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Geopolitical Update : Act of War, limited economic impact, big geopolitical aftermath

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By Independent Macro Economist Christian Takushi – 17 Sep 2019 (adapted release to public)

I have been monitoring the aftermath of the attacks on the main Saudi Oil Processing Facilities over the past three days. My assessment deviates from consensus – here some bullet points

  1. Attack on Saudi Oil Fields may have modest economic impact – mainly on European & Asian economies. USA and Russia well prepared for an Oil Shock.
  2. Main effect is not on Economy or Markets, but Geopolitical Escalation.  Oil Risk Event also exposes the fragility of Trading Routes linking Europe & Asia
  3. At the margin this Event adds to deflationary pressures on EURO zone and likelihood of a recession. I stick to my view that debt-burdened EU will ramp up fiscal stimulus
  4. Geopolitical Risks still grossly underpriced: Saudis and other US allies are growing uneasy at the soft US stance on Iran and North Korea. Risk of unilateral retaliation is rising!
  5. Security Risks for Europe keep rising: With the EU actively backing Teheran, EU cities could be targeted by missiles in the next major Middle East War
  6. Sophisticated massive attack was probably a multi-national operation that may have enjoyed intelligence/technology support from industrialised nations
  7. Oil Risk Event could help usher a rotation in Investment Styles / Factors

I elaborate on the Geopolitical-Political process and the economic-market effect:

(a) Who was behind the attack on the main Saudi Oil Processing Plants?

My analysis points to an extremely well organised multi-national operation – Teheran-proxies probably provided ground resources, but more sophisticated capabilities came from elsewhere. It relied probably on intelligence and technology support from industrialised nations. Hard to single out Teheran.

The facilities were not prepared for such an attack. But such is the state of the world’s infrastructure: under-serviced and unprotected. It is remarkable that even after this attack, world markets refuse to price in the geopolitical risks surrounding our vulnerable trading routes, energy supplies and essential infrastructure. The geopolitical risk premiums would send asset prices much lower.

(b) Who benefits from this attack?

1st ) Teheran. It is proving to Muslim world since last December that it can hit US allies at will and that President Trump will let down them down in order to protect his re-election campaign.

2nd) USA and Russia. Practically energy-self-sufficient USA and Russia can shrug off this Oil Shock, while Europe and China take yet another hit. In this multi-year geopolitical struggle between America and China along its European allies, the USA scores a point and looks like a safer place to invest.

3rd) Defence companies. After having been on the receiving end of so many attacks from supposedly Iran-backed forces in the past 11 months, Sunni-Arab states are edging closer to hitting back at Iran. The White House’ “soft stance” on US foes has invited more attacks on US allies. The risk of unilateral action and war is rising.

(c) Growing Sunni-Arab unease towards Teheran, but also Washington

My analysis points to Sunni Arab states and other US allies becoming increasingly angry at the current US Administration – the inner Trump Team in particular. This is quite a turn of events. I believe that behind closed doors it is not so friendly anymore.

Scholars in Oriental studies and Oriental history know that to “talking tough, but staying passive if attacked” is probably the worst possible strategy in the Orient! This invites aggression in the Middle East and Asia, and US allies will ultimately run out of patience. Those leaders are also under domestic pressures. It could result in armed conflict – potentially of the disorderly kind and out of control of Moscow and Washington.

For 10 months I have been warning about President Trump’s exceedingly predictable stance on aggressive moves by Iran, North Korea, Venezuela and other states. All over the Asian Continent, US foes and US allies alike are growing increasingly convinced that the US President is being advised not to defend US allies in order to get re-elected.

A cautious foreign policy stance in an election year is normal, but the White House has amplified the effect. It remains to be hoped that the Trump re-election campaign team is well advised on Oriental studies. The latest attacks are being seen as acts of war.

Our prediction is proving correct: The number of provocations and hostilities against US allies (Japan, South Korea, Israel, Saudi Arabia etc.) has risen substantially this year and those allies are still been told the same all over: “stand down”.

(d) The price of re-election?

President Trump may win a re-election by keeping this non-involvement promise, but many policy advisers in Asia feel the White House has practically invited US foes to go after them. The image of the USA may thus suffer serious damage amongst the most loyal of US allies. It should be a concern when states like Israel and Japan begin crafting their future Defence Policies to include Russia and China as partners. Open architecture: multiple alliances, everyone for himself.

India has observed the new US course and taken swift action. It has reached out to Russia – unthinkable a while ago. Delhi is purchasing the formidable Russian S-400 Air Defence System. I wonder if the Trump re-election team is aware of the true long term cost of their strategy. India is simply leading the way.

After predicting Donald Trump’s election in 2016, I think Mr. Trump could be elected again in 2020 as US President. But the consequences of his policies in 2019 are likely to converge over the USA and the world after 2020 in a most disruptive manner. 

(e) Israel and Sunni-Arab states closer to hit back

Feeling “exposed & unprotected” by Washington, Israel and Sunni Arab states have had to learn to help each other: this defence alliance is a remarkable development. Just as historic as the Turkey-Iran-Syria alliance.

As the Middle East, South Asia and the Far East step up their unprecedented Arms Race, several potential combatant states are building missile and nuclear capabilities. President Obama’s shield of Iran’s Missile Program in 2015 kicked off a regional Missile Race. By 2022 several Sunni and Shia states should have secured Advanced Mid-Range Missiles – capable to deploy nuclear, chemical or EMP loads to the entire Middle East and major European cities.

It makes sense for Europe to embrace Iran and for Iran to seek a rapprochement, but it is remarkable that EU leaders and European investors behave as if they will be treated as “neutral” in the coming Middle East wars. Europe will be viewed as a quasi-combatant or allied-combatant state.

It is ironic that the US President has been advised to do what the candidate Trump was opposed to: “don’t be predictable – our enemies should not know how we will respond”.

US allies may be right, but only from their regional perspectives – They cannot fully appreciate the complexities of presiding over the United States of America and the Free World. Nobody in Europe or Asia can. They can’t see that President Trump is currently fighting an even more complex enemy: a Strong Dollar. And any US retaliation against a US enemy would make the USD and US Treasuries only more overbought.

(f) Hoping on Pompeo and West Point doctrine

US allies in the Middle East and the Asia-Pacific theatre are setting their hopes on Secretary of State Pompeo and Secretary of Defence Esper. Both with a West Point background. They hope that Mr. Pompeo will be able to bring in the less dramatic, but more consequential West Point doctrine.

This is exactly what Fed Chairman Powell and Secretary Mnuchin would like to do as well. The problem is, they don’t belong to the inner core of the Trump Team nor the re-election campaign team. The latter is clearly overshadowing US foreign policy since Q1 2019.

In my opinion, Secretary Pompeo has currently the most pragmatic approach to Iran and North Korea:  It doesn’t really matter in the Orient if the President meets US foes once or twice. If the relationship is warm or cold. Not even if there is a Deal or No deal. Mr. Pompeo knows, what is most needed across the Orient is a consequential line.

Will Mr. Pompeo risk it all? Probably not. He and Mrs. Haley are solid potential contenders for the US presidency down the road.

(g) Economic & Market Implications: recession & deflation fears get a modest boost

In itself the Saudi Risk Event can be digested within a few months. But ..

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

This is the current state of my research. My main scenarios are continually tested and updated if necessary.

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 17 Sep 2019.

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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