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June 26, 2002


President Bush's Mid-East policy address on Monday effectively withdraws the US from the current Israeli/Palestinian controversy, so we can pursue our primary objective of hunting down al Qaeda and, in the process, ousting Saddam Hussein from Iraq. For the time being, we are essentially withdrawing from the Israeli/Palestinian problem - letting it play out as it will, while knowing the eventual outcome - while we pursue our anti-terrorist priorities.

While this may be the appropriate policy, we should all understand that this strengthens Yassar Arafat's hand in the meantime. It will also widen the divide between the US and Saudi Arabia, a move which could drive the Saudis closer to Iraq and Iran. I will explain below how this may happen and why it could be a good thing.

In this issue, we also look at the very complex and confusing issue of what the Palestinians and their leader Yassar Arafat are trying to accomplish with their continued terrorism against Israel. Virtually everyone agrees that there can be no Palestinian state until the violence ceases. So why does it continue? I will try to address that question, but the answer is not pretty.


President Bush's latest Mid-East policy called for the removal of Yassar Arafat as the head of the Palestinian Authority (PA), an end of the violence against Israel, free democratic elections and, eventually, a Palestinian state. Bush also stated that such a state would be based on the pre-1967 borders, a position that hardly anyone believes is realistic.

The media widely reported that officials in both Palestine and Israel welcomed Bush's latest plan. But did they really? How pleased could Israel be that Bush has once again floated the idea of going back to the 1967 borders? How thrilled could Arafat be that the president of the US has called for him to step down? Arafat reportedly said, "MAKE ME!"

Whether you agree or disagree with Bush's latest policy initiative, a few points seem clear. For example, the president's latest policy announcement effectively allows the US to withdraw from the Israeli/Palestinian conflict, and more or less let things play out as they will, so that America can get on with the War Against Terror (WAT). Presumably, this means we move forward with plans to remove Saddam Hussein from Iraq.

Another point overlooked by the media is the fact that Bush's latest policy actually strengthens Arafat, at least in the near-term. How? By calling for Arafat's removal, Bush has - intentionally or inadvertently - made it such that anyone within Palestine who calls for Arafat's removal will be denounced as a supporter of US policy in the region.

The media also failed to pick up on the policy implications for the US and Saudi Arabia. When the Saudi Crown Prince visited the US recently, he pressed President Bush hard for greater US involvement in the Israeli/Palestinian conflict and a slowdown of the WAT. Bush's latest policy, however, sends a message to the Saudis that we are effectively washing our hands of the Israeli/Palestinian conflict, and we are moving full speed ahead in the WAT.


With all the cave-ins by the Bush administration this year (campaign finance reform, steel tariffs, farm bill, etc.), I have become somewhat cynical whenever they make major announcements. With the latest Mid-East policy announcement, I was once again disappointed that the president called for a return to the 1967 borders.

However, I was most encouraged to see that Bush and his administration have apparently acknowledged, finally, that Saudi Arabia is a major source of terror. The president's latest policy address sends a message to the Saudis that: 1) we are getting on with the war against al Qaeda; and 2) if you don't get your act together, we will strike the terrorist enclaves in your own country. I think this was precisely the right message to send - finally!

This new position by the US will undoubtedly worry the Saudis. As the US begins to deploy more forces in the region, Saudi leaders will become even more worried and insecure about possible US attacks on terrorist factions in their country.

If the Bush administration actually follows through with its plans to intensify the WAT in the Mid-East, the Saudis will feel compelled to strengthen ties with neighbors who are intent on resisting US dominance in the region. With most Gulf states, including Yemen and Jordan, seemingly in support of the WAT, that leaves only Iraq and Iran to help the Saudis.

As the analysis above slowly makes its way into the media, you will probably hear criticism of the Bush policy for driving Saudi Arabia, heretofore presumed to be a US ally, into the hands of Iraq and Iran. Actually, I don't think this is a bad idea. As the Saudis move closer to Iraq and Iran, perhaps the public will finally recognize that the Saudis are just as responsible as these countries for global terror, if not more so. Our good friends at agree:

". . . there can be little doubt that the key components of al Qaeda derive direct support -- financial, moral and perhaps even intelligence -- from the desert kingdom. The group's leader is himself a Saudi from one of the country's richest and most powerful families. Fifteen of the 19 hijackers were allegedly Saudis, and though there is no direct evidence yet, logic suggests that much of al Qaeda's financing comes from sympathizers there."


Let's quickly review what has really happened in US/Saudi relations over the past few months. The only reason the Saudi Crown Prince came to the US was to try and convince Bush not to attack Iraq and remove Saddam Hussein. Yes, I know this is not what you heard in the media. What you heard was that the Crown Prince came to offer a new Mid-East peace plan and pleaded with Bush to get the US more involved in the Israeli/Palestinian peace process.

Yet the Crown Prince's real purpose in coming to see Bush was to try and convince him not to topple Hussein and install an "America-friendly" government in Baghdad. The Saudis realize that if an America-friendly government were installed in Iraq, which has the second largest known oil reserves in the world, US dependence on Saudi oil would evaporate.

The other problem the Saudi royals have is they can't appear to be cooperating with the US. The House of Saud is already on very shaky ground with the Saudi people, and if they are seen as sympathizing with US interests in the region, the royal family could be ousted. More importantly, many of the most powerful supporters, and even leaders, of al Qaeda are Saudis. The Saud regime cannot risk having these patrons of al Qaeda turn against them.


If the Bush administration holds firm on its latest demands that the Saudis cooperate with us in the WAT, we are likely to be on a collision course. Unable to deliver, the Saudis may migrate toward Iraq and Iran. The media will almost surely paint this as bad policy by the Bush administration. But in fact, it may be the right policy. If the Saudis align with the likes of Iraq and Iran, they may become a part of the new "Axis of Evil," thus making it easier for the US to justify attacking the vast al Qaeda network in Saudi Arabia.

