Fears Grow for a Return to War Between US and Iran

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1:45Bloomberg Audio Studios. Podcasts, radio, news. This is Bloomberg Business Week Daily. reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily Podcast with Carol Masser and Tim Stenebeck on Bloomberg Radio. Edward Fishman is back with us. He is Senior Fellow and Director of the Maurice R. Greenberg Center for Geoeconomics at the Council on Foreign Relations. He's also author of the New York Times bestseller, Choke Points, American Power in the Age of Economic Warfare.

2:29He's a perfect voice for us. Ed, thank you so much for coming back on here. As I keep saying, and Anna, one of our producers, saying, what is this? Like what we were talking about in our planning call. Conflict, denuclearization, a war, tough peace talks. Hard to know where we really are in this situation. And we have days where the markets look through it and some days they don't. Where are we, in your view, when it comes to the U.S. war with Iran? So, look, I think that there is a fundamental, irreconcilable difference between the United States and Iran. And that is, what is the status of the Strait of Hormuz moving forward?

3:06You know, this war, when the United States and Israel started it in February, was clearly aimed at regime change. When it became apparent that that was not going to happen, the United States sort of pared back its intentions to try to get denuclearization. But I think it became apparent that Iran's closure of the Strait of Hormuz was imposing so much pressure on the global economy and on the U.S. economy in particular that it has really become a conflict over that issue. And even the Memorandum of Understanding, the deal that was signed last month, it left some serious ambiguities over the future status of the Strait of Hormuz.

3:40And I think that's what's bubbling to the surface right now, the U.S. and Iran really fighting over what the status of the strait will be moving forward. Well, Edward, I want to stick on there, stick on the Strait. Could, you know, all the influence that Iran has on that waterway, could it kind of change the power dynamic in the Middle East permanently? Oh, certainly. And I think that's what Iran sees and why Iran believes it's so important for it to retain control over the Strait of Hormuz moving forward. because for Iran, the Strait of Hormuz offers really two major benefits. First of all, it's a deterrent that any time the United States or Israel or any other country threatens Iran militarily, Iran can say, well, guess what?

4:20We are closing the world's most important energy choke point and we can inflict significant harm on you. That's obviously what we've seen over the last few months. But I think there's another benefit for Iran, and that's just in terms of revenue. The Iranian government officials have said that they see the Strait of Hormuz as about a$40 billion annuity just from charging service fees, insurance fees, other fees for ships going through the strait. That's a huge amount of money for Iran. That would basically double the amount of money that they earn selling oil, which is their one major export. So I think it's going to be very challenging to get Iran to give up that control.

4:56But of course, the only way to get Iran to give up that control would require the U.S. to escalate militarily. And that doesn't seem like something President Trump really wants to do. Why not go back to where we were? Give Iran the straight. I mean, it seemed to work pretty well. And if we can get the denuclearization, which I thought was really the main goal here, and maybe a regime change, but that is obviously tricky. Why not? Doesn't the U.S. say, OK? Yeah, I think it's there's a few reasons. But I think, First of all, you know, free and open navigation of waterways is a linchpin of the international system that the United States has really buttressed since the end of World War Two.

5:38And Donald Trump on multiple occasions has said that there will be no charges in the Strait of Hormuz. Marco Rubio has been even more explicit, saying that if Iran were to set up a toll at Hormuz, that that would cause chaos. us. But the thing that's unusual, though, Carol, is if you those really strong statements made by President Trump and Secretary of State Rubio, they really cut across the grain of what the U.S. agreed to in the MOU, because the MOU very clearly, it says that Iran won't charge tolls, but only for 60 days. So it leaves the sort of the future of the strait beyond 60 days not defined.

6:13And then also the MOU said that Iran will determine the future status of the straight alongside Omar, gave Iran this role. Help me understand something. I've been to the Panama Canal. I've watched big boats going through. They charge a lot. So what's the difference? What am I missing? Yeah. So the Panama Canal, the Suez Canal, they are both, you know, man-made canals that require, you know, engineering officials to operate them. And so they have long-charged fees. And for both the Egyptian government and the Panamanian government, they make billions of dollars a year operating those canals. I think probably the best analogy here for the Iranians would be either the Bosphorus, you know, which is a strait, naturally occurring strait, maybe just like there is that Turkey controls both sides of the Bosphorus, whereas Iran is only one side of the Strait of Hormuz or the Strait of Malacca.

