#writing Geopolitics for the layperson. Don't let the chaos distract you from the very plain interpersonal forces, that we are all well-acquainted with, playing out on the global stage. While the experts are trying to reconcile their outmoded worldview with the reality of today, unburden yourself from this unnecessary and ill-advised task to grasp the simplicity of what we are seeing in the markets and in policy circles today. --- **April 14, 2025** Just like anyone can operate a car without an engineering degree, anyone can understand geopolitics without being steeped in its theory or practice. In fact, in times like these, where conventional wisdom is being turned on its head on what seems like a daily basis, a [Beginner’s Mind](https://en.wikipedia.org/wiki/Shoshin) can be an advantage. The engineers can’t help when we stop using the machine the way they intended or stop using it entirely. The forces driving the markets today are raw and ones we are all well-acquainted with. ![[Occam's Razor#^50ff4e]] Bob Elliott made a very important point last week: this crisis is a function of a **_[Policy Choice](https://x.com/BobEUnlimited/status/1909191619422609753)_** rather than a consequence of some exogenous event. This created what Kris Abdelmessih called a "theta component" to the market: namely that as time went by without a change from the administration the pressure on the market grew. The market’s responded in usual fashion with an inverted VIX curve, but that pricing implies that we will return to the way things were after a period of time. Everyone was waiting for what we got on Wednesday, but now that we have the policy change many are doubting its lasting effect. It would be an error in logic to assume that because this crisis is a function of a choice that means that the choice can be undone, and the horses can be put back in the barn. You can't punch someone in the face, apologize, and reasonably expect no retaliation. But it’s also important to consider that the forces driving this change aren’t merely the choices of one man. The policy norms we have become accustomed to emerged from the Cold War, and the Cold War ended long ago. Therefore, the policy norms have become not only outdated but detrimental to the US national interest, and assuming a return to outdated and adverse norms doesn’t make much sense. Now that the markets have the hoped for “policy pivot” it begins a more complex and uncertain phase of this new paradigm. It would also be an error to dismiss the chaotic policies emanating from the White House as the whims of a madman; instead consider that chaos is being used to gain the upper hand by shattering convention which forces opponents to be reactive. It is more useful to view the Trump Administration as the embodiment of the national mood towards the status quo. The result of one week's worth of policy has been to completely upend global trade and isolate the US’s geopolitical rival: China. Whether this was the objective all along risks asking the wrong question; it’s better to view the strategy simply as let’s take an axe to the tree, see what falls out, and adjust accordingly. Wall Street wants to believe that the economic interests of the US reign supreme, but that view fails to account for national security interests. The two are inextricably intertwined, but economic interests depend on rules and certainty, and geopolitical shifts change the rules. It may be hard to see through the chaos of the present day but adapting to a new reality, while painful in the present, can be better than stubbornly adhering to a system that has long outlived its usefulness. If we were to express this in the pricing of VIX futures we would expect to see a steep term structure peaking in the intermediate term and followed by declining volatility over the long run. Now that the pieces on the board are starting to come into focus, we can start to game out some potential actions and reactions. We'll start with the Fed because they are reactive and are not going to do anything quickly: they are the caboose. Until the Fed starts acting _proactively_ what they say and do will carry little weight in the market. The real game is being played between China and the US; therefore we can calibrate our thinking to be prepared for what comes next. China's export-oriented economy is in bad shape, and now that their primary customer has put them on notice that a new deal is required, they are under even more pressure. Xi is cornered and doesn't have many options, and as Sun Tzu warned, a cornered opponent is the most dangerous kind of opponent. While geopolitics can be complicated, the power dynamics that govern are something we are all familiar with: survival instinct. Nations are made up of people and reflect the collective hopes, dreams, and most importantly, fears of their people. What is unfolding now between China and the US is analogous to a street fight. Representing the current superpower and a rising superpower, the US and China have been on course for a showdown for some time. The only question was when and in what domain. While an economic war is preferrable to a kinetic war, war of any sort is not ideal for the world but does become more likely as great powers rise and fall. To understand how this war may unfold it is imperative to understand the motivations and constraints that each party is facing. ## China's Imperatives China’s domestic concerns center on the Han core along the coast where most of China's wealth is concentrated; however, the frequent revolutions throughout China’s