Geopolitical shocks and market durability: What’s next?

Hello, and welcome to a Head of the Curve, presented by Credit Agricultural C.I.B. Over the past few weeks, the escalation of conflict in the Middle East has injected a fresh layer of geopolitical risk into an already complex macro-environment. If you were watching markets in real time, you probably felt it. But as we digest the recent news that the U.S. and Iran appear to be making tangible progress towards an extended ceasefire, the bigger picture suggests something different altogether. But just because this conflict is not as disruptive as initially thought, doesn't mean it shouldn't be analyzed critically and with respect to the future. The White House's approach, rapid escalation followed by blatant and visible efforts to stabilize the reaction are a playbook with which many investors have become increasingly familiar. I sat down with Ivan Razdira, head of debt capital markets for the Americas, and global U.S. dollar sponsor, to discuss this complicated intersection of public policy, markets, and why breaking news doesn't necessarily lead to broken markets. Hello everyone, and welcome to a head of the curve presented by Credit Agricultural CIB. I am joined by our first repeat guest, Ivan Razdira, head of debt capital markets for the Americas and global U.S. dollar sponsor, Ivan, welcome back to the pod. Great to be here, Connor, thank you. Happy to have you. So we're back today because seven months ago, you said on this podcast that the administration posed a tail risk that markets weren't fully taken into account. And I think everybody at this point can agree that the administration has injected something into markets that wasn't there previously. But there's this paradox, and this paradox is kind of where I want to start in the sense that as we think about markets before the war, during the war, and after the war, those are three different conversations, and all three of them kind of form this bigger picture. So I kind of want to start there with level sitting about markets, funding conditions, and establishing those pre-war, during war, and post-war conditions. Yeah, no, all very good observations. So let's start maybe with level setting, as you said, where we were pre-war. So going back to let's say February 25th or whatnot, I think we could agree that the previous year, year and a half exhibited super strong funding conditions in the U.S. IG market. I like to think of this as a two-by-two matrix in terms of what influences markets or what has influenced markets lately. On one side, you have high rates, low rates, on the other side, you have high-ball, low-ball. In this case, when we say "ball," we're referring to interest rate volatility, as measured by the move index. And for the better part of the previous 18 months or so, we were in the perfect fourth quadrant. We had high rates, low-ball, and the result was super strong funding conditions. No new issue concessions, no price discovery, et cetera, high price tension. What happened with the war obviously took one leg of that stool, if you will, down which was an incredible move, higher in volatility, in every measure of volatility, in this case, also in the move. So we had a corresponding move in the move index, sort of a move squared, if you will. And what has happened since then is a retracement of all of those levels. What was interesting is during all of the noise with respect to the war, the underlying conditions of financing, and I would say the overall general U.S. economy were still very strong. And the trajectory of the war, at least at this point, has not changed that meaningfully. But what you had was the IG index, gaining about 50 basis points in yield over the course of the month. And I think, you know, sometimes we track things and spreads, sometimes we track things in yield. But I think yield is a very appropriate one here, because as you mentioned, when we think about volatility, we very much think about it in interest rate volatility. Total return investors do care about interest rates, and they care about interest rate volatility. So when we think about that move in credit, you're looking at it from a yield basis. That's fair. Absolutely. Absolutely looking at it from a yield basis, because as I said, in that two by two matrix, it's been an extremely supportive driver of that. So investors looked at this, and as you very well know, and as you sort of alluded to in the introduction, in March, despite all the pockets and all the no-go calls, and, you know, all the volatility, we still had the fourth busiest month ever in the US IG market. I know that's an often cited statistic. I'll cite it again here, again, a reflection of the fact that during periods of relative stability, investors and issuers alike took advantage of these strong underlying conditions to finance themselves and to invest. So the question on everyone's mind here should be, where do we go from here? So let me lay it out this way, in my opinion. The way to think about the trajectory of the sort of administration's decision making is you have the tweets, and on the other hand, you have what people are now commonly referring to, of course, as the taco trade. The market is clearly voted that the outcome here will be closer to taco. And I tend to agree with that. And now the narrative is that we're looking through the market volatility and the war, and some people are saying that we're wrongly ignoring the longer term effects. I think that, you know, that that is a reasonable point. But I personally think we are heading toward taco and not toward the sort of rhetoric associated with the tweets that I think would be much more destructive in the longer term. I would almost say, and you tell me if you feel differently on a micro level, on an anecdotal level, you almost hear whether it's clients or investors using that term as sort of pretext, as if they expect it or they assume it. So I, you know, again, I think that's