In a blog posted to this site on April 27, 2008 ( scroll down about 5 pages and read it), I referenced a man called Avner Mandelman. Mr. Mandelman often writes in the Canadian national newspaper The Globe and Mail. In late April he was cautioning about the severe impact even marginally higher interest rates could have on the murky world of derivatives and credit swaps.

Now he is warning about the rapidly escalating situation in Iran. And sure enough, when I did a Google search on "mass graves Tehran" I found a story in the Asia Times online edition. Here is a snippet from that article…

This past weekend, a senior Iranian general, Mir-Faisal Bagherzadeh, said his country was digging 320,000 graves for American soldiers scheduled to fight in Iran. "In implementation of the Geneva Conventions, the necessary measures are being taken to provide for the burial of enemy soldiers. We have plans to dig 15,000 to 20,000 graves for each of the border provinces, or a total of 320,000," he said, pointing out that some of them would be mass graves, if necessary. This was "to reduce the suffering of the families of the fallen in any attack against, and prevent the repetition of the long and bitter experience of the Vietnam War".

These may sound like big words - similar to those barked by Saddam Hussein and his information minister Mohammad Said al-Sahhaf in 2003 - but they carry real impact on the psychology of American troops. Iraq - with its weak army and corrupted regime - was impossible to chew for the Americans. Nobody can imagine how difficult a war would be against 65 million Iranians, with a well-trained, well-armed military indoctrinated with Shi'ite Islam and a strong sense of purpose against the "great Satan".

Whether these graves are being dug or not, this is the kind of verbal exchange that cannot be ignored. Something is going to happen in Iran…and soon. I personally doubt it would be a US led attack. I do however think that it could be a brutal, hell, fire and brimstone attack led by Israel who for sure has the capability to carry out such an attack.

Now, any such attack cannot just happen for no good reason. There would have to be a provocation. One such provocation that I have written about in my weekly musings would be a blockade of the Strait of Hormuz which would crimp the supply of oil to the western world. The Strait is the world's second-busiest international water route, channeling 25% of the world's oil supplies on a daily basis. Over 75% of Japan's oil, for example, runs through Hormuz. According to Mustapha al-Sayyed, a Syrian oil expert, "if the Strait is closed, alternate routes [if available] would have to be used, and this will result in a loss of more than 20 million barrels per day in the international market." He added that he expected oil prices to reach "no less than US$500 a barrel".

As Mr. Mandelman notes in his recent column, the US has been buying oil even at these elevated levels to fully stock its Strategic Petroleum Reserve (which by the way is now nearly full to capacity). The other times it has done this, war has soon followed. I have to chuckle with amusement as the media points a finger at a moving target they like to call "the speculators" who have been responsible for pushing oil prices higher. Maybe there is an element of speculation at play, but the US Government is the real operator at work here. Something is afoot…..

So here we sit with a double edged sword staring at us. As I noted in a recent blog, inflation is a savage beast and other nations have already started raising rates to keep inflation at bay. The US is late to the party and has now signaled that it is at least done cutting rates. The first rate hike (whenever it may come) will send a shiver through the derivatives markets and by extension the equities markets. The second edge of the sword is the looming situation in Iran. An all out assault on Iran (whoever may initiate it) will cause havoc in equity markets.

So what to do? My advice is to keep a good portion of your money as liquid as possible. My advice is also to stay mostly in Canadian stocks. Canada has a solid economy, Canada has resources that the world needs, a solid currency and comparatively little exposure to nasty debt related meltdowns that could occur. Within Canada, allocate investment capital to gold and silver related investments that are large cap and liquid. If you are playing in the junior space, stay with only those companies that have a clear business plan, that are working on highly prospective properties and that have good management. Avoid those that are just exploring at the grass roots level with no solid plans. As for oil, the charts clearly show that we are in the final leg up of a 5 wave pattern. This final leg as it unfolds could be full of shock and awe. If playing with energy related equities be nimble and quick. Any attack on Iran will be swift and sure. Once the markets realize that the initiator of the attack (whoever it may be) has realized a quick success, oil prices will fall to complete the 5 wave pattern.

Batten the hatches. The seas could get very stormy, very soon. Market traders, get set to spring into action.