As covered this Spring, the Bank of Japan has a new governor who was chosen to hopefully change course away from the endless money printing they’ve been doing.
He’s already started to do this, but not quite fast enough…
This week we’ll be discussing Japan at length (Again, lol) and we’ll cover the recent invasion of Gaza and its potential impacts on markets as well.
Song of the Week - LilCj Kasino - Opped Out
Table of Contents
Invasion Weekend
US Troops, Advisors or Combatants
Risk to Oil Markets
Softening Yield Curve Control in Japan
The Yen In Trouble
Large Intervention is a Matter of When, not If
Sovereign FX Holdings
Why Japan Matters
Conclusion
Internal References
1. Invasion Weekend
A ground invasion was always the inevitable outcome here, it was only a matter of when.
there’s no doubt that the IDF bombing campaign has had some success, but rooting out Hamas would likely take an extensive invasion and occupation.
Well, that happened on Friday night during the Jewish Sabbath. This was likely done to maintain the element of surprise, but I wonder if this may have also been done so that the invasion wouldn’t begin until markets were closed on Friday. You may recall that the US asked Israel to delay their invasion.
I don’t know the details of the invasion and can’t tell you precisely what’s going on, and it’s doubtful that anyone else can either.
As usual, there are ten million gore videos all over Twitter of people getting blown up by tanks, fathers and mothers holding the bodies of their lifeless children and streets littered with human body parts in the aftermath of a bomb. I will spare you those as well, you can find them if you want to, but I don’t think your peace should be disturbed in this manner.
This is the part of social media that I have begun to find distasteful over the past year or so. Everyone is rushing to be the first person to post a video of the latest murder for engagement (At least in my corner of Twitter and IG), and I’m just not interested in seeing it. There was a point in time when I believed that to be well rounded you needed to see and understand these things, and I still believe that is true, but lol, I think I’m rounded enough as it is. I also don’t think that the point is to constantly look at the dead strewn across the street, it’s just to know that it happened.
But I don’t even think that everyone needs to know it happened. There is beauty in ignorance, and some people in this world should intentionally remain ignorant of such matters so as to bring light and beauty into their corner of existence. Tactical ignorance is a skill that many take for granted. You don’t need to know everything. Will knowing this improve your life and make you a better presence to your loved ones? Do you really need to look death in the face every waking moment? Every family needs its protector, and if that’s you, well, you’re gonna carry that weight. But the point of taking on burdens is so that other people don’t have to, and that is best remembered and taken seriously before you decide to spread images of chaos into the mental space of others.
That being said, what’s going on and how does this impact the broader financial world?
Israel’s invasion came after warning residents to move South or be treated as enemy combatants if they did not leave. Some people seem to think that is a sufficient warning and justifies any atrocities done after the warning because “they were warned.” But Gaza is tiny, and many of its residents are poor, and the average age in Gaza is 18. Two-thirds of the residents in Gaza are not old enough to rent a car in the US. Do they have the means to just pick up and become permanently homeless 5 miles south of their homes (Israel will not give the land back ever)? If you were given such a warning, walled in on all sides in a 141-square-mile strip of land, would you and could you pick up and leave your home when given such a warning? I don’t evacuate for hurricanes (Harvey sucked), and I suspect I’d be dumb enough to stay in my home if I were in Gaza, so I can understand how a 20-year-old might think the same thing. I’m not giving up my home to invaders.
This sort of invasion will necessitate civilian casualties. And we’re now seeing that begin to accrue.
~1,400 Israelis were killed in Hamas’ initial invasion of Israel.
But now there are estimates of 8,000-10,000 Palestinians killed so far as Israel conducts extensive bombing in an attempt to destroy/cave-in tunnel networks under the city while pushing troops and armor in to essentially cut Gaza in half. Estimates are for 1.5 million Palestinians displaced by the invasion (the entire population of Gaza is ~2.5 million people), but the borders are still closed so these people are essentially stuffed into the streets and empty buildings of the southern half of Gaza. They likely crowd the hallways of hospitals, schools, and government/police buildings. It’s doubtful they know where their next meals will come from, nor if they will have water to drink, much less bathe or use for hygiene.
