It may be called the World Economic Forum, but most of the conversations at Davos this year have been about politics, not economics. Partly this reflects the remarkably benign economic conditions that everyone foresees for 2007: a so-called Goldilocks expansion, with a world economy that is neither too hot, thus generating inflation, nor too cold and threatened by recession. Turning to geopolitics, by contrast, there seems to be nothing but bad news: the quagmire in Iraq keeps getting bloodier and deeper; terrorism is spreading; global warming is accelerating; nuclear proliferation is out of control. Meanwhile, in America a lame duck president is paralysed by a hostile congress and public opinion, Europe is as usual looking inwards, and the only nations that seem to be in the ascendant are China, Russia and Iran.

What some of the shrewder financiers at Davos are arguing, however, is that for stockmarket investors all this geopolitical anxiety could actually be good news. There are two ways for investors to react to the threat of a war against Iran or a nuclear confrontation between America and North Korea. The obvious reaction is to sell everything, buy a truckload of baked beans and move to New Zealand or Patagonia. The alternative is to view the geopolitical paranoia, not only about Iran, but also about China, Russia and North Korea, as an indispensable driving force for the global bull market in equities, which still has a long way to go. After all, bull markets have to climb a "wall of worry". And as the global economy moves this year from its mid-cycle slowdown into the sweet spot of a perfect Goldilocks expansion, worries about geopolitics are just what the doctor ordered to restrain investor enthusiasm and keep the bull market rising in a nice steady upward channel over the coming months.

Another way of putting this bullish argument is to note that stockmarket valuations remain quite moderate, given the low level of interest rates, the sustained rise of profits as a share of national incomes and the good prospects for global growth. Are these moderate valuations a sign that Mr Market perceives something fatally wrong with the global economy or the business outlook? This seems increasingly implausible, as fears about inflation, recession, global imbalances and leverage have disappeared, one by one. The genuine anxieties that remain - and prevent equities from overshooting on the upside - are not about economics but politics.

The most important of these risks is obviously a military attack on Iran. A military attack on Iran could turn the localised clashes in Iraq and Lebanon into a regional, perhaps even global, conflict of World War proportions. Not only would the oil price soar, at least for a while, to over $100, transforming the fear of stagflation that briefly spooked the markets last April into a genuine threat. More seriously, the inter-communal violence in Iraq would turn instantly into a full-scale civil war, drawing in Iran, Syria and Saudi Arabia, which could easily lead to hideous US casualties, a Vietnam-style withdrawal of all US military power from the Middle East, including even Israel. This is why Israeli (and Saudi) officials, while they publicly endorse Mr Wolsey’s aggressive analysis of the Iranian nuclear challenge, are privately much less gung-ho about any military intervention. It is also why the US is very unlikely, in the end, to attack Iran – especially as the combination of economic sanctions and diplomatic carrots is already showing signs of swinging Iranian politics against President Ahmedinejad. So it looks like the financial markets can continue climbing their Wall of Worry in peace.

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