I wanted to write a few note on my overall thesis, which I will write separate articles about in more detail with facts, figures, and research. This is more of a stream of consciousness note that encapsulates my views on the current state of the market and where we could be headed from here.

There will be no images or graphs, just notes and my thoughts.

First, I believe that there are going to be continued disruptions in the Strait of Hormuz for months to come at the minimum, and that this conflict will rage on in some form for at least the next several years.

The United States has found itself trapped in quagmires in the Middle East that it could have avoided continuously over the prior couple of decades and this will not be any different. 

We are not going to simply get out of this easily. Even if we did, the idea that there will not be continued disruption and the overwhelming threat of hostile action across the Middle East for the coming months or years is simply naive. The belief that things will return back to “normal”, whatever that looks like in your head, is not an honest assessment.

Markets react because they operate under the assumption that this is going to be quickly tied up in a bow one way or the other. The assumption is that, we as the United States, will effect a regime change quickly or we will negotiate a ceasefire and leave quickly. Every piece of news is viewed as contributing to one of those two scenarios. Neither result is particularly likely. 

Trump has no good options. Disapproval of the Iran war is a view shared by the majority of Americans and he is fully aware of this.

But he can’t afford to back out and look weak. I think we can safely conclude that Trump isn’t a person that will ever admit defeat publicly, in any case. In fact, as we have already seen, he will continue to look for opportunities to publicly claim victory regardless of the conditions on the ground. 

It has become clear that he deeply cares what the American public, the markets, his party, and his enemies say. But most of all, he cares what his closest advisors, like Steve Witkoff, Stephen Miller, and Jared Kushner think. Trump’s advisors are primarily responsible for counseling him into this war. They have no interest in ending this conflict. Billionaires with Israeli ties that have donated incredible amounts of money to Trump have no interest in ending this conflict. AIPAC has no interest in ending this conflict. The military industrial apparatus and leadership in the United States have no interest in ending this conflict. There are many sitting representatives in the Senate and House, on the Republican and Democratic side, who have no interest in ending this conflict, regardless of the messaging they present to the media and their constituents. 

The Gulf States are on the brink of collapse and will suffer immeasurably - if for no other reason than the fact that tourism and their hard-fought campaign to make places like Dubai a destination for Western tourists and a safe place for international investment is evaporating before our eyes. It is not unreasonable or dramatic to assume that several regimes in the Gulf States will fall as a result of the economic damage from this conflict. It cannot be clear what that means, but it lends itself to the the possibility of disruption in the global energy markets clearly remaining high. 

Israel will not allow a deal to happen under these conditions.

Israeli leadership is fully invested. The leadership of Israel in it’s current form are set clearly on the goal of becoming regional hegemons of the Middle East and have a limited window to achieve this. They will not stop until at the very least Iran is unable to enrich Uranium and has no means of doing so available to them. Netanyahu has no choice politically or legally but to continue the conflict. As long as a state of war continues, he can legally continue to govern. When the conflict stops, he faces serious legal and political trouble. How could they possibly turn back now?

Iran has no reason to negotiate with the United States or Israel. 

The first reason is that they have now been validated that their strategy is objectively working.

Trump quickly caved and sought out peace talks as he quickly realized the crippling damage that Iran can do to the global economy. This was the predictable escalation on the Iranian leadership side, and in line with their strategy. They want to bring maximum pain to the global economy in order for the US to be forced to negotiate or withdraw.

This has already happened.

While the US and Israel can continue to pound Iran from the sky with unquestioned air superiority, they cannot fulfill their ultimate goal of regime change or the permanent destruction of Iran’s nuclear capability with air power alone.

There will have to be a ground component, and the US is following this playbook precisely, planning to deploy thousands of Marines and the 82nd Airborne to the region. 

This also plays into Iran’s hands - as it is clear that a ground invasion will be wildly unpopular in the US and across the world, and Trump will suffer under public opinion and political pressure. While Trump and his advisors can hope for a quick victory and a regime change, this is highly unlikely and will prove to be nothing like Venezuela.

I truly believe that the speed and success of the Venezuela operation to capture and replace Maduro gave Trump and his advisors, along with many American citizens, a warped view of the difficulty level and time required to effect regime change and demolition of the existing power structure in Iran. 

From another perspective, the new leader Mojtaba Khamenei cannot simply sign a ceasefire or agree to terms with the US or Israel.

Doing so would make him appear weak and he certainly cannot be seen to negotiate or accommodate the US, after his own father and the Supreme Leader of Iran was killed at the hands of the US and Israel. As the new leader of Iran, no choice remains but to establish strength and defiance.

If Khamenei were to negotiate or even be seen open to talks with the US and Israel, this would be a quick way to put yourself in danger, and make the possibility of a coup by more extreme elements of the military structure imminently likely. Giving in to the demands of the United States or Israel at this stage is a foolproof way to be assassinated by hardliner elements in your own government, which the new leader of Iran must avoid at all costs. 

The other goal of obtaining and destroying Iran’s stores of Uranium will not be as easy as it might seem. The material can be moved anywhere within the country and failure to find and destroy it will keep the conflict raging, as this is one of Israel’s key aims. Although reports from the Israeli PM himself have stated that Iran can no longer enrich or take steps towards a nuclear weapon, this is provably untrue. Unless all of the enriched uranium has been destroyed and the Iranian regime has fallen to a new regime more accommodating to US and Israeli interests, the threat remains and the wholesale destruction of these capabilities cannot be confirmed.

