The Battle for the Strait of Hormuz (WSJ)

It’s no mystery what Iran intends to achieve by blocking the Strait of Hormuz. It seeks to pressure President Trump to end the war prematurely, establishing an Iranian veto on energy flows and winning impunity in the future. But what if Mr. Trump won’t play along? The result is the emerging Battle of Hormuz. (…)

Asked Sunday about the political cost of rising oil and gas prices—Iran’s remaining means of coercion—Mr. Trump replied, “I have to do what’s right. I can’t say that, ‘You know, gee, I don’t want to have any impact on oil prices for three or four weeks, or two months, and we’re going to let Iran have a nuclear weapon.’” (…)

Mr. Trump is rallying a coalition, and allies can help reopen the Strait with anti-mine vessels and more. “Numerous countries have told me they’re on the way,” he said Monday. (…)

This is no easy mission, and “militarily manageable risk” won’t be comforting to Americans or energy markets if this goes sideways. But Iran doesn’t hold all the cards. Its action in Hormuz could force Mr. Trump to see the war through, which is bad news for the regime. (…)

Tehran has given the U.S. a challenge that could add up to a strategic defeat if Mr. Trump stops early. (…)

Armed with missiles and drones, Iran’s regime has closed international waters and attacked neighbors’ energy facilities. This is while Iran is relatively weak. Imagine how the regime would blackmail the world—and get away with it—if it were left to amass twice or three times the missiles, or nuclear weapons.

The Battle for Hormuz underscores the U.S. interest in degrading the ayatollah regime—and giving Iranians a chance to overthrow it.

• Who is winning the Middle East war? (FT)

(…) The man with access to the best intelligence available, Donald Trump, insists that the US and Israel are clearly winning, before bemoaning that the Islamic republic is not caving. (…)

Rushing a Marine Expeditionary Unit from Okinawa, moving air defence systems from the Korean peninsula and urging navies from ambivalent if not unfriendly countries to deploy in the Gulf region are not a sign of panic given Washington’s massive capabilities. But they are not indicators of sound forecasting and well-thought-through planning either.

For every gung-ho retired general on television, there is another quiet one shaking his head.  

Reactive defence requires resources and the sustainment burden will be significant and politically controversial. How many ships can be devoted to escorting tankers and will any other nations help? How many aircraft and drones can be kept in the air at all times?

Good strategy is the alignment of ends and means. By that standard, the Iranians haven’t done badly. Lacking the ability to defend itself, Tehran has chosen to impose a high cost all around and its focus has been deliberate.

(…) the nearby UAE has borne the brunt of Tehran’s retaliation, followed by Kuwait and Bahrain. High on the list has been energy infrastructure, from production and refining to loading and transport. Saudi Arabia has comparatively been spared, although one-third of the drones fired at the kingdom has targeted the crucial oil site of Shaybah.

Above all, Iran’s ability to paralyse maritime traffic in the Strait of Hormuz has defied expectations that the US had gamed this war out.

Graphs showing high interception rates and reduced incoming projectiles don’t say how many interceptors have been used up or whether Iranian targeting has improved. Modern interstate warfare is no longer primarily about the frontline, it is about what happens in the rear. Russia’s invasion of Ukraine and the latter’s valiant defence show how faulty assumptions can deny military victory to the force that is strongest on paper; how no single or specific range of weapons systems can be decisive; how adaptation and innovation give temporary advantage before being matched or overcome by the other side; how social resilience underpins military power.

What will phase two of the war look like?

For Israel, the focus will be on the continued destruction of Iran’s military infrastructure and greater targeting of its coercive apparatus to weaken the Revolutionary Guards and its associated militia, the Basij force.

For the US, the goal will be to restore maritime traffic, defend its Arab partners better than to date and adapt to Iran’s own adaptations.

For Iran, it could involve weapons we have not seen deployed much. One of the mysteries of the war is why it has not fired more of its cruise missiles. The optimistic answer is that they have been largely destroyed; the likelier one is that Iran has held many back as they are a particularly useful capability for close combat in the Strait of Hormuz.

After the beating it has taken, the Iranian regime is unlikely to back down because it retains several advantages: geography, time and asymmetry. Iran can target more countries and areas from more positions. The longer the war goes on, the greater the cost to everyone else — and the Iranian regime has superior pain tolerance. When survival is the goal, anything goes.

• The “Final Battle” (Ray Dalio)

(…) I hear from those who run governments, geopolitical experts, and people all over the world that if Iran is left with control over who can pass through the Strait of Hormuz, or is even left with the power to negotiate:

1. The United States will be judged to have lost the war, and Iran will be judged to have won. (…)
If Donald Trump and the U.S. don’t win this war—with victory being easily measured by whether they can ensure safe passage through the Strait of Hormuz—they also will be perceived to have caused a disastrous situation they could not fix. (…)

When the world’s dominant power that has the world’s reserve currency is overextended financially, and it reveals its weakness by losing both military and financial control, watch out for allies and creditors losing confidence, the loss of its reserve currency status, the selling of its debt assets, and the weakening of its currency, especially relative to gold.

