Just Because the War Escalates…
Just Because the War Escalates…
On the one hand, the president says the Iran war is “very close to over.”
On the other hand, he said something similar over a month ago: “I think the war is very complete, pretty much.”
Then and now, the words are market-moving. Yesterday the S&P 500 closed within a few points of its all-time high… and oil futures sank to their lowest all month.
It’s tempting to dismiss the latest market reaction as “hopium” or maybe as normalcy bias. But doing so might be hazardous to your wealth.
Assume that the war in fact escalates. That’s a sensible assumption given that more U.S. troops and ships and planes are headed toward the Middle East.
“Most people assume that any escalation in this situation automatically means higher oil prices,” says Paradigm trading pro Enrique Abeyta. “That’s the knee-jerk reaction.
“But markets aren’t just reactive. They’re also anticipatory.”
And what he sees the market anticipating right now is “a temporary disruption, followed by a decisive response” by the U.S. military that reopens the Strait of Hormuz.
Exactly what that response looks like is impossible to tease out right now. The point is that as Enrique sees it, the market is not writing off the fact that more U.S. forces are headed toward the Gulf region.
Rather, the market is anticipating that those forces will compel a resolution, and soon — “restoring flow and removing the threat.
“If that’s the case, oil prices may not spike nearly as much as people expect.”
“In fact, the bigger move could come after the situation stabilizes,” Enrique continues. That is, oil moving to the downside.
“Because once the choke point is clearly broken, risk premiums evaporate. Supply expectations normalize. And prices can move sharply in the opposite direction.
“That’s the kind of setup that catches people off guard. Not because the outcome is surprising, but because the timing is.”
Bottom line: “The market has experienced volatile periods before and thrived on the other side — sometimes much sooner than anybody expects,” Enrique says.
If he’s right here… and escalation yields a quick resolution… the stock market is in for a face-ripping rally.
A final point before we move on — about how our editors don’t always agree.
We’ve said it before, but that’s by design.
We’ve never enforced a “company line” around here. We want our editors to speak freely. You paid good money for your subscription(s) and you deserve nothing less than the unvarnished truth as the editors see it.
In the present instance, you might be aware that Jim Rickards believes this war is nowhere near over and there’s a high likelihood for a grueling bear market.
When opinions come into conflict, we respect your intelligence enough to evaluate them and decide what rings true for you.
Agree or disagree, as long as our editors exercise a well-thought-out paradigm — a model of how the economy and the markets work — they have a place on our team.
Will Trump Fire Powell?
For once, the big business-news headline of the day has nothing to do with the war.
Donald Trump says he’ll fire Federal Reserve chair Jerome Powell if Powell stays on the job after his term is up on May 15.
Which is a distinct possibility. A new chair might not be in place at that time.
Recall that Trump has nominated former Fed governor Kevin Warsh as Powell’s successor. Senate hearings are set for next Tuesday…
But Sen. Thom Tillis (R-North Carolina) promises to hold up any Fed nomination as long as the Justice Department continues investigating the renovation of the Fed’s headquarters. At issue in the investigation: Did Powell lie to Congress when he said the renovation plans are not as lavish as reported by the New York Post?
On occasion the market reacts to stories like these by selling off because of a perceived threat to the Fed’s “independence.” Today is not one of those occasions.
At last check, the S&P 500 is up another third of a percent to 6,989. If that holds at day’s end, it will be a record high. The Nasdaq is up a solid three-quarters of a percent (though it still has work to do to reach a record) while the Dow is in the red.
The big mover today is Allbirds (BIRD) — up 700% as the company says it will pivot from the business of selling “sustainable” athletic shoes into the business of leasing AI computer hardware.
On the one hand, this is the sort of silliness companies engaged in amid the dot-com bubble of the late 1990s. On the other hand, as John Maynard Keynes said, “The market can remain irrational longer than you can remain solvent.”
Elsewhere, precious metals are pulling back — gold clinging to the $4,800 level and silver just over $79. Crypto is holding onto its weekend gains with Bitcoin just under $74,000 and Ethereum at $2,341.
Crude is little changed after yesterday’s sell-off, now $91.78.
Fertilizer Update
If the war ends today, it doesn’t stop the looming fertilizer crisis facing U.S. farmers and our food supply.
Nearly half the world’s exports of urea depend on the Strait of Hormuz to reach their destination. Like oil, urea is a global market.
“The price of [dry urea] in January to February was $560 per ton,” North Dakota farmer Ben Vig tells the Responsible Statecraft site. “At the end of March it was $770 per ton.”
About a quarter of U.S. fertilizer supply is produced outside the country. And even the stuff made domestically relies on imports of ingredients like potash, phosphate and nitrogen.
Even if the strait reopens immediately, production facilities can’t be restarted with a flip of the switch. And supply chains take time to unscramble.
“To get product from around the world,” says Vig, “we have to put the order in, and once we put the order in, it takes four weeks for a cargo ship to go from one side of the planet to another, and then it all goes to [an import hub in] New Orleans, and it takes three–four weeks from a cargo ship to a barge, and then the barge up the river.
