Yardeni Research | Another Regime Alteration

💡A short US-Israel war with Iran is likely to cause an initial spike in oil prices; however, a ceasefire is anticipated to lead to a subsequent decline, reducing global oil prices and ultimately mitigating inflation. The attack also incapacitated Iran's navy, which significantly reduces the threat of a blocked Strait of Hormuz, thereby stabilizing oil transit and lowering geopolitical risk in the Middle East.

💡Reduced geopolitical risk in the Middle East, coupled with declining oil prices following a ceasefire, will boost US consumer spending. Lower gasoline prices will increase consumers' purchasing power, benefiting global economies and stock markets, reinforcing positive economic outlooks.

💡The incapacitation of Iran's navy by the US and Israel significantly reduces the threat of a blocked Strait of Hormuz, a critical waterway through which over 20% of global oil is moved. This development is expected to alleviate concerns over disruptions to oil shipments, despite initial warnings from Tehran.

💡President Trump's 'regime alteration' strategy involves replacing key leaders without deploying American ground forces, aiming for a short timeframe for military operations. In Venezuela, it meant replacing President Nicolás Maduro with Delcy Rodríguez to follow Washington's commands on oil production; in Iran, the goal is to force the next regime to abandon nuclear weapons ambitions and support for terrorist organizations after the killing of Supreme Leader Ali Khamenei.

💡The Abraham Accords are likely to be expanded to include more Arab countries following the decapitation of Iran's Mullah regime and its terrorist proxies in Gaza, Lebanon, and Yemen. This shift reduces Middle East geopolitical risk and enhances regional stability, a scenario that the Israeli stock market has been discounting for the past two years.

💡Oil prices could spike initially, with Brent crude jumping 10% to about $80 a barrel, potentially reaching $100, due to immediate geopolitical turmoil and supply concerns. However, prices are expected to decline in the coming months after a ceasefire in a short-war scenario because the US and Israel have incapacitated Iran's navy, reducing the threat of a blocked Strait of Hormuz and ensuring continued oil flow.

💡Lower oil prices, resulting from a short-war scenario in the Middle East, will benefit global economic growth by reducing input costs for businesses and increasing consumer purchasing power. This positive economic environment is expected to drive stock markets worldwide to continue setting record highs, particularly in oil-importing Asian countries and most emerging economies.

💡Falling oil prices, by contributing to a faster decline in inflation, might persuade the Federal Open Market Committee (FOMC) to lower the federal funds rate. This could particularly influence Fed Chair Kevin Warsh, potentially increasing the likelihood of bubbles inflating in financial asset markets or averting a financial crisis stemming from the private credit markets.

💡The projected target for gold prices remains $6,000 per ounce by year-end and $10,000 by the end of the decade. While an initial spike due to safe-haven demand is possible, the overall decrease in Middle East geopolitical risks, assuming a short-war scenario, suggests a more stable price trajectory without sustainable large jumps.

💡The biggest risks to the bullish 'Roaring 2020s' and 'Meltup' scenarios are identified as a geopolitical crisis and a financial crisis, particularly in the US private credit market. While the risks of a geopolitical crisis in the Middle East are seen as declining in a short-war scenario, the risks of troubles in the private credit markets are increasing, which could trigger a meltdown despite potential Fed intervention.