WW3? The Great Game may be reaching a new dangerous level.
While we have casually mentioned how an attack on Iran by the US and its allies could start WW3 it was still very strange to hear it come from the President of the United States, George W. Bush himself. Oddly enough in saying it he has now raised the stakes once again to an unprecedented level. None of this of course is to say that it will actually happen but for the past few years there has been steady repetitive rhetoric emanating from senior US officials to suggest that it is an eventuality not just empty words. All (or most) of the Presidential candidates have helped by repeating the same rhetoric. The Generals have also chimed in with the same lines. But the stakes just keep getting higher. They are playing a very dangerous game of showdown and no it is not Sidney Crosby one on one with Martin Brodeur (or Nicolai Khabibulin).
Vladimir Putin’s visit to Tehran was not only against the wishes of the US (that they can dictate to the dictator is just bizarre) Mr. Putin made it crystal clear that a military attack against Iran is totally unacceptable. That of course it is unacceptable is beside the point. As well Mr. Putin continues his huge opposition to any missile shield on European soil. Attempts at the UN to raise the sanction stakes against Iran are effectively falling on deaf ears with Russia and China.
The contention is that Iran is in the process of obtaining a nuclear bomb and wants to wipe Israel off the face of the earth. That it is undoubtedly very far from the truth is irrelevant. Repeat it enough and it becomes the truth. But it is a leap of faith to believe that Iran’s intentions no matter how nefarious end up in the conclusion that they would be so insane to not only build or obtain a nuclear bomb but to actually use it boggles the imagination. That both the US and Israel have a massive nuclear arsenal and could in an instant wipe Iran off the map (or at least reduce it to rubble) could only make such an event a death wish on their part. Setting aside the rather interesting interview with 60 minutes (www.cbsnews.com/stories/2007/09/21/60minutes/main328669.shtml) during Ahmadinejad’s recent US visit the only official source one has to go on is reports from the International Atomic Energy Agency (IAEA) the official agency responsible for nuclear inspections. The reports of the IAEA of course do not support the US stance. In the lead up to the invasion of Iraq the US also ignored, downplayed and made every attempt to destroy the reputation of the IAEA chief inspector Hans Blix. The same pattern is repeating itself with El Baradei the current chief inspector. There were no WMD in Iraq.
The US has also accused Iran of meddling in Iraq and supplying arms and munitions to insurgents in Iraq and Afghanistan. It of course may or may not be true. Does it matter except to the US. One has to consider the long close ties of the Iraqi Shiites with Tehran and that the US is in Iran’s backyard not the other way around. Iran has more right to be dealing with Baghdad then does the US. Remember that Iran and Iraq fought a war for 8 years and the US backed Saddam Hussein and Iraq. Recently the US criticised the Iraqi government for signing deals for an electricity plant with Iran . One also has to understand the political structure of Iran which is far more complicated then is let on. Unlike what the Columbia University President called Ahmadinejad he actually has little power to be a cruel dictator. The real power in the country lies with the supreme leader Ayatollah Ali Khamenei. They have a legislature that is to be elected again in 2008 and the President who is the elected head of state. Ahmadinejad is up for re-election in 2009. He has not proved popular with certain segments of Iranian politics and is probably on the way out. That there are limitations on their elections is beside the point. The President must be vetted by the Guardian Council which is controlled by Ayatollah Khamenei. Iran’s main industry is its oil and gas and that makes up almost 83% of their export earnings. Their leading markets are with Japan, China and Turkey.
According to statistics of the Energy Information Administration (EIA) Iran has the world’s second largest reserves of conventional oil (Canada has larger reserves but the tar sands are considered non conventional oil) behind Saudi Arabia and as well the world’s second largest reserves of natural gas behind Russia. Iran is also on the Caspian Sea an area of the world that is indicated to contain huge potential reserves of both oil and natural gas. As with Iraq it is all about the oil (Greenspan had it right when he said the Iraq was all about the oil). The Great Game in the Mid East, the Caucasus and the region around the Caspian Sea has for centuries been the subject of control by Empires. It is a region awash in oil and with all signs continuing to point to peak oil and a decline in the global availability of oil you have the makings of a clash of the titans (this issue sets aside the ability to extract more oil and obtain it from other sources). And the real clash of the titans is the USA, Russia and China. Iran is merely a by-product. But Iran is extremely important to China for oil (as is Myanmar and the Sudan (Darfur)). China’s economic growth is at a pace that they are on pace to becoming the world’s largest economy in as short of time as 2025-2030. That would of course threaten US hegemony and its global corporate empire. Oil is the engine that drives it and the US continues to be the world’s largest consumer of oil. If China were to consume like the USA there just wouldn’t be enough oil to go around. But the reality is China (and India the other growing economic powerhouse and a growing military power in itself) are consuming increasing amounts of oil.
