The Middle East – What’s Really Driving The War?
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Is This The Beginning Of World War Three?
2. Stratfor’s Analysis Of The Players & Motivations
3. Will Hezbollah Resort To American Hostages?
4. Where Things Go From Here In The War
5. On The Economy & The Fed– Recession Ahead?
6. On The Markets & Investing Now
In a matter of only three weeks, the world’s geopolitical landscape, and indeed the international investment landscape, has been turned on its head. While I would hesitate to say that the war in the Middle East is spiraling out of control, there are those who are now predicting that we are witnessing the beginning of World War III. Although I would not agree with that assessment, the latest developments between Israel and Lebanon (and the related players – Hezbollah, Hamas, Syria, Iran, et al) are indeed troubling and could quickly deteriorate into something much more serious, especially if Israel were to attack Syria.
The global equity markets, not surprisingly, have reacted very negatively. While already in a downward correction, largely due to inflation concerns and fears of more Fed rate hikes, the equity markets sold off hard on the news of the war in the Mideast, and the fact that oil has soared to over $77 a barrel last week. The Dow has fallen over 1,000 points since the peak in early May, and it looks like we haven’t seen the bottom yet, what with Hezbollah rockets increasingly falling in Israel and the war escalating.
Over the past month or so, I have suggested that the recent drop in equities would provide a new buying opportunity, and that we are not headed for a recession. So is that advice out the window? Quite honestly, I’m not sure yet. We will have to let the events in the Middle East play out a little longer in order to assess whether the crisis will blow over or escalate much further, and how that will likely impact the investment markets. Simply put, we just have to wait and watch.
Along that line, I think it would be insightful for us to take a look at some of the latest analysis from our good friends at Stratfor.com regarding the situation in the Middle East. While the mainstream media is following the developments 24/7, Stratfor – as usual – has some insights and analysis on the terrorist groups in the Middle East that you won’t find in the mainstream press.
Hezbollah – The Players Out Front & Behind The Scenes
The following analysis from Stratfor is very interesting. Stratfor gives us a condensed history on the development of the current players in the Mideast, especially Hezbollah and Hamas. The terrorist groups like Hezbollah and Hamas are some very bad people. Plus, Stratfor gives us some concise information on which states are funding the terrorist groups in the region and are therefore pulling the strings (think Syria and Iran). Here we go:
Hezbollah is primarily supported financially by Syria and Iran (and arguably Russia). Hezbollah’s other primary source of income comes from the international drug trade. Hezbollah maintains a large network of processing centers for turning Afghan opium into heroin and operates methamphetamine labs in the Bekaa Valley, with some opium and marijuana produced locally as well. So Hezbollah is a major player in the world drug trade.
With that very distasteful element injected into the picture, let’s continue with Stratfor’s analysis of how the current Mideast crisis developed and, most importantly, what the likely outcome may eventually be:
Thus far, Stratfor has walked us through the Syrian involvement with the advancement of Hezbollah. While the Iranians had been involved all along, Stratfor next illustrates how the Iranians became a much larger influence on Hezbollah once Syria stepped back.
This is where Stratfor’s analysis becomes most troubling and, frankly, is the main reason I wanted to walk you through this whole exercise.
Before I continue, I wish to thank Dr. George Friedman and all the good folks at Stratfor.com for allowing me to reprint portions of their analyses for you from time to time. I highly recommend their various intelligence services. For a limited time InvestorsInsight readers and ProFutures clients can subscribe to Stratfor for a special reduced price of only $199 per year. If you want access to Stratfor’s premium intelligence, this is a great deal – CLICK HERE. (FYI, I receive nothing whatsoever in return if you subscribe.)
Where Things Go From Here?
As this is written (and time to hit the “send” button), there is no way to know what will happen next in the Mideast crisis. All kinds of options exist. It is difficult to imagine that Israel will agree to a cease-fire even if Hezbollah agrees to return the captured Israeli soldiers, especially now that Hezbollah has intensified the rocket attacks.
Several Arabic nations that would not normally make such a gesture have joined to condemn Hezbollah, including Jordan, Saudi Arabia, Yemen, the United Arab Emirates and others. Thus, Israel must feel that it has an unprecedented window of opportunity to wipe out Hezbollah, or at least render it powerless. At the least, Israel will almost certainly attempt to disarm Hezbollah, what with rockets striking Haifa and other Israeli cities and potentially Tel Aviv.
I look for Israel to put the hammer down in the next few days and weeks. Look for Israel to intensify the bombings. I believe the prior bombings and air campaign have been to clear the way for a ground campaign that could begin any day now. I could be wrong, of course, but this looks like the most likely scenario to me. Stratfor seems to agree. Fasten your seatbelts!
One puzzling aspect to all of this, however, is why the US has not already ordered mandatory evacuations of Americans from Lebanon, given the growing threat of a ground invasion by Israeli forces and the intensifying level of bombing by both sides. Transportation out of Lebanon is being provided for Americans beginning today (Tuesday) but on a voluntary basis, not mandatory.
This has led some to speculate that the US is privy to some inside information suggesting that Israel will not invade, or that some last-minute peace accord is in the works. I find that doubtful, but stranger things have happened. It may simply be that it is taking longer to move the Americans out due to the large numbers and the logistics and safety issues involved in such an operation. In any event, it seems strange that this hasn’t happened sooner.
The United Nations, France and the usual suspects are demanding a cease-fire and warning against an Israeli ground invasion of Lebanon. But we should not be surprised to see Israeli forces inside Lebanon later this week (or perhaps even as you read this). As such, I expect the Mideast crisis will continue to be a destabilizing force in the markets for at least several more weeks to come. How destabilizing remains to be seen.
