The Independent Market Observer

Thinking Ahead: The Next Major War

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 17, 2015 2:11:00 PM

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next major warFor some reason, when things are good—and they are—I start thinking about the next set of problems. Call it the Eeyore mindset, or just a deep need to try and see around the corner. This gets me into trouble sometimes, as I usually identify five out of every three problems that show up. But to the extent that it lets me think through issues before they become urgent, it’s usually a helpful tendency.

One potential issue on my radar lately is what the next major war might be. I’m not talking about conflicts such as the Russian invasion of Georgia or takeover of eastern Ukraine, or the skirmishing between India and Pakistan over Kashmir. I’m talking about an industrial-level conflict between major states, an even match between global players.

Although the Arctic and Africa also deserve attention, my two big areas of concern right now are Europe and Asia.

In Europe, echoes of World War I

The current Greek crisis has spawned multiple comparisons to 1914. Although I think that’s overstating the case, there are definite similarities between then and now, with each state focused on its own perceptions and needs while overlooking the bigger picture. Then, as now, both the Germans and the French acted on national interests and expectations, and the relationship deteriorated as those interests diverged.

Moreover, Russia is once again threatening Europe, with the smaller states, particularly Poland, caught in between. Increasingly, the U.S. is committing military resources to those front-line states, which says that risks are rising.

In Asia, escalating tensions at sea

For the first time since World War II, the Japanese government has voted to allow its military to operate as a military. For other Asian countries, this brings back bad memories. Japan’s decision was largely driven by continuing Chinese military expansion, especially in the South China Sea. China and Japan get much of their raw materials via sea and need to control their shipping lanes—but both can’t control them at the same time. Two recent headlines bring this point home:

The U.S. is already dialing up its response to Chinese claims in the area, and with the introduction of two more navies—well, what could possibly go wrong?

How long should investors count on peace?

The past 70 years have been, despite everything, among the most peaceful in human history, largely due to the overwhelming superiority of American power. The Pax Americana worked and, like any multigenerational state of affairs, is now taken for granted.

Bringing this back to the investing arena, think about how we normally analyze the world. You routinely see the word “postwar” on data sets. Most analyses implicitly assume that peace is now a given. And many analysts explicitly assume that, with the global economy as integrated as it is and most countries now organized around free markets and making money, a war would be irrational.

In an entirely rational world, of course, that conclusion makes sense. In fact, it has been reached before, several times. The most pertinent example was a book by a Briton named Normal Angell, called The Great Illusion, which argued that war between industrial countries made no sense. It was widely read and praised at the time of its publication—in 1909.

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