Market participants are sometimes forced to consider what no one wants to think about. It is not only an unpleasant experience, but you find yourself in a mental state that is quite uncomfortable. Still, when threats are being lobbed like bombs and when the world's political elite are off in no-man's land casting ever more heated words, then this realm must be entered, if only to consider the dreaded behemoth rising once again, and throwing the markets into the darkest of dungeons. I speak of war.

The current U.S. President can be somewhat erratic. However, he is not without purpose. North Korea has now engaged him, and the U.S., in a worrisome battle of words that keeps escalating by the day. I have faith in the rational behaviour of Donald Trump but when a sovereign nation, North Korea, actually threatens Guam with a "ring of fire" then miscalculations become an ever increasing threat. As author Margaret Atwood said, "War is what happens when language fails."

Someplace, in all of this rancor, there is a line that should never be crossed. It is the line where words morph into battleships and tanks. In our nuclear age, the threat envelops more than just the destruction of armies but of entire nations thrown into a sea of incomprehensible destruction.

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My concern here is with the leader of North Korea. Kim Jong Un does not seem to recognize any line and he seems to have no respect for anyone. Any person killing his own people with howitzers just for the show is someone to be terrified of because they have obviously lost any respect for humanity. The North Korean despot is a very dangerous man and what he may do could well threaten the entire world by some moronic action.

What I am sure about is that if a military engagement occurs then virtually every bet that has been made in markets, every position that has been taken, will be 100 per cent wrong. The battlefield won't be the only place where bombs are exploding. The markets -- all of them -- will go ballistic.

Equities will get creamed, prices of U.S. Treasuries will head toward the stratosphere, oil will rise back above $100 a barrel, yield spreads for credit assets will widen viciously against Treasuries, and riskier assets in general will lose their present value in the first moments of combat.

I do not think any of this will happen, but preposterous things have occurred before in our world. The leader of North Korea is a fanatical dictator who reminds me of another, many long years ago. It was 1938 and they said it could never happen, and yet it did. I am always mindful of this. My father bore the scars of what could not happen and he bore them for the rest of his life. One cannot ignore what stares you in the face.


Mark Grant is a managing director and chief strategist at Hilltop Securities.