Disaster Deal with Iran

Global Macro Update

As expected stocks reacted well to the announcement of a “deal” that is destined to either break down, or if not, create a path for the Iranian regime to regain most of what it lost in the war. Oil prices dropped 5% and are now back to the low $80s (per barrel), where prices were exactly one year ago. Lower oil prices are also leading to a decline in inflation concerns which can be seen in a decline in U.S. treasury yields— the 2-year yield fell by 5bps to 4.03% and the 10-year yield fell by 4bps to 4.44%. Several weeks ago the 30-year Treasury yield hit 5.20%, which was featured throughout the financial press since it was the highest yield on the 30-year since early in 2008. The yield on the 30-year bond is now back down to 4.94%, with no fan fair. So much for the forthcoming government bond crisis that so many publicly worried about.

The frantic reaction to the war from analysts and the media about high oil prices, higher inflation, and higher bond yields all likely contributed to Trump’s desperation for this pathetic deal that he announced.

But it may not be too long before Trump grows frustrated with the almost wall-to-wall criticism of his Iran-deal.  It’s clear that JD Vance, Jared Kushner, and Steve Witkoff were the main proponents for the deal among Trump’s inner circle. Meanwhile, Secretary of State and National Security Advisor Marco Rubio, Secretary of War Pete Hegseth, and CIA Director John Ratcliffe opposed it. In other words, those with knowledge of the facts on the ground and experience opposed the deal. Those with business interests in the region or domestic politics in mind supported the deal.

Now it’s Vance alone who is out there selling the deal to the American people. Rubio is keeping a very low profile. Is anyone in the American public buying what JD is selling?

In his TV interviews Vance says that the details of the deal still need to be sorted out, “but we hold all the cards.”  That claim that we hold all the cards sounds a lot less credible today than it did a week ago, a month ago, or on April 8th when we had our boot on the Islamic Republic’s neck.

Iran is up to its old games, and they seem to be getting away with it, like they’ve always done. According to Fars, the Iranian state press, the US has agreed to permanently hand over the Strait of Hormuz to Iran under their full sovereign authority, with Iran having the right to collect tolls called "service fees" from all commercial ships after a 60-day waiver period. This directly contradicts Trump's claim of a "toll free” Strait of Hormuz.

With pre-war Hormuz traffic at 30,000 vessels and 7.6 billion barrels of oil per year, this could generate $10+ billion in annual revenue for Iran, and comes on top of the $300 billion in reconstruction funds that will reportedly be sent directly sent to Iran.

When JD Vance was asked on CNBC about the Iranian claim that tolls would be charged by Iran in the SOH he replied, "Well, our expectation is that the Strait is going to be opened in a toll free way for the long term. And that's the sort of thing that we're going to figure out in these technical negotiations.” That’s a weak and unconvincing reply, wouldn’t you say?

There are three possibilities here:

1. Iran is conducting information warfare to sell a victory narrative to domestic hardline audiences, and Vance is just playing along for now to get to Switzerland to sign the deal on Friday.

2. There is a genuine point of difference that will cause the collapse of talks and potential resumption of conflict after 60 days, or more likely after midterms as long as Trump has the appetite to defend his reputation as an effective president.

3. A sign of a bad deal for the U.S. and the world.

Number 3 seems the most likely explanation.

The area where the conflict may re-emerge first is between Israel and Hezbollah. The truth is it’s a fallacy to distinguish between Iran and Hezbollah— it is just an Iranian terrorist/military force that occupies Lebanon. Iran uses Hezbollah to strike Israel while avoiding blame for being the aggressor. Hezbollah never stopped its attacks on Israel during the ceasefire.  The Israeli Defense Minister stated that Netanyahu made it clear to President Trump and senior U.S. officials that Israel will not withdraw from Lebanon despite the U.S. agreement with Iran, and  Israel will not stop retaliating. We shall see if Iran protests the retaliatory strikes by Israel. Furthermore, Israel cannot allow Hezbollah to rebuild its military might no matter what Trump may have agreed to with Iran. That would be both irresponsible and suicidal. When Trump scolds Bibi for hitting Hezbollah he is doing Iran’s work. Who played who in these negotiations? It seems clear. The U.S. military performed spectacularly well on the battle field, but as always, the Iranians have run circles around another U.S. administration at the negotiating table.

Inside the Iranian regime stories are emerging that there is growing satisfaction with the Memorandum of Understanding. In exchange for granting Trump an opening of the Strait of Hormuz, lower oil prices and a stronger stock market, Iranian officials believe they managed to preserve what matters most— their ballistic missile program, their regional proxy network, and the ability to rebuild their power.

The message delivered by IRGC Commander Ahmad Vahidi throughout the day yesterday was “first, we take the money.” Apparently discussions inside the IRGC are already focused on the day after the agreement - not the agreement itself. Iran is making plans to humiliate another U.S. president and destroy his reputation in the process. So far it’s working. Let’s see if Trump wises up before too much damage is done.