The Economic Fallout of the Iran War – w/ Global Monetary Expert Jeff Snider

本站添加: 2026-05-30

[00:00:04]Hey, good morning Jeff. How are you?

[00:00:06]>> Great. Azie, how are you?

[00:00:08]>> Great. Great. You know, um, everyone seems to be focused on this, you know, the memorandum of understanding theou, you know, what's going on with the on the geopolitical side. You know, we've got the kinetic military side, but I want to focus uh on the more economic side of things, right? uh your work has consistently argued that more important story beneath the surface is really um the liquidity, the dollar funding, you know, bond markets, oil demands, and the the conditions that we're seeing in the markets um and the signals that the markets are sending before, you know, we we see more of this broader economy catchup. So, I want to explore what's going on with the markets. Over the last week, we've seen investors have increasingly embraced these reports suggesting that a framework agreement may be approaching between, you know, the Washington and and Tehran. We saw immediate the reactions even in the oil markets. We saw, you know, the the price of oil drop um the low it's been it's been or close to the low it's it's been since the war started. We've seen um you know shifts in equities and even President Trump recently said the final aspects and details of the deal are currently being discussed and will be announced shortly. Of course, we also hear different messages from Iran and uh representatives from Iran and then we see also differences of opinion with what is in the framework from the US side. So, a lot of this rhetoric and the narratives does impact the markets. I'm seeing that. I want to get your your thoughts on all of this. Um you've written mainstream forecasts were built on one assumption which is China had this underlying res uh resilience. The bond markets disagreed and you also said the bond market is not necessarily a policy tool but it's information in addition to what's going on with this Iran conversation. We do see emphasis also on China and China perhaps also being one of the underlying factors uh in what we're seeing in the region. So I want to get your thoughts on all of this and welcome you today.

[00:02:08]>> Yeah. So I mean you're right everything is geopolitics at least in the short run and even oil prices right now are mostly being driven by maybe qualified optimism that maybe that there is some kind of memorandum of understanding it maybe this time it will actually go through though I I think that's qualified in a in a pretty substantial way because even today you know what oil prices are at 8750 that's not exactly the oil market saying this thing is a done deal it's kind of hedged in both directions there's there's sort of some benefit of the doubt from the marketplace. And I think what we really want to see if there if there if it looks like this is going to go through, we really want to see oil prices drop into the 70s. That would be kind of the signal that the market is saying, okay, we've got enough information that this time it's going to stick because there's just way too many variables to try to game plan otherwise.

[00:02:53]As you said, I mean, who are they even negotiating with on the other side of this? And what, you know, are the people on the other side of this authorized to speak for everybody, right? There's just way too many unknowns uh and variables that uh make it difficult to to try to put together analysis. So, okay, let's look outside of the oil market to see what other signals we're getting. Uh I think the number one topic on a lot of people's mind is of course inflation.

[00:03:18]Will oil prices end up being inflationary across the economy? Because there's an argument that people hear that sounds plausible that when energy prices go up, it has to drive the cost of everything else up. And so I mean you hear it in the media, you hear it central bank officials, they're talking about raising their policy rates because of inflationary impact of oil. What does the market think about all that? And then we actually do have a market that price that prices not necessarily inflation but the CPI version of inflation is called tips. Treasury inflation protected securities. And tips have been consistent throughout this entire episode. And really going back to last year when everybody was going crazy about tariff inflation. The tips market said no that's not happening. And right now the TIPS market is nothing is ever 100% but TIPS is saying there's there's very little inflation risk from the energy shock going on right now. Tips break even rates yeah they got you know the 5-year break even got up to a multi-year high but that's not nearly as impressive as it sounds. And in reality most break even rates have been basically sideways for the last couple years which is the market saying there is zero long run inflationary impact.

[00:04:20]Where there is an impact is in the short run. So yes, consumer price rates go up in the short run because obviously gasoline gets more expensive. That's going to drive a significant part of the CPI. It's going to drive a significant part of consumer experience. But the net effect of that and what's really been lurking behind the marketplace this entire time is the historic energy shock case. Because you go back in time, what you see is that when energy prices go up for non-economic reasons, and these are non-economic reasons, geopolitics and conflict, that just means restriction of supply. Whenever whenever energy prices go up for non-economic reasons, what follows is not inflation. It's the opposite, unemployment. Because businesses who are struggling to begin with, because usually it's a fragile economy that gets hit with gets hit with an energy shock. So you have unemployment goes up because businesses that were struggling can't afford higher energy costs, which you can't get away from. That's the big thing about oil and energy and gasoline, diesel, big one. Uh you can't do without it. It's priced in elastic. If the cost goes up, you got to pay for it. And if you got to pay more for gasoline, your revenues aren't increasing. That means your profit margins are getting squeezed. What do you do? You start cutting back on your workforce. You cut back their hours. You don't give out raises. And in extreme situations, you start laying off workers. So that's been the danger that the marketplace has been pricing. And this morning, we got another reminder of that when Canada fell into technical recession already, even before we get to the the second quarter of this year, really the the main part of the energy comp. France negative GDP print for the first quarter there. some of the uh economic statistics we got yesterday from the US especially the income numbers related to jobs market just absolutely ugly. If you look at um real personal income excluding transfer receipts which is a measure of basically private economy income that one looks like the recession began in October. So what's lurking in the marketplace is the idea that we have a fragile economy not a resilient one fragile economy before we even get to the energy shock. Then the energy shock hits and while it was cushioned for a little while by tax refunds um that came out, consumers were still were still spending primarily on gasoline, but consumers were still spending as long as they had the tax refunds. But once you got a weak economy that was already shedding jobs, incomes that were nowhere near enough to keep up with price changes, it's a pretty bad mix. And then it, you know, this is not just a US phenomena. It goes around the rest of the world. You mentioned China.

