D (7:11)

I feel like that's the curse of this podcast where every time we talk about international stocks the next week that X US index drops like 5%.

C (7:22)

Well, we have talked quite a bit about dutifully or almost grudgingly buying Ex U S shares. They haven't worked out for a long time, but you should own them anyhow for diversification. And we were kind of holding our noses. But it just so happened that last year they solidly outperformed the US market. This more than a decade long stretch of American exceptionalism in investment returns reversed. So investors were glad they held those overseas shares last year and they also got a boost from a weakening of the dollar. And that started off the case this year too, but it reversed this past week. So the VXUS, a Vanguard fund of X US shares that fell about 5% at one point this past week and that's largely why more exposure to a rising oil price in Europe and Japan. We don't know how this war in Iran will play out. The President has said that his goals are to destroy Iran's missiles and navy and end its support of terrorist proxies and prevent it from ever obtaining a nuclear weapon. There's a Washington D.C. based group that advises investors on government policy matters. It's called Capital Alpha Partners and they've done some handicapping here on five possible outcomes in Iran. The most likely of these, which they give a 40% probability, is that Iran is left declawed with internal strife but not a military surrender. They give a 25% chance to a government collapse and transition to pro US rule. 20% for Iran's remaining leaders striking a US commercial deal similar to what has happened in Venezuela. A ceasefire with no deal. They give that only a 15% chance, but they say it becomes more likely if fighting drags on or if the US stock market crashes. And finally, a tiny 5% probability that Russia or China aid Iran militarily. Russia has limited capacity and China has deep trading ties with many of Iran's Gulf rivals. That's Capital Alpha Partners view. You'll hear Laura's view from Oxford Analytica in a few minutes. Wall street banks have been busy parsing what the war in Iran might mean for the US stock market and its leadership. Morgan Stanley has studied factors or stock characteristics. It found that in the month following past geopolitical surprises that sent oil higher value and dividend yield have tended to shine. Growth has slumped. That's not so surprising. Value includes oil majors, and their products are suddenly worth more. You find big oil companies and a lot of value in dividend funds. Also the largest defense contractors. They need to re up missile stockpiles, including interceptor systems for overseas customers. They tend to pay above average dividends. But there's a problem here, and it's what we've been talking about in recent weeks. Well before the launch of strikes in Iran, there was already this violent rotation in leadership of the US stock market. It's been happening underneath the surface. AI related stocks have been giving up their gains. Many of them and just about everything else has been running higher value dividends, small caps, cyclicals, staples, and so on. So if you're buying into a value fund now because you've heard that value tends to do well after a geopolitical crisis, you're getting a fund that's already beaten the S&P 500 by eight points over the past three months. And you're paying a price that I think kind of strains the definition of value. In the case of Vanguard Value ETF, it's 19 times this year's projected earnings. Barclays did a similar analysis of sectors. They found that in the year following geopolitical risk spikes that discretionary tech, materials and utilities have done well. Telecom, energy and industrials have lagged behind. That last group might sound surprising. Why would energy lag behind over the coming year? Barclays points out that energy stocks are already trading as though crude were selling for more than a hundred dollars a barrel. It's not nearly there just yet. I think all of this tilt chasing sounds frankly, exhausting. You can imagine the poor retirement fund plunker who's already chasing popular themes, robots or nuclear power, and now he has to retilt his factors and his sectors for war while keeping, I guess, an eye on cable news. Fortunately, Barclays also points out that the regular old S&P 500 has tended to return 12% in the year following major geopolitical flare ups. So if you're a well positioned investor, doing nothing is an attractive option. There's nothing new I'll recommend here. Overseas stocks have high exposure to this war, but they're also cheap relative to the us A fund focused on dividend yields also tends to come with modest valuations, and the income stream gives you a cushion if the stock market falters for a while. I'll make one last financial comment about what's happening in Iran. Sensible people can argue for or against this war. We've all heard both, and I'm sure we'll continue to President Trump's critics will say this lacks approval from Congress or broad partnership overseas, and that it fits a pattern of rising military intervention that seems at odds with the President's boasts on peacemaking. Trump's supporters will say this is peace through strength. And the President, they'll say, is rightly taking bolder action than his predecessors against Iran's nuclear ambitions. And which argument will win over the politics allergic? That can depend on the duration and the outcome of fighting. But I think everyone should pay attention to the cost. We heard about the debt and the deficit in last week's episode. The U.S. debt this year will hit $33 trillion. That is more than a quarter million dollars per household. And last month the Congressional Budget Office predicted that the deficit that's the amount by which the country is going further into the that'll total $1.9 trillion this year, or $15,000 per household. And this doesn't include everything. It doesn't include the revenue loss from a Supreme Court ruling against tariffs, and it doesn't include the cost of the war in Iran. It's pegged now at 50 to $100 billion, but it's subject to revision. Did you know that it cost $45,000 an hour to operate a carrier based F35 fighter? And if you're intercepting $30,000 Shahid 136 suicide drones using either Raytheon's $4 million Patriot PAC3 missiles or Lockheed Martin's $14 million per launch THAAD system. You can quickly run up the tab. The Defense Department will easily find the funds. There'll be a supplemental request or a reallocation from last year's reconciliation bill or some other budgetary flanking maneuver. And it might very well be money well spent. But we're now running crisis level deficits every year. Elon Musk's government waste cutting drive last year looked more like performance art than a needle mover. Any serious budget balancing effort would need either cuts to Social Security, whose trust fund could run dry in six years, or to Medicare or Defense, or increased tax revenue, or all of those things. But they're all deeply taboo. Let's keep in mind that today's deficits act like a credit card advance on economic growth, so reducing them tomorrow would be a growth drag. And that's another tough sell. But eventually, America might be forced to choose between fiscal reform and pricey military interventions. Otherwise, the bond market might launch an Operation Epic Fury of its own. That got pretty preachy. Jackson at the end there is it too.

