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Don't forget to use the coupon from Elon at meetkevin.com. Donald Trump is going to have Liberation Day 2.0. And in this case, it's not because of unfair trade practices by other countries, but purely because of the war in Iran. You see, military strikes are episodic in nature . They are subsiding. We go in, strike the infrastructure, some missile base.
We are trying to cause some damage to the Iranian fleet, radars or airports. And then we have to fend off all the ballistic missiles and drones they launch, oil prices jump, people panic, but then everything calms down. And as Donald Trump's rhetoric changes from, " We're going to send them back to the Stone Age," to, "We're going to make a deal," to, "We're going back to military strikes like we did in World War II ," to, "We're actually negotiating again," as markets get used to these kinds of episodes happening over and over again , people start to realize, you know, military strikes are n't really going to get us a nuclear deal.
They won't actually deprive us of highly enriched uranium. They won't actually open the Strait of Hormuz to us. So instead, Donald Trump is going to unleash the Kraken. And in this case, it's not Howard Latnick. This is not a cruise missile. This is not the F-35. This is Scott Bennett. Yes, Scott Bennett is going to launch a plan to economically isolate Iran.
Only this time it will be an unprecedented set of measures, never before seen in the history of economic isolation of any country. We will see a double whammy from the Trump administration to finally rein in Iran and force them to make a deal. Only in this case will we literally arrange for them the Middle Ages.
You see, the old medieval siege was where you cut off access to food and supplies. You are blocking exports and income, that is, the outflow of goods and, accordingly , the inflow of money, so you are cutting it off. And then you also prevent weapons and people from getting in to reinforce the target—the city or country you're trying to crush.
This will apparently be a new, unprecedented form of siege warfare against Iran that the Trump administration believes will finally force them to surrender. After all, last week Donald Trump said that we are negotiating with Iran privately because we have not yet been able to make a deal. This new economic isolation plan will take over and do the dirty work for us.
So the question now is , what does this Treasury Secretary's plan to isolate Iran really mean? What might unprecedented economic measures actually look like? And what will be the short-term and long-term consequences for our economy and stock market? Let's start with this. So, the first thing you need to know is the Caspian Sea.
The Caspian Sea is an area where there are virtually no US naval forces. And this is an ideal north-south corridor to connect Russia with Iran, as well as with neighboring countries, including Kazakhstan, Azerbaijan, etc. These particular countries benefit from trade in the Caspian Sea, and in my opinion, it is no coincidence that Ukraine accidentally hit an Iranian ship in the Caspian Sea, killing an Iranian sailor, which almost led to the Iranians striking a Ukrainian port in the Black Sea.
So, what does the Caspian Sea have to do with this blockade? Well, for now, Scott Besson's new economic isolation plan remains unclear as to what it will actually entail. So we're going to think about where we can hurt Iran, as well as the economy. And the first is, as I already mentioned, the Caspian Sea.
If we end up hitting the countries or ports of the Caspian Sea that support trade between Iran and Russia, not with missiles, but with targeted sanctions against this north- south transport corridor. This, by the way, could include sanctions against Turkey, we could start putting pressure on Russia and Iran much harder than ever before, despite the fact that we already have about 2,200 different sanctions against Iran, and they have not led to anything.
The next thing that could be quite tough on Iran is secondary tariffs, not just on Chinese refineries, but on all of China. Donald Trump could potentially use this war against Iran as a way to say that we are going to significantly increase sanctions against China, even more than the tariffs we already have against China.
This could be a large-scale measure against the entire country or a targeted one. A large-scale measure against the entire country could be problematic, at least in the short term for markets. If we think back to 2018, during Trump's first term, when China and the US were arguing over steel imports or tires, we had a lot of market turmoil due to the trade war.
Now this would combine a trade war with China with a war in Iran to pressure Iran, as we know that China supplies Iran not only with economic aid, but also probably with weapons, including potential missile defenses. So how do they do it? Well, between China and Iran, a lot of it is done by rail. Just a few weeks ago, we struck for the first time a railway in Iran, at least according to official figures, which was built by China.
And we see that rail traffic from China to Iran has increased from once a week, that is, once every 7 days, to about once every 3.5 days. This means an approximate doubling of the amount of cargo moving from China to Iran or vice versa on a weekly basis. This is no coincidence, and I think there is a chance that Scott Bessant will indeed take tough measures against China in his economic isolation plan .
I hope not, because it would have global consequences. We are seeing significant nervousness in the markets, which may be the reason for today's drop in quotes following Bessent's statement. But this may be just the beginning. You see, they could go as far—though it's unlikely—as disconnecting Chinese banks from the SWIFT system, or any country that supports Iranian oil trade.
I do n't know if they will do that, because they have already cut off Russia — the Biden administration did it in February 2022, and back then it was called a financial nuclear weapon. After 18 months, Russia had its own financial system, which is actually based on or denominated in Chinese yuan. So, by doing this, we have actually only accelerated the de-dollarization of the United States.
