00:00Welcome. Good afternoon. We kidded when you walked in. It's a shame there's nothing going on.
00:04Jenny just laid out a lot of different scenarios. How are you guys thinking about it in your group?
00:08Look, I mean, the first thing that we're doing is taking a healthy dose of reality and recognize
00:13that we're managing a lot of noise right now. So we're jumping headline to headline. This person's
00:17having a conversation with this person and that person denies it. It's very, very noisy. So what
00:22we're trying to do is take a step back and look at some of trying to look at what some
00:25of the
00:25fundamentals are. The first place that we start is the initial conditions in the markets. Go
00:29into this war, which is that, you know, the economy was relatively strong. A lot of fiscal
00:35stimulus. Inflation was on the way down. The fiscal stimulus has put a lot of money in consumers'
00:39pockets just due to tax refunds. That means that the consumer can probably absorb some of the shock
00:46of higher energy prices for the near term. The question that you asked, Jenny, and the right
00:51question is, so how long does this last, right? What's the duration? What's the tipping point where
00:56this becomes something worse? We don't know what the answer to that is. But I do believe,
01:01though, that we are in a period here of negotiated escalation where there's going to likely be an
01:07escalation before we get to what Trump highlighted as a deadline somewhere between April 11th and April
01:1318th. And there'll be a campaign of maximum pressure until hopefully a deal comes to the table.
01:20Now, what I think Iran believes and what the U.S. believes is that the longer we wait,
01:27the better deal that we're going to get. There's going to be a breaking point someplace. I don't
01:32think that's today. So I would fully expect there to be an amplification of some of the bombings and
01:39everything else that may go on. But the escalation is part of the negotiated endgame settlement process.
01:47So I think the markets are seeing this escalation the exact same way that Jenny laid it out is part
01:53of the endgame settlement process. A lot to go with here. I want to start with what markets you
01:59think are pricing in right now, because if the president is correct in saying that at 8 p.m.
02:06tonight is the final deadline and the U.S. could attack civilian infrastructure and essentially put
02:13Iran back to the Stone Age as he's threatened in recent days, it doesn't seem like that the market
02:18is taking that threat seriously. Is that fair? So market pricing is, if you think of this as like
02:24a distribution, like a normal distribution, there's definitely a left tail where things can go really,
02:30really badly. And the markets may not be fully accounting for that. However, there's also a right
02:36tail where things could go a lot better and oil prices could come down and then we could resume
02:41those initial conditions. What the market does is it finds the midpoint. So what we're really saying
02:47is that, yes, things could get materially worse, but there's also another tail out there where things
02:52could get a little bit better. So it's a good question that you're asking, does the market fully
02:56anticipate this on a probability distribution, on a weighted probability distribution, depending on how
03:02you think of these events and how much you weigh these events? Yes, it is. It just means that the
03:07tails are pretty far. What that also tells me is that there could be a lot more volatility because
03:12depending on which way it goes, it could be volatility to the downside, it could be volatility
03:16to the upside. So that's what the markets are effectively pricing in right now. What's the longer
03:22term impact of all of this? And I guess I keep thinking about increased defense spending around
03:27the world. So then what isn't there money for? Are there's growing deficits, Jim? I also think about
03:32every nation seems to be thinking about their national security and whether that means water,
03:36energy, technology. And there's a cost of doing this on our home front. What's the cost of that?
03:44And what's the impact of that? So that's a great question. And this is exactly what our team is
03:48trying to think through is a second and third order effects. The first order effect is oil prices are
03:52high and that hurts the consumer. Second, third, fourth order effects go much further down the line.
03:58So the cost ultimately is it's not obviously just in the US. It's also in Europe as well.
04:04It's raw materials. It's agriculture. It's fertilizer. It's food. It's PVC pipes. It's all
04:11these shortages. I mean, I just saw today that used car prices are going back up again and they've
04:16reached highest level since 2023, like during the COVID pandemic, right? Because of chips and all of
04:21these various things. So when we start- We're going to have a conversation later about inflation and
04:26they're saying it's more like 2022 versus some other inflation spike.
