Why Iran Deal Is Good for Stocks
Ethan sidled into a backroom of the Jack Schwartz Cigar Store in the Chicago Board of Trade Building, where we were reading. After talking about the spring football scrimmage at the University of Michigan (his alma mater), he quickly got down to brass tacks.
As a stock options trader both on and now off the floor of the Chicago Board Options Exchange for more than two decades in up markets and down, he’s accustomed to living in the belly of the beast that is volatility or, as traders call it, vol. But these days, he finds that the markets -- whether stocks, bonds, or currencies -- are throwing off disturbing signals.
There are too many divergences and discontinuities in market action, with prices careening upward or more often downward on seemingly no news. He attributes this to the drying up of liquidity both because of new regulatory strictures and capital requirements for bank market makers and the demise of so many high-frequency traders. “I worry that should some black-swan event occur in the market or economy, stocks could hit a nasty air pocket that catches everybody by surprise,” he observes.
Certainly, the stock market action was anything but discomfiting. Rising prices throughout most of last week took the Standard & Poor’s 500 index within hailing distance of its all-time high, after rising about 2% for the week. Traders seemed to take comfort in the rebound in oil prices, the slowdown in the vaulting value of the dollar, hot mergers-and-acquisitions activity, and the fact that softer economic numbers might delay the onset of Federal Reserve monetary tightening to later in the second half of this year.
But there’s perhaps another factor bolstering the stock market that folks might be ignoring at their loss, if not their peril. We’re speaking, of course, of the framework for a nuclear agreement arrived at two weeks ago between Iran and the five permanent members of the United Nations, plus Germany.
If enacted this summer, the pact would dramatically slow and, perhaps, permanently sidetrack Iran’s path to attaining nuclear weapons. In return, the U.S.-led regime of economic and financial sanctions that have been so fiendishly successful in crippling the Iranian economy would be lifted. If nothing else, such a pact engaging Iran directly might help control the ring of fire currently raging in the Middle East and Arabian Peninsula. And once the U.N., European Union, and other, single-nation sanctions come off, Iran will be able to furnish the global energy market with one million barrels a day or more of additional supply.
To take stock of the import of the possible agreement, we contacted two U.S. private intelligence companies, Stratfor and Teneo Intelligence, which pride themselves on the objectivity of their geopolitical judgments even on the hottest, most emotion-laden issues. Both asserted that the agreement, should it be finalized this summer, represents an important breakthrough.
We caught up with George Friedman, founder of Stratfor, on vacation in Mexico but closely following events. He observes that the pact represents a shift from U.S. Middle East foreign policy that kowtowed to Israeli interests and intervened too often in regional conflicts with U.S. boots on the ground.
The Obama administration has instead opted for a balance-of-power strategy in which it engages simultaneously with the four major powers in the region -- Israel, Saudi Arabia, Turkey, and now Iran -- as ever-changing U.S. interests dictate. Thus, these days, the U.S. teamed up with Iranian-led Iraqi Shiite militias to take Tikrit from the barbaric Islamic State by aiding militia forces with aerial intelligence and surgical air strikes. Yet, in Yemen, we’re on the other side of our Iraqi frenemy Iran, aiding the Saudi-led coalition of Sunni Arab states with target intelligence in their now-air war against the Iran-backed, Shiite Houthi rebels who are trying to take over that nation.
In Friedman’s opinion, Israeli Prime Minister Benjamin Netanyahu and, by extension Israel, have lost much credibility in confronting the Iranian nuclear issue. For a decade or more, Netanyahu has engaged in his Chicken Little act of insisting that Iran is just a year or two away from developing a bomb. Yet, the doomsday never comes.
Moreover, according to Friedman, Netanyahu has talked endlessly about Iran’s achievement of a nuclear capability as constituting an “existential threat” to Israel, ignoring the fact that Israel, with its undeclared nuclear forces, would wipe Iran off the face of the earth in retaliation.
