Video Update: Global Crisis and Its Long-Term Effects

This weekend, the world was rocked by the events unfolding in the Middle East.

The long-term implications of a war between Israel and Hamas are at the forefront of everyone’s minds.

That’s why in today’s video update, Chief Analyst Adam Galas will do a deep dive into this global crisis.

We hope for a speedy end to this conflict.

But in the event that it spirals and impacts geopolitics and eventually the markets… we want to make sure we’re prepared for that scenario.

Click below to watch the video or scroll down to read the transcript.

Happy SWAN (sleep well at night) investing,

Brad Thomas Editor, Fortress Portfolio

Welcome Fortress Portfolio members to a special global crisis edition of the weekly update.

Now, today will be briefly covering what's going on in the Middle East and what the implications are for the global financial markets and your Fortress Portfolio.

But first, here's a quick summary in case you haven't been following the events that started on Saturday.

Hamas terrorists launched the biggest single incursion into Israel in the last 50 years, attacking several cities.

They attacked from the Gaza Strip, launching assaults by air, land, and sea.

The Israelis say about 700 are dead with thousands injured.

And the gun battles are continuing.

As a result, Israel declared war on Hamas and launched immediate retaliation, calling up 300,000 reservists – the largest call up of reservists in the country's history.

That's about 10% of the Israeli reserves.

They've since launched a complete siege of Gaza, cutting off the city from electricity, food, fuel and other essential commodities.

The Palestinians say they have about 700 dead and 3,700 injured.

So that is a total of about 1,500 dead so far and around 8,000 injured from both sides.

About 200,000 people were displaced from their homes and about 140,000 are currently sheltering in schools throughout the territory.

So this is, of course, a tragedy for the Israelis and for the Palestinians… who we cannot forget have been held hostage by Hamas for decades.

So, what are the global implications?

Now I'm sure a lot of people think we shouldn't even be thinking about the financial implications of something this horrific...

But it's important to remember that this has the potential to spiral into something much bigger.

After all, WWI began with the assassination of a single archduke.

And this is the largest incursion into Israel in 50 years.

They are describing it as their 9/11.

And remember, 9/11 had ramifications for geopolitics for decades to come.

So the United States, according to The Wall Street Journal, believes Iran was heavily involved in the planning for this.

Because for one thing, the Israelis who are legendary for having incredible intelligence capabilities did not see this coming…

In addition, this was, a series of attacks from land, air and sea… something Hamas has never before had the capability to do.

So the U.S. believes, as does Israel, that Iran was to blame – or at least heavily involved in these attacks.

This is where things could get very tricky and could spiral into something much worse.

Fortunately, it's not likely to become anything like WWIII because right now, Iran's biggest ally is pretty much Russia.

And as you can see, Russia is currently bogged down in Ukraine, spending 3% of their GDP (gross domestic product) on that war.

(Source: The Daily Shot)

That's the second biggest spending as a percentage of GDP in world history outside of WWII.

And that would be the equivalent of the United States spending about $750 billion, which is our entire defense budget.

So the point is, Iran is pretty much alone.

And the biggest potential risk here is that Israel believes that Iran is an existential threat and decides to try for a regime change – attacking it directly in a full-blown military conflict.

Currently, this is more of a proxy war between Hamas and Israel, but Israel might decide to just go for a full-blown hammer down against the Iranian regime.

Now, we do not believe that Iran has nuclear weapons...

However, the Arms Control Association does believe they have enough uranium… that if they were to enrich all of it, they could build a single bomb.

And of course, that's all it would take for a catastrophe.

But most likely it would be a non-nuclear confrontation between two major powers.

And this, of course, brings us to the geopolitical implications of the world – the oil markets – the primary reason that the world cares about what happens in the Middle East.

Now, if you remember back to 1973 and the Yom Kippur War, Arab armies caught Israel off-guard and Israel came within days of collapse.

Israel was able, of course, to win, but that led to the Arab oil embargo.

And it caused oil prices to triple, which today would be around $250 a barrel.

Now, Iran has about 160 billion barrels of reserves and is producing about 4 million barrels per day, half of which goes to export.

That's about 2% of global supply.

