Blain’s Morning Porridge April 15^th 2024 – All eyes on the Middle East and Iran

“Good days and bad days go past. What stays is a good name or a bad name.”

Markets will breathe easy if Israel forgoes retaliation for Iran’s apparently failed drone strike, but Iran remains the fundamental crisis at the heart of the Middle East. Peace and prosperity will remain elusive while Iran plots regional instability.

Interesting week’s play ahead in prospect here in the global markets. Last week it felt like the breaks were applied. Will this week be any different? Investors and traders will be watching, listening and considering the form and consequences of multiple diverse issues including:

• Bond yields – what do a lacklustre series of US bond auctions, and expectations being slashed on interest rate cut timings, mean for all financial asset prices?
• A whole raft of central bankers will be explaining the “wait and see” approach to rates.
• US banking results plus further insights into credit conditions for US consumers.
• The imminent BitCoin halving has the crypto-sphere frantic with predictions of upside, but the reality is it slashes the profitability of marginal crypto-mining operations – these guys need B/C to rise or they go bust. These guys need the greater fools to buy the halving hype.

But, of course, the big issue is the Middle East.

Markets don’t like uncertainty – even though uncertain markets often offer the best opportunities. The current wisdom is that it’s all utterly dependent on how Israel responds – will they go big with an all-out strike on Iran bases and its nuclear capability, or will they take the apparent win Iran granted them over the weekend?

There has been something of the sense of a well-choregraphed dance between Israel and Iran circling each other over recent weeks and months – very aware it’s not what is done, but how actions are perceived. Everyone expected the well-flagged Iran attack over the weekend. That’s why Oil prices barely wobbled. After a few words of predictable fury, this morning there are signs an Israeli stand down might be on the cards – which would favour markets. Doesn’t mean it’s over – revenge is oft a dish best tasted cold and considered.

The weekend strikes gave Israel a tactical win. After Israel took out key Iranian generals in a pinpoint surgical missile strike on Iran’s embassy in Damascus, over 300 Iranian missiles, drones and rockets rained down, mostly in broken bits over deserts outside Israeli borders, swotted out the skies by Western and Israeli defence tech. Iron Dome and other systems were shown to work effectively.

But, strategically it might be a win for the Iran/China/Russia Axis. The strike’s apparent abject failure may have been exactly what the Iranian war planners expected. They would be very aware of how Russian drone and missile strikes have fared in Ukraine. The attack would have provided valuable information by forcing Israel to reveal just how effective their top of the range tech defences are at a time when global opinion meant there was a significantly reduced likelihood of a devasting Israeli counterstrike.

The Russians will be factoring countermeasures garnered from the strike into their current glide missile assaults, while the Chinese will already be pouring over the data to determine the practicalities of taking out similarly protected US carrier task forces in the South China Seas at some future date.

I’m not going to comment on rights and wrongs of the Palestine Israeli conflict – but it’s critical to understand the reality of this manufactured conflict to draw the right conclusions from the current inexcusable horrors being perpetrated in Gaza, and the justifiable righteous anger of the Israelis. Both are wronged people. Strip it down to basics, and both nations (deliberate choice of the word for both sides) are victims of deliberate Iranian policy. If the world were a more thoughtful and considered place, then Iran is where the buck should ultimately stop.

When Iran and its proxies planned the October 7^th Hamas outrage, the immediate objective was to derail Saudi Arabia and Israel signing a peace deal that would effectively marginalise Iran from much of the Arab world – allowing Saudi and moderate Arab nations to deal with the Iranian proxies in the midst. Iran avoided that by provoking a devastating Israeli reaction against Gaza from the weak and fractious Netanyahu coalition government.

The Iranians exploited Israeli political weakness, Netanyahu’s desperation to cling to power, and the extremism of some of his political partners – and the way they continued to rack up pressures on the dispossessed Palestinians. It was judged perfectly. The Iranian’s played Israel like a fiddle. Shocking as the Oct 7th outrage was, the Iranian calculus of terror predicted it would ultimately win support against Israel in the court of human opinion – which is exactly what subsequently happened. It had the added benefit for Iran of distracting from their multiple internal crises and increasing disatisfaction from young people.

Oct 7^th, the Houthi attacks in the Red Sea, the tensions in the West Bank, and Hezbollah on the Northern Border are all classic asymmetric warfare – coordinated by Iran and straight out the Ho Chi Min playbook. Call them terrorists or urban freedom fighters – there was never a realistic expectation the Hamas pawns would beat tanks or air-strikes on Gaza, but that they would achieve heroic status from apparent Israeli outrages. As we have seen, they well and truly kicked the Hornet’s nest – and got what Iran wanted.

What happens next?

Iran is the aggressor – but the West is too disjointed, distracted and politically conflicted to present any real threat to the Ayatollah’s and their Republican Guard. The US congress looks incapable of standing up to Russia by approving aid to Ukraine, while Europe is wracked by demonstrations in support of Gaza. 30,000 dead in Gaza is shocking but even more so are the nearly 1 million who’ve died this century in Iraq and Syria in the Civil Wars and against ISIS?

However, all these aggressor nations; Iran, Russia, North Korea, and China too, suffer the same problem – the cult of personality. Democracies may be the worst form of government, (except for any of the alternatives), but they do weather change better than authoritarian regimes.

Until the West decides what it wants to be…. the instability in the Middle East will continue to be fuelled by Iran and its support.

Side Note: During the last re-engagement with the West in the early 2010s, I attended meetings with Iranian trade delegations in Paris (the place in Europe they felt welcome to visit.) The Iranians wanted global investment into infrastructure, railways, airports and shipping – all areas where we had potential funders. However, my colleagues and I were shocked at the naked corruption and greed we encountered from the Iranian “businessmen” who expected us to pay them immediate large sums of cash to facilitate further discussions. It was explained to us these “figureheads” would be paying significant sums to seniors back in Tehran for the right to run their businesses as effective monopolies. We quite rightly decided this was not business we wanted.

Out of time and back to the day job.

Bill Blain

Author of the Morning Porridge

Wind Shift Capital

www.windshift.capital