(…) it will threaten American power in the world and the existing world order. (…)

If President Trump demonstrates his and the U.S.’s power to do what he said he would do, which is win this war by having free passage through the Strait of Hormuz and eliminating Iran as a threat to its neighbors and the world, it will greatly bolster confidence in his and the U.S.’s power.

2. If, on the other hand, the Strait of Hormuz is left in the hands of the Iranians to use as a weapon to threaten American allies in the Gulf and the world economy more broadly, everyone will be hostage to the Iranians, and Donald Trump will be perceived to have picked a fight and lost. (…)

President Trump is now calling on other countries to join the U.S. in ensuring the free passage through the Strait; his ability to get them to do so will be indicative of his ability to form alliances and muster power, so that would be a big win.

It will be very difficult for the United States and Israel alone to ensure the safe passage of ships without prying Hormuz loose from Iranian control, and it will likely require a great battle to do so.

The outcome is existential for the Iranian leaders and the largest and most powerful segment of Iran’s population. To the Iranians, this war is very much about revenge and commitment to what matters more than life. They are willing to die as a demonstrated willingness to die is essential for one’s self-respect and showing the devotion that brings about the greatest reward—while Americans are worrying about high gas prices and America’s leaders are worrying about midterm elections.

In war, one’s ability to withstand pain is even more important than one’s ability to inflict pain.

The Iranians’ plan is to try to drag the war out and steadily intensify it because it is widely known that the American public, and therefore American leaders, have very limited capacities for pain and wars that drag on. So, if this war is made painful enough and long enough, the Americans will abandon the fight and their Gulf “allies,” and other “allies” around the world, will see that the United States will not be there to protect them. This will undermine the relationships with aligned countries in analogous situations.

3.
While there is talk of ending this war with an agreement, everyone knows that no agreement will resolve this war because agreements are worthless. Whatever happens next—i.e., leaving Hormuz in Iranian hands or taking control away from them—is likely to be the worst phase of the conflict. This “final battle,” which will make crystal clear which side won and which side lost control, is likely to be a very big one. (…)

Both sides know that the final battle, which will make clear which side won and which side lost,still lies ahead. And they know that if President Trump and the United States don’t deliver on reopening the strait, it will be terrible for them. If,on the other hand, President Trump wins this final battle and eliminates the Iranian threat for at least the next several years, it will greatly impress everyone, empower President Trump, and demonstrate American power.

4.
The direct and indirect effects of this “final battle” will ripple around the world, affecting trade flows, capital flows, and geopolitical developments with China, Russia, North Korea, Cuba, Ukraine, Europe,India, Japan, etc. (…)

I want to emphasize that I am not political; I am just a practical person who has to bet on what will happen (…).

• Trump’s coalition of the unwilling (FT)

(…) America’s partners are suffering, too, from soaring oil prices since Iran in effect closed the crucial oil artery. Getting dragged into the Middle East conflict, however, could be worse. They have every right to remain outside a war they did not seek or endorse.

Trump has called for European allies including the UK and France, as well as China, Japan and South Korea, to join a coalition to open the strait. Despite America’s naval strength, officials say European countries possess specialised assets such as mine hunting ships and drones. For the US, having a multi-flagged fleet in the strait makes it harder for Iran to retaliate without risking escalation on multiple fronts. (…)

For those Trump is pressing to join in, doing so carries multiple dangers. Tehran has declared any ship from a coalition ally in the strait a “legitimate target”, raising the risk of attacks that could suck them into a wider conflict. Trump is signalling that not participating carries risks, too: he might reduce US commitments to European security. The president has said pointedly that he will remember who answered his call.

While Trump is asking Nato members to support a US-led coalition rather than launch a formal Nato mission, he is overtly using the alliance as a lever. Nato is, however, a defensive alliance designed to aid members that are attacked. It has demonstrated its readiness to come to America’s assistance — in Afghanistan, when the US triggered Nato’s collective defence clause after the 9/11 attacks for the only time in its history. It also undertook operations “out of area” in Libya in 2011, under a UN Security Council mandate to protect civilians.

Trump, disingenuously, portrays allied support in Iran as a form of payback for US help to Ukraine. Russia’s full-scale invasion posed a direct menace, however, to Nato’s core area. The US decision to join Israel in striking Iran is, by contrast, a war of choice, in which Trump has provided no evidence that the Islamic regime posed an imminent threat. Nato is not a vehicle for one member to launch a discretionary conflict then demand that others pitch in. (…)

US allies are justified in avoiding steps that could make them a party to the war. If the US and Israel call a halt to their strikes, partners can examine options to police the strait against any further Iranian attacks. They also have a role to play in negotiating with Iran. (…)

Naval escorts will not guarantee safe passage through Strait of Hormuz, says IMO chief

The head of the International Maritime Organization has said that naval escorts through the Strait of Hormuz will not “100 per cent guarantee” the safety of ships attempting to transit the critical waterway. (…)

Dominguez said that part of the problem was the geography of the strait. It is 33km wide at its narrowest point, but the combined width of the deep-water shipping lanes for traffic in each direction is just two nautical miles (about 4km).