But despite all of that, they are positioned to win an extended ground invasion if Israel can’t achieve strategic success quickly. The answer is in demographics. Only 15% of Israel’s armed forces are infantry, with another small fraction operating armor. Currently, Israel has ~400,000 active duty troops and active reserve forces engaged in combat/securing its borders and other activities. There are maybe another ~150,000 reserves they could call up before they would need to conscript citizens. This means they only have ~60,000 trained infantry, but they can’t deploy them all into Gaza, as they have to maintain security on their other borders with Lebanon, Syria, and Jordan as Hezbollah and other groups pose a continuing threat.
If Israel is unable to sufficiently capture territory and push the Palestinians further towards Egypt’s border, or eradicate Hamas without angering the non-combatant Palestinians to want to further take up arms, then they will end up in a long occupation and protracted engagement with guerillas and militias. Palestinians can’t go anywhere else, they are stuck in an ever-shrinking cordon. For any male 14 and up there may simply be no choice but to fight in some way. If even half of the males 15-30 find themselves feeling this way, they can outnumber Israeli infantry 10 to 1 or 15 to 1.
From the Israeli side, if this becomes a pointless occupation or too dangerous, there are many places an Israeli soldier can decide to go if sufficiently demoralized by a long occupation. Many are dual citizens or may decide that it’s not worth their life to continue to remain in the armed forces after they’ve completed their time. In Israel, joining the IDF is actually something that the upper class not only does but is proud of. It’s not like the US where our elites either dodge military service or are deployed as an intelligence officer who is never really in the same level of danger as an infantryman. In Israel, all levels of society serve in the IDF. This means that support for a war can’t last if the occupation becomes pointless while presenting danger to those enlisted. If Hamas is to win they simply must outlast them while engaging the youth to participate in the defense of Gaza. And honestly, I don’t think it would be that hard to convince a young man in Gaza that Israel presents an existential threat to their life, because it does.
Israel’s best bet is to capture some land, set up a new border quickly, and bring in settlers while vigorously guarding whatever border they set up. Is this ethical, moral, or right? Probably not, but the only truth of the world is that might makes right. We’ll pay for this later of course, because while the Western world is mostly backing Israel, the entirety of the Muslim world sees this as an exercise of Western hypocrisy (which it is), and it further degrades our ability to operate diplomatically with that sphere. One day those chickens will come home to roost.
Will this impact the market? If it’s a short engagement, no, not really. The only sanctions likely to come out of this already are in place. We can’t double-sanction Iran, and Iran will not stop selling oil to China. Israel holds a mild amount of US treasuries and won’t impact yields much at all if they sell them to bolster their own currency.
The big risk is that the longer this conflict lasts with US assets in the area, the higher the risk that we find an excuse to attack Iran. So far, there seems to be media consensus that US bases in Iraq and Syria have been attacked by drones and rockets 24 times since this conflict began. We claim these attacks are by Iranian proxies, and they might very well be. So far there have been a couple dozen minor injuries from these attacks, with one death from cardiac arrest (contractor, not armed forces) while sheltering in place during these attacks.
There is one other big risk of sanctions potentially being enacted the other way, I’ll discuss that later.
In general, our drone defense is far better than people understand, but in unconventional warfare, it only takes a little slip-up for major damage to occur.
In the year 2000, the USS Cole, a Navy Destroyer was damaged by a suicide bombing from what appeared to be a friendly vessel at the time while the Cole was in the port of Aden in Yemen. Simply having ships in this area increases the possibility that they will be targeted. Of course, our naval vessels in the Mediterranean now are not making port there (they make port in Sicily), and they typically do not allow any vessels to approach within a certain distance of them, however the potential for escalation always exists when we are present.
