I think you're discounting how much core Europe is already suffering, and to your point of German unemployment... I am afraid you should not fully believe the Bloomberg provided stats. I'm assuming they're using the highly "beautified" official statistics? If so, the unemployment is masqueraded by a lot of statistical massaging -> people that are actually unemployed but currently in *mandated trainings*, to give just one example, *are excluded from "unemployment"* since the mandated training (there are other reasons to be excluded, but it's "complicated" as they say. - there are many other peculiarities for that data set.
Just thought to share that little tidbit as it is relevant to what you're saying in regards to energy being utilized as a weapon. I agree with the rest of your logic, but I fear the impact is way worse than an unemployment number would be able to state. Energy costs are through the roof, affordability is at a bottom, inflation hits the lower quartile hard and I personally think the country is if not in prolonged recession at least caught in agonizing stagnation for the past 3-5 years ever since lockdowns.
TL;DR: Germany's economy is not as well as these numbers look on a glimpse. Stagflation is already there. Just no one talks about it - obviously from an official standpoint everything's dandy.
"The Europe is stuffed" view hard to square up new all time highs in Dax and Eurostoxx in February. Same with the the sell off in back end yields... big difference of course is austerity versus non-austerity policies.... my view is non-austerity continues... which is what the bond market says too.
Oh yeah, don't mistake bottom level economic outcomes (population level) with spending at the government level (there is a huge dissonance here imho) - thanks to the debt-infused new budget there's no austerity to be seen for now.
Maybe also a great expression of how "the market" is not long-term as Graham said... weighing on short-term vs betting on sustainability (if you're into buy and hold vs. trading where the money flows only).
My view is there's also a lot of capital seeking other havens and the DAX and EUROSTOXX looked underpriced (they also do to me). This is all true on a pure valuation-to-corp value basis -- but they're buying into a lot of current uncertainty that is not yet baked in (imho) based on what's happening in Energy. Prices will get wild potentially for natural gas (LNG).
That aside: If you measure on a pure metric basis vs. the overpriced US valuations (even still) the EU stocks are way more in the value range than many on the US side. I'd hope the market is right and I'm skewing too negative here.
Interesting take as always. Only pushback I would have is that trying to get regime change in Iran will be very difficult. It was assumed it would be quick like Venezuela; I say this based on Trump's first communication as soon as the war started as he asked the Iranian people to take their country back. Instead we found out that the IRGC is deeply ingrained and they have military assets that can be hidden in their topography. They have been preparing for this for decades and the Iran/Iraq war should be a lesson as to how long they can survive. I think there is an off ramp here, but regime change IMO is going to be v v tough and installing a western puppet will once again lead to instability.
Dont disagree - just saying the "energy weapon" of closing the straits of hormuz does not look that effective - and the longer this drags on, the less effective it becomes...
I just look at markets and economics. Objectively speaking, the US becoming an energy exporter makes it more resilient to energy disruptions. I also note that Israeli asset markets have barely weakened in response to the War. I think I practice objective thinking rather than wishful thinking
Fair point. But they did need to sell oil to finance that war. If we get evidence that China wants this war to drag on like in Ukraine, then we would have to think it drags on then...
This is my exact point.. Iran also has an interest in getting oil to flow... its an empty threat... and if only lets Iranian oil flow, then Saudis will likely start blowing up Iranian oil tankers, and so does a deal with Saudi then eventually all the oil flows....
Yes that would bring us back to “tanker wars” scenario Iran vs Iraq (where US had a mini incursion with seal team), how I see it, is that Iran is more prepared this time around (drones etc) and us doing the same playbook as the eighties. (Oil glut) Yes oil will flow but Iran will decide how much and where. The tanker wars iran lost essentially 1) military was outmatched 2) saudi/soviet/Kuwait ramped up production. we’ll see I can’t see a regime change scenario in the short term.
Other sources highlight risk of systemic collapse if Hormuz closed for another 2-3 weeks (e.g. Craig Tindale, Jeff Currie, etc), is that not relevant to you?
I agree that this can be very bullish when the dust settles. Not just for the Middle East but also for the West, because of the hammer blow regime change would deal to China. But the issue for yields here is v complex. Oil spikes lead to lower oil prices down the line and lower growth - maybe pulling down yields?
I know what to own now, but I am confused what to buy when oil peaks. Where should the Oil allocation go on regime change? Hard to think SPX makes new highs in any circumstance. Is it Gold perhaps, that is the biggest beneficiary of regime change? Maybe Copper? You could tactically buy Consumer stocks but it seems too tactical to me.