The Strait of Hormuz is bounded on the Iranian side by mountains, which favour the aggressors who can strike ships from on high with little notice. “We are collateral damage of a conflict when the root causes have nothing to do with shipping,” Dominguez said. (…)

Access to ports is limited as well because port facilities are being targeted. At some point, supplies will start running low in relation to food, water and oil [fuel] for the ships to continue to operate.” (…)

U.S. Allies Rebuff Trump’s Demand for Help Opening Strait of Hormuz

Germany has rejected taking part, while Japan and Australia have indicated they are unlikely to send vessels to help. Britain and France said they are assessing possible action but haven’t committed to doing anything before fighting halts. All are close U.S. allies. (…)

“This is not our war. We did not start it,” German Defense Minister Boris Pistorius said.

European reluctance to get involved reflects in part strained relations with a U.S. administration that has derided its traditional allies and leveraged its economic and military heft to achieve its desired outcomes. (…)

None of Washington’s traditional partners can afford to entirely dismiss White House pressure. European countries are still trying to keep Trump engaged on Ukraine and prod him away from a U.S. realignment with Russia, out of fears it would undercut Kyiv’s sovereignty and help relieve economic pressure on the Kremlin.

Europe is highly exposed to near-closure of the strait after a surge in energy prices across most of the continent following Russia’s invasion of Ukraine in 2022. European countries are slashing Russian energy imports. They were angered by an administration decision last week to temporarily lift sanctions on Russian oil exports. (…)

French President Emmanuel Macron has sent eight frigates, two amphibious helicopter carriers and an aircraft carrier to the region and said some ships would be deployed near the Strait of Hormuz. Macron is seeking to put together his own coalition of European, Asian and Gulf countries for a mission, but French officials say any operation would take place after a halt in the fighting. (…)

The EU’s foreign-policy chief, Kaja Kallas, said after the meeting: “Nobody wants to go actively in this war.” (…)

***

Nvidia’s CEO Projects $1 Trillion in AI Chip Sales as New Computing Era Begins

Chief Executive Jensen Huang ushered in the Age of Inference at the company’s annual GTC conference Monday, outlining a huge array of new products, both in hardware and software, geared toward running AI models more quickly and efficiently. (…)

“The inference inflection has arrived,” Huang said in his keynote speech. “This is the secret sauce.”

Huang said Nvidia expected to sell $1 trillion worth of Blackwell and Rubin chips by the end of 2027, updating earlier guidance that had the company selling $500 billion worth by the end of 2026. (…)

The coalition’s work would put the development of enterprise software tools into hyperdrive, Huang said, helping speed the transformation of the world’s software-as-a-service industry into an agentic-AI-as-a-service industry. (…)

The FT adds: “Right now where I stand . . . I see through 2027 at least $1tn” in revenue, said Huang, adding he was “certain” demand would prove to be higher. (…) Analysts’ forecasts for its 2027 and 2028 fiscal years — running to the end of January 2028 — total about $835bn, according to Capital IQ.

• NVIDIA GTC Keynote 2026

Did you miss The AI Supercycle: A Deep Dive.

• AI Capex Ate the Economy in Q4 Revised Q4 figures turned AI capex into the only material growth line

[Last Friday] BEA second estimate revised Q4 2025 GDP growth down to 0.7% annualized, which is half the advance estimate. Buried in the detail: the BEA line that captures servers and GPUs and such contributed +0.66 percentage points to that growth. The rest of the U.S. economy contributed roughly +0.04 points — statistical noise.

That’s the direct figure. It almost certainly undercounts AI’s role. Data center structures investment is a net positive contributor masked inside a broader nonresidential structures line that declined overall. Power infrastructure buildout driven by data center demand adds more. Construction wages more yet.

A reasonable upper-bound estimate puts AI-related capex at around +0.80 percentage points — exceeding total Q4 GDP growth. The implication: Strip out the AI infrastructure buildout and the U.S. economy was flat in Q4, with government spending (-1.03pp) and weak exports doing the most damage. AI capex just ate the (weakening) U.S. economy.

This is a different oil crisis: the volume, more than the price, is in play. The price will not matter much if much less oil is physically available for a long period.

“You can shut down the strait through fear alone,” retired Navy Rear Adm. and former Pentagon press secretary John Kirby said Thursday on MS Now’s “Morning Joe.”

Secretary of War Pete Hegseth saw a need to explain last Friday:

The only thing prohibiting transit in the straits right now is Iran shooting at shipping. It is open for transit should Iran not do that. As the world is seeing, they are exercising sheer desperation in the Straits of Hormuz, something we’re dealing with. We have been dealing with it and don’t need to worry about it.