[00:06:37]China's in rough shape. Really rough shape. In fact, uh, interest rates there have been moving lower. In fact, the PBOC allowed its medium-term lending facility to drop to a record low, which is something you never want to see. You never want to see central bank rates hit record lows because that tells you the situation is getting to be more and more serious. So that's the I think the market everybody has been talking about Iran the geopolitics oil prices and the geopolitics of oil prices but the the macroeconomy in the background there has been okay if this thing goes on long enough we end up getting the classic energy shock case which means unemployment not necessarily inflation.

[00:07:15]Yeah, you've spent a lot of years, you know, arguing that investors often become fixated on the supply side narrative while missing some of those demand signals. You you kind of touched on some of that when you compare what the equity markets are saying today with what the Treasury markets are saying today. Where do you see that biggest disconnect? You know, Scott Besson has come out recently uh with a lot of statements in including even sanctions against Iran or any country that that deals with Iran. Are those stock pricings uh a world are they growing while the bonds remain kind of skeptical? Are are you seeing indications of that as well or are both markets beginning to converge around maybe perhaps the similar messaging that's coming out?

[00:07:58]>> Yeah, that's the main point of confusion. It always well at least the last several decades. The idea is and then what we're told is that the stock market is pricing it's it's the biggest discounting mechanism you know humanity has ever invented. Therefore, if the stock market is soaring, everything must be fine. Otherwise, why who would own equities? And that's just simply not true. It there's an argument that it's never been true. It's an it's a uh it's a narrative that has been created by Wall Street to give you an idea. Buy stocks. Why not buy stocks? Stocks are information discounting, right? Uh so, and again, it's a big issue because you know, you have politicians that always say, I must be doing well. The economy, look at the stock market. We heard it all the time. Stock market, stock market. Biden said it repeatedly. Look at the stock market. Trump says it repeatedly. Look at the stock market.

[00:08:44]And the truth of the matter is the stock market is a casino. It doesn't p it doesn't tell you anything about the state of the real economy except maybe during recessionary periods when it actually tanks. It's about the only time you get any kind of fundamental signal from the from the uh stock market. So that's really the biggest issue is interpretation. So you can have a bond market that says, "Holy crap, uh France and you know Canada's in technical recession. we just got some really ugly numbers in the US and the stock market's way up here and the bond market says yeah we got trouble ahead and those two things are not necessarily mutually exclusive because stocks are looking at something completely different um and it's even it's more true if use that term uh especially recently when the stock market is is narrowed itself down to basically it's AI or nothing at this point everybody's chasing you know AI momentum in the stock market which makes it appears even more robust than it might actually be so I I think the easiest thing to do uh and really the best thing to do is to set aside the stock market as some sort of fundamental signal because it's really not only the only thing the stock market tells you is how much Americans are saving for retirement because our money goes straight into the stock market. That's the primary vehicle for retirement savings and really all savings. Um and it has been for the last 40 50 years which is why valuations keep going higher and higher and higher has nothing to do with the fundamental economy. It's just where all our money goes. Um, so that's I think the biggest interpretation problem. You see the stock market at record highs and you think, well crap, everything must be fine when that's that's not the case at all. So the two markets um they're they're speaking different languages and looking at very different things. And you look at the bond market, the bond market before we got to the energy shock was saying, "Holy crap, things are going wrong." You saw the two-year Treasury rate, for example, which is a key rate to watch. the two-year Treasury rate got down to a multi-year low on February 27th, the day before the conflict really erupted. What that was telling you is that first of all, economic fundamentals are getting increasingly difficult and increasingly negative. And second of all, they were getting to be so negative that even the Federal Reserve is going to have to lean toward rate cuts this year, even despite the fact that most of the or a good number of people on the FOMC don't want to cut rates. They would rather raise them. Again, that's before we get to the Iran conflict. Um, now the two-year is kind of heading back down in that same direction after pricing the the possibility the Fed might hike rates because it's going to overreact to oil prices. But going back to the uh to that fundamental, you know, moving past oil prices, the bond market is saying, look, we've got a world of problems here. We had a world of problems la last year.

