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The Gambler
Iran on Monday branded Donald Trump a "gambler" for weekend strikes on the country's nuclear program
The market seems very confident the Hormuz Strait will be unaffected. Oil barely up (he grumbles). Closing the Strait is seen as Iran’s last-resort, we’re-all-going-down-together option. So is the market therefore confident the regime will not be pushed to brink of change?
They can’t do anything, John. I mean, I understand the temptation to go in for these scary-sounding narratives, but take it from someone who was a “consultant” for a guy who made millions peddling those sorts of narratives: They’re all Baghdad Bob-style bullsh-t when it comes to rickety regimes like Russia and Iran and even China, frankly.
When push comes to shove, they’re impotent. They’re just tin-pot dictatorships. Even if Iran mines the Strait, how long do you think that’s really going to last? The US Navy will de-mine it in a ~month, and that’ll be that. Plus, the US doesn’t need foreign oil. Do you really think the US is going to let the Iranian Navy permanently close off the world’s most important oil chokepoint? That’s a joke. Trump will just say, “Listen, we’re going to open up that shipping lane, and either you’ll get out of the way or we’ll kill you.”
And to your comment below about China, what do you mean “rushes to Iran’s defense”? Where’s the PLA? Bullying a fishing vessel in the South China Sea somewhere probably.
I’m sorry, but the fact is: These regimes are all bark and no bite.
“The US Navy will de-mine it in a ~month, and that’ll be that.”
Elite and well trained teams, ready to be called to service.
https://en.m.wikipedia.org/wiki/Explosive_ordnance_disposal_(United_States_Navy)
De-mining is slow and hazardous, and the ships and personnel are fat targets, unless enemy antiship missiles and drones have been suppressed.
Look how “effectively” we quelled the Houthis. Limited success at a cost of severely depleting our stockpiles of ship based anti-missile armaments. We were using $2.3 million missiles to repel $5000 drones.
It’s worse when it comes to ship to shore missiles. They cannot simply be churned out like SCUDs. More worrisome is that we are only able to produce one or two of those per month. As one military guy noted, the latest missiles are pretty much akin to a fighter jet rather than a simple rocket.
Our advanced weaponry cupboard is getting pretty bare which is why I think it is foolhardy to blithely assume the US will have a cakewalk when it comes to China.
Ok, guys. Well then burn premium buying SPX puts waitin’ on the World War III crash, and buy some crude futures while you’re at it.
I mean, the thesis implicit in what you’re saying is tradable. So go trade it.
What I’m telling you, though, is that you have to strike a balance between acknowledging the perils of US military hubris and accepting the fact (because that what it is) that Russia, Iran and even China aren’t in any sort of position to challenge for the global hegemon role.
I mean Jesus Christ guys, get real. The rial’s worthless. Russia’s economic “resilience” is entirely attributable to the war footing, and as I reminded everyone over the weekend, the Russian military mounted their initial assault on Kyiv not from Russia, but from Belarus. That’s just 150 miles! Putin couldn’t capture a city that was just 150 miles away. And China’s so “confident” in the yuan that their capital account’s still closed and the currency’s soft-pegged to the dollar.
I love a good geopolitical “shift” story, really I do. I tell them here all day, every day. But it’s important not to get so lost in those narratives that we lose track of the reality. And the reality right now is that Israel just ran over Hezbollah and Iran like they weren’t even there. The read-across from that is pretty straightforward: These “challengers” aren’t ready. Really they aren’t.
Honestly, mining the strait is so 1940’s. What they should do instead is take a page out of the Ukrainian playbook. “We’re not going to mine the strait, were going to strike your tanker with a submarine drone when you least expect it.” That’s how you get around technological and weapons superiority. It would also create a very lucrative escort business opportunity for anyone who had the capital and drone detection capabilities.
I think that, if Iran’s current regime gets into a screw-it-let’s-blow-it-all-up state, maybe after Khamenei’s third replacement is killed, it could effectively block the Strait. Not to warships, but to tankers whose maritime insurers are ready to pull coverage if the risk of ship loss ticks over 0.01% per sailing (or whatever, I made that number up). Maybe not with mines, as I assume the US is watching Iran’s naval bases and activity and can quickly target ships and subs sent on mine-laying missions. But if the Houthis could close up the Red Sea with Iran’s second-hand weapons, why can’t Iran do the same? The US and other response will be multiples greater, maybe Iranian forces are less resilient than the Houthis, so maybe the impedance to navigation lasts weeks or a month rather than six+ months. Still plenty of time for oil to respond.
