Straightening out the Strait of Hormuz

A ceasefire headline is easy to trade. The Strait of Hormuz reality is harder: crowded sea lanes, mixed flags, sanctions workarounds, and one “accident” that can yank oil prices and risk assets in a single day. We dig into why the probability of disruption can stay high even when diplomats say the right words and why the nightmare scenario is an incident involving a Chinese-flagged oil tanker that forces a much wider response.

We also get practical about the plumbing of global shipping. What does a flag actually signal, how do crews and registries affect perceived neutrality, and why are “shadow fleets” less about invisibility and more about insurance, sanctions evasion, and enforcement by groups like OFAC? That framework matters because markets often price the conflict like a simple regional story, while the mechanics of maritime trade make “friend vs foe” decisions messy under stress.

Then we connect geopolitics to investing. We talk negotiation credibility, nuclear enrichment timelines, and how Israel’s strategy toward Hezbollah and the idea of “mowing the grass” can imply recurring conflict rather than clean resolution. Finally, we bring it back to portfolios: oil stocks versus crude, demand destruction at high energy prices, cash as an asset class, put options as a hedge, and why damage to LNG, pipelines, and other capital assets can keep inflation sticky and push the economy toward stagflation.

If you want a clearer way to think about energy markets, sanctions, and portfolio risk when a chokepoint drives the news cycle, listen now. Subscribe, share this with a friend who watches oil, and leave a review with your take: do you expect normalization soon, or a long period of elevated volatility?

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Transcript

Welcome And Ceasefire Odds

Steve Davenport 0:26

Hello everyone and welcome to Skeptics Guide to Investing. Today, Clem Miller and I are here and we're trying to figure out how do we straighten out the Strait . It says it's straight, but it just seems to get more complicated every day. And I realize that that's a chea p pun but I always think it's strange that it's a straight without a G and an H. Um and why do we have a straight and not just call it the straight with a G and an H in a spelling? So Clem, can you explain why it's a spelling without a G and an H? And what makes a straight different than um but really Clem, how do you look at what's happening today and think that this is in any any way, shape, or form gonna start to look and feel like a ceasefire that's gonna last? Do you think this ceasefire lasts through the two-week period or gets extended?

Flags Crews And Tanker Confusion

Clem Miller 1:35

I think there's a there's actually a some chance that it could be extended. but I think 50 percent, 60 percent. So I think I think it's I think it's about 40 percent that it'll get extended. Um and it would be extended if there's some serious talks going on. And apparently the Pakistanis are you know alluding to quietly alluding to the fact that there's still some diplomacy going on. So so yeah, I'd say 40 percent. But the thing is is that there's now because the the Iranians are in the strait, the US is in or around the strait, and the Iranians need the oil, and the Chinese need the oil, I think there is a high likelihood greater than 50%, of some kind of accident or intentional action taking place that could disrupt the the you know the tendency to have negotiations. So yeah, I think 40 percent that the ceasefire will continue, 60 percent that there will be some sort of incident, whether intentional or accidental. My greatest fear, Steve, is that one of these incidents or accidents would involve a Chinese-flagged oil tanker.

Steve Davenport 3:12

Right. I mean, I think it would be good for us to just talk a little bit about what's going on with these ships, because I was reading about one boat that has a crew that's Indian, and it's a Chinese frigate and it's under the flag of Albania or something, and it's got an Indian crew, and the reason they have an Indian crew is they think that because India's neutral, this will make the boat neutral. Like, is it is it really that like easy to say, hey, if I put Indian people on this boat, I'm gonna assume that nobody dislikes India, so we're gonna let this boat go through. I mean, is is is the destination always even really occur? Like, when these things have these um logs of where they're gonna go, have boats ever said, hey, I'm going to you know Indonesia, and they and then they change direction and go to China? Like it it feels to me like these crews and these things could be very fungible, couldn't they?

