AI Growth Surge & Iran Crisis: What Investors Need To Know

And as always, great to speak every month with Wharton Emeritus Professor of Finance, Jeremy Siegel, who is also a senior analyst at Wisdom Tree. Jeremy, great to have you back with us this month. Thank you, sir. Happy to be with you, Dan. Obviously, a lot going on when you're talking about the impact of the war in Iran, but also we had a Fed meeting before we talked to you last, and I guess let's start there, with the decision of no rate cuts. Give us your thoughts. Yeah, actually, let me start with Iran, because two hours ago, I mean, I know that it takes a couple of days to lag here, but two hours ago, we did have an announcement of a five-day postponement that rallied the markets dramatically by Trump. Now, Iran has denied that there was such contact, but the markets like the fact, this is the first de-escalation of the war on one part. It is a lot of confusion and a lot of hope. So, this was going to be Monday, an extremely tense day, very tense, and we'll see how it unfolds. Iran is by far the most important determinant of all market directions, not just oil, but equities, bonds, Fed action, and all the rest. Let's go to Fed action. It was no one's surprise that there was no change. I'll tell you what somewhat surprised me, and this has somewhat longer-term consequences, but that Fed Chair Jay Powell was very adamant that he will not leave the Fed until he's cleared of all charges of impropriety that have been leveled by the Trump administration. Now, let me explain that that doesn't mean he will stay as chair. It might be that the Senate will still confirm Warsh's chair, but as we know, Powell has two more years left, and there's no way that Trump can remove him. So, basically, he's saying, if you want me out, so that's significant. Now, I'll tell you why it's significant, because if Powell stays on, even if Warsh becomes chair, I mean, Powell will have an influential voice as ex-chair and can sway a number of people, and I expect there to be some very close votes coming up in June when Warsh takes the reins about whether to cut rates or not. Now, everything depends on what happens in Iran, if oil goes back or not, and so on. So, there's many months to go, but it's a very interesting position. Let me also say something that I thought was very significant. The long-term real growth rate in the U.S., which is predicted by the Fed officials, the 19 FOMC members, was raised by the most in its history by 20 basis points, two-tenths of a percent, from 1.8 to two percentage points. In words, what they think the long-term real GDP growth is, that has never happened before. It's the biggest increase in a three-month period. Why does that matter? I think that confirms their belief that AI is, in fact, productive and will raise the growth rate in the United States. There's very little else that happened in the last three months that could explain for that big an increase. And by the way, we won't go into it unless you want to, but an AI increase in real GDP growth is extremely important for the long-term fiscal viability of the deficit and government spending. Let me play off of that because we've also, in recent months, seen more and more companies making job cuts seemingly linked to their path around AI. And it brings up the question I think a lot of people would ask, and I've talked to a lot of labor economists about it, and I'll ask you from your side of it. You're seeing the expectation of this growth is there, but you also have this concern about the labor force as well. So how do those two kind of balance out as we move forward? Well, it's kind of interesting because we've gotten some layoff. But when you look at the actual data, we don't see unemployment claims go up. We don't see the weekly ADP numbers that talk about the payroll. Yes, the payroll was very weak in February, but it really offset unusual strength in January. And really, the equilibrium demand is zero, but the equilibrium supply is zero. So that's why the unemployment rate is remaining the same. Challenger layoffs, I think, were actually down. Job openings actually, I think, edged up. Yeah, we get block laying off 20,000. I don't know if they attributed AI or not. Many people who studied blocks said they had hired way too many people anyways, and it really wasn't related to that at all. You hear a lot of anecdotal stories, but you don't get any hard evidence on the macro level that it's costing jobs. And one has to understand, and I've written about this, AI will increase wages and income, and it ultimately will produce a lot of demand from the extra income and productivity that it brings that will bring a lot of, even white power workers, demand will remain stable. So I think the whole story of the AI labor apocalypse is wrong. Yeah. And the Citrini report, which sparked a panic on Wall Street a month ago, was cleverly written, but from a macro standpoint, in my opinion, completely unfound. Okay. Let me finish up going back to kind of a byproduct of the war, because we've seen the markets pull back a little bit, obviously, with what has been going on. I think the expectation is if there's some sort of agreement reach, we will see the markets move higher. Generally, what is your thought about where the markets are right now, and how should investors be thinking about what we're kind of seeing play out now? And I think the expectation has to be that at some point, we're going to see some sort of balance come out from what we're seeing with Iran, and that the markets will get back on the path we saw before this war started. Yeah, I agree. Absolutely. I mean, again, I don't know. I mean, but let me say the Iran situation is, if it isn't solved, if Hormuz stays closed, and the productive talks that Trump talked about were not so, that's going to lead to further downside. But there's just a global impact here. We are impacted much less, but Asia is very impacted, and that impacts. Now, I've been talking to firms that, for instance, are using remote workers in Philippines, they're having blackouts in the Philippines. The energy situation there is so bad that there's rationing, and they can't get their work out there. It will be a serious effect. On the other hand, if we get that oil moving again, there's no reason that the bull market will not continue. Let me finish up, actually, with one other thing, because we've talked so much about oil through the Strait of Hormuz. The other component that's very interesting is fertilizer, and how that can potentially have an impact on the farming sector in so many different locations. Yeah, I heard that urea, which is one of the main elements of that, that almost 50% goes through Hormuz, or I heard, you know, that was one report, and absolutely, yes, the fault affects not only oil itself, oil derivatives, fertilizer. I mean, it is incredible that a little strait could hold the world hostage. You know, Iran does not own that strait. Some people say, oh, we're going through Iran. No, it isn't. International law, they own three miles out. There's still 20 miles of passage. It's international waters. And, you know, them blocking it or charging a toll, as they suggested, et cetera, et cetera, really violates international law and will not be tolerated. So again, let's hope some sort of deal is there. We all want that. But I do think what we saw is the first verbal on either side de-escalation, I mean, which I think is hopeful, and let's hope that that is, in fact, going to prevail. Jeremy, I appreciate your time today. All the best. Thank you, sir. Thank you, Dan. You got it. Jeremy Siegel, Wharton Emeritus Professor of Finance, as we mentioned, also with Wisdom Tree.