Somewhere in the Credit Writedowns archive are comments regarding US President Trump to the effect that political economy shocks won’t matter. So I want to share a quick anecdote with you on why I have never put too much stock in the political economy as a crucial factor regarding market or economic outcomes.
The Iran Fiasco
Last night I was catching up on some of the foreign news broadcasts I watch. And the 9:50 pm Swiss 10vor10 broadcast caught my eye.
The Iranian ambassador to Switzerland was on the programme telling the broadcaster that he doesn’t understand why the Swiss media downplay Switzerland’s role in mediating the US – Iran relationship. He said the Swiss played a critical role in the absence of an official US – Iranian relationship or bilateral US-Iranian ambassadorships.
In fact, the Iranian Ambassador to Switzerland suggested that had the Swiss not acted as information broker between the two sides, the conflict could have spiraled out of control. It was clear from what he said that neither the US nor Iran wanted to escalate. And they used Switzerland as a medium to relay that message. As an aside, it was interesting that the interview was conducted in English and translated into German for the programme.
For me, the whole episode showed what goes on behind the scenes regarding public rhetoric, even in a world in which the US is supposedly acting completely unilaterally under Trump. The reality is that there is a back channel via Switzerland (and likely others) that, while imperfect, makes Black Swan political events less likely. We really can’t take things at face value.
This morning, I also saw that there were 11 US casualties from the Iranian retaliatory missile strike after the Suleimani assassination. This is information that the US withheld from the public immediately after the strike in order to prevent further escalation. To de-escalate, Trump went as far as to lie on TV afterwards, saying there were no casualties. Only now have we discovered he was lying. But the impetus for escalation has died. And so, his lie served its purpose – de-escalation.
Worst Case Scenarios
In retrospect, then, what were the chances that this could have escalated into a full-blown war? The Iranians are already dealing with civil unrest that resulted in thousands of deaths from the government’s crackdown. Trump is mired in an impeachment trial during the election cycle and under fire for the assassination, which the Iranians call a war crime. Both sides have reasons to want this incident to go away. And so it has – at least as a pretext for war. I think the chances of it’s ever ending in war were always relatively low.
At the same time, this is a huge breach of international law. As Jim Webb put it, “When did it become acceptable to kill a top leader of a country we aren’t even at war with?”
How did it become acceptable to assassinate one of the top military officers of a country with whom we are not formally at war during a public visit to a third country that had no opposition to his presence? And what precedent has this assassination established on the acceptable conduct of nation-states toward military leaders of countries with which we might have strong disagreement short of actual war — or for their future actions toward our own people?
The answer to these questions is that it is not acceptable. It’s criminal. And there will be long-term negative consequences regarding what other nations deem permissible. Russia is already killing domestic enemies on foreign soil. They can certainly use this assassination attempt to kill foreign (government) enemies on foreign soil as well. What’s good for the goose is good for the gander.
But, from an economic perspective, this has no real impact. And even had we seen war, I would question how negative the impact would have been on the economy. The reality is that it is hard to go from political event to economic outcome.
For me, 9/11 was a case in point. Before the strike, I was under the impression that any Middle East tensions would play out just as the first Iraq War had done, causing oil prices to rise. In my mind, that put a floor under oil prices and the shares of oil companies. I invested accordingly. Then when 9/11 happened and markets re-opened, oil prices tanked as did the price of companies in the oil sector. Ironically, this was also the beginning of the end of the downturn as well. The trough turned out to be November 2001.
It is very hard to assign economic causality to worst case political scenarios.
My takeaways
So, I am always sceptical when you hear people talk about this or that political event and possible market or economic outcomes. For me, they are rarely drivers of economic events. Therefore, I don’t think the election in the US will have a dramatic impact on equity prices or the economy. Whether a ‘centrist’ or a ‘liberal’ wins the Democratic nomination is largely irrelevant from an economic perspective.
That’s my brief thought for the day. Enjoy the weekend.