PREVIEW LIVE： Brokenomics ｜ The Iran War
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Summary
In this episode of Brokonomics I talk about the Iranian strikes on Iran and the impact on the global financial markets, risk repricing and the role of the oil tanker disaster on the Persian Gulf. I also discuss the impact of the strike on the Iranian regime and how this impacts the financial markets and the rest of the world.
Transcript
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Hello and welcome to Brokonomics. Now, this one I am doing live and there is a reason for that.
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The reason is that I spent two weeks in Asia and I thought that I had more recorded episodes than
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I actually did and I came in this morning and found out that I didn't. So that's fine. I get
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to spend time with you lovely people and because it's a live, the chat is open should anyone wish
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to post a comment although because i didn't tell anyone that i was doing a live episode i don't
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think there is anyone in the chat i can i'm looking at the chat now and there's only one
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message and it says hello fans from me um to complete silence so anyway um if you do happen
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to watch these um the moment they come out then then you you can respond to it now the fact that
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i was in asia for those two weeks um gives me a sort of interesting anecdote to sort of start
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this one off you see because the flight that I was on um as it turned out and I did check this later
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uh was almost exactly over Tehran at the moment that the strikes began um I I flew out um sort of
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you know obviously several hours earlier on that and I know that I was over Tehran because
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we can see it on the in-flight map and also I could look out the window and um yeah it it later
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transpired when I did the maths that if I wasn't directly over Tehran at the time the missiles
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were flying I would have missed it by no more than about 20 to 30 minutes and I mean that just
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gives us a bit of pause for thought doesn't it because how differently we would have viewed the
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war if in the first few minutes we had lost one of our best and brightest the impact that that
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would have on us all I mean especially me um I'm just envisaging the plane getting clipped
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by some sort of incoming hypersonic missile and breaking apart and I would then would have been
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sort of flapping and flailing as it as it took about two and a half three minutes to tumble to
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the ground to land on the outskirts of Tehran wondering in that time what I was going to do
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with the rest of my life which would not be very long at all so that that's how close we came
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ladies and gentlemen that's how close we came that's worth thinking about but no so um my
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thoughts on the iran war now because i'm coming to this a couple of weeks late um i'm i'm not
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going to give you the standard sort of spiel that you probably heard 50 times already about who's
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gonna you know win the war and all that kind of stuff i i'm looking at this from a different
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perspective i'm looking at this from the point of view of risk repricing and i don't just mean
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insurance rates or anything like that what's really happening here you've got this sort of
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global um multi-agent um risk re-evaluation going on or based on incomplete information
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and that is everything from um the decisions that this state of iran is making the state of israel
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the us the shipping agents the energy markets the financial markets the voters in the various
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countries fascinatingly the the set of decisions that the gulf state has to make um the decisions
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that you know the the rest of the BRICS countries that europe has to make so i mean there's there's
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a considerable number of people that are going to be forced to re-evaluate on this um and and as
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well as that and they've each got their own they they're each seeing different risks and they're
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and they've all got different time horizons and they're all reacting at different speeds to this
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so what you've got is a system that was was previously in balance which is now
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and i don't think it's going to proceed linearly as as we go through this this is going to be
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threshold driven and the the early thresholds came early on with the closing of the straits
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of humus and i don't believe at this time we've lost a single tanker but if that were to happen
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um you know if if one oil tanker were to go down or you know god forbid three or five or something
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the knock-on effects for the decision making that the rest of the system has to make is is going to
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be enormous and i'm kind of reminded um to bring this back to a sort of financial angle of the
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George Soros idea of reflexivity now I know Soros is just the embodiment of evil these days and just
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spends his time trying to destroy the western world as fast as he possibly can but when he was
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in finance he was actually genuinely quite brilliant and the reflexivity model is something
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I've been trying to think about this through and that is not just that you know reality informs
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people's perception of events but your perception changes your behavior that then changes reality
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that then changes your perception and so on and so on it's it's it's a recurring loop so you know
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behavioral changes can come from the way of which the the risk of a set of events or the risk of
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pricing something is is considered as you go through it then of course we've got the whole
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dynamic of the asymmetric risk that the different actors are facing within all of this so iran has
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the ability to make these fairly low cost disruptions low cost in terms of its attack the
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the attacks of which it is receiving of course of significant cost to it the US can bear the cost
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of making expensive attacks but the cost to the system is what I really want to get into
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the destabilization the Gulf states are having to consider the fact that they have got very
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high cost exposure in all of this i mean not least from being able to ship just their just
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their oil which is existential for them because of course the it's it's not just a one-way oil
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trade it's it's it's a two-way oil for food technology um electronics tourism everything
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that keeps a desalination plants running it's it's as significant to them um as we talked about
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china and india how they decide to in russia how they decide to eat to play this as well um and
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then europe as well who at the moment are being largely passive and choosing not to involve but
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they've got a such a degraded energy system which was already running at the point of
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very close to insufficiency very much relying on you know last minute just-in-time deliveries
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the the start of the ukraine war was uh i mean you faced a mini energy crisis at that point
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so it just doesn't have any resilience at this point it's only been made up through
