Variables of War Confound Markets

NEW YORK -- Right now, the war in Iraq is the most important event affecting the economy. With billions of dollars in energy costs, capital investment, government deficits and consumer spending resting on the war's outcome, economic forecasters are spontaneously transforming themselves into military analysts. But can they really handicap the war?

One answer came from Ari Fleischer, the White House press secretary. "I don't know how anybody can do a formal analysis when there are as many variables as there are," he said at a briefing last Monday.

As that briefing drew to a close, the markets seemed to be backing up Fleischer. The Dow Jones industrial average had risen by 235 points on the previous Friday, propelled by good news from the front. Yet by the time Fleischer wrapped up his remarks on Monday, reports that Americans had been captured and killed had sent the index spiraling down by more than 300 points.

It looked as if investors were grasping for straws -- or at least the latest shreds of information from journalists at the front -- when it came to predicting the war's outcome. In that sort of atmosphere, it's not easy to be a forecaster, let alone one responsible for making daily or weekly pronouncements about the markets and the economy.

One forecaster, whom I will not name, was a case in point. On March 22, he had sounded the familiar refrain that some companies would wait until after the war to make big decisions about hiring and investments. But he also said that "most people are expecting the whole situation to be resolved within a week or two."

Three days later, he was not so sure, declining to guess when the conflict would end.

Many forecasters have posited two or three potential ways for the war to unfold, usually ranging from a short conflict that would give the economy a slight boost to a long, bloody struggle, worsened by confidence-crushing terrorist attacks. But they have rarely attached probabilities to the various possibilities. Though they may have fancy models for analyzing economic data, they have little advantage in gauging military might.

"I've been glued to the television set and the Internet, just like, I guess, everybody who's interested in this," said Donald Straszheim, president of Straszheim Global Advisors in Santa Monica, California. Any extra insights he had, Straszheim said, came from his service in Vietnam in 1965 and 1966.

"Out in the middle of a desert, this is no contest, as we all know," he said. "In an urban setting, the technology advantage is much less. I know what it's like to be in an urban area in which two people are on opposite sides of a door, both with a gun."

Some forecasters are making a special effort, though, to learn.

Robert Barbera, the chief economist of ITG/Hoenig, an investment firm, says he has steeped himself in research since the Sept. 11 terrorist attacks. "I have become a real student of geopolitics," he said.

Barbera said he had studied the history of the modern-day Middle East, all the way back to the Treaty of Versailles. He said he had also read studies on terrorism by the RAND Corp., which researches security issues, and "The Threatening Storm: The Case for Invading Iraq" (Random House), by Kenneth Pollack, a senior fellow at the Brookings Institution who served on the National Security Council.

This kind of cramming, Barbera said, has been necessary for giving worthwhile economic advice. "The biggest call you had to make in the last several months was that Afghanistan was not it, and we were going into Iraq with certainty," he said. "You couldn't get that with an econometric model."

Once the attack on Iraq appeared inevitable, the next step was to realize that fighting in the desert was a lot easier than trying to take Baghdad.

Last week, Barbera gave Saddam Hussein a one-in-six chance of staving off defeat long enough to deliver a stunning shock to the global economy, either by drawing Israel or Turkey into a wider war, destroying oil fields in Saudi Arabia or engineering terrorism in the United States. Barbera said that little he saw on television could sway his strategic recommendations.

Straszheim agreed daily war dispatches were of limited use. "This reporting has the feel of reporting a day or two in the markets," he said. "The slices are like looking at 25 or 50 different stocks and trying to make conclusions about the broader market."

But try telling that to the seesawing stock market. For all their access to costly advice, big investors seem just as susceptible to emotion as the rest of the war-watching public.