00:00Risks from the Iran war are rising, and so are the economic consequences.
00:04Economists now warn inflation could climb back above 3%, putting renewed pressure on U.S. growth.
00:10At the same time, BCA strategist Marco Papic says that the clock is ticking on the global economy.
00:15He lays out four possible outcomes for Iran, including what he calls a new kinetic equilibrium,
00:21where the conflict continues but oil keeps flowing.
00:24Marco joins us now alongside Bloomberg economist Stuart Paul for, like, the all-star of all-star roundtables on geopolitics
00:31and this economy.
00:33Marco, let me just start with you.
00:34What are the four scenarios that you're looking at?
00:37Well, first of all, they don't combine to 100% because some can happen in conjunction.
00:41Like, regime change, I still assign 10% to that.
00:45The problem with it is it can go good, it can go bad.
00:48You know, you can get a more compliant regime, you can get a far less compliant regime.
00:52Then the second, of course, ground incursion, you know, re-escalation.
00:57I think if President Trump chooses the ground incursion option, the market is going to suffer.
01:03Then de-escalation, that's an obvious one, you know, some sort of a deal.
01:08The one that I think is most interesting and the one that I assign 50% probability is a new
01:13kinetic equilibrium,
01:14where basically the war continues for the next six months.
01:17No, actually even six years, perhaps.
01:20However, an equilibrium emerges where energy gets to transit through the Strait of Hormuz, despite the hostility.
01:27So you never actually get a moment where there's a ceasefire, where the market breeds a sigh of relief necessarily.
01:34There's no, like, taco day.
01:35But eventually we just realize, huh, vessels are transiting Strait of Hormuz.
01:40Interesting.
01:42Sir, let me bring you into the conversation.
01:43How are you mapping out the different scenarios and the extremities of the risk to the economy in them?
01:49Well, in the U.S. context, the thing that's going to matter most and where the rubber really hits the
01:53road is with gasoline prices and the consumer outlook.
01:56Where gasoline prices are now, it ends up equating to about a $12 billion a month drain on consumers' pocketbooks.
02:02That ends up going to gasoline retailers.
02:06It ends up going upstream to refiners, producers, into the energy infrastructure.
02:11But all of that money needs to be taken out of real spending elsewhere.
02:15And so we should be marking down our growth forecast by almost a percentage point.
02:20Definitely our real household spending growth forecast by about a percentage point.
02:25In the rest of the world, among oil importers, it really does depend on what scenario we end up seeing.
02:30If we do see energy transiting through the Strait of Hormuz once again.
02:34Yeah, like Marco's scenario.
02:35Marco's scenario where we have this new kinetic equilibrium, we end up having less of a drag in places like
02:42India and China.
02:43And Marco, that's why I'm really particularly interested in this scenario.
02:47I'm interested sort of who holds the cards here.
02:49Is it China and India who are going to pressure Iran into negotiating some sort of a deal with the
02:56United States that the regime can stay in place?
02:58Those barrels can keep moving to China and Iran.
03:01Or does Iran want this to continue, but they sort of need revenue?
03:05Who holds the cards here in this negotiation?
03:08You know, I think everybody holds a little bit of cards, you know, so this isn't one of those, like,
03:12I hold all the cards.
03:13But it's a great question, Stu.
03:14And what you point out, what you're double-clicking on by asking that question, is what can China do to
03:20change Iran's behavior?
03:21And everyone's sort of focusing on the wrong things.
03:25I'll tell you one data point that I'm sure you're going to chart later after this conversation.
03:30And it's that Iran has a trade deficit with China.
03:33How is that possible?
03:34They send so many barrels of oil to China.
03:36Well, it's because they receive everything that makes them a modern industrial economy.
03:43What that means is that those drones flying into vessels, they've got Chinese components.
03:47And no, not because China's evil.
03:49American drones have Chinese components in them.
03:52Let's be real.
03:53Iran may be able to assemble a drone.
03:55It doesn't have semiconductor fabs.
03:58So, absolutely, China has massive leverage on Iran.
04:02Without Chinese trade, Iran cannot function as a modern economy or conduct combat operations.
04:09So, I do think that at some point, you can get Iran to accept certain limits to kinetic action.
04:16But, Marco, why not then just have Iran only open up for Chinese vessels?
04:21Why have some sort of situation in your kinetic equilibrium where more oil can go through?
04:27Why wouldn't Iran just make the decision, okay, we're just going to distinguish, only let China go through?
04:32Maybe oil comes down a little bit, but that still seems like it settles at a much higher premium.
04:37Yes, absolutely.
04:38I mean, it would have to set at a higher premium.
04:40But I also think that there's other ways to pressure Iran.
04:42Obviously, U.S. can attack.
04:44You know, there's a tacit agreement between U.S., Iran, and possibly Israel on what is appropriate to attack.
