Sunday night at the Macro: With gêne but no rationale

The 60 day ceasefire enabling negotiation of a final deal on the Straits of Hormuz ends tomorrow week. And it doesn’t appear we are in any way close to having a final deal. Watching on is almost the entire rest of the planet. There wouldn’t be many nations without some sort of effect depending on how things are resolved.

As things currently stand we have the US with about 305 million barrels of fuel in their Strategic Petroleum Reserve, which equates to just over 40 days. While the US is a major global crude producer and refiner, US Prices wouldn’t be expected to withstand the ongoing closure of the Straits of Hormuz which holds large amounts of crude chemicals and fertilisers in the Persian Gulf.

That is probably a major concern of the US Federal Reserve looking over an economy which is obviously weakening. But that US Fed is also observing an equities market which has been pulled by the ‘Magnificent Seven’ to a succession of highs, as valuations and borrowing capacities for AI investment go parabolic. President Trump often points to it as an indication of just how good his presidency is, for him at least, but questions continue to mount. Demand is OK in aggregate but soft for probably the downmarket 80 percent of people in the US economy. Inflationary pressures could unearth some ugly issues under the bonnet.

The key factor in that is US fuel prices. President Trump has a vested interest in ensuring that the US doesn’t run out of fuel, that prices of an everything that is invariably related to fuel don’t rise, and also ensuring that the very idea of an interest rate hike by the Fed never comes to fruition. That decline in the size of the US Strategic Petroleum Reserve, is now starting to fence President Trump in. Removing Jerome Powell and replacing him with Kevin Warsh as Federal Reserve Chairman is one thing, but even Warsh has to hold the credibility of global investors in the integrity of US financial settings. And that involves the credulity of funds managers looking at the same data he is.

If it loses that credibility there is an awful lot of US debt that that same credulity determines can be ‘managed’ – or rolled over at a given interest rate by fresh borrowings with the sale of more US Treasury bills. In addition to the management of that debt – which has necessitated repeated hikes in the US debt ceiling imposed by US Congress on government borrowings, culminating in a $5 Trillion hike Just last year as part of the ‘One Big Beautiful Act’ signed off by President Trump, is the interest rate at which particularly global buyers are prepared to buy US debt, long the global benchmark but also being questioned. Any whiff of the worlds largest debtor inflating away any of that could draw tighter credit markets. The $41 Trillion debt ceiling agreed to by that Act is expected to be reached next year.

To bring us back to the negotiations this week about the Straits of Hormuz, it appears that the Iranians still do have the ability to hit targets in the Straits as well as targets in Saudi Arabia, Bahrain, Qatar, and Kuwait – all major crude producers and refiners, as well as significant gas, fertilisers and chemical producers – and that all of these nations appear to be low on, if not out of, US manufactured anti drone and missile systems and armaments. Even more disturbingly for anyone negotiating with the Iranians, it appears that the US is being careful with its supplies of the same. And the link between the US debt ceiling and the events near Iran are that those systems and armaments are spectacularly expensive, and take a long time to make.

On the other side of the table the Iranians are playing the game the same way they have for about 3000 years. In that time they have seen off the Assyrians, the Greeks, the Romans, the Byzantines, the Ottomans, the Mongols, the Russians, the British, and the Americans. Those last two managed to remove an Iranian Prime Minister (Mossadegh) in the early 1950s who had proposed something as radical as taking a share or Iranian oil reserves, taxing foreign oil companies working in Iran, and spending on Iranians (health education infrastructure etc). The coup they engineered cemented in the rule of a drunken playboy who ultimately behaved in such a way as to make popular an Islamic cleric promoting theological purity whose theological descendants remain in power, notwithstanding the Ayatollah who was killed in the initial American strike on 28 February.

When not dealing with major global superpowers they have a similarly robust habit of eschewing the Islam practiced by almost all other Islamic nations and openly support Shiite adherents elsewhere – starting with Hezbollah in Lebanon and Syria, including the Houthis controlling Yemen, and more than half the population of Iraq. They are the last word in national ‘Resilience’ and less than 50 years ago have found themselves sending young men into battle with inferior armaments against a Saddam Hussein supplied by both the West and the Soviet Union, notably to clear minefields by walking through them and martyring themselves in the process.

At the core of the negotiations between the Americans and the Iranians, if we set aside reparations for a unilateral strike, a generations worth of frozen funds and sanctions, a desire by the Iranians to have nuclear weapons to dissuade other nations from unliterally attacking them, and the demolition of much of their infrastructure by American and Israeli armaments, – all of which have their discussion points – is the status of the Straits of Hormuz. In short, do ships traversing those Straits need to pay Iranian tolls to do so? The Iranians are saying yes, and the Americans are saying no.