something we've seen, but it probably supports, again, these are anecdotal evidence, but it supports the idea that it has weaved its way into the psychology of things, that the market itself is defaulting towards that as the base case. I think we wouldn't be at the levels where we are if it weren't heavily defaulting to that, to that base case. And we could be wrong, but I'll explain why I think the market is right and why I think this will turn out to be a taco trade. So for one thing, you know, just to revisit maybe the tweets and the, you know, the, I guess the vocal mechanism that the president has in expressing his opinions, I think they've become almost by any measure, increasingly erratic, and in some cases almost irrelevant to the conversation at hand. And that discredits the validity and the impact of the tweets. In other words, you're turning up the noise when you say things like you're glad Robert Mueller died or you get in a fight with the Pope or you use explicit language, vulgarity, use explicit language as Marjorie Taylor green noted no less on Easter Sunday. And what I think the administration or the president, I guess specifically is doing here is expressing frustration at the failure of turning US military might into tactical success. And people have picked up on that. And people have picked up on the fact that the actions of the administration are different than the rhetoric expressed through the tweets and the actions are much more conciliatory. And you could see that through the, you know, the various negotiations. And we're not going to go through the latest headlines because we're recording this on a Thursday by the time we get this out Connor, there'll be 50 headlines that will invalidate what I will have just said. But suffice to say, I think we're heading in that direction. And the other thing that leads me to believe that this will end up in a taco trade is that nothing gives me confidence that going deeper into this conflict results in victory for the United States. And the administration can claim a victory, however, you know, papered over. It might be realistic. It might not be realistic to me that is still the simplest off ramp. And I agree with the market's trajectory here in voting in this ending as a taco trade, which I think makes a ton of sense as you said, you know, I do think it matters as we think about where we have come from and where we are now. Even the Fed mentioned it is too early to tell what the economic impact would be. Just because this might end up being a taco trade does not necessarily mean that it will not have a lasting impact on economic growth or anything in that regard. So I'm wondering if you think that the fact that we have reverted back to pre-war valuations is also a signal, not just of a taco trade, but also a little bit of, I would say, looking past a transient economic impact. Is that fair to say or do you think that's something that we might have to continue to pay attention as those sort of ripple effects potentially trickle through in the coming weeks and months? Yeah, I would agree with the latter, in other words, it's never over. I think it'd be foolish of me or anyone else to say, no, no, no, this will be all gone in two weeks. I think that when people talk about the length of the conflict, to me that doesn't mean boots on the ground or missiles fired, that measures the severity of capacity destruction, I think, among the region to produce an export oil. But I would make a couple of observations here on why I think it is not unreasonable to look past this, with the huge caveat that there might be something down the road that might impede our ability to effectively import an export oil. So let's think about a couple of things. So first of all, I think if you take a look at, the market is voted with its feet very clearly. I think the move index again has reverted as we record this back to pre-war levels. I think interestingly, the spot on the move index right now is lower than the one-year average preceding the war. So we're already at very low levels. So the market has voted. You mentioned oil. I came across something that was very interesting, which is that on an inflation-adjusted basis, we used to talking about $100 barrel and oil as being very-- That was the psychological hurdle. It has second-order effects to it, absolute. It does. And it's just simply $100 barrel of oil in 2026 is not the same thing as it was in 2010 or 2015. So that oil shock, quote unquote, is not as devastating, I think, as people think. A couple of other things, maybe-- I think the consensus, or maybe just to reframe this, one of the things we get a lot from clients is, wow, the market is so great. Look at the S&P. The S&P 500 on the day before the war was just to pick a fairly round number. It was at $69.50. The earnings consensus on the S&P for this whole year is about 15%. Let's assume, for one second, that multiples on the S&P stay where they are. I know that's a big assumption, but let's just say they are. Let's just say they stay where they are. That means that almost being equal, the S&P should be 15% higher at the end of the year than it was at the beginning of the year. So if we were at $69.50 on February 25th, where should we be on April 25th, two months later, at that run rate? We should be at $71.25, about 100 points higher than where we are right now. So now I realize that that's really fuzzy math. Markets obviously don't travel in a straight line. I could hear the people groaning and whatnot, but it does give you some context as to, wow, the market is high. Well, it's actually not as high as it would have been in the absence of this conflict. Frankly, when you threw that statistic in me, I sort of found a parallel. It is admittedly a little bit of a flimsy parallel, but with the tariffs last year, where people were citing, you know, I would say an academic model about, you know, every percentage of tariff reduces X from GDP, it is a very, of