Israel Attacks Iran– Conflict Certain to Escalate From Here
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*Not financial advice, merely pointing out political trends*
On April 13th, 2024, Iran followed through on its threats and for the first time attacked Israel directly. They launched almost two hundred drones and 100 missiles at Israel. All but seven were destroyed.
People took different sides after this attack. Some argued that it was going to start World War 3. Others argued it was just an attack to save face, and meant nothing. On the morning of April 19th, the Israelis responded by limited attacks on Iran, at Isfahan and Natanz, and at Iranian assets in Syria and Iraq. Many thought that was it for the Israeli response, and Iran promised no more retaliation from their side. So problem solved? Not so fast!
We wrote on April 13th:
The real attack is likely to come next month, in massive size, after a few probing skirmishes.
Our view has been confirmed by these above two incidents, which we would classify as probing skirmishes. At this point, escalation is inevitable and will have to turn into MAJOR escalation. The reason is simple: both sides have now shelled each other’s homeland and the combat has gone far beyond the proxies from earlier skirmishes. Israel has several hundred nuclear bombs and a strong air force, while Iran has thousands of ballistic and cruise missiles which can hit Israel. Either Iran or Israel will have to launch a broad strike to knock out the other’s attack abilities, or risk being on the receiving end of the entire arsenal.
The markets did not care about this conflict for the initial few months when it was just Israel in Gaza. We mentioned they would not until it (inevitably) went regional. As missiles started flying, they cared a lot, and stocks have declined almost 10% since their March peak. We would anticipate a respite over the next two to three weeks as it turns to just mild skirmishes, or nothing at all. But in May, we expect that stocks will again price in a risk-off scenario as tensions and conflict rise to new levels.
This is not just an Israel versus Iran dynamic at this point, which only exacerbates the conflict. We will have a large article in the next week or two on how Israel versus Iran is now the main theater in the conflict between the BRICS+ and NATO. With the Ukraine war headed to a Russian victory, the focus shifts south. The effort to push out the United States and its proxies from EurAsia is now centered on the Middle East. Neither side will let up until the issue is settled. The US repeatedly says it’s not involved and won’t intervene, but it is likely that it gets dragged in to this mess in some way.
Now on to April 13th and the several outstanding questions:
Was it a real attack?
Was this a one-off, like the post-Soleimani attack, or the start of a new conflict?
Was Israel’s defense effective, or not?
Was it cost-effective?
Brief Overview of April 13th
The night of April 13th, Iran launched a missile and drone strike targeting several air bases in Israel.
The attack was layered – slow moving drones were launched first, and as they neared Israel, cruise and ballistic missiles were launched. Only a few missiles (5 to 10 depending on who you ask) actually breached the defenses. US and UK aircraft helped to stop the drones. The fact that the longer-range missiles were able to get through, while drones were struck down, highlights the fact often cited that the Iron Dome has limited effectiveness against long range ballistic missiles.
First off, let’s set the record straight: This was not a major attack. Iran and its proxies could have launched potentially ten or twenty times what they did. There have been several times since October 7th that 50-75 missiles have been lobbed at once towards Israel from Lebanon or Yemen. If Iran wanted to seriously damage Israel, they would have sent 500 ballistic and hypersonic missiles. Iran has already announced that continued Israeli attacks would be met by such a 10x attack:
There are some rumor mill sites saying that hypersonic missiles were effectively used on April 12th. Others are saying that the Israeli air base in the south of the country sustained heavy damage. We do not know how to verify these. But if it’s true that the damage was substantially worse than Israel admitted, then it would be an additional win for Iran. Simplicus76 had a fantastic post on this with ample photo and video evidence:
Most importantly, this was a clear psychological victory for Iran. It was able to launch an attack on Israel and demonstrate its capabilities. Despite the efforts of Israel and several of its allies, Iran was able to hit targets inside Israel. The idea of invincible Israel has now cracked. This photo of missiles over the Israeli Knesset, their Parliament, is psychologically devastating:
The Cost of Defense
How much did the attack cost, and the defense? This is perhaps the Achilles heel of the Israel system, its tremendous cost despite limited effectiveness against long range missiles.