history have come from the interior where economic conditions are not as favorable. China, like the US, has a large wealth divide, and for China the wealth divide is an existential threat because of its history of revolutions. During the GFC, China realized a critical weakness in its economic model was its overreliance on foreign demand and has attempted to transition towards a more domestic demand driven economic model. This has come with its challenges as it puts upward pressure on the currency which increases the cost of living for its poor rural population. Externally, China is protected on its western, northern, and southern borders by mountains and deserts but is vulnerable on its eastern front where the threat a naval blockade is its primary concern. Japan, Taiwan, and the Philippines make up a chain of islands which have close relations with the US and can quickly be used to blockade China from the global markets on which is depends. This is why Taiwan, and the Philippines have been such a focus for China in recent years and why it is working feverishly to develop its navy which has raised concerns in the West regarding China’s rising status as a global power. Xi wants a deal, his trade minister said so last week, but as Trump intimated, he doesn't know how to go about it because he cannot come off as weak and risk losing his increasingly weak grip on power sending China into a domestic political crisis. He needs a deal as he manages this delicate transition from an export-oriented economy to a domestic demand oriented one, but he also needs the space a deal would allow for China’s naval capabilities to continue to develop which is needed to ensure their national and economic security. ## US Imperatives The US enjoys a very stable geographic position with the Atlantic and Pacific acting as natural buffers against its adversaries. With Canada to the north and Mexico to the south the US is free to project its power outward securing its trading routes by maintaining control of the Atlantic and Pacific. In both WWI and WWII, the US remained on the sidelines until control of these oceans was threatened. Economically the US represents the world's largest economy in nominal dollars, however the US is also among the most indebted countries in the world and runs a large trade deficit. These imbalances resulted from post-WWII economic policies which entrenched the US as the global economic superpower. As the US economy was transformed from a manufacturing-based economy into a service-based economy a wealth gap emerged and has grown to the point where it is putting significant pressure on society and domestic politics. As economic and security interests are closely related, these economic imbalances have become an issue of national security and has pushed the country into an economic war with China. The frontline for this war is currently trade policy centered on tariffs, but China may have opened a second front last week in the Treasury market. China and Japan are the largest holders of US Treasuries and as such hold a certain amount of negotiating leverage over the US. However, that leverage is a double-edged sword because if China leans too hard on the Treasury market, they will only end up hurting themselves and creating domestic inflation which would only further exacerbate their own social crisis. China doesn't have many cards to play as it attempts to transform its economy and strengthen its national security at the same time. COVID taught the world the importance of having production close to consumers, and the advent of AI and robotics lowers the bar for easily and quickly establishing low-cost manufacturing sites anywhere in the world. The US is responding to the hollowing out of its middle class that resulted from globalization by reshoring production which aligns with China’s desired economic transition; however, it is not clear what will lift China’s interior out of its economic doldrums. China accumulated a great amount of wealth while the US accumulated massive trade and fiscal imbalances over the past thirty-years. China holds a large share of the US debt and therefore their economic destinies are joined at the hip while the US is now seeking to rebalance that relationship. China’s inability to use the wealth gained under globalization to increase the fortunes in its interior was an economic failure that now puts it in the untenable position it finds itself in. The US and China are joined at the hip, but as they move in different directions China risks being torn in two. It is very easy to outsmart yourself in complex times, therefore it’s important to take a step back and look at the most obvious things that people ignore when they are trying to figure something out. In this case it is vitally important to understand that while Trump and his administration's policies are important, they are merely the result of the circumstances the US finds itself in today. Everything flows downstream from here. Secondly, it is very important to realize the very untenable position China was already in prior to being isolated by the Trump administration's trade policies. These are the big forces that will shape the events that unfold from here and what is true in the street fight, that both bullies are usually masking an underlying fear or trauma with their aggressive disposition, is true on the global stage and that has important downstream implications for the markets. Times like these don't call for fancy analysis; they call for being dumb so that you can see what is hiding in plain sight.