Now, currently, we have a very tight oil supply. Oil prices recently hit as high as $95.

And you probably know gas prices at the pump are approaching $4.

Now, the Saudis say officially they have the capacity for 12 million barrels per day. But right now, they're pumping 10.1 million per day.

They do say that they could, in a crisis, go as high as 12.5 million per day… and increase the capacity by 2.4 million.

This could completely replace Iran's production if there were to be an embargo.

But again, that has never actually been tested. They've never produced above 12 million per day.

Now, the doomsday scenario would be if Iran gets attacked by Israel, specifically its oil export capacity.

Remember, if that were to happen, then Iran could retaliate by attacking the Straits of Hormuz. That's where 17 million barrels per day or 70% of the global supply passes through.

So the good news is that the Straits of Hormuz are unlike the Suez Canal. If you remember a few years ago, a ship got stuck for several weeks and caused all kinds of supply chain disruptions.

This is something completely different.

Iran has no single point of attack which they could bomb that would shut down global supply chains of oil.

They would have to actively attack tankers. And of course, the Israeli and U.S. Navies could wipe out their navy quite quickly.

However, the risk here is Ras Tanura. This is the major Saudi oil export terminal, which has a capacity of 6.4 million barrels per day or about 6% of all global oil supply. That’s how much passes through this single export terminal daily.

And this export terminal accounts for 60% of Saudi Arabia's export capacity.

Now, if you remember back in August of 2019, Iranian backed Houthi rebels from Yemen attacked Ras Tanura as well as some other oil assets from Saudi Arabia. They used about 1,300 missiles and drones.

And they were able to decrease some capacity for several weeks, but it was not a global crisis.

Now, Iran is currently believed to have around 200 drones and about 3,000 ballistic missiles.

So they could more than double the attack capacity if they tried to do what the Houthi rebels did back in 2019.

This is what our current intelligence estimates, or at least what the media is being told… it’s quite possible that Iran has thousands of drones and more ballistic missiles that could potentially wipe out all of these infrastructures.

Now, Prince Mohammed Bin Salman, the crown prince of Saudi Arabia, said back in 2019 that if they were attacked by Iran in this full-scale scenario, oil supplies would be disrupted.

Oil prices would jump to unimaginably high levels that have never been seen in our lifetimes.

Now, of course, he does want to be protected.

And the Saudis do have the best patriot missile batteries that the U.S. is making available to them. So it would not necessarily be easy for the Iranians to wipe out their capacity.

But what would happen to oil prices in this worst case scenario? Remember, we are still sanctioning Russian oil.

Imagine if Iranian oil was completely wiped out by the Israelis, and the Iranians launched thousands of drones and missiles against Saudi oil infrastructure… knocking them offline as well.

Well, Bank of America modeled such a scenario back in 2022 after the Russian invasion, and they estimated oil prices could go to $300 a barrel.

That would, of course, be approximately twice the previous record set at $147 a barrel in 2008.

Now, what does that actually mean for gas prices?

Well, JPMorgan modeled this back in mid-2022 and they estimated $120 a barrel of oil could lead to $6 on average U.S. gas prices and $7 in parts of California.

And, if we assume proportionality here, for $300 a barrel, we're looking at around $15 to $16 national average gas prices...and $17.50 to $20 in parts of California.

That of course, would throw the economy into chaos and destroy the Fed's plans for a soft landing.

As we've talked about several times in previous weeks, the Fed has never before been able to avoid a recession trying to bring inflation down to 2% when inflation began at over 5%.

But this time, they're quite confident.

They do think that they will be able to accomplish it. And Goldman Sachs estimates an 85% chance that they are right.

However, if oil prices do soar towards even a fraction of what Bank of America estimates say ($140 to $150), we’re talking $6, $7, $8 gallon gas.

And inflation expectations would soar to 3% or 4%, possibly 5% or 6%.

The Fed would thus have to raise interest rates to 6% or even 7%. This is what Jamie Dimon, CEO of JPMorgan, recently warned about for the worst-case scenario.

And, of course, they would probably have to raise interest rates even higher if gas prices were to hit new record highs.

