Daily Commentary

MarketMinder’s View: While Tuesday evening’s ceasefire technically opened the Strait of Hormuz, it remains effectively shut in practice, and this is a good look at why. It isn’t just that Iran is allowing only ships it deems friendly and which agree to pay a hefty toll. It is also requiring ships to hug the Iranian coastline, veering dramatically from the normal shipping lane that runs closer to Oman. For many tankers and their insurers, this is a nonstarter: “Ships would be diverted between the islands of Qeshm and Larak, forcing traffic through an extremely narrow choke point only a few miles across. … The narrowness of the waterway would increase the risk of collisions and groundings involving 1,000ft tankers that can carry two million barrels of oil and take three nautical miles to stop. Forcing ships through the narrow waterway also threatens to overwhelm navigation systems, which track signals from nearby ships. Other dangers include uncoordinated changes of direction that could cause chaotic chain reactions.” Even without the mines maritime analysts think might be in the normal shipping lane, this is too hazardous for many of the 700 stranded tankers. Eventually this will probably be hashed out, whether diplomatically or militarily, and we still believe the Strait probably reopens faster than most anyone seems to think. It is also not a surprise to markets, which appear to have pre-priced it based on stocks’ and oil’s journey since the ceasefire. News of a continued de facto closure didn’t cause stocks to plunge or oil to spike anew. But if you were wondering why this isn’t an open sesame situation, this is why. It is also why, no matter what happens in the peace talks, Gulf producers are highly likely to invest in pipelines and other transit methods for oil that circumvent the Strait. While the effect would be years out, this would likely squash Iran’s leverage in full.

MarketMinder’s View: The titular investment is Treasury Inflation Protected Securities, better known as TIPS, basically an inflation-linked US Treasury bond. Their principal adjusts semiannually with inflation, and they pay interest on that adjusted amount (with interest rate at issuance generally less than comparable-maturity US Treasury yields). At maturity, you get the full inflation-adjusted principal. This piece explains that, advocates TIPS as a superior inflation hedge for long-term investors, then spends several hundred words suggesting how to do it. But in doing so, it glosses over some big issues and ignores others. Here is a tip: TIPS aren’t all they are cracked up to be. As the article notes, they fell in 2022 because they, like normal bonds, are interest rate-sensitive. That means, in the most recent year of hot inflation, TIPS didn’t provide a positive total return. That is kind of a big deal! Consider also that long rates tend to rise when inflation heats up, making the very thing you are supposedly guarding against a portfolio risk. Simple Treasury bonds have outperformed TIPS plenty, and unlike TIPS, their principal doesn’t get marked down when the consumer price index (CPI) turns negative. Yes, deflation will also deflate your TIPS principal. Lastly, missing here is any discussion of why anyone should own bonds in the first place, treating them only as a long-term cash flow generator. That puts portfolio income on a pedestal, conflating income (dividends and interest) with cash flow. If you do that, you miss the crucial factor: your long-term goals and any consideration of the total return (price movement plus interest and dividends) necessary to reach them over time. Then bonds become more about reducing a portfolio’s expected volatility, which TIPS may not be optimal for. Always think big picture, putting your goals and time horizon first, and don’t let fear of today’s bogeyman push you into an asset that might not match your needs. Lastly, the article operates on the presumption inflation is here to stay after the CPI popped up in March, which isn’t really right. Oil prices are volatile, usually fall in the months after conflict, and the March CPI showed little price pressure outside that.

MarketMinder’s View: Checking in on one of the big financial stories backburnered by the war in Iran, the confirmation hearing for Fed head nominee Kevin Warsh was potentially slated for next Thursday but is apparently TBD once again. According to the ever-trusty unnamed sources familiar with the situation: “The committee’s rules require that it give a week’s notice before the hearing is held, and the panel first needs to collect paperwork from the nominee, including financial disclosures. The banking committee has yet to receive Warsh’s paperwork, according to three people familiar with the Senate process.” The article suspects this might be to do with his family finances being a tad complicated, noting Warsh “listed nearly 1,200 assets” on his paperwork when nominated for his first Fed stint 20 years ago and likely only increased since, as he worked for a hedge fund in the interim. We will leave all that speculation to the side, along with speculation over whether the senator who pledges to block Warsh’s confirmation until the Justice Department’s investigation of Fed Head resolves will back down. We simply note: This remains a wee source of uncertainty but will resolve, one way or another, soon. Meanwhile, outgoing Fed head Jerome Powell plans to remain as caretaker leader beyond his term’s scheduled expiration if necessary—consistent with precedent—and has hinted at remaining on the Fed board after the new chair is installed (his term there ends in 2028). Given the Fed votes by committee, none of this latest news looks terribly consequential for monetary policy, the economy or stocks.