Lull'abye
I am leaning on the idea that we are in a lull between the initial event shock and the coming supply shock.
Iran is now three weeks into running out of missiles in two weeks.
The big thing that the market missed in Covid was the lagged impact of China trade coming to a halt. That cascaded as plumbing issues arose just as the US started its ‘two weeks to stop the spread’ campaign.
Equally as short sighted was the idea that off-ramps would arise in Russia/Ukraine and send stocks back to all time highs. Not only was this lazy geopolitical analysis, but it forgot the fact that inflation was already on the rise and an energy/food supply shock was at hand.
I get the sense we are in a similar lull as Feb 2020 and late-March 2022 before things hit the fan again due to lags and market structure. Everyone knows the put call ratio on US equities is high and in need of clearing (either via price or time). Everyone knows there is not yet an immediate shortage of energy or food for most of the world. And yes, there are different factors this time (mainly massive China stockpiles, and a more experienced world that can move quickly to alleviate bottlenecks through policy).
The attention span of the market is roughly 1-2 weeks and so as equities ‘base’ and as energy and food range around here, commentators will likely allude to the worst being behind us.
As discussed, game theory suggests the US will not stop until it has secured Uranium (in some sense, even if only for optics) or regime change (that allows for the security of Uranium). Israel won’t stop as long as they have the funding/backing. Russia has an interest in prolonging this so energy prices get to a level where they are welcomed back to market. China can endure short term continuation due to stockpiles and a desire to see power balances shift away from the US in the region, but cannot tolerate a global demand shock for their products beyond 2 months. Iran wants to see the world economy suffer, so as to never be questioned again about their regional importance. I am sure there are some moderates in Iran who are willing to do anything to end all of this, but diplomats don’t have weapons…
I am in the camp that these lags will catch up in creative ways and that market structure is masking some of the future pain and actually exasperating it. For instance…
…if you are Trump, the financial markets are letting you continue and so you continue of course… but the market lull is intensifying future issues by extending the pain when the lag kicks in. That’s reflexivity baby. If oil was at 200 and stocks -20% then this would end tomorrow and the recovery would be more balanced. But because everything is fine, the supply shock risks becoming worse and deeper entrenched IMO… and the administration will find it very hard to jawbone a physical market in actual (not just financial like last week) stress.
…if you are Iran, it makes sense that you slow play things as supply is already halted. You have many many escalation trees in your pocket to use when ready (Houthis, Red Sea, East/West pipeline, ports). If you sense your energy infrastructure is going to get evaporated, you should first hit critical assets immediately, as then the world cannot see your supply go down as well. Anywho, this is just to say that prolonging this can lead to worse outcomes.
…if you are a US farmer who has been suffering a corn/wheat bear market for four years, you are definitely sitting on last years crop having been praying for a rally to sell. So you sell this rally and cap near-term prices, but your existing crop is going to cost even more than what you are selling this at now (and what the forward curve is currently suggesting). Back of the napkin math for EXISTING supply shocks imply about a buck in corn and wheat, let alone if things get worse. It’s like holding a stock in a bear market for four years and then selling at breakeven right before it explodes.
…if you are a Gulf state who funds your government (and the US government via SWF Treasury buying) with incoming petrobucks, you are no longer getting those USDs. In the last piece I highlighted the mechanics of petrodollars and how stress could show up in the plumbing in early-mid April (all things being equal on trade). State entities who lose USD inflows (from petro/adjacent trade) become deficit agents, draw on banks (or SWFs) and stress markets.
Once again, a delay makes things significantly worse despite lulled price action right now.
My back of the napkin maths suggest this should become a financial issue in the first/second week of April. Considering what sort of Treasuries Gulf states would usually be buying, there is the risk that 5%-10% of the usual buyers don’t show up for the Apr 8/9 auctions. If there are issues with Saudi (east west pipeline or Red Sea), then this period gets significantly worse. Given the above, I am focused on May topside for June CL and July ZC.
Side note: if you look back at every country the US has declared war on post-WWII there is absolutely no comparison to Iran vs. any of these places. The idea that the most advanced/strategic country the US has ever actively gone to war with (who has also been prepping for 50 years) is going to fall over on US terms in 3-4 weeks seems kind of not likely. There is a reason why no previous US neocon touched this place and we may find out why in the weeks ahead. ¯\_(ツ)_/¯