House Of Cards

In recognition of last week’s release of all 13 episodes of Season 2, we are reprinting – from our Chief Geopolitical Strategist, Marko Papic – an October 2013 review of the popular Netflix original series, House Of Cards.

House Of Cards

Anyone who has watched the TV series House Of Cards could quickly imagine how Francis J. “Frank” Underwood would resolve the ongoing government shutdown in Washington. Underwood, played by Kevin Spacey, is the Democratic House Majority Whip from South Carolina’s 5th congressional district. Congressman Underwood would likely combine several tactics to cajole and bludgeon his way to compromise:

  • Use ‘earmarks,’ i.e., spending on specific projects, to buy off reticent party members opposed to compromise.
  • Trade committee chairmanships like playing cards, rewarding compliant colleagues with juicy appointments.
  • Work with the opposing party behind closed doors to ensure that hold-outs within his own are irrelevant in the final vote count.
  • Threaten to make his party’s campaign war chest unavailable to House members who do not tow the party line.

Underwood is a figment of some very good imagination (and a healthy dose of inspiration from the original BBC series protagonist Francis Urquhart), but the fiction does not stop with the show’s characters. The entire series portrays a Washington political arena that no longer exists.

While House Of Cards has been praised for its realistic portrayal of D.C. lingo and social interactions, it actually gets the politics wrong:

  • Democrats are in control of both the presidency and the House of Representatives in the series, but that is difficult to imagine today. Republicans held on to the House even after losing the national tally for the House by over a million votes in 2012. This is a result of both redistricting and a natural advantage Republicans hold in rural districts, which are overrepresented in the House.
  • Republicans decided to do away with earmarks in 2011, thus taking away from the House leadership one of the most effective tools it has to keep its members in line.
  • Republicans aligned with the Tea Party can rely on funding from various conservative Super PACs, and therefore the Republican National Committee campaign war chest is far less relevant to them.
  • Tea Party members do not care about committee chairmanships.
  • The current House Majority Whip, Republican Kevin McCarthy, is largely irrelevant. Ted Cruz, the freshman Senator from Texas and a Tea Party darling, has more capability to whip the vote in the House than McCarthy.
  • And finally, the greatest fantasy of all, on par with hobbits and orcs in the Lord Of The Rings, is the concept of a white Democrat from South Carolina. The actual district that Frank Underwood supposedly represents as a Democrat, the South Carolina 5th, is staunchly conservative.

We still recommend House Of Cards because it does a good job portraying lobbyists and interest groups in Washington. It also illustrates the legislative process, the sausage making, realistically. In the series, “the American government” does not exist as an entity in and of itself, but rather as a setting where other characters pursue their interests. So while we recommend to our clients that they unwind with House Of Cards episodes after a long day at work, we also caution that they should not try to find Frank Underwood in the real U.S. Congress.

Remembering Nelson Mandela

If the world had more leaders like Nelson Mandela, I would probably be out of a job.

Remembering Nelson Mandela

At BCA Geopolitical Strategy, our methodological credo is constraints over preferences. We focus on constraints to policymaker actions, not on their preferences. This methodology helps us dehumanize geopolitical analysis and focus instead on structural factors that constrain human agency. Such constraints can be quite macro – geography, demographics, military capability, access to natural resources, and technology – or relatively cyclical – domestic politics, economic outlook, shifts in trade patterns, etc.

Every decade or so, however, a policymaker faces a situation in which constraints appear weak, allowing preferences to take over. These can be dangerous moments, especially if ideology or dogma influences decision-making. More often than not, policymakers in these situations overestimate their power and overreach. Nelson Mandela faced such an opportunity and yet chose to constrain himself and his allies with humanity, respect for his adversary, and pragmatism. This was a surprising choice.

South Africa in the late 1980s and early 1990s appeared to be on the edge of a civil war. Mandela’s African National Congress (ANC), today the ruling party of South Africa, was then a national liberation movement for which armed struggle was a central component of its identity. Mandela was also an important leader in the ANC’s military wing, Umkhonto we Sizwe. With the end of the Cold War, the apartheid regime realized that the writing was on the wall. In other words, it would no longer be able to parlay its role in the superpower conflict into support from the West for its regime. It had to negotiate.

