Chapter 1: How is the Iran war affecting global markets?
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Odoo replaces multiple expensive platforms for a fraction of the cost. That's why over thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. Today's number, 10. That is the percentage of US-imposed regime changes that have ever led to a successful and lasting democracy.
The other 90% have actually made things worse, resulting in harsher governance and in many cases, civil war. But I'm sure that this time will be different. Welcome to Profty Markets. I'm Ed Elson. It is March 4th. Let's check in on yesterday's market vitals. The major indices all dropped in early trading as much as 2.5% before pairing losses. Still, they ended the day firmly in the red.
Meanwhile, treasury yields spiked again, and the price of oil rose as much as 9% before pulling back on those gains. Okay, what's happening? As war with Iran escalates, so do investors' anxieties. The major indices sold off yesterday morning as the U.S. warned that its strikes on Iran will continue to ramp up in force.
Brent crude, the international benchmark, briefly hit $85 a barrel for the first time since 2024. Then President Trump said the U.S. will escort and provide insurance for oil tankers moving through the Strait of Hormuz. The indices recovered some of their losses on that news and crude retreated from its highs. Still, oil prices are up 13% over the past week.
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Chapter 2: What are the implications of rising oil prices on inflation?
And so we're going to do something different today. Instead of going to one guest, we are going to go to three guests. We've got our panel of experts here today. We're speaking with Mark Zandi, Chief Economist at Moody's Analytics, who you know. Robert Armstrong, US Financial Commentator for the Financial Times. And Matthew Martin, Semaphores Saudi Arabia Bureau Chief.
Mark, Rob, Matthew, thank you very much for joining me on the show. Rob, I'm going to start with you. We've seen some interesting reactions here from the markets. Specifically, it seemed that people weren't that worried on Monday, and then on Tuesday, maybe more worried because suddenly stocks sold off. What do you make of how the markets have reacted so far?
It seemed pretty clear on Monday morning. that the market was pricing in a short, tidy little war, something on the style of Venezuela, a regime change light, where you strike or kidnap or whatever, and it all ends fairly briskly.
I think the market is still pricing in some of that, but as Iranian resistance has proved a bit more resilient than expected, that has to show up in things like crude prices and by extension inflation expectations. That in turn means that stock prices are creeping down again. Nothing like the worst case scenario is being priced in right now, Ed.
But a slightly worse best case scenario is what I would say is priced in now. Matthew, you are the only one of us who's actually in or around the region right now. What are you seeing in the Gulf? And does Rob's view of what investors are pricing in make sense to you? Yeah, look, I think it does. I mean, I've been, look, I'm based in Riyadh today. I've been out and about in the city.
You know, generally people are still going about business. You know, went out to dinner with some people this evening. You know, obviously the war is a topic of conversation, but it's not like, it's not the only topic of conversation. People are still continuing to talk about other things.
And I think that is kind of reflective in what you're seeing in markets and that, you know, it is a factor, but it's not the number one thing that people are thinking about. And so, you know, I think, and also, you know, within the region, I think people are taking this very, very differently as well.
I mean, if you look in Dubai, you know, there are some people who have been in buildings which have been struck by Iranian drones, who never expected that they would live through something like that and are panicking about it and are wanting to leave. And depending on, you know, you could live in other parts of the city and have no idea of what's going on and be pretty isolated from it as well.
So, you know, I think that sort of goes into this kind of psychology of how people are responding to it. You know, some people are thinking this is going to be really significant. This is going to be dramatic and long lasting. And some people are kind of taking a much more sanguine view of it.
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Chapter 3: How are investors reacting to the geopolitical tensions?
That's stagflationary. And that's kind of the pain point to watch, I think. I don't have any predictions. I don't know anything about wars. I don't have any predictions for what's going to happen. But that's the thing that kind of worries you about this particular flavor of conflict.
Yeah, Mark, there are pretty significant implications, it seems, for consumers here, and that is we put oil in our cars, and most of the oil is coming out of this region. What actually is the relationship between what is happening in Iran right now and how that would impact our lives and prices at home? Well, I'll give you some rules of thumb. So if oil prices are up, stay up $10 a barrel.
So on WTI Westex Intermediate, which is the key price in the U.S., was $65 a barrel before all this. Now we're $75 a barrel. I'm rounding, obviously, but say it's $10. That would, if it's sustained for two, three, four weeks, will sustain an increase in the cost of regular unleaded by about $0.25. So right now, the U.S. consumer nationwide is paying about $3 for a gallon of regular unleaded.
It'd be $3.25. You know, that's manageable, but a bit uncomfortable, particularly in the context of all the affordability concerns that Americans are facing right now. Everything else is up in price. The only thing that wasn't was the cost of a gallon of regular unleaded. And now it's also headed up.
