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August 2014: Risks: Geopolitical and Financial

Download: Coxe Strategy Journal: August 2014

Our core concept for analyzing global risk in our Conference Calls and the Journal has been that 2014 is the year when large-scale, sustained, geopolitical risk reemerges, more than two decades after it went into hibernation.

So why should North American investors worry about wars in far-off places?

Because a major geopolitical shock could have quicker—and greater—impact, by destroying the complacency that has underpinned equities for three years, even as the economy has continued to underperform consensus forecasts.

With the S&P 500 nearing an all-time high, there has been only modest sustained response to the worrisome mix of wars in Ukraine and the Mideast, an over-valued US stock market, a renewed weakening of the Eurozone economy, and the spectacular growth of newfangled derivatives and ETFs, particularly of the High Yield variety.

Is investor complacency the correct response to the current geopolitical crises?

Maybe all intelligence services are behaving more intelligently now, and maybe all government leaders are smarter this time, and maybe nuclear weapons rule out serious wars, and maybe Mr. Putin is satisfied with acquiring merely Crimea, and maybe the Chinese are not seriously annoyed with Japan, and will share the spoils of the South China Sea with their neighbors, and maybe Iran will decide it does not really want nuclear weapons, and maybe ISIS is just a small collection of nutcases, and maybe Hamas will decide it really wants permanent peace with Israel.

If so—and only if so—then the stock market’s current complacency is warranted.

We recommend further modest trimming of equity exposure and discuss a range of risk indicators that have been showing signs that the aging equity bull market may be getting long in the tooth.