Iran responded on Sunday to President Donald Trump’s latest peace proposal with demands of its own. The United States asked Iran to agree in principle to forfeit its nuclear program and reopen the Strait of Hormuz while it negotiates the details. Iran rejected that, asking the U.S. to pay war reparations and acknowledge Iran’s sovereignty over Hormuz, by which Iran is blocking around 20% of the world’s oil and gas supply. With both countries acting like they have the upper hand, a war-ending deal is impossible.
Trump has insisted Iran has been “defeated militarily” and reassured that “as soon as the war is over, which will not be too long, you’re going to see oil prices drop.” Wall Street has appeared similarly confident. For example, JP Morgan’s latest guidance said, by June, oil shortages will “force the reopening of the Strait of Hormuz, one way or another … following a clear and credible announcement ratified and confirmed by both sides.”
But no politicians or bankers have explained how this will happen, and their complacent insistence that it will work itself out delays the hard choices necessary to resolve the war. Resource shortages are growing, and in the coming months, they will likely get so impactful that they’re impossible to dismiss.
U.S.-Iran negotiations are in the same place they were last month, when I wrote that Iran was in a stronger strategic position than the U.S. and Trump’s only options were a humiliating surrender or military escalation (which could end in a more costly humiliation). Trump has chosen neither, kicking the can down the road while jawboning markets and issuing threats, apparently hoping something will change.
But you wouldn’t know it from listening to the U.S. government, observing stock markets or following a lot of day-to-day media coverage. Consider just the last two weeks. With negotiations stalled, Trump announced that the U.S. would get ships through Hormuz in “Project Freedom.” It managed to escort just two — prior to the war, more than 100 passed through daily — that came under Iranian fire. U.S. warships rebuffed the attacks, but the U.S. effort did not show shipping and insurance companies the passage was safe. Less than three days later, Trump abruptly announced the end of Project Freedom, claiming “great progress” in talks. The price of oil dropped over 10% in response.
That was a multilayered lie. There was no progress with Iran. And Saudi Arabia, angry that Trump didn’t consult it in advance, revoked U.S. basing and airspace access.
Resource shortages are growing, and in the coming months, they will likely get so impactful that they’re impossible to dismiss.
Then the White House sent Iran a one-page offer sheet with basically the same terms as before, earning headlines suggesting productive discussions. Iran rejected it, reiterating the same position it stated weeks ago. Trump called that “unacceptable” and issued yet another threat to resume bombing, but to this point he has not attacked.
Since Iran survived the initial U.S.-Israeli assault and established leverage with the block of Hormuz, more U.S. threats won’t budge it. More bombing probably won’t either, and a U.S. ground invasion of Iran’s coastline would be incredibly risky, costly and, even in the best case scenario, might not fix the situation.
When will America accept this reality? Discontent for the war — unpopular since its first day — has increased as gas prices rise and shortages of fuel and fertilizer impose burdens on agriculture, which will translate to higher food prices. U.S. inflation in April leapt to an annual rate of 3.8%, the highest level in nearly three years, and upward pressure on prices from the war-caused supply crunch is only starting.
But a prominent portion of public perception comes from the stock market, and Wall Street probably won’t acknowledge the economic problems until they’re undeniable.
The closest historical analogy is the 1973 Organization of the Petroleum Exporting Countries oil embargo.
U.S. stocks were relatively high in 1973, when the Yom Kippur War broke out between Israel and several Arab states. In response to America backing Israel, OPEC reduced oil production and imposed an embargo against the U.S. Oil prices leapt up, but U.S. stocks dropped only about 10% in response, then stabilized and traded within a fairly narrow range.
When OPEC lifted the embargo five months later, the Dow and S&P 500 were a bit higher than in late 1973. Only after that did the market crash, with the Dow falling 36% compared to before the war started, and the S&P 500 41% lower as of September 1974. That suggests U.S. stocks are more likely to decline after Hormuz reopens, rather than soar, as Trump has said.
The oil supply shock of 1973 caused a U.S. recession that lasted over a year and prolonged stagflation. The current energy market disruption from Iran blocking Hormuz is larger than 1973’s, and the war is causing shortages in other important commodities, too. A recession could be coming.
For another historical comparison, consider the German stock market under the Nazis.
Shortly after the Nazi seizure of power in 1933, German stocks took off. They dipped in 1939 with the breakout of World War II, but they mostly held the gains of previous years. Then an irrational exuberance launched them higher as Germany won early battles, eventually stalling out as the Soviet Union stopped the Nazis in 1942’s Battle of Stalingrad. The government froze prices in 1943, recognizing that the euphoria had broken and the market would decline. After defeating the Nazis, the Allied powers closed German stock markets. They reopened in 1948 at levels even lower than they were before the Nazis took power.
Trump’s America is quite different from Hitler’s Germany, and the 2020s economy is different from the 1930s and 1940s. But this comparison shows how stocks can soar under a corporatist authoritarian demagogue until forced to reckon with setbacks. Together, these historical analogies suggest U.S. stock markets can keep the music playing for a few more months — perhaps longer if buoyed by continued euphoria over artificial intelligence-related stocks — but it will stop eventually.
Iranian officials may not be considering these comparisons, but their behavior shows they understand that economic damage from blocking Hormuz is their best leverage and will take time to really hit. They also know the U.S. political calendar, and they likely assume Trump will be weaker if his party loses control of at least one house of Congress this November.
Since Iran survived the initial U.S.-Israeli assault and established leverage with the block of Hormuz, more U.S. threats won’t budge it.
Trump might restart major combat operations, but that option doesn’t present an obvious path to success. Iran faces considerable economic hardship, worsened by a U.S. blockade, but the regime doesn’t have to worry about losing power in elections, and it has the unifying motivator of resistance to a larger foreign aggressor. The CIA estimated Iran could hold out for months before economic problems become too difficult. The Islamic Republic’s leaders have a strong incentive to keep defying the U.S. and asserting their claims — with accumulating global economic damage and no American bombing about the best situation for them under the circumstances.
Trump crashed the economy — major damage is unavoidable at this point — and likely lost the war he unnecessarily started, dealing America a major geopolitical setback. The question now is how much worse he’ll make things as he desperately tries to pretend that he didn’t.
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