Listen to the full episode here.
John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we ever good friends, Sam Clement. Sam, say, hello,
Sam Clement (00:42):
Hi John. How are you doing?
John Norris (00:45):
Sam, I’m doing okay. I’m doing okay. Better than I was doing over the weekend when I was reading all the news from around the world. And lo and behold, as though the headline came from a bolt out of the blue, Assad had fled Syria, the Syrian government fell.
Sam Clement (00:52):
This has been an ongoing issue for quite a while, what…
John Norris (00:57):
13 years? Something like that?
Sam Clement (00:57):
But it is almost like nothing happened until it all happened, or at least that’s how it felt like. I mean this conflict’s been going on, but a relatively small group of rebels overtaking a government that had been in existence for what, five plus centuries?
John Norris (01:13):
It’s been decades.
Sam Clement (01:15):
Yeah, with his dad.
John Norris (01:16):
I mean, it was kind of shocking to me. I mean, I knew that the rebels had made some gains of around Aleppo, but it all seemed to happen very rapidly and my first thought was, what in the world is going to happen there? Is this going to lead to some kind of power vacuum? Investors hate uncertainty and uncertainty in that section of the world is bound to give people some angst, and then all of a sudden you take a look at what happened in the markets yesterday and…
Sam Clement (01:45):
Not a whole lot.
John Norris (01:45):
No one really seemed to care. And in fact, it’s kind of hard to find a lot of worthy news coverage on it really in the U.S. press. You have to go overseas, you have to go to the BBC and elsewhere in order to find anything. And frankly, it’s still kind of a question mark exactly what happened when all that stuff… We know that Assad is in Russia somewhere, maybe an ophthalmologist again, maybe, although he would not be a very good ophthalmologist if he couldn’t see this coming (laughs). Thank you very much. I’m here all week! But in any event, when I take a look at this, it really does beg the question, well two questions. Just how much do U.S. investors really consider the remainder of the world when plunking down money in their portfolios? That’s the first question.
(02:35):
And then the second one is, what is it about this section of the world that has to have strong men, dictators, absolute monarchies and all of the like? You go throughout any other majors sort of section of the world, you can call it Middle East, Western Europe, eastern, go throughout, just you take a look at the Middle East and just about every country has some form of a “strong man” sort of rule. If it doesn’t have that, it’s got chaos. With the one exception being Israel, what is it about this? I go, what is it about the section of the world? However, and Sam is chomping at the bit to answer that question. Go back to the first question and just Sam, what do U.S. investors consider when plopping their money down? If things like this don’t move the needle, if what President Xi’s doing, waving a sword around Taiwan over the weekend, if the Eastern European bloodbath has haven’t moved the market, I mean hell, if the situation with Israel and Hezbollah and Hamas, if that hasn’t moved the markets, what possibly could?
Sam Clement (03:42):
Well, even Israel’s stock market is pretty much at all time highs. I mean, they’re in that conflict.
(03:49):
And so we’ve talked about this before. We’ve talked about it with the conflict in Ukraine, and we keep going back to what’s the GDP impact, the global GDP impact. And when we’re talking about the Middle East, the caveat is energy of course, and the impact that that has on energy supply. But outside of that, Syria is not a country that has a huge GDP impact globally, and there’s not key industries coming out of Syria. And so when you get that all said and done, when you talk about even global investors, the percentage that’s in the Middle East, it’s really marginal. I mean almost nothing. When you start to market cap weighted or what have you, most people have U.S. dominated portfolios with Western Europe, really the G7, and then if they’re getting into emerging markets, it’s largely China and China affiliates.
John Norris (04:40):
So really not a lot of investment in Syria, not a lot of investment in Georgia.
Sam Clement (04:47):
You could be passively globally indexed and you have almost zero exposure to that area. I mean, you don’t have Iranian exposure.
John Norris (04:59):
Certainly no Yemeni exposure.
Sam Clement (05:01):
You have Israeli tech exposure largely.
John Norris (05:03):
That’s about it really, I mean outside of maybe, I guess what you’re trying to say is really outside of petro dollars, that’s what we used to call them. Outside of really petroleum crude oil and what have you, the Middle East’s overall economic impact on the global economy is relatively minimal.
Sam Clement (05:22):
Yes. And again, the caveat is energy, whether it’s how does this impact supply, I mean, what does this impact relations with Iran who has been backing Syria or was backing Syria? Those are the kinds of questions that, whether it’s pipelines through Syria, I mean, there’s these tangential things that you kind of have to look at, but in terms of just broad picture, global GDP, the impact from the Middle East is pretty small.
John Norris (05:47):
So when we take a look at a country like Syria that at least in terms of headlines over the last decade, really has maybe punched above its weight class, perhaps? I mean, do you know the names of all the dictators around the world of all the presidents around the world? But you could at least probably mention Assad, right?
