Moneybeat: Duration is destiny

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MARY REICHARD, HOST: Coming up next on The World and Everything in It:

The Monday Moneybeat.

NICK EICHER, HOST: It’s time now to talk business, markets and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. Good morning to you.

DAVID BAHNSEN: Good morning, Nick, good to be with you.

EICHER: Well, obviously, Iran’s the story, but I think the place to start from an economic perspective, David, is by noting we’ve had economic sanctions in place, pretty much since the Iranian Revolution in 1979, from the immediate sanctions over the hostages, to a trade embargo, to UN sanctions over the nuclear program, to maximum pressure to Saturday morning.

Bottom line, for years, the U.S. and our allies have tried to contain Iran primarily through sanctions rather than necessarily militarily. And yet here we are.

From an economic standpoint, why didn’t sanctions change Iran’s behavior — and what does that tell us about the limits of using economic leverage to influence regimes like this?

BAHNSEN: Well, economic sanctions are much more motivating for countries that value their own economic well-being. And Iran has ideologically been willing for much of its population to be impoverished, more so even than a country like Russia, which is also very willing for the vast majority of its people to be impoverished. It does still value its self-preservation in Russia. In Iran, I’m not even sure we can necessarily say that, given some of the Shia extremism.

So it’s difficult to do a business deal with someone that doesn’t respond to business incentives. And there’s a geopolitical parallel here as well.

EICHER: There’s still a lot of uncertainty about how far the Iran attack goes and the fallout around it — whether this remains contained or becomes something more sustained.

So I want to ask: When markets look at a conflict like this, how much of the economic risk comes down to duration? What’s the difference between a brief disruption and a prolonged one?

BAHNSEN: Well, so much of the answer to that question is going to depend on the longevity and magnitude of this.

The president values hard strikes, decisive victories, but quick activity.

There hasn’t been much that he has done geopolitically —it may have surprised some people who are radically isolationist. The president has certainly proven not to be that. But he also has not done anything yet in either the first term or in this part of the second term that suggested a tolerance for prolonged presence. And my assumption is that this will be the same.

But there’s just a lot of uncertainty here, Nick. And then that’s where the economic aspects come in. Impact in the Strait of Hormuz. Impact to Israel. Where other trading partners come in on this. What support Iran ends up getting from China, and what that does in U.S.-China dynamics.

We need some time for these things to play out, because these are answers we don’t have right now.

EICHER: One of the immediate pressure points we always watch in this region is the Strait of Hormuz — a critical artery for global energy and shipping.

Help us understand the real economic exposure there, David, not just for oil but for global trade more broadly.

BAHNSEN: Well, it’s global. It’s not domestic. And that’s the issue that has given the President and any other U.S. president significant leverage that we didn’t have for many decades post–World War II.

The United States dependency on oil is sitting in West Texas. It is not sitting in the eastern part of the world. And so to the extent that there was a lot of assumption that this might happen over the last week or two, and that the quote-unquote prediction markets were presuming something could end up happening at over a 50 percent chance, we didn’t know until we all woke up Saturday morning that it had happened. But there was not a shock to this.

And yet oil had been at 66, 67 dollars. There were times a few years ago, let alone a few decades ago, where just the mere chatter of this, we would have been looking at 85 or 95 dollar oil. We’ll see where it goes.

But the world does not need Iranian oil. And the U.S. most certainly doesn’t need it. And in fact, our ability to export even changes the game for global trading partners.

And it’s also by the way why those of us who believe in free trade also believe in a Navy. And our Founding Fathers understood this well, although they were dealing with Barbary pirates.

The United States will protect its own interest there. And I don’t have any doubt in my mind about that. The issue on this question is more logistical. Does it take a week? Does it take a month? What delays take place? What reroutings take place?

We’re going to look this week at shipping prices. There’s a few market signals we’ll get. But the U.S. will protect its own interest.

EICHER: As we continue to watch developments, David, what should we be looking for in the coming days to gauge whether the economic risks here are escalating or stabilizing?

BAHNSEN: Well, I really don’t know that the president is willing to put ground troops in. And so that’s where you start getting into quagmire talk—being there a long time, loss of U.S. lives.

Could it be a prolonged air war? Could it be a prolonged issue that affects Israeli safety? We right now do have a travel ban of any flights getting out of Israel.

So those types of factors are all out there. But assuming that this goes to like a three- or four-year Iraq-level war, I just don’t see it. I don’t believe it’s on the table. But I don’t know you’ll find anyone who believes that the president has an appetite for that.

So there are legitimate questions, regardless of what people think about the propriety of this particular effort. There are questions that we don’t know the answer to right now—what the end game exactly is.

But let’s also not forget, Nick, that when we talk about these things, there’s an upside and downside. What if there is, unlike the case in Iraq, robust Iranian people waiting for freedom to take over with self-government and open up markets? This is a very big country with a very big population.

There’s all kinds of upside scenarios too. I don’t think they’re likely, but I don’t want to rule them out. And I think that the left-tail risk outcomes are pretty unlikely too.

So just from the economist in me, it’s so hard to project this early. But I think we’ll have more clarity in the days and weeks to come.

EICHER: All right. David Bahnsen—founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions. David, hope you have a great week … although I imagine it’ll be a little crazy.

BAHNSEN: Well, that’s what we’re here for. Always good to be with you, Nick.

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