The war and beyond

For the past 17 days, a significant and highly intense conflict has unfolded in the Middle East. This war is multifaceted, encompassing military strikes, counterattacks, intricate narratives, and propaganda from all sides. The aggressors in this war are the United States of America (U.S.) and the State of Israel, while the defender is the Islamic Republic of Iran. While the U.S. is a secular state, under President Donald Trump, there have been calls to promote a stronger Christian identity. Israel, as a Jewish state, and Iran, an Islamic state, have starkly different ideologies but share a long history of religious and political conflicts rooted in their common Abrahamic heritage.

The relationship between Israel, the U.S., and Iran has been contentious for decades. A key event in this ongoing tension was the 2025 military confrontation between Israel and Iran. On June 13, 2025, Israel bombed Iran’s military and nuclear sites, killing several military officers, scientists, and civilians. After 12 days of intense fighting, the U.S. mediated a ceasefire.

However, the current conflict cannot be reduced to religious differences, counter-terrorism, or self-defense. Instead, it appears to be part of a broader U.S. strategy to:

·         Control the global energy market and key trade routes,

·         Maintain geopolitical and economic supremacy over Russia and China, and

·         Prevent the rise of autonomous economic powers in the Middle East.

With Iraq’s military power decimated and Pakistan’s strategic assets severely weakened during Operation Sindoor, Iran remains the only truly independent and potent military power in the region. The ongoing Russia-Ukraine conflict has also highlighted Western Europe’s energy vulnerabilities, further underscoring the importance of controlling energy resources and strategic trade routes such as the Suez Canal, the Strait of Hormuz, and China’s Belt and Road Initiative (BRI). Achieving this would give the U.S. a decisive edge in global geopolitics.

Despite the theoretical strength of this strategy, its implementation has not been without complications. The first major setback came when coalition forces killed Iran’s Supreme Leader, Ayatollah Khamenei, on the first day of the conflict. This act, combined with the bombing of a school that killed 160 young girls, has galvanized Iran’s resolve and transformed the war into a religious struggle. The death of Khamenei has united the Iranian people under the banner of Islamic radicalism, while also making Arab support for the U.S.-Israel coalition increasingly uncertain. Meanwhile, the attack on the school has severely damaged international opinion, particularly in Europe, where anti-coalition sentiments are rising. Even President Trump faces mounting criticism domestically. Most NATO allies have so far refused to join the war despite repeated calls by President Trump.

The Current State of Affairs

As of now, the war shows no signs of de-escalating soon. While the intensity of attacks may subside as military resources dwindle, the broader conflict appears far from resolution. Additionally, several key trends are emerging:

·         Global Economic Crisis: The war threatens to spark a global economic crisis, driven by energy inflation and severe logistical bottlenecks reminiscent of the economic disruptions seen during the Covid-19 pandemic.

·         Middle Eastern Impact: Countries like Qatar, Bahrain, UAE, Kuwait, and Iraq, caught in the crossfire, are witnessing widespread infrastructure damage and suffering reputational harm as secure havens.

·         Israel’s Vulnerability: Israel, long considered militarily invincible, has reportedly sustained significant losses to both its infrastructure and military forces, leading to a reassessment of its invulnerability.

·         U.S. Economic and Security Costs: The U.S. has sustained considerable losses, both in terms of military assets and economic costs. The long-term implications could be far-reaching, with the U.S. facing higher security risks for years to come, as Islamic radical groups seek to avenge Khamenei’s death.

·         Iran’s Dilemma: Iran has lost many key leaders, faced substantial infrastructure damage, and alienated long-time allies like India and Pakistan. Meanwhile, the Iranian prince in exile has called for a popular uprising in Iran, hoping to restore his regime.

·         Russia and China’s Restraint: Surprisingly, both Russia and China have refrained from directly entering the conflict on Iran’s side, although there are reports suggesting they may be providing covert support through ammunition and technology.

Potential Endgames: How Will the Conflict End?

Admittedly, I do not possess even basic qualifications to forecast the outcome of this war. Nonetheless, like any aware citizen, I find it relevant to stay aware of the current situation and make an assessment of the likely outcomes based on my understanding of the various contemporary issues and readings.

In general, wars can end in four main ways:

1.    Aggressor Victory: The aggressor achieves its objectives, replaces the existing regime with a puppet government, and extracts reparations from the defeated enemy. A historical example would be the U.S. victory in Iraq.

2.    Defender Victory: The defender manages to repel the aggressor’s forces, captures or kills key military leaders, and emerges with a strengthened position. Examples include World War II and the 1971 Indo-Pakistani War.

