What Bin Laden's Death Means for the Stock Market and Your Financial Security
Stock-Markets / Financial Markets 2011 May 03, 2011 - 09:56 AM GMTBy: Money_Morning
Martin Hutchinson writes:
The finding and killing of Osama bin Laden after 10 years of searching is clearly being heralded as an enormous U.S. victory.
But once you look past the news itself, the death of bin Laden brings to light some highly worrisome revelations about Pakistan. And those revelations have some potentially serious long-term implications for the Dow Jones Industrial Average - and for your money and future financial security.
So let's look at the longer-term implications of the death of bin Laden, the troubling new insights that we've gained about the "real" Pakistan, and how this development actually injects even more geopolitical uncertainty into an already uncertain world.
The Death of bin Laden
Late Sunday, the networks interrupted regularly scheduled programming to announce that bin Laden, the 54-year-old mastermind of the Sept. 11, 2001 terror attacks that killed thousands of Americans, had been killed himself. According to an NBC News report, the firefight that ended the highly emotional decade-long manhunt took place in a "luxury hideout" in a compound in the Pakistan city of Abbottabad.
U.S. Navy SEALS and paramilitary forces of the CIA reportedly conducted the raid, leading U.S. President Barack Obama to tell the American people in a late-night television appearance that "justice has been done."
The death of bin Laden was the news.
But here's the real story.
Unfortunately, bin Laden's death will make very little difference to the effectiveness of the terrorist network known as al-Qaida. For several years now, since the U.S. invasion of Afghanistan in late 2001 disrupted its command center, that terrorist network has been run very much like a business-franchise operation, with operations in a number of countries sharing resources, ideas, training and know-how - but little in the way of direct operational control from the center.
As with such a franchise operation, the death of the founder makes only a modest amount of difference. Indeed, the operational control from al-Qaida's center was so loose that the effect of bin Laden's removal is less than that of the death of Ray Kroc at McDonald's Corp. (NYSE: MCD), where Kroc had been involved in central-policy formation.
Instead, it was more like the death of Harland "Colonel" Sanders at Kentucky Fried Chicken, where Sanders had been a figurehead, advertising symbol and inventor of a batter, but not an operational manager.
The comparison may appear frivolous, but it encapsulates an essential truth: While there may be an adverse effect on the morale of al-Qaida operatives, there is unlikely to be a long-run diminution in their ruthlessness and effectiveness. The Global War on Terror, as distinct from the rather separate military campaigns in Afghanistan, Iraq and Libya, will continue at undiminished ferocity.
And that brings us to the truly disturbing aspect of Sunday's news - the "real" story about Pakistan.
The Real Story About Pakistan
When he was run to ground on Sunday, bin Laden wasn't holed up in a hovel or a cave in Pakistan's bleak-and-barren mountainous north. Instead, the world's-most-sought-after terrorist was luxuriating in a million-dollar compound that was sitting a mere 500 yards from the Pakistani military barracks in Abbottabad, which itself is a mere 30 miles from Islamabad, that country's capital.
This striking fact - coupled with former Pakistani President Pervez Musharraf's complaint that the United States violated Pakistan's sovereignty - suggests that Pakistan's pretense of alliance with the United States has been a false façade.
Even worse: The circumstances surrounding the death of bin Laden says that a large part - perhaps even a majority - of Pakistan's military is violently anti-American.
Combine this newfound reality with the strong anti-American feeling in the Pakistani population, and you have a major new danger: A hostile nation - 170 million strong - that is a nuclear power.
Even if Pakistan cannot be considered truly hostile at the present time, there must be a substantial danger that the next upheaval in the country's weak government could make it so.
This may be the true cost of the 10-year War on Terror. Pakistan has historically been a close ally of the United States. But the military actions that have been required to prosecute the War on Terror have been used by unfriendly elements within Pakistan to gradually transform the country into a deadly potential enemy.
