Beware of the Fallout From a Nuclear Iran

by Bryan Perry | October 12, 2012 7:30 am

Of all the highly fluid situations that will affect investors this month, the potential for an Israeli-Iranian conflict is the most unpredictable and would create the greatest impact on world markets. Despite sanctions by the U.S. and European Union, those efforts have failed to slow Tehran’s nuclear program. If anything, it’s speeding up. The UN reported in mid-August that Iran has doubled the number of uranium enrichment centrifuges it has in an underground bunker.

As a graduate in political science whose core focus of study was the Arab-Israeli conflict, I’m a lifelong student of this highly charged topic — and if history is any teacher, here’s the deal: If the Persian Gulf states now aligned against Iran conclude that the U.S. won’t take action against Tehran and they lack the assurance that we’re willing to confront Iran if it crosses the nuclear threshold, they will run for cover toward Iran.

Thus, Tehran will succeed in decoupling the Arab states that are in alliance with Washington, thereby destabilizing the entire region and allowing radical Islamic extremism to flourish.

In late August, UN Secretary General Ban Ki-moon, at the Non-Aligned Movement summit in Tehran was quoted as saying, in no uncertain terms: “Claiming that another UN member state, Israel, does not have the right to exist or describing it in racist terms is not only utterly wrong but undermines the very principles we have all pledged to uphold.”

In response, Meir Javedanfar, an Iranian-Israeli expert said: “In the history of the Islamic Republic, nobody has challenged the supreme leader’s position on Israel in front of him, and in such a manner… This is likely to have long-term reverberations and consequences inside Iran’s halls of power.”

Unfortunately, Washington isn’t sending the right message, and this problem can’t be avoided by playing bystander, as much as we would all like to consider doing so. Iran is already feeling the economic pain, and a massive show of force to supply Israel might get Iran to tap out before the Russians and the Chinese decide to get involved.

The stakes are high, and the balance of power will change dangerously for the worse if Iran is allowed to bear nuclear arms. Again, it’s the wild card in the deck that’s likely to cause the most market turmoil, and it bears monitoring very closely in the days ahead.

If you think gasoline prices are high now, you haven’t seen anything yet under this scenario. So, understandably, the one sector that keeps my inbox full of questions is the energy income trusts, which keep bumping along the low end of the range. Chesapeake Granite Wash Trust (NYSE:CHKR[1]) and SandRidge Permian Trust (NYSE:PER[2]) are both sporting significant yields of 11%-12% and should hold up with these kinds of yields being offered.

Crude oil prices will remain under pressure as the growing perception of slowing global demand supersedes the risk of an Israeli attack on Iran — an event that could interrupt the free flow of 25% of the world’s oil supply.

Bryan Perry is editor of Cash Machine[3], a newsletter focused on dividends and income investing.

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