04:50By the way, there's a historical precedent to this that I think your viewers should really study up on.
04:56Iran-Iraq war was a vicious war.
04:58And Iraq was actually a proxy of the United States at the time, financed by the GCC, the Saudis, you
05:04know, UAE.
05:05And yet, that war, despite its brutality, over a million people dead.
05:09I mean, much worse than what's going on today.
05:11It settled into this appropriate kinetic path where there were certain things that were appropriate to strike and then others
05:19that weren't.
05:20One thing that I've been wondering a little bit about, Marco, is where this conflict fits into any sort of
05:27larger multipolar or bipolar geopolitical rivalry, let's say, between the U.S. and China.
05:33If there's this relationship between Iran and China where China needs Iranian crude and Iran needs imports from China, particularly
05:42to create drones or any other sort of infrastructure,
05:45why would the U.S. want any sort of de-escalation if it lifts its geopolitical rival, China, and allows
05:51revenue to flow back into Iran?
05:54Well, I think your question reflects this real struggle between a bipolar outlook and a multipolar.
06:01In a bipolar world, you're right.
06:03It's a zero-sum game between the two rival superpowers.
06:07But in a multipolar world, actually, Stu, you have these conflicts where the two rivals find themselves on the same
06:14page.
06:14And in this particular case, I would argue that the U.S. and China are on the same page.
06:19Let's imagine a scenario where there is no de-escalation.
06:22There is no kinetic equilibrium.
06:24It's that 35% where the market's down another 30%, right, re-escalation.
06:28I can see a world where Chinese vessels are shoulder-to-shoulder with American in six months' time trying to
06:35pry open the Strait of Hormuz.
06:38And you know why that's interesting, Marco, is because this was an administration that has gone back and forth as
06:43to whether they really want this.
06:44But at some point, wanted NATO vessels to be the one alongside American ships.
06:51What difference does it make in the division of this global world to have American allies, which have already been,
06:57let's be honest, abused by tariffs, this time around being much more hesitant to help out the United States?
07:04That's a multipolar world, right?
07:05It's every pole for itself.
07:08It's the famous Paul Merson quote, there are no friends.
07:12There are no enemies.
07:14There's just interests.
07:15As we look ahead to U.S. discussions with China in the coming weeks, I'm wondering how that, you know,
07:22each pole for themselves, this multipolar world ends up working out.
07:26Of course, we're seeing some rhetoric out of China this morning to ramp up any retaliatory tariffs against the U
07:32.S.
07:32But as there is this larger negotiation about the relationship between the U.S. and China, do you think that
07:38this is going to be basically the entire talking point, reducing, de-escalating on trade so that the two poles
07:46or two of the poles in a multipolar world can focus its attention on Iran and opening up the strait?
07:53Well, I think this is where, you know, you could probably criticize the Trump administration a little bit for refocusing
07:59America to the Middle East.
08:01So how much slack does the U.S. have to not also wage another front war with China on trade?
08:09To me, it looked like President Trump was, you know, lining up for some sort of detente with China anyways.
08:15And I think that the current situation in the Middle East probably reinforces that necessity.
08:22China needs to be a willing partner to pressure Iran now, you know, and they're going to extract something for
08:29that service to the United States.
08:33So, Marco, there's a lot of wild cards, a lot of variability in it.
08:38And one thing that also sticks out to me, you said the other day, if this doesn't get resolved, we're
08:41looking at a pandemic-style shutdown of the global economy.
08:43So much is at stake.
08:45What are you advising clients to do right now?
08:48Are markets appropriately pricing in this risk?
08:51No, they're not.
08:52And the lower the markets go, and, you know, the futures are flashing on the side of the screen, as
08:58I'm saying that,
08:58the lower the markets go, the better for the de-escalatory scenarios.
09:03So, if you are sitting there wanting to buy back into risk-on trades, particularly all the rest of the
09:10world stuff that was outperforming U.S.
09:12that looked really juicy over the past 12 months, if you want to nibble at that, you want market to
09:18go down hard in the near term.
09:20It's necessary.
09:21It's important.
09:22The 10-year yield has to go higher.
09:24Stocks have to go lower.
09:26That will put pressure on President Trump to avoid re-escalating from this position, so the ground troops.
09:33And, you know, Colonel Sanders that came on before me, he really articulated very, like, objectively and straight the fact
09:41that the troops that are being amassed,
09:43and I can't even use the word amassed, because it's not appropriate, the troops that are being assembled are just
09:49nowhere near the levels we've had in Gulf War I, Gulf War II.
09:53So, what's the point?
09:55You know, what's the plan here?
09:56Why?
09:57Take some island in the middle of the Strait of Hormuz that doesn't really give America any strategic advantage,
10:02given that it's already got the air bases and the ports in the region.
10:06I think that President Trump really needs to think about what is the risk-reward for any ground action,
10:13given the amount of troops he has already positioned in the region.
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