First Thoughts on March 18
Jude Wanniski
April 7, 2003


Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: My March 18 Client Letter

The morning after President Bush told the nation on March 17 that he would give Saddam Hussein 48 hours to get out of Iraq or war would begin I assessed the situation for the Polyconomics' clients, on what to expect in the financial markets. The “worst case” would not involve the war itself, which I thought would end in several weeks, but political terrorism that might occur as a result of the war:

* * * * *

The relentless decline in the financial markets these past several weeks as the drums of war sounded louder from the Bush administration has now been replaced by a rally in the financial markets with the certainty of war upon us. The explanation lies in the fact that we are now in a war market that requires its own distinct set of calculations, with the first reflecting optimism that President Bush has made the right decision and things will go well. I'm still hopeful that diplomatic maneuvers at the UN may be revived in time for a peaceful outcome, as President Bush last night did leave the door open just a crack by saying war would begin at a time of his own choosing, not necessarily as soon as the 48-hour deadline has passed for Saddam's departure. As I noted yesterday before the President spoke, there could easily be a satisfactory UN resolution adopted that would contain Iraq's threats in perpetuity. I simply misjudged Secretary of State Colin Powell, who in the end has embraced (or swallowed) the regime-change objectives of the warhawks.

As for first thoughts, when I awoke this morning my very first thought was of General Douglas MacArthur's quote: "Councils of war breed timidity and defeatism." By this he meant that in planning for war the decision-maker is confronted by every possible argument on what can go wrong. MacArthur's spectacularly successful Inchon landing in North Korea was opposed as being impractical by every one of his advisors, but he saw its benefits as far outweighing the risks when he did not hear any argument that had not occurred to him. There's little doubt that President Bush confronted all the downside arguments in the internal debates leading up to his decision to finally pull the trigger and found the risks acceptable relative to his objectives. To the last, I believed he would settle for Iraq's total disarmament, which has practically been achieved. He clearly wants Saddam's head on a platter, as has been the case all along.

Another thought was that in 1991 I worried a Desert Storm push to Baghdad would be met with Saddam's use of weapons of mass destruction and cause massive casualties to U.S. troops. I could not know then that Iraq had totally failed in its efforts to produce a nuclear weapon. Today, I have no such fears, as it is most unlikely there is anything Iraq can throw at the troops which can cause massive casualties and no reason to think it will take more than several weeks to defeat Iraq. Nor is there a parallel here with Vietnam. Saddam may be thinking that if he can get the fighting into hand-to-hand combat American public opinion may turn against the war. More likely U.S. public support for the objective of ridding the world of Saddam will increase during such fighting and if Saddam and his generals are realistic, they must know their defeat is inevitable.

Before the first bombs drop and the first blood is spilled, the war market is finding the downside risks immediately ahead as acceptable as the President has. In the best case, Saddam and his sons and their families would disappear, either voluntarily or through a judgment by the generals that defeat is as certain as it seemed in Tokyo after Hiroshima and Nagasaki. My own bearishness has never been about the war itself, which is what the war market is now discounting. It has been about the unintended consequences of unilateral, pre-emptive war against a relatively helpless Muslim population. There is an assumption by the administration of increased political terrorism directed against Americans at home and abroad, but the war market will not discount human casualties when the numbers will be small. The real problems arise if Islamic vigilantes find ways to disrupt transportation, communication and trade with unanticipated creative strikes that cost little in terms of money or lives. In the worst case, the added risks to American commerce will drive down incentives to invest and the war market will be forced to adjust to the levels I have suggested, a DJIA in the 5000 range and a gold price at $500.

Diplomacy will not end even when the fighting begins. The move by President Bush last week to announce a "road map" to peace in the Middle East is an example of how the current anger of the Muslim world over injustice in Iraq could be diverted to hopefulness about justice for the Palestinians. The Pentagon warhawks have been saying for years that the road to peace in the Arab/Israeli struggle runs through regime change in Baghdad, a concept that has never been satisfactorily made sense to me. War with an Iraq that has been meeting the conditions of the UN would seem to sharply reduce the chances for Middle East peace, but if the Bush administration is serious about playing that kind of role, perhaps it can work. In any event, this is the kind of maneuvering that could be part of the dynamic which alleviates concerns about heightened terrorism.

Finally, I do think the chances of heightened risks are greater than the chances of upside gains in the financial markets. Things really have to go perfectly in the weeks and months ahead for the President to achieve his own Inchon Landing and it will not take much to throw a terrorist scare into the commercial world, which will have the effect of driving up budget deficits everywhere and drying up planned investments. These, though, are only my first thoughts on the war market. I'm sure I will have plenty more in the days ahead, hopefully with unexpected positive developments across the board.