This week started on CNBC, where we could barely scratch the surface on so many issues.

We will focus on presidents Xi Jinping and Donald Trump later this week, but for now, wanted to give a quick geopolitical take, that might seem surprisingly optimistic.

Greenland Deal

Let’s start at the “easy” end of the geopolitical spectrum. President Trump announced a deal with Greenland. I am yet to see the full details, so we will need to read those and get full comments and responses from all sides, but this looks like a win.

The deal could even be a real game changer as the president implied via Truth Social. It might just be an updated formulation of agreements already in place (never hurts to update something from a time that looked very different than today).

The real key to how big of a deal this is, or isn’t, hinges on:

• Does it make it easier to develop extraction (and possibly even processing and refining) of rare earths and critical minerals in Greenland?
• Can Greenland, with the potential for hydroelectric and geothermal power, as well as natural “cooling,” become a hub for data centers?

A win in any case. How big of a win remains to be seen, and it is helpful to have this in hand before meeting with Xi.

I do think most (if not all) of this could have been achieved all of the “annex/take” Greenland rhetoric.

Houthis and Saudi Arabia

Should we be treating what is going on between the Houthis and the Saudis as a subset of the Iran/U.S. war? The Houthis are, after all, a proxy for Iran. The Saudis have been working with the U.S. and the president, so are they merely just an ally? A subset, an extension, or something in its own right?

While Iran is likely influencing the Houthis and certainly has given them the tools to cause havoc and mayhem, they seem to be taking the initiative. Maybe they see the U.S. as distracted with Iran. Maybe they see the U.S. testing the Saudi’s loyalty as an ally. In any case it seems like they have seen an opportunity and are taking strides to set their agenda in and around the Red Sea. They have seemingly gone out of their way to avoid any attack against U.S. assets. Instead, they are hitting the Saudis where it hurts — their energy industry. And according to reports, that includes jet fuel facilities at the airport.

We cautioned getting excited that the pipeline damage inflicted on the “alternative to the Strait” pipeline would be repaired quickly. One, the damage seemed more extensive than just to the pipeline. Two, and more importantly, there is no evidence that new strikes could be thwarted. It seems like we should start pricing in “disruptions” to the energy complex that are outside the scope of the U.S./Iran conflict.

Will the Saudis be able to defend themselves? Will they “beg” America to get involved more directly? If they do, will the U.S. get involved? Will they try and disrupt traffic through the Red Sea? If so, how much can they do before the U.S. gets involved? I’d ask how much before Europe would get involved, but that seems like it is too unlikely to even think about (they probably should, but it doesn’t seem imminent).

Markets seem only to react badly when actual events affecting energy prices occur.

Markets seem to react positively to any story, rumor or hope that is positive.

That relationship may need to change, though this week is starting with lower oil prices despite not only attacks in the Middle East, but with Russia and Ukraine launching larger than normal attacks on each other — with some energy infrastructure being hit.

I am worried about the situation here, but think it is a positive for now, that it seems to be getting treated as a “separate” conflict, rather than as part of a larger U.S./Iran fight. That makes it easier to find a deal with Iran.

One Path to Victory With Iran

Anything could happen. Sometimes it feels like we cover the downside risks too much. So today, I try and walk through some “positive” scenarios that come up with the Geopolitical Intelligence Group at Academy Securities.

The economic sanctions could pressure Iran into a deal. The blockade has been very successful. Iran seems to be able to “contain” the amount of trade going through the strait against their interests (some is going through, but Iran is still able to scare many into not trying to run through the strait).

• Can the increased focus on sanctions work? Sure, but in a matter of weeks? Hmm… I find it difficult to believe that a nation that kills its own citizens on an industrial scale, will collapse in weeks, or even a couple of months. They have had experience with evading sanctions for decades, albeit sanctions not being enforced as strictly as they are supposedly being enforced now.
• It remains unclear how sanctions will work unless the U.S. is willing to go after China (and Turkey) to the full extent of what Scott Bessent has outlined. So far, that doesn’t seem to be happening. It will almost certainly be a discussion point this week for Trump and Xi.

Sanctions are helping and might be enough to force a good deal, but that doesn’t seem like a “tomorrow” sort of event.

Increasingly, we are being asked about “knocking out” Iran’s infrastructure. Could that happen? Yes, but here is a quick assessment:

• Anything clearly military focused has already likely been hit and destroyed
• That leaves “dual use” facilities. Facilities that have both a military use and a commercial use. Lets say energy sources close to military facilities that also service communities. Some of these are viable targets as the military usage is enough to justify going after them. Similar for some bridges necessary for moving troops or armaments. But this can be tricky — on a legal and humanitarian level. Global perception, while not necessarily at the top of the administration’s concerns, should still be a concern.

This is a possible path for the U.S., but it could be a difficult balancing act of doing enough to force change, without doing too much reputational (or even legal) damage.

Taking the islands that control the strait, after the midterm elections.

One theory that General (ret.) Bellon discussed this week is taking action to secure the islands that control the strait, culminating, possibly, with Kharg Island.

The rationale is:

• Wait until after the midterms, because risks to U.S. troops will increase, but it won’t be as politicized as it would be prior to the elections. Prior to the election, Iran will have more options than after the elections. Basically, if Iran believes the midterms represent a hurdle to Trump, they can take different actions than they can after the midterm has occurred. There is no longer some “deadline” for Trump, giving him more flexibility and changing Iran’s response function. This makes a lot of sense.
• Sanctions may work to create a deal, but anything resembling a different regime, not likely. Taking the islands that control the strait, and eventually Kharg Island itself, would cripple their industry and demonstrate real weakness on their part. It will be difficult to do without loss of further life, but when so many other options leave us with a “kick the can” option, the president may decide an option that has horrible costs, may be better than going through this effort and risk every few years is worth it.
• Signaling the will to do this might be enough to change Iran’s negotiating stance. Taking even one small, relatively insignificant island, that is the easiest to defend may also change the calculus for Iran. The U.S. might win not by taking every Island, including Kharg, the start of turning a threat into reality could be enough.

  What to watch for:

• The U.S. moving vessels with top notch medical facilities into proximity (less than 1 hour by helicopter, say as a guideline) would be a good indication. The military’s commitment to saving each and every life possible, of providing the best care possible is real. So they would need to move these vessels that can perform state of the art surgery and operations, close enough to help any soldiers needing aid.

Of all the discussions that I’ve heard around “post midterm” victory, this path seems reasonable. Maybe the theory would even be that once Iran sees the ships moving in, and knows the president isn’t potentially hamstrung by upcoming midterms, that Iran capitulates into a deal? Maybe a bit optimistic, but it resonates with me.

Bottom Line

Diesel is more important than oil, but if we can get some positives out of the Trump/Xi meeting, it will help markets. With Bessent’s meeting on Sunday sounding positive, expect positive soundbites. At this point it is in the president’s interests to come across positive with China, even if it really isn’t (pretty much my base case).

Keep an eye on diesel, but with the UN in town, I’m leaning toward positive new on either the Middle East or Russia/Ukraine.

With rates currently tied so closely to energy prices, some positives would be great for rates — I prefer LQD (longer dated credit) to TLT (longer dated treasuries), though at the moment I don’t hold either — I will likely be adding to some of my closed ended municipal fund positions) in my rate portfolio (where I’ve had a decent sized allocation top money market funds).

I continue to like energy, but will likely be reducing some exposure (given my current outlook on geopolitics and the strong performance of that sector).

I have not added to rare earths or critical minerals in some time (it has been in the doldrums for months), but am keen to see how names in the sector respond to the Greenland deal.