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Cedars Hill Group — March 9, 2026 — Three weeks into the war the markets have begun to settle into a new risk on, risk off regime. We can see it emerging in the back-and-forth reactions to the headlines last week. Monday through Wednesday alternated risk on, risk off and then Thursday and Friday were risk off. As we observed previously risk positions were cut after the initia... CHG Issue #221: Regime ChangeThree weeks into the war the markets have begun to settle into a new risk on, risk off regime. We can see it emerging in the back-and-forth reactions to the headlines last week. Monday through Wednesday alternated risk on, risk off and then Thursday and Friday were risk off. As we observed previously risk positions were cut after the initial shock of the attacks and now investors and algorithms are starting to make new bets based on the patterns we have experienced over the past three weeks. This will inevitably end the same way it began with forced liquidations of outsized positions when the facts on the ground change. The chart below shows what a risk-off day looks like in this new regime: long and short rates up, stocks down, oil up, and the dollar up. It is pretty much “sell financial assets and buy real assets.” What we should see here is all the different colored bars for a ticker on the same side of the x-axis since the first ten days are considered a risk off window. So far, the reaction has been pretty uniform across the market with only minor divergences in short rates, gold, value stocks, momentum stocks, bitcoin, and software stocks. Initially Bitcoin and software rallied on risk-off days but have recently fallen back in line again as risk-off assets. The moves on Friday in the front end of the curve and gold demand more attention in the coming days.  The chart below shows what a risk-on day looks like compared with the first ten days of risk off. We should see the opposite effect in this chart with the risk-on days being the mirror image of risk-off. Once again, we find that the pattern is pretty universal with only a few divergences in gold, the dollar, bitcoin, and software stocks. Bitcoin and software stocks are traditionally risk on assets and have still mostly behaved as such with only software stocks giving back some of their recent outperformance on Wednesday’s risk-on day (which was a mild one). Gold is a bit more nuanced as it can quickly shift from risk-on to risk-off and has been basically going down no matter what happens, but last week it started showing signs of being a risk-on asset again.  In the charts above we took the volatility experienced during the first ten days of the war and used it to normalize the moves experienced across later days in terms of number of standard deviations. This helps us to identify the new patterns the market is settling into under this heightened geopolitical risk environment, and it will also help to identify when the market starts moving away from that regime and pricing in an end to the war. We have referred to this market phenomenon in the past as the “macro blob” which is a crude name for very real behavior of market participants. Quants might call this the “crowding effect” but in layman terms it just reflects the emotional reaction to a surprise: initial fear which eventually shifts to greed. The cyclical nature of human behavior creates market cycles from the long ones to the very short ones like what we are experiencing today. It is basic supply and demand analysis, initially very few were positioned for war, now everyone is and investors are even starting to over position for it. If you want to know how the market will react to an end to the war just look at how it is pricing the war today. The moves in oil and the dollar have lessened while the moves in stocks have increased as the initial expectations for a short timeline are starting to come out of the market. Notably, foreign stocks risk-off beta has decreased, and their risk-on beta is higher than domestic stocks as Iran’s treatment of different countries passing through the Strait of Hormuz has evolved into a toll-based system where access is granted based on political alignment. This sort of positive convexity shows that investors are reevaluating their initial assumptions on the impact of the war on domestic and foreign stocks. The knee jerk reaction was to sell the stuff that is physically closest to the war and now it is evolving as we learn more about the intermediate and longer-term impacts. Bigger picture the market is starting to settle into a longer timeline for this war despite the recent hints from the US of a ceasefire. The major news outlets tend to heavily discount what the Trump Administration says. This treatment is both well-earned and also short-sighted. As we have pointed out previously, Trump is an agent of chaos and he uses chaos to keep his opponents on their back foot. We have all gotten used to a standard way of doing things with past administrations, and this administration seems to have made it policy not to do anything in the standard way. This uncertainty benefits the administration, but it creates a challenge for the market in pricing risk. All the models based on the standard ways of doing things must be thrown out. However, what we are seeing is that the market is simply discounting everything the administration says.  