Ill Winds Blowing

ICangles Investment Post…

The potential for global unrest upsetting financial markets is rising. From the Middle East to Asia ill winds are blowing. Last week in addressing the United Nations Israel’s prime minister drew a red line threatening military action if Iran produces weapons grade materials for a nuclear bomb. This corroborated my March blog post “Iran’s Nuclear Rubicon” where I argued fears over a military strike on Iran this year were unwarranted, as such action was unlikely until Iran crossed the red line or Rubicon of assembling weapons grade materials. My Iran mollification, along with my prediction from my March 2011 post “Forecasting the Reckoning” that risks in China were unlikely to occur until after that government’s 2012 power transfer should be of lesser comfort as 2012 moves into the rear view mirror and time passes. Looking around the world, global pressures are building and the risks of events negatively impacting financial markets is rising.

Springtime for Islamists

A stroll through the Middle East provides much to worry about. Iran continues to pursue a nuclear program and sponsor terrorism, including its Hezbollah affiliate in Lebanon. This week the ongoing civil war in Syria again caught the world’s attention, as reports of chemical munitions being moved made the news. Despite numerous man portable surface to air missiles that can easily bring down commercial airliners going missing, Libya was being heralded as a success story of western intervention, until a terrorist attack on the American consulate on September 11th killed the U.S. ambassador and other Americans. This attack of course transpired on the same day Egypt’s new Islamic government did not stop a mob from storming the grounds of the U.S. embassy. Once one of America’s strongest allies, even President Obama let it slip in an interview that whether Egypt remains an ally is uncertain. Meanwhile,  Turkey a NATO member and once a strong American ally continues to show worrisome signs, as the democratically elected Islamic government disregards civil rights in order to enhance its power.

It’s easy to say the Middle East has always been a powder keg. Nevertheless it has not only become more combustible, but less secular. Whether ruling entirely or simply having more power that was previously the case the rise of Islamists characterizes the current Middle East. Labeling recent events the Arab Spring seems in retrospect to be hopelessly naive on the part of Western observers hoping for an embracement of Western values. Obviously many of the secular regimes under threat or replaced were despotic dictatorships with few redeeming qualities. But a close examination of the new Middle East brings the world Islamist rather than Spring to mind. For better or worse the trend is towards the rising power of Islamists. In Libya where they do not rule outright such groups are certainly more powerful than under Gaddafi, while in Syria they also enjoy more power than previously in the ongoing civil war. Iran remains a theocracy and Saudi Arabia an Islamic state, while democratic elections brought Islamic parties to rule in Egypt, Iraq, Turkey and the Gaza Strip. Outside of Saudi Arabia this ongoing trend is so far leading largely to worsening relations between both a secular West and a Jewish Israel.

West Weaker, Asia Riskier

Along with easily saying the Middle East is a powder keg, it’s also easy to say that Europe has ridden U.S. coattails when it comes to security, but that problem is also becoming worse. The Libyan intervention demonstrated the inability of European states to mount a credible overseas military operation without U.S. support, due to a lack of funding and armaments. Unfortunately, also on the easy to do list is for Americans to assume that withdrawing U.S. troops from a war ends it. But the absence of U.S. soldiers in Iraq has created a power vacuum, while the looming withdrawal from Afghanistan is likely to create the kind of power vacuum in that region, which led to greater, not lesser, conflict and loss of life in Southeast Asia after American’s withdrawal from South Vietnam. In a global system largely Western in its nature, a decline of Western power is destabilizing.

Turning back to China, its economic model is showing increasing cracks, threatening internal stability, while externally tensions with nearly all of its neighbors were spotlighted recently in its very public disagreement with Japan over sovereignty in the Senkaku or Diaoya islands. Resulting Chinese riots against anything Japanese were also joined by the deployment of warships around the islands in question. North Korea remains a mystery to most observers, but one where ongoing changes by its new leader may well prove destabilizing in another country pursuing its own nuclear weapons program. Summing up the situation: Europe, even without the Euro crisis, is in less of a position to promote stability, the Middle East is a mess and getting messier, Asia is heating up and America is in the process of pulling back from overseas engagements. Add into the math a drought likely to drive up food costs near term in nations already struggling with stability, and odds are good the term Pax Americana will not be bandied about to describe the near future any more than Arab Spring is used to retrospectively describe the Middle East years hence.

The Silver Lining

So, that is the bad news. But this is an investment blog post and there is some good news on the investing front. Although I am concerned about the risks rising starting next year for another downturn, I am still optimistic a new secular bull market is not far off. Market historians should remember the embassy takeover in Iran, invasion of Afghanistan by the U.S.S.R. and OPEC oil embargo all preceded a secular bull market that began in 1982. Similarly, the secular bull market in U.S. stocks that began in 1942 transpired during a little event called World War Two. Towards the end of a secular bear market global unrest is to be expected. This pattern doesn’t provide much comfort for those caught in its storms, but there is a silver lining for investors in that it really is often darkest before the dawn. And right now it looks like more than a decade into the current secular bear market the world could get a little darker.

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