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Geopolitical Update: The war risk investors refuse to price in

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By Christian Takushi, Independent Macro Economist & Geopolitical Strategist. 5 Jan 2020. (public release delayed, modified)

Over the holidays I have been following the tensions between the USA and Iran.

Executive Summary

The situation in the Middle East is dangerous and the region is on a strategic path for war. World leaders’ calls for restraint are somewhat ironical, because their governments and companies are part of the problem and have enabled the main drivers. We are saying for years that at least two major wars are coming to the Middle East. One of them is likely to see the use of nuclear weapons, which will bring the economies of the Northern Hemisphere into disarray or depression, especially in Europe and China. Still, while we may know the strategic direction and that all ingredients have converged, the exact trigger of such a conflagration is difficult. With so many complex overlapping conflicts and possible triggers, no one can exactly predict “when” this next large-scale war will be fought. We have nevertheless moved closer to it.

The majority of investors go sadly from one extreme to the other – over the past 20 years markets have refused to price in the significant security deterioration around the world, especially in the Middle East. Most investors fail to constantly monitor these geopolitical risks, rushing to emergency meetings in the aftermath, overreacting and going back to their neglect. They are – by choice or default – victims of mainstream media and the experts that shape their consensus.

I have been asked this question countless times this week “Is war imminent?” As of this morning I can say that this present confrontation is only a foreshadow of the massive war ahead of us. But we must be prepared for an acceleration. The Middle East needs continuous monitoring.

The Crisis: Iran and America on the stage, but Turkey and Israel .. what really matters

Let me give you an excerpt of my independent analysis at this stage, while putting most recent events in perspective

  • Most of what we are hearing and seeing is speculation or propaganda. News from Iraq have to be taken with some caution. The country is de facto politically and militarily controlled by Teheran. Mainstream media has underplayed the degree to which Teheran has expanded and already controls key nations in the Middle East
  • Although Teheran had been attacking Saudi, American and Israeli targets for almost a year, it seems to have been poorly prepared for this eventuality, a bold US move to target their top general. There are some open question marks
  • There is no telling exactly of how Iran will respond, because there is quite a scramble going on for the replacement of General Soleimani. Until that is resolved, everything we hear is speculation. There is an intense competition of views and methods in Teheran
  • For years now Teheran has been expanding aggressively across the Middle East. By the end of 2018 Teheran already controlled most of LebanonSyriaIraq and Yemen  – Teheran had successfully encircled its arch enemies Saudi Arabia and Israel. During 2019 Teheran moved to target Saudi, Israeli and US assets with more lethal power. The US-Iran Deal shielded Iran’s massive ballistic missile program and its campaign to control key regional states. President Trump – like most of his predecessors – failed to retaliate against Teheran during 2019 (we criticised it in June 2019), something he has now caught up with. Unchecked aggression leads to war in the Orient. The West has tolerated and even enabled aggression by regional powers, setting the region on course for the coming wars
  • Throughout the Middle East Teheran has become the most dominant religious-political force with boots on the ground. Since 2019 Teheran “works” together with Ankara, the most assertive geopolitical-economic-military power in Europe, North Africa and the Middle East. After shielding Teheran during the past decade, European powers have become the strategic competitor (foe?) of the United States and her regional allies – Israel and Saudi Arabia
  • Unexpected: While we have been clearly expecting Washington to be more aggressive in its Foreign Policy and Military Response in the first half of 2020, we were not expecting the White House to target the top Iranian General – this due to the material risks and downsides to such a move that might unfold 3 to 4 months too early for the US 2020 Election Campaign. It appears that the USA gathered intelligence that made this move necessary. The disruption triggered by the top general’s neutralization has foiled what Teheran was planning to carry out at the onset of 2020, but it has accelerated the confrontation
  • Those who say “this US move brings the region closer to war” can only impress those relying on mainstream media and consensus. This region has been practically destabilized beyond repair and is decidedly on a path for war. The US-Iran Deal helped mitigate Western interests, but it set Shia and Sunni-Arab states on an irreversible path for nuclear armament and war. War is inevitable – it can only be partially mitigated or postponed
  • Our independent analysis doesn’t point to an act of US warmongering for domestic political reasons – this latest US move poses indeed more risks for Western powers (including President Trump’s reelection) than to Teheran. The timing is far from ideal for the GOP reelection campaign
  • This US move exposes contradictions in EU Foreign Policy: Just a few weeks after the EU decided to increase her strategic reliance on Russian Gas, the EU ties to Teheran are exposed. Brussels is at odds with the US attack on General Soleimani. The reason is that despite some differences on human rights and Israel, the EU had aligned herself with Teheran on several strategic common interests. Paris-Berlin-London were also helping companies circumvent US sanctions on Iran. The move exposes an European Union that is embracing US arch enemies like Russia and Iran, while expecting the USA to continue protecting Europe unconditionally. NATO is becoming an ever more asymmetric risk for Washington. Turkey is thus not the only nation that is blurring the lines between foes and enemies. As we have said in the past, there are now more military alliances on the table than nations involved. The security deterioration means that nobody can fully trust its so-called allies.
  • Because of all the above, this latest move will end up helping Turkey the most. It had come under attack by European thought-leaders for “pretending” to be a committed NATO member, while entering deals with Russia and China. After updating the relevant scenarios, I can say that whether Teheran wins or loses during 2020 in its struggle against the USA, Ankara will benefit from it. No nation is playing its geopolitical cards more smartly than Ankara. Another beneficiary could be the Kurds. If Teheran asks the Iraqi government to expel US forces from Iraq, the autonomous Kurds might once again be the only reliable US allies in the region for America & Israel. Who could lose the most strategically? Israel. This latest US move underscores our assessment that the next Israeli elections matter less than the prior two. Israel is quietly preparing a unity government. Israel has always embraced a unity government when at war, and key parties are de facto preparing for war on multiple fronts. The talk is that one of the next two wars could bring the Jewish state to a point where it faces near extinction. Israel has unfortunately focused too much on Iran and overlooked the biggest threat. So far Israeli assets and Shekel were relatively “safe”, but I think this will change sooner rather than later. Unlike the past, Israeli think tanks and top security circles have been consumed by internal politics. I see Israel “behind the curve” this time or next.

