The 1963Macro Iran Series has been tracking the conflict since before the first projectile was released in 1Q26. In the course of this analysis, many criticisms of the United States administration’s approach to the conflict have been rendered — with most of those critiques aging well. It would be easy, based on that commentary, to assess that the United States will fail. Or, at best, that it conducted a seemingly haphazard campaign aimed at “solving a problem” that previous administrations didn’t want to address or prioritize. Viewed that way, the current administration at minimum put forth significant effort toward solving the “problem” that has bounced around the American media landscape for decades — even if victory is billed as elusive or unobtainable based on much of the legacy media’s coverage of the conflict.

It is here that I need to be plain before we pivot ahead of your mainstream news cycle. I am an American. America is an institution, not a person. It is the bastion of many things. I will criticize American leadership without hesitation as my interests lie in the broader wellbeing of that institution - not a single person. Plus, when you do Capital Markets, what matters is “what is” — not what someone says it is or wants it to be. On that basis, this Bayesian Brain followed the data where it led and for much of this conflict it led to a negative outcome for the United States and allied nations. I share this as a frame, context, and also as a takeaway for you as a valued reader: set your ideology aside and follow the data and reality if you are attempting to accurately assess outcomes on a probabilistic basis. Challenge your thesis. Be comfortable with outcomes that aren’t what you want when you can’t do anything about it. See the stage as it is, and not in a vacuum or through the lens of desire.

We’ve done that here and we did it up front. The base case that any deal is null absent it directly occurring with the IRGC has held up for six months — and holds today. There is no credible or OSINT reason to believe that it will change, now. The IRGC is exceptionally resilient, deeply religiously motivated, and will endure significant suffering to ensure their mission is not ended - Iranian people be damned. This is what made President Trump’s optimistic remarks, ongoing social media warfare, and misdirection all symptoms of a failed strategy. The IRGC isn’t going to buckle because of an AI generated image — and they have not. Plus, President Trump has effectively torched his credibility on the topic of Iran for thinking people or close observers. That isn’t good for any politician when analysts have to read way around the bend and discount the “leader of the free world.”

However, remaining disciplined to process, just as we have highlighted perceived operational blunders we have to acknowledge when the landscape has changed.

It has.

The United States, for all of the approaches it has taken, now holds the upper hand on the waterway that has defined this war. No, it does not have a “full open Strait of Hormuz”, insurance is not peacetime. and definitional “freedom of navigation” has not been restored. What it does have is control of throughput under protection: ships are moving, volume is rising, and Iran’s advertised “closure” is no longer the binding constraint. Iranian coercive control of Hormuz has been dramatically eroded. With continued U.S. engagement, that control is dying. That is now the board. And all of that got laid bare this weekend by the Iranians.

Here is what I mean by that, and an assessment of go-forward implications:

On Sunday, it was revealed that the U.S. conducted drone strikes on two IRGC missile launchers. These launchers were reportedly laden with mines that would be launched into Hormuz to reclaim the mine deterrence that the U.S. stated is eliminated. We won’t know what the intel was that led to this strike likely soon if ever, but it is the Iranian response that is the tell.

To begin, Iran has never denied attempting to lay more mines in Hormuz with these projectiles. Nor have they denied laying mines in the first place. The mine threat then is known-to-be-real, so a U.S. strike to thwart further activity of that ilk fits all observable patterns. A one-off U.S. strike to thwart further Hormuz disruption is not only exhibit A in the standard U.S. air-based playbook, but also matches reported threats.

Iran retaliated quickly but also in a more-or-less “equivalent” manner. The drones were allegedly launched from Jordan, so U.S. assets in Jordan were targeted, along with U.S. naval assets near Hormuz. Reportedly, those strikes had minimal impact. But, whether direct hits or duds, the direct Iranian retaliation stopped there. This is a tell.

Alongside that, the U.S. is now stating that nearly 7 million barrels per day of crude has been flowing out of Hormuz as a recent average — Strait volumes only, no workaround. That figure is consistent with the trader and official band of the last several weeks, and the direction of travel is up - all brought to you by U.S. air cover and defensive measures. In part, this is substantiated by what reads as nearly 24-hour USAF airborne refueling missions over the Gulf of Oman or the Persian Gulf over the course of the last month, paired with occasional sightings of an E-3 Sentry, drones, and what has been “normal” airlift activity for the conflict. The U.S. has been escorting ships out, and not a small number. This is why over a week ago, this publication noted you can stop counting Hormuz traffic for the moment. Traffic is flowing.

When the East-West line to Yanbu, Fujairah, and the SUMED path are included, collective Gulf crude reaching the market is closer to three-quarters of pre-war flows. Coupled with SPR draws and supply growth elsewhere, NATO-aligned nations are more-less serviceable on crude at the moment. Distillates are another matter, and that is not entirely a Hormuz story in its current state. The energy picture isn’t “all clear!”, but it is very far from “the U.S. failed and we are out of oil”.

Those claims were further backed today by the acknowledgement that a USAF F-35 that was actively providing air cover to ships transiting the Strait in the last 24 hours was fired on by an Iranian SAM. That both the U.S. and Iran acknowledged this point is another tell. It means that the U.S. has been providing air cover, and that Iran is shooting at that air cover — now. However, Iran had not been shooting at aircraft for some time, which suggests a capability problem — not a desire problem. The last round of U.S. strikes plowed the field to allow for U.S.-escorted transit of Hormuz by materially degrading the denial network such that Iran couldn’t strike ships or U.S. assets as effectively. Iran still put a few projectiles on ships during daylight hours or the few ships it could identify, but nowhere near hitting all of them. This combination of air cover and degraded Iranian missile or targeting capability likely led to a relatively quiet military operation providing escort and cover for crude-laden vessels — and it worked.

That is not an open strait. It is U.S. control of shipping under protection, at a volume that makes Iran’s claim of ownership demonstrably false. The Strait of Hormuz is no longer under full Iranian coercive missile control, and if present pressure holds it likely never will be again.

On the nuclear file, the United States retains optionality to drop extremely powerful weapons of its choosing on Iranian nuclear sites — just as it has already done multiple times. This does not mean the U.S. is preparing to use tactical nuclear weapons — a claim that is entirely fabricated by the media and not supported by any operational fact or observance. While this may make some people recoil, planning requires the understanding of all options on the table. That doesn’t mean you use all options, it means you have them. President Trump in this case, then, is right: we’ll address the nukes one way or another. For the moment, that file is largely entombed under a significant amount of rubble and constant sentinel coverage from Space Force, but “entombed” is not removed. The residual 60 percent stock and whatever centrifuge sets were moved before the winter campaign are the asterisk, but likely are not a sprint underway. If reconstitution were imminent, it would be struck or Israel would be saying so in public. It is not. The nuclear file is not closed but instead set aside as Hormuz and regime pressure become the primary focuses of U.S. and allied action.

Negotiation, then, yielded precisely the outcome that we have tracked for months: nothing. It was never going to. We won’t rehash what has been sliced many ways and lived to tell the tale, but instead simply note that President Trump has eschewed further negotiation, Iranian President Pezeshkian has effectively been silenced in his ability to speak of the hardships that should push the regime towards the negotiating table, and in a move that had the effect of chilling the civilian leadership diplomacy talk further, the IRGC abandoned surrender by attempting to re-mine Hormuz as outlined above. Pezeshkian still can’t make a deal unilaterally, and the IRGC still sees any deal as removing its power and coercive control. The IRGC is correct in their assessment of what a deal means. Thus, we do not have one, despite economic challenges.

Those economic challenges are now being exploited via Treasury Secretary Bessent and “Operation Economic Fury.” Secondary sanctions enacted, extreme threats levied globally, and a call to entirely cut off any economic activity with Iran or IRGC-related entities or people. Said plainly, complete denial of access to the dollar system. This pressure comes as Iran experiences high double-digit inflation, shortages, and meaningful isolation. The blockade adds the layer of primary income shuttering, further compounding the regime’s economic and internal woes. For Iran, it also means that any destruction absorbed becomes harder to rebuild, forces prioritization of the IRGC over the people, deepens the infrastructure hole that will now take decades to dig out of, and removes the benefit of FDI to help improve their energy production or broader economy.

This is economic strangulation when taken together with the blockade. Bessent does not appear to have fired his larger projectiles toward China aside from Hong Kong to date. That is less of a hole than it looks as a large share of the China money was oil exports and payment. Those loadings have largely been cut off by the blockade, so aggressively targeting Beijing does less work than it used to when the physical flow is stemmed at the gate. The United States has already signaled it knows where the remaining dollars live. That is unused optionality and creates deterrence if Tehran believes Washington will use it - a question that has not yet been answered.

Regionally, the tone and alliances have tilted against Iran. The Mecca Defense Alliance raised the cost of a direct IRGC strike on Saudi energy or territory. The MDA creates a scenario where Iran would theoretically have to address not only the Saudis and the U.S., but also Turkey — which has the second-largest military in Europe — and Pakistan. That pact is a threat today, not a completed tripwire. It has not priced the proxy channel to zero and Iranian strikes remain a significant threat that the IRGC may be wise not to test via state-on-state action. Do not forget the second motive: Erdogan would prefer the IRGC sequestered to Iranian territory as he seeks to spread Turkish influence in rebuilding Syria - a desire likely shared by the U.S. administration and to some degree, GCC countries. The net impact is that the largest oil producer just put a price on its energy apparatus that is expensive for the IRGC to buy if they are thinking practically. That weakens the largest piece of leverage the IRGC has left — using their missile and drone magazine to spread economic pain via aggressive attacks on GCC energy infrastructure. The boomerang now comes back around with increased mass.

Lastly, Iran’s internal temperature is warm if not hot. The majority of the Iranian population is facing material economic problems. These problems sow unrest as a not-inconsequential portion of their population are not religiously motivated — these are people who are trying to hold a job, feed a family, and keep a roof over their head - goals that are universally understandable by a huge swath of the humanity. None of that says endure extreme hardship so that the IRGC regime who has you in this position can keep you there. Iran has responded by executing “dissidents,” effectively forbidden dissent, and the Supreme Leader’s statement covered in a separate 1963Macro piece codifies unity around IRGC and the Supreme Leader’s priorities as clear and non-negotiable. Clamping down harder is the sign of a regime under stress or incapable leadership, not one who is in control and has earned genuine, broad-based support of its people. Genuine support is hard to penetrate, contrived obedience, less so.

On leadership, the United States and Israel did take the top of the chart. Go two layers down in any corporation, tell a junior VP they are now CEO, and you have problems. Seats got filled, sure, but that does not mean the machine functions as it did. That isn’t about Iran. It’s how organizations work. A degraded command can still fight. It typically cannot fight as the original org chart fought, at least for a period of time.

Taken collectively, the United States has wrecked Iran’s economy, degraded its conventional military, stripped two layers of leadership, broken cheap coercive control of Hormuz, put a regional defense pact on the table, created material internal problems, and left the negotiating table after it became clear negotiation simply was not going to bear the desired fruit — and it never was, as we have discussed.

So what’s the proof for all of that? Iran’s response.

Iran fired a relatively small salvo of missiles in response to the U.S. strike on the mine-laying missile launchers over the weekend. That is a major tell. Iran did not broaden strikes against the UAE, Qatar, or any other GCC member beyond Jordan. Earlier in the conflict, Iran would regularly fire missiles at any country it deemed “out of compliance” or “aiding The Great Satan.” No more. Iran’s economy is destroyed and it will factually take decades for them to rebuild in current state — if ever, absent material changes. Their ability to project power beyond missiles and drones is now effectively eliminated or sequestered when thinking regionally. The strategy of holding the GCC nations hostage now bears a very significant escalation cost. The U.S. owns Hormuz under the surface with submarines and UUVs. Space Force tracks everything in extreme amounts of detail (which is more true than most appreciate). Iran is simply not in a position to escalate when thinking all-in if their goal is to retain a functioning society. The United States, for as messy as the media and negotiation process was, now has Iran cornered and is winning this engagement in a notably decisive manner. Higher gasoline prices with mildly elevated inflation is the price Americans pay, but that price is absurdly low relative to the costs borne by the Iranian regime.

So why isn’t this conflict over then? The answer is simple: The IRGC is almost certainly not going to surrender. Period.

And that is seriously dangerous.

The IRGC is likely now in full-blown regime survival mode. If you’re the IRGC, gas lines, losing a couple of missile launchers, shooting some dissenters — these are annoyances when all of your remaining resources are going to fight the severely losing battle against the United States and allies. If Iran increases costs on the U.S. or allies, those costs will come back to them multiple fold — the framework to ensure that’s the case is active right now and immovable from Tehran’s perspective. Turning to history, regimes that have faced this position have two options: fold entirely, or fight to the point that defeat is undeniable. It is likely they choose the path of aggression, because it’s their only hope.

Strategically, Iran can attempt to turn the tide now by making the cost of the conflict too expensive, politically radioactive or problematic, or too stagnant to amass material support for continued Western pressure. This means attacking GCC energy, U.S. ships and bases, activating proxies against GCC members, unleashing cyber attacks, and activating cells or attempting to “globalize the Jihad” in an effort to push the United States out of theatre, allowing Iran to rebuild with (likely) Chinese and Russian backing in the absence of a U.S. Gulf presence. These levers remain intact or partially so. However, their coffers are nearing tank-bottom, their oil exports are running dry, and their ability to compensate combatants and fund kit is facing headwinds. War is expensive and breaking the bank mid-conflict is a problem. They are simply not in a position to finance a lasting offensive without creating other, significant problems despite their religious motivations to do so for any cost at the leadership level.

That’s the Western mind talking. In practice, the IRGC has shown it cares zero about any of the aforementioned headwinds. This is regime survival. In this scenario, being broke, broken, or having your disarmed population hate you remain annoyances, not reasons to stop fighting. Said another way, being broke can be temporary, being destroyed can be rebuilt, but being removed from power is lasting. The IRGC mission of safeguarding and pushing “pure” Shia Islam globally into perpetuity outweighs pain when “short term problems” could mean decades — which is meaningless when thinking on the scale of hundreds or thousands of years.

So, despite the U.S. being clearly ahead in this conflict and still retaining kinetic, economic, and diplomatic optionality to squeeze Iran harder if it so chooses, the IRGC likely remains defiant and more conflict is ahead, absent material changes in their calculus regarding what their role would be in the world and inside Islam going forward should they accept a deal - a deal that is likely beneficial for the Iranian people, but deeply damaging to IRGC ideological goals.

Perhaps this leaves us with a mixed message. On the one hand, it is objectively fair to say that the United States has conducted a successful operation using a varied toolkit to put Iran in this position. On the other, “victory” does not exist while the IRGC still holds the decision to keep fighting. In practice, the IRGC can hold this position for some time absent further U.S. escalation — or they can see the squeeze coming and act. That action may come sooner and more aggressively than most appreciate.

From here, the next steps will be decided by Iran. The United States seems to be chiefly concerned with Hormuz traffic, so we will likely continue to see U.S. presence near and around the Strait for the duration of this conflict if not for years to come. However, if Iran is as serious about Hormuz leverage or expelling the United States as it has stated it is, it will have no choice but to fight more, take more risks, escalate beyond its borders or the region, and accept that their attempts at increasing cost will almost certainly boomerang — but all of that is not nearly as big of a deal as when might think when the alternative is the elimination of your regime.

The United States has unused levers it could pull much harder and, as of this writing, has not. That is not absence of control, but is unused capacity. Iran faces regime collapse pressure and will likely eschew that pain for survival. That does not mean the U.S. isn’t winning. It means Iran is desperate. Desperate times call for desperate measures, which is potentially dangerous in a scenario such as this conflict.

Next time you see a headline that says the United States is not in control, has mismanaged this conflict, or doesn’t have options — you can solidly discount that as partisan uninformed noise. When Iran says it controls the Strait, that is also now demonstrably false. The U.S. can move ships at decent volume under protection. That is the upper hand, and it is gaining ground.

On the flip side, just because the U.S. is in that position does not mean this is over, nor does it mean the IRGC is unwilling to use the tools it has left to continue the fight for its — not Iran’s — existence.

Taken together, we should expect some form of escalation that likely starts somewhat small, and then we will find out if the IRGC is willing to fight existentially.

If that aggression expands, all sides may end up realizing that negotiations, deals, and normalization was the better path all along.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

Yesterday, Iranian Supreme Leader Sayyid Mojtaba Hosseini Khamenei issued a notably lengthy statement via official Iranian channels with the full statement included below this article. Supreme Leader Khamenei has issued many statements since assuming his role earlier this year following the death of his father in coalition airstrikes. This particular iteration arrived on a religious calendar date, which is not an accident, but it was not consistent with historical, routine holiday greetings. It was long, inward-facing at the decisive points, and it carried a message that aligns with what this publication has tracked since before the conflict began.

Specifically, the statement opened with the following:

“Muhammad, the Messenger of God, and those who are with him are firm against the disbelievers and merciful among themselves” (Holy Quran 48:29).

That verse set the table for the balance of the announcement, which called for unity among Muslim nations and particularly those in West Asia:

“The solution to the Islamic Ummah’s problems lies in maintaining unity, friendship, and cooperation in the pursuit of goodness and virtue. The criminal rulers of the US and the illegitimate Zionist regime are the sworn enemies of this unity and friendship. They aren’t just the enemies of the Islamic Republic, the Iranian nation, and the vast front of Islamic Resistance. Rather, they hold an enmity toward the entire Islamic Ummah, including the nations in West Asia and North Africa. In this regard, not even the rulers of these countries – many of whom are considered to be their allies – are exempt, and the blatant disrespect and derogatory remarks of the leaders of Global Arrogance directed toward certain leaders of Islamic countries are still fresh in your memory and ours.

The important lesson of unity and avoiding discord is the first lesson of the school of Islam on the discussion of how to deal with friends and foes. But the second lesson is to defend one another against disbelief. And the third lesson includes various forms of cooperation and synergy in the diverse material and spiritual spheres of Muslims’ lives – in terms of wealth, security, science, and progress. The ultimate outcome of this will be the attainment of the New Islamic Civilization.

Therefore, the Muslims’ unity is the main cornerstone for achieving an exalted, triumphant Islamic civilization. This conceptual, intellectual package – in which our aspiration for the Islamic world resides – has materialized in our dear Iran to an acceptable degree. Once again, this humble servant’s recommendation to the entire nation is that you mustn’t allow any division whatsoever to emerge between you.”

In essence, these comments advocate unity across the Muslim world such that aggressors, or “disbelievers,” are no longer a threat to the goal of a “New Islamic Civilization.” Calls for unity happen often, globally, which can make the statement look unremarkable when read in isolation on a holiday specifically intended to sow unity. The referenced themes are also not new, and have been repeated in various forms for years. What makes this statement notable is the context, the timing, the length, and what the words suggest in practice against the current backdrop.

Background before we go further. Unity Week messaging is a familiar instrument in the Islamic Republic. In ordinary years it is typically a relatively compact greeting: congratulations on the Prophet’s birthday, the same Quranic pairing of firmness toward outsiders and mercy among Muslims, an appeal to shared ground between Sunni and Shia, and generally combined as a call for cooperation among Islamic states. The political content is usually present, but it is brief and conventional. Yesterday’s letter used that wrapper and then kept going. It interrogated Gulf rulers, named the United States and Israel as sworn enemies of Muslim friendship, walked through defense against disbelief as a standing duty, and closed by telling Iranians not to allow any division among themselves. That is the signal. The holiday provided the platform.

