Cooler Heads Prevail in U.S./Iran Military Showdown

US Iran Conflict

When two hotheads and gunslingers Donald Trump and Ayatollah Ali Khamenei get into a gunfight, anything can happen. It turns out that both are wiser than they get credit for.

The stakes were high in the current confrontation between the United States and Iran. World leaders are generally careful in their remarks, even when they are upset, although this does tend to be much more the case with leaders of democracies, and not so much with autocratic ones, who do not have voters to answer to and can therefore be much more frank and even greatly embellish their remarks.

Iran has acted with impunity since their revolution, when the U.S. backed Shah was thrown out and a Muslim dictatorship replaced it, where Iran went from a friendly country to the U.S. to a sworn enemy. Decades of insurgency went unchallenged, starting with the huge embarrassment that the Iranian hostage crisis caused 40 years ago, and Death to America has been the battle cry of the Iranians ever since, a cry that has gotten even louder lately.

Stability in the Middle East has been a complete mess for further back than this, particularly since the nation of Israel was formed 70 years ago. While the Arabs did have a legitimate beef here, as the West simply seized the country of Palestine and displaced its people, 70 years has not been close to long enough for the hatchet to be buried or even put down.

By lending a hand in trying to promote political stability in the region, the United States has remained a central player in the conflict and this has placed them in the crosshairs, which continues to this day. The importance of this task to the U.S. has lessened in recent years though, thanks to America freeing itself of the dependence on oil from this region, but sitting by and seeing Americans getting maimed and killed by way of this persistent anger is certainly getting very old.

The goal on all sides needs to be to promote more peace, not less, but sometimes you have to take one step back to take two steps forward, as long as that step back is well calculated. Dancing with Iran with guns pointed at each other’s head is a very dangerous dance indeed, starting with the fact that the country’s two leaders know no limits as far as shooting their mouths off.

This is a given with the Iranians, but with Donald Trump, they have met their match, and Trump may actually be singularly gifted in this regard, which he showed with not only North Korea but with his allies as well.

After all these years, someone finally stood up to Iran and showed them that we were no longer prepared to see the lives of our people taken without consequences. Trump took one of theirs, and not just any life, but the life of Iran’s beloved general, thought to be the second most powerful man in Iran next to their supreme leader. He was buried this week, and this sparked outrage in the country.

Iran vowed revenge, which absolutely no one doubted it would extract to some degree, and the only thing in doubt was how far they would go with their retaliation. It could have been argued that it was the U.S. that evened the score, and alongside all the lives that General Soleimani was responsible for taking, just paying with one life does not even seem enough, from a body count perspective at least.

However, a scalp from someone this important is worth a whole lot more than your average scalp, and the goal here was clearly to send a message to the Iranians that we are fed up and will not tolerate this anymore and are finally prepared to fight back. Soleimani had bragged in the past that he was untouchable, but he did not envision the resolve of our current president, and paid with his life for his arrogance.

This is not about being bloodthirsty, it is about putting troops in harm’s way and then accept that they will be picked off by their foes without providing any real deterrence. General Soleimani and his legion of minions and proxies have acted unopposed for all these years, but there is a new sheriff in town now, one that is looking to clean up the town at least a little.

Talk is Cheap, and Actions Speak Louder Than Words They Say

More moderate folks are still pleading that we try words instead of actions in dealing with this mess, but all of the words that have been spoken thus far has rung hollow, which is what happens when you try to reason with a bully and rely on words alone. There needs to be consequences involved if you want to change this behavior, or there is no real reason for it to.

Make no mistake though, this is a dangerous game, and one that few would dare to play, perhaps no one else, but whatever President Trump’s faults may be, a lack of boldness isn’t among them. This could have gone very badly if a mistake was made on either side, especially with the Iranians, who had to respond with precision to ensure that we did not see the dangerous escalation that so many feared.

One false move would have taken us fully over the brink, and it’s anyone’s guess how badly things could have ended if there was a single American casualty, which we were locked and loaded for. Saddam Hussein talked a big game, but was powerless once the missiles started flying. While Iran would also be outgunned, they would have put up a much stronger effort.

The stock market showed ample concern here, especially when the story about the attack on Soleimani broke, although as is generally the case, fear went first and had their day. As we had a chance to gain more perspective, many were calling for people to significantly reduce their exposure to the risk that was out there with this.

We looked at the likely probabilities at the time and told you that we felt that it was unlikely that the Iranians would mishandle this, and did not see this as enough of a threat to worry about too much. You never know what may happen in these confrontations, but for all the fist pounding, the Iranians are not stupid and surely realized the risk that they were under here if they step over the line and provoke Trump further.

