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Global markets have traded sideways over the past couple of days despite the removal of top leadership from a rogue state. From a military perspective, one could not have asked for a more perfect execution of plans. However, there is obviously far more at hand here and the markets continue to reflect that unease. For sophisticated institutional investors and risk managers, this installment aims to address the source of that unease and possible outcomes.
Regime changes are often challenging as there are many who benefited from the prior system. Complicating matters in Iran is the disparity in arms; the prior government had/has them, and the citizens do not. Furthermore, as demonstrated by recent events, the theocracy is willing to kill thousands to quell uprisings.
While there is little doubt that the leadership of the Islamic Republic of Iran was miserable, the major question is what comes next. Turning to the experts, Niccolò Machiavelli is a widely recognized author on political matters. Advising the princes in Florence, Italy, via his treatise entitled The Prince, Machiavelli wrote:
Men change their rulers willingly, hoping to improve themselves, but they soon discover they have made things worse.”
Providing guidance on regime changes, Machiavelli provided five rules:
One could argue that of the five steps, only part of the first step has been completed; Khamenei’s son apparently is still alive and well. Furthermore, per the WSJ, he might be more radical than his father.
Curtis LeMay was the Army Air Corps commander during World War II directing the Army Air Corps operations primarily against Japan. His belief was that the war could be won via a bombing of major Japanese cities. While the firebombing of Tokyo and other cities achieved the stated objectives, it was not until the release of the atomic bombs that Emperor Hirohito was convinced to end the war. (Even with the Emperor’s decision, there were some in the military that attempted to thwart the surrender.)
Back to Iran, there appears to be little evidence that Iranian leadership has any interest in coming to terms, and if the previously-mentioned WSJ article is accurate, it might be even more unpalatable. While there is little doubt that the combined forces and intelligence of Israel and the US have blunted the Iranian leadership, the fact remains that the regime has the weapons and the citizens do not. Hence, there is the task of arming the right people and establishing a new order. Presumably, Israel is not a good candidate for direct involvement because of the historic hostilities between Muslims and Jews. There is talk of Kurds and possibly Turks being involved, but there are challenges with both. Again, the trick is getting arms to the right people to counter the old regime.
The relevancy of this whole dilemma is the nuclear threat posed from a country which is actively hostile to the West, and its ability to shut down the Strait of Hormuz through which approximately 20% of global petroleum is transported. While Iran’s nuclear threat appears to be materially degraded, the second threat remains. Presumably, the calculus being used by the remnants of the old regime is to increase pressure on all who possibly oppose the regime in an effort to encourage a withdrawal. Given the dispersion of Iran’s missiles, eliminating all of them is difficult and probably will require some escort-type arrangements. In the meantime, it is not clear that Iran’s ally, China, is benefiting from the curtailment of oil shipments.
We continue to watch developments. There are a multitude of aspects of this conflict that need reviewing, some of which will dramatically change the investment landscape.
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