Time to re-visit this one:
Part I of III
By Mark Haimes
01/15/2007 10:00 AM PST
Q: In April of 2001 you identified a possible terrorist attack on U.S. soil as the most serious threat to the U.S. financial markets (see Weekly Updates Q2-2001, and Patriotism Proves a Poor Investment Guide, by Aaron L. Task) and in November of 2002 you said :
"An invasion and occupation of Iraq, will create such chaos, that will make it impossible for U.S. troops to reduce their presence, even if policy makers wanted to. Iraq will be a black hole, forcing the U.S. to throw good money after bad for years to come, while neglecting much needed domestic investment in areas such education, and health care. The Administration's beliefs that its actions will result in a "democratic, and peaceful" Iraq, that will also be friendly to Western economic interests by way of cheap oil, are based on fantasy, arrogance, and ignorance. Within the next 2-3 years, Iraq will be on the brink of a civil war, oil will be between $60 and $80 per barrel, and young Muslims from all over the world will be forming long lines at terrorist recruiting camps, to become suicide bombers!" (see 11-17-02 interview)
So, I was wondering what your thoughts are with regards to potential risks to the global financial markets given the deteriorating situation in Iraq.
A: Before I answer your question I would like to re-iterate a point I made back then; I am not a foreign, or, a national security expert. I have given detailed account of how I had come to those conclusions (see 9-22-01 report, and 11-17-02 interview) Moreover, many people around the world with access to the same public information, had come to the same conclusions. It is sad and frightening that ordinary people with limited information and knowledge could come to those conclusions, yet, policy makers with access to classified information, and supposedly superior expertise, could not. It speaks volumes of the level of cluelessness on behalf of policy makers, and it speaks volumes of our attitudes as a nation of people who are happy to "shoot first, and ask questions later." The courageous men and women who serve in our military-and their families- deserve much better from their government, and from their fellow Americans -like you and me. The average American is more interested in the sports section than what is going on around the world, yet they have no problem when other fellow Americans are sent to their death to far away places for no good reason! We are a long way off the "shining city upon the hill" we once aspired to be. As a nation, we need to realize that because of our economic, and military power, our capacity to do good can only be overshadowed by an equal capacity to do bad! However, we are not like any other nation, we are the United States of America, we have a special obligation to live up to the vision of the Founding Fathers, and to live up to the unique system of values, and beliefs that gave birth to our country, and have guided us thru-out our history. Driving a pick-up truck with a portable rocket launcher in the back, while waving the flag is not what a patriot is all about, a patriot is an informed citizen, who is capable of understanding, appreciating, and honoring his/her civil responsibilities, and actively participates in the election process by exercising his/her right to vote. It is absurd to talk about "spreading democracy" to other places around the world, when almost half of our own citizens do not even care to participate in the democratic process, here at home!
Now lets answer your question; In my view, the highest risk to the global financial markets is Iran's desire -and need- for the price of oil to rise to $100 per barrel. The Iranian president -in several speeches that he has made over the past year- he has expressed the belief that the fair price of oil ought to be north of $100 per barrel. The question is; how do you get the price of oil to rise to that level? You get it by provoking an attack either by the Americans, the Israelis, or, both that does very little damage to your long-term nuclear aspirations. However, in the short-term such an attack will unify the population, it will give the regime the opportunity to sink a few ships in the gulf, which in turn, it will disrupt the flow of oil, it will cause its price to rise over $100 per barrel -and stay that way for up to a year- resulting in a recession to all Western economies, while at the same time, providing the Iranian government with much needed cash to pursue its nuclear aspirations, and to further advance its military without sacrificing domestic spending, brilliant isn't?
Q: Are you saying that Iran's defiance and bellicose rhetoric is an attempt to provoke a military attack for the purpose of artificially forcing higher the price of oil?
A: That is exactly what I am saying! And these are my reasons for saying what I am saying:
1) First and foremost, the belief that we can stop Iran from becoming a nuclear power is naive and it is based on fantasy, and wishful thinking. We could not stop a country like North Korea from developing a nuclear weapon, does anyone honestly believe that we can forever prevent one of the world's biggest oil producers from developing one? Iran has both the financial, and human resources to develop a nuclear weapon, and whether we like it, or, not, they will. The question is one of "when" not one of "if."
2) One thing that pretty much everyone can agree on, is that the Iranians do not have one right now, if they did, they would have let us know, so, we wouldn't try something "stupid" like attempting to remove the regime by force. Depending whose information you want to believe, the Iranians are anywhere between three to six years away from developing a nuclear weapon. Therefore, from their point of view, what really matters now is how to gain the most by sacrificing the least in the interim time.
3) The U.S. knows very little about the specific location of the various nuclear facilities, and due to its involvement in Iraq it is in no position to embark on a sustained military campaign against Iran. Therefore, any military attack will be short in duration, and it will probably cause very little damage to Iran's nuclear facilities, but it will cause oil prices to spiral upwards. In other words, it will do very little to damage Iran's long-term nuclear aspirations, but in the short-term it will do wonders to Iran's oil revenues. Iran's strategy -by provoking an attack by the U.S., by Israel, or by both- is one that best can be described as "taking one step backwards now, in order to be able to take two steps forward later." It is pretty clever, and given the attitudes of the current U.S., and Israeli administrations, in all likelihood, the Iranians will get the gift they're looking for. To test the validity of what I am saying, one ought to pay attention to the rhetoric coming out of Iran as the price of oil keeps falling. I would not be surprised at all to see oil falling to the low 40s (40 U.S. dollars per barrel) and then rally up towards $100.00 per barrel, due to hostilities with Iran.
Q: If one wishes to be cynical, one can say that under such scenario, it is not only Iran that will benefit from higher oil prices, others such us Russia, even our "friends" the Saudis will benefit, too, not to mention oil companies!
A: You said that, I did not!
Q: How would you position your portfolio to prepare for such an event, by owning gold, and oil stocks?
A: Just owning gold, and oil is too much of a simplified approach. Moreover, in the event that common sense prevails -although the odds seem rather low at the moment- one must have an approach that will balance the portfolio thru both long, and short positions in gold/oil, and in gold/oil stocks. I will discuss the specifics in part III.
Part II will be posted next Sunday 1-21-07. ------------------------------------------------------------------------
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