Leverage
The week before last ended with optimism (albeit with plenty of confusion) around a reopening of the Strait of Hormuz and the possibility of a negotiated peace deal before this week’s Tuesday night ceasefire deadline would expire. Well, last weekend, after Iran re-closed the Strait and then the U.S. doubly closed it with their own naval blockade, that tentative optimism was pretty well shredded.
Before all hell could break loose Tuesday night, however, President Trump released a Truth Social post in which he extended the ceasefire “until such time as their proposal is submitted, and discussions are concluded, one way or another.”
Shortly thereafter, CNN released a story titled, “Why President Trump extended his ceasefire with Iran.” According to CNN,
President Donald Trump huddled with his national security team Tuesday afternoon at the White House facing a major decision: what to do next with Iran.
His ceasefire deadline was nearing its end, and Air Force Two was sitting on the tarmac at Joint Base Andrews ahead of Vice President JD Vance’s scheduled departure to Pakistan for the next round of talks. But the administration was dealing with a conundrum: virtual silence from the Iranians.
In the days prior, the US had sent Iran a list of broad deal points that they wanted the Iranians to agree to in advance of the next round of talks. But days had gone by without the US getting a response, raising suspicions about how much Vance and others could achieve by heading to Pakistan for planned in-person talks, according to three officials familiar with the matter.
As Trump met with Vance, Secretary of State Marco Rubio, Defense Secretary Pete Hegseth, Chairman of the Joint Chiefs Dan Caine and CIA Director John Ratcliffe at the White House Tuesday, the administration had still heard nothing from the Iranians. Officials had urged the top mediator from Pakistan, Field Marshal Asim Munir, to get at least some kind of response before Vance boarded Air Force Two. Still, hours later, there was nothing.
At the White House, Trump’s top aides believe a main reason they didn’t hear back was fractures within the current Iranian leadership, their understanding based partly on dispatches from the Pakistani intermediaries, according to the three officials. The administration’s sense is that the Iranians don’t have consensus on their position or how much to empower the negotiators on uranium enrichment and the country’s current stockpile of enriched uranium—a major sticking point in the peace talks.
Rather than resume military strikes, Trump opted to extend a two-week ceasefire with Iran…
Trump, who called Iranian government officials ‘seriously fractured’ in an afternoon Truth Social post extending the ceasefire, remains eager for a diplomatic solution to the war, wary of reviving an unpopular conflict he’s claimed the US already won. Yet the negotiations’ collapse, for now, underscores the difficulties Trump continues to face as he seeks a deal that meets his numerous demands.
In HAI‘s view, the combination of the extension of the ceasefire, Iran’s “virtual silence,” the reported internal fractures among the Iranians, and the fact that the Strait remains double blockaded all underscore a very key takeaway—the Strait could remain closed much longer than current market consensus expects.
If that is the case, when consensus recognizes it, the abrupt change in expectations could certainly have some very serious negative implications to a stock market already at record highs once again. A prolonged Hormuz closure that causes a major (Covid-level) supply chain breakdown while spiking energy prices, food prices, along with the prices for many other critical industrial inputs, would almost certainly culminate in a major economic and market meltdown that would ultimately manifest in a Western sovereign debt crisis.
In short, if Hormuz remains closed, as global supply chains continue to physically break down at an accelerating rate, watch for the potential for the recent market surge to turn merciless bull-trap. Furthermore, should the market and economy come under critical stress, the typical emergency monetary response measures by policymakers could be compromised by the fact that this would be an inflationary supply chain crisis. In other words, the typical monetary policy crisis response of rate cuts and liquidity injections could amount to little more than pouring gasoline on a fire.
In addition, this week offered further evidence that the hot war with Iran has, itself, created very real and important operational and strategic constraints on U.S. policy optionality.
This week, a Wall Street Journal article titled, “Iran War Complicates Contingency Plans to Defend Taiwan, Some U.S. Officials Say” illuminated some important emerging policy considerations that may have been a motivating factor in the U.S. decision to extend the ceasefire with Iran.
