Treasuries Sink as Oil Jumps on Iran War, Stoking Inflation Fears

17:52Tim Stenovec:Weeks or months. You mentioned what Iran has done in response just in recent days. And I think one thing that's notable is the allies that the U.S. and Israel find more so in the Middle East than in Europe, for example. I'm curious who Iran has in its corner? Can it rely on any of its partners, China, for example, to help at all?

18:17Carol Massar:We've not seen significant support beyond perhaps rhetorical support from Russia and China. We don't know, of course, what's happening covertly. But Iran actually has managed to alienate the Gulf, which, frankly, up until this latest conflict, the Gulf had actually been working hard to de-escalate tension and to insist that there should not be war against Iran. Now, because of Iran's reaction and the ways in which they have ensnared these various Gulf countries, you're seeing Gulf countries galvanize their support against Iran. I'm not saying we're going to see military action by the Gulf, but it's very clear that Iran is really alone.

19:06Carol Massar:It has its proxies, but even they, again, are weakened. Let's wait and see. I think the other shoe to drop will be if the Houthis choose to engage once again. And that could actually further snarl commercial and shipping traffic in the Gulf and around the Babel Mendev, another key choke point in the region. How weakened are Iran's proxies and how deep do they go? It does seem like a lot of leadership, official or otherwise, has been taken out. But how much do we know about that, which will speak to their ability to come back? Well, we've seen the so-called axis of resistance that is comprised of Iran's proxies very much unraveled.

19:50Carol Massar:Hamas very much on the back foot. But Hezbollah, yes, they mounted, frankly, a rather tepid drone and missile strike on northern Israel, no damage even from it. We haven't heard much from Iran's proxies in Iraq. They've been relatively quiet. Even the Houthis have remained on the sidelines. Now, I say that with some trepidation because I do think we could see the Houthis engage. But I think it's fair to say that Iran's proxies have really been substantially cut down to size, and they really don't pose the same threat that they had, let's say, certainly before October 7. Again, I would put one caveat, which is the Houthis, and they really could engage and snarl Red Sea shipping and go after U.S.

20:43Carol Massar:and Israeli targets. That is something I think we could see in the coming days.

20:47Tim Stenovec:Mona Yucubian, director and senior advisor of the Middle East program, the Center for Strategic and International Studies. She joins us from Washington, D.C. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

21:17Tim Stenovec:fullest potential to create smarter business.

21:21Carol Massar:My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side.

21:28Tim Stenovec:For example?

21:30Carol Massar:If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind it. if anybody is not using AI to make their developers who write software 30 % more productive today with the goal of being 70 % more productive. Yeah, wow. So we are not asking our clients to be the first experiment on it. We say, you can leverage what we did. We are happy to bring out all our learnings, including what needs to change in the process, because the biggest change is not technology. It's getting people to accept that there's a different way to do things.

22:11Tim Stenovec:To listen to the full conversation, visit ibm.com slash smarttalks.

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24:12Carol Massar:See how your business can get stronger and go farther with Chase for Business. Learn more at chase.com slash business. Chase for Business. Make more of what's yours. The Chase mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank N.A. Member FDIC. Copyright 2026. JPMorgan Chase and Company. 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.

24:48Tim Stenovec:Blog's recent layoffs, prompting not just worry about the job market, but also deep cynicism about how corporate leaders will frame an uptick in AI usage. Danny Moses mentioned it. He was like, hey, there's not one executive out there right now who's not thinking to themselves, can I use AI as a way to reduce my workforce? Can I blame it? And listen, to be fair,

25:08Carol Massar:I think most leaders that we talk to, when you push them a little bit, they'll say, of course we're thinking about it. We're trying to understand its impact, what it can do for our workers. How does it help? How does it aid them in maybe some of the more tedious tasks to open them up to do things that maybe are more meaningful to the company, especially in terms of the company's top and bottom line. So I think we are very early in. Some say first inning. Some, I talked to somebody this morning, said we're in the third inning, which I thought was surprising. But I think we are early on in terms of understanding the true impact.

25:42Tim Stenovec:You know, you and I are going to be at Bloomberg Invest tomorrow. It's a conference that is about finance. It's downtown. It's, you know, Wall Street adjacent.

25:52Carol Massar:Right in the heart of the financial sector.

