As before, anything I write regarding the situation in Iran is based on what I believe to be true right now. None of us know how accurate any individual report is. Every party involved has an incentive to shape opinions regardless of what’s really happening on the ground. Again, I’ve seen videos claiming to show the current situation in one country when the video is years old and from a different country. I’m following the situation and will adjust my opinion as information and events warrant.

 

In 2022 and 2023, I made a bit of a name for myself by being early and right about inflation being worse than mainstream economists thought and by correctly predicting the Fed’s policy would be “higher for longer”. I explained my reasoning in public and was invited to be on many podcasts and programs. What gained me attention was that instead of explaining what happened yesterday, I was explaining what I thought would happen over the next year and why. There’s risk to that and every time I make a prediction, or buy a stock for the portfolio, I’m aware of the possibility of both losing money and looking like an idiot in public. It’s happened before and it’s not fun. But I need to take that risk for my work to have value.

 

In my opinion, too much mainstream “analysis” involves fitting an explanation to match yesterday’s events. For example, a couple of days ago, gold rose sharply leading all of us (including me) to say, “Of course gold rose:  It was a flight to safety trade.” However, when gold fell yesterday, we got a lot of additional explanations:

• The dollar was a more liquid flight to safety trade so it strengthened which lowered the dollar price of gold.
• Portfolio managers raising cash to reduce risk tend to sell winners before losers so they don’t have to realize losses. Gold is up 42% in the last 6 months and 75% in the last year so it was early on the chopping block.
• Or my view which is gold is currently just under $5,200 and up more than 4% in the last month. It’s more than tripled since DKI bought it in 2020 with most of that increase coming in the past year. Short-term volatility is interesting, but not important. The war in Iran is affecting current trading, but not the long-term thesis for the underlying asset.

 

The above explanations aren’t wrong. They’re just post hoc instead of predictive. (If someone was selling gold on Monday and buying it back at Tuesday’s lows, then I tip my hat to them!) Let’s take another example. $TPL is trading near an all-time high and is up almost 4x DKI’s initial purchase price. It was up on Monday. Of course it was:  Oil was up so we’d expect an oil stock to go up. But $TPL was down on Tuesday. That also can be made to make sense. Higher oil prices affect the cost of memory chips made in Korea and the cost of running a datacenter. One exciting part of $TPL’s business model is the plan to put AI datacenters on its land and provide energy and water. Worse datacenter economics mean fewer builders of them will want to pay to be on $TPL’s land. See the point – no matter what happens, there’s an explanation that makes it all seem to make sense.

 

I’ll give you three examples explaining some of why I’m not currently making changes to the portfolio during the current war-related volatility.

• Yesterday, it appears that Israel successfully blew up the building where Iran’s 88-member council was meeting to choose the next Ayatollah. This dealt an incredible blow to Iran’s leadership. I didn’t see anyone predicting this. Do any of us know how they’ll select the next leader? Who’s going to be in charge? Also, why is the Iranian leadership still meeting in surface-level buildings that can be turned into rubble from the air? The memes about Zoom using this as advertising aside, they do have underground facilities and Israel has publicly explained how it knows where all of these leaders are.

 

• Iran’s “irrationality”. I previously noted that Iran’s attacks on other Gulf countries seemed likely to result in more countries uniting against the regime. That appears to be the case. Some have speculated that so many Iranian religious political leaders and military leaders have been eliminated that the in-field commanders are just following the last orders they received regardless of changes in circumstances that would lead to a change in orders.

 

• President Trump’s Insurance. This is the BIG one. A day ago, I wrote about how Iran didn’t actually need to close the Strait of Hormuz. Insurance companies had stopped writing policies or were doing so at much higher prices. Risk underwriting was bringing Strait traffic to zero (or close to zero). President Trump changed that in one social media post. He announced a US government agency would issue reasonably-priced insurance policies, cutting Lloyds of London out of the market. How can President Trump underwrite this risk and not end up with massive insurance losses for the US and oil tankers at the bottom of the Strait? He’s said the US Navy will escort ships if necessary. That’s a level of insurance no insurance underwriter can match. The key point here is that with one social media post, the President changed the calculation for shipping oil through the lane that carries 20% of the world’s crude (and changed the market for the shipping insurance companies).

 

The Korean stock market has gotten crushed during the first few days of this week because they are tech-heavy and have to import energy. Memory prices may rise even further from currently-high levels. If the US Navy can keep the Strait open, that changes things. If one Iranian missile or one submarine can hit a Naval ship or oil tanker, the opposite will happen leading to higher oil prices, higher losses in Korea, higher memory prices, and lower stock prices for the US-based semiconductor firms ($NVDA, $INTC, $AMD) and for the hyperscalers like Google, Meta, Apple, and Amazon.

 

No post hoc analysis here. I don’t know what’s going to happen over the next month let alone the next 24 hours. I do like current DKI exposure featuring dollar alternatives like Bitcoin, gold, and silver, big energy positions in oil and nuclear, and a select number of high-growth stocks. I’m watching current events like all of you are, but don’t want to get whipsawed by trying to trade every intra-day move.

 

As always, IR@DeepKnowledgeInvesting.com with any questions.

 

 

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