As ISIS Falters, Pressures Rise In Syria

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by: Tom Luongo

Summary

Syria chased off Israeli jets near Palmyra on Thursday.

This highlights just how high the political stakes are in the Middle East and Europe.

Protect long-term assets with gold and high yield blue chips.

Things are heating up in Syria as pro-government forces continue making big gains against ISIS. As ISIS retreats, one would think the situation would become less complicated. Unfortunately, that doesn't seem to be the case.

Thursday evening the Syrian government finally had enough of Israel bombing its forces fighting ISIS near Palmyra. Syria s S-200 anti-aircraft systems fired upon four Israeli fighters and claims it shot one down which Israel denies.

Israel regularly violates Syria's borders to strike at what it feels are Hezbollah positions. But Palmyra is in the center of the country, so this was not some defense of Israel's border, but rather what Syrian President Bashar Al-Assad has been saying for years, Israeli aggression.

What is new here is that Assad felt enough was enough and had his SAA troops fire back at the Israelis.

While the markets didn't react to this news this morning, investors need to be very aware that with ISIS in full retreat across Syria the real fight for regional control begins.

Exit ISIS, Enter Chaos

Israel has been tacitly supporting Assad's overthrow for the past six years by harassing the SAA in the name of fighting Hezbollah.

A coalition of Sunni states - Turkey, Saudi Arabia and Qatar - were providing logistical support while the U.S. provided the materiel.

Now that the rout of ISIS has begun since the re-taking of Aleppo and the election of Donald Trump those above-mentioned states are looking to keep hold of what gains they've made. Turkey always planned to carve out the Northeastern portion of the country while wiping out the Kurdish YPG forces. And Israel sees Syria as a stepping stone to neutering Iran.

We now have U.S. troops assisting those same YPG Kurds assault the areas around the ISIS 'capital' of Raqqa, in effect, opposing the advances of NATO ally Turkey.

If you're confused now, you're not alone.

The main takeaway from last night is that Assad feels secure enough to strike back at Israeli jets who regularly fly over Syrian territory.

This tells me that something fundamental has changed.

I've seen unofficial reports of U.S. and Russian coordination in attacking ISIS. This tracks with the big territorial advances the pro-Assad forces have made so far this year.

Occam's Razor tells you that this is the most likely scenario even if the U.S. Dept. of Defense won't admit it. And, if that is the case, then Trump's multiple meetings with Israeli President Benjamin Netanyahu have been to quell fears that the U.S. would leave Israel hanging now that Syria's future is on a much clearer path to stability.

But, the reality on the ground is that ISIS is the highest priority and Israel's concerns about Iranian and Hezbollah forces in country have to take a back seat to that. I don't expect any further escalation from this incident, just the opposite, in fact.

Israel has been warned that Syrian air space is off limits and with Russian S-300's on the ground the next Israeli foray will likely be deadlier. This further secures Assad's position as well as Russia's interests in the region, namely securing a southern gas pipeline route into Europe for Gazprom (OTCPK:OGZPY) and weakening Russia's underbelly.

The Politics of Cr-ISIS

The mess in Syria highlights the reality that political risks are rising all over the world and the uncertainty this engenders is mounting.

From elections across the Euro-zone, to last night's incident, the risks to richly-valued equity markets like the German DAX (NYSEARCA:EWG) are enormous.

Europe is in a political crisis which makes German stocks trading at all-time highs dangerous to hold. But, it underscores where capital is finding value while Italy's banking system flirts with oblivion, Greece is imploding, France could elect Marine Le Pen and the ECB keeps punishing savers with negative interest rates that is creating a deflationary spiral.

The Dow Jones Industrials (NYSEARCA:DIA) are less vulnerable, despite high valuations, because of the dominance of U.S dollars (NYSEARCA:UUP) in foreign owned dollar-denominated debt and this political nightmare in Europe.

With the Fed raising rates, that will keep dollar demand to service that debt high. It will also spark a wider budget battle in Washington D.C. as Trump tries to sell his cuts to various alphabet agencies over the cries of the legislature and its corporate backers to offset rising interest payments on U.S. Treasuries.

And this leads me to say that I agree with Martin Armstrong s projections that the U.S. equity markets are ripe for a continued rally through the end of the year and into 2018. Safe-haven capital flows emanating from European political risks, among other factors, like increased domestic investor confidence thanks to Trump's patriotism will likely drive trillions into U.S. assets seeking relative safety.

The Takeaway

No portfolio strategy is complete without assessing the bigger picture of geopolitics. It is a lesson that was hard-won for me. Our markets are dominated by big policy-makers making big choices.

And there is a risk, like Wednesday's FOMC rate hike, that those markets will not react per conventional wisdom. Acts of war in Syria can't get the market's attention while risk-on asset classes rally on rising interest rates.

For the long-term investor, I feel it is prudent to avoid trading major markets like gold (NYSEARCA:GLD) and/or U.S. Treasuries and keep the bigger picture in mind. If we are entering a period of government instability, then building a position in gold and silver (NYSEARCA:SLV) are always your top choice to protect your overall wealth.

In addition, adding blue-chip stocks with yields above 4%, like Verizon (NYSE:VZ) or AT&T (NYSE:T), that generate lots of free cash flow with recession-proof businesses are a great alternative to over-priced bonds. So, if there is a correction in stocks due to some external shock, the cash still flows to you quarterly. Stocks like those will be the first bought off the bottom, anyway, so the risk to holding through any crisis is minimal.

While Syria's aggressive response did not set off a wider conflict this time, the next provocation could. And in trying to account for things like this it is better to be a few months early than a day late.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I one some gold and silver, a few guitars and a lot of goats.

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