The Geopolitical Risk Premium: What Markets Equity and Rates Are Actually Pricing

Decomposing the geopolitical signal across equities, FX, and rates

When we came into this year, the central question was HOW MUCH impact AI would have on jobs and the software industry. Geopolitical risk and higher crude prices have since layered additional complexity onto that picture. Here is what you MUST understand: there are three forces driving markets right now: AI thematic flows, geopolitical risk flows, and positioning unwinds. If you can quantify ALL three, you can begin to map WHEN each is moving the market and HOW things are likely to play out.

If you are brand new to Capital Flows, my goal is very simple: map the macro regime so that I am on the right side of it, and find the few large, asymmetric bets that become home run trades.

Since the beginning of the year, I have been focused on building out a full suite of agentic macro models that quantify the macro regime and identify asymmetric bets in alignment with how I think about markets. I will be sharing some of the outputs below.

Let me set the context before diving into the report:

• My geopolitical framework for the current situation is laid out here: LINK. If you feel like there are a lot of confusing and conflicting opinions on Iran and Trump, read this. It is about the larger structure, not predicting coinflip news events.

• My AI report explaining how the supply chain, adoption, and labor market impact breaks mechanically into three distinct phases: LINK

• All of the educational primers I have written on macro and markets, with a full suite of free models if you do not have a Bloomberg: LINK

With these as context, the positioning note below is going to make a lot more sense, and the market is going to become a lot clearer.

---

S&P500: How much is geopolitical risk, and how much is the economy?

Notice that on a YTD basis, ever since the negative rolling returns in ES gained persistence, 30% has been driven by geopolitical risk premium.

As I laid out in this video, there are multiple factors causing positioning unwinds in equities from crude, to STIR, to FX (link):

Now here is where we can quantify the STRENGTH of these macro moves even further. This gives us insight into HOW PERVASIVE these forces are, which sets the stage for identifying WHEN divergences take place and how that creates opportunity.