Editor’s note: Events are gathering speed as the year 2006 is coming to an end. In the week that ended on 10-20-06, several developments suggest that major geopolitical stories that have affected the financial markets may be heading into their final stretch. First, there is the Iraq war, in which the U.S. is looking for alternatives, and perhaps a way out. Second is the effect of lower oil prices on Venezuela, and the potential ramifications on the regime of Hugo Chavez. And third, is the potential for a change of leadership at the Pentagon, as the Washington Post reported that Secretary of Defense Donald Rumsfeld might resign his post. In this analysis, Dr. Duarte ties the loose ends together, concluding that perhaps these three stories are becoming highly influential in the way the markets are currently moving. If Rumsfeld resigns, it would pave the way for a radically different strategy in Iraq, which in itself could lead to an easing of pressures in the Middle East. Markets are forward looking. Such a positive scenario could clearly account for both higher stock prices, and lower oil prices.

Iraq: Disorder Looms (10-18-06)
A Radical Change

There are increasing hints that the U.S. is about to embark on a radically different strategy in Iraq, just as jihadists and secular politicians in Iraq are reaching the boiling point. The situation is now threatening to fall from Chaos into Disorder.

The Iraq Study Group, headed by former U.S. Secretary of State James Baker, has been increasingly loose about leaking what it is likely to propose to President Bush.

And the options, so far, seem to be to either withdraw U.S. troops from Iraq, or to partition Iraq into three autonomous regions.

According to AFP and the BBC: 'Former US secretary of state James Baker was visibly shocked when he last visited Iraq, and said the country was in a "helluva mess".'

AFP added: 'Citing a unnamed close friend and ally of Baker's, himself a top politician, the BBC said that Baker added that "there simply weren't any easy solutions". '

According to the U.K.'s Times Online: "The report of the Iraq Study Group, led by Mr Baker, is expected to propose significant changes to American strategy, including negotiating with Iran and Syria or even pulling US troops out of harm’s way to bases beyond Iraq’s borders."

The Times added: "The report will not be published until after votes have been counted, when President Bush will know if the Republicans have lost control of one or both Houses of Congress."

Indeed, the White House is not totally on board, as 'Tony Snow, the press secretary, has emphasized that Mr Baker is operating in an advisory role and no one should expect the President to just “rubberstamp what an independent commission recommends on Iraq”.'

There are some timely comparisons in play here: "Such unease is only increased by comparisons being drawn between the Baker panel and the commission of “wise men” asked by President Johnson to come up with new ideas about the Vietnam war. They told him that the war could not be won quickly enough for public opinion and that the US should begin to disengage. Five days later Johnson announced a restriction on bombing in North Vietnam and withdrew from the re-election race."

Meanwhile, in Iraq, the situation grows more urgent.

According to Stratfor.com, a group of four jihadist groups is forming an alliance, aimed at taking control of the Sunni populated areas of the country. Stratfor reports: "transnational jihadist elements are trying to capture political space in Sunni-dominated central Iraq. Their approach involves seizing the military and political initiative from the mainstream Sunni nationalist insurgent groups. The jihadists are trying to take advantage of the fact that the political negotiation process is reaching an impasse, the sectarian violence from Shiite death-squads is raging on, and moves are accelerating toward creating three federal autonomous zones along ethno-sectarian lines."

This is a key development, as it goes right to the matter of one of the potential solutions offered by the Baker group. According to Stratfor: "While the mainstream Sunnis are busy trying to counter the move toward federalism, the jihadists have accepted the idea that Iraq could be divided into three autonomous, if not independent, regions. The jihadists aim to take control of the situation. They are busy trying to make inroads into the tribal leadership and the insurgent groups by forming alliances. In other words, they are trying to portray themselves as the vanguard of the military struggle against the United States and its Shiite and Kurdish allies."

Stratfor notes the following key points:

1. A significant battle may be near as "the Sunni areas of Iraq already have an existing political structure, which will not allow them to take over. There have been several reports in recent months of fighting between Sunni nationalist groups and the jihadists. But now that the jihadists are aggressively seeking the leadership of the insurgency, the Sunni nationalists can be expected to strike back hard, and soon. Neither they nor the tribal leaders want to lose their leadership position to the jihadists."

2. There are inherent weaknesses to any association of insurgents as "the jihadists themselves are divided into two broad groups: the foreigners and the indigenous Iraqis. Both share the same transnational ideology, but they disagree on how to realize its ideals. The indigenous Iraqis do not like the way the foreigners operate -- killing not just Shia but also Sunnis who oppose them. Moreover, the Iraqi jihadists do not want to see the foreigners take over the leadership, because they know it will alienate them from the Sunni mainstream."

