(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

This will be the last essay in my “White Boy” series. I am done talking about Sam Bankman-Fried (SBF) and the collapse of FTX/Alameda. It’s not fun dunking on someone when they can’t fight back. The only tweets SBF will be sending in the coming weeks — if any — are likely to be bland, carefully-crafted platitudes designed to render him more likeable before his trial. But, before I commence ignoring him and his deeds, there is one final and important lesson to be learnt from the FTX debacle and what it signifies from a global macroeconomic and political perspective.

Throughout this series I have used SBF and the FTX saga as a foil to make a broader point — and I intend to do that one last time with today’s essay.

As has become abundantly clear, the world is splitting into two major blocks: The West (or as I’ve referred to it in my past essays, Pax Americana) and Eurasia. Pax Americana is a combination of America, Western Europe, and their fair-weather allies. Eurasia is a combination of China and Russia, with China the major and Russia the minor partner in their alliance. The Ukraine war is a physical manifestation of this competition, as it has quickly become a proxy war between Pax Americana and Eurasia. The semiconductor chip/trade war between America and China is another example of the non-lethal/economic side of this war.

In the middle of Pax Americana and Eurasia are a number of non-aligned countries that have the things both sides need. These countries have young productive workers who can make things at affordable wages. And these countries possess critical resources like hydrocarbons, cobalt, lithium, nickel, copper, etc. These are the materials that will power the next phase of human economic and technological advancement. These countries have a choice of who to trade with. This choice is predicated on sentiment — that is, how they feel they are being treated in any bi-lateral trade relationship — and the actual economic terms of trade. The economic terms of trade include both the quantum of money paid and which currency is accepted (e.g., the USD, the RMB, gold, etc.)

This essay focuses on the sentiment piece of the equation. Specifically, I’ll be exploring how the world’s perception of Pax America may start to shift after yet another pillar of Western financial exceptionalism, SBF/FTX — aided and unwittingly abetted by the Western financial and media establishment — robbing the rest of the world (ROW) blind. I say the ROW because a majority of the impacted individuals and entities are neither American nor Western European. It was the Global East and South that were harmed the most by this fraud. And I will argue that the reason these countries let the fox in the hen house yet again was misplaced trust due to centuries of social conditioning, which has historically resulted in little “white” soy-boys like SBF being given an automatic seat at the proverbial table, no questions asked.

This is important because if we are to navigate the next few decades of financial markets, we have to analyse whether the West, which consumes things, or the ROW, which produces things, will triumph in terms of returns to investors. I and many others believe that the secular trend of the West gorging to its heart’s content at the expense of unfair trade deals for the ROW will slowly reverse. The growing confidence the ROW has to challenge the West is driven by a historical sense of aggrievement from unfair treatment (both perceived and real) — and I believe the FTX saga is a perfect example of the behaviour that rankles the ROW and that is likely to motivate them to further stand up to the West. And that means that investors allocating funds in various instruments and businesses that do well when producers choose to adjust the terms of trade in their favour will earn above-average returns.

And with that, please digest and consider my usual warning as I delve into the issues of “race” in Pax Americana and globally:

One of the primary goals of these essays is to help you recognise when stereotypes are clouding your judgement. There is no human alive who doesn’t use stereotypes and heuristics to simplify the trillions of subconscious and conscious decisions made over our lifetimes. We are all racist to some small or large degree. The elites of any system will use this against us in an attempt to nudge our behaviour in a direction that suits them. Recognize when you are being played, and adjust your behaviour accordingly.

Pigment

Vitiligo is a condition that results in the de-pigmentation of the skin. I have a mild form of it on my face, and it results in blotchy pink patches. Where am I going with this? Well, human civilisation writ large has experienced a mild bout of its own figurative form of vitiligo over the past few centuries. Let me explain.

The Eurasian landmass contains 70% of the world’s population and, up until recently, was the locomotive of human civilisation.

Up until quite recently, India and China accounted for 50% to 60% of the world’s GDP. It wasn’t until the 16th century that the Western Europeans (followed by the Americans) began to supplant their mostly Asian competitors and create venerable empires such as Pax Britannica and Pax Americana.

