In early 1991, during the final phases of the first Persian Gulf war, my father and I took a long walk to discuss its outcome.
In
Iraq
, The VII Corps had surrounded the remainder of Saddam’s elite Republican Guard units and was awaiting orders to crush them in the desert.
Other coalition ground forces stood on the banks of the Euphrates River, ready to march victoriously into Baghdad and depose Saddam Hussein.
Instead, President George Bush decided to declare a cease fire, leaving Saddam in power. Dad wanted to better understand the reasons why, and so did I.
The official reason given by the White House was that they had completed their original mission — to evict Saddam’s forces from neighboring Kuwait. They did not have a United Nations mandate to go any further. So they decided not to.
We accepted that rationale. But we also felt there was another, possibly more critical reason for leaving Saddam in power.
The President’s two most trusted military advisers — Defense Secretary Dick Cheney and Joint Chiefs Chairman Colin Powell — wanted a stable Baghdad government with a strong man at its helm. Saddam, unfortunately, was their only choice.
Without Saddam, they told the president,
Iraq
would disintegrate into a bloody civil war and split into three warring states — a Kurdish state in the north, a Shiite state in the south and a Sunni state in the center.
And without Hussein, they argued, the allies would lose a strong buffer between the deeply hated Shiite-led
Iran
and the highly valued Sunni-led
Saudi Arabia
. A united
Iraq
was their only hope; a disintegrated
Iraq
, their worst nightmare.
That was February 1991. Now, fast forward nearly 15 years to September 2005.
Dire Warnings
Fall on Deaf Ears
I take you to September 22 — last Thursday.
The place — Washington, D.C.
While Mississippi and Louisiana are still reeling from Katrina’s unprecedented destruction … and while most Americans are still riveted on Rita’s projected path … one man makes the rounds in Washington to warn of a new — and far larger — brewing storm.
He meets with President Bush, Condoleezza Rice and anyone who will listen. He speaks bluntly. And he gives them one, single, alarming message:
Iraq
is now beginning to sink into a tumultuous civil war!
Its disintegration will lead to a broader, regional conflict!
But no one listens to him.
It doesn’t seem to matter that he is Prince Saud Al-Faisal, the respected Foreign Minister of Saudi Arabia.
Nor do his hosts seem to give much consideration to the fact that he has more intimate knowledge and more years of experience in the Persian Gulf than virtually anyone in Washington or Riyadh.
So by the end of the week, frustrated by the deaf ears at the pinnacle of the American power, he decides to go public with his dire warnings.
He invites a group of reporters to
601 New Hampshire Avenue, the Royal Embassy of Saudi Arabia. He gestures forcefully. And he repeats the same warnings he just delivered to President Bush and his advisers:
Iraq
is rapidly heading toward disintegration.
Just as Cheney and Powell feared in the final days of the first Gulf war,
Iraq
is now in danger of splitting into three separate states — a Kurdish state in the north, a Shiite state in the south, and a Sunni state between the two.
If so, it will drag at least three other countries — Turkey, Iran and even Saudi Arabia — into the conflict, risking a Persian Gulf war of unprecedented dimensions and unpredictable consequences.
Specifically:
1.
Turkey
will send its troops into
Iraq
’s Kurdish north.
For decades,
Turkey
has fought a violent and protracted revolt against Kurdish rebels on its own soil.
So it absolutely will not tolerate an independent Kurdish state on its western border. And it has repeatedly vowed to use force — including a massive invasion into northern
Iraq
— to prevent one from forming.
In response, the Kurdish militia, probably the best-equipped and best-trained non-Coalition force in
Iraq
, will strike back.
The Turkish army, in turn, will do everything in its power to undermine the Kurds, providing arms and support to the Kurds’ local enemies —Turkmen (ethnic Turks living in Iraq), Iraqi Christians, and Iraqi Sunnis, all of which fear eviction under a Kurdish regime.
2.
Iran
’s army will march, unopposed, into
Iraq
’s Shiite South.
Indeed,
Iran
has already been pursuing a quiet and unopposed invasion of
Iraq
.
As
U.S.
intelligence sources have frequently reported,
Iran
has operatives throughout the Shiite south, providing logistic and financial support to Shiite religious leaders and Shiite political parties.