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us-based um liquid natural gas uh and and if the straits of hormuz stay shut for any length of
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time what will happen is is the us will simply start limiting energy exports and i don't see
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the solution that europe has other than to go crawling on its hands and knees to russia which
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completely undermines the geopolitical stance that they've adopted over the last well whatever
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it is four years at this point so we're in a we're in a flux in the system which favors people who
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can inject risk cheaply and that's iran um and perhaps to a lesser extent israel as well they
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don't bear this this this this whole burden of costs other than the fact that israeli support
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in the western world is declining significantly i looked at some numbers the other day
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and it split down israel support in the u.s by age group and amongst young people support for
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israel had literally halved now it wasn't that high to begin with i think it was something like
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40 but that's that's halved to just below 20 and even the oldest generations even though they're
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much more resilient because they've been raised on this their whole life even then it's turned
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from um something like 60 support to under 50 which is again uh significant for a state which
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requires strong western support um we have to consider the optionality as we go through this
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so some actors have high optionality um the u.s if it is willing to bear the
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reputational cost the cost of walking away have the ability to do that they can they can step
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away although it would be humiliating and it would also play into the loss of empire which
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they are likely to be faced with and we talk about that as we go through iran has lots of
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optionality um and and they are using that optionality at the moment to endure significant
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punishment in order to raise the costs of acting against them significantly um the options of
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people like europe are constrained but the optionality facing china and russia are also
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fascinating to what degree do they wish to lend assistance to what degree do they want to place
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pressure um on the us or israel um particularly with the upcoming conference that that trump
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will be doing to china and it's all starting to get quite reminiscent of the suiz crisis in 1956
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so in the suiz crisis the uk and france um obviously got into a dispute with the
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egyptian government at the time and tried intervention and what ultimately ended it
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was not the fact that the uk and france were unable to militarily achieve its objectives
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even though it proved difficult I mean ultimately what got them is that the rising global superpower
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the US in that post-war period was unwilling to bear the second order costs that came as a result
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of the Suez crisis and they placed pressure on the UK and France to basically withdraw and they did
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are we going to be looking at a similar situation where the rising the new rising global superpower
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China is going to exert influence on the US to say no we we are not willing to bear these costs
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and if you continue to put us in this situation we will we will punish you for it one way or
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another and again China has plenty of options there so you know some people are fully committed
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while other people you know they have some exit paths but but all of them are constrained
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risk is going to show up in a whole number of ways it's going to show up in pricing
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I mean insurance obviously the physical flow of the energy itself the narrative is going to be
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a huge effect especially on domestic populations in in Europe and US and and it's probably going
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to reprice policy costs over the next few decades so you know the the the hidden constraints that
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we have here is this is a coordination failure and you know most of the actors i'm going to be
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talking about here what they prefer is stability and they prefer continued trade but we're starting
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to realize that in this globalist system that cannot be offered and and this is this is a
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significant blow coming after the covid era which demonstrated that actually no you you cannot rely
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on a fully globalized system you cannot rely on a just-in-time delivery model you cannot run down
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your domestic energy and um you know strategic reserves or strategic industries of whatever it is
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and this is just going to be a you know a second nail in the coffin for that globalist system so
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i think what we've i think what we've got to start doing is
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not asking the straightforward questions which has been you know discussed endlessly on
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um you know a whole bunch of channels that you would have seen analysis that you would have seen
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on this stuff but we we got to ask a little bit more fundamentally what is the set of decisions
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and risk pricing that everybody involved in this conflict is is going to have to calculate
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but i mean let's start with um first of all what i think each side in this is trying to achieve
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because even answering that question has been problematic for everybody so starting with the
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U.S., I think they are trying to degrade Iran's ability to be a regional power, which is
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increasingly emerging as, because it is not a U.S. client state, it has strategic depth,
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it has a coherent and motivated population to take action. I mean, yes, I know that's
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been under question yes i know there's been protests within iran but this is this is sort
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of served as a galvanizing function for them so the us can degrade iran as a um as as a regional
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power well by default it is the regional power um and therefore it can exercise its will more
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clearly iran i think has different set of um choices ahead of it i think iran wants the long
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term inviability of um iran so israel has the long-term inviability of iran and for them
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the best outcome is probably going to be to instigate so much chaos that it effectively
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becomes a failed state over the next 30 years i think something similar to iraq where after the
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invasion of iraq they then spent the next 20 years um devolving into competing warlords
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and no strong centralized government i suspect that is what they are looking for which is a much
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broader and expansive goal than perhaps the u.s has um but of course if they can get the u.s to
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fight their war um then then why wouldn't you take that and it would effectively leave them
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as a much more dominant regional player than they are i think for iran what they're looking to do
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is i think they're trying to raise the cost of being a u.s ally in the region i think they they
