Summary

We believe the world is currently going through a geopolitical transition that will have wide-ranging impacts on the investment landscape: the transition from a unipolar world to a multi-polar world.

What Is A Multi-Polar World?

Before we explain the dynamics of a multi-polar world, let’s define the unipolar and bi-polar worlds. The unipolar world is best illustrated by the period of relative peace experienced after the fall of the Soviet Union, in which free trade became the driving force of the global economy, and peace was maintained through the United States’ military and economic power. A bi-polar geopolitical landscape is best encapsulated by the Cold War between the Soviet Union and the United States, in which two “great” powers divided the world into two separate spheres of influence. A multi-polar world is the most complex of the geopolitical dynamics, one in which a larger number of states have become sufficiently powerful that they are able to pursue foreign policy that is independent and globally significant to the “great” powers.

Nothing exemplifies this new era of multi-polarity like the sharp increase in regional conflict. From Russia’s war with Ukraine, the Nagorno-Karabakh war between Armenia and Azerbaijan, the tension between Taiwan and China, and the wave of military coups in Africa’s Sahel region, none of these conflicts could occur in the previous era in which the United States acted as the global guarantor of peace. An era of multipolarity is the death of the American peace dividend.

It should be noted that we are not arguing that the United States has lost its economics and military might on an absolute basis; a multi-polar world is one of relative power; the regional powers that now look to challenge the United States on the geopolitical stage have seen a rise in economic and military power relative to the United States. However, we do not believe that the United States is at any risk of losing its current mantle on an absolute power basis.

The Rise of The Unaligned State

Another effect of a multi-polar world is the rise of unaligned states — countries that do not directly align themselves with the traditional “great” powers but instead cooperate in different foreign policy domains with different “great” powers in order to pursue policies that maximize their geopolitical interests. This tends to take the shape of unaligned states playing the “great” powers off one another. Because of this dynamic, we believe that those describing the current tense diplomatic relations between China and the United States as a Cold War are ignoring the more complex geopolitical dynamics that have made the old Cold War playbook obsolete.

The tactics of economic isolation that the United States is employing with China will not be nearly as effective as they were with the Soviet Union. The global economy exists in a different state than when the Cold War started; economic isolation was possible then because of the United States' control of global commerce with Western nations, but this is no longer the case.

The rise of the unaligned state is best exemplified by the role of Turkey in the current geopolitical order. While Turkey is a member of NATO, they are not consistently aligned with the geopolitical calculus of Western Europe and the United States. Turkey has positioned itself as a go-between for NATO and Russia but still does not implement any sanctions on Russia and, by the looks of the Nagorno-Karabakh war, is making the most of Russia’s weakening influence in the south Caucasus to strengthen their ally Azerbaijan. Regional powers such as Turkey make maintaining Western-imposed sanctions difficult, if not impossible, as can be seen by how easily Russia has been able to dodge oil price cap sanctions (link here). Regional powers are more comfortable than ever with their unaligned status, freely transacting with anyone who can help them maximize strategic gains. These regional powers have become militarily powerful enough that, while they cannot take on the United States, they can maintain military dominance in their region and economically powerful enough that the United States often can not afford to take punitive measures with them as they once would have.

From Laissez-Faire to Dirigisme

Uni-polarity set the stage for the era of globalization and laissez-faire economics, with the free trade policies dictated by the United States easing the movement of capital and goods across borders, but the trend towards laissez-faire policies has begun to reverse in concert with the rise of a multi-polar world.

This trend towards increased deficit spending has been seen on both sides of the political aisle, likely signaling that the median voter is now much more amenable to dirigiste policies than they have been for the last30 years. Two different narratives spur these dirigiste policies in previously laissez-faire Western democracies: firstly, the need to compete economically with a centralized form of government like China’s — that picks economic winners and losers through its heavy use of industrial policy — and secondly ,the populist politics that have taken hold in largely low-income populations that feel globalization has not provided them with the economic benefits that they were promised.

While this populist rhetoric often displays a narrow understanding of the full economic implications of globalization, the core premise that working-class people have not necessarily received a proportionate amount of globalization’s economic benefit is not false. We would argue that on an absolute basis, working-class people have received economic benefits from globalization in the form of substantially cheaper products that have become taken for granted over the last 30 years. The end effect of re-shoring supply chains will undoubtedly be significant cost inflation that is then passed directly to the consumer.

The Biden administration’s Inflation Reduction Act is unequivocally an example of industrial policy designed to be disguised as climate change legislation; it aims to make national champions in critical infrastructure and energy technologies — in addition to developing independent sources of critical minerals and refining capacity of those minerals — in order to compete with the stranglehold China has established in these industries. The problem with industrial policies in capitalist economies is that when governments pick winners in their economies, they create economic inefficiency, as the winners they pick can not be allowed to fail even if that business stops being economically viable. Economic stagnation is the inevitable cause of these policies; a perfect example is Japan and its Ministry of Economy, Trade and Industry (METI), one of Japan's most powerful government agencies. METI has been given the authority to pick the economic winners and losers in Japan, disincentivizing innovation and causing the Japanese economy — which in the1980s seemed on track to become the largest economy in the world (link here) — to suffer from stagnation, losing its manufacturing edge to South Korea and China.

Resource Nationalism

Resource nationalism is the likely end result of this multi-polar world dynamic. After all, what good is it to re-shore one’s supply chains but still depend on China for the critical refined minerals you need to manufacture?

We believe this will cause certain commodity markets to become significantly more fragmented than ever before. Rare earth elements (REEs) area good example of this; rare earth elements are used to make permanent magnets, which are necessary components of electric vehicles, wind turbines, and many other everyday household electronics. China currently has a 70% market share of REE concentrates production and a 90% share of global refining capacity. The Inflation Reduction Act mandates certain thresholds for the percentage of minerals that need to be sourced from the United States and free trade partners in order for electric vehicles to be eligible for certain substantial tax credits. The United States currently has only one operational REE mine, Mountain Pass, operated by MP Materials (Berman Capital maintains a position in MP Material); we see a future in which critical minerals like rare earth elements produced in the United States or Europe receive a higher market price than those produced in China, simply because of the industrial policies of the west.

We believe resource nationalism, spurred on by industrial policy, will lead to large-scale price dislocations in commodity markets as they are forced to adjust to a new era of de-globalization. These price dislocations will provide astute investors with opportunities for outsized financial gains, gains that investors under-allocated to commodities and real assets will likely miss out on.