The Strait squeeze

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JENNY ROUGH, 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: Alright, well let's begin as we have the last couple of weeks with the Iran war. We've seen volatility in the markets this week, quite a lot of volatility in the markets this week, but as you've pointed out, it's not really dramatically lower.  For example, the S&P 500 down just about 3% on the year, so not all that much. 

And you've made the point that uncertainty around oil and shipping in the Strait of Hormuz, not the war itself, seems to be more of the real story. So walk us through why that matters so much?

BAHNSEN: Well, obviously the Strait of Hormuz activity that is at the core of current uncertainty and current volatility is inextricably connected to the war, but it is a particular causation here. It has to do with the fact that there has been a basic cessation of shipping that is not really related to military strike that rendered the Strait inoperable. It’s fear of activity, of drone attack, of some endeavor that is causing the insurers, the shippers, just anyone, friend or foe in the region with commercial interest, to sit tight. 

And so the number of ships that have now stacked up, inoperable, is massive. That is largely being felt in the marginal price of oil, and in refiner spreads for where you can get oil. But now it has pushed margins much higher in what they call the crack spreads, in terms of refinery, but then also other products and other goods that are stuck on cargo ships.

This is a big question right now. First of all, it appears to me that it’s one of the few vulnerabilities in the way the attack and the effort, the entire operation, was planned—that it doesn’t seem that the administration was fully prepared for this, or at least had a plan for dealing with it. And that doesn’t mean they won’t come up with one and that they’re not going to end up prevailing strategically with what needs to happen here. But I think it has caused a certain pause around, "Well, if they missed this, what else have they missed?"

But more so just the direct economic impact. Four days creates some inconvenience, four weeks becomes a pretty big problem; more than four weeks becomes a massive problem. And so there is some uncertainty around this key element of global economic function.

EICHER: Well David, I’d like to talk about the nature of that problem. Of course, we’ve had massive sanctions on Iran. We don’t buy oil from Iran, Iran is the supplier of oil to the bad guys around the globe. So what if the bad guys don’t get their oil? Seems like that’s a good thing. Why does it hurt the whole economy, and not just them?

BAHNSEN: Well, it doesn’t, if all we were talking about—you know, India shouldn’t be buying oil from Iran. China and Russia do, and they’re the bad guys. If that’s all we were talking about, it wouldn’t be an issue. But there is other necessity through the Strait of Hormuz as a commercial waterway, getting products to certain parts of Europe and Asia and getting liquefied natural gas out of other elements of the Gulf.

So this has a Persian Gulf story that goes far beyond Iran selling to Russia. And it also is incoming and outgoing. And so there is a complexity that becomes, again, all economics is done on the margin, and it becomes marginally significant.

EICHER: Well, David, I’d like to talk now about something you identified in your Dividend Cafe, a rotation going on among investors in the market—not a collapse in the market, but money moving into what we would call real economy sectors: energy, utilities, consumer staples—and decidedly away from speculative tech. 

Is that a temporary thing? Is it Iran-related? Or do you think it’s more of a permanent phenomenon?

BAHNSEN: No, it’s not Iran-related at all. It had gone on and really sort of began in the fourth quarter of last year. A lot of the hot tech companies peaked in September or October. The high for Oracle was September, the high for Nvidia was October. And you saw healthcare rally significantly in the fourth quarter, utilities and industrials.

And so when I refer to real economy, I’m talking about things that people are using day to day a lot more. They use their gas, an electric bill; consumer staples have rallied a lot in the first 10 weeks of this year—the diapers and paper products and food and beverage items that are necessities in everyday life.

I think that when we talk about how long-lasting it will be, we don’t really know where some of the AI narrative is going to go and when some of the excess in some of the tech valuations are going to be let out. But I think that if the rotation were to change and the tech side were to not rally, then you would be talking about a whole-market retracement.

But clearly, as we’re sitting here talking before the market is opened on Monday, the S&P is down just barely 3% on the year. The NASDAQ is not even down 5%—I think it’s 4.8%. That’s not a correction. That’s not obviously a bear market. It’s a very minimal drop. But the reason is that there are things like energy up over 20%, utilities up over 10%, consumer staples up over 6%. That’s really the definition of a rotation. And I think that at this point now, we see how the Iran war affects all of this.

EICHER: All right, David, before we go, just one more item from your Dividend Cafe this past week. You identified kind of a tug of war in the U.S. economy between growth and stagnation, and what you’re saying is that stagnation right now has the edge. 

What has to happen for that to change?

BAHNSEN: Uh, the Supreme Court throwing out all of the tariffs? [laughs] I kid, I kid!

Look, the tariffs are weighing on the economy, and it’s not a political opinion, it’s not me editorializing; this is economically, objectively true. 

I am utterly shocked that the high, and I think somewhat faulty measure of rent inflation that was pulling the total inflation number higher, that it’s come down as it has, and yet the total inflation number has stayed where it is because goods inflation went from 0%—there was no goods inflation in aggregate for all of 2024 and much of the end of 2023—and now it’s come up to 1.7%, 1.8%.

We’re used to getting downward pressure in goods/prices and services being the thing that holds it higher. And now all the tariffed items are putting upward pressure on those prices, offsetting what should be a price benefit from the lag effect of shelter inflation coming down.

So as far as economic stagflation, look, there’s still this hope I have that the really significant incentives for business investment kick in and offset some of the cost of tariffs. I really believe it’s going to be $200 billion of tax benefits this year to capital expenditures. But we’re not seeing it yet. And I think, other than AI, a lot of the reason for capital expenditures being held back is uncertainty about tariff costs. 

And we’re seeing that in hiring plans too. Fortunately, we’re not seeing a major escalation of firings yet, but you’re just not seeing a lot of new job hiring. And I think that has to do with people not knowing what the impact is going to be in their business with tariffs. 

And this should be unsurprising when you look at the dollar amount of what’s going on—over $300 billion of new cost. That’s a massive amount of money that has to be absorbed by American importers.

EICHER: Alright, David Bahnsen is founder, managing partner, and chief investment officer of the Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions.

David, I hope you have a good one, we'll talk to you next week. 

BAHNSEN: Thanks so much, Nick.

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