FORECASTS & TRENDS E-LETTER

September 17, 2002

1.  Iraq Agrees To Inspectors, No Surprise.

2.  US Rejects Offer & Presses Ahead.

3.  Will Newfound Coalition Hold Up?

4.  Bush To Wield The "Ugly Stick".

5.  Iraq May Already Have Nukes.

6.  Implications For The Markets.

Iraq Agrees To Weapons Inspectors -- Why Is Anyone Surprised??

Wars always have significant effects on the investment markets, especially wars in the oil-rich Middle East.  For that reason, we need to pay keen attention to developments on the Iraqi front, especially given the latest news from Saddam Hussein.

On Monday, we were told that Iraq would allow UN weapons inspectors back in without conditions.  Was anyone surprised by this?  They shouldn't have been!  Saddam realized over the last week that President Bush is dead serious about attacking Iraq, and that support for such an attack is building around the world.  Even the Saudis agreed to allow the US to use its air bases for an attack on Iraq if the UN produces such a resolution, which is looking pretty likely in the wake of Bush's powerful UN address last week.

So, why should anyone have been surprised that Saddam made the latest move?  Clearly, he is buying time.  It buys him time to continue to develop weapons of mass destruction and nukes.  In addition, buying time puts off any potential military action until after the winter over there. 

Iraq's latest position is likely to gain support from neighboring Arab countries, including those such as Saudi Arabia who had opposed military action until the last few days.   Finally, this action also increases the chances of a watered-down UN resolution, or no resolution at all.

[LATE NOTE:  This issue of Forecasts & Trends E-Letter was finished shortly after noon today.  As I hit the "send" button, there are new reports that there ARE, in fact, conditions on Iraq's offer to allow inspectors back in.  No one should be surprised by this!]

Hussein Does The Democrats A Big Favor

In one sense, Saddam has inserted himself as a "relief pitcher" for the Democrats.  The Dems very much want any military action against Iraq to happen AFTER the November elections.  Allowing inspectors in should assure that nothing militarily will happen until after the elections.

As political consultant Dick Morris argued in his latest NY Post article (see link below in SPECIAL ARTICLES), the Democrats shot themselves in the foot recently by requiring Bush to "make his case" for regime change and military action in Iraq.  Public opinion in favor of the war is soaring.  This is not good for the Democrats.  Hussein obviously would prefer to have Democrats in charge rather than Republicans, so he has played his cards in an attempt to get the US political discussion away from the war and back to domestic issues prior to the November elections.

Bush Administration Rejects Iraq's Offer

The Bush administration immediately rejected the Iraqi offer, saying, "This is not a matter of inspections. It is about disarmament of Iraq's weapons of mass destruction and the Iraqi regime's compliance with all other Security Council resolutions. This is a tactical step by Iraq in hopes of avoiding strong U.N. Security Council action. As such, it is a tactic that will fail."

Based on this clear response, it appears the Bush administration is going to continue pushing forward for an attack and regime change in Iraq.  It remains to be seen if such an attack will really happen.   Immediately after Iraq's latest offer, Russia, China, France and Germany welcomed the notion of new weapons inspectors.  Each issued statements endorsing the latest offer by Saddam.  Each is a member of the UN Security Council that is now considering Bush's request for a resolution authorizing military action against Iraq, which requires a unanimous vote of approval.  That doesn't look likely today.

Given this response by several Security Council members, plus the shift toward inspectors in the region (Saudi Arabia and others) as discussed above, it would seem unlikely that the Bush administration can hold onto international support for the war.

Bush To Wield The "Ugly Stick"

While it might seem unlikely, today, that the Bush administration can hold onto allied support for a war, don't under-estimate the power of US arm-twisting.   While Russia, China, France, Germany, the Saudis and others in the Mid-East have their reasons for avoiding war with Iraq, they may yet support US action in the end.  Why?

Russia is owed $7 billion dollars by Iraq, a major trading partner. This is an awesome sum for their struggling economy, and they are looking for the US to secure repayment for them.  The US could tell the Russians privately that they can forget the $7 billion if they don't support us.  Russia also desperately needs the new Caspian oil pipeline being built in Afghanistan.  The US can "nix" that project if we choose to.  The Russians also need the US to "look the other way" should they decide to invade the Republic of Georgia.

China will support us because they desperately need the positive PR of the Olympics. The US could "nix" that deal as well, if we really wanted to.  France will come aboard when we agree not to reveal that they have been selling "questionable" materials to Iraq for years, in violation of the UN sanctions. If France comes along, the Germans will follow.

And what about the Saudis?  Quite simply, if the Saudis don't cooperate, President Bush only has to tell them, "Fine then, you're next on the list in the War On Terror."

While the initial reaction from these countries has been in favor of allowing the inspectors in and delaying any military action, don't rule out the possibility that the Bush team may yet prevail.  If President Bush is to be believed, there may be nothing that will deter his administration with regard to national security.  Now, let's look at the reasons why the Bush administration is so concerned about Iraq.

Time Is Not On Our Side

President Bush has "made his case" on the need to stop Saddam Hussein, both to selected members of Congress and in his stunning speech before the United Nations.  Among the evidence administration officials presented to select members of Congress was the latest report from the International Institute for Strategic Studies (IISS).  That report says that Saddam Hussein needs only to smuggle in the necessary uranium or other radioactive material, and he could be capable of producing nuclear weapons in only a few months.