7:10And in the case of the Bosphorus, there's an international treaty, the Treaty of Montreux, that does give Turkey the ability to regulate that waterway. They do make money off of it. So according to international law, the Strait of Hormuz is a naturally occurring strait. Iran should not be charging tolls there. But if they are providing value-added services, environmental cleanup, et cetera, they do have some claim to potentially charge fees. I think the challenge is what Iran is doing right now is not that at all. What they're saying is that if you try to sail through Omani waters, we are going to strike you with a drone or a missile.

7:43I mean, that is effectively, you know, a gangster style move that is really challenging for the United States to tolerate. Hey, Edward, 20 seconds. So so conflict, denuclearization, war. Like, what's the word real quickly? How do we call this at this point? I think this is a war. I mean, it's a low, simmering war that that doesn't have a clean ending and may not. I think it may be the type of thing where you have fighting that bubbles up and down over the over several years where, you know, countries like Saudi Arabia, Qatar, UAE cut their own side deals with Iran. Man, keeping us busy, that's for sure, and not over yet.

8:16Edward Fishman, always appreciate your perspective. Senior Fellow Director of the Maurice R. Greenberg Center for Geoeconomics over at the Council on Foreign Relations. Also check out his book, bestseller, at the New York Times Checkpoints. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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9:48Learn more at brex.com slash AF. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. We're also watching oil, too, on top of that. So we want to bring in Aaron Mulville. He's a global alternative strategist, JPM Morgan Asset Management. Aaron, so I have to, like, turn after just our conversation that we had. I'm looking at Brent crude. It's at$75 a barrel. WTI crude,$71 a barrel. They're down about 2.5%. I mean, what does that tell you after the conversation that we just had?

10:27Yeah, I mean, we just had a great geography lesson there from Edward. If I take us to another part of the world, it's actually quite interesting in terms of the impact on oil is Russia right now. You've got the Iran conflict, but also the Russia-Ukraine conflict is one of the factors that's impacting the price. So we've seen, you know, we get questions, why is oil not even higher than it is right now? And one of the factors is Russia has got a plentiful supply of crude oil, but it's not able to refine all that crude oil right now. because Ukraine has made such an impact on the refining capacity of Russia that now there's a million and a half extra barrels in play on global markets out there that Russia is actually exporting.

11:07But it's not being refined, which is why we're not necessarily seeing it reflected at the pump, correct? Exactly. And we might see diesel prices continue to remain higher even as oil prices come down. You know, I'm so glad you brought it together because I don't think we can talk about one war without thinking about the other because they're, you know, between the alliances and relationships and so on and so forth and then the impact on the global economy. Do you look, though, through the U.S. war with Iran at this point? Because there are days where the market certainly does, and then there are days that the market does not.

11:34I think we have to. There's other dynamics at play that are just that much more important long term than any conflict can be. And AI is just the most transformational of all of the impacts right now. So I think that a lot of investors are looking through. Over the last couple of months, you certainly had a negative impact from the war and the geopolitical issues. But there's so much positivity and enthusiasm around AI right now in public markets. Fundamentally backed? In private markets. Backed by fundamentals, a lot of cash flow generation, certainly. Some of it is more future looking. Certainly in the venture space, a lot of enthusiasm right now around not just the foundational models, but how are companies and applications going to use these models and apply them to actually generate real cash flow for businesses, for consumers.

12:21And we're starting to see this kind of convergence of the public and the private markets now with more IPOs coming to the markets recently and a lot of IPOs in the hopper, as we see. And there's a lot of enthusiasm around the AI trade, too. But is there, I don't want to say a less expensive alternative, but what else is there aside from the AI trade? That's a question, Lisa. We're getting a lot from clients right now where they're excited about AI, they want to be unexposed AI. But what else is out there that's a little bit different? And so we're pointing them towards, at least in the private markets, areas like real estate that have positive dynamics, but they're not AI-linked dynamics.

12:59There's part of it is AI. You're seeing in San Francisco, New York, property prices going up because AI companies want their folks in the office and they're renting out office space. But that applies also more broadly to the markets. We're seeing the real estate market now recover from a bottom. And if you look around, everything looks expensive, but real estate actually today looks pretty cheap on a historical basis. One of the things I wanted to ask you about, and something we're going to kind of dig thematically over the next couple of hours, is that you look at the MAG-7, and it is definitely lagging in a big way.

