In our last post we discussed the relationship between crises in the Middle East and recessions in America. Over the past 50 years Middle East problems have often created spikes in oil prices which have coincided or preceded recessions. The reason is that spikes in oil lead to higher gas prices which takes away purchasing power for other items for the average consumer. I stated then that I was not yet thinking that will be the case presently. However, events are always dynamic in our world, especially in the Middle East. In the intervening time news of the Assad’s regimes use of chemical weapons has been reported and thus another look at the situation is merited.
The appeasement of Syrian President Assad by forestalling any attack (not that I am necessarily for an attack or think there would be any guarantee of success) while Syria says that they will submit to international treaties and inspections for chemical weapons is complicated and problematic at best. What we do know is that it buys time for Assad. What we don’t know is what is Assad planning to do with this time. It reminds me of another famous appeasement of a mustachioed sallow looking dictator. History buffs and those old enough to remember may recall that British Prime Minister Neville Chamberlain after returning from Germany in September 1938 said the following: The settlement of the Czechoslovakian problem, which has now been achieved is, in my view, only the prelude to a larger settlement in which all Europe may find peace. This morning I had another talk with the German Chancellor, Herr Hitler, and here is the paper which bears his name upon it as well as mine. …. … We regard the agreement signed last night ….as symbolic of the desire of our two peoples never to go to war with one another again. I am not saying that Syria poses the same threat to the world that Hitler did. However there is no doubt that Assad has used chemical weapons and possesses enough material to slaughter thousands if not millions of people. In my mind there is also no doubt he has been appeased. Assad has been refereed to as a pathological liar by other politicians and the press so its hard for me to believe any promise of suddenly abiding by international law (not that those groups are so trustworthy either). Your guess is as good as mine about what happens in Syria but we both know that these dictators tend not to go quietly into the night! Therefore there is a real possibility that negative events in Syria could easily become a threat to the stability of the region.
Since this particular dictator is in the Middle East it brings us back to the geopolitics of the situation and the possibility that problems in Syria lead to wider regional problems that interfere with the supply of oil. At the end of the day these events, or lack thereof, will reflect in the markets. As fate would have it, the markets are at a fairly crucial juncture. The arrows in the chart below indicate the latest series of higher low points and higher high points of the S&P 500 over the past months. That is by definition a bull market. The three circles may represent the makings of what market technicians call a “head and shoulders” pattern. These formations often foreshadow lower prices. The direction that the market exits the last bubble will most likely be the direction that stock prices take for the next few months. Like it or not events in Syria may change to odds of which direction the market takes.