The Permabulls and Iran
On Monday, the market proved Michael Burry’s claim that this is the greatest buy the dip generation in history. Unconcerned with all the unknowns about how the situation in Iran will play out, the permabulls bought the opening dip and the S&P finished essentially flat on the day. Apparently Iran is no big deal. Stocks always go up.
One of the biggest permabulls on FinTwit is Ryan Detrick. On Sunday afternoon, Detrick tweeted that it was a good time to “dust off the Chart of Fears” which shows that despite what is happening being “confusing and scary…. stocks have always moved from bottom left to upper right”. No need for analysis, no need for concern, just pure complacency as always. To paraphrase John Kenneth Galbraith, never underestimate the intellectual shallowness of financial professionals.
This morning the market is rethinking yesterday’s reaction as things escalate in Iran – and rightly so. I don’t know what’s going to happen either but there are risks that need to be considered. Nobody expected the assassination of Archduke Franz Ferdinand to be the catalyst for World War I. More recently, Bush 43 had no problem eliminating Saddam Hussein in the Second Gulf War. The problem was the aftermath as Iraq fell into complete chaos and our stated goal of turning it into a democracy failed miserably. Iran is down but not out – to use the title of an editorial in Monday’s WSJ. This isn’t likely to blow over as quickly as the market thought yesterday (Monday).
I’ve been telling people to buy defense stocks for years as it has been obvious since Russia invaded Ukraine in 2022 – and especially since October 7 – that the world is becoming an increasingly dangerous place again (“Defense Stocks Are A Buy”, Top Gun Financial, October 17, 2023). Some investors have tried to get cute by buying European defense stocks like Rheinmetall. Being no expert in defense, I recommend an ETF like the iShares Aerospace & Defense ETF (ITA) or Invesco Defense ETF (PPA) – which have both more than doubled over the last three years and are going higher.
To be clear, I’m not telling you to sell everything. I sold nothing on Monday because of Iran and I don’t plan to today or going forward either. But I do have a decent position in PPA as well as a few shorts to hedge our portfolios. While history suggests that the market will be fine over the long term, it is not a sure thing.
