← Macro Voices
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- [00:08]
Eric Townsend
This is Macro Voices, the free weekly financial podcast targeting professional finance, high net worth individuals, family offices and other sophisticated investors. Macro Voices is all about the brightest minds in the world of finance and macroeconomics, telling it like it is bullish or bearish. No holds barred. Now here are your hosts, Eric Townsend and Patrick Seresna.
- [00:33]
Macro voices Episode 528 was produced on April 16, 2026. I'm Eric Townsend. We've got another Macro Voices double header lined up for you this week. Forest for the Trees founder Luke Grohman returns as this week's feature interview. Guest Luke and I will discuss the Iran crisis, its knock on effects and what it will mean for inflation. Looking ahead. Luke's interview was recorded on Monday afternoon and since the time of that recording there's been quite a bit of news flow. The market seems to be celebrating an all clear signal that the Iran crisis is finally over. But hold on, Commodity Context founder Rory Johnston will be joining me for a second Iran Update interview recorded late Wednesday afternoon. And Rory says it ain't over till it's over. While markets are clearly celebrating the perception of a final resolution, Rory will explain that while quite a few smaller ships have transited the Strait, no VLCCs have passed since Saturday before the peace talks collapsed. Then be sure to stay tuned. Our post game segment when Patrick's Trade of the Week we'll look at how to position in bonds for both near term inflation risk and potential growth slowdown, using a structured options trade to navigate that sequence. And then we'll have our usual coverage of all the markets with Patrick's post game chart deck.
- [01:55]
Patrick Ceresna
And I'm Patrick Ceresna with the Macro scoreboard week over week. As of the close of Wednesday, April 15, 2026, the S&P 500 index up 355 basis points trading at 1023, an impressive short squeeze to the upside on the markets. We'll take a closer look at that chart and the key technical levels to watch. In the post game segment. The US dollar index down 101 basis points to 9805. The May WTI crude oil contract down 330 basis points trading at 91.29 over $20 of risk premium has been pulled out of the markets on hope of a peace deal. The June Arbo gasoline up 238 basis points trading at 301. The June gold contract up 98 basis points trading at 4824. The May copper contract is up 537 basis points to 608 trading back toward its 52 week highs. April uranium up 94 basis points trading to 8620. The US 10 year treasury yield down 1 basis point trading at 428. The key to watch next week is the retail sales and we enter the heart of earnings season. This week's feature interview guest is Forest for the Trees founder Luke Roman. Eric and Luke discuss the escalating risks around the Strait of Hormuz, why supply chain disruptions may be far more severe than markets are pricing, and the potential for non linear break in global logistics. And how the interaction between inflation, fiscal stress and bond markets could drive the next major macro regime shift. And stay tuned for a special follow up with Rory Johnson where we break down the geopolitical developments in the Middle east and the implications for global energy markets. Eric's interview with Luke Roman is coming up as Macro Voices continues right here@macrovoices.com.
- [04:10]
Eric Townsend
And now with this week's special guest, here's your host, Eric Townsend.
- [04:16]
Joining me now is Forest for the Trees founder Luke Gromen. Luke, we're recording this on Monday afternoon. That's only three days before our listeners will hear it. There could have been two or three wars between now and then at the rate things are going. Why don't we start with a recap of your understanding and your perception of the current situation with the Iran conflict and what it means to markets and listeners. Obviously. Please understand that we have to record in advance of airing this. The news flow is coming pretty fast, so it may have changed by the time you hear this.
- [04:50]
Luke Gromen
Fast and furious indeed. No. Thanks for having me on again, Eric. I appreciate it. For me, I think this is simultaneously at the moment both the easiest and the hardest macro event to trade in quite some time. And the reason I say that is it's the easiest because it's a one factor market in my opinion. Is Hormuz open or is Hormuz closed? And as long as it's still closed, we are accelerating nonlinearly toward a really bad outcome. And if it reopens then we can kind of start looking at secondary and tertiary explanations, outcomes, etc. As things stand now, you know, Hormuz, when this war started, it was started it was supposed to be a weekend and then maybe a week and then maybe a couple weeks and then a month and it was supposed to be open quickly. And when it started, my worst case scenario was that this could end up being a US Suez 1956 moment. And now seven weeks in, Hormuz is still closed. Supply chain issues are Just now really starting to stack up. Whether you look at social unrest over fuel in Ireland, you look at, I thought, interesting data point today, Toto, the Japanese toiletry maker or toilet maker had to stop taking new orders for lack of raw materials and the stock was down 7% today. So I think the base case now for me is that this is a US Suez 1956 moment, where until Hormuz reopens, I think supply chains are going to keep getting worse exponentially from here. I think we still have, at some point that's gonna matter even more to sovereign bond markets, particularly in the West. You're already seeing Japanese bond yields. The US has had, I think, two or three different Trump tacos once the 10 year has hit 4.4%. A couple weeks ago we had three straight really sloppy auctions. So there's some, there's some noise in there that is being managed as well. And at the same time as all this is going on, I'm just astonished still how complacent the consensus appears to be about these supply chains and bonds, number one. But then, number two, how complacent consensus is about the fact that this is not just existential for Iran and for Israel and for the us, but it's existential for China and Russia too. And so every analysis I see, practically, it seems that sooner or later we're just going to beat up and wear down the Iranians. And maybe that's true, it's probably true. But none of these analyses I see are factoring in that this is existential for China and it's existential for Russia. And what does that mean? And people say, well, they can't do anything. Well, China supplies our military, China's factories back the S&P 500. Essentially, there's a lot they can do. I think where this is all headed is forcing the US into a choice. Right? So what does Suez 1956 mean for us? I think it means we're forced to pull back or we're forced to print money into an oil spike to contain the bond market, or we let rates rise in a recession and an oil spike and let the economy take the hit, which is not really an option, but it's for very long at least it's an option in the very short run, conceivably. But I guess just overall, I've been doing this 30 years in investment research, and I've only seen two other times like this that I can recall. And the first is in for Q07, where I was in a former seat and I was seeing, we were doing bottoms up fundamental equity research at Cleveland Research and I was seeing the US economy and financial system collapse in real time. And yet the equity markets hit an all time record on the S and p in 4Q07. And it also reminds me of 1Q20 when you know, obviously with COVID and quite honestly, I didn't think Covid was a big a deal initially and I was wrong about that. But the same way markets were just sort of blissfully complacent and then Tom Hanks said he had Covid and then they shut things down and the markets absolutely, you know, had a fit. The view I've had, and the view I'm sticking with is Hormuz is all that matters. And every day that it stays closed, it brings us closer to a non linear break in supply chains. And my view has been that that's not going to be good for markets if slash when that happens. And you know, I just, that's why I highlighted that Japanese toilet maker today. Down 7% on the day. Like if they had gone up 7% or up 10% on announcing that they couldn't make anything anymore because the supply chains, I'd probably would have to say, all right, well, maybe I'm just not getting this, but the fact that individual names are getting crushed on supply chain problems I think means that if this continues, the market's going to get crushed probably sooner rather than later. It just feels like a Wile E. Coyote moment.
- [09:46]
Eric Townsend
Let's go a little deeper on that issue of consensus complacency. I have a theory I'd like to run past you, which is I think it's as simple as the people in finance who are not physical crude oil market traders just don't understand the logistics lag effect. And trust me, among professional physical market crude oil traders, there's no complacency crisis there. They're scared shitless. And I think what people don't understand is the last tanker to transit successfully on February 28, before all of this stuff started, that Hormuz oil will arrive at its destination next week. That's how long it takes for oil that's flowing through the Strait of Hormuz to get to where it's going. So there hasn't been any supply. I mean, there's been speculation obviously about this is a big deal and what could be coming. But the actual disruption of supply hasn't even started yet. And it seems to me like it sets the stage. If we saw some kind of resolution in the Next week or so, fingers crossed. It really sets the stage for the market to breathe this huge sigh of relief where all the people who don't understand the physical logistics say, okay, that's over. Well, glad we got through that. And they don't realize that there's like this six week complete stoppage of flow of crude oil into the whole rest of the world that's going to happen no matter what. And you don't just take the, you know, let's say we resolve this and we open the strait completely and totally next week. You don't just call up the captains of those VLCCs and say, hey, engage your warp drive and, you know, get to Asia in a week instead of a month and a half. It still takes more than a month to get there. Which seems to me like that's a setup, if I'm right about that, for the market to really have kind of a final blow off of complacency and then a, oh, shit, this is reality. What do you think?
- [11:50]
Luke Gromen
I think that makes perfect sense. You know, I've seen that in conference calls where, you know, someone asked me on a, on a conference call and this was probably six days into this and they said, okay, what do you think? And you know, this should be over in another week. I said, another week? Are you kidding me? Based on what I was hearing? You know what I said? As I said, my base case is we're going to be, we're going to get to at least mid April. I said. And that kind of stunned them. I said, but I would actually be risking. Your portfolio for Hormuz is still closed on the 4th of July or for mid May. Late, late, you know, or mid May to mid June. And it looked like their face, like, looked like I jumped through the screen, kicked their coffee into their lap and then, you know, just shock them. And their response was, well, you understand, you're saying if that happens, like hundreds of millions of people could starve to death, right? I said, I know exactly what I'm saying. This is why I'm so worked up that people in finance are just sort of, well, hey, just, you know, hit, you know, control P and we'll print oil or we'll, the oil will be where it needs to be and the, the sulfur will be where it needs to be and the fertilizer will be where it needs to be. Because, oh, by the way, on fertilizer, as I'm sure you know, Eric, we're on the clock for a growing season. Like, you're not going to be throwing fertilizer down in June or July. It's too late at that point in the Northern hemisphere for a lot of places. So.
