of globalization) and a fraying global order.
Globalization won’t cease to exist, but geopolitical advantages and disadvantages will once again start to dictate history. This matters much more to investors than who occupies the White House.
For example, companies that contain as much of their supply chains as possible within the United States (or North America, really) will have inherent market advantages in the coming decades. There’s a reason Tesla is considering investing directly in lithium production in the United States — a country that produces virtually no lithium today — and it’s mostly to combat geopolitical risks posed by China’s dominance of material markets.
We’ll see a decoupling of numerous markets. For instance, if conflicts break out in Europe or Asia, then crude oil prices would likely soar. Most of those countries need to source liquid fuels from elsewhere on the globe, but few countries can protect shipping lanes. The Americans, however, might not experience price shocks due to the ability to source energy from within North America.
There are numerous ways a fraying global order will begin to impact investors, especially for businesses that are stretched too thin globally or too dependent on certain foreign markets (read: China) for growth. That means it’s time to begin paying less attention to domestic bickering among political ideologies and closer attention to the rest of the world.