1 00:00:00,080 --> 00:00:03,400 If you've been gauging the severity of the war in Iran by 2 00:00:03,400 --> 00:00:07,560 just looking at the S&P 500, you'd be forgiven for thinking 3 00:00:07,560 --> 00:00:11,520 that the whole thing is just a minor administrative hurdle, the 4 00:00:11,520 --> 00:00:14,880 kind that clears up after a weekend of strongly worded 5 00:00:14,880 --> 00:00:17,600 tweets. Equity investors, it would 6 00:00:17,600 --> 00:00:21,760 appear, have decided that a regional conflict might just be 7 00:00:21,760 --> 00:00:26,760 a by the dip opportunity. dot com finally broke on Thursday 8 00:00:26,920 --> 00:00:30,680 when stocks had their worst day since the conflict began with 9 00:00:30,680 --> 00:00:35,560 the S&P 500 sliding to a six month low and the tech heavy 10 00:00:35,560 --> 00:00:40,320 NASDAQ officially crossing into a technical correction, meaning 11 00:00:40,320 --> 00:00:43,040 that it's more than 10% below it's high. 12 00:00:43,480 --> 00:00:47,360 The mood on the bond and commodity desks remains grim. 13 00:00:47,680 --> 00:00:51,640 Analysts there are staring at their screens in a state of what 14 00:00:51,640 --> 00:00:55,560 1 commentator called alarming cognitive dissonance. 15 00:00:56,040 --> 00:00:59,760 In the bond market, the term premium, effectively the 16 00:00:59,760 --> 00:01:03,600 insurance premium investors charge for holding long term 17 00:01:03,600 --> 00:01:07,400 debt, is surging. Robert Armstrong noted this week 18 00:01:07,560 --> 00:01:11,040 that while 10 year interest rates have gone up, break even 19 00:01:11,040 --> 00:01:13,480 inflation has stayed relatively flat. 20 00:01:13,760 --> 00:01:17,080 This suggests that investors aren't just worried about 21 00:01:17,080 --> 00:01:20,680 inflation, they're worried that in a world of supply shocks, 22 00:01:20,680 --> 00:01:24,120 bonds no longer act as a good hedge for stocks. 23 00:01:24,280 --> 00:01:26,960 They simply both fall at the same time. 24 00:01:27,400 --> 00:01:33,120 In the UK, 30 year gilt yields have climbed to 5 1/2% as the 25 00:01:33,120 --> 00:01:37,520 Bank of England faces a central bankers nightmare, an energy 26 00:01:37,520 --> 00:01:40,960 shock that raises inflation while killing growth. 27 00:01:41,280 --> 00:01:45,440 This divergent is being driven by a new Wall Street obsession, 28 00:01:45,640 --> 00:01:49,400 the Trump Pressure Index. Developed by Deutsche Bank's 29 00:01:49,400 --> 00:01:53,720 head of Cross Asset Strategy, the index is made-up of the one 30 00:01:53,720 --> 00:01:57,440 month change in Trump's approval ratings, one year inflation 31 00:01:57,440 --> 00:02:02,280 expectations, the performance of the S&P 500 and U.S. 32 00:02:02,280 --> 00:02:05,640 Treasury yields. The idea is that these are the 33 00:02:05,640 --> 00:02:08,160 things that Trump cares the most about. 34 00:02:08,360 --> 00:02:11,200 Sorry Eric, but you just didn't make the list. 35 00:02:11,680 --> 00:02:15,640 The higher the index goes, the more pressure Trump is under to 36 00:02:15,640 --> 00:02:20,120 make a change to his strategy. In Iran, traders are using this 37 00:02:20,280 --> 00:02:23,480 to predict when the administration will experience 38 00:02:23,480 --> 00:02:26,440 what Robert Armstrong calls a Taco moment. 39 00:02:26,720 --> 00:02:30,680 The acronym, coined about a year ago, stands for Trump Always 40 00:02:30,680 --> 00:02:34,000 Chickens Out. We saw this play out in real 41 00:02:34,000 --> 00:02:37,280 time on Thursday. Just 11 minutes after the 42 00:02:37,280 --> 00:02:41,600 closing bell, the president posted a 10 day extension to his 43 00:02:41,720 --> 00:02:45,440 peace deadline, pausing his threats to destroy Iranian 44 00:02:45,440 --> 00:02:50,640 energy plants until April 6th. Now we have to ask ourselves, do 45 00:02:50,640 --> 00:02:53,880 stock traders actually believe these announcements? 46 00:02:54,200 --> 00:02:57,880 A few weeks ago, the president announced that the war was very 47 00:02:57,880 --> 00:03:02,600 complete, pretty much causing stocks to rise and oil to fall. 48 00:03:02,800 --> 00:03:06,680 Those moves reverse themselves later as events in the Middle 49 00:03:06,680 --> 00:03:09,960 East dragged on. Earlier this week, Trump 50 00:03:09,960 --> 00:03:13,760 announced that the US and Iran had held very good and 51 00:03:13,760 --> 00:03:18,720 productive conversations about ending war, once again causing 52 00:03:18,720 --> 00:03:22,520 stocks to rise and oil to fall, even though Iranian leaders 53 00:03:22,520 --> 00:03:25,640 quickly came out and denied having any talks. 54 00:03:25,920 --> 00:03:29,360 I'm not sure the traders actually believe these peace 55 00:03:29,360 --> 00:03:33,200 announcements, but they possibly see the announcements as a 56 00:03:33,200 --> 00:03:36,320 signal that the president's resolve is weakening. 