25:54Tim Stenovec:It is in the heart of the financial district, Wall Street adjacent. And the one thing that I've been thinking a lot about is how the conversation has shifted. Because I did a panel there last year about AI and a tool that people could use. How the conversation has shifted from AI being this tool from that a year ago now to being this layer that everybody's using all the time. And my panel includes Marjorie Janowitz. She's the chief revenue officer of Mistral AI. So they're a frontier model provider. So like OpenAI or Claude paired up with Shobit Varshney, who's the global head of AI at Citi. So if you're interested in that conversation and about how financial institutions are using it and building for it, check that out.

26:32Tim Stenovec:It's happening just about 8.30 tomorrow morning. And you can check it out on the Bloomberg Terminal.

26:36Carol Massar:Lots of great conversations coming from Invest. Right now we have a good conversation we want to get to. And this has to do with Block's recent layoffs, prompting not just worry about the job market, but deep cynicism about how corporate leaders will frame an uptick in AI usage, so-called AI washing. We got there rather quickly, using AI as an excuse for drastic job cuts. Now front and center, as Tim mentioned, as critics highlight Block co-founder Jack Dorsey's management decisions in recent years, including a pandemic-era hiring spree. I feel like we are still trying to figure this way out. And there's a lot of people weighing in on it.

27:07Tim Stenovec:Yeah, one of those people weighing in, Marcelo Lima, managing partner at Heller House. It's a firm that calls itself a, quote, value-oriented investment management company. It invests in companies with, quote, low fundamental risk and high potential upside. Marcelo joining us from Miami. me. Marcelo, welcome, because you were one of those critics last week when Block announced its layoffs. He posted this on X, quote, Block's 40 % reduction in force is the new Citrini fake narrative. Everyone will assume Jack Dorsey is the, quote, greatest of all time, is doing this because AI. He's not. Block has been massively bloated for years.

27:42Tim Stenovec:Don't forget, Jack was head of Twitter. When Elon took over, he fired 80 % of staff within five months and the product got better. That was before Gen AI and Cloud Code. So is this about AI at all or not at all about AI? Yeah, Tim, thanks for having me. You know, I think it's, there's no question that AI is going to make companies more efficient. We heard from Jamie Dimon last week talking about moving people from certain jobs to other jobs where their skills can be better used as AI takes over certain tasks. But as far as block is concerned, I think it's hard to argue that this company wasn't massively bloated.

28:18Tim Stenovec:I think, in fact, even after this reduction in force, they're still above about 50 percent more than where they were in 2019. And the company really should be a lot more efficient if you compare them to other global players in fintech. Well, they didn't have a few things. They didn't have Afterpay in 2019. It was still called Square back then. The company's changed a lot since then. What about using instead of using a fintech as a corollary, we use a company like Anthropic as a corollary, a corollary, a company with, you know, more than 300 billion dollars in valuation in the private market and just several thousand employees.

28:57Tim Stenovec:That's sort of the AI angle there. Does that make sense? Yeah, I think it does. In fact, I did a ranking of Block a few years ago where you could go and look at how much in gross profits different companies generate, even from different industries, because that is really the metric that matters for Block is gross profits. That's really their top line. And then how much of that drops to the operating income line. And Block was dead last almost next to a cruise ship company. So across different industries, including software, fintech, et cetera, Block was really poorly shown very poorly in terms of efficiency.

29:38Tim Stenovec:They were eating up a lot of dollars between those two lines, gross profits and operating income in things like R &D expenses, general administrative sales and marketing, et cetera.

29:48Carol Massar:So like if you were sitting down with Jack Dorsey, what would you be asking him? What do you want to know from him right now?

29:54Tim Stenovec:Well, I'd say, you know, Jack, is this reduction in force really the most that you could have done? If you could pull an Elon here, how far would you go? And is there more to come? Because, you know, still, the margins that they are guiding to next year are about 26 % EBIT margin compared to gross profits. but a company like Adyen is at 69%. A company like Nubank is at 66%. PagSeguro is at 34%. StoneCo is at 43%. So they could be even more efficient than they're projecting for 2026 now after this reduction in force.