D (15:38)

It was pretty balanced, I'd say.

C (15:40)

I'm just saying.

D (15:41)

I think you're just laying out the facts.

C (15:43)

It might be worth it, but it's not free. If you're going to do these things, you need a balance sheet that's prepared for it. I think that's my point. Anyhow, if you vehemently disagree with any or all of this, drop us a line at Jackson. What is it again? Jackson Cantrell@DefinitelyNotJack.org Nice.

D (16:04)

I'm on it.

C (16:04)

But if you have a question for us and you want to submit a voice recording could be played and answered on a future episode. You can send that one to Jack Howe. H O u g h@barrons.com you're getting ahead of yourself.

D (16:16)

We still got another segment here.

C (16:18)

I know. That's my outro. I turned it into a mid trow. What we're going to do now is take a quick break and we're going to come back with Laura James from Oxford Analytica. She knows a heck of a lot more than I do about Iranian politics. That's next after this quick break.

A (16:37)

Data is everywhere. But is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

C (16:56)

Welcome back. Laura James is senior Middle east analyst at Oxford Analytica. That's a group that provides risk assessments for clients that are modeled on the President's daily Briefing. It's part of Barron's parent Dow Jones. I'm going to give listeners a heads up on two things they might hear. Laura will mention the Strait of Hormuz. That's a choke point for access into the Persian Gulf, and Iran abuts it. Basically, there's this shipping lane that's about as wide as midtown Manhattan, and it's vital for getting energy out of Saudi Arabia, Iraq, Kuwait, United Arab Emirates and Qatar. And so one fifth of the world's oil and liquefied natural gas passes through this strait. And right now it's effectively shut down. There's a threat of attack from Iran, which is trying to sow chaos in financial markets, and also the fact that maritime insurers have turned skittish on providing cargo insurance there. So that's the Strait of Hormuz. You might have heard that a US Submarine recently sank an Iranian naval ship that was not near the Strait of Hormuz. In fact, it was thousands of miles away in the Indian Ocean. One other thing you'll hear Laura use the word besiege. She's not saying besiege. She's saying B A S I J. That's the name of a paramilitary group in Iran. Basically, Iran's leadership has been backed for decades by the Islamic Revolutionary Guard Corps. That's a professional military of more than 125,000. But there's also a civilian volunteer group called the Besiege, and that has 10 million registered members across virtually every town and university. One of the things the besieged do is to quickly suppress dissent. And with that, let's get to Laura at Oxford Analytica.

