AI Adopters

Last week I wrote about the different ways investors can participate in the enormous opportunity presented by artificial intelligence. While much of the attention is focused on companies developing AI models and building the infrastructure to support them, I believe some of the most attractive long-term opportunities will come from businesses that already exist. Companies that can use AI to become more productive, more efficient, and ultimately more profitable.

These businesses don't necessarily need to develop their own AI models or spend billions building data centres. They just need to adopt the technology and use it to improve what they already do. For established businesses with large customer bases, extensive operations and strong competitive positions, even relatively small improvements in productivity can translate into substantial increases in profitability.

Consider Caterpillar, a company best known for manufacturing the heavy machinery used in mining and construction. Caterpillar has been developing autonomous equipment for decades, and its driverless mining trucks have already transported more than 11 billion tonnes of material. AI, robotics and machine learning are extending these capabilities into increasingly complex environments. Machines that operate more safely, work longer hours and reduce operating costs create enormous value for customers. For Caterpillar, that strengthens an already formidable competitive position.

McDonald's is another example. With more than 40,000 restaurants worldwide, the potential benefits from automation are significant. AI can improve inventory management, predict customer demand, reduce equipment downtime and simplify restaurant operations. Over time, I expect robotics to automate most, if not all, of the food preparation process. McDonald’s doesn’t need to reinvent itself to become a major beneficiary of AI. Improvement in efficiency across such a huge network will have a big impact on profitability.

JPMorgan Chase has a different advantage. It possesses vast amounts of proprietary financial and customer data accumulated through decades of banking relationships. AI allows the bank to extract greater value from that information, improving fraud detection, credit assessment, customer service, and operational efficiency. Its AI-powered investment research platform has already reduced the time required to turn manual research into actionable insights by 80%. Importantly, its competitors cannot simply replicate those datasets. The technology is becoming widely available, but the information used to make it valuable is not.

Walmart presents a similar opportunity in retail. Its enormous distribution network, purchasing power and customer data provide the foundations for AI-driven improvements in inventory management, logistics and supply chains. With thousands of stores and an extensive global supply chain, improvements in forecasting, stock availability and distribution efficiency can deliver substantial savings. For a business operating on relatively thin margins, even small improvements can have a meaningful impact on earnings.

What attracts me to these businesses is that their investment cases do not depend entirely on AI. They already have established operations, substantial revenues and competitive advantages developed over decades. AI provides another opportunity to strengthen those businesses rather than being the sole reason for their existence. They don't need to win the AI race. They simply need to benefit from it.

Adopting AI does not automatically make a company a good investment. The benefits must eventually translate into earnings, and the price investors pay for a company's shares still matters. Some businesses will struggle to implement the technology, while others may find their competitive advantages weakened rather than strengthened. There will be winners and losers, even among the most established companies.

For investors, the opportunity is not only to identify which companies will use AI, but which can convert it into a lasting competitive advantage and higher earnings. Businesses with scale, proprietary data, strong balance sheets, and established market positions are particularly well placed to do so. As AI becomes more widely available, the technology itself may well become less of a differentiator, while the ability to deploy it profitably becomes more important. Over the coming decades, I think some of the best AI investments won't look much like AI companies at all.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Only Game in Town

Artificial intelligence seems to be the only game in town these days, and to a certain extent, it is. I believe AI represents one of the greatest technological advancements in history and an investment opportunity that will unfold over decades. But what exactly is an AI company, and how should investors approach the opportunity?

There are the chipmakers developing the processors that power AI, the hyperscalers such as Microsoft, Amazon and Google, the companies developing AI models and the robotics businesses that will eventually bring AI into the physical world. Then there are the energy providers supplying the electricity needed to run it all, and the businesses that will benefit from adopting AI to improve their own operations. The opportunity is enormous, but not all these businesses are created equal. Some offer compelling investment opportunities, while others carry substantial risks. AI is too broad and diverse to treat as a single investment category. Investors need to understand the different layers of the industry and the quality of the businesses operating within them.

One group attracting attention is the emerging neocloud sector. Companies such as CoreWeave, Firmus and Nscale provide specialised computing infrastructure that helps power AI. Their emergence reflects an imbalance between demand for computing capacity and the industry's ability to supply it. Even the world's largest technology companies are struggling to build infrastructure quickly enough to satisfy that demand. Increasingly, they are turning to specialist providers to bridge the gap.

But being essential to the AI revolution doesn't necessarily make them good investments.

The recent withdrawal of Australian company Firmus's proposed IPO highlights the risks. Its proposed valuation raised serious questions, particularly given the potential for existing shareholders to sell down their holdings. In South Korea, neocloud provider Elice recently listed following high retail demand, only for its shares to plunge 32% on debut. The stock has since recovered somewhat but remains below its issue price. Meanwhile, British provider Nscale recently had Microsoft withdraw as a customer for one of its major projects after delays in securing electricity supply. These are businesses making huge commitments to infrastructure that can take years to deliver.

Another concerning example is CoreWeave. Its massive growth has been fueled by substantial debt, and the bond market is beginning to question the risks. The yield on its debt maturing in 2032 recently approached 15%, reflecting growing concerns about its financial position. For a business dependent on continued access to capital, that really matters. Higher borrowing costs can quickly undermine the economics of new projects, while an inability to refinance existing debt could threaten the survival of the more heavily leveraged operators.

There is an interesting dynamic at play here. The hyperscalers are investing enormous amounts in their own infrastructure, but increasingly they are relying on other companies to finance and build additional capacity. In doing so, they are transferring some of the capital requirements and financial risks to businesses with considerably weaker balance sheets. The hyperscalers still have substantial financial commitments, but they also have highly profitable established businesses supporting their investment. Many neoclouds do not.

For our clients, the distinction is important. We want exposure to the extraordinary long-term opportunity in AI without taking unnecessary financial risks. That is why we continue to favour established businesses such as Microsoft, Amazon, Alphabet, and Meta, alongside energy producers and, increasingly, businesses that will benefit from adopting AI.

AI will transform the global economy over the coming decades. But not every company helping to build that future will be a good investment.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

November Rain

The next few weeks leading up to the US midterm elections on 3 November could be particularly volatile for investment markets. At the centre of the political battle is an issue far more immediate to American voters than foreign policy or government debt. It is the price of fuel, particularly diesel, and the growing financial pressure on the industries and communities that depend on it.

Farming, construction, mining, and transport are all heavily dependent on diesel. When prices rise sharply, the consequences flow through almost every part of the economy. These are also communities that have traditionally provided strong support for Donald Trump and the Republican Party. Rising fuel costs threaten that support at exactly the wrong time. With control of both houses of Congress at stake, the Republicans can’t afford to lose voters.

Trump understands the political consequences. His determination to bring energy prices down was highlighted on 9 October when he announced an extraordinary agreement with Vladimir Putin for Russia to supply diesel to American and global markets. The agreement involved Washington easing sanctions imposed on Russia over its invasion of Ukraine. Regardless, it is a remarkable reversal of policy and it demonstrates the political urgency surrounding energy prices.

But there is another side to this equation. Iran has its own reasons to want Trump politically weakened. With the conflict between Iran and the United States continuing, sustained pressure on global energy supplies serves Tehran's interests. Higher oil prices hurt American consumers, damage business confidence and increase the political cost of the conflict for the administration. Whether Iran is deliberately seeking to influence the election is impossible to establish, but the potential political consequences are difficult to ignore.

