00:00 Speaker A
The Dow is down roughly I think 1,300 at one point, Josh. Now you are bouncing back here. Uh I’ll just get a quick check for you. And my last check we were down about, yeah, there it is. We’re down about 300. Let’s talk about these headlines from from Trump that Nez was just referencing. The President on Truth Social talking about how the Navy if necessary will escort tankers through the straight of hormuz. The US he says is to provide political risk insurance for trade through the Gulf. So he’s saying, listen, I’m going to do what I can to keep this critical artery open. United States, he says, will ensure the free flow of energy to the world. An impact very quickly on the markets, the stock market, the oil market. What do you make of it?
00:44 Speaker B
I think it’s a positive development for all of the markets you just cited. The straits of Hormuz really are a bottleneck and a chokepoint globally. Between 20 and 30% of whether you’re talking about liquefied natural gas or just global energy products in general do transit the straights of hormuz. I think the equity markets were starting to sniff that out this morning. We saw the market starting to come back ahead of this announcement. It was certainly some of the chatter in the market earlier today was is the potential for can there be an insurance solution that would allow these boats to continue to to ship out from places like Qatar, specifically when you’re talking about liquefied natural gas, has a huge impact as we’re looking at European markets, the European health of the European consumer, the economic ramifications. Ultimately, higher oil places, higher higher oil prices, excuse me, are the transmission mechanism from this conflict into, you know, an economic dimension. And so the ability to keep these barrels flowing is is a real positive.
01:41 Speaker A
I think the big question is how it affects the consumer, which is the engine of our economy, what it would mean for the the trajectory of inflation from here.
01:50 Speaker B
This has been a multi-year story. It isn’t something that just started in 2025 or 2026. If we go back decades, we’ve had increasing fuel standards for automobiles, so you get better miles per gallon in your car. If you’ve upgraded a boiler in your house or maybe put in new windows, it’s all about energy efficiency. And so per unit of economic growth, the US economy consumes fewer barrels of oil. If you look at a consumer wallet, about somewhere between 3 and a half and 4% of that wallet directly goes into energy costs. The biggest piece of it is gasoline to fill up your car. But that’s down substantially over the last couple of decades. It’s among the lowest in history. It was slightly lower coming out of the COVID pandemic. But even if we just go back four years to when Russia invaded Ukraine, it was closer to 5% of a consumer wallet was going into energy. So as we have moved through time and and and made these efficiency gains, we are now seeing less sensitivity and that means if oil goes up and stays high for a sustained period of time, the the economic drag is is going to be less.
02:51 Speaker A
Interesting. I think investors are trying to figure out, they see these headlines of war, uh they’re watching oil prices. You’re trying to figure out what is going to be ultimately the impact on corporate profits?
03:07 Speaker B
I I think it is too too soon to say. I think we’re still in the scenario analysis phase where we’re trying to dimension this from a top-down perspective. Broad stroke say something like, is oil going to be at $75, $85, $95 over the next quarter, two quarters, three quarters and let’s flow that through a model. As we get more clarity in the coming hopefully days, if not weeks, uh we will be able to refine those estimates and I think we’ll start to see earnings estimates move on the back of that. But I think that that’s more of a second, third, fourth week, not a first couple of days.
03:41 Speaker B
I think that the experience of of 2021, 2022 shows that the Fed can’t completely look through an oil price shock. However, they do focus on core measures of core inflation because commodity prices, one are mean reverting, and two, their tools are are not properly calibrated to to uh to enact change in that area. So I don’t think the Fed’s going to say we can completely sit on the sidelines and look through an oil price shock. However, I don’t think they’re going to dramatically reorient policy as a result of that. So
04:14 Speaker A
When we’re looking out towards the end of the year, uh could we get a little bit less fewer rate cuts? Could they come a little bit later?
04:22 Speaker B
Absolutely. But our view was that the Fed wasn’t going to cut until the second half of the year before all of this. We still think that’s the case.
04:29 Speaker A
What do you make make uh I have to ask you, Trump’s decide, listen, Kevin Warr, she’s the guy to lead the Fed. What do you make of that call?
04:36 Speaker B
Look, Kevin’s a credible economist. He’s certainly qualified for the job. We’ll see what happens with the Senate confirmation process, but ultimately, we think he can be a great leader of the Fed. And I’m looking forward to hopefully having him on board in the next couple of months.
04:49 Speaker B
We think that the economy is going to reaccelerate. Uh right now we’re starting to see the benefits from the one big beautiful bill impact consumer wallets where you have disproportionately large tax cuts for the middle and upper middle income consumer. So I think that’s really the one of the key drivers for the consumer discretionary space. On the industrial side, we’ve seen the PMI rise above 50. Uh new orders, which is something that we focus on, it tends to provide a little bit more lead time. New orders were on 55 last month. So the industrial economy looks like it’s accelerating. You’re seeing order books build. We’re starting to see the beginnings hopefully of a cyclical acceleration in the economy and we think those two sectors are best positioned to benefit from it.
05:28 Speaker A
Final question, Josh, squeeze this one is, why aren’t investors buying treasuries here? There’s no safe haven bid. Is that I mean is that inflation worry? Is that what’s going on?
05:38 Speaker B
In in our view, that’s our interpretation that uh the potential for oil prices to to to ripple into inflation is keeping yields in check, whereas you’re seeing as as Nez was talking about the dollar’s been a safe haven, gold’s been a safe haven. I think the difference for Treasury is is specifically that inflation worry.
05:58 Speaker A
Makes sense.