While the scenario described above will take considerable time to unfold, and much could change along the way, it appears the Bush administration has finally decided to hold Saudi Arabia, a long-time ally (at least sort of), accountable for its significant role in the global terrorism threat. To that I say, it's about time and don't back off!


Suicide bombings have clearly become the mainstream Palestinian strategy. Yet Arafat and the Palestinian Authority (PA) leadership know that this very violence makes the creation of a Palestinian state impossible. Thus, the question is why?

Before delving into the answer, let me state what should be the obvious. These suicide bombing attacks, for the most part if not altogether, are not the result of fringe groups of radicals that are outside of Arafat's control. They have been engineered by Hamas and Al Aqsa Martyrs, both of which are directly or indirectly under Arafat's control.

When the suicide bombings intensified last year, it is believed that Arafat's initial goals were to: 1) create such fear and panic in Israel that the public would demand a peace negotiation, including a Palestinian state; and/or 2) drive a wedge between Israel and the US, due to the violent Israeli reprisals, in which case Israel would be pressured by the US to agree to a Palestinian state; and/or 3) draw other Arab nations into the fight on the side of the Palestinians. The bottom line is, none of these goals were achieved.

Arafat undoubtedly knows this strategy failed miserably. So, again, the world must ask, why do the suicide bombings continue?


Late in his second term, Bill Clinton hammered desperately on Israel and Palestine to reach a peace accord so he could win the Nobel Peace Prize. The Israelis, under Ehud Barak, agreed to the most generous Palestinian state ever proposed. At the last minute, and knowing full well this was the best offer he was ever going to get, Arafat rejected the deal. That should have told the world, in no uncertain terms, that Arafat was not willing to accept an Israeli state and a Palestinian state living side-by-side.

Prior to Clinton's peace initiative, Israel and the PA had been coexisting fairly peacefully for several years. Many argue that if Clinton had just left things alone, rather than quest for a Nobel Peace Prize, we would not be in the dangerous position we are today. But that's another story for another time.

The point is, if Arafat and the PA would not accept the deal Barak offered them in 1996 (which by the way, led to Barak's removal from office), why would they accept any of the recent proposals for less? Why diplomats around the world, including Colin Powell, don't get this is a mystery to me.

All of which leads us to the ultimate question: if the Palestinians will not accept the very generous offer made to them in 2000, nor any of the offers which have been put on the table since then, what do they want? Some have argued that they don't want anything at all, that they just want to coexist, more or less as they were doing prior to the 2000 peace negotiations that failed.


While the media does not like to admit it, Arafat and the PA leadership want nothing less than the removal or annihilation of Israel. However, Stratfor's sources in the Middle East believe that Arafat and company have recently acknowledged that there is no way they can accomplish this goal in the foreseeable future. Arafat's primary problem is that the PA has no support from the Islamic states and the Arab states in particular.

Since the Arab states either dislike the Palestinians or will not support them, and given that Arafat will not accept the offers for an independent state, he has been forced to take a very long-term view of the campaign against Israel. Stratfor's sources believe that Arafat has accepted the fact that it will take a major transformation of the Islamic world before the Arab states will unite behind the Palestinians. Presumably, such a transformation would take a very long time.

However, Arafat may believe that the Islamic world will undergo this transformation when the US begins military actions in the region against Iraq and al Qaeda. Actually, he could be correct, but the odds don't currently favor it. Yet if Saudi Arabia allies with Iraq and Iran, as discussed above, the odds increase. Only time will tell.

In the meantime, Arafat has apparently decided to continue unrelenting warfare against the Israelis, using whatever means are available - currently, suicide bombers. This suggests that the violence in the region will only escalate. Now that the US seems committed to continuing the WAT, presumably in Iraq, the bombings and subsequent reprisals could escalate. This is not a pretty picture!


The Bush administration has apparently decided to wash its hands of the Israeli/Palestinian conflict for the time being so as to focus on prosecuting the War Against Terror. Yes, the US will continue to call for peace in the region; yes, we will continue to appear to be engaged; and yes, Bush will occasionally chastise Israel and huff and puff about pulling troops back, etc. Yet it now appears the Bush and his advisors have decided to largely withdraw from the conflict and refocus on the WAT, unless and until there is a regime change in Palestine.

In addition, the US has put Saudi Arabia on notice that is had better cooperate fully in the WAT. Given the instability in Saudi Arabia, the Bush administration may know the Saudis can't or won't deliver, and that they may migrate toward Iraq and Iran. Apparently, Bush has said, so be it. If I am correct about this, the administration should be congratulated. It's about time!

Meanwhile, expect the violence in Israel and Palestine to continue, and most likely even escalate. Arafat's mindset is: I can't win, so what have I got to lose; send more suicide bombers. Israel's retaliations will get more brutal, as they should if the bombings continue.

Again, it's not a pretty picture, but one that is fraught with dangers and negative surprises, especially if the US moves to topple Iraq in the fall or early next year. As I said in SPECIAL UPDATE #1, the world has been changed forever.


As you have no doubt heard by now, the U.S. 9th Circuit Court of Appeals ruled that children in many western states may no longer recite the Pledge of Allegiance in their schools. Most Americans are outraged, as they should be. Be sure to read Congressman Ron Paul's response in the link just below.

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All the best,

Gary D. Halbert


Ron Paul denounces court ruling on the Pledge.

Bush sets out on a new and different Mid-East policy.

Bush seeks a new Middle East, not just Israel/Palestine peace.

Saudis had better clean-up their act.

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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