Succession, Oil, and the Fear of Prolonged Warfare
What Happened
- Succession: On March 8, Mojtaba Khamenei was confirmed as Iran's new Supreme Leader.
- US Transition: SECWAR Pete Hegseth confirms that the US is no longer aiming for limited damage, but is instead shifting to "complete destruction".
- The Hormuz Blockade: The Straights of Hormuz remain under strict guard by the IRGCN. Iranians have planted mines, and are using traditional drone "swarm" attacks to prevent any "unauthorized" ships from entering the Persian Gulf.
- Oil/Bond Prices: Oil prices continue to surge, meanwhile bonds are proving to be a broken safe haven asset in this conflict.
Why It Matters
The new Supreme Leader, Mojtaba Khamenei is the son of the Supreme Leader the US just killed. Not only that, he lost is wife and son in an airstrike. Within two weeks, this man has lost his father, wife, and child, prompting reasonable questions about emotionally driven escalation.Â
SECWAR Hegseth declaring that the US is no longer aiming for limited strikes but rather shifting to a strategy of total destruction is, by definition, escalation. What began as just a single strike to take out a group of senior Iranian officials has grown into a lasting campaign aimed at dismantling the entire country's infrastructure.Â
The Straights of Hormuz remains a major chokepoint for global oil, the confirmed reports of Iranians laying mines in the straights has forced all civilian ships to avoid transit through them. Companies that own these ships are doing risk/reward calculations based on safety/oil prices and cannot reasonably move forward with sending ships through an area that is all but certain to result in hostile action against them.Â
Let's Dig Deeper
Succession
The hopes of a reformative regime change for Iran are dwindling in front of our eyes. President Trump has routinely called for the people of Iran to rise up and rid themselves of the government that has oppressed them for the last 47 years. However, Iran now has a new Supreme Leader that reflects not a reformed pro westerner, but rather the same religious zealotry of his father, however he also just lost the latter. Within days of losing his father his son and wife would be killed in an airstrike. A religious extremist who now has the loss of three people he likely loved most in this world is a recipe for escalation, not reform. The Khamenei continues to refuse talks with the United States, suggesting he has no interest in anything but blood. Investors have started pricing these developments into the oil and bond markets.Â
US Transition to "Total Destruction"
This week SECWAR Pete Hegseth declared that the US is no longer focusing on limited target strikes, but instead is aiming for total destruction of Iranian military infrastructure. This is a clear sign that we are waging war totally against Iran, as SECWAR has stated is the best strategy when in conflict. Although President Trump doesn't have a history of involving the US in prolonged warfare, the markets are beginning to price this in as a possibility. A total war scenario will have drastic impacts on gas prices, the bond markets, and equities more broadly. We will go into greater detail in section four.
The Hormuz Blockade Continues
The ability to block the Straights of Hormuz (SOH) remains the single greatest weapon for Iran. Western countries outclass them in weaponry, intelligence, cash, numbers, and everything in between. But, to take a lesson from the Spartans in the battle of Thermopylae, choke points can alter a battlefield regardless of numbers and weapons. As a way to protect their interests Iran has started laying mines in the straights, discouraging any shipping company to send vessels through the straights, less they be destroyed in an oil filled explosion from a mine tapping the hull. Iran has also increased their strategy of "drone swarming" which is a method that involves dozens, if not hundreds, of explosive drones set towards a single target. The shear volume of drones makes it nearly impossible to defend against. Here at Pioneer Financial, we've been through the straights as we've mentioned. Drone swarming is a tactic that has long been used by Iran, we would be briefed on it routinely. The tactic is so simple that it almost outclasses technological advantages. Primitive, yet effective, and not to be taken lightly since most ships transiting through the straights do not have the weapons capabilities to automatically target flying explosives the size of a small motorcycle.Â
Oil, Bonds, and Market Impacts
The price of Oil has surged in recent weeks. Both oil and bonds have experienced extreme volatility due to uncertainty around the conflict. However, over the last few days the trend has seemed to solidify itself. Oil up, bonds down. Oil is the single greatest driver of inflation given that every good you purchase got to its destination through a vehicle that uses oil. Bond prices have started dropping with fears that the oil shortage will cause entrenched inflation that can only be solved by the mercy of a theocratic state that wants to destroy the US. The Federal Reserve had just begun focusing more on the labor market weakness rather than inflation and now, as if on cue, inflation is back on the table. Bonds are typically a safe haven asset, with investors flooding to them in times of crisis. What happens if that very crisis is something that naturally brings bond prices down? We'll tell you, it results in markets dropping in every sector from tech to bonds, with the one exception being oil. Here is a chart to show market performance over the last six days:
TL:DR
VIX up, yields up, oil up, not good. If oil prices persist for any reasonable length of time it means that inflation is officially back on the menu, if it's not already. Bond markets will have to decide where a recession due to war and a weakened labor market is more/less important than oil driven inflation. And, the United States will have to decide if another extended conflict overseas is worth the consequences it will surely bring on the homefront. These decisions are not ours to make, nor are we going to pick sides. As always, we simply want to bring you the facts at hand. President Trumps history suggests this conflict won't last long. That said, we have long since moved past the single-strike-scenario that he typically plays by. Uncharted waters indeed.Â
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Thanks for reading! Until next time, good luck and Godspeed.
Disclaimer:
The views and opinions expressed in The Pioneer Perspective are those of Daniel Harlow and Pioneer Financial, LLC and are provided for informational and educational purposes only. Nothing in this publication constitutes financial, investment, tax, or legal advice.
Market data and information are obtained from sources believed to be reliable, but their accuracy cannot be guaranteed. Past performance is not indicative of future results, and all investments involve risk, including the potential loss of principal.
Readers are encouraged to conduct their own research or consult a qualified financial professional before making any investment decisions.