Melt up
There’s a lot to cover today, as the Trump-Xi meeting on Wednesday, the Senate confirmation of Kevin Warsh, and the continuing melt-up in assets demand some discussion in this newsletter.
Before I begin, I’m assigning some reading for those who are interested in how AI will evolve and change our world. The paper “Situational Awareness” was written in 2024 by Leopold Aschenbrenner (a 25 yr old former OpenAI researcher and current fund manager) and discusses how AI compute and intelligence will improve by many Orders Of Magnitude (1 OOM = 10x) over coming years, eventually creating superintelligence that will overwhelm humankind’s ability to understand it. He talks about how this threshold, which many call the Singularity, will affect society, technology, and geopolitics.
Leopold wrote this essay two years ago, an eternity in AI-land, but reality has tracked his predictions quite closely. Although nobody can determine the future, one can derive some useful insights from Leopold’s vision for the next eight years. Just to warn you - the pdf version is 165 pages long. I’ll discuss my thoughts on the paper later this week.
Trump-Xi meeting
Trump is flying to Beijing May 13-15 to have tea with President Xi. Analysts have discussed the following possible outcomes:
A joint plan to end the war in Iran
A decision on the US $14b arms sale to Taiwan
An explicit statement by the US to oppose Taiwan independence
Deescalation of the US-China trade war
Chinese purchases of US agricultural products and Boeing airplanes
The Iran war is at the top of both Trump and Xi’s minds right now, so a joint plan to get the US and Iran to agree on an end to the war is a likely and impactful outcome that I’ll be looking out for. Trump may have to provide concessions to Xi on Taiwan and trade in order to get China’s help in ending the war. The range of outcomes favors risk on and markets shifting to a more disinflationary regime following the meeting. My portfolio is already positioned for this regime, as I’ll explain later in the paid subscriber section.
The Senate advanced Kevin Warsh’s nomination yesterday, putting the odds of his confirmation close to 100%. Both the Trump-Xi meeting and the confirmation of Warsh should allow for a more dovish path for the Fed going forward, yet front end SOFRs are pricing in a probability of a hike by March of next year. I believe this is a mispricing that will resolve over the coming month.
I discussed previously why oil isn’t higher than most energy specialists predict, and here is another reason: China is importing 3.5-3.8 mbpd less than before the closure of the Strait of Hormuz.
Not only that, but the US is cranking up its exports of crude to the rest of world by 3.8 mbpd compared to before the closure of the Strait:
Both factors have combined to make up a large part of what many oil analysts believed would be lost supply from the closure of the SoH!
Alyosha makes an interesting point in his latest post:
Since March 1, net global supply has been reduced by about 700 million barrels according to multiple sources; 1 billion lost due to the closure of the strait less 300 million in demand destruction or net loss = 700 million.
Concurrently specs bought 730 million barrels in combined futures positions on the NYMEX and ICE for a total loss of 1.43 billion barrels (spec buying is a loss of supply).
The IEA is releasing 400 million barrels. The net loss of supply and spec length are equal.
If China continues to import 3.5 mm fewer barrels per day for 30 days that returns over a hundred million barrels to the net supply equation. Sixty days 2 hundred million barrels flowing out of demand. China would like that especially at $100/barrel.
If the specs sell out (and they will) “the glut” reappears almost spontaneously by June 11. If the strait opens today… add another 424 mm bbls (13.7 mm per JPM X 31 days), 848 mm barrels by July 4. It’s almost like a bad dream…. If the Strait opens circa 300 mm barrels comes out, including a month of Iranian in floating and onshore storage.
The thinking no one is talking about is most of that oil counted as missing is still there…. waiting.
If and when prices do go down, some demand will come back but some will not come back. Supply might be curtailed but market share lost will be aggressively pursued. And…No one… is short oil.
Had it not been for the war (which may have been encouraged by players in the wings because of the glut) oil would probably be in balance now. The question that is difficult to answer because no one can be trusted to accurately state facts… is where will balance be if Trump comes back from China with a deal (ht… TD)?
Alpine Macro also points out that “history has shown that every major surge in oil prices is often followed by a subsequent crash of more than 50%.” If this outcome repeats itself this year, we will see a very strong disinflationary impulse (lower inflation, stronger growth) that will further support risk assets and precious metals.
AI infrastructure names continue to form a vertical wall on the charts. Optical networking names alone surged by 10-20% yesterday on Lumentum’s announced addition to the S&P 500. I believe this is a cycle where it pays to be greedy and not overthink rather to be cautious and hesitant. In other words, I’m not selling.
In the paid subscriber section, I’ll share my current equity allocations. The portfolio has expanded to 19 names as I have increased capacity and have added names after doing more research. I’m also looking ahead to 2027 and beyond when physical AI and robotics start to dominate as a theme and picking what I think will be winners there.
