Oil, Credit, and Liquidity: The 3 Macro Risks That Could Crash Markets w/ John Gillen
Summary
- Oil volatility is driven by the Strait of Hormuz conflict; prices above $100 will trigger SPR releases, while prices above $120 threaten irreversible global economic destruction.
- Private credit markets are showing cracks, with major funds halting withdrawals as software borrowers become insolvent due to AI disruption.
- A market dispersion is occurring: mega-cap tech and software are lagging due to overvaluation, while tangible assets, small caps, and industrials are outperforming.
- Massive liquidity demands from $700 billion in AI capex and US debt refinancing will likely force the Fed and Treasury to intervene as lenders of last resort.
Trade Ideas
The price of oil spiked up to around $120 a barrel and then has since dropped back down to around $85... If oil goes over 100, we will see a lot of countries start to tap their strategic petroleum reserves. Geopolitical instability in the Strait of Hormuz creates a volatile binary outcome for oil. However, upside is capped by government SPR releases at $100, and extreme upside above $120 causes demand destruction. WATCH oil prices as a leading indicator for macro stability, but avoid directional bets due to government intervention caps. A sudden, severe escalation in the Middle East could bypass SPR caps and cause an immediate, uncontrollable price shock.
There are cracks forming in private credit with halting of withdrawals from private credit funds from BlackRock, Blackstone, Blue Owl... software companies that have taken loans in private credit that are now insolvent. Software companies disrupted by AI are defaulting on private credit loans. Because these markets are opaque, the losses are not fully realized yet, meaning these asset managers carry hidden risks on their balance sheets. AVOID private credit managers until the extent of the software defaults is priced in and credit spreads stabilize. Fed liquidity injections could bail out these borrowers, preventing widespread defaults and allowing funds to resume normal operations.
We are seeing a participation of small caps, cyclicals, industrials... hard assets, things that are real, tangible, based in the real world are performing well. The market is experiencing a dispersion where capital is rotating out of overvalued, screen-based tech into tangible assets and cyclical sectors that benefit from a re-accelerating physical economy and sticky inflation. LONG real assets and cyclical sectors as the market broadens out beyond mega-cap tech. A broader market rollover or deep correction in the S&P 500 would drag down all risk assets, including cyclicals and small caps.
The MAG 7 have turned into the lag 7... slowing down the NASDAQ... things that only exist on a screen, software, and generally speaking tech have been struggling. Mega-cap tech and software are priced to perfection regarding AI expectations. As investors question the immediate return on investment for AI infrastructure spend, multiples will compress, causing these sectors to drag the broader indices. AVOID high-multiple software and mega-cap tech until earnings growth justifies the massive AI capital expenditures. Hyperscalers could report blowout earnings that reignite the AI trade and force a rapid rotation back into tech.