The negotiations between the ANC and the National Party (ruling party of the apartheid government) took place in an environment of violence and serious tensions. Negotiations broke down several times due to massacres that the ANC blamed on the government. Nonetheless, Mandela refused to use the various incidents as a reason to ratchet-up tensions, and instead appealed for calm, using crises as opportunities to galvanize support for a political, and thus peaceful, transition.

Forecasts of South Africa’s future were almost uniformly bleak in the 1980s. Unlike the National Party, the ANC was not really constrained. It could have sought retribution for the decades of systematic racial discrimination and it could have demanded massive property redistribution. I admit that, had I been in the position to make my own forecast, our constraint based methodology would have probably led to the same pessimistic conclusion for the country. Mandela, however, was eminently unpredictable and the ultimate path he followed averted a war that most would have chosen in his place. This is what makes him such a profound historical figure.

Is A Grexit Possible Before The German Elections?

Greek Exit, German Elections
The probability of Grexit has increased due to several factors:

  1. Austerity measures are being implemented, particularly the placement of 25,000 public sector workers into ‘reserve’ (from where they can be fired after 8 months)
  2. The governing centrist coalition has had its majority in the 300-seat parliament reduced from 167 to 155 due to a junior coalition member quitting over austerity measures
  3. Greece has achieved primary surplus, which means that the austerity is enacted purely to pay the official sector cost of interest on loans. However, the probability was low to begin with.

While we do believe that the three factors above have increased it, we are talking a jump from somewhere in the single digits to 10-15%. This is because:

  • Euro area exit is unpopular in Greece. Even the far-left SYRIZA has caught on that Greek voters fear uncertainty and therefore do not want to risk Grexit.
  • Post-German election, an OSI (Official Sector Involvement) is likely, with further cuts in interest rate payments and extension of debt maturity at the very least
  • Greeks have an upper hand in negotiations due to reaching primary surplus, so they will likely eventually receive OSI

An OSI is not an option, and cannot be discussed, in the run-up to the German elections. So it won’t be. However, it is the likely outcome eventually of another Greek showdown. German election is two months away, including August which is usually completely dead in terms of news flow out of Europe. As such, it is highly unlikely that Greece will come up before the election. Particularly not after they already received the funding from the official sector and have passed the necessary legislation. As they fail to deal with implementation of austerity, and further disappointment with privatization, Greece should flare up again as an issue in late-2013. Post-German election, however, Merkel will have the necessary political capital to shove it under the proverbial carpet.

North Korea: A Global Optimism Index?

The below editorial is reprinted from BCA’s first interactive service, New Daily Insights. Currently in beta with select clients, the product – which includes significant content and feature enhancements on the previous Daily Insights service, will launch May 13, 2013

Originally published April 17, 2013.

T here is something puzzling going on with the global media coverage of the North Korean imbroglio. The world has never shown as much interest in North Korea as in the past two months, according to Google Trends*.

North Korea Google

Why this should be is not self-evident.

North Korea has not actually done anything since its February 11 nuclear test. Sure, the rhetoric is quite extravagant, but Pyongyang has threatened neighbors many times before. The leadership may be new in both the North and the South, but the military constraints to Pyongyang’s belligerence are considerable. In fact, BCA’s Geopolitical Strategy recent analysis on the matter (North Korea: What If A ‘Red Herring’ Bites?) largely reiterated what has been understood about North Korea, and its woeful military capacity, among the global intelligence community for quite some time.

This only deepens the mystery of why our Chart shows that the searches of “North Korea” are growing at a clip unseen in prior crises. A mystery that is only reinforced by the fact that the previous  North Korean provocations were far more serious, especially the March 2010 sinking of South Korean military vessel Cheonan and the November 2010 shelling of South Korea’s Yeonpyeong island.

Two factors may be at play:

  • First, a lot was going on in 2010. The world was dealing with the aftermath of the 2008 Great Recession and ‘Black Swans’ seemed to be lurking around every corner. The euro area sovereign debt crisis, at the time in its most nail-biting phase, was enough to put the Korean skirmishing in its proper perspective.
  • Second, traditional media continues to be assaulted by non-traditional information sources, such as twitter, and blogs. The 24-hour news cycle has become turbocharged and, since 2008, highly sensitive to tail-risks. Falling behind on the ‘Black Swan’ du jour means that readers, viewers and investors, will turn to twitter or some blog post touting a conspiratorial read of the crisis.

