by

John Wright

Today, March 3, 2003, I talked with my elder son about the stock market. We discussed the various "forces" that would cause major market ups and downs during the next few months. Later in this article I will share that information with you. For now, let’s consider one very obvious fact. For the past three months the stock market has responded in small ways to the economy and in much larger ways to the ebb and flow of events related to possible war with Iraq. What do the major investors believe that is causing them to create daily and weekly fluctuations based on news about the possible war? Why are we hearing the talking heads on CNBC say "There is a lot of money on the sidelines and people want to invest now, but they are holding back … that is, we do not see any sustained rally."

I for one have been watching carefully, and so far as I can determine, the market moves up when war seems less likely, and it moves down when preparations are broadcasted that suggest war is inevitable. In short, every time Blix and Saddam show progress, the market responds positively. Every time Bush and Rumsfeld make increasingly threatening moves with troops or aircraft carriers the market goes down.

Gee, it really is pretty simple, isn’t it? All you have to do is realize that every positive move by the UN and Iraq will quickly be countered by a hostile interpretation and action by Washington. By golly, Luke, we could get rich in this stupid stock market. All we have to do is short the market every time it goes up from positive UN announcements and then buy like crazy each time Bush and Rumsfeld screw the pooch!

Okay, I oversimplify, and I admit it. But, you have to admit that really is the recent behavior of the stock market. This tells me that the serious money does not, IN ANY WAY, want a war with Iraq. Now lets be reasonable. If the big money doesn’t want it, there is something afoot that we need to consider. Might it be the fear of chaos in the world financial community, or possible global negative reaction at a business level if we indeed make war with Iraq? Who knows? I certainly don’t, but I am cognizant of the behaviors I see.

What this tells me is that I should be in a cash position now, in anticipation of an inevitable war, that will drive the market down considerably, even if only for a few days to a week. Thus, it is apparent that I can make a lot of money via "market timing" for it is certain that we will whip Iraq. The effect will be a temporary euphoria that will drive the market up and, if I invest at the bottom, make me a rich man. Of course, I have to be wise enough to get out before the next negative event … like a successful terrorist attack.

Oh my, that is something to consider, isn’t it? How will I know when to get out? Deep down inside, another voice is telling me that I should exit the stock market altogether, as the future for the next few years is indeed uncertain. I might choose to play briefly, but as I look forward in time I perceive that the risks far outweigh the possible rewards. I guess that puts me in the company of the big guys who are presently on the sidelines.

Of course, I don’t want the rest of you to convert your 401K plans or IRA holdings into interest bearing cash accounts, for that will cause a market crash, and I might get caught in the middle. On the other hand, if I can anticipate your panic, I can short the market and make a bundle, etc., and then buy like crazy at some future apparent bottom. I don’t know about you, but I am getting dizzy thinking about all the possibilities and timings over which I have no control. Isn’t the greed/fear cycle exciting, exhausting and marvelously amoral?

You are in the same boat as me, at least with regard to future uncertainty, so lets analyze a few different war related scenarios and see if there is any clear path to success.

Scenario #1:

Saddam is killed or deposed after a short war. The USA withdraws most of its military forces. A new and USA friendly regime is formed as part of USA funding to rebuild Iraq. Terrorists everywhere become frightened and poor as they have lost a primary source of operating funds. Peace reigns and the economy responds quickly. The stock market makes large advances. Oil is cheap.

Scenario #2:

Saddam is deposed or killed after a two-month war. Meanwhile, terrorists kill hundreds of thousands of USA citizens with chemical poisons in our water supplies and dirty bombs set off in busy metropolitan areas. The economy really suffers due to citizen withdrawal behavior and the stock market declines seriously within three months. Martial law is imposed to stop further terrorist attacks and that exacerbates economic woes.

Scenario #3:

Early success with conquering Iraq leads the USA to direct its military forces elsewhere in the Middle East. Syria and other countries are threatened and in some instances attacked, and Palestine is totally overrun by Israel, which establishes an Israeli government in Palestine. Military success leads USA citizens to believe that Middle East problems are effectively over. Oil is cheap. The economy rebounds and the stock market soars.

