Ad Hoc Commentary – economic warfare

Mr Market seldom disappoints. Despite the barrage of good numbers coming from official statisticians, our favorite Dow Jones Industrial gave up all the post-QE3 gains. The Dow closed just below the level it opened on Sep 13, the fateful day when Uncle Ben unveiled QE3.

Alas, monetary policy is impotent for now. The main reason investors and businesses are holding back is politics. Firstly, in the world’s biggest economy, it is the uncertainty of the US presidential elections. The outcome will determine the fate of the now well publicized US fiscal cliff – an issue that we pointed out many months in advance.

Moving on to the second largest and third largest economies of the world, China and Japan, we have the trappings of an economic war. Those who believed that the Diaoyu affair will be short lived should remember that the most enduring intellectual game in the Far East is weiqi (or go). If the Anglo-Saxon chess is about a decisive battle leading to a checkmate, the Chinese-Japanese weiqi (or go) is about a protracted campaign leading to strategic encirclement. Since the global backdrop is that of a sovereign debt crisis, Japan is understandably dealt a weak hand. The new emperors in China likely understand this, and the fragmented politicians in Japan should be mindful of this.

Lastly, in the Middle East, there seems to be an economic war that resulted in the precipitous fall of the Iranian currency, the Rial. Iran, despite its propaganda, can never compete with the United States. But it can definitely exhaust it by creating anarchy in the Middle East – a strategy that it had pursued with Syria in the last few years. The Americans are no doubt hoping that ousting the ayatollahs will magically lead to a more pro-American Iran, and thus Middle East. While possible, that is improbable. Iraq was a case in point. The Americans should remember what happened to the British during the last Arab spring of the 1970s. In all likelihood, a democratic fervor in Iran will lead to a new order in the Middle East. Instead of being more pro-American, the Americans, like the British in the 1970s could very well be replaced.

Good luck in the markets.