Marko Papic: Global Stakes High as Iran Strikes Israel | Geopolitics

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1:13hi everyone welcome to the splash update on geopolitics in the wake of iran's military strike on israel with me to share his insights is marco papich partner and chief strategist at the clock tower group hey marco how are you hey maggie it's always fun to be uh live with you Yeah, gosh, there is a lot to unpack. So happy that you could break away, because I know it's probably been crazy for you, because I think everyone feels the same way. We saw that flash on our phones wherever we were, and our kind of stomachs dropped at what the implications must be. So things a bit calmer today, obviously, than what we saw on the weekend.

1:49But give us your assessment of what transpired. Well, I think what transpired was that Iran has been saying that it would retaliate to the Israeli strike in Damascus. They basically hit an annex to their embassy and killed several very high-ranking members of Iranian military and government. And so Iran has been saying, like, look, this is our sovereign territory. We're going to strike back. And after about, you know, week and a half of telling us about this every day, they proceeded to attack Israel in an unprecedented attack because they've never actually done this directly. It's always been through proxies in Syria and mainly Lebanon, of course, Hezbollah.

2:28And then, you know, we had this very strange announcements by global media where they said, well, there's drones coming towards Israel and it's going to take him hours to get there. And that was like right off the bat, the first sign that there's something a little bit different about this attack. I mean, when you can basically track a military device on flightaware.com, you know it's extremely well telegraphed. And I think the mix between ballistic missiles and drones is important. Drones are not a military tool you would use in this kind of a strike. Drones, you know, they're slow, they're visible, especially those that can carry explosives over long distances.

3:09This is something you use when you target terrorism, when you target individuals, as the U.S. has done extensively. So I think Iran used this on purpose so that they can be intercepted and so that they can limit the casualties and effectiveness while maximizing the sort of immediate attention to the fact that they are defending their sovereignty. So that's what transpired. And now, of course, everyone's watching what the retaliation from Israel will be. And if there is one, right? So just on that point, it sounds like you think that it was more political theater than it was an actual attack meant to cause destruction and pain.

3:56because there's a there's kind of two narratives floating understandably some are like this is a this shows that it's impossible to attack israel the you know the advanced military might this is an embarrassment to iran and then the flip side of this is like listen this was iran's response but they did so in a way to make sure that or to try to lay the groundwork where this would be the end of it it's over and they issued a statement at the end saying this is now done but the ball now in Israel's court. Sounds like you think it was more political theater than just a sign of weakness or their military is ineffective.

4:32Yes, I do think it's the latter. I mean, first of all, one of the advantages that Iran has over Israel is just geography. Israel doesn't have proxies next to Iran. Iran has proxies next to Israel. And so if it were to fire sophisticated missiles out of Syria and Lebanon, it would be a different story. Some of these long range air defense systems like the Patriot systems work better over longer distances when they have more time to intercept. So just keep that in mind. I mean, Iran could supply its own military that is present in Syria with sophisticated missiles and then use it against Israel.

5:08So yes, I do think that that would have been a different story. Also, those drones are far more effective if they can slip under radar, flying at low altitude, again, from Syria or Lebanon. If you release them like 10 kilometers away from Israel, like it's game over. There's no way that an Israeli F-16, F-15 or American fighter jets are going to be able to scramble and intercept them in that case. So I do think it was a message like, hey, we have these tools. We're going to fire them from, you know, half of the region away. You're going to have hours. I'll give you three hours to get yourself.

5:40Yeah. You can like make yourself a cup of tea, watch it on FlightAware, you know, like all that stuff. Have Jordanian Air Force intercept them. But so, yeah, I do think it's actually a mix of both. I don't think it proves that Israel is imprenetrable. It shows Iran has sophisticated weapons and it can elect where it can fire them from. So, you know, both sides have a good argument here. Iran has an argument like, look, we were responsible about how we did this. Israel has an argument to say like, look, even though we fended off this attack, it shows Iran means us harm and it could be much more serious next time.

