More Dangerous Than Iran

I have a very timely question for you.

What Arabian Sea country could be a far greater threat to world peace than Iran … has more than double Iran’s population … and could be a much bigger disruption to global financial markets?

Some hints:

These are the undisputable — but underreported — facts of one of the world’s most potentially explosive nations: Pakistan.

Find the hints above a bit hard to believe?

Despite massive resources mobilized in recent years to destroy them, the Taliban still control or influence most of the territories — shown in red, orange and yellow — that they controlled before the government’s offensives of recent years.

If so, here are the facts …

Pakistan is the headquarters of the Taliban, which, since 2011, has killed nearly 10 times more people than the Islamic State — an average of 1,999 people per month vs. Islamic State’s 208 per month.

At least two-thirds of the Pakistani population considers the United States an enemy, making it one of the largest hotbeds of anti-American sentiment in the world.

The country’s extreme poverty, Muslim extremism, religious hatreds and periodic political upheavals are, in many ways, reminiscent of the conditions prior to the overthrow of the Shah of Iran, once America’s staunchest ally in the region.

Most worrisome of all, Pakistan is a nuclear power with 12 times as many nuclear warheads as North Korea.

Like North Korea, it has never signed the global Treaty of the Non-Proliferation of Nuclear Weapons. But unlike North Korea, it has the ability to drop its bombs on its enemies.

In a moment, I’ll connect the dots to your investments and show you how this is related to global financial markets. But first, let’s look at …

The Two Most Serious
Risks for Global Stability

Risk # 1 is nuclear terrorism. Even in the absence of a national revolution or coup, if extremist groups — often operating with virtual impunity in Pakistan — are able to seize the needed facilities or materials, they could easily become the world’s first nuclear-armed terrorists.

Right now, for example, countless numbers of Taliban operatives are defecting to a newer group that’s on the rise in Pakistan — none other than the Islamic State.

After 12 years of war, these Taliban operatives have grown impatient with their own splintered leadership. They are enraged by just-announced efforts to begin peace talks with the hated, U.S.-backed government in neighboring Afghanistan. And they’re drawn by the Islamic State’s rapid conquests, media blitz and “glamour.”

Meanwhile, the Islamic State in Pakistan is said to be preparing a new push to seize territory in the province of Baluchistan, which, unfortunately, also happens to be the center of Pakistan’s nuclear weapons program.

Some Mideast experts are asking: If the Islamic State has been able to gain control over large weapons like the one shown here, why couldn’t they do the same with an atom bomb?

Some Middle East terror experts are now even warning that the Islamic State could be close to obtaining a “dirty bomb.”

Example: Afzal Ashraf, a former senior officer in Britain’s Royal Air Force, says Pakistan is “the most likely place” for ISIS to obtain a nuclear explosive.

Another important footnote from history: Pakistan’s famous leader and icon of the country’s original nuclear program was Abdul Qadeer Khan. But Khan was, himself, the most notorious trafficker of nuclear bomb technology to rogue states in the history of mankind.

How do we know? He openly confessed to all his crimes and was placed under arrest.

Pakistani atom bomb trafficker Abdul Qadeer Khan waves after his release from house arrest in Islamabad.

At the time, some Pakistani groups alleged that his activities were sanctioned by the Pakistani authorities. I never believed that … until, that is, a memorable day in February 2009, when I learned he was released as a free citizen of Pakistan, allowing him free movement inside the country.

The United States warned that Khan still remains a “serious proliferation risk.” But even if that’s no longer the case, what about the proliferation risk of his successors? And what about the risks associated with the growing power of their enemies?

Risk #2 is an Islamic revolution or coup. If the U.S.-backed government is overthrown by extremists, everything the world fears about Iran’s distant future could instantly become a real and present danger in Pakistan.

Again, just consider the facts:

Pakistan’s population is almost three times larger than that of the UK — more people than California, Texas, Florida, New York, Illinois, Pennsylvania, Ohio and Georgia combined.

It is the second-largest Muslim state on the planet (after Indonesia).

It’s more than four times larger than Syria.

It shares its 1,963-mile Western border with the two other largest conflict countries in the region — Iran and Afghanistan.

It interconnects Central Asia, China, the Middle East and South Asia.

And it’s been either in a hot or cold war with nuclear India since its independence 68 years ago.

Result: Any conflict in the country could potentially spill over into all three regions.

Never forget …

Poverty and lack of opportunity help create the
breeding grounds for revolution, terrorism and chaos.

They always have and always will.

Throw in chronic unemployment, pitiful government services, plus repression, and you have a nearly complete recipe for disaster. Alas, all of these are severe, widespread and deeply ingrained in Pakistan:

Unemployment: According to the World Bank, youth unemployment in Pakistan has been rising by approximately 0.5% annually for the past four years. In a recent survey, 75% of families said their members joined militant groups because of unemployment.

Pitiful government services: One of the most intractable services in Pakistan is both simple and extraordinary: Power outages. In fact, the energy crisis may be one of the biggest security threats facing the country.

