It seems as though whatever is going to happen in Syria – if it’s going to
happen, when it happens – will not happen in August. Earlier this week, the
opposite had seemed to be the case: The looming American/allied attack was
expected to take place within days. This delay may be a source of relief, or of
additional concern, that the dithering and blithering Obama administration, with
its pathetic and largely impotent British and French allies, cannot bring itself
to do what it has all but said it will do because, so it believes or would have
us believe, it must do.
The passing of August into September may not
affect how this crisis plays out, but it might help lay to rest some ghosts from
the past. The World War I, about which we can expect to hear a great deal as its
centenary nears, actually broke out in early August, after a six-week, slow-burn
diplomatic crisis (which began with the assassination of Austrian archduke
Ferdinand in Sarajevo on June 28) ran out of the control of the politicians
supposedly managing it. A mere 25 years later, World War II broke out in early
September, after a crisis over Poland dragged on through August and, having
spawned the incredible in the shape of the Nazi-Soviet alliance, delivered the
awful in the shape of the invasion of Poland and the ensuing declarations of war
by Britain and France against Germany.
There is considerable evidence to
suggest, if not conclusively prove, that the statesmen involved did not want,
nor did they expect, war to break out at those points in time – neither in
August 1914, nor in September 1939. Libraries have been written on this topic,
so there is no need to pursue it further here. But a fascinating and
little-known aspect of the run-up to World War I is that the financial markets
failed totally in understanding what was happening and assessing where it was
Many scholars believe that this is, in fact, the default mode
for financial markets: They have zero ability to understand geopolitical
developments or predict their outcome.
Indeed, as markets have become
increasingly dominated by computerized models, which are based on the
assumptions that human activity is a) rational and b) develops in a linear
manner, the chances of financial players that rely on these models to reach any
useful conclusions move toward zero.
One of the most striking analyses of
market failures in this context is that of Prof. Niall Ferguson with regard to
the events of that dramatic summer, 99 years ago. Anyone following world events
in July 1914 through the prism of the financial markets – equity, bonds and
currencies – would have been unaware that anything untoward was under way. The
first inkling that things were not as they should be, Ferguson found, came
around July 21-22, when the diplomatic crisis was well advanced. From that
point, the markets became increasingly alarmed, as might be imagined with mass
mobilizations taking place across the European continent. In August they
collapsed, but that was not the really bad news for investors. Rather, it was
that exchanges closed down completely in the course of August, trapping everyone
invested in them, and did not reopen until December of that year.
course, it is unthinkable that markets would behave that way today, when we and
they are so much more sophisticated. Or is it? Not a day passes without a market
somewhere in the world closing for an hour, or three, or more, because of
“computer glitches.” Recent examples include Shanghai, the mighty Nasdaq and
humble Tel Aviv, so it cannot be said to be a localized problem.
unpalatable truth is that the financial markets are, from a technical point of
view, very vulnerable to crashing, in the sense of becoming dysfunctional under
That is in addition to the now uncontested fact that, from a
fundamental point of view, they have been subverted and their price mechanisms
distorted by the massive and prolonged use of expansionary monetary policy. As
Ferguson showed, they have never been capable of understanding or predicting
geopolitical or military crises. But they have never been more central, both to
the macro-economy and to households’ financial well-being.
background, we enter September-October – historically and statistically the
worst months for markets and the best for crises.www.pinhaslandau.com
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