Host: Hello my friends. Today is February 28th and this is Markets Weekly. So this morning we woke up to war in the Middle East. Last evening, Israel and the United States began their assault on Iran. And as we record, Iran is retaliating and the fighting is ongoing.

Host: So today, first let's talk about what's happening in the Middle East and look at prior Gulf Wars to see what that could mean for markets. And secondly, we have to talk a little bit about Catrini's viral piece on AI displacement and note some counterpoints as well. All right, starting with the Middle East.

Host: So this morning, the president released an 8-minute recorded video uh basically stating out his rationale for war with Iran and his goals. He noted that Iran is a bad regime. in the past has attacked the United States, taken their uh attacked US embassy, taken hostages, also could have ballistic missiles that could reach the US, could potentially have nuclear weapons, a great threat to the US. And so what they're doing is that they are attacking their capabilities and also pushing for regime change.

Speaker: Finally, to the great proud people of Iran, I say tonight that the hour of your freedom is at hand. Stay sheltered. Don't leave your home. It's very dangerous outside. Bombs will be dropping everywhere. When we are finished, take over your government. It will be yours to take. This will be probably your only chance for generations. For many years, you have asked for America's help, but you never got it. No president was willing to do what I am willing to do tonight. Now, you have a president who is giving you what you want. So, let's see how you respond. America is backing you with overwhelming strength and devastating force. Now is the time to seize control of your destiny and to unleash the prosperous and glorious future that is close within your reach. This is the moment for action. Do not let it pass.

Host: So this is the absolute maximus position the US could have taken. Now this should not be a surprise to any of you. We've seen the US build up military forces over the past few weeks. The USS Gerald Ford, the largest aircraft carrier in the world, went into position on Friday. And if you understand the US's political structure, you can see that this was definitely going to happen.

Host: Now, the president's excuses are very obviously nonsense. Now, Iran did attack the US embassy that happened in 1979. So, quite a way back. And then, you know, if you're reaching that far back to find excuses to attack someone, you are just kind of making it up. Iran does have ballistic missiles, hypersonic ballistic missiles that are a great threat to people in the region um but not a threat to the US. Uh on Friday, uh the New York Times released a piece where people in the intelligence community basically said that uh that is just not what the person said was just not true.

Host: Now, with respect to Iran's capacity to have a nuclear weapon, US intelligence also suggests that they don't and are not close to having a nuclear weapon. But I'd also show you this. If not stopped, Iran could produce a nuclear weapon in a very short time. It could be a year. It could be within a few months.

Speaker: They have the wherewithal, the stored up, preserved knowledge to make a bomb very quickly uh if they wanted to do it.

Speaker: Iran is so dangerous, weeks away from having the file material for an entire arsenal of nuclear bombs.

Speaker: They're very close. They're 6 months away from being about 90% of having the rich uranium for an atom bomb.

Speaker: Iran is gearing up to have to produce 25 bombs, atomic bombs a year, 250 bombs in a decade.

Speaker: Ladies and gentlemen, time is running out.

Speaker: Iran will be capable of producing alone without importing anything nuclear bombs within 3 to 5 years.

Host: So as you can see uh Prime Minister Benjamin Netanyahu of Israel has been saying for uh 30 years that Iran is about to have an nuclear weapon imminently and so we need to attack them. So Iran is what is who Israel perceives to be their greatest regional threat and if you are an Israel with dreams of having more influence in the Middle East you really have to take Iran out. And so they've been trying to do this for some time. They cannot, but maybe with the US's help, they could.

Host: Now, for those of you who know, the Israel lobby has tremendous influence on foreign policy in the United States. I can tell you from a personal example that a few months ago, I noted that Israel was killing tremendous amounts of Palestinians. Again, some could call that to be a genocide. Some could call that to be ethnic cleansing, whatever. And right after making that video, I got all sorts of emails telling me that, you know, that's not true, that's not true, you know, and then I would point out, you know, this is what the UN and the Red Cross are saying, and they just turn around and uh it's like talking to a brick wall.

Host: And then I was scheduled at that time to speak to a conference in the coming weeks. And the conference organizer actually sent me emails and told me that a lot of people were trying to get me cancelled because of my comments of what Israel was doing in Gaza. If you if you research on the internet, you'll notice that this is actually very common. Uh people just ordinary people who make comments about Israeli actions, Israeli policy uh in in Gaza or elsewhere, uh they get intimidated. Some of them lose their jobs. So this is something that is actually quite widespread in the US. And we are not I'm not that important and these general white collar workers are not that important either. But on but the pressure intensifies when you are actually in u in politics and congress or so forth.

