This is probably the most important question in the markets right now, arguably in the world. It is the multi-trillion-dollar question, which is: will we go back to fighting? And if so, for how long? I know that we can't predict the future, but if you had to make an estimate, what would your estimate be on the probability that this is resolved permanently?
So in my view, the probability that this is resolved permanently, I'd put it at less than 20%.
Welcome to Prof G Markets. I'm Ed Elson. It is June 16th. Let's check in on yesterday's market vitals. The major indices rallied on news that the US and Iran have an agreement. More on that in a second. The Dow hit a fresh high. Brent crude fell below $80 on hopes that the strait will finally and truly reopen. Meanwhile, Treasury yields and the dollar fell. SpaceX shares soared 20% in their first full day of trading, and Fox tumbled 15% after announcing its acquisition of Roku for $22 billion.
Okay, what else is happening?
The US and Iran have reached a deal again. After 107 days of war, the two sides agreed to a memorandum of understanding. It includes a 60-day ceasefire, the reopening of the Strait of Hormuz, and a halt to fighting in Lebanon. A formal signing is set to take place on Friday in Geneva. But the big negotiations, like Iran's nuclear program, sanctions relief, and frozen assets, are all deferred to the next two months. Meanwhile, Israel says it is not bound by the deal and its forces will stay in Lebanon indefinitely. Still, Brent crude fell more than 5% on the news of the pending peace deal. Here to help us unpack what this deal actually means, we're speaking with Karim Sadjadpour, senior fellow at the Carnegie Endowment for International Peace.
Karim, thank you so much for joining us on the show today. This is really important news. I think the place I'd like to start is a place of skepticism, and that is we've had deals with Iran before. Trump said we had a ceasefire back in April. Then he said we had a framework of a ceasefire. He said that the deal was in its final stages in May. He said it was all largely negotiated. We've had plenty of false alarms. And so the question on this news is: is this also a false alarm, or is this different?
Well, I'm not going to try to disabuse you of your skepticism, Ed, because I share it. I think there's a couple of big questions. Number one is whether indeed we do have a memorandum of understanding. At the moment, you could call it a memorandum of misunderstanding, because the US version of this is very different than the Iranian version of this in terms of what kinds of economic relief are going to be provided, what Iran's nuclear commitments are going to be, and the future of the Straits of Hormuz. Virtually every single major issue appears at the moment unresolved. So that's one of the big questions.
The second is: if indeed the two sides can agree on a common memorandum of understanding, what happens next? The most difficult questions have been deferred for future negotiations. The two sides have given themselves 60 days to resolve those issues of tension, like most notably the nuclear issue. But there's very little chance that those issues are going to be resolved over 60 days. So bottom line for me, this isn't a resolution of the US-Iran conflict. We may have temporarily paused a hot war and gone back to a cold war. But unfortunately, these two sides are going to remain adversaries. We haven't resolved the US-Iran conflict, and in fact, as President Trump alluded to today, there's even a possibility we could go back to conflict if he doesn't see any flexibility from Iran on the nuclear file.
It's really fascinating that you say that. The first thing I was going to mention was that disagreement over these reconstruction costs, because Iran says that the US is going to pay $300 billion in reconstruction costs, that they were going to release $24 billion in frozen assets, and then JD Vance goes and denies those claims. So memorandum of misunderstandings sounds accurate to me. And I guess the question then becomes: what actually is this deal? We don't know yet, because they've said it's happened, and to be fair to Trump, Iran has said they're going to sign it on Friday. But I guess my question is: what actually is it? What are we even agreeing to?
Well, phase one of this deal is supposed to essentially be a lifting of the mutual blockade in the Straits of Hormuz. So over the last almost four months, Iran has been strangling the global economy, trying to strike the price of oil with their blockade of the Straits of Hormuz. Simultaneously, the US has been strangling Iran's economy with the naval blockade, and Iran has suffered as a result of that. It's losing as much as $450 million daily. It can't get its oil exports out of the country. So even though you hear a lot of bluster and bravado from the Iranian side, it's an economy which has been decimated, even more decimated than it was before the war.
So what phase A of this deal is meant to be is to lift that blockade, and virtually the entire world wants to see the blockade of the Straits of Hormuz lifted, with one exception perhaps, which is Vladimir Putin's Russia, who has really experienced a cash windfall over the last several months. But then, as we talked about, the blockade is meant to facilitate a nuclear deal, and that it actually could serve to do the opposite, because once Iran gets some economic relief as a result of this lifting of the blockade, it may actually feel less inclined to make nuclear compromises. And likewise, President Trump may feel, I can actually go back to war now that oil prices have dropped.
Right. This is exactly where my mind is going. Despite that, oil prices did fall 5%. So clearly traders and investors are more optimistic about the notion that the strait will be unblocked. I guess my question to you: do you think it will be opened up? And if so, to what extent, for how long? I mean, how optimistic are you when it comes to the Strait of Hormuz specifically, which is the thing that impacts Americans the most in the form of inflation?
Well, the Iranian regime has been saying consistently that the Straits of Hormuz will not go back to status quo ante, to be what it was before the war, which was an international waterway. They want to figure out a way to establish a fixed revenue stream over the strait. Whether that is tolling, perhaps that's too ambitious for them to toll individual ships, but perhaps some type of an administrative fee over the strait. That's what they've been talking about. I haven't seen any statements from senior Iranian officials saying they're going to go back to status quo ante.
