The Dividend Cafe - Special IRAN Issue

Episode Date: June 23, 2025

Today's Post - https://bahnsen.co/3FPqMt6 Market Reactions to U.S. Attack on Iranian Nuclear Sites and Geopolitical Implications In this Monday edition of the Dividend Cafe, the host discusses recent market reactions to the U.S. military strike on Iranian nuclear sites over the weekend. The discussion covers muted responses in equity markets, fluctuating oil prices, and subsequent rallies in bond markets. The geopolitical implications of the strike, including potential de-escalation by Iran and the impact on U.S.-China trade war negotiations, are explored. Additionally, the episode touches on the current U.S. legislative process concerning tax policies, the economic impact of AI on businesses, existing home sales, and upcoming political events. The host also pays tribute to Fred Smith, the late founder of Federal Express. 00:00 Introduction and Welcome 00:23 US-Iran Tensions and Market Reactions 02:34 Market Analysis and Reactions 06:27 Long-term Implications of US-Iran Conflict 10:30 Public Policy Updates 12:59 Economic Indicators and Predictions 16:13 Closing Remarks and Tribute to Fred Smith Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to The Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Monday edition of The Dividend Cafe. I am really, really happy to be with you. Very grateful to Brian Sightel for filling in for me last Monday as I was out of town with my family for a few days. I am now in Grand Rapids, Michigan, where like much of the country, there is a bit of a heat wave going on. Summer is most definitely officially here. There is a lot to talk about at the Divided Cafe today, so I'm

going to get right into it. Obviously, the big story of the weekend being the US attack on Saturday night of the spots where Iran has famously been experimenting and preparing and planning and building various nuclear capabilities. And there was a lot of, shall we say, apprehension coming into today's market day as to what it would mean for markets, where we are going. There's a lot of, shall we say, apprehension coming into today's market day as to what it would mean for markets, where we are going. There's a lot of uncertainty as to what retaliation may be there, what the next military steps may or may not be from the United States. And it is yet another example in my running log of now many thousands of examples where sometimes the

media, sometimes really not very smart people, sometimes very smart people could have a general expectation of what may come to be that is the exact opposite of what does come to be. There's a lot of reasons for that. We're going to unpack all of that and more today. Let's just sort of first get into today's market action before we get into more details around the US activity in Iran. The futures on Sunday night opened down about 200 points. So already we knew it was a much more muted response. Financial media outlets had gone to emergency Sunday night coverage expecting there to be a lot of noise and excitement in Sunday night market action based on what

had taken place with Iran and the military strike Saturday night. And 200 points down in the futures is not exactly the soap opera some of the media outlets may have been hoping for, but oil prices were up about 4%. That also was not quite the soap opera media outlets were hoping for. But again, you had equities down a bit, not much. Oil up a bit, not much. Both those things would have been expected, but maybe not to the magnitude that was hoped for. And then when I woke up very early on Monday morning, futures were up 50 points. So the already muted downside didn't live up to hype,

but then even that didn't last. And we ended up opening up in the US equity market here this morning. There was a point in the middle of the day today where markets dipped into negative territory. Again, you're talking about a hundred points here, a couple hundred points there, nothing dramatic. But at some point in the middle of the trading day, it was announced that Iran had fired six missiles at a US base in Qatar in the Middle East. Then about a half hour later it was announced that they had intercepted those missiles.

Nobody was hurt, no damage done, and that was the end of that. And then as more time went by for markets to respond, and it was clear that Iran had given forewarning of this attack, it began to look more and more like this was almost their attempt at de-escalating, I get that it doesn't sound totally coherent, but I think if you think through it, you'll see the general point I'm making that this was assumed potentially to be a way of saying, okay, here's our little flex, but we're going to go ahead and do this. you'll see the general point I'm making that this was assumed potentially to be a way of saying, okay, here's our little flex, but we're not planning on doing a lot more. Now, this isn't

to say they're not going to do more. Although oil prices had been up 4%, as I mentioned last night, they were about flat on the day at the time. They then dropped like a rock and closed the day down at 9%. Oil coming from at one point $77 a barrel last night, closing today at $67 a barrel. It had been at about 74-ish when this all went down. And again, there's really no way to interpret that other than the belief that there is some possibility of significant de-escalation and Iranian capitulation playing out. I do not say that predictably because any number of things could happen from here that could escalate. There is still the possibility of uncertainty that contributes to downside volatility, whether

