Editor’s note: The financial markets are concentrating on the next move on interest rates of the Federal Reserve. Yet, across the world bombs and missiles are flying, a country is being destroyed, and Islamic militants are making history by outlasting the Israeli attack on Lebanon. As world leaders stand by and watch, a major and pivotal point in history is being carved out, one bomb and one missile at a time. In this analysis, originally produced on 7-28-06, Dr. Duarte explores the critical situation and delivers a sobering conclusion.

Geopolitical Decisions Are Being Made Right Now

As we head into the weekend, there are two key areas to consider, the Middle East conflict, with special emphasis on Iraq and Lebanon, and the U.S. economy.

The former remains highly unpredictable. The latter seems to be headed for a slower growth environment, although GDP data, due out at 8:30 Eastern time, will tell the tale for sure.

The one thing that both share, though, is their potential to influence the markets, and to create volatility.

Middle East Stalemate

A clear message is emerging from the fighting in the Middle East, both in Lebanon and in Iraq. The Islamic fighters are dug in, and are not likely to go away any time soon.

This point, obvious to anybody who is following the action, is slowly filtering its way through the markets, and is responsible for a great deal of the volatility.

The best confirmation of this fact is that Israel is suddenly indecisive, and increasingly tentative in its operations in Southern Lebanon, opting for a continuation of the air war, and limiting its ground operations, at least in its public disclosures of the situation.

There have been a myriad of reports, including one in the Canadian press that suggested that Israel had attacked a U.N. outpost in Lebanon due to the fact that Hezbollah was using it as a possible base of operations.

Citing a set of e-mails from a U.N. observer who was killed in the attack, the article surmised that Hezbollah was, at the very least, using the U.N. facility as a shield. Other reports have also suggested that U.N. employees/representatives/peacekeepers in Lebanon have been involved with Hezbollah, and that the U.N. flag has been flown side by side with Hezbollah's flag.

It's difficult to confirm these reports, but their plausability is not out of the question, given the U.N.'s record of ambiguities in the past. What most Americans don't understand, is that most of the world, including the majority of the U.N., don't agree with U.S. views on many things, including Hezbollah and other similar organizations.

Inside Israel's own intelligence community, there is disagreement on how successful the campaign in Lebanon has been.

According to Haaretz.com: "The Mossad intelligence agency says Hezbollah will be able to continue fighting at the current level for a long time to come, Mossad head Meir Dagan said. However, Military Intelligence chief Amos Yadlin disagrees, seeing Hezbollah as having been severely damaged."

Indeed, a clear theme is emerging; a great deal of intelligence, used to make key decisions about the Middle East has been flawed. The post 9/11 incursion into Iraq has clearly shown that to the United States. And the lack of the apparently expected results of Israel's air campaign is again proof that air campaigns are not the only way to win extended conflicts.

Unless we're missing something, war planning in the conventional sense being deployed by Israel and the United States is far from ideal, and may be fundamentally flawed, for the fight being presented by Islamic militants.

Stratfor.com puts forth a key set of points:

1. "Hezbollah has positioned itself in this fighting. It should not be regarded as a guerrilla force."

2. "Rather, its strategy should be thought of almost in terms of Japan's strategies for defending islands during World War II."

3. And here is the key: "Hezbollah fighters are dug into well-designed bunkers that are difficult to destroy from the air or assault from the ground. The bunkers are well stocked and don't need re-supply, at least within the scope of the fighting. Since there is little maneuver, communications are not critical, except on the tactical level. Outside of southern Lebanon, Hezbollah defenses are not clearly known; but within southern Lebanon, they are not fighting a guerrilla war, but conventional, positional warfare. And they seem prepared to resist effectively and are mounting tactical counterattacks. It is taking days to reduce a small position."

Conclusion

Israel, as did the U.S. in Iraq, seems at least based on current results, to have misread key developments in Hezbollah's strategy.

How this happened, if indeed this is what has happened, is hard to figure, given the fact that major tunnel networks have been discovered in Palestinian territories within the last few years, and that any aerial photographs should have been telling the Israeli intelligence community the degree of fortification being put in place during the building of any bunkers in Lebanon.

It shouldn't take more than a reasonable set of assumptions to suspect that a better financed, and better-organized network, such as Hezbollah, with similar goals would have at least some sort of tunnel and major fortification network at play.

The fact that Hezbollah has had years to prepare for this war should also have been taken into consideration somewhere along the way.

This conclusion assumes, at least for the sake of argument; that Israel's intelligence is faulty, or that strategic mistakes have been made.

An equally plausible conclusion is that Israel's intelligence is dead on, and that their planning is on target.

If the second conclusion is the truth, then Israel has an even bigger set of problems to deal with, the fact that even though their planning and intelligence are on the money, due to Hezbollah's positioning and strategic thinking, the best that Israel can hope for is a stalemate.

We may be ahead of the curve on this. And a whole lot can happen in the next few days, or perhaps weeks.

But from a strategic and geopolitical standpoint, if all Israel can achieve with this campaign is a stalemate, then Hezbollah has won.

From a trading standpoint, if that latter thought is the way things work out, the market will have to start dealing with a whole new set of realities, such as the fact that the war against militant Islam has moved to a new and dangerous stage.

That stage would clearly be where the Islamists will be in charge of setting the agenda, dictating terms, and can begin to spread their battle beyond regional conflicts, and more directly onto the global stage.

The battle, as Iran has proven, does not have to be fought with missiles on all fronts.

Indeed, the Lebanon issue has the potential to change the world. We're not sure the markets have grasped the potential implications of this conflict just yet.

© 2006 Joe Duarte, M.D.
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