THE APOCALYPSE HAS A SUPPLY CHAIN

On March 8, around the time that the Swedish navy was impounding its first Russian “shadow fleet” carrier, Britain was considering sending an aircraft carrier to the Persian Gulf. President Trump responded “That’s OK Prime Minister Starmer, we don’t need them any longer. We don’t need people that join Wars after they’ve already Won!” Creative grammar aside, days later the White House was calling on Britain, along with France, Japan and South Korean – and China - to help the United States. NATO’s response has been aggressively noncommittal. And so the Islamic Republic of Iran, without much of a navy to begin with, has effectively exposed what we might call the global supply chain apocalypse. And knows it.

The Cold War-era free market had that quality that Nassim Taleb called “anti-fragile”: a system that not only withstands shocks – but is made stronger by stressors. The Arab Oil shock of the 1970’s is a handy example: It hurt like hell, sure, but it caused the global markets and energy supply chains to re-wire themselves and diversify across alternate supplies and energy sources with the net effect of limiting the damage of a chokepoint crisis. With end of the Cold War, the system theoretically went global, offering new economies of scale and greater efficiency.

The Spreadsheet Blind Spot

A great deal of what we call “irrational” choices by humans are, in fact, very rational: they just aren’t what economists call “optimized.” Humans didn’t evolve to optimize, we evolved to survive. And to do that, you need to hedge your bets against catastrophic outcomes. The end of the Cold War brought a strange euphoria that discounted risk and the need to hedge against it. The “peace dividend” of the 90s was the cost benefit of reducing system redundancies for ever greater efficiencies. Which is a wonderful thing, provided that the risk assessment is accurate. China saw the blind spot in the unipolar world and offered oceans of poor, indentured people as cheap labor paid with a gamed currency no capitalist would touch at the time. Using the West’s obsession efficiency as its weapon of choice, China began to situate itself into the global supply chain on critical supply chain chokepoints.

Meanwhile, stabilizing redundancies in the global system fell out of fashion. And while they may not look good on a spreadsheet, they were a fair hedge against nightmare scenarios like the one unfolding in the Strait of Hormuz right now.

“Wars begin when you will, but they do not end when you please.”

So what happens next? That’s the $64 billion question. Long tail market risks are famously hard to price on a good day. And when analysts start pulling quotes from Machiavelli, its not a good day.

Last week I wrote that whoever is calling the shots in Tehran may have given themselves an off-ramp if the pressure on the regime gets too great. It’s hard to tell where this point is, but two things are clear from the outside 1) Iran has lost the ability to escalation control of the conflict, and 2) they are doubling down on the escalate to de-escalate. This may backfire quickly, but it may not. The US has largely destroyed the navy but, like the Houthis on the Red Sea, they don’t really need one to keep Hormuz closed. There may be mines in the strait, they are more nuisance than a blockade. We know this because Iranian tankers are passing and both India and China have negotiated passage for their shipping.

Now comes the hard part: While Hormuz is the easy chokepoint, it’s not the only one. Iran has some 745 miles of sunny Persian Gulf coastline from which to harass shipping. To control the waterway, the entire coastline needs to be secured - which will require ground troops – and unless you want the furious locals lobbing all manner of firepower at you from the interior, you’ll want to secure that as well. See how it keeps getting bigger? Meanwhile to effectively deny traffic through the strait, all Iran has to do is hurl enough drones or shoulder-mounted “stinger” style missiles to spook commercial shippers and their insurance underwriters.

To be clear, one aim involves essentially taking over a heavily militarized country that is geographically very hard to invade, and the other requires being a pest to commercial traffic.

Which brings us back to Europe and that call to help the US reopen the strait. All solutions have a cost, and the cost to get Europe to pick up the basics of self-defense was to famously leave the continent to its fate with Russia. It worked, but now they hate us. That trade spat and Greenland foolishness hasn’t helped. Fortunately for the US, Europe is no position to be anything put practical. After weening itself off of Russia energy (almost) in 2022, Europe is much more exposed to Persian Gulf volatility than the United States. As are our Asian allies like South Korea and Japan, who’ve also been called on to send navel help to the strait.

On paper, these allies have every reason to assist the US effort to keep the strait open, as its their energy that is getting pinched. But does this map onto practical reality? Why fight a messy, expensive and low-percentage naval war that has clearly not been thought through and will make enemies of the oil producers needed to make modern economies tick, when they can simply negotiate?

Over what? Take your pick, Iran is a high-octane grievance factory: Sanctions, the right to pester Sunnis and Jews with proxy gangs, or what to do with all that nuclear yellowcake they’ve got buried under the rubble Allah knows where. For Europe, a nuclear armed Iran may not be optimal, but Iran isn’t an immediate threat. So the smart move might be to negotiate with Iran to let the oil flow as a hedge against its economy crashing down while it’s dealing with the very immediate Russian menace at its back door.

So What’s Next?

The White House may have temporarily eased sanctions on Russian oil already at sea, it isn’t clear how much that’s going to help anything. Production has been falling and it has nothing to do with sanctions. European navies are now scrambling to impound Russia illicit “shadow fleet” carrying everything from sanctioned oil, arms or plundered Ukrainian grain. What this tells us is that Europe is tightening the noose around Russia’s economy without the help or blessing of the United States. Which is exactly what every administration since Clinton has wanted to happen. The second-order affect is that Washington is loosing leverage over European affairs.

During the Cold War, the America effectively bought allies with a dynamic open market and security umbrella that allowed Europe and Japan to get back on its feet.It’s couldn’t last forever. If Europe finally peels away from the US over negotiated passage of hydrocarbons, then Tehran will has achieved something that Moscow and Beijing could not: splitting up the world’s dominant alliance.

The QED is not so much a radical de-globalization that both the whack-o left and right are rooting for, but a radical rewiring of the global supply chain. The “Universal” system will be replaced by several independent trading bloc networks operating and policing their own interested markets and sea lanes. The good news is that there is no real reason why the emerging system won’t work. It will be less efficient, more expensive and cumbersome. There will be less of everything. On the other side of the equation, with many players policing their own spheres, a modular redundancy will be baked in to the new global supply chain adding to greater stability overall.

So the Apocalypse isn’t - quite - now. Although the future of NATO is a tricky call.