Weekly Market Wrap: Why ALL is not what it seems in the Middle East

This week in our Friday Market Wrap we cut through the noise around the conflict in the Middle East, Outlook for the global economy, oil prices and other assets.

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Transcript

SPEAKER_00 0:00

The days when our leaders wrote down their ideas on paper with a pen and discussed them for hours and formulated policies that were to bring about the well-being of peoples. And we did do that, sometimes cynically, and sometimes we did the opposite. And the twentieth century was not a great century for European civilization. But those days seem to have disappeared. We are so obsessed and addicted to science, the internet, blogs, websites, time, twittering, twattering, you know, emails that we have lost our sense that generational problems have to be confronted in a very serious way. Not with garbage psycho-babble language.

SPEAKER_01 0:50

This is the most important thing podcast, the Friday 5. I am Alan O'Sullivan. This podcast is brought to you by the Truth Series. Every Tuesday I release a one-on-one interview with one of the brightest and best minds in finance, investments, economics, and geopolitics. The conversations are evergreen in nature, meaning we discuss timeless principles and their most important thing. Every Friday morning we release the Friday 5, which provides you with an inside look at what's driving global markets, the global economy, and your money. On Saturday mornings we release a free investment and markets newsletter, which you can subscribe to at the MittPodcast.com. Just click join now on the homepage and you're in. You will not regret it. Let's get to the show. So the voice you heard there was the famous journalist crime war correspondent Robert Fisk, who's a personal hero of mine. I've read all his books. And there's a bit of a I would call it pathetic attitude really to the mainstream media in terms of covering this war. A lot of the economic houses, a lot of the investment houses, usually start off any analysis with well, we'll focus on the markets and the economic side of it. Yeah, I think that does a disservice, and I think it's completely wrong morally, but also it's wrong strategically. If you don't know or don't understand or get an appreciation for your enemy suffering, enemy and inverticum, then you are missing a major part of the analysis. I want to start this episode by looking at a chapter from this book. This is Robert Fisk's masterpiece. Anyone that wants to understand the Middle East, and I'm not talking about mainstream news, I'm talking about a proper understanding from somebody that was on the ground and spent lifetime reporting there. Unfortunately and sadly, Robert Fisk died a couple of years ago. He died in a country that he loved. He loved Ireland, he did his PhD in Trinity College, but he died in Ireland, and it was a big shock. But again, a life well lived. We're coming up close on the 40-year anniversary of another tragedy in the Middle East, another intervention by a US government, Ronald Reagan, that time in 1988, when Iran air IR-655 was shot down by a US warship. And I want to just read a quick passage on this. So it's a long way from Washington to the Mossan Food and Fruit Coal Store in Bandarabas. The Pentagon's clinical details of the last flight of Iran Air IR-6 on 3rd of July 1988 cannot reflect the appalling human dimension of the Charnell house in which I am standing, where three-year-old Layla Bavani lies in her cheap chipboard coffin. She was a very little girl and she still wears the small green dress and white pinafore in which she died three days ago when the United States Navy missile struck the Iranian Airbus over the Gulf, killing Layla and her two hundred and eighty-nine fellow passengers. She was pulled from the water only minutes after the explosion and she looks as if she has fallen asleep, her left wrist decorated with two bright golden bangles, her feet still in white socks and tiny black shoes. Her name is scrawled in crayon on the coffin lid that is popped up beside her. Equally small brother, a dark set handsome boy with very short black hair, lies a few inches from her, cradled inside another plywood coffin. Unless we understand the tragedy of this war and the tragedy of a US government policy action that has no end game in sight, we get this. Now we also send our sympathies to the US soldiers that have been killed, the Israeli casualties, these there's been I think 15 to 20 Israeli casualties, hundreds of those injured, Lebanon 700 injured. But we need to understand that the fog of war is not transparent and casualties lead to radicalization, escalation, and particularly when there's no end game in sight. We will get to the markets for sure, but what's important to talk about first in this fry first episode of the Friday 5 is that if credit is the lubricant of the financial system and the banks are the heartbeat, we could say that oil is the circulatory system. And right now, oil is going nowhere. If I hear another news article about the Strait of Hormuz, I think I'll lose the will to live. But I gotta come at this today looking at five particular questions. Today is the Friday five. So what is the end game with this war in the Middle East? Has Mr. Trump bitten off more than he can chew? Even if this stops tomorrow, he declares victory. Okay, folks, let's