Scenario #4:

While we are fighting Iraq, the UN issues sanctions against the USA for ignoring a Security Council veto. North Korea attacks South Korea and uses a nuclear weapon to subdue Seoul. China attacks Taiwan and quickly wins. USA conventional military forces are unable to respond effectively as we have concentrated our assets in the Middle East. Pakistan attacks India with nuclear weapons and hundreds of millions of people die in both countries. All the conflicts outside Iraq occur because all the other nations involved know the UN is useless and anti-USA, and that the USA is not able to intercede. We have precipitated WWIII, and our former allies wait to watch us commit more errors in the Far East. Meanwhile, world trade with the USA all but disappears, but our economy within the USA is temporarily boosted with a major commitment to building more military hardware for coming engagements. The stock market is schizophrenic with defense stocks soaring and most other stocks declining. Martial law and rationing become a fact of life in the USA.

Scenario #5:

In an eleventh hour fit of uncommon good sense, "W" decides to stand down and avoid war with Iraq. The UN prevails and is saved from practical extinction. The market soars but quickly falls after the initial euphoria, for the economy does not support significant market advance. There is no signpost to indicate just when the economy might recover. Oil prices remain high. Federal and State deficit spending prolong and delay market recovery as we return to the old bad years that preceded a major market advance based on a balanced budget with mandated debt elimination.

One might create or imagine many additional scenarios, but the ones above cover most of the possibilities in the short term. I won’t state definitively how other strong nations would respond in detail to scenario #4, with regard to downstream consequences for the USA, but I have my suspicions.

In two scenarios the stock market improves, and in three scenarios it is not the place to be with your retirement money. It then becomes necessary for you to gauge the probability of the different scenarios, and your conclusions should drive your actions, for the outcomes are quite specifically positive or negative with no ho hum middle ground.

This means I am looking for some overwhelming evidence that tells me, directly or indirectly, that one of the above scenarios or something that produces the similar results is most likely. As of now, I see too large a military commitment to even suggest that we will avoid war, regardless of what Saddam or the UN do. Second, North Korea is letting us know in no uncertain terms that they are definitely belligerent towards the USA and ready for war. Third, like it or not, we have sided with India and Pakistan knows it. The problems between those two countries need little nudging to escalate into nuclear war, and Pakistan has little to lose. China will respond poorly when their UN Security Council veto is ignored. France, Germany and Russia will simply watch us waste our lives, our military assets and our economy, after which they will pick up the pieces to their own advantage. Turkey and Saudi Arabia are seeing the handwriting on the wall and are already backing off from supporting the USA. Deep down they know who the ultimate loser will be, and they want nothing to do with that loser, either for guilt by association or for future potential for economic exploitation.

Finally, I come to my conclusion. I’m getting out now. I am staying out for the foreseeable future, which means up to three to five years. I will likely buy gold or invest in certain stocks in neutral countries.

I will use the actual results from my scenario projections to determine whether or not or how soon I decide to expatriate my cash and myself, for I am utterly morally and logically opposed to what I believe we are going to do. And, to stay with the theme of this article, we are committing financial suicide, and many investors will see their assets die.

Perhaps I should have used the words "Last Rites" instead of "Requiem" in the article title. I didn’t, even though the market is gravely ill as opposed to dead. I guess I betrayed my beliefs about the future of the stock market in the very first word.

Footnote: The stock market did in fact climb throughout 2003 after a quick war with Iraq. Terrorism didn’t happen here and the economy started to recover. How much of that was programmed? I don’t know. I did make some money, but I am as uncertain as ever about the timing and impact of a possible terrorist attack in the USA. Paranoia is catching. Oil prices are now going through the roof. The market has stalled. It seems that continued high unemployment and the high federal deficit, due to the war, are rightly killing investor exuberance.

JW