Regular readers are familiar with my views on the futility of hedging geopolitical risk.

I suppose there’s some tension between the notion that the vagaries of geopolitics aren’t amenable to hedging and my raison d’être. If the fate of markets is “inextricably intertwined with the ebb and flow of geopolitics” (as I’ve long asserted) and if “you can’t fully comprehend markets without a thorough understanding of concurrent political outcomes and societal trends” (as I habitually insist), then surely someone who goes out of their way to stay apprised of geopolitical developments has an edge in markets. If not, what’s the point?

I’m afraid I can’t reconcile that apparent contradiction, other than to suggest that hedging isn’t necessarily synonymous with having an edge. And you’re anyway a smarter person for knowing a little bit about geopolitics. Ignorance is surely bliss, but it’s also… well, ignorant.

Goldman this week examined equity drawdowns around geopolitical events ahead of what the bank’s Cecilia Mariotti and Christian Mueller-Glissmann aptly described as “a busy geopolitical agenda” for 2024.

“Geopolitical and political events represent key risks for portfolios, but they are particularly difficult to position for — timing and market impact tend to be hard to anticipate, especially for the former,” they wrote, adding that historical spikes in the Geopolitical Risk Index tended to push up vol.

The figure above is more eye candy than anything else. As Mariotti gingerly put it, “benchmarking the VIX to the news-based Geopolitical Risk Index shows an imperfect relationship.”

Timing is the main problem — you can’t dial up Pyongyang and ask for a timeline on the nuclear apocalypse. But “heterogeneity” is another. While there’s a very real sense in which the geopolitical crises the world currently faces are actually one big crisis (i.e., a new Cold War, proper noun, with multiplying small hot wars on the way to a tense US-China bipolarity), geopolitical conflicts tend to have discrete drivers and to the extent they impact macro outcomes, that impact can be event-specific.

Given that, diversification is your best defense, as Goldman suggested. Indeed, with bonds now fairly valued (they were outright cheap headed into this month, but November’s blockbuster rally may limit incremental near-term gains), a simple 60/40 portfolio might be just as good a hedge as anything else. According to Vanguard, the odds of such a portfolio matching the three-decade average 10-year annualized return are now around 40% from just 8% in 2021, during peak “everything bubble.”

For what it’s worth (which is to say this is so self-evident as to be scarcely worth mentioning), commodities, gold and the franc can be decent hedges too. Although there’s no “consistent pattern” for cross-asset performance when the above-mentioned Geopolitical Risk Index triggers an equity selloff, Goldman noted that oil works for Mideast conflicts, Treasurys and gold for crises to which the US is a direct party and the franc as a kind of no-questions-asked, reliable store of value when things get dicey for whatever reason.

“From a portfolio construction perspective, commodities (especially oil and gold) have been the most reliable diversifiers in periods of prolonged geopolitical uncertainty,” Mariotti went on.

Notably, geopolitical shocks became better dip-buying opportunities as time went on, likely because the central bank “put” (or, just as importantly, buying on the assumption of such a policy put) limited downside.

The figure below illustrates the point. Selloffs tied to geopolitical shocks since 2000 disappear in no time flat.

“In recent episodes, equity markets have recouped losses in about a month and rallied further afterwards, suggesting geopolitical news might actually provide a ‘buy’ opportunity,” Goldman wrote. “This change in the equity pattern could be due to faster information flow, faster expectations adjustment or higher confidence that conflicts will remain relatively contained.”

Given that, and considering the difficulty in successfully hedging geopolitics in the first place, it’s entirely reasonable to suggest there’s no point. That’s especially true in light of the fact that, as Mariotti wrote, “allocating to safe assets can have a significant performance drag on portfolios as they usually deliver lower returns through the cycle, while commodities can add significant volatility.”

Of course, Goldman isn’t going to tell clients not to trade. That’d be counterproductive. For Goldman, anyway. Mariotti flagged long gold volatility or franc calls (against the euro), and suggested the low VIX makes “traditional equity puts interesting.” For my money, I’m content with commodities and duration (not investment advice).

I want to leave readers with some excerpts from the Weekly I published last month in the immediate aftermath of the Hamas attacks and the onset of full-on war between the group and Israel. The passages below are from “The markets, of course, have no heart,” sent to subscribers on October 14.

Markets tend to look through geopolitical conflicts unless it’s impossible not to.

In the post-Lehman world, some of that witting obliviousness was facilitated by a dozen years of central bank accommodation, a regime which effectively punished investors for not being long assets (with leverage).

In that context, you might argue that the return of price discovery, as monetary authorities in the developed world raise rates and shrink their balance sheets, could make investors more sensitive to geopolitics, but I tend to doubt it.

For one thing, most investors simply don’t understand, and don’t care to understand, what’s going on outside their personal bubbles (or their asset bubbles). In addition, it’s impossible to hedge the worst geopolitical risks (e.g., nuclear war), so obsessing over North Korea’s nuclear program or Iran’s nuclear ambitions or even the prospect that Russia might deploy a tactical nuclear weapon in Ukraine, is a waste of time.

For investors, determining which geopolitical escalations “count” is a matter of discerning a clear transmission channel to markets. If there’s no such transmission mechanism, why bother? “The markets, of course, have no heart,” as Rabobank’s Jane Foley put it.