- [13:08]
Rory Johnston
So I think it's that.
- [13:09]
Luke Gromen
And then I also think too there is we are in generously, we're in fog of war, not generously. We are being subjected to very good propaganda and control of the message, which is to say from day one, I was getting very credible rumblings that this war was A, going to last longer than we thought and B, it was not going as well as we were advertised as we were being told. And you know, when I started hearing that was probably three, four, five weeks ago. And last week, last week and a half we've had in the Wall Street Journal the news come out that the US Embassy at Riyadh not only was hit way harder than we had admitted, but that the Iranians were so accurate that they didn't just hit the embassy, they picked out the very part of the embassy where the CIA office was and destroyed it. And they were so accurate. I hear credible rumblings that much of the CIA evacuated much of the Middle east early in this war. Not a peep from. And so I had heard that relatively early on. Then you hear things like, you know, the Fifth Fleet at Bahrain again heard that it got hit very hard relatively early on, that our air defense stuff wasn't as good as as we were being told our air defense missiles and the Iranians were far more accurate than we expected and that the Russians were helping target and you know, the Russians helping target came out relatively early on. And then again last week we had an article saying that 1500 people at the head the home of the US Fifth Fleet in Bahrain were evacuated so quickly they couldn't at first they weren't even going to let them take pets and they finally let them take pet pets. But it was basically grab your pet, grab a bag, grab your toothbrush and go. And they evacuated them back to the U.S. i'd heard about that three, four weeks ago. And so it's publicly reported now. And my point here is, is that between the physical constraints and the lagged effect of that that people in that world are seeing, and then just this, you know, you would never gather hay the Iranians. And to be clear, I'm not hearing the Iranians are winning. That's not my point. I'm hearing they're getting beaten up tactically very badly. And I'm also hearing that they are doing some very damaging things to our infrastructure and bases in a way that absolutely point to this being A, much longer than we thought, which I was hearing three, four weeks ago, five weeks ago, and B, like the whole dynamic of, well, weed, you're just, you know, there's been all kinds of reasons why Hormuz is enclosed. Like when you tell people on the ground in the Middle east, well, Hormuz isn't closed because they kind of don't want to. And it's ship insurance and all this stuff. Like, they laugh at you and they're like, that's stupid. The reason it's closed is because no one wants to get blown up. And we've seen sort of the proof in that of, hey, not only did they get by our air defenses, but they hit, they hit our embassy and they hit the part of the embassy where the CIA was, not where the families were. They hit. The Fifth Fleet base at Bahrain is very beat up. I hear. If they're getting through those things, which presumably had pretty good air defense. Like, by all accounts, sailing a ship through the Strait of Hormuz is like shooting fish in a barrel for that kind of stuff. So when you pair that with what, you know, what you're hearing in the physical world, what the physical world is like, okay, the work, we have not even seen the shortfall yet. And then sort of the guys in the defense world are going, this is going to last longer than we think. And it's going to, you know, if we really do this the wrong way, it's going to be bloodier than we think. Then you start saying, okay, I'm still not optimistic it's going to be open in a week, in two weeks, in a month. To me, I think it's very possible this thing still closed on the 4th of July. And if that, like, nobody's positioned for that at all. So I think between your point of, hey, we've not even seen the lagged effects. And look, is it my base case, it's still closed on 4th of July? No, but is it my base case is still closed in a month. Yes. And you and I both know what that implies for the second half of the year for supply chains, it's a disaster.
- [17:24]
Eric Townsend
Let's talk about some of those knock on effects now and how they're going to affect the economy and what it's going to mean in terms of trades and markets. Let's suppose you're right, that the fertilizer shortage that's already occurring is going to mean that farmers don't plant because it's planting season now, or it's coming up on planting season, depending on what latitude you're at, if they're not able to use as much fertilizer as they would like to, or they can't get the fertilizer they need or whatever it means crop yields this year are not going to be as strong as they've been in past years. We won't see those effects hit the real economy until after the harvest season. But it means six to 12 months down the road there's a very significant food inflation effect there. Potentially, if you're right, that it's at least another month, that's going to cause the backwardation to steepen even further. And we're going to get to where the people who need the diesel fuel most urgently, especially in Asia, Australia, the hardest geographies, you know, we're going to be looking at double, triple prices. That creates an inflation shockwave that potentially becomes self reinforcing and changes behaviors because as our listeners know, the study of inflation says that once it gets going, consumer behavior changes. As people know that things, the prices are going up, they start hoarding and you know, that just exacerbates the problem. Are we headed into some of those feedback loops that are, I mean, are they avoidable at this point? And if they're not avoidable, where's that going to leave us a year from now in terms of inflation, bond yields and so forth?
- [19:06]
Luke Gromen
I think you absolutely nailed it. I'll simplify, I'll use a stark but I think straightforward simplification of it, which is our world in data. Put out a chart. Bit data is 2015, but it shows world population of 7.5 billion. And then it shows world population supported without synthetic fertilizer. So to be clear, this is what population would go to if we didn't have synthetic nitrogen fertilizers via the, the Haber Bosch process. And world population in 2015 with fertilizers seven and a half billion. World population without synthetic nitrogen fertilizers in 2015, 3.9 billion. That's the dynamic we're talking about. And so there's a, obviously it isn't a, we've not been completely cut off, but it is a marginal. Everything happens on the margin and on the margin yields are going to fall, supplies are going to fall, supplies down, demand for food is constant and if anything it's probably up here. You saw the Trump Administration take the E15 limits off of ethanol. So I don't know if anyone's blending at higher levels, but conceivably they could, which will chew up more of the corn crop here in the US and further reduce any sort of, you know, to tightened global corn markets. So yeah, you're looking at a situation where later this year you're going to be looking at starvation across, in parts of the, in the poorest parts of the global south, possibly quite bad, a humanitarian crisis. You're going to see food inflation that is pretty pronounced across the richer countries and that then gets into important implications for obviously for politics. You can, if food inflation and gas inflation is soaring, it's probably a good idea to short the incumbent. So you'd be talking about a blue wave probably in midterms this year. But from a markets perspective, we're going to be talking about a spike in inflation with bond yields already at problematic levels and not able to go much higher without creating market feedback issues. I had thought that number was 4.6% to 4.8% on the US 10 year treasury yield. Last three weeks, four weeks have shown me at least that Besant and Trump seem to think that number is 4.4% because every time it breaks 4.4% like the war goes away for a couple days and some sort of positive announcement or last week, week and a half ago, Bessant did the single biggest treasury buyback in a single day in history at $15 billion. So clearly 4.4%, 4.5% in a 10 year is a bogey they're watching for. And you know, we're at what, 4.32 today. You get more food inflation, it's going to want to go through that 4.4% on the upside like a hot knife through butterfly, which if it did would then create okay, this decision point again, do we let stocks really tank and the dollar really rip, which is going to create a dollar debt spiral of higher yields, higher dollar, lower stocks, lower receipts, higher deficits, higher issuance, higher yields, higher dollar, lower stocks until we crash into the ground at 500 miles an hour. Or do they come in into a food spike and an oil spike and print money to cap yields, which I think is what they would do, which will only make the problem worse. So yeah, it is, it is a, it's a huge, huge issue. And again, if they fixed it today, it's going to be a huge issue and I don't think they're going to fix it today and I don't think they're going to fix it for another month at least. And that makes it a huge, huge issue. And if it goes the Fourth of July, which I think is, you know, 10, 20% chance. Holy cow. Like, we really are talking about looking at the possibility of one of the worst humanitarian crises in my lifetime. And then you get into, from the financial standpoint of, all right, you're going to have food riots all over the global south, you're going to have political instability, you're going to have bond problems. And it's just, you know, it's not a good environment for risk taking, for investing. It's a good environment to, you know, own cash and own gold and go to the beach and have a drink. Because it's going to be a tough
- [23:08]
Eric Townsend
environment based on the things that you're saying and that we both agree on. Governments would need to get very heavily involved in coming to the rescue. If you have a humanitarian crisis. People are literally starving to death. Obviously, governments have to step in and do something to help. California's already announced an intention to suspend its gasoline tax in order to help people through this crisis. Okay, I support all those things. But wait a minute. If all of the governments around the world have to subsidize a whole bunch of things, doesn't that dramatically exacerbate a government debt crisis that you and I both agree is already, you know, you've got famously made the comment that government deficits and excessive debt don't matter. Until they do, then they matter a lot. Well, I thought we were kind of getting close to that matter a lot moment already before this all hit the stage. Now we're talking about events that it seems to me are necessarily going to force governments to step in and subsidize a whole bunch of things with a whole bunch of money that they don't have.
