Asset Bubbles - Geopolitical Troubles Craig Harris Harris Capital Management, Inc. CTA November 15, 2001 Lately I've been speculating in my nightly newsletter on a wide range of issues related to the now all-important geopolitical environment surrounding us today... but in some ways I feel like I've dragged myself down into unnecessary detail with all of it. I guess maybe part of it all was just to present my ongoing argument for why I think like I do regarding future events and why I have positioned myself in the markets a certain way. So, I'm going to net out all this geopolitical speculation and try to cohesively state my opinion as a useful long range forecast in the essay below --Craig Harris 1.) There will be a war with IRAQ, and I'm fairly confident that it will happen by March of 2003. After IRAQ, then comes Iran, Syria and Saudi Arabia probably in that order. The US and Israel will attempt to systematically invade, disarm them, install puppet governments and take over the oil. That will happen over the next 7 years or so. I think they are grossly underestimating the difficulty and the risk of that endeavor. A lot of Americans, both civilians and military will die for that oil. Hundreds of thousands of Arabs, (millions if it goes Nuclear) will die. It's quite possible that other countries could become involved in the future as well. This effort could spark a regional conflict or even worse, everyone's nightmare... a nuclear WWIII. What makes me say that is that I don't think the entire Arab world will roll over and allow their oil to be effectively "taken over" by foreign interests without a struggle once they figure out what is happening. I believe the hope of the hawks in the US is that by the time they figure it out, it will be too late. It's a risky gamble in my opinion. 2.) The "War on Terrorism" as it is currently being waged does not address the root causes of terrorism whatsoever. My equation of poverty+hatred=terrorist shows that terrorism should be expected to rise, not decline in the future given recent trends in US political strategy, and in fact that has been happening. The US strategy focuses on eliminating the present generation of terrorists as if they were a crop disease which is a simple minded and frankly juvenile approach to a very complex problem. If nations that contain terrorists or potential terrorists cooperate, they will do so by repressing the dissidents in their countries whose most angry or discontented 5% or so are the terrorists. Angered and frustrated by further repression, those dissidents will attract a larger following and then grow the next generation of terrorists, which will be larger than the current generation. In addition to that, as weapons follow the technology curve, more lethal and devastating weapons will become ubiquitous... getting cheaper, smaller and becoming easy to obtain on the black market as arms dealers flourish in this environment... not unlike how a casual computer user of today has the power of a multi million dollar supercomputer of 20 years ago sitting on their desk for a cost of $1000. Cheaper, better, faster; weapons are based on technology. As a result, the War on Terrorism in its current form is self-feeding, and it will never be won the way it's being fought (defining winning by the elimination of the terrorist threat). You can take that to the bank. 3.) As a result of the "war on terror," it will cause the US to become an international outlaw and lose the respect and moral high ground it has enjoyed since its inception. As the world loses its "role model," it will stimulate more war and conflict in other parts of the world, it will undermine international law and legitimate governments, dramatically increase civil unrest and terrorism around the globe and increase global instability both politically and financially. We are seeing those trends emerge already. Americans ultimately will live in a police state and lose most of their civil rights now guaranteed under the US constitution. In this sense, the terrorists have already won the war. Capitalism will certainly flounder in this environment. Foreigners will have less rights than they already have, and they will become loathe to invest in the United States. This is already happening. Wednesday McDonalds announced plans to close all Mid East operations due to the Arab boycott (they didn't say due to the Arab boycott but that is the reason). The civilized world will become a global police state. The war on terrorism will very likely prove to be unaffordable and there will be a massive debt and deficit added to the already massive US debt, so large it will become unpayable. This will present tremendous problems for the worlds central bankers and the global money cartel. Signs of desperation are already emerging. 4.) It is quite likely that you have lived through the largest asset bubble you will ever see in your lifetime. The unwinding of this bubble cannot happen in a short period of time. It took 10 to 25 years to reach its crescendo depending on how you are measuring it, and the heyday of financial assets may be over for a very long period of time. There will not be a return to anything like we saw in the 90's in your lifetime. 5.) The truth is being misrepresented by Wall Street, by the Central Bankers, by the politicians, and the media in the US. They all have their own special interests to serve and it's probably in your best interest to fade what they are "serving." That will only get worse amid more secrecy. As I said, signs of desperation are emerging. a Japan like scenario is not out of the question, in fact I think the US bubble collapse it is quite likely to be worse here in the US than what Japan has had to deal with, but the ultimate outcome will only be determined by decisions made farther down the road, both monetary, fiscal and also geopolitical, on paths we haven't reached yet. Because these decisions are out of our control, it's impossible to know now, the ultimate outcome. Admittedly, it isn't a very rosy assessment, but it's honest, I believe it's well thought out and without any innate bias. No one pays me to have any special interests in mind. I may end up being wrong, but if I am, it will just be because I'm not as smart as I think I am. If I am right regarding all of these things, then I think it presents opportunities in the markets and also will prohibit me from making a lot of moves that are going to get a lot of people in financial trouble. Without trying to toot my own horn, so far I have been right as the recovery that everyone has been expecting quarter after quarter has not happened as I've been insisting it will not all along. So, the mindset I'm using is to hope that something happens that alters the world's current course. My positions are set such that if somehow things work out a lot better than I expect, I don't expect to get killed, and if they go as I expect, I will do ok. "Hope for the best, plan for the worst." That's been my motto since 911. I think that's prudent and it appeals to my intellectual sense of the best course of action. In the futures markets, that translates to using less leverage than I would otherwise use. It translates into taking positions with a sensitivity to what would happen to those positions if, for example, I woke up one morning to see a Nuke had exploded in the Mid east, or to the contrary if Bin Laden was found dead. In other words, thinking through all the possible geopolitical scenarios before I pick up the phone to buy or sell anything. Remember, the off-the-floor speculators biggest advantage is that he does not have to trade! November 15, 2001 Craig Harris President Harris Capital Management, Inc. CTA http://www.harriscapitalmanagement.com bcharris@gate.net Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. 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