CHECKMATE
by Richard K. Brawn
June 26, 2006

We are about to be checkmated by our own false assumptions. 

Assumption

Now there is an important word. An assumption is that which must be correct for the end result to be correct. Modeling is how virtually every concept ever devised was developed. All science, engineering, finance, political science, virtually every concept that we know is underwritten by assumptions. When an architect designs a structure, he/she assumes the materials will all meet certain standard. Those assumptions fail from time to time. That is why the position of supervisory architect exists. Testing such as slump tests for concrete, etc. are to ensure the assumed conditions are met. All economic projections are based on assumptions. All stock recommendations are based on assumptions. Next time you read or hear a recommendation for a stock, ask yourself: what are the assumptions? What is it that must be correct in order for the recommendation to bear fruit?

Assumptions come in three levels. The first is the local or direct effect assumption. If this happens, the direct effect is for that to result. The second level of assumption is the indirect assumption. If this happens, then it will create a situation advantageous to something else that in turn will give a certain result. Let’s use fire insurance as an example. The direct assumption is that the building meets code. The indirect assumptions are that the city has an enforcement program so that the buildings surrounding the insured building also meet code. That makes it safer for all buildings and thus the insured building is that much better protected against fire. The third level of assumption is the macro assumption. That is the assumption that nothing unforeseen will happen. For example, it is the assumption that no rogue wave will hit a ship broadside. It is the assumption that extremes of weather will not change dramatically. Returning to the fire insurance example, the third level of assumption is that the city will not have riots that torch buildings or that war will not occur. These things are usually thought of as a ‘Force Majeur’. Unfortunately, the third level of assumption is the most powerful as it can render level one and two assumptions totally wrong. 

Investing uses level one and two assumptions. We assume the company is complying with proper accounting procedure and the profits are real. The level two assumption is that the conditions in the sector and market in which the company operates will not unexpectedly change. The third level of assumption is that at which the State Department and Intelligence agencies deal. The question these organizations seek to answer is what fundamental changes are happening in the world that will influence the interests of the United States. Unfortunately, both State Department and Intelligence services are saddled with political appointees who do not just manage the production of the organization, but warp the assumptions to serve political interests. We saw this with the weapons of mass destruction in Iraq. We have been disabused by Louis Free, former Attorney General of the United States how Clinton/Berger manipulated governance in order to fulfill their ideas of rapprochement with Iran. In both cases the assumptions were manufactured and fitted as a template over the intelligence services and Department of State. 

New Age

We are entering an age when the third level is becoming increasingly important. Climatic change is modifying assumptions about weather. Political tensions are rising along with political rigidity and therefore assumptions about the course of political events are in flux. Tectonic shifts are occurring in the various elements of national power. Even the concept of war is being changed by re-defining it to agree with preconceived political notions. Natural resources are becoming increasingly central to maintaining national power. I live near the San Andreas Fault in California. Major ruptures of the fault occur every so often. The movement of the tectonic plates does not stop to wait for a rupture. The movement is constant but unseen. The pressure builds on a stable section of the fault until it simply lets go. The period during which this sudden jolt can be expected is a window of time. Internationally we are in such a window of time because of unrecognized changes in plate tectonics of world power. 

Population density has shifted and the combination of medicine, culture, and religion has created a population growth that far exceeds economic growth. The gap between rich and poor on the planet has increased. On a worldwide basis, beliefs are increasingly replacing reason. An economic oligarchy called the Group of 7 controls world wealth but is being challenged by regional economic power structures. The current power structure uses diplomacy to supposedly accommodate political change forgetting that diplomacy always represents the status quo. So, tectonic plates underlying our way of life are creating forces and that will give way to abrupt change. We are entering a window wherein the balance of power that we know will rupture. 

The greatest stress point is in the Middle East. Therefore, one really must examine the assumptions that underlie our investment decisions in light of that stress point. If a rupture occurs there what will happen to our investments.

The situation in Iraq is like seeing more and more steam coming from an old volcano. It indicates something is going on below the surface, unseen to us. It is at the center of tectonics involving oil, population, and religion. It is at or near the point of greatest stress between the Developed countries and the Muslim world. If there is a rupture where will it be and what will it be like?

