MacroVoices #532 Mike Green: Record Mechanical Flows

This is Macro Voice. Finance. with individuals, family offices, and other sophisticated investors. Macro Voices is all about the brightest minds in the world of finance and macroeconomics telling it like it is, bullish or bearish, no holds barred. Now here are your hosts, Eric Townsend and Patrick Serezna.

Macro Voices episode 532 was produced on May 14, 2026. I'm Eric Townsend. We've got another Macro Voice's double header lined up for you this week. Simplify Asset Management's chief strategist and portfolio manager Mike Green returns as this week's headliner. Mike says it should come as no surprise that the risk of the Hormuz crisis crippling the global economy hasn't even slowed down the SP five hundred's meteoric rise to new all time highs.

Because according to Mike, market flows aren't being driven by macro analysts. They're being driven instead by the machinery of passive investment fund flows. Mike also disagrees with some of our other guests who have predicted persistent secular inflation as a result of this conflict, and also has an interesting take on why Mike thinks Kevin Walsh.

will be far more likely to aggressively cut rates as opposed to hiking them. And of course we'll touch on Mike's specialty, the unintended consequences of passive investment through index funds. After the feature interview with Mike Green, commodity context founder Rory Johnston returns for a cameo appearance to provide an update on the Hormuz crisis and how it's affecting global energy markets.

including what's yet to come if the strait remains closed. Then be sure to stay tuned for our post game segment, when Patrick's trade of the week will explore a setup built around Mike Green's view that the market may be underestimating the risk of a sharper economic slowdown and a significant reversal in the future Fed rate path.

and then we'll have our usual coverage of all the markets with Patrick's postgame chart deck. And I'm Patrick Serezna with the Macro Scoreboard week over week as of the close of Wednesday, May 13th, 2026. The S P 500 index up 107 basis points, trading at 7444, continues to press 52-week highs on semiconductor leadership. We'll take a closer look at that chart and the key technical levels to watch.

in the postgame segment. The US dollar index up fifty-two basis points, trading at ninety-eight fifty-two. The June WTI crude oil contract up 625 basis points, trading at 101.02, once again pressing above$100 as the standoff at the Strait of Hermuz continues. The July RBOB gasoline up five hundred and fifteen basis points to three forty seven, trading at fifty two week highs.

The June gold contract up 26 basis points, trading at 4707. The July copper contract up 793 basis points to 667, pressing to all-time new highs. The May uranium contract down twenty three basis points to eighty five eighty, and the US ten year treasure yield up thirteen basis points, trading at four hundred forty six. Treasury's breaking out of a multi-month trade range to the upside. The key news to watch next week is the FOMC meeting minutes and the much anticipated NVIDIA earnings.

This week's feature interview guest is Mike Green. Eric and Mike discuss why passive and systematic flows continue to dominate market behavior. how the energy shock could eventually translate into economic slowdown and weaker employment, and why the market may be underpricing a future reversal in the Fed rate path. Eric's interview with Mike Green is coming up as Macro Voices continues right here at macrovoices.com. Here's your host, Eric Townsend.

Joining me now is Simplify Asset Management's chief strategist and portfolio manager, Mike Green. Mike prepared a slide deck which only contains one slide. So I guess it's not a slide deck, it's just a slide. But boy. It is a doozy. You're really gonna wanna see this chart, so I strongly encourage you to download that to accompany this interview.

Mike, it's great to get you back on the show. I've got to ask you, because you've always been a voice of reason in my investing life, I feel like I did at the end of January, beginning of February of twenty twenty. I thought there was just information so obvious that the market had to discount it and it wasn't and I felt like you know, wait a minute. Usually when you're the only guy who sees it, it means you're wrong.

But boy, I was so convinced and I'm convinced now. I don't think that the market gets it, that we've got a really big problem with uh energy flows. And it seems like, you know, it's just another reason to rally the market, S P all time highs. I don't get it. Help me. Well, the good news is that rising energy prices increases earnings for the energy companies which have been powering the SP. I'm totally joking when I say that.

No, I mean look, you already know what my answer is going to be, unless the news meaningfully impacts employment and therefore contributions coming from four oh one Ks or other equivalent strategies. I don't see any reason why the marginal pricing behavior for the S P should change. We have the mindless bid coming from the passive robot where money is flowing into four oh one K is

on a continuous basis and into retirement accounts. Nobody called Vanguard and said, change your allocation schema. Nobody called BlackRock and said your model portfolios need to change. And as a result, they don't. And so when you get a drawdown, as we had from the February 27th until basically the early April lows.

that triggers multiple forms of rebalancing. The most important of those in terms of its initial implementation is going to be a target date fund, which uses a threshold level for rebalancing out of bonds and into equities.

every time you see that anomalous behavior where equity markets are rising and bonds are simultaneously selling off aggressively, we'll hear all sorts of narratives about, you know, the end of bonds, et cetera. But the simple reality is that's just a portfolio It has allocations between bonds and equities. that is rebalancing itself at a massive scale. And unfortunately that's what I think we saw.

And I don't see any reason for it to change until unemployment begins to rise significantly, retirements begin to increase significantly, and that bid coming from the passive robot comes to an end or turns negative. Unfortunately, you know, that sounds like I'm bearish because I keep saying the markets are irrational. What I'm reminding people is the Keynesian statement the markets can remain irrational, quote unquote, far longer than you can remain solvent.

we saw that play out fiercely in April where hedge funds decided that they wanted to hold their favored names and instead increase their shorts. And when markets reversed we had an unbelievable amount of short covering. We saw fast moving strategies like CTAs and to a certain extent vol control strategies. rapidly scale up their exposures, risk parity had some leveraging up, etc. So basically everything hit all at once. That's the chart that I shared with the listeners.

showing that we had a record one month flow into equity markets. And surprise, surprise, we had a record one month performance in equity markets. it had nothing to do with any thoughtful application. It had everything to do with positioning and with the mechanical bid.

Let's talk then about what would happen next because I suppose with the COVID pandemic, you know, there was a brief little emotional freakout, but then the market looked completely through it and we saw as a result of a lot of money printing.

uh rally to fresh all time highs right in the middle of the pandemic. Are we headed into a situation where we do have a major economic dislocation? Things are shutting down all over world because of an energy dislocation, which I think at least in some parts of the world, as far as I'm concerned, has to be inevitable at this point.

Does that just mean that it's time to celebrate and uh rally to even higher highs on the S and P because as Louis Gav said last week, it's probably gonna be other countries that feel the massive human suffering as a result of this and not so much the bigger developed economies. Does that just mean S and P. keeps going up from here?

The painful reality is that as passive continues to gain share and it owns more and more of the market, the market will behave more and more like a low float stock because Vanguard or BlackRock are not going to change their positioning. unless they receive a sell order. And so the simple you know, the simple math is this gets crazier and crazier. And y you know, I have to confess, like when I made that forecast it was with some pre trepidation

Because there's always periods of craziness in markets. It's hard to imagine an environment much more crazy than late twenty twenty one when people were receiving significant stimulus payments. But even more importantly in that time period they were getting their paycheck and they were staying at home and they weren't incurring all of the costs that I've identified in things like, you know, my poverty line analysis.

um, like childcare and transport to work and fancy clothes as you have to wear to work, et cetera. We all wandered around in our pajamas and decided to buy stocks with our spare time. You know, the difference is this time we haven't seen the stimulus. What we're seeing is an increase in costs and consumer balance sheets are significantly weaker.

than they were in the twenty one, twenty-two time period when we suspended debt payments, et cetera. You know, but within the moneyed class, those who effectively have money and have the capacity to spend it. we're not seeing much of a disruption. And I don't think we really will until the Fed ultimately begins cutting interest rates and reducing that income transfer to that cohort.

That's a very strange place to be where cutting interest rates could actually be contractionary, uh, because of the, you know, the give or take ten trillion dollars in short term instruments that are linking their payments to the Federal Reserve's policy. that's created an extraordinary pulse of income that is really fiscal policy but not identified as su

Let's take a look at the soul chart in your chart deck, which is really staggering for me to look at given the news flow backdrop upon which it happened. Listeners, again, you'll find the download link in your research roundup email. Mike, what you're showing here is basically the biggest inflow ever in history. And you told me off the air, even though this chart only goes back to twenty sixteen, you said there is no prior example.

of a bigger inflow any time in US history ever into the S P five hundred, other than the one that's happened in the last month or so on the back of news that we've got a massive global energy dislocation, which hasn't quite hit the tape yet, but we know it's coming because we've used up that six week lag of delivery times. We're burning into all the buffers of of c you know, spare oil that was sitting around in storage were about to run out.

of diesel fuel and jet fuel globally and have a massive crisis on our hands and that's been I don't want to say the cause, but that has been coincident with the biggest inflow into the stock market in recorded history. Yeah. It does sound crazy, doesn't it?

Well p part of what I would emphasize on this chart is if you look through the discretionary portions here, we're really not capturing anything that is happening other than systematic flows. And so I I just wanna caveat that you know, we we do see flows into things like SPY, V O O and IV V on a discretionary basis where people ultimately decide everything is great, we should buy back in.

