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- [00:01]
A
John, were you monitoring the situation over the weekend?
- [00:05]
B
Like any, like any good Twitter addict, I was aggressively monitoring the situation.
- [00:10]
A
Come on.
- [00:11]
B
And like you know, some, like I said at the beginning of this, this week's timestamp, some people are pros, some people do it for the love of the game and you know, I just do it for the love of the game. They, whether they pay me or not, I'm gonna monitor the situation.
- [00:25]
A
Well, the situation evolved over the weekend. I guess we'll jump into last week we met, I was in Key west and we were about two, two and two days in, maybe early Saturday morning, Sunday. Yeah, two and a half days into this operation, epic fury into Iran. It has persisted and things have escalated pretty significantly. I guess we'll just start here. All focus is on oil and gas markets right now or not all focus but the predominant focus is on oil and gas markets. Obviously the, the continuation of this operation or war as many people are referring to it as has led to the closure of the Strait of Hormuz. There's been a bunch of critical oil and gas infrastructure hit both within Iran and within the Arabian Peninsula, uae, Qatar, Saudi Arabia have had some of their oil infrastructure hit. I believe many refineries have been and all this is going to have dire consequences on energy markets which are the base of everything we do in the global economy. And so there will be knock on effects throughout the global economy and particularly on the price of goods which I think it's safe to say they're not going to go lower from here. John, what was your reading of the situation over the weekend?
- [01:50]
B
Yeah, well, I mean you referred to it but it's not a war. It's a sparkling conflict currently if you listen to our, our dear leaders in Washington. But yeah, it's interesting. It's kind of a piece with the theme that we've talked about some on this show that you've talked about a bunch on TFTC and that has kind of informed a lot of the way that we've invested over the last five years at 1031 which is just the reemergence of the physical world into the economy and whether it's supply chain snares in 2020 and 21 or a similar oil and gas price spike you saw after the Russia's invasion of Ukraine to the last few years, the need to aggressively to reshore and to ramp up power capacity for the HPC story like now finally again one of the, probably the biggest oil shock that the world has seen Since I think 1983 was the last time we got a move this big in one week. Some are pointing back to the Suez crisis even before that. So it's the latest iteration and entry in this series of are more frequent reminders now that the physical world gets a say. And we can't necessarily assume that the cost to make stuff and produce goods and get them around the world in a reasonable time frame is always going to be trending to zero. And the markets are trying to price that in this morning with oil almost hitting $120 a barrel last night, both Brent and WTI down a little bit this morning around 100, just above 100. Clearly a massive impact that I don't think anyone was really pricing in certainly a year ago, certainly even a few months ago. And you can see this chart just captures well kind of what we're looking at. The Hormuz Strait around Iran and the Persian Gulf controls roughly 20% of the world's liquid petroleum products is basically traffic through there has ground to a standstill with Iran threatening to blow up tankers that are trying to pass through insurance contracts. Attacks on various tankers and maritime vessels have gotten canceled. Maybe we'll see what the US does with that. But all that is to say we're in a very, very sticky situation to say the least. And we'll get into it here. But it's going to have this latest physical constraint of the physical world is going to have a lot of downstream impacts on every market.
- [04:12]
A
Yeah, it's pretty crazy. See it all unfold and we'll get into I think what we discussed last week really tying it to the national security strategy and this being being a roundabout way to put pressure on China. I think that is one of the predominant theses that is, that is hitting the airwaves and hit the airwaves over the weekend is continuing to this week. We'll jump into that. But I think re approaching a chart that we brought up last year, last week that we should check in on is the 10 year yield which is going up alongside oil and gas prices as well. But we'll get into the ramifications of the geopolitics of this all after touching on what's happening here domestically.
- [04:57]
B
Yeah, it's fair to say we are still you can kind of see on the chart on the left that's 10 year yield and the right is price. This is WTI, the price of oil which is even I think higher than what that screenshot captures right now. But you can kind of see them spiking in tandem the 10 year is at the very least you could say only kind of giving back some of the recent gains that it made. So we're just back to like, you know, mid February levels. But it's an interesting, it's an interesting move for what should be theoretically the world's premier safe haven asset. This is the bedrock of the global capital stack. This is historically up until the last few years kind of where you go when things get hairy. And so to see the 10 year at least not getting an incremental bid on a conflict that is I think materially worse than consensus was pricing in a couple of weeks ago or was expecting a couple of weeks ago is a noteworthy move in and of itself. And you can kind of understand why that would be the case when you just look at what's going on with the price of oil. And Marty, to your point, the likely knock on effects of that on realized price inflation, however you kind of want to define that term, whatever kind of hedonic adjustments you want to apply to it, clearly this is a massive structural, applies massive structural upward pressure to realized inflation, which is a big problem for fixed income. And it's a big problem as well given where debt to GDP sits on the US existing debt stack. So I think the market is trying to work out right now what this would actually mean if we had sustained oil prices in these levels, what that would mean for inflation, what that would therefore mean for fixed income and for a government that already is struggling to manage its non discretionary expenses even with interest rates in the call it 4% ballpark on, on a blended basis.