In the year 2000, the USS Cole made several slip-ups that have likely been mitigated by now, but we don’t know what we don’t know. There may be other holes in our security that have yet to be exploited. Might another one of our ships come under attack? Who’s to say?
US Troops, Advisors or combatants?
So, are there US troops in Israel or Gaza right now?
According to Kamala Harris, “The United States is only providing advice, equipment, and diplomatic support to Israel. US troops will not be sent to Israel or Gaza.”
But we already know that Delta Force operatives were on the ground in Israel and Gaza performing hostage rescues after the White House posted unredacted photos of their faces on its social media account for clout. We also know that despite claims that there are no US troops stationed in Israel, a US military contractor was recently awarded $35.8 million to build “a life support area” (this is what they call a barracks) in Israel on behalf of the US Army. So clearly, if there aren’t already US troops stationed in Israel, there will be soon.
If you ask Iran, they are claiming that the US has deployed 5,000 troops into Gaza alongside the Israeli invasion. Is that true? Probably not. From leaked documents, we know that the US only deployed around a dozen special forces troops into Ukraine during that conflict. Yes, to be exact, it was 14 troops. After the leak, it was claimed that those troops were in the embassy in Kyiv for security reasons.
I have no doubt that we do have some US forces on the ground in Gaza acting as advisors to the IDF. They are not supposed to fire on opposing forces but simply embed themselves within IDF squadrons and provide guidance in combat. A decent depiction of this is in the opening scene of the movie Triple Frontier.
Of course, in the movie, at the end, the advisor takes the shot and then hands the gun to local forces and congratulates them on a good shot. It’s a movie, we’d hope art is not imitating life, but who can say how things really occur on the battlefield. If we do have advisors in Gaza with the IDF, there are probably less than 100 of them. I don’t believe that 5,000 troops could deploy into Gaza without us finding out about it through some means or other from a simple standpoint of the logistics of getting them in and supplying them.
Risk to Oil Markets
But none of this matters to Iran, nor the rest of the Muslim world. How they decide to interpret this conflict will determine what they do in the future and what further escalations or diplomatic fallout we may have to deal with in the coming months and years.
As the conflict currently stands, I don’t see it having a significant impact on the markets just yet other than speculators pushing gold and silver prices higher as a flight to safety. I don’t see sanctions coming from this nor any major changes in FX flows, but we will discuss meaningful FX flows in Section 5, since there are only two countries that can have a large impact on our currency and treasuries anytime soon.
People speculating on oil right now seem to be looking at this from the perspective of a supply cut from Iran. I don’t think that is a meaningful risk vector. The major concern that people should be having is if the arab world as a whole through OPEC enacts another oil embargo only targeting the West and Israel’s allies.
While the West essentially agreed upon its support of Israel, the sentiment in Arab countries among the regular people within them is that the West is acting hypocritically and supporting atrocities that it condemned Russia for doing in Ukraine. If Russia can’t bomb Ukrainian outposts that are in civilian areas, then why is it suddenly okay for Israel to do the same in Gaza?
If actions like these above necessitated full sanctions, removal from the Western trading sphere, and aggressive diplomacy, then what do actions like these below necessitate?
Read the comments under both videos. There is a glaring hypocrisy in regard to the amount of sympathy the West shows to the civilians who are in the areas of both of these strikes. We may be unaware of this, or think of ourselves as neutral or impartial, but from the outside looking in we very clearly do not actually have any moral or ethical standards. Might makes right. If we were honest about this it would be one thing, but most Westerners are blithely unaware of their own cognitive dissonance.
This is the risk I see. I see our current administration being indelicate in their foreign relations with the Arab World during this time and pissing off OPEC enough for them to attempt to give us a taste of our own medicine or enact some form of economic sanctions in regard to oil.
Whether that comes to fruition or not is anyone’s guess, but it’s the main risk I see to the markets at this time.
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