just go home. It's too late for that, in my opinion. That what we've seen is completely underpriced by markets, and in general, people are don't realise how significant Iran attacking its neighbors in the Gulf region has been. What if Iran decides not to play ball? What does Trump do then? Why isn't gold screaming past six thousand dollars an ounce? What's the asset allocation implications for all this? And where are the potential off ramps? We read today, this is Friday the thirteenth of March, and we read today that Russia is cleaning up a hundred million a day, is what the FT reported, in increased oil prices. And now there's even talk that US is going to be lifting sanctions. So unbelievable uh twist of events. What we definitely know in terms of the end game here is that there's been a massive miscalculation. Not for the first time, US foreign policy in the Middle East, a massive miscalculation in terms of the end game. We know that this war is particularly unpopular in the United States. A recent Harvard Harris poll asked US voters what their main priority was. Was it immigration? Was it crime? Perhaps it's climate change, perhaps it's foreign policy, or is it day-to-day spending, inflation? And you can guess what it was. The results were unambiguously it's the economy stupid. Americans haven't changed. They're more motivated by domestic issues. So it's incredible that Trump and his Department of War, Buddy Hegesett, have decided to go as aggressive as they have into Iran. And it almost certainly means now that the midterm elections in November are going to be a bit of a car crash for Republicans, which isn't necessarily good for the US stock market either. And remember, the market has been booming since Trump came in, so people get a bit lopsided with the view that okay, Trump is a bastion of uncertainty, all this geopolitical tension, but he has promoted deregulation, tax cuts, lower interest rates, which is all good news for the stock market. So is this going to be an unwinding of that? The degree of unpopularity of this war is bipartisan in nature. We know that 80% of Democrats oppose it, but a similar number of Republicans support it. So it's it's the Republican numbers that's going to be key here. There is one fact, and that is that despite all the bombs, all the munitions drops drops on Iran, the Iranian regime is still there. It's likely that the new hameni is either seriously injured or is dead, but you have to look at it if this guy is alive, you have to look at it from his point of view. We're talking about his mother was killed, his father obviously was killed, his wife, his sister, and one of his children. So if this gentleman wasn't radicalized before this war started, certainly hasn't softened his approach after that particular bit of business by the United States. How do we factor in how higher oil prices could lead to a global recession? So lots of people throwing around, well, oil isn't moving, so we're looking at a global recession. But how why is that? Particularly based on two reasons. We can say that increased oil will feed its way through to inflation, higher consumer prices, because oil is an input into everything. If you're in an office or if you're in a shop or if you're at home, look around furniture, tables, doors, oil is a major input into all of these products. All of these products have to be delivered by trucks, by freight. This costs money, this has to be fueled, transport costs. So everything feeds into oil prices, and higher oil prices is a tax on consumers because ultimately the consumer will pay. If cons if there's a higher tax on consumers, they have less disposable income. If they have less disposable income, that means they're spending less. If one person's income is another person's spending, you can see how a slowdown in consumption leads to a slowdown in economic activity. Last time I checked the United States was 70% a consumer-based economy. The other impact you get is on interest rates. We know that Mr. Trump has been calling for lower interest rates, pressurizing the US Federal Reserve, Jay Powell to lower lower interest rates. But central banks don't have the effectiveness in an inflationary environment. Because inflation lowering interest rates is going to cause problems because the bond vigilantes, the bonds, bonds are likely to sell off in an environment where we get higher inflation. Because imagine if you own bonds, if you own a government bond and you're getting a fixed payout and you're concerned about future inflation, why would you own that government bond when the purchasing power of that coupon is going to be inflated away? So bonds likely to be sold could actually create a negative feedback loop where by the pro the action of selling bonds actually increases yields higher, bond prices down, yields go up. If you're confused, you need to join the Truth Series community. My aim in setting all this up is to improve investor awareness, improve investor education. I'm given a ton, as they say in the United States, a ton of information away for free. We have our Tuesday podcast, full-length interviews with the masters, I call them. And this is a Friday wrap. So looking at the end game, who knows? And the market is pricing in uncertainty at the moment. The market is always looking about six months ahead, maybe nine months ahead. So it's the old grain Getzky line, I think I have that name