I rarely discuss political risks, but these are becoming increasingly central to the investment markets. It is difficult to discuss war in relation to finance, because such discussions often appear terribly cold to the human tragedy of it. With the understanding that politics is never a subject that evokes agreement, here are my thoughts.

On a historical basis, war has not been particularly bad for the markets, because early uncertainty has been followed either by a certain numbness or by resolution. In both cases, risk premiums have initially spiked higher, followed by a decline. Prices move opposite to risk premiums, of course, leading to the characteristic sharp selloff and prolonged recovery related to war.

With regard to current risks, however, I don’t think we can be so neutral about them. A military action in Iraq is likely to lead to much wider ramifications than the Gulf War. If the greatest fear of our enemies is that the U.S. is willing to use its power to threaten or prevent their sovereignty, what stronger way to validate these fears than to overthrow one of their governments? As a result, a military action in Iraq carries with it a much greater risk of retaliation in the form of renewed terrorist attempts. This would most probably drive risk premiums to high and fairly sustained levels, with economic effects on profits further depressing equity values.

The human risks to a war in Iraq are of far greater concern. Many of the “hawks” favoring war seem to have little combat experience, and are relying on a cakewalk to Baghdad – convinced that the U.S. made an error by failing to “finish the job” in the Gulf war. One wonders whether they recall that Eisenhower chose not to “finish the job” by making a northern push to Berlin in World War II. The Russians pushed ahead, and lost roughly 400,000 soldiers doing so – more than the U.S. lost in the entirety of World War II. The Iraqi army is certainly not the German army, but war, if it comes, will not be confined to the desert as it was during the Gulf War. The U.S. would certainly minimize casualties by destroying as much as possible from the air before land troops were deployed. But I doubt that the total number of casualties on both sides would be reduced by such destruction. Though we are Americans first, every life lost in war is a tragedy.

It strikes me that the U.S. has lost much of the international support and sympathy that it enjoyed last year, largely because of a White House foreign policy team that seems intent on escalation of conflicts to the exclusion of diplomatic alternatives. That’s unfortunate, because already the White House’s unfathomable doctrine of “preventive war” has provoked a destabilization of nuclear risks in North Korea. To a great extent, our enemies hate us not because of our freedoms, but because they believe that we are willing to deny them the same freedoms that we defend for ourselves. If our enemies understood America from the standpoint of its principles, its ideals, and its people, they would see these fears as unreasonable. But such fears can certainly be fanned by the foreign policy of a particular Administration, and this one is doing a good job of it.

The heightened nuclear tension in North Korea is a predictable response from a country identified as the third vertex of an “axis of evil,” in the face of a planned military overthrow of one of the other vertices. What country, so identified, would not move to defend itself in the face of a potential invasion of Iraq? Understanding this, the best answer from the White House would be some gesture to assure that the U.S. does not intend a preemptive attack on North Korea as well. The resolution of any dispute requires one to ask “To what is each side entitled?” – and North Korea has asked for a nonaggression pact. Even if our response falls short of such formality, there are certainly some gestures that the U.S. can make along those lines to de-escalate the threat there.

All peace is based on a willingness – however distasteful – to understand one’s enemy. Hate and evil typically have their origins in fear, ignorance, suffering, and perceptions of injustice. It is always possible to make gestures that address these without compromising one’s own security or justice.

Is the group of hawks in the White House wise enough to understand its enemies? Maybe not. U.S. foreign policy is increasingly based on the notion that enemies should be eliminated. But if our enemies believe the same thing, the equilibrium cannot be peace without devastating losses first. Escalation is a long road, and the end of that road may not be peace after all. As Zen master Thich Nhat Hanh says, there is no way to peace – peace is the way. Understanding our enemies requires us to contemplate their fears, ignorance, suffering, and perceptions of injustice – however distasteful that is to imagine. Understanding does not prevent us from defending ourselves, or from seeking justice, but it informs a multitude of decisions and actions that can help, and as a result, that can stabilize our world.

As we enter a new year, there seem to be no fewer risks than in the year that is ending. But always, we can be full of hope.

I want to thank you for the opportunity to come into your computer monitor every week to analyze, discuss, teach, rant, and occasionally make no sense at all. (Those of you who have flat panels are also forcing me to buff up, so thanks for that too). As always, I appreciate your business, and I hope that I have served you well. But most of all, I am thankful for your trust.

Wishing you health and happiness in the New Year. – John