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Circle of Threats
Saddam threatens his neighbors. The U.S. and Britain threaten Saddam and Osama threatens the U.S. It is becoming a vicious circle of threats that is making the markets uneasy. The U.S. intelligence agency has authenticated last week’s audiotape of Osama bin Laden. The war drums are beating louder with each side vowing dire consequences. The U.S. is committed to disarming Hussein who is equally committed to inflicting damage on either the U.S. or it’s neighbor, Israel. The Washington Times has reported that Iraq has boosted the range of its surface-to-air missiles. The Chinese have provided Iraq with fiber-optic communications system to enhance their air-defense network. Iraq’s air defense unit continues to fire regularly at U.S. and British warplanes. The countries air defense network now employs 1,500 surface-to air missile launchers. It isn’t quite clear whether firing on patrolling jets is a violation of the U.N.’s resolution of forbidding hostile action against U.N. member states. The U.S. and British patrol jets have been operating in the region since 1991 to prevent Iraq from attacking opposition forces in other parts of the country. Most recently allied warplanes have stepped up their attacks against Iraqi air-defense systems. Coalition warplanes are now attacking larger air-defense targets in what may be a prelude to war.
In response to the possibility of an attack, Iraq has now threatened to launch strikes against Israel. Deputy Prime Minster Tariq Aziz warned that any military action against Iraq would endanger not only Britain and America, but also Israel. When questioned as to what kind of threat or danger, he simply said that ”the consequences will be very bad for them and their friends in the region.”
While the U.S. and Britain threaten Iraq with consequences if they don’t comply with U.N. resolutions, al-Qaeda threatens the U.S. and Britain with spectacular terrorist attacks. Last Friday, the FBI said the organization is planning a “spectacular” terrorist attack. Intelligence sources say that the al-Qaeda attacks would be designed to achieve three objectives: high symbolic value, mass casualties, severe damage to the U.S. economy, and maximum psychological trauma against the American people. An alert has been posted on the FBI’s web site after news of a possible major attack was reported by The New York Times and Associated Press. A weakened al-Qaeda may use conventional explosives and low-technology platforms to deliver their attack such as truck bombs, commercial or private aircraft, and explosives that could be easily concealed Federal authorities have issued warnings for specific industries, especially energy and power, and national landmarks. Concern is growing because of increased chatter that is being picked up through intelligence channels. The risk has heightened recently because of the Muslim holy month of Ramadan, which started last Wednesday and ends on December 5th. Last Wednesday the FBI warned authorities in Houston, Chicago, San Francisco and Washington to be aware of threats against hospitals.
Last Friday, the same day of the FBI warning, Russian officials announced that small amounts of weapons and reactor-grade nuclear materials have disappeared from the country's nuclear facilities. Russia’s nuclear security has long been a high concern in the last decade. Suitcase nuclear weapons are missing and now it is reported that nuclear material is also missing. There was an article published on Asian Times Online that al-Qaeda has gotten a hold of nuclear devices. That story has since been pulled and has been declared as a hoax. But the chatter and the rumors continue to surface. And last Friday Russia acknowledges, in addition to missing nuclear bombs, we now have missing nuclear materials. The inferences and the whereabouts of those materials have now become a high stakes intelligence game. The stakes keep getting higher as each side threatens each other with dire consequences of its action. Over the weekend al-Qaeda made yet another threat against New York city and Washington D.C.
It has not yet dawned on the financial community and many U.S. citizens that we are now at war. It isn’t going to be a traditional industrial age war fought in the Clausewitzian traditions with armies lined across from each other as in times past. The new war is asymmetric and more in the tradition of Sun-tzu. To quote Sun-tzu,
"The place we have chosen to give battle must be kept from him. If he cannot anticipate us, the positions the enemy must prepare to defend will be many. And if the positions he must prepare to defend will be many. And if the positions he must defend are many, then any unit we engage in battle will be fewer in number… The ultimate skill in taking up a strategic position (hsing) is to have no form (al-Qaeda today). If your position is formless the most carefully concealed spies will not be able to get a look at it. Just as the flow of water avoids high ground and rushes to the lowest point, so on the path to victory avoid the enemy’s strong points and strike when he is weak.” Sun-tzu
There you have the playbook for asymmetric warfare. To win against it requires all out war. To beat such an enemy, you must fight war like the Romans. This is against Western traditions -- at least for now unless unrestrained attacks against the U.S. push it towards a militaristic state. The U.S. has always been a reluctant combatant, but when pushed to fight, it fights to win.
