Mr. Arnold, welcome back to the show. A little week hiatus there for very good reasons, but we're back.
And a lot has happened over the last two weeks, sir. A lot has happened since I woke up this
morning. Trump sending out true social posts, markets moving pretty aggressively this morning.
But let's take a step back and put ourselves in your mindset, in your writer's seat. You titled
the newsletter, the timestamp this week, Qui Bono, who benefits?
benefiting from all this? What's happening here? Yeah. I mean, it's a question that's very much on
my mind and I hope the minds of others over the last few weeks when you've got things like the
snip-snap Michael Scott approach to foreign policy and how to handle what's going on in
the Persian Gulf. It's helpful to just kind of step back and try to frame it as who's actually
benefiting from the different ways that things are playing out or that could play out.
And, you know, I wrote about that, tried to reason through a little bit of that in the
timestamp this week, standing on the shoulders of people who are much smarter than me and much
better informed. I think we can kind of get into that. But as just a table setting comment,
it really feels like, you know, the newsletter this week was just a response to like,
it feels very much if you're, if you're strolling the timeline, if you're watching the clips on
meet the press or someone off Fox news, you know, your, your options for processing all this are
basically like, you know, rah, rah, we're going to destroy the most evil regime in the world.
And we can't let Iran have a nuclear weapon. And you're, you know, what are you not a patriot? If
you don't want that to happen, you got that. And then you've got Trump is a complete moron. And he,
he alone is guiding every element of foreign policy and every decision that's being made.
And he has no plan and he's going to get us all killed. And it's, it's World War three. And so,
you know, sell everything. And there's, there's no hope and no, no strategy at all going into this
and those, and China's going to win everything as a result, you know, the world, the U S will
destroy its position in the world and the China will, you know, take place. And so there's kind
of like the, the Mark Levin approach and like the Ray Dalio approach. And that's like basically all
that we have been given by the mainstream press. And I feel like there's a lot more nuance at play,
which I don't pretend to be smart enough to fully reason through entirely, but that's what I was
trying to maybe think through a little bit, you know, the newsletter this week. Yeah. No, I recorded
with Tom Luongo late Friday night too.
I think that's a little bit more in the middle.
He's got a very specific theory
that we're not going to dive into here
if you want to listen to that
and get a TFTC and get it.
But I think fog of war.
I've consistently had to remind myself
of this over the last three, four weeks
is try not to make any shoot from the hip decisions
or react too emotionally to the headlines,
the pundit talking points
or the true social posts that come out because we're truly in the fog of war.
And speaking of true social, I think just to make sure we're staying on at the task of the show,
which is topical news to fill you all in on how we're reading this.
I mean, we have true social posts from Saturday and then early this morning.
Many people are calling this a taco and an attempt to basically suppress interest rate yields
and the price of oil so that markets don't go too haywire.
But essentially, going into the weekend, Trump said that Iran had 48 hours to open the strait or there would be some massive hits on their power infrastructure.
And then early this morning, Trump came out and said there was productive talks, both directly and indirectly, with the Iranian regime over the weekend.
A market screamed, Bitcoin screamed above 71,000. It's still holding over that level right now. Oil fell below, WTI fell below 90, $90 a barrel. And then Iran came out rather, rather quickly and said, hey, these talks did not happen. So what is your reading on this?
Yeah. I mean, my only my only reading is that there is no reading. Right. Like I let off with this because I fought a war is exactly the right way to think about it.
And like you'll see people on both sides of that kind of general bifurcation that laid out.
It's like, you know, when when Trump says something that's totally credible and should be completely believed.
And when Iran says something, they're just lying or when China comments on something, they're just lying or trying to manipulate or using propaganda tactics or whatever.
And there are other people who think the exact opposite. Right.
Like anything Iran says is totally correct and accurate.
And they're the ones telling the truth.
And Trump is just making everything up.
And I think we should all just be in the mode of everyone is, if you're part of my French, bullshitting right now.
It is totally to everyone's advantage in all elements of this conflict to create as much uncertainty and obfuscation as possible.
