The Independent Market Observer

1/23/13 –“India Warns Kashmiris to Prepare for Nuclear War”

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 23, 2013 10:19:58 AM

and tagged Europe, Yesterday's News

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When I saw the above headline in today’s New York Times (page A3), I have to admit I was taken aback. All of the discussions I have heard about nuclear war recently have been metaphorical, typically centering on how Congress is dealing with something. This one isn’t. Reading the article is scarily reminiscent of civil defense drills that I am just old enough to remember—when we stood in the central hallway of the school, facing the wall with our hands over our heads.

I couldn’t have asked for a better reminder that even as economic risks recede—and they are receding—there are a number of geopolitical risks that will come back to fill that worry-space. The relationship between India and Pakistan is certainly one risk; another is Japan and China, where, as of yesterday, both countries were sending fighter jets to the disputed Senkaku/Daioyu islands.

I gave an internal talk at Commonwealth yesterday about the economy and the markets, and I pointed out that the U.S. economy is improving in a big way, using data I have discussed here in the blog, but that risks remain, principally stemming from Washington, DC. As I said to my colleagues yesterday, though, even that risk seems to be receding, as both sides appear less willing to force the issue; this is evidenced by a Wall Street Journal headline today: “Obama Would Accept Stopgap Debt Extension.” Following my presentation, a coworker asked an excellent question about the risks—on both sides—to my analysis.

The upside risk is relatively easy: a full, grand bargain that reduces the U.S. deficit to a sustainable level over a period of years, using a mix of taxes and spending cuts. If that could be done, it would unleash a torrent of business activity, including hiring and investment, which could turn the current slow recovery into a boom. I hope that happens.

The downside risks are more numerous. We’ve talked about the domestic political risks, which seem to be receding, but the geopolitical risks seem to be stepping up even as the economic risks recede. India and Pakistan; Iran, Syria, and Saudi Arabia; Japan and China—all of these are potential war risks in the near future. Europe seems to have laid the groundwork for economic recovery, but it is starting to look weak politically. The prime minister of Great Britain has announced that that country will hold a referendum on leaving the European Union, France is coming into increasing conflict with Germany, Silvio Berlusconi is attempting a comeback in Italy . . . the list goes on and on.

And yet, with all of these risks, I take away two major things. The first is that there have always been risks like this, and sometimes bad things happen, but we deal with them and move on. The systemic risks seem to be receding, and the other risks are normal. Let’s not overreact.

The second is that I am deeply thankful I live in the U.S. Our problems are mostly self-inflicted, under our control, and still relatively minor compared with those of many other countries. Could things be better? Of course, and, in fact, they are getting better. There is no other country in the world that is as well positioned, overall, as we are.

I started off with the warning of nuclear war and a brief reminiscence of civil defense drills. Within my memory, nuclear war was something that hung over the U.S. like a shroud. Nowadays, even mentioning the notion is something of a shock. Thirty years ago, the Soviet Union was a major threat. Now even as China expands, its interests are primarily economic, not military. Even with all our worries, we are in a much better place than we have been. Worth remembering.

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