- [24:16]
Luke Gromen
Yeah, 100%. And some governments have other options, right, Depending on the government. For example, Japan's probably one of the first that is already right there teetering on the edge of a bond market problem. If you know something, we've been repeatedly highlighting declines. If you look at the 10 year US treasury yield minus the 10 year JGB Japanese government bond yield, and then you compare that to the yen against the dollar, you can see that those two have been tightly correlated up until about six or eight months ago. They've diverged massively with. And so what that's telling you is the Japanese government bond yield is getting higher and higher relative to the treasury bond. But instead of that strengthening the yen, it's weakening the yen against the dollar. And that's emerging market price action. Like people are watching that with great curiosity in the developed markets going, hmm, we've never seen this before. And, you know, everybody in the emerging markets is doing like the Leonardo DiCaprio meme, right? Where with the beer in their hand on the sofa, pointing at the tv. Like, I recognize that's. I know what that is. And that's the market saying, higher yields are not going to strengthen your currency. Japan, they're going to weaken it because we know you can't afford a higher yield and you're going to have to print it. So, you know, Japan's already dancing along the edge. But Japan has some, you know, has. Has an option that, say, the US doesn't have and that Britain doesn't have, and Europe has less of which is. Japanese have this massively positive net international investment position, which is just Japan's piggy bank. All of the years that Japan's been running massive trade and current account surpluses, they've invested a lot of them into dollar assets, and they've got trillions of dollars in dollar assets. And so if this hits Japan something, Japan can do something Korea can do, something Germany can do to a lesser extent and parts of Europe is, do we print the money or do we not print the money? And we just sell treasury bonds and sell US Dollar assets that we've saved up for a rainy day. And they're going to sell the bonds, they're going to sell the stocks. And that's where people say, well, there's this view that the plan of what Trump is doing is he's an agent of chaos, and he's just going to create chaos. And that's going to be an opportunity. And it's not. It's going to blow up his own bond market because people aren't going to hold treasury bonds, and certainly they're going to buy more of them. They don't have enough food if they don't have enough energy. Treasury bonds and stocks are below food and energy on Maslow's hierarchy of needs. And so the countries that have been running surpluses for a long time, they have some leeway to sell dollar assets. And the world, in total, owns $70 trillion in dollar assets gross, $27 trillion in dollar assets net. And they'll sell every one of them to get food and get food and energy in the same way that you or I would sell everything we own to feed our children or feed our loved ones. So the world will break down. You know, the poorer countries that are barely have not really run current account surpluses, like, they're gonna have to print money, and it's only gonna make it worse. The Americans are Gonna have to print money, the Brits are gonna have to print money because US is a twin deficit nation, Brits are a twin deficit nation. You know, Turkey is a twin deficit nation. These places are going to have to print money to buy food and it will be orders of difference. Right. I'd rather be in the US than in Turkey and rather be in the US and Britain. But it's all going to be highly inflationary. So yeah, I agree it is very problematic.
- [27:44]
Eric Townsend
You mentioned gold a minute ago. Let's come back to that because this has been really fascinating. At the beginning of this crisis in February, gold was acting in its traditional role as a geopolitical risk hedgehog. Bombs drop, gold goes up along with oil. Then on March 2, everything changed and we got this inverse relationship where its bombs drop, oil goes up, gold goes down. Presumably because the market was sensing that that oil driven inflation signal was going to tie the Fed's hands and pretty much rule out any possibility of a rate cut. It started to look like gold was maybe starting to go back to its historic behavior over the last week or two. But then Monday we saw a muted recovery on gold. But as, I mean, just think about this. Monday was a day first. Over the weekend there was supposed to be this big peace talk and everything would be worked out that failed. We didn't get to a peaceful resolution to the crisis in Iran. And the S and P breaks out to the upside through its hundred day moving average in reaction to that news. But gold, which had been suppressed because of the Iran crisis and the perception that it was going to create this inflation signal, it's not breaking out to new highs, it's kind of struggling. What gives here?
- [29:14]
Luke Gromen
I think your explanation for why gold got hit initially was exactly right. And you know, there are a lot of tourists in gold at those prior price levels. And so there was some, some fuel for it to head lower when there were concerns about higher rates and people were kind of complacent initially about stocks. And then people were like, oh my gosh, this actually is a big deal. And they hit stocks and so people have kind of been out of offsides for, for a lot of these moves. A lot of people who got, you know, for the first week oil didn't really move that much and then it moved a lot and then, you know, then it kind of came back. So a lot of people have been offsides both ways on oil and a lot of people have been offsides both ways on gold. A lot of people have been, you know, hey, I'm you know, okay, markets don't care about, the stock market doesn't care about this. And then the next week it cared about it a lot. And so people had to position by the time everyone repositioned and then it started going the other way. And so I feel like there's a lot of that still going on in the broader context of. Investors have had 30 plus years going back to 1990, 35 years. Everybody in a senior seat today has gotten paid for buying when the bombs start falling and you know, once the bombs drop, you buy stocks and you sell oil and you, you, you sell gold you don't need. And they've not revisited their priors. This thing was supposed to be over three, four weeks ago. It ain't and it's not, it's not getting better. Now that's my Occam's Razor explanation. There's a, an old saw, there's no atheists and foxholes and, and in wartime there's no such thing as free markets. These markets, make no mistake, are being managed. I'm not gonna say that they managed gold. I think, look, gold was due for a sell off and I think that's the reason gold sold off. Now, now you had three really ugly auctions, including a two year treasury auction. You should never have a bad two year treasury auction ever. And it was a really ugly one. I think it was three weeks ago, followed by an ugly five and I think an ugly seven or ugly ten, I can't remember what, but they were all ugly. And then literally like five days later we get this huge treasury buyback program. And again, is it new liquidity? Not technically, but if you're putting in bills and taking out notes or duration, like it's a management, it's a manipulation and like that is what it is. Because the reality is Besant and Trump are not going to let the bond market and the stock market beat them. And so the release valve is going to have to be something else. They're not going to let the price of oil beat them. I mean the former commander in chief of the Iranian, the IRGC came out like a week, week and a half in and said, listen, our plan is simple. They were planning on a very short stay. We can see that from their logistics. All we're going to do is we're going to hang in here and we are going to create a financial crisis. Like Hormuz stays closed, the world economy is going to collapse. That is not a guess. That is a mathematical, physical certainty. We can debate how long it'll take Hormuz to stay closed for it to collapse, but if it stays closed long enough, the world economy will absolutely 100% collapse. And that's their plan, is, hey, let's keep Hormuz closed. We'll collapse the global economy and we'll see. If Trump wants to continue to be a warmonger, his words, not mine, will drive oil up a whole bunch. So I think part of what's going on here is you're getting the military guys, like, hey, some of what they're doing over there with these airstrikes are shaping operations. I think Bessant and his team are doing shaping operations in the market, which is if people want to take yields to a bad level, they shape those. People want to run away with oil, they shape those. They, you know, they. So there's, I think it's a very challenging environment as a result of that, because, again, that there is zero chance, in my opinion, that Trump and Besant are going to allow the US to lose because of free markets. And they have absolutely have the firepower, the means, motive and opportunity to do these things. People might think I'm crazy, but I would just point you to the blatant front running in the oil markets, which I'm sure you saw, right? Somebody, you know, on the 24th of March, somebody front ran on $500 million in notional shorting oil ahead of Trump's tweet. And then last week, somebody front ran the ceasefire. $950 million in no show. Those are big boy positions. Who's getting the heads up, right? Why is. These are not clean markets. These are not exactly the, These are not your, these are not our fathers or our grandfather's markets of, hey, this is just supply, demand. And there's no political impetus here. There's a huge political impetus in these markets.
- [33:27]
Rory Johnston
Markets.
- [33:27]
Eric Townsend
Let's talk about how this inflation signal plays out. Because at first glance, it seems just overwhelmingly clear that if you have an oil crisis, oil prices have to go dramatically up. That's a huge driver of inflation. Food prices, if you have crop yields diminished as a result of a lack of fertilizer, that is a huge driver of inflation. But wait a minute, Luke, you said just a minute ago that it is an absolute certainty that the entire global economy crashes and stops if this thing goes too far. Well, wait a minute. That's deflationary, right? You know, at what point does the inflation signal go the other way?
