Light at the End of the Tunnel
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Author's note: This piece was written before Monday's announcement of de-escalation. The new development was expected. We have been staunch believers that an offramp is coming soon.
We continue to believe US involvement in Iran will last weeks, not months, let alone years. This has always been the timeline maintained by Trump, and we outlined reasons why he is incentivized to stick to this plan.
Interestingly, the market (as measured by options pricing) is losing faith in this outlook and is starting to assume this war will last for months longer. An understandable reaction, since Trump repeatedly saying “almost over” has always led to further escalation from both sides.
Nevertheless, there were some positive developments this week. Israeli Prime Minister Benjamin Netanyahu announced they would no longer target Iran’s energy infrastructure, and that “the war will end way faster than we think”. He also claims Iran no longer has uranium-enrichment capacity, and committed to helping reopen Hormuz.
Shortly after the market closed on Friday, Trump published a Truth post claiming that Iran’s military is severely hampered, and the US is considering winding down the mission:
That led to stocks bouncing sharply higher near the close, after an ugly trading session (made worse by quad witching expiry of options and futures, which often leads to unusual volatility).
By now, the market knows not to take Trump at face value. As we’ve said before, the administration has been talking up markets, keeping a lid on oil prices, as the invasion reaches fever pitch. This week was perhaps the first time that the market realized this will be a protracted battle.
Going back to Trump’s Truth post, the important line is this: “The Hormuz Strait will have to be guarded and policed by other nations who use it”. This effectively gives Trump a plausible withdrawal path without the laborious work of actually keeping the Strait open. He’s saying, “Our job is done here, it’s now others’ job to keep it going.”
It also gives Iran some leeway to continue controlling the Strait, perhaps even levy a toll on traffic. A concession that Iran may quietly accept, as it cements their stranglehold on world oil (the strongest military in the world could not take it) while extracting economic rent from the entire Gulf region.
But here’s the catch: Before withdrawing from the region, the US needs to make a final push to ensure Iran’s offensive forces are neutralized. This could be a ground invasion, a takeover of Kharg Island, or some other devastating climax. The goal is to ensure that Iran cannot fight back once the US withdraws. This will likely happen within the next two weeks as thousands of Marines are en route to the Gulf.
This is Trump’s true meaning of “very close to meeting our objectives”.
We discuss the full offramp in this week's deep dive. Continue reading at MktContext.com...
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