Quick Note on Developments in Iran

Iran will lose. Iran has no friends, and has indeed made new enemies in the region. China just wants oil. Russia just enjoys higher oil prices. Timing is uncertain, but this won’t take long. Brent is only trading slightly above our $80 price target anyway. There is near-zero risk of cascading catastrophe, with stocks contained in their recent high-level plateau. The biggest risk is the false belief that an oil shock will cause inflation – which has already taken one Fed rate cut out of the money-market curve. This would be a pro-cyclical policy error, because supply shocks are recessionary and therefore deflationary. But this won’t last long, so the Fed likely won’t have time to make that error.