Midweek Macro Note: What's Real and What's Not in the Middle East
In the Midweek Macro Note - we discuss the latest out of the Middle East, highlight upside oil risks, the latest Global Bubble Index updates, and much more. #MacroEdge
Don Johnson (@DonMiami3), Chief Economist
Good Thursday evening MacroEdge Readers & Community,
This evening we’re going to briefly dive into the latest on the Iran-Israel war developments, discuss the continued centralization (and backstopping of equity markets) in the US, South Korea, and Japan - which marks the beginning of the end for this latest debasement trade higher that began at the start of the war - we’ll cover an update to the Global Bubble Index, and highlight why energy prices are not telling the full story.
On the latest news front - we’re learning about the absolute atrocity of a ‘deal’ that this MoU represents - in giving Iran access to nearly ~$400 billion in funds while they retain control over the Strait of Hormuz in a joint-relationship with Oman. Notably, in ship traffic patterns in the last 24 hours, ships have all been following the toll path on the north end of the Strait - signifying that Iran is setting up the infrastructure to continue tolling ships for an indefinite period once the 60-day MoU period is completed. Whether or not the 60-day MoU leads to anything more remains to be seen; the negotiations have been cancelled in Switzerland, and this was definitely a time-buying measure… It’s also notable that conflicts between Israel have not ceased - they’re actually intensifying, and I expect that they are trying to pull the US back into the conflict. It’s a prisoner’s dilemma here with competing interests from each angle - and right now, the most clear winner has been Iran. They’re also going to be able to sell oil unsanctioned, and the development fund will enable them beyond the teaser period to begin deploying that capital into the purchasing of foreign goods, not just US goods… We’ll have more on the outline below. I do not think, however, that energy markets are correctly pricing the collapsing supply to the markets in the weeks ahead, and this Administration is sleepwalking us into multiple potential crises’ that could catalyze into our ‘29’ or ‘07’ moment, which are looking like more probable scenarios later in the year. I do expect them to continue pulling out all of the howitzers to kick the can through the massive IPOs (Anthropic and OpenAI), though I still expect that those may be moved earlier.
The problem that this is going to create is that we have an administration that panics at the first sign of any market trouble. With CAPE near all-time Dotcom highs - we’re still left wondering every single day - how high, and how insane can this thing go? Can it pull off a true Japan-89 repeat, or are the wheels going to come off the bus sooner than that as the AI-trade unwinds?
Margin debt to nominal GDP ratio is at an all-time high:
A few months (or less) for this party to continue seems like a reasonable assessment, yet again:
Iran wants to limit flows in the Strait to put a floor in on oil prices - yet another point that will not make the current admin happy - who is shooting for $55/bbl. All of the shots and ammunition were fired to get us back to the mid-$70s, though with any sign of an MoU falling apart - it could quickly revert - as I noted several times on X today regarding gasoline prices as spreads back to the cycle highs. Today marked a total capitulation day in sentiment on energy - and nothing has changed for the trade other than the number of boats coming out of the Strait increasing somewhat. It will take months (3-6 months) for production in the Middle East to come online, and right now, countries will have to assess what the traffic flows actually look like. We’re still sleep walking into the real energy shock if I’ve seen it as Cushing hits operating minimums next week…
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Continued Centralization of Markets
The trend in the last 3 months has been even more aggressive than what we saw last year in the tariff capitulation - in a total inability of US politicians to determine any downside whatsoever in US equity markets. This is an evolution of the stock market ‘becoming the economy’ and one that’s purely nominal in nature. Inflation policies are supported by politicians since it means assets continue to push higher & higher at the cost of things becoming totally detached from real income levels.
Today we saw 6 explicit mentions of the stock market from the President - and we’ll have to see how the weekend pans out with Israel continuing to engage in war with Hezbollah… the MoU is in a very fragile place.
This centralization and protection of the US equity market at the expense of everything else will backfire massively at some point, though it remains the true gauge of when politicians will actually just panic and capitulate on everything or anything they set out to accomplish. As soon as steam ran out on the ridiculous momentum rally from earlier in the year (when the war ended) - they began to panic… A Hoover-style scenario is very real and faces this President daily, and they simply can’t let that downside materialize for the time being to even let that happen.
Update to the Global Bubble Index
The Global Bubble Index has not yet shown signs of meaningful slowing - required for a US bear market.
Nikkei:
Korea:
Still no stopping yet for the IBEX:
The AI bubble continues to expand in the US, with all capital flooding in from all sides:
Record weakness in the KRW and JPY are helping high-beta bubbles:
Higher DXY will finally begin to put pressure on these, though that will take >105 in the next move.
MoU Details and War Update
I think there’s a very real chance that the MoU falls apart in a short period of time as people realize how horrible it is and how much control Iran was just handed over the Middle East (including of the Strait of Hormuz). The dilemma for the administration is now choosing to go back into conflict at some point this year, supply Israel in their conflict against Hezbollah, or simply do nothing and turn the points from the MoU into an agreement.
