Are the markets right or wrong about Iran?

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

War in the Middle East and the blockage of the Strait of War Moose 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 This is Unhedged, the Markets and Finance podcast once again for normal people from the Financial Times and Pushkin.

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 now. That must be getting quite boring by now. 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. 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, last time I questioned for 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.

A lot of people claim to be normal who listen to this show, but Claiming you're normal is a little bit like saying, uh I don't know, you're that you're not a spy or that Yeah. Like how I have a degree in Russian, but I swear I'm not a spaffy. Yeah, exactly. My kids think I am, but I'm 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 gonna say it was pretty euphoric, right? That was a word that that Deutsche Bank was using in a note the other day. Of US interest rates they're 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. I would frame this point, Katie, in terms of just one way to do it anyway. is to frame it in terms of the VIX index. Uh-huh.

In the S P five hundred. Yes. People call it the the fear index. And then finance pointy heads get in touch and say, Oh, actually it's just a measure of expected volatility doesn't matter. It for our purpose. And basically what it does is it reflects how expensive it is to buy options to buy or sell the S P five hundred over the next month. And if you think the volatility is gonna 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 fifteen and it's been like chugging its way up and it peaked. March sixth at twenty nine. Now it's back to twenty two. But it's like been following this volatile path up. Yeah. So there's also, of course, an index called the VVIX, which is an index of how volatile the VIX is. Yeah. And that one's up too. Whether there is also a fear of fear of fear index is is an open question. Somebody's trading it.

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 at the same time, which usefully Bank of America does every month. You do come across this idea that like 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 uh 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.

Biggest jump into cash since March twenty twenty. I remember March twenty twenty, Rob. Do you? It was not great. It was not great. However, I am looking at the cash allocation chart. And welcome to the part of the show we call Charts on the radio. Charts on the radio, people. 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 n 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. Yeah, vibe shift, dude. So also the survey from Bank of America said that um fund managers are still overweight equities. Now that is jargon for we still own lots of stocks.

So if if if you are a normal person and you have ICES or you have like other like s 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 um but so 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. It is quite odd, isn't it? I mean the SP stopped going up basically in October. Yeah. But it's not really going down. Yeah. 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. Mm-hmm. You know, and that that's the kind of weird contradiction we're sort of sorting our way through here. I think it's because there's a lot of things that are like

bad but not awful. So um 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 Ezer from Ribico, which is a big Dutch asset manager. And he said, um Uh in geopolitics this is not the seventies. In AI, this is not the dot com boom. In private credit, this is not two thousand and eight. 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 horrible historical analogies. Yeah, I really agree with what he said there, by the way. You know what I mean? I think uh that 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 gonna have to get marked 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? No, I do not. 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 a hundred and two dollars a barrel on Brent, which is the main European benchmark. That's bad, right? So that's up I think something like forty percent over the course of this year. That's a steep increase in in oil costs which w affect all of us, whether you like it or not. But

The oil price was higher, much higher uh in twenty twenty two, when Russia properly invaded Ukraine. Russia obviously a big supplier of of oil and gas. It was much higher still in the run up to the crisis in two thousand and eight because China had got its boots on. Huge economic boom in in China. That just led to lots and lots of demand for all sorts of commodities, including oil.

But that wasn't the reason why the system fell over in two thousand and eight. So the system is perfectly capable of handling large increases in 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, they're like, ooh, there's some bad juju going on in the oil market here. 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. Well what they're saying I mean I I spent the day yesterday getting some oil people on the phone, and clearly the belief is the Closure of the Strait of Hormuz.

a thing that gets worse geometrically rather than arithmetically as it goes on in time. I see. Right? 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. Like if you you and I want to make a contract for buying oil to be delivered in May of twenty twenty seven. It's$77.68, which is only about ten dollars higher than it was when the war started.

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 seventy seven dollars in a year says to you the most probable outcome is things are okay by then. Yes.