The rest of the world is seeing scope for a sudden significant price rise for the oil, the gas, the fertilisers and the chemicals which it wasn’t paying a year ago, and like President Trump is disinclined to stand before people and acknowledge that prices are rising. The reticence stems from much of the developed world being significantly, and historically in a degree of debt and rising prices meaning that central banks get ideas about raising interest rates resulting in those nations need to spend more on servicing that debt.

That world of data and numbers, and money, is getting a rough time elsewhere too.

In Japan they have told an entire generation of people that buying their own bonds, and that having a zombie economy, and an ageing society, is preferable to experiencing a recession. In 2026 they are wondering if that is still the case with public debt at 200% of GDP, and the energy price shock brought about by the imbroglio in the Persian Gulf generating inflation. If the Americans don’t have enough on their plate they are now buying Japan Government Bonds, just to make sure the Yen doesn’t dive so low against the US dollar it makes anything made in Japan unbeatable value on the streets of the US. President Trump has an issue with Current Accounts and although his tariff fetish hasn’t really come off as expected it has fractured globalisation as it was known. The Japanese have witnessed some demoralising approaches to international cooperation. The last thing they would want is to go the road of Europe.

Europe has major issues. US President Trump is one of them and he doesn’t like Europeans, suspecting they have been light with their military commitments to NATO while the Americans handed over the dollars. A problem for the Europeans is that they did do that, but their bigger problem is energy. For reasons best known to themselves they swapped a reliable cheap supplier – the Russians – of energy for unreliable expensive suppliers of energy – the Americans for gas and wherever they can get it for the crude. That they get large volumes of it from the Persian Gulf where the Iranians are currently holding it to ransom only adds to the disillusionment.

For some nations in the EU – see Germany – there is further cause for circumspection stemming from the fact that they have demolished their nuclear energy plants to add to the degree of difficulty factor. Electricity prices in the EU have risen by four and fivefold in the last 5 years, only adding to the problems of industry which is in the process of closing or migrating.

The destination of that migrating industry is sometimes China. The Middle Kingdom is presumably watching global events with a sense of bewilderment too. Having learned from the Japanese the value of a mercantilist approach to currency, and having harvested manufacturers from around the world, the risk for them is that the globalised world they were hopefully presuming to take a leadership role in is all of a sudden fragmenting. The punters in Beijing fortuitously toned down the T Bill addiction nearly a decade ago but they still hold so many it would be a painful haircut if there was any sort of falling out of the global financial system.

Then there’s the strategic world as seen from Beijing. The resilience at the Straits of Hormuz by Iran would be of interest to them, and the depletion of US armaments and limitations of military processes for bringing about a satisfactory resolution is enticing. But what if the Taiwanese took that type of approach. The renegades in Taipei might easily have some technological gimmicks of their own to cause what the French would refer to as gêne. If they are patient, in the form they are in the Americans might self immolate or try and start a stoush.

But things could be worse. They have solid sources bedded down for most of their needs, and although they need product through those same Straits the Iranians and Americans are jostling over, they haven’t run their strategic fuel reserves down in any manner like the Americans have done. And they are still friendly with the Russians and have them nailed to the floor for contract prices.

In an office in downtown Beijing there is a young man completing a report on the political developments of one of the nations supplying China. He has studied for some years Australian politics and the Australian people and its mysteries and contradictions never fail to entertain.

A country which supplies tremendous amounts of energy to the world and which has made its own energy so expensive that no business would base itself there if energy was an important consideration. A nation with so much land, but which makes housing so incredibly expensive for its own people. A nation which imports people then creates meaningless jobs for them to do, and lacks the presence of mind to get them to do more. A nation with a policy of embedding itself into China’s economic path but which sails naval vessels past China’s cities as an act of assertiveness, but will still respond with alarm if a single Chinese ship were to go anywhere near their continent. A country with good education institutions and a people with intelligence, but who leave for their future an economy in which nothing takes place but the selling of houses at ever inflating prices, and a media which panders to the trivial or the whims of the rich.

But his report notes that their strategic fuel reserves are in the US and that they are spending billions to join with the old powers of the US and UK in a military alliance aimed at China. Their governments are spending based on taxing their people but not what they do, and what they do do is dig fossil fuels from the ground or other resources requiring deployment of fossil fuels. Such a people will find change of the type underway a great tribulation, but they seemingly cannot bring themselves to reconcile their contradictions.

What will they do next? what will the world?