Clem Miller 4:22

Yes and no. So there's obviously there's a long, long, long history of maritime trade, right? Maritime activity. And there has been developed a body of law which was codified a few decades ago in what's called the the Law of the Sea Treaty. and you know, there's a lot of provisions in that treaty. I think the ones that are most familiar to us have to do with economic zones and territorial seas and how you divide up overlapping you know sea lanes and that kind of thing. But there's a lot of other rules in that as well. But there's a lot of you know, there's a lot in the law of the sea treaty, there's a lot of customary, what they call customary law that goes back a long time. But the point is is that is that there's a whole complex nature of maritime trade that involves how ships are flagged, which means where they registered. There are internationally recognized registries of ships. You know, a lot of that is for taxation purposes.

Steve Davenport 5:42

Right.

Clem Miller 5:43

It's hard to to reflag ships. that's a that's an exercise in itself. you have you have crews that you know maybe they shift them around depending on where they're going, or maybe they're not, but you do have these crews. I remember the the crew that that smashed into the into the bridge here in Baltimore. Yeah, was an Indian crew, right? So I don't know that I mean maybe they picked an Indian crew in the Gulf to make it easier to go through, or maybe not, right? but well I guess what I was thinking about is all the shadow.

Steve Davenport 6:27

There were all these shadow cargoes, right? That the I was gonna mention that. I mean, what happened the shadow? I love a carrier who's you know four football fields long, and it's like a secret carrier.

Clem Miller 6:42

Well, that secret's really not very good. The ocean is pretty big. no, but I mean the the thing is is that is that with sanctions, whether it be the sanctions that had that are on Iran or the sanctions that are on um Russia or North Korea or Venezuela, they have tried to get around those sanctions, those countries, using um hiring shadow fleets, right? Right now, those shadow fleets, the main thing about those shadow fleets is that is that it's a way of avoiding having to get insurance.

Steve Davenport 7:25

Right. That's what I because the big thing was insurance, and if you but but still even the term shadow fleet, doesn't it doesn't it feel like if we can get satellite photos of Kameini going into a building? We can certainly get satellite images of oil carriers?

Clem Miller 7:44

Well it's not really a shadow if you can see the whole thing on there's there's no question about that, but it but the the point is is that is that you know how you know there's always a big kerfuffle. Okay, the there's always a big kerfuffle when a country's embassy is attacked in a conflict. I don't know if you remember back in the in the Kosovo war, , we accidentally hit the Chinese embassy in Belgrade, right? And that created a huge a huge issue, right? Huge issue.

Steve Davenport 8:25

Yeah, it's considered neutral land, isn't it?

Clem Miller 8:28

Right. Well, not neutral, it's considered the territory of of the of the you know country that whose embassy it is, right? Then you've got and now I'll give you another example. back in either the Gulf War or the Iran and Iraq War, I forget which one, , we had we had a ship in the Gulf, in the Arabian-Persian Gulf, which I forget what those things are. It has the like the rotating, like it can shoot like all these missiles at once in multiple directions. It had a rotating head. That thing accidentally hit an Iranian airliner. An Iran air airliner killed like two or three hundred people on board that airliner. And and that became a big, and it was a civilian airliner, right? And it became a big issue, and and the US ended up paying um, you know, paying compensation to the folks whose families were were killed on board that that airliner. And um I think something similar happened with the Korean air off the coast of you know, off the coast of Siberia. Remember when the Soviets shot that one down? The Korean jet. So there's a there's a a history of international transportation being subject to specific you know regimes that require, you know, that recognize nationality of those vessels that you know have um special rules for how much should be paid out in the event you know there's there's damage caused in wartime. You know, there's all sorts of special rules. There's there's you know, there are UN organizations for maritime shipping and for aircraft. For aircraft, ICAO, right? International Civil Aviation Organization, for maritime, I think it's called the IMO International Maritime Organization. they run these rules, they administer these rules, they're very involved in in implementing these things. And so, yeah, I mean there's a whole regime for the high seas, to speak.

