Iran, oil, and politics: What investors should know

KARI: So, over the last couple of days, attention has turned to Iran and the Middle East region as the U.S. has executed strikes across Iran in concert with Israel. This really didn't come as a surprise. There had been a buildup in the region and we'd known about this for the past couple of months, but maybe the timing surprised folks a little bit as we had been in diplomatic talks with Iran all the way up until the weekend when the strikes began. So, Jack, what are your views? Did this come as a surprise to markets or was this being anticipated?

JACK: Yeah, I think it's a little bit of a surprise on the timing, right? I think there was some talks that Rubio was going to be heading over to Israel. And then you've also had the  Xi-Trump Summit that's coming up. So, I think people were expecting at least this to sort of maybe wait until maybe April. But certainly, when you get this sort of size of buildup that we've seen, especially within the U.S. Navy, I think the markets were certainly anticipating something was coming. It was just a question of timing. So, from a timing perspective, I think that's what caught people off guard. But certainly, if you look at what’s been going on, for example, in the oil markets, oil had been sort of drifting higher, volatility implied probability of volatility moving higher. All these things I think were slowly being discounted with the idea that something was probably going to be happening.

KARI:  Do you think that there was a lead up to this in oil markets and how have we seen oil markets respond in the wake of the strikes?

JACK: Yes, not surprising, right? We've seen the oil continue to grind higher in here. And, you know, obviously that's going to be one of the key elements that I think Iran focuses on. It's a key choke point, not just here for the U.S., but for the global economy. And so, if oil prices continue to persistently rise and actually stay at these elevated levels for quite some time, you probably see a lot of diplomatic pressure from a lot of neighboring states and countries to have the U.S. sort of put a quick end to this. So, you know, the elephant in the room here is going to be the duration and how high the oil prices go and stay.

KARI: Yeah, when I think about where our worlds collide, I think about the politics of this. Affordability has been on Americans' minds. And just overnight, oil prices, gas prices at the pump are really, really going up. And that's going to put a little pressure on politicians here in Washington as they think about this issue.

KARI: I'm wondering beyond just oil markets, what are we seeing across equities? How are we looking at the US dollar in response to this?  Is this sort of a short-term phenomenon or longer term?

JACK: I think this is actually a pretty interesting point because just looking at the dollar, we've heard quite a bit of talk over the last couple of quarters about, you know, has the dollar lost its global reserve currency status? Is it still considered a safe-haven currency? And I think if you just look at what the dollar has done over the last two or three days, you know, the dollar has significantly outperformed basically all the global currencies. Now, part of that could be due to the terms of trade shock, right? So those countries that are going to be net importers of oil, those currencies are going to adjust a little bit quicker and a little bit more aggressive than those that are going to be exporters.

But at the end of the day here, you're looking at the dollar basically outperforming basically all the major currencies. So, I think we can kind of put the issue that the dollar may be losing its sort of key status in the global reserve system here. We can kind of put that to the back pages, I think, because we're seeing obviously the dollar outperform. But I think there's a couple of other things that are worth noting here.

This is all happening at a time when I think the market had gotten a little bit ahead of itself. And so, when you get volatility spiking, it forces the market to actually end up deleveraging. And given how crowded positioning has been and how long some of these trades have been, so things like long semiconductor, short software, long Korea markets, for example, the list goes on and on here. A lot of investors have piled into these same trades. And so when you get this volatility spike, it forces a lot of these value-at-risk models to sort of set off these red flags forcing these guys to basically de-risk and so you get this massive  deleveraging trade that starts to work its way through the market and so put all these things together and you're getting some significant outsized moves.

So again, you'll look at what the KOSPI did overnight, you know down north of 10 %. Okay, this is just a function of  deleveraging, so all this is happening at a time when the market was sort of a little bit over its skis, if you will, a little bit extended, a lot of people piling in the same trades and we're seeing some of that froth come out of the market here and that's why you're getting some of these outsized moves.

KARI: From a political perspective, the administration has stated a few goals, right? So, to destroy the missile program, prevent Iran from getting a nuclear weapon, see the removal of the supreme leader, potentially regime change. So, the administration could pretty much at any point say that they've accomplished some of those goals and end the conflict. So, in your view, do you think this is a short-term phenomenon or are we talking about this in the second half of 2026?

