When War Is a Win-Win Scenario

 | Apr 12, 2017 | 3:00 PM EDT
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A theme I've addressed regularly over the past several years is that the decision to wage war pivots on the perceived economic benefits of doing so. That's not a unilateral decision, though, although it used to be. Prior to the post WW2 creation of the numerous multinational organizations that exist today, it was easier for war to be pursued or declared by a single party and forced upon another party.

Organizations like the UN, IMF, NATO and others, were designed to raise the cost of waging war, thereby reducing the economic benefits of doing so and encouraging other means of resolving disputes and seeking economic growth. 

The result has not been that warring is no longer done, obviously. It has, however, profoundly changed the decision-making process in two ways. 

First, wars are now not just economic in nature, but essentially exclusively about economics. 

Second, warring is now not the result of the failure of other diplomatic means, but the extension of them. The waging of war now requires, at least, two parties to agree to do so, with both expecting an economic benefit in doing so. Wars are negotiated, pragmatic economic events. They are not aggressor and defender. 

The reason I bring this up here is that political and economic instability in North Korea is steadily changing the predominant referencing orientation within the media about the relationship between the US, China, and Russia, back to that which existed when the stalemate / armistice of 1953 ceased active warring between North and South Korea.  

This is profoundly wrongheaded. 

The economic situation each country is experiencing, both domestically and internationally, is different today than it was then. 

With each passing day though, the markets price the potential for war involving these three countries based on the news of the day. 

Today, the dominant media meme is that China wants to take a more active role in facilitating a diplomatic resolution to the tensions concerning North Korea, and the result is a uniform decline in the prices of all of the largest U.S. government contractors -- Boeing (BA) , Lockheed Martin  (LMT) , General Dynamics  (GD) , Raytheon  (RTN)  and Northrop Grumman  (NOC) .  

There is nothing wrong with pursuing diplomatic resolutions. Doing so is required by the post-WW2 organizations referenced earlier.  

As that is being pursued, it is important to be cognizant of the economic situation each country is experiencing. 

One of Trump's principal foreign policy themes has been that the U.S. can and will no longer supply the financial support it has provided the rest of the world since the end of WW2. 

China is facing the middle income trap, which I last addressed in the January column, "China Needs U.S. More Than U.S. Needs China." 

Russia is facing the prospect of long-term, and perhaps permanent, restructuring of its economic viability because of the ability of alternative U.S. oil producers to operate at much-lower oil prices than was believed to be possible just a few years ago. I discussed this issue last August in the column, "If Oil Prices Don't Rise, the Middle East Will Sink." 

Although there are many other nuanced factors that need to be taken into account, it is imperative to consider the financial and economic incentives these three countries have to engage in war.  

When war is perceived to be a win-win economic situation for all parties, the prospect of it occurring increases dramatically. 

That's where the world is today -- and should be the reference for investors to consider in taking positions in the contractors.


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