00:00You got to wonder if Korea is in fact a warning signal to the rest of the world that perhaps
00:05investors are underpricing the risk from Iran. I think at the very least Korea's moves are at
00:15least somewhat indicative of the equity markets finally starting to take this risk seriously. I
00:20agree with you. For the first day, day and a half, markets have been completely underpricing this
00:25risk. But, you know, the move in Korea, you also have to keep in perspective, the KOSPI went
00:31parabolic. I mean, it went from 5,000 to 6,000 in basically a month, right? So we were overdue
00:37for a bit of a correction. And I think a lot of things have come together, the surging dollar,
00:41the fact that Korea depends a lot on the Straits of Hormuz for natural gas, for oil, you know, and
00:47that's being shut off and just sentiment turning. So yes, it is a warning signal in terms of direction.
00:54I wouldn't go so far as to say that that scale will be repeated. Tomorrow morning when we walk
00:59in, bar any other big developments, the S&P is not going to be down 4%. It'll be down, but
01:05probably a
01:05percent or so. You talk about the parabolic increase for Korea, for the KOSPI, but we're seeing huge
01:13losses too for other benchmarks. I mean, we're looking at the SET currently down more than 6%.
01:19The MSCI-HPEC index is already lower by 4%. I mean, there seems to be perhaps, you know,
01:26a path to panic. Do you disagree?
01:30No, I think it's not so much panic as, number one, starting to price in the risk that this war
01:37is not going to be over soon, unlike June 2025 or April 2024 or October 2024. In each case,
01:44you remember, we were done in three to four days. There was no escalation. Markets are now starting
01:48to wake up to the fact that this one might, might be pretty darn different. We might still be here
01:54two weeks from now, three weeks from now. That's number one. Number two, markets are differentiating.
02:00The Straits of Hormuz are key here. And the fact of the matter has, is that the United States does
02:06not
02:06depend on its oil needs from the Middle East anymore. Not very much. You know, the Straits
02:12of Hormuz are far more important for Europe, but most importantly, for the big Asian economies,
02:18for China, for India, for South Korea, for Japan. And those are the markets that are giving it up
02:23correctly, I think.
02:26So, are you then saying that the US market is going to be pretty resilient? Remember,
02:32we're seeing an upsets in oil prices. And it is an economy that's pretty reliant on oil as well. I
02:39mean, we've heard Trump say again and again, he wants cheap oil.
02:44Right. But as a system as a whole, the United States is now a gigantic energy superpower of its own.
02:52There's no question. The consumer gets hurt and consumption is the lifeblood of the US economy.
02:56But on the other hand, oil majors get a lot more money. They issue more dividends. That money starts
03:01to circulate back. Last year, the United States pumped 30% more oil than the Saudis. It's easy
03:09to forget. We are the world's largest consumer of oil. But we are at this point, near net neutral
03:14when it comes to our needs. And natural gas, we have that coming out of it. I don't want to
03:20sound
03:20too optimistic. Not at all. I do agree with you. Markets have underpriced, including the US equity
03:26markets. My only point is that the differentiation that markets are doing now, where they are hurting
03:32Asian equities the most, followed by European equities, followed by the US, that makes sense
03:39to me. I do think the direction is down everywhere for a bit.
03:44RJ, if we see the Iran war persisting, will we see that rotation back to the US? Because in recent
03:51months,
03:51we've seen that rotation away from the US to Asia and Europe.
03:57I think we will. I think that is part of what is happening right now. I mean, you take India,
04:02for example, right, a country where the macro is doing pretty darn well. They just got a boost in
04:08the trade deal with the United States. Before that, they had a trade deal with Europe. Everything's
04:14working well. Except now you have a massive energy price shock for a country that imports virtually all
04:22of its energy needs and gets a lot of it from the Middle East. If it seems like the Straits
04:28of Hormuz
04:28genuinely are not physically closed, but blockaded, you know, insurance companies are not willing to
04:34allow ships to go through, then countries of that nature are going to be hurt. And that rotation you
04:40spoke about, which went in the other direction for the last six, nine, 12 months is going to
04:44reverse. I don't see how it doesn't. So RJ, are we then seeing a stronger dollar from here?
04:52If the war continues, no question, we are seeing a stronger dollar. And there's a couple of reasons
04:57for that. First is the traditional flight to quality aspect of it, where the dollar is reasserting
05:02itself. But the second, as you said earlier in your program, is that the longer the war goes on,
05:08the longer oil prices stay elevated, the lower the chance in the market's mind of continued Fed rate
05:16cuts, which also narrows the rate differential argument against the dollar. So yes, if it stays
05:21there for two weeks, three weeks, look, I think the arguments for containment are still very strong
05:26on both sides. Iran has extremely high inflation, energy scarcity, it's getting pounded. In the United
05:32States, the war is not politically popular. I would argue that even now, you know, we should get
05:38some kind of an off ramp in a week to two weeks. But if that doesn't continue, then yes, I
05:44think the
05:44dollar is going to do pretty, pretty well from here. So RJ, when you take a look at your portfolio,
05:50how should you be positioning? What's the role of treasuries right now? How should it be looking at?
05:56How should it be looking? So the biggest surprise for most investors I spoke to when we walked in
06:02on Monday morning was that treasury yields were up as much as they were, right? And markets were
06:08clearly saying, taking the argument that, look, this is going to be a problem, but it's going to
06:13be a short term problem. And it will show up primarily through inflation. So the treasury side's
06:19traditional portfolio hedging function, right, where you buy treasuries because you hope that
06:24that serves as the hedge when equities are going down will not be needed. So far, that is proven to
06:30be correct. Now, if equities are down another five to 10%, I'm talking about the S&P between now and,
06:36you know, a week from now, that portfolio hedging function absolutely will kick in. But for now,
06:42what we are telling investors is honestly, and I know this sounds like a cop out, it's not meant to
06:47be,
06:47we are telling investors that the tails on both sides are mispriced. The tail of things
06:54going very wrong is mispriced. But I would also argue that the tail of a quick snapback,
06:59because there is an off ramp that is taken, is also less so, but a little mispriced. You'll notice
07:05that the White House put out a statement today with a list of objectives. And you know what is
07:10missing in that? Regime change was not given as an objective. And, you know, who knows what
07:17ultimately happens. But that, I think, might be an indication that the United States is open,
07:22if not actively searching for an off ramp. And if that happens, then the risk assets will pop
07:29from here, no question.
07:32RJ, there's still so many ifs. How do you hedge? I mean, what's the best place to hide?
07:40I still like precious metals. I realize that gold's had a hard time in the last couple of days. I
07:46think
07:46that is something that will not last, number one. So I think that's the safest place. On the commodities
07:54side, copper structurally is just in such a bullish demand supply dynamic that I don't see that changing,
08:03regardless of what happens with the Iran war. Oil, I would start to worry about the US economy
08:10if the third or fourth contract, I do not care about the spot price of oil. It goes to $100,
08:16$120.
08:17If it comes back in a week to two weeks, the economy will blink and not miss it. Yes, equities
08:22will react,
08:22but the economy will be fine. But if the third or fourth contract goes up to $90, $95, I would
08:28start to get
08:29pretty worried. And at that point, I would tell investors, look, you are supposed to really lighten
08:34up on risk here. But in general, stay close to home, buy wall, buy options on both sides,
08:40which is still mispriced. That's what we've been telling clients.
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