Financial Markets React to Increasing Threats
As war threats heighten on each side, the financial markets headed to the downside. The main beneficiary of these new threats of war was the price of energy. Natural gas prices rose 7 percent to $4.263. Heating oil rose 5 percent and crude oil rose almost as much rising 41.20 a barrel to $26.71. The CRB Index rose 1.08 to 228.21. Behind the day's gains were a run up in energy prices, cocoa, cattle and grains. The index has risen from a low of 186.93 on January 30th of this year to today’s close of 228.21. Since its low in January, the CRB has steadily risen 22 percent. A rising CRB Index may be one reason, besides a falling dollar, that the bond market has been running into trouble lately.
Besides a falling dollar and rising gold prices this year, rising energy prices pose a threat to the markets. Industry groups within the natural gas market have warned FERC not to interfere with the pricing markets. The industry warns that market prices are needed in order to build the natural gas infrastructure. Price controls or regulation would inhibit this building, which is badly needed to meet the country's future energy needs. At debate within this country is the issue of energy production decline. Government officials and academics believe that world oil production won’t decline for decades. Most geologists in the industry take a different view. They believe that oil production will peak sometime in this decade. Many feel that the peak in production in the western world will be sometime between the years 2005-2006. If the geologists are right the world is going to face a severe energy crisis. Four-five years isn’t enough time to ramp up energy exploration and development, which has a long lead-time from the time of discovery to the time you fill your car's gas tank. Add to this equation the uncertainties of war and it isn’t difficult to see why the price of oil is rising again. The fact is that we have run out of $10 oil, and it appears now we may be running out of $20 oil. Now the question is, how soon will it be that we start to run out of $30-$40 oil? The sooner we start facing that issue, the further out we can push the time reckoning.
Today's Market
Looking at today’s casino results, the markets had difficulty holding on to gains earlier in the session. Typical of today’s news was Wal-Mart reporting that same store sales are lagging forecasts, thereby raising concern over a slowdown in spending by a debt burdened consumer. There is a growing feeling that earnings this quarter are going to be weaker than forecasted. Financial shares fell after Fannie Mae reported a slow down in its growth. Defense shares sold off as short-sellers increase their short positions in defense contractors in the belief that war is less likely. Defense, energy, and the metals remain the most attractive sectors within this market. The herd is trading tech stocks again in the hopes of another boom to recoup their heavy losses. While the individual fund manager and day trader load up on techs, the pros are increasing their tech short positions. The latest Commitment of Traders report shows that the smart money commercials hedgers have increased their net short positions to 38,857 contracts net short. Bullishness is running high as investors seem to have abandoned all caution, and worry now about missing out on all of the action of the market's rise. As the CBOE Put/Call ratio falls, a number of newsletter writers turn bullish. The VIX has fallen to 31.11 and the VXN has dropped below 50 to 48.09. This is about the level they reached during this past summer's rally before the September selloff.
Outside the earnings warnings, business slowdowns, bankruptcies and scandals, there was nothing out of the ordinary to focus on. Most of the news was geopolitical in a vicious circle of threats. One trader put a positive spin to it all by saying, "Despite war threats and the numerous bad news stories, the markets have managed to rise." In this trader's view, the markets have already discounted all the bad news so there is nowhere else to go but up in this low interest rate environment. In other words, with interest rates at 1 percent, where else are investors going to go but stocks?
Volume came in at 1.2 billion on the NYSE and 1.7 billion on the Nasdaq. Market breath was negative by 4-1 on the NYSE and the NASDAQ.
Copyright © James J. Puplava
November 18, 2002 |
