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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).
Welcome to the Confluence Investment Management Bi-Weekly Geopolitical Report for 07/28/2025. I'm Phil Adler. This year's turmoil in The Middle East appears to strengthen the case for investment strategies that Confluence Investment Management has maintained over recent months. Confluence Associate Market Strategist Daniel Ortwerth joins us today to discuss implications of the Israel Iran conflict. Daniel, I think the Iran Israeli military conflict and the regime change in Syria are huge events even by Middle East standards.
Phil Adler:Let's look first at the outcome of the twelve day war between Israel and Iran. What do we actually know about the extent of damage done to Iran's nuclear facilities?
Daniel Ortwerth:Hi, Phil. Good to talk to you again. Truthfully, we do not know much for sure, and even seemingly connected sources do not agree. The Trump administration's official statement published on the White House website and announced in the president's press conference declares that the US Air Force's b two strike obliterated the nuclear facilities at Fordo and Natanz. Meanwhile, the official US intelligence estimate offers a far more conservative estimate, essentially saying that the strike set the program back a few months.
Daniel Ortwerth:We see this disparity of assessments across the spectrum of different sources of information. In our view, only an eyewitness assessment can determine the truth. Iran is very unlikely to disclose that information, and it is possible that amidst the rubble, they don't even know yet. I do feel confident saying that, given the unmatched targeting skill of the US Air Force, the strike force's uncontested access to the target area, and the sheer weight of ordnance employed, some significant level of damage was done.
Phil Adler:As we consider the new balance of power in The Middle East, where does this leave Iran and its proxies like Hezbollah and Hamas?
Daniel Ortwerth:Phil, it leaves them in an extremely weakened position. Along with its own military power, the big key to Iran's ability to exert influence in the region has been what we call the axis of resistance. This refers to the loose informal network of militant groups and state controlled armed forces that Iran and its Islamic Revolutionary Guard Corps have long supported throughout the Middle East. In addition to the IRGC, the axis has comprised Hezbollah in Lebanon, Hamas and the Palestinian Islamic Jihad in the Gaza Strip and the West Bank, certain militias in Iraq, and Houthi forces in Yemen. Until December 2024, when the government of Bashar al Assad was toppled, the Syrian Armed Forces had been a key component of the Axis and allowed unfettered access between Iran and the Mediterranean Sea.
Daniel Ortwerth:Virtually every element of the Axis has been severely degraded over the last two years. Hamas has been decimated. Hezbollah has been badly degraded to the point where there have been public reports about its wariness of getting drawn into this conflict between Israel and Iran. Bashar al Assad's regime in Syria is gone. The Houthis have suffered considerable losses from US and Israeli strikes.
Daniel Ortwerth:Iran's proxy and partner network is now a shell of its former self, as is the Islamic Republic's ability to project its influence throughout the region.
Phil Adler:One thing I noticed is that China and Russia didn't seem to lift a finger to help Iran. What does this suggest about their ongoing influence in the region?
Daniel Ortwerth:Phil, I would be careful drawing any conclusions from that. Both China and Russia have many tentacles of influence in the region, financial, economic, and otherwise. They certainly profit from their relationships with Iran, but Iran's diminished geopolitical prominence in The Middle East does not necessarily impact their relationships or how they benefit. For instance, China imports most of Iran's oil, and Russia purchases a considerable volume of drones from Iran. In both of these cases, Iran needs this business.
Daniel Ortwerth:And now that Iran is in a weakened position, it needs that business more than ever. If anything, this weakness makes Iran more dependent on its external patrons than ever. Iran's misfortunes are Iran's problems, not China's or Russia's.
Phil Adler:Now how might Iran try to navigate a future relationship with The United States?
Daniel Ortwerth:Something that we highlighted in our report last year about Iran's new president, Masoud Pazushkan, is that he has thematically emphasized the need to gain sanctions relief to help revitalize the country's struggling economy. Although he declared the nuclear program off the table for discussion, he welcomed to the possibility of a renewal of negotiation with The United States. In the days since the ceasefire took effect in late June, renewal of negotiations has been a hot topic, and we expect it to probably happen. Of course, there will be seemingly endless bickering and disagreement about what is on the table for negotiation, what has actually been said, and even who wants to negotiate. It will be a long laborious process.
