🗞 Iran's Ultimatum

WHILE YOU POUR THE JOE… ☕️
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Speaking of statistics, let’s get on with today’s email 📧….

WE CAN’T HELP OURSELVES
Conspiracy Theorists Love This

If you’ve ever done a deep dive on all major wars, conflicts, and maybe even the recent pandemic…

Then you probably noticed something:

• These things only happen when the economy is slowing, and central banks need an excuse to print money

• Certain markets move before the hammer is dropped, because someone always knows something

• The national budget hits a certain mark to make room for these tragedies

Here, let me explain what I mean: ⬇️ 

Notice that in the mid-1990s, the amount of interest the US paid on its debt surpassed the national defense budget?

At the same time, the economy was slowing to a halt and needed to land a win fast. Of course, the Fed couldn’t just act on its own will; there needed to be a catalyst to get things started back up.

In the early 1990s, both the unemployment and inflation rates moved in a direction that would typically get the Fed to act, but again there needed to be a justification for it.

At the same time, the interest expenditures on US debt exceeded the national defense budget, thus creating the perfect opportunity. 👀 

Enter the War Pigs

This is when the US started the Gulf War, and of course the defense budget needed to be expanded, and the economy could heat up again as more money flooded the system.

Employment in the arms manufacturing, technology, and other industries took off and got the economy back on track (mission accomplished).

Today, we have a similar situation, as you can see, inflation is falling and unemployment is starting to come up again.

However, there is one major divergence in markets to show one of them is lying:

Notice that the correlation between gold and real rates typically stays put, until recently…

That relationship makes fundamental sense because gold is typically an inflation hedge, and bond yields are also a proxy for inflation expectations.

Yet they’re diverging like never before, and I think I know why that is.

1. We are still in the last innings of a risk-on cycle as real interest rates remain negative for now.

2. That means there is no incentive to be in bonds right now, since they will net lose money overall.

3. Gold, like other currency derivative assets, is going off the cuff.

But, this might change soon, especially as inflation continues to cool and real rates go back to positive (making bonds and other yielding assets more attractive). 📈 

There’s also door #2.

This is when the government finds the perfect excuse to print money again, which could be the Iran-Israel war if the US ends up getting involved (looks like we already are).

It’s a tight spot, but this is one thing we should all be aware of moving forward.

And in all cases, I am bullish bonds today, no matter which way you see it (positive real rates or war) bonds will be a safe haven. 🔥 

Is it Time?

In global macro hedge funds, there’s always a good way to time events like this one. It’s not perfect, but it’s grounded in proven and tested strategies.

It is done through correlation regimes, so let’s check the past two decades of data for gold and bonds here:

As you can see, that divergence between bonds and gold is throwing today’s regime closer into the negative deviations that typically are associated with recessions.

• 2008

• 2020

• Briefly in 2022

Which also aligns with where the 10Y2Y Yield Curve in the United States is headed (steepening)

Look, will we have a war? Nobody knows, even with Trump announcing a successful strike in 3 nuclear sites in Iran.

The real question is whether Iran chooses to keep retaliating, and whether China or Russia joins the party in favor of Iran.

All told, though, chances are we do get some sort of conflict considering where our expenditures are and how slow the economy is.

They need an excuse to start printing money again, period.

More coming soon,

G. 🫰 

GO AND MAKE IT HAPPEN
In Case You’re Wondering

The title of today’s book recommendation 📖 says it all..

If you’re wondering what the future of energy will look like, in terms of fossil fuels and nuclear or other renewables, then this book is for you.

You’ll find the conclusions are all there, but do have patience when reading it.

To your success,

G. 🥃