And as Defense Secretary Rumsfeld has repeatedly warned,
Iran
has done nothing to stop the shipment of lethal roadside bombs from
Iran
to
Iraq
, used to attack
U.S.
and Iraqi forces throughout the country.
Worst of all, the Iranians do all this with great impunity, as the Iran-friendly government in Baghdad either cheers them on or looks the other way.
3. The Sunni majority of
Saudi Arabia
will pour out support for the Sunni-led insurgency in
Iraq
. And the Sunni-led government of
Saudi Arabia
will not stand in their way.
For obvious reasons, when he visited the White House and spoke to reporters at the Saudi embassy last week, the Saudi Foreign Minister could not pledge support for the Sunni insurgents in
Iraq
. But he did everything but.
He lambasted the U.S. Government for its neglect of the Iraqi Sunnis. He blamed the
U.S.
for effectively labeling “every Sunni as a Baathist criminal.†And he faulted
America
’s leadership for its failure to orchestrate a key government role for Sunni Arabs in the recently drafted Iraqi constitution.
Prince Saud’s ultimate conclusion: Unless the Sunnis are included, “
Iraq
will be finished forever.â€
D-Day: October 19
It will all come to a head three weeks and two days from today, on Wednesday, October 19.
That’s the day the Iraqi draft constitution will be put to a national referendum. And that will be a critical breaking point for the entire country.
Reason: Regardless of the referendum’s outcome, there is simply no force in
Iraq
that’s bringing the warring parties together. .
This is a political firestorm with just two alternative paths:
Path #1. Opponents to the Iraqi constitution muster a majority in three of
Iraq
’s provinces, the minimum needed to defeat it. Without a government and without a plan to rebuild one, the country plunges into political chaos, fomenting more violence and, ultimately, a bloody partition.
Path #2. The constitution is ratified. But except for lip service and a few symbolic concessions, it fails to give the Sunni minority any significant role, disenfranchising the former elite of
Iraq
. A new, far broader phase of the Sunni insurgency gets under way.
A Low-Level Civil War
Has Already Begun in
Iraq
At this juncture, it would be an overstatement to say that
Iraq
is in a civil war. But the population is already experiencing a consistent barrage of murders, assassinations, attacks and massacres that are incubating a full-blown conflict.
Earlier this month, for example, the threat of suicide bombers set off a massive and tragic stampede, killing over a thousand Shiite worshipers, the worst single bloodbath since a Basra massacre by Saddam Hussein in the wake of the first Gulf War. The Shiites, blaming the Sunnis, are seething with anger.
Just last week, also in a Shiite area, British troops blasted into a supposedly friendly Iraqi police station to free some comrades who had been arrested by the Iraqis. This, in turn, has set off furious anti-British demonstrations in southern
Iraq
, followed by equally furious calls for a wholesale British withdrawal in London. Suddenly, a major force that might have promoted stability in the south has lost credibility.
All this is precisely what I have been warning you about since last year. Now it’s happening: Day by day, step by step,
Iraq
is plunging deeper into chaos.
Allied forces are doing a valiant job of defending themselves and ferreting out the enemy. But by their own admission, there’s virtually nothing they can do to stop Iraqis from killing Iraqis.
The Uncontrollable
Consequences
The goal of the current Gulf war was not just the freedom for Iraqi citizens. It was also to secure and protect the rich Iraqi oil reserves, the third largest in the world.
But in the wake of an Iraqi civil war, that goal will fall by the wayside. Oil production will grind to a virtual halt. Exporting oil from Iraq will be next to impossible.
Similarly, the goal of the first Gulf war was not just to liberate Kuwait. It was also to secure and protect the rich oil reserves of the entire Arabian peninsula, many times larger than any other reserves on the planet.
But, alas, in the wake of an Iraqi civil war, involving Turkey, Iran and Saudi Arabia, that 15-year-old goal may also be in jeopardy
This is a much larger brewing storm than any that might strike the Gulf of Mexico. Indeed, according to the International Energy Agency, Hurricane Katrina is actually at the BOTTOM of a list of ELEVEN events in modern history that have had an even more damaging impact on oil supplies.
A spreading war in the Persian Gulf region could easily rise to the TOP of that list.
Moreover, as we have stressed here many times before, the real force driving energy markets today is neither Katrina nor Rita. It is the chronic imbalance between demand and supply, and little or nothing is being done to restore it.