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have they have decided that if they continue along the status quo they will get hit regularly
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because for whatever reason the influence that israel has on the u.s and the set of decisions
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if it can raise the costs of the war to the global level which has certainly been achieved
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at this point um i mean an additional factor for the u.s i should probably mention is they are no
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doubt concerned about the creeping influence of china in this with iran being a chinese ally i
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think i think that one is going to backfire spectacularly the gulf states they've got to
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consider um the least risk patron at this point perhaps Saudi Arabia has the potential to be a
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um the the dominant regional power but certainly none of the rest of them do
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and for whatever reason um Saudi has not really demonstrated the sort of military coherence that
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that might suggest that they're in that place so I think the Gulf states understand that they are
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client state but is the u.s able to provide the protection i mean the u.s has effectively been
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running for the last well since breton woods really it was since since since the mid 70s
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certainly the u.s has been running a protection racket in the gulf states they've they've basically
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well they started off and then this is the sort of formation of the petrodollars they went to
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the house of Saud and said we will guarantee your security you've got a lot of nice oil
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but you've got a population that would drag you into the streets and do unspeakable things to
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you if they could and you've got hostile you know warring Arab states around you and of course the
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Arabs do like to fight amongst themselves so we will provide security for you and in return you
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will sell your oil in dollars and only dollars and thus the birth of the petro system petrodollar
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system which was exactly what the u.s dollar needed after 1971 and it came off gold and the
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the value of the petrodollar system and i mean i've talked about it before a number of times
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on brokonomic but it can't be overstated um but that does rely on the protection rack and work
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protection racket working if the u.s is not able to um upkeep its side of the bargain
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which is the security in exchange for you will only sell in dollars
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it is rational for the gulf states to start to consider what other patronage options they have
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it doesn't have to be iran but it it could be some combination of the bricks as a whole
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Russia and China I mean Russia and China is a powerful combination because with that you get
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the military expertise of the Russians you get the the market of the Chinese in India
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you get the technical support of the Chinese at what point does it become
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viable for these Gulf states to seek their protection from BRICS as opposed to the US
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now bear in mind the u.s has already had a rather humiliating retreat from afghanistan
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and it has launched this this war without clear objectives presumably hoping for a short war
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to remind the region who's boss and it doesn't appear to be working out that way
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um the brick states um china russia perhaps to a lesser extent india and some of the rest of them
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um of course it's in their interests if the u.s um ceases to be a global power they would probably
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much prefer them to become a regional power and and that process is already underway you could
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already see the trump administration reprioritizing from being a global power to being to shoring up
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its own um theater of influence and thus increased actions in um south america um thus increasing
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concern about the way that western europe is driving itself off a cliff nevertheless it has
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its key clients in other parts of the world the middle east being a key one of those and you know
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taiwan perhaps being another one but if you can if you can break um u.s global um dominance
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which this war has the signs of being able to do then the world will move to a multi
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polar world and some people say we're already in there i don't think we are necessarily because
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china does not yet show any ability to project force it would probably be a more whole of bricks
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effort if they were to come to that um but that would give them considerable further leverage
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And then finally, Europe, they cannot maintain their energy situation without the Straits of Hormuz opening.
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And that is not because the Strait of Hormuz is primarily supplying Europe.
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Most of what goes through the Straits of Hormuz is going to be going towards Asia.
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a lot of it goes to China but it's very important for India and Japan as well the problem that
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Europe have got is that because it is a global energy market by raising the marginal cost of
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energy they're already strained to the point where their system is insufficiently holding
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on anyway domestic energy prices have been a huge issue in britain over the last uh well i mean
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since covid uh certainly since the beginning of the ukraine war it has been a um constant issue
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and what will happen if energy prices go up is it will simply cause the um rerouting of energy
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supplies from lower bidders to higher bidders and europe being relatively rich at the moment
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although for how much longer its paper money is is given that credence I don't know but think back
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to and this was a few years ago what was what ultimately was the issue in Sri Lanka which if
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you recall led to you know a changed government it led to the president's compound being broken
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open and his collection of nice cars being pushed into river um you know it led to basically in a
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sort of internal revolution and ultimately the cause for that is because Sri Lanka ran out of
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dollars meaning that it couldn't buy oil now I don't think we're necessarily at the point of
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dollars running out because the US can just print more whenever it damn well pleases
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but if the oil just literally isn't there to be bought it is going to get redirected towards the
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higher bidders now the people who are bidding more for that are going to bear the costs associated
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with that and the demand destruction that comes which then leads to i mean demand destruction is
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basically just being people deciding to use less because it's no longer in their economic sense in
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order to spend the energy but then further afield um how many developing nations are going to be
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effectively priced out which in turn then means their yield of agricultural goods or commodities
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or whatever it is that they produce is also going to be constrained which then feeds back into the
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western system as well so that's the broad overview of of what i'm going to be trying to look at