57 00:03:36,560 --> 00:03:39,440 They aren't buying the peace so much as they're buying the 58 00:03:39,440 --> 00:03:43,280 capitulation. But possible problem with that 59 00:03:43,440 --> 00:03:48,160 is that you can't necessarily tackle out of an actual war as 60 00:03:48,160 --> 00:03:52,240 easily as you can a trade war. Unlike a trade dispute, which is 61 00:03:52,240 --> 00:03:56,120 a matter of administrative ink, the Strait of Homeowners is 62 00:03:56,120 --> 00:03:59,880 currently governed by mines and broken infrastructure. 63 00:04:00,320 --> 00:04:04,520 Even if a ceasefire was signed tomorrow, oil wells can't just 64 00:04:04,520 --> 00:04:06,680 be turned back on like a kitchen tap. 65 00:04:06,920 --> 00:04:10,400 It takes weeks to bring them back online without causing 66 00:04:10,400 --> 00:04:13,920 permanent damage. But even if Trump does blink, 67 00:04:14,080 --> 00:04:18,000 negotiating a deal assumes that there's a credible leader on the 68 00:04:18,000 --> 00:04:21,920 other side of the table, and the war has left Iran's command and 69 00:04:21,920 --> 00:04:26,560 control in total disarray. As the saying goes, it takes 2 70 00:04:26,560 --> 00:04:29,280 to tackle. Or at least I think that is what 71 00:04:29,280 --> 00:04:32,880 the saying is. Senior officials in Iran are 72 00:04:32,880 --> 00:04:36,160 reportedly underground and avoiding all electronic 73 00:04:36,160 --> 00:04:40,000 communications for fear of targeted assassinations. 74 00:04:40,200 --> 00:04:44,320 It's not clear if any single diplomat in Tehran actually 75 00:04:44,320 --> 00:04:48,280 speaks for the Revolutionary Guards, the people who actually 76 00:04:48,280 --> 00:04:50,160 have their fingers on the buttons. 77 00:04:50,400 --> 00:04:53,920 A formal agreement signed in a safe house may have little 78 00:04:53,920 --> 00:04:57,880 effect on a field commander at a remote missile side who's either 79 00:04:57,880 --> 00:05:01,520 unable to receive orders or probably doesn't respect the 80 00:05:01,520 --> 00:05:03,760 authority of the person who sent them. 81 00:05:04,200 --> 00:05:08,160 Today we're going to look at why this crisis is about much more 82 00:05:08,280 --> 00:05:11,840 than just the price of Brent crude and how the global economy 83 00:05:11,840 --> 00:05:16,120 may be approaching a supply Cliff that no true social post 84 00:05:16,120 --> 00:05:18,560 can fix. We'll look at the single points 85 00:05:18,560 --> 00:05:23,560 of failure for global industry commodities like helium, LNG, 86 00:05:23,600 --> 00:05:28,120 aluminium and fertilizer that have no easy alternative routes. 87 00:05:28,280 --> 00:05:32,200 We'll also discuss the winners and losers of this new reality, 88 00:05:32,360 --> 00:05:35,640 and why the physical damage to the region's infrastructure 89 00:05:35,800 --> 00:05:39,080 means that we'll likely be living with the fallout of this 90 00:05:39,080 --> 00:05:41,600 war long after the shooting stops. 91 00:05:41,880 --> 00:05:45,120 Now, while much of the general news coverage is quite rightly 92 00:05:45,120 --> 00:05:48,600 focused on the military conflict and the human cost of the war, 93 00:05:48,840 --> 00:05:52,240 the financial headlines have focused almost exclusively on 94 00:05:52,240 --> 00:05:54,840 the price of oil. And this is understandable 95 00:05:54,840 --> 00:05:57,760 because it's the source of the region's immense wealth. 96 00:05:58,040 --> 00:06:01,400 But if you're only watching the price price of a barrel of Brent 97 00:06:01,400 --> 00:06:06,000 crude, which hit $110 this morning, you're likely missing 98 00:06:06,000 --> 00:06:09,640 the real story. Oil, for all of its importance, 99 00:06:09,640 --> 00:06:12,280 is a relatively fungible commodity. 100 00:06:12,520 --> 00:06:16,080 If a shipment is blocked in the Gulf, you can eventually find 101 00:06:16,080 --> 00:06:20,120 another barrel in West TX, Guyana, or the North Sea, 102 00:06:20,320 --> 00:06:22,440 provided you're willing to pay up for it. 103 00:06:22,760 --> 00:06:26,600 The real crisis is to be found in commodities that are much 104 00:06:26,600 --> 00:06:30,040 harder to replace. According to ship tracking data, 105 00:06:30,320 --> 00:06:34,160 we're currently approaching a Cliff edge as the final LNG 106 00:06:34,160 --> 00:06:38,040 tankers that loaded in the Gulf before the blockade began are 107 00:06:38,040 --> 00:06:41,200 due to reach their destinations in the next few days. 108 00:06:41,400 --> 00:06:45,200 When snow ships are unloaded, the flow of these commodities 109 00:06:45,240 --> 00:06:49,240 essentially stops. Qatar produces 1/5 of the 110 00:06:49,240 --> 00:06:53,240 world's liquefied natural gas and nearly all of its exports 111 00:06:53,240 --> 00:06:56,480 have been halted by the closure of the Strait of Hormuz. 112 00:06:56,960 --> 00:07:01,920 Unlike oil, LNG requires massive specialized liquification plans 113 00:07:02,120 --> 00:07:04,760 to turn gas into liquid for transport. 