Blockade Stumbling Block

Even though I have as little information as everyone else, I think my Iran War calls have been pretty good (if I do say so myself). I had been wondering in the early weeks of the War why we didn’t blockade earlier. It made no sense to allow Iran to profit during the War. I suppose better late than never. In any event, I have some thoughts about the blockade and why it may not be as successful as people seem to think. The blockade is more of a slow bleed than a decapitation, so it will be interesting to see whether Iran or the global economies crack first.

But first the week in news:

· The FOMC meeting provided little information. I was leaning towards thinking the Fed may move to a neutral bias, but it appears there are only a handful of members (3 voters and at least one non-voter) who wanted the switch. I think all it would take is another high CPI report. But the June meeting will have Warsh at the helm, so it will be interesting to see if Warsh can keep the hawks at bay.

· Warsh says he is not a fan of forward guidance. The lack of forward guidance could cause more volatility in the markets. This is because the markets will be guessing at the direction and magnitude of future moves. Higher volatility could mean lower asset prices, AOTBE. As a trader, more volatility could mean more opportunities. But I am not holding my breath, as it’s unclear if the rest of the FOMC agrees.

· Warsh apparently said during his testimony that more than 4 meetings a year was appropriate. I don’t see what would be gained from switching from the “8 meetings a year” stance that most central banks have taken. However, you should be cautious about trades that rely on the current 8 meeting time structure.

· Trump raised EU auto tariffs to 25% (again). This is why you can’t give Trump much in a negotiation. He has a dirty image, so everyone knows that anything that is agreed to can’t be relied on. It probably shouldn’t be a surprise that Iran took nuclear enrichment off the table (for now).

· The UAE quit OPEC. This could put downward pressure on the longer end of the oil curve, as it could take some time for the UAE to ramp up production from pre-war levels (assuming the War ends at all).

Blockade Stumbling Block

It seems obvious that the Don thinks the US blockade will be a huge success, as he seems to think it’s the Trump card in getting the Iranians to capitulate. A blockade can be effective over time. HOWEVER, there are a few things that should be noted:

· Trump’s limited experience with naval blockades has been positive, and could be clouding his judgement on effectiveness. The naval blockade worked well in Venezuela because they only have three neighbors: Guyana (who they have threatened war), Brazil (I doubt there is much commerce through the Amazon), and Columbia (who have had a tense history with). So in effect, Venezuela is an “island” so they are heavily dependent on the sea. Ditto for Cuba, which is an actual island.

· Iran has SEVEN neighboring countries by land. Plus, they have the Caspian Sea, by which they have access to two more countries (including Russia). Russia is making so much money right now that they are probably happy to provide as much assistance to Iran as possible to keep the standoff going. That is a total of NINE countries that Iran can actively trade with, WITHOUT THE BLOCKADED OCEANS. It is no coincidence that Persia was the center of global trade for millennia. In addition, Iran is part of China’s Belt and Road railway, so while China is not a direct neighbor, Iran still has access to trade with China. In other words, Iran has access to EVERYTHING. So while the ocean is how they get out almost all of their oil and conduct 70% of trade, they still have trade – especially since the US naval blockade does not include food, medicine and other supplies. Is the blockade annoying? Sure. Is it as critical as Trump is saying? Probably not.