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The Gathering Clouds of War

by on March 30, 2014 7:00 AM

Russian President Vladimir Putin has moved troops into the Crimea area of Ukraine and has officially annexed that area to Russia.

Not many years ago Russia agreed by treaty to respect the sovereignty of all of Ukraine.

Russia however has always wanted and needed a warm water port and Sevastopol in the Crimea fits the bill. The real concern is whether Russia's ambitions are fulfilled or are only encouraged by their supposed success.

The civil war continues to boil over in Syria. More than 100,000 people have been killed with almost no news coverage, and with lots of outside fighters taking positions for and against the sitting government. Importantly this is a testing ground for the Russian -- and Iranian -- backed Shia Muslims versus the United States -- and Saudi Arabia-backed Sunni Muslims.

Casualties are rising in Afghanistan. Iraq is seeing more violence and bombings are becoming more common. North Korea is rattling its sabers occasionally, continuing to mistreat its people and threaten its neighbors. China has become more aggressive with regard to neighboring territories, especially those historically claimed by Japan.

Venezuela is in upheaval as its economy fails to provide basic everyday commodities and inflation destroys the economics of a country otherwise rich in resources. More than a year has passed since the American ambassador to Libya was murdered by terrorists and no one has been brought to justice.

There was no status of forces agreement (SOFA, an agreement between a host country and a foreign nation stationing military forces in that country) in Iraq at the end of that conflict, allowing Iran to freely overfly Iraq and supply terrorists with weapons and supplies in Syria.

The status of forces agreement in Afghanistan is not complete, potentially leaving that area prone to relapse into tribal warfare. I worry that any of these developments could lead to wider armed conflicts and increased acts of terrorism.

On the home front, two developments appear to be leading us in the wrong direction yet again. Despite continuing cutbacks in the Defense Department's budget, defense stocks are soaring to new heights.

What do the investment markets understand that Main Street doesn't? The current administration continues to reduce American forces, now scheduled to be reduced to the smallest level since just before World War II. We make no political distinctions about those whose goal it is to destabilize the Western world through acts of terrorism.

Terrorists, those with evil intent and actions who promote death and destruction, are either ignored or excuses are made for them. I recall President Reagan during his administration citing the "global campaign for freedom" which eventually led to the fall of the Iron Curtain and the introduction of free market capitalism and democracy in many formerly Communist countries. The axis of good in those days included Pope John Paul, Margaret Thatcher and Ronald Reagan. The world changed under their leadership.

It seems to me that the world is falling back into isolation, fear, and feuding. We don't have the enlightened leaders, here or abroad, who can make the world a safer place for everyone.

All of the above developments have consequences for investors and the investment markets. The notion of risk-on or risk-off markets signals whether investors are willing to fund new companies and technologies or are retreating to the safety of bonds and precious metals.

Certainly more conflicts could lead to risk-off investing, especially if we lack credible leadership showing the way to a better future with expanded possibilities.

Perhaps all of this is just part of the ebb and flow of human behavior worldwide. I hope so. I would not want my grandchildren to have to live through another period of dark ages and would prefer that they live in a world of development and enlightenment.

I do know that things are changing rapidly and that technological developments are changing what it is to be human. While we have lots of short term problems, the very long term looks potentially wonderful.

Now, if we can just get over this rough patch without more armed conflict.

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Dan Nestlerode is the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. A graduate of Penn State University, Nestlerode has been an investment advisor since 1965. He can be reached at danielj@nestlerode.com.
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