03-30-07
I'll see you, I'll call you, I'll raise you
But it's no cheap thrill
It'll cost you, cost you, cost you
Anything you have to pay...
– Suzanne Vega, No Cheap Thrill
As a long-time Nevada resident, your Macro Musings editor is naturally an avid poker player. While the rules can be learned in a weekend, the game itself can take many years to master. (Some would say it takes a lifetime.)
Subtleties aside, poker boils down to two things: patience and aggression. The skillful player maintains deep reserves of both, with situational awareness determining the mix between the two.
As Kenny Rogers once sang, one must indeed know "when to hold 'em and when to fold 'em." But, just as importantly, one must also know when to press a bet for maximum advantage.
There are many reasons to bet—usually with misdirection in mind. Sometimes a bet telegraphs strength... sometimes a bet disguises weakness... and sometimes it's just a stone-cold bluff, meant to strike fear in the heart of one's opponent.
Poker and geopolitics have much in common, no?
In the past few days, we have seen Iran raise the stakes yet again. The capture of 15 British sailors in the Shatt al-Arab (a waterway dividing Iran and Iraq) has led to heightened tensions and a six-month high for the price of crude. The Washington Post reports:
Oil traders [are] worried that the conflict could disrupt Iran's oil exports or shipments through the Strait of Hormuz, the narrow opening that leads from the wells of oil-rich Saudi Arabia, Kuwait, United Arab Emirates and Qatar to world markets. Iran is on one side of the strait.
Considering that 17.5 million barrels of oil per day pass through that strait, traders can hardly be blamed for getting edgy when a new war front looms. On matters of war in particular, the west is divided into two camps: those who say America must forswear military action, and those who say counter-aggression is the only thing Iran understands.
Representing the dovish side, the New York Times opines:
The only realistic course, even after the latest insult represented by the British sailors' seizure, is to sustain the policy of engagement, however thankless this seems.
...We must keep talking to the Iranians, offering carrots even when these are contemptuously tossed into the gutter, because there is no credible alternative.
Lt. Gen. Thomas McInerny, retired vice chief of staff of the Air Force, weighs in for the hawks via the WSJ:
The U.S. can... assemble a large-scale force capable of an air offensive... The immediate strike force could be composed of some 75 stealth attack aircraft—B2s, F117s and the F22s—and some 250 nonstealth F15s, F16s, B52s, B1s and three carrier battle groups.
We're the United States of America. We don't threaten any nation. What Iran must come to realize—and we must now decide for ourselves—is that we are in this confrontation to win it.
From a poker perspective, Iran has been consistently and aggressively raising the pot. The capture of British sailors is just one more brash bet in a long line of blatant provocations, meant to exploit and expose the poor strategic position of the US and its allies.
So here is the dilemma. Should the United States fold its hand against Iran (as the New York Times advocates) and essentially admit that military action is not in the cards? Or should Uncle Sam follow through with a dramatic reraise (as Lt. Gen. McInerny advises) and threaten to commit the mullahs for all their chips?
Let us not forget that fortunes can shift dramatically on the turn of a card... and that there are still plenty of wild cards left in this game.
Israel, for example, is one. If the United States folds, Israel might be forced to consider acting alone, as it did with the pre-emptive bombing of Saddam Hussein's Osirak nuclear reactor facility in 1981. (Whether Israel has the capability of taking out Iran's facilities on its own is unclear. Whether Israel would have to employ the nuclear option this time is also unclear.)
Saudi Arabia is another wild card. Thanks to the bloody feud between the Shia and Sunni branches of Islam, the House of Saud has watched Iran's rising fortunes with a mixture of horror and alarm.
Iraq is predominantly Shia; Iran is also Shia; Saudi Arabia is Sunni. If Iran successfully assimilates Iraq into its power structure, the balance of power in the Middle East will be irrevocably tilted. Saudi Arabia would then have to fear the possibility of uprising in its minority Shia population, or even a future attack from Iran. A weakened and withdrawn United States could thus lead to desperate measures from the House of Saud, running the gamut from strategic appeasement of Iranian expansion plans to backing the Sunnis in a regional civil war.
Russia is yet another unknown. Long a key ally of Iran, the two countries seem to have fallen out over money lately. Russia is demanding a settle-up on delayed payments for military hardware and nuclear fuel; in irritated response, Iran has been bad-mouthing Russia as an unreliable business partner.
It is not yet clear whether the Russia-Iran tiff is a genuine parting of ways, or just stagecraft for the benefit of western observers. One thing is certain though—the Russians are excellent poker players. Consider this observation from Spengler of the Asia Times:
It is instructive to contrast Russia's policy in Chechnya with America's catastrophic policy in Iraq, Palestine and Lebanon. Force, duplicity and bargains with the devil are the hallmarks of Russian strategy. Free elections have brought Hamas to power in the Palestinian territories, entrenched Hezbollah in Lebanon, and set in motion a civil war in Iraq. By contrast, Putin has pacified the most stubborn Muslim population in the world, namely Chechnya, by means that horrified the world. The United States offers democracy to the Muslim world, and is universally hated; Putin destroys an entire Muslim country, and is welcomed as a friend. The question begs itself: who better understands the Islamic world, Vladimir Putin or George W Bush?
There are other factors to consider too, such as Iran's civil discontent and dependence on imported gasoline; political struggles overshadowing the Iraq war at home; overstretched and overtaxed US military conditions; oil exporters' massive pile of dollar-denominated assets; and more.
You and I have our own hand in this high-stakes game. As investors and consumers, the ultimate result of the showdown will affect the cost of things we buy, the fuel in our gas tanks, and the profit and loss in our portfolios.
However things turn out, the volatility and uncertainty surrounding energy prices will see long-run increase, not decrease. Rising instability will also place a premium on stable energy sources (like Canada's oil sands), which will in turn drive further demand for intermediate fuels (like natural gas).
Last but not least, the cost of financing one war has already contributed to US fiscal decline. The thought of financing yet another can't be pleasant. The ultimate fate of the dollar, not to mention gold's traditional role as safe haven in times of crisis, mean that precious metals opportunities still have a long way to go.