- [06:43]
A
Yeah, and I think it's. What are your thoughts on how markets are reacting right now? Because I'm going to pull this up. I was listening to his spaces last night and I, I, I, I really don't think the market has digested the, the gravity of what's happening with Middle east oil infrastructure. And the one comment that was made in the spaces that I was in last night that really stuck out to me is that, I mean you mentioned it earlier, but in 2022 when Russia and Ukraine began their war, there was just many people surmising that Russia's oil infrastructure would be a target of Ukraine and potentially European allies. And just the fear of that infrastructure being a target led to WTI spiking above 130. And here we are in 2026, the Strait of Hormuz is ground to a halt and very critical infrastructure within the Middle east, which is obviously one of the largest oil producing regions in the world has actually been hit. There's talks and again, fog of war, it's hard to discern what's actually going on. But there's plenty of, I think verified videos of tankers being hit, oil deposits being hit in Iran and Tehran. And there's reports of many refineries being hit across the Middle East, Qatar, uae, Kuwait. And I don't think people understand where the market hasn't digested the gravity of the refineries specifically being hit. Because this is a key part of the oil and gas supply chain that you can't just, if you're going to have any part that you want to protect the most, it's probably the refineries.
- [08:25]
B
Yeah, I mean, it's a fair point. Now, some of the, I think the retrace this morning was based on a pretty aggressive G7 countries jawboning, big SPR release. So I think overnight as we got to 120, there was a headline leaked about Strategic Petroleum Reserves getting tapped major parts of the world. So that put I think maybe a little downward pressure on us. For now, we'll see if that can be sustained. And I think if you look, I don't have the charts at hand, but if you look at futures contracts several months out, I believe the implication, at least when I looked over the weekend and early this morning was the market is still effectively saying this move will reverse in relatively short order of the next few months. So to the extent that that's the case, if that's your belief, I think that speaks to some level of skepticism that the conflict as it stands can be sustained, whether that's because the Iranian regime is about to collapse. I put in the timestamp a couple references to some data points that, let's take them with a massive grain of salt given your point on fog of war, but just data sets showing that perh, perhaps the ballistic stockpile that Iran has access to is maybe dwindling pretty quickly. So maybe you take that view, maybe you take the taco view and just say, well, it's a midterm election year and there's just no way that Trump's going to let gas be $5 plus dollars a gallon around the country when he's trying to hold on barely to a coalition and keep his agenda intact. So that's a piece of it too, potentially. I don't know. I, I don't envy anyone who professionally has to make a call specifically on the near term directionality of the oil price, although you could say in one way or another we're all going to have to effectively make a call on that with various allocation decisions for our personal wealth and professionally at 1031. But there are a lot of crosswinds. And I definitely think it's fair to price in or to think about how the market might ultimately price in what you're talking about, that if this is more extended and if it's more structural and it can't be reversed with a simple truth social post saying various things to get traders to move prices in the direction that Trump wants, that could have meaningful structural implications for a lot of different things. And I think you alluded to the geopolitics question. We can maybe get into that if you want a little bit. But to the extent that you think that there's something more going on here than Trump being an impulsive moron that might speak to and might give you grounds to to think that this isn't necessarily going to end next week.
- [10:59]
A
Yeah. And so let's jump into the geopolitical ramifications and run with the thesis that this is a way to curb China's acceleration towards becoming a global dominant player in the realm of geopolitics and economics. And I think the data that is coming out in terms of how dependent China is on oil coming from the straight of Hormuz in the Middle east specifically would point like, hey, if this is what they're trying to do, it could be effective. And so you prepped with this little phrase here, this little snippet here from an article that was released over the weekend. China, which has friendly relations with Iran and relies heavily on Middle Eastern supplies, is unhappy about the Islamic Republic's move to paralyze shipping to the strait and is pressing Tehran to allow safe passage for the vessels. According to the sources, the world's second largest economy gets about 45% of its oil from the Strait. And that is but only one resource that China is sourcing from the Middle east. And they also get byproducts. And our good friend Matt Pines, who is one of my favorite geopolitical analysts working at the intersection of Bitcoin, geopolitics, energy AI, UFOs, if you're into that stuff. But he highlighted that the halt of Qatar's LNG production threatens 21% of global helium supply. So helium is a byproduct of LNG production and helium is a raw input for the chip industry. And so this could seriously perturb the ability of Asia to produce chips at the pace that they would like. If you believe this is playing into the AI race. This is a good way to slow down what the US and the current Trump administration deems as its biggest foe in this race to win the AI war.
