Modern times have certainly got more interesting.
Robert F. Kennedy famously attributed the “thick face, black heart” saying of “may you live in interesting times” to the Chinese curse of wishing trouble and turmoil, instead of peace and tranquility, in the lives of those hoped to find such times.
The actual Chinese connection is rather dubious (though deliciously ironic), and the actual etymology is hopelessly murky. Perhaps the expression comes from the Persians, whose descendants incandescently rule Iran in the present age.
The Iranians have without question ratchetted up the interest gauge over the past few months. Beyond, at last count, probably brazenly attacking at least a half-dozen oil tankers and threatening to shut down Hormuz Strait chokepoint near its shores – through which over a third of world oil supply must pass to get to market – it has also stated it will resume the production of nuclear weapons-grade uranium in a matter of days if its economic sanctions relief demands are not met.
As if things were not already interesting enough, without the protracted trade war slowing world commerce and glaciating China, a feared-flagging US economy prompting speculation of the Fed’s not only not raising rates but actual cutting them, and the prospect of a truly dazzling spectacle of a US Presidential race as the Blue and the Red line rank up for what may be the fight of the Century.
Whither now, bull market, onto this field of danger and uncertainty?
Not only have times got suddenly scary, but many pundits have branded this bull market record-aged beef, soon to stumble into the BBQ pit. No less than the Wall Street Journal’s Jason Zweig has recently declared “This bull market for U.S. stocks is by far the longest on record, and only a lunatic would think it can last indefinitely,” the implication being, of course, that stocks have been going too high, too long, and are bound for a “must go down” fall.
Without question stocks – especially US stocks – have been on a tear since the big Great Recession bottom in March of 2009. The over 325% rise since then seems meteoric, and – inevitably smoothed by the hardwired cognitive functioning of the human mind – can seem to have been a pretty much straight ride up.
Of course – just run an S&P or DJIA graph – the reality has been everything but smooth.
There’ve been bumps aplenty, and while none may have technically met the academics’ and journalists’ arbitrary definitions of what a bear market must be, there have been jarring drops and crashes that unquestionably meet the emotional definitions of corrections and bear markets, if not the textbook ones.
Just check your shins, and look for scars.
Of note, those textbooks are not active market participants, just us emotion-crazed human players. For me, the late-2018 Christmas Crash certainly qualifies as a bone fide bear market.
While on a closing basis the S&P 500 “only” dropped 19.8% instead of the official bear market “required” 20%, the three-months-long plunge sure scared the bejesus out of enough investors to change their thinking and rewire their expectations.
We are very arguably – if not certainly – in the beginning stages of a brand new bull market. The old bull’s jerky, a hide hanging on the barn door, and the new one has plenty room to stampede.
But will Iran skewer this frisky new critter?
Aside from the perfectly reasonable fear that a raging (and possibly radioactive) regional conflict with a rabid and likely already nuclear-armed foe should inspire, the economic risks – unlike those engendered by the tanking Chinese economy – are fairly limited to oil price effects.
Not to discount the damage an intense war in the tightly-would Middle East that could ensnare arch enemies Iran (and satellites like Syria and Lebanon) on one side, and major non-US players like Israel and Saudi Arabia on the other.
Such a flashpoint could engender untold and unholy consequences that might poison human culture for decades, or longer.
The economic consequences are a bit easier to handicap, and to swallow. While torrents of oil flow through the Hormuz chokepoint – principally from the Saudis, as well as from the UAE, Kuwait, and Iraq (ignoring of course Iran’s own sanctioned production), all of this gush does not equal the combined production of even the world’s two biggest producers, the US (now #1!) and Russia, both of whom would surely benefit from the price spiking a choked Hormuz spigot would entail. Other non-Persian Gulf major producers – and there are at least 17 in the million-barrels-a-day major league – would surely stand to benefit.
My brother Michael Camarda (Yale man, poor devil!) is a professional journalist specializing in the global petroleum trade. When asked about his view on the impact a Hormuz closure might have on oil pricing, he said “a closure of the strait by Iran is highly unlikely, given that it would not only hurt Iran’s own exports, but bring the entire world down against it, as it’s an internationally recognized shipping lane. Even Moscow, who is ostensibly a partner with Iran and would benefit from a price surge, would likely vote against Iran in the UN, if such an event were to occur. But if hostilities were to break out, the oil price would likely rise, perhaps even approaching three-figures and may linger there for sometime as clearing the strait for shipping could take some time.”
While higher oil price pressure could surely spur increased costs across the world economies, and spark at least some asymmetric inflation, this observer believes the impact would be absorbable and relatively benign. For one thing, a trade-war shackled world economic slowdown has depressed demand for oil so much so that OPEC-dominated Saudi Arabia – even in the wake of the tanker attacks – is calling for reduced production to shore up prices. Not all are warm to the call, which will likely signal plenty of supply elasticity ahead. For another elastic thing, world petro supply has never seemed bigger. What with the fracking revolution and the untold riches beneath and around the Northwest Passage, it’s a good bet that supply can rise to meet the shackled demand.
Absent a radioactive war in the Mideast – which would ultimately mark the end of the post-Carter Ayatollahs and a new age for the new Persian empire – the economic and financial effects of an Iranian conflict are likely to be muted.
Mr. Market seems to agree. On the same day the US President “threatens war with Iran if it tries to get nukes” the SP 500 flirted with and nearly closed at a record all-time high.
What say the tea leaves about the prospects for our frisky young bull? Clear uncertainly and volatility ahead. As has long been said, “a bull market climbs a wall of worry.” There is much to worry about in the world, and the new bull will without doubt be taken down a peg or two in the near term.
Long term, prospects seem bright. A deal with China – the real cloud over the market – is a virtual inevitability. It simply costs China and the US – in terms of prosperity and the political realities of both respective leaders – too much to not get done, and get done soon.
Probably in response to the protracted trade war, but intoxicating nonetheless, central banks the world over – not excluding King Fed – seem inclined to ease policy and reduce rates. This should be a tailwind on an already afterburner-poised young bull market.
While we expect some buffeting and summer-doldrums soft spots, we remain convinced 2019 could be a very good year for those that steer their ships wisely. For a whitepaper by this author on market dangers that could scuttle your investment ship, click here.