Iran, Israel and the Market

Posted on August 16, 2010 by

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Harvard divests Israeli holdings?

(note: This post is old. You might be interested in an more recent related post here.)

Israeli F-16

Israeli F-16 Loaded for Bear

This report in the August 13, 2010 issue of Israeli business daily, Globes, caught my eye:

“… the Harvard Management Company notified the US Securities and Exchange Commission (SEC) on Friday that it had sold all its holdings in Israeli companies during the second quarter of 2010. No reason for the sale was mentioned.”

When I read this I assumed Harvard was responding to the presently escalating tensions in the Middle East centered on Iran’s advancing nuclear ambitions.   In particular they might have been concerned that if Israel were to become embroiled in a war with Iran, the value of pubic companies in Israel would plummet.

The story spread quickly through the internet, where the the leading interpretation seemed to be that Harvard was divesting itself of Israeli holdings — “divesting” in the sense of selling and not intending to reinvest.  Harvard, probably under intense pressure from benefactors, faculty and students, was quick to respond:

“The University has not divested from Israel. Israel was moved from the MSCI, Harvard’s benchmark in emerging markets, to the EAFE index in May due to its successful growth. Harvard’s emerging-markets holdings were rebalanced accordingly.

“Harvard continues to have holdings in developed markets, including Israel, through outside managers in commingled accounts and indexes, which are not reported in the filing in question.”

Harvard is probably telling the truth: They’re following a disciplined methodology tied to indices and factor analysis, and indeed Israel was promoted from “developing” to “developed” recently.  In fact, my sense is that Harvard revealed more than they would have liked to in their announcement, just to go the extra distance to reassure their stakeholders.

But still…

The possibility remains that Israel or the US may strike Iran.

A number of conservative pundits including Charles Krauthammer, Bill Kristol, and Jeffrey Goldberg have predicted that Israel will attack Iran’s nuclear facilities.  Israel has already demonstrated its willingness to take preemptive action against Arab nuclear facilities when they targeted Iraq’s in 1981 and Syria’s in 2007.  And, the theory goes, Iran is edging inexorably closer to an unacceptable nuclear capability (and flaunting it in Israel’s face).

The speculation about such a strike began as early as 2006, and it reached a crescendo in the run up to the 2008 election.  There were several theories that involved either the US or Israel striking Iran.  Kristol suggested that George Bush would direct a strike if it became clear Obama would win the election — presumably because Obama would be too much of a dove to carry out the task.  (In fact there are reports that Bush mocked Kristol and Krauthammer for their hawkish views at the time.)

By 2008 I had become convinced by the hawks’ rhetoric that a US or Israeli attack on Iran was imminent.  But it didn’t happen then, and it hasn’t happened yet.  It seems no one, even George Bush, had the stomach for another war in the Middle East in 2008.  Yet, recently there’s been a substantial uptick in the chatter about a strike on Iran.  Consider the following:

  • “We do not accept the idea of Iran having nuclear weapons.” — US secretary of defense, William Gates, June 20, 2010.
  • “We cannot live with a nuclear Iran.” — U.A.E. Ambassador to the US, Yousef al-Otaiba, July 6, 2010.
  • An Attack on Iran: Back on the Table — Article in Time, July 15, 2010.
  • “I have begun to consider that that may not be the worst of all possible outcomes.” — Former CIA director Michael Hayden, regarding a strike on Iran, July 25, 2010.
  • “They [the United States and Israel] have decided to attack at least two countries in the region in the next three months.” — Iranian President Mahmoud Ahmadinejad, July 26, 2010.
  • “Who is the second one?” — Israeli defense minister Ehud Barak.

These events taken together reveal two key changes in the thinking of policy makers since 2008.  First, a growing sense within the US, at the highest level, that an attack on Iran is feasible and defensible on the world stage.  And second, that Arab nations are willing to accept an attack by Israel on Iran because they dislike the idea of a nuclear Iran as much as the US and Israel dislike it.

How certain is an attack?

The US and Israel have stated in no uncertain terms that an Iran with nuclear weapons is unacceptable.  One might doubt the US’s determination to stand by that claim, but no one can doubt Israel and their track record.

This line in the sand is being inexorably approached by Iran.  Iran shows no interest in slowing down either.   So unless the line moves or Iran changes course, expect a collision.

How long?  This is hard to guess, but I predict sometime before 2012.

Not everybody agrees with me, here are some contrary views at foreignpolicy.com:

Coming up next: Iran, Israel and your portfolio

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