The Red Line

The September Effect says the stock market tends to slump after Labor Day. This year’s Effect would likely be triggered by the bond market.

JP Morgan CEO Jamie Dimon says the stock market is overvalued and overleveraged. In July, he said bonds were overvalued too, with10-year U.S. Treasury Notes yielding only 4.5%. Since then, the 10-year has hit 4.75%.

Stock prices are based on prevailing U.S. Treasury rates used to discount future company earnings; the higher the rate, the lower stocks’ value. Also, Treasuries are competitive investments; the higher their yield, the more attractive they become – to a point.

Dimon’s remarks are concerning. So are recent statements by other prominent figures in the world of finance.

Last April, former U.S. Treasury Secretary Hank Paulson issued a dire warning.

Until recently, U.S. policy had been to staunchly defend Israel’s right to exist, while, simultaneously, to advocate for a Palestinian homeland. No longer. The Palestinians have been forgotten.

Nevertheless, today, there is a real opportunity to rebalance and create a Palestinian home (not state) in Gaza and the West Bank. That potential already has tangible form.

A variation of the two-state solution has already been adopted (but not yet implemented) as the short-term “day-after” solution in Gaza.

In Gaza, international peacekeepers (“the International Stabilization Force,” or ISF) are to disarm Hamas and replace the Israeli Defense Forces. The plan calls for Gazans to accept demilitarization and oversight by an external security force that protects them from Israel and vice versa.

Yet, this plan could be jump-started if U.S. troops man the ISF together with troops from a major Arab nation. And, if it can be launched in Gaza, it can be expanded to the West Bank and extended long-term.

A Gaza-only plan is not a solution.

The outcome in Iran is emerging as a two-staged agreement where, in the second stage, Iran agrees to as-yet undefined limits on its nuclear program over a period of ten to twenty years. President Trump will declare victory, but he will have a hard time explaining how his agreement is much better than former president Obama's 2015 ten-to-fifteen year deal that he criticized and cashiered.

Yet, with the destruction of so much of Iran’s weaponry and its military-industrial complex, he has set back Iran’s ability to produce a nuclear weapon for years in a way the Obama did not. And, with a decade of advances in remote surveillance technology, arguably, American ability to detect deal violations will be robust, enabling immediate responses.

Beyond trading removal of the American blockade for Iran’s opening of the Strait of Hormuz in the first stage, we do not know what Iranian demands he will have to meet to reach a deal. No deal is ever one-sided.

The likely outcome of the Iran War is a draw at best. Yet, President Trump could achieve much more. In high irony, the conflict has revealed that Iran may not need a nuclear weapon. Closing the Strait of Hormuz has emerged as Iran’s non-nuclear weapon of mass destruction. With some diplomatic pressure and ingenuity, Iran might be induced to swap nuclear for non-nuclear.

This swap could serve as the basis for settlement of the entire Mideast conflict.

Trump could induce Iran to give up its entire nuclear program in return for the establishment of a Palestinian homeland (not state) in the West Bank and Gaza overseen by U.S. and Arab armies.

He could sweeten the deal with a plan for the U.S. and Iran together to patrol and toll the Strait, an idea that the President recently half-embraced half-seriously. The toll receipts would be devoted to the massive cost of regional reconstruction, for which there is no other apparent source of funding.

President Trump does not to have a clear strategy in Iran, despite that the objective is clear, namely, to deny Iran a nuclear bomb. The general approach has been apparent: punish Iran until it capitulates.

Except that military punishment has ceased. Now, it is economic warfare. The outcome depends on which side can outlast the other.

What are the president’s strategic options? In common parlance: go long, go home or go big.

We have been going long. The expected outcome has been a long-term agreement somehow limiting Iran’s nuclear program, although the recent suspension of peace negotiations raises doubt about this outcome.