This creates a difficult situation in the lead-up to the 3 November vote. Trump has a strong incentive to contain energy prices and avoid further disruption before the election. Meanwhile, Iran has little reason to make that task easier. I suspect the recent escalation by the Iran backed Houthis in Yemen, including attacks on Saudi infrastructure, are directly related to this political calculation.

What concerns me more is what happens after 3 November. Once the election is over, the immediate political pressure to contain fuel prices diminishes. I think Trump will feel considerably less constrained in his response to Iran, particularly if he believes a more aggressive military campaign could bring the conflict closer to a conclusion. Further air strikes, attacks on critical infrastructure or a broader escalation of American military involvement are all possibilities. After the midterms, if Trump believes a more aggressive approach to Iran is necessary, I think he will be prepared to accept considerably higher oil prices as a consequence.

None of these outcomes is inevitable, but the political calculations will change quickly once the votes have been counted.

For investors, this matters because energy prices influence inflation, interest rates, corporate profitability, and economic growth. Another significant disruption to oil supplies would arrive when financial markets are already dealing with considerable uncertainty.

My concern is that investors may be concentrating too heavily on the election itself and not enough on what follows. I see a meaningful risk of higher energy prices in the months ahead, with consequences extending well beyond the oil market. The greatest risk may have less to do with how Americans vote than what happens once they have, regardless of the outcome.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Busy or Productive?

Being busy has become a strange measure of modern success. People complain about it but also wear it as a badge of honour. A full calendar suggests that they are in demand. There is always somewhere to be and something that needs their attention. Somewhere along the way, we have come to associate being busy with being important. Perhaps they worry that without all that activity, they might not be.

We are conditioned from a young age to work harder and do more. Effort is rewarded, which is fair enough. But working hard at something worthwhile is very different from filling your days with tasks and activities that achieve very little. People spend so much time trying to get everything done that they forget to question why they are doing it.

In my own case, I prioritise being productive over being busy. I find there are a lot of things I just don’t need to do. Saying no to an event or a meeting that does not fit your core priorities is a good place to start. An invitation might be interesting, but unless it's very worthwhile, I am just not going. You can appreciate being asked and still decide your time is better spent elsewhere.

I go to very few industry events. In fact, I go to very few events generally. Some are worthwhile, and I enjoy seeing people. But I deliberately avoid being busy because it eats into the quiet space where I do my best thinking. I like having time to research and read about investment markets as and when I want to, including following an idea further than I had planned.

That time matters to my work. I want to work out where best to invest funds given everything going on in the world. That requires reading widely and thinking independently. Talking to other investment people can be useful, but I don’t want to do what everyone else is doing. Often, it's better to do the opposite and have a different view. The focused work that matters most to me rarely comes with an invitation, so unless you protect space for it, other people’s requests will fill the day.

The same applies to life outside work. People become so caught up in being busy that they lose sight of what makes them happy. Every spare hour becomes available for another commitment. The days fly by, and suddenly another year has passed. Doing less gives us a chance to enjoy an afternoon without watching the clock or thinking about where we need to be next.

By the same token, the answer is not to turn life into an elaborate exercise in optimisation. There is plenty of advice about ice baths, perfect routines, and extracting more from every minute. That nonsense becomes exhausting too. We do not need to manage ourselves like a production line. Keep it simple. Use your common sense. If something adds little value and you don’t enjoy it, stop doing it. But if something is fulfilling or creates real productivity, then keep doing it.

There is no right answer for everyone. We all have responsibilities and commitments. But we do get to choose more than most people are willing to admit. I want to do my work at a very high level and have time to enjoy my life. Being busy tells me very little about whether I’m achieving either. I’d much prefer to be productive.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

When Risks Converge

There are several significant risks unfolding across the global economy. Higher oil prices from the war with Iran, persistent inflation, pressure on central banks to raise interest rates, rising bond yields and stress in parts of private credit. Each is a material concern in its own right. My greater concern is what happens as they begin to reinforce each other.

Oil is the most immediate pressure point. Its influence extends well beyond the petrol bowser. Higher energy costs flow through freight, manufacturing, agriculture, and the logistics behind almost everything we consume. Businesses will either absorb those costs or pass them on. Either way, someone pays. Margins fall, household purchasing power weakens, and an economy already dealing with stubborn inflation faces another obstacle.

That puts central banks in a difficult position. Higher interest rates don’t reopen a shipping route or produce more oil. But they will reduce spending elsewhere in the economy. If higher energy costs become embedded in broader prices and inflation expectations, central banks may well hike rates further, even as growth slows. The risk is that controlling inflation ends up delivering more economic pain than markets have allowed for.

Bond markets add another layer. Rising yields increase borrowing costs for governments and businesses, while also placing pressure on asset valuations. They also make refinancing more difficult. A business might manage its existing debt today but face a very different calculation when that debt matures. These pressures take time to work through the system. The absence of an immediate crisis does not mean the consequences have been avoided. There are material problems brewing here.

Private credit deserves particular attention in that environment. Many borrowers face interest costs that rise with market rates, making them vulnerable when financing becomes more expensive. If earnings also weaken, the squeeze comes from both directions. This is a sector I have long been concerned about. The economic conditions now emerging will likely expose more of its underlying weaknesses.

That does not mean every private credit fund is in trouble, that a bond crisis is imminent, or that a global recession is inevitable. An easing of the conflict could also relieve energy pressure and improve the outlook. But with the US midterm elections approaching, political calculations on both sides could complicate efforts to resolve the conflict.

The point is that the risks to the global economy are not only mounting, but they are also converging and beginning to reinforce each other. Higher oil prices sustain inflation. Persistent inflation keeps interest rates elevated. Higher borrowing costs weaken cash flow. Weaker cash flow increases credit stress. If lenders then become more cautious, businesses find it harder to access capital, adding another constraint to growth, potentially creating a downward spiral.

We do not need to predict a specific breaking point to recognise that the margin for error is narrowing. Individually, these risks are significant. Collectively, they threaten the global economy because each can make the others harder to manage.

For investors, this is a time to remain disciplined and manage your portfolio prudently. Strong balance sheets, low levels of debt, reliable cash flow, and sufficient liquidity become far more valuable when conditions tighten. While markets appear to underestimate these risks, we continue to take profits on selected stocks and build our cash holdings.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The End Game

When the war with Iran began, I wrote that the market was treating it as a short conflict. My concern was that Iran had a different end game: create another 1979. An energy shock would spread through the economy until the pressure to end the war not only became impossible to ignore, but it would also serve as a warning for the future.

Nearly seven months on, we are approaching the pointy end.

The Strait of Hormuz has been severely disrupted for months. Saudi Arabia’s east–west pipeline helped keep oil moving around it, carrying roughly four million barrels a day to the Red Sea. Then that pipeline was attacked, just as the Houthis intensified their activity around the Red Sea. Saudi Arabia has since restarted the pipeline, but that event shows how exposed the alternative route really is. Iran and its allies have shown how much of the world’s energy supply they can disrupt. It leaves the world with little room for further setbacks.

Countries around the world continue to draw down on their strategic reserves. The International Energy Agency estimates that observed global oil inventories fell by 507 million barrels between the start of the war and August. Meanwhile, Europe is heading towards winter, when heating demand puts more pressure on supply. In the United States, the midterm elections are just over five weeks away. The price of fuel at the pump will influence the election.  That could give Iran an incentive to escalate if they want to apply real pressure. This makes the next three months critical.