[00:11:12]There was no job growth in the in the United States for the entire calendar year. And that was according to the establishment survey. Job growth last year was like 180,000. That used to be a bad month. That was the entire calendar year of 2025. So even before we get to 2026, the bond market is saying, "Hey, we're not going in the right direction.

[00:11:30]Forget about what stocks are pricing.

[00:11:32]The the the overall economy is in is uh is getting worse, not better." And then the energy shock comes along and it's like, "Hey, history says energy shock, weak economy, you end up with more like something like a recession." And now you're seeing more and more of those signs pop up all over the place. It's like the bond market signal is about the fundamentals in the real economy inside the US as well as outside the US whereas stocks are something else entirely.

[00:11:56]>> Yeah. You've you've also argued um you know speaking of investors you've argued that investors frequently misunderstand these falling rates. You know I I think I read you wrote this quote um failing or falling rates are not stimulus.

[00:12:10]They're more of a negative expectation.

[00:12:13]How does that apply to the current environment particularly when the markets are seemingly optimistic about this diplomatic track that perhaps can get us somewhere out of the conflict that we're in?

[00:12:25]>> Yeah. So that's I mean Milton Freriedman called it the interest rate fallacy way back in the 1960s.

[00:12:30]>> Yeah, I remember.

[00:12:31]>> Yeah. It's it's precisely the opposite of what you get from Wall Street and academic economists which includes the central bank. You know, the central bank wants you to believe that it controls interest rates and therefore can use interest rates as a policy lever. And so, it's convinced people that when it lowers its policy rate, that is somehow stimulus. And let's set aside the fact that there's mil there's multiple steps in between lower policy rates and what would end up being stimulus. But that's what they've convinced people. And it sounds sounds plausible. It sounds logical. Sounds, you know, rational, right? If if borrowing costs go down, how is that not stimulus? would be cheaper for me to borrow, be cheaper for companies to borrow. So, it's probably stimulative. But first of all, it doesn't take into account the perspective of the lenders. Do lenders want to lend when rates go down? Well, they're kind of disincentivized for lending at lower rates because they have lower returns. So, at the very least, the narrative is more complicated than it's made out to be. But what Freriedman was pointing out, what history shows and what Freeman was pointing out was history is that when you look back through history, low rates correspond with periods of tight money and lack of economic vitality.

[00:13:36]Great the the biggest example is the Great Depression. Worst depression we've ever experienced. What were interest rates doing during the entirety of the Great Depression? They were going down, down, down, and they stayed there.

[00:13:47]Conversely, during the great inflation, the most inflationary period we've experienced in modern in modern economic history, what were interest rates doing during the great inflation? They were going higher. They kept going higher to the point by the end of the great inflation, they were in double digits.

[00:14:01]So, as Freriedman said, it's precisely the opposite of what you're told. And what you're told is a narrative that allows the central bank to at least pretend that it's controlling interest rates for whatever reason. It gets back to what central banks are really doing.

[00:14:15]What central banks are really doing is psychological manipulation. If you think the Fed lowering its Fed funds rate, which by the way is not even that important of an interest rate, but if you think the Fed lowering the Fed funds target rate and the reverse repo rate and IR is somehow stimulative and you don't know how that is or why that is, but you just think that the stimulus because everybody says so, then you start changing your behavior and maybe you become the stimulus that the Fed is trying to signal. Now, that's not how the real world actually works, but that's the theory. So what ends up happening in practice is the complete opposite. So the US economy or you know it doesn't matter which central bank we're talking about. The European economy is a good example too. The economy gets to be in increasing trouble. How do central banks respond to growing concerns on the economy? They respond to it by lowering their policy rate, telling people that they're fixing the economy and they're supporting it with accommodative policies. But what ends up happening is they lower their policy rates in reaction to economic weakness. So even the policy rate ends up being just like the Milton Friedman interest rate fallacy which is rates go down among central bankers when the economy is weak. It doesn't fix the weakness. It's a response to it the same as we're seeing in the marketplace. So that's why when you see recessionary periods, what happens, you know, whether it be 2008, 2001, the uh early 1990s, and every recession cycle since the Fed went to an interest rate targeting regime sometime in the 80s, really the early 80s, policy rates go down and you get the recession anyway. It doesn't keep the recession from happening. It's the Fed following the weakness. So whenever you see interest rates going down, whether it be a policy rate or a market rate, it is telling you the market is increasingly nervous. And the reason why that is, it's very simple.

[00:15:56]The part that you never hear. Why would you why would anyone want to own treasuries in the first place? Well, they have low returns, but they're also the safest and most liquid assets that we have. And in periods where safety and liquidity become paramount, you can understand why demand for those assets would go up, like the Great Depression.

[00:16:14]Why would treasury yields fall during a depressionary period? Because you want to own safe and liquid. Same thing with the 2010s. So treasury rates go down when demand for safety goes up, which is the same time that central banks cut their policy rates because they're responding to the same thing. They're not fixing it, they're responding it to responding to it. So the uh the narrative that we're given about interest rates is completely and utterly backwards, which is again another reason why people have so much trouble uh parsing these signals from the from the bond market and interest rates curves.

