GOOD COP - BAD COPS, RUSSIA IS OUR FRIEND

Last Saturday, Iran failed to answer the question, Will Iran agree to hold uranium production at current levels for the next 6 weeks if the UN + 1 agrees to hold sanctions at current levels for the next 6 weeks, while all parties sit down to hash out an agreement? Iran continues to stall talks while making all the uranium it can.

Iran is trying to sneak under a door as it closes. Countries which already have nuclear weapons, USA, Russia, China, France, UK India, Pakistan and presumably Israel are not expected to disarm any time soon. However, to have access to low cost nuclear fuel and to be permitted to trade nuclear technology the counties must agree to other treaties. A certain exception has been made for India but, with the exception of Iran, nations must agree to all three nuclear treaties or to see limitations in trade. There are at least 180 other nations who are party to the NPT without having "the bomb". Iran wants to take its "rightful place" on the level of the 5 nations in the UN Security Council. Of course, Germany, Japan and others would argue for Iran to get at the back of the line as far as membership on the security council. By making the negotiations the 5 + Germany, it has been shown that having nuclear weapons is not a necessary criteria to be a member of the council.


Economics and nuclear orders on the books tell us that nuclear power is set to surge. During the years that oil prices have gone up, the price of nuclear electric power has gone down. The price of oil electricity is now more than double the price of nuclear electricity. The price of oil must come down substantially or it will make sense for transportation to go "all electric". In the near future, many nations, members of the GNEP (Global Nuclear Energy Partnership) will have low cost access to abundant supplies of power grade enriched uranium.

We already have too many nuclear bombs on this planet. Many have been destroyed in recent years. It remains to be seen if the next round of negotiations will reduce the number even more. In any event, the overwhelming majority of nations are opposed to allowing Iran, North Korea or Syria to produce nuclear bombs. North Korea has destroyed much of its bomb making infrastructure but has not given sufficient proof to get out from under sanctions. Syrian facilities were taken out by Israel a few months ago.

In the meantime, the third round of sanctions are biting Iranians hard. Yesterday, 800 workers at a major company in Tehran, the capital city, went on strike. They joined groups such as the sanitation workers at the air force base, 600 nurses at a hospital, and 200 tire factory workers. The protests are about not being paid for three months, going on four. The pay for workers apparently stopped back in April when the US slapped freezes on Iranian money in banks. Public beatings and public hangings have held the level of protest down but the pressure continues to build.

The "national guard" has been called out. The IRGC, Islamic Revolution Guard Corps, has been called into action to discourage protests. This action is actually a bit more like calling out elite special forces to aid the national guard because the National Security Forces were already on the job. Iran is facing extreme pressure from inside and from outside. On top of every thing else, they are being whipsawed by a well played game of good cop - bad cop.

GOOD COP - BAD COP

Curtis Martin, a professor at Georgetown University and author of several books on international politics and economics, wrote a few years ago about the use of the "good cop - bad cop routine" "As a model for non-proliferation diplomacy toward North Korea and Iran". The USA, Europe and Russia have been playing the good cop - cop game.

Martin says that for the game to work, there must be:

1) Role differentiation
2) Role coordination around a common objective
3) No avenues of escape
4) Credibility of threats

Top business and political leaders know that it is easy to lead if the crowd being lead wants to go in your direction. All the leader has to do in such situations is get in front. The trick is to get the followers to want to go in your direction.

Russia has several reasons, including trillions of dollars worth of profits, to go in the same direction the US and Europe want to go. It is no state secret that the elimination of state supported terror will be a good thing for Russia too. Certainly it should be a good thing for nuclear proliferation to be contained.

Russia and the US have a long history of cooperation. Our alliance against Germany in WWII being a prime example. The cooperation has never been more coordinated than it has been after the US and Russia signed a massive 123 Agreement in May.

This morning, it appears that Russia is taking Iran's side but this is the role of the good cop. The USA and Europe are agitating for tougher sanctions immediately while Russian diplomats agree with Iran that last Saturday was not set as a deadline. Saying nice words of agreement with Iran does not take away the bite of the current sanctions. Russia said nice things to Iran after round two, but that did not stop them from going along with round 3.

There is no way out. Iran can sit in jail for a very long time but as John McCain well demonstrated, even the most determined prisoner can be broken. McCain signed a "confession" only after five years of beatings, broken bones and isolation. The leaders of Iran can see that they can accept a wonderful package of goodies, including many multi-billion dollar trade deals and the WTO status craved by Russia or they will be defeated from the inside or the outside.

