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Wednesday, 18 October 2017

Peters: On Syria, conflict and the markets

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  • Anthony Peters

“Buy the sound of guns, sell the sound of bells…”

I’m sorry to be mentioning Syria for the second day on the bounce but such utter nonsense is being trotted out on the subject that I feel necessitated to do so again.

I read a piece this morning which opened “Leaders of the world’s biggest economies at a Group of 20 summit in Russia grappled with threats to the global economy as the effects of the Syrian conflict added to the fallout from a potential stimulus exit.” which then went on to declare “Chinese and Italian officials warned that military intervention in Syria would risk harming the global economy….”

What piffle! What about Gulf 1, Gulf 2 with the ensuing and enduring Iraq conflict, Afghanistan, Libya and so on and so forth. Harm to the global economy? I believe it was one of the old Rothschilds who coined the phrase that one should buy the sound of the guns and sell the sound of the bells which translates that wars are great for the economy and for markets and that, I suppose in consequence, peace is boring and unproductive.

Of course that bon mot might have been fine and dandy in the simpler world of the 19th century and there might rightly be some suspicion that it barely works quite as well today but there is still more than a goodly amount of evidence that it does.

At the outbreak of Gulf 1, the oil price spiked up to the eye-watering level of US$40pbb but by the time the late General “Stormin’ Norman” Schrwarzkopf had successfully turned Operation Desert Shield into Operation Desert Storm – and we’re talking fully committed land war here with plenty of “boots on the ground” – that very oil price was back where it started, namely somewhere around $20 pbb. Global economic effect of the war? Nada. Effect of buying the guns and selling the bells? A healthy P&L for anyone who was not spooked.

Likewise, as the 12th anniversary of the “9/11” terrorist attacks on New York draws closer, we should ask ourselves what the longer term economic fall-out of that event was, the answer to which is probably also “Not a lot”.

However, the massive overreaction by the staunch Republican Fed Chairman Alan Greenspan with the concomitant slashing of rates and general easing of all monetary controls more than likely unleashed the rampant credit boom and the subsequent financial crisis from which we are still trying to recover.

Impact?

What lasting effect lobbing a few cruise missiles into Syria is supposed to have on the global economy escapes me. It is not an oil producer and its greatest ally, Iran, is isolated from the world markets anyhow. It might cause some ructions – in fact it already is – between the US and its other ally, Russia, but that is very much a bilateral punch-up which I cannot see blowing up into a block versus block event like the Cold War. If there is, in my humble opinion, one age that has passed, it the one that determined “Guns before Butter”.

However, the effect of a winding down of monetary stimulus is another matter entirely and one which will surely be taxing our minds for the best part of the next half a decade, if not for longer.

Ambrose Evans-Prichard of the Telegraph wrote a column yesterday – I must add that he is euro-sceptic of a hue which puts even me to shame – in which he reminded that although the economic crisis in the Club Med might not be on the front pages any more and although the risk premia are no longer quite so visible in the markets, the financial position of those countries continues to deteriorate rather than ameliorate.

During the depth of the sovereign debt crisis, much was made of the massive rates at which these countries had to pay for money. In the event, of course, the likes of Portugal and Greece didn’t need to fund as they had the bail-out loans to live on and means were found which prevented the other treasuries in question from being full exposed to the wrath of the market. However, if as and when overall rate levels begin to normalise, the refinancing cost of the total debt pile will become a significant drift-anchor where recovery and growth is concerned.

Although Evans Prichard (known in the UK simply as AEP) is quite right, he hasn’t taken on board that investors seem to have given up asking how the debt is going to be funded and/or paid down and have tacitly decided that it is in their own best interest to shut up and to keep on lending.

I argued throughout the worst of the crisis that hope is not a strategy and that closing one’s eyes does not make the problem go away. With respect to the former, I appear to have been wrong. Nevertheless, the problem has not gone away at all and is, in itself, getting worse by the day. However, as ever, investors and traders eventually got bored with the subject and decided to look at something else. We all know that there is another crisis around the corner. What we don’t agree on is how far away that corner is and in the mean time lets all get long again and assume that the authorities won’t let the punch bowl run dry too soon. So far, so good.

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Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. Finally, the brats are off back to school but with that the parents’ Saturday morning driving season begins again may it be rugby training for the boys and ballet practice for the girls but if it were to be the other way around, stand proud and behave as though you’d have done the same yourself if you could have.

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