But ironically, that was among the smallest parts or smallest contributors to this. So this was really a mechanical bid. that was caused by CTA's, you know, trend following strategies basically having to rapidly reverse their move into a net sale. they reversed that within a month at a pace that we have candidly never seen before. Vol control strategies. As volatility retreated and never really hit the realized levels that the implied volatility was pricing.

we were emphasizing at Tier One Alpha where I shared the chart from that you know, we were behaving like a market that had already crashed. People bid for protection, the discretionary bid was there. and it didn't materialize. And so they were forced to cover shorts, they were forced to cover their protection. That led to a collapse in the VIX. The VIX itself then becomes a profit center as people short the VIX, creating a synthetic long

all of this has no real thought behind it. Right. I mean that's the frightening part of this is that I don't think it's that people are looking at your analysis and saying, it's wrong in principle. I think by and large they're saying, Well, the market is telling me it's wrong, right? And that means that it's wrong, at least in the short term, until it actually starts to hit the employment numbers until it starts to actually hit the flows into the market. But Machines did what the machines do.

Okay, now before the inflow happened, I see what looks to be the fifth largest drawdown or or outflow from markets. I assume that was the build up to this current energy event that caused that. So you're saying the market correctly discounted what everybody knew was coming. then because it takes uh six weeks to two months for d big ships full of crude oil to transit the entire planet.

The algorithms in the CTAs didn't really build in that lag effect, so they're recovering and basically going to massive inflow into the market because the market has proven wrong the prediction that we're gonna have. a big energy disruption, or at least that's what the algos think is going on. And that's the reason for this.

Yeah, I... Is that really it? With the exception of the thinking part, right? They are just mechanically tuned. So a trend following strategy will take consideration of volume and volatility in establishing the trend. But most importantly, they ended up getting short, right? They did exactly what you would expect trend following strategies to do as we flattened out in twenty twenty five and basically made no real progress for an extended period of time.

CTAs began to take down their positioning. As we sold off, they increased their net short positioning. And then as the market reversed rapidly, they were forced to cover that. And as it continued to power higher driven by the inflows in four hundred one Ks'cause once the discretionary trader has sold their shares, remember the line from uh speculation or reminiscences of a stock up. I'll lose my position is why he didn't want to sell in a drawdown, because it was a bull market.

CTAs are very similar, hedge funds are very similar. Cover the position and ask questions later. You can construct the narrative at any point in time, and candidly I think that's what we've by and large done. Okay, what happens next? The way we're looking at it i is that ultimately those systematic strategies have now returned to basically a fully invested position and so the market has lost that ammunition.

The four oh one K flows have shifted strongly in favor of equities. We're now actually potentially looking at a rebalance back towards bonds. which have suffered under this environment as you're well aware, although for all the hoopla about the directional move in rates, we really haven't gone anywhere there for an extended period of time as well.

And so we're starting to see the inflows into fixed income return, but they're not returning at a pace that is yet large enough. And this is particularly true at the back end of the curve. They're not returning at a pace that is large enough. to offset the net issuance or lack of demand for that product, particularly as people are moving away from sixty forty type strategies.

and increasingly embracing things like trend following, which has actually done quite well in its recovery off of the kind of April sell off. W you know, the quick answer is that my expectation is is that our bias should be bullish But in a much more muted fashion for the next couple of months. And then we'll see if the idiosyncratic event of an actual energy stalkout.

leads to job losses, leads to you know or whether it's coming from AI, right? Whether that actually begins to manifest itself as actual job losses. Rather than what we've seen so far, which is a low fire, low hire environment that's particularly affecting the

Let's talk about scenarios of what happens next as a result of the Iran conflict. I'm gonna say it's extremely likely that in many parts of the world there will be an extreme price increase or there will be caps placed on prices, price controls will be put in place and that will lead to shortages where it's impossible to get any supply. of diesel fuel and jet fuel particularly.

I don't think that that's going to necessarily happen in the United States, but I think it will happen a lot of places around the world. And what remains to be seen is the extent to which there's a price transmission. You know, if the price of diesel fuel in Singapore is you know, thirty nine dollars a gallon. What is the price of diesel fuel in Santa Monica? I I don't know how that's gonna play out, but it seems to me like there's gonna be at least some price transmission. What would you expect

the result of that to be on US markets. If that happens. Well I think there's uh so I think you hit on something that's incredibly important. It's one of the reasons why I very much push back on the idea of this is like the nineteen seventies. There's two primary differences. First, in the nineteen seventies, the marginal buyer of

of oil on the international stage became the United States. We effectively moved from a net exporter to a net importer. That meant that the world's richest consumer was suddenly bidding for oil versus Everybody else. That more than anything else is what made the nineteen seventies unique in that framework. The US could afford significantly higher oil prices than the rest of the world could.

and they were the marginal consumer for globally traded oil. This time around it's the emerging markets that are the incremental consumer, uh, the marginal consumer for oil in particular. And candidly, they're kind of tapped out in a lot of ways. You know, you're already starting to see that type of behavior, the demand restrictions, the limitations flowing out through many emerging markets.

many emerging markets are beginning to experience near catastrophic conditions, particularly as it relates to fertilizer and agriculture. they're doing everything they can to avoid those price increases, but they simply are less well positioned than the United States. And I realize this sounds crazy given how bad it was in the United States.

But many of those emerging markets are less well positioned to handle these prices and they you know, I I hate to say it, but I would somewhat include Europe in that mix as well.

The second thing is is that there's just not the population pressures that there were in the nineteen seventies. And so, you know, a a really interesting chart. I probably should have included it in the chart pack. is looking at real rates relative to population or more accurately labor force growth. The high real rates or the high rates that we experienced in the nineteen seventies

were largely and the inflation we experienced in the nineteen seventies were largely a function of that oil price shock as we already mentioned. But then more importantly, just the simple reality that there were boomers and young women streaming into the labor force, demanding the capital that's required to keep a labor capital ratio somewhat constant.

if you allow that number to you know, the quantity of labor to exceed the quantity of capital, you will experience falling productivity. In the nineteen seventies were all about trying to maintain that pace of business activity and it required significant capital.

that the Federal Reserve candidly stepped in front of and somewhat prevented by raising interest rates as high as they did. This time around, you know, labor force around the world is actually shrinking the United States labor force growth over the last five years, even with the population adjustments from the surge in immigration that has not yet been removed from much of the labor force statistics.

It really only hit about one percent versus about three and a half percent per year in the nineteen seventies. So yeah, my hunch is is that we're not gonna see anything even remotely close to the sort of gasoline or oil price spike that we saw in the nineteen seventies where we saw five hundred percent sort of increases. But the pain that is gonna be felt in the emerging markets is significant. And as you're correctly pointing out, the answer in many situations will be we'll do without.

Um that means that we will likely see dramatically reduced uh production levels for many foodstuffs, et cetera. We are somewhat fortunate in that we were very well supplied. We've had extraordinarily strong growing seasons, many forms of soft commodities. have been oversupplied for the past couple of years. And so we're looking at inventories that are relatively high there.

But there's no question that this is going to flow through as price increases in agriculture, assuming that the harvests i you know, are diminished by the reduced application of fertilizer. Likewise, the ability to get stuff to market. If diesel prices are extraordinarily high, the vast majority of agriculture is transported by truck.

that means there will be less shipping available or less transportation, logistics available for the the delivery of those crops and some may very well rot in the fields and less prices are much higher.

And so this is the paradox of capitalism, right? In some ways we should be celebrating higher prices because they're sending a much needed signal and they are allowing agricultural producers to somewhat offset the cost of fertilizer, but y you know, that's painful for households and in the United States we're already seeing a growing fraction of households

being forced to do things like increase their pawn shop activity at the lower end or their credit card activity. And that becomes very difficult as we look at credit card delinquencies beginning to spike, et cetera. This is creating conditions under which people are just gonna have to do with less. And that means lower household formation. It means households are going to decide to move out of a individual apartment.

and move back in with their parents, for example, where you would reduce your net consumption. We're seeing the signs of all of that. And I you know, I I joked on Twitter the other day that B N P L buy now, pay later is actually turning into buy now pawn later as households are scrambling for cash.

Donald Trump is set to meet later this week with Xi Jinping. It seems to me that China's reaction to all of this and Trump's ability to negotiate with China is gonna play a major role in it. China has more crude oil and frankly everything else stockpiled than just about anyone.

So it seems to me if China says, Well, look, get some positive PR by coming to the rescue and saving a few uh c smaller countries around the world by sharing some of our strategic petroleum reserves and helping them out in exchange for some concession That's one thing. If China goes the other way and says every drop of oil that we have is for us and we're going to block any export of finished products to other countries until this mess is over, that's a very different outcome.

W am I reading those tea leaves correctly and how do you think this is likely to play out later this week? I agree with how you're reading it. So far what we're seeing from China is largely every drop is precious. We're not going to share any. that makes sense. China is a very insular society and candidly has always prioritized China over any other country.

Um, that's not a bad thing, by the way. I wanna be clear. That's part of the process of capitalism broadly is we all should be seeking our own self interest. But we need to recognize that that has implications for how we're perceived going forward. In the United States we see very clearly what's happening in our society and our economy. Our news is very attuned to it.

we don't have that sort of transparency as it relates to what's happening in China or candidly for that matter Iran, which is largely in a blackout from the internet. And so the the real question that you have to ask yourself is how much is China suffering in this process? And the evidence that we do have is that they are actually being hit quite painfully and they've stayed remarkably quiet in this engagement with Iran. My hunch is is that Trump will find a relatively receptive

Chinese audience that is basically looking to cut some sort of a deal and ameliorate some of the pressures that are being placed on the Chinese economy. The flip side of that is the you know, the the downside to putting in a mercurial individual like Donald Trump Is Kendall I don't think anyone knows what he's thinking as he goes into these discussions and negotiations, and is he going to settle for a quick deal that may be much less than he could otherwise extract?