- [34:09]
Luke Gromen
Yeah, it's a great question because it is in a very short run. You're exactly right. Which is to say that once these oil prices get too high as a deflationary impulse. Now if you have right now, you know, the new fiscal numbers just came out for the U.S. it's through, it's halfway through the year, right? So we're six months in through March. I ran the math on Friday. If you look at us true interest expense, which is entitlements plus gross interest, or actually in this case net interest plus Veterans affairs, through March, which is six months of the fiscal year, we're at 102% of receipts. In other words, the interest and interest like obligations of the federal government are 102% of the receipts. And so it is this tricky dynamic where there is a pass through inflationary impulse of commodities on the one hand, which all else equal, raises inflation expectations. There is a deflationary impulse from the recessionary aspect of an oil price spike and commodity price spike, which slows growth, takes away discretionary spending, et cetera. And then there's both of those two factors get layered on to the dynamic, which is if you have a recessionary deflationary impulse, you're going to send your receipts well below your interest and your entitlements and then you're in a real, another very simple decision market which is, is the US Government going to print money to pay for interest and entitlements or is the United States government going to default and miss a payment on entitlements and interest? And I think there is zero chance they do the latter. I think they're gonna print the money. Now to be clear, until they do, that's gonna be a market where you can get dollar up, rates up, everything else down. And we've seen a number of those markets since 2019. And so there's this very sensitive, okay, inflationary impulse of higher commodities, higher oil, deflationary impulse of those things, and then a deflationary impulse of those things hitting receipts which are going to create dollar up, rates up, slow things down. But then it also is going to raise the question of are they going to print money, are they going to default on treasury bonds and entitlements? And of course they're never going to do those things. And there's, there is nothing that is more inflationary in the long run than a government who needs to print the money just to pay the interest on their existing debt and obligations. So that's the sort of when I led off by saying it's both the easiest market and the hardest market at the same time. It's the easiest, it's like, is Hormuz closed? Yes or no? Okay, that's pretty easy. The hard part is, okay, when is it inflationary? When is it not inflationary? Are they. How long are they going to let people twist in the wind until they print the interest and the entitlements? How much is the US and other governments involved in markets, whether that be subsidizing food or, you know, if you're long oil. What? You know, if Trump comes out, you're long oil, you're feeling good, bombs are dropping, Trump comes out and goes, hey, I'm thinking about doing exports controls on oil now. Oil's going to go limit down. What? Like, it's, it is very simple and very, very complex. I personally, for me, I kind of put it in what, you know, my friend Lynn, our friend Lynn Alden calls it the too hard camp. Right? Just too hard. So for me, it's too hard to try to trade the very short run. I feel very confident that an oil spike and a food spike will drive a slowdown, if not a recession, particularly when married with higher rates and the disruption from supply chains. And I'm not trying to bet on exactly when they're going to pivot. I feel very strongly it's going to create an air pocket, and I feel very strongly that that air pocket will send receipts below their interest and their entitlements. And I feel very strongly that will ultimately lead to them having to print money probably into a commodity spike. That's the sequencing I see. And. But in the short run, I'm just kind of sitting in cash and bullion, mostly because it's too hard to try to nimbly work my way through that. I'd rather just wait, maybe give up some upside and wait for the okay, they're having to do QE or they'll. They'll do it, whatever, right? They won't call it qe, probably they'll call it reserve management purchases or food purchases to help the poor or some BS like that. You know, we're printing money to buy food for people, right? Which is, of course, not helping anybody, but it's. It'll play well with the masses. So at any rate, I'm kind of rambling now, but that's. You're right that it's this yin and yang to inflation deflation in the context of the fiscal situation.
- [38:42]
Eric Townsend
Let's come back to my favorite Luke Gromen quote, which you've been saying for more than a decade now, which is, government deficits don't matter until they do and then they matter a whole lot. It seems to me like when you talk about market complacency, the complacency we have in the United States is everybody has just always assumed, look, the US Dollar is the world's global reserve currency. There's always going to be a market for US Treasuries, always. There's a special privilege, the so called exorbitant privilege that the US Government has. They're always able to print the money, they're always able to go into further debt. They're not going to have a fiscal crisis or runaway interest rates because they got too indebted, because they're immune to it, thanks to being the world's reserve currency. Hang on a second. Didn't we just see most of Europe completely unwilling to support the US in this Iran debacle? Aren't we seeing changes where around the world a lot of central banks are a lot less inclined to really focus on U.S. treasuries as their primary reserve asset? Are we headed toward a US fiscal crisis that everybody was too complacent to see coming?
- [39:57]
Luke Gromen
In a word, yes. And you can see it. It's been slow motion. People say, well look, foreign demand for Treasuries at all time highs. Which is true. When you break that down, what that actually looks is, well, foreign central banks who once upon a time were one of, if not the biggest holder, they haven't bought any new treasuries since 2014. On net they're actually down slightly. Japan's bought a little bit more, the UK has bought a bunch more, which is primarily investors and hedge funds. And then you look at where the biggest marginal buyer is in foreign. Fed did a white paper in October of 25 that pointed out that 37% of the net issuance of U.S. treasury notes and bonds, so belly of the curve in duration, 37% in net issuance over the last four years has been the Cayman Islands, which is heavily US hedge funds. It's this treasury basis trade and you know where you're buying, you're buying cash bonds and you're shorting futures on insane amounts of leverage. And so yes, nominally foreign demand is absolutely at highs. That's correct. The makeup of it has been we've gone from financing with very patient foreign insurers and pensions and central banks to highly levered hedge funds who sell Treasuries when risk goes off. Which is why Treasuries, when you look at the correlations, have become risk off, at risk, off risk on assets. Right. They've stopped Acting, you know, even in this crisis, you know the weekend we the bomb started flying Iran I was having discussion with, with someone on X. They're like oh, 10 year yields are going way lower. I'm like sold to you. They, they aren't going lower, they're going way higher. And sure enough, right, we're up 50 basis points give or take from you know, in seven weeks from where they started this war at. I don't know that they ever traded down at all from 3.94 on the 10 year. So so we have the foreign demand is nominally better but it is lower quality, less patient creditors. And in the meantime the biggest marginal buyers have been besides hedge funds and the Caymans have been the Fed itself and US Banks as well. And so people say well when's it going to start? And you go when's it going to start? Since central banks stopped buying Treasuries and started buying gold. You know long term treasury bond futures priced in gold are down 90% since 2014. And it's like the dream trade for a macro. The Sharpe ratio on it is beautiful. It's like up and to the right at a 45 degree angle if you look at as gold over Treasuries. But it is a one way trade. Long gold, short Treasuries has just been an absolute beautiful, very minimal drawdowns, very minimal volatility. So I think we're sort of already there. But in terms of it going critical, that's the part to me that I just think the administration and a lot of investors were just super complacent on or just out the lunch on which is there's this view that the Chinese have no move and I think that's totally wrong. I think they just need to squeeze supply chains a little, get inflation going and the bond market will do the rest. And if the bond market doesn't want to do the rest and point being that if they don't let inflation print the real number or they cap yields or whatever they do, then real inflation is going to show up politically no matter what. Right. Because you know Trump and Bassin can say hey inflation's only three and a half and if it's actually seven or eight, you know they're going to be spending the next two years of their lives dealing with impeachment hearings for Trump for the last two years because they'll lose the House and the Senate, you know, one way or another. You know, China has a way to force this dynamic in terms of cost on the bond market and so Yeah, I think it is. That's where I think it is going to further accelerate. There's nothing more inflationary than war. So if you already had sort of a very delicately balanced situation and here too, I would just point back to what we talked about earlier, which is this net international investment position dynamic. Look, Japan needs oil, they need food. Other places that own a lot of dollar assets, including Treasuries, they need food, they need energy, they're going to sell those things. And so your net supplies of Treasuries may potentially rise dramatically, US deficits, especially if we have a recession. Foreigners selling, your biggest marginal buyers have been levered hedge funds. And when volatility goes up in equities or anywhere else, they're going to sell Treasuries, not buy them. So it is an accelerant without a doubt to the stresses we've been talking about for some time in the sovereign bond markets and particularly western sovereign bond markets.
- [44:30]
Eric Townsend
Let's talk about where the trades are. I appreciate you said this is too hard to trade in the very short term, but as we start to get through this and see a light at the end of the tunnel, where are the trades going to be? It seems to me that the food, if you look for things that have not been priced yet that are certain to be coming, food inflation seems to me like a certainty. So how do you play that? Is there a curve steepener here in the bond market that makes sense? What else? Where might the trades be when it is time to start trading this?
- [45:01]
Luke Gromen
I think there's a lot here sort of secular, you know, food inflation. There's even things like, you know, grocery store comps will accelerate, you know, it's nominal but there's leverage there because it's a high fixed cost model. Right. So grocery stores should do well in a higher food inflation environment. I think for me the cleanest fundamental plays are things around energy and uranium and domestic electrical infrastructure and the industrials selling into that. You've got bottlenecks there already. You've got an impetus to reshore. So I think every and anything in electrical infrastructure and nuclear and even oil, emp, those things all seem very well positioned. I think I still really like gold. I think gold does well. I think there's going to be a time for Bitcoin that's coming up here probably next, I don't know, few months later this year. You know, I still, I'm watching bitcoin as it trades still with igv, the software etf. And you know, there's maybe a sign of a divergence in the last week. We'll see. IGVs broken down again, but then Bitcoin didn't. But I think Bitcoin's going to follow it lower again, if I'm correct about the the supply chain, whoosh down. So I think all of these things, when you kind of get to the other side of, you know what I think is this supply chain problem that is going to get very acute and a moment of brief moment of panic in the grand scheme of things on the other side of that, I think these types of names will do quite well.
- [46:26]
Eric Townsend
Luke, I can't thank you enough for a terrific interview. Before I let you go, your firm, Forest for the Trees, which is at fftt-llc.com has really become one of the most respected boutique investment research firms really in existence. Tell us a little bit more about what you do and what people can expect to find when they go to fftt-llc.com something.
