China's drastic cut in oil imports was not caused by the war. Demand was already collapsing from a domestic property crisis. The conflict provided a convenient public explanation for Beijing to stop propping up import figures used to hide its economic weakness.
In a true supply crisis, near-term oil prices should soar above long-term prices. The oil curve's flatness, with low long-term prices, indicates the market is pricing in a severe, protracted drop in global demand that overpowers any immediate supply shock.
Economists long assumed energy demand was non-negotiable, meaning supply cuts automatically spike prices (like in 1973). Today’s muted market response to a huge supply disruption proves this model is obsolete. Underlying global economic frailty has made energy demand far more elastic than assumed.
A modern depression isn't a 1929-style crash but a prolonged period of stagnation and a 'lack of upside.' The key indicator is the chronic failure of the economy to return to its previous growth trend, resulting in millions of missing jobs and suppressed real wage growth over many years.
Prices jumped 25-30% post-COVID and never fell, creating a permanent 'phase shift.' This allows companies to report higher nominal revenues without selling more goods, enabling them to reduce headcount. The result is record stock prices coexisting with abysmal job growth and 50-year lows in labor participation.
Despite high inflation, the bond market's 'break-even rate' predicts inflation will plummet below the Fed’s target within a year. Since the Fed is holding rates steady, traders are implicitly betting that a severe economic slowdown and demand destruction are the true forces that will kill inflation.