Has been a crazy month here. Turns out I was wrong on strikes in Oman, been getting missile and drone hits here and we have a “Days since last drone and missile” on the whiteboard in the office. It has read zero a lot of days this month. My wife and dog are now evacuated, I’m alone doing my fifth war/conflict for who knows how long. Worst case will be here another year by myself if the war lasts like this. I try not to think about it. We have settled into a 21st century war rhythm as we trade missiles and drones and none of us need our guns. Our ability to detect them is degraded, at times we get only minutes before impact, sometimes we never even find out there were strikes until after they hit. Good thing behind every American defense manufacturer are 100 Chinese suppliers. I’m sure everything being hit and used is going to be replaced quickly so we can continue to break up BRICS and limit China. Oh wait…
If you are in the Fortress you’ve been seeing the SITREPs I’m posting as things progress in the region and I’ve written a couple pieces publicly this month which we’ll talk more about in this letter.
My mission, as always, is to be like Thucydides. I take my own risks, seek understanding, and tell the truth with clarity. As we all feel the weight of uncertainty, my sole focus is what I should do as an individual investor to protect my family.
The main point through this entire letter: The only thing that matters is the Strait of Hormuz and the consequences of Iran showing the world it can exert control over it and the U.S. hasn’t stopped it.
“It is easy and almost unavoidable to become caught up in the headlines of the day. We witness a raging war in the Middle East, having the potential to reshape energy flows, trade routes, and even more ominously, geopolitical alignments. It seems that it could even get much worse. The headlines command our attention, financial markets respond in real time, and narratives shift by the hour. It is natural to see each development demanding immediate interpretation. Yet, we are not served well by constant reaction. Instead, we need the kind of clarity that begins by stepping back from the noise and focusing on what actually matters over time.
Governments and politicians lie. The press lies. Treating official narratives as solid ground, especially in war, is a mistake. In wartime, truth is obscured by design. Information is delayed, manipulated, framed for effect, stripped of context, and turned into propaganda. Each side presents its own story.
Reporters recycle claims they cannot verify and analysts mistake access for insight. The videos that circulate on social media are often Al-manufactured. As a consequence, we are left trying to build certainty out of fragments, contradictions, and deliberate distortions. There is no denying of this reality.
In such an environment, one can spend endless energy sorting claims, disputing events, parsing official statements, and chasing "breaking news," only to discover days or weeks later that the underlying picture was very different. In my view, the more important discipline is not reaction but inference. If truth in the moment is obscured, consequences are not. They unfold with a logic of their own. Ergo, the essential task is to think forward.”
Tony Deden, emphasis mine h/t Rudy Havenstein
“With the watery weigh station past Qeshm, Iran isn't closing the strait to global commerce. It is simply doing what the U.S. does with the dollar, exerting power over the chokepoint it controls… anything less than breaking Iran's control of the strait will be seen as a loss for the U.S., much like the Battle of the Red Sea was against the Houthis.”
Image from Matt Bracken
“The idea Israel and the U.S. would be able to assassinate Iranian leaders like a reenactment of the Shia origin story, throw a few JASSMs at them, and they would capitulate to foreign powers when literally their entire history is built around resisting foreign powers for thousands of years is absurd. We remain tragically ignorant of the people we want to wage war on… with Larijani dead and Israel continuing to assassinate anyone we can negotiate with, the hope for a deal before the global economy breaks fades by the day.”
These pieces I wrote earlier this month are unfortunately aging well. Israel continues to assassinate anyone in the IRGC we could negotiate with. Most recently the commander of the IRGC Navy and the head of its intelligence directorate. We are now at Thirty-one days of bombing, and repeated ultimatums to Iran with deadlines that keep getting extended. Meanwhile Iran continues to say they will not be forced into submission and have secured a strategic victory in controlling the Strait of Hormuz.
Until this war, one long-held U.S. assumption around Hormuz was Iran would never attempt to close the strait, for fear of risking its own oil exports. This has proven to be a comically wrong assumption. Iran’s missile and drone threat has kept the Carrier Strike Group (CSG) at distance while the global economy is so indebted that the U.S. Treasury Secretary is unsanctioning Iranian oil to keep the global economy from breaking. Even as other ships are stranded in the gulf, the U.S. Treasury Secretary is ensuring that Iran oil is flowing out of the Persian Gulf. Iran has exported roughly 1.8 million barrels per day this month since Israel started the war, an 8% increase over last year. The U.S. and Israel claim they are doing massive damage to Iran. Meanwhile Iran is exporting more oil and making more money than before the war started. More importantly, Iran is now controlling the Strait of Hormuz and generating new revenue from tolls paid by ships to transit Hormuz safely.
