From Neue Zürcher Zeitung's TheMarket.ch, April 17:
Marko Papic, Chief Strategist for GeoMacro at BCA Research, talks about his scenarios on how the war in Iran will play out and what the long term consequences for the world economy and for investors will be.
The war in the Persian Gulf is entering its eighth week. Although a fragile ceasefire is currently in place, the supply of raw materials to the global economy – oil, gas, petroleum products, fertilizers, helium – has by no means returned to normal. The Strait of Hormuz remains largely blocked; only a handful of tankers pass through it each day. The global economy is drawing on its reserves.
Equity markets, however, are back in high spirits. The correction suffered in mid-March has already been absorbed; the S&P 500 is trading at an all-time high, as is the Nikkei 225 in Tokyo.
How does that fit together? «The Spice must flow,» says Marko Papic, referencing the science fiction novel and movie Dune. The chief GeoMacro strategist at BCA Research assumes that the flow of resources from the Persian Gulf will soon normalize. «Both history and game theory teach that we’ll have this outcome. It’s my base case too», he says.
But Papic also warns: «If this is not over in three weeks, things are going to start breaking down rapidly.» In an in-depth conversation with The Market NZZ, Papic explains how he views the chokepoint of Hormuz, how China sees the war, and what longer-term consequences investors need to prepare for: «We will see a global capex boom, and that means a global commodities bull market.»
«We need to rebuild the physical infrastructure for a multipolar world.This means a lot of capital investment. We’ll see capex everywhere»: Marko Papic.What’s your base case scenario on how the war in Iran and the crisis around the Strait of Hormuz will play out?
I see three scenarios. My base case, to which I assign a 35 to 40 percent probability, goes like this: Iran, Israel and the US find what I would call a kinetic equilibrium, where they can continue to have their enmity, while the world gets its oil and other resources from the Persian Gulf. This would mean a continued state of war, where America and Israel come back and bomb Iran every time they think they do nuclear stuff. But they stop for now and somehow both sides find a way to claim victory. The concept of a kinetic equilibrium might be difficult for many people to process, but that is the history of the Middle East. Throughout the last 80 years or so, wars happened in the region – but those wars did not shut off the flow of oil. Think of the war between Iran and Iraq, a war that lasted for eight years, involving a brutal ground invasion, claiming millions of lives. And yet, for most of the time, oil continued to flow out of the Persian Gulf. That’s not supernatural, it’s simply a function of the fact that too many countries will become involved, because they need those resources.
Is it really an apt parallel to compare today’s war with the war between Iran and Iraq?
Why not? The Gulf War of 1980 to 1988 was infinitely worse than what’s going on today. Most clients, when I tell them that, they bring up Israel and claim it’s different this time. To which I counter that Saddam Hussein was the original Benjamin Netanyahu. Iraq back then was a proxy of the west, armed by France, given intelligence by the Americans, and financed by Gulf petro monarchies. Iran sees both Israel in 2026 and Saddam in 1980 similarly as a proxy of America.
Let’s assume that we’ll have that kinetic equilibrium scenario: What makes you so sure that the flow of oil and other resources will resume? Hasn’t Iran shown that they can effectively close the Strait of Hormuz at will?
One might say that Iran has a lot of leverage with their ability to threaten shipping around Hormuz. But they can’t overplay that leverage without coming under immense pressure. I’m not talking about pressure from American bombs or financial sanctions. I’m talking about the fact that Iran completely depends on China for all of its imports. Imagine a development where eventually Iran’s leverage over Hormuz angers Beijing. In that scenario, China will stop sending Iran the semiconductors that it needs for their Shahed drones. All drones need Chinese components. Eventually, it is difficult to maintain this kind of aggressive composure towards commodities that are required for the rest of the world to operate – including people in South Asia that depend on resources from the Gulf to feed themselves.
What are the other two scenarios?
The best case, to which I would assign a probability of 30 to 35 percent, is a comprehensive peace deal and a lasting ceasefire. In this case, the flow of commodities, be it crude, LNG, refined crude products, fertilizers or helium, will revert back to normal.
And the third?
That’s when it all goes terribly wrong in many different ways. A large scale escalatory spiral where physical infrastructure for the production and shipment of oil and gas in the Gulf region will be attacked and destroyed. It’s clear that both sides have refrained from that kind of escalation so far, but it’s not impossible. This would be an absolute calamity for the world. We’d have shortages everywhere. The world economy would fall into a violent recession. That scenario perhaps has a probability of 30 percent.
So all in all, scenarios one and two, with a combined probability of 70 percent, assume that the resources – oil, gas, fertilizer, helium – will soon flow again and the world economy will get what it needs. While in scenario three, all bets will be off and the world economy will fall off a cliff. Correct?
Yes. But my concern is that financial markets completely agree with the combined two scenarios of a sanguine outcome. The market has not panicked. It agrees with me that there is a 70 percent probability that everything will eventually be okay. That’s a problem for investors.
How so?
The danger is that the market has not left any room for error. It assumes the Spice will flow. That assumption is not wrong per se. History teaches that we’ll have this outcome, and game theory teaches it too. It’s my base case too. But that doesn’t make it a certainty. There is a non-trivial probability that we fall into a calamitous recession, which would be a shock for financial markets.
Right now, we’re still in a situation where none of these scenarios have played out. The Strait of Hormuz is not completely blocked, a handful of ships get through every day, but nowhere near enough to keep the world economy afloat. How much longer can that continue?
We are at a point where, depending on the commodity, it’s between three weeks and three months before things have to get shut down. Then we have a big problem. That’s why I don’t agree with commentators who say that China is ambivalent or even cheerleading to what’s happening in the Gulf. Sure, China may be happy that America looks like an unreliable ally and is depleting its stock of offensive weaponry. But if semiconductor production in Taiwan has to stop because there is no helium or LNG, then Chinese AI ambitions, which is a national security priority, are going to have to be put on ice. And if food prices go up, that’s not something that Chinese policymakers will be comfortable with. That’s why I think China will lean on Iran to reach some form of solution where both sides can declare victory.
President Trump is scheduled to visit Beijing in mid May, less than a month from now. Does this fact increase the chance of a solution before then?
President Trump generally tends to have only one crisis going on at any time. So yes, I do think that he would like to wrap this up by then. China can help by pressuring Iran, and I think it will, because at the end of the day China doesn’t want 100 $ oil any more than Trump does. And again, if this is not over in three weeks, things are going to start breaking down rapidly.
Some commentators suggest that the war in Iran is part of a grand strategy by the Trump Administration to weaken China, as was the intervention in Venezuela. What do you make of that?
That’s nonsense. White House officials will tell you it is, to kind of connect the dots post facto, but America just kind of stumbled backwards into this crisis. It’s absolute nonsense that this is designed to hurt China. Look at the math: China gets less than 20% of its crude imports from Venezuela and Iran. Until recently, it was able to purchase that crude at discounts to market prices of 7 to 9 $ per barrel. So China was saving 7 to 9 bucks per barrel on less than 20% of its oil imports. Big deal. If anyone thinks that China is a global power because of that discount, then I’m Queen Elizabeth. Do people really think that this was part of a brilliant plan, that the US just depleted its entire stock of offensive weaponry, so that China can pay more on less than a fifth of its oil imports? Plus, what would the proponents of this ‹It’s All About China› theory suggest America will do if Saudi Arabia stepped in to replace Iran as China’s main Middle East partner? Bomb Riyadh? That doesn't make much sense.
If we take a longer term perspective: What do you see as the most important consequences of this war?....
....MUCH MORE
