Trends I'm Watching

Is a Showdown with Iran Looming?

Trend: The tension between the United States and Iran is increasing as deadlines draw near.

If war breaks out:

• Oil prices will double or triple.
• The stock market will drop.
• Gold prices will rise (Iran and the Bomb: Gold’s Blast-off?).

Link: The Iranian Incursion in Context | STRATFOR

The Iranian government is aware that Washington has said the end of 2009 was to be the deadline for taking action against Iran over its nuclear program — and that according to a White House source, the United States could extend that deadline to Jan. 15, 2010.

That postponement makes an important point. The United States has treated the Iran crisis as something that will be handled on an American timeline. The way that the Obama administration handled the Afghanistan strategy review suggests it assumes that Washington controls the tempo of events sufficiently that it can make decisions carefully, deliberately and with due reflection. If true, that would mean that adversaries like Iran are purely on the defensive, and either have no counter to American moves or cannot counter the United States until after Washington makes its next move.

Is the Current Stock Market Rally Sustainable?

Trend: The current stock market rally is not sustainable in the view of many of the observers who predicted the financial crisis.

It's no fun communicating dismal predictions about the future. Killing the messenger is a common tendency. However, facing reality prepares us for the surviving the hard times so we can enjoy the good times. Denial is not a viable strategy, as history so often confirms.

John Hussman explains why he believes a second market plunge and economic downturn will occur in 2010. Excerpts below.

Link: Reckless Myopia - John Mauldin's Outside the Box - InvestorsInsight.com.

...I was wrong about the extent to which Wall Street would respond to the ebb-and-flow in the economic data – particularly the obvious and temporary lull in the mortgage reset schedule between March and November 2009 – and drive stocks to the point where they are not only overvalued again, but strikingly dependent on a sustained economic recovery and the achievement and maintenance of record profit margins in the years ahead.

I should have assumed that Wall Street's tendency toward reckless myopia – ingrained over the past decade – would return at the first sign of even temporary stability. The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade – the dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble. And here we are again.

We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.