Oil recently climbed back above US$100 a barrel, although it has since eased as hopes of diplomacy and the pipeline restart brought some relief. The number I am watching even more closely is diesel. US diesel and gasoil prices passed US$200 a barrel in early September; European diesel futures reached US$210 a barrel. That is the wholesale price, not the pump price, but the pain is already reaching businesses and households.

Diesel powers the trucks that move goods, the machinery that plants and harvests crops, and much of the work done in mines and on construction sites. A farmer cannot just stop harvesting because fuel costs have risen. A freight company still has to deliver food. Those costs move through supply chains, often with a delay, until they appear in the prices everyone pays. At the same time, businesses facing higher bills may postpone investment or cut back elsewhere.

To me, we are still in the first of three distinct stages. First an energy shock, then growth shock, and ultimately economic shock. Higher prices squeeze consumers, while higher operating costs squeeze businesses. If both last long enough, recession becomes a real possibility. It is the same danger I have been writing about since the beginning. We are seven months in, and the energy shock phase is still playing out.

There is now talk in the US of restricting diesel exports to ease domestic prices. I understand the political appeal, particularly before an election. It might provide temporary relief at home. But an export ban does not create more diesel, and countries that rely on American supply would be left competing harder for what remains. The pressure would move elsewhere rather than disappear.

Markets still broadly seem to expect that somehow everything will return to normal soon enough. I think the opposite is likely true. I think Iran has been strategic and deliberate from the day they were first attacked. I still hope diplomacy provides an exit. But I do not expect it.

The risks I outlined at the start of this war are now coming into focus. Ultimately, the timing rests on how long the world can absorb an energy shock before the economic damage becomes the force that determines the wars end game.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Who Wants to Be a Millionaire?

If you have children or grandchildren in their twenties, this might be worth sending to them. Right now, they have an enormous financial advantage that they will never have again: time.

The idea is simple. From the age of 25, invest $1,000 a month into a diversified portfolio of shares and continue doing it until you are 65. Don't try to pick the next great company or predict when markets will rise and fall. Just invest every month and give your money 40 years to compound. It may sound boring, but it is extremely effective.

To put some reasonable numbers around it, Australian shares have returned around 9% a year over the 30 years to June 2026, including reinvested dividends. US shares have done even better. Past returns are no guarantee of future returns, but let's use 9% as our long-term assumption and allow for inflation of 2.5%.

It is important to talk about the result in today's dollars. Telling a 25-year-old they could have $5 million or $6 million in 40 years sounds impressive, but it doesn't tell them what that money will actually buy. So in this example, we assume the $1,000 monthly investment also increases with inflation over time, meaning they are always investing the equivalent of $1,000 today.

Do that for 40 years and the result is around $2 million in today's money.

That is a significant outcome. They will have personally contributed the equivalent of $480,000. Compounding does the rest. This is before considering their superannuation, their home, any additional savings as their income increases, an inheritance, or anything else they accumulate during their life.

Of course, $1,000 a month might be difficult at 25. If it is, start with $300 or $500 and work towards it as your income grows. What matters most is starting, because the one thing you cannot make up later is time. Someone starting at 25 has 40 years of compounding ahead of them. Wait until 35 and a quarter of those years have disappeared.

Financial independence doesn't necessarily require earning an extraordinary income or finding an extraordinary investment. Sometimes it comes from doing something quite ordinary for an extraordinarily long time.

For parents and grandparents, I think this is one of the most valuable financial lessons we can pass on. For anyone lucky enough to be reading this in their twenties, don't underestimate what you have.

You have time.

Invest $1,000 a month, give it 40 years, and create financial freedom for the future.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Number to Watch

For most of the past two years, the conversation around interest rates has focused on what the US Federal Reserve will do next. Will they cut? How quickly? By how much? But that's not really the right interest rate to watch today. The number that matters most from here in my opinion is the US 10-year bond yield, and in particular what happens if it moves above 5% for a sustained period. The 10-year is already around 4.7%, while the 30-year is above 5.2%, so we are getting increasingly close to that point.

There is nothing special about 5% itself. The US economy has lived with much higher interest rates before. The problem is the environment those rates are being applied to today. US Government debt has passed $40 trillion, mortgage rates are already close to 7%, consumers are carrying more debt and corporate borrowers face years of refinancing ahead. At the same time, economic growth is slowing, employment has weakened and the energy shock is adding another layer of pressure.

At around 5%, I think there is an immediate risk to financial markets. Higher bond yields make equities relatively less attractive and increase the discount rate investors apply to future earnings. That puts downward pressure on the sharemarket and stock valuations. It doesn't require a recession to produce a correction. Investors simply have to decide they are no longer prepared to pay the same price for the same dollar of future earnings.

The more concerning scenario begins around 5.25% to 5.5%. At that point it becomes less about sharemarket valuations and more about the economy itself. Higher Treasury yields flow through to mortgages, corporate borrowing, commercial property and private credit, and eventually into employment and consumption. If earnings begin falling at the same time valuation multiples are contracting, a relatively ordinary market correction can quickly become a 20% or 30% bear market.

There is another complication I am mindful of. Normally when an economy weakens, the Federal Reserve cuts interest rates, bond yields fall and financial conditions begin to improve. But if the Fed cuts interest rates and long-term bond yields don't fall because investors are demanding a higher return, that’s a serious problem. If investors are worried about inflation, government debt and huge new issuance of bonds, monetary policy becomes considerably less effective. The Fed can control short-term rates. It cannot really control what investors demand to lend the US Government money for ten or thirty years.

So the 10 year bond yield is really important to watch right now. A 10-year yield of 5% is a real warning for equity markets. At 5.25% the economic risks become considerably more serious. At 5.5%, particularly if sustained, I think something probably breaks.

It is important to note that none of these numbers exists in isolation. A 5.5% bond yield in a strong economy with healthy employment and moderate debt would be one thing. A 5.5% yield alongside slowing growth, weakening employment, an energy shock and enormous government borrowing is something very different.

We aren't at crisis levels yet. But we are getting closer to the point where higher bond yields stop being just another number and start having meaningful consequences for markets and the economy. That is why the US 10-year bond yield may now be the most important number to watch in financial markets.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The National Security Economy

Back in early 2024 I wrote about the three major themes we were focused on from an investment perspective. The first was AI, the second was energy, and the third was more complex: a world preparing for war.

At the time, I explained that preparing for war was about much more than increased defence spending. It was also about changing supply chains, reshoring manufacturing, securing critical resources and reducing dependence on countries that may not always remain friendly.

More than two years later, I think that theme has become broader still. A better way to describe it today is the national security economy. This is about the economics of sovereignty, security and resilience in a more uncertain world. Governments and companies are increasingly asking, what happens if the system we depend upon suddenly stops working? It’s no longer simply about the cheapest and most efficient way of doing something.

For several decades globalisation was largely built around efficiency. Manufacturing moved to wherever it could be done most cheaply. Supply chains became longer and more complicated. Inventories were reduced. Energy was sourced from the most economical supplier. It worked well, as long as everyone continued to cooperate. That can no longer be assumed. Efficiency still matters, but security matters more.

