Zhao Jian: Out-of-control war, will this time be different?

How does Zhao Jian’s nonlinear game theory model predict the outcome of war?

In the ten years since Trump entered politics, the world has entered a period of great upheaval. Especially in the five years since the pandemic, three major accelerators of history have emerged simultaneously: plagues, wars, and technological revolutions, which are overturning the fundamental paradigms of the world’s political, economic, and social systems.

However, heaven has a benevolent nature; the human world can always recover from major crises. Whether it is a plague or a war, it’s just a matter of time—who can endure it. The same applies to investors: betting in such volatile markets requires experiencing nearly annual small tsunamis, and a major tsunami every three years. Managing positions well becomes a lifeline for survival.

Last year, when Buffett increased his cash holdings to forty percent, we perhaps didn’t understand why he was so cautious. Today, maybe we understand the survival secret of the Oracle of Omaha: better to miss opportunities than to stand under a collapsing wall.

However, as long as one can endure, the market will once again reach new highs. Every crisis is an opportunity for macro trading’s excess beta. The pandemic is such, and the Russia-Ukraine war is as well. Optimists always succeed in the end, but pessimists may live longer.

The Russia-Ukraine war has been one of the most challenging periods in the past five years. The war has also caused an energy crisis, with crude oil soaring to $150, and U.S. inflation approaching double digits. In the subsequent period, U.S. stocks entered a bear market lasting ten months, until ChatGPT emerged, attracting global capital into the U.S. market. Meanwhile, Chinese assets—both stocks and real estate—entered a long three-year valuation night.

Today, at this very moment, we are also at the beginning of an out-of-control war. Similarities include the U.S. versus Russia, and Iran versus Ukraine. At the start of the Russia-Ukraine conflict, Russia also aimed for a lightning-fast victory, seeking a quick end to the war, with both sides engaging in negotiations. No one expected it to last into the fourth year.

War is a mystery; no one can predict it precisely, especially in conflicts like the “Three Kingdoms” of history—where deep-seated hatred and religious grievances intertwine. Traditional linear game models are difficult to predict accurately; only complex nonlinear dynamic game models can analyze them.

What I can do is approximate through linearization without significantly altering the topology or losing core information. The current high-probability forecast (over 65%) is that it will not evolve into a prolonged conflict like the Russia-Ukraine war. I still adhere to the logical deduction from my previous report: the doomsday spiral—rather than de-escalating, war intensity actually intensifies to facilitate an exit.

Could it then, beyond human will, surpass the controllable scope of the U.S. and Israel, evolving into a protracted war? It’s not impossible, but at present, the probability is not high.

Our positions and portfolios are adjusted based on the probabilities of future war outcomes.

If the war further escalates, the world could face a global energy crisis. The Russia-Ukraine war has already caused an energy crisis in Europe, but this time, the energy crisis might become global.

Stagflation would severely damage the economy and markets, requiring all risk assets to be revalued within a new quadrant. Today, risk premiums are evidently still insufficient. A medium-sized crisis has already occurred, but the cleanup is not thorough enough. We are on the edge of a major crisis. May humanity be blessed.