30:33Carol Massar:Do you think, just based on what we saw on the share price on Friday, jumping almost 17%, 21 % at its highs intraday, but finishing with a 17 % gain, another half a percent higher today, Okay, Marcelo, that you think that is maybe, I don't know, what message does that send to Jack Dorsey? I mean, obviously, the investors are behind it. Are they misreading it, though, in your view?

30:58Tim Stenovec:You know, I think short-term stock price moves have a lot of noise. There could be short covering in the stock. I don't have the short data right in front of me right now. But there's no question that this increases the probability of them actually achieving that metric, which is earnings per share that investors actually want to see. A few years ago, I think it was almost two years ago to the date, I sent Jack and Amrita an email with a projection showing about$4 in earnings per share of 2026. I think they're going to deliver, according to their guidance,$3.66. Of course, they're probably trying to beat that.

31:33Tim Stenovec:So they are actually now, finally after this reduction in force, delivering the high end of my estimate from two years ago. And frankly, they should continue on this path, and hopefully they do. And I hope shareholders enjoy that ride because it's better late than never that the company should become more efficient. Are you a shareholder now? I am not a shareholder now. I was a frustrated shareholder for many years, and I kept trying to get in touch and engage the company on this topic of becoming more efficient, showing them this is what your valuation will be if you deliver these numbers. This is what the IRR between the current share price and the future share price could be.

32:13Tim Stenovec:And it was it was not very fruitful. So I moved on. Are you would you would you invest in the company again? Look, if I have proof that Jack and Amrita have really changed their stripes and they really are focused in generating shareholder value, then yes, I think I would, because I do think Jack is a visionary. He's a great product guy. But I do think that the company was really not one for shareholders historically. And I would like to see if you could marry both things, be a product visionary, be good at executing and be a good steward of shareholder capital, then this company could do extremely well for shareholders as well.

32:52Carol Massar:Yeah, it's kind of interesting. I guess to have this happen on top of the Citrini research, this nightmare of mass unemployment, and that certainly spooked the markets when that report came out. You know, we just talked, you know, with Danny Moses, founder of Moses Ventures, of course, you know, the big short fame, if you will. But this idea that these things that are some of these things coming out, and I'm just going to go to the Citrini research, that maybe it's just, you know, a longer term view of perhaps where these things are headed. Because if you do talk to a lot of executives, they're very careful in terms of the impact on the company.

33:35Carol Massar:but it's hard to ignore that things are changing when it comes to the impact of AI. How do you put it kind of in its proper place? Or what is your view on what is the AI trade, the AI scare? What is the proper place for investors? How should they be kind of reading into it?

33:55Tim Stenovec:You know, Carol, I think every investor should try to code, to bytecode with Cloud Code and Codex as well from OpenAI. They're fantastic tools. I've been using them a lot. I used to be a software engineer earlier in my career, and it's not the panacea that everybody, it's sort of this magic wand that everybody claims it is, oh, I one-shotted this or that application. It's actually pretty complicated, and you have to guide it a lot. Yesterday, I spent a lot of hours coding a plugin for Excel that I want to do certain things, looking up a certain API. etc. So this still requires a lot of guidance.

34:33Tim Stenovec:Yes, I do understand the science fiction future, but I think some of the smartest voices now are really actually the guys trying to disrupt the incumbents. And those are the top capitalists in the world, people like Mark Andreessen from Andreessen Horowitz, right? And if you listen to what his firm is saying, they, these guys are in the business of disrupting incumbents. They are saying that AI will be actually a tailwind to the best enterprise software companies. So when the guy's saying that, and they have a vested interest in disrupting the incumbents, maybe we should listen to that signal, right?

35:07Carol Massar:Yeah, there is certainly something to that. I do want to be fair. Jack Dorsey did take to social media on Friday and responded to one critic who pointed to the accusations of bloat that have dogged his companies. He acknowledged the company is overhired during COVID and operated inefficiently when he ran Square and Cash App as two separate businesses. He went on to say the block had corrected for all of that and that it now aims to generate more than$2 million in gross profit per employee, quadruple what it was generating pre-pandemic. And then Block's chief financial officer said in an interview with Bloomberg, we are taking bold and decisive action here, but we're doing it from a position of strength.

35:42Carol Massar:So just wanted to share that with everyone as well. Hey, fun to catch up with you, Marcelo. Things to think about, certainly, as we kind of make our way through this and will be, no doubt about it, not only for months, but probably years to come. Marcelo P. Lima, he is founder and managing partner of Heller House, joining us from Miami. This is Bloomberg.

