A ‘Gorey’ Speed Bump On The Road To Baghdad

• September 30, 2002
• Peter Navarro

Market Trend: Down

Market Outlook: Neutral

Sectors Long: Flat

Sectors Short: Flatter

Media Watch: Caveat Barron’s and IBD’s Touts

Macroplay of the Week: Get ready for Bubbles Bursting

Dominant Position: The Sidelines

The Broad Market Outlook

“If
you’re going after Jesse James, you ought to organize the posse first.”


–Al
Gore

“With Congress already debating a resolution
that would allow a US invasion of
Iraq, former Vice President Al Gore warned Monday that unilateral military
action to topple Saddam Hussein would divert the nation from the more crucial
war on terrorism, possibly increase the threat from Iraq, anger the rest of the
world, and saddle the staggering American economy with a huge war bill.”


–Salon.com

Is Al Gore really playing Neville
Chamberlain to George Bush’s Winston Churchill?

You might think so, after
reading the razor-edge editorials of the


Wall Street Journal that followed
Gore’s blistering attack on Bush’s Iraqi campaign.

Regardless of your politics on this (from
“Nuke the SOB” to “Give Peace a Chance”), the Gore missive has set in motion a
chain of events that is rippling through
both the gaggle of other Democratic presidential hopefuls as well as certain
sectors of the stock market. The important market point that the effect of these
ripples is to now suggest that a war with Iraq may not be as inevitable as we
had all imagined.

On the political side, Gore, though battered and bruised, remains the Clydesdale
to beat for the Democratic presidential nomination. So when Gore stakes out
what polls suggest is the American political center position on Iraq, as he did,
it makes it very difficult for presidential wannabees like Senate majority
leader Daschle and House Minority leader Gephardt to toe the Bush line. As a
result, the probability of a tough Congressional resolution on Iraq and a quick
invasion has dropped down from about 99% to more like a 50-50 proposition, or
less. 

Gotta love Mr. Market. He quickly re-jiggered the war probabilities last week
amidst the post-Gore pronouncement gavel-pounding of Daschle on down. Just take
a look at the “Gore effect” in this chart on several key gold stocks.  Note
Wednesday’s cliff they dropped off.

The broader point, of course, is that this little political donnybrook is going
to have a big effect on the market trend. And the news ain’t particularly good
for the markets.

On the war front, the “worst case” scenario for George Bush is that the
Democrats drag out the invasion timetable. Economically, this will extend the 
“oil premium” drag on the world economy. It will also expose consumers — now
holding the whole damn shebang up — to a lengthier period of risk and possible
“stuff the cash under the mattress” diminished consumption. And of course,
militarily, it gives Saddam and his allies several more months to gird their
bio-terrorist loins for the attack. In this worst-case scenario, we limp into
the war with a weak economy and a diminished strategic advantage and get a much
bloodier victory than we bargained for.

As for Bush’s best-case scenario, here’s how it might go. The Euro-UN-Democratic
choke-chain on him results in a diplomatic resolution in which Saddam actually
lets inspectors into every nook and cranny, demonstrates to the world that he
is a pussycat rather than a weapons-of-mass-destruction tiger, and we all go
back to the business of trying to revive a moribund economy with cheaper oil.
(Probability of this scenario: Slightly above zero.)

One other leading possibility is the Neville
Chamberlain appeasement scenario. With a wink and a nod, Saddam allows in
UN weapons to parts of the country but bars them from wherever he is hiding his
weapons; the UN declares the Saddam is in compliance and is a man of peace;
and Bush and the Democrats fight over who was responsible for this “victory.” 
The irony here, of course, is that this scenario is the best one in the short
and medium run for both the economy and the stock market but certainly
problematic for the longer-term war on terrorism.   

Last
take: We think that if you took a poll on Wall Street (as opposed to Main
Street), it would show that the vast majority would like to see Saddam excised
from the planet and the Western powers in control of Iraq’s oil reserves — which
could be used for once and all
break OPEC’s economic chokehold. BUT the poll would likely also show a majority
thinking that Mr. Bush is in over his head when it comes to forging a solid
consensus on the issue — particularly in light of ongoing economic weakness and
both internal Congressional squabbling and external hand-wringing from the Eurocrats. Why this matters is it makes the markets extremely nervous — and
bonds a continued safe haven.

So stay tuned in to these geo-political soap
opera. Watch gold stocks as your barometer of war fever.  And stay out of this
vicious little market until we get some more clarity on both the war and
economic fronts.

And speaking of more clarity on the economic
front…..read on, as it will be a very BIG week for macroeconomic news.  Let’s
see what we’ve got coming.

The Week’s Macro Data Market Movers: Red Hooks, Left Cross

The Macroeconomic Calendar

* Potential major market movers in red

It certainly won’t be a quiet week
in Lake Economybegone this week. We are likely to get hit with a big right hook
on Tuesday when the ISM index reveals whether the supply side of the economy is
recovering or receding.  A jump up well clear of the dreaded 50 reading would
help knock out fears of a double-dip recession. But if that puppy breaches 50,
Wall Street will be down for the count.

The other big report capable of doing serious damage is the Jobs Report on
Friday. There are any particular rumbling that we are going to get a sharp rise
in the unemployment rate, so the likely risk here is to the more pleasurable
upside. Put a fall in the unemployment rate together with a boost in the ISM
and you may well stitch together a nice rally — war jitters be damned.

As for other reports, auto sales should continue to show robusticity but we urge
you to also start tuning in to Alan Greenspan’s favorite inflation index — the
ECRI. It has DISQUIETINGLY begun to creep up. Further increases will not only
tie the Fed’s hands on further rate cuts. Note to Alan: You blew it last week
when you didn’t cut. Such inflationary pressures might also burst the bond
market balloon.

Macroplay of the Week: Cash

Failed breakups, whipsaw action, and a daytrader’s
volatile delight.  Why mess with it unless you want to scalp teenies?
Meanwhile, we continue to assess the prospects of a
bond/housing/mortgage/mortgage-insurance bubble and may have some observations on this in a future column. 

If you have a favorite macroplay or stock you would like us to consider in this
column, send an e-mail to

peter@peternavarro.com or go directly to

https://www.peternavarro.com.  We’d love to hear from you.