So SWIFT is probably not the path they will choose. The next thing Scott Bessant may announce, in coordination with the United States, is that the economic blockade we are implementing in or near the Strait of Hormuz could last indefinitely. The Pentagon has already hinted at this, and now we are sending a replacement aircraft carrier to the Middle East to help with this particular blockade.
The next thing we could do is ask Ukraine to strike Iranian and Russian ships in the Caspian Sea more often. Although we do not have many naval assets in the Caspian Sea, Ukraine could well launch attacks there. Or use other , you know, drone strikes or unmanned technology. Maybe we shouldn't call it " drone strikes" because that sounds like Reaper strikes, right?
But one-off attacks, kamikaze drones, could be used to create serious problems in a region where Iran and Russia have not prepared for defense. Now, it's entirely possible that strikes could occur here, but it's worth remembering that there are no US naval forces here. Iranian forces, most of the Iranian forces, are located along the Strait of Hormuz , at least that's what they think today.
And most of the Caspian Sea was considered a kind of civil and commercial waterway . One that wasn't really intended for use in, well, frankly, war. And this is where it's really interesting to just look at the facts. On July 25, just 3 weeks ago, Ukraine struck an Iranian commercial vessel in the Caspian Sea, killing one sailor and wounding others.
Kyiv said the target was actually a military cargo bound for Iran, bound for Russia. And then, later, Ukraine came out and said, "No, no, no, actually we were wrong. It was just a mistake." Mostly people say that Ukraine was allegedly making excuses so that Iran would not attack us. And, apparently, Russia was telling Iran, " Please don't attack Ukraine," because Russia is trembling with fear that the US and Ukraine could potentially get even closer than they are now if Iran attacks Ukraine, because then you would be combining two wars.
You already have Ukraine at war with Russia with the support of the United States in the north. And then in the south, the United States is at war with Iran . Well, if Ukraine and the US are now perceived as allies who together attack Iran and together , in essence, attack Russia, then this will turn into one global conflict, not two isolated or regional conflicts.
Russia doesn't want this. They don't want more US support in the war , you know, or support for Ukraine against Russia, because Russia obviously wants to win. That's why Russia says, "No, Iran. No, calm down." OK? But this economic plan of Bassin could cause more problems in the Caspian Sea. We're not sure, but this is another front that could make this all worse .
There's no really good way to put it. None of this gives us the feeling that we are getting closer to a solution. It just means this mess will last longer, not shorter. Now the next problem that could arise is secondary sanctions not only against China, but also against India for potential purchases of Russian or Iranian oil.
These are additional issues that could eventually affect even American companies, like Apple, which has literally moved some of its production from China to India. Mostly to diversify their risks outside of China in light of Donald Trump's tariff attacks against China. If they spread to India, you will now have even more production and cost problems.
And the problem is not just tariffs on manufacturing countries like China or India. It is worth remembering that Russia itself has huge capacities for smelting aluminum and other metals, such as nickel, which can also increase the cost of resources. So in reality, whatever Scott Bessant's plans in coordination with Donald Trump to increase pressure on Iran, they unfortunately create the risk of another jump in commodity prices.
In other words, long-term inflation. And this may be the exact reason why Treasury yields are changing the way they are today, and the market is turning a little red. You will notice that the 10/2 spread has been increasing recently due to fears that this war will last much longer than expected and oil prices will remain high for longer than anticipated.
All of this is obviously problematic. But if you really look at the analysis of this—and I always find this the most interesting—and look at the actual 10-year and 2- year bonds to see their dynamics, sometimes you can understand the situation a little better. So, you'll notice that the 10-year bond is up 5.5 basis points today.
Almost up to 4.7%. We're almost at 4.7%, while the CPI came in below expectations, the CPI came in below expectations, retail sales are below expectations, and employment figures were quite weak last year. Why? Amazingly. So we have a 5.5 basis point increase in 10- year bonds. 2-year bonds are lagging behind this growth, rising only about three basis points.
So we have a three basis point spread between them, which means the 10/2 spread is increasing by about three basis points, right? That's what he measures. This all sounds complicated, but an easy way to understand it is to get out this cute little board and color everything in. Of course? If the 10- year bond rises more than the 2-year bond, it usually— at least in this market, every market has its own reasons— creates a bearish bias, like we saw in 1979 during the oil crisis, which then led to Paul Volcker's massive rate hike policy, echoing some of the market predictions we're seeing now that interest rates could rise fourfold.
This is TS Lombard's forecast that interest rates will rise four times, to a total of 100 basis points, or a full percentage point. And the rise in the 10-year bond actually means, " Wow, we could see structurally higher inflation for a longer period." "And all these secondary sanctions or tariffs or whatever, you know, the ongoing blockade in the Strait of Hormuz plus the risks in the Caspian Sea— all of that creates more global inflation not just for metals or oil but also for food prices .
