Are the markets right or wrong about Iran?

0:08Rob Armstrong: The mood among investors is bad. They are super spooked by Iran and also by private credit. But financial markets, stocks, bonds, currencies, all that jazz, they're kind of fine. Like not rosy, but also very much not terrible. It's quite a weird contrast and it suggests that despite every headline on Iran, every new development, investors are still fixed on the idea that somehow the war in the Middle East and the blockage of the Strait of Hormuz will just somehow magically blow over. Today on the show, how can everything be awful and fine at the same time? Is the market right or wrong? This is Unhedged, the markets and finance podcast once again for normal people from the Financial Times and Pushkin.

0:59Rob Armstrong: I'm Katie Martin, a markets columnist here at FT Towers in bright and sunny London, joined down the line from New York City by first sea lord Robert Armstrong, my partner in crime on the Unhedged newsletter, which you should all sign up to at once. Rob, it's still chilly out there. No, that must be getting quite boring by now.

1:18Katie Martin: Oh, it's horrible. As I've said on a previous show, there's nothing as horrible as the month of March. It's freezing outside today.

1:25Rob Armstrong: Now, we have received multiple emails from listeners since the last show saying, me, me, I listen to the show and I'm normal. Yeah.

1:33Katie Martin: Last time I questioned for listeners who didn't listen last time, last time I questioned whether any normal people actually listen to this show, but which I generally meant people who don't have all the professional deformities that come along with working in finance. And a lot of people claim to be normal who listen to the show, but claiming you're normal is a little bit like saying, I don't know, you're that you're not a spy or that.

1:59Rob Armstrong: Yeah.

1:59Katie Martin: It's like it only makes me more suspicious when you have to say it out loud.

2:04Rob Armstrong: Yeah.

2:04Katie Martin: You are like

2:05Rob Armstrong: how I have a degree in Russian, but I swear I'm not a spy.

2:09Katie Martin: Yeah.

2:10Rob Armstrong: My kids think I am, but I'm Genuinely not. So look, let's talk about the vibe, man. It's all about vibes. So start of the year, I'm going to say it was pretty euphoric, right? That was a word that Deutsche Bank was using in a note the other day. You have US interest rates that are heading down. You have US fiscal policy, so taxes also coming down. You have Germany splashing the cash for once. You have loads of companies spending tons of money on AI. Everything is good. And now it's like, stop that.

2:44Katie Martin: I would frame this point, Katie, in terms, just one way to do it anyway, is to frame it in terms of the VIX index, which is the index of expected volatility over the next month in the S &P 500.

2:59Rob Armstrong: Yeah. So people call it the fear index and then finance pointy heads get in touch and say, oh, actually, it's just a measure of expected volatility. It doesn't matter. For our purposes. It is a beer index.

3:10Katie Martin: And basically what it does is it reflects how expensive it is to buy options to buy or sell the S &P 500 over the next month. And if you think the volatility is going to be higher, you pay more for the options. That increases the chance that the options will turn out to be profitable. So anyway, we started the year at 15 and it's been like chugging its way up and it peaked March 6th at 29. Now it's back to 22, but it's like been following this volatile path up. So there's also of course an index called the VVIX, which is an index of how volatile the VIX is. And that one's up too. Whether there is also a fear of fear of fear index is an open question.

4:02Rob Armstrong: I'm sure someone somewhere is somewhere. Somebody's trading it.

4:05Katie Martin: Yeah.

4:06Rob Armstrong: But if you go out and talk to investors one-to-one, which you and I do all the time, or if you do surveys of what hundreds of fund managers think all the same time, which usefully Bank of America does every month, you do come across this idea that people are quite jumpy, right? So the latest survey from Bank of America was out just the other day. It said the mood has gone from boom to stagflation. There are major worries about private credit, major worries about geopolitics, obviously Iran, yada, yada. There is a dash to cash. So there's the biggest jump among fund managers into cash, which is where you go if you really are worried about what's happening next and you don't want to be in risky stocks or anything else.

4:48Rob Armstrong: Biggest jump into cash since March 2020. I remember March 2020, Rob. Do you? It was not great. It was not great.

4:57Katie Martin: However, I am looking at the cash allocation chart. And welcome to the part of the show we call Charts on the Radio.

5:03Rob Armstrong: Charts on the Radio, people.