So that should, to your point on asterisks, leave just like leave everyone with a lot of humility on what's actually happening.
And yeah, I guess I would just say, let's try to be equally skeptical of the various posts and media reports coming out of all the different sides of this conflict.
But that, you know, so that just frames everything up.
The one thing that I is maybe less, maybe a good place to dig into like the meat of the newsletter is actually like a more objective data point is just the spread between WTI and Brent, Brent Crude.
You mentioned WTI went below 90. I haven't checked Brent this morning, so I don't know where exactly the spread's shaking out today as of Trump's semi-taco or not taco, depending on how you think about it.
But to me, this was kind of the story of the week as it relates to trying to parse through what's going on and what the actual goals are and constraints are.
This pretty remarkable move, which may or may not be sustained.
But I think everyone got a good reminder last week that it's easy to forget in times of relative tranquility and especially like world is flat globalization.
But oil is not like a globally homogenous market.
It commands different prices in different places for different grades and benchmarks.
There are people, again, who are way smarter and more in the weeds on all the nuances of the global oil market than you or I.
But this is just kind of a good summary chart to show that kind of violent reminder that we got.
So WTI is a US-based benchmark mostly for consumption here domestically.
Brent is mostly a benchmark for Europe, Middle East, and Asia.
And unsurprisingly, the places where supply has been much more disrupted is starting to show a much greater price spike.
If you flip to the next slide, you can see that even more clearly with the prices in the Persian Gulf.
So the places that are most disrupted are just blowing out even beyond where Brent is.
And I think that's interesting because as you parse through what could, to the extent that there maybe were a plan, if you entertain that argument from the United States aside, if there were a plan, you'd probably be interested in leveraging one of the U.S.'s key advantages,
which is being an energy independent net oil exporter.
We are currently all sitting here experiencing
more pain at the pump than I think we would like but at the same time supply in the US is not really meaningfully at risk today Whereas there are a lot of parts of the world where that not the case where they net oil importers and they have to source a ton of oil through places like the Gulf Coast
through the Strait of Hormuz, and it certainly applies to what's oil and LNG, so natural gas as
well. Certainly a big issue for Europe, as we saw a few years ago with the Russia-Ukraine debacle.
And it's a huge source that we've talked about on the show before for China and the other East
Asian countries, you know, allies as well, Japan, Korea, Taiwan. But I think that spread is an
interesting data point for thinking through, if you were in the driver's seat at the Pentagon,
if you were writing the national security strategy that we've talked about in here before,
when you were kind of sizing up, what are the US's advantages that we can push on?
What are the buttons we could push? Probably the first one you would think of is the base energy
input to the entire global economy, especially when several of the parties that you consider
be your adversaries or your rivals do not have the energy independence that you do right and they
they can be made to kind of you know be put over a barrel a little bit depending on what happens
in the middle east in a way that you don't necessarily have to deal with so to me this
is like as you're reasoning through what might be going on what might the administration be looking
for and like trying to do to the extent that you want to entertain the notion that there is a plan
i think this was a big you know flashing red signal for you know one of the the key kind of
of asymmetries and relative leverage points that most likely the U.S. is probably thinking about.
And if so, I think that has implications for how anyone should think about, you know, what's going
to happen from here. Yeah. Just to give an update, because the spreads have changed,
at least the spot spreads. So we're looking now, Brent's down around 9% today at 102.28.
As I speak, WTI, as you can see over here, is under 90 at 89.30. So we've got like a $13
spread here. So the spread, at least on the spot prices, has compressed. I'm sure it's similar to
that one month spread that we had in the chart above. But this is all, again, subject to change
on a whim, on a true social place. So be aware there. But here's where we're trading now. A lot
of volatility in the market. And that's, again, going back to the fog of war and trying to discern,
I think these pricing signals are probably where we're going to get the most signal is in these
markets. And you can decide whether or not you want to listen to the pundits and listen to the
politicians involved. I think markets are going to give you the clearest signal. And I think the
volatility that we've experienced over the last three weeks, and more specifically over the last
week with weekend, true social posts, with aftermarket hour sort of negotiations, whatever
it may be, or tax. I think the volatility in the market is just pricing in this uncertainty.
