War With Iran This Week? Will Markets Implode? Economist Answers | Steve Hanke
Summary
- The "warning shot" partial closure of the Strait of Hormuz is unlikely to escalate immediately due to new defensive capabilities (Chinese radar in Iran), meaning oil markets are correctly pricing in low risk for the current week.
- US inflation has bottomed and will drift upward throughout 2026 because M2 money supply growth has accelerated above the "Golden Growth Rate" of 6% annualized.
- The Federal Reserve is stealth-loosening monetary policy not just through rates, but through bank deregulation (removing liquidity constraints and encouraging mortgage origination), which will expand credit creation.
- The US Dollar is overvalued relative to the Euro; fair value is estimated between 1.20 and 1.40 EUR/USD.
Trade Ideas
Steve Hanke
Professor of Applied Economics, Johns Hopkins University
Hanke observes that the 3-month and 6-month annualized growth rates of M2 money supply have accelerated above 6%. He explicitly states inflation will "drift up" and the Fed will not hit its 2% target sustainably. Inflation is a monetary phenomenon with a lag. The current acceleration in M2, combined with the "second shoe" of bank deregulation, guarantees sticky or rising inflation. Standard inflation hedges (Gold, TIPS) are mispriced if the market expects a return to 2%. Long Inflation Hedges to protect against the debasement of purchasing power caused by accelerating money supply. A deflationary bust or a sudden contraction in the money supply (though Hanke views this as unlikely given the deregulation).
Steve Hanke
Professor of Applied Economics, Johns Hopkins University
Hanke highlights that the Federal Reserve (specifically Vice Chair Bowman) is moving to loosen bank regulations, including supplemental liquidity ratios and mortgage origination rules, to "re-empower commercial banks." Hanke argues that bank regulation *is* monetary policy. By loosening these rules, banks can expand their balance sheets and reclaim mortgage market share from non-banks. This regulatory shift directly increases the profitability and lending capacity of the traditional banking sector. Long Commercial and Regional Banks as they benefit from a structural shift in regulatory favor and increased lending volume. A sudden recession or credit event that causes loan defaults to spike before the volume benefits materialize.
Steve Hanke
Professor of Applied Economics, Johns Hopkins University
Hanke states that the "most important price in the world" is the EUR/USD exchange rate, and his model places fair value between 1.20 and 1.40 (currently trading lower). While the Dollar is "King," it is currently expensive. Hanke expects the exchange rate to slide back into his fair value zone, implying Euro appreciation against the Dollar. Long the Euro (via FXE) or Short the US Dollar (DXY) to capture the mean reversion to fair value. Geopolitical instability in Europe or the ECB cutting rates faster than the Fed, which would weaken the Euro.
Steve Hanke
Professor of Applied Economics, Johns Hopkins University
Iran partially closed the Strait of Hormuz as a "warning shot." Hanke notes that a full closure would send oil to $120/barrel immediately. While Hanke believes an immediate escalation is unlikely this week (due to ongoing talks and deterrence), the geopolitical floor is fragile. The upside risk ($120 target) is asymmetric compared to the downside. Watch Oil. Do not aggressively short volatility here, as the "warning shot" confirms capability. Peace deals in Geneva could remove the risk premium entirely, causing oil to drop.
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This The David Lin Report video, published February 18, 2026, features Steve Hanke discussing GLD, TIP, KRE, KBE, XLF, FXE, USO. 4 trade ideas extracted by AI with direction and confidence scoring.
Speakers: Steve Hanke · Tickers: GLD, TIP, KRE, KBE, XLF, FXE, USO