Both physical shippers and financial markets are complacent about the Iran conflict because of a persistent belief that President Trump will suddenly reverse course (a "taco"). This expectation of an imminent, tweet-driven resolution is suppressing oil transit and preventing markets from pricing in the catastrophic tail risk of a protracted crisis.
While most US economic cycles appear healthy, the opaque private credit market represents the most significant systemic risk. Recent signs of stress, such as fund redemption limits and high exposure to volatile sectors like software, are reminiscent of the "contained" problems that preceded the 2008 financial crisis.
The current inflationary period is analogous to the 1970s, structured as a three-act play. We have passed Act 1 (initial shock) and Act 2 (premature all-clear), and the Iran conflict is the catalyst for Act 3 (inflation's resurgence), similar to how the 1973 Yom Kippur War triggered a new wave.
In the 1970s, food inflation had a greater impact on CPI than energy. A similar pattern is emerging now, as the Strait of Hormuz disruption hits key fertilizer inputs like urea and sulfur. This creates a reliable six-month leading indicator for a major surge in food prices that markets are currently ignoring.
Gold's value extends beyond being a simple inflation hedge; it also acts as a critical hedge against deflationary tail risks like a major credit event. Its recent rally is driven by a lack of other assets that can protect a portfolio from such extreme, contradictory outcomes, positioning it as unimpeachable collateral.
The yield curve is poised to steepen, similar to the 1970s OPEC-1 shock. Markets anticipate the incoming Fed chair will be dovish, like Arthur Burns was, and avoid hiking short-term rates into a supply-driven inflation shock. This will cause long-term inflation expectations and yields to rise faster than short-term rates.
The full impact of the Hormuz closure hasn't hit yet. An "air pocket" in global tanker supply is developing. When tankers that departed pre-conflict finally arrive at their destinations, Asian inventories will begin drawing down at an unprecedented 10-15 million barrels per day, triggering a severe, delayed price shock.
The idea that US energy independence provides insulation from a global crisis is a fallacy. Markets are global. The only way to decouple US prices would be to enact export controls, which would ironically disrupt domestic markets, lead to production shut-ins, and ultimately fail to prevent economic damage from a global price shock.
Today’s market, with its narrow leadership, resembles the 1970s "Nifty Fifty" era. However, valuations are far more extreme, with the cyclically adjusted P/E ratio at 40 today versus 18 back then. This suggests a potential sell-off could be even more severe than the 45% market drop that followed the 1973 war.
Financial futures like Brent and WTI are lagging indicators of the current oil crisis. Physical markets, which reflect immediate supply-demand, are already showing extreme stress with prices like Oman crude over $180 and Singapore jet fuel over $200. These physical prices are a leading indicator of where futures are headed if the crisis persists.
The traditional risk-off reaction of a surging US dollar is less certain now. Unlike the 2008 crisis, where the dollar rally was driven by US entities repatriating funds, the US is now far more exposed to foreign equity outflows. In a major risk-off event, this structural shift could significantly weaken the dollar's safe-haven status.