Steve Davenport 10:50

I guess I was thinking that if if they were previously under sanctions in in Iran, then they probably like Russia have these vessels that travel, you know, and aren't you know, to avoid the sanctions, and they use like Russia does a shadow fleet. And so I was waiting for one day where they say this ship went through, but it's part of the shadow fleet, so we don't recognize it, and we don't, you know, and then and then like is anybody really able to operate in this world without us knowing what's going on? Like, in reality, we we can't sneak you know a carrier through a six-mile passage and and hope that nobody notices, right? I mean, there's there there has to be some general knowledge of okay.

Clem Miller 11:49

I mean, there certainly is because I know that within the US government, the when the Office of Financial Assets Control, Office of Foreign Assets Control, OFAC, administers economic sanctions, financial sanctions. they try to target the owners of ships, you know, the ships and the ship owners who run this, who run these shadow fleets. So they try to do that. so they they have some knowledge from somewhere about who these ships are, where they are, who owns them. So there is knowledge about that. I think the only question is how do you how do you distinguish between friend and foe?

Steve Davenport 12:39

Well, that's my my question is if you start moving around the the the crew that's on, like is somebody not gonna take the flag out of of an enemy nation and put a flag in that's a friend, you know, Maritos or you know, someone of these small countries, and they're gonna put the flag of that small country in there, and the country doesn't even, you know, can some country in Indonesia know that a flag in the strait is really their boat, or is it just put a false flag? Like the whole false flag idea, you know, it feels like, hey, I'm gonna switch my flag, and therefore they're gonna, I'm gonna sneak by and they're not gonna notice that it's you know, it's really the you know, Indonesian boat, it's not the , you know, Israel, you know, the Iraq boat.

Clem Miller 13:34

well, yeah, I mean, they're gonna these flags have been taken seriously, right, over the years. I know they've been taken seriously, but I'm just saying that's the right thing. And so I don't know. I don't know that I think you know the US might make a dis might try to make a distinction and say, okay, well, you know, if it's , you know, if it's one of these tiny little like countries that that you know sell their flags just like they sell postage stamps, then we'll you know, then we'll attack them, or we'll, you know, we'll be freer in attacking them. But if they're like a real country, um, you know, like Chinese shipping, right, from a Chinese shipping company, then maybe that's maybe that's different. Um and we won't attack them. So that this might actually be a case where ironically, if you know, you might might be at more risk if you have one of these weird flags, and if you have actually if you're actually under Chinese flag or Indian flag or Pakistani flag, Korean flag, Indonesian flag, you know, those are real countries. Um not to not to disminish, not to diminish other countries.

Negotiations And Nuclear Enrichment

Steve Davenport 14:56

But I mean I'm gonna have to change the subject because I think we're gonna get to um you know some some flag bashing here. I mean, Clem, when I look at what's happened in the last 10 days, you know, a ceasefire was announced, and we thought all of this was gonna lead to some good things. And we had the first day of negotiations and the second day. Um, where do you see the negotiations now falling? Um, they've talked about giving up nuclear enrichment for a number of years. Is that ultimately the number that's gonna determine whether we have a ceasefire or not? Is it just the issue of nuclear development, or are there other aspects of this negotiation that are gonna, you know, kind of be swirling around for a while?

Clem Miller 16:09

, I think these negotiations will be going on for a long time. Yeah. I think that the Iranians have much more patience for this than Donald Trump has. Donald Trump would like to get this thing over with well before the midterm elections. He kind of admitted that they might not be, , and that oil prices might be high through the midterms. but you know, he his patience level is not great. And the energy level brought to this by the administration might not be that great either.

Steve Davenport 16:54

so do you think it was a mistake to send Kushner and Wikov and Vance instead of sending some people who really are used to doing negotiations with these foreign countries?

Clem Miller 17:10

Well yes, I think I think it was a mistake. because I think international negotiations, international diplomacy is different than a real estate deal. I really think so. I think they're different than a real estate deal. it's this isn't just a question of like sitting down a few times, haggling over a few things, and then you know, splitting some hairs and getting a price that everybody can agree on. it's not like that at all. You know, there are matters of national identity that don't exist in a in a sort of a real estate negotiation construct. I think that I think you know, as much as as much as Vance may himself not be a great negotiator, I think it was smart to have him be involved. Um and the reason why I think he had to be involved is because the Iranians at this point have zero faith in Whitkoff and Kushner, zero faith. Well, they've been negotiating for a year. Yeah, we attacked them.