Daniel Ortwerth:However, we think Iran will focus its efforts on upholding the ceasefire. They just cannot afford a renewal of the fighting in their current condition and getting sanctions relief.
Phil Adler:Daniel, do you think regime change is a good possibility in Iran?
Daniel Ortwerth:Well, Phil, regime change can take more than one form. There can be an outright change in which the government falls and gets replaced by a new one. However, it can also take a stealthier form in which the government structure remains in place, but key members are replaced and radical policy changes previously considered out of the question get implemented. In any case, the future of the Iranian regime has become a central topic of speculation due to attribution of the country's failures to the regime's sclerotic decision making and emerging signs of infighting within its ranks. Unstable and opaque situations such as this can turn surprising directions.
Daniel Ortwerth:The classic example is the collapse of the Soviet Union. At the time, virtually no Western experts, Soviet or foreign officials, or even Soviet reformers foresaw the impending collapse of the system of one party dictatorship, state ownership of the economy, and the Kremlin's control over its domestic and East European empires. Something similar could happen in Iran with little notice to the outside world. Still, considering the resilience of regimes such as this, we consider it more likely that the regime and its political system will endure, but with transformational internal changes. These changes could potentially alter how the regime conducts its foreign policy.
Phil Adler:Well, one nation's loss means other nation's gains. The other three major powers in the Middle East, which you've identified as Turkey, Saudi Arabia, and Israel, all stand to wield greater influence in the region. Which country may benefit the most short term?
Daniel Ortwerth:We think it will be Turkey. It has the biggest, most diverse economy in the region, and it also has one of the largest populations and levels of defense spending. Turkey sits at the crossroads of major trade routes and pipelines. And all of this gives it more capability to seize opportunities when they arise. Last year provided just such an opportunity when the Assad regime in Turkey's southern neighbor, Syria, proved too weak to stand.
Daniel Ortwerth:Turkey had been providing a rebel group in Northern Syria, Hayat Taril al Sham, with equipment, training, and logistical support. When that group succeeded last year in overthrowing the Assad regime, Turkey quickly moved to establish a dominant relationship with them, helping them become the new government of Syria and a close client. We should remember that Iran had been the primary supporter of the Assad regime, and it was an emerging sense of Iran's waning support for Assad that inspired the successful overthrow attempt. In our view, this is just an example of how unfolding events might provide Turkey further opportunities to expand its Middle Eastern influence at Iran's expense.
Phil Adler:Daniel, what about the effect of all this on smaller Middle Eastern countries like Lebanon?
Daniel Ortwerth:Phil, you know, in any geopolitical system, the strongest countries dominate while smaller countries align themselves with the larger powers that best serve their interests. If the balance of power among the dominant players shifts, the smaller nations might find themselves in a position in which a strategic realignment better serves their interests than the old loyalties. With this weakening of Iranian power, we may witness any number of smaller Middle Eastern countries shifting their positions. The case of Lebanon really does illustrate this idea. The Shiite Muslim political party and militant group, Hezbollah, has dominated Lebanon since its emergence during that country's nineteen seventy five to nineteen ninety civil war.
Daniel Ortwerth:Hezbollah has been one of Iran's most powerful and loyal allies. It has dominated Lebanese politics and society, and this has held Lebanon tightly under Iranian influence. The last two years have fundamentally altered this state of affairs. Israel has waged a devastating campaign against the organization, most prominently through the pager caper by which it used compromised handheld devices to kill dozens of its top figures. Together with the losses Iran has already sustained and the loss of Syria as a conduit for supply, Hezbollah, and hence Iran's influence over Lebanon is crippled.
Daniel Ortwerth:With the door open to a potential realignment, Lebanon may very well realign itself to another power. Before the period of Iranian domination, Lebanon was a prosperous crossroads of the Middle East known for its flourishing banking sector and open society. A rebirth of this sort is entirely possible.
