Transcripts

Erik: Joining me now is Rabobank's global strategist for economics and markets, Michael Every. Michael, it's great to get you back on the show. I'm sure you've heard the great news today, and we are recording, just so our listeners will know, on Monday afternoon, so three days before this episode will air. A lot can happen in the news flow lately.

But as of Monday afternoon, the news is President Trump says, "Don't worry, everything's all set. Oil prices are about to drop like a rock, and time is on our side." Do you concur, sir? 

Michael: No, I don't think that time is on anyone's side, first of all. I think that's true for every human being throughout history that time doesn't work in our favor.

Entropy is a universal truth. But specifically, that news flow, of course, that we had on the Monday as we're speaking, was superseded within I think about an hour and a half, two hours maximum, where we went from a tweet saying, "Okay, Iran doesn't want to talk. That's fine. We don't have to talk. Maybe we've done too much talking.

I'll just maintain the blockade," to then suddenly backpedaling and saying no, the reason for Iran not talking is because Israel was still moving against Hezbollah in Lebanon, and now I'm telling Israel they can't move against Hezbollah in Lebanon. And Hezbollah have promised they're going to stop attacking Israel pinky swear and therefore everything can continue, and we're gonna continue talking to Iran."

So maybe that doesn't necessarily contradict the fact that Trump thinks that time is on his side, and I think you, you can put that to one side as a separate argument, but it certainly shows just how dynamic the news flow is and how incredibly confusing and befuddling this tweet-driven crisis continues to be for all of us.

Erik: Michael, let's go a little deeper on the time on our side perspective with respect to the global oil market. A lot of people have been warning for a long time, myself included, that we're going to run out of the buffers in the system. We're gonna get to the point where we don't have the crude oil needed to supply the global economy, and the only resort left is gonna be a wild price reaction in order to destroy at least 10 million barrels per day of demand.

A lot of macro guys are saying, "Look, stop listening to these doomer commodity idiots. They don't know anything. Obviously, they've been proven wrong. Oil prices didn't go to 200. Everybody relax. We, time is on our side. We've got plenty of time. We produce plenty of oil. We can wait this out, and we can w- you know, the president is right to feel that he can wait this out."

What do you think? It's true that the oil prices have not gone to the moon yet. Does that mean that we're safe? 

Michael: First of all, full disclosure, I'm not an energy expert, and I know you speak to many, and indeed you're very well-versed in that field yourself. So I don't want to try and over-represent my specialism here.

But I can't really recall such a dichotomy and passionate dichotomy of views as we have over this particular crisis, where, as you said, you've got absolute experts saying this is going to end in absolute catastrophe within, weeks. And these are people who, are neck deep in this industry.

And then to be fair, you have a few who understand the industry who are saying maybe it can be okay." But you get a lot, as you said, of macro fellow travelers who are great with an Excel spreadsheet and very good at being similar to that sarcastic meme of the elderly guy with the white beard drinking a cup of coffee saying, I've finished being an expert on X now, and now I'm an expert on Y," saying it hasn't gone wrong yet, therefore everything will be okay."

And when you've got that kind of talent stack really disagreeing, but the people who are really well-versed in the industry panicking the most, that makes me extremely nervous because I've worked through many different potential crises similar to this, and most of the time I've been the one pointing at the gray rhino or the black swan and saying, "This is bad," be it, all the way back to the global financial crisis 20-odd years ago, and everyone else around me who's, making money by not seeing it saying, "No, it's all okay."

And most of the time it's worth listening to those downside risks when they're that big. So I think at the very least, everyone should be paying attention rather than confidently rubbing their hands and saying the people who understand this industry like the back of their hand are all wrong.

Erik: Let's talk about what the follow-on and knock-on effects of this could be. One of the things that's really perplexing me is at first I thought, this has to be inflationary. We already, I thought, were probably into a secular inflation. It seemed to me this was gonna really force the argument, and I was really surprised when I talked to Mike Green, who said he thinks that it's going to be deflationary and the Fed is gonna be forced to cut aggressively because of this oil crisis.

And I said, "Mike, can't you see that $150 oil is inflationary?" And he said, "Yes, I can see that. Can't you see that $500 oil is deflationary?" And I said, "Oh, that's a point." How do you see this playing out and how in the world do you analyze this if you don't really know, and it seems like experts can't agree on how far this can go?

Michael: Let's break that down for a moment. First of all, you would get, a lot of heated disagreement about whether we'd ever get to 150, and if we start talking 500, which is then, it's the first time I've heard that number mentioned, I think, that's a heart attack on the screen, isn't it?

In its simplest form, we have to recognize that central banking, as currently constituted, isn't able to deal with these kind of crises. We've had repeated, examples of that over the past few years where institutions which are effectively neo-Keynesian and all to do with demand management struggle to adapt to something the supply side and then have to try and work out, do they deal with second order effects?

And more importantly, is it temporary on the supply side, which of course, or that famous word transitory or is it something that's protect- potentially structural? And if so, what do they do? And effectively it's it's almost like that old comment, I think from the 1960s, the feminist comment, the, a woman needs a man like a fish needs a bicycle.

Like central banks understand supply side or structural supply side shocks like a fish understands a bicycle. They're just entirely different things. So you can listen to any number of different central banking experts who will say they should do this, they should do that, they should cut rates, they should raise rates, they should do nothing at all."

They're all wrong and they're all right at the same time because it's a very complex problem, and I don't think any of them really are the full solution to it. 

Erik: We've got Kevin Warsh taking over as the Federal Reserve chair. How does that factor into this equation? 

Michael: He was already prior to this happening, muttering about the fact that he wanted to change the Fed.

And I don't think that's going away. And looking at the fact that AI in his mind from, in public statements, is likely to be very deflationary and as a result, there's room for the rate cuts there because of that future deflation. Now it's a bit of a curve ball to say that you've got that deflation plus the, potential for the absolute economic cacophony and chaos that could be caused by the kind of outcomes that you are referring to hypothetically It's very hard to call.

But I think the interesting thing will be listening to these central bankers who, while they may talk less under a Warsh Fed, tend to be so apparently transparent about what they're thinking and try to make clear to everyone how they're thinking about these things. It will be interesting to watch them squirm to an extent and make clear they just don't know what to do.

Because I repeat my larger point that I think the mechanisms we have set up now simply cannot function the way that we want them to. Clearly what you would need instead, at the very minimum, are vast strategic petroleum reserves or the equivalent across various different products which are no longer flowing because of the Hormuz crisis, which central banks could look to tap to try and smooth these processes out, which are, hundreds if not thousands of year old policies used in various different countries around the world and which China still uses today.

And you have to say to yourself, is that not a better mechanism than just making borrowing costs on aggregate for the entire economy, either more expensive or less with all the second and third and fourth order effects and with a lag. So I'm not trying to dodge the question in any way. I'm actually trying to hammer the point home that I don't know what Warsh will say.

I don't know what any central bank will say. I'm not sure whether they'll all be united, and I'd imagine they're probably gonna be on the phone to each other trying to make sure that they all at least hang together collectively rather than bravely trying to go in different directions with the odd exception.

But I don't think any of them are set up for it intellectually, and I don't think any of their advisors are, because all the economists who do the number crunching for them also don't have any models which work in this particular environment that we're talking about. They're presuming that this w- were structural and is as bad as you were just alluding to, which is not what I'm forecasting.

But if that is the case, yeah, w- what does one do? The en- the entire infrastructure that you've set up isn't fit for purpose anymore. 

Erik: You described Kevin Warsh as muttering about changing the Fed. What do you think is on his mind long term? What do you think he and President Trump and Scott Bessent maybe are architecting in terms of a new central bank regime for the United States?

Michael: I think it is important to return to Iran, and I'm sure we'll do that in a few minutes. But if we kind of segue to that particular discussion, from my perspective, if you'll recall, in many of the chats that we've had over the years, I've been underlining that I thought when Trump was reelected that he would shift from economic policy to economic statecraft.

That was the, the line I was traveling with. And the US is openly now saying publicly that economic statecraft is what it's pursuing, and that's absolutely part and parcel of the argument I was just making then about this energy crisis Because you cannot have an independent central bank which is trying to target 2% CPI and all the other paraphernalia that it claims to be targeting And not have joined up thinking across every element of state and government towards the national security goals or the foreign policy goal that you're aiming for with economic statecraft, and not have the central bank as part of that.

The central bank is so important in all that we do. It's just logically ridiculous to conceive of a Fed saying we're not going to change. We're going to keep doing everything Greenspan did or Bernanke did or Yellen did." And he- who cares about the struggle for AI? Who cares about the struggle for the supply side?

Who cares about national security? Who cares that we're in, at a war at the moment, or that we need to re-arm rapidly to make sure that we can fight the next one, wherever that were to pop up? None of that matters to us. We're just gonna look at 2% CPI. Now, I can assure you there's a long queue of economists who will say that's the right way to go.

Of course, they're apparatchiks within a certain Soviet style machine, and that's how they think, and, that's the answer they'll always give. But from a political economy perspective, looking down from a helicopter view, it's just really irrational to conceive that Warsh would not be aware of the fact that Bessent, who's been pushing for him along with Trump to get this particular role, is himself plotting that particular course.

So un- unless he's worn a mask the whole time, now gets his sh- his feet under the table at the Fed and says I'm just gonna be the same as everybody else," which, you can't rule out, but it's pretty unlikely, the Fed will, from my particular perspective of global strategy, gradually be moving more towards the economic statecraft field.

And I think one giveaway on that, before we maybe, pivot back to Iran again, is that Warsh, when he was asked, "What do you think about dollar swap lines?" Which I think are really crucial at the moment in many different ways. He gave an interesting answer where he alluded to the fact that he thought Fed independence didn't apply to them because they were a geopolitical transaction, effectively, and they are, which I think is hon- honesty on his part.

But if he's serious about that, what that means is that potentially, instead of everyone just thinking the Fed is a technocratic institution, which is there to provide euro dollar liquidity to anyone around the world, particularly, the old boys club of largely Western and OECD central banks who need it to prop up their financial markets from time to time of course, in the US interest.

Now, potentially, this can be very much under the remit of the presidency or the treasury with a much more explicitly quid pro quo agenda, which we have actually seen, of course, running through the oil market via the DOE recently And I think that speaks to exactly the point I'm trying to make here about economic statecraft emerging, and again, this all factoring into this Iran crisis.

Erik: Let's pivot back to Iran. As you said you told me off the air that you had several wild outcomes that you could conceive as possible, not predictions, but possibilities. Let's go wild. What are they? 

Michael: Okay, so this isn't a forecast, but again, it's from an economic statecraft lens, taking a big picture view, joining dots and projecting them forward as a what if, which I find is a useful discussion point.

So before we get into the nitty-gritty or maybe even avoiding the nitty-gritty of how long this crisis is going to grind on and what the ultimate outcome is, let's presume that the US is cognizant of the fact that were we to get a TACO, which actually would be, as far as I'm concerned, the whole enchilada of a retreat from the Middle East and abandonment of US allies there, and effectively handing over Hormuz and all the energy in the Middle East to, an Iranian nexus along with its allies, that would be a geostrategic disaster for what the US is trying to achieve in terms of economic statecraft and for the entire West.

So if we presume it can't do that, and we presume therefore it's going to just keep maintaining this blockade going forward if it can't move ahead with more aggressive military action, which is seemingly the message that we're getting at the moment You know, how long is a piece of string? How long can this blockade run?

Potentially long enough to start taking us towards some of the worst case oil scenarios that you're describing if you're in that particular camp, and I think a lot of people are. What is to stop the US taking even more radical economic statecraft action itself vis-a-vis energy? Because we've seen the US, for example, regularly dip into the SPR.

Now that's economic statecraft. Biden did it. Trump's doing it again now, and that's one of the reasons why we're not seeing energy prices going up, and actually, if anything, they're coming down overall trending lower. But that's obviously, a pot of a physical capital that's only got so much in the banks so to speak.

But what if they were to say number one, we are going to stop exports of refined products"? Now, they've denied it, but of course, you should never consider anything until it's been officially denied. And I think, lots of people can talk through the nuts and bolts of that, and it wouldn't necessarily achieve what they want to achieve, but you couldn't rule it out.

But that's the US in isolation. The more radical idea I had is that we could actually see the US in the face of a looming energy crisis where it really is just catastrophic, potentially, in, in the near term horizon, looking at a certain subset of countries, for example Mexico, Canada, Venezuela, Guyana others in Latin America, and key players in the Middle East who are still prepared to work with it, and key countries in Asia who are US allies who have key refining capacity, and saying, "Look, let's do the math here.

If we look at oil production and oil consumption," and I know that oil is not generic, I know there are different kinds obviously, "but we have the right mix and match between us of production, consumption, and refineries. If we form a closed loop, we can potentially get through this, and it's everyone else who's in serious trouble."

So that would really fragment the global energy markets in a way that we've already started to see in terms of different pricing for different kinds of product for different geography, but it would take that to an extreme. And the kind of the pun that I'm playing on for this idea is instead of having NAFTA, which of course no longer exists, and the USMCA itself is now being renegotiated as we speak.

Instead of having NAFTA, you have NAPTHA, which is the North American Petroleum and Hydrocarbons Trading Hub Association Where effectively you have, again, this closed loop for energy, which means that the US could say to others look, we can ride this out. It's you who can't. Are you going to help us solve it or not?"

Erik: And what would the next card be in that deck if it's we're gonna force you to play ball with us, you're gonna have to do what we ask you to do in order to solve this, and they say, "Okay, Uncle, we have to do what you say." What does the US tell those countries to do? 

Michael: Again, this is purely a hypothetical.

It's not a forecast but I enjoy these kind of, scenario projections. Rather than using military statecraft, which is obviously what worked in Venezuela in a very focused manner, and is what is not working at the moment vis-a-vis Iran versus where it was a few months ago, we've hit this stalemate, this comes purely back to economic statecraft and coercion, which is work with us and together with Fed swap lines, which of course have now been offered to the UAE, which if is itself very cash rich, has a currency pegged to the dollar, and has an awful lot of energy, and is no longer in OPEC and OPEC Plus as we know.

Let's start offering swap lines to people so they have that ultimate financial backstop, which most commodity producers traditionally don't. It's only the old boy network of, Europe, BOJ, Etc., Etc., who have it when needed for financial assets. No. Okay, now it's for new allies rather than old allies, and it's for physical commodities.

So let's offer that. Let's offer the defense umbrella while it still has some meaning, which is one of the reasons why the US, I think, can't cut and run and do a taco, which as I joked, is the whole enchilada. But if we do that and then say, "And together with these other countries banging heads together, we can make sure that we can survive the energy crisis and others can't," I think just that carrot itself would see a lot of people rethinking.

In the same way an adjunct to this that while Canada has been obviously daggers drawn with the US because of the way it's been treated in public and one can understand why it's gone there, the change in rhetoric in some recent headlines from them has been remarkable. That in January you had the Prime Minister, Carney saying that we're in favor of a new world order working with China, which is quite remarkable rhetoric, for a NATO ally bordering the US to last week saying, "We want to form a new partnership with the US to make America great again," and that's a direct quote.

So imagine what's gonna happen or what could happen were we to see that kind of looming energy crisis, and I think that coercion itself, that carrot together with that stick that we're creating this crisis by not just walking away could do a lot of the moving parts or be a lot of the moving parts in and of itself without any guns being needed to be placed on any tables.

Erik: You're describing a scenario where the US has a stronger hand of cards than other players at the table because we could weather the crisis longer than others could. It seems to me that in some ways China, China has more reserves, more oil reserves than anybody, including the United States. They haven't drawn them all down.

The US has already started to ra- well, it, during the Biden administration has already drawn down its strategic pro- petroleum reserve considerably. It's now being drawn down to much lower lows. China's held onto all of theirs. Now, China doesn't have the production capability that the US has, so i- it's not an apples to, to apples comparison.

But i- is China in a particularly strong position here, and what are the scenarios where China might assert their strong hand? 

Michael: First of all, let's think about what their strong hand is, and obviously they are a commodity champion, either as the net importer and therefore everyone has to pay attention to them, and if they have the stocks in theory, they can be the net supplier to people in the way that the US actually is at the moment and Japan is by drawing down its particular reserves and sharing them with others in Asia.

So if China's stocks are as high as they say, and let's just say that there are different views on that, I'm not getting into it and I'm not trying to nudge, wink, wink, but there are public views out there that they're not as high as people think or they're even higher. We really don't know, but let's presume they're very high.

Then potentially China can turn around and say, "Look, the US has the ability for now to dip into the SPR for a while. It's got that defense stack. It's got the ability to step in and help on other fronts too. So we can step in physically with product and say, "If you actually need oil, we have buckets of it.

We can offer you the renminbi via renminbi swap lines," which can be set up in various different ways. And effectively, we can be there, through a medium-term crisis in the same way that the US can. And maybe we don't have the same military cards to play yet, but maybe in another few years we will, and, Russia can help out at the margin.

So you could potentially see that as being some kind of alternative emerging over time. But that really does depend on whether China wants to share. And you'll notice that initially during this crisis, the first thing they did was to stop exporting refined products and fertilizer, Etc., which didn't exactly stand behind that view.

And interestingly enough, it's only, I think around an hour after the UAE left OPEC and OPEC Plus that suddenly China started exporting again, because I think they realized that these geopolitical tectonic plates are shifting, and they needed to start staying ahead of the game and realizing that would be potentially an offering they would have to make to people.

But that's only true if they have the reserves. Let's take the other completely hypothetical case that they don't. Let's say that they're not there the way that they profess, and how would we know? Then they're not in particularly strong position. They can, maybe keep going for another couple of months, and then just as many other countries w- would realize by the time that we get to late summer, things are looking really pretty messy.

At which point, that brings us back to, the hypothesis that I've been expounding for quite some time, which is that ultimately part of this resolution could be, ironically, China having to work with the US against its own ally, Iran, because it realizes that the potential damage to it from this crisis i- is even larger than losing Iran as an ally.

Now, we're not there yet, clearly, otherwise there'd be more movement or at least you'd pick up rumors of it, even if it isn't being, reported in the mainstream press. It's still logical that could appear at some moment, but it purely depends, as I said, in terms of what China can assemble, and that's a product of what they do or don't have as cards in hand, and there's no transparency on that front.

Erik: Michael, let's come back to the US implications of this. Experts are telling us that even if the crisis ended tomorrow, it would take, eh, four or five months before oil prices and particularly finished product gasoline prices would start to stabilize again. Okay. The midterm elections are only five months away now.

So if gasoline prices stay at these extreme elevated levels all the way through the midterm elections, does that make it extremely difficult for the Republicans to hold on to the Congress? And if they lose the Congress, what are the implications? 

Michael: Let's unpack that in a couple of different ways.

First of all, as we have seen, and as you were referring to at the beginning of this conversation, all it takes is a few handy tweets and prices can go down 5, 6% in a day. Tweeting doesn't cost that much, and it's amazing how much of an impact it can have for a while. Ultimately, if we are going to hit that pinch point up ahead, it's not going to work forever unless that particularly optimistic view that this is a crisis that can be worked through because, for example, China is importing much less at the moment, and is there some kind of background cooperation going on with the US?

We simply don't know. Then that might be one solution. If not, and we do find that tweets don't work anymore and prices start moving higher, that's exactly the pressure that would lead to hypothetically the US making one of two different choices. Number one is saying, "Okay, we have to go the whole enchilada," and say, "This is a mega taco," which, really does us enormous geostrategic damage and the entire West.

Or we have to look at the naphtha scenario I was just talking about, which is we will have lower prices in conjunction with others, but it means that they're going to be much, much higher in a larger subset of countries and, we're not gonna get our reputation back on the other side of that, but we can live with it But that's just the energy side of it.

You then have to look at the US itself, and I'm actually speaking from the US today, which is one of the reasons why I apologize if I'm stumbling over my words somewhat. The jet lag traveling here from Asia is quite remarkable sometimes. But we've seen this, constitutional upheaval, and I do think we have to be cognizant of the fact that obviously high gasoline prices are very unpopular.

But at the same time, it's always a binary, one party or the other. And it's also about enthusiasm. So provided enthusiasm can be kept up by Trump way or one way or another, and I'm not saying that can happen, but it's not impossible. If you can make it a sharp binary between whatever Trump is putting forward as a platform at the time versus what the Democrats are doing, with the redistricting that we're currently seeing it's still not a gimme that he loses the midterms.

And we have seen very experienced election callers really humiliated several times, not just in America, but around the world in recent years. And I wouldn't rule out that the confidence that people have of what it will look like in November could prove, misplaced once again. 

Erik: Michael, let's move on to gold now.

A lot of us thought that the reason gold has been so weak and why we saw a breakdown in the usual correlation where normally, bombs start falling, gold goes up. In this crisis, it's been bombs falling, gold goes down. Most people, myself included, have assumed that the reason for that has been that we're seeing an oil price-driven inflation signal that's spooking the precious metals market.

We just had a 10-day long, pretty significant risk-off cycle in oil prices and, gold didn't recover to new all-time highs or anywhere close to it. So maybe we're I'm feeling like maybe I've misdiagnosed why we've had all of this weakness in gold. And so I wonder what do you think has caused gold to be so weak, and what's it gonna take for it to bottom and eventually turn around, or does it turn around?

Michael: Again, without giving any kind of investment advice, I'm looking at this as part of a bigger picture thesis rather than focusing on one asset and then trying to explain everything back from there because, that's my methodology the former, not the latter. I think an interesting anecdote, and that's the best I will do here because people who look at gold full-time will obviously get, passionate about this and send me very angry emails.

But I think the best anecdote to explain this is very early on in the war, you saw the fact that people were finding that they were having to sell gold for dollars to try and then move them abroad and then buy other assets again. So when it actually came, push came to shove in the Middle East, you actually had missiles flying in a region which historically likes gold a lot, you suddenly have people realizing it's not the easiest thing to flee with.

You're actually a high net worth individual with a safe full of dollars, sorry, sa- a safe full of gold. And it is ironically for all the problem with fiat currency, which I, I'm not gonna unpack here, we're all aware of the downsides, it's pretty easy to get out of the country, via one press of a button at times.

And then on the other side of that, do you really wanna put it back into, very heavy to carry metals on the other side? Now, that's only one factor amongst many, but I do think it feeds into a broader thread running through Iran, running through economic statecraft, running through what the Fed and Warsh are doing.

And that is what is our emerging geopolitical, geoeconomic, geofinancial architecture looking like on the other side of this war? Because, at the moment you could say the war is in an interregnum. We don't know if it's gonna start again or just fade away. The shooting we've seen over the past couple of days has been, quote unquote, "mostly peaceful bombing," if you can, get away with that phrase.

But people aren't genuinely focusing yet on what things will look like when it is over, whether the US wins or loses or this draw drags on longer. And we've talked about the energy side of it to a degree, but many other things factor into it, and the dollar, gold, stable coins, commodities, all of them factor in too, and in a very big way.

Erik: Michael, let's come back to your specialty of economic statecraft. That includes stable coins. It includes the swap lines that I think have been offered to the UAE. There's probably other dimensions of this. Take us out to the bigger picture of what's going on here in terms of what you think Trump and Bessent really have in mind longer term.

What are their intentions for the US to assert economic statecraft, and how are the ways that's gonna play out? 

Michael: Sure. I think the easiest summary of that is that clearly there's absolutely no appetite from Bessent or from Trump to give up the global power of the dollar, but there's a full understanding that the euro dollar system, which does give the US a great deal of power, is also responsible for de-industrializing it because everyone demands the euro dollar, which comes from holding US financial assets rather than productive assets.

So you can make the link that effectively, you know the rules-based order was propped up ultimately by the US military. The US military was propped up by US industry, and US industry was killed effectively by the US dollar system, and therefore the US dollar system killed the system the rules-based order, which actually props up.