Candidly we don't know. And I think that's been one of the real challenges for the US military as well in conducting operations in Iran has been the uncertainty around what policy is going to emerge in the next twenty four hours. It's a very challenging environment. that in some ways can be helpful. You know, my my wife used to call it the crazy monkey approach, right? If you just act crazy enough, people will largely leave you alone and try to placate your behavior.

But the flip side of that is it makes it very hard for the people that are quote unquote partnered with you, like the US military with the commander in chief, to anticipate the direction that you're gonna move. And so, you know, I this is very much a wild card, but what has been communicated to me Is that China is much more interested in this in this meeting than the US is candid.

It seems to me that China is absolutely pivotal to the outcome of the Iran situation, because if China takes the stance, look, Mr. Trump We are uh trying to be patient here, but we're not going to tolerate much more of your interfering with our ability to import oil from the Persian Gulf and uh you've gotta work this spat out. right away within a certain amount of time or else you're gonna lose a lot in your relationship with China and it's going to only make things worse.

If it goes in that direction, it seems to me like, you know, that's very different than if China says, uh, look, we're willing to cut a deal with you and help you in Iran, which uh frankly I don't see is very likely, but i it it does seem to me that China is in the the position of greatest power here. They could throw this Iran situation either direction.

I I think there's definitely some truth to that. I think it would lean more towards if they were to decide enough is enough and basically communicate that to Iran. I agree with you that that seems unlikely given that they have been an active partner with Iran and Iran is a significant source of their crude oil. You know, this is gonna be an interesting question. We don't know what the Iranians are thinking at this point. We don't have full transparency in terms of what their actual position is.

part of the reality of why I would argue entities like the UAE are choosing to leave OPEC is if Iran continues down the current path and damages its oil production capability China is gonna have to recognize that and we'll be looking for alternate sources of supply as well. And so it does feel like this is you know, that that we're in a in a point where the narrative within the United States has been very much about the impact on the United States.

without significant consideration for how things are really playing out in Iran or China or other regions where we have much less transparency.

Since you mentioned UAE pulling out of OPEC, I'm very curious to get your take on what this means to the future of global oil market reserve or spare capacity. It seems to me like we were already down to the point where really the only OPEC countries that had any spare capacity were UAE and Saudi Arabia.

Feels to me like UAE has signaled pretty clearly that they're gonna pedal as fast as they can and make as much oil as they can and and keep selling it. Does that mean that we've reached a point where either Saudi Arabia is the only spare capacity on the globe or and I would think in that situation they probably pedal as fast as they can too. So It seems to me like maybe that creates an illusion of a recovery in the sense if everybody's making as much as they can coming out of this crisis.

It probably drives prices down in the short term, but it also means there is no spare capacity going forward. Do I have that right? I think you have that right. I wanna be careful on that though, because again, the miracle of high prices is that it does stimulate production. And so it it is important to recognize that right now we are beginning to see some of the supply response UAE would be a good example of that. Likewise we're finding lots of alternate ways

out of the Persian Gulf. Pipelines are running at max capacity. By and large, they have not sustained significant damage. And it's becoming very clear that that there need to be alternate approaches and this is gonna be particularly true if Iran is successful in articulating that it is in control of the Straits of Four moves on an extended period of time.

The other reality though, and this is something I wrote about in twenty two, when if you remember the projections were that, you know, we were gonna see a surge in oil demand and that oil prices were going much higher and that as China reopened from the COVID events that we would see an an incredible surge of demand that would power us well above the hundred and six million barrels that were the forecast.

My argument was that we actually had multiple demand curves. The developed world was already in decline in terms of its oil usage. China has proven to be far less hungry for oil despite the fact that they have been stockpiling, as you pointed out, their demand has disappointed expectations from that time period. And when you see price surges like this, it rapidly leads people to seek ways of conserving oil.

And trying to do the same thing more effectively. Again, that's the beauty of capitalism. You send a price signal through and people adjust their behaviors to it. My hunch is is if anything, this actually pulls forward the peak oil demand story with a notable caveat being that you'll likely see some significant restocking demand. But I'm less worried about the supply side in oil, you know, in the same way that I'm not that worried about uh whale oil populations.

I'm much more concerned about the demand implications as we look out past the inelasticity of a three to twelve month time period.

Speaking about longer term trends, let's talk about inflation more generally and where it's headed. We just had an inflation print. Uh you told me off the air you're a little bit concerned about the stale birth-death model data. Give it give us some perspective on that. Yeah, so there's a couple of narratives that are going on. One is is that there has been, you know, a reacceleration of inflation. Again, another chart I probably should have included. I posted it on Twitter earlier today.

is that we are dealing with residual seasonality in our inflation prints, the non atypical seasonality associated with COVID and then the Russian invasion of Ukraine threw off the seasonal adjustments from the BLS quite dramatically to the point that in the fourth quarter and first quarter we're typically printing about half a percentage point higher than the actual inflation is running. That's due to the seasonal adjustments being made.

against an atypical seasonal pattern. If you look at the second half of this year you know, I wrote a sub stack on this called the year was eighteen sixteen or eighteen fifteen, which was the year without a summer. We're not seeing any of the seasonal pressures that we traditionally see on things like rents, et cetera.

Which make up a far larger portion of the CPI, that is a really critical thing to understand. The second is is that the birth death model which you were referring to, this is the assumption of entrepreneurship and new jobs that are created. It has also been the source of the terrible downward revisions that have been made. Birth Death was originally introduced as a tool to try to reduce revisions. Unfortunately, a number of technical changes in how data is reported and collected

have led to the BLS continually overestimating how many new jobs are being created by new businesses being formed. Those corrections won't emerge until what's called the quarterly census on employment and wages. which is the gold standard for measuring that data. We have that through September. That's why we had such terrible downward revisions in the twenty four and twenty five time period versus what was initially reported.

that is on hold until basically next month when we'll get the updated fourth quarter data. My assumption is is that the birth death continues to be over reported and adding about a hundred thousand jobs And so if you include that in the data, we actually are not really seeing any improvement. We continue to lose jobs.

And importantly, even if you look at the official data, I would highlight that our labor force is now starting to shrink in the United States. We have a drawdown from peak labor force. that is roughly in line with the worst recessions that we have seen over the past, you know, fifty years. it's very hard to reconcile those two data points with the idea that the US is suddenly accelerating and that what we're seeing is an overheating of the economy.

I think unfortunately we're just we are dealing with really bad data quality and the revisions will likely pull that lower. All else equal, that suggests that there is less inflationary pressure over the summer and into the fourth quarter. And beyond that point I don't have the same clarity because I don't have the ability to to model fully what the seasonal will do until we've received that data. But it does appear that we are shifting back into a more normal seasonality.

an all else equal that should lower both inflation and then we'll get the downward revisions in employment. I continue to think there's a reasonable chance that Kevin Walsh comes in and by September he's suddenly looking at inflation running less than we had anticipated. the tariff surge will have been over at that point. People are highlighting that it you know, we anticipated that would flow through in goods.

The crazy data is is that goods inflation is basically really, really low, which suggests that companies are eating most of the tariff increases either in the United States or in supplying countries. And I think there's a very high chance that Kevin Wars suddenly wakes up in September, October and realizes that he has to cut and cut more aggressively than anyone had anticipated.

That's fascinating because uh it seems to me that you and I have m broadly agreed on what's about to happen energy wise, which is we're gonna have a real energy crunch globally as a result of this Iran conflict. If that happens, doesn't that create a fairly long lasting and persistent inflation driver? Not really, because if you think about what we're talking about, we're talking about the fastest moving components of inflation and also the most inelastic

And so if we do end up seeing, you know, businesses shut or air flight curtailed that prevents activity from happening. And I think it's important for people to recognize that unlike COVID, We now do have the potential to work from home. You know, we've discovered that is a solution. And so could I see an oil surge accompanied by another dramatic reduction in people's mobility and reduced demand from transportation, et cetera, I think the answer is yes. And so as you pointed out,

one of the key risks becomes a supply response in oil that is met at the same time with a demand reduction. You know, I'm not gonna draw the direct analogy to two thousand eight,'cause I don't think it's actually fair in that analysis. But remember, oil prices can fall just as quickly, if not faster, than they can rise. Well that's definitely true. Well. Prices increasing is definitely inflationary until they cripple the global economy and cause a Great Depression.

Definitely not inflationary at that point. And that that is that's the uncertainty. And again, most of this pain is being felt outside the United States and by outside the United States, I'm including California. which, you know, has just absolutely absurd restrictions on oil production that make it much more like an Asian a Southeast Asian country in terms of its import patterns.

And there we're already seeing pretty strong evidence of behavioral change associated with gasoline prices hitting the levels that they are in California where, you know, m one of my team members works out there I was sharing with me, you know, pictures from the pump where they've exceeded seven dollars. I kind of laugh in a crying sort of way that Trump found it appropriate to highlight how cheap gasoline prices had fallen in January, February.

and now m is basically trying to ignore that they've moved in the opposite direction, putting incredible stress on many of the households candidly that had hoped that Trump would strengthen their position. But, you know, the simple reality is that is the way it plays out. If we end up with actual shortages, meaning that we have to reduce consumption you could simultaneously see a supply, a positive supply shock and a negative demand shock that would manifest as oil prices falling very quickly.

