Monday, August 14, 2006

Financial market implications of recent wars

Just a quickie here but in watching the markets' response and reading press reactions to the easing of hostilities in Lebanon, I find I take a different view. Surprise.

The buzz, as best I can glean sitting in my barn more than 100 miles away from Wall St. is that "no war is good for bonds and equities, bad for oil and Gold." This reminds me of one of my wife's descriptions of less educated economic views; vending machine economics. A more nuanced view might prove a little more apt.

Almost 5 years ago, the US began a war in Afghanistan, and it still rages. Almost 3.5 years ago, the US began a war in Iraq, and it still rages. Israel seems to be backing away from its month long war in Lebanon. In each instance the strategy was similar; make use of the vast differential in air power and soften up the enemy by bombing the country. Shock and Awe was the phrase that filled the airwaves.

Yet, it appears that the "shock value" of air assaults are diminishing rapidly over time. In the case of the War in Lebanon, Hizbollah appeared to jump right back each time the F-16s flew by. The Israeli Army found that this militia at least, doesn't shock easily.

So, what are the financial market implications of this. Well, in the case of Lebanon, it seems to me to be a more open negotiation. That is, it isn't a victor dictating terms but two sides who will have to give and take.

In the event that negotiation between the Islamic world and the West is not conducted as victor to vanquished but as two parties who realize that either can inflict horrible damage on the other, the global flow of funds might change dramatically.

I have previously touched on the issue of the return on investment of US military spending. If our military cannot produce better deals, it truly is a negative investment return, unless you get your jollies blowing things up.

We might, in the coming months, get a sense of how much US$ recycling was tribute based.