John J. Hardy

As I am on the road in a very different time zone, I haven’t said a great deal about the stunning US midterm elections from a ‘grand macro strategy’ perspective yet - but here are a few quick thoughts (without being party political/analytical or normative): 🌍💭 Grand Macro Strategies are not foolproof and can clearly be both foolish and fooled around with; but that doesn’t mean they don’t exist and/or can’t adapt to new circumstances. 🌍🔥 Is the US anti-war or anti *losing* wars? If Iran had worked out like Venezuela, would it have been the same issue? That is an important distinction. 🌍🔥 Regardless, the clear anti-war message from the US elections has massive geopolitical implications. 🌍🔥 Sadly, they don’t suggest world peace though. First, it’s still likely Trump still opts to escalate vs Iran to try to achieve what he hasn’t been able to so far. Second, if there is now a genuinely higher chance that Trump does an Iran TACO, to think that would end all Middle East hostilities —or leave the US in a better geostrategic position overall— is arguably wrong. 🌍🔥 If we assume the US retreats from the Middle East, regional stability is going to be very hard to sustain without the security role it now doesn’t want to play. New structures being set up are rivals as much as pillars. That suggests higher energy prices as a backdrop, just without the US playing a role. 🌍🔥 On the other hand, can the US leave the region to Iran to squeeze, as it surely will? That’s a vast loss of global position to China and Russia if so. If the US now must do that, maybe regional instability to keep all sides there tied down is the better realpolitik option, ugly as it sounds(?) However, that also won’t mean lower energy prices. One can argue this current backdrop, if sustained, *relatively* strengthens the US geostrategic hand as an energy exporter vs others. Yet it also hurts domestically, as we just saw in the midterms. However, is there a way to get oil prices down without surrendering geostrategic position? If not, are we back to the logic of escalating again before the new Congress sits? And will the new Congress not face the same old geopolitical problems? 🌍🔥 Elsewhere, Moscow has even less reason to negotiate with Kyiv now it smells US weakness, which surely won’t fight for Ukraine whatever EU countries choose to do with their own force deployments in that country ahead. Therefore, the Russia-Ukraine war is also likely to escalate - and again hit energy markets as a result given Ukraine knows that’s a key weapon it possesses. 🌍🔥 US allies in Asia are (to quote Mel Brooks) in the Psycho-Neurotic Institute for the Very, Very Nervous. 🌍🔥 Very sadly, being anti-war doesn’t stop wars and the opposite of war is not necessarily “peace”. 🌍⛴️ On tariffs, there is also a geostrategic / national security logic. That’s not just a US issue. Europe is pushing for new tariff instruments vs China, for one key example. Note Biden followed Trump 1 with China tariffs, which are now more global. 🌍⛴️ One could argue any US policy pivot here is most likely to be an opportunity for western economies to *align on common external tariff structures vs China* - which is an end position long argued as geostrategically logical. 🌍🔥 That only accelerates geopolitical tensions; but unfortunately so does removing tariffs if over time that also means weakening the US military-industrial base even further.

The Houthis threatened to hit Saudi oil after the Saudis threatened their oil. We only have desalination plants left to threaten before we hit the top rung of the regional escalation ladder… and the risks are of a societal snake down to Mad Max style nightmares. The larger question is how this ends. Do the Saudis surrender to the Houthis - and have to yield what to them and Iran? Do Pakistan and Turkey defend Saudi, as they both busily —and S L O W L Y— complete the paperwork on their ‘Mecca Defence Pact’? Does the U.S. step in - and pre or post-midterms? Does Israel, the suggestion being only after its late October election, and only if Bibi loses (as he’s willing but not welcome)? In short, this could go on for weeks. It could damage Saudi far, far more. And far, far more violence will be needed to end this crisis even if it can be ended. Many other countries could be pulled into this mess. Higher for longer is the risk for energy prices, at least for physical, and bond yields…. and then global political and social stress. And there’s not a thing a central bank can do about it (save help fund a government to fight the Houthis like in the old days?)

“The Justice Department is preparing to activate a long-dormant maritime war court to streamline military capture of Iranian oil tankers as US prizes.” Letters of Marque, here we come! That’s as Russia introduces an inverse version - it can now legally seize any local asset that gets hit by Ukrainian drones…. So defend yourself better or lose your stuff. This was always an obvious economic statecraft play for overextended and over indebted states - simply incentivise the dynamic private sector to do the geopolitical work for you. That’s how it worked in the past and how a few years ago I flagged (skull & crossbones version) it would in the future. And here we are. Can ‘rules-based order’ pirates compete with their likely ballast of paperwork and state oversight? Or will they just abandon the seas to those who put the Aaargh in R&D? We live in interesting times that continue to get more interesting.