3.    Truce: Both sides agree to a ceasefire, with the aggressor retreating and both parties finding a negotiated resolution. An example of this would be Operation Sindoor.

4.    Stalemate: Neither side wins, but the fighting continues at low intensity, with no formal end to the conflict. The Russia-Ukraine conflict serves as an example.

U.S.-Israel Alliance Victory (Aggressor Wins)

A U.S.-Israel victory could lead to the following outcomes:

·         Regime Change in Iran: Iran’s Islamic regime is overthrown, and a new, U.S.-friendly government is installed.

·         Enhanced U.S. Control over Arab States: The U.S. solidifies its influence in the region, ensuring strategic dominance over vital energy resources and trade routes.

·         Expansion of Israel’s Borders: Israel may continue its aggressive policies in Palestine, potentially annexing more territory and solidifying its position as a regional superpower.

·         Strengthened Economic Sanctions on Russia: With enhanced energy security in Europe, the U.S. could ramp up its sanctions on Russia.

·         Shift in U.S.-China Relations: The U.S. could gain an advantage over China, particularly in the economic and trade spheres.

·         Stabilized Energy Markets: As the conflict subsides, energy prices may stabilize, albeit at a higher baseline.

Iranian Victory (Defender Wins)

An Iranian victory could result in:

·         Revenge for Khamenei’s Death: Iran avenges the death of its leader by targeting top figures in Israel and the U.S.

·         Iran’s Rise as a Regional Power: Iran assumes a dominant role in the Middle East, uniting other Islamic nations and taking control of energy resources and trade routes.

·         Peace with Palestine: Israel may be forced to negotiate with Palestine, leading to a resolution of the longstanding conflict.

·         Empowered Radical Groups: Groups like Hamas, Hezbollah, and the Houthis could gain territorial control in key areas such as Palestine, Lebanon, Yemen, and Syria, destabilizing the region further.

·         U.S. Withdrawal from Iraq: The U.S. could lose its influence in Iraq and be forced to pull its military out of the region.

·         China’s Rising Influence: China may step in as the new protector of the region, offering military and economic support to rebuild Iran and other conflict-ravaged nations.

·         Surging Energy Prices: Iran’s control over energy routes could send oil prices skyrocketing, triggering a global economic crisis.

·         Ukraine yields to Russia’s demands: The NATO funding of Ukraine defense comes under pressure. Ukraine is forced to strike a deal and yielding control of some territories to Russia.

Truce (Mutually Agreed Ceasefire)

A truce could result in:

Restoration of the Status Quo: The parties agree to a ceasefire, and the conflict ends without significant territorial changes.

Continued Tensions: While fighting ceases, the underlying tensions remain high, and the region faces ongoing risks of further conflicts.

Shift in U.S. Influence: U.S. influence in the region may diminish, while Israel faces increased diplomatic isolation.

Regional Reconstruction: Reconstruction efforts in Israel, the UAE, Bahrain, Qatar, Iran, and other affected countries would begin.

Stabilized, Yet Elevated, Energy Prices: Although energy prices may stabilize, they will likely remain elevated due to increased security risks.

Stalemate (Low-Intensity Conflict)

A stalemate would lead to:

Continued Uncertainty: The conflict would drag on at a low intensity, with no clear victor.

Weakened U.S. Alliances: U.S. allies in the Middle East may begin to distance themselves from Washington, seeking their own political and economic strategies.

U.S.-Russia Diplomacy: With the conflict unresolved, the U.S. could seek a diplomatic resolution with Russia, easing tensions in other areas.

Pressure on NATO: The U.S. and NATO’s support for Ukraine may dwindle, leading to concessions with Russia over disputed territories.

While it is impossible to predict the exact outcome of this war with certainty, the evolving situation requires close monitoring. This war could potentially be the most defining moment in post-WW2 history.

I encourage readers to share their predictions and continue to stay informed.

 

Tomorrow: Where does India stand in this conflict

 

The world is not resetting — It is reorganizing

The idea of a “global reset” has gained popularity in recent years. It reflects a widespread sense that the extant world order is no longer working and a fundamentally new thing needs to emerge to replace it. Total collapse of global growth in the past couple of decades, unsustainable trade balances, and excessive socialism (social security in developed countries) have raised the specter of a total collapse in the global order, just like it happened in the early part of the twentieth century.

While this feeling is understandable, the term itself might be misleading, in my view. What we are witnessing may not be a reset, but a reorganization of global institutions and systems.

Global systems rarely collapse overnight. Instead, they evolve unevenly, often while appearing stable on the surface. Trade continues, markets function, currencies circulate, and institutions remain intact. Yet beneath this continuity, the logic guiding decisions is changing.

