Podcast: Play in new window
- Would Regime Change In Iran Effectively Solve The Nuclear Deal?
- Will The Middle East War Spread?
- Gold Replacing T-Bills As Flight Captial Preference
“We talked about the breakout in silver, and I think silver more than even the gold market is your tell for the Western investor finally saying, maybe we do need some version of a plan B. What is our best way of navigating the days, quarters, years ahead where volatility is normal, and where uncertainty becomes what you get? It’s the norm.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, welcome back for just a little while. Dave, I know you had the family reunion last week. Well, while the world was erupting, I mean, Israel going to war with Iran, that’s a first, isn’t it?
David: It’s made its way into a few of the conversations. But most of the time we were just playing, which was super fun. The house we stayed at had a foosball table, and my minor in college was foosball, or should have been because I would’ve gotten decent marks in that. Actually developed a lower back problem, I played so much. And still leaning towards being critical of my kids playing video games, and yet I had my own outlet.
Kevin: Yeah. Yeah, they called it foosball at that time. Well, some of the events of last week, it was interesting watching the Army’s 250th year anniversary birthday. That was impressive, and at the same time, of course, the detractors were trying to make it look like there were huge protests nationwide. That sort of fell flat on its face. But the situation over in the Middle East was really volatile. And this is the first time we’re actually seeing Israel being hit back pretty hard. Obviously, they took out many, many top, top, not only missile launchers, but military leaders, but we’re seeing the makings of a war. I mean, how is that affecting the markets, Dave?
David: Well, if you linger on last week’s market action, you will observe a sensitivity to a world of unknowns and stress. Pretty normal. Uncertainties this time of a geopolitical nature. And then to start the week this week after an incredibly violent weekend in the Middle East, calm quickly returns. So the conflict is far from over, but it would appear that traders have determined that the effects will be manageable. Time will tell if that determination is naive or if it’s on the money.
Kevin: Well, and I’d like to talk about what are the vulnerabilities like the Strait of Hormuz, and so let’s go to the price of oil for a minute.
David: For one thing, it is the price of oil which is in this case the potential disruptor to economic growth globally and a stimulant to inflation. We had the May CPI and PPI numbers last week, both barely higher. Both below expectations. And the tariff concerns are the longer lingering concerns if you’re talking to economists these days. Folks at Goldman Sachs still think we’ll finish the year closer to 3%, and of course, they’re looking at PCE, which is the Fed’s preferred measure. So tariff concerns have a longer lingering effect on inflation expectations for a one, three, and five year time frame. And as we’ve stated previously, the Democrats when polled in the University of Michigan numbers expect higher numbers than anyone else.
And is that a tariff concern or is it just a concern about the current administration? They expect now north of 10% inflation on a one-year time frame. Seems a little high. But Israel impacting oil prices is a truer immediate pressure point for inflation statistics as missiles fall on Iran. And while the price of oil did rise in dramatic fashion last week, it’s not yet a moonshot, which would take the closure of the Strait of Hormuz to get oil traders really concerned.
Kevin: Well, and I remember, it was about three decades ago, when the threat of the Strait of Hormuz being shut down, that was a huge threat to the global oil economy. But hasn’t the Saudi’s pipeline in Saudi Arabia changed that a little bit?
David: When I think about an effective day trade, that would be what you would see, because you’re talking about flows that are halted for a matter of days or hours. The Saudis have capacity via their east-west pipeline to divert flows to the west coast and avoid the Strait of Hormuz altogether. They move to the west coast about one and a half million barrels per day now, but they could shift as much as five, five and a half million that direction using the pipeline. So even in the event of an Iranian blockade, a disruption to flow would be for only a short period of time. That was the purpose behind building the pipeline. Remove a strategic choke point. In the past—I mean, you’d have to go back to the ’80s—it was a dangerous geographical choke point.
Kevin: Well, and another change that we’ve seen, and we really saw it during the first administration under Trump, was the impact that Shale has. And so the likelihood of the closure of the strait, plus where does the shale supply come in?
