In the markets, as in war, hope is the last to die

The war against Iran’s mullahs has now turned into a war against Iran. President Donald Trump has given various, often contradictory, justifications for his bombing the country to smithereens. One of them, ‘regime change’, has been made impossible by the destruction of ordinary life in Persia.

Black, poisonous rain in Tehran, the decimation of apartments and national monuments and the killing of school students made the cruel regime look the lesser evil. Trump had offered reasons for the war only when prompted by the press. He saw no need to rally the American public, or to make a case in Congress. For both he does not care, nor for international law.

He is the decider. Most journalists accuse Trump of acting without a plan. This is not true. The planning was just outsourced to Israel, as we know from an offhand remark by Secretary of State Marco Rubio, which he hastily withdrew minutes later.

Israel and the US had prepared for this attack many years, by joint military drills and close intelligence cooperation. Armageddon in Persia was the dream of deliverance nurtured by the religious right in both countries. Netanyahu pressed the start button while the US and Iran were still trying to achieve a diplomatic solution that Israel never wanted. Trump followed, but thought he could do a quick Venezuela 2.0 – kill the leader and adopt the country for his unabashed resource colonialism.

This was never Israel’s idea. Netanyahu visioned the destruction of an enemy, of which he had dreamed since his youth. For this, he would apply his Syria, Lebanon, and Gaza playbook: first carpet bombing the adversary until any resistance becomes meaningless and then inciting a civil war between ethnic minorities – in Iran the Kurds, Baloch, Azeri and Arabs, driving a wedge between Sunni and Shia. Should this fail, he would return to the Gaza strategy of “mowing the lawn”: forever repeating bombing campaigns. There’s never an endpoint in sight, but this is the point.

It does not matter if Trump’s electorate feels discontent, with gasoline in the US getting more expensive by the day. His country is a net exporter of crude and gas. Supplies are secure. Admittedly, international energy markets are united, threatening to force prices up in the US exactly as elsewhere. But Trump can put a stop to this. He can always ban US energy exports, or allow his best buddy Putin to export more freely, with sanctions lifted.

Trump has already done this. For Putin, the war in the Middle East is god-sent. He rakes in more revenue by the day and sees US rockets and missiles consumed to the tune of more than a billion dollars per day. With the ongoing depletion of American ordnance inventories, Ukraine will go empty.

The upside of tightening energy markets is increasing profit margins for big US oil companies abroad, and the severe damage done to energy importing countries in Asia and Europe, which was described in a recent strategy paper as an ideological enemy. The ongoing conflict will do more damage to them than his tariffs could ever have achieved. As the US imports less than more open economies, inflationary pressures there will be less felt than elsewhere, which is enough for Trump to glee.

The problem for us European consumers is multifaceted. The Strait of Hormuz is not only the world’s energy highway. Besides LNG, crude and transportation fuels, Gulf countries also produce  a wide range of petrochemicals, like plastics and raw materials for the pharmaceutical industry. They are weighty exporters of fertilisers; and of helium, sulphur and sulphuric acid, needed for copper extraction and in the microchip production. These materials are now not available in substantial quantities. Their prices will go up as a result, and everything that is manufactured from these substances, from chips to lettuce.

Like a chain reaction, everything we consume will become dearer. The conflict has also weakened the euro. This will compound the inflationary effects.

The Strait, which has currently trapped 1,000 vessels and their cargo, is also an aviation hub and flight corridor. Tens of thousands of passenger flights have been cancelled, and many more were expensively re-routed to avoid overflying Russia and the Middle East. These planes carry not only holidaymakers, but 50% of Europe’s trade with Asia in their hold.

Higher fuel costs and longer journeys mean higher ticket prices for travellers, who may refrain from flying. This will result in higher cargo transport costs, with immediate effects on consumer prices. Zara will all of a sudden be priced like a high-end boutique, not a discounter.

Sea transport will be multiple times dearer too, as a result. Prohibitive insurance costs, fuel costs and the potentially irreplaceable loss of crews, cargo and vessels, make expensive detours around the Cape of Good Hope the only viable alternative.

To insure a ship at full value, no matter how expensive, is no solace when making a new ship has a three-year waiting time and crews will not show up anymore. The Red Sea/Suez Canal route is no alternative: remember the Iranian minions, the Houthis, anyone? Longer routes necessitate more ships to transport, and more fuel to burn. Not surprisingly, freight rates have exploded.

For us retail investors it is high time to war-proof our portfolio. Some early losers are obvious. Utilities depending on fossil fuels will suffer higher costs, hence shrinking margins. Consumer goods will be caught between higher costs and retreating consumers. This applies to everyday items as well as to discretionary purchases like cars or furniture.

European chemical companies, like my poor BASF, will suffer from higher feedstock prices no matter how hamstrung the competition.

For the time being, investors turn back to information technology and AI, as those businesses seem to be a step removed from the hard realities of processing, trading and manufacturing. Until investors realise that data centres are exorbitantly energy-hungry, that is. The eternal laggards in my portfolio celebrate a revival: oil companies, particularly those not suffering disproportionately from Middle East investments, like Repsol, Total, or Chevron, are up, and so are over-indebted losers like BP, which all of a sudden got more wiggle room.

Fertiliser maker Yara is enjoying a rare day in the sun. Its shares have not moved for eons, and now they shine.

German defence contractor Rheinmetall AG has underperformed, though. The company cannot ramp up production as analysts would have expected, and with a P/E of 72 is eye-wateringly expensive. Gold is down too, as investors have to cover losses elsewhere and repay margin loans on bets that turned sour.

My shares in container shipping company Moller-Maersk are up, of course. With not enough vessels around, forwarders can auction off their services now. Freight rates will stay higher for longer. This will feed into any item we buy. Inflation will rise, as will interest rates.

Against the backdrop of burning storage tanks, halted refineries and petrochemical plants that will need refurbishment once they restart, markets have reacted calmly, almost irrationally so. Share indexes have dropped, obviously, but not more than in single digits so far. Hope seems to die last.

Given the singular dependence of some Asian economies on Middle Eastern oil and gas (South Korea 70%, Japan 95%) it all increasingly looks like the COVID lockdown days. Only against Israel’s aggression and Trump’s thoughtless spite, no vaccination will be found.