A US war against Iraq appears to be only
a matter of when, not if, despite the latest rumblings from a few
high-level Democrats who oppose the idea. The latest Zogby poll
shows that 70% of Americans believe that Saddam Hussein is a
legitimate threat to the safety and security of the United States,
compared to 25% who believe Hussein is just another ruler whose
policies are anti-American. Most Americans also have little doubt
that we will win a war with Iraq handily, complete with the removal
of Saddam Hussein.
But the question I have been most interested in is whether there is
any group in Iraq that can successfully manage and govern that
country after Saddam and his thugs are removed from power. It would
be a terrible mistake for the US to clean out Saddam & Company, only
to see the country fall back into the hands of tyrants, especially
religious extremists who are sympathetic to al Qaeda, in another
year or two.
Most observers agree that there is no one group in Iraq who could
successfully govern and manage it in the post-Saddam era, given its
diverse population and different religions. Given that, what are the
US and our allies to do?
Well, my good friends at STRATFOR.COM released a fascinating report
last Friday. Stratfor.com is one of the most respected geopolitical
intelligence services in the world. Stratfor's high-level sources
tell them that one of the leading long-term strategies being
considered by US war planners is one that will DIVIDE Iraq into
three separate regions. Under this plan Iraq would CEASE TO EXIST.
Stratfor believes the plan would divide Iraq as follows:
The central and largest part of Iraq that is populated by the Sunni
Arabs would be joined with JORDAN to form one "United Hashemite
Kingdom," which would be ruled by Jordan's King Abdullah. This area
would include Baghdad, which would no longer be the capital.
The Kurdish region of northern and northwestern Iraq, including
Mosul and the vast Kirkuk oilfields, would become its own autonomous
state.
The Shia Region in southwestern Iraq, including Basra, would make up
the third state, or more likely it would be joined with Kuwait.
Stratfor's sources indicate that the plan to divide (and thus
eliminate) Iraq as described above is not the only plan under
consideration, and it is also not finalized. However, such a plan
makes a lot of sense to me.
Stratfor says that such a plan reportedly was discussed at an
unusual meeting between Crown Prince Hassan of Jordan and pro-US
Iraqi Sunni opposition members in London in July. Further, they say
that in September, the Israeli newspaper, Yedioth Ahronoth, stated
that the US goal in Iraq was to create a United Hashemite Kingdom
that would encompass Jordan and Iraq's Sunni areas. Also, Israeli
terrorism expert Ehud Sprinzak recently echoed this sentiment on
Russian television on September 24.
So whose idea is this? According to Stratfor, Sprinzak stated that
the authors of the "Hashemite" plan are Vice President Dick Cheney
and Deputy Secretary of Defense Paul Wolfowitz, both considered the
most hawkish of Bush administration officials. That is not
surprising.
Why Such A Plan Might Make Sense
As noted above, the Bush administration may be considering the
proposal because the current goal of replacing Saddam Hussein with a
pro-US Iraqi government still would not guarantee long-term
democratic stability over the territory and its oil. It may become
too hard for a new government in Baghdad to effectively control the
whole country, even with US troop support. An example is
Afghanistan, in which the government of President Hamid Karzai still
controls only the capital. Stratfor offers the following analysis:
"The new government's attempts to establish control over all of Iraq
may well lead to a civil war between Sunni, Shia and Kurdish ethnic
groups, with US troops caught in the middle. The fiercest fighting
could be expected for control over the oil facilities. But uniting
Jordan and Iraq under a Hashemite government may give Washington
several strategic advantages.
First, the creation of a new pro-US kingdom under the half-British
Abdullah [king of Jordan] would shift the balance of forces in the
region heavily in the US favor. After eliminating Iraq as a
sovereign state, there would be no fear that one day an
anti-American government would come to power in Baghdad, as the
capital would be in Amman [Jordan]. Current and potential US
geopolitical foes Iran, Saudi Arabia and Syria would be isolated
from each other, with big chunks of land between them under control
of the pro-US forces.
Equally important, Washington would be able to justify its long-term
and heavy military presence in the region as necessary for the
defense of a young new state asking for US protection -- and to
secure the stability of oil markets and supplies. That in turn would
help the United States gain direct control of Iraqi oil and replace
Saudi oil in case of conflict with Riyadh."
Benefits To The US
According to Stratfor's sources and the Israeli media, the richest
oil areas would go not to the Hashemite kingdom but to the
autonomous Kurdish region in the north. To make sure the new Kurdish
state is not seen as a threat to Turkey, our ally, the US would
deploy armed forces and build new military bases in the area, not
only to prevent any hostilities along the border, but also to insure
the free flow of oil from this area.
As a part of this plan, it is believed that the Bush administration
would also negotiate new deals to build US military bases in the
Hashemite kingdom and in the Shia Region to the south. This would be
a huge development in the War On Terror. With US military bases in
the three new states, the US would be in an ideal position should it
choose in the future to go after Iran, Saudi Arabia or other states
in the region that are supporting terrorism.
With Iraq divided as described above, with US aid and military
assistance, and not to mention, huge oil revenues going into
government coffers (as opposed to Saddam's pocketbook), this region
could become very prosperous very quickly.
Benefits For Israel And Jordan
Stratfor suggests that the division of Iraq, as described above,
will reap big benefits for both Israel and Jordan. Iraq, arguably
Israel's most determined enemy, would be eliminated. The end of
Saddam's regime would also deprive the Palestinians of much
financial and other assistance, which could reduce the effectiveness
of their attacks against the Jewish state.
King Abdullah of Jordan would vastly expand his role and prominence
in the region with a joint Hashemite state, becoming the second-most
important US ally in the region after Israel. In addition to his
huge territorial gains, he also would get a chunk of Iraqi oil. And
Palestinians, who currently make up half of Jordan's population,
would become a minority in the new state, with much less potential
to stir up trouble.