course, mathematically and academically reasonable model. But I think one of the takeaways that we have seen since then is in a 21st century economy, the ability to re-adapt supply chains and for supply chains to adapt to these new complexities and things of that nature. So I almost drew a parallel from the market's ability to adapt to a quickly evolving supply chain dynamic to a quickly evolving energy supply dynamic. So that was at least the parallel in my mind that potentially could help explain why that supported. But again, I welcome your thoughts if there are some other things kind of underpinning maybe why the market continues to be confident in that regard. Yeah, I think you make a very good point about the re-adaptability of that was the word that used a second ago. It's a very good word. One of the other things that I think is, and I've talked to a lot of other people about this, is the sort of X factor here is the productivity boom associated with AI. And I think this is a real, as I just said, a sort of X factor in that it is clearly unknown. There's clearly some hype here. But there is also something real about this. Productivity in the United States has unquestionably increased over the past couple of years here. And I was talking to our economists about this, maybe not about productivity exactly, but just about the underlying state of the economy and how healthy it is in a productivity clearly plays a very big role. Our economist, Nick Bannes, said that if you were to look at one thing, that one thing that indicates the health of the economy would be the unemployment rate, which of course currently stands about a 4.3%. It's interesting to me, because it ties in a lot of things. Of course, the unemployment rate has always been important. It's more important today, because it ties in the increased, or alleged increased, I guess, productivity associated with the AI boom. It ties in fewer jobs being created within, and it ties in the scope of immigration and how that affects the replacement rate or the break-even rate, I guess, as economists call it, which has meaningfully decreased. I'm sure most of-- or some of our listeners have seen the Dallas Fed report that came out. I think it was a couple of weeks ago that suggested that the break-even rate in the United States might even be negative just because we've had-- just because we've had such a dramatic decrease in immigration. Our economist here is generally in the low, sort of low, sort of 20,000 to 40,000 number in terms of break-even. So, again, I think there's that X factor here of that this AI boom, you can argue whether or not it's a bubble, but this really means something, and it is really underpinning certain sectors of the economy in a very strong way. And you made, I think, obviously, as people want to discuss it, have made kind of this analogy to other bubbles, specifically, in technology. But this has been with us for years now. The theme has been with us for years now. The impact is growing, evolving, but the theme has been with us for years now. And as you just said, as we continue to learn more about it, the productivity games do appear to be real, lasting, and substantial. I think that's a fair analogy to say, wouldn't you? Yeah, I think so. Again, I'm not-- I don't think any of us are AI survived. Let's say-- Yeah, I'm definitely not. All I'm seeing is that there's something going on in the background that, again, I'll use the term for a third time as sort of an X factor here in terms of explaining some of this underlying strength. I guess maybe I get this question all the time on AI and private credit. And I'm not going to discuss private credit here today, because that's a very rich subject matter that's beyond the scope of this discussion. Suffice to say, if private credit is indeed a bubble, it is the most well telegraph bubble I have ever heard of or seen. In terms of AI, though, I mean, if you look at-- I went back and uncovered some numbers. So the height of the NASDAQ bubble back in 2000, I was already in markets, and I'm sort of embarrassed to say. But the NASDAQ forward multiple at that point was 60 times, 12-month earnings. Today, it's about 26. And I think the sort of-- I guess if you were the constituents, not necessarily the NASDAQ, but you think about what we were funding back then. So sure, it was a lot of the Ciscos of the world, but it was a lot of the websites and the deliveries. And it wasn't that those things are bad, because today you can buy pet food online, and you can get your stuff delivered. It was the valuations assigned that were incorrect at the time. Do we have that going on today? Possibly. I think Jamie Diamond was the one who made the point that there's obviously going to be overspending misallocation of resources. There's going to be some of that. But on the other side of this, there's going to be something that's going to matter materially. Maybe just to address one thing here that I thought was also interesting researching this going back, I looked at what happened to the IG market back then. And the IG market actually reacted not a little, but not tremendously to the bursting of the bubble. The IG market was actually undergoing some significant widening from the late '90s on due to other idiosyncratic factors, long-term capital management for those of us who remember that the Fed was hiking rates, peaking at 6.5% in 2000, and of course, September 11th. And it just kept widening after that. But the bulk of the widening actually took place before the bursting of the NASDAQ bubble. So credit even back then, which is a much smaller market, of course, proved to be much more resilient. So I thought those are interesting observations of where we are today and even sort of the slight durability of credit back then. You could make the argument that that market was a lot different than ours today, but I think it's worth something to kind of remember that. Well, I'm glad to use the word durability, because when we were