[00:16:46]interest rate curves even though the fact they're they're really easy to understand once you once you unce you see what's actually going on there. So the the easiest thing to look at is if rates are going down that's not a good sign. You know President Trump last year spent the entire year talking about how he wanted rates to go lower and I'm shaking my head like no you don't want rates to go lower because of what that actually means.

[00:17:09]>> Yeah. You know we do see some of this. I mean I track more the geopolitics side of it and the the narrative around more um than anything going on. My my focus is on that part the words. But but I do see these indications you know you see the markets like I said they seemingly um they they seem more optimistic about this diplomacy track. But then at the same time you see on on the Trump side the Trump administration they tend to they tend to send these different messages. And again, even with Iran, right, you know, kind of moving more into that as well. I want to talk to you a little bit about the Treasury Department, you know, they've dramatically expanded these sanctions targeting Iran's energy relationship with China. Uh, Bessant came out yesterday as well targeting even their their airlines saying that even any ticketing sales will be sanctioned. You know, measures targeting uh petrochemicals. um Hegley, Hegeni, sorry, Hegeni Pharmaceutical, one of China's largest independent refineries, I think it is, um and some of their terminals, the shipping companies, even their vessels. Uh Scott Besson said, "Economic fury is imposing a financial stronghold uh on the Iranian regime, hampering its aggression in the Middle East and helping to curtail its nuclear ambitions." And he also went on to add that, you know, the Treasury Department will continue to constrict the network of these vessels when we're looking at it. Um, you know, even from the straight of Hormos and the the access to this oil, their intermediaries and even the buyers that Iran relies on. So clearly their policy is to suffocate Iran's ability to um, you know, to to gain any funds there.

[00:18:48]Do you do you see any of this as you know this this pressure campaign expanding into shipping aviation these financial networks the logistical uh aspect of it the infrastructure you know do you see any of this you know um really making a difference in terms of the diplomacy side of it or do you think that the markets are going to force the Trump administration to rethink their strategy on this diplomacy track specifically even with the sanctions that they're starting to roll out more aggressively this past week.

[00:19:19]>> Well, yeah. I think the markets, the Trump administration, yeah, they have shown repeatedly that they're in this for whatever whatever their end goal is, they're they're not going to take a bad deal or what they consider a bad a bad deal. So, I think that's that's perfectly consistent what you just said.

[00:19:34]They're they're rolling out additional pressure points that they can try to use to either force the whoever it is in Iran to to the negotiating table under their own terms and to accept the the terms that the US administration has set forward. Um I that's exactly what we should expect from them that they're they they've decided what what they think is the end point here. if they if they believe that it's, you know, the nuclear program or regime change or whatever it is, whatever the uh whatever the minimum acceptable deal is, they're not going to take anything less than that. And so, um they're not just going to sit back and just watch as Iran, you know, try tries to play chicken here because from the Iranian side, their their goal is pretty simple, too. Their goal is to inflict as much pain as they can on the global economy so that you know allies of the United States start complaining and start putting pressure on the US to make a deal or the uh US economy really falls off sharply. The midterm elections go really badly. So the US is going to continue to apply a pressure in that direction trying to get the the Iranian economy to break as Besson said what was it yesterday? You know the the Iranian economy is is on the on the cusp of collapse. At least that's what he said or what he claimed.

[00:20:42]and Iran all they what they think they have to do is just wait as long as they can before oil prices really break the economy down and may may already have achieved that goal. Um so I don't you know that's why the market reaction to me is um is qualified skepticism because there is a lot of uh a lot of details a lot of things to work out but I think the other point that you made here about the markets act behaving optimistically is some of that is shortterm focus if you believe that the Iran conflict is the biggest negative factor for the entire global economy and oil prices are the biggest boogeyman out there that is creating all of these negative pressures then it stands to reason if Iran breaks it then the end of the Iran conflict would fix everything. So the chances that the Iran conflict gets wound down in some favorable fashion therefore would mean you tend to be a little bit more optimistic. I think that is over that's tremendously shortsighted and it dismisses a whole lot of other issues that are going to be increasingly relevant as we go forward including food prices. Uh whether the Iran conflict gets wound down tomorrow or not, food prices are on track for a pretty substantial increase later on this year to begin with. That's already in the in there. And like I said, we already have economic weakness that's that's growing.

[00:21:52]But in the short run, a lot of these narratives do have an impact in markets across the short term. If you think the Iran conflict is the only thing holding back the economic growth and e economic potential, then a possible end to the Iran conflict becomes this huge positive euphoric thing that everybody can gather around. And the more likely it appears to be that that's the case, the more shortrun euphoria really starts to get into it. Which, by the way, I think is what the Trump administration has done masterfully. They have managed these expectations. As you said, Azie, I mean, they've they've managed oil prices uh exceptionally well. Every time oil prices started to creep up, what happened? There would be a truth social that came out or a speech that said, "Oh, Iran deal. We're we're very close.

