“Unconditional Surrender!”

By Michael Every of Rabobank

So, no, President Trump didn’t leave the G7 to discuss a Middle-East ceasefire. From the Situation Room, he instead declared: “we” now have total control over Iranian airspace; “we” know where Supreme Leader Khamenei is bunkering down but are not going to kill him (yet); and that Iran must offer its “UNCONDITIONAL SURRENDER!”

So, is the US going to enter the war despite the risk of possible attacks on its bases? Anonymous claim a false flag attack on US soil perpetrated by what’s clearly implied as Israel looms to drag it into the war: but isn’t the war part obvious(?) Khamanei tweeted from his bunker –presumably not on a new gold Trump phone– “The Battle begins”, referring to Khaybar, Shia Islam’s conquest of a Saudi Jewish town in 628CE. The unofficial Shah of Iran, abroad, called for an uprising with unsubstantiated claims some of Iran’s military may defect to him, as parts of Tehran were evacuated, Israel hit more military facilities, and some ATM machines stopped functioning. Regime change really can’t be ruled out, it seems: but what then? And who will have control of the nuclear material scattered round the country?

France’s Macron is warning that a violent Iran regime change would trigger ‘chaos’; so would leaving a violent Iran regime in place with a nuclear programme; and so is trying to remove that programme with violence. It’s easy to be a purist and say ‘Non’ to things which one isn’t capable of doing about threats one chooses not to see. It’s not so easy to say, ‘Oui, *quelque chose* doit être fait’ (Yes, *something* must be done.) But what and how?

It’s all desperately confusing and extremely worrying. Indeed, it can feel like we are watching ‘Top Gun: Maverick’ and ‘Hot Shots’ on twin screens, and ‘V for Vendetta’ and ‘The Dictator’, while humming The Scorpions’ ‘Wind of Change’. As such, some in markets are unconditionally surrendering to the appeal of ignoring this as much as possible; or of ‘maverick’ geopolitical Top Hot Takes that the USA V Iran will see asset prices heat up even further once the Big Gun enters the arena. Both are possible in the short term but overlook that this isn’t a regional but a global issue.

As Bloomberg puts it, ‘Russia Fears for Ally Iran With Few Tools to Influence Crisis’, with memes of Khamenei sitting sadly in a Moscow flat with former Syrian President Assad flowing. Russia loves the thought of higher oil prices and hates the idea of losing an ally in Iran. Even with its resources tied up with Ukraine, agreeing to allow the regime to flee to Moscow would have to be part of a larger geopolitical deal. And if you don’t know what that might mean, it might mean you’re part of it.

In geoeconomics, the Wall Street Journal says, ‘If Iran’s Oil Is Cut Off, China Will Pay the Price’ as “Chinese refineries have become hooked on cheap imports of sanctioned Iranian crude.” China also may want to have a say: what’s in it for them if Iran sees regime change and the Middle East, and its oil, ends up as a US satrapy?

Or the EU, which just released its latest proposals to wean itself off Russian gas – but not oil. However, that’s just as Qatar –whom it will have to rely on instead– warned that LNG carriers sailing to it should wait outside the Strait of Hormuz as GPS tracking being jammed has already seen two tankers collide, and its foreign ministry noted everyone is concerned about “uncalculated targeting” of the South Pars gas field.

The EU is also spurning economic dialogue with China due to the latter’s neo-mercantilism: a planned summit in July is now off. Moreover, European Commission President Von der Leyen said at the G7, “On this point, Donald is right – there is a serious problem… [China’s] undercutting intellectual property protections, massive subsidies with the aim to dominate global manufacturing and supply chains. This is not market competition – it is distortion with intent,” and threatens “a new China shock.” So, is the EU going to line up with the US vs. China as the larger threat? If not, what?

That’s as ECB President Lagarde spoke of a “global euro moment.” No, not more countries watching their camp Song Contest –where Israel was also a story this year– but EUR gaining ground on the USD as a global reserve asset. Yet that’s at a time when European powerlessness vis-à-vis the US could not be more amply demonstrated across multiple realpolitik dimensions from military to energy to tech to banking. (And as UK PM Starmer is reportedly going to meet NATO defence spending targets by counting rural broadband as such. “We” feel safer already.)

Indeed, while Bloomberg notes ‘Trump Is Driving Off Investors and Imperilling the Dollar’s Reign’ it’s others’ physical reigns in question due to US hard power. If markets are too blind to see that truth, “because markets”, and think somehow, they sit above that dynamic, not below it, then I’m not sure what function they play anymore – with emphasis on the word ‘play’.

The same can be said about fudging defense spending figures to please markets who think pure economic policy targets actually still matter. Go ahead: just don’t be surprised if you turn out to be more of an Iran and less of an Israel if/when push ever comes to shove.

Notably, Lagarde’s call also implies Europe must produce more financial assets and less physical stuff – as if that helps it in the present geopolitical circumstances. On cue(?), the EU is to resurrect securitisation banking practices that helped cause the 2008 global financial crisis. Then again, ‘US Plans to Ease Capital Rule Limiting Banks’ Treasury Trades’, where Bloomberg notes: “The revisions aim to bolster banks’ roles as intermediaries in the market, but some experts argue that easing the leverage ratio may not encourage banks to buy more Treasuries and could make the financial system more fragile.” But if this all goes wrong, who will need whose swap lines as part of a bailout? I’m asking for a friend who may or may not be in a bunker.

True, Bloomberg also ran a story saying some exporters to the US don’t want to receive dollars: so, don’t sell to the US then, which is how the current and capital accounts link up; or get the dollars and sell them to someone else. There is no sign of an unconditional dollar surrender here really.

In politics, the US Supreme Court will also get to look at Trump tariffs at some point later this year – who doesn’t, it seems? Moreover, the White House may ban pharma firms from TV advertising, with a huge impact on both, and the FBI is alluding to attempted Chinese election interference in 2020. Not a dull moment.

But it’s the Fed today, where their usual whisperer Nick Timiraos is tweeting that they would be thinking about cutting already if not for their concern over the known unknowns of tariffs, which have not shown any real impact on CPI so far. Yet what about the unknown unknowns of geopolitics? Will the Fed today mark an unconditional surrender to that hard exogenous reality or continue to fight and die on the hill that it has nothing to do with them at all… and that they have nothing to do with it, when actually they ?

I would wager most of the money will be on the latter, who coincidentally think the same way – for now. After all it’s not until 2026 that they must face up to that ugly reality, unless we get a Shadow Fed Chair appointed earlier. Plenty of time to go risk on and ignore the world around them and their now subordinate position within it.