AN ENDLESS WAR? Why the Conflict in Iran May Not End Soon—And What the Market May be Getting Wrong

Certain of the views expressed in the material below are sourced from center to hard-left-leaning sources. Regardless of what our staff’s highly diverse personal views on the war are, we believe that just because some suggesting the conflict may be protracted are left-leaning, does not nullify their thinking from the probability distribution of possible outcomes.

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For our friends on the right that are new to KCR, we wrote pieces that addressed the well-intentioned but woefully misguided electric car initiatives from the left, the hypocrisy of the mineral sourcing for EV batteries, and the misrepresentations of the IEA’s work on net-zero emissions by left leaning politicians. Our organization does our imperfect best to remain non-partisan, open-minded, and committed to the open exchange of ideas in the pursuit of what is factual and possible.

The stock market – and the bond market – may not yet be pricing in anything other than a rapid end to the Iran conflict. To be clear, the KCR team hopes that we can find a swift and peaceful resolution to the current conflict.

Since the US and Israel began bombing Iran on February 28^th the US stock market has fallen just shy of -8%. An entire generation of investors, raised in the fiscally profligate post 2009 GFC markets were then given a demonstration of how money printing could fix, apparently, anything. We are of course talking about Covid.

The post 2009 bull-market and Covid stimulus has taught so many to buy the dip. The entire concept of monetary debasement as a solution to every crisis has become the new and improved “Greenspan put.” Today, “the put” seems like a three-legged promise. First, whenever there is trouble, there will be money printing. Second, when there is money-printing the effect will always be “stocks higher.” Third, within that framework, if you do not own equities, you should leverage everything to the hilt and buy them.

We believe this dynamic may be heading towards a brutal collision with reality. Specifically, the type of reality that can only be answered by asking the following questions:

1. Where do your groceries come from? Literally, what countries, farms & supply chains.
   
2. Where does the water and fertilizer to grow those groceries come from?
3. Where do the everyday items your doctor, your kids’ schools, and your everyday life come from?

Here is one answer we have high conviction in: not from the Mag 7.

The U.S. is now in a large and growing conflict with Iran. We’ve had plenty of conflicts in the Middle East. No inflation. No market stress.

And we see that in the below: the S&P 500 is still nearly 70% more expensive than the peak of the dot.com bubble.