Two Views On The Iran Threat

I believe that the biggest geopolitical threat to stock markets remains a military strike on Iran. I’ve written three prior articles on this, all here.

Yesterday morning, I sent the following to subscribers:


I’ve mentioned a few times that I see a strike on Iran’s nuclear facilities as being the biggest geopolitical risk to the stock market.

According to Jonathan Laing in this weekend’s Barron’s, that risk is fading. Regarding an imminent attack, he wrote: “Don’t bet on it — or on oil prices heading higher as a result of hostilities.”

He quoted Statfor’s George Friedman, who thinks the widely reported preparations for attack by Israel and the U.S. were psychological warfare. “Why would Israel telegraph its punch like that?” Mr. Friedman asked. “Recall that when Israel took out Iraq’s Osirak reactor back in 1981, it was successful precisely because it gave no hint at all of an impending attack.”

Mr. Friedman believes that the Iranian response to any attack would be dire for the global economy. Iran would attack oil tankers and block the Straight of Hormuz to choke off 40% of seagoing oil traffic. “This is what could drive crude oil prices to more than $300 a barrel, which even over a short period would be cataclysmic to the global economy and stock markets,” Friedman says.

Therefore, Israel and the U.S. will hold back.

Mr. Friedman sees an endgame under way, “in which Iraq will emerge as a buffer state protected by a residual force of 30,000 to 40,000 U.S. troops. They will be deployed in the desert, away from the Iranian border and Iraqi cities, serving in a non-combat, training role. As a result, Iran will have little reason to fear more aggression from Iraq.”

Finally, he thinks Iran is “decades away” from producing nuclear missiles, if it can ever do so. The country lacks the experts needed to turn enriched uranium into weapons.

Let’s hope so, and hope he’s right about the threat of a strike having faded. Oil at $300 would turn this stock market into a bear of Arctodus proportions.

One benefit of having a newsletter with subscribers in all parts of the world is the front line perspective that comes back to me following almost every note I send. A Kelly Letter subscriber works as a television cameraman in Israel. After reading the above piece, he sent me the following:

Living in Israel and knowing the psyche (I’m not Jewish, I just work here), and also being one of the cameramen who worked on the recent 60 Minutes piece on the Israeli Air Force so I got to listen in on all of the interviews, I can tell you that it will not take much for the Israelis to jump the gun. They really feel in their bones the existential threat to the Jewish State of Israel. The Holocaust experience and the lack of action by the Allies during World War II is burned into their military thinking…they are on their own.

In 1967 they were warned explicitly by the United States that if they started the conflict with the Arab states then they would be on their own. They did it anyway and struck first with a devastating raid on the Egyptian Air Force which basically won them the war. (Six Days of War by Michael Oren is a very good read…even though the guy is pretty center-right.)

Israel struck first also in 1956 with the British and the French in the Suez Crisis.

And of course the 1981 reactor that you mentioned in Osirak.

Iran is currently beefing up its air defenses with a brand-new type of Russian SAM system. This combined with any kind of unwelcome development could push the Israelis over what they predictably refer to as the “red line”.

I spoke to a couple of F-16 pilots at parties in Tel Aviv (yes, Israel is that small) and of course they did not tell me anything secret, but it was obvious from the conversation that they really were training for a strike and that it was a warning not just to Iran but to the world to get it together and solve this problem.

It’s not looking good as of this morning. Reuters reported at 5:30 a.m. New York time: “Iran has refused to halt its nuclear program despite the threat from major powers of increased U.N. sanctions.

“The United States said on Sunday that Tehran had left the U.N. Security Council no choice but to increase sanctions after Iran ignored an informal deadline to respond to an offer for talks on its nuclear program.

“The West accuses Iran of seeking to build atomic weapons, a charge Tehran denies.

“The U.S. says it wants a diplomatic solution to the dispute but has not ruled out military action if that fails.”

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