- [12:48]
B
Yeah, for sure. I mean, I think over the last year and especially the last few weeks, it feels like you've had two kind of camps emerging. If you're a professional situation monitor, there's the kind of like, USD is dead, US can't win, China's going to eat our lunch. I'll loosely attribute this to kind of a Lou Groman type of framework. I agree with much of what he says, but that's kind of one caricature of a viewpoint you see a lot on, let's say, financial Twitter and financial press. There's another side which kind of takes the opposite view. We can call it kind of the Brenton Johnson framework, maybe the dollar milkshake theory that the US Is top dog, going to remain top dog. The dollar's network effect is so entrenched, we have all these different levers we haven't pulled yet and the US Will come out on top regardless of what happens. And I think there's elements of truth to both. Actually, I like listening to both of those guys. I think they both have a lot of interesting things to say. But I think these couple headlines highlight the way that I have found it to be most useful to conceptualize. All this stuff is just it's the US And China both have strengths and weaknesses. They both have significant leverage points and they both have significant constraints. And we saw last year China really subtly flex some of its leverage points, specifically as it relates to critical minerals and rare earth materials that the US Is very short on. Those are significant for defense. We have a lot of defense applications that have effectively been outsourced to China or like Chinese levered supply chains. And there are materials that China has kind of a chokehold on that are critical for building up the HPC and the AI infrastructure that we need to do to stay ahead on that game and effectively to do the run it hot agenda that Trump wants to do. On the flip side, the US has leverage points too, right? We are the world's biggest energy producer, or at least among them. We are energy independent in a way that China's not right now. As you just highlighted with the prior headline, we do have an advantage on oil. And the other piece that I think people don't emphasize enough is, yes, TSMC is responsible for leading edge semiconductors and that are critical for actually manufacturing the semis that flow into all these AI applications and data centers that are being built out. But the US and US adjacent countries have a chokehold on the machines, effectively the machines that make the machines. Right. So the semiconductor capex industry is basically for players. It's Applied Materials, LAM Research, KLA of which are in US and then asml, which basically has a monopoly on lithography and that's in the Netherlands, but effectively kind of is under US dominion. Basically all of these guys have either admitted to or it's constantly speculated that they have kill switches built into their machines that if China were to ever set foot on Taiwan, basically you just kind of brick TSMC by turning all these off remotely. Technicians never go there again. And that kind of becomes a stalemate. So I think what Pines is getting at here too highlights an interesting element where we also have some subtle leverage and a subtle potential way to push buttons on the semi story. And I think it's all just to tie that back to what we were talking about before. There is this chess match being played. The US does have moves. We are not without weaknesses, but we're also not without strengths. And I think that's a lot of what you're seeing with closing down the straightforward moves. If you were to put your tinfoil hat on, you could say, I do think that the guys at the Pentagon, many of them may have something to be desired in terms of intellect, but I think there's a lot of high IQ there as well. And I got to think that they thought through the asymmetric impacts of closing down the straight up Hormuz if that happened for China relative to the US and so I think that is just the framework that we need to bring to anything that's happening here. Not that China is an entire skeleton key for all of it, but that chess match to me is makes a lot more sense of everything you're seeing than it's all about Israel or it's all about Trump being a complete moron or some other thing. To me, this is the most obvious existential conflict in the world right now. And I think in one way or another it colors everything we're seeing. And you just pull up this great tweet that I recommend everyone go read just about those strategic objectives and the way Trump may be thinking about them.