The WSJ:

Before the U.S. went to war, Gen. Dan Caine, the chairman of the Joint Chiefs of Staff, told President Trump that an American attack could prompt Iran to close the Strait of Hormuz. (…)

Trump acknowledged the risk, these people said, but moved forward with the most consequential foreign-policy decision of his two presidencies.

He told his team that Tehran would likely capitulate before closing the strait—and even if Iran tried, the U.S. military could handle it.

But:

• The U.S. military has started looking at options to potentially escort ships through the strait, should it be ‌ordered to do ⁠so, General Dan Caine, chairman of the Joint Chiefs of Staff, said on Tuesday.
• Officials describe the narrow strait as a “kill box” where Iranian missiles, drones, and mines pose an extreme threat to both tankers and warships.
• Experts warn that even advanced destroyers may be overwhelmed by “swarms” of fast boats or low-flying drones that are difficult to intercept in such narrow waters.
• Analysts suggest that a full reopening of the strait may require the “decimation” of Iranian coastal defenses, a process that officials expect to take weeks rather than days.
• “The challenge is going to be dealing with the proximity of the drone launchers and the missile launchers that are going to be along the Iranian coast,” said Bryan Clark, an expert in naval operations with the Hudson Institute. (…) it would require at least a dozen MQ-9 Reaper drones patrolling the skies and striking Iranian missile and drone launchers when they pop up on the coast. That’s thousands of soldiers and sailors, and a pretty sizable investment of money, and you might have to do it for months.”

Nonetheless:

• Donald Trump said the US Navy would “soon” escort oil tankers through the Strait of Hormuz.
• Trump said escort operations would begin “very soon.” In a pair of social-media posts Saturday, the president called on other nations to help.

But:

• On March 12, energy Secretary Chris Wright and defense officials have clarified that “We’re simply not ready. All of our military assets right now are focused on destroying Iran’s offensive capabilities and the manufacturing industry that supplies their offensive capabilities.”

CNN:

SSY [a naval broker] said the US Navy “has privately told the industry it will lack escort capacity until the initial stage of the military operation is complete. (…)

“Physical geography favours the attacker,” it said. “[Shipping] lanes are 2 [nautical miles] wide each direction; vessels transit at 10–12 knots and must turn at the narrowest point adjacent to Iranian islands.

“A destroyer can intercept missiles but cannot simultaneously sweep mines, counter drone-boat swarms from multiple bearings, and manage GPS disruption,” SSY said.

The firm pointed to recent US operations in the Red Sea at the height of attacks by Yemen-based Houthi militants, where “escorts failed to restore commercial traffic despite ~400 drones/missiles downed”.

An additional issue is that US law does not allow the country’s navy to escort ships that are not US-flagged or -owned, or have no US crew, the firm said. (…)

During the Iran-Iraq War, Kuwaiti oil tankers were under attack and requested US Navy protection. The US initially refused because the ships were foreign. To bypass the legal restriction, 11 Kuwaiti tankers were re-flagged as US vessels. They were renamed, given American captains, and flew the American flag, legally transforming them into US territory that the Navy was obligated to defend.

“It would take months to clear a backlog of more than 600 international trading ships stuck in the Gulf.”

That’s just to get them out of the strait. Some will need to get back in to load again…

The FT:

Tehran now has near-total sway over the Gulf oil market, forcing neighbours such as Iraq to almost entirely stop production and trapping roughly 300mn barrels of oil and gas in the region, a number that rises by about 20mn every day. (…)

Iran has never blocked the strait before, despite its previous threats. Its decision to do so this month, together with its attacks on neighbouring countries’ energy assets, is a mark of how existential a struggle the war has become for the country’s regime. (…)

“If the conflict drags on, the world’s reserves will be depleted.”

What now?

In a Truth Social post on Friday, the US president warned he would attack the energy assets if Tehran impeded more shipments through the Strait of Hormuz.

Trump said he had “chosen NOT to wipe out the Oil Infrastructure” on Kharg, which had been left untouched in the US and Israeli bombing campaign that began a fortnight ago.

However, he said he would reconsider his decision if Iran, “or anyone else”, does anything else to interfere with the free and safe passage of vessels through the Strait of Hormuz, the narrow waterway that is a chokepoint for global commodities.

Nine out of every 10 barrels of oil Iran sells abroad are loaded at Kharg.

Iran’s central military command’s response:

The Khatam al-Anbiya Central Headquarters said, “in response” to comments from President Donald Trump, that in the event of the country’s oil, energy and economic infrastructure being attacked, Iran would hit back at all such assets in the region that have American stakes or co-operate with the US.

This was “as we have warned before”, the unit’s spokesperson said in a statement in state media, saying they would be turned “into ashes”.

Other options?

The administration has said it is keeping all options on the table, including the use of ground troops.