For much of the post–Cold War era, economic integration was the dominant force. Countries pursued efficiency, specialization, and scale. Global supply chains expanded, capital flowed freely, and geopolitical considerations took a back seat to economic growth.

That framework is now under strain.

In recent years, governments have begun to prioritize resilience over efficiency, security over openness, and control over integration. Supply chains are being restructured, trade rules rewritten, and capital flows increasingly scrutinized. These shifts began immediately after the global financial crisis (2009) and have become more visible and consequential in 2025.

Importantly, this does not mean globalization is ending. Instead, it is becoming selective. Nations still trade, invest, and cooperate, but increasingly on conditional terms. Strategic sectors—technology, energy, finance, and critical resources—are no longer treated as neutral economic domains.

For example, the "US-India strategic relationship" experiment started by Bush Jr and MMS has ended. We have gone back to the pre-2009 transactional relationship. People in their 20s may find it hard to assimilate this reversal, but older people find it normal to accept.

This reorganization is messy by nature. Old assumptions coexist with new priorities. Policies are often reactive rather than coherent. Markets oscillate between optimism and caution as they try to interpret incomplete signals.

The danger lies in misdiagnosing the moment. Believing that a clean reset is underway encourages extreme positioning and binary thinking. In reality, the world is navigating a long transition, with overlapping systems and partial adjustments.

For investors, policymakers, and businesses, the challenge is not to predict a final outcome, but to operate effectively during the transition itself. Adaptability matters more than certainty. Flexibility matters more than conviction.

The world is not being rebuilt from scratch. It is being rearranged—slowly, unevenly, and with friction. Understanding this distinction is the first step toward navigating what comes next.

“Trade” over “War”

After the recent geopolitical escalation between India and Pakistan, the president of the United States (POTUS), Donald J. Trump, has become one of the most hated personalities amongst Indian households. His babbling about facilitating a truce between two neighbors, offering trade deals as incentive, may not have gone well with most Indians; even though the Indian government has officially denied any role of the POTUS and his administration in negotiation with Pakistan. This is perhaps one of the reasons the market discourse has mostly ignored “the strategic economic partnership” signed between U.S. President Donald Trump and Saudi Arabia’s Crown Prince Mohammed bin Salman, last week.

In my view, this renewed strength in the Arab-US relations is very significant, not only for the US economy, but also for a much wider global economic context. Although, it might be speculative on my part, nonetheless I believe that this “strategic economic partnership” deal could potentially result in—

(a)   a material reduction in global geopolitical conflicts and yielding some peace dividend to the global economy;

(b)   strengthening of the USD, reinforcing its position as the primary global reserve currency;

(c)   additional demand for the US treasuries, arresting the yields;

(d)   sustainable reduction in energy inflation, affording good reasons to the US Fed for embarking on a sustained easing path;

(e)   normalization of global trade, especially aiding the growth in export-oriented economies like China;

The US-Arab strategic economic partnership

Last week, the U.S. and Saudi Arabia signed a strategic economic partnership that includes a range of deals. The agreement aims at boosting bilateral economic ties. The white house claimed that the deal entails a total investment commitment of $600 billion by Saudi Arabia into the US, encompassing investments in defense, energy, technology, arts, and zoology. Notably, some sources have claimed that the actual new commitments may be closer to $283 billion, since the US$600bn number includes some projects predating the latest agreement.

The deal reflects Saudi Arabia’s interest in diversifying its economy and the U.S. goal of securing foreign investment. A significant part of the agreement is a $142 billion arms deal, including sales of military equipment to Saudi Arabia, strengthening its defense capabilities and U.S.-Saudi security ties.

The stated part of the deal is significant. However, various sources are alluding to the unstated part, which could be transformative. For example,

(i)    The BoFA Securities strategist believes that this deal implies that the US is abandoning the original plan to boost its oil production to 3mbpd (from the current 1.7mbpd), as it is influencing OPEC+ “to boost oil output in return for lifting Russia sanctions, military support for OPEC nations (Iran deal a further catalyst)”.

(ii)   As per Reuters, Trump has relaxed requirements for Saudi Arabia to normalize relations with Israel as a condition for U.S. support in developing a peaceful nuclear program, signaling a shift in U.S. foreign policy priorities. This could pressurize Israel to stop hostilities against Palestine, ending one of the most brutal conflicts in recent years and paving the way for reconstruction of Gaza and other Palestinian territories.

