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MitonOptimal Weekly CommentFor those of you who are sick of hearing about taper on – taper off, I thought I would add a new saying into the mix , namely that of ‘war on – war off’. Markets have seemingly become very nervous over war chatter on top of the tapering chatter, but in the very short term it appears that any news on whether the U.S. plans to launch missiles at Syria has the upper hand, with pro-attack statements leading to sudden dips and vice versa. In this weekly view, I want to share some of the current thinking on the topic.

There can be no doubt that Syria is a humanitarian disaster, but why now? Why, after 100,000 people have already allegedly died, does the world suddenly want to act remains a little bit of a mystery? I am reminded that the U.S. did not intervene in 1988 when Saddam Hussein used chemical weapons to slaughter 3,000 to 5,000 Kurds. Is killing civilians with chemical means so much worse than bullets?

According to President Obama it is worse, especially after the speech that he made last year (which he may now be regretting) in which he said that if the Syrian government were to gas their own people it would be “a line too far” and the world would have to intervene. Obama has even gone on to say, as he tries to muster support for an attack on Syria, that the “red line” is not actually his line, the world has agreed that chemical weapons are banned and so the world must stand up against it.

For now the French, the Germans and Japanese agree that Assad is behind this dreadful attacks, but UN approval for a fight is sorely missing and the Russians and Chinese are resolutely set against an attack on Syria. I may not be popular for asking this, but do the Russians have a point?

The U.S.’s intelligence officials have apparently said that the intelligence linking Syrian President Bashar Assad, or his inner circle, to an alleged chemical weapons attack is no “slam dunk”, with questions remaining about who actually controls some of Syria’s chemical weapons stores and doubts about whether Assad himself ordered the strike. Multiple U.S. officials used the phrase “not a slam dunk” to describe the intelligence picture – a reference to then-CIA Director George Tenet’s insistence, in 2002, that U.S. intelligence showing Iraq had weapons of mass destruction was a “slam dunk” – intelligence that turned out to be wrong. [Source: Washington Post]

One can’t help but feel that this is a war in which Obama does not want to get involved and his latest decision to insist on congressional approval for a missile attack speaks volumes on the subject. When the U.S. attacked Libya there was no congressional approval, so why is this so different? It strikes me that Obama has no desire to go to war and is desperately looking for the Republican-led Congress to take the fall.

Would a missile strike even work? U.S. administration officials say that their goal is to strike the regime without dramatically altering the country’s balance of power. Isn’t the purpose of military action to “alter the balance of power” in a conflict? If that is not the objective, should they be using military power at all?

The U.S. may have currently painted themselves into a corner. Is this fight not just about the moral good, but about retaining their credibility in the Middle East? Some believe that this is really all about the U.S.’s fears over Iran and their nuclear capability. If they step away from Syria, they may become the laughing stock of the Arab world.

Personally, I have no idea if the U.S. will eventually back this fight or not, but this intended slap across the wrist to protect the U.S.’s integrity is a dangerous gamble. Indeed, it is already impacting the cost of petrol at the pump in the U.S.and the longer the rhetoric carries on, the more this will flow over into other goods and services.

How does all of this impact our view on the markets? ‘War on – war off’ is leading to higher volatility and historically, over the long run, dips and rises in markets during the lead-up to war creates buying opportunities for the brave, especially as markets have tended to quickly normalize during or after recent wars (such as both Iraq wars for example.) Based on our experience and research, we do not see recent events as a reason to de-risk our portfolio further and we are definitely looking to buy on any dips.


War On - War Off




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