www.upi.com By Gregory Fossedal Special to UPI From the Business & Economics Desk Published 3/19/2003 5:50 PM

WASHINGTON, March 19 (UPI) -- Vast changes are in store for the world economy in the coming weeks, as the United States and its allies prepare to invade and liberate Iraq.

Oil prices should continue to coast down toward $25 and even $20 a barrel -- albeit with a final spike if Saddam Hussein attempts to destroy his country's wells and lobs a pre-emptive chemical strike at U.S. troops or tankers, Israel, possibly even Saudi Arabia.

Business, investment and consumer decisions that have been put on hold for six agonizing months will go forward in April -- with an actual impact on the real economy.

It's time, then, for a review of the U.S.-led world economic turnaround that's about to begin, one that will have implications for every country from Africa to Russia, from the Americas to Southeast Asia.

Our guide for this tour de force is John Mueller, the co-creator of the "world dollar base," a measurement of dollar creation by not only the U.S. Federal Reserve Board but also by other central banks that buy and sell U.S. Treasury securities, and in so doing, "monetize" them.

He's well-placed to provide the kind of global perspective critical to understanding a global economy that runs on global dollars. Mueller isn't a household name, but he should be.

As the former economic counsel for the House Republicans (1981-87) and longtime adviser to Jack Kemp, Mueller designed perhaps the best flat-tax package ever conceived, the Kemp-Kasten tax bill, which essentially became law in 1986. He was also a force for getting House Republicans, and Democrats for that matter, to pay attention to Fed monetary policy throughout the 1980s.

He then transitioned to the real world to co-found a private-sector forecasting firm, Lehrman Bell Mueller Cannon, Inc., in 1988. (The firm is now incorporated as LBMC, LLC.)

At LBMC, he has compiled an enviable track record, particularly at projecting major turning points up to two years ahead. Most economic "forecasts," by contrast, amount to bean-count estimates for the coming three to six months and are usually little more than slightly adjusted extrapolations of recent trends.

Mueller's best calls include a 1989-90 "double dip" recession call, followed by a 1993-94 observation that welfare reform could significantly reduce the "natural" unemployment rate, and thus, combined with surging world dollar creation, lift stock markets and economic growth.

With the latter, Mueller provided insight into something few Republicans seem able to explain: namely, the Clinton economic boom of the 1990s.

In late 1997, Mueller did a careful study of demographic trends for a private-sector Social Security reform commission, which was weighing various options for privatization. While Mueller favors Social Security reform (in the form of a tax cut), he was rightly cautious about projections for never-ending stock market growth that would make privatization painless.

Noting the rapid aging of the U.S. population, he projected a generation of generally flat stock market returns, through about 2015.

Accordingly, Mueller was bullish on bonds from 2000 onward, and generally bearish on the stock market when his stock market buy-sell index turned negative. Along the way, he took first place in the group of 50 economists surveyed by The Wall Street Journal for his 1999-2000 interest rate calls.

Anyone who sold stocks and bought bonds in the spring or summer of 2000 was considered a nervous ninny at the time, but in retrospect, it was a heck of a call.

The firm's worst calls include a call for a 1995 slowdown and mild 1996 recession, when there was a non-recession slowdown, and a 2000-01 slow growth call, when there was a very mild recession.

Investors who traded those notions, however, didn't suffer severely if they were investing the firm's short-term buy and sell signals on the stock market. The same model had investors mostly out of the market in 2001-02, with one timely "buy" interval including the market surge months after the Sept. 11 attacks.

At present, Mueller sees a number of strong trends of note for global investors. Let's focus on just two, which are likely to be at the core of the world economy over the next 12 to 24 months.

First: A return to oil normalcy

For all the talk of supply shocks, the recent rise in oil prices has been (as are all prices) a tale of supply and demand. Mueller's oil model predicted a surge in oil prices in the second half of 2002, although Mueller would be the first to say that this demand-side surge was strongly aided by interrupted supplies from Venezuela, Nigeria, and the threat of war in the Middle East.

The same model now points to a return to oil normalcy at $25 a barrel and below by the summer -- a projection "the bottom line" highlighted several months ago in advising readers to sell off oil positions in the high $30s.

Even if Saddam destroys Iraq's ability to pump oil in the short term, there will likely be a release of supplies from the U.S. Strategic Petroleum Reserve to compensate. In the longer term, there will be not an embargo on Iraqi oil, but a liberation of it. Thus, the move in prices, eventually, could be even sharper.

