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War and Terror and the Whole Damn Thing!

They say the first casualty of war is truth. If that is the case then since the so-called War on Terror got underway following the events of 9/11 we have undoubtedly been fed considerable propaganda. Trouble is it is difficult to tell the lies from the truth and most people accept whatever they are told because it is the nature of people to want to believe their government and accept what they are being told as the truth. In other words they want to accept what they are being told because it is more distressing to discover that it may have been a lie.

However, we now know that numerous truths we were told were indeed lies. The most damning of course was the invasion of Iraq where it was revealed that the reasons for the invasion were a lie. There were no weapons of mass destruction; there were no direct ties between Al Qaeda and the Iraqi government. The war, as was revealed in the leaked Downing Street memo, was based on the "fixing" of information around the policy.

But starting wars based on lies is not new. The Spanish American War of 1898 was started based on an alleged mining in Havana Harbour of the USS Maine by Spain. It was later revealed that a coal bin explosion that was clearly reported by the Captain from the outset sank it. By the end of the war the US had taken control of Cuba, Puerto Rico, the Philippines and numerous islands in the Pacific, which of course were not relinquished. Hitler used it to great effect with first the burning of the Reichstag that was blamed on communists, Hitler used it as an excuse to cement his grip on power and begin an assault on numerous citizens. Later they justified the invasion of Poland to start WW2 on the basis that Poland had attacked first. Even Pearl Harbour was later revealed to have been a set up to draw the Japanese in the Pacific to facilitate the US's entry into WW2. The Gulf of Tonkin attack was based on a faulty report that was exaggerated and used to escalate the Vietnam War.

Which brings us to the most recent war between Israel and Hezbollah/Lebanon. The mantra was that Hezbollah started the war on July 12 by kidnapping two Israeli soldiers and the killing of a number of others. While it may have been a trigger for the latest Israeli attack it is merely part of a 60 year Arab-Israeli war. Israel occupied parts of Lebanon for roughly 18 years starting in 1982. It was Hezbollah guerrilla fighters that finally forced the withdrawal of Israel in 2000. Since then according to United Nations reports there has been almost daily incursions including kidnappings and targeted assassinations over the United Nations monitored blue line by Israel. And of course there has also been numerous incursions or retaliations by Hezbollah. The attack on July 12 was merely one in a string of retaliatory attacks. So what was different this time?

Then there was the alleged terror plot in Britain last week. As with numerous other alleged terror plots since the real one of 9/11 they make huge headlines and then once again they are used as an excuse to ramp up security. Trouble is that outside of 9/11, the Madrid train bombings of 3/11 and the London subway attack of 7/7 they have largely consisted of huge headlines, heightened security, disrupted travel and of course they generated a lot of headlines and raised fears but they have delivered little in the way of trials let alone convictions. Indeed many of them have seen the alleged terrorists released or charged with nothing more than minor misdemeanours or minor immigration infractions. To date one of the alleged plotters in Britain has been released already while the remainder languish without charges. Under British law they can be held for 28 days without charge.

Columnist Joshua Marshal noted (Toying With Terror Alerts? - Time Magazine July 7, 2006) that many of these alleged plots have gone nowhere except to embarrass the authorities that initiated the arrests. Grant you, the actual arrests as we note, generate huge headlines, raised terror alerts and calls for a further security clampdowns but the release of the alleged plotters and the falling apart of the case is buried in the back pages.

Even here in Canada one alleged plot to blow up the CN Tower in Toronto saw all of the alleged plotters released. A more recent alleged plot that included a plot to blow up Parliament and behead the Prime Minister was allegedly masterminded by a bunch of young men and teenagers. Of course it generated huge headlines but since then it has barely been heard from. In one 18 month period leading up to the 2004 US elections there was a barrage of colour coded alerts including three during the Democratic convention. As soon as the election was out of the way the terrorist warnings seemed to go out of style. With elections coming up again this November are alleged terrorist attacks once again playing a role to influence decisions?

This is not to lessen the potential threat but in the case of the latest plot of using liquid explosives on airplanes it doesn't take a nanosecond to realize that the same tactic could be used on trains, subways or shopping centres just as easily. Does the public take all this in stride? It is a mixed bag of those who are fearful and therefore welcome security clampdowns, those who find it a bit much but are resigned to acceptance and those who are contrarians who dissent and are cynical and point out the inconsistencies the unanswered questions and the lies. The radio talk shows from the right burn up with cries to clampdown further on security and from the left there are warnings about the approaching totalitarian state. The issues of course are polarized views and dissent is even being attacked as unpatriotic or worse. Much of it is not dissimilar to the war on terror itself, all about polarized views.