Steve Davenport 18:36

Yeah, and so I I guess I don't understand where Whitkoff, I guess I don't know enough of about him as a as an individual. It seems like Kushner and Vance are there for appearance purposes. And then I look at Whitkoff and I think he's gonna be the adult in the room, kind of really directing this because his experience is greater.

Clem Miller 18:59

Is that true or no? I I disagree with that one, Steve, right? Okay, , I think I think I think Whitkopf is basically Trump's golfing buddy, and I think I think that Whitkoff he is you know, you you hear some of the things he says, like especially in the Russia-Ukraine context, and they just don't seem you know, I I don't want to use the word idiotic, so I won't use the word.

unknown 19:32

Okay.

Steve Davenport 19:33

I I guess I'm I'm trying to figure out if this has a real chance, I think it has to have a little more serious group who's negotiating. Yeah, so if you if you don't put serious people at the table who have a great understanding and ability to negotiate and not intimidate, because I think that's what Trump plays that role, right? He he wants to tell them they're gonna get serious or else they're gonna be bombed back, you know. How do you look at um this like he wants to have this role? And I've seen presidents in the past do this where when the president gets involved, that's when they know it's getting serious. But if the president is always getting involved, then it never really gets that serious because it's just another you know moment of hype. It feels like that's what we've going through is hype on top of hype instead of details on top of details.

Hezbollah Strategy And Mowing The Grass

Clem Miller 20:35

I I think you're absolutely right on this one. I think that I think that the more Trump talks about this and that and the other thing, I think you know, each individual thing he talks about, you don't take, you know, you don't take seriously, right? So I think that a lot of people out here in the real world don't take you know, don't take him seriously at all. so there's no reason for the Iranians to take him seriously either. They can they can wait him out until he's no longer until he's no longer president. Um they can just wait him out. So and you know they got a weaponry.

Steve Davenport 21:20

Yeah, I mean I guess I'd say that when I look at this, it comes down to um it's not a simple solution between the US and Iran because of what's going on between Israel and Hezbollah. Can we talk a little bit about like does Israel have a game plan that is has an end near in terms of what it wants with Hezbollah, or is it gonna be like Gaza where you keep looking for these people in these underground tunnels and there's areas they need to go through that are just gonna be extremely difficult to clear or to verify? And then the areas you just inspected or cleaned out are gonna fill back up with, you know. I mean, is the snake of Hezbollah more than just Iran, you know, supports a few people? Or is it is there a culture within the country there that is gonna constantly recreate more and more fighters against Israel? Are you talking about Iran, Hezbollah, or Hamas?

Clem Miller 22:31

I'm talking about Hezbollah and Hezbollah, okay, Israel. Okay, so Hezbollah, Hezbollah is the Is one of the most powerful non-state. Well, let's put it this way, it's the most powerful non-state military force in the Middle East. Okay. And it's heavily aligned with the is the Islamic the IRGC, right? The Islamic Republican, Islamic Republic IRGC. Now I'm forgetting what IRGC stands for. But anyway, the the the very powerful Iranian militia, the IRGC, it's aligned with them, and they together are the biggest military force, non-state military force in the region, or Hezola is, supported by IRGC. And while they're situated on the territory of Lebanon, you know, they don't control the country of Lebanon, right? Lebanon doesn't control them. Hezola controls the Shiite areas of of Lebanon almost as as if it were its own country, , but it's not. Islamic Revolutionary Guard Corps, by the way, that's IRGC. Um half my brain was working on that.