B (18:48)

There are two big variables here, aren't there? One is how committed the United States is going to be. Is Washington committed to a days long conflict? Weeks, months? I think we're getting mixed messages on that. The other question, which I think is more opaque for a lot of people, people, is how resilient is the Islamic Republic? Really, the point I'd like to underline here is that it's much more resilient than a lot of people in the United States think. We have seen massive protests. It is very unpopular, as governments go at the moment, largely because of the very poor economic conditions and also this sense that people are trapped in a situation where nothing changes and policies get worse and there are high levels of corruption, all of those things. So that was the environment before the war started. The thing that's important to remember is that the Islamic Republic is not just a clerical leadership on top of an unwilling society. It has A very deep state which is part of society. It has religious underpinnings throughout society. Perhaps even more importantly, it has long standing structures, the Islamic Revolution Guard Corps, the besieged militias, which are the principal armed actors in the country and are absolutely pervasive through everything that happens. You know, there are besieged professor groups in universities, there are besieged student groups in universities. And we saw in fact in the student protests that those pushed back against the original protesters who were angry with the government. So there isn't a kind of a top that can be blown off in the decapitation strategy and allow the Iranian people to go free. There isn't even an organized opposition inside the country. Even the so called moderates within the regime have been progressively pushed out over say the last 20 years. When it was called, for example, for Iranian security forces to hand over their weapons, the question was immediately raised. Hutu. Now, of course, it's a very large, diverse country. There are peripheries, there are ethnic groups and religious groups that have a long history of opposing the Islamic Republic. But the core of the state is hard to shake. And I think a days long or even a week's long campaign is very unlikely to do it. Especially given that we saw in June 2025 in the last war that there is some kind of rally around the flag effect. When the United States and particularly Israel attack Iran, many Iranians, even those who don't like their government, feel that they like the attackers even less. That's not universal. There are plenty of people rejoicing in the attacks and we see pictures of them on telev smuggled out of the country, but they're far from being in the majority and they're not safe.

C (21:42)

It sounds like from what you're saying, that we might end up in a situation where the next level of leadership takes over and it's not a change in government. If it's the case that maybe we run out of the best targets to strike and the US is not willing to go in there on the ground and make a change, maybe we end up with the same group in power some weeks from now. What do you think? Changes in the world? Are there any sort of effects that investors should be watching for or keeping in mind?

B (22:13)

It's hard to get to a scenario where a significantly different group comes into power without a large scale intervention with boots on the ground, for example. But I think the really important variable for markets is how long the conflict lasts at something similar to the current level. Because what's really important here for global markets is what's happening to the oil price, what's happening to the gas price and what's happening to global trade. And this is where we're seeing, I think, very worrying trends because Iran, as it said it would if attacked, sees this now as an existential struggle. And so it's widened the conflict of the Gulf countries. There have been some attacks on oil and gas facilities. Qatar has shut down its LNG production and that's extremely significant for the world, has sent gas prices leaping up. Iran has threatened to close the Strait of Hormuz. It's not clear it has the capacity to do that, but it certainly, as we've seen, has the capacity to raise insurance premiums to raise the sensation of risk. Gulf countries are stuck with flights not going in or out, tourists stranded, the future of tourism in question, the future, if this goes on for a long time, of the Gulf being seen as a safe destination in question. So it's all about the extent of the war. And I think this particularly applies to oil markets, given that on the one hand there are large stockpiles, so the fact that at the moment ships aren't going round. Hormuz isn't the end of the world. There are other routes. Saudi Arabia is using Yambu to load all that kind of thing, but that's not going to last forever. There is a lot of oil that can't get out, including from Iraq, where not only is Hormuz cutting off exports, but militia activity by Iran backed militias inside the country has just caused Iraq to shut off its pipeline to Turkey. So that's no longer operating either. The alternative route for Iraqi oil has just been stopped. So if that lasts, then oil prices could go sky high, other products will stop being shipped, oil derivatives are going to be affected. There's a whole sort of snowballing effect at that point. Now, the real factor here is that so much of the world's spare capacity is in the Middle east, in the countries that are being targeted, particularly Saudi Arabia, the UAE and Kuwait. Now, at the moment, I think the markets are still assuming this will be a short conflict and security can be brought back to normal levels. But if there are doubts over that, even if passage around Hormuz is riskier, not just not impossible, but just riskier, then getting back to normal will take longer. And I don't think the markets have fully factored in those risks yet. It's very possible that oil and gas prices will be elevated for longer and higher than anyone had expected. And I think how markets respond to that is possibly not yet Taking that

