Before diving into the dynamic updates of the war and related political developments, please immediately read Craig Tinsdale’s widely distributed article, “Systemic Risk: A 12th Cascade Analysis of the Zero-Flow Strait of Hormuz Closure.” In all seriousness, allowing this analysis to gain the traction it deserves may be the best way to move the investor base out of its unduly complacent attitude toward this conflict. As we said in the run-up to the 2008 crisis, financial time moves faster than political time. President Trump went to TACO as a result of the market crash after Emancipation Day. Raising the funds to wake up to the seriousness of the downside risks of continuing this conflict should create a market movement that could force Mr. Trump to retreat.
Tinsdale’s analysis is both reliable and alarming. My normally phlegmatic colleague Aurelien sent me this book with a note that said, “It makes my hair stand on end…”
Yesterday, in our update on the Iran war, we alerted our readers to the potential impact of anything beyond the short Strait of Hormuz on fertilizers and agriculture. Tisdale argues that far more important sectors will also be severely affected. The neoliberal creation of overly efficient supply chains dependent on oil inputs (Nassim Nicholas Taleb has long warned that highly efficient systems are vulnerable) means that significant oil and gas crises will cascade and create destabilizing synergies much faster than expected.
Please send this article to relevant people, especially market commentators, asset managers, business journalists, and politicians, including members of Congress and their staff.
I highly recommend reading Mr. Tinsdale’s review in full. Key parts of his executive summary:
The modern world order, organized around efficiency, cost minimization, and logistical precision, has created a system of dependence so extreme that the blockage of one narrow passage can spread outward and lead to a crisis for entire civilizations…
From here, the logic cascades cumulatively. Fuel inflation becomes fertilizer inflation. Fertilizer inflation becomes food inflation. Food inflation leads to urban instability, the depletion of government subsidies, and ultimately starvation. In this context, food shortages are not a secondary humanitarian problem. These are among the central political consequences of the crisis. Because people today experience system collapse not first through grand strategy, but through unaffordable bread, intermittent electricity, empty pharmacies, and, in some cases, a breakdown in security. The globalized Arab Spring.
In this framework, hyperinflation appears as a social expression of an actual physical bottleneck. When energy-importing countries are forced to obtain dollarized fuel at any price, their currencies depreciate, and fertilizer and transportation costs reprice the entire harvest cycle, inflation ceases to be cyclical and becomes forced.
Enter all household accounts and all state ledgers at once. As a result, the plan itself is destroyed. Businesses will no longer be able to estimate, governments will not be able to subsidize, and citizens will no longer be able to calculate the future. Under such conditions, credit markets become dysfunctional, foreign exchange reserves are depleted, sovereign spreads widen, and the boundaries between economic and political crises disappear.
Modern technological systems amplify this disorder rather than weaken it.
The closure of the strait will thus extend, by entirely physical means, to server racks, hospital networks, payment systems, electrical substations, and defense industrial bases. In this scenario, the myth of a digital civilization floating above heavy industry disappears. Computing has been shown to rely on copper, transformers, stable voltage, LNG, ships…
The most immediate suffering will fall on import-dependent and fiscally weak societies: power outages, food insecurity, unemployment, debt defaults, regime stress, and mass unrest. However, developed countries are not running away. They are experiencing deindustrialization, infrastructure delays, AI and semiconductor bottlenecks, strategic stockpiling, and a permanent repricing of security over efficiency. What started as a supply shock ends up as a political and economic transformation. Countries will abandon the fiction of neutral markets and move toward allocation of command, export controls, emergency powers, and militarized trade corridors. Market prices are replaced by strategic rationing. Globalization is not just about slowing down. It hardens and becomes an armed block.
The final conclusion is stark. The terminal risk in this model is not a shortage, a recession, or even a war risk premium.
It is a transition from a globally integrated commercial order to a world system dominated by scarcity, coercion, and administrative triage.
These are the normal operating features of a civilization that late discovered that its efficiency was built on concentrated vulnerabilities….
There is such a risk. The whole world will be forced to support efforts to bring this situation under immediate control. China, the US and Europe need to work together.
The political cycle over the coming days and weeks will be more important than ever.
Here are 10 crises that are likely to be imminent
Polyester → Apparel… Natural gas → Fertilizer → Food… Sour crude oil/sulfur → Sulfuric acid → Copper… Propylene → Polypropylene → Medical/Packaging… Salt + Electricity → Chlorine/Caustic Soda → Water Treatment… Natural Rubber + Synthetic Rubber → Tires → Cargo… Iron Ore + Coking Coal → Steel → Construction/Machinery… Bauxite + Alumina + Cheap Electricity → Aluminum → Transportation and Packaging. Soda ash + natural gas -> glass -> buildings, cars, solar power… High purity gases and chemicals -> Semiconductors -> Electronics and automobiles
Note that not all of these catastrophic cascades propagate in the same time frame, as can be seen from the text of Tisdale’s analysis. He identified early on that semiconductor supply chains, refining and industrial chemicals, mining and metal mining were suffering body blows.
In theory, if Iran allowed Chinese and Russian ships to pass through the strait, the overall impact of the closure would be blunted. But all I’ve found are unconvincing sources that say Iran will allow Chinese ships through. For example, from NDTV:
According to sources, Iran announced that it would only allow Chinese vessels to pass through the Strait of Hormuz, expressing gratitude for the Chinese government’s stance toward Iran since the outbreak of the Middle East war. This is important because the strait, which provides access to the open sea from ports in the Persian Gulf, is a key chokepoint that Iran has blocked since the start of the conflict in the region, threatening global supply chains.
Furthermore, some analysts argue that the real reason for the Iranian operation is a continuation of US efforts to disrupt China’s energy supplies, perhaps motivating the US to take control of Venezuela’s oil through the Caracas raid. Although I have doubts about that theory, I believe that Iran’s nuclear program represents a fusion of Zionist and China hawk interests.
But if reining in China is part of this equation, the United States will likely pursue China-bound tankers operating from the Persian Gulf. All it would take is a single attack or seizure to dampen shipowner participation. And that’s before we get into the question of how many ships engaged in the China trade are insured out of London. Risk writers may not trust Iran’s promise to let these tankers sail unimpeded, or they may be relied upon by Western governments not to give them a break on war risk rider pricing.
Note the remarkable rendition that Bloomberg has made of the new tanker accident. From the landing page as of 7am EST:
Given that bleak picture, our editorial balance on developments in the Iran war might seem to lie in “Mrs. Lincoln, how was the play?” category.
In case you haven’t seen it yet, Larry Wilkerson has a particularly useful discussion.