- [46:51]
Luke Gromen
Thank you for that, Eric. I appreciate you. You've played a big role in that and I've always been very appreciative of all the support you've given us over the years. What we do is we aggregate a large amount of publicly available data points in a unique manner, trying to identify developing economic bottlenecks for our clients and identifying different sectors that are more attractive and less attractive for investment. Really appreciate that.
- [47:14]
Eric Townsend
And folks, be sure to stay tuned as Rory Johnston, founder of CommodityContext.com will be joining us next for an update on the crisis and the logistics of oil in and out of the Strait of Hormuz.
- [47:29]
Patrick Ceresna
It was great to have Luke back on the show. Rory Johnston is next on deck for a special second feature interview on the developing Iran conflict and what it means for the oil markets. Then Eric and I will be back for our usual post game chart deck and Trade of the Week. Since this extra coverage format seems to be a hit with our listeners, we'll do our best to continue it for as long as the situation in the middle EAS warrants. Now let's go right to Eric's interview with Rory.
- [48:01]
Eric Townsend
Joining me now is Commodity Context founder Rory Johnston. I should let our listeners know that we recorded this one about two days after we recorded the interview with Luke Gromen. So it's Wednesday afternoon that I'm speaking with Rory. Rory, the market is sounding the all clear. The S&P 500 futures have rallied back above their pre Iran crisis levels. Oil has crashed from oh boy. Just in the last couple of days. I'D say from Sunday's opening panic, we're down $20 or we were on Tuesday afternoon, $30 down from where we were last week. Seems like the market is saying this thing's over. President Trump is saying this thing's almost over. What does Rory Johnston say? Is it almost over? And particularly I want to get a read from you on oil compared to what's normal is really now transiting, because I think the market's getting this message, oh, we're up to 20 ships now. How much non Iranian oil is actually transiting through the strait at this point?
- [49:10]
Rory Johnston
Yeah, so thanks for having me back on the podcast, Eric. Yes, we're hearing lots of these numbers thrown around and generally I'm not seeing them validated by any of the kind of tanker tracking outfits that I track. Whether it's, you know, Kepler or tanker trackers or even the kind of the, the Bloomberg tracker on the terminal. We're seeing some ships transit but still like we're talking free Iran war levels. You were seeing kind of sustained 120 to 140 ships transiting Hormuz, you know, in both directions. So let's give or take 70 each way pre crisis. And now we're seeing, I mean like on the, the latest Bloomberg tracker here we of seven today, you know, you had a high of 16 on April 12th. These are not huge volumes and they're not material in the scheme of what we're really talking about, which is the kind of ongoing stoppage of 13 million barrels a day of shut in Gulf production across, across the kind of main 6 non Iranian Gulf members. So it's not a lot of oil. If anything, an actual move that really did matter was this past Saturday when you had announced you had news along the lines of the ceasefire that you know, you saw some movement. And there was a day on the Saturday when you had three VLCCs where these are kind of 2 million barrel a day ships. These are like the real kind of volume we're talking about. Three of them transited the strait. That was a big deal. And I was, you know, kind of saying at the time, I was like if this is sustained, this really does change the game here. But it wasn't sustained. And so many of those ships that you're seeing are like, like instead of 2 million barrels a day, some of these ships are like 50,000 barrels. And I think that is a major difference in what we're talking about kind of ship count versus actual volumes. And if Iran is facilitating these or allowing these transits, I think the other thing is like, they're like oh well if it's 10 VLCC, this is all solved. Which is like of course it would be. But Iran knows it's on these ships as well and it's, it's actively choosing who gets through and who doesn't.
- [51:07]
Eric Townsend
So VLCC stands for very large crude carrier. That's the great big ship that carries 2 million barrels of oil. How many, you said three of those got through last Saturday. How many more since Last Saturday of VLCCs, the big boys, how many of them have actually come out of the strait and taken oil off towards where it needs to go?
- [51:26]
Rory Johnston
None non Iranian that I've seen. And you know, we're getting mixed reports that you're still seeing some Iranian crude oil. I think today you saw a VLCC reenter the strait past the US Blockade. And this is a ship that would have been historically related to the Iranian oil trade. So it's been interesting. I mean this blockade has also been kind of a moving target as to exactly where it's being imposed. What's being imposed on. Is it all ships? Is it Iranian ships? I think the, the official word is that it's any ships that are planning on servicing Iranian ports. But then today we had, we had this confirmation from tanker trackers that you had two empty VLCCs actually both U. S Sanctioned traverse the Strait of Hormuz towards Iran. So there is still some ships getting back and forth through, but it's still again, you know, de minimis relative to the pre war flow.
- [52:19]
Eric Townsend
Let's talk about what the United States blockade of Iran actually means. I think just that language is not completely clear to all investors who don't follow this stuff closely. What does it mean for the United States to blockade Iran on top of Iran already kind of blockading the whole world by restricting the strait? What's the significance and meaning of that?
- [52:43]
Rory Johnston
What is the even said of the double blockade? Right. I think one of the things that's been really weird about this crisis so far is that if you had asked me, and I think you have asked me, you know, two, three months ago, is Iran going to close the straight of Hormuz? I would say absolutely not because I wouldn't have thought we would have gotten to this point. But then if you would ask me if the Strait of Hormuz was closed, would Iran still be exporting its oil during an act of war with the United States? And my answer would have been of course not.
- [53:09]
Luke Gromen
Not.
- [53:09]
Rory Johnston
We had just seen that the United States could blockade Venezuela this past kind of, you know, November to January, fully preventing Venezuela from exporting of its, any of its oil and actively chasing these tankers down across the ocean to kind of, you know, impose this blockade. We know that they could do it. And even in the first weeks of the war, we saw the US Essentially topple the entire Iranian navy. You had submarines kind of in the, in the, in the Indian Ocean, kind of taking out Iranian naval vessels on their way back, back. Clearly they had dominance of the seas. They could have imposed this blockade a long time ago, but they chose not to. And it, my read of this is actually not dissimilar to the US Response following Russia's invasion of Ukraine, that it was a bad situation and they didn't want to make it worse by further curtailing any available oil and gas supplies, even if that was from, you know, the party that was the violator or the kind of enemy in this case. And obviously in 2022, it was Russia. And, and instead of imposing full blockades, they imposed the price cap. And I think now it was similar that the US treasury wanted to kind of maintain the access of, or the flow of Iranian oil, the markets. So not only did they not prevent and not blockade Iranian flow, they also actually temporarily rolled back sanctions on Iranian floating storage to allow consumers to kind of get every barrel they could. Now, we've heard that they're not going to be renewing that, that waiver, so the sanctions are going to be back on. And now they're kind of more. Now the, the Trump administration is kind of going more towards this maximum economic pressure. So now instead of exporting, now, again, we're still kind of early days here, and there's still some leaks in the screen. But in theory, what it means is that you'd go from, say, initially Hormuz went down from say, 20 million barrels a day to say, maybe 2 million barrels a day of Iranian oil and maybe a handful of other, of other barrels that are, that are on kind of allowed through, whether there's with, you know, bilateral deals like with India or because they pay the toll or whatever. Now, theoretically, this stops all of that flow. Now, that makes the current global oil crunch worse because it takes, you know, precious barrels off the market at a time when we already are deeply, deeply in deficit. At the same time, it obviously makes some strategic sense given that Iran had very little pressure on it during this period, aside from the obvious, you know, attacks and bombings, but particularly during the beginning of the ceasefire, it was still just exporting its oil and capturing these windfall profits but without kind of any of the pressure. So now this is making Iran at least share in the pressure the rest of the world is feeling. It's going to feel like one of the other Gulf states that now has the vast majority of its key export industry shut in. Now if this lasts say a week or two and Iran is not able to clear any oil, you will likely see Iran begin to shut in its production much like the rest of the Gulf states have have which would lift that 13 million barrels a day of shut in gulf production from 13 to 15. But the argument goes this accelerates the pain and pressure on Tehran and brings them to the table for some kind of broader peace deal to end the conflict and to reopen the strait. I think the challenge with that in my mind, I think that again. So the rest of the world has had six weeks of this pressure building up and now we're just kind of starting it on Iran now. Now you know, that takes time to build up and all the while the pressure continues to build in the global economy and as I know it gets incrementally worse with you know, even less oil getting into the system. So it becomes a battle of patience between Tehran and the Trump administration on who's willing to bear the pain longer. Now you know, as we've seen so far this week, oil prices have fallen about 10 bucks a barrel on, on prompt Brent for June delivery and that's obviously already well off the the pre ceasefire highs. So there is less pressure being built up in the system right now, at least the market's pricing, less pressure. But I think this continues to a question that I fundamentally believe that fundamentals matter in this market and it's just a matter of time until these largest supply shock in the history of the oil market does come to bear on prices and push them higher.
- [57:11]
Eric Townsend
Now, with respect to a deal coming together, Iran has on Wednesday presented a proposal and it seems to be being interpreted by the market as further sign that this is all winding down. But as I read this proposal, what Iran is saying is hey, if you guys agreed to our terms, which is respect our right to continue enriching uranium and all the other things that the US is almost certain to never agree to, under those circumstances we'd be happy to allow ships to pass on the Oman side of the strait unhindered. In other words, if you caved to our original terms, we would would make the same agreement that we'd offered you last week that you walked away from. I'm not really sure why the market is interpreting that as further evidence that this is all winding down when it seems like they're actually standing their ground. Am I misinterpreting that?
