SRA Commentary: Beltway Bolsheviks
October 16, 2002
The best reason we can think of to sell stocks
By Chris Sanders
I have seen that we do not intend to set free, but to subjugate the people of the Philippines. We have gone there to conquer, not to redeem.
- Mark Twain, New York Herald 15 October 1900
Creative destruction is our middle name, both within our society and abroad. We tear down the old order every day, from business to science, literature, art, architecture and cinema to politics and the law. Our enemies have always hated this whirlwind of energy and creativity, which menaces their traditions (whatever they may be) and shames them for their inability to keep pace. ... We must destroy them to advance our historic mission.
- Michael Ledeen, War Against the Terror Masters
The completion of the socialist revolution within national limits is unthinkable…the socialist revolution becomes a permanent revolution in a newer and broader sense of the word; it attains completion, only in the final victory of the new society on our entire planet.
- Leon Trotsky, Permanent Revolution
The 2004 Presidential campaign gets under way…
The US equity market rose sharply at the end of last week and bonds sold off reflexively. Bonds have been bought in recent weeks more because they are not stocks than because they offer any value. It is very likely that the lows of last week will hold for at least the rest of this year. Much bad news is in stock and government bond markets. From here, the low cost of money, ample liquidity, rising government deficits, and lopsided short equity and long bond positions should propel a sharp reversal in financial asset pricing trends. (SRA Economic and Strategy Update)
On Friday the US government revealed its intentions for the military occupation and administration of Iraq. General “Tommy” Franks is to replace Saddam, and for the first time the US has announced its intention to administer the Iraqi oil industry. While perhaps unsurprising, this news at least removes one significant element of uncertainty. American plans for the installation of a regime led by personalities from the Iraqi opposition have always been unconvincing and unrealistic. This “solves” that problem by simply avoiding it.
…with another go at “pump and dump”
It is possible that this is not unrelated to the stock market rally on Thursday and Friday. From the narrowly self-interested point of view of the market, this ought to be good news, whatever one thinks about it otherwise. It in effect means that America shall become the swing producer of OPEC. This is a prospect of overwhelming importance to the international oil industry and to the international economy. The US is moving from a position in which it indirectly influences production to one in which it directly controls it. Iraq’s oil sector can look forward to billions of dollars in infrastructure investment that for the first time put it into a position to compete with Saudi Arabia.
Some analysts believe that this will spark an overt hostile reaction from Saudi Arabia and Iran, but it is hard to see what either can do about it. To begin with, the Saudi armed forces are deeply dependent on the US. But more to the point is that both need to market their oil and the US controls their access to the markets. This is reminiscent of John D. Rockefeller’s ruthless corner on the refining business that put him in control of the producers. Control of production is useless without transport, refining and marketing. For that matter, the only direct action that the other Gulf oil powers conceivably have the power to take is to increase production. Given that the next presidential election is only two years away, an oil price war would probably suit the U.S. administration admirably. Indeed, with control over Iraqi reserves, it will probably make sure that prices go down anyway. $10 to $12 oil would seriously hurt Saudi Arabia and Iran. Saudi Arabia needs the price of oil to be about where it is now, and certainly above $18 to $20 per barrel. A price war would hurt a great deal. The real risk for Iran and Saudi Arabia is that the Americans use control over Iraqi oil to drive the price down.
“Tommy” Franks, chairman of the Revolutionary Command Council
Administration strategists and their apologists are fond of referring to the post WW2 occupation of Japan and Germany as the models for the administration of Iraq. As with just about everything else in this claque’s program, this is intellectually and historically tenuous. A better comparison of the program for Iraq would be with the US conquest of the Philippines in 1898. This is a straightforward imperial project, with an open-ended time-table. And lest one think that this is all bluff, the US announced that the headquarters staffs of the 5th Army Corps and 1st Marine Expeditionary Force were being deployed to Kuwait.
