We talked about the 2022 analogue yesterday — a major war flashpoint, disruption in global energy, and the related fall out in economies and the flight-to-safety of global capital.
And we talked about the (related) cracks that are beginning to show in Europe — an importer of energy that's becoming materially more expensive, set to compound (already) fragile balance sheets and recessionary-level growth.
The market response to this backdrop was severe on Tuesday, and today things calmed down, with a mild retracement day.
Why?
Because Scott Bessent (U.S. Treasury Secretary) was in front of a camera early this morning (on CNBC) before U.S. markets opened, to calm markets.
He systematically addressed every fear.
The fear: The Strait of Hormuz has been shutdown (where a quarter of the world's oil supply travels. Bessent reiterated what Trump had said yesterday — Hormuz is being reopened with a Navy escort.
The fear: Lloyds of London had pulled insurance on any shipping activity in the Hormuz. Bessent said, the U.S. government would replace it.
The fear: The disruption in global crude oil supply will spike gasoline prices. Bessent said, crude markets are well supplied.
The fear: The U.S. military campaign will turn into a long war. Bessent said, it's ahead of schedule (Trump's original four to five week schedule).
The fear: This is another first half of 2022 (Russia invaded Ukraine, huge oil spike to $130, deep decline in stocks, economic slowdown). Bessent said, it's not 2022. America is energy dominant (this time), not energy dependent.
The message was delivered. The market liked it (for today).
But Bessent had another message this morning that was far more important than this sentiment massaging.
He described the orders he's been executing against the Iranian economy since last March, "to excerpt a maximum pressure campaign."
He explained step-by-step, how they (the Treasury) used U.S. dollar access to break Iran's economy before the first bomb was dropped.
They "cut off the dollar supply into Iran." Iranian banks failed because they can't settle international transactions (they need dollars). The central bank was forced to print money to keep the system alive. That spiked inflation. The currency collapsed. The economy imploded.
That's the story of the power of the dollar in the global economy.
This ties in very cleanly to the situation we've been talking about in Europe — the potential use of dollar liquidity, as leverage to force European alignment with the U.S. policy direction.
And probably no coincidence, these comments from Bessent today come as European leaders are waffling (at best) on support for the Iran strikes. At worst, in the case of Spain, they're outright blocking U.S. military use of staging grounds for combat operations against Iran.
In the case of Canada, Carney postured in front of the world at the Munich Security Summit about creating a "third pole" in the new global power structure, to stand in the middle of global powers, the United States and China.
He's been on a plane visiting China, India, Australia and Europe, promoting the strength of these relationships — all meant to be an affront to American leadership.
And today, he cut a trade deal with China as bombs are dropping in Iran.
With all of this in mind, under a new Trump-appointed Fed Chair, coming in May, the implicit U.S. financial support (like access to dollar liquidity) will likely become "conditional" for these allies. And that would quickly expose their liquidity and solvency vulnerabilities.