Steve Davenport 23:57

Can you compare like what they're trying to do in Lebanon with what they did in Gaza? Like it it feels to me like it's a much deeper entanglement of the the Hezbollah within the country than it was with, you know, it was a smaller area in Palestine for the you know, for Gaza and the Hamas than it is for Hezbollah. Like it feels like Hezbollah is a much deeper and entrenched organization, and that what Israel's trying to do in short a short period of time, relatively speaking, two or three months, compared to the time it took to remove Hamas from you know Palestine. Can you compare and contrast like how long you think it will take for Israel to actually complete this mission? Or do you think it's just something that they just want to do as much damage as they can for as long as they can? So apparently they can really eliminate it.

Clem Miller 24:56

So apparently there's an expression that's used within Israel in Israeli security circles, military circles, called mowing the grass. And what that refers to is the fact that you can never you know, you can never eliminate threats entirely, that they'll keep um popping their heads up from time to time. And so what you really need to do is periodically mow the grass. And so that's what's motivating um Israeli military policy is is the need to mow the grass occasionally. So so you know that's that I think is a is a good description of what's going on with Israeli policy. Now, now there is there are elements within Netanyahu's coalition that are extreme, right? I mean Netanyahu himself is extreme, , but there are elements within his coalition that are even more extreme. And you know, these folks, , the extremist folks in his coalition have grand designs for a greater Israel, right? , which covers not just you know Israel slash Palestine, right? West Bank and Gaza, but but even goes beyond that as well. Yeah. I think I think we always let me let me just stop and say that I think we always need to make a distinction. Um, you know, just like we would say there's the Iranian government and there's the Iranian people, two different things. I think we need to make it a big distinction between the Israeli people and the Israeli government. So I'm very careful to say, you know, the Netanyahu government or the Netanyahu's coalition of extremists. And you know, there are plenty of people in Israel who don't like what's going on with any of this stuff. and and they and you know they would rather just you know live at peace with their neighbors rather than keep fighting them. so and if there was some way that we could, you know, I would say that it's just important to have regime change in Israel as it is to have regime change in Iran. I mean, put put people in who who don't want to you know create constant warfare is is what I would say.

Steve Davenport 27:31

Do you think that this came down to or that this actions that Netanyahu government has been involved in are reaction to the Saudis getting close to an agreement and that that they didn't want that agreement to happen, and so they've You mean the Iranians didn't want that to happen. Right.

What Could Straighten The Strait

Clem Miller 27:50

Yeah, oh no, that's definitely the case. I think I think I think the Iranians helped Hamas do October 7th, , in part because there were there was increasing closeness between between Saudi Arabia and and Israel. And I I think that's a misread a little bit on the Iranians' part, because I don't think the Saudis are going to are going to establish diplomatic relations with Israel without some kind of settlement to the Palestinian problem. So I think that was a misread on the on the Iranians' part. Yeah.

Steve Davenport 28:35

Um well the name of this episode is The Strait and Straightening Out the Strait. Let's try to talk about what an agreement might look like for the strait to be reopened or to be there to be start to be some end to the aggression. I I I think like you mentioned to me a five-year hold on nuclear development and Trump, that the Iran Iran wants a five-year and Trump wants a 20-year. Um, and the idea that they're so far apart, but in reality, you know and I know that people could say, let's just agree to 10 years and call it a day, and we'd you know, we'd all walk away saying, Oh, we succeeded in keeping the nuclear if you're Iran, and if you're Trump, you'd say you've stopped development for 10 years, which no one else has done, and then they can all pat themselves on the back and go, is that the resolution that you see happening in terms of Iran, or is there gonna be a lot of other things that need to be resolved, such as Hezbollah and such as Israel's agreement to not you know, Iran doesn't want to agree to anything because when they agreed to something and then they still got bombed last June. Exactly. It's it's kind of a I mean, how do how do you enforce a no-bomb zone in Iran if if these countries basically, you know and I know, have political reasons on their own for wanting to bomb Iran, right? So what will straighten out the strait?

Clem Miller 30:23

I think what we have in the strait, I don't think there's any political or legal agreement that can fix this. I just don't. I think I think the only thing that can fix this is kind of a um when I say fix it, I mean fix it in its comprehensive entirety. Okay.

