The Iran-Israel War: 30 Years of War Drums Reaches a Finale

“Those who cannot remember the past are condemned to repeat it.”–George Santayana, The Life of Reason, 1905

Before I offer a brief analysis of the potentially dangerous outcome of this current conflict, allow me to state categorically that I am not a supporter of either Iran or Israel, so placing an anti anything label on this author is not applicable. My lifelong disgust with the Muslim Brotherhood, the Sevener Shia, and “Greater Israel” (militant Zionist) movements is due to the unintended consequences these groups are seeking to impose on the entire world to achieve their goals. I am pro-American, period, end of conversation. Thus why I completely understand Ron Paul’s voice on this matter some twenty years ago plus why so few politicians like his son Rand and Congressman Thomas Massie(R-KY) speak out on this issue in the manner that they do.

The problem with a pending Iranian nuclear weapon has been ongoing since the post-Gulf War One calls for inspectors in 1992 to visit Iran’s nuclear program. Fast forward to 1995 and the New York Times hits the pre-internet era with this story on January 5, 1995:

Iran May Be Able to Build an Atomic Bomb in 5 Years, U.S. and Israeli Officials Fear

This story has been washed, rinsed, recycled ever since then to justify a massive defense spending since the end of the Cold War with the USSR to keep the war machine primed and ready. As this event unfolds however, the world is about to find out that there are unintended consequences for the United States and NATO acting as mercenaries to assist Israel and protect the Arab monarchies in the region.

Now it would finally appear a finale is approaching and hopefully it turns out for the best, however I would not bet on this knowing the region and the inherent risks it has for the global economy.

I. Instability Increases

The current thinking is all over the place depending on which “expert” one listens to or happens to catch a two minute television interview with at that moment. The biggest wildcard is if the Iranian government does maintain a sufficient number of hidden launchers, they probably can continue trading blows for several weeks possibly turning the table on Netanyahu and driving him from office. It’s unlikely but potentially possible as everyone forgets about Israel’s failure to close the deal in the early 1980’s Lebanon War resulting in domestic political strife.

If somehow the Israelis were to succeed and the Iranian regime is overturned one would think that the US would just push some relation to the old Shah back into power and business as usual again, right? Wrong.

The odds are we will see more instability introduced into all of the Middle East and South Asia as Pakistan would feel even more desperate and the Taliban more emboldened to support violent Islamist and separation movements throughout the region. This instability would of course spread into North Africa and the Arab Peninsula leaving major international shipping lanes at risk.

If the Iranian regime somehow survives this, its new mission will be to create an even more defiant Islamic street on a global scale.

II. Energy Price Shocks Return

The lessons of the 1970’s were never learned except that President Trump did try to restore the US oil industry to its glory days in his first term as President. Unfortunately if one is to believe the trend, the shale boom might well be coming to an end at the same time global instability spreads.

The potential for even lower oil prices was mention by analysts at S&P Global, who said that WTI prices were on a course to decline below $50 per barrel this year. Based on the “drill baby drill” mantra of the Trump administration, oversupply with a slowing economy became a real concern for explorers and legacy oil companies alike. Thus they started to shutter less productive wells and reduce rig count, as dramatically indicated by last week’s rig count report from Baker Hughes:

The problem for now is that a true stagflationary wave seems to be entrenching for probably the remainder of 2025 and the industry has to decide if it is worth the risk to start drilling again, especially if recession odds increase again, regardless of what the White House promises.

III. President “Let’s Make a Deal”

Even this afternoon while Israel was bombing Iran and vice-versa, the President of the United States actually said the following to the media:

This from the man who has yet to have signed one single trade deal in full nor ended the Russia-Ukraine War which he promised to do in his first month thinks he can hold sway over a major conflict between Iran and Israel.

Unfortunately, the backlash to what he did with Iran might in fact influence his trade deals far more than his advisers estimated. Why would China, who could lose a major source of their cheap oil if Iran is destroyed, trust Donald Trump or his administration or anything they said?

The Chinese Communist Party recognized the opportunity to take the giant leap technologically and economically after America looked for global revenge after 9/11. They exploited the distracted giant to buy, copy, steal, and borrow technology from the US while luring manufacturing from America into their country with inexpensive educated labor along with the ability to do business in China.

Now that Trump wants to reverse this process, which is probably impossible, the trade conflict is in full view for the entire world to see. American hegemony isn’t what it used to be as here it is June and nothing of substance has been created regarding any trade agreement with any nation beyond a framework for a MoU with the United Kingdom.

This results in a real problem for the trade hawks in the United States as now there is no incentive to take anything Trump or his minions say at face value nor to engage in any agreements since his past behavior indicates he will renege on them anyways.

There is no incentive to negotiate with President Trump or his team beyond providing an opportunity for those nations with large US Treasury balance sheets to offload some of their holdings as bond markets experience periodic rallies.

IV. Markets go Slap Choppy

I’m sure my long time readers remember seeing those late night commercials like this one for the “Slap Chop”:

The forecast is really simple as Vince is going to step into the markets and slap traders all over the place as a consequence of this conflict. The S&P 500 could see more days like last Friday and then some crazy, shallow rallies. Unfortunately for equity traders however, the bond market, US Dollar, and commodities will be where the real controlling action originates.

As commodities continue to climb as new shortages appear and the obvious shortage of credit to consumers continues to contract, the chopping sounds my readers heard in that ad above will be the small time investors being slashed, chopped, and ejected by violent institutional moves in and out of equities. Commodities will continue to put stagflationary pressure on every aspect of the economy and that’s where the danger of getting enamored with the idea that we will see peace in our time and a return to the economic environment of 2018 becomes a fallacy.