Tag: Iran
Bi-Weekly Geopolitical Report – The War in Iran and the End of US Hegemony (April 20, 2026)
by Patrick Fearon-Hernandez, CFA | PDF
In a Bi-Weekly Geopolitical Report late last year, we argued that the 2025 trade dispute between the United States and China revealed just how dramatically Beijing has increased its comprehensive power — military, political, economic, and technological. We argued that China’s comprehensive power may now rival or even surpass that of the US, potentially ending the US’s traditional role as the global hegemon, i.e., the big, strong, dominant country that provides the world with security, order, and the reserve currency. Now that the US has launched a war against Iran — a key member of China’s geopolitical and economic bloc — the world has seen additional evidence that the US may not continue as a hegemonic power. In this report, we examine the evidence pointing to the US relinquishing its hegemonic role and what that means for investors.
Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify
Asset Allocation Bi-Weekly – #160 “Wars, Price Shocks, and Inventories” (Posted 4/17/26)
Asset Allocation Bi-Weekly – Wars, Price Shocks, and Inventories (April 13, 2026)
by Patrick Fearon-Hernandez, CFA | PDF
Since the launch of the US-Israeli war against Iran on February 28, if there’s been one dramatic feature, it’s that the conflict and official statements about it have shifted dramatically almost on a daily basis. By the time this report is published, the war could be going in a wholly different direction from when we started writing it. Nevertheless, we do think we can make some predictions about how the conflict will affect the global economy over the long term. One such prediction touches on how corporate behavior may change in the future. Specifically, we think the war will spur companies to once again embrace high inventories to shield themselves against supply disruptions and associated price jumps. A broad return to higher inventories will likely have important implications for corporate profitability, facility-site decisions, and stock valuations.
The chart above shows the inflation-adjusted value of US private sector inventories as a share of gross domestic product (GDP) since the end of World War II. Clearly, the overall trend has been for companies to hold less inventory compared with their sales. What explains this? We believe many factors are responsible. For example, the extremely high inventories around World War II and the Korean War probably reflected hoarding at a time of limited consumer sales. Inventory holdings would have naturally fallen as the end of those conflicts allowed for normalized supply dynamics and rebounding consumer spending. At the same time, innovations in transportation quickened delivery times and reduced freight costs, while the information technology revolution improved the ability of firms to optimize inventory holdings. And, as we’ve argued many times before, the end of the Cold War convinced many business managers that global peace was at hand and that competing in the era of globalization required using just-in-time inventory management.
Equally noteworthy, the decline in price inflation since the early 1980s has made inventories less needed. Indeed, the chart above shows a long, steep decline in inventory ratios starting in the early 1980s when the Federal Reserve under Chair Paul Volker hiked interest rates and Congress passed a series of deregulation bills, both of which slashed price pressures on the economy. Just as important, the chart clearly shows how rising inflation in the 1960s and the energy crises of the 1970s prompted a big jump in inventory holdings equal to about 1% of GDP. The chart also shows that after commodity prices surged around 2005, firms boosted their inventory holdings. That inventory investment was short-circuited by the US housing crisis, but once the recovery started, inventories climbed back to almost 14% of GDP.
This review of history suggests that as company management internalizes the commodity supply shocks and rising prices associated with the war in Iran, there will likely be a rebuilding of inventories. More broadly, as it becomes increasingly clear that the war reflects a wider geopolitical change marked by a US retreat from hegemony, global fracturing, and increased international tensions, we think the rebound in inventories could be bigger and longer lasting than the one in the early 2000s. We also believe this trend will extend beyond the US, with companies around the world incentivized to boost their inventory holdings again.
What firms will be most affected? In the chart above, we focus on the US Census Bureau’s current series of monthly business sales and inventory data, in nominal terms, which allows us to trace corporate inventory/sales ratios by sector. The chart clearly shows that the rise in the overall inventory/sales ratio since the early 2000s has come from higher manufacturing stockpiles. This makes sense to us, as supply disruptions and higher costs for inputs and components are probably more important for manufacturers than for wholesalers or retailers. Going forward, we suspect that the Iran war will especially boost inventory holdings at the factory level.
In our view, any broad, sharp rise in manufacturers’ inventories from here on out will have significant investment implications. For example, holding more inventories will tie up more of manufacturers’ capital and increase costs. Investors are therefore likely to put higher valuations on the stocks of manufacturing firms that can better control their inventory levels, all else being equal. Given that the US is now a net energy exporter and has significantly greater levels of secure supplies of oil, gas, and other key commodities, we expect many foreign manufacturers to move production to the US, helping to reindustrialize the US economy and stimulating business for US suppliers. The need to store more inventory could also lead to increased demand and stronger rents for firms that own commercial warehouses. All the same, higher inventories will generally result in a less efficient economy than in the just-in-time world of globalization, so price inflation is still likely to be higher and more volatile than in years past, and the same will likely be true for interest rates.
Note: The accompanying podcast for this report will be delayed until later this week.
Asset Allocation Bi-Weekly – The Strategic Petroleum Reserve: A Primer (March 30, 2026)
by Bill O’Grady | PDF
On March 11, the International Energy Agency announced a coordinated draw of 400 million barrels from the Strategic Petroleum Reserve (SPR) System maintained by the organization’s member countries. Understanding the reasoning behind this decision requires an examination of the economics of inventory. This analysis will help the reader understand that SPRs are not just protective stockpiles but have a key psychological element as well.
