Cannons, Tariffs, and a World War Trigger Stock Market Crash
“Buy on the sound of cannons, sell on the sound of trumpets.”
The famous motto going back to 1810 is attributed to Nathan Rothschild, of the famed Rothschild banking family. The implication is that wars don’t cause a stock market crash. Rather, wars favor investment.
The quote’s context was a period of great turmoil and wars in Europe. Napoléon Bonaparte was intent on exporting the disruption of the traditional ruling classes resulting from the French Revolution.
Now there are credible rumors that a major war—World War 3—could break out.
The financial repercussions of a war should not be the first concern (there are human lives at stake, after all). But examining how wars affect stock market performance is timely because the world is very close to a major war. In fact, there are many wars on the horizon. They are both military and commercial wars.
If you thought the Dow Jones records of January 2018 meant good times ahead, you would be wrong. And Rothschild’s maxim about wars and market warnings may no longer hold true.
Nathan Rothschild spoke during a period when wars occurred on battlefields. They would also result in the
confiscation of assets, as well as changes in leadership. But the weapons were different. There were no drones, guided missiles, or thermonuclear bombs. Mutually assured destruction (MAD) did not exist as a concept.
An inevitable winner would emerge from the conflict. Thus, bankers could make profits by buying bonds and equity at lower prices, when the threat of war was building. After all, the smart money says to acquire valuable assets when others panic and give them away.
Still, as discussed below, the kind of war that may be approaching risks making all assets valueless. Certain stocks, especially the large-cap stocks, move higher during wars. Yet, typically, they do so when outcomes appear to be favorable, when victory seems imminent. That’s when you get the so-called “war rally.”
The next war leaves no room for winners. We’re all losers in a nuclear conflict. As Albert Einstein said of a prospective World War 3, he did not know how it would be fought, but World War 4 would be fought “with sticks and stones.”
A Stock Market Crash Is Going to Be the Least of Investors’ Worries
President Donald Trump has faced obstacles to his leadership ever since he announced his candidature for office. His election and inauguration have done nothing to ease the tensions. In fact, the pressure has been relentless. Special Prosecutor Robert Mueller has continued to press, digging into the alleged collusion with Russia (Russiagate). But he’s gone beyond.
That may explain why Trump has lost so many “pieces” through firings and resignations alike. The two latest departures, Hope Hicks (former White House communications director) and economic adviser Gary Cohn, may be the proverbial straws that break the camel’s back.
Rumors are that Secretary of State Rex Tillerson is next because the Saudis and Emiratis think he’s too partial to Qatar. (Source: “UAE linked to efforts to get Donald Trump to fire Rex Tillerson over Qatar support, reveal emails,” Independent, March 6, 2018.)
Tillerson is guilty of having expressed the opinion that the Saudi-UAE-Qatar dispute is bad for the United States. Yet, in a sense, he has inadvertently hinted what many fear, that the U.S. has become another emirate subjugated to, rather than dominant over, the Gulf princes.
Trump now has his back against the wall and he’s dangerous. The President of the United States is ready to overturn decades of economic strategies. He wants the U.S. to navigate the global economy “upstream,” introducing policies that appear prehistoric: tariffs and trade barriers. Trump is reviving the trade wars of yesteryear—and as a refresher, most recorded wars started out over trade issues.
Trump Pushed into a Nuclear Corner
Trump needs a distraction. Most of all, he needs to identify a clear enemy to deflect attention away from Mueller—and from the tensions driving his cabinet members away from the White House. Thus, after playing the role of the savior of American business with the tax reform, Trump will now play “protector of American workers and national security.” (Source: “Trump says US will impose steel and aluminum tariffs,” CNN, March 8, 2018.)
The White House is sending a clear message: trade barriers are a matter of national security. It used Section 232 of the Trade Expansion Act of 1962—that is, the pinnacle of the Cold War—which refers specifically to national security. By combining the two concepts, the president has defined commerce with the terminology of war.
America, after decades of free-trade policies, will launch a new protectionist offensive. Steel and aluminum tariffs are the first salvos of a war on foreign imports. And duties of 25% on steel (and 10% for aluminum because the U.S. imports most of its aluminum from Canada) is nothing short of a war.
