Tags: Syria | US | investors | CLI

Non-Speculators Shouldn't Take on Any New Risk in Current Environment

By    |   Tuesday, 10 September 2013 12:15 PM

It doesn't matter if we like it or not, Syria is back as an extremely important topic to investors, particularly long-term investors.

In answering a question on Monday if Syrian President Bashar al-Assad still could avoid an U.S. military strike, U.S. Secretary of State John Kerry said, "Sure, he could turn over every single bit of his chemical weapons to the international community in the next week — turn it over, all of it without delay and allow the full and total accounting of it, but he isn't about to do it and it can't be done."

Kerry clearly kept short giving any solid reason for igniting whatever kind of hope there is for a quick realistic possibility of a full dismantling of Syria's chemical weapons stock that would eliminate the possibility of a U.S. military strike on Syria. Of course, wonders do happen.

The problem that immediately arises is that if a military action against Syria should take place, that action by itself could generate the real possibility "too many" could see this (e.g., Hezbollah) or even try to profit from such an action (e.g., Al Qaida, various terrorists organizations), as they would definitively consider it as an act of war against Syria perpetrated by the United States and its allies.

Interestingly, and so far at least, an important part of the investing community seems to take the whole event that was caused on Monday by Kerry's comments and by the ensuing comments of Russia and Syria at face value, and has turned immediately more optimistic that a diplomatic solution to the chemical weapons issue, of course not to the civil war, which is quasi impossible, is still possible/achievable and therefore put "risk appetite" back on.

As a long-term investor, I still would remain extremely cautious and I would surely wait for trustworthy facts before turning definitively confident in the good intentions and compliance with its commitments of Syria.

Among other things, I'd certainly wait until Syria signs, ratifies and complies, to begin with, the Chemical Weapons Convention (CWC). Syria has stubbornly refused to sign the CWC, as has North Korea, Egypt, Angola and South Soudan. As of June 2013, 189 states were party to the CWC, while two countries, Israel and Myanmar, have signed, but not ratified, the convention.

So, at least to me, looking for a rapid diplomatic solution that would dismantle the Syrian chemical weapons stockpile "completely" is nothing more than wishful thinking. Of course, I could be wrong, and believe me, I hope I am. Unfortunately, experience has taught me, most of the time to most humans the "unreal" is more powerful than the "real."

That said, it's interesting to see how many have already "forgotten" that at the beginning of December 2012, different intelligence sources (United States, Israel, France and several others) signaled Syria was moving parts of its chemical weapons and was apparently making preparations to use them, which, by the way, resulted in the fact that NATO cleared the missile deployment in Turkey along the Syrian border.

Also, remember that in August 2012, President Obama told reporters that any evidence that al-Assad was moving its chemical weapons in a threatening way or making use of them was "a red line for us" that could prompt direct American intervention. No question, this red line has clearly been crossed.

I personally, and of course again I could be wrong, have no doubt Obama will give the order for a military "punitive" strike on Syria unless that "wonder" comes in between.

The big problem to all of us is that once the military strike happens, the only thing we will know is the time when "hostilities" started and not, oh no, not by a long shot, when hostilities — with all its foreseeable and unforeseeable implications — will end. I'm not saying we'll see American boots on Syrian ground, but it's practically impossible to exclude any military presence in Syria.

Don't overlook the fact Syria is far more complex than a Rubik's cube, and even Libya and Egypt are no match for its complexity.

Therefore, long-term investors shouldn't overlook the risks to the United States and others getting involved against their will with the best of intentions for entering the raging civil war that already has spread above and below the surface far beyond Syria over the whole Middle Eastern and North African region.

No doubt, all countries that will be involved could be on the hook for a long time to come, which would simply result in a disaster and easily could cause deep and unforeseeable dislocations in various markets in many places.

The whole Syrian situation bears the risk it could easily spin out of control in a way the world has never experienced before. Long-term investors would do well not to overlook that uncertainty. Believe me, it's a really big one.

Interestingly, Iranian Mehr News Agency (MNA) reported that recently elected Iranian President Hassan Rouhani said in a speech to clerics that Iran "will not give up one iota" of its nuclear rights. This comes after Iran supported Russia's offer to work with Syria to put chemical weapons under international control.

On a more pleasant note, the Organization for Economic Co-Operation and Development's latest composite leading indicators (CLIs), which are designed to anticipate turning points in economic activity relative to trend, confirm economic growth is further firming and growth remains above trend in the United States (101.1), Japan (101.1) and the United Kingdom (101) (100 represents trend of economic activity).

Interestingly the CLI for the eurozone also showed overall growth firming (100.5), which is also positive news, but that remains to be confirmed further on.

Of the BRIC countries (Brazil, Russia, India and China), the CLIs show that China (99.4) is returning to trend and in Brazil (98.9), growth remains below trend.

Overall, the majority of the CLIs of the major economies in the world, while moving in the right direction, show "diverging" growth patterns, which in case growth realignment doesn't come within the next few months, global growth could encounter roadblocks.

Besides that, and about the so-called uncertainty about the yes-or-no question on the Federal Reserve tapering its stimulus next week, I can't see anything that should restrain the Fed starting tapering now. But, even if tapering doesn't start next week, the Fed will have to return sooner rather than later to conventional finance, which implies raising its reference interest rates in the foreseeable future and, in my opinion, before 2014 is over. By the way, the 10-year Treasury note CME futures contract for December 2013 quoted Tuesday morning at 122.275, which implies a yield of 3.2975 percent.

Another sizable uncertainty long-term investors have to take into account is the German elections' outcome on Sunday, Sept. 22 when we will learn who will be the next coalition partner of the outgoing Chancellor Angela Merkel. The latest polls show that her coalition partner, the Free Democratic Party, is at risk of not collecting the 5 percent threshold of the votes that would eliminate it of being part of the next German government coalition.

No, it cannot be excluded the Social Democratic Party coming back into the government. If that would be the case we can expect profound policy changes in, among many other things, Europe's austerity management.

Finally, on the question/uncertainty if China has finally stabilized at a lower growth rate level, which is currently projected at about 7.5 percent for 2013, Fan Jianping, chief economist at the State Information Center, which operates under the National Development and Reform Commission, said the government may cut its growth forecast for 2014 to 7 percent.

In today's environment where uncertainties abound and even grow, I can't see why non-speculators should take on any new risk. Of course, everybody needs to decide for themselves.

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In today's environment where uncertainties abound and even grow, I can't see why non-speculators should take on any new risk. Of course, everybody needs to decide for themselves.
Tuesday, 10 September 2013 12:15 PM
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