The Real Game of Thrones

Jay Martins Premium Letter

“The best we can do is have factories in many parts of the world. If things get difficult in one part of the world, we can still keep things going in the rest.” - Elon Musk

I’ve written at length about how the era of globalization is over, and we have entered the next stage in world history. I don’t know what happens next, nor do I believe this transition will be simple, quick or predictable. 

But I love studying the balance of power in the world - specifically, who holds the power and why they hold it. 

When I am looking for trends in the market, I always come back to a fundamental principle - follow the money. This has led me to the biggest wins of my investor career - picking up on money flows before the mainstream (and the masses) arrive. 

I’ve been applying the same principle to global power recently, using Greenfield Foreign Direct Investment (FDI) as a filter.

What Is Greenfield FDI?

Greenfield foreign direct investment (FDI) is when a parent company creates a subsidiary in a new country, building its new operations from the ground up. 

Brownfield FDI (by contrast) involves refurbishing existing facilities in a foreign country - instead of starting from scratch. I am looking at Greenfield as this better resembles new trends in money flow. 

Greenfield FDI most often occurs in developing countries that offer subsidies, tax preferences or other incentives.

Greenfield FDI for Dummies:

Jay Martin Inc. is looking for a new facility to expand its operations.

Hedonistan is a small emerging country seeking to grow its economy. 

Hedonistan offers Jay Martin Inc. a 10-year corporate tax waiver if they build their new facility there. It stipulates that a percentage of the building and operating jobs must go to locals.

While Hedonistan may take a hit on tax revenue, it makes up for it in job creation and the increase in knowledge and technical skills of the arriving Jay Martin Inc.

Jay Martin Inc. takes the tax break (and typically discounted labour) and builds the new facility in Hedonistan.

Globalization, by definition, was a burst in Greenfield FDI over the last 40 years. If the globalization era is over, then Greenfield FDI should supply some evidence.

Is there evidence?

At the time of writing, leaders from all over the world are gathered in New York City for the 78th United Nations General Assembly. 

One of many items on the agenda was a vote on whether or not to condemn Russia's invasion of Ukraine and call for a withdrawal.

Not surprisingly, the vast majority of countries voted to condemn (as they had the previous year) - representing roughly ⅔ of the world's GDP (but notably, this represents only ¼ of the global population).

But if you divide Greenfield FDI flows between the 141 countries that condemned and the 38 countries that did not, it suggests a few things about the geopolitical alliances of the past and future.

I might be jumping to conclusions (I am a speculator) - but I would wager that what the vote really told us was which countries were betting on a future dominated by the American Empire versus those betting on a transition to a multipolar world or, at an extreme, one where China takes the torch.

The voting countries weren’t taking a stance on Ukraine so much as they were pledging their allegiance to one power or another.

I’ve had guests on my podcast that claim the Russia-Ukraine war is really a proxy war between the US and China. I don’t believe that to be the case, but if we follow the money, we will see that the United States has already spent more on this war than Russia has - and more than their entire decades-long war in Afghanistan. They are incredibly financially invested.

Vladimir Putin has simultaneously deepened his alliance with President Xi. Last week, he announced a plan to sell gas to China at 50% of the rate he sells to Europe. There have been a lot of doom and gloom forecasts on China’s economy recently; I think they are overblown, but either way, a 50% break on energy costs will move the needle, noticeably.

Since the invasion, American Greenfield FDI in China has fallen 60% from their ten-year average, redirecting huge sums of that cash to Mexico.

In July, Mexico surpassed China as the United States' largest trading partner. 

Looking deeper into Greenfield FDI trends, the 38 countries that abstained or voted not to condemn Russia have collectively averaged 30% of global Greenfield FDI over the previous decade. But since the invasion of Ukraine, this share has dropped to 15%. China, which previously received 11%, fell to 2%. 

“We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values.” - European Central Bank President Christine Lagarde 

Germany’s government recently warned its biggest companies to revisit their geopolitical exposure, stating that the government would no longer bail out companies stressed by costs relating to a geopolitical crisis.

According to Bloomberg, the term “geopolitics” has become the most trending word on earnings calls, AGM minutes and corporate press releases in 2023. From property developers to money managers, utility companies and manufacturers -  use of the word is up 300% since 2021.

What Does This Mean?