President Bush Makes His Case
FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
October 8, 2002
IN THIS ISSUE:
President Bush Makes His Case, Reveals New Intelligence On Iraq
On Monday night, President Bush went before the American people (sort of) and made his most compelling case yet that Iraq has weapons of mass destruction and is developing long-range delivery systems. The president said:
“We've also discovered through intelligence that Iraq has a growing fleet of manned and unmanned aerial vehicles [UAVs] that could be used to disperse chemical or biological weapons across broad areas. We're concerned that Iraq is exploring ways of using these UAVs for missions targeting the United States.
Failure to act would embolden other tyrants, allow terrorists access to new weapons and new resources, and make blackmail a permanent feature of world events . . . And through its inaction, the United States would resign itself to a future of fear. That is not the America I know. That is not the America I serve. We refuse to live in fear.”
To me, the president’s address to the nation was very serious, understated, non-political and very, very important. One journalist described the president’s speech as follows:
“He [Bush] systematically addressed the concerns that have been raised by fence-sitters and anti-war advocates for weeks. He treated those concerns with respect and high seriousness in a speech remarkable for its gravity and an absolute refusal to play politics with a popular political issue in the middle of a political season.”
President Snubbed By Media – Unheard Of
It was a speech that all Americans should have heard. But only one of the major broadcast networks, Fox, chose to air it. Fox and Major League Baseball agreed to postpone the start of a playoff game to assure the president the air-time he needed.
What about the other broadcast networks? ABC aired “The Drew Carey Show.” CBS aired the “King of Queens.” NBC showed the reality program “Fear Factor,” during which a person was covered by 200,000 bees. Yep, some real serious stuff! While the White House didn’t formally ask for broadcast air-time, you would think the networks would have aired the address in any case, since public support for the war is so high.
At the risk of overstating the obvious, I agree with the president that regime change needs to occur in Iraq. US foreign policy has undergone a fundamental shift in the last 18 months. It has changed in principle and in practice from a “reactive” policy to a “proactive” policy. That is to say that the US will no longer wait for its interests to be threatened, but will act decisively to preempt such threats. This change in policy is evident in the War on Terror, and will shortly see application in Iraq and elsewhere in the future.
Those For & Those Against The War
Now that this weekly E-Letter is being sent to over 1,000,000 people all across the country, I get a lot of e-mails in response. The majority of e-mails I receive regarding the war on Iraq are resoundingly in agreement – Saddam must go. Of those who oppose the war, most are against it since they see it as nothing more than an “OIL GRAB” that will line the pockets of Bush’s friends in the oil business.
With regard to Iraq in the context of our new proactive foreign policy, there are those who view US action against Iraq as unilateralist and/or imperialist. That’s fine. After all, there needs to be a debate on this issue. But those in the anti-war camp who claim that any US action in the region is motivated by our desire to annex or nationalize the vast Iraqi oil reserves for our own purposes are absolutely incorrect, in my opinion.
Will The Russians Get Onboard In The War Against Iraq?
One of the reasons the “oil grab” theory is wrong, is that the Russians would not go along with it. While it is true that the US and Britain could “go it alone” and topple Saddam Hussein, it will be much more difficult and costly without cooperation from the Russians and others. Ideally, the US and Russia should be in complete agreement. Currently they aren’t, at least publicly. Privately, however, the Russians may well be onboard, especially if the US has a role for Russia in Iraq after Saddam is removed.
The future of Russia’s fragile economy turns on one thing and one thing only… OIL. It is widely believed that when Russian president Vladimir Putin visited President Bush last November (or maybe even at an earlier summit), the two agreed on a long-term plan to significantly expand Russia’s oil production and exports. Putin desperately needs the oil income to rebuild his economy, and Bush wants another major oil producer besides the Middle East.
The Russians also played a big role in the war in Afghanistan because they wanted to build their much-needed Caspian Sea oil pipeline. Russia is very short on warm water ports, which is not a good thing for a future petro-state. That is one of the reasons they invaded Afghanistan in the first place. For more analysis on Russia’s involvement in the war in Afghanistan, you can see what I wrote on this subject last December in the first link below under SPECIAL ARTICLES.