Steve Davenport 30:49

I think that's probably never gonna happen.

Portfolio Moves During War Volatility

Clem Miller 30:51

Yeah, I think that that that just like the US and the Soviet Union, you've got a smaller version of mutual assured destruction of that doctrine in the Gulf, where if Israel attacks Iran, Iran will attack the Gulf states. if Israel and the US attack Iran, Iran closes the Gulf. Right? It's all you know, it's it's asymmetric, right? It's not like Israel attacks Iran, Iran attacks Israel. It's not it's not symmetric like that. It's now asymmetric. And and so you have this sort of asymmetric mutual assured destruction. And I think the only way that this they they can climb down is for everybody to agree not to attack each other, and for and for sanctions to be removed um on Iran, frozen assets to be delivered back to Iran, which Trump is gonna hate doing because he always complains about Obama doing that. , but he's gonna probably end up having to do that as well. and and I think that's ultimately the solution. I think Trump may try to press us even more and try to go for some kind of revenue sharing agreement with Iran. I don't think that's gonna happen. , but you know, Israel has a vote in this too. And I'm not sure that Netanyahu is going to give up on the idea of regime change in Iran. Um, you know, Israel was, I think, in large part responsible for getting the U.S. into this war. And I I don't think that Netanyahu really wants to end the war. I mean, he said as such. He said, we still have work to do in Iran. And so he's not, you know, he's not hiding that.

Steve Davenport 32:53

Um well, he's really doing the work in Hezbollah under the guise of this is all because of Iran, but it's like you said, he he's you know mowing the lawn. Um but I guess when I get back to what does it mean for our investors, the US market here has been ignoring what's been going on. And I think it's been a daily, you know, um show of what's happening, and every day it's some expected news. And so the market kind of got tired and said, we've got to start to get back to earnings and what's happening here. And it feels like the two are now detached. Do you think there's anything that investors need to do to kind of think about this war and and and figure out what the what the actions are to take in your portfolio or not take? Or do you think it's just gonna be too uncertain to really come up with a path forward for a while?

Clem Miller 33:55

Well, you know, a lot depends on where you started off in this conflict, right? Um but I would say I would say that, you know, as far as my own portfolio is concerned, um, I still have quite a large chunk of cash. you know, I had, as of a few weeks ago, quite a bit of oil in my portfolio, which I had bought on the way up. And um, you know, seeing some of the the day-to-day volatility, news-driven volatility, you know, there's there are days when I wish I had more oil, and there are days when I'm glad I, you know, had sold my oil. So given that, I've decided, you know, it's too, it's too crazy to try to figure out what's going on from day to day. So I don't know. I sold the oil, right? I sold my oil stocks at around $100 a barrel. And I mean, yeah, sure, oil could go up to $150 or $130 barrel dollars per barrel. It could, but you know, it's hard to, you know, there's it's not a linear relationship between oil stock prices and oil and oil prices, because what happens is that a lot of these oil companies are vertically integrated. And so it depends on the margin between the fuel prices that they sell at and the oil prices. So, you know, it looks to me, based on the last few weeks, that maybe the the optimal oil price for an integrated oil company is like $90 a barrel, $80 a barrel, $100 a barrel. Um, but I I'm not sure at $130, $150, because that's gonna cause a lot of demand destruction, and they're probably gonna have to narrow their margins. So I'm not sure that if it goes up anymore, we're gonna get any more benefit out of owning oil stocks. So I I I have sold my oil stocks and I still have a lot of cash and I've got some tech stocks that I'm invested in now. I mean, I've always been somewhat invested in tech stocks, but you know, I'm back involved in tech stocks that you know with with due appreciation for things like short ratio and low peg and and and so on. Um I don't really have to worry about the beta for those stocks because I've got so much cash.

