At The Money: Navigating War, Tariffs and Geopolitics

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1:00War. Geopolitics. Tariffs. How is an investor supposed to navigate their way through an environment where the U.S. bombs Iran's nuclear sites, Israeli drone attacks have taken place in the Middle East, as well as aircraft bombing raids. All of this comes after months of noisy tariff announcements and walking those back, geopolitical wrangling. What are investors supposed to do when a war breaks out? I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss how to manage your way through war, tariffs, and all manner of headline risks. To help us unpack all of this and what it means for your portfolio, let's bring in veteran markets journalist and CFA, Sam Rowe.

1:52Sam's known for his clear data-driven insights into markets and the economy. He is a journalistic veteran who has worked at Forbes, Yahoo, Business Insider, and Axios. His sub-stack ticker was named by the Society of Business Editors and Writers as the best in business for 2022. So Sam, let's start with something you wrote recently, quote, the U.S. stock market has a long history of demonstrating resilience in the face of major geopolitical risk events. Explain that. Yeah, I mean, it's every couple of years or every couple of months, I think you and I or you and your clients and me and my readers have the same kind of discussion.

2:41Some conflict breaks out. Volatility comes to the markets. What are we supposed to do? And, you know, of course, you know, as a human being, this is very scary. As someone who cares about or has friends and family connected to those events, It's really distressing. And then you put your investor hat on and think about, you know, what does history tell us here? Now, obviously, every event is going to be slightly different. But history also tells us that the markets seem to eventually look past this. Even with what's going on in the Middle East right now, I think for as long as we've been alive, there's been some permutation of a Middle East conflict.

3:26And it's always been scary. And there's always secondary effects in the financial markets, whether it's with oil prices or volatility and interest rates and currencies and all these sort of things. And I think for traders who are trying to weave in and out of this, it's a big deal. And you really should be paying close attention to every development here. But, you know, as someone who has to get somewhere in terms of retirement and long term savings, or if you're saving for your college, your kids college fund or something, you have to wonder, you know, what does what does five years out look like?

4:03What does 10 years out look like? What does even three years out look like? And, you know, when you see some of these reviews of various geopolitical events in the past, there are some conflicts that go on for a very long time and may or may not have a sort of a longer term impact on the financial market. But for the most part, the market hits tend to be very brief. I think I saw something from Deutsche Bank recently that reviewed something like 30 geopolitical events of the last 100 years. And from the beginning of the event that triggered the conflict to the bottom of the S &P 500, on average, the median stretch is about 15 days.

4:4315 trading days. 15 trading days. So essentially three weeks. So that's kind of interesting. You said something not too long ago that I thought was intriguing, and I'm wondering if it was geared to investors or traders. Stocks usually look past geopolitical events, but these events shouldn't be ignored. How do you have it both ways? Absolutely. I think one of the mistakes that a long-term investor can make is to try to pretend like nothing else is happening in the world. I mean, of course, this stuff matters, and we're going to follow news in our personal lives and all that kind of stuff. But sometimes we want to just ignore all this stuff, especially if we have 15, 20, 30 years until we actually have to begin selling these stocks.

5:32But I don't know if that's totally healthy, because maybe the study says 15 days till the market bottoms, but the study might also have a range of outcomes where it might take three years till the market bottoms. 15 days is the average, but that doesn't necessarily mean each time it's going to be 15 days. Exactly. So I think you definitely want to be mindful of the possibility that things can get worse. Even with what's happening right now, the markets seem to have bounced back pretty quickly. All-time highs. All-time highs. We're within reach of all-time highs. But that doesn't mean there isn't going to be another flare-up tomorrow or next week or in a couple of months.

6:13So I think you have to be mindful of the fact that this stuff is going on in the world. And then you go back to the history and say, hey, the odds actually say people want de-escalation. People would rather not have violence out there. And that involves all parties. And so as long as there are more people who would rather not have violence than want violence, I think there's some gravity toward de-escalation and a pullback in violent activity. So let's delve into the history of – we'll deal with tariffs in a little bit. Let's talk about war. There's a history of the last century of small wars, large wars, world wars.

6:57We have World War I and World War II. We have the Korean War, Vietnam, Iraq in 1991, and then Afghanistan and Iraq in 2003. And today it's Iran, which seems to have been building, I don't know, since 1979 when the hostages were taken following the Iranian revolution. How should investors, not in their personal or family life, but as stewards of capital, contextualize the dangers of war and the dangers of being frightened out of the market because of war? You know, I was just having a conversation about this the other day, about this whole matter of, you turn on the TV and someone will tell you, well, uncertainty is elevated today.