- [17:13]
A
Yeah, this is from who I've had the pleasure of having him on as a recurring guest on TFTC since I think going back to 2020. And I think Anas, through my conversations with him over the years, it's become clear to me that he is one of the sort of top experts in the realm of oil and gas globally. And to your point, Nikki, he's co signing that message here. And I think if we're talking about the game theory of this all and the leverage that the United States and what we can surmise the Trump administration thinks we have right now, it's like, hey, we need to cripple China in this war for AI and economic dominance globally if we're going into a more multipolar reality, which is certainly going to accelerate from here considering this little sparkle of an operation, sprinkling of an operation over in Iran. But it's essentially the US can stomach some short term pain in the form of higher oil and gas prices. And Trump came out in truth social last night and basically said that hey, yes, there's going to be some short term pain that's going to play out in the long run. And essentially the thesis is if we can cripple the supply lines to critical fuels and resources necessary for large manufacturing in Asia, we're going to be fine in the long run in the United States because as you mentioned we a ton of natural resources ourselves here, not only in the United States but to the north of us in Canada, to the south of us in Mexico and we mentioned it last week, but Venezuela being being sort of the first takeout with their heavy crude and locking that down with our heavy crude refineries in the Gulf. It seems like from an energy perspective we can be inoculated from any, any problems that may persist after, after this disruption in the Middle east because we have the resources on our continent.
- [19:10]
B
Yeah, for sure. To take the other side to the more US Bear side. Some of our constraints show up more on the financial sector and we mentioned our overall indebtedness and the state of the treasury market right now. I think we also got some interesting headlines last week that maybe got a little blurred by everything that was going on in the Middle east and perhaps rightfully so. But the private credit situation has been, we've been documenting it in timestamp and you've been talking about it a lot in the show. You're seeing more and more signs of what Jamie Dimon called cockroaches in the system. And last week we got some pretty notable headlines of Blackstone and blackrock both having pretty big redemptions out of two of the biggest private credit funds in the world. Blackrock actually had to end up gating theirs. You can see down at the bottom right there is the first quarter in which that particular fund saw withdrawal requests exceeding 5% of assets. Blackstone allowed full withdrawals, but that's 8% of the asset base. So pretty significant in both cases, especially given how both of those are blue chips in the alternative asset management industry. And these are highly scaled funds. It's not some tiny $100 million vehicle somewhere. These are pretty meaningful headline funds. And big numbers. I think you can see on the next chart too, just the alternative complex over the last six months, down 20, 30, 40% plus 50% from recent highs last year, showing you there's increasing consternation for a variety of reasons that we've talked about in prior episodes around this complex, which increasingly has played more and more of a role in retiree portfolios, whether directly or indirectly, whether it's people investing in them through different platforms or more often pension funds just allocating major slugs into them on the assumption that this is high quality credit, that it's always going to be money good or very likely money good. And that may well still be true. Not trying to sit here and call this is the big one, this is the start of 08. But clearly there's pressure in the complex. And if you scroll down one more, we also saw last week unexpected softness in the jobs market. And this is even really before you see any potential. Almost none of this had anything to do with AI layoffs as far as the sectors that were hit. But so you could read that as everyone should calm down about AI, or you could read that as you're seeing pain start even before the hurricane really kind of makes landfall. So you look at all those things kind of in tandem and it's like, yeah, we may have a great position from an energy perspective. We may have buttons we can push on the semi side in certain materials and that can bring China to the table in one way or another. But the flip side is the financial situation. The state of American financial markets and what would be required to offset some of this puts us in a position where we may have a shot clock on how much pain we can actually take and how long oil can actually be at 100 plus dollars a barrel, particularly given what that could do to the treasury market. So we should acknowledge on the other side that that's a major dynamic that is going to bear watching as we try over the next few weeks to do whatever it is that we're doing in the Middle East.
- [22:24]
A
Yeah, I think the 10 year is going to be the most important thing. Right. Because why is this, this private credit, private equity, why is the stress emerging? And I think if you've Been reading the tea leaves and just looking back the last six years, I mean, post Covid 2020, 2021, you had the stimulus, you had the ZIRP 0 interest rate policy and persist for a few years there. And a lot of these funds raised a ton of money and then loaded that money into companies at peak valuations that were bolstered up by the money printing. And now here we are in 2026 and a lot of these private equity funds and a lot of the private credit deals that were done are medium duration. So you have like five to seven year loans that were underwritten in 2020 21, 2022, and now you're seeing the first big refinancing waves. Are the companies as profitable as they were back then? Are they cash flowing? Maybe, but you have to refi at significantly higher rates. And I think the market's beginning to see that. And I'm not sure if you caught it, but Steve Eisman had a forensic accountant on his show last week, a gentleman named Tom Grober. I've actually been in contact with, going to have him on TFTC at some point here in the next couple of weeks. But he highlighted that a lot of these private equity funds have taken the Warren Buffett route, or at least have tried to, and acquired a bunch of insurers and reinsurers and have been funneling some of the premiums that have been generated from those insurance properties that they've acquired and pushing it into these private credit and private equity deals. And to your point about retirees having a lot of exposure to this, it's in multiple ways, not only to the funds directly, but a lot of these insurance companies are providing annuities for retirees. And if these private equity funds are taking those premiums for those annuities and putting it into risky private equity bets that need to be refi'd, this could be pretty cataclysmic from a financial perspective here in the United States.
