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The first week of August 2003 behaved as an August week should. Europeans quietly went off on their vacations, and even Americans seemed to take some time off -- albeit frantically checking into their office email, voice mail and key web sites. We vacation in very national ways. The sense of leisure was reflected in the world's markets, which generally drifted lower -- for no clear-cut reason other than that it was the first week of August. Even the Aug. 12 meeting of the Federal Reserve Bank's Open Market Committee hasn't aroused much interest. The general view, with which we hold, is that the Fed has played its hand for this business cycle and has no more moves to make. Nothing substantive will come out of the meeting, and it's better so.
The markets still have not absorbed the important news: The United States is involved in a world war and for the moment, it is not going particularly well. It is not just a matter of Iraq, although Iraq is a nasty situation. The situation in Afghanistan is nasty as well, and many of the plans for summer offensives throughout the world have dried up as troops are reorganized and redeployed for long-term wars. The recent explosion at the Marriott hotel in Jakarta represents a nightmare scenario: Indonesia is the world's most populous Muslim country. It straddles critical maritime choke points, and population movements could affect key allies through the region, particularly Australia. It is not the explosion in itself that is a concern so much as the fact that any destabilization in Indonesia will force the United States to commit forces there, and troops are becoming a scarce commodity. Finally, and most importantly, the threat of an al Qaeda attack in the United States is real and dangerous. The mere fact that Homeland Defense is saying the situation is risky is no reason to discount it. The next few months will carry the threat of major action in the United States.
The markets, therefore, should enjoy their vacation. It won't last. The collision between the markets' cyclical upturn and geopolitical reality that we will see shortly after Sept. 1, which is only about three weeks away, is the key process that will dominate this fall. Tough geopolitical times do not undermine good economic times; nevertheless, the still geopolitically naïve markets will have problems trying to figure it all out.
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