Phil Adler:Daniel, the bombing of Iran aside, The United States has seemed to be drifting to more of a hands off policy in The Middle East as our nation focuses attention on China. Now how might The US try to influence events there now in the wake of recent events?
Daniel Ortwerth:Phil, I don't think that these events will change that drift. The United States certainly views China as its main threat, and that is not going to change reaction to the weakening of Iran. However, even in a diminished level of priority, the Middle East remains far too important for The US to ignore it. We have seen this down through the succession of US administrations, each of which has found its legacy partially tied to Middle Eastern events. Even in the short span of the second Trump administration, we have seen The US remain heavily involved, be it through support for Israel and Gaza, agreements with Saudi Arabia, or a bombing strike on Iran.
Daniel Ortwerth:We have already discussed the likelihood of US Iranian negotiations, and I suspect that the Trump administration will try to use these negotiations as a lever to influence the outcome of the most recent conflict.
Phil Adler:We looked at the impact on oil prices in the mid year geopolitical outlook podcast that we released this month. Why have oil prices remained fairly steady throughout these conflicts, and do you expect this will continue?
Daniel Ortwerth:Phil, the global oil market has shown a surprising ability in recent years to take Middle Eastern conflict in stride with the price of oil remaining relatively stable. There is always the possibility of a price spike in response to an extreme event such as an Iranian attempt to close the Strait Of Hormuz through which 20% of global petroleum consumption flows. However, it seems increasingly likely that oil prices will ride out Middle Eastern turmoil Compared to previous historical periods when Middle Eastern crisis shocked oil markets, global supply has diversified with new or growing supply coming from places such as The United States and Guyana. Also, advancing technology has enabled improved management and enhanced visibility of global transportation flows. When the twelve day war began, oil market participants were able to use new tracking capabilities to determine in real time whether the number of tankers transiting the Strait Of Hormuz had changed.
Daniel Ortwerth:Observing virtually no impact, traders refrained from bidding up the price.
Phil Adler:As we draw to a close here, Daniel, would you say that the outcome of the Israeli Iran conflict affirms Confluence Investment Management investment strategies?
Daniel Ortwerth:In at least one key respect, Phil, I think it has. At confluence, we have been emphasizing the emergence of an increasingly strong pattern of events revealing the dissolution or at least weakening of the global order that has held sway since World War two. Israel's bold move to bomb Iran fits that pattern. Boundaries and norms that had been relatively stable elements of the global order for decades are losing their force. We view this trend as a natural consequence of The US reassessing its global commitments and willingness to serve as the global hegemon.
Daniel Ortwerth:In the wake of this retreat of the world's stabilizing force, countries in virtually every region are increasingly asserting themselves and taking their security into their own hands rather than relying on The US or the international rules based order to protect them. As this pattern continues to unfold, the world will become an increasingly risky place. This makes the global investment environment riskier than what was typically the case in the post Cold War era of globalization. Among the consequences, we expect countries and investors alike to respond to rising risks with budgets and investment allocations tailored to the new environment.
Phil Adler:And within your broader outlook, can you identify for us pockets of shorter term opportunities?
Daniel Ortwerth:Phil, one of the most likely enduring consequences of the change will be rising defense budgets throughout much of the world, especially Europe. Along with this, we expect rising expenditures in the broader industrial sector as its outputs are necessary, not only for defense, but for the societal infrastructure to support security priorities that even extends to the tech sector as it relates to things such as cybersecurity. Companies that operate in these sectors and their investors may experience a sustained period of opportunity. Along the way, we expect investors to continue to seek safer assets in their portfolios, so gold may continue to rise.
Phil Adler:Thank you, Daniel. The title of this week's report is implications of the Israel Iran conflict. You can find a link to the written report on the Confluence website, confluencenvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice.
Phil Adler:This information does not constitute a solicitation or an offer to buy or sell any security. Our audio engineer is Dane Stoll. I'm Phil Apper.