It seems that now America owns Israel’s war. Will it also own the grounds for peace for a two-state solution that will satisfy the Arab nations? And could this endeavor represent a strategic misfiring by the US, taking its focus away from the long-term strategic pivot it needs (away from the Middle East and toward Asia) to be the leader that the free world needs in the next quarter century?
The fact that the US chose to hit only the nuclear sites and not military, energy, or political targets points to a limited and restrained retaliation from Iran with limited (if any) consequences. Ayatollah Khomeini drank the “chalice of poison” – as he stated in 1988 – and accepted a cease-fire with Iraq. Ayatollah Khameini can do the same now and end the conflict, especially as Iran’s proxies in Lebanon, Syria, Gaza, and Yemen have been weakened so significantly in the last 12 months. If indeed that’s the scenario to be unfolded over the next few days and weeks, then we could hope that a smooth landing in the geopolitical threats emanating from the Middle East would be the most likely scenario.
If that were to take place, then regime change in Iran would be more viable in the medium term, as it would give time to local opposition to strengthen against the weakened mullahs. Regime change is sustainable only if it originates from inside the country and comes from a unified and strong local opposition to tyranny. The fact is that besides the hardliners, who can be found in the ranks of the institutionalized Iranian tyrannical regime, there are enlightened opposition leaders who can stir Iran and the wonderful people of Iran towards a liberation path.
Having stated the above, for the time being, if the leadership of Iran were to fall in the next 12 months, our assessment is that a hardline regime will succeed it, given that internal opposition is not strong enough yet, and certainly not as cohesive or organized as it should be. That’s the result of what institutionalized autocracy and tyranny do, i.e., it weakens internal liberal forces but cannot decapitate them as liberalism (in the classical sense) has a nasty habit of rising again!
Theocratic regime ambitions (whether originating from mullahs, Buddhists, Christians, Confucians, etc.) are not just dangerous, inhumane, and destabilizing, but also represent the ethos of the original sin (becoming gods in place of God). There could be several positive outcomes emerging from the recent bombing of Iran by the US, but the question is not about costs vs. benefits in a utilitarian perspective, but rather whether what was done strengthens institutional democracy and the necessary guardrails of checks and balances without which the non-monetizable American character of liberal democratic leadership around the world would be hard to sustain.
If Khameini estimates that the end of his regime is approaching, then he may choose to play the martyr, in which case a number of possibilities may be unfolding: He could start by leaving the Nuclear Nonproliferation Treaty and expelling the inspectors of the International Atomic Energy Agency (IAEA), in an attempt to use the stockpiles of enriched uranium left to manufacture nuclear weapons.
Vice President JD Vance hinted on Sunday evening that the Iranian stockpile of enriched uranium remains largely intact, which confirms those original assessments of leftover enriched uranium, given that no radioactive materials emerged after the bombings. Alternatively, the mullahs can use the enriched uranium and manufacture dirty bombs and/or compact nuclear explosives, which, in combination with biological and/or chemical weapons, will have severe consequences. The road to martyrdom (which does not include direct attacks on the US) may also include closing the Strait of Hormuz and activating the Houthis to resume attacks in the Red Sea, while hitting energy assets in the Gulf in combination with drone attacks and cyberwarfare against anyone it chooses. On top of those, if the road of covert resistance and covert martyrdom is chosen, Iran can activate terrorist cells and coordinate attacks with terrorist organizations, in its ultimate drive to build deterrence through nuclear weapons, which, of course, raises the question of how wise it was to leave the 2016 Agreement.
In the unfolding geopolitical game, there are several useful idiots, and several attempts are being made to use another country’s leadership as a useful idiot to advance vested interests that may not be as vital and strategic as portrayed. The 2003 US experience related to those weapons of mass deception exemplifies the game of useful idiots. The US cannot lose its focus on remaining the leader of the free world by exhibiting strength (military, economic, financial, diplomatic, technological, educational, etc.) against China. Celebrations of victories against weak regimes can only produce Xerxean/Persian hubris and oxidation, which, for the long term, is not that useful, if not detrimental.
So, what could the market outcomes be of the above scenarios? If the unfolding developments verify the good/optimistic scenario at the beginning of this commentary, then we wouldn’t be surprised if, in a few days, oil prices drop, and equity markets gain. However, if a straight martyrdom scenario is chosen (unlikely), markets will be rattled, oil prices will increase (which will benefit Putin but probably inflict pain on China), and equity markets will drop.
The most dangerous scenario, in our opinion, however, is the covert martyrdom scenario, which, irrespective of what the short-term market outcomes are, could have serious if not devastating market consequences. Such a scenario would drive oil prices to well over $110/barrel, boost gold prices, inflict serious damage to equities, and boost bond prices. As for the price of gold, prices might drop in the short term under the good scenario, which will be a buying opportunity in our opinion. This is because the long-term trajectory – indicated by several countries and their central banks – is that they will keep accumulating gold.
Let me close by questioning some of the pre-determined answers that we all naturally might have:
Could actions taken legitimize and strengthen our adversaries? Could they give ground to belligerence? Could they legitimize warmongering around the world? Could they encourage rogue states to unite against the US? Do those actions advance, hinder, or even undermine constitutional liberal democracy? Could we see a new age of warfare coupled with the removal of institutional checks and balances that promotes illiberalism and anti-democratic practices edging on totalitarian environments where fear suffocates liberty and unfreedom reigns supreme?
