Are the markets right or wrong about Iran?

Katie Martin (0:06)

Pushkin. The mood among investors is bad. They are super spooked by Iran and also by private credit. But financial markets, stocks, bonds, currencies, all that jazz, they're kind of fine. Like not rosy, but also very much not terrible. It's quite a weird contrast, and it suggests that despite every headline on Iran, every new development, and investors are still fixed on the idea that somehow the war in the Middle East and the blockage of the Strait of Hormuz will just somehow magically blow over. Today on the show, how can everything be awful and fine at the same time? Is the market right or wrong? This is Unhedged, the markets and finance podcast, once again, for normal people from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist, here at FT Towers in Bright and Sunny London, joined down the line from New York City, my first sea lord, Robert Armstrong, my partner in crime on the Unhedged newsletter, which you should all sign up to at once. Rob, it's still chilly out there, no? That must be getting quite boring by now.

Robert Armstrong (1:18)

Oh, it's horrible. As I've said on a previous show, there's nothing as horrible as the month of March. It's freezing outside today.

Katie Martin (1:25)

Now, we have received multiple emails from listeners since the last show, saying, me, me, I listen to the show and I'm normal.

Robert Armstrong (1:33)

Yeah. Last time I questioned, for listeners who didn't listen last time, last time I questioned whether any normal people actually listen to this show. But I wish I generally meant people who don't have all the professional deformities that come along with working in finance. And a lot of people claim to be normal who listen to the show, but claiming you're normal is a little bit like saying, I don't know, that you're not a spy or that. It only makes me more suspicious when you have to say it out loud.

Katie Martin (2:04)

Yeah. Like how I have a degree in Russian, but I swear I'm not a spy. Yeah, exactly. My kids think I am, but I'm genuinely not. So look, let's talk about the vibe, man. It's all about vibes. So start of the year, I'm going to say it was pretty euphoric, right? That was a word that Deutsche Bank was using in a note the other day. Of US interest rates, they're heading down. You have US fiscal policy, so taxes also coming down. You have Germany splashing the cash for once. You have loads of companies spending tons of money on AI. Everything is good. And now it's like, stop that.

Robert Armstrong (2:44)

I would frame this point, Katie, in terms of just one way to do it anyway, is to frame it in terms of the VIX index, which is the index of expected volatility over the next month in the S&P 500

Katie Martin (2:58)

Yeah. People call it the fear index, and then finance pointy heads get in touch and say, oh, actually, it's just a measure of expected volatility. Doesn't matter. For our purposes.

Robert Armstrong (3:09)

It is the fear index. And basically what it does is, it reflects how expensive it is to buy options, to buy or sell the S&P 500 over the next month.

And if you think the volatility is going to be higher, you pay more for the options. That increases the chance that the options will turn out to be profitable. So anyway, we started the year at 15, and it's been like chugging its way up. And it peaked March 6th at 29 Now it's back to 22 But it's like been following this volatile path up. So there's also, of course, an index called the VVIX, which is an index of how volatile the VIX is. And that one's up too.

Katie Martin (3:55)

The Fear of Fear Index.

Robert Armstrong (3:57)

Whether there is also a Fear of Fear of Fear Index is an open question.

Katie Martin (4:02)

I'm sure someone somewhere was working on it.

Robert Armstrong (4:04)

Somebody's trading it, somebody's trading it.

Katie Martin (4:06)

But if you go out and talk to investors one to one, which you and I do all the time, or if you do surveys of what hundreds of fund managers think all the same time, which usefully Bank of America does every month, you do come across this idea that people are quite jumpy, right? So the latest survey from Bank of America was out just the other day. It said the mood has gone from boom to stagflation. There are major worries about private credit, major worries about geopolitics, obviously Iran, yada, yada. There is a dash to cash. So there's the biggest jump among fund managers into cash, which is where you go if you really are worried about what's happening next and you don't want to be in risky stocks or anything else. Biggest jump into cash since March 2020 I remember March 2020, Rob, do you? It was not great.