David: Yeah, that’s a big deal. And I think the other pressure point on Iran is they’re unlikely to close the strait because I think what they’d have waiting for them is a rapid increase in pressure from all quarters of the globe. 26% of global supply flows through the Strait of Hormuz, and so you’re talking about massive needs on a global basis. And if it did halt for any period of time, again, you’d have everyone on the planet up in arms. So should they opt for flow disruption, they would be inviting a massive increase in pressure from all over the world. And additionally, as you mentioned, US Shale was and is truly a revolution in global energy markets. It reduces the economic risks of Middle East oil in the event of even something like an embargo dynamic, which we also had going back to the ’70s and ’80s.
Kevin: Well, and there’s a lot of tensions worldwide. So the question that I ask is, we have war in the Middle East. Will it spread?
David: Yeah. Well, we have it now. Instead of it being theoretical, we have a war in the Middle East. Will it end quickly when objectives are met? Israel has chosen to focus on eliminating nuclear threats, they’ve targeted Iranian senior military leaders, they’re hitting oil refineries, which does not disrupt oil production, just domestically used refined products. And so thus far, the offensive has been about key people, key institutional supports, and key facilities buttressing their nuclear development.
Kevin: It’s interesting to see the strategy, how precisely it was thought out. I have a friend who was a general in the Air Force, and a couple of years ago he told me the real way to handle Iran is to have an overthrow of a regime that those people hate anyway, and I can’t name the person I was talking about, but this was a man who understood asymmetric warfare and had really gained his name in that area.
David: And I think Israel has been particularly sensitive to a global audience, and focusing on refineries, that made the short list. Production assets did not. Rebuilding Persian culture and reintegrating the Iranian economy into the global economy, it occurs much quicker if the oil fields and oil terminals are left intact.
So I think this is an important point. Because rather than foreign aid, energy exports are a perfect source of revenue to establish a new regime. If you’re looking at concerns about that infrastructure, it’s not from Israel getting more aggressive on that front. I would be far more concerned with Khamenei salting the field, so to say, destroying that infrastructure in a final spiteful act of revenge on the West, really on his own people. “If I lose, you lose too,” more than Israel destroying those assets. So a stable regime in the next chapter of Persian history, a stable regime, building wealth, supporting the populace. That’s optimal. Kind of like we had under the Shah.
Kevin: Yeah. Yeah, well, I guess we can’t go down that road, but the United States was behind the overthrow of the Shah and the overthrow of Batista in Cuba, so we don’t have to go there. But going back to the precision on Israel, they’re taking out military leaders, but they’re leaving civilian leadership alone right now because they’re hoping that the people will actually speak out and shift things over and really have a major political shift in Iran.
David: I think it’s worth noting that isolationists here in the US are right to be concerned about regime change because our track record is not great. We take out one group and replace them with another that ends up being suboptimal. I understand the concern, and of course there’s the fiscal concern, which I think is a bit of a joke because you count 37 trillion in debt, and it’s not like we have any fiscal conservatives, truly, back in D.C., so that’s a bit of a ruse, in my opinion, if you wanted to leave on the, “We’re not going to spend the money” or “We shouldn’t be spending the money” side of the equation.
The big surprise through the weekend was the unilateral nature of Israel’s attack on Iran. So far, Tehran’s Police Headquarters have been destroyed, along with its Intelligence Ministry, their Naval Headquarters, the Justice Ministry, their Air Force Headquarters. The Basij Headquarters also destroyed. That’s the arm of the police directly responsible for managing riots and protests, and is, again, I would say, one indication that Israel is interested in regime change, not just elimination of the facilities making nuclear fissile material. So remove the obstacles to the Iranian people reclaiming a voice, and you know what you have in the future, a very different social and political trajectory for the country.
Kevin: You were talking about the potential of the Ayatollah. It looks like he’s going to be ousted. You had talked about salting the fields. Remember when Saddam Hussein did that? Remember that, how he just lit up all the oil? It was meaningless destruction.
David: Yeah. So this is an interesting point in Middle East history, we could very well see the end of the Iranian regime with Khamenei, Iran’s supreme leader, ousted or targeted and killed.
Iran is at its most vulnerable state in decades, and although their retaliatory options are dwindling with the IRGC bases, with the air bases, with the air defenses already having been badly damaged, you could still see acts of desperation. That remains a possibility. And there are still missiles being launched and drones being launched, and a certain percentage still getting through. Tel Aviv has taken some pretty decent hits.