Hard to believe? Then imagine living in 100-plus-degree heat day after day with power outages that can last 12 to 16 hours each day.

You’re confined to a tiny room with no air conditioning. Everything is hot – the air, the floor, the water you drink. During those rare hours when the power is on, the most you can do is turn on a couple of light bulbs, a charger, maybe a fan. No more.

Accessing the Internet? A pipe dream. (I know. Because friends in Pakistan that I wanted to interview for this article about power shortages could not join me online precisely because of those shortages.)

The Center for Strategy and International Studies (CSIS) reports that the crisis cuts a whopping 4% of the country’s GDP annually and adds greatly to unemployment and poverty.

The crux of the crisis: While Pakistan imports mostly expensive fuels, it holds energy prices down at a level that’s lower than production costs. Meanwhile, population growth drives demand to new highs, while supplies remain tight.

Compounding the problem is the likelihood of water scarcity in the near future. Given that one-third of electricity is produced from hydropower, any attempt to draw water from reservoirs would only make the energy crisis that much worse. And sadly, electric utilities often get first dibs on the water supplies. Those dying of thirst often do not.

Race riots, political attacks and violence: Princeton University’s “Empirical Studies of Conflict” concludes that, from January 1988 through May 2011, there were 28,731 incidents of demonstrations, riots, terrorism, state violence and insurgent violence in Pakistan.

And there have been thousands more since.

In fact, just this past Friday, the nation marked its 68th year since independence, but many Pakistanis weren’t celebrating.

They were protesting or rioting.

The only recent good news: This year hasn’t been nearly as bad as last year’s Independence Day, when two major opposition groups, led by cricket star-turned-politician Imran Khan and Muslim cleric Tahir ul-Qadri, led hundreds of thousands of marchers on the capital and other large cities. Between the rioters and the security forces, the entire nation was gripped by a de-facto siege.

What’s behind the unrest?

The Pew Research Center gives us some clues with its survey that highlights the most pressing problems facing Pakistanis:

* At least 90% complain about rising prices, electricity crisis and unemployment.

* More than three-quarters say that crime and income inequality are very big problems.

* Over half complain bitterly about health care, corrupt political leaders, poor quality schools, and other entrenched problems.

Is doom for Pakistan written in stone?

Of course not.

The country’s economy is still growing.

It has prospects for more infrastructure investment and international trade, especially with China — current trends that Wall Street and Washington consider “positive.”

And it’s still a democratic country with core values, which, under normal circumstances, could probably keep the country stable for years to come.

The problem is that the circumstances of our world today are anything but normal.

As our colleague Larry Edelson predicted two years ago, global wars, revolutions and conflicts have been ramping up steadily — and show every sign of continuing to do so.

And just as Larry warned (at a time when nearly everyone else was heralding “a great boom”), we’re now witnessing a global decline in all three of the things that matter most for countries like Pakistan. We have:

1. Falling emerging-market currencies

2. Falling emerging-market stock markets, and …

3. Falling prices for commodities that emerging-market countries rely upon for their livelihood.

These are the global economic forces that can fuel the worst wars and revolutions, while, at the same time …

It’s these kinds of wars and revolutions that can most easily shred even the most well-researched forecasts by Wall Street or Washington.

This is a key reason why their forecasts differ so markedly from ours:

Forecast #1. Unless reason and wisdom can somehow prevail, political violence and economic ruin will continue to feed off each other — not just in one country or region, but, in varying degrees, virtually everywhere in the world.

Forecast #2. Pakistan could be one of the U.S. government’s biggest and most shocking foreign-policy failures of our time.

Forecast #3. Whether Pakistan deteriorates suddenly or more slowly over time, whether its crisis reaches a worst-case scenario or something less frightening, it’s bound to be another important catalyst in the Global Money Tsunami — wave after wave of flight capital moving from high-risk regions of the world to the few remaining safe havens like the U.S. dollar and select U.S. assets.

This is where the dots connect to your money.

Already, thanks in large measure to the turmoil overseas, your U.S. dollars are worth a lot more than they were when this phase of the global crisis began just a couple of years ago.

Simply by sitting in dollars, even with meager or no interest income, savers and investors are wealthier today in terms of how much they can buy in a wide range of asset classes.

Your U.S. dollars can buy more euros, Japanese yen, Australian dollars, Brazilian reais and a host of other major currencies.

Your dollars can buy more gold and silver, more oil and gas, more copper and steel — almost any commodity on the face of the earth.

And most recently, as I illustrated here one week ago, your dollars can buy many more shares in some of the best blue-chip companies of major foreign countries.

See why it makes so much sense to stash cash in U.S. dollars and keep them in a safe place … why it’s such a good idea to hold big cash positions in your investment portfolio … and why some of the most successful investments are extreme high-quality companies in safest-haven countries?

This is what my team and I have been advocating all along. And this is what we continue to advocate now — with increasing caution.

Stay faithful to this investment philosophy, and not only will it protect you from risks like those emanating from the Middle East and South Asia … it could help you build your wealth like never before.

Good luck and God bless!

Martin