US Finally Attacks Iran – Outlook From Here
US winning militarily, but political end game highly uncertain
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*Not financial advice, merely pointing out political and macro trends*
On February 28th, the US and Israel unleashed their long-awaited strikes on the regime in Iran. Since then, there have been a million headlines and announcements. We are going to focus on the key takeaways now after the first few days of conflict rather than specific headlines.
The US expects this to go on for another three or four weeks. We think that’s right, militarily speaking. But a political situation favorable to the US and Israeli is not yet in sight and remains the big risk here. The US knew what it wanted militarily, but has not yet made a plan to secure the peace.
We’ll remind you that we already wrote several articles on this leading up to the attack which have largely unfolded as expected. Our big piece on January 25th predicted a window of attack of February 15th to March 31st when all military assets would be in place. Right on schedule! Can you afford to miss our big calls?
1) Iran is Down, But Not Out
The initial strikes took out many top leaders and generals in Iran, including the Ayatollah Khamanei. Yet the military continues to function and a new Ayatollah has been put in his place. We obviously expect continued bomb blasts coming to this new generation, but it does show the government is not a one man band.
Trump has declared, in his typically modest style, that the military operation is a 15 on a scale of 1 to 10. There is no doubt the allies have taken out many Iranian assets, including their navy and vast swathes of their air force. Iran’s missile launchers remain active however and are attacking targets in Israel, the UAE, Bahrain, and Kuwait.
Chinese air defense systems failed, as in Venezuela. Iran has yet to heavily deploy its scary ballistic and hypersonic missiles. One explanation is that the US took them out, another is that they are trying to exhaust the US’s interceptor capabilities before unleashing its most dangerous weapons.
Iran is not going to surrender now, they still have the capacity to fight on for several weeks.
2) The Oil Impact
We think the oil impact is going to be higher for longer. Just Iraq taking 1.7m bpd offline is enough to unbalance the oil market. A lack of traffic through the Strait of Hormuz, which typically carries 20m bpd, is going to cause shortages around the world in short order.
Qatar, maybe the world’s largest LNG supplier, cut off production. It will take at least a month to restart. That will put further pressure on the energy marketplace.
We are also sure that there will be further damage on both Gulf and Iranian oil production and transportation, further tightening the market. Putting the market back together is going to take far longer than most people expect.
3) The Ground War
As we wrote earlier, we expected the US to do limited special forces raids but not commit its own ground troops. Instead it would arm rebel and dissident groups and defecting army units.
The US has armed several thousand Kurds in Iraq and Northern Iran and it looks to be getting the Azeris involved too. This won’t be a very effective military force, but they will serve to tie down the regime in remote areas for the time being.
We highly doubt that the US government has the will to commit the 500,000 troops needed to win a ground war at this point. Congress won’t go for it. It will take six months to build up necessary forces and the US would be running very low on many munitions by that point.
4) The Political End Game
The US is likely to declare victory and the destruction of Iran’s nuclear program (but for real this time). They will push hard for limitations on ballistic missiles and other technology. The Iranians will want an immediate cease fire and eventual sanctions relief.
But who will the US negotiate with? At this point many of the top leaders have been killed. The new ayatollah Khamenei is far more of a hardliner than his father and unlikely to be in the mood for total surrender to start. If the US can help to install a new more moderate President, such as Rouhani, it would have a good starting point for negotiations. As of now, the exiled Shah Reza Pahlavi does not seem to be an option for leadership.
So the military campaign will continue while the US gropes for a political solution. It could be several months before a credible leader steps forward who both controls the apparatus of the state in Iran and who wants to negotiate with the US team on realistic terms for all sides. Tricks like leveraging Madruo’s VP will be far harder to pull off in the better defended and more diffuse government of Iran.
This is the grand flaw in the US overall plan. It has a very strong military rollout and absolutely no plan to secure the peace and to realistically pull off a regime change. The Iranian people don’t like the mullahs’ rule, but they also don’t like being bombed into rubble and will not exactly acquiesce to US demands.
5) Market Outlook
This created a huge risk on move for oil, now up over 10% in a week. Risk off in equities lasted two days in the US, but led to an outright crash in the Korean market, down almost 20%.
Korean investors have poured in almost $50bn to US leveraged ETFs since the start of 2024. You think they won’t start redeeming with their own market in freefall? That would be the first crack to form in the range bound Nasdaq.
We think the oil dependent markets will be the first to go, and then gradually deleveraging will go around the world over the next few weeks as this drags on. This is going to create a resumption of inflationary pressures and take large rate cuts off the table in nearly every country.
6) Midterms Outlook
This is not a broadly popular move by Trump and Netanyahu. Popular support seems to be below only 40-45%. A neo-con pro-war candidate for Senate in Texas, Senator John Cornyn, barely won 41% of the vote in a primary and now faces a run off in the primary. This race being so competitive shows how far pro-war views have fallen.
To have a good chance in the midterms, Trump will have to past the SAVE act, tie up the Iran situation quickly and successfully, and basically say he’s done war-mongering. Continuing or extending the messy conflicts to say Cuba or other places would hurt his popularity.