Does the stock market’s immediate reaction to economic news leave you scratching your head?
Take the latest Fed rate hike, for example. Earlier this month, instead of going down as most people would expect in response to higher rates, the Dow responded with a 129-point surge.
Wall Street’s rationale: “The Fed wouldn’t raise rates unless it believed the economy was strong and growing. So, the bad news is really good news.”
The reality — the inevitability of rising borrowing costs — would naturally get in the way of Wall Street’s great money machine. So, their response is simply to ignore it — or spin it — for as long as they possibly can.
Similarly, last month, Fed Chairman Greenspan told Congress that the spike in oil prices is “transitory.” Now, he’s already being proved wrong. But Wall Street still believes him.
They’re ignoring the surging price of oil, which hit nearly $50 per barrel last week … which could surge to $60 or $70 in a very short time … and which threatens to derail the worldwide economic recovery … even without a major disruption in supplies.
They’re ignoring the record budget deficit, record trade deficit, and record debts that have piled up in every economy of the world.
But this “ignorance-is-bliss” syndrome is nothing new. Just take a brief detour to another time, and you’ll see exactly what I mean:
The Consequences of Complacency
The year is 1987; the place, the New York Stock Exchange.
The Dow Jones Industrial Average has jumped from slightly below 2,000 at the beginning of the year to over 2,700 in August — a 35% surge. But behind the euphoric front, the news is NOT so rosy:
==> The budget deficit has exploded. President Reagan has done a lot to reduce taxes, but he’s done little to reduce the size of government.
==> The Commerce Department announces a record trade deficit of 3.4% of GDP — the largest since 1960.
==> Gold and gold stocks have been rallying. In the 12 weeks prior to October 19, the XAU Philadelphia Gold Index has rallied another 47%. Newmont Mining is up even more — a whopping 122%!
==> The dollar has been going down, losing 15.3% of its value against foreign currencies in the year. But Treasury Secretary Baker has just appeared on TV to pooh-pooh the dollar’s fall. His statement is that the dollar could slip even further; his implication, that it won’t affect the markets one way or another.
==> Iran is a hot spot. The U.S. has attacked an Iranian offshore platform, reacting to an earlier Iranian attack on American registered vessels in the Persian Gulf.
Wall Street’s reaction to all this in early October 1987?
“It doesn’t matter” …
“Who cares?” …
“So what?” …
… until, that is, the fateful morning of Monday, October 19, when the Dow falls 22.6% in ONE trading day.
How much would that be in today’s Dow? Check the arithmetic for yourself: This past Friday, the Dow closed at 10,110. Multiply that figure by the 22.6% single-day decline of 1987, and you get 2,285 points.
Hard to believe, isn’t it? A Dow decline of TWO THOUSAND, TWO HUNDRED AND EIGHTY-FIVE points in just one single day? Even if it were just HALF that bad, it would be a financial shock that would change the world.
Sure, right now, the ugly fundamentals “don’t matter.” But as soon as they do start to matter, the price of overstaying the party could be steep indeed.
Consider these latest events …
==> The budget deficit has just hit a new record. President Bush has done a good job reducing taxes. But he has not done enough to reduce the size of government.
==> The Commerce Department has just announced the largest trade deficit in history.
==> Gold and gold stocks have been in a bull market for many months. On Friday afternoon in Europe, gold spiked up sharply to touch levels last seen in April as fund buyers piled into the market to hedge against the potential inflation risk from record-high oil prices. This morning, gold is down a bit. But it won’t last.
==> Despite small rallies, the dollar has been in a long-term decline against the euro and other major currencies for many months. But Treasury Secretary Snow doesn’t seem to give it much heed, seeking to focus the public’s attention last week on the domestic economy.
==> And, as in 1987, Shiite-dominated Iran is a hot spot, declaring last week that, in order to protect its nuclear facilities, it might embark on a pre-emptive strike against Israel — or even against the United States!
This is especially serious. So, it merits a closer look …
The Worldwide Shiite Revolution
Right now, as you read these words, U.S. troops and Shiite rebels are fighting fierce battles in the holy Iraqi city of Najaf; and throughout Iraq, Iranian forces have infiltrated the Shiite population.
Multiple explosions and gunfire are echoing around the world’s most sacred of shrines in the Shiite Muslim world — the Imam Ali mosque where the Mehdi Army militia of Moqtada al-Sadr are under siege.
Supporters of the radical cleric say a U.S. aircraft has fired a rocket into the outer western wall of the mosque compound.
The U.S. military denies that the shrine has been targeted. But one independent correspondent says he saw a dent in the wall measuring about three feet square and one foot deep, with rubble and spent parts of a rocket littered on the marble floor.
Indeed, according to the latest AP wire, shrapnel landed in the courtyard of the gold-domed mosque, whose outer walls have already been slightly damaged in fighting since the eruption of the rebellion, which has killed hundreds and driven oil prices to record highs.
