France Burning! What's Next?

Pay close attention and watch this situation:

France has just declared a nationwide state of emergency.

It’s their most recent — and most desperate — attempt to stem the tidal wave of rioting, destruction and carnage that has spread to every major city in the country … has torched thousands of cars … and has now even reached Belgium and Germany.

In one single night, police have reported 330 arrests, 12 officers injured and 1,173 vehicles burning in nearly 300 towns.

But in some respects, the state of emergency, announced yesterday by President Jacques Chirac, is also frightening.

It gives local police the authority to establish curfews anywhere in France, set up roadblocks, make mass arrests, shoot first and ask questions later. It seems to be even more extreme than the high state of alert which gripped America in the aftermath of 9/11.

What’s next? What does it mean to you and to your investments? Is this crisis just another in a recent series of natural and man-made disasters? Or is it the prelude to similar unrest that could impact investors everywhere?

The Next Phase

Right now, the imposition of curfews in the cities and suburbs of France are bound to quell the first wave of riots, but it is, alas, only the first wave.

Roadside bombs. Suicide attacks in public areas. Destruction of oil refineries and factories.

This is the scenario, now limited primarily to Iraq and Afghanistan, which some analysts fear could emerge from the massive civil unrest in France.

Indeed, the intifada in Israel was also initially a spontaneous rebellion by rock-throwing youths. Now it is a highly focused, well-organized, and extremely deadly guerilla war.

Likewise, in its early stages, the insurrection in Iraq was far more primitive and much less threatening. Today, it contains elements of the most sophisticated urban warfare tactics ever devised.

I will not opine on whether the French authorities should respond with hard-line counteroffensives or reach out with massive support services. Rather, my role is to objectively analyze the trends and suggest ways to protect yourself from any financial fallout.

From that perspective, I can tell you flatly:

The Conflict That Has Been Festering
In The Middle East for Decades Is Now
Spreading to Europe — and Beyond

This conflict is broader and deeper than America’s international war on terror.

It is a conflict of poor against rich, young against old, minority against majority, traditional culture versus modern technology.

It has historical roots that date back to the Crusades, the Renaissance, nationalist movements of the 19th and 20th centuries, and two world wars.

And right now, it is all coming to a head on virtually every continent:

• In the Central Asian states of the former Soviet Union, conflicts based on ethnicity rage in Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Turkmenistan.

• In the Transcaucasian states, also formerly part of the Soviet Union, violence continues in Georgia, Armenia and Azerbaijan. National elections, including the latest parliamentary voting this week in Azerbaijan, were supposed to integrate warring parties. But the elections have been routinely undermined by fraud and outright intimidation.

• In Chechnya, two bloody wars designed to end the conflict by leveling the regional capital, Grozny, have had precisely the opposite effect: The conflict continues to fester and has spread outward to neighboring republics.

• In China’s western province of Xingjian, a predominantly Muslim Uighur region with a culture and language that is very different from that of the ruling Han Chinese, the population is on the verge of a major uprising against the authorities. According to the World Uighur Congress, “China’s crushing campaign of religious oppression and cultural assimilation against its Muslim Uighur minority, in the name of terror-combat and anti-separatism, risks turn[ing] the region into a ‘time bomb.’”

  And a coal mine explosion just yesterday, killing at least 11 miners and blamed on poor safety precautions by the Chinese, is only inflaming tensions still further.

• Ethnic wars are being waged in North Africa, South Asia, Indonesia, Thailand and Malaysia. In the Philippines, a three-year truce with guerrillas is routinely broken. Just this week, Philippine police say they’ve shot dead the brother of a Muslim separatist spokesman, while Communist rebels have just killed three men for refusing to join their leftist movement.

Al-Qaeda — plus the ongoing wars in Afghanistan and Iraq — are not the cause of each of these local conflicts.

But they are helping to bring them to the forefront. They are instigating more aggressive action and counter-action by both sides. In short, they are transforming a series of small brush fires into a worldwide conflagration.

That is the context for the national crisis you are witnessing in France right now.

It is a spontaneous insurrection driven by domestic hatreds, nurtured from decades of discrimination, segregation, repression and neglect.