So it's a closed loop, and I, I've been arguing that in various different ways for a long time. But that doesn't mean you wanna give the dollar up completely. So I think what they are going to try and do, and we've discussed this in part before, but again, it runs through this war, it runs through energy, it runs through commodities, trying to push back at what China is doing, like through letters through a stick of rock It is the use of stable coins to effectively create lower interest rates in the US and effectively sucking euro dollars out of parts of the global economy and replacing them with these digital tokens, which to an extent for the US are buy one, get one free.

Why would you not want to do that? And they also have a sorting effect in that the countries that will trade with you, that will put tariffs on China and share a common external tariff with you against them, and split their technology supply chains and work with you on defense, they will be the ones that will expect the accept these digital tokens, which are not money, but they can become money if people will accept them as money.

They will be the ones who will accept them, and the ones who won't ultimately weren't going to be your allies anyway. So there's a sorting effect, there's a reorganizational effect, there's a buy one get one free, and there's fiscal breathing room through all of that. So that's what I think the US is trying to achieve there, and I think they were already, they were moving towards that.

The Iran crisis/war is likely to accelerate that, particularly, depending on how it ends. But that's just the US view. There are other countries and other players involved here, obviously. It's not only the US playing the game. And the interaction of how all the different players come together will drive ultimately what that architecture looks like.

Erik: You mentioned earlier the scenario of you, you said something to the effect of, if the US wins this war with Iran or loses this war. It really got me thinking, obviously the US is not gonna lose the war in the sense of Iran won and destroyed the United States and the country doesn't exist anymore.

So what does losing the war for the United States look like? Is it just the scenario where Trump is forced to taco and walk away and say okay, that didn't work out the way we thought," and just walk away from this, leaving Iran kind of controlling the strait? Is that the lose scenario or is there a worse one I haven't thought of?

Michael: It's a cascading effect that flows on from that, because what it would do at a meta level is show that even when you have a very ostensibly gung-ho president like Trump, in reality, of course, he hasn't been getting involved in wars on a large scale up until recently, and of course, that's what he's campaigned on so successfully in the past, which is, counter to the image that some people have of him domestically and internationally.

But even when you have someone who's prepared to, talk very tough about these things, that effectively the US would be in a state that the geostrategist Ed Ludback refers to as post-heroic Whereby, and this isn't any kind of criticism, it's just an observation, that the US is so casualty-phobic that while it has this magnificent technological military machine, which is of course very highly reliant on inputs from China and others, and that's part of what Trump is trying to address by, onshoring and shifting supply chains, Etc., Etc., It's limited in what it can achieve.

It can do a lot, but it can't achieve everything it needs to in the same way that Israel wasn't able to fully defeat Hamas because it would've required, many more men on the ground going everywhere. The US would've needed to have boots on the ground versus Iran in some scenarios, you could argue that.

And if that political will for that isn't there, then you can say therefore there are certain geostrategic problems or quandaries that the US simply isn't going to be able to resolve, and the cost of being involved is going to get higher and higher without any realistic prospect of victory. Ergo, the more logical thing to do is to, as you said, cut and run and say however we dress it up, Iran controls Hormuz," Etc., Etc..

But that would shatter the US image globally, which is why in the past I've referred to it as a 1956 crisis for the US in the way that the UK and France experienced one, and it dropped them from being great powers to just being powers. And the US would of course remain a hyper power, were this to happen, but people would recognize there are lots of things it just can't or won't do anymore, and that does absolutely change the parameters within which its opponents would expect it to then operate.

So it really is very significant. And within the Middle East in particular, just to underline that, it would change the dynamic totally. It wouldn't necessarily be for the better for anyone else either because if Iran says effectively we're top dog," even the, though the UAE has openly come out and, and attacked Iran several times, which has now been revealed, much of the Gulf might end up having to try and make terms with Iran even though they don't like it.

But not everyone would. It's potentially the case that the UAE and Israel would continue sniping away at it, and you could still therefore have stru-structurally high energy prices even if the US says we're out of here." Countries that are permanently based there may not accept the fact that happens and say we're not gonna give up."

So there are lots and lots of cascading effects, both for the region, for the US, and for the entire West that flow on from it. And how you price that is interesting, but I think you would have to really take a step back and think, is one still as positive on the US dollar and on US assets in their totality if you're accepting that there's a very firm limit to what the US is prepared to do?

Erik: Final question, Michael. Let's go back to the Kevin Warsh Fed. I think you're right that the theme here is going to be economic statecraft, stables coin statecraft, and so forth. What policies do you think, if you had to predict the wild surprise scenarios that nobody sees coming, not predictions, but scenarios or possibilities, wild outcomes, what are the Fed policies that Kevin Warsh might advance that would surprise everyone?

Michael: I've been talking about this for a while, so this isn't completely new, but I'm not sure if we've discussed it here or again, my jet lag is so severe that I can't remember if we have. Apologies. And that's this, that Warsh is openly talking about trying to reduce the Fed balance sheet, which itself would really set the cat among the pigeons, as I'm sure you're aware.

But at the same time, Trump is talking about expanding the Pentagon budget next year by $500 billion. How do you square that circle? And ultimately, alongside a corollary to this, which I think is the Fed may have to start looking at the supply side rather than the demand side and which sectors of the economy need lower or higher rates than others rather than one size fits all, which I've never understood the logic for in a geopolitical environment.

The Fed might be having to think, do we really need to be offering QE style balance sheet support to the financial part of the economy, which effectively doesn't do anything in terms of actual physical bang for the buck?" Fair enough. But do we need to be looking at some kind of acronym, tacit balance sheet support using one mechanism or another?

And there are lots of ways, of course, this could be dressed up in a technocratic way that wouldn't make it look quite as egregious as it is when I describe it in a simple form like this, to saying we can offer the same QE support that we have done up until now, but for the physical economy." So for example, again, swap lines or stable coin support for countries that are going to physically build out mines, port, infrastructure, shipbuilding, military supply chains, Etc., Etc., Etc., to re-industrialize and re-militarize parts of the US.

And I think I've made this joke on this podcast before, and if I haven't now's the time, and if I have, I humbly apologize, which is I've said for years that we're now living in a world of Warcraft, and I think we can all recognize that, whether this particular war is on hiatus or not. But effectively, the joke here is that would be using what I also call financial Farcraft, which is just financialization, to try and prepare for a world of Warcraft.

And I don't think people have, in markets broadly, got their heads around what it would mean to have extra liquidity that goes to some sectors, but it doesn't flow to all the favored ones, which is what an entire generation, if not two, of financial market participants have grown up expecting as normal.

But I think we are now in a new normal, and therefore that paradigm will have to shift. 

Erik: Michael, I can't thank you enough for another terrific interview. I really enjoy our talks every time we get the opportunity. Before I let you go, please tell our listeners a little bit more about what you do at Rabobank and how they can follow your work.

Michael: Sure. As you've probably heard I'm the global strategist at Rabobank for the economics and markets team, which means I look cross-asset, cross-geography, and cross-disciplinary to try and join the dots and project those dots forward to look for the kind of rather esoteric emerging trends that I'm talking about that once upon a time only happened every few years or every decade or so, and were just colorful entertainment up until that point, but now seem to be happening once every couple of weeks.

And so we really do need to be spending much more time talking about them. And if you'd like to join me in those conversations, if you're a Rabobank client, please go to the Rabobank Knowledge website. And if you're not, look for me on LinkedIn and also look for me on X, and the handle is @themichaelevery.

Erik: Patrick Ceresna and I will be back as Macro Voices continues, and be sure to stay tuned because we've got a cameo appearance from Commodity Context founder Rory Johnston with an update on some of the logistic issues in the crude oil market

Erik: Joining me now is Geopolitica Institute founder and CEO Dr. Pippa Malmgren. By popular listener request, we've had quite a few emails from people basically saying, "You've got to get Dr. Pippa back to talk about the Iran conflict." Just wait, she's got a whole lot more to tell us than just Iran. But Pippa, it's great to have you back.

Let's start with the Iran conflict. I have to tell you, there is so much talk on the table about, oh the deal is just... we're hours away from closing the deal. The way I'm interpreting this is we're nowhere close to any kind of deal because President Trump has said very firmly and Iran has said very firmly at the same time Trump says they must turn over their 60% enriched near weapons grade uranium.

Iran says, "No way, not negotiable. We're never gonna give it up." It seems to me like until one of those sides caves on that specific point, there is no deal and there is no resolution. Am I reading that right? 

Pippa: First of all, hi, Eric. It's so great to be back on with you. I do love the sessions with you 'cause you let me go deep into the whole breadth of what one needs to understand.

And on that, we need to start understanding, first of all, the superpowers are negotiating between themselves, right? The US, China particularly, Russia as well, and they are attempting to resolve all of the outstanding geopolitical issues all at once. This is a kind of Rubik's Cube approach, where you say you can't fix any one of them independently of the others.

And therefore, it really matters that we understand this, that the US is basically saying to China, for example, "We can negotiate a deal on Taiwan. There are conditions around that, but we accept that Taiwan is in your world and that Cuba and Venezuela are in ours. So you get out of our part of the world, we'll get out a little bit out of your part of the world."

Again, the conditions are important 'cause it's not just a clear swap. Part of the conditions are that China needs to become more like Taiwan, because the Chinese economy is not functioning very well, and if China's economy glitches, the whole world economy glitches. And so Trump has been reaching out effectively to the Communist Party saying, "You guys have two big choices in front of you," which I personally describe as either Star Wars or Star Trek.

Star Wars is where we go to war with people, which between these two superpowers would literally be the end of Earth. Nobody can survive that superpower conflict given the level of nuclear weapons that we have today. Or we decide to go to war with problems. That's the Star Trek scenario And China is absolutely signaling that it prefers Star Trek, no question.

But to do Star Trek, China can't run its economy the way it has been, and therefore, not only does it need to be more like Taiwan, but the US needs to offer China access to the US market on more preferable terms than have been available in the past. And specifically, China needs to move from a world where everything's stamped "Made in China" to a world where they're stamped "Owned by China."

In other words, they need to copy the exact same model the Europeans did after World War II, the Japanese did a little bit later, which is you start by exporting cheap goods based on cheap labor, and you end up making goods in the US to the point that you can build global brands. Americans, a lot of Americans, they actually think that BMW and Mercedes are American brands these days, right?

And so this is the only way you can raise national income. So the US is basically saying let's figure out a deal that we can get us all there." They've just said they're gonna create a board to review which businesses in China can come into the United States on that basis. So Iran. So then Iran is part of this deal.

Now, first, who are the Iranians is a very important question because now that the leadership has either left for Moscow or been eliminated by the United States, what's left is not really leadership. It's like the remnants of a structure that no longer exists. It's we could almost say a lot of stragglers that are now competing with each other because they all know that there is a deal coming from the United States, and they want to emerge as the guy who gets to shake hands with the United States, in the same way that the new leader of Syria used to be considered a very bad terrorist guy and now is a head of state that  the United States says good things about.

Because the strategy is not regime change. The strategy is conversion. It is to create the conditions that are so favorable that it's not worth remaining where you were. It is worth basically giving up the terrorism in exchange for a place in the world economy and some cash in the bank. So you're right, the uranium's the sticking point, but not for the reasons we think.

It's not about the Iranian nuclear program, in a sense. They know that everyone in the region is opposed to them becoming a nuclear power They know that China was their ally, but the, what was left of the, IRGC, when they made the decision to start lobbing closing the Strait of Hormuz, who did that hurt most?

That hurt China, their own sponsor. So at that point, China becomes extremely pragmatic and says "Hey guys we were on your side, but no, this is not gonna work." The president comes in and says, "Yeah, we agree." So the US and China start collaborating on the conditions under which the Strait of Hormuz can be reopened, and notice that the first ships that came through are all Chinese oil-carrying vessels.

Also, the US has been very clear with China, of course, China can buy all the oil it needs from Venezuela, from Alaska, right? We cut a deal to sell Alaskan oil to China during the Trump G summit. But there's a kind of silent parentheses which is, unless you wanna go to war with the United States, in which case the US can now turn the taps off on these things.

So that option of Star Wars is literally just not even available. So let's not talk about that. Let's go to Star Trek, which is where we all win. So the Iranians understand the real reason the president wants the uranium is because he wants to prove definitively the origin of that uranium, and his belief is that it is American, and that it was sent to Iran as part of the various deals cut under the period when Senator Clinton was the Secretary of State, when President Obama was in office, and when President Biden was in office, that part of the deal was not just sending vast amounts of cash to Iran, but also quietly, surreptitiously facilitating their nuclear program.

Now obviously that sounds completely nuts to many people, but this is what he is after, is the receipts. He wants to be able to prove that this nefarious position was even worse than we think. So that's why he also talks about gold dust, right? That the uranium is gold dust. In other words, he only needs a few grams to be able to prove the origin.

Also, now that the Iranian leadership, what's left of it, I don't even wanna call it leadership, it's just what remains, they started lobbing missiles at all their neighbors And destroying extremely valuable infrastructure, not to mention hitting a nuclear plant. So now everyone in the Middle East is aligned.

There is no daylight between them. They all are like, "This cannot continue. These guys cannot be allowed to disrupt the entire region." So they have no more friends in that respect, and now that Cuba and Venezuela are shaking hands with the United States and China's not supporting them anymore, what's left?

Russia. Russia, like China, is open to a swap. So if they have a choice between Iran and Ukraine, they're gonna focus on Ukraine, and the president understands that. China understands that, and that's why the last piece of this Rubik's Cube that's being negotiated is not Iran. That's considered pretty much a done deal.

The question is, how long do these folks keep lobbing missiles around in their internal competition to emerge as the winner that gets to shake hands with the world? But the real problem is how do we get to a resolution over Ukraine? And I think the-- that's a separate conversation we can have, but I think now we have a better context and understanding.

And by the way, for those who haven't been paying attention, 'cause I find a lot of people are like, "Oh, what are you talking about? Cuba is never gonna flip." And I'm like, did you notice that the head of the CIA flew into Havana on the very day that Trump and Xi met? And the reason you don't see Secretary of State Rubio there is because the US is not doing diplomacy in Cuba.

The US is dictating terms, and it's basically said, "You can have 100 million in cash," which you need because they have no gasoline, they have no diesel, they have no lights on. So they are in a, raise your hand and say, "Uncle" moment, where they are up the creek and the conditions are being laid out by the US.

So these things are historic. Any one of them is historic, but you have to understand the whole thing together. It's a Rubik's Cube. It's not about individual locations anymore. 

Erik: Wow, so much to unpack here. We'll definitely get back to Ukraine and all the rest of it, but I wanna stay on Russia for start. So I- I'm not following exactly what you're saying about the origin of Iran's uranium, and I think this is something that's been so badly not reported by the mainstream media that I wanna start with a little bit of context for our listeners.

Iran has 441 kilograms of 60% enriched uranium. It's in UF6, which is the stuff that's a gas when it's in the centrifuge, but it's a solid form at room temperature. It's in about 17 or 18 casks that are each about the size of a scuba tank. So that's the... And that's not speculation.

IAEA inspectors have gone and looked at it, put a seal on it and said, "We've seen this." So nobody disputes that they have that. The other thing to understand is 60% enriched uranium is never ever something, at least not in that quantity, that has any explanation in civilian use. This has everything to do with Iran being what's known as a threshold state.

They don't have nuclear weapons. They don't have weapons-grade uranium. But they've done 99% of the work necessary to get their uranium to weapons grade. It's only 1% more effort to go from 60% to 90% enrichment if you've got operable centrifuges to do that enrichment in. It's not clear whether or not their centrifuges are still working or completely destroyed or what the status is there.

But they've got this uranium. It sounds like you're saying, Pippa, you think that they got it from the US? And i- if so, how would you prove that? Even if you had these 17 canisters or tanks of uranium, each the size of a scuba tank, y- are you saying you do some kind of DNA test on it and figure out who sold it to you?

Pippa: Yeah, that's exactly. And I'm not saying that this is my belief. I am saying I believe it is the president's belief And the actions he's taking reflect this belief. But what's even more important is we have to be really careful about this idea of what constitutes a nuclear weapon. When I was in the White House I was very privileged to get the chance to work on nuclear threats to the domestic economy.

So everybody on the National Security Council was out chasing terrorists down globally, but the group that I was part of, we were looking at what would happen if a terrorist hit a shopping mall in America with not an ICBM, right? Not what you're talking about, a nuclear weapon, but something that has nuclear material attached to a traditional old-fashioned explosive.

That's what we call a dirty bomb. And this is where a lot of the confusion has come in about, what-- how close was Iran to having a nuclear weapon? The answer is they already had it. It's just w- are we talking about an ICBM that you can deliver for 5,000 miles, or are we talking about something you put in a backpack and you can destroy an area for 10,000 years, right?

Both of them are serious threats, and both of them are things that the, people that we're discussing seem to be perfectly morally content to do. So when we talk about getting the uranium, it's not just how highly enriched it is. You don't even-- You can take uranium from a dentist office refuse, and then you can put that in something, right?

We have to understand that we're talking about a range of nuclear threats, not just one kind. So that's the first thing. And now there's universal agreement, as I said, in the Middle East, everybody's "These guys can't have any of it. None." So that's a- an overarching understanding we have to have.

The second thing is, can you tell where it came from? My understanding is you can, and I think that what the president is aiming at... As he's undergoing a extraordinary effort to go back in time and find out exactly what happened when and why it happened, because it's ever more clear that, there was, a massive effort to undermine his first presidency, to prevent him from executing the vision that he had.

and he believes that the other side was willing to go to almost any lengths to get their way, and that included start being literally paying the very terrorists that we were supposed to be chasing down. And we know that. That's in the public domain now, right? Even when Trump recently entered office, the, when the excavation of USAID and other such channels began, and everybody's "Wait, why are we sending $40 million a week to the Taliban?

Wait, what the heck? What's causing that?" And it's part of this history of a belief that sometimes it's better to work with an opponent. It's the old, the enemy of my enemy is my friend logic, or the belief that you need an opponent to justify Congress allocating funds, or you're so used to working with an opponent that you've converted some of them, and so you have to give them cover stories.

There's a million reasons that the people doing all this would say were perfectly legitimate But in Trump's view, they were not perfectly legitimate. And so I'm just saying that one of the reasons that he is insisting on a physical access to this material is because of that, and the people on the other side know this, so they're holding out for the highest possible price.

So it strikes me that we're not actually in a state negotiation anymore, we're in a price negotiation. The folks left know that they are not going to be running this country, partly because, depends your-- how you count it, but something between, let's say 60 and 90 million Iranians are pretty mad about all this and do not want these people in charge.

So they're gonna have to face their own public, which is not gonna be pretty. So will they actually survive that? There's a chance they probably won't. That's why a number of them, when they were offered the opportunity to take the-- what Russia put on the table, which is take an apartment in Moscow, it's free, have a pension, and live a life where you can have a coffee without worrying, Americans are chasing you down.

But they didn't offer that to everyone. They only offered that to the really senior people. So the people left didn't get the offer. So where are they gonna go? What options do they have? The only real option left is to either join forces with the US and become part of the new world. That was partly the reason that Trump said, "Okay, everybody joins the Abraham Accords now."

'Cause then everybody becomes an enforcer against this kind of thinking. And so basically, where are you gonna run and hide? The whole rest of the Middle East is gonna shut you down as well. There's no place to go. That's why I think we are gonna end up with a deal. I do think Iran is going to emerge back into the family of nations with new leadership.

Is it gonna be messy? Yeah. But the US is not doing what it did in Iraq, which is just to destroy the government and then walk away and hope for the best. They're instead saying, "Okay, let's all together work on removing the one group of people who have adverse interests to the whole rest of the world, and then try to figure out how do we create the conditions for Iran to choose their own leadership?"

Erik: Pippa, the distinction that you drew at the beginning of that between what's possible and what the president believes to be possible not being the same thing seems central in my mind. And frankly I'm just gonna point out that in the president's most recent Truth Social post, he was absolutely adamant- 

Pippa: Yeah

Erik: that the US absolutely, positively, there's only two options that he said. One is Iran turns over its enriched uranium and gives it to the United States. The other is that the US Atomic Energy Commission be present in Iran and supervise and oversee any downblending or destruction operation that might occur in Iran.

Pippa: Yes. 

Erik: I can't help but point out, Pippa, that the US Atomic Energy Commission was dissolved in 1974, 52 years ago. So the president's command of of all of these topics maybe leaves a little bit to be desired. 

Pippa: Yeah, and I hear you, but no, what he means is American atomic energy experts, that basically a US team of, our most cutting edge experts to oversee the process.

Erik: Okay, but you think that the motive is not just to make sure that Iran does not possess this nuclear threshold state condition of having the, this near weapons grade material. You think it is to to do an, a forensic operation- Yes ... to prove that it's really got Barack Obama and Nancy Pelosi's DNA mixed in with that U238 and 235.

There's also a little bit of Barack's fingerprints on it somewhere. 

Pippa: Yes. I think that is the belief of this 

Erik: White House. Of the president. And do you- Yes ... think that any of these nuclear experts, whether they're from whatever IAEA would be the normal agency to do that, do they believe that it's possible to do?

I've never heard of a forensic analysis of enriched uranium to determine its source. So far as I know it- 

Pippa: And also remember, it won't only be about the material, it'll also be about the history and when you're negotiating and you're offering a lot of money on the table, what you're asking is for people to start singing.

You're saying, " We'll offer you this money, but we want to know what is the history? Where did things come from? Where did you get the insight? What, how, why did you m- how did you make this leap with your nuclear process? Was this given to you?" There's a whole forensic excavation that I think is occurring and going to continue occurring.

And so I'm just adding in that this piece of it Exists. Now, we can argue about whether it's sensible, and I'm not, a nuclear forensic expert by a million miles. But do we think that nuclear forensic experts could do this kind of work? I think the answer is yes. And when you listen to them, their answer is yes.

So I just think when we're trying to understand what's going on in the world, we cannot look at this thing the way the media is presenting it, which is the leadership of Iran is negotiating with the leadership of the United States, 'cause that is not what is happening. It is what is left of what was a command control structure negotiating really now with the various superpowers, 'cause China is very involved in this as well.

And even China agrees and has said, "We do not... we also don't support any nuclear weapons. Is their fundamental position, whether that's for Russia or Iran. So the US and China are aligned on this piece. And so I just think that's a better frame for understanding the back and forth than the traditional way of looking at it.

Erik: Okay. With that framework in place, let's come back to the current global energy disruption situation. What we have going on is both sides are saying they're not gonna back down on t- somebody's gotta cave on this giving over of the enriched nuclear material in order to end this conflict and fully reopen the strait.

Every single crude oil expert that we've spoken with has said the same thing, which is the buffers and safety margins have pretty much been used up. If the strait remains closed for another month, we're gonna be looking at out of control oil prices, $150, $200 oil prices. This has to get wrapped up in the next month, or the world is in a really big pickle with respect to energy.

Do you a-agree with that appraisal of the situation? And if so, do you see it, a, an agreement being made on this nuclear material in the next few weeks? Or how does this resolve? And if it doesn't, what happens to the global energy market? 

Pippa: Sure. So first thing is we have to understand that the United States is perfectly fine with the strait remaining closed, because this forces the whole world to buy these molecules of oil and gas that are currently blocked in the strait, they have to buy them from America.

So the US is saying, "We're open for business. We got all-- everything the world needs, we can sell plus the petroleum byproducts. They're all here too." I'll give you an example. I remember a few weeks ago, I was in South Korea and went up to the North Korean border and, all the headlines were saying, "Oh my God, semiconductor production globally is gonna collapse," because since the IRGC hit the various production plants in Qatar, there was not enough helium for semiconductor production.