However, a report in the TimesOnline (London Times) on Monday quotes a former high level Iraqi official who says Saddam might already have nukes.  Dr. Khidir Hamza, who was a science adviser and helped start and direct Iraq's nuclear bomb program before he defected, claims in an interview with The Times that Saddam could be in a position to make at least three nuclear weapons within the next few months, if he has not already done so.

Dr. Hamza gave warning that UN inspectors would be useless because even if they were given "unfettered access," they would find it far more difficult than before to detect the nuclear assembly lines. "The beauty of the present system is that the units are each very small, and in the four years since the inspectors left, they will have been concealed underground or in basements or buildings that outwardly seem normal," Dr. Hamza said.

Unlike the IISS report, Dr. Hamza says he has information that Saddam already has the radioactive materials needed to produce nukes, and that these materials are already being enhanced to "weapons grade."  He said that Iraq is using a centrifuge method to make a bomb, which is quicker and easier than other methods.  "Unless he's stopped soon, Saddam will have set up a whole nuclear bomb industry, not just have made a couple of bombs," Dr. Hamza said.

If Dr. Hamza is correct, then the Bush administration is dead-on correct that we need to disarm Iraq sooner rather than later.  Based on this information and other intelligence the administration will dribble-out over the next few weeks, Bush may decide to go ahead, with or without a UN resolution.

A More Dangerous War Than In 1991

Regardless of what happens on the weapons inspectors, the administration and the military will be planning its strategy for attacking Iraq.  While most Americans are solidly in favor of attacking Iraq and removing Saddam Hussein, we must all understand one thing.  This mission will be much more difficult and dangerous than Desert Storm in 1991!

My best military and geopolitical sources believe that Saddam intends to fight the next battle in the streets of Baghdad, not in the desert.  They believe Saddam is convinced that his best chance for survival is an urban war that would require very large numbers of US and coalition troops and involve very high casualties on both sides.  My sources think Saddam believes the American people won't stand for heavy casualties in Iraq, and his best chance is to try to survive until public pressures at home cause the US to give-up and pull out.  That means an urban war in Baghdad.

While I do not believe Saddam's strategy is correct, if the war centers in Baghdad, it will be ugly!  In Desert Storm, there was never any plan or intention of going into Baghdad.  This time, we will have to.  My military sources believe it will take at least as many troops and equipment, if not more, if the heart of this war ends up in the streets of Baghdad.

The Question Of When

With the latest developments surrounding Iraq's offer to allow inspectors back in, there is no way to know what will happen next.  We just have to wait and see if those partners and allies that initially supported the inspectors can be brought back into line, as discussed above.

My best military and geopolitical sources believe that the attack must begin by late October or early November, or it will have to wait until next spring, due to harsh winter conditions in parts of Iraq.  Again, we will just have to wait and see.

Implications For The Markets

In 1991, the stock markets declined sharply prior to and at the beginning of the war.  But as it was seen that we would prevail in Operation Desert Storm, the stock markets reversed sharply higher and began a multi-year advance.  The S&P 500 climbed over 50% from the Gulf War low to the end of 1993. Will the same thing happen again?  Impossible to say.

Stocks have been under pressure again in the first half of September, partly due to the growing likelihood of a war with Iraq, and partly due to negative economic news.  Despite the recent weakness, the Dow and the S&P 500 are still above their intermediate lows on August 5 and the major lows on July 23.  It remains to be seen if these lows will hold.

While stocks are clearly in a bear market, I have been predicting for several weeks that the markets would begin to improve this fall and perhaps enjoy a significant rise, at least for a time.  However, if we are going to attack Iraq before the end of this year, a meaningful move on the upside may not be in the cards, at least not yet.  For that reason, I would stay on the defensive for now, or use "market-timing" strategies for much of your equity portfolio. 

The equity markets may again react as they did in 1991 prior to Desert Storm.  But keep in mind, however, that if we are successful in the war, another great buying opportunity should arise. 

Bonds Look Good, But Be Careful

In uncertain times, especially times of war, and when stocks are under pressure, many investors are drawn to bonds, Treasury bonds in particular.  Many people consider bonds safer than stocks.  That is not always true!  Bonds have moved substantially higher this year, and long rates are at 40-year lows in some cases.  We could be nearing the end of the downward trend in rates.  That means risks are high now in bonds, especially Treasuries.

With this in mind, I invite you to read my latest Special Report -- "How To Own Bonds Now" (click here).  In it you will find a strategy for participating in the bond market, but with lower risk.

Beware Of The Charlatans Out There

As the likelihood of war with Iraq has increased, so has the number of investment scams out there.  I get tons of junk mail due to the dozens of newsletters I subscribe to, and I am seeing lots of new war-related promotions.  It's even worse on the Internet.  Gold and oil deals will be prevalent.  Just remember, if it sounds too good to be true, it probably is!    

Visit Our Brand-New Website

Let me again invite you to visit our totally updated website at www.profutures.com.   I would very much appreciate any comments (positive or negative) and suggestions you may have.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Dick Morris - Dems huge gift to W.

Bush gives U.N. a chance to matter.

US must beat Saddam to the punch.

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