Ahead of the Curve: The Baghdad Stock Market
10-Mar-03 09:29 ET
[BRIEFING.COM - Robert V. Green] Frequent readers of Ahead of the Curve will know that we are now postulating that the real strategy behind the Administration's approach to the Iraq situation is not war, but a gradual increase in pressure, to force Hussein into abdicating. Obviously, that is only Plan A, with all-out war as backup. But the Baghdad stock market seems to feel Plan A is the likely outcome.
The Thesis: Plan A is No War
On February 11, we published a Stock Brief entitled Ahead Of The Curve: What Defense Stocks Are Saying. In it, the only meaningful interpretation for why defense stocks were falling was that the market believed that there will be no war.
On March 3, we followed up this analysis with a Stock Brief entitled: Ahead of the Curve: Update on "Impending War," wherein we postulated that the real strategy is not to actual have military confrontation with Iraq, but to pressure Hussein into abdicating office. The strategy is to bring Hussein to a point where the choice becomes either near certain destruction of his country or abdication. Since the US forces, even without support from other western nations, is strong enough to completely overwhelm the Iraqi forces. There is simply no way that Iraq could "win" a prolonged war.
To achieve a decision by Hussein to abdicate, the strategy is increase the pressure so high that eventually a wedge is driven between Hussein himself and others in power in Iraq. When it becomes clear to them that the choice is suicide with Hussein or some kind of life post-Hussein, it is possible that they will choose to push Hussein out.
This strategy can be effective because while Plan A involves the avoidance of actual military conflict, the alternative, Plan B, an all out confrontation is always present.
The strategy is somewhat reminiscent of Theodore Roosevelt's adage: "Speak softly and carry a big stick."
This viewpoint, ironically, is now supported by the Baghdad stock market.
The Baghdad Market
The Baghdad stock market, although tiny by any standard, is very bullish.
In the past five months, since President Bush's speech on October 8, 2002, the market has risen more than 50%.
The stock market is both small and primitive. Trading is limited to Iraqi citizens.
All transactions are manually exchanges, with floor brokers talking directly to one another. There are approximately 120 stocks on the market, although some rarely trade. Total volume averages just $150,000 per day. Trading stops in any one stock when it rises 5% in a day. The entire market halts when the market index rises 5% in one day.
Why are stocks rising in Iraq?
The only possible explanation is that those with money believe that the post-Hussein world will be extremely positive for Iraqi companies.
The "closet capitalists" in Iraq apparently believe not only that Iraq will emerge relatively unscathed but that opportunities for capitalism will flourish.
Conventional Wisdom
The conventional wisdom regarding the onset of war is the following:
War is good for defense stocks because it causes sharp increases in revenues as supplies and equipment are consumed and replaced.
The onset of war is good for the stock market because it removes uncertainty.
War is good for the overall economy because government spending provides an economic stimulus that ripples through all sectors.
The problem with this war is that none of the conventional wisdom seems to be applicable. Defense stocks aren't rising. The overall market is not rising. The economy shows modest growth, but no stimulus.
The best explanation for all of this data is still that the market believes there will not be a war of meaningful military action.
Affect on Market - Post-War
At this point, we now believe that a successful resolution of the Iraq situation will ultimately have a minor effect on the overall US stock market (it might be great for the Baghdad market!).
Markets like the removal of uncertainty. The successful abdication of Hussein (Plan A) would have a short-lived positive effect, but the market would soon become preoccupied again with domestic economic conditions.
If Plan B occurs, military war, the economic stimulus would be minor. The markets would offset this stimulus with a discount for fear of higher oil prices are greater instability in the Middle East.
In fact, the economic stimulus from this Middle East would hardly make a dent in the US economy. The highest estimate of the cost of a war we have seen is $150 billion. This is only 1.5% of the overall GDP of the US. In World War II, the annual cost of the war was as high as 130% of GDP.
There is simply no comparison of the economic stimulus caused by prior wars to this Iraq war. The Iraq war is irrelevant when it comes to overall stimulus for the economy.
Conclusions
Pay attention to what markets say. They are not always right, but they often represent the best overall summary of what capital believes is going to happen. Capital "puts it's money where it's mouth is."
That message all adds up to one thing: the strategy is to squeeze Hussein out and preserve the economic infrastructure of Iraq. That is what the US market and defense stocks are saying - and the Baghdad market agrees.
- Robert V. Green, Briefing.com |
