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Are the markets pricing the effects of this war correctly? As far as I understand it, the blockade (which seems to be in effect) of the strait of Hormuz is going to reduce the amount of oil in the market by about 20%, until either the war ends, or another pipeline workaround is found. This is going to be absolutely catastrophic for the world economy, especially for Asia, as there isn't a ready substitute. Even in the US, where we produce enough oil to cover domestic consumption, increased prices are going to hurt consumers and businesses significantly. It's not just oil: sulfuric acid for mining is made from Middle Eastern Crude, most of Europe's LNG comes from Qatar, and global air shipping routes are also going to become more costly. Even if we reach an agreement with Iran tomorrow (unlikely given the nature of the regime), the supply chain shock would be at least on the level of the Iraq War in 2003.
Yet the SP500 is only down 2% from January this year. Are investors not taking this war seriously, or is there really nowhere else to park money other than in US tech stocks?
I personally sold all my index funds and random stocks a few days ago and reinvested the money into US Oil Companies and 3-months CDs.
Aren’t the point of index funds to never try and time the market? Buy, hold, and buy more until you’re close to retirement?
That's my understanding, yes. If you don't know enough to predict what the day-to-day stocks will do, and you have a long enough time frame, the line will generally go up. It's kind of like betting on the favorite every time to outright win, no points spread. Sure, you'll lose some, and sure, there will be cases where picking the underdog will win you a lot more, but you'll come out comfortably ahead of where you started in the long run.
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Right now prices are a bit high, but volatility (as measured by VIX and options prices) is super high, suggesting there's a huge range of ways this could go. Sound reasonable to me.
My main opinion is still that the US military is giving an absolute master class of dominance right now. They've recently destroyed everything on Kharg Island except the oil facilities, so that Iran can still sell its oil while limiting its ability to attack oil tankers. If this goes on much longer, Iran just isn't going to have anything left, and the strait will be open again. Then oil will crash back to where it was before, at historically relatively cheap prices.
Of course, it's also possible that this all blows up tomorrow. In that case oil shoots up again. Bad news for China, and anyone else who relies on imported oil. But everyone is scrambling to find workaround for that, too. Rationing, strategic oil reserves, the Saudis sending oil to the Red Sea, nonconventional oil increasing production, coal... there are options, even if it's painful in the short term.
I'm glad you brought up the Kharg Island thing, because it is the perfect example of showy tactical dominance that acomplishes zero strategic objectives.
All of the oil on Kharg Island is Iranian oil. The only purpose the garrison on Kharg serves is to protect the island's oil infrastructure. Drones from the mainland can still reach the Kuwaiti shipping lanes. The strategic situation before and after the airstrikes is... exactly the same.
I don't think this is true. If Iran wants to keep Kharg Island, and we take it, then it allows us to bargain for a post-war outcome that is more beneficial to us. Assuming we intend to negotiate with the regime at some point, which it seems likely that we do, it's only a stupid play if we gain less value out of holding the island than the costs we incur to take it. (Which might in fact be the case, and I would be interested in such an argument, but you do not present one here.)
It also potentially allows the US to push ISR assets up closer to Iran's borders and deny Iran use of whatever assets they have there.
Finally, assuming the Iranians will have a fairly normal response to having their land taken and try to either get it back or retaliate, it could bait them into make foolish decisions or even just divert their targeting away from US/allied/random third party assets. This is also beneficial to the United States.
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The Americans aren't protecting their own oil: they're protecting global oil supply - which goes to SEA and Europe. Blockading the strait is only useful if it spikes the price of oil to pressure the Americans to stop. If they're still selling to non Israeli, non American customers downstream then it severely limits the effectiveness of the tactic. It's just for show.
The Americans and Israelis do not rely on Gulf oil for this exact reason, ever since the supply shocks of the 80s. I find that people who talk up Iran's actions in this light to be silly.
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Apparently Kharg island was one of the places Iran stored marine mines. Which would be sufficient reason to hit it.
Of course if the US intends to seize it, that would be another reason to hit it, but while that's what most people seem to think the US is going to do, I expect Qeshm and the nearby smaller islands would be a better prize.
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There is enough global strategic reserve capacity to cover the missing 20% of global production for about 6 months. There will be a ground invasion of Iran if the strait is still substantially closed after 3 months (you can quote me on this). My guess is that oil stays below $125 unless Iran sinks an aircraft carrier or something.
Regarding your efficient market hyopthesis point, a lot of the guys selling futures for West Texas Intermediate are oil drillers in Midland, not geopolitics analysts. You can take their money if you're paying attention.
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Why US oil companies. Most of a companies value is terminal value and not current cash flows. Is this war going to last 15 years?
Mainly because those are the companies listed on the NYSE and because US oil seems relatively safe from Middle East turmoil. There's no way quarterly profits don't go up from this. I can always sell if the war ends in the next 6 months.
Think you should do an excel dcf model one time before investing. One time profits from (like a oil price surchage boosting prices) is an incredible small part of a stocks valuation.
Jane St will gap the oil stocks down on “war ended” before you even see the headline.
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If you need to ask if markets are pricing something correctly, as a member of the public with no insider knowledge, the answer is always yes. As others have mentioned, there are plenty of potential mitigations or off-ramps that could make this a relative non-issue in a few months.
Not your financial advisor but liquidating your entire portfolio based on a current event that the public has almost no visibility on seems incredibly insane to me.
IDK Covid was a pretty big market oversight: the market reacted quite late (March) when it was clear there would be a problem in January-February. The market has also been retarded for a long long time when it comes to tech, so I do not share your blind faith.
I mean I don't see the downside from a personal financial standpoint. I put the money in 3 month CDs and American oil companies. I can always sell both of these instruments and get back into index funds if the situation changes...
The semi-strong EMH is perhaps not true if you're a quant at a prop trading shop, but it is certainly true for a random guy off the street. I assure you anything you think you know about the war has already been priced into the market by an army of quants.
The SP500 was up like 10% from Jan 2020 at the end of the year. It did in fact turn out that the Fed would print unlimited money to keep the market going and that the pandemic wouldn't hurt the markets long-term. Lots of rationalist types were selling everything they had in early 2020 as well, but likely they all lost money unless they all bought back exactly during the March dip. Even if you think assets are over-priced it's not actionable unless you can predict how and when the drop will happen.
Your plan is, checks notes, to sell when prices are depressed and try to get back in if your new assets start dropping and index funds recover? Bold move.
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Iran isn't indiscriminately attacking ships. So, e.g., Chinese vessels have been able to transit without being attacked.
This means the global economic impact will be much less severe than if the Strait was actually closed (for instance with uncharted mines).
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Less than that because
Iran's oil is still getting through.
The Saudis and the UAE have pipelines to bypass the straits, which were not at capacity before things started
Venezuelan oil should be ramping up
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Partly this but another major cause is that the slow bleed is actually rather rational here. It could end at any point so no one wants to be the one to sell right before Trump is pressured off/gets bored/actually wins/pick whatever resolution you expect here. A major panicked sell off increases the chance of Trump pulling away, which would then fuck the people who sold off after all.
The slow bleed will accelerate as the war drags on (if it does) and the likelyhood of immediate resolution in some way becomes less concerning.
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