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Will War Be the Second Derivative of the Financial Crisis?

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Economic hardship and religious differences abound.

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We've witnessed a surreal sequence of events the last few years that shifted the course world history. A financial crisis emerged; it migrated to the global economy and subsequently consumed the social sphere. The virus, once believed to be contained to subprime mortgages, went airborne and it infected the planet.

A disturbing dynamic has crystallized in my minds-eye, which is consistent with the Five-Step Guide to Contagion that was penned in February 2010.

In that missive, written long before European Disunion became front-page news or austerity measures emerged in our lexicon, I offered there were five stages to the grieving process -- denial, anger, bargaining, sadness, and acceptance -- that translated to our financial fortunes.

On the topic of sadness, I offered:

"We can talk about how the capital market construct forever changed, how our constitutional rights have been challenged, or how the lifestyles of the rich conflict with the struggle to exist. While those dynamics remain in play, they miss an entirely more relevant point for purposes of this discussion. (See The Declaration of Interdependence.)

Social mood and risk appetites shape financial markets. One of the greatest misperceptions of all time was that The Crash caused The Great Depression when in reality, The Great Depression actually caused The Crash.

It's been a full year since Minyanville fingered Eastern Europe as a modern day incarnation of a sub-prime borrower. The question is therefore begged: what if Greece is Fannie Mae, Portugal is Freddie Mac, Spain is AIG, Argentina is Wachovia Bank, and Ireland is Lehman Brothers? (Also read Eastern Europe, Subprime Borrower.)

Contagion, by definition, arrives in phases and we must remember that Greece is a symptom of the problem, not the problem itself. Regardless of what IMF or Euro Zone "cross border solution" we see, it'll simply buy time, much like the bearded nationalization of Fannie and Freddie pushed risk out on the time continuum.

Given the trending direction of social mood and the discounting mechanism that is the market, the perception that defines our financial reality must remain front and center in the mainstream mindset."


The Power Play

As I synthesized my thoughts over the holiday weekend, I began to extrapolate the Middle East as the second derivative of our financial contagion. Remember, long before TARP was introduced as a perceived solution, we spoke of two possible paths coming out of the crisis.

The first was the medicine of debt destruction or reorganization that would require painful deflation in the near-term but put us on a path towards sustainable outside-in globalization. The second was more drugs that masked the symptoms -- synthetic inflation -- which pushes pain to future generations and manifests through the tricky trifecta of societal acrimony (think BP (BP) and Goldman Sachs (GS), social unrest (riots) and geopolitical strife). (See: Will QE2 Trigger War Games?)

At first glance, a few isolated incidents in Northern Africa or the Middle East might seem like a reach to connect unrelated dots for purposes of crafting a column. Taking a step to the left provides a slightly different perspective -- that current events are the unintended consequences of policy directives pushed through the system, and entirely consistent with the second scenario above.

Not many people paid attention when Tunisia ousted their president last month, although the world took notice when Egyptian President Hosni Mubarak was run out of town. Now, hundreds are dead in Libya -- which happens to hold the largest oil reserves in Africa -- after a crackdown on anti-government protests, while Libyan leader Muammar Qaddafi refuses to leave and his son promises "rivers of blood."

I'm all for cleansing the system and ending oppression; there are evil people in this world who rule with an iron first, and the digital age has given a voice to millions of people who were previously silenced. This isn't an ideological discussion as much as a practical and progressive one. While we have our own issues closer to home, what's happening on the other side of the world has profound implications.

Geopolitical conflicts are born from religious differences and economic hardships so perhaps this is an unavoidable, albeit unfortunate, reality. Still, I can't help wonder if -- consistent with the Five-Step Guide offered above -- Tunisia was Fannie Mae, Egypt was Freddie Mac, Libya is AIG (AIG), Bahrain is Wachovia Bank, Yemen is Washington Mutual, and either Iran or perhaps more likely Saudi Arabia is Lehman Brothers.

I've never claimed to be a geopolitical strategist but I strongly believe that technology in general and the Internet in particular, aside from being the most deflationary invention of all-time, has quickened everything from business cycles to mating rituals (think about it -- Facebook has become the de-facto "first date.").

I'm also a firm believer in "what goes around, comes around," and while I'm hopeful for a peaceful reconciliation to the percolating geopolitical problems, we are in the business of risk management, and nestled within the forward probability spectrum is the potential for a leadership vacuum -- and an attendant power grab -- that could forever change the new world order.

See it, even if you choose not to believe it.

R.P.


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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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