According to the WSJ, “The U.S. has burned through so many munitions in Iran that some administration officials increasingly assess that America couldn’t fully execute contingency plans to defend Taiwan from a Chinese invasion if it occurred in the near term, U.S. officials said.” The Journal added, “Wholly replacing those stockpiles could take up to six years, officials said.”
While already alarming enough, the WSJ article actually understates the potential problem of replacing munitions. That’s because the U.S. remains critically dependent on China for the military-grade rare earth magnet supplies needed to replace spent munitions stockpiles. And, since Trumps tariffs were announced a year ago, China has been leveraging its rare earth dominance with export controls that overwhelmingly target the U.S.
According to the most recent Chinese customs data, while Chinese rare earth magnet exports dropped only 1.6% in March, rare earth exports to the U.S. specifically were down 9.5% month-over-month and a massive 31% year-over-year (at a time when the U.S. military demand for them is surging).
In HAI‘s view, the munitions stockpile drawdowns, the multi-year replacement timetables, and the Chinese leveraging of rare earths all highlight the possibility that a contributor to the decision to extend the ceasefire may have been a strategic reluctance to draw down stockpiles any further, if at all possible.
That possibility, as unpleasant as it is to contemplate, suggests that perhaps Iran has more negotiating leverage than Western consensus seems to believe.
Earlier this week, referring to the U.S. blockade of Hormuz amid a ceasefire, Treasury Secretary Bessent seemed to confirm the new U.S. strategy against Iran when he said, “The US Treasury will continue to apply maximum pressure through Economic Fury to systematically degrade Tehran’s ability to generate, move, and repatriate funds.”
In other words, rather than return to hot war, the new plan seems to be: extend the ceasefire, double down on the blockade and sanctions, and hope that Iran will relent before oil and critical commodities spike, global supply chains malfunction, U.S. and global stock and bond markets break, and a Western sovereign debt doom loop commences.
In HAI‘s view, this puts the global economy at serious risk through two potential scenarios.
If Iran collapses, then Iranian oil will be shut in and offline for a long time and the likely resulting oil spike will risk recession and a corresponding western sovereign bond market crisis.
On the other hand, if Iran doesn’t quickly collapse, and the Strait remains closed for too long, then the global supply chain breakdown will likely cause a global inflation spike risking recession and a corresponding western sovereign bond market crisis.
In other words, it is possible that the U.S.’s “new plan” to blockade Iran, wait them out, and eventually reach a deal, may both be exceedingly far removed from ideal and at the same time the best option available. It also suggests that in order to avoid a worst-case outcome, the U.S. would have to, in some way, acknowledge Iranian leverage and make some negotiating concessions to close a timely deal with Iran.
Sure enough, this week, U.S. Gulf allies seemingly expressed concern that the U.S.’ munitions supply situation, along with a sensitivity to any negative economic and market impacts stemming from further hot war, may be leading to a weakened U.S. bargaining position with Iran. In a Reuters article titled, “Gulf worries US-Iran talks may cement Tehran’s ‘golden’ grip on Hormuz,” Gulf sources stated concerns over U.S. priorities.
According to Reuters, “Gulf officials warn the [new U.S] approach risks entrenching Iran’s grip on Middle East energy supplies by managing rather than dismantling its leverage… Gulf sources say U.S.–Iran diplomacy is now centered less on rolling back Iran’s missile programme and more on enrichment levels and tacitly accepting Tehran’s leverage over Hormuz… Although negotiations remain stalled over enrichment, with Iran rejecting both zero enrichment and demands to ship its stockpiles abroad, Gulf officials say the shift in priorities itself is troubling.”
In short, if U.S. vulnerabilities contributed to the ceasefire extension, it validates the idea that Iran may have more leverage than Western consensus believes. And again, if that is the case, any peace negotiations could take far longer than currently expected and the Strait of Hormuz could stay closed far longer than Western consensus believes.
As to impacts on HAI‘s ongoing theme of monetary regime change, a current Wall Street Journal article titled, “UAE asks US about a wartime financial lifeline” suggested to HAI that, amid the current crisis, foreign nations are beginning to try and leverage emerging cracks in the omnipotence of the global dollar system.
