If you thought 2014 brought shocking surprises from overseas — such as the horrors of ISIS, the land grabs by Russia, or the cyber-attacks by North Korea — you’d better brace yourself for major new wars that could explode in 2015.
Investors have heard plenty about the conflicts raging in Eastern Europe and the Middle East; and those are bound to continue.
But most are ignoring — or underestimating — two others that are already raging and could also have a big impact on their investments …
Civil War #1. Pakistan!
Ever since 9/11, while the U.S. and its allies have lost countless lives and expended immeasurable treasure in Afghanistan and Iraq, a far larger and potentially more dangerous country in the region — Pakistan — has been steadily sinking into the abyss of failed statehood.
Just compare the three countries side by side …
First, Pakistan is one of the most populated countries in the world, with 185 million people — more than Russia or Japan.
In contrast, Iraq and Afghanistan have just 35 million and 31 million, respectively.
Second, Pakistan is the fourth largest nuclear power in the world — with an estimated 100 to 120 nuclear warheads. That’s ten times more than North Korea, and also more than those of India or Israel.
|Pakistan is the fourth largest nuclear power in the world.|
In contrast, neither Afghanistan nor Iraq is a nuclear power and most probably won’t be in my lifetime — or even my grandchildren’s lifetime.
Third, ever since its first day as a sovereign nation in 1947, Pakistan has been at war — or on the brink of war — with the one country that’s now the only other nuclear power in South Asia: India.
In fact, Pakistan and India have fought three declared wars, one undeclared war, several major battles that have bordered on all-out war, plus countless lesser skirmishes.
Just this past week, in the disputed Kashmir province, Pakistani Rangers opened fire at several Indian Border Security Force posts along the international border, which prompted retaliation from the Indian troops, and in turn, a threatening advance by the Pakistani army toward the area.
Meanwhile, neither Afghanistan nor Iraq are fighting — or are likely to fight — wars with neighboring countries. They’re far too preoccupied with civil conflicts.
Fourth, civil war in Pakistan is ramping up on a massive scale.
|The Tehrik-i-Taliban is an alliance of militant groups to unify groups fighting against the Pakistani military.|
Last month’s massacre of 132 schoolchildren in Peshawar by the Tehrik-i-Taliban Pakistan was horrific.
But it wasn’t their first. In 2013, they were linked to the killing of 124 Christians, also in Peshawar.
Three years earlier, their operatives massacred 86 minority-religion worshippers during Friday prayers at mosques in nearby Lahore.
And soon thereafter, it was an American citizen trained by this very same organization that attempted to bomb Times Square in New York.
The recent Peshawar school massacre was so shocking, however, it finally seems to have galvanized Pakistan’s people and government to fight back more forcefully.
But if recent history is any guide, there are only three possible outcomes from this new trend: Their will to fight will wane as the terrible memories fade. Or each side will retaliate even more forcefully until most of the nation plunges into a three-way civil war — not only the Taliban against civil society, but also Muslims against Christians and Sunnis against Shiites. Or both.
How does Pakistan’s civil strife compare to that of Iraq and Afghanistan? It’s the one aspect that the three countries have in common.
The key difference is this: In Iraq and Afghanistan, it’s already in an advanced stage, and their governments are fully engaged in coping as best they can. But in Pakistan, the civil war is just beginning to ramp up.
Worse, much of Pakistan’s civil strife has been virtually legalized! It’s based on strict laws against “blasphemy” used by Muslims to attack minorities with impunity. And it’s spreading across the nation, with most opponents to those laws routinely persecuted or assassinated.
Bottom line: In Iraq and Afghanistan, the troubles are a known quantity to global investors and bankers, who have already written off those countries long ago. In Pakistan, it is not. As Pakistan fails, global investors will pull out en masse, and those funds will seek safer havens, including the highest quality U.S. equities they can lay their hands on.
Civil War #2: Nigeria!
Africa, like South America and Australia, can rarely compete for the attention of North-of-the-Equator media, typically devoted to the so-called “more important” parts of the world.
