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'Game' of Fear Factor and the Markets
Like a ball in a pinball machine, our attention has bounced around the globe during the past five years, as different spots on this troubled earth have temporarily lit up in a spasm of violence -- from New York to Lebanon, by way of Kabul, Indonesia, Fallujah, Madrid, London, Chechnya and Paris.
What will be next? Will it be a bombing in Rome, a coup in Pakistan, a new Taliban-like regime in Somalia, increased instability in Russia, or chaos in some other place we've never even heard of? Does the recent change in power in Cuba factor into this?
Will it be a natural disaster, a hurricane, cyber-terrorism, an oil-supply shock, another war or some other turn of events that we could never even have imagined?
Just when we think we have a handle on things, a new conflagration emerges to test our strength, patience, courage, optimism and faith.
After a relatively placid last decade of the 20th century, the first six years of the 21st should have taught us something about the unpredictability and randomness of the world as we know it.
It certainly seems as if the geopolitical risks are taking center stage these days. If the 1990s were characterized by the preponderance of news stories about financial risk (long-term capital, east Asian currency crisis), the first few years of the 21st century have seen geopolitical risks, at the very least, sharing the earth's stage (Sept. 11 in New York and Washington; bombings in London, Madrid and Indonesia; a devastating Asian tsunami; hurricanes Katrina and Rita; and war in Iraq and the Middle East).
Control an Illusion
Risk is a constant presence in our lives; it will never go away, even as it mutates and re-emerges in many different permutations and forms.
If risk is a stark reality, then control is a human illusion -- a sign of human being's predilection towards wishful thinking and avoidance of unpleasant truths.
The late Secretary of State George Schultz, in a Wall Street Journal article in March 2004, offered this opinion: "If we put this in terms of World War II, we are now sometime around 1937. In the 1930s, the world failed to do what it needed to do to head off a world war. Appeasement never works. Today, we are in action. We must not flinch. With a powerful interplay of strength and diplomacy, we can win this war."
If 2004 was analogous to 1937, what is 2006? Has the world failed to do what is needed to head off a world war?
Looking at the historical relationship between wars and financial markets, we can easily make the case that those investors who bail out of the market at every sign of geopolitical trouble miss the inevitable recovery that follows victory and stability. "Buy on the sound of cannons and sell on the sound of trumpets," goes the phrase.
However, as we've stressed before, the past is not prologue, and this fight with those who are trapped in a 13th-century crusade has no real precedent.
Like everyone -- with maybe the exception of the terrorists -- we hope the world settles down, but we would be beyond foolish to make any solid predictions. And if the international situation heats up anymore, then we work and invest on the assumption that at some point, freedom will be victorious, the world will calm down, the financial markets will settle, and life will go on.
Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management.