The Investor's Mind: Anticipating Trends through the Lens of History
The Iran Oil Bourse
by Doug Wakefield with Ben Hill
[The following is the first 3 pages of our February Newsletter. The entire newsletter is offered at no cost to those who subscribe through our website.]
The February and March newsletters will talk about a topic that is so painful to address, that we will want to quickly dismiss this information and shove it off of our computer screen and out of our minds. Some will say that I have gone too far. Others may question my sanity or my business savvy. I could lose readers, or business, or your respect.
As investment advisors, we are told to always be optimistic. But, I figure, if you didn't believe that the huge imbalances our world is currently experiencing pose a threat, you probably wouldn't be reading this newsletter. By necessity, we all talk every day with family, friends, and associates who feel that optimism is the only constant need in life. Plainly, based solely on the fact that it doesn't leave them with "warm fuzzies," many of them will dismiss the material in this newsletter.
As investment advisors, we are taught to always conclude with profits. Our conversations should go something like, "Bird flu could kill millions, so here are the five companies you need to invest in to get rich." To me that's always seemed barbaric, or at least extremely calloused. Richard Russell says, "Everybody loses in a bear market. The winner is the one who loses the least." I like that. It's much closer to reality. We will all read this and other sources, and make our best calculations and judgments and invest accordingly. Yet, the distinct probability remains that we may invest and make money, and perhaps a lot, but we will likely feel less secure than we do today. That's the part that's guaranteed. That's why I like what Russell has to say.
I am an American. My father and mother were depression era people who struggled greatly through that period of our nations history. At the age of 17 my father entered the Army Air Core to fight in World War II. He was a tail-gunner on a B-24. At the age of 19, he was shot down over Austria, and survived as a prisoner of war from November of 1944 until he was set free in April of 1945. Over the past 60 years, my father's story is one of the many American Dream stories that has inspired me. My point is this: in speaking about America's shortcomings, it is never my intention to be disrespectful to those who have sacrificed far more than I have for our freedom. Indeed, it is by their sacrifice that I am able to write freely about our nation's past.
"Now, you may think that I have become insane. That is partially true because I am convinced that the US Fed's monetary policies will lead to exponentially widening wealth inequity and impoverish the majority of US households, which will then lead to social strife, protectionism, war, and the breakdown of the capitalistic system"1 - Mark Faber
Dr. Faber called the Crash of 1987, the Japanese stock market crash of 1990, and the Asia - Pacific financial crisis of 1998. As such, I tend to respect his opinions. A few months earlier, while speaking at a Dallas luncheon, Dr. Faber touched on the same topic. Because his comment was so different from what we normally hear in the world of investment advice, it was quite memorable. He said:
"Today the brokerage industry does not have analysts whose specific job is to evaluate geopolitical risk. I think, over the next several years, this will change to where we will see analysts who specialize in areas such as this."
I am certainly not a geopolitical analyst. Yet, I have begun to monitor circumstances with which some of you are already familiar. With the gravity and scope of the potential effects of this situation, I feel compelled to present an orderly and balanced account. Depending on how far back one wants to look, these events have been unfolding for decades, if not longer. All of this has led us to a point where Iran has taken center stage.
Dr. Krassimir Petrov, a Ph.D. from Ohio State who is currently a professor at the American University in Bulgaria, has recently completed a very informative article titled, "The Proposed Iranian Oil Bourse."2 This article opened my eyes to the immediacy of the tensions that have been building in the Middle East. These developments carry with them such a massive potential for detrimental change to the U.S., that "financial warfare" could be considered a fitting term.
Financial warfare is not a term of my own creation. Rather, the term comes from a book, Unrestricted Warfare, which claims to be a direct translation of an original Chinese document, written by Colonels Qiao Liang and Wang Xiangsui of the People's Liberation Army and published in China in February of 1999. The publisher notes:
"Pan American Publisher's Edition: The original translation of Unrestricted Warfare contains inconsistencies in style and spelling. Adhering to the translation as closely as possible, the editor has made changes only where necessary to clarify or to correct egregious misspellings. Numbers and text in brackets are translators' notes."3
The book also notes that the original document is well known by the CIA and America's national security establishment. In addressing various types of "unrestricted warfare" where "there are no rules," the authors introduce "Financial War."
