A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report
The modern, highly-globalized international economy is host to a multitude of differing political approaches to governance, each resulting in a different capital flow environment. Though it is tempting to divide them all into two broad camps, the autocratic and the democratic, it’s not so simple. Every nation expresses itself differently in how policy is formed and put into action, and how constituents both perceive of, and participate in, national administration. Remember, for the vast majority of human history since the emergence of centralized “society”, people have been ruled over. 1 A lot of the effects of capitalism as expressed through democracies are currently visible in the modern world, but the limited history does not permit some types of comparison between ruler-governed and voter-governed economies.
In this quarter’s issue we focus first on the recent trend of “nearshoring”, referring to the attempt to reorganize certain economic activities so they are more geographically founded on soil belonging to a nation’s nearby allies, and then on to central administration and how agility and bureaucracy interrelate in geopolitics to produce less- and more-favorable economic and investment environments. Through the following, we hope to illustrate how geopolitical complexity and the variance of governance promote unpredictability while also identifying profitable trading opportunities for equity investors. Geopolitics is a contest of contradicting motivations that nobody can escape.
The Limited Effects of Nearshoring
Nearshoring does not reduce or eliminate the irreplicable nature of key “ingredients” (mostly minerals and agricultural goods) that pin down supply chains to global nodes that can’t be moved. Just like one can’t collect wheat from the Sahara desert, one can’t mine for platinum in the Swiss Alps. “Resources”, which is itself a very anthropocentric means of labeling nature in terms of its utility to humans, are not evenly distributed across the Earth’s crust; international supply chains are a permanent feature of the modern economy.
It’s a simple fact that when a company cannot afford the costs of its own inputs, it is only a matter of time until output ceases, revenue falls, and the business folds or is acquired. Refusing to use the lowest-cost inputs from an international “adversary” has the effect of forcing many companies (usually the smallest) to close up shop as they’ve known it. Nearshoring is an activity largely relegated to the largest corporations with the deepest pockets, as they are the only market participants with the ability to withstand notable cost increases and long lead times for the construction and implementation of new operations on “friendlier” (and usually more expensive) soil. It is always possible that economically viable niches are carved out by smaller players who are in the right place at the right time, but the thrust of major nearshoring geopolitical initiatives are largely borne by the dinosaurs and giants in the room.
In broad terms, nearshoring will achieve some measure of supply chain reorganization, but China will never be cut completely out of international trade input sourcing. Nor will China stop being the ultimate destination for many consumer goods, especially considering the continuing rise in the PRC’s GDP/capita and “standard of living”. Nearshoring will not prevent further exacerbation of the current geopolitical contests in national security and technological supremacy, nor will it prevent future war. In fact, it likely motivates greater detestation between competitors. Nearshoring, as a concept, has more political utility than functional “umph”. The most likely effects will be to strengthen certain participants and industries in the second-tier economies (such as throughout Latin America, and Southeast Asia) that are becoming host to more concentrated spending efforts from the two major economic poles, the US and the PRC. Both [SEP.23 Squad Asset #1] and [SEP.23 Squad Asset #3] are in a prime position to reap such benefits.
Bureaucracy
Bureaucracy is one of those phenomena of the modern world we are all so familiar with that it’s no longer a question of whether or not we will encounter it within any given administration system, but a matter of how much bureaucracy we’re going to have to navigate to finally achieve some sort of result. Though the literal definition of the term describes it as essentially a decision-making system composed of non-elected officials, it is the qualities of bureaucracy (specialization of functions, adherence to fixed rules, hierarchy of authority, officialism, etc.) that color the meaning of the term today. When a system becomes tiered in such a way that individual officials become representatives of access between levels, the effect is of the implementation of bottlenecks, which tend to enhance the level of corruption within a system by attracting actors who are drawn to the implicit and explicit access to power therein. No system is immune to corruption, full stop, but some are worse than others. This psychological “backdrop” of understanding is a shared cultural consciousness (in Jungian analytical terms) regarding bureaucracy that participates in upholding the perceived qualities of the system, whether or not they would otherwise be active if not supported emotionally by the perceivers. To some extent, and unlike religion, “believing it to be so”, makes it so.
Across the trans-Pacific economies, bureaucracy rears its head everywhere and represents the primary mode by which “paperwork” is registered and maintained. Both corporations and governments impose bureaucracy on their users to varying degrees, ensuring, among other things, that there is always somebody to blame when shit hits the fan. Whether it’s a successful program, a legal misstep or a loss of capital, somebody’s gotta take the fall, or the credit.
Economies that streamline or reduce the amount of bureaucracy a company must navigate in order to do business are obviously the most friendly for capitalists and returns on capital, from an administrative standpoint. Bureaucracy costs money to implement; officials need to be paid, “paperwork” needs to be systematized and maintained, administrative infrastructure needs to be upkept. But even in extreme cases of this, “access roads” can be paved for the right capitalists/companies at the right times. For assurances of monetary returns, red tape can be cleared away by special interest lobbying and spending. Very large corporations with endlessly deep pockets and fundamental positions in industry sectors, such as the chaebols23 of South Korea, are rarely as bogged down by bureaucratic red tape as are smaller market participants with less access to funds and politicians. In fact, ultra-large conglomerates routinely leverage bureaucracy to effectively close doors behind them and reinforce market share growth, among other anti-competitive practices. Geopolitics throughout Asia is a matter not only of governments dealing with each other, but of governments trying to appease, satisfy, or stifle relationships among the most significant domestic market players from a capitalist perspective, as they are the ones who are actually engaging in outbound international trade (which most Asian economies are reliant upon) and who are actually generating the “gross national product” metrics that the governments are weaponizing for their political motives. As such, geopolitics is market politics in the modern era.