For weeks, Iranian authorities have worked to keep the domestic picture as orderly as possible, treated shortage as a test of resolve, and to hold public support together by framing endurance as strength. This letter fits that messaging. A short blessing would have been enough if the only task were the calendar, but he went further because the regime’s problem is not a lack of holiday language. The problem is a public being asked to treat empty pumps and collapsing purchasing power as proof of righteousness, while visible civilian officials continue pointing at the cost of resistance.

To wit, the statement came as President Pezeshkian has been unusually blunt about Iran’s economic problems over the prior weeks. He has publicly called out fuel shortages, inflation running in the high tens of percent with staple prices in some cases near or above a doubling, severe currency devaluation, and the inability of residents to meet basic needs, and pushed hard for a return to the “MOU” or further negotiations. We have covered Pezeshkian’s path to office and the circumstances of his ascension, and we have wondered if the IRGC now regrets backing a more moderate public face to ease internal tensions, only to watch that posture rebound into open talk of ending hostilities, negotiations, and deals that would leave the Iranian people materially better off while reducing the IRGC’s room to operate consistent with their desires both inside Iran and around the region.

Parliament Speaker Mohammad Bagher Ghalibaf has also been vocal about the economic war the public is living through. He is not a second Pezeshkian. He is an establishment figure with IRGC roots, and his recent line has been that livelihoods matter and that officials should heed the Leader on unity. That combination still matters. When the president talks openly about pain and a deal, and when other visible officials are forced to acknowledge the same wreckage, the IRGC is left managing a story it can no longer fully seal. Despite the rhetoric over time, the thing the IRGC tends to fear most is its own population. The security-ideological core is a minority of Iranian society. The balance may be Muslim, or largely so, but many care more about being able to eat, find work, get fuel, and live with some security. Civilian officials know this, and their statements speak to those needs. The hardline core is not indifferent to those needs so much as it is more committed to regime survival and long-term IRGC causes. That creates a mismatch in how much pain each side will tolerate, and the gap widens when Iranian leadership says out loud that negotiation, not more endurance, is how people get bread.

That is why the Supreme Leader’s letter should be read with the rest of the week, not as a self-contained sermon. A separate Government Week message had already declared that anything detrimental to social cohesion was prohibited. Executions of dissenters and protesters have been underway for months, and they remain the reminder that “division” is not a metaphor. The Supreme Leader then capped the line in the only form still available to him: a long signed text that names the external enemy and tells Iranians not to allow any division among themselves. His message did not need to go as far as he did if the point were only the Prophet’s birthday. The extra length, in this case, was is aimed at what is actually stressing the system.

Why does this matter?

Plainly, it means the IRGC is doing precisely what we have discussed for months: digging in, remaining defiant, placing ideology ahead of near-term monetary relief, and tightening on those who dissent from the leadership’s perspective. Now directly from the Supreme Leader.

It also means diplomacy is de facto dead as a public path, even if some channel can always be kept open in the dark. The United States has rebuffed Pezeshkian’s latest commentary regarding a return to the “MOU” for a simple reason: He cannot unilaterally close a deal. He has no standing to bind the people who hold the guns and the veto power. His “pursue diplomacy” stance is now almost impossible to advance without saying why the fight is failing, and saying that is precisely what the new unity line treats as aid to the enemy. You cannot argue for a settlement without arguing that more war, more blockade, and more “strength” are not working. Under this message, that argument is the crack they have forbidden.

The effect is subsequently chilling by design. The Supreme Leader’s statement, and the orders around it, do not have to indict the president in order to constrain him. They only have to make division the unforgivable category, making further discussion of talks, deals, or peace that is not found on the IRGC’s terms politically toxic. Logically, that is the point: keep internal disagreement from widening, and keep a broader rupture from arriving.

Putting the pieces together, recall that last week President Trump said negotiations were “not happening” and that diplomacy was effectively dead. Pakistan and others tried to hope early last week regarding “progress” toward negotiation, but by midweek those words looked hollow. A deal would still be better for Iran and for the world financially, and better for regional peace, but it will not be accepted if the result is that the IRGC cannot continue in current form. The room for a negotiated settlement therefore becomes narrow at best, and non-existent in practice unless the security core can sell the outcome as the other side’s submission. President Trump and other administration officials appear to have acknowledged this before the Supreme Leader issued the most recent statement, which suggests that while the comments came yesterday, the understanding had been building for some time.

This all brings us back to our base case. Any deal that works in practice has to be made with the IRGC and the apex around it, because they hold the functional levers of power inside Iran. President Trump gave material time for diplomacy, and on review also provided ample room for the more moderate civilian voices to work both publicly and privately inside Iran and round the Middle East. The aim, it appears, was to move the needle toward an agreement that would leave the IRGC without coercive influence over the region, the Strait, proxies, or other aligned causes. In exchange, Iran would have received significant compensation, sanctions relief, and likely FDI to help rebuild and improve the economy for the Iranian people. As we have tracked for months, money is not the sole motivator for the IRGC as operating in that manner is in conflict with their stated purpose, mission, and goals.

For those of us who observe the conflict, we can reasonably take the perspective that diplomacy is not going to be an available lever in the near term. That does not mean we return immediately to full-scale conflict. However, it does suggest that whether the next move comes from Iran or the United States, the stalemate will likely have to be broken by breaking something, leaving this conflict far from resolution absent a material change in position by the Supreme Leader, his advisors, or IRGC leadership.

None of which currently reads as high-probability.

The full text of Supreme Leader Khamenei’s statement below for reference in italics.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

Full text of Supreme Leader Khamenei’s statement:

“In the Name of God, the Compassionate, the Merciful

“Muhammad, the Messenger of God, and those who are with him are firm against the disbelievers and merciful among themselves” (Holy Quran 48:29).

I extend my congratulations to the noble nation of Iran and the great Islamic Ummah on the occasion of the auspicious birth anniversary of the Great Luminary, the Noblest of Creation, the Radiant Lamp, God’s Chosen One, the City of Knowledge, the Mercy to the Worlds, the Honorable Messenger of Islam (PBUH), and the auspicious birth anniversary of his pure and virtuous child, the definitive Proof of God, Imam Ja’far Sadiq (PBUH).

From the moment the sun of the Last Prophet’s existence rose in Holy Mecca, the horizon of human salvation, which is contingent upon perfecting servitude and obedience to the Exalted and Almighty, gained a renewed brilliance. The souls of the prophets, the angels of God, and the holy ones were immersed in joy, while the devils among humans and jinn bit their fingers in rage, regret, and sorrow. This was because the greatest of God’s creation throughout all the countless realms of existence had stepped on the earth, soon to be vested with the mantle of prophethood and the seal of the prophets. Holding the magnificent Quran and tasked with the mission of the comprehensive guidance of humanity, he was to direct the movement of humanity’s great caravan toward servitude to God and spiritual perfection in the journey to Him.

The life of the Prophet and the lives of his infallible successors are all lessons for guidance and servitude; lessons in spiritual understanding and love; lessons in faith and jihad; lessons in living and both individual and social ethics; lessons in trustworthiness and honesty; lessons in honor and dignity; lessons in knowledge and action; lessons in mercy and decisiveness; lessons in justice and equity; and lessons in unity and brotherhood. The better these lessons are learned and acted upon, the more attainable the peaks of prosperity and bliss become for all of humankind. We believe that the immaculate soul of the Prophet of Mercy, as well as the pure souls of his immaculate successors and the immaculate Proofs of God (peace and blessings be upon him and all of them) are always watching, guiding, and compassionate with regard to the situation of the Muslims and the Islamic society. Whenever a mistake is committed by the children of this kind and noble father, his soul is grieved. And whenever Muslims act in accord with his lessons and instructions, his blessed heart rejoices.

Now, after passing through difficult, turbulent times and having traversed numerous ups and downs from the early dawn of Islam to the present time, Islam and its followers have reached a fateful, decisive juncture. Today, Muslims can play a highly effective, fateful role. Today is a time when the prospect of the ultimate triumph of truth over falsehood, and of Islam over disbelief, has come much closer to becoming a reality than any other time.

The first prerequisite [to reaching this critical objective] is the unity of the Muslims. The Muslims’ unity in the face of the world’s disbelief is a Quranic strategy and a basic teaching of the pure Islam of Prophet Muhammad (PBUH). This isn’t a superficial or transient matter. By unity, what is meant is that at the level of the general public in Islamic societies, commonalities must serve as the core and foundation for everyone. Naturally, efforts must be made that are backed by logical reasoning and that observe all the requirements of brotherhood and camaraderie, exactly as understood from the teachings of the Quran, to transform points of difference into a common ground in an atmosphere of complete peace and harmony.

What is certain is that all Muslims in the various Islamic societies must keep the Quranic principle “firm against the disbelievers and merciful among themselves” at the center of their thought, speech, and action when facing disbelief in the world. It is with this approach that Islamic unity and solidarity are achieved. Whenever either of these two aspects of this heavenly message is separated from the actions of the Muslims, they will likewise be removed from the position of honor that they had rightfully attained in the Medina of Islam. And this is an inviolable rule.

This principle is one of the fundamental tenets and core messages of the Islamic Revolution. Unity Week was celebrated for the first time in Esfand 1356 AHS (February–March 1978) during the time of the uprising against the tyrannical Pahlavi regime, when our illustrious, martyred Leader (may God elevate his noble station) proposed this concept while he was in exile in Iranshahr. This suggestion was welcomed by both the Shia and Sunnis. Because of the foresight of the founder of the Islamic Republic, Imam Khomeini (may God sanctify his noble soul), “Unity Week” was officially established shortly after the victory of the Islamic Revolution. By the grace of Almighty God, this issue of unity throughout the entire Muslim nation has a successful model in the Iranian people, and the machinations of enemies have had little effect in undermining it.

However, ill-wishers are always lurking to target this great blessing. What makes them hopeful is highlighting differences. Although ideological and religious differences are a major part of what the enemies of Islam are seeking – and on which they heavily rely – they won’t stop there. They strive to turn every kind of racial, cultural, social, economic, political, and geographical difference into a pretext for sowing division among the Muslims in Iran and in every other Islamic country.

Their goal is to see the fragmentation of the Islamic Ummah and the erosion of its strength, as they wait for an opportune moment to impose their dominance over it. The command of the Holy Quran in such matters may be seen in the noble verse, “And do not dispute, or you will lose heart and lose your power” (8:46). Therefore, anyone in any position who does an action that leads to a division among the Muslims and creates strife within the Islamic community – whether this is done knowingly or unknowingly, intentionally or unintentionally – has advanced the agenda of the enemies of Islam.

And in this day and age, how could anyone attribute such an act to just ignorance or negligence, when the evil taghuts [tyrants] of the world – at the forefront of whom stands the criminal US – have stripped the deceptive, flimsy masks from the hideous face of their colonial objectives and arrogant, domineering plots? They have removed their deceptive, velvet gloves and exposed their blood-stained claws to the entire world.

It’s now time for Muslims to think and examine events with a more careful scrutiny. If the Muslims had been a single, united hand, which is clenching its fist with firm resolve, would the Palestinian nation have been left so defenseless in this way and subjected to the oppression and crimes of the occupiers? And if the nations and governments, which are on the shores of the Persian Gulf, had firmly established their unity under the banner of Islam, would corrupt, unprincipled scoundrels have dared to covet their lands and wealth from thousands of kilometers away?

My repeated, emphatic recommendation to the rulers of Islamic countries, particularly those in the West Asian region and along the Persian Gulf, is that you must know who your true enemy is, understand their plots, and confront them.

The solution to the Islamic Ummah’s problems lies in maintaining unity, friendship, and cooperation in the pursuit of goodness and virtue. The criminal rulers of the US and the illegitimate Zionist regime are the sworn enemies of this unity and friendship. They aren’t just the enemies of the Islamic Republic, the Iranian nation, and the vast front of Islamic Resistance. Rather, they hold an enmity toward the entire Islamic Ummah, including the nations in West Asia and North Africa. In this regard, not even the rulers of these countries – many of whom are considered to be their allies – are exempt, and the blatant disrespect and derogatory remarks of the leaders of Global Arrogance directed toward certain leaders of Islamic countries are still fresh in your memory and ours.

The important lesson of unity and avoiding discord is the first lesson of the school of Islam on the discussion of how to deal with friends and foes. But the second lesson is to defend one another against disbelief. And the third lesson includes various forms of cooperation and synergy in the diverse material and spiritual spheres of Muslims’ lives – in terms of wealth, security, science, and progress. The ultimate outcome of this will be the attainment of the New Islamic Civilization.

Therefore, the Muslims’ unity is the main cornerstone for achieving an exalted, triumphant Islamic civilization. This conceptual, intellectual package – in which our aspiration for the Islamic world resides – has materialized in our dear Iran to an acceptable degree. Once again, this humble servant’s recommendation to the entire nation is that you mustn’t allow any division whatsoever to emerge between you.

In conclusion, I hope that through the intercession of the Holy Messenger and his pure Progeny (PBUH), the shield of God’s compassionate, blessed grace will be cast over Islamic societies. And, under the aegis of acting in accord with the divine commands, may Islamic societies scale the heights to progress and honor day by day even more than before.

May God’s greetings, mercy, and blessings be upon you.

Sayyid Mojtaba Hosseini Khamenei”

This past Monday, Treasury Secretary Bessent launched Operation Economic Outcast and billed it as the next phase of the conflict: “Economic D-Day.” The package featured sectoral determinations on digital assets, gold, aviation, technology, and shipping comprised of roughly sixty designations. Secondary-sanctions risk widened as a result with Bank Melli branches told to go dark and Bessent forecasted enforcement action on a “major financial institution” by the end of the week.

That is not nothing. It is also not “D-Day”.

Using the “D-Day” terminology, the landing happened but the breakout did not. Specifically, a systemically important clearer has not been removed from the dollar system at the time of this writing. China, still the buyer of the overwhelming share of whatever Iranian oil gets out, said on Tuesday that cooperation with Tehran “should not be interfered with” and that it would “take all necessary measures.” For markets, oil did not reprice as if the oil-clearing bank had just been cut off or was about to be, imminently.

The lead-up to these new economic actions came with the “power plant and bridge day” register most observers have already priced: maximum language, bounded or non-existent next step. To that end, Bessent stated he does not want to “blow up the global financial system” which signals to observers that he would unlikely take severe or systemic action. Hitting a no-name intermediary is cheap, but hitting an actual oil-clearing bank is a second war that sits in front of a Trump–Xi meeting and on top of a Treasury market this publication has already argued is a material part of any Iran-related consideration set.

What Monday likely was

As outlined in the one-trick pony note, the U.S. playbook has been to negotiate, escalate, threaten, then pull back. Monday’s presser is aging in a way that shows this playbook being applied to the economic campaign as well - existential branding paired with a payload that seems more like a warning shot than a course of action the U.S. is willing to follow through on.

The IRGC watched the same comments and resultantly stayed in their defiant posture. However, civilian Iranian officials say they are trying to halt an inflation spiral and keep shelves from emptying. The pumps and the rial suggest civilian leadership has reason for concern: kilometer-long petrol queues, a daily gasoline shortfall on the order of 14–15 million litres, the rial through two million to the dollar, inflation near 90 percent and food worse. To garner support, the IRGC cites multi-decade sanctions survival and a Chinese buyer that has already refused to participate in damaging actions against Iran. The net is a regime that still believes it has a safer economic harbor than Washington’s commentary implies.

Alongside this, the official U.S.–Iran diplomatic track reads as dead. Washington rebuffed a return to the June MOU and continues to say there is no diplomacy underway, while Iran is not advertising a live or active channel either. Third-party traffic continues — Pakistan’s army chief was in Tehran on Monday — but it is more likely than not another episode of mediation theater and hope that delay (time) creates space for further diplomacy. The “significant progress” comments from mediating nations have lost their bid, no differently than U.S. escalatory threats.

Taken together: existential language spent on a first-day package, an Iran with sanctions-evasion muscle memory and a Chinese buyer that rejected the ask, and a diplomatic track that exists mostly as content. Enter a stalemate absent a move that changes the oil math.

The stalemate problem

From Washington’s chair, time is doing the work of munitions. That was the argument in The IRGC’s Escalation Trap: Iran, not the United States, sits in the structurally tighter trap due to having less optionality. The blockade, the internal inflation, and the closing of the post-succession unity window are compounding. Pezeshkian has been blunt about household pain inside Iran — the same constraint laid out in The Path of Least Resistance That Isn’t. Iranian data tends to be opaque but the petrol queues are not. On the question of economic pressure, the current approach U.S. approach is working.

So how do you break a stalemate when every departure from status quo carries material economic and military risk?

If you are the United States, you don’t — unless the threat that underwrites the status quo starts to look fake. Status quo is delivering what Washington wants: material economic pain, social unrest, and a security apparatus that is clamping down rather than seeking an off-ramp. Protesters from the winter unrest are still being executed, including in public. The IRGC is being forced to first lie, then explain not to believe your lying eyes, then to say there are five lights. That path can work until reality demonstrates it to be false.

Trump, Bessent, or any other American actor does not need a kinetic restart if compounding has a viable chance of working. Communications can insist Iran is strong with the petrol lines telling a different story. For Trump, a slow grind is also the midterm-compatible path. Rubio and others have indicated economic levers will be the preferred manner of engagement at least through November. Course and speed have been plotted around political realities, as many have expected.

Three options, same split

That leaves the ball in Iran’s court. At a high level, Iran remains with three options:

1. Concede and take a deal on U.S. terms.

2. Hold status quo and bet that U.S. political will, the midterms, or fuel-price pain at home sends Washington off the field.

3. Raise the intensity of the campaign already underway — Hormuz rules, drones, shipping pressure, lawfare — and try to drive the United States out by raising the cost.

Civilian leadership has shown a preference for option one as the path most likely to relieve the household economy Pezeshkian wants to fix. Option two is defiance. Option three is not what the civilian track desires as it seeks to avoid further costs associated with a wider war.

However, the IRGC apparatus that holds functional power has given no sign it wants a deal. To wit, Iranian parliament is advancing a bill that would further write Hormuz regulation — fees, permits, sovereign framing — into domestic law. State-linked media put a $10 million bounty on the head of a sitting U.S. president’s son (though later denied). Pressure on shipping has continued with Iranian drones or missiles striking merchant vessels regularly. None of that is option one or a clean option two. In practice, the third option of continued hostilities becomes Iran’s official stance by default - regardless of the commentary from civilian leadership.

This is Iran’s escalation trap in operational form. The civilian leadership talks paths away from further aggression while the IRGC leans on threats and kinetic pressure. Option two could work for a time, but it does not appear certain that the average Iranian will suffer indefinitely for IRGC benefit. Internal unrest is a problem that Tehran has long feared and it moves closer if Bessent’s measures land on a real oil clearer or, even without that, tightening isolation of Iranian finances.