Mahmoud Ahmadinejad

To me, Mahmoud Ahmadinejad, President of Iran, is “the real thing”. Nobody is more dangerous that a charismatic ascetic with a vision to cure for deep seated resentment. The danger lies in the absence of easily understood vices that can be used to manipulate. Politics and diplomacy are all about manipulation. Ahmadinejad seems to be one of the people that carve a deep furrow in history. I think the safest assumption we can make is to take him as a potential Middle East equivalent of Hitler. His vision should be studied and taken to be as deeply held as Hitler’s “Mein Kampf.” 

With that in mind, I can see the start of a check-mate of the industrial powers. For want of a better word for the machinations going on, I will use the term ‘game’. The Game is complex in its details. We see the details and somehow have to connect the dots to figure out where it is headed. That process tells us nothing about the destination. It is just an on-gong storyline. Where Hitler was going prior to World War II was laid out clearly to us. The world simply could not believe it. We are in similar danger with Ahmadinejad. He has laid out his view of the future. We just can’t believe it. 

Iran has always thought of itself as the center of empire. Iranians will unite behind the banner of anyone who will restore Iran to being Persia. The power to do so is at hand. The development of nuclear weapons by Iran complements the power of its oil. The weapon defends the wealth that is oil. Iran also has a weapon we do not possess. It has created these weapons by causing relations between the Arabs and the Israelis to become infected and fester and create the gangrene that we know as the suicide soldier. Added to this will be the Shiite dominance of the upper gulf. This will cause the domination of Middle East oil. Nuclear weapons are a blunt instrument, if there ever was one. It can kill, it can instill fear, but cannot purify. It cannot change what people think. Purifying what people think is what Ahmadinejad is after. 

The Sting

The gambit being played out is for Iran to offer the west, that it will stop development of nuclear weapons in exchange for elimination of nuclear weapons within Israel. That would be checkmate for the west in the Middle East. To arrive at that point, Iran would accept terms of nuclear development supervision but ensure the terms contain language that would assure substantial future disagreement so Iran can manage the process in light of on-going events. The western Europeans and US politicians will be only too pleased to put off the hard decisions. Details of the agreement will allow for a slow deliberate process over an extended timeline. The timeline would ‘reasonably’ allow Iran to continue development but shut down various development processes as the west delivered on its side of the ‘bargain’. It would set a very prominent future date for a complete stop to development of nuclear weapons. That is the prize being sought by diplomacy. When that future date arrives, Iran will demand Israel also be subject to the same controls. 

If followed, this scenario will create a sharp decline in the price of oil, with the effect of halting investment in alternate energy sources. World economies will boom under the false assumption that the in the Middle East a deal is a deal. This scenario will get us through the upcoming mid-term elections. The President needs to show progress in Iraq and is more likely to do a deal with the devil (Secular dominance of Iraq by the Shiites). The prospect of lower oil prices would take inflationary pressure off the economy and will clench the deal. What a good deal!!! In two years the next Presidential election will occur. With it, Presidential powers will be at low ebb and Tony Blair will be retired. That would be a perfect time to serve up the nuclear proposal. What could be more friendly and inspiring of peace? Iran would guarantee peace in the Middle-East. Peace would guarantee availability of oil. Israel would not be needed as a western surrogate to safeguard access to oil in the Middle East. Peace would be assured by a friendly Iran. This will merit a Nobel Peace Prize. With the Peace Prize in hand, Iran would effectively control the upper Gulf and thus the oil in the Middle East. What could be more insidious and devious than such an offer? We trade immediate benefits for long term disaster. What other course of action could make the west more beholden to the Jihadis?

Just add up what would be lost by the G7:

       1. No adjustment in balance of trade and international debt. 
       2. Critical time lost to convert from dependence upon oil.
       3. Virtual elimination of the only world wide military response because the Congress would see no           xxxxpotential ‘enemy’. 
       4. Further delay in making critical economic choices that must be made by Congress. 

All of this fits if you believe Mahmoud Ahmadinejad believes what he says. But if you think he is just another sparkler in the Middle East fireworks, then this makes no sense at all. 

Would it be just another move on the world chessboard or Checkmate?

© 2006 Richard K. Brawn
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CONTACT INFORMATION
Richard K. Brawn, CCGA, MPA
Petaluma, CA USA
Email
California Certified General Appraiser (CCGA)
Master Public Administration (MPA)

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.