So when you say that Kevin Walsh may by September be Yeah. in a situation where he unexpectedly has to be cutting aggressively. Y are you implying that means he'll be reacting to a not necessarily two thousand eight sized, but a global economic slowdown that would be bringing that about?

It certainly seems that that's the logical conclusion from what we're experiencing, and that's particularly true as you point out, if the current disruptions that have been largely ameliorated by the release from strategic petroleum reserves if we find that we cannot draw those down significantly further, and I would highlight that many countries that have tried to keep pricing, you know, basically keep pricing cap

had their balance sheets stressed already in an attempt to do that in twenty twenty two, the UK would be a really good example of that. The capacity to continue to support that is just significantly less. And so, you know, we we are looking at a situation in which I if this continues for an extended period of time, the absolute shortages of oil will really begin to hit those areas that are the marginal consumers, primarily the emerging market.

Well, I certainly agree with that. So what happens let's say we get to September and Kevin Walsh is cutting rates aggressively because of a global economic slowdown. Uh, what happens to your chart then? Do we get an even bigger inflow into uh semiconductor stocks? I mean

And it depends on what happens to employment on our path there. You know, and it depends on the mix of employment as well. So part of the perverse dynamic of the low hire, low fire environment is that by and large we've retained relatively high earning individuals who are fully trained and capable of operating at high productivity. what we're seeing is a reduction in the hiring of new labor force entrants, those who need to be trained

those who don't meaningfully contribute to productivity, but actually disproportionately contribute to marginal demand. You move out of your parents' house when you get a job. you move into an apartment, somebody had to build that apartment, put a dishwasher and a uh oven in there and a refrigerator, etcetera. All of those things have to be done in advance of that. We're seeing very weak hiring at the younger level.

And unfortunately, that means that demand is likely to be relatively hit in those segments. And that certainly is being supported by data we're getting from apartment rents, et cetera. On the flip side of it, You know, it means you continue to pay the fifty-five year old because now instead of training a twenty-five year old, they're training an AI. And that has extraordinary value if we're able to pull it off and it turns out to have the productivity impact that many people think it might have.

the only analogy I can draw to this is the end of the guild system in the nineteenth century. Whereas uh w you know, where the industrial revolution began to move from things like textile mills into actual factory production. Many people love Victorian homes.

without realizing that the um popularity of those homes was driven by a collapse in the price of things like filigreed wood that was driven by the industrial revolution, that created that growth created a demand surge for the artisans that were already trained so that they could build the factory jigs that could be used to produce those low-cost products. But it destroyed the apprentice business.

And so unemployment became highly cyclical and very sensitive in the mid part of the nineteenth century. In the panic of eighteen thirty seven, for example, unemployment hit sixty three percent in New York City. I don't think anything like that's going to happen because we don't have the same rates of population growth in particular in the United States.

But I do think it's really critical to understand that we are basically putting, you know, those who should be rapidly moving up the productivity curve and the learning curve. We've basically put them on ice and told them, you know, congratulations, you've got a uh an engineering degree or a degree in French medieval literature uh from a prestigious institution that qualifies you to work at Starbucks.

or drive for Uber. That's a real cost. And it's similar to what we've seen in recessionary periods where it creates much lower lifetime earnings. And we don't yet know how that is gonna play out, but it's showing up very much in the data. The hiring rates for those fifty five and up is up eighty four percent year over year. The hiring rates for those twenty nine and under are down twenty five percent year over year.

It has all the signatures of that sort of breakdown of the guild system and the apprenticeship system. And it again, if I told you I knew how it was gonna play out, I'd be lying too. Let's move on to the subject that you are famous for and in fact have now literally written the book on, which is active versus passive investing, or probably more accurately the potential unintended consequences of the passive investing trend of the last several decades.

It seems like the chart that we uh looked at earlier was pretty strong evidence that you're right that these passive flows do funny things in the market that it seems to me eventually lead to potentially very negative uh outcomes. Am I right to be worried about this? And how worried should I be? Well, I think you're right to be worried about it. I think um we have to acknowledge that y you know, we continue to see strong flows and we are not yet seeing the negative outcomes.

What we are very clearly seeing are the inflationary components of the impact of passive investing, where buying at any price. is actually required by fiduciary duty, not by a thoughtful application of discounted cash flow analyses, et cetera. We experienced two remarkable events in our lives, Eric.

The first was the transition from defined benefit plans to defined contribution plans. There's a fantastic white paper that was just released in twenty twenty five, made it into the financial analyst journal in March of this year. Um, by a gentleman by the name of Coimbra. And what he highlighted is the mechanical properties of the importance of that shift. When you move from defined benefit plans, which guarantee you an income stream.

to a defined contribution scheme in which you have to accumulate assets in the hope that either the income from those assets or the sale of those assets are going to allow you individually to secure your retirement. It creates an extraordinary outward shift in the aggregate demand for financial assets. As an individual, I have absolutely no idea when I'm going to die or how long my retirement is going to be. As a result, I have to accumulate as much assets as I possibly can.

in a defined benefit plan, the statistical properties of a large population allow me to accumulate assets and try to generate income against an actuarial outcome. The reason that system failed in the nineteen sixties and nineteen seventies was because people began living much longer than we had anticipated. The retirements were much longer.

Now we're looking at a situation where everybody is basically being forced to assume the worst case scenario. That means that they are both accumulating more financial assets. and they are spending less out of that financial asset base than they otherwise might. the traditional four percent withdrawal has been replaced by something closer to a two percent withdrawal, which means that we are hoarding financial assets, which naturally causes prices to rise.

The second phenomenon is the growth of passive investing. Because we basically told secretaries and janitors that they needed to become experts at stock picking. we arrived at a conclusion that minimized the amount of activity that they had. Market cap weighting is unique in an index construction in that it doesn't actually require you to continually rebalance your portfolio.

the market pricing by and large does that for you. The only impact is on the the marginal flow, your net contribution or your net sale. that also has an inflationary impact. And so we have had two distinct phenomena that are related and both inflationary to financial assets over the course of our lives. And because of the demographic bulge of the of the baby boomers, that's gonna eventually reverse and we will find ourselves selling ourselves selling those assets.

in order to secure retirement, the relative shortage of labor suggests that those retirements are going to prove to be much more expensive than people had anticipated. we're likely to see inflation in elder care at the same time that we see much more deflationary pressures in areas where we're beginning to see population growth turn significantly negative. Colleges would be a good example of

You know, we're we're watching basically the reverse of what happened with the baby boomers coming into the system. When the baby boomers came into the system, we had to build a ton of uh maternity care, maternity ward. Most hospitals in the United States were built in the nineteen fifties and nineteen sixties primarily to accommodate the surging population and and the growing number of births. Now we have a growing number of deaths. And we've done a terrible job of preparing for it.

And so it's only logical to conclude that y you know, that which we need less of will likely become less expensive and that which we need more of, i.e. end of life care, is likely to become significantly more expensive. And this is one of the real tragedies of where we sit today.

because old people are candidly scared. Understandably so. They don't know how long they're gonna live. They don't know what the high volatility asset mix that they have gotten themselves into is ultimately going to yield. And they continue to see headlines from including people like myself that say the expected returns to equities given these levels of valuations should be quite low.

If I heard that and I was uncertain about my retirement and I was uncertain about when I might run out of money, I would be less willing to spend as well. And then we have the paradox of thrift, which basically says the lack of spending from the old. Impacts the income of the young. And so, you know, we've created a condition under which the old people are scared and the young people are really unhappy. And it's it's not a good mix.

You've written a book on this subject. I know that because as a follower of your Substack blog, I've been teased by a number of sample uh pieces of that writing. The book is titled The Greatest Story ever sold the unintended consequences of passive investing.

It looks like it won't be released until the end of June, but it's available right now for pre order. Listeners, we've got the uh pre order link on Amazon linked in your research roundup email. Mike, what is the book about? Tell us what to expect when it's released in June.

So the book is really actually about the destruction of price discovery. The implications of passive investing and the demand for financial assets has created conditions under which the most important price that we really receive in the economy, the price of Equity, the price of debt. are increasingly being outsourced to algorithms. And so it brings us full circle back to that chart that I shared where systematic strategies that have never done a discounted cash flow analysis in their lives.

are dictating the prices that we're seeing on screens. We're trying to attach meaning to that because that's really what price is. Price is the mechanism of information exchange in a market based economy. If you destroy that process of price discovery, the consequences are understandable and foreseeable. and perversely create many of the conditions that we now experience in our lives, everything ranging from gambling and the growth of speculative activity in financial markets

can largely be tied to the phenomenon and the choices that we made in how we choose to fund our retirements. Those decisions were made back in the nineteen seventies when we had very poor information on how financial markets actually work. Since I began my work in twenty sixteen, there's been an explosion of academic research that is highlighting the adverse effect.

on price discovery of the growth of passive investing and the demand for defined contribution plans and the government sponsorship of certain areas as being preferred, what's called the qualified default investment alternative. that by and large is directing the retirement assets of the United States into the largest public companies that until very recently had no real reason to receive those inflows.

And so the book is actually about the you know, what happened, why it matters, and what is likely to occur given that we have severely impacted our capability for price discovery in a capitalist economy. And again that is available for pre order right now on Amazon. Uh Mike, you also W with w with one caveat I just wanna actually highlight that date has been pushed back. We're actually targeting a release on October nineteenth, which will be the anniversary of uh the crash of eighty seven.