How the people of Iran respond is critical. They’ve been at inflection points in the past, but never with the opportunity to escape the religious extremism of the post-1979 regime.
Kevin: Yeah, I was in high school when the embassy was taken over in Iran, and that’s when Nightline started, Ted Koppel, and everybody watched the news. We’d stay up late every night, and we’d see day one, day two, day three, day 50, day 80 of the hostage crisis. But it was a completely different regime. Before that, it was a Western-leaning policy, and then, of course, we had radical Islamic fundamentalism after that.
What would prevent Netanyahu from finishing off the regime? Is there something that would stop that?
David: I don’t know. Pressure from the US, perhaps a Trumpian ego that would like to lay claim for peace in the Middle East. I don’t think Israel will relent till the nuclear program is a hundred percent dismantled, and since the current regime will never assent to that, dismantling the program is more or less implicitly the dismantling of the regime.
Kevin: It’s interesting, Dave when you go back and just look through biblical history, Persia was really not an enemy of Israel. Persia was where Esther, the Book of Esther, was. But Artaxerxes III is the one who sent Nehemiah back to Jerusalem to rebuild the temple and Nehemiah was his cupbearer, and Artaxerxes III actually gave him orders and protection to get that rebuilt. So what we’re seeing right now really is a first in history where we see Persia as an outright enemy of Israel.
David: Sometimes we think about propaganda and put it through a negative lens, but it is just a messaging of one group with a particular audience in mind, and there is an agenda attached to it. We’ve got the Israeli propaganda engine going. It’s running hard to convince the Iranian people that regime change is what they want, what they need.
From President Netanyahu: “To the proud people of Iran,” he says, “we are clearing a path for you to achieve your freedom. The nation of Iran and Israel have been true friends since the time of Cyrus the Great.” So, Kevin, to your point, this is a longer history than ’79 to present-
Kevin: Right.
David: He says, “The time has come for you to stand up for your freedom from an evil and oppressive regime that has never been weaker, this is your opportunity to stand up and let your voices be heard. Brave people of Iran, your light will defeat the darkness. I’m with you. The people of Israel are with you.”
Kevin: Wouldn’t it be nice to have a more peaceful resolution than have to resort to bunker busting bombs on nuclear facilities?
David: Yeah. Well, what does a nuclear deal accomplish that complete regime change does not more comprehensively affect? Sanctions of the last 20 years have merely slowed the pace of nuclear development, and have never ended the funding of terrorist activity on the part of Iranian proxies throughout the Middle East. The net effect of regime change—and I think this is very important—not orchestrated by D.C. is massively beneficial to global peace and massively beneficial to Middle East stability.
Syria has already shifted dramatically, fallen out of the Russian sphere of influence. Iran is even more critical if you’re thinking about the axis of evil, to lean on an old phrase. The Iranian people are not the targets of Israeli strikes, the regime, its nuclear program, and its resources geared for retaliation, those are the targets.
Kevin: Dave, years ago, I read a great book called Bullseye One, and it was about what Israel has done now three times. Okay, back in 1967, the Six-War was a preemptive strike on the enemies that surrounded them, but they knew they were about to be attacked in combination by the enemies, everyone surrounding the nation. That worked.
The next preemptive strike was on Saddam Hussein’s nuclear program in Osirak, and Bullseye One was about a what could have been a suicide mission of the F-16s that had to be converted to fly further, go in. It actually was almost a miraculous mission. And this time, this is a preemptive strike, so Israel doesn’t do it all the time, but they’ve been successful on the first two preemptive strikes, and I’m wondering, in this particular case, is this like Osirak?
David: I doubt, now that Israeli leadership has risked military retaliation from Iran and international ostracism, that they will stop until regime change is complete. This is not Osirak. It is more than a strategic preemptive strike. It’s a reshaping of Middle East power for decades to come, with the primary losers being China, Russia, Qatar, Pakistan—who, by the way, provided intel to Iran on the imminent attack—and, of course, the anti-Western block. They are the losers here.
Kevin: Well, Dave, we’ve just seen today that Trump is talking about domination of the Iranian skies, US domination of the Iranian skies. So the question is, when will America get involved, and are we already involved?