3. The potential for more darkness is on the rise as "Despite the creation of dubious alliances and a media campaign to highlight their "achievements," al Qaeda and its jihadist allies now face problems from fellow jihadists as well as Sunni nationalists. While it might appear that this would lead to a decline in the violence, the country is now so divided that the fighting is only likely to get worse."

Conclusion

The end game, or at least, a prelude to the end game in Iraq, may be approaching.

The potential for open Iranian and Syrian involvement in Iraq, the possible partitioning of the country, and the likelihood of infighting among the Sunnis and the jihadists, are extremely significant events that signal only one thing, all hell is about to break loose in Iraq.

Even more interesting will be what happens when the Baker group report is made public, and what the White House response will be.

The bond, oil, and currency markets are likely to react, with the stock market soon following.

Maybe the current rally in stocks is nothing more than one last good run before everybody runs and hides as the situation in Iraq completely disintegrates.

The election and the few days after the election should prove very interesting indeed.

Chavez: Trouble Ahead (10-19-06)
Too Much Too Soon

Venezuela's President Hugo Chavez may be losing influence in South America, according to multiple sources.

Indeed as the price of crude oil has fallen so, seemingly has Chavez' influence. The catalyst, for many, might have been his anti-Bush tirade at the United Nations.

According to Canada's Globe And Mail, Chavez fate, at least in the near future may depend on OPEC's ability to shore up oil prices: "More than most members of the Organization of Petroleum Exporting Countries, Mr. Chavez is desperate to the stop the erosion of oil profits, which he has spread widely to support his popularity at home and abroad."

The paper added "Chavez-watchers say Latin America's champion of the underdog will have to rein in his ambitions and make some tough choices if crude prices fall much further."

One source, Riordan Roett, professor of Latin American studies at Johns Hopkins University, quoted in the article, noted: '“They're totally stretched - I think Chavez is about to hit a wall in that his commitments in Venezuela, but also his commitments throughout the region, are based on very high and continuing high oil prices. Unless he is able to convince other members of OPEC to have a sharp drop in production — which I think is what he needs to achieve his goal — Venezuela is in trouble.”

Production Woes And Lasting Effects

The Globe And Mail, once again summarized a familiar story, which is worth refreshing.

1. "Record crude prices over the past year have masked a growing problem."

2. "The state-owned oil company Petroleos de Venezuela SA (PDVSA), has seen its production decline as a result of the government's sacking of 18,000 workers after a failed coup four years ago, and the lack of reinvestment."

3. "Venezuela as a whole is now producing far less oil than allowed under its OPEC quota of 3.2 million barrels a day. Latest estimates from the International Energy Agency suggest the country produces about 2.5 million barrels — a cut in output would hurt, but a fall in prices would bite much harder."

4. "Petroleos de Venezuela, which was the country's sole operator 15 years ago, once pumped more than three million barrels of oil a day. Now it accounts for only about half of the country's production, though Mr. Chavez has forced international oil companies to accept PDVSA as a joint venture partner, meaning the state-owned company's nominal output will rise."

More important, and adding to Venezuela's problems, is the possibility of a potential cash crunch, which may be on the way.

According to the paper: "Roger Tissot, director of the Latin America group for Washington-based PFC Energy consultants, said Mr. Chavez likely needs a $60 price to stave off serious financial problems. He said the Venezuelan government is already operating in a slight deficit position, despite record prices."

Loss Of Influence

Stratfor.com suggests that Chavez' influence is on the decline: "Venezuelan President Hugo Chavez's power outside Venezuela is on the decline and his self-declared leadership of Latin America is weakening. The most recent sign of Chavez's waning influence is the race for the temporary seat on the U.N. Security Council (UNSC)."

Stratfor added: "Also complicating matters for Chavez is his problematic relationship with left-wing ally Bolivia. Bolivian President Evo Morales sided with Chavez even before becoming head of state in La Paz, and Chavez has overtly supported Bolivia, most recently saying Venezuela would not stand by if Bolivia were attacked. Morales, however, has recently distanced himself from Chavez, seeking the renewal of a preferential trade agreement with the United States, among other things."

Most recently, the Chilean government took a stand against the possibility of Bolivia reportedly building 24 army bases, with help from Chavez. "The Bolivia-Venezuela relationship became further complicated when Chilean daily El Mercurio reported Oct. 10 that Caracas is planning to help La Paz build up to 24 military bases along Bolivia's borders with Brazil, Paraguay, Peru and Chile -- prompting a quick and negative response from Chile and Peru. The Morales administration later corrected the report, saying only two bases are planned -- one in Riberalta near Brazil and the other in Puerto Quijarro, on the Paraguay River bordering Brazil. Chile then announced it no longer sees the bases as a threat."