JACK: I think you touched on a few things. I mean the affordability issue is certainly going to be front and center as we head towards the midterms, right? And so if we get a sustained elevated oil price, that's certainly going to seep into gas prices, which at the pump, that's certainly going to bother voters. And then, obviously, I think at the wider lens, you're going to start to see these higher energy prices seep into the broader consumption basket. So, you know, again, the longer this plays out, the probability of the issue affordability is going to start to become a thing greater and greater. And I'm sure the Democrats will seize upon this going forward.

So, this is going to be a bigger issue. We are seeing signs from the administration, though, as to potentially trying to deal with that in the near term. We've already had OPEC announce, come April, the potential for increased supply. There's some talk of having the US Navy potentially escort some of these transports coming through the Gulf, or the straits of Hormuz, in terms of being able to free up the supply again of, or at least the logistics for oil and energy coming through that area.

So, you know, they're working on a few measures. It'll be interesting to see if these actually play themselves out. But, you know, as you well know, that inflation backdrop and the affordability issue is going to be coming front and center. And that's going to be a key, I think, motive here for this to wrap up quicker than I think people might expect.

KARI: And when you put this in historical context, Americans in the 21st century have become a little war weary. But even going back a little bit further, people think about the stagflation that we saw in the 1970s. Is this something that you think is going to be an issue here or are we sort of in a different environment totally?

JACK: Yeah, as we like to say, that, you know, the energy intensity in the United States has certainly shifted a lot. So, this these oil price spikes are certainly going to be a little bit different than your mother and father's oil price spikes that they went through. You oil intensity or energy intensity is simply just the amount of output that we have per unit of input of energy. And that's consistently continued to move lower every year. And we're at some of the lowest that we've had in history. So from that perspective, we're doing a lot more with a lot less. But a couple of things I think that are worth highlighting are, one, when you go back and look at these recessions that have occurred in history that have resulted from energy price spikes,  typically we've seen a doubling over the year on year price of oil. We're not even close to seeing that. So, from a historical perspective, you probably need to see oil pushing up close to $120, $140 a barrel. So, a long way to go between now and then. And so I think that's one of the bigger issues to sort of think about going forward here in terms of just how different and how much the same is it today relative to where we've been in history.

Maybe one other thing that's worth highlighting here is the oil markets are in contango. So what does that mean? If you look at the futures market curve, the near contracts are trading a lot higher than the far contracts. And so what that's telling us is that the market is expecting oil prices to actually come down over the next two, three, four months. So you get that sort of contango, sort of inverted futures curve with regard to the oil markets. That's what futures traders are telling us with regard to the spot oil going forward as well.

KARI: I just want to end on my final point politically and get your final point from a markets perspective.

KARI: Politically, there are obviously a lot of human costs to any conflict, and voters will be thinking about those costs if this persists. So the real question here politically is how long this lasts, what's the actual cost to Americans, but also to civilians across the region. And it's really hard to predict that. We don't know how this is going to end, and we don't know what this will mean in November.  So what's your final word on the market impact here and what should people be taking away from this?

JACK: You know, maybe a couple of things that are worth highlighting and back to sort of the concerns over inflation and the potential for what the Fed might do. You know, if you think about it with regard to when oil prices start to rise, gasoline starts to, gasoline prices start to pick up, you that's going to act as a tax on the consumer. So you're going to see consumption start to slow. And so you're going to have this potential stagflationary backdrop, so to speak, where you have growth slowing, but inflation ticking higher.

So from an inflationary perspective and really putting that back to what the Fed might do, I think you're at a probability where growth is going to trump the inflation backdrop. And, as a result, the Fed actually stays on hold in the interim unless this sort of plays out. But the bigger picture, the bigger risk here again goes back to the elevated oil prices. And I think the one risk here going forward is really contingent upon what Iran does. And if Iran continues to strike infrastructure across the Middle East, those are damaging the potential longer-term.

The bigger risk is that Iran continues to sort of widen out its attacks and you actually start to see some significant damage to the oil infrastructure in some of those neighboring countries. So, aside from that, if we are able to wrap this up it should be a short-term phenomenon and, probably nothing that I'd be looking to sort of overhaul a complete portfolio with. It's more of just kind of wait and see and wait this out. And if anything, it presents an opportunity, you're going forward longer term.