“Look, if Iran has truly been an existential threat to Israel all these years, then Netanyahu has been derelict in his duties by not acting,” Friedman avers. “One suspects that all his apocalyptic rhetoric over the years was just a way of maintaining certain leverage over American foreign policy, he says. The Obama administration is trying to change to a multi-polar policy, but Netanyahu doesn’t want it to deal with other players in the region.
The new framework calls for a scrapping of much of Iran’s uranium-enrichment capacity, a shipping out of Iran’s existing enriched-uranium stockpile, and vigorous inspection and verification monitoring of the nation’s entire uranium supply chain to ensure compliance in return for the lifting of sanctions.
Overall, the proposed pact is designed to keep Iran a year away from nuclear “break out,” which is defined as the development of a functioning nuclear device, for the next 10 to 15 years.
Even this measure is less ominous than it sounds. According to Friedman, Iran lacks the miniaturization, detonation, and missile technological capacity to build a deliverable weapon. That would take many more years under the watchful eye of the international community.
Naturally, the U.S. and Iran have a fraught history going back to the 1979 revolution that saw the Shah overthrown and a theocratic regime take power.
The litany of sins perpetrated by Iran ever since has become almost rote, especially in conservative and pro-Israel circles in the U.S. There was the embassy hostage crisis in 1979-81, the blowing up of the Marine barracks near Beirut in 1983 that cost the lives of 241 servicemen by Iran’s Lebanese proxies, Hezbollah, and the bombing of the Jewish Community Center in Buenos Aires in 1994 that killed 87 people and that has since been tied to Iranian operatives, just to name a few.
Of course, Iranians are quick to mention the shooting down of an Iranian passenger jet by a U.S. guided missile in 1988 and the strong backing in materiel and intelligence that the U.S. proffered Iraq’s Saddam Hussein during the 1980-88 war with Iran that cost that country more than one million lives.
“Mutual demonization of Iran and the U.S. is the unfortunate byproduct of 35 years of little direct contact and megaphone diplomacy,” contends Crispin Hawes, a Teneo operative in London with 20 years of consulting experience in the Middle East and Africa who has made many trips to Iran over that period.
He sees great promise in the latest diplomatic rapprochement, which follows years of fruitless negotiation. The American-led sanction programs have devastated the Iranian economy for all but the mullahs and revolutionary guard cadre, who have exerted monopoly control. The recent slide in crude oil prices just administered the coup de grâce to the Iranian economy, which paved the way to a possible final agreement “better than anything we could even dream about a year ago.”
In Hawes’ estimation, Iran’s Supreme Leader Ayatollah Ali Khamenei has burned through a lot of political capital since the rioting following the rigged 2009 presidential elections and the despond the Iranian economy has fallen into in recent years. So one can perhaps discount much of the bluster he unleashed last week on the interim framework deal, accusing the Obama administration of having “devilish” intentions in “lying” about the supposed provisions of the agreement.
“Khamenei is no longer in control of the nuclear negotiations,” Hawes contends. “Public opinion has clearly swung over to the side of the more moderate Iranian President Hassan Rouhani, who wants to end Iran’s isolation and revive the economy. Besides, Khamenei has seen what has happened in recent years to other Middle East autocrats despite having supposedly impregnable security apparatuses.”
Hawes doesn’t see any flood of Iranian oil driving global market prices lower as sanctions burn off over the next year or so. About the best Iran can hope for is to recover about one million barrels a day in lost world exports.
Saudi Arabia may cut its production to compensate for the new Iranian supply. Likewise, it will be difficult for Iran to ramp up production much above that number in the near term, given the age of its fields and the difficulty in bringing back online its heavy oil wells that are now shut in.
Good news is a rare commodity in today’s Middle East. But just maybe the tide is turning there, which will reduce the chance of a black-swan event emanating from this lawless, fractious precinct of the globe.