Difficult, But Not Impossible
Stratfor is quick to admit that the division plan above may not be
the final strategy. Others are on the table as well. Stratfor also
acknowledges that the plan will be difficult to achieve, and there
are obviously some risks. Certainly, it will be difficult to get the
various factions in Iraq to agree to the new arrangement. Obviously,
Saudi Arabia and Iran, and perhaps others in the region, will have
major heartburn over such a plan. Stratfor cautions that even Turkey
could have a problem with this plan. In addition, Stratfor says:
"The plan may not be free of negative consequences for Washington,
however. Iraq's Shia majority -- whose anti-Hussein opposition seems
currently divided between the United States and Iran -- probably
would not agree to become a part of the new kingdom. Iran may
interfere by urging Iraqi Shias to join with Tehran. Washington
might counter by agreeing to attach the Shia Iraqi region to Kuwait,
Israeli media speculates. Turkey, despite a U.S. military presence
in Kurdish areas, still might have reservations about the plan.
Finally, it is unclear how Sunni tribal and other leaders inside
Iraq would react."
Conclusions
As noted at the beginning, I believe a plan that involves splitting
Iraq into separate entities is a very good idea. Assuming Saddam's
regime is toppled, it will still be very difficult, if not
impossible, for any one faction to control the entire country. If
the plan includes provisions for permanent US military facilities in
the new states, that will make the prosecution of the War On Terror
much easier.
There are certainly arguments against a permanent US military
presence in the region. Some will argue that we are setting
ourselves up for another Vietnam-like conflict that could last many
years. And there will be plenty of other negatives voiced if this
plan is actually adopted.
Yet in the end, some type of plan that splits Iraq and eliminates
Baghdad as the capital may be the best long-term solution, as
Stratfor suggests.
The Economy -- Disappointment Ahead
Earlier this month, the Wall Street Journal surveyed 11 leading
economists for their predictions for the 3Q and 4Q. Their average
forecast for the 3Q was +3.8%, while their average for the 4Q was
+2.9%. I expect both forecasts to be too optimistic.
In late September, the Commerce Depart released its second estimate
of 2Q Gross Domestic Product. The government revised its estimate
from +1.1% to +1.3% (annual rate of growth) for the 2Q. So, what is
it that 11 leading economists are seeing to make them think that 3Q
GDP will rise at an annual rate of 3.8%? Whatever it is, I don't see
it.
Here's what I do see. One of the most reliable barometers of the
economy's trend is the Index of Leading Economic Indicators (LEI).
The LEI has been down for the last three months in a row. This
suggests to me that 3Q GDP may be as bad as the +1.3% number for the
2Q, not +3.8% as expected by the economists in the latest WSJ
survey. The 4Q may not be much better and could be worse.
American consumers have remained in "spend mode" despite the
sluggish economy and the plunge in the equity markets. Consumer
confidence has edged lower in the last four months, but it has yet
to plunge. Why? Because most households have seen more increase in
the value of their homes than decrease in their stock portfolios.
The question is, are we going back into recession? Assuming housing
prices remain firm, the odds are good we will not dip back into
recession. On the other hand, if housing prices fall significantly,
consumer confidence will really go in the tank, and another
recession will follow. I don't see that happening over the next two
quarters.
For a more detailed analysis of what is likely to happen to housing
prices, go to my website at www.profutures.com. Look in the archives
for my May 2002 issue of my Forecasts & Trends newsletter (the
monthly hard-copy edition). In it you will find the latest Harvard
study on the outlook for residential home prices. [Hint: it's very
positive.]
Whether the economy can rebound firmly next year depends on housing
prices, as noted above, the war with Iraq, a stabilization of
corporate earnings and a bottom in the equity markets. And of
course, no more serious terrorist attacks.
The Investment Markets
The equity markets continued to drill down to new, four-year lows in
the last week. The S&P 500 Index is down over 28% for the year, and
almost 50% from the peak in March 2000. The Dow Jones fell 12.4% in
September, the worst month since August 1998. The S&P fell just
slightly more.
The Fed's decision to leave interest rates unchanged at its last
policy meeting (Sept. 24) precipitated the latest plunge to new lows
in equities. September certainly lived up to its legacy as the worst
month of the year for stocks.
Yet as this is written (Tues), the markets are sharply higher.
Traders are buying on the chance that the markets are so oversold,
we're overdue for a strong rally, even if it's just a "correction"
in the bear market. Time will tell.
Whether this is "the bottom" or not, I do expect to see a meaningful
rally before the end of the year. The next Fed meeting is on
November 6 at which time I expect a full 50 basis-point reduction in
interest rates.
This suggests that the slide in equities will end, at least for a
meaningful time, BEFORE November 6.
Picking major bottoms in the investment markets is much more about
LUCK than about skill, so I will not venture a guess as to when the
markets bottom. However, another excellent buying opportunity should
happen in the next several weeks.
Treasuries are about as overbought as I have ever seen them. Bullish
sentiment on bonds is near 90%, suggesting that the risk of a nasty
selloff is very high just ahead. Whenever the flood of investors who
are cashing out of equities in favor of bonds is over, expect bond
yields to ratchet back up again.
The only way I would get into bonds now is in a professionally
managed bond-timing program. To learn more about the only Investment
Advisor I recommend to do this for you, read my latest Special
Report, "How To Own Bonds Today" at www.profutures.com.
As suggested last week, gold prices should remain firm overall, due
to all the global uncertainty and the coming war with Iraq. If gold
can close firmly above $330, the June high, that will be a very
positive technical development.
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