Doubling down on the defense and security aspects of his tariffs, Trump explained that many weapons systems, from planes to warships, need steel and aluminum. The logic flows. America should not find itself in a situation where the manufacturing of its military hardware is dependent on imported raw materials. The president might want to consider titanium as well. It’s crucial to modern jet fighters and jet engines. Of course, China and Russia have the world’s biggest titanium resources.
The context in which Trump has launched his trade war should cause investors to panic. The U.S. Director of National Intelligence, Dan Coats, warned Congress that the risk of war has not been so dire since the end of the Cold War. (Source: “U.S. Intel Chief Dan Coats Says Risk of Global Conflict Is Highest Since Cold War,” KTLA, February 13, 2018.)
Coats is not talking about the kind of war that leaves prisoners or investors alive.
It’s not just Russia he’s worried about. China, Iran, and North Korea have developed their military capacity to the point of being able to cause a significant problem for the United States.
Coats fears that Russia and the new and emerging military powers (which happen to be allies to Russia) could become more aggressive and disrupt the current equilibrium. The result could be nothing less than a nuclear conflict. Coats is also worried by the gradual disintegration of the European Union and this phenomenon—highlighted by the March 4 Italian elections—is suggesting that common security, immigration, and military issues are being ignored in favor of pettier concerns.
Of course, as fashion in Washington dictates, Coats argued that Russia is interfering in elections in the United States as well as in Europe, weakening the West, as it were. Coats made a not-so-veiled reference to the German elections but also to the 2018 U.S. congressional vote.
But in repeating and doubling down on the mantra that Russia interfered to get Trump elected, Coats is putting more pressure on him. Coats has pushed Trump into a corner from where the president sees no choice but to distract the establishment and voters with nationalist tactics, including beating the drums of military and trade wars.
The trade wars are a mere appetizer. To distract the public and the media from Mueller’s investigations—to say the facts or veracity of Russiagate never mattered—Trump has an ideal target. Trump will do what Barack Obama did not, exploiting the media’s propaganda over the Syrian regime’s struggle to end the rebellion in the Damascus suburb of Ghouta.
Yes, Trump will probably do what he accused Hillary Clinton of planning to do: attack Syria and drag the U.S. into another Middle Eastern regime-change exercise. Are there any suggestions that Trump can succeed where George “Dubya”’ Bush and Obama failed? Of course not. The war that Trump plans is based on “mass distraction,” not weapons of mass destruction.
Trump may be considering launching military action against Bashar al-Assad’s government. The excuse will likely be the use of chemical weapons. (Source: “After reports of chemical attacks, White House considers new military action against Syrian regime,” The Washington Post, March 5, 2018.)
Disaster Warning Ahead
Unfortunately, facts stopped mattering long ago. Trump’s war in Syria, should he fire the first shots, will have no relevance to facts or a clear strategy. The Pentagon may object to a war in Syria, understanding that it would imply a war against Russia. President Vladimir Putin, perhaps sensing the direction of the wind in Washington, made it clear that an attack on Russia’s allies (i.e. Syria) is an attack on Russia itself. (Source: “Russia Warns U.S. Not to ‘Play With Fire’ in Syrian Conflict,” Bloomberg, February 19, 2018.)
Trump may wish to consult Bush Jr. to find out how Iraq worked out for him. Indeed, why stop there? He should ask how the entire concept of shifting the bulk of the U.S. military to fight a war against an abstract tactic—the war on terrorism, as it were—worked out for him.
Trump may also consult the Nobel Peace Prize-winning Obama over how Libya and the “Arab Spring” worked out for him. In truth, it was President Nicolas Sarkozy of France who led the charge. But Washington and London followed the “French Legion” enthusiastically. The results speak for themselves: a country decimated physically, politically, and socially.
Terrorism, despite wars on it, continues while hundreds of thousands of refugees have destabilized North Africa as well as southern Europe, as the Italian elections have shown. Trump appears ready to swallow the bitter pill. He has been pushed into a corner and finds himself forced to justify what Obama and Hillary Clinton did, advising the Turks and Gulf Arabs to overthrow the secular government of Bashar al-Assad, none other than Hezbollah and Iran’s historic partner.
Don’t expect a stock market war rally; expect a total disaster.