The infrastructure that makes a country resilient is surprisingly broad. Defence is part of it, but so are electricity grids, data centres, ports, water infrastructure, agriculture, energy production, semiconductor manufacturing and critical minerals. These are not just industries; they are also matters of national security.

Artificial intelligence provides an interesting recent example. Earlier this year the US government designated Anthropic a supply-chain risk following a dispute over how its technology could be used by the military. Then in June, citing separate national security concerns, the US temporarily restricted foreign access to Anthropic's newest models.

Whatever the merits of those decisions, it highlights a much bigger issue. AI models are becoming embedded into the everyday operations of businesses and governments. If your organisation becomes dependent upon one of them, who ultimately controls your access to it? The same question increasingly applies to cloud computing, payment systems, satellites and communications infrastructure. Access to technology itself is becoming a matter of national security.

National sovereignty is starting to extend well beyond borders.

We already understand this when it comes to oil, rare earths and semiconductors. Taiwan Semiconductor Manufacturing Company is perhaps the clearest example. TSMC is an extraordinary business that I would otherwise love to own. But for me there is one major problem. I believe that at some point China will make a play for greater control over Taiwan. I don't know when or exactly what that looks like, but if it happens, the value of TSMC becomes extraordinarily difficult to assess.

That is one side of the investment equation. The national security economy creates risks for companies sitting on geopolitical fault lines. But it also creates opportunities for the companies helping countries remove those vulnerabilities. Some of the biggest opportunities will be in areas far less glamorous than AI or defence.

Water is one. Food is another.

A country can survive without the latest smartphone. It cannot survive without reliable electricity, clean water or food. It is not just food and water themselves that matter. Everything required to produce and secure their supply becomes strategically important. Fertiliser, irrigation, agricultural machinery, water treatment, storage and transport all become part of the national security equation. As governments think more about resilience, security and strategic independence, more investment in this critical infrastructure will inevitably follow.

The world spent decades optimising for efficiency. We built very sophisticated systems on the assumption that goods, energy, technology and capital would continue flowing relatively freely across borders. The next decade will be about building greater self-sufficiency, stronger contingency planning and eliminating single points of failure. That will be expensive and at times inefficient. But that is the price of national security.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Unmistakably Human

This week I turned 50. When I was younger, fifty seemed old. I’ve grown considerably as a person, but I don't really feel that different to the person I was twenty years ago. My interests have evolved, my perspective has broadened and hopefully I've become a little wiser, and perhaps more patient. Over time you become aware of just how much you don’t know. That everyone is working life out as they go no matter what age they are. Everyone has their own lessons to learn at different stages of life.

What has surprised me most is not how much I've changed, but how much the things I admire have changed. When I was younger, success always seemed to be about more. More achievements, a bigger business, more money and more recognition. We tend to think if something was good, then making it bigger was even better. Growth becomes the measure of success. Scale became the goal. There is nothing wrong with ambition. The world needs ambitious people because ambition builds companies, creates jobs, solves problems and pushes society forward.

But everything today is about scale. The café becomes a franchise. The software company must become a unicorn. The YouTube channel becomes a personal brand. The hobby becomes a side hustle. Every success is expected to become something bigger. Somewhere along the way we have confused growth with progress. We have become so obsessed with optimisation and scale that we risk overlooking something far more valuable. Craftsmanship. Authenticity. Trust. Humanity.

I find myself increasingly admiring people who dedicate themselves to mastering something simply because it is worth mastering. The family bakery that has perfected the same loaf of bread for generations. The cabinet maker whose furniture will outlive him. The restaurant owner who refuses to open a second location because quality matters more than growth. There was a time when we admired these people.

Where have all the craftsmen gone?

More than sixty years ago the German writer Heinrich Böll wrote a short parable that has since been retold around the world. A tourist sees a fisherman relaxing by the water and asks why he isn't catching more fish. The fisherman replies that he has already caught enough for the day. The tourist explains how he could buy more boats, build a fleet, become wealthy and eventually retire somewhere beautiful where he could spend his days fishing and enjoying life. The fisherman simply smiles.

"But I'm already doing that."

It is such a simple story because it asks one of life's most important questions.

How much is enough?

That question stayed with me as my wife Paula, and I travelled through Sicily in May to celebrate our 30th wedding anniversary. Like most visitors, we were captivated by the coastline, the history and the food. But what stayed with me most was something much quieter. Life didn't seem optimised. It simply was.

The baker wasn't trying to build an international bakery chain. The winemaker wasn't talking about dominating global markets. The family restaurant wasn't searching for investors. They simply wanted to make beautiful food, great wine and welcome people into their corner of the world. There was a quiet pride in doing ordinary things extraordinarily well. It reminded me that there is a profound difference between becoming bigger and becoming better.

There are examples of this all around us.

Every Italian child grows up familiar with The Last Supper. Prints of Leonardo da Vinci's masterpiece hang in the dining room of Italian family homes all over the world. Millions of perfect reproductions exist. You can buy one online for less than a hundred dollars. Then you stand in front of the original in Milan. It isn't perfect. The colours have faded. Sections have deteriorated. Five centuries have left their mark despite extraordinary restoration efforts. Ironically, many reproductions are brighter, sharper and closer to what the painting may once have looked like. Yet the original is priceless.

Why?

Not because it is perfect, but because it is authentic. Every faded brushstroke and every imperfection is evidence that Leonardo himself stood before that wall more than five hundred years ago. The imperfections do not diminish its value. They are part of its value.

The same principle explains why collectors pay millions of dollars for a rare trading card, a first edition book or a vintage watch while a flawless replica is worth almost nothing. Investors understand this instinctively. Scarcity creates value. The replica may look identical. It may even function better. But it lacks the one thing that cannot be manufactured. A human story with history and provenance.

I can see the same thing happening to humanity itself as artificial intelligence rapidly makes intelligence abundant. It will write better than most people. Analyse faster than us. Create images, music and software that will often be indistinguishable from or even better than human work. For most of history, knowledge has been scarce. Increasingly, it will become almost free. As intelligence becomes abundant, humanity becomes scarce. As perfection becomes cheap, imperfection becomes valuable.

I believe that is where the value of the future will lie. In people who are authentic. In the founder who genuinely cares about their employees. In the artist whose brushstrokes reveal the hand that painted the canvas. In the musician whose voice cracks during a live performance. In the conversation that wanders without an agenda. In the local café where the owner still knows your name. These things are valuable because of their imperfections.

That is the main lesson I have taken from turning fifty. I haven't become less ambitious. I still admire great companies and remarkable founders. I still believe in building things that matter. But I have become just as fascinated by those who know when enough is enough. People who choose craftsmanship over scale, depth over breadth and authenticity over optimisation. The premium of the future will shift to trust, craftsmanship and genuine human connection.

For much of the past century we have pursued efficiency, perfection and endless growth. But I don’t think the future will necessarily belong to those who are the biggest, the fastest or even the smartest. What will matter is whether something is real. Whether it has a story. If it bears the fingerprints of the person who created it. Those whose relationships are built on trust rather than algorithms. Who understand that craftsmanship matters. The greatest irony of the AI age may be that the closer machines come to becoming like us, the more valuable it will be to remain unmistakably human.

Choke Points

We are now 5 months into this “4-week war”, and my thesis remains the same. Iran is not interested in a deal. They want to teach the world, especially the US, a lesson. If you attack us, we will choke off the world's oil and gas supply and bring your economy to its knees.