Markets 

 The above entails a turnaround for Oil and continued support for Gold, safe haven currencies and US treasuries. Since a military systemic risk is what markets have to contemplate, no asset can really compete with the USD or US treasuries in the event of a confrontation. In the preliminary stage though, currencies like the Yen and the Swiss Franc could also benefit. Although these economies could also be exposed to the fallout. Concerning Oil, the political will to move towards a complete eco-friendly CO2-neutral economy is growing fast, but the world economy is far away from being able to look down on Oil. ESG goals are better lived and achieved when the assumptions are realistic. Currently or as of last week, the valuations of Oil majors reflected a consensus of “oil is down and out”.

But the closer we should come to a serious military conflagration, only the USD or US treasuries will be a haven – only competed by Gold, which in my independent analysis should be able to reach USD 5’000 during this decade.

It is simple: No security, no economic prosperity. Without (US) security most investors won’t even be able to access & trade their gold. Why the Yen and the CHF are not perfect safe havens: Japan could be badly affected by a disruption of oil supplies, while the European Union and tightly EU-policy-aligned Switzerland have de facto sided with Teheran. Thus, for Sunni-Arab states neither the EU nor Switzerland are neutral non-combatant states as so many want to believe.

As of today, what I see is just a foreshadow of the major Middle East War I have been predicting. The strategic direction is clear, but the tactical timing is open. More importantly, the fear of a war in the Middle East could give many governments the excuse they need to initiate massive investments with money they don’t have. Expect concerted fiscal-monetary policy action to gain only more traction. This in turn could push Bond Yields higher.

Paper money has been debased and the debt crisis may no longer be addressed in our time – But policy makers control the data, the news flow and even market supply & demand. All that without any independent audits. Investors didn’t mind, because all stakeholders are sitting in the same boat. But the converging geopolitical crises are outside of policy makers’ tight control. The risk is that geopolitical tensions could trigger a Perfect Storm at some point. I am sure that this decade will be very different from the past decade. Investors’ portfolios are diversified for a global paradigm that is fading away fast or is already behind us.

Whether the war is ignited or not, investors will at one point rush into Defense & Oil stocks. Equities as a whole have not had to really discount geopolitical risks over the past 2 decades. We have to be mindful that a military conflagration could unleash short term and long term upward pressure on interest rates. It could bring a sudden cost-push inflation shock ..

To read the full report, kindly contact c.takushi@bluewin.ch

I keep a close eye on the Middle East. If I don’t write, it is, because I don’t want to bother you with anything that is not really added-value versus consensus or because my assessment has not changed.

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 5 January 2020.

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation
A distinct broad approach to geopolitical research

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers

(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

(d) Independent time series data aggregation & propriety risk models

(e) He only writes when his analysis deviates from Consensus

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