it's in commodity markets or risk assets. The VIX got a little bit over 20 today, it closed below 20. That's hardly the stuff of a risk-off situation taking place, but there was a bid into Treasuries. The 10-year was down, and the yield was down another three, three and a half basis points. So you got a bit of a rally in bond prices up and down the yield curve today. I would expect that bonds will continue to be a safe haven throughout. But look, the equity markets after this Iranian missile issue in the middle of the day had settled and it really was. You'll see the chart at dividendcafe.com for intraday stock market action right in the middle of the day had settled, and it really was. You'll see the chart at dividendcafe.com for intraday stock market action right in the middle of the day, and equities immediately

rallied from there. And then ultimately, the Dow closed up today by 375 points, almost 1%. The S&P up almost 1%. The NASDAQ up almost 1%. 10 out of 11 sectors in the stock market were up. Energy, unsurprisingly, with oil down 9% was the one sector that was down. It was down 2.5%. But real estate led the way up 1.5%. Consumer staples right behind that up 1.3%. consumer staples right behind that of 1.3%. So a very interesting day with stocks and bonds up, oil down. Not exactly what many would have predicted off of the hype Saturday night that we may be preparing to go to another war and all that type of stuff. As of right now, what we know As of right now, what we know is that it appears the strike was highly successful, that it appears Iranian nuclear capability was, if not obliterated, substantially hindered. There were no American casualties. The bomber both got there and returned to the United States, an absolutely stunning 17-hour flight time, returned to

the middle of America safe and sound, and again, without relying on certain intelligence reports and satellite imagery, expectations that this was a successful mission. Long term, do I believe the possibility exists of a particular left-tail risk having been removed in markets? That is the possibility of a nuclear Iran taking a significant step back, if not totally eliminated. And why is that a left-tail risk? Because Iran being one of the few countries on earth that has said they want to eliminate Israel, eliminate America.

The proxies for Iran that have been so violent and bloodthirsty over the years, whether it be Hamas or Hezbollah, totally neutralized in the aftermath of the October 7th, 2023 attack on Israel. There is just simply progress that has been made in hindering bad people doing bad things. It has not become a peaceful world. The Middle East is now not off of our list of concerns. I'm going to write more about this in the Divinity Cafe on Friday. But long-term, is there a possibility that some left-tail risk has gotten better as a result of these actions? There absolutely is. Short term, would I argue that there is smooth sailing from here, that everything has gone well and that's all we need to know? Of course not.

Retaliatory efforts could still be forthcoming. The issue I highlighted in Divinity Cafe I'll get into now that I do think it warrants some consideration is whether or not there's any repercussions on this in our efforts to get to an end of the trade war. China is a buyer of Iranian oil. I suspect one of the reasons Iran has not and is not likely to mess with oil moving in and out of the Strait of Hormuz is that China is a beneficiary of that. And so there is a sort of strange bedfellow situation here where it's probably not in

China's best interest. It's not in Putin and Russia's best interest either to be overly kissy face with Iran right now, but they're not pro-America either in either Russia or China. So I am one who has to do geopolitical analysis every now and then as part of what we're doing in financial markets. I have sources I trust and follow closely that are genuine subject matter experts in that arena. It is not the area that I feel I am most qualified to analyze for the very simple reason that

by definition we're dealing with things that nobody knows. And when people say they have a high conviction in a point of view, they are civilians who don't know. And they hopefully know that they don't know, but it is still a world that is dressed with uncertainty. And I recognize that. I humbly recognize that in the way we apply it to our point of view. That is why I'm not coming out with a more sanguine and bullish call, but nevertheless, 24, 48 hours later, there's some good things to report. And anyone who denies that is probably being somewhat blinded by a certain political point of view. I would suspect that China will not take such a conciliatory and amicable approach with

Iran that it does end up impeding progress with the trade war talks with the US. But I wouldn't say it's impossible. That would be the one area I want to keep my eyes on. On the public policy front, moving on out of markets and out of the Iran action, the Senate parliamentarian was meeting most of the day to day, and there's still a lot more to go as they really try to fine tune what is eligible to be in the bill and not in the bill as it pertains to the BIRD rule that really speaks to what is deficit impacting and what is not as a way of staying

compliant with the Byrd Amendment so as to allow the bill to pass on a simple majority basis, not requiring filibuster proof majority. There is a market sensitive element of what's going on, represents a little delta between the House and the Senate bill right now around the so-called PTET, the pass-through entity loophole that is a part of the SALT deduction. The House eliminates it altogether. The Senate changes it a bit to allow for the PTET deduction, but only up to the greater of either $40,000 or 50% of the benefit of the workaround.