And I'm like, "But the largest helium reserve on Earth is in Texas. They're just gonna buy from Texas." And then three weeks later, headlines: Hynix, Samsung semiconductors close the deal with Texas. So we-- when-- It's like people don't understand, you can just shift the supply chain. Now, you can't shift it forever because the US doesn't have unlimited supplies forever, but it does have these supplies probably for about two years.

So that's one layer. Second layer is part of what the US is trying to do is shift the whole world away from molecules to atoms, because we're trying to enter a world where it's not oil and gas that power our future, it is small modular reactors, it is basically nuclear energy in new, safe forms.

And I keep referring it to my written work on Substack as we have to understand we now can put a star in a box, literally So for example, there's a company, there's several, but there's one in California called Valor Atomics. Valor is making a box that's literally half the size of a car, and what's miraculous is that it's not just a small modular reactor, which of course we've had, for decades.

That's what powered the US Navy since the '50s. So we know this works and it's safe. But they're putting them in these small boxes that then you can literally move anywhere you want. So not only can the US now create a nuclear power plant quickly, but we can create a distributed nuclear plant that we can put anywhere you need it.

So another one in Austin, where I'm now living, 'cause it's our new tech center, which is quite amazing here. Another one called Aalo which is making small modular reactors. These things are... Just to be really clear, 'cause I think people don't understand. The new technology evolves around what they call TRISO fuel, which are little tiny pellets the size of a poppy seed, which have super hard shells that are almost impossible to break, and inside is the fissile material, the nuclear material, I should say.

And so it can't melt down. This is not like Three Mile Island or Chernobyl. That risk does not exist. And it takes literally half a handful of TRISO pellets to fuel, as I'm told, 5,000 homes I had originally thought for a year, and I keep being corrected and being told no, indefinitely." Okay. So since the US and China are leading in this new nuclear technology The US is delighted to be making a ton of money on the oil that it can sell to the world for the next couple of years in order to finance the transition from the old drill, baby, drill approach to let's just use new forms of clean energy.

Of which, by the way, nuclear is just one. There's also a whole bunch of others which are developing super quickly. And by the way, this takes me to, and it's important we all know about the Genesis mission, and most people, even investors in the market, they're like, "What is that?" That's the announcement by the White House that all our national labs, so that's Los Alamos and Lawrence Livermore and the Argonne and all these amazing labs that have had our best scientists since the end of the Second World War, they've all been totally classified.

N- none of the data has ever been let out the door, let alone, even internally, they've never been allowed to talk to each other, right? It's like Apple, right? People who work on the glass can't work on any other part of it, so that nobody knows, how to make a whole iPhone. The president said this is gonna stop.

We're gonna lift the lid off all of them. We're gonna run AI over all the data, and we're gonna connect the dots within the labs and across the labs, and we're betting there's a whole bunch of world-shaking technologies that are gonna come out of that and massively accelerate The solutions like new forms of energy.

Now, related to that is definitely gonna be nuclear fusion and how close are we? So again, I have investors who say, "Oh, nuclear, that means $30 billion and 30 years." No. In Austin, we have one company here that is a, it's a startup doing this technology I've described. They have built a small modular reactor with less than 300 people in less than 365 days, right?

The governor said go. I give approval. I can see that there's no, health risk here, no meltdown risk." Boom. We're in a different world. So that's why the US is like, "Okay, I understand everybody's in pain as long as the Strait of Hormuz is closed, but that's not our fault. It's these guys.

And if these guys would go home, then we could open everything up." But as long as they're gonna be a pain and keep it closed, the fact is we're a net beneficiary of this process. The US is also gonna be able to invest a whole lot more in its own oil and gas while this is going on, right? There's nothing like high energy prices to stimulate investment and CapEx and especially in alternative energies, which is definitely happening as well.

So you can start to see oh, that sort of explains why the White House is not like panicking like everybody else. But of course, if you're European, the idea that you have to buy your oil and gas from President Trump Is pretty galling, so they're like, "We don't wanna do it." But what other options do they have?

You can buy from the Russians. Who do you prefer? But these guys in the Strait are basically saying you can't buy it from anybody in the Middle East. So that's n- the US didn't do that, right? That was their decision. 

Erik: So many things to unpack here, Pippa. Someday we're gonna have to sit down and have a debate on triso versus not triso fuel.

But- Sure ... I agree with you that that Allo particularly, which does not use triso fuel, is a really exciting startup right next to you- yeah ... in Austin there. They're doing some absolutely amazing things. If we had the best thing we could do w- would be to make 25 more companies like Allo, because they're really on the right track.

Pippa: Exactly. 

Erik: And I think we're headed in that direction. The thing I'm still missing, and I'm just gonna come very quickly back to it, is- Sure. ... we've got about 13 million barrels per day of production shut-ins in the Persian Gulf region as a result of the closing of the Strait of Hormuz. The US doesn't have spare capacity to service all of that.

There's a little bit that's going through the pipelines and so forth. The East-West Pipeline in Saudi Arabia is delivering some through the Red Sea. 

Pippa: Yeah. 

Erik: But still, we've got to somehow destroy about 10 million barrels of demand unless that strait gets fully reopened really quickly.

Where do you see that coming from? 

Pippa: So why do you think Trump and Xi just had this meeting? That is exactly, they are in total alignment because who will suffer most? China, not the US. So you can be sure that China is also putting enormous pressure and incentives for this to stop, and so is everybody else in the Middle East.

So again, what are you actually dealing with? Are you really dealing with the leadership of a nation, or are you dealing with a bunch of people who understand that the whole world would like them to stop doing this and are willing to pay them to stop doing this, and your incentive is to just sit tight 'cause you'll get a bigger offer tomorrow than today?

So that's why the threat of another military action becomes necessary. It's not a costless decision to say no. 

Erik: We've gotta get to the point where we reopen the strait. I think we, we can all agree that the strait needs to get reopened and reopened soon, or the world is going to face a real energy crisis.

And as you said, the most powerful nations around the world are all aligned on that. But the guys that have the drones and the missiles right next door to the strait are the Iranian IRGC, which has been, by its design, separated and decentralized into 32 different command and control regions that all independently are engaged in a religious war.

Pippa: Exactly. 

Erik: So what's gonna bring that to an end? 

Pippa: Exactly. So and to my point, you have a whole bunch of independent groups that don't have a command control structure, and that's why, like you'll just see The Wall Street Journal is reporting right now, six hours ago US Navy is guiding ships through Strait of Hormuz, right?

They're just quietly coordinating, and everybody understands if you hit one of them, all hell is gonna break loose. So this is a way of beginning the process of moving the control away from these kind of warring factions. So I don't know. How long do these warring factions last? When do they finally either just get exhausted, they say yes to the money they get taken out by a military action?

I don't know, but it just strikes me with all of this alignment between the US, all the regional nations, and China That it's not gonna last that long is, I- would be my view 

Erik: President Trump has said on several occasions, "Look, we've got time on our side," and I don't think that statement is true. I don't think we have time on our side.

Is he- 

Pippa: Oh, yeah ... 

Erik: Does he know better and he's just bluffing, and it's part of his negotiating style? Or does the president really believe that we've got plenty of time and we don't need to worry about- 

Pippa: I think I just outlined the exact case of why the United States does in fact have time on its side, right?

It is exactly why. It's not the world has time on its side. It's the US has- 

Erik: Okay ... 

Pippa: time on its 

side. 

Erik: So this comes back to I'm thinking to something Louis Gave said on this program- ... a few weeks ago when I said, "Louis, how can it be that we're not, that the stock market is not freaking out about this energy crisis?"

And Louis said, "Unfortunately, the bottom line is that i- when we get to a real crisis situation, which we probably will, the resources go to the highest bidder, and if millions of people are gonna starve to death as a result of this crisis, they won't be in countries that affect NVIDIA's earnings, and that's the reason the stock market is not crashing on this."

Is that basically what's going on here, is if there's going to be massive human suffering as a result of this, it won't be in the US, it won't be in China, and it won't be any place that affects the earnings of NVIDIA? 

Pippa: That's a... I do, I know and love Louis. It's a very brutal analysis that you've outlined there.

I think it's more that everybody understands that all the players are moving toward a resolution. They have agreed on quite a few issues. Yes, there's some sticking points, but it's not that we're starting from scratch. We've come a long way from day one. So I guess the market is just betting that, first of all, when you have that many nations all involved and moving in one direction, these guys can't hang on that long.

That's one. And remember, they have no support internally in Iran, right? Like I said they're... The reason they don't get thrown out is only because they're the only ones with guns. And are they really religious? Are they really a theocracy? That's also an open question. Some yes, but many no.

This is a pragmatic situation. That's why Scott Bessent has been very clear about, making the conditions such that they would have no paycheck for several months before the military action began, so they'd already be destabilized and vulnerable to negotiations which I think many of them were.

So I also think the world can see that we are quickly moving into a world where we need to be off oil and gas anyway, and we're coming up with new methodologies all the time, even in fertilizers, right? Everybody was like, "Oh my gosh, now no one will be able to plant. There won't be enough fertilizer." And then suddenly you see we're developing all these new forms of things like green ammonia that don't even use any petroleum byproduct.

So it's accelerating the technological shifts away from oil and gas. Now, of course there's a lag, so I'm not saying this happens tomorrow, but it's the same thing. Like a parallel issue is the semiconductor production in Taiwan, and there's this debate right now where, Chemath came out a few days ago and said, "Yeah, the...

It's we've only gotta rely on Taiwan for another 18 months, maybe two years, and after that the production's moved to the US and T- Texas and Arizona, and they'll just take over." And then there was an outcry. People said, "No, we don't have the expertise. We don't have the capability. It's gonna take 10 years."

Okay, but all you've got is a bid offer spread then. The reality is that the core focus at the cutting edge of technology is going to happen in the US. It's not going to be happening in Taiwan the way it did. The US has already moved most of those engineers to the US anyway. These are the things we have to understand.

In an AI-led world, the speed at which you can shift from one kind of technology to another is absolutely blinding. And I think actually this is a wake-up call to everybody in the oil and gas industry who've been like, "Ah, yeah, nuclear, that's years and decades away. Nuclear fusion will never happen."

And you're like with artificial intelligence where you can do literally millions of test scenarios in seconds, it is happening, and it is gonna happen a lot faster than they realize, and you are gonna see the building of nuclear power plants at a speed and scale that doesn't match our mental model of 30 billion in 30 years.

So I think that's why the markets are like, " Yeah, we're in a transition, but not the end of the world." 

Erik: Let's go a little deeper on a topic that I know you're passionate about, which is a lot of people right now are up in arms, and there's literally people protesting in the streets, particularly in universities, saying, "AI is gonna take all of our jobs.

It's gonna destroy the economy. We're going to have mass unemployment because AI is just the worst thing that's ever happened." I personally think that they're wrong, but give me your take. Why-- How should we think about both AI and robotics? Are these the greatest productivity enhancers ever, or are these the greatest threats to employment ever?

Pippa: First, all technologies cut both ways, right? The car can safely transport you and your family from A to B, and it can kill everybody in your family as well, mow you down. So all technologies, it depends how you use them, and we need to be careful about that. But you have to understand the key thing about AI and robotics is we live in a world where the debt burden for all the major players, for the United States, for Europe, for Britain, for China, is so massive that a regular human being who needs to sleep at night can't outrun this thing.

So again, the superpowers are looking at this going, "The only way that we can get ahead of this terrible hole that's been created is to go to a whole new level of production." And this is not the same as productivity, because we're not talking about productivity. We're talking about how do we get to a world where energy doesn't cost anything, where literally the star in a box with TRISO fuel is permanently powering 5,000 homes and nobody is having to really pay more than pennies for that.

That world is now within reach because of AI and robotics. People have a hard time with that. They're like, "Wait, what?" And I keep pointing out, look, every single person, that's probably listening to this podcast, they all have a washer and a dryer. Those are robots. But they're not sitting around saying, "Oh gosh, I really miss the old days when I had to hand wash all the clothes."

No. You... They're doing it for you, and nobody misses this task So in a sense, we're confusing jobs and tasks with income and standard of living. And the disconnect is happening, and it's hard for the, especially the older generation, to imagine a world where you don't have to work very hard to get a high standard of living because the cost of supplying it is collapsing.

I'll give you a practical example. Here in Austin as well, there's this amazing company called Icon, which is doing 3D-printed homes, and in fact, 3D-printed neighborhoods. And I've driven through the neighborhood where you can buy a three-bedroom, absolutely stunningly beautiful house that's got perfect wiring and has a Tesla Powerwall, so you're already not really paying for your electricity and have the capacity to start selling your electricity back to the grid, which means your 3D-printed home is paying the mortgage on your behalf.

Now, not 100% today, but that will come. And I would add in, we're making big advances in some other new forms of energy like wireless transmission of energy space-based solar power. Japan has just made a big breakthrough there. This is gonna happen. So now you're not even dependent on the power grid anymore because we can move energy without it.

So imagine a life where that 3D-printed home is only gonna cost 100 grand, because that's where we're heading, right? It costs the same or actually a little bit less now than a three-bedroom house that already exists in Austin. But once they get the hang of doing this, then the price is gonna collapse.

So suddenly then you can have a really nice house, not have to pay very much for the energy, if anything. Actually, maybe earn enough that it pays your mortgage or part of it. How hard do you have to work? The answer is not so hard. In other words, AI and robotics are about freeing us up from these basic tasks like laundry washing, do it on our behalf at a scale that's not achievable by a human And suddenly we can devote our time and attention to much more serious and interesting problems.

But this creates some social, dislocation, to say the least, because we're so accustomed to having our identity tied to our job. The idea that now you won't even be working for one company with one income stream, but you'll have a portfolio of activities, and you don't even need to earn that much to have a high standard of living, this means you have to start defining who you are without reference to a job title.

And I think that is not well articulated or even understood, but that is the bigger problem than even the, "I won't have a job," right? It's, "I won't have a job," means I won't have an income. But people are already figuring out how to get AI to generate income without us even having to do very much. So of course, not everybody's gonna figure it out, so I'm not saying everyone progresses at the same speed.

But when you watch especially young people starting to get the hang of it, they're creating crazy businesses. I'll just give you one that just personally tickles my funny bone. I just think it's so interesting. Some kid somewhere figured out that he could record the sound of the rain and then upload it as a track onto Sono, set up AI agents to go market this thing as a, like a, what do they call it?

AMSR, or ASMR, and suddenly he's making 10 grand a month. And you're like, We have to open our imaginations to what this stuff can do, which is very hard to do if you're all locked into, "I am terrified that I am going to lose my job." And by the way, why is your job all tasks? And if it is all tasks, let the robotics and automation and AI do it, and figure out what's the more important problem that needs to be solved, 'cause that's where a human excels.

A human is the most brilliant problem solver ever to walk on the face of Earth. So it's about restoring our confidence and our capacity to be, epic problem solvers as opposed to cogs in a machine that are just conducting narrow tasks for a paycheck. 

Erik: Pippa, last topic I wanna touch on, I, at risk of being what might sound a little bit conspiratorial, something's going on, and I'm not sure what.

But, you've talked quite a bit in past interviews about there being lots of different ways that warfare has evolved, and things don't really happen in terms of, soldiers in trenches shooting at each other anymore. The hybrid warfare is much more sophisticated. There's a couple of stories that don't get a lot of attention.

One is oil infrastructure all over the world, refineries and so forth. Some of them have been attacked as part of military conflicts, but there's a lot of other ones that just have had these mysterious accidents, like too many to explain by chance probability. And then there's all these scientists that keep disappearing.

It feels like, we're back to 1960s spy movies where somebody's taken out- ... the oil infrastructure, and the smartest people who know how to fix things are suddenly disappearing. I know that sounds conspiratorial, but is there something real to this? 

Pippa: I have written a bit on these in my Substack column lately.

So I think, look, there are a few things. On the infrastructure when you have old infrastructure that's very hard to just walk away from because the capital investment has been so enormous, and the cost of decommissioning is so high. It's a very human tendency that things just burn down. Oh my goodness, and then you have insurance, and then you start again, right?

This has been happening throughout the course of human history, so that's not new. But maybe it's accelerating in a world where people can see that all these new technologies are arriving so rapidly that old infrastructure is redundant much faster than it used to be. So I'd put a little bit down to, oh my goodness, the darn thing burned down.

Gosh. There's that. I think we do-- you, you know that I've been arguing since, gosh 2021, I started to say I think we are now in World War III, and at that time it really sounded completely out there. People are like, "What are you talking about?" But now I think we can see in retrospect that it was beginning, right?

We started to see when, the Russians started to cut the sub cables in the Arctic which I've talked about a lot, in order to try to disrupt the global flow of information. That was a kind of precursor to the tanks rolling into Ukraine. That event now in retrospect, is clearly part of what was a global conflict, but it wasn't recognized as that at the time.

So today it's funny, we live in a world, people are like, "Oh my God, we're in World War III." And I'm like, "Actually, we've been in it, and I think now it's beginning to be resolved, like we're coming to the end of this episode." But others have only just recognized it. Anyway, if either way, it's not crazy to assume that your opposition isn't just going to try to deal with you on neutral ground or expected places.

Are there Russian or Chinese or Iranian operatives in the US that might have an interest in disrupting US critical infrastructure? I think Homeland Security under every single president would say yes. So are they successful sometimes? Probably yes. Does anyone want to explain it as that's what it was?

No, because then everyone would be totally scared, because the idea that there's a conflict here in the US is too terrifying. So instead you just have these accidents But I'm sure that people in that world of strategic security think a certain percentage of them might be from, opponents of the United States.

So the good news is that it seems pretty contained, right? We so far haven't had something that is on a scale that the public has really registered. So I think that's something. So I think there are many reasons why we might be seeing this happen. But again, what's so extraordinary is all these events occurring and the markets are still pretty solid.

So obviously the markets aren't too worried about the loss of the physical infrastructure, even in a war zone like what we see around the strait, let alone adding onto it critical infrastructure of oil and gas in the US. It's actually encouraging that you could remove that much capacity and everybody goes, "Okay, we'll just move on from here," right?

So that's one thing. The scientists are a related matter in my view. And th- this is a more-- to me, more interesting, more important subject because we have maybe now something between 12 and 15 of the most senior American Nuclear scientists or people who were working on materials related to nuclear, capability have literally just disappeared or suddenly been killed in very odd ways, in statistically unlikely ways.

And maybe the tell has been that for a long time there was no investigation. And you're like, "Wait, how can our most senior people, people who are running things like the Air Force Research Lab, just suddenly be gone and nobody asks any questions? So what's going on?" And I think the answer is nobody knows.

We have started to realize this is not only happening in the United States, it's also happening in China. A lot of their senior scientists have suddenly disappeared, or especially younger ones, died under strange circumstances. So again, I look at this and I'm like look, we're having extraordinary events happen right now.

Not only the Genesis mission, which is where, like I said, all those super classified technologies around nuclear are suddenly going to be revealed, made available to the public in what the president will no doubt view as a kind of Robin Hood move, right? Take it out of the control of the traditional military industrial complex and put it into the control of the public who paid for it.

But are there gonna be people who don't want that to happen? Sure. It's nice having a monopoly on certain technologies. So is there a pushback going on? Is this about removing the people who know how to do these things? Is that? I don't know. I'm a little bit hopeful that it might be the opposite, that maybe there's a gathering of the best scientists on the planet on this subject in anticipation of announcements from both the US and China that we've had massively important breakthroughs.

So is this then tied as well to, or is it pure coincidence that you have a president who suddenly announced and is in fact executing the declassification of all the documents and evidence related to the famous UAP, UFO, call it what you will, anomalous phenomena subject. And I think they are intertwined.

It's difficult to disentangle them. And the public is beginning to see, and, let's face it a billion people have now looked at the declassified website that the White House put together. And I thought personally it was a very important signal when the White House set up two websites alien.gov and aliens.gov, and everybody laughed and said, "Okay, the president's losing his marbles," and da.

And I'm like, oh, this is maybe very clever because I bet a bunch of these scientists who've been working on these super hyper-classified subjects probably have developed patents around their knowledge, maybe not on the exact thing they're working on, but on tangential aspects, 'cause this is what scientists do, right?

But under US law, if the origin of a technology is not human, then the patents are not valid. So is this an effort by the president to say, "You guys who've had access to all this technology and didn't share it with the public, I'm gonna not only take it off you, but I'm not gonna allow you to say that you still own it through some patent claim.

And instead, you're gonna find out that because there's a possibility that it has a non-human origin, that patents are nullified." Could that be part of the story? I'm not saying that's definitively the case. I think it's an interesting thing to think about. And so now as this stuff is being declassified, We have to ask, why would anybody be upset about all this?

And notice the speech that the president gave a couple of months ago to the defense community, where he basically said, "You guys have been optimizing for share buybacks and for profits, and this is gonna end. You're now gonna optimize for the creation of defense equipment that actually works at a reasonable price.

And so the old game is over." Which, by the way, is the same position he has with the pharma companies, where he said you guys were charging Americans three times as much for drugs as you charged anybody else in the world. This is over, and that's just the way it is." And they have said that's what we're gonna do."

So it's a kind of a general strategy to reduce costs on the American budget and the American taxpayer. So even if it's not true, let's say there are-- there is no non-human intelligence, this whole thing is a ruse, it's still an interesting strategy for reorienting the balance of power over technology.

It's still an interesting strategy for bringing technologies that have been You know, outside of public use into public use. Now, whether or not you believe, there's intelligence beyond humans is a different matter, but I think this is also an extremely important, interesting question to ask at a time when AI is accelerating, and we all can feel it as we're talking to the AI.

It sure feels like an intelligent, maybe more intelligent something is on the other side. And I'm-- as I'm talking to you, I'm looking out a window at a bunch of trees, and I'm thinking we're so arrogant as humans when we say, "Is there intelligence, non-human intelligence?" And you're like, trees move in the direction of the sunshine.

That is an intelligence, right? We know that trees migrate their roots together, and they share information through that root network. That's intelligence. So this idea that, we're alone and there's nothing else this intelligent, that is actually not right. And can I just-- I know it's taking a little time, but can I just tell you one quick story about whales?

'Cause this is just my favorite one. AI has recently cracked one of the whale languages. They discovered that these whales have specific and shared nicknames for the marine biologists who study them. So of course, the marine biologists are all like, "Oh my God, what's its nickname for me?"

And I'm like guys, did anybody ask the whales what do they think? What is their opinion? What knowledge do they ha-" "No, we just wanna know what is it calling me," 'cause we're so darn egotistical. So are we at a moment with this declassification process that was forcing humanity to recognize that we are not the only intelligence in this universe?

There's plenty of it right outside our window if we just look at it and reframe it in a different way And what possibilities does that open to our understanding of the world? So I'm-- I think it's a very exciting time in technology, and this is the reason I'm not down on the, "Oh my God, we're all gonna have a recession."

I think that we're coming into something that is bigger than the Industrial Revolution, for all of humanity. So I wanna I be clear. I may be the most optimistic economist on the planet at the moment but somebody has to walk through the upside because everybody else has covered the downside.

Erik: Pippa, I can't thank you enough for a terrific interview. We do have to call it there in the interest of time. But for our listeners who want even more we do have more coming up in the sense that Pippa and I and Jim Bianco will be doing a video discussion for Zero Hedge about Kevin Warsh on the Fed and what that's going to bring, monetary policy, a whole bunch of things.

That's... We don't have, unfortunately, as of our publication, or at least as of we're recording this interview, we don't actually have a date for that from Zero Hedge, but it should be next week sometime. So follow Zero Hedge Debates on X if you wanna find out about that one. We'll try to get it into this week's Research Roundup email, but I'm not sure that we'll get a date from Zero Hedge before we go to air on Thursday.

Meanwhile, we do have, by pure coincidence, Jim Bianco coming up for a cameo appearance coming up next to talk about an update on the Iran conflict. Pippa, before I let you go, I wanna come back to your Pippa's Pen and Podcast, which is your fantastic Substack. I'm addicted. For people who don't know about it we've got a link t- on the Research Roundup email where you can click to connect to it.

