Investors seem to be growing increasingly relaxed about the legion number of political risks though they remain concerned about one key aspect of modern political discourse – intransigence. Trump may blow hot and cold about tariffs with China, but the markets are betting that when push comes to shove both parties will do a deal. Thus, equities look bullish.
But there are two areas where I think that the risk of intransigence is growing exponentially – Brexit and Iran. I also think that the investment cost of these two outbreaks of intransigence could be very substantial indeed.
Let’s start with Brexit. I’ve long held to my view that the governments putative deal was the best of a very bad bunch of options. I still think that there is no natural majority for a Hard Brexit nor for another Peoples Vote. I should be hopeful about the discussions with Labour but I’m not. I still think there’s precisely zero chance of it ever working, although I would like to be proved wrong. Why my caution? Most observers think that Labour is focused on thinking through the implications of Brexit. They aren’t. They are obsessed with internal politics. Much of the shadow cabinet, and especially Keir Starmer and a rump of discontented Watsonites don’t want to save the Tories from Brexit and basically want a new People’s vote. The hard left at the top are instinctively quite attracted to a hard Brexit (the CPGB has apparently decided to back Farage’s Brexit Party, hilariously) but in reality only really care about stuffing the Tories and getting into power, regardless of what deal is done with Brussels. There is no real moral imperative to do a deal. So they won’t.
On the right, we can slowly start to hear a very decisive break in the consensus. Until now most Tory leaders probably were willing to put up with the May deal. Now they are shifting inexorably towards a Hard Brexit option. Just get on with it is the house view. Now I think a Hard Brexit is a unicorn. It sounds like a clean break but it isn’t. We’ll still be stuck in discussions with the EU about all the things that we’d once agreed. Just throwing your toys up in the air doesn’t mean that they don’t land exactly where they were before, courtesy of the forces of gravity. We’ll still have to work out so kind of post WTO deal (whatever that is). But that’s all irrelevant because sentiment is shifting towards a hard exit.
What worries me here is that the room for compromise is now disappearing. Remainers have got the scent that they can get a revocation possibly and certainly a vote. So, they’ll stick to their more intransigent positions. Likewise, with Brexiteers who are moving aggressively towards a hard line. This means that the chances of either another vote or a hard Brexit are increasing, exponentially in my view. Which is bad news for one main reason – intransigence breeds uncertainty? We won’t be able to organize another vote very quickly while Hard Brexit will almost immediately result in yet more interminable negotiations with Brussels. I repeat, a Hard Brexit does not mean the end of negotiations. It means we go back to the beginning again and restart from afresh. Now that may be an attractive option for some but for many investors, it’s a horror show.
Which means that the Bargain Brexit Britain story about UK assets looks like it’ll be postponed, again.
The bigger worry is Iran. Put simply, I don’t understand what the Trump administration hopes to achieve with their ramping up of pressure. In sum, they are backing a hard-line regime with fairly substantial internal support (not a majority but no small minority) into a nationalist corner. In all negotiations, one needs a potential escape route so that both parties save face. I can’t for the life of me see what that escape route is for Iran. In essence, the Trump administration wants the removal of the regime because that is what shutting down its aggressive geopolitical military strategy and the Revolutionary Guards means. This regime, a hugely corrupt one, is built on an aggressive pan Shia ideology to maintain its legitimacy. There may be a growing number of clerics who think this corrupt and brutal regime is bringing their religion into disrepute, but they don’t control the police, the militias or the military. I have no truck with this regime and would dearly love to see its fall but that has to happen because of internal pressures not from regime change imposed externally.
One possible explanation for the Trump strategy is to build a containment strategy. This borrows on George Kennan’s ideas from the Cold War, which worked fairly well. But that consisted of a united front that worked together (largely through NATO and other alliances) and also involved complex behind the scenes back channels. If an Iran containment strategy is at work then there’s already trouble. Iraq and Pakistan look very wobbly. As obviously does Syria and Yemen. Russia and China don’t sound terribly interested in taking part either. The mainstream Sunni conservative powers might be aligned alongside Israel, but someone evidently forgot to get Erdogan and Turkey on side. If you don’t have a united containment block, you’ll have seepage and the dispute will spill out into adjacent areas, with horrible consequences.
So, to put my fears into concrete terms, I am really very worried that Iranians will – stupidly but possibly rationally, in their view – launch premeditated terror attacks against US interest worldwide which might provoke a brutal reaction. I also worry about a large-scale terror attack using missiles against Israel. And more precisely I worry that the Iranians faced with declining oil imports might decide to go all in and shut the gulf, precipitating US military action. At this point, my main concern then becomes “what’s the US exit strategy” for the ensuing mess? Toppling the Iranian regime is a complete nonstarter. How do the Americans get their troops out of that particular shitshow? I think many fine US and Israeli military strategists get this concern but I’m not sure that their increasingly intransigent political leaders are quite so clued up, although one small part of me hopes that Trump in his heart of hearts knows this would be an escapade that will cost tens of billions and result in lots of body bags.
Anyway, the net effect of this geopolitical action on the global economy would be devastating in the short run.
UPDATE – If you want a succinct analysis based on foreign policy expertise about why the US policy towards Iran won’t work see this excellent article HERE
Oh, and while I am on my geopolitical hobbyhorse about intransigence can someone have a quiet word with the growing chorus of voices in the US who believe that the West needs to, or in fact, SHOULD enter a new cold war with China. Like many I have huge worries about how the Chinese are taking the mickey out of the rules of trade and espionage but pushing China into a containment corner and then ramping up the political and military pressure is a terrible long-term strategy. I’m completely fine with tough, poker-faced negotiations which keep the lines of communication open and amiable. But treating China like a pariah is not a smart move. There has to be a middle way between sucking up to this new superpower (as some in the Conservative Party appear eager to do as would most of the Labour front beach I guess) and treating China as the new Soviet Union. Deliberately encouraging nationalism in China to facilitate your domestic objectives is a terrible, terrible idea. Beware.