Two clocks, one conflict: Assessing the path forward in Iran

As the war in Iran stretches on, the question I am most frequently asked is simple: “How long will this go on?”

Investors want to know whether this particularly violent phase – including the closure of the Strait of Hormuz, strikes against critical oil and gas infrastructure, and a high intensity bombing campaign against Iran by the United States and Israel – will last much longer. And yesterday, President Trump announced a new round of talks with Iran, offering a flicker of hopeful news. So where is this headed?

I can answer that in three words: “I don’t know.” Nobody does. Not only is it a war and thus inherently unpredictable, but the war aims of the US and Israel are not in synch and have changed over the course of the conflict.

Both the US and Israel want to degrade Iran’s military, especially their air defenses, radar network, air force, ballistic missiles, drone production facilities, and naval capabilities. Securing the existing stockpile of enriched uranium (reportedly nearly a thousand pounds) is also a key goal for both protagonists. But at the moment, Israel seems to be more aggressively and repeatedly discussing “regime change,” while the US has taken a softer tone in that regard.

At the moment, there are two clocks ticking on the battlefield.

The first is the growing antipathy to the war in the United States, coupled with soaring gasoline prices and an initial Pentagon bill for $200 billion. Those costs (around $1-2 billion per day thus far) and declining ammunition levels (notably expensive air defense missiles) are another part of the clock ticking that Washington is hearing more clearly each day. With midterms coming in November, the Trump administration is keenly aware of the political need for an off ramp soon.

The second clock ticking is in Tehran, where the regime’s goal at this point is simple – to survive. They would define this as the theocracy still running the government, the armed forces dominant within the country, the people of Iran cowed and unwilling to rise up, and a functioning economy. The clock that they hear ticking is the ability of the US and Israel to fully destroy the critical infrastructure in the country, especially the oil and gas production facilities and the electric grid. The longer the bombing goes on the harder that becomes.

Given the growing pressures on both sides, the most likely (and optimistic) course of events would be a ceasefire and reopening of the Strait of Hormuz in the 4 to 6-week range. This could be catalyzed by the Trump administration deciding to increase the level of bombing by attacking Iran’s electric grid or even put boots on the ground to increase pressure on the Iranians. Israel will continue to focus on leadership targets, stripping away another layer of Iranian commanders. I believe this relatively optimistic course of action has roughly a 65% chance of occurring.

In the other 35% pathway, there are a host of undesirable outcomes. These events could include long term closure of the Strait by Iran (perhaps conducting a massive mining campaign or even sinking large tankers in the center of the traffic separation scheme). Another possibility would be more asymmetric attacks by Iran, perhaps using terror (assassinations of soft targets like business leaders or diplomats), either in the region or globally.

Cyber is a card the Iranians have not played in significant ways, and given reports that Russia is providing targeting to Iran, the possibility of Russian offensive cyber assistance seems quite real. Another dog that has not barked as yet is the Houthi terrorists – Iranian clients and proxies – on the Horn of Africa, who have the ability to conduct sophisticated attacks on tankers and merchant shipping. This would in effect shut the Suez Canal, providing another jolting shock to the global economy.

In this 35% scenario, the bombing campaign would continue for several more months or even longer. It is impossible to rule out US boots on the ground as well, as the Trump administration increases pressure to achieve a conclusion before the November elections.

What can investors watch to help decide how the scenario may play out? Here is what I am focused on at the moment:

• Send in the Marines? First, watch the movement of the two Marine Expeditionary Units currently enroute to the Persian Gulf. Each of them will bring more warships, combat aircraft (fighters, attack helicopters, and tiltrotor Ospreys for air assault), of 2,500 Marines and Sailors with the ability to go ashore to seize and hold territory. They will threaten Kharg Island in the northern Gulf, the Iranian coastline along the Strait of Hormuz, and even the stockpile of enriched uranium. The first, with the flagship USS Tripoli, arrives in ten days; and the next, centered on USS Boxer, in around 3 to 4 weeks. This would be the first potential major deployment of ground troops – if they actually go ashore, this may last longer.
• Who’s at the table? Second, and on the more promising side of the equation, watch for the movements and public engagement of Jared Kushner and Steve Witkoff. They are the principal negotiators for the US, and their normal counter party is Iranian Foreign Secretary Abbas Araghchi, who is still apparently still alive. If there is going to be a serious conversation, these would be the discussants. There are a variety of rumored back-channel conversations between the US and Iran, brokered by regional players. But until Kushner and Witkoff suit up and head back to a neutral site like Geneva, the sides aren’t really talking.
• Strait Talk? Clearly, the principal theater in the drama from the perspective of investors is the Strait of Hormuz. Iran still has many cards to play to “hard close” the Strait, including mines (they have an inventory of over 6,000); small boat swarms armed with rocket propelled grenades; drones attacking in swarms; short range ballistic missile launchers (so-called “shoot and scoot” systems); and even coastal artillery. In a worst-case scenario, they could sink tankers to literally close it navigationally. If the Iranians decide they are going to play a long and violent game, watch for those kinds of systems to build up along the Strait.

We should get more clarity in the next week or so with the arrival of the first Marine Expeditionary Unit. Let’s hope both sides heed the ticking clocks at their back and get to the table.