Why are investors so relaxed about the tensions in Korea?

The markets have concluded Kim Jong Un and Donald Trump are blusterers.

A ROGUE state has tested what may be a hydrogen bomb and has sent a missile over the territory of a neighbouring country. The American president has promised “fire and fury” if threats continue. The Security Council of the United Nations has been locked in debate. This sounds like the plot of a Hollywood thriller or a paperback potboiler in which the world is heading for conflagration.

But international investors are not thrilled, and seem barely disconcerted, by the crisis on the Korean peninsula. Gold has risen a bit, the yield on Treasury bonds has dropped and the MSCI World equity index has fallen since the start of August. However, the moves have not been huge. Even the South Korean stockmarket, surely the most sensitive gauge of war risk, is well above its level at the start of the year.

What explains this remarkable insouciance? One possibility is that the markets may simply not be very good at assessing political risk. After all, investors failed to foresee either the result of the Brexit referendum in Britain or the election of President Donald Trump.

Another possibility is that investors have learned in recent decades that geopolitical events—from the September 11th attacks and the invasion of Iraq to countless presidential elections—tend to have only very short-term impacts on the markets. Economic growth and corporate profits are far more important factors. For investors who use algorithms to trade, political risk probably has very little bearing on their calculations.

Go back far enough, however, and it is possible to find political events with huge financial ramifications—after revolutions in their countries, the Russian and Chinese governments defaulted on their debts, for example. A war that engulfed the Korean peninsula, dragging in China and Japan as well, would surely be one of those “fat tail” events that the models struggle to assess. But a few brave analysts are now trying to contemplate the effects.

Besides the terrible humanitarian cost in both North and South Korea, there could be immense damage in certain industries. The global economy is a lot more integrated than it was during the Korean war of 1950-53. Capital Economics points out that South Korea produces 40% of the world’s liquid-crystal displays and 17% of its semiconductors. If Japan was the target of missile strikes from North Korea, as it might be, the disruption would be even greater. A war with conventional weapons would be bad enough; the lasting impact of nuclear weapons’ use would be immense.

The limited reaction of investors to this terrible possibility suggests that they do not believe it will happen and that they feel the heightened rhetoric on both the American and North Korean sides is simply bluster. A recent example was a tweet from Mr Trump on potential trade sanctions. Rabobank, a Dutch bank, says that American counter-threats are not perceived to be credible. “The distinctly limited likelihood of the US cutting all trading links with China should the country continue to do business with North Korea is a case in point,” the bank adds.

Just because a war would have disastrous economic consequences may not prevent political leaders from stumbling into conflict, either by accident or because they have other priorities. In 1909, Norman Angell wrote a book called “The Great Illusion” which posited that war between nations would be futile because of their economic interdependence. Five years later, war broke out anyway.

But in the early 20th century, many nations were still ruled by hereditary monarchs, for whom economic issues were not the highest priority. By the late 20th century, most developed countries were ruled by professional politicians who recognised that economic success was their surest route to staying in office. Recent conflicts in Afghanistan and Iraq did not involve the same level of commitment as either the Korean and Vietnam wars, and thus did not have big economic consequences. This may help explain investors’ confidence that geopolitics will not interrupt the flow of goods and capital.

It is possible, in an age of populism and greater nationalism (and at a time when American hegemony is being challenged by China), that the calculations of political leaders have changed again, making conflict more likely. But no amount of number-crunching based on past data can properly assess whether this is the case; it is a judgment call. Investors have decided that a Korean conflict will not happen. Cross your fingers that this is one case where the “wisdom of crowds” will be proved right.