Thursday, May 22, 2008


Most people are not aware of the tremendous progress being made in Iraq and throughout the rest of the Middle East. During the tough times, the media focus is on Iraq. During the good times, the media focus is elsewhere. In his testimony before congress, General Petraeus reported that the recent death rate is the lowest in 4 years and that the Iraqi military has taken the lead in the drive to secure Basra, Sadr and Mosul. The militias are standing down. The Iraqi government is as strong as it has been. It enjoys the support of Kurds, Sunnis and moderate Shiites. Steady increases in oil production is causing revenues to soar. Iraqi troops now peacefully patrol Basra and Sadr city which were under militia control a few weeks ago.

In the area around Mosul, the occasional car bomb and fire fire fight breaks the peace but even here the progress is noticeable. Yesterday, terrorist where caught in a fire fight with a US helicopter and 6 terrorist were killed. After the fight, it was learned that the terrorist carried children as human shields, two of whom were also killed. It was the terrorist who killed those children, even though they were hit by American bullets. Petraeus told congress that he expects to bring additional troops home by the fall.

Over in Lebanon, Syria and Israel are preparing for a marginalization of Hezbollah. If the Syrian's will secure the peace for Israel, Syria will be granted power in Lebanon. Syria will also receive title to the Golan Heights while Israel will retain the water rights.

The underlying story, hidden in the above, is that Iran has apparently withdrawn its support for militias and for Hezbollah. The amazing thing is that the market has not yet caught up with the reduction in risks. I have done a private poll and have not found a single person who believes peace in the Middle East is a probability. Of course, there will be wars and more wars but I believe there is a real shot at relative peace.

The commodities futures market does not believe it possible, it has gone wild. Michael Masters, a hedge fund manager, told a Senate committee that the funds invested in commodities index trading has zoomed from 13 billion in 2003 to 260 billion in 2008, a twenty fold increase in 5 years! I read a report somewhere today, perhaps the Hays Advisory report, that says the demand for gold has fallen in every market except the ETF demand. In other words, portfolio managers are going all out to secure inflation hedges. The great irony here is that many who believe inflation is a growing threat also believe that housing prices will fall another 20% or more. Which is truth? Inflation or deflation? Please do not reply both. The total overall cost of living is basically unchanged. A peace agreement, followed by a break in the price of oil and food, will cause the headline inflation rate to fall below the moderate core inflation rate. Money will flow out of commodities and back to real estate and stocks.

It is the hype of the market that is becoming a self defeating action. If everyone believes the price of oil is going to rise a great deal, then everyone will find ways to cut back. At first, the price momentum will break and then the actual price will break. Stories are all around about the cut back in usage. Scooter sales are at all time record levels, truck and SUV sales have collapsed and buss ridership is soaring. In some cities, privatized bus systems have seen huge increases in ridership and lower costs.


I cannot tell you enough times that peace is at hand. While it is difficult to find information about the oil piling up in Iran (a search on supertanker leases will show you that Iran's most recent lease is for a 270,000 ton ship at the rate of $44,000 per day), it is easy to find information about Iran's willingness to negotiate. Iran has agreed to let the UN negotiator deliver a proposal that includes the request for Iran to temporarily suspend the enrichment of uranium. The offer of incentives is said to include the gift of enriched uranium in exchange for Iran's commitment to not enrich.


If peace is at hand, the world is a new place. Ironically the power the peacenics, who have taken control of the democratic party, will suffer as a result of the break out of peace. The probability of a democratic three house sweep will fall. The probability of foolish cap and trade legislation will fall. The probability of drilling for known reserves of oil will rise. International trade will soar.

History is clear, the way to secure peace is to maintain a strong deterrent force. The way to maintain peace is to build commercial relationships with your neighbors.

Iran, Pakistan, India and China are prepared to work together on a pipeline to take natural gas from Iran to the other three. This pipeline is of great importance to all four countries. Just the thought of it gives all four reason to be at peace with their neighbors. After years of war between Pakistan and India, would it not be great to see them working together? It sounds too good to be true but the chances are good!