Blain’s Morning Porridge – Oct 23rd 2023: Events in the Middle East have changed the World

“In the final end he won the wars, after losin’ every battle.”

Markets have not sold off on renewed Middle East conflict, but the geopolitical faultlines are being reinforced as it become clear this is war the US and Israel are fated never to win.

Something peculiar happened over the weekend. The lead item on BBC news wasn’t Gaza… Instead it was the weather; as extreme rainfall from Storm Babette drenched the North. I’m not sure Ukraine was even mentioned. How quickly we think we’ve moved on….

The reality is the headlines are likely get worse, much, much worse. And, it’s all so predictable. Storm Babette was a momentary distraction.

The big issue for markets will remain the consequences of rapidly escalating events in the Holy Land. Thus far the markets have not staged any big-sell-off to the rising conflict – traders are watching, but waiting and wondering how it play out. Still hoping for the best, rather than pricing the worse case. The next stage – what happens when the Israeli tanks roll across the border is getting close. Could an invasion of Gaza trigger a greater market reaction – watch oil and Saudi?

Is it time to load up on oil stocks and gold? What about US Treasuries as a safe-haven play – not according to the charts, but a number of banks are recommending longer duration bonds as we’re approaching the end of rising rate cycle! (Are we? Lets see what a bad winter and oil prices do to energy costs first..)

What happens next?

From 1944-1975 Ho Chi Min and General Vo Nguyen Giap, the leaders of the Viet Minh Guerrilla forces, inflected successive humiliations of the Japanese, the French and finally the Americans by dint of losing most battles, but not the war. Giap is dimly remembered today – but is perhaps the most important military figure of the immediate Post WW2 age. With a peasant army, he won a guerrilla war against the most industrialised nation that had just beaten Germany and Japan (ahem)!

Today, Giap would be impressed how effectively the unsophisticated Hamas and Hezbollah terrorists have set impossible victory conditions for Israel. Giap’s strategy was always simple: as the underdog he had make the war unwinnable for the other side.

Hamas are betting they have already ensured Netanyahu’s War on Terror may result in tactical victories for the IDF, but ultimate strategic defeat for Israel.  The seek to isolate Israel regionally and globally and turn it into a pariah state. This battle in being fought on the media. Hamas succeed if they force Israel to over-react.

That looks increasingly likely:

• Massive civilian casualties when the IDF moves into Gaza will harden global opinion. No matter how carefully the Israelis tread, the Arab World will remain convinced its ethnic cleansing.
• Hamas will be holding hostages in its network of deep tunnels and bunkers. To breach these will require bunker busters and worse, further appalling TV audiences, and wrecking Gaza’s already crushed infrastructure and housing stock. To say the optics will look terrible underestimates the likely devastation by a couple of million magnitudes.
• Hezbollah on the northern border seeks to provoke an Israeli invasion of the Lebanon, raising further pressure on Arab States to intervene. Any invasion of Lebanon or the West Bank will further alienate global opinion.
• Netanyahu will ultimately be held to account for Israeli failings pre-atrocity – but his current appeals for patriotism, unity and purpose are based on the preservation of his government and position.
• The latest, well-prepared and pre-seeded Iran narrative has moved the propaganda one step further: American (and European) support for Israel makes the this a holy-war against the Great Satan itself: the USA.

The US in trouble in the Middle East? It’s a gift for Russia. It’s a win for Iran. It’s an opportunity for China to sew further doubts and present itself as a valid alternative to the USA. This war is going to played out on the TV screens. Just 2 weeks ago, following the Hamas attrocity, I noted how much it looked like the Tet Offensive in 1968 – a massive tactical defeat for the Viet-cong, but which led to the strategic defeat of the South as US domestic audiences turned anti-war.

While the Global South was shocked at the Hamas atrocities a fortnight ago, the narrative of the destruction of Gaza is now their immediate focus. The history of the 21^st Century has been dominated by the Post 9/11 wars of retribution in Iraq and Afghanistan – which ultimately achieved nothing except to harden global opinion against perceived Western double standards. Today, the West’s imperative to support Ukraine against Russian aggression sits uneasy with its’ support for Israel’s aggression towards Gaza. Where is the equivalency?

At its most basic, the geopolitical ramifications of the Gaza war are likely to further reset already fractured relationships between North/South, East/West. That has implications for peace, prosperity and global trade.

Meanwhile, there seems to have been a whole raft of curious things happening over the weekend. There are rumours of a UK naval force patrolling off-shore North Sea wind farms. American troops have apparently been attacked in Middle East. The Finns are examining damaged fibre optic cables and a wrecked Gas Pipeline – and trying to trace suspicious Russian and Chinese vessels.

Did the West just miss the start of World War Three?

Five Things To Read This Morning

FT                               A big problem looming for bond markets

FT                               Toyota nears mass production of solid-state batteries

BBerg                          China Rattles Foreign Firms With Arrests, Foxconn Probe

WSJ                            Fed Rate Moves Squeeze a Key US Ally

Businessweek             Inflation at 130% Is Pushing Argentina Down a Radical Path

Out of time,

Bill Blain

Market Strategist