Biden’s New Houthi Strategy Is “Like Trying To Find A Needle In A Haystack, While Eating Truffles And Foie-Gras”

By Michael Every of Rabobank

The New Hampshire Republican primary saw Donald Trump beat Nikki Haley, though by how much was unclear at time of writing, as some pundits say a chunk of Republican primary voters were actually Democrats – ‘shenanigans’. Regardless, with Haley refusing to drop out, on to South Carolina we roll on February 24. President Biden also won his contest vs. the outsider Dean Philips without doing any campaigning, for those who had forgotten there is a partial Democratic primary process too. The markets can chew on that all at their leisure today: so far it’s taken as dollar up, yields up at the margin.

The BOJ saw no change, but rate hikes were put back on the menu as soon as April by Governor Ueda’s press conference. As a result, Asia’s Wednesday starts with the US dollar up (DXY at 103.6) and Treasury yields mixed (2s at 4.34%, -7bp from their intra-day peak Tuesday, 10s at 4.14%, close to that peak), and US stocks a baseball cap lower at ‘Dow 37,905!’, but with 10-year JGBs up to 0.72%. While well below the peak of 0.96% back in November, that’s still vs. 0.55% in the middle of January.

China’s proposed $278bn stock bailout, taking offshore cash holdings of profitable SOEs and buying the shares of firms that don’t make money, has seen what Bloomberg calls a “wall of market scepticism”. Indeed, the plan offers those who are still allowed to sell the opportunity to do so, and as @BaldingsWorld notes, it’s “like getting a chocolate shake after your girlfriend dumps you after finding your parents got murdered.” Indeed, Reuters notes China’s plunging stocks are triggering losses on billions of linked derivatives, forcing a vicious cycle of selling in both. Question: What’s a Leninist response to “financial oligarchy” – or do we just get QE?

On which, ‘Christine Lagarde makes a poor central banker, ECB staff say’. 50.6% of those surveyed ranked her performance as “very poor” or “poor” vs. less than 10% for her predecessor Draghi. Specific complaints include her “being an autocratic leader who does not necessarily act according to the values she proclaims,” who is “wading too deeply into politics and using the ECB to boost her personal agenda,” although there are no problem with green issues, just gender and geopolitics, and several respondents suggest Lagarde wants to use the bank as a “springboard back into French politics”. We’d never see that happen, surely? (**cough** Draghi and Yellen **cough**) On monetary policy, only 38% of respondents backed the rate decisions taken under Lagarde: so they didn’t want to raise rates, or thought they were raised too slowly? Worse, over half the ECB staff respondents said they were concerned it won’t be able to deliver a return to price stability. And developments in the world of geopolitics which the staff think Lagarde shouldn’t talk about support their scepticism.

An Israeli proposal for a two-month ceasefire in exchange for the release of all hostages was rejected by Hamas: an offer is now being made for a one-month pause, but the issue of an official surrender is a likely stumbling block. The deaths of 24 Israeli troops yesterday, the highest one-day toll since 10/7, are likely to increase, not decrease its focus on uprooting Hamas.

Moreover, the US and UK — now backed by 24 nations, all of whom are just holding signs saying “applause”– again bombed the Houthis, as the US alone struck Iran-backed militia in Iraq. However, the White House’s lack of strategy is evidenced by another Politico article, ‘How to stop the Houthis’, which notes:

“The US attacks on Houthi targets will degrade the militants’ abilities to keep shooting at ships, as will the interdiction of vessels carrying weapons to Yemen. Last week’s redesignation of the Houthis as terrorists will increase the sanctions pressure on them, starving fighters of the resources that bankroll operations. Eventually, the official continued, regional countries and other nations with an interest in open sea lanes –China, for example– will demand an end to the shipping crisis that has inflated prices and imperilled lives. Meanwhile, Israel’s plan for more targeted operations in Gaza could mean fewer civilian casualties, which would weaken the Houthis’ case for rising to the Palestinians’ defence. An end to the war would remove that rallying cry.”

So, in reverse order, the ‘plan’ relies on:

A quick resolution to the Israel-Palestine problem(!), and a scaling back of the war when escalation to other front via Hezbollah is still a threat.

Overlooking that while China’s exporters are hurting from this crisis — which makes the case for onshoring/near-shoring– it’s also watching a steady erosion in US global standing, deterrence, and key munition levels, and Europe is exposed as very vulnerable – a stagflationary recession there would make cheap Chinese imports even more attractive vis-à-vis local goods. Moreover, China just launched a new shipping line specifically promoting its ability to sail through the Red Sea unhindered.

On sanctions, the Houthis get help from Iran: so will Iran be sanctioned, and secondary sanctions placed on those who break them, as some already are?

Military strikes vs. movable Houthi targets are like trying to find a needle in a haystack, while eating truffles and foie-gras, given the very high cost involved.

Indeed, Politico admits, “Even if all those various elements lined up,” –which they likely won’t– ”it’s still not clear the strategic picture the Houthis care about will shift radically enough for a course correction.” More pointedly, the Middle East Institute’s Charles Lister notes, “There’s no denying the lack of strategic clarity right now,” and a former Middle East peace negotiator quoted shows those skills in adding, “They have no magic fix. Often the choice is not between a great and a bad option. It’s between a bad option and one that’s worse.”

In the meantime, almost all the world’s largest container ships are going round the Cape of Good Hope, not via Suez, and we see warnings of ‘Covid revisited: Empty container concerns grow as Red Sea shipping crisis drags on’.

In short, the people running US national security policy might as well be setting ECB rates, and Lagarde directing the military. In the eyes of their own staff, neither of the two institutions look to be doing what’s needed to deliver a 2% CPI target.