David: When you look at the nuclear assets, so to say, the question of whether complete elimination of nuclear facilities in Iran, if that can be accomplished without the direct assistance of the US, this is where ultimately you are going to need some assistance. Fordow is a deep underground facility. It’s inside a mountain. It’s a little bit like our Cheyenne Mountain. Our Cheyenne Mountain is the command and control center as an alternative to Washington, D.C., and it was designed to take a direct nuclear hit and still be functional. Fordow was not designed for that, but in order to neutralize it, it would require US GBU-57/B bunker buster bombs, and they’re so heavy they’re only deliverable via B-2 bombers. And so if elimination of Fordow is on the table, then you’ve got to have some cooperation—you’ve got to have major cooperation—from the US. So Trumpian ego is such that if history is being written in the Middle East, he may require an attribution, so there are some limits here.
Kevin: I remember when Schwarzkopf was interviewed after the first Persian Gulf War, Desert Storm. He had actually designed the entire battle plan two years before. And Dave, even a few weeks ago, you had talked about, they were moving more B-2s into the Middle East, here on this Commentary, if you recall. So these things don’t come as as much of a surprise as it looks like on the news. But if we were to see bunker-busting bombs from B2’s, is that something that the president can do without congressional approval?
David: No, he would need to have congressional approval. Or to participate directly with Israel you could look at UN participation. So outside of UN sanctioning of the action—low probability, because if you look at the constituents on the permanent members of the, “Security council,” including Russia and China, really not going to happen. So he would need congressional approval.
And there are plenty of isolationist legislators that I think, from this standpoint, can’t really think from a macro perspective, seeing the benefits of a positive shift in the Middle East and a positive shift in terms of a major antagonist on the world scene becoming a historical footnote. A change in Iran of a political nature is game-changing, not only for the Middle East, but for the whole global chessboard. Maybe that is why Netanyahu was suggesting intelligence that Iran had plans to take Trump out. On Sunday he was in a Fox interview, and he said, “We have intelligence that Iran planned to eliminate President Trump.” Is that sufficient for Congress to approve an act of pre-emptive self-defense? That’s the legal category that it fits into. Would Congress get behind an act of war? Israel will push in any way it can to eliminate Fordow. It has to happen—that is, if your goal is ending Iranian nuclear ambitions. Anything less is appeasement, at least the way I see it. It nourishes a global insecurity which lies at the heart of our habitual dependence on the military industrial complex.
Kevin: Over the last couple of years we’ve seen an awful lot— Well actually, I could even go back a decade or so. We’ve seen some pretty creative ways in which enemies have fought each other. Okay, we talked about that tunnel from the Russian side over to Ukraine using a pipeline. These guys took days to get through it. Then we had the drone strike a couple of weeks ago where, literally, shipping containers were in Russia taking out their bombers. But do you remember when the Iranian nuclear facilities were disrupted based on a software glitch that had been programmed years before by Siemens into the software that they ran? I’m wondering, Dave, could it be that we don’t need B2’s? Is it possible that we could see something that we’ve never thought of before that would disable the nuclear facilities without bunker-busters?
David: Yeah, we’ve seen some pretty unique things in 2025, weaponizing cell phones and pagers, weaponizing logistics. Maybe Mossad has prepared something different that doesn’t require the B2s. Is anything off the table? I hope so. We do have the possibility, and this is just theoretical, Israel using a limited nuclear strike on Fordow. Pakistan has already said that if Israel does—someone else is obviously acknowledging this possibility, Pakistan to be precise—they’ve promised that they will respond using nukes on Israel. So then you’ve got the daisy chain problem. And of course, the international community would make Israel persona non grata forever for using nukes. But taking out that facility is the final blow to the Iranian nuclear program.
Kevin: Whether you like him or don’t like him, Trump is a deal maker. And he wants credit for a deal rather than a war. I don’t think he wants to be known for a war. He loves making deals. He’s talked about all the deals that he’s had in the past. So it seems to be that he’s at a point where he would like to see that happen with Israel and Iran, don’t you think?