Tell people what they can expect to find there and how they can sign up. 

Pippa: Yeah. So this is where I like to write about all these things that are going on in the world economy and to help people widen the aperture of the view through which they see the world.

The lens gets made smaller every day by all the algorithms that only give you more of what you like, and they fence off what you don't like. So I'm trying to widen the view, and that's what I write about on... in the column. 

Erik: Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.

Erik: Joining me now is Boxwood CEO Morgan Downey, who's probably much better known as the author of Oil 101. For any listeners who are not familiar with that book I guess for most professional investors even, maybe if you're not in the oil market, you haven't heard of it. But if you are in the oil market, there's nobody who's anybody who didn't start their career reading Oil 101 by Morgan Downey, which is a book that really goes from upstream to downstream and tells the whole story of how the energy market works, from the logistics and the tankers all the way to futures trading.

It's an amazing book. There is a new version. We'll talk about that at the end of the interview. But Morgan, I wanna start with the big picture. Boy, Middle East I keep telling my listeners I think it's a really big deal, maybe more than the equity market is discounting. You're the expert.

You're literally the man who wrote the book on the market. Is this just another hiccup, a- another little Middle East skirmish, or is this a significant event in the history of the oil market?

Morgan: This is the significant event. The next 50, 100 years whenever the next history of oil over the next 200 years probably is written.

We are living in an event that people have modeled, traders have modeled it, risk managers have modeled it, the oil market itself has modeled it for the last 60 years, and this is it. This is the most significant event in the oil market. And over the last, s- since, probably World War II, to be honest.

Even it's greater than the 1970s crises. It's a larger, it's a larger event. And what's interesting is that a lot of things that people had presumed were going to happen when a situation like this occurs, this, the shutting of the Strait of Hormuz, have not happened. We haven't seen $500 oil yet, yet, because we're still in the middle of the crisis.

We're at 100, just over $100. And we also haven't seen a panic and a kind of, with equity markets are still relatively strong. So this is a crisis that everyone had worried about that potentially would happen. It's happened and is happening. But now A lot of the assumptions of how the world would react have not come to pass.

As I said, equities seem to be sailing along okay. Oil prices are a little bit higher, but not at crisis levels higher. It seems that the world's kind of taking this in stride, which is very unusual. The world taking this in stride is not what people would've predicted.

Erik: So why is that? Because as you say, this is, Strait of Hormuz closure has literally been the stuff of doomsday blogs. Yeah. It's what the doomers say, "Oh my God, Strait of Hormuz closed for a few weeks, you'd see thousand dollar oil," yes. Yeah it's been way longer than anybody...

And I used to get laughed out of the room for worrying about this because people thought it was a doomsday scenario that's never gonna happen. And even the people who were the biggest skeptics, Morgan, what they said is, "That can't happen because the consequences would be so dire that we couldn't, possibly let it go on for more than a few weeks."

Well- Yeah ... but it did. Nothing really that big of a deal has happened yet.

Morgan: Yeah. And I think a few key things have mitigated, at least in the short term, and we're s- we're over two months into this situation, but a few things have happened. One was the huge strategic petroleum reserves releases around the world.

So you had the US SPR release a whole bunch of other countries within the IEA, the International Energy Organization released SPRs. China has a big SPR, their own domestic SPR. So there was a large short-term dumping of oil, physical oil into the oil market. And oil is a very unusual commodity.

It's not unusual. It's like any commodity in that the oil industry hates to carry inventories. Carrying inventories, storing oil in tanks or in pipelines or ships or whatever, it costs money. What the oil industry loves to get it out of the ground and get it to the customer as quickly as possible.

It's never really that profitable to store oil. So the oil industry tends to try and run inventories, stored oil as lean as possible. That's always been the case for since the oil industry began 150 years ago. And that lot of oil from these strategic petroleum reserves that's a lot of oil for all of it to be released in one month into the market.

It's like someone a snake eating an antelope. It's kinda stalled- the rally in oil markets because the oil market kinda has to digest that big glut of oil from the SPR releases that were released in one glut. So that was the first thing that stalled the rally.

It stopped it immediately. It was like throwing water on a fire. It just quenched it. The challenge is that there's only so much SPR out there. There's not... this is not an indefinite situation where you can keep dumping SPR into the market, but it did stall that initial rally.

And then in addition to that, you had some demand reduction. You're-- when you went from, we were, before the crisis, in the 60s basis WTI or even Brent crude, and now we got up to 100. Some demand did fall off. It wasn't a huge amount, but a little Usually it's jet fuel is the first thing that reacts when oil spikes.

So jet fuel demand fell off a little bit enough that it took the edge off the rally. So you had the SPR release, you had a little bit of demand destruction. Demand destruction in oil, as I said, jet fuel's one of the first to go because it's it's discretionary. People just choose n- to drive to their vacation or take a train rather than fly to the other side of the world.

So jet fuel, there was a little bit of demand destruction, and then you had, so you had the SPRs, you had a little bit of demand destruction And then you had a what I think is the kind of the hidden thing that has occurred in the oil market over the past five years in particular, is that over the past five years, we had a huge increase in efficiency in inventory use across the oil industry, and it's one of the most boring things to talk about.

If you look at BP or Shell or Exxon's financials, deep in there, they'll talk about working capital usage and that they've gotten 20, 30% more efficient in terms of their working capital usage, which is basically a lot of its inventory, storage oil. They've reduced their need to store oil by 20, 30% over the last five years.

A lot of that is due to they've now got sensors, electronic sensors on pipelines and tanks, so they get real-time data on inventory levels. It used to be 10 years ago, 20 years ago, a guy sticking a stick into a big tank. It was literally that basic, even as recent as 10, 20 years ago. That's all gone now.

It's all electronic. You've got much better demand forecasting models so people can... the oil industry is a lot of really lo- small local markets. It's a big global market, but at the end of the day, there's usually this airport, this tank terminal, this gas station. It's a very local market. And so the oil industry has become much better at forecasting local, hyper local level demand.

It's almost like Amazon does delivery. The oil industry has applied that same big data technology to inventories such that the world has rounding the numbers here, 8 billion barrels of oil in storage globally in SPRs and commercial storage. 10 years ago had 8 billion.

Today, it has also 8 billion, but the world has loosened up the need for that 8 billion by about 1 billion barrels. So there's a hidden kind of extra availability of oil in the market in these inventories that has been loosened up by just technology improvements over the past five years. And if the evidence for this is you have to just look, just search for working capital of BP.

They announced their last year they had, as I said, reduced their inventory levels by 25, 30%. And so that I think has been a hidden reason for oil kind of being a little bit looser in terms of this not rallying to $200, $500. And then finally, another reason is there was a lot of oil in floating tankers.

Everyone points to it. There was 150, 180 million barrels of Iranian oil because Iran, remember before this, the crisis, it was sanctioned and via mostly US sanctions. But that meant that Chinese refineries and a lot of refineries around the world, they would buy the occasional cargo, but they were very reluctant to deal with Iranian oil.

So Iran had to store all this They kept producing oil and they just put it in in tankers offshore Malaysia and offshore Singapore, near Singapore, and a lot of that oil now is being drawn down. So there was a, there was a little bit of excess... not a little bit, a lot of excess supply in the market.

And so all of that together combined, the big SPR, that was like a first shot that, that really took the energy out of the rally. And the world has got probably another one or two slugs of SPR releases that could hit the market if governments decide it over the next month or so. But and then you had the inventory efficiencies, you had the floating storage that Iran and a few other countries had.

And so you had all of these kinda combined to take the edge off the rally and the oil price rally, but the underlying crisis is still there. And, one of the, one of the things when people talk about a crisis, everyone thinks about we're gonna run out of oil, like as in tanks will go to tank, empty tanks.

That doesn't happen. The world is a f- big... The oil world is a f- a big floating, people make the analogy of it's a big floating bathtub in that no one's gonna run out of oil. The world is still producing w- we, before the crisis, 105 million barrels a day. Now it's 95 million barrels per day, roughly.

And so the, but the world is still producing 95 million barrels per day. It's still a lot of oil being produced and refined. It- all that's gonna happen is that oil prices now we're in a situation where we kinda have to go up, unless the crisis ends today, and even if it ends today, we, this may happen.

Oil prices have to go up to kill more demand destruction. And demand destruction, the oil industry started in 1859, demand has only fallen four years in all that time. So over a hu- almost 160 years, oil has only fallen, demand year on year, even throughout wars, World War I, World War II, it only fell in 1973, 1978 2009, the housing crisis, and COVID.

Four times over the last 160 years. And Prices are gonna have to rally to cause that fifth year of demand destruction in the oil industry. Oil is very inelastic. People need it to drive to and from work, to and from school. It's one of those things, it's an essential of modern life, and it doesn't matter how, "Green People" say they are you buy anything, literally a pint of milk in a, or gallon of milk in a shop that everything is transported via oil.

So it's in everything that people touch. And so- Price has to go a lot higher to kill demand. As I said, d- jet fuel is the first thing to, to the first cookie to crumble in the oil demand sequence. The next one tends to be gasoline for cars and then diesel for trucking and so on.

But it's basically, it's starting to happen, but it needs to happen much more severely. And, so we're not gonna hit a situation where tanks are empty, but we're gonna have to hit a situation where if this goes on, we are going to go to 200-plus oil if this goes on. We're currently the middle of May or towards the end of May here, 2026, and we're two months on-- more than two months into the crisis.

If this goes, this can't go on for another month when we can have a few slugs of SPR releases, but this is not sustainable without, with $100 oil. We need oil prices... Either two things have to happen: oil prices have to go much higher, 200-plus probably, to kill demand, or the crisis ends today, and then even if the crisis ends today, there's gonna be a wind-up time of people ha- all this production in the Middle East has been shut in.

It has to be restarted. Tankers have to start going in and out through the Strait of Hormuz. So there's gonna be a recovery time and and longer term, five years plus I think the Strait of Hormuz is going to be removed as a choke point for the world oil market in, within five years.

Every Gulf producer, Saudi, UAE, all of them Iraq, they're all going to start building these pipelines, overland pipelines to avoid the Strait of Hormuz regardless of cost, and the Strait of Hormuz is not going to be an issue in five years plus. So this is a five-year issue. Iran played their card. They choked the Strait of Hormuz like everyone worried about for years.

They've played that card. Now, all these pipelines are gonna be built. It's gonna cost $50, $75 billion. And put this in context can this... Is that a lot of money? Saudi Arabia on that NEOM project, that kind of desert city that they were gonna build, was gonna be $1 trillion. So 50 to 75 billion, yes, it's a lot of money.

In the Saudi oil industry, no, it's not a lot of money. It'll add $1 or $2 a barrel onto the cost, and for the Saudis and others to avoid using the Strait of Hormuz within five years, they're gonna build these pipelines. So the Strait of Hormuz has got five years left as a choke point. Beyond that, it's gonna be replaced by pipelines.

It is... There-- These pipelines are already... Drawing boards are, have already been drafted to get these things built. So it's a certainty that that strait is, within five years, will no longer be a choke point.

Erik: Okay, so recapping what we've discussed so far, it is m- fairly easy to understand how we got to where we are today, which is we came into this crisis with a fairly significant supply surplus.

Then as we got into the crisis, there was a whole bunch of SPR releases. There's a whole bunch of floating storage. For a while, Iran was exporting a lot of its own oil. China has a huge inventory o- of SPR and commercial storage. It all makes sense, but the question that's in my mind now is that explains how we got six weeks farther into this than I thought possible at these prices.

How short is that fuse from here? Is this something where, oh we could still go on for three more months and then it's gonna really start to get bad? Or are we down to just a matter of weeks or less before this really turns into a major big deal?

Morgan: We're down to weeks. Yeah, it's really become that simple.

Erik: And is it linear? Is it... Should we expect prices to gradually start creeping higher and higher? Or is this something where one day an event happens where somebody says, "Oh my gosh, we're completely out at location X," and that's a Bloomberg headline, and people panic and, it all happens at once?

Morgan: I think when people say they're gonna be out, I think that the only places that will be out of storage will be those places that set the local price below the international price. So oil will be still available. As I said, there's still 95 million barrels per day produced outside of, that's available to the global market.

There was 105 before this crisis, and so 10 million barrels a day of inventory, or sorry, of daily production has to be killed. That demand has to be... And the only way to kill demand is higher prices. So we're gonna see $100. It still doesn't... it reduces demand a little bit, but it doesn't reduce demand enough.

We're going to have to see a lot higher prices before to c- to reduce demand by 10 million barrels per day. And w- what I think is gonna happen is that you're going to have a situation where there will be some sort of negotia- not negotiation, some sort of either stalemate where we get a a kind of a ceasefire-type situation, and the strait kind of opens, but it opens, I think, slower than people anticipate because you're going to have tankers willing to transit that strait, and that's a lot of tankers every day.

It's 100-plus tankers that go through that the Strait of Hormuz. And so you've got to have a situation where- the process has to be restarted, and that restart process y- your listeners are of course very familiar with the fact that these tankers from the Middle East to China, Middle East to Japan, they take a month to, to make that journey.

So this process is like a flywheel. Once it stops, you... it takes a month or so to get back up and running, probably even longer, maybe two months. And even then, even if the tankers start moving a lot of this production is shut in, and so that production, when it's shut in, literally people have turned valves at the wellhead to stop oil coming out of these wells.

And those valves have to be turned back on. The whole process, oil is a flow type process. Everything is always in movement. These liquids are always in movement. These things have to be restarted as well. And the hope is that not much damage has been done to these, this production, these wells by shutting in production, but there's always some damage and always some unknown when that restarts.

And so that whole process, like a flywheel, is gonna take one or two months to get back up and running. So even if today, m- end of May 2026, the process starts up and running, we're into June, Jul- end of July before we've got a full even close to recovery. So This is gonna take a bit.

It's gonna take a while, and I think that what's gonna happen is that people will realize it within... people are familiar with equity markets and foreign exchange markets where you can literally print paper or print equities, issue stocks, and it's immediate. Just it's an electronic transaction.

Oil is not like that. It takes... there's a a, if it's a physical process, it takes a while to get started and stop. And I think that the markets have become have think that this is like a COVID-type situation where the government will print money to get the whole process started again.

It, that doesn't help. It l- it helps certain markets, but it won't help in oil because this is engineers have to get literally on the ground, start up production. In Qatar, there's a lot of natural gas there, LNG, liquified natural gas that facilities have been damaged and might take three or four years to repair if they can even get the repairs done in that time because parts are, they, these turbines are very are being demanded by a lot of industries, including data centers.

But I think that the market has been, less panicked. No one likes to panic in any situation. The panic is never helpful. But I think this is, we're in a crisis where this market is unusually calm. And as I said, there's, and you mentioned, there's a bunch of reasons why we've haven't rallied fast, the SPR dump, the inventory overhang, all of these things have happened, but I think that they've lulled the market into this feeling of safety that is not r- reality.

We're still in this crisis, and it's a it's like someone had a heart attack, and they've made it to the hospital, the emergency room. They're still in the middle of a heart attack. It's one of those w- where we s- even to get the heart started and the blood flowing again, we still need to get that the, it, that there's still a risk in this whole situation. And I would be shocked if we're not over $150 within a month. It, I think this is gonna take a lot longer, even if it, as I said, even if peace is declared today, it's gonna take a lot longer to restart than people think for confidence to restore in the oil market itself and for all those valves to be turned back on, and for...

and it's n- when I say turn the valves back on, it, they're not, I'm simplifying it grossly by saying that. You've gotta have a whole situation where a lot of these Saudi wells, these reservoirs are water-flooded, where there's water pumped on underneath the oil to help keep the pressures in the reservoirs c- up so the oil comes out of the ground.

And these, it's a, there's a, an engineering, very complex engineering process. It's not just turning a valve behind the scenes to produce all of this oil, and that process has never really been shut in to this extent ever. And there's a lot of gonna be, a lot of unknowns that are gonna be f- discovered over the next two, three months, four months that could really complicate the restart.

So we're still in the middle of the crisis. That's, one thing to, to think about in terms of it... We should we need to c- create demand destruction to deal with the current crisis. But then going forward, the restart process, I have this feeling it could take a lot longer than people anticipate.

And so I... my personal view is I think we stay at $100 plus. People think we're gonna collapse immediately following the strait reopening in two or three months' time. I think we stay at $100 plus for a year unless there's... barring an economic, global economic recession or anything like that.

I think that th- this risk premium for... that's gonna, is gonna stay there because even if there's a p- peace declared today, there's gonna be the risk that Iran falls back and the crisis restarts in another six months' time or four months' time. So I think that the current crisis, we need higher prices immediately to kill oil demand.

 secondly, the r- the restart process, I think it's gonna take a lot longer, six months to one year, maybe even longer. In some cases like the LNG in Qatar, it's gonna take four or five years because engineering facilities were damaged by drones. I think it's gonna take a l- a lot longer than people think.

And so I think that we may see $100 plus oil, barring a recession or anything like that, $100 plus oil for a year or two, and which is... that creates opportunities for other parts of the oil industry. The US oil industry, Permian producers are having a great time right at this moment.

Erik: Let's talk a little bit farther out then about how... beyond just the immediate recovery, how the global energy markets evolve afterwards, because it seems to me we've already seen some pretty strong signals. United Arab Emirates was probably half of global spare capacity before this crisis.

Pulling out of OPEC seems to me like a really clear signal that their intention is gonna be to pedal as fast as they can and just produce as much oil as they possibly can as soon as this is over. First of all, would you agree with that? And if it is, doesn't that kinda leave us in a place where, okay, then Saudi Arabia would be the only remaining spare capacity?

They're not gonna just, sit this one out and let everybody else make the profit. They're probably gonna produce as fast as they can too. So doesn't that mean that although maybe that will help bring the prices down and the supply back online, doesn't it mean that we end up with no spare capacity at the end of the day?

And then, okay we'll just make more. Wait a minute. There's been underinvestment in the energy sector due to ESG for more than a decade now. It seems to me like Maybe for the next, decade or so, we've got an investment deficit-driven energy crunch. Is

Morgan: that realistic?

I think it is realistic. I think you've got... The, going back to the UAE, them leaving OPEC UAE was always-- Everyone in OPEC except for-- OPEC is Saudi Arabia. It always has been Saudi Arabia. They've been the big boy on the block in terms of cutting production to maintain prices high, at a higher level than otherwise would be.

So Saudi has always been the real OPEC. All of these other countries, O- UAE and everyone else, they've been cover to make it seem like there's a global consensus. It's one of these, it sells much better when there's a group involved. Even, it's a cartel.

That's what... They're a price-setting cartel to try and keep prices high. So it's it doesn't sell well to the consumer that they're trying to keep prices high. That's why OPEC exists. So Saudi has been hiding behind all these other countries, including UAE. UAE itself, they've been they've had, their, their politically, they're, they've had issues with Saudi Arabia over the last t- for a long time.

They're a much more Western-focused entity, with Dubai, the success of Dubai in tourism and all of that. So they've been much more they're probably 10, 20 years ahead of Saudi in terms of diversify- trying to diversify their economy away from oil. And so I think that them leaving OPEC, it, it was it was always something I think that the oil market suspected that they would do. But now that they have done it yeah, they're gonna produce us flat out just like anyone else. They're gonna do they have no OPEC constraint. So it's gonna be, Saudi is gonna be the only player left with major spare capacity in OPEC.

So the dynamics of OPEC in terms of oil prices and that, I think that at a grand level, I don't think it's gonna change the long-term outlook for oil in terms of Saudi was always the big br- big brother in OPEC. It's gonna continue to be the big brother.

Yes, UAE left, but I don't think it's as big a deal as the market kinda as it's not gonna be a big deal long term. Going to the the thing you mentioned about longer term and ESG and investment in oil and gas pre- Three months ago, we were at $60, give or take, WTI. The marginal producer in the world was the US Permian producers, all these fracking wells in West Texas.

They were the marginal production that grew over the last 10 years. I- when I wrote Oil 101, that was published in 2009. Since 2009, what's called conventional oil production, as in you drill a hole straight down... i'm simplifying grossly here, but you drill a hole straight down and you, you hit a reservoir and the oil comes up by itself.

That production has stagnated. It's gone sideways over the last 15, 20 years. All of the growth in oil supply over the last 15 years has been from fracking, which is a US phenomenon because it's more kind of a manufacturing type process. You drill, you move the well on a pad the drilling rig 50 meters, you drill again, you frack, you drill sideways.

All of these kind of technologies have only been developed in the last 15, 20 years. So since 2009 oil production has come from this fracking and horizontal drilling as well as heavy oil out of s- out of Canada. Those have been the two major supply areas over the past 15 years. Both of those things are high cost.

They're very capital intensive. They're People make the analogy that they're akin to manufacturing because as I said, you used to drill a well, and it would be the only you would drill on a, in, within 40 acres. Now, you drill a well, you move 100 meters, you drill another well, or 50 meters, you drill another well.

So it's it's become much more capital intensive, but that, what that means is that the the marginal cost of production over time ha- is now 60, $70 per barrel for crude oil. So as long as we stay above $70, give or take WTI crude oil the oil industry can fund itself. Can, at $100, the oil industry is actually a little bit, it's decently profitable.

At 70, some w- marginal producers start shutting in production. In terms of the ESG and the investment against energy growth, w- a lot of that that ESG initiatives, those initiatives were to stall oil production, stall nat gas production. Those ESG kind of initiatives have fallen out of favor and the oil industry has just moved on beyond them.

It's at $100 oil as we are today, give or take, and the oil industry doesn't really... w- the oil industry is still very conscientious about pollution and making sure the environment is taken care of. It's not a, it's not a careless industry. But those kind of ESG where people were trying to reduce energy production, those kind of initiatives I think have stalled.

There's still a remnant of the, philosophical objections out there. You've got now a big push, you may have seen in social media all these people complaining about AI data centers, and everyone's couching it in, "Oh, they're too noisy.

Oh, they consume water." They don't consume water. They actually have closed systems, or they don't they don't... They recycle their usage. People say they're burning nat gas and other fuels. Yes, they do. Yeah, they do. That's a reality. The world's economy does need energy, and AI data cen- data centers are, 4% or 5%, or will be in the next year or two of global oil consumption or global nat gas and power consumption.

But that kind of ESG anti-energy underpinning is still there. It k- morphs into different forms. It's currently morphing into an anti-data center initiative. I think that what happens is that, people forget because people are disconnected from where their energy comes from.

Oil, nat gas and coal are still 80% of the world's energy usage. And for good or bad, for good, here we are talking on the internet on other sides of the world and listeners are listening in from all over the world. The energy from oil, nat gas, and coal enables this situation where we are living in a safe, much safer more knowledge is available type environment.

If you cut energy supply, cut nat gas, cut oil, cut coal you're trying to stall a lot of the global economy. And people can be disconnected from where basic things come from, even their food. A lot of food we've discovered from the closing of the Strait of Hormuz, fertilizer also comes from nat gas.

It is the famous nitrogen creation process, and it relies on cheap natural gas. So a lot of fertilizer a lot of plastics, a lot of the energy to move things around the world, food and tractors and everything like that comes from energy, from oil, nat gas and coal. And if you restrict those energy sources.

And if you try and go for just wind and just solar, they're good. Wind and solar, there's nothing wrong with them, and they have their place, but they don't meet all of the flexibility and the use cases. You can't make fertilizer from solar yet. Maybe one day you... someone will discover something.

But one day, the oil and nat gas and coal they are essential to, hydrocarbons are essential to modern life. And, things like nuclear, they're also very useful and should be, I think, myself personally, I think should, they should be expanded as a part of renewables ecosystem. And but I think that the oil industry at $100 oil, I think is going to be okay.

