What is it good for?
Bonds down. Stocks down. Oil down (flat). Crypto down.
Gold up big.
It looked for a minute there like the Iran v. Israel stuff had concluded on Saturday. Sunday was a relaxed day with little bad news, and futures opened up.
The follow through is worrisome, especially because it’s unclear how much of it is just off the Israeli rhetoric today and how much of it is presaging a more substantial move.
The problem is that the increase in VIX and general increase in volatility and risk will necessitate some big players de-risking. And a large de-risking event sparked by the war could cause a serious asset price correction, as a cascade of re-balancing forces continued sells.
That could look something like S&P 4750 and Nasdaq 14500.
That’s just part of the business and if we do get a pullback like that we will be happy to have some cash on the sidelines to buy on the way down.
Still, that’s worst case scenario. My base case is that the war fears resolve themselves this week and we continue onward with bonds down and risk up or flat.
World War 3
I shared a scary post in the chat from
that is still nevertheless worth reading.https://substack.com/home/post/p-143440526
I’m hoping and expecting that some of the darker speculation in that post will not come to pass. Still, we should always be considering worst case outcomes and making plans.
What’s Next
It’s very hard to forecast and make recommendations here, because the truth is we are looking at a probability scenario that is something like this:
85% chance the current thing resolves within the week and we all get to forget it happened.
10% chance it looms over us for the medium term (a few weeks to a month or so) before resolving and we all move on.
3% chance it evolves into an ongoing thing that periodically sends shocks through markets, and ramps up overall tensions.
2% chance it evolves into a wider regional conflict that no one can see out the other side of (World war 3 is a subset of this bucket).
That’s the landscape as I see it, though of course the specific probabilities are just a guess.
My thinking however is that, as always on geopolitical risk, the R/R of being long here is fairly good. Nasdaq is down 3.5% as of this writing on middle east tensions. In some of the worst case scenarios it might go down another 5%. In the absolute worst case scenarios, who knows. If we get a three+ sigma event you’re going to regret not holding cash, but the whole world is going to get turned upside down.
In the much more likely “markets forget about this soon” scenario, we will shrug it off and go back to our regularly scheduled programming where equities should largely outperform.
General Risk Off
It’s easy to read that last section and conclude that you should “buy the dip.” Maybe you should, but that depends entirely on your portfolio. I’ve been allocating capital to risk assets throughout this last week and the increased tensions, but that’s because I was overweight cash.
You should treat your portfolio the same way the big guys do. They have risk departments estimating the VAR (Value At Risk) of their positions, and in times of greater uncertainty this VAR will go up and they will look for opportunities to de-risk.
You should roughly handle your portfolio the same way. I’m still at a very conservative 40% cash. That’s not a prescription, just some information.
Some Reassurance
If you’re looking for a little reassurance, look at the bond and oil markets. If the market was really worried about a regional conflict, oil would be bigly. Remember, some of the biggest oil traders in the world are the Saudis. They would be buying.
And if domestic investors really thought a widespread conflict was imminent, they’d be buying bonds not selling them.
I will keep watching, as should you, and let’s all hope we aren’t talking about Iran or Israel by Friday.
Please also always remember... none of this is financial advice. I’m not a professional. I quite literally don’t know what I’m doing.