C (25:13)

fully into account, you mentioned that it'll be important how long this lasts. How do you get out of a thing like this? If you start this with these decapitation strikes, obviously you want a change in government in Iran. You've just explained to us clearly and convincingly. I think that might be difficult.

B (25:33)

I think there are a few things that are likely to happen, and how they develop exactly will depend on the ongoing succession process in Iran as well as military decisions in the United States. But one is that I think the United States and Israel at this point will do their very best to remove as much of Iran's missile capacity as possible. And obviously they have a massive military machine. There's quite a lot of scope to do that. Also removing senior leaders selectively, including the ones who are seen as more hardline. Again, the intelligence is clearly very good. They are able to target individuals. So those things are happening. I think that probably won't completely remove us from the situation we're in because that still leaves drones available. It still leaves some of the proxy militias operating. Iran has decentralized its command and control. So there will probably be some units that are loyal to the former supreme leader who want to carry on fighting according to previous instructions they were given that they shouldn't. If there had been a decapitation strategy, which Iran expected, they should just carry on with these certain prearranged plans. But it will reduce the threat certainly to the region. I think that would then have to be combined with. With making some kind of deal with whoever emerges as leader. It might possibly be somebody more from the military side who emerges as an effective leader, even though the religious overall leader could be someone different. I think that some kind of deal just to stop that's going to be very hard for any Iranian leader to make, mind you, because legitimacy in the system that still exists comes from a very deep well of anti Americanism. People will be crying out for a return to normality, economic viability for Iran. So I think there'll probably be enough support that a leader could make that deal. So this is probably the exit strategy, but I would say that it's an exit strategy to a much more unstable Middle east than the one we used to be in.

C (27:34)

Are there any spillover effects here that other regions or countries that might become less stable because of what's going on in Iran now? Or how would the effects, the economic effects in Europe maybe compare with the U.S. i'll just open it up to you for anything else you'd like to add on the subject.

B (27:54)

The really important point to undermine here is that there will be spillover effects in almost every country in the region. Europe will be drawn in militarily, but again, for Europe, as for the United States, oil and gas prices will be the main transmission mechanism that affects their interests substantially. But for almost all the Middle Eastern countries, there will be spillover effects, and for each country those will be different. For example, we can look at Bahrain within the Gulf that has a very specific situation with a Shia majority population which is actually reacting very strongly against the strikes on Iran. So that could destabilize the social contract in Bahrain. In Lebanon, we've seen that Hezbollah, which has long been Iran backed, made a somewhat symbolic strike in retaliation against Khamenei's death. And Israel has hit back very hard, has brought troops in, has killed more Hezbollah leaders. So that changes the balance of power in Lebanon a lot. I think the point I would want to make here is for any country involved in the Middle east, this is a complex and different world. Old assumptions don't hold and you need to investigate very carefully what might have changed, what the future scenarios could be. They may not be the same as they were in May.

C (29:06)

Thank you, Laura, and thank all of you for listening. Sometimes it's geopolitics, sometimes it's tacos. I think next week might be a taco week, but let's see if you have a question. I already gave you a spiel about that earlier, so I don't have to read that thing now. You can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. Imagine your luck. And if you listen on Apple, please write us a review. See you next week. Jackson. There was hardly any Jackson time this episode. Anything you wanted to just add in parting?

D (29:40)

You know, I don't really get political on this podcast, but make tacos, not war.

C (29:46)

Get a haircut, hippie. Sorry, man, you didn't deserve that. Your hair looks great.

A (29:59)

Data is everywhere. But is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.