Sh*ts getting real
The format of this newsletter is evolving. For paid subscribers, I will be writing on a more regular cadence with timely updates on the markets, my trading plan, and how I’m positioned. The time I save from no longer writing real time trade alerts and updating the position sheet will go into writing content that’s more useful to the average reader and investor. Today’s post is free.
Last week’s price action looks sanguine and complacent in hindsight. Oil has exploded higher as the idea of the Strait of Hormuz being closed for a while has finally sunk in with the market. Even though my initial reaction last Monday was to fade the moves, I’ve gotten fully on board with the view that this war in Iran is a big deal, and that it will disrupt the supply of energy, freight, fertilizer, and the movement of most commodities much worse than people expect. I went long Brent on Thursday with the view that the market would come around to this view as we approached the weekend, and that trade is now over $30 in the money.
Headlines over the weekend show that the war is intensifying. A few highlights:
-Iran picks Khamenei’s son, Mojtaba, as Supreme Leader and seems nowhere close to backing down
-More missiles launched by Iran at Bahrain, Saudi Arabia, UAE
-US strikes an Iranian vessel in the Eastern Pacific
-US attacks a desalination plant in Iran
-Israel attacks 30 oil depots near Tehran, sparking huge fires and thick black smoke throughout the region
-Kuwait Petroleum declared force majeure on oil sales
-The State Dept orders US employees in Saudi Arabia to leave.
-Rumors of the 82nd Airborne Division canceling drills so they can be on standby to put boots on the ground in Iran
-Trump considers troops to seize Iran’s uranium
The ES chart is finally reacting, and is on the brink of breaking 5 month support at 6600:
Today’s moves in the market are likely making Trump uncomfortable. This is not a popular war and it’s likely hurting his approval rating and Republican chances in the mid-terms. Even though the US and Israel have succeeded in destroying Iranian equipment, personnel, and infrastructure, they clearly did not plan for Iranian’s scorched earth campaign that is inflicting maximum damage on the global economy. Trump is now trapped - he has spent billions of dollars and expended a large portion of military munitions and assets, and now Iran is putting the screws on him, both economically and politically. My guess is that it’s too early for Trump to back down, so things will get worse before they get better. At some point the impact on the global economy and supply chains will become too painful for Trump, and he will TACO. The question is when? Is oil at $110 and SPX at 6600 painful enough, or does it have to get worse? How much worse, are we talking $150 oil and SPX sub 6000? Perhaps we need a volatility event on par with April 2025 or March 2020 to convince Trump that it’s time to call it quits.
By the way, we’re already seeing a private credit induced widening in credit spreads, totally unrelated to Iran:
The scary part is that even if Trump TACOs, the US and Israel will have failed at achieving regime change or state collapse, and Israel will likely continue fighting the war. Iran might continue to keep the Strait of Hormuz shut off as leverage long after the US has exited. A Trump TACO might create some relief for the market, but it’s really Iran calling the shots on whether they want to release the global economy from its grip.
When volatility explodes, traders can choose to either reduce risk and sit it out, or lean into it. I’ve alway thrived in volatile markets, so I’m choosing the latter. In addition to my long oil, I established a new short position in ES and went long natural gas (after fumbling my long last week) and corn. A large portion of the global nat gas and fertilizer supply goes through the Strait of Hormuz, so a shortage in both commodities would disrupt the supply of both commodities significantly. In case you’re wondering which of the big three ags - corn, wheat, and soybeans, relies most on fertilizer, it’s corn. If Trump TACOs, I’ll likely exit these positions.
In my long term portfolio I’ve been raising cash - I got out of EWY (South Korea) and EEM (Global EM) but am still sitting on some EWZ (Brazil).
BTC and precious metals:
BTC has been trading well and is showing good relative strength. I’m comfortable holding a long BTC as long as I have my other trades as a hedge.
Gold and silver tend to trade poorly during extreme risk-off and volatility events. However, they tend to be great buys once the volatility subsides and policy makers react. I’m still bullish long-term and plan to add on dips.
One interesting thing to consider is how would the Fed react to a supply shock-induced volatility event? Would they cut or would they hold? If you think they cut, then April or July Fed funds futures would be a good buy.
A couple episodes and linked I consumed over the weekend to inform my views:
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.
Hi! Can someone walk me through why gold doesn't perform well in a shock like this? Especially in a world where international investors were already getting out of dollar assets? Is it that gold has already moved so much recently? Retail trader with no formal financial education here.
Thanks mate!