Replies to post #60109 on Zeev's Turnips Talk Politics (ZTTP)

[Rick Faurot]

Cash balances up as economic worries rise
By Jennifer Hughes in New York
Published: August 17 2004 20:39 / Last updated: August 17 2004 20:39
http://news.ft.com/cms/s/9e9579c2-f07e-11d8-a553-00000e2511c8.html
Fund managers' cash balances have reached levels associated with extreme periods of uncertainty, according to a survey by Merrill Lynch that highlighted growing risk aversion in the investment community.

The net balance of managers “overweight” in cash relative to their benchmarks was 30 per cent. Average cash balances rose to 4.8 per cent the highest in more than a year.

Merrill said the only other times the survey had shown cash balances at such levels was after the September 11 2001 terrorist attacks, the October 2002 credit crunch and in the lead-up to the war in Iraq last year.

The survey, of 293 money managers who among them look after assets worth about $940bn, showed that pessimism was deepening, especially regarding US equities, with more than half of managers rating it their least liked region.

Investors also turned negative on global corporate profit growth for the first time in more than three years. A net 18 per cent expected profits to deteriorate, against a net 2 per cent who still expected an improvement in the previous month's survey.

David Bowers, chief global investment strategist at Merrill Lynch, said: “There's a veritable collapse in expectations. They are abandoning corporate earnings and focusing on cash.” The increasing pessimism comes as US markets remain near their lows for the year. For the first time in the survey's history, more fund managers felt that returning money to shareholders was a better use of corporate cash than capital expenditure.

Mr Bowers said: “With investors at the moment, it's a case of ‘show me the money'. “Many of them have given up believing in global economic growth, so if nothing better can be done with corporate cash, they want it back.” A third of the fund managers surveyed by Merrill said their investment horizon was shorter than normal which is usually seen as a sign of risk aversion and more than a third said that they were taking lower risks than normal.

More than half of those surveyed believed that the global economy would get a little weaker over the next year, against a third who expected it to strengthen.

Just over half 51 per cent of managers rated the US their least-liked region for equities, up from 43 per cent in July. Investment opportunities outside the US were viewed more favourably, with 32 per cent ranking Japan as their preferred region, down from 36 per cent in July.

[Rick Faurot]

Time to Quit Iraq (Sort Of)
By EDWARD LUTTWAK

Published: August 18, 2004

Chevy Chase, Md. — Many Americans now believe that the United States is depleting its military strength, diplomatic leverage and Treasury to pursue unrealistic aims in Iraq. They are right. Democracy seems to interest few Iraqis, given the widespread Shiite proclivity to follow unelected clerics, the Sunni rejection of the principle of majority rule, and the preference of many Kurds for tribe and clan over elected governments. Reconstruction was supposed to advance rapidly with surging oil export revenues, but is hardly gaining on the continuing destruction inflicted by sabotage and thievery. And in any case, it is unlikely that the new Iraqi interim government will be able to oversee meaningful elections in a country where its authority is more widely denied than recognized.

Yet few Americans are prepared to simply abandon Iraq. For one, they are rightly concerned that to do so would be a mortal blow to America's global credibility and encourage violent Islamists everywhere. An outright withdrawal would leave the interim government and its feeble forces of doubtful loyalty to face the attacks of vastly emboldened Baath regime loyalists, Sunni revanchists, local and foreign Islamist extremists and the ever-more numerous Shiite militias. The likely result would be the defection of the government's army, police and national guard members, followed by a swift collapse and then civil war. Worse might follow in the Middle East - it usually does - even to the point of invasions by Iran, Turkey and possibly others, initiating new cycles of repression and violence.

Thus the likely consequences of an American abandonment are so bleak that few Americans are even willing to contemplate it. This is a mistake: it is precisely because unpredictable mayhem is so predictable that the United States might be able to disengage from Iraq at little cost, or even perhaps advantageously.

Here's why: In Iraq America faces several different enemies, as well as some remarkably unhelpful nominal allies. As things stand, their intense mutual hostility now brings no advantage to the United States. But all could be unbalanced by a well-devised policy of disengagement, and forced to stop harming American interests and possibly even serve them in some degree.