And of course, if it's going from $3 to $3.25, the next question is, well, is it going to go to $3.50, $3.75? And then that's real money. So, yeah. you know, it's moving in the wrong direction. It's going to make already very anxious Americans even more anxious.
And in this case, the other pernicious aspect of it is, you know, a higher gas price doesn't matter at all for a high income, high net worth household. They don't really, you know, it doesn't matter if they're paying a quarter more for a gallon of regular unleaded, but it means a lot for lower middle income Americans. I mean, that's real money. And if you add it up over a year, it's,
200, 300 bucks in addition, you know, 20 bucks a month. And that's pretty tough for people that are in that kind of situation. So there's a lot of aspects of this and from the prism of the American consumer that make it, you know, more uncomfortable than it typically would be just because of where we are on this affordability issue. Stay tuned for more of this panel right after the break.
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Chapter 4: What is the current sentiment among consumers regarding rising prices?
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You know, having good feed, good water, a nice light area, that's what's important to us and that's what's important to Stonyfield. Visit stonyfield.com to find Stonyfield Organic Yogurt near you. We're back with our panel. Matthew, when I look at the international markets, Korea's market down, Germany's DAX is also down, FTSE in the UK on track for its worst day in almost a year.
What is kind of interesting here is that it seems that the concerns are more exacerbated outside of the U.S., perhaps because of proximity to the region, perhaps because of what that will do to energy. I mean, why is that? How do we account for the difference here?
Well, I think probably a big part of that is going to be the impact of gas prices in particular, because, you know, we've seen the attacks on the Qatar energy facilities and the shutdowns that they've had. I mean, that's led to huge increases in the gas price, which is Obviously, that's a big part of the feedstock that's going into Europe and that's going into Asia as well.
And Qatar has become a huge producer of gas. So that's going to feed immediately into a big inflation problem for a lot of those economies. So I think that's really what is at the root of the way that those markets are digesting this. Yeah. The difference between Henry Hub gas here in the United States and European natural gas is striking.
You know, our natural gas is up 6%, 7% or something like that. Mark may know better than me. European gas is up like 40%. And especially Germany is an extremely gas sensitive economy. So... You know, the other thing, Ed, is that the U.S. produces a lot of oil, right? I mean, at the end of the day, the U.S. produces as much oil as it consumes.
So consumers get nailed, but, you know, producers benefit, not immediately, but over time if prices remain high and persist. But in many of those other countries, they're full-on consumers. They don't produce any energy. So there's nothing but negative here. So you have these differentials across the globe because of the fact that the U.S. is now the largest oil producer on the planet. Right.
Which brings up questions of how insulated from all of this actually are we? And perhaps we are quite insulated, but it's kind of an interesting dynamic because it was us who launched the attack in the first place. So does that essentially mean that we can kind of do what we want? over there in Iran, and we aren't particularly affected. I mean, let's look at liquid natural gas, for example.
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Chapter 5: What are the potential tail risks associated with the conflict in Iran?
But I view that to be more second, third order as opposed to the initial things that we should be worried about. I don't think we have enough export infrastructure to really make hay off Europe's price problems. We'd like to have more export terminals and so forth. We just don't have them. I mean, I think the point of connection to U.S. markets for U.S.
investors and how we feel it is going to be the Federal Reserve. Right. So last week we got two unpleasant reports. inflation prints in the form of producer prices, prices paid was high. And then we had the ISM manufacturing report and their prices paid reading was bad.
And so already you can sort of see the Federal Open Market Committee thinking, geez, maybe these cutting rates might now not be so smart. And then you get another inflationary element into the picture, which is gas prices going up, which feed into food prices and have a big effect on sentiment, inflation expectations, maybe those rate cuts come off the table.
And it's a horrible thing when there is something as serious and mortal Right. Right. You know, the other thing, Ed, the way to think about it is, you know, the U.S. economy has been hit by three negative supply shocks in the last year, first being the tariffs, right? That's inflationary and weakens growth.
Then it's the immigration policy, heavy-handed immigration policy that raises costs and reduces growth. And now you've got these higher oil prices. So the U.S. economy has been pretty resilient, you know, kind of managing through those other shocks. But you've got to ask yourself the question, Ed, At what point does this all kind of feed on itself and become too difficult to digest?
That's exactly my question. And I think the thing that is striking is when I look at having spoken with people who work in energy or who consult in energy, and having spoken with investors, there seems to be this assumption that this is... not that big of a deal.
And maybe that's right, but it seems in this discussion that there are so many larger implications here that could be actually quite rattling. There's also the question of, like, is the situation in Iran even resolved?