6:16So both sides, It will be interesting to see now what develops. In my view, however, because of the point you made that Iran said it's over, I mean, the ball is in Israel's court. And I feel that the market reaction today was pretty sanguine because everyone kind of said, oh, well, Iranians didn't do much and they said it was over. Fine, fair, I agree. The question is, what does Israel do? And so we should be focusing on that, not on Iran's reaction function. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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8:58Exactly. And it seems that at least based on the reaction in the markets, and again, you know, where the money's flowing, that everyone kind of believes that it's over and that Israel's not going to retaliate. Is that too simplistic of a view? Should we have that high of a conviction when it comes to what Netanyahu may choose to do? Yes, I do think that's a mistake. So I'm comfortable with the consensus on Iran. I think, as you say, the statement right after the attack, it was almost Trumpian. I don't know how many folks remember January 2020, when America assassinated General Soleimani of the IRGC with a drone strike.

9:42And then Iran retaliated by basically using ballistic missiles against U.S. military bases in Iraq. And once that happened, President Trump came out and said, I consider this the end of it. Like, you know, almost like, hey, I understand Iran had to retaliate. Chapeau. It's over. And that was it. That was 2020. You know, it was a very kind of, and Iran basically almost used verbatim the Trumpian statement. Like, yeah, we now consider this the end of it. The issue is that Israel has a number of reasons why it may not want to consider this the end of it. First of all, it's an unprecedented attack against their sovereign territory by another regional power using ballistic missiles and drones.

10:22Okay. Number two, there is the issue of increased enrichment of uranium by Iran. And I'm just going to share a screen here for a second and show you something. So this is something that's been unsaid. Nobody's really pointing this out over the past several weeks and months. This is out of a client note that I just published for my clients a couple hours ago. And basically, this is kind of the elephant in the room, the growing stockpile of 20 % enriched uranium, which is an important stockpile because then you enrich it further to get highly enriched uranium for nuclear device. And as you can see, since Biden became a president, Iran's stockpile has absolutely ballooned.

11:10And this is an issue. I mean, Israel can claim that it has to retaliate because Iran is a bad actor that attacked them. But he can also say like, hey, listen, it's time to settle the score with Iran and attack their nuclear facilities. Now, that's the negative. That's the very kind of a scary scenario where we do get Israel-Iran fighting. A more sanguine view would be that Benjamin Netanyahu just completely flipped the script on the entire planet. that he just got a huge PR victory. Israel has gone from being the aggressor in the eye of most media and Western commentators to being the victim. And he now has a sword of Democles over the Biden presidency.

11:56He can tell President Biden in a conversation, hey, look, man, I think I'm going to retaliate. I think I'm going to get oil prices to 150 bucks. And I think I'm going to scuttle your presidency See, unless you tell your friends in the Democratic Party, particularly Chuck Schumer, to tone down the criticism of my operations in Gaza and that you give me a blank check to finish what I started in Gaza. And so I fall in the camp that believes that Benjamin Netanyahu will do the latter. He will use this as a trade ship and refocus on Gaza. But that's a low conviction view. And I could be very wrong on that.

12:30I mean, Benjamin Netanyahu has been around long enough to see the way that Washington works, and it's not Biden's decision, and it's not clear who really controls some of the lawmakers in Congress. They don't seem to be towing the line when it comes to aid to any particular person or political view. The Republicans are traditionally hawks, and there are some breakaway Republicans who don't want to fund anybody, who are very isolationist, not to mention we're approaching a U.S. election. That seems like a big gamble to think that he can make that sort of demand for a blank check. Yes, but it's working.

13:07Let me give you a very simple example of this. on Friday, when we all went to sleep, the top story on CNN.com was that hundreds of Israeli settlers basically broke into West Bank and assaulted and burned some Palestinian homes. That was the top story on Friday. Saturday, that had gone down. And both parties, almost every member of both parties, naturally said, look, we stand with Israel. They just got attacked by Iran. And so that media shift, that PR shift is really, really important. As President Trump said, by the way, in an interview with Israeli media about a month ago, President Trump, mind you, probably one of the most vociferously supportive presidents on Israel, he basically said, look, you guys have a PR problem right now.

13:58You need to wrap up the situation in Gaza very quickly, almost verbatim quote by President Trump. Even President Trump, in other words, was calling for an end to the situation in Gaza. No one was calling for that over the weekend. No one's even thinking about that. Again, those news have fallen down the scrolling kind of screen. And so I think that's very important because it does give Benjamin Netanyahu the opportunity to finish the situation in Gaza. Now, why is it complicated? It's complicated because Rafa in the south of Gaza is where you have almost 2 million Palestinian internally displaced people.

