The world is a chaotic place, and the recent war against Iran is a stark reminder of this. As a financial analyst, I've been exploring the concept of the 'gradual print' thesis, which I've discussed in my recent newsletters. But with the war in Iran, we're witnessing a flywheel of chaos that could challenge this gradual approach.
The 'gradual print' refers to the Fed's expected mild-to-moderate balance sheet expansion, a response to liquidity shortages in overnight financing markets. In my September interview and December newsletter, I predicted this gradual expansion, contrasting it with calls for a large money-printing period. The Fed's announcement of ongoing balance sheet expansion seemed to confirm this gradual approach.
However, the war against Iran introduces a significant wildcard. The Strait of Hormuz, a vital passage for global oil and hydrocarbon liquids, has been mostly closed, causing energy prices to spike. This has far-reaching consequences, affecting not just fuel prices but also feedstocks and byproducts crucial for various industries. The potential for shortages and rationing looms, threatening depression scenarios.
The war's impact on the financial landscape is complex. While the Fed's gradual print continues, the potential for a 'big print' scenario is rising. The Fed's position is delicate, as they must navigate between addressing economic weakness and combating inflation. The US's financialized economy, with its high stock market valuation relative to GDP, adds further complexity. Executive compensation and investor capital gains are tied to stock market performance, influencing federal tax receipts.
In my view, the current situation underscores the importance of a diversified investment strategy. I advocate for a three-pillar portfolio approach: profitable equities, commodities/producers and hard monies, and cash-equivalents. This strategy is designed to weather various economic scenarios, from disinflationary growth to stagflationary conditions with energy and raw material shortages.
The war in Iran serves as a stark reminder of the unpredictability of geopolitical events and their profound impact on financial markets. It's a wake-up call for investors to consider the long-term implications of such crises and the potential for a 'big print' scenario, especially if the conflict persists and energy infrastructure damage is severe. As an analyst, I'll continue to monitor these developments, providing insights and recommendations to help investors navigate these turbulent times.
