It Looks Very Bleak for Stock Markets: 3-Minutes MLIV
Summary
- The speaker has adopted an extremely bearish view on equities, arguing that markets are mispricing the geopolitical reality of the Strait of Hormuz closure.
- The traditional 60/40 portfolio is failing because the crisis is an inflationary energy shock, causing both stocks and bonds to sell off simultaneously.
- The US Dollar is identified as the only viable safe-haven asset, as Treasuries suffer from inflation and Gold suffers from rising yields and a strong dollar.
- The market's assumption of an imminent diplomatic "offramp" is flawed because Iran lacks the incentive to reopen the Strait without massive concessions.
Trade Ideas
Iran is the one who's closed the Strait of Hormuz, which is the one that's disrupting the global economy. The Strait of Hormuz is a critical global chokepoint for oil logistics. Its closure severely restricts global crude supply, creating an immediate energy shock. This directly drives up the price of crude oil commodities and expands the profit margins of Western energy producers who are not reliant on the Strait for distribution. Long oil commodities and domestic energy equities to directly profit from the supply disruption. Iran is offered massive geopolitical concessions and reopens the Strait, causing global oil prices to collapse back to baseline levels.
Stocks are completely complacent. And I still see severe downside for stocks. The market is incorrectly pricing in a quick geopolitical resolution, assuming politicians will find an easy offramp to protect markets. However, Iran controls the Strait of Hormuz and has no incentive to reopen it. As the reality of a prolonged energy shock and supply chain disruption sets in, broad equities will be forced to re-rate lower. Short broad market indices as they adjust to prolonged geopolitical disruption and inflationary pressures. A sudden diplomatic breakthrough or unexpected reopening of the Strait of Hormuz would cause a massive short-squeeze rally in equities.
The dollar is the only haven to this kind of crisis... the dollar continues to be strong, there's more to rally. In a geopolitical crisis that triggers an energy supply shock, traditional havens fail. Treasuries sell off due to rising inflation, and gold sells off due to higher yields. Therefore, global capital is forced to flow exclusively into cash (USD) as the sole remaining safe haven that protects purchasing power. Long the US Dollar as the structural haven during an inflationary supply-shock. Reopening of the Strait of Hormuz would immediately reverse the dollar's safe-haven premium and trigger a rotation back into risk assets.
You're going to getting an energy shock, so you can't buy Treasuries. It's inflationary... they sell off badly first. The closure of the Strait of Hormuz creates a massive supply-side energy shock. This drives up inflation, forcing interest rates and bond yields higher. Because bond prices move inversely to yields, long-duration Treasuries will mechanically decline in value. Bonds cannot act as a hedge to equities in this specific environment. Short long-duration Treasuries as inflation expectations and yields rise. If the energy shock causes severe and rapid demand destruction, a deep global recession could eventually force a flight to safety into Treasuries.
You're not going to buy gold because until you see higher dollar, higher yields... you've got to sell gold. Gold typically acts as a geopolitical safe haven, but it yields zero interest. When an energy shock drives up both inflation (pushing bond yields higher) and the US Dollar, the opportunity cost of holding gold increases drastically. The strength of the dollar and rising real yields will overpower gold's geopolitical risk premium, forcing a sell-off. Short gold as rising real yields and a surging USD create a toxic environment for non-yielding assets. If central banks pivot to cutting rates despite inflation, real yields would fall, which would cause gold to rally aggressively.
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