A fall in the oil price is not only, therefore, a likely consequence of all this, but very probable. Sabotage of the fields is possible, but these risks are hard to quantify. Will they do it? And if they do, how reparable is any damage? For investors, these are basically imponderables. And they have to be balanced against the real possibility that the US achieves its objectives without an invasion against a hostile Iraqi army. Its moves so far have increased the pressure on Iraq’s military commanders to turn on Saddam. None of these elements basically alter the equation. The US is staking everything on Saddam’s ouster, and is making sure that all the possible avenues toward that end are open. It should not matter too much to the markets how this happens.
If this sounds too pat, consider that we are not forecasting pleasant outcomes, only regime change in Iraq and temporarily lower oil prices. It is far more unrealistic, we think, to imagine that the Iraqi armed forces can do anything about it. As with the rest of the Arab states, Iraq’s armed forces and security services are organised more to neutralise domestic opposition to the regime in power than they are to prosecute wars against external enemies. The US understands this very well. It ought to; it helped to organise them.
The real problem with all this is not that the United States cannot successfully occupy Iraq, but that as a corporate body, it does not understand the long-run risks that this entails. Different perspectives lead to different conclusions. In a recent superb article published in the London Review of Books Anatole Lieven observed that the Sharon government in Israel believes that the Palestinian Intifada is a direct result of Israel’s withdrawal from south Lebanon, not from Israel’s occupation of Gaza and the West Bank. The problem as Sharon sees it is that Israel’s withdrawal was a consequence of a failure of will that caused a loss of prestige that emboldened the Palestinians to revolt. This sort of thinking brooks no alternatives and, consequently, is non-negotiable. The real lesson is that Israeli public opinion after years of wasted blood and treasure would no longer support the occupation of southern Lebanon. It is highly doubtful that the ideological and military adventurers who are at present in the ascendant in Washington think about it this way.
A coup, not a revolution
Although the invasion of Iraq and its occupation and exploitation may well be a straightforward imperial project, it is being justified in revolutionary terms. Many observers have noted the contrast between the aggressive foreign policy of the extreme internationalist civilians (the so-called neo-conservatives, also known as the chickenhawks) in contemporary Washington and the reluctance of many in the military to follow. It is probably not mere coincidence that within the uniformed military it is the air force that consistently appears the most hawkish. The Air Force, which emphatically means its officer corps, benefits disproportionately from the cash flow for projects such as missile defence and the F-22. It is, consequently, the Air Force that gains the most from the collapse of sensible debate over America’s defence priorities. As we have pointed out repeatedly, virtually the entire budget increase that has been approved by Congress was approved before September 11 last year. This spending has little to do with the prosecution of any war on terror. By contrast it is in the Army and the Marines that voices of experience and caution are heard. This is unsurprising. They are after all the ones who are going to be on the ground. But it is an Air Force general who has been given operational command of the global “war on terror.”
What all of this promises is more than an autumn of war. And while the stock market is likely basing for a significant rally, neither market nor politicians appear to really understand either the logic or the long-term implications of Mr. Ledeen’s “creative” destruction. Wall Street has become accustomed to visiting this on others, and is mentally if not materially ill prepared for the reorganisation of the international financial system that is in train. It is staffed and prepared for a twenty-year bull market, not a fifteen-year bear market. The current structure of the Street is well suited for the purpose of transferring value from public to private hands. It is not well suited for free markets and real competition.
Equity investors would do well to contemplate the implications of this. President Bush may well get his lower oil price and a stock market rally to take him through the election in 2004. Who knows, he may even manage to get a little military glory. But if he does, it will be at the price of further straining an already thinly stretched financial system. This rally is a chance to sell, and to sell a lot.
As for Michael Ledeen, “Resident Scholar in the Freedom Chair” at the American Enterprise Institute, what can one say? In true Washington fashion, he is neither scholarly nor interested in freedom. Calling himself a consultant is too modest; he was rather, during the Iran-Contra period, the National Security Council’s go-between with Israeli intelligence. Our guess is that he is a “sell” too.
But in all honesty, what worries us most is that this may be nothing more than the triumph of hope over experience.