Oh okay. So we should not uh not believe the june thirtieth date on uh Don't don't believe the hype. Correct. Okay. Coming from the uh the source itself. You gotta trust that signal, folks. Uh let's also talk uh you manage several funds for simplify asset management. You also write a sub stack. Tell us about those as well.

Sure. It is a hedged high yield product and so it attempts to mitigate the impact of credit spreads. That has been a very challenging period since April of twenty twenty five. We've seen credit spreads by and large tighten significantly.

even as we're seeing signs of credit deterioration in the broader economy. Part of that is of course due to the passive bid as money flows into these strategies, they buy the highest price securities disproportionately. That has driven a bifurcation in the high yield market. Just like it's driven a bifurcation as we've seen in US markets where there's the four hundred ninety three and the mag seven.

the uh but that product is certainly something that people can check out and take a look at if they are interested in a more protected version of income generation and candidly I think this is gonna be one of the real critical Um realizations that people have is that they should be taking advantage of these high prices to rotate into areas in which income can be generated.

The Substack is YesI Givea Fig. It is yes I giveafig.com. It's available on Substack. You can search for Michael Green or YesI Givea Fig. It is available uh weekly. I try to put it out early Sunday mornings, uh more or less every week.

It is the outgrowth of my own personal note taking and thought process more than a desire to put charts or trades in front of people. And it covers topics ranging from a discussion of the poverty line, a piece that went viral to the type of work that I'm doing around passive to insights in terms of markets that people would be more familiar with seeing from other areas.

As I describe it, it's basically how I clean out and clear and straighten the attic that is in my mind behind my overly large forehead.

Well Mike, I can't thank you enough for another terrific interview. Listeners, be sure to stay tuned'cause we've got Rory Johnston coming up for an update on golf. Oil flows and what comes next in the Strait of Hormuz. Patrick Serezna and I will be back as Macro Voices continues right here at macrovoices.com. It was great to have Mike back on the show. Now Rory Johnson is next on deck for a special second feature interview for an update on the Iran conflict and what it means for the oil markets.

Then Eric and I will be back for our usual post game chart deck and trade of the week. Now let's go right to Eric's interview with Rory. Joining me now is Commodity Context founder Rory Johnston. Now folks, I know it feels like, oh yeah, you guys have had Rory on three times now since this saran thing started. Yep, we have had Rory on three times. Separated by a full month each time. It's been four weeks between each of Rory's

three appearances on this uh conflict that was going to take less than three weeks in total, we were told in the beginning. Rory, I want to start with what you're getting in terms of just reaction from markets. Uh it feels to me like when we first talked about this and you and I were both afraid that it could go on for months.

Everybody told us we were crazy stupid and out of touch because it was gonna be a very small number of weeks and it would be over. And the crazy thing is, well, okay, now it's been months. It seems like we've been proven right. I think most people are feeling like we've been proven wrong because price drives narrative and what they're saying is look, the S P all time highs.

You guys were all worried about this, like it's a big deal, obviously. It's not a big deal, it's all blown over. Is that the reaction you're getting from people and how does that jibe with your understanding of, I don't know, reality? Yeah. So thanks for having me back on, Eric. I would agree that obviously, very clearly, we've seen the market that the oil market in particular has been far more patient with this collapse in supply of the middle.

than I would have expected. And we saw during the first month a lot of panicked up, you know, buying and precautionary demand to insure against any even larger supply loss. But basically since The end of March, beginning of April, prices have been down sideways and jagged. Up, and then another, you know, uh Trump tweet and then back down again. So what's going on? I think the most important thing, and we would have spoken last time just after the ceasefire was announced.

And I think one thing that's important and one thing I I would say I've started to appreciate more was just how much of that March and early April rally was a real precautionary demand on the tailrist Not just that Hormuz would remain closed for another month or two, but that you would see the conflict spiral into more direct attacks. From Iran against Gulf oil production infrastructure in Saudi Arabia and Iraq and Mui, et cetera. And that that was just such an important Mm.

and massive fat tail in the market, that it was commanding a decent amount of kind of justified price premium. And when the the ceasefire was announced, And sure, it's been all over the place. But I think at this stage it seems generally likely, and the at least the market is interpreting it as the Trump administration and Trump himself does not have an appetite to restart all at once. Yeah.

But if we get back there, I you know, based on what we saw in March and April, it seems likely that the market would react very violently to a resumption of open warfare. The other thing is that it's taken a long time Longer. than I would have expected for those deficits to accumulate in visible inventory. So, as you know, Eric, a lot of the data in this market is lagged. We're flying blind a lot of the time in the immediate here and now. And

But going into this crisis we had high stock levels. So we had a cushion. And if you moved it away from the kind of the hormous of it all, the kind of narrative weight of the Middle East and just look purely at the inventory numbers, yeah, you could justify a non-crisis level price.

For a couple months of drawdown, assuming you also have the SPR and assuming oil and water got drawn down and everything else, you can make that case. I would not have expected the market to have been as patient as it clearly has been. But there's also the fact that anyone that did try and kind of bring forward and incorporate some of this risk. got blown out to the downside multiple times by Trump posting on True Social or whatever, you know, saying to a reporter in the in the White House.

that the war was almost done and this was all gonna get wrapped and then prices would fall fifteen dollars to the downside. So I think it's also made that aspect of it really, really hard for anyone to price forward risk.

And instead, we're just kind of waiting and we're just drawing down inventory. So now we're just in this process now where we're watching the market, monitoring inventories, monitoring all of our indicators, and slowly watching stuff draw down. Let's take stock of where we stand with respect to the strait now because frankly the fog of war has made the news flow very confusing.

The the strait is still substantively closed. It certainly hasn't had a full reopening. But there are some ships getting through. The thing is I'm not sure they're all big VLCC ships. So if we d just talk in terms of the flow, everybody has heard the statistic that about twenty percent of the world's oil normally flows through the Strait of Hormoons. How much of that, you know, if there's 20% as a good normal day, how much is still flowing through the strait on ship?

today and how much is flowing past that position through other means, such as through the east west pipeline, over to the other side of Saudi Arabia and out through the Red Sea? You know, there's other mitigations in play. So from the twenty percent that normally goes through the strait, how much is actually making it through the strait and how much is finding its way around the corner and you know, out the other side, so to speak?

Prior to the blockade from the United States, you had probably about one to two million barrels a day of mostly Iranian crude uh and products making its way through the strait. Since the blockade and particularly since the flare-up in violence in the strait over the past two weeks, with both

multiple instances of US blockade enforcing by kind of striking Iranian-aligned tankers, as well as Iran attacking or trying to seize tankers in the region as well, trying to enforce its own blockade. That spike in violence depressed levels even further, but relative to pre-war levels, where let's say between 130, 150 ships would have normally been transiting the Strait.

We hit a recent kind of near term high in the kind of like low double digits, kind of like call it ten to fifteen ships, around the announcement of the ceasefire in early April. But over the last couple of weeks, those have fallen back down into single digits again. So if anything, the situation in Hormuz has gotten a little tighter over the past month. To your question about

These offsets, these have mostly been fairly well established now or flowing well. But relative to the normal or the pre-war 20 million barrel a day number, we have gotten around Hormuz to somewhere in the tune of five. million barrels a day. It was about seven when you we had Iranian oil still going through Hormuz, but now that has also kind of been backed up with the blockade. So the most important piece of that was the Saudi East West Pipeline.

about four, four and a half million barrels from the Gulf out to the Red Sea. You also have the Amrati port uh linking to Fugera on the Omani coast. And also Iraq has a small pipeline that that allows it to export some small volumes. out of the Turkish port of Kihan. So I think all of that together, non Iranian crude that's still stranded and kind of shut in through the Gulf is around thirteen million barrels a day, give or take thirteen percent of global uh total.

And then you now you have Iranian oil that has now also been bottlenecked uh by the blockade. So now based on the latest indications, it seems that they have finally run out of new tankers or empty tankers to to to fill up.

So now they're building inventories where they can and those will, you know, Iran will also begin shutting in production. And if they shut in everything or everything that they were exporting, that thirteen million barrel a day total of shut in production will rise to give or take fifteen million barrels. Okay. So uh on a normal good day before all this went down, twenty million barrels came out of the region every single day.

Now we've got a situation where about five to maybe seven is coming out per day. the remaining thirteen is not only just piling up in storage tanks, but the storage tanks it sounds like have long since been filled and those fifteen million is not flowing and it sounds like you're saying thirteen of those fifteen represent production that's already been shut in, meaning that those wells have been capped and it would take some amount of work to get them flowing again.

I I'm not nearly as expert as you are on this, Rory, but I know when you shut in an oil well, it's not always possible to just turn it back on. Sometimes it is it can never be restored to its full prior uh flow rate. And other times it can be, but it takes six months and a whole bunch of capital investment in order to get the thing started up again. Let's imagine that let's suppose that Xi Jinping and Trump somehow come to

some amazing deal this weekend and uh they come back saying, Okay, look, China's going to help intervene in this and we've gonna solve the whole problem and we're gonna go back to normal. Everybody's gonna agree starting next week. Sounds like pretty much all of what is not flowing today cannot start reflowing until that thirteen million barrels of shut in production. is restarted. Is that right? And if so, how long does it take to restart it?

Yeah, that's absolutely right. And just to to your prior question as well about like there are still some, a handful of V L C C's making their way through every once in a while. You have seen a couple pass, uh, but it's not a consistent flow.