What does that look like? At this point, the most likely outcome is an energy shock that morphs into a growth shock and quite possibly a global recession. Their playbook takes a leaf out of the 1979 oil crisis. But the worst-case scenario could be far more severe.

How severe will depend on how far Iran wants to take it. That's the key point, and it is why I am especially cautious at the moment from an investment perspective. Where this goes next might well be out of the hands of the US and the rest of the world. Iran appears to hold the strategic initiative.

The 1979 oil crisis led to the recessionary environment of 1980-81. Back then Iran stopped producing oil for about 8 months. It amounted to around 5%-10% of global supply. Yet today by closing the Strait of Hormuz, they can disrupt around 20% of the global oil supply and almost 20% of global LNG trade.

How could it be worse? Well in the past week or so the Houthis of Yemen, who are aligned with Iran, started attacks on ships in the Red Sea. This is a significant potential escalation and brings into question whether the Bab-el-Mandeb Strait will be next to close.

If the Houthis close this Strait, it not only puts more pressure on the supply of oil but also a range of other cargo. Bab-el-Mandeb accounts for around 12% of global trade as it leads to the Suez Canal and is the gateway to Europe from the Middle East.

All of this demonstrates just how little control the US really has over the current situation. I think it is unlikely military action alone will deter Iran. They are fighting a completely different war to the one the US thinks it is fighting.

So, what is next? Again, this depends on Iran and its allies. Saudi Arabia has a 1,200km pipeline that was built to bypass the Strait of Hormuz to help in a situation just like the one unfolding today. My concern is that the next phase of escalation in the months ahead is focused here.

If Iran's strategy is to create prolonged disruption and uncertainty both geopolitically and in financial markets, then attacks on infrastructure including this pipeline are possible. That will come with its own set of risks by way of response from the US and its Gulf allies.

The rest of the world is watching too. There are many chokepoints around the world that are critical to global trade. There’s the Suez Canal in that same region, but then there’s the Strait of Malacca in Asia which sees 25-30% of global trade pass through it as well as the Taiwan Strait and the South China Sea.

So how the fight for control of the Strait of Hormuz unfolds will be strategically important for many other regions. There are precedents being set here that will reverberate around the world depending on the outcome and who manages to wrest control of the waterways.

In its simplest form, for now, this starts as an energy shock. But that is just the beginning. There are multiple flow-on effects. If the disruption does persist, the price of oil and gas will skyrocket. That will quickly flow through to higher fuel prices, renewed inflationary pressure, and a further increase in the cost of living.

The increase in prices hurts everyone from consumers to businesses. Higher inflation presents a major problem. Not only as costs increase but because there are implications for interest rates. Higher inflation puts pressure on central banks to raise interest rates.

That is bad enough, but an energy shortage means there simply isn’t enough. Paying more for the commodity doesn't create more of it. There is no alternative. Less energy means less of everything. Less production, less output. Unavoidably economic growth takes a hit.

This is where the real flow-on effects occur; higher costs meeting slower growth or even negative growth. When these forces converge, the risk of a global recession rises materially. Then there is nowhere to hide. The global economy slows, the share market falls significantly, businesses lay people off, unemployment rises, and consumers stop spending.

The longer this remains unresolved, the greater the probability that this scenario unfolds. It is a scenario we have been preparing for and one where the downside risk is potentially much more serious than the market is factoring in. At a stage in the market where many sectors are priced for perfection, the reality unfolding is very different. We will continue to take profit and build a cash war chest.

The Price of Greatness

Every generation produces a handful of companies that seem capable of changing the world. The challenge for investors isn't just identifying them. It's deciding whether it is a great company to own shares in and if so, what price to pay for them.

There is no shortage of opinions about SpaceX. Depending on who you ask, it is either the greatest private company ever built or the latest example of irrational exuberance. The truth is probably somewhere in between. It has transformed the economics of launching rockets, become a critical partner to governments, built a rapidly growing global communications network through Starlink, and continues to pursue one of the most ambitious commercial visions of our lifetime. With SpaceX now public and companies such as OpenAI and Anthropic expected to follow, investors are about to face one of the biggest waves of technology IPOs in history. The critical question isn't just whether these are great companies. It's whether they are great investments at today's valuations.

This is an important distinction that investors often overlook, especially during periods of technological change. Transformative innovations attract huge amounts of capital. Railways, electricity, the internet and now artificial intelligence have all experienced periods where money flowed faster than opportunities could absorb it. Some of that capital funded businesses that changed the world. Others disappeared almost as quickly as they arrived. Today's AI ecosystem is attracting capital at very high valuations, but that should not automatically be confused with the quality of the underlying technology. Great technologies can coexist with expensive prices. The challenge for investors is separating the two.

The valuations are extreme in my opinion. SpaceX is currently valued at around 50 times annual revenue and has traded at more than 100 times, while OpenAI and Anthropic are valued at roughly 34 and 20 times revenue respectively. Those aren't multiples of profit. They're multiples of revenue. None of these businesses are generating the level of profits that would traditionally justify valuations of this magnitude. Investors are paying for what these businesses might become over the next decade, not what they earn today. That means an enormous amount of future success is already reflected in today's prices.

The SpaceX IPO also highlights how much the world of capital raising has changed. Twenty years ago, businesses typically listed much earlier because they needed access to capital. Today, the largest private companies can raise tens of billions of dollars without ever listing on a stock exchange. Deep pools of venture capital, sovereign wealth funds and institutional investors are prepared to fund these businesses for far longer than was previously possible. The result is that much more of the value creation now occurs while companies remain private. For decades, ordinary investors could participate in much of a company's growth after it listed. Increasingly, that is no longer the case. Many of the largest gains are now captured by founders, employees and private investors long before an IPO takes place.

That changes the investment equation. Increasingly, an IPO is less about raising capital to build the business and more about providing liquidity for founders, employees and early investors who have backed the company for years. None of that is inherently negative, but public market investors need to be mindful that they are entering at a very different stage of the journey. SpaceX shares were issued at around US$135, surged to more than US$225 as excitement built and have since fallen below the issue price and now sit at around US$116. The underlying business didn't materially change during that time. The market's expectations and hype certainly did. It's also worth remembering that many founder, employee and early investor shares remain subject to lock-up and vesting arrangements. In other words, they can’t yet sell. As those shares become tradeable over time, supply and demand dynamics may change again, regardless of the quality of the underlying business.

SpaceX may well justify every dollar of its valuation over the coming decade. OpenAI and Anthropic may do the same if and when they reach public markets. They could become defining companies of this century. But that doesn’t mean everyone should invest, or that they are appropriate investments. These are not investments for the faint of heart. Equally, they may prove that even extraordinary businesses can produce ordinary investment returns if purchased at too high a price. That is not a criticism of any of these companies. It’s a reminder that finding great companies is only half the job. Paying a fair price for them is what ultimately determines long-term returns.

Future Me Problems

Going back a few weeks, I was talking with my 23-year-old son Will about something he was intending to do. I laid out the more sensible case for what might be a better choice for the longer term. I punctuated my parenting masterclass by highlighting the problems that lay ahead with his preferred option.

He replied instantly, “that sounds like a future me problem” and proceeded to ignore all my advice.

It made me laugh in the moment, but it was a great insight into the mindset of not only young people but everyone these days in a world of getting what you want now and worrying about the ramifications later.

The world seems to be accumulating a lot of “future me problems”.