Sam Clement (06:06):
Yeah.
John Norris (06:07):
However, Syria’s overall global economic impact, as you point out, is next to nothing, and it doesn’t really have any sort of significant energy resources as well as I can tell. It’s certainly not compared to some of its neighbors. So I guess what you’re trying to say is when you have a country like Syria in the Middle East, which has marginal domestic economy and no energy… if it’s dictator falls, it’s almost as though if a tree falls in the woods and no one’s around to hear, it doesn’t make a sound. If a Syrian dictator gets toppled, and we don’t care…. Well, I guess we don’t care.
Sam Clement (06:49):
And there’s differences that are going to come in. I think al-Golani, and I think their group that is now kind of in charge is more of a..
John Norris (06:57):
Is that the former Al-Qaeda person,
Sam Clement (07:00):
More of a Shiite or more of a Sunni Muslim rather?
John Norris (07:05):
But he says he’s done a 180.
Sam Clement (07:06):
Yeah, he stepped away from Al-Qaeda. So we’ll see.
John Norris (07:10):
that, I think that’s one of those ones you can step away from Al-Qaeda, but Al-Qaeda step away from you.
Sam Clement (07:15):
But I think that’s kind of getting to your second point of the strong leaders and dictators, and I think a large part of it is the violent factions of different religions and the impact that that’s had over there. I mean, the wild swings we’ve seen, I mean, Iran is really the largest player in the Middle East in a lot of ways. In a lot of ways. They are an extremely Shia Muslim country.
John Norris (07:42):
Very much.
Sam Clement (07:43):
And that is very different than some other countries in some other groups in the Middle East, and a lot of these groups are extremely violent, and so you have these passionate disagreements, putting it lightly. And so I think that is what leads to this…
John Norris (08:01):
The need to have a “strong man,” if you will.
Sam Clement (08:03):
Or the only, not successful in terms of economic growth, but the only way to have a successful kind of government.
John Norris (08:10):
Well, when you take Iran, think about it, you take Iran, I mean, I think we could say that that’s, if nothing else, a theocracy led by the “Supreme Leader” or what have you…
Sam Clement (08:21):
50 plus years now.
John Norris (08:23):
So then we have kind of a void provisional government in transition for perpetual ever since the toppling of Saddam Hussein in Iraq. Then you have in Saudi Arabia, you have clearly pretty much autocracy there, pretty much autocracy in Oman. “In transition,” I guess you could call it in Yemen.
Sam Clement (08:47):
Dictator in Turkey.
John Norris (08:48):
Yes, dictator in Turkey. And then you have Kuwait as well as Bahrain and Qatar that are all pretty much very strong monarchies. UAE, Listen, commoners don’t rule there either. So when you kind of take a look at this whole section, Jordan has a very strong king. It’s not quite autocracy, but it’s pretty close to it. You either have a strong man, strong king or you have just absolute just hell to pay. Just almost no government. You see that in Sudan. Well, in Egypt, they’ve had a strong man forever. I mean, who knows what this guy’s going to do now, and Tripoli and Libya, I mean, it’s falling apart. Algeria, same people are running it there. They’ve made some promises in 2012. Yeah, yeah, yeah, yeah, yeah, yeah. But it’s still the same folks. Tunisia, Ben Ali got ousted out, but who knows what’s behind door number two. Morocco still has a strong king when you take a look at all of it and you still have, I mean… These are largely, from the outside looking in… this is what I find kind of comical about it. You have these strong men that are trying to hold these people together to keep them from killing each other. However, for Westerners, it seems like so much denominational differences.
(10:03):
I mean, it’s kind of like, and then this is where perhaps Christianity or Christian countries or Western countries have maybe moved on a little bit. Who knows? Maybe Muslim countries would be there another 400 years. But it’s kind of like during the Reformation, whatnot. Protestants and Catholics are killing each other like nobody’s business. They were still doing it up in Northern Ireland, not so long ago now. It just seems kind of silly into the outside world. You could probably explain the differences between Shia Islam and Sunni, and I probably wouldn’t get it. And yet here you have these enormous section of the world where they’re fighting tooth and nail, really killing each other, drawing bloodshed over these things… that to the outside world might just seem like you’re kind of, you’re arguing over semantics,
Sam Clement (10:49):
The largest disagreement’s on the lineage. After Muhammad.
John Norris (10:52):
Yes.
Sam Clement (10:53):
So to outsiders, that probably doesn’t sound like as big of a deal. Again, I’m saying to outsiders,
John Norris (11:00):
Listen, I was predestine to be a Presbyterian, so me, I’m like…
Sam Clement (11:04):
It’s a passionate,
John Norris (11:05):
It’s a passionate,
Sam Clement (11:06):
It’s passionately dividing issue that has led to hundreds of thousands of lives lost.