Energy Damage Rebuild And Timeline

Steve Davenport 36:30

Um yeah, I mean personally I have the put options and I got close, you know, a week and a half ago to to cashing in some of those put options and taking the profits. They were up 100 to 140 percent, and I didn't do that. Um I waited because it felt like we were getting deeper and deeper into this, and um, I still believe that the market is a little bit too complacent about what this is gonna mean to the economy and the likelihood of a recession. I think people said if it went on for more than two months, a recession was gonna be guaranteed. I feel like we we've gone past the point where they're gonna cause a recession. So I think you need to be positioned for a recession. And that's why I have the put options to try to um when the market wakes up and realizes that this isn't gonna go away overnight, I still feel the biggest thing not talked about here is the fact that energy is not just oil. We've got natural gas providers that are a big part of a lot of countries' you know, energy needs, and the natural gas fields in Qatar and UAE are also being affected. I don't see anybody doing a comprehensive analysis of how much has been destroyed in terms of capability in the Middle East. I feel like there's still so much bombing going on that it's almost like we can't come out for a little while and say, all right, Qatar was at this many barrels a day and this much natural gas, and today they're at 0.8 and 0.7, and go through each country and say, what capacity has been destroyed, and therefore will need to be rebuilt over a period of years to get us back to what was the capability of the Middle East. I look at the the pipeline that Saudi Arabia is using and how that pipeline was attacked, and then the pipeline, you know, the pipeline was at 0.5 of what was originally gonna go through the strait on CARI, you know. So when you take out capability, ultimately you affect how long the price is gonna have to stay high to compensate these countries for this recapitalization. And we're not we're not even talking about recapitalization, right? We're not talking about rebuilding, we're just saying we know we have to rebuild, but we don't even know how much. So if there is no price tag, then it's probably a number greater than the market is assuming. Would you agree with that? I mean, do you think there's a clear path? If if the war were to end today and everybody were to shake hands, would would we be able to say, you know, these countries are going to be rebuilt in this many months, and therefore, you know, they're gonna be shipping through, you know, it's still, even if everything were working perfectly, they can only get 135 ships through the strait, and 63 are going one way, and 63, you know. So it really comes down to, you know, how long will it take for this to be back to normal? And my number is I think it's a it's a six months to a year where we're gonna have elevated energy, and therefore that's gonna cause economic pain for a while. It's not gonna just turn around and say, oh, oil's gonna go back to 65 a barrel, and we're gonna start re-replacing our reserves. And I mean, I I don't I don't see it's gonna take so long for us to even get the reserves out of our strategic and for Europe to do the same. That they're they're not they're not gonna stop pumping that at least for another six months, because it takes time to get these reserves out. What do you think of the time frame for this?

Clem Miller 40:48

you know, I don't know. I'm not gonna guess, right? I mean, certainly it's not a couple months, two, three months. , I don't know that I would quite go as far as a year. thing you got to remember about the, you know, about Qatar and and Saudi and UAE and so on is that they've got a lot of money stashed away. And they could use that money to rebuild fairly quickly their energy resources. They certainly have the incentive to do so. Um, you know, whether whether Iran will do its own mowing of the grass in the Gulf is another question, right? but you know, I think they've got a lot of money to rebuild. And so the gating factor here is definitely the the strait.

Stagflation Recession And Closing Thoughts

Steve Davenport 41:41

Yeah, I mean I I've heard a lot of strategists say that a gold has seen a sell-off because these countries are selling their gold to buy the materials and and to set up for the rebuild, and that we've already seen you know gold levels go down in some of these Middle East countries. And I think that you know, I couldn't really get at why gold was going down when the you know this this whole thing was going on, and and I think it's it's somewhat of an explanation, but I I still look at it and say, it's still steel, it's still, you know, who's gonna do the rebuild? Aren't the companies that are gonna you need to do a rebuild in UAE are gonna be the same companies they're using you know Qatar? And it's gonna be the same, like there's not like an industry in each country for for the specialized construction of these things. So I gotta imagine it's it's it's there's a limited resource, right?

Clem Miller 42:40

There's gonna be a lot of work for Indians, Pakistanis, and Indonesians in the Gulf over the next few years rebuilding this stuff.

