I know. The headline should read “LAW” but where’s the law these days? Certainly, it’s nowhere near Washington as the new Trump fund raising “squeeze” is an emailed request for cash donations in exchange for “private national security briefings” straight from the desk of The Don himself. I kid you not. Anyway, let’s get back to the war, or ‘excursion’ per the Orwellian Oval Office. Clearly, things on the Iran war front are not going to plan. My particular favourite summary of the moment is a delicious one from The Economist: “Although Donald Trump claims to have destroyed 100% of Iran’s military capabilities, the remaining 0% is wreaking havoc on the global economy.” Now, the purpose of this article is not to re-hash all the negative first-order global impacts of the war ranging from higher fuel prices, to supply chain disruption, to inflation, to reduced growth….to interest rate hikes. Yuk! None of this helps financial markets or business in the near term but I’m intrigued by some of the second-order possibilities which could emerge from an extended period of uncertainty. I’m thinking of three areas in particular:
AI Infrastructure: The simple math of a shock to the global economy is that financial flows dramatically shift. Quickly. Extra money will be needed to meet higher energy bills, economic stress etc. That money must come from somewhere else in the system. So, one thing to consider is that the hundreds of billions Saudi Arabia , UAE, and Qatar committed to the funding of AI infrastructure projects might just be needed to rebuild energy infrastructure closer to home. Current estimates of the cost of the attack on Qatar’s Ras Laffan LNG hub is up to $20 billion per annum . And the worst bit, the rebuild could take 5 years – so let’s call that $100 billion. There is a teeny weeny bit of irony here given the US tech broligarchs’ man in the big house (and ballroom) has screwed up royally. Current estimates suggest $4 trillion is needed to build data centres, training models, memory/storage etc. by 2030. A squeeze on access to that investment capital will favour the biggest balance sheets and cash flows like Google, Microsoft and Amazon. Not for the first time, I worry about OpenAI’s positioning in the middle of all this AI excitement (remember the famous FT graphic) and being attached to more than $1 trillion of AI projects. So might its bankers worry, watching its tiny balance sheet.
Electric Revolution: There was a theory for years that Saudi Arabia was deliberately keeping the oil price lower in order to delay the electric/renewable revolution. Their thinking apparently was that if energy was cheap it would remove the urgency to seek alternatives to fossil fuels. So, with Asian buyers already paying over $170 per barrel of oil we are beginning to see some interesting developments. In a little more than 2 weeks, Chinese EV player, BYD Co, is seeing its showrooms packed with customers wanting to switch to EV models. From Bloomberg….”At a BYD Co car dealership in Manila’s financial district, demand for the Chinese company’s electric vehicles is so high that Matthew Dominique Poh said he’s seen a month’s worth of orders in just the past two weeks.” This feels similar to the Covid-19 acceleration of remote working. Also, spare a thought for US auto manufacturers who have scaled back their EV ambitions to keep the Dearest Leader happy and have written off $55 billion of EV projects. Timing is everything they say…..Get ready for some pretty interesting EV headlines in the coming months.
Defence: Ukraine was the wake-up call when the world’s second most powerful military power turned the Kremlin’s “3 day operation” into a battlefield quagmire which has decimated its stores of equipment and weaponry, incurred more than 1 million of its own military casualties and incredibly has now lasted longer than the Soviet Union’s WW2 conflict with Nazi Germany. Fast forward to today and we are witnessing the world’s most powerful military gain almost total superiority over Iran but now staring down the barrel (!) of a strategic disaster that “nobody ever expected” per the stable genius hurling ketchup against the walls of Mar-a-Lago. The trapping of 20% of the world’s fuel supplies in the Strait of Hormuz and the destruction of critical energy infrastructure in UAE, Saudi Arabia and Qatar has been achieved with drones which cost as little as $20,000 but require the US to quickly run through their stores of $2m missile air defence weapons. Astonishingly, the Pentagon is looking for an additional $200 billion of budget to fund this “excursion”. However, the bigger picture is that military strategy and economics have utterly changed. Drone warfare developed on the battlefields of Ukraine is the scary future. For some it will be opportunity. Check out the IPO this week of the Ukrainian drone software company, Swarmer, on the Nasdaq. The IPO price was $5 per share but by the close of its first day of trading the share price was $55. Just the 950% gain for early investors. Oh, and last year Swarmer had generated just $300,000 of revenues. The US military-industrial complex is having its “ChatGPT” moment and will soon embark on a massive drone warfare investment programme.
Clearly, not all of the above is cheery stuff but it does feel like some ‘leaders’ in business, technology and investment are now facing very different prospects than they planned for just a few short weeks ago. And, there doesn’t seem to be a “TACO” option this time.
