Loser take all

In structural terms, the Iraqi constitution process and debate resemble closely the vote on the European Union constitution earlier this year. No, actually, Iraq is in worse shape.

The Iraqi constitution was drafted secretly by elites with one eye on the people, another eye on U.S. elites and support, and still another eye on factional disputes and their own survival. Yes, that's three eyes.

When, after much well-intended dealing among power-brokers, it is approved for submission, it will go to the people in the coming days as an all-or-nothing, take-it-or-leave-it proposition. No further editing allowed.

Leaders from across the spectrum will, as they did in Europe, try to massage its ambiguities one way in front of one audience, and another way in front of a different group. Iraq's voters will listen, take note of the contradictory rhetoric and hopeful promises that the same elites will smooth things over later - and be highly suspicious. All the more so given that, at times, the debate will be joined by American political leaders, whose pleadings will be well-intended, but, to Iraqis, suspect.

If this process didn't work for Europe, a group of advanced nations with much recent experience in democracy, and a strong desire to unify, why would we expect it to work better for Iraq?

Popular sovereignty

A much better approach would be to put the basic structure of the document before the people for a yes-or-no vote - but at the same time, pose the most divisive issues in separate ballot questions.

1. Should Islam be "a" major source of Iraq's law, "the" major source, or not mentioned at all?

2. Should federalism take form a, or form b?

3. Should Iraq's oil be owned by the central government directly, or the regional governments, or should it be divided up equally in voucherized share between every Iraqi who registers to vote?

4. Should U.S. troops leave immediately, in 12 months, or when the Iraqi legislature tells them to?

Of course, the danger of this approach is, there could be confusion, or the need for runoff voting in the event of multiple submissions. But this is not an insoluble problem. Iraq could do worse than to have lots and lots of votes.

And, one must ask, where confusion, violence, or delays are posed as a disadvantage: Compared to what?

Iraqi and American politicians have imposed much confusion, and many delays, in the process of bringing a constitution to the table. They will now encourage Iraqis, as one American observer puts it, to "embrace a certain ambiguity" in the constitution and "let matters get sorted out by Iraq's courts."

Iraqis are to be forgiven if they are nervous about trusting the future of their country's basic governance compact to the tender mercies of lawyers and judges.

The history of constitutional votes and referenda suggests that if Iraqis are unhappy with any of the key points in the constitution - or nervous about the contradictory importunings - they will tend to vote no.

Many will vote no (as they did in France) even if they like large parts of the draft or its goals, but are unhappy with the general state of affairs in Iraq, or concerned about the difficulty of changing the constitution in the future, or even for the simple reason that they want the United States to get out of the country.

It would be better, if one wants them to vote yes on the overall design, to let them decide for themselves on the key controversial points.

Furthermore, there's a fundamental question few have dared to give voice to. What if they vote no?

Iraqi and U.S. political leaders will, probably, handle this question the same way Jacques Chirac did in France: A no vote will be an unmitigated disaster; we have no backup plan. As the example of France suggests, this approach will not win support, it will raise concern.

Debating the debate

Perhaps most troublesome of all, none of the major players in the debate - the Bush administration, Democratic (and some Republican) critics in Congress, and even Iraq's leaders themselves - appears to have hit on such a means to defuse matters through a direct, populist, trust-the-people approach. In fact, most of them are hypnotized by debating whether or when to set a pullout date for U.S. troops, or how to fight the insurgency.

The Bush administration, its critics, and the Iraqis all disagree about these substantive questions, and make important points. Strikingly, though, they all agree that some elite body should make these decisions for the Iraqis - or at least, that they must treat the Iraqis like children, and offer them only the most limited, and inefficient, voice in actually crafting their own constitution.

Of all the players, Bush, personally, appears to have the most faith in the wisdom of the people to decide on such momentous questions. All that is needed is for Iraqi and U.S. leaders to realize that if the people can be trusted to judge an overall framework, yes or no, they are also wise enough to judge its key parts.

Two years ago, a member of Congress scoffed at my notion that America should allow a prompt vote on the continued presence of U.S. troops. "They might well vote no," he fretted. My answer was: If a majority of Iraqis want us out of the country, then our presence is untenable.

The same logic applies to questions from the role of Islam to the proper ownership of Iraq's oil. And the necessity of allowing people a meaningful choice is, given the nascent state of Iraq's democracy and the turmoil and real divisions that exist, not less urgent, but more.

An investment Vietnam?

As always, investment decisions are about what will happen, not what should. It's possible that in the coming weeks, some combination of leaders in the Iraqi parliament, the U.S. administration, or the Congress will figure all this out, and untie the Gordian knot.

It's not likely, though. In that case, it's hard to figure out a good direct investment play, because most of the obvious impacts of a 6-8 week Iraq crisis cut against much stronger trends or imbalances, rather than adding to them.

Oil, for example, will face one more supply threat, as if more were needed. Supplies from Venezuela, Nigeria, and even, to some extent, Iran and Saudi Arabia, are all suspect. But oil in the high $60s looks overvalued, especially as the driving season winds down.

Likewise, the implications for U.S. stocks of a constitutional defeat are decidedly bearish. So are a number of other political factors, such as the strong possibility that some White House officials, or Republican office-holders, will be indicted this fall.

On the other hand, the U.S. economy is growing strongly, and probably at a faster pace (close to 5 percent) for the second half than most worry warts think. Look for earnings growth rates of, oh, perhaps

15 percent, surprising many. Bush will win on his Supreme Court nomination, and seems to be shifting his eyes (wisely) away from the won't-win issue of Social Security reform to the could-win issue of tax relief.

If, as is quite possible, the unwinnable debate over an all-or-nothing constitutional referendum spurs continued violence in Iraq, it should continue to add to the pressure on the U.S. dollar seen of late. The dollar, though, is probably a fundamental buy at this point. And Bush has rallied on Iraq before.

Bottom Line

"You don't have to have a position on everything," as Warren Buffett puts it. Bottom Line's position in the Iraqi constitutional quagmire is, wait. It doesn't seem likely that political leaders in the U.S. or Iraq are going to figure this all out until Oct. 15. Still, they might.

Then it will be time to short oil until it returns to the high $50s; add to your shorts on U.S. 10-year Treasuries; and buy in, if you haven't already, to the U.S., Israeli, and Turkish technology sectors that should have a nice rally this fall.

Once Iraq muddles through, we will probably enjoy a nice rally in United States and global equities, similar to the surge that took place in the weeks after 7/7 in London. In the meantime, this is a situation that calls for lots of dry powder.

(Gregory Fossedal, [email protected], is an adviser to international investors on global markets and ideo-political risk and a senior fellow at the Alexis de Tocqueville Institution. His clients may hold long and short positions in many of the investment securities and opportunities mentioned in his reports. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Fossedal's opinions are entirely his own, and are not necessarily those of his clients, AdTI, or UPI. Furthermore, they are subject to change without notice.)

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