I think at 70 and 60, which it was a few months ago, it was not struggling, but it wasn't it wasn't thriving. So I think at $100 oil, the world in the next few years will get enough oil out of the ground and nat gas to enable and enable growth to continue. And an interesting kind of side note is that Saudi Arabia, they their famously cost of oil production is five, $10 a barrel, and here we are at $100.

Unfortunately for Saudi, it's their only industry pretty much, and so they're... If you factor in all of their government welfare and costs like that, military their cost of production goes up to $95. So Saudi is, at $100 oil, is break even. So I think here we-- That's, it's interesting that we got to $100 oil.

I think this is a spot where consumers can tolerate, producers can make a decent profit and g- and bring additional barrels onto the market. But in a crisis, $100 oil is not enough. We need to get much higher quicker if this continues, if this crisis continues. I think it looks like it, even if it's resolved, this is a crisis that's gonna take a while to restart.

I think we're gonna see $150 plus oil over the next month or two regardless of what happens, even if there's peace in today. I think that we're gonna, we need to slow down demand, oil demand a little bit by 10 million barrels per day, 10% roughly over the next few months or weeks at least.

Erik: I agree with you, but at the same time I'm very concerned because from a macro perspective the world could easily tolerate a spike to $150 oil that lasts for a couple of days.

But if we're talking about months and months of $150 oil, I think that's a, a global recession to depression kind of outlook.

Morgan: So- it is. Oh my gosh. The a- the analogy of that situ- or the comparison of that is the housing crisis 2008. People forget the, in the run-up to the 2008 housing crisis, one of the things that pushed the market, the macroeconomy over the edge, was we were at $150 WTI.

We were at, from 2005 to 2008, the oil market moved Up $100 a barrel, and just right before the crisis in the summer of 2008, we were at 150 plus per barrel oil, and that was the final straw that pushed the market over the edge. And right up to the middle of 2008, everyone knew the housing crisis was highly leveraged, even though people say, "Oh, I, they didn't know it was coming," and whatever.

It was... Everyone knew that the market was very leveraged. But the market still hummed along right up until oil got to 150, and then that was it. That money has to come from somewhere. People, only have so much spending money or disposable income, and if they have to choose between buying a, going on vacation or buying a new computer or a new phone or driving to work, they're gonna...

if it's $150 oil, which is, $5 plus, $6 plus per gallon gasoline it's, they're gonna choose to drive to work because it's an essential. So unfortunate thing about $150 oil will kill the economy. It it, there's no doubt about that. It's even if it's over for a few months, it's gonna really hurt.

Erik: It seems to me the critical question to ask then is if what you've said so far basically leads me to conclude that the prices only have to stay super high for long enough to cause about 15 million barrels per day of demand destruction. Okay, can the global economy tolerate 15 million barrels a day of demand destruction because, okay, we'll just carpool?

Or is that enough of a hit in... it's about 7% or 8% of global energy consumption. Can you just, cut that back and everybody carpools to work and it's okay? Or is that just a shutdown kind of event for the global economy?

Morgan: I think it's gonna be a shutdown type event. I don't think it's gonna shut down, but it's gonna be an event where marginal Businesses that rely on low oil prices, tourism even delivery...

everything is delivered, you buy anything on the internet these days, it comes by oil. People, they forget it's a diesel truck. Maybe the last mile is electric, but the big long-haul trucks that drive on highways, they're all diesel. Trains are diesel, train aircraft are jet fuel.

And that, getting that 10 10 million barrels per day cut in demand destruction, it's going to be very painful because as I said, it's oil is inelastic, it's an essential of daily life. It's one of the last things people cut, and so the only reason they cut consumption is because prices get too high.

And it's gonna be, I think it's gonna, it'll be a little bit painful. It's a terrible thing to say, but it's, it doesn't happen that often in the oil industry. As I said, it's only happened four times in 160 years where oil demand has fallen year on year, and those four times oil prices had to rally a lot.

In going back to 1973, oil prices went up fourfold, 400%, which, in the space of six months. So we went from back then, these are pre-inflation adjusted dollar prices, but we went up 400% within six months. That was the first kind of recent times oil crisis. And that was a, it caused demand destruction.

And the one thing I would always mention to people is that when they think about the 1970s, 'cause they're the kind of the classic oil demand destruction, 1973 and 1978. It was the OPEC and the Iran situations in ni- in the 1970s. And people also have this image, the grainly, grainy low-res images of lines at gas stations.

And the interesting thing to always note is that the only, one of the few places in the world that had lines at gas stations was the US, and the reason it had those lines is that US government in, as a reaction to the oil crisis in the 1970s, the US set the price, the domestic price of oil in the US below the international price.

And so it created a shortage because if you're a, an oil producer in Saudi Arabia, you wouldn't send your oil to the US because the price was capped. And so the lines were all artificial. They were government-created lines in the 1970s. So there's-- there will be no shortage of oil in this crisis. There will be no lines or shortage of oil if you have no price caps.

The flip side of that is that you might have $200 per barrel oil with no lines. And so for a lot of governments will feel like they need to intervene. The problem is oil is a global market. If you put a local price cap, you're just gonna cause lines in your local country. So if Germany puts a price cap or England, UK puts a price cap, there's gonna be lines in that country alone.

Everyone else will be fine. They'll be paying $200 per barrel, but they'll be-- they'll have supply. There's that interesting dynamic of comparing... Because this, in this situation, every oil analyst, including myself, we look at back at history and say, "What happened in the past?"

This time is different. There's a whole bunch of different dynamics are happening right now. But the, the-- a few lessons to be learned from the 1970s was, one big lesson is, if you are a government, do not cap your local price of oil. You are gonna cause a local shortage in your market. That's the one big lesson that I would encourage if you're a government-influencing person, do not set a price cap on your local market.

It's, it backfires big time

Erik: I w- I would counter that with I can't remember if it was Warren Buffett or Charlie Munger who said the the biggest lesson that history teaches us is that people don't learn from history. And I don't think governments have learned their lesson or are going to learn their lesson.

I predict that they... There will be price controls, and they will cause all of the adverse consequences that you're predicting. But that doesn't mean they're not gonna do it.

Morgan: Yeah. There are price controls out there for certain goods. India has famously price controls, and they're already finding shortages of of oil.

Allowing the free market to operate, it feels sometimes it gives people a sense of there's no... You're losing control because the price is being set out there in the market. Sometimes it's al- it's the... not sometimes, it's almost always the best thing to do, is just let the market do its thing.

It... Prices will, yes, they will have to go higher to kill some demand, to sh- create some demand destruction. But y- at least your, if your local population wants to buy oil, it's gonna be available. It's gonna be a little bit higher price, yes. But there's no... Apart from Saudi Arabia, they really are, with their spare capacity, trying to control the price of oil, the marginal price of oil, and all these governments with their dumping of the SPR into the market in a very short period of time, they're trying to keep the price down.

So there is, quote-unquote, "manipulation of markets" going on, but there's no nefarious secret group or country or company trying to do. I think everything's pretty relatively transparent, so it's just a matter of, look at history, look what happened in the 1970s. Don't put a local price cap.

You're just gonna kill your local economy. It's basic common sense. And yeah, unfortunately, as you said, some g- some governments fail at basic common sense in history.

Erik: Let's come at this from another angle, because if I think about the consequences of everything that you're saying, what you're really saying here, Morgan, is It's not a question of prices might rise, prices might not rise. It's a question of prices must rise enough to cause 10 million barrels or about 10% of global energy demand. We have to see demand destruction on the tune of approximately 10% gross of total global energy production or energy demand.

Yep. When's the last time the world went through a 10% reduction in energy demand and- Okay ... or came anywhere close to it? Yeah. And what happened economically then?

Morgan: So here's where, in, on trading floors and hedge funds and and basically s- research firms, they always try and back test when something like this happened before, what happened in the market then.

The challenge with that is that sometimes the situation is very different. So this is a supply side shock. There's a production has stopped oil coming to the market. The consumer still is out there doing okay. The most recent comparison was COVID, unfortunately, was 2020 when demand, because of the shutdowns and lock-ins demand collapsed by a lot, where it was, 20% at one stage over the, month to month in early 2020.

And so that was the last time oil had a a, it's... That was a consumption side shock. W- One of the very few consumption side shocks that happened to the oil market ever. And in that situation, we had the oil market became, discombobulated. I hate to use that word because it's a strange word, but we had WTI priced at negative prices because storage tanks became full.

It was like the opposite of the current situation in that we had demand collapsed because everyone stopped flying, stopped traveling. Every, the world kind of transport kinda shut down for a month or more than a few months. And oil inventories filled because the oil is like a flow. It's like a human body.

It's as I said, the oil industry doesn't like to store oil. It likes to keep everything flowing through the pipes, get it to the consumer, drill more, get it to the consumer. And so when COVID happened demand stopped. The oil industry is still pumping, and 'cause the oil industry hates to shut in wells because it causes all these down problems.

So that was the last time we had a kind of a 10% or greater than 10% fall off in demand. Demand recovered rel- very quickly in COVID even. But the prior situation was 2009 the financial crisis, 2008, 2009. That was the prior situation where... So 2020 COVID, 10% drop. 2008, 2009, 10% drop in oil demand.

And then before that it was the two 1970s shocks, the 1978 Iran, w- the Iranian revolution when the Shah, which was the he was a US style king installed there in the 1950s, but the overthrow of the Shah and the installation of the Islamic regime. And then 1973 was the the Arab oil embargo, so those four situations, COVID 2020 2008 the f- financial crisis, and then the two '70s shocks. Those, over the last 60 years, those are the four data points y- as an oil analyst or a hedge fund, you gotta try and back test and see, okay, when these things happened in the past 60 years, what happened to the rest of the economy?

In every situation equities took a huge dive immediately. So 2008, obviously the 1970s but also equities struggled in the 1970s. The only situation where equities rallied was COVID, and we all know what happened in COVID. There was the money printing and and the stimulus checks went out.

And so I think one of the big reasons behind equities being so strong into this crisis is that COVID stimulus is still fresh in people's minds. And everyone thinks that if this thing gets bad enough, as in this crisis goes on for another month, oil goes to 150, we may have another stimulus. It could be just turn on the printing presses.

It's inflationary and it comes out in the wash in the end. This money printing doesn't come out of nowhere. Everyone has to pay for it in the long term. But short term, that will have a big boost to equity prices. If you put 10, 20 grand into each family in the US or in Europe or everywhere around the world because of an oil crisis, I think that there's a little bit of thinking that equities, we're going to see a big bailout in terms of a stimulus if this gets worse and if it gets worse fast.

We may see, I think the equity markets are looking forward saying, we're going to have a COVID-style bailout if this thing gets really bad. And it's sad that the world has that kind of view now that, the printing press is going to save us or save equity markets. But it did during COVID.

And, people have got that fresh in their memory. That was only five years ago. I think that people think that if this oil crisis gets bad enough, equity markets will be bailed out by the printing press and a stimulus. That's, I think, a lot of what's in addition to the SPU dumping and all this kind of inventories in terms of a lot of the oil market itself is the sting has been taken out by shoving so much inventory into the supply chain over a period of weeks that the oil industry is struggling to manage these SPR releases.

I think that similarly, I think people are looking at equities and saying, hey, if the situation gets bad, we'll just do a COVID-style print and give everyone 10 grand and 20 grand and they can go off and buy tech stocks or- Fill up their tank once ... or fill up the tanks once buy some cryptocurrency and and make it 2020 rain again.

Erik: Let's go back to the two most recent major data points, which was the 2020 COVID crisis and the 2008 into 2009 great financial crisis. How long, how many months did demand destruction stay above 10% during each of those events? And how many months do you anticipate, e- even if we were to open the Strait of Hormuz next week, how many months do we have to have that 10 million barrels of demand destruction in order to balance this market?

In other words, put those two on a scale. Is this half as big as 2008? Is it just as big as 2008 in terms of how many months of more than 10% demand destruction it's going to involve?

Morgan: That's a very good question, and the interesting answer is it doesn't take very long at all. It takes... Oil gets to 150, and oil will move there fast.

It... People think we're gonna stay at $100 for a long period of time. Give the market a three or four weeks from now, if we're still here in the middle of June that's, we're gonna get to 150. If we're in the same situation, strait is closed, as I said, I think that even if peace is declared today, I think this is gonna be...

the restart time is gonna force oil to get to 150 plus, even with the restart today. And so it doesn't... And then going back to comparing it to 2008 and 2000-- and 2020 oil didn't have to... On a, if you inflation adjust the price level back to today's money, oil prices only have to stay above 150 for a few months, and you get that destruction.

People stop. A lot of discretionary consumption just falls out of the market immediately. Because when you think about it, it, people start canceling vacations. They don't book long trips. They stay local. They will cut back on other things. People will still buy oil, but they will buy less of it, and they'll be more conscious of, consumption that, that involves oil s- spending.

And so it doesn't take that long. I think in 20-- in 2008, I think we only stayed above $150 for a few months. I think it was, it literally was two or three months. And in 2020 oil demand fell below 10%, and again, it was only a few months. And that-- 2020's a complicated one because there were so many...

It was in a very unusual situation with the stimulus checks and the whole f- obviously the situation. 2008 is the better comparison, and it only took about two months of $150-plus oil for-- in the middle of 2008, for consumption to fall and stall. And then obviously we had a- an equity crisis immediately around, after that.

So it basically this happens fast. And so I would encourage your listeners to, to be prepared for, if you're one of those things, even oil, oil companies fa- are famous for the fact of, they do stress testing of their portfolios. Banks do that now since the financial crisis also.

And but they basically I would-- if you have-- y- you should be stress testing your portfolio, not just in a negative way, in a positive way, because some things will actually become very cheap when you have $150-plus oil. I would be stress testing your portfolio for 150 to $200 oil happening over the next month.

What will you do when that happens? Because that is a more than 50% chance of probability of happening over the next two months, 150 to $200 oil. The economy's gonna take a moment, as in it's gonna react negatively, the macroeconomy, and it's gonna look bad. It's gonna look-- People will be starting to say really bad things about the economy.

We're in a doom-type situation. Equities might do okay in this because as I said the people are gonna think we're gonna money print our way out of it. It doesn't help the oil industry, unfortunately, the money printing, but it might he- help equity valuations and multiples might expand because of that.

But I would s- if-- as of today, the end of May 2006, I would be stress testing my portfolio for 150 to $200 oil within the next 30 days. And what will you do when that happens? Some things, airlines, a lot of the US airlines are not hedged. Some of the European airlines are hedged. A lot of them actually are Ryanair and Lufthansa and a lot of these guys.

But so you're gonna see a lot of these instru- interesting dynamics are gonna start to appear. Oil and gas producers in the US are gonna be-- are gonna have a really good summer. No one-- They're, they're normal people like you and I. They're not gloating over higher oil prices.

They would like prices to be $100 or $4 per MBtu for nat gas. People would like those prices to be their producers. Those producers are gonna look could be looking cheap today versus if we get to 150 to $200 oil 150, $200 oil is not sustainable f- over a longer period of time, at least today.

And but I would be stress testing my portfolio today in anticipation of this happening over the next 30 days.

Erik: On that uplifting note, we're gonna have to call time on this interview. I can't thank you enough, Morgan, for a terrific interview. But before I let you go, there's another piece of news in the oil market, maybe not quite as big as the Hormuz crisis, but close, and that is a new edition of Oil 101, the book that almost all of us read in the beginning back when it came out in 2009.

Why now, almost 20 years later? I don't think this was brought on by this crisis. You were writing the new book before the crisis hit. So why the new edition? What's new in it? And for those listeners who haven't read Oil 101, tell us a little bit about just the structure of the book and what it's about 'cause it's definitely the bible that everyone goes by.

Morgan: Prior to the first edition of Oil 101, I was an oil trader. I traded, I still do futures physical oil swaps, OTC swaps. So but I was-- I had to assemble all of my knowledge and as did everyone in the industry, from dribs and drabs. There was no single source where you could say, "Okay, I want to learn about shipping oil and pipelines as well as refining, as well as a bit of history and context," like a bigger picture, zoom up a little bit.

But still not in a dumbed down way, in a relatively, information intense way. And so I wrote the book I wish someone else had written. I had to-- I kinda had to write the book. I felt obliged to do it. And that was in 2009. And the oil industry in 2009, and so we're now obviously in 2026, 2009, fracking and hydraulic fracking as well as-- so back in the big recovery in US oil production as well as a whole bunch of other kind of developments like electric cars hadn't-- didn't really exist.

It sounds like a long time ago now, 15 years. And I wrote the first edition in 2009. It became-- it was- People bought paper books back then. People don't do that now . But p- it became a really-- it became a global bestseller. It was... Basically, you get a new trader on a desk, or you're starting a job in an oil refinery or an, a nat gas producer in the US, you get handed this book.

And it stood the test of time. It's-- A lot of it was, has been evergreen. But a few things did really need to be addressed in the second edition. One was the huge growth in US oil production. So That in itself was an interesting tale of how did that happen?

And it is actually a very interesting story. The whole backstory of how US oil recovery that had been a long-term oil production, had been long-term decline, how that turned around, and the US is now the largest oil producer in the world. And is a net exporter. That was 15 years ago, that was not the case.

It was not looking good. And a lot of this was turned around by technology. The oil industry is highly innovative. People think of NVIDIA and tech companies like that when they think of technology. The oil industry is a extremely technology-intensive industry, and which is the reason why the US has become one of the largest oil producers, if not the largest oil producer depending on the month at the moment.

And so that was one reason, just to cover the changing supply, including especially the US oil production growth. And the second thing was I wanted to make it fully electronic. So it's now, it's on... If you go to morgandowney.com it's there on the on the internet.

It's much more interactive. The charts... it's no longer just a book because things change so quickly, obviously, these days that it needed to be delivered in a different format. So the second edition which is produced tw- 2026 it has much more interaction.

Everything is interactive about it, as well as it enables me I have a chapter on the Strait of Hormuz crisis, and And I update it every day or two. It's allows me to talk about, how much inventory is in SPU or how much is being drawn down. So it's basically a modern delivery mechanism for the same book.

So you can still buy the physical book off Amazon and things like that. And it's still worth getting because it's, some people like the tactile nature of being able to flip to the index and look for a particular obscure word, like what does API mean or some acronym. And so physical book is still useful, but the...

You can just go to morgandowney.com and... Or just look up Oil 101, just Google it, and you'll find the book. And it's just a modern version. It just needed, to be more interactive, which is great. It enables the book to keep up with current, evolving situations like this the Hormuz crisis.

Erik: Okay, Morgan, and just briefly, tell me what is Boxwood? You're now a software guy.

Morgan: Yeah. So as mentioned, the oil industry is a very technology-focused industry, and Boxwood is a piece of software that oil and gas producers, so the people that get oil and gas out of the ground, primarily in the US they use it to manage their hedging.

So if you're a nat gas producer and you need to lock in $4 per MMBtu gas, you can use this software called Boxwood to help you get that overview and as well as detailed level analysis. So it's air traffic control for financial markets for oil and gas companies. So it allows them to make really fast-moving decisions and very smart decisions using the Boxwood software.

So it's like a tool used by the CFO, the CEO, the treasurer of oil and gas companies primarily in the US, but all around the world, and it's called Boxwood, B-O-X-W-O-O-D.

Erik: And again, listeners, the book is Oil 101. Your research roundup email contains a link where you can find both the Amazon link as well as a link to Morgan's website, which is morgandowney.com.

Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com

Erik: Joining me now is Simplify Asset Management's Chief Strategist and Portfolio Manager, Mike Green. Mike prepared a slide deck which only contains one slide, so I guess it's not a slide deck, it's just a slide. But boy, it is a doozy. You're really gonna wanna see this chart, so I strongly encourage you to download that to accompany this interview.

Mike, it's great to get you back on the show. I've gotta ask you, because you've always been a voice of reason in my investing life I feel like I did at the end of January, beginning of February of 2020. I thought there was just information so obvious that the market had to discount it, and it wasn't.

And I felt wait a minute. Usually, when you're the only guy who sees it, it means you're wrong. But boy, I was so convinced, and I'm convinced now. I don't think that the market gets it, that we've got a really big problem with energy flows, and it seems like, it's just another reason to rally the market.

S&P all-time highs. I don't get it. Help me. 

Mike: The good news is that rising energy prices increases earnings for the energy companies which have been powering the S&P. I'm totally joking when I say this. No, look, you already know what my answer is going to be. Unless the news meaningfully impacts employment, and therefore contributions coming from 401Ks or other equivalent strategies, I don't see any reason why the marginal pricing behavior for the S&P should change.

We have the mindless bid coming from the passive robot where money is flowing into 401Ks on a continuous basis and into retirement accounts. Nobody called Vanguard and said, "Change your allocation schema." Nobody called BlackRock and said, "Your model portfolios need to change." And as a result, they don't.

And so when you get a drawdown, as we had from the February 27th until basically the early April lows, that triggers multiple forms of rebalancing. The most important of those in terms of its initial implementation is gonna be a target date fund which uses a threshold level for rebalancing out of bonds and into equities.

Every time you see that anomalous behavior where equity markets are rising and bonds are simultaneously selling off aggressively, we'll hear all sorts of narratives about, the end of bonds, Etc. But the simple reality is that's just a portfolio that has allocations between bonds and equities that is rebalancing itself at a massive scale.

And unfortunately, that's what I think we saw. And I don't see any reason for it to change until unemployment begins to rise significantly, retirements begin to increase significantly, and that bid coming from the passive robot comes to an end or turns negative unfortunately, that o- that sounds like I'm bearish because I keep saying the markets are irrational.

What I'm reminding people is the Keynesian the Keynesian statement, "The markets can remain irrational," quote unquote, "far longer than you can remain solvent." We saw that play out fiercely in April, where hedge funds decided that they wanted to hold their favored names and instead increase their shorts.

And when markets reversed, we had an unbelievable amount of short covering. We saw fast-moving strategies like CTAs and to a certain extent, vol control strategies rapidly scale up their exposures. Risk parity had some leveraging up, Etc. So basically everything hit all at once. That's the chart that I shared with the listeners, showing that we had a record one-month flow into equity markets, and surprise, we had a record one-month performance in equity markets.

It had nothing to do with any thoughtful application. It had everything to do with positioning and with a mechanical bid. 

Erik: Let's talk then about what would happen next, because I suppose with the COVID pandemic, there was a brief little emotional freak out, but then the market looked completely through it, and we saw, as a result of a lot of money printing, a rally to fresh all-time highs right in the middle of the pandemic.

Are we headed into a situation where we do have a major economic dislocation? Things are shutting down all over the world because of an energy dislocation, which I think at least in some parts of the world, as far as I'm concerned, has to be inevitable at this point. Does that just mean that it's time to celebrate and rally to even higher highs on the S&P?

Because as Louis Gave said last week, it's probably gonna be other countries that feel the massive human suffering as a result of this, and not so much the bigger developed economies. Does that just mean S&P keeps going up from here? 

Mike: The painful reality is that as passive continues to gain share and it owns more and more of the market will behave more and more like a low float stock because Vanguard or BlackRock are not going to change their positioning unless they receive a sell order.

And so the simple, the simple math is this gets crazier and crazier. And y- I have to confess, like when I made that forecast, it was with some pr- trepidation because there's always periods of craziness in markets. It's hard to imagine an environment much more crazy than late twenty twenty-one, when people were receiving significant stimulus payments.

But even more importantly in that time period, they were getting their paycheck and they were staying at home and they weren't incurring all of the costs that I've identified in things like, my poverty line analysis like childcare and transport to work and fancy clothes that you have to wear to work, etc.

We all wandered around in our pajamas and decided to buy stocks with our spare time. The difference is this time we haven't seen the stimulus. What we're seeing is an increase in costs, and consumer balance sheets are significantly weaker, than they were in the '21, '22 time period when we suspended debt payments, etc.

