David Woo
According to a new Axios report, U.S. National Security Adviser Jake Sullivan recently "floated to his Israeli counterpart Eyal Hulata" a proposal for an "interim agreement" with Iran that would offer to "release some frozen Iranian money" in exchange for Iran suspending "enriching uranium to 60 percent".
This story strengthens my conviction that the next and seventh round of the U.S.-Iran nuclear negotiation, due to start on November 29, will go anywhere. The Axios report, quoting an unnamed Israeli official, suggests that Israel is opposed to an interim deal that it (rightly) fears will become a permanent one that allows Iran to maintain its nuclear infrastructure. It is safe to assume that the Israeli position is shared by Saudi Arabia and other U.S. allies in the Gulf.
Meanwhile, Reuters reported last week that the IAEA, the UN nuclear watchdog, informed its members earlier this month in a confidential report that Iran still had not granted its inspectors the access it promised two months ago to re-install surveillance cameras at the workshop in its Karaj complex that makes components for centrifuges, machines that enrich uranium.
This should not come as a surprise. Iran is entering the new round of negotiation with backing from China and Russia. President Ebrahim Raisi and President Vladimir Putin spoke last week over the phone about signing a strategic partnership agreement similar to the one Iran signed with China earlier this year.
You don’t have to be a political scientist to see that the rise of the China-Iran-Russia axis to challenge the post-Cold War international order is the single most important geopolitical development of the past decade. The formalization and increasingly open cooperation between the three countries signal their acceptance that joining forces will help them more effectively achieve their shared and individual goals, whether it is the dethroning of the U.S. dollar as the global reserve currency, the Nord Stream II pipeline (Russia), Taiwan (China), or Iran's determination to become a full-fledged nuclear power.
Sadly, not only the Biden Administration has failed to inspire any confidence that it has a strategic vision for how to counter this alliance, everything this administration has done over the past eleven months – from the fiasco of its hasty retreat from Afghanistan to openly encouraging Taiwan's participation in international organizations – is only serving to strengthen this powerful anti-American alliance.
How could investors profit from the mistakes of the Biden Administration?
A new arms race:
General John Hyten, the outgoing vice chairman of the U.S. Joint Chiefs of Staff, said in an interview last week that the hypersonic missile fired by China this summer "went around the world." He suggested that China will soon possess the ability to launch a surprise nuclear attack on the U.S.. "Why are they building all of this capability?" Hyten said. "They look like a first-use weapon. That's what those weapons look like to me." Meanwhile, Putin announced earlier this month that Russia's own Zircon hypersonic cruise missile will be ready to deliver to his navy by 2022. Unlike ballistic missiles, hypersonic missiles can change trajectory and maneuver en route to their final targets, making them more difficult to track.
Lockheed Martin, Raytheon Technologies and Boeing are all set to benefit from the billions of dollars the U.S. will soon be pouring into playing catch-up in the development of hypersonic missiles.
The further disengagement of the U.S. from the Middle East under the Biden Administration is also speeding up the arms race in the volatile region as moderate Arab states like Saudi Arabia and UAE are already taking matters into their own hands to counter's Iran's influence. Saudi Arabia spent $58 billion on arms in 2020, making it the 6th largest military spender and the largest military importer in the world.
I like Israeli defense contractors like Elbit, Rafael, and IAI that should benefit from failed U.S.-Iran nuclear talks as the Gulf countries and Israel then will have no choice but to broaden their cooperation.
Higher energy prices:
With a fiscal breakeven oil price of $75 a barrel, Saudi Arabia needs oil prices to stay high to finance its military spending. This and Biden's move to reverse Trump's decision to place the Houthis on the U.S. terrorism list are just some of the reasons why Biden's recent call on the Saudis and OPEC to increase oil production fell on deaf ears.
Meanwhile, Biden's clean energy push at home has made U.S. oil production more price inelastic.
All this means higher oil prices will be here to stay. Biden’s decision to release the U.S. strategic oil reserves is unlikely to push oil prices by very much, given positioning data for oil futures do not suggest that speculators have played a big role in driving up oil prices this year and the likelihood that OPEC will use this as an excuse to reduce production.
I like oil majors like Exxon Mobil as a high dividend play that will benefit from the high oil price. I would take advantage of the release of the strategic reserves to buy more.
Likely in response to increased pressure from Biden, Germany last week decided to delay the approval of the Nord Stream II application. This sent European natural gas prices up 30%. As the weather turns colder, the negative effect of the high gas price (it has gone up 600% so far this year) on the European economy will become more visible in the coming months.
I have recommended selling the euro against the dollar and think the euro's downtrend has more room to continue.
The greatest irony of 2021 is that the end of the Trump presidency did not usher in a more stable world order. In fact, the contrary has been true. 2021 has taught us that successful foreign policy has nothing to do with style. Far more important is understanding interests and redlines and doing whatever it takes to convince your enemies not to second-guess or test you. It is comforting to know that it is not only on Wall Street that nice guys finish last.
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