According to the WSJ:
Emirati officials haven’t made a formal request for a swap line, which would give the U.A.E. central bank inexpensive access to dollars to support its currency or shore up its foreign reserves in case of a liquidity crisis. In talks with the U.S. in recent days, they have portrayed the proposal as preliminary and precautionary, the U.S. officials said.
But they have also argued that it was President Trump’s decision to attack Iran that entangled their country in a destructive conflict whose effects may not be over, some of the officials said. Emirati officials told the U.S. officials that if the U.A.E runs short of dollars, it may be forced to use Chinese yuan or other countries’ currencies for oil sales and other transactions, some of the officials said.
In that scenario is an implicit threat to the U.S. dollar, which reigns supreme among global currencies partially because of its near-exclusive use in oil transactions.
And the U.A.E. is not alone. According to a Reuters article this week titled, “Bessent says Gulf, Asian allies request swap lines, UAE and US would benefit from one,” many more countries are requesting U.S. dollar swap lines that have historically been reserved for only G7 nations.
According to Reuters:
U.S. Treasury Secretary Scott Bessent said on Wednesday that a number of allies in the Gulf region and in Asia have requested currency swap lines from the United States to help deal with energy shocks and other fallout from the Middle East war…
Bessent did not name the countries making such requests, but told a U.S. Senate Appropriations subcommittee budget hearing that such facilities would help stabilize financial markets amid turmoil from the Middle East war.
“And swap lines, whether it’s from the Federal Reserve or the Treasury, are to maintain order in the dollar funding markets and to prevent the sale of the U.S. assets in a disorderly way,” Bessent said. “So, the swap line would benefit both the UAE and the U.S., and as I said, numerous other countries, including some of our Asian allies, have also requested them.”
In other words, in HAI‘s view, this translates to foreign nations essentially saying to the U.S. “lend us the dollars or we will have to tank your stock and bond markets by selling our dollar assets to raise those dollars ourselves, or we will push beyond the petrodollar system and buy energy and commodities in yuan and/or other local currencies under a net gold settlement arrangement.”
In short, HAI continues to agree with the point made by Bloomberg macro strategist Simon White two weeks ago in his article, “Iran war has caused lasting damage to the USD system.” In other words, in HAI‘s view, other countries now increasingly understand the U.S.’s acute dollar system vulnerability, and are leveraging it.
Again, this essentially amounts to foreigners saying “if we respect the petrodollar system, we will sell our dollar assets to raise the dollars to buy needed energy and commodity supplies, but that will threaten to cause an economic/market crisis and debt spiral in the U.S., so either just give us the dollars, or watch us leave the petrodollar system.”
So, the old $64,000 question remains: does the U.S. want to go down with Triffin’s Dilemma and the petrodollar system ship, or will Trump’s MAGA intentions utilize this current conflict with Iran (and Iran’s de facto backers, China and Russia) to make a deal akin to what Scott Bessent previously described as a “grand global economic reordering” and embrace some form of global monetary restructuring? Only time will tell.
In the meantime, HAI is confident that gold is the likely beneficiary of current events either way. That’s because what is happening in Hormuz is either pushing the world toward a global sovereign debt crisis, which should ultimately be incredibly bullish for gold, or the Iran conflict will prove to be the final catalyst for a “grand global economic reordering” that ushers in a global monetary regime change away from a unipolar petrodollar system and towards a multipolar system in which gold in increasingly central.
Again, HAI struggles to imagine how gold doesn’t shine bright in the coming months and years, regardless of exactly how current events unfold.
Weekly performance: The S&P 500 was up 0.55%. Gold was off 2.57%, silver was down 6.35%, platinum was off 5.64%, and palladium lost 5.9%. The HUI gold miners index was down 6.29%. The IFRA iShares US Infrastructure ETF was up 2.36%. Energy commodities were volatile and mixed on the week. WTI crude oil surged 13.15%, while natural gas was off 5.61%. The CRB Commodity Index was up 4.49%. Copper was off 2.02%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 1.06%. The Vanguard Utilities ETF was nearly flat, up 0.07%. The dollar index was up 0.43% to close the week at 98.52. The yield on the 10-yr U.S. Treasury was up 5 bps on the week, closing at 4.30%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
