Monday, July 17, 2006

Geopolitics and Investment Markets

This is going to be a busy week, PPI tomorrow, CPI and Bernanke testimony on Wednesday. I think we’ll know whether the Fed is going to move again by the end of Wednesday.

The current crisis in the Middle East has not resulted in any kind of flight-to-quality bid for U.S. Treasuries, surprising some commentators. The stock market has been sharply lower since the flare-up in hostilities. I thought it would be interesting to look at what happened to the markets during the 6-day War in 1967, the last time open warfare was waged between Israel and various Arab nations.

While the stock market was very volatile during this crisis, bond yields moved steadily higher. Looking solely at events surrounding the war, we see that two of the major escalation events leading up to the war resulted in sharp sell-offs in the stock market. On the other hand, the stock market moved steadily higher during the actual war, possibly due to relief that the super powers stayed out of the conflict. I’d love to hear from anyone who was in the business at the time who can shed light on what the market was like during this conflict.

For the curious, here is a similar chart on the Cuban Missile Crisis. I’m shocked that the very real potential for open war between the U.S. and the U.S.S.R. caused so little market reaction.

3 comments:

Rederin said...

To be honest I'm surprised treasuries didn't do worse. In most disaster scenarios, people rush to the safety of treasuries but if a nuclear war broke out, there would be a real possibility of a treasury default. I bet gold prices spiked. Anything that would do well in a barter economy should have performed well during that period. You know, those morons who pedal gold on TV should consider talking about it's value in a barter economy just in case civilization collapses in the near future.

Tom G. said...

I can't bring up anything on gold or oil through Bloomberg, although I know the data exists.

I once was talking to a stock broker who had a couple pro atheletes as clients. One major league baseball player had over $1 million in gold under the theory that if the government collapsed, he'd still be rich. Don't know if he had in buried in his back yard or not.

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