"Financial warfare has now officially come to war's center stage - a stage that for thousands of years has been occupied only by soldiers and weapons, with blood and death everywhere. We believe that before long, "financial warfare" will undoubtedly be an entry in the various types of dictionaries of official military jargon."4
But China is neither the focus of this newsletter nor of the upcoming event in March of 2006.
On March 20, 2006, a historic occurrence will take place, which does not bode well for the reserve currency status of the U.S. dollar. On that date, Iran is scheduled to open an Oil Bourse (Exchange) that will trade in Euros.5 As always, it is only in understanding the past that we can perceive the magnitude of this exchange.
In August of 1971, Nixon took the United States off of the gold exchange standard and the last bastion of gold-based currencies, ceased. Prior to this point, foreign central banks had the ability to exchange any U.S. dollars they accumulated for gold. Because we were expanding our money supply rapidly, many central banks around the world had done just that. As such, from 1958 to 1971, our gold stock had fallen from $19 billion to $10 billion, and over the same time, U.S. liquid liabilities to foreign central banks had risen to over $60 billion.6 Though, this is, comparatively, a pittance to the trillions we owe today, the demand, especially from France and Britain, became so strong that the United States reneged on this agreement, and the world embarked on the current free floating currency system we know today.
But, the world needed something to take the place of gold as the "anchor" for currencies. Oil became this benchmark. According to David Spiro's book, The Hidden Hand of American Hegemony, OPEC had discussed pricing oil with a basket of currencies. An unpublished proposal involved currencies from the G-10 (Group of Ten) nations. The members were to include the Bank of International Settlement, Austria, Switzerland, Germany, France, the UK, Japan, Canada, the Saudi Arabian Monetary Authority, and the United States.7 Even though a basket of currencies was discussed, something happened which caused oil to trade solely in dollars. In his book, Petrodollar Warfare, William Clark offers an explanation:
"In order to prevent this monetary transition to a basket of currencies, the Nixon administration began high-level talks with Saudi Arabia to unilaterally price international sales in dollars only - despite U.S. assurances to its European and Japanese allies that such a unique monetary/geopolitical arrangement would not transpire. In 1974, an agreement was reached with New York and London banking interests that established what became known as 'petrodollar recycling.' That year the Saudi government secretly purchased $2.5 billion in U.S. Treasury bills with their oil surplus funds, and a few years later Treasury Secretary Blumenthal cut a secret deal with the Saudis to ensure that OPEC would continue to price oil in dollars only."8
To this day, when oil trades on the New York Mercantile Exchange (NYMEX) or the London International Petroleum Exchange (IPE), all of the transactions are made exclusively in dollars. This means that every country in the world has to exchange their currency for U.S. dollars in order to buy or sell oil.9 Again, if Russia, Argentina, or Iran wants to sell oil to China, India, or France, they must do so in U.S. dollars. Because of this, each country keeps an ample supply of dollars on hand, hence the term "reserve currency." Needless to say, this gives the U.S. certain economic advantages.
Yet, all of this is about to change. On March 20, 2006, Iran is scheduled to begin trading oil contracts on its own exchange and, you guessed it, none of the contracts will trade in U.S. dollars. Instead, they will trade in Euros. This threatens the reserve currency status of our dollar, and as such, has huge implications for our heavily indebted and fiscally unbalanced nation.
To read the entire February Newsletter, you can sign up, at no cost, through our website. If you would like a copy of our research paper, Riders on the Storm: Short Selling in Contrary Winds, visit our website. This will also give you access to our new monthly newsletter, which is at no cost, titled The Investors Mind: Anticipating Trends through the Lens of History.
3. Unrestricted Warfare: China's Master Plan to Destroy America (1999) Colonel Qiao Liang and Colonel Wang Xiangsui, Translated by Pan American Publishers (2002), pg xviii
4. Ibid, pg 39
6. The Power of Gold: The History of an Obsession (2004) Peter Bernstein, pg 269
7. The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (1999) David E. Spiro, pg 121-123
8. Petrodollar Warfare: Oil, Iraq, and the Future of the Dollar (2005) William R. Clark, pg 20