This week, in Washington, there was more saber rattling. The word was that the US cannot be expected to hold off Israel from attack while Iran is making nuclear bombs and not engaged in negotiations. Is this threat credible? Some will say yes and others no. The question is, do any of the people of Iran believe the threat is credible? The treat is made all the more real for as long as there are US troops and airbases in Iraq. If the debate is about whether the attack will come from Israel or from US forces in Iraq, the choice is between the great humiliation of having Israel bomb uranium sites or the military over throw of the government. The asking of the question adds to the probability of political instability.

Besides, bombing by Iran or the US is not the biggest threat. The absence of pay, supplies, gasoline, etc have already caused dissension, if the next set of sanctions are allowed to go forward, there well could be another revolution. Just the waiting to find out will be psychologically difficult. I recall sitting in the hospital after breaking my leg. The x-rays had been taken but the wait for an answer seemed to be forever. I was in great pain. When the doctor came to say that my leg was broken and that I would be in a cast for x number of weeks, I was greatly relieved, the pain and fear went away. The doctors drugs and my own "inside drugs" kicked-in at the same time. I would walk again!

Iranians have two broken legs and two broken arms and are wondering what will be broken next. They are also wondering just how long this pain will last. Each time there is a glitch in the negotiations with Iran, the negotiations in Iraq stall. The US and Iraq have worked out details about the continued presence of troops in Iraq but a significant part of the deal with Iran includes stipulations about troops in Iraq. It makes no sense for the US to take troop presence in Iraq off the negotiating table in Iran.

Again, there are many parts to the pending deal. Much is at stake. Bush would certainly like to secure major agreements while in office. If he does not, it will be all the more important for McCain to beat Obama. It is clear that McCain understands military strategy. In the handbook of military training there are 9 steps to effective war. The first is in knowing your objective. Our objective is not to kill Osam bin Laden. Our objective is to win the war on terror.

Obama wants us to divert our attention to Afghanistan. Yes, there are terrorist hiding out in the mountains of Pakistan and Afghanistan but, the big oil and big gas deals that are craved by Russia, China, Europe and the USA and lower oil prices craved by all consumers are a function of success in Iran. Asking NATO troops to risk their lives in the high mountains of Afghanistan over renegades is tough. The town folk in the old west were more willing to guard the bank in town than to go after bad guys hanging out in Old Mexico or the hole in the wall hide out.

After the US invaded Iraq, al-Qaeda put the bulk of its resources into winning in Iraq. Now that al-Qaeda has failed in Iraq, it is focused on Afghanistan. At the current time, there is a Mexican standoff there, the bad guys hold the high eastern mountains and the southern regions of Afghanistan and the good guys hold the west and the north, including the major population centers. It is good news that most of the terrorist rats are now concentrated in one area. Recruitment from the people of Syria, Iraq, Iran and Lebanon will fall flat after peace deals are made. Many of the terrorist will lose their will to fight after Iran agrees to peace.

Of course, the easiest time to kill the economy of Iran is when the world is being hit by economic slowdown. The slowdown makes Iran's biggest ace in the hole, oil supplies, worth less and less. Now that growth has slowed, the world can easily get along without Iranian supplies.

The stock market is having to look over the valley of a recession that has spread from US housing to US banks to US autos and now is washing up on the shores of Japan and other places. However, the big downturn in commodities prices portends relief. The S&P GSCI commodity index is down 41% since July 1! Yesterday, I purchased gasoline for $3.66 and the current wholesale price is consistent with $3.59 gas a week from now.

Meanwhile, low interest rates in the US are having the expected stimulative effect. US housing sales increased better than 5% last month. Big money flows are being released as the housing market heads back to normal. Further declines in commodities and money raised by the sale of covered bonds will be accompanied by declines in mortgage rates. Houses are about to be as affordable as they have been in a very long time. A low price times a low interest rate makes for a very low payment.

Going into battle, if I had to choose to be on the side of Russia or Iran, the choice would be easy. As the game of good cop bad cop continues, the pressure builds on democrats to vote on oil drilling and the pressure builds on Iran to accept incentives rather than the consequences. If the Bush skeptics are right and George Bush is all about benefits to big oil, then the must be in no hurry to conclude a deal with Iran. Under those circumstances, Bush would require the vote on oil before he agreed to any deal with Iran.

Investors should not wait for a signature on an energy bill or on a peace deal. The market is already "smelling" future results. Money is flowing out of gold, oil, commodities and foreign currencies and into the winners of the next cycle. Keep the faith during the stops and starts of difficult negotiations. The "big boys" need a bounce in commodity investments to get the foolish to buy more.