On the demand side, such forces, Mueller's model suggests, are already in play. The spike in dollar creation lagged by two to three years peaked last fall and is coasting down.

Another result will be a greater boost to corporate profit margins in the U.S. and the world than after the first Gulf War, because of the greater squeeze on pricing power that took place this time around.

In the last Gulf War, producer input prices, measured by the Bureau of Labor Statistics' broad commodity index, rose 7 percent in the year leading up to war. The prices that producers charge, measured by the BLS's finished goods index, also rose 7 percent -- a relative wash for profits.

In the 12 months through this February, by contrast, prices for producer inputs rose 8.2 percent, while finished goods prices rose only 3.5 percent.

Thus, conversely, a return to oil normalcy will provide greater relief than in 1991. This assessment of the impact of oil price normalcy differs from that of many other economic forecasts.

The bottom-line implications of this forecast: Take profits in oil stocks and futures and oil-sensitive economies such as Russia, Indonesia and Mexico. Or, keep those positions, but hedge against oil price declines.

Buy U.S. cyclicals and technology and their Asian equivalents, as oil returns to normal. Japanese and Taiwanese technology stocks are a value play and a growth play.

And if (as we expect) there is continued and even heightened geopolitical unrest surrounding the North Korean nuclear program, you can short the South Korean market as an Asian-crisis hedge.

Second: The Bush recovery

Mueller agrees with the economic consensus that the U.S. first and second quarter will be weak. But he parts company with many in seeing a strong (4 percent) third quarter this year, surging toward 5 percent in third-quarter 2004 and 6.5 percent growth in the fourth.

None of which makes Mueller especially bullish on U.S. or other world stocks over the coming months. His model of price-earnings ratios on the U.S. market implies a range of as low as 700 on the S&P 500 index through summer.

If his short-term indicator is right, then rallies like the recent it-will-soon-be-over Iraq surge are a time to lighten up, at least into May and June.

The same model, however, implies an upside to the S&P 500 of perhaps 1,400 by late 2004, and of perhaps 2,500 on a revived NASDAQ market.

Assuming there is perhaps one more sell-off to test recent lows in the United States, Europe and Asia, this implies taking some profits, or putting on short-term-expiration puts, on rallies in March and April. By summer, Mueller would be fully invested -- expecting the biggest market gains in 2004 but wary of missing the rally by holding off too long.

The one caveat, Mueller says, is if the Fed cuts interest rates again, in the common but false assumption this will stimulate the economy.

At this point, Mueller said, further rate cuts have the primary effect of delaying an economic upturn as investors, employers, and consumers continue to wait for the bottom before locking in loans to expand output. A further Fed rate cut, say during the Iraq war, wouldn't reverse the long-term upsurge, but it might (like last fall's move, Mueller argues) delay it.

The bottom line implications: Sell U.S. bonds. Now.

Buy equities, especially in the technology and cyclical sectors in the United States and Asia, hedging on rallies over the near term. Utilities, as we've said before, should also be a value play, and many will actually provide an interest payout, through dividends, to match or exceed the rate on U.S. Treasurys.

Latin equities, in sympathy with the U.S. market, should be a strong buy around the third quarter -- especially as a new round of trade liberalization kicks in. Brazilian President Luiz Inacio Lula da Silva, initially an opponent of Bush's proposed pan-American free trade zone, has quietly toned down his opposition.

There's a second-order implication to all of the above that is political and long-term in nature, but no less important.

There will, at least in the United States, be a surge in Bush's job performance ratings, and, accordingly, in his ability to win domestic legislation. Assuming he shows the same confident stubbornness he did in dealing with the Democrats in Congress last November, and the United Nations this February, Bush will win a major tax rate cut, probably even the majority of the dividend tax cut he is seeking.

Deficit projections reaching into the heavens will prove, as in the 1980s, to be unduly pessimistic, especially in 2004 and 2005. If this is combined with the rapid establishment of self-rule in Iraq, and a Middle East economic boom built around U.S.-led free trade agreements, all these affects will reinforce one another, synergistically.

The prospects for Social Security and medical insurance reform, a Middle East Marshall Plan, and other Bush initiatives, should all rise.

