An argument soothing nerves over the current geopolitical standoff with North Korea is that rational leaders are going to avoid war. Such soothing voices point to the stock market, which is climbing higher in the face of currently unfathomable nuclear risks and in the face of a rising interest rate environment, an oddity that Goldman Sachs recently pointed out in a report. But forget the soothing voices singing a lullaby at bedtime. Macquarie analysts Viktor Shvets and Chetan Seth look at the history of war with a degree of wariness, pointing to a momentum towards war that even a rational leader could not avoid – and a stock market history that has badly mispriced geopolitical risk.

Know more about Russia than your friends:

Get our free ebook on how the Soviet Union became Putin's Russia.

 rational leader
herb1979 / Pixabay

The first two World Wars occurred as society was transitioning

While a Goldman Sachs is noting the absurdity of stocks up in the face of rate hikes, a historical rarity, Macquarie’s Shvets and Seth have a decidedly more macabre focus: the illogical nature of gruesome war.

In the lead-up to both World Wars, there was a commonality of social tension. In the previous World Wars, it was the industrial revolution that placed a nervous unease over the populace. This time, Shvets and Seth observe an approaching technological cloud that leads to “declining returns on humans.” The nature of this technological revolution, which for the first time in history replaces human thought processes, is one that “disintermediates businesses, destroys labor markets, unleashes waves of immigration and increases inequalities.”

The negative outlook comes as Wall Street Journal analysis says that the coming technical swarm that is set to eliminate scores of traditional jobs will be replaced by new jobs, pointing to retail jobs being replaced by new e-commerce jobs. This analysis is dependent on innovation continuing at blistering pace and points to a knowledge economy where an educated workforce is at a premium. But such a world points to an even deeper divide for those without education or a natural intelligence.

Inequalities are not only going to be seen within a society but also among nations. The wealthy and well-positioned will increasingly break free from the dependent class, a movement that might only exacerbate the itch to engage in endless war.

Preventing war, even when leaders know it is an illogical choice, is challenging.

Using history as a guide, Shvets and Seth point to the lead up to World War I, where both leaders, German Kaiser and Russian Tsar, were close relatives (as well as the king of England who looked nearly identical to the Tsar, although in that case they were allies - see below) and in fact (both would likely be considered more of a rational leader than Kim) knew war would be a bad choice. But as the sense of a nation being attacked rallied the populace – the assassination of Archduke Franz Ferdinand of Austria-Hungary is credited with starting the conflict – the “shrill voices” beating the war drums created “sufficient momentum,” a blood lust that could not be stopped by rational leaders.

Tsar Nicholas II & King George V.JPG
By Ernst Sandau ( — search for "Ernst Sandau"), still alive in 1960[2][3][4] - Uploaded by User:Mrlopez2681, who says the uploaded image is scanned from a photo in his collection. LIFE also has this image in its archives here., PD-US, Link

“People can be always brought to believe… all you have to do is tell them that they are being attacked and denounce pacifists for lack of patriotism and exposing the country to danger,” German Nazi military leader Herman Goering once cynically observed. “It works the same in any country.”

Rational leader theory does not apply to North Korea, and the markets are mispricing risk

The rational leader notion is an absurdity from various perspectives, as the report pointed to momentum and events getting beyond the control of political leadership. Shvets and Seth think this rational leader argument, applied to North Korea, misses the point that such situations have failed to prevent leaders in the past from talking up war and then losing control over events.

But the stock market isn’t expressing concern, why should investors worry?

Geopolitical risk is rarely properly priced by the markets. Investors were buying stocks leading to the German blitzkrieg all the way to the battle of Stalingrad, the report noted. Likewise, markets failed to accurately measure the risk associated with the assassination of Archduke Ferdinand to the 1936 German remilitarization of Rhineland, a trend evident in the Korean and Vietnam wars as well as with the "Arab Spring".

“The assumption is that politics fix geopolitics and that central banks fix economies,” the report opined, pointing to historically inaccurate assumptions. “Equity investors prefer to return to their areas of expertise and leave geopolitics and economics aside for as long as humanly possible.”