Episode 25 - Situation Update with Lance

In this special “Situation Update” episode, Lance Peltz unpacks the rapidly evolving global landscape and its economic implications.

Lance offers a grounded, no-predictions perspective on geopolitical tensions, highlighting how disruption to energy, materials, and supply chains is driving inflation, market volatility, and consumer pressure worldwide. From oil and LNG dynamics to emerging-market vulnerability, the conversation explores how conflict directly translates into economic stress.

They also examine investor behaviour, shifting market structures, and growing concerns about private credit, AI-driven change, and speculative trends in assets such as silver and Bitcoin.

With no clear end in sight, this episode provides a sharp, sober view of markets in flux—and the deeper structural shifts shaping the global order.

Transcript

Dave (00:00.088)
Welcome, Lance, to this special edition of the podcast. I'm going to call it Situation Update. Every time we talk, there seems to be stuff going on in the world. And at the moment, there seems to be an awful lot. So I wonder if I could kind of get your reflections on what's happening. You know, I'm certainly interested in

Lance Peltz (00:16.287)
Right.

Dave (00:44.518)
you know there's a lot of uncertainty out there but the things that you know you're going to be keeping a close eye on as well but maybe if we start with your views as to what's going on that would be great.

Lance Peltz (01:00.533)
Yeah, I think I'm in a position to make observations. I'm absolutely not going to make any predictions. And that's because I'm very certain that the main protagonists really don't know what the end state is, what their goal is, and in fact, how to end it.

I was at one of these interesting lunch presentations literally Thursday before this started, so that's getting on for just over two weeks ago, where there were some global macro strategists and a former very senior NATO general. And essentially this was a topic of conversation. And essentially the message was, and I paraphrase, they wouldn't be so stupid to do this.

So we start from that point.

Dave (02:03.373)
Yeah.

Lance Peltz (02:06.898)
So I think one of the big issues that this may no longer be, or almost certainly is no longer in Trump's control as to when to call the end of this. And one of the scenarios is that if you're an Iranian strategist or the new Supreme Leader,

The best outcome is to maintain the disruption and elevated oil price and energy prices for as long as possible to impact Trump in the midterm elections.

Lance Peltz (02:54.034)
And that's quite a scenario.

Lance Peltz (03:01.492)
All the time we're talking about this, I've got to remember, I focus on the economics and the market implications, but this is still a war and people are suffering and losing their lives. But let's just focus on what I know a little bit about. The transmission mechanism for conflict to the economy is absolutely the disruption of both energy and critical materials.

which then flow through to the impact on things like inflation and consumer confidence and consumer spending. When these events happen, just like Ukraine, the wider market participants learn of all sorts of things that we really never knew about or concerned ourselves about. Like Saudi Arabia is a major supplier of sulphur to the global chemicals market.

it's one of those byproducts they extract from their crude which is called sour crude and it's got a lot of sulphur in it. The Middle East is also a major exporter of fertilizers and fertilizer components so either

finished fertilizer component which is usually urea because it's a chemical that actually takes a lot of energy to make essentially think of a fertilizer as bottled chemical energy which is then distributed to plants to help them grow and we're seeing considerable disruption of that as well and fertilizer prices have gone up. We tend to focus on the oil price and actually oil has been relatively well behaved.

Given the disruption, 20 % of the world's oil supply goes through the straights of humus. Brent, which is the best yardstick for crude is over $100 at the moment, but it's been very volatile, it rose to a much higher level after Ukraine. The other energy sources, liquefied natural gas, LNG.

Lance Peltz (05:14.844)
And actually, that's the price of LNG has been.

also reasonably well behaved given the disruption. And it's worthwhile looking at the backdrop. So oil is much more fungible and the US is largely self-sufficient in oil and a net exporter of oil. And most of the imports it takes come from Canada or Venezuela.

So in terms of supply, the US is actually very well insulated. The other country that's surprisingly well insulated is actually China. China still produces nearly 60 % of its electricity from coal, which it has its own domestic sources. And then another kind of 23, 25 % from renewables, hydro,

solar. They've also made significant strides into electrification of their transport network and they've got significant, probably largest of any country reserves, maybe up to 200 days of oil reserves. So China's quite well insulated.

But the vulnerability is actually LNG, which because of the way you store it, the way you transport it is not such a global market. The US will not have a problem with LNG, but other countries will eventually. And the countries mainly at risk from this actually tend to be Asia and Asian emerging markets. Europe.