Iran is formidable enough to have been able to exact real retribution if they wished, and the attack on Saudi oil facilities last year showcased their abilities quite well. With so much more on the line, and with the targets well in reach, they could have easily caused the sort of American casualties that some were afraid of, and then the game truly would be on.

Even a limited conflict would not be in the interests of either country and would have been incredibly stupid actually, but at the same time, something had to be done about this, and while this was a calculated risk, the right calculations were made on the U.S. side.

Iran is far worse off for this long-standing conflict, they are the ones paying the price for this by way of the enormous sanctions that they are under, and to add a lot of military damage and lives lost on their side cannot possibly be seen as sensible. This is a lot like what we saw with the cold war, with both the U.S. and the USSR placing their fingers on the trigger of world destruction, but managing to refrain from acting insanely.

The stakes were nowhere near this high with this situation though, but still, Iran throwing a real punch at the U.S. would have entered into the world of insanity as well, and that had to weigh on their response. We’ve seen the prowess of American air power in the region before, but now they have even more weaponry, and even more notably, a commander in chief that would not think twice in using this against them should he feel justified, without the assent of anyone, including other countries or even Congress.

The Iranians predictably and admirably chose a benign path to extract their revenge, where they get to tell their people that the death of their beloved general has been met with a strong response, even though the end result was no lives lost and just a lot of noise being made by their missiles. This turned out to be the perfect solution for all involved, and although they couldn’t just back away, it didn’t matter so much to them that the response was virtually harmless, as it absolutely needed to be.

The Stock Market Was Skittish at Times but Took All This in Stride

The stock market still got spooked by the attack though, as it always does from these things, and the program trading took the headlines and translated them into a 400-point drop in Dow futures in the first hour and a half of trading after the incident. As the real facts of the matter weighed in, we ended up seeing a big move to the upside, where by the time Trump finished his address to the nation on Wednesday morning, we not only gained back those 400 points lost but added 200 more for good measure.

A 600 point move up with the Dow in less than a day is an unusually good move and is not indicative at all of concern, and quite the opposite. Those who had the presence of mind not to panic have been rewarded, as instead of bailing on things at lower levels, they weathered this little storm and are still on this merry-go-round ride that continues to see stocks being pushed forward into 2020.

In the aftermath, we now sit about 300 points higher than when we started the year less than a week ago, and the biggest message here is that the market will not be put off by either petty concerns or even ones much more substantial such as this one was. The shots have been fired, and we dodged the bullets very well even though the ones shot at us were only made of rubber.

Even though we knew that the likelihood of real bullets being used was low, and that the U.S. may have the means to take evasive action, as they did, it usually doesn’t take much at all to scare the stock market and we saw it run pretty scared even from meaningless threats such as the bond inversion fears.

On the political front, the aftermath also has us in a more secure position in the region, where clear notice has been given to the Iranians that they cannot use their might unopposed anymore. The dogs may have been called off, but they are still at the ready if needed, and it probably won’t take much barking from the other side to see them set loose again. After you do get bitten though, you do tread more carefully among dogs, and this has been the goal of this mission, and the Iranians backing off now speaking well for its success.

The Iranians got what they wanted out of the mission, and are telling their people that they have scared Trump enough with their missile attack that he has decided to stand down. If they didn’t get to save face with this charade, they may have had to rely on a real attack, but that was out of the question, but they got what they needed.

There is no way that this is not a benefit to the United States, and by inference, U.S. stocks as well, and Trump has clearly won this battle. He’s not prancing around though about it, and has chosen his words very well as to not excessively try to show up the Iranians, even though the temptation to do so cannot be a small one, especially for him. As well, anyone who questioned his ability to deal with explosive situations now have their answer.

President Trump does bark a lot more than any other president in history has, or perhaps ever will, but sometimes you need to bark and sometimes you even need to bite, as long as the bite is well thought out. This one clearly was, and even though this fight between these two bellicose heavyweights could have gone much further than the first round, with both sides only throwing a single punch with the Iranian one missing, it turned out that their heads ultimately were much cooler than many had thought when they truly needed to be. Anger often wins over sensibility, but thankfully, not this time.

The stock market taking this punch so well and it getting back on its feet so quickly is particularly notable, and if coming this close to war with a powerful adversary doesn’t scare them so much, we’re on very solid ground here indeed. This was a real litmus test for the 2020 stock market, and along with President Trump and Ayatollah Khamenei, everyone passed this test with flying colors. We now enter a new day in a little more secure position at least, both in the Middle East and on Wall Street, which should be welcome news to all.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.