Yeah, but John, even with your “6+ months” caveat I think you’re assuming for these people the capacity to do something they can’t do: Namely, keep these shipping lanes closed to commercial traffic forever. I know you didn’t say “forever,” but for regular people trying to navigate this (no pun intended) I don’t think it’s especially relevant whether crude jumps to, whatever, $105 for a couple of days or even for a couple of weeks. Can Iran “close” the Strait for a while? Sure. Maybe. But it’s one thing to make it dangerous intermittently (“Argh, pirates!”) and to be “resilient” to planes and missiles. But if we get into a situation where Iran or the Houthis say “These lanes are closed permanently,” they’ll end up in an actual war with the US Navy and probably with the Royal Navy too. If your contention is that the IRGC and the Houthis are capable of conquering the US and British navies, then I’ll let you go ahead and run with that. And I’ll take the other side if you want to put some money on it. Point is: Whatever happens tomorrow or next week or next month, there’s no world in which the IRGC and the Houthis can sustain a blockade of those two waterways indefinitely. So I just don’t know why anyone other than people whose job it is to trade crude or hedge near-term swings in crude, should care from a markets perspective.
Shorting the S&P500 is a fool’s errand, thanks to the massive and relentless bid from share buybacks. Which, as you’ve noted many times, helps to suppress volatility on the downside which draws in buying from vol-driven models. Those are the two largest sources of inflows. It’s a seemingly limitless source of buying which will run you right over.
But your black & white choice ignores the benefit from reducing US holdings as well as buying more of those lovely doorstops in the last year.
On another note, in my youth I hated central banks which restricted prop traders from shorting their currencies. But now, I don’t see how opening up the capital account in China would benefit anyone but foreign speculators.
“But your black & white choice ignores the benefit from reducing US holdings as well as buying more of those lovely doorstops in the last year.”
Not at all. Gold’s out there for you to buy. It was out there last year too. Go buy you some gold.
Done.
No, definitely not thinking Iran can impede the Strait for six months. More thinking a few week/one month event, more backlog for defense names, a chance to see something other than red in energy names, Trump pays whatever MAGA price there is for getting into a genuine ME war, and China gets more real-world feedback on the performance of its weapons vs the USN, all data for the real blockade event to come in the Taiwan Strait, if we even call it that anymore. If Iran plays that last card, that is. Markets seem pretty sanguine.
Trump seems interested in following in W.’s footsteps. I imagine Netanyahu’s “intelligence” is now driving Trump’s decision making, he loves listening to foreign intelligence. So we get drawn into another protracted regime change initiative, another nation building experiment. While we’re watching terrorist bombs blow up soldiers every few days in Iran, we probably won’t even notice how China just invaded Taiwan.
I wonder if Xi is weighing how many US carrier groups need to be tied up in the ME to create a propitious moment on Taiwan? Three? Four?
Or hey you know what, we get involved in two wars at the same time? What’s the worst that could happen, we lose both and add trillions of dollars in salt to the wound?
The market seems very confident the Hormuz Strait will be unaffected. Oil barely up (he grumbles). Closing the Strait is seen as Iran’s last-resort, we’re-all-going-down-together option. So is the market therefore confident the regime will not be pushed to brink of change?
Meanwhile, China rushes to Iran’s defense with harsh condemnation of the US strikes as “bad precedent”, and Iran swears “proportional response” to the US and “total defeat” to Israel.
Sorry, not sure why the repeated post 🙁
I have been somewhat surprised that Iran, China, Russia and others don’t look at this more from the economic lens response. Not going to challenge the US and Israel militarily, but more oil-style threats to get the price up, combined with expected tariff impacts, combined with some language on cutting off rare earths again and forcing either TACOing or a strong tariff response, COULD work.
Trump isn’t going to like mining the Strait but he likes the idea of stocks going down or the Fed being in a position to cut even less.
Feels like we were holding off until we dropped the bunker busters. Now we are in it. Any Iranian retaliation now, will probably be met by the US swiftly, probably involving some overkill, because, what the hell, it’s on !
Trump called on “everyone” NOT to rise the price of oil in the wake of the US attack on Iran.
In a post on his social media site Truth Social, he warned rising oil prices would play into the hands of “the enemy.”
===============================================
EVERYONE, KEEP OIL PRICES DOWN. I’M WATCHING!
YOU’RE PLAYING RIGHT INTO THE HANDS OF THE
ENEMY. DON’T DO IT!
He then followed up with another post addressed to the U.S. Department of Energy, encouraging it to “drill, baby, drill” and saying, “I mean now!”
Thank you for your attention to this matter.
Exactly.
As of 2016, $1usd was equivalent to 30,123 Iranian rials. Currently, that exchange rate is 1:42,269. In addition, the gdp per capita (in equivalent usd) peaked in 2012 at $8,100. Currently, it stands at about $5,300.
It seems that the Iranians were willing to forgo improvements in their living standards so long as they thought they were sacrificing for a realistic chance to eradicate Israel (The oppressive police state also helped the Iranians follow along with that). However, now that there is no longer even a far-fetched chance that Iran can eradicate Israel; it is hard to believe that this country of 92 million (who is not particularly well liked by any of its ME neighboring countries) will agree to sacrifice even more than they already have, in order to try to rebuild toward the (no longer plausible) goal of eradicating Israel.
Even if the Iranian (men) still believe the 72 part of the myth.
Well hot damn, it sounds like the bearded ones in Qom may be reading and taking heed from our Dear Leader’s writings and comments.