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|Why You Shouldn’t Ignore Geopolitical Risk||Views: 741|
|Mar 21, 2007 1:34 am||Why You Shouldn’t Ignore Geopolitical Risk||#|
|Why You Shouldn’t Ignore Geopolitical Risk|
We have long warned of major problems ahead (stealth inflation; the graying of the baby boomers; a residential property bust; our massive unfunded entitlement program; a potential slump of the U.S. dollar and the possibility of a pre-emptive U.S attack on Iran; etc). All the while, bond and stock markets have roared ahead as if no major storms were on the horizon.
Story continues below . . .
Even gold, at less that $1,000 a troy ounce, is at less than half its inflation-adjusted high ($850) of $2079.61 per ounce.
Last week, Barron’s cover story, titled “Wake-Up Call,” was on precisely this issue of complacency over geopolitical risk. It is a seminal article and worthy of a serious read, if not of deep study.
The article featured Niall Ferguson, “One of the world’s most famous and provocative historians with high-profile posts ranging from Harvard to Oxford to Stanford University’s Hoover Institute.”
Ferguson is the author of several major books including Colossus and The War of the World 92006).
By chance, we ran an item last week titled, “Globalization: Is America Ready?” In it we pointed to the fact that there have been two great periods of Globalization. The first led by Great Britain (1880 to 1914); the second by the United States (1945 to the present day.) The intervening period (1914 to 1945) saw a reversal of globalization as the great powers sought to protect their turf.
[Editor’s Note: A 2007 Global Recession Is in the Cards. Here's How to Position Yourself Now For Monster Profits Before the Panic Headlines Begin.]
Fergusson agrees that the first period of globalization was from 1880 to 1914. In addition, he observes that the financial markets of the time were roaring, paying little attention to the major geopolitical risks that should have been apparent.
Fergusson points to the ebullient global stock markets and high levels of liquidity that pervaded international financial markets when it was clear that war was in the cards.
We do not agree that a war between Great Britain and Germany was inevitable at the time. (Britain had no mutual defense treaties with either Russia or France, who were effectively tied, directly or indirectly, to Serbian defense.)
However, history shows that war is beset with unintended consequences. Wars seldom end up as planned by the aggressors. Indeed, it was the German miscalculation of invading Belgium, with whom Britain did have a defense treaty, which drew Britain and eventually America into war.
We would accept that the German Kaiser had built a magnificent and awe inspiring military machine. Furthermore, it was increasingly apparent that he appeared to be bent upon using it in order to acquire an empire, even if he had to preempt a “defensive” war. (Some might argue, like Iraq/Iran.) This alone was reason enough to suspect the advent of a war, even a war caused by such a relatively minor event as the assassination of the heir to the Austrian Imperial throne. And yet, at that time, financial markets continued to roar.
[Editor’s Note: Warren Buffet Has More Than $40 Billion Parked in Cash and Cash Equivalents — Find Out Why.]
As Mohamed el Erian, president of Harvard Management points out in the same Barron’s article, “Niall [Ferguson] has the ability to understand both current issues and historical trends. He reminds people that a catalyst for a significant market move can be quite small [like the assassination of Arch Duke Ferdinand in 1914 or the sub-prime market today?] The smart money likes to have historical perspective.”
Here it is of interest that last week, as Arnaud de Borchgrave (currently a NewsMax columnist and UPI editor at large) noted, our Congress tied the President’s hand over Iraq. However, in the very same week they untied his hands over Iran, under pressure from Israel!
Ferguson points to both social and political parallels between what he sees now and those existing in 1914.
Barron’s reports, “While Ferguson doesn’t see another world war looming, a geopolitical shock, he argues, could dry up financial liquidity, now abundant, and shut global stock exchanges.”
Our readers will know well how much today’s “frothy” markets are buoyed by massive liquidity.
Ferguson notes that, at today’s prices, the markets represent the “paradox of diminishing risk in an apparently dangerous world.”
Barron’s goes on to make a point that should be of vital interest to our readers.
They point out that geopolitical risk is a vexing problem for professional investors. While they might recognize dangers, they can lose their jobs if they are excessively defensive and hold too much cash in a rising market.
We, at NewsMax, are not paid to manage money and believe this seminal statement should be writ clear in front of every owner of capital who employs professional money managers.
Barron’s go on to point out that that Ferguson acknowledges this and says that, “If we all get caught in a 1914-style crisis, we all go down together and nobody will under perform the benchmark.”
[Editor's Note: Four Gold Stocks Set to Skyrocket in 2007.]
Well, this is yet another seminal remark that goes a long way to explaining why many professional money managers, greedy for fees and backed by investment bankers and most of the financially interested financial media, keep urging us all to turn a blind eye to the problems we see ahead and meanwhile talk the markets up.
It is because we agree strongly with such people as: Niall Ferguson, Sir John Templeton, Paul Volker, Alan Greenspan, and Stephen Roach of Morgan Stanley, that we have urged our readers to be observant, patient and cautious; to seek not high returns, but capital preservation.
We welcome the Barron’s article on Niall Ferguson, because we feel it points to the reality of a geopolitical risk that our current markets appear determined to ignore.
It also fortifies our recommendation to our conservative readers; that they should concentrate high weightings to their asset allocations of cash, high coupon, high quality, short-term bonds and of gold.
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