Chinese-style administration is notable in that it can essentially overlay bureaucracy on top of a prevailing governance system, and it does this, quite heavy-handedly, through the Communist Party of China (CCP). The sheer enormity of the population the CCP is charged with overseeing translates to an equally astonishing volume of “officials” responsible for said oversight at every level and jurisdiction. As such, the PRC is host to a lot of bureaucracy, though somewhat “loosely” in that, since the number of participants is so vast, particularly in urban areas, there are a lot of “cracks” in the system through which individual efforts can squeeze, innovate, and disrupt before being tackled by the system and wrangled into line. Eventually, any participant who flies above what can be thought of as the phoenix threshold will get their wings singed. But beneath that threshold, the CCP bureaucracy has demonstrated that there is actually a fair amount of leeway available, only so long as it doesn’t threaten to destabilize the powers-that-be. Intelligent investors in the space are wise to these limitations and try not to get too inextricably entangled with institutions that, although in the West they may be viewed as too big to fail, in China they are ripe for being made an example out of. Crafty divestitures, such as breakups of major conglomerates into nimbler and less CCP-authority-threatening components frequently turn out to be big winners for capital gains growth. Good business in China and PRC-involved economic arrangements is good navigation of Chinese-style bureaucratic limits.
In the West, by contrast, the capitalism-forward behemoths are less preventable and less obstructable… which also explains some of the exorbitantly high valuations of major blue chip companies in US markets. Bureaucracy in the US is much more cumbersome for policymakers than it is for capitalists (as well as bureaucracy in foreign autocracies, which function to further entrench the current representation of an autocratic State into a more-permanent expression of government.) So, although enormous returns (ie: 20x on capital) are extremely rare for conglomerates which are already very large, the ability of capitalism to bypass a lot of the slog of bureaucracy in democracies means that strong and ongoing revenue and profit growth are almost guaranteed for the biggest players in the space. Bear markets bring temporary downturns, but growth ultimately resumes for basically every firm that doesn’t fail; the irrepressible chauvinistic optimism inherent within humanity represents itself in market activity thusly. Welcome to the geopolitical West.
Companies such as [SEP.23 Squad Asset #2] and [SEP.23 Squad Asset #4] who are intrinsically involved with the major players essentially have government support for their efforts as their most-major contracts are critical to the geopolitical maneuvers of the State. The battle for technological supremacy between the US-led West and the PRC-led East virtually ensures that their “star players” have political backstopping for at least the near-to-intermediate term timeline.
Maybe this will help: the geopolitical state-of-affairs influences investor confidence, which determines capital flows, which affects market valuations, which are instrumental in developing corporate operations and budget outlays, which broadly impact stakeholder satisfaction, which determines leniency on R&D and innovation spending along with higher-risk projects approval and expansion/contraction efforts, which are cornerstones of total employment decision-making.
There.
That’s as clear as I can make it.
And now,
A Brief Conversation:
“How nimble is your government?” asks one bureaucracy to the other.
“Nimbler than yours! I’m unicameral; no opposition party, no dissent.”
“It is our internal dialogue that produces our innovative atmosphere and rapid progress. We are stronger when we (make it seem like we) take all our different opinions into consideration. How can you compete with that?” the questioning bureaucracy defends.
“It is easy. Look at our progress over the last fifty years. Our pace dwarfs even your storied history in the modern era. It is only your chauvinism that seeks to press us back and hold us in. When a new direction is determined, our people turn and march onward valiantly. We are the future. You need to accept the reality of a reduced role for you in the coming decades.”
“How dare you?! Sanctions! We sanction you, we tell you! Sanctions!!”
A note on “special interest” influence:
Though being receptive to spending from “special interests” is seen as corrupt by many, the manner in which litigation unfolds in the US, by comparison, makes stemming and punishing this dynamic much more difficult than in the PRC. Take US Supreme Court Justice Clarence Thomas as an example. Even though his reception of lavish gifts from highly-partisan wealthy elites has become widely known, it will be extremely difficult to remove him from his position, as the legal process, if it even ever occurs, will inevitably be fraught with drawn-out toe-dragging, endless appeals, dramatic and heightened rhetoric from both sides, and who knows what other unforeseeable defensive maneuvers from those who desperately grasp onto the reins of power. Corruption in the US, though often visible, is unfortunately an inherent feature of the world’s most capitalist-friendly nation. In the PRC, if Xi wants to crack down on bureaucratic corruption, all he has to do is unilaterally define “corruption” as he sees fit for the moment, then impose his choice of sanctions on those he deems violators. Aligning with Xi’s vision for the future is a much more significant action for future operational insurance than is aligning with the Biden administration, whose days are numbered to 5 more years at most. Longer-term planning is actually possible in a government wherein internal, bipartisan vengeance doesn’t constantly undo and reverse actions and policies of previous administrations every couple of years.
- Universal suffrage, the continuous right for any and all citizens to vote, is a relatively brand new experiment going back no more than about 150 years throughout the whole world, and even now it is seldom, if ever, really, truly universal. Women and minorities have always been disenfranchised. Conditions virtually always apply. The US has only been toying with the full effects of the democratic experiment since the passing of the Civil Rights Act of 1964 (only ~60 years ago), and most people would not claim that the US has done a very good job of it so far, except when compared to autocracies. ↩︎
- https://brownpoliticalreview.org/2023/03/the-chaebol-a-curse-in-disguise/#:~:text=While%20chaebols%20only%20account%20for%2010%20percent%20of,conglomerates%E2%80%99%20monopolistic%20dominance%20over%20the%20South%20Korean%20economy. ↩︎
- https://carnegieendowment.org/2022/11/22/changing-face-of-south-korea-s-business-sector-amid-global-competition-pub-88420 ↩︎
tkscm, limited 