If The Gulf Remains Shut Down, These Stocks Will Soar
Inside today’s Daily Journal…
Essay: 4 Ways To Hedge Against A Wider War
The Strait of Hormuz is closed
War in Iran sends energy prices higher
A weak jobs report
Chart Of The Day… APA
Today’s Mailbag
Air campaigns don’t win wars.
While I hope there’s a miracle in Iran, it seems extremely improbable to me that the U.S. / Israeli missile and bombing campaign to force regime change in Iran will quickly lead to peace. Likewise, it’s virtually certain that instability in Iran will lead to more violence as multiple factions begin to compete for power. How that will impact energy prices in the short term and the long term is far from certain… but higher prices for longer is the most likely scenario.
You may recall that I’ve been raising the “warning” flag that a 1970s-like stagflation scenario is emerging. Yesterday I explained how consumer credit is rolling over and the next sign of an emerging recession would be job losses. And today’s jobs report was far weaker than expected, with the economy losing 92,000 jobs since January. Looking at the jobs numbers it’s obvious that, in the private economy, a recession has begun.
With oil prices up 50% this year, the economic outlook is pretty grim. My 1970s scenario – weak earnings, high inflation – becomes more likely.
How can you manage these risks? Raise cash. The normal cash allocation in Porter’s Permanent Portfolio is 25%. If you’re looking at retirement in the next five years or if you simply don’t want to stomach the volatility that an ongoing war in the Persian Gulf is almost certainly going to cause, then I recommend selling out of bonds (aka, property and casualty insurance) and moving those assets into the “cash” bucket, which is made up of three short-duration fixed-income ETFs.
That would leave you with a portfolio that’s long stocks (25%) but hedged with gold and Bitcoin (25%) and a huge cash hoard (50%). If that seems far too conservative, keep in mind that Berkshire Hathaway is also holding a third of its balance sheet in cash.
Another way to hedge the risks of a wider war is to add exposure to the companies best positioned to profit from the ongoing disruptions to global oil supplies.
The escalation in the Persian Gulf has effectively shut down 20% of global liquefied natural gas (“LNG”) production (Qatar) and almost 20% of seaborne crude (Strait of Hormuz).