The constraint is the second war

Bessent cannot “BACO” the economic warfare strategy and expect it to be successful on a timeline that the U.S. can accept. The blockade alone may work over a longer horizon, but likely runs into the U.S. election and economic clocks via higher energy prices and dwindling SPRs simultaneously. Much like the military engagement, a “BACO” before the midterms would defang another lever of U.S. offensive credibility absent a tangible result from the threat. Showing you will not fight kinetically, then demonstrating you will not make good on the economic threat that replaced the fighting, leaves you low on ammunition and at risk of further losing control in the information and optics spaces.

That is the one-trick pony problem applied to Treasury. Escalation language has too often outrun matching action, and Iran now says so out loud. A threat has to be something you can do and be something you are willing to do.

The week is not over and the “major-institution” designation can still land. It would not be surprising to see the action come after market close on Friday as the administration has historically favored escalating when equity markets are closed. As of this writing, the higher-probability read seems to be the one we have been running: maximum language, bounded first step, decision deferred to China and the long bond. Markets, so far, seem to be trading that version.

That could change quickly. For the moment, treat “Economic D-Day” as a beach landing, not a breakout.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

Many have wondered why the United States, after months of failed “talks”, continued on the diplomatic path despite few to no outcomes that support it being a road to success. It appears the answer to that wonderment may center on Iranian President Masoud Pezeshkian.

Of late, President Pezeshkian has been notably vocal about the need to fulfill the MOU, return to diplomacy, and consolidate the “victory” for Iran on the heels of the conflict. So vocal that he has been censored by internal Iranian news agencies over being too direct about the need for “peace” and a “deal” when compared against more military conflict.

President Pezeshkian’s stance has put the United States in a difficult position, but also an opportunistic one. They see that the civilian-elected Iranian president is pushing for negotiations and a deal that the United States desires. A potential opportunity for a mutually beneficial outcome. On the other hand, that same president controls zero functional levers of power. The strategy for the U.S. appears to be create space for Pezeshkian to reach the point of a “deal”, or let his efforts play out as long as possible to avoid renewed hostilities. When you weigh that patience against the likely costs of further military engagement, the United States’ patience reads as both intelligent and warranted. And that is also where the formal constraints of the Iranian system become decisive.

Pezeshkian represents a path to a negotiated peace under this logic. But that narrative misses the structure that allowed him into office in the first place, and that structure remains intact. The Guardian Council and the broader IRGC-linked apparatus that approved him continue to hold the decisive authority. As a result, diplomacy remains constrained by institutions that do not answer to the elected president.

Reframing today with more historical context, the United States may have put too little weight on that structure. It is a system built to retain power through disruption, and that is exactly what it continues to do. The desired diplomatic offramp is unlikely to materialize absent more force - be it large or smaller scale - because the elected office does not control the relevant levers. To color in this assessment, we have to understand some recent history and political structures that typically go undiscussed.

Here is what I mean by that:

On May 19, 2024 Iranian President Ebrahim Raisi died in a helicopter crash, creating an unexpected opening in Iranian politics. In short, a Bell 212 helicopter carrying Raisi, Foreign Minister Hossein Amir-Abdollahian, and several senior officials, went down in mountainous terrain near the Azerbaijan border amid dense fog. It was flying in a group of three military helicopters when the trio was instructed to climb to avoid the weather. The other two helicopters successfully avoided the weather, while the President’s helicopter ran into a mountain and all aboard the president’s aircraft were killed. Iranian authorities attributed the accident primarily to sudden weather conditions, though there remains speculation around the actual circumstances of the crash.

The crash forced a snap election and produced an outcome that few had anticipated: the elevation of Masoud Pezeshkian, a cardiac surgeon and long-serving parliamentarian from Tabriz, to the presidency.

Pezeshkian was not known to be a radical. To wit, he was a reformist-leaning figure with a record of loyalty to the Islamic Republic and to Supreme Leader Ali Khamenei. He served as health minister under Mohammad Khatami, represented an Azeri constituency, and maintained a generally clean personal image that managed to walk the line between the IRGC and support for the broader Iranian people - a skill one must have in a country that has clear structural divides and not all sides necessarily keep the best interests of all parties in mind. But, his current time in office was not his first attempt at ascending to the presidency.

In 2021, the Iranian Guardian Council had barred Pezeshkian from the presidential race as part of a broader exclusion of reformists and moderates designed to clear the path for Raisi. The Guardian Council is a 12-member board that approves the presidential candidates - then the people vote for the approved candidates. At the time, the system favored a president aligned with hardline priorities. This sidelined Pezeshkian in favor of Raisi. Raisi was deeply unpopular with the Iranian people, uprisings began, and the emotional temperature inside Iran was fairly high at the time of Raisi’s death. This created some challenges for internal stability, as the civilian population wildly outnumbers IRGC headcount; that stability must be maintained for the system to retain credibility.

Seeing this backdrop following the death of Raisi, the Guardian Council approved Pezeshkian in 2024. The change in tone reflected a calculated decision rather than any fundamental change in the Council’s membership or broader belief structure. This leads to the reason why negotiations remain constrained:

The U.S. may have read Pezeshkian as a credible moderate who would make a deal under duress for the benefit of the Iranian people. To exploit that determination, Israeli and U.S. strikes eliminated top layers of the hardline leadership. The aim being that a softer leadership would emerge, or that Pezeshkian as a leader of “the people” would win out, be able to make a deal, and a new and brighter day for Iran and global security could emerge. This roadmap aligns with early U.S. messaging about the war.

What receives less weight in that reading is that Pezeshkian was effectively approved to serve a specific function: absorb public discontent and raise participation without altering control of the core institutions. The Guardian Council did not soften and the hardliners remained in place as they were. It is a structure, not a person. The IRGC system produced a president who could bring some civil quiet and unification - not one empowered to undercut their regional, global, or internal coercive power.

Leading up to the election in 2024, Iran had experienced chronically low turnout in recent elections which created a legitimacy problem for the IRGC. Raisi’s death required a rapid succession process, and approving a single, relatively safe moderate candidate offered a means of raising participation and absorbing public discontent without surrendering control of the core institutions. Pezeshkian seems to have been read by the U.S. as an opening when in practice the role he plays is the one the system permitted, and those permissions have limits.

To wit, the Guardian Council is the institutional mechanism that makes such calculations possible and in essence allows the deeper power structure to retain control of civilian government. It is a twelve-member body established by the Iranian Constitution where six members are Islamic jurists appointed directly by the Supreme Leader. The other six are legal experts nominated by the head of the judiciary—who is himself appointed by the Leader—and approved by parliament. The IRGC and the institutions linked to it essentially control the apparatus beyond the president, making the notion of a “civilian government” more theater than a practical, change-making body. This dynamic was present when Pezeshkian was allowed to run, remained following the leadership decapitation strikes, and is present now. It functions to prevent elected government from overtaking or working against the deeper power structure. This structure is more-less in place to avoid what Pezeshkian is advocating for from coming to fruition.

Framing further back to the election of President Pezeshkian, the Iranian public responded positively to Pezeshkian’s candidacy. This was a candidate who wasn’t IRGC, had a background in helping people via medicine, and was known to be a more moderate political voice. As a result, he defeated the hardliner Saeed Jalili in a runoff, capitalizing on the desire for economic relief and some forms of modest social easing. This is the signal the U.S. was given in 2024; Iran has a new president who is more moderate, seems to care more about the people, and we may be able to make a deal with him that we haven’t been able to in the past as the Iranian people showed us they want moderation. In other words, this is an opening to engage Iran that we haven’t had in many years if ever - so, capitalize.

Both the backstory of the election and the derived U.S. calculus makes sense. Simultaneously, the structural constraints of the IRGC system remain intact. Actual authority over national security, the nuclear program, and the red lines of foreign policy resides with the Supreme Leader and the IRGC today just as it always has - as it operates alongside a more populist president of the system’s own approval. The presidency manages day-to-day administration and can shape tone; it does not command the decisive levers of power, and will almost certainly not be allowed to negotiate away Iranian power or leverage - which they have demonstrated to be the case.

By the summer of 2026 the limits of Pezeshkian’s position favoring diplomacy became increasingly clear. He continued to argue for engagement with the United States as a path to economic relief and for that effort, elements of the security establishment pushed back, accusing the president of weakness, and restricting his access to the airwaves. Economic hardship gave him a public argument he could credibly sell against the “hardline” message: the cost of confrontation was being borne by ordinary Iranians. It did not, however, give him the institutional power to compel the IRGC to accept terms that threatened its core interests or the system’s red lines on the nuclear program and the Strait of Hormuz.

The United States seems to have sought to test whether a more moderate president under economic stress could shift the internal balance. Military pressure, a naval presence around Hormuz, and the collapse of an interim memorandum of understanding were followed by a renewed emphasis on economic isolation. To be discussed in more detail tomorrow, the administration has prepared what it described as an unprecedented tightening of secondary sanctions—an “Economic D-Day” intended to close remaining revenue channels by threatening any country, bank, or intermediary still dealing with Iran. Iranian officials called the measures a declaration of war, while countries like China and Russia showed no inclination to enforce them. The historical record shows that the IRGC has repeatedly absorbed severe economic pain rather than conceded on foundational security positions, but these actions may be severe enough to alter the future of that scorecard.

Pezeshkian remains moderate enough for the system to tolerate and popular enough among segments of the public to complicate pure hardline rule. However, he is not powerful enough to void the security establishment. The economic suffering of the population strengthens his rhetoric but it has not, so far, produced a strategic recalculation at the level required for a durable agreement on the nuclear file or control of the Strait. The United States can intensify costs on multiple fronts while the IRGC can continue to demonstrate it is prepared to bear them. Between those two realities resides an Iranian president who can advocate for a deal but cannot deliver one against the internal institutions that retain veto authority absent dovish changes to their stated positions.

Whether the current combination of economic extremity and external pressure produces a different outcome depends less on the preferences of the elected president than on the calculations of the forces that stand behind him and, when necessary, above him.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, tax, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

In the previous 1963Macro article, a case was made that Iran, not the U.S., is locked into an “escalation trap.” The logic applied runs contrary to the common, prevailing narrative that the United States was ill prepared for this conflict, planned poorly, executed OK, and is now stuck in the “quagmire” they — and President Trump specifically — wanted to avoid. That story plays against a backdrop of the SPR drained below 300M barrels, some days from 1983 lows, and less than 50M barrels from minimum.

The prevailing narrative also folds in inflation, rates, broader economic concerns, and mid-term risks into a blanket claim that the United States has failed to achieve its stated military objectives. This narrative is pervasive. It gives hope to financial and energy markets that President Trump will take an offramp, Iran will emerge victorious or at least intact, the Strait will return to pre-war volume, and things will get “better” economically in a relatively short period of time. Said plainly, U.S. defeat followed by economic improvement on the basis of energy flows.

That narrative may be true, and may well come to pass. But it leaves us omitting a perspective that tracks the cadence of this conflict more accurately:

Material escalation or a significantly larger phase of the conflict was always a highly probable outcome. A deal was never tenable for the IRGC, and the pattern of U.S. actions is consistent with a strategy that has been shaping the environment toward a more decisive engagement if diplomacy failed to deliver.

That perspective changes how you view the chessboard.

When the conflict started, President Trump and many others discussed this being a “quick” operation. Weeks, maybe months, but not many of each. No quagmires. That sold well to the American people, and initial support for the war was high following the successful operation to capture Maduro. That support faded once the United States stopped shooting and began the negotiation process in April. Since then we have seen multiple returns to hostilities and a significant amount of positive and “hopeful” messaging around the diplomatic process.

This is where the 1963Macro base-case started before the conflict: negotiation that lands the United States the victories it seeks is very unlikely to succeed — not because that is the wrong path, but because the IRGC will not accept it. The IRGC faces an existential threat. Inking any deal that opens the Strait, curbs nuclear ambitions, or removes their ability to exert influence over their existing population and the broader Middle East is a tactical non-starter. It would equate to signing away decades of work for no benefit relative to their stated mission.

The United States knows this from experience. The strategy it has employed — chipping away with airstrikes, sanctions, and the blockade — appears designed to create repeated opportunities for an offramp while preparing for the possibility that none would appear. Strikes, threaten larger strikes while a campaign is actively engaged, call off larger strikes at the last minute with great fanfare, negotiate. Repeat. Given the repetition, this is a deliberate pattern (noted in a previous article). The prevailing narrative paints the same sequence as disorganization and failure. Said differently, it makes the United States appear rudderless and out of options. That may not be the case at all.

Viewed through a lens of the conflict being executed to plan, the United States has been managing the conflict such that if a decisive phase becomes necessary, it occurs when the IRGC is degraded. Their conventional military — air force and surface navy — is functionally destroyed. This leaves drones, missiles, proxies, and asymmetric tools, but not the ability to prevent the United States from establishing air dominance and striking more freely, which has already happened more than once. That is military success. The diplomacy path was both legitimately hopeful and strategic — a point Iran itself has called out multiple times. From the U.S. perspective, if an offramp appears, that is preferred. If not, the grinding process allows more time to plan, watch Iran expend resources it does not have in abundance, and reconstitute.

The U.S. strategy, viewed this way, has been far more effective than most reporting suggests. In essence, the United States has successfully degraded Iranian capacity while increasing the IRGC’s need to fight, which pushes Iran deeper into its own escalation trap.

Break away from the prevailing narrative and consider the point. The United States created significant optionality between diplomacy and military engagement, provided tactical pauses, and left the door open to a deal that would avoid a costly larger engagement.

That same strategy is what created Iran’s escalation trap — not one for the United States. The allied air campaigns materially degraded Iran’s ability to fight and to prevent U.S. air dominance. The last set of U.S. strikes lasted approximately ten days before stopping. Even more dovish voices noted at the time that unless the United States was willing to strike the remaining escalatory targets — the “20% we didn’t hit” in the opening wave — further limited strikes would not move the needle. President Trump opted against that engagement, citing a preference for negotiation and a desire to avoid additional suffering inside Iran.

Fast forward to today, and the IRGC has stated it is shifting to an “offensive doctrine” and will extend the conflict “beyond our borders.” That is defiant rhetoric, but it may also be a promise. Throughout this conflict, when Iran says it is going to do something, it eventually does so absent intervention. This is the escalation trap in action. A deal is tantamount to existential defeat. Fighting may also bring defeat, but a deal is a certain loss that fighting, from the IRGC’s perspective, may still prevent. Or, as Iran has said for a long time: “we won’t give up with negotiations what couldn’t be taken by force.”

The United States strategy of negotiation tried to minimize force while letting time create diplomatic opportunity and degrading Iran in a manner that shapes the battlefield in its favor. Results on the ground support this as a coherent approach if the aim was to have any larger phase of the conflict occur on more favorable terms. This suggests that “power plant and bridge day” remains the strongest escalatory option — the remaining target set. Viewed this way, the United States has spent five months attempting to avoid that scenario, the major economic problems that would accompany it, and the associated human cost, while understanding that a more decisive phase might still be required. The current position — a degraded adversary facing internal political friction over whether to deal or fight — is a more optimal setup for such an engagement than the one that existed at the outset.

This is not to discount IRGC capability. It retains reach and fortitude, paired with a reportedly capable supply of drones and missiles. As demonstrated, that alone is enough firepower to impose significant costs through coercive control over broader GCC economies. The IRGC will use it. That reality plays directly into the U.S. decision to avoid immediate escalation and watch the leadership realignment and open debate inside Iran about what a fold-or-fight future looks like.

Laying this review over the conflict today, the probability is high that this is how the United States has calculated and managed the campaign — including the understanding that further escalation may still be required and that it is likely the IRGC who will climb the ladder. The United States managed for optionality, degraded a tough adversary, and left itself in a better position than commonly reported to prosecute an engagement that could break the stalemate. The ball has been placed in the IRGC’s court. The United States retains political cover for returning to talks, and if the IRGC escalates materially, the United States can respond with clearer justification than a unilateral move would have provided.

The validator of this managed approach is the yen intervention. On the Friday that Trump met with his cabinet at Camp David, Treasury Secretary Bessent also made comments about intervening in the yen. At the time the yen was beyond 160 and rising. Bessent’s move to intervene over the weekend and into early this week was the tell. If major escalation is coming, the yen must be backstopped to avoid a disorderly carry-trade unwind that would be extremely painful not only for global markets but for U.S. Treasury securities. Japan would need to sell Treasuries to support the yen, spiking yields. In a larger engagement, energy prices would likely rise materially. That would hit Japan severely, as well as Europe.

Bessent sold euros to fund the yen support in high enough volume that he received a diplomatic phone call from the ECB. That type of uncoordinated euro sale had not happened before. It came on the heels of Camp David, where plans for managing the next phase of the conflict and military optionality were discussed. If you assess that something is coming that could disrupt energy markets — and by extension Japan — then you need to protect the carry trade to minimize damage, and you burden-share with the euro because dumping U.S. Treasuries would be a self-inflicted wound.

This is managing the conflict, not merely reacting to it. At the time, yen weakness was concerning, but that Bessent used euros rather than Treasuries to offer support reads as signal. The United States may be managing against the risk of the Treasury market being “weaponized” when a larger phase arrives.

Consider the sequence:

• The United States has managed this conflict with the understanding that a more decisive phase would likely be required if its goals are to be achieved or if the IRGC is to be removed from functional power.

• The strike–threaten–pause–negotiate cycle provided repeated opportunities for offramps.

• The United States shaped the environment to leave itself in a stronger position to prosecute a larger conflict if necessary.

• That shaping created the current scenario in which the IRGC, not the United States, sits in the tighter escalation trap.

• Because the United States has controlled the tempo, Secretary Bessent’s role includes supporting the economy and preparing to defend the dollar and Treasury market if necessary.

Yen intervention says the assessed probability is high enough that preparation is required.

Hank Paulson recently noted that the United States needs to be prepared to defend the Treasury market and the dollar because they could be “weaponized” back against us. That comment received some airtime but little dissection. Japan owns approximately $1.13 trillion of U.S. Treasuries. The United Kingdom holds roughly $949 billion. China holds approximately $659 billion. The risk begins here. If Japan must sell Treasuries for the legitimate purpose of supporting the yen, that is not an act of aggression but of necessity. No harm to the United States is intended, yet meaningful sales would pressure U.S. rates. If China, or other actors with incentive to do so, decided to sell meaningful amounts of Treasuries while Japan is a forced seller, the combination creates the potential for a negative feedback loop — selling begets more selling. The weaponization is not Japan’s need to stabilize its currency; it is the ability of malign actors to pile onto a necessary move and exacerbate stress on the dollar and the Treasury market. Note that actors do not need to sell all of their holdings. They need only create an environment in which augmented volumes are being offered into the market at a sensitive moment.

Attention has been focused on energy and oil, but the second-order effects of an energy disruption are inflation, currencies, and sovereign debt. The SPR has helped keep energy prices from spiraling, which stabilizes the broader system and holds off those three problems. That buffer is thinning.

Finally, the IRGC knows this landscape and maintains relationships with actors who hold significant amounts of Treasuries. If they go on the offensive and aggressively strike GCC energy infrastructure, they open the door to material problems for the yen, the dollar, the euro, and the global yen-funded carry trade. By extension, short-term economic pain for China could still serve a longer multi-polar objective if it produces a period of U.S. financial stress.