At present, because the United States is fully committed in Iraq, the Shiite followers of the renegade cleric Moktada al-Sadr feel free to attack the same American forces that elsewhere are fighting Sunnis bent on restoring their ancestral supremacy. Many Shiite clerics and the population at large - the very people the Sunnis are hoping to oppress once again - either applaud Mr. Sadr or do nothing to stop him.

But if the Shiites were persuaded that America might truly abandon them to face Saddam Hussein's loyalists alone, it seems certain that they would quickly revert to the attitude of collaboration with the occupation forces they showed in the aftermath of invasion.

Likewise, while some say that the two major powers in the region, Iran and Turkey, would see an anarchical Iraq as an opportunity to expand their influence, that seems unlikely. Rather, a divided Iraq would be a base from which those countries' enemies - especially dissident Kurds - would be able to operate with impunity.

For now, with the United States viewed as determined to stay the course, the hard-liners in Iran can pursue their anti-American vendetta by encouraging the Shiite opposition, supplying Mr. Sadr's militia and encouraging Syria to help Islamist terrorists sneak into Iraq. But an American withdrawal would mean the end of any hopes for a unified, Shiite-led Iraq, which is Iran's long-term goal, and likely a restored Sunni supremacy, which is Iran's greatest fear.

As for Turkey, our ever-more nominal ally, it now seems focused on uniting the Turkmen minority in Iraq under its leadership, while dividing the Kurds. It has done nothing to help the United States in its difficulties - and Turkey could do much, most obviously sharing information collected by its intelligence units operating in Iraq. But if the alternative is an imminent American withdrawal - and a de facto independent Iraqi Kurdistan - Turkey would soon come to heel.

The threat of disengagement would affect the lesser players as well. Kuwait, whose very existence depends on American power, has done little to help. At a time of exploding oil revenues, and with Kuwaiti subcontractors collecting huge sums from Pentagon contracts, the Kuwait Red Crescent is sending only odd truckloads of food into Iraq (and even those figures seem inflated). As for the Saudis, their attitude is exemplified by their recent offer of an Islamic contingent to help garrison Iraq: it sounded courageous at first, but turned out to be a promise of troops other than their own, and was hedged by conditions that made it worse than useless.

Yet Kuwait and Saudi Arabia would be greatly endangered by an anarchical Iraq, which might even allow Iran to invade its southern regions on the pretext of protecting fellow Shiites. Again, the threat of American withdrawal would be apt to concentrate minds wonderfully. The goal would be to get Kuwait and Saudi Arabia to replace the American taxpayer in aiding Iraq; the two could also jointly sponsor peacekeeping troops, in earnest this time, financially rewarding poorer Muslim countries with troops to spare. While deploying such soldiers across Iraq would be a very bad idea - they would be Sunnis of course, and most unwelcome to Iraq's Shiites - they would be fine for the recalcitrant Sunni towns.

This is no diplomatic parlor game. The threat of an American withdrawal would have to be made credible by physical preparations for a military evacuation, just as real nuclear weapons were needed for deterrence during the cold war. More fundamentally, it would have to be meant in earnest: the United States is only likely to obtain important concessions if it is truly willing to withdraw if they are denied. If Iraq's neighbors are too short-sighted or blinded by hatred to start cooperating in their own best interests, America would indeed have to withdraw.

That is a real constraint. Then again, the situation in Iraq is not improving, the United States will assuredly leave one day in any case, and it is usually wise to abandon failed ventures sooner rather than later.

Yes, withdrawal would be a blow to American credibility, but less so if it were deliberate and abrupt rather than a retreat under fire imposed by surging antiwar sentiments at home. (See Vietnam.)

So long as the United States is tied down in Iraq by over-ambitious policies of the past, it can only persist in wasteful futile aid projects and tragically futile combat. A strategy of disengagement would require risk-taking statecraft of a high order, and much competence at the negotiating table. But it would be based on the most fundamental of realities: for geographic reasons, many other countries have more to lose from an American debacle in Iraq than does the United States itself. The time has come to take advantage of that difference.

http://www.nytimes.com/2004/08/18/opinion/18luttwak.html?pag...

Edward N. Luttwak is a senior fellow at the Center for Strategic and International Studies and the author of "Strategy: The Logic of War and Peace."