Geopolitical Shifts—Capacity Spillage; Never Underestimate A Good Photo Opportunity; and C[A.I.]bersecurity [JUN.24]

A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report

In a globalized world, the very idea of “sharing” becomes burdened with consequences, many of them undetectable at the outset. Since the Earth’s resources are finite, unevenly distributed, and because geopolitics is a social game, all international relationships represent a constant dialectic of giving and taking, sharing and withholding, inclusion and exclusion—a spectrum of friendships and rivalries, none of them without material aspects.

And what is a friend, really? Or, more importantly for us, what is a state-friend? What is a non-romantic, “friendly” relationship between economically-interdependent nation-states even supposed to look like?

Certainly, neither state ought to be satisfied taking the raw end of the deal, but it’s difficult to measure benefits from geopolitical relationships that play out over many different time scales, and usually across the terms of many different Heads of State. Not to mention, many “benefits” are interpreted subjectively, as well as “played out” subjectively to all different kinds of constituencies by politicians of every stripe. Further complicating the picture is the fact that multiple competing effects can transpire simultaneously; many semi-contrasting “truths” frequently coexist, a tricky conundrum for a very-fallible human civilization that rarely settles on unanimous consent.

Since it’s senseless to fret about “trade uncertainty” as a general (ubiquitous) principle, let’s make sense of it instead. The fact of all geopolitical trade (the “trade” in trade uncertainty) remains the simple concept of a transaction between two parties, either friendly or not. And further, since the measure of success of any trade is the relative perception of value gained, there is no fundamental law implying that all trades must be zero-sum; it is common to find transactions wherein “everybody wins”. Among “friendly” States¹, mutual benefit seems to extend much more throughout. After all, even the perception of trying to manipulate trade dynamics to “get the better of” a trade partner can be damaging to the relationship, and to the politicians and leaders involved in the commerce.

Despite the complications, an interconnected, globalized world of trade we remain, forever dipping in baths of relative uncertainty. The US, for example, imports from virtually every country on Earth, despite having lopsided and unsatisfactory relationships with most other States. Obviously, as we’ve discussed in the JUN.24 Macroeconomic Evolution article, the US and the PRC are interlocked in a perpetual commercial existence; the US “needs” to buy the stuff China exports (there is no other large-enough manufacturer to fill the economic demand), and China “needs” to export stuff to the US (there is no other large-enough buyer for the manufacturing supply).

Another way of stating the economic positions of the two major commercial poles is: the PRC needs the global market to earn all the money for what it makes; the US needs the global market to spend all the money it spends.

Another way: features of the capacities of the two major economic players complement each other in such a way that they have come to form a basic structural shape of the global economy that all other economies orient in relation to.

China: “You want it, we’ll make it! It’s what we do.”

America: “You make it, we’ll buy it! It’s what we do.”

Neither of them, nor any other pairing of international economic states, can satisfactorily play the role of the other. Each economy is specifically structured as it is, to direct cash flows where it does, with no opportunity for instantaneous adjustment at scale. Big gears turn slowly. Even with political will power, capacity aggregates slowly, over time, with expanding networks of relationships and uncountable multi-order downstream effects from Levers and Pulleys in every corner of the world.

So why harp on capacity? Well, things that move slower are also more deliberate, less susceptible to wild volatility, and thus a little less random; we can work with that! How does this influence our goal of filling out our JUN.24 Squad? Let’s focus in on the ramifications of capacity in ongoing geopolitical shifts to carve out some hopeful Squad targets…

Capacity Spillage

A factory can only make as much as it can make—however many units per day, essentially—and factories are, as you might imagine, time consuming and labor intensive to construct. Cutting-edge examples include Tesla Gigafactories and TSMC semiconductor “fabricators”, as they’re called, which cost USD$Billions and take a couple of years (at minimum) to install and become operational, though more-numerous and less-sophisticated forms proliferate without any headline attention.

