Many commentators have remarked recently that the U.S. stock market has not rebounded by as much as they expected, especially given the recent, rapid U.S. military success in Iraq. But these observers fail to recognize that the market is forward-looking — and fail to see that the market accurately anticipated a quick U.S. victory in Iraq. The market also has performed better, since military action began in Iraq on March 19th, than is commonly believed.
Although the U.S. did not begin to wage an actual war on Iraq until March 19th of this year, a Congressional resolution authorizing force last fall — and the subsequent U.S. military build-up — set a bullish tone. Since the recent market bottom of October 9th, the NASDAQ, S&P 500 and DJIA have risen by 27.7%, 14.8% and 14.5%, respectively. Analysts are missing the bigger picture — and the market’s forward-looking nature — if they cite only the (seemingly) less-robust gains seen since the day before the Iraq campaign began. Even so, the NASDAQ, S&P 500 and DJIA have risen by 1.5%, 2.9% and 2.6% since March 18th; on an annualized basis these gains amount to rather dramatic increases of 18.4%, 35.4% and 19.2%, respectively. Who can deny that this is a robust reaction to war?
Still, there is reason for caution on stocks, since U.S. national security remains threatened. Iraq should be seen as just one battle in a much wider war. That’s precisely how markets see it. Markets know that there remain at least a handful of other terrorist states that threaten the U.S. and Israel. But instead of making plans to vanquish them, U.S. officials are resorting (again) to “diplomacy” (appeasement), just as they did with Iraq for eighteen months. If the Iraq campaign is deemed sufficient — and a wider war is not waged — then business confidence will remain low.
Despite the overwhelming and quick success of the U.S. military in Iraq, risks to U.S. national security (and to U.S. business confidence) remain due to 1) the uncertain status of the post-war Iraqi government and 2) the on-going existence of terrorist states that threaten the U.S. (and Israel). We can be glad that the Pentagon (and not the U.S. State Department or the U.N.) has been taking the lead in constructing and organizing a post-war Iraqi government. Retired General Jay Garner is in charge (for now). But so is the White House — and its disastrous goal in recent months has been “democracy” in Iraq and local oil fields that “belong to the Iraqi people.”
Those familiar with political theory and practice will know that democracy does not ensure that the resulting government protects individual rights — including property rights — or civil liberties. Democracy simply means one-man, one-vote; it does not specify the kind of government or policies that one votes for (or gets). For example, on a deserted island consisting of three survivors, “democracy” would not prevent two of the survivors from voting to cook and eat the third one. Democracy is nothing but a form of mob rule — and the Founders were against it.
America was established, not as a democracy but as a constitutionally-limited republic. The republican aspect meant that government was to be generally representative of the intent of voters, but not an agency of arbitrary rule by “popular will.” More important, America’s constitution severely restricted (and separated) government powers, while protecting individual liberties. Thus whether voters elect Thomas Jefferson or Ted Kennedy, neither officeholder can violate the voters’ individual rights, as spelled out in the constitution. Sadly, most U.S. government officials today — including those with a say in forming the government of post-war Iraq — simply don’t recognize the difference between a democracy and a republic; if anything, they lean in favor of the former, not the latter.
The problem in Iraq is that 60% of the population consists of Shiite Muslims. They are more religious and more anti-American than the other two tribes (Kurd and Sunni) that comprise the population. The Shiites in Iraq are similar to those who run the dictatorial, terror-sponsoring theocracy in Iran. By deposing the Shah of Iran in 1979, the U.S. helped terrorist Shiites take hold of Iran. Will the U.S. now do the same thing in Iraq? It certainly will if it concedes to “one-man, one-vote” in that country — with no constitution protecting individual rights. If that is the result, the U.S. will have wasted its war effort, by allowing an Iran-style government to develop next to Iran.
The U.S. position on the oil fields of Iraq is equally troubling. The socialist-style position is supported by prominent conservatives who seem apologetic about the U.S. military victory in Iraq. Here’s how Jack Kemp puts it:
As President Bush has said repeatedly, the natural resources of Iraq belong to the people of Iraq, and no authority to consume them or sell them can or need be granted by any outside entity.
Contrary to the claims of the White House — and of alleged pro-capitalists like Kemp — those assets do not “belong to the Iraqi people.” They belong to those who discovered, explored and pumped the oil. They belong to Western oil companies. The oil fields were nationalized (stolen) by the Iraqi government and, in other Middle East nations, by other Arab states. In June 1972 the Iraqi government stole the oil assets of British Petroleum, Royal Dutch Shell, Compagnie Francaise des Petroles, Mobil Oil and Standard Oil of New Jersey. The assets should be returned to their rightful owners (if the lineage can be documented) or else auctioned to today’s highest (non-state) bidders.
The U.S. should be acting to make the world safe for capitalism and liberty — not to make it safe for democracy, theocracy, dictatorships, terror-sponsors or public ownership of the means of production (socialism).
It should be clear that even if the U.S. erects a republic in Iraq that restricts and divides government powers, protects individual liberties and privatizes property, there remain at least a handful of states that threaten America’s national security. These regimes must be vanquished as well. The most dangerous, anti-American terror regimes are in Iran, Saudi Arabia and Egypt. To a lesser extent Syria, Lebanon, the Sudan and the PLO also present threats.
When it comes to Islamic terrorists in charge of governments, Iran is in a position equivalent to that held by Germany in the fascist world of the 1930s and 1940s. Thus, for the U.S. to take out the Iraqi regime is similar to it taking out Japan’s fascist regime in the 1940s. Saudi Arabia and Syria are equivalent to the position held by Mussolini’s regime in 1940s Italy. Obviously, the Allies never would have won World War II had they only vanquished the Japanese regime. When it comes to Marxist-style terror regimes, the obvious culprits are North Korea, Cuba and the dictatorship that’s beginning to take hold in Venezuela. The greatest immediate threat is North Korea. Unfortunately, the U.S. has embarked on a policy of “negotiation” (appeasement) with that regime, even as it builds nuclear weapons and threatens to use them against America — or to sell them to America’s enemies.
The U.S. military victory in the battle for Iraq has been encouraging; but it remains a partial victory so long as there is any possibility of a “popularly-elected” Shiite government to follow. Beyond Iraq a wider war still must be waged by the U.S. — and won. The enemy is regimes run by Islamic terrorists. Until the U.S. beats this enemy, America’s national security will remain at risk, business and investor confidence will remain low and time horizons will remain short. With shorter time horizons necessarily comes lower P/E multiples on stocks, regardless of earnings levels.