Middle East Is A Looming Tinderbox Think Egypt

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 13, 2013

IN THIS ISSUE:

1. Unprecedented Embassy Closings in Middle East & Africa

2. The Nature of the Terror Threat, As Best We Can Tell

3. Why the Middle East is a Looming Tinderbox

4. Egypt: What’s Next – New Government or Civil War?

5. Benghazi “Sealed Indictment” – Did Obama Break the Law?

Overview

Today, we depart from our usual topics and focus on why the Middle East could soon deteriorate into a full-blown crisis that could affect markets around the world. We begin by looking into the latest unprecedented embassy closures across the Middle East and North Africa. Did President Obama take the appropriate actions, or were the closures a sign of weakness to our enemies in the region? Or maybe both?

From there, we turn our attention to the worsening political tensions in Egypt. There is a real threat that Egypt could deteriorate into a full-scale civil war in the months ahead. Egypt controls the Suez Canal through which the majority of the oil produced in the region passes to get to the West. While the military controls the country for now, a civil war could threaten oil flows and send crude prices through the roof. As investors, we absolutely need to keep a close eye on the unrest in Egypt.

And finally, did President Obama break the law in his press conference last Friday when he revealed that the US has a “sealed indictment” against some of the perpetrators of the attack on our consulate in Benghazi last year? Divulging the existence of a sealed indictment is against the law. The media is largely silent on this, but I will give you the details today.

Unprecedented Embassy Closings in Middle East & Africa

On Friday, August 2, the Obama administration announced that it would close 22 US embassies and consulates in the Middle East and Northern Africa on Sunday, August 4, due to an undisclosed terror threat. This was an unprecedented move on the part of our government, and as such, it sparked a great deal of controversy.

Many believed that this was a sign of weakness on the part of the Obama administration, and an admission that we did not believe we could adequately protect our diplomatic facilities in the region. Clearly, our enemies in the region felt this way. However, others including the mainstream press, concluded that in light of the deadly attack on our Benghazi consulate last year, the embassy closings were more than justified. I won’t comment one way or the other.

What I will say is that it was very unfortunate that President Obama revealed to the world how we intercepted the terror threat and the fact that our intelligence sources have the means to monitor al Qaeda’s sophisticated communications system. No doubt the terrorist leaders will shift to another medium to communicate that is not readily available to our intelligence.

So why did the president feel it was so important to reveal how we got the terror warning? There are several theories floating around, but most agree that it was a real blunder on the part of the Obama administration to reveal that we could monitor the terrorists’ communications. I could write extensively on this topic alone, but today we’ll stick to what we know.

We were told that our intelligence agencies picked up on “chatter” of an impending terror attack on one or more of our embassies and/or consulates in the region as early as late July. British intelligence agencies reportedly got wind of the same communications, and some of their diplomatic facilities in the region were closed on that same Sunday as well.

The Obama administration was very tight-lipped about the nature of the threat, saying only that the chatter was as high, or higher, than it was before the 911 attacks on the World Trade Center and the Pentagon in 2001.

Map of Middle EastThe greatest threat of an impending attack reportedly originated from Yemen, an Arab country in the Western Middle East, occupying the southern end of the “Arabian Peninsula.” It is bordered by Saudi Arabia to the north, the Red Sea to the west, the Gulf of Aden and Arabian Sea to the south and Oman to the east, as you can see at left.

Yemen is known to be one of the remaining strongholds of al-Qaeda in the Middle East/ Northern Africa regions. It is the ancestral homeland of Osama bin Laden. We still don’t know the precise nature of the terror threat or how serious it really was or is. However, more details have been leaking out in recent days, and I will have more on the current thinking as we go along.

We are now told that all but two of the shuttered embassies and consulates reopened this past Sunday. The State Department released such a statement late last Friday. The US embassy in Sanaa, Yemen remains closed, we are told, because of continuing concerns about a threat for potential terrorist attacks by al-Qaeda. The US consulate in Lahore, Pakistan was shut down on August 8 due to a separate threat and also remains closed according to the State Department.