So there's just nuances in the way they're both doing it, but either way they're both substantially getting rid of it, in the house's case altogether. So in the meantime, most of the focus is on whether or not the deduction cap will go from 10,000 up to 40 or maybe 30, and what the income limit would be. And I find all of that to be a big distraction because I don't think it really matters to that many people at all when very, very few in that income bracket itemize. And in order to get the SALT deduction, you have to itemize deductions in your tax return. If you take the standard deduction, it's all a moot point.

That's kind of one of the policy issues still to be adjudicated, but then the broader one is just how they're going to get the votes when there's so many senators saying they're not there or there are senators that will get there on their version, but then there's other House members saying, well, if the Senate does that, then we're a no. And there's not a real clarity for me as to how they're going to get there. That said, my own policy advisors are adamant that they will have this passed. So I do continue to believe that it's a mortal luck that the Trump tax cuts are going to be extended and where exactly this kind of roller coaster moves around in the literally days ahead, let alone weeks ahead, we'll see.

But they're still talking about a vote by the 4th of July, which you may know is a week from this Friday. On economic front, the US Census Bureau pulled 1.2 million American businesses if they were using artificial intelligence to help produce goods and services, and only 9% replied yes. Now some may say 9% shows that there's so much room to grow in the AI world. Some may say that there is an overrated expectation for what AI will be able to do. I would point out the nine seems to me to be a high number based on the fact that they were not only including machine learning and language processing, but even things like

voice recognition and virtual agents, which have been around for some time well before chat GBT. And even then with those things included, only 9% responded and saying yes. So is this AI bullish or AI bearish? The answer is maybe a little bit of both. It's just too early to tell. I'm more curious in the magnitude of efficiency that AI in the aggregate will end up either representing or not representing.

Existing home sales were up 0.8% in the month of May. They are down 0.7% on the year. The median price of a home was up only 1.3% from where it was a year ago. Keep in mind the shelter component of CPI, which is measuring rents and owner's equivalent, but is meant to capture kind of the ecosystem of shelter. It makes up 34% of CPI. It's still pretending that there is over 4% annual increase in this space, but the median price increase year over year was 1.3%. Don't look now, but the Fed funds futures market is now pricing in a 23% chance of a rate cut next month. That had been near

zero with expectations that we'd be waiting until September for the first Fed rate cut. The bank of England left rates unchanged last week, but it was by a six to three vote, which is very uncommon in developed central banks, the split vote indicating still a lot of pressure for ongoing rate cuts. I've already kind of talked about the action in oil markets today, up 4%, closed down 9%. Expect more volatility, presumably, in the next few weeks. cuts. I've already kind of talked about the action in oil markets today, up 4%, closed down 9%. Expect more volatility, presumably, in oil markets as this continues to play out and we see what Iran will do next and so forth and so on. In the meantime, President Trump is allegedly off to Europe tomorrow for the annual NATO summit. The New York mayoral primary is tomorrow and we'll see if former governor Andrew Cuomo pulls that off or this socialist opponent.

And nevertheless, it's still not likely to matter because you'll then go to ranked choice voting going into the general election in the fall and the candidates will likely be back on the ballot as independents then, so we'll see what happens. I myself would be very surprised if New York ends up with a socialist mayor when that mayor is willing to call oneself a socialist. I'll leave it there. I have a quick shout out to this in the written dividend cafe, but I want to say it on the podcast and video. Rest in peace to Fred Smith, the founder and long, long, long time CEO of Federal Express.

Fred Smith died last evening at the age of 80. I had the occasion to break bread with him a couple of times. This was an American hero, a titan of business, patriot, military, genius, and one who was an absolute pioneer in specifically overnight delivery, but really just monumental contributor to logistics and transportation, and one who our country is better off for having had. Rest in peace, Fred Smith. Thank you as always for listening, watching, and reading. The Dividing Cafe will be with you throughout the week as more things develop in the situation

with Israel, Iran, and the United States, and everything happening in markets as we get ready the final few days of the first half of 2025. Take care. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC.

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