These pink-beige people — known in the lingua franca of Pax Americana as “white” — lacked numbers, but they made up for it with strong political organisation and technological advancements. That’s a slight oversimplification — the intricacies of why the West has triumphed over the East in the last few centuries is a topic of hot debate amongst historians, and everyone has a theory. But regardless of your specific views on how the West applied its advantages to ascend from its position as the perennial underdog, it is indisputable that the West has always been deficient in its number of human subjects (i.e., its users) and the natural resources it brought to bear upon the world. (Eurasia contains the majority of the world’s human and critical natural resources, and most importantly, its hydrocarbons.)

To overcome this lack of homegrown labour and resources, the West resorted to slavery and the colonial subjugation of the rest of the pigmented world.

Armies of hundreds of thousands, sailing in ships far away from their homelands, were able to subdue and subjugate populations in the hundreds of millions. In the beginning, overwhelming technological might did the trick — picture bows and arrows vs. breech-loading muskets. But as information about basic science and technology spread alongside education, it became harder to use pure might to subdue the locals. Recognising that their iron grip was slipping, the West adapted by synthesising a social caste system that deputised the local pigmented elites by purchasing their loyalty.

Be a good little local despot. Ensure that your people work hard for wages well below what they would receive if they were citizens of the empire. Protect the property rights of your clique and the foreign industrialists who own all the farmland, factories, and natural resource deposits. Export all those essential minerals and foodstuffs cheaply to the West, and import more expensive finished products in return. If your country finds itself in a current account deficit because of upside-down terms of trade (i.e., your imports are larger than your exports), then you can just borrow from the Western banks in the reserve currency of the empire. And when a financial crisis inevitably occurs because you cannot pay back your foreign debt, don’t you dare default. Instead, sell off more of the country’s productive resources to the foreigners to “pay back” the loans.

Now you can bask in the adoration and glory of the West as an enlightened rich toff who gets to gallivant around the wealthy cultural hotspots of the empire and flaunt the wealth you acquired on the backs of your country’s people.

When some of your people acquire a little education and protest this lopsided economic agreement, label them “communists”, “marxists”, or “leftist terrorists”. Sit back and wait for the gunships of Pax Americana to exterminate these threats to “democracy” and “the rules-based order”. Never mind that neither you nor the peons that toil under your jackboot had any say in the construction of said order, nor reaped any of the benefits of the “liberal” democratic Western society. You just happened to have the “right” last name or belong to the “right” religious sect, and thus you inherited your unearned power.

This formula worked so well and enriched the West to such a great degree, the elites forgot that the universe is ever changing. Due to hubris and/or incompetence after WW2, the Pax Americana political elites made two colossal blunders, which — in this armchair historian’s opinion — allowed Eurasia the breathing room it needed to regroup and regain strength over the past 80 years.

The Chinese Nationalists, led by Chiang Kai-shek, and the Communists, led by Mao Zedong, were engaged in a brutal civil war leading up to the Japanese invasion of China in WW2. They put their differences aside to concentrate on defeating Imperial Japan. Post the war, they resumed their battle with one another. The American elite politicians always favoured the Nationalists, as Chiang Kai-shek was pro-America and perfectly willing to kowtow to the demands of his imperial masters.

But in his time of great need, the Americans abandoned Chiang Kai-shek and did not provide the funds and weapons he needed to oust Mao and the communists. Why the Americans removed their support is not important — what’s important is that the Nationalists were bested by the Communists, and in 1949 the People’s Republic of China was born. Mao cut off China from Pax America, and modern China did not resume material interaction with the West until the 1980’s.

Modern China bided its time and started quickly advancing its economy, beginning with policies enacted by Deng Xiaoping and progressing to those enacted by Jiang Zemin, Hu Jintao, and now Xi Jinping. These policies included using its cheap labour and willingness to degrade its environment in the quest to onshore production and refinement of many key critical modern technological inputs like polysilicon, lithium batteries, and rare earths. In doing so China built herself into the workshop of the world, and she is finally done being a passive participant in world events and is itching to resurrect the supremacy of Eurasia at the expense of Pax Americana.

The below chart illustrates how successful China has been surplanting America as the world’s largest trading partner in record time.