04:29Yeah. No, no, no, no. That's exactly right. So the way that we're thinking through this as an
04:33investment team, because that's what we're qualified to do, is we're starting to find out and trying to
04:38identify where those shortage, those choke points might actually be that could have a positive impact
04:44on asset prices and also where there could be a negative impact on asset prices. What does it do to
04:49the consumer? The consumer gets hurt. So if you had an expectation for GDP to grow at say 2.5
04:55% this
04:56year, it's got to be a lower number than that. How much lower? How much damage have we incurred and
05:01what's the cost of that repair and can it be repaired and over what timeframe? What the markets are saying
05:07is that it's going to be tough in 2026, but if you look at the forward earnings forecasts going into
05:132027, they're still high. Analysts are always high. They will come down, but does it come down to the
05:20point where earnings growth rates go to the low single digits or do we stay around low double
05:25digits like 8, 9, 10, 11, 12%? We don't know yet though, do we? We don't fully know yet,
05:29but what the
05:29market's trying to discount is it probably stays somewhere around like 10, 11% on average. Could be
05:34wrong. Yeah. But so far, we're going to get first quarter data for earnings coming up. The month of March
05:40was bad, but January, February, we're good. So it's going to be a mixed message right now.
05:44Yeah. JP Morgan, one week from today, we'll hear from JP Morgan. And then the other banks as well.
05:50Hey, okay. So this in the context of politics, because everything you're saying right now about
05:56affordability and questions about American consumers, I think is front and center when it
06:01comes to midterms. How do you think about that in the context of markets?
06:05So the affordability is obviously, it's a major issue, right? Gasoline price is moving higher.
06:11The consumer is going to feel that every single day, every time they fill up their, you know,
06:15their car with, with gas. Look, the midterms are going to be tough. I mean, I'm hearing a lot of
06:20different people, you know, very upset about what's going on. Who wouldn't be, right? But I think
06:27ultimately, we have to see how this all ends, because there's another contingent of people that are
06:31saying, well, is it better to have a nuclear armed Iran? Or is this the right, you know,
06:36we had a date with this destiny at some point. We didn't know when that date was the dates now.
06:43And so do you want to take this on right now? Or is it a or is it a can
06:48kicking exercise,
06:49where you just kick the can down the road and deal with it later? So I think I think the
06:52American
06:52people, once they get past the shock of higher gas prices, and the dust settles on this, so to speak,
07:00ultimately, it's going to be the choice was a nuclear powered Iran, or nuclear, you know,
07:06armed Iran with nuclear missiles, or, or something else, which one would you have picked? And how much
07:12damage? Or how much pain did you have to take in the meantime? So it is, it's a complicated question.
07:18So we'll see how it shakes out in the midterm. So yeah, it's interesting. We've had a lot of folks
07:22say, listen, this was a war long overdue. This has been, you know, tension, stress, dislike between,
07:28the US and Iran for a long time, as we all know. Does the US come out stronger on the
07:32other side
07:33as a result of this? It's an interesting time in our history. Here we are a quarter of a century,
07:38not a quarter of a century, 250 years old. But I just wonder how you think the role of the
07:43US?
07:44You know, I think, I think we're gonna have to wait five or six years to answer that question with
07:48with accuracy. Right now, it seems pretty chaotic. Right now, it seems like the, the, you know,
07:53the rules-based order is not being, we're not following the rules and the rules-based order.
07:58We can make the argument that that rules-based order really wouldn't tell us to do nothing
08:03right now. And is that the right solution too? So I, I honestly don't know the answer to that.
08:09And I think it'll be debated for decades going forward. I don't know that we're going to have
08:14an answer anytime soon. I certainly don't.
08:17So do you have an answer in 40 seconds of what an investor should do in this environment?
08:21I know you like the US over Europe. Just quickly, we'd be remiss not to ask.
08:25Listen, I think that there were some great value opportunities in the value sector.
08:29Dividend, dividends, quality and defensive sectors are pretty good. Healthcare, healthcare has been one
08:34of our biggest sectors. We think that benefits the most from AI over the long run. Love the healthcare
08:39sector, particularly in the managed care areas. That's really good. Technology, AI and defense
08:44related. That's another area that I think is going to see exceptional growth. That's how
08:47we're positioning portfolios.
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