One of the questions I’ve been getting lately has been about rising geopolitical tensions and what that means for investing. Recently, the focus has been on North Korea, but, with the Israeli strikes in Syria, that should be coming up as a topic soon.
My usual response, which isn’t meant to be flip, is that I’d be more worried if things were quiet. If they’re making noise, we at least kind of know what they’re thinking.
The reason I say that is, given the wide range of U.S. interests—and the need of many governments to visibly oppose the U.S. for domestic political purposes (North Korea, Iran, Afghanistan, Russia, France, among others)—you have to bank on a certain amount of noise. Wrap in the game-theoretic reasons for many of these powers to sound as bellicose as possible, and a higher level of noise is not only understandable but desirable: it says they are acting as expected.
I therefore tend to discount much of the noise, getting excited only if something unusual comes along. North Korea’s threats don’t qualify, nor does Israel bombing Syria—although both of those certainly have the potential to become more important issues.
Instead, I try to focus on threats that are real but less reported. For instance, I’ve made a big deal about the coming clash of China and its neighbors, particularly Japan, in the seas of Southeast Asia. This is something that will affect oil markets and world trade, and it’s being driven not by a desire to make noise but by fundamental resource and trade conflicts that have triggered regional and global wars in the past. I have also focused on the growing gap between France and Germany. If the euro were to melt down, especially because of a fundamental break between those two powers, we could move right back to the nineteenth century. At this point, I don’t expect that to happen, but it is a worry.
My other areas of focus are wars that are currently under way, such as our war on Iran. Didn’t know about that? It hasn’t been declared, but just because we aren’t sending in kinetic platforms doesn’t mean we’re not at war. Consider the Stuxnet virus that crippled the Iranian uranium enrichment program and the economic sanctions that have impaired its currency and trade.
The other war we are engaged in is cyberwar with China. The Pentagon recently acknowledged that the Chinese military is behind many of the cyberattacks on the U.S., which is hardly a surprise, given the Mandiant report. What is surprising is the acknowledgement. That this is now in the public eye—on the front page of the New York Times, no less—suggests that the government wants a discussion of cyberwar and how we are already engaged. As I mentioned, we are also at cyberwar with Iran, and we (or Israel—the attribution is unclear) seem to have made the first strike.
Arguably, yet another war is the currency war, a set of economic conflicts that could certainly escalate. I will have a lot more to say about that in a future post.
The fact that we are already actively engaged in these very real but nonmilitary conflicts—as well as others explicitly identified as wars (such as Afghanistan) and others (like Syria and Libya) where we no doubt have special forces—combines with the usual noise level to reduce my sensitivity.
As with the stock market, daily noise can and does obscure important underlying trends, cyber and economic war being the two most important. Even though they are moving into the public eye, they are still worth far more attention than most people give them.