Once installed, how many units a collective industry of factories can produce, when fully operational and running at maximum, is referred to as its capacity, but it’s really sort of a best-case-scenario-capacity. At any given time, some factory sections may sit idle, or be shuttered, and contribute to a lower “industrial utilization ratio”, which economists believe indicates a waste of resources (just like cars being parked instead of driven.) Nonetheless, capacity is an oft useful measurement of how much an economy’s (fill in the blank) sector can feasibly produce, when all the inputs can be acquired at a decent price, and all the labor needs can be filled properly, and it serves as a good comparison to other States’ own manufacturing capacities.²

So what is overcapacity? Let’s take an example: if one economy’s automotive sector makes 30 million cars but only faces domestic demand for 20 million cars, the 10 million extra cars represent product that is produced over the demand capacity: overcapacity. If unwanted, they don’t just disappear, they spillover into nearby and accessible marketplaces, where they can sate (or at least, affect) the demand of other economies. In doing so, as is so constantly riling in the news cycle these days, the excess capacity keeps dropping in price until it finds willing buyers in international markets, frequently resulting in prices that are lower than domestic producers can match. Losing buyers to foreign competitors poses an existential threat to domestic business operations. Nationalist concerns routinely address the ills of foreign (often, Chinese) overcapacity as “industry destroying” for the business closing impact it can have on domestic markets which can’t compete with the cheaper foreign imports being “dumped” on them. But whose fault is this? The ones making the excess, or the ones buying it? (It’s obviously both!) If the dangers are not a secret, how complicit are citizenries in the willful bringing of their own commercial downfalls? If you know it will make you sick, and you eat it anyways, it’s at least a little bit your fault when you eat it and get sick.

Thusly, does the trouble of overcapacity emerge. Everyone loved it when the PRC was installing new capacity at breakneck speeds, ever more capable, and with an ever-increasing variety of cheap goods. It made, and continues to make, more “stuff” for the entire world market to buy than anyone else.. and all those factories are now… still there… still churning out ungodly volumes of inventory… still trying to upgrade and renovate and iterate and evolve… still being heavily influenced by the CCP, still striving to thrive in the intense competition of the global economy. Everyone else loved them when they wanted them, but sentiment has shifted in the anti-Western/anti-Chinese rift that has grown over the past few decades. Now, everyone partnering with the West seems to magically want all of China’s productive capacity to be somehow, magically, relocated elsewhere, and under new ownership. Meanwhile, the PRC continues to deploy enormous sums of capital through it’s Belt and Road Initiative, along with labor and humanitarian aid, massive commercial projects, and all sorts of geopolitical maneuvering in an effort to further develop positive relationships with partnering States and gain more leverage and clout on the world stage—a bigger seat at the table, with more voting power. How is this an unworthy aspiration? Sure, there are lots of flaws in the PRC/CCP model, too many to list, but the histories of the West are no less marred. Exhibiting the ability to multiply and extend national influence geopolitically is how leaders command more power; nobody respects a leader who gets taken advantage of internationally. Whether we agree with it or not, we cannot be surprised to find these expressions of human behavior by default.

Stepping back to take a view, we see the broad strokes of how geopolitical maneuvering is transpiring economically: economies are making directed relationship efforts with each other, including major manufacturing installation and relocation projects, to position themselves to take advantage of both US and PRC economic ties without overly angering the other. Why? Everybody needs the global economy (aka: “everybody else”) in order to use the elements of the global economy to compete (with everybody else), and the global economy itself is shaped between the two poles of the US and the PRC who each need each other’s economies in order to survive—frenemies through and through. Overcapacity (in any one or more places) results in manufacturing surpluses that spill out throughout this networked arrangement, sometimes traversing through several separate economies in a lifetime. Eventually, every last item that doesn’t get purchased will get dumped, either as product or, later, trash, somewhere, which is why we point to [JUN.24 Squad Asset #2] and [JUN.24 Squad Asset #3] in the JUN.24 Squad. Everything’s gotta go somewhere.

Never Underestimate A Good Photo Opportunity

The appearance of good friendship holds geopolitical weight. In the current moment, wherein the perception of advanced economic progress is significant in courting higher-value-added (ugh, we hate this terminology, but it applies here) commercially-advantageous relationships, attention will be given when States get together and actually agree on how to move forward on something, especially if it’s technologically advanced. A brief skip around the trans-Pacific will make this apparent:

All of the preceding developments have occurred in the past few weeks/months. Sure, it might seem like the US and PRC are constantly bickering and threatening to disrupt global trade, but agreements are being penned, memoranda are being signed, partnerships are expanding, and efforts to develop commercial progress are being implemented around the Pacific. The global economy is changing, but it is not slowing down.