7:48Uncertainty, it doesn't make sense that the market's so high because of all this uncertainty that's out there. Well, uncertainty just defines the nature of investing in the stock market, right? If there was no uncertainty, you wouldn't get a great return. Right. If you want certain returns, you can get four point something on the 10-year treasury. Right, exactly. But I was just thinking about, you know, the history of conflicts, especially, you know, in the Middle East. And I remember when the Gulf War started in 1990. And, you know, I was eight years old. And I was looking at the data. And apparently, that was a pretty rough time, both in the oil markets and in the financial markets.

8:28And it was a tough time to be an investor, you know, going through all this volatility, because, you know, maybe this is it. Maybe this is the end of all that. But then, you know, it's not long after that you realize that's actually an incredible time to start putting money into Sam Rose 529. I wish my parents put money into a 529 plan at that time, but they didn't. But again, you just look backwards. And if there's a more powerful force than geopolitical tensions, it's going to be everyone's desire to want things to be better. and even from like a business perspective, they want better technologies, they want things to be cheaper, they want things to be faster and that force that's driving earnings and profits and productivity and the economy and employment and quality of life, standards of living and all this stuff, will continue to be the dominant force in the markets.

9:23So I think that's what people miss. Like if you were to be able to, if you could put all that into like a pie chart, Sure, you have these flare-ups in geopolitical events, but the dominant forces remain. That makes a lot of sense. You mentioned oil earlier. In the 1990s, and especially in the 1970s, anytime we saw Mideast tension, that always translated into higher oil prices, which then pushed into CPI inflation, driving it higher. Are we in the same set of circumstances today? Ever since the new fracking technologies in the 2000s and the United States just cranking out oil for the past, I don't know, 10, 12 years at all-time record rates, does the U.S.

10:15lesser dependence on Middle Eastern oil make it more or less likely that Middle East flare-ups are not going to be as inflationary? as they once were? I think it's going to be not as inflationary as they once were. One of my favorite metrics that's out there is energy consumption spending as a percentage of personal consumption expenditures. And that was floating around at about 10%. Energy spending as a percentage of personal consumption. Household budgets. Yeah, household budgets. About 10 % in the late 70s, early 80s. And that's steadily been declining. and now it's closer to somewhere between 3 % and 4%.

10:55That's amazing. Yeah, so energy, the direct spending on energy has shrunk significantly. And then past that, the car you drive today is far more fuel efficient than the car you drove 20 years ago. So fuel economy has improved for one of the biggest purchases of energy, which is gasoline for cars. To say nothing about hybrids and EVs. Hybrids, EVs, your refrigerator is more energy efficient. The AC is more energy efficient.

11:31We switched to natural gas from oil, I don't know, 10 years ago. It costs a fraction of what oil costs and it pollutes less. And, you know, as much as people say natural gas is a problem, it's certainly much better than coal and better than oil. Right, right, right. Having said that, it can certainly have a psychological effect on consumers, especially. We can spend all day talking about how I get 25 miles per gallon now as opposed to 15 when I first got my driver's license. But when you see gas prices go from$250 to$325 in a very short period of time, that affects you because that's immediately coming out of whatever your Starbucks budget might be.

12:14Really interesting. So we've seen an argument pushing for homeshoring. We'll bring these factories back to the U.S. We'll create all these new jobs. Is that realistic in the modern age of advanced automation, new technologies, artificial intelligence and robotics? Are we really going to fill factories with workers or are we going to be filling new U.S.-based factories with a whole bunch of robots? Yeah, I think there's several ways to answer that question. And in every way, it's going to be, no, we're not going to have a ton of homeshoring. We might have some at the margin. Everything happens at the margins, right?

12:54Some people who are saving 0.001 percentage point manufacturing in China might figure out a way to move to the U.S. But for the most part, it's not going to be that much cheaper to move your manufacturing to the U.S. just because it was so expensive in China. You're going to move to Vietnam. You're going to move to Mexico. You're going to move to Indonesia and all these other places where it might be more expensive than China, for instance, but it's still going to be cheaper than the U.S. So I think that's one of the unintended consequences of that. But as far as what you're saying about AI and machinery and robotics and all this stuff, yeah, absolutely.