36:00Tim Stenovec:Stay with us. More from Bloomberg Business Week Daily coming up after this.

36:08Tim Stenovec:Hello, hello. I'm Malcolm Gladwell, host of the podcast Smart Talks with IBM. I recently sat down with IBM's chairman and CEO, Arvind Krishna, and I asked him, how can companies use AI to its fullest potential to create smarter business?

36:25Carol Massar:My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side.

36:31Tim Stenovec:For example?

36:33Carol Massar:If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind. if anybody is not using AI to make their developers who write software 30 % more productive today with the goal of being 70 % more productive. Yeah, wow. So we are not asking our clients to be the first experiment on it. We say, you can leverage what we did. We're happy to bring out all our learnings, including what needs to change in the process, because the biggest change is not technology. It's getting people to accept that there's a different way to do things.

37:14Tim Stenovec:To listen to the full conversation, visit ibm.com slash smarttalks.

37:44Tim Stenovec:You can build a portfolio of stocks, options, bonds, crypto without all the bugs or the confetti. Retirement accounts, yep. High-yield cash, yes again. They even have direct indexing. Public has modern design, powerful tools, and customer support that actually helps. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. And paid for by Public Holdings. Brokered services by Public Investing. Member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor, crypto services by ZeroHash. All investing involves risk of loss.

38:22Tim Stenovec:See complete disclosures at public.com slash disclosures.

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38:56Carol Massar:They'll help your business grow with individual guidance and convenient digital tools all in one place. With that guidance and your determination, you can take your business farther and help build a brighter future for your community. Learn more at chase.com slash business. Chase for Business. Make more of what's yours. The Chase mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank N.A. Member FDIC. Copyright 2026. JPMorgan Chase and Company. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern.

39:33Carol Massar:Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube.

39:40Tim Stenovec:Well, speaking of those higher energy prices, I want to bring in Cole Smead, CEO and Portfolio Manager of Smead Capital Management. He joins us from Phoenix. The Smead Value Fund has more than 20 % of its holdings in the energy industry, including APA and Conoco as top 10 holdings. Diamondback and Occidental are in there as well. Cole, what is your reaction, at least from a market's perspective? And then we'll get to the energy side of this in a minute. What's your reaction to the events over the weekend and ongoing in Iran? Yeah, and thanks for having me. Good to hear from you guys and see you as well.

40:13Tim Stenovec:I would just say to begin with, you have to remember, Tim, that you're starting with an S &P that owns less than 3 % in energy. To quote the Monty Python for the S &P 500, this is merely a flesh wound from a sector perspective. And so I think we're in an environment where people have really not cared about this kind of stuff. If you go back to the last spring, the idea for most investors, you know, if they did touch or think about energy at all was, well, energy is going to get drilled into the ground because we're going to have a recession tied to tariffs and the oil price can be low. And therefore, there's not much concern other than we know OPEC is going to increase, obviously, their production.

40:51Tim Stenovec:And as you fast forward through the year, there were other conversations with that. You know, Venezuela fell into that same like let's get everyone out of the energy space, at least temporarily in rhetoric. And what we wake up with a world is where nothing in the last 12 months really makes any sense to anyone other than they're waking up with a much higher oil price than they would have expected at any point during that. And attention that seems to be so much less easy to solve than Venezuela. I think one thing that has to be mentioned is OPEC is effectively liquidating its excess capacity. not dissimilar to how other industries when they go into liquidation.

41:27Tim Stenovec:Three to four years ago, if you look at the tanker business, which is another whole subject in this, the tanker business was liquidating where they got such low cash rates per day that they would not reorder or buy as many tankers as they had in their fleets. And so we're seeing a liquidation of the global oil market for its excess capacity. But the question remains, Tim, isn't the future fairly bright? And don't we have more demand and needs? And so how are we going to meet 10 million barrels of new demand that shows up in, say, 10 years when OPEC effectively has a million barrels of excess supply left?

41:58Tim Stenovec:And that is it, my friends.