(iii)  Lifting economic and other sanctions on Syria simultaneously with signing this deal, corroborates this shift. Given Trump’s focus on n U.S. economic and strategic interests, it could be reasonably speculated that lifting of Russian sanctions is on the table, as it aligns with these goals, especially securing energy supply chains for the European Union, and preventing the UE, Russia and Arabs from becoming too close to China. Resumption of US-Russia trade could also open new possibilities of a durable ceasefire between Russia and Ukraine.

(iv)  Saudi Arabia agreeing to retail petrodollar (pricing its crude in USD terms) implies a consistent demand for the USD, and flows into the US treasuries. This could halt the process of de-dollarization, if not completely reverse it.

To sum up, the latest US-Arab deal removes much uncertainty and adds some hope of a peace dividend accruing to the global economy in the next couple of years. Trump promoting “Trade” over “War” is definitely a good sign for the financial markets in particular.

India is reportedly at an advanced stage of trade negotiation with the Trump administration. Hopefully, this deal would be a balanced one and shall remove the uncertainty hanging over the markets for a couple of months.

View from the Mars - 3

About 17 years ago, a global financial crisis (GFC) engulfed the global markets. The impact of the crisis on financial markets was mitigated in a couple of years by collective efforts of the governments and central bankers. However, the social, geo political and economic impacts of the crisis largely remain unmitigated even today.

The "Reset" button pressed by the crisis resulted in widening of socio-economic divide across the world. The geopolitical tensions have intensified materially with rise in nationalism, protectionism and parochialism. This has not adversely impacted global trade. The rising unemployment in Europe and most commodity dependent economies in Asia, Africa and Latin America, declining growth in China, substantial cut in developmental aid to least developed nations due to fiscal pressures, has caused widespread rise in human suffering.

The COVID-19 pandemic further accelerated the "Reset" process, paving the way for the emergence of a new global order.

To put things in a right perspective, it is pertinent to note the changes in world order that have taken place since the advent of the 20th century.

In 1917, the Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of the USSR. In the following decades, many smaller independent European states became subservient to a mighty Russian socialist army, and together formed one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, USA decided to shed its long-held policy of isolationism, and joined the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, the USA evolved into a formidable military and economic power that led the NATO allies to become the second pole in the emerging bi-polar world.

It took three decades for the new order to consolidate. The imperialist global order that existed in preceding centuries began to dismantle. Many colonies of European empires gained freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, was completely dismantled in the following three decades.

The new order was characterized by the UN, NATO, WARSAW, Mao, Israel, NAM, Bretton Woods, World Bank, Cold War, energy cartel (OPEC), WEF, et. al. The globalization that was a norm prior to the first War was completely overpowered by the forces of nationalism and protectionism. This world order lasted till the German Wall fell and the USSR disintegrated in early 1990s; unleashing a new wave of globalization. In this world order, ‘market’ and ‘multilateralism’ was the dominant theme.

For two decades, since early 1990s, the global narrative was driven by global trade (WTO), Internet, digitalization, dematerialization, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control, until the global financial crisis pressed the reset button and Covid-19 pandemic added further impetus to the process and brough us on the threshold of a yet new global order.

The imperatives of the new world include—

·         Necessity to exit the accommodative monetary and fiscal policies originally adopted to mitigate the impact of GFC, which have become completely unsustainable after further loosening to mitigate the impact of Covid-19 pandemic.

·         Need to find an alternative to the USD, which continues to be the only global currency despite material weakness in the underlying fundamentals.

·         An urgent need to correct the imbalances that have creeped into global trade in the past three decades, due to aggressive growth agenda pursued by China & OPEC, technology developments in the US, persistent low yields in EU and Japan, and economic sanction on Russia, etc.

·         Weakening of old trade and geopolitical blocks weakening and emergence of new trade and geopolitical alliances, especially Russia, China and Iran nexus.

·         China is accelerating the drive to assume global leadership through mega initiatives like One Belt One Road (OBOR) and China Pakistan Economic Corridor (CPEC) and enlarging BRICS.

·         Weakening of the European Union due to the exit of the UK.

·         The US withdrawing from conflict zones like Afghanistan, Iraq, Libya refusing to engage in Syria, and ignoring genocide in Palestine, signaling a paradigm shift in its policy towards globalization and, free trade.

·         Worsening of the refugee crisis in the western Europe.

·         India’s effort to emerge as an alternative manufacturing hub to China, for the developed countries seeking to derisk their supply chains.

·         Growing irrelevance of the multilateral institutions like the UN, OECD, IMF etc.

It may be little early to speculate on the likely contours of the emerging new world order. However, I do believe that the new world may not be excessively localized, nationalist and/or protectionist. Nonetheless, it is entirely possible that several new trade and geopolitical blocks get form, and define the contours of the new world order.

