@DaveBC
Yes, I think you sum up the Nazis dilemma well. I've supported the notion of a Unilateral Declaration of Peace, or at least a ceasefire.
However, even if the British acknowledge the ceasefire, they will most likely simply use the time to rebuild the army, repair ships and complete new ones, shift forces to Egypt etc. Plus they will be free to use shipping through the Mediterranean and, without the Battle of the Atlantic, will not be so dependent on US supplied. Arms and ammunition yes, but not raw materials, fuel or food. So scarce USD conserved.
As you say, once the military and civil service have analysed the situation, they will simply allow the ceasefire to end. Having improved their position substantially.
And if they don't acknowledge the ceasefire but carry on bombing raids on Germany, how long can Hitler turn the other cheek? About 48 hours?
In which case, back to the dilemma.
You're right that there are serious reasons to think this strategy would fail. On the flip side, there are risks to any approach. The only three that anyone has credibly floated for Germany in 1940 are, so far as I can see, Sea Lion, Barbarossa, or a unilateral ceasefire. Maybe you can do the first two together, and maybe you can do the second two together. You certainly can't have all three.
Now Glenn has made a valiant effort at making a case for the first of those, but has failed utterly.
The real world has pronounced its judgement on the second.
Which leaves a diplomatic route. Cue the howls of protests that I am being unrealistic, no doubt, but if someone wants a credible answer to "how does Germany win the war in 1940," I think that's the best one there is.