But it makes sense. 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 like economists in the room who are modelling what would happen if we went to two hundred dollars a barrel in a straight line.

what would that look like economically, what would that look like for markets? So yes you know, they're not saying this is a thing I think is definitely gonna happen. They are saying it is worth our while So just think about what would happen in this scenario and it's not normally that's normally a waste of time'cause it's just stupid. But at the moment it's not inconceivable that we could get in tomorrow when oil could be at one hundred and thirty, hundred and forty dollars.

S some person who's smarter is gonna write in and tell me r I'm wrong about this, but my understanding is that the rule of thumb in America is ten dollars a barrel on crude is a quarter on your gas price. If we go to a hundred to two hundred, that's another two dollars fifty a gallon at the pump. There is gonna be torches and pitchforks, I tell you what. Yes if we have two hundred dollar oil. So Yeah. So like that 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 strait opens up slowly. Oil prices start working their way down and we're back to worrying about AI again by the summertime. Isn't it amazing how quickly we've all stopped worrying about AI, right? So all of last year

We worried obsessively about AR, 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 Um I was uh reading a little note from 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. It I'm going to trim the stuff that has been, you know, doing well and I'm gonna kind of get a bit more kind of back to neutral. So For example, some of the like most poorly performing stocks at the start of this year were software stocks.

Because we were going through this thing saying AI is going to eat all of these software companies. they've actually recovered pretty nicely because people were like, oh, turns out I'm like 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, a 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, you think it that's probably about right. 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 I I I you know 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 gonna see some big price changes. But right now, what is priced in seems about right to me. And uh but 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?

You know what I mean? 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 sixty five a barrel world kind of middle price.

or m you know, mean price over time, maybe we're in a seventy five dollar world now. Yeah. 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 oughta bought by oil companies,'cause they're gonna sell off when everybody breathes a sigh of relief. But maybe they've gotten a long term secular boost in valuation.

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. That could happen too. I mean th the same argument by the way would apply to those other sources of energy too. Mm. 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. Um so just thinking very briefly about things that can go wrong in addition to everything that's already gone wrong. Um 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?

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 uh Yeah, um America's tired of all the winning in Cuba over the past. This time it's personal. Yeah. Is uh gonna you know, the movie we're gonna you know, I 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 all the rhetoric you just put it aside. He has got his hands full because he he turned to Europe who he's been busy insulting for the past few years and said, Oh Guys, can I have some help opening up the Strait of Hour Moose? And everyone said, Uh, let me think about uh no. It was a good demonstration of what soft power is. Yeah. Right, which is when things get messy.

It is politically useful to have friends around the world and it is also an economic stabilizer. Yep. So I think h maybe uh have we all learned a lesson here, class? Yes. Lesson as if you learn nothing. Be nice. It's nice to be nice. So be nice and in the meantime we're gonna be back in just one second with

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 you saying? KD, I'm gonna 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 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's a lot of issues about how companies report and and like what information they should disclose each time they discl 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, 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.

I think I would agree with you if it wasn't for the fact that the general tone in US financial regulation at the moment is, Oh, it's fine, just go and do some fraud. We can just do things. Speaking of just doing things. I I don't know if you're familiar with the story, uh Rob, but I am long Mark Andreessen. He's like big like US tech venture capital type person. Yes, you're longing him, that's the one. 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 grind core 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, four hundred years ago it would never have occurred to anybody to be introspective. He said all the things around introspection were manufactured in the nineteen tens and nineteen twenties in Europe.

It's all a new construct from from Europe and that that Europe invented the What was Immanuel Kant doing back there? You know? Like did it did anyone tell Augustine about this? I don't think anyone has informed for example Aristotle that nobody Sorry or Introspection was invented in nineteen ten in New By uh by Sigmund Freud. That's literally I'm not joking, that's what he said. So Mencius, Confucius, the Buddha. Yeah. Catholicism. They were just they were just grinding and making startups.

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,'cause that made me laugh as well. That's uh 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 Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Tokyo.

From TOFA 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. Just go to FT.com slash unhedged offer. I'm Katie Martin. Thanks for listening.