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Investors are not unaware of global risks, says Tony Jackson. They are just too used to living on the edge of the volcano.

With the world’s stock markets at record highs, there is a contrast between today’s benign global economics and malign global politics - dubbed by Martin Wolf, the “Davos dilemma.”

The latest edition of the World Economic Forum’s Global Risk Report identifies 23 types of global risk grouped into five main categories: economic, environmental, geopolitical, societal and technological. No single risk, the report says, became less severe in the course of 2006. Most became more so.

On geopolitical risk the report read, “While expert opinion suggests that geopolitical risk worsened in 2006, market expectations of volatility tended to fall, indicating a major disconnect.”

Meanwhile, research group Oxford Analytica on balance reckons hostilities between China and Taiwan or India and Pakistan presently look unlikely on a five-year view. But a return to global protectionism looks likely. So does a “major disorder” in Central Asia. The view on China and Taiwan is something of a relief, given that Oxford Analytica also thinks a conflict there would have the biggest single potential to harm the world economy — worse than an oil price shock or a deep US recession.

Why? One large European institution gives the rather bleak explanation that that scenario would be more likely to draw in the US, and thus has great risk of knock-on effects.

Simple observation suggest that global risks are not priced in. In South America, for instance, where several governments have recently threatened default as a political ploy, bond spreads have scarcely widened.

When you’re used to living on the side of the volcano, until the eruption proper, another few rumbles are neither here nor there.