In textbook economics, inventory doesn’t exist. Theory assumes a frictionless world, which means that production and consumption are continuous functions, and production meets consumption instantaneously. Obviously, this condition doesn’t reflect the real world. The classic example is agriculture: production is seasonal, so there are periods when supply is scarce (between harvests) and other periods when supply is abundant (right after the harvest). Inventory smooths out the supply to better meet demand.
Most goods markets have inventory, and many of them have inventory cycles driven either by production or consumption. Analysts usually attempt to determine what is a “normal” inventory for a given time of the year. Once this norm is established, inventory changes can signal the balance of supply and demand in a market. If inventory is below normal, it likely signals a tight market, which would be expected to bring higher prices. Higher prices encourage producers to make more and consumers to consume less, and the opposite is true when inventory is above normal. This pattern suggests that, under normal conditions, we would expect to see an inverse correlation between inventory and price. In general, high inventory levels should be bearish, while low inventory levels should be bullish.
If the correlation between inventory and price is positive, it suggests hoarding. Hoarding occurs when consumers fear that a good will become unavailable. In response, consumers attempt to build their personal inventory by purchasing more than they would usually hold. If markets are functioning normally, hoarding is irrational. Seeing higher prices, producers will boost output, which should provide enough product to ease shortage concerns. However, hoarding doesn’t usually occur in a vacuum. It typically happens in response to an exogenous shock, like a weather event, war, pandemic, etc. The problem with hoarding is that, at the micro level, it’s a perfectly reasonable response that can make the market situation worse at the macro level. Hoarding is a prime example of the “error of composition.”[1]
The chart below shows US commercial crude oil inventories and the West Texas Intermediate oil price. We have divided the graph into periods where the correlation between oil prices and inventories flipped. Note that in the 1970s, oil prices and inventories were highly positively correlated, reflecting hoarding. The correlation became positive again from 2003 through 2006 at the end of the China-driven commodity bull market early in this century. The rest of the time, the correlation has been negative, which is what one would expect under normal market conditions.
The thinking behind the creation of SPRs was to reduce the tendency to hoard. If a consumer is worried about physical scarcity (as opposed to high prices), then there is an incentive to stockpile. During the gas lines crisis of the 1970s in the US, it was not uncommon for drivers to wait in line to buy merely a gallon or two of gasoline “just in case.” Strategic reserves serve the purpose of ensuring the availability of supply, which should dampen the desire to hoard.
The chart below shows US SPR draws and oil prices. To measure draws, we compare oil prices to the previous month’s peak in the SPR. There are numerous small draws shown as Congress sometimes uses the SPR to fill budget gaps. Often, the SPR oil is “swapped” during supply outages and then usually replaced a month or two later. The major draws, which tend to bring down prices, are noted on the chart.
In our view, the recently announced draw should stabilize oil prices — at 400 million barrels, it’s the largest combined draw in history. However, it’s important to note that the Strait of Hormuz outage amounts to about 20 million barrels per day, meaning this draw could only offset about 20 days of losses. So, we view it as an action that should prevent spikes in oil prices, but it likely won’t be enough to bring down prices sharply without a reopening of the strait.
As our analysis on hoarding shows, if the nations releasing SPR oil keep it within their borders, prices may actually rise. To prevent that, the taxpayers who funded the strategic storage must be willing to “share” with nations that did not. For investors, this is the key factor to monitor. How will we know if the announced SPR release isn’t working? If we see commercial oil inventory and prices rise simultaneously.
[1] A logical fallacy that assumes what is true for an individual is also true for the whole.
Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify
Asset Allocation Bi-Weekly – #159 “The Strategic Petroleum Reserve: A Primer” (Posted 3/30/26)
Bi-Weekly Geopolitical Podcast – #84 “From the Shah to the Strait: The US Gamble to Stabilize the Gulf” (Posted 3/23/26)
Bi-Weekly Geopolitical Report – From the Shah to the Strait: The US Gamble to Stabilize the Gulf (March 23, 2026)
by Thomas Wash & Bill O’Grady | PDF
It has been nearly 50 years since the 1979 Islamic Revolution toppled the Shah of Iran, replacing the Persian monarchy with a theocracy that sent shockwaves through the West. This upheaval triggered the decade’s second major oil crisis and effectively dismantled Washington’s “Twin Pillars” policy. By losing Iran as a strategic counterweight alongside Saudi Arabia, the United States saw its primary mechanism for regional proxy influence collapse — a blow compounded by the wave of oil field nationalizations across the Middle East from the preceding years.
Today, a new regional conflict has emerged as a definitive inflection point — one that could reverse decades of geopolitical momentum. Through Operation Epic Fury, the US and Israel have launched a decisive campaign to dismantle the current regime’s military and leadership infrastructure, signaling a bold attempt to usher in a new era for Middle East oil politics. While fraught with risk, this escalation presents a singular opportunity to reassert Western leverage and fundamentally reshape the regional balance of power.
In this report, we examine the geopolitical significance of Iran and what the current conflict could mean for US global influence. We also summarize the potential market ramifications, including the impact on bond markets, the US dollar, and equities.
Due to the holiday, there will be no Bi-Weekly Geopolitical Report published on April 6th.