The upshot would be a classic election-year bull market, and a likely Bush sweep at the polls in 2004. If the Mueller model pans out, Bush will have no need to rely on chads in Florida. The only political question, at that point, will be who Hillary Clinton and Jeb Bush will put on their respective party tickets in 2008.

It's possible to look this far out thanks to minds like Mueller's, which treat economics as a science, but a human one, and make actual predictions. It's part of what makes an encounter with this true forecaster both interesting and potentially profitable.

Harry Truman, tired of hearing his advisers answer questions by saying, "on the one hand," this, and "on the other hand," that, once impatiently asked his chief of staff to go out and "get me a one-handed economist." Mueller has only one hand, but it's highly skilled.

The bottom line is, sell oil and the countries that go up with it, get out of bonds, and buy into a long-term surge in equities starting, approximately, in May or June -- if Mueller is right. He usually is.

-0- (Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own professional adviser before making any decisions to buy or sell these or any related securities.)

www.cbc.ca 03:05 PM EST Mar 20

TORONTO (CP) - With the zero-hour for a war in Iraq approaching, the closely watched Dow average of blue-chip stocks rose Wednesday to close up for a sixth session in a row - something that hasn't happened since August 2000.

Most North American stock markets and gained on reports that U.S. planes attacked several artillery batteries in southern Iraq. Hopes for a short war also fired up the U.S. dollar, in turn driving the Canadian currency lower by 0.37 of a cent to 67.45 cents US.

As the greenback rose, the euro fell to $1.0562 US, down from $1.0621.

But generally the tone on stock markets Wednesday was of caution ahead of the expiry of the U.S. ultimatum to Saddam Hussein, even as U.S. forces began moving through the Kuwaiti desert towards Iraq.

In New York, the Dow industrial average gained 71.22 points to 8,265.45. The Dow has racked up more than 700 points in the last six sessions as investors bet any war will be short.

"It has sort of slowed down in intensity from what we've seen in the last couple of days, but the equity markets are proving remarkably resilient here," said Scott Kinnear, economist with MMS in Toronto.

Toronto's S&P/TSX composite index moved 14.87 points higher to 6,453.48. The junior TSX Venture Exchange was up 1.02 points at 1,063.02.

The Nasdaq lost 3.47 points to 1,397.08 while the S&P 500 was ahead 7.57 at 874.02.

Generally, stock markets have been driven higher since the middle of last week as investors looked to the rally that followed the start of the 1991 Persian Gulf War and hoped that history would repeat itself.

"The general feeling out there is that there will be a quick war so you don't necessarily want to wait for the start of the war because by that time it will be too late," Kinnear said.

But there are plenty of reasons for caution, including the possibility of torched oil fields, use of biological weapons and terrorist attacks.

In corporate news, shares in DuPont Canada soared $4.35 to $21.59 after its U.S. parent offered $1.4 billion to shareholders to take the firm private. The two companies announced that DuPont will offer $21 a share to buy the 24 per cent of DuPont Canada stock it doesn't already own.

Softness on the Nasdaq came after software maker Oracle Corp. reported a cautious outlook for a recovery in technology spending late Tuesday.

The company posted a 12 per cent rise in fiscal third-quarter profit and said revenue grew modestly, helped by growth in sales of software upgrades to existing customers.

But the company said revenue from new software licences and sales of its flagship database product line each fell four per cent. Its shares were down 94 cents to $11.31 US.

Lowered fears about a shortage of oil as a result of a new war in the Persian Gulf took crude prices beneath $30 US a barrel. Futures lost another $1.79 to $29.88 US a barrel on top of Tuesday's $3.25 US plunge.

While U.S. crude inventories remain uncomfortably low, OPEC producers other than Iraq and strife-torn Venezuela have been increasing production for weeks.

Much of that oil is now in storage or in tankers on the high seas, say oil analysts.

www.stockhouse.ca Bank of Nova Scotia (The) Quick Quote: T.BNS 52.60 (+0.45) 3/19/03

Scotiabank's Commodity Price Index, which measures price trends in Canada's major exports, surged by 6.4% in February to a level 30.5% above a year earlier. Gains over the past two months have been the third highest in the history of the All Items Index, with data back to 1972. The previous jumps occurred at the time of the Arab oil embargo in 1973 and in early 2001, when natural gas prices spiked during an exceptionally cold winter. 'The latest advance was led by another double-digit increase in the Oil and Gas Index, which rose 13.7% in the month of February alone, and 131% above the soft levels of a year ago,'says Patricia Mohr, Vice-President and commodities specialist, Scotia Economics. 'The Oil and Gas Index, including propane, climbed 75% above peak levels during the 1990-91 Gulf War - the result of geopolitical tensions, lower U.S. stocks of oil and refined products and fundamentally tighter North American supplies of natural gas.'

