▶ Full Post Text
*A lot has been happening personally lately, so whilst I wanted to comment on things sooner, I have been frankly utterly exhausted. In any case, recent headline events have been quite stirring, economically and diplomatically so I sat down to compile a brief update :)*
**SCOTUS**
The Supreme Court recently invalidated President Trump’s use of IEEPA for global tariffs. As expected, the administration immediately pivoted to Section 122 of the Trade Act of 1974 to impose 10%, and then 15% levies, likely seeking to offset forward relative losses in revenue. Surprise.
Interestingly, Section 122 applies only to fundamental international payments problems or severe financial instability.
Specifically, it allows for imposition of tariffs or import restrictions, to a maximum of 150 days, if “fundamental international payments problems require” restricting imports to manage “serious United States balance-of-payments deficits.”
A persistent trade deficits is not an acute currency or payment crisis. The DOJ has historically maintained that trade deficits remain conceptually distinct to payment crises.
The law is clear, in that a Section 122 “payments problem” involves a flight from the U.S. dollar; designed to combat a devaluation of the dollar in the 1960s and 70s during the Petrodollar turmoil.
It is almost certain that the Section 122 tariffs will be subject to legal contest, and likewise vulnerable to refund and repayment, causing further balance sheet holes in the Treasury, should repayment be upheld in the courts of arbitration.
In the near term, it's a stall manoeuvre by the administration to prevent a large balance sheet dilemma, preying on the legal delays inherent in challenging an invalid directive.
An executive equivalent of the third finger salute to the everyday person and corporate America. Watch for pivot to alternate legislation in coming months as cracks appear in Section 122.
**Iran**
Mobilisation of the US forces in preceding weeks have shown to be less than theatre; estimation of theatre and coercion would be erroneous, or a very expensive exercise. Unsurprisingly the 'Board of Peace' has shown to be more than a peace-finding alliance, and little less than an Iran-escalation containment conference.
Recently with the death of Ayatollah Khamenei, the ambition of regime change instead throws Iran into constitutional crisis. Under Article 111 of the Iranian Constitution, a provisional council holds transitional authority, but with IRGC Chief Commander Mohammad Pakpour also eliminated, the dual clerical-military structure is effectively shattered. This leaves considerable power vacuum - one that President Trump is urging the Iranian people to utilise and capitalise on in order to erect more permanent regime shift in a recent social media post.
In terms of markets, the Saturday strategy of a weekend strike to avoid a Monday morning gap-down is wise, however with retaliation on US bases already underway, this anticipated economic containment is already breached.
From a commodity perspective, while the USA-UK-Israel alliance projects mass firepower into the Arabian Sea, the tactical strikes and presence will hardly translate into maritime security. Iran unfortunately possesses geographical advantage and aymmetric denial of the Hormuz Strait with overwhelming volume of ballistic missiles and drones, rather than technological parity.
Individual high-value vessels may be largely protected, whilst the safety of the 80% of un-escorted commercial traffic is at high risk. Immediate diversion of nine LNG carriers on Saturday and surging Lloyd's of London war-risk premiums prove this point.
Without doubt, the Arab nations will benefit from this. From a global perspective unfortunately any narrative of Arab oil excess mitigating this disruption is erroneous. In raw data terms, Saudi Arabia’s current spare capacity of 2.4 million b/d is hardly replacement for 20 million b/d that represents 20% of global supply, and while the East-West Pipeline has a surge capacity of 7 million b/d, there remains a structural deficit of over 13 million b/d.
Priority is likely to be given to Western nations, leaving a large energy shortage for Asia, which relies on Hormuz for over 70% of its crude (language, excuses my French).
*In light of this surges in Oil, SQQQ, Yen are likely to be seen immediately on Monday. Defence stocks bullish. Defense & Geoint tech mixed drop-to-recovery; currently watching a few stocks in this space that present a buying opportunity*
🍀