Talking Points
1. Financial markets experienced aggressive swings across major assets and crude oil. The key question is whether current geopolitical risks are temporary or indicative of a more lasting, thematic shift, contrasting with past instances where geopolitical flare-ups were opportunities to fade.
2. Market price action shows the S&P 500 down 0.58% and NASDAQ down 1.1%, signaling a risk-off environment. Bonds are up, resuming their role as safe havens.
3. The Japanese Yen is up, and the US Dollar is down, further indicating classic risk aversion and an unwinding of carry trades. Crude oil is down 1.41% on the day after being up 2% earlier.
4. Bitcoin is up 3.3%, breaking out of its oscillation range since early December. The speaker has made portfolio changes to their Bitcoin position.
5. Recent economic data for November shows wholesale inflation (PPI) came out "hotter than anticipated." Core PPI is up to 3% (expected 2.7%), with the prior month revised to 2.9%. Headline PPI also hit 3% (expected 2.7%).
6. Analysis of wholesaler margins reveals a squeeze since the advent of tariffs, affecting both the beginning and end of the US-based supply chain. Importers have experienced significant margin hits, the largest since 2013, as they appear to be absorbing tariffs to shield downstream demand.
7. While prior CPI data suggested relatively benign inflation (around 2.7%), with goods inflation leveling out and services inflation decreasing, this stability is seen as temporary. If wholesalers are eating tariffs, they cannot do so indefinitely, potentially leading to an unmooring of inflation once costs are passed on.
8. If inflation spikes due to these factors, the Federal Reserve would be in a difficult position to cut rates. Markets currently anticipate two rate cuts this year (53 basis points), a wide disparity from the Fed's projection of only one cut for the year, with others spaced out through 2027.
9. The S&P 500 has not made new highs since October of last year, consistently failing to hold levels above October's highs. This stagnation began after the Fed indicated that markets were overextrapolating rate cut potential.
10. Crude oil shows a clear technical breakout, violating a downtrend extending from mid-last year, with a bottom formed at the beginning of this year. This breakout exacerbates the pressure on wholesalers who are absorbing tariffs.
11. The current crude oil movement is attributed to a larger, long-term discussion involving geopolitical dominoes falling, not just immediate US intervention in Iran. The Venezuelan raid to extract Nicholas Maduro initially did not impact crude, and the ongoing organic uprising in Iran precedes discussions of US involvement.
12. These geopolitical events, including US actions against Russian shadow fleet tankers and the instability in Iran, significantly impact China's oil import mix. China, the world's second-largest oil consumer, would be forced to reshuffle its supply chains, potentially increasing reliance on Saudi Arabia, other Gulf countries, UAE, West Africa, and Iraq.
13. This reshuffling of China's oil supply would make energy more expensive due to logistical challenges and the non-perfect substitutability of different oil grades. This could lead to a squeeze on global supplies.
14. The spread between Brent (global benchmark) and WTI (US benchmark) crude has jumped, indicating stress in global prices. US-based crude is cheaper due to the US being a net exporter, while the global price reflects a potential supply squeeze driven by the impact on China's imports rather than imminent US military action in Iran.
15. A recoil in crude oil occurred after US President Trump's comments suggested the US might not be in a hurry for direct involvement in Iran, even as US allies evacuated civilians and rerouted flights. Despite the pullback, the crude oil breakout technically holds, with the longer-term story of China's supply reshuffling expected to take months.
16. Higher oil prices are expected to filter into US inflation within approximately one month. If CPI follows crude oil's spike, producers will face further margin squeezes, increasing their inclination to pass costs to consumers, which would further complicate the Fed's ability to cut rates and threaten overall risk sentiment.
17. The speaker's current portfolio includes long positions in gold and the dollar. A Bitcoin position was flipped to long a call vertical. Short positions are maintained in NASDAQ and S&P via put verticals. Oil exposure has been doubled with a long position, expecting continued upside. A long call vertical in TLT (bonds) has been added at the long end, anticipating a lift from risk aversion and delayed rate cuts impacting the long end of the curve.