….more on this tomorrow.

Also read

View from the Mars

View from the Mars - 2

Trade war cannot quick-fix

The master failing the first test

Laying BRICS for the future

Early this year BRICS, a bloc of leading emerging economies, announced the induction of five new members, viz., Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, to its fold. The ten-member bloc has a significant presence in global trade. More specifically, it exercises significant control over the global energy markets, controlling 42% of global oil production and 35% of total oil consumption.

In July 2023, the then President of BRICS, South Africa claimed that over 50 emerging nations have expressed their desire to join the group. Recently, Russia’s Federation Council Committee on International Affairs, stated that BRICS would be expanded further as more than 40 countries are desirous of joining the group.

The cooperation between BRICS members is free, and flexible and extends to a variety of subjects of common interest amongst members. The members and other countries desirous of joining the group, view BRICS as an alternative to global bodies viewed as dominated by the traditional Western powers and hope membership will unlock benefits including development finance, and increased trade and investment.

Defining the vision of BRICS, President Putin said, “BRICS is attracting an ever increasing number of supporters and like-minded countries that share its underlying principles such as sovereign equality, openness, consensus, aspiration to form a multi-polar international order and a fair global financial and trading system.

The expansion and strengthening of BRICS could, therefore, be interpreted from different perspectives. From the geopolitical perspective, it could be seen as a vote of no-confidence in the extant global order, dominated by Western developed countries (especially the US), by the emerging economies. A larger BRICS could undermine the dominance of NATO, the UN, and even the IMF.

From India’s perspective, it could act as a strong resistance to any material escalation between India and China. We have already seen the traditional rivals Iran and Saudi Arabia bridging the differences and coming together on the Palestine issue. We have also witnessed ineffectiveness of the NATO sanctions against Russia over the Ukraine invasion issue. BRICS and other developing countries have increased their trade with Russia materially in the past couple of years, as reflected in a larger current account surplus for Russia.

From an economic perspective, a larger and stronger BRICS could play a significant role in determining the terms of global trade. Its present and prospective members would control a significant proportion of the global human, mineral, and manufacturing resources. Besides, helping in securing better terms of trade, ensuring energy security is seen as another key advantage of a stronger and larger BRICS.

From a financial perspective, post global financial crisis, a large number of developing countries have reported a slowdown in financial aid from developing countries. The conditions appear to have deteriorated further post the Covid-19 pandemic. A deeper and wider cooperation between the enlarged BRICS grouping, the humanitarian aid to the developing nations could be restored.

From a monetary perspective, there is an intense debate about limiting the role of USD in global trade. A BRICS agreement on adopting a common independent currency or increasing the bilateral trade in local currencies could help in achieving this objective. There is strong evidence of a material rise in yen trade between Saudi Arabia-China and Russia and China. India has also made some advances in promoting INR trade with traditional trade partners like UAE and Russia. We might see more developments on this front in the next couple of decades.

These may be the early days to term BRICS as a foundation for change in the post-USSR unipolar global order to a multipolar world order that shall facilitate much-delayed reforms in the global institutions like the UN and IMF etc. Nonetheless, the developments are encouraging and offer hope.

China+1 – rhetoric apart…

Last month, in one of my posts (read here), I mentioned that “From the events of the past few years, it is evident that the era of peace and global cooperation, which started in the aftermath of two devastating wars in the first half of the twentieth century and flourished after the end of the Cold War in the late 1980s, may be coming to an end. In my view, the year 2024 will see a new paradigm unfolding in global economic, political, and geopolitical spheres. The new paradigm which would take a couple of decades to manifest fully, may inter alia see multiple axes and alliances emerging in the global order, competing with each other for supremacy. Consequently, global trade may get fragmented into multiple trade blocs.”

I also expressed a view that “The trend in the financialization of economies may reverse. Physical resource ownership and localized manufacturing may become the primary focus again.”

A team of the International Monetary Fund (IMF) analyzed the economic impact of the fragmentation of commodity trade, in a working paper titled Geoeconomic Fragmentation and Commodity Markets (Jorge Alvarez, et. al., October 2023). The conclusions of the research are pretty scary. The following are some excerpts from the IMF paper.

Concentration of Production

Unlike manufactured goods, the first stage of production of commodities depends on natural endowments that can be concentrated geographically. As a result of natural endowments’ concentration, there is a significant concentration of production at the country level, with the top three producers accounting on average for about 65 percent of the global output of agriculture, about 50 percent of energy, and about 75 percent of minerals commodities.