13:31If I look at the index overall, let me just pull up the Bloomberg MAG-7 index. You're looking at it up about 1 % year to date. If I look at the S &P 500, it's up 10%. The equal weight is up about 12 % here. The MAG-7, NVIDIA, Alphabet, Amazon, they've gone nowhere. They are trailing 300 stocks in the S &P 500. Something like a Dollar Tree or a Hubble Inc. are outperforming. Is that significant in your view? It's a very important trend. We've been looking at this for a couple of years now. So if you go back to 2023, every one of the MAG-7 beat the S &P 500. The next year, I think three of the MAG-7.

14:12Last year, very mixed bag. And this year to date, again, a very mixed bag with some of them beating, some not. So we're seeing this trend broaden where it's not just the Mag7 now, but the semiconductor companies, the memory companies, all these companies that are in the chain, as well as in the private market space, companies that are supplying the power, the infrastructure. They're being the beneficiaries right now of the AI trade. And it's sort of a cash flow conversion. We're seeing the Mag7 spend massive amounts of cash. And the beneficiaries of this right now are those that are the supply chain components of AI.

14:48So can I just follow just real quick? So do you think that's significant? It's going to continue? Or do you think it's an opportunity in terms of that they're underperforming? It's a fantastic opportunity for stock pickers. And so we think this is a good opportunity just for active management in general. So if you're sort of a passive investor, you're along for the ride. if you're an active investor, you can put the research in and understand which of the MAG7 are likely to outperform, which of their beneficiaries and customers are likely to outperform. We're at a historical high right now in terms of stock dispersion.

15:21So there's enormous opportunities for stock pickers. Well, you mentioned opportunities. Do you see any signs of volatility under the hood too? Certainly massive amounts of volatility. So it will not go without volatility. There's mechanisms to avoid some of the volatility. And that's where we would point towards something that's less correlated to AI, either in the public space or then in the private space. Real estate, as I mentioned, infrastructure is another play. Why is the VIX below 16? I don't know. Maybe not everybody loves that index. There's still interesting dynamics happening where you've got overall stock volatility is low, but interest stock volatility is higher because you have now this sort of dispersion of companies that are likely to outperform.

16:01If you look at software, not doing so great, although we're starting to see a recovery in some software companies. So again, stock pickers are having a field day right now and trying to identify which are going to be the winners and the losers. A lot of volatility, but also a lot of opportunity to outperform for active investors. Are you guys super busy when it comes to the IPO season? I was talking to one of our deals guys and he says, I am nonstop, but he also said not everything is actually great. That is being trying to get through either regulatory or just come to market because they're thinking about what happens in the midterm.

16:32It's just got about 30 seconds. It's been a historically high IPO season. Q1 was higher than I think any year since 2021. But a lot of companies will probably not IPO. And so it's important also for investors to be exposed to venture and private markets. Good stuff. Thank you so much. Tying it all up for us, Aaron Mulvihill. He is Global Alternative Strategist over at J.P. Morgan Asset Management, joining us in studio. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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18:18Plus one conversation on the day's biggest developments, all in just 15 minutes. Subscribe to Bloomberg Daybreak for a precise, thoughtful take on the stories that matter. Listen to Bloomberg Daybreak each morning on Apple, Spotify or anywhere you listen. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Hey, we want to stay with tech and get to a couple of stories by our own Kurt Wagner. He is catching up or caught up, I should say, with Mark Zuckerberg earlier for a lengthy interview and a few reveals.

18:59He is, of course, Bloomberg News senior technology reporter, Kurt Wagner. He's out there in Denver. Hey, Kurt, a second story just dropped of yours on the Bloomberg. Talk to us about your conversation with Zuck and like how it came to be, the timing of it all and what he wanted to talk about and what you wanted to talk about. Yeah. Yeah, those aren't always the same. I think in this case, it ended up working out. But, you know, the news that he wanted to talk about was this new model that was announced a few hours ago, Muse Spark 1.1. The model is, I think there's two things that are unique about it.