The more I thought about it, the more I realised Will had tapped into something deeper than he probably intended. He had perfectly captured one of the defining characteristics of human nature. We all have an incredible ability to separate today's decisions from tomorrow's consequences. We naturally overvalue immediate rewards and undervalue future costs. Behavioural economists have studied this tendency for decades, but sometimes a 23-year-old can explain it in five words.

The evidence is everywhere. We promise ourselves we'll start exercising next week because our health is a future me problem. We put off difficult conversations because repairing relationships is a future me problem. We delay saving and investing because retirement belongs to someone we'll meet decades from now. Unfortunately, future me eventually becomes present me, and the bill always arrives.

Businesses aren't immune either. Underinvestment in technology, neglected maintenance, weak cultures and postponed strategic decisions rarely cause immediate pain. In fact, delaying them can often make this quarter's numbers look better. The consequences belong to a future management team. Until one day they don't. Many corporate crises are not unexpected events at all. They are simply years of future me problems finally demanding attention.

The same pattern plays out across society. Governments can borrow and spend more because servicing the debt is a future taxpayer problem. Infrastructure can be delayed because congestion is a future commuter problem. Housing shortages, energy security and countless other long-term challenges often begin with decisions that were easier to postpone than confront. The temptation is always the same. Enjoy today's comfort and let tomorrow deal with the consequences.

The trouble with putting off problems is that they rarely stay the same size. Left unattended, they have a habit of compounding. A missed opportunity becomes regret. A small issue becomes a crisis. One poor decision is manageable, but a series of deferred decisions changes the direction of a career, a business or even a life. The longer we convince ourselves that tomorrow will deal with it, the fewer options we are left with.

That might be one of the most overlooked characteristics of successful people. They don't necessarily make fewer mistakes than everyone else. They are just more willing to accept a little discomfort today to avoid much greater discomfort tomorrow. They make the difficult phone call. They invest before they spend. They exercise even when they don’t feel like it. They address small problems before they become big problems.

We end up spending much of our lives trying to solve problems our younger selves created. The quality of our future often depends less on intelligence than on our willingness to do difficult things before they become urgent.

Every decision is ultimately a negotiation between today's comfort and tomorrow's freedom.

The most successful people, businesses and societies aren't those who don't have many problems or don't have big problems. They're the ones who tackle them front on and refuse to leave them for future me.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions. 

Mining for AI Gold

I've spoken before about the stages of the AI revolution. The first stage is the infrastructure build-out. The second is the rise of agentic AI, where systems begin acting independently rather than simply responding to prompts. The third is what I call "everything AI", where artificial intelligence becomes embedded in almost every product, service and industry. We are still firmly in the first stage. 

In my opinion, AI will prove to be the most significant technological advancement in human history. It will likely surpass even the Industrial Revolution in both its scale and its impact. Like every transformational technology before it, however, the path forward will not be a straight line. Investors should expect periods of extraordinary optimism followed by equally painful corrections. The innovation may be exponential, but investment cycles are not. 

The first phase is the easiest to understand because it involves building the foundations. Think of it like constructing a new mine. It may take a thousand workers to build the roads, install the equipment, connect the power and prepare the site. Once the mine is operational, only a fraction of those workers are needed to keep it running. The same principle applies to AI. Today we are pouring huge amounts of capital into chips, data centres, networking equipment, cooling systems and electricity generation because that infrastructure is needed before the next phase of AI can prosper. 

That has created an enormous investment opportunity, but investors also need to exercise caution. Every major technological revolution has experienced a period where investors assume today's shortages will last forever. Railways required steel. Electricity required power stations. The internet required fibre optic cables. AI requires computing infrastructure. These periods often lead to extraordinary investment returns, but they also result in overbuilding and excess capacity as companies race to meet seemingly insatiable demand. 

Throughout history, technology has advanced at an exponential pace. Every generation of computing becomes more powerful and more efficient than the last. AI models continue to improve, software extracts more performance from existing hardware, and specialised chips deliver greater computing power in smaller and more efficient packages. Over time, demand for AI infrastructure will change. The market tends to extrapolate current conditions indefinitely. That doesn’t always hold up, especially with regards to technology.    

None of this changes my long-term optimism. AI will transform businesses, industries and society over the coming decades. Productivity gains will be massive, entirely new business models will emerge and many of today's largest companies will look very different in ten or twenty years' time. The opportunity is real. 

The challenge for investors is recognising that a technological revolution and an investment boom are not the same thing. The AI revolution is real. Parts of the infrastructure build-out may also prove to be overvalued over time. Understanding the difference will likely be one of the most important investment decisions of the next decade. Investors cannot blindly invest in AI. It is critical to understand the technology, the pace of change and consider the future revenue and profit that will ultimately justify and drive company valuations.  

Deal or No Deal

US President Donald Trump and Iran have announced they have agreed on a deal. Markets have welcomed the news, and oil prices have responded positively. But before declaring the crisis over, it's worth asking a simple question. Have the issues that brought both sides to the brink of conflict actually been resolved?

I'm not convinced.

Since the early days of the war my thesis has been that Iran will use the Strait of Hormuz to teach the US and the rest of the world a lesson. They want to send a message: if you attack us, we will choke off the oil and gas supply and create a global recession. They want to make the outcome severe enough that no one ever attempts this again.

There's an argument that Iran's economy is in such a bad state that they need a deal more than the USA. I think that's a very western assumption. Firstly, their economy has been bad for decades. Secondly, they are facing what many in the regime would view as an existential threat. Economics becomes a secondary concern. The hardliners in Iran will do whatever they believe is necessary to survive.

There is another angle here, too. After decades of trying to draw the US into a conflict, Israel has little incentive to see America disengage before its objectives have been achieved.

The US appears to have underestimated both Iran's ability to influence events in the Strait of Hormuz and its ability to control the broader outcome of the conflict. Since then, Trump has appeared increasingly keen to find an off-ramp.

To his credit, he has done a good job of jawboning the economic fallout to date. The memes on the internet declaring that Trump has won this war more times than anyone else has won a war humorously allude to his many declarations of victory and repeated assurances that a deal was imminent. Does anyone believe him now? Oil markets seem to. Share markets too. 

That has been a major win for him. It has helped keep oil prices below $100 a barrel and supported the share market.

The price of oil matters even more as the US midterm elections approach. Higher fuel prices are a lightning rod for the US consumer, including many of his most ardent supporters. So a deal, or at least the perception of progress towards one, is politically valuable.

But this is not really a deal. It's a deal to do a deal. It's actually just a headline.

The most difficult matters have been deferred for 60 days. Iran is still insisting that it will place a toll on the Strait of Hormuz. That is unpalatable to both the US and many nations in the region. Both sides appear to have red lines that remain fundamentally incompatible.

How much oil and gas is actually getting through the Strait of Hormuz is all that really matters. Countries around the world have been drawing down strategic reserves. In the weeks and months ahead, as those reserves deplete, that is when shortages become critical. At that point, only physical supply matters. The key variable is the volume of oil and gas moving through the strait.

I think the hardliners in Iran will ultimately get their way. I also doubt Israel will be enthusiastic about seeing the US withdraw its military support before the conflict's objectives are achieved.

Those forces are the weakest link in this agreement.

That is why I remain very sceptical. This may prove to be a successful deal. But for now it looks more like a temporary pause than a lasting settlement.