My forecast: With the spreading conflict in the Persian Gulf, expect …
- A surge in energy prices that makes the recent rise seem small by comparison …
- A rush to gold, driving its price to $500 and beyond …
- A fall in the dollar, rivaling the decline that took place in 2002-2004 …
- A doubling of current inflation rates and interest rates, and …
- A collapse in the stocks of companies that are most vulnerable to rising energy costs and rising interest rates.
What To Do
Right now, in Texas and Louisiana, preliminary reports seem to indicate that most of the feared damage to gasoline refineries in the path of Hurricane Rita has not occurred.
That’s very good news, and Wall Street is bound to greet it with a sigh of relief, possibly driving oil prices temporarily lower and the Dow temporarily higher.
But Cat-3 Hurricane Rita, much like Cat-3 Hurricane Ivan, has probably done most of its damage off shore — to oil rigs lining the Gulf coast and to the vast network of pipelines below the water’s surface. Reports of this damage won’t be available for days or even weeks. But as they trickle in, expect oil prices to recover.
Despite any short-term ups and downs, do not veer from your basic strategies. Among them …
Safety first … using primarily short-term U.S. Treasury securities.
Their yield is exempt from state income taxes.
Their principal and interest are guaranteed by the United States Treasury Department, a guarantee that is widely recognized as superior to the guarantee of the Federal Deposit Insurance Corporation (FDIC).
And their interest rate has been rising steadily since June of last year, when the Fed began its relentless campaign of raising its key Federal funds rate.
Back then, the Fed had driven their yield down to the lowest level in 46 years, and I still recommended them as the safest haven.
Now, their yield is nearly four times greater, and with every Fed rate hike, it goes still higher. By early 2006, they should be paying 4% or more.
You can buy them directly from the U.S. Treasury department, through their Treasury Direct program.
Or you can use a Treasury-only money market fund, giving you enhanced liquidity and, typically, free check-writing privileges.
As before, my favorites are:
American Century Capital Preservation Fund (CPFXX; 800-345-2021),
Dreyfus 100% U.S. Treasury Fund (DUSXX; 800-645-6561),
Fidelity Spartan U.S. Treasury Fund (FDLXX; 800-544-8888),
Vanguard Treasury MMF (VMPXX; 800-662-7447), and
Weiss Treasury Only Money Fund, (WEOXX; 800-430-9617)
Second — Protection against a falling dollar … with investments that generally go up as the dollar declines.
Back in 2002, the dollar began falling sharply and steadily against most major currencies.
This year, it has rallied somewhat, but not significantly. And, conversely, most major currencies have come down a bit in value, but not by very much.
The Australian dollar, for example, has been especially strong.
After surging from the 50-cent area in 2002 to nearly 80 cents this year, you’d think it might suffer a major correction, especially as the Fed tried to make U.S. dollars more attractive by raising U.S. interest rates.
Instead, the Australian dollar has held firmly between the 75- and 80-cent level.
For American residents, probably the most convenient vehicle for buying Australian dollars is by opening an Australian-dollar CD at Everbank, a U.S. bank that offers a range of CDs denominated in foreign currencies.
The latest rate on their 3-month Australian dollar CD is 4.19%, while the equivalent New Zealand dollar CD is paying 5.46%. Just be aware that the FDIC insurance that covers these CDs does not cover any possible losses that you may occur due to a decline in the foreign currency you choose.
Right now, to hedge against a dollar decline, my favorite instruments are still gold mining and energy stocks.
For example, on Friday, I told you that Royal Gold (RGLD) had taken a modest dip and was well within a “buy zone.â€
Sure enough, the stock has already started to recover sharply, rising to $26.96 by the end of the regular session and to $27.20 in after-hours trading by late Friday.
Trying to juggle between day-to-day swings in any stock is a treacherous game. But long term, a modest allocation to stocks like these can serve as a good hedge against the declining purchasing power of the dollar.
Ditto for energy stocks, especially the more stable, yield-oriented ones like Enerplus (ERF) which I have been recommending here. But if you don’t own it yet, wait for a correction — whether it comes now or from higher levels.
Meanwhile, for your speculative funds, Larry’s Energy Options Alert is almost sold out. If there’s a correction in the energy markets this week due to less-than-expected damage to the Beaumont and Port Arthur refineries, it could be a made-to-order window to jump on board. For the details, call us at 877-719-3477.
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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