Getting It Wrong

And correcting bad predictions on the Iran War, just in case.

Photo by Julian Gentile on Unsplash

A couple of weeks ago, as U.S. forces were gathering in the Middle East, I wrote that financial markets would largely ignore any new attack on Iran. After the conflict started, I expanded on the argument under the headline “The Iran War Doesn’t Matter to Global Investors.” While I knew geopolitical risks would be unpredictable and the human toll would be heartbreaking, I believed investors would largely shrug off the conflict as they did the bombing of Iranian nuclear sites last July. As long as any interruption in the oil flow through the Strait of Hormuz was brief, the consequences for the global economy—and global markets—would be limited.

Hmm.

Now I could still fall back on my precise wording, which was that the conflict would last “weeks rather than months.” I could give myself at least until May before changing my call. I could also argue that when I wrote “markets,” I really just meant the S&P 500, which is trading only slightly below its Friday, February 27 close. I could even fall back on finger-pointing and claim that I had no idea the Trump administration would botch the operation. Didn’t they know that bombing alone was only going to entrench the Iranian regime further?

But, in fact, I lazily accepted the analysis of those who argued the U.S. Navy is, well, the U.S. Navy. It has minesweepers, guided-missile destroyers and aircraft carriers built to protect the Freedom of the Seas! Once Iranian naval forces were destroyed, as they have been, then nothing would keep the region’s oil locked in the Gulf.

Instead, I should have recalled military history since the Battle of Thermopylae, which confirms the advantages of any defending military over any attacker. I should have incorporated what we have learned in Ukraine about the assymetric advantages of drone warfare to frustrate one of the world’s largest military forces. I should have connected those thoughts with my own base case that pro-Western Jeffersonian democracy seems unlikely to spring forth in Iran anytime soon.

Even if the conflict magically ends tomorrow, the world now understands that the free passage of 20% of its oil consumption now depends on the goodwill of whatever government ends up running Iran. At one extreme, this means that American sailors face a long-term mission of protecting oil tankers that are mostly bound for China, so that gasoline prices at home might drift back towards $3 a gallon. At the other extreme, Iran’s rulers may choose to open the strait as part of some negotiated settlement with the U.S. and Israel. But investors can no longer ignore the threat that rising tensions will close it again.

More likely, we will see some messy intermediate scenario in which Gulf ship transit becomes safer than it was before, but not nearly as safe as it was on February 27. This means a much longer boost to energy prices, which raises the odds of recession.

Yesterday, the Washington Post published an editorial marking the death of Stanford professor Paul Ehrlich, who shot to fame with his 1968 book, The Population Bomb, which predicted that too many babies would lead to mass starvation and resource depletion. Boy, did he get it wrong. Instead of hundreds of millions starving during the 1970s, the actual number was less than 4 million and has been dropping in the decades since.

It turns out Ehrlich ignored signs of the Green Revolution and agricultural efficiency gains, which means that today’s 8 billion earthlings enjoy 30% more daily calories than their forbears some 58 years ago. Worse, his ideas caught on with disastrous effect, justifying forced sterilization programs and China’s one-child policy. But he never apparently owned up to his mistake.

These columns may never sway the course of global economics as Ehrlich did, but I want to be sure I correct errors as I go—just in case!

Paul Ehrlich’s “Population Bomb, a renouned