David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


September 26, 2009


Remember the old story about the kid and cookie jar?  “If you do that one more time, I will punish you,” says the mom.  This latest two-months so-called “line in the sand” is not the first, nor the second, nor the third time.  The only thing different now is that the Brits (Brown), the French (Sarkozy), and the Americans (Obama) are collectively drawing it.  Make no bones about it; it will be tested by the power in Tehran.

The Iranians are caught in a fully disclosed lie.  President Mahmoud Ahmadinejad (pronounced: Ach-pitoui MAD Jihad) proves himself the worst of his ilk in the political category. He is a thug like Chavez or Kim or Mugabe, but he has one thing that they do not have: he has a credible weapon in the making.  And he has oil and money and is empowered by an oppressive political constituency (mullahs) that preserve him.

Prez A shows his true colors when he uses historical revisionism as a political tactic.  That becomes the basis for distracting others within his country and for arguing policy abroad.  Larry Kings interview is worth watching for those who might disagree with this contention.

For me, this one is easy to call.  I’ve walked through Auschwitz twice.  That’s right, an American Jew walked in and out of a crematorium; it’s the one in the back of Birkenau that wasn’t fully destroyed.  I’ve visited the “white ponds” in the back where 800,000 souls have their ashen remains interned and where the gray color of the water is still there after a half a century and where you can still walk and kick the dirt and find a small fragment of a bone and wonder if it is a remnant of a Holocaust victim and not something deposited there by a stray cat.

The notion of a Holocaust denier holding the key to a nuke is frightening.  He is a leader of an Islamic revolutionary state and has one mushroom cloud in the making.  There is no choice for the Western world, in my view.  Think about it: in 1981 the Israelis took out the Iraqi nuke weeks before it was about to be turned on.  The location was Osirak.  Google it if you are too young to remember this history.  Imagine how the world would look if Saddam Hussein had gotten his nuke.  Then close your eyes, think back further into history and imagine that the West had responded to Hitler with something other than Chamberlain’s pacifism.  Contemplate the silliness of failed sanctions and realize that they only empowered the regime that is targeted.  Ask yourself if our sanctions on sales of helium (the Hindenburg used hydrogen) had any effect.

You want proof of intentions.  Here is Iran’s powerful speaker of parliament warning other countries not to provoke Iran and cautioning against moves that would “cost them heavily.”  Ali Larijani said that any countries trying to provoke Iran could pay heavily. He also recommended that Western nations consider the recent comments from UN nuclear-watchdog Chief Mohamed ElBaradei, who said Saturday that a strike on Iran would turn the Middle East into a “ball of fire.”  “We advise you to take Mr. ElBaradei’s warnings seriously and not to be after provoking Iran. In that case, you will face our predestined action, and returning to interaction will become impossible for you,” Larijani said in parliament in Tehran.

Until 1979, the US-Iranian nexus had one dominant family on the Iran side.  America’s counterparty was one ruler, Mohammad Reza Shah Pahlavi, who ascended the throne in 1941 and ruled until 1979.  America and Iran considered themselves allies.  The US supported the regime and got strategic location advantage in return.  Remember: the Soviet Union bordered Iran. The US failed to see the changes coming in Iran as a generation raised under the Shah resented his monarchy.

The 1979 Islamic Revolution deposed the Shah; America and Iran became adversaries.  Iran’s strategic Persian Gulf location remains its current critical geopolitical source of power.  Saudi Arabia sits opposite Iran on the Gulf. That summarizes the basis for the US-Iran relationship today.  That is also why a nuclear weapon on an Iranian missile will change the entire regional and global balance.


Take this seriously.  This is not North Korea’s Kim, who is a sick and fake actor with a poor country and limited resources and is fully isolated and subject to close surveillance from above and nearby.  Rather, in Iran you have the funding, the brains, and the formula.  Thanks to a Pakistani who sold it to the world, in Iran you have the technology or, at least, enough of it to advance heavy water and form the basis for a weapon.  Iran is not just developing peaceful usage of nuclear material for electric power; it is making weapons and it is setting up to deliver them on intermediate- and longer-range missiles.  For excellent and independent research on this issue and others in the geopolitical sphere, see the commentary from Stratfor, at www.stratfor.com.  George Friedman and his colleagues are doing superb intelligence work in this area.  We subscribe to their service and find it very helpful.  Our conclusion: if no action is taken to stop Iran, they will advance their program to full-blown nuclear weaponry.


War is the ultimate act of diplomacy.  It can happen by design or by accident.  It is horrible and, regrettably, human behavior requires that it is still necessary.  It changes form as technology evolves and as political systems are subjected to modernism.

In our present Western world, war is viewed as limited in human terms and extensive in technological terms.  We in America have lost the sense of a draft and of broad-based citizen-manned military service.  We therefore function with a two-class system for our soldiers.  There are those who do and those who don’t.  A divide exists between them.  Many of our political leaders never wore a uniform; their children don’t either.

Thus their political decisions do not reflect the direct experience of military service.  Vicariously obtained impressions drive viewpoints.  They are no substitute for experience.  This pains me and others whom I know well and who wore uniforms in their earlier years.  Some of us still believe that all should serve our country in some form.  Our society might be better off if they did; our leaders might make different decisions if that universal service was part of our national policy.