right, where you skate to where the puck is going, not where it is. So if a market is looking forward, it's trying to price it future prices based on information available today, the conditional expectation to for a geeky term. But nobody knows, nobody has any idea. And it's a bit ironic that the Iranian regime are actually incorporating some strategic uncertainty into their process. There's no doubt that the hurdle for the Iranians is quite low. What I mean by that is if they just survive, they win. And I don't know if Khamenei is alive or not, but the if he is alive, they probably have him buried deep in tunnels somewhere where the Israel Israelis and the US won't get him. But keeping him alive is going to be important. Trump won't come out and say that, but you can be sure they're looking for him. But central banks will be unable to cut interest rates as aggressively as they can. That means that existing loan repayments remain expensive or become more expensive. God forbid if there's an interest rate increase, which is not beyond the bounds of possibility. And it also means that credit may dry up. The appetite for credit uh reduces if you've got a higher base interest rate. So these are the short-term realities that we face. Longer term, we can look at some structural trends. Renewables, oil part in the Gulf is another real example of why renewables, wind, solar, uranium, nuclear, need to be looked at urgently. You cannot send a drone attack at the wind, or you cannot block out the sun. More spending on oil and gas infrastructure, that is just an absolute that's baked in. There's going to be bigger military budgets if we can get any bigger. There's going to be more challenging outlook for the Gulf states. I did say that this was a major change in terms of Iran striking Abu Dhabi, Doha, Qatar, Dubai. So the game has all changed for the Gulf states. You've got major cities like Dubai, Abu Dhabi, Doha have come under attack from Iran. And these countries are going to put the US under major pressure because their brand has been tarnished. You went to the Dubai, you had an expat life, sold its product as very safe, very secure, but it has been badly exposed. There's a major transition in the United Arab Emirates. Communication strategy is where transitioning into a tourism base, a tourism hub, any planes going to Asia usually stop off in Dubai. There are serious questions now about the safety and security of Dubai. And in terms of the escalation, there is this notion of an asymmetric escalation. So the cards are in Iran's hands. If Iran gets lucky, lucky and un inverted comers in terms of a successful military operation, which leads to the death of a significant number of US military servicemen, women this will put an asymmetrically disproportionate amount of pressure on the United States and Trump. So again, the hurdle for victory is quite low. There is a false assumption that Trump can just declare victory and move move on. What if Iran don't play ball with that and they persist with this uh campaign of disrupting this the Strait of Hormuz? Just on that notion of I think it's been overplayed by the mainstream media again, this notion that Iranians would disrupt the Strait of Hormuz. There is another line that's that says the main reason for disruption is insurance related. And because these large tankers are unable to secure insurance, that's effectively meant there is no hedging capability in the region to transfer the ship this oil, hence it's been stopped to a trickle. Few conspiracy theories going in. I'm not going to subscribe to those. It's hard to imagine that the Treasury Secretary Scott Besant, who has built his platform around lower energy costs, lower interest rates, but for Besant now, we've got higher oil prices, higher interest rates, and a rising dollar. So exactly the opposite of what he's looking for. Now there has been evidence that Mr. Bessent can be touchy. So we expect to see some explosions, perhaps at cabinet level. It's interesting, this is a personal view. Anytime I've ever seen somebody in public, if by mistake perhaps, of second guessing the US president, they don't last too long. So that footage of action man Pete Heggsit correcting, not me really correcting, but second guessing the president along the lines of who was responsible for that Iranian school tragedy disaster, where it looks like a US tomahawk and missile landed on the school, killing incredibly sadly 130 Iranian children, schoolchildren. Trump was quick to apportion blame to the Iranians, but Hegzit cautioned saying that it was under investigation. From an economic perspective, we gotta ask what's the impact of all this on growth and inflation. According to the IMF, every 10% increase in oil prices would shave 0.1 to 0.2% off global growth, and it pushes up inflation by 40 basis points or 0.4%. So this is why there's a lot of concern about this stagflationary environment. What is stagflation? Stagflation is this miserable economic regime where you have stagnant growth, lower economic growth, and higher trending inflation. So people feel really poor because wages are stalling, and maybe they're on they're laid off because of slowdown, but inflation is remaining high and stubborn, primarily usually associated with supply shocks. We got this in 2022. Remember when Russia invaded Ukraine, we got this um stagflation type environment. There wasn't a recession, but