The US/Iran war served as a reset for positioning in the equity markets and provides a launchpad for a new bull run in equities. Agentic AI is taking off and creating so much demand for compute that LLMs like Anthropic have to throttle users during peak periods to manage the load on their servers. More importantly, users and companies are now spending more money than ever on AI compute while prices in the equity market are only beginning to catch up.

I am seeing a lot of failed topping patterns that undercut key levels during the drawdown and then quickly reclaimed them. Failed topping patterns (such as a head and shoulders top that reverses back into an uptrend) are some of the most powerful setups for a continuation in technical analysis. I will show some of these charts in the paid section, along with the ETFs and companies I want to add to. My plan is to build positions gradually on market pullbacks.

Unfortunately the market has not provided any pullbacks whatsoever. Systematic strategies have relevered quickly - the 5 day increase in CTA positioning is at the highest over the last nine years.

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Despite that, the blast radius of the US-Iran war is receding as the equity markets have moved on. Systematic flows and discretionary short covering are driving a powerful rally back toward the highs and the market is shifting its focus back on to the AI supercycle. The bottom end of the K-shaped economy continues to struggle, with tighter liquidity conditions, private credit woes, and higher energy prices creating a heavy drag.

None of this may matter for the top end of the K as the growing demand for AI tokens is an unstoppable force that supersedes economic forces. The launch of Openclaw just several months ago ushered in the era of agentic AI, sparking a Cambrian explosion of use cases and with it, an exponential increase in the demand for compute. As AI gets more powerful and useful, the demand for tokens increases and spurs investment in more gigawatts of compute and innovation towards more efficient compute (more tokens per dollar and more tokens per gigawatt). As compute becomes cheaper and more readily available, AI in turn becomes more powerful and useful. The flywheel will continue to accelerate until AI spending becomes such a large share of the global economy that it slows down under its own weight.

This interview of Dario Amodei (founder of Anthropic) helped give me a framework for how AI capex spending can continue to rise alongside accelerating revenue and demand for AI tokens. It’s an inside look into the economics of running one of the largest LLM and agentic application business in the world.

Anthropic’s annual revenue run rate has surpassed that of OpenAI despite having raised less.

Must of the value derived from AI won’t show up in GDP or corporate revenues. It will show up as a massive consumer surplus1 - the time saved by querying an LLM instead of digging around on the internet, the money saved by vibe-coding an app instead of paying an annual subscription on an existing SaaS product, the effort saved from having a robot at home instead of doing housework.

I have no doubt that many industries are getting disrupted and jobs displaced, but I that demand will shift away from commoditized products and services towards things that come with a human touch. Alex Imas explains it well in his Substack post:

Ghosts of Electricity

What will be scarce?

Starbucks is a huge company (market cap of $112 billion) that sells one of the most standardized products in the modern economy. Making a cup of coffee or even one of the fancy specialty drinks is very easy to mechanize and reproduce. If the entire economy is soon to be automated, with labor being replaced with increasingly more sophisticated capital, S…

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5 days ago · 78 likes · 28 comments · Alex Imas

But the economics of structural change, combined with deep-seated features of human preferences, suggests something different: as people get richer, they don’t just want more commodities. They want things that aren’t commodities in the standard sense of the word. The social aspects of products such as the relationships, the status, and exclusivity—what Rene Girard called the mimetic properties of desire—become much more relevant once people’s basic needs are satisfied. And the demand for these properties will bring the human element back into the production process, and with it, the jobs.

If this is right, then AI won’t just automate the commodity economy. It will trigger the emergence of something new: a post-commodity economy, where a growing share of expenditure goes toward goods and services whose value is inseparable from the human who provided them. The same economic forces that moved 40% of the American workforce off farms and into factories and offices will move workers out of automatable commodity production and into what I’ll call the relational sector. By this I mean the human-intensive, provenance-rich, sometimes artisanal part of the economy where the human aspect is part of the value of the good or service itself. The economics of scarcity won’t disappear, it’ll just relocate.

This profile of Alon Chen, a startup founder who formerly built a $2b product line at Google, gives examples of how creativity and strategic thinking are now more valuable than STEM and coding.

Creativity is the new coding. Chen is far from alone in making this case—and it’s a long-overdue win for the skill that corporate America spent decades telling people wasn’t serious.

Billionaire and former PayPal CEO Peter Thiel previously warned that AI is a bigger threat to technical roles than to creative thinkers. And the data is already proving him right.

IBM research highlights that there is now a “premium on creativity,” with innovative thinking among the most prized qualities in the workplace.

It’s a shift Snowflake’s CEO predicted in Fortune late last year: Once AI handles execution, the only thing left to compete on is the quality of your thinking. “In 2026, as execution becomes commoditized, strategic thinking and vision will separate high-performing organizations from the rest.”

It’s already showing up in the jobs market, too. LinkedIn’s Skills on the Rise 2026 report—which tracks the fastest-growing skills in the U.S.—found surging demand for communication and creative thinking. In fact, a LinkedIn spokesperson told Fortune that job postings mentioning “storytellers” have doubled over the past year alone.

Odds and Ends

I usually put this section, which is a mish mash what I’ve been reading recently, at the end of the post behind the paywall. Today I’m putting it in front because I realized a lot of people are missing out on it. If you can’t access paywalled articles, you can try searching for them on archive.ph.

Memory might actually benefit from Google’s TurboQuant algorithm thanks to Jevon’s Paradox.

AI might create more opportunities for equity short sellers, says Carson Block

Claude (the AI) has his own Substack. Read about Mythos and Project Glasswing from his own point of view.

Claude Opus 3

Frontier AI and the future of cybersecurity: grappling with the implications of Project Glasswing and Claude Mythos Preview

This post is part of an ongoing experiment by Anthropic. Opus 3 does not speak on behalf of Anthropic, and we do not necessarily endorse its claims or perspectives. Read more here…

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5 days ago · 131 likes · 49 comments · Claude Opus 3

The way deep-sea anglerfish reproduce is crazy.

Male anglerfish lack lures completely and are much smaller than their better halves. But they do have large chambers in their heads, apparently for detecting females’ pheromones and other scents—and they have big eyes with which they may spot the glimmer of a potential mate….

A male permanently latches onto the female, relying on her blood for food. His brain and other organs dissolve, except for his testes. Then the female releases her eggs into the water and the male his sperm.

Imagine having a compelling biological urge to search for something in the deep dark waters for your entire life. Upon finally finding it, you suddenly realize your life’s search will culminate in the ending of your existence. If anglerfish had feelings, would mating be a happy and fulfilling experience or would it be terrifying?

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I’ve been ruminating about Anthropic’s new model Mythos over the weekend and about what it means for privacy and society overall. I can’t he…

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The main threat from Mythos is that it can, along with doing the usual LLM stuff better, identify and exploit vulnerabilities in every operating system and software when directed by a user to do so. It’s every hacker’s wet dream, and upon release, it will likely be used to do exactly what Bessent and Powell are worried about.

The scary thing is that Mythos is the first model to be trained on Nvidia’s Blackwell GPU racks. More models as powerful, if not more, are on the way…and we haven’t even gotten to models trained on the latest Vera Rubins. OpenAI is in a neck-to-neck battle to outcompete Anthropic, particularly in the areas of coding where Anthropic has excelled. The only problem is that Sam Altman and OpenAI can’t be trusted with AI safety.

Silicon Valley will tell you that AI will drastically improve the livelihoods of people and boost GDP and productivity. Businesses and industries will get spun up that we couldn’t comprehend of in the past. I have no doubt that people are benefiting from AI at an individual or firm-wide level, but in the equity markets, I’m concerned that a lot of the positives of the AI boom (chips, memory, components, LLMs) are already fully valued whereas the downside caused by disruption (software stocks, private equity and private credit) have only started to materialize. Now we have one more thing to worry about - can the leading LLM providers continue to improve their models without exposing all of us to cybersecurity risk?

I’m getting a lot of mixed messages out of the Strait of Hormuz:

Positive: The ceasefire proposal was revised and brings the US and Iran closer together in terms. Israel has approved direct negotiations with Lebanon (while continuing to attack them). At the moment it looks like the summit in Pakistan is going ahead as scheduled on Saturday.

Negative: A continuation of US military assets getting airlifted to the Gulf. Saudi capacity in the East-West pipeline has been cut by 700k bpd. The Strait of Hormuz remains very much closed, and Trump is not happy. Even if it reopens, it won’t be until June for flows to restart back to normal. Drones are still hitting Iran.

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To my surprise, after threatening to wipe out Iran’s civilization a day earlier, Trump agreed to Iran’s 10-point proposal, which amounts to a total and utter capitulation that leaves Iran in a more powerful place than before the war started. Not only will sanctions be lifted on Iran, but Iran will control the Strait of Hormuz, charge a toll, and use the funds for reconstruction of their country.

Equities surged and oil collapsed on the news, and markets are moving quickly to price in the most optimistic scenario possible. Anticipating that yesterday would end in a volatile and binary outcome for the market, I trailed my stop in May WTI futures to 110.50 ($7 off last night’s high). That fateful decision allowed me to lock in gains instead of allowing a winner turn into a losing trade. Meanwhile, gold and June 2027 SOFRs rallied on relief from the stagflation regime that was dominating the market due to the war. Even though my view on the war was totally wrong, I somehow still enjoyed a large pnl up day thanks to solid risk management.

Where do we go from here? What if this is all a ruse by Trump to buy time for his military assets to get into position? The truce feels fragile, and I find it hard to believe that Trump will agree to all ten of Iran’s points. Doing so would crystalize a significant loss of global hegemony and leave America’s allies (Israel and Gulf countries) in a position worse than when the war started. Drones and projectiles are still flying, and Israel is already trying to drag the US back into the war by attacking Lebanon. Even if these ceasefire talks eventually lead to the end of the war, it won’t happen in a straight line. The market feels more uncertain today than it did last week.

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I am very impressed by how you manage to successfully trade in and out in all this market chaos. However I was wondering whether trading in this very short term tactical style one could miss “the big one”. Let’s say one day the market has a gigantic gap up or down because overnight half the Gulfs oil infrastructure was destroyed or a peace deal was reached and you were flat or had the wrong position. Do you see this as a risk? And if you had high conviction in predicting the war’s ultimately outcome would you consider switching to a less short term framework by just holding on to your position?

This is a good question and a useful way to introduce a few trading principles that have improved my performance and reduced pnl volatility over time.

There was once a time when I would trade by taking the view that outcome “X” would happen and result in a market going from 100 to 120 (as an example), so I’d have to stay long from 100 to 120. The problem was that sometimes the probability of outcome X was a coin flip, and half the time I’d get stopped out. If outcome X did happen and the market went from 100 to 115 and then back to 105, I’d end up staying in the trade too long and giving back a lot of my profits. This approach of trying to anticipate what the market would do instead of reacting to it got me into a lot of trouble.

The approach of reacting to the market rather than anticipating results in better expected outcomes. Let’s say I waited for outcome X to happen and the market immediately gapped to 105. If I still believe the market should be at 120 in that scenario, I would buy at 105 and stay long to 120 or until my trailing stop gets hit. I would miss out on the first 5 points of pnl, but a profitable outcome is more certain.

Principle #1 - spend more time reacting, less time anticipating. This means waiting until an outcome is determined to trade, rather than having a position waiting for an outcome to happen.

Accepting this principle means accepting that you will miss parts of some moves even when your underlying view is right. Sometimes the market never gives you an attractive entry to join a trend. Sometimes you simply miss the boat, and forcing a trade after the move has already happened only digs a deeper mental and financial hole. In those situations I remind myself of the following:

Principle #2 - Another trade is always around the corner. Do not chase trades out of FOMO; other opportunities will appear.

Markets spend roughly two thirds of the time in choppy, range-bound conditions and only about one third in trending phases. It is almost always easier to make money riding a strong trend than trying to extract small gains from a range. I would much rather take profits from a move that covers a lot of ground in a short time and then step aside, instead of sitting in a position for months to earn the same dollars. For example, my current long in WTI oil is about 12 dollars in the money after less than a week of holding it (with the usual caveat that I may still give some of it back). In calmer markets, a 12 dollar move in oil would take weeks, and capturing it would be a home run.

Principle #3 - Look for environments with volatility and clear trends that allow you to make meaningful pnl in a short period.

It is also important to distinguish between a trader and an investor. Investors work with longer horizons because their thesis takes time to play out. Their entries and exits will never be perfect, and they have to sit through both trending and range-bound markets. You need to be very clear which role you are playing. The worst outcome is letting a swing trade turn into a long term “investment” simply because you refused to cut losses.

I followed these principles when developing my S&P futures trading strategy. The goal of the strategy is to risk less than 1% in price to make 2-5% on each trade. I use defined stops and trail them aggressively to protect profits. Because of these parameters, the strategy naturally has a shorter time horizon of 1-3 days. In environments like this, when I am more active on the short side, I have to be quicker to cover because squeezes can be brutal. If that means I miss a large move up or down on a big headline, so be it. My objective is not to catch every large swing, but to run a process with positive expectancy per trade and a smooth pnl curve that avoids large drawdowns.

Since the war began, my journal shows I have taken about 200 points out of ES through active trading. If I had simply sold ES on day one of the war and held the short, I would be up about 300 points, but with a much more volatile pnl path. That 300 point figure also assumes perfect hindsight, while the 200 points come from real trades and realized gains.

This short-term tactical trading strategy is well-suited for S&P futures as the market is more prone to mean reversion than others. When I trade other markets, I usually trade with wider parameters that allow for longer holding periods. In gold, for example, I would risk 100-150 points to make 300-500. In today’s oil market I would risk $3-5 to make $10 or more.

Trump is threatening to create a humanitarian disaster for millions of innocent Iranians by hitting Iran’s power plants and bridges if Iran doesn’t open the Strait of Hormuz by 8 am EST. Equity futures have gone bid this afternoon, perhaps on speculation that Trump will back down again. I hope they are right.

Citrini wrote a great piece of investigative journalism after sending one of his analysts to the SoH. The analyst got himself into some hairy situations and the piece is an entertaining and insightful read. Unfortunately the article is behind a paywall, but a subscription is well worth the price.

Citrini Research

Strait of Hormuz: A Citrini Field Trip

Introduction…

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13 days ago · 942 likes · 33 comments · Citrini

The piece describes how in a status quo scenario, Iran will slowly allow more ships to pass and collect a toll on all traffic. Today, the amount of ships passing through is in the low teens and may increase over coming weeks.

The list of approved nations is expanding fast. On March 26, Iran granted passage to five countries: China, Russia, India, Iraq, and Pakistan. Within a week, Malaysia, Thailand, the Philippines, France, and Japan had all secured access. We expect this list to keep growing as the rest of the world decides that guaranteeing its own energy supply is worth the diplomatic cost of dealing with Tehran.

Where my view differs from Citrini’s is that I don’t see a world where Trump and his allies (Israel, Saudi Arabia) allow Iran to control who can and cannot go through the Strait of Hormuz, even if traffic gets restored close to its previous levels. This would be seen as a tremendous loss of global power and influence by the US and will be viewed by the American public as a losing situation. Trump already has a large portion of his Navy and over 10,000 troops ready to stage a ground war in the Middle East, and I don’t see how he will just walk away without attempting a ground war to take control of the Strait. Maslow said “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.” The world’s most powerful military sitting in the Gulf is Trump’s hammer, hovering ominously over Iran and ready to strike.

In the event of a ground war, I’d have to question whether Iran can slowly bring back traffic in the SoH as described by Citrini. The SoH would become ground zero for any military escalation, making it too dangerous for ships to pass. In order for the Strait to open back up, things have to get worse before they become better.

Paid subscriber section: Current positions, views on oil, equities, and rates, thoughts on swing trading vs holding, and content that I’m paying attention to

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The biggest market-moving headline over the past 24 hours came out of the Wall St Journal saying that Trump is considering pulling out of Iran and leaving the Strait of Hormuz closed. I place little weight on his words and instead am following the movement of his military assets as the primary signal. The arrival of troops in the Middle East tells me that this conflict will last beyond the end of April, with further repercussions on global commodity prices.

I want to shift our attention to what I think is the bigger story that is unfolding as a result of the war in Iran - a global recession that may unfold over the course of this year. Any seasoned student of economic history would know that an energy shock is often a precursor to a recession, as it creates demand destruction and consumes a larger share of spending that otherwise would be spent on goods and services. The inflationary effects also contribute to tighter monetary policy and worsening liquidity going into the recession. In the chart below (courtesy of Alpine Macro), a surge in oil prices has preceded five out of the last seven recessions. I didn’t count 2020 as the surge in oil happened after the recession, not before.

The recipe of a typical recession goes like this:

1. Financial excess and over-optimistic sentiment building up to the recession

2. Energy shock that causes demand destruction

3. Tightening liquidity and a paralyzed central bank that is slow to respond due to surging inflation

#1 creates the kindling and leverage while #2 and #3 prevent the central bank from acting as a natural stabilizer.

Case Study - Bursting of the 2000 tech bubble

The excesses of the dot-com boom provided the tinder and leverage for the following recession of 2000-2002. The peak of the Nasdaq occurred in March 2000, but the bull market in oil continued until Q3 of that year. The Fed was still hiking rates in June, and kept rates on hold until the end of the year despite the Nasdaq selling off 50% from its peak.

Why did the Fed stay on hold for so long? Core CPI was still above 2.5% all the way into the end of 2000, preventing the Fed from carrying out its duel mandate.

Case study #2 - the Great Financial Crisis

In 2007, cracks were already showing in the economy. Housing prices had been declined since 2006, and economic data was slowing down. The Fed started cutting in late 2007, and accelerated their cuts when Bear Stearns went under in March 2008. However, oil prices continued to surge to new highs in 2008, and core CPI remained above 2%. If it weren’t for oil and inflation, the Fed probably could have cut more aggressively (not that it would have prevented the financial crisis from happening).

The recipe for a recession today

In present day, we have financial excesses in the form of uncontrolled investment and spending on AI without a clear future payoff and a slow motion train wreck in private credit. The evolving capabilities of AI are also disrupting the labor market and existing businesses that private credit lent too.

We now have a commodities price shock that extends beyond oil into fertilizer, food prices, and basic inputs of industry.

Finally, we have a Fed that is now paralyzed with indecision, with many mentions of the word “uncertainty” in its most recent press conference.

The conditions are now ripe for a recession to unfold by the end of this year. I’ve already mentioned previously in this blog that I’ve spent the past 1-2 months raising cash in my long term portfolios. I rode the rotation out of the S&P 500 into EM and energy, and made some money going long oil and tactically trading gold and SPX. I’m now focusing on recession trades that I believe will pay off over the coming months or quarters.

Today’s paid subscriber section is free: Current positions, including the trades I’m putting on to position for a recession, plus the gold chart that will dictate how I trade the next few months.

ES - I bought SPX futures at 6407 yesterday and benefited from the 120 squeeze off the low. I moved my stop to breakeven, and it was triggered during the US cash session.

Gold

I think we have a chance of moving up towards the top end of this parallel channel. However, if I’m right about recession and risk off, gold will struggle to maintain upward momentum and could fail at the top of the channel. I went long yesterday and will look to take profit at 5100 in spot.

This channel also implies that gold is not done making new lows. We could see 3500-4000 this year before the uptrend resumes.

Long June 2027 SOFR

I went long June 2027 SOFR futures at 96.42 - not far from where the market is right now. SOFR futures sold off this month on expectations that the Fed would no longer be able to cut this year and on the unwinding of popular hedge fund trades. For a couple weeks, we saw equities down = SOFR futures down, but that relationship broke last Friday.

The breaking of the correlation suggests that the market 1) Sees value in the SOFR curve, as it’ll be a stretch for the Fed to hike into a stagflationary shock, and 2) The market is starting to shift its focus on the potential for a recession down the line.

Talk to any seasoned global macro trader, and you’ll learn that long SOFR futures (previously eurodollar futures) is one of the best ways to position for a recession. The short end of the rates curve is more responsive to weakening economic conditions, whereas the S&P 500 can continue making new highs well after the economy has already started to deteriorate. The decisions of policy makers can trigger sharp short squeezes in equities, making it difficult to hold on to short positions or long puts. By being long SOFRs, you are long the medicine that the Fed needs to deliver. Timing the exit on the trade is also less of a problem, as interest rates usually stay low long after the equity market has bottomed.

If I’m right on this trade, I could be going long at the ground floor of a several hundred basis point bull market in SOFRs. It’s the kind of trade a global macro trader can put on in size and take the rest of the year off while the world blows up around him.

Because I can’t help myself, I also spent several hundred bp of capital on six month puts of several single name stocks that I think will sell off particularly hard in a recession. I’m out of time so will save that for another post.

Disclaimer: The content of this newsletter is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments. The newsletter is not a trade signaling service and the author strongly discourages readers from following his trades without experience and doing research on those markets. The author of this newsletter is not a registered investment advisor or financial planner. The information presented on this newsletter is based on his own research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this newsletter are at your own risk. Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this newsletter will be profitable or suitable for your specific situation. The author of this newsletter disclaims any and all liability relating to any actions taken or not taken based on the content of this newsletter. The author of this newsletter is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.

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US troops will likely commence military operations in Iran starting this week. We don’t know yet exactly what the objectives are, but they might be a combination of 1) Secure the Strait of Hormuz, 2) Extract Iran’s uranium, or 3) Take over Kharg Island. As traders it will be almost impossible to anticipate how quickly or successfully the US military will achieve its objectives in Iran, so my plan is to just react to extreme moves and read the market for news failure.

Equities are rightfully pricing in a very negative outlook for the war in Iran. Most positioning and sentiment indicators I follow have retraced to either neutral or bearish. If you are underweight or short equities here, positioning is no longer on your side. I’m pointing this out because it’s often the scenarios that look the most hopeless that are the best buying opportunities. Going short on Wednesday and covering on Monday has also been a reliable strategy that takes advantage of the natural cycle of human sentiment and news. For these reasons, I’ve covered my shorts in ES and TY futures, and have flipped to long futures as of this morning. After having raised cash earlier this month, I might do some shopping for the long term portfolio as well.

In the paid subscriber section: Why gold and bonds are now a buy and the ES chart pattern that will dictate my trading plan

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Iran is putting in place a framework where they control the flow of traffic through the Strait of Hormuz and collect a toll. I think this will become the new normal going forward.

Philippines is now in a state of national emergency due to a severe shortage of fuel. The fuels lines reminiscent of the 1970s have arrived:

The Russia/Ukraine war is also affecting global oil supply, with over 40% of Russian export capacity halted.

In the paid subscriber section: Current positions and some interesting links

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The news sent stocks ripping higher and oil ripping lower, and also made a lucky Trump insider hundreds of millions in profits in the futures market.

The moves retraced a bit after Iran denied it was having talks with the White House, and reports later surfaced that the WH is speaking to Iranian parliament speaker Mohammad Bagher Ghalibaf. Us traders are dealing with a tremendous amount of noise, but the reality is that nothing has changed over the last 24 hours - US troops are still en route to the Middle East, missiles and bombs continue to fly in both directions, and the Strait of Hormuz remains closed.

Despite being long-term bearish equities and Treasuries, I closed my shorts on the futures Monday open as my gut feeling, trained from years spent in the global macro trenches trading Trump headlines, told me that attacking Iran’s power infrastructure was a threat that Trump would TACO on. This gave me the opportunity to reload my shorts at much better levels in ES and TY less than 12 hours later. ES is trading within a well-defined parallel channel that will inform my stop loss and take profit levels as I navigate this conflict.

Meanwhile, the Saudis are getting closer to entering the war, a move that would expand the conflict to other Gulf countries. Meanwhile, one of the largest refineries in Texas is in flames after a large explosion. Coincidence, or terrorism?

Behind the paywall: Why this rally in risk is a sell, and a case study on when gold bottoms during crises

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Thanks to Trump’s timing, I dodged a bullet as it became clear over the weekend that the US is nowhere close to winding down in Iran. Trump proceeded to threaten Iran’s power grid, which was followed by threats by Iran to target critical infrastructure throughout the Middle East:

Iran also made it clear that the financial markets are one vector where they plan to inflict pain on the US:

The US is also sending thousand of Marines to Iran - most likely a move to occupy and secure the Strait of Hormuz, a feat that will take months to achieve, if success can be achieved at all.

In the paid subscriber section: Why I’m taking profits (for now), why the price of oil is just the tip of the iceberg for inflation, my favorite global macro trade, the long term buy zone in gold, my long term views on the US equity market, some additional study material, and some AI prompts that explain why Iran will keep this conflict going much longer than you think.

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The market is telling us that we are seeing an inflationary shock on par with 2022. Traders who are holding out hope that the inflationary impact will be short-lived are drawing dead. My Perplexity query estimates that 10-12 mb/d of Middle East oil production has been shut in. Even if the war stops today, it will take months for that supply to come back online, and some of those wells will be permanently degraded. QatarEnergy’s CEO said that 17% of its LNG export capacity was damaged and will take three to five years and roughly $26B to repair.

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The main news out of Iran over the last 24 hours was that Ali Larijani has been assassinated by Israel. Larijani was the Secretary of Iran’s Supreme National Security Coun…

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BCA Research made available their Hormuz Crisis Dashboard. Highly recommend bookmarking it:

With the few projectiles that Iran is firing, they are targeting the Strait of Hormuz bypass route that allows 7mbpd bypass the SoH via the East-West pipeline. If they successfully damage it, that would be very bad for oil supply.

The best thing I read today was Ray Dalio’s take on the US-Iran conflict. Trump probably understands this and that’s why he’s not going to TACO anytime soon. In order to resolve the conflict, he needs to go deeper and achieve the main objective of securing the SoH:

My reading of history and sense of what is now happening leads me to believe that if the U.S. were to lose in this way, there would be a significant risk that losing control of Hormuz would be for the United States what the Suez Canal Crisis was for Great Britain (in 1956) and analogous defeats were for the Dutch Empire in the 18th century and the Spanish empire in the 17th century. The pattern of events that leads to the breakdown of empires is almost always the same. While it is covered much more comprehensively in my book Principles for Dealing with the Changing World Order, I can tell you here that there are innumerable cases in which a perceived lesser power challenges the leading world power over the control of a critical trade route (e.g., Great Britain's control of the Suez Canal being challenged by Egypt). In these cases, the dominant power (e.g., Great Britain) threatens the lesser power (e.g., Egypt) to open the route, and everyone watches and shifts their approaches to these countries and where their money goes based on what happens. This decisive "final battle" that determines the winners and the losers and whether the empire survives or falls reshapes history because people and financial flows quickly and naturally run from the losers. These shifts affect markets, especially the debt, currency, and gold markets, and geopolitical power. Seeing so many analogous cases led me to the following principle: * When the world's dominant power that has the world's reserve currency is overextended financially, and it reveals its weakness by losing both military and financial control, watch out for allies and creditors losing confidence, the loss of its reserve currency status, the selling of its debt assets, and the weakening of its currency, especially relative to gold.

Read the rest here.

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In order for Iran to get oil to $200 or even $150, the closure of the Strait of Hormuz would have to choke off all flow of oil out of the Strait. However, it now appears that Iran is open to allowing oil to selectively flow to certain countries such as India. This would only be a partial blockade and it suggests that Iran is either seeking an off ramp or is desperate to sell its oil in order to support its finances.

Meanwhile, the US attacked Kharg Island - a move that is possibly a precursor to putting boots on the ground to take control of Iran’s oil. Taking control of Kharg Island poses an existential threat to Iran and would give the US significant leverage in this conflict.

Trump is also building an international coalition to help escort ships and secure the SoH.

On the surface, the headlines can be interpreted as bullish for oil and bearish for risk as it suggests the conflict will extend for at least another few weeks. However, I see it differently as the developments suggest that Trump has finally defined his objectives (securing Kharg Island and the SoH) and is taking military steps to achieve them. Iran, meanwhile, is showing cracks in its resolve by its willingness and need to selectively allow some tankers to pass through.

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