The second major blunder was the failure to integrate Russia into the fabric of the West post the USSR collapse in the early 1990’s. Again, whether it was arrogance or another bout of isolationism on behalf of elite American politicians, a major opportunity was squandered. Instead, the West allowed a band of Russian opportunists (aka “oligarchs”) to take control of productive state assets for peanuts and expropriate all that wealth to Knights Bridge.

Then, along came a little KGB spider named Vladimir Putin. He committed himself to righting what he believed were historical wrongs and re-creating the strong Mother Russia of old. That’s one view — I’m sure many readers think he is simply a bloodthirsty megalomaniac. But it doesn’t really matter what your opinion of him is — in his mind, he is about the improvement of Russia. And now that he has steered Russia into this latest proxy war with the West in Ukraine, the only direction Russia can turn is to the Southeast. The West confiscated Russia’s sovereign wealth held in Western financial institutions, and refuses to trade just about anything with Russia.

Due to the alienation of Russia that began in the 1990’s by the West, Russia is now firmly an economic ally of China. And given the recent sabotage of the Nord Stream pipeline, all efforts will be made to build the pipeline infrastructure to connect Russian energy to the Chinese manufacturing outposts. Eurasia will now have the cheapest energy globally that will power the world’s largest manufacturer. Germany and Japan should be quaking in their space boots.

Agent of the Empire

The monetary system of the world is extremely important when it comes to how resources are shared. Money is just the transformation of the potential energy of the earth into a form that can be traded. Every form of money represents a claim on energy. If you control the monetary system, you control energy. If you control energy, you control the course of human civilisation.

The Western financial system supports the world’s reserve currency, the US dollar. The majority of global trade in energy and goods is priced in dollars. That means that Pax Americana can print energy at will. Obviously, if they abuse this privilege, a new currency and financial system will emerge to challenge the corrupt ancien régime. Think of Bitcoin and crypto as the natural reaction to the profligacy of the USD-based Western financial system.

The TradFi system works on trust. You trust a number of centralised Western financial institutions to process transactions, honour contracts, and generally keep the system up and running. In return, we the people allow them to make money from money. Bankers get rich doing no actual tangible work. I’m not throwing shade on my former profession as a financier, but that’s just the hard truth — we don’t make shit.

Every profession has its unwritten rules of decorum. The Western bankers wear suits, ties, and leather-soled shoes if they are men, and pant suits, skirts, and high heels if they are women. The point of the costume is that when you wear it, people automatically and instinctively make certain assumptions about you. Before you even open your mouth to pitch your product, the listener already assumes you know what you are talking about.

The Western banker goes to a small subset of universities. And by and large, they look like the people who helm their institutions (i.e., white and male). And everyone who doesn’t look like the top dogs apes them as much as they can. Where you eat, where you school your children, where you vacation — all of these things are meant to show that you are part of the guild and deserve to be respected just as if you were the CEO.

And when the acolytes of the Western financial system disperse from the financial capitals of New York and London, they bring their look and behaviour with them. They help upkeep the empire by ensuring that the tributary states that provide the raw materials necessary to power the empire employ the correct version of the Western financial system. It’s the analogue form of version control.

I myself travelled that path. As a graduate of the Wharton Business School who spoke child-level Mandarin, zero Cantonese, and had never spent more than six months in the Asia-Pacific region, I had no business being recruited to work in the Hong Kong office of Deutsche Bank. My counterparts who studied the same subjects at Hong Kong University of Science of Technology (where I did a semester abroad), spoke fluent Mandarin and Cantonese, and were steeped in the culture of the region, did not get recruited. But if you are a Western, Too Big to Fail Bank that needs to ensure the empire’s financial system functions as it should far away from home, it makes sense to hire individuals schooled at “target” Universities.

If you look around at the senior policy makers at non-Western Central Banks, for example, you will most likely find that most of the individuals did a stint at some prestigious Western University. That is how the global financial culture is kept Western — and at some point, these individuals support policies that are to the detriment of the people they are supposed to represent. The desire for purity of thought, uncorrupted by Western-leaning economic theories, is probably one reason why Xi Jinping decided to remove several senior People’s Bank of China officials for alleged violations of anti-graft and corruption laws.

