War Note: The Latest on Hormuz, Geopolitical/Energy Updates, Record Complacency Means Binary Outcomes, Hoovernomics

In this 2nd edition of the resumed 'War Note' we take a look at the latest Strait of Hormuz data, provide a geopolitical & energy update, discuss record complacency, and much more.

Don Johnson (@DonMiami3), Chief Economist

Good Tuesday evening MacroEdge Readers and Community,

In this second edition of the resumed ‘War Note’ series, we’re going to take a look at the latest from the Middle East war between the US and Iran. Trump just authorized a landmark deal for Saudi Arabia that will provide a pathway to nuclear enrichment, and behind-the-scenes developments continue to get more interesting and complex, beyond what meets the eye about the war in the immediate term.

On the conflict front, things really accelerated over the weekend as Iran began using maneuverable IRBMs, causing casualties among American forces in Jordan and Kuwait. Iran is seemingly less focused right now on Qatar than they are on Kuwait, Bahrain, and Jordan - and some sources have reported a possible mobilization near Kuwait. It appears that Iran continues to operate on a relatively linear escalation trend - and as strikes intensify - we seem to go up the rung on both sides to match. This latest escalation sequence will last until (one or some of these happen): oil prices get so high the US is forced to come to the table - or China forces Iran to the table, bonds fall too low that the US is forced to come to the table, or we escalate to such a degree that the conflict ends in a quicker fashion, but that will come with massive energy infrastructure impacts across the Middle East in what could be ‘mutually assured destruction’.

Outside of the geopolitical and energy sphere - the ‘carry trade’ continues to go absolutely crazy - and allows them to pump equities at the expense of the yen:

The won still appears on the precipice of some strengthening - and yields are at or near cycle highs. Today was one of those bizarre days where ‘everything goes up’ in the literal sense.

Just remember, at the end of the day, war is one of the most inflationary forces of them all - and especially when it’s between two oil powers (and involving many others):

Will the TACO arrive just in time once again?

The official Iran war clock…

In futures markets to start the evening, which I don’t really even like covering, markets are mostly flat in the United States, while they’re up in Asia - led by Korea and Japan tracking not too far behind. The KOSPI and semiconductor trades are becoming one and the same, and everyone that got all excited and antsy today about the rebound should see the ‘record complacency means binary outcomes’ section below for more on the risks of what we’re seeing.

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The Latest on Hormuz

Hormuz traffic has effectively returned to zero after nearly a dozen tankers and freighters have been targeted by IRGC Sepah Navy forces in the last few days (charted in the section below).

The latest development to watch will be whether or not Yemeni Armed Forces successfully shut the Red Sea route to Saudi tankers - and today we saw our first signs of that happening. I really don’t think the Houthis have much to lose given the environment they’ve faced since the embargo, and with that the escalation ladder can get quite steep, quite quickly, especially over the next couple of weekends.

Geopolitical and Energy Updates

The EIA made an absolutely bizarre comment this morning, essentially green-lighting the President to run the Strategic Petroleum Reserve (SPR) down to 70 million barrels if need be. The SPR is subsidizing global demand right now and playing a key role in filling the gap in those millions (hundreds of millions of aggregate) lost barrels from the Middle East.

I continue to believe they will run this down lower than currently is being broadcast (280mb) or so - and the next few auctions will be telling in terms of whether or not anyone actually can purchase the product in these salt caverns. If worst came to worst, I do not think Trump would have a problem running through the congressionally mandated minimum (set by a law in the 70s) - and run the thing to zero if he could. As I mentioned on X today, I really am pondering if they are going to ‘collapse the caverns’.

Keep an eye on the 3-2-1 spread:

(Continued below —> geopolitical and energy updates, record complacency means binary outcomes, Hoovernomics & tariffs ride again… from John)…