Host: What would happen actually uh recently actually is that if you are not supportive of Israel uh you would not get donations from the Israeli pi and they would actually fund your challengers to try to take you out. So there's tremendous influence of by Israel on US foreign policy and in the institutions in the media and so forth. If you are not supportive of Israel, they can do things to uh ruin your career. So there is very much below the surface a very strong pressure campaign uh to support Israeli causes. So you know I understand as President Trump was probably uh of course under the most intense pressure of his lifetime and it seemed like that was enough to push him to actually launch the strike uh on Iran.

Host: Now how this goes forward it's going to be very very difficult to say. So first let's think about what happened in prior US middle eastern wars. So uh in 1990s there was something called operation desert storm. At that time Iraq attacked a smaller neighbor Kuwait and the immediate market reaction for that was of course huge huge spike in oil. At that time the Middle East was super crucial for oil and the US was a major oil importer. The markets of course sold off and did not like it.

Host: In the following months, the US built an international coalition aiming to uh free Kuwait, repel Iraq and so forth. And during that buildup, it was very obvious, of course, when you move assets to the Middle East, it's it's basically in your face, similar to the buildup we're seeing uh the past few weeks. And so interestingly the markets did poorly into the buildup but at the moment the strikes commenced oil totally totally imploded and the markets rallied furiously. So it was a very classic uh sell the news event. Uh so it could be that the markets saw that this would be very easy to win. It would be something that was very brief. It could be the markets had already digested the um uh digested the news and so they were selling off in the months before and rallied a at the actual realization of the event that happens sometimes.

Host: Now another recent example is in 2003 we had the Iraq invasion. So that invasion was also something that was very much out in the open. The US built an international coalition of the willing, launched tremendous assets into Iraq and then uh invaded and overthrew Saddam Hussein. Now into the buildup of that event uh the markets did poorly. Everyone was kind of worried. Oil was spiking and equity markets selling off. But uh the moment that attack began oil prices imploded and again markets rallied furiously and that was a really very quick strike. In a few weeks the US had taken down Baghdad. Of course the aftermath took many many years but the battle was over very quickly.

Host: So what you see is historically these geopolitical events are something that you would fade. Same thing actually in the Russia Ukraine war for example. Oil spiked tremendously at the beginning but again uh it's went down a lot. Now the I think that is basically true. You historically want to fade these geopolitical events. Uh but I think what's a little bit uncertain is that just how this conflict would play out because the market did not price this in or at least it didn't seem like it was pricing it in the equity markets largely ignored it. Oil you do see a geopolitical premium. It's not super high but it is there.

Host: So Iran is different from Iraq in that uh for for a couple reasons. One is that Iran is much much much bigger and also uh in geography and in population. Also, they have more sophisticated weapons and word is that they have some assistance from Russia and China, though it's hard to know how much. So, at the moment, what Iran seems to be doing is that they are striking um oil facilities or military assets, basically neighbors in the region.

Host: It's really hard to know, fog of war and all that, but one of the things that they have said they're doing and appear to be doing is to try to disrupt global oil. So, if that's the case, and if Iran does have these military assets that maybe we don't fully know about, the ballistic missiles, the hypersonic ones are are very effective uh and cannot easily be intercepted. This could be a longer war than we anticipate and it may not be as easy as um as the market well as past military action has been. Again, whereas US has a lot of assets here, last time I think they had like five carriers, this time there's only two. So this is very much a high degree of uncertainty. But what I think is pretty clear though is that this will not be something that is over by the end of the weekend. If you really want regime change, this is going to take days and the US seems to be prepared for that. The president noted very clearly that uh there will will be casualties here. So he's prepared to do that.

Host: One limiting factor is that the US actually doesn't have that many munitions and so it really can't be here for a very long period of time in the matter of weeks. It could eventually run out of munitions and as I understand those are not easily replenished. So this is not something that's necessarily going to take months but it could take weeks. So uh this is something that first and foremost is going to be destabilizing. It's going to be a big riskoff day, but I expect that eventually this is something that uh would be worth fading.

Host: Now the most direct impact that this would have on the US economy is through oil prices, of course. Now, recall though that US is actually the largest oil uh producer in the world today. So, it's not going to have as much of an impact on US as it would in the past. But that's not true for other countries. Think about Japan. I think about Europe for example. So that's going to have a much bigger impact on them uh than um than the US.

Host: More broadly looking out, this is going to have an important implications on the political prospects of the Republicans uh in the midterms. They're going to lose the House. There is some probability that they could lose the Senate as well. So losing all of Congress uh would be a very big blow to the president's agenda. It opens up all sorts of investigations on the president and his cabinet members and you know maybe some of them would might possibly go to jail. So if you're banking on having a America first agenda or maybe further deregulation and all that other stuff that becomes much more difficult should the president lose Congress.