I agree. Attacking your friends and neighbours seems a desperate strategy and has turned almost everyone against them. The Russians and Chinese won’t bother to help. The consensus view seems to be this goes on forever and massive disruption to the global economy. I always bet against consensus.
Hi Russell, main issues I have with this view is 1) if it’s about regime change why the US have so few troops in the region, hearing from military experts that with <100 000 soldiers a ground invasion is out of question 2) in order for Iran to over-play his hand and drag other powers into the conflict (you mention Saudi, but it’s not clear how much more they can do that the US and Israel couldn’t - I would think more about China/France in case), the US must be willing to tolerate a lot of market pain, not obvious they are willing and 3) yes, war accelerates trends and bonds reaction is telling, but at the same time the repricing in short terms yields seems way overdone
The point is that Iran's weapon of closing the Strait of Hormuz does not hurt the US that much - and basically makes it impossible for any of the regional players to go back to the original state of affairs.. The longer Iran plays hardball, the more the rest of world diversifies energy sources. Either way Iran loses.
Lack of consideration for the timeline required to diversify energy sources seems extremely naive….you sound like just flipping a light switch, in the meantime the global economy down the drain
Its not an opinion - just an observation that Europe was able to cope with much higher gas prices in 2022. And Asia was also able to cope with much higher LNG prices at that time too. Also - Iranian "allies" like China and India I am sure would like to get some energy flow - so risk is far more nuanced in my view.
Make sense. Counter arguments would be that so far the impact has been dampened by the use of strategic reserves, drawing of oil inventories on the sea, and lifting of sanctions on Russian and Iranian. There’s a view that the market isn’t extrapolating the current shock to energy supply exactly because it would be too large to be tolerated for more than some weeks.
Thats reasonable. Markets have been late to react to many things in recent years such as Covid - but ultimately markets have moved back to highs fairly quickly...
I think you're discounting how much core Europe is already suffering, and to your point of German unemployment... I am afraid you should not fully believe the Bloomberg provided stats. I'm assuming they're using the highly "beautified" official statistics? If so, the unemployment is masqueraded by a lot of statistical massaging -> people that are actually unemployed but currently in *mandated trainings*, to give just one example, *are excluded from "unemployment"* since the mandated training (there are other reasons to be excluded, but it's "complicated" as they say. - there are many other peculiarities for that data set.
Just thought to share that little tidbit as it is relevant to what you're saying in regards to energy being utilized as a weapon. I agree with the rest of your logic, but I fear the impact is way worse than an unemployment number would be able to state. Energy costs are through the roof, affordability is at a bottom, inflation hits the lower quartile hard and I personally think the country is if not in prolonged recession at least caught in agonizing stagnation for the past 3-5 years ever since lockdowns.
TL;DR: Germany's economy is not as well as these numbers look on a glimpse. Stagflation is already there. Just no one talks about it - obviously from an official standpoint everything's dandy.
"The Europe is stuffed" view hard to square up new all time highs in Dax and Eurostoxx in February. Same with the the sell off in back end yields... big difference of course is austerity versus non-austerity policies.... my view is non-austerity continues... which is what the bond market says too.
Oh yeah, don't mistake bottom level economic outcomes (population level) with spending at the government level (there is a huge dissonance here imho) - thanks to the debt-infused new budget there's no austerity to be seen for now.
Maybe also a great expression of how "the market" is not long-term as Graham said... weighing on short-term vs betting on sustainability (if you're into buy and hold vs. trading where the money flows only).
My view is there's also a lot of capital seeking other havens and the DAX and EUROSTOXX looked underpriced (they also do to me). This is all true on a pure valuation-to-corp value basis -- but they're buying into a lot of current uncertainty that is not yet baked in (imho) based on what's happening in Energy. Prices will get wild potentially for natural gas (LNG).
That aside: If you measure on a pure metric basis vs. the overpriced US valuations (even still) the EU stocks are way more in the value range than many on the US side. I'd hope the market is right and I'm skewing too negative here.
Interesting take as always. Only pushback I would have is that trying to get regime change in Iran will be very difficult. It was assumed it would be quick like Venezuela; I say this based on Trump's first communication as soon as the war started as he asked the Iranian people to take their country back. Instead we found out that the IRGC is deeply ingrained and they have military assets that can be hidden in their topography. They have been preparing for this for decades and the Iran/Iraq war should be a lesson as to how long they can survive. I think there is an off ramp here, but regime change IMO is going to be v v tough and installing a western puppet will once again lead to instability.
Dont disagree - just saying the "energy weapon" of closing the straits of hormuz does not look that effective - and the longer this drags on, the less effective it becomes...