Nature of the Terror Threat, As Best We Can Tell

The Wall Street Journal reported early last week that the terror alert which led the US to close almost two dozen diplomatic facilities in the Middle East and North Africa was prompted by intercepted communications between the head of al Qaeda in Pakistan and the chief of the group’s most lethal affiliate in Yemen.

The WSJ (and later CNN and Fox News) reported that the head of al-Qaeda – Ayman al-Zawahiri in Pakistan – received a communication from Nasser al-Wuhayshi, the leader of al-Qaeda in Yemen, about a significant and imminent terror plot he was planning in his country.

The New York Times reported this story slightly differently, such that it was al-Zawahiri who ordered al-Wuhayshi to attack US (and possibly other) diplomatic facilities in Yemen, as early as Sunday, August 4.  Either way, this communication was intercepted by US intelligence and was immediately considered a legitimate threat.

The fact that the threat emanated from Yemen probably did not come as a surprise to US intelligence officials. The US sharply escalated its drone war in Yemen in late July, and Yemini military officials reported that 38 suspected al-Qaeda militants were killed by drones in less than two weeks.

[Editor’s Note: While it’s no secret that I am not a fan of President Obama, I have to give him some credit here. No one but the president could have given the order to kill 38 terrorists in a series of drone strikes in Yemen. Whether he wanted to do it or not, he made the right decision.]

The fact that the US had already escalated its drone attacks on al-Qaeda in Yemen may explain why our intelligence officials recommended to the Obama administration that it close down almost two dozen embassies and consulates in the region, two of which are still closed.

U.S. Embassies

Unfortunately, the intercepted communication between al-Wuhayshi and al-Zawahiri apparently did not include any details about the planned terror attacks, such as the time or place or what means might be used.

Fox News reported last Friday that authorities in Yemen said they had discovered that al-Qaeda intended to attack multiple foreign embassies in the capital of Sanaa and to disrupt international shipping in the Red Sea. These same authorities said that a group of at least 25 al-Qaeda militants had entered Sanaa and other cities to carry out such attacks. The Yemeni statement said the government would pay $23,000 to anyone who comes forward with information that leads to the arrests of any of the wanted al-Qaeda men.

The discovery of the al-Qaeda plot prompted the Yemini Defense Ministry to step up security around the strategic Bab el-Mandeb waterway, which connects the Red Sea with the Gulf of Aden. Officials banned speedboats and fishing vessels from the area as details of the plot were reminiscent of the suicide attack on the USS Cole in 2000 in Aden harbor that killed 17 American sailors.

So far, there have been no terror attacks but the last two weeks have provided an opportunity for US drones to kill a reported 38 al-Qaeda members. However, the latest scare reminds us that terrorism is still very much alive in the Middle East and North Africa. And it may get worse before it gets better, as I will discuss below.

The Middle East is a Looming Tinderbox: Think Egypt

There is an old adage which says: “As Egypt goes, so goes the Middle East.” But the historic changes underway in Egypt today have repercussions far beyond even that. Egypt is where we need to focus.

For four decades, Egypt, as the political and military leader of the Arab world, has been the linchpin of US Middle East policy, the anchor for a moderate and pro-American Arab camp, the first Arab country to make peace with Israel and an indispensable first stop for all regional American diplomacy.

The alliance between the US and Egypt is not an easy one. When Egypt supports American policy, the US is far better able to promote its regional objectives; when it does not, as has happened fairly frequently, the US encounters difficulty.

The 2011 revolution that toppled Hosni Mubarak dealt a severe blow to Egypt’s tourist industry, which was a mainstay of Egypt’s economy. The tour buses that lined the streets around the pyramids have disappeared, according to France 24 international news. The Egyptian economy is practically dead. Political frustrations are boiling over, and even the most risk-tolerant investors are shying away from the economically devastated country.

In a country where religious fundamentalism remains widespread and where absolute poverty and illiteracy afflict most of the population, the prospects of a stable democracy taking root are dubious. The harsh reality is that no one has an answer to Egypt's crushing poverty, and a prolonged period of instability is likely.

Let’s fast-forward to July 3 when former President Mohammed Morsi was removed from office by the Egyptian military. Since then, the country has seen mass demonstrations and riots between the pro-Morsi Muslim Brotherhood supporters who want Morsi back in office and anti-Morsi protesters. These demonstrations have proven to be very violent at times, especially in recent days. Reports are that over 200 Egyptians – mostly Muslim Brotherhood protesters – have been killed by the police or the military.

