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10/21/02  

Three Scenarios

Since consumer confidence is critical in determining economic activity, it is equally pivotal to understand how the conduct of this war might unfold, and how each scenario might impact the economy, as a consequence, equity valuations.

The good news scenario is that we will successfully implement heightened security, tighten our borders, incarcerate known and suspected terrorists, and witness the destruction of terrorist camps by the indigenous governments throughout the Middle East, including Syria, Iraq, Iran, Sudan, Palestine and Yeman. Further the moderate Arab countries like Egypt, Jordan, and Morocco will demonstrate the courage to eradicate the fundamentalist Muslim threats that so threaten their regimes. While we might have to have selective demonstrations of our tremendous military might to discourage overconfident terrorists, these demonstration send the message that we are completely invincible and determined. The Taliban collapses without any  US troop involvement and bin Laden is grabbed. Islam is liberated from the hijackers. This is the highest probability outcome and clearly the most advantageous to our deeply depressed economy and capital markets. 

The second scenario implies a very lengthy process where it becomes evident that radical fundamentalist Muslims have so thoroughly captured mind share that we must gain hard fought victories one county at a time, straining our resources and upping the costs tremendously in lives and capital. This scenario might involve some confidence draining battle field losses in an overall strategic victory. This lengthy scenario would have dampening effects on confidence and spending, create a large deficit, hurt the long end of the bond market and see equity markets weaken further. bin Laden continues to operate from the shadows, reverting to more conventional car bombs to hurt consumer confidence. Civil liberties are further curbed. This is a 30% possibility.

The doomsday scenario is one completely inhospitable to equity investing. Rather than detail gory details, just assume we find the forces arrayed against Western values and freedoms more ruthless, more numerous, more organized, and more lethal than imagined. I assign this only a 10% possibility. While there is no doubt we would prevail in the end, the sacrifice and cost could be monstrous.  

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