“So we’re looking at maybe a seven-week period.”
“An overwhelming majority of America’s farmers who responded to a nationwide survey say they cannot afford to purchase enough fertilizer to get them through the year.”
So says the American Farm Bureau Federation — which surveyed 5,700 farmers between April 3–11. Fully 70% of respondents say fertilizer is so costly they won’t be able to buy all that they need.
Even in the Midwestern grain belt, only two-thirds of farmers pre-booked fertilizer purchases in advance of planting season. In the rest of the country, it’s one third or less. Here’s a map the Farm Bureau posted on social media…
So now comes the squeeze: “Without the necessary fertilizers, we’ll face lower yields and some farmers will reduce acres altogether, which will impact food and feed supplies,” says Farm Bureau president Zippy Duvall.
Financial Privacy Update
The White House is barreling ahead with plans to compromise your financial privacy in the name of cracking down on illegal migrants.
We gave you a heads-up about this at the end of February — new requirements for banks to collect citizenship information from their customers.
Upshot: You might have to present a passport or birth certificate just to keep your current bank account, much less open a new one.
This week, Treasury Secretary Scott Bessent says an executive order is still in the works.
“I don’t think it’s unreasonable,” he tells the Semafor site. “Why don’t we have information on who’s in our banking system?”
Answer: Because the “land of the free” has already gone too far down the road of “show me your papers.”
Also: Because that “information” will in time be weaponized against citizens and legal residents, either by this administration or a future Democratic administration.
Curbing illegal migration is just the excuse for the feds to impose new and more intrusive levels of financial surveillance…
Mailbag: DoorDash Grandmas, Trusting the Plan, Duels
“Love your work. Just wanted to pass along that the DoorDash at the White House was a plant and shameless plug for a temporary tax benefit,” a reader writes.
“That lady has appeared in Nevada and Missouri, claiming to be a resident there, but now lives in Arkansas. That was a long delivery. With gas over $4.00, she would need to spend most of that $100 on gas.”
Dave responds: Yeah, I didn’t get into the details of the photo-op. It would have gotten too far afield from the central point of yesterday’s Bullet No. 1.
But yes, the event was even more staged than it appeared on the surface — with active participation from DoorDash, whose PR rep spent much of yesterday on social media defending the stunt…
Anyway, something is deeply wrong when “DoorDash Grandma” is a thing and politicians think it’s something they should lean into…
“I had no idea that writers at Paradigm are taking free speech to the N-th degree,” a reader writes.
“You have no idea what the classified reasons are for our president to make difficult decisions. Neither does Tucker or Megyn.
“For all the ‘writers’ at Paradigm, it would serve you best to stop making comments regarding delicate geopolitical events that involve our USA. You realize that even our enemies are reading your comments.
“Simply state the facts from our secretary of state, President Trump, secretary of war and Gen. Caine.
“None of you has the facts, especially mainstream media.
“Report on our economy, equities you recommended, financial systems, commodities, precious metals and how major averages are affected.
“Otherwise, I recommend that you stay out of making political commentary, because that is not the reason I paid for Rickards.
“May God bless our great USA and President Trump.”
Dave responds: To be clear, this e-letter is a free benefit on top of your paid subscription.
Anyway… Your case comes down to Trust the experts.
How did trust the experts work out when we were told Saddam Hussein possessed weapons of mass destruction?
How did trust the experts work out when we were told the trouble with subprime mortgages was under control and wouldn’t collapse the economy?
How did trust the experts work out when we were ordered to stay home to save Grandma from a virus?
Oh but Trump is different somehow? Maybe in temperament. But like Dick Cheney and Ben Bernanke and Anthony Fauci, he’s a fallible human being who’s vulnerable to the temptations of political power.
Gentle reminder on the eve of our nation’s 250th birthday: This country was founded by people who were deeply suspicious of political power and who tried to construct a system that would thwart it at every turn. In particular they sought to keep the warmaking power away from the executive branch.
It comes back to this editor’s favorite Founders’ quote…
Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts and taxes are the known instruments for bringing the many under the domination of the few… No nation could preserve its freedom in the midst of continual warfare.
—James Madison, 1795
It’s no coincidence that the income tax came into being just in time to raise funds for U.S. participation in World War I. And we’re still stuck with it 113 years later.
Something to think about on this Tax Day, anyway…
We’ll try to wrap up today’s mailbag on a lighter note…
“The comment by one reader that you included yesterday (‘I'm pretty much done with politicians, not a single one of them is worth a s*** and what gives them the right to rule over me?’) prompted me to share this as a possible solution:
Dave: I hear ya, but it’s still an imperfect solution.
The late libertarian writer George H. Smith observed that by the time Aaron Burr shot and killed Alexander Hamilton during a duel in 1804, the damage was done: Hamilton had already strangled the great American experiment in its crib. And so it goes…