[00:22:33]We got a ceasefire, right?" And then oil prices really go right back down and then they go >> ahead. You know what's funny, Jeeoff?

[00:22:39]I'm sorry to interrupt you, but you reminded me of one of the most, I don't know, bizarre, but but really, really in-your-face consequential moments throughout the whole war. Do you remember that weekend where Trump said, you know, if this doesn't happen within the next 48 hours, we're going to obliterate them to the stone ages. That morning, is it was a m, you know, that was over the weekend. By Monday morning, I saw I think it was like maybe six times, I saw how the markets reacted back and forth, back and forth, back and forth. It was I I would say that that particular Monday morning by far out of all of the days from the start of all of this was the most, you know, um chaotic and and and bipolar because it was literally every 30 minutes >> you would see go up, go down, go up, go down, you know, >> not by small moves, right? It was like gap up, gap down, gap down.

[00:23:30]>> Yes. Yes. Yeah. It was it was insane. I was watching all that. I was like, "Okay, wow." you know and uh when I was analyzing it later and we did you know a space about it even discussing it it was just you know trying to go through the timeline it was just it was bizarre but you know one of the things you've repeatedly argued uh is that markets often underestimate the second and third order consequences you know you kind of touched on some of that right now as you were talking if policy makers are really successful in restricting Iranian exports while they're you know simultaneously targeting the Chinese refineries some of the ports you know the shipping firms Where would you expect those consequences to emerge first?

[00:24:07]>> Well, I think it just it look the the clock has been running from the very beginning. And again, the Trump administration knows this. They know they're up against uh just from the from an oil energy only perspective. Uh the the system, the global energy marketplace has been able to withstand what it really is a historic energy shock. As the IEA had said not long ago, what was it last month? This is like 1973, 1979 and 2022 combined. The amount of oil flow that has been restricted is absolutely mind-boggling. You're talking about something like on the order of 20 million barrels per day, which is, you know, like almost 20% of global daily supply, which is absolutely I mean, you can't comprehend how big of an oil shock that is. And one of the reasons why it doesn't seem to be the case is because the energy marketplace had the wherewithal to withstand that. But the you know strategic petroleum reserves and releases from there inventories that were building up before the Iran conflict started those have been drawn down but those are finite and so the clock has been ticking from the very beginning. At some point the amount of oil that we have just kind of loosely hanging around after the initial shock and and stuff moved around a little bit is being drawn down. I think it was Chevron, the CEO of Chevron the other uh was it yesterday came out and said if we don't do something in the next month or so, oil prices aren't going to gap up to like 110. They're going to go to 150 or 170 because inventories have been drawn down so far. We're getting to the point where we've never seen inventories this low before. And when inventories get to be low, people start panic buying and then you get to some of the some of the more adverse scenarios. So the energy marketplace is is there's a clock ticking down there and obviously the Trump administration knows it. But you know backing up from the Trump's administration's perspective if you're if you're if you're entering a conflict like this which you know the big danger was always going to be the closure of the straight or hormuz and therefore energy prices what are the two things that you need to do to keep people in it not just to lose the American public and the American voting public right off the bat. We got to give people some sense of we're managing the downside, which would be oil prices, keeping a lid on them, which again the Trump administration has done really well, keeping oil prices from skyrocketing to where they really should be. And the other thing is to keep people relatively optimistic by boosting the stock market because that's the signal most people get. And Trump has done very well with, you know, every once in a while um he'll say something, stock goes, you know, stock market goes flying higher. Usually it's the same thing, right? Trump says we're close to a ceasefire. Oil prices fall, stocks sore. So that's the sort of the psychological manipulation that the administration has been engaged in. At the same time, all that's been taking place, it um it's been easy to tr to it's been easy to not see the the behindthe-scenes stuff which uh is much more much much less happy and optimistic because you have as you mentioned not just sanctions but the possibility of restraining oil trading economic activity. not a huge way but you know across the margins which would just make the situation even more difficult um as the clock continues to tick down. So all of the stuff that the US administration is doing is in line with their policy and in line with their strategy and goals and they do realize that there is a downside there. what they think they're hoping and what they're really betting betting on is that all of these negatives that are piling up behind the scenes that people don't see because oil prices seem relatively low, stock prices are relatively high, they can get this stuff all wrapped up and resolved before the real consequences be really start to hit. And you mentioned the second and third order effects, it might actually be too late for those. And second order effect is nothing more than something happens and then something else responds to it. The something else that responds is a second order effect. So when energy prices go up, the second order effect according to central bankers might be inflationary, but in reality and according to the marketplace, the second order effect would be companies start ditching employees. And so you get a rise in unemployment or you get a you get a restriction in economic activity.

[00:28:06]U whether it be from an oil shortage or from the response to prices. So, some of those second order effects have already started to show up, which means that they're they're accumulating even though most people aren't aware that they're accumulating because you look at just the oil price or the stock market and you think things seem to be relatively optimistic. And then that's fed by, you know, every time something comes out, oil prices collapse, stock prices soar, and it seems like the market is pricing these optimistic scenarios and it it creates this narrative that it's all about Iran, it's all about the bottleneck, it's all about um you the conflict. And if once the conflict is over with, and as Trump said, we're we're in the last stage of the conflict.