For minerals, production is concentrated both at the mining stage due to the geographic concentration of deposits, but often also at the processing stage, with a few countries (most notably China), having developed a strong comparative advantage through the deployment of capital intensive facilities, efficient technological solutions, lighter environmental regulations, and relatively cheaper labor.

Low Elasticities of Supply and Demand

Commodities exhibit low elasticities of supply and demand, particularly in the short run.

On the supply side, scaling up production often requires large investments and long permitting processes that can delay a supply response to price changes. For example, it takes on average 16 years from exploration to the opening of copper mines. Discovering new deposits is also costly and takes time.

On the demand side, many commodities are inputs for key technologies and products or are essential to household consumption, making them hard to substitute, and attenuating the demand response to price changes.

Trade Dependence

With production highly concentrated and demand often spread across many countries, commodities are heavily traded. Their homogeneity and fungibility also contribute to market integration. As a consequence, the share of production that is traded internationally across commodity types is consistently higher than the ratio of world trade to gross output. Across agricultural commodities, around 40 percent of output is exported, around 30 percent for energy and almost 50 percent for mineral commodities are exported. more than 80 percent of lithium, or potash produced cross borders, with the share increasing over time for most raw commodities.

Fragmentation and Commodity Prices

Events of the past few years suggest that the Western Economies and Russia/China led (or controlled) economies are drifting apart, getting divided into separate trade blocks. The Covid-19 pandemic exposed the fault lines of global manufacturing. If commodities cannot be transported between China, the West, and Africa, much of the modern manufacturing may halt. For example, Congo supplies two-thirds of the global Cobalt requirement. Disruption in supply chain could halt production in various manufacturing units that use cobalt as a raw material.

A model examines how much prices of 48 key commodities would change in the Western bloc and the Russia/China bloc if trading between the two blocks stopped altogether. In such an eventuality, the Western bloc would end up with a surplus of some commodities like iron ore or copper where there is more production than is needed in the region. Hence, steel prices would drop a lot in the West and rise dramatically in China, which undoubtedly would put an end to a lot of the growth in infrastructure and real estate in that country. Prices for magnesium and graphite, used extensively in the production of batteries and other renewable energy equipment as well as platinum, group metals, and rare earth metals would skyrocket in the West since we would be cut off from supply from China.

Prices of various commodities could move dramatically in the event of geopolitical decoupling of the West from China and Russia.

Obviously, the current geopolitical standoff is an invitation to mutually assured economic destruction for both blocs. The whole rhetoric of China+1; the isolation of Russia and China and the emergence of India at the expense of China appears fraught with danger.

Investors who are positioning for a secular growth of India’s economy over the next decade and the success of China+1 strategy may want to review their strategy in my view.

Watch those Spread Sheet closely

 Last weekend the already tense situation escalated materially in the Israel-occupied Gaza Strip area of the Palestinian state. Apparently, the Hamas controlled militia launched a massive ariel and ground attack on Israeli territories, killing over 700 people and injuring many more, including several civilians - women and children. In retaliation, Israeli forces attacked the Palestinian territories in the Gaza Strip, killing over 300 people, including women and children, and destroying several civilian targets. This is the deadliest episode since 1967, in the conflict that started in the late 1940s.

The government of Israel has formally declared war on Hamas, committing to a “mighty vengeance” and “a long and difficult war.” They have received support and solidarity from all their traditional allies like NATO members, Australia, and strategic partners like India. As per the latest reports 84 nations have issued formal statements supporting Israel’s right to self-defense. On the other hand, Hamas has also received open support from Islamic countries like Iran, Qatar, and Lebanon.

Not surprisingly, two major countries – Russia and China – have not openly taken any side in the recent escalations. After being nudged by the US, the Chinese foreign ministry spokesperson stated that "the fundamental way out of the conflict lies in implementing the two-state solution and establishing an independent State of Palestine" while urging the relevant parties to remain calm and end hostilities against civilians".

Russia also expressed its support for an independent Palestinian state within the borders of 1967. "We regard the current large-scale escalation as another extremely dangerous manifestation of a vicious circle of violence resulting from a chronic failure to comply with the corresponding resolutions of the UN and its Security Council and the blocking by the West of the work of the Middle East Quartet of international mediators made up of Russia, the United States, the EU, and the UN," Russian Foreign Ministry Spokesperson said.