5:06Katie Martin: It is a very big jump in the March Bank of America Fund Manager Survey, but it's not at a super high level yet. It's not anywhere, you know, it's not at the level of Liberation Day yet, let alone the horrors of COVID or whatever. So there's more cash, but we're looking at average cash allocation of four something percent. And it's not huge yet, but the move is big. And so that is a good indicator of vibes changing.

5:31Rob Armstrong: Yeah, vibe shift, dude. So also the survey from Bank of America said that fund managers are still overweight equities. Now that is jargon for we still own lots of stocks. So if you are a normal person and you have ISAs or you have other holdings of stocks in the stock market, a way to sound clever about that is to put your glasses on the edge of your nose and say, oh, I'm actually overweight equities. It just means that you own stocks. But so it is weird. People aren't selling, you know, their core holdings, but they are telling people either sort of one-to-one with people like me and you or in surveys that, yeah, they don't like what they see.

6:12Rob Armstrong: It's quite old, isn't it?

6:14Katie Martin: I mean, the S &P stopped going up basically in October.

6:20Rob Armstrong: Yeah.

6:20Katie Martin: But it's not really going down.

6:23Rob Armstrong: Yeah.

6:23Katie Martin: It's just kind of flat. You know, the NASDAQ is down a little bit, but really we've seen the kind of vibe indicators shift a little bit in the way you've described in exactly the way one might expect they would shift in wartime. But the risk asset markets, like the spot or cash prices for risk assets, pretty solid. You know, and that's the kind of weird contradiction we're sort of sorting our way through here.

6:50Rob Armstrong: I think it's because there's a lot of things that are like bad but not awful. So I know, Rob, you religiously read everything that I write. So you will have seen in one of my columns the other day, I quoted a chap called Anton Iza from Rubico, which is a big Dutch asset manager. and he said in geopolitics this is not the 70s in AI this is not the dot-com boom in private credit this is not 2008 but we do have a bit of each and that's still not great and I think that's actually quite a good way of putting it right you can see yeah horrible historical analogies yeah I really

7:30Katie Martin: agree with what he said there, by the way. You know what I mean? I think that praises it perfectly. Do I think the big hyperscalers, as they call them now, are spending so much on AI data centers that they cannot possibly make a good return on equity? Yes, I certainly do believe that. Do I think that will cause them to go out of business? No, I certainly do not think that. Do I think there's some crappy private credit loans out there that are going to have to get mark down? Yes, I do. Do I think there are enough private credit loans out there that if they all went a little bit bad all at once, we'd have a financial crisis?

8:09Katie Martin: No, I do not.

8:11Rob Armstrong: No, no. And so the oil price, it's worth putting this into context. So last time I looked at my screen, we were about$102 a barrel on Brent, which is the main European benchmark. That's bad, right? So that's up, I think, something like 40 % over the course of this year. That's a steep increase in oil costs, which affect all of us, whether you like it or not. But the oil price was higher, much higher in 2022, when Russia properly invaded Ukraine. Russia, obviously, a big supplier of oil and gas. It was much higher still in the run up to the crisis in 2008, because China got its boots on huge economic boom in China that just led to lots and lots of demand for all sorts of commodities, including oil.

8:57Rob Armstrong: But that wasn't the reason why the system fell over in 2008. So the system is perfectly capable of handling large increases in the oil price. It's just, I guess, that one of the things that I find quite weird is still, and I think we've mentioned this on the show before, like when you talk to people in the oil market,

9:17Katie Martin: they're like, ooh, there's some bad juju going on in the oil market here.

9:22Rob Armstrong: I do not like this one little bit. And you numpties who don't understand the oil market don't know how bad this is. And when you talk to everyone else, they're like, la, la, la, I'm sure it'll be fine.

9:33Katie Martin: Well, what they're saying, I mean, I spent the day yesterday getting some oil people on the phone. And clearly the belief is the closure of the Strait of Hormuz is a thing that gets worse geometrically rather than arithmetically as it goes on in time.

9:54Rob Armstrong: I see. Right.

9:55Katie Martin: Like right now, we're in this moment in time where there's a lot of oil inventory in the world still. But if you take out about a fifth of the world's daily supply, those inventories dwindle pretty quickly. And some weeks or a couple months in the future, suddenly the global well is dry and you have a real problem. But, and here is the big but, that doesn't seem to be the outcome that people expect. Yeah. And let me give you an illustration of this. The price of oil in a year's time, like if you and I want to make a contract for buying oil to be delivered in May of 2027, it's$77.68, which is only about$10 higher than it was when the war started.