Oh, it's all a mess. Now the two-year yield is rising less, so I'll draw a smaller arrow because it's rising more slowly, partly because of inflation, but usually the two-year yield is more responsive to what the markets think the Fed is going to do . So you're closer to a kind of wait-and-see stance after some of the data that we've had.
Certainly, the rate cut is not priced in yet. And normally you'd only see two-year bonds fall sharply when we start to build in recession fears, which we're not doing right now. So we don't see the bond market building in recession fears. In the short term, the market bonds react more like: "This is not good ." This is not a recession, but it is not good either.
"In the long term, it looks like, 'Yes, we're going to need more compensation for the long-term oil price problems that we're going to face.'" "So that sounds pretty reasonable and logical, the bond market reaction here. So what is Donald Trump's ultimate goal? Well, the goal is to essentially crush the Iranian currency, which has already lost 30% of its value this year, and in a state of siege, cut them off from China, Russia and crush their economy, of course, also through the Strait of Hormuz.
And the oil exports, which are pushing people into poverty within the country itself. The question is , does pushing people, you know, does pushing people into poverty in Iran lead to Iran's capitulation? Probably not. Because Iran can just keep doing what it's been doing—which is essentially central planning, you know, almost communism or socialism, where they have to give people a means of subsistence just to survive.
So people are in abject poverty. You know, over 70% of the people in Iran are broke. There are only a very few who really has decent money. In Iran, the currency, as I said, has lost 30% of its value. GDP has collapsed by 6.1%. Well, that's the expectation for this year , mainly because of the ongoing war.
Well, and that pressure could continue to increase. So you're trying to bleed them from the inside. That's Donald Trump's latest strategy, at least. The risk, of course, is that Iran continues to centrally plan the printing press so that the money keeps flowing. They create a terrible and endless inflation , but it doesn't matter, because somehow they still manage to feed the people.
Everyone ends up in poverty, the average standard of living falls, but Iran doesn't capitulate, and the rest of the world has to deal with prolonged inflation, which is not very good. So that's the whole problem. Of course, in the near term, we already see Saudi Arabia trying to bypass the Strait of Hormuz, which is just one of the problems, right?
The Strait of Hormuz is just one problem. If we add the Caspian Sea, we introduce another inflationary element. We have three inflationary elements right here. The Caspian Sea is not yet used for military purposes, except, of course, for commercial cargo that goes between Iran and Russia. You know, Iran makes drones here in Russia and then sends them to Iran.
And, of course, the other way around, in terms of production. Because Russia also uses drones against Ukraine, right? But, in any case, it's another potential inflationary front that can be used. The Strait of Hormuz is an inflationary front. And then there's the southern part of the Red Sea, which is another bottleneck.
Countries get around it like this : Saudi Arabia uses its west-east pipeline to recover about half of its oil exports. That's great. The UAE expects to get 85% of previous levels, largely also due to the use of pipelines to take oil out of here. Land freight routes are used to take fertilizers out of the region .
Ships pass through Hormuz with their transponders off. These are all short-term efforts to keep oil prices low. In the medium term, we expect new west -east pipelines, another pipeline from the UAE, with the aim of being completed by 2027. This makes the UAE completely independent of Hormuz. We also expect a new UAE terminal on the east coast in about 3-4 years.
The plan here is basically, " Hey, if we have ports here, why do n't we build ports on this side, and then you bypass the Strait of Hormuz because you built a port on the other side, and so you can run pipelines from west to east, and you don't have to go through all these mountains here." You can just go through the sands to the coast and you're already in the Gulf of Oman.
So this is the new UAE terminal. And of course the long-term implications: Iraq and Syria are also planning a pipeline to the Mediterranean, which seems logical. That would be a 3-5 year project. We have potentially ADNOC Gas, which is building a new gas terminal also on the other side of the Strait of Hormuz.
And together, Saudi Arabia, Kuwait, the UAE, Qatar and others have agreed to borrow money to finance the construction of the bypass infrastructure. I said it a bit too complicated. Simply put, they are going to spend a lot of money to never have to depend on the Strait of Hormuz again. Okay. So what are we really doing here?
Well, the new Besson shock is something that the markets are not really ready for. You have this potential risk of another inflationary shock, which again entrenches higher inflation, brings back interest rate risks, a bearish tilt that goes beyond the shock territory, pushing oil to $90— all of this is a huge mess that shows that long-term inflation risks matter here.
So we'll see what happens next week, but all of this should be announced in detail next week, well, the answers are expected next week. We don't know exactly which of all these options they're going to choose yet, but that's what we should be paying attention to. Thanks so much for watching, come on over to meetkevin.com, see you in the next video. Bye and good luck . .
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