The war is also being seen as a setback to the fast-improving Israel-Saudi relationship. In an official statement, The Saudi foreign ministry stated, “The Kingdom of Saudi Arabia is closely following the developments of the unprecedented situation between a number of Palestinian factions and the Israeli occupation forces, which has resulted in a high level of violence on several fronts there.” The statement recalled, “its repeated warnings of the dangers of the explosion of the situation as a result if the continued occupation, the deprivation of the Palestinian people of the legitimate rights, and the repetition of the systematic provocation against the sanctities” and renewed “the call of the international community to assume its responsibilities and activate a credible peace process that leads to the two-state solution to achieve security and peace in the region and protect civilians.”

Arab League representatives are reportedly visiting Russia for further discussions on the matter.

Many readers and friends have asked for my views on the latest episode of the Israel-Palestine conflict and its likely impact on the financial markets. I claim no knowledge of global strategic affairs, politics, or international relations. Nonetheless, I am happy to share what I see as an observer of current affairs and a student of financial markets. Many may find these thoughts as naïve. Notwithstanding I feel strongly about my view and would like to hold these till I see any strong evidence of the contrary emerging.

In my view, as of this morning, the world is divided more than ever on the issue of the rights of the Palestinian people, Israel’s right to self-defense, and the legitimacy of violence against civilians on both sides.

I believe that the latest escalation may be just another manifestation of the wider trend of the rebalancing of the world order that had evolved after the Second World War and was particularly dominated by the US and its strategic allies since the disintegration of the USSR in 1991.

The unified Germany (that dominates the European Union), China (the leading force in the global economy and strategic sphere), Russia (the traditional US enemy), Saudi Arab (looking to free itself from petrodollar dominance), and Iran (striving to unshackle its economy from the US influenced economic sanctions), etc. have been actively striving to enhance their influence in a mostly unipolar world.

China’s Belt and Road Initiative and China-Pakistan Economic Corridor, Russia’s occupation of Crimea in 2017 and invasion of Ukraine in 2022, Iran’s open support to Hamas, and Saudi Arabia’s decision to initiate Yuan trade with China and INR trade with India are some of the many initiatives taken to rebalance the unipolar world order.

The recent Hamas attacks on Israel appear just an extension of these initiatives. The intensity of Hamas attacks is clearly aimed at highlighting that (a) Israel (and Mossad) may not be as invincible as it has been made out to be. Of course, Israel would retaliate strongly to protect this perception, inflicting devastating injuries to Hamas; (b) The US (and CIA) has been totally ineffective in the Afghanistan and Ukraine conflicts and would lose many more points in its standing as the unchallenged global strategic leader.

Notably, unlike the past instances, there is significant civilian support for Palestine in countries like the US, UK and France. This could also result in the hardening of right-wing stand on the policies regarding immigration and refugees in these countries, further diminishing their acceptance as global leaders.

Obviously, the conflict will not only intensify but avoid any sustainable resolution till the larger issue of global rebalancing is addressed.

Insofar as the financial markets are concerned, this will just add to the extant level of uncertainty and volatility. The mountains of debt, rising borrowing costs, still elevated inflation and faltering growth are keeping the global financial markets jittery. This escalation could add to this jitteriness, especially if it causes a sharp spike in crude oil prices or disrupts global trade, especially the movement of cargo through the Suez Canal.

It would be highly imprudent, in my view, to believe that the Indian economy and financial markets will escape the damage, especially when the stress on fiscal and current account balances is already visible and RBI has cautioned about inflation in its latest policy statement. A 25bps hike in policy rates from here could materially disturb many Excel sheets.

What to do with gold?

 Five months ago, I had highlighted the likelihood of a trading opportunity emerging in gold. (see here) The opportunity did present itself, though not exactly in the manner I had anticipated. Nonetheless, the gold prices rallied about 19% in USD terms; from a low of USD1630/oz in early November to a high of USD1950/oz in early February.

Since peaking out in early February, the gold prices have corrected about 7% in USD terms. It would therefore be pertinent to ask what traders and investors should be doing with their gold positions.

It has been my long standing view that gold is no longer an investment asset. (for example see here and here) The view is even strengthening with each passing year. I believe that it is highly unlikely that gold will stage a comeback as a widely accepted medium of exchange (gold standard); and it will be gradually phased out as a store of value as better digital options emerge.

In this context, the latest report of the World Gold Council (WGC) presents some interesting data that needs to be noted.

Demand structure of gold demand is changing

WGC highlights some important changes in the demand structure of gold in the past three decades.

·         The consumption demand of gold has declined structurally.

·         Gold demand in paper form (ETFs etc.) has turned negative in the post Covid period.

·         Demand for gold in bar and coin form has been sustaining since the Global Financial Crisis (GFC).

·         Central Bank demand that was negative for two decades has been sustaining since GFC.

It is therefore clearly evident that the demand for gold for social security, vanity and social status purposes is on the decline structurally.