John Norris (11:11):
And so you have to have a strong sort of head of government kind of hoisting up, not just the flag, but then also the sword in order to ensure that their version of Islam is enforced.
Sam Clement (11:28):
I think you said it earlier in a way that I think makes sense and that’s “holding it together,” I think is the term that makes sense.
John Norris (11:34):
If I’m not mistaken, Assads were Druz or D-D-R-U-Z, which shy. That’s all Greek to me. I can’t really figure that out. There you go. But you were saying you wanted to say something about the Sunnis and Shias, and you’re staring at me blankly right now. Oh, no.
Sam Clement (11:59):
Oh no.
(12:01):
So this is something that again, I mean you mentioned all the power players across the Middle East, and again, the GDP impact isn’t that significant, but the global affairs, we saw it slightly with inflation after Russia with the energy production coming out of there. It’s massively more so what’s coming out of the Middle East and the reliance on oil coming out of the Middle East, so you can’t discount it entirely. It’s hard to not see it. When you look at the members and the seats at the table for OPEC or OPEC plus to not see that there’s a ton of importance that comes out of the Middle East, especially to essentially most of the world that is not energy independent.
Sam Clement (12:51):
There are very few countries that are fully energy independent, that are players in the global economy.
John Norris (12:59):
This then begs for the question, if the United States could ever get to true energy independence, it just simply doesn’t have to count on the remainder of the world for any of it. Can we forget about dealing with the Middle East? Or is that just because it’s still so much energy and so important to the remainder of the world and the smooth function of the global economy, we’re always going to have to have some interest over there.
Sam Clement (13:21):
Well, I think part of that is our globalist policies that we are not just going out there to serve our own interests. I mean, if we do get to energy independence, does that mean we are no longer going to be concerned about global energy affairs? I don’t think we ever get to that point. I mean, I think we’ve swung a little bit from, hey, we need to worry a little bit less about what’s happening in other countries to more making sure what’s happening in our own country is going in the right direction. But I don’t think we get to a point where we say, we’re fully independent. Do what you want to do. We don’t care. I just can’t envision us ever getting to that point, especially with global trade and our trade partners and NATO allies that are still significantly reliant. And that would take us, I mean, we are energy independent in the sense that we produce enough, but we basically don’t consume our own oil.
John Norris (14:19):
No, we export.
Sam Clement (14:20):
We export.
John Norris (14:21):
We export the light sweet stuff that doesn’t require any refining, and we import all that sludge from the Yucatan,
John Norris (14:29):
From the Eroica Basin to a degree and from Canada because for so many years when we weren’t producing enough, that’s what our refineries end up…. In any event, so if you go back and take a look at history, and you were mentioning how everyone just kind of yawned. I mean, it was a countrywide yawn about Syria’s government following over the weekend.
Sam Clement (14:51):
You couldn’t even read about it.
John Norris (14:51):
I mean, it was hard to find. I mean, I found more news about Alabama not making the college football playoff than I found out about Assad fleeing the country. But so not a lot of news right there. We know that in the early 1990s, we went to war because Iraq invaded Kuwait, and then we went back in Iraq. What countries out there do you think the United States would become super involved with if their government fell or we would have to step in some form or fashion if there was governmental issues there?
Sam Clement (15:32):
Well, I think we’re doing it in just about every conflict.
John Norris (15:36):
But for Syria? I mean, I don’t know.
Sam Clement (15:38):
Biden came out and said they were helping the rebels a little bit.
John Norris (15:41):
Well, I mean the Wall Street Journal this morning pretty just refuted everything that Biden had to say.
Sam Clement (15:46):
It’s hard to imagine we’re not playing some sort of role in most of these. It’s hard for us to not pick a side, I think as a country.
John Norris (15:52):
Well, I think you’re right about that, but I mean, do you think that we would actually be visible and I mean just going on in guns and blazing if Jordan falls?
Sam Clement (16:03):
I, I think we are shifting away from that.
John Norris (16:08):
I mean, clearly Yemen, we have not gotten too many boots on the ground.
Sam Clement (16:12):
The conflicts in the Middle East that involved U.S. boots on the ground have left a taste that I can only from reading about feels similar to Vietnam ish in the sense that we don’t want to do this again. And I think the sentiment is there still of these supposed weapons and mass destruction that we never found, but 20 years of conflict for us to leave pretty poorly. But even if we left efficiently, I don’t envision the results now being that different than it would’ve been in another world.
John Norris (16:49):
But you don’t think they would attempt the Pentagon anyhow if all of a sudden we saw some issues in Oman?
Sam Clement (16:55):
Look, I’m sure the Pentagon, I mean, I think they’d love to get involved in just about any conflict they can, and I think they probably are involved in more conflicts than we even know are going on at this time.
John Norris (17:05):
I don’t even like to think about that.
