Investors Say: Give the Iraq Plan a Chance

Larry Kudlow
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Posted: Jan 12, 2007 3:09 PM
Investors Say: Give the Iraq Plan a Chance

Amidst all the pessimism about the U.S. strategy-shift in Iraq, world financial markets seem to be voting for Bush and his plan -- not against. On the days immediately preceding the president’s speech, as its contents were leaking out, oil prices were plunging and stock prices were rising. And right after the speech, when the contents of the Iraq plan were clear, guess what? Oil prices continued to fall and share prices hit record highs.

Of course, there are a lot of factors driving these markets. Corporate profits are strong. Productivity is high. Inflation and interest rates are low. And the threat of recession is nil. All this is good for stocks.

And markets do work. The high oil prices of the last couple of years have generated huge profits and considerably more production. Oil inventories are high and the world seems to be awash in oil supply. That (along with some unusually warm weather) is driving prices lower.

But President Bush’s overhauled Iraq strategy, including a tougher line on Iran, is being viewed by investors as a plus for security in the Middle East. Two large aircraft carrier groups and 16,000 sailors have been positioned in the Persian Gulf. There also are indications that the U.S. will provide Patriot anti-missile defense systems to allies in the region. So, putting all this together, geopolitical risk premiums are actually declining -- hence lower oil prices.

While pundits and politicians are saying the new Bush plan won’t work, market investors are voting with their money for a much more positive verdict. And after surveying the details of the new Iraq strategy, I’m casting my lot with the investors.

The U.S. military buildup -- including the strengthened naval presence -- not only will provide better security for Iraq’s democratically elected government, but also enhanced security for the entire region.

Covering slightly more than 20,000 new troops, the revamped military plan will put five U.S. brigades in Baghdad and a sixth in al-Anbar province. Very simply, the White House believes that political progress and reconciliation in Iraq cannot come without better population security -- hence the need for additional U.S. troops and a shift in tactics. The rules of engagement also are going to change. This means no more political interference by the Maliki government in U.S. military operations.

In essence, the whole war plan has been changed from an American clearing operation -- where Iraqi forces would unsuccessfully attempt to hold that cleared ground -- to a strategy where U.S. forces will clear, hold, and stay. There also will be a beefed up “clear and hold” operation in the volatile Anbar region, where local tribes have begun to move against al-Qaeda and other enemies.

These are all crucial components of a strategy that, for a change, sounds like a recipe for victory. However, it is critical to the success of the plan that all belligerent parties in the region now be held accountable.

“We will interrupt the flow of [enemy] support from Iran and Syria,” warned the president. “And we will seek out and destroy the networks providing advanced weaponry and training to our enemies in Iraq.”

These tough words amount to a virtual declaration of war against the rogue states within the Axis of Evil.

Just hours after the Bush speech, U.S. troops raided a building in northern Iraq and arrested five Iranian Revolutionary Guard operatives. Shortly afterwards, Secretary of State Condoleezza Rice told senators, “the United States is not going to simply stand idly by” while Tehran tries to disrupt Washington’s renewed efforts to stabilize Iraq.

It’s about time.

Additionally, the U.S. is waging financial war against Iran. The Treasury Department froze the assets of Iran’s oldest bank, Bank Sepah, which has facilitated the funding of Iran’s weapons-of-mass-destruction programs. The bank is now barred from American financial markets.

And let’s not forget that plunging oil prices -- from nearly $80 a barrel all the way down to $52 -- will do severe damage to Iran’s already tenuous fiscal position. As the new U.S. security blanket protects Persian Gulf shipping lanes from any Iranian mischief, continued oil-price declines will bleed the weak Iranian economy. That, in turn, will undermine Iran’s ability to financially assist terrorist groups like Hezbollah and Hamas, or anti-American factions in Iraq.

Think of it: Falling oil prices not only reflect lower war and political risk, but they are actually doing enormous damage to one of the Middle East’s top risk producers: Iran.

Political opposition by Democrats and Republicans to Bush’s new strategy may be hardening, but financial markets are pointing to a much more positive scenario. Might the president’s new plan actually work? World markets are saying give it a chance.

I agree.