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June 05, 2002

Dodge City East - Showdown at the Kashmir Line of Control
by William Thomson

With the world - always excluding the United States, exceptional as ever - obsessed with the most truly global sporting event, its quadrillenial festival of football and the United Kingdom, as ever looking backwards and drowning in a wave of nostalgia, there has been little thought of the possibilities of nuclear war. But that is just what the world is facing at the moment with the showdown between Pakistan and India, the first since they have become nuclear armed.

The world's population has put its nuclear fears on hold since the end of the Cold War in 1990 but the present situation is the closest to we have been to using these weapons in anger since the standoff between the Cuban missile crisis forty years ago. Indeed, the situation is probably worse since the US and the Soviet Union danced a dangerous minuet, but there was always an understanding of the rules of the game. There were hot lines for the leaders to communicate, and the armed forces were clearly under the control of civilian authorities. The command, control and communications (C3) systems were secure and well established and the likelihood of a rogue general firing them was remote.

Under the intellectual guidance of Dr. Strangelove-like academics a peculiar use doctrine termed Mutually Assured Destruction or MAD emerged and led to a strange stability between the two largest nuclear powers. And true to its name, the doctrines did verge on the mad at times. In one case, a high-powered team proposed placing nuclear powered and armed submarines hidden under the polar ice. At the appropriate time the submarine was supposed to burn a hole in the ice with lasers, blow off the ice plug and launch its missiles through the hole in the ice. It was, of course, completely mad, cooler heads prevailed and the doctrine never got beyond the drawing board.

But there was almost no limit to their ability to think and plan the unthinkable. Scientists, mostly cynical, planned computerised war games of strike, counter strike and counter, counter strike, in which the casualties were measured in mega or millions of deaths. They suffer 20 mega deaths, say, we take 10, and so we win.

Fortunately, the Soviet Union collapsed and the US and Russia have recently agreed to substantial cuts in the their nuclear arsenals. So far so good, but in fact far from going away the problem has mutated, downsized and globalised. Not only do India, Pakistan and Israel now openly own nuclear weapons but it is also estimated by some that several hundred Russian backpack or suitcase nuclear weapons are unaccounted for and some have probably reached other Islamic countries and some of these may have been transferred to non-state i.e. terrorist organisations. This is the fear that Vice President Cheney and Warren Buffett have publicly and correctly warned about.

The immediate problem is Kashmir, a territory over which India and Pakistan have fought three hot wars over the past fifty years and which has been under a situation of low intensity warfare for almost 18 years. Pakistan has been infiltrating guerrillas into Indian controlled Kashmir across the so-called line of control. Pakistan controlled guerrillas have been responsible for a number of terrorist outrages in India, beyond Kashmir, in recent months. And India, under its Hindu nationalist Prime Minister, is weighing its options.

Pakistan suffers from having no certain lines of control. The army is far from unified under President Musharref. Al Qaeda and Islamic extremists are separate power centres with their own agendas and support within elements of the military. They may want war. A war that Pakistan loses and then disintegrates may play to their interests of making Pakistan a nuclear-armed Afghanistan. Whilst India has a no first use doctrine, Pakistan does not and being heavily outnumbered on a conventional forces basis may be readier to use them. Without effective C3, a rouge Pakistani general could go nuclear.

Both sides may be playing up the situation to better their bargaining power with the United States. India wants more respect and a closer relationship. The United States may want that also for its longer term goal of making sure China is contained. But it cannot stand the risk that Pakistan disintegrates. Some intelligence observers say, hopefully, that the United States already controls Pakistan's nuclear armaments; others say it would take control in the event of hostilities. We can hope but will not know until it happens.

Nobody can tell at this point how the situation will develop or be resolved but we may know shortly. Some foreigners who were first advised to consider leaving the region have now been instructed to leave, their governments fearing the worst. But the worst does not bear thinking about. Some estimates of a nuclear exchange over the regions densely populated conurbations run to 20 mega deaths or more, taking into account the long-term account of radiation fallout.

Welcome to the Brave New World of the third millennium. This is the first crisis of the new millennium with weapons of mass destruction at the ready. There will plenty others and in many cases, if used by terrorists, there will be little or no warning. Governments in the west are ignoring the problem and not preparing their populations because they do not know how to handle the problem and do not want to concern their populations unnecessarily.

The World Cup and Jubilee circuses continue.

Market prospects
With global instability increasing and the United States in danger of facing a case of imperial overreach, it budget deficit is set to grow steadily. Increasingly, capital will be looking for safe havens. The US current account deficit is over USD 500 billion almost 5 percent of GDP and becoming more and more difficult to finance at the present overvalued level of the dollar. The deficit requires the US attract USD 1.5 billion of foreign capital every day, including Saturdays and Sundays, to maintain the dollar at today's levels.

Foreign capital has been becoming more and more skittish this year. As a consequence, a steady flow of foreign capital out of the dollar has appeared. The dollar has been breaking important chart levels of the downside. The US dollar index has sketched out a 3-4 years top and breaking 116 was important. It is presently around 111.5. Any rally from here would be an opportunity to go short and a break of 110 would probably open the floodgates. Morgan Stanley's Stephen Roach sees the possibility that the dollar will retrace all of it 1995-2002 bull market. That would put the low of the dollar around 85 on the index.

The Euro has rallied to $0.94 and looks to have the chance to rally to parity by the end of the year and then to $1.05 to 1.10. Longer term it could rally to $ 1.20 and even higher. The Australian dollar looks very interesting. With gold prices rallying it looks set to go much higher. And being in the Southern Hemisphere it could become a safe haven currency in the event of a wider war.

Gold remains in its own mini bull market. It probably needs to consolidate its gains of the last six months here, but looking out further this year and next it looks as if it will go much higher.

William R. Thomson
Chairman of Private Capital Ltd.

William Thomson, Chairman of Private Capital Ltd., an advisory company in Hong Kong. He is also a senior adviser to Franklin Templeton in Hong Kong and Axiom Alternative Funds in London.

Mr. Thomson is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright © 2001-2008 William R. Thomson

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