The New, Hotter Cold War

A long series of U.S. foreign policy mishaps, stumbles, and outright failures have set us on a collision course toward a new, hotter cold war — with far-reaching consequences for all investors.

This week, I will focus on the Middle East. And in Part II of this series, I will turn to East Asia.

How U.S. Policymakers Grossly Underestimated

The Depth of Ethnic Conflicts in the Middle East

Not long ago, the West was applauding the “Arab Spring” — a wave of democracy movements that began in Tunisia, spread east to Egypt and the Arabian Peninsula, then West to Libya.

But today, those movements have morphed into a series of violent, multinational ethnic conflicts, largely between the region’s two most deeply entrenched groups — Shiite and Sunni Muslims.

I first warned of this conflict in 2006, at a time when Washington was hailing the “success of the first democratic elections” in Iraq.

But I saw it differently.

I wrote that those elections were opening …

“a new, more violent chapter in the war between Shiite and Sunni Muslims — the ethnic-religious conflict born with the death of Muhammad’s grandson during the battle of Karbala of 680 AD, over thirteen centuries ago.”

I described a scenario in which …

“The Sunni population rises up in a broader rebellion …

“Iraq bursts into civil war …

“And the conflict spreads to neighboring countries in the region.”

Plus, I warned:

“Throughout the West, the depth and deadliness of this millennial conflict is severely misunderstood and grossly underestimated.”

Now, just as I feared, the millennial Shiite-Sunni conflict has escalated dramatically across the region, thrusting the U.S. into inexplicable, unjustifiable and untenable positions — virtual TRAPS that can make mincemeat of U.S. policy in the region.

For a better understanding, look at this map.

The dark and light brownish areas have majority Shiite populations, while the balance of the countries shown are predominantly Sunni.

Moreover, the map belies the fact that ALL countries in the region have a mix of both Muslim sects:

Kuwait has a Shiite minority of 27 percent; Saudi Arabia, 3.3 percent; Oman, 12 percent; and the United Arab Emirates, 16 percent.

And in most of those countries, the hatred and resentment between the two Muslim sects run deeper than those associated with virtually any other ethnic conflict in the world today.

Consider, for example, the absolute irony — and DANGER — of these situations:

Syria

In Syria’s 13-month civil war, the U.S. has supported the rebellion with food, medicine, and training. Plus, right now, President Obama is about to expand that support with the addition of non-lethal military equipment.

But in the meantime, to the great dismay of the U.S. State Department, the rebel group taking credit for the biggest battlefield victories in Syria is none other than Jabhat al-Nusra, a close ally of Al Qaeda in Iraq.

Worse, this week Jabhat al-Nusra has declared that its ties to Al Qaeda go far beyond a mere alliance: They are one and the same organization!

How did Washington wind up in this predicament?

It was mainly because the State Department and intelligence services AGAIN underestimated the Shiite-Sunni hatreds … were caught off guard by the civil war it created … failed to give timely support to non-Al Qaeda rebel groups … and gave Al Qaeda the time window it needed to carve out a dominant position on the ground.

End result: Any support the U.S. gives to the Syrian rebellion — whether lethal or not — will also help support precisely the same organization that has sabotaged America’s efforts in Iraq.

Turning to Iraq itself,what’s even more ironic is that nearly its entire leadership — including its economic elite and military top brass — is now one of the staunchest allies of the same country that provides the most support to Assad’s regime and to terrorists groups in the region — Iran.

How did THAT happen?

From the very beginning of the war in Iraq, the State Department and the Pentagon pooh-poohed warnings about the Shiite-Sunni conflict.

They assumed that any democratically elected government would naturally include power-sharing among major ethnic groups.

But they were dreaming.

Instead, soon after the U.S. paved the way for the majority Shiites to come to power in Iraq, precisely the opposite happened: The Shiites shoved the minorities out of critical positions in government, took control of the country’s strategic resources, and then went on to establish the country’s closest alliance with Iran in modern history.

It should have been obvious:

Iran’s leaders are fellow Shiites.

Iran was the host for Iraq’s Shiite leaders in exile during the Saddam years.

Iran’s Ayatollah Ruhollah Khomeini was their idol then, and Ayatollah Ali Khamenei is their idol now.

The ayatollahs’ disciples, including the Iranian Revolutionary Guard, were their mentors.

Iran has frequently invited Iraq’s Shiite leaders to Tehran for consultations and even instructions.

End result: The $6 trillion in overall costs related to the Iraq War — not to mention the 4,500 in U.S. military casualties and hundreds of thousands of civilian casualties — have achieved little more than to hand Iraq to Iran on a platter.

This is why Shiite-led Iraq has regularly opened its territory to let Shiite Iran transport tons of weapons to the Shiite regime in Syria — not to mention the Shiite Hezbollah in Lebanon.

And it’s why Iraqi’s Shiite president, Nouri al-Maliki, turned a deaf ear to U.S. Secretary of State John Kerry last month when Kerry pleaded with him to stop facilitating those shipments.

Meanwhile, the U.S. has also underestimated the impact of similar ethnic conflicts in …

* Lebanon — where the Shiite Hezbollah, widely considered a terrorist organization, is a leading faction in the coalition government and a direct supporter of the Assad regime of Syria.

* Pakistan —where the Shiites, Christians, and other minorities have recently come under fierce attack by gangs of majority Sunnis, and where they face unprecedented insecurity and persecution.

* Bahrain — the only remaining country in which the Shiite majority is ruled by a Sunni minority, and where a Shiite-led rebellion, although repressed, continues to smolder.

In Part II of this series, I will expand the discussion to East Asia … and more importantly, explore the potential impact on oil, inflation, interest rates and your investments.

In the meantime, be sure not to miss this week’s feature stories in Money and Markets (below).

Good luck and God bless!

Martin

 

---

 

EDITOR’S PICKS Inside: How to avoid losing your shirt! by Larry Edelson Last week, I told you about the hundreds, if not thousands of readers that wanted my head for remaining bearish on gold and silver. Well, gold and silver have taken the shirts off the backs of loads of investors and analysts who refused to listen to me! Trend Following Explained by Douglas Davenport If there’s one thing I’ve learned through all my years of managing money and following the financial markets, it’s that no one can predict the future. How to Get an Edge over Wall Street’s Hotshots by Bill Hall An investment model is a framework for analyzing financial information. And as an experienced Wall Street professional, I call tell you that a number of them can result in investment success. But the ones that are most profitable — and have the best chance of growing your money over the long-term — share several characteristics.

THIS WEEK’S TOP STORIES Will Downbeat Data Lead to a Negative Surprise for Stocks? by Mike Burnick When stocks get off to a good start to the year, unpleasant surprises in the economic data often spoil the party. This typically occurs in combination with rising financial stress thanks to the usual suspects such as: Investing in today’s “Bizarro” market! by Mike Larson I don’t know if you’re a Seinfeld fan like me. But one of my favorite episodes of all time was “The Bizarro Jerry.” In that 1996 show, Jerry Seinfeld and the rest of his friends meet versions of themselves that are completely opposites in terms of personality and behavior. Regulators Close Gold Canyon Bank, Arizona by Weiss Ratings JUPITER, Florida (April 5, 2013) — On Friday, regulators closed Gold Canyon Bank, Gold Canyon, Arizona. This marks just the fifth failure for 2013 following 16 failures at this time for 2012 and 28 for 2011.

---