Today feels like some combination of the TARP vote and FOMC Day. Not a good combination. I can’t help but think of the three way stand-off in The Good, the Bad, and the Ugly. According to Grok, the “Spaghetti Western” genre was known for:

• Being much more gritty, violent, cynical, and morally ambiguous than classic Hollywood Westerns.
• Heroes are often anti-heroes: cold, silent, ruthless gunmen motivated by money or revenge rather than justice or heroism.
• Famous for stylized violence, slow-motion shootouts, close-up shots of eyes and hands, and sudden bursts of action.

Seems like a pretty apt description for where we are in this conflict.

The Western genre probably has been stuck in my head because it is impossible not to get the sense that each side is counting bullets. How many Westerns depended on knowing whether a character had fired five or six shots?

The U.S. equipment is expensive and takes time to re-stockpile. By all accounts stockpiles are more than sufficient for anything necessary in Iran, but you don’t want to let them dwindle too low.

The U.S. has been attacking Iran’s weapons caches and weapons manufacturing facilities throughout the war. How many are left? How many are available, but difficult to retrieve? How many can they still make?

So, we are just sitting here watching the countdown to 8pm ET as each side evaluates and reevaluates their own position against what they think the enemy will do, and matches it with a series of potential goals. A lot like a typical Fed day but more of an elevated angst, not quite to the level of the TARP vote day, but eerily similar. Lots of time to second and third guess positioning.

If only it was “that” easy. 😊 Not only do we have to wait for an unknown outcome, but we are also being bombarded with social media posts about negotiations, back channels, possible direct communication, infighting, attacks, accidents, etc.

My Playbook

Ceasefire. Very low probability (let’s call it < 10%). If we get a ceasefire, I would construe that as a big win for the U.S. and markets. Iran has far less to gain from a ceasefire than the U.S., so it should be construed as a sign of weakness for Iran to enter any such deal.

Status quo. This could be an “extension.” It could involve more attacks on infrastructure (some have already occurred) but not rising to the level of “stone age.” Either side could attack more, which at some level would be an “escalation,” but I’ll interpret it (rather loosely) as the status quo. The number of times you will read or hear “TACO” if this occurs, will be almost mindboggling. Markets will dip on this (bonds and stocks), but nothing too severe as there could be a “deal at any moment.” Call this a 40% likelihood (or base case). Markets will react badly if there is more targeting of infrastructure, and markets will react “less bad,” or barely budge, if the status quo/extension is accompanied by optimistic pronouncements for a deal. All of the paths listed in this weekend’s End States and Timing remain in play.

A real deal gets announced. This is a possibility, but that possibility seems pretty remote. The two sides, from what anyone can tell, are too far apart to have a deal today. So, delaying “severe escalation” with headlines about nearing a deal will be at the rosier end of the status quo outcomes.

True Escalation. If the U.S. really goes down the path of “Power Plant Day and Bridge Day.” If the “bombing to the stone age” commences. Or, also possible, Iran preemptively escalates their attacks in the region. Call it < 10% chance. Why so low? Markets will respond horribly. Oil will skyrocket, and not just in the front contracts, it will also spike higher out the curve as damages (actual and anticipated) get priced in. Also, it seems that even domestically, this sort of escalation does not have strong support, and certainly the world would take a dim view of such actions (which would amplify market moves). It is difficult for the President to back from this ultimatum (yet again), but following through on this seems like a low probability event. I hope I am not wrong by putting such a low probability on this. Increased normal course attacks would fall under “status quo,” as this is really contemplating a level of attack described in some of Sunday’s Truth Social posts.

Take the Oil. An escalation, but one designed to change the energy industry forever, rather than just result in the overall destruction of Iranian infrastructure. The President “tossed it out there” quite casually yesterday, but it is in his wheelhouse. The success of Venezuela resonates. The problems it would cause for China (and even Europe) make it even more tempting than what was accomplished in Venezuela. Clearly a much more difficult task than Venezuela, but it should not be ruled out. This could work out very well (quick seizure, minimal damage, little loss of life, quick “unconditional” surrender by Iran). It could also turn out ugly. Loss of life. Severe damage to Iran’s oil infrastructure, and also to oil infrastructure in the region as Iran counterattacks. Incredibly volatile for markets. It may seem crazy, but I’d give this a higher probability of being the next step than True Escalation. More targeted and a more desirable outcome if effective.

I am pretty sure this doesn’t add up to 100%, but weirdly, I am not remotely embarrassed by that. It is that chaotic out there, even with all of the amazing input from our Geopolitical Intelligence Group. The situation on the ground is difficult enough to analyze, but that pales in comparison to the task of figuring out what is really in the minds of the leaders on all sides.

In any case, we will have to judge what any deal means for markets and the global economy as terms are released (if we get a deal or status quo). We laid out our thoughts on this in the report linked above.

This is far more stressful and dangerous than watching The Good, the Bad, and the Ugly for the 20^th time – hopefully, this conflict proceeds towards a successful outcome with minimal loss of life, as soon as possible. Though again, True Victory is worth the time and negative market implications.

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