[00:28:44]We're done. This this thing's going to wrap up. You can see how people would be relatively optimistic or at least easily more optimistic than pessimistic.

[00:28:53]>> Yeah, I I I see a lot of that. I want to move to the straight of hormones a little. Um, you know, it seems like the center of gravity both from a military standpoint, from a diplomacy, political standpoint, and we also see from an economic standpoint is kind of like that center of gravity for the global economy in the current moment that we're in to an extent. You know, markets are continuing to react to these conflicting reports as we've been discussing. Um, you know, there's the military activity, the sanctions, um, and the future structure of whatever maritime transit.

[00:29:26]In fact, um I don't know if you you saw this as well, but there seems to be some kind of dispute um emerging out of Iran saying, "Okay, no tolls, but we're going to start charging an environmental fee, and we're going to also work with Oman as a partner to start charging this environmental fee for navigation traffic." You know, you had Secretary Basin come out and say the United States government will not tolerate any effort to impose any kind of tolling system or or fee on there. And then you have you know Iran's foreign minister's office saying there is no toll but saying it's more for you know navigation of preservation of the ecosystem of the strait the Persian Gulf Cman etc. And so it will have costs. I also saw some report in a statement coming from S&P Global's um Ernsburgger who said you know uh people are afraid there and and they're afraid to take a position you know um with so much mixed messaging going on about the status of these negotiations um and this principle of I think you put it the principle of freedom of maritime flow that's really at stake here and then we also see what Brent crude is doing in all of that one of your most widely discussed uh you know observations that I've seen I I was looking at this during this crisis is when you wrote this is not influ inflationary and you talked a little bit about the inflation you know towards the beginning we were talking you said oil shocks never are and I think you said something to the effect of history is conclusive on this and and you mentioned the 70s and all of that when why do you think investors economists and policy makers continue to view oil shocks primarily through the anti-inflation lens you know when perhaps history often suggest something very different. You know, you talked about some of the other aspects of all of this, but that specific aspect of it and your statement is is, you know, telling in the moment that we're sitting in right now.

[00:31:18]>> Well, I think there's a couple things that are really important is the I think more as much as the nuclear aspect of the Iran conflict, you know, the US has been pretty adamant they're not going to end the conflict or end the blockade or any of their pressure points without getting the nuclear nuclear matter settled. I think that's one of the I hate to use the term red line because it's overused, but I think that's one of the red lines for the Trump administration. And I was I think it was on I was on with Mario on Friday when he told me he was speaking to people um within the Middle East, a former UAE official I think he brought up who said that the straight of Hormuz is another red line where a lot of the UAE, Qatar, Kuwait, maybe even Saudi Arabia too. I don't know. I don't want to put words in his mouth and I think you know just he kind of mentioned it where a lot of the other parties in the Middle East conflict say we also have to settle the straight of Hormuz issue because we can never have this happen again. And I think that might be a primary sticking point going forward as well where the US is saying look Iran you can no longer have control or at least you can no longer have complete control of the strait. The strait has to be has to be um governed and guided by probably some kind of international body. It's no longer an Iranian thing. Um even though Iran is trying to put together an agreement with Oman and I think that's another key sticking point that uh makes this much more delicate and much more uh complicated to get done and wind down then certainly the marketplace is appreciated. If that is an issue that has to be settled before the conflict ends then I think we're in for a much longer conflict than people are anticipating certainly in the short run.

[00:32:46]I mean, Trump can say that we're in the last stages and technically negotiating who who controls the straight of Hormuz could be in the last stage, but that last stage could linger on for weeks and weeks and weeks because that would be a tremendous sticking point, a huge sticking point because Iran, that's their only leverage. That's what they have. They don't have a military capability to lash out beyond, you know, sending missiles and drones in a couple places. Their only leverage is, you know, asymmetric warfare is we can we can influence and heavily influence the price of oil and therefore inflict economic pain on the rest of the world.

[00:33:18]So Iran's not going to want to give up control of the straight of Hormuz. And the other side of that is having gone through this experience, nobody else is going to want Iran to have control of the straight of hormones. So, as much as there is optimism about ending this conflict, I think people are jumping the gun because it's, you know, again, give credit to the Trump administration because they paint this narrative that, hey, it's it's going to be done in 48 hours, then two weeks later, oh, it's going to be done in the next 24 hours and then two weeks later it's, you know, they constantly paint this narrative that's it's getting done. It's getting done. It's getting done. We're moving closer. We're moving closer. Moving closer. And for the oil market, the closer it gets to a resolution, oil prices are absolutely going to plummet.