people are saying, oh, well, it's not there's not going to be a recession again, it's like 2022. It's not like 2022, and the main reason it's not like 2022 is because in 2022, if you lost your job, the labor market was so tight in the United States that you could cross the street and walk into another job. And the reason for that was the pandemic and the amount of layoffs. There was a huge shortage in labor supply. That's not the same place we're in now. With Trump's policies on immigration curtailment, the labor market is much weaker. And we saw that in the most recent job employment report, where there was a shedding of I think it was 90,000 jobs in the United States. Another interesting point to make is that there's going to be winners and losers in all of this. And again, I I I'm I I'm uncomfortable using this term winners and losers. The losers are obviously the citizens of Iran, the innocent people in Iran, the innocent lives lost in Israel, in Lebanon, which has been decimated, US servicemen and their families. But the country experience from an economic perspective, the likes of China and Brazil, who are net exporters of oil, will have l a less a less severe experience than say the likes of Asian countries, European countries. The US is awash with oil, obviously, but Canada and Brazil are net exporters of oil. Potential winners, Russia, as mentioned earlier, Putin is obviously delighted with this current set of events. Not alone is the oil price skyrocketing, increasing their revenues, but also talk of removing sanctions, which is really incredible to believe. Our own Tae Chuck Michael Martin is due in the White House in a couple of days, and timing now he's uh a bit unlucky with his timing, but I'm sure there'll be a few questions about that, given his forceful and forthrightness in supporting Ukraine correctly, in fairness, in recent years. So the renewable sectors from an asset allocation perspective, hard to argue that they'll see some benefits. Defence stocks, it's a wild, uh dangerous world. There is a certain irony in Trump's constant ref reference to windmills, but energy is being used as a weapon. So energy has been weaponized most recently by Russia. Russia weaponized oil. A lot of talk about how Biden drained the strategic petroleum reserve, the SPR in the United States. And again, there's discussion around they're likely going to release more of these barrels from the Strategic Petroleum Reserve. And the Internet EA also recently announced that there's going to be, I think it was this week, 400 million barrels of oil released. But this is again needs to be taken with a large pinch of salt. Because but there was a report from Goldman Sachs which questioned the viability of such a large figure, 400 million barrels. And in reality, on the ground, it's very difficult to release that much capacity, that much supply. It's going to be released at a trickle, even if the war stopped tomorrow. Because of a number of circumstances, most notably Iran's actions, Iran is trying to create a major deterrent for the United States. You have to admit that it's it's succeeding in that. But also, you would have to admit that there's going to be associated insurance risk premiums associated, which could be fed back in to consumers as well. So there is no quick fix for this. In terms of winners, you could look at nuclear, uranium, nuclear energy, again, the EU policies. I recently interviewed Louis Vincent Gav, who commented that the EU energy policy was beyond stupid. You had the likes of Merkel, um German leader, who turned her back on nuclear energy after the Japanese Fukushima accident, and a lot of European countries are again looking at nuclear. There will be substantial, as I said, investments in oil and energy infrastructure. My own view now is that Trump is fully aware and he looks a little rattled. So it takes a lot to see him rattled, but he looks rattled. I think he was walked into this by Netanyahu. He hasn't been advised accurately when you don't have serious people around you that this is what happens. I mean, if you think about even Bush with all the neocons that he had alongside him, he went to the UN, he went to Congress, he sought approval from the American people before the disastrous war in Iraq, but at least he went to the US Congress, at least he spoke about the plans and the strategy. This was a complete unilateral decision that was made on the pretext, I think, that it would be a quick win. My view is that Trump's approval ratings will sink. We heard of more US loss of life last night. This happens in the fog of war, and there's going to be more of this. It's going to hit home in the United States that here we are yet again embroiled in a foreign Middle East war where our sons and daughters are being killed for no real strategic aim. So he's going to come under pressure. Inflation is going to bring under pressure. We could see some volatility in markets, but markets didn't need a reason to sell off. I mean, we've seen double-digit huge returns in equity markets. Maybe gold was a leading indicator. Maybe gold was give telling us or hinting at us the performance of gold in the last 12 months was hinting at something big was happening. I know some of the investment houses, BCA research, other institutional research houses were pointing towards an oil spike. What's the most important thing for me here is how long this persists and