Political systems in the West do not permit large casualties, which his why the Vietnam era was the last of them.  We replace mass casualties with more sophisticated and costly weapons.  America dominates the world’s air power and the seas so it can engage from distance.

Larger land war deployments like Iraq and Afghanistan become political albatrosses in the US.  Sequential casualties quickly sink our presidents.  Obama knows that fewer dead on our side is the driving force that makes the decisions; that is why the increased troop deployment in Afghanistan will likely not occur.

But Iranian nukes will introduce a new dynamic to the present system.  The war on the Korean peninsula in the 1950s and the Vietnam War in the 1960s were fought under the no-nuke accord. In those wars it was understood that nukes would not be used.

In the jihadist world of suicide bombers, this assumption is not valid.  Nuclear war and mass casualties are more of a risk now than they were a few decades ago. That is why Pakistan is a constant global worry.  That is why Iranian nukes are a high risk gambit.


In ancient times and in modern times, some market players like war.  They willingly sacrifice another’s life for money.  This is one of the terrible tragedies that haunts human history.  With nuclear war it may or may not be different.  There may still be some who personally think they can escape harm and profit.  More likely, in the jihadist sphere, is that there are actors possessed by what some of us would deem to be fanatical belief systems. But, as we learned from the Pakistani sale of nuke technology, money can motivate killer behavior without regard to the scale of the ultimate threat.

War requires financing, and capital markets are the system to provide it.  Here is America’s weak underbelly.  To fight war you need trained personnel and materiel and money.   We may have enough of the first, because we have an abundance of the second.  But the third is questionable in the eyes of the world because of the financial crisis and the huge ongoing federal deficits.

In Iran they are smart enough to see this side, too.  Deficits cannot be enlarged forever, and that includes the financing of a preemptive military action against Iran.  In Tehran they are counting on this economic aspect of the issue.  They see America as weak enough that it may be challenged head on. They see the possible mining of Hormuz as their card to play.

We expect the Iran situation is introducing a risk premium in markets.  It will reflect in a shift in pricing of certain sectors.  It may change yields on some debt instruments.  It is an added force impacting the US dollar.  The volatility increase in the currency realm is already apparent.

Markets expect this US-Iran standoff to end in some form of diplomatic settlement.  Markets are not pricing in a shooting war or military event or bombing of Irans facilities or mining of the Persian Gulf or even gasoline sanctions.  That is one tool that has power against Iran and that can threaten the present regime. Changing the Iran nuke policy requires changing their regime.  The US could embargo Iranian gasoline imports; they do not refine enough for their own needs.  But Russia holds the key to the success of gasoline sanctions.  As George Friedman has so well explained, Russia could send in unlimited quantities of gas by truck if it chose to undermine American sanction policy.

In our view it is time to be thinking about scenarios where we would make major shifts in strategy. We’re not making them yet but we are worrying about them and we do watch things very closely.

Geopolitical risk is rising.  The global economic recovery is still fragile. Nukes, war risk and Iran have made things more problematic.  We are holding a cash reserve in our US ETF accounts for the time being.  We would commit it back to a fully invested position but only at lower prices.

When event risk is rising we want our clients to be compensated for it.  We wish this caution were unnecessary but we must conclude that this is a very uncertain and dangerous world.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Nukes, War & Markets”

  1. emmanuel117 says:

    A little fear-mongering much.

    OTOH, this is bullish for the $!

  2. cewing says:

    I’m not the least bit worried about Iran having a nuclear weapon. Not while The US has tens of thousands of weapons ready to go any second. This issue is so far down on the list of Things Americans Need to Worry About, it’s rediculous.

    “In ancient times and in modern times, some market players like war.”

    Let’s not whitewash this – in the last 60 years the ONLY “market player” that’s demonstrated this interest time and time again is the United States of America. That’s why we have to walk the earth armed to the teeth and bracing for payback from every global backwater for whom we have made life hell.

  3. hatterdude says:

    This is entry too much. Saw this somewhere else the other day and found it very offensive.

    The accomplishments of the Jewish people are very impressive. I hold them to a higher standard because they should understand discrimination and abuse of fellow humans. Treatment of the Palestinians has been an abomination.

    Fear-mongering is correct.

  4. Simon says:

    Rosie pegged heightened geopolitical tensions as an issue for 2009 way back in December 2008 in his “don’t know much about history” commentary. It’s a very worthwhile re-read. He really nailed a lot of stuff an I’ve been keeping an eye out for his call for political risk. Incidentally he picked gold as an important hedge against policy “miss-steps” Can’t find a link to the article sorry.