On The Economy & The Fed – Recession Ahead?
I had intended to devote this week’s E-Letter to a discussion of the latest economic reports, what is likely the next step(s) for the Fed, and what the impacts are likely to be for the markets. Let me briefly summarize, with the above geopolitical uncertainties in mind.
The US economy soared at an annual rate of 5.6% in GDP in the 1Q, well above expectations. As a result, most economists increased their forecasts for 2Q growth, with most expecting a number in the 3-3.5% range. The first report on 2Q GDP will be released on July 28. The economy clearly slowed down a bit in the 2Q. Personal consumption spending slowed; consumer confidence eased; leading economic indicators weakened; durable goods orders were down; and CEO confidence took a big drop in the 2Q.
Now as for GDP growth in the second half of the year, most economists have significantly revised their estimates lower – even before the war in the Middle East and before oil prices soared to new highs. The latest Bloomberg survey of 51 leading economists showed an average estimate of 2.7% GDP in the 3Q and 2.3% in the 4Q. This is consistent with my view in recent months that the economy would slow down rather significantly in the second half of the year.
Which leads us to what to expect from the Fed. There is now a broad consensus that the Fed will raise short-term rates yet again on August 8 to 5.5%. The big question now is whether the Fed will hike rates yet again on September 20. In its latest policy statement on June 29, the Fed stated:
Obviously, this statement gave no comfort to the markets that the Fed is done raising rates, and the war in the Middle East and soaring oil prices only made matters worse.
I have maintained all year, and even before, that we are not likely looking at a recession this year. I still believe that, even if the economy is on course to slow down significantly in the second half of the year. However, we must all admit that the odds of a recession, either late this year or next year, have increased in light of recent developments.
There is no way to know how things ultimately play out in the Middle East, or how high oil prices are headed. We routinely hear the talking heads on TV refer to oil prices of $100-$150 per barrel, despite the fact that the supply/demand fundamentals have not changed materially this year. While I don’t know how they support such claims, were oil prices to reach such lofty levels, or if the war in the Middle East were to devolve into a global conflagration, then certainly a recession is not out of the question. But I still do not believe it is the most likely scenario.
On The Markets & Investing Now
As noted above, the US equity markets have been in a downturn since May, exacerbated by the recent developments in the Mideast. Obviously, we could see more downward pressure if things deteriorate in the Middle East. Ditto if oil prices skyrocket, as some would have us believe. On the other hand, corporate profits and productivity remain very strong, and US stocks could rebound nicely. So stocks are a tough call at this point.
Bonds have been the beneficiaries of all the latest uncertainty and unrest in the Middle East. Bonds have historically been a refuge in times of international unrest. Additionally, if the US economy is going to continue to slow down, bonds could continue to gain ground in that long- and-medium-term rates could continue to ease. But with inflation continuing to hold above the Fed’s target, the upside for bonds is probably somewhat limited as well.
One of the most common questions I get is about the US dollar. There remains a very broad consensus that the US dollar will move lower over the long-term. I agree. Yet the dollar has surprised investors several times over the last couple of years with counter-trend moves to the upside, as has been the case since mid-May. The latest rally has not been impressive by any means, but it has been yet another rally. My analysis is quite simple: any time you have such a broad consensus that any commodity is going to move one way, there will almost invariably be occasional corrections in the opposite direction.
Gold. We have many clients who have more than a passing interest in gold and precious metals. As you know, gold made the largest move in decades over the last couple of years, with prices reaching $720 in May. Interestingly, gold moved from $550 in mid-March to $720 in mid-May, only to plunge back to $570 or so by mid-June. Now, it’s on the rise again with prices back up above $650. Obviously, this is not a market for the faint of heart, and it is not one which lends itself to reliable predictions at this point, at least in my opinion.
Oil. Commodity prices are famous (or infamous) for over-reacting on both the upside and the downside. Oil is particularly known for overshoots because of (in part) geographic sensitivities, geopolitical tensions and transportation vulnerabilities, in addition to the usual supply/demand issues. Since 9/11, oil prices have also included what is called a “terror premium” which some analysts believe is as much as $10 per barrel or more – and this was before the latest war in the Middle East.
I happen to believe that oil prices, and energy prices in general, are going up over the very long-term. But prices have gone up tremendously over the last couple of years. While there is no question that oil prices could spike even higher if things turn worse in the Middle East, a sharp drop in prices would not surprise me at any time, especially if there is a cease-fire or some kind of settlement in the Middle East soon.
We live in a dangerous and unpredictable world, as we’ve seen in the last few weeks. Surprises happen. Markets react accordingly and frequently over-react. This is why I advocate using professional money managers that employ time-tested “active management” strategies that have the potential to get out of the way or hedge positions in the event that unexpected things happen and markets react adversely.
Let me be clear: I believe that “buy-and-hold” strategies have a place in most diversified portfolios. But I do not believe that one’s entire portfolio should be subject to the whims and sometimes severe ups and downs of the market indexes, or of particular stocks or bonds or mutual funds.
The S&P 500 Index fell over 44% in the bear market of 2000-2002. It has yet to recover to new highs some 4-6 years later. Millions of buy-and-hold investors are in this position today. This is one reason I am a big believer in active management strategies that seek to reduce the losses during down markets.
That’s all for this week. Hope you’re having a great summer!!
Very best regards,
Gary D. Halbert
Middle East: Shaken Awake By War (a very good read).
This writer has a good point: Iran & Syria are the problem; US -
Hillary supporter tells her how to win (let’s hope not).
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.