Trump has gone from declaring the war over soon to calling on European and Gulf allies to help.

Trump was repeatedly pressed by European and Asian counterparts, countries the US failed to consult on the war, about his endgame. “If there’s no response or if it’s a negative response I think it will be very bad for the future of Nato”. Article 5 in reverse!

“I think China should help too because China gets 90 per cent of its oil from the straits [sic],” Trump said. He added that his trip to China might also be put back. “We may delay,” Trump said.

Meanwhile:

What is crystal clear is that the objectives of the United States and of Israel are not fully aligned.

Israel’s stance contrasts starkly with that of the Gulf countries dragged into the conflict. Reeling from the damage to their petroleum-based economies, they have, like Iran, complained of the economic cost of the war as they seek to bring it to an end. Both Qatar and Saudi Arabia have warned of the catastrophe that deepens with each passing day, as their oil and gas fields and processing plants become further damaged and take longer to return to normal.

Gulf countries tried to warn the US of the chaos it would unleash by seeking regime change in Tehran before the fighting began, according to several people familiar with the matter. (…) theGulf countries are “furious that this happened, they are furious with the Iranians and they are furious that the hornets’ nest was kicked.” (FT)

But no worries:

• No one was panicked then and no one is panicked now — this is a fake narrative that the media is peddling to sensationalise their stories,” says White House spokesperson Taylor Rogers. “The president and his entire energy team have had a game plan to stabilise the energy market since before the operation began.
• It is categorically false that they did not plan for Iran closing the Strait of Hormuz,” said Montana Senator Tim Sheehy on Friday. “Lawmakers and national security officials have known for years that this was Iran’s plan once their backs were against the wall. (FT)

Senator Chris Murphy is privy to the U.S. war strategy in the Persian Gulf and has recently attended classified briefings on the conflict:

“They had no plan to address the crisis in the strait,” said Sen. Chris Murphy (D., Conn.), who joined a classified briefing Tuesday with administration officials about the operation. “The fact that these guys didn’t have a plan ahead of time, and a week into the war still didn’t have a plan, was pretty shocking.”  I can’t go into more detail about how Iran gums up the Strait, but suffice it say, right now, they don’t know how to get it safely back open.

• The State Department didn’t urge U.S. citizens to depart countries in the region or evacuate some embassies until after the war began. By then, commercial airspace was already closed, leaving tens of thousands of Americans stranded in the Middle East and U.S. diplomats at some embassies in harm’s way.

How about this plan?

The White House has considered intervening in the oil futures market to try to bring down prices, said Interior secretary Doug Burgum, adding that such a move would be hugely costly. “I would say there has certainly been a discussion. We have a lot of smart people working in this administration, a lot of smart people work in the energy trading market,” Burgum told Bloomberg Television.

“The administration manipulating the market is one of the key risks to our view of oil prices rising,” says one hedge fund manager drily.

Such a move would be a “biblical disaster” if investors lost confidence in markets to set the price of such crucial commodities, says Terry Duffy, the chief executive of CME, which runs the world’s largest oil futures exchange. (FT)

It’s all figured out:

“The United States is the largest Oil Producer in the World, by far, so when oil prices go up, we make a lot of money,” the US president wrote in a social media post.

It’s not quite so simple as Time writes:

The first week of the war with Iran reportedly cost U.S. taxpayers upwards of $11 billion—a figure that doesn’t include the buildup of troops and warships in the region ahead of the initial strikes. (…)

Beyond the cost of munitions and military hardware, Americans are already feeling the effects of the war at the gas pump, and rising food prices could soon follow as the war disrupts global trade. Mortgage rates are climbing amid renewed inflation threats. And, stock markets have fallen as concerns grow about the war’s wider economic impact. (…)

In a Monday letter to Trump, Zippy Duvall, president of the American Farm Bureau Federation, warned that farmers across the U.S. would face disruptions in fertilizer supply and higher prices, which would translate into higher grocery prices for consumers. The U.S. “risks a shortfall in crops.” (…)

Gulf states produce nearly 49% of global urea exports and 30% of global ammonia exports, according to an analysis by American Farm Bureau economists, and around a third of the world’s urea transits through the Strait of Hormuz. Urea prices have already risen by 35% since the U.S.-Israeli strikes on Feb. 28.

Almost half of the world’s supply of sulfur, a byproduct of oil and gas refining that is used to produce fertilizers, also comes from the Gulf, according to CRU Group. Sulfur is also used in the manufacturing sector.

Big global producers like China may also consider imposing export restrictions to meet domestic demand. “This means that even though the United States does not directly import large quantities of fertilizer from the Middle East, domestic fertilizer markets still respond to price movements in the region,” the farm bureau said.

Around 8% of the world’s aluminum is produced in the Persian Gulf, according to the International Aluminum Institute, due to the fact that processing the metal requires large amounts of energy. Amid the closure of the Strait of Hormuz, aluminum smelters in Qatar and Bahrain have paused shipments of the metal.

