Cowboy Chaos: Why Being Hedged Is Still Our Best Bet

The Broad Market Outlook:
Beware the Ides, Ids,
and Egos of March

We must parse three big news events moving into
the week: First, there is the
destruction of missiles by Saddam — a dovish event that makes it significantly
more difficult for the US to declare war. We’ll presume that, everything else being equal, the market will react
bullishly to that (which is the wrong reaction, we shall argue below).
Second, there is the capture of Bin Laden’s Rasputin, which, absent any
other developments, would likely spark a rally at least half as robust as when Bin Laden gets his neck in the noose. Third, and the real joker in the deck, there is the Turks
voting thumbs down on US troops using their soil to open the second front in
the Iraqi. Let’s just spin
through some of the chaotic possibilities of both big headlines to understand
why chaos theory may be a whole lot better at assessing events in the coming
weeks than any rational, linear “checkers” approach.

On the Saddam missile defense, if this action
and mounting world opinion are successful in backing Mr. Bush off, this would seem
like a good thing for world peace. But
this backing off — which would be clearly a defeat for Mr. Bush — would
likely embolden Saddam to resume his mischief in short order. It would also reestablish him as a hero on par with Osama to the
terrorist network.

Over time, in the worst-case scenario, oil would
begin to flow in much greater quantities from Iraq (as the French, Chinese, and
Russians are allowed to develop Iraqi oil as “barter” for opposing the US). Eventually Saddam will be
awash in petro cash to do God (or is it Allah?) knows what. Work that one through as the Bushies are likely doing and factor in the
fact that Mr. Bush is a one-term president without a decisive victory in Iraq
and one must conclude once again that the destruction of the missiles doesn’t
matter after all and war will instead be inevitable.

On the capture of Osama’s Rasputin, the good
news is that as you read this, he is likely coughing up secrets left and right
in some dank and dark little room under the press of some very modern and
painful thumbscrews. The bad news
is that when rats are cornered, they lash out — so this latest news, in the
short run, may very well increase the probability of a terrorist attack.

As for the Turkish belch in Mr. Bush’s face,
in the short run, this will slightly reduce the probability of war — which may
be bullish. More likely, it will
significantly increase the probability that the war will not be as quick and
easy to win and will entail much higher American casualties.
This is because the Joint Chiefs will have to redeploy the troops bound
for the Turkish launchpad to Kuwait and ultimately fight a one-front war from
Kuwait, which is a lot further from Baghdad than the Turkish approach.

Once war begins, it is easy to imagine both the
Iranians and the Turks coming across their borders — the Iranians to grab
territory and the Turks to grab oil wells and disarm the Kurds. BUT this will be against
US wishes so that conflict could quickly
escalate — with the end result that the US may be fighting more than one
army in short order.

With the Iranians, the conflict will be welcome
as it will give the US a chance to push into Iran and dump the clerics running
this restive country. However,
skirmishes with Turkish forces — make no mistake about it, it could come to
that — would politically be a disaster.

As for the Turkish parliament, what the hell
were these people thinking? Sure,
it’s a Muslim nation and 80% of the population are against the war. But 100% of them are also against recession and depression.
In rejecting the US. request for help, Turkey
forfeits about $25 billion in aid, and it takes itself out of the military loop
for dealing with the Kurds (unless it does so unilaterally, risking a US
confrontation). If you
don’t think that will be a blow to the ailing Turkish economy, see how the
Turkish Investment Fund
(
TKF |
Quote |
Chart |
News |
PowerRating) dropped like a stone on a gap down this morning.

Most broadly, what we learn from the Turkish
model is that it’s not just dictatorial Muslim nations that can whip up hatred
for the US infidels. It’s the
“models of democracy” like Turkey as well.

It follows that the logical checkers match
between the old Cold War superpowers has now morphed into a much more chaotic
religious war between a diffuse, decentralized and HUGE Muslim population around
the globe and the advanced infidel industrial nations led by the US.

The bottom market line: In the short run, if you
go into the market either totally long or totally short, you’re gambling not
speculating, and you’re just as likely to get totally wiped out by chaotic
events that should now move fairly rapidly, as you are to benefit from them. Accordingly, stay hedged or in cash and wait
until the chaos passes — and
stop all that rational garbage about how the 1991 Gulf War will provide a
template for events in this one. Apples
and Oranges. Order and Chaos.

The Week’s Macro Data Market Movers