And so I think the signal that we're getting is despite any certainty that politicians or
administration members may be posturing publicly. I think markets are still out there saying we have
no idea exactly how this ends. And I think one thing that we may have more clarity on than
anything else is just long-term ramifications of the destruction to the energy infrastructure
in the Middle East and what they may have on markets in the long term. And I think,
here's a signal here, Iran, the attack wiped out 70% of Qatar's LNG capacity for up to five years.
Qatar Energy CEO says, reported by Reuters, I believe there was a five-year force majeure
on some government contracts Qatar had with trading partners. And so it seems clear at this
point that a lot of critical refinery infrastructure has been materially impacted by the war in the
Middle East right now. And I think this is one thing that markets are beginning to price in,
is what is the long-term ramifications of this disruption to the supply chain,
and how do we reorient the energy industry based off of the destruction of this infrastructure?
Yeah, for sure.
I mean, I think this is one of the more sobering headlines from last week
that I think people are just now still trying to process,
that even if the conflict ended tomorrow or today and there were no more attacks
on, you know, different elements of Gulf energy infrastructure, refining infrastructure,
transportation infrastructure, et cetera. You know, you've already got now like a long tail
of multiple years, perhaps up to five years, right? As Qatar is saying, disruption to significant
elements of a significant percentage of production out of the region, right? So that there's going to
be a lengthy cost impact to that. There's going to be a lengthy supply disruption impact to that,
again, even if Trump is right and we're going to get a deal very, very soon. And, you know,
I think that, again, you ask the question like, well, who does that help? Who does that hurt the
most? Structurally, like, I think you are, you tend to think that that would hurt the, you know,
Europe, Middle East and Asian countries the most. And, you know, it's not something that can be
ameliorated if, if that, you know, if headlines like that, if statements like that are not just
being sensational, you know, if, if that's actually accurate, which we don't have any reason to believe
it's not directionally, that's a structural problem that doesn't get ameliorated whenever
Trump decides that he wants to sign a deal or taco or whatever you want to call it.
And I think that leads into this piece that was written by Anas al-Haji early.
It was posted early today, but it synthesizes some of his thoughts from the last couple of weeks.
Highly recommend giving him a follow and just checking out the link there to the substack where he summarizes all this,
but just kind of walks through the relative leverage that either side has and the asymmetry of the impact of all the disruption
in the Strait of Hormuz and in the Gulf, and we won't read it all here. I really recommend everyone
go check it out. But he's positing that in a somewhat counter consensus way that I think
has not really shown up in most mainstream discussions, that Iran does not really have
the capacity or the interest or the incentive to close the Strait of Hormuz, and that a lot of the
headlines that suggest that there's a blockade effectively, or that no ships can get through,
or that they're attacking a bunch of different tankers are overdone and maybe missing key context.
And that it's not even totally clear to hear him tell it exactly who's responsible for different threats that have been made to different ships and shippers and insurers.
So, you know, anonymous threats from unidentified sources could easily be coming from any different side.
And, you know, he's positing as a result that the U.S. does have potentially significant interest in being the driver here of keeping the strait disrupted and then engaging in the kabuki theater to suggest to make it seem like, you know, it's not actually our fault and it's being orchestrated by somebody else.
Obviously, Iran is still attacking or seems to be attacking Fog of War, asterisk again, but there's still attacks on infrastructure around the Gulf, which may or may not be fully workable within this framework.
But I just think like that kind of thinking is,
you know, it's a, it's a, it's a 0% on the, the,
the nodes of the, you know, this, the decision tree
that people are thinking through right now,
mostly in the market.