- [58:07]
Rory Johnston
No. I had the same confusion when I saw the headline, by the way, and I think on a couple different fronts. So the first question I would have is it seems to make very little sense that Iran would voluntarily give up up its leverage of the straight of formulas given that that's now like the main thing in addition to enrichment that it's looking to get out of this war at the end of the day. There's a couple other points that I think are interesting there as well. First of all, it didn't say if it was all ships. There was no, you know, it was a very vague statement. You know, is this US and Israel line ships as well? Is this just, you know, you know, some other ships? They didn't say, well, they would actually help remove or identify any of the mines. Again, this is the area that supposedly Iran has mined more heavily on the Omani side of the strait.
- [58:48]
Luke Gromen
Right.
- [58:49]
Rory Johnston
And as you note, I think most importantly the quote was the source added that the proposal hinged on whether Washington was prepared to meet Tehran's demands. Which to your exact point just brings us back to square one in terms of the negotiation. The final thing I'll mention on that is I think one other element of this that is important to keep in mind is that on top of the barrel flow calculation that we're all watching in terms of ships, they will leave the straight and leave the Gulf Gulf. There is also hundreds of tankers and ships trapped in the Gulf for six weeks. You have 20,000 seafarers that have not been able to return home since the end of February. They're running low on supplies, water, everything else. I think there is going to be an increase to actually try and exit some of those ships. And even in that Reuters headline it said Iran offers proposal allowing ships to exit Oman side. So there's also this open question of is this a go forward by, you know, bi directional proposal or is this just a humanitarian kind of acquiescence to get some of these people back home who are kind of the most direct kind of captives ongoing in this conflict.
- [59:52]
Eric Townsend
Now there was plenty of press coverage of that story that Iran had offered this potential, you know, we'll make a deal if you'll make a deal. But what was not really covered very well in the press in my opinion is around the same time Iran also threatened and said, but if you don't make a deal, we're going to use our Houthi friends to close the Strait of Bob el Mandeb. Rory, help me. Cause you understand this market much better than I do, and I'm admittedly a little bit paranoid about these things. But closing the Red Sea and the Strait of Hormuz at the same time sounds to me like lights out for the global economy. That's a really big deal. And a little bit of research I did suggests, well, hey, the Houthis have already successfully closed the Strait of Bob el Mandeb a couple of times previously. There's really no reason they couldn't do it again. So is that a serious threat? And why is that not getting the press that the potential peace office was getting?
- [60:54]
Rory Johnston
I think the reason it's not getting the attention is because it's kind of been this, you know, lingering risk and threat that we've seen kind of raised multiple times. We've seen the Iranians in particular mention, you know, the other strike, right. Kind of threateningly in the past. Just to kind of give the perspective on why it's especially important right now. It is turned into the kind of primary rerouting outlet for Saudi barrels that have been rerouted from the Gulf side of Saudi Arabia to the Red Seaside via the east west pipeline. There's been about four and a half, five million barrels of switching from and kind of rerouting from the Gulf to the Red Sea. And virtually all of that is traveling on the same kind of core Asian trade route, routes that would have been serviced out of the Gulf. So if the Houthis did close the Strait, which as you note, they have demonstrated capacity to do before, that would, theoretically, you could still get some of that oil out. It would just have to go up through Suez. And there's going to be all these questions around. You know, you can't, you know, put a full kind of tanker through Suez. You have to offload some into the Sumed pipeline and all these other things. But I think even fundamentally, let's assume you could get every barrel coming out of the east west pipeline and the other barrels kind of going back, back through the Suez. It takes way, way, way, way longer. So you would basically force the flow, rather than going straight line to Asia, you would have to force it up into the Med, all the way around Africa and back around. And given that this fundamentally remains a crisis of lost time, we simply do not have the time, the market doesn't have the time to absorb that kind of disruption that we saw. It kind of look mostly through, say, a couple years ago when the Houthis did kind of throttle flow through the Red Sea, Broadway. So I think now we're in a situation where we're just that much more, in that much more precarious market state that's going to make any of that stuff that much, you know, more painful. And obviously, given the Red Sea flows out of Saudi Arabia, that much more consequential to an already kind of Hormuz starved market.
- [62:50]
Eric Townsend
And from what I understand, it takes about two weeks extra delivery time if you have to reroute tanker traffic around the Cape of Good Hope. So it's a really big deal. On that same note, I want to move on to what I don't think anybody gets yet, which is so many people in global markets are just breathing this huge sigh of relief. Okay, this thing is finally ending. It's pretty much over now. Hang on a second, Rory. The last tanker ship to successfully transit the Strait of Hormuz outbound on February 28, before all of this started. That ship won't reach its destination until next week. So what this means is for all six weeks that we've been at this, the flow of oil to the global market, we've had a lot of speculation in markets that something bad was coming. But the supply disruption hasn't actually started yet. It's going to start probably next week and nothing can be done. Doesn't matter what happens at the strait, doesn't matter what deal gets made, doesn't matter how many VLCCs get out next week. That disruption is coming and it cannot be stopped. Do I have that right? And what are the consequences?
- [64:09]
Rory Johnston
Yeah, the only, the only way I would adjust that is to say that I've been describing it, essentially the air pocket moving through the global system, basically that last tanker after it reaches your, your, your kind of arrival ports and there's nothing behind it but air. That's when you start feeling the scarcity in real time time. And depending on your distance from the Gulf, you realized and kind of felt that air pocket at different moments. So the first region to feel it was East Africa after about three weeks, then East Asia after about 4ish, Europe after 5, and now North America after 6. And the benefit there is that North America is the least exposed generally. But to your point, each one of those markets, you've seen conditions tighten up almost immediately. Once that air pocket hit. For instance, instance, we saw shipments of US Diesel heading to Europe right around the time when you saw the air pocket hit East Africa, which is A large importer of Gulf distillates and diesel, etc. And that, and that tanker that was heading for Europe basically did a sharp break south, you know, back around to the east side of Africa. So you basically, this is how the market's going to solve is once those physical scarcity moments arrive, then those participants are going to start bidding maniacally for any other barrel that can find. And this is why we get this kind of, you know, any. Even if the scarcity is primarily in Asia, it gets felt everywhere because those, those buyers try to find supplies elsewhere. Now this is also why the President has been talking about the flow of tankers heading towards the United States. And this is something that again is another expression of the same thing. Now given, you know, the crisis in the Gulf and the fact that China has, has basically blocked exports out of its markets that have historically been an important swing supplier in times of crisis like this, the US Gulf coast is now the kind of functional swing supplier for the entire global oil market and you're going to have a bunch of tankers inbound. Now the President sees this, I think on one level, rightly as a sign of kind of North American energy security, which is true. But at the same time, the only reason those tankers are coming to the United States is because other people around the world are willing to pay more for those barrels than Americans are right now. So that is how the shock transmits from Asia and Europe and East Africa to North America, because someone is always going to be more willing to buy those barrels than you are right now, which is how we get much higher prices to any trade exposed regions of North America, particularly the east and West Coast. Whereas, you know, the center of the country, the Mid Continent, is arguably now the most energy secure region on the entire planet, given ample domestic refining capacity, not a lot of trade exposure and kind of captive feedstock from Canadian crude traveling on pipeline.
- [67:00]
Eric Townsend
I want to go a little bit deeper on that transmission mechanism, especially because frankly I see maybe a ripe trading opportunity here. I think what's about to happen, Rory, is there's going to be a massive sell off as all of the macro tourists go from panic buying crude to shorting crude. So I think WTI and Brent futures are going to be shorted here and pushed down substantially. That's going to collapse the time spreads at the front of the curve and then about two to three weeks from now when that air pocket that you've described hits Southeast Asia and Australia and New Zealand, I think that refineries in Singapore, if The, the delivery point for WTI was hypothetically in Singapore. I'd say there has to be an explosion of those time spreads at the front of the forward curve. That would be the big trade. The thing is, I'm not sure if that transmission mechanism works. If you desperately need and are willing to pay hand over fist for oil in Singapore in order to refine it, to send it to Australia and New Zealand. New Zealand doesn't have any refineries. They're entirely dependent on importing finished products. If that situation develops, does that get transmitted back to front of the curve time spreads on WTI and on Brent, or is the fact that the crisis is someplace else kind of make the time spread market independent from that?