David: Well, for sure, particularly since he dismantled the Obama deal. And if he could be a part of introducing a more significant, more comprehensive, more effective deal, one that doesn’t have an expiration date on it, then I think he would love to be a part of that. The previous deal was just basically buying time, and there was a certain allowance, five years, of not producing a certain amount of fissile material.
Trump seems at this point to want a deal between Israel and Iran more than anything else. We don’t know if he’s posturing and remaining at a distance from their actions to maintain plausible deniability. Remove the last primary threat from the Middle East, and with Russia running out of men to move to the front lines—in fact, this week, bringing in more North Koreans because they’re running out of Russian fodder—the US could pivot most effectively to Asia.
And of course, that pivot was set in motion under Obama, with our strategic focus being much more Asia and China specific. But if you could remove Iran as a threat in the Middle East, and, as I say, Russia running out of steam in Ukraine, a US pivot to Asia is interesting. It allows for a concentrated and focused effort on Chinese containment, which has been the stated goal from Obama forward. So Iranian exports of oil, if you’re looking at another chapter in Iranian history, Iranian exports of oil could be increased over time. We’re sitting at about 3.3 million barrels per day. It peaked at about 6 million barrels per day in 1974. And so working back in the direction of 6 million barrels per day, those revenues, along with foreign direct investment from European and American firms, which would be unfettered and no longer subject to sanctions, would radically transform the Iranian economy. So lessons from the past, just don’t let the US State Department interfere in Persian politics. We created this monster in 1979 and 1980 with the US orchestrated ouster of Reza Pahlavi.
Kevin: Yeah, I remember when I came to work for your dad, one of his favorite books was written by the Shah of Iran about the Western overthrow of his, was it a kingdom? It was a monarchy, wasn’t it?
David: Yeah. So The Shah’s Story was the title of the book, a tough one to find, but worth a read for bringing some balance to what occurred and what the history was. And the nub of it is this. You’ve got a father and then a son who were very interested in developing light rail, very interested in developing a nuclear energy program, which the US was the sponsor of, by the way. And they were developing a very robust economy. The problem was he had nationalist leanings. Imagine that, someone prioritizing—
Kevin: Their own nation?
David: —their politics and a domestic audience over the international will, or really, the US State Department and CIA’s will. And he became unusable. And they figured that Khomeini would be more usable. And that was a major mistake.
Kevin: A little like our friend Bill King would ask, “How’s that working out for you?”
David: Right.
Kevin: So let me ask you, on working out, do you think the financial markets are prepared to move on right now?
David: Yeah, I think they are, at least that’s the way they’re behaving at present. And is that because statistically the oil price would’ve to double in order to threaten a global recession? Maybe they understand that. Is it because the East-West pipeline in Saudi provides the assurance of oil supplies that allow for circumventing the Strait of Hormuz? These are things that may reasonably hit the minds of investors to say, “This is not truly terminal crisis.” Maybe it’s because Wall Street traders are attempting to be geopolitical analysts and have concluded that looking through the current chaos we can start pricing in a healthier global landscape sans Iranian radicalism, or maybe, and this is just because this is this week, maybe this is options expiration on Friday.
Kevin: Maybe it has nothing to do with geopolitical events.
David: Yeah. We’ve got the Fed meeting this week. Do we end up with Fed acquiescence on interest rates? We just had another benign inflation report. That’s in the bag. The S&P is trading near psychological—depending on where you look at it—either resistance to the upside or support to the downside, right at around 6,000, only about a hundred points away from all time highs. Is it time for traders to fight for a breakout and a takeout of those old highs?
A move lower in interest rates could be highly stimulative to investor sentiment, if nothing else. And with the volume of options trades maintaining close to record levels, there’s more than a few shekels at stake this week. So if you look back in time, you can see how the options market has become so much more significant, short-term speculation in the markets versus long-term buy and hold with an equity position. 2015 average daily options volume was about 15 million per day. By 2020, it had doubled to over 30 million, and at present it’s over 50 million options contracts a day. Big days actually coming in closer to 60 million. Expirations become more consequential with scale, and of course there’s been a proliferation of leveraged vehicles which facilitate retail buying of those leveraged positions. So retail exposure is at a peak.