That the oil is not under American control is a problem more for the USA then it is for China and of course to a lesser extent India. The regimes that have a lot of oil are for the most part not US client states or are outright hostile towards them (Iran, Venezuela and to a lesser extent countries like Nigeria and even Sudan and Myanmar and don’t forget Russia has the world’s largest reserves of natural gas and Europe is dependent on that as is Europe dependent on mid-east oil). Canada alone can simply not provide the needs of the USA and the tar sands are expensive to develop and remain an major environmental problem. So the USA invaded Iraq to topple a regime unfriendly to them and therefore be able to control its huge reserves of oil and the potential for a lot more easy for the taking just under the sand. Attempts to coerce the Iraqi parliament into effectively signing over the oil to the USA has naturally met with extreme opposition in Iraq. That the US is building 5 mega military bases all adjacent to the major oil fields is no accident and building a fortress embassy that is itself a small city is a sign that they are there as occupiers and have no intention of leaving under any circumstances. Democratic Presidential candidates know this.
So we are back to the rhetoric against Iran where all parties chime the same tune. All signs continue to point to the eventuality of an air attack on Iranian infrastructure under the pretence of the false WMD just like Iraq before it. But the risks are now considerably higher given the statements of Russia’s Putin. And the Chinese will not tolerate it either. The current snub by the US against China of meeting with the Dali Lama while correct is not what it would appear. It is all part of the game of escalation that is going on. Meeting the Dali Lama we suspect was designed to raise the ire of China.
Naturally any outbreak of hostilities in the Mid East will be extremely detrimental to stock markets globally. Oil will soar and could even reach $200 or higher. More selling of US assets particularly by the Chinese and others would continue even though it hurts them as much as it would hurt the USA. Figures from September indicate that foreigners were heavy net sellers of securities in September including selling Canadian securities. Further figures from central banks indicate that there was heavy selling of US Treasuries from Asian banks (China, Taiwan and Japan primarily) totalling some $52 billion in August. Globally it was reported that central banks dumped $163 billion of US Treasuries. There has been some return over the past month including $14 billion in the most recent Fed report of marketable securities held for foreign official and international accounts. Oil prices are soaring again and are now beginning to reach the lower end of inflation adjusted prices last seen at the height of the Iranian hostage crisis in 1979/1980. We emphasize though that the impact at these levels is no where near those days because of auto fuel economy and the fact that oil consumption is a lot smaller percentage of the economy today.
While oil prices are being pressed higher because of the threat of hostilities between Turkey and Iraqi Kurdistan don’t lose sight of the fact that the real issue is Iran. There is nothing in the Kirkuk oil fields of themselves that would justify a concern over oil blockage. The Kirkuk oil fields are already producing below capacity and pipelines that largely go through to Turkey have in the past been the subject of attacks by insurgents. So it is really not that important in the scheme of things. The real issue is further destabilization in the region. Turkey also has ties with Iran and have not hesitated to sign energy related deals with them and have talked of military cooperation because they both have a Kurdish problem. From the Kurds perspective of course they remain the largest ethnic group (estimated 30-40 million) in the world without their own country a travesty of the Great Powers dividing up the Ottoman Empire amongst themselves at the Treaty of Paris 1919.
The credit mess remains constrained but seething behind the scenes. Witness the bank results from Bank of America this week. The Bank Indices have been falling and if the Bank Indices are falling the broad market can not go higher. Note that the bank indices began falling in 1998 and presaged the stock market collapse of 2000-2002. Their lows were actually made in 2000 as the rest of the market was topping. The banks topped back in late 2006/early 2007 and have been in a downtrend for the most part ever since. No one it seems know the extent of the credit mess related to the sub prime and other mortgages, structured finance and the asset backed commercial paper market. Credit tightening is in evidence and even the Canadian banks are tightening credit. A credit crunch coupled with debt collapse is what all major recessions/depressions are about. And it is a global problem as the size of the structured finance market is unknown it is probably more than $1 trillion.
Technically the markets remain in a topping pattern. The S&P 500 has broken its up trend line from the August lows and a possible ascending wedge triangle (bearish). MACD indicators have crossed to the downside. This current bounce back is not surprising because after the first break we usually see an attempt to rebound. Tuesday’s low was 1526 right on our 1525 support and a break of that level will send us down to 1500 in a hurry. If the ascending wedge triangle is correct then we should break to the August lows and quickly and possibly new lows.
Gold has soared to new highs as well and given that we are now building some value over $750 the major bearish scenarios are beginning to look less probable. Still a correction back to $720 or even $700 can’t be ruled out but our breakdown level under $680 remains firm. Any correction must hold this zone. The US Dollar keeps falling and has hit new lows at 77.50. Our targets remain down to the 70-72 level but a rebound back to 80 first can’t be ruled out. For gold initial signs of topping would be a break now under $740. Oil has hit targets at $88 and next targets are $92/$93 and given the rise that now seems likely.
We have seen nothing in the past week to suggest that we are anywhere near out of the woods on the markets. The action since August has been return action or a B wave. The C wave appears to lie just around the corner. It needs another trigger. What the trigger is remains to be determined. Yes the credit mess could raise its ugly head again and we suspect it will. But the musings of Bush and Putin have raised the rhetoric level in the Great Game to a new dangerous level. While the Gulf War and the 2003 invasion of Iraq were a signal for the markets to rally while the US entrance into WW1 and the bombing of Pearl Harbour saw the start of a sharp sell off. An expansion of the war in the Mid East would do the same. We seem to be marching slowly towards a sure confrontation and there seems to be little in the way of stopping it.
D.C.
www.davidchapman.com
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