But, before you start panicking about $20 gas prices, $300 oil prices, and what that could do to the economy (with 7% interest rates from the Fed)…

Let's talk about what's actually likely to happen.

The table below shows that the stock market drops an average of about 1% on the day geopolitical shocks take place… and the peak average decline for the entire market is just 4.6%.

(Source: The Daily Shot)

And on average, stocks only fall for about three weeks and within 43 days are back to record highs.

So as far as the stock market is concerned, such events fortunately do not tend to impact our portfolios.

But to give you a little more context, what is the probability of this worst-case scenario that we just described?

The $300 oil… $20 gas in California… inflation raging out of control... the Fed hiking to 7%... mortgage rates at 10%... and the stock market tanking...

Well, to give you an estimate for this kind of worst case scenario, it’s the same risk as nuclear war with Russia… which Goldman Sachs estimates is currently about a 2.5% risk.

 So, what does that actually mean?

Well, let's consider credit ratings.

This is something that we generally have talked about, a 2.5% risk of bankruptcy (and thus a stock going to zero) is an A-minus credit rating.

That is the same credit rating for Enterprise Products (EPD), one of our Fortress Portfolio holdings.

It’s also the same credit rating for Costco (COST).

So thinking about it another way – how worried are you that that Costco’s stock is going to become worthless in the next 30 years?

Not much. You're not losing sleep over that.

And I'm guessing you're probably not losing sleep over the idea of D.C. and Moscow exchanging nuclear warheads.

So don’t put too much worry in the worst-case scenario I mentioned above.

But that being said, our hearts certainly go out to the thousands of people suffering and dying in this newest war in the Middle East.

Now is the time to make sure we do not take for granted the fact that we live in such an incredible country… and personally be grateful knowing that our families here in the United States are out of the line of fire.

Something else to be grateful for is how your Fortress Portfolio is performing… after all financial security helps us protect and care for those we love.

Right now, S&P long term risk management is still averaging your Fortress Portfolio in the 68th percentile.

(Source: Fortress Portfolio Risk Table)

And this is the long-term risk for the entire Fortress Portfolio.

As we talked about two weeks ago, this has over a thousand metrics, that include pretty much anything you can imagine that could go wrong with a company.

The S&P has it calculated and quantified. And they've been perfecting their model for 20 years, which is why we incorporate its metrics into our own 3,000-point safety and quality model.

And notice that entire portfolio is averaged into the 68th percentile, meaning the top 32% in terms of long-term risk management.

And this is out of almost 10,000 companies that the S&P rates, covering 90% of global market share.

So they’re saying that our companies are very solid, low risk companies with great risk management. And some of our companies are in the top 100 of all companies on earth.

And that's not surprising, because some of our companies were founded 50, 75, and 100 years ago.

The oldest company in our portfolio is Toronto Dominion (TD). It was founded 167 years ago and has never missed a dividend payment since it started paying one (166 years ago).

TD has never cut its dividend. Not in the Great Depression… not in the Great Recession… and not in the pandemic when we locked down the global economy.

So as terrible as all the recent news has been, and our hearts and prayers certainly go out to the people who are suffering… we have to be thankful that Fortress Portfolio is still offering a very safe 7.5% yield. And this has been growing at 8% over the last five years, representing the best source of safe ultra-high yield for our needs.

The companies in our portfolio are also overseen by skilled and adaptable managers with an average of 20 to 25 years of experience.

And in combination, Fortress Portfolio is overseen by our safety and quality model that's based on 3,000 data points across a thousand metrics.

As I have previous shared, we've spent eight years, 20,000 people hours and over $1 million in R&D (research and development), creating it…

All so you can sleep well at night knowing that your money is in the best of hands and is working hard for you – so that one day you don't have to…

No matter what craziness is going on in the world of geopolitics, regular politics, the Fed, or the economy…

Thank you for joining us for this week's special edition.

I hope you join us next week when we go over the blow-out jobs report and the important implications that it has for the economy, the stock market, and your Fortress Portfolio.

Please send us your questions and feedback so I can respond to them in these videos and our monthly issues.

Until next week, this is Adam Galas wishing you and your family safe investing and a healthy, happy, and joyful weekend.