In regard to Iraq, Lukoil (the Russian state petroleum consortium) has existing contracts worth billions of dollars to drill in Iraq’s vast northern reserves. Lukoil needs about $50 billion to transform and upgrade itself into a modern oil producer and exporter. There is no way they can raise that kind of capital internally. Their contracts with Iraq are critical. Thus, Putin cannot sit by and see the US go for the Iraqi “oil grab.”
As discussed in last week’s E-Letter, my sources believe the US is considering a plan to divide Iraq into three separate states, with each state getting some of the rich oil reserves. If this, or something like it, is true, that further trumps the argument that the US plans to nationalize the Iraqi oilfields.
So, do not be surprised to see the Russians come out publicly in support of the war on Iraq. If so, the US would probably agree (maybe already has) to work vigorously to get the UN sanctions lifted once Saddam is gone, so that Iraqi oil can flow freely on the world markets.
If oil from Iraq, or whatever the new state configuration is, starts to flow freely on the world market, the price of oil is likely to fall, perhaps significantly. That doesn’t bode well for Bush’s friends in the oil business, which runs counter to the thinking of the “oil grab” crowd.
Finally, if the Russians do come onboard, it will confirm three things: 1) that the Russians get to keep their lucrative drilling contracts in Iraq; 2) assurance that they will recover the $8 billion Iraq owes them; and 3) the “oil grab” theory is defunct.
The benefits to the US include: 1) Russian help in ousting Saddam; 2) a new source of dependable oil in the Middle East; and 3) new military bases in the region to assure stability and provide staging areas for the War On Terror.
Economic Impact Of The War On Iraq
The US economy is clearly slowing down. The government’s Index of Leading Economic Indicators (LEI) has declined for the last four consecutive months. In addition, the manufacturing index fell for the first time in eight months. This suggests the economy will be weak at least through the end of the year.
Trying to assess what affect the war with Iraq will have on the economy is difficult. At this point, we don’t know: 1) when the war will start; 2) when it will end; or 3) how much it will cost. Also as discussed in my September 24 E-Letter, we still don’t know if the Saudis are going to cooperate with us and allow the use of their military bases.
A lot of analysts are predicting deflation for 2003, which is just around the corner. As a result, many are urging the Fed to take a more aggressive stand in cutting rates and increasing liquidity to counter the growing deflationary pressures. Some have even suggested more fiscal spending at the federal level. They are about to get it in the form of the war on Iraq.
I’m sure you’ve seen estimates on the cost of the war. They range from as low as $50 billion to as high as $200 billion. Obviously, it all depends on how long the war lasts and how difficult it is to win. Whatever the cost is, $50 billion, $100 billion or $200 billion, that is a LOT of extra fiscal stimulus to come into this economy over the next year. That could serve to head-off the deflationary trend and stimulate the economy next year.
The “gloom-and-doom” crowd is convinced, as always, that we are headed into a severe deflationary recession, and that the Fed will be unable to stop it because interest rates are already so low. Yet wars are inherently inflationary. So if we go to war with Iraq early next year (or sooner, who knows), the additional fiscal spending ($50-$200 billion) could easily be enough to both overpower the deflationary forces and stimulate the economy.
Of course, if something changes and we do not go to war with Iraq, then this analysis could be out the window, in which case the deflationary scenario becomes much more likely. As always, we will just have to wait and see, but I would caution against “locking-in” on the deflationary argument for now.
The Investment Markets Outlook
The stock markets continue under pressure. The slowing economy, weaker than expected corporate profits and fears about a war with Iraq have sent the broad indexes to four-year lows. With the markets so severely oversold, a bottom could come at any time. However, it is also possible that the downturn will continue. This is why it is so important to have most of your equity investments in market-timing programs that can go to cash.
Bonds, especially Treasuries, are in a bubble that is ripe for bursting. However, the flight to safety rush could continue. Like stocks, the only way I would be in bonds now is in a market-timing program like Capital Growth Management that will go to cash if bond yields should start to spike upward.
Good luck in these crazy markets!
Gary D. Halbert
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.