I’m probably on the record enough by now, but just in case: I’m avowedly not in the camp which believes the “Iran thing” (the “war,” the “special military operation,” or whatever you want to call it) has the potential to bring about a market apocalypse.
It might bring about the actual apocalypse (petroleum-saturated rain capable of burning human skin seems pretty ominous), but in that case the S&P will be of little import.
Setting aside an argument which says the cost asymmetry between the cheap drones and missiles Iran’s launching and the hugely expensive US munitions deployed to intercept them will eventually force Donald Trump to reconsider, the IRGC isn’t capable of sustaining this war in perpetuity. They’re being bombed around the clock by two vastly superior militaries and they have no air defenses to speak of. It’s hopeless.
But Trump can’t sustain the fight either, or at least not the way it’s being fought currently. If he tries, he’ll end up with $5 gas nationwide and an uptick in US rates volatility which’ll eventually bleed the sacred stock market cow.
As the figure shows, last week was two weeks in a row of “stocks down, bonds down,” and the most recent batch of (admittedly stale) spending indicators suggests the US consumer’s tired.
A negative wealth effect impulse on top of a huge increase in gas prices is a pretty daunting proposition, particularly when household moods are as bad as they’ve been in half a century.
For all the bravado, Trump’s recent social media messages indicate he understands we’re at an inflection point: There isn’t much left to bomb in Iran without going the scorched-earth route, so it’s either take the gloves off and target the oil sector and civilian infrastructure or figure an off ramp.
The are two boxes Trump hasn’t checked: The uranium’s still missing and the regime’s still in place. The empty squares beside those objectives will just have to stay unticked. A SEAL mission to secure the uranium’s lunacy and anyway, didn’t Trump “obliterate” the nuclear program last year with his “midnight hammer”?
As to the regime, there’s no organized resistance and no opposition figure around whom those opposed to the regime might rally. Even if there were both, how would they fight? You can send the Kurds on a suicide mission — and they’ll probably go God bless ’em — but this isn’t Afghanistan and the IRGC isn’t the Taliban. You can’t just supply a few local warlords with small arms and tell them to ride their horses into the capital.
To oust that regime, Trump needed an all-at-once, mass popular uprising that overwhelmed the security forces’ capacity to respond before the IRGC could intervene. Or he needed the IRGC itself to stage a palace coup. That’s why I repeatedly argued that if Trump was determined to get a Delcy outcome, he should’ve refrained from acting until he had IRGC buy-in.
Anyway, there’s a narrative making the rounds that says the hawkish read-across from the oil surge for monetary policy could mean central banks tightening (or at least not easing) into a nascent demand crunch, which could in turn tip more dominoes in private credit, resulting in a 2008-style market cataclysm.
That narrative was attributed late last week to BofA’s Michael Hartnett who actually intimated that isn’t likely. (This is when I’m compelled to remind readers that the financial media, mainstream and otherwise, is just like any other business in that it exists first and foremost to turn a profit. If there’s a way to work “2008” into a headline, they’re gonna do it. Any nuance will be left to the body of the article which they know you won’t read.)
“We suggest fading oil >$100/bbl, DXY >100, 30-year UST yield >5%, SPX <6.6k,” Hartnett said, in the same note that contained the 2008 analogue everyone parroted for clicks on Friday. Those levels, he wrote, are likely “to provoke a policy response that short-circuits Main Street risks.” “Trump can’t allow his approval ratings to fall much further,” Hartnett said, flatly.
Weighing in on the aggressive repricing of US monetary policy expectations, Nomura’s Charlie McElligott said that in his view, “very few” clients “actually believe” the Fed will hike this year. “[Q]uite simply, we’re gonna have a global growth problem if crude is sitting at $150/bbl for three months, particularly with current credit consternation.”
Ah, the ghost of the Bundesbank did make a cameo last week. I saw a headline which I failed.to click on suggesting that the ECB would raise interest rates in response to higher oil prices.
