When hegemony gets 'Hormuzed'

What's ahead tactically.

If you seek notes directly from the strait, or local geopolitical expertise on the scenarios ahead, stop reading now. This isn’t investment advice. I wrote about this conflict a month ago and laid out how I thought it would unfold. Read here, and here and a interim post here.

The path ahead for risk assets is a function of SoH reopening. And SoH reopening is a simple function of ‘intent to reopen’ x ‘speed of reopening’ x ‘extent of reopening’. All narratives (and there are plenty on both sides) have to be distilled down to what it means for flow through the strait.

Several ways to frame what's ahead. Like many, I have no particular edge in assigning subjective probabilities. But frameworks help you trade, and this is mine.

The Scenarios

A) Escalation: Boots on the Ground. Full kinetic escalation, ground deployment (amphibious and/or parachuted). Very bad outcome (protracted closure), and very unlikely — the hostage rescue operation told you everything about this administration’s sensitivity to American casualties. I assume < 10% probability.

B) Escalation: Critical Infrastructure attacked. US strikes Iranian civilian infrastructure; Iran retaliates against GCC oil (UAE, Saudi), gas (Qatar), and desalination (Saudi) infrastructure. This is the scenario where the conflict metastasizes beyond the Strait. Very bad. I assume <15% probability.

C) Kumbayah. A deal that includes SoH reopening conditions, sanctions relief, and a sizeable OPEC quota increase for Iran (they want this more than enriched Uranium). Russia and Israel unhappy (but US will tell Bibi to desist); China happy the US is out of the Gulf. Good to very good outcome, depending on the speed and conditions of reopening. I doubt this is the ‘next’ outcome, but I assign < 20% probability — however, conditional on Scenario B occurring first, the probability of C as the subsequent resolution rises to < 30%.

D) Full Taco. Trump abdicates the GCC protection commitment. SoH reopens under Iranian control — effectively a toll system. This is the base case. I assume >50% probability.

The Problem With Full TACO

D is my modal outcome (for now). But, D contains a wide distribution of outcomes, and the variable that matters is shut-in volume:

D.1 — Manageable (2–3 mbd shut in). Mildly stagflationary. Risk assets rally, gold rips, rates probably rally too. The world absorbs 2–3 million barrels offline with friction but without structural damage. Asia doesn’t like it. Europe pays up. US fine.

D.2 — Painful (3–4 mbd shut in). Bad. Rates don’t know what to do, gold probably sells off, dollar strengthens, Asia in real trouble, EU in trouble, US relatively insulated. Value over growth, probably. Who knows.

D.3 — Ugly (5+ mbd shut in). This is the scenario where the IRGC toll system effectively stalls Bahrain, Kuwait, Qatar, and the UAE (they hosted US bases > retribution). That’s the ugly number. Go to cash — everything does poorly except the dollar. (Bahrain is 70% Shia, so perhaps I’m wrong about them being on the wrong side of the toll.)

I am optimistic (hopeful) the outcome is D.1 while also believing that's not necessarily the next outcome.

On a more philosophical note: how should one view bartering US hegemony for political survival?

Iranians on local broadcast are calling this — in Arabic — “the final war.” I wonder what happens in Scenario D, not to markets, but to the architecture of American power. The Suez Crisis finished British and French hegemony in 1956. They were never viewed the same way again.

Hope for a quick resolution.