By Michael Every of Rabobank
The Kobayashi Maru Scenario
Yesterday's Global Daily by Ben Picton, 'The Wrath of Kharg', couldn't help but get me thinking about the infamous Kobayashi Maru scenario in Star Trek II: The Wrath of Khan. For those unfamiliar, back when Star Trek was a popular franchise based on serious ideas, not an unpopular one based on frivolous ones, Starfleet Academy tested its budding starship captains by making them try to rescue the simulated crew of a disabled freighter stranded in dangerous territory. Abandoning them was a failure; yet every attempt to retrieve them would be met by an ever-increasing number of attackers. Crucially, this no-win scenario was a key test of officer candidates’ characters, not their tactics or strategy.
The question today is if President Trump is himself caught in a Kobayashi Maru scenario given:
If he retreats from Iran, it's a geopolitical defeat the equivalent of the 1956 Suez Crisis; and he may not even be able to retreat if Iran refuses to stop the war regionally.
If he continues to attack, energy markets will panic further. The Israeli press says the country is preparing to fight for another month vs Iran and Hezbollah in Lebanon, not the three weeks alluded to yesterday; and Iran is now targeting upstream oil and gas fields (such as Shah in the UAE), not just refineries and export terminals, threatening energy supply, not flow.
Yet in Star Trek II we hear that Captain Kirk, in his youth, found a novel solution to the no-win outcome: he reprogrammed the computer, so victory was possible, winning a commendation for original thinking. "I don't like to lose," he tells a logical Vulcan who had already failed the test. Indeed, even as the media are calling this war Operation ‘Epic Folly' --and recalling that oil prices vs physical supply, and bunker fuel, jet fuel, and diesel are worse-- the futures market continues to price for cheaper energy within a few months. Even with backwardation showing the current physical squeeze, which seems to suggest an inherent view there will be no long-run disruption to the region's energy flows: and US assets are not tanking more than others on the suggestion this is due to a looming 1956 defeat. Or is that just the normal science fiction of mean-reverting "because markets" thinking? Let’s be clear: it's very easy to see how things can get far worse. However, there are arguably ways things can also improve as a result.
On one hand, Treasury Secretary Bessent says the US is fine with some Iranian, Chinese, and Indian vessels having successfully made it through Hormuz. Why wouldn't they be? If Iran starts letting everyone but the US and Israel through --neither of whom use it-- then the blockade is effectively over. Yet that argues for Iran not to do so to any great extent.
On the other, the underlying logic is that Trump also needs to reprogram the no-win scenario via further escalation of his own. As an example, Trump has announced his long-awaited looming trip to Beijing is unlikely to happen because of the war: he wants a delay of a month or so. In short, only if the war ends without a US retreat can Trump and Xi discuss the US-China relationship. The messaging is crystal clear. So is that China can get energy from the Western hemisphere to replace Iran and the GCC if needed. So is the US ability to then put a foot on the hosepipe in certain geopolitical circumstances - as it is now doing with Iran at far greater distance, risk, and cost. But that doesn’t mean it isn’t part of a future deal.
For those who can’t join those dots, note that after Trump blocked most oil exports to it after flipping Venezuela by force, the communist Cuban government has just embraced perestroika, allowing Cuban American exiles to return to the island and open private-sector businesses. That’s yet another Russian-Chinese-Iranian ally that seems in the process of being flipped into the US camp. The world is changing radically and rapidly – and it’s not something one just gets to sit out in splendid isolation.
Indeed, while NATO allies and Japan and South Kore (so far) won’t send ships to help reopen Hormuz despite Trump threats to NATO and even key Asian security alliances, the "It's not our war" crowd must note that the longer this drags on, the more painful it risks getting for them. Moreover, they may also come to see that an angrier nuclear Iran with ballistic missiles, which can happen if the regime survives, would have huge implications for everyone. Japan’s PM Takaichi is reportedly ‘weighing her options’ and could agree to join a Hormuz coalition for freedom of navigation in principle, according to the Japan Times.
By contrast, the EU is saying “Don’t “blackmail” us’: but it arguably is being – in which case, who has the greater leverage and risks the larger fallout? Notably, Europe is also arguing ‘Not one molecule!’ and has ruled out relaxing a Russian gas ban, which logically only leaves the US as an LNG supplier. Via a transitive geopolitical process, that also places Europe on the same side as the US vs Iran, a key supporter of Russia vs Ukraine… and then vs China(?) Meanwhile, with India pushing to now deepen new EU ties even further, does that tie the EU to the US via that South Asian route too, or to pro-Russia India?
The first of the major central banks to have to try to grapple with this today was the RBA. They opted to raise rates 25bps to 4.10%, as expected. They also noted that sustained higher energy prices will add to inflation and that risks on that front have tilted further to the upside: indeed, Aussie inflation is seen staying above target for “some time” even as there are “material uncertainties” about the economic outlook. The Reserve Bank also added it “will do what’s necessary to deliver its price and jobs goals” – but, in the worst case, what if they run in opposite directions ahead? The Aussie 10-year yield, which managed to break through the psychological 5% level yesterday, is now back at around 4.92%. AUD softened slightly on the decision.
What will the other central banks say and do this week? And what will they say and do next month if this really is a Kobayashi Maru scenario for them rather than one they can simply reprogram with a new liquidity acronym?