Oleksii Liskonih
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This is an excerpt from this week's Investing Experts episode: Fiscal Headwinds And Unrealistic S&P EPS Growth With James Kostohryz.
Transcript
James Kostohryz: I mentioned to you in the episode that we dedicated entirely to this issue that for Israel, the threat of Iran is absolutely existential. Iran has officially committed itself to a policy of destroying the state of Israel.
This is not just something that they chant. This is actually state policy. Therefore, from the Israeli point of view, preventing Iran from obtaining a nuclear weapon is an existential problem.
It's existential for a couple of reasons. Some people, I think, place too much emphasis on the potential for Iran to actually bomb Israel with a nuclear weapon. Of course, that's possible, and Israel doesn't wanna ever be subject to that sort of threat. But quite frankly, that's not actually the biggest threat that Israel faces in that regard.
The biggest threat that they face is that Iran is funding all sorts of terrorist proxies in Israel's neighborhood, financing them so that they can attack Israel with all sorts of missiles and drones and other sorts of weapons that being close to Israel can actually penetrate Israeli airspace and cause really major damage.
Iran is actually funding all of these activities. So if Israel wants to stop these activities, it can't just go after, these small-scale actors that are always gonna be around its borders.
It actually has to do something that Israelis sort of talk about in the press, which is cutting off the head of the snake, or sometimes they talk about cutting off the head of the octopus.
The octopus because its tentacles reach in a whole bunch of places surrounding Israel. In other words, Israel needs to be able to retaliate against Iran in the event that its proxies hit Iran.
But what's gonna happen? If Iran gains access to a nuclear weapon, Israel will never be able to strike back at Iran for financing its proxies. And eventually, these proxies, if financed by Iran, will be able to exhaust Israel.
And if Israel can actually hit back at the source of these attacks, then Israel is gonna be in an extremely, extremely precarious situation in the long run. So, for this reason, it's absolutely existential that the Israelis prevent the Iranians from gaining a nuclear weapon.
In the last few months since we've talked, is the Iranians have continued to enrich uranium, have continued to stockpile enriched uranium that would allow them to manufacture a bomb.
In fact, it's pretty much consensus now that they have enough enriched uranium to produce several nuclear bombs. It's believed that they still don't have the technology to actually produce a bomb with this enriched uranium, but most experts believe that they're within a matter of months of being able to acquire that technology.
Donald Trump has shown an awareness of this issue. He's shown that he essentially buys in or believes that Iran poses an existential threat to Israel, and that's why he's taken a very, very hard line in the last few months.
And, again, this is just not in the news enough, where he has said that the United States wants to do a deal with Iran, is willing to do a deal with Iran where the United States makes all sorts of concessions to Iran, especially commercially and with respect to their ability to export oil.
But the one thing that Donald Trump says that he will not permit Iran to do is to, well, possess a nuclear weapon. But pursuant to that, he will not enable a situation where Iran is able to enrich uranium. Because enriching uranium is obviously the thing that's required to actually produce a nuclear weapon.
And Trump has said that Iran must dismantle its entire capacity and all of its facilities for enriching uranium. The Iranians have now completely rejected that demand on the part of Trump. This is an official rejection. It's been rejected by the Iranian president, by their foreign minister. It's been rejected and even mocked by the Ayatollah Khamenei.
The Iranians have taken a very hard line position on this that they will never relinquish their right to enrich uranium. They consider this to be a matter of national sovereignty and national pride, and they're just not gonna do it.
So Trump has said if they don't concede on this particular issue, then this is gonna have very serious consequences, and he has alluded to military consequences for Iranians. He's said he wants to prevent a war, but that will be inevitable unless the Iranians give up their nuclear ambitions.
And in fact, there was just a news item today where one of Trump's top generals actually had a briefing with Trump and administration officials going over the military options that the United States has in the event that negotiations break down.
This is Commander Kurilla who just briefed Trump today and this was announced to the press. Basically, with this announcement to the press, what the administration is saying, we're getting ready for war, and we've already set down our clear demand.
And if Israel doesn't accede to this demand, we're prepared to undertake overwhelming force. That was actually the term that was used by Kurilla today. We are prepared to respond with overwhelming force to prevent Iran from obtaining a nuclear weapon. That's end quote.
Despite some rumors that have been circulated about some strains between Trump and Netanyahu, who knows if that is true to any extent. But in terms of policy, there doesn't seem to be any daylight there. Both Trump and Netanyahu have reiterated the last couple of weeks that they see eye to eye on the threat to Iran.
