Is 2012′s Black Swan Taking Flight In The Middle East?

Every year, it seems, brings us at least one “black swan” event of the sort popularized by Nassim Nicholas Taleb in 2007. While we focus on the economy, the presidential election and Europe’s debt woes, is this year’s bird taking flight in the Middle East?

According to Taleb, black swans are highly improbable events that have a major impact. Despite the fact that they are surprising at the time, black swans seem foreseeable in hindsight. Nearly every year provides at least one good example. We had the financial meltdown and the collapse of Lehman Brothers in 2008. A year later came news that Greece was in far worse financial shape than it had let on. In 2010, there was the BP oil spill. Last year brought the Japanese nuclear accident and Standard & Poor’s decision to downgrade U.S. Treasury debt.

The Middle East has been a global disaster in the making for about as long as any of us can remember, but that alone is part of the problem. The very fact that year after year passes without the whole region going up in flames leads to a sort of complacency, the kind displayed by people who live near major geological faults or explosive volcanoes when there has been no earthquake or eruption for centuries. We know the worst-case scenario, but we assume it will not happen, at least not in our lifetimes.

The geopolitical seismographs are starting to register activity. It might subside, but it also might be the precursor to the Big One.

As a sign of how much the situation has already changed, consider these points. Egypt, long one of America’s key allies in the region, has been in political turmoil for a year, but it is not even close to the top of the list of our concerns. Lebanon, a traditional trouble spot, is all but forgotten, notwithstanding Hezbollah and its thousands of missiles pointed at Israel. The Palestinians are trying to reconcile their competing factions on the West Bank and in Gaza and to regroup for their drive for statehood – and we aren’t even talking about them. I need not even discuss Iraq, so diminished is its role. Not long ago, today’s developments in any one of these places developments would have dominated the news.

Instead, we are watching Syria fall into a civil war pitting strongman Bashar Assad against an amorphous opposition. In the short term, this development gives Israel less reason to worry about its northern neighbor, even as it weakens Iran and Hezbollah, both of which rely on Syria to help them project regional influence. At another time, we might even have seen this as a positive development, notwithstanding the suffering being inflicted on the Syrian population. At the moment, however, nothing coming out of Syria seems very positive.

This is because Israel and Iran appear to be steadily moving toward armed confrontation, with serious but unpredictable consequences for the rest of the world. Until recently the threat of this conflict seemed abstract, borne of the usual Middle Eastern bluster. It does not seem that way now.

Both Israel and the Iranian regime have reason to feel their existence is threatened. Israeli leaders almost certainly believe they have a duty to prevent Iran from obtaining nuclear weapons, particularly since Iran already has missiles that can reach the Jewish state. Israel has acted preemptively in the past to destroy nuclear facilities, in Iraq in 1981 and in Syria in 2007. There is little reason to doubt Israeli claims that they will move against Iran if they become convinced such a strike is the only way to stop an Iranian nuclear weapons program.

The Iranian leadership believes it is under siege both publicly, in the form of ever-tighter Western economic sanctions, and clandestinely, through a campaign of sabotage and assassination aimed at nuclear and military facilities and at the personnel who support them. We probably saw an Iranian response earlier this week with car bomb attacks aimed at Israeli embassy staff in India and the former Soviet republic of Georgia. Israel’s Prime Minister Benjamin Netanyahu alleged that the Iranians were also behind other unsuccessful and previously unreported attacks elsewhere in the world in recent months.

The United Nations’ nuclear watchdog, the International Atomic Energy Agency, reported three months ago that there is evidence that Iran has carried out tests “relevant to the development of a nuclear explosive device.” Just this month, inspectors seeking to confirm Iranian reassurances that its nuclear aims are peaceful were denied access to key facilities and staff. Meanwhile, Iran is also in the process of moving its uranium enrichment activities into mountain bunkers, apparently to protect them from possible air strikes.

Expert estimates of how long it would take Iran to assemble a nuclear weapon at this point, if it decided to do so, range from as little as six months to over a year.

Aside from Iran’s trading partners in Moscow and Beijing, the world’s nations largely agree that a nuclear Iran would be a very bad thing. Most countries also agree that the best solution is to apply heavy international pressure, in the form of strict sanctions, until Iran gives up its suspected nuclear aspirations and allows unfettered access to inspectors. The Iranians, however, have proven adept at circumventing and adjusting to sanctions over the years. The reluctance of some major trading partners, including India along with Russia and China, to forgo Iranian energy and other commercial benefits has aided them to no small degree.

An escalation of hostilities may not be far off. At a security forum this month, Israeli Defense Minister Ehud Barak warned, “Whoever says ‘later’ may find that later is too late.” He stressed that the movement of Iranian facilities into bunkers is a critical point, stating, “The dividing line may pass not where the Iranians decide to break out of the nonproliferation treaty and move toward a nuclear device or weapon, but at the place…that would make the physical strike impractical.” The BBC reported that American intelligence analysts believe Israel may strike Iran as early as April. The growing chaos in Syria, which limits Iran’s physical access to targets in Israel, probably makes a near-term strike on Tehran’s facilities look somewhat less risky from the Israeli perspective. Iranian leader Ayatollah Ali Khamenei, meanwhile, has said his country would not hesitate to retaliate against any attack.

The Iranian regime continues to insist that its nuclear program is peaceful, though this assertion does not convince anyone who does not consciously choose to believe it. Iran certainly should have learned by now, from the demise of non-nuclear dictatorships in Iraq and Libya and from the kid-glove treatment afforded nuclear-capable North Korea, that having a nuke in the basement is probably the best way to keep bombs from falling on the roof.

We are proceeding blithely into 2012 on the assumption that the big stories will continue to be the U.S. and global economies, the potential installation of new presidents in Washington, Moscow and Beijing, and Europe’s ongoing financial travails. All of these are big stories – big but predictable stories. Black swans, by definition, are unpredictable, and the consequences of an outright clash involving Iran and Israel or the West are impossible to know in advance.

But we can hear, amid the war talk in the Middle East, the sounds of rustling wings. It’s time to brace ourselves for our annual surprise.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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