Are the Markets finally getting it?
Sorry for more on the conflict, but I think the markets are finally realizing that this isn't a limited horizon incident, and that there will be concrete, long-term implications that are really fucking bad
Sorry to bang on about the war in the Middle East, but it is something that can't be ignored, something that is going to have ripple on effects that we can't even begin to flesh out, effects that can't be fully anticipated.
This time, I want to talk about the markets. Yesterday, I posted about a milestone, where the expected TACO move failed to calm the market:
Geoff Anderson
Yesterday, the incomparable Patrick Boyle, whose dry British dialog is a benefit, did a nearly 30 minute video to explain the effects of the conflict on the economy. I will link it below, but it is bleak.
Early in his analysis, he pointed out that the observable effects of the conflict (lack of stability, blockade of a fifth of the world supply of oil (and, it turns out, a LOT of other things, like urea based fertilizers, precursor chemicals for pharmaceuticals, and a lot more) and it has created not exactly a power vacuum in Iran, but a culture of paranoia of the echelons of leadership making the eventual negotiations difficult or even impossible.
But, as the world has learned, a scrappy underdog can fight back remarkably risiliently a much more formidable aggressor. Putin began the 2022 war against Ukraine with the smug confidence that he would be able to roll into Kiev and plant his flag in a handful of days at the most.
But Ukraine became crafty, and has battled to a war of attrition with their ever adaptive tactics. The rise of drone warfare is here, and no, it is not the nerdy Reaper multi-million dollar drones that the US Military loves to recruit video gamers to control, but instead it is waves of low cost, autonomous swarms of drones like the Iranian Shahed's that are fired off with enough quantities that they do regularly overcome the ability to block them, and you only need a few to instill terror in the local populations.
Additionally, the attacks on the neighbor, "non-combatant" nation states is unnerving to their population. Read up on places like Dubai whose growth and rise to world prominence has been driven by being a "safe" and "stable" place for the wealthy to reside, and to enjoy the amenities provided by the resource wealth. That lustre is tarnishing quickly.
As a product manager, one of the things I learned a LONG time ago, is that to understand what is happening to my products, I really need to know something about the economic environment that they are sold into. If the industry I am working in is shitting the bed, it doesn't matter what magic I coax out of my engineering team to delight the customers we ain't gonna be able to sell it.
Thus, I spend a consistent part of my day watching what the stock market is doing, looking for clues and signals. (Yes, the markets are often really sensitive to early warnings)
With the gyrations of this conflict, that I am 100% certain that Trump felt would be about as complicated and taxing as his "arrest" of Nicolas Maduro of Venezuela, assured that the ungodly amounts of firepower of the Military, and the urging by Bibi that this would be a breeze. What has been clear though is that like Ukraine against Russia, Iran has been watching the US and its allies for decades, preparing for an eventuality that this has been. And are they prepared for it.
Combine that with the conditioning by the traders and trading desks that Trump really cares about the S&P 500, as well as the DJI that this whole ordeal would be a short horizon, and that Trump would wash his hands and walk away. That all this "damage" would be quickly reversed, and the traders could then return to their usual program, taking money from retail investors and the institutional investors.
Thus, the signals that I would watch, mainly the price of a barrel of oil (Brent or WTI) was a good indicator for Trump's TACO two-step, but my internal detector was thinking that the ups and downs of this benchmark (oil) was not reflecting the loss of 20% of the supply. My head was exploding.
But, as Patrick explains below, this was a feedback loop of the investors, not a reflection of the actual market outlook.
My takeaway is that, well, we are fucked. The damage to the infrastructure, distribution, and money flows are going to resonate for a long time. At the outside, this might end the "petro-dollar" regime, in place since the oil shocks of the early 1970's, that has cemented the US Dollar as the world reserve currency. What I think will happen though is that the market for petroleum will be bifurcated, with a Petro-Yuan joining the Petro Dollar being the clearing currency for the market.
And that will be another point of major Trump Fuckery that will again diminish the stature of the US, as if we needed more. Even if Trump opts to not put our service people at risk in theater, this is going to be an epic disaster.
The TACO is no longer a valid play.
Do watch Patrick below, he's awesome.
