Purves: Long Oil & Gold After U.S. Attacks Iran

0:00We now discuss the recent outbreak of conflict in the Middle East and how different asset classes respond to major events like this. We want to welcome in our next guest, as Michael Purve is founder and CEO of Tallbock and Capital. Michael, thank you so much for joining us today. So listen, I mean, this weekend had my head spinning. Yeah. I was like, what is happening here because this is not how I expected to come into March, although there had been, you know, talk of tensions rising between the U.S. and Iran. And you think about your latest report, how do we make sense of this? Well, I guess, you know, first of all, it's been a series of interesting weekends, right? It's always new seems to break early Saturday morning and there's not much trading at that time besides Bitcoin there. But look, I guess when you think about this and what to do with your portfolio, my view is that you have to go back and look at what's happened historically, right? And I profiled in this note, I just put out last night, four different, sort of, you

1:02know, geopolitical shocks, all of which had to do with oil, right? So you go back to a rexnovation of Q8 1990, you go back to September 11th, you go back to Russia's invasion of Ukraine, and then you go back to Venezuela, right? All four of those very different, very distinct scenarios, but there's sort of oil is sort of embedded somehow in all of them in different ways. What you see in all of those scenarios is that being long oil usually works, not just for the day, but for, you know, certainly next couple of weeks from a sort of trading point of view, long gold works, right? That's been consistent. When you get to the other asset classes, like the S&P, right, or the Nasdaq, for example, there, it gets much more nuanced and muted. And I think, you know, what really has to happen before you get too excited about dumping all your stocks is, is there a US recession case that's going to be front and center here

2:02because of this event, these events, right? And if you can convince yourself that's the case, yeah, then you maybe want to really think about VIX calls or dumping your stocks or however you want to de-risk there. But in the absence of that, it's really unclear, certainly based on historical data, how that, you know, whether like, you know, dumping your stocks is going to be the right answer here. That said, you do have to recognize what trends were in place sort of coming into this week, right? And we did see, if you look at the S&P 500, it'd go in from bullish, to kind of a neutral stance, to a slightly moderately bearish stance, and none of this stuff is positive, right, certainly there, right? You're going to, at the very least, you're going to see higher gas lean prices there, how long, and to what extent we don't know yet, but it's going to be something there. When do you start becoming concerned about this being prolonged, like how long does it last, how long does the conflict last, where you become concerned about, you know, inflation

3:06risk, and as you mentioned in our word, recession risk? Yeah. So, in terms of like the conflict, you know, whether this, I don't think this is going to be so tidally wrapped up the way Venezuela was, right, I mean, Venezuela was clean and quick, and I think this thing is just orders of magnitude more complex, and nuanced, and all that. And there's a lot of oil infrastructure in the Gulf that is going to be severely damaged here, right? And so this does, unlike Venezuela, Venezuela didn't really kind of lead off into other significant economies around here, we're talking about the whole Gulf region there, the ability to ship oil cost effectively, what's going to have to do insurance premiums on carriers, all of that stuff ultimately is going to bleed through into a higher cost of oil, and I think that could be kind of structural. In terms of, you know, when do we actually, you know, get around off the front page of the newspapers? I don't know when that's going to happen.

4:07My guess is it's going to stay on longer than Venezuela, but you know, I get to come back to this concept. So you have to distinguish what is higher gasoline prices, maybe a higher level of sort of stack flation in some economies, maybe Europe more so than the U.S., but is that enough to really drive, you know, oh my God, there's a recession, you know, these events are driving versus I don't think we're going to really see that there, whether it's next week or tomorrow or in three months. I think that's probably a real tail scenario. Okay. Let me ask you a little bit more about oil markets. So, you know, when you think about oil markets, we're seeing a spike today. Last year was a very, you know, it was a downbeat year for oil, and the expectation coming into this year wasn't, we wouldn't see much different contingent upon something like this. Yeah. You know, so when you think about it, oil, is this a tactical move that you see in a situation like this? For sure.

5:08The knee jerk response up 7% is kind of like, yeah, like what do you expect, like on Saturday morning? You expect to see some sort of move here there. I think the question about whether oil is going to be like the cost of oil is going to be sort of, I see a structural shift higher, not just from a trading point of view, but maybe over the next two or years, yeah, I think that's sort of looming more and more as a base case. I don't know right now what the extent of that's going to be, and I don't know if anyone really does there, but I think you have to be prepared for oil to be higher longer than it was before this weekend. That's it, and I do think it's important to recognize that like things like oil equities, like, you know, like, you know, Exxon, Chevron, we're pretty, all those, you know, trans-ocean energy, anything traditional American energy company. And stuff was kind of like, well, oil is going to be 50 bucks, and, you know, there's too much supply, and it just was a very uninteresting story, and there was a lot of complacency built

6:11into that, and I think what you're going to start seeing is that, you know, as we talk about the rotation, you know, we've talked about tech rotating into value and cyclicals, well, now there's going to be an added dimension of that where there's just going to be, I think, a re-appreciation for energy equities there, and look, after the Ukraine invasion, four years ago, energy equities, you know, you didn't want to really short the market, you wanted to buy long energy as a hedge against that event, that worked much better than buying, you know, S&P Pluts, right? So I think that people are, you should expect to see energy shares also do, you know, particularly well over the next, not just a couple of days, but next few months. Which I can't believe it's been that long since that began four years. Yeah. All right, we'll leave our conversation there for today. Thank you, Michael. Appreciate it. That's Michael Purvis, he's the CEO and founder of Tallbock and Capital.