Tick Tock

Oil wells do not operate like water spigots; damaged infrastructure does not get repaired overnight. It still takes weeks for tankers to reach their destinations once the Strait is eventually opened. With each passing day, the ability of the U.S. economy to remain relatively unaffected is degraded. Tick tock.

The ceasefire had barely begun when the fragile nature of the agreement became apparent. There is still fighting in Lebanon. The Strait of Hormuz remains effectively closed. The ceasefire is a welcome event, but it fundamentally solves nothing; the demands from each side make it clear that there is a wide chasm that must be filled in negotiations.

From the beginning, the consensus has been that the key to minimizing economic blowback in the U.S. is a quick end to the war—that is, a short interruption in global energy markets. It has now been six weeks since the start of the Iran War. While the destruction of critical energy infrastructure has ceased for now, the economic clock keeps ticking. Traffic through the Strait remains down some 90%, continuing to pressure the global economy—particularly in Asia, which is most dependent on Gulf oil. The U.S., as the largest global energy producer, is more insulated; however, make no mistake: if the Strait remains effectively closed, the economic repercussions will extend to the U.S. too, albeit with a delay.

We have a ceasefire, but the U.S. economy — and indeed, the global economy — is not out of the woods yet. This must progress to a real resolution in fairly short order.

Talks are scheduled to begin today (April 11). With the reaction rally over, we look for the stock market to be range-bound as long as talks continue. However, the risk this weekend is the reverse of last weekend: markets hoping for a negotiated resolution, only to be disappointed on Monday.

The Role of Central Banks

Central banks around the world have the unenviable task of promoting growth while inhibiting inflation. The question for central banks is: If we have inflation AND slow growth, which issue should be addressed first? React to inflation, and growth slows further. React to growth, and risk higher inflation. In the U.S., we believe the Fed fears weak growth more than it fears high inflation, because reigniting growth is a tougher road than reducing inflation. The path of least resistance is to address growth issues first and worry about inflation later.

The longer this is dragged out, the greater the growth concerns will become. In that scenario, we would expect interest rates to come down. Sticky, if not higher, inflation would be a necessary consequence of that action.

Although inflation is generally not good for equity valuations, once that adjustment is made, stocks are among the better investment options in an inflationary environment because revenue and earnings are impacted by inflation as well. Commodities would also generally perform better in an inflationary period; however, the erosive power of inflation on the value of money would generally make bonds a relatively poor choice in this environment.

We close with a repeat of our closing comment last week: Which way this is headed seems to change by the hour. Don’t get caught up in the headlines, and remain a believer in the fundamental resilience of the U.S. economy.Have a great week!

 

What We’re Reading

 

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All information has been obtained from sources believed to be dependable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that no such statements are guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

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By: Adam