The United States has managed the conflict to this point knowing Tehran retains the ability to strike GCC energy infrastructure and tick the first domino in that sequence. That is why Washington has had to be careful about tipping the scale into a scenario that invites Treasury market stress before it is prepared. The yen intervention is evidence that the United States is building moats and thinking through how it would defend the Treasury market and the dollar if that risk materializes as a byproduct of a larger phase of the conflict.

That the United States has managed the conflict this effectively — using this lens — suggests it is thinking ahead and that the engagement will continue to be managed on multiple fronts. Confidence can at least be drawn from the fact that the United States is five months into an engagement it avoided for almost fifty years, gasoline remains cheaper than it was a few years ago, inflation is elevated but not uncontrolled, and equity markets are solidly positive seven months into the year. That is effective management.

If the same approach that produced those results can be trusted going forward, it may still be possible to avoid the worst of the outcomes described here.

In any case, the IRGC got what it always wanted: the world is in many ways at the mercy of its next move.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

This past week brought significant change in the Iran conflict as but a week ago, President Trump decided against an aggressive strike campaign in favor of another test of the diplomatic path. Rhetoric around a potential “deal” was notably sunny. The deal itself remained elusive or non-existent, as expected.

Iran responded accordingly by releasing six maximalist demands that would sit alongside any arrangement, strengthened defiant rhetoric, and moved to codify restrictions on U.S. and Israeli-linked shipping through Hormuz into Iranian law, permanently. The week closed with the formation of the Mecca Defense Pact and a clear Iranian leadership rotation toward hardline, IRGC-trusted figures.

As outlined in the previous 1963Macro piece on the “one-trick pony,” the logic demonstrated there tracks with the current U.S. slow-play posture. The American approach reads as the correct one for the moment (a separate article will cover that point) given the active, in-flux nature of the chessboard. However, our current environment suggests we should examine a point most mainstream coverage is missing:

Escalation is no longer solely a U.S. decision. The IRGC is now structurally incentivized to shift toward an offensive posture to protect its remaining leverage.

That observation introduces a level of uncertainty that did not exist when the United States was applying consistent military pressure.

Hardline consolidation

On August 9, Supreme Leader Mojtaba Khamenei elevated Mohsen Rezaei to secretary of the Supreme National Security Council and named him his personal representative on that body. Rezaei commanded the IRGC from 1981 to 1997 through most of the Iran-Iraq War, and has been serving as military adviser to the Supreme Leader. His appointment replaces Mohammad Bagher Zolghadr, another IRGC veteran, who was moved to the role of political adviser to Khamenei.

This is not a typical technical reshuffle. The move places a foundational IRGC hardliner with direct access to the Supreme Leader at the center of the formal machinery that coordinates security and strategic policy at a time of existential conflict. In parallel, IRGC commander Ahmad Vahidi—already a “hardliner” with elevated influence over U.S.-related decisions—has been publicly instructed to prepare strategies for both “maximum deterrence” and readying for “powerful offensive operations against the enemy.”

For regular readers of 1963Macro, the expectation that Iran would eventually move toward initiative rather than pure reaction was a contrarian call but not unfamiliar to you. We have noted that growing possibly for months. The personnel and rhetorical signals and actions are now aligning with that observation, and those changes are happening quickly.

Why offense is becoming the rational path

The prevailing U.S. media and observer narrative discusses how American is stuck in an “escalation trap”. There is truth to that, but it ignores that Iran faces more of a trap to forced-escalation than the U.S. Two reasons demonstrate why:

1. A deal acceptable to the United States is a strategic loss for the IRGC.

Any arrangement that meets core U.S. requirements (or doesn’t violate “red lines”) would neutralize Iran’s newfound practical control over the Strait of Hormuz. That control is the last high-value asymmetric lever the IRGC still holds. Surrendering Hormuz control in a durable way, even in exchange for sanctions relief and revenue, is closer to institutional defeat when compared to continued conflict. A clean, lasting normalization under an agreement that removes Iranian veto power over the waterway serves to cement the defeat that Iran seeks to avoid.

2. The United States appears unwilling to fight a larger war.

If your opponent has repeatedly threatened major escalation and then pulled back, and if the stated constraints include munitions limits, negative economic outcomes, and political costs, the rational response is to push that opponent toward the path it is trying to avoid. Iran retains a substantial portion of its pre-war missile and drone inventory (working estimates have circulated in the 60 percent range) while production continues at least to some degree. On a pure interceptor-versus-threat basis, the attrition math favors the side with more plentiful, regenerating, and cheaper systems. The IRGC can force the United States to expend scarce defensive stocks or accept visible costs, while retaining additional strike capability to cause material damage should defensive weaponry bankrupt.

These points, amongst others, highlight why the deal path remains unlikely. Not because Washington is incapable of further damage or unwilling to make tactical concessions, but because any settlement that permanently forfeits Strait leverage ranks as total loss for the IRGC at this stage of the conflict.

Iran’s tighter trap

The United States retains sanctions, a naval blockade that continues to pressure the Iranian economy, and the ability to disrupt weapons flows to proxies (as seen in recent cache seizures in Iraq and Syria). It is also slowly reconstituting munitions. Iran, by contrast, has lost most of its conventional military capacity, faces severe internal inflation and economic strain, and is increasingly reliant on asymmetric and proxy tools. The IRGCs ability to sustain the “Axis of Resistance” is observably eroding.

The Mecca Defense Pact between Saudi Arabia, Pakistan, and Turkey compounds the problem. Turkey, a NATO member with the second-largest military in Europe, now carries a mutual defense commitment with the Saudis. Attacking Saudi infrastructure or testing the new alignment carries significantly higher potential costs than before the pact was signed. Iran’s public statement that the pact should not operate against its proxies is telling: Tehran recognizes that a capable “Axis of Defense” is forming opposite its remaining network of IRGC-aligned actors across the Middle East.

Related, if the United States, Israel, Saudi Arabia, and Turkey ever brought coordinated military pressure to bear, the IRGC would struggle to survive a conventional force-on-force contest. The IRGC almost certainly understands this and as the region aligns against it, the incentive grows to demonstrate that deeper engagement can still be made expensive and to stress-test the new arrangements before they harden further or expand beyond existing coalitions.

Ideology over material gain

A Western cost-benefit analysis continues to conclude that a deal is the superior path: reduce the risk of existential military pressure, restore oil revenue, and capture economic and societal benefits that fighting likely cannot deliver easily or quickly. That logic does not govern the IRGC.

The IRGC exists as the revolutionary guard of a specific ideological project. Accordingly, it operates with a purpose that is not national wealth maximization. A deal that allows the Gulf states to deepen capitalist development, attract sustained foreign investment, and improve defensive and offensive capabilities while treating Iran as a contained neighbor rather than a central arbiter would render the Guard’s gatekeeper role increasingly obsolete. Over time, this scenario would leave the IRGC at a growing military disadvantage as interceptor technology and regional stockpiles improve. Their window to use the Strait and residual missile/drone capacity as coercive instruments is not infinite.

Saudi Vision 2030 and the UAE model both depend on reducing the risk of Iranian disruption to be seen through to their full potential. Capital, tourism and global business do not flow easily into environments under credible missile and drone threat. The IRGC has already demonstrated that threat repeatedly during this conflict. As a result, a durable settlement that this control would accelerate exactly the regional economic and security realignment toward the West and the globe that the Guard is built to resist.

Base case unchanged

The U.S. playbook has been exposed: negotiate, escalate, threaten further escalation, then pull back. That sequence can work fine against many state actors, but it has not broken the IRGC’s preference ranking.

Any deal that removes Strait control removes the IRGC’s remaining strategic relevance. Iran’s domestic economy is in severe difficulty; at the leadership level of the security apparatus, that fact is secondary to ideology and institutional survival. Said another way, the IRGC is “anti-capitalist” in the sense that capitalism breeds global engagement and ideological freedom. When the Guard sees its mission—the arbiter of a particular vision of Islam and holder of the last major coercive lever against the West in the Gulf—being compromised, doctrine demands continued resistance rather than accommodation.

The historical memory inside the system is relevant. Pre-1979, Iran under the Shah was open to Western investment and influence and functioned, for a period, as a regional destination for Western visitors - a vision that is hard for many to fathom today - because that openness was followed by revolution. The current regime’s foundational purpose includes preventing a repeat of what the IRGC views as “dilution” under the Shah. A settlement that enables deeper Western economic engagement across the Gulf runs directly against that purpose.

What escalation could look like

The form is relatively straightforward: higher-tempo missile and drone attacks, intensified proxy activity, cyber operations, and continued harassment or selective strikes on shipping—all aimed towards raise the political, economic, and munitions cost of continued U.S. and coalition posture. The goal is not a conventional battlefield victory. It is to make sustained engagement expensive enough that Washington or regional partners seek an off-ramp on terms that preserve Iranian leverage. Said plainly, the IRGC likely wants to force full U.S. retreat such that it can reconstitute and strengthen its grip on the GCC - just as we have seen with Hormuz.

Timing for this, however, is more opaque. The current pattern—installation of IRGC hardliners into key oversight roles, continued weapons production and announced capability enhancements, and efforts to rearm proxies where possible—reads as preparation. The logical window for IRGC-led escalation is likely before the United States and its partners can meaningfully reconstitute interceptor and strike inventories after recent operations - particularly when the IRGC likely has the advantage in a war of attrition using missiles and drones vs. known U.S. and allied interceptor stockpiles.

Bottom line

Neither the United States nor the GCC fully controls the escalation ladder from this point. It is Iran - and the IRGC specifically - that is stuck in an escalation trip. A deal would be better for nearly every civilian economy involved. The IRGC’s institutional calculus points the other direction because they were built precisely for this escalating scenario - not to back down. The IRGC likely sees an opportunity to impose costs ahead of the U.S. midterms, test new regional alignments, and export some of the economic and political pain it is already absorbing. Those points only come to fruition if they escalate, and anything less amounts to the deal path that ensures the IRGC will begin a journey that relegates them to the pages of history.

The IRGC was not built as a negotiating instrument at its core. It was built to fight and to preserve a revolutionary project. Under the current power configuration inside Iran, proactive escalation reads as the logical next step—an outcome that may arrive sooner than the prevailing Western narrative expects or suggests.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

In the most recent 1963Macro article, we covered some of the risks associated with President Trump’s most recent set of “major strike” threats should they be carried out. The strikes read as probable because anything less would be the definition of insanity—doing the same thing over and over again expecting a different result. The offramp to that strike was either American retreat—which is what happened—or the lower-probability Iranian capitulation. As reported, Saudi Arabia talked Trump out of the strikes and thus avoided the military campaign, but simultaneously exposed the major problem for the administration:

The United States is a one-trick pony with excessive ambitions relative to toolkit.

First, the ambitious diplomacy. Trump, along with the negotiating team of Witkoff and Kushner, clearly desire an expansion of the Abraham Accords to secure a diplomatic win. Kushner appears to be driving much of that end of the engagement, but his efforts have repeatedly failed and brought the process back to the starting line. Despite essentially zero supporting evidence, the administration clearly believes it has the platform, tools, and ability to coerce additional countries into the Accords such that the war would theoretically end or change composition in favor of U.S. desires.

To this end, recall President Trump attempting to force effectively all GCC nations into the Abraham Accords on a conference call—met with silence before Kushner tried to keep the conversation going. Trump then tried to tie the Saudi nuclear deal to the Accords after the deal was already signed. This is the clearest illustration that, in this deal-making framework, the U.S. truly believes various settlements that are beneficial to the U.S. and GCC can be negotiated into existence despite a consistent lack of supporting outcomes.

The deal-making did not stop with the Abraham Accords. We saw the Saudi nuclear deal, arms deals with Ukraine, the reintroduction of various tariffs, and more. Negotiation itself is not the problem—it is the preferred path and works far more often than it fails globally. In this instance, however, it simply doesn’t, a point Trump himself has acknowledged.

With that understanding, the administration lives out the same cycle because this is the only path it appears willing or capable of pursuing. A one-trick pony. The playbook is not a book; it is a page. Iran sees that, and U.S. strategy loses effectiveness as a result.

We have now experienced three identical cases of major escalatory rhetoric followed by unwillingness to follow through. The theory—which Trump wrote a book about and which everyone, including Iran, can read—is to apply pressure in order to extract more favorable terms. That works only if the threat is credible. After the third iteration producing no deals and no resolution, the threat has lost what credibility it once had. Iran views the pattern as weakness and as evidence that it is inching closer to Strait ownership and cemented regional dominance. This is the opposite of what the U.S. has repeatedly stated it hopes to accomplish.

A one-dimensional toolkit also gives Iran room to exploit. Iran has the door open to go on the offensive, reconstitute, and drive the U.S. out of the region—its stated objective—because the U.S. either cannot or will not match its bark with meaningful bite. The much-hyped sanctions have had minimal effect. Unlike the United States administration, Iranians worship a god via religion, not money. A strategy that works only when the other party shares that same lust for money fails flatly when higher motivations exist. Iran has survived and will likely continue to survive under the current U.S. approach in large part because of this mismatch.

Taken together, nothing material has changed from last week. The Camp David meeting, press conferences, and Israeli coordination ultimately did not need to happen, nor moved the needle. Iran still controls the Strait, shipping traffic remains effectively zero, Iranian influence is growing rather than shrinking, and the U.S. has now demonstrated that major military operations are something it is either not capable of or unwilling to execute.

Our earlier piece on the yen remains a useful contingency blueprint should dynamics shift back to confrontation. Setting strikes aside, we should expect more headline roulette from Trump, continued Iranian resistance, and the ongoing sternly worded statements from GCC nations. Iran will continue to harass commercial shipping, and the Strait will remain effectively closed. Nothing credible points to another path beyond status-quo.

This where our long-standing baseline assumptions may have run their course. The administration appears to be actively seeking any offramp that can be spun and sold. That course of U.S. action leaves Iran more powerful than it was at the onset, Israeli and GCC relationships fractured, U.S. military security guarantees worth materially less, and opens the door to a legacy-defining loss for President Trump. The baseline that this administration would not accept defeat, would “finish the job”, and project strength is now broken. Solving the Iran file requires accepting short-term economic pain for long-term economic and security gain and time is the commodity the administration does not have. The concept of wholesale defeat and retreat of a U.S. fighting force is not something Americans are accustomed to, and many would not believe to be possible. Taking the path of an offramp aligns with the “End of the American Empire” thesis that is growing in analyst circles and factually moves us closer to that state—a world in which American security guarantees, military force, or any form of aggressive policy is viewed as unserious and feckless. For any country, that outcome is expensive long-term. Retreat is just as if not more expensive than fighting over time, but those impacts are points the administration will likely attempt to blunt once the elections have finished.

In a scenario such as Iran, the costs of disengagement can be compounded by deals that are signed and then walked back or loaded with post-signature stipulations, rendering the United States an unreliable counterparty. The most foundational guarantee America can make is its military one, and once that that is broken, the deal-making that was previously tolerated under the security blanket loses force and effectiveness. The implications extend well beyond Iran to American influence and American business ambitions globally. While attention will focus on the handling of this specific file, the bigger development most Americans have not yet internalized is that, absent major strategic changes from the U.S. administration, they are living through what is tracking towards the largest degradation of U.S. influence and power in their lifetimes. Military ineffectiveness is a problem, but compounding that with untrustworthy deals and unrealistic stipulations serve to make these problems more broadly impactful.

The conflict now sits in the blank space between actual diplomacy and military action. Iran will logically exploit that space to extract additional concessions if negotiations resume. For now, the threat of material U.S. military escalation can be taken off the table.

Extending on that assessment, the learning of the last 24 hours suggests that, at baseline, a full U.S. retreat from this campaign and from securing the Strait of Hormuz is increasingly likely to materialize. There is no evidence that Trump will authorize major strikes in practice, and those strikes are the last option short of disengagement. The negotiating team has failed repeatedly because negotiations were always going to fail given Iran’s stance and motivations. The Iran file has shifted from an attempt to solve a problem into one that makes multiple problems worse and accelerates the energy risks observers have tracked for months. Absent a change in strategy or military escalation - neither of which appears to be in the toolkit - disengagement becomes the logical option.

Of course, this can all change quickly. It has been said by allies and noted in observer circles that this engagement is being managed on the fly by the United States. As Israel shared, there is no plan, meaning strikes could be put back on the table seemingly at any time. That lack of clarity is likely viewed by the administration as an asset, but in practice, it fractures relationships and leaves the U.S. more flailing and alone than controlling.

Hopefully the administration has more tricks than it has shown us to date. Otherwise, American foreign policy is likely neutered for the foreseeable future - and with it, some amount of American influence and primacy.

In the meantime, it seems we can reduce our vigilance regarding strikes and the associated market implications.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

In the most recent 1963Macro article, the distinction was drawn between one of two paths forward: escalate or leave. A few days later, the United States appears to have chosen the path of escalation. Whether that decision proves correct or successful remains to be tested against time. But, barring a repeat of April—which seems unlikely at this moment (see No Offramp)—or a highly unexpected Iranian capitulation under threat, aggressive U.S. strikes have been said to likely move forward imminently.

If strikes are imminent and move forward, we have reached the point of major escalation that potentially brings a suite of negative economic consequences the administration has sought to avoid. Examples of key economic risks associated with material U.S. escalation:

• Sharp moves in crude and broader energy markets

• Conflict that extends beyond the immediate theater

• Renewed inflation pressure, primarily supply-driven

• Damage to energy and water infrastructure

• Currency stress and potential disorderly moves

• Physical shortages of critical inputs

• Sovereign debt and fiscal stress in vulnerable economies

• Internal political or social unrest

• Wider, uncontrolled regional war

This is not exhaustive, but is a representative list of the high-level pain points to weigh if the United States is going to pull the kinetic lever in a sustained or meaningfully more aggressive manner.

A bit over a month ago, in Molecules over MOUs: Japan’s Approaching Supply Stress, the case was made that eyes should become more aware of Japan. The country is notably import-dependent on crude from the Gulf, shoulders sizable inflation and currency problems, and sits at the center of the USDJPY carry trade that still matters for global markets. If Japan experiences serious internal stress (yen), the ripple effects may be challenging to contain should anything happen in a disorderly manner.

Today we received a useful signal on that front. Treasury Secretary Scott Bessent publicly addressed the yen, noted its extreme undervaluation, and indicated coordination and preparedness around yen-related transactions and potential intervention—coming shortly after South Korea’s own actions and Japan’s recent large-scale support operations. In practical terms, the U.S. Treasury seems alert to the types of risks outlined above and would logically inject this stability at a time that military operations may otherwise be destabilizing. Bessent and his team understand that Japan (and others) could, under sufficient pressure, sell Treasuries at scale. As Hank Paulson has warned in recent months, Treasuries can be weaponized; the Fed and Treasury need ready tools to manage that possibility. In this example, even if out of necessity with no intent of harm.

This ties back to the Camp David discussions today and the reported decisions surrounding strikes. It appears that the United States is laying what foundation it can to manage potential fallout if the economic cost of engagement proves as severe as some assessments suggest. The comments from Treasury are less about the yen or Japan in isolation and more about ensuring that systems with weak foundations have backstops so that other, less-fragile but still imperfect systems do not cascade. Additional Treasury and Fed actions seem possible if the engagement proceeds as currently signaled - which may be more severe than some observers anticipate.