Steve Davenport 42:49

Right. And so to me, it's first of all, do you think we're gonna have a recession? I want to wrap up in the next couple of is it is the US gonna go into a recession this year?

Clem Miller 43:01

I think , well, , you know, recession is a is a loaded term. I think you know you know you've got the NBER definition, you've got the two quarters in a row definition. and it really, in my mind, it doesn't really matter if we're going into a recession or not, because the market reacts in advance of a recession. So by the time a recession comes, the market might already be might already be pricing in recovery. So that's one of my biggest gripes with economists, is economists talk about recession, and you know, recession is only measured after the fact. And so what good is that? Right? That's no good at all, right? So, but I mean, in terms of what's relevant for the markets, , do I think that there's that demand is going down? Yes. and will continue to go down more generally, yes. Do I think that inflation is going up? yes. Oil, higher oil prices are not just the oil component, but they also feed into other components of of prices. And so, yeah, I think inflation is going up. So what what do I conclude? I conclude that we are in an increasingly stagflationary environment. So that's what I would conclude. And I think that that's not necessarily good for stocks, except maybe for those stocks that are more resilient. Resistant to economic weakness. And I would consider those to be more along the lines of the tech stocks. So, you know, I I think that, you know, if it were if it weren't for the Gulf situation, I would not have invested in energy stocks for that time that I did. Because energy stocks are cyclical. They're very responsive to what's going on with the you know with the fluctuations in the economy. And so I would not have been involved in those otherwise. I I like the sustained growth of technology-oriented stocks. I also like, you know, even though it's lower beta, I like things like healthcare and staples as well, um, because those are less susceptible to stagflationary issues. so I like those as well. but you know, right now, you know, I have a lot of cash and I have a lot of, you know, there are opportunities out there that I could exploit if I find the right numbers.

Steve Davenport 45:59

Yep. I mean, I I believe that we are gonna see a recession this year. I believe that we are gonna see um a pullback in markets because I think that this is going to, you know, there is gonna be demand destruction, there is gonna be um periods where we inflation will hit us again for the next three to four months, and that inflation will prevent the Fed from lowering. Eventually, when the inflation starts to calm down during a ceasefire or doing normalization of the strait, I believe that we will, you know, the Fed will then get on their bicycle and start to pedal hard to try to reduce the rates to help the economy come back from um some of this destruction. And I I I honestly believe it could be a global recession, which I think is something we haven't really seen for a while. And I think that that fear of a global recession is gonna make some of the American companies who usually have a benefit from some of their international operations start to feel like those are dragged on their on their earnings instead of supporting. So I'm positioned now with put options, and I believe we should all um try to be conservatively allocated because I think there is a possibility that we're gonna see um more economic firepower that is going to be um destructive to people's portfolio. So I would add, I would add that I I'm I'm as cautionary or more cautionary than I've been, even though we have what I'll call good news coming from negotiations and a ceasefire. I think this is a temporary item, and I think we're gonna have trouble getting to a final item of a complete ceasefire and really rebuilding. I don't think we start talking about rebuilding until August. And then I see there there's a potential for globally some reaction, but I think it's gonna take time that people don't realize when you you destroy capital assets that have a 20-year life, recreating them isn't that easy. Um, so all of these assets that they've destroyed um are not things that you can just turn around and you know lay a new foundation and you're you're done. It's it's gonna take time for these complicated facilities to be rebuilt. So I would tell people be patient, um, wait for the opportunities to come and um good things will happen with your portfolio. The idea is we want to try to add value in a down period. In my mind, there's lots of people chasing alpha on the upside, and when things are positive 70% of the time, it's a good place to look for alpha. But there is the time when markets are down at 30% that you also can try to look for alpha on the downside, and that's where I think we are right now. So, do you have any final words? No, that's about it. All right, everybody, thanks for listening, and I'm we're gonna be I'm gonna be on vacation, and Clem's gonna be on vacation in June, and we're gonna try to give you an outline of some things that are coming up. But thanks for listening, and we appreciate you.