Encouragingly, the obsession with North Korea is a sign that the media has no other tail-risk to talk about. The U.S. fiscal crisis is largely assuaged, and it is certainly  nowhere near its mid-2011 apex. Europe may be in a deflation-induced torpor, but existential threat to the euro area  has been tempered by the ECB dovish stance. The Middle East is no better than it was two years ago, but it is now conventional wisdom that the Muslim Brotherhood in Egypt and Civil War in Syria are not signs of the Apocalypse. (And we suspect that North Korea will very quickly fall off the front pages in the wake of the tragic terrorist attack in Boston.)

In other words, all the focus on North Korea, a ‘Red Herring’ if there ever was one, is a sign that tail-risk compression is real. We therefore suggest a contrarian take:  investors should use North Korea as a bellwether of optimism. The more the media is talking about it, the less real worries are in the ether.

While our tongue-in-cheek conclusion may be encouraging, the North Korean crisis illustrates the real challenge of getting good information and geopolitical analysis in the ‘twitter age’. More information, faster, in 140 characters, seems to definitely not mean better. Not only is the media forced to froth the waters with every crisis, lest its thunder be stolen by non-conventional sources, but it would also appear that the net effect is to make us all… well, less informed (put  mildly).

Stay tuned to learn more about the imminent launch of New Daily Insights.

Click here for a trial to BCA’s Geopolitical Strategy service.

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*Google Trends tracks how many searches have been performed for a particular term. According to Google, the numbers on our chart indicate the searches for a term “relative to the total number of searches done  over time.” The data is normalized by Google and presented on a scale from 0-100.

How To Read The News? Slow Down And Take A Deep Breath

What do the Greek general elections, the U.S. Supreme Court decision on the Affordable Care Act (ACA or ‘Obamacare’), and the Italian general elections, have in common?

T he press initially misreported all three, causing investors to make split-second decisions with incorrect information.

What happened?

  • In Greece, the media initially reported that the left-wing SYRIZA won the election. However, SYRIZA only appeared to be in the lead because the heavily left-wing urban center votes were counted first. As the vote streamed in from other parts of the country, the center-right New Democracy slowly emerged on top.
  • As the Supreme Court decision on ACA was read, the Drudge Report made an incorrect call that the Court had struck down Obamacare. The analysis was wrong; the Drudge Report simply did not understand the decision.
  • As we watched the Italian election results today, most news outlets confused the regional Senate election results from Lombardi as the results for the entire country. Former PM Silvio Berlusconi was pronounced the winner of the Senate by reporters who likely did not even know where Lombardi is.

How To Read The NewsMore broadly, the media failed. In today’s twittersphere universe, journalists have to respond to events within minutes, not days. Often, they are responding to events that they have no experience covering. How many Reuters or CNN journalists remember the last Greek election? Or know to wait for the Italian Senate vote to be announced in full? Or are constitutional law experts?

This inadequacy is not necessarily the media’s fault. Journalists are responding to the demand for instant news and to competition from blogs, pseudo-news outlets, and twitter, which are more than willing to provide a fresh view every 10 seconds. I receive at least a dozen emails a month, asking me to interpret analyses of portending doom from obscure sources as if they were the Dead Sea Scrolls.

Ironically, the proliferation of monitoring and global connectivity has made the media’s job tougher and its reporting worse. In the past, journalists had the time to work their network, to connect with a source who did know how politics in certain countries worked before they filed their piece for morning publication. Today, because of pressure from non-traditional outlets, they barely have the time to copy/paste the report from a wire service before someone with a twitter account beats them to it.

Mitt Romney’s campaign adviser, Stuart Stevens, recently gave an interview in which he made several revealing comments. The first was that because of the prevalence of twitter-speed reporting, journalists are under pressure to constantly report on stories, even when there are none to report. The second point was that “news is whatever people decide news is.”

The media’s objective is to have its readers ‘gasp.’ However, good investment decisions are not made while holding one’s breath. My advice to investors trying to weather this environment is to slow down and stay on the sidelines until the fog of uncertainty dissipates. Sure, some potential returns will be missed, but in the long term, more calls that end up being correct will be made (and less ulcer medication consumed).

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