An Iran conflict taken to the level necessary to actually remove the IRGC goes well beyond what was advertised at the outset of the campaign. There was legitimate hope in the early stages that sustained, high-tempo air power would force Tehran—or what remained of its decision-making structure—to the table in a lasting way. In some respects it did produce pauses. Those pauses, however, proved largely tactical.

Ultimately, the combination of an air campaign plus the threat of further attack was insufficient to disarm Iran’s nuclear capability and permanently secure free passage through the Strait. This publication has long been skeptical of the MOU path, not because a durable agreement would be undesirable—it would be highly beneficial for Iran, the GCC, and global energy markets—but because it was never the most likely outcome. President Trump has recently acknowledged this himself.

It is possible that something intervenes to postpone or avert the next phase of strikes and produces a more durable de-escalation. The probabilities, however, do not currently lean that way. Even if delayed, absent a legitimate diplomatic path that has so far remained elusive, the situation simply returns to the same decision point at a later point in time. The cycle has repeated enough times that further recycling appears less operationally useful.

This returns us to the risks listed above regarding military escalation in Iran. The potential negatives depart from zero and move toward probability values that require serious assessment if strikes proceed. Before examining those probabilities more closely, it is worth scaling the Gulf’s importance to the global economy:

• The GCC accounts for roughly 2% of global GDP (nominal; somewhat higher on a PPP basis).

• It produces 20–23% of global oil and holds some of the world’s lowest-cost reserves.

• The Strait of Hormuz carries approximately 20% of global oil consumption and a comparable share of seaborne LNG trade.

• GCC sovereign wealth funds collectively manage an estimated $4.8–6 trillion, with a substantial portion (commonly cited in the 30–40% range) invested globally.

• Petrochemicals, fertilizers, and a range of industrial inputs remain heavily dependent on Gulf production and logistics.

The Gulf matters. The costs of sustained conflict in the region will therefore likely be shared, in some form, across the global system.

The question then becomes how much of the economic damage outlined earlier materializes, and who outside the Gulf absorbs it most directly. We already know the Strait is effectively closed for practical commercial purposes. Global energy inventories and logistics are and have been under pressure. GCC economies are registering the hit—Saudi Arabia’s economy contracted roughly 4–5% in the most recent reported quarter amid the disruptions. Globally exported, supply-driven inflation is no longer theoretical. The physical flows discussed throughout this series will eventually become a problem that cannot be papered over indefinitely. As argued in Iran Has the World by the Gas Tank, it is this physical constraint that Iran has been exporting, forcing markets into successive adjustments. Many of those adjustments have proven adequate for a time, with markets seemingly treating the conflict as a temporary Hormuz problem. That framing underweights the more consequential assumption: that GCC infrastructure will remain intact and ready to export at scale once shipping conditions improve.

The decisive variable likely becomes how Iran chooses to retaliate. Iran has openly threatened GCC energy and economic infrastructure on multiple occasions. The Houthis have already fired on ARAMCO facilities, and Iran retains a missile capability such that one or a small number of successful strikes causing disruptive damage to critical Gulf infrastructure is a credible concern.

The risk of damaged GCC energy infrastructure dots directly to Japan and the U.S. Treasury. Japan’s energy position becomes more critical if its primary suppliers are not merely constrained but physically degraded. The difference between “stymied” and “destroyed” carries a meaningfully higher probability of inflation spikes, particularly for energy-import-dependent economies. Japan, already operating with a cracked foundation on currency, inflation, and fiscal metrics, sits near ground zero for the transmission of several of the risks listed above. Yen support helps keep the dominos wobbling rather than falling in sequence, in theory.

Iran has been a major global event blending markets, geopolitics, energy, economics, history, and ideology into a single, high-stakes topic. More importantly, it possesses both the reach and a non-trivial probability of inflicting economic damage, absent clear surrender by one side or the other. The United States has not lifted pressure. Iran has not capitulated. Both sides have been damaged in places and emboldened in others. Both appear to view the conflict as being about more than today’s map of the Strait; it is about the future of a region that is consequential globally.

The base case from here is that the U.S. strikes that proceed in some form. How they are executed, and for how long, is no longer fully at the discretion of the United States aside from beginning the campaign. The Iranian response will likely be the key determinate for the economic cost of the engagement and how that cost resonates globally.

Time will tell.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

Throughout the U.S.-Iran conflict, this publication has held one base case that remains intact:

Diplomacy will not produce a durable outcome unless the IRGC is degraded to the point that it is effectively eliminated as a controlling force, and is therefore willing to negotiate and make meaningful concessions.

Recent events continue to support that view of the conflict.

The pause initiated by President Trump last Friday and the short-lived ceasefire of the past weekend are already giving way to renewed fighting. Hostilities have resumed from the U.S., Iran, and proxies—Houthis in the Red Sea and IRGC-aligned Iraqi groups at minimum. Shipping has been harassed in multiple waterways and Saudi energy infrastructure has been targeted repeatedly. Iranian ballistic missiles were launched at a U.S. base in Jordan; with U.S. reports indicating they were intercepted. Saudi and American aircraft have struck Iranian-backed militia sites in eastern Iraq after drone attacks on Saudi oil facilities, expanding the fight further into Iraq.

None of this is surprising if one listens to the Iranians. They have been explicit about “jihad,” “resistance,” and revenge for some time. They have described an “offensive phase,” stated they will “fight to the last fighter,” denied that meaningful talks are underway, and rejected any arrangement that does not leave Iran in control of the Strait of Hormuz. That messaging should be taken at face value given Iran has come up behind their rhetoric with strikes and proxy expansion.

At this stage in the conflict, it is important to remember that this is not primarily a territorial or transactional dispute. It is an ideological conflict across both religious and economic lines for all parties involved. The IRGC views itself as the protector of “pure” Shia Islam in the Gulf and beyond with its purpose not being to reach a mutually beneficial equilibrium with the West or the GCC - by intentional design. Rather, its purpose is to preserve and expand a specific religious-political order. Any durable deal that reduces its coercive hold on the Strait, GCC energy flows, or regional alignment renders that project inert. The IRGC knows this and has logically (and consistently) acted accordingly. Negotiation only functions when both sides value compatible outcomes and seek to obtain them. For the IRGC, the welfare of the Iranian people is secondary if not tertiary to their ideology.

Western observers continue to misread this reality. The preferred Western outcome remains a deal, capital inflows, and a return to prosperous stability. That preference is understandable and not typically wrong in the sense that peace is a foundation of prosperity. It is also the product of an ideology of its own making: the post-Cold War professional consensus that violence is pathological, that conflict is a failure of process, and that sustained imposition of costs is illegitimate or unnecessary. Those instincts leave the West structurally exposed to an adversary that does not share any of those values as it pertains to the outcome of a military engagement. Your author writes from inside that professional class—I think, write, and manage capital for a living while possessing zero desire to see people killed, harmed, or held back from creating a better life for themselves and their family. That perspective is common across much of the American and Western educated classes, voting blocs, and now drilled into children from an early age. It is also the perspective that systematically discounts the seriousness of an enemy like Iran who is willing to execute protesters, strike commercial shipping, and fight to the last combatant.

The operational picture now makes the cost of that ideological mismatch clearer. Pre-war U.S. Patriot PAC-3 stocks stood near 2,330. By late July they had fallen to roughly 760–830, with THAAD similarly depleted. Meaningful replenishment does not arrive until 2029. Iranian drone and missile inventories far exceed interceptor capacity, and the U.S. typically expends multiple interceptors per inbound Iranian threat. The math favors the attacker, leaving the United States is spending multi-million-dollar munitions against relatively very low-cost drones and missiles (U.S. munitions that were never designed to engage low-cost, high-volume targets that didn’t exist when when it was developed). Iran has exploited this by striking more consistently and attempting to force a war of attrition in which U.S. bases eventually face thinner defensive screening. To that end, the U.S. has already acknowledged allowing some projectiles through in order to conserve ammunition.

This magazine mismatch is a real operational problem, but the larger problem is political and social will. Neither the administration nor the broader public appears prepared to meet an ideologically committed adversary on the terms the conflict actually requires. Iran understands this dynamic deeply and is already seeking to exploit it to the greatest degree possible - on all battlefronts. To wit, the result of that Iranian observation is expansion across multiple fronts—Houthis, Iraqi groups, the Red Sea, pressure on GCC states—while existing theaters with Israel, Lebanon, and Hezbollah remain active. Once several proxy actors with overlapping incentives are in motion, a clean pause becomes far harder to impose. Western restraint has been turned into a weapon against itself - an ideological battlefield of great importance that few give appropriate weight to.

The conflict is therefore entering a phase over which the United States and its allies will have materially less control unless they are prepared to engage more directly. Given the available information, these expectations appear reasonable:

• The war widens further into Iraq, Lebanon, Yemen, and additional theaters while pressure continues on GCC states. Broader international engagement is not off the table.

• The United States may need operators on the ground to secure the Strait. Do not be surprised if that requirement arrives in the coming weeks or months. This would not be a mass invasion, but U.S. forces would likely need to operate on Iranian soil at some point in the conflict.

• Attrition of U.S. equipment and personnel will occur and likely increase as the conflict expands. Losses of aircraft, drones, or sensitive kit should be treated as an expected cost, not a strategic shock. You must harden yourself against headlines. NHTSA data suggests that since the conflict with Iran began in March, we have lost somewhere between 13-15k U.S. citizens to automobile accidents against about 20 confirmed service member deaths tied to the conflict with Iran. This is not a comment on moral equivalency, it is a comment on scale. Be prepared for harsh but unsupported headlines.

• Significant strikes on Iranian power, infrastructure, and denial networks supporting Strait control will likely be required.

• More GCC states will adopt a more active retaliatory posture if they assess that Iran has been sufficiently degraded and the risk of severe retaliation has declined.

• Escalation continues until IRGC-aligned entities and the IRGC itself are degraded enough that they cannot sustain the campaign. Full elimination of the IRGC is not U.S. doctrine and is not a near-term outcome, but the level of force required to create the brighter future for the Gulf and America will likely exceed what much of the American public is currently prepared to accept.

• A durable off-ramp with this many actors remains unlikely unless the IRGC loses controlling power inside Iran—an outcome that is possible but not yet high enough probability to underwrite.

• Achieving the stated objectives will require actions the American public is no longer conditioned to sustain. It is a return to the laws of nature - the strong will survive - which Western culture deeply rejects despite the logical truism in the statement.

There is one clear alternative: a managed declaration of U.S. victory followed by withdrawal. This publication has not abandoned its base case, but the political and social will required to remove the IRGC from a controlling position may not exist in sufficient quantity to realize the ambition. In an election environment, narrative management can blunt the immediate domestic cost while leaving the strategic consequences deferred. The Iranian people would be no better off, GCC nations would lose a more stable path, and the largest state sponsor of anti-Western terrorism would emerge emboldened and likely enriched. That would be objective failure, but it may be required to satisfy the domestic audience. Don’t assume the U.S. won’t simply quit.

The current U.S. administration has shown that one of its core philosophies is a willingness or desire to negotiate with terrorists. That stance marks a major departure from both Bush and Obama - and administrations prior. Absent a tougher and more consistent stance akin to those prior administrations, retreat and disengagement should be viewed as a reasonably probable outcome from a U.S. leadership stack that has a demonstrated desire to prioritize the U.S. equity market performance and optics over durable, long-term solutions. However, it does not yet read as the highest probability.

The 1963Macro base case remains intact: no durable resolution without definitive IRGC degradation to the point of capitulation.

As a result, fighting will continue until that happens, or the U.S. retreats.

Everything else is commentary.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

After several months of engagement, the United States and Iran are locked in a position neither can easily exit.

Twelve-plus consecutive nights of American strikes, Iranian attacks on ships in the Strait of Hormuz, expanded strikes against GCC energy and civilian infrastructure, Houthi activation in the Red Sea, and explicit statements from both Trump and Rubio that Tehran is not serious about a deal have brought the conflict to a sharper inflection than many anticipated. Oil has already pushed through $100. The market is not waiting for the next rhetorical escalation; it is pricing the physical reality that two critical energy chokepoints are under simultaneous pressure.

For 1963Macro readers, the outcomes are not surprising. The IRGC is behaving as we have anticipated for months when pressed by what is a real and growing U.S. threat. Iranian rhetoric has remained defiant, if not escalatory, and there are few visible signs they seek an alternate course.

Absent the United States simply stopping, Iran is unlikely to make a deal that surrenders coercive control of the Strait or accepts meaningful, enforceable constraints on its nuclear capability. Scenarios like this do not create clean off-ramps. As tracked in previous articles, escalation is now less a trap than it is the logical outcome. This is what happens when one side has to concede something fundamental to end the hostilities, but neither will.

This conflict has shown that conditions can change quickly—and they keep doing so. The probabilities, however, now significantly favor further escalation, and the character of that escalation is becoming clearer.

The Incentive Problem

Using our base case as the frame—that the IRGC will not concede given they are not a traditional state actor but a keeper of “pure” Shia Islam and the broader Middle East—the core problem has always been structural. Iran is fighting for more than the Strait, and we should expect them to engage accordingly. There was always some room for diplomacy, but it was doomed if the expectation was that the IRGC would disarm and cede voluntarily.

That baseline sets the foundation for the problem we have today. If the United States walks back while Iran retains effective leverage over Hormuz and residual nuclear reconstitution capacity, Tehran emerges stronger than it has been in four decades. That would be complete mission failure. It would also demonstrate that sustained pressure on American forces can force Washington to accept state control of an international waterway. Gulf states would be forced to recalibrate alliances. Proxies would be emboldened. Every subsequent administration would face a more confident adversary, even if Iran is depleted today. Taken together, the current U.S. leadership has shown it is unwilling to allow these outcomes—though it did try meaningfully to achieve its objectives through peaceful means.

The alternate view is no better for the IRGC. If Iran concedes—restoring free navigation on non-Iranian terms, accepting tight nuclear constraints, and dialing back the horizontal campaign—it ends the nightly attrition but loses the two instruments that have given it regional weight for a generation. The resistance narrative takes a severe hit. From Tehran’s perspective that registers as strategic defeat even if the physical state survives and the country receives compensation or foreign investment.

Our long-standing baseline, coupled with recent developments, produces a high-stakes kinetic stalemate. Neither side sees a tolerable compromise that leaves the other with its core coercive tools intact. What we are witnessing is likely less the beginning of limited strikes and temporary pauses than a battle for the terms of the regional order over the coming decades. In more than forty years of engaging the Islamic Republic, the United States has never put this combination of sustained kinetic pressure on Iran’s maritime and logistics networks, an explicit contest for control of the Strait, post-Khamenei internal Iranian dynamics, and simultaneous activation of a second chokepoint.

The pre-war status quo is long gone, and with it many of the variables that were still in play in April.

Why April Likely Won’t Repeat

Observers will note that we have seen maximalist rhetoric before. That is true. In early April, Trump threatened “Power Plant Day and Bridge Day,” complete demolition of Iranian infrastructure, and a return to the “Stone Ages.” It was made-for-TV pulpit pounding complete with specific deadlines. As the deadline approached, the full campaign as described did not materialize. The United States moved toward a ceasefire path, limited tit-for-tat strikes, and the subsequent Memorandum of Understanding.

The MOU collapsed quickly once Iran resumed attacks on shipping and the United States resumed strikes. Our base case prescribed this outcome. We had already seen a ceasefire violated numerous times that resulted in a U.S. blockade of Iranian ports. The MOU language prescribing “freedom of navigation” for 60 days on the Strait was met negatively by the IRGC and hostilities resumed. Force posture was elevated in April and remains elevated today. So why should this time be different?

Several conditions have changed:

• Sunk costs and operational momentum are higher. The United States is already inside a multi-week strike campaign, making walking kinetic action back after consecutive nights is politically and operationally harder than extending a future deadline on a threatened package that has not yet begun.

• The energy-market damage is no longer prospective. In April the severe supply shock was still largely a threat. Now with Hormuz traffic collapsed, the Houthis opening the Red Sea front, oil through $100, and physical availability, insurance, and spread effects are occurring in practice. Stopping without restoring navigation leaves the United States with the economic and political pain already incurred and none of the strategic benefit of removing Iranian leverage. That “all pain, no gain” problem was less acute in April.

• Force posture is more visibly committed than it was after a month of high-tempo operations in the spring. Additional strike assets, including B-1s operating from British bases, are flowing into theater. Public tracking of these movements and the Iranian response—designating RAF Fairford a legitimate target and issuing pointed warnings framed around the British monarchy—raise the cost of quiet reversal. Increased force posture expands the potential target list for Iran, as they have already signaled.

• Iranian horizontal escalation is already underway. Strikes and threats against GCC power and desalination infrastructure, explicit UK-base rhetoric, and Houthi attacks on Saudi-linked shipping mean both sides are climbing the ladder at the same time. A U.S. pause would occur against active Iranian expansion rather than a relatively quieter environment in which a freeze might appear more reciprocal.

• The post-MOU record has taught both sides—and outside observers—that pure diplomatic pauses without behavioral change tend not to hold. Rubio’s current language—that Iran is “begging” for a deal but is not ready to accept one that sticks, and that the price rises every night—reflects that lesson. The diplomatic track is now treated as secondary until Iranian engagement in the Strait stops. The rhetoric is similar to April, but it is being communicated more broadly by administration officials in a more direct and less hyperbolic manner.

• Credibility and precedent also cut against disengagement. Allowing Iran to retain effective control or permanent interdiction capacity after this level of American investment would signal that a determined regional actor can seize a critical chokepoint and the United States cannot reverse it at acceptable cost. That lesson would be unlikely to stay confined to the Gulf. Other actors watching other waterways and partners evaluating the reliability of U.S. security commitments would likely view this as a negative and a sign of American weakness. That outcome would serve to undermine U.S. ambitions across multiple theaters.

• Legacy considerations, while secondary, point the same direction. A clean walk-back that leaves Iranian coercive leverage intact after a sustained campaign is not an outcome history would paint favorably for President Trump. The more attractive framing remains that Iran was finally made to feel sufficient pain and free navigation was restored. All U.S. presidents factor how outcomes will read; the case of Iran is almost certainly no exception.

These factors do not make another “TACO” impossible, but they do make it more challenging. Domestic sensitivity to energy prices, munitions stockpiles, alliance management, and Trump’s deal-making instincts remain real. The structural reasons against a clean walk-back that leaves Iranian control of the Strait intact are stronger than they were in April. The costs already paid mean the United States would be treating the effort to date as a pure sunk cost. That appears to be an unlikely preference against the current backdrop.

The Escalation Ladder

If the probabilities favor continued pressure rather than a repeat of the April pause, what does the next phase likely look like?

The highest-probability course likely keeps intensified pressure on energy supplies and markets. Hormuz is already constrained while the Houthis have opened a second front in the Red Sea. Iran has demonstrated willingness to strike GCC infrastructure that supports both civilian life and American basing. Additional ship attacks, broader energy and power targeting inside the Gulf, or credible threats against alternative export corridors would deepen the disruption; all likely continue or expand. Gulf states are accelerating pipeline bypass projects, but those take time. Short-to-medium-term volatility in physical oil supply, prices, and spreads remains an expected side effect of the conflict.