here seven months ago, the word of the day was resilient. And I didn't want to just repeat that. I think durability is an excellent addition to our AlexaCon for it. But I think seven months ago today, again, not to give ourselves too hard a pat on the back because we have not certainly gone everything right. But this intersection between public policy and markets is something we discussed and we identified. And while we didn't necessarily predict this exact war, I do think we recognize that the administration is a tail risk, and I kind of want to close by sort of just very quickly rediscussing this theme, which is, again, as we think about the administration, there's a couple of things that we said in September that I still think are true and I would love your comments on. The first of which is this administration is demonstrated they are going to push the boundaries of what is, you know, customary for an executive administration. The second of which is that there are guardrails, whether those guardrails are the courts, whether it's the markets, there are guardrails that still exist, institutional guardrails that in, you know, these cases have helped. And the third is that just because the guardrails act as a buffer does not necessarily mean it will keep the administration from pressing the boundary elsewhere. In light of what I think those three kind of dynamics are at play, I'd love to sort of end with kind of just a revisiting of that concept, how you think about it, and how you think about it on a forward-looking basis. Yeah, no, I absolutely, I think, you know, just to revisit those comments in September, you know, back then I wasn't worried about inflation. We identified a policy error as the greatest threat, I think, or to markets at that time. And I think that proved to be correct. I think it's very clear that no matter how the Iran conflict ends up, that this will in hindsight be seen as a policy error, you can argue, I think, credibly, in defense of the administration that taking out some of Iran's capabilities is better for America, better for the region, better for the world, that's fair. I don't think we'll know about the longer term effects on how durable to use that word again. That will be for several months, but you could argue that this highly disrupted markets, in almost any measure, the S&P, down 10% top to bottom, all sorts of volatility indices higher, oil higher, rates higher, etc. So this is not a good thing for markets. We flagged this potential, not Iran, of course, as you correctly suggested a second ago, but a policy error, just simply because of the unilateral decision-making mechanism of the government. Not only I don't think we've ever seen, not only have we not seen an administration so divorced from Congress in terms of decision-making, but the executive alone. One person makes the decisions in this administration, and one person only, there are no checks and balances. The only checks and balances, as you rightly suggested, are things like the Fed, things like the Court, and when you hit those guardrails, they're not fun to hit. No, they are not fun for the administration to hit. I think in this case, the administration was highly emboldened by the action in Venezuela. I think they saw what they did, and took out a bad guy in 24 hours later. He's sitting in a jail in Brooklyn. Wow, that's amazing. American military might. American military might, and let's replicate that, and so TBD on whether or not that was a good decision, but I certainly think it's indisputable that that was an error in terms of, I think, the execution in the market saw it that way. Maybe just forgetting that for a second, what do we see coming up is the administration still emboldened to make some of these errors. I wonder if the administration's best interests and senses will be checked here. I think if I were to point to one adult in the room in terms of the cabinet, I think most people would agree that that is Scott Bessent, and so it's not under the realm of possibility that may be the president temper some of his language, but the language that I've seen coming to a head here in Mid-May is quite strong, and worries me a little bit here. Which, again, I think, as you rightly alluded to, it's not necessarily about the judgment of the outcome, but I think understanding the decision making and the forces that play behind that decision making is how we think about what could potentially come next out of there. So, again, to think that seven months ago, that was something we highlighted, and here we are backtracking on the biggest story, at least in our market, in 2026, was a very fun exercise, at least for me, so definitely appreciate your time. I hope for all of our sakes that this is the biggest story of 2026, and that we see this in the room every year, and when we do another podcast in seven months, that we won't have much to talk about, but I suspect that that won't be the case, and maybe the dangle are here, is that notwithstanding the fact that it's conventional wisdom that the Democrats will take the House, and that they might take the Senate, I don't think that necessarily alleviates some of this erratic decision making of the administration. So TBD, and I think they'll be more to discuss, because it doesn't seem like this administration is going to change the way that it governs or attempts to govern. And that is how you end a podcast on a gravitational hook, so for anyone, as we start to approach more midterm season and electoral commentary, obviously knows where Ivan sits, and obviously I think you would welcome anybody to have a discussion on that front. Ivan, thanks so much for your time today to our listeners again, our first repeat guest on the pod. I'm sure they enjoyed hearing your comments. Thank you all to our listeners for your time again today. We hope that you enjoyed this latest episode, and we look forward to seeing you again next time on ahead of the curve. Thanks so much. [MUSIC]