114 00:07:05,200 --> 00:07:09,880 The Raz Lafan facility in Qatar has already suffered enormous 115 00:07:09,880 --> 00:07:12,160 damage from Iranian missile strikes. 116 00:07:12,440 --> 00:07:16,760 The Qatari energy minister has warned that 17% of their 117 00:07:16,760 --> 00:07:21,520 capacity will be out of service for three to five years, forcing 118 00:07:21,520 --> 00:07:25,160 them to declare force majeure on long term contracts. 119 00:07:25,400 --> 00:07:29,760 This is a hole in the the global energy supply that no amount of 120 00:07:29,760 --> 00:07:33,760 diplomatic pressure can fail. Then there's helium. 121 00:07:33,960 --> 00:07:38,600 Around 33% of global seaborne helium passes through the Strait 122 00:07:38,600 --> 00:07:41,800 of Hormuz. Helium is a non renewable 123 00:07:41,800 --> 00:07:46,080 byproduct of natural gas, and it's essential for cooling the 124 00:07:46,080 --> 00:07:49,480 Super magnets used in manufacturing semiconductor 125 00:07:49,480 --> 00:07:52,400 chips. There's no synthetic substitute, 126 00:07:52,600 --> 00:07:56,480 and for high tech manufacturing hubs in Asia and the US, there's 127 00:07:56,480 --> 00:07:59,200 no easy way to reroute the supply. 128 00:07:59,640 --> 00:08:04,200 We also have to consider fertilizer and aluminium. 1/3 of 129 00:08:04,200 --> 00:08:07,520 the world's seaborne fertilizer trade passes through the 130 00:08:07,520 --> 00:08:11,360 straight, along with 1/4 of the world's seaborne aluminium. 131 00:08:11,720 --> 00:08:15,640 Since the US and Israel launched their strikes, including a fresh 132 00:08:15,640 --> 00:08:19,440 wave of strikes on Tehran this morning, the price of nitrogen 133 00:08:19,440 --> 00:08:21,600 based fertilizer has skyrocketed. 134 00:08:21,840 --> 00:08:25,600 This happened right as farmers in the Northern Hemisphere are 135 00:08:25,600 --> 00:08:28,960 heading into springtime when they fertilize their fields. 136 00:08:29,120 --> 00:08:32,400 This is a lurking threat to food security. 137 00:08:32,640 --> 00:08:37,280 As UAE Minister Sultan Al Jabaar put it this week, Iran holds 138 00:08:37,280 --> 00:08:41,919 Hormuz hostage and every nation pays the ransom at the grocery 139 00:08:41,919 --> 00:08:44,640 store. If farmers in Asia and Africa 140 00:08:44,760 --> 00:08:48,480 can't fertilize their crops this spring, the World Food Program 141 00:08:48,480 --> 00:08:53,600 warns that we could see record levels of acute hunger by 2027. 142 00:08:54,320 --> 00:08:58,120 These are the single points of failure in our modern supply 143 00:08:58,120 --> 00:09:00,400 chain. The optimism that we see in the 144 00:09:00,400 --> 00:09:04,240 stock market relies on the idea that these are temporary 145 00:09:04,240 --> 00:09:06,800 hitches. But with Iran now asserting 146 00:09:06,800 --> 00:09:10,440 sovereignty over the straight and reportedly demanding a 147 00:09:10,440 --> 00:09:15,360 $2,000,000 fee for every vessel that wants to pass, the physical 148 00:09:15,360 --> 00:09:19,680 reality suggests that we're moving into an era of scarcity 149 00:09:19,800 --> 00:09:22,080 that a simple ceasefire won't fix. 150 00:09:22,640 --> 00:09:26,560 Even if a breakthrough is reached by Trump's new April 6 151 00:09:26,560 --> 00:09:30,280 deadline, the immediate relief rally will likely see in the 152 00:09:30,280 --> 00:09:34,240 stock market will be at odds with the reality on the water. 153 00:09:34,520 --> 00:09:38,720 To understand why, we have to look at 3 specific bottlenecks 154 00:09:38,880 --> 00:09:42,120 that a peace treaty cannot simply wish away. 155 00:09:42,400 --> 00:09:45,560 First, there's the problem of the shut in wells. 156 00:09:45,840 --> 00:09:49,520 Because the Strait of Homers has essentially been blocked for a 157 00:09:49,520 --> 00:09:53,920 month, Gulf producers were forced to stop as their storage 158 00:09:53,920 --> 00:09:57,600 tanks hit their limits. This is a much bigger problem 159 00:09:57,720 --> 00:09:59,760 than just pausing a production line. 160 00:09:59,960 --> 00:10:03,600 When you stop the flow of an oil well, the environment inside 161 00:10:03,600 --> 00:10:07,520 that well changes immediately. Without the constant heat and 162 00:10:07,520 --> 00:10:11,040 the movement of flowing oil, the crude starts to settle and 163 00:10:11,040 --> 00:10:13,800 separate. It can become waxy and thick, 164 00:10:14,000 --> 00:10:17,680 physically clogging the tiny pores in the rock that the oil 165 00:10:17,680 --> 00:10:21,520 needs to travel through. In some cases, the surrounding 166 00:10:21,520 --> 00:10:25,520 groundwater can even seep into the oil layers, which can 167 00:10:25,520 --> 00:10:28,280 permanently drown a well's productivity. 