13:34That's already happening. And so it's a question that, like, I don't know if you can fight that, right? Like, unless there's a policy that decides that there's a limitation on how many robots you can have in your factories. I mean, we're not even talking about manufacturing anymore or goods production. We're also talking about services, right? Everyone in the service, it's like AI has gotten to the point where it's not just affecting the assembly line. It's affecting people who go into an office and go to meetings and strategize for their marketing departments. Or if they work in banking, suddenly you can cut a couple steps out of putting numbers into an Excel spreadsheet.

14:17Really interesting. So last question, how can investors balance staying invested against all of these geopolitical risks, war risks, trade war risks, tariffs, and just unexpected escalations? How do they balance the need to stay invested through this against the potential downside risks of all these headlines? You got to study the history and you got to look at the data and you got to remember how bad things were at various points in history. Me personally, I like to keep a journal when bad things happen. I wish I had done this more actively during the financial crisis, but I didn't. I certainly did during COVID.

15:03And something that I mean, you know, you can sort of get this by proxy through reading a really deep account of various historical events. but reading my own memories or my own real-time accounts of something like COVID reminded me that it always feels like the end of the world and it lasts so much longer than you expected. Like, you know, I have, you know, 50 pages here where it's just like day after day after day, you know, we live in a new era where we're never going to be in the same office again. We're never going to meet anybody ever again and all these kinds of things. And, you know, it's something I like to do every once in a while, especially when things are calm, right?

15:42It's one thing to be in the middle of a crisis and then study the history of crises. And it's like, no, no, no, no, no. This time it's different. But when things are calm, that's probably actually the best time to go back and remember things like, well, here's another, I'm sorry to sort of - Keep going, no, I'm interested. Digress a little bit. I got a notification on Facebook saying that, I think it was exactly 15 years ago, I submitted an idea for fixing the Deepwater Horizon disaster. I don't know if people remember this, but... That was BP Amico and Ken Feinberg oversaw the... Yeah, yeah. I recall that.

16:21Yeah, yeah. Gulf of Mexico, an oil well blows up and it's spewing oil into the Gulf of Mexico. Do you remember how long it was spewing oil into the Gulf? Like 60 days, some crazy... Three months. Yeah, 90 days. Wow. Three months that they were eventually able to put a cap in it. And it took, I think it took another two or three months to officially say this thing was sealed. Right. It's insane how long this went on for. But, you know, everyone's memory is going to be, oh, well, it was something in the past. It's like, I remember it being three months. Oh, I remember it being, it couldn't have lasted longer than two weeks.

16:55But when you're in the moment, in that humans live in the here and now. And when it's happening, especially day after day after day. Yeah. It's funny, you mentioned journaling during these things. I was essentially ended up writing Bailout Nation in real time in public on the blog. Yeah, yeah, yeah. I recall having a conversation with my trading desk back then who were just like exhausted from the volatility. Everybody was making money, but it was exhausting. Yeah. And there's this fantastic line in Apocalypse Now. Do you remember the Charlie Don't Surf scene where Duval goes up to Martin Sheen and he says with this wistfulness, you know, son, someday this war is going to end.

17:44Like disappointed. And when you're in the middle of it, it feels like it's never going to end. The financial crisis is never going to end. Deepwater Horizon is not going to end. The tariffs were not going to end. But we always seem to come out the other side. Yeah. Yeah. And again, we just came out of COVID. Which really felt like it was never going to end. We were literally living a science fiction movie. Right. There's no amount of money you can throw at this problem. You just have to pray that the science is going to be good enough that we figure out how to come up with a vaccine and contain this thing.

18:19But the scale of death was unbelievable. Yeah, millions, millions of people in America and tens of millions around the world. And yet, you know, the economy has never been stronger and the stock market has never been higher. So I think, listen, it's not to sort of necessarily downplay what's going on in terms of – and it's not just, you know, Iran. We still have a war going on between Russia and Ukraine. Let's not forget about that, right? So it's the Middle East. It's Russia and Ukraine. There are other hotspots going on in Africa as well. Yep. And there's going to be something else that's going to flare up.

18:52That's inevitable. But, you know, again, I think not to downplay any of it, but to offer some perspective, it might help to go back and just sort of remember those times when things were really tough. So to wrap up, we experience these geopolitical disruptions in a form of duality. As human beings, we are aware of the emotional turmoil of the toll in human suffering and just how psychologically damaging all these horrific events are. And yet at the same time, we have to be good stewards of our own capital and recognize that this too shall pass. I'm Barry Ritholtz, and this is Bloomberg's At The Money.

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