  5. cvienne says:


    I’m on board with you 100% on this… (the threat)

    I’ve actually been posting comments ON THIS BLOG this past summer urging people to stay vigilant about this… (my opinions were summarily met with ridicule)…

    Since Obama has apparently chosen to throw Israel under the bus, I’m worried that Netanyahu, lacking an ally, will be forced to act as he sees fit…

    Even the WEB BOT project has identified the October 26th – November 5th period as a “hot zone” for this…

    I really don’t know what we can do at this point… (since our grand pooh-bah doesn’t seem to care)…

  6. Pat G. says:

    You know, I found your last article about how “military expenses weren’t adding to our deficits” kind of amusing. The Iranian President should be told this; as a sovereign nation you have the right to develop uranium and use it at your discretion. You also bear the responsibility and subsequent military actions should another nation be harmed as a result of that discretion. Alone, the U.S. would be able to deliver enough nuclear missiles by land, air and sea to essentially wipe Iran off the map. But they won’t have to. The best way to oust a government is internally. Back away, give them room, let them launch an ICBM, declaring their intentions and the Iranian people who are still a little upset about the last election there will be willing participants in a coup supported by even us. Get a grip David and try to write articles that are more reality based please.

  7. cvienne says:


    None of you people get this do you? (I’m not trying to criticize you Pat because I like you)…

    But LOOK PEOPLE… Let me say it again… LOOK PEOPLE…

    Nukes in that region aren’t about PEOPLE they’re about OIL…

    Remember Goldfinger (007)?

    Goldfinger wanted to NUKE Fort Knox… Why? Because the “half life” of the detonated uranium-235 isotope (or plutonium – as the case may be), would render the GOLD useless for 704 million years… Making Goldfingers gold more valuable…

    A nuke could do the same to the oil fields in the region (where 25% of the worlds DAILY output comes from)… Thus, CRIPPLING the world economy (especially that of the largest importer, THE UNITED STATES)…

    Iran isn’t looking to nuke Tel-Aviv or Jerusalem… It wants to nuke Saudi Arabia & Iraq (or, more specifically, wants to turn their oil fields to black glass)…

    Saddam Hussein wanted to do the same… But somebody, I can’t remember who, decided that that wasn’t an option…

  8. Pat G. says:


    I like you too but we can’t keep going around judging nations on what we think they might do. Then draw up a plan to preempt their plans. That’s what happened in Iraq, it’s what keeps us in the police business, kills our soldiers, adds to our deficits and is the reason many nations despise us. You can’t be all about freedom here and then all about everyone else getting our okay first, there. It’s two-faced.

  9. cvienne says:

    @Pat G


    Then you roll the dice and you take your chances… If you are the President of the United States, what do you do?

    The present version is… Well, people adore me and my glamorous image… So, since I have the “community” interest in mind, I’m going to try and act in a way to continue to be liked by the “community” (which I happen to be organizer of)…

    My take: Who knows? Maybe it’s the right thing to do… Good luck with that… I hope it turns out well for you and your future book deals (assuming the world manages to survive to the point that you get to write your 2nd life history… you know, the one AFTER your 1st life history… before you friggin’ ever did anything)…

    FWIW – If I were POTUS…I could care friggin’ less what other countries think about me…(Except I WOULD care, a little, about the ones that HATE me… ESPECIALLY those ones who have expressed the notion that one of my “deepest” allies should be wiped clear from the face of the earth)…

  10. Pat G. says:

    @ cvienne

    Rolling the dice and taking your chances is what life is all about. If I’m Obama, I tell him exactly what I said he should be told in the 9:10 post. Israel has made some miscalculated risks and they are apt to make more. But let them make it. There is an old saying my friend that goes, “keep your friends close and your enemies closer”.

  11. cvienne says:

    How Churchillian!

    “An appeaser is one who feeds a crocodile, hoping it will eat him last.”

  12. Peter Davies says:

    The most effective way for the US government to undermine Ahmadinejad, Al Qaeda and other militant Islamists is to vigorously pursue a balanced Israel/Palestine peace settlement. The main obstacles to this to this will be the likes of AIPAC and their toadies in Congress and the media, rather than Hamas which has already clearly signalled that it is prepared to negotiate seriously but from the position of an equal and not that of a supplicant.

    Only the USA is capable of doing this. The Europeans are too encumbered by their own shameful history of anti-Semitism but they will follow if the USA leads.

    Achieving a peace settlement will not automatically result in the demise of miliant Islam but it is the primary pre-condition for this outcome. Without a peace settlement, militant Islam will survive and prosper.

  13. meellerbee_21 says:

    I, too, found this post offensive. In the second paragraph alone, Mr. Kotok uses two stereotypes–the awful stereotype of using jihad as part of any middle eastern name (and mispronouncing the name at that) and then saying, very incorrectly, that Iran has mullahs. Mullahs are part of the sunni structure, imams are part of the shia structure. Would it hurt for authors to know about the basic politico-religious layout of the middle east when they right about it? Better authors, please!

  14. leftback says:

    I’m sorry, I also thought this post was silly and irresponsible.

  15. Thatguy says:

    As a signatory of the NPT, Iran is well within its rights to enrich uranium for peaceful purposes. If someone can show me how they’ve done anything other than this, please do. Until then, please quit your alarmist warnings about this possible threat to our existence and that threat to our existence. They are abiding by their obligations under that treaty (although only just barely) so I’m not sure what everyone has their panties in a twist about.

    I also thought it was interesting how he chose to gloss over the democratically elected Mossadegh who was deposed by us in the 50s. No agenda here.

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