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September 25, 2006

Eye of the Storm
by Martin Weiss

Money and Markets

When Hurricane Wilma struck Florida last year, the eye was so vast and the calm so reassuring we had a hard time believing the storm was not over.

Elisabeth went outside and started cleaning up debris in the yard. I dove into the pool to fish out fallen branches. Even after the winds kicked up again, I braved the terrace for a short while.

We didn't grasp the enormity of the eye until I double-checked the live hurricane map on the Web. And within minutes, the second half of the monster storm was upon us, with even greater ferocity than the first.

New Winds of War

That's the situation I fear in the Middle East and the Persian Gulf right now:

A fragile peace was declared in Lebanon.

The UN's deadline with Iran passed uneventfully.

Oil and gold fell.

But now there are new winds, and the dangers we've been warning you about are finally being more widely recognized ...

Many months ago, for example, Larry warned you about a looming conflict with Iran, possibly direct attacks.

At the time, few people were even thinking about it. But this week, Time magazine's cover story -- "What War With Iran Would Look Like" -- brings the dangers into fresh perspective.

According to Time, two recent Pentagon messages are especially significant.

The first, a "Prepare to Deploy" order, has been sent to an Aegis-class cruiser, two mine sweepers and two mine hunters. The second, from the Chief of Naval Operations (CNO), requests a review of long-standing U.S. plans to blockade Iranian ports in the Persian Gulf.

The Pentagon's primary focus: The precise spot on the planet we have been focusing your attention on all year long -- the Strait of Hormuz, a 20-mile-wide bottleneck in the Persian Gulf through which roughly 40% of the world's oil must pass each day.

Time's conclusion:

"Coupled with the CNO's request for a blockade review, a deployment of minesweepers to the west coast of Iran would seem to suggest that a much discussed -- but until now largely theoretical -- prospect has become real: that the U.S. may be preparing for war with Iran."

Time supports this thesis by showing how the crisis has been long in the making and how it may now be approaching a point of no return ...

• Over the past decade, Iran has acquired many of the pieces, parts and plants needed to make a nuclear device.
• In recent months, Iran's President Mahmoud Ahmadinejad has crisscrossed the country, making Iran's right to a nuclear program a national cause and solidifying his base of hard-line support in the Revolutionary Guards.
• While stoking nationalism at home, Tehran has dramatically consolidated its reach in the region, supporting terrorists groups, especially Hezbollah. Moreover, Time talks about circumstantial evidence that Iran ordered Hezbollah to provoke this summer's war against Israel, in part to demonstrate that Tehran can stir up big trouble if pushed to the brink.
• In practical terms, the United States would have to consider military action long before Iran had an actual bomb. U.S. intelligence chief John Negroponte has told Time that Iran is five years away from having a nuclear weapon. But even before they have the actual bomb, nonproliferation experts are worried about Iran's ability to enrich enough uranium to fuel a bomb, a fatal threshold which could be just a year away.

No one is talking about a ground invasion of Iran. Too many troops are tied up elsewhere. But there is serious discussion about an air war targeting 18 to 30 nuclear-related facilities and 1,500 "aim points." But a U.S. attack, say Time editors, no matter how successful, would set off an uncontrollable chain reaction of events:

Event #1. Terrorism: Iran would authorize Hezbollah to attack Israel in order to draw Israel into the war and rally public support at home.

Event #2. Mayhem in Afghanistan: Iran already has partnerships with warlords in western Afghanistan. It would be a small step to lend aid to Taliban forces now gaining strength in the south.

Event #3. Mayhem in Iraq: Iran is intimately close to the ruling Shiite factions in Baghdad and dominates the political scene in the oil-rich region of Basra. At virtually the flip of a switch, Tehran could orchestrate a dramatic increase in the attacks on U.S. troops. As Sayed Ayad, a Member of Parliament says, "America owns the sky of Iraq with Apaches, but Iran owns the ground."

Event #4. Oil price explosion: This is the crux of the problem, which Time describes with these words:

"The Persian Gulf, a traffic jam on good days, would become a parking lot. Iran could plant mines and launch dozens of armed boats into the bottleneck, choking off shipping lanes in the Strait of Hormuz and causing a massive disruption of oil-tanker traffic.

"A low-key Iranian mining operation in 1987 forced the U.S. to reflag Kuwaiti oil tankers and escort them, in slow moving files of one and two up, and down the Persian Gulf.

"A more intense operation would probably send oil prices soaring above $100 per bbl. -- which may explain why the Navy wants to be sure its small fleet of mine-sweepers is ready to go into action at a moment's notice."

This Is Precisely What You've Been Reading
Here in Money and Markets for a Long Time.
Now It's All Over Time, CNN and Fox News.

That alone doesn't make it inevitable.

Indeed, I pray that the louder voices of caution will bring greater awareness of risks, and along with it, reduced chances of conflict.

But unfortunately, this week's news brings more confirmation that our worst fears are coming true.

We warned, for example, that the worldwide Muslim riots earlier this year -- in response to cartoons published by a small Danish newspaper -- was a harbinger of larger revolts to come.

Now, here we are, nine months later and an unfortunate passage in a speech by the Pope, quoting the words of a 14th century Byzantine Emperor, has triggered a whole new round of protests, riots and even deaths.