Trump has basically signaled that unless these negotiations with Iran are successful, he's gonna be giving Israel a green light to attack Israel's nuclear facilities and probably other infrastructure. And the United States will probably become inevitably ensnared in this issue if it comes to that.
And as we discussed in one of my previous interviews with you, this puts the Hormuz Strait at risk because this is Iran's one ace card that they have.
If Iran can close off the Strait Of Hormuz and the flow of oil through the Strait Of Hormuz, They can basically cause a worldwide depression. They can cause oil prices to shoot up. They have the military capability to do this.
This has actually been increasingly proven by the capabilities of the Houthis of Yemen who actually are far less capable than the Iranians are, but you may remember, it was just a few weeks ago that the Houthis almost caused the disastrous situation for US aircraft carrier which was previously thought untouchable by anybody.
But the Houthis actually managed to have a near miss and it was such a near miss that it actually caused one of the fighter jets on the aircraft carrier to fall off the aircraft carrier because the maneuver was so severe that they had to take that it actually dislodged one of the airplanes that were on the aircraft carrier.
So the Iranians have serious military capabilities in terms of simply being able to block off the Strait Of Hormuz. They don't have the capability to defeat the United States in a war, but they do have the capability of halting all commercial vessels from going through there because all the Iranians have to do is they are saying, hey, if you're a commercial vessel, and you try to come through here, we're shooting you.
They don't have to confront the United States Navy or military in order to shut off the Strait Of Hormuz. All they have to do is issue a threat to any commercial vessel that tries to go through there, and they certainly can take down any commercial vessel. And there is also no US naval capability to, for example, escort every single oil tanker out of the Strait Of Hormuz.
They don't have that capability, and also the tanker companies just aren't gonna do that. They're not gonna put their equipment at risk, and that's an uninsurable risk.
They won't do it because insurers will simply not provide insurance for shipping companies to go through the Strait Of Hormuz in the event that Iran actually announces this sort of threat and shows the ability to carry through with it.
So this is the single most dramatic threat that is faced by the US market in 2025. If there is ultimately a confrontation between Iran and Israel, the Strait of Hormuz is gonna be in play.
And if that happens we're gonna be seeing a huge spike in oil prices and that can bring the entire US stock market crumbling down.
And that has something to do with what we talked about earlier because what that'll do with oil prices rising dramatically, that'll cause US inflation to go higher, it'll cause inflation expectations to go higher, it'll cause interest rates to go higher and the fed is just gonna have to sit there and do nothing.
In other words, even though the United States will be experiencing as a recession as a result of that oil (CL1:COM) shock, the United States, Fed will not be able to intervene in terms of providing QE or lowering interest rates while inflation is rising.
And so that will be an absolutely devastating scenario. Now, I'm not saying that there's certainty that this scenario is happening. What I'm saying is that the markets are not at all discounting this possibility. And I believe that this possibility is actually more than 50% at this point.
So while I don't think it's anywhere near 100%, I do think that it's actually more likely than not that we're gonna get some sort of war between Israel and Iran. And why? Again, because I said, this is an existential issue for Israel. They just simply can't afford to not take this military action, and so the only alternative is negotiations and it seems that these negotiations have failed.
So given that we're seeing that negotiations have failed, I think we do need to consider that there's over a 50% chance that there's gonna be a conflict. And in the event of this conflict, global markets are gonna be in a lot of trouble. Now, that's not something that I'm suggesting that investors go run out right now and do a lot of buying or selling of stocks on this basis.
What I'm suggesting is that investors need to pay a lot closer attention to the news in this particular regard, follow this situation closely, and also really weed out unnecessary risk in their portfolios.
Because, again, the risk is asymmetric right now. I mean, we're talking about PE ratios being at close to all-time highs in the United States, and we have more than 40% downside for stocks to simply get down to, historically, more normal levels.
And so, the US market, if everything goes absolutely right, could have, five, ten upside 10% upside from here. But we're also looking at the possibility of downside of thirty, forty, 50% in the event that we get something like a shock, as a result of an Iran Israel conflict.
In addition, we have some other, let's say, less dramatic shocks that would be brought about by the possibility of a recession as a result of these headwinds that I mentioned earlier in our program where I talked about tariffs and the effect of the tightening labor supply and some of these other factors that are starting to potentially cause a recession in the US economy without the need for a serious shock.
So I think that investors are dealing with a very asymmetric risk scenario today, and they need to really start positioning their portfolios accordingly.
Rena Sherbill: James, I really appreciate this conversation and how deep you're going. Again, you run the Successful Portfolio Strategy on Seeking Alpha, an Investing Group for those interested in finding out more.
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