The Wednesday Letter #240 - 10/2/2024

THIS WEEK: Netanyahu's Gamble; Liquidity and the New Goldilocks; Longshoremen Strike; Investment Themes to Watch.

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NETANYAHU’S GAMBLE

After the 2006 war between Israel and Hezbollah, there was widespread talk that missiles had become an equalizer. Hezbollah did not have the military capabilities of a state and it certainly did not have Israel’s formidable armed forces, but it was able to hold its own for 33 days thanks to thousands of missiles that it rained on Israel. That was then.

In the eighteen intervening years since 2006, both sides have been preparing for a rematch. For Hezbollah, encouraged by the effectiveness of its missile arsenal, “preparing” meant more missiles, and new ones that were longer-range and more precise. A few years after 2006, Hezbollah could boast that it had the ability to strike any part of Israel, including city centers, military bases, nuclear facilities and industrial plants.

For Israel, “preparing” meant finding a way to blunt Hezbollah’s missile capabilities and devising new unconventional strategies to cripple the group. With regards to the first (blunting Hezbollah’s missile capabilities), Israel limited Hezbollah’s arms buildup by bombing warehouses and delivery convoys as they transited through Syria or parts of Lebanon. Israel also built the Iron Dome defensive shield which disables incoming missiles before they reach their targets.

With regards to the latter (devising unconventional strategies), we saw an example with the explosion of thousands of Hezbollah pagers and walkie-talkies two weeks ago.

Before we go on with what may or may not happen in the next few weeks and months, let’s consider the following recent statements:

Benjamin Netanyahu addressing the Iranian people:

When Iran is finally free, and that moment will come a lot sooner than people think, everything will be different. Our two ancient peoples, the Jewish people and the Persian people will finally be at peace.

Netanyahu also addressed the Lebanese people, emphasizing that Israel is at war with Hezbollah, not with Lebanon or the Lebanese people. Both of these statements indicate that Netanyahu sees an opportunity for a new regional paradigm, one in which Iran and its proxies have been pacified and Israel has improved relations with its neighbors and with Iran. This in essence is Netanyahu’s gamble: that Israeli action and the decapitation of Hezbollah and assassination of Iranian and Syrian leaders will allow a new Middle East to emerge.

Here is Jared Kushner about Israel’s attacks on Hezbollah leadership:

Today, with the confirmed killing of Nasrallah and at least 16 top commanders eliminated in just nine days, was the first day I started thinking about a Middle East without Iran’s fully loaded arsenal aimed at Israel. So many more positive outcomes are possible. This is a moment to stand behind the peace-seeking nation of Israel and the large portion of the Lebanese who have been plagued by Hezbollah and who want to return to the times when their country was thriving, and Beirut a cosmopolitan city. The main issue between Lebanon and Israel is Iran; otherwise there is a lot of benefit for the people of both countries from working together.

And French philosopher Bernard-Henri Lévy, also as quoted by Kushner:

Israel is not invading Lebanon, it is liberating it. This is a historic moment, not only for the Israelis, but for the Lebanese, Arabs, and Eastern Christians.

There are other similar quotes expressing hope that the aftermath of the war will bring peace and a new period of prosperity, something that resembles the post-world war 2 era in Europe and Japan.

The question is to check this hope against history and reality. For example, is the animus directed at Israel from Lebanon and Iran merely a construct of Hezbollah and Islamic Republic leaders, or is it more deeply rooted in those populations? In other words, is Iran the main issue between Lebanon and Israel, as Kushner says? And is the Islamic Republic the main issue between Iran and Israel, as Netanyahu suggests?