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: This piece provides some sensible context around Social Security’s overall health—a refreshing change from headlines’ usual doom and gloom. Namely, it highlights a recent paper that found most Americans assume Social Security is “going broke” tied to Trustees’ forecasts, politicians’ comments and public discourse more generally. Yet this is off base for several reasons. Yes, the program is currently in a deficit—more money is going out than coming in. But as the article notes, this doesn’t equate to total insolvency or default. “When the reserve runs out, if nothing is done, the federal agency will have sufficient funds to pay only about 81% of full benefits, according to an estimate from AARP. There’s a big difference between 81% and zero, but many Americans don’t see it.” Yep. On Social Security’s so-called “insolvency date,” the program would still pay out the lion’s share of benefits even if nothing changes policy-wise. It wouldn’t be a total freeze. Plus, as also noted here, payroll taxes fund most of Social Security, making it a pay-as-you-go system and rendering the depletion of the trust funds less of an issue than headlines commonly portray. The issue from there is a mismatch between incoming revenue and outgoing benefits, which Congress can easily address with tweaks to payroll taxes, the retirement age or something similarly small. Congress has already proven its willingness to adapt tax policy and keep benefits flowing in full, albeit acting at the last minute. (It could also make changes that aren’t about taxes to improve its health.) We doubt that changes, given angering voters by cutting benefits hurts their re-election chances. Secondly, these insolvency forecasts are highly imprecise, making straight-line projections around economic activity and wage growth—two inputs into future tax revenues. But none of that is knowable now, so take these estimates with a grain of salt. In concert, worries around Social Security’s health are a long-running false fear, more a political talking point than reason to do something different with your retirement investments.