As we are sure you all know, the situation in the Middle East is tense and potentially dangerous right now.  This situation would seem to have the potential to disrupt financial markets, but so far we are not seeing many signs of serious dislocation.  That could change if things get more serious, but we really don’t know.

It started with Iran-backed militias in Iraq attacking an Iraqi base with missiles and killing an American.  American forces hit five of their bases; they attacked our Embassy in Iraq; and then we killed Iranian Commander Qassem Soleimani, considered the second in Command in Iran, and a senior Iraqi militia leader as well.  This was a very serious step, one that several previous Presidents had not taken.  It changes things pretty substantially, and is seen as controversial.

All this in a Presidential election year!  Let’s not go there, we are already seeing sharp disagreement about our course of action in the political arena, but that really does not matter at this time.  Let’s all just hope this does not get a lot worse, and meanwhile let’s consider what is happening and what it might mean for us personally, for financial markets and our portfolios.

Retaliation was expected, but Iran is economically weak and diplomatically isolated; that could make them dangerous, but for now it appears unwilling to provoke a full military confrontation.  But for them to not respond at all would be a major loss of face for them.

15 missiles today.  Ballistic missiles fired from Iran, not from Iranian forces in Iraq.  It appears that they were carefully aimed to not hit American forces, perhaps attempting to respond but not cross the red line of causing American casualties.

Airlines are diverting flights away from Iranian and Iraqi airspace.  American forces are on high alert, and reinforcements moving into the region as we speak.

But will we have a serious escalation, and will it matter to financial markets?

Judging from the tepid reaction of equity markets and oil prices moving very little, the collective wisdom of the world seems nonplussed.  I am not suggesting there is nothing to worry about, but I am suggesting that this may be a high stakes game of chicken, at which the Iranians are very skilled, and the world is collectively betting that the outcome will not be as big a deal as many fear right now.

We should add that America becoming the number one producer of oil in the world changes the game.  In past years Middle East crises threatened our vital oil supplies and caused huge increases in oil prices.  Threats to close the Strait of Hormuz caused panic.  No more.

Best Regards,

Roger Hewins

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