Bond Market Meltdown: Investors See No End To The Iran War

Yeah, absolutely. My baseline expectation is that this is going on certainly through the midterms. That Trump, you know, does not see a reason to give up on the leverage that he thinks he has versus Iran. He's not willing to take the L on the blockade or on potential additional military strikes before November. And if he's willing to go past November, he's willing to go beyond that.

They tell you that essentially the Iranians and the Americans are still involved in geopolitical price discovery. They are both trying to assert that they have more leverage over the other than the other is willing to accept. And that is both true economically in terms of the amount of pain that can be meted out by the Americans onto the Iranian economy through the blockade and through sanctions, as well as the threat and the use of military force from Iran. That is true in terms of their ability to continue to strangle some of the exports out of the strait, directly as well as through proxies, and their willingness to engage in military strikes to ensure that they continue to have that leverage. The fact that there is no agreement on those things means that you continue to have an unwillingness to get to a more sustainable place in negotiations — the Iranians demanding a return to the memorandum of understanding, the Americans saying go scratch. Look, these are still contained strikes. The Iranians, upset that 5 to 7 million barrels is getting through the strait — a lot less than before the war, but more than a couple of months ago — has led them to engage in putting more mines, or attempting to put more mines, into the strait and engage in direct strikes against ships that are going through. Once they do that, the Americans take shots directly against Iran. Both of these are still pretty constrained. A couple of months ago, you'd be calling this skirmishing, right? You wouldn't call this a return to all-out war. It's certainly not an escalation that risks getting other Gulf states directly involved the way they were briefly, that kind of thing. But we're nowhere close to an agreement, and that means that you're still having significant amounts of oil that you do not expect to get through the strait, a significant amount that you do not expect to get out of Yanbu, Saudi Arabia, and through the Red Sea or up through the Suez. And given that that is happening in the context of major disruptions in the Russia-Ukraine war as well, there is upward push on oil prices, on gas prices in the United States, on gasoline and diesel prices. They have been balanced out by the fact that so much of Chinese demand has been taken off the market because they have massive reserves. But what had been 5 million barrels of import a day has now ticked up to seven for the Chinese, so they are starting to show that they don't want to give up on all of their demand despite a higher price environment. That plus the fact that some of the stockpiles in the United States are at the lowest levels we've seen in decades. Diesel refining capability is also constrained, so that price is at record highs. Those things are going to continue to have a big impact on price. And one final point: the fact that Trump worked very, very fast to suddenly announce a really big deal with Venezuela, where the Americans would take an almost colonial position in the government, directly engaging in an ownership stake in Venezuelan fields and extraction, is because Trump sees that the impact of a low level of reserve in the strategic petroleum accounts and that prices are continuing to be higher than he likes, that he needs to address that. So we should not... Your expectation for the markets is that this is going on for the foreseeable, predictable future.

Yeah, absolutely. My baseline expectation is that this is going on certainly through the midterms. That Trump, you know, does not see a reason to give up on the leverage that he thinks he has versus Iran. He's not willing to take the L on the blockade or on potential additional military strikes before November. And if he's willing to go past November, he's willing to go beyond that. That's why I mentioned the Venezuela point — like he's trying to come up with some alternative narratives for a war that he believes is going to continue. You can say that you're going to blow up the Iranians tens of times, as he has over the past six months. You can threaten them, say that Iran's already functionally destroyed, no one's running the country. The Iranians certainly don't feel that way. They believe they have more leverage and that their leverage comes from the ability and willingness to continue to strangle the strait, including military strikes. And as long as that difference persists between the Iranian perspective and the American perspective of who has leverage, then this war is going to continue. Again, at a constrained level. We don't see the Americans going after massive critical infrastructure. We don't see the Americans deciding they're going to try to kill a bunch of additional Iranian leaders. Nor do we see the Iranians engaging in unfettered strikes against major infrastructure across the Gulf. We don't see that. So, as much as I believe the markets are correct in assessing that over the coming months we are going to continue to have significant conflict and disruption, no deal that works, we should also recognize that the upside on escalation appears to be constrained by both of the principal antagonists. Now, that may not be true of Israel, particularly as we get closer to an election that Bibi Netanyahu may well lose in October. But leaving that aside — and the Americans would put pressure on him certainly not to take such steps — the United States and the Iranians at this point are not getting to a yes. They're not getting to a negotiated settlement, but they're also not blowing each other to kingdom come.

Well, it could potentially last several years. But the Americans are very unwilling to put troops on the ground, so it won't look like Iraq or Afghanistan. They appear to be very unwilling to engage in broader strikes against Iranian critical infrastructure because they know what would be coming in return, including with America's Gulf allies. So that makes it not look like Iraq and Afghanistan. And also, Iran's leverage over the strait is a wasting asset. There will be additional capabilities — radar, defensive capabilities — where the Gulf states can defend themselves and their key energy assets and their populations better over time, where the Gulf states will have alternatives to get their energy and other product out of their region. They'll export it without using the strait. Other countries around the world will also find other ways to avoid the strait. And that means that Iran needs to figure out what price they're going to extract from having influence, because otherwise they're not going to get what they want. So they can't wait for two, three, four years, or they just don't have the position that they presently are in. For all of those reasons, this looks very different from Iraq, from Afghanistan.

Yep. Yep. I mean, again, Treasury — what we've seen from Bessent is an effort by Trump to give a competing narrative. What we see in the conversation on Venezuela and the actions, an effort to give a competing narrative. Trump will say this is all fake news. He says the polls are fake. He says that affordability is a made-up issue. The reality is that most voters don't see it that way. Trump is underwater. Trump is badly underwater on the economy. He's badly underwater on inflation. He's badly underwater on Iran. He's also badly underwater, since we're talking about water, on Lake Ontario, but hasn't stopped him there either. He just doesn't care that much about the midterms. He cares more about himself. He's not the one on the ballot. Republicans that are running in November are very keenly aware of the difference between the two.

Great to see you, man.

This is a blockbuster lawsuit, and I have to hand it to the FTC. I've been critical of the administration when they do the wrong thing, but I'm also quick to praise them when they do the right thing. And this is an example of the administration bringing an important enforcement action against Amazon. And I should note that it's alongside a large number of bipartisan state attorneys general. So here's what the lawsuit alleges. It says that Amazon sells search ads. And by that I mean when you go and look for something on Amazon, you typically go in that search bar and you try to find something. Those ads, the rankings that show up from there, are paid and they're sold in an auction. And the kind of auction is called a generalized second-price auction. So what that means is not that the highest bidder pays the amount they bid — it means that the highest bidder pays what the next highest bidder bids. And so what this is supposed to do is it's supposed to incentivize someone in an auction to offer their highest price. There's a lot of science on this. It's become very common. This is how Google search ads were sold. So lots of small businesses on Amazon, a lot of sellers on Amazon, large sellers, were bidding, as this suit alleges, with this notion that they're going to pay the second-highest price or a penny above the second-highest price. What the lawsuit alleges is that Amazon was cooking the auction, that they were effectively putting in a quote-unquote proxy price in order to raise the second-highest price of the auction so that they can squeeze out more money from the highest bidder. And what the FTC and the state attorneys general are arguing is that that is costing advertisers — these are the small businesses primarily selling on Amazon — in excess of $20 billion. In other words...