Political organisations of humans, also known as governments, are complex adaptive systems that evolve over time. There wasn’t some meeting many centuries ago in which a bunch of old dudes established the playbook for how the West would project and perpetuate its financial power globally. It just evolved naturally over time as a system that made sense from a self-preservation perspective.

And so, in that same vein, if you are a complex political organism that faces a threat from a reactionary techno-currency called Bitcoin (the hardest and purest form of energy money ever created), wouldn’t you want to co-opt it into your sphere of influence by having one of your own at the forefront of its adoption?

Now, I want to take a quick step back and clarify that I am not supporting some conspiracy theory suggesting that the Western financial illuminati put SBF in power as a plant in an attempt to take control of the crypto capital markets. What I am saying is that the TradFi system will unconsciously attempt to cosy up to individuals and firms it believes will continue to support the supremacy of the fiat-led financial order.

SBF was very clear about his belief that operating a centralised crypto business was the best way to earn the most amount of money in the shortest amount of time so that he could give it all away for the betterment of humanity. The organisation to which SBF would entrust the spoils of his business success was Effective Altruism (EA). I have friends who are or were in EA, and they are good people. But … I have a big problem believing that, as a human with funds to allocate to charitable ventures, I should hand over all agency to a bunch of highly educated people who come from predominantly elite Western Universities. They don’t represent the interests of all of humanity — no organisation does. But their hubris in believing they alone can divine the methods necessary to preserve and save our species is nauseating.

SBF, in his own words:

If you really are trying to maximize your impact, then at what point do you start hitting decreasing marginal returns? Well, in terms of doing good, there’s no such thing: more good is more good. It’s not like you did some good, so good doesn’t matter anymore…That means that you should be pretty aggressive with what you’re doing, and really trying to hit home runs rather than just have some impact — because the upside is just absolutely enormous.

To give you one (admittedly flippant) example, take the idea EA put forward regarding how we should all change our diets by minimising the amount of animal proteins we eat in order to reduce our carbon footprint. Who are they to decide what the best diet is for every human on the planet? If you want to eat bugs, go eat them. I will be munching on a succulent, medium-rare morsel of Miyazaki A5 wagyu beef at my favourite Yakiniku joint and washing it down with a bottle of Desai Beyond sake. And everyone should be able to experience that sort of sublime pleasure if they wish — who am I to tell them otherwise? If you somehow believe that you (or the organisation to which you belong) alone know what’s best for society and should have the sole right to instruct the poor unwashed masses in correct behaviour, GO FUCK YOURSELF!

When certain TradFi folks heard through the grapevine that SBF had no real interest in the ethos of crypto and just wanted to support EA — an organisation that is firmly for a continuation of humanity’s current power pyramid status quo — they knew SBF was their dude. It also helped that he was a young white boy educated at the Massachusetts Institute of Technology. He checked all the standard Western financial establishment boxes. If SBF is supposed to lead the development of a new technologically-powered money and financial system, then it fits the popular narrative that he should be a young white male who went to the “right” Western STEM focused university. If he were some old, washed-up former Managing Director of Goldman Sachs (regardless of race or gender), many individuals globally would have rolled their eyes at any suggestion this person was about anything other than a continuation of the dominance of Western financial capitalism.

Every tentacle of the Western TradFi system supported SBF as he expanded globally. It was in their interest to do so. It was not in their interest to ask too many questions about exactly how SBF ran his business. Conserving plausible deniability was the preferred course of action. As a result, the lackeys of the system didn’t do a thorough job of vetting SBF and it was to their detriment. It was not in the interest of the Western financial system to support what we now know was one of the largest financial smash and grab frauds in human history.

The plebes conditioned to trust the agents of the TradFi system are understandably experiencing a “what the fuck” moment. The TradFi system concocted a series of stereotypes that tricked their plebe brains into assuming SBF and FTX were to be trusted. It was the establishment’s job as the gatekeepers of the Western TradFi system to properly vet who they touted as card-carrying members of their guild. These people have been told since they were children to embrace change and new technology. They did so by placing their trust and funds in FTX, a supposed pillar of the Western financial system building a tangential new financial system, and then poof — this little soy-boy took their money so he could cover losses at his hedge fund run by his girlfriend who admitted she wasn’t good at maths. So, the people’s natural response has been a universal: “what the actual fuck?!”

