Moneybeat: Hormuz and hype

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

NICK EICHER, HOST: 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, David. 

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

EICHER: Well David, early in the war we talked about why it came to war and why economic sanctions just didn't seem to be getting the job done, and I remember what you said, you made the point that sanctions work best on countries that respond to normal market pressures—and that doesn't apply to Iran. It does apply to us, it does apply to our allies, even the reluctant ones. 

So is there a risk, David, with Iran now using economic leverage against us in the Straight of Hormuz, that the economic pain is landing faster on our side than the military pain is landing on theirs?

BAHNSEN: Yeah, I think that there’s a combination of things there. And I think you’re already seeing the fact that the way the country is interpreting the efforts, you know, you always get a certain degree of spin and so forth, when these types of things happen.

But in this case, I think most of what the administration has said is true, that there has been a pretty significant amount of military dominance, and yet the reason that I think the country [the U.S.] seems mostly concerned or skeptical or unsupportive is related to the economic pain you’re referring to. That when all’s said and done, there’s a lot of data points that we can point to to talk about success and prevailing and optimism for some of the military objectives, but the Strait of Hormuz is closed, and oil is $98, and that’s really the bottom line as far as how our country interprets it, and what our appetite for economic pain may be is.

Now, I do believe that the complexity that you talked about a moment ago in sharing comments I made a few weeks ago, I do think it’s true that Iran is tough and market signals are tough to work when people don’t respond to normal economic incentives, and a lot of it has to do with their Islamic regime not valuing self-preservation. 

But there’s a limit to some of that too. If one of the Israeli and U.S. objectives is to try to get an internal uprising within the country, the theocratic regime of Iran may not value self-preservation, but there certainly are millions of people in Tehran who do. And yet it’s hard to see a path right now to that internal overcoming of the regime, and so Iran feels that they can outlast us in the Strait of Hormuz, and then you get just a lot of military and tactical things that go into what they’re trying to do and what we’re trying to do to combat it that I don’t really know how it plays out.

What I do know is that if someone had said oil would get up into the high 90s and stay there now for two weeks, as opposed to that first week that it was up, down, and it went above 100 but came back to 80, now we’ve really—it was actually as volatile as a week as it was in equities. It wasn’t very volatile in oil prices, it just stayed up there in between $95 and $100. We’re at a point here where this is starting to risk becoming economically very profound for the United States.

EICHER: Well David, there are reports from last week that Iran is letting at least some ships through the Strait—maybe selectively, maybe not fully confirmed in every case. But if that is even partly true, does it suggest the leverage here is not total closure so much as selective control: deciding who gets access and who bears the cost? And isn’t it kind of extraordinary after yet another week of uncontested war, that Iran is calling any shots at all?

BAHNSEN: Yeah, well, it would be extraordinary, and I’m not sure that it’s untrue, but I’m not totally sure how true it is either, because there’s disputes about what ships have gotten through and the Japan issue, I think, is not necessarily totally confirmed, so I’ve read different reports on it. But certainly that’s the intent is for Iran to message that they will allow things for China, Russia. That also changes things too in terms of leverage and what the United States is able to count on in terms of cooperation with other counterparties.

And so if that is the case, then we have to expect that to get a successful outcome in the Strait of Hormuz, the United States is going to have to put significant more resources there into Hormuz.

EICHER: Well David, the U.S. is also backing off efforts—namely backing off economic sanctions to impede some Iranian oil already at sea—the hope there being that promoting greater supply in the global oil market will ease this upward pressure on oil prices right now.

What does that tell you? And isn't it an acknowledgement that market reality is forcing a change in strategy on our part?

BAHNSEN: The sanctions that were presumed to be in effect for Iran exporting oil to other countries, and the United States is now you know, saying all bets are off, but that’s a self-interest objective with Iran. They’re obviously not going to respond to sanctions right now when they’re in the middle of a war with us, but you’re talking about the other countries receiving.

At this point, the United States is saying, the more oil out there, the better. We’re not gonna impede global oil supply with oil between 95 and 100. So some of the different rules being suspended and policy objectives changing for a day or a week or a month is to be expected when the entire objective is to maximize supply so as to try to bring prices down. 

The issue is that nothing is really working to bring prices down right now.

EICHER: Well David, before we wrap up today, I do want to pivot to something you wrote about in Dividend Cafe. Financial media are talking about the specter of “contagion” in private credit—the idea that bad loans outside the banking system could spill into something bigger. In plain English, David, why do you think that comparison is overstated, particularly when people start invoking the Great Financial Crisis of 2008?

BAHNSEN: Yeah, you know Nick, in Dividend Cafe on Friday, I wanted to talk about the concern that many in the financial media put out there as really a prevailing narrative, that we might risk this sort of contagion issue of various non-bank lenders, which has become an over-trillion-dollar business since the financial crisis.

I think it’s a very healthy thing in the economy, investors doing a lot of private lending as opposed to all of that risk being embedded in our commercial banking system, and whether or not, if some of these loans start to go bad, it will spread throughout the financial system. And I think that right now, there’s not even really a lot of proof that a big amount of loans are going bad. You always have a certain degree of defaults there. There have been a couple of defaults that have been in the news lately, but very, very, very low percentage.

But even if that were to increase, when people start talking about any comparison in 2008, which has come up all the time since 2008 because it’s a very sensationalistic way to frame any story, but 2008 was a particularly unique moment in that first of all, the loans going bad were connected to an asset class that everybody had, which was housing. And the loans going bad were held in the banking system that everybody needed for not only the safe preservation of their own deposits, but whatever next loan is needed to keep the economy going, small business loans, more mortgage loans, that though, if those banks were impaired, then there’d be no lending, and then there’d be no economic activity, et cetera. So that was a pretty textbook definition of what we refer to as a contagion effect. 

In this case, I believe that a couple loans may go bad and maybe more loans go bad, but it’s very isolated into the non-bank lenders, the investors, insurance companies, pensions, but they’re diversified. It’s a small portion of a portfolio, and these are risk-bearing investors, as opposed to a banking system with depositors that is not supposed to incur losses, and I think that it is being portrayed in a way that is very distortive of truth.

Now, we don’t know exactly where things will go. I’m referring to where things are now and what the indications are going forward. If the facts change, then my perspective would change. But I generally encourage people to resist narratives that are trying to bring back memories of certain events that are not really analogous.

EICHER: Alright. David Bahnsen, founder, managing partner and chief investment officer at The Bahnsen Group. He writes at Dividend Cafe each week and frequently at WORLD Opinions. 

David, I hope you have a great week, thanks so much.

BAHNSEN: Well, thanks so much, Nick.

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