We looked around at various other sites, all with varying estimates. We cannot verify the final tally. The point remains- Iran’s attack cost no more than $50m, whereas Israeli spent around $1bn on one night’s defense.
Let’s fast forward – imagine if Iran has done multiple attacks, which they could easily do given their thousands of missiles available. It would have cost $10-15bn in defense. That’s roughly half of Israel’s 2021 defense budget. How are they going to pay for this? How many Interceptor missiles have been produced and can actually be used in the future? It is very possible, just like in the Red Sea and in the Ukrainian conflict, that the BRICS+ nations can use cheap military hardware to score a victory both economically and militarily.
Moody’s and S&P this year have downgraded Israel’s credit one notch. As the various conflicts drag on, we would certainly imagine that Israel will see more downgrades. We are not calling for a default here. But the cost of the war and a higher cost of borrowing will box in Israel’s financial options.
AP, April 19th
We think that Iran has done some serious research and will try to find a way to either overwhelm at one time, or make Israel use up the vast majority of its resources before the real attack comes. It can bleed Israel financially and operationally, whereas Iran “makes missiles like cigars”, as one general said.
Ramifications
Many immediately likened this to Iran’s response to the killing of General Soleimani in 2020. That time, Iran launched a few dozen small missiles and hit space around a US military base. There are differences between that attack and this one. First, that retaliation targeted no targets: it just went to the desert around the base. Secondly, the Iranians gave ample warning to the USA then, and gave none this time. Finally, this is hitting Israel directly- not a proxy or a US base in another country. The move from decades of proxy fighting to direct confrontation is a “crossing the Rubicon” moment. All countries are far more willing to step up with extreme action when their homelands are targeted. The fact that both of these countries have massive arsenals will create a very tense situation near term. The country that waits must know that they risk facing a huge aerial attack at any moment.
We should also note that even in the limited Hamas vs. Israel fight, there is no real peace treaty or cease-fire on the table. Israel has rebuffed US proposals multiple times. For the larger Iran versus Israel conflict, there have been no talks. No attempt at regional rapprochement. If anything, there have merely been increasingly hostile threats from both sides.
Furthermore, Israel can no longer leverage Arab states against Iran. Iraq is firmly under Iranian control. Syria, Yemen and Lebanon are allies. Saudi Arabia and Turkey have begun tighter diplomatic relations with Iran and would never support Israel or allow the US to use their territory for attacks on Iran. Only little Jordan stands with Israel.
Next Steps- Escalation
At some point, one side will launch a massive attack on the other. We are leaning towards Israel going first, for the reasons we outlined last week. The defensive capabilities of both sides have proven limited. If a massive attack is launched, those defenses would be overwhelmed. So the need for a major offensive to knock out the other side’s launch abilities becomes critical. There will probably be another couple of test attacks and probes before a real major attack occurs.
Israel’s targets would be:
· Iranian shipping points
· Iranian oil refineries and oil infrastructure
· Air bases and locations of ballistic missiles
· The locations of the Iranian nuclear program, although heavily protected
· Iranian bases in Syria, Iraq and Yemen
Iran’s targets include:
· Israeli air force bases
· The Israel nuclear arsenal in Dimona
· The locations of the missile launchers for the Iron Dome
· Israeli conventional forces
And that is merely the direct component of the escalation. We should finally see a real ground war between Hizballah and the IDF. We would also imagine that each side as a host of targets prepared in and around Syria to attack, perhaps with aerial attacks, perhaps with close in ground attacks like mortars. The Houthis, backed with Iranian missiles and intelligence, would put major pressure on Israel and Red Sea shipping alike. Iran has already seized an Israel bound cargo ship, and would doubtless menace all the shipping coming into and out of Israel.
It may turn into a conflict over the Persian Gulf too, although that would probably take time to develop into a crisis zone.
Conclusion
We take no pleasure in giving this forecast, but we have hit the point of no return. After some tit for tat and some further tests of the other side’s defenses, this conflict will grow in scope. We are guessing mid or late May at this point, as that gives each side a few weeks to position ground and air assets to work together. The window is definitely open from May until August, we would estimate. Iran doing this in parallel with a renewed Russian offensive in Ukraine would have the maximum psychological impact, stretch NATO’s resources to the limit, and turn up the financial pressure on the West.