The disruptions have already raised aluminum prices to their highest level in nearly four years. That surge could drive up the cost of autos, and lead to higher costs in the construction and aerospace industries, Lim says.

The Middle East also accounts for a significant amount of the world’s helium, a byproduct of natural gas processing that plays a crucial role in semiconductor manufacturing and has a range of other uses including in medical imaging, electric vehicle batteries, and defense technologies. The trade disruptions could push up the price of consumer electronics including iPhones and laptops.

Other “friends” also get hurt:

Allies in the Gulf are privately furious with the U.S., according to diplomats and others familiar with the matter. They blame the Trump administration for triggering a war that put them in the crosshairs and pierced their image of a luxurious, business-friendly locale free of the region’s chaos.

The World Travel & Tourism Council (WTTC) estimates that the escalating conflict involving Iran is costing the Middle East travel and tourism sector at least $600 million to $800 million per day. This significant loss, driven by reduced traveler confidence and airspace closures, threatens a regional industry that was projected to see $280 billion in visitor spending in 2026.

The Middle East accounts for 5% of global international arrivals and 14% of international transit traffic, causing disruptions to affect worldwide travel.

“Asia directly imports 80 per cent of the crude oil that passes through this strait.”

China was buying over 80% of Iran’s exported oil.

Iran ships nearly 15% of China’s seaborne imports. Together with Venezuela, they account for 18% of China’s total oil imports.

Trump is meeting Xi end of March  .

What’s the end  game?

On Friday, Trump said he would end the war when he feels it “in his bones.”

“Iran wants to be sure that eight months or 10 months down the line, once a ceasefire has been established, that the Israelis and the Americans don’t come back. They don’t want a third war. So they’re going to push this to the point where the Americans cannot come back,” she says.

Further escalation is possible. Yemen’s Houthis, one of Iran’s proxy militaries, have yet to enter the conflict and disrupt shipping in the Red Sea, through which Saudi Arabia is trying to redirect some 70 per cent of its exports, or target the kingdom’s pipelines.

Yesterday: “Houthis just dropped a bombshell: Senior official Mohammed al-Bukhaiti says Yemen has decided to align militarily with Iran and will announce “Hour Zero” (the start of major action) at the right time.”

 Trump adviser calls for US to ‘declare victory and get out’ of Iran 

One of Donald Trump’s close White House advisers has called for the US to “find the off-ramp” in its conflict with Iran, the first public signal of discontent over the war from a senior figure in his administration.

“This is a good time to declare victory and get out,” David Sacks, Trump’s AI and crypto tsar, said on the All-In podcast he co-hosts. Such a move “is clearly what the markets would like to see”, he added. (…)

Sacks raised specific concerns about the consequences of further attacks by the US on such infrastructure, including the prospect of nuclear war.  “You are seeing a faction of people, I would say largely but not exclusively in the Republican Party, who want to escalate the war,” he said.

If more Iranian energy infrastructure gets hit, “they could continue to target the oil and gas infrastructure across the Gulf states . . . that would be a much worse outcome”, he added.

Further escalation “could render the Gulf almost uninhabitable”, Sacks said, mentioning Saudi Arabia in particular. “That would be a truly catastrophic scenario.”

Sacks singled out Israel as the biggest potential flashpoint.

“If this war continues for weeks or months, then Israel could just be destroyed,” he said. “Their air defences could become exhausted . . . And then you have to worry about Israel escalating the war by contemplating using a nuclear weapon.”

The intervention by Sacks, who is close to Elon Musk and several other tech billionaires, came as an account linked to Iran’s Revolutionary Guard named US tech groups, including Amazon and Oracle, as potential targets.

Sacks is also close to vice-president JD Vance, who Trump on Monday described as being “maybe less enthusiastic” about the initial strikes on Iran.

The day after, if and when?

A lengthy stalemate would starve the world of crucial commodities creating a global physical, economic and financial crisis largely blamed on the US.

Even a few more weeks of this would have lasting effects.

The market is acutely aware that a return to normality could be months or even years away. “The industry is in shock. They know how difficult it will be to repair and bring fields back and restore equipment,” says Yergin. “Energy supply systems don’t turn on a dime. It takes time and investment to bring on new capacity of any kind.”

“After the war, Iran will maintain control of the strait and could demand fees for passage,” says Hosseini of the Iranian oil exporters’ union. “No country will be able to challenge this. Iran has found a point of leverage that the US cannot effectively counter.”

My investor life has always been to find an edge and assess the odds of winning vs losing.

Here, the only edge one has is to understand, unlike most investors currently, that this situation is out of control.

The motivations and objectives of Israel, USA and Iran are very different. Israel and Iran are clearly in survival mode while the US, strongest militarily but weakest ideologically with low domestic support, is acting, or reacting, in a rather disorganized way.

Who can tell how and when this will end?