The fellow geezers here may fondly remember how the Bundesbank, which only had an inflation mandate, always preferred to raise interest rates in response to a surge in energy prices.
Now they are only a part of the ECB so I guess their new role is to publicly whine to and grouse.
So $150 a bbl oil lowers GDP, which could then necessitate rate cuts, right into the teeth of already rising prices. Would that be a proper 1970s stagflation scenario then?
At some point, some third party will need to step-in and offer to serve as some sort of intermediary between Iran and the U.S. (For some reason Macron of France comes to mind.) The initial goal would be simply to de-escalate the situation and stop the bombings in exchange for some passage through the Strait of Hormuz (obviously). The problem is our Fearless Leader has crossed and frustrated nearly all of our traditional allies to the point that no one wants to volunteer for that role, nor do they want to risk irritating Iran’s (still) existing leadership. If it happens, Trump had better seize the opportunity, as it may be his only feasible off-ramp for some time. Sending in the Marines will accomplish nothing other than endangering their lives, and further complicating (and prolonging) the conflict. (Let’s hope that is merely a bluff.)
This still comes down to Iran’s openness to negotiation. Why would they deal without ironclad reassurances that a ceasefire will be honored, not just now but into the future? How can they trust this administration or Bibi given how many times we’ve bombed them while negotiating? Can the Iranians deal without losing face with their public if it means forgoing some sort of revenge for the sizable loses they’ve suffered?
Having foolishly (to be polite) started this thing, I don’t see how the U.S. can now leave those two boxes unchecked without reducing our collective safety by an order of magnitude. Leaving a further radicalized regime with their enriched uranium drastically increases the chances many many of us die in the fallout of a dirty bomb.
It’s not going to be easy to decock this baby when it’s being held by a delusional narcissist without getting it out of his hand first.
At this point the military targets in Iran that matter are 1) missiles, drones, mines, speedboats manned and unmanned plus their launchers and guidance, 2) the IRGC leadership, and 3) the IRGC and Basij forces controlling the population. I don’t think the US has said anything quantifiable about its progress in destroying #1, it hasn’t been able to keep up the early hit rate on #2, and despite some reports of strikes on checkpoints and bank data centers there’s isn’t much known about #3.
I don’t think it really matters what other military installations or equipment gets hit; none of it is of any use against the US and Israel anyway. Who cares if Iran’s fleet of F14s are hit; they were as relevant to the war as Iran’s fleet of soft-serve ice cream machines.
Absent very major progress on #1, I’d guess #2 will be able to keep up their side of the war while #3 supports the home front.
If the US and Israel change the scope of their air war, for example by destroying Iran’s oil, water, power, or food infrastructure, that could change things. Maybe not in a good way, since Iran seems still quite able to hit Gulf infrastructure, and may become more able depending on the interceptor supply.
On the US side, I think Trump is more than ready to declare victory and withdraw, but he cannot, so long as the SoH remains closed.
He could probably bluster away his failure to eliminate Iran’s nuclear and missile programs and his failure to do anything much to the regime besides transition power from Khameni to Khameni.
But oil, that’s the barbed hook sunk deep in his lip, that he cannot throw so long as the IRGC keep their line taut, no matter how he thrashes and rants and threatens.
We investors are used to the game of guessing what Trump will and won’t do and when he’ll gobble the taco. We’re not used to the game of guessing what the IRGC will or won’t do and, at least in my sketchy memory of Iranian history post-Shah, I don’t think they have shown much taste for Mexican food.
All that said, I think that if allowed the time, the US military will be able to degrade Iran’s SoH-relevant military ability enough to run escorted convoys, and that if asked nicely – which Trump is incapable of doing, but the Gulf states can – other countries will contribute ships to supplement the US destroyers. Convoys do not allow the same throughput as free sailing, but with the East-West pipeline and Faraijah (sp), it’ll probably be close enough to “normal” volumes.
Will Trump stick it out?