Much as we did this past September with our comment “Force Majeure, Coming Soon to a Theater Near You,” we explore stresses on the global order and what that portends for asset holders. To paraphrase one notable ideological prime mover, you – the investor or lender – may not be interested in volatility but volatility is interested in you. Lenders and investors should continue to factor an appreciation of event risk and risk mitigation, as geopolitics continue to jostle before coalescing.
So much in life inevitably becomes learning by doing, we never really get the cheat sheets we need, life’s natural entropy cannot be denied. Of course, some times we are willful, obtuse, myopic or doctrinaire – and did I mention inflexible? These qualities, traits or predispositions complicate things even further.
At the onset of the Second World War, the United States faced a challenge – the working reality of a two front war and the need to develop war-making capability quickly. The US recognized the need to project force across the vast Pacific theater against a formidable enemy. In that regard, and among other things, the American military had to develop and deploy pilots, fast.
To do just that, US defense planners came up with a “cheat sheet” technique, the OODA Loop. Through the course of the war, it worked.
The acronym stands for “Observe, Orient, Decide then Act”. Pilots were taught to observe their surroundings for a potential target; importantly, they were taught to then orient where they were in the immediate airspace and what else might be out there, to then decide on their course of action, and then to act. And then, to repeat the sequence.
So, pilots were trained with this cheat sheet, this heuristic. The US military, engaging in wonderful pragmatism, would, as practice, pull after a time surviving and effective pilots from the front line, and have them instead train fledging ones. The benefits from this accrued, with the US able to muster gradually more survivable and skilled pilots, while Japan witnessed the growing attrition of their skilled pilot cohort.
Granted, it’s an interesting history anecdote, but why relevant here – when we are considering the markets and risks to lenders and investors?
Think of, say, the current US administration – you know who – having had to choose, over the past year or so, specific branches on specific decision trees: such as whether to facilitate US energy production and independence or to curb domestic production in the interest of moderating fossil fuel dependence; or whether to act with some probity and caution on the US military presence in Afghanistan or to expedite with dispatch the unilateral pull-out from that country because now is the desired time; or, to name another one, to be ham fisted and foggy minded, and to encourage Ukraine to join NATO when it’s irascible and paranoid neighbor’s more choleric impulses are still in abeyance – or perhaps not to do that.
As far as current official policy and thinking have played out in these venues over the past year, there was, to paraphrase Gertrude Stein, no there, there. There was no appreciation, apparently, for context. No perceived need to orient oneself.
Which brings us back to our OODA loop story, imagine a fighter pilot who observes his target but does not orient himself to his environment – to where he is in the airspace. That might be fatal. If he were to just ignore or be oblivious to where he is in three dimensions, he might get caught by an enemy unawares.
It appears that, upon implementing their declared energy policy, the current US administration did not orient to the geopolitical and global economic features of the day. They did not consider, it seems, the geopolitical consequences of artificially priming higher energy costs through, by policy diktat, removing a portion of US production capacity.
To illustrate, US domestic oil production amounted to 12.910 million barrels daily in December 2019, before Covid; by December 2021, despite economic recovery then being in full swing, US domestic production amounted to only 11.567 million barrels daily, according to the US Energy Information Administration.
Note that the current US administration, it appears, does not seem to have recognized that by arriving at this stressed world energy market place, they may have excited revanchist and imperialist ambitions of a major global player, or maybe several players. And, in the context of a pricier global energy market, they may have given that player the resources to act upon those ambitions.
And of course, ordering a quick but pell-mell pull-out from Afghanistan might have been seen as regretful messy business, but still minor when compared to the perceived political payout of “ending a war”.
Just so, this was failure “to orient” again. There was no appreciation of what the Afghan pullout might entail. No thinking materialized apparently over how a unilateral pullout – done without consulting our NATO allies, and for obvious cosmetic political reasons – might damage US ability to project deterrence. No thinking, it seems, over how weakened deterrence might be consequential in the new environment of great power politics.
And then, in a rather blinkered way, the current US administration agreed to last November’s Charter on Strategic Partnership, which supported Kyiv’s ambition to join NATO. Here again, an inability “to orient”, to first get to know and appreciate the lay of the land – or perhaps more aptly, the battle space. Cambridge historian and noted Stalin biographer Robert Service cited the agreement as “shambolic mismanagement”.
And the columnist Tunku Varadarajn commented on the November agreement recently in the Wall Street Journal, noting, “(the current US administration) offered Ukraine encouragement on the NATO question but gave no apparent thought on how such a tectonic move away from Moscow would go down with Mr. Putin…”
A broken OODA loop – failure to orient, to consider ramifications and consequences, geopolitical consequences – primes event risk. The cross-border investor and lender should risk mitigate accordingly – at least until there’s better pilot training again.