In the first month of the war, out of the 110 ships which have left the gulf this month, more than 80% of them belong to Iran, China, Pakistan, and other nations friendly to Iran. If this continues, why would those tolls be paid in dollars through SWIFT where the U.S. Treasury can sanction them?
It makes more sense for tolls to be paid in RMB over CIPS, China’s system for interbank transfers. Iran will export oil and collect toll revenue from the Strait of Hormuz, buy goods and services from China which are as good or better than what is available in the west now, and save excess in gold held under a nuclear umbrella in Shanghai.
As the Council on Foreign Relations wrote this month on CIPS and sanctions,
“The U.S. has long relied on the threat of cutting off foreign banks from SWIFT in order to pursue foreign-policy objectives—such as pushing Russia to end its war against Ukraine. Although RMB transactions are still a tiny percentage of total international transactions, a continued shift to RMB—and the accompanying messaging from SWIFT to CIPS—will weaken the role of the dollar as a sanctions tool.”
The U.S. has put itself in the position where anything less than a total U.S. military victory will be seen over time as a loss by our Gulf allies, Asian allies, and the U.S. debt market. Does it even matter what kind of deal the U.S. makes? What is the difference between a deal that leaves Iran in control of the strait or one where Iran agrees to not exert control? The only thing that matters is having started this war, the U.S. has not broken Iran’s hold on Hormuz by force. The U.S. talks about destroying the Iranian Navy but we all know that Iran is really a land power. If the U.S. does not regain control of Hormuz, it will be the first time in five centuries a land power has defeated the most powerful maritime power in the world.
Louis-Vincent Gave recently wrote a great piece which he was kind enough to make free, that summarizes current assumptions and helps us think forward:
The events of the past five years have shattered these assumptions.
The first assumption, that US treasuries could be transformed into energy at a moment’s notice, was crushed when Russian reserves were frozen (see What Freezing Russia’s Reserves Means). That unilateral decision by Western politicians (but not Western courts) led central banks everywhere to start stockpiling gold instead of US treasuries.
The second assumption, that the US controlled the sea lanes, took a hard knock when the Houthis blocked the Red Sea and then a death knell when the Islamic Revolutionary Guard Corps blocked the Strait of Hormuz. Both events highlighted how even the most modern and fearsome navy in history is now neutered by the threat of cheap drones.
The third assumption, that the US was a benevolent hegemon with an embedded interest in maintaining the global trading system, took a body blow on Liberation Day and another severe punch to the face with the Greenland saga.
The bottom line is that even if the Iran conflict finds a truce in the coming days, assumptions that underpinned policies and portfolios for the past decades are now obsolete.
I agree with Louis’s shattered assumptions, which is why I am focused on the Strait of Hormuz.
Say there is a deal at some point. Let’s pretend everyone gets something so they can say they won. The U.S. relocates bases in gulf to Israel, unfreezes Iranian assets, Iran calls it reparations. U.S. lifts sanctions, says China doesn’t get discounted oil anymore, and some kind of nuclear deal, like the same one Iran offered last year and this year before Israel attacked. Iran relaxes control of Hormuz, doesn’t charge tolls, but Iran and Houthis threaten to close Hormuz and Bab el-Mandeb if Israel launches another attack.
Personally I don’t see how Iran reestablishes deterrence from being attacked again by Israel without building a nuclear bomb, but I’m trying to be optimistic. Let’s assume this deal happens in the next two weeks before higher energy prices work their way through the entire supply chain to customers.
If a deal happens, I have no doubt U.S. 10-year rates will fall, along with oil prices. The entire world will breathe a sigh of relief, at least initially. But once the relief washes over them, people will start thinking about the three assumptions that their world was built on as Louis outlines above. At that point we will see in the charts what the world really thinks as they quietly vote with their money.
The U.S. was not able to protect shipping through the Hormuz. The U.S. told allies that have dutifully bought U.S. debt for decades that they have to pay for the war. The decades of recycling oil revenue into the U.S. bond market are not payment enough for U.S. protection. This is while the gulf states are taking hundreds of rockets and drone strikes. Then the President tells Iran if they don’t do what he demands he’s going to bomb civilians and civilian infrastructure. The President knows it won’t be the U.S. that is retaliated against, it will be the Gulf allies desalination plants and power grid that is destroyed in retaliation. I wonder how the Gulf allies feel about being used as human shields. It is their economies and countries being hit on the front line of this war. Meanwhile Asian allies are watching this and have to be wondering what their countries would look like if this was China.