What Happens Next? New Government or Civil War?

While the Egyptian military refrains from an all-out crack down on Muslim Brotherhood protesters for now, representatives from the United States, the European Union, the United Arab Emirates and Qatar are in Cairo looking to broker a compromise between jailed Brotherhood leaders and the military – one that will calm the streets and reach a democratic solution to Egypt’s political process.

This scramble for a solution makes all interested parties appear to be human rights advocates while they pursue their respective and, in some cases, competing strategic interests. But their mediation efforts have added to the Egyptian military’s dilemma on how to navigate the political crisis while keeping critical aid channels open.

When the military deposed Morsi in early July, it did so believing that countries already nervous about the spread of Islamist governments in the region would welcome the move and provide the necessary financial aid to sustain a new regime. The US and the Europeans maintained an ambiguous stance, publicly avoiding characterizing the shift as a “coup” while staying in close and quiet contact with Egypt’s generals.

With their own deep aversion to the Muslim Brotherhood already in plain view, Saudi Arabia and the United Arab Emirates publicly stepped up financial aid to the new military-backed regime, adding to a steady and quiet stream of payments that had made their way to the military and opponents of the Brotherhood in the months leading up to the intervention.

Yet even with continued aid from the West and from its neighbors, the situation in Egypt may be spiraling out of control. While it is widely believed that the military is in control, the protests are becoming increasingly violent. The Muslim Brotherhood is reportedly supported by nearly one-third of the Egyptian people, so it is not going to back down or go quietly away.

At risk is an all-out civil war in Egypt that could see hundreds of thousands, or even millions, dead in the aftermath.

Should this happen, it will almost certainly have serious economic repercussions around the world. While Egypt does not produce much crude oil, a significant portion of oil produced in that region is transported via the Suez Canal to the West.

Conclusions

While the Egyptian military has proven that it is capable of keeping the Suez Canal open in the past, all bets are off if the country deteriorates into a widespread civil war. Oil prices could explode wildly higher if the canal is threatened or blocked. Some energy analysts believe crude prices could top $200 a barrel in that case.

Should that happen, it could mean the end of the bull market in stocks around the world. With the bullish consensus on stocks as high as I’ve ever seen it worldwide, it won’t take much to burst this bubble. That’s precisely why we need to keep a close watch on Egypt.

Finally, some geopolitical analysts believe that if Egypt deteriorates into a full-scale civil war, the most likely outcome would be that the country ends-up a terrorist-controlled nation. That conclusion assumes that the Egyptian military loses power at some point, which could happen. Hopefully, it will not get to that point. Stay tuned.

Benghazi “Sealed Indictment” – Did Obama Break Law?

One final note before I hit the “send” button: I hesitate to bring this up, but President Obama may have broken the law in his press conference at the White House last Friday. The president was asked where we stand on bringing the Benghazi perpetrators to justice. To the surprise of his aides, he said:

“We have informed, I think, the public that there's a sealed indictment. It’s sealed for a reason. But we are intent on capturing those who carried out this attack, and we're going to stay on it until we get them.”

According to federal law, “No person may disclose a sealed indictment’s existence,” and a “knowing violation … may be punished as a contempt of court.” Contempt of court carries a maximum sentence of six months in jail.

A US official, speaking on the condition of anonymity, called the president’s disclosure “crazy.” He then asked, “Doesn’t the law apply to the president too?” And then jokingly added, “I guess he could pardon himself.”

There is a lot more to this very interesting story, but time and space don’t permit me to go into detail. If you want to learn more, see the links in SPECIAL ARTICLES below. I just wanted to bring this to your attention since the mainstream media basically ignored it, as usual.

Wishing you well,

Gary D. Halbert

SPECIAL ARTICLES

Embassy Closures Could Do Lasting Damage

Misstep: Obama Discusses Sealed Indictment on Benghazi

Obama reveals secret “sealed indictment” on Benghazi
 


Read Gary’s blog and join the conversation at garydhalbert.com.


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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