It is an intifada inflamed by economic differences that are now greater than at any time since the Industrial Revolution.

It comes with an overlay of religious fervor from a small but increasingly influential minority of fanatics.

Worst, it is likely to be exploited by international terrorist organizations who are quick to promote their own agenda — social chaos and the overthrow of established governments.

This Is Clearly Not
A Stable Situation!

I believe we now face the greatest social threat to Western economies since the Great Depression and the social upheavals that followed in its wake.

Like the avian flu, it is not yet a reality that drives stock prices or interest rates up or down. But it is clearly a danger that must not be ignored.

If it quiets down, as I hope it will, we can set it aside and go back to other issues. But if it heats up, as I fear it may, it can …

• Slow down the flow of international travel and foreign trade.

• Disrupt the production and shipment of essential fuel sources such as oil and natural gas … basic metals such as copper and aluminum … plus construction materials such as cement and lumber.

• Emerge as another powerful force that drives up the cost of natural resources and brings on more inflation.

This merely reinforces the two pressures we have been telling you about all along — (1) diminishing or disrupted supplies of critical resources and, at the same time, (2) burgeoning demand for those same resources.

Yesterday, I showed you how copper prices are surging, leading the way to greater inflation.

I also told you how the pattern we’ve been seeing in copper is spreading to aluminum and other metals.

Now, Jack Crooks, our senior market analyst, has handed me this chart that brings that point home.

Notice how copper and aluminum have generally been moving higher in unison.

The only significant exception in recent times was in the summer of this year, when aluminum fell sharply while copper continued to soar.

Now, however, aluminum is quickly making up for lost time, catching up with copper and about to surge to new, all-time highs. We can say the same for zinc and other basic metals.

Bottom line: Even without major supply disruptions of the kind that could come from domestic and international conflicts, these prices are going through the roof.

This Is Inflation Par Excellence,
And, as I’ve Warned You Before,
Quarter-Point Rate Hikes Are
Hardly Enough to Stop It!

The kind of inflationary fires I’ve been alerting you to are not put out simply by raising rates by a quarter of a point every month or two.

Nor are they the kind that go away just because the economy shows signs of weakness.

Yesterday, for example, Wall Street suddenly began to wake up to the two key sectors we’ve been telling you about — autos and housing.

In the auto sector, investors were disappointed by the downbeat forecasts from auto parts maker Visteon Corp., dragging down the entire auto sector. Meanwhile, in housing, Toll Brothers’ low sales projections raised the specter of slumping demand and a possible bust.

So most stocks fell.

Meanwhile, in the bond market, all this bad news was actually considered “encouraging.”

Again, as they have done so many times in recent months, bond investors speculated that a slumping auto and housing sector would discourage the Fed from raising rates.

And again, that led bond investors to fantasize about “the coming peak in the interest-rate cycle.” Hope springs eternal.

So bonds rallied.

But …

Throughout All These Twists and Turns,
The Big Picture I Described Yesterday
Remains Firmly and Totally Intact …

• Inflation ramping up at an accelerating pace.

• Commodities playing leapfrog in an upward march.

• Bond prices falling and interest rates rising. (Yesterday’s rally in bonds does nothing to change this trend.)

• Interest-sensitive stocks in a long-term decline. Sure enough, housing stocks, one of the most interest-sensitive sectors of all, have just gotten battered again.

• Natural-resource-based stocks in a long-term rise. And indeed, energy stocks rallied nicely, with the OIH up about 1% yesterday despite the decline in most other stocks.

To stay on target with these big-picture trends, continue to

1. Keep most of your cash short-term and invested conservatively. See my Safe Money Report for details.

2. Maintain a solid stake in natural resource investments. See Larry’s Real Wealth Report.

3. Reduce your exposure to the riskiest stocks. Register at www.WeissWatchdog.com for instant Weiss ratings and follow-up e-mails.

4. For your speculative funds, aim for doubles, triples and home runs with call options that can go ballistic when energy rises and put options that can blast through the roof when bonds fall.

Best wishes,

Martin

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