MacroVoices #524 Simon White: War + Inflation = More Inflation

Summary

• Simon White argues inflation is severely mispriced, with the Iran conflict catalyzing a return to secular inflation, drawing a detailed analogy to the 1970s three-act play where premature all-clear ends with a Middle East war (Yom Kippur then, Iran now).
• In the 1970s, food shocks contributed more to CPI than energy shocks; today, fertilizer prices (rising due to Strait of Hormuz disruptions) lead food CPI by ~6 months, signaling imminent food inflation not priced in.
• Simon expects the yield curve to steepen, akin to OPEC 1 in the 1970s, as break-evens rise and short yields fall under a dovish Fed chair (compared to Arthur Burns), unlike OPEC 2 where Paul Volcker flattened it.
• Equity markets show complacency despite high valuations (CAPE ratio ~40) and narrow leadership (similar to Nifty 50 in 1970s); belief in a Fed backstop persists, but private credit is a weak link with contagion risk reminiscent of subprime 2007.
• Gold is presented as a hedge against both inflationary and deflationary tails, driven by demand for unimpeachable collateral, diversification from the dollar, and central bank buying; recent weakness may be temporary.
• Risk-off dynamics may be rewritten: dollar rally could be limited by altered capital flows (less repatriation vs. 2008), and commodities might not sell off in a commodity-induced recession if supply shocks ease growth pressure.
• Rory Johnston details the Strait of Hormuz closure: even an immediate end would take months to clear logistical backlogs; prolonged closure could spike oil to $200+, causing global demand destruction and economic crisis.
• Fertilizer supply disruptions from the Gulf threaten food production, compounding inflation; Rory reinforces Simon’s view on food price risks, noting a third of global fertilizer flows through the region.
• Geopolitical outcome is paramount: if the Iran conflict resolves quickly, it’s a buy-the-dip opportunity for equities; if protracted, oil spikes risk market crash and stagflation, with high uncertainty due to the Trump administration’s unpredictable response.
• Patrick Ceresna proposes a defined-risk long wheat trade via a WEAT ETF call spread to hedge against the emerging food inflation narrative, leveraging elevated volatility and right-tail skew.
• The US economy remains strong across multiple cycles (business, liquidity, credit), but a protracted war could derail it through hysteresis effects in supply chains.