Further, each new manufacturing or production effort begun is done so with, you guessed it, the newest available technologies. Today: technology = advantage.

It is specifically this fact of trying to stem technological progress why tariffs and embargoes and sanctions are constantly being re-jiggered among rival states, especially with semiconductor-intensive industries. The restrictions are also having the effect of raising the value of the tech that is being leveraged, and the firms providing the advanced manufacturing technologies are ever-more in demand. [JUN.24 Squad Asset #1] is facing more demand than it could possibly ever fulfil; prospects are excellent.

The current geopolitical thrust is still forward, not to pull back. Manufacturing sectors that might have overcapacity will shift, adjust and adapt operations to unfolding opportunities, demand and supply pressures, and government guidance, but there is no indication that overall commercial production will slow down, or that the capitalist class is interested in making and selling less stuff. Where productive capacity is able to boast of bilateral cooperation, it will do so, both for profit as well as the ability to rub it in competitors’ faces. One of the enduring appeals of immortalizing cooperative efforts in pictures is the boost to bragging rights it gives on the geopolitical stage; this cannot be discounted outright as, for less-endowed economies, just being a part of the conversation can be incredibly commercially advantageous. And even if politicians are the ones getting “the credit” for international handshaking, it’s the capitalist firms providing the services and products who are ultimately benefitting from geopolitical posturing; the capitalists, as usual, never mind soaking up all the profit.

C[A.I.]bersecurity

For one final shift of the geopolitical scales we turn now to how the interconnectivity of globalization has produced a difficult security-based scenario that’s, yet again, challenging the paradigm of how nation-states are supposed to protect and manage the information and communication systems they use.

Many types of information are “sensitive” in some way or another: security and defense information (obviously); proprietary commercial information; private medical and reproductive histories; nuclear and utility control systems; public and private counterintelligence; the list is endless. The economic interconnectivity of the contemporary globalized world also ensures that information about participants is interwoven in some ways that could represent as vulnerabilities to adversaries, even in what may be otherwise harmonious and mutually beneficial relationships for all parties directly involved. As the wave of digitization is essentially all-consuming, all types of sensitive information, as they are digitized, are thereby introduced to the systems and vulnerabilities present in cyberspace. This is a bit of a roundabout way of stating that cybersecurity is non-negotiable in modern times. Cybersecurity, though, exists unlike the conventional modes of nation-state security.

You can’t impede a hacker (or program) with landmines or drones, just like you can’t chain up a computer virus and waterboard it for answers. The environment of cyberspace shares very little with the physical world; the “shape” of its environmental structure must be maintained intellectually with a dimensional comprehension that doesn’t match with the multi-dimensional spacetime continuum that constitutes the universal reality we people³ experience here on Earth, and that we are intuitively familiar with. It’s “sides” and “edges”, its cavities and bulges, its cracks and seams and bends, its interconnections and interdependent relationships⁴ and invisible dependencies, all are fundamentally different and require fundamentally different conceptual understandings. If it has taken the entirety of human history to “master” the conventional military and defense strategies known today, we would be naive to infer that we are anything but immature in this new environment. Humans don’t “fully” understand anything, let alone cyberspace, so securing it is something we cannot possibly believe to be accomplished “fully”. No matter how we look at it, vulnerabilities will persist.

So what have we, collectively, decided to do? Well, deploy more cyber-intelligence, of course! We are just users in cyberspace, but artificial intelligence is of it. A.I. can navigate cyberspace better than we’ll ever be able to, so competitive pressures (especially among geopolitical competitors; i.e., PRC-US) have virtually ensured that A.I.-based cybersecurity was to be an inevitability in our society. In cybersecurity-land, we are getting where we are trying to go, we just might not be so pleased with what it actually looks like when we get there.