I don’t see how you read the post below and ever think U.S. treasuries are a safe investment ever again.
The President of the United States is threatening to specifically target civilians and civilian infrastructure out of vengeance like we have been transported to the 16th century and we are in the middle of the 30 Years’ War. The 30 Years’ War, where civilians were regularly killed and crops systemically destroyed, was so brutal that the war didn’t end until 40% of the population on the continent was dead from war, famine, and disease as trade broke down from targeting civilians. We’re choosing to play a very dangerous game.
The Suez Parallel
The 1956 Suez Crisis wasn't just a military humiliation for the British. It was the moment the world's financial system saw Britain was no longer the guarantor of global trade routes. This is the second assumption Louis describes above and what is at stake with Hormuz for the U.S.
The Suez Crisis was a joint British, French, and Israeli operation where Israel would attack Egypt, who had recently nationalized the Suez Canal, and then the British and French would enter under the deception of separating the two warring nations, while actually using it to regain control over the canal.
What finally broke the British wasn’t a military defeat in the field, but a defeat in their debt market. The Americans threatened to sell the U.S. government's sterling bond holdings, which could devalue the pound and undermine Britain's foreign exchange reserves.
By 1956, Britain was highly dependent on international borrowing to maintain its standard of living. The United States owned $3.75 billion in British debt, more than the entire foreign currency reserve of Britain.
The Suez crisis showed the world the British pound was an overvalued currency propped up by prestige. The foundation of what made the pound a global reserve currency was gone by 1956. The empire had lost India in 1947. It was highly indebted after the second world war. It was no longer the guarantor of global trade routes, that was now the U.S. Navy. How goes global trade so goes the global reserve currency.
The decades that followed were not kind to British investors who stayed denominated in sterling following the Suez Crisis. Britian held it’s dollar peg through enormous sacrifice for the next decade with repeated rounds of austerity, restricted imports, and slow growth until finally the peg broke in 1967.
In November 1967 the British government devalued sterling by 14.3%. Families lost 14% against the dollar in a single weekend, and that was just the official number. As we all know, the erosion of purchasing power exceeds the official numbers and it was the same in 1960s Britain as continuous inflation and underperformance hurt those that stayed denominated in sterling. It didn’t help matters that the economy continued to become less competitive compared to other major world economies as Britain tried to hold the peg to the dollar for that decade but ultimately failed as the dollar became the dominant global reserve currency.
Comparing the current Hormuz crisis to Suez, the credibility shock that the U.S. is not guaranteeing the sea lanes is real. Hormuz handles roughly 20% of global oil supplies, much more than Suez, and as the U.S. cannot guarantee freedom of navigation, ships are starting to pay the toll in RMB to transit Hormuz.
According to three separate sources with direct knowledge of the new system, vessel operators are being asked to contact approved intermediaries with IRGC connections prior to moving.
They are then instructed to submit full documentation, including IMO number, ownership chain, cargo manifest, destination and a full crew list.
The intermediaries then forward the package to the IRGC Navy’s Hormozgan Provincial Command for sanctions screening, cargo alignment checks that currently prioritises oil over all other commodities, and for what is described as “geopolitical vetting”.
While not all ships are paying a direct toll at least two vessels have and the payment is settled in yuan.
Next is the reserve currency trust shock. In 1956, the U.S. used its financial leverage over Britain to discipline Britain. Today, the U.S. is the one being disciplined and the one who weaponized its own financial system. The 2022 freezing of Russia's foreign exchange assets was a pivotal moment. Countries have been buying gold ever since, drawing down their dollar reserves since the U.S. is now willing to seize dollar reserves. The shift toward a politically neutral, seizure-resistant reserve asset is real. Emerging markets share of gold as reserves has more than doubled in the past decade while China’s U.S. treasury holdings have declined by 45% since a peak of $1.3 trillion in 2013, now down to $730 billion.
The parallel between Suez and Hormuz isn’t exact. The U.S. is not as vulnerable as 1956 Britain. The U.S. is a net energy producer, it has the deepest capital markets on earth, and the dollar's share of reserves is declining gradually. However ships paying tolls to Iran in RMB to transit Hormuz because the U.S. Navy cannot enforce freedom of navigation is not a small thing. While the direction is clear, the rising power is not. After the Suez Crisis, British investors who pivoted toward dollar assets and U.S. equities did extremely well as they rode the rising hegemon. So what are the consequences of this thinking forward?
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