By Stephen Leeb, Ph.D., with Megan Davis
We don’t know how China will react to the U.S. choosing to continue the war in Iran. What we do know is that the war has vastly complicated the outlook for the Xi-Trump summit scheduled for mid-May in Beijing.
So far, China has taken a non-militant stance in the war and seems to be cautiously hedging—balancing covert economic support for Tehran with efforts to protect its own energy security and manage relations with the U.S. According to the U.S.-China Economic and Security Review Commission, China supports Iran’s right to a civilian nuclear energy program while expressing opposition to Iran developing nuclear weapons. In fact, both China and Russia were signatories to the Joint Comprehensive Plan of Action (JCPOA)—the Iran nuclear deal negotiated by the Obama administration—and have indicated they would be happy to see an even stronger version. That’s part of what makes the current state of affairs so confounding.
President Trump has said that the war with Iran is all about a nuclear deal. But it appeared that they were close to finalizing an agreed-upon framework for a deal that would have been stronger than the JCPOA in Oman on February 27. Instead of taking a deserved bow for bettering Obama’s deal, Trump chose to launch a surprise joint military attack with Israel against Iran on February 28. One day later. It has become difficult to distinguish the real news from a Saturday Night Live skit—Iran is refusing to settle for what it was willing to settle for before the war, and here America sits with no way to use the Strait of Hormuz, a bunch of locked up oil, and a world facing catastrophe in the major differences between the prices reported in the financial news (paper prices), and the prices at the pump (real prices).
So this potential meeting in China? It is emerging as a possible black swan.
The term black swan was popularized by Nassim Nicholas Taleb in the vanguard of the housing crisis, in his 2007 book “The Black Swan: The Impact of the Highly Improbable.” Taleb describes how rare, improbable events can have massive consequences. And yet, they seem to be occurring more often than would be expected in standard statistical analysis.
We aren’t totally giving up, and we’d be happy to see the summit between the American and Chinese leaders occur. We simply fear that what could have been an important and meaningful meeting for mankind now stands with odds diminished because of the war. The postponement of the original meeting in March was due to the ongoing war, which is why we think that whatever happens now, the meeting is at risk of becoming one of those black swan events.
Why? For one thing, Xi may now decide to take advantage of the growing influence of the yuan to accelerate a gold-centered monetary system. It has been reported that ships wanting passage through the Strait of Hormuz can pay the $2 million dollar toll in yuan or in cryptocurrency. And according to Fortune magazine, Iran has been selling its oil in yuan for a while now, but the current conflict in East Asia will only push other GCC countries further away from the dollar and any dollar-sanctions, and closer to the country that not only has become their biggest customer but that also seems most capable of holding together peace in the region, as China successfully brokered a rapprochement with Iran and Saudi Arabia in 2023, and China is one of Saudi Arabia’s top oil purchasers, as well as the purchaser of over 80% of Iran’s exported oil, so China was well-placed economically to engage with both sides.
It does seem that Iran has defended itself much better than many thought possible. Or perhaps we must reconcile with a version of the U.S. whose military shadow is much shorter than it once was. Either way, America certainly cannot provide the military protection in the Middle East that once kept many East Asian countries tied to Washington and to the petrodollar.
This has left China and Russia in a strong position to replace America in offering Mideast countries the kind of deal that was foundational in the creation of the petrodollar – trading military protection for currency-dominated oil pricing. But a new deal would offer the added benefit of a currency—whether the yuan or a broader basket of currencies—with gold at its center. Within China, the yuan already is gold-backed in that any Chinese citizen can exchange yuan for gold and vice versa. The Chinese have all the tools and technologies in place to implement this arrangement, a black swan event that could leave the U.S. severely disadvantaged, if not completely shut out.
The most sensible approach right now is to stay cautious, alert, and protected – for example, I have long advocated that owning gold is the best protection in any disruptive economic scenario – inflation or deflation. This blog touches on just one of many areas that are potential black swans in today’s world, yet there are so many others. The stock market, Artificial Intelligence, bond yields (now close to multiyear highs in the face of an economy that, to say the least, is not very good), and a potential credit crisis (noted by JPMorgan Chase CEO Jamie Dimon).
Any of the above could, and may, turn into tipping points. They continue to pop up wherever you look. There are even more potential black swans in unknown areas full of vulnerabilities to any particular nation or group. The reliance of the U.S. on the ASML factories in the Netherlands that at any point could be subject to attack, completely flip-flopping the current hierarchy in the semiconductor world. The potential for China to have a lithography breakthrough of its own, as we discussed in our blog, “Who is Winning the AI Race“, which would propel them ever further ahead. An assassination of any major political leader. So many swords of Damocles hang from the world’s rafters by no more than a horsehair.
The unsettling reality is that there are a lot of balls in the air. A normal person can handle two, maybe even three balls at a time. An excellent juggler, five or six. The world record is fourteen. But eventually, there will come that one extra ball that sends them all to the ground. No one knows what it will be, but it seems they’re piling up. If the Xi-Trump meeting really happens, it could lead to a new world order that allows every nation to act with sovereignty and have an equitable stake in a gold-backed monetary system that better serves us all. Or it could lead to an America left out in the cold with little more than natural gas to back up some paper IOUs. The choice is ours to make.
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