[00:33:57]So that's always there and that's that's one reason why oil has seemed to be relatively sanguin but I think a more realistic interpretation is this thing is going to linger on for quite some time and then the other part of that if that's true and even if it doesn't I mean we may have passed the point of no return you know going back to the issue of an energy shock historically uh energy shock is pretty simple when oil prices go up because oil is priced inelastic which means you got to pay the whatever the cost is uh because because energy is so interwoven into the the modern society, if prices go up, you got to pay for oil. But when prices go up for non-economic reasons, which means, you know, the the economy is not getting richer, consumers are not doing better, their wages aren't going up and their pace is not going up. Therefore, there's more demand push pulling oil prices up.

[00:34:41]Oil prices are going up for non-economic reasons. You know, supply is being restricted. That means there isn't, you know, economic growth isn't advancing the same rate oil prices is. So, because you have to pay for energy, we have no other choice. I mean, yeah, when oil prices get to be really high, it does lead to some demand destruction where people start to cut back, but really even that's limited. I mean, you've got to drive to work, you got to drop your kids off at school, you got to go to Walmart to buy more and more uh low brand products. Um, so you really can't get away from energy. So, when energy prices go up, what do you do? Well, you've got to cut back in other areas.

[00:35:15]So that's one reason why oil prices don't become inflationary because as oil prices go up, prices of other goods come down and other goods and other services start to come down because they're seeing drop off in demand. You pay more for oil but you got less to you know to for a subscription to Netflix or something like that. And that's exactly what we've seen by the way uh consumer price rates around the world. Uh whether it be the UK, Japan, uh what was the one that came out today? I forget. Let's forgot off the top of my Oh, Germany. uh German consumer price rates. Uh you would think that with energy costs going higher and higher, CPIs would be accelerating rapidly. But we're seeing the opposite take place in place after place after place. CPIs are decelerating. They're not crashing.

[00:35:55]They're not dropping, but they're decelerating because we're already seeing weaknesses across the services economy. As consumers pull back, you pay more at the gas pump, you have less for services. You know, less vacations, less, you know, eating out, less dining out, less stuff like that. That's why energy shocks tend to be recessionary because after energy shocks destroy too much demand through higher prices, it leads to demand destruction in in the rest of the economy which ends up leading to, you know, higher unemployment. So the longer the energy shock sticks around, the greater the probability that we end up with the recession consequence, not the inflation consequence, which explains a lot of what the markets are really pricing outside of stocks.

[00:36:37]>> Yeah. Speaking of shocks, uh, one of the things that you said which I found a very fascinating observation throughout the whole crisis was you said that oil shocks become dollar shocks and that massive dollar squeeze, you know, that that's been building up um, you know, contributes to some of these shocks. And you also said importers across Asia are scrambling. I I think you said something to the effect of, you know, for the dollar funding while these banks don't want to provide these dollars. You know, one of the reasons your work, I think, stands apart um in in this conversation here is that you don't just stop at the commodity itself. You look at what happens inside that monetary system after that shock. So, I want to just kind of spend some of the rest of our time a few minutes talking about, you know, when you say an oil shock becomes a dollar shock, what exactly are you describing? What happens inside that global financial system when countries suddenly need more dollars to secure the energy? um you know while these financial institutions become more cautious about extending the credit.

[00:37:37]>> Yeah, that's I think you know big picture terms that's one of the the you know why are the markets so optimistic about Iran. It's they tend to focus on very narrow narrow uh issues. When you when you broaden out and start to look at uh more of the stuff that takes I mean we live in a complex system uh we operate in a complex system which means if something big happens over here they're going to be ripples throughout the entire system. Uh there's just no getting away from it. There's ripples in geopolitics. There's ripples in so society. There's ripples across the economy. And there's also ripples in the monetary system. And the reason why energy shocks become dollar shocks is because everybody needs dollars to buy energy. And if the cost of energy suddenly goes up right away in an unex unexpected fashion, everybody needs a lot more dollars to pay for the higher cost of energy. Plus, in the initial stages, uh, especially across Asia in this particular episode, um, everybody, you know, oil prices didn't just go up, meaning you had more dollars to pay for, you needed more dollars to pay for higher oil prices. You had to buy a whole lot more oil because you thought you bought oil, but now it's trapped in the Persian Gulf when you had to buy, you know, alternatives. So, it was almost like a double energy shock or a double energy shock leading to a double dollar shock. Now, a dollar shock is simply, like I said, everybody needs dollars to buy these international commodities, oil being the primary one.

[00:38:49]So if energy costs go up in an unexpected way, you got to have more dollars to do so, which is not as easy to do. It sounds like it should be, oh, just go, you go find more dollars. Uh it's not that simple. Uh the system doesn't have that kind of spare capacity. And at the same time, people who do have dollars, dollar providers across the global system, they tend to be a little bit more reluctant to provide dollars in situations where the risk continue to go higher and higher and higher because they want to have those dollars come back to them. They want to lose. Um, so what ends up happening is you get double whammy.