168 00:10:28,600 --> 00:10:32,080 To make matters worse, many of these wells will have been 169 00:10:32,080 --> 00:10:36,280 closed using heavy mud or cement plugs, which are needed to keep 170 00:10:36,280 --> 00:10:39,840 them safe during the fighting. Those plugs will have to be 171 00:10:39,840 --> 00:10:44,000 painstakingly drilled out before any oil can move again. 172 00:10:44,400 --> 00:10:47,480 If you try and force the pressure back too quickly, you 173 00:10:47,480 --> 00:10:51,240 risk cracking the underground formation and ruining the field 174 00:10:51,240 --> 00:10:54,200 forever. It's a delegate multi month 175 00:10:54,200 --> 00:10:57,720 restart process that doesn't just happen overnight. 176 00:10:58,160 --> 00:11:01,160 The second hurdle is the naval gauntlet. 177 00:11:01,400 --> 00:11:04,760 While the US and Israel have spent a month bombing Iran, 178 00:11:04,960 --> 00:11:08,920 they've achieved almost no substantive gains in loosening 179 00:11:08,920 --> 00:11:10,960 Iran's chokehold on the straight. 180 00:11:11,200 --> 00:11:14,880 This is why the Pentagon is currently sending in 10,000 181 00:11:14,880 --> 00:11:18,800 additional troops, including units trained to seize and hold 182 00:11:18,800 --> 00:11:21,280 land. Their mission appears to be 183 00:11:21,280 --> 00:11:25,200 prying the straight open by force, physically taking the 184 00:11:25,200 --> 00:11:29,160 islands and coastal slivers where Iran hides the drones and 185 00:11:29,160 --> 00:11:32,960 missiles that are keeping the American Navy at a distance. 186 00:11:33,360 --> 00:11:36,920 Even after those launch sites are secured, the waterway 187 00:11:36,920 --> 00:11:40,280 remains, at the very least, a suspected minefield. 188 00:11:40,600 --> 00:11:44,680 Whether or not Iran has actually laid thousands of mines, the 189 00:11:44,680 --> 00:11:48,800 mere risk of them creates what experts call a psychological 190 00:11:48,800 --> 00:11:52,400 blockade, which is just as effective as a physical one. 191 00:11:52,880 --> 00:11:56,600 Reopening the straits safely requires a careful naval 192 00:11:56,600 --> 00:12:01,080 operation, first hunting down any remaining threats like speed 193 00:12:01,080 --> 00:12:04,600 boats and drones that have been harassing shipping, followed by 194 00:12:04,800 --> 00:12:08,680 the slow, painstaking process of sweeping the water for mines. 195 00:12:08,960 --> 00:12:13,200 Only then can the final phase, providing continuous naval 196 00:12:13,200 --> 00:12:16,560 escorts for commercial tankers, actually begin. 197 00:12:16,960 --> 00:12:20,240 Finally, there's the logistical logjam. 198 00:12:20,480 --> 00:12:24,760 Traffic through the Strait has dropped 97% this month. 199 00:12:25,040 --> 00:12:28,760 The few ships that are moving are often dark fleet vessels. 200 00:12:28,920 --> 00:12:32,760 Are those willing to pay the $2,000,000 safe passage fee that 201 00:12:32,760 --> 00:12:36,880 Iran is currently demanding? Insurance premiums for the 202 00:12:36,880 --> 00:12:40,800 region haven't just spiked. In many cases, policies have 203 00:12:40,800 --> 00:12:44,520 been cancelled entirely. Ship captains and their crews 204 00:12:44,720 --> 00:12:48,880 are not going to steam back into a recently cleared war zone the 205 00:12:48,880 --> 00:12:51,200 moment a true social tweet goes out. 206 00:12:51,440 --> 00:12:55,400 They'll wait for a sustained all clear from naval authorities and 207 00:12:55,400 --> 00:12:58,080 for the insurance markets to normalize. 208 00:12:58,640 --> 00:13:02,360 When you combine all of these issues, the Oxford Economics 209 00:13:02,360 --> 00:13:05,680 timeline of the Strayed remaining largely impossible 210 00:13:05,680 --> 00:13:09,000 until May starts to look very realistic. 211 00:13:09,240 --> 00:13:13,000 Whenever a crisis like this breaks out, economists are quick 212 00:13:13,000 --> 00:13:17,400 to point out one comforting statistic Our oil intensity has 213 00:13:17,400 --> 00:13:20,920 collapsed. In the 1970s, it took roughly 214 00:13:20,920 --> 00:13:25,680 one full barrel of oil to produce $1000 of global GDP. 215 00:13:26,000 --> 00:13:28,400 Today, that number is less than half. 216 00:13:28,640 --> 00:13:32,520 We need only about .4 barrels to generate the same amount of 217 00:13:32,520 --> 00:13:36,120 economic output. The argument is that because 218 00:13:36,120 --> 00:13:39,480 we're more efficient, we're no longer the hostages to the 219 00:13:39,480 --> 00:13:41,840 Middle East that we were 50 years ago. 220 00:13:42,320 --> 00:13:44,800 But this is a dangerous distraction. 221 00:13:45,000 --> 00:13:49,280 While we've moved away from oil as a primary fuel for factories 222 00:13:49,280 --> 00:13:52,840 and home heating, we haven't actually reduced our energy 223 00:13:52,840 --> 00:13:55,640 vulnerability. We've simply transferred it to 224 00:13:55,640 --> 00:13:57,760 the power grid in much of the world. 