The Upside of Chaos
First Principles Reasoning Series
Fellow Partners,
There are decades where nothing happens, and there are weeks where decades happen.
Vladimir Lenin
Uncertainty is at its highest in a decade or more. The largest war in Europe since 1945 is raging. The world’s 35th largest nation is under siege. The world’s 11th largest economy has been quickly cut off from most of the world. Inflation is at its highest in four decades and war will exacerbate this. Global supply chains are still a mess. Global shipping, too. Covid-19 is far from over.
We should decry the horrors we are witnessing.
We should also be mindful of some less-discussed externalities.
Emergence
Institutions, markets and businesses are best understood as complex adaptive systems.
Complex, in that they are dynamic networks of interactions, whose collective behavior may not be predictable from the behavior of individual components.
Adaptive, in that individual and collective behaviors mutate and self-organize in reaction to their environments.
These properties mean that institutions, markets and businesses exhibit emergent behavior — observable novelty, coherence, wholeness, and dynamism as they interact and adapt.
That sounds much like the description of a business we would admire.
Fragility
In the past few years, we have become victims of much that we knew but did not act upon.
Be prepared for rare-but-possible epidemics (we know they’re coming).
Don’t depend on resources from adversarial governments and be cautious about their motives (e.g., Russian government investments in NGO’s against shale gas to maintain dependence on Russian hydrocarbons).
If your supply chain is complex, don’t rely on just-in-time inventory. Keep a buffer of spare capacity and avoid single points of failure (businesses, but also central banks, and governments).
We’ve had many failures on many fronts. That’s a lot of bad news.
Adaptation
Here’s some good news: these failures will be the source of future strength.
More research firepower has been thrown at Covid-19 than any other disease in history. It’s not even close, and happened fast.
The degree and speed with which much of the world has decided to stop dealing with Putin’s government is stunning.
An economic war has begun. The West has imposed unprecedented sanctions. Investors are dumping Russian assets as fast as they can. So far this year the ruble has lost one-third of its value. The government may soon default.
Energy independence and national defense are now back in vogue, the combination of which may lead to more democracies less reliant on the actions of global superpowers and less beholden to economic interaction with adversarial governments.
On the business front, substantial investments have been made to improve shipping logistics, increase and diversify semiconductor supply, and reduce single points of failure in supply chains. Energy, too, may see some needed rationalization as we consider exploiting cleaner resources such as natural gas (which burns cleaner than oil, which in turn burns cleaner than coal) to increase energy independence and total energy output as we continue the transition to renewable energy sources.
Time
As it relates to our partnership, how long will all this take?
We don’t know, but we don’t need to. The direction and speed of adaptation is more important than the dates.
This quote is a great example of how we are filtering the information bombardment:
If you’re making ten-year investments…a good investment isn’t really complicated. You want a compelling value proposition to consumers, and you want real reasons why other people won’t be able to duplicate this or erode your economics via competition.
Take the information you get and ask yourself: we’re sitting here ten years from now, are we going to look back on this as the seminal moment where it all fell apart? In ten years, are we going to be talking about this? If that answer is no, don’t worry too much about it. But on the other hand, think about the things that will matter in ten years and take those seriously.
Cliff Sosin
Closing thoughts
The concept and dynamics of complex adaptive systems paired with long time horizons are clarifying, and calming.
Covid-19 has been terrible. But it also helped galvanize the best of what humanity is capable of: global mass-coordination between governments, public, and private organizations to face a complex, common enemy at lightning speed.
More broadly, we are witnessing a reinvigoration of the liberal democratic order in the face of its greatest kinetic challenge in decades.1 I wasn’t around for the space race but suspect it felt a bit like the galvanization we’ve seen recently against pandemic and war.
One lesson of history is the many benefits that arise from challenges far bigger than our day-to-day partisanship. We now have several, and likely long-term externalities include less stagnation and more robustness in the world’s major institutions, markets, and businesses.
The costs will be great, and we should decry the horrors we are witnessing. But don’t lose sight of the emergent behavior in institutions, markets, and businesses that are the result of adaptation to these trials. It is likely much of the world will emerge from them far more resilient.
All the best,
John
Founder and Managing Partner