10:45Katie Martin: So that price, that future price, isn't pricing in things being awful. It's like giving you a little bit of extra price in there just in case things are awful in a year's time. But basically,$77 in a year says to you the most probable outcome is things are okay by then.

11:06Rob Armstrong: Yes. But what makes it okay?

11:09Katie Martin: I don't know if they will, but that's what that price is telling you.

11:12Rob Armstrong: Yeah. But there is also, there was another investor I was speaking to the other day who was like, look, chances are we do bob along somewhere around this hundred-ish dollars a barrel. But we've got economists in the room who are modelling what would happen if we went to$200 a barrel in a straight line. What would that look like economically? What would that look like for markets? So, you know, they're not saying this is a thing I think is definitely going to happen. They are saying it is worth our while to just think about what would happen in this scenario. And it's not normally. That's normally a waste of time because it's just stupid.

11:45Rob Armstrong: But at the moment, it's not inconceivable that we could get in tomorrow when oil could be at$130,$140.

11:53Katie Martin: Some person who's smarter is going to write in and tell me I'm wrong about this. But my understanding is that the rule of thumb in America is$10 a barrel on crude is a quarter on your gas price. If we go to$100 to$200, that's another$2.50 a gallon at the pump. there is going to be torches and pitchforks. I tell you what, we have$200 oil.

12:18Rob Armstrong: So like that,

12:19Katie Martin: that is a terrible scenario. But again, the market doesn't anticipate it. And look, I think you can sketch out a scenario without dabbling in geopolitics in which both sides declare victory and go home. That happens. The straight opens up slowly. Oil prices start working their way down. and we're back to worrying about AI again by the summertime.

12:41Rob Armstrong: Isn't it amazing how quickly we've all stopped worrying about AI, right? So all of last year, we worried obsessively about AI. You know, is it a bubble, yada, yada? Then at the start of this year, suddenly we started worrying about, oh, maybe it's not a bubble. Maybe it's going to eat all of these software companies. But I was reading a little note from Deutsche Bank earlier. it was pointing out that really what we've seen in markets through the course of this crisis in Iran so far, this conflict in Iran, is not a kind of sell everything, run to the hills, I'm very worried, sort of dynamic in markets.

13:17Rob Armstrong: It's I'm going to trim the stuff that has been, you know, doing well, and I'm going to kind of get a bit more kind of back to neutral. So, for example, some of the most poorly performing stocks at the start of this year were software stocks. Because we were all going through this thing, say AI is going to eat all of these software companies. They've actually recovered pretty nicely because people were like, oh, turns out I don't own very many software stocks anymore. And maybe I should kind of get a little bit more back into balance. So it's a rebalancing exercise. exercise are kind of let's get back to neutral exercise, not let's sell everything and run to the hills, which it does feel a little bit, I don't know, I feel like that's a little bit too sanguine, I think, because you're like a reflexively more optimistic person.

14:07Rob Armstrong: You think that's probably about right.

14:09Katie Martin: I think that's right. Look, risk assets are expensive across the board. You know, I'm not leaping and jumping up and down and saying buy them all, double down, leverage up and everything else. But what I am saying is, and what I think the oil price is telling you and a lot of other prices are telling you is this is a nasty crisis where the central forecast is that it blows over in the near term. If it does not, we are going to see some big price changes. But right now, what is priced in seems about right to me. And that doesn't mean this is not significant. For example, one thing I'm interested in is when we get to the other side of this war, will it have repriced oil in a permanent way?

15:00Rob Armstrong: You know what I mean?

15:01Katie Martin: Like we've suddenly realized, boy, this is a fragile system and we need to buy more insurance and we need to have more redundancies. We need to hold deeper inventories all over the world to make sure it's secure. All of this means kind of increased demand and increased risk premium across the board for oil. Not hugely, but if we were like headed for a 65 a barrel world kind of middle price or, you know, mean price over time, maybe we're in a$75 world now.

15:33Rob Armstrong: Yeah.

15:33Katie Martin: Which means, you know, and this was the kind of the punchline of the newsletter yesterday, which means maybe the day peace breaks out, you ought to buy oil companies because they're going to sell off when everybody breathes a sigh of relief. But maybe they've gotten a long-term secular boost in valuation from this war.

