Can Bond Markets predict a World War?

Nial Ferguson, a seasoned historian, always tirelessly reminds everyone of every important history lesson that's not well learned. I can still hear him screaming from his book (The War of the World): "When will they ever learn?"

 

 

 "When will they ever learn?" Let me forward this question to the bond market which, in America alone, is currently worth $53 trillion (according to Learnbond.com).

Size matters.

 

 

Government bond traders, needless to say, have feelers for war and peace, in which they have a financial stake. Readers of Mao Dun's Midnight ( 茅盾《子夜》) must recall the Shanghai bond market's crazy ups and downs in response to China's political volatility. Shanghai was---and probably still is---a playground for wheeler-dealers.

 

 

 

What about London and New York? Both markets have never run short of wheeler-dealers, of course. Interestingly, though, it's hard to find a worried bond trader in the early 1910s, as both markets contemplated no outbreak of the First World War even on the eve of August 1, 1914 (the day when Germany declared war on Russia).

It's unlikely that a few big players in the bond market could have conspired to hide bad news from the world. In all likelihood, as attested by the pre-WWI records, London's most powerful financiers, such as the Rothschilds, truly believed that the bond market just needed to iron out some wrinkles. They had no idea that the Great War was already around the corner. Because of their own over-optimistic forecast, they ended up losing almost half of their wealth. 

"Once bitten, twice shy." This idiom, however, didn't apply to European traders.

In 1938, bond values still held up fairly well in the Swiss market, thanks to the unwavering commitment of the United States to the Trans-Atlantic trade. It's business as usual even after the fact that Hitler invaded Poland on September 1, 1939, which touched off the Second World War.

Echoing public sentiment, the bond market regarded the initial 8-month lull on the Western Front as a good bet that WWII was, after all, a phoney world war. WWII was not phoney. The West had simply lulled itself into a false sense of security. That's why the Third Republic of France sank into oblivion while Hitler's troops were parading through the Arc de Triomphe on June 14, 1940.

How come the bond market in the West woke up so late when a world war was about to erupt? Also, how come the leading news outlets of those times turned out to be equally clueless?

With the benefit of hindsight, it's quite clear to us that the two world wars were each preceded by escalating conflicts between and among the great powers. Still, who or what could have turned the bond market into such a Titanic, not once but twice?

I don't profess to know the answer. But I would venture to say the following:

Given all the geological fault lines, it remains difficult, if not impossible, to predict exactly when a super-earthquake will happen --- likewise for a world war, given all the geopolitical fault lines. This being the case, we might want to have our guard up, particularly if the market smells like roses when it's not supposed to.

Be a cat, so as to smell a rat.

Author: renqiulan


(The above images come from Google.)