And I think it if you look through the incentives you look through the capacities on different sides you look through what the U has explicitly said about the national security strategy and how the Strait of Hormuz aligns with the Panama Canal and Red Sea routes and Greenland and shipping routes that might be controlled or influenced by that
and everything about that Trump has said about wanting to exert more dominance of trade flows
and, you know, reposition the U.S. as a true industrial powerhouse again, it all kind of
neatly lines up with what you're seeing in the straight-off-form moves. So I just think, you know,
maybe that's not, maybe that shouldn't even be your base case, but it should be more than a 0%
chance, right? It should be, call it 20%, 25%, whatever. And if that's the case, then you start
to have to entertain a lot of other downstream impacts and thoughts on how the U.S. might actually
be able to pull off the triple Wendy that they may actually be looking to do here.
We were sharing another piece of a NOS analysis last week.
And I think there was one thing in that particular analysis that really said, oh, this is something
I didn't realize that the market is completely misreading.
This was Chinese tankers making it through the straighter home years.
And people were saying, well, Iran is basically picking Chinese oil tankers and saying, you
guys can go through, we'll settle in Yuan.
But Danas highlighted the reason that these Chinese ships are making it through the straits
because they have Chinese insurance and Lloyd's London dropped the insurance of every other
oil tanker moving through the strait.
And so if you're not insured, you're not going to move because the risk is too high.
Whereas the Chinese ships are using Chinese insurance.
And so they feel that they're able to move through the strait relatively, not risk-free,
but they're hedged with insurance.
And so that was a signal there like, oh, maybe there is something here.
And then to add to that and to put a put a point in the this is geopolitical 40 chess that is working in Trump's favor.
There was a deal between the U.S. and Japan to deliver oil from from Alaska to Japan.
And so sort of that shift of demand for for U.S. oil over oil in the Gulf.
That's another point in that direction.
So fog of war trying to read through the lines here.
Those are those are two things that stuck out to me last week as well.
But speaking of China and the idea that this is basically a proxy war to assert dominance and shift demand from other parts of the supply chain towards the United States, I think there's some interesting reactions from China's economy to this that show it does have some relative strength and leverage in this game.
Yeah, yeah, for sure. I mean, there's, you kind of read this one either way, right? Like,
there, the chatter on, you know, some of the Anas Al-Haji type points that you would see over the
last couple of weeks on Twitter and elsewhere is like, okay, well, even if that's right, you know,
China will just hit back by, you know, playing the rare earths game and not shipping other critical
goods to the US. And I think it's interesting because like, that's definitely possible.
At the same time, you're seeing already last year and then this year, this Reuters headline pointing out massive growth in Chinese exports, particularly into a lot of this is going especially into Europe, kind of diverting away from the U.S., although U.S. exports are still growing significantly.
Um, but I think like the, it's an interesting, uh, East West interweaving where it takes
to to tango here and yeah, China could curb exports dramatically, but the fact that, you
know, they, they need to grow exports so dramatically over the last year.
And especially again, into places like Europe, which you have to think there's going to be
eventually a downstream political impact to that as Europe's existing industrial base
gets further and further hollowed out by things like that.
But I think that's telling you like the, this is the model for China, right?
It is an industrial powerhouse that needs to keep shipping and producing and having the world buy its goods and running this massive finished goods trade surplus.
And, you know, that gives them a choke point on a lot of goods.
But the flip side is like just deciding to effectively boycott, you know, huge parts of the world as a means of, you know, cutting off, say, the U.S. and U.S. allies from finished goods that they provide is eventually becomes cutting off your nose to spite your face.
They've got a massive issue with real estate.
They've got banks. They've got a ton of effectively zombie banks. You can go look at great work from Alex Campbell. I think he's A.B. Campbell on Twitter. He's done a ton of deep analysis on the state of Chinese banks. The consumer is still far weaker than I think they would like the domestic consumer.
So saying that you're going to, you know, undercut the entire driver of the country's economic model as a means of retaliating with the against the U.S. is like, yeah, it's possible.
But again, it just comes back to a question of who's going to blink first. Right.
Who has, in this relative leverage game, who has more leverage, who has more time to sit and wait?
