THOM CALANDRA'S STOCKWATCH - War is a market plus, peace is not - Friedman: Bush's future rides on imminent invasion

cbs.marketwatch.com By Thom Calandra, CBS.MarketWatch.com Last Update: 12:04 PM ET Feb. 26, 2003

SAN FRANCISCO (CBS.MW) - A veteran intelligence analyst says Washington almost surely will choose a full-out war against Iraq, as soon as this weekend over the moonless Arab desert. CBS MARKETWATCH COMMENTARY

THOM CALANDRA (WEEKDAYS) Intelligence analyst: Weekend invasion, rally, likely TOMI KILGORE (MONDAYS) A lack of volume is negating some positive signals BAMBI FRANCISCO (TUESDAYS) Why Ma Bell should buy Covad MIKE TARSALA (WEDNESDAYS) The tech guidebooks are all wrong DAVID CALLAWAY (THURSDAYS) Osama and the great duct tape conspiracy JON FRIEDMAN (FRIDAYS) What am I offered for CNN?

With that first strike, says Strategic Forecasting founder George Friedman, President Bush will have lodged the centerpiece of his administration's foreign policy: a global effort to oust Saddam Hussein and root out international terrorists. The president also will have sparked greater technology spending, a significant stock-market rally and a collapse in energy prices.

"He really has no choice," says Friedman, who explains how the president has a bleak political future if America capitulates to Iraq, or the United Nations. "His biggest problem is that right after Sept. 11 (2001) he was decisive, and now he has dragged this out so long."

Friedman, as chairman of 7-year-old Strategic Forecasting, or Stratfor.com, is something of a pioneer in the field of private intelligence. The former director of the center for geopolitical studies at Louisiana State University publishes regularly on national security, warfare and computer security. His books include "The Future of War" (Crown, 1997), "The Intelligence Edge" (Crown, 1997) and "The Coming War with Japan" (St. Martin's Press, 1991).

In Friedman's view, Bush has hemmed himself in politically and strategically. On the political front, "no attack on Iraq" leaves America, and the world, with a lame-duck president, abandoned by his right-wing allies and scorned by those to his left.

"Imagine, Bush throws up his hands and says, 'No international coalition, so I am not going to invade.' The left wingers say they stopped the lunatic. The right wing bolts. We have now a two-year lame duck. Can you say President (John) McCain? Bush will be crippled," Friedman tells me from his office in Austin, Texas.

Many investors fail to interpret correctly the fast-moving events leading up to war, he says. The financial media are under the impression peace will bring with it lower oil prices and a relief rally in the stock market. Not so, says this analyst.

"If the scenario the market regards as bullish comes to pass, which is the U.S. makes the decision not to attack, the consequences will be intense. Saddam Hussein becomes a hero of the Arab world. The United States appear weak, and the foundations underneath Bush will crumble," Friedman tells me. "The financial markets, as they always do, will react badly when the Republican leadership dissolves."

In the Middle East, a stalemate "leaves Kuwait hung out to dry. Israel will become much more aggressive in its own defense. And strategically, the United States does not have the Iraq base of operations to pursue its war against terrorism," he says.

Friedman, in a long career of mixing geo-political and economic forecasts, says he is always amazed at how markets - energy, currency, stocks and bonds -- react irrationally at the perceived threat of war.

"The short-term market has an IQ of 60. The long-term market is a genius," says Friedman, who offers his opinion on where the smart money is headed later in this article. "Yet we all talk about the market as if it is one entity."

Of note is the fact that speculators in the past three months have bid up prices of crude oil, natural gas and other energy products. At one point in frenzied trading this week, natural gas futures contracts were trading at double their price of mid-November, and at least one energy executive was proclaiming a "new era" of higher prices for natural gas, a crude-oil alternative. See: Energy market set to tumble.

"Iraq exports 1.7 million barrels of oil a day," Friedman explains. "In the event of a total catastrophic war, the world markets will lose just 1.7 million barrels at a time when Venezuela oil is coming back online and many producers, like Saudi Arabia, want to fill that capacity. The rising oil market is acting how it always does in the short term, irrationally."

Friedman says Saudi Arabia and other members of the Organization of Petroleum Exporting Countries are eager to boost production in a bid to replenish their dwindling financial coffers. "Every major producer has some surplus capacity and is eager to fill it because they have cash-flow problems," Friedman says. "In the '73 oil crisis, the debt structure of these countries was absolutely different. In '73, the Saudis could sit on their oil. Now they can't."

Friedman fully expects that if, or indeed, when, America goes to war, and the war is rapidly successful, "the war premium gets squeezed out of energy markets. The prospect of cheaper oil now and in a year or two is very bullish for most financial markets."

On timing, Friedman says an attack is probably imminent. This weekend offers a moonless night over Iraq's desert sands. U.S. Gen. Tommy Franks, who will have responsibility for an invasion of Iraq, arrived at Camp As Sayliyah in Qatar earlier in the week.

"This is the best weekend militarily to do it," Friedman says. "There is no moon, and if you ever have been on the desert in special operations, you know you don't want a moon when you need to take bridges and other strategic posts."

The war in Iraq, Friedman is telling his clients, is simply a campaign in a "much longer and much more complex war, and the forces that invade Iraq will remain there, for future potential operations (against terrorists)."

Friedman dismisses talk that the court of public opinion will lead to a peaceful solution in Iraq. Opinion polls still show a majority of Americans who support an invasion of Iraq. "Public opinion around the world does not matter that much," says Friedman, who says "elitist" European opinions about America's motives actually benefit the Bush administration's domestic approval ratings. "The U.S. is never going to be loved."

What's more, France's Jacques Chirac and Germany's Gerhard Schroeder are in their own political deep water. "Schroeder is sitting there with a 25 percent popularity rating. Chirac and Schroeder are committed to the European Union but the EU is badly split on several issues, not just the war. The French want the EU to be a vehicle for French foreign policy, but the Spanish and the Italians don't," he says.

Friedman says an invasion, whether it is immediately successful or a one-year affair, will boost technology spending. "Historically, wars have been stimulative," says the analyst and author, who scoffs at the notion the war will rack up costs of $1.3 trillion, as some have forecast. "Deficit spending is stimulative. The antidote of a deflation scenario is a deficit. Wars also drive technology. Oracle (ORCL: news, chart, profile) was created to give the Navy a database."

I asked Stratfor.com's Friedman where he thought the long-term money, the smart money, was headed. "In general, I don't believe in smart money," he says. "Everyone I knew who was smart bought dot.coms. The definition of smart is to be unstable. The official smart money that I talk to is incredibly confused. Some believe in deflation, others are buying commodities--some believe in deflation and are buying commodities."

He sees profits in stocks, especially those tied to security issues.

"We believe that with the yield curve positive and net free reserves positive - in other words, a healthy, liquid financial market -- equity markets are the place to be over the long run," Friedman says. "We are particularly interested in technologies that will become important in homeland defense and the extended war-fighting we will be seeing in the eastern hemisphere. The smartest people I know are positioning themselves to take advantage of technologies that feed into federal purchasing for the war."

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