We can forgive some readers if they wonder what the fog of war and terror has to do with investments and the markets. Well a lot actually. It is all about psychology. Alleged terror attacks raises the fear level and the public is softened into accepting whatever constraints are imposed. Or it is used to justify wars and invasions that might not have otherwise occurred. As we note the first casualty of war is truth and lies and propaganda have been the staple of war since time immemorial. Both sides in the conflict use it. And with the revelation of lies used to justify the invasion of Iraq it compromises what are lies have we been told. Even the terror attacks of 9/11 and 7/7 have left many unanswered questions that often contradict the official story.

Markets are a study about the psychology of crowds. Fear and greed dominate investor thinking. It drives manias and bubbles and it drives panics. Crowd psychology is merely a study of strong emotions that dominate an individuals reasoning and can impact his value system, It has been said that ones ability to maintain independent ideas and objective analysis is subjugated by the mesmerizing influence and intensity of the crowd. (Analytical Methods for Successful Speculation - James Schildgen).

Since the war broke out on July 12 markets have essentially gone nowhere but market volatility was prevalent as there was a sharp down followed by sharp up. While war and terror may be good for business (defence industries and security firms) it is terrible for markets as investors are just frozen not knowing what do. It is war and terror 24/7. How can a rational person invest positively in that kind of atmosphere? On the other side there is no shortage of those who claim that war and terrorism are always with us and implore investors to just invest as in the long run the market always goes up.

They may be right but war (and this time terror as well) is not very friendly to markets at least at the outset. At the outset of WW1 the NYSE closed for the first time and stayed that way from August 1914 and did not restart again until December 1914. Any sell off was actually short lived and shallow and with America benefitting from the war from a business standpoint the gains seen in 1915 are still a record that will probably be never seen again. But with the US entering the war in 1917 the market fell throughout the year. Market psychology had changed.

When WW2 broke out in 1939 the NYSE effectively flat lined for the next number of months but when the blitzkrieg got underway in May 1940 the market fell precipitously. The market did not make a bottom until the famous 1942 bear market bottom that some analysts say was the real bottom of the Great Depression. What changed after the 1942 bottom was a shift in the fortunes of war and market psychology changed for the better.

The era of the Vietnam War was a classic response to market psychology. In the early stages the bull market that began in 1949 continued its up ward trend. But as the mood shifted and the US became more bogged down and opposition to the war grew the markets roiled. Vietnam, Watergate and the impeachment of Richard Nixon roiled the early part of the 1970's. The market didn't bottom until 1974 losing upwards of 50% for the blue chip markets and more for small caps and others. Grant you it was also a period of rising inflation, rising interest rates and economic stagnation but the negative psychology of the war, Watergate and the political scandals weighed heavily.

At the onset of Gulf War 1 when Iraq invaded Kuwait the initial reaction was very negative and the market swooned as oil prices leaped. It was not until the UN sanctioned war to push Iraq out of Kuwait did the market soar as they realized that the war would be short lived. The market was already falling in 2001 when the events of 9/11 brought a short lived bottom after the NYSE was closed once again for a brief period for the first time since the outset of war in 1914.

The invasion of Iraq in 2003 triggered a huge rally as the expectations were for a repeat of the 1991 Gulf War 1. The market soared 44% (S&P 500) over the next year in response. The President's approval soared through 9/11 and remained high through the invasion of Iraq. But since then over the past two year the market has only been able to add about 10% as the fog of war and terror and the President's plummeting popularity coupled with the revelations of lies surrounding the invasion of Iraq and evidence of torture and even murder and war crimes have put a damper on the market and it is taking its toll.

Now what going forward. It is war and terror and the whole damn thing. Iran and its nuclear program remain firmly in the forefront as does the accusations of Iran's funding and support for Hezbollah. It is well known that both Israel and the US want regime change in both Iran and Syria. But given that after a month of major bombing in Lebanon, Israel with clear military superiority, could not finish off Hezbollah and the US is bogged down in Iraq in the midst of a growing civil war how could they possibly execute a war against Syria and Iran? Of course we don't have that answer but for the past few years we have been prepared with a mantra about the evil of Syria and Iran so an invasion or bombing of one or both is a matter of when and it will be started with a trigger that will be blamed on them.

The Kondratieff winter is not just about a bear market in stocks or a depression or serious recession in the economy. It is also about wars and terror. In the past wars and terror were between nations with identifiable armies. Eventually the wars ended as one side defeated the other. But today's war on terror is open ended with no identifiable army. The invasions of Afghanistan, Iraq and Lebanon rather than resulting in defeat for the other side have instead only increased insurgencies and brought thousands more into the other sides cause, a cause they see as noble as do the Western powers.

We are entering a dangerous phase in cycles for the markets. Numerous cycles are pointed down over the next few years. They include the well known 4 year cycle and as well we are in the period of the 18 year cycle, the 54-60 year Kondratieff cycle and a possible 72 year mega bear cycle. The current Israel/Lebanon/Hezbollah has attained a cease fire. How long it lasts is any ones guess. What is clear is that the war decided nothing so it will go on and may flare up again at any time. And once again we will be immersed in war and terror and the whole damn thing 24/7.

We have a few charts to show.


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