While we remain at war, why do the markets seem optimistic about the future when they should be pessimistic in the face of these concerns, and is this an optimism that can last or simply a calm in the storm?
Though last weekend’s peace talks in Islamabad, Pakistan failed to produce a deal between the United States and Iran, something seems to have changed this week. Personally, I hadn’t given up hope. I always figured there would be at least two rounds of talks with potentially the resumption of short term combat operations in between, but I was expecting another topsy turvy week for the stock market and oil prices, believing the lack of a deal suggest more turmoil ahead. Instead, the opposite has occurred at least so far. The Dow Jones Industrial Average rose to above 48,000 for the first time since the war began, the NASDAQ is approaching 24,000, and the S&P 500 almost 7,000, both record highs in the midst of a currently unresolved conflict. Oil prices have fallen as well, with WTI Crude dropping from over $100 a barrel to barely $90 and Brent Crude falling from over $100 a barrel to barely $95. While the war hasn’t officially ended, these are not the sort of numbers most expected without a deal over the weekend. CNN, for example, reported not once but twice about the spike in oil prices before and as the week began. On Sunday, they claimed, “Oil prices rise after Trump threatens to block passage through Strait of Hormuz,” writing “Oil prices topped $100 a barrel again on Sunday after President Donald Trump said the US would blockade ‘any and all Ships trying to enter, or leave, the Strait of Hormuz,” threatening to further disrupt oil flows. Brent crude, the international benchmark, was up 8%, at about $102. US crude was up 8% to $104. Dow futures sank 1.04%, or 502 points. S&P 500 futures were down 1%, and Nasdaq futures declined 1.15%.” On Monday, they noted much the same. “Oil prices jump on US plans to blockade Iranian ports in Strait of Hormuz,” “Oil prices climbed Monday, after the US military said it would implement a shipping blockade against Iranian ports in the Strait of Hormuz — a move that could test the current ceasefire while further tightening global oil supply. Brent crude, the global oil benchmark, rose 7% to $102 a barrel — a gain of 40% since the start of the war. WTI, the US benchmark, climbed by 7.8% to $104 a barrel, more than 50% higher than it was before the war effectively shuttered the Strait of Hormuz.”
To be fair, this wasn’t an unreasonable position. In addition to the failure of the peace talks, any talk of a “blockade” through a vital shipping lane during a war when one of the participants was already said to have enacted a blockade, suggested that at least the potential for trouble was on the horizon. As The New York Times and The Wall Street Journal put it respectively, “Trump’s Latest Oil Blockade Brings Bigger Economic Risks” and “U.S. Threat to Blockade Hormuz Sets Up Risky New Showdown,” not entirely unreasonable positions in my mind despite longstanding concerns about any semblance of objectivity from the media, especially when President Trump is involved While we remain at war and anything can happen, why do the markets seem optimistic about the future when they should at least conceivably be pessimistic in the face of these concerns, and is this an optimism that can last or simply a calm in the middle of the storm? Though the second question is impossible to answer, I will hazard a guess later in this post, but for the first, I can posit two reasons, one psychological and one physical. While it was assumed the US blockade would inflame the situation, it did the opposite because it revealed that Iran never really controlled the Strait of Hormuz to begin with. For the past several weeks, the media and the experts have been debating two things, and perhaps not surprisingly many have claimed both do not bode well for President Trump. First, there was the common claim that Iran had blockaded the Strait to prevent passage of unapproved ships, throttling much of the world’s oil supply, causing economic pain that gave them leverage in any negotiation.
On March 16, National Review described the situation and its impact this way, “the effective closure of the strait is threatening the world economy and giving the Iranians leverage it was hard to imagine when they lost their top leaders in the war’s initial strike. The result is an object lesson in why geography still matters, why it was always folly to treat Iran as some distant place unconnected to our national interests, and why control of the seas is as important as it ever was…This is an enormous strategic advantage to Iran. If the war ends with the regime still in power, which seems likely, and in de facto control of the strait, that will give it a major deterrent to ward off future attacks on its nuclear and missile programs. It will be seen to have fought the Great Satan and not just survived but imposed a significant cost on its more powerful enemy. Trump’s biggest and riskiest military operation as president might end up eroding American deterrent power rather than enhancing it.” Left leaning outlets were, if anything, even more hysterically convinced that Iran’s ability to prevent free passage through the Strait meant that the United States was losing. According to The Nation, for example, “there is no avoiding the truth: The United States is, in fact, losing this war.” In their view, despite some 11,000 strikes and counting at the time of the writing, “as anyone with eyes can plainly see, the Iranian military continues to fight, not just in a flailing and minuscule way as the president implies, but with consistent levels of ballistic missile fire towards both Israel and American bases in the Gulf,” remains capable of “additional waves of attacks and shows no sign of stopping or even dropping the number of missiles and drones it fires,” and despite “claims of the destruction of the Iranian Navy, the Strait of Hormuz remains closed to all shipping from nations the Iranian state deems to be hostile.” As a result, seemingly “all other objectives of the war, be they degrading the Iranian military’s capabilities or overthrowing the Islamic Republic, have fallen by the wayside as the American government desperately attempts to control the price of oil, and reopen the Strait that was previously completely open before the war…Whatever happens next, this is not what a won war looks like. Instead, the mission creep of the war against Iran continues to lurch forward. The question of a potential new forever war that will cost many more thousands of Iranian lives, to say nothing of the American soldiers who would be in the line of direct Iranian fire, has been treated with a completely cavalier attitude.” By practically every measure, they were convinced we are on a clear, near inevitable path to defeat, going so far as to compare the situation to Vietnam, where we lost over 50,000 soldiers.
