Morning Note

Global equity markets are seeing yet more downside this morning (I'm typing this at 8:50am pt) on the latest out of the Middle East... Iran's new leader declared publicly that they intend to keep the Strait of Hormuz closed, and that attacks on neighbors and US military bases in the region will continue... I.e., we're looking at escalation at this point.

Oil is up markedly on the news, and, again, global equities are getting slammed.

On the upside, we're seeing gains in our ag commodities, inflation protected treasuries, US consumer staples, US materials, energy infrastructure, energy producers, utility producers, and of course our S&P 500 put positions.

As for our positions in commodity-producing regions; while, at first blush, one might see current conditions (rising commodity prices) as a legitimate tailwind, other factors -- blanket risk-off selling of equities, a notably rising dollar, and perhaps the early pricing of demand destruction that would take hold in a prolonged crisis scenario -- are overwhelming the positives this morning.

Probably the most surprising mover today is our gold position, down over 1% as I type... Intuitively, gold "should" be catching a nice bid in such an uncertain global environment... It's safe to say that today's weakness reflects some forced liquidation from volatility-targeting strategies cutting exposure across all positions simultaneously, as well as perhaps some profit taking... Make no mistake, however, the fundamental case for gold in a prolonged stagflationary conflict (confirmed by a decline in safe-haven treasuries [yields up] this morning as well) has not at all weakened of late... The statement form Iran's new leader, if anything, reinforces it.

We're holding tight at this point, while of course closely monitoring the overall, evolving global macro setup... Per last evening's note, we've increased our cash position, while de-risking some of our currency exposure.

Here's from that note:

"This morning we exited the remainder of our emerging market bond position (held in portfolios above 100k), and added the proceeds to our cash (short-term treasury mmkt fund) allocation... Our original thesis -- EM high relative yields, rate-cut prospects/optionality, and our structurally weak dollar view -- is essentially being challenged under present geopolitical conditions... I.e., we presently see more downside risk in that space than we do upside potential.

In terms of our overall positioning, we're actively testing it against three distinct scenarios -- contained conflict, protracted conflict, and stagflation -- and conclude that our now-higher cash position gives more room to act decisively as we gain clarity over the coming days and weeks/months."

While -- after careful consideration -- we will tweak/reposition as evolving conditions warrant, keep in mind that we're positioned in a manner that allows us to remain non-reactive in any kneejerk sense of the term. 

Stay tuned, and thanks for reading!