So the other thing here is that not only do we need to get tankers out, but we need to get unladen or empty tankers back into the Gulf, because only then will you be able to begin drawing down domestic inventories that have been built up and restarting those. So in terms of time, in terms of can they be restarted at all, I would say generally yes. The nice thing about this happening in the kind of core of OPEC.

is that we know that these producers can cut really, really deeply and turn their production on pretty quickly. We've seen multiple instances of this. Ne they've never cut quite this deep, mind you, but I think the overall at this stage we don't have any reason to believe there will be large permanent impairment. Now, maybe you lose, maybe you only get ninety five percent back in the first year or so. We might, you know, so you might be down

half a million to a million barrels a day of production capacity at the upper end. But in the scheme of it, I think the most I think most of it's gonna come back on pretty quick. I think that when you look at uh but it's not gonna be the same across the producers. I think when you look at Saudi Arabia and the UAE, I think that those members typically wealthier, uh, more technical expertise, better wells in many cases.

they're gonna be able to turn that back on. I mean the Aramco's saying weeks and I think that probably within a month you're gonna get the majority of their shut in production back online. I think when it when you look at Kuwait and Iraq probably more like months. But I think in this scheme of things, from the perspective of the market and the scale of the shock we're facing, it w you know, weeks to months, I think is is a reasonable expectation across the board. I've been modeling roughly

uh a scaled back over three months with seventy percent coming back on in the first month, then twenty, then ten. I think that's at least a bulp a useful way of thinking about the pace of returns. And I think but that's only going to start when we get empty tankers back in and we can't even get the full tankers out yet. So on top of everything else, there was earlier, uh, was it last weekend I'm losing track of time.

There was when Operation uh Project Freedom was going on, there was initially some thought that maybe this was a legitimate deal or plan with the Iranians. to begin evacuating the thousand plus ships that are trapped i that have been trapped in the gulf for months now in the twenty thousand plus seafarers. That I think is gonna be a separate thing. And I could see an interim period where you can get those ships out of the Gulf and back home to their families.

as a humanitarian invent intervention well before we o ever get actual new rules and a return to any sense of normalcy through the Strait of Hormoes. Uh and it's only that latter benchmark that's really going to allow us to start restarting that production.

Okay, so uh presumably before they shut in any production on the upstream side of the Strait of Hormuz, they filled all their storage tanks first. So presumably if we could start getting those empty tankers, empty VLCCs, back into the Gulf next week, they could fill those tankers up from storage tanks for probably several weeks long enough to get the production restarted.

And presumably once we get the straight open, we could resume moving oil pretty darn quickly at full pace back out like it was pre conflict, assuming the military situation had changed. Is that right? Yeah, and and assuming the Iranians let them do that, right? And I and I think the other thing is we don't need to get back to full pre war pace.'Cause as as we were noting earlier, we have the East West Pipeline now. I think the Saudis are gonna continue using that.

Or at least they will have the option to continue using it. So even if you only got back to say 70% of pre-war levels, at least from the oil market's perspective. you could get back to but like there aren't alternative pipelines for LNG or helium or fertilizer or any of the other things that are blocked up. But in oil specifically, you could see a world where you don't need to get back to 100% to kind of get past the crisis.

But to your point, it only starts you only can only begin drawing down those inventories when you get unladen tankers back. And many of those unladen tankers are all over the planet now. So it's gonna take weeks or months to get them back to where they need to be to start this process again on the other side.

I know you're mostly an oil market guy. Do you have any insight or perspectives on helium and fertilizer and the other things besides oil that flow through the strait, how long it's gonna take to get those markets back to normal? This is gonna be an interesting question because a lot of those are gonna be more products, byproducts of the downstream sector. And when we were saying when I was saying earlier that we don't

think there has been much durable damage to the upstream. So this is like the actual wellheads, the production of oil and gas, fertilizer, helium, petroleum like refined petroleum products. all these things are products of the downstream. So refineries, petrochemical facilities, et cetera. There have been widespread reported attacks against these facilities. And very frankly, the a lot of these uh you know uh the Gulf monarchies keep a lot of this information very close to the chest.

So we do not know the full extent of the damage to those facilities. And I l and I expect we will not likely know the full extent of damage to those facilities until we get Harmoose reopened and we get empty ships back in there to see what they're gonna fill. Like for instance

If tankers show back up in Kuwait, it's gonna one of the first things I'll be watching is are they loading crude oil or are they loading diesel and jet fuel? Because that will tell us very quickly what the operational status of Kuwait's refineries are. Rory, let's continue on that subject to finish products and where they need to get to because I think that the crisis that a lot of the market is ignoring is about to get real and get real very quickly. And it's not about you know, this is gonna

change the world forever. Someday we will get the strait reopened. I have no doubt in my mind about that. But the damage has already been done. There are parts of the world where they're already running out of jet fuel and diesel and eventually gasoline, uh petrol, depending on what country you're in, what you call it. uh are all going to start running out and it's going to cause massive localized crises.

Am I exaggerating to say that that's already baked in and as a certainty? I mean it sounds kind of doomerish, but frankly I think that's what the data is telling us. Am I missing anything there? And how do you see it playing out in terms of where what parts of the world would be most urgently in demand of those finished products?

And is there a a Hail Mary, is there a solution that if we got something open in a certain amount of time, okay, we could get a whole bunch of diesel fuel out of Kuwait or wherever it is and rapidly take it to where it needs to be. I think that particularly in Asia, there have been acute local shortages of products. I think at that stage it's kind of undeniable. And I think one of the things that people are watching right now is this idea of demand destruction. I think

'Cause again, I think uh you know, we've as we've chatted about before, Eric, you know, there's so much of this that there's like a price drives the narrative element going on here in the market. So with oil still around, you know, not much higher than a hundred bucks on a Brent basis. Everyone's looking at us and saying, like, what did you get wrong? And the first thing they go to quite frequently is because I think at at this stage, like it's hard to say that

There isn't 13 million barrels a day of oil shot in the Gulf, right? Like we can see it. We can see the tankers not being loaded. There's no other physical way to for that to get the market. So I think that's a pretty safe assumption. We have a lot less visibility on the demand side and a lot less detail. So a lot of people will jump to, okay, we've already seen massive demand destruction. The challenge I have with that is that demand destruction is is a funny thing. You've got Normally.

When we talk about it. We talk about it in one of two ways. We talk about price elastic demand destruction. So prices are too high at, you know, at the at the local pump. So maybe we will, you know, we'll take the bus or we'll bike or we'll walk or whatever else. And then there's income elastic demand destruction, which is high oil prices crashed the global economy. Uh the firm you worked for went bankrupt, so now you're not driving to work. That has kind of a more macro top-down view on

Neither of those things has happened yet. We do not yet have high enough prices to destroy that level of of demand. Because again, we've had much higher prices very recently in 2022, and we didn't see anywhere near that level of demand destruction. So unless you think that in four years the price sensitivity has completely changed, I do not think that's like.

But what we have seen is this third kind of weirder form of demand destruction, which is just physical barrels not available fast enough in the right places, these kind of sh, you know, supply chain shortfalls. We are kind of interpreting this war at the speed of tweet.

But these tankers take forever to get to where they're going, you know, weeks, months in many cases. Like someone had asked me, uh someone on Twitter had asked me, Oh Rory, why did uh why was there an uptick in the latest weekly data?

uh from the EIA, a late why was there an uptick in imports from Iraq? Why shouldn't I rock be producing or exporting nothing right now? I'm like great question. I looked at the data and I looked at the tanker tracking and it was actually a ship that landed and unloaded in LA.

uh this past week that loaded out of a rock on February twenty second. So these tankers are still out there finally getting to destinations. They're mostly gone now, but there are still some. So I think that pacing aspect is taking longer to play out than we expected. And then I think the final thing here is that from this view of demand destruction, all eyes right now are on

And that I think makes a lot of sense because China is always the center of kind of market fascination in these moments. And as the largest importer of oil in the world and particularly the largest importer of golf oil, it was kinda kind of be ground zero for you know, pricing pressure for demand destruction, for trade diversification, everything else. We've seen Chinese imports of crude fall by something like three or four million barrels a day over the past two months.

That has, and people have actually pointed to that and said, that's demand destruction. And I say, no, no, no, no, no, no. That's not what a demand destruction is. You stop importing oil and you start drawing down stock. And you can keep prices going, there's been no demand destroyed. It's only when stocks draw down, prices rise to a level that people stop literally consuming the barrel. that demand destruction has occurred. And what's weird about this

Imports have fallen, check, US or or or Chinese uh refining capacity or or refining uh activity has fallen off, which we typically treat as a pretty strong indicator of domestic demand. That also seems to be pointing towards demand destruction.

But then you start looking at other things and you start looking at flight tracking data. Again, everyone's talking about jet fuel was the epicenter of this, so you would expect to see flight activity begin to pull down. But no, flight activity is at or above EuroGo level. I was just pulling some of the data, uh the weekly data from China's Ministry of Transport. Rail traffic.

Truck traffic up, uh port traffic up, uh flight traffic up. All of these indicators are showing mobility at or above EuroGo levels.

But all of our oil market indicators are implying a level of destruction last seen in twenty twenty two and twenty twenty three during China's COVID zero crackdown. So what's happening? And the big galaxy brain kind of whispery thing people are talking about right now is that China likely has some kind of massive pool of refined product strategic stocks that it has been pushing into the market.

