Van Eck On Money, The Economy, And Current International Events: Syria Situation.

[ 0 ] August 27, 2013 |

Van Eck Hotline on Money and the Economy
For: Tuesday, August 27, 2013
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Just when Wall Street and the financial community thought that they had a handle on the risks facing the markets and the economy during the second half of 2013 – problems in the Middle East have jumped into the spotlight. Egypt has been a worry for a while now but that trouble spot has been largely pushed to the backburner. People have been concerned about the struggle for control of that oil producing nation and the hundreds of recent deaths that have resulted from the ongoing struggle. For the most part though, Wall Street and Main Street have been able to get on with business as usual as Egypt has teetered on the edge of chaos. As for Syria, that nation has been one of the most worrisome trouble spots on the planet in recent years. The hard-line Assad government has been using brute force against military and civilian targets since Syria fell into a civil war some 2-1/2 years ago. With powerful allies in Russia and Iran, the Syrian government has been well armed and has punished its enemies during the ongoing struggle. There have been numerous estimates that the number of dead during the conflict has topped 100,000. The number of refugees is estimated at nearly two million.

We live in a cynical world and it can take a lot to snap the politicians and the populations of the Free World into action. The U.S. government claims to have proof that the Syrian government used chemical weapons last week during a military push in the suburbs of Damascus. Modern technology has allowed events such as the recent gas attacks to be documented with photos and videos – and broadcast to the world via the internet and other sources. UN inspectors were already in Syria when the recent reports about gas attacks became public. Despite a large-scale artillery assault on the areas impacted by the gas attacks (presumably to destroy evidence), UN inspectors have been acquiring information – both physical and via interviews. Some of those inspectors recently came under sniper fire as they investigated the area. Not surprisingly, the Assad regime claims that U.S. officials are lying about Syrian government involvement and that America is just looking for an excuse to meddle in the region.

Right on cue, Russia and China have been blocking action by the UN Security Council. Russia has been one of Assad’s biggest supporters – providing his government with military and financial aid. China rarely passes up an opportunity to take a shot at America. Its lack of cooperation regarding Syria has been just one more example of the fact that the communist leaders in Beijing have no problem with a morally corrupt government killing and injuring civilians – all in the name of power. The Western world has been watching Syria for a while now. There have been arms embargoes and other measures. However, with willing and active partners such as Russia and Iran – the Syrian government has been able to remain afloat and supplied. If Assad and his cronies had kept their efforts within the realm of conventional warfare, things would likely not look too different today than they did six months or a year ago. Assuming that the evidence being compiled by the U.S., the UN and others is correct though, the Syrian government has crossed a line that demands the attention of the global community. Russia says that America has no evidence to back up its claims. Perhaps we are headed for a “Missiles of October” moment in the UN during the time ahead, when such evidence is displayed in a clear and concise manner. At that point, it would be up to Russia and China to decide whether or not to accept the evidence, refute it or ignore it altogether.

Much of the West is feeling restless regarding Syria. The British parliament is going to come back early from its break – in order to discuss possible actions against the Assad government. The Obama administration has been claiming that it already has definitive proof that the Syrian government was responsible for the gas attack. Several sources in Washington and London are claiming that some kind of military intervention could take place during the days ahead. America already has three warships in the Eastern Mediterranean. A fourth ship has been ordered to the area. In order to keep risks at a minimum, any initial action would likely be limited to the use of Tomahawk cruise missiles (and perhaps some other air attacks) – as was the case in Libya a couple of years ago. If the U.S. and its allies move ahead with military action against the Syrian government – without the approval of the UN Security Council – it would stir the pot and keep investors guessing about the future. The price of oil has received a boost from the latest problems in Syria – taking NYMEX crude oil to $109 per barrel today.

The Syria situation has the ability to tip in a number of directions. It could escalate quickly – throwing the world into a new military and economic crisis. However, the recent threats of military action might prove to be enough to kick start negotiations and keep such action limited or block it altogether. As you might know, the U.S. and UK governments are in no hurry to see most of the rebels in Syria gain control of that country. Many of them are linked to al-Qaeda and if the West were to destroy the Assad regime’s ability to make war – and thus open the way for rebel control – it would effectively give some of America’s sworn enemies access to the same weapons of mass destruction that were used in Syria last week. You can bet that the White House is trying to find a middle path through this situation. However, Obama’s previous warning to Assad about punishment for crossing the line (such as the use of chemical weapons) means that the president likely believes that the U.S. military must take some kind of action soon. It is hard to believe that the financial markets would be able to ride right through such events without experiencing some heightened volatility.

As of this morning, the S&P 500 is sitting just below the level that marked the closing low for that index last week (1,642.80). For the time being, debate and predictions about Fed tapering have been quieted. No matter what happens in the Middle East during the time ahead though, that story is destined to take back the headlines during the next 30 to 60 days. Last week’s FOMC minutes report once again gave the world a clear indication that the Federal Reserve is getting ready to back away from its unprecedented program of asset purchases. Unless the economy goes in the tank during the weeks ahead (and it would likely take a sustained U.S. military role in Syria to trigger such a downturn), the Fed will take action relatively soon. Just this morning, I saw an interview with a money manager that insisted that the Federal Reserve will keep the current $85 billion monthly pace of asset purchases in place right through the end of the year and into 2014. That Wall Street insider seemed to rely heavily on the rather flimsy idea that Bernanke does not want to hurt the economy just before he leaves office. Instead, the Fed chairman is supposed to be ready to dump such problems on his replacement (rumored to be Larry Summers). Anyone that bets on the current pace of QE remaining in place for the rest of the year is asking for trouble. If you are setting your investment and business plans on such a scenario – you should have some better reasons than the silly talk that has been showing up in the media and on Wall Street of late.

The simple fact is that the U.S. economy has been slowly but surely healing from the damage wrought by the recession and financial crisis. The housing market has only just begun to build its way higher – after taking years to stabilize from the post bubble collapse. Despite all of the predictions of late about how the U.S. economy is headed for a new recession soon (or already in a recession), the fact is that the bedrock supports within the system are in far better shape today than they were leading into the last downturn. Businesses and consumers have less debt and more cash. A lot of leverage has been squeezed out of the system. As the housing market has improved during the past year, banks have relaxed their credit standards. While conditions are still relatively tight, I expect the ocean of liquidity that is sloshing around the banking system (and corporate America) to be put to work during the next few years.

There is a tremendous amount of pent-up demand in the U.S. economy. Vehicle sales have reached their strongest levels since 2007 – but many other big purchases have yet to be unleashed on the broad economy. I hear a lot of talk about how recoveries and bull markets run into a brick wall after they reach a certain age. The current economic rebound in America is said to be at just such a roadblock right now. However, the last economic downturn was unique and I believe the current recovery will prove to be unique as well. Keep in mind that real GDP (adjusted for inflation) has grown by about one percent annually since late 2007 (just before the last recession began). Population growth alone has been responsible for most of that improvement. The economy is not destined to collapse into a new recession – just because history suggests that the current recovery has gone on long enough. There will be a few ups and downs during the time ahead (with Syria, the debt ceiling and Fed tapering all giving people something to worry about). A year from now – I expect the bears to be scrambling around – looking for excuses to explain why they were wrong AGAIN. There are rumors that the U.S. military could strike Syria during the next few days. Such action would help to keep investors on their toes. Long-term though, I believe stocks will trade based on the underlying fundamentals of the U.S. economy. More next week – after Labor Day.


Category: Economics