Lance Peltz (07:08.66)
will suffer and some countries like Austria apparently are already thinking about degrees of price control and some degree of rationing. But we should differentiate between supply and price because even the US which will not run dry, the prices are set on a global basis. So US gasoline,

use Americanism. The wholesale price, and I had a look at this just before we started the call, the wholesale price is up about 50 % from the point before the tension started to build. The retail price of gasoline is not up so much as a degree of delay in feed through, but that's already at $3.50 a gallon. Contextually, it actually touched $5 a gallon at the very peak of the Ukraine.

But nevertheless, the US consumer, US voters, is very susceptible to gasoline prices. They fill up on average more than once a week. And it's something that stares them in the face all the time, is the big billboard with the gasoline price. And for a lot of US consumers, that's the significant variability after they spend their money on rent or housing, food.

and the transport costs outside of the big cities on the coast, most Americans drive. That's a big variable in both their consumer discretionary spending and in their well-being. there's an absolute mechanism by which Iran can translate this into political pressure for the US.

The key issue just is how long energy prices remain elevated for. If I look at the futures market for oil, spot Brent, i.e. Brent for delivery today or in the next week is trading about $100 and $102.

Lance Peltz (09:29.172)
If I look at September delivery, the futures market, basically says I'll deliver, if I sell a future, I'm promising to deliver a cargo of Brent crude in September, is trading at $87 a barrel. In other words, a discount, which is basically the market saying that come somewhere between three and six months, a degree of equilibrium in supply will be restored to the market.

I have no idea whether that's going to happen. Is that optimism or realism? And that's really quite important because if it passes, then this is a transitory issue. Yes, it will cause an inflation impulse across the world. Yes, Asian emerging markets are more vulnerable, more susceptible to this. And there are definitely some...

Asian emerging markets which do not have lower stockpiles which will quite soon see supply constraints rather than just price constraints.

But the impact, the transmission mechanism is energy and material costs. And it really does depend on the unknowable of how long this will last.

Dave (10:54.222)
mean it is really interesting because as you say there doesn't seem to be

any view coming out about how to end this. I mean, I guess what I didn't sort of think about or realize is, know, Iran doesn't need to do an awful lot to cause a huge amount of problems. mean, you you just look at what it's doing in terms of some of the other countries it's targeting. It's not targeting them with huge waves of drones. It's targeting them with...

one, two, three drones and that's causing absolute mayhem, isn't it?

You sort of target transport hubs and oil refineries or water distillation plants and it sort of upsets confidence, upsets the way people kind of go about their daily life. mean, it's kind of fascinating that you don't need to be doing an awful lot in order to cause maximum disruption.

Lance Peltz (11:57.661)
No, I'm very conscious that we're only.

absorbing a limited set of news and we get to hear about the stuff that gets through. I'm not aware of the volume of stuff that's intercepted but there are articles in the FT today about the rate at which the US is burning through its munitions stockpile which is significant, let alone the cost which the voters have yet to appreciate.

There was another article and again this is all kind of journalistic here, but apparently the Pentagon didn't really consider the prospect of the straight circle was being closed. I know if it's real it's really quite shocking and it just goes back to that opening premise that they just don't know what they're doing. So I don't know how it ends.

Now that's a challenge in making investment decisions.

Lance Peltz (13:08.464)
One can easily get incredibly bearish and negative and sell more. Our portfolios are underweight equities. Bonds which have also been affected because of the definite but yet unquantifiable inflationary impulse from this.

We are both underweight equities and in bonds we have very short duration which is less susceptible to inflation risk. We took a view last year that Asian

and emerging markets were attractive for a whole host of reasons and we're overweight. And the relative performance at the moment is definitely unwinding some of strong gains we've made last year. It's certainly within the equity mix. So emerging markets are now down 10 % from the peak, whereas the US is only down about 4.5 % from the peak. Now we've got a lot less emerging market even though we're overweight.

the US still remains the world's largest market where we are underweight. But I think that performance reflects both some degree of the relative future risks we spoke about, supply and price and disruption, but also the changing nature of what's been driving markets.

I personally have a very strong premise that the US is increasingly driven by retail investors buying index tracker funds. And their muscle memory is don't sell, buy the dips. It's another unmissable opportunity to make loads of money. And certainly last week we saw a behaviour like that. There were appreciable increases in risk, like the first time oil went to $100.

Lance Peltz (15:13.574)
US equity market opens lower and there's buying coming in and it's retail buying, buying tracker funds. Other markets like Asia, emerging markets, Europe and UK. The marginal buyer is still the institutional investor. People like Kevin Deshware to BlackRock and...

other very large fund managers who look at the fundamentals. So we're more likely to be sellers rather than buyers. So those markets are actually have underperformed. don't know whether it's right or wrong. If this is relatively short-lived disruption, then the premise for Asian emerging markets is frankly stronger and better than the US. The same with bonds.

