STRATFOR.COM: Iraq -- What’s Next?

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
February 18, 2003

IN THIS ISSUE:

1. Does The U.S. Need A U.N. Resolution?

2. Stratfor Believes Bush Won’t Ask For One.

3. Do France & Germany Have Dirty Hands?

4. Stratfor: War Will Start Around March 1.

5. Market Implications – A Bottom For Stocks?

6. A Classic Case For “Market Timing.”

Introduction – What Happens Next In The War With Iraq

With thousands of investment clients all across America, I take a lot of phone calls. Virtually every client I have spoken to over the last month has asked the obvious question: Are we going to war with Iraq? My answer from the beginning has been: Yes, I believe we will.

The big question now is whether the US will formally request a second United Nations resolution authorizing the war, or if the US and Britain are prepared to go to war without such authorization. The front page of today’s Wall Street Journal has a story saying the US is going to make a major push this week for a new UN resolution, even with the threat of a French veto.

My friends at Stratfor.com, on the other hand, believe the Bush administration has decided privately NOT to request a second resolution. Stratfor, you may recall, is a highly respected international intelligence firm and one of my very best sources for geopolitical information.

This week, I will share with you Stratfor’s latest thinking on the UN resolution, and also when they think the war with Iraq will begin. In short, Stratfor believes the US will: 1) not ask for a new UN resolution authorizing military force against Iraq; and 2) go to war with Iraq around March 1st. If correct, this will mean that the French don’t have to veto a second UN resolution authorizing war.

What follows is my summation of Stratfor’s latest analysis on the question of a second UN resolution and how the war will unfold.

United Nations Approval –
Do We Need It, Do We Want It?

The latest UN Security Council meeting on February 14 proved that no positions have changed, and France repeated its intention to veto a UN resolution authorizing war. France also chided Colin Powell and rejected the idea that Iraq and al Qaeda are linked.

The second most frequent question my clients ask me is: What’s the deal with France? Here’s how Stratfor analyzes France’s opposition to the war:

“To a great extent, that [a second UN resolution] seems to depend on the French. Russia and China are more likely to abstain from a vote than veto; the French are the issue. The problem for France is political -- international and domestic. Internationally, Paris now has staked out a position from which it will be difficult to retreat. Its partner, Germany, would feel completely betrayed -- and keeping the Germans aligned and the government of Chancellor Gerhard Schroeder alive is much more important to France than good relations with the United States. Indeed, anti-Americanism is rampant in France, and Paris' position is popular. Shifting makes little sense.”

I should also note that anti-France sentiment is growing rapidly in the US. This has led to the recent increase in President Bush’s approval ratings, especially regarding the War On Terror and a possible war in Iraq.

The most interesting and surprising thing about the February 14 Security Council meeting was the fact that Colin Powell did NOT formally request a second resolution authorizing military force against Saddam Hussein. According to Stratfor, the Bush administration now realizes that it is not going to get a second UN resolution in time for the war to begin, so they are now pursuing a different strategy. Yet as noted above, today’s Wall Street Journal suggests the Bush administration will launch a new push for a second resolution this week. We’ll have to wait and see who is correct.

Stratfor’s analysis that the US will not seek a second UN resolution is based on the following. The Bush administration has begun to argue more forcefully that we are already authorized by UN Resolution 1441 to use force against Iraq, so we don’t need a second resolution.

Interestingly, Stratfor believes the French privately favor this strategy. Why, especially given how vocal they have been in opposition to the war? Despite their rhetoric, the French don’t want to be the lone Security Council member to veto the second resolution. If the US doesn’t ask, this gets France off the hook. Stratfor also believes that Russia and China are privately satisfied if the US goes to war without a second resolution.

The bottom line is, Stratfor believes that France and Germany would privately acquiesce if the US decides not to ask for a second resolution asking for war approval. Yet we don’t hear a word about this in the mainstream media!

Have France & Germany Helped Saddam?

Of course, Stratfor could be wrong. There are those who believe that the French and the Germans are adamantly opposed to the war because they fear that a US war with Iraq will uncover illegal sales of materials and technology to Iraq that have aided Saddam in the production of WMDs. I don’t know if this is true or not, but if it is, that would explain why France and Germany have been so adamantly opposed to the war.

The world knows that large French companies have been awarded lucrative oil contracts in Iraq. Germany is believed to have lucrative industrial contracts as well. What is not clear is how they got those lucrative contracts. Did they sell/give Iraq sensitive technology in return for those contracts? Did they convey prohibited technology and/or materials under the Iraqi embargo?

So, the ultimate question is: Are France and Germany so adamant against the war on Iraq because of their left-leaning social agendas, or do they have something material to hide? Again, I don’t know. But the odds are great that the US will find out the real reason if we go in, remove Saddam and take control of Iraq. We may never know, but there are questions about why the French and Germans are so opposed to the war on Iraq.

In any event, Stratfor believes the Bush administration has already abandoned the idea of a second resolution authorizing force and is now moving full-speed-ahead with final plans for war.

Can War Be Avoided At This Point?

