OldLimey

'Wars and Rumors of Wars' - Time to Look at Defense Stocks

It's interesting to me that the threat of significant wars (as opposed to local conflicts or insurrections) appears increasingly frequently in the financial blogosphere; by 'increasingly frequently' I mean that I am now seeing one or two such posts each day. The sources are usually American. I've lived for several deacdes in Europe, Asia, and the Middle East so my understanding of psyche in the American heartland (i.e., away from the coasts and amongst people with only limited exposure to the outside world) is far from deep. So let me add the thoughts of somebody from outside 'fortress America'.

1. I can see absolutely nothing out there to suggest the possibility of a global conflict. Yes, I know all about 'Black Swans', but this one is in the 'death rays from Mars' camp.

2. Russia is an aggressive and disgruntled imperial power with deep-seated domestic problems, and if I were Ukrainian I would be deeply worried. But as anybody with experience of school playgrounds can attest, being a bully and resorting to physical force are two different things. The playboys who fund Putin will not want to put their Riviera lifestyles at risk, so Russia will continue to pressure its neighbours wherever it can without resorting to outright, large-scale war.

3. A study of Chinese history does not show this to be an empire with an appetite for long-distance military power projection. Sure, they can get quite tetchy when the Middle Kingdom's historical sphere of influence is perceived to have been invaded by interlopers or shows signs of wanting to go its own way, but that's a lot different from going to war with a distant major power - such as the US or India, both of which have been named as potential targets in 'mainstream' blogs I have read today.

4. The Middle East certainly has plenty of unfinished business which will inevitably lead to further regional conflict. Iran, Hezbollah, and the Arab street are clearly unhappy with what's going on in Gaza - as anybody should be if they have a shred of human decency - but Arab regimes (other than Syria) are content to see Hamas getting a caning, even if the outcome eventually falls short of what Israel would like. Is Iran really likely to fan the flames directly, as opposed to rhetorically or indirectly through Hezbollah? Unlikely at this point in time, given the apparent progress it's making on the nuclear front. Is Syria likely to act? Unlikely, given that their new up-market Russian SAMs are not yet operational and they have anyway been signalling a desire to come to a settlement with Israel.

5. India v. Pakistan? Possible, but neither India nor the United States want a failed state sandwiched between the former and Afghanistan. My bet would be that the current crisis will lead to further posturing before the Indian election, but nothing more. However, if the bad guys mount another successful 'spectacular' inside India within the next few months all bets are off.

6. The US defence-industrial complex clearly benefits from certain types of conflict fought on its own terms in a controlled way. However, chastened in Iraq and faced by a much more important yet until recently neglected challenge in Afghanistan I would really wonder whether even the most hawkish of neo-cons has an appetite for further adventures. Whether A & D stocks are about to benefit from the hand-out gravy train or a budgetary pullback (from 2010, given that 2009 is already baked in) I have no idea.

The world is a dangerous place at the best of times, and this certainly isn't one of those. However, I would think that with some local exceptions the resurgence of nationalism to which politicians and the tabloid media often take recourse in difficult times is more likely to find voice in greater trade protectionism - including anti-competitive bail-outs and subsidies. We are already seeing a lot of this in public policy under the guise of saving jobs/the system/the world, and the sentiment is also showing up increasingly frequently at the grass-roots level (e.g., in SA posts and comments over the last few days).