And that's the only way that we can square how mobility has stayed so robust while all the other indicators are falling off. So what this essentially says is that there has been more of a supply response because I I treat SPR releases.

whether it's from China or from the United States or Japan, as effectively new supply into the market. Now it's temporary supply because it can't go on forever, but the market interprets it from a pricing perspective as new supply because those are barrels that doesn't need those don't need to get bit higher. so i think That goes some of the way towards explaining why

the pressure is not quite as intense as we expected it to be, and why inventories as well are not drawing down as quickly as we would have expected. But still they are drawing down pretty much across the board. And if that continues through the end of May, the end of June, we there is still no way that we really get to avoid that pricing pain at the other side, because we still will need to destroy that demand durably across the world. And I just don't believe we've done it.

Oh, Rory, I strongly agree with you that demand destruction has been misinterpreted in many dimensions during this crisis, not the least of which there's a statistic floating around that a hundred thousand airline flights have now been cancelled. because of this crisis. And wait a minute. That's not consumers saying I am not willing to buy an airline ticket.

That's airlines that failed to hedge their consumption, that sold cheap tickets six months ago, that are canceling those flights that are certain to be unprofitable in order to cover their own tail. It's not a a lack of consumer demand. So I I I agree with you completely that demand destruction is being misrepresented. You touched on China though, and I wanna pivot to that because I think that's really the most important thing. I'm gonna make a a prediction here.

I think that this coming weekend is going to be a pivotal moment in the evolution of this crisis. And the reason is I think this sit down between Xi Jinping and Donald Trump Could change everything. If China says, Look, Mr. Trump, we need you to end this crisis. If you want to negotiate with us on any other subject, you gotta, you know, get this wrapped up because we want to get those

several million barrels a day of imports that we were getting from the Persian Gulf. Uh we want'em again. It's important to us and we're not dealing on other matters uh until you fix this uh this mess. That's one message. The other message is uh look, we've got more strategic petroleum reserve than you do. We can wait this out longer than you do. This is your problem, you sort it out.

which way those discussions go could easily drive either a rapid stand down resolution or a massive escalation of force in the Gulf. What do you think? Yeah, I would say at this stage it it's clear that that Beijing has been attempting, at least publicly, to message towards some kind of resolution. But I think also at the same time It has been pretty intense. I mean, you have not seen any big announcements out of China about

releasing SPRs or doing things that would help alleviate the stress on the global economy. And I think one of the rationales for that was that any of those actions would have reduced pressure on Trump. To end the war and reopen Hormuz, which is the only sustainable solution to this at the end of the day. I think that.

from a kind of from an immediate economic argument. I think absolutely they want it reopened, but I uh from the kind of longer term strategic view of great power competition and rivalry between Washington and Beijing. I think this is this war is doing a lot of damage to US credibility, to a kind of a view and the and the kind of cohesiveness of US alliances, particularly in the Gulf.

I think that it's an opportunity for China to flex geopolitically in a way that it has not done historically, and I think that it's not hating that.

Final question, something you and I have discussed and agreed on before, is that there is a tipping point in a crisis like this. where eventually you get to a point where what's already happened, despite that there's a lag effect before the effects are realized, you get to a point where what's already happened is going to create such a big economic disruption that it's going to be i you know, incredibly damaging.

I don't think we were there yet last time we spoke. Are we getting closer to that point? And how long can the strait remain closed, really, is the question, uh, before we get to irreversible catastrophic damage just has to happen. I think that if Hormuz remains closed to the end of June, we will have drained down a sufficiently large volume of stocks that I don't see a way we avoid all time highs. Now

Does that mean that we're going to kind of go into the full apocalypse mode? I think clearly there are levers that have still yet to be deployed that could buy us more. You know, for instance, there are still more SPRs out there that have yet to be tapped on top of the uh kind of the 400 million that's already been announced and released by the IEA countries. Clearly China has more in reserve that it can do if this became a real kind of existential drag out.

But I again I think at this stage, you know, my banking now is, you know, my base case. And again, I basically just keep rolling forward the optimistic bay case. Uh now it's June first. If that's the case, we'll still have hemorrhaged 1.4 billion barrels of oil uh from the global system. Sure, we'll have some demand destruction, and maybe the net effect will be less than that.

But that's still oh I mean, even just upwards of a billion barrels of stock, it's a lot of stock. And as that inevitably gets pulled out of the global system, prices are going to rise. Well, the interesting thing here is that while the front of the curve, High prompt prices that everyone's seeing have been sideways to lower over the past month. The back of the curve is beginning to rise.

And when you look at December twenty twenty six futures, December twenty twenty seven or December twenty twenty eight, all for Brent. Those prices, at least as of yesterday, I haven't checked in the last uh couple hours, but they were sitting at all-time or crisis level highs, rising back to the levels of 2022. And I think that is how this is going to go, is that as we drag down inventory,

the whole curve will begin to kind of re-rate higher, even if we're not getting that big swing in backwardation at the front. And I should note, even though backwardation is down, it's still at clearly kind of crisis levels.

Anytime that you're measuring backwardation or prompt backwardation, the spread between the first and the second contract, anytime you're measuring that in dollars and not cents, something's already kind of broken. And that I think will remain in that in that stage, but I think that we may have already been past.

The crazy backward data levels that we saw all-time highs realized at the end of March and beginning of April when prompt WTI spreads were$15 a barrel. Like that never even made sense in the moment. It's just so high. Uh so I do think that at this next stage it's gonna be more the whole curve needing to lift higher to bring that overall price level higher.

Well Roy, I can't thank you enough for another terrific update. I'm hoping that we don't have to do another one of these crisis updates in four more weeks. Uh at that point it's would be a bigger crisis. Uh please before I let you go, tell our listeners what you do at commoditycontext.com. What can our listeners expect to find when they go visit that website and what services are on offer there? And I just wanted to say one last thing'cause I forgot in my last answer, in terms of the big kind of

flag, you know, the the signpost along the road to the market re-rating higher. I think the one thing that we're gonna have to see, and I think we will continue to see, is US crude inventory's drawdown. Those product inventories are drawing down, crude's drawing down globally, but US crude stocks have been abnormally high through the crisis.

And now I think are beginning to draw down more aggressively thanks to the kind of rise in exports. So I think that will be the big thing that the market will need to see to finally get to those more crisis level pricing. But yeah, thank you so much for having me, Eric. I always enjoyed chatting. Uh for years now.

And I encourage everyone to come follow some of our research at commoditycontext.com. You could follow me on Twitter at Rory underscore Johnston. Uh, and you can also follow uh my podcast, uh the Oil Ground Up Podcast, on any platform you listen to podcast.

Patrick Serezna and I will be back as Macro Voices continues right here at macrovoices.com. Now back to your hosts, Eric. And Patrick Serezna. Now listeners, you're gonna find the download link for this week's trade of the week in your research roundup email. If you don't have a research roundup email, it means you have not yet registered at macrovoices.com. Go to our homepage and look for that red button over Mike Green's picture saying looking for the download.

Patrick for this week's trade of the week. Mike Green argued that while markets continue to levitate on passive and synthetic flows, the energy shock could eventually lead to slower growth and a sharp reversal in the Fed rate pass. So how do you position for that shift in interest rate expectations? Now, Mike Green's argument was that while markets continue to levitate on passive and systematic flows, the underlying economy may be weakening much faster than the headlines suggest.

Mike specifically highlighted deteriorating labor market conditions, overstated payroll data, and the risk that the energy shock ultimately translate into demand destruction rather than persistent inflation. As a result,

He believes markets may be underpricing the probability of a much more aggressive Fed easing cycle later this year and into 2027. So rather than chasing this short-term inflation impulse from higher energy prices, This trade is about positioning for a reversal in the future policy rate path. through longer dated Sofa Futures. Now what makes this setup interesting is that the December 2027 SOFR Futures contract has been pushed down to around 96 and a quarter

Back near one year lows and levels we haven't seen in since early 2025. Sofa futures now imply the market is pricing roughly a 375 forward sofa rate. In other words, the market has effectively pulled much of the easing out of the curve and is even flirting with the possibility of more restrictive Fed path next year.

The trade here is to fade that repricing, consistent with Mike Green's view that weaker labor data, demand destruction, and slowing growth could force the market to price a more aggressive Fed easing cycle. From this trade construction standpoint, rather than buying sofa future outright, I wanted to use the bull call spread on the December 2027 contract. specifically using the December 2026 options with roughly two hundred and eleven days till its expiration.

The structure buys the$96.50 call for around 19 cents and sells the 97 call for around 8 cents, creating a 50 cent wide call spread for a net debit of roughly 11 cents. The payoff profile is attractive. Max risk is 11 cent debit, while the max profit is 39 cents if the December 2027 sofer contract settles at or above 97. That creates roughly a three and a half to one risk reward profile, with the break even being at 96.61.

The objective is simple. If the market merely reprices back towards the highs seen earlier this year before the conflict-driven FedPath reset, the spread can capture the reversal with defined downside risks. Patrick, every Monday at Big Picture Trading, your webinar explains how retail investors can put on our most recent trade of the week.

For those listeners that want to explore how to put on these trades in greater detail, don't miss out on a 14-day free trial at bigpictrading.com. Now let's dive into the postgame chart deck.

Alright Eric, let's dive into these equity markets. Well Patrick, the trend is clearly up and it's strong. But in addition to the cautions Mike Green expressed in the future interview, Nomura's Charlie McEllegate was unusually outspoken in recommending a ratio put spread to hedge against a blow off top in the semiconductor stocks, which have been the primary thing levitating this market.