14:32And yet that is the last stronghold that the IDF needs to handle. So it's going to be very messy. There's going to be a lot of civilian casualties. Israel is basically telling Palestinians to go back to the rest of Gaza, which is destroyed. So this last bit of dealing with Hamas in Gaza is going to be the most difficult for Israel, both militarily and from a PR perspective. And I do think that they just got a blank check from the U.S. because, again, Joe Biden already called Netanyahu, said, please don't retaliate against Iran. There's something that Netanyahu will want in return for that. And I think it's effectively a free hand.

15:13So they may not retaliate against Iran directly, but they will use this to finish what they intend to do in Gaza and expect to do so without any public criticism from the Biden administration. So I think that that's a it's a low conviction view, but I can see that being the tradeoff. And I can see why the market would assume that that's what's going to happen. So the market may be sanguine, both because Iran has said it's over. President Biden has been quoted by Axios as saying that he has asked Israel not to retaliate. And then Marco Popich in Real Vision says there'll be a tradeoff. You know, the problem with all of that is that there is some probability that we're all wrong and that Israel says, no, guys, look, you showed the highly enriched uranium stockpile.

15:58They attacked us. We're going to retaliate directly against Iran. And in that case, we have to talk about what that means for all prices. Yeah, so let's do that. And by the way, this is not at all priced in. The idea that they would, because everyone's talking about, and as you point out, rightly so, let's finish, like this will give us finish to cover the job that we started in Gaza. What we are not, the real risk, it sounds like you're saying, and what's not priced in is much more serious, and that's a direct attack on uranium facilities within Iran. That or targeting all sorts of other military facilities.

16:32I mean, Iran targeted supposedly Israeli defense installations so that we're not targeting civilians in this Saturday attack. And then, you know, Israel could do the same. Let me share the screen for a second. Yeah. Because first of all, there is some question of what is already priced in. Is there some geopolitical risk premium in all prices? I think it's difficult to say that. Because as you can see on the chart on the left, this is Brent. Brent bottom, so there's basically December, and there's the Fed's pivot in December towards leniency. This is where the Fed essentially said, look, we're going to be cutting rates in 2024, almost no matter what.

17:14And then they doubled down on that view in March, which sent oil flying even further. Maybe this last bit here, you can see it right here, maybe the last kind of, so you have the first third is Fed announces in December it's leniency. Then in March, it doubles down on that view. Maybe this is related to geopolitical premium. So in other words, I would argue that maybe you can argue there's$2 to$5 right now. I know Goldman Sachs, for example, argues there's already$10 of geopolitical risk premium. I disagree. And I disagree because methodologically, my team and I, we went long oil right here. So we went long oil in February for no geopolitical reason.

17:54None. Zero. It was purely fundamentals. There is no recession. China is showing green shoots of growth. And so we want to be long oil. And the Fed has stepped back and is not going to be a headwind with hawkish monetary policy to risk assets and cyclicals like energy. So this is purely a monetary policy, global macro view. It has nothing to do with geopolitics. So I would argue that when you look at this chart, if you're arguing that geopolitics played a role in oil going from 75 to 90, then you've got a problem with your framework. First of all, why did oil collapse after October 7th, Hamas attack then?

18:35And why did the Fed pivoting trigger all of this? So that's the first issue. And this is important, Maggie, because if you take my view, it means there's very little priced in, not just today, but over the past two weeks. This is all related to the Fed. It's all related to the macro context, which is very bullish oil and energy. And so I do think that there needs to be a little bit more of a risk premium. I've been long oil since early February, expecting it to hit about 100, 105. So I thought there was another$10 worth of action without any geopolitical events. Just over the next three to four months, I was going to keep my long oil until it hit 100, 105.

19:16I expected Joe Biden then to release SPR ahead of the U.S. election and probably settle prices between 90 and 100. Now, if you think about outcomes, let's go down to the table of probabilities. I know it's very difficult for your readers to read this, but you can see on the left-hand side different scenarios. Here's that expanded Gaza operation scenario, right? So my view is that this probability is about 60%. This means that, yes, Benjamin Netanyahu will trade, like trading chips. Oil impact, none, obviously. There hasn't been any. VIX impact, none. Expanded regional conflict by going to Lebanon, Syria.

