Mutually Assured Destruction Stays Trump's Hand. The Bond Market Will End The Stalemate.

Strait of Hormuz, Bab-el-Mandeb, Suez Canal and Gibraltar Strait all in play. Diplomacy won't end the Iran War. The Bond Market will.

That Trump again rowed back on his latest threat to destroy Iran’s energy infrastructure obviates Tehran’s retaliatory destruction of all the Persian Gulf’s oil-and-gas installations and keeps alive — however tenuous — the possibility of an off-ramp from the war.

No matter, we have seen a significant expansion of the war with tankers being hit in the Caspian, Persian Gulf, Gulf of Oman, Red Sea and now the Mediterranean, where a US owned LNG tanker and Floating Storage and Regasification Unit (FSRU) were struck at Egypt’s Damietta port.

The message is clear — if Damietta port on Egypt’s Mediterranean coast can be struck by drones (assuming it was not a false flag) so can ships transiting the Suez Canal; that same capability can also just as easily hit Ukraine in retaliation for their strike on an Iranian vessel in the Caspian.

And Yemen has effectively shut down Saudi’s East West crude oil pipeline. The extent of the damage done to the world’s largest crude oil stabilisation and processing facility at Abqaiq has not yet been made public.

That Saudi responded by striking the Popular Mobilisation Forces and Shīʿi militia groups in Iraq — despite Yemen’s Ansarallah claiming responsibility — was either a response to a combined Ansarallah-PMF-IRGC operation launched from Iraq against the Kingdom or more likely the result of US pressure to hammer Iraqi resistance groups aligned with Iran.

Either way Riyadh risks opening three separate fronts if it continues to confront or facilitate US attacks against its largest northern, western and southern neighbours — Iraq, Iran and Yemen. Unsurprisingly, Lloyd’s of London has already instructed brokers to exclude Saudi-linked ships from war-risk cover.

Washington remains trapped in denial, unable to prevent Tehran from prising open its grip on three of the world’s most critical maritime chokepoints — the Strait of Hormuz, Bab el Mandeb and Suez Canal. That the Strait of Gibraltar is also ostensibly in play, now a target for the Israel-Morocco axis to punish Spain, will only add to the West’s reverses.

Scarcely believable — Iran and Yemen, two of the most sanctioned and isolated nations on earth, have established a new geopolitical reality — maritime trade in the Persian Gulf, Red Sea and Mediterranean is now at their discretion (the vast majority of direct maritime trade between Europe and Asia uses the Suez Canal). In essence the linchpin to over three centuries of western hegemony — control over the world’s critical maritime chokepoints — is being prised out.

A return to the Persian Gulf bases the US has been forced to evacuate is not going to happen anytime soon, if ever — in other words, the US is being systematically excised from the Gulf with clinical precision, before our eyes.

Only, as we have seen, Washington is willing to risk all, including sinking the global economy — and Europe and East Asia with it — to reassert control over the Strait, halt its ongoing expulsion, and put Iran back in the cage it so carefully constructed over the last half century.

That’s because, if it loses the Persian Gulf, it can no longer provide the ‘protection’ it guaranteed under the 1974 ‘Milestone Pact’ to the Sunni Gulf Monarchs, in return for their adherence to the petro-dollar mechanism — a then secret annex to the Pact — whereby Gulf oil revenues are recycled into US debt. Bluntly, it would massively accelerate the end of dollar hegemony.

Yet for Washington, there are no good choices left. Relinquishing control of the Strait confirms Iran as the region’s preemptive power and ushers in a new security architecture that excludes Washington.

Striking Iran’s energy infrastructure would by extension destroy the entire Gulf’s oil-and-gas installations, plunging the world into a crisis the depths of which we can only guess, not to mention depleting the US arsenal of defensive and offensive missiles.

There is also the risk that half a dozen monarchs would lose their crowns overnight if their kingdom’s revenues suddenly stopped. The US is not just providing ‘protection’, it is propping up deeply corrupt, dynastic families, ruling over cowed subjects.

No surprise then that Saudi’s de facto ruler, Mohammad Bin Salman, reportedly pleaded with Trump to cancel the strikes on Iran’s energy infrastructure.

And any deal with Iran, at the very least, will mean further significant, upfront concessions that simply could not be sold as a victory. Tehran is in no mood to provide Trump with a face saver.

Even assuming a deal is struck, economic pain is now baked in and is already erupting. Did anyone really think there would be no casualties from soaring energy prices?

Well they have certainly hit the Japanese Yen hard, at one point sinking to a 40-year low. The US Treasury was forced to sell Euros and buy Yen or risk its largest foreign buyer of Treasuries initiating a fire sale. That support is but a sticking plaster for a bond market that is bleeding out. US 10Y yields are already hovering around 4.7 per cent, if they hit 5 per cent, Washington’s $40 trillion dollar sea of debt becomes a tsunami that will engulf global markets.

It won’t be diplomacy that ends the kinetic war — it’ll be a bond market in freefall.

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