My views:

• The odds of the world finding itself very short of oil and many other commodities for an extended period are far from zero.
• China (and many others) would angrily scramble to find adequate supplies at much higher prices.
• The odds of the world finding itself short of oil for an extended period are very far from zero.
• China (and many others) will angrily scramble to find adequate supplies at higher prices.
• The odds of continued or even aggravated chaos throughout the Middle-East are very high.
• Inflation will very likely be higher for longer and so will interest rates.
• A global recession?
• Corporate profits will suffer from reduced demand and higher costs.

Negatively skewed possibilities, some with very poor outcomes, and impossible odds.

What a mess!

With no plan.

Yet, Trump got the support of the WSJ he once called a “rotten newspaper”, “gone to hell” and “clinkers”:

‘We have to start winning wars again. . . . And now we never win a war. We never win. And we don’t fight to win. We don’t fight to win. You either got to win or don’t fight it at all.”

President Trump spoke those words in February 2017, a sentiment he has often repeated. We hope he recalls them now as Iran escalates its retaliation and imposes costs on the U.S. and the world economy. Will Mr. Trump still fight to win?

(…) on Wednesday in Kentucky, he told a rally, “We don’t want to leave early, do we? . . . We got to finish the job.” He added: “We don’t want to go back every two years.” On Thursday the President said, rightly in our view, that a short-term increase in oil and gasoline prices is worth eliminating Iran’s threat to the Middle East, the world economy and the U.S.

Mr. Trump is also right that the U.S. shouldn’t fight wars we don’t intend to win. Winning now includes reopening the Strait of Hormuz.

But reopening the strait is not winning the war.

Holman W. Jenkins Jr., in the same WSJ Friday:

(…) OK, a nuclear attack isn’t in the immediate offing. Iran’s surviving leaders need an exit incentive too. And the U.S. military has other options for clearing the strait—though they aren’t great (…).

He can be wrong about much but Mr. Trump is right about two things. One, given changes in technology, is the growing intolerability of regimes like Iran’s or North Korea’s, with elites who stay in power by cultivating incurable grievances against global society. (…)

The U.S., even under a less flamboyant president, would be prepared to risk a great deal to defend its prestige. Unless Iran gives Mr. Trump the “win” he needs to end the violence, the American president’s path is likely to be one of escalation.

Funny that “One Battle After Another” and ”Sinners” stole the Oscars show last nigh.

To raise your understanding of where we are: What Trump Didn’t Know About Iran

Markets?

Goldman Sachs:

• The baseline outlook for US equities remains constructive, but the war in Iran adds to the downside risk posed by elevated valuations.

The 5% S&P 500 decline from its January high has continued to follow the historical average equity market path following geopolitical risk events.

Our baseline expectation is that the market will eventually resume its upward climb, continuing that historical pattern.

However, the outlook now embeds higher oil prices, weaker US GDP growth, and later Fed easing than we and the market previously expected.

While the distribution of potential outcomes is wide, the macro headwinds in our base case outlook generally appear priced, the fundamental engine of earnings growth continues to run, and valuations — while still elevated relative to history — are less demanding than they were a few months ago.

• For corporate earnings, the AI investment boom should offset the drag from modestly weaker economic activity.

Recent earnings reports have reflected the ongoing strength of earnings resulting from AI investment spending, which we estimate will contribute roughly 1/3 of S&P 500 earnings growth this year.

(…) we maintain our forecasts for 12% EPS growth in 2026 ($309) and 10% growth in 2027 ($342), but those growth rates now point to a slightly higher level of earnings.

An escalation of the conflict could derail the AI investment freight train, but we believe it would require a severe tightening of credit markets and a substantial decline in the operating performance of the hyperscalers.

• The unfavorable skew to our oil price and economic forecasts, combined with the modest decline in equity prices and positioning so far, creates an unfavorable skew to the distribution of near-term outcomes for share prices.

In a moderate growth shock scenario, we expect the S&P 500 would decline to 6300, consistent with a 1 standard deviation decline in our Sentiment Indicator and a P/E multiple of 19x.

An equity market decline matching the most severe oil supply shocks in recent decades would reduce the S&P 500 level by 19% from current levels to 5400, bringing the P/E multiple to 16x.

Goldman reminds us of previous oil shocks:

The major oil supply shocks of recent decades show the large potential downside risk in a severely adverse scenario.

The S&P 500 declined by a median of 12% alongside rising oil prices during the oil price spikes in 1974, 1980, 1990, and 2022, and suffered a median peak to trough decline of 23% around those episodes.

The oil shock following the 1979 Iranian revolution was a notable outlier, with Fed easing helping lift the S&P 500 during the spike in oil prices, but the market ultimately declined in 1981 as the economy fell into recession.

However, as our rates strategists have noted, the current labor market and inflation backdrop create a less challenging environment than during the previous oil price spikes.

In addition, the lower oil intensity of the US economy and higher US oil production further reduce the risk from an oil supply shock today.

