Column

THE ‘CHIRAQ’ ATTACK

The worst outcome for investors would be a phony war that lasts for months

DONALD COXE March 3 2003
Column

THE ‘CHIRAQ’ ATTACK

The worst outcome for investors would be a phony war that lasts for months

DONALD COXE March 3 2003

THE ‘CHIRAQ’ ATTACK

Column

The worst outcome for investors would be a phony war that lasts for months

DONALD COXE

UNTIL VALENTINE’S DAY, the consensus among U.S. investors was that war with Iraq would come. It would be short, followed by a rebuilding process that would mean Iraqi oil production would soon climb to levels that would drive crude prices down to the low 20s per barrel. There might be terrorist attacks, but Americans were fatalistic that there would be terrorist attacks in any case: 9/11 had come when the U.S. was largely disengaged from the Mideast, so an Iraq conflict would make little difference.

With war out of the way, the stock market could get back to focusing on the basics— the outlook for the economy and company profits. The period in which corporate fraud had dominated the headlines was largely past. Despite all the investigations, only Enron, WorldCom, Tyco and Adelphia had produced fraud indictments among the big public companies. The stock option issue remained, but progress was being made.

Then UN inspector Hans Blix produced the kind of bureaucratic report that called for more inspectors and more time. France, having already wounded NATO, took charge of the Security Council (claiming vindication for French values), with the enthusiastic acquiescence of Germany, Russia and China, and suddenly it looked as if there might not be a war after all.

This column’s mandate is not to try to convince Canadians of the U.S. case for war. Polls show that would be futile. The divide between the nations appears, at least on the surface, in terror bombing convictions: Timothy McVeigh was executed for his part in Oklahoma City, whereas the first conviction in the Air India murders drew a sentence of 5.5 days’ jail per victim. My task is to analyze the implications for investments. A few thoughts:

First, the worst outcome for investors is a phony war that lasts for months and months in which Jacques Chirac suns himself as king of the world against the U.S. and his foe, Tony Blair. “If’twere done when ’tis done, ’twere well ’twere done quickly.” Oil prices would

stay at levels that strain an already dicey global economy, corporate treasurers would continue to defer capital spending, the U.S. fiscal deficit would explode, consumers would stay traumatized, international tourism would remain constrained, and the stock market would be jerked around by stories of war and terrorism, descending to new lows. The price for peace at any price includes a return to the global bear market, which would probably trigger, at the very least, a double-dip recession

Second, the best possible outcome, in which Saddam and his entourage depart for sanctuary abroad (such as Libya, which as chair of the UN Commission on Human Rights might pity the desperate), will happen only if Saddam believes France can’t protect him any more. Saddam bought his original nuclear reactor in 1976 (destroyed by Israel in 1981) from then-prime minister Chirac, who agreed (as Andrew Coyne notes in the National Post) to a clause in the contract forbidding Jews from being involved; that began decades of deals for weapons and oil rights between the two: Saddam and “Chiraq.”

Third, as Henry Kissinger observed, if the U.S. is forced to bring home its vast legions because of outmanoeuvring at the UN, U.S. deterrence against other threats to peace will be seriously, if not fatally, flawed. Kim Jong II will be watching closely. If Iraq ceases to be a worry to the stock market, North Korea will quickly take its place.

Fourth, if the global economy survives this crisis, the world will need full Iraqi oil production within two or three years to keep crude prices manageable. Non-OPEC pro-

The eurozone is now the biggest drag on the global economy-further reason for Chirac and Schroder to play the anti-U.S. card

duction declines at roughly four per cent per year and global demand rises roughly three per cent per year. OPEC includes too many unstable states to be a truly reliable supplier. No outcome of this crisis that leaves Saddam in Baghdad will mean Iraq’s return to three million barrels a day of production.

Behind all the sound and fury there are signs of economic recovery in the U.S. and Asia. The eurozone has replaced Japan as the biggest drag on the global economy, which is further reason for Chirac, Schröder and friends to play the anti-U.S. card with their largely anti-American voters.

If they win, and the U.S. is humiliated, expect a wave of revulsion from the American silent majority. The U.S. trade deficit (at more than US$1.5 billion a day) is the highest in the industrial world, despite those two protectionist follies, steel and softwood. By almost any measure, the U.S. is the most open major economy in the world. American consumers’ inexhaustible willingness to buy foreign goods has been the salvation of the global economy since the Asian crises of 1998.

Americans expect the world to understand that they feel vulnerable and violated since 9/11. They resent the hatred and contempt displayed by nations that would not exist except for huge sacrifices of American lives and resources, and whose export and tourist industries rely so heavily on American consumers.

Americans are beginning to face up to the probability that major components of the political and intellectual elites of France and Germany are more anti-American than they or their parents were actually anti-Nazi or anti-Communist. Their willingness to attack NATO—an American symbol in Europe—has stunned American internationalists in both parties.

America was the leader in creating GATT and the World Trade Organization. It now sees its agricultural exports blocked by allegations of dangers from genetically modified foods, its high-profile multinationals under attack from anti-globalists who are, at best, loosely restrained by their governments, and its mergers blocked by Eurocrats.

What may come is a grassroots reaction that could give those elites—and global investors—something to really worry about.

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca