The escalating conflict in the Middle East and the tragic loss of life across the region have commanded the world’s attention this week. With the Strait of Hormuz compromised and energy markets reacting violently, the immediate human and economic tolls are yet more severe. This past Monday, a mere 72 hours into the Iran war, I appeared on BNN Bloomberg to provide my thoughts on the situation and what it meant for the economy and markets. Needless to say, this situation is as fluid today as it was a few days ago, but rather than be reactive to the noise of the news cycle, I believe our value as stewards of your capital is to get into what is going on behind the headlines. So, this week’s newsletter is going to be less focused on the direct conflict and more on the broader implications for our portfolio.

Right now, we are watching two vastly different economic strategies play out in real-time. In Washington, the tactical unpredictability we saw with aggressive tariff rollouts is mirrored in their current geopolitical maneuvers—heavy-handed actions that seem to lack a cohesive, long-term blueprint. The U.S. is aggressively building an isolationist fortress, but they are footing a massive deficit bill to do it. That fiscal overreach is now compounded by stubbornly high inflation expectations to effectively handcuff the US to higher for longer borrowing costs.

Meanwhile, a very different reality is quietly unfolding at home. While the U.S. plays a global interventionalist game with arms, Ottawa is attempting to take a more pragmatic, forward-looking economic approach in reaching out with a pen. Case in point, while crisis in the Middle East widened, Canada was inking a resource deal with India. By securing stronger trade avenues outside of the US, Canada is not only reinforcing its position as a safer haven for energy during a crisis, but is positioning be a more fiscally reliable architect of Supply Chain 2.0.

The Cost of the Isolationist Fortress

To understand the divergence between the U.S. and Canadian markets right now, we have to look at the math behind the rhetoric. The U.S. strategy—characterized by aggressive tariff walls and massive domestic subsidies—was already inherently inflationary. Now, inject the outright chaos of a hot war in Iran into that equation. We aren't just talking about a vague "Middle East shock" anymore; with retaliatory strikes flying, the Strait of Hormuz effectively choked off, and millions of barrels of Iranian and Gulf crude suddenly sidelined, the cost of energy is acting as an immediate, massive tax on the global economy. There was a feeling midweek that things might be stabilizing after a media outlet reported that someone from within the Iranian leadership was inviting the west for an off-ramp. The calm in the markets was shattered again with continued violence in the region and reports that the recently “executed” supreme leader’s son was likely to take over as the country’s spiritual leader. Trump has pushed back against that, while US and Israel forces continued attacks alongside Iranian retaliatory strikes on tankers and other infrastructure targets in the region. In short, at the time of writing, this was still a fluid and chaotic situation.

As the chart above shows, Brent crude futures have spiked above US$90/barrel this week, reversing all of the decline since April 2024. At the time of writing, there were still roughly 200 ships, including oil and LNG tankers, as well as cargo vessels sitting anchored offshore and outside Hormuz. In addition to product not getting to end users, the back-up in vessels has also led to a slowdown or restriction in crude and LNG production since there simply isn’t enough storage on the water. Even outside of the energy market, this war is causing major disruptions.  Farmers are facing the risk of restricted fertilizer shipments, while are now potentially going to see limited supplies, and similar disruptions are being felt in drugs, batteries and semiconductors.

But the bottleneck in the Gulf is only half the story behind the current energy shock. What we are witnessing isn't just a passive supply disruption; we are seeing Washington actively weaponize global oil flows. If there is indeed a playbook being run here, it seems like the administration is aggressively pushing to lock up alternative heavy crude supplies—even turning toward previously sidelined sources like Venezuela—not merely to feed domestic demand, but to potentially limit available supplies to  adversaries like China. Call it another layer to the trade war. This is where the narrative shifts. Washington isn't just attempting to build a defensive economic fortress; it is aggressively hoarding resources to cut off the rest of the world. But as we know, forts are expensive to maintain while fighting a two-front economic and military battle.

