Will Geopolitical Risks Upset the Stock Market?

October 16

By Robert Wiedemer

In Short, They Haven’t Had Long Term Effects Before – Not Sure Why That Would Change Now

Stock market fears based on geopolitical risks have usually simply turned into buying opportunities in the past. The downturns were short lived. Sometimes, there wasn’t even a downturn. When the US began bombing Iraq in 2003, the stock market rallied.

Over the course of wars in Iraq, Afghanistan and major proxy conflicts with Russia in Syria and Ukraine we have seen nothing but rising markets. To the extent markets were down over that long period, it had nothing to do with geopolitical risks.

I simply don’t see why that would change now.

Let’s Take a Look at Some Geopolitical Risks We Face Today to See What Might Be Different

Israel/Iran

Israel has just announced that it will not target Iran’s oil facilities which has calmed the oil markets, but some sort of retaliatory attack could occur between Iran and Israel that ultimately constricts the supply of oil coming out of the Middle East. The key market risk of such an attack would be Iran closing off the Strait of Hormuz which would cut off much of the flow of Middle East oil.

Unfortunately, that would also cut off the flow of Iran’s oil. Since Iran is exporting a huge amount of oil that is very important to their economy, it’s unclear how long they would want to do that just to show support for Hezbollah or Gaza. They could also attack Saudi’s oil facilities but that would invite retaliation on their oil facilities. It’s not easy to see a quick win for Iran there so I think it is unlikely to happen.

Also, conflict in the Middle East is nothing new. We have had a lot of conflict in the Middle East since the Arab oil boycott of 1973, and we have NEVER seen the oil supply from the Middle East cut off. To the extent we have seen cuts in Middle East oil exports it has been due to US sanctions on Iran or wars in Iraq and Kuwait. Yes, they have raised the price of oil at times, but none had a long term devastating effect on the stock market.

Ukraine

If the war in Ukraine hasn’t already affected the stock market, it probably won’t have much effect going forward. Much of the economic impact came in the early stages of the war and most of that was on Europe.

China vs the US

Talk about a war with China seems to come up again and again as a big geopolitical risk. But I wonder what that war would look like. Are we going to sink the Chinese ships carrying our Christmas presents or our Fourth of July bar-b-que grills? Seriously, that’s what a war would likely entail.

Sure, maybe we could have a war that doesn’t interfere with our shopping. Maybe we just have a war between each other’s war ships? But that seems tricky.

Also, would China really want to bash their biggest customer who is becoming increasingly important now that their internal economy is not doing well. Almost instantly that could throw 50 million Chinese workers out of work. What if a war with the US also means losing their next biggest customers as well – Europe and Japan. That would kick another 50 to 100 million workers out of work. Oh, what fun that would be for Chinese leaders!

China vs. Taiwan

Another option for a war with China that is often discussed is for them to invade Taiwan. That might not interfere too much with our Christmas shopping season, but it would hurt Taiwan’s’ massive exports of semiconductors to China. Almost a third of Taiwan’s exports are to China. And about two thirds of those exports are integrated circuits which are critical for their exports to the rest of the world. Total Taiwanese exports to China are $155 billion.

Also, what if Taiwan didn’t want to be invaded by China? What if it decided to develop nuclear weapons? I can imagine few countries in the world more capable of developing nuclear weapons than Taiwan, South Korea and Japan. They likely already have some of the nuclear material they need, and they certainly aren’t lacking in research or industrial skills, and needless to say, they have plenty of cash.

That sure would put China in a bad situation. China may desperately want to invade Taiwan and potentially destroy all the semiconductors they get from Taiwan, but do they really want to risk a nuclear bomb on Shanghai, even if it’s a small nuclear bomb?

I suspect in the end Chinese officials will want to focus more on increasing the money they get from massive corruption than trying to disrupt their export machine and risk a nuclear war.

A Final Issue that Nobody Seems to Want to Talk About

Everybody seems to get upset when I say that military actions are decreasing at a rapid rate, but to me, it seems like they are. During my life I have seen a massive amount of military conflict – Vietnam, Laos, Cambodia, Indonesia, Bangladesh, Sub-Saharan Africa (Congo, Nigeria, Rwanda), Central America, the Middle East, involving millions of deaths and millions more casualties.

My father saw far worse – World War I, the Russian Revolution, Turkish Independence war, World War II, Korean War, the Chinese Revolution, India/Pakistan, Algeria, French Vietnam, almost all of Africa in various wars and much more. Not just millions of deaths, but 10s of millions of deaths.

However, in the last 10 years, the big wars have been restricted primarily to Syria, Ukraine and Africa. For the most part, the rest of the world, particularly Asia and Europe, which have seen truly massive conflicts in the past 50 – 100 years, have been very, very quiet.

We haven’t seen the end of war, but there is no question that it has decreased substantially. That’s partly because the last 100 years were so violent. Still, it’s a big change that shouldn’t be ignored.

I know it seems like there is a lot of conflict in the world – and there is. But it’s nothing like what the world has seen in the past 100 years. I know it has little effect on the stock market, but not everything is about the stock market. I would hope that others would see this huge change as a very positive sign for the future. I certainly do.