Week signals: Networks and moats
Plus: watch points for South Korea, Mexico, Poland, Ukraine, Russia, Israel, and Palestine.
This week:
IN REVIEW. Wide moats, deep networks, and national self-sabotage.
UP AHEAD. Elections in South Korea, Mexico and Poland, and the prospects for peace in Ukraine and Gaza.
Connect with me on LinkedIn and X (Twitter).
Week Signals is the Saturday note for clients of Geopolitical Strategy, also available to GD Professional subscribers on Geopolitical Dispatch.
The Week in Review: A SWOT analysis on Pax Americana
The week began with a short-lived panic over US tariffs on Europe. It ended with new tariff warnings against China, plus a threatened doubling of steel and aluminium duties to 50%. In between, a key plank in the White House's increasingly erratic trade policy was temporarily halted, with a ruling against the use of emergency legislation for fentanyl and reciprocal duties, since paused on appeal. It will likely be considered by the Supreme Court.
Amid the whipsaw policy, it was at times hard to zoom out, but important developments were seen elsewhere, from a potentially structural shift in Japanese bond issuance to a potentially game-changing deal between Washington and Tehran on nuclear enrichment. Progress on resolving the wars in Ukraine and Gaza was halting at best, but here too the signs of a multipolar order were ever more apparent.
And zooming out even more. it would appear the market is now cognisant of this trend. The “sell-America” trade has not led to a rout in US stocks, recording their best May since 1990 (the financial equivalent of faint praise for a typically dreadful month), but US 30-year Treasury yields remain close to 5%. The US dollar index is above April lows but still down more than 8% in the year to date. And when looking at overseas stock markets in local currency terms, investing in America has been a poor trade for the first time in a long time.
The key attribute that made US equities so appealing for so long was not so much the US economy’s productivity or output – though this too has tended to be better than its peers (though perhaps at the expense of fiscal and household balance sheets) – but the strength of its tech sector. Strip this out, or, more specifically, strip out the ‘Mag-7’ of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, and returns don’t look so amazing. Still, even if you’re a tech sceptic, there is something special about these companies and hence the US. What makes them so profitable? In two words: networks, and moats.
The network effect, where a product or company's value increases as more people use it, is perhaps most illustrative in Meta’s Facebook and Instagram platforms. The importance of an economic moat is perhaps best seen in Nvidia’s dominance of AI GPU hardware and software, thanks to its Compute Unified Device Architecture. As long as these attributes hold these companies will continue to do well. But networks and moats have collapsed in the past. Tesla became a Mag-7 stock when it broke through the legacy car industry’s almost 100-year moat. And its position as a Mag-7 stock now is in dispute, as its first-mover-advantage moat is being tested by Chinese rivals (and climate-conscious consumers turned off by Elon Musk’s erstwhile involvement with Donald Trump).
The same is true for geopolitics, and economies as a whole. The US has long enjoyed a wide moat in its market depth and its literal maritime boundaries. Its network, both in terms of a large domestic market and a web of alliances that has only grown stronger through deeper trade, integration and cross-pollination, is the most comprehensive in history. Previous empires, like Britain’s or the Romans, while long-lasting, lacked both moats and networks of such strength or scale. Their durability can be ascribed more to their competitors’ weaknesses than an inherent advantage.
In looking at markets and power in the present moment, it’s then worth doing a SWOT analysis on America’s moats and networks, particularly as China, through its industrial strategy and the Belt and Road Initiative, eyes advantages of its own. It’s also worth examining to gauge just how serious the Trump administration’s actions could be in undermining these features of US success and just how likely scenarios of US crisis or collapse might be. And ahead of the potential legislation of Section 899 of the ‘Big Beautiful Bill Act’, which could give the Treasury a theoretical right to tax foreign capital, it’s an especially urgent question for anyone outside the US with dollar assets.