An elevated risk consistent with current rhetoric is the activation or demonstration of hybrid capabilities inside other nations, particularly the United Kingdom. Iran has a documented history of directed plots and influence operations in Europe and the UK recently designated the IRGC under national security powers for exactly this reason. Iranian commentary highlighting open borders in the UK and the explicit naming of British bases as legitimate targets function as classic signaling: the capability to operate inside or activate networks already present exists or can be generated. This does not require large missile salvos. It provides a relatively low-cost, deniable, and politically disruptive means for Iran to fight the battle. Some may view this as a tail risk. This publication assigns higher conviction. That is not a prediction of any specific domestic incident inside a NATO country by rather a stance that dismissing the possibility outright fails to give appropriate weight to Iranian rhetoric and known capabilities. Lower probability, but high enough that cleanly dismissing this possibility seems like a mistake.

More constrained in practice is the use of longer-range missiles reaching into southeastern or central Europe remains on the table (or any number of other in-range locations). Standard Iranian medium-range systems sit in the roughly 1,700–2,000 km class. Some configurations and the prior attempt to strike Diego Garcia suggest possible range extension under modified parameters. From northwestern launch points this puts parts of Europe in theoretical range; deeper Western European targets would require less-proven or scarcer systems. If long-range strikes occur, selective demonstration attacks are more likely than sustained saturation. If the IRGC is to be believed, longer-range strikes will likely happen but further up the escalation ladder.

Lower-probability as a direct conventional option, but still viable asymmetrically, are strikes or disruption aimed at energy pipelines well beyond the Gulf—Azerbaijan and other Caspian or Caucasus routes being the example often raised. Iran has stated that regional export corridors will be “shared by all or denied to all.” Direct ballistic strikes can be geographically and politically awkward, leaving proxy action, special operations, or cyber as more realistic pathways. To wit, recent commentary explicitly highlighted the vulnerabilities that U.S. utilities have to cyber attacks. This, along with missile strikes, are all within the IRGC toolkit.

The overall pattern is horizontal and asymmetric first: deeper energy and infrastructure pressure, maritime disruption across two chokepoints, hybrid signaling and activity, and selective longer-range demonstrations if required. Pure vertical escalation into large-scale long-range ballistic attacks on European territory (or inside/on the United States) is higher-threshold because it risks a materially more severe response.

It is important to understand that as the United States further demonstrates control or degrades Iranian capacity, the closer the IRGC gets to no longer being in power. Regimes under existential threat care little for the boomerang that returns to them.

Against the Consensus Expectation

The consensus view still seems to treat the current phase as another turn in a familiar cycle: threats, limited strikes, mediation, pause, reconstitute, repeat. The structural incentives now argue against that symmetry. The United States has already absorbed meaningful economic, military, and political costs and stopping without progress on the Strait converts that expenditure into pure loss while validating Iranian leverage. The post-April record showed that maximalist rhetoric followed by an unserious pause ultimately solved nothing. Force posture is more committed on both sides, and Iranian horizontal moves are already in progress.

These observations guarantee neither a decisive American victory nor Iranian collapse. We may well end up negotiating settlement again in the future. However, they do mean the barrier to another clean U.S. walk-back is higher than it was four months ago, and the relative cost of continued engagement is lower. The more probable path remains continued and potentially sharper escalation until cumulative damage forces a change in one capital’s calculus—either Iranian capacity and will degrade to the point that negotiation on American terms becomes preferable to further attrition, or U.S. costs rise high enough to force a compromised outcome. The latter still looks less likely given the empowerment risk and the precedent problem, at minimum.

Hormuz control and the nuclear file are not secondary issues that can, at this phase, be easily papered over with another memorandum. Failed diplomacy that leads to fighting does not tend provide a clean return to negotiation absent a material change in the conflict. Accordingly, until one side absorbs enough pain to revise its red lines, the conflict does not likely end through agreement. It ends through exhaustion, degradation, or a forced redefinition of acceptable outcomes under duress. Current indicators still point to the United States choosing to keep raising the cost, which remains the base-case for this publication at the time of this writing.

The differences from April make the U.S. and Iranian course of escalation more durable than the last time maximalist language appeared during conflict.

Escalation, potentially significant, is the expectation from here. The duration of that escalation remains unknown.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

The prevailing media narrative is that the war with Iran is not about “regime change.” In a narrow sense, that’s true. The United States is not mounting a full-scale invasion and occupation aimed at installing a new government in Tehran. But that framing misses the bigger picture. What we are witnessing is regional power realignment — a sustained campaign to degrade the IRGC’s ability to export disruption so that pragmatic, integrationist models can prevail. At the center of this realignment sits Saudi Arabia’s Vision 2030.

Vision 2030 is the gravitational force shaping incentives across the Gulf. Saudi Arabia has spent nearly a decade and significant capital betting its future on diversification, global integration, foreign direct investment, tourism expansion, and positioning itself as the pragmatic leader of the region. MBS and his inner circle — including his son, who has signaled openness to normalization — have tied the Kingdom’s legitimacy and long-term economic trajectory to this vision. Abandoning or severely compromising it to accommodate the current Iranian regime would be self-defeating on multiple levels.

This fundamental incompatibility makes a clean diplomatic solution at this juncture unlikely. Instead, it points toward continued military pressure — and the real possibility of further escalation — unless Iran’s capabilities are degraded enough to force meaningful concessions.

Vision 2030 vs. the IRGC Model

At its core, Saudi Vision 2030 is a deliberate strategy to reduce reliance on fossil fuel revenue, attract Western and global business cooperation, and further integrate the Kingdom into the international community. The end game is clear: elevate Saudi Arabia’s standing as both a global player and further formalize their standing as the practical leader of the Middle East.

That future requires several non-negotiable conditions: regional stability, open and reliable sea lanes (especially the Strait of Hormuz), strong investor confidence, and a dramatically reduced security drag. Iran’s IRGC-driven system — built on revolutionary export, proxy networks, asymmetric warfare, and ideological confrontation — is structurally incompatible with those conditions. The IRGC’s ire is aimed directly at the very partners and stability mechanisms Saudi needs to achieve its goals.

One model bets on integration and prosperity. The other bets on resistance and leverage through targeted disruption. This is not an abstract ideological clash. Recent GCC statements condemning Iranian attacks on Saudi and Qatari tankers in the Strait of Hormuz, alongside continued US strikes enabled from Gulf bases, illustrate the tension in real time.

This incompatibility helps explain Saudi hedging: public diplomacy and occasional engagement with European channels alongside quiet support for US pressure. Riyadh wants the Iranian threat degraded enough to protect Vision 2030 without owning the full costs or optics of the conflict. Given that the Saudis have invested a decade in this vision and already seen tangible benefits, it seems highly unlikely they would abandon it to “save” Iran. They have absorbed hits, enabled operations, and joined strong GCC statements condemning Iranian actions against shipping and territory. While they must walk a careful narrative line for domestic and regional audiences, their actions consistently support power realignment rather than work against it. The long-term incentives are straightforward: a weakened IRGC unlocks the Vision; an emboldened one sets it back.

One could reasonably argue that Saudi Arabia might prioritize short-term oil revenue windfalls or immediate stability over strict adherence to Vision 2030 discipline, especially if Iranian retaliation intensifies. This is a fair counterpoint. However, the sunk costs, domestic expectations raised by a decade of reforms, and the strategic bet on diversification make a full reversal highly costly. The trajectory of Saudi behavior to date — hedging while enabling pressure — suggests they are trying to thread the needle rather than abandon the Vision.

The De Facto Coalition

Publicly, there is no grand anti-Iran coalition photo-op. Functionally, however, one exists and is operating effectively. This is not a conspiracy — it is the normal convergence of national interests in a high-stakes environment.

The United States leads the offensive, using air and missile strikes to degrade Iranian radar, coastal defenses, missile and drone sites, and naval capabilities. GCC states — Saudi Arabia and the UAE most notably — provide basing, intelligence, logistics, and defensive support while absorbing retaliation. Israel, despite public Saudi criticism, degrades shared threats such as Hezbollah and the Houthis that complicate Gulf stability, delivering indirect but meaningful benefits to Vision 2030 (including reported interceptor support to the UAE).

The dual tracks we’ve observed from Saudi Arabia make perfect sense under a “power realignment” lens. Engagement with European actors provides intelligence and deniability, while kinetic pressure continues. The Saudis have long understood that the IRGC will not voluntarily surrender its crown jewels. Diplomacy remains useful for tactical pauses and shaping terms, but it has proven insufficient for the strategic rollback required. This pattern has held throughout the conflict.

Escalation Ladder and the Boomerang

Iran retains significant levers it has not yet fully deployed. From Tehran’s perspective, a successful Saudi Vision 2030 represents an existential ideological and strategic threat. If the Saudis remain committed to their path, Iran will likely feel compelled to strike back directly. Retained capabilities include expanded proxy operations, renewed Strait of Hormuz harassment, mining campaigns, long-range strikes, and cell activation abroad.

Each rung on this escalation ladder raises the pain for all parties but also increases the risk of the boomerang. At some point — particularly if Iran closes key chokepoints again or conducts strikes beyond the immediate region — the GCC (with Saudi in the lead) will likely conclude that continued perceived alignment or excessive restraint damages their interests and global brand. That moment can turn rhetorical distance into more forceful engagement. Current US and Israeli pressure is already setting the conditions for this by degrading Iranian capabilities now, making later GCC involvement less costly and more feasible (though exact timing remains uncertain).

Shia minority dynamics outside Iran further reduce the risk of chaotic spillover in a post-degradation environment. These communities are often minorities living in Sunni-majority or mixed societies. Without robust IRGC state backing, sustained disruption becomes expensive martyrdom with limited strategic upside all against enemies who would rather welcome them than fight them. Blowback is real, but likely overstated as an existential threat to the broader region.

Why Diplomacy Falls Short

Iran has repeatedly signaled it will not trade its ideological crown jewels for economic relief. Saudi Arabia cannot credibly broker a deal that delivers a meaningful win for the US and Gulf states without being painted as traitors to the cause. The Saudis understand this dynamic well. Their incentives therefore lock them into supporting degradation over premature accommodation.

The generational reality in the Gulf reinforces the trend. Many under-45s across GCC countries prefer the prosperity and normalization path offered by Vision 2030 over perpetual resistance. The IRGC model has kept the region economically and diplomatically constrained; the Saudi model offers a credible way forward.

The Irony and the Larger Picture

There is a striking irony at play. Israel’s actions, despite routine public criticism from Saudi Arabia, functionally benefit the GCC by weakening the resistance axis that threatens Vision 2030. The US security relationship remains foundational to Gulf stability and the Vision’s progress. Even segments of Shia business communities outside Iran stand to gain from reduced disruption.

The key takeaway is straightforward: this engagement is about creating conditions where the pragmatic, integrationist future can succeed. Because Iran is highly unlikely to negotiate away its core capabilities, military pressure will continue until Tehran concedes meaningfully or is sufficiently weakened to no longer pose a systemic threat.

This is regional power realignment — not the invasion-and-occupation version of regime change that dominates media framing. Success then looks like a contained Iran operating in a Gulf led by Saudi pragmatism. That is notably different than the widely-held belief that the U.S. is attempting, or only attempting, “regime change” in Iran.

The boomerang may yet force more open GCC engagement if Iran escalates further up the ladder. Until then, the United States will likely carry the primary offensive burden while partners enable, defend, and manage optics. The incentives are strongly aligned. Vision 2030 is too important, the incompatibility too deep, and the alternatives too costly for the current trajectory of escalation to change easily.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

Mohsen Rezaei, senior military advisor to Iran’s Supreme Leader, has warned that Iran will shift to full-scale offensive operations with no “political boundaries” if the United States continues its military campaign. In recent statements, he signaled a move away from limited retaliation toward higher-intensity actions, stating that no political border will provide security against Iranian forces if the pressure persists another two to three days.

This is not routine rhetoric. It reveals core Iranian operating assumptions about how a wider conflict would play out. Here we focus on the biggest one: the boomerang.

Iran appears to calculate that it can:

• Impose sufficient costs on the U.S. and Israel through firepower, proxies, and asymmetric tools to deter or degrade sustained operations.

• Strike non-U.S./Israeli targets (or energy infrastructure) in ways that GCC states will find politically untenable, leading them to expel U.S. forces, shun Israel, or withhold support.

• Rely on Shia populations across the Gulf to create internal political or social backlash against any GCC participation in strikes on Iran, especially if Sunni-led governments take the lead.

These baselines drive the “no political boundaries” posture. But they rest on assumptions that may not hold once tested—particularly if Iran crosses lines that directly threaten the economic lifelines of mixed Sunni-Shia societies.

Why GCC hesitation has been rational so far

Arab Gulf states have long balanced real concerns: fluctuating U.S. political commitment, the risk of direct retaliation on their own energy infrastructure, and the broader destabilization of a region where regime survival depends on delivering prosperity and managing internal cohesion. All are legitimate.

But remove or override those constraints—through direct strikes on energy infrastructure or escalated actions that ignore “political” red lines—and the calculus shifts. The Strait of Hormuz and associated energy infrastructure are not peripheral; they are the heart of GCC economies. Today’s disputes center on shipping and Western alignment. Tomorrow, “non-compliance” could be defined far more broadly by Iran. Iranian willingness to weaponize the region’s economic lifeline for leverage creates an existential long-term threat that may outweigh short-term political optics.

The sectarian layer and the war inside the war

President Trump and others have repeatedly discussed “moderate voices” inside this conflict. While there are likely many moderates inside Iran, functional power remains with hardline elements. This aligns with Iran’s foundational role as self-appointed guardian of “pure” Shia Islam.

On balance, Sunni-led Gulf states have pursued more pragmatic engagement with the West—defense cooperation, foreign direct investment, and deeper societal integration. There is a spectrum inside both Sunni and Shia communities: not every Sunni embraces Western ties, and not every Shia rejects them. Yet the broader Sunni-led governance model has proven more compatible with global economic and security integration.

Shia communities are mixed throughout most GCC nations: a majority among Bahraini citizens (under a Sunni ruling family), roughly 30-40% in Kuwait, significant concentrations in Saudi Arabia’s oil-rich Eastern Province (nationally 5-16%), and smaller but notable shares in the UAE and Qatar. Many of these populations view Iran—rhetorically and through networks—as a guardian of Shia interests and a pole of more traditionalist or “pure” Shia Islam.

An attack on Iran, particularly one involving Sunni-led states, can be received as an attack on the faith itself. This dynamic risks internal unrest, political fallout, or localized violence along religious lines—precisely the kind of internal flashpoint that “regional stability” language often euphemizes. Iran’s own leadership, deeply rooted in religious doctrine, frames external pressure similarly: strikes on Iran are strikes on the purest expression of Shia Islam that the Islamic Republic was built to defend. Sunni participation amplifies the perceived betrayal.

The secular Western lens often misses this. In much of the West, religious differences rarely drive organized violence or regime-level threats, and denominational conflict is negligible. Analyses therefore gravitate toward nukes, the Strait, missiles, and great-power stakes. Those matter. But they sit atop a deeper sectarian substrate that shapes how populations and leaders in the Gulf perceive legitimacy, threat, and acceptable costs.

The boomerang in practice

If Iran removes political constraints and strikes energy infrastructure across the region, we return to the starting point. GCC societies—already straddling Sunni and Shia populations—would face a stark choice: prioritize the stability and prosperity of their current mixed economies and social orders, or risk internal fracture to preserve Iran’s role as ideological guardian.

This is the boomerang. Actions meant to punish, deter, or force U.S./Israeli retreat could instead erode sympathy among GCC leadership and potentially among Shia communities if economic hardship follows. By extension, Iranian aggression against nearby GCC states could accelerate the very unification or active opposition Iran hopes to avoid. Iran has shown pragmatic restraint toward Saudi Arabia at times, partly due to the latter’s large Shia population and mutual religious considerations. But sustained economic damage changes the equation. Saudi (and broader GCC) calculations have always blended geopolitics, oil security, and regime survival with the sectarian overlay—not pure religious solidarity.

Signs of moderation exist: hosting U.S. bases, deepening Western business ties, and Vision 2030-style diversification point toward pragmatic, economically integrated paths. Iran’s regional influence, including its “Axis of Resistance” model, represents the more assertive, resistance-oriented pole. If Gulf nations—especially Saudi Arabia—openly join direct action against Iran alongside the U.S. to protect their economic lifeline and degrade Iranian missile/drone capabilities, it would be a notable tell. It would signal that “moderate” (pragmatic, state-interest-driven) voices are prevailing in shaping the regional order going forward. This is the outcome that Iran exists to prevent.

The larger ideological contest

This is not merely another round of U.S.-Iran escalation. As noted in prior analysis, we are in a war of ideology—one that extends beyond the West versus Iran. It is also an internal contest over the direction of Islam in the near-to-intermediate term: how much space will exist for the more traditionalist, resistance-oriented current that Iran embodies versus more pragmatic, economically outward-looking models?

The GCC’s response to Iranian overreach on energy infrastructure or political boundaries will provide a key data point. If broader coalition action materializes, it suggests the region is moving toward separating from—or at least containing—the most assertive fundamentalist expressions in favor of global integration. The opposite outcome entrenches the hard poles.

Iran’s current posture, as voiced by Rezaei, assumes its baselines will hold. They very well might—Iran has already demonstrated non-negligible destructive capability. However, the boomerang risk—economic pain activating sectarian fault lines and forcing societies to choose—suggests those assumptions deserve close scrutiny. The Strait, energy infrastructure, and the religious undercurrents beneath them remain the decisive terrain. How this plays out may shape not only immediate military outcomes but the longer-term ideological map of the Middle East.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

A lot can change in a short period of time. For better or worse. But sometimes when things don’t change, we have to reflect on the impact of stagnation — or heed earlier warnings about the cost of inaction.

Around June 17, 2026, the United States and Iran signed a 14-point memorandum of understanding. Trump framed the deal as essential to reopen the Strait of Hormuz. His core argument was direct:

“If we didn’t do this deal, we could have dropped more bombs for another three weeks, two weeks, four weeks, two years… but then you would never have the Hormuz Strait open.”

In the same window of time as the above comment was made, President Trump also noted that the U.S. had approximately “four weeks” before serious economic problems may befall the global economy as a result of the disruptions to the Strait of Hormuz.

He identified three main risks of prolonged closure: oil supply disruption (the strait carries roughly 20 percent of global oil), energy-driven inflation and higher gasoline prices, and broader economic fallout from sustained high energy costs and volatility. The MOU was presented as the pragmatic way to restore flows quickly, even if it required military restraint. It included a temporary reopening of the strait, relief from the U.S. naval blockade, and a framework for further talks.

A subsequent analysis noted Trump’s concern that failure to reopen the waterway risked an “economic catastrophe” severe enough to invite comparisons to Herbert Hoover. Four weeks later, the window President Trump mentioned has largely closed. The MOU was only partially observed and is now effectively a memory. Both sides show little appetite for serious diplomacy amid continued strikes and threats.