19:36One is sort of it's improved with agentic capabilities and coding capabilities for Meta. That's a big deal. They've sort of always lagged behind the open AI anthropic Googles of the world. In this case, Mark Zuckerberg was very excited to tell me that they've actually surpassed Google's Gemini in most of the benchmarks that they were measuring against. And so this sort of felt like a leap for them in terms of model quality. So I think that's one. The second big thing, of course, from a business standpoint, is that they're going to sell the model to developers via an API. So Meta will host the model on its own data centers or infrastructure.

20:10But if you're building on top of it, if you're using it as a business, you would pay Meta a fee to access it, which is a business that we've seen from Anthropic and OpenAI and others. So Meta is kind of catching up on that front. And he was excited to talk about that, and that took up a good portion of our conversation. But as you mentioned, we had another story just drop, which I'm happy to talk about related to their cloud aspirations, which was something I was about. Well, go there. Go there. Because I find it interesting because they really, you know, weren't like all the other hyperscalers.

20:44Right. I mean, and now it sounds like they're leaning in big. Is this because they want to be like Amazon and have data centers for others? Or is this them planning for the future when they need data centers? I think it's both. And, you know, to be clear, he stopped short of confirming our report last week that they were developing these businesses, but he spent a lot of time explaining why those businesses might make sense for them. And so there's kind of two parts to this. The first is, you know, like a core weave or a nebius or something. They might just say, hey, we have excess or extra computing capacity.

21:18Let's rent it to someone else who needs it and make a nice premium on that. They're one of the companies that can do that because they have all of this infrastructure in place and they're building a lot more. So that's one potential. The other is sort of doing what they're doing with MuseSpark right now, which is host models on their infrastructure and then sell access to them. It's something like AWS has a product called Bedrock. It's very similar. In that case, Meta would go out and actually have licensing agreements with Anthropic and OpenAI and others to kind of host their models, but then distribute them on their behalf and use their infrastructure that way.

21:51Both of those things I floated to Mark Zuckerberg. Both of those, he spent a great deal of time explaining why that would make total sense for the company. But again, not saying we're announcing anything today, just that these are the types of things we are thinking about. And so I think, again, if you're an investor in Meta, you have to be somewhat encouraged by the fact that three or four months ago, we were sitting here going, hey, what's the business around this huge AI investment? And now today we have several different things that they've announced in the last couple months where they're trying to make money from their AI investments, which, again, are very hefty and very steep.

22:24And they've been making money. They need to make money because they've been spending money. Right. So let's talk a little bit about Zuckerberg's big spend. OK, so he's been aggressive with it. He's trying to keep up with OpenAI or Alphabet or all them. Is he feeling the pressure? Can you talk about his big spend? Yeah, they're spending aggressively. It's they had record CapEx projected for 2026. I'm going off the top of my head here, but I want to say it was in the like one hundred and forty billion dollar range. Um, they, he's committed to spending$600 billion on AI infrastructure projects across the U S over the next couple of years.

22:58You know, they're building a data center that our colleague Riley Griffin, uh, went to visit down in Louisiana that isn't expected to be upwards of$200 billion for that single data center. So he is throwing money around, uh, very aggressively to build the infrastructure here. The question was always, well, what do you get from that? Right. And up until very recently, the answer was, well, our ads are going to be stronger or our recommendations and feed are going to be better. And that wasn't super satisfying to a lot of people. Now we're hearing them say things that we're hearing those other AI companies talk about.

23:28Hey, we're going to maybe rent capacity. Hey, we're going to charge an API for our models. We're going to charge a consumer subscription for our chat bot. Like those are the types of products that they've started to tease over the last couple months, which makes, I think, stomaching a$200 billion data center at least a little bit easier if you're a meta investor. Does it get investors excited? And I'm just looking at meta shares down 7 % year to date, down 22 % since August of 2025. Why are investors not so impressed, Kurt? Well, because all of this is sort of ideas at this point. It hasn't necessarily shown up on the balance sheet at earnings, right?

24:08It's like the story that we wrote last week about them considering these various cloud businesses I talked about, that sent the stock up 9%. I think it was$125 billion of market cap moved in a single day. That's people excited about the prospect of them making money from this. But that's a big difference from showing up at a quarterly earnings and saying, here's the money that we made. Well, there are ideas like making glasses and then there are ideas like the metaverse. Like, which one is this? Or we don't know yet. I think this is much more glasses than metaverse because one of the things Mark Zuckerberg and I talked about in our conversation was the the AI's ability to do one agent stuff, agentic stuff.