19:57Probability, 20%. Oil impact, minimal. I don't think it matters. Now, there's two versions here, as you can see, of direct war with Iran. Why? This requires us to spend some time unpacking the current regional context. You know, Iranian proxies, the Houthis, Hezbollah, Syria, have not been impacting oil production facilities in the region. This is very important to remind ourselves. And that's because Saudi Arabia and Iran have a detente. a detente that's really helping Iran and that has given Iran a lot in the region. Which is why that even if there's a direct war between Iran and Israel, it could be a clean type of a war where only Iran and Israel are involved.

20:42And Iran does not retaliate against the Gulf monarchies producing oil because they have a deal with it. In that case, I think the probability is that Brent could maybe go up$20, but not more, and it would be temporary. And then there's, of course, a more dirtier version, a more complicated version of a war, where, yes, the Saudis do join Israelis. I just don't see that happening. I assign very low probability. So when you actually do the math on this, what I get is that it's appropriate to have around a$7 increase in Brent at this point. I mean, I hate to be very specific, but that does get me to that final$100,$105 that I thought we would get to in the next two to four months anyways.

21:24We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:35it's it's so interesting because the regionals you know the the regional dynamics do play such an important role talk to me a little bit about the saudis since they're they are so central here uh what are they thinking about this what are they worried about because anytime we're talking about this complex of the situation it's it's often not the intended it's the it's the unintended unintended, you know, or unforced error that just has the ability to spiral things in a way that I think that this is what the worry is. How are the Saudis positioning themselves here? What do we know about how they're thinking about this?

22:16Listen, Maggie, this is the most underappreciated part of all of this since October 7. I don't see anyone in the Western media focusing on this, especially in the U.S. And it's why everybody gets it wrong, I think. That's why everybody in October 8th thought that oil prices would go$20,$30, and it didn't. Saudi Arabia is focused on priority number 1, 2, 3, 4, 5 to 170, and its economic development of Saudi Arabia. That is what Prime Prince Mohammed bin Salman is focused on. They really, truly couldn't care less about anything else. I mean, truly. And God bless them for that. They're focusing on economic development, like Southeast Asian economies in 50s and 60s.

23:00This is all they care about. And so what they did in 2022 is they concluded a deal with Iran. They gave Iran honestly everything Iran wanted. Prime Prince Mohammed bin Salman met with Bashar al-Assad, recognized him as the official ruler of Syria, pulled funding from all the Sunni militant groups that were trying to overthrow the Syrian regime in concert with the U.S. He started negotiating with the Houthis in Yemen a peace deal and ended the war, which Saudi Arabia was obviously the primary aggressor in that conflict. And then finally, in 2022, Iran essentially acquired all of Iraq. The Saudis pulled the funding and support for the nationalist Muqtada al-Sadr, giving the Iranian proxies in Iraq the free reign to rule that country.

23:51And that's really the jewel of the Middle East. It's Iraq. It's not anything else. It's Iraq. It's the buffer state between Saudi Arabia and Iran. Now, here in the U.S., we know this deal, but we obsessed about it because China was involved. I mean, when you look at the media coverage of this Iran-Saudi Arabia deal, the only thing American media reported was that somehow Beijing concluded that deal, which is complete nonsense, first of all. The Saudis just waved in the Chinese at the last minute just to kind of troll the Americans, quite frankly. It's like going out with somebody and putting it on Instagram so your other guy sees it.

24:27Literally, that's what the Saudis did. China's role was minimal. This was mainly a deal between Saudi Arabia and Iran. So why does it matter? It matters because in 2019, Houthis attacked Saudi energy facilities. In 2022, they attacked the Abu Dhabi airport that I landed on three weeks ago. And so think about it. Everyone's obsessing about Houthis and the fact that they're attacking some container ship carrying your toys, toasters, and t-shirts. But remember, the Houthis could easily send those drones north and attack facilities. Why aren't they doing that? Because Iran is saying, hey, listen, we have a deal with Saudi Arabia.

25:09So this deal is the most important factor in the Middle East right now. It's a major, major change in dynamics in the region. Yes. And that's why the Saudis are not on Israel's side. They're saying, look, a big risk to Saudi Arabia is Iran. And we concluded a deal. We gave Iran what they want. They kept their proxies from attacking us. So Israel, you're on your own. Now, there are some rumors Saudis were involved in interdicting some of these drones. And, you know, that's fine. They're probably telling Iran, like, hey, listen, we want peace here. And Iran is like, no, we get it. We get it. We also want this to end.