This publication has argued for months that the negotiation path carried elevated economic risk because it prolongs contestation of the Strait. The current environment — a militarily contested waterway, ongoing strikes, threats to GCC infrastructure, and minimal reliable crude flows — matches that concern.

If the MOU was meant to prevent the outcomes Trump described, those outcomes should now be visible.

Several are.

Checking the Scoreboard

1. Energy prices and oil disruption - Worse and still deteriorating.

   • Brent is near $85–$86. WTI is near $79–$80. Prices fell after the MOU as markets priced in reopening, then rose again with the agreement’s breakdown, renewed blockade rhetoric, Iranian attacks on shipping, and fresh strikes. Refining margins remain extremely elevated. Sustained flows through the Strait have not returned; post-MOU movement was limited and short-lived. The Strategic Petroleum Reserve has been drawn down to roughly 317 million barrels, a 43-year low. Crack spreads have reached rarely seen levels. The physical system is tighter than it was before the MOU period. This is the clearest area where the outcome Trump said he wanted to avoid is materializing.

2. Inflation pressure - Mixed, with energy as the live variable

   • June CPI rose 3.5 percent year-over-year, down from 4.2 percent in May. The monthly index fell 0.4 percent, driven largely by a temporary drop in energy prices after the MOU. Energy remains up 15.7 percent over the past year. Core inflation eased to 2.6 percent. The June improvement reflected that brief window of lower energy prices. With oil rising and Hormuz tensions elevated, later readings are at risk of reversing some of the progress. Even an immediate halt to fighting would likely leave normalization of shipping at least a quarter away.

3. Broader economic damage - The most severe version has not arrived.

   • Growth forecasts still center near 2% for 2026. Recession probabilities remain moderate. The labor market has held up. Consumer sentiment is weak and spending shows fatigue from higher energy costs, but there is no collapse in activity. Warning signs exist — stagnant housing, rising delinquencies, private credit stress, and an elevated 10-year yield — yet equities have stayed resilient.

That resilience has an internal logic. Markets tend to look through macro problems they expect to be temporary. In a strong AI-driven bull market, the preference for pricing optimism is pronounced. Current positioning appears to assume that energy stability will return and that this phase will resemble previous rounds: disruption, followed by diplomacy, followed by recovery. Under that assumption, looking through the stress is rational. The vulnerability is a negative surprise that breaks the “temporary” thesis — particularly meaningful damage to GCC energy infrastructure. Such an event would signal greater physical fragility and raise the probability of further disruption. This outcome became more probable as the IRGC has today signaled willingness to attack GCC energy sites.

Until that or another negative and unexpected shock happens, the market has been conditioned by recent patterns: limited shooting, intermittent flows, and repeated U.S. signals that diplomacy remains preferred. GCC productive capacity itself is not drastically below pre-war levels; the binding constraint has been shipping. If shipping were restored, recovery would look relatively quick, which is what markets appear to be attempting to price.

The contention becomes that the current situation may not follow the prior blueprint. Western buffers are thinner, refining is constrained, and Iran has shown both the will and the ability to keep the Strait contested. The market is looking through on the assumption that this round ends like the others. That assumption may prove correct. It may also prove to be the central mismatch if disruption becomes a longer-term Iranian tool. The market is not necessarily irrational given the recent pattern. It is potentially pricing a path that increasingly looks less likely.

Interpreting the Decision

Three high-level explanations remain for the push the U.S. made to enter into the MOU:

1. A political off-ramp that used economic risks to justify restraint.

2. Genuine concern that a prolonged Strait closure posed unacceptable costs.

3. Limits on further military options or residual hope for diplomacy.

With the benefit of hindsight, the second fits the sequence most cleanly. Initial rhetoric pointed toward continued strikes. After Iran claimed it was mining the remainder of the Strait, the ceasefire and MOU process followed quickly. The speed of that shift is consistent with real sensitivity to the energy implications. Iran has since treated the Strait as primary leverage and worked to block effective bypass routes. Elevated SPR draws helped contain prices temporarily but left the system with less margin for error. The assumption that the Strait would reopen on usable terms has not held.

The Prevailing Assessment

The sequence breaks into phases:

• Phase 1 — Strike and pause.
  A renewed air campaign began. After the mining claim, strikes were paused.

• Phase 2 — Temporary stabilization.
  The MOU halted fighting, supported a narrative of control, and allowed some ships and crude to move. Prices eased into early July.

• Phase 3 — Reassertion of control.
  Iran rejected arrangements that diluted its effective control. Attacks on shipping increased after talks broke down.

• Phase 4 — Current position.
  Limited volumes moved and the immediate backlog eased, but sustained reliable flows have not returned. Buffers are thinner. Refining constraints and low diesel inventories add pressure. Iran retains the ability to throttle activity. Desire for conflict is high from the Iranian perspective. Open-ended negotiations at this stage would extend uncertainty while giving the other side time to adjust.

The earlier deferral of the worst outcomes was real. The current configuration makes repeating that deferral more difficult. The path of least resistance now points toward further pressure and a higher probability of consequential energy problems in the months ahead.

The warnings were issued. The window was identified. Four weeks later, the physical and strategic realities have not improved. In several important respects, they have deteriorated when thinking forward.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

By now, most of the planet is familiar with the conflict in Iran that has escalated into open regional war. At the outset, prevailing narratives framed this conflict as Israel “conning” the United States into battle or simple military adventurism by the Trump administration. Taken in isolation, elements of both arguments can be made. But when viewed through broader context, the administration’s motivation appears different than headlines suggest.

In short, the conflict with Iran reads as a campaign against state-sponsored terrorism, systemic anti-American activity, and a network of anti-Western actors. That framing changes the strategic picture — and makes the conflict more serious than a narrow dispute over nuclear facilities or the Strait of Hormuz.

Consider the sequence. In early January 2026, the United States conducted a targeted operation that resulted in the capture of Nicolás Maduro in Caracas. The action was framed by the administration as a law-enforcement operation against an indicted narcoterrorist. Maduro had been a vocal opponent of U.S. interests — anti-capitalist, supportive of anti-American elements, and deeply tied into a network of non-democratic states in the hemisphere. His removal marked the launch of a more assertive “Hemispheric Defense” posture aimed at rolling back socialism, communism, and aligned adversarial influence in America’s near-abroad.

The Maduro operation succeeded. Venezuelan oil production has since recovered above 1 million barrels per day — the first time in over seven years — with exports shifting from black-market routes to licensed U.S. and Indian buyers under Treasury oversight. For Venezuela, this is productive. For the United States, the restored flow provides a practical buffer against potential oil market disruptions from larger confrontations ahead.

Cuba came into focus shortly afterward. Heavily dependent on Venezuelan subsidized oil, Cuba became a softer target once that lifeline was severed. Following Maduro’s removal, Venezuelan shipments to Cuba collapsed. Starting in February 2026, the U.S. imposed an effective oil blockade on Cuba through tariffs and interdiction of third-country shipments. The island has since faced severe fuel shortages and widespread blackouts. In this context, the Venezuela operation reads as cutting off one head of the remaining global support structures for socialism, communism, and aligned anti-American activity.

While hemispheric pressure built, negotiations with Iran were also underway. As far back as February, the U.S. and Iran were engaged in talks that closely resembled the diplomatic maneuvering seen in recent months. Those earlier discussions failed to deliver meaningful Iranian concessions on the Strait of Hormuz or its nuclear program. Kinetic action followed.

Notably, while Iran talks continued behind the scenes, public rhetoric heavily featured Cuba — a far easier military and political target. Many in the media and pundit class fixated on Cuba, only to be caught off-guard when strikes began on Iran. This publication flagged the strong likelihood of direct U.S.-Iran conflict back in Q1, but not primarily due to the usual historical grievances. The deeper driver appeared to be the administration’s “America First” and Hemispheric Defense priorities: to meaningfully degrade a central financier and weapons distributor for a broader “anti-American” network.

Much of the U.S. and European media adopted the narrative that Israel drew the U.S. into the conflict for its own interests. That remains possible. What seems more likely with the benefit of hindsight and context is that Israel opened the door and provided operational support, but treating Tel Aviv as the prime mover underestimates the administration’s own long-standing ideological and strategic instincts — particularly when viewed alongside the Venezuela operation and “America First” priorities.

Rarely reported in depth by Western media, Iran has cultivated deep international ties that extend far beyond the Middle East. Here is a non-exhaustive but illustrative look at key relationships:

State-Level Partners

• Venezuela — Closest Latin American partner with deep military-technical ties. Iran has supplied Mohajer-6 drones, anti-ship missiles, and fast-attack craft. In December 2025, the U.S. Treasury sanctioned the Iran-Venezuela drone assembly pipeline, confirming operational cooperation in the Western Hemisphere.

• Cuba — Longstanding diplomatic, economic, and technical ties; shared anti-U.S. alignment; Iran as observer in ALBA.

• Nicaragua — Political solidarity with Ortega’s government, multiple agreements, and public support.

• Bolivia — Military and technological cooperation (drones, equipment); anti-U.S. positioning under prior MAS governments (ties have varied).

• North Korea — Diplomatic relations and reported technical/military exchanges within a broader anti-U.S. axis.

• China — Major economic and strategic partner in a pragmatic “multipolar” alignment against perceived U.S. dominance.

Beyond states, Iran is associated with a range of non-state and government-adjacent actors who openly share “anti-American”, “anti-capitalist”, and “anti-Western” orientations:

Aligned Organizations & Outlets

• Code Pink: Organized delegations to Iran (including meetings with officials such as Zarif), defended Iranian missile capabilities, and ran campaigns like “Hands Off Iran” and “Stop the War on Iran” with rapid-response toolkits opposing U.S. intervention.

• Party for Socialism and Liberation (PSL): Issued statements and organized protests against U.S. strikes, using anti-imperialist framing that defends Iran’s “resistance.”

• Communist Party USA (CPUSA): Joint statements with Iranian communists (e.g., Tudeh Party) condemning U.S.-Israeli aggression.

• Workers World Party: Consistent opposition to U.S. actions toward Iran and support for “resistance axis” positions.

Most of these names are familiar to observers of geopolitics. All have been open about their opposition to the United States, and their histories are well documented. Much of this alignment is a function of convenience rather than perfect ideological alignment. Iran and these entities do not agree on everything, but they share the core view that the United States, in the classical sense, is an adversary.

From the administration’s perspective, Iran functions as one of the most accessible high-value targets in this network — an economic and military backbone enabling many of these actors. Degrading Iran’s capabilities creates downstream effects across the chain, as already seen with Cuba following the loss of Venezuelan support.

This lens matters because, beneath President Trump’s characteristically bombastic social media style and hyperbolic language, a structured strategic plan appears to be in motion. Secretary of State Rubio’s upcoming conference with up to 60 nations on “far-left violence,” followed by the President’s Thursday evening address, fits this pattern. The timing of the conference — announced just prior to the latest escalation — suggests coordination rather than coincidence.

What This Means

Given that the conflict, from the administration’s standpoint, is likely about more than the tangible points of dispute, the U.S. is unlikely to offer major concessions. Iran shows no signs of yielding. This pivots the conflict toward an ideological contest. You can slice the rationale along political, social, or religious lines and still arrive at the same fundamental clash: a notably anti-American regime versus an administration determined to reassert a traditional vision of American primacy and push back against hostile ideological networks.

Wars of ideology are painful. They run deeper than disputes over resources or territory and tend to be more protracted and aggressive. Off-ramps will be narrow until one side suffers enough degradation to blink. We are still far from that point.

For markets, this creates a growing mismatch. The “Strait is open,” “peace is coming,” and “we’re destroying them” rhetoric has conditioned investors to expect short, contained episodes followed by de-escalation. President Trump’s own comments linking his peace messaging to market rallies reinforced this. However, if the deeper driver is ideological rather than limited tactical goals, markets may be underpricing both the duration and intensity required for a clean resolution.

As the conflict has unfolded, it has become increasingly likely that the two sides are warring over ideology rather than the resources the prevailing narrative has emphasized. If true, the U.S. and broader Western markets are not yet priced for that reality.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

The current phase of the conflict continues to be defined by two observable patterns of action. The United States and Israel are conducting sustained and intensifying strikes on Iranian southern energy, port, naval, and military infrastructure. Iran continues selective attacks and harassment of commercial shipping in the Strait of Hormuz, along with strikes against Gulf Cooperation Council targets. Iran has made no public concession on practical control of the strait. The United States has not declared the campaign over, and continues their path of escalation.

These actions point to a contest whose central variable remains the Strait of Hormuz. A point that 1963Macro readers are deeply familiar with. From the perspective of observable behavior, the Islamic Revolutionary Guard Corps continues to treat credible denial of free navigation as its primary source of leverage. Post-funeral statements from hardline institutions and senior leadership have reinforced that major concessions on the strait or the nuclear program are off-limits. Walking that position back now, after sustained kinetic exchanges and public defiance, would carry measurable internal costs for the IRGC’s credibility and cohesion.

This creates a credibility trap that has not eased. The IRGC’s actions — continued selective pressure on shipping and rejection of third-party management proposals — indicate it still believes it can absorb strikes on its southern infrastructure while keeping the strait contested. Disengaging without offsetting gains would undermine the resistance narrative that has been reinforced since the funeral period.

Faster Degradation Changes the Timeline

The pace of operations has intensified. The United States has referenced striking well over 130 targets in recent phases, with a focus on southern infrastructure and IRGC naval and denial-related capabilities. Israel has conducted a substantial number of additional, meaningful strikes that have received less public attribution. The cumulative effect is real degradation of Iranian southern capabilities, particularly air defenses and coastal assets that support operations around the strait.

This faster tempo narrows the window during which Iran can maintain credible denial of navigation. As air defenses weaken, the conditions for higher-tempo operations (including greater use of platforms such as B-1 bombers) improve. From the IRGC’s perspective, visible erosion of its ability to contest the airspace and protect launch sites increases the pressure to respond more broadly before its core leverage is further reduced.

Likely Near-Term Behavior

The most consistent pattern of action suggests Iran will maintain selective pressure on shipping while absorbing additional strikes. This allows it to keep the strait contested without immediately triggering a full-scale U.S. minesweeping or clearing operation. At the same time, limited probes against GCC targets serve to raise costs for U.S. partners and test for fractures in that coalition.

Side-channel contacts with certain GCC actors are likely to continue in parallel with kinetic activity. Iran has historical precedent for using limited diplomacy as a pressure-release valve while maintaining operational pressure. This dual-track approach — selective shipping attacks combined with messaging and limited outreach — can persist for days to weeks.

The Houthis have been relatively quiet in recent days. This suggests Iran is still holding that capability in reserve rather than committing it immediately. The current focus appears to remain on direct responses and strait pressure.

Pathways Forward

Two broad trajectories remain consistent with observed behavior, though the faster pace of strikes makes the second path more proximate than it appeared earlier.

Managed Attrition

Iran maintains selective pressure on shipping and limited GCC probes while absorbing further strikes on its southern infrastructure. The strait remains contested, with traffic limited and operating under elevated risk. Iranian capabilities continue to degrade, and energy export revenue comes under pressure, but the IRGC retains enough leverage to avoid immediate collapse. The United States and Israel continue calibrated strikes aimed at raising the cost of resistance. This path can still persist for weeks, but the accelerating degradation of air defenses and coastal assets shortens the timeline before one side faces a clearer decision point.

Earlier Broadening of the Fight

If Iran assesses that its ability to harass shipping is eroding faster than expected, or if a particularly sensitive target (such as major nuclear infrastructure) is struck, the incentive to widen the conflict increases. This could include more aggressive and sustained pressure on the strait, direct strikes on Gulf energy infrastructure, or expanded proxy activity (particularly in the Red Sea).

The logic is straightforward: when the current method of imposing costs becomes insufficient to offset the damage being absorbed, Iran has strong reasons to raise the overall price of the conflict. Timing such moves for maximum economic and political impact (including during market hours) would be consistent with past behavior aimed at shaping perceptions and increasing pressure on the United States and its partners. The more efficiently the U.S. degrades Iranian capability, the sooner this escalatory path comes to fruition.

U.S. Position and Sustainability

The United States retains operational and political cover to continue strikes as long as Iran is attacking ships or GCC targets. Each round of strikes can be framed as necessary to restore freedom of navigation and respond to attacks on partners. This framing supports a sustained campaign without requiring an immediate shift to a single, high-visibility “clear the strait” operation.

However, the faster tempo of strikes also raises the risk that Iran reaches its escalation threshold sooner. Degradation of the denial network sufficient to meaningfully open the strait will still require sustained high-tempo operations, but the timeline for visible weakening of Iranian air defenses and coastal capabilities appears to be compressing.

Economic Dimension

Even limited but persistent restriction of traffic through the strait continues to add friction to global supply chains. A period of two to three weeks of meaningfully reduced throughput would begin to produce more noticeable effects on prices and availability, particularly with strategic reserves already drawn down in several major economies. Iran retains the ability to modulate this pressure. The United States retains the ability to respond with additional strikes or naval measures. Neither side has yet been forced into a position where the current level of pain requires an immediate strategic reversal.

Implications

The situation remains structured in a way that favors continuation over sudden resolution. Iran has strong internal reasons not to concede practical control of the strait without offsetting gains. The United States has operational and political reasons to continue applying pressure as long as Iran is attacking ships or GCC targets. The result is a contest that can persist at the current or modestly elevated tempo.

The faster pace of strikes on Iranian southern infrastructure increases the likelihood that Iran will reach a decision point on widening the fight earlier than the more gradual attrition scenario previously emphasized. The key triggers remain the same: a clear perception or reality that its ability to harass shipping is being neutralized, or a strike on a highly sensitive target that shifts internal calculations.

This is the logical extension of the actions taken to date. The strait remains the terrain where leverage is most concentrated and where the costs of concession are highest for the party that currently holds de facto denial capability. As long as that condition holds, the contest is likely to continue along the lines already visible, with the risk that Iran moves to raise the overall costs of the conflict sooner rather than later.

The next real inflection will likely comes when Iran assesses that its current method of imposing costs is no longer sufficient to offset the degradation it is absorbing. At that stage, the conflict would shift from managed attrition toward a broader and more dangerous phase.

The larger conflict we have anticipated for months is likely upon us.

Disclaimer: This article is provided for informational and educational purposes only and does not constitute investment, financial, legal, or tax advice. The views expressed are those of the author and are based on publicly available information and the author’s analysis at the time of writing. Geopolitical developments, military actions, and policy decisions discussed herein can materially impact financial markets, commodity prices, and asset values. Such events are inherently uncertain and subject to rapid change. Past performance or historical patterns are not indicative of future results. Readers should conduct their own independent research and consult with qualified financial, legal, and tax advisors before making any investment decisions. The author and 1963Macro assume no liability for any losses or damages resulting from the use of the information contained in this article. Investing involves risk, including the possible loss of principal.

Tomorrow, in the PM hours for America, Ayatollah Ali Khamenei will be laid to rest. This marks the end of the mourning period — and the beginning of a new chapter in the conflict between the U.S. and Iran.

This publication operates at the intersection of military engagement, markets, and economics — a niche that remains underserved relative to its importance. Military action is what happens when diplomacy fails. It is the brass tacks of humanity: who can overpower whom. Most people are not comfortable operating at that raw baseline of reality. For reasons that are hard to articulate, your author is.

