The stalled descent

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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. Good to be with you.

EICHER: Let’s start with what markets are reacting to right now. We’ve had this back-and-forth Friday and Saturday over whether the Strait of Hormuz is open—but what do markets actually care about in an ambiguous situation like this?

BAHNSEN: Well, I think what you have seen now is that the markets have a quick response to things that look like bad news, and they have a quick response to things that look like good news. And there’s two reasons for that. First of all, good news results in a better situation in markets fundamentally, and bad news does the opposite.

But then there’s also a quicker trading response to it, where people that were hedging one way have to undo hedges, or people that were speculating one way have to undo speculation. You look to Friday’s market action, where markets closed up and had a big up day, but the highest level of the day was very early on.

And I think that what you’re going to see here is that the Strait of Hormuz is open, stays open. The markets are less interested in some of the other things that might be even bigger stories geopolitically, in terms of what the future of the Iranian regime is going to be and what the real long-term status will be for Middle East peace and Israel’s place in the region and so forth.

Markets, in my opinion, when we define financial markets correctly, have no ability to price that in. It’s a 30-year thing, a 20-year thing. Markets have no history that it moves up and down. So when people say, well, hey, we might have this really good long-term outcome, doesn’t that create a peace dividend in markets? It’s very different than the Cold War, where a whole empire went away.

In this case, you say, well, I think markets now have enough news to say that such and such has gotten better. But markets know that when Hamas went away, Hezbollah came, or when Hezbollah went away, ISIS came. There’s just been moving parts in the Middle East. And I don’t expect markets to price in a generational change, but I do expect markets to do exactly what they did Friday, which is say, if the Strait of Hormuz is open, more petrochemicals are being delivered, more oil is being delivered, prices can come down.

Now, you notice what didn’t happen? Oil didn’t go back to 70. Oil didn’t go back to 64. Oil came way off of the $100 level, but still sitting into the 80s. There is still questions about the equilibrium between supply and demand, and that’s what you see priced in commodity markets.

EICHER: You pointed out something really interesting—oil came down, but not all the way back. It didn’t go to $70 or less, it’s still elevated. What is the market telling us there—and is the real issue less the next few weeks of supply, and more whether expectations change between now and then?

BAHNSEN: It’s more than weeks. In some cases, there’s some parts of this. If you look at the liquefied natural gas production in Qatar, which is 17% of the LNG that gets out of the Middle East, out of the Persian Gulf, to Europe and Asia, that’s a couple years to rebuild infrastructure.

So there’s elements of it that are even longer than a few weeks, and there’s almost no elements that are quicker than a few weeks. However, Nick, it’s important to remember that markets are discounting mechanisms. Prices don’t reflect what is right now this second. If we know something will be such and such in six weeks, markets can price that ahead.

And so there’s a lot of complexity in this, but I think the bigger issue for markets is not the fact that some oil won’t get delivered for four to six weeks. It’s that whatever we believe is going to get delivered in four to six weeks today, is our belief going to change between now and then? Because there’s still a lot of open-ended questions in the overall situation.

EICHER: Let me ask about the U.S. angle—there’s a lot of talk that disruptions like this are a long-term win for American energy. Is that overstated?

BAHNSEN: Yeah, here’s what I would say in terms of the U.S. opportunity in the moment. With Russia-Ukraine, we got a perfect example of why Europe needed to rely on bad actors less for its energy needs. And on the margin, Europe did increase purchases of liquefied natural gas from the US.

The largest enemy of that was not Putin, and it wasn’t Germany. It was President Biden. It was the ESG movement. It was the U.S. domestic left-wing progressive opposition to it. A lot of that has been heavily defanged, but our ability to meet world LNG needs is non-existent. We can increase production, we can increase our building of terminals, but we have no ability to meet the world’s need.

So that’s one of the things that I think—and we’ve had WORLD listeners that have reached out with questions on a lot of this—because people say, well, if we can make more oil than we need, then why does the world price affect us at all? And the complexity in that is the refinery that we have to refine oil, because there’s different grades of what we’re making versus what has to be imported.

And if it was all one grade of oil, the total amount in aggregate that we need, we could meet on our own. But it doesn’t work that way. So it requires a refinery process, and it gets priced into refinery spreads. And also, we don’t build new refineries.

So when you add—this is the economic tie into this political question—when you look at Europe’s opposition to fossil fuel, when you look at U.S. difficulty in building refineries or nuclear power plants or LNG export terminals, none of this is a light switch. And so then you have to factor in the economics of capital investment into long-term projects versus short-term volatility of outcome, political headwinds, change of administration, electoral changes.

It’s just a very complicated element. My belief, the great opportunity we have with American enterprise, is to just stay long energy, stay long an all-of-the-above policy portfolio. And when opportunities come for more LNG investment, for more crude oil production, for the fracking that made all of this possible, for more buildout of LNG, understand that every time you embrace it, you’re not just embracing a pro-growth economic agenda. You’re embracing a future geopolitical benefit the next time a bad actor does something.

So this is a really big story, Nick.

EICHER: You wrote this week in Dividend Café that the story around AI has flipped—from lifting the whole tech sector to fears it could wipe out big parts of software—and you argue people are confusing disruption in the industry with destruction of the industry. What are they getting wrong?

BAHNSEN: Well, I think the high-level takeaway is that when people talk about disruption, they often get confused—disruption with destruction—and that adaptation is the blessing of a market economy.

There are some companies that, the horse-and-buggy example we use from the industrial revolution, they didn’t get to merely pivot. They kind of became obsolete. 

But my point in Dividend Cafe that I think is very important for WORLD listeners is to understand disruption can get misunderstood. First of all, when it’s thought about monolithically, as if everything is getting disrupted the same way, all the software companies now are victims of AI self-generating code and are no longer needed—not understanding that some software has greater network effect and switching cost and brand loyalty and service model than others.

And so it isn’t one size fits all. But what I’m trying to get to is that there’s a great opportunity for some companies that could be disrupted by AI to benefit from it by embracing, collaborating, and utilizing it as a tool, as opposed to accepting that the mere existence of new code means that what the company previously did is obsolete.

Now, I’m really heavily referring to the software space here, but the same principles are first principles and therefore should be applied across any sector or industry.

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.

BAHNSEN: Thanks so much Nick.

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