The Opera Ain’t Over IV
The main purpose of the stock market is to make fools of as many men as possible – Bernard Baruch
A friend of mine who worked just under the Cabinet level in the US government during his career once told me to never underestimate the power of the US government when fully mobilized towards a task. At the time, I was a fervent believer in the power of markets even as that belief has been shattered since 2009. US actions in the Persian Gulf illustrate this point.
Based on the sharp drop in output in the region, the price of oil should be much higher – simple supply and demand. The chart below suggests that speculators in the oil markets have gotten destroyed trying to push the price of crude higher. They bet against the US government and lost.
Yes, we are paying $20 per barrel more for oil since year-end but if left uncontested, the price, by all accounts, would be dramatically higher. The impact on the US consumer has been negative but not catastrophic.
For me, the biggest show of power in the markets has been in the US stock market. Negative speculators got wiped out early in the Iranian conflict when the Nasdaq jumped from 21,000 to 27,000 in two months and a second time with the Naz jumping from 24,500 to 26,500 in less than a week! All it took was massive call option purchases.
The S&P500 is sitting at all-time highs despite the unresolved conflict in the Persian Gulf, cratering credit quality for consumer and corporate loans, and irresponsible capital spending at Mag 7 companies. Negative speculators have been surgically gutted to provide the buying power to drive stocks higher.
And now that stocks are higher and oil prices are somewhat contained, the US military gets the green light to finish the job which includes taking Kharg Island. I wrote about this extensively in the previous three editions of this piece linked here. https://geovestadvisors.com/the-opera-aint-over/
Market as War Indicator
I had to abandon free market principles in order to save the free market system – George W. Bush
THE STOCK MARKET IS THE MOST IMPORTANT ECONOMIC INDICATOR TODAY. Keep telling yourself this over and over because it explains every move the President makes, especially in the Persian Gulf. Military commanders get the green light to hit targets when the stock market is stable and red lights when it is teetering.
The Iranians can thank Leopold Aschenbrenner for the respite in bombing last weekend. If the Situational Awareness Fund wasn’t being liquidated, it’s likely that the bombs would have kept falling. Instead, we got nonsense about talks in Oman, a blue-light special for Citadel, and a face-ripping rally in tech this week. But now that tech stocks have recovered, the US military can resume dismantling the IRGC this weekend.
It's not just tech stocks that needed to recover; it was also the Japanese yen. The yen carry-trade was at risk of ending because a falling Japanese yen was pressuring Japan to raise interest rates, reducing the profitability of the trade. Instead, the US government intervened. The double long ETF gives us a more dramatic view of what took place.
Would the spike in technology shares have been possible without this intervention in the yen? I’d say Treasury Secretary Scott Bessent has earned the accolades he’s been receiving from everyone except central bankers.
The only way the US economy can remain positive for the next three months is if we accept the presumption that AI is viable and worthy of investment despite evidence to the contrary. AI stocks like CoreWeave must remain stable through the elections. Hyperscalers must continue to throw good money after bad without a clear avenue to profitability and despite the value proposition of Chinese knock-off models. This is a tall order.
You don’t get 50% moves over a week without serious fundamental turbulence in a stock. These moves happen when short sellers get eviscerated by overwhelming purchase volume. It’s why I liken short selling tech stocks to swimming in a tidal pool full of sharks. Chances are pretty good that you’ll lose a leg.
The problem for the US government is that they need to keep things stable for three more months and that will likely mean more short squeezes following sell-offs. The problem with short squeezes is that they’re similar to the martial art of judo where a judo master uses an opponent’s weight and momentum against him. It only works when there is a concentration of short positions leaving traders very little room to maneuver.
The conditions were right last Friday when the knucklehead running the levered AI fund started a feeding frenzy of short sellers trying to profit from his need to liquidate; the short sellers left themselves vulnerable. But these conditions don’t exist every day – short sellers have learned to protect themselves, for the most part.
This is why I believe we’ll get far more volatility in the next three months…
Conclusion
Boxing is like jazz. The better it is, the less people appreciate it – George Forman
The Trump Administration needs to concurrently keep stocks elevated, oil prices contained and GDP expanding while bombing Iran and battling the combined power of global central banks that want his economic vision squashed. The constant shifting of priorities is an attempt to maintain the appearance of success while battling seemingly insurmountable forces.
Advancing, retreating, feigning one direction while moving in another direction are the tools of warfare. Believing temporary changes in the conduct of the conflict with Iran is anything more than a feint is to disregard all of the data that led up to this point. The US is committed to controlling the Strait of Hormuz and Trump has effectively “burned his transports” to the battlefield. I cover this in my third installment of this series: https://geovestadvisors.com/the-opera-aint-over-iii/
The only relevant question is how much longer will it take to finish the job in the Persian Gulf? The White House is going to need $50 oil to take the pressure off newly appointed Fed Chairman Kevin Warsh so he can orchestrate 0% interest rates.
As investors, we are running from foxhole to foxhole in a war zone, wanting to invest in fundamentals but knowing it’s impossible until after we know which side of the war will win. Will it be the American System or the Globalist System? The US mid-term elections promise to be the decisive battle that tells us where to invest.
Momentum favors the American System but that momentum can be lost if we’re bogged down in the Persian Gulf, if Japan is forced to raise interest rates to break the carry-trade, or if the hyperscalers cut off the AI funding stream. An objective reading of the system suggests a toss-up. The next move is a resumption of hostilities in the Persian Gulf with an eye to controlling Kharg Island.
The financialization cycle is over after 125 years. The future is about re-building a destroyed industrial base, not about trading crypto and Mag 7 stocks. If you’re interested in learning more, visit us at https://geovestadvisors.com/ and give us a call.
Philip M. Byrne, CFA