Shifting to the markets, one of the key problems with Wall Street and retail investors is that many believe that good news means a complete resolution. We should know by looking at history that you cannot simply put the genie back in the bottle after opening it. Once war has been unleashed, it can rage on for decades (see Afghanistan and Iraq) and hostilities can quickly reignite at any given time - even if there is an official peace agreement.

Escalation is not always linear.

We could see what looks like a promising diplomatic off-ramp, peace talks, and even a ceasefire.

None of those scenarios mean that the situation is resolved.

We have an impulse as investors and humans to believe that once we have seen good news, we are on the right path, and we will continue on that path. Then we go and worry about something else, because that problem is resolved.

This is not how regional conflicts work.

I have set out the motivations and position of the key players in this conflict above.

Those motivations and aims are not going to change overnight, and so, the conflict will continue play out in one form or another until someone breaks and capitulates.

This leads us to the impact on the global economy. 

Stagflation is economic hell, and it is likely coming. The signs are everywhere, the reality is becoming more obvious with each passing day. We have no choice but to prepare for this. 

Stagflation is simply a combination of stagnant growth in an economy, at the same time that inflation is rising. This leaves no good options, as the Federal Reserve cannot simply lower rates in order to spur economic growth.

If they do, they risk inflation running away and crushing the average American citizen. This almost always leads to intense political pressure, escalating desperation among citizens, or in the worst case, outright revolution. The surging prices in the energy markets will have second and third-order consequences that have not been felt yet. But the consequences that we feel already from rising oil prices alone are incredibly damaging.

How do you invest and look out for yourself in this kind of situation?

Well, I will be writing quite a bit about this in more targeted, specific articles. But we can look at the sectors and investments that do best in this kind of environment.

Gold, materials, industrials, value, short term fixed income, high conviction growth names that are structurally sound and financially healthy, held for the long term and added to along the way. Putting as much of your idle cash into an interest bearing account is important, or into an ETF cash alternative like SGOV.

The most important thing to remember is that this isn’t the market that many of us have grown up in. 

Many young retail investors began investing for themselves in the 2010s and 2020s. Many young people outperformed traditional financial advisors and money managers during this time because they were not restrained by the sound risk management that professional investment advisors are. 

In other words, anyone could pick a few high-flying software names, or just stick to the Mag 7 megacaps. One could ride the Googles, Apples, Amazons, Nvidias, etc to enormous outperformance against the broad market and pat themselves on the back for “beating the market".”

When you don’t have to explain your decisions to clients in investment reviews, you take as much risk as you personally feel comfortable with. Then when you outperform, you declare victory - as if there is no real value to sound risk management and downside protection that advisors and allocators are forced to exercise.

This has lead many investors to become overconfident in their own abilities to pick stocks, attributing their own outperformance to genius in a market that rewarded any software business with growing revenue with absurd multiples to their own personal genius and skill investing. 

If we can learn one things from the greatest investors of all time, and the wisdom of those who have come before us, we can say with confidence that the market humbles everyone eventually. No doubt I will be humbled as well.

But I’m at least aware enough to know that this is going to be a different type of market. 

This is a market that doesn’t reward rapidly growing software and tech companies with the absurd multiples it has in the past decade. Instead, this market will reward companies with resilience and fortress balance sheets.

This is a market in which we could see real economic pain hit earnings.

Great earnings results are the only thing keeping these businesses trading at the levels they are now, despite the geopolitical turmoil. Even so, if the economic picture holds steady and resilient, we could see a couple of years of terrific earnings performance and beats, with investors scratching their heads as stocks continue moving sideways.

This is all happening in the backdrop of perhaps the greatest technological disruption we have seen in our lives to this point, which is Artificial Intelligence.

AI is absolutely going to displace jobs and lead to an uptick in unemployment. The market will adjust and new jobs will be created working in tandem, and using these tools, but as there has been for all rapid technological advancements in the past, there will be an adjustment period in which nobody is clear on the best path forward. This means that for now, there will be pain. Especially if you are a young person trying to start a white-collar career.

There is hope that AI will actually unlock growth, make us infinitely more productive, and allow us to grow out of this situation. In other words, our $40 trillion in debt isn’t as crippling as it is now, if our GDP is suddenly growing between 3-5% instead of 1-2%. This would make our Debt to GDP ratio at least manageable. It explains why we have seen such an incredible amount of investment in AI infrastructure from the largest companies in the world. And I believe that this is possible. But it has to be executed well and we need to see results. This hasn’t happened yet.

We also have to draw a distinction between the performance of the economy and the prosperity of the individual American. If AI makes the top 10-20% more productive, but more than half of our population unemployable, is that a vision for the future we want to champion?

We could see real unemployment that the Fed can’t get a hold of under normal circumstances. Compound the structural unemployment with the continued AI disruption and you have the recipe for an economic and political upheaval.

Business owners are likely going to follow the playbook and look for ways to shed employees if they can automate their position. They are concerned with the profit motive first and foremost, and will continue to be.

Time will tell what this actually looks like as these factors converge, and I will write in detail about each of these issues - but I thought it would be important to lay out the narrative and thesis I see playing out on my side.

Make no mistake, this is the time to adjust allocations and prepare to weather the storm, regardless of positive stories in the media about a ceasefire. 

There will be more to come, as I dig into some of these trends specifically and come up with actionable ideas to deal with them. But for now, let this be a guide for my overall thesis and view of the situation unfolding before our eyes.

The Earnout Investor provides analysis and research but DOES NOT provide individual financial advice. Jamie Dejter may have a position in some of the stocks mentioned. All content is for informational purposes only. The Earnout Investor is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.