More important is the effect that Chavez is having on political candidates which he has endorsed, or that have used him as a model. "Chavez also has lost ground in several important regional elections. His endorsement of presidential candidates Ollanta Humala in Peru and Andres Manuel Lopez Obrador in Mexico backfired when anti-Chavez candidates Alan Garcia and Felipe Calderon won those races. Perhaps fearing the negative power of his endorsement, Chavez has remained quiet on the upcoming second round of Ecuador's presidential election, which involves his ally, left-wing candidate Rafael Correa. While Correa has played up his friendship with Chavez -- even going so far as to echo the Venezuelan president's criticisms of Bush after Chavez's U.N. outburst -- rival Alvaro Noboa has taken advantage of the negative Chavez sentiment to make his anti-Chavez stance clear. The race between the diametrically opposed candidates is extremely close, with the vote split down the middle. Correa had been favored early on to emerge from the first round with a more decisive win, though his friendship with Chavez could have soured his popularity with voters."

Conclusion

The price of oil has always been a political weapon. In the case of Venezuela, as in previous cases, when it is rising, oil can be a persuasive tool.

Yet, as with all commodities, rallies and bull markets invariably reverse, and with the reversal comes the loss of influence by those who have wielded the crude oil weapon.

In the case of Venezuela, this is likely just the beginning of a difficult period.

The Globe And Mail, accurately reported: '“Most of the money the government is spending comes directly from PDVSA ... and because of that, there is less money available for investment,” Mr. Tissot said. He added that lack of investment — and the attacks on foreign involvement — stand in the way of the government's stated intention of doubling output to five million barrels per day by 2012.'

As Stratfor concludes: "Venezuela's reach is growing smaller and smaller."

Washington Post: Rumsfeld Out (10-20-06)
Time To Find A New Scapegoat Says Columnist

Defense Secretary Donald Rumsfeld will resign after the November election says one Washington Post writer.

President Bush "realizes that Rumsfeld has outlived his usefulness," says Washington Post columnist Sally Quinn, quoting "those in the know."

It's one of those things that eventually happens when a high profile policy goes wrong, its most ardent proponent is shown the exit.

And according to one Washington Post columnist, Sally Quinn, U.S. Secretary of Defense, Donald Rumsfeld, is likely on his way out.

To be sure, this isn't front page stuff, as the column appears on page A29, of the October 19, 2006 edition of the Post.

Yet, it is the first article that we've seen that deals with Rumsfeld's fate.

That the Post has taken on the task of writing Rumsfeld's pre-obituary column, is only mildly surprising, given the highly publicized change of perception on the Iraq war from President Bush, during recent speeches, as well as his on camera interview with ABC's George Stephanopoulos.

What is surprising is the low key nature of the article, whose major point seems to be that once Rumsfeld goes, the real burden of proof will fall on President Bush and Vice-President Cheney.

As Quinn sees it, Rumsfeld has been Bush's scapegoat. Thus his departure, will leave the convenient spot vacant.

According to Quinn, Rumsfeld has embraced his role, since "he understands better than anyone that somebody has to be in line to take the blame when things go wrong. So far he has been willing to do so. But not much longer."

Yet, Quinn concludes that Rumsfeld's time has run out as "The drumbeat to get him out of the Pentagon has reached deafening proportions. Republicans and Democrats, the generals, the media, Colin Powell, Condi Rice, Andy Card, the first President Bush, and even Laura Bush all want him gone. Until now George W. Bush has resisted all of the pressure to get rid of his defense secretary. But those in the know say that the president may have reached the point where he realizes that Rumsfeld has outlived his usefulness."

So what does Quinn theorize about Rumsfeld's future?

The columnist suspects "that he has already told the president and Cheney that he will leave after the midterm elections, saying that the country needs new leadership to wind down the war. And he will resign to take a job in some sort of humanitarian venture, thereby creating the perception that he is a caring person who left of his own accord to devote the rest of his life to good works."

Conclusion

With OPEC, Iraq, and North Korea grabbing the headlines, this story, which marks a significant turning point in the Iraq war, has been missed by the mainstream.

To be sure, the Washington Post is being careful about the way it is presenting it, placing it deep within the bowels of its content, and using a columnist to break the story.

Yet, the story rings true, using "those in the know" as sources, and providing insight into the notion that Rumsfeld has had enough.

Perhaps the coup de gras is the provision of the timeline as to when Rumsfeld will exit, ie. after the election.

There is likely no coincidence there either, as the Iraq Study Group, headed by former Secretary of State James Baker is due to present its already leaked findings to President Bush, also after the November elections.

In Washington, stories like this one, usually don't appear unless the sourcing is as impeccable as possible.

And in our opinion, the fact that Sally Quinn is former Post editor Ben Bradlee's wife, and that the story comes two weeks after Bob Woodward's "State of Denial" book, pretty much clinches it as quite likely to happen.

© 2006 Joe Duarte, M.D.
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