Precariously Placed

I had a conversation with a client yesterday who asked a simple question; why are we raising interest rates? It wasn’t rhetorical. It was genuine curiosity. They said all I see is people dealing with cost-of-living pressures and businesses struggling to get by. Won’t raising rates make everything worse?

That question gets to the heart of the real problem for the RBA and the Federal Government right now. Financial conditions are already tight for both consumers and business, yet interest rates are rising again. The short answer is because inflation is back, but before deciding whether the response is right, it's worth stepping back and understanding why.  

Before the war with Iran, annual inflation in the US was about 2.4% compared to roughly 3.7% for Australia and trending higher. We already had an inflation problem brewing. Interest rates were already being raised here while other countries were holding or were cutting them.

Now overlay an energy shock poised to push headline inflation beyond 5%, and it has given the Albanese Government and Treasurer Jim Chalmers a convenient explanation. The narrative shifts quickly. Instead of being held to accountable for reckless government spending, the focus turns outward to the war and the surge in energy prices.

Without accountability there’s little pressure to change their ways. Government spending is still far too high and a big contributor to inflation. Increasing interest rates will slow consumer spending. But if the government doesn’t reign in its spending, we might not be solving the inflation problem.

So, we enter the Iran war with consumers and businesses already under pressure from rising costs. Now we layer on an energy shock. Higher petrol and diesel prices don’t just hit households at the pump, they flow through transport, retail, construction and mining. This touches almost every part of the economy.

Headline inflation will rise quickly, but this isn’t being driven by demand. It’s a supply shock. Costs are increasing and are being felt almost immediately. Raising interest rates into that environment doesn’t fix the problem. It doesn’t create more supply. It simply adds another layer of pressure by hitting profitability and reducing consumer spending.

The move to increase interest rates is logical but the RBA risks reacting the wrong way at the wrong time in this case. Usually, inflation reflects too much demand in the system. Government spending has played a role, but this supply shock is different. Responding to it in the same way risks amplifying the downturn rather than stabilising it.

The real problem is that Australia entered this shock without having its house in order. Inflation was already elevated, spending was already high, and the economy was already under pressure. Leaving us in a far more fragile position as the energy shock unfolds.

A Small Cut, A Big Shock.

One of the most useful ways to understand what’s unfolding today is to look at how similar shocks have played out before. The 1979 oil shock is as close as we get to a reference point for what’s now building in the Middle East.

As part of that research, I went back through the dates, the figures, and the sequence of events. The first is that the 1979 shock was, at its core, a production shock. Supply fell and that reduction was held for around eight months. It wasn’t temporary. It was a sustained loss of supply that the global economy had to absorb over time, and the consequences were severe.

The second point is the one that should make people pay attention now. The amount of global oil supply lost in 1979 was around 4 per cent. Later, with the Iran-Iraq war, total global disruption rose to roughly 7 per cent. On paper, that doesn’t look like much, but it was enough to create a very damaging period for the world economy. Inflation surged, growth slowed, and the effects spread far beyond the countries directly involved.

That is why the current situation is more serious than markets seem to be taking it. We are only around two months into this disruption, but the scale of supply at risk through the Strait of Hormuz is enormous. This isn’t about production being switched off. It’s about whether supply can move at all. And in this case, we’re talking about roughly 20% of the world's oil and LNG supply. That changes the equation. In many ways, the current situation is even more fragile and precarious than in 1979.

The uncomfortable reality is that the Strait of Hormuz remains at the mercy of Iran. They do not need to permanently shut it in the traditional sense. They only need the ability to occasionally strike a vessel with a relatively cheap drone or missile, and insurers step away. Once that happens, trade can grind to a halt without the need for a formal blockade. Fear and uncertainty can be just as disruptive as physical destruction.

I expect some degree of partial reopening is possible through heavy military escorts, but that should not be mistaken for a real solution. Escorting ships through a danger zone may restore some movement, but it does not restore confidence, normal insurance markets, or stable energy flows. Markets are still not pricing a sustained disruption.

History shows that it does not take the loss of all supply to do serious damage. It only takes enough disruption, held for long enough, for the system to start breaking under the strain. The scale of supply at risk today is far greater than 1979; it just hasn’t been offline for as long. Unless there is a definitive resolution soon, it is only a matter of time before share markets realise this and respond to the economic crisis unfolding.

The Window to Act is Closing

The human body is made up of 60% water. You don’t need to lose all of it to die. Lose around 20%, and the system starts to fail. The global economy isn’t that different. You don’t need to lose all the oil supply to break it. You just need to lose enough, and that’s what we may be about to find out.

There is an energy shock building beneath the surface. It hasn’t fully hit yet, which is why markets appear to be calm. For weeks, shipments that left the Strait of Hormuz before the disruption have continued to arrive. On the surface, it looks like business as usual. But that’s changing as those final shipments clear, and countries move from incoming supply to drawing down reserves. That is when the real effects begin to show. As supply shortages emerge, pricing pressure hits, and ultimately economic activity slows down.

In that sense, the event has already happened. We just haven't felt it yet. That disconnect creates a kind of cognitive dissonance. Investors can see the risk, but they can’t yet feel the impact, so they hesitate. They wait. They look around at each other for confirmation. This is the phase I think of as the window of opportunity. It’s a short, finite period where a serious problem is visible but not yet fully reflected in markets. Everyone knows something could go very wrong, but investors tend to simply wait. After all, that's what long-term investors are meant to do.

In early 2007, cracks were already forming in the U.S. housing market. Subprime lenders were failing and credit conditions were tightening. It was clear to those watching closely that something was wrong, yet the S&P 500 continued to push higher, ultimately peaking in October 2007. The prevailing narrative at the time was that the problem was contained. It wasn’t. By the time losses spread through the system and that view was proven wrong, markets had already begun to reprice.

A similar pattern played out during the COVID-19 pandemic. By January 2020, the data coming out of China was already concerning. Case numbers were accelerating and the implications for global supply chains and economic activity were obvious. Yet markets continued higher into February. It wasn’t until the reality became undeniable that the sharp sell-off began. The pattern is consistent. First comes the signal. Then the debate. Then the recognition, and finally the repricing.

We are somewhere between the first and second stages now. Part of the delay comes down to how the financial system processes information. Large institutions don’t react to instinct, they react to data. So, economic forecasts need to be revised; company earnings need to be updated, and guidance needs to be cut. That takes time. By the time the data confirms the problem, the market has usually already moved.

In the meantime, narratives fill the gap and optimism persists. Analysts perform all sorts of mental gymnastics to explain why this time might be different. A ceasefire. A deal. A quick resolution. It’s possible, and I hope it happens. But with each passing week, it becomes less probable that we see a real long-term solution. So markets hold up, partly because they want to, and partly because until the impact is tangible, it’s easy to assume it won’t be as bad as feared.

But there are moments where you don’t need a model. You can apply simple logic. You cannot remove around 20% of global energy supply and expect the system to function as it did before. The modern economy runs on energy. Disrupt the flow, and everything downstream is affected.

This has the hallmarks of one of those moments. A situation where the risk is visible, the implications are significant, and the response is delayed. Where investors of all types look at the market not falling and conclude that maybe it won’t. Until it does. When the window of opportunity closes, it usually closes quickly, and decisions become reactive instead of proactive.

