BackWall Street’s Mr Risk makes a career out of investors’ ignorance of politics
Ian Bremmer's line of business thrives on political instability, which hasn't been in short supply thanks to Brexit, US election and an imploding Middle East
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New York: It was 1998 and Russia was on the verge of gaining investors’ confidence when oil tumbled to nearly $10 a barrel.
Foreign creditors dismissed talk of a collapse. Russia had the money to pay its debts, they said, and it wouldn’t sacrifice its credibility. Then-President Boris Yeltsin’s appointment of a young reformer to manage the crisis was proof.
A young Stanford Ph.D named Ian Bremmer was one of a small minority on Wall Street who, correctly, questioned this line of thinking. Yeltsin defaulted on $40 billion that August, sending the rouble down more than 70% and sparking outflows all across developing nations that led Brazil to devalue its currency months later.
“Everyone out there seemed to think, well these guys have the money to pay so they are going to pay," said Bremmer, recalling an early triumph for Eurasia Group, the political risk firm he had just founded. “I told them, Yeltsin is drunk half the time and not paying much attention. They are going populist on this one."
Creative destruction
Bremmer built that defiance of trader consensus — what he calls market ignorance of politics — into a lucrative business that took an academic discipline and turned it into a coveted product for financial professionals and investors. Today there are about a dozen firms in a cottage industry valued as much as hundreds of millions of dollars.
And while Bremmer’s record is hardly unblemished (he had assured his high-paying clients that Donald Trump would never gain the Republican nomination), he offered a core insight two decades ago that has held up well: the collapse of the Soviet Union has led to the start of “creative destruction" in the post-World War II order; and the rise of China and other emerging markets make geopolitical risk assessment more important than ever. He has defined “emerging market" as a country where politics matters at least as much as economics to the market.
That means his is a business that thrives on instability — and there has been plenty of it lately, from Brexit, to the US election and the endlessly imploding Middle East. That’s good for Bremmer, although he is wary of pushing that too far. As he puts it, “We’re like taxi drivers. You want the weather to be sufficiently bad that people want to get into your taxi but not so bad that they don’t want to leave their house."
Modest background
That kind of cunning marketing analysis reflects Bremmer’s style. Bespectacled, fast-talking — he projects his voice as if on stage even in a small room — Bremmer looks younger than his 46 years. He grew up fatherless in a Boston housing project with a mother who hadn’t gone to college and passed the time obsessively playing Risk, Hasbro Inc.’s war strategy board game. He showed exceptional intellectual promise. At age 15, he went to college; at 16, he visited the Soviet Union; at 20, he edited his first book; at 24, he received his doctorate in political science and joined the Stanford faculty.
It’s a trajectory most Ph.Ds can only dream of. But Bremmer hated it.
“Good teachers are people that have actually gone and done something and have experiences to share with people," he said. “I needed to go get experience."
Behavioural revolution
So he abandoned tenure and headed to New York to wage what he calls a “behavioural revolution" in political science: making it useful for the free market.
Anchoring himself at Columbia University and the World Policy Institute, Bremmer spent a year pitching his services to the likes of Frank G Wisner, then-vice chairman of American International Group Inc.; Theodore Roosevelt IV, then-vice president at Goldman Sachs Group Inc.; Enzo Viscusi, chairman of Eni Petroleum Co. None would hire him as their in-house political scientist. But they agreed to be his client.
With $25,000 in savings, Bremmer incorporated Eurasia Group in January 1998. The firm now employs 150 and earned $100 million in revenue last year. He sends out a weekly update, writes a column for Time magazine, teaches at New York University, has 191,000 followers on Twitter and is a frequent presence on international news channels.
Eurasia has leveraged products like its global political risk index into partnerships with PricewaterhouseCoopers, Deutsche Bank AG, Citi Private Bank and, most recently, Nikko Asset Management.
Others are jumping into the game. Teneo Holdings, a U.S. based global advisory firm, created Teneo Intelligence in 2013. IHS Markit, a publicly-traded industry data provider, has been on a buying spree, acquiring specialist risk analytics and intelligence companies such as Jane’s Information Group, Global Insight, and Exclusive Analysis. Verisk Analytics Inc., another publicly-traded data supplier to insurers and banks, bought Maplecroft.Net Ltd. for $31.7 million in 2014. IHS has also approached Eurasia about a possible merger, said Bremmer, who adds he will never sell the firm or take it public.
Of course, political risk assessment is as old as international trade and investment. The insurance market was created out of the Lloyd’s Coffee House on Tower Street in London which opened in 1688 as a gathering place for sailors, merchants and shipowners.
In the modern era, the scramble for oil and other natural resources took developed nations’ businesses to far-flung corners, where the political environment was often raw and volatile. Many commodity-rich countries had emerged from decades or even centuries of colonial rule and were wracked by dramatic political shifts.
Multinational companies recruited outside experts such as diplomats, consultants, academics, journalists and government officials on a contractual basis to assess risk.
David R. Young, a politics lecturer at the University of Oxford, founded Oxford Analytica in 1975, two years after he left Washington where he had served as National Security Council assistant to Henry Kissinger. Others followed.
Marketing machine
What differentiated Eurasia is that Bremmer created a lasting demand for his product and service, said Kevin Kajiwara, former director of strategic clients at Eurasia, now at Teneo.
“Ian is a very smart guy but maybe even more importantly is a marketing machine who naturally has a very deftly coordinated media strategy," said Kajiwara. “He is not afraid to ask for the trade, he is not afraid to put a value on what he does and say you should pay for it."
Meanwhile, this year has been a reminder for investors that even correct political predictions do not necessarily lead to correct market calls. Nonetheless, a new generation of start-ups, using statistics and metadata, is emerging as competitors. Bremmer, of course, says he is not worried.
“There is no such thing as completely objective data because a human being is filtering," he argued. “Patterns are everywhere but you need to spend enough time in the countries, with the decision makers, with the journalists, with the analysts, all of the people to actually understand what you are doing."
The main worry for Bremmer is that his thesis behind global order, or the lack thereof, will remain true for too long. The world is undergoing a re-balancing of power for the first time since 1945, which could prove devastating if the current vacuum of global leadership is prolonged, he says.
Trump forecast
Bremmer still believes a Trump victory is “extremely unlikely" because he won’t be able to secure a solid majority of the anti-establishment vote without the backing of Bernie Sanders and his supporters, or at least their refusal to support the Democratic Party’s front-runner Hillary Clinton.
“Short of an external shock — a Hillary health scare, a 9/11 type event God forbid, a huge unexpected scandal — I think the demographics remain too steep for Trump to win," Bremmer said.
“If the worst comes about geopolitically, our business is not going to do well because that would mean a global depression," he added. “There is no question when the wave is coming in, you want to be with the wave but when the wave is a tsunami, there is just a lot of human damage." Bloomberg
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