RESILIENT MARKETS WAIT

Pakistan just suffered a sophisticated al-Qaeda attack against one of its two Nuclear Bomb locations. The story was sugar coated in the NY Times and TV pundits blamed the $5 per barrel jump in oil prices on the possibility that hurricane Fay will turn around and head back to the Gulf of Mexico. (Others blamed it on the fall of the dollar but the dollar fell because of the bombing in Pakistan and the tough talk from Russia.) The final demand for oil continues to fall even though the risk premium has risen since the invasion of Georgia.

The war in Pakistan is a "big deal". Pakistan is the 6th most populous nation on earth, 167 million people. It has the 7th largest Army and it supplies more peace keeping troops to the UN than any other nation. It is 77% Sunni and 20% Shiite. Since 2003, Pakistan has been a strong ally of the USA in the war on terror. Since it joined the US, its economy has grown at an average of better than 7% per year. Saudi Arabia, also primarily a Sunni nation, has helped to fund the governments war.


Georgia has gotten a ton of press but Georgia does not possess nuclear bombs and it is no where near the importance of Pakistan. The GDP of Pakistan is not as large as Poland's, 410 billion versus 620 billion (Georgia 20 billion), but Pakistan has nuclear weapons and it is basically in a civil war against the enemies of the USA.

Believe it or not, northern Pakistan is a vacation spot for thousands of international tourist. The country covers the length of the Indus river and its many contributories. The river starts in the high Himalayan Mountains and flows to the beaches of the Arabian Sea. There are areas in Pakistan where you don't want to go, deserts that reach 122 degrees in the summer (they freeze in the winter), but Pakistan is a beautiful country and likely to be an economic powerhouse in years to come.

Pakistan has been at war with India off and on since 1947. Conditions between the countries have improved in recent years, but the Pakistani secret service has its own agenda and has been accused of supporting terror. It may have been involved in the assassination of Benito and a recent bombing in India.

Since the resignation of General Musharraf, the US has continued to strike Pakistani terrorist leaders from the air. Our eyes in the sky help us know much about who is for us and who is agin us. The government of Pakistan has been using conventional aircraft to bomb the 100's of terrorist camps. The battle with Pakistani government troops has put the Taliban between the NATO forces in Afghanistan and the Pakistani forces.

The US market is now resilient. The talk all day was about the implosion of the credit markets but the market closed higher on the day. Admittedly, it was Energy and Basic Materials that lead the way. Still, it is nice for the market to show such resilience in the face of bad news on top of bad news.

NO DEAL IN IRAQ

Condi Rice made a surprise visit to Iraq but the deal to keep troops in Iraq is a slippery fish. The worst of the war in Iraq is over, assuming Iran does not stir up more trouble, but the war in Pakistan has a long way to go. It would be foolish to land a slippery fish and then let it get away.

The NY Times said the bombings in Pakistan were next to weapons factories and ammunition depots, but it did not mention the site as one of two locations where the Pakistanis have nuclear weapons. If necessary, the US will correctly invade Pakistan to prevent al-Qaeda from capturing nuclear weapons.

While TV shows put up pictures of Hurricane Fay, the risk of the US going to war in another country has increased, and the country is not Russia. Russia, which has been fighting terrorist for years, is very opposed to allowing terrorist to have nuclear weapons. It may even be that the armada that is being assembled in the Arabian Sea, near the Straight of Hormuz is all about protecting nuclear bombs in Pakistan. It makes sense to embargo Iran to stop the process of building nuclear bombs, but even more sense to protect existing bombs from terrorist organizations.

While I only know a tiny bit of what is going on in Pakistan, US government employees in several agencies know in great detail. General Musharraf resigned under pressure. There is a battle between left and right within the Pakistani government. The Islamic Republic form of government has been plagued by the occasional coup or government reorganization. It is important that all nations that possess nuclear bombs have stable governments. Those who say the US should pull out of Iraq in order to focus our energy on finding Osama bin Laden are not looking at the big picture. The potential for terrorist obtainment of nuclear bombs is in Iran and Pakistan.


GOOD NEWS

There is evidence that Pakistani citizens are joining the fight. The Pakistani army is a voluntary force and "awakening councils" similar to those in Iraq have begun to appear. The war in Iraq was won when thousands switched sides. Time is needed to prove that the switch is permanent, but former enemies are now killing our enemies.

None of the above changes any of the pending deadlines. The congress must vote on its budget by October 1. Iran has until around September 19 to make a key decision. The odds of the US invading to protect Pakistani Nuclear Bombs is quite low, but necessary if needed. The $5 bump in oil will be temporary. US refineries are running at only 85.7% of capacity. The demand is low enough to bring prices way down.