In the run-up to the Second Gulf War in 2003 global stocks plunged downwards. And yet the precarious situation with Iran today is accompanied by stocks close to all-time highs. Indeed, a better than expected set of jobs figures in the US is likely to be greeted with a surge in stocks this week.
Why are the markets so blind? Only last week the detention crisis surrounding 15 British sailors gave the oil and gold market a sharp upward tick. Imagine how big that upward shift would be if Iranian nuclear facilities were bombed or there was a naval clash in the Gulf with loss of life.
One thing we know from history is that when armies and navies are massed in one place then the chance of a conflict is greatly increased. It does not take much to set it off.
So what would happen in global capital markets if this event actually happened? Well, global stocks would plunge, energy prices would surge, the dollar would plummet and safe haven assets like precious metals would soar.
Oil and gold up
And over the past two weeks of the UK detention crisis we did see oil and gold prices rise. However, is it not also quite clear to any sensible investor that global asset prices are in something of a bubble right now, which is just waiting to be pricked?
US stocks will likely rebound this week on the back of some better than expected, but far from marvelous jobs data issued last Friday. Commentator Jim Shepherd's website actually issued a warning to his subscribers that a bad jobs figure would trigger a stock market crash, so close to the edge does he think Wall Street has strayed!
For why should US stocks be heading back to a new all-time high this week? The US housing sector is in meltdown with house prices tumbling and the sub-prime mortgage market in a state of collapse. Statistics are usually trailing indicators, behind what is actually happening in the economy and it may well prove that this jobs data is another example of this truth.
The twin budget and current account deficits are still huge, the US auto industry is still in decline and energy prices are still too high. This is not a place to be putting your money right now. Wait a while and you might get a very good buying opportunity.
For what we really have in the US is a stock market that has lost touch with reality. In 2003 just the fear of the outcome of a war in Iraq sent stocks to the floor, while today the prospect of a war in Iran is not even being seriously considered by the market, although many opinion polls suggest that people think it is a high probability.
It might not happen, and of course this is a far from desirable course of history for many reasons. But efficient capital markets are supposed to discount all likely events. If markets are not efficient then that will make the correction phase more violent and devastating than usual.
Prudent investors should therefore avoid US stocks and keep their funds liquid or in precious metals, or gold stocks which have not moved with the present emergency and must be a bargain.