- [68:31]
Rory Johnston
One of the weird things that we've seen in this crisis so far is that the vast majority of the pricing pressure has been felt entirely at the front of the curve, if not directly in the physical market. Whereas as futures prices have remained much lower relative to those prompt delivered cargos. Now part of this makes sense. You know, if, if I was to tell you, Eric, with everything you know about the oil market, if you didn't know it was Hormu, let's just say all of a sudden you had, prior to this you had a relative, you had an oversupplied market, you had ample stocks, and then all of a sudden you had a 10 million barrel a day pipeline kind of shut off with, you know, it's not going to, you know, it's not off, it's not disappeared entirely, it's still there. And the assumption is eventually it's going to turn back online now the way that market I think would solve. And again, I'm trying to extract itself myself from the kind of enormity of Hormuz as kind of a symbolic element in this market. But just if we just go back to this pipeline example, it would make sense that until you saw the realized drawdown of those inventories, cumulatively, that overall the overall level of the curve, at least on my model, generally isn't going to move that much. What you're going to see is you're going to see an explosion at the front of the curve to basically fill that 10 million barrel a day hole. Now that's very similar to what the oil market looks like right now. For those that don't follow all the pieces of the oil market, you know, even on Monday as an example, prices have come down a little bit. But I think Monday was exemplary of this. You had oil prices for Brent futures and the day around $100 a barrel. Meanwhile dated Brent, which is the kind of physical benchmark and nearer dated because you know the prompt Brent futures is delivering for June and dated Brent is typically for, you know, cargoes 10 to 30 days ahead that was trading at 132. So you had this massive spread there and you've also seen these and on top of that you've seen delivered premium, a physical delivered premium for those of something like $20 a barrel above dated Brent. So you're like $150 right there. And I think the thing I wasn't expecting in this crisis was to see that dislocation between dated Brent and Brent futures explode to the level it has because it's never exploded at that level before. Even in, you know, 22 or back through history even, even in Covid, we never had a dislocation that large. It's typically only been a couple dollars a barrel at its maximum level. And now we're seeing kind of huge blow ups in all of these typical spreads. You even saw, I was tweeting this morning, HSBC's CEO, you know, quoted and noted that the highest delivered barrel of an, of a barrel of oil he's seen so far through this crisis was $286 a barrel for a cargo that was delivered to Sri Lanka, which like clearly there are massive physical dislocations in this market market now that can only last for so long in a market that is freely traded. Those immense acute local pain points can get arbitraged away through trade. But that takes time. And I think what we're seeing right now is that the main to your point of like if WTI was priced in Singapore, I think yes, I think then we would see a faster transmission to the overall market awareness. And because it's so far away from those benchmarks and it's taking down a hit that them. I think that helps explain the relative sanguineity of futures markets right now. Now if this holds, if Hormuz remains closed for another month, I would be shocked, Eric, I would be truly shocked. I've been shocked already by pricing so far just because of again the enormity of Hormuz. But I would be truly, truly shocked if we could do another month of this without any tangible kind of material upgrade across the curve. That would be, my expectation would be to see the whole thing begin rising and that front end kind of remaining heavily backwardated.
- [72:25]
Eric Townsend
What happens in the unlikely event that this escalates to the point where we've got Hormuz still closed and Strait of Bab El Mandeb also closed. At the same time, the Houthis do something to shut down transit in and out of the Red Sea and we get that two week additional delay around, around the Cape of Good Hope.
- [72:45]
Rory Johnston
How I would normally assume it would go would be that futures would immediately incorporate this panic into the curve. But I think using what we've seen thus far, let's use the, let's assume the market remains stable in how it's approaching the situation. The situation remains the same. It just gets worse in magnitude. But still, those timing issues, now you have a, now you have a time delay and air gap from what was coming out of Babelman Deb. So I think initially, as you saw, even with this crisis when it began, initially there would be some kind of giant spike in prices and a market overreaction to that initial news that would likely sell off and that would itself perpetuate a narrative of the thing being over. But I do think that, you know, physically you still lost all those barrels from the market, or at least lost two weeks of the delivery of them. And then I think that has to begin accumulating through prices again. So I would say initially probably a spike and then a fade followed by a gradual organic rise in prices at an even faster pace than if we just had Hormuz closed.
- [73:45]
Eric Townsend
Well, Rory, I can't thank you enough for this update. For people who want to know more about this, tell them a little bit about what you do@commoditycontext.com well, thank you
- [73:54]
Rory Johnston
so much for having me, Eric. Always a pleasure. And if anyone wants to join me on this journey of trying to make sense of this crazy, crazy oil market, you can follow my work@commoditycontext.com I've got a weekly, I've got monthlies, and I've got a lot of thematic resources. And please also follow me on Twitter and check out the Oil Ground up podcast as well, which is my podcast where I mostly just speak with very wonky oil analysts about barrel counting.
- [74:16]
Eric Townsend
Patrick Ceresna and I will be back as Macro Voices continues right here@macrovoices.com.
- [74:27]
Now back to your hosts, Eric Townsend and Patrick Ceresna.
- [74:32]
Patrick Ceresna
Listeners will keep bringing on Second Guess as conditions warrant until the Iran situation eventually settles down. Now you'll find the download link for this week's Trade of the Week in your Research Roundup email. If you don't have a Research Roundup email, it means you have not yet registered@macrovoices.com just go to the home page and look for the red button over Luke Roman's picture saying Looking for the
- [74:57]
Eric Townsend
download Patrick for this week's Trade of the week. If inflation keeps pushing yields higher in the short term but ultimately slows growth and pulls them back down later on, how do you trade for that sequence in bonds?
- [75:11]
Patrick Ceresna
Yeah, I think this is the key distinction here. The bond market is still reacting to the inflation impulse, pushing yields higher as commodity risks and near term premium gets priced in. But if you take Luke Roman's framework from the interview, that same inflation shock can ultimately feed into demand destruction and a broader slowdown, which is typically when long term yields begin to reverse lower. So rather than making a one directional bet, I'm structuring this as a paired trade that plays both parts of the sequence. In the near term I want downside protection in case the bonds sell off further on inflation fears, but if the same time in the near term I want downside protection in case bonds sell off further on inflation fears, but at the same time I want upside exposure further out if the downside begins to take hold. What makes this attractive right now is that bond volatility has come down, which makes the structure relatively inexpensive to carry. To illustrate that on page three of the slides I've included both the move index and the implied volatility on TLT and you can clearly see that bond volatility is near the lowest levels that we've seen in over a year. So with this trade you're defining risk staying positioned through the near term uncertainty and still maintaining exposure to a potential rally in duration if the market transitions from inflation concerns to growth slow down. Now, the way I'd structure this is through a two legged option position on TLT that reflects that sequencing. With TTLT trading around 86.80, the idea would be to buy the January 2027 $87 call with roughly 275 days to expiration for about $3.25, giving you an at the money exposure to a potential decline in long term yields if growth slowdown begins to ma materialize. That's paired with a shorter dated June 202685 to 83 put spread for about 64 days to expiration where you're buying the $85 put for roughly $0.89 and selling the $83 put for about $0.44, creating a $2 wide spread for a net debit of approximately $0.45 or about a 3 to 1 payoff off. This means you're layering a defined risk downside structure over a longer dated convex upside position. This put spread can be worth up to $2 if bonds sell off further in the near term, providing a potential offset to the call premium while the call maintains exposure onto a medium term rally in duration. In practical terms, the call break even sits around ninety and a quarter, so you don't need a full reversal in yields for the position to be working on the upside. The idea is straightforward. Use a short dated downside spread to potentially monetize further short term weakness in bonds while maintaining a longer dated upside exposure if the macro environment shifts and duration begins to recover.
- [78:37]
Eric Townsend
Patrick Every Monday at Big Picture Trading, your webinar explains how retail investors can put on our most recent trade of the week. For those listeners that want to explore how to put on these trades in greater detail, don't miss out on a 14 day free trial at Big Picture. Now let's dive into the post game chart.
- [78:56]
Patrick Ceresna
Dick all right, Eric, let's get into these equity markets.
- [78:58]
Eric Townsend
Our regular listeners will recall that when The S&P 500 was more than 500 points lower than it is today, I said if you believe that the President has this all under control and we're going to wrap up the Iran conflict within a few weeks, then buy the dip and buy it in size. Now. I personally was skeptical and did not buy that dip. So congratulations to those of you who did and made money on the trade. But guess what? I'm still skeptical. There could be no doubt that the market has switched to risk on mode and this is discounting the reopening of the Strait of Hormuz. I hope that the market has that right, but I'm not yet convinced. As Rory Johnston explained, Iran really does have the wherewithal to block access to both the Persian Gulf and the Red Sea. And the shock of what's already happened has yet to really hit the global economy because of the lag effects that I discussed with Roy. So I don't rule out markets realizing that the damage already done was maybe a little worse than perceived. And likewise, I think the perception that the Strait is imminently about to reopen and reopen completely might be premature. I lifted my S and P hedges at a loss when it became clear that I was fighting sentiment that wants to conclude that this is over. So I'm going to let this run until it's played out, but I won't rule out new hedges if this persists longer than the market is perceiving or or if the delay effects of what's already happened are worse than feared. And I think there's plenty of room for that, I don't think people have really internalized yet what it's going to mean when we see this as what Rory described as a six week or so air pocket where oil stops showing up at all of the parts of the world where we're used to having it show up every day. So it's going to be interesting to see how this plays out. I could be wrong. We're in uncharted territory here and nobody knows what's coming next. But I think the market is breathing a little bit, bit too much sigh of relief before it's really due.