The US and Israel have a primary and secondary objectives to this war which can be seen in their actions and official statements: 1) destroy Iran’s nuclear program and 2) force regime change. One of the factors that led the US into this war was the wide-spread anti-regime demonstrations that took place prior to the attacks. By removing the regime, the US hoped to empower these demonstrators to create a new, friendlier government that would abandon the nuclear program. Despite killing the Supreme Leader, and other major regime leaders within the government and IRGC, the US and Israel have so far failed in this objective. The IRGC’s mosaic defense strategy has proved effective in allowing it to continue retaliatory strikes and project a unified front against Iran’s adversaries. News outlets continue to contrast the words of the Trump administration with the words of the IRGC who remain defiant and belligerent to any US overtures and it appears that the market has decided to believe the IRGC over the administration. The problem with this approach is that it is not clear who is actually calling the shots in Tehran. We must consider the possibility that IRGC is not calling the shots and the US is talking with another element within Iran that is able to yield power and control. Much of Iran’s governing system, including the leadership and infrastructure, has been destroyed which makes governing Iran very difficult. The Iranian President is considered weak, and the new Supreme Leader has not been able to consolidate power and may be injured or dead. The IRGC has been able to execute operations, but it is not clear if it is able to exercise political control within Iran. It is likely that the Iranian government, led by the President, is trying to bring the IRGC under its control and has publicly apologized for the initial retaliatory strike undertaken by the IRGC. Iran’s regular army, the Artesh, is commanded by the Supreme Leader, and since we do not know the status of Mojtaba Khamenei, it is not clear who they are taking orders from. The Artesh is not as ideological as the IRGC, and it is likely that there are elements within the government and the Artesh that are cooperating to bring the weakened IRGC under control.  Trump is a strange person and the press conference last week where he spoke about a gift from Iran was strange but also might be more than a random Trump ramble if it was truly a sign from an element within Iran that is able to exercise power and control independently of the IRGC. The IRGC represents the most extreme ideological elements within Iran, and they will never negotiate with the US or Israel whom they have sworn to wipe off the face of the earth. Therefore, we should not be surprised by the IRGC’s continued denials of talks and continued missile strikes. But we should pay close attention to any deviation from the IRGC’s normal rhetoric coming out of Iran and for any signs of another “MORE REASONABLE, REGIME” that is able to exercise power and control within Iran.
This weekend the Houthis entered the conflict by conducting missile and drone attacks on Southern Israel. This is seemingly an escalation of the conflict and opens another front in the war, but the Houthis decision to not attack international shipping lanes, something they have done frequently in the past, may suggest they are pursuing a relatively cautious approach toward their cooperation with the IRGC. This may indicate the IRGC appears weak to the Houthis, and they don’t want to risk an escalation with Israel and the US when their primary benefactor is severely weakened. Additionally, the Supreme Leader’s Telegram channel published a statement about Iran’s “resistance economy” that is disconnected from the reality on the ground in Iran. This may reflect an effort to portray the Supreme Leader as an active leader amidst reports that he is seriously wounded. Despite what they say on the surface and how Western media interprets this news; these are not the actions of a strong and united Iranian regime. It is clear there is a power struggle taking place in Iran which may result in the regime change the US is hoping for, but that could come with a significant escalation of the conflict before it ends. There are reports of growing discord between the Artesh and the IRGC and we can only hope that the anti-regime elements within Iran are the ones taking control of the Artesh, consolidating power, and negotiating with the US. The only thing we can be certain of is that you can’t trust anything anyone says in times of war. Cedars Hill Group is a boutique investment bank built by investors. We invite you to explore our Knowledge Base to learn more about how you can run your business or portfolio like the best. At CHG, we connect clients and experts to drive innovation and solve complex problems in today’s fast-paced and rapidly changing financial markets. Get in touch to learn how we can help you navigate your financial future. Source: https://cedarshillgroup.substack.com/p/chg-issue-221-regime-change Comments are closed.
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