The interesting thing is that before we started to record this, we touched upon you asked what were we thinking about? Well, before this, before the missile started flying, I was more interested in developments in terms of the profitability of the technology companies and the amount of CAPEX they're spending on building out data centers.

and there were signs of the profitability of AI, the rate of growth which the CAPEX was growing was taking off. We were also seeing signs of stress in an area called private credit. If I take a step back, historically companies used to borrow money.

in bond markets, publicly traded bond markets. Basically, a bond is a packaged loan into chunks of a thousand or a hundred thousand dollars, which investors buy and sell. Private credit is essentially the opposite of that. It's essentially loans, but not openly traded on a market.

Lance Peltz (17:26.196)
there's been a whole surge of interest fund creation money flowing into that space because it was meant to offer higher superior returns for the same amount of risk which is kind of one of those things like this time it's different. We have absolutely

avoided that space because it just doesn't feel right nor do I think our clients need to take or should take the liquidity risk that can happen in this space. And even before the war, there were signs of stress building up in that space. So again, just looking at this thinking is there a contagion effect or is it contained to the investors that have gone into that space?

Dave (18:05.102)
Right.

Lance Peltz (18:15.572)
Again, stuff we're thinking about.

So that's what we're juggling with. simply put, markets haven't sold off enough to make it look attractive to even think about is this a buying opportunity. Nor has the situation got enough clarity to make us think that we should go further underweight equity than we already are.

And that's trade-off and we've been discussing this a lot and I'm going to have another discussion with my colleagues on the investment committee on Monday.

but it's a state of flux. Longer term.

This really does further undermine the US status in the world. If you're a Gulf country and a supposed ally and friend of the US or if you're South Korea, there's been this unwritten pact that the US will provide defense, degree of stability, and you will buy

Lance Peltz (19:38.728)
You will hold lots of US dollars and you will buy US Treasuries which fund the US deficit.

When the dust settles, I suspect that the leaders of those Gulf countries are going to really reappraise that. And if you're in South Korea, where the US has just taken away a load of Patriot missile defences to go to the Gulf, you're also thinking, who do I rely upon to provide me some degree of surety from my aggressive neighbor that's sworn to destroy me? And the same with the Middle East.

So the post, you know, the pre or and definitely the post Cold War order is changing and this will accelerate it even if there is successful regime change in Iran.

Lance Peltz (20:35.186)
And on that note, that's the only insight I have.

Dave (20:36.866)
Yeah, look, I mean, I really appreciate it. I really, you know, again, it's just it's really good to get your perspective from what you're thinking. I know there isn't any answers and the situation is changing on a sort of almost minute basis. But, you know, from my point of view, having the reassurance of

You know, just hearing your thoughts is really, really good. So thank you so much for that. And, you know, I guess from a podcast point of view, if there are moments where, you know, there is a bit more clarity, then we'll definitely take that opportunity to have another conversation. Fantastic.

Lance Peltz (21:25.044)
Yeah.

Lance Peltz (21:30.761)
Just as one final note, there's some really strange things going on. Normally one would expect gold and silver to be the go-to safe haven. They're not behaving like that. Silver especially has actually become correlated to equity market risk on. All the speculative surge, particularly in silver last year, just turned it into a...

another risk on token. There are some things really being turned on the head at the moment. The other thing I was reading about is apparently you can now buy, you can make bets on whether Bitcoin will be up or down in the next 15 minutes on what they call.

US prediction which are basically online gambling. And it's just like this kind of these things can't end well.

Dave (22:26.625)
Wow.

Dave (22:37.634)
No, and it's interesting because I mean, on a separate note, I had a chat with someone from Moody's Ratings yesterday who she does the sovereign ratings for countries and that was fascinating because she was talking a lot about AI diffusion into economies. And, know, the impression I got from that is, you know, Moody's are going to be changing the way they look at.

how they credit rate countries based on adoption of AI. that was that. So to your point is there's lots of stuff going on, which is very new. And these changes are all things that need to be kind of kept an eye on.

Dave (23:27.64)
Fantastic.

Lance Peltz (23:27.924)
I think the expression is, may we live in interesting times.

Dave (23:34.92)
Yeah, every podcast is one where we say that. So thank you so much, Lance.

Lance Peltz (23:46.343)
I think you're obviously.