Good afternoon. Today I’m trying to think through why despite everything going on, stocks are still having a good year (even compared to other less chaotic periods).
Also in today’s letter: a Q&A about AI and investing, the latest inflation numbers, weird things you may be able to claim on your taxes, and crazy World Cup prices.
As always, send me an email if you have any comments, questions, or thoughts to share.
— Taylor Scollon
How much are you willing to bet on TACO?
Markets are down a bit today because no one is really sure what’s going to happen with the ceasefire between the U.S. and Iran. Trump says the talks are going ahead, but also seized an Iranian cargo ship yesterday. Iran says maybe they won’t show up to the negotiations, but flights have started again at Tehran’s main airport. The ceasefire ends on Wednesday, so maybe we’ll have more clarity by then, but also maybe not.
All of this uncertainty still existed last week too, but markets chose to pretend it didn’t, absolutely ripping as soon as it looked like the Strait of Hormuz was once again open for business. Both the S&P 500 and Nasdaq hit all-time highs and oil prices crashed. And the strait never did really reopen. Somewhere north of a dozen tankers apparently crossed on Friday, but today that was down to just one ship. Typical traffic prior to the war was around 130 vessels per day.
The physical reality that triggered a surge in oil prices — the closure of the strait and removal of ~20% of the world’s oil supply from the market (minus the fraction that’s been diverted) — has not really changed, but markets have decided that nothing has happened.
It’s worth pausing for a moment to reflect on why this might be happening.
First, the TACO trade — Trump Always Chickens Out — is very much on. Investors are convinced Trump will walk away from this war, and give Iran whatever he has to to get oil flowing through Hormuz again. Whatever threats he posts on Truth Social is to be ignored. At the end of the day, this is a guy who cares a lot about the stock market, and won’t do anything that triggers a real, sustained drop in equities. This all sounds a bit nutty, but remember that TACO has been the right view so far, not just in the Iran war, but with every policy Trump has announced that’s caused stocks to sell off.
Second, if you’re an investor who missed out on all the previous chances to profit off TACO, how do you think you’re feeling now? I bet a lot of people in that boat are buying the dip these days, either because they now think TACO is a viable investment strategy, or because they think enough other people believe that and will buy the dip as well. Either way, there is a strong psychological pressure at this point not to miss out on the anticipated recovery, and that in itself may be enough to create the recovery.
Third, there is another thing investors fear missing out on, and that is AI. The desire to maintain exposure to AI is, I suspect, keeping some people invested who might otherwise decide that what’s going on in Iran is creating too much risk. This is not an insignificant factor in how market indexes perform given that the Mag7 now make up around a third of the S&P 500. If you’re buying AI exposure, you’re pushing up the index. There is again a strong element of FOMO at work here. What happens if a groundbreaking new model arrives while you’re sitting on cash? If AGI is around the corner, how much does it matter if a barrel of oil costs $70 or $140?
As Kyla Scanlon writes in The New York Times this weekend, “The implicit argument embedded in current valuations across both public and private markets is that A.I. will be productive enough to offset an economic downturn as the economy loses jobs from A.I. The valuations also suggest that the A.I. industry will be efficient enough to navigate an energy crisis with the knowledge to reroute supply chains disrupted by, say, war.”
I can’t tell you what comes next, but this is a very strange situation. Maybe it’s because the facts of the world are strange, and investors are responding rationally to the combination of a) who is in the White House, b) a possible AI-driven productivity boom, and c) the potential for a settlement in Iran. Maybe it’s bubble chasing. Either way, it’s very weird that given everything going on, it’s turning into a great year for stocks.
Fidelity Canada’s emerging tech director on how AI will automate investing
In this Smart Money Q&A with John Bradley, Fidelity Investments Canada's director of emerging technologies, we ask:
In three years, what parts of investing will be fully automated using AI systems for the average person?
What are AI’s shortcomings when it comes to investing?
How trustworthy are investment recommendations or portfolio changes suggested by AI?
Whether there will always be a human in the loop on every investment decision?
What are some of the emerging fraud risks that people should be more aware of?
Inflation jumped to 2.4% in March. Gasoline prices were the biggest reason for the surge, up 21.8% on the month. The report wasn’t actually terrible, though: forecasters were expecting headline inflation higher at 2.6% and so far energy prices aren’t spilling over into other prices.
K-shaped economy alert! Delta’s CEO said the airline isn’t worried about an economic slowdown because its affluent passengers will keep spending no matter what: “As difficult as it is to see what's going on with the conflict in the Middle East, I'm not sure that our premium customers are feeling affected by that.”
The gas tax is suspended until September 7. The tax is up to 10 cents per litre of gasoline. It’s something, but the reality is whatever happens in Iran is going to make much more of an impact on what you pay at the pump.
Weird things you may be able to claim on your taxes: Gluten-free groceries, wigs, and psychic advice may all be legit expenses. (This is not professional advice!)
World Cup price gouging is picking up steam. NJ Transit is charging $150 for a round-trip train from Manhattan to the stadium at Meadowlands. Toronto backed off plans to charge for entry to “fan zones” after backlash, but I’m certain we’ll see cities try to find more ways to recoup the extraordinary cost of hosting this event. Not to be a grouch, but with ticket prices for these games being what they are, I’m struggling to see the attraction of hosting a World Cup.
It’s a terrible summer job market for young people. The youth employment rate was just 51% in the latest Labour Force Survey. Here’s a (paywalled) story in The Globe: “Chloe Rahman, a third-year communications student at Carleton University, experienced the competitive market for months after starting her summer job hunt in December last year. ‘You apply to 100 jobs and then you get one or two interviews, and then you might not even get those jobs,’ she said.”
Anyone in the market for a never-used private jet?
