Highly conservative investment advisor John Hussman whose fund has one of the best track records the past few years is cautiously bullish on peace. Not a fan of the boy emperor obviously.
Sunday February 2, 2003 : Weekly Market Comment
Copyright 2003, John P. Hussman, Ph.D., All rights reserved and actively enforced.
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The Market Climates for both stocks and bonds remain hostile, characterized by both unfavorable valuations and unfavorable trend uniformity. In stocks, we are fully invested in individual stocks displaying favorable valuation and market action on our measures, but we have largely removed the impact of market fluctuations on the portfolio through offsetting short positions in the Russell 2000 and S&P 100 indices. In our total return approach, we continue to hold a relatively short portfolio duration through callable agency notes and short duration Treasuries. We also hold Treasury inflation protected securities over a range of maturities. These securities are sensitive to real interest rate movements, are generally less volatile than straight bonds of similar maturity, but have recently enjoyed equivalent gains. This is because recent declines in interest rates have been driven wholly by declines in real interest rates, while inflation expectations have been constant or rising. Finally, we hold moderate positions in precious metals shares, utilities and foreign government notes. In all, we are positioned in a way that takes advantage of existing pockets of favorable valuation and market action, but without much dependence or sensitivity on overall market movements.
Last week was a powerful negative from the standpoint of trend uniformity. About mid-week, there was a chance that we might actually set the stage for the classic momentum shift that often marks good, tradeable "bear market rallies." Unfortunately, the market stabilized later in the week, and as it happens, moderate deterioration is nowhere near as favorable as a washout. Meanwhile, the percentage of bullish investment advisors remains at 50%. This level of bullishness is uncharacteristic of important market lows, and adds to the risk that the market could break further. As usual, that's not a forecast, but there seem to be few reasons to accept such risks at present.
The best chance for a near term shift in trend uniformity would actually be a washout, consisting of a hard market decline with strongly negative breadth, a preponderance of downside trading volume, and a significant increase in advisory bearishness. That's certainly a possibility given near term uncertainties, so we can't rule out the prospect of a more constructive position ahead. Still, we would never position ourselves in anticipation of that kind of shift, particularly because of the brutal short-term decline that would be required as a prelude. In any event, we're still defensive for now, and we'll take our evidence as it comes.
Clearly, the coming weeks will be critical ones. By unanimous opinion, war with Iraq is now considered a certainty. Well, nearly unanimous opinion. At the risk of being excused as utterly naive, implausibly contrarian, or incorrigibly pacifist, I am increasingly of the opinion that there will be no war, at least no early war, with Iraq.
Following a surge in crude oil futures on the eve of the initial U.N. inspectors' report, crude prices have displayed an inability to better those highs. Certainly a move to $40 or more would suggest an increased likelihood of military action, but at present, the behavior of crude prices is out of context, if war is indeed imminent.
Politically, the reasons to doubt an early war are also increasing. It is probable that Colin Powell's presentation to the U.N. on Wednesday will not present obvious evidence of "material breach" but rather what the Administration considers a pattern of evasion by Iraq during recent inspections. It is also probable that this presentation will not alter the determination of Germany and France to allow more time for inspections in the interest of avoiding war. Statements from political leaders in these countries make it clear that the notion of "material breach", which the Administration equates with justification for war, has no such implication in their view. Rather, the consequence of material breach would be a referral back to the security council for "appropriate enforcement actions" which need not be military in nature. As a result, the German and French governments insist that a second resolution, apart from 1441, would be required in order to constitute U.N. sanction of war.
There is no question that it is in the interest of the U.S. to claim and preserve the right to unilaterally declare war in its own defense. However, in this instance, the imperative for war is far from clear, and nearly 70% of Americans favor war in Iraq only if it is sanctioned by the U.N. - an indication of uncertainty among Americans as to whether military action is actually justified. So unless France (which holds veto power) and Germany (which does not) abruptly lose the resolve that is so popular among their own people, the Administration may be hard pressed to recruit widespread public opinion in support of war even within the U.S. itself.
Needless to say, the press has not been particularly careful in distinguishing the will of the American people with the will of the current Administration. To anybody who believes that America's virtue lies in its principles, its liberty, its democracy, and its people, the eagerness to equate the two in this instance is troubling. But this distinction is a critical factor in assessing the probability of war.
The willingness to choose long and frustrating diplomacy instead of war does not constitute "appeasement" - a word that has been recklessly contorted in recent months. Appeasement involves the grant of concessions - generally dishonorable ones - to an enemy, in return for assurances of nonaggression (as when Hitler was offered part of Czechoslovakia in the Munich Agreement, over the objections of Czechoslovakia, which was barred from attending). Appeasement is not inherent in the pursuit of diplomacy, nor in the demand for grave justifications as a precondition for war.
The argument against war is also not an argument against U.S. security or the defense of its interests, but rather a recognition of the elements that are necessary to achieve those aims. It is exactly in pursuit of American security and interests that the Administration should emphasize containment, deterrence and diplomacy - even years of it if necessary - instead of a war on a government that, while tyrannical, is of questionable threat. A war would predictably increase international resentments, further destabilize very tangible risks in North Korea, and ultimately radicalize countless potential terrorists, with no central authority from which surrender could be obtained. As the International Herald Tribune puts it, the Administration has proved itself "good at fighting terrorists, but not at fighting terrorism."
As John Jay wrote in The Federalist in 1787, "the safety of the People of America against dangers from foreign force, depends not only on their forbearing to give just causes of war to other nations, but also on their placing and continuing themselves in such a situation as not to invite hostility or insult; for it need not be observed, that there are pretended as well as just causes of war... and that whenever such inducements may find fit time and opportunity for operation, pretences to colour and justify them will not be wanting. Wisely therefore do they consider Union and a good national Government as necessary to put and keep them in such a situation as instead of inviting war, will tend to repress and discourage it."
In the weeks ahead, a number of factors are likely to gauge the probability of war, quite apart from the obvious news. One is crude oil prices. Again, a surge above $40 a barrel would suggest a deterioration in the likelihood of peaceful resolution. News coverage will also be important. Any shift in public opinion against military action in Iraq is likely to be accompanied by a substantial increase in news stories focusing on the human costs of war.
We certainly would not take investment positions on the expectation or forecast of a peaceful resolution, but this is mainly because we never take positions on the basis of forecasts or scenarios. For now, the Market Climate holds us to a defensive stance. |