42:02Carol Massar:Well, I don't know. I mean, how do you bring the U.S. into this? And a world that, you know, Cole, is increasingly also embracing alternative energy. So I'm just curious, you know, whether it's, you know, go all the way from green energy to, you know, nuclear energy in different forms to meet the demand. Increasingly, as you say, some of it is a lot of it to do with AI. But I remember having a builder in and, you know, doing massive projects. And they're saying that increasingly everything's electrical. So you've got to figure out how to power it. So I'm just, you know, as we continue to embrace more forms of energy, you still see that there will be the demand and the uptick when it comes to fossil fuels, and that will lead to higher prices.

42:48Tim Stenovec:Yeah, I mean, we're going to need every form of energy. That's not the question. We're going to need a lot more of it because that's the nature of human progress. Go ask Elon how much easier it is to sell EVs without a subsidy. So I think that's the other question that has to be asked is what policies grow the best without subsidy? And frankly, oil and gas is just a place that grows easily without subsidy. So if you look at this, I mean, if you look, let's use the United States. We are exiting our position of leadership in growing global supply. We were we are the largest oil producing nation in the world, nine million barrels a day.

43:24Tim Stenovec:We grew to that from almost nothing 20 years ago. And we have decided, stupidly might I add, but we have decided that we want low oil prices. And so what happens when you believe that you have low oil prices? You scare your producers from producing more versus at times like the 2010s or coming off the peak oil theory of 2008. Investors thought we were going to have high oil prices forever and ever on man and that the emerging market consumer was going to be the drumbeat of that. And what we ended up finding was we could grow a lot of production off that. The only way America will produce more oil into the future is with high prices.

44:00Tim Stenovec:And what the Trump administration has tried to do is they have tried to effectively use the bully pulpit into making people believe we'll have lower energy prices. It just ain't seeming to work in as much as it has, say, compared to last April.

44:14Carol Massar:So are you ready to go for higher energy prices and higher inflation and a higher rate environment, if that's what it takes?

44:23Tim Stenovec:Well, it's a good question. You've got to remember Newton's third law, Carol, says that for every action, there's an equal and an opposite reaction. And so let's just run that path. Let's take the path of we're going to have higher energy prices. That'd be very tough for the Fed to deal with because obviously, you know, you can't do anything about that. It's like the, you know, the fly in the ointment, if you will. Except that if that happens, that's not good for stocks, particularly historically. If you go back and look, long duration stocks, what are the longest duration stocks out there? We call those tech stocks nowadays.

44:53Tim Stenovec:And so the great part about being the 10-year treasury is you're not a stock. So what was the initial reaction yesterday in the bond market? Well, the initial futures reaction of the 10-year was yields down, okay, with the NASDAQ down nicely in that futures move. So I say that because I don't think the government has as much trouble if there's something, you know, orbiting that 10-year and the stock market doing poorly would actually drive long-term yields down because it's a place to hide. And so the idea that yields go up, that that automatically is just terrible for the bond market. No, I would say people looking at a 10 year at four might be begging for four percent yield in a bad stock market.

45:36Tim Stenovec:Hey, Cole.

45:37Carol Massar:The only thing is I will say, US government doesn't necessarily want yields to go up too high either, right? Because if you look at the deficit, that just continues to grow and grow. And that becomes...

45:44Tim Stenovec:They don't. They don't. But again, why would investors be willing to accept higher inflation? If they get punished in the stock market, they'll just accept less volatility. And that's what happens often in bad markets. Hey, Cole, we only have 30 seconds left, but the S &P 500 is flat right now. And I would not have bet that that would happen today. why such a muted reaction very quickly? Yeah, people are just fading the risks. They want to be long. They don't really care. I mean, Tim, who's going to go out and pay capital gains on taxable assets after what they've seen the last five to seven years?

46:19Tim Stenovec:The history is they always deal with the tax situation when things are much worse. And so we're seeing this investor that is right now saying we don't really care. You know, what the wise man does in the beginning, the fool does in the end. We'll find out whether this is foolish, I guess.

46:33Carol Massar:Hey, 10 seconds, you buying more energy names? Just real quickly.

46:37Tim Stenovec:It's a great environment and people hate the long-term story. So we're very comfortable in our seat.

46:42Carol Massar:Okay. That sounds like no, but it sounds like you like what you've got. Good stuff. Cole Smead, Chief Executive Officer Portfolio Manager at Smead Capital Management. This is the Bloomberg Businessweek Daily Podcast. Available on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5 p.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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