“You can’t predict. You can prepare.”

Investor Howard Marks

In last month’s letter, we briefly alluded to the war with Iran that had, at that point, only just begun. Then, our only observation was that “these dynamics bear watching in the months ahead.”

Well, as the conflict now continues into its third month, it is worth stepping back to examine both its economic implications and, more broadly, what the current administration’s approach to international relations may mean for markets and long-term stability.

We’ll begin with the immediate situation.

The Economics of the Iran Conflict

First, we want to start by acknowledging that this war, like all conflicts, carries profound humanitarian consequences. There is no scenario in which a prolonged disruption, especially one involving the globally vital Strait of Hormuz, does not result in widespread hardship, both regionally and globally.

While those human and geopolitical dimensions are critically important, they fall outside our core area of expertise. As always, our role is to assess how these developments may affect the broader economy and, by extension, our investment portfolio.

From an economic standpoint, the implications are clearly negative and will grow worse if the conflict continues past the current, fragile ceasefire.

Oil sits at the center of the global economy in ways that are often underappreciated. It is not just a direct input, but an input into countless other inputs. It drives transportation costs, manufacturing costs, and supply chains across nearly every industry. The shutdown of the Strait of Hormuz due to the war has introduced a global supply shock that has already resulted in the cost of oil increasing dramatically. Already, certain crude oil grades purchased by European and Asian buyers have risen as high as nearly $150 a barrel. Domestically, the price of oil has increased by over 50% since the war began (from under $70 per barrel to over $110 for WTI crude oil).

Add to that the disruption of other goods moving through the Strait, ranging from fertilizers to sulfur, and the result is a layered, compounding effect on prices.

For many businesses, this will translate into higher costs and, ultimately, higher prices.

That said, we do not believe the situation has yet crossed into what could be described as economically catastrophic. For most companies, this represents another in a long line of external shocks. It’s difficult, but not existential, at least as things stand now.

Importantly, events like this tend to separate stronger businesses from weaker ones. It is not that well-positioned companies avoid damage entirely; rather, they sustain less damage than their competitors. In fact, these periods can create opportunities to strengthen operations, refine supply chains, and gain share.

At the portfolio level, this is exactly what we look for.

Yes, we expect our companies to feel some impact. However, we also expect them to navigate these pressures more effectively than their peers. In some cases, we can reasonably expect them to emerge in a stronger competitive position.

While this is not a favorable backdrop, we remain confident in how the portfolio is positioned, particularly after rebalancing in January and February.

A Broader Shift in Global Dynamics

Beyond the immediate conflict, there is a larger theme unfolding, one that we initially highlighted a year ago. At that time, we wrote:

“The Trump Administration is clearly experimenting with upending the entire post-World War II international order….

“The post-World War II order—the one largely architected by the United States itself—may not be perfect, but it has given our nation a leading seat at the table and, with it, an enormous amount of influence over all kinds of different policies globally. Losing that influence makes us more vulnerable over the long-term to global political and military shocks without a credible, rooted alliance on which we can lean in moments of need.

“At the end of the day, we’ve taken trust and stability as assets that took generations to build and betrayed that trust. We cannot even begin to predict the consequences to that.”

One of the more notable aspects of the current situation is how limited international support has been. Traditional allies have shown little appetite to participate, and in some cases, have actively distanced themselves.

The Trump Administration’s approach to the war and coalition building around it has demonstrated its broader shift toward a more coercive, transactional approach to international relations. While the United States remains a dominant global power, we can only achieve so much through a coercive approach to our allies. After all, if you’re an international partner, why would you even want to help someone who has repeatedly embarrassed, demeaned, and even outright threatened you? Would you risk your citizens under those conditions?

We do not claim to predict how this conflict will resolve. Perhaps the current ceasefire will hold. Perhaps it will not. Either way, we remain skeptical about Trump’s willingness to embroil himself in an endless action that plays badly for his approvals (which hit a new low in March), especially as we approach the midterm elections.

