 Financial
Terrorism
by Dan Denning
July 5, 2005
The Daily Reckoning PRESENTS:
Of all the geopolitical events looming on the horizon for America,
the largest one is the potential for conflict with Iran - which
would certainly cause a major change in the world economy. Dan
Denning offers his advice for investors who are willing to prepare
for the unexpected...
[This essay was adapted
from Dan's new book: The Bull Hunter]
Contrary to what you see in
the press, though, the average Frenchman or woman is not that
different from you, except, perhaps, at the dinner table. The
French take their food seriously. A cup of coffee or a three
hour dinner is not just about the quality of the food or the
wine. Eating is a social experience in France. What's more, serving
food is a serious profession for which men and women go to school
in France.
That may seem silly to Americans. But you can see why a Frenchman
who deals with food professionally chafes at being bossed around
by Americans who deal with food recreationally. For the French,
food is serious pleasure, to be relished and treated with respect.
For Americans, food is serious business, to be consumed and treated
with salt.
Americans want prompt service, healthy portions, and plenty of
attention for an extra fork, some more napkins, or another Coke.
The French want to be left alone to eat, talk, and digest. I
am convinced that much of the animosity between America and France
stems from the difference in the way we treat food. A lot would
be resolved if both nations treated food the way the English
do, namely as something to be deep-fried, eaten, and tolerated
between cups of coffee or pints of lager.
This culinary side trip has served a purpose, I hope. When you
visit foreign countries, it takes you out of your comfort zone.
Other people have different customs. The food is different. Often
the language is different. Making yourself uncomfortable causes
you to see things you wouldn't otherwise see. It changes your
perspective. It's also a way of showing yourself that what once
seemed too challenging to attempt is actually not as hard as
it looks. But what does it mean to make yourself uncomfortable
as investors? There are three answers to this question.
First, it means being bold enough to think unconventionally.
This, of course, is the whole bull hunter philosophy. You recognize
that the world is always changing and that what worked yesterday
may not work tomorrow. You are willing to try new approaches
to achieve your investment goals.
Second, it means using all the tools at your disposal. This can
sometimes be even more difficult than allowing yourself to think
differently. Most of us are lazy. We'd do as little as possible
to achieve our investment goals, if we could get away with it.
But these days, doing as little as possible is the same thing
as doing nothing at all.
Finally, you have to be willing to ask the questions no one else
wants to ask. In the investment world, thinking about the future
can be a dangerous game. You can't predict the future. If you
invest your money based on faulty predictions, you could easily
lose it. Yet the investor's greatest challenge is to figure out
what price to pay today for future earnings that are unpredictable.
The further you go into the future, the harder it is to tell
what tomorrow will bring and what you should be willing to pay
for it today.
But the stock market looks ahead, not behind. And so we have
to look ahead, too, to try to see what's coming, if not in the
earnings picture, then at least in the bigger picture. You're
going to be investing in a stock market driven by geopolitical
events as much as earnings, probably for the rest of your investment
life. That means trying to decipher what events like war in the
Middle East or high personal debt levels in America might mean
for the stock market.
It's also possible to look into the future and make some intelligent
speculations on what might happen. Using options on index funds
and exchange-traded funds is one way that modern investors can
insure themselves against large, macroeconomic risks. It is not
foolproof insurance. And it is not without risk. But in a dangerous
and uncomfortable world, it is one practical way to begin putting
the tools at your disposal to work.
In a speech I gave in Chicago in 2004, I made the case for $100-a
barrel oil to 150 options investors. They were shocked, skeptical,
and intrigued, by turns. I told them that event-driven investment
moves - the kind where an external event shocks markets and causes
a big move up or down in a sector or the whole market - are nearly
impossible to predict. But strategic foresight can help you prepare
for some of them.
One of the largest geopolitical events looming on the horizon
today is a potential conflict with Iran. Iran is a charter member
of President George W. Bush's Axis of Evil. Iran is near the
top of the president's foreign policy agenda for his second term.
At stake is whether Iran will become a nuclear power. It's not
clear how this would change the world. What is clear is that
the mullahs who run Iran have a strategic vision of their own.
To investors, what ought to be even clearer is what the consequences
of a war with Iran would mean: $100 oil.