Our economists estimate that US GDP growth would register nearly 2% on a Q4/Q4 basis in 2026 even in an extreme scenario where a 60-day disruption to flows lifted oil prices to a March average of $145.

Deutsche Bank: “oil prices have risen by over 45% since the start of the war with Iran. Previous large shocks saw them rising by a median 30% (the first Gulf War in 1990, Iraq War in 2003, Russia-Ukraine in 2022 and around the Iran bombing last year).”

@neilksethi

Ed Yardeni:

The apparent resilience in the S&P 500 is attributable to the increasing bullishness of industry analysts’ consensus estimates for earnings per share in 2026 and 2027.

So S&P 500 companies’ aggregate forward earnings rose to a record high last week of $328.80 per share. At Friday’s close, that implied a forward P/E of 20.2, which is down from 22.0 on January 27.

The 1.8% increase in forward earnings per share offset some of the 6.8% decline in the valuation multiple, resulting in the 5.0% decline in the S&P 500.

So far, the war appears to have had no adverse impact on analysts’ earnings-per-share estimates for each of this year’s four quarters.

Apparently, they did not get the memo about the possible negative consequences of a protracted war and closure of the Strait.

Note that LSEG IBES forward EPS are $316.89, 3.6% lower than Yardeni’s. On that measure, the forward P/E is 20.9, down from 22.8 last December. In June 2022, it fell from 22.0 to 16.0 on recession fears that did not materialize.

The S&P 500 is right on its 200dma:

Why you should care of credit spreads:

Source:  @MichaelKantro

• “Private credit redemption requests have tripled in 6 months. Investors are heading for the exit. Fundraising will be much harder for years to come.”

Source:  @IlliquidInsight

Also on Friday:

Signs of Caution in January Consumer Spending Even Ahead of Iran Conflict

As markets remain keenly focused on the conflict in Iran and potential domestic impact, the January personal income & spending data feel even further out of date. They’re still important in terms of monitoring the state of the consumer, and show households entered the year with fairly sturdy spending momentum. But under the surface a renewed slowing in discretionary spending suggests some cautious behavior among households, even ahead of the recent oil-price shock.

Real personal spending rose 0.1% as goods spending slipped (0.4%) and services consumption expanded (0.3%). At first pass, the fastest pace of services spending in four months is encouraging and signals resilience despite the weaker retail sales print last week.

While that remains true, the main discretionary services components (transportation services, recreation services and food services & accommodation) all slowed during the month. (…) the broader pace of annual discretionary spending has broken lower in recent months and signals some cautious behavior among households.

Source: U.S. Department of Commerce and Wells Fargo Economics

The 0.4% gain in personal income came in how we anticipated for total growth, but the details suggest income was a bit sturdier than we anticipated. That’s because most of the growth stems from a 0.5% gain in wages & salaries, or the largest monthly gain in four months, rather than solely resting on the annual cost-of-living adjustment (COLA) to social security benefits. Together these two components propelled total real disposable personal income growth, or household purchasing power, to rise at its fastest monthly clip in three years, up 0.7%.

Source: U.S. Department of Commerce and Wells Fargo Economics

There was little surprise on the inflation side. The core PCE deflator rose 0.4%, lifting the annual rate of inflation a tenth to 3.1%. With the Consumer Price Index in for February and the ongoing conflict in Iran, these data feel stale as we brace for some upside to inflation in the coming months.

In addition to today’s personal income & spending report, we got the second estimate of fourth-quarter GDP growth, which sliced the fourth-quarter GDP figure in half—a 0.7% annualized clip, versus 1.4% previously estimated. The downward revisions stemmed from lower services exports, softer structures investment, and weaker consumer services spending.

The modest real spending data for January, combined with downward revisions to Q4 spending, suggest some modest downside risk to our estimate of a 1.9% annualized rate of real personal consumption expenditure (PCE) growth in Q1 and suggest PCE is tracking closer to about 1.5%.

Source: U.S. Department of Commerce and Wells Fargo Economics

Higher gasoline prices in the wake of the conflict in Iran will likely exert some modest downward pressure on household purchasing power in coming months. In a recent note, we highlight how gasoline and even broader energy-related purchases make up a smaller share of household spending today than they once did. But even so, we’ve marked down our consumer spending forecast in our recent update as a result and expect a slower pace of spending this year.

Wells Fargo’s emphasis on January’s +0.5% monthly gain in wages and salaries can mislead if one takes no account that December’s was only +0.1%. Moving 2-month growth rates have declined from +5.5% annualized in September to +4.8% in November and to +3.6% in January.

More worrisome is the trend in real disposable income ex-transfers, up only 0.6% annualized since last August and unchanged in December-January.

COLA adjustments in January boosted poorer Americans’ income but that will only make them somewhat less poor.

As shown in previous posts, US wages are rising 3.0-3.5%. Inflation is already at 3.0% before Iran.

FYI from BCA: