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Iraq – What’s Next?

November 12, 2002

IN THIS ISSUE:

1.  U.N. Resolution – What Happens Next?

2.  What Will The Inspectors Find?
     It Depends On U.S. Intelligence.

3.  Saudi Arabia’s Predicament.

4.  Implications For The Economy & Markets.

Introduction

The United Nations Security Council’s unanimous passage of the Iraq resolution on November 8 sets in motion two things.  The most obvious being the return of UN weapons inspectors to Baghdad for at least 60 days, assuming Saddam Hussein consents.  The not-so-obvious will be the aggressive deployment of US and coalition military forces, equipment and weapons to the region.

At this point, the odds greatly favor a war with Iraq, as discussed below, and this will no doubt have various impacts on the economy, the markets and our investments.  In this issue, we will look at what is likely to happen over the next 2-3 months.  There will be a lot going on that we will know about, and a lot more that we will not know about – at least in terms of the mainstream media reporting.  Hopefully, my geopolitical and military intelligence sources will keep us ahead of the general public.

Iraq – What’s Next?

The UN resolution represents a massive defeat for not only Saddam Hussein but also for Saudi Arabia.  Hussein’s war-deterrence strategy, which was supported by the Saudis, was built on creating a split between the United States and Europe and the Middle East. The unanimity of the vote, including Syria, means that strategy failed miserably in the end. 

Almost certainly, Hussein will decide to let the weapons inspectors back in.  His puppet parliament voted this week to reject the UN resolution, but this is very likely just a smokescreen to make Hussein look better.

The UN inspectors, led by Hans Blix, plan to return to Iraq on November 18.  To avoid war, the Iraqi leader has seven days to accept the resolution and pledge his compliance.  By December 8, he must produce a full and accurate list of Iraq’s nuclear, chemical and biological weapons programs and ballistic missile developments to demonstrate that he is ready to be the primary agent of his own disarmament.

The key words above are “full and accurate list.”  There is very little optimism that Hussein will divulge information on his weapons of mass destruction (WMDs).  In fact, producing such a list would contradict repeated statements by Hussein that Iraq has no WMDs. 

There is widespread skepticism about the weapons inspections.  Even if the inspectors are given unfettered access, most military analysts doubt that they will have much success UNLESS the US has much more intelligence about the location of Hussein’s WMDs than we know about.

This is really the key.  Hussein has had years to move and hide any sensitive programs he might have had under way.  He also has had the opportunity to develop plans for last-minute redeployments.  Reportedly, US intelligence has actively tracked the deployment of these systems, but Iraqi leaders are believed to understand many of Washington's intelligence systems and know how to evade them.  More cat and mouse games.

On the other hand, if Washington can supply the inspectors with precise information about where to go for evidence, Hussein either will have to block them or permit an inspection that yields damaging results.  Most analysts believe it will be the former and not the latter.  Time will tell.

The Odds Greatly Favor A War.
What Kind Of War Will It Be?

If we assume Hussein will not divulge all of his weapons, the inspections chess game has three possible outcomes: 1) the inspectors find WMDs; 2) the inspectors are blocked from access to key sites; or 3) the inspectors are allowed unfettered access but find nothing.  There is plenty of evidence that Iraq has WMDs and is working on nuclear capabilities.

It is clear that the Bush administration believes that the outcome of the inspections process will either be 1) or 2) above, not 3).  If true, the odds are very high that we will go to war against Iraq within the next few months.

My good friends at Stratfor.com, the highly respected geopolitical intelligence service, believe that Secretary of State Colin Powell has prevailed among the top ranking military leaders when it comes to war plans for Iraq.  Stratfor’s intelligence, coupled with war plans that were leaked by the White House late last week, indicate that a decision has been made to go with Powell’s plan which would involve large numbers of US and coalition troops (200,000-250,000 or more) on the ground in Iraq.  In its latest analysis of November 11, Stratfor says:

“This evolution of events represents a substantial victory for U.S. Secretary of State Colin Powell. The real victory was not in waiting for a U.N. resolution, which was ultimately secondary. Rather, it was in shifting U.S. strategic planning away from the Air Force/Joint Special Operations Command's desire to use a war plan similar to that seen in Afghanistan to a more conventional, robust force emphasizing heavy Army assets.

Powell wanted a coalition, but that was secondary in our view to his mistrust of the kind of plans that were being developed in the Department of Defense. In the end, it was the conventional Army general with the diplomatic portfolio winning out on both the military and diplomatic scenarios.”

If this is true, we should see an acceleration in the shipment of troops and equipment to the region in the weeks ahead.  The US already has forces in the region in Kuwait, Qatar, Jordan and Turkey.

Saudi Arabia – Fish Or Cut Bait?

The Saudis are openly opposed to the war on Iraq.  With the passage of the UN resolution, the Saudis have a difficult decision to make.  Do they capitulate and get behind the war plans, or do they increase their efforts to derail an attack on Iraq?

The Saudis greatest fear is that the installation of a democratic government in Iraq would lead to uprisings and upheaval among the Saudi people.  Specifically, al Qaeda factions in the country have threatened to instigate and lead such an uprising among the Saudi people if the House of Saud caves in and backs the war on Iraq.

In the Gulf War in 1990, when Saudi Arabia assisted us, the Saudi rulers rejected Osama bin Laden’s offer to raise an Islamic army to defend Saudi territory from the US.  This drove a crucial wedge between bin Laden and the House of Saud that eventually evolved into al Qaeda's jihad.  Ever since, al Qaeda has been seeking a trigger to mobilize the Saudi population and military against the House of Saud, and the terrorist organization might see its chance in the Iraq campaign.

The Saudi’s other major concern can be summarized as follows.  If the US and its coalition partners install a “pro-America” government in Iraq, that would insure a steady flow of oil to the US and reduce our dependence on Saudi oil.  More importantly perhaps, the Saudis are very alarmed at the possibility of new US military bases in the new Iraq.  Why?  Because the Saudis fear that they might be next in the War On Terror.

The Saudis may believe they can quell any uprisings that might occur as a result of acquiescing on the war against Iraq.  However, they know absolutely that the Saudi people would revolt over US military sweeps into Saudi Arabia in search of al Qaeda, once our military bases are in place in Iraq.  That would mean the end of the House of Saud.

No Good Options.  Al Qaeda?

Clearly Saudi Arabia has no attractive options.  Most likely the Saudi rulers will continue to condemn US war plans in Iraq and hope their people believe them.  Some have suggested that Saudi Arabia will try its best to broker some kind of peaceful solution before the war commences, perhaps including offering Saddam Hussein and his family sanctuary.  Stranger things have happened in Saudi Arabia.

The US is probably content with Saudi Arabia’s stated opposition to the war.   The last thing the Bush administration wants is to see a major revolt in Saudi Arabia at the same time we are prosecuting the war on Iraq.  If the Saudi royalty were swept out of power, the country and all its oil could fall into the hands of al Qaeda. The US could not allow this to happen, given its ominous implications for the global economy.

Saudis Hope The Russians Are Successful

Stratfor says it has information indicating that the Russians are working with Iraqi generals in an effort to oust Hussein prior to an attack by the US.  Stratfor says:

“Informed Russian sources told Stratfor on Nov. 7 that Russian intelligence services are working in tandem with pro-Russian Iraqi generals to oust Iraqi leader Saddam Hussein, hoping to stave off a U.S. war. Moscow seeks to stage a coup before the end of November, in time to prevent a U.S. attack.

Russian President Vladimir Putin reportedly does not aim to hijack a U.S. victory over Iraq, but rather fears that a war would have serious economic consequences for his country and would hurt its international standing. Sources say Putin likely has discussed the matter with U.S. President George W. Bush.”

While this might sound encouraging, Stratfor goes on to discuss just how difficult a coup would be in Iraq.  There was some talk several weeks ago that Hussein might be planning step down and replace himself with his younger son.  Whether such a move occurred voluntarily or under force, replacing Hussein with one of his close relatives would not be an acceptable regime change to the Bush administration.

Implications For The Economy & The Markets

Given the significantly increased likelihood that the US will attack Iraq, investors are asking what implications the war will have for the economy and the markets.  That all depends, of course, on whether the war is quick and relatively easy, or if it is difficult and protracted.

The latest economic news was encouraging.  GDP increased at an annual rate of 3.1% in the 3Q, above expectations.  The best news in the report was that business investment spending increased by 0.6% in the 3Q.  A recent survey of economists suggests the economy will avoid slipping back into recession and grow at a rate of 2% (on average) in the 4Q.  

My best source for economic and financial forecasts is the highly respected (and very expensive) Bank Credit Analyst (BCA).   I have been a continuous subscriber to BCA since 1977.  Of all the services I subscribe to, BCA has the best long-term record in calling major turns in the economy.

BCA believes that the US economy will manage to stay in positive territory, thus avoiding another recession for the next 2-3 quarters.  They see growth of 1-2% over that period.  This forecast assumes, however, that the war with Iraq (assuming it happens) will not be protracted and ugly. 

With regard to the stock markets, BCA remains defensive for now.  They continue to recommend “below-average” holdings of stocks and mutual funds for now, but they expect a buying opportunity in the near future.  In this regard, we could see a repeat of what happened in the Gulf War.  Stocks went down in anticipation of the war, but then bottomed and turned sharply higher for the next three years.

With regard to the bond market, BCA believes there is a very good chance that interest rates bottomed out in October, especially Treasuries. While they don’t expect rates to rise sharply higher in the months ahead, they believe the bull market in bonds is over.

If BCA is correct that bonds have peaked out, this argues more than ever for a bond-timing service like Capital Management Group (CMG), which I have recommended in the past.   CMG can move from bonds to the safety of a money market account if rates turn higher.  For more specific information on CMG, including their past performance record, visit our website at www.profutures.com or call us at 800-348-3601.

One market that is sure to remain very volatile is OIL.  We have already seen some big swings in oil prices, in both directions, and the swings may only get bigger as the war looms closer.  Unless you are a professional or a very experienced investor, I don’t recommend that you try to tackle the oil market, any time, and especially not now.

Newsletters & More Online

My November newsletters are posted on my website at www.profutures.com.   In addition to these weekly Forecasts & Trends E-Letters, I also write two monthly newsletters (in paper format).  There is also a wealth of other information you can find at the website.

The “Other” Gary Halbert

If you search the Internet for “Gary Halbert,” you’re going to find a LOT of information about one Gary C. Halbert.  Remember, I am Gary D. Halbert.  When you search for Gary Halbert on most search engines, you won’t find anything about me until you get down 15-20 links from the top of the list.

I don’t know Gary C. Halbert, and I don’t believe we are related.  He claims to be a lot of things: marketing wizard, advertising guru and even has some kind of stock trading system (or at least he used to).

If you want to search for me on the Internet, be sure to use Gary D. Halbert.  Even then, you will see some links for the “other” Gary Halbert.   Better yet, just visit our website at www.profutures.com.

Best wishes,

Gary D. Halbert

SPECIAL ARTICLES

An optimistic view on the economy.

The shape of an Iraq invasion.

Interesting take on the war (PDF file).

 

 

 

 


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, 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, ProFutures, 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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