225 00:13:57,800 --> 00:14:02,080 Electricity prices are set at the margin by natural gas fired 226 00:14:02,080 --> 00:14:05,440 power plants. So when the Strait closes and 227 00:14:05,440 --> 00:14:09,800 20% of the world's LNG vanishes, the shock doesn't just hit the 228 00:14:09,800 --> 00:14:13,120 gas pump, it hits electrical sockets too. 229 00:14:13,480 --> 00:14:17,360 And this is where the modern U.S. economy has a weakness that 230 00:14:17,360 --> 00:14:21,480 didn't exist in the 1970's, the AI revolution. 231 00:14:21,920 --> 00:14:25,520 Right now we're near the start of what's being described as the 232 00:14:25,520 --> 00:14:28,560 largest infrastructure build out in human history. 233 00:14:28,760 --> 00:14:33,560 Centred entirely on hyperscale data centres, these facilities 234 00:14:33,560 --> 00:14:37,840 are essentially giant energy things that require massive 235 00:14:37,840 --> 00:14:41,760 steady state power to function. To understand the scale, 236 00:14:41,960 --> 00:14:44,200 analysts look at these facilities in terms of 237 00:14:44,200 --> 00:14:48,000 gigawatts. One GW is enough power to run a 238 00:14:48,000 --> 00:14:51,960 mid sized city, or about 750,000 homes. 239 00:14:52,360 --> 00:14:56,520 The International Energy Agency predicts that by 20-30 the 240 00:14:56,520 --> 00:15:00,280 global demand from these data centers will grow by an 241 00:15:00,280 --> 00:15:04,400 additional 50 gigawatts. To put that in perspective, the 242 00:15:04,400 --> 00:15:08,520 electricity needed just to keep the world's AI chips running in 243 00:15:08,520 --> 00:15:12,920 four years time is expected to be equivalent to the total power 244 00:15:12,920 --> 00:15:18,760 consumption of Germany and France combined, or roughly 3 245 00:15:18,760 --> 00:15:21,840 1/2 times the total power consumption of the UK. 246 00:15:22,320 --> 00:15:25,720 These projects represent hundreds of billions of dollars 247 00:15:25,720 --> 00:15:29,080 in capital investment, and the United States appears to be 248 00:15:29,080 --> 00:15:33,320 pinning it's expected growth in the coming years on AI build 249 00:15:33,320 --> 00:15:35,760 out. An energy shock today would 250 00:15:35,760 --> 00:15:39,440 likely be very different to the 1970s, where there were long 251 00:15:39,440 --> 00:15:43,160 lines of gas stations. But it's not reasonable to claim 252 00:15:43,360 --> 00:15:46,160 that energy scarcity won't impact growth. 253 00:15:46,880 --> 00:15:50,240 In the world of geopolitics, winning doesn't always involve 254 00:15:50,240 --> 00:15:53,800 having the best military. Sometimes it just means being 255 00:15:53,800 --> 00:15:56,720 the last person to run out of somebody else's money. 256 00:15:57,120 --> 00:16:01,000 The terms winner and loser often have very little to do with 257 00:16:01,000 --> 00:16:04,000 whose cities are being bombed and everything to do with 258 00:16:04,000 --> 00:16:07,960 relative strategic advantage. If we look at the scorecard for 259 00:16:07,960 --> 00:16:11,720 this conflict, the results are surprising and deeply 260 00:16:11,720 --> 00:16:15,000 counterintuitive. It's difficult to call a country 261 00:16:15,000 --> 00:16:19,000 a winner when it's air defenses are in pieces and its leadership 262 00:16:19,000 --> 00:16:21,760 is hiding in bunkers to avoid assassination. 263 00:16:22,000 --> 00:16:25,680 So the best we can say for Iran is that it's a survivor. 264 00:16:26,120 --> 00:16:30,160 But as The Economist argues, for the Islamic Republic, mere 265 00:16:30,160 --> 00:16:33,960 survival against the combined might of the US and Israel 266 00:16:34,160 --> 00:16:38,280 counts as a victory of sorts. Iran has successfully 267 00:16:38,280 --> 00:16:42,520 demonstrated that it can hold the global economy hostage using 268 00:16:42,520 --> 00:16:46,640 nothing more than asymmetric tools, cheap drones, missiles, 269 00:16:46,640 --> 00:16:49,320 and the credible threat of underwater mines. 270 00:16:49,800 --> 00:16:53,320 Most strikingly, in a move that highlights just how desperate 271 00:16:53,320 --> 00:16:57,200 the global energy situation has become, the US appears to have 272 00:16:57,200 --> 00:17:00,360 quietly retreated on its own sanctions. 273 00:17:00,560 --> 00:17:04,079 Despite being in an active shooting war with Tehran, the 274 00:17:04,079 --> 00:17:07,800 Trump administration has temporarily waved sanctions on 275 00:17:07,800 --> 00:17:12,599 140 million barrels of Iranian oil currently at sea because the 276 00:17:12,599 --> 00:17:16,599 supply stock from the Straits closure is so painful that the 277 00:17:16,599 --> 00:17:19,079 White House cannot afford to keep those one and a half 278 00:17:19,079 --> 00:17:24,000 million barrels a day off the market while Gulf allies watch 279 00:17:24,000 --> 00:17:27,920 their own tankers sit idle. Iran is currently getting its 280 00:17:27,920 --> 00:17:31,520 crew to China and is now attempting to institutionalized 281 00:17:31,720 --> 00:17:36,400 a $2,000,000 safe passage fee for non hostile vessels. 