that we can't assume that Iran is just going to play ball here when Trump does his inevitable rollback, declares victory, because the Iranians need to ensure that they have a sufficient deterrent in place to ensure that the US thinks twice about further attacks. The implication for markets is perhaps more straightforward than the economic implications or the geopolitical implications. Because we've had an enormous run-up in most asset classes. People are surprised with why gold hasn't screamed up through six thousand dollars an ounce. That analysis ignores all the momentum that gold has had. So gold stabilizing, we forecasted that gold would stabilize. Not to say gold could rally significantly, but you have to analyze an asset in the context of its most recent behavior. And gold has had an exponential rally, blowing through 3,000, blowing through 4,000. And pullbacks was healthy, was was considered just normal. But we're likely to see weakness in equities given that interest rates are likely to stay higher because of the inflation story. But where do people invest? Bonds are become trickier now because of the bond vigilantes and pressure coming on bonds. So we have written to our clients, our clients are aware of our views. I think it's very, very important that you have information that you can use and is practical, and it's in that you get information that you can implement yourself. It isn't a time for sitting passively in an index fund. That worked for the last decade. That worked when interest rates were zero and central banks were just printing trillions and trillions of dollars. Inflation wasn't a concern. You need to get serious about how you allocate your capital for the next 10, 15, 20, 30 years. If you forget about growth, if you just want to maintain your purchasing power. We're in a new regime. This isn't Kansas anymore, as they say. So how do you do that? There's lots of places you can do it, but I suggest following this podcast, following the most important thing. I've got four interviews, Ivan and I, Ivan Yates, co-host. We've looked at four individuals so far, Dr. David Kelly, chief global strategist with JP Morgan, Irishman, at a very senior role, gave a fantastic interview about central banks. We had a geopolitical expert, Louis Vincent Gav of Gav Cal Research, spoke about how vice president J.D. Vance, who's very quite lately, haven't heard much from J.D. Vance, speech in Munich in 2025, March 2025, a year ago, where he basically broke up with the European Union. Fascinating speech. And Louis basically said everything has changed. And he's right, I think. I had Ronald Peter Staffler, who's a gold expert in Goal We Trust. I've been following him for years, and he spoke about how gold is now a neutral reserve asset and how the drivers of gold is not what people think. Yes, geopolitical premium, yes, an equity hedge against equity market volatility, perhaps an inflation hedge in the long term. But also at the core of gold is this mistrust of the financial system and a breakdown of the global order. That's very well worth it. Most recently, I spoke with Sebastian Page interview on Tuesday. We had a portfolio construction masterclass. So, how do we build portfolios that are a bit more intelligent and take account of negatively correlating assets? Easier said than done. This none of this is easy, by the way. So just on the J.D. Vance thing popped into my head. It is interesting that we're starting to see cracks emerge in MAGA, this Make America Great Again group. There's no doubt that the vice president JD Vance has been sidelined. There's no doubt that the likes of Joe Rogan, who is a big supporter of Trump, has come out publicly this week denouncing him as a betrayal, his policies as a betrayal on US voters. Other major supporters are getting nervous. We know that Republicans will be getting nervous coming up to the midterms. So unless Trump has a major plan under his sleeve that we don't know about, very likely he's going to come under pressure, stock market's going to come under pressure, and uh the US voter is going to come under pressure because of increased inflation pressures. Just one point, and when I finish up on this, every time President Trump goes on the stage, he talks about how they've decimated the Iranian Navy and they've decimated the fleet. They're all at the bottom of the Persian Gulf. Just curious then why he's so concerned about mines in the Strait of Hormos. Who's gonna lay all these mines? Who's gonna attack these ships? I think we need to be a bit more careful in how we scrutinize the information we're being given. It's going to be volatile out there for the next while. If you own high-quality assets, volatility is the price you pay for return. Stay tuned. Follow the channel. Reach out, please, if you have suggestions on future interviewees. We've got loads of high-profile people coming up. Part two of Sebastian Page is coming up. Sebastian Page is Chief Investment Officer of T Row Price, award-winning authors, billion dollar hedge fund managers, and super, super high quality guests. Thank you for your attention. And again, let's just spare a thought. I don't subscribe to this pathetic nonsense that we shouldn't look at the human story of war. War is rotten, disgusting. It's as Robert Fisk would say, it is the failure of humanity. And he knew he saw enough of war. It's a real pity we don't have him. Thank you.