Host: Looking beyond that it also impacts JD Vance's um chances for presidency as well. a big constituency in the Republican party is against war and they basically broke all their promises and so this is something that that uh makes it much more likely that they would lose the 2028 election and of course uh if we have a Democratic party there that suggests significant changes in things like tax policy and immigration policy as well. So this is something that we should definitely focus on. It's um very unfortunate to have this war and so um but again it's it's early so let's see how this plays out.

Host: All right, the second thing that I want to talk about is of course the huge viral piece had on AI sketching out a potential uh kind of a doomsday scenario where AI massively massively displace white collar workers uh leads to tremendous rise in the unemployment rate uh maybe deflation maybe it impacts a lot of um mortgages loans and so forth and we'll also talk a little bit about uh some counter examples to this. So the scenario that

Host: Centruni sketches is something that I think we've talked about before and we can kind of see happening today. So this past week, uh, Jack Dorsey of Block fired 4,000 out of his 10,000 employees, saying that AI basically has made a lot of them unnecessary. Now, the naysayers will say that Jack Dorsey overhired and he's trying using AI as an excuse to shrink headcount. I think that definitely plays a role as well. But the ultimate question is is agentic AI as it is today capable of replacing some white collar workers.

Host: Now after having using anthropic and listening to wider perspectives I think that is definitely true.

Host: Now Sutrini's example takes that and takes it a step further and notes that you know maybe there's much more widespread uh displacement and what happens to these white collar workers? Well, they all tumble into blueco collar jobs like uh driving Uber until we get autonomous driving of course compressing wages for blue collar workers and in sense we get into this huge u kind of a deflationary spiral and in that scenario of course in my personal view bonds would be the ultimate AI trade.

Host: Now a counterpoint to that of course would be uh looking past over the past 100 years 200 years we've always had technical logical advancement right and what we've seen after every advancement from electricity steam engines internet and so forth is that yes there is some friction in the employment market but at the end of the day there's no mass spread unemployment right people find new jobs you know people become I don't know YouTubers or something like that and at the end of the day we are all wealthier here. So that is of course a very obvious historical observation.

Host: Now one thing I'll note though is that I think that's not fully true. So one is that over the past few decades we actually do see mass unemployment but it's just not measured and let me explain. So one of the things that we saw partially through globalization and partially through increased automation in manufacturing was that you the US has much fewer manufacturing jobs. Now that doesn't necessarily show up in the higher unemployment rate because what happened actually is that hundreds uh thousands millions of of people basically dropped out of the labor force. So they're not counted in the unemployment rate.

Host: So if you look at the labor force participation prime age among cohorts you can see that uh people without a college degree people who usually in the past would have worked in say bluecollar manufacturing jobs their labor force participation rate dropped precipitously as automation and globalization were going on and just has not retire recovered. So a portion of the population does get left behind permanently. they don't show up in the unemployment rate because they drop out of the labor force.

Host: Now the second thing to note is that the technology definitely makes us all wealthier. Obviously, let's say that I'm using AI now. I can create a funny uh photo or funny video effortlessly. That is goods and services produced, right? You are basically in real terms having uh more wealth and AI can do a lot in research and so forth. All that stuff is super important. And if you were to count it into GDP, more goods and services produced, that is definitely going to boost GDP. But that is not the whole story. it doesn't necessarily boost income because of massive deflation in in the products produced.

Host: Now income nominal income is important because a lot of people uh will have debt and so if you have massive massive technological innovation that allows you to produce goods and services much cheaply. Yes, overall we are all wealthier but that doesn't necessarily mean you make more money. And if you have fixed nominal obligations like a mortgage or like corporate debt and so forth, uh that that's actually big trouble for you. So my best guess is actually at the end of the day, AI will make us all wealthier, but no one will make any money.

Host: So we're seeing some of that creep into the debt markets. So what's kind of alarming is that we saw some stress in the debt markets. So the senior loan market or if you look at private credit a lot of the BDC's these are basically publicly traded credit private credit funds uh these guys are taking huge huge haircuts on their equity prices because they're are big lenders to software technology.

Host: So as this disruption goes on it's creeping into the debt markets it's creeped into the equity markets. So it's it's hard to say how this would play out. I do think though that this can definitely uh re AI can definitely replace let's say an associate or an analyst. So there is going to be structurally lower demand for labor.

Host: Um it's going to be a bumpy road and the way that I think policy would react to this is going to be more rate cuts. Um just one other note, we did have inflation data last week that was higher than anticipated. Uh but really that's kind of looking at the rear view mirror. the disruption that we're having is just about to occur and it's not yet in full force. Greg Ip from the Wall Street Journal has a really good article on this noting that actually software jobs are are increasing. So maybe this AI stuff is just doom and that could be true but I think we are early in this process. Also if you look at other more broadly other technology sector jobs they've actually been declining.

Host: All right so that's all I prepared for today. Thanks so much for tuning in. Next week is going to be a very exciting and volatile week. All right, talk to you next week.