And now, we the people shall be treated to the spectacle that will be the public trial of SBF in a federal courtroom in New York City, the seat of Pax Americana. Regardless of the outcome, this trial will not impact the recovery of lost FTX customer funds. Ignore this sideshow and focus on how to align whatever is left of your portfolio towards the future. The future is Eurasia, the past is Western exceptionalism. Let’s jump into my theories on what this means and what comes next.

Trade You For It

The mere fact that any sovereign nation or flag uses the USD to price their exports and to purchase your imports means they inherently host the Western financial system inside their borders. And it’s understandable that many countries are willing to do so — when the whole world uses one currency for global trade, there are benefits in terms of cost and speed of exchange of goods. However, when the system that supports the global reserve currency spits out charlatans for industry leaders and says “trust them, it’s ok,” trust in said financial infrastructure tends to wane.

At another point in history, The FTX saga might have just been your garden variety, Western-sponsored financial fraud of epic proportions — but today, Eurasia (led by China) has an alternate financial system they wish to offer to the world’s non-aligned countries. With another readily available system for the Global South’s aggrieved, non-aligned trade partners to turn to, this incident has the potential to have a considerable impact on how those nations trade and who they trade with. The non-aligned countries are not in the orbit of Pax Americana nor Eurasia. These countries will trade with both sides depending on which side offers a better deal. Examples of extremely important non-aligned countries are India, Indonesia, and the Democratic Republic of Congo (DRC). These countries are important because they contain a large and growing amount of young and productive workers, and/or critical natural resources needed for the “green” economy of the future. India is the largest country in the world with a growing young educated population. Indonesia is the fourth most populous country globally, and also features a growing young educated population. Indonesia also has large deposits of critical resources such as bauxite. The DRC is the largest producer of cobalt in the world, a critical mineral needed for various advanced technologies. The list goes on and on.

Former US President Trump might label these and other non-aligned countries as “shithole countries”, but rest assured — those holes are filled with the seeds of technological advancement, not human excrement. Now, these non-aligned countries have a choice in the currency they accept for their labour and goods, and who receives what. There is a global scarcity of young productive workers and natural resources at an affordable price. (Side note: This is why inflation will continue to persist, regardless of what central bankers wish to be true.)

The question is, will these non-aligned countries do like their predecessors did — i.e., export raw materials and import expensive finished goods to their financial detriment? Or will they attempt to level up by requiring their trading partners to invest in them, thus allowing them to produce the middle and finished goods internally and export those finished products at a higher price to the world markets? My money is on the latter — starting in 2023, Indonesia will ban the export of many critical key resources and require firms to instead invest in building facilities to export intermediate higher value versions of these resources. I expect other countries to pursue similar policies.

Taking it a step further, will these countries continue to price trade in USD when their largest trading counterparty is China, which uses the RMB? Will these countries continue to give favoured status to Western financial institutions, when these institutions and the people who run them have screwed them over time and time again, like what just happened with SBF and FTX? (To that end, NY Magazine had a very sad and poignant article about how ordinary Nigerian people entrusted their meagre savings to SBF’s scams.)

The Western financial system offers the same old thing in the same old package, but China has a different message. The rhetoric from Xi Jinping at various global summits that are not attended by Western diplomats or covered by Western media outlets – e.g., the Shanghai Cooperation Organisation — is that China is ready to trade with no political strings attached. China does not offer a “you are with us or against us” foreign policy. Rather, China wants to engage in what they believe is a fair trade of money for resources and leave the political stuff out of it. Regardless of whether or not you believe the rhetoric, it is in stark contrast to the various historical examples of how terms of trade have been enforced at gunpoint by Western imperialists — with their violent coercion in turn ensuring that certain Western currencies continue to be used to price international exports. An example of this would be the CFA Franc, which is issued and managed by France and used by many West African countries. 

