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Financial Markets Intelligence Report

Politics / Emerging Markets Jun 27, 2008 - 02:29 AM GMT

By: John_Mauldin

Politics Best Financial Markets Analysis ArticleThis week I want to share with you one of the more important tools in my arsenal for keeping up with what is going on in the world. As I've told you before, George Friedman and his team at Stratfor are my go-to guys for geopolitical intelligence. Their insights into this facet of the world are simply without peer. Now I want you to see their Intelligence Guidance which they publish each Friday for the upcoming week; last week's edition is below.


The Intelligence Guidance is an internal document that guides their intelligence team for the upcoming week. It's not a forecast of what's going to happen (more on that in a minute) but a list of potential inflection points that bear close scrutiny. On a short term basis, these are the critical items that can move policy in one direction or another. I put this side-by-side with my calendar of Fed meetings, statistics releases, and earnings announcements to get a holistic picture of what's going to be driving markets and plan tactics. I highly encourage you to click here for a Stratfor Membership , at special prices available to my readers, and add Stratfor's Intelligence Guidance to your weekly thinking.

Now about that forecast. Stratfor is just about to issue their third quarter forecast, and you definitely want to incorporate this thinking in your strategic planning. Stratfor's past calls on everything from the Asian currency meltdown to China's internal problems have proven to be eerily prescient. And I should point out that they also provide a scorecard that makes it very clear where their calls have been off, too. The Quarterly Forecast is included free as part of your Stratfor Membership, so click this link for the special deals available to my readers and make sure that you don't miss out on this important look ahead.

John Mauldin, Editor
Outside the Box

Intelligence Guidance Summary:
By George Friedman

The following are internal Stratfor documents produced to provide high-level guidance to our analysts. These documents are not forecasts, but rather a series of guidelines for understanding and evaluating events, as well as suggestions on areas for focus.

Analysis

All guidance from last week remains in place (see those below). Supplemental guidance:

1. The situation in Iraq: Let's spend next week focusing on something that is not happening: the war in Iraq. The bombing in a Baghdad market really drove home how few there are. So did indications that Iraq is going to open the oil fields to investment. We need to review the status of the war carefully. Our perception has been that the war is winding down and the general outlines of the resolution are in place. Time to do a net assessment re-evaluating our position.

2. China and oil prices: China has lifted the caps on oil prices, the Saudis are promising to raise output and consumption appears to be dropping. That would indicate that oil prices will fall, but that is not our business. Our business remains figuring out what higher energy prices do to the international system. The China watch remains essential. That is the center of gravity of the problem. They are still trying to ride it out with subsidies. Questions like "What is the status of their cash reserves?" and "What is happening to export profit margins?" become very interesting. They are spending real money to keep these caps on to keep those margins up. We do not know where prices will go but we know where they are. Let's drill into the reserve and margin question.

3. Venezuela and Cuba: Venezuelan President Hugo Chavez tried to create a police state then backed off. Next thing we hear are stories the he is giving sanctuary to Hezbollah, which we assume is psychological pressure from Washington. Then he turns up in Havana for talks with Fidel and Raul Castro. In the meantime the European Union drops whatever sanctions are left on Cuba. Cuba needs Venezuelan help on oil. But it also seems to want to get out of its isolation. It's not all that interesting what Chavez said to the Castros, but it would really be interesting to find out what Raul said to Chavez. Fidel cranked him up. Is Raul following the old line with Chavez, or telling him to calm down?

4. Israeli domestic politics: What is holding Israeli Prime Minister Ehud Olmert up? In any other country the allegations alone would have bought him down, not to mention Ehud Barak, a coalition partner, calling for his resignation. With the Syrian talks clearly proceeding and Hamas agreeing to a truce with Israel, things are at a crucial point. Since this is the Middle East, that's usually when disaster strikes. Olmert's fall would seem to derail everything, but he does not fall. Let's dissect the Israeli situation and see what we can learn.

5. Zimbabwe and South Africa: Zimbabwe is not important in itself. South Africa is, or more precisely, the degree to which South Africa plans to exercise power in Africa. With commodity prices high, Africa becomes important, and as the Chinese increase their presence, the South Africans could use their longstanding close ties to move in as well. It would make geopolitical and business sense to do that. Zimbabwe is the test for South Africa. If either South African President Thabo Mbeki or African National Congress President Jacob Zuma can help pull Zimbabwean President Robert Mugabe out of office, his authority in the continent will be solid. Mbeki and Zuma have the power, but it isn't clear they have the will. If they do not have the will in Zimbabwe, they will not have it to create a sphere of influence elsewhere. The Zimbabwe crisis is in a quiet phase but that won't hold indefinitely. We need to watch South Africa to see if it will act.