And you could argue, in many ways, China does because of that manufacturing base.
You could also, I think, argue on the other side that they can't necessarily afford to slow that down dramatically as a means of hitting back against what the U.S. is doing,
especially to the extent that oil continues to do what it's doing, especially asymmetrically impacting Asia.
you know, you're getting squeezed on both sides there if you start to compress the revenue base
and also get hit on the cost side. So yeah, I think it's just, it's not clear to me that
either side here has the clear like knockout punch and we're very much like these Siamese twins.
Like it's not that easy to like just separate either one. It's going to hurt both, right?
Maybe that leads then into to take the other side of it, you know, the yield story, right? For the
US and other Western governments. Yeah. I mean, talking about signal and markets, I think
Many people are surmising that Trump sent out that tweet this morning because he was looking at the two-year yield going over 4%.
And there are people behind the scenes saying this is getting rather chaotic.
The financial system cannot sustain rates at this elevated level for too long.
And again, fog of war, who knows exactly why he sent the tweet, but many people are saying he's looking at the yield curve and noticing it's getting a bit out of whack.
And here we have the U.S. 10-year, which is back to levels not seen since early August of last year.
Yeah. And, you know, we're still in a range that's like reasonably manageable historically.
You know, we're not breaking out to multi-year highs or, you know, breaking out of like this recent channel over the last year or two.
But you can see where, you know, the bigger picture is probably that I probably should have put on here as well as the move index, which is the treasury volatility index that measures the volatility of these yields.
And that printed 109 on Friday night, which was the highest level since liberation day.
So it's not even just a level, but it's also the direction of travel and the speed of that
direction.
And so I think that's clearly like on everyone's mind and that this is like our Achilles heel,
right?
The, the, the, the debt situation is not, yeah, here you go.
Here's the move.
The, you know, this isn't, this isn't 1975 anymore.
That's GDP is, you know, not 30%.
It's 125%.
You know, we, we have, uh, as we've talked about on the show before an interest expense
coming out of the federal government that is growing swiftly.
And when you look at interest plus fixed entitlement payments plus military budget which we learned last week is going to grow by another billion unplanned to fight this war veterans benefits et cetera basically more or less fixed expenses We already kind of roughly on a hundred percent of tax receipts And so we can really afford to be rolling debt at much
higher than, you know, call it a blended rate of like 4%. So like this is as it relates to relative
leverage for the rest of the world. Yeah, this is, this is the key point to watch and keeping this
in check is going to be, you know, you have to think one of the main constraints that the U.S.
has. And then it's even, you know, you bring up here like the German and French 10-year bonds
going back to levels not seen since in France's case, basically 08 and Germany back to the
Eurozone sovereign debt crisis in 2011. So this is actually like much more notable in terms of,
you know, historical ranges and really breaking out. And, you know, I think it's kind of like
the classic, you know, the U.S. sneezes and the rest of the world gets a cold, you know,
just like with kind of the oil and gas story we talked about, you know, we're uncomfortable with
the current, the yield levels that we just talked about at kind of four, four and a half percent.
But you're quickly, you know, ripping to levels that are much more historically notable for
countries that are going to, like Germany, France, and the rest of the European complex,
that are going to be hit much harder by, you know, the spike in, say, Brent crude that we
talked about, or the lack of availability of Qatari LNG. So this is, for the West,
broadly construed for kind of the U.S. nexus. We can debate whether Europe is in the U.S. nexus
anymore or not, but this is the constraint to watch kind of on our side. Yeah, I mean, this would
validate the theory that Trump's trying to break free from the World Economic Forum DABA's class,
and I guess this is very Luongo-coded where we're trying to deflate the euro-dollar market and bring
control of our interest rates and control over the dark dollar pools back to the United States and
And to do that, you would need to essentially decimate European economies and their financial
system.
And this seems like the war in the Gulf right now is certainly putting a lot of stress on
European treasury markets.
And so with that, we have a couple more slides we could go through, but I'm going to pick
one.