The other way in which they want to use the strait is as a deterrent, to essentially have this sort of Sword of Damocles hanging over it, to send a signal to America, Israel, and others that if we're attacked again, we're going to take this strait hostage, and we've done it once, we can do it again, and we can wreck the global economy. So it's my view that it is a major US priority, and it's obviously an enormous priority for our partners in the Persian Gulf to have the strait be an international waterway. But I don't take it for granted that Iran is going to accept that.
Do you think it would be an overstatement to say that Iran is strengthened coming out of this? I mean, of course their economy has been damaged, many of their military leaders have been taken out. But it sounds as though they now have a point of leverage that they have realized in a very big way that they perhaps didn't know they had before. And it sounds like potentially this could mean higher oil prices forever, or at least a suppression on demand that lasts for the foreseeable future. Do you think that they are coming out of this feeling, I guess, strengthened or optimistic?
I think psychologically they certainly feel that they have been strengthened. It's been a major psychological boost for this regime that they were able to defy the greatest military power in the world, the greatest military power in the Middle East, Israel, and the United States, and survive. For them, the bar was set pretty low. They didn't need to thrive, they just needed to survive, and they achieved that.
At the same time, it is a country, it's a deeply unpopular theocracy ruling over a society which very broadly dislikes it. They have a decimated economy, 70% inflation, triple-digit food inflation. So if you're looking at this from the outside, Iran isn't a country you envy. Few countries would want to be Iran. But by virtue of the fact that they've survived and they've discovered this newfound form of leverage in closing the Straits of Hormuz, I do think that they feel they've emerged from this stronger.
What we know from history and from wars is that it oftentimes takes years, if not decades, to really understand the true impact of them. But certainly in the immediate term, Iran looks stronger than it did going into the war.
You mentioned that you thought that this was more of a temporary pause in the hot war, that we've gone back to sort of a cold war state, but that implies that we might return to a hot war. And this is probably the most important question in the markets right now, arguably in the world. It is the multi-trillion-dollar question, which is: will we go back to fighting, and if so, for how long? I know that we can't predict the future, but if you had to make an estimate, what would your estimate be on the probability that this is resolved permanently?
So, in my view, the probability that this is resolved permanently, I'd put it at less than 20%. If we look at the probability of a return to conflict, there's a few triggers at least. One is that in negotiating phase two of this deal, which is to get Iran's highly enriched uranium out of the country and to get Iran to cease its enrichment of uranium, two big priorities for President Trump, that the regime shows no flexibility. In that case, he may feel, he being President Trump, may feel obliged to return to conflict.
And remember, this is a president who on two occasions in the middle of negotiations with Iran launched military strikes on them: last June's 12-day war and then this year's war. So I think the Iranian regime certainly feels that President Trump is capable of returning to war. Another potential trigger could come from the back-and-forth missile and rocket volleys between Israel and Lebanese Hezbollah. If Hezbollah continues its attack on Israel, or Israel continues its retaliations, at some point Iran may get in and launch attacks again on Israel. Israel may respond inside Iranian territory, and that could again trigger another attack.
I should say there's one additional trigger, but I don't think it's a near-term trigger, and that is if we have any intelligence that Iran is making a mad dash for a nuclear weapon, I think that would likely trigger military action. But I don't think that's an immediate-term possibility.
Just before we wrap up here, what do you expect the messaging will be from Trump? I mean, part of me is trying to understand why he appears to be trying to pull out of this, or at least say that we have a deal. I assume that it's related to inflation and the fact that his approval ratings are just tanking right now. But do you think that this is enough for him to go out there and claim victory? Do you think that that will be the strategy going forward?
It already is his strategy. I saw his statement today in a press conference with President Macron in which he's declared victory. And his benchmark, his public benchmark for success, is to say that this was better than Obama's 2015 nuclear deal. And if you compare the two objectively, in the 2015 deal, there was no war that was launched. So already this conflict has cost American taxpayers perhaps more than a hundred billion.
Second, in Obama's nuclear deal in 2015, the United States handed over about $1.7 billion in economic relief to Iran, which is why President Trump called that the worst deal in history. But what is being talked about now is to provide Iran perhaps tens of billions of dollars in economic relief. And then finally, the actual terms of the agreement between President Trump's potential deal and Obama's deal in 2015 are not that dramatically different. So in essence, will President Trump's potential deal vindicate the cost of this war? And in my view, the answer to that is almost unequivocally no.
The other concurrent approach he may take is to essentially transition accountability for this deal to Vice President Vance. I saw it was Vice President Vance this morning who was trying to sell the deal. And you know, last thing I'll say before we part is that what's interesting, if you look at the 47-year US-Iran conflict, Iran has played a major role in essentially sabotaging American presidencies since 1979. They ended Jimmy Carter's presidency with a hostage crisis. They tainted Ronald Reagan's presidency with Iran-Contra.
And then, you know, after that, you can count one by one: George Bush's efforts to bring democracy to Iraq were sabotaged by Iran. The Iran nuclear deal consumed the latter part of Obama's presidency. October 7th, the Hamas attacks, Hamas being an Iranian proxy, consumed Biden's presidency. So this is another example of Iran consuming an American presidency and perhaps sabotaging the presidential campaign of JD Vance.