After the words have been said, the lies propagated, the narratives managed, and the virtues signaled — but nothing accomplished — what then? Western society often defaults to more talk, folding, or concession. Yet nothing of greatness or that is lasting has ever come from relenting. At nation-scale, that brings us to war.

War is hell. War is not good. Your author doesn’t hunt, doesn’t physically harm animals or people, values life, and sees little benefit in the egotistical ways many humans operate. But your author is also aware that America — like nearly every other country — was born in the crucible of fighting. Land, resources, ideology, safety: all secured by men willing to wield weapons for their children’s future and a vision they believed in. That history is undeniable, even if uncomfortable.

This is not a call to love war or glorify killing. Nor is it an apology for failed diplomacy. War simply exists because some differences are too stark and irreconcilable to fix any other way.

We have reached that point with Iran.

Largely unspoken, we are embarking on what amounts to a modern religious-ideological war. Iran is fighting, in part, for its future and its vision of the country. That resolve deserves respect. But it is also fighting to preserve its role as the vanguard of a Shia-led Islamic dominance. The CIA and others have documented this dynamic for decades. It is not new.

That lack of understanding in the West does not come from malice. America is a multi-cultural melting pot by design. I’m a white guy who grew up with an eclectic mix of mainstream and underground hip-hop (and still listens). You likely have your own stories of embracing diverse cultures. We celebrate differences as color and spice — humanity at its best when varied.

But not everyone sees the world this way.

America and much of the EU are fundamentally secular societies. I hold personal beliefs in a higher power, but organized religion feels too polluted for me. This leaves room for many valid paths to the divine. Iran’s leadership, however, operates from a different foundation.

Iran’s constitution explicitly outlines a vision of Shia Islamic expansion and global primacy. That is a statement of fact, not speculation. It is highly relevant because it reveals not just what Iran can do, but why they fight. The “why” determines commitment and depth of resolve. Mercenaries quit when the money stops. Ideologues do not.

This is where we stand. The collective West has embraced global cultural exchange — often a strength. But in doing so, institutions and elites have diluted a unifying national culture and, with it, the collective will to defend a shared vision. Iran has not.

Iran’s steadfast ideological commitment — particularly its religious dimension — generates a passion and resolve that the modern Western system struggles to match at scale. Accordingly, Iran is in a strong position to exploit that asymmetry.

I hope the terrible costs of war also force a reconfiguration in the West — one that rebuilds unity around something worth defending — and that surviving Iranians can eventually find common ground.

For now, we are entering a war of ideology.

May we get through it as peacefully as possible.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

We are in a highly dynamic period, where change often turns the page to the next chapter. To navigate from here to there, we must assess what we are learning from recent events.

Here are my key takeaways at the moment—most of which point to a materially higher-conviction view that we will see escalating military conflict:

1. The MOU Is Dead
The Islamabad Memorandum of Understanding (signed mid-June 2026) was always aspirational for reasons previously covered in this publication. Iranian strikes on commercial vessels by the IRGC were unhelpful, but actively returning fire against U.S. warships (and recent attacks on multiple merchant ships) represents a significant escalation. The MOU will struggle to regain momentum for multiple reasons, some of which are outlined below.

2. Iran Controls the Strait—for Now
In the current environment, Iran effectively controls the Strait of Hormuz. Shipping slowed dramatically after attacks, with recent strikes on vessels (including a Qatari LNG carrier and Saudi tanker) using the southern “Oman” route. This suggests many operators remain unwilling to engage with Iran—while those attempting alternative paths face punishment. Iranian officials have described the negotiators’ handling of the Strait as a mistake; it remains their greatest leverage, and they know it. It seems highly unlikely Iran will relinquish control willingly, regardless of their public statements.

3. The U.S. Did Not Legitimize the PGSA
Washington skillfully avoided a trap by refusing to legitimize the Iranian Persian Gulf Strait Authority. Had U.S.-linked entities directed ships to “coordinate with Iran,” it would have been an immediate concession on point #2. As long as Iran maintained its stance, no meaningful change was possible absent military force.

4. The Strait Is “Empty”
We have seen many tankers exit the Strait over the past week, including a notable Japan-linked fleet. The backlog has reportedly fallen toward or below 500 ships, down from thousands earlier in the crisis. In an offhand comment, President Trump mentioned getting “the oil out” and then “seeing where we are,” framing it in part as an opportunity to refill the SPR. While the volumes involved are nowhere near enough to refill the Strategic Petroleum Reserve, it provides a modest cushion. With the backlog clearing and some supply pushed out, the cost of fully clearing the Strait has decreased slightly.

5. NATO
There has been a notable uptick in NATO-related airlift and surveillance activity over the Middle East, including German, UK, and Spanish-flagged aircraft—something not seen for most of the conflict. Coincidentally, the NATO summit is underway as tensions in the Strait escalate. Iran is motivated for revenge following the recent funerals, while Europe urgently needs stabilized energy flows. Iran has also directly threatened Germany for its role in the conflict. Further escalation could reasonably draw greater NATO involvement.

6. Iran Is Motivated
Iran appears highly motivated for revenge right now. The public has called for targeting President Trump and has harshly criticized Iranian negotiators as cowards. Authorities prepared for (and reported) millions attending the funerals for the late Supreme Leader— with estimates ranging from hundreds of thousands to over 10 million in Tehran alone, part of multi-day ceremonies. The IRGC holds significant support among the populace, and that sentiment favors confrontation. This materially reduces concerns about Iranian internal concerns around further escalation.

7. The U.S. Gains Control When Fighting
The U.S. military seizes control once engaged. A motivated U.S. force is exceptionally destructive and shifts the dynamics away from Iran’s historical preference for prolonged talks paired with low-level provocations. This meaningfully strengthens the U.S. position.

8. Play for Keeps…?
Given Iran’s current posture of vengeance, “punishment-level” U.S. strikes are unlikely to go unanswered. The core issue is that fighting over the Strait stems from the inability to negotiate a solution—the shooting is unlikely to pause simply to restart talks on the very issue that defied agreement. Finding a viable off-ramp could be more challenging.

9. Broadening Comes with Escalation
Iran has recently praised its proxies for their loyalty and hard work, invoking the “axis of resistance” that could engulf the Middle East in a “ring of fire.” In practice, this suggests Iranian proxies will broaden attacks across the region if fighting persists. That would likely draw additional nations directly into the conflict, with energy and critical infrastructure as prime targets. This would worsen the economic fallout and raise the overall cost of engagement. Iran is signaling willingness to pursue this path.

10. It Is Becoming Existential
The conflict is becoming existential for multiple parties—and could become so for many more depending on its duration. Iran’s actions are impacting global energy flows. GCC nations can credibly foresee a future where Iran dominates their economies. Europe and Asia require reliable energy. Strait closure strikes at several existential nerves in the near-to-intermediate term. For the IRGC, this fight is also existential. This environment makes negotiation extremely difficult and dramatically raises the odds of all-out war.

Many conditions are aligning for this to evolve into something materially larger and more consequential.

More to come.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

U.S. officials have repeatedly described the Strait of Hormuz as open and normalizing since the MOU was signed. The data shows something more limited: a narrow, escorted corridor that is moving backlogged oil but has not restored the reliable, high-volume commercial traffic that the global economy desperately needs.

Current Traffic Levels

As of early July 2026, total daily transits through the Strait have improved from wartime lows but remain suppressed. Recent reporting shows peaks of 70–109 vessels on stronger days in late June, yet averages often hover in the 25–55 range—well below pre-war levels of 130–140 vessels per day. Even during the strongest rebound periods, daily crossings remained materially below normal.

U.S. Navy coordination and escorts have supported a small number of VLCCs—typically in the low single digits per day—primarily clearing backlog. These movements remain overwhelmingly outbound (loaded tankers exiting the Gulf), while inbound traffic to load new cargo stays muted and is heavily dominated by Iran-linked shipping. This is not the two-way commercial flow that existed before the conflict, and it falls far short of the normalization suggested by U.S. media talking points.

Where the Limited Volumes Are Going

Of the non-Iranian-linked or commercially relevant crude currently moving out of the Gulf, the large majority continues to head to China and India. These two countries have absorbed most of the limited volumes—reportedly as much as 75% or more of resumed flows since the MOU—consistent with long-standing patterns where Asia has accounted for ~75–84% of Hormuz crude.

Japan is receiving minimal to negligible volumes on a consistent basis. South Korea and Europe are seeing very little of the current flow. The escorted corridor is primarily serving Asian demand rather than restoring broad global supply stability. Who receives the crude is just as important as the ability to move it out. Current allocations don’t bolster Western-aligned supply meaningfully, which reduces the economic benefit of an “open Strait” relative to the optimistic U.S. framing.

Scale in Context

Global oil consumption runs at approximately 103–104 million barrels per day. Before the conflict, the Strait of Hormuz normally carried 19–21 million barrels per day of crude and products — roughly one-fifth of global seaborne oil trade.

Even on better days since the MOU, volumes have recovered only partially. Early rebound phases saw flows around 2 million barrels per day, while stronger days in late June reached significantly higher levels — with some reports citing 17+ million barrels on peak days and multi-day averages climbing into the mid-to-high single digits (though still inconsistent). This is a meaningful improvement from wartime depths, but far short of the sustained 19–21 million barrels per day needed for stable supply.

Scale matters. Consider that 300 million barrels equals roughly three days of global supply — or six days if only half the world received it. Crude flows don’t work in perfect symmetry, but this shows that at global scale the big numbers being touted aren’t especially reassuring.

This is why durable economic improvement requires the Strait to be open and flowing on an ongoing basis. A one-time “flood of crude” does not solve persistent shortages, and inconsistent mid-to-high single-digit daily volumes remain insufficient.

For illustration: Japan, which consumes roughly 3.3 million barrels per day and relies heavily on Middle Eastern crude, highlights the pressure. Even assuming an optimistic sustained 10 million barrels per day through the Strait, with ~75% going to China and India, only about 2.5 million barrels per day would remain for all other importers worldwide. Japan, South Korea, and Europe would still face meaningful shortfalls and need to continue drawing on reserves or competing in the global market at higher prices.

The SPR Refilling Premise

President Trump has discussed extending the MOU period in part to allow time to refill strategic petroleum reserves. That is an uplifting soundbite, but the logic does not hold up under scrutiny.

Refilling reserves at any meaningful scale requires sustained, high-volume commercial flow through the Strait—not a handful of escorted VLCCs per day. Even if the Strait were fully open tomorrow, meaningful relief would still take 30–60 days due to mine clearance, insurance normalization, loading schedules, and transit times. By many estimates, 60 days is very optimistic for consistent normalization.

As tracked, the current escorted movements are primarily clearing backlog rather than establishing normal daily cycles. They are nowhere near the volume needed to rebuild inventories drawn down over months. Extending the MOU to “refill reserves” assumes a level of supply recovery that does not currently exist and does not appear likely to materialize in the near term.

Rhetoric vs. Physical Reality

The gap between official messaging and conditions on the water is significant. Claims of normalization have helped compress the geopolitical risk premium and contributed to lower oil prices. The physical picture is more modest: limited escorted movements, persistent U.S. air cover over the Strait (including during the MOU period), mostly outbound traffic serving primarily Asian buyers, and volumes still well below pre-war levels.

These points help explain why the current price relief is temporary. SPR draws and backlog surges created a short-term perception of abundance. Once those effects fade—and heavy SPR support reaches its practical limits—the underlying constraints will reassert themselves unless there is genuine, sustained improvement in reliable commercial flow.

The Strait remains the dominant variable for the global economy. Until daily volumes return to something close to the pre-war 19–21 million barrels per day (or more when factoring future SPR demand) on a consistent, low-risk basis, structural supply tightness persists.

The current U.S. rhetoric is running well ahead of the data.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

The New York Times and other outlets are reporting today that Oman is signaling willingness to accept “fees” or other restrictions on shipping through the Strait of Hormuz — in line with Iran’s preferences.

On its own, this is not surprising. Oman has long been caught in the middle of U.S.–Iran tensions and tends to be pragmatic. Agreeing to Iran’s terms reduces the probability that Oman will be targeted by Iranian missiles or drones. For Oman, that calculation makes sense.

Framed in context, however, this development is emblematic of a broader U.S. foreign policy and strategic failure on Iran.

Iran remains in effective control of the Strait of Hormuz. By extension, Iran exerts leverage over a large swath of the global economy and Middle Eastern energy flows. While the U.S. has pursued a media campaign that often reads as intellectually dishonest, the reality on the ground has not changed.

Oman and Iran are separated by less than 25 miles (40 km) at the narrowest point of the Strait. Muscat is roughly 300–350 miles (480–560 km) from the southern Iranian coast — well within Iranian missile range. Oman’s historical alignment with the U.S. has put it in an uncomfortable position, and the U.S.-backed push for joint management talks has left Oman negotiating directly with Iran on terms favorable to Tehran.

This is not an isolated incident. It reflects a pattern of U.S. diplomatic ineffectiveness. Recall Trump’s May threat to “blow up” Oman if it acquiesced to fees or tolls. Framed differently, the U.S. was asking Oman to hold the line against Iran while ignoring that Oman faces immediate consequences from Tehran. This type of coercive diplomacy — threatening allies who are caught between two stronger powers — signals weakness rather than strength.

The same pattern appears elsewhere. Trump’s attempt to pressure Gulf nations into signing the Abraham Accords (something Saudi Arabia has long opposed) was met with silence and disbelief. Kushner reportedly tried to repair the damage, but the effort went nowhere. GCC nations are increasingly consulting China and other non-U.S. players, seeking side deals that bypass Washington.

These examples highlight a deeper problem: U.S. foreign policy has become ineffective and unprofessional. Threats and demands born of desperation are pushing allies toward accommodation with adversaries who can offer more immediate protection or pragmatism. When the U.S. lacks the willingness (or ability) to back its rhetoric with decisive action, allies notice — and distance themselves.

The cost is clear. Iran has little incentive to make meaningful concessions. The Foreign Ministry’s recent comments on managing the Strait with (or without) Oman show Tehran is not interested in a deal that relinquishes control. The MOU was always a tactical pause; the hardliners never bought in.

Markets have remained anchored to optimistic U.S. rhetoric and the belief that “it always works out.” That narrative is increasingly detached from reality. The U.S. has lost control of the negotiating process, allied cohesion, and the ability to dictate outcomes on the Strait. With time compounding the pain of constrained shipping and depleted buffers, the world may eventually accept (or ask for) Iranian management (and fees) if it normalizes energy flows.

When markets finally internalize this — the loss of leverage, the broken diplomatic track, and the lack of good options — the reaction is unlikely to be bullish.

The U.S. urgently needs a more coherent strategy. For the world’s sake — and its own.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.

Iran’s Assembly of Experts met yesterday and issued a 10-point message supported by a vote of 62 out of 88 members. That vote and message answered the key question about Iran’s willingness to relinquish control of the Strait: it will not concede anything.

The Assembly of Experts is Iran’s highest clerical body, made up of 88 senior clerics. It is constitutionally empowered to select, supervise, and (in theory) remove the Supreme Leader. In practice, it serves as a key institutional check that reinforces the Supreme Leader’s authority, especially during periods of internal or external pressure.

Specifically, these three points from The Experts renders the MOU inoperable (points listed in order from Assembly of Experts statement):

3. Any breach of the MoU must be responded to immediately. Therefore, considering the continuation of ceasefire breaches by the Zionist regime in Lebanon, and the failure to withdraw from the occupied territories, the opening of the Strait of Hormuz is contrary to the obligations of the officials and is considered a major strategic mistake, and will only embolden the enemy to continue its breach of the agreement.

4. We remind you again that according to the obligatory guidance of the Supreme Leader, the country's nuclear rights should not be discussed nor disputed, and should be completely excluded from the negotiations.

5. Establishing management over the Strait of Hormuz, receiving compensation for war damages, the release of frozen assets, lifting all sanctions, and the withdrawal of U.S. forces from the region are inviolable demands of the Supreme Leader and the people, and they must be pursued. Any negligence in this regard will be met with a fierce reaction of the nation.

The statement specifically reinforces Iranian red lines on Strait control and nuclear enrichment. The practical impact is these points cannot be negotiated away in a manner that meets U.S. terms. These positions are backed by the Supreme Leader, the Experts, and IRGC leadership. These parties remain the functional levers of power in Iran and would control implementation of any deal.

Taken together, the comments suggest the MOU delivering a palatable outcome for the U.S. is effectively zero. The internal Iranian power dynamic has been at the foundation of this analytical series. Until the IRGC and the senior clerical establishment signal willingness to concede on core issues, a strong diplomatic outcome has always been low-probability. That remains true today and is reinforced at the highest levels of Iranian leadership.

As a result, we are faced with some uncomfortable observations:

• Iran retains coercive control of the Strait, with multiple levers to pull that could materially damage the global economy.

• The Strait is likely to be contested for the foreseeable future, with normalization far from imminent.

• There typically is not an easy off-ramp to stop escalating conflict born out of recently failed diplomacy.

• A path that avoids further escalation likely cedes control of the Strait to Iran, which is a dangerous precedent for international maritime chokepoints.

• U.S. escalation likely results in a closed Strait, proxy activation, and, on the extreme end, attacks on G.C.C. energy infrastructure. Basically, it has the potential to deliver everything the U.S. doesn’t want.

• The only means to return the Strait to freedom of navigation is the military option.

The last point is the most concerning.

For the U.S. to ensure “freedom of navigation” or to avoid setting a “dangerous precedent” on international waterways, it is effectively forced toward military action. The red lines now cast in stone by Iran’s senior decision-makers present no other realistic option — aside from U.S. willingness to concede defeat. This highlights the boxed-in position the U.S. faces. Escalating now invites the concerns that were rightfully avoided. Failure to escalate hands the Strait to Iran, which then creates the other undesirable outcomes.

We have talked for months about the negotiation path being the highest pain and lowest probability of success. The U.S. still seeks to avoid full escalation because of the associated resource drain and high-probability economic pain. As a result, the MOU path can and likely will continue to some extent, but without the support of the ultimate decision-makers in Iran it functionally buys time but can’t deliver a desirable outcome for the U.S. or G.C.C. nations. Iran has now made that clear.

This period now becomes more dangerous. Many cite proxies or “expansion” of the conflict as the major risks. Those are real and founded concerns, but a larger risk is the lack of a clear, obvious off-ramp via diplomacy should full-scale conflict return. To date, we have had ceasefires for talks and the MOU. The next phase of conflict likely won’t be able to lean on those features as easily or credibly. This creates a path to the oft mentioned “quagmire” the U.S. deeply wants to avoid.

The world has seen the U.S. and Iran escalate, de-escalate, talk, and shoot more. But now, absent a major breakthrough diplomatically tied to the U.S. or Iran conceding on stated red lines, the durable outcome will have to be produced militarily.

Disclaimer: This note is provided for informational purposes only and does not constitute investment, financial, or legal advice. The information contained herein is based on current market observations and analysis, which are subject to change without notice. All investments involve risk, including the loss of principal. We do not provide personalized recommendations, and readers should conduct their own due diligence or consult with a qualified professional before making any investment decisions.