Very unlikely, in Stratfor’s opinion. At this point, Stratfor believes the only way war would be avoided is if Saddam decides to step aside and seek asylum in another country. That does not seem likely. Here’s more of Stratfor’s latest analysis on this point:

“It seems inconceivable, at this point, that the United States will withdraw its forces. The current diplomatic crisis [no UN resolution] was anticipated; the decision to deploy in the face of the expected crisis indicates that the decision to go to war was made with full awareness that there would be a diplomatic crisis that might prevent a Security Council resolution.

An evolution in Baghdad would include either a true capitulation on weapons of mass destruction, a coup or a resignation. We doubt very much that anything Iraqi President Saddam Hussein would do at this point would placate the United States on WMD; Washington simply does not trust him. A coup or resignation is possible, but not, we suspect, until war is launched. Hussein also will not resign while he sees a possibility of heading off the war. It seems to us that at this point, the decision to go to war has been made.”

When Will The War Begin?

Stratfor expects the war to begin around March 1, irrespective of what the UN might decide to do. They say:

“The situation is this: The United States is deploying a massive force to the Iraq theater of operations. Many, if not most, of that force is in place or will be in place within a week. That force cannot be held there indefinitely, for a host of reasons, including the fact that it constitutes the bulk of the striking power of the United States and that concentration might unexpectedly be needed elsewhere. This force cannot remain in place for six months, and the United States does not want to fight this war in the summer. It needs to be over by mid-April. That means it has to begin within a few weeks, probably somewhere around March 1.”

Hans Blix, the head of the weapons inspectors, is scheduled to make another report to the UN Security Council on February 28. Thus, Stratfor’s suggestion of a March 1 launch date may prove to be very accurate. Today’s Washington Post also reports that March 1 is likely the start date. If so, we could be at war within two weeks.

Market Implications

The market implications are obvious. We are about to go to war, or so it seems. The markets do weird things ahead of war. Following a brief rally in early January, the stock markets have fallen sharply as the war looms closer and closer. This weakness could continue, generally, for the next couple weeks. Expect the equity markets to be very, very volatile in any case.

Yet if the past is any indicator, we could see an excellent buying opportunity in the next 2-3 weeks in stocks. Most analysts I read and listen to believe the US and Britain will have stunning and rapid success in the war on Saddam. Within the first couple of weeks, they believe the US will establish control of Iraq. This remains to be seen, of course, but if accurate, stocks could begin a powerful move upward, much as they did in Desert Storm.

If we are successful early in the war, consumer confidence is likely to soar. Consumer confidence has fallen in seven of the last eight months as Americans are concerned, not only about the war, but also about the economy. However, as I have written previously, the media has had a lot to do with the fall in consumer confidence.

The economy is not that weak. GDP increased 2.4% in 2002, and most of my sources believe the economy will improve to at least a 3% pace this year. Here is what The Bank Credit Analyst (“BCA”), my best source for economic and financial trends, had to say in their February issue:

“There is still pervasive gloom about the economy. . . We believe that the pessimism is overdone, and that the economy has a good chance of surprising on the upside once the geopolitical [Iraq] clouds lift. Thus, we are sticking to our view that risky assets [stocks] will outperform over the course of this year. This means favoring stocks over bonds and corporate bonds over Treasurys on a 6-to12-month view... Presumably, there will be a healthy relief rally in equity prices and a selloff in Treasurys when the conflict with Iraq is no longer a major issue.”

This is another bold forecast from BCA, especially with war looming. Obviously, they could be wrong. However, if the war goes well, as is anticipated, I believe BCA will be right-on once again. This suggests an excellent buying opportunity in stocks and mutual funds just ahead. It also suggests that Treasury bonds will come under pressure once the war is under control.

What To Do Now -
A Classic Case For Market Timing

As discussed above, war with Iraq looks exceedingly likely, probably within the next month at the outside. A preponderance of experts believes the war will go very well for the US and our allies. As BCA suggests, we could see a great deal of optimism and a recovery in the stock markets if things go well in the war. With stocks so depressed at present, a post-war rally could be quite impressive.

Yet we all know things may not go exactly as planned. War is never pretty, especially with a despot like Saddam Hussein who has chemical and biological weapons and tactical missiles. While certainly not expected, there is at least some chance the war will go badly. So, jumping back into the equity markets, even at today’s depressed levels, is not without risk.

I will be increasing my own allocation to stocks and stock mutual funds in the next week or so. Currently, all of my equity portfolio is under the direction of professional money managers who can move all or a significant portion of my equity investment OUT OF the market and INTO the safety of money market funds, if need be. This method of investing is known as MARKET TIMING.

If you have had your money on the sidelines for some time, or if you are under-invested in stocks and mutual funds presently, you might also consider a market timing strategy, given the uncertainties out there. However, I only recommend doing so under the direction of professional money managers. The same goes for a good portion of your investments in bonds and bond funds.

The next few weeks may be a key time to increase your exposure to stocks and/or stock mutual funds. It may also be a time to reduce your holdings of bonds, especially Treasury bonds. Or better yet, move to a professional who can move in and out of bonds occasionally as need be.

If you would like to learn more about successful money managers who can do this, visit our website at www.profutures.com or call us toll free at 800-348-3601.

Best regards,

Gary D. Halbert

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