15:51Rob Armstrong: Maybe, or maybe the world decides that we should stop being so reliant on this incredibly volatile part of the world and just do wind and solar properly.

16:00Katie Martin: That could happen too. I mean, the same argument, by the way, would apply to those other sources of energy too, right? And they would probably sell off on peace too. So that would be a good time to buy your wind and solar names, I would think.

16:13Rob Armstrong: So just thinking very briefly about things that can go wrong in addition to everything that's already gone wrong. I don't think this is necessarily a market moving event, but it's still a what the hell event. Your president, Robert Armstrong, your president, Donald Trump seems to be talking seriously about annexing Cuba. Is this a real thing?

16:37Katie Martin: Well, because our history with Cuba is just one good decision by the American government after the next, I can only assume that proud tradition is going to continue. So yeah, America is tired

16:54Rob Armstrong: of all the winning in Cuba over the past.

16:56Katie Martin: Bay of Pigs part two. This time it's personal. Yeah. is uh gonna you know you know i i don't know i don't put any stock in what the president says whatsoever you just watch his actions i think he's got his hands full right now and you know all the rhetoric you just put it aside he has got his hands full because he turned to europe who

17:18Rob Armstrong: he's been busy insulting for the past few years and said oh guys can i have some help opening up the strait of hormuz and everyone said uh let me think about uh no it was a good demonstration

17:29Katie Martin: of what soft power is.

17:32Rob Armstrong: Yeah.

17:32Katie Martin: Right, which is when things get messy, it is politically useful to have friends around the world and it is also an economic stabilizer.

17:42Rob Armstrong: Yeah.

17:43Katie Martin: So I think maybe, have we all learned a lesson here, Klaas?

17:47Rob Armstrong: Yes. Listeners, if you learn nothing else from this, it's be nice. It's nice to be nice. So be nice. And in the meantime, we're going to be back in just one second with Long Short.

18:05Rob Armstrong: Okay, it is time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Rob, what are you saying?

18:13Katie Martin: Katie, I'm going to shock you. I'm short, quarterly reporting. There is a story going around the newspapers today that the SEC is considering a proposal to no longer require American companies to report four times a year. It would be twice a year. And I think that would be fine. I think the problem with information in the stock market is not volume, but quality. And so there is a lot of issues about how companies report and and like what information they should disclose each time they disclose, you know, they release their earnings and so forth. And, you know, sometimes I think there's been a trend to releasing too much information.

18:55Katie Martin: So the important information gets lost in the thousand page annual report or whatever. But I think twice a year is fine and not much information will be lost to the market.

19:07Rob Armstrong: I think I would agree with you if it wasn't for the fact that the general tone in U.S. financial regulation at the moment is, oh, it's fine. Just go do some fraud.

19:18Katie Martin: We can just do things.

19:20Rob Armstrong: Speaking of just doing things, I don't know if you're familiar with this story, Rob, but I am long Mark Andreessen. He's like big, like US tech, venture capital type person.

19:33Katie Martin: Yes, you're long him.

19:34Rob Armstrong: Well, he has given me a right laugh this week. I have been laughing a lot at it. He did a podcast in which he said he does no introspection of any kind. He said you just move forward and go. And I guess that's kind of, you know, this kind of grindcore kind of hustle. hustle mindset but you will enjoy this rob because i believe you have a background in philosophy he said and i quote 400 years ago it would never have occurred to anybody to be introspective he said all the things around introspection were manufactured in the 1910s and 1920s in europe it's all a new construct from from europe and that that europe invented the it's like what was

20:15Katie Martin: What was Immanuel Kant doing back there? You know, like, did anyone tell Augustine about this?

20:21Rob Armstrong: I don't think anyone has informed, for example, Aristotle that nobody.

20:26Katie Martin: Sorry. Introspection was invented in 1910 by Sigmund Freud.

20:33Rob Armstrong: That's literally, I'm not joking. That's what he said.

20:37Katie Martin: Mencius, Confucius, the Buddha. Yeah.

20:39Rob Armstrong: Catholicism.

20:40Katie Martin: They were just grinding and making startups.

20:45Rob Armstrong: No one had ever thought about the self before and therefore we should not think about the self. So I'm glad that made you laugh because that made me laugh as well. That's a good one. So anyway, very funny. Listeners, remember to be nice. It's nice to be nice and we will be back in your ears on Thursday. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Foreheads. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else.

21:27Rob Armstrong: Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

21:45We'll be right back.