In today’s blog post, I will skip the weekly breakfast. As many of you may already know, Iran carried out missile strikes targeting Israel over the weekend. These strikes mark the latest developments in a series of escalations involving Iran and its affiliated groups, pitted against Israel and the US.
According to media accounts, the missile attacks did not yield significant results as 99% of the projectiles were intercepted by Israel, as well as by other parties like the US military. As of my current update, Israel has refrained from direct retaliation.
In the aftermath of the October 7 terror attacks on Israel, the Middle East has become increasingly volatile. The situation escalated dramatically when Iran unleashed over 300 drones and missiles toward Israel over the weekend, marking the first direct Iranian assault on the country.
Prior to this event, Iran typically operated through proxy militias in strategic areas like Yemen, Lebanon, and Gaza/Palestine. This tactic sheds light on Yemen’s recent actions in disrupting shipping routes in the Red Sea, as Iran leverages its proxies to exert pressure on economic supply chains.
The weekend attack comes at a time when the macro picture is already complicated. Should tensions escalate, the markets would likely factor in the prospect of diminished economic growth and a prolonged period of higher market volatility with a bigger effect on the price of commodities, particularly oil.
In my humble view, the likelihood of a full-scale war in the Middle East is minimal. In other words, no escalation is expected. After all, neither Iran nor Israel would benefit from a full-blown war in the region. Iran’s decision to provide Israel and allies with ample time to prepare for the attack may suggest that Tehran was aiming to present the appearance of a robust response while actively avoiding a substantial confrontation. You get the idea.
Come on, nobody knows what is going to happen. Damn it! What if my assessment is wrong and I have been wrong before, and the entire Middle East region becomes engulfed in a new war or World War III?
The consequences would likely be severe and far-reaching. Such a scenario would have significant implications for global security, geopolitical stability, and economic well-being. The humanitarian toll would be immense, with widespread displacement, loss of life, and devastation to infrastructure.
From an economic standpoint, the impact would be profound. The Middle East produces more than 30 million barrels of oil each day. That is roughly a third of global output. As one can imagine, any disruption could immediately lead to higher energy inflation, which could work its way through the fragile global economy.
Furthermore, financial markets would experience heightened volatility and uncertainty, as investors grapple with the implications of a prolonged conflict. Investments in the region would become riskier, leading to capital flight and decreased economic activity.
Geopolitical tensions in the oil-rich region have little effect on our portfolios beyond the short-term volatility which is considered part of the routine. I’m not doing anything just because some people are jumping up and down expecting some worst case scenarios. Indeed, our alternative investment positions especially those in oil and gold, stand to gain from a perfect storm.
There are always things to worry about whether you are investing based on a macroeconomic strategy or bottom-up company analysis. Some of them are legitimate concerns, while others are not. I’m not sure which is scarier actually, Donald Trump or World War III. Has anyone been tracking the long-end yields amid all the terrifying headlines out of the Middle East?
Go for a vacation if you need to. Consuming extensive coverage of a developing crisis can lead to an escalation of worst-case scenario thinking. Another challenge arises when you are correct in your prediction, yet the reaction in the markets don’t align with your expectations.
In other words, even if your prediction is right, you still don’t know how the markets will react. In situations like this, the multitude of signals from my highly reliable TM-IM models can be incredibly beneficial. They offer reassurance by providing me with peace of mind.