Meanwhile, a classified National Intelligence Estimate on terrorism, representing the consensus view of 16 U.S. government spy agencies, now asserts that Islamic radicalism, like a metastasized cancer, is spreading across the globe, due largely to the war in Iraq.

But I repeat what I wrote last year:

This is not primarily about religion. Nor is it about Muslim fundamentalism. Rather, it primarily reflects the growing battle over the world's scarcest and most strategic resources.

This global conflict is spreading because of severe imbalances between supply and demand -- not enough energy, not enough food, not nearly enough water.

This global conflict is both the consequence of the imbalances ... and the cause of still greater imbalances.

It reflects the surging cost of resources people must have to survive ... and it drives those costs even higher.

Iran is flexing its muscles because, despite its oil riches, it still desperately needs more energy. And because it's flexing its muscles, it threatens to drive those same energy costs even higher. Therein lies a classic illustration of the interplay between the global imbalances and the global conflict.

Another Consequence and Cause of
Global Imbalances: Hezbollah

We also warned about Hezbollah -- along with its Iranian counterpart, al Quds -- at a time when the only terrorist group on America's mind was still al Qaeda.

Now, on Friday, its leader, Sheik Hassan Nasrallah, has just made his first public appearance since the start of his group's 34-day war with Israel.

He drew a crowd of nearly a million. He celebrated Hezbollah's "victory" against Israel. And he unabashedly vowed to defy the U.N.-orchestrated peace agreement signed just a few weeks ago.

End result: Even as Osama bin Laden recedes into the background, Nasrallah is emerging as the single most powerful leader of radical Muslim masses.

These are the new winds of war, and they are stronger than the older ones.

So if you're thinking the worst is over, think again. And if you're wondering if now is the time to unload your carefully chosen investments needed for protection, just look around you.

It's not time to let your guard down. It's not time to change your strategy. Quite to the contrary, it's time to hold firm with ...

1. A Strong Cash Position

For money you want to protect no matter what, there's no substitute for cash stashed away in short-term U.S. Treasury securities. Compared to banks, for example, they offer many advantages:

Unlimited guarantee. Bank CDs and other bank accounts are insured up to a maximum of $100,000. Treasury securities, no matter how you own them, are directly guaranteed by the U.S. Treasury Department, whether it's just $10,000 or it's $10 billion.

Unrivaled liquidity. The market for short-term Treasuries is the most actively traded and liquid in the world. And if you own them through a Treasury-only money fund, you can get your cash out with an immediate wire transfer or simply by writing a check.

Higher net yields. The yields advertised by banks -- on any kind of account -- are always quoted before deducting service fees. In contrast, when a Treasury-only money fund quotes you its yield, it is invariably after deducting its fees and expenses.

How much of a difference can this make? In most cases, a very large one. Indeed, I figure that, after deducting the myriad bank fees, most Americans using bank checking accounts today are getting a net yield of close to zero on their accounts, while many may wind up losing money.

Tax exemption. The income you earn on both Treasuries and bank accounts is subject to federal income taxes -- there is no difference in that regard. However, when it comes to local and state income taxes, there is a difference: The dividends you earn on Treasuries or Treasury-only money funds are exempt. The income earned on bank accounts and CDs is not exempt.

If you want to bypass all intermediaries and buy straight from the U.S. Treasury Department, consider using their TreasuryDirect® service for the purchase of Treasury bills.

Or if you prefer the flexibility and convenience of a money fund, choose from one of the many Treasury-only funds now available.

Our favorites include:

• American Century Capital Preservation Fund (800-345-2021),
• Dreyfus 100% U.S. Treasury Fund (800-645-6561),
• Fidelity Spartan U.S. Treasury Fund (800-544-8888),
• USGI U.S. Treasury Securities Cash Fund (800-873-8637),
• Vanguard Treasury MMF (800-662-7447), or
• Weiss Treasury Only Money Fund (800-430-9617).

2. Solid Inflation Hedges

The one risk of U.S. Treasury securities is the simple reality that they are denominated in dollars, and that the U.S. dollar is subject to a decline in its value.

To offset that risk, stick with the dollar and inflation hedges that we've been steering you to in my Safe Money Report and Larry's Real Wealth Report. That includes gold- and energy-related investments that have soared in recent years even as others languished or fell -- investments that have overcome every lull or correction, consistently making new highs.

The main reason: The underlying growth in demand, especially from China and India, continues to accelerate.

3. A Prudent Strategy Aiming for Large Profits

I recommend two retirement nest eggs.

The first nest egg should be in conservative, protective investments to guarantee the minimum income you need to cover your necessities. That's where the strong cash position and inflation hedges play an important role.

The second nest egg, although not guaranteed, should throw off nice big chunks of cash to cover the extras. For details see my article just posted on the Web, "Two Nest Eggs."

My recommendation: If you haven't done so already, take action now, while we're still in the eye of the storm.

Good luck and God bless!

Martin

Martin Weiss, Ph.D.
Editor, Safe Money Report
support@martinweiss.com

For more information and archived issues, visit http://www.moneyandmarkets.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

Copyright © 2006-2007 by Weiss Research, Inc. All rights reserved.
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