282 00:17:37,040 --> 00:17:40,520 If they can make this stick, they could generate up to $80 283 00:17:40,520 --> 00:17:44,920 billion a year, effectively replacing their lost oil revenue 284 00:17:45,080 --> 00:17:49,720 with a global transit tax. Russia is perhaps the most 285 00:17:49,720 --> 00:17:51,920 unambiguous winner of the crisis. 286 00:17:52,160 --> 00:17:56,360 Not only are soaring oil and gas prices relieving its previously 287 00:17:56,360 --> 00:18:00,240 strained budget, but it has now received its own sanctions 288 00:18:00,240 --> 00:18:04,080 holiday. On March 13th, the US Treasury 289 00:18:04,080 --> 00:18:08,240 lifted restrictions on Russian oil tankers currently at sea to 290 00:18:08,240 --> 00:18:12,840 prevent a global supply shock. This move has achieved 2 of 291 00:18:12,840 --> 00:18:16,960 Moscow's primary strategic goals, it provides an immediate 292 00:18:16,960 --> 00:18:20,920 cash infusion to its war effort in Ukraine, and it has triggered 293 00:18:20,920 --> 00:18:25,240 A bipartisan revolt in the US Congress, with lawmakers like 294 00:18:25,240 --> 00:18:28,600 Chuck Schumer labeling the policy asinine. 295 00:18:28,960 --> 00:18:32,840 By forcing the US to choose between between energy security 296 00:18:33,000 --> 00:18:36,840 and its foreign policy goals, Russia has successfully exposed 297 00:18:36,840 --> 00:18:39,480 the limits of American economic warfare. 298 00:18:39,760 --> 00:18:44,840 China occupies A fascinating and arguably enviable position. 299 00:18:45,120 --> 00:18:49,000 While it's the world's largest oil importer, it's now roughly 300 00:18:49,000 --> 00:18:53,640 85% energy self-sufficient thanks to its massive domestic 301 00:18:53,640 --> 00:18:57,880 coal reserves and an aggressive multi year pivot to renewables. 302 00:18:58,560 --> 00:19:02,480 The upside for Beijing is that this oil shock is the best 303 00:19:02,480 --> 00:19:06,240 possible advert for Chinese technology, as the world may 304 00:19:06,240 --> 00:19:10,680 speed up its transition to solar panels, batteries, and EVs, 305 00:19:10,960 --> 00:19:14,200 industries that China absolutely dominates. 306 00:19:14,680 --> 00:19:18,800 While Netanyahu may be thrilled with the tactical success of the 307 00:19:18,800 --> 00:19:23,080 strikes, the strategic reality for Israel is much bleaker. 308 00:19:23,360 --> 00:19:27,560 Despite the bombardment of their enemy, Israel is not really any 309 00:19:27,560 --> 00:19:30,800 safer than before. Iranian missiles have still 310 00:19:30,800 --> 00:19:34,560 penetrated Israeli airspace, and the nuclear threat remains 311 00:19:34,560 --> 00:19:38,680 buried under rubble. Furthermore, the war is severely 312 00:19:38,680 --> 00:19:42,560 straining Israel's relationship with its most important patron. 313 00:19:42,800 --> 00:19:47,520 As US gasoline prices soar and markets slide, American voters 314 00:19:47,520 --> 00:19:51,120 are increasingly pointing the finger at the cost of supporting 315 00:19:51,120 --> 00:19:54,640 the conflict. Europe is currently facing what 316 00:19:54,640 --> 00:19:58,200 analysts call its second major energy crisis. 317 00:19:58,400 --> 00:20:03,000 With Qatari LNG completely cut off and domestic gas storage at 318 00:20:03,000 --> 00:20:08,560 a dangerously low 30% capacity, electricity surcharges of up to 319 00:20:08,560 --> 00:20:13,440 30% are hitting heavy industry, leading to fears of permanent 320 00:20:13,440 --> 00:20:17,360 deindustrialization. The real shock to Europe isn't 321 00:20:17,360 --> 00:20:21,080 just economic. On March 20th, Iran fired 2 322 00:20:21,080 --> 00:20:25,560 ballistic missiles at. The USUK base at Diego Garcia. 323 00:20:25,840 --> 00:20:31,400 This strike demonstrated a range of 4000 kilometres, twice Iran's 324 00:20:31,400 --> 00:20:35,400 previously known capability. This means that every major 325 00:20:35,400 --> 00:20:39,080 European capital is within direct reach of Iranian 326 00:20:39,080 --> 00:20:42,120 missiles. If you want to find the G 20s 327 00:20:42,120 --> 00:20:45,240 biggest loser, you don't have to look much further than the 328 00:20:45,240 --> 00:20:48,000 United Kingdom. Because of its extreme 329 00:20:48,000 --> 00:20:52,080 dependence on imported natural gas, the UK is facing what 330 00:20:52,080 --> 00:20:56,480 Kenneth Rogoff calls the biggest stagflationary shock in five 331 00:20:56,480 --> 00:20:59,600 decades. The damage is appearing in real 332 00:20:59,600 --> 00:21:02,120 time. The route in the gilt market has 333 00:21:02,120 --> 00:21:05,280 pushed 10 year borrowing costs to their highest level since 334 00:21:05,280 --> 00:21:10,400 2008, forcing lenders to withdraw over 1500 mortgage 335 00:21:10,480 --> 00:21:13,280 products from the market in a single month. 336 00:21:13,720 --> 00:21:16,040 Finally, there's the United States. 