But within the moneyed class, those who effectively have money and have the capacity to spend it we're not seeing much of a disruption, and I don't think we really will until the Fed ultimately begins cutting interest rates and reducing that income transfer to that, to that cohort.

it's a v- it's a very strange place to be, where cutting interest rates could actually be contractionary, because of the, the give or take ten trillion dollars in short-term instruments that are linking their payments to the Federal Reserve's policy that's created an extraordinary pulse of income that is really fiscal policy, but not identified as such.

Erik: Let's take a look at the sole chart in your chart deck, which is really staggering for me to look at given the news flow backdrop upon which it happened. Listeners, again, you'll find the download link in your Research Roundup email. Mike, what you're showing here is basically the biggest inflow ever in history, and you told me off the air, even though this chart only goes back to twenty sixteen, you said there is no prior example of a bigger inflow any time in U.S.

history ever into the S&P five hundred other than the one that's happened in the last month or so on the back of news that we've got a massive global energy dislocation, which hasn't quite hit the tape yet, but we know it's coming because we've used up that six-week lag of delivery times. We're burning into all the buffers of of s- spare oil that was sitting around in storage.

We're about to run out of diesel fuel and jet fuel globally and have a massive crisis on our hands, and that's been I don't wanna say the cause, but that has been coincident with the biggest inflow into the stock market in recorded history. Explain. It does sound crazy, 

Mike: doesn't it? It does. Pa- part of what I would emphasize on this chart is if you look through the discretionary portions here, we're really not capturing anything that is happening other than systematic flows.

And so I just wanna caveat that, y- we do see flows into things like SPY, VOO, and IVV on a discretionary basis, where people ultimately decide everything is great, we should buy back in But ironically, that was among the smallest parts or smallest contributors to this. So this was really a mechanical bid that was caused by CTAs trend following strategies, basically having to rapidly reverse their move into a net sale.

They reversed that within a month at a pace that we have candidly never seen before. Vol control strategies. As volatility retreated and never really hit the realized levels that the implied volatility was pricing, we were emphasizing at Tier 1 Alpha, where I shared the chart from, that, we were behaving like a market that had already crashed.

People bid for protection, the discretionary bid was there, and it didn't materialize, and so they were forced to cover shorts. They were forced to cover their protection. That led to a collapse in the VIX. The VIX itself then becomes a profit center as people short the VIX, creating a synthetic long.

All of this has no real thought behind it, right? That's the frightening part of this, is that I don't think it's that people are looking at your analysis and saying, "It's wrong in principle." I think by and large they're saying the market is telling me it's wrong," right? And that means that it's wrong, at least in the short term, until it actually starts to hit the employment numbers, until it starts to actually hit the flows into the market.

But, the the machines did what the machines do. 

Erik: Okay. Now, before the inflow happened I see what looks to be the fifth largest drawdown or outflow from markets. I assume that was the buildup to this current energy event that caused that. So you're saying the market correctly discounted what everybody knew was coming, then because it takes six weeks to two months for big ships full of crude oil to transit the entire planet the algorithms and the CTAs didn't really build in that lag effect.

So they're recovering and basically going to massive inflow into the market because the market has proven wrong the prediction that we're gonna have a big energy disruption, or at least that's what the algos think is going on, and that's the reason for this? Yeah. Is that 

Mike: really it? With the exception of the thinking part, right?

They are just mechanically tuned, so a trend following strategy will take consideration of volume and volatility in establishing the trend But most importantly, they ended up getting short, right? They did exactly what you would expect trend following strategies to do as we flattened out in 2025 and basically made no real progress for an extended period of time.

CTAs began to take down their positioning. As we sold off, they increased their net short positioning. And then as the market reversed rapidly, they were forced to cover that, and as it continued to power higher, driven by the inflows in 401Ks, 'cause once the discretionary trader has sold their shares remember the line from speculation or reminiscences of a stock operator, "I'll lose my position," is why he didn't want to sell in a drawdown because it was a bull market.

CTAs are very similar. Hedge funds are very similar. Cover the position and ask questions later. You can construct a narrative at any point in time, and candidly, I think that's what we've by and large done. 

Erik: Okay, what happens next? 

Mike: The way we're looking at it i-is that ultimately those systematic strategies have now returned to basically a fully invested position, and so the market has lost that ammunition.

The 401K flows have shifted strongly in favor of equities. We're now actually potentially looking at a rebalance back towards bonds which have suffered under this environment as you're well aware. Although, for all the hoopla about the directional move in rates, we really haven't gone anywhere there for an extended period of time as well.

And so we're starting to see the inflows into fixed income return but they're not returning at a pace that is yet large enough, and this is particularly true at the back end of the curve. They're not returning at a pace that is large enough to offset the net issuance or lack of demand for that product, particularly as people are moving away from sixty forty type strategies and increasingly embracing things like trend following, which has actually done quite well in its recovery off of off of the, kinda April sell-off.

The quick answer is that my expectation is that our bias should be bullish, but in a much more muted fashion for the next couple of months, and then we'll see if the idiosyncratic event of an actual energy stock out leads to job losses, leads to... Or whether it's coming from AI, right?

Whether that actually begins to manifest itself as actual job losses rather than what we've seen so far, which is a low fire, low higher environment that's particularly affecting the young 

Erik: Let's talk about scenarios of what happens next as a result of the Iran conflict. I'm gonna say it's extremely likely that in many parts of the world there will be an extreme price increase, or there will be caps placed on prices, price controls will be put in place, and that will lead to shortages where it's impossible to get any supply of diesel fuel and jet fuel particularly.

I don't think that's going to necessarily happen in the United States, but I think it will happen a lot of places around the world, and what remains to be seen is the extent to which there's a price transmission. If the price of diesel fuel in Singapore is, $39 a gallon, what is the price of diesel fuel in Santa Monica?

I don't know how that's gonna play out, but it seems to me like there's gonna be at least some price transmission. What would you expect the result of that to be on US markets if that happens? 

Mike: I think there's so I think you hit on something that's incredibly important, and it's one of the reasons why I very much push back on the idea of this is like the 1970s.

There's two primary differences. First, in the 1970s, the marginal buyer of oil on the international stage became the United States. We effectively, moved from a net exporter to a net importer. That meant that the world's richest consumer was suddenly bidding for oil versus everybody else. That more than anything else is what made the 1970s unique in that framework.

The US could afford significantly higher oil prices than the rest of the world could, and they were the marginal consumer for globally traded oil. This time around, it's the emerging markets that are the incremental consumer the marginal consumer for oil in particular, and candidly, they're kinda tapped out in a lot of ways.

You're already starting to see that type of behavior, the demand restrictions, the limitations flowing out through many emerging markets. Many emerging markets are beginning to experience near catastrophic conditions, particularly as it relates to fertilizer and agriculture. They're doing everything they can to avoid those price increases, but they simply are less well-positioned than the United States, and I realize this sounds, crazy given how bad it was in the United States.

But many of those emerging markets are less well-positioned to handle these prices, and they, I, I hate to say it, but I would somewhat include Europe in that mix as well. The second thing is that there's just not the population pressures that there were in the 1970s. And a really interesting chart I probably should have included in the chart pack is looking at real rates relative to population, or more accurately, labor force growth.

The high real rates or the high rates that we experienced in the 1970s were largely, and the inflation we experienced in the 1970s, were largely a function of that oil price shock, as we already mentioned. But then more importantly, just the simple reality that there were boomers and young women streaming into the labor force, demanding the capital that's required to keep a labor capital ratio somewhat constant.

If you allow that number to, the quantity of labor to exceed the quantity of capital, you will experience falling productivity. The 1970s were all about trying to maintain that pace of business activity, and it required significant capital that the Federal Reserve candidly stepped in front of and somewhat prevented by raising interest rates as high as they did.

This time around, labor force around the world is actually shrinking. The United States labor force growth over the last five years, even with the population adjustments from the surge in immigration that has not yet been removed from much of the labor force statistics, it really only hit about 1% versus about three and a half percent per year in the 1970s.

My hunch is that we're not gonna see anything even remotely close to the sort of gasoline or oil price spike that we saw in the 1970s, where we saw 500% sort of increases. But the pain that is gonna be felt in the emerging markets is significant. And as you're correctly pointing out, the answer in many situations will be, we'll do without.

That means that we will likely see, dramatically reduced production levels for many food stuffs, etc. We are somewhat fortunate in that we're very well supplied. We've had extraordinarily strong growing seasons. Many forms of soft commodities have been over-supplied for the past couple of years, and so we're looking at inventories that are relatively high there.

But there's no question that this is going to flow through as price increases in agriculture, assuming that the harvests, y- you know, are diminished by the reduced application of fertilizer. Likewise, the ability to get stuff to market. If diesel prices are extraordinarily high, the vast majority of agriculture is transported by truck.

That means there will be less shipping available or less transportation logistics available for the delivery of those crops, and some may very well rot in the fields unless prices are much higher. And so this is the paradox of capitalism, right? In some ways, we should be celebrating higher prices because they're sending a much needed signal And they are allowing agricultural producers to somewhat offset the cost of fertilizer.

But that's painful for households. And in the United States, we're already seeing a growing fraction of households being forced to do things like increase their pawn shop activity at the lower end or their credit card activity, and that becomes very difficult as we look at credit card delinquencies beginning to spike, Etc.

This is creating conditions under which people are just gonna have to do with less, and that means lower household formation. It means households are going to decide to move out of a individual apartment and move back in with their parents, for example, where you would reduce your net consumption.

We're seeing the signs of all of that, and I, I, I joked on Twitter the other day that, BNPL, buy now, pay later, is actually turning into buy now, pawn later as households are scrambling for cash. 

Erik: Donald Trump is set to meet later this week with Xi Jinping. It seems to me that China's reaction to all of this and Trump's ability to negotiate with China is gonna play a major role in it.

China has more crude oil and frankly everything else stockpiled than just about anyone. So it seems to me if China says look, get some positive PR by coming to the rescue and saving a few c- smaller countries around the world by sharing some of our strategic petroleum reserves and helping them out in exchange for some concession," that's one thing.

If China goes the other way and says, "Every drop of oil that we have is for us, and we're going to, block any export of finished products to other countries until this mess is over," that's a very different outcome. W- Am I reading those tea leaves correctly, and how do you think this is likely to play out later this week?

Mike: I agree with how you're reading it. So far what we're seeing from China is largely every drop is precious. We're not going to share any. that makes sense. China is a very insular society and candidly has always prioritized China over any other country. That's not a bad thing, by the way. I wanna be clear.

That's part of the process of capitalism broadly is we all should be seeking our own self-interests. But we need to recognize that has implications for how we're perceived going forward. In the United States we see very clearly what's happening in our society and our economy. Our news is very attuned to it.

We don't have that sort of transparency as it relates to what's happening in China or candidly for that matter Iran, which is largely in a blackout from the internet. And so the real question that you have to ask yourself is how much is China suffering in this process? And the evidence that we do have is that they are actually being hit quite painfully, and they've stayed remarkably quiet in this engagement with Iran.

my hunch is that, Trump will find a relatively receptive Chinese audience that is basically looking to cut some sort of a deal and ameliorate some of the pressures that are being placed on the Chinese economy. The flip side of that is, the downside to putting in a mercurial individual like Donald Trump is candidly I don't think anyone knows what he's thinking as he goes into these discussions and negotiations, and is he going to settle for a quick deal that may be much less than he could otherwise extract?

Candidly, we don't know, and I think that's been one of the real challenges for the U.S. military as well in conducting operations in Iran, has been the uncertainty around what policy is going to emerge in the next twenty-four hours. It's a very challenging environment that in some ways can be helpful.

My, my wife used to call it the crazy monkey approach, right? If you just act crazy enough, people will largely leave you alone and try to placate your behavior. But the flip side of that is it makes it very hard for the people that are, quote-unquote, "partnered with you," like the U.S.

military with the commander-in-chief, to anticipate the direction that you're gonna move. And I-- this is very much a wild card. But what has been communicated to me is that China is much more interested in this in this meeting than the U.S. is, candidly. 

Erik: It seems to me that China is absolutely pivotal to the outcome of the Iran situation, because if China takes the stance "Look, Mr.

Trump, we are trying to be patient here, but we're not going to tolerate much more of your interfering with our ability to import oil from the Persian Gulf, and you've got to work this spat out right away within a certain amount of time, or else you're gonna lose a lot in your relationship with China, and it's going to only make things worse."

If it goes in that direction, it seems to me like, that's very different than if China says "Look, we're willing to cut a deal with you and help you in Iran," which frankly I don't see is very likely. But it does seem to me that China is in the position of greatest power here. They could throw this Iran situation either direction.

Mike: I, I think there's definitely some truth to that. I think it would lean more towards if they were to decide enough is enough and basically communicate that to Iran. I agree with you that seems unlikely given that they have been an active partner with Iran, and Iran is a significant source of their crude oil.

This is gonna be an interesting question. We don't know what the Iranians are thinking at this point. We don't have full transparency in terms of what their actual position is. Part of the reality of why I would argue entities like the UAE are choosing to leave OPEC is if Iran continues down the current path and damages its oil production capability, China is gonna have to recognize that and will be looking for alternate sources of supply as well.

And so it, it does feel like this is that we're in a point where the narrative within the United States has been very much about the impact on the United States without significant consideration for how things are really playing out in Iran or China or other regions where we have much less transparency.

Erik: Since you mentioned UAE pulling out of OPEC, I'm very curious to get your take on what this means to the future of global oil market reserve or spare capacity. Seems to me like we were already down to the point where really the only OPEC countries that had any spare capacity were UAE and Saudi Arabia.

Feels to me like s- UAE has signaled pretty clearly that they're gonna pedal as fast as they can and make as much oil as they can and keep selling it. Does that mean that we've reached a point where either Saudi Arabia is the only spare capacity on the globe? Or, a- and I would think in that situation, they probably pedal as fast as they can too.

So it seems to me like maybe that creates an illusion of a recovery in the sense if everybody's making as much as they can coming out of this crisis, it probably drives prices down in the short term, but it also means there is no spare capacity going forward. Do I have that right? 

Mike: I think you have that right.

I wanna be careful on that, though, because again, the miracle of high prices is that it does stimulate production. And so it, it is important to recognize that right now we are beginning to see some of the supply response. UAE would be a good example of that. Likewise, we're finding lots of alternate ways out of the Persian Gulf.

Pipelines are running at max capacity. By and large, they have not sustained significant damage. And it is becoming very clear that there need to be alternate approaches, and this is gonna be particularly true if Iran is successful in articulating that it is in control of the Strait of Hormuz on an extended, period of time the other reality though, and this is something I wrote about in '22, and if you remember, the projections were that, we were gonna see a surge in oil demand and that oil prices were going much higher, and that as China reopened from the COVID events, that we would see an incredible surge of demand that would power us well above the 106 million barrels that were the forecast.

My argument was that we actually had multiple demand curves. The developed world was already in decline in terms of its oil usage. China has proven to be far less hungry for oil, despite the fact that they have been stockpiling, as you pointed out. Their demand has disappointed expectations from that time period.

And when you see price surges like this, it rapidly leads people to seek ways of conserving oil and trying to do the same thing more effectively. Again, that's the beauty of capitalism. You send a price signal through, and people adjust their behaviors to it. My hunch is if anything, this actually pulls forward the peak oil demand story with a notable caveat being that you'll likely see some significant restocking demand.

But I'm less worried about the supply side in oil, in the same way that I'm not that worried about whale oil populations. I'm much more concerned about the demand implications as we look out past the inelasticity of a three to 12-month time period. 

Erik: Speaking about longer term trends, let's talk about inflation more generally and where it's headed.

We just had an inflation print. You told me off the air you're a little bit concerned about the stale birth/death model data. Give give us some perspective on that. 

Mike: Yeah. So there's a couple of narratives that are going on. One is that there has been, a re-acceleration of inflation.

Again, another chart I probably should have included, I posted it on Twitter earlier today, is that we are dealing with residual seasonality in our inflation prints. The non, atypical seasonality associated with COVID and then the Russian invasion of Ukraine threw off the seasonal adjustments from the BLS quite dramatically to the point that we're print-- in, in the fourth quarter and first quarter, we're typically printing about half a percentage point higher than the actual inflation is running.

That's due to the seasonal adjustments being made against an atypical seasonal pattern. if you look at the second half of this year, I wrote a Substack on this called The Year was 1816 or 1815, which was the year without a summer. We're not seeing any of the seasonal pressures that we traditionally see on things like rents, Etc which make up a far larger portion of the CPI That is a really critical thing to understand.

The second is that the birth-death model, which you were referring to, this is the assumption of entrepreneurship and new jobs that are created. It has also been the source of the terrible downward revisions that have been made. Birth-death was originally introduced as a tool to try to reduce revisions.

Unfortunately, a number of technical changes in how data is reported and collected have led to the BLS continually overestimating how many new jobs are being created by new businesses being formed. That is, that those corrections won't emerge until what's called the Quarterly Census unemployment and wages, which is the gold standard for measuring that data.

We have that through September. That's why we had such terrible downward revisions in the '24 and '25 time period versus what was initially reported. That is on hold until basically next month when we'll get the updated fourth quarter data. My assumption is that the birth-death continues to be over-reported and adding about 100,000 jobs.

And so if you include that in the data, we actually are not really seeing any improvement. We continue to lose jobs. And importantly, even if you look at the official data, I would highlight that our labor force is now starting to shrink in the United States. We have a drawdown from peak labor force that is roughly in line with the worst recessions that we have seen over the past, 50 years.

It's very hard to reconcile those two data points with the idea that the US is suddenly accelerating and that what we're seeing is an overheating of the economy. I think unfortunately, we're just, w-we are dealing with really bad data quality, and the revisions will likely pull that lower.

All else equal, that suggests that there is less inflationary pressure over the summer and into the fourth quarter. And beyond that point, I don't have the same clarity because I don't have the ability to model fully what the seasonal will do until we've received that data. But it does appear that we are shifting back into a more normal seasonality and all else equal, that should lower both inflation and then we'll get the downward revisions in employment.

I continue to think there's a reasonable chance that, Kevin Warsh comes in, and by September he's suddenly looking at inflation running less than we had anticipated. The tariff surge will have been over at that point. People are highlighting that we anticipated that would flow through in goods.

The crazy data is that goods inflation is basically really low, which suggests that companies are eating most of the tariff increases either in the United States or in supplying countries And I think there's a very high chance that Kevin Warsh suddenly wakes up in September, October and realizes that he has to cut and cut more aggressively than anyone had anticipated.

Erik: That's fascinating because it seems to me that you and I have m- broadly agreed on what's about to happen energy-wise, which is we're gonna have a real energy crunch globally as a result of this Iran conflict. If that happens, doesn't that create a fairly long-lasting and persistent inflation driver?

Mike: Not really, because if you think about what we're talking about, we're talking about the fastest moving components of inflation and also the most inelastic. And so if we do end up seeing, businesses shut or air flight curtailed that prevents activity from happening. And I think it's important for people to recognize that unlike COVID, we now do have the potential to work from home.

We've discovered that is a solution. And so could I see an oil surge accompanied by another dramatic reduction in people's mobility and reduced demand from transportation, Etc? I think the answer is yes. And as you pointed out, one of the key risks becomes a supply response in oil that is met at the same time with a demand reduction.

Y- I'm not gonna draw the direct analogy to 2008 'cause I don't think it's actually quite-- it's actually fair in that analysis. But remember, oil prices can fall just as quickly, if not faster, than they can rise. 

Erik: That's definitely true. Oil prices increasing is definitely inflationary until they cripple the global economy and cause a Great Depression.

Yeah. In which case it's definitely- Yeah ... not inflationary at that point. It's 

Mike: definitely not inflationary at that point. And that, th-that is, that's the uncertainty. And again, most of this pain is being felt outside the United States, and by outside the United States, I'm including California which, has just absolutely absurd restrictions on oil production that make it much more like an Asian, a Southeast Asian country in terms of its import patterns.

And there we're already seeing pretty strong evidence of behavioral change associated with gasoline prices hitting the levels that they are in California, where you know, one of my team members works out there and was sharing with me, pictures from the pump where they've exceeded $7. I laugh in a crying sort of way that Trump found it appropriate to highlight how cheap gasoline prices had fallen in January, February and now, is basically trying to ignore that they've moved in the opposite direction, putting incredible stress on many of the households candidly that had hoped that Trump would strengthen their position.

 But, the simple reality is that is the way it plays out. If we end up with actual shortages, meaning that we have to reduce consumption, you could simultaneously see a supply, a positive supply shock and a negative demand shock that would manifest as oil prices falling very quickly.

Erik: So when you say that Kevin Warsh may by September be in a situation where he unexpectedly has to be cutting aggressively, are you implying that means he'll be reacting to a not necessarily 2008 sized, but a global economic slowdown that would be bringing that about? 

Mike: It certainly seems that's the logical conclusion from what we're experiencing, and that's particularly true, as you point out.

If the current disruptions that have been largely ameliorated by the release from strategic petroleum reserves, if we find that we cannot draw those down significantly further, and I would highlight that many countries that have tried to keep pricing basically keep pricing capped, had their balance sheets stressed already in an attempt to do that in 2022.

The UK would be a really good example of that. the capacity to continue to support that is just significantly less. And we are looking at a situation in which i-if this continues for an extended period of time, the absolute shortages of oil will really begin to hit those areas that are the marginal consumers, primarily the emerging markets.

Erik: I certainly agree with that. So what happens, let's say we get to September and Kevin Warsh is cutting rates aggressively because of a global economic slowdown. What happens to your chart then? Do we get an even bigger inflow into semiconductor stocks?

Mike: it depends on what happens to employment on our path there.

And it depends on the mix of employment as well. So part of the perverse dynamic of the low hire, low fire environment is that by and large, we've retained relatively high earning individuals who are fully trained and capable of operating at high productivity. What we're seeing is a reduction in the hiring of new labor force entrants, those who need to be trained, those who don't meaningfully contribute to productivity, but actually disproportionately contribute to marginal demand.

You move out of your parents' house when you get a job, you move into an apartment. Somebody had to build that apartment, put a dishwasher and a, oven in there and a refrigerator, Etc. All of those things have to be done in advance of that. We're seeing very weak hiring at the younger level, And unfortunately, that means that demand is likely to be relatively hit in those segments, and that certainly is being supported by data we're getting from apartment rents, Etc.

On the flip side of it, it means you continue to pay the 55-year-old because now instead of training a 25-year-old, they're training an AI, and that has extraordinary value if we're able to pull it off and it turns out to have the productivity impact that many people think it might have. y- the only analogy I can draw to this is the end of the guild system in the 19th century, whereas w- you know, where the Industrial Revolution began to move from things like textile mills into actual factory production.

Many people love Victorian homes without realizing that the popularity of those homes was driven by a collapse in the price of things like filigreed wood that was driven by the Industrial Revolution. That created, that growth created a demand surge for the artisans that were already trained so that they could build the factory jigs that could be used to produce those low-cost products, but it destroyed the apprentice business.

And so unemployment became highly cyclical and very sensitive in the mid part of the 19th century. In the panic of 1837, for example, unemployment hit 63% in New York City. I don't think anything like that's going to happen because we don't have the same rates of population growth, in particular in the United States.

But I do think it's really critical to understand that we are basically putting, those who should be rapidly moving up the productivity curve and the learning curve, we've basically put them on ice and told them, "Congratulations, you've got a an engineering degree or a degree in French medieval literature from a prestigious institution that qualifies you to work at Starbucks or drive for Uber."

 that's a real cost, and it's similar to what we've seen in recessionary periods where it creates much lower lifetime earnings, and we don't yet know how that is gonna play out, but it's showing up very much in the data. The hiring rates for those 55 and up is up 84% year over year. The hiring rates for those 29 and under are down 25% year over year.