We’ll find out whether my theories and opinions are right or not in the near future. However, those who get caught up in being right in absolute terms miss the financial returns to be had by being right in a relative fashion. Eurasia — and the Global South in general — are starting from a historically low base (see the first chart above depicting each region’s historical share of global GDP). A decline in America’s share of global GDP by just a few percentage points could mean a doubling or more of some “shithole” country’s share of the pie. And as investors, we want to position ourselves to experience a swift rise off of a low base, rather than a death by a thousand small cuts by being long the S&P 500 as it underperforms both emerging markets and inflation in the near future.

As I mentioned earlier, the degree to which a resource-rich country decides to trade more with the West or China is a combination of positive or negative sentiment, and who is willing to pay the appropriate price. And in today’s landscape, with more trade opportunities opening up for non-aligned countries, the sentiment piece is more important than ever. If a country historically felt that they received a raw deal in the colonial and neo-colonial structure of the Western world economy, and SBF — supported by the Western media and financial establishment — just stole a bunch of your people’s money under the guise of some new-fangled tech thingamajig, you might be pissed off enough to dabble in an RMB-based financial system that actually has commodities (Russia), gold (Russia and China hold some of the largest gold reserves globally), finished goods (China), and no history of colonisation.

This is not to say the dollar will wither and die over the next 12 months. But at the margin, the relative importance of the Eurasian upstart — powered by a rock-solid alliance between China and Russia — could score some easy economic points. And as investors, we are always down for smacking the Easy button.

The Future

Let’s quickly walk through some chart porn that illustrates the opportunity for the Global South to emerge triumphant from its currently low base.

Ratio Of SPY US (S&P 500 ETF)/EEM US (MSCI Emerging Markets)

The above chart shows the ratio of SPY/EEM ETFs. As you can see, the US equity markets have outperformed emerging markets by almost 300% over the last decade. The last decade was the peak of financialisation, money printing and a trough of developed-market inflation. This combo won’t be repeated in the coming decades.

Ratio of S&P 500 Index/Bloomberg Commodity Index

The above chart clearly demonstrates how over the past ten years, Pax Americana has outperformed commodities by the largest margin in the history of the Bloomberg Commodities Index. To return to the longer-term trend line implies the financialised West is due for massive underperformance vs. the Global East and South, which has young workers and critical natural resource inputs.

On a broad index basis, I do not want anything to do with the S&P 500, and probably the Nasdaq 100 either. Of course, individual stocks might do well, but as an index that represents the best companies Pax Americana has to offer, I believe they will severely underperform commodities and emerging markets going forward. This is especially true due to the resistance of many previously staunch allies of the West refusing to pump oil on command (see Saudi Arabia’s recent refusal to do so at US President Biden’s request). Similar situations will occur with respect to other requests for cheap critical inputs into the Pax Americana economic juggernaut. There will always be enough of a particular commodity at a high enough price, but in its current overly indebted form, the Pax Americana cannot afford to pay too high a price to power its economy at the current size.

Investing in commodities is not as easy as picking out some ETF from your stockbroker and hitting the buy button. You have to understand contango and backwardation, and you have to understand how upstream or downstream a company sits along the path from the production to the sale of a given commodity. In short, passively saying “I want to invest in commodities” is not enough. Real work is required. So, I expect there will be a marketwide search for an easier way to express and trade on this view in the coming months, and in my case, a quest for a theory regarding how the rise of the commodity Zhu-per cycle can be connected to a rise or fall in the value of Bitcoin and other cryptocurrencies.

This will be the topic of many essays this year. Before I posit my own guesses, my current goal is to better understand the theoretical interplay of a few potential outcomes. And as I work towards that, I have a few questions:

All those sub-questions lead to the two most important questions:

At the moment, it’s impossible to know the answer to any of these questions — but we can perform thought experiments about what happens in these scenarios and how politicians, central bankers, and capital allocators might react. And through these thought experiments, we can construct a portfolio of government bonds, Bitcoin/crypto, and commodities that hopefully — when combined — grows in all scenarios. This is the task I have set for myself in 2023 — and while I work on it, I intend to ignore the distraction of the comings and goings of our favourite little white soy-boy and his merry band of fools.