THE REALITY OF WAR
by Marc Faber
There is an important point investors should be aware of,
which may have been overlooked during the peaceful and
financial bubble years of the 1990s: wartimes are common in
the history of the world; it is times of peace that are the
exception. According to the historian Will Durant, war is
one of the constants of history, and has not diminished
with civilization or democracy. In the last 3,421 years of
recorded history, only 268 have seen no war.
Just look at the period between 1895 and 1918. During this
brief span of years, there were continuous conflicts around
the world, including the Russo-Japanese War (1895), the war
between Turkey and Greece over Crete (1897), the Spanish-
American War of 1898, the Anglo-Boer War of 1899-1902, the
military expeditions of the great powers in China in 1900,
the Russo-Japanese War (1904-1905), the Russian Revolution
of 1905, the Turkish Revolution of 1908, the French
military expedition in Morocco (1907), the military
conflict between Italy and Turkey over Tripoli (1911), the
First Balkan War (1912), the Second Balkan War (1913), the
Chinese Revolution of 1911, the First World War (1914-
1918), the February Revolution in Russia (1917), the
October Revolution and the Russian Civil War (1917-1921).
According to Durant, the causes of war are the same as the
causes of competition among individuals: acquisitiveness,
pugnacity, and pride; the desire for food, land, materials,
fuels, and mastery. The state has our instincts without our
restraints. The individual submits to restraints laid upon
him by morals and laws, and agrees to replace combat with
conference, because the state guarantees him basic
protection in his life, property, and legal rights. The
state itself acknowledges no substantial restraints, either
because it is strong enough to defy any interference with
its will, or because there is no super-state to offer basic
protection, and no international law or moral code wielding
effective force.
As to the causes of the Iraq war, I leave them to the
reader to ponder.
I am not necessarily suggesting that the next 20 years will
be as turbulent as the first 20 years of the 20th century.
But we must realize that the late 1980s and 1990s were
extremely unusual from a historical point of view, since,
aside from some minor conflicts, there were no major wars
or revolutions. So, purely from a probability point of
view, investors should not expect the relatively peaceful
time that has followed the Korean War, and especially the
peace dividend we have enjoyed over the last 15 years or
so, to continue forever.
The peace dividend that followed the end of the cold war
was certainly a contributing factor to higher stock
valuations around the world (declining interest rates and
rising profits aside). If the world is now moving into an
era of increased tensions, then this will be an additional
negative factor for equity valuations. Moreover, during the
relatively peaceful 50 years that followed the Second World
War, trade as a percentage of GDP increased rapidly and
peace allowed a truly global capital market to be created,
both of which factors were favorable for economic
development around the world. As a percentage of the
world's GDP, trade increased from around 5% in the 1950s to
over 20% at present.
Moreover, since the creation of a truly global capital
market in the late 1980s, international capital flows
financed the investment boom in the emerging economies in
the early 1990s, and have in the last few years financed
the excessive consumption in the U.S., which is reflected
by the growing American current account deficit.
If we assume, therefore, that rising global trade and an
increase in global financial flows had something to do with
peace around the world in the 1990s, we should also assume
that in the case of increased geopolitical tensions and,
especially, a major conflict, there could be some
interruption in these favorable trade and financial trends.
In the worst case, severe geopolitical tensions could lead
to an interruption of free trade or of international
financial flows and bring about supply shortages, trade
embargos or outright trade wars, the imposition of foreign
exchange controls, and even the freezing of assets held by
foreigners or, in an extreme case, their outright
expropriation.
In short, the financial markets and financial
intermediaries seem to me to be particularly vulnerable,
since they have become so disproportionately large in
comparison to the real economy. One point is clear to me.
In the next major conflict in the world, the derivatives
market is most likely to cease to exist, since financial
institutions throughout the world hold derivative
positions. Therefore, if one major player somewhere in the
world doesn't settle or fails altogether, a vicious chain
reaction could follow, with the result that the markets
will be closed.
It is not my intention to sound alarmist, but I think that
investors who grew up during the last 50 years have no idea
of what unpleasant financial and economic consequences
might result from a major conflict. Throughout history,
asset freezes, the imposition of foreign exchange controls,
and expropriations have been very common, and I have no
doubt that sometime in the future we shall experience such
emergency measures once again. Therefore, investors should
seriously consider diversifying not only their assets, but
also how they hold those assets.
To hold all of one's assets in one country with just one
financial institution may be imprudent in an age of rising
risks of international conflicts. Consequently, an investor
may want to hold some of his assets in the U.S., but also
consider the ownership of assets through a foreign bank or
the holding of real estate in a foreign country.
Such diversified allocation is an important - if not
essential - safeguard against the negative consequences of
major conflict.
Regards,
Marc Faber,
for The Daily Reckoning
Editor's Note: Headquartered in Hong Kong for the past 20
years, Dr. Marc Faber specializes in Asian markets,
advising major clients seeking down and out bargains with
deep hidden value - unknown to the average investing
public. The editor of The Gloom, Boom and Doom Report, Dr.
Faber is also a major contributor to: |
