**March 7, 2022** #writing [[Geopolitics]] #change #china [[Decision Making]] | [[Investing versus Trading (Speculation)]] A friend mentioned to me on Monday last week that the world was updating their priors and I think that was a very profound statement, it was a comment that I found myself coming back to a few times last week. We have talked before about the Monty Hall problem which is a great example of using Bayes' Theorem to update prior probabilities. Another good example is an interview question from Susquehanna: what would you pay for the chance to roll a dice where the payout is the number you roll; then what would you pay for the chance to roll the dice if you can have a second roll? This is an exercise in pricing an option and Bayesian thinking. Bayes' Theorem gives your a way to update your probability distribution of expected outcomes when new information is received. We could also just quote Keynes who said: >"When the facts change, I change my mind" What has transpired in Europe over the past two weeks was completely unexpected and it is a big change. Investing is all about change. Before I get too far, I have to acknowledge the risk that I am blowing this all out of proportion. However, it doesn't matter if I go too far or get too excited, what we are going to do is take a look at how the facts have changed and start to think about how we should be updating our priors. When Russia invaded Ukraine it made a bunch of assumptions but the key assumption they got wrong was that Germany would value its economic ties with Russia over its ties to NATO. Germany was forced to make a choice, a choice that it has long avoided, and by choosing to not only back Ukraine but also rearm, Germany has changed the facts on the ground in Europe. By forcing Germany into this decision Russia has put itself in a bad position. The fragmentation of Europe did not happen. The fragmentation of NATO did not happen. Not only did they not happen but the invasion of Ukraine drove Germany to remilitarize, and a militarized Germany has been a historical threat to Russia. Not only that, historically a militarized Germany has been a destabilizing force for all of Europe. George Friedman dove into this beautifully this week and had a wonderful quote in his [article](https://geopoliticalfutures.com/the-new-old-germany/): >"In geopolitics, solutions to one problem can breed new ones." Russia set into motion a chain of events that is now far out of its control. That is what we are witnessing in the markets, in political circles, policy circles, etc. Investors and policymakers around the world are updating their prior assumptions about Germany, the EU, NATO, the European Peninsula, Continental Europe, etc. I don't think one can overstate the significance of what has happened over the past few weeks. Unfortunately, my intuition tells me this is not good in terms of increasing stability in the world. The US has been stepping back from its role as the global police officer for years after its misadventures in the Middle East and Asia. Much ink has been spilled about declining US power and influence as China rises. The global balance has been shifting from US domination to something else for years now. When a global superpower steps back it creates a power vacuum which can be very destabilizing. We just had a major destabilizing event and a potentially destabilizing response. A militarized Germany, newly invigorated NATO, and empowered EU adds a new element to the global power balance. This could be a further sign of the US stepping back or it could be the US finally figuring out how to wisely execute its power. The addition of a new force could help to balance the world or be a destabilizing force. This is all very uncertain, and don't forget we are still in a Fourth Turning. Don't read me wrong, I am not predicting doom or anything like that. I am not predicting anything because I simply don't know. What I'm pointing to is that we are witnessing a historical and global adjustment of prior assumptions and probabilities based on significant new information. It is like the moment when the market is at support and it's either going to hold or breakout lower. "It's the deep breath before the plunge." (extra credit it you can name the source) This breath could last for years, it could come and go without us even noticing, but the facts on the ground have changed and you better recognize it or risk being left behind. Mental flexibility is a required practice for life and the markets. China is watching closely and we can learn a lot from their actions in the coming months and years about how they have updated their priors. Will the Europeans turn their nuclear reactors back on now? Will the backlash against Russia provide an opportunity for Chinese and US cooperation? Are we embarking on a new cycle of defense spending in Europe? Have economic sanctions further strengthened the use case for crypto? Will the weaponization of the dollar drive the world to a new international gold or crypto standard? Is fiat money ultimately destabilizing not only financially but geopolitically? Would a return to a hard currency system promote peace and stability? Lots of big questions with big investment themes that I’ve seen raised over the past week or two. Sorry I don't have the answers and if I did I wouldn't share them....its a free newsletter after all! The market action was clear last week: no one has a clue. Sentiment is pretty negative but there was no directional conviction, except for Gold which should be doing good in this type of environment. The Ukraine situation, as terrible as it is, will eventually move out of view of the market but what is left in the wake may have long-lasting consequences that we are only starting to think about now. So far we haven't seen investors rushing for the exits, but we also haven't seen any new reasons to buy. There is a large risk premium in the market that will eventually have to come out, but prices have not gone down enough to attract significant new buying yet. The Fed needs a reason to raise rates but it doesn't need an excuse to hike less or not at all. Inflation is only getting worse. Sorry that I only have questions today and no answers.