16 Jun Isis What Crisis ?

Was it only 1 month ago that I listed as one of my “4 Investment Themes To Watch Out For” as geopolitical risk & here we are with the Middle East flaring up once again.

Iraq is presently governed by a Shia (or you will see it also described as Shiite) government who replaced Saddam Hussein’s Sunni controlled government and has been supported by the West since 2003. The Shiite’s historically & religiously draw their regional support from Iran. The Iranians are believed to have spent billions propping up the Al-Assad government in Syria.

Our Prime Minister has remarked previously that the Middle East is not necessarily goodies & baddies, but baddies & baddies. You may also remember Wayne La Pierre who is the Executive Vice President of the National Rifle Association in the USA who has been known to famously remark that “The only thing that stops a bad man with a gun, is a good guy with a gun”. The problem here in Iraq is who are the goodies, baddies, or the most acceptable baddie ..???

ISIS (The Islamic State Of Iraq/Syria) also known as ISIL (Islamic State Of Iraq/Syria & Levant) are jihadist fundamentalists who have been fighting the Al-Assad regime in Syria & have been tacitly supported to now in that fight by the West. They represent Sunni’s whose regional power base is in Saudi Arabia. The group is believed to be better armed, trained & paid than the armies of both Syria & Iraq (stories have abounded of them being paid 3 times what an Iraqi soldier is paid – so there is a bit of Economics 101 here as well). Many of ISIS’s leaders and front-line soldiers come from abroad, but more than half of the membership is made up of Syrian and Iraqi tribesman, people well known to their relatives and former neighbours now fighting against them. Once they take control of an area they have been shown to quickly implement a fundamentalist interpretation of Islamic sharia law, including crucifixions of Muslims & Christians called kufar (infidels). On various social media sites ISIS have also been showcasing fighters from Germany, USA, Britain & Chechnya. Okay are you with me so far…

Since the toppling of the Shah Of Iran in 1980 we have been told that the Iranian’s are the Baddies. Remember Iraq fought Iran for 8 years (when Saddam was considered a “goodie”). After Iraq invaded Kuwait in the first Gulf War Saddam then became Public Enemy No. 1. Then came along Al-Qaeda & since Post 9/11 replaced Saddam as the New Public Enemy No. 1. Now you will find this hard to believe but even Al-Qaeda Leaders believe that ISIS are a bunch of nut jobs (it almost if not so serious seem a bit Monty Pythonesque to me – People’s Front of Judea Vs the Judeans Peoples Front). Remember also that Iran has nuclear ambitions/capabilities & is under UN (effective USA led) sanctions.

This is turning out to be a sectarian proxy war with Sunni & Shiite Arab states which is now being played/fought out in Iraq. To date ISIS have made great strides in capturing & controlling land in western & northern parts of Iraq & have been moving towards Baghdad (remember that the Kurds who have ties to Turkey control parts of the North as well). As they get closer to the Iraqi capital they are heading into Shiite grounds. Last week the most senior & powerful Shiite Cleric (Grand Ayatollah Ali Sistani) issued a holy call to arms to defend their country, people & holy places, so expect ISIS to meet significantly more resistance than has appeared to date. Iran says it will assist the Iraqi government, with Iranians reportedly already co-operating with local forces.

So where does this leave the Americans you might ask (good question !!!). The Oil fields are in the Southern part of Iraq, so no insurgent forces will get anywhere near these. The USA will also aim to keep the Saudi’s out of the fight to avoid full blown sectarian violence (remember that the Americans buy 40% of Saudi’s oil output). Expect the Americans to invoke the “Good Man Good Gun” clause & likely bomb ISIS from the skies whilst the Iraqi Army & Shiites fight them on the ground. This will lead to a very confusing issue where the Americans will be fighting ISIS in one country (Iraq) & effectively supporting them (or staying out of the way) in another Syria. It also means that they will be fighting alongside (or from the skies) their long-time enemy (Iranian Republic Guard in Iraq) & against them (or staying out of their way again) in Syria & controlling/imposing UN sanctions against them – Are you still keeping up with me…???

So what does this mean to me & my investments you might ask (again good question !!) ?? History always seems to repeat the following pattern: –

War or fighting breaks out
Share & investment markets drop as investment capital seeks to find safe havens
The price of oil & gold rise, monies finds it’s way into US Cash & Bond denominated assets (considered “safe havens”)
The value of the $US Dollar increases relative to other currencies (i.e. the $ Australian dollar would fall in value)
Once market strategists can determine a “winner” in the war monies then flows back into Investment & Equity markets and all the trades mentioned above reverse.

To date markets have taken a very sanguine attitude to this Middle East conflict and as of writing this today the ASX Top 200 is up very marginally (3 points) after being down 40 points at the open. It reads to me that markets are not concerned about the conflict in the short term & that the USA has the appropriate level of military resolve to control the situation. ISIS it would appear have catapulted themselves now into Public Enemy No. 1 status which is not a good place for them to be in and have very few friends in high places (especially if Al-Qaeda think they are crackers as well). So watch your nightly news and expect to see American drones & Bombers in the skies shortly.