And it seems to me there is almost no clarity on that question, in which case it seems that there is actually pretty enormous tail risk here to the downside that is not quite being reflected in markets right now. I mean, look at the price of oil, which has gone up. but it hasn't gone up that much. People were saying it was probably going to hit $100 a barrel.
That isn't really happening, which tells me that investors say, you know, this is contained. This is only going to happen in a small region. It's not going to affect us much, and it's not going to affect other nations that much. I'll take their word for it, but I'm just a little bit skeptical of it. Perhaps, Matthew, you could provide some clarity on this question for me.
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Chapter 6: How does the situation in the Gulf impact international markets?
Others would say, no, we've taken action. It was conclusive action and the world is more certain. in Saudi Arabia right now, in the Gulf, what would you say the consensus is on that question? I think that the next couple of weeks is going to be very, very uncertain. Last week, the big question was, is the US going to invade? Is this going to launch a strike? Okay, we know that that has happened.
But it doesn't seem clear that there is a very political strategy about how this conflict unfolds. proceeds from now. It doesn't seem very clear from the Gulf states about how involved they're going to become in it. It's obviously very unclear how the Iranian regime is going to respond.
I mean, I think the forcefulness of their response is one of the things that has caught everybody by surprise, and the fact that you have seen these attacks on Gulf states as well. So, I think that uncertainty, people should be pricing a much higher degree of uncertainty now than they were. I like the way you framed it in terms of the uncertainty.
I think, though, what's happening is that investors are still kind of in the middle of the distribution of possible outcomes. And that's still – even though the distribution of possible outcomes is pretty flat, you've got fat tails, they're still in the middle because we're only a couple days into this.
But if it goes on for another week or two or certainly three or four, then you jump to the tail. And then you get the kind of scenarios you're talking about. Then you see the big consistent declines in prices across all asset markets. And Rob made a really interesting point. Prices are down for everything. Stocks are down. Bonds are down. Gold is down. Crypto is down.
It's all got to be going into cash, right? So that is an indication that people are nervous about what's going on. But they haven't jumped yet. But we will jump if this goes on for any length of time. The market was fragile going in, right? Because of the AI stuff. The market was expensive and jumpy on the way in.
I think one thing that is something to watch that several of my colleagues who work on the oil side and analysts who work on the oil side have talked to me about is the crucial question of damage to infrastructure in the Gulf. We all like to talk about the choke point that is the Strait of Hormuz because It proves we can look at a map.
But, you know, you can close the Strait of Hormuz, you can open it, right? It doesn't disappear. But if refineries, ports, water desalinization plants that provide Matthew with his drinking water, if Iran can really damage these bits of infrastructure, that is lasting damage, not something that can be turned around in a week.
And so I think the fact that that hasn't happened yet, there's been a hit on a Saudi refinery, but I think it was a contained hit. Matthew will be able to correct me on that. But that is something that would change the game. A devastating hit on infrastructure in the Gulf region would change the scenario and make things look much uglier, more frightening, more uncertain.
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Chapter 7: What strategies can investors consider in times of uncertainty?
Uh, I think people are going into cash. I mean, the dollar is it's up a little bit, but I wouldn't say, you know, it's still down quite a bit from where it was a year ago. I don't think it's the safe haven that it was. You know, I don't think there's there's anywhere to hide. And, you know, one of the reasons to be more nervous in the current about all of this in the current context is.
is the valuations are high across all asset classes. I mean, there's been some correction in crypto, but, you know, still, Bitcoin's what? $68,000 a coin. You know, so gold is, as Rob pointed out, it's, you know, it's still very high. Silver is still very high. Corporate bond spreads are still very paper thin. Equity prices or valuations are, you know, extraordinary. So,
you know, again, that raises the potential that you get out onto those fat tails, that you jump from the baseline to kind of in the middle of the distribution, everything's okay, to it's, well, it's not okay, and there's nowhere to hide because the valuations are so high, and it all goes into cash. It just all goes into cash. It's not a great setup. No, it's not a great setup. All right.
Mark Zandi, Robert Armstrong, Matthew Martin, gentlemen, really appreciate your time. Thank you. Pleasure. Thank you. Thank you. Okay, that is it for today. We appreciate you joining us for another Profiteer Markets panel.
If you have a guest you think we should speak to on this topic or any other, please drop us a line in the comments or email our producer, Claire, at markets at profiteermedia.com. We hope to hear from you. This episode was produced by Claire Miller and Alison Weiss, edited by Joel Patterson, and engineered by Benjamin Spencer. Our video editor is Brad Williams.
Our research team is Dan Shalon, Isabella Kinsel, Kristen O'Donoghue, and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profiteer Markets from Profiteer Media. If you like what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow. Support for this show comes from Odoo.
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