Reversing the scenario described above, Bremmer and Keat note that investors not only misread Luis Inacio Lula da Silva’s (Lula) electoral chances in 2002, but having heard his often fiery rhetoric, they feared that his victory would among other things lead to a default on Brazil’s debt. Once again, the political economics of his victory were misunderstood in that having suffered previous defeats, once in office Lula moderated his message. As the authors remember for us, “few experts” were able to forecast the political incentives Lula “would inherit to stick to restrictive fiscal and monetary policy.” In short, a correct political read of Lula could have translated into investment gains for those who availed themselves of analysis that went beyond the economic.

And while it’s often said that governments are merely the puppets of corporate interests, the authors helpfully show how that’s not the case. This speaks yet again to the importance that investors must attach to the political outlook in making investment decisions. Specifically, in the lead up to World War I, the authors note that “most British and German bankers bitterly opposed it” with their investments in mind. Sadly in this case, they remind us that “corporations cannot do much to prevent geopolitical shifts from happening.”

Happily, The Fat Tail is more than a book that makes the clear case for applying policy analysis to investment strategy. Indeed, one of its most appealing attributes is the history that it offers. From the psychological impact of ineffective guns when it came to the Spanish invasion of Mexico to the Soviet’s role in the creation of the Eurodollar market to Wal-Mart’s brilliant response to Hurricane Katrina, the authors do a great job of keeping the reader interested in what on its face might seem a bland subject.

The above in mind, the differing fortunes of German aircraft makers Fokker and Pfalz in World War I’s aftermath caught this reader’s eye the most. Fokker thrived after the war thanks to its greatest asset being its intellectual know-how when it came to airplane manufacture. This was easily transportable to the Netherlands. Conversely, Pfalz was less reliant on intellectual property, and instead had thrived due to wartime opportunity. There’s a lesson here for the many businesses lined up in Washington for surely ephemeral government “stimulus.” As for our federal government that presumes it can tax productive businesses and individuals without consequence, it should be known that as we’re increasingly an economy of the mind, excessive taxation may drive our human capital out of the country altogether.

On the regulatory front, the authors make the essential point that regulators, like armies, are always fighting the last war. Sarbanes-Oxley was passed to fix the Enron and Worldcom mistakes with greater balance-sheet clarity, but as the last year has shown, it was very unequal to the task. Ultimately regulators never know what to regulate until after the fact, and even with hindsight they do a poor job. This writer’s not holding his breath, but maybe, just maybe, the political class might in time wake up to the simple reality that as they lack a hotline to the future, regulators are at best an inhibitor of productive economic activity.

There were a few disagreements with Bremmer and Keat. They suggest that the Yom Kippur War triggered an oil “price shock”, but since the U.S. was the recipient of more oil after the war than before, they perhaps could have better described the oil “shock” as a weak dollar shock. Further on they note that for “a local producer, a currency devaluation makes products cheaper to sell abroad.” Were that the case, Argentina, Turkey and Zimbabwe would be economic powerhouses. More realistically, inflation steals the alleged benefits of devaluation, and as we’re nothing if not a world economy, a cheaper currency would drive up the costs of the various imported inputs that make up a finished product. Devaluation’s virtues are frequently extolled, and its demerits not enough.

One other disappointment likely resulted from an editing error: in the second chapter the authors ask if the U.S. has “finally entered a period of relative decline?”, and allude to a full discussion of the question later in the chapter. Their views on this subject would have been very interesting, but they were hard to find.

Despite these small quibbles, The Fat Tail is a very worthwhile and fun read. What’s unknown, however, is how easy it might be to apply very essential policy analysis to the frequently numerical art that is investing. Indeed, as the authors make clear, it’s hard enough to predict future events like the Bolshevik Revolution, and even in hindsight there’s broad disagreement as to its causes. That being the case, we know that political risk is an essential investment input, but can we profitably analyze it?