Warning: This article contains potential spoilers for the 2023 film Oppenheimer.
A movie is a type of art that allows us to reflect on the world we live in. As such, investors can also learn important insights from watching movies.
The movie Oppenheimer, released last week in the Netherlands, portrays the life of J. Robert Oppenheimer, the American physicist who led the Manhattan Project, the US government project that produced the atomic bomb. One of the most horrifying scenes of the movie is when Oppenheimer warns the bomb might ignite the atmosphere of the earth and destroy the planet. Obviously this did not happen, but the chilling conclusion of the movie is that the possibility of destroying the world still exists today.
Indeed, in recent years, the risk of nuclear warfare has returned. Because of the war in Ukraine, in which Russia has repeatedly threatened to use nuclear weapons, as well as the conflict between the United States and China, the United Nations have warned that the risk of nuclear warfare is higher than at any time since the end of the Cold War in 1991.
It is important to note, however, that the risk of nuclear warfare has changed the world in other ways as well. In the 1990 paper titled From Geopolitics to Geo-Economics, the author Edward Luttwak argued that because of the risk of nuclear warfare, conflict between countries would increasingly become economic instead of military. Indeed, since 2016, the conflict between the United States and China has been primarily economic: higher trade tariffs, a ‘subsidy war’ as both governments pour billions into strategic industries, as well as export restrictions for semiconductors and metals.
To understand what is likely to happen in the coming years, we should look at a lesser-known aspect of Oppenheimer’s life: his affiliations with communists. Throughout the film, Oppenheimer is in close relation to several people who were affiliated with the American Communist Party. As a result, in 1954, the US government revoked Oppenheimer’s security clearance (doubts about his loyalty were fueled by the discovery of a Soviet spy among the scientists of the Manhattan Project). This tragically ended Oppenheimer’s role in government. The movie raises the question whether the treatment of Oppenheimer was fair, or whether one of America’s most brilliant scientific minds became the victim of a widespread paranoia.
For right or wrong, the intense focus on national security that took hold of the United States during the Cold War seems to be coming back. This time the focus is on China and it has probably only just begun. In the 2021 paper titled The Logic of Strategic Assets: From Oil to AI, the author Jeffrey Ding warns that politicians who become responsible for identifying industries that affect national security are likely to surprise us with how far they will go. An example given by Ding is that in the 1980s the US government decided that all “machine tools” from Japan were a national security threat and were no longer allowed to be imported into the United States. In recent months, the likelihood of history repeating itself has increased as American politicians have discussed national security threats from Chinese-owned weather balloons, cranes and corn mills.
All of this points to a key insight for investors. Although the fear of a military conflict between the US and China may be overblown, it will become more important to assess the impact of their national security thinking. Based on the high probability of more conflicts in the future, the risk premium of Western companies with exposure to China (and vice versa) is likely to keep rising. Even if no escalations occur, however, the massive rise of government subsidies to support domestic industries will continue to affect markets. For example, based on the subsidies provided by the US Inflation Reduction Act, several battery manufacturers have shifted their operations to the US. As a result, the European Union has also allocated billions of euros to bring more battery manufacturing to Europe. Finally, as digital technology collects data and creates the possibility of surveillance in (nearly) every industry, the amount of industries in which governments will see national security risks will be bigger than in previous historical episodes. As a result, the national security policies of governments will most likely affect more industries than is widely expected.