Non-energy commodity prices also rose by 3% in February, with gains in the Forest Products, Metal and Mineral and Agricultural Indices. 'While G7 industrial activity has softened since last summer, strong demand in China for a wide variety of materials has provided some offset - especially for nickel and copper,'comments Mohr.

West Texas Intermediate crude oil prices climbed from US$32.70 per barrel in January to US$35.73 in February. However, prices eased back to US$31.67 on March 18th, with Nymex traders unwinding long positions, expecting a short and successful U.S.-led military engagement in Iraq.

'Supply concerns are also easing,'says Mohr. 'While Iraq exports under the United Nations administered 'oil-for-food'sale are being suspended, as U.N. personnel leave Iraq, Saudi Arabia has given assurances that it will offset any potential Middle East supply disruptions. The Kingdom has already stepped up production from about 7.97 million barrels per day in November (prior to the Venezuelan oil workers'strike) to more than 9.2 million barrels per day in March and reportedly has stocks of more than 50 million barrels to offset any shortages.'

'The rest of OPEC - aside from Saudi Arabia, Iraq and Venezuela - has also increased output by about 910,000 barrels per day since November and Venezuelan flows are gradually recovering. The net result, OPEC is now likely producing at a rate above world demand for its crude oil,'says Mohr.

Nymex natural gas prices strengthened markedly in February, rising to US$6.66 per million British thermal units from US$5.38 in January. Concerns over rapidly dwindling stocks drove prices up as high as US$9.58 on

February 25th - almost triple year-earlier levels and approaching the daily peak of US$9.98 during the extremely cold winter of late 2000. As of March 7th, U.S. gas-in-storage dropped further to a level 55% below a year earlier.

'Natural gas prices have also slipped back to US$5.34 in mid-March with slower storage withdrawal, expectations of an end to the heating season on March 31st and some industrial 'demand destruction','adds Mohr. 'While prices may ease further during the second quarter, a period of seasonally weak demand, we continue to believe that natural gas prices have moved to a higher plane.'

The Metal and Mineral Index strengthened in February alongside widespread gains in base metals and gold. Nickel led the advance, rising from US$3.64 per pound in January to US$3.91 in February. Nickel-containing stainless steel consumption surged in China by 26% in 2002. China is relatively dependent upon imports of nickel to meet its burgeoning demand, with only one producing nickel mine.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

CONTACT: TEL: (416) 866-4210 Patricia Mohr, Scotia Economics TEL: (416) 933-1093 Michael Arbour, Public Affairs

news.ft.com

By Kevin Morrison in London and agencies Published: March 19 2003 10:24 | Last Updated: March 19 2003 23:18

The slide in US oil prices accentuated on Wednesday, deepening the rapid fall in prices during the previous four sessions as traders braced themselves for more volatility in the days ahead with the US and UK on the verge of going to war with Iraq.

The key London IPE Brent crude futures contract for May delivery fell further, extending losses as US prices were weakened by fading concern over low commercial oil stockpiles. US oil imports rose in the latest week, according to official data.

"Oil inventories were higher and we can expect to see that trend continue as there is plenty of oil being shipped across the water to the US," said Kevin Norrish, head of commodities research at Barclays Capital.

The Nymex light sweet crude contract for April delivery settled $1.79 lower at $29.88 a barrel in New York. With the April contract ending on Thursday, more activity was seen in the May contract, which lost 70 cents to $29.35 a barrel.

In London, IPE Brent crude oil for May delivery lost 50 cents to $26.75. Despite talk that prices could fall to the lower end of the $22 to $29 per barrel range favoured by Opec, investors were pricing in more modest falls. The December Brent contract traded at $25.60 a barrel on Wednesday and December Nymex light sweet crude at $26.80.

In the latest US weekly inventory reports, both the US Energy Information Agency and the American Petroleum Institute, said crude stocks had risen, but gasoline inventories had fallen and were now heading towards relatively low levels ahead of the US driving season, the biggest consuming period of the year.