Everybody's talking about the Fed.
I think as it pertains to what we focus on Bitcoin, hard assets, neutral reserve assets
in the digital age, we do have some signal out of the gold markets throughout all this
chaos.
And I think it highlights that gold is actually being used as a just true reserve asset in these times.
Many people are expecting gold to skyrocket.
We were talking before we hit record.
I didn't even realize it hit right around $4,000 earlier today.
I guess a wick down to about $4,000 currently sitting at $4,469.
But many people are saying, hey, isn't this supposed to be a flight to safety?
But it seems like particularly in the Middle East, as all this infrastructure is getting blown up,
You have people leaving these countries.
Real estate in Dubai is down something like 40% to 60%, depending on what index you look at to track that.
It seems like these countries are needing to tap into gold reserves to actually tap into liquidity to put cement in some of these holes that are emerging.
Yeah, I mean, it's a funny, crazy move that I think is probably not what a lot of people would have expected on an e-jerk basis.
But, you know, it's yet another iteration of, you know, in a crisis, you sell what you can, not what you want.
But I think it's also, and to be fair, also like gold is probably overdone.
Big, massive recent move.
And this is just an ugly chart.
So probably due for, you know, a puke on just on that basis.
But I think it's interesting because if you flip down one slide, it's showing you, I think, the beginnings of gold actually becoming more relevant again as a reserve asset to absorb trade surpluses.
And it's kind of exactly, Michael McNair makes this point that it's kind of exactly what you would expect when these massive trade surplus economies in the Gulf kind of see their trade surpluses temporarily shrink to zero, right?
When top line goes to zero and the bills still need to be paid across the country, the place you can tap into is the neutral reserve asset.
But you can only do that if you've been building reserves of that asset to absorb prior trade surpluses.
So this is kind of an unwind.
This unwind is telling you that something has been happening over the last few years, the last decade.
We've kind of known this anyway.
If you look at just sovereign gold buying, right?
If you look at most sovereigns kind of on net, not no longer buying treasuries as of, I think, 2015.
Clearly, there's been a big move and an accelerated move in the last couple of years, especially since Liberation Day into gold to absorb trade surpluses.
And so it's it's counterintuitively kind of like exactly the move you would expect to see if that were happening.
Right. If if you had a bunch of people who are a bunch of countries that needed to move into gold to as a flight out of other things, then, yeah, you'd see a bid or at least a sustained price in this kind of environment.
But this big sell off is telling you there are big trade surplus actors out there that need to tap into this because they need something to sell to cover, you know, expenses and keep the lights on.
So that, I think, is to get to tie everything back to what we do here with Bitcoin.
I think fundamentally, this is actually on a longer run basis, a medium term basis, pretty bullish for the hard assets as absorber of trade surplus thesis.
As gold fulfills that role more and more, which I frankly expect it to over the next five years, 10 years, this sell off notwithstanding, that's just opening up a bigger and bigger market for neutral sovereign assets that can serve as that kind of absorption.
And I think that only just primes the pump further and further for eventually meaningful actors around the world to understand and act on Bitcoin's relative value proposition relative to gold.
Yes, and we'll end it with this. And again, fog of war before I share the screen and show the tweet. I think this is a newly appointed part of the Iranian regime as they're trying to re-architect their administration or their high levels of power as the war decimates the IRGC.
And he came out and tweeted last night, I believe, alongside military bases. Those financial entities that finance the U.S. military budget are legitimate targets. U.S. Treasury bonds are soaked in Iranians' blood. Purchase them and you purchase a strike on your HQ and assets. We monitor your portfolios. This is your final notice.
And so obviously some very, very strong rhetoric here from MB Golubiff.
But I think it highlights that whether or not people truly react to this specifically, I think it does highlight some some truth where the global reserve asset, the world being U.S.
Treasuries does come with increased political risks, especially today.
And the case for a neutral reserve asset, whether it be gold or Bitcoin, is only getting stronger by the minute here as this war continues to wage on.
Co-sign once again.
We'll be back next week.