The war with Iran we all saw coming (a “political” solution regarding Iran’s nuclear and missile program was never really a possibility for the Trump Administration) arrived this weekend. Here are our thoughts on the questions many people have…
- Why now? Truth is, Iran was in a weakened position following last year’s attack by the US and Israel on Iran’s air defense systems, missile facilities, and nuclear facilities. Additionally, many of the proxies it sponsored—Hezbollah, Hamas, and the Houthis—have been significantly weakened. Intelligence efforts revealed that Iran’s Supreme Leader Khomeini (who had been in hiding for much of the time since then) was meeting other key officials at his compound, putting several members of his key leadership in known locations.
- How long will this last?
- It is unlikely that US and Israeli offensive efforts last more than a week or two. By then, their military objectives will have succeeded.
- Surprisingly, Iran’s retaliation included targets in neighboring Middle East nations—Saudi Arabia, UAE/Dubai, Qatar, Bahrain, Kuwait, Jordan, and Oman—not just US targets and those in Israel. This effectively eliminated any possible support from other Arab nations, although most that were attacked were Sunni Muslim majority nations vs. Iran, which is 90-95% Shia.
- Support from military and economic allies Russia and China is not expected to be forthcoming as Russia is in no position to lend military support to Iran. China—which acquires 80% of Iran’s oil exports (at a discount) but that comprises only 13.5% of China’s total seaborne imports—is not expected to engage or support a war that they honestly have little interest in.
- What happens next to Iran?
- There will likely be a major power vacuum. While there have been protests in Iran that a majority of the population supports, there is no clear leadership to step forward. The military and the Islamic Revolutionary Guard Corps still present a major obstacle for a secular leadership to emerge. The son of the former Shah, Prince Reza Pahlavi, who has lived in exile for the past 47 years is attempting to gather support to lead and ultimately transition the nation to a democracy, but that is far from guaranteed.
- What are the economic implications?
- In the near-term, most of the impact is likely to be related to oil and natural gas pricing and shipping routes through the Strait of Hormuz. Major shipping carriers have suspended transits through the Strait and the possibility of Iran laying mines in the shipping lanes remains a critical threat. The Houthi’s have also indicated they plan to attack ships in that region. Longer-term, there may be some disruptions to energy, but this should resolve due to output from other nations or the reduced threat of attacks.
- Hidden Implications
- Russia. Iran was a significant supplier of drones and missiles to the Russian effort of Ukraine, with reportedly more than 2000 Shahed-136/131 kamikaze drones and hundreds of ballistic missiles provided in 2024. This could change the strategic balance in the war between the two nations. Although, Russia has other suppliers it relies on, including China, North Korea, and India, it will likely ration the resources it has at its disposal in the near-term.
- Terrorism. We can expect individual and small team terrorist actions against the US, Israel, and allied nations. Iran has a number of religious supporters around the globe. The attack in Austin, Texas this weekend, as an example, was likely the first of many to happen in the coming weeks and months.
- Retribution. Historically, there has been an unwritten rule that nations do not attack the leadership of other nations. The entire concept of diplomatic immunity exists because of this. After the attack on key Iranian government officials (and capturing the leader of Venezuela earlier this year), the US has changed the rules of the game. It would not be a surprise to see one or more assassination attempts against a member of the executive branch and/or Congressional leadership of the US.
- US Weapons Supply. After last year’s bombing to dismantle Iran’s nuclear weapons facilities, increased training exercises, equipment and supplies transferred to Ukraine, and the current effort in Iran, the stock of missiles, armaments, and missile defense systems held by the US are becoming seriously challenged.
- Impact on Defense Stocks
- We expect high volume and gains in defense stocks across the board today.
- In the coming months and year, we anticipate an increased focus on efforts to overcome any supply chain issues to increase the production rate of drones, missiles, and missile defense systems. In advance of this, companies operating in these areas should see increased contracts that would enable the US military to overcome the depletion of supplies.