It has all the signatures of that sort of breakdown of the guild system and the apprenticeship system and a- again, if I told you I knew how it was gonna play out, I'd be lying to you. 

Erik: Let's move on to the subject that you are famous for and in fact have now literally written the book on, which is active versus passive investing, or p-probably more accurately, the potential unintended consequences of the passive investing trend of the last several decades.

It seems like the chart that we looked at earlier was pretty strong evidence that you're right that these passive flows do funny things in the market that it seems to me eventually lead to some potentially very negative outcomes. Am I right to be worried about this, and how worried should I be?

Mike: I think you're right to be worried about it. I think we have to acknowledge that we continue to see strong flows and we are not yet seeing the negative outcomes. What we are very clearly seeing are the inflationary components of the impact of passive investing, where buying at any price is actually required by fiduciary duty, not by a thoughtful application of discounted cash flow analyses, Etc.

W-we experienced two remarkable events in our lives, Eric. The first was the transition from defined benefit plans to defined contribution plans. There's a fantastic white paper that was just released in 2025, made it into the Financial Analyst Journal in March of this year by a gentleman by the name of Coimbra, and what he highlighted is the mechanical properties of the importance of that shift.

When you move from defined benefit plans, which guarantee you an income stream, to a defined contribution scheme in which you have to accumulate assets in the hope that either the income from those assets or the sale of those assets are going to allow you individually to secure your retirement. It creates an extraordinary outward shift in the aggregate demand for financial assets.

As an individual, I have absolutely no idea when I'm going to die or how long my retirement is going to be. As a result, I have to accumulate as much assets as I possibly can. In a defined benefit plan, the statistical properties of a large population allow me to accumulate assets and try to generate income against an actuarial o-outcome.

The reason that system failed in the 1960s and 1970s was because people began living much longer than we had anticipated. The retirements were much longer. Now we're looking at a situation where everybody is basically being forced to assume the worst case scenario. That means that they are both accumulating more financial assets and they are spending less out of that financial asset base than they otherwise might.

The traditional 4% withdrawal has been replaced by something closer to a 2% withdrawal Which means that we are hoarding financial assets, which naturally causes prices to rise. The second phenomenon is the growth of passive investing. Because we basically told secretaries and janitors that they needed to become experts at stock picking, we arrived at a conclusion that minimized the amount of activity that they had.

Market cap weighting is unique in an index construction in that it doesn't actually require you to continually rebalance your portfolio. The market pricing, by and large, does that for you. The only impact is on the marginal flow, your net contribution or your net sale. That also has an inflationary impact.

And so we have had two distinct phenomenon that are related and both inflationary to financial assets over the course of our lives. And because of the demographic bulge of the baby boomers, that's gonna eventually reverse, and we will find ourself selling-- ourselves selling those assets in order to secure retirement.

The relative shortage of labor suggests that those retirements are going to prove to be much more expensive than people had anticipated. We're likely to see inflation in elder care at the same time that we see much more deflationary pressures in areas where we're beginning to see population growth turn significantly negative.

Colleges would be a good example of that. we're watching basically the reverse of what happened with the baby boomers coming into the system. When the baby boomers came into the system, we had to build a ton of maternity care, maternity wards. Most hospitals in the United States were built in the 1950s and 1960s primarily to accommodate the surging population and the growing number of births.

Now we have a growing number of deaths, and we've done a terrible job of preparing for it. And so it's only logical to conclude that y- you know, that which we need less of will likely become less expensive and that which we need more of, i.e., end of life care, is likely to become significantly more expensive.

And this is one of the real tragedies of where we sit today because old people are candidly scared, understandably they don't know how long they're gonna live. They don't know what the high volatility asset mix that they have gotten themselves into is ultimately going to yield. And they continue to see headlines from including people like myself that say the expected returns to equities, given these levels of valuations, should be quite low.

If I heard that and I was uncertain about my retirement, and I was uncertain about when I might, run out of money, I would be less willing to spend as well. And then we have the paradox of thrift, which basically says the lack of spending from the old impacts the income of the young. And we've created a condition under which the old people are scared and the young people are really unhappy, and it's not a good mix 

Erik: You've written a book on this subject.

I know that because as a follower of your Substack blog, w- I've been teased by a number of sample pieces of that writing. The book is titled "The Greatest Story Ever Sold: The Unintended Consequences of Passive Investing." It looks like it won't be released until the end of June, but it's available right now for pre-order.

Listeners, we've got the pre-order link on Amazon linked in your research roundup email. Mike, what is the book about? Tell us what to expect when it's released in June. 

Mike: So the book is really actually about the destruction of price discovery. The implications of passive investing and the demand for financial assets has created conditions under which the most important price that we really receive in the economy, the price of equity, the price of debt, are increasingly being outsourced to algorithms.

And so it brings us full circle back to that chart that I shared, where systematic strategies that have never done a discounted cash flow analysis in their lives are dictating the prices that we're seeing on screens. We're trying to attach meaning to that, because that's really what price is. Price is the mechanism of information exchange in a market-based economy.

If you destroy that process of price discovery, the consequences are understandable and foreseeable, and perversely create many of the conditions that we now experience in our lives. Everything ranging from gambling and the growth of speculative activity in financial markets can largely be tied to the phenomenon and the choices that we made in how we choose to fund our retirements.

Those decisions were made back in the 1970s when we had very poor information on how financial markets actually work. Since I began my work in 2016, there's been an explosion of academic research that is highlighting the adverse effects, on price discovery of the growth of passive investing and the demand for defined contribution plans and the government sponsorship of certain areas as being preferred, what's called the qualified default investment alternative, that by and large is directing the retirement assets of the United States into the largest public companies that until very recently had no real reason to receive those inflows.

And so the book is actually about the, what happened why it matters, and what is likely to occur given that we have severely impacted our capability for price discovery in a capitalist economy. 

Erik: And again, that is available for pre-order right now on Amazon. Mike, you also- 

Mike: Now with one caveat.

I just wanna actually highlight that date has been pushed back. We're actually targeting a release on October 19th, which will be the anniversary of the crash of '87. Oh, 

Erik: okay. So we should not not believe the June 30th date on on Amazon. 

Mike: Don't believe the hype. Correct.

Okay. 

Erik: Coming from the the source itself. You gotta trust that signal, folks. Let's also talk, you manage several funds for Simplify Asset Management. You also write a Substack. Tell us about those as well. 

Mike: Sure. It is a hedged high yield product, and so it attempts to mitigate the impact of credit spreads.

That has been a very challenging period since April of 2025. We've seen credit spreads by and large tighten significantly, even as we're seeing signs of credit deterioration in the broader economy. Part of that is, of course, due to the passive bid. As money flows into these strategies, they buy the highest priced securities disproportionately.

That has driven a bifurcation in the high yield market, just like it's driven a bifurcation as we've seen in U.S. markets where there's the 493 and the Mag Seven. the but that product is certainly something that people can check out and take a look at if they are interested in a more protected version of income generation.

And candidly, I think this is gonna be one of the real critical realizations that people have is that they should be taking advantage of these high prices to rotate into areas in which income can be generated. The Substack is Yes I Give a Fig. It is yesigiveafig.com. It's available on Substack.

You can search for Michael Green or Yes I Give a Fig. It is available weekly. I try to put it out early Sunday mornings more or less every week. It is the outgrowth of my own personal note-taking and thought process more than a desire to put charts or trades in front of people, and it covers topics ranging from a discussion of the poverty line, a piece that went viral to the type of work that I'm doing around passive, to insights in terms of markets that, people would be more familiar with seeing from other areas.

As I describe it, it's basically how I clean out and clear, and straighten the attic that is in my mind behind my overly large forehead. 

Erik: Mike, I can't thank you enough for another terrific interview. Listeners, be sure to stay tuned 'cause we've got Rory Johnston coming up for an update on Gulf oil flows and what comes next in the Strait of Hormuz.

Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com

Erik: Joining me now is GavCal co-founder Louis-Vincent Gave. Louis, I'm so excited to get you on. I always enjoy your non-US based perspective being having lived in France and in Hong Kong and all over the world, I think of you as a very international perspective kinda guy. If ever we needed to step away from the biases of of US and US foreign policy and so forth I think it's now.

Without me preloading you with any of my thoughts, what do you think about this Iran situation that's going on? The market seems to be pretty darn certain it's just no big deal. We're off to, new all-time highs. Nothing to worry about with twenty percent of the world's oil potentially cut off in the Strait of Hormuz.

What do you make of this?

Louis: First of all, again, thanks for having me, and I wanna commend you for the lineups that you've had in recent weeks. I've really enjoyed listening to to Rory, to Anas, to to everybody you've had on here. And look I'm not sure I have great insights on on what's happening in Iran.

I would say this. I would say it is fascinating that the oil markets, have behaved in a certain way. They've-- obviously gasoline prices have ripped higher, oil prices have have ripped higher. And yes, to your point the equity markets have mostly brushed it off and, we'll go into that, I think, p-perhaps a little bit later.

Now, the reality, I think one of the reasons the equity markets have been able to so far brush this off is that while so far the energy price spike, and let's say oil is at, depending on which benchmark you wanna use, Brent, WTI, Etc, but you're essentially hovering around hundred to hundred and ten bucks.

It's high, but it's actually not punitively high. If you take a hundred dollar WTI or if you take today's gasoline price and you look at it adjusted for CPI and you look at it as a percentage of US disposable income either of these measures, you're getting close to the upper band where things start to get really uncomfortable, but you're not hitting sort of recession band yet.

So all this to say, hundred dollar oil, sure, it's not great, it's not ideal but perhaps one of the reasons the equity markets are brushing it off is that it's not a crisis. Hundred dollar oil is not a crisis. Hundred twenty, hundred thirty, that's when it really starts to take a bite. That's when the pain starts.

So the question really becomes do we get there? Do we get to the hundred twenty, hundred thirty? Now, I think- If we go back to a month ago there was that period when the Israelis bombed the Iranian energy infrastructure, and Iran responded by bombing the Qatari gas field.

And at that point, it really felt oh my God, they're really-- it's not gonna be just about the straits being closed, they're actually taking each other's infrastructure away. And, which l- you know, opened up a much more nightmarish scenario. 'Cause right now, if you look at the oil forward curve, essentially, you look at oil in six months' time and it's at 85 bucks, so-- or 80 bucks.

So the market is essentially saying, "Yeah, you know what? Hormuz is gonna reopen. I don't know if it reopens this week or next week or in a month or two, but in six months it'll be reopened, and so by and large we'll be fine." Of course, if we start to bomb each other's infrastructure then even if Hormuz is reopened, then you're still left with busted infrastructure and a whole other quandary.

So I think in the first few weeks of the war, that was the big uncertainty. Do we bomb each other's infrastructure? And it looked like we walked back, then the whole question became, oh, does Hormuz reopen? And the market started to price in you know what? I d- I don't know when it's gonna reopen but it's gonna reopen.

So all this to say, there's different ways in which the market might be right or might be wrong. The first question is are we really done with the threat of bombing each other's infrastructure? Or was that just a short-term truce? Because if we go back to bombing each other's infrastructure then we're not talking whether we go from 100 bucks to 120 then we're at 200 very quickly.

And with 200 comes economic devastation. So the first problem is what probability do you put on that? The idea that we go back to bombing each other's energy infrastructure. The second problem is the probability on reopening Hormuz and reopening Hormuz smoothly.

And here if I'm Iran why would I wanna reopen Hormuz? This is what I keep coming back to, is today Iran is saying, "Look, you wanna put your ships through there, it'll cost you two million bucks." And if we go back to a world in which 100 ships paid 2 million bucks to Iran, that would be equivalent to roughly 20% of Iranian GDP.

So now that they have this potential revenue, why would they give that up? Put yourself in the shoes of the IRGC. Pre the war, they were selling their oil, they were selling between half a million and a million barrels, mostly through Iran's dark fleet, and they were selling it at 20 buck discount mostly to China.

And mostly to teapot refiners in in China who were buying this oil at at a $20 discount. So again, half a million to to a million barrels at at 60 bucks. Now Iran is conceptually selling a million and a half, maybe two million barrels a day at huge premiums to spot because as the Oman benchmarks, Etc, are much higher.

So they're probably selling a million and a half barrels at, I don't know, 120, 130 bucks. And at the same time, for the few ships that go through, they get two million a ship. It's for them, this is pretty awesome. This is like financially they're doing better than they ever have.

So as long as they don't get bombed, like the ceasefire is a good deal for them. You know-- I firmly believe in Charlie Munger saying that, "Show me the incentives and I'll tell you the outcome." Iran's incentive is to not get bombed. And and the way they don't get bombed is they say, "If you bomb us, we're gonna bomb the energy infrastructure of the other guys."

Which, is a pretty scary thought for everybody involved. So right now the market, if you look at the curve, Etc, is essentially pricing in a reopening of the straits in the coming weeks, which I'm personally dubious. I don't see what Iran has to gain. And then you get to the third big player in this arena, which is Saudi Arabia.

Now, Saudi now has they can export through the Red Sea. They can export four and a half, five million barrels, which is down from the roughly eight or nine they were exporting before. And but before, remember, they were exporting eight or nine at 60 bucks. And now they g- they move into a world where it's we can export five maybe at about 120 bucks or we can export eight or nine, but then we have to give a bunch of money to Iran for every ship that goes by, and we don't really like Iran, and we definitely don't wanna give them two million bucks a ship.

So maybe we just sell five at 120 bucks rather than eight or nine at 60 bucks and have to pay Iran a toll on the way. So again, show me the incentives and I'll tell you the outcome. I think the futures oil market is pricing in a return to Saudi, to UAE, Etc, to f- you know, essentially producing fully and sending their oil through the Hormuz straits.

I'm not sure that comes back. I-- or it's not obvious to me that it does. So perhaps the better bet today is the idea that oil in six months' time is still too cheap

Erik: Louis, you said this is not that big of a deal at $100 oil. It's not the end of the world economically, and I agree with you completely.

But hang on a second. This is a much bigger physical market dislocation in terms of delivery of oil than something like the Abqaiq bombing that happened a few years ago. But we're not seeing that price dislocation. So I guess what I come back to is, okay, yeah, it's 100, it's not 150. But why isn't it 150 when every single oil analyst that I listen to is saying the same thing, which is this is the absolute biggest physical disruption in the history of the oil market ever.

Okay, we've had lots of much bigger price dislocations than this one. So it seems like the whole investment community's kinda shrugging it off, saying, "Oh, those oil guys are just talking their book." What's going on?

Louis: That's right. What do they know? What do those guys know? No look I completely agree.

And to your point, and I know it's a point you've discussed with previous guests, it's of course not just oil, it's natural gas, and it's fertilizer, and it's urea, and it's and it's helium, and it's like all sorts of stuff. We don't wanna reduce the Middle East to just the oil.

I think perhaps most importantly, what this highlights, this whole war highlights a message we already had gotten when... with the Houthi things and something that you and I discussed before. But the days when we... you could always count on the US Navy to patrol the oceans and to deliver whatever goods you, you ordered are now clearly over.

And this isn't because of Trump, and this isn't because of Iran. It's just in this new age of drone warfare, controlling the world's ocean is, has just become impossible. And this matters a lot because I think it, it really means that every country that for years and years just always saved in US Treasuries because you could...

or you knew that in a crisis, the Treasury market is the biggest, deepest liquid market in the world. You could always transform your Treasuries into whatever commodity you needed. That is no longer true. Look at India. India's got $700 billion in US Treasuries, and they're out of fertilizer.

And so they call China and say, "Hey, you guys have a lot of fertilizer 'cause you've been smart enough to stockpile it for the past decade. Can you sell us some, please?" And and China says sorry, mate, I'd rather keep what I have. But good luck selling your Treasuries for fertilizer."

I don't wanna belittle what we're going through. I think it's a dramatic shock to the system. I think coming out of this, every country will say, "You know what? I can't sprinkle treasuries on my field to grow wheat. I can't shove treasuries into my car to make it go." So every country will have to build inventories of refined products, inventories of fertilizer, inventories of stockpiles of oil.

If you want to essentially have an independent monetary policy and an independent foreign policy, you will now need to stockpile commodities. It's just that simple because the days when you can rely on the United States to bring you what you need are now over. And I think, th- this was, I think, already obvious for anybody who paid attention following Russia-Ukraine and following Houthis but now it really is in your face.

So I completely take your point that, energy prices should be higher. The question has to be why isn't it? And the only thing I can really come up with is that oil is a sort of unique market in that we have a lot of buffers in the system.

Obviously, the oil on the ships and the inventories and the strategic petroleum reserves. There's a lot of buffers in the system, and that maybe in this crisis, maybe, following Russia-Ukraine following the Red Sea thing, people did build up their buffers. The most obvious one, of course is China.

Officially, China has roughly one point three billion barrels in reserves. We've actually published various reports highlighting that the number is actually probably c- closer to one point eight billion barrels. So China today has the has more oil in storage than the rest of the world combined.

And the reason this matters, of course, is China's the biggest oil importer in the world. Having this massive oil inventory gives China the ability to go into the market when prices are down and to back off when prices are high. Now, what's fascinating is I would've actually expected in the back of all of this for China to back off with the price of the s- the spike.

You would've expected to see the price spike, you'd have expected China to back off. If you look at official import numbers for March, we don't have them yet for April China's imports of oil were still up eight percent year on year in March. So it doesn't look like China's backed off.

Although, maybe you take the official numbers with a grain of sa-sand. Maybe on the official stuff they backed off, but all the teapots, refiners, all the the dark fleet or all that stuff, maybe that faded. That, that's always very hard to know. The bottom line, I think perhaps the market is assuming two things.

The market is, A, assuming that Hormuz is gonna reopen in the not so distant future. And here, I just discussed, given the set of incentives, I'm not sure that that assumption will turn out to be right. So that's number one. And I think the second thing the market is assuming is, look, there's all this storage in China, so we're not gonna hit a crisis like, say, 2008 when China came into the market following the Go-Gansu and Sichuan earthquakes and just, hit, hit the bid on absolutely everything.

Everything that was energy related. So I think these are the two market's assumption. And both turn out to be right, but they may still both turn out to be wrong as well. The bottom line for me, if we step away from the day-to-day, if we step away from the, why are markets reacting, Etc, and we project ourselves to six months, 12 months, 18 months from now, I think you're still left in a situation where individuals, where companies, where countries will be building more inventories.

Where we will look at the supply shock and decide, "You know what? I need to stockpile fertilizer. I need to stockpile more natural gas." Why does Korea have less than a week's worth of natural gas today and China has more than 50 days? If I'm a Korean voter, I'll say, "You know what? I'd rather have fewer US w-weapons, I'd rather have fewer US Treasuries, and I'd rather have more natural gas in storage, thank you very much."

And so I think every country will head down this way. So however you cut it, you end up with a structural outlook for commodities that is, for me, pretty darn bullish

Erik: I definitely wanna come back to both China and structural bullish argument for commodities. But first, a-as you said, I've spoken to quite a few guests about everything from fertilizer to, to other knock-on effects.

There's one I've been saving just for you, Louis. ... Before this, let's set the way back machine to before the-

Louis: Is it Bordeaux wine that you've been saving for me?

Erik: No. You've, ... you've already got the market cornered on on that one. What I wanna go back to is before the Hormuz crisis broke out, the AI trade was kinda running out of steam, and the reason, or at least one of the reasons that a lot of people were starting to question whether we were about to see a bursting of the AI bubble was because AI was getting constrained by energy.

We didn't have enough electricity to really build all the data centers that AI wanted to build. People were getting really concerned about there being enough energy, and that was maybe gonna pop the AI bubble. Now, add an oil crisis, and that means that there's even more reason for worry, and semiconductors are through the roof driving this massive rally in the S&P to all-time to new all-time highs.

Apparently, the AI trade is back, and back with a vengeance. Why? Because there's a looming threat of a global energy crisis that could make the reasons that the bubble was gonna pop even worse. I'm missing something here. So am I maybe misinterpreting? Is the reason that semiconductors are rallying so incredibly strongly not related to AI?

I don't get it.

Louis: Now, look, it's the rise in semiconductors for those of us who, like me, who unfortunately haven't been massively long is is quite painful. It's especially painful for emerging market investors. If you look at the EM index depending on which benchmark you're using but essentially Samsung, TSMC, and SK Hynix are anywhere from a fifth to a quarter of people's benchmarks now.

And in a month like April where they all rip more than 30% you're left scrambling. So you look at the, the EM benchmark has absolutely crushed it. And it's all semiconductors. And yeah, to your point if you look at semiconductors as a percentage of the S&P 500 it was 10% two years ago.

It's now 17% which is very reminiscent... You'll remember this. Do you remember back in 2007, 2008 when everybody was running around talking about peak oil, how there wasn't gonna be enough oil for everyone and oil was hitting 150 bucks? In 2006, was 10% of the S&P 500, and then it spiked to 16% of the S&P 500 a couple years later before it all rolled over with the 2008 crisis.

So there's-- for me, as I look at semiconductors today, there's a strong sense of déjà vu. If you go back to 2008, you had the mortgage crisis, it was already obvious, banks were failing, Etc. But everybody was telling you, "You know what? Forget that. Who cares about Bear Stearns?

Who cares about Citibank cutting its dividend? Who cares about UBS doing the biggest rights issue in history? Whatever. Boring. The real story is peak oil. There won't be enough energy for everyone. All this other stuff doesn't matter." And energy kept ripping in the first half of 2008, even as the world was falling apart.

And today I've got this sentiment of déjà vu because everybody is running around saying, "Yeah, you know what? Energy, who cares? It's not it's-- that's not where the story is. The story is AI. AI is gonna change the world, and there's no way we can produce enough semiconductors to feed the world's AI needs.

It's just we just won't be able to keep up." And so this year, Samsung Electronics will end up being the most profitable company in the history of capitalism. And so I think this is this is-- And people will point out that the Samsungs, the SK Hynix, the TSMCs of this world are actually very attractively valued.

They're trading sometimes at single-digit P/Es. Just like oil stocks back then were trading at single-digit P/Es. 'Cause people forget that cyclical businesses, capital-intensive and cyclical businesses, you typically wanna buy them when they have low price to book and very high P/Es, and you usually wanna sell them when they have low P/Es and high price to books.

The nature of of cyclical businesses. And you look at it and you're like, "Okay, either this is like I said, déjà vu all over again." It's reminiscent of the 2008 peak oil boom what am I missing?

Why in April did semiconductor stocks all of a sudden decide to go up 30%? Now, you mentioned in your question, I'm sorry to be long-winded, but I think this is super important. You mentioned in your question the fact that we were starting to run out of steam in the first quarter of this year on the premise that, yes, electricity costs were going up.

And you'll remember that there was like a referendum in Indiana and I think some other states when Trump was elected re-re-elected this last time around, where people were saying, "You know what? We don't want data centers in our state. Having a data center here means then my electricity cost goes up, and it doesn't create any jobs thanks, but no thanks.

No interest in having this in my neighborhood." And Trump's response to this was a fairly elegant one. To be fair, he said he immediately flew out to... His very first trip was to Saudi Arabia, to the UAE, to Qatar, where he not only picked up a plane, but he also picked up contracts for huge rollouts of data centers all across the Gulf States.

And the idea was simple. These guys had cheap electricity. These guys had cheap solar, cheap cheap natural gas. So let's put the data centers over there. And conceptually, that made a lot of sense until Iranian drones and missiles started to fly. Then I think if you're... Today, if you're Microsoft and Amazon, you're thinking, "You know what?

I probably don't wanna build a $20 billion data centers right next to Dubai especially since I probably can't insure it. So I, I have no choice but to bring it home. And if I bring it home, then I'm left with, how do I produce cheap electricity?" Now, there's a fairly obvious way to produce cheap electricity quickly and plentifully, and that would be to cover the whole of Nevada, New Mexico, and Arizona with solar panels.