In many of our client portfolios, we’ve been using this period to gradually reduce exposure in areas most sensitive to a global economic slowdown and build a cash buffer. Not wholesale changes, but recognising that when the balance of risk shifts, positioning should too. Should the problems materialise, we have funds to deploy. Because by the time everyone agrees there’s a problem, the window to act has already closed.

Risk On, Risk Off

“Risk on, risk off” sounds like something wise Mr Miyagi would tell Daniel-san before a karate tournament. But right now, global markets aren’t following a disciplined strategy. They’re swinging between risk on and risk off depending on the latest headline. One day risk on. The next day risk off. Driven by escalations, ultimatums, ceasefires, and political signaling.

As I write this, the USA share market has just had a risk-on day. A two-week ceasefire has been agreed following the latest escalation, after President Trump issued another ultimatum to Iran. Markets have rallied accordingly. This volatility feels largely manufactured. Equity markets appear increasingly disconnected from energy markets. When Trump escalates, markets barely react. When he de-escalates the very threat he created, markets celebrate. None of it makes a great deal of sense. Prices are swinging between hope and fear.

But a ceasefire is not the end of a war. In fact, there is every chance one or both sides breach the terms. If that happens, we return to the cold, hard reality that Iran sits in a position of control over the Strait of Hormuz. Everything else is noise layered on top of that reality. This is the market today. Not driven by earnings or valuations but by headlines.

It is very easy to get caught up in the drama. It's very serious and lives are at stake but from an investor perspective, much of it is drama. The escalation, the de-escalation, the ultimatums, the negotiations. It creates movement, but not necessarily value. For long-term investors, there is very little benefit in reacting to this carry-on. The more markets swing day to day, the more tempting it becomes to do something. But activity is not the same as progress.

So who benefits from volatility? Traders and hedge funds thrive on it. Volatility creates opportunity for short-term positioning, leverage and rapid capital rotation. It also rewards those who somehow know the direction ahead of time. When markets swing on political announcements, the advantage naturally shifts toward speed and information. For long-term investors, however, volatility is mostly noise unless it creates genuine mispricing. Short term movements are not where serious long-term investors sit.

This is where perspective matters. In a recent interview, Warren Buffett described the current market decline as “nothing.” He noted that a five or six percent fall is not meaningful and reminded investors that markets have dropped more than 50 percent several times during his career. He indicated Berkshire would only deploy significant capital after a much larger dislocation. In other words, while small moves create headlines, large moves create opportunities.

That patience is reflected in Berkshire Hathaway’s balance sheet. The company currently holds roughly US$370 billion in cash and Treasury bills, around 30 percent of total assets. Buffett is not reacting to volatility. He is waiting for opportunity. That patience stands in contrast to current market optimism. Despite risks at every turn, markets continue to lean toward best-case outcomes. Yet the conflict itself is far from resolved.

The war is not over.

It is entirely possible that Iran consolidates control over shipping through the Strait of Hormuz. If, hypothetically, a toll of around US$2 million per ship were imposed on roughly 100 to 140 vessels per day, that equates to approximately US$70 billion to US$100 billion per year. In the context of the global economy, that is actually a relatively small price to avoid a full-scale energy shock or global recession. But the toll itself is not the real issue. The real risk is control. The longer Iran effectively controls global energy flows, the more likely volatility turns into a genuine economic shock.

The longer the Strait of Hormuz stays disrupted, the more permanent damage to the global economy and the more likely a serious recession becomes. Markets continue treating this like temporary noise. But if the structure of energy supply changes, it isn’t noise. It’s repricing. For long-term investors, the real advantage comes from patience, discipline, and perspective. Being ready for an economic shock that creates genuine mispricing is when the real opportunity occurs.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions. 

Strait Talk

If the world is to avoid a global recession, it will come down to one thing. The reopening of the Strait of Hormuz. Around 20% of the world’s oil and roughly a quarter of global LNG flows through that narrow passage. It is not just a geopolitical pressure point. It is one of the most important economic arteries in the world.

The problem is that the ball is well and truly in Iran's court, and it is effectively the only meaningful card they have left to play. They have absorbed significant economic and military pressure and have not capitulated. Having endured that level of strain and still holding its position, it is unlikely to give up the one lever that genuinely shifts the balance of power. The Strait is that lever.

So why would Iran reopen it? Not out of goodwill, and not simply because of pressure. They will only do so if the incentives are compelling enough. That likely means some combination of sanctions relief, de-escalation, or at the very least recognition of the strategic leverage they have demonstrated. Without that, reopening the Strait voluntarily makes little sense from their perspective.

How it plays out it from here might simply come down to who blinks first. At first glance this looks like a contest of military strength, but it isn’t. It is a contest of endurance and the longer this drags on, the more the economic consequences compound. Energy prices rise, supply chains tighten, and confidence falls. What started as a geopolitical conflict has already morphed into an economic one.

Iran can withstand pain and has done so for decades under sanctions. The United States faces different constraints. Political pressure, market pressure, and voter pressure. Trump may have overestimated the brute strength of the US military as a strategic advantage. Consequently, Iran is now using their position to drag this out and create chaos for the global economy.

There are few topics that generate as much concern globally as the price of fuel. A spike is a cause for concern. A sustained spike will quickly morph into outrage. In the middle of a cost of living crisis, an energy shock hits discretionary spending hard. Making matters worse, as the prospect of higher prices and inflation leads to central banks increasing interest rates. That's the double hit and we are already seeing that play out here in Australia.

The second-order effects are where this becomes more dangerous. It’s not just oil. Fertiliser markets begin to tighten, pushing up agricultural costs and ultimately food prices. Industrial inputs like helium, critical for medical and semiconductor industries, become constrained. Shipping costs rise as routes are disrupted and insurance premiums spike. The longer the Strait remains compromised, the more these pressures ripple through the global economy. This is how a shock turns into something more systemic, slowing global growth and the possibility of recession.

Allies are reluctant to join Trump in this conflict. It appears many are happy to keep their distance, ensuring that at the end of this it is clear where the blame rests. This is a USA decision. This is a Trump decision. His problem right now is that there is no obvious solution and not one that he can easily control.

From here it may well be Trump who is more desperate for this to end. He can declare victory and manage the narrative but unless the Strait reopens and the supply of commodities is restored then he has a problem. One that the world knows he has created and one that he needs to fix. He knows this.

Iran knows this too.

They want the world to understand the strength of their position and their ability to inflict economic pain on the world if they so choose. The question is how deeply they want the world to feel that pain. Push too hard and they risk uniting the world against them. The most likely path is controlled pressure. Enough to make the point but not enough to become the clear villain. They will want Trump to be seen as the problem, not move so aggressively that they are seen as the problem.

That said, Trump is nothing if not a creative problem solver. He is also unpredictable. So, it would be unwise for Iran to push Trump too hard or for markets to underestimate his ability to manoeuvre out of difficult situations. Push too far and his response may not be linear.

From an investor’s perspective, this is much less about the war itself and far more about the reopening of the Strait. Markets have shown they can absorb conflict. What they struggle with is sustained disruption to critical supply chains, particularly energy. The key variables to watch are simple. The duration of the disruption, the trajectory of oil prices, and any credible signals that shipping flows are normalising.

I still think this is resolved in a reasonable timeframe. There will be economic consequences, and some of them will linger. But as is often the case, it won’t be the conflict itself that does the real damage. It will be the bottleneck. Right now, markets are underestimating just how powerful that bottleneck is.


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