Normally I do not post about geopolitics because generally these issues do not affect the performance of the financial markets. However, I have to alert you to rumblings about Iran that I am reading, mostly via Stratfor, and why that warrants our attention.

The issue of course is that Iran is developing nuclear capability. That’s something that’s especially agitating Israel – the nearest enemy to Iran. This nuclear capability is being developed by Iran with Russian help. Russia’s interest in this is to have a political lever on the United States. You see during the recent Bush presidency the U.S. pushed up against Russia’s borders and discussed military support of those nations. These range from the Ukraine to Kazakhstan to Poland to the Czech Republic. That made Russia very nervous. To make the U.S. nervous, and gain a bargaining chip, they began helping the Iranians in developing a nuclear capability.

Iranian placation is important for several reasons. First is that they are the world’s Shiite power and thus they control the Shiite levers in Iraq. If Iraq is fractious, Shiite vs. Sunni, it is unstable. If it is unstable then it is very difficult for the U.S. to pull its forces out. So the Iranians have U.S. attention. Second, the Iranians control the levers to terrorist organizations in Lebanon, as well as have the Syrians’ attention. An irritated Iran can activate the Middle East rapidly. Third, the Iranians are located very strategically. Iran provides ready access to Afghanistan. If the U.S. is interested in supply lines to land-locked Afghanistan then it needs options. Currently the U.S. moves supplies through Pakistan (politically unstable), the Russian sphere of influence (politically unreliable) and Iran (ouch!). More importantly, Iran sits right on the very narrow Straits of Hormuz where a great majority of the world’s oil transits. An agitated Iran can shut down world oil flow by mining the Straits.

This brings us to the U.S. relative to Iran at this moment. The U.S. is not directly threatened by a nuclear Iran, but Israel is. That means that Israel would be forced to act should they feel Iran is close to developing a nuclear weapon. That leaves several options for the U.S./Israel.

1. Do nothing. Highly unlikely that this choice would be exercised.

2. Sanctions. These would take the form of gasoline sanctions. Yes, Iran, a major oil producer has limited refinery capability. So they export oil and import gasoline. [The irony is not lost on me.] The problem is that truly strong international gasoline sanctions require universal buy in. Unfortunately at the most recent meeting of the U.N. Security Council meetings in late September both Russia and China said that they did not support sanctions. Of the two, Russia is the more important. Via rail Russia can supply all of Iran’s needed gasoline and circumvent sanctions.

3. War. This would be a short-term war, say a month. The nuclear facilities would need to be hit. Of course any attack on Iran would lead them to immediately attempting to shut down world oil transiting in the Sraits of Hormuz. That would collapse the world’s economy and throw it back into recession as oil prices shot through the roof. So the Iranian navy would need to be hit so that they could not interfere with, or mine the Straits of Hormuz. In the meantime, oil speculators would send the price of oil sky high regardless of the flourishes of the war.

Which of these three options is chosen is contingent upon how far along Iran is in developing a nuclear weapon. If they are near then we are near war. If they are far then we are far from war. That brings us to two newspaper leaks that occurred this past weekend. The leaks came from “off the record” political insiders.

One was in the New York Times and the other was in the English daily The Times. Both stories suggest that the Iranians are very far along in the development of a nuclear weapon and thanks to the deep assistance of the Russians.

Why were these stories leaked? The suggestion is that the U.S. and Israel are trying to get Russia to reconsider its stance on sanctions. By demonstrating how close both the U.S. and Israel are to war it is hoped, or so the thinking goes, that Russia will support sanctions and renege on its Iranian nuclear assistance.

So the conclusions to be drawn are thus…

1. Pay very close attention to the “sanctions” discussion, especially from Russia. If there is not much movement here then there is a very real chance of a global economy collapsing war.

2. To what Iran is saying and doing about its nuclear program. Additionally, pay attention to Iranian bluster about its nuclear program.

3. The silence. Right now it is deafening. Up until this weekend there was daily news about Iran’s nuclear program for months. Now there is nothing. This is not a good sign. Silence indicates last-minute attempts to stave off war aimed at avoiding public outrage and panic. Silence also suggests planning for military action.

4. It may be time to look at any financial market gains you have had this year and think about locking them in. That is, you may want to think about cash for awhile. GDP growth in the 3rd quarter was likely positive, meaning the recession is over. But that scenario has been priced into the stock market since late July. Sitting in cash after dramatic gains means that you have made some money. The downside to this is that you may miss out on some upside. I consider this to be the lesser of two evils.

What am I doing? I am going to a largely cash position and waiting out the resolution to the Iranian situation.

What might the more adventurous of you do? Look at your favorite oil and natural gas company and think of investing.

Jason