And now, of course, you and I both know who would produce the solar panels, and that brings me to perhaps the reason why these things are rip- these semiconductors are ripping higher. If we start off with the premise that the Iran war is an inflationary shock to the system, and right now there's no doubt it's going to be an inflationary shock to the system.

Just on the back of gasoline, oil, heating oil, jet fuel, Etc inflation's gonna go up by at least one percentage point in the coming readings. If we start off with the fact that it is an inflationary shock, then you're left with the conclusion that Trump and Xi, who are scheduled to meet four times in the next 12 months, are condemned to get along.

They have to strike some kinda deal. And there's lots of deals they can strike because Trump desperately needs the rare earths and the magnets to repla-replenish his weapons cupboard that has been emptied far faster than what he'd anticipated when he'd started this war.

The first thing is he needs China to agree to sell the rare earths. That's number one. Number two, he actually probably needs the solar panels now in a way that he didn't before. And he needs them, and all the big tech are gonna be lobbying are gonna be lobbying for the solar panels.

What he wants as well is China to revalue the renminbi. This has been a big demand of Treasury Secretary Bessent, and I think Bessent is absolutely right to argue for this since the renminbi is just... you and I have discussed this before, but it's the wrongest price in the system. It's like it's so stupidly undervalued.

It's absolutely ridiculous. Now, interestingly, the renminbi is going up every day which I think China is doing in in anticipation of these meetings with Trump. The renminbi going up every day incidentally is a departure from traditional policy at the Chinese Central Bank.

Usually, when you have uncertainty in the world, In the past, they always freeze the value of the currency. This time they're le-letting it go up. Now what would China want out of all of this? I think it's pretty obvious what China wants. China wants the lithography machines.

It wants the A- basically from ASML, from Tokyo Electron, and it probably wants the high-end chips as well. Is there a deal to be struck where China sells the US what the US needs? The US agrees that China can get high-end semiconductors. I'm not saying that this is going to happen but perhaps that's what, that's why the semiconductor stocks are absolutely ripping.

And it's all quite speculative, and to be very clear, I'm not participating. I own some Samsung electronics, but that's pretty much the only one I own. And again, I think Samsung is gonna be the biggest, It's going to be the most profitable company that's ever been this year, and I don't think it's fully priced in for that yet for these kinds of headlines.

But maybe the market, as I look at the way the markets have behaved in April, essentially saying, yeah, energy, whatever. S&P energy stocks were down 2% in April, and semiconductors up 30. Either the market is completely delusional and is back to, oh the only thing that matters is AI. And note that the AI propaganda on the media is absolutely relentless, right?

It's constantly, oh, AI is going to replace half the jobs out there. This is the most important macro trend, Etc. It's absolutely relentless. So maybe that's just the simplest explanation. We have market participants that are like goldfish in a fishbowl that just play the chess, one chess move ahead.

perhaps the market is sensing that you're going to get a China-U.S. deal that will be beneficial for Chinese rare earths, beneficial for solar panel manufacturers, and beneficial for semiconductors everywhere.

Erik: What do you think Trump could have lined up? He had a meeting with Xi Jinping. Then that seemed to get delayed at a time when nobody was really expecting it to be delayed.

It almost feels like Trump wants to get to a certain point with the Iran conflict where he has more leverage to negotiate. I'm not sure what's going on. How do you read that situation with the upcoming summit between Trump and China?

Louis: I think when Trump launched the offensive in Iran, I think he thought or was told by Netanyahu that it would be a one-week deal, that he'd come in, that all he needed to do was kill Khamenei and 170 schoolgirls, and that the regime would fall all by itself.

Unfortunately, that didn't happen. And he ended up being stuck in an operation that's obviously taking a lot more time, taking a lot more attention, costing him a lot of political capital. And yeah, he had to postpone the China trip because instead of rolling into China as the victor of Venezuela and Iran, he didn't want to roll in there while having to take phone calls about what was happening in Iran.

He wants to be able to sit down with Xi and negotiate without that concern in the back of his head. Now, as it turns out, he's going to have to go almost regardless. But incidentally, I think all these rumors that, oh, the war is going to start again, That we're gonna get a second wave. The US is moving more assets into the region.

I think if something is gonna happen, it's gonna happen after the China visit. I think at this stage we're getting too close to the China visit for Trump to launch a new a new round of offensive. So that-- I think that's the situation on the ground. I think that's where we stand.

And for different reasons, but mostly for domestic political reasons, both Trump and Xi need a win out of these... the summit that's coming up and then the next three following up. And by the way, I don't know if I mentioned this earlier, but it's the first time in history that the Chinese and US president are scheduled to meet four times in 12 months.

And again I don't think they're meeting to discuss the World Cup or the weather. There's a lot on the plate a lot of things to discuss. I think FX policy is a big one and that one is fairly obvious. Everyone's aligned on this. China wants a higher RMB. The US wants a higher RMB. It's the most undervalued currency in the world, but it's the currency with the strongest momentum today.

The way I work is I try to look for the easier trades. There's... I have a bucket of easy trades and a bucket of hard trades. The easiest trade in the easy trade bucket is the RMB moving up. Everybody wants it to happen. It is happening and it's a trade with massive valuation tailwinds.

So from there, unless the meetings go really bad between Trump and Xi the obvious consequence if the meeting goes well, then investors all across Asia will say, "Okay, meeting went well. RMB is now definitely structurally going up, so will the other Asian currencies." And I think that means that absolutely anything with a, with any kind of yield in Asia gets bid up ev-even by local savings.

Local savings that up until now have mostly been recycled into Max Seven, into Bitcoin, into gold, into anything with momentum. All of a sudden, if you know that the RMB is gonna go up 6.5% a year, which is what it just did in the past 12 months, if it is gonna do f-five to 8% a year for the next three years, then you look at a lot of the local stocks that are yielding six, 7%.

Your PetroChinas, your China Mobiles, your... Some of the life insurance guys, Etc. And you're like, "Okay, I can get 6% dividend yield, 6% on the currency. That's 12% without taking too much risk." That seems like a pretty attractive proposition. So I think the... In the easy trade bucket, it's Asian currencies going up and anything with a yield in Asia gets gets re-rated.

But going back to your question, sorry to ramble on, but going back to your question what happens in the in the meeting between Trump and Xi? First, I think the meeting happens. And secondly, I think they both need the meeting to go well. They both need domestic wins. So the incentive structure for things to happen and for things to go well are very much there.

Erik: I very much agree with you on almost all of that. There's one dimension of it, though, that I just want to make sure I understood correctly, because the place we agree is Trump wants to go in from a position of strength. He doesn't want to be negotiating with Xi Jinping when things are falling apart in the Middle East.

He wants to come in with, we kicked ass in Venezuela. We kicked ass in Iran. We're the tough guys. You better not mess with us. So I agree with you on that part, but you're saying, therefore, it's more likely that any further escalation in the Iran conflict would happen after a meeting with Xi.

I would have interpreted it the other way, which is Trump is more likely to try to go for the Hail Mary and say, we got to get a win in Iran before I go meet with Xi. We can't go in, from a position of weakness where we are now. We got to get a win first and try to get the win. And if he doesn't get the win, postpone the meeting again.

Louis: That's possible. Like it's Trump, anything's possible. What I would say is the window of opportunity to get the win in Iran before the meeting is starting to close pretty quickly. It's if he was going to do it, he should have done it by now. Because unless the plan is to really bomb Iran to absolute smithereens for which, I'm not sure there is a political appetite even in the U.S.,

For literally, is there the appetite for hundreds of thousands of civilian casualties? I want to hope that, there isn't the appetite for that in the U.S. for such a murderous type of action and behavior. And and to be honest, if they did do that, if they went ahead and murdered hundreds of thousands of civilian population, then it probably wouldn't be Trump who would postpone the meeting.

It would be Xi. He'd say, look, in these conditions, I'm not like you have blood on your hands. I'm not really keen to shake your hand, my dear president. So it's all this to say that it's, I think Trump actually needs, I take your point. He wants to come in strong, Etc, but he actually needs this meeting now.

Like the U.S. is getting to the point where they need they've emptied the defensive armament cupboard. They really need the rare earths. They really need the magnets. And they really need some kind of solution on Iran. Now incidentally, how do you get a solution on Iran?

Option one is yes, you bomb them to the Middle Ages, which Trump keeps threatening. The second option is you lean on the one country on-- that does have influence in Iran, namely China, and you tell China: "Look, if you help us out here you sort Iran out, you reopen the straits for us we can do stuff for you on semiconductors.

We'll decide actually China is not the bad actor that we were saying it was, and we-we'll help you on the semiconductor front. We'll help you... maybe we'll allow BYD to open factories in the United States and open our car markets," so on and so forth. And so there, you could twist it around and say, I think what Tr-- does Trump care more about looking strong to the Chinese, or does he care more about looking strong to the American electorate six months before six months before a midterm?

If he cares more about looking strong to the American electorate six months before midterm then actually he needs to go to China and he needs to cut a deal that where he comes back and says, "I got the Chinese to revalue the RMB. I got them to buy a bunch of Boeings. I got them to buy a bunch of Nvidia chips.

And and they agreed because I asked them to sort out the Iranians who are a pain in everybody's neck." So y-you can slice that, slice and dice that in many ways. But for me, if really they were gonna go militarily for Iran I think the window to do it before the meeting is closing fast.

'Cause I don't think he wants to restart a war and have to be in Beijing as the war goes on

Erik: It seems to me that the new risk for Trump is that the political opposition is really pushing pretty hard now for, "You don't have congressional approval for this. You're at the 60-day mark." Trump's defense to that has been to say no, the 60 days doesn't count because we're in a ceasefire."

As soon as we're not in a ceasefire- Yes ... which as of we're recording this on- To

Louis: restart

Erik: the clock ... on Monday yeah, w- we're not in a ceasefire anymore as far as I can tell. On Monday things have started to heat up again. So he's gotta do something in order to not have his political opposition in the US shut the war down on him.

And so a- as you say, we went from any export of Nvidia chips to China is absolutely embargoed because they're evil. Now Trump's gotta make a trip to China and try to get a, a salesman's commission on selling a bunch of Nvidia chips to China. That's right. That's the new twist.

Louis: So I think that's one possible explanation for this face-ripping rally in semiconductors from 10%, again, of S&P 500.

Erik: You think the market sees that Trump has no choice but to basically cave to China and say, "Okay, you can buy all you want"?

Louis: So the argument against this, again, I'm scratching my head, you try to put the puzzle pieces together.

The argument against this is that if this is what the market was seeing, you would expect a better performance from Chinese equities, right? And you really haven't seen it. Now, interestingly, if you look at the Chinese equity markets the performance this year you had a great '24 for Chinese equities, you had a great '25.

This year's disappointing. And what's been fascinating, what's been really disappointing has been all the big tech stocks, your Babas, your Tencents, your Baidus. The... Meanwhile, the Chinese hardware names the CATLs, the BYDs the Cambrian, the-- like all those guys, they've done very well.

So Chinese hardware has done well. Chinese internet plays and and other sort of Telecom and media, Etc. That's all really struggled. So in that respect, it's, it actually hasn't been that different from the US where software stocks have gotten crushed and hardware stocks have thrived.

You've had the same dynamic in China. The big difference is that the hardware stocks in China are, pretty much meaningless in, in the broader benchmarks. They're very tiny. And your Babas and your TenCents, Etc, are massive and all those names are down fifteen, twenty percent y-year to date.

But I would imagine that if, the scenario I painted where it's okay the market is starting to price in the fact that the US and China can no longer trip each other up. That because of the Iran war, they're condemned to get along, they have to find a deal to curtail inflation, so on and so forth.

That if that was the case, Chinese stocks should be doing better. If really we're on the verge of a big US-China d-deal, then you would expect all the guys in the White House who seem to be front-running every decision to be front-running this one as well by going out and buying Chinese equities.

And so far there's been a little, again, there's been good performance in things like CATL, the biggest battery maker in the world, m-maybe that's where the US-China deals focus on in the broader EV space, in the broader battery space, 'cause that part of the market has actually done quite well.

But it's so far, I would say that the Chinese part of that equation isn't really giving a confirmation of the scenario I just made out

Erik: Louis, the most striking thing to me from this interview has been your comments going back 20 years or 21 years probably it was e- almost exactly, to the peak oil fears in the ear- early mid-2000s.

It was January of 2005 when Matt Simmons published the book "Twilight in the Desert," which started a whole bunch of doomsday bloggers writing about a theory, a speculative possibility that we might run into a real oil crunch. And just that speculative blogging led to $147 oil. Inflation adjusted today, that's $212 oil in 2026 prices.

That's what we saw in in early 2008, just because some guy who was discredited by most of the serious people, Dan Yergin was making fun of Matt Simmons for that book back in the day. Yeah. So a guy who was discredited by most of the serious oil traders writes a book and it leads to $147 oil prices.

Now we have all of those same serious guys in the oil business who were making fun of Matt Simmons. They're circulating on Twitter that movie clip where Leonardo DiCaprio is talking about, "There's a Mount Everest-sized comet hurling toward the Earth." "We took a picture of it on radar. It's coming, and you guys aren't taking this seriously."

That's what the serious oil guys are saying now. And Street's "Yeah, but we could buy semiconductors," and those oil guys are just talking their book.

Louis: Yep.

Erik: This seems to me like a setup. Really, it f- what it feels like to me is the COVID pandemic, when everybody was ridiculing me and calling me a fearmonger when I said there's a pandemic, global pandemic coming in early February of 2020, and it took a month before the market finally figured out the obvious.

Are we in another setup that's just like that?

Louis: I think that's a distinct possibility, Eric. And I would say that the longer the Straits of Hormuz stay closed, the more your COVID-like scenario becomes credible. I think so far what has happened is that, cars are still driving and planes are still flying, and we haven't really dealt with the sh- the possible shortages in the system because they haven't emerged for two reasons.

First, there's a lot of buffers in the energy industry, so we could draw down these buffers. But now, on our calculation, by early June, we run-- the buffers run out. So that's the first point. The second point, I think, is we haven't really hit shortages because The last boats that left the Gulf were still arriving at their destination by around mid-April.

They-- If you left in late February, you were arriving in Australia or in the US or in Japan by early to mid-April. And so it's now that all of a sudden nobody is showing up at the ports, right? That nobody's showing up at the refinery. It's now that we have to draw down on the inventories that have been built in, the buffers in the system that will take us to early June.

But if by mid-June the Strait of Hormuz is still closed then yes, I think th-this is when you start to hit panic moment. And again, I think when you look at the forward curve, the market is very much pricing in the idea that the Straits of Hormuz are gonna reopen. So nothing to worry about.

Let's keep going. Now, and I said it earlier, but I'm doubtful that it reopens so quickly because I don't see the incentive for Iran to reopen this so quickly number one. And number two, there's also the sort of Damocles sword scenario the nightmare scenario that instead of just having the Stra-Straits of Hormuz closed, we go back to targeting each other's energy infrastructure.

And if that happens, then w-- then it's a whole other can of worms. And then things get, get nasty very quickly because once you take out each other's energy infrastructure, even if the Straits of Hormuz reopen, it's not like things are back to normal because th-they won't be. So I completely take your point that the downside scenario is actually quite scary.

It i-it is a scary scenario, and I think perhaps because it is such a scary scenario, just like your pandemic parallel, it's like, "Ah, you know what? I'd rather not think about it." This is like-- This seems like doom mongering. It's like too scary. Forget it. The AI is the trade. Let's go back to AI.

That's more fun. Thinking of the end of the world that's no fun. So let's just think of AI and how AI is gonna be so exciting. so yeah, I think there's, there is a certain level of discomfort wh-when you look at today's market behavior. Essentially I think the clock is count-- is turning.

The clock is ticking, sorry. We s-probably still have the month of May to be okay, but i-if by the end of May things aren't open, then we're setting up for a pretty horrible summer

Erik: Now, I really wanna push back on that part of this, 'cause this is the one place where I just don't understand the logic of the market.

Almost everybody I think would agree with what you just said, which is we've got maybe the month of May to be okay. But, if we can get this resolved in the month of May, then things are gonna be okay because we don't run out of those buffers until early June." But here's the thing, Louis, you-- we agree that in early June we're gonna run out of those buffers.

Louis: Yep.

Erik: If we've solved this, if we solved it tomorrow before this episode even airs on May seventh, if Hormuz is totally solved and all the ships are flowing freely, it still takes six weeks for them to get where they need to be, and we're gonna run out of the buffers in early June. So we need to have solved it, I would say past tense.

Oh, yeah, no, we need to solve it now. It needs to have already been solved in order to avoid something utterly colossal starting in June. And everybody seems to be acting like but yeah, if we solve this in May, then that won't happen in June." I think it's set to happen in June no matter what.

Louis: So it's, look, here I'm gonna sound terrible, but it's it's the old story of th-the rich do what they want and the poor suffer what they must. What's gonna happen is the real victims, and it's already starting to emerge, but if there's not enough to go around, it's gonna be the Sri Lankas, the Pakistans, the Kenyas of the Bolivias of this world that get cut off first and foremost.

Oh,

Erik: so if millions of people starve to death

Louis: in countries that are not

Erik: really that significant to the S&P 500, it's fine.

Louis: This is what I said, I'm gonna sound terrible. This is exactly what I meant. I-- like I said, I'm gonna sound absolutely dreadful. But this is how the market is gonna take it.

It's gonna be, "You know what? If there's no electricity in Manila do I really care?" And I think that's the mentality right now. And look I'm not saying this is awesome. And again, I'm an EM guy, so for us it's much more problematic. But I think that's the... Perhaps that explains the S&P's behavior today, where it's like, "Yeah, you know what?

Yep, I'm very sad for people in Sri Lanka, but anyway, let's what are Apple's earnings? 'Cause that's what matters to me." And all this to say that if it reopens now, I agree with you that we're still set up for some dislocations in June and July, but those dislocations will happen in the poorer markets first and foremost.

And either way, though, I would say that right now as things stand You know, w- debating whether if we reopen now, whether it will be okay in June, Etc, it's a bit-- it might be a just a specious debate because we're not reopening right now. And it doesn't look to me as if there's any attempt at diplomacy in the United States, 'cause this thing is only gonna get solved through diplomacy, and it doesn't really look like there's genuine attempts at the US at diplomacy.

The u- the way the US is conducting diplomacy is through a long list of demands that are equivalent to essentially Versailles in nineteen-nineteen, where we told the Germans, "This is it. Sign here, and here," as if Iran had been thoroughly defeated in the field. But Iran doesn't believe it has been thoroughly defeated in the field.

Iran believes its position is strong. Iran doesn't feel it's negotiating from a position of weakness. And I think that you must have seen this many times in your life either, people going through divorces or people going through fights with business partners or whatever. The worst results in negotiations happen when both sides are, A self-righteous, and B, believe that they're in a stronger position than they really are because the willingness to compromise is then not there.

And that's when you get bad outcomes all around. And to me it seems like we're still there in the Iran US situation where both sides believe they're very much in the right that the other side is profoundly evil talks about things in very Manichaean term of good versus evil, and both sides very much believe that they actually have the upper hand.

And so if that's the case, like it's pretty hard to reach compromises on anything. You and I could debate, "Oh, but look, if we reopen now, what's gonna be the impact?" Etc. The reality is we're not reopening now, so that's what matters.

Erik: What happens if Trump gets his war-making abilities taken away from him because of this sixty-day rule?

What if he loses in Supreme Court says, "Look without congressional approval, you have to stop." Does Iran open the strait at that point with a toll, or do they just say, ha, we won, and we control the global energy infrastructure from now on"?

Louis: No, I think Iran says "Yeah, you wanna go through the straits, it'll be two million bucks."

At that point, I think the ball then moves to Saudi Arabia. The question becomes, does Saudi Arabia wanna pay two million bucks a ship? Does the UAE wanna pay two million bucks a ship? Two million bucks that goes straight into the pockets of the IRGC. Now, if you're the UAE... By the way, the UAE leaving OPEC and essentially thumping their nose at Saudi Arabia strikes me as somewhat odd of an odd move because essentially UAE is saying we, here they are, you look at a map, they're stuck in between Iran and Saudi Arabia.

They're in a fight with Iran right now. UAE has received about three times as many missiles and drone hits as Israel. So they're in a fight with Iran and they pick this precise moment to pick a fight with Saudi Arabia. It's mind-blowing to me where it's like it'd be the parallel I would use is, in World War I when Germany invaded Belgium and if Belgium had turned around and decided to thumb their nose at France.

I think when you're in a fight, you typically you want to look for friends rather than make new enemies. And what's particularly surprising, I get Saudi Arabia's, UAE's point. It's we're going to need to rebuild after this. So we, we got to go. We want to produce 5 million barrels a day.

We don't want to produce three and a half. But how are those barrels going to move? Are you going to move them by ship? Then you're going to have to pay Iran. Or are you going to move them to pipeline through pipeline and then you're going to be fully dependent on Saudi Arabia? So you're going to be dependent on somebody giving you geography.

Why would you say stub your nose at both? It's to me, it's a little surprising. Anyways, to answer your question, if the U.S. Congress decides to tell Trump, OK, this war's over. You've had your fun. This has been a disaster diplomatically. It's been a disaster for the image of the U.S.

in the world. It's been a disaster for the U.S. consumer. It's been a disaster for the U.S. military. We've spent all of our weapons for no for really no concrete outcome. So we've done all this. So now you're done. You're out. You can't do this anymore. I think the ball then falls into Saudi Arabia.

Does Saudi Arabia decide, you know what? I don't want to pay Iran. So I'm only going to produce five million barrels a day and ship them out through the Red Sea. And that's that. Not only that, but I don't really have an incentive to move the UAE oil. You know what? UAE, you might want to produce five million barrels.

If you want to produce five million barrels, you have to pay the IRGC their two million. And the UAE is way more against the IRGC than Saudi Arabia. So politically, it's going to be very hard for the UAE to say, yeah, fine, we'll pay two million bucks a ship to Iran. Will they want to do it? So you're still left then on the other side.

If I'm Saudi Arabia, if I'm MBS, I'm saying, you know what? I'd rather sell five million barrels at a hundred and fifty than eight million barrels at sixty bucks, thank you very much. I'll just do that. And you might say that's gonna really piss off the US." But by that point, the US doesn't have military bases in the Middle East anymore, and the US has just shown it doesn't have the willingness to defend the Middle East.

So if you're MBS, do you still worry about what the US thinks? No. You just say, "You know what? I'll sell five million barrels at a hundred and fifty bucks and leave it at that."

Erik: Louis, I can't thank you enough for another terrific interview. I always really enjoy our conversations.

Before I let you go, tell us a little bit more about what you do at Gavkal, how people can find out more about what's on offer there, particularly for our institutional audience, since you are an institutional advisory firm, as well as how to follow your work generally.

Louis: Thanks. Look, Eric, I always enjoy our chats.

It always helps me crystallize a lot of my own thinking, so really thanks for having me on. Thanks as well for all the interviews that that you did in the past few weeks. It's really helped me think through a lot of issues, and y- I think you had some great guests in the past few weeks, so thanks a bunch.

Anyway, for me yeah, the best place is our own website. It's gavkal.com, G-A-V-K-A-L. We really do three things. We publish research for institutional investors. We we manage a series of fund, mostly Asian-focused funds, so Asian equities Chinese fixed income, Chinese distressed debt. And we we also have a private wealth business run out of Bellevue for the US, for US clients, and run out of Mauritius for offshore clients and Hong Kong where our headquarters is.

So if any of your listeners come through Hong Kong, they should feel free to reach out. Always happy to meet new people. And yeah, best place to find out is gavkal.com. I am on X. I... I'll post the the occasional thing, but Yeah, I'll post every now and then a paper that that I've either liked or that clients have asked me to unlock.

So don't hesitate to follow me on X.

Erik: Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.