And that's a sad-and-tragic outcome: Had bin Laden been captured in the Tora Bora caves in November 2001 - and the Afghan campaign wound down thereafter (without any invasion of Iraq) - the radicalization of Pakistan would have been most unlikely.
Unfortunately, all of that did occur, and is now a historical fact, meaning the political and economic equations have been forever changed for the West.
A hostile and nuclear-armed Pakistan is a grave reality, for it substantially elevates the element of risk in the world economy and in world markets. We have been worrying for five years about the possibility of Iran acquiring nuclear weapons, yet Pakistan - which is much poorer, since it has no oil - has a population that's more than double that of Iran.
Furthermore, Iran does not yet have a single nuclear weapon. But Pakistan is estimated to have 70 to 90 nuclear warheads and is thought to have medium-range missiles with a range of 2,500 miles. In addition, Pakistan's nuclear missile program is relatively sophisticated, with a number of nasty tricks - such as spiking their plutonium-based nuclear weapons with a bit of tritium, a bit of engineering that can increase the yield of each warhead by 300% to 400%.
The Death of bin Laden, Pakistan and the Dow
With a hostile Pakistan, the probability of nuclear terrorism or even a nuclear war is greatly increased. Accordingly, the current overvaluation of global stock and financial-asset prices could prove to be especially egregious.
The optimism of global stock markets since the financial crash of 2009 has been truly misplaced, fed as it has been by the highly distorting monetary policies of the U.S. Federal Reserve, and its chairman, Ben S. Bernanke.
The U.S. stock market remains hugely above its levels of early 1995, the point at which U.S. monetary policy became over-expansionary.
The Dow Jones in February 1995 passed 4,000 for the first time - a point that, in and of itself, was 50% above the speculative peak of 1987. If the Dow had increased - just in line with nominal gross domestic product (GDP) - it today would be standing at around 8,000. (The Dow closed yesterday at 12,807.36, down 3.18 points, or 0.02%. That represents an increase of about 92% from the March 9, 2009 bear-market bottom, and keeps the closely followed blue-chip index up near its post-crash high.)
However, the world is a great deal less secure both politically and economically than it appeared in the tranquil days of 1995 - and the revelations the death of bin Laden has brought to light about a potentially not-so-friendly Pakistan only makes it even less so.
Hence, a current Dow level of 12,800 isn't just overvalued by as much as 50% - it could be as much as three times above where it should be.
And while we hope this would never be the case, the fact is that some event as yet unforeseen could cause this overvaluation to unwind, and the Dow to correct.
What's more, if this event happened to be the "just-right" kind of geopolitical trigger - hopefully not a direct act of nuclear terrorism - it could be enough to spill the Dow down toward 4,000.
Fortunately, as is always the case, if you understand something, you can take actions to protect yourself - and your financial future.
[Action to Take: Before you dismiss this out-of-hand, it's important to remember two things:
•First, this is more a warning than a prediction, but it's worth viewing it as the latter in terms of at least taking some steps to protect yourself. Why do we say this? That's simple. It's because ...
•Second, Martin has issued a similarly dire warning before - and been lauded by Slate magazine for being perhaps closer to anyone in the financial markets for predicting how bad the 2009 bear market would actually be. (In June 2008 - a point in time when the Dow Jones Industrial Average was up above 12,000, and most folks were calling for the Dow to go higher, and not lower - Hutchinson predicted the 30-stock blue-chip index could nosedive all the way to 7,800 (it actually spun down to 6,600, but Slate was stunned by Hutchinson's gutsy timing).
So what is Hutchinson telling readers to do? Simple. Buy long-dated, out-of-the-money Standard & Poor's 500 Index "put" options on the Chicago Board Options Exchange (Nasdaq: CBOE).
The December 2013 options are the longest-dated options available, and you can choose between the 500, 600 and 700 strike prices, at 50% to 65% below the current level. They may expire worthless in December 2013, but if the political and economic threats to our security become properly valued by the market, you will be glad you owned a few of them.]
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Source : http://moneymorning.com/2011/05/03/...
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