- [80:57]
Patrick Ceresna
Well, Eric, the way I see this is that the de escalation, or at least the perception of the de escalation was a trigger. But what it caused was actually a flows driven squeeze. A combination of dealers, delta hedging position and the Vanna effect of a rally. CTAs that were covered, all of their long positions being forced to buy back and of course a short squeeze on those that were playing that this was going to further deteriorate all being forced to buy. But what's particularly interesting to me when we look at this chart, not only did we reach the previous highs, but for the first time something very different happening. That short squeeze was almost entirely driven by Mag 7 stocks. The breath of the market has not returned. But what we have seen is the Mag 7s materially recover off of this 5, 6 month correction. What will be particularly a huge tell as to what is in store for us is as we get into earnings, will we see earnings beats from these mag sevens? Because if there is a continued surge from this huge oversold condition in them, they have more than enough clout to be able to drive the S and P to new highs irrespective of the deteriorating macro and geopolitical conditions. And so right now this is a flows driven rally. We have to find out how long this will last. Obviously, as we test a previous high, there's always a risk that we're going to consolidate here. Especially since on the hourly charts we're so overbought. And so I wouldn't be surprised if we had a three to five day sequence where the market just absorbed this previous rally. But the Mag sevens and their earnings will decide what's next in terms of whether there's more upside. All right Eric, let's touch on this dollar.
- [82:49]
Eric Townsend
We still have a big unfilled gap on the Dixie chart from after the ceasefire and I won't be surprised if that gap gets fil if we get another scare over the Houthis taking action to block the Strait of Bob Al Mandeb, the southern choke point below the Red Sea. But eventually I think the dollar downtrend will resume and resume in earnest and the tape action so far on the perception of an all clear seems to confirm that view of what's coming. I just think there's room to go back up before we go further down.
- [83:20]
Patrick Ceresna
Well Eric, the way I see this right here is the dollar is about to give a huge tell. The Euro has approached a very key overhead resistance around this one level. The dollar index came back to a 50% retrace of its prior rally. If this was simply a pause in its prior advance, these are reversal points where dollar could very easily strengthen. If we do not see that dollar strengthening off this level, it implies that there simply isn't a dollar bull phase. And to me the next week will reveal a lot on the short term I'm still going to give the bulls the benefit of the doubt that they're going to take this higher but we will need week or so back to the upside if this thesis is actually the one materializing. Well Eric, we had some great insights from Rory. What's your take here on oil again?
- [84:11]
Eric Townsend
Patrick, I question whether Macro traders understand the lag effects. The last tanker to transit the strait on February 28 hasn't even reached its destination yet. It won't until next week. Then we begin a period of at least six weeks and it depends on different parts of the world when it starts and when it ends. But there'll be at least a six week period where crude oil just plain isn't coming in in places all around the world where it's desperately needed. So for now, in the very immediate future, further perception by macro traders that this crisis is coming to an end. It's all over, it's all done with. I think that's going to cause for the next week or so Brent and WTI futures to continue to sell off absent more bad news that send them the other direction. But barring other factors, I think Brent and WTI have room to come further down and I' that dip on the front of curve time spreads at some point because I think starting in a week or two we're going to see the actual impacts of what's already happened being realized in the real economy and I think it's gonna take people by surprise.
- [85:19]
Patrick Ceresna
Well Eric, I'd love to give some technical insights here but Recruit oil continues to be headline driven and obviously we took out a substantial risk premium out of oil Coming from, you know, $115 back down to the low 90s, I don't see a huge downside risk beyond an outright peace deal. But even then the downside probably in my mind is only about another $10 drop which is not chump change but it's certainly at this moment relative to this almost $20 drop that we saw here already much smaller in terms of that risk. At the same time, if this market that's pulling the risk premium out, if we had any re escalation or a break of the ceasefire, oil certainly has all the backdrop able to make a substantial rip back to its highs. So this continues to be something that is much more challenging to trade because you're really betting on what the next path of headlines is going to be. Now Eric, the gold markets have been relatively quiet in comparison to a lot of these other markets. What's your take here?
- [86:28]
Eric Townsend
Well, after a nice brisk rally we stalled right at the 50% Fibonacci retracement of the correction which is at 48.654865 on the June delivery compound contract. I think we'll eventually see a full retracement back to new all time highs but not until the Iran crisis is really and truly over. And I don't think we're there quite yet. There's a convergence of support lines co located with the 38.2% Fibonacci retracement at 46, 854685 and I'd consider buying another dip down to that level so long as the Iran oil situation doesn't get markedly worse.
- [87:09]
Patrick Ceresna
Well, I'm keeping my gold analysis pretty straightforward here. Now while we had this massive short squeeze in so many of these risk on assets, gold, silver, platinum, palladium, they all retraced back to their moving averages and have stalled out here. They have not shown signs that they have turned outright bullish. In fact, all of these charts just simply look like retracements in a downtrend. Now when I say that carefully because I remain actually quite bullish. Gold, silver. But what we're just trying to determine is whether or not there's still another leg of consolidation here in gold or whether this is all upside from here, I wouldn't be surprised if gold retested its previous lows one more time just for one more quick washout before we start getting into more bullish conditions. Maybe in the late second quarter if not in the third quarter of the the year. Now moving on, let's get a quick update here on Uranium.
- [88:10]
Eric Townsend
Well, we're seeing a nice brisk recovery in the uranium miners, but so far it's just in sympathy with the broader stock market. Spot uranium hasn't moved much, at least not yet. But the nuclear renaissance news flow just keeps getting better and better. So we're seeing more and more ammunition behind the longer term bull thesis here. But seasonality wise, this is the slow season for uranium trading. There's definitely a seasonality to the utilities buy fuel for reactors. We're out of that active season now, so we might not see this market really take off again until after American Labor Day as we get into the autumn. But eventually I expect much higher prices on both spot uranium and uranium miners.
- [88:54]
Patrick Ceresna
Well, technically uranium Eric has been in a correction for many months and is attempting to turn up. I say attempting because we have not had legitimate bull breakout candles yet out of this consolidation pattern. But it does have of these characteristics that could make this a setup after such a prolonged correction and the market going risk on if the risk on continues in in the broader intermarkets, uranium may get a tailwind. From that from a speculation perspective and many of these may break out here. This is certainly something that's high on my watch list to see whether this begins to follow through.
- [89:34]
Eric Townsend
Patrick, before we wrap up this week's show, let's hit that 10 year treasury out chart.
- [89:38]
Patrick Ceresna
Clearly Luke was talking about that throughout the interview. Overall, clearly we have yields pricing in some inflation risks. The bigger question is is that has this now already been baked into the cake? I actually think in the by year end we're going to be seeing yields heading lower through the economic implications of of this tight commodities market and the energy market. But on the short term, you know, if we have one more surge in oil driven by a re escalation of the situation, there's still vulnerability on the short term. In general though, beyond a short term surge risk, I actually think we're on the upper boundaries of where yields will be capped and I'm not looking for yields to go much higher from here. Maybe beyond retesting their highs from a few weeks weeks ago.
- [90:34]
Eric Townsend
Folks, if you enjoy Patrick's chart decks, you can get them every single day of the week with a free trial of big picture trading. The details are on the last pages of the slide deck or just go to bigpicturetrading.com Patrick, tell them what they can expect to find in this week's research roundup.
- [90:49]
Patrick Ceresna
Well, in this week's research roundup you're going to find the transcript for today's interview. As well as the Trade of the Week chart book we just discussed here in the post game, including a number of links to articles that we found interesting. You're going to find this, this link and so much more in this week's Research Roundup. That does it for this week's episode. We appreciate all the feedback and support we get from our listeners, and we're always looking for suggestions on how we can make the program even better. Now, for those of our listeners that write or blog about the markets and would like to share that content with our listeners, send us an email@researchroundupacrovoices.com and we will consult Consider it for our weekly distributions. If you have not already, follow our main account on X Acro Voices for all the most recent updates and releases. You can also follow Eric on xericstownsen. That's Eric Spelt with a K and you can also follow me at Patrick Ceresna on behalf of Eric Townsend and myself, thank you for listening and we'll see you all next week.
- [92:03]
Eric Townsend
That concludes this edition of Macro Voices. Be sure to tune in each week to hear feature interviews with the brightest minds in finance and macroeconomics. Macro Voices is made possible by sponsorship from BigPicture Trading.com the Internet's premier source of online education for traders. Please visit bigpicturetrading.com for more information. Please register your free account@macrovoices.com Once registered, you'll receive our free weekly Research Roundup email containing links to supporting documents from our featured guests and the very best free financial content our volunteer research team could find on the Internet each week. You'll also gain access to our free listener discussion forums and research library. And the more registered users we have, the more we'll be able to recruit high profile feature interview guests for future programs. So please register your free account today@macrovoices.com if you haven't already. You can subscribe to Macro Voices on itunes to have Macro Voices automatically delivered to your mobile device each week free of charge. You can email questions for the program to Mailbag and we'll answer your questions on the air from time to time in our Mailbag segment. Macro Voices is presented for informational and entertainment purposes only. The information presented on Macro Voices should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions. The views and opinions expressed on Macrovoices are those of the broken participants and do not necessarily reflect those of the show's hosts or sponsors. Macro Voices, its producers, sponsors and hosts Eric Townsend and Patrick Ceresna shall not be liable for losses resulting from investment decisions based on information or viewpoints presented on Macro Voices. Macro Voices is made possible by sponsorship from BigPicture Trading.com and by funding from 4 Fourth Turning Capital Management, LLC. For more information, visit macrovoices.com.