Ed. note: The plan was to expand on a new “7-footer” trend today (as mentioned yesterday), but current events intervened.
There is an old saying that dates back to the cold war: “One man’s terrorist is another man’s freedom fighter.”
The phrase cuts to the heart of the Iran-Contra scandal in the late 1980s. In that scandal, the Reagan administration sold weapons to Iran and used the cash to fund anticommunist rebels, the Contras, in Nicaragua.
The Contras were terrorists as far as the Nicaraguan government was concerned. But they were freedom fighters in the eyes of Uncle Sam.
Now, in Colombia, the shoe is on the other foot. As a result, as The Washington Times puts it, South America is “on the brink of war.”
Let me explain…
Fighting Over FARC
For decades the Colombian government has been plagued by FARC, a self-proclaimed Marxist-Leninist guerrilla group. FARC makes its stronghold in the lush Colombian jungles and is highly active in the cocaine trade.
For obvious reasons, tied to political ideology and the war on drugs, the United States considers FARC to be terrorists. But, just as the Contras were freedom fighters in the eyes of Uncle Sam, the FARC guerrillas are freedom fighters in the eyes of Venezuela.
Relations between Venezuela and Colombia were already on a downward spiral. They blew apart completely a few days ago when, with the help of U.S. intelligence, Colombia targeted and killed a top FARC leader in Ecuador.
In response to the cross-border assassination -- deemed an infringement on Ecuador’s sovereignty -- Venezuela and Ecuador amassed thousands of troops, tanks and fighter jets on the Colombian border.
Hugo Chavez, Venezuela’s president, then threatened to join forces with the FARC rebels in overthrowing the Colombian government.
In an ironic twist, Venezuela’s Chavez is accused of secretly funding FARC to the tune of $300 million -- just as the Reagan administration once secretly funded the Contras. (As the old saying goes, one man’s terrorist is another man’s freedom fighter.)
A High-Stakes Bluff
Alvaro Uribe, Colombia’s president, is considered a friend to the United States. The war on drugs is another factor. If Venezuela actually invades Colombia, the United States will likely get involved.
The obvious question is, get involved with what? American military might is already stretched thin.
Chavez knows this, of course. He is probably running a high-stakes bluff, betting that America’s hands are tied by Iraq. (Ecuador’s leftist leader, Rafael Correa, is merely following Chavez’ lead.)
That is the logical assessment… but it’s hard to know for sure.
The home-front stakes are high for Chavez right now. In spite of all the oil money, cracks in the Venezuelan economy are widening. Corruption, incompetence and the shortage-inducing effect of price controls are taking a toll. With paradise crumbling, Chavez’ bold bid to become president for life was rejected. His populist sway is fading.
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Straight From the Playbook
If dictators were handed a playbook along with the keys to the new regime, the top “Hail Mary” play would be this one: “When there’s trouble at home, make trouble abroad.”
Dictators always need a cause to rail against or an enemy to fight. This gives them an excuse to keep the country in lock-down mode. Meanwhile, stirring up nationalist sentiment is a kind of sleight-of-hand; it gives the people something to focus on other than their own troubles.
For a dictator on the ropes, making trouble abroad hits all the right strategy points. When the people are angry and ready to rise up, redirect their ire towards an outside target. If normal political functions can be suspended in a time of military emergency, so much the better.
This is why the possibility of an actual Colombian invasion can’t be ruled out. The more Venezuela’s economic situation deteriorates, the less Chavez has to lose in executing an insane gamble abroad.
The Petrocrat Problem
Whether South America erupts into war or not -- which could still happen as of this writing -- Venezuela nicely illustrates the “Petrocrat Problem.” (While democracy means “rule by the people,” a petrocracy is basically “rule by oil interests.”)
In short, the Petrocrat Problem is this: A number of regimes around the world -- from Venezuela to Iran to Russia to various members of OPEC -- are dependent on the high price of oil for their continued stability.
These regimes have become addicted to their oil money inflows. They have been spending like mad and making big promises to maintain stability. If those oil inflows were to stop (or significantly decline), economic chaos could ensue. Populist sentiment could erupt. Entrenched leaders could fall.
This presents a nasty Catch-22 because, if the price of oil falls enough to threaten one (or all) of the various petrocrat regimes, the incentive to “stir things up” becomes greatly magnified.
Or think of it like this: If the price of oil were to go into real decline, Hugo Chavez would have a big problem. Mahmoud Ahmadinejad would have a big problem. Vladimir Putin would have a big problem. The House of Saud would have a big problem… and so on.
The end result of an oil-price decline could thus be one (or more than one) of these players doing something drastic. (Like touching off a small-scale hot war, for example.)
If the price of oil then continued to decline, one or more of the various petrocrat regimes could implode under the weight of fiscal and political tensions. That would naturally wreak havoc on the day-to-day delivery of oil supply, sending prices right back up again.
Don’t Hold Your Breath
Some financial commentators see a silver lining in the prospect of global slowdown. If we see enough of a slowdown, they believe, the price of oil could fall. Heck, these commentators suggest that maybe the price of oil could fall a lot, sending us go back to the good old days when fuel was relatively cheap (or at least not painfully expensive).
To that hope we say, don’t hold your breath.
In addition to the buoying effects of a disappearing dollar, the price of oil has a geopolitical floor underneath it. In homage to the “Greenspan Put” of yore, perhaps one could call it the “Chavez Put” (or the “Putin Put,” or the “Ahmadinejad Put”…)
Energy Stocks Aren’t Done
From a trading and investing perspective, it feels like Wall Street is still thrashing around without much of a clue right now. Investors are too busy dumping holdings willy-nilly to sort out what still has a bright future versus what truly deserves to be sold.
It seems the concept of divergence hasn’t sunk in yet -- the idea that, in this wild and unprecedented environment, certain industries and sectors will continue to do well even as the rest of the market falls.
To borrow an old cliché, we are headed for “a market of stocks” as opposed to a more uniform “stock market.” Energy stocks could fly high once again when Wall Street catches on.
Warm Regards,
JL