Is this author a Zionist engaging in wishful thinking?
I just look at markets and economics. Objectively speaking, the US becoming an energy exporter makes it more resilient to energy disruptions. I also note that Israeli asset markets have barely weakened in response to the War. I think I practice objective thinking rather than wishful thinking
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Its like both sides have chosen the "screw thy neighbour" path with no success to date with that strategy.
A reminder - Iranians fought Iraqis for 8 years with a million dead.
I'm writing in my quiet Dubai house at 03:30, 31 March as a military jet, afterburner roaring, passes high overhead.
Fair point. But they did need to sell oil to finance that war. If we get evidence that China wants this war to drag on like in Ukraine, then we would have to think it drags on then...
Is the strait closed? only for some, read that Thailand made some sort of arrangement to get oil more nations will follow
This is my exact point.. Iran also has an interest in getting oil to flow... its an empty threat... and if only lets Iranian oil flow, then Saudis will likely start blowing up Iranian oil tankers, and so does a deal with Saudi then eventually all the oil flows....
But with the negative aspect of every buyer looking to buy other sources of energy...
Yes that would bring us back to “tanker wars” scenario Iran vs Iraq (where US had a mini incursion with seal team), how I see it, is that Iran is more prepared this time around (drones etc) and us doing the same playbook as the eighties. (Oil glut) Yes oil will flow but Iran will decide how much and where. The tanker wars iran lost essentially 1) military was outmatched 2) saudi/soviet/Kuwait ramped up production. we’ll see I can’t see a regime change scenario in the short term.
Other sources highlight risk of systemic collapse if Hormuz closed for another 2-3 weeks (e.g. Craig Tindale, Jeff Currie, etc), is that not relevant to you?
I worry about it - but as we saw with Russia turning off the natural gas tap in 2022, the global energy system is much more robust than it used to be.
I agree that this can be very bullish when the dust settles. Not just for the Middle East but also for the West, because of the hammer blow regime change would deal to China. But the issue for yields here is v complex. Oil spikes lead to lower oil prices down the line and lower growth - maybe pulling down yields?
I know what to own now, but I am confused what to buy when oil peaks. Where should the Oil allocation go on regime change? Hard to think SPX makes new highs in any circumstance. Is it Gold perhaps, that is the biggest beneficiary of regime change? Maybe Copper? You could tactically buy Consumer stocks but it seems too tactical to me.
So far, I would suspect winners before the war return to be winners after the war.
Yes. Already some signs of it re-asserting itself, even within equities
gold and oil up on friday was a good sign of this too
and again today
oil flat today...
was up earlier when I was writing
I agree. Attacking your friends and neighbours seems a desperate strategy and has turned almost everyone against them. The Russians and Chinese won’t bother to help. The consensus view seems to be this goes on forever and massive disruption to the global economy. I always bet against consensus.
Bond market is not signalling recession. More likely we get increased investment into renewals and non Mid East energy sources.
Hi Russell, main issues I have with this view is 1) if it’s about regime change why the US have so few troops in the region, hearing from military experts that with <100 000 soldiers a ground invasion is out of question 2) in order for Iran to over-play his hand and drag other powers into the conflict (you mention Saudi, but it’s not clear how much more they can do that the US and Israel couldn’t - I would think more about China/France in case), the US must be willing to tolerate a lot of market pain, not obvious they are willing and 3) yes, war accelerates trends and bonds reaction is telling, but at the same time the repricing in short terms yields seems way overdone
The point is that Iran's weapon of closing the Strait of Hormuz does not hurt the US that much - and basically makes it impossible for any of the regional players to go back to the original state of affairs.. The longer Iran plays hardball, the more the rest of world diversifies energy sources. Either way Iran loses.
Lack of consideration for the timeline required to diversify energy sources seems extremely naive….you sound like just flipping a light switch, in the meantime the global economy down the drain
Its not an opinion - just an observation that Europe was able to cope with much higher gas prices in 2022. And Asia was also able to cope with much higher LNG prices at that time too. Also - Iranian "allies" like China and India I am sure would like to get some energy flow - so risk is far more nuanced in my view.
Make sense. Counter arguments would be that so far the impact has been dampened by the use of strategic reserves, drawing of oil inventories on the sea, and lifting of sanctions on Russian and Iranian. There’s a view that the market isn’t extrapolating the current shock to energy supply exactly because it would be too large to be tolerated for more than some weeks.
Thats reasonable. Markets have been late to react to many things in recent years such as Covid - but ultimately markets have moved back to highs fairly quickly...