Kevin: One of the things that seems to have changed since the global financial crisis, Dave, especially over the last five or six years, is we’ve really been conditioned to be risk-on. In other words, just go take the risk. We hate it when it’s risk-off. I don’t know if the markets were always this way, but from my memory, memory serves that the central bank sort of created this psychology that things are always going to get better. Okay, yes, you can be fearful today, but tomorrow it’s going to be good. Risk on. Risk on. I’m wondering, investor psychology, at that kind of leverage, you’re talking almost 60 million contracts a day on highly leveraged options contracts. That sounds to me like the psychology of the public is going to be craving risk-on.
David: Well, I think underappreciated are those once in a blue moon events where events become bigger and spill over, whether that’s geographical spillover or, in the case of the global financial crisis, expand into other asset classes.
When you look at Mideast conflict over the last several decades, what has been more often the case is that you have days or weeks of panic followed by days or weeks of recovery, and very quickly you can see it all in the rear-view mirror. And anyone who panicked is kind of the fool for playing the risk-off game, because in the long run being risk-on and having a bias towards being long and strong made more sense. The exception of the rule was during the oil embargo, which stretched beyond weeks into, I think it was close to 1,400 days. So there are these events, whether it’s geopolitical or, in the case of the global financial crisis, really focused on economics and finance, where it can become a bigger issue.
That’s where issues of contagion, issues of being over-leveraged, forced unwinds of leverage in the system, that can take on a life of its own. One of the things to be aware of is this habituation of quick resolution to even what seems could be a worst-case scenario. And so we have a pattern of behavior which is: don’t panic, everything will be fine.
You never know. Is this the exception to the new rule of quick resolution because of central bank intervention or because of a policy shift, or because people sit across the table and start having a conciliatory conversation? Risk-on and risk-off are the net effects of investor psychology being swayed by various inputs.
Investor psychology is a critical element in market performance, more now than in many decades. You have in the last, let’s call it three years, politics and geopolitics becoming the drivers of economics and, by extension, financial markets. And yet most people in Wall Street, when I say they might find themselves underprepared or not appreciating what this can become— Wall Street traders typically use policy-agnostic economic models. They’re not thinking about political economy. They’re not thinking about trade dynamics the way that we’re seeing them put on display by the Trump administration, where it takes on a geopolitical aspect. They’re using, again, these standard economic models for allocating assets, which could leave them in a real bind. One of the things we talked about quite a bit in our meeting today is how many of the giants of finance today—
Kevin: Jamie Dimon.
David: Jamie Dimon. Paul Tudor Jones.
Kevin: Paul Tudor Jones, yeah.
David: Yeah. Jeffrey Gundlach. Mohamed El-Erian.
Kevin: These are the big bond boys. Yeah.
David: They are. Where you see the most acute concern being expressed is not from equity traders. It’s from folks who have an insight in and through the lens of the fixed income market, through the credit markets. Their concern is, we’re going to have a problem in the bond market, and very different in most risk-off environments where you would move to bonds to get out of risk assets. They’re basically saying, “Watch gold. Watch silver.” Which is a fascinating bit of commentary when you think about fixed income guys, who are usually not really interested in hard and tangible assets, saying, both from the standpoint of “watch them because they’re an interesting tell,” but some of them have even gone so far as to say, “shift your asset allocations in the direction of hard assets” because these changes within the fixed income markets are their own version of catastrophe.
Kevin: Yeah. The US Treasury bond is no longer the flight capital preference. It’s now gold, is what they’re saying.
David: Right. And that’s evident in the price. It’s evident in the traffic flows. We talked last week about the breakout in silver. I think silver, more than even the gold market, is your tell for the Western investor finally saying, “Maybe we do need some version of a Plan B.” What is our best way of navigating the days, quarters, years ahead where volatility is normal and where uncertainty becomes what you get—
Kevin: The norm.
David: —every day. It’s the norm, whether it is geopolitics driving economics, or it is economic statistics. The World Bank just lowered global growth estimates for this year by another half a point. What is it that creates uncertainty? There is a reason why hard and tangible assets make sense, and the audience continues to grow. Watch the silver price over the next couple of months because it’s going to tell you a lot, a lot about how eager the Western investor is for a Plan B.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at mcalvany.com and you can call us at (800) 525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