Even at the time, however, it should have been obvious that something was missing from the analysis. Namely, how had Iran achieved control over the Strait in the first place and was that control real or merely perceived? While the end result may appear the same on the surface, there’s a fundamental difference between a physical barrier that prevents passage and threatening anyone that attempts passage with a drone or missile attack, similar to the difference between an alley blocked by a brick wall or the fear that there’s a sniper on the rooftops that might or might not fire. In the first case, the barrier must be removed for passage. In the second, the threat could simply be a bluff which could not really be carried out; if you try to cross that alley, you might discover there is no sniper or the sniper is out of bullets. Though Secretary of War Pete Hegseth and others have tried to make this distinction several times throughout the conflict, the media and the experts refused to acknowledge it, pretending there was none to the point where some questioned whether the US Navy itself could navigate the Strait without suffering significant losses. This was the second concern: That Iran’s grip was so strong, it could not be dislodged even in the face of a potential international armada, but as negotiations were underway in Islamabad, the administration sent the first Navy ship through the Strait without encountering any meaningful resistance, dispelling the illusion that Iran actually had physical control over the waterway or that they could truly defend it. The relative ease with which we continued to the full blockade on Monday only cemented that reality, serving to both pressure them economically by cutting off millions of dollars per day in revenue and to demonstrate conclusively that their so-called blockade was more fear than anything else.
The second reason the markets seem to believe the war will soon be over is more subtle, namely that cease fires and follow up negotiations tend to have a momentum of their own, as though once conjured into being they defy being easily dispelled, almost the opposite psychological phenomenon of Iran’s original seeming control over the Strait itself. While the current cease fire has not fully resolved the issue in the Strait, it has largely stopped the fighting otherwise, lending a calm to a region that had gone through over five weeks of war. Beyond the economic impact, no one – or more properly next to no one – wants to see that calm broken and there is enormous pressure on both the United States and Iran to make sure that’s the case. Thus, it is not surprising that both sides are sending signals that another round of talks is imminent even though the first round failed less than a week ago. At this point, it seems likely there will be some form of deal in the near future that, while far from perfect, will provide an opportunity to move forward. The question by then will be how do we do so? In terms of the relationship between the United States and Iran, I am cautiously optimistic that Iran will accede to most of our terms including nuclear enrichment, removal of nuclear materials, suspension of ballistic missiles, funding of terror, and threatening their neighbors. Sadly, that is not likely to be the end of it, however. Iran isn’t exactly a trustworthy negotiating partner and any deal made under obvious duress will likely not be worth the paper it’s printed on once they do everything in their power to wiggle out or outright defy it. Setting aside that nothing in human affairs is either permanent or unbreakable, that was always going to be the case whether a deal was made before the war or after. The questions will be, how can we enforce it to the best of our ability and simultaneously coax Iran into realizing they are better off as a prosperous, peaceful country, than a belligerent, sanctioned one? Given the damage to Iran’s military and economy, there will likely be several or more years required for them to rebuild to the point where they pose another threat. Taking advantage of that time will be crucial.
In terms of domestic politics, the outcome seems pretty clear as well. President Trump’s detractors will do what they always do: Completely forget that their dire, dare I say unhinged predictions, never came to pass and move onto the next outrage. They are likely to make the bizarre claim that the deal that ended the war was the same as the one President Barack Obama made without a conflict, known as the JCPOA, pretending that the war never happened, those he made the deal with are still in power, or even still alive, and five weeks of war did nothing to change any dynamic. In no event, will any credit for confronting a global menace be provided. President Trump’s disillusioned supporters, and contrary to popular opinion in some circles there are reasonably large number of them, are likely to forgive the short term trespass and come back into the fold – if he can successfully pivot to what they consider more pressing concerns, which he should do for the sake of the midterms alone. Internationally speaking, the fall out will take years to truly understand, but it seems likely the effort will redound to America’s benefit by binding our new allies in the Middle East closer together and with Israel, reducing the the influence of China and Russia by toppling two of their allies in less than six months, and by making an unmistakable statement about our military might. This too would be contrary to what detractors insist, but nothing speaks more loudly in certain corners of the world than hard power and the military display the United States just put on will go down in history as among the most amazing ever, if not the most amazing ever. If yesterday’s reports our accurate, China has already acceded to no longer arm Iran and not meddle in the blockade or the next steps. Either way, it’s impossible to believe they won’t have taken notice, much less ask for the same to happen to them, but all things in life, we shall have to see and we can be certain of only one thing, there will be a lot of crying.
Confessions of a Conservative Atheist 