- [24:29]
B
Yeah, there's a good, we referenced a couple weeks ago the Citrini AI report that kind of broke markets for a couple days a few weeks ago. There's a good kind of summary of that, the state of play there in that report, if anyone wants to go back and read that. And it's definitely some bear juice, but worth looking at to be aware of where the bodies might be and where the moving pieces are. But all it is to me just adds up to the thing that I ended the start of the timestamp with this week was just whoever you are Whatever you're doing, if you're expecting, if you're banking on a decline in the size of the Fed balance sheet with all these things going on, and it's not that any one of these things would necessarily cause the big print, not even necessarily saying that's coming, but they stack right. The need to radically reframe the global trade order, to endure whatever pain we're going to have to endure to do what we want to do vis a vis China, to potentially fight, launch new kinetic conflicts around the globe as the private equity and private credit complex melts down, as jobs get softer or whatever, to do all that and think that you're going to shrink the Fed balance sheet back to pre2020 or pre08 levels, you know, as the Morgan Freeman gift says, good luck.
- [25:43]
A
Good luck. Right. That's what I mean. I tweeted out over the weekend, we're getting like double whammy black swan. I think calling the private credit private equity stress of black swan is a bit of a stretch because you can't really see black swans. That's the whole point of them. And if you're paying attention and you're logical thinking about where rates are and where a lot of that, when that capital was deployed and where rates were, then, like, you could see this refinancing wave hitting and causing a lot of stress. And people have been talking about it. So it's a stretch to call that a black swan, but I think what's happening in the Middle east is certainly a black swan, particularly the refineries getting hit and the oil and gas supply chain being as, as, as, as hindered as it has been in the last two weeks. But if you have these inflationary pressures being driven by the energy supply chain chain disruptions, and on top of that, you have the stress in the private equity and private credit markets that they're going to have to print. There's no way out of it. And that's where things get hairy. If the Trump administration can't thread the needle with this conflict in the Middle east and quell markets sufficiently and sufficiently enough and in a timely manner, you could have a situation where you have private credit faltering, needing a bailout and inflation ripping at the same time. And you need to print money as that's going on, and that cannot, that's not a good situation. And with that, we can get to how does bitcoin fit into all this pumping is a stretch. We're up today. We're above 69,000 after falling to 67 high 66s over the weekend.
- [27:31]
B
Yeah. Maybe we can then tie it all back and close on this. But I put this chart in here. This just shows March 4th of last year. Kind of date, kind of pick drawn out of a hat. But well before Liberation Day, going into this big dip that you can see kind of early in the chart is Liberation Day. And then up to a couple months after that, somewhat confusingly, gold gets the orange line. So we know we've won when bitcoin automatically hits the orange line. But the top blue line that you ultimately see there on the right, that's bitcoin from last year. And if anyone was around at the time, you kind of remember around Inauguration Day we peaked and then we just dumped for like two months for no obvious reason. Eventually the equity indices started to catch up too. But then Liberation Day happened and that was basically the bottom tick. Right. The bad news was happened and then bitcoin started to recover a lot more strongly than anything else. And I'm not going to say that we are in a perfect analog to that. But the price action over the last couple weeks increasingly reminds me of that. We had a dump for months on no obvious negative catalysts other than liquidity turning over in the last couple of weeks. We mentioned it last week after on the initial Iran headlines. We dumped a little bit and then started to just kind of recover pretty quickly. And we pumped last week over to over almost 74k, retraced, whatever. But my point is, as you look at it, it's early days, but if you were going to call for a bottom at some point, this is what you'd want to see, right? You'd want to see us consolidating in a range, not oil went to 120 last night and bitcoin went down a little bit and then came back up right now to 69k. This is the kind of action you'd want to see when bad news and increasingly bad news no longer causes dumps to new levels. So it's just worth keeping an eye on. And I'm not going to tell you that the world is now pricing in the big print or everything. We just talked about that the Fed balance sheet needs to expand to accommodate what's going on. I'm not going to say that's exactly what's happening here, but it is nonetheless extremely interesting price action that anyone who's interested in any asset class I think should be. Your eyebrows should be raising when you see something like this.
- [29:43]
A
Yeah, completely agree. Interesting times. May you live in interesting times. John Arnold. The real John Arnold.
- [29:49]
B
Nice. It's certainly working out so far.
- [29:51]
A
All right. This was great. We'll be back next week.