Gold sold off contracts as well with spot gold prices finishing at $335.50/$336.26 a troy ounce by the end of New York trading, down from $337.50/$338.25 late on Tuesday. London dealers fixed the afternoon reference price at $335.80.

Spot platinum fell as Japanese investors, who have been one of the major reasons for the white metal hitting a 23-year high recently at $707 an ounce, were selling with higher than average trading volume on Tocom.

A casualty of the falling oil price is rubber, which was pushed to five-year highs last month as rising prices for synthetic rubber, which is made using oil, pushed up natural rubber prices. The August futures contract on Tocom fell ¥1.9 a kilo to ¥128.1, down almost 7 per cent from its peak.

boston.com By H. Josef Hebert, Associated Press, 3/19/2003 11:49

WASHINGTON (AP) As the United States and Iraq move closer to war, oil markets seemed to be taking it all in stride. Global crude oil stocks are growing, prices declining and some analysts are talking cautiously of a possible oil glut on the horizon. Lower energy prices probably would follow.

That is, energy experts warned, if a war in Iraq doesn't drag on and Iraqi leader Saddam Hussein doesn't torch his oil fields or, in the worst case, finds a way to disrupt other Persian Gulf supplies.

For now, the markets are betting those things won't happen and that the war will be a swift one.

Oil prices dropped by more than $3 a barrel, or about 9 percent, on Tuesday, falling to their lowest in more than two months as traders believed there is enough crude in the system to make up for Iraq's lost production if war erupts.

The price of crude oil for April delivery was down another 82 cents to $30.85 a barrel by midday Wednesday on the New York Mercantile Exchange.

Oil traders ''are beginning .. to realize there's a bit of a glut of oil around,'' said Leo Drollas, chief economist of the London-based Center for Global Energy Studies.

But that oil has yet to reach the U.S. markets.

The Energy Department said Wednesday U.S. crude oil stocks remained uncomfortably low at 270 million barrels, roughly where inventories have been most of this year and at the minimum industry says is needed for smooth refinery operation. The U.S. stocks increased only slightly over a week ago.

Crude inventories have consistently been 300,000 to 400,000 barrels below a year ago, said Doug MacIntyre, an oil analyst for the Energy Information Administration. Imports also have been down from previous levels, although OPEC producers other than Iraq and strife-torn Venezuela have been pumping more oil for weeks.

The low U.S. inventories reflect transportation delays, but also reluctance by refiners to buy oil when the price has been $35 to $37 a barrel, analysts said.

Much of that oil is now in storage in the Persian Gulf or in tankers on the high seas, say oil analysts. Saudi Arabia is believed to have as much as 50 million barrels in storage in the country and more en route to other storage facilities. That's enough to replace Iraq's 1.5 million to 2 million barrels a day for about a month.

Larry Goldstein, president of the private Petroleum Industry Research Foundation, said the markets also have been calmed because the Bush administration has made clear that it's ready to use some of the 600 million barrels in the Strategic Petroleum Reserve to counter shortages.

Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, said this week he is convinced the reserve is capable of providing oil quickly on orders from President Bush. It has shifted ''from the fill mode to the flow mode,'' Tauzin said.

Still, there remains some trepidation among oil traders and analysts should war in Iraq last a while. Crude oil prices are likely to remain volatile in the months to come, they cautioned.

''This thing could go right back up,'' said Tom Bentz, an analyst at BNP Paribas in New York, suggesting prices could rebound once fighting erupts. ''We're still vulnerable because inventories are tight.''

When prices jumped in the weeks before the Gulf War, oil inventories already were high. That helped cushion the impact on prices, which jumped briefly to more than $40 a barrel and then declined rapidly when it became clear that the war would be settled quickly.

The biggest fear in the market is that oil facilities in other Middle Eastern countries, such as Kuwait or Saudi Arabia, could be attacked a scenario that would cause oil prices to shoot higher very quickly, said Fadel Gheit, senior oil analyst at Fahnestock & Co. in New York.

Short of that happening, there is plenty of oil, Gheit said, and the recent price declines make clear that for the time being the ''war premium'' has disappeared. He said prices could drop an additional $5 a barrel in the coming days.

Energy experts say a glut could result if war in Iraq doesn't drag on and Iraqi leader Saddam Hussein doesn't torch his oil fields or disrupt other Persian Gulf suppliers.

For now, the markets are betting those things won't happen and that the war will be a short one.