The U.S. is currently staring down a projected $1.9 trillion deficit. When you combine a shrinking labor pool, higher costs of imported goods via tariffs, and a sudden, violent spike in energy inputs driven by the Iran conflict, you get a recipe for sticky, structural inflation. The bond market is doing the math. Investors are demanding a higher premium to hold debt issued by a government funding a de-globalized industrial policy while managing a geopolitical powder keg. Ultimately, defending this fortress means the U.S. is locking itself into a "higher for longer" interest rate environment—a direct headwind for lofty U.S. equity valuations. The chart above shows the 10-year US treasury bond yield over the past 20 years. While we still aren’t back to the 5% levels seen back in the fall of 2023, any rallies (even like this week’s flight to safety move) have essentially stalled out at 4%.

The Pragmatic Pivot: Canada’s Resource Renaissance

Contrast this with the quiet, pragmatic reality unfolding north of the border. While global markets panic over the daily military updates out of Tehran and Washington, Canada finds itself in a structurally dominant position. As the Persian Gulf becomes increasingly uninsurable for commercial shipping, Canada’s energy patch is looking like not just a safer haven, but a contributor to rewiring the global supply chain. In other words, rather than isolating, Canada is diversifying. While the U.S. plays whack-a-mole with Iran, Canada is securing long-term buyers for our most critical assets. This is a generational re-rating for the Canadian resource sector. It’s not that we don’t think there is value in US resource companies, but the options north of the 49th look better in our opinion and this has been shown over the course of the last year. The chart below shows the TSX energy group in comparison with the S&P500 energy index from this time last year and the degree of outperformance is approaching 20%.

Architecting Supply Chain 2.0

The escalation with Iran proves that the era of "just-in-time" global shipping and relying on vulnerable maritime chokepoints is at risk of becoming a memory. For the fractures from the recent de-globalization trend to be closed, we will need to see the building of new, secure trade routes from the ground up. As I have said before, it is doubtful whether the U.S. can successfully nearshore its manufacturing, but if Canada is going to export heavily to new global partners like India, the physical infrastructure of North America has to be completely overhauled to handle the load.

We are looking at a massive, sustained capital expenditure cycle. The smart money is moving toward the architects and operators of Supply Chain 2.0. This puts Canadian Class I railways—the literal, irreplaceable arteries of North American commerce—and air transport in a prime position to capitalize. It also highlights major Canadian engineering and construction firms that will be tasked with building out the export terminals, grid upgrades, and domestic industrial bases required to make this new reality function. Examples would be Canadian Pacific KC, Canadian National Railway, Cargojet, WSP Global and Stantec.

The Bottom Line for Your Portfolio

The headlines out of the Middle East are likely to remain disturbing, and the volatility in the broader markets could continue as algorithmic and human traders react to every new development in Iran. But as investors, we don't trade on panic; we stick to the strategy, make tactical adjustments where necessary and we position for structural reality. The Great North American Divergence is a clear signal to lean into Canadian strength.

We are maintaining a defensive and opportunistic posture: overweighting Canadian equities—specifically energy, critical materials, and industrial infrastructure—as a hedge against U.S. debt and volatility. While the US dollar experienced a “safe” haven recovery this week, we still see headwinds on the horizon and maintaining our near-100% Canadian dollar hedge strategy. On the fixed-income side, we remain tilted to shorter maturity bonds, both government and investment grade corporate, and staying underweight US in our global bond portfolio as we navigate the "higher for longer" rate environment being exported by Washington.

Ally and I will continue to monitor the developments in the Middle East and all other potential disruptions, but as we have talked about for the past year, the world is re-ordering itself. There are definite signs of de-globalization, but this development isn’t across the board. Canada, as a relatively smaller and more open economy versus the US, may not look like it’s in a leadership role, but right now, it seems to have at least a better playbook for the next “new world order”.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.     

Andrew Pyle