Yet Africa is the home of 1.1 billion, exceeding the population of all of the Americas (North, Central and South) by 138 million … and surpassing the population of all European countries by 368 million.
That means all residents of the United States — PLUS all the people in Europe — are now outnumbered by those living in Africa.
In area, Africa is the second largest continent on the planet, twice as large as South America.
Moreover, it’s the fastest growing continent — demographically AND economically.
|Nigeria produces more oil than Qatar, Algeria or even Norway and the U.K.|
So when the one country on the continent with the largest population and the most oil resources — Nigeria — suddenly sinks into deep trouble, you’d think Wall Street would pay more attention.
Not so. Unless oil supplies are threatened — or hundreds of schoolgirls are kidnapped, raped and sold off as slaves — very few investors ever talk about it.
Because Nigeria produces more oil than Qatar, Algeria or even Norway and the U.K.
It has more proven oil reserves than Kazakhstan, China, Mexico or even the United States (excluding new shale oil discoveries).
Heck. When Greece goes into a tailspin, the news hits the headlines almost instantly. But Nigeria’s GDP is larger than Greece’s — and far larger than Ireland’s, Ukraine’s or Iraq’s.
The big problem: It’s moving rapidly on much the same turbulent path as Pakistan — toward the status of a failed state.
Consider its domestic energy, for example. Even though it’s a huge oil producer, its electric power generation per-capita is only a tiny fraction of what other counties in Africa have achieved. Even Libya, also a failed state, generates at least 30 times more!
Mostly thanks to oil, the country has had a cumulative trade surplus of $298 billion since 1970. But nearly all of that money has sunk into the black hole of waste, corruption, and lavish living by a small elite.
|Nigeria’s central government has not been able to counter the insurgency.|
Meanwhile, Boko Haram, the Muslim terrorist group — now operating in the northeast, north-central and central states of the country — is growing rapidly. Since 2009, the group has abducted more than 500 women and children, killed over 5,000 civilians and forced the displacement of at least 650,000.
But the central government, despite a state of emergency declared three years ago, has been almost entirely ineffective in countering the insurgency — again because of official corruption, and, worse, a spate of war crimes by its own soldiers.
Nor has the government been able to address the tremendous discontent that has been endemic in nearly all regions, especially in the oil-rich Niger Delta — a conflict that dates back to the early 1990s between foreign oil corporations and the Delta’s disadvantaged minorities.
What happens now with Nigeria’s oil revenues suddenly cut almost in half? And what happens as the world’s powers, distracted by widening conflicts in Europe and the Middle East, devote even fewer resources to Africa?
The most likely scenario: A widening civil war, a coup d’état, major disruptions in oil production and, again, massive flights of global capital from Nigeria and from Africa as a whole.
How Do These New Civil Wars Affect Investors?
In the long term, any conflict is worrisome: If civil wars pour across national borders … if national wars engulf an entire region … and if regional wars become interlinked with the ever wider East-West divide … this entire conversation will change dramatically.
|Global conflicts create wave after wave of anxious buying.|
But that has not happened yet and probably won’t for some time.
Instead, for the foreseeable future, these conflicts are ramping up locally, not globally. That means, the primary impact on U.S. investors is precisely the reverse of what you’d normally expect.
Instead of threatening the most stable and prosperous economies of the world, they drive more money TO those economies.
Instead of causing panic selling, they create wave after wave of anxious buying.
And instead of a signal to investors to cower in the sidelines, they can be used as opportunities for investors to seek out investments that are benefiting from the global flight to safety.
Those used to be mostly U.S. Treasury notes and bonds. But with Treasury yields so low and with the U.S. economy now picking up strength, most of the new flight capital is going into to U.S. equities, especially those with the best liquidity in the most solid corporations.
That’s a key reason why every major market dip has been followed by a new surge.
Will that pattern continue in 2015? It’s too soon to say with certainty. But until and unless a new major force emerges, we see no reason it will change.
Good luck and God bless!