Sam Clement (17:07):
I mean, I think conflicts across the globe, the U.S. is playing a role in one way or another. I mean, we’ve seen it in conflicts in civil wars in Northern Africa and U.S. training soldiers and what have you. We play a role in it one way or another.
John Norris (17:21):
What business of ours is that?
Sam Clement (17:25):
Well, again, we’ve talked about it. It’s a tough question to answer of what the role is of the world’s global superpower in humanitarian rights and what is our role if there is genocide going on. I mean, it’s hard to say we shouldn’t play a role in it, but what that role is?
John Norris (17:47):
Genocide? No, I know what you mean, but we didn’t seem to get too involved in Rwanda. We didn’t seem to get too involved in the Congo.
Sam Clement (17:59):
We got involved in Somalia.
John Norris (18:01):
Yeah, we haven’t gotten too involved in Myanmar from what I can tell. So I think we’ve come across as maybe a little bit, oh, I don’t know, hypocritical in a lot of stuff. If not that, then maybe we’re a little bit too selective. However, we have veered off dramatically from the first two points. That is: why do investors care, and then why does this section of the world need to have a strong man? And going back to the first one, then we’re going to start wrapping things up.
Can you envision outside of maybe one of the major, major energy producing states like a Saudi Arabia collapsing or something like that, what countries out there do you think would absolutely jolt the U.S. investor if something dramatic were to happen their country were to implode?
Sam Clement (18:53):
- Well, Taiwan, I know that’s getting away from the Middle East and I think is one that we’ve talked about, and it’s kind of like, it feels like it’s something’s going to happen at some point. We just don’t know when.
- Israel always is going to have an impact. One just being the only democracy in the region. Two our closest if not one of our closest allies.
- Iran, I think is one that would play a significant role due to the fact that we know they have nuclear weapons or close-to nuclear weapons. That unknown risk of geopolitical escalation, I think is the biggest jolt that the investment markets could have from the Middle East.
I mean, we’ve seen it with countries that feel like they’re backed into a corner in what happens to them or what they do. Their reactions to that.
John Norris (19:42):
What about a fall of the Kim regime in Pyongyang?
Sam Clement (19:45):
I mean, again, it depends what China and largely Russia are gun willing to do in response to that, if anything. But there was a story of Putin once saying when he was a little boy that he saw rat in a corner and the rat jumped up and bit him and almost killed him by making him bleed out. He goes, I dreamed of the day of being that rat one day being backed into the corner and attacking and fighting my way out. And so that’s the concern from these countries is when they do start to collapse these countries that Russia has the most or second most, depending on the actual numbers of nuclear warheads, what happens if the Russian regime starts to collapse? What happens if the Iranian theocracy starts to collapse? That’s the concern to me. I mean, Russia, we’ve seen their economy, is a classic wartime economy right now with inflation and what’s happening with rates and everything over there. But it hasn’t impacted us.
John Norris (20:44):
No,
Sam Clement (20:45):
Iran hasn’t impacted us. That mean the most common gas price right now is $2.70 a gallon.
Sam Clement (20:51):
But I think we’re doing okay. So it’s that tail risk concern that I think is the biggest possible impact on global markets.
John Norris (20:59):
So, could you make the argument that for as globalized as the economy actually is, the U.S. is somehow immunized?
Sam Clement (21:08):
Slightly, yes. When you take the impact that emerging markets as a whole has on the U.S. economy, it’s pretty small. I mean, we we’re going to be okay either way.
John Norris (21:26):
And that is exactly how U.S. investors have responded thus far to the news that the Syrian regime has collapsed. We don’t know what comes behind door number one, two, or three in terms of who’s going to rule it and how they’re going to rule it. From what I understand, a lot of the Syrian bureaucracy has stayed at their desk for whatever reason, but we’ll just have to see what happens. But Syria, regardless of who’s going to be in power, while it has tried to be a major player in that area, just simply doesn’t have the resources nor the business acumen in order to move the needle and the global economy, or even in the economy in its own backyard. Fair enough. Alright guys, well thank you all so much for listening. We always love to hear from you all. So if you have any comments or questions, please by all means, drop us a line.
(22:13):
You can always send us an email to TradingPerspectives@oakworth.com or you can leave us a review on the podcast outlet of your choice. Of course, if you’re interested in reading more or hearing more of what we got to say or how we think, you can always go to Oakworth.com. Take a look underneath the thought leadership tab and find links to all kinds of exciting information, including previous Trading Perspectives podcast links to our blog / newsletter Common Cents links to our quarterly analysis called Macro & Market, as well as other thought leadership pieces by the Advisory Services group led by Mac Frazier amongst other associates here at Oakworth Capital Bank. That being said, Sam, you got anything else to add?
Sam Clement (22:53):
That’s all I’ve got.
John Norris (22:53):
That’s all I’ve got today too. Y’all take care.