337 00:21:16,240 --> 00:21:20,360 On paper, the US is a winner. It's energy independence and 338 00:21:20,360 --> 00:21:25,000 status as a major LNG exporter have provided a massive windfall 339 00:21:25,000 --> 00:21:29,600 for domestic producers. But according to the FT, this 340 00:21:29,600 --> 00:21:33,200 insulation is something of a mirage, and the reason comes 341 00:21:33,200 --> 00:21:36,240 down to what economists call embedded energy. 342 00:21:36,520 --> 00:21:40,400 The US runs massive trade deficit in manufactured goods, 343 00:21:40,760 --> 00:21:44,560 and it takes an enormous amount of energy to produce those goods 344 00:21:44,720 --> 00:21:47,280 in factories across Asia and Europe. 345 00:21:47,640 --> 00:21:51,520 When energy costs for those global manufacturers skyrocket, 346 00:21:51,800 --> 00:21:56,080 those costs are eventually exported to the US in the form 347 00:21:56,080 --> 00:22:00,200 of higher prices for everything from electronics to clothing. 348 00:22:00,680 --> 00:22:04,800 The American grocery bill is also directly in the crosshairs. 349 00:22:05,040 --> 00:22:09,080 Because the US agricultural system is so heavily dependent 350 00:22:09,080 --> 00:22:13,640 on fossil fuels for both fuel and nitrogen based fertilizers, 351 00:22:13,840 --> 00:22:18,000 the energy shock in the Gulf translates almost immediately 352 00:22:18,000 --> 00:22:21,440 into higher prices for bread, meat, and dairy. 353 00:22:21,520 --> 00:22:25,880 This imported inflation has forced a radical shift at the 354 00:22:25,880 --> 00:22:29,560 Federal Reserve. This brings us back to the Trump 355 00:22:29,560 --> 00:22:32,520 Pressure Index. The president's political 356 00:22:32,520 --> 00:22:36,560 survival is tethered to the returns of the S&P 500, 357 00:22:36,760 --> 00:22:39,240 inflation, and the price at the pump. 358 00:22:39,720 --> 00:22:43,600 By making a big threat and then backing down the moment markets 359 00:22:43,600 --> 00:22:47,920 panicked, the administration has signalled to every adversary on 360 00:22:47,920 --> 00:22:52,080 earth that the fastest way to defeat a superpower is to strike 361 00:22:52,080 --> 00:22:56,360 it's retirement portfolios. I'm recording this video right 362 00:22:56,360 --> 00:23:00,480 before the market opens on Friday and S&P futures are down 363 00:23:00,480 --> 00:23:03,120 almost half a percent in the overnight market. 364 00:23:03,400 --> 00:23:06,640 And it's possible that markets are no longer giving the 365 00:23:06,640 --> 00:23:10,160 president the benefit of the doubt that his strategy in Iran 366 00:23:10,160 --> 00:23:13,160 is working beyond the major powers. 367 00:23:13,160 --> 00:23:17,120 The conflict is triggering a form of energy triage that's 368 00:23:17,120 --> 00:23:20,400 fundamentally reshaping daily life around the world. 369 00:23:20,680 --> 00:23:24,240 We have to start with the United Arab Emirates and the potential 370 00:23:24,240 --> 00:23:27,080 end of what we might call the Dubai dream. 371 00:23:27,280 --> 00:23:32,120 For decades, Dubai has branded itself as a neutral high luxury 372 00:23:32,120 --> 00:23:36,040 Oasis, a Singapore of the sands where you could do global 373 00:23:36,040 --> 00:23:39,200 business while the rest of the Middle East was in turmoil. 374 00:23:39,400 --> 00:23:41,960 But that brand is currently being battered. 375 00:23:42,200 --> 00:23:46,680 Since Iran began its retaliation on February 28th, the city has 376 00:23:46,680 --> 00:23:50,400 transformed from a billionaires playground into a ghost town in 377 00:23:50,400 --> 00:23:54,040 just three weeks. The problem is demographic. 378 00:23:54,240 --> 00:23:58,400 Over 90% of Dubai's population is foreign born. 379 00:23:58,640 --> 00:24:02,760 When you don't have deep roots in a location, stability isn't a 380 00:24:02,760 --> 00:24:07,520 luxury, it's the entire product. The mobile elite have already 381 00:24:07,520 --> 00:24:10,040 hit the exit. We've seen reports that the 382 00:24:10,040 --> 00:24:14,080 hedge fund Millennium Management is exploring a relocation of its 383 00:24:14,080 --> 00:24:18,200 Dubai based staff to Jersey after drone debris reportedly 384 00:24:18,200 --> 00:24:20,800 damaged the building housing their offices. 385 00:24:21,040 --> 00:24:24,440 Which leaves us wondering if Andrew Tate will soon be the 386 00:24:24,440 --> 00:24:26,880 only person left on the Palm Jumeirah. 387 00:24:27,240 --> 00:24:31,280 While wealthy expats might fleet tax neutral islands in the 388 00:24:31,280 --> 00:24:34,680 English Channel, the rest of the world is entering a period of 389 00:24:34,760 --> 00:24:38,120 energy rationing. Governments almost entirely 390 00:24:38,120 --> 00:24:41,760 dependent on Middle Eastern energy are racing to save what 391 00:24:41,760 --> 00:24:44,960 little they have left. In Thailand, the Prime Minister 392 00:24:44,960 --> 00:24:48,360 has ordered civil servants to take the stairs instead of 393 00:24:48,360 --> 00:24:52,160 elevators to save power. In the Philippines, the 394 00:24:52,160 --> 00:24:55,800 government has shifted to a four day work week and ordered 395 00:24:55,800 --> 00:24:59,160 officers to switch off computers during lunch breaks. 