Any economist worth his or her pocket protector will tell you
that $100 oil is not economically sustainable. The world simply
could not afford to pay $100 for a barrel of oil - for a sustained
period of time. It would create a world of oil haves and have-nots,
and might even precipitate oil wars between nations desperately
competing over a scarce and expensive natural resource. Not only
would it drive U.S. gasoline prices to unimaginable heights,
the shock of such a dramatic rise in energy costs would throw
the world's economy into a deep and painful recession, if not
a depression. But that doesn't mean it couldn't happen anyway
- at least for a few days or weeks.
You don't have to be Dr. Strangelove to envision what the Iranian
strategy might be against the U.S. economy. I say economy and
not military. The nature of an Iranian counterattack would mostly
likely be to strike against U.S. economic interests. And what
greater interest than oil? After all, it's much easier to drive
the price of oil to $100 a barrel and instigate a political firestorm
in Washington, D.C., than it is to defend against American strategic
bombers and precision-guided munitions. Iran knows that America
and all of Europe and Japan are addicted to oil.
Much of that oil comes from the Persian Gulf and must physically
pass through the Strait of Hormuz to get to its final destinations.
By choking off the supply of oil at this strategic point, Iran
could exert enormous pressure on the United States, which would
itself be pressured by those who desperately count on Middle
East oil and want no part of America's quarrel with Iran.
With such a potentially high economic price to pay for a war
with Iran, I've been told by some strategic investors that the
United States would never risk it. But here is a question to
make you uncomfortable: If it is plain for all to see that the
way to America's weakness is through interrupting the flow of
oil from the Persian Gulf, isn't it just a matter of time until
someone tries it? Instead of fighting a war conventionally, why
not try economic warfare, attacking what makes a country strong
to begin with - its economy?
In total economic warfare, you attack a country's access to natural
resources or its currency. By attacking its economy, you indirectly
weaken its ability to attack you militarily.
If not Iran, then perhaps al Qaeda? And if not at the Strait
of Hormuz, then perhaps at the Saudi oil refinery of Ras Tanura,
one of the world's biggest and most productive? Even the British
Broadcasting Corporation (BBC) sees what could happen. In 2004,
the BBC aired a docudrama about what's been called an "energy
Pearl Harbor."
Here's how it works (in the mind of the BBC). A rogue Middle
Eastern oil trader works for a major money-center bank. Working
in concert with his terrorist conspirators in Saudi Arabia, the
trader takes an enormous leveraged position short crude oil,
much as a hedge fund or institution might. At the same time,
al Qaeda terrorists target the Saudi oil facility of Ras Tanura,
the largest oil complex in the world. Ras Tanura cranks out almost
4.5 million barrels per day. Former CIA agent Robert Baer wrote
in his book Sleeping With the Devil (Crown, 2003) that an attack
like the one on the U.S.S. Cole in 2000 could knock out Ras Tanura
for weeks. Baer also speculates that if the oil processing facility
of Abqaiq were attacked via a hijacked jetliner, it would reduce
Saudi production by as much as 4 million barrels per day for
up to seven months.
You get the picture. The trader takes a huge position short.
The oil price spikes on the terror attack. The leveraged short
position becomes a form of financial terrorism. The banks' losses
mount to the stratosphere. They hit their capital reserve requirements.
They must liquidate others' assets. They are forced to sell,
causing a wave of selling by other financial institutions.
The BBC presentation of the story morphed into the trader's "real"
motives. He was upset with his bosses' focus on profits and turned
out not to be in collaboration with al Qaeda. It's all fiction
anyway. But if you were looking for a way to put Western economies
in checkmate, sending the oil price sky-high and precipitating
a financial crisis at the same time, it's hard to think of a
better way - if you practiced total economic warfare, that is.
Regards,
Dan Denning
for The Daily Reckoning
Editor's Note: Dan Denning, editor of Strategic Investments,
is one of America's most respected "big picture" analysts
working today. The above essay was adapted from his new book,
The Bull Hunter.
In The Bull Hunter, Dan lays out all the details of how
to profit in ways most investors never imagined just five years
ago. What's more, he'll show you why it's never been more dangerous
to put all your investment eggs in the basket of the U.S. economy.
It's a timely warning, along with an exceptional opportunity.
Purchase your copy here.
321gold Inc
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