If nothing else, credit markets are likely to act as a constraint. The 10-year U.S. Treasury yield has moved sharply higher since the conflict began, rising from under 4% to roughly 4.45% by the end of March, as investors price in higher inflation, geopolitical risk, and increased fiscal spending.

Higher yields make it more expensive to finance a prolonged conflict and tighten financial conditions across the broader economy. Sectors that rely heavily on credit, like housing, are already showing strain. Over time, these pressures tend to incentivize de-escalation.

Our own expectation remains that there will be behind-the-scenes efforts to bring the situation to a close, one way or another, accompanied by a narrative framing any outcome as a success.

Unfortunately, we expect the broader pattern here to persist until there is a significant shift in the political landscape (perhaps after the midterms or 2028): a cycle of episodic disruptions, each with economic consequences that ripple through markets. Even if the economy avoids recession, volatility will remain elevated, and prices will likely continue to rise for some time.

Behind the Scenes: Portfolio Decisions and Risk-Reward

Against this backdrop, we are doubly pleased to have had the opportunity to rebalance the portfolio earlier this year. We discussed our new positions in detail last month, but given that the changes were more extensive than usual and that we must now evaluate our portfolio in the context of a wartime economy, we thought it would be helpful to provide a bit more context around how those decisions were made.

At its core, investing is about evaluating an evolving opportunity set. Markets are not static. Periods arise (sometimes gradually, but often suddenly) where the number of compelling opportunities swells seemingly all at once.

When that happens, we have a responsibility to reassess capital allocation. The guiding principle is always the same: improve the portfolio’s risk-reward profile.

This can take different forms:

• Moving into opportunities with similar upside but lower risk

• Moving into opportunities with greater upside at a comparable level of risk

In any case, the goal is to increase expected return relative to the risks being taken.

But risk is only part of the equation.

We also think carefully about volatility. Here, we mean the day-to-day and month-to-month variability in portfolio value. While volatility is not the same as risk, it matters. Every client has a different tolerance for “swinginess,” but no one has an unlimited tolerance, especially in an environment that has been inherently volatile for a long while.

Our objective is therefore to construct a portfolio that fits within acceptable:

• Risk framework (the likelihood of achieving long-term return expectations), and

• Volatility framework (the degree of fluctuation required to get there)

Throughout all of this, quality remains the foundation. We maintain a consistent set of criteria: management strength, competitive advantages, balance sheet integrity, and long-term economics. We do not expect perfection, but we do hold a very high standard.

January/February presented us with a rare opportunity to rebalance in a way that improved quality, risk, and volatility considerations all at once; and we gladly seized that opportunity.

On Glenn’s Desk

Finally, a brief note on a recent development involving Rivian (RIVN) and Uber (UBER). Uber recently agreed to invest $1.25 billion in Rivian through 2031 in exchange for 10,000 robotaxis using Rivian’s R2 model.

We view this deal as reinforcing the idea that Rivian’s platform has multiple potential pathways to monetization over time, particularly as autonomous and mobility ecosystems continue to evolve. While there is still significant execution ahead, developments like this highlight the optionality inherent in Rivian’s business and the range of outcomes that could emerge over the next several years. You can view an interesting conversation between technologist Matthew Berman and Rivian CEO RJ Scaringe, discussing the future of robots and self-driving vehicles, here.

Closing Thoughts

It is frustrating to watch the country lurch from one unforced error to the next on the world stage, but a little over a year into Trump’s second term, it has become clear that the American economy stands on a bedrock of underlying strength and resilience, and that even a disruptive administration remains responsive to the disciplining forces of markets.

Though it is easy to get distracted by the steady stream of self-inflicted crises, we at GDS Investments will continue to remain focused on your investments and our shared future. As always, our sole focus remains on navigating uncertainty with discipline by positioning the portfolio not just to withstand volatility, but to capitalize on it where opportunities arise.

As always, thank you for your continued confidence.

With warm regards,

Glenn

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.