9/11 Special Issue -- Protect your finances from terrorism

September 13, 2006

How has terrorism evolved since 9/11?

Terrorism flourishes where the government fails to provide basic services, such as in Iraq, southern Lebanon, and Afghanistan. Shadow or even criminal organizations arise to provide those services, engendering support from the local population. Terrorist networks piggyback onto these shadow organizations, and can find funding through the criminal activities. Since 9/11, they have also become more sophisticated in taking advantage of global financial networks for their funding.

The Iraq war has, unfortunately, provided a perfect terrorism breeding ground. Iraq insurgent activities account for one third of all terrorist incidents and half of all terrorist deaths. A good example is the al-Qaeda Jihad organization in Iraq, led by Jordanian Abu Musab al-Zarqawi. However, many experts prefer to define these attacks as part of a civil war, not terrorism. If Iraq is excluded, the number of incidents with ten or more deaths has remained stable at 70 per year.

Since 9/11, the U.S.-led war on terror has successfully eradicated 15 of the 37 top al-Qaeda leaders. As a result, the State Department believes that the terrorism network is now led by micro-actors who are committed more to a shared ideology than a personal leader.

Terrorist groups have become very sophisticated in their use of the Internet and the media to coordinate activities, attract recruits and advance their goals. The Council on Foreign Relations has stated that the Internet provides a vehicle for a leaderless resistance, and hence a worldwide jihad. This evolution makes it easier to trace and catch the micro-actors after the fact, but harder to predict when and where specific terrorist attacks will occur.

Source: Congressional Research Services, “Al Qaeda: Profile and Threat Assessment”, August 17, 2005; Council on Foreign Relations, CFR Press Briefing: 2005 Country Reports on Terrorism, National Counter Terrorism Center

Will another 9/11-type attack occur?

Terrorism is here to stay, driven by the ongoing conditions in many Muslim countries that cause it:

• Repressive or corrupt governments,
• Oil-based wealth not shared with all elements of society.
• An increase in the number of young men who feel alienated.

Radical Islamist political parties with ties to terrorism, such as Hamas and Hezbollah, are gaining influence. Many African countries, with their corrupt and repressive governments, poor delivery of basic services and large Muslim populations, are of particular concern for the future. The State Dept. believes that attacks are more likely to be regional than international, so centrally coordinated attacks on the scale of 9/11 are probably less likely to happen.

While al-Qaeda has become less of an influence, other regionally-focused organizations have become more of an influence. For example, Pakistan’s President Pervez Musharraf warns of a growing Taliban insurgency regrouping in southern Afghanistan. Pakistan is one of the largest and most powerful Muslim countries, and has nuclear weapons. If Musharraf’s moderate government is toppled by an extremist faction, Kashmir and Afghanistan could quickly fall, threatening India as well. This could destabilize the entire region.

Terrorism is also driven by a unifying vision to return to the glory days of the Ottoman Empire by creating a new Islamic state, or caliphate, governed by Sharia, or Islamic law. However, the growing tension between the Shia and Sunni visions of that caliphate could ignite a civil war that envelops the Gulf region, transcending current national boundaries.

If the jihad spreads to other countries, the traditional U.S. military response will be too expensive to maintain. To be successful, the U.S. will need to work with these other countries to enforce their own antiterrorism efforts. However, any U.S.-led efforts will be seen by the jihadists as more fuel for their opposition to their own government, as has happened in Iraq. Furthermore, as these groups become more allied with powerful, well-armed governments in Iran and elsewhere, their ability to inflict military damage to the U.S. becomes greater.

Source: Radio Free Europe/Radio Liberty, China People’s Online Daily News, “The Evolving Al-Qaeda Threat.” James Phillips, Heritage Foundation, Congressional Research Services, Al Qaeda: Statements and Evolving Ideology, January 26, 2006

Protect your finances from terrorism

A large-scale terrorist attack would disrupt financial networks, transportation and the Internet.  The stock market could abruptly drop, but would return to normal levels in response to government action. After 9/11, the Fed dropped its prime lending rate to 1%, returning the economy to prior levels.

• If there is a 9/11-type attack, do not panic and sell into a market crash. Hold steady with a diversified portfolio. If anything, review your portfolio today and scale back on airline and insurance company stocks, whose industries are still recovering from the 2001 attack.
• Back up your financial records onto your computer’s hard drive or make paper copies at least once per year, in case Internet records are compromised.
• Have a week’s worth of cash on hand.
• Make sure you have savings of six months expenses in a short-term money market. If an attack caused the market could to drop precipitously, you would not want to draw from these temporarily depressed funds. If you were to lose your job, or needed to take a leave for some reason, six months of cash would allow you to make whatever longer term adjustments were needed.

Even without a large-scale attack, terrorist-driven instability in the oil-producing regions leads to an undercurrent of fear in the financial markets, which keeps oil prices up. Although ooil prices temporarily drop with good news, the long-term trend is towards ever-increasing prices. Prices could escalate significantly if the insurgency in Iraq is exported to Saudi Arabia, since most of the oil in this country is located on the Sunni-dominated border with Iraq. Long-term instability would deter development of infrastructure, decreasing supply and further increasing prices.

• Since oil prices are so volatile, the best rule of thumb is to increase your holdings when prices are low, and sell when prices soar. This can be accomplished by rebalancing the asset allocation in your portfolio on a regular basis.

The cost of the war on terror has increased the U.S. budget deficit, putting downward pressure on the dollar. However, this is balanced for the time being by investors using the dollar as a safe haven.

• To protect against a potential decline in the dollar, have between 15-40% of your portfolio in international funds, including Europe, Japan and emerging market sector funds. Over time, a declining dollar will help U.S. competitiveness, so include large-cap funds in your domestic portfolio. Talk to your financial advisor for specific fund recommendations.