Share of India and China in global gold demand peaking

India and China had emerged as major growth drivers for global gold demand during the 1990s and 2000s. The combined share of China and India in global gold demand had increased from ~20% in 1992 to ~55% in 2008. Post GFC this share stagnated and has declined to less than 50% post Covid.

Central Banks major buyers since GFC

In the post GFC period central banks have been a major driver of the global gold demand. The banks which were net sellers of gold in the 1992-2008 period, turned net buyers of yellow metal, buying close to ~1200tonne in 2022. Apparently, the unprecedented money printing prompted the global central bankers to diversify their reserves away from USD and EUR.

The major surge in central banks’ gold buying was also driven by the demand by central Asian and East European bankers for the fear of NATO sanctions.

Now since most central bankers are pursuing a policy of quantitative tightening and inflationary expectations are well anchored in medium term; the bond yields are expected to stay higher for longer; the sanctions on Russia and allies have failed to show the desired impact; global consumers continue to remain under severe cost of living stress; demographic indicators continue to deteriorate in the developed world and showing signs of population peaking in China; there are few demand driver for gold to sustain the current prices.

The short term trading opportunity in gold is therefore over in my view. The medium and long term outlook for gold continues to remain weak.

Russia, China and El Nino

In the past one year, inflation has been one of the primary concerns for most countries across the globe. Rising prices of food and energy in particular have materially impacted the lives of common people on all continents. The central bankers of most major economies have hiked policy rates in the past one year to control inflation. In the current year 2023 so far, 13 major central bankers have taken policy action(s) and all of these actions have been hike in policy rates.

However, in recent weeks inflation has shown some tendency of cooling down. It is difficult to assess how much of this cooling down is due to tighter monetary conditions; and how much could be attributed to other factors like restoration of supply chains that were broken during the pandemic and warmer winters resulting in lower energy demand in the northern hemisphere, etc. Nonetheless, some central bankers have adjusted the pace of tightening to smaller hikes. Most of them, though remain circumspect about the persistence of inflation. While the debate continues over the trajectory of price hikes in the next few quarters; an overwhelming majority of experts believe that prices may remain high for much longer.

The global growth forecasts have witnessed some downgrades in the past six months as tighter monetary conditions and higher prices are seen hurting demand for consumption and investment. As per the latest assessment of the World Bank, in 2023 “the world economy is set to grow at the third weakest pace in nearly three decades, overshadowed only by the recessions caused by the pandemic and the global financial crisis….Major economies are undergoing a period of pronounced weakness, and the resulting spill-overs are exacerbating other headwinds faced by emerging market and developing economies (EMDEs).” 

With this background, three key issues that could influence the future trajectory of global prices and therefore interest rates are geopolitical situation; impact of China ending Covid restrictions and the impact of the emergence of El Nino on global food production.

Geopolitical conflict in Eastern Europe (Russia-Ukraine) has materially influenced the prices of energy and food in the past one year. Any worsening or this conflict or expansion to Western Europe could make things worse. Some events in the recent weeks have indicated that Sino-US relations may not improve anytime soon. NATO countries hardening their stand on Russia; Russia retaliating with a cut in energy output; and some key OPEC members openly expressing disagreements with US oil pricing has materially increased the uncertainty in the energy market.

China has been gradually relaxing the covid restrictions for the past many months. This has eased the logistic logjam across the world. The supply chains that were broken due to congestion at major ports, shortage of containers, short supply of key raw materials, and poor take-off have mostly been repaired. The freight rates that had become prohibitively high have eased to pre Covid (2019) levels. The debatable question however is whether China reopening will be inflationary (higher demand) or deflationary (complete supply chain restoration and consequent destocking; improved mobility of workers etc.).

As per the latest forecast of various weather agencies (see here), the probability of El Nino conditions developing in the coming summer could impact the agriculture production in major countries like India, this year. If these forecasts come true, we may see food prices remaining at elevated levels.

A variety of views prevail on these three issues and their outcome. In my view, China reopening will indubitably be deflationary for the global economy, especially metals and other raw materials).

I am however not sure about the geopolitical conditions. I would therefore continue to expect elevated crude oil prices through 2023. By the way, the RBI in its latest statement has assumed the price of Indian basket of crude oil to be US$90/bbl for FY24, against the current price of US$84.19/bbl (see here).

It is little early to talk about weather conditions in the forthcoming summer and its eventual impact on global food prices. For now, the Rabi crop in India appears to be good; and there is enough food in the Indian granaries. Thus availability of food should not be a problem for sure even if we had a poor monsoon year after three normal/excess monsoons.