The Underlying Dynamic that CNBC Viewers Will Not Be Privy To

The Underlying Dynamic that CNBC Viewers Will Not Be Privy To

by | published August 9th, 2019

For some time, I have believed that eclectic approaches usually work out best in both investment decisions and life in general. At least it has worked out for me.

Borrowing something from one part of experience and understanding how to apply it elsewhere, or combine it with something else, is sometimes the key to completely new solutions, even if a connection does not appear to exist at the outset.

It may also be a version of “thinking outside the box.” Once I understood it, it also emerged earlier in life as integral to how I managed to stay alive by predicting what the other guy was about to do.

It also comes in handy today when moving beyond what the pundits say about energy matters.

All this begins with my experience in Vietnam…

There’s an Underlying Dynamic to Geopolitics These Days

On Monday, I will appear on CNBC’s “Closing Bell” to discuss the latest developments in the Persian Gulf crisis and their impact on the energy sector.

In my Dark Files installment earlier this week (and you can learn how to get access to my Dark Files series by clicking here), I conveyed some of what I will not be including in my comments on camera; there is, after all, always more substance in a rapidly changing situation than one can realistically address in a short interview.

However, there is also something more basic.

Because behind all of this is a significant consideration underlying what is really going on both in the area surrounding the Strait of Hormuz and the energy sector’s reaction to it.

And in classic eclectic style, that consideration initially came about in a very different environment.

In a D.C. policy briefing years ago, I called it the “gravamen of escalation.” Learning how to apply it later to very different settings is a sterling example of an eclectic approach.

So, today I am taking you to an earlier period in my life (I still had some hair then).

For the second time this week (it does seem to be a week of personal reminisces), I will transport you back to my intel days and the most important single operating principle of how deadly conflicts morph and intensify.

My last Oil & Energy Investor column presented a vetted version of analysis I completed later in my career when dealing with the implications of an initial crude oil sanction round against Iran.

This time around I propose to take you to the first phase of my intel career, almost fifty years ago. At that time, the conflict was very different, and conducted in a very different theater of operations.

A place called Vietnam.

Learning – Or Not – From the Past

Now, this is not the time to fill you in on what my job was, or how I managed to complete it. Today, I simply want to discuss what I learned in one world that I would later apply to a very different world.

I flew into Tan Son Nhut one hot Saturday in late 1970. I left some six months later to provide operational support outside Tokyo.

Normally, one would expect that a field commander weighs the use of troops with an eye to preserving corps strength. Not so with the other side. The Tet Offensive was still fresh when I arrived in country.

Then, in a more recent version of the tactic used by the Chinese in the Korean War two decades earlier, the PLAF (People’s Liberation Armed Forces; i.e., the Viet Cong) hurled human waves at military targets. The ultimate losses were staggering.

Similar events, though on a much smaller scale, transpired in operations under my direction shortly after my arrival. The tactic made no sense to me, and required a complete rethinking of what was going on. Unless you come to grips with an adversary’s way of looking at the world, the contest will remain unknowable.

My problem was shared by others in the intelligence business. Ultimately, a broader concept came about in the way we analyzed an opponent. It would become a fundamental factor in how I would approach operational and policy matters, later morphing into market and investment decisions.

We called it “cost tolerance.”

How much is a participant, leader, people, or army prepared to lose and keep going? How much pain are they prepared to endure?

During the Vietnam War, the PLAF had very high cost tolerance; their leaders saw conflict in generational, not annual, terms, and the population would absorb an immense amount of suffering. You cannot defeat an opponent like this by applying traditional “push them against the wall until they cry uncle” logic.

Flash forward to what is taking place these days in the Persian Gulf.

The (In)Efficacy of Economic Sanctions

In my view, the U.S. has put too much reliance on the efficacy of economic sanctions.

These have never been a successful solo end game in securing policy objectives. It didn’t work against Japan in 1941 or bring the Iranians to their knees ten years ago. It won’t deter Russia today.

These have been one tool among several, useful only when combined with diplomacy or carefully crafted military strikes.

Unfortunately, in sanctioning Iranian Foreign Minister Mohammad Javad Zarif on July 31, Washington effectively closed the door to negotiations, accentuating that position in a firm rejection of the European attempt to mediate.

On the military side, few options exist that do not rise the threat level even further. U.S. policymakers are ensconced in a protracted internal disagreement over using them anyway.

Meanwhile, Teheran is geared up for a long struggle.

For some there, this struggle has been going on since the revolution in 1979, which also involved a bloody war against Iraq from 1982-1988. The two conflicts resulted in death and/or debilitating injury hitting almost half of all Iranian families.

The last several decades have hardened attitudes and emphasized a pronounced religious zeal animating a worldview.

Cost tolerance.

Tensions Will Not Be Defused Anytime Soon

Iran cannot close the Strait of Hormuz for more than a short time, nor does it have the naval might to confront the U.S. directly.

But it can conduct a low-level war “of a thousand cuts.”

Teheran knows the U.S. (and to a lesser extent the UK) cannot protect all vessels. Nor can they effectively protect facilities onshore in the face of surgical strikes against oil assets like pipelines, terminals, and port facilities.

But, as with the U.S. involvement in reflagging regional vessels during the “tanker wars” toward the end of the Iran-Iraq War, this will open up to all manner of miscalculation and mistake.

Back then, a U.S. cruiser was mistakenly attacked with loss of life, while the USS Vincennes mistook an Iranian Air civilian flight for a military aircraft. The resulting missile launch killed all 290 on board.

Regime change seems to be Washington’s real target. If so, it is a nonstarter. U.S. policy has hardened Iranian resolve, solidified the position of hardline elements from the Iranian Revolutionary Guard and the clergy, and rallied the population around the leadership.

The question is, how long this can remain? That brings us, once again, back to cost tolerance.

If the recent past is any indication, this is an Iranian strength and an American weakness.

Which means we are not likely to see a lessening of tensions in the Gulf anytime soon.



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  1. August 10th, 2019 at 00:56 | #1

    Hi Kent

    Interesting article .
    I remember reading a book sometime ago (I think it was ‘MAO’) which made the comment about when Pol Pot asking Mao how to deal with his problems.
    Mao said to him “Life is cheap” basically don’t worry about how any people you kill, as long as you get what you supposedly want. (same as your Vietnam mention)
    Would be far better saying to your opponent, ” We have a problem, how can we work together and fix it.”
    Nobody looses face and hopefully down the track things can be repaired and hopefully you can start to be friends.

  2. Carl Podrecca
    September 14th, 2019 at 04:50 | #2

    Just wondering here, weren’t both Korea and Vietnam colonies? Iran once had a democratically elected president. I think all he wanted was the same deal Iraq had just received! It sure looks to me like we have let our leaders be imbeciles in foreign policy. I remember George Washington warning USA’ll about those kind of career politicians. Has the USA ever been Christian like in it’s foreign endeavors? It sure seems to me that with the politicians writing laws that only pertain to them or don’t at all, we now live and die working for them!

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