[00:39:20]There's actually a triple part of that which I'll get to in a second. But the double whammy is demand for dollars suddenly goes way up. At the same time, the supply of dollars or really the circulation of dollars starts to go down because people who have dollars are a little bit more reluctant to provide them, especially to people in places where they're going to experience the consequences from the energy shock first and foremost. So if you're Indonesia, for example, Indonesia needs a lot of energy. They get a lot of refined products from China. China doesn't have as much feed stock coming from the Middle East. Suddenly, Indonesia needs a lot of dollars to try to find gasoline and diesel fuel and jet fuel from other places. So, they need a lot of dollars to do that. However, dollar providers look at Indonesia and say, "Maybe I don't want to lend you some dollars today because uh you're one of the weaker economies out there. There's a lot more danger. I'll give you dollars, but I'm going to mark up the price up to here." So, it becomes much more difficult and more expensive. And we see that happen through falling currency exchange rates. So you look at the Indonesia rupia and the Indonesian rupia which is continuing weak to begin with but when the energy shock showed up it just absolutely fell off and that was the dollar shock part of it and the Indonesian government has responded to it with capital controls the uh central bank in Indonesia just hiked its policy rate by 50 basis points. So the Bank of Indonesia and the the government of Indonesia, authorities in Indonesia are are telling you, look, we're having a dollar problem here and we're trying to do our best to deal with it, but it's really not working because the dollar system itself is not during an energy shock period. It's it's everything lines up against you. And then again, the third part of all this, what really restricts, what helps restricts dollar flow is that a lot of dollar flow, especially to the rest of Asia follows oil, which means the Middle Eastern dollar centers like the UAE. UAE is a very big dollar center um because you have a lot of oil, you know, oil sales internationally means a lot of dollars are flowing into the Middle East and then those dollars that flow in the Middle East get redistributed across the rest of the world because, you know, the Middle East doesn't need all those dollars. So, they have those dollars that they lend out through, you know, short-term money markets. They make longerterm investments. So, the Middle East is a key contributor to dollar flow throughout the rest of the world. And the Middle East isn't selling as much oil as it used to. It has less dollars coming in. there's less dollars from the Middle East that are available to be recirculated and you end up with this you end up with this toxic mis mix where demand for dollars is going up at the same time supply is being restricted and it creates all sorts of problems and havoc and and in places you might not expect too not just Indonesia look at Japan Japan just came out today and basically admitted they wasted $75 billion in reserves trying to defend the yen that is right back down to around 160 again to begin with that's the dollar shock effect rippling through the entire economy hitting or the tri entire monetary system uh impacting the Japanese and the Japanese currency exchange rate which has further consequences down the road too. So that's a great point that you made that you know you often focus on one issue okay just oil or even just the straight of horos when there's all these ripples that go out go through the entire complex system.

[00:42:22]>> Yeah. Um I want to thank you for being with me today and and uh discussing some of this. I just have like one very quick final rapid fire question for you. As you watch these negotiations unfold over the coming weeks or even days, what is that one chart or one market or one indicator that you'll be watching the closest in all of this that maybe even our our viewers would be interested in tracking?

[00:42:47]>> One chart. I always say you never want to look at one chart because you know there's always >> I know that's why I'm challenging you on this. I'm taking you out of your comfort zone.

[00:42:58]>> Yeah. So, I mean the the the problem is there's a lot of ambiguity in charts and so you you look at one signal and then the immediate instinct has to be I got to look other places to see if I'm seeing the same thing in other places.

[00:43:09]So, that's what makes it challenging because you never want to fall in love with one chart. But the one if I had to pick a single chart would be something >> or one market or or indicator. It could be any one of those three.

[00:43:20]>> Yeah. I think the most important thing that we're really watching is just a very simple indicator. It's a It's not, you know, definitive, but as a starting point for analysis and investigation, you watch the two-year Treasury yield.

[00:43:32]The two-year Treasury yield is sort of the it's sort of the middle point or nexus between a whole lot of factors that come into play, whether it be, you know, central bank policy rates and the reactions as well as the fundamentals across the real economy. The two-year Treasury rate is a big one. So, when the two-year Treasury before the Iran conflict got down to a multi-year low, that was a signal. Didn't didn't matter.

[00:43:51]The Fed was saying they didn't want to cut rates. the the market was saying, "Yeah, the economics uh the economic outlook here is getting worse and worse and worse. The Fed may have to cut rates. Rates going down are not a good thing." But then the Iran conflict shows up and what happened to the two-year Treasury? It starts to pop up again. Not because the market was was was uh forecasting inflation, but it was forecasting that central bankers would respond to energy by hiking rates or there was a possibility. they would see oil prices as inflation and therefore there was a chance that short-term rates were going to go up and that popped the two-year Treasury higher as as a um as sort of a uh a guide to how the market was thinking central banks might react to it but but then the two-year didn't get all that high to begin with. Now it's moving back lower again. So there's a lot of information in the two years spot of the >> So we'll watch that the two years. So everybody watching that's what Jeff likes to watch here. Thank you so much Jeff for joining us. I I'm sure I'll see you again as as all of this develops and the markets react. So, thank you again.

[00:44:47]Happy Friday.

[00:44:48]>> Yeah, you too.

[00:44:50]>> Okay. Bye.