Markets underestimate 1914 risks.
Commentary
In the summer of 1914, none of the great powers realized that they were sleepwalking toward disaster. A singular regional event—the assassination of the Archduke Franz Ferdinand of Austria by a radicalized Serbian nationalist—would prove to be the proverbial spark that set the whole European house aflame through a daisy chain of national actions and reactions. Each country took steps in its own perceived self-interest that it thought were rational, reasonable, and proportionate. Armies were mobilized, treaties were honored. Within a year, the continent was engulfed in an armed conflict then unseen in the history of man. The long Great War and the resulting devastation of Europe was inconceivable to Europe’s leaders, as none understood the interconnectedness of their actions with those of others, nor did they appreciate the implications of the technical advances of the age.
We are in a similar moment of great risk. Hamas’s surprise terrorist attack on Israel brings the expectation of a certain and devastating response. Whether proportional or not, such a response will inevitably invite further reprisals and the potential widening of the war to involve not only regional players such as Lebanon and Syria but also the great powers aligned with them, whether the United States, Iran, or others. We are quickly ratcheting up the escalation ladder and are in grave danger.
Iran, long seeking as a matter of official policy the complete annihilation of the “Zionist entity”—i.e., the state of Israel—has acted to destabilize the normalization of diplomatic and commercial relationships between Israel and its more moderate Muslim neighbors, including the United Arab Emirates, Bahrain, Egypt, and Saudi Arabia. Iran has been the primary financial and logistical sponsor of Hamas and Hezbollah. With the Biden administration’s relaxing of Trump-era U.S. sanctions on oil exports, the radical Islamicist government in Iran is now flush with cash and armaments, and is posturing for war. Specifically, Iran has threatened to intervene should Israeli military forces enter Gaza, a step which now seems inevitable.
The Syrian army has mobilized following Israel’s bombardment of airports in Damascus and Allepo. Rockets have crossed into Israeli territory from both Lebanon and Syria. Qatar has refused to eject Hamas leadership and welcomed the Iranian foreign minister to meet with them there. The United States is moving not just one but two carrier strike groups into the Eastern Mediterranean. Even if this is just posturing, the probabilities of a conflict event with U.S. forces—whether accidental or intentional—has increased meaningfully.
The markets are ignoring all of this. In the week following the terrorist attacks on Israel, the stock and bond markets essentially shrugged their shoulders. Traditional risk-off assets such as gold and commodities moved up, but not substantially. The U.S. dollar was flat, and Bitcoin fell. Even oil, perhaps the global commodity most at risk, failed to regain the highs seen only a few weeks before.
The markets seem to be signaling that this will all blow over, that cooler heads will prevail, that perhaps China will intervene diplomatically as it has successfully done recently in the region. In other words, the markets are pricing for a best-case, “soft landing” scenario. This is a fantasy.
Now is not the time to ignore the warning signs. While events may not develop as severely or as rapidly as they did in 1914, the situation is unlikely to end quickly or easily. The odds are that this conflict expands, and that the world is thrown further into turmoil.
There appear to be very few investment safe havens in this environment. Cash is certainly one, with short-term Treasurys now yielding above 5 percent. The United States is now committed to support both Ukraine and Israel, in addition to replenishing its own recently depleted armaments inventories. While I hate to say it, defense industry stocks, up as much as 10 percent this week, should also continue to do well. And, if indeed the conflict widens, oil will inevitably run.
Whatever one’s religious or political views, we should all heed the words of the psalmist and pray for the peace of Jerusalem.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
In what ways can the United States and other major powers play a constructive role in resolving the conflict between Israel and Hamas, without risking a wider and more catastrophic war
Stern Mediterranean, a clear show of force in support of Israel. These are just some of the actions and reactions taking place in the wake of Hamas’s attack on Israel, and each step further escalates the risk of a wider, more devastating conflict.
The parallels between the events leading up to World War I and the current situation in the Middle East are striking. Just as the great powers of Europe sleepwalked into war in 1914, oblivious to the consequences of their actions, so too are we witnessing a dangerous lack of awareness today. Each country involved in the current crisis perceives its actions as rational and proportionate, just as the European powers did a century ago. But the chain of events triggered by the assassination of Archduke Franz Ferdinand quickly spiraled out of control, leading to unimaginable devastation. We must not allow history to repeat itself.
At the heart of the current crisis is Iran’s long-standing desire to see the destruction of Israel. Iran has actively worked to undermine the emerging peace and normalization in the region, supporting groups like Hamas and Hezbollah. With the lifting of certain U.S. sanctions, Iran now has the financial means to further escalate tensions and act on its threats. This poses a significant risk to the stability of the region and the safety of Israel.
While Iran plays a central role, other players are also contributing to the escalation. Syria has mobilized its forces in response to Israeli airstrikes, and rockets have been fired into Israeli territory from both Lebanon and Syria. Qatar, a key regional player, has openly hosted Iranian officials and refused to distance itself from Hamas. Even the United States is getting involved, demonstrating its support for Israel by deploying significant military assets to the region.
The danger we face is not limited to regional conflict. The interconnectivity of global politics means that any escalation in the Middle East has the potential to draw in major powers like the United States and Iran. With each step up the escalation ladder, the risk of a wider, more devastating war increases. The consequences could be catastrophic, not just for the countries directly involved, but for the entire world.
We must learn from history. We cannot
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