Bi-Weekly Geopolitical Report – Mid-Year Geopolitical Outlook: Uncertainty Reigns (June 17, 2024)

by Patrick Fearon-Hernandez, CFA, Thomas Wash, Daniel Ortwerth, CFA, and Bill O-Grady | PDF

As the first half draws to a close, we typically update our geopolitical outlook for the remainder of the year. This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international landscape for the rest of the year. The report is not designed to be exhaustive. Rather, it focuses on the “big picture” conditions that we think will affect policy and markets going forward. We have subtitled this report “Uncertainty Reigns” to reflect the fact that chaos and unpredictability have become entrenched as the post-Cold War era of globalization gives way to a new period of Great Power competition. Our issues are listed in order of importance.

Issue #1: China – South China Sea

Issue #2: Russia-Ukraine-NATO

Issue #3: Israel-Hamas-Iran

Issue #4: The US Elections

Issue #5: US Defense Rebuilding

Issue #6: Global Monetary Policy

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Bi-Weekly Geopolitical Report – The Philippines, China & Escalation in the South China Sea (June 3, 2024)

by Daniel Ortwerth, CFA | PDF

On the short list of seemingly constant topics in the news today is the rising tension between the United States and the People’s Republic of China.  Across the spectrum of issues, disagreement between these two great powers seems increasingly unavoidable.  Geopolitical developments in every corner of the globe often find a way to become another point of US-Chinese friction.  When conditions become stormy like this, the question arises as to whether this tension will escalate into greater conflict, possibly even outright war.  If it does, what will be the flashpoint?  Where will the spark occur?

A storm is currently brewing in the South China Sea (SCS) that might make this body of water the area of greatest risk.  Like so many conflicts in history, this one does not involve a direct conflict between the opposing great powers, but rather a local dispute involving a small but significant country, the Philippines, and China.  This dispute holds the potential to stir up a storm that engulfs the region or that even spills into the world beyond it.

This report explains how the current Philippine-Chinese dispute developed and how it could further escalate.  After providing a recent history of key developments in the SCS, we explain in detail the dispute at hand.  Next, we show the strands that connect the tiny outcropping of land at the heart of the dispute to the broader world.  As usual, we conclude with a review of implications for investors.

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Bi-Weekly Geopolitical Report – The Changing Face of War (April 22, 2024)

by Daniel Ortwerth, CFA | PDF

If the United States were at war with another great power, would we know it?  How would we know it?  These questions might seem absurd but consider that the US has not fought a war against a major world power since 1945.  Meanwhile, when the US has engaged in conflicts against weaker and regional powers since World War II, the beginnings and endings of the conflicts have tended to be blurred.  Technology has advanced in ways unimaginable to the 1945 mind.  This has changed the nature of life, and it has also changed the face of war.  In this report, we consider how the contours of that face have changed over time, what it takes to recognize war in the 21st century, and whether the US and its allies might already be at war with China and its allies.

By addressing key elements of technological advancement and geopolitical evolution, we explore how 80 years have changed the face of war.  We consider aspects of war that have not and never will change as well as what has changed, and we drive to the bottom line for investors.  In our view, that bottom line has remained constant through time as war is expensive, citizens pay the price, and that price largely manifests itself in the form of higher inflation and long-term interest rates.  Will the US ever go to war again with another major power in a way that we can recognize?  Will we know it when we are there?  These questions are harder to answer than ever before, but investors can still prepare.

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Asset Allocation Bi-Weekly – The Incremental Uranium Demand for Weapons (April 15, 2024)

by the Asset Allocation Committee | PDF

In our Asset Allocation Bi-Weekly report from March 4, 2024, we began to explain more fully our recent decision to introduce uranium and uranium miners into our Asset Allocation strategies. Our key thesis was that current and planned investments in new nuclear reactors for electricity generation, especially in China and India, will likely lead to booming demand for uranium in the coming decades, while supplies are likely to be constrained. This theory is increasingly discussed among investors, and we think it’s a key reason for the jump in spot uranium prices since 2022, as shown in the chart below. In this report, we discuss a less-recognized source of incremental uranium demand that could drive prices even higher: China’s ongoing rapid expansion in its arsenal of nuclear weapons and the possibility of a global nuclear arms race in the future.


After decades of keeping only a “minimal” nuclear deterrent of about 200 warheads, China has recently begun a dramatic expansion of its arsenal. Western analysts believe China’s arsenal has expanded by about 42 warheads annually since 2020, reaching 500 warheads in 2024. Publicly observable and classified evidence suggests Beijing aims to match the United States’s deployed arsenal of 1,770 warheads by 2035 (not including reserves), which would imply adding an average of 115 warheads per year until then. Finally, as we have written elsewhere, we think rising geopolitical tensions around the globe and growing doubts about the US’s commitment to its allies could potentially prompt a dozen or more non-nuclear states to develop nuclear weapons in the coming decade or two. If that results in a global nuclear arms race, the world could end up producing several hundred new nuclear warheads each year.

In every scenario we’ve looked at, China would be the main driver of new nuclear weapons production in the years to come. So, in order to understand the incremental uranium demand for weapons, we will focus on China’s expected needs. Because of China’s long nuclear history and technological prowess, we assume its nukes are similar to the advanced, plutonium-based hydrogen bombs fielded by the US and Russia. According to a 1999 declassification guide from the Department of Energy, such bombs can theoretically be made with just 6 kg of plutonium, similar to the mass of fissile material for a uranium-based bomb. Another DOE report says that the US has used 3.4 metric tons of plutonium in its 1,054 nuclear tests since World War II, implying the use of about 3.25 kg per test. Actual weapons probably use more plutonium than the hypothetical minimum or test levels, so we assume current and future Chinese bombs would use at least 10 kg of plutonium each. Data on weapons-grade uranium and plutonium stocks from the International Panel on Fissile Materials suggests modern hydrogen bombs encompass an average of about 15 kg of plutonium each, which we use in our calculations below.

Of course, very little plutonium occurs naturally on Earth; it is generally made from uranium. Open-source reports indicate that producing 1 kg of plutonium takes about 4,000 kg of uranium. If these reports are accurate, each new Chinese warhead requires about 60 tons of uranium, and China’s current annual production of about 42 warheads probably represents about 2,520 tons of uranium. Unclassified sources don’t clarify what form of uranium is used in the 1:4,000 ratio, but if it is standard uranium mine output (i.e., “yellowcake,” or minimally processed ore consisting of about 85% triuranium octoxide), then China’s current annual nuclear weapons output is using the equivalent of 4.2% of the approximately 60,000 tons of uranium that was produced by mines around the world in 2023. We therefore suspect that China’s current nuclear build-up is probably helping to buoy spot uranium prices even today.

Looking forward, if China increases its bomb output to the expected 115 per year, its nuclear program would require at least 11.5% of 2023’s global mine output and would more obviously put upward pressure on uranium prices. Moreover, we believe our estimates could be quite conservative. For example, it may be that the plutonium/uranium ratio of 1:4,000 refers to pure or enriched uranium, which would imply that even greater quantities of uranium ore are needed. China might also decide to build up an inventory of reserve warheads, further boosting the need for uranium ore. Plutonium and uranium production waste may also boost uranium needs. Finally, if geopolitical tensions do result in a global nuclear arms race, we believe the total uranium demand from China, Russia, the US, all other existing nuclear states, and new nuclear states could easily overwhelm global supplies and send long-term uranium spot prices dramatically higher.

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