Tuesday, July 27, 2010

The “surprise” reflation trade?

A couple of weeks ago I wrote that war might be the surprise way for the US to dig itself out of a debt hole. After all, investors tend to care less about mundane things like debt service ratios when the shooting starts – and who knows what kinds of assets the winner may gain in a war?

The hawks circle
Avner Mandelman, who has been warning about the possibility of war, wrote on the weekend about the beat of war drums:

[L]ast month the U.S., British and French navies held an unprecedented joint exercise in the Mediterranean, and right after, the U.S. aircraft carrier Truman and its 10 accompanying battleships crossed the Suez Canal to join the two other U.S. carrier groups already in the Gulf. Even more interesting, two weeks later an air caravan of American and Israeli cargo planes landed in Azerbaijan, downloading "equipment," which caused the Iranians to protest loudly and go on war alert.

Such force concentration near the oil fields doesn't mean a conflagration is imminent, but it does mean the risk of one has gone up, with possible investment implications.
Michael Hayden, former director of the CIA, believes that the march to war with Iran is “inexorable”. Consider these two interpretations on his interview with CNN’s State of the Union. The first is from the viewpoint of the hawks from DEBKA and the second from the doves at the Fabius Maximus blog.

A bullish fat-tailed event
For investors, war would be the ultimate reflation trade that would make the bears really run for the hills. This is a possible fat-tailed event that we need to keep an eye on. While coverage is not easily found in the mainstream press, it is possible to find sources such as DEBKA, which is good source of information (or disinformation, depending on how you view things).

Don't just react to newsflow, analyze
Readers should be warned that DEBKA has a Likud Israel-is-under-continual-siege mentality and is prone to exaggeration as it has falsely pounded the war drums before. For example, this recent story about the deployment of a third US carrier opposite Iran sounds alarming. Upon closer examination, the third carrier turns out to be the USS Nassau, which is an amphibious assault ship carrying marines rather than a large Nimitz class carrier such as the USS Dwight D. Eisenhower or USS Harry S. Truman, which are reportedly deployed in the theatre.

Please be reminded that the United States has heavy troop presence in Iraq and Afghanistan and it would not be overly unusual to have one or two large Nimitz class carriers in the region.

Investors should be prepared for the possibility of war, but analyze the situation carefully before jumping to conclusions.


Unknown said...

In my humble opinion, DEBKA is to serious geo-political analysis as CLUSTERSTOCK is to serious financial market analysis.

Cam Hui, CFA said...

But sometimes even Clusterstock has interesting insights. Certainly it's a source for chatter that shouldn't be ignored, at least as a gauge of sentiment.