Update
I have been getting the views of some friends involved in the Middle East and others serving in Ukraine. Both sets of views are a bit different to what markets believe. It changes the timing and risks of events in my macro scenario.
Here's what's different: one is that the all-out race for nuclear arms by Iran is now Iran’s only defence option. That makes war with Israel more inevitable and brings the timing forward from 2026. The second is the likelihood of escalation in Europe has increased because Putin is likely to refuse any Trump “deal”.
Now I’ll set out the reasons why.
Middle East It looks like that Syria - seen from the standpoint of the Americans and the Israelis - is most unlikely to achieve stability and will evolve into internecine warfare between military factions, religious factions and tribes. The worst case scenario is for decades of chaos extending across the Levant, including Iraq and Lebanon and Syria.
What is sure is that the actions of US and Israeli forces don’t look like they are preparing for peace to break out.
US Centcom forces have bombed of over 70 ISIS locations Syria. US backed rebel forces (SDF and FSA units from the “secret” US-FSA base of AL-Tanf) have also moved to secure the Jordan-Iraq-Syria border area. The SDF (with the help of US Warthogs) has taken over the Euphrates crossing at Deir ez-Zur. This was previously in the hands of the IRGC. Israeli has attacked Syrian chemical weapons facilities, Assad’s Intelligence HQ, the Mezzeh airbase – all near Damascus. Israel has also carried out a missile attack on the Syrian naval base at Latakia. And the IDF has occupied Mt Hermon (2814m/9,232ft) the highest mountain in Syria giving unobstructed view of Damascus (40km away) and of the Beqaa valley.
One result, that holds under almost any feasible scenario, is that Iran has lost its ability to reconstruct Hezbollah or disrupt the West Bank because it will not be able to deliver weapons across the Syrian corridor. Thus, Iran's defence policy for the last 40 years of shielding itself by proxies is dead. So, Iran’s only defence option is to develop nuclear weapons, as fast as it can.
Israel will not accept a nuclear-armed Iran, which won’t stop Iran, but it makes the war between Israel and Iran more probable earlier. It is now likely to happen before, 2026.
The second development is in the European theatre. It's becoming clearer that Putin is not going to accept negotiations with the Americans on any basis that the Americans are likely to propose.
The Americans simply want a peace corridor, a truce, arming Ukraine (but not letting Kyiv into NATO) and funds to rebuild Ukrainian infrastructure.
Putin wants the “Great Discussion” about reestablishing Russia in the shell of the old Soviet empire to come first. Putin still insists on the basis of negotiations being the Istanbul Russian proposal of March 2022 – denazification and demilitarisation of Ukraine, no Nato membership and acceptance that territory lost by Ukraine (including Crimea) is Russian.
He will get none of that. And he will not get his gold and international reserves back either and no sanctions will be lifted. There is no indication of any softening of Putin’s stance in any of the Russian information streams I have monitored. This is unlikely to be pre-negotiation bluff – at least in my judgment.
Putin believes that if he continues the war, the Americans will be unwilling to support it by the middle of 2025. In reality, it's Putin’s own economy which is in trouble. Moreover, military logistics multiple this weakness. Russia’s ability to supply the front with tanks and other armor taken out of storage will be pretty well over by the second half of 2025. And that accounts for about 3/4 of the armour which is being used at the front.
So when Putin rejects Trump (and General Kellogg's) blueprint for peace, what will Trump do?
The psychology of Trump is to create “Peace from Strength”. He does not want any repetition of Kabul. Therefore, if Putin turns down his terms, Trump will simply bash him by arming Ukraine to do so using US targeting.
Such escalation could inflict such damage on Russia that the economy weakens below the level at which the war can be sustained. The economy is now so unbalanced that it only needs a big shove to fall over the cliff ( see Russia: Rough Update Nov 28, 2024). But from the point of view of the investment management community, that means the escalation would be beyond the costs and risks which are currently embedded in expectations.
Hope you're having a good day.