396 00:24:59,520 --> 00:25:02,720 This rationing highlights a brutal divide. 397 00:25:03,000 --> 00:25:07,200 While wealthy nations like the US and the UK can use massive 398 00:25:07,200 --> 00:25:10,520 subsidies to shield their citizens from the worst of the 399 00:25:10,520 --> 00:25:14,440 price hikes, they are inadvertently suffocating 400 00:25:14,440 --> 00:25:17,600 everyone else. But by artificially keeping 401 00:25:17,600 --> 00:25:21,960 domestic demand high, rich countries block the price signal 402 00:25:22,120 --> 00:25:24,880 that would normally force a drop in consumption. 403 00:25:25,160 --> 00:25:28,920 This leaves the world's poorest nations to bear the full brunt 404 00:25:28,960 --> 00:25:32,800 of the scarcity. In Bangladesh, universities have 405 00:25:32,800 --> 00:25:37,440 been closed, and in Pakistan and India the gas shortage is so 406 00:25:37,440 --> 00:25:41,200 acute that families are being issued half filled cylinders of 407 00:25:41,200 --> 00:25:44,440 cooking gas. Shortages aren't just happening 408 00:25:44,440 --> 00:25:48,400 in poor countries either. A Japanese potato chip company 409 00:25:48,480 --> 00:25:52,600 had to halt production this week due to a shortage of oil, which 410 00:25:52,600 --> 00:25:55,680 is a relatively minor inconvenience in Japan. 411 00:25:55,920 --> 00:25:59,800 But if deep fries went dark somewhere like Scotland, where 412 00:25:59,800 --> 00:26:03,920 people have evolved to subsist entirely on deep fried food, it 413 00:26:03,920 --> 00:26:08,160 could cause a genuine famine. As we approach the next deadline 414 00:26:08,160 --> 00:26:12,200 on April 6th, the temptation is to believe that a deal will 415 00:26:12,200 --> 00:26:16,600 return everything to the status quo, but the logistics of oil 416 00:26:16,600 --> 00:26:19,480 and gas may not be so easily appeased. 417 00:26:19,960 --> 00:26:24,000 Even if a deal is signed tomorrow, the economic fallout 418 00:26:24,000 --> 00:26:28,080 from this conflict will likely be felt well into next winter 419 00:26:28,280 --> 00:26:32,840 and possibly for years beyond. This crisis has highlighted 420 00:26:32,840 --> 00:26:36,240 something that we've also been seeing in Ukraine, that you 421 00:26:36,240 --> 00:26:40,400 don't need a peer level military to defeat a superpower. 422 00:26:40,680 --> 00:26:44,840 By holding the global economy hostile, Iran has shown that 423 00:26:44,840 --> 00:26:49,480 asymmetric disruption is just as effective as traditional warfare 424 00:26:49,480 --> 00:26:53,240 in achieving your goals. The fact that the US has been 425 00:26:53,240 --> 00:26:57,440 forced to ease sanctions on its enemies is the ultimate proof 426 00:26:57,640 --> 00:27:01,080 that in the modern world, the market is a more sensitive 427 00:27:01,080 --> 00:27:06,120 target than any military base. The 2nd shift is the end of the 428 00:27:06,120 --> 00:27:10,480 idea of security by distance. For decades, Europe viewed 429 00:27:10,480 --> 00:27:14,480 Middle Eastern volatility as a tragic but distant problem. 430 00:27:14,680 --> 00:27:19,240 The breakthrough of the 4000 kilometre missile has ended that 431 00:27:19,240 --> 00:27:22,520 luxury. Every European capital is now 432 00:27:22,520 --> 00:27:26,280 within reach of a power that has proven it's willing to strike 433 00:27:26,400 --> 00:27:29,000 whomever it needs to to get its way. 434 00:27:29,400 --> 00:27:34,240 Ultimately, a negotiated de escalation might provide a sigh 435 00:27:34,240 --> 00:27:38,320 of relief, but it can't Weld the turbines back together at Ras 436 00:27:38,320 --> 00:27:40,880 Lafan. And it can't erase the new 437 00:27:40,880 --> 00:27:45,120 reality of fragmented alliances, where energy security has 438 00:27:45,120 --> 00:27:49,240 replaced ideology as the ultimate geopolitical currency. 439 00:27:49,760 --> 00:27:53,440 The stock market might be buying the peace trade today, but the 440 00:27:53,440 --> 00:27:58,000 physical world moves at its own pace, dictated by ships, pipes, 441 00:27:58,000 --> 00:28:00,600 and turbines rather than sentiment. 442 00:28:00,840 --> 00:28:03,400 Thanks again for tuning into this week's podcast, with 443 00:28:03,400 --> 00:28:06,960 special thanks to my supporters on Patreon whose financial 444 00:28:06,960 --> 00:28:09,240 support makes this whole thing happen. 445 00:28:09,440 --> 00:28:13,280 If you'd like to sign up on Patreon, I'll leave a link in 446 00:28:13,280 --> 00:28:15,880 the show notes. Have a great week and talk to 447 00:28:15,880 --> 00:28:17,280 you again soon. Bye.