I personally still have put spread hedges in place on the SP 500. Now I've come to terms with the entirely likely outcome that those put spreads are going to expire worthless given the current uptrend, but frankly, I'm still happy to have insurance in place. The market continues to shrug off an economic shock from the Hormuz crisis that I continue to believe is both certain and imminent.

But I'm also starting to come around to Louis Gav's view expressed last week that the countries most adversely affected by the Hormuz crisis are not the ones that drive stock index prices. and Mike Green's view that the machine isn't programmed to discount such risks. So I'm still sticking to my guns on the Hormuz crisis, leading to a pretty darn significant global energy shock.

question is whether or not that's gonna transmit back to the stock market or if we just keep on rallying and levitating from here on the AI craze. Well, Eric, I want to go a little bit under the hood of the S P five hundred and actually look at the flows driven move that happened. First of all, we're approaching uh seventy five hundred, which is a weekly chart measured move target on the upside of the market.

This is happening when we seen some of the most overbought conditions on semiconductors that we have actually ever seen. This entire move higher has had a huge bullish tailwind from option flows and uh obvious dealer hedging that has to occur, uh, which has accelerated that upside. We're now coming to a pretty important op egg.

And we're gonna certainly see with these elevated implied volatilities whether mean reversion is the name of the game for semiconductors and whether or not that puts in a swing high here on the SP 500.

Now, I'm not necessarily bearish thinking that there's a huge decline coming in the market, but we are long overdue for a healthy pullback. And if you just put it into the context of a traditional retracement, one that approaches its previous moving averages, what were previous highs of the stock market become support. we could easily h see a a five to seven percent market correction that would be a very healthy reset of a primary bull market.

The point here is that while we're looking for a pullback here is n we're not necessarily trying to imply that uh that's uh uh gonna lead to a big bear market decline. where the semiconductors here are so overbought that at some stage here mean reversion driven by a correction in semis uh would be a very natural thing to occur. All right, Eric, let's move on to the dollar. What are your thoughts here?

The very short term Dixie trend has turned up in the last few days, but we're still trading well below the unfilled gap that uh still exists above the market up to ninety nine spot thirty nine on the Dixie chart. I predict that the Trump She talks in China and the next couple of days and the possibility of a military re escalation in Iran this coming weekend will be remembered as a pivotal moment in the development of both the Iran crisis and the present Dixie chart.

I'm just not sure which way that pivot is going to go, leaving me with no directional view on the market. But I think what happens in China is going to pretty much decide what happens next in most financial markets. For me, Eric, the dollar's all about this intermarket relationship and as oil presses higher and we see stress in yield markets and certainly concerns that uh areas like Europe may be more uh directly hit by the s uh closure of the strait and certainly see more economic weakness.

at some stage there is room for the dollar to easily trade back to the top of his trade range. I don't wanna be um uber bullish on the dollar like we're about to see a huge leg higher, but it wouldn't surprise me here

if we saw the dollar work its way back to the hundred handle into that previous overhead resistance. All right, Eric, let's uh dive into the oil market. Well, once again, I uh apologize for sounding like a broken record, but I think it all hinges on the outcome of the China negotiations. Frankly, I think China is holding that big handful of cards that President Trump keeps saying the United States is holding.

So if China is the one to somehow step in here and say to Iran, look, we're your biggest customer. We want you to do X, Y, and Z next because we said so and we're gonna make it painful if you don't. I think Iran pretty much has to listen to China. The question is, can President Trump persuade China? Can he make a deal with China that causes them to want to use their influence that way? And I have absolutely no idea what the answer is.

Absent a solution from China, I think Trump and Iran are locked in a stalemate situation that could easily prolong the crisis for another month or more. If that happens, it's going to take oil prices much higher and it's potentially going to have a crippling effect on the economy sooner or later. On the other hand, I think China could bring a very prompt end to this crisis if they want to.

So my only prediction is that I do not anticipate a flat, low volume, low volatility trading outcome from here. I think uh we're gonna see a a fork in the road pretty quickly here in the next several days. I just don't know which direction it's gonna take. Well, I wanna just look at this purely technically. Obviously we wanna respect the fact that the uh uh geopolitical headlines will drive oil.

But overall, each pullback on oil has been held by its 50 day moving average and retracement zones. And so while we've seen a lot of volatility, there's actually been a primary bull advance. that has been very well respected technically. Now uh i with the strait continuing to be closed and inventories continuing to draw down around the world

there could still be a potential bull impulse. So we're watching to see whether or not we WTI can clear the uh hundred level legitimately on the upside. A bigger question is when does the stock market and other markets start to care? I think at this point we wouldn't need to see a clearing to 52-week highs before it really starts to uh create a new wave of nervousness at this stage.

uh that resistance is still ten to fifteen dollars higher. So at this moment, while we're looking for oil to to strengthen here back into those highs,

Uh, I w don't think an there's gonna be a huge intermarket reaction unless it really genuinely made a huge breakout. All right, Eric, let's move on here and touch on gold. We're seeing more and more signs that precious metals are ready to begin a recovery. The uh strict opposite of crude oil price action that we had been seeing seems to be abating. We're occasionally seeing both gold and crude oil move up together, at least in the very short term.

And the weekly RSI and stochastics are starting to move into oversold territory, suggesting that maybe the bottom is already in or is almost in. for precious metals. But if there's no resolution from China and the Hormuz situation continues, there's still plenty of room for another leg down in gold as the market digests the oil driven inflation signal.

So I'm not quite ready to sound the all clear yet, but if China resolves the crisis with Iran, then I think the bottom's probably in on gold and it's time to potentially lever up and expect a big rally from here. I'm just not sure if we're there yet.

Well in my mind here, Eric, uh we had that blow off on gold back in January and we've just been more or less consolidating. There's a lot of pressure from higher yields and uh dollar dynamics that has just put gold into this uh no man's land purgatory of trading sideways.

in the bigger picture, I do think that uh gold is going to bullishly break out, but uh maybe it's gonna still be something that's more like a second half of the year story. I wouldn't be surprised if uh we continued the rest of this month. in this kind of a meat grinder trade range without uh much resolution. All right, Eric, let's move on to uranium here. Well, Patrick, as our regular listeners know, I remain super duper bullish on both nuclear energy and on uranium long term.

But frankly, I'm starting to get pretty darn concerned here in the very short term because the uranium miners just plain have not participated in this gigantic rally that we've seen in the broader market, or I don't know if I should be even be saying the broader market.

in the stock indices, which are frankly being narrowly driven, not broadly driven, by semiconductor stocks ever since the March lows. So, you know, if the uranium miners are just holding flat in the face of this massive semiconductor rally. What are they gonna do if the semis blow off and retrace to the downside as some observers, including our friend Charlie McGellagh at Namura, have begun to anticipate?

Uh I'm not sure, but I'm bracing for a near term correction. If that happens, I d a buying opportunity because the bullish thesis is as strong as ever for both uranium and nuclear energy. I just have a feeling that we're maybe about to hit an air pocket here if the global energy market is upset in the way that I fear it's about to be upset. if China doesn't bring an end to this Hormuz crisis.

Well, Eric, I share your sentiment towards the your bullishness on uranium. The big question for me is when uh are is there going to be signs of accumulation like that they have restarted a new bullleg. At this moment uranium is grinding. And uh and that we haven't seen yet a flows pivot that has uh really reopened the upside window for another leg higher. Uh at this stage I don't see a big bear decline coming or anything, so it's uh gonna be once again just a scenario of

consolidation and just watching for when there's technical signs that in fact the flows have pivoted back into the favor of the bulls. Now Eric, I wanted to just briefly touch on the copper chart on page eight. We had a breakout to all-time new highs on copper. Now uh is there more room for it to run to seven on the upside? Absolutely.

But on the short term, this uh bull impulse here is gonna likely hit some uh overhead resistance, but so long as old pullbacks are contained to you know twenty-five to fifty cent pullback.

and a a bought on dip, then I'd be looking for uh that to be continuation patterns to inevitably see copper trade all the way up to the seven handle. It's interesting that many copper names uh as individual equities have not yet fully started to participate, but uh the copper market remains decisively bullish here.

Patrick, before we wrap up this week's podcast, let's hit that 10-year Treasury note chart. Here we have a breakout to multi-month uh highs on that 10-year yield. Now we haven't yet hit the highs of 2024 or 25, which are in that. 460 to 475 range. But clearly the bond market looks like it wants to press uh to retest those levels driven by the short-term inflation fears, driven by higher oil prices. At this stage the bond market is uh pretty ugly and yields continue to press.

And I don't see any reason why that has to reverse this week. So right now, be careful in the bond markets. It's simply uh the trend is not your friend and there's no im immediate catalyst for this trend to reverse.

Folks, if you enjoy Patrick's chart decks, you can get them every single day of the week with a free trial of Big Picture Trading. The details are on the last pages of the slide deck or just go to bigpictrading dot com. Patrick, tell them what they can expect to find in this week's research roundup.

Well in this week's research roundup, you're gonna find the transcript for today's interview, the trade of the week chart book, which is discussed here in the postgame, including a number of links to articles that we found interesting.

You're going to find this link and so much more in this week's research roundup. So that does it for this week's episode. We appreciate all the feedback and support we get from our listeners, and we're always looking for suggestions on how we can make the program even better.

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