GeoMacro | Tactical Risks & Opportunities
Near-term geopolitical analysis, focused on the 0-3 month horizon. Publication frequency shaped by urgent global events.
In this monthly iteration of our chartpack, we focus exclusively on just two questions. First, we present four scenarios for how the situation in the Middle East develops. Second, what happens if the pernicious scenarios come to dominate, how investors should play a global recession, were it to occur.
Close oil trades tactically, but beware lingering economic costs of the Iran war this year.
Investors have decided that the news flow out of the Middle East over the weekend was beyond negative, it is borderline apocalyptic. There are several reasons to agree with this assessment.
Instead of a normal missive, I am sending all my clients today a very lightly edited internal email that I just shared with the whole firm. I hope that it illustrates to you some of the … “fear”… that we all share with each other behind closed doors here at BCA Research as colleagues and teammates. Hopefully you see some of it in our research as well. That “cold sweat” is a necessary part of anyone in research and strategy roles. Once we lose it, we become disconnected from our clients who are in the trenches and the frontlines.
Clients are universally asking us when we expect President Trump to activate the legendary “Trump Put.” We believe that the S&P 500 would have to correct by more than 10% to practically guarantee a put. We are open minded that it could occur before; it could also occur later. But a double-digit stock price decline will certainly be a greater motivator.
An energy price spike caused by a Middle Eastern war almost guarantees that Republicans will lose control of the House, and the chance of a Democratic Senate victory increases from 35% to 40%.
In the short term, there is plenty to be worried about in macro beyond the Middle East. The market was on thin ice before the Iran conflict. In the long term, the base case scenario remains bullish, but the war in the Middle East needs to be brief.
It is too soon to sell the rip in oil or buy the dip in stocks. Stick with risk-off trades for now.
Since our Saturday missive, there have been several developments in the ongoing conflict between Iran and the US-Israel coalition.
The fog of war is the thickest at the dawn of kinetic action. However, BCA’s GeoMacro Strategy has trade recommendations to manage and thus we send this missive despite the significant uncertainty.