Larry Kudlow

Amidst all the pessimism about the U.S. strategy-shift in Iraq, world financial markets seem to be voting for Bush and his plan -- not against. On the days immediately preceding the president’s speech, as its contents were leaking out, oil prices were plunging and stock prices were rising. And right after the speech, when the contents of the Iraq plan were clear, guess what? Oil prices continued to fall and share prices hit record highs.

Of course, there are a lot of factors driving these markets. Corporate profits are strong. Productivity is high. Inflation and interest rates are low. And the threat of recession is nil. All this is good for stocks.

And markets do work. The high oil prices of the last couple of years have generated huge profits and considerably more production. Oil inventories are high and the world seems to be awash in oil supply. That (along with some unusually warm weather) is driving prices lower.

But President Bush’s overhauled Iraq strategy, including a tougher line on Iran, is being viewed by investors as a plus for security in the Middle East. Two large aircraft carrier groups and 16,000 sailors have been positioned in the Persian Gulf. There also are indications that the U.S. will provide Patriot anti-missile defense systems to allies in the region. So, putting all this together, geopolitical risk premiums are actually declining -- hence lower oil prices.

While pundits and politicians are saying the new Bush plan won’t work, market investors are voting with their money for a much more positive verdict. And after surveying the details of the new Iraq strategy, I’m casting my lot with the investors.

The U.S. military buildup -- including the strengthened naval presence -- not only will provide better security for Iraq’s democratically elected government, but also enhanced security for the entire region.

Covering slightly more than 20,000 new troops, the revamped military plan will put five U.S. brigades in Baghdad and a sixth in al-Anbar province. Very simply, the White House believes that political progress and reconciliation in Iraq cannot come without better population security -- hence the need for additional U.S. troops and a shift in tactics. The rules of engagement also are going to change. This means no more political interference by the Maliki government in U.S. military operations.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.