This is very different from what we heard late last week, when Iraq’s prime minister Iyad Allawi said he hoped for a diplomatic resolution to the conflict.
But diplomacy at this juncture is a lost cause. Because in the minds of the radical Shiites barricaded inside the mosque, the only possible outcome is victory:
As long as they can hold out and repel the U.S. and Iraqi government forces, they are seen as heroes …
As soon as they are killed defending the holy ground, they are considered martyrs …
- And to the degree that the mosque is damaged, the entire region will be vulnerable to a massive popular rebellion — precisely what the radical Shiites want to see happen.
Last week, hundreds of young men inside the shrine chanted slogans vilifying Allawi.
“We are winning, we will win over Iyad Allawi and the traitors collaborating with the Americans,” they chanted.
Some held banners that said: “Where is the bullet that will grant me martyrdom?”
But this is just a small sample of the rebellion that could spread throughout the Shiite world in the wake of damage to the temple.
Like America has remembered the Alamo for nearly a century and seven decades, the Shiites will remember the Imam Ali mosque for at least a millennium.
A Long History of Betrayals
Indeed, it has already been over 1,350 years since the Shiite people first began to suffer what they believe to be a long series of vile and vicious betrayals that they could never possibly forget.
And this background is critical to what’s happening in the region today … how it could affect the world economy … and how it could impact your investments. So you must understand it.
The first betrayal was in the seventh century AD when the Shiites believe the prophet Mohammed chose his son-in-law, Ali, to be his rightful successor. Instead, many Arabs supported another candidate, who usurped that role when Ali was murdered in 661 AD.
It was the losing side, the supporters of Ali, who became known as the Shiites — a minority that, like other minorities in the world, has suffered centuries of disdain, discrimination, and mass murder.
In the years after their first defeat, the Shiites sought support from anybody else in the Islamic Empire who felt left out or neglected by the dominant sect, the Sunnis, including many non-Arab people who had converted to Islam. Thus, Shiism emerged as the revolt against the religious establishment, the Arab upper class, and the predominant culture.
The Wall Street Journal picks up the story in modern times:
“Iraqi Shiites fell under Sunni Muslim rule during the reign of the Ottoman Empire, which collapsed during World War I. The Turkish Ottomans, Sunnis themselves, staffed their officer corps and administration from Iraq’s urban Sunni elite.
“The British continued the tradition during their domination of Iraq, from 1918 to 1958. Britain’s ties to the Shiites frayed from the start. After a joint Shiite-Sunni uprising in 1920, Britain created a government in Iraq by anointing a Sunni king whom they imported for the job from exile in London, along with hundreds of his courtiers from Syria.
“The betrayal festered among Iraqi Shiites for years. Then Britain established a parliament in Baghdad that contained just one-quarter Shiites, despite their majority status. Even these representatives were generally symbolic tribal lords without executive powers. Virtually no Shiites rose high in the army or civil service.
“The 1970s brought the rise of the secular Sunni Muslim leader Mr. Hussein. He climbed to power against the backdrop of growing revolutionary fervor among the Shiite Islamic clergy, especially in neighboring Iran. Launching a vicious crackdown, Iraq murdered five senior Iraqi Shiite clerics in 1974, eight more in 1977, and killed the country’s senior Shiite cleric and his sister in 1980.
“All the while, Iraqi troops deported some 200,000 suspected Shiite activists to Iran, summarily dumping them over the border and stripping them of their property and nationality.
“Thus, many Shiites were overjoyed when, after ousting Mr. Hussein’s forces from Kuwait in 1991, President Bush’s father called on Iraqis to rise up and depose the dictator themselves. They assumed this meant U.S. troops already on hand would protect them. Instead, Mr. Hussein’s army was permitted to quell the uprising with helicopters and heavy weapons, killing an estimated 20,000 Shiite fighters.
“Members of the first Bush administration have defended the decision to stand back by noting United Nations resolutions at the time permitted the U.S.-led coalition only to liberate Kuwait, not to help oust Mr. Hussein.
“The perceived betrayal still rankles Iraqi Shiites. ‘The Shiites of the south cannot get rid of the bad memory from 1991,’ says Mr. Rubaie, the Shiite activist in London. ‘They cannot see what you and I do, that this is a one-way street for Mr. Bush and Mr. Blair, that there’s no going back from this.'”
Now, it is Americans who are battling Shiites!
This is VERY dangerous. Although Shiites represent only about 10% of Muslims in the world, they are a MAJORITY in Iran and Iraq, with sizable Shiite populations in Yemen, Syria, Lebanon, East Africa, Pakistan, and northern India.
Beware. A worldwide Shiite rebellion would greatly destabilize an already unstable world.
My advice, as before: Get to safety. Do not fall for the “who-cares” attitude that still prevails on Wall Street right now.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