Ongoing items:

1. Oil and food markets: Oil and food prices remain at the top of the list. We need to be watching carefully what the Arabian Peninsula is doing with its money and what the Russians are planning to do. In the immediate, we need to be following global crop forecasts. Unseasonable rain in the U.S. Midwest has threatened to bring the corn harvest down by about 10 percent this year. Flooding is hitting China's harvests right now as well, and corn crops in Mexico have been threatened by unseasonably dry weather. As other crops see seasonal disruptions worldwide, we could see increased fluctuations in the prices of these goods. Particularly vulnerable to increases in the price of corn are Japan, South Korea, Mexico and Egypt. Mexico and Egypt are particularly prone to food-related civic unrest, a development that must be monitored carefully. Along those lines, all food crops around the globe must be carefully monitored as prices continue to climb. This is much more immediately significant than oil prices right now. If there are crop failures larger than the U.S. corn crop looming, prices are really going to soar. That is not going to result in a one or two point drop in gross domestic product; it can result in chaos in large parts of the world. We don't know if this is going to happen, but we need to be on top of this whole process hour by hour.

2. China's economy: China is getting hit both ways. As one source put it, bad margins are disappearing. As they disappear, we can expect massive problems. The government has plenty of resources in the short run, and we can expect things to hold together until after the Olympics, but we need to watch carefully to make sure that they do. By then, all of these pressures might recede. But that is dubious. September -- and the rest of 2008 -- should be interesting for China.

3. The European Union: The Irish referendum on the European Union's Lisbon Treaty is in one sense no surprise. The EU is based on unanimity, and there was no way this was going to pass without someone blackballing it. There are two choices here. Either the EU accepts that it is an economic bloc and not a proto-nation, or the EU changes the rules on how constitutions are ratified. Both are hard for the union to do, and as a unit the EU does not do hard things. We need to watch the Germans and French and see what they have up their sleeves. The burden especially falls on France to patch things up because it is taking over the bloc's presidency soon. Never forget that the French solution to violating the Stability Pact by higher than acceptable deficits was to ignore it. There are ways out of this. Let's figure out if there is any consensus among the major players as to what these solutions will be.

4. Turmoil within Iran: Iran is giving off more and more signals of political turmoil. Iranian President Mahmoud Ahmadinejad certainly is not backing off on his public statements, and his opponents -- some pretty powerful -- have said things it is hard to back off from, too. Meanwhile, from what we can tell, the clerical establishment is not looking to oust Ahmadinejad, preferring to see him exit the system next June when he is up for re-election. The clerics fear an intra-conservative rift could cost the conservatives next year's presidential election -- hence the naming of Ahmadinejad's political foil, Ali Larijani, as parliament speaker to contain the president's moves, especially on the foreign policy matters that are preventing Iran from prospering in a time of high energy prices. Meanwhile, the European Union's foreign policy adviser is in Tehran to offer new incentives in the nuclear controversy. In the midst of the rhetoric of defiance, there the Iranians have faintly signaled that they might be ready to reach a compromise of sorts. So let's not take our eyes of this.

5. U.S.-Iranian talks: The controversy over a future U.S. military presence in Iraq, a key part of U.S.-Iraqi strategic talks, continues to escalate. Opposition to any deal that could cut into Baghdad's sovereignty has brought together not just warring Shiite factions but also elements from both major sectarian groups. The Iranians are obviously making this an issue because it not only undercuts their influence in the U.S.-Iraqi dynamic but could create a security threat for them. The Iranians have done more than issue statements; they are threatening to unleash a Shiite uprising -- something that has not happened throughout U.S. forces' involvement in Iraq. Obviously U.S.-Iraqi talks should be watched, but more importantly, we should keep an eye on any signs of renewed U.S.-Iranian contacts because both Washington and Tehran are posturing and do not seek a confrontation.

6. U.S.-Pakistani relations: A U.S. military strike in Pakistan's northwest tribal belt struck a Pakistani military border post and killed 11 soldiers, including an officer. The two sides have agreed to jointly investigate the matter, but Washington's position has been that it struck at hostile forces and the strike was in line with standard operating procedures. This incident clearly shows that Washington's attitude towards Islamabad has entered a new phase where U.S. forces will engage in routine overt military actions -- something Stratfor had forecast for some time. The thing to watch is the reaction from not just the Pakistani street but the state, especially the army.

7. Chavez's difficulties: Chavez reversed himself on three policies: his stance on the Revolutionary Armed Forces of Colombia, a new tax and a new intelligence law that would have required citizens to spy on one another. In the past he has been enormously surefooted. Last week he seemed to be behaving like a man under a great deal of pressure from all sides who had engaged in some pretty careless politics, got burned and retreated. He seems to be weakening. Venezuelan state-owned energy company Petroleos de Venezuela's inability to pay its contractors bodes ill for the company's ability to keep funding Chavez's social programs. Without that support, Chavez is in trouble. We need to keep watching for cracks in Chavez's party as the November local elections approach. Ongoing dissatisfaction with Chavez could give the opposition the fuel it needs to pursue change.

8. Asian economies: Vietnam is having economic problems. Not important in itself, unless like the Thai bhat in 1997, it signals deeper problems. We see issues in Korea and elsewhere. Asia's economies have always appeared to be shakier than others to us. Let's evaluate our position based on these rapid developments.

Your Guided-by-Intelligence-Voices -Analyst,

By John Mauldin

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

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Copyright 2008 John Mauldin. All Rights Reserved
John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Millennium Wave Advisors, LLC may or may not have investments in any funds cited above. Mauldin can be reached at 800-829-7273.

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