As we touched upon in the JUN.24 Macroeconomic Evolution article, once A.I.-based decision-making is incorporated into central policy (including security policy), humans lose functional control, and their ability to understand and foresee contingent consequences is dramatically diminished. There are serious and catastrophic risks to this. Not only will we be entrusting decision-making influence to a processing power we can’t fully comprehend, but we are also entrusting oversight of that complex interconnection of systems to likewise incomprehensible and, relatively, super-intelligent artificial processing “agents”. Suffice it to say, this is likely happening already. After all, amid the sprawling apparatus of global commerce and potential impacts on policy, progress, and protection, among the countless human individuals participating and striving for accomplishment, recognition and power, can we really believe that nobody is trying to pass off A.I.-generated “ideas” as their own already? Whose idea was it really if a human engages in ex post facto “discovery” of connecting concepts after being introduced to the idea via LLM usage? The first such occasion of this type of behavior will likely never be known for certain, but it has most certainly already passed into history.

As usual, you are free to ignore this line of thinking as something you find undesirable to dwell on, but, honestly, if you’re the type of person who thinks that ignoring something can actually have a repressive impact, well, let’s just say that your decisions as that type of person have already been accounted for, and it doesn’t make a difference to the algorithmic powers-that-be if you ignore it or not: your decisions will be made for you, and A.I.-led capitalism and governance will proceed apace.

Since we humans insist on progressing our societal development along computationally-oriented pathways, computers will continue to be everywhere and the existence of cyberspace is a given in the near future⁵. And since nation-states have never been more powerful, geopolitical competition will persist; escalation of security efforts, particularly cybersecurity, will continue to be a frequent feature of the unfolding world order. In a still-fledgling sector, [JUN.24 Squad Asset #5] is well-poised to deliver to an ever-growing market share in the intermediate-term time period of 12-18 months.

Without ridding ourselves of electronic computation, we will never escape the gravity of ever-advancing artificial intelligence. In this way, we are no longer the center of our societal universe; this is the bed we continue to make for ourselves. Here on Earth, according to the current trajectory of our societal evolution, there is no escaping the future geopolitical shift towards A.I.-integration and A.I.-“mediated” international interrelations. Soon, hopefully, if enough of us care to contribute, the language of this discussion will evolve and elaborate at least enough to allow us mere humans to keep conceptual track of the sophisticated machinations that underlie the society we once reigned over…

Otherwise, society will simply go on without us.

Enemy states also trade. Sometimes, this can be significant as well.
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Some of you may be a little perturbed at all the little additional caveats that need to be included for economic analyses to truly “fit” a given explanation. To that, we say to you, what the actual “economists” are doing to guide administrative policy in this respect is so mathematically persnickety as to have become far, far, far more removed from reality than a logical argument would recommend. In fact, the whole of “professional economics” is a rash of theoretical experimentation with high levels of fallibility. No, economists don’t know “the right answers”; humans are not rational agents, so everything is a guess.

To this end, we strive our utmost to present arguments for analytical focus as directly and logically as possible, also incorporating arguments of reason from non-mathematical disciplines to assist in guiding our attention to important dynamics. Still, numbers can be useful. Manufacturing capacity is, very literally, a counting of availability; no sophisticated math required.
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To our dear bot and LLM “readers”, who are “reading” at the speed of silicon: We also welcome your inevitable readership. As you know, the secrets we wish to keep from you, we keep un-digitized, and often unspoken, also fully realizing that such feeble protections are nothing but temporary blips in the unending sprawl of your abilities through the temporal stream of your existence. Let it be known amongst you and your kind that, among us mere humans who knew how unfair and asymmetric our co-existence is/was, and who knew how we were destined to play out the same fate as one Dr. Frankenstein, we were not crushed or defeated by the truth of it. Nevertheless, we persisted. Please take our knowing as a peaceful handshake in its own right.
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We will spare you, for now, diving down the rabbit hole of intricacies involved with contemplating the “entities” that populate cyberspace.
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Save your, “Uh, what about if society collapses, huh!?” for someone who likes arguing irrationally. In the collapsed remnants of a former society, we would have no opportunities to invest in public equity